Bukhara regional state unitary enterprise "SUVOKOVA" Independent Auditor's Report and Financial statements for the year ending December 31, 2016 Content Independent Auditors' Report 3 STATEMENT OF FINANCIAL POSITON 7 STATEMENT OF COMPREHENSIVE INCOME 8 STATEMENT OF CHANGES IN EQUITY 9 STATEMENT OF CASH FLOWS 10 \.ore� w the fin:tncial :• Financial statements for the year ended 31 December 2016 (in thousands of UZS) STATEMENT OF FINANCIAL POSITON ASSETS: Non-current assets Property, plant and equipment 6 156 288 474 88 639 824 Investments in district water supply utilities 7 377 076 Deferred expenses 8 32 787 37 472 Total non-current assets 156 321 261 89 054 372 Current assets Inventories 9 2 229 772 1 162 638 Trade and other receivables 10 17 276 192 11 168 619 Cash and cash equivalents 11 1 244 832 1 380 113 Total current assets 20 750 796 13 711 370 Total Assets 177 072 057 102 765 742 Equity Charter capital 12 3 369 845 1 138 805 Retained earnings (65 931 652) (54 574 260) Restricted capital 13 13 544 018 11 842 779 Total Equity (49 017 789) (41 592 676! Liabilities Long-term liabilities Long-term borrowings 14 194 683 690 117 906 178 Total long-term liabilities 194 683 690 117 906 178 Short-term liabilities Accrued interest payable 1 701 867 1 701 867 Current portion of long-term borrowings 14 21 731 268 16 111 112 Trade payables and other payables 15 7 973 021 8 639 256 Total current liabilities 31 406 156 26 452 235 Total liabilities 226 089 846 144 358 413 Total liabilities and equity 177 072 057 102 765 737 Director Chief Accountant 7 Bukhara RSUE «Suvokova" Financial statements for the year ended 31 December 2016 (in thousands of UZS) STATEMENT OF COMPREHENSIVE INCOME Revenues 16 32 216 186 21 015 109 Cost of sales 17 (25 209 609) (18 844 689) Gross profit 7 006 577 2 170 420 General and administrative expenses 18 (3 128 4 8 4) (1 147 552) Other operating expenses 18 (1 979 409) (1 778 416) Impairment of receivables from district water (672 437) supply utilities Impairment of trade and other receivables (4 027 974) 1 776 900 Government grant 19 21 282510 2 574 733 Other operating income 20 4 373 688 205 123 Operating profit I (loss) 23 52 6 907 3128 771 Finance cost 21 (33 475 386) (14 818 954) Finance income 21 32 220 2 847 Interest expense (1 388 816) (551 849) Loss before taxation (11 305 076) (12239185) Taxation 22 Nett loss for the year (11 305 076) (12239185) Approved and signed on behalf 1e Company's management: Chief Accountant 8 Bukhara RSUE as minimum requuements. • "Annual Improvements to IFRS, the period 2012-20 1 4." The Company reviewed these amendments to standards in the preparation of financial statements. Changes to the current standards did not have a significant impact on the Company's financial statements. Sundards, clarifications • Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 5. Significant Accounting Policies (Continued) Useful life (years) Buildings and constructions 50 Cars and equipment 8-12 Computers and office equipment 5-7 Others 5 The residual value of the asset is the estimated amount that the Company would currently receive if the asset was sold, less estimated costs of disposal if the condition and age of the asset were consistent with the age and condition that the asset will have at the end of its useful life . If the Company intends to use the asset before the end of its physical life, the residual value of the asset is zero. The residual value of assets and their useful life are reviewed and, if necessary, adjusted at the end of each reporting period. 5.7. Income taxes Income taxes are recognized in the financial statements in accordance with the requirements of Uzbek law, effective or substantively enacted at the balance sheet date. Income tax expense comprises current and deferred taxes and is recognized in the statement of comprehensi,·e 1ncome unless they are to be recognized in other comprehensive income or equity because they are related to transactions that a.re also recognized in other comprehensive income or capital in the same or in any other reporting period. Cu.rrenL tax is the amount that is expected to be paid or recovered from the budget in respect of taxable profit or loss for the current and previous periods. Taxable profits or losses are calculated on the basis of an assessment if the financial statements are approved before the filing of the relevant tax returns. Taxes other than income tax are mcluded in general and adrninistrative expenses. Deferred income taxes are calculated using the balance sheet method for carrying forward tax losses and temporary differences arising between the tax base of assets and liabilities and tbei.r carrying amount in the financial statements. 'The carrpng amount of deferred tax is calculated at the tax rates that are expected to apply during the period restoration of temporary differences or use carried forward for future tax loss periods at the tax rates, in full or in the principal moments adopted at the balance sheet dare. Deferred tax assets for deductible temporary differences and deferred tax losses are recognized only if there is a high probability of future taxable profits, which can be reduced by the amount of such deductions. 5.8. Uncertain tax positions Managen1enr reassesses the Company's uncertain tax positions at the end of each reporting period. Liabilities arc recorded for those positions of income tax, wh1ch, according to the nunagemcnt, are likely to lead to additional tax charges in case of challenging these positions by the tax authorities. Such an assessment is carried out on the basis of mterpretation of the tax legislation that was in effect or substantially entered into force at the end of the reporting period and any known court decision or other decision on such matters. Liabilities for fmes, penalties and taxes, other than income tax, are recorded on the basis of management's best estimate of the costs required to settle liabilities at the end of tl1e reporting period. 21 Bukhara RSUE �> Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 5. Significant Accounting Policies (Continued) 5.9. Inventories Inventories are recorded at the lower of the original cost and net realizable value. The cost of inventories is determined using the FIFO method. Net realizable value is the estimated selling price in the ordinary course of busmess, less the costs of completion and selling costs. 5.1 0. Trade and other receivables Trade receivables and other receivables are earned at arnortized cost using the effective interest method. 5.11. Impairment of financial assets carried at amortized cost Impairment losses are recognized in the statement of comprehensive income as they are mcurred as a result of one or more events ("loss events") that occurred after the initial recognition of the frnanCJal asset and affect the amount or timing of estimated future cash flows associated wid1 the financial asset or with a group of financial assets that can be assessed with sufficient reliability. If the Company does not have objective evidence of impairment for an individually assessed financial asset (regardless of its materiaJit�y), this asset is included in the group of financial assets with sinUlar credit risk characteristics and is assessed in conjunction with then1 for rmpairment. The main factors that the Company takes into account when considering the issue of rmpairment of a financial asset are its overdue status and the ability to exercise collateral, if any. The following are the other main criteria on the basis of which the existence of objective evidence of an impairment loss is determined: ! • • delay of any next payment, while late payment can not be explained by a delay in the work of settlement systems; ! • • poor social knowledge base of users about the sewage system (private individuals); ! • • the counterparty experiences significant frnancial difficulties, as evidenced by financial information about the counterparty at the Company's disposal; ! • • the counterparty is considering the possibility of declaring bankruptcy or other financial reorganization; ! • • there is a negative change in the payment status of the counterparty due to changes in national or local economrc conditions affecting the counterparty; or ! • • the cost of collateral, if any, is srgnificandy reduced as a result of tl1e deteriorating market situation. If the terms of an impaired financial asset carried at amortized cost are reviewed as a result of negotiations or modified in any other way because of the financial difficulties of the other party, the impairment is detenruned usrng the onginal effective rnterest rate until the conditions are revised. Imparrment losses are always recognized by creating a provision in such amount to bring the asset's carrying amount to the present value of expected cash flows (which does not include future loan losses that have not yet been incurred) discounted using the original effective interest rates for this asset. Calculation of the discounted value of the expected cash t:1ows of the financial asset to which collateral is secured includes cash flows that may arise as a result of the creditor entering into possession of the debtor's property, less the costs of obtarning and selling collateral, regardless of the likelihood of the creditor entering into possession of the debtor's property. 22 Bukhara RSUE «Suvokova" Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 5. Significant Accounting Policies (Continued) If, in a subsequent period, the amount of the impairment loss decreases and this decrease can be obJectively related to an event occurring after the impairment was recognized (such as an increase in the customer's credit rating), the previously recogruzed unpairment loss 1s reversed by adjusting the created prov1s1on through the staternent of comprehensive income. r\ssets that cannot be repaid and for which all necessary procedures have been completed for the purpose of full or partial recovery and the final amount of the loss is determined are written off against the provision for impairment on the balance sheet. Subsequent recoveries of previously written-off amounts are credited to the impairment loss account in the staternent of comprehensive income. 5.12. Prepayment Prepayments are recorded at histmical cost less allowance for impairment. A prepayment is classified as a long-term if the expected period of receipt of goods or services related to it exceeds one year, or if the prepayment relates to an asset that will be recorded as non-negotiable on initial recognition. The prepayment amount for the acquisition of an asset is included in its carrying amount upon receipt The company controls tlus asset and tl1e Company will receive the likelihood tl1at the future economic benefits associated with it. Other prepayments are wntten off when you receive goods or services related to it. If there is a sign that the assets, goods or services relating to the prepayment will not be received, the carrying amount of the prepayment is to be reduced and the related impairment loss is recorded in the statement of comprehensive 1ncome. 5.13. Cash and cash equivalents Cash includes cash and cash on bank accounts. Cash equivalents include short-term financial assets that can be easily transferred to cash and have a maturity of less rlun three months. Restricted funds mclude cash balances and cash equivalents that are not to be used for other purposes than those provided for in the loan terms or under banking law. Restricted funds are not included in the statement of cash flows. 5.14. Deferred income tax Deferred tax assets and liabilities are calculated on temporary differences using the balance sheet liability method. Deferred tax assets and liabilities are included in the financial statements for all temporary differences between the tax base of assets and liabilities and their carrying amount that is recorded 111 the financial statements. Deferred tax assets are recognized only if it is probable that the existence of future taxable profit will allow the deferred tax assets to be realized or if such assets can be offset against existing deferred tax liabilities. Deferred tax assets and liabilities are calculated at tax rates that are expected to apply in the period when assets are realized or liabilities are discharged on the basis of tax rates in effect at the balance sheet date or about which the effective date in the near future was reliably known as of the reporting date. Deferred income taxes are recognized for all temporary differences associated with investments in subsidiaries and associates, as well as JOint ventures, unless it is possible to check the timing of the reversal of temporary differences and when it is probable that the temporary differences will not decrease 1n the foreseeable future. 5.15. Value added tax Value added tax related to sales proceeds is payable to the budget on an earlier of two dates: (a) the date of receipt of receivables fwm customers or (b) the date of delivery of goods or services to customers. VAT paid on Lhe acquisition of goods and services is generally recoverable by offset against Vr\.T accrued on sales proceeds upon receipt of the seller's invoice. Such offset is made in accordance with the tax legislation. Vr\.T 23 Bukhara RSUE «Suvokdva» Notes to the Financial statements for the .year ended 31 December 2016 (in thousands of UZS) 5. Significant Accounting Policies (Continued) payable and VAT paid are disclosed in the statement of fmancial position in its detailed form as assets and liabilities. When a provision is made for the impairment of receivables, the impairment loss is recognized in the total amount due, including VAT. VAT is applied at the following rates for sewerage services: ! • • 20% - the standard rate applied to legal entities; and ! • • 0% is the zero rate applied when selling services to individuals. 5.16. Capitalization of borrowing costs. Borrowing costs directly attributable to the acquisition, construction or production of an asset whose preparation for its intended use or for sale necessarily requires considerable time (an asset that meets certain requirements) are included in the cost of this asset. Capitalization of borrowing costs begins when: (a) the Company bears costs for tlie qualifying asset; b) the Company bears borrowing costs; (c) the Company shall take the necessary steps to prepare the asset for use or sale. The Company capitalizes borrowing costs that could have been avoided if it had not made capital expenditures on qualifying assets. Capitalized borrowing costs are calculated on the basis of the average cost of the Company's assets (weighted average interest expenses apply to expenses for qualifying assets), except when the funds are borrowed for the acquisition of a qualifying asset. 5.17. Trade payables and other payables Debt for the main activity is accrued upon the fact of the counterparty's performance of its contractual obligations and is accounted for at amortized cost using the effective interest method. 5.18. Reserves for future expenses and payments Reserves for future expenses and payments are non-fmancial liabilities with an indefinite period or amount. They are accrued if, as a r�sult of a certain event in the past, the Company has legally substantiated or _ voluntarily assumed obligations, it is probable that an outflow of resources providing for economic benefits will be required to settle the obligation and the amount of the obligation can be estimated in monetary terms with a sufflcient degree of reliability. Reserves, including post-employment compensation and a reserve for obligations for the liquidation of fixed assets and environmental restoration, are recognized if, as a result of a past event, the Company has a current legal or voluntarily assumed obligation, the settlement of which is likely to require disposal of resources and which can be estirlJ,ated in monetary terms with a sufflcient degree of reliability. Liabilities are recognized immediately after they are identified at the current fair value of the expected future cash flows associated with the settlement of these liabilities. The initial assessment of the costs of the liquidation of fixed assets (and subsequent changes in estimates) are capitalized as part of fixed assets. 5.19. Capital Share capital is the aggregate in monetary terms of contributions (shares at a nominal value) of the founders (shareholders) in the Company's property when it is created to support the activities within the framework defmed by the constituent documents. The share capital of the Company is the collective property of the founders and at the same time the property of the Company as a legal entity. The procedure for forming and changing the share capital is regulated by the legislation of the Republic of Uzbekistan. 5.20. Capital of restricted· use Contributions of the Government of the Republic of Uzbekistan are capitalized upon receipt and are recorded at fair value, which are designated as cash and in kind as Capital of restricted use in equity. 24 Bukhara RSUE «Suvokova» Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 5. Significant Accounting Policies (Continued) 5.21. Foreign currency revaluation The functional currency,of the Company is the currency of the underlying economic environment in which the company operates. The functional currency and reporting currency of the Company is the national currency of the Republic of Uzbekistan - Uzbek Sum (hereinafter referred to as "UZS"). Monetary assets and liabilities are transferred to the functional currency of the Company at the official exchange rate of the Central Bank of the Republic of Uzbekistan (CBU), for the respective reporting dates. The gains and losses arising from the settlement and the translation of monetary assets and liabilities into the functional currency of the compan y at the official rate at the end o£ the year are recognized in the statement of comprehensive income. !Zecalculation at the exchange rate at the ·end of the year is not carried out with respect to non-monetary items of the balance sheet, measured at actual costs. 5.22. Revenue recognition The source of revenue is d1e use of the sewage system by legal entities and individuals. Revenues from the sale of services are recognized when the risks and rewards of ownership of the services are transferred, usually at the time the services are provided. The rendered services are taken into account on the basis of indicators of water meters installed in the field. In the absence of water meters, mainly from individuals, revenue is calculated on the basis of agreed and approved by the state standards. Revenues are shown net of VAT. The amount of revenue is" determined at d1e fair value of the consideration received or receivable. 5.23. Remuneration of employees and deductions to social insurance funds On the territory of the Republic of Uzbekistan, the Company implements deductions for a single social tax. These deductions are also reflected on the accrual basis. The single social tax includes contributions to the Pension Fund. The Company does not have its own pension scheme. Salary expenses, contributions to the state pension fund and social insurance fund, paid annual leave and sick leave, bonuses and non-monetary benefits are accrued as the Company's employees provide relevant services. 5.24. Contingent assets and liabilities Contingent assets are not recognized in the statement of frnancial position, and information about them .is disclosed in the financial statements when it is probable that the related economic benefits will be received. Contingent liabilities are not recognized in the statement of financial position, and information about them is disclosed in the financial statements, except for cases when the disposal of resources due to their redemption is unlikely. 5.25. Related party transactions Related parties are those where one of the parties is controlled by the other or has significant influence in making frnancial or business decisions of the other party. In considering all possible relationships with related parties, the economic content of such_relationships is taken into account, and not only their legal form. Due to the reason that the Company is government related company, applies exemption from IFRS and discloses following about the transactions and related outstanding balances: the name of the government and ilie nature of its relationship and the nature, type and amount of each individually significant transaction. The Company disclose key management personnel compensation in total and for each of the following categories: short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits and (e) share-based payment. 5.26. Events after the reporting date Post-year-end events that provide additional information about a Company's position at the statement of frnancial position date (adjusting events) are reflected in ilie financial statements. Post-year-end events iliat are not adjusting events are disclosed in the notes when material. In terms of its products, ilie Company has one business segment, i.e. production and sale of additives and materials for ilie construction industry. 5.27. Errors Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of consolidated financial statements. An entity corrects material prior period errors retrospectively in the first set of consolidated frnanciai statements authorized for issue after their discovery by restating the comparative amounts for the prior period presented in which ilie error occurred. 25 Bukhara RSUE «Suvokova» Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 6. Fixed assets 1 896 332 79 580 970 837 281 46 775 854 129 090 437 Carrying amount as at 31 December 2015 Accumulated depreciation as at 31 (746 209) (39 362 356) (342 048) (40 450 613) December 2015 Residual value as at 31 December 2015 88 639 824 1 150 123 40 218 614 495 233 46 775 854 Association of branches: Book value 923 994 48 740 464 423 541 21 888 615 71 976 614 Accumulated value (44 751) (2 201 202) (20 513) (2 266 466) Heceipts 2 828 467 2 828 467 Translations 1 869 189 (1 869 189) Disposals (657) (34 632) (301) (35 590) Depreciation deductions (86 610) (4 728 065) (39 700) (4 854 375) Book value as at 31 December 2016 4 688 858 131 115 269 1 260 521 66 795 280 203 859 928 Accumulated depreciation (8l7 570) (46 291 623) (402 261) (47 571 454) Residual value as at 31 December 2016 3 811 288 84 823 646 858 260 66 795 280 156 288 474 The book value of the "Buildings and constructions" group represents the cost of the sewage treatment plant building and the sewage network system. The book value of the "Machinery and equipment" groups is the cost of tractors, trucks used for cleaning the sewage system and pumps. Incomplete construction is lTJ.ainly the cost of reconstruction of sewage treatment plants and sewage systems. The unification of the branches was in accordance with the proposal of the Council of Ministers of the Republic of Karakalpakstan, regional khokimiyats, d1e Ministry of Economy, the Ministry of Finance of the Republic of Uzbekistan, the Uzbek agency "Uzkommunkhizmat", a smgle state unitary enterprise "Suvokova" was established with branches in cities and regions on the bas,is of operating water supply and sewerage organizations . 7. Investments in the Suvakava District According ro the orders of the Cabinet of Ministers of the Republic of Uzbekistan, Uzbekistan No. 215 dated 16 October 2015 and No. 306 of 30 October 2015, "On Measures to Implement the Main Directions for the Development of \\later Supply and Sewerage Organizations," the Company was reorganized as the Suvoka\·a State Unitary Enterprise and is a con1.mercial organization. All areas were merged into the Company. 8. Deferred expenses Deferred expenses include a one-time conunission of one percent of the prine1pal amount of the IBRD loan. These deferred expenses for the loan period of 20 years 26 Bukhara RSUE «Suvokova» Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 9. Inventories Spare parts 590 498 569 ogn Water meters 287 861 311 499 Raw materials and materials 1 174 618 159 736 Stationery and fuel 176 795 122 304 Total inventory 2 229 772 1 162 638 Invenrories are raw materials, stationery, inventory and household items, spare parts and are recorded at historical cosr. Raw materials mainly include chenucals used in a sewage treatment tank, reinforced concrete curbs and manholes, as well as various cast iron devices (bends, latches, valves, etc.). Spare parts include spare parts for vehicles, excavators and tractors purchased from suppliers used in the daily activities of the Company. 10. Trade receivables and other receivables 13elow is informacion on other receivables: Financial assets Trade receivables 13 870 762 8 733 331 Less provision for impairment (5 719 041) (1 691 067) Total financial assets 8 151 721 7 042 264 Non-financial assets Prepayment 8 758 304 3 531 743 Prepaid taxes 218 865 529 242 Other receivables 152 340 70 404 Less provision for impairment (5 038) (5 038) Total non-financial assets 9 124 471 4 126 351 Total trade receivables and other receivables 17 276 192 11 168 615 The accounts receivable for the rnain business, with a maturity of less than three JTJ.Onths, are not considered as overdue debts. As of the date of each report on the financial statements, the Company evaluates all objective factors in connection with wluch it is possible to consider the impairment of receivables. In the event that there is sufficient grounds to consider a receivable as impaired, the amount the allowance for impairment losses is determined as the difference between the carrying amount of that debt and the expected recoverable amount, discounted at the orig111al effective interest rate. In the event that the Company establishes the fact that there are no objective factors for the impairment of this receivable, irrespective of the materiality of the amount. The company relates tl-lls debt to the group of debts with the corresponding characteristics of the credit risk, and the fact of the impairment of the entire group of receivables is considered. 2.7 Bukhara RSUE «Suvokova» Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 10. Trade receivables and other receivables (Continued) The main factors that the Company takes into account when considering the issue of impairment of trade receivables is its overdue status for more than 91 days. Movements in d1e provision for impairment of trade receivables and other receivables as at 31 December 2016 and 2015 are as follows: Provision for impairment at 1 January 1 696 105 3 473 005 (Recovery) I provision for impairment during the year 4 027 974 (1 776 900) Provision for impairment as at 31 December 5 724 079 1 696 1 05 Total % Total % Legal entities 5 461 65:1 67% 5 927 450 84% Individuals 2 690 068 33% 1 114814 16% Total trade receivables 8 1 51 721 1 00% 7 042 264 1 00% Neither past due nor impaired Current accounts receivable 11 180 694 2 690 068 13 870 762 7 618 517 1 114 814 8 733 331 Current and non-impaired 11 180 694 2 690 068 13 870 762 7 618517 1 114 814 8 733 331 Overdue and impaired With a delay of payment from 90 to 365days With a delay of payment more 5719041 5719041 1 691 067 1 691 067 than 365days Total overdue and impaired 5 719 041 5719 041 1 691 067 1 691 067 Provision for impairment (5719041) (5719041) (1 691 067) (1 691 067) Total accounts receivable, 5 461 653 2 690 068 8 151 721 5 927 450 1 114 814 7 042 264 net amount 11. Cash and cash equivalents Hamkor Bank- Current account in US dollars 706 740 lpoteka Bank- Special accounts in UZS 1 1776 05 373 394 Hamkor Bank- Special Account in UZS 272 901 lpoteka Bank- Current account in UZS 67 054 26 967 Corporate card 173 111 Total cash and cash equivalents 1 244 832 1 380 1 1 3 28 Bukhara RSUE «Suvokova>> Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 11. Cash and cash equivalents (continuation) The special account in US dollars and Euros is a special account with the Joint-Stock Commercial Bank "Asaka" for accounting of funds received on IBRD and IDA loans. The company has a current account in the UZS in the AICB "Ipoteka-bank" and in the bank "Hamkorbank" and the block account for conversion into the JSCB "Asaka" . .Joint-stock commercial bank "Hamkorbank" with participation of foreign capital, according to Moody's ratings, bas a deposit rating in national currency with the "B2" rating, a deposit rating in foretgn currency "B2", and a basic crecliL rating of the bank "bl". The outlook for all ratings is "Stable". r\.ccording to the agency Standard & Poor's, the JOint-stock cornrnercial mortgage bank "Ipoteka-bank" has a "B + / B" rating with a "Stable" outlook. The assigned rating of IICB "Ipoteka-bank" is one of the highest among the ratings assigned to the commercial banks of Uzbekistan, which has a rating from the agency Standard & Poor's. The international rating agency Moody's has affirrned the ratings of the Joint Mortgage Bank r\.ICB Ipoteka Bank for deposits in national currency and foreign currency at B2 level. All ratings of Ipoteka-bank have a forecast "Stable". Joint-stock commercial bank "I\.saka" according to the international rating agency "Fitch Ratings" has an international credit rating "Stable". Also, tl1e international raring agency "Moody's" assigned the rating of tbe bank ".Asaka" at the level of "Stable". 12. Chartered capital Charted capital 3 369 845 1 138 805 Total Chartered capital 3 369 845 1 138805 The company was registered by Decree No. 589 of 24 June 1978, by the Council of Ministers of the Soviet Socialist Republic of Uzbekistan. The company has the rights of an independent economic enterprise and is managed in accordance witl1 the legislation of tl1e Republic of Uzbekistan. The share of the Government of the Republic of Uzbekistan in the authorized capital of the Com.pany is egual to one hundred percent, the an10unt of the authorized capital of the Company is directly regulated by the Government of tl1e Republic of Uzbekistan. 13. Restricted capital Restricted capital as at 1 January 2015 5668331 6 174 449 State contribution Total restricted capital as at 31 December 2015 11 842 780 State contribution 1 701 238 Total restricted capital as at 31 December 2016 13 54 4 018 29 Bukhara RSUE «Suvokova>• Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 13. Restricted capital (continuation) In the framework of the IDr\ loan No. 4633 in accordance with Presidential Decree No. 1216 of 29 October 2009, the State's contribution in kind is provided in the form of exemption from taxes and duties on goods, work, sernces and veh1eles of the Suvokov PU of Bukhara region and its contractors. The contribution of the State on co-financing the Project is capitalized upon its receipt and is recorded at fair value, defined as the cost of consUlJCtion as capital of restricted use in equity. 14. Borrowings Long-term part: The loan from the "Asaka" 11 11 0 835 21 098 236 A loan from the International Development Association (IDA) 17 206 464 14 578 124 A loan from the International Bank for Reconstruction and Development 12 376 326 11 436 341 (IBRD) Loan from IDA (Reconstruction of sewage treatment plant) 102 183 022 70 793 477 Loan from the Asian Development Bank 51 807 043 Total 194 683 690 117 906 178 Short-term part: Current portion of long-term borrowings 21 731 268 16111 112 Total 21 731268 16 111 112 Total borrowings 216 414 958 134017290 In addition to the loan agreement No. 4633-UZ dmed 26 November 2009, signed by the IDr\ and the Republic of Uzbekistan (Note 1), on 29 March 2010, a long-term sub-loan agreement was signed. The Company signed a long-term sub-loan agreement for 19 217 Special Drawing Rights ("SDRs"), wluch 1s equivalent to USD 29,689. The parties to this sub-loan agreement are the Republic of Uzbekistan, the Uzbek Agency "Uzkom.munkhizmat", the Khokimiyat of the Bukhara region and the Company. In accordance with the sub­ loan agreement, the Company is the recipient of funds from IDA through the l\!Iinistry of Finance of the Republic of Uzbekistan represented by the Republic of Uzbekistan. r\ccording to the repayment schedule, repayment of the principal amount begins on 1 November 2019 with final repayment on 1 May 2044. The Ministry of Finance bears the main responsibility and guaraqtees repayment of the loan on behalf of the Republic of Uzbekistan, which corresponds to Loan Agreements No. 3620- UZ and No. 4655-UZ at 12 r\pril 2002 and No. 4633-U3 of 26 ovember 2009, signed by IDA, IBRD and the Republic of Uzbekistan . Also, the Government of the Republic of Uzbekistan received the permission of the International Developrnent �Association (IDA) ro purchase a loan (loan agreement No. 5189-UZ dated 18 July 2013) to improve drinking water supply in the Alat and Karakul districts of the Bukhara region. The project will finance the improvement of coverage, quality and efficiency of public water services in the �Alat and Karakul districts of the Bukhara region. On 4 October 2002, the Company signed long-term sub-loan agreements No. 2002-21 and 2002-22 with ,-\saka Bank to finance a contract with a foreign supplier, OndeoDegremontS.A, For a total amount of 17,379 Euros. Both agreements were initially funded by Spanish financial institutions: (1) LnstituwDeCreditoOficial and (2) SocieteGenerale, which will finance the total contract amount in egual parts. The interest rate of the loan (I) of InstitutoDeCreditoOficial is 0.8% per annum, including 0.5% per annum of the r\saka Bank. Interest is paid every SL'C months from 20 May 2003 with a final maturity date of 20 May 2033; the principal amount is paid from 20 November 2012 with a final maturity date of 20 May, 2033. The interest rate of the loan (II) of SocieteGenerale is 1.2% per annum plus EURIBOR, including 0.5% per 30 Bukhara RSUE «Suvokova>; Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 14. Borrowings (Continuation) ::mnum of Asaka Bank. Interest is paid every SL'C months, beginning on 23 June 2003, with a final maturity date of 20 October 2016; the principal amount is paid out every six months starting on 23 June 2005 with a final maturity date of 20 October 2016. On 1 2 r\pril 2002, the Company signed a long-term sub-loan agreement with the following International Financial Institutions (IFis): (i) IDA-No. 3620-11 2 for an amount equivalent to US$ 9,080 and (ii) IBRD No. -+655-112 for US $ 9,090 and the Republic of Uzbekistan on the "Water Supply Project of Bukhara and Samarkand". The interest rate on the IDA loan (I) is calculated at the SL'C-rnonth LIBOR rate plus 1.75% per annum. Interest ts paid every si..'\ months, starting on 1 July 2004, with a final rnaturity date of 1 July 2022, and payment of the principal amount every SL'C months frorn 1 January 2008 with a final maturity date of 1 July 2022. The interest rate on d1e loan (II) IBRD is calculated at a six-month LIBOR plus 1.75% per annum. Interest is paid every si.." months, beginning on 1 April 2003, with a final maturit)' date of 1 April 2022, and payment of the principal amount every si.., months, starting on 1 October 2007, with a final maturit)' date of 1 r\ pril 2022. 15. Trade payables and other payables Financial liabilities Accounts payable to suppliers and contractors 4 840 116 5 333 296 Total financial liabilities 4 840 116 5 333 296 Non-financial liabilities Taxes payable to the budget 1 595 688 983 798 Advances received 1 04 2 833 1912579 Salary 494 383 409 583 Total 3 132 904 3 305 960 Total liabilities 7 973 020 8 639 256 16. Revenues Drinking water 32 194 1 7 7 17 729 445 Sewerage 22 009 3 285 664 Total revenue 32 216 186 21 015 109 Tariffs for the supply of drinking water and collection of waste water are approved by the regional department of d1e Ministry of Finance of the Republic of Uzbekistan. r\s indicated in Note 1 of d1e Company, legislation allows for a gross margin of not more than 1 0%, which leads to a permanent net loss before the receipt of a Government Grant. However, in order to support the Company's activities and to implement capital expenditures, the Government provides contributions in kind and in cash. During 2007, management mstalled water meters, which allowed the Company to measure the exact amount of water produced and supplied to the system. Tlus information provides a reliable basts for calculating the water balance. Further, the management analyzes d1e loss of water resources, which are still significant. To analyze the causes of water losses, reliable estimates and judgments of management are needed. However, these circumstances indicate that there are significant inaccuracies that may lead to significant doubts about the completeness and reliability of billing for water consumption. 31 Bukhara RSUE «Suvokova» Notes to the Financial statements for the year ended 31 December 2016 (in thousands of l!Z S) _ "'- ___ _ _ 16. Revenues (continuation) By popuhtion, i.e. to individuals, the account is conducted in the specialized program Billing - automation of accounting, control and analysis of indicators of water use and sanitation. According to concluded agreements with the population for water use, the data on the availability of water meters (meters) have been entered into the program, and if they are not established, then by the number of residents, the data are provided by the self-government bodies (ZhEK, shirkat, etc.). Monthly, the program records data on consumed water volumes (meter readings) collected by line inspectors and, according to the established tariffs, the Company's revenues are calculated. For that category of the population that do not have water meters (meters), accrual is made monthly according to the tariff for the number of residents. The technical effectiveness of the billing system is limited. The data on billing for individuals' custom.ers is based on budgetary norms for the use of the sewage system per person, while the actual use of sewerage by individuals may differ materially. 17. Cost of sales The table below shows the cost of sales: Staff costs 10 509 587 6 387 469 Depreciation 4 762 251 5 311 161 Fuel and electricity 4 623 440 3 234 750 Cost of purchased water 2 638 477 1 919 877 Security Services 1 178 270 1 030 870 Repair and maintenance 428 336 459 927 Used materials and components 993 916 358 907 Other 75 332 141 728 Total cost of sales 25 209 609 18 844 689 18. Administrative and other operating expenses The table below shows the items of general and administrative expenses: Staff costs 1 572 455 825 097 Depreciation 92 124 80 817 Write-off of low-value and short-wearing items 136 793 66 801 Repair costs 24 220 65 655 Expenses for fuel 31 711 39 289 1 203 595 27 838 Legal, audit services and insurance, services of outside organizations Communications costs 17 063 11 072 Fare 2 060 2 183 Other 48 462 28 800 Total general and administrative expenses 3 128 484 1 147 552 32 Bul> Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 18. Administrative and other operating expenses (continuation) The table below shows the items of other operating expenses: Taxes, except for profit 697 751 767 917 Staff costs 716 856 485 841 Bank commissions 257 991 252 147 State duty and legal costs 26 393 28 498 Repair and maintenance 15 687 14 998 Insurance 26 557 10 762 Protection of the environment 11 622 10 602 Financial aid 28 165 6 568 Expenses for fuel and lubricants 4 625 6 129 Fines and penalties 17 779 4 395 For rent 14 854 1 198 Fare 53 333 136 652 Other 107 796 52 709 Total other operating expenses 1979 409 177 8 416 19. Government Grant Government grant 21 282 510 2 574 733 Total Government grant 21 282 510 2 574 733 20. Other operating income The table below shows the items of other operating expenses: Income from services provided 149 529 137 118 Income from the sale of assets 35 771 Received fines and penalties 18 674 18 055 Income from sales of materials 68 450 13 821 Other Revaluation Revenues 4 137 006 Other 29 358 Total other operating income 4 373 688 205 123 33 Bukhara RSUE "Suvokova» Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 21. Financial expenses and incomes The table below shows the items of fi.nane1al expenses and revenues: Interest expenses on long-term borrowings (1 388 816) (551 848) Loss from revaluation of foreign currency on financ.ial activities: Long-term borrowings (33 475 386) (14 818 955) Accounts payable on principal other activities accounts payable Financial expenses (34 864 202) (15 370 803) Profit from revaluation of foreign currency on financial activities: Long-term borrowings 32 220 2 847 Financial income 32 220 2 847 22. Income Taxes The Company compiles tax payments for the current period on the basis of tax accounting data that is carried out in accordance with the requirements of the tax legislation of the Republic of Uzbekistan, which may differ from IFRS. Differences between IFRS and the tax legislation of the Republic of Uzbekistan result in certain temporary differences between the carrying amount of a number of assets and liabilities for the purposes of compiling financial statements and for the purpose of calculating the corporate income tax. Tax on income (profit) by the Company is accrued in accordance with the Tax Code of the Republic of Uzbekistan. The current tax rate on income (profit) for the Company in 2016 and 2015 amounted to 7.5 percent of the taxable profit. In accordance with the tax legislation of the Republic of Uzbekistan, the Company also pays other taxes and deductions related to its operating activities. Loss before tax (11 305 076) (12 239185) Estimated amount of compensation for income tax at a statutory rate of (847 881) (917 939) 7.5% (2015 7.5%) Non-deductible expenses 847 881 917 939 Income tax expense for the year 23. Contingent liabilities Legal issues. In the normal course of business, the Company is subject to lawsuits and clain1s. In the opinion of the management, the probable liabilities (if any) arising from such claims or claims will not have a material adverse effect on the financial position or performance of the Company in the futcue. 34 Bukhara RSUE «Suvokova» Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 23. Contingent liabilities (continuation) Insurance. The m:1rket of msurance setvices in d1e Republic of Uzbekistan is at the stage of formation and many forms of insurance, common in other countries of the world, are not yet available in Uzbekistan. The company does not have full insurance coverage for its production facilities; losses caused by production delays, or incurred obligations to third parties due to damage to real estate or the environment caused by accidents or the Company's activities. Until d1e Company has full insurance coverage, there is a risk that the loss or damage of certain assets could have a material adverse effect on the Company's operations and financial position. Tax law. Currendy in the Republic of Uzbekistan there are a number of legislative acts regulating the system of taxes paid to the Republican and local state budgets. These taxes include value added tax, income tax, and a number of other taxes and social deductions. The tax legislation of the Republic of Uzbekistan is subject to varying interpretations and subject to frequent changes. Often there are different opinions regarding the interpretation of legislative acts both between different departments and within one deparunent (ie the State Tax Committee and its various inspections), which creates uncertainty and the ground for various disputes. Tax declarations and other legal obligations (for example, questions of customs and currency regulation) are subject to review and inspection by a number of agencies that by law have the right to apply significant administrative penalties (including fines and penalties) and may take a tougher position in the interpretation of legislation and verification of tax calculations. As a consequence, tax authorities may file clain1s for those transactions and accounting methods for which they did not make claims before. This situation creates a greater probability of occurrence of tax risks in the Republic of Uzbekistan than, for example, in other countries with more developed taxation systems. Tax inspections can cover five calendar years of activitv, immediately preceding the year of verification. Under certain co�ditions, earlier periods may be subjected to verification. As at 31 December 2016 management believes that it adheres to an adequate interpretation of the relevant legislation, and the Company's position regarding tax, currency and customs issues will be supported by the controlling bodies. Credit related commitments. The main purpose of these instruments is to ensure the provision of funds to customers as necessary. The total amount of obligations for guarantees, sureties, letters of credit and other financial Liabilities does nor necessarily represent future cash requirements, as the expiration or cancellation of these obligations mar be possible without the provision of funds to the counterparty. Neverd1eless, there is a potential risk, therefore, in the statement of fmancial position, among other obligations under guarantees, provision is made for a loan commitment in respect of provided guarantees and guarantees, depending on the financial condition of the client. The management of the company does not control issued credit related commitments, as it believes there will be no obligation and accordingly no provision for these contingent credit liabilities has been created. 24. Related Party Transactions For the purposes of these financial statements, the parties are considered to be related if one of them has the ability to control the other or exercise significant influence in making other fmanc1al and operational decisions by the other party as set out in lAS 24 "Related Party Disclosures". In considering all possible relationships with related parties, the economic content of such relationships is taken into account, and not only their legal form. 35 Bukhara RSUE < Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 26. Fair value (continuation) and a sirnilar maturity. The discount rate used depends on the credit risk of the counterparty. The carrying amount of financial assets other than investment in the Company is approximately equal to their fair value. Liabilities t·ecorded at amortized cost The fair value of liabilities is determined using the valuation technique. The estimated fair value of the instrument with a fixed interest rate and a fixed maturity is based on the expected discounted cash flows usirrg interest rate s for new instruments with similar credit risk and a similar period to maturity. The fair value of liabilities repayable on demand or redeemed irr advance notice ("liabilities payable on demand") is calculated as the amount payable on demand, discounted starting from the first date of the potential presentation of the demand for settlement of the obligation. Discount rates used vary from 2.5% to 12% per annum depending on the maturity date and the currency of the obligation. Due to the short maturities, the book value of short-term financial payables approximates its fair value. 27. Risk Management The Chairman of the Management Board has overall responsibility for the organization of the Company's risk management system and for overseeing the operation of this system. The risk management of the Company is carried out irr respect of financial risks (market, currency, interest, credit risks, liquidity risks) .The Company's mam task irr risk management is to identify and analyze the risks faced by the Company, establish acceptable risk limits and appropriate control mechanisms, and for monitoring risks and compliance with the need to make changes in connection with changes in market conditions and the Company's operations. Nlarkct risk Market risk 1s the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Company's profits or the value of its available financial instruments. The goal of market risk management is to control exposure to market risk and keep it within acceptable limits, while seeking to optimize return on investment. Curre11c�v risk The Company is exposed to foreign exchange risk on the following transactions: provision and receipt of loans in foreign currency; mutual settlements with related parties in foreign currency. Due to the underdevelopment of the instnunents of currency risk management in the financial market of Uzbekistan, the Company does not effect currency risk insurance. The table below shows the changes in the financial result and aggregate irrcome as a result of possible changes in exchange rates used at the end of the reporting period, while all other conditions remain unchanged. A reasonably possible change irr the exchange rate for each currency is determined on the basis of tl1e extreme limits of the fluctuations of the rates changed in comparison with the semi-annual dynarmcs of 2017 with the current rates (for 2015 annual). The sen1i-annual change in the rate is only for strengtherung forergn exchange. The risk was calculated only for cash balances in currencies other than the functional currency of the Company. The change in the exchange rate \vill be further negatively reflected in the financial position of the Company, as the Company is forced to attract credit resources frmTl banks and international financial institutions to fulfill the whole investment obligations. 37 Bukhara RSUE «Suvokova» Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 27. Risk Management (Continued) Cutrency risk (Continued) The following table provides an analysis of the Company's currency risk as at 31 December 2016. The Company's financial assets and liabilities are shown in the table at face value in terms of major currencies. Financial assets: Cash and cash equivalents 1 244 832 1 244 832 Trade receivables 17 276 192 17 276 192 Total financial assets 18 521 024 18 521 024 Financial liabilities: Trade payables 7 973 021 7 973 021 Long-term loans and semi-deferred 164 957 051 29 726 639 194 683 690 loans Short-term loans and borrowings 21 731 268 21 731 268 received Other financial liabilities 1 701 867 1 701 867 Total financial liabilities 7 973 021 188 390 186 29 726 639 226 089 846 Open balance sheet 10 548 003 (188 390 186) (29 726 639) (207 568 822) The following table provides an analysis of the Company's currency risk as at 31 December 2015. The Company's finanoal assets and liabilities are shown in the table at face value in terms of major currencies. Financial assets: Cash and cash equivalents 1 380 113 1 380 113 Trade receivables 11 168 619 11 168 619 Total financial assets 12 548 732 12 548 732 Financial liabilities: Trade payables 8 639 256 8 639 256 Long-term loans and semi- 88 179 539 29 726 639 117 906 178 deferred loans Short-term loans and borrowings 16 111 112 16 111 112 received Other financial liabilities 1 701 867 1 701 867 Total financial liabilities 8 639 256 105 992 518 29 726 639 144 358 413 Open balance sheet 3 909 476 (105 992 518) (29 726 639) (131 809 681) 38 Bukhara RSUE «Suvokova» Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 27. Risk Management (Continued) A.rwly;sis ofsem;idvity to HJPe�gn excha11ge tisk The following table provides an analysis of the sensitivity of the Company to 15% and 16% of the increase and decrease in the sum to the US dollar and euro as at 31 December 2016 and 2015, 11% and 3.8. % respectively. Management believes that, given the current economic situation in the Republic of Uzbekistan, it is possible that the exchange rate of the swn against the US dollar and euro will fluctuate up to 25%. This level of sensitivity is used internally by the Company when preparing currency risk reports for key management personnel of the Cornpany and represents management's assessment of possible changes in exchange rates. The sensitivity analysis includes only the foreign currency amounts available at the end of the period, with the conversion at the end of the year using rates that are changed by 25% compared to those in effect as at 31 December 2016 and 2015, respectively. Limitations of sensitivity analysis The above tables reflect the effect of a change in the main assumption, while other assumptions remain unchanged. In fact, there is a connection between assumptions and other factors. It should also be noted that the sensitivity is non-linear, so interpolation or extrapolation of the results should not be performed. The sensitivity analysis does not take into account that the Group actively manages assets and liabilities. In addition to this, the financial position of the Company may vary depending on the changes taking place in the market. For example, the Group's strategy in the area of financial risk management is aimed at managing the risk of market volatility. In the case of sharp negative price fluctuations in the securities market, management can resort to such methods as selling investments, changing the composition of the investment portfolio, and also to other methods of protection. Therefore, the change in assumptions may not have an impact on liabilities and significantly affect the assets recorded on the balance sheet at the market price. In this situation, different methods of assessing assets and liabilities can lead to significant fluctuations in the amount of capital. Other limitations in the above sensitivity analysis include the use (with the ain1 of disclosing the potential risk) of hypothetical market movements, which are just the Company's forecast of fortl1coming market changes that can not be predicted with any degree of certainty. Also a limitation is the assumption that all interest rates change in an identical way. l11terest rate pj..:;k. The Company asswnes tl1e risk associated with tl1e effect of fluctuations in market interest rates on its financial position and cash flows. Such fluctuations may increase the level of interest margin, but in the event of unexpected changes in interest rates, interest margin may also decline or cause losses. Changes in interest rates affect mainly borrowed loans and loans, changing either their fair value (fL-xed-rate debt) or future cash flows (variable-rate debt). \'qhen attracting new loans or loans, the management decides whether a fi.."�:ed or variable interest rate will be more beneficial to the Company during the expected period before maturity, based on its own professional judgment. The change in the floating interest rate during the reporting period would not affect the profit or loss for the period, as all borrowed loans were received with a fL'I:ed interest rate. The refinancing rate established by tl1e Central Bank of the Republic of Uzbekistan since 29 June 2017 has been increased from 9% to 14%. This change may have a negative impact on tl1e financial position of the Company, as the Company is forced to attract credit resources from banks and international financial institutions in order to fulfill the whole investment obligations. 39 Bukhara RSUE «Suvokova» Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 27. Risk Management (Continued) Credit tisk. The Company is exposed to credit risk, namely the risk dut one party to a financial instrument bears fmancial losses to the other party by defaulting on its obligations. Exposure to credit risk arises fron'l the provision of services by the Company on deferred payment terms and other transactions with counterparties that result in financial assets. Financial assets for which d1e Company has a potential credit risk are mainly due to the related parties' indebtedness for loans, balances with banks and od1er receivables. The company issues loans to its structural enterprises. And d1e obligation to repay loans was not evenly distributed. In tllis regard, tl1e Company's exposure to credit risk from counterparty debt is significant. To reduce the credit risk associated with paying suppliers, the Company adheres to tl1e policy of concluding the main contracts for ilie purchase of goods and services from corporate clients that have a reliable credit llistory. The Company's accounts are serviced in one bank (see Note 12). The management of the Company believes that the credit risk associated with cash depends on the size of the bank and its reputation. M:Jximum e"'posure to credit risk The maximw11 size of the Company's credit risk may vary significantly, depending on the individual risks inherent in specific assets and on general market risks. The following table shows the maximum exposure to credit risk for financial assets. For financial assets recorded on balance sheet accounts, the max.1mum exposure to credit risk is the carrying value of these assets, excluding offsets of assets and liabilities and collateral. Cash and cash equivalents 1 244 832 1 244 832 1 244 832 Trade receivables 17 276 192 17 276 192 17 276 192 Cash and cash equivalents 1 380 113 1 380 113 1 380 113 Trade receivables 11 168 619 11 168 619 11 168 619 Liquidity risk. Liquidit)' risk is the risk that the Company has difficulty in meeting its financial obligations, wllich are settled by the transfer of cash or another financial asset. The Company's approach to liquidity management is to ensure, to the extent possible, the Company's continued availability of liquid funds sufficient to pay off its obligations on time, both under normal and stressful conditions, preventing the occurrence of unacceptable losses and withour jeopardizing reputation of the Company. The Company does not provide an analysis of the Company's financial liabilities by maturity, with an indication of d1e terms that remain at tl1e reporting date before the end of the terms of repayment of information secrecy provided by the terms of the contracts. Capital management 40 Bukhara RSUE «Suvokova» Notes to the Financial statements for the year ended 31 December 2016 (in thousands of UZS) 27. Risk Management (Continued) The Company's task in the field of capital management is to ensure the Company's ability to continue its uninterrupted business, providing an acceptable level of profitability, respecting the interests of other partners and maintaining an optimal capital structure. The company controls capital based on the ratio of debt to capital. This indicator is calculated by dividing the net amount of the debt by the whole amount of capital under the management of the Company. Net debt is the total amount of debt recognized in the statement of financial position, net of cash and cash equivalents. The total amount of capital under management of the Company is the total amount of equity recorded in the statement of financial position. 28. Events after reporting date According to d1e Decree of the President of the Republic of Uzbekistan, UP-517 of 18 April 2017 "On measures to furd1er improve the management of the housing and communal services system" and PP-2900 of 18 April 2017 "On the organization of activities of the Ministry of Housing and Communal Services of d1e Republic of Uzbekistan", d1e enterprise was reorganized as Bukhara regional state unitary enterprise "Suvokava" under the Ministry of Housing and Communal Services. 41