“AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY The International Financial Reporting Standards Consolidated Financial Statements and Independent Auditors’ Report For the Year Ended December 31, 2017 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 1 INDEPENDENT AUDITORS’ REPORT 2-4 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017: Consolidated statement of financial position 5-6 Consolidated statement of comprehensive income 7-8 Consolidated statement of changes in equity 9 Consolidated statement of cash flows 10-11 Notes to the consolidated financial statements 12-80 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (In thousands of Azerbaijani Manats unless otherwise indicated) 1. THE GROUP AND ITS OPERATIONS Corporate Information “Azerbaijan Railways” Closed Joint Stock Company (“ADY” or the “Company”) was re-established on February 15, 2010 pursuant to the decree of the President of the Republic of Azerbaijan No. 383 “On Foundation of Azerbaijan Railways Closed Joint Stock Company” dated July 20, 2009 in connection with the development of overall railways system, meeting the increasing requirement of population and economy for transportation and freight services, improvement of management and increase of efficiency in the railways system. The Company is 100% owned by the Cabinet of Ministers of the Republic of Azerbaijan (the “Government”). The legal address of the Company is 230 Dilara Aliyeva Street, Baku, The Republic of Azerbaijan. The Group operates a government regulated nationwide railway system providing freight transportation, railway passenger transportation, services and maintenance of railway infrastructure within the Republic of Azerbaijan. The detailed main activities of the Group include ensuring a secure transportation of cargoes, passengers, posts as well as baggage in time by railways, formation of trains and organization of traffic on railways, provision of passenger and freight transportation services, maintenance and exploitation of unique production infrastructure, application of unique technical normative, provision of services for locomotive transportation, provision of current repair services for locomotives and trains, organization of security services on railways, protection of sites attached to railways and approval of those sites by relevant executive powers, production of necessary construction and raw materials to construct railways, construction of permanent and administrative buildings for railways, fulfillment of transportation on the basis of contracts and public orders, provision of transportation- expedition services, modernization of railways infrastructure being in use, application of telecommunication and information technologies to control services and organization of disaster- salutary services on railways. The total length of main railways in the Republic of Azerbaijan is 2,954 km as at the reporting date; the operational length is 2,132 km, including 803 km of bilateral roads. The roads consist of 192 stations. Over 14 million tons of freight is carried and over 2.4 million passengers are transferred annually. Structure and projects of the Group The Government controls the structure of the Group and establishes the long-term structure of the railway operations in the Republic of Azerbaijan. Since 2009, the Government has been in the process of restructuring the railway system in the Republic of Azerbaijan which included the establishment of the Group, the disposal of certain service businesses not related to main operations out of the Group the introduction of government investments for the improvement of the railway infrastructure. 12 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) According to the decree of the President of the Republic of Azerbaijan signed on September 18, 2015 the Group has been taken off from subordination to the Ministry of Transportation of the Republic of Azerbaijan and is directly reporting to the Cabinet of Ministers of the Republic of Azerbaijan starting from the decree date. The Government, through the Group, is continuing to restructure the railway transportation system in the Republic of Azerbaijan and has developed a mid-term development strategy for the years between 2015-2020 that includes a significant investment in the railways system. Within this strategy the Group has developed a detailed restructuring action plan, to be implemented by 2020, which will result in the establishment of robust railways infrastructure, improvement of the quality and commerciality of freight and passenger transportation services, increase of security matters in transportation, application of latest technologies in the railways system, acquisition of new locomotives, replacing direct current electrification with more efficient alternating current electrification, etc. Pursuing the decree No. 1974 of the President of the Republic of Azerbaijan, the Government is also financing Baku-Tbilisi-Kars railway route. The funding of Baku-Tbilisi-Kars new railway line project is provided by the State Oil Fund of the Republic of Azerbaijan. The construction of this transport corridor will connect railway network of Azerbaijan, Georgia and Turkey and will serve increasing the transit potential of regional countries. Currently, the estimated date of completion of the construction is the second half of 2018. On December 1, 2014, as part of the Azerbaijan Railways Reconstruction Project the Group entered into an agreement with Moravia Steel A.S. to supply equipment and materials, and perform related works and services for a complete refurbishment of 600 km of the rail track of the railway between Baku and Beyuk-Kyasik. The project commenced in the beginning of 2015 and is planned to be completed in 4.5 years. In order to finance this project the Group signed a loan in the amount of EUR 458,861 thousand from HSBC Bank plc on April 14, 2015. In 2016 the Group commenced construction of railway linking Astara (the Republic of Azerbaijan) and Astara (the Islamic Republic of Iran) as part of the International North-South Transport Corridor. The project commenced during 2016 which includes construction of 10 km railway line and railway bridge. The Government of the Republic of Azerbaijan invested about $60 million for performing related works and services to complete construction of the railway corridor between Astara (the Republic of Azerbaijan) and Astara (the Islamic Republic of Iran), as well as the construction of a railway station and cargo terminals in the territory of the Islamic Republic of Iran. As part of the project four terminals are planned to be built for the cargo storage - container, general cargo, oil and grain. At the first stage, it is planned to launch two terminals - container and general cargo. It is planned that the Republic of Azerbaijan will have the right to operate the Astara-Astara line and a railway station in the Islamic Republic of Iran’s Astara for 15 years as well as the terminals located in the Islamic Republic of Iran’s Astara, for 25 years. The project of restoring the former electric railway lines serving to Baku in order to improve considerably passenger transportation was started at the end of 2017. The construction works commenced from the Sabunchu station and AZN 100 million were allocated for the “Baku Ring Railway construction” project. As part of “Baku Ring Railway construction” project, the Baku- Sumgait railway line started to operate from 2015 with stops at two stations – Bilajari and Khirdalan. The purpose of the project is to put into use additional passenger stations and expand the direction of Baku-Sumgait railway via Bakikhanov, Zabrat-1, Zabrat-2, Pirshagi, Fatmai, Novkhani stations and further to Sumgait. 13 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) The Government of the Republic of Azerbaijan is the party in the financing of the second phase of the Reconstruction of Railways Project and is obliged to provide EUR 74,937 thousand advance payment in two installments. The aggregate amount of these installments shall not be less than 15% of the project cost. The Government has made a payment of the first installment in the amount of EUR 39,739 thousand on November 1, 2015 and the second installment in the amount of EUR 40,334 thousand during the year ended December 31, 2017. This installment was provided as a loan to the Group. The details of the loan is described in Note 17. Subsidiaries and structural changes in departments ADY’s major subsidiaries included in the consolidation as at and for the year ended December 31, 2017 are as follows: Name of the Company/Branches Nature of business Group’s equity interest “Capital Construction” and “Technical Construction management and supervision Supervision” LLC 100% “Nakhchivan Railways” LLC Freight and passenger transportation, construction works 100% “Administrative Management” LLC Administrative support 100% “Railway Services” LLC Construction works 100% #11 Limited Liability Company Construction works 100% #5 Limited Liability Company Construction works 100% “Capital Repairs” LLC Construction management and supervision 100% “Absheron Volleyball Club” Ltd Sport 100% “Locomotive Volleyball Club” Ltd Sport 100% “Locomotive Women Volleyball Club” LLC Sport 100% “Azerrail Volleyball Club” LLC Sport 100% “ADY Express” LLC Logistics services 100% Georgia branch of ADY Construction works 100% “ADY Container” LLC Management of container transportation 100% “ADY Property” LLC Management of real estates 100% “AzRus Trans” CJSC Freight transportation 51% “Astara Grain Terminal” LLC Logistics hub 50% ADY’s major subsidiaries included in the consolidation as at and for the year ended December 31, 2016 are as follows: Name of the Company/Branches Nature of business Group’s equity interest “Capital Construction” and “Technical Construction management and supervision Supervision” LLC 100% “Nakhchivan Railways” LLC Freight and passenger transportation, construction works 100% “Administrative Management” LLC Administrative support 100% “Railway Services” LLC Construction works 100% #11 Limited Liability Company Construction works 100% #5 Limited Liability Company Construction works 100% “Capital Repairs” LLC Construction management and supervision 100% “Locomotive Women Volleyball Club” LLC Sport 100% “Azerrail Volleyball Club” LLC Sport 100% “ADY Express” LLC Logistics services 100% Georgia branch of ADY Construction works 100% “AzRus Trans” CJSC Freight transportation 51% “Astara Grain Terminal” LLC Logistics hub 50% 14 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Information of subsidiaries established during the year ended December 31, 2017 is provided below: Establishment of “ADY Container” Ltd. “ADY Container” Ltd. was incorporated under the Republic of Azerbaijan law on June 23, 2017. The share capital of this company constitutes the amount of AZN 50,000 comprised of 2 shares with par value of AZN 25,000 each fully owned by “Azerbaijan Railways” Closed Joint Stock Company. The main activity of the Company is to improve the quality and safety of rail freight transportation, and efficient and centralized management of container transportations. Establishment of “ADY Property” Ltd. “ADY Property” Ltd. was incorporated under the Republic of Azerbaijan law on April 27, 2017. The share capital of this company constitutes the amount of AZN 200 comprised of 2 shares with par value of AZN 100 each fully owned by “Azerbaijan Railways” Closed Joint Stock Company. The main activity of the Company is management of real estates. Establishment of “Absheron Volleyball Club” Ltd. “Absheron Volleyball Club” Ltd was incorporated under the Republic of Azerbaijan law on April 27, 2017. The share capital of this company constitutes the amount of AZN 200 comprised of 2 shares with par value of AZN 100 each fully owned by “Azerbaijan Railways” Closed Joint Stock Company. The main activity of the Company is arranging sporting events. Establishment of “Locomotive Volleyball Club” Ltd. “Locomotive Volleyball Club” Ltd was incorporated under the Republic of Azerbaijan law on January 24, 2017. The share capital of this company constitutes the amount of AZN 200 comprised of 1 share with par value of AZN 200 fully owned by “Azerbaijan Railways” Closed Joint Stock Company. The main activity of the Company is arranging sporting events. The summarized financial information of the significant subsidiaries acquired and established during 2017, based on amounts before inter-company eliminations is provided below: Summarized statement of financial position as at December 31, 2017: “ADY Container” “ADY Property” LLC LLC ASSETS Non-current assets: Property, plant and equipment 22 - Intangible assets 2 - Total non-current assets 24 - Current assets: Trade and other receivables 583 50 Cash and cash equivalents 49 78 Other current assets 3 3 Total current assets 635 131 TOTAL ASSETS 659 131 15 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) “ADY Container” “ADY Property” LLC LLC LIABILITIES AND EQUITY LIABILITIES: Current liabilities: Trade and other payables 560 85 Taxes payable other than income tax 19 2 Advances received - 22 Total current liabilities 579 109 Total liabilities 579 109 EQUITY: Share capital 50 - Retained earnings 30 22 Total equity 80 22 TOTAL LIABILITIES AND EQUITY 659 131 Summarized statement of comprehensive income for the year ended December 31, 2017: “ADY Container” “ADY Property” LLC LLC Revenues Cargo revenues 738 - Other revenues - 50 Total revenues 738 50 Operating expenses Depreciation and amortization (7) - Wages, salaries and related contributions (50) (16) Rent expense (50) - Bank commission (2) (1) Other operating costs (591) (5) Total operating expenses (700) (22) Profit before income tax 38 28 Income tax expense (8) (6) Net profit for the year 30 22 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 30 22 Information of subsidiaries acquired and established during the year ended December 31, 2016 is provided below: 16 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Acquisition of “Karvan Logistics” LLC On February 5, 2016, in accordance with Order #16/us/01, the Group acquired 100% of the shares of “Karvan Logistics” LLC, an unlisted company based in the Republic of Azerbaijan and specializing in the logistics services. The Group renamed the company name to “ADY Express” LLC. The share capital of “ADY Express” LLC constitutes the amount of AZN 100 comprised of 100 shares par value of AZN 1 fully owned by the Group. The fair values of the identifiable assets and liabilities of “Karvan Logistics” LLC as at the date of acquisition were: Fair value recognized on acquisition Assets Property, plant and equipment 35 Trade and other receivables 722 Cash and cash equivalents 682 Other current assets 1,092 Total assets 2,531 Liabilities Trade and other payables 172 Advances received 1,701 Other current liabilities 5 Total liabilities 1,878 Total identifiable net assets at fair value 653 Gain on bargain purchase 653 Purchase consideration transferred 0.1 From the date of acquisition, “ADY Express” LLC contributed AZN 82,808 thousand of revenue and AZN 1,817 thousand to profit before tax from continuing operations of the Group, till the end of 2016. If the combination had taken place at the beginning of the year, revenue from continuing operations for the year ended December 31, 2016 would have been AZN 90,350 thousand and profit before tax from continuing operations for the Group would have been AZN 2,432 thousand. Establishment of “AzRusTrans” LLC On September 6, 2016, the Company has entered into the agreement with “Rusagrotrans” LLC to establish “AzRusTrans” LLC to provide logistics services. The initial share capital of this company is AZN 150,000 equally divided into 150,000 shares with nominal value of AZN 1 each. The shareholdings and the initial number of shares of the parties is as follows: 17 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) - “Azerbaijan Railways” CJSC owns 51% of the share capital, i.e. 76,500 shares with total nominal value of AZN 76,500; - “Rusagrotrans” LLC owns 49% of the share capital, i.e. 73,500 shares with total nominal value of AZN 73,500. Establishment of “Astara Grain Terminal” LLC “Astara Grain Terminal” LLC was incorporated under the Republic of Azerbaijan law on September 23, 2016. The share capital of this company constitutes the amount of AZN 100 comprised of 100 shares with par value of AZN 1 equally owned by “ADY Express” LLC and “Yasha Inshaat” LLC. The main activity of the Company is warehousing services. The summarized financial information of the subsidiaries acquired and established during 2016, based on amounts before inter-company eliminations is provided below: Summarized statement of financial position as at December 31, 2016: “ADY “AzRusTrans” “Astara Express” LLC Grain LLC Terminal” LLC ASSETS Non-current assets: Property, plant and equipment 114 59 10 Total non-current assets 114 59 10 Current assets: Inventories - - 12 Trade and other receivables 6,673 81 - Cash and cash equivalents 701 503 43 Other current assets 3,576 - 24 Total current assets 10,950 584 79 TOTAL ASSETS 11,064 643 89 LIABILITIES AND EQUITY LIABILITIES: Current liabilities: Trade and other payables 1,374 43 100 Taxes payable other than income tax - 29 - Income tax payable - 20 - Advances received 7,489 1,813 - Other current liabilities 5 1 - Total current liabilities 8,868 1,906 100 Total liabilities 8,868 1,906 100 EQUITY: Share capital - 150 - Retained earnings/(Accumulated loss) 2,196 (1,413) (11) Total equity 2,196 (1,263) (11) TOTAL LIABILITIES AND EQUITY 11,064 643 89 18 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Summarized statement of comprehensive income for the year ended December 31, 2016: “ADY “AzRusTrans” “Astara Express” LLC Grain LLC Terminal” LLC Revenues Cargo revenues 90,350 1,313 - Other revenues - 162 - Total revenues 90,350 1,475 - Operating expenses Transportation cost (88,154) - - Depreciation and amortization (19) (3) - Wages, salaries and related contributions (363) (20) (6) Material, repairs and maintenance (20) (2) - Taxes other than income tax (72) (4) (1) Fuel expenses (78) - - Other operating costs - (2,951) (4) Total operating expenses (88,706) (2,980) (11) Other income Foreign exchange gain 843 21 - Other income - 91 - Profit/(loss) before income tax 2,487 (1,393) (11) Income tax expense (331) (20) - Net profit/(loss) for the year 2,156 (1,413) (11) TOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE YEAR 2,156 (1,413) (11) Acquisition of interest in “MSP International AZ” LLC On October 1, 2016, “Railway Services” LLC, subsidiary of the Group acquired 5% interest in the voting shares of “MSP International AZ” LLC. The initial share capital of the Company is AZN 50,000 equally divided into 100 shares with nominal value of AZN 500 each. The shareholdings and the initial number of shares of the parties is as follows: - “Railway Services” LLC owns 5% of the share capital, i.e. 5 shares with total nominal value of AZN 2,500; - “MSP International” s.r.o. owns 95% of the share capital, i.e. 95 shares with total nominal value of AZN 47,500. During 2016, the Group made structural changes in the Infrastructure Department and Department of Maintenance and Operations to increase operational effectiveness and efficiency. New structure of the Infrastructure Department consists of 35 sub-departments. 19 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Common control business combination The Ministry of Transportation of the Republic of Azerbaijan transferred ownership of the Georgian branch of “Azeravtoyol” OJSC (previously named as “Azeryolservis” OJSC) from “Azeravtoyol” OJSC to the Group through issuing order # 34/u on March 2, 2015. In accordance with this order, all assets and liabilities of the Georgia Branch of the Group (the “Branch”) were combined to the balances of the Group. The summarized financial information of the branch as at the transfer date is provided below. This information is based on the amounts reported in the branch’s financial statements prepared in accordance with IFRS adjusted for the purposes of the consolidation into these consolidated financial statements before intercompany eliminations and hence it differs from the information presented in the IFRS financial statements of the branch. As at transfer date Non-current assets 384 Current assets 76,903 Non-current liabilities (7,471) Current liabilities (85,842) Total net assets (16,026) Total net assets in the amount of AZN 16,026 thousand was recognized in other reserve. Pricing policy The pricing policy of the Group for international freight is conducted based on “Tariff policy” on International Freight adopted by CIS in Tariff Conference held annually according to Tariff Agreement dated February 17, 1993. The General Director of the Group approves the pricing policy. Prices exclude Value Added Tax (“VAT”). The tariffs are denominated in CHF. However, payments in USD and Euro are also accepted. The prices in USD and EUR are converted using average exchange rates for USD and EUR announced by Reuters till last three months the prices in CHF are announced. Prices in CHF are announced annually no later than December 1. Payments are translated to AZN using CBAR exchange rates. Generally, the total cargo transportation price payable by a shipper of cargo consists of the following components: a charge for locomotive traction and infrastructure services and a charge for the use of a railcar. If a customer uses a railcar owned or leased by the Group, railcar component is also subject to tariff regulation. Tariff policy is not applied for pricing of local freight. Local freight tariffs are set by the Group, reviewed annually and priced in AZN. Liquidity As at December 31, 2017 and 2016, the Group’s current liabilities exceeded its current assets by AZN 152,652 thousand and AZN 559,258 thousand, respectively, which is to a large extent explained by the nature of the Group’s current liabilities mainly represented by payables for construction, development, modernization and maintenance of property, plant and equipment as a part of Group’s investment program, as well as by advances received for construction works. The Group makes significant changes in the general business terms of its contracts with credit lenders. Details are described in Note 35. 20 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) The Group is investing in expansion, modernization and maintenance of its property, plant and equipment. The Group finances its investment activities through cash generated from operations and short-term and long-term borrowings and governmental financing received in the form of grants. The Management uses the following instruments in order to manage the Group’s liquidity and overcome the negative liquidity gap in subsequent periods:  continuous monitoring and management of credit portfolio structure aiming at extending its duration and maintaining even flows of borrowings repayment in future periods;  maintaining diversified sources of external borrowings, including borrowings from commercial banks;  entering into long-term and medium-term credit agreements with local banks to ensure sufficiency of available financial resources;  using short-term bridge facilities to ensure smooth cash flows to finance investments and operations. Management believes that through twelve months after the date of authorization of these consolidated financial statements, there will be sufficient funding from (a) existing cash balances, (b) cash generated from operations, (c) debt financing and (d) government support. 2. SIGNIFICANT ACCOUNTING POLICIES Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (“IASB”) and Interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”). The consolidated financial statements provide comparative information in respect of the previous period. Principles of Consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an investee so as to obtain benefits from its activities. Income and expenses of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate. Total comprehensive income of subsidiaries is attributed to the owners of the Group and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of the branch and subsidiaries to bring their accounting policies into line with those used by other members of the Company. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. 21 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Business combinations and acquisition of non-controlling interests Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition -related costs are expensed as incurred and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. Contingent consideration, resulting from business combinations, is valued at fair value at the acquisition date as part of the business combination. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IAS 39 “Financial Instruments: Recognition and Measurement”, is measured at fair value with the changes in fair value recognized in the statement of profit or loss in accordance with IAS 39. Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests and any previous interest held over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognized at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Common control business combinations IFRS 3, “Business Combinations” does not apply to a business combination of entities or businesses under common control. A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. The management used “predecessor value method” for accounting of such transactions as this provides the most relevant and reliable information in accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. A predecessor value method involves accounting for the assets and liabilities of the acquired business using existing carrying values. The difference between the acquirer’s cost of investment and the acquiree’s equity is presented as a separate reserve within equity on consolidation. Going concern These consolidated financial statements have been prepared on the assumption that the Group will be able to continue its operation on a going concern basis for the foreseeable future. Management views the Group as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading or seeking protection from creditors pursuant to laws or regulations of the Republic of Azerbaijan. 22 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Accordingly, assets and liabilities are recorded on the basis that the Group will be able to realize its assets and discharge its liabilities in the normal course of business. Some financial reporting frameworks contain an explicit requirement for management to make a specific assessment of the Group’s ability to continue as a going concern, and standards regarding matters to be considered and disclosures to be made in connection with going concern. Management’s assessment of the going concern assumption involves making a judgment, at a particular point in time, about the future outcome of events or conditions which are inherently uncertain. Other basis of presentation criteria These consolidated financial statements are presented in thousands of Azerbaijani Manats (“AZN”), unless otherwise indicated. These consolidated financial statements have been prepared under the historical cost convention, except property, equipment and intangible assets which are stated at fair value as deemed cost. Property, plant and equipment and intangible assets Property, equipment and intangible assets are carried at historical cost less accumulated depreciation and amortization and any recognized impairment loss. Depreciation on assets under construction and those not placed in service commences from the date the assets are ready for their intended use. Depreciation and amortization are charged on the carrying value of property, equipment and intangible assets and is designed to write off assets over their useful economic lives. The estimated useful lives, residual values and depreciation/amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis at the following useful lives (years): Superstructure 13-27 Roadbed 50-75 Railway vehicles 9-12 Buildings and similar constructions 35-40 Operating equipment 8-15 Intangible assets 5-10 Other fixed assets 5-10 Expenditures related to repairs and renewals are charged when incurred and included in operating expenses unless they qualify for capitalization. Expenditures relating to track renewals are capitalized to the extent that the flow of the future economic benefits is probable and those expenditures can be reliably measured. The replaced assets are valued at lower of cost and net realizable value and transferred to inventories or property, plant and equipment, as applicable. The excess of the carrying value of the replaced assets over their net realizable value is recognized as an expense in the consolidated statement of comprehensive income. All property that does not provide future economic benefit is expensed immediately in the consolidated statement of comprehensive income. 23 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. At the end of each reporting period, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit and loss accounts, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or a cash- generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit and loss accounts, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. An item of property, plant and equipment and intangible assets is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit and loss accounts. Prepayments Prepayments are carried at cost less provision for impairment. A prepayment is classified as non- current when the goods or services relating to the prepayment are expected to be obtained after one year, or when the prepayment relates to an asset which will itself be classified as non-current upon initial recognition. Prepayments to acquire assets are transferred to the carrying amount of the asset once the Group has obtained control of the asset and it is probable that future economic benefits associated with the asset will flow to the Group. Other prepayments are written off to profit and loss accounts when the goods or services relating to the prepayments are received. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly and a corresponding impairment loss is recognized in profit and loss accounts. 24 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Inventories Inventories are recorded at the lower of cost and net realizable value. Cost of inventory is determined on the weighted average cost basis. The cost of finished goods and work in progress includes raw materials, direct labor, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realizable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses. Inventories are reported net of provisions for damaged or obsolete items. Financial instruments The Group recognizes financial assets and liabilities in its consolidated statement of financial position when it becomes a party to the contractual obligations of the instrument. Regular way purchases and sales of financial assets and liabilities are recognized using settlement date accounting. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit and loss accounts. Financial assets Financial assets are classified into the following specified categories: financial assets “at fair value through profit or loss” (FVTPL), “held-to-maturity” investments, “loans and receivables” and “available-for-sale” (AFS) financial assets. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Financial assets at FVTPL Financial assets classified as held for trading are included in the category “financial assets at fair value through profit or loss”. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated and effective hedging instruments. Gains or losses on financial assets held for trading are recognized in the profit and loss accounts. Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity. Held-to-maturity investments are measured at amortized cost using the effective interest method less any impairment. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as trading securities or designated as investment securities available-for-sale. Such assets are carried at amortized cost using the effective interest method. 25 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Gains and losses are recognized in profit and loss accounts when the loans and receivables are derecognized or impaired, as well as through the amortization process. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition available-for sale financial assets are measured at fair value with gains or losses being recognized in other comprehensive income until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in other comprehensive income is reclassified to profit and loss accounts. However, interest calculated using the effective interest method is recognized in profit and loss accounts. Loans receivable Loans receivable are non-derivative assets with fixed or determinable payments that are not quoted in an active market, other than those classified in other categories of financial assets. Loans receivable are initially recognized at a fair value plus related transaction costs. The difference between the fair value of consideration given and the fair value of the loans receivable is recognized as a loss on initial recognition and included in the consolidated statement of comprehensive income according to nature of these losses. Subsequently, the balances are carried at amortized cost using the effective interest method. Loans receivable are carried net of any allowance for impairment losses. Financial guarantee contracts Financial guarantee contracts issued by the Group are the contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specific debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts are initially recognized as a liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the best estimate of expenditure required to settle present obligation at the reporting date and the amount initially recognized less, when appropriate, cumulative amortization. Fair value measurement Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction on the measurement date. When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis. If a market for a financial instrument is not active, then the Group establishes fair value using a valuation technique. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Group, incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. 26 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Trade and other receivables Trade and other receivables are carried at amortized cost using the effective interest method. A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The amount of the provision is recognized in the consolidated statement of comprehensive income. The primary factors that the Group considers whether a receivable is impaired is its overdue status and realizability of related collateral, if any. Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short- term highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at amortized cost using the effective interest method. Restricted balances are excluded from cash and cash equivalents for the purposes of the cash flow statement. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date are included in other non-current assets. VAT deposit account The Value Added Tax (“VAT”) deposit account system is introduced in 2008 by the Ministry of Taxes of the Republic of Azerbaijan which aims prevention of VAT misuse. From January 1, 2008 on the basis of amendments to the Tax Code, the amount of VAT refund is considered the tax amount which is paid, according to the submitted VAT invoices to the taxpayer’s VAT deposit account in the framework of transactions carried out in this account. By the support of this module the taxpayer pays the amount of VAT indicated on the VAT invoices to the VAT deposit account of another taxpayer. At the same time tax obligations to the state budget regarding all kinds of taxes and VAT amounts on the import transactions which is necessary to be paid to the customs committee, can be paid by taxpayers through the VAT deposit account. Information about paid amounts is transferred by the Ministry of Taxes to the Main State Treasury (“MST”) and then to the Central Bank of the Republic of Azerbaijan (“CBAR”). CBAR on the basis of information submitted by the Main State Treasury ensures the transformation of amounts to the relevant local treasury authorities. The Ministry of Taxes ensures inclusion of amounts which is noted in the submitted information to the taxpayer’s personal files. The current system is connected with the Automated Tax Information System of the Ministry of Taxes. At the same time online exchange of information was organized with the MST and CBAR. Implementation of the VAT deposit account makes it possible to timely control payments and refunded VAT amounts. Taxpayers who have tax debts can only transfer these amounts to the state budget. Taxpayers can make payments to the state budget without visiting banks, to the sub-accounts of other taxpayers and to the customs committee through the deposit account. The Ministry of Taxes automatically controls all transactions carried out through the deposit account using special software. Use of balances in the VAT deposit account is restricted and can be used only for transactions connected with VAT and other applicable taxes. 27 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Reclassification of financial assets If a non-derivative financial asset classified as held for trading is no longer held for the purpose of selling in the near term, it may be reclassified out of the fair value through profit or loss category in one of the following cases: • A financial asset that would have met the definition of loans and receivables above may be reclassified to loans and receivables category if the Group has the intention and ability to hold it for the foreseeable future or until maturity; • Other financial assets may be reclassified to available for sale or held-to-maturity categories only in rare circumstances. A financial asset classified as available-for-sale that would have met the definition of loans and receivables may be reclassified to loans and receivables category of the Group has the intention and ability to hold it for the foreseeable future or until maturity. Financial assets are reclassified at their fair value on the date of reclassification. Any gain or loss already recognized in profit and loss accounts is not reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortized cost, as applicable. Impairment of financial assets The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. De-recognition of financial assets The Group derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received. On de-recognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit and loss accounts. 28 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) On de-recognition of a financial asset other than in its entirety (for example, when the Group retains an option to repurchase part of the transferred asset or retains a residual interest that does not result in the retention of substantially all the risks and rewards of ownership and the Group retains control), the Group allocates the previous carrying amount of the financial asset between the part it continues to recognize under continuing involvement, and the part it no longer recognizes on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognized and the sum of the consideration received for the part no longer recognized and any cumulative gain or loss allocated to it that had been recognized in other comprehensive income is recognized in profit and loss accounts. A cumulative gain or loss that had been recognized in other comprehensive income is allocated between the part that continues to be recognized and the part that is no longer recognized on the basis of the relative fair values of those parts. Financial liabilities Financial liabilities are classified as either “financial liabilities at FVTPL” or “other financial liabilities”. Financial liabilities at FVTPL Financial liabilities are classified as FVTPL when the financial liability is either held for trading or it is designated as at FVTPL. Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on re- measurement recognized in profit and loss accounts. The net gain or loss recognized in profit and loss accounts incorporates any interest paid on the financial liability and is included in the “other income, net” line item in the consolidated statement of comprehensive income. Other financial liabilities Other financial liabilities are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. Borrowings Borrowings are carried at amortized cost using the effective interest method. Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are cap italized as part of the cost of the asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. 29 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Finance leases Assets held under finance leases are initially recognized as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated statement of financial position as a finance lease obligation. Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognized immediately in profit or loss unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Group’s gene ral policy on borrowing costs. Contingent rentals are recognized as expenses in the periods in which they are incurred. Operating leases Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments are charged to profit and loss accounts on a straight-line basis over the lease term. The lease term is the non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option. Where the Group is a lessor, rental income from operating lease is recognized on a straight line basis over the term of relevant lease. Initial direct costs in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized over the lease term. Trade and other payables Trade payables are accrued when the counterparty performed its obligations under the contract and are carried at amortized cost using the effective interest method. Advances received Advances received from customers refers to an item that will initially be recorded as a liability, but is expected to become an asset over time and/or through the normal operations of the business. Advances received from customers are initially recorded at the fair value of consideration received plus any directly attributable transaction costs, and subsequently are carried at amortized cost. De-recognition of financial liabilities The Group derecognizes financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit and loss accounts. 30 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Offset of financial assets and liabilities Financial assets and liabilities are offset and reported net on the consolidated statement of financial position when the Group has a legally enforceable right to set off the recognized amounts and the Group intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. In accounting for a transfer of a financial asset that does not qualify for de- recognition, the Group does not offset the transferred asset and the associated liability. Provisions Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the obligation can be made. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect of the time value of money is material). When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Taxation Income tax Income tax expense represents the sum of the tax currently payable and deferred tax expense. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the consolidated statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s current tax expense is calculated using tax rates that have be en enacted or substantively enacted by the end of the reporting period. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. 31 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized. Deferred tax is charged or credited in the consolidated statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred income tax assets and deferred income tax liabilities are offset and reported net on the consolidated statement of financial position if:  The Group has a legally enforceable right to set off current income tax assets against current income tax liabilities; and  Deferred income tax assets and the deferred income tax liability relate to income taxes levied by the same taxation authority on the same taxable entity. Value added tax The difference of output VAT and claimable input VAT is payable to the state budget within 20 days following the reporting month. Output value added tax related to sales is payable to tax authorities on the earlier of (a) collection of the receivables from customers or (b) delivery of the goods or services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases is recognized in the statement of financial position on a gross basis and disclosed separately as an asset and liability. Where provision has been made for impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT. Land tax Owners and users of land in the Republic of Azerbaijan are subject to land tax at varying rates. The rate of tax varying from AZN 0.06 up to AZN 20 depends on the type of land, i.e. agricultural, industrial, construction, communication, trading or residential land, as well as the location of land. The reporting period is a calendar year. For legal entities owning or using the land the deadline for tax filing is May 15 of each year, while the tax should be paid in equal installments no later than August 15 and November 15. Property tax Except for cases when the property has been insured at a value exceeding its residual value and the property tax is then calculated on the market value, the taxable base for resident legal entities and non-resident legal entities with permanent establishment is the average annual residual value of their fixed assets. Thus, an average annual residual value of fixed assets owned by such legal entities is subject to a property tax at the rate of 1%. At the same time, the taxable base in respect of resident and non-resident individuals comprises of buildings and their parts, as well as resident individuals’ water and air transportation means, where the property tax rate varies depending on the type of asset owned. The reporting period is a calendar year. Legal entities, owning the fixed assets, have to file the tax return no later than March 31 of the year following the reporting period. The property taxpayer legal entities remit the tax by way of advances (20% of the last year’s property tax) by the 15th of the second month of each quarter with the final balancing payment due no later than the filing deadline mentioned above. 32 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) The Republic of Azerbaijan also has various other taxes, which are assessed on the Group’s activities. These taxes are included in the consolidated statement of comprehensive income. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognized as a deduction from equity, net of any tax effects. Dividends on ordinary shares are recognized in equity as a reduction in the period in which they are declared. Dividends that are declared after the reporting date are treated as a subsequent event under International Accounting Standard 10 “Events after the Reporting Date” (“IAS 10”) and disclosed accordingly. Government investments According to the decree No. 183 of the Cabinet of the Ministers of the Republic of Azerbaijan dated October 22, 2010, all government investments allocated to the state companies of the Republic of Azerbaijan for the purposes of improvement of the infrastructure and enhancement of their operations since 2007 should be included in the share capital of these entities. The Group policy is that government investments are initially recorded in government investments line in the equity until they are registered in relevant government agencies. It is then classified as share capital when all necessary documentary works are completed and amounts are registered in relevant government agency. Other reserve Other reserve represents the difference between the acquirer’s cost of investment and the acquiree’s equity under common control business combinations. Revenue and expense recognition Revenues are recognized when it is probable that the economic benefits associated with the transaction will flow to the Group and the amount of revenues can be measured reliably. Revenues and expenses are accounted for at the time the actual flow of related goods and services occurs and transfer of risks and rewards has been completed, regardless of when cash or its equivalent is received or paid, and are reported in the statement of comprehensive income in the period to which they relate. The Group assesses its revenue arrangements against specific criteria in order to determine if it is acting as a principal or an agent. Transportation services In respect of services related to cargo transportation, revenue is recognized by reference to the stage of completion of the transportation at the reporting date provided that the stage of completion of the transportation or other specific condition has been met and the amount of revenue can be measured reliably. In the event that either of the conditions above is not met as at the reporting date, the recognition of revenue is deferred to the date when transportation is completed, i.e. cargo delivered to the place of destination. The stage of completion is determined as a percentage of services performed to date to total services to be performed. In respect of services related to passenger transportation, revenue is recognized when transportation is completed. 33 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Revenue from construction services The Group renders significant construction services to third parties under long-term construction contracts. Revenue from construction services rendered is recognized in the consolidated statement of comprehensive income on a monthly basis in accordance with the actual volume of works completed. The stage of completion is assessed monthly. When the outcome of the contract cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable. The Group provides for estimated losses on uncompleted contracts in the period, in which such losses are identified. Interest income and expenses Interest income and expenses are recorded using the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount of such an instrument, taking into consideration all contractual terms of the instrument. Employee benefits Wages, salaries, contributions to the Republic of Azerbaijan state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits (such as health services and child care services) are accrued in the year in which the associated services are rendered by the employees of the Group. Foreign currency translation The functional currency of the Group is the currency of the primary economic environment, in which it operates. The Group’s functional currency is AZN. Financial assets and liabilities denominated in foreign currencies are translated into AZN at the appropriate spot rates of exchange of the CBAR ruling at the end of reporting date. Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transaction. Profits and losses arising from these translations are included in foreign exchange translation gain/(loss) account. The exchange rates at reporting date used by the Group in the preparation of the consolidated financial statements are as follows: December 31, December 31, 2017 2016 USD/AZN 1.7001 1.7707 EUR/AZN 1.9463 1.8644 GEL/AZN 0.6514 0.6663 CHF/AZN 1.7374 1.7351 RUR/AZN 0.0295 0.0293 KZT/AZN 0.0051 0.0053 34 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Foreign currency translational reserve On consolidation, the assets and liabilities of foreign operations are translated into AZN at the rate of exchange prevailing at the reporting date and their statements of comprehensive income are translated at exchange rates prevailing at the dates of the transactions. The exchange differences arising on translation for consolidation purposes are recognized in other comprehensive income. On disposal of a foreign operation, the component of the other comprehensive income relating to that particular foreign operation is recognized in profit and loss accounts. Contingent liabilities and assets Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed in the notes to the financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but disclosed when an inflow of economic benefits is probable. 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES The preparation of consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and disclosure of contingent liabilities during the reporting period. As a result of the uncertainties inherent in business activities, many items in financial statements cannot be measured with precision but can only be estimated. Estimation involves judgments based on the latest information available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur. The most significant estimates relate to the depreciable lives of property, plant and equipment, impairment of non-financial and financial assets, fair value of financial instruments, provision for obsolete inventory, provision for tax and legal contingencies and deferred taxation. Actual results could differ from these estimates. Useful life of property, plant and equipment The Group assesses the remaining useful lives of items of property, plant and equipment at least at each financial year-end. If expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. These estimates may have a material impact on the a mount of the carrying values of property, plant and equipment and on depreciation recognized in profit and loss accounts. Impairment of property, plant and equipment and other non-financial assets The Group assesses at each reporting date whether there is any indication that an asset or any of the Groups’ cash-generating units (“CGU”s) may be impaired and determines recoverable amount of an asset or a CGU if impairment indicators are identified. Recoverable amount is the higher of an asset’s or CGUs fair value less costs of disposal and its value in use. When the carrying amount of an asset or a CGU exceeds its recoverable amount, the asset or CGU is considered impaired and is written down to its recoverable amount. 35 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) 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 assessment of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. The Group bases its value in use calculation on detailed budgets and forecast calculations which are prepared separately for each of the Group’s CGU to which the individual asset is allocated. These budgets estimates and forecasts generally cover the period of 5 years. For longer periods, a long-term growth rate is determined and applied to projected future cash flows after the tenth year. Due to significant uncertainties regarding future changes in the tariff-setting policy management cannot predict what effect changes in fiscal and political policies may have on the Group’s remaining investment or ability to make future investments in property, plant and equipment, which may affect the recoverable amount of such investments. Management plans to revisit such an assessment at the time more certainty regarding factors outlined above exist and upon finalization of Group’s property, plant and equipment registers for the movements in property, plant and equipment, including the effects of impairment and accounting for components, in accordance with its accounting policy. Accordingly, the amount of impairment loss may be revised. The value of the CGUs was calculated by discounting the future cash flows at the rate of 7.2% on pre-tax base and impairment charge of AZN 265,808 thousand (2016: AZN 229,386 thousand) has been recognized in consolidated statement of comprehensive income to write-down the book value of certain property, plant and equipment with regard to the functional use of these assets. The discount rate calculation is based on the specific circumstances of the Group and its operating segments and derived from its weighted average cost of capital (“WACC”). In calculating WACC the cost of equity was estimated using peer group data and the cost of debt is based on interest bearing borrowings, the Group is obliged to service. Specific risks are incorporated by applying individual beta factors, market risk and size of the Group. The beta factors are evaluated annually based on publicly available market data. If the estimated WACC used in the calculation had been 1% higher than management’s estimate, the aggregate amount of impairment loss would have been AZN 907,408 thousand higher (2016: AZN 633,314 thousand higher). 6.96% is the threshold level where there is no need for impairment (2016: 6.23%). These estimates, including the methodologies used, may have a material impact on the amount of any property, plant and equipment and other non-financial assets impairment. As at December 31, 2017 and 2016 the Group has provided allowance against prepayment for inventories and services made in the amount of AZN 39,113 thousand and AZN 30,840 thousand, correspondingly. Inventory valuation Inventory is valued at the lower of cost or net realizable value. The Group records an allowance to reduce the carrying value of obsolete and slow-moving inventory to net realizable value, when appropriate. The actual value realized on disposition of such inventory may differ from the net realizable value; any such difference could have a significant impact on future operating results. As at December 31, 2017 and 2016 the Group has provided allowance for loss on damaged and obsolete inventory in the amount of AZN 8,238 thousand and AZN 12,500 thousand, correspondingly. 36 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Recoverability of VAT At each reporting date the Group assesses the recoverability of VAT arising on purchase of goods and services. The Group can only receive these amounts through an offset against future VAT liability or collection from the tax authorities. In assessing the recoverability of the VAT receivable, the Group considers information from the internal tax department regarding projected VAT liability, correspondence with government tax authorities, and historical recovery experience. The actual amount of VAT recovery could differ materially from the Groups estimate and this could materially impact operating results. Impairment of financial assets The Group assesses, at each reporting date, whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and when observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. As at December 31, 2017 and 2016 the Group has provided allowance for impairment losses in the amount of AZN 135,186 thousand and AZN 114,210 thousand for loans receivable and allowance for bad debt in the amount of AZN 93,178 thousand and AZN 90,868 thousand for trade and other receivables, respectively. Litigations The Group exercises considerable judgment in measuring and recognizing provisions and the exposure to contingent liabilities related to pending litigations or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgment is necessary in assessing the likelihood that a pending claim will succeed, or a liability will arise, and to quantify the possible range of the final settlement. Because of the inherent uncertainties in this evaluation process, actual losses may be different from the originally estimated provision. These estimates are subject to change as new information becomes available, primarily with the support of internal specialists, if available, or with the support of outside consultants, such as legal counsel. Revisions to the estimates may significantly affect future operating results. Current taxes Azerbaijani tax, currency and customs legislation is subject to varying interpretations and changes occur frequently. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activity of the Group’s entities may not coincide with that of management. As a result, tax authorities may challenge transactions and the Group’s entities may be assessed additional taxes, penalties and interest, which can be significant. Periods remain open to review by the tax and customs authorities with respect to tax liabilities for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. As at December 31, 2017, the management believes that its interpretation of the relevant legislation is appropriate and that it is probable that the Group’s tax, currency and customs positions will be sustained. 37 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Fair value of financial instruments Where the fair value of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. Construction contract When the outcome of a construction contract cannot be estimated reliably revenue is recognized only to the extent of contract costs incurred that it is probable will be recoverable; and contract costs are recognized as an expense in the period in which they are incurred. An expected loss on the construction contract is recognized as an expense immediately. The expected loss is assessed based on analysis performed by the management of the Group in accordance with approved project budget. 4. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS In the current year, the Group has adopted all of the applicable new and revised Standards and Interpretations issued by the IASB and the IFRIC of the IASB that are relevant to its operations and effective for annual reporting periods ending in December 31, 2017. The adoption of these new and revised Standards and Interpretations has not resulted in significant changes to the Group’s accounting policies that have affected the amounts reported for the current or prior years. Amendments to IAS 7 “Statement of Cash Flows” – The Group has applied these amendments for the first time in the current year. The amendments are intended to clarify IAS 7 to improve information provided to users of consolidated financial statements about an entity’s financing activities. To achieve this objective, the IASB requires that the following changes in liabilities arising from financing activities are disclosed (to the extent necessary): (i) changes from financing cash flows; (ii) changes arising from obtaining or losing control of subsidiaries or other businesses; (iii) the effect of changes in foreign exchange rates; (iv) changes in fair values; and (v) other changes. Amendments to IAS 12 “Income Taxes” – The amendments to IAS 12 “Income Taxes” clarify how to account for deferred tax assets related to debt instruments measured at fair value and clarify recognition of deferred tax assets for unrealized losses, to address diversity in practice. Annual Improvements to IFRS Standards 2014-2016 Cycle, IFRS 12 “Disclosure of Interests in Other Entities” – The Group has applied the amendments to IFRS 12 included in Annual Improvements to IFRS Standards 2014-2016 cycle for the first time in the current year. The other amendments included in this package are not yet mandatorily effective and they have not been early adopted by the Group. IFRS 12 states that an entity need not provide summarized financial information for interests in subsidiaries, associates or joint ventures that are classified as held for sale. The amendment clarifies that this is the only concession from disclosure requirements of IFRS 12 for such interests. Unless otherwise described above, the new Standards and Interpretations are not expected to significantly affect the Group’s consolidated financial statements. 38 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) 5. STANDARDS AND INTERPRETATIONS ISSUED AND NOT YET ADOPTED At the date of authorization of these consolidated financial statements, other than the Standards and Interpretations adopted by the Group in advance of their effective dates, the following Interpretations were in issue but not yet effective. Annual Improvements to IFRS Standards 2014-2016 Cycle contains amendments to IFRS 1 and IAS 28 which are not yet mandatorily effective for the Group. Standard Subject of amendment IFRS 1 “First-time Adoption of Deletion of short-term exemptions for the first-time adopters: The International Financial Reporting amendments delete the short-term exemptions in IFRS 1 that relate to Standards” IFRS 7, IAS 19, IFRS 12 and IAS 27. IAS 28 “Investments in Associates Measuring an associate or joint venture at fair value: The amendments and Joint Ventures” clarify that the election to measure at fair value through profit or loss an investment in an associate or a joint venture that is held by an entity that is a venture capital organization, or other qualifying entity, is available for each investment in an associate or joint venture on an investment-by-investment basis, upon initial recognition. The amendments to IFRS 1 and IAS 28 are effective for annual periods begin on or after January 1, 2018. The IASB and FASB have issued their joint revenue recognition standard, IFRS 15 “Revenue from Contracts with Customers”, which replaces all existing IFRS and US GAAP revenue requirements. IFRS 15 specifies how and when an IFRS reporter will recognize revenue as well as requiring such entities to provide users of consolidated financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers. IFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or after January 1, 2018. An earlier application is permitted. This standard might have significant effect on the consolidated financial statements. Yet the management has not estimated the effect of adoption of this standard. Amendments to IAS 40 “Transfers of Investment Property” are intended to clarify that an entity can only reclassify a property to/from investment property when, and only when, there is evidence that a change in the use of the property occurred. The amendments are effective for periods beginning on or after January 1, 2018. Earlier application is permitted. An entity applies the amendments to changes in use that occur on or after the beginning of the annual reporting period in which the entity first applies the amendments. Retrospective application is also permitted if that is possible without the use of hindsight. IFRIC 22 “Foreign Currency Transactions and Advance Consideration” addresses foreign currency transactions or parts of transactions where: • there is consideration that is denominated or priced in a foreign currency; • the entity recognizes a prepayment asset or a deferred income liability in respect of that consideration, in advance of the recognition of the related asset, expense or income; and • the prepayment asset or deferred income liability is non-monetary. The Interpretations Committee came to the following conclusion that the date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. If there are multiple payments or receipts in advance, a date of transaction is established for each payment or receipt. The interpretation applies to annual reporting periods beginning or after January 1, 2018. An earlier adoption is permitted. 39 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) IFRS 9 “Financial Instruments” – in July 2014, IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting.  From a classification and measurement perspective, the new standard will require all financial assets, except equity instruments and derivatives to be assessed based on a combination of the entity`s business model for managing the assets and the instruments` contractual cash flow characteristics. The IAS 39 measurement categories will be replaced by: fair value through profit or loss (FVPL), fair value through other comprehensive income (FVOCI), and amortized cost categories. IFRS 9 will also allow entities to continue to irrevocably designate instruments that qualify for amortized cost or FVOCI instruments as FVPL, if doing so eliminates or significantly reduces a measurement or recognition inconsistency. Equity instruments that are not held for trading may be irrevocably designated as FVOCI, with no subsequent reclassification of gains or losses to the income statement. The accounting for financial liabilities will largely be the same as requirements of IAS 39;  IFRS 9 requires the Group to record expected credit losses on all of its debt securities, loans and trade receivables, either on a 12-month or lifetime basis. The Group expects to apply the simplified approach and record lifetime expected losses on all trade receivables. The Group expects a significant impact on its equity due to the unsecured nature of its loans and receivables, but it will need to perform a more detailed analysis which considers all reasonable and supportable information, including forward-looking elements to determine the extent of the impact. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Retrospective application is required, but restatement of comparative information is not required; the effect on the transition date – January 1, 2018 – would be recorded in retained earnings. The adoption of IFRS 9 is expected to have an effect on the classification and measurement of the Group`s financial assets, but no impact on the classification and measurement of the Group`s financial liabilities. The Group expects a significant impact on its equity due to adoption of IFRS 9 impairment requirements, but it will need to perform a more detailed analysis which considers all reasonable and supportable information, including forward looking elements to determine the extent of the impact. Amendments to IFRS 2 “Share-Based Payment” – The IASB have published final amendments to IFRS 2 “Share-based Payment” that clarify the classification and measurement of share -based payment transactions. Classification and Measurement of Share-based Payment Transactions contains the following clarifications and amendments: Accounting for cash-settled share-based payment transactions that include a performance condition Until issue of these amendments, IFRS 2 contained no guidance on how vesting conditions affect the fair value of liabilities for cash-settled share-based payments. IASB has now added guidance that introduces accounting requirements for cash-settled share-based payments that follows the same approach as used for equity-settled share-based payments. Classification of share-based payment transactions with net settlement features The IASB has introduced an exception into IFRS 2 so that a share-based payment where the entity settles the share-based payment arrangement net is classified as equity-settled in its entirety provided the share-based payment would have been classified as equity-settled had it not included the net settlement feature. 40 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Accounting for modifications of share-based payment transactions from cash-settled to equity- settled Until issue of these amendments, IFRS 2 did not specifically address situations where a cash-settled share-based payment changes to an equity-settled share-based payment because of modifications of the terms and conditions. The IASB has introduced the following clarifications: • On such modifications, the original liability recognized in respect of the cash-settled share-based payment is derecognized and the equity-settled share-based payment is recognized at the modification date fair value to the extent services have been rendered up to the modification date; • Any difference between the carrying amount of the liability as at the modification date and the amount recognized in equity at the same date would be recognized in profit and loss immediately. The amendments are effective for annual periods beginning on or after January 1, 2018. Earlier application is permitted. IFRS 16 “Leases”, which specifies how and IFRS reporter will recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. IFRS 16 was issued on January 13, 2016 and applies to an annual reporting period beginning on or after January 1, 2019. IFRS 17 “Insurance contracts” was issued in May 2017 and replaced IFRS 4 “Insurance contracts”. The new standard establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the standard. An entity shall apply IFRS 17 “Insurance Contracts” to insurance contracts, including reinsurance contracts, it issues; reinsurance contracts it holds; and investment contracts with discretionary participation features it issues, provided the entity also issues insurance contracts. IFRS 17 is effective for annual reporting periods beginning on or after January 1, 2021. Earlier application is permitted if both IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments have also been applied. IFRIC 23 “Uncertainty over Income Tax Treatments” addresses the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. It specifically considers: • whether tax treatments should be considered collectively; • assumptions for taxation authorities’ examinations; • the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and • the effect of changes in facts and circumstances. The interpretation applies to annual reporting periods beginning on or after January 1, 2019. Annual Improvements to IFRS Standards 2015-2017 Cycle contains amendments to four International Financial Reporting Standards (IFRSs) as result of the IASB’s annual improve ments project. 41 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Standard Subject of amendment IFRS 3 “Business Combinations” The amendments to IFRS 3 clarify that when an entity obtains control of a and IFRS 11 “Joint business that is a joint operation, it remeasures previously held interests in Arrangements” that business. The amendments to IFRS 11 clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business. IAS 12 “Income Taxes” The amendments clarify that all income tax consequences of dividends (i.e. distribution of profits) should be recognized in profit or loss, regardless of how the tax arises. IAS 23 “Borrowing Costs” The amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalization rate on general borrowings. The amendments are all effective for annual periods beginning on or after January 1, 2019. Amendments to IAS 28 “Investments in Associations and Joint Ventures” – The IASB has published amendments to IAS 28 regarding the long-term interest in associates and joint Ventures. According to the amendment the entity should apply IFRS 9 to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. The amendment is effective for annual periods beginning on or after January 1, 2019. Amendments to IFRS 9 “Financial Instruments” – The IASB has published amendments to IFRS 9 regarding prepayment features with negative compensation and modifications of financial liabilities. Prepayment Features with Negative Compensation amends the existing requirement of IFRS 9 regarding termination rights in order to allow measurement at amortized cost even in the case of negative compensation payments. The IASB also clarifies that the entity recognizes any adjustment to the amortized cost of the financial liability arising from a modification or exchange in profit or loss at the date of modification or exchange. The amendment is effective for annual periods beginning on or after January 1, 2019. 6. RECLASSIFICATIONS Certain reclassifications have been made to the consolidated financial statements as at December 31, 2016 to conform to the presentation as current year presentation provides better view of the consolidated statement of the financial position and consolidated statement of comprehensive income of the Group. 7. BALANCES AND TRANSACTIONS WITH RELATED PARTIES Related parties are defined in IAS 24 “Related Party Disclosures”. Parties are generally considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence or joint control over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The Group’s immediate parent and ultimate controlling party is the Government of Azerbaijan. 42 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) The Group applied the exemption in paragraph 25 of IAS 24 “Related Party Disclosures” regarding the disclosure requirement for government related entities. A reporting entity is exempt from the disclosure requirements of paragraph 18 of IAS 24 “Related Party Disclosures” in relation to related party transactions and outstanding balances, including commitments, with: (a) a government that has control or joint control of, or significant influence over, the reporting entity; and (b) another entity that is a related party because the same government has control or joint control of, or significant influence over, both the reporting entity and the other entity. The nature of transactions with government related entities include purchase of electricity, borrowings, government investments, sales, construction services, rendering and receiving other services, etc. Compensation paid to directors for their services in full or part-time executive management positions is made up of a contractual salary. During the years ended December 31, 2017 and 2016 the remuneration of members of the key management included salaries and compensations classified as short-term in accordance with IAS 19 “Employee Benefits”. During the year ended December 31, 2017, the remuneration of key management personnel included salaries, discretionary bonuses and other short-term benefits totaling AZN 605 thousand (2016: AZN 305 thousand). 43 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) 8. PROPERTY, PLANT AND EQUIPMENT Movements in the carrying amount of property, plant and equipment were as follows: Super- Roadbed Railway Buildings and Operating Construction Other Total structure vehicles similar equipment in progress constructions Initial cost January 1, 2016 1,423,230 539,612 460,707 248,224 96,501 455,730 16,420 3,240,424 Additions 632 200 87,246 13,694 58,171 689,018 3,806 852,767 Internal transfer 75,849 - - - - (75,849) - - Disposals (11,933) - (1,393) (462) (367) - (101) (14,256) Effect of translation to presentation currency 63 - - 178 19 - 965 1,225 December 31, 2016 1,487,841 539,812 546,560 261,634 154,324 1,068,899 21,090 4,080,160 Additions 12,741 - 41,072 5,815 35,500 522,538 5,912 623,578 Internal transfer 250,252 - - 21,165 1,098 (272,515) - - Disposals (26,033) - (2,124) (407) (1,609) - (1,644) (31,817) Effect of translation to presentation currency - - 62 4 12 - 7 85 December 31, 2017 1,724,801 539,812 585,570 288,211 189,325 1,318,922 25,365 4,672,006 Accumulated depreciation January 1, 2016 (411,688) (71,201) (112,041) (47,241) (48,766) (40,519) (10,462 (741,918) ) Charge for the year (79,039) (5,991) (50,820) (6,790) (13,926) - (3,375) (159,941) Impairment charge (82,710) (37,746) - (17,119) (7,496) (83,723) (591) (229,385) Eliminated on disposal 7,372 - 558 462 246 - 78 8,716 Effect of translation to presentation currency (3) - - (3) (1) - (126) (133) December 31, 2016 (566,068) (114,938) (162,303) (70,691) (69,943) (124,242) (14,476 (1,122,661 ) ) Charge for the year (89,873) (5,991) (54,777) (7,579) (19,363) - (4,249) (181,832) Impairment charge (85,004) (32,887) (29,095) (16,499) (7,939) (93,795) (589) (265,808) Eliminated on disposal 13,862 - 2,124 215 1,101 - 859 18,161 Effect of translation to presentation currency - - (27) - (1) - (3) (31) December 31, 2017 (727,083) (153,816) (244,078) (94,554) (96,145) (218,037) (18,458 (1,552,171 ) ) Net book value: December 31, 2017 997,718 385,996 341,492 193,657 93,180 1,100,885 6,907 3,119,835 December 31, 2016 921,773 424,874 384,257 190,943 84,381 944,657 6,614 2,957,499 44 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) During the year ended December 31, 2017 the Group purchased and put into use a ballast railway cleaning machine, a machine for railway construction and a crane on the rail track of the railway between Baku and Beyuk-Kyasik. The major part of these transactions were financed by the loan attracted from HSBC Bank plc. During the year ended December 31, 2017 the Group repaired 8 passenger cars. Capital repair works were performed by M Steel Project a.s. and financed by the loan attracted from HSBC Bank plc. During the year ended December 31, 2016 the Group purchased and put into use two ballast dozer, two machines with towing and buffer equipment, a machine for renewal of ties, a dynamic stabilizer on the rail track of the railway between Baku and Beyuk-Kyasik and two Stadler 4-Car double deck electrical multiple units type KISS trains on Baku-Sumgait mainline track. The operations were financed by the loan attracted from HSBC Bank plc and “Credit Suisse” AG. During the years ended December 31, 2016 and December 31, 2015 the Group also purchased and put into use 600 tank wagons for oil and petroleum transportations, 401 covered wagons, 1000 open- top wagons, 400 multi-purpose flat wagons, 300 grain wagons, 100 cement hopper wagon, 200 container flat wagon and 100 ballast hopper wagon from UVZ International s.a.r.l. Ten diesel locomotives have been leased from Hanseatic Rail LLC and put into use during the year ended December 31, 2016. As described in Note 3, as at December 31, 2017, the Group performed impairment test on CGU level and as a result recognized impairment losses for property, plant and equipment during 2017 in the amount of AZN 265,808 thousand (2016: AZN 229,385 thousand). As at December 31, 2017 and 2016, property, plant and equipment with the carrying amounts of AZN 123,954 thousand (EUR 63,651 thousand as per contract), AZN 5,269 thousand (USD 3,096 thousand and AZN 5,482 thousand as per contract) and AZN 14,945 thousand were pledged as collateral under the borrowings obtained from Credit Suisse AG, “Azer Turk Bank” OJSC and other banks, respectively. Property, plant and equipment as at December 31, 2017 include borrowing costs incurred in connection with the construction of property, plant and equipment. Borrowing costs capitalized as property, plant and equipment during 2017 amounted to AZN 8,928 thousand (2016: AZN 4,841 thousand). The historical cost of items held under finance leases at December 31, 2017 and 2016 was AZN 79,091 thousand. Leased assets are pledged as security for the related finance lease. As at December 31, 2017 depreciation charge in the amount of AZN 6,310 thousand was included in the cost of construction in progress (2016: AZN 2,447 thousand). Disposal of property, plant and equipment was partly written off through profit or loss under loss on disposal of property, plant and equipment and partly written-off to the inventory account. 45 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) 9. INTANGIBLE ASSETS Intangible assets Initial cost January 1, 2016 515 Additions 82 December 31, 2016 597 Additions 107 December 31, 2017 704 Accumulated amortization January 1, 2016 (71) Amortization charge (106) December 31, 2016 (177) Amortization charge (134) December 31, 2017 (311) Net book value: December 31, 2017 393 December 31, 2016 420 10. PREPAYMENT FOR PROPERTY, PLANT AND EQUIPMENT The prepayment for property, plant and equipment in the amount of AZN 277,660 thousand and AZN 325,114 thousand as at December 31, 2017 and 2016, respectively, mainly represents the outstanding prepayments related to the purchase of freight locomotives from Alstom Transportand S.A., railroad passenger cars from “Stadler”, as well as works and services for a complete refurbishment of 600 km of the rail track of the railway between Baku and Beyuk-Kyasik. 11. INCOME TAXES The Group measures and records its current income tax payable and its tax bases related to assets and liabilities in accordance with the statutory tax regulations of the Republic of Azerbaijan and the Republic of Georgia where the Group operates, which differ from IFRS. The Group is subject to certain permanent tax differences due to non-tax deductibility of certain expenses and certain income being treated as non-taxable for tax purposes. 46 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Temporary differences as at December 31, 2017 and 2016 relate mostly to different methods/timing of income and expense recognition as well as to temporary differences generated by taxation bases’ differences for certain assets. Tax legislation of the CIS region in particular may give rise to varying interpretations and amendments. In addition, as management’s interpretation of tax legislation may differ from that of the tax authorities, transactions may be challenged by the tax authorities, and as a result the Group may be assessed additional taxes, penalties and interest which could be material for these financial statements. Temporary differences as at December 31, 2017 and 2016 comprise: December 31, December 31, 2017 2016 Deductible temporary differences: Tax losses carry forward 478,996 653,802 Other non-current liabilities 20,118 22,822 Loans receivable 135,186 114,209 Trade and other payables 29,227 12,517 Other current assets 32,000 23,727 Borrowings 26,880 12,763 Trade and other receivables 93,178 90,868 Inventories 3,928 6,126 Total deductible temporary differences 819,513 936,834 Taxable temporary differences: Property, plant and equipment (279,148) (675,133) Total taxable temporary differences (279,148) (675,133) Net deductible temporary differences 540,365 261,701 Net deferred tax asset at the statutory tax rate (20%) 108,073 52,340 Deferred tax asset not recognized (106,369) (49,238) Net deferred tax asset 1,704 3,102 Relationships between tax benefit and accounting loss for the year ended December 31, 2017 and 2016 are explained as follows: Year ended Year ended December 31, December 31, 2017 2016 Loss before income tax (553,234) (565,636) Theoretical tax charge at statutory rate of 20% 110,647 113,127 Valuation allowance for deferred tax assets (112,513) (43,680) Tax effect of permanent differences (443) (497) Income tax (expense)/benefit (2,309) 68,950 Current income tax expense (911) (545) Deferred income tax (expense)/benefit (1,398) 69,495 Income tax (expense)/benefit (2,309) 68,950 47 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) December 31, December 31, 2017 2016 Deferred income tax asset/(liability) Beginning of the period 3,102 (66,393) Change in the deferred income tax liability for the period charged to profit and loss accounts (1,398) 69,495 End of the period 1,704 3,102 December 31, December 31, 2017 2016 Valuation allowance for deferred tax assets Beginning of the period (49,238) (5,558) Valuation allowance (112,513) (43,680) Write off of deferred tax assets 55,382 - End of the period (106,369) (49,238) 12. INVENTORIES December 31, December 31, 2017 2016 Spare parts and construction materials 80,097 57,449 Inventories held for sale 6,804 11,491 Fuel 1,789 961 Office supplies 197 100 Uniforms 102 99 Other 425 489 Less: Provision for obsolete and damaged inventories (8,238) (12,500) Total inventories 81,176 58,089 Movements of provision for obsolete and damaged inventories are as follow: December 31, December 31, 2017 2016 Provision at the beginning of the year (12,500) (33,777) Loss on damaged and obsolete inventories (391) (70) Disposal of assets 4,653 21,347 Provision at the end of the year (8,238) (12,500) 48 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) 13. LOANS RECEIVABLE December 31, December 31, 2017 2016 Loans receivable 184,538 175,027 Less: Provision for impairment losses (135,186) (114,210) Total loans receivable 49,352 60,817 As at December 31, 2017 the Group had loans receivable in the amount of AZN 184,538 thousand (2016: AZN 175,027 thousand). The management provided allowance against these receivables as at December 31, 2017 and 2016 in the amount of AZN 135,186 thousand and AZN 114,210 thousand, respectively. The net amount represents interest free loans granted to the entities in the amount of AZN 21,523 thousand (2016: AZN 43,697 thousand) and interest bearing loans (12% annual) granted to the entities regarding construction of Baku-Tbilisi-Kars railway route in the amount of AZN 27,829 thousand (2016: AZN 17,120 thousand) as at December 31, 2017. 14. TRADE AND OTHER RECEIVABLES December 31, December 31, 2017 2016 Receivables from cargo services 135,802 110,518 Receivables from other services 10,852 8,454 Receivables from construction services 5,630 1,947 Receivables from security services 140 445 Other receivables 2,727 1,066 Less: Provision for impairment (93,178) (90,868) Total trade and other receivables 61,973 31,562 Movements of provision for impairment recognized for receivables are as follow: December 31, December 31, 2017 2016 Allowance for bad debts at the beginning of the year (90,868) (41,344) Bad debt expense (2,310) (46,104) Recovery of assets previously written off - (3,420) Allowance for bad debts at the end of the year (93,178) (90,868) 49 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) 15. CASH AND CASH EQUIVALENTS December 31, December 31, 2017 2016 Cash in bank accounts 46,880 146,989 Cash on hand 2,508 768 Total cash and cash equivalents 49,388 147,757 16. OTHER CURRENT ASSETS December 31, December 31, 2017 2016 Prepayment for inventories and services 85,664 89,695 Restricted current accounts in banks 53,372 - Input VAT 8,801 5,270 VAT receivable 5,781 - Prepaid expenses 696 721 Advances to employees 367 362 Other prepaid taxes 522 8 Less: Provision for impairment (39,113) (30,840) Total other current assets 116,090 65,216 Prepayments for inventories and services mainly comprise prepayments for the inventories and services related to the refurbishment of 600 km of the rail track of the railway between Baku and Beyuk-Kyasik, Baku-Sumgait mainline track and Baku-Tbilisi-Kars railway route. Restricted current accounts in banks in the amount of AZN 53,372 thousand are related to the repayments of borrowings mainly from BNP Paribas (Suisse) S.A., Ceska Sporitelna S.A and Ceskoslovenska Obchodni S.A. 50 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) 17. BORROWINGS The borrowings as at December 31, 2017 comprise: Lender name Effective interest Initial CCY Outstanding Origination Final maturity rate disbursed type amount in date per date amount in AZN in contract/ Original thousands amendment CCY in thousands BNP Paribas (Suisse) S.A. Loan 1 Libor+3.75% 180,000 USD 92,655 Sep-28-2015 Feb-28-2020 VTB Bank Austria Loan 1 5.75% 195,000 USD 70,888 Feb-13-2014 Feb-25-2019 Credit Suisse AG Loan 1 Euribor+1.15% 73,735 EUR 127,589 Jun-15-2015 Jan-31-2030 Loan 2 Euribor+3% 11,194 EUR 10,771 Jun-15-2015 Jun-30-2020 HSBC Bank plc Loan 1 Euribor+1% 243,445 EUR 467,931 Apr-14-2015 Jun-30-2025 Loan 1 Euribor+1% 72,982 EUR 116,304 Apr-14-2015 Jan-31-2027 Ceska Sporitelna S.A Loan 1 Euribor+1.45% 64,039 EUR 117,757 Feb-25-2016 Feb-2-2022 Ceskoslovenska Obchodni S.A Loan 1 Euribor+1.45% 82,000 EUR 166,631 Feb-26-2016 Aug-26-2022 Societe Generale Loan 1 Euribor+1% 99,698 EUR 204,505 Mar-30-2016 Oct-15-2031 “Kapital Bank” OJSC Loan 1 4.6% 136,579 USD 233,176 Jul-4-2017 Jul-4-2019 “International Bank of Azerbaijan” OJSC Loan 1 4% 49,500 USD 82,538 Jul-18-2017 Jul-18-2020 “Demir Bank” OJSC (currently under liquidation) Loan 1 14% 7,500 USD 2,550 Feb-24-2015 Dec-31-2017 “Bayburt Group Construction” Ltd. Loan 1 0% 15,455 EUR 3,259 May-17-2016 May-17-2026 “Agrar Credit” NBCO Loan 1 4.5% 9,495 AZN 7,859 Jan-26-2017 Jan-26-2019 The Government of the Republic of Azerbaijan Loan 1 Libor+Variable Spr 21,554 USD 36,643 Sep-18-2009 Dec-15-2030 Loan 2 0.2% 39,739 EUR 80,698 Nov-1-2015 Jul-31-2021 Loan 3 0% 10,000 EUR 20,307 Apr-7-2016 Apr-7-2020 Loan 4 1% 213,000 USD 362,280 Dec-15-2017 Jun-15-2032 Loan 5 1% 344,000 AZN 344,424 Dec-15-2017 Jun-15-2031 TOTAL 2,548,765 51 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) The borrowings as at December 31, 2016 comprise: Lender name Effective interest Initial CCY Outstanding Origination Final maturity rate disbursed type amount in date per date amount in AZN in contract/ Original thousands amendment CCY in thousands BNP Paribas (Suisse) S.A. Loan 1 Libor+3.75% 180,000 USD 178,602 Sep-28-2015 Feb-28-2020 VTB Bank Austria Loan 1 5.75% 195,000 USD 169,986 Feb-13-2014 Feb-25-2019 Credit Suisse AG Loan 1 Euribor+1.15% 73,735 EUR 117,140 Jun-15-2015 Jan-31-2030 Loan 2 Euribor+3% 11,194 EUR 13,845 Jun-15-2015 Jun-30-2020 HSBC Bank plc Loan 1 Euribor+1% 174,650 EUR 325,618 Apr-14-2015 Jun-30-2025 Cargill Financial Services International, Inc. Loan 1 Libor+5.5% 13,689 USD 24,239 Dec-29-2016 Dec-15-2017 Loan 2 Libor+5.5% 13,689 USD 24,239 Dec-29-2016 Dec-19-2017 Loan 3 Libor+5.5% 10,936 USD 19,365 Dec-29-2016 Dec-22-2017 Loan 4 Libor+5.5% 8,745 USD 15,485 Dec-29-2016 Dec-27-2017 Loan 5 Libor+5.5% 10,936 USD 19,365 Dec-29-2016 Dec-29-2017 Ceska Sporitelna S.A Loan 1 Euribor+1.45% 61,279 EUR 114,561 Feb-25-2016 Feb-2-2022 Ceskoslovenska Obchodni S.A Loan 1 Euribor+1.45% 65,885 EUR 122,921 Feb-26-2016 Aug-26-2022 Societe Generale Loan 1 Euribor+1% 99,698 EUR 186,181 Mar-30-2016 Oct-15-2031 “Kapital Bank” OJSC Loan 1 4.3% 50,000 USD 85,849 Feb-11-2016 Feb-11-2019 Loan 2 5.4% 94,990 USD 168,198 Apr-5-2016 Apr-5-2019 Loan 3 5.4% 14,749 USD 7,871 Apr-5-2016 Jun-3-2016 “International Bank of Azerbaijan” OJSC Loan 1 16% 10,000 AZN 7,779 Mar-3-2014 Mar-3-2016 Loan 2 4.5% 59,697 USD 45,880 Mar-11-2014 Mar-11-2017 Loan 3 16% 193 USD 342 Feb-3-2015 Feb-3-2016 Loan 4 3% 35,000 USD 59,628 Oct-30-2015 Apr-30-2017 “Demir Bank” OJSC (currently under liquidation) Loan 1 14% 7,500 USD 7,947 Feb-24-2015 Dec-31-2017 “Azer Turk Bank” OJSC Loan 1 8% 3,000 USD 5,312 Aug-25-2015 Aug-25-2016 “Karvan Logistics” LLP Loan 1 0% 15,455 EUR 28,815 May-17-2016 May-17-2026 The Government of the Republic of Azerbaijan Loan 1 Libor+Variable Spr 18,058 USD 31,975 Sep-18-2009 Dec-15-2030 Loan 2 0.2% 39,739 EUR 74,089 Nov-1-2015 Jul-31-2021 Loan 3 0% 10,000 EUR 18,644 Apr-7-2016 Apr-7-2020 TOTAL 1,873,876 52 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) A reconciliation of the opening and closing amounts of borrowings with relevant cash and non-cash changes from financing activities is stated below: January 1, 2017 1,873,876 Cash changes Proceeds 1,249,368 Repayment (799,613) Interest paid (65,038) Non-cash changes Proceeds 162,144 Repayment (30,479) Interest expense 85,901 Effect of foreign exchange differences 72,606 December 31, 2017 2,548,765 BNP Paribas (Suisse) S.A. In 2008, the Group signed a long term loan facility agreement with “BNP Paribas” (Suisse) S.A. for the amount of USD 220,000 thousand with two tranches. The attracted funds were directed towards (a) the purchase of transport and other capital equipment, (b) short-term debt refinancing, (c) general corporate purposes and (d) to pay any commitment fees. In 2010, the Group signed an addendum to the main agreement and the loan facility amount was amended to the USD 295,000 thousand with two additional tranches. On December 1, 2014, BNP Paribas, Sumitomo Mitsui Banking Corporation Europe limited, Siemens Bank Gmbh, Banque Cantonale de Geneve (BCGE) provided credit line in the amount of USD 180,000 thousand, in order to reorganize debt finance of the Group and on September 28, 2015, the Group signed an addendum to the credit line agreement and payment terms were amended. On April 21, 2017 the Group signed an amendment to the agreement with BNP Paribas (Suisse) S.A. According to the amendment, grace period granted till July, 2018 and monthly principal payments reduced from USD 2,600 thousand to USD 1,000 thousand starting from July, 2018. The Group will make bulk repayment in the amount of USD 35,500 thousand on February, 2020. The information about effective interest rates are described in the table above. The Group is obliged to comply with certain financial covenants as stipulated in the loan agreement signed with “BNP Paribas” (Suisse) S.A. The Group failed to comply with some financial covenants stipulated in the loan agreement as at December 31, 2017 and 2016. The Management believes that breach of covenants would not lead to early withdrawal of these borrowings and therefore these borrowings are classified according to their original payment schedules in the liquidity analysis. VTB Bank (Austria) AG In 2013, the Group entered into USD 120,000 thousand and USD 20,000 thousand loan agreement and supplemental agreement, respectively with VTB Bank (Austria) AG. The amounts borrowed were partly utilized in financing of capital expenditure of the Group and restructuring of other borrowings with higher interest rates. In 2014, the Lender agreed to increase the amount of facility to USD 195,000 thousand by making available to the Group a further loan in an aggregate of USD 55,000 thousand. 53 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) According to the Key Restructuring Terms agreed with VTB Bank (Austria) AG on May 2017, the Group has repaid principal amounts of USD 15,000 thousand and USD 8,000 thousand on May and June 2017, respectively. Subsequently on July 13, 2017, the Group signed “Second Amendment and Restatement Agreement”. According to the agreement, starting from July 2017 the Group has to repay monthly principal in the amount of USD 1,000 thousand till January 2019. The Group will make bulk repayment in the amount of USD 28,670 thousand on February, 2019. The new effective interest rate is 5.75%. The Group is obliged to comply with certain financial covenants as stipulated in the loan agreement signed with VTB Bank (Austria) AG. The Group failed to comply with some financial covenants stipulated in the loan agreement as at December 31, 2017 and 2016. The Management believes that breach of covenants would not lead to early withdrawal of these borrowings and therefore these borrowings are classified according to their original payment schedules in the liquidity analysis. Credit Suisse AG On June 15, 2015 the Group signed an export credit facility agreement with Credit Suisse AG for the amount of up to EUR 73,735 thousand. The amounts borrowed were used for the financing of five Stadler 4-Car double deck electrical multiple units type KISS trains. The loan matures in 2030 and bears annual interest rate of Euribor + 1.15%. On June 15, 2015 the Group also signed a commercial loan agreement with Credit Suisse AG for the amount of up to EUR 11,194 thousand in connection with the financing of five Stadler 4-Car double deck electrical multiple units type KISS trains. The loan matures in 2020 and bears annual interest rate of Euribor + 3%. The Group is obliged to comply with certain financial covenants as stipulated in the loan agreement signed with Credit Suisse AG. The Group failed to comply with some financial covenants stipulated in the loan agreement as at December 31, 2017 and 2016. The Management believes that breach of covenants would not lead to early withdrawal of these borrowings and therefore these borrowings are classified according to their original payment schedules in the liquidity analysis. HSBC Bank plc On April 14, 2015 the Group signed a credit facility agreement with HSBC Bank plc for the amount of EUR 458,861 thousand. The amounts borrowed were directed for the financing of the rehabilitation of 600 km of the rail track of the railway between Baku and Beyuk-Kyasik. The loan matures in 2025, bears annual interest rate of Euribor + 1% and is guaranteed by the government. The credit facility in an aggregate amount of EUR 458,861 thousand available in two tranches is as follows: - a tranche in an aggregate amount of EUR 243,445 thousand, and - a tranche in an aggregate amount of EUR 215,416 thousand. The Group is obliged to comply with certain covenants as stipulated in the loan agreement signed with HSBC Bank plc. The Group complied with financial covenants stipulated in the loan agreement as at December 31, 2017 (the Group failed to comply with some covenants stipulated in the loan agreement as at December 31, 2016). Cargill Financial Services International, Inc. On December 29, 2016 the Group signed five credit facility agreements with Cargill Financial Services International, Inc. for the total amount of USD 57,995 thousand. The amounts borrowed were directed for the financing of the construction of railways, reconstruction of rail cars and core activity on provision of transportation services to exporters. 54 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) The Group is obliged to comply with certain financial covenants as stipulated in the loan agreements signed with Cargill Financial Services International, Inc. The Group failed to comply with some financial covenants stipulated in the loan agreement as at December 31, 2016. On December 18, 2017 the Group has repaid all borrowed amounts from Cargill Financial Services International, Inc. with the new loan received from Ministry of Finance in the amount of USD 213,000 thousands. Ceska Sporitelna S.A On February 25, 2016 the Group signed a credit facility agreement with Ceska Sporitelna S.A. for the amount of EUR 64,051 thousand. The amount borrowed was directed towards the modernization and reconstruction of up to 50 km Baku-Sumgait mainline track in the Republic of Azerbaijan and delivery of special machinery, technology and services. The loan matures in 2022 and bears annual interest rate of Euribor+1.45%. The Group is obliged to comply with certain financial covenants as stipulated in the loan agreements signed with Ceska Sporitelna S.A. The Group complied with financial covenants stipulated in the loan agreement as at December 31, 2017 (the Group failed to comply with some covenants stipulated in the loan agreement as at December 31, 2016). Ceskoslovenska Obchodni S.A On February 26, 2016 the Group signed a credit facility agreement with Ceskoslovenska Obchodni S.A for the amount of EUR 82,000 thousand. The amount borrowed was directed towards the modernisation and reconstruction of 8.3 km railway from Azerbaijan to Iran and delivery of special machinery, technology and services. The loan matures in 2022 and bears annual interest rate of Euribor+1.45%. The Group is obliged to comply with certain financial covenants as stipulated in the loan agreements signed with Ceskoslovenska Obchodni S.A. The Group complied with financial covenants stipulated in the loan agreement as at December 31, 2017 (the Group failed to comply with some covenants stipulated in the loan agreement as at December 31, 2016). Societe Generale On March 30, 2016 the Group signed a credit facility agreement with Societe Generale for the amount of EUR 276,995 thousand. The amount borrowed was directed towards the purchase of 50 locomotives from Alstom Transport S.A. The loan matures in 2031 and bears annual interest rate of Euribor+1%. The Group is obliged to comply with certain financial covenants as stipulated in the loan agreement signed with Societe Generale. The Group complied with financial covenants stipulated in the loan agreement as at December 31, 2017 and 2016. On March 30, 2016 the Ministry of Finance of the Republic of Azerbaijan signed a government guarantee contract with the parties acting as a government guarantor for the Group. “Kapital Bank” OJSC On February 11, 2016 and on April 5, 2016 the Group signed credit facility agreements with “Kapital Bank” OJSC for the amounts of USD 50,000 thousand and USD 14,749 thousand, respectively. The amounts borrowed were directed for the enhancement of operations and general corporate purposes. The loans mature in 2019 and bear annual interest rate of 4.3% and 5.4%, respectively. 55 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) On April 5, 2016, the Group signed loan restructuring agreement with “Kapital Bank” OJSC to the main agreements signed in the prior years in the amount of USD 10,750 thousand, USD 15,000 thousand, USD 5,000 thousand and USD 73,000 thousand. The loan agreement amount was amended to USD 94,990 thousand with interest rate of 5.4%, which matures in 2019. On July 4, 2017, the Group signed loan restructuring agreement with “Kapital Bank” OJSC to the main agreements signed in the prior years in the amount of USD 50,000 thousand and USD 94,990 thousand. The loan agreement amount was amended to USD 136,579 thousand with interest rate of 4.6%. The Group will repay monthly interest and bulk principal repayment will be made after 2 years from restructuring date. The new effective interest rate is 4.6%. “International Bank of Azerbaijan” OJSC In 2014 and 2015 the Group obtained 7 loans from “International Bank of Azerbaijan” OJSC. The amounts borrowed were directed for the financing of capital expenditures, construction of Baku- Tbilisi-Kars railway route and general corporate purposes. On April 28, 2017 the Group also signed a credit agreement with “International Bank of Azerbaijan” OJSC for the amount of USD 200,000 thousand. On July 27, 2017, the Group signed an addendum to the main agreement and the loan maturity date was amended to September 28, 2017. The loan bears annual interest rate of 1.25%. On November 16, 2017 the Group has repaid the loan with the proceeds from credit agreement signed with Ministry of Finance in the amount of AZN 344,000 thousands. On July 14, 2017, the Group signed loan restructuring agreement with “International Bank of Azerbaijan” OJSC. According to the agreement loans received from the bank in prior years (in the amount of USD 35,000 thousand, USD 59,697 thousand, USD 193 thousand, AZN 10,000 thousand) and also loans received from “Azer-Turk Bank” OJSC in the amount of USD 3,000 thousand were consolidated as a single loan. The Group will repay interest on annual basis and bulk principal repayment will be made at the end of 3 year grace period. The new effective interest rate is 4%. More detailed information about these loans is described in the table above. No financial covenants were stipulated in the borrowing agreements with “International Bank of Azerbaijan” OJSC. The Government of the Republic of Azerbaijan On December 18, 2009, the Government of the Republic of Azerbaijan and the International Bank for Reconstruction and Development (the “IBRD”) have agreed to lend a credit facility in the amount equivalent to USD 450,000 thousand in order to finance “Rail Trade and Transport Facilitation project of the Republic of Azerbaijan”. The Project’s original completion date of September 30, 2013 has been extended to December 31, 2017 on September 17, 2013. The Project’s four month grace period for making last disbursement date has been ended on April 30, 2018. On June 27, 2013, the Government of the Republic of Azerbaijan and the IBRD agreed to restructure the Project by providing additional financing in the amount of USD 220,000 thousand and extending the closing date to December 31, 2017. The additional financing was planned to be used for full replacement of power supply and signalling systems on the East-West Main Line. The IBRD and the Group agreed on cancellation as of May 17, 2018 the undisbursed credit line balance of USD 119,757 thousand and USD 128,350 thousand from the loan accounts “Rail Trade and Transport Facilitation Project – Loan No 7509-AZ” and “Rail Trade and Transport Facilitation Project – Loan No 8282-AZ”. The objective of the project is to improve railway services in the Republic of Azerbaijan, as well as the competitiveness, financial sustainability, operating and cost efficiency and capacity of the Group in particular along the east-west transport corridor. 56 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) The Project consists of the following components: Component 1: Rehabilitation of East-West Main Line Provision of goods, works and services to: (a) rehabilitate about 240 km of mainline track; (b) convert power supply on the East-West Main Line; and (c) upgrade signalling, compatible with new 25kV AC power supply system. On June 27, 2013 the IBRD and the Government of Republic of Azerbaijan agreed to restructure the Loan Agreement and correspondently, additional 298 km of mainline track was included in the scope of Component 1. Component 2: New Mainline Locomotives Provision of goods and services in order to provide mainline 25kV AC electric locomotives to operate on the east-west corridor. The Government of the Republic of Azerbaijan and IBRD agreed to finance the new mainline locomotives directly using the funds of the Government of Republic of Azerbaijan and requested the IBRD to reallocate USD 202,000 thousand to the rehabilitation of the East-West mainline of Component 1. Component 3: Modernization of Azerbaijan Railway Services Provision of goods, works, services and training in order to: (a) support the implementation of the restructuring and development of Azerbaijan Railways, including, but not limited to, for the transition to the IFRS and legal restructuring of the Azerbaijan Railways; and (b) improve its oil spill prevention capacity. Component 4: Project Implementation Support of the Project Implementation Unit for effective implementation of the Project, through provision of goods, consultants’ services and training. The loan facility was expected to be used as follows: Allocation of the Loan (expressed in thousands USD) Percentage of expenditure to be financed by IBRD Original Revised Additional Total original financing (1) Goods, works, consultants’ services, training and incremental operating costs for Component 1 of the Project 232,875 434,875 211,950 646,825 100% (2) Goods for Component 2 of the Project 202,000 - - - 0% (3) Goods, works, consultants’ services, training and incremental operating costs for Components 3 and 4 of the Project 14,000 14,000 7,500 21,500 85% 0.25% of the total (4) Front-end fee 1,125 1,125 550 1,675 disbursement TOTAL 450,000 450,000 220,000 670,000 57 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Following this agreement, the Group signed project agreement with Government of the Republic of Azerbaijan on the same date and loan agreement with the Government subsequently. According to the loan agreement, the Group takes obligation for the repayment of financing to be received from IBRD for the Component 3 in the amount of USD 21,500 thousand and for the Component 4 in the amount of USD 54 thousand and related interest costs. The Government of the Republic of Azerbaijan in its turn takes obligation for the repayment of financing to be received from IBRD for the Component 1 in the amount of USD 646,825 thousand and for the Component 4 in the amount of USD 1,621 thousand and related interest costs. The interest rate was determined as Libor+Variable Spread. Variable Spread is the rate to be effective on the repayment dates of loan, which is determined by the IBRD semi-annually. The Group is obliged to comply with certain financial covenants as stipulated in the project agreement in connection with loan agreement signed with IBRD. The Group failed to comply with some financial covenants stipulated in the loan agreement as at December 31, 2017 and 2016. On November 1, 2015 the Group signed a loan agreement with the Ministry of Finance of the Republic of Azerbaijan for the amount of EUR 39,739 thousand. The amounts borrowed were directed for the financing of the rehabilitation of 600 km of the rail track of the railway between Baku and Beyuk-Kyasik. The loan matures in 2021 and bears annual interest rate of 0.2%. On April 7, 2016 the Group signed a credit line agreement with the Ministry of Finance of the Republic of Azerbaijan and “International Bank of Azerbaijan” OJSC, acting as arranger for the amount of EUR 10,000 thousand. The amounts borrowed were directed for the financing of the rehabilitation of 600 km of the rail track of the railway between Baku and Beyuk-Kyasik. The loan matures in 2020. On November 15, 2017 the Group signed an agreement with the Ministry of Finance in the amount of AZN 344,000 thousands. The amounts borrowed were directed for repayment of borrowing received from “International Bank of Azerbaijan” on April 28, 2017 in the amount of USD 200,000 thousand. According to the agreement, grace period for principal repayment was granted till December 2021 and scheduled to be repaid on semi-annual basis. Interest repayment will start from July 2018 and also scheduled to be repaid on semi-annual basis. The maturity date is June 15, 2031. The effective interest rate is 1% per annum. On December 18, 2017 the Group signed an agreement with the Ministry of Finance in the amount of USD 213,000 thousands. The amounts borrowed were directed for repayment of borrowing received from Cargill Financial Services International Inc. and trade payable to UVZ International s.a.r.l.. According to the agreement, grace period for principal repayment was granted till December 2022 and scheduled to be repaid on semi-annual basis. Interest repayment will start from June 2018 and also scheduled to be repaid on semi-annual basis. The maturity date is June 15, 2032. The effective interest rate is 1% per annum. No covenants were stipulated in the borrowing agreement with this lender. Other loans During the years ended December 31, 2017 and 2016, the Group also obtained general purpose loans from “Agrarcredit” CJSC NBCO and “Karvan Logistics” LLP, “Azer -Turk Bank” OJSC, “DemirBank” OJSC (currently under liquidation), and “International Bank of Azerbaijan-Georgia” OJSC, respectively. 58 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) On July 19, 2016 the Group signed a tripartite credit agreement with “Karvan Logistics” LLP and “Bayburt Group Construction” Ltd. for the amount of EUR 15,455,000. The subject of the contract is the regulation of relationships regarding the transfer of the claim rights arising out interest-free loan agreement between the Group and “Karvan Logistics” LLP dated May 17, 2016. The contract is effective on the date of its signing and shall be valid till the parties fulfil their obligations. The Group was the guarantor of the loan taken by “Transoil” LLC from “International Bank of Azerbaijan” OJSC on February 24, 2014 for the amount of AZN 15,000 thousand. On August 11, 2015 the loan was transferred from “International Bank of Azerbaijan” OJSC to “Agrarcredit” CJSC NBCO. On January 26, 2017 the Group signed a resolution with “Agrarcredit” CJSC NBCO for the amount of AZN 9,495 thousand for the non-repaid portion of the loan. The information about these loans are described in the table above. No financial covenants were stipulated in the borrowing agreements with these lenders. 18. FINANCE LEASE OBLIGATIONS The Group entered into finance lease agreement with “Hanseatic Rail” LLC and “Hanseatic Transport” LLC for purchase of 4 electric locomotives in 2015 and 50 passenger wagons in 2013, respectively. The lease term is 6.5 years and 8.5 years with the effective interest rate of 4% and 12%, respectively. The Group also entered into finance lease agreement with BRK Leasing LLC for purchase of 10 highway diesel locomotives in 2015. The lease term is 10 years with the effective interest rate of 5.85%. On August 18, 2017, the Group signed lease restructuring agreement with Hanseatic Transport LLC. According to the new agreement the Group made a bulk repayment in the amount of USD 8,775 thousand and new repayment schedule was created, also interest rate decreased from 12% to 5%. The present value of the net minimum lease payments as at December 31, 2017 and 2016 are as follows: December 31, December 31, 2017 2016 Finance lease liabilities: Not later than 1 year 17,662 28,793 Later than 1 year and not later than 5 years 51,077 87,671 Total minimum lease payments 68,739 116,464 Less: unearned finance income (10,225) (19,910) 58,514 96,554 Representing lease liabilities: Current 14,804 21,633 Non-current 43,710 74,921 Total 58,514 96,554 Finance charges for the year ended December 31, 2017 amounted to AZN 7,956 (year ended December 31, 2016: AZN 8,920 thousand) and are included in “interest expense” line in the consolidated statement of comprehensive income. 59 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) A reconciliation of the opening and closing amounts of finance lease obligations with relevant cash and non-cash changes from financing activities is stated below: January 1, 2017 96,554 Cash changes Repayment (34,532) Interest paid (7,956) Non-cash changes Interest expense 7,956 Effect of foreign exchange differences (3,508) December 31, 2017 58,514 19. TRADE AND OTHER PAYABLES December 31, December 31, 2017 2016 Payables for property, plant and equipment, current 1,602 62,133 Payables for construction work 57,301 59,377 Trade payables for inventories and other services 55,171 46,309 Payables for other services 32,991 46,486 Payables for electricity 2,255 2,909 Other payables 4,488 4,398 Total trade and other payables, current 153,808 221,612 Payables for property, plant and equipment, non-current - 164,537 Payables for other services, non-current - 10,538 Total trade and other payables, non-current - 175,075 Payables for property, plant and equipment includes interest-bearing payables to UVZ International S.a.r.l. for purchase of new 3,101 multipurpose wagons of various models. In accordance with Annex #1 to the contract, the supplier provided the Group with an instalment payment opportunity for the period of 5 years at the annual interest rate of 20%. Payables for other services include payables to “Georgian Railways” JSC for rent of railway vehicles in the amount of AZN 11,205 thousand and AZN 12,533 thousand as at December 31, 2017 and 2016, respectively. 20. OTHER NON-CURRENT LIABILITIES December 31, December 31, 2017 2016 Provision for construction losses 2,721 4,876 Warranty provision 17,398 17,946 Total other non-current liabilities 20,119 22,822 60 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) 21. TAXES PAYABLE OTHER THAN INCOME TAX December 31, December 31, 2017 2016 VAT payable - 4,763 Customs fee payable 4,093 4,093 Social tax payable 4,095 1,976 Personal income tax payable - 39 Total taxes payable other than income tax 8,188 10,871 22. ADVANCES RECEIVED The advances received in the amount of AZN 101,852 thousand as at December 31, 2017 represented the outstanding advances related to the “Construction of Baku-Tbilisi-Kars railway route”, works and services for a complete refurbishment of 600 km of the rail track of the railway between Baku and Beyuk-Kyasik, as well as advances received for logistic services which will be provided by ADY Express LLC (2016: AZN 138,324 thousand related to the “Construction of Baku- Tbilisi-Kars railway route” and works and services for a complete refurbishment of 600 km of the rail track of the railway between Baku and Beyuk-Kyasik). 23. SHARE CAPITAL On August 10, 2017, the Cabinet of Ministers of the Republic of Azerbaijan introduced an amendment to the resolution on approval of the charter and structure of the Company, dated February 15, 2010. Authorized share capital of the Group increased by AZN 79,915 thousand and equalled to AZN 806,062 thousand through transfer of the amounts invested by the Government to the share capital. Accordingly, the number of the Group’s shares in circulation with face value of AZN 2 each, increased by 39,958 thousand units and equalled to 403,031 thousand units. The share capital of the Company as at December 31, 2016 amounted to AZN 726,147 thousand ordinary shares with par value of AZN 2 each. 24. GOVERNMENT INVESTMENTS In order to improve and enhance the operations and the infrastructure of the Group, the Government has allocated subsidies to the Group under the several government programs. According to the decree #183 of the Cabinet of the Ministers of the Republic of Azerbaijan dated October 22, 2010, all government investments allocated to the state companies of the Republic of Azerbaijan for the purposes of improvement of infrastructure and enhancement of their operations since 2007 should be included in the share capital of these entities. As described in Note 2 to the consolidated financial statements in accordance with IFRS, all these subsidies were initially recorded in government investments line in the equity until they are registered in relevant government agencies, the management registered AZN 127,147 thousand and AZN 79,915 thousand of government investment as share capital in 2014 and 2017, respectively. The management of the Group is now working on registering the rest of subsidies as share capital. 61 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) The government investments amounted to AZN 1,174,509 thousand and AZN 946,205 thousand as at December 31, 2017 and 2016, respectively. The investments were as follows: Reference to the decree of the Cabinet of Purpose of investment Amount in Ministers and other sources thousands of AZN 2007-2015 607,098 2016 Decree of Cabinet of Ministers # 424s as at Share of IBRD in “Rail Trade and Transport 30-Dec-2014 Facilitation project” 111,654 Share of Government in “Rail Trade and Transport Facilitation project” 22,315 Decrees of Cabinet of Ministers # 424s and # Payment of VAT in “Reconstruction of 398s as at 30-Dec-2014 Railways project” 36,714 Decree of Cabinet of Ministers # 231s as at Reconstruction of road infrastructure in “Baku- 24-July-2015 and Order of Ministry of Sumgait-Baku” route Finance # i-144 46,000 Repair and construction works on the railways Decree of Cabinet of Ministers # 95s as at within the “International North-South 22-Feb-2016 Transport Corridor”, including construction of Astara Azerbaijan-Astara Iran railway 45,000 Share of Government in purchasing 50 units of Decree of Cabinet of Ministers # 95s as at freight locomotives from Alstom Transport 22-Feb-2016 S.A. 77,424 Total amount for 2016 339,107 Total allocated amount as at December 31, 2016 946,205 2017 Decree of Cabinet of Ministers # 424s as at Share of IBRD in “Rail Trade and Transport 30-Dec-2014 Facilitation project” 82,440 Share of Government in “Rail Trade and Transport Facilitation project” 23,300 Decrees of Cabinet of Ministers # 424s and # Payment of VAT in “Reconstruction of 398s as at 30-Dec-2014 Railways project” 134,232 Share of Government in purchasing 50 units of Decree of Cabinet of Ministers # 95s as at freight locomotives from Alstom Transport 22-Feb-2016 S.A. 1,768 Repayment of loan facility received from Repayment of debt to HSBC Bank plc by the HSBC Bank plc for “Reconstruction of Government on behalf of the Group Railways project” 30,479 Construction of two locomotive depots for 50 Decree of Cabinet of Ministers # 447s as at units of freight locomotives from Alstom 21-Jun-2017 Transport S.A. 4,000 Decree of Cabinet of Ministers # 424s as at Reconstruction of a metal bridge over Kur river 30-Dec-2014 at 253 km in the “Yevlakh-Malay” direction 12,000 Repair and construction works on the railways within the “International North-South Transport Corridor”, including construction of Astara Azerbaijan-Astara Iran railway 20,000 Total amount for 2017 308,219 Decree of Cabinet of Ministers # 325 as at Registered as and transferred to the share 10-Aug-2017 capital (79,915) Total allocated amount as at December 31, 2017 1,174,509 62 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) During the year ended December 31, 2013 and 2012 the Group signed agreement with the third parties regarding the installation of signalling system and power conversion facilities on Baku to Beyuk-Kyasik railway route with estimated cost of USD 288,140 thousand (related taxes approximating of USD 51,860 thousand will be financed by the Government) and USD 337,123 thousand (related taxes approximating of USD 60,682 thousand will be financed by the Government), correspondingly, under the “Rail Trade and Transport Facilitation project” financed by IBRD. The estimated completion date for both projects is 2018. The Government is responsible for repayment of above mentioned loan facility and total investment in these projects will be included in the equity of the Group according to the Group’s policy. In June 2010, the Government of Azerbaijan Republic and Czech Export Bank signed an agreement regarding the financing of the “Construction of 317 km railway route from Baku to Beyuk -Kyasik project” (the “Project”) in the amount of EUR 215,000 thousand. Following this loan facility, the Group and Moravia Steel A.S. (the “Supplier”) which is a legal entity registered in the Czech Republic, signed an agreement on purchasing materials and services from the Supplier. Total cost of the project was EUR 252,941 thousand where EUR 215,000 thousand was financed through loan facility and the rest of contract amount approximating of EUR 37,941 thousand and related taxes was financed by the Government. The Government is responsible for repayment of above mentioned loan facility and total investments in this project will be included in the equity of the Group according to the Group’s policy. The project was completed at the end of 2014. After completion of “Construction of 317 km railway route from Baku to Beyuk-Kyasik project”, on December 1, 2014, the Group entered into an agreement with the Supplier to supply equipment and materials, and perform related works and services for a “Complete refurbishment of 600 km of the rail track of the railway between Baku and Beyuk-Kyasik”. The project commenced in the beginning of 2015 and is planned to be completed in 4.5 years. In order to finance this project the Group signed a loan in the amount of EUR 458,861 thousand from HSBC Bank plc. on April 14, 2015. The loan matures in 2025 and is guaranteed by the government. On December 21, 2017 the government has repaid the loan principal amounting EUR 15,215 thousand. During the year ended December 31, 2017 and 2016 the Group received a grant in the amount of AZN 20,000 and AZN 45,000 thousand, respectively, for the financing of repair and construction works regarding the “International North-South Transport Corridor”, including construction of Astara Azerbaijan-Astara Iran railway based on decree of President of the Republic of Azerbaijan #1608 dated December 7, 2015 and decree of Cabinet of Ministers #95s dated February 22, 2016. The Group signed an agreement with Societe Generale for the loan in the amount of EUR 276,995 thousand on March 30, 2016. The loan was granted for the purchase of 50 locomotives from Alstom Transport S.A. and is guaranteed by the Government. During the year ended December 31, 2016, 15% of the loan agreement was granted by the Government in the amount of AZN 77,424 thousand. In March 2017, the Government of the Republic of Azerbaijan and French Development Agency signed an agreement regarding the financing of the construction of new railway locomotive depots for 50 units of freight locomotives purchased from Alstom Transport S.A. in the amount of EUR 112,500 thousand. During the year ended December 31, 2017, the Group received a grant in the amount of AZN 4,000 thousand from the Government based on decree of Cabinet of Ministers #447s dated June 12, 2017. 63 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) 25. CONSTRUCTION REVENUES AND CONSTRUCTION COSTS In February 2007, the Republic of Azerbaijan, Georgia and Turkey signed agreement regarding construction of Baku-Tbilisi-Kars railway route. The State Oil Fund of the Republic of Azerbaijan extended financing in the amount of USD 750 million for this project. The Group is rendering construction services through its branch operated in the Republic of Georgia. Construction revenues and associated construction costs during the year ended December 31, 2017 and 2016 derive from the construction of Baku-Tbilisi-Kars railway route. Total amount of contract is AZN 195,346 thousand. Year ended Year ended December 31, December 31, 2017 2016 Construction revenues 73,175 61,913 Construction revenues 73,175 61,913 Year ended Year ended December 31, December 31, 2017 2016 Construction costs, including warranty costs 71,592 76,171 Reversal of construction loss recognized in prior years - (13,080) Construction costs, net 71,592 63,091 December 31, December 31, 2017 2016 Receivables from construction services 5,630 1,947 Payables for construction work 57,301 59,377 26. OTHER REVENUES Year ended Year ended December 31, December 31, 2017 2016 Revenue from rolling stock operations and maintenance services 20,497 17,855 Revenue from scrap metal sales 14,902 2,025 Revenue from rent of cargo cars, wagons and other properties 3,667 3,471 Revenue from security services 1,983 2,038 Revenue from wagon washing services 158 387 Revenue from water sales 157 144 Revenue from electricity sales 41 141 Others 1,501 323 Total other revenues 42,906 26,384 64 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) 27. TAXES OTHER THAN INCOME TAX Year ended Year ended December 31, December 31, 2017 2016 Social tax 18,383 14,334 Property tax 6,086 4,406 Land tax 3,255 3,248 Others 5 6 Total taxes other than income tax 27,729 21,994 28. OTHER OPERATING COSTS Year ended Year ended December 31, December 31, 2017 2016 Business trip expenses and trainings 3,712 2,572 Sanitation costs 3,554 932 Transportation expenses 3,164 970 Professional services and fees 2,729 2,251 Commercial expenses 1,726 519 Contribution to trade union and professional associations 1,499 1,155 Insurance costs 939 968 Security expenses 934 577 Communication costs 839 583 Water expenses 776 1,066 Printing costs 776 1,237 Office supplies 704 814 Representation costs 628 140 Sewerage expenses 451 52 Customs fees 230 143 Vehicle running costs 117 67 Natural gas expenses 83 84 Other 1,437 947 Total other operating costs 24,298 15,077 29. BAD DEBT EXPENSE Bad debt expense during the year ended December 31, 2017 comprises allowances for loans receivable in the amount of AZN 20,976 thousand, allowances for other current assets in the amount of AZN 8,273 thousand, allowance for trade and other receivables in the amount of AZN 2,310 thousand (2016: allowances for loans receivable in the amount of AZN 29,131 thousand, allowances for other current assets in the amount of AZN 6,315 thousand and allowance for trade and other receivables in the amount of AZN 46,104 thousand). 65 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) 30. FINANCE COSTS Year ended Year ended December 31, December 31, 2017 2016 Interest on debts and borrowings 85,901 51,510 Finance charges payable under finance leases 7,956 8,920 Total interest expense 93,857 60,430 Unwinding of discount and effect of changes in discount rate on provisions 1,172 4,280 Total finance costs 95,029 64,710 31. OTHER EXPENSES/( INCOME) Other income mainly comprises of sponsorship fee received in the amount of AZN 4,181 thousand and gain from extinguishment of liabilities in the amount of AZN 2,575 thousand for the year ended December 31, 2017. Other expenses mainly comprises loss on guarantee contracts in the amount of AZN 12,586 thousand for the year ended December 31, 2017. Other income mainly comprises of gain from extinguishment of liabilities in the amount of AZN 8,392 thousand and other expenses mainly comprises penalties charged by suppliers for the late payments in the amount of AZN 3,119 thousand for the year ended December 31, 2016. 32. CONTINGENCIES, COMMITMENTS AND OPERATING RISKS Legal proceedings From time to time and in the normal course of business, claims against the Group are received. On the basis of its own estimates and both internal and external professional advice, management is of the opinion that no material losses will be incurred in respect of claims in excess of provisions that have been made in these financial statements. Tax legislation Tax, currency and customs legislation in the Republic of Azerbaijan and Commonwealth Independent States (“CIS”) region is subject to varying interpretations, and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activities of the Group may be challenged by the relevant authorities. Recent events within the region suggest that the tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances, reviews may cover longer periods. Management believes that its interpretation of the relevant legislation is appropriate and the Group’s tax, currency legislation and customs positions will be sustained. 66 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Capital expenditure commitments As at December 31, 2017 and 2016 the Group’s capital commitments were associated with the borrowing facilities and government investment programs. The Group had commitment to the second phase of the installation of the signalling system and power conversion facilities on Baku to Beyuk-Kyasik railway route, Baku-Sumgait mainline track, construction of “Baku Ring Railway” and Astara Azerbaijan-Astara Iran railway route. Finance lease commitments The Group has finance lease contracts for various items of property, plant and equipment. The Group’s obligations under finance leases are secured by the lessor’s title to the leased assets. Future minimum lease payments under finance lease contracts, together with the present value of the net minimum lease payments are disclosed in Note 18. Operating lease contracts are cancellable comprising mainly lease of production equipment and vehicles which are cancellable. Environmental matters The enforcement of environmental regulation in the Republic of Azerbaijan and CIS region is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognized immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be estimated but could be material. In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage. Tariff Regulation Policy Potential reforms in tariff-setting policy may have a significant effect on the Group’s financial position and results of operations. The Group is continuously discussing the tariff setting policy, including both unification of such tariffs between domestic and foreign transportation and increases in the tariffs, with the Government of the Republic of Azerbaijan. It is currently uncertain whether and when any further changes will be introduced in the tariff setting policy. These consolidated financial statements do not include any adjustments that might result from these uncertain effects. Such adjustments, if any, will be reported in the Group’s consolidated financial statements in the period when they become known and estimable. Operating environment of the Group The Group’s operations are conducted in the Republic of Azerbaijan. As an emerging market, at the present time the Republic of Azerbaijan is developing business and regulatory infrastructure that would generally exist in a more mature market economy. The Azerbaijani economy contracted by 1.3% growth (year-on-year) in the first half of 2017, driven by a decline in oil GDP (7.2%) as oil revenues were decreased due to production volumes and oil prices. On the upside, and despite continued banking sector distress, the non-oil economy expanded by 1.7% for the first time in over a year, supported by the strong performance of the agriculture and manufacturing sectors. Annual inflation remained high at 13-14% during 2017, driven mainly by an increase in government-controlled tariffs for electricity, water, and gas, and in domestic food prices. Citing inflationary pressures, the Central Bank of the Republic of Azerbaijan continued to tighten the 67 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) monetary policy stance during 2017 by scaling up liquidity absorption operations. The manat has appreciated by 4.4% against the U.S. dollar since end-2016, reflecting its stronger external position and increased liquidity absorption operations. The troubled financial sector continues to exert a negative impact on the economy. Credit contracted by 15.6% in the first half of 2017, and the quality of assets continued to deteriorate. Per official statistics, the nonperforming loan ratio reached 13% in June 2017 compared to 9% at end 2016. Although manat deposits grew in the second quarter of 2017, the client deposits (corporate and household) shrank by 4.4% during the first seven months of 2017. Starting from February, 2016 the Central Bank of the Republic of Azerbaijan has gradually increased refinancing rate from 5 to 15% during 2017 and the minimum capital adequacy ratio was lowered from 12% to 10%. In February 2018, Standard & Poor’s, international credit agency, affirmed long and short -term sovereign credit rating of Azerbaijan in foreign and local currency at “BB+/B” upgrading rating outlook from negative to stable. The Azerbaijani economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. While the Government has introduced a range of stabilization measures and plans to expedite reforms and support to banking system in response to current economic challenges. The Management believes it is taking appropriate measures to support the sustainability of the Group’s business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Group’s results and financial position in manner not currently determinable. The future economic growth of the Republic of Azerbaijan is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory and political developments. The Management is unable to predict, all developments in the economic environment which would have an impact on the Group’s operations and consequently what effect, if any, they could have on the financial position of the Group. Amidst the ongoing crisis, the government of Azerbaijan shifted its oil-oriented economic policy, dominated for two decades, to the diversification of the economy. For that purpose, a “national strategic roadmap” was adopted to formulate a correct development strategy covering 11 sectors. The implementation of the “national strategic roadmap” was assigned to the newly formed “Center for Analysis of Economic Reforms and Communications,” the aim of which is analyzing the effectiveness of conducted reforms and making new proposals. Significant measures have been taken in custom services and taxation as well. As of August 1, 2016, new regulations to ensure more operative and transparent custom clearance (a “green corridor” and other access systems) were implemented. The new simplified procedures are intended to stimulate imports and provide favorable conditions for business and external trade. As a continuation of reforms in customs, the reception of e-declarations is introduced minimize the contact of citizens with government officials. In order to amend the existing tax system, the decree approving the “Directions of Reforms in Taxation for 2016” was signed. The presidential decree requires the Ministry of Taxes to ensure that on-site and off-tax audits are performed within short periods of time and extend the coverage of electronic tax audits to limit face-to-face contacts with taxpayers. Another important amendment on monopolistic actions was made to the Criminal Code. Besides, the latest changes in December 2016 to Taxes Code “transfer pricing” will be applied against artificially exaggerated expenses and “voluntary tax disclosure” notion included in the Code which is highly practicable in greatest economies. Furthermore, in order to prevent additional exposure to financial sanctions by the tax authority because of tax liability miscalculation, the mechanism of “determination of tax liability in advance” principle will be in force. Along with them, implementation of electronic invoices will play an important role in prevention of tax evasion and will impact positively on tax system optimization. 68 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Azerbaijan is also trying to benefit from regional connectivity initiatives to boost transit and trade. In particular, the country is one of the sponsors of the East –West and North–South transport corridors. Construction of the Baku–Tbilisi–Kars railway line, connecting the Caspian region with Turkey, was completed in 2017. The Trans-Anatolian Natural Gas Pipeline (TANAP) and Trans-Adriatic Pipeline (TAP) will deliver natural gas from Azerbaijan’s Shah Deniz gas field to Turkey and Europe. The economy is expected to expand from 2018 onward, supported by an acceleration of oil GDP as the Shah Deniz gas field-one of the largest gas fields in the world-begins production. Non-oil output will continue to grow at a slow pace due to limited credit growth and the weak business environment. The consolidated financial statements reflect management’s assessment of the impact of the Azerbaijani business environment on the operations and the financial position of the Group. The future business environment may differ from management’s assessment. Insurance The Republic of Azerbaijan and CIS region insurance industry is in a developing stage: insurance market capacity and low variety of product line does not completely meet customers’ requirements. Compulsory insurance common in other parts of the world is being introduced in stages and may not be available for some types of insurance. Management has not approved insurance policy for the Group which sets general principles for the Group in respect of major terms of insurance contracts. During the year ended December 31, 2017 and 2016, the Group did not maintain insurance coverage regarding major categories of its property. The Group did not maintain insurance coverage on business interruption as management assessed insurance expenses to be significantly higher than potential losses associated with this risk. 33. FINANCIAL RISK MANAGEMENT The Group’s principal financial instruments comprise bank loans, cash and bank deposits. The main purpose of these instruments is to raise finance for the Group’s operations. The Group has other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The Group is exposed to credit and liquidity risks and market risk. Financial risks are monitored by Corporate Finance Department of the Group. Credit, currency and interest rate risks are regulated by corporate financial risks management policies. The Company also maintains centralized financial risk management policy at all subsidiaries. Credit Risk Credit risk is the risk that a counter party will fail to discharge an obligation and cause the Group to incur a financial loss. Cash is placed in financial institutions, which are considered at a time of deposit to have minimal risk of default. Management monitors the creditworthiness of the banks in which it deposits cash and ensures that the deposits placed by ADY in each financial institution do not exceed approved upper limit. These limits are recalculated quarterly in accordance with corporate policies, which include qualitative and quantitative analysis of financial institutions’ performance. 69 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) These limits are monitored and approved by the Company’s Corporate Finance Department. Financial assets, which potentially subject the Group to credit risk, consist principally of trade receivables and loans receivables. The carrying amount of these financial assets, net of impairment, represents the maximum amount exposed to credit risk. With the exception for the matters discussed below, the Group has no significant concentrations of credit risk. Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group beyond the impairment already recorded. The maximum exposure to credit risk is equal to the carrying amount of financial assets as at December 31, 2017 and 2016 which is disclosed below: December 31, December 31, 2017 2016 Financial assets: Loans receivable 49,352 60,817 Trade and other receivables 61,973 31,562 Cash and cash equivalents (excluding cash on hand) 46,880 146,989 Other current assets (restricted current bank accounts) 53,372 - 211,577 239,368 Maximum exposure of credit risk The Group’s maximum exposure to credit risk varies significantly and is dependent on both individual risks and general market economy risks. Financial assets are graded according to the current credit rating they have been issued by an internationally regarded agency such as Fitch Rating. The highest possible rating is AAA. Investment grade financial assets have ratings from AAA to BBB. Financial assets which have ratings lower than BBB are classed as speculative grade. The following table details credit ratings of financial assets held by the Group as at December 31, 2017 and 2016 (this information is prepared for all financial assets that are neither past due nor impaired): December 31, 2017 A+ A- BB B- Not Rated Total Loans receivable - - - - 49,352 49,352 Trade and other receivables - - - - 61,973 61,973 Cash and cash equivalents - - - 29,795 19,593 49,388 Other current assets (restricted current bank accounts) 1,325 13,872 - - 38,175 53,372 December 31, 2016 A+ A- BB B- Not Rated Total Loans receivable - - - - 60,817 60,817 Trade and other receivables - - - - 31,562 31,562 Cash and cash equivalents - - 498 - 147,259 147,757 70 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Geographical risk concentration The Management exercises control over the risk in the legislation and regulatory areas and assesses its influence on the Group’s activities. This approach allows the Group to minimize potential losses from the investment climate fluctuations in the Republic of Azerbaijan and CIS region. The geographical concentration of financial assets and financial liabilities is set out below: The Republic OECD Other non- December 31, of Azerbaijan countries OECD 2017 countries Total FINANCIAL ASSETS Loans receivable 49,352 - - 49,352 Trade and other receivables 61,823 28 122 61,973 Cash and cash equivalents 49,010 - 378 49,388 Other current assets (restricted current bank accounts) 19,787 33,585 - 53,372 TOTAL FINANCIAL ASSETS 179,972 33,613 500 214,085 FINANCIAL LIABILITIES Borrowings 1,173,734 1,375,031 - 2,548,765 Finance lease obligations - 24,180 34,334 58,514 Trade and other payables 34,227 22,320 97,261 153,808 Salaries payable 8,030 - 758 8,788 TOTAL FINANCIAL LIABILITIES 1,215,991 1,421,531 132,353 2,769,875 NET POSITION (1,036,019) (1,387,918) (131,853) (2,555,790) The Republic OECD Other non- December 31, of Azerbaijan countries OECD 2016 countries Total FINANCIAL ASSETS Loans receivable 60,817 - - 60,817 Trade and other receivables 31,053 20 489 31,562 Cash and cash equivalents 147,400 - 357 147,757 TOTAL FINANCIAL ASSETS 239,270 20 846 240,136 FINANCIAL LIABILITIES Borrowings 542,331 1,331,545 - 1,873,876 Finance lease obligations - 56,246 40,308 96,554 Trade and other payables 47,648 18,746 330,293 396,687 Salaries payable 6,497 - 797 7,294 TOTAL FINANCIAL LIABILITIES 596,476 1,406,537 371,398 2,374,411 NET POSITION (357,206) (1,406,517) (370,552) (2,134,275) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. 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. 71 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) The Group manages liquidity risk by maintaining adequate cash reserves and borrowing facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. The Group prepares a financial plan on a monthly basis which ensures that the Group has sufficient cash on demand to finance expected operational expenses, financial obligations and investing activities. The Group developed standard payment periods in respect of trade accounts payable and monitors the timeliness of payments to its suppliers and contractors. The following tables summarize the maturity profile of the Group’s financ ial liabilities based on contractual payment terms. Repayments, which are subject to notice, are treated as if notice were to be given immediately. Accordingly, the related liabilities were reported as payable within less than 1 year. Up to 1 month to 3 months to 1 year to Over 5 years December 31, 1 month 3 months 1 year 5 years 2017 Total FINANCIAL ASSETS Loans receivable 49,352 - - - - 49,352 Trade and other receivables 61,973 - - - - 61,973 Cash and cash equivalents 49,388 - - - - 49,388 Other current assets (restricted current bank accounts) 21,113 32,259 - - - 53,372 Total financial assets 181,826 32,259 - - - 214,085 FINANCIAL LIABILITIES Borrowings 34,563 35,452 152,484 1,226,966 1,099,300 2,548,765 Finance lease obligations 1,103 2,785 10,916 31,527 12,183 58,514 Total interest bearing financial liabilities 35,666 38,237 163,400 1,258,493 1,111,483 2,607,279 Trade and other payables 136,139 2,787 14,882 - - 153,808 Salaries payable 8,788 - - - - 8,788 Total financial liabilities 180,593 41,024 178,282 1,258,493 1,111,483 2,769,875 Liquidity gap 1,233 (8,765) (178,282) (1,258,493) (1,111,483) Cumulative liquidity gap 1,233 (7,532) (185,814) (1,444,307) (2,555,790) 72 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) The management of the Group plans to cover its negative liquidity gap through attracting new loans from lenders, government support and future operational cash inflows. Up to 1 month to 3 months to 1 year to Over 5 December 31, 1 month 3 months 1 year 5 years years 2016 Total FINANCIAL ASSETS Loans receivable 60,817 - - - - 60,817 Trade and other receivables 31,562 - - - - 31,562 Cash and cash equivalents 147,757 - - - - 147,757 Total financial assets 240,136 - - - - 240,136 FINANCIAL LIABILITIES Borrowings 258,652 31,932 231,809 960,343 391,140 1,873,876 Trade and other payables 36,996 - 23,505 164,537 - 225,038 Finance lease obligations 7,642 3,469 10,522 63,411 11,510 96,554 Total interest bearing financial liabilities 303,290 35,401 265,836 1,188,291 402,650 2,195,468 Trade and other payables 158,161 2,950 - 10,538 - 171,649 Salaries payable 7,294 - - - - 7,294 Total financial liabilities 468,745 38,351 265,836 1,198,829 402,650 2,374,411 Liquidity gap (228,609) (38,351) (265,836) (1,198,829) (402,650) Cumulative liquidity gap (228,609) (266,960) (532,796) (1,731,625) (2,134,275) Asset and liability maturity periods and the ability to replace interest liabilities at an acceptable cost when they mature, are crucial in determining the Group’s liquidity and its susceptibility to fluctuations in interest rates and exchange rates. A further analysis of the liquidity and interest rate risks is presented in the following tables in accordance with IFRS 7. The amounts disclosed in these tables do not correspond to the amounts recorded on the statement of financial position as the presentation below includes a maturity analysis for financial liabilities that indicates the total remaining contractual payments (including interest payments), which are not recognized in the statement of financial position under the effective interest rate method. 73 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) The maturity analysis of financial liabilities at December 31, 2017 is as follows: Demand From 1 3 months 1 year to Over 5 Total and less to to 1 year 5 years years than 3 months 1 month FINANCIAL LIABILITIES Borrowings 38,181 41,249 185,133 1,314,676 1,148,615 2,727,854 Finance lease obligations 1,240 3,469 12,953 37,648 13,429 68,739 Total interest bearing financial liabilities 39,421 44,718 198,086 1,352,324 1,162,044 2,796,593 Trade and other payables 136,139 2,787 14,882 - - 153,808 Salaries payable 8,788 - - - - 8,788 Total potential future payments for financial obligations 184,348 47,505 212,968 1,352,324 1,162,044 2,959,189 The maturity analysis of financial liabilities at December 31, 2016 is as follows: Demand From 1 3 months 1 year to Over 5 Total and less to to 1 year 5 years years than 3 months 1 month FINANCIAL LIABILITIES Borrowings 262,847 40,206 267,317 1,014,638 438,976 2,023,984 Trade and other payables 40,746 7,501 57,261 264,678 - 370,186 Finance lease obligations 9,953 4,788 14,053 75,067 12,604 116,465 Total interest bearing financial liabilities 313,546 52,495 338,631 1,354,383 451,580 2,510,635 Trade and other payables 158,161 2,950 - 10,538 - 171,649 Salaries payable 7,294 - - - 7,294 Total potential future payments for financial obligations 479,001 55,445 338,631 1,364,921 451,580 2,689,578 Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, currency risk and other price risk, such as equity price risk and commodity risk. Financial instruments affected by market risk include loans and borrowings, deposits, available-for-sale investments and derivative financial instruments. 74 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Interest rate risk The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long- term debt obligations with floating interest rates. The Group borrows on both a fixed and variable rate basis and has other interest-bearing liabilities. The Group incurs interest rate risk on liabilities with variable interest rate. Impact on loss before income tax: As at December 31, 2017 As at December 31, 2016 Interest rate Interest rate Interest rate Interest rate +1% –1% +1% –1% FINANCIAL LIABILITIES Borrowings (25,488) 25,488 (18,739) 18,739 Trade and other payables - - (2,250) 2,250 Finance lease obligations (585) 585 (966) 966 Net impact on loss before income tax (26,073) 26,073 (21,955) 21,955 Currency risk The currency risk is the risk of losses due to adverse changes in foreign exchange rates with regard to the Group’s assets and liabilities denominated in foreign currencies. The Group maintains centralized currency risk management system, which establishes risk policy towards certain currencies and prescribes regular analysis of foreign currency risk exposure. This analysis includes the assessment of open foreign exchange position, forecast modeling of exchange rates and the analysis of deviations between forecast and budget rates. The Group aims at maintaining a neutral open foreign exchange position through offset of outflows in a foreign currency by inflows in corresponding currency. The Group is exposed to currency risk on selected receivables, payables and borrowings that are denominated in a currency other than the Group’s functional currency. The currencies in which these transactions are denominated are primarily the US dollars, GEL, CHF, EUR and KZT. 75 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) The Group’s exposure to foreign currency exchange rate risk is presented in the table below: AZN USD GEL EUR KZT CHF December 31, 2017 Total FINANCIAL ASSETS Loans receivable - 49,352 - - - - 49,352 Trade and other receivables 40,046 21,927 - - - - 61,973 Cash and cash equivalents 20,961 27,117 349 655 2 304 49,388 Other current assets (restricted current bank accounts) 5 11,190 - 42,176 - 1 53,372 TOTAL FINANCIAL ASSETS 61,012 109,586 349 42,831 2 305 214,085 FINANCIAL LIABILITIES Borrowings 352,283 880,730 - 1,315,752 - - 2,548,765 Finance lease obligations - 24,180 - - 34,334 - 58,514 Trade and other payables 30,630 57,202 26,340 17,707 - 21,929 153,808 Salaries payable 8,030 - 758 - - - 8,788 TOTAL FINANCIAL LIABILITIES 390,943 962,112 27,098 1,333,459 34,334 21,929 2,769,875 OPEN CURRENCY POSITION (329,931) (852,526) (26,749) (1,290,628) (34,332) (21,624) AZN USD GEL EUR KZT CHF December 31, 2016 Total FINANCIAL ASSETS Loans receivable - 60,817 - - - - 60,817 Trade and other receivables 31,053 319 165 - 25 - 31,562 Cash and cash equivalents 9,801 118,821 322 18,704 - 109 147,757 TOTAL FINANCIAL ASSETS 40,854 179,957 487 18,704 25 109 240,136 FINANCIAL LIABILITIES Borrowings 7,779 864,283 - 1,001,814 - - 1,873,876 Finance lease obligations - 56,246 - - 40,308 - 96,554 Trade and other payables 34,591 60,449 25,796 225,456 2,142 48,253 396,687 Salaries payable 6,497 - 797 - - - 7,294 TOTAL FINANCIAL LIABILITIES 48,867 980,978 26,593 1,227,270 42,450 48,253 2,374,411 OPEN CURRENCY POSITION (8,013) (801,021) (26,106) (1,208,566) (42,425) (48,144) 76 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Currency risk sensitivity The following tables detail the Group’s sensitivity to a 10 % increase and decrease in the respective currencies with regard to its net monetary position against the AZN. 10 % is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the possible change in foreign currency exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the end of the period for a 10% change in foreign currency rates. A positive number below indicates an increase in profit and other equity where the AZN strengthens 10% against the relevant currency. For a 10% weakening of the AZN against the relevant currency, there would be a comparable impact on the profit and other equity, and the balances below would be negative. December 31, 2017 December 31, 2016 Change in Net impact on loss Change in Net impact on loss exchange rate before income tax exchange rate before income tax AZN/USD 10% (85,253) 10% (80,102) -10% 85,253 -10% 80,102 AZN/GEL 10% (2,675) 10% (2,611) -10% 2,675 -10% 2,611 AZN/EUR 10% (129,063) 10% (120,857) -10% 129,063 -10% 120,857 AZN/KZT 10% (3,433) 10% (4,243) -10% 3,433 -10% 4,243 AZN/CHF 10% (2,162) 10% (4,814) -10% 2,162 -10% 4,814 34. FAIR VALUE OF FINANCIAL INSTRUMENTS As at December 31, 2017 and 2016 the Group had no financial instruments measured at fair value. The following table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorized. Fair value measurement using Date of valuation Quoted prices Significant Significant December 31, in active observable unobservable 2017 markets inputs inputs Total (Level 1) (Level 2) (Level 3) Assets for which fair values are disclosed Cash and cash equivalents December 31, 2017 49,388 - - 49,388 Loans receivable December 31, 2017 - - 49,352 49,352 Trade and other receivables December 31, 2017 - - 61,973 61,973 Other current assets (restricted current bank accounts) December 31, 2017 53,372 - - 53,372 Liabilities for which fair values are disclosed Borrowings December 31, 2017 - - 2,548,765 2,548,765 Finance lease obligations December 31, 2017 - - 58,514 58,514 Trade and other payables December 31, 2017 - - 153,808 153,808 Salaries payable December 31, 2017 - - 8,788 8,788 77 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Fair value measurement using Date of valuation Quoted prices Significant Significant December 31, in active observable unobservable 2016 markets inputs inputs Total (Level 1) (Level 2) (Level 3) Assets for which fair values are disclosed Cash and cash equivalents December 31, 2016 147,757 - - 147,757 Loans receivable December 31, 2016 - - 60,817 60,817 Trade and other receivables December 31, 2016 - - 31,562 31,562 Liabilities for which fair values are disclosed Borrowings December 31, 2016 - - 1,873,876 1,873,876 Finance lease obligations December 31, 2016 - - 96,554 96,554 Trade and other payables December 31, 2016 - - 396,687 396,687 Salaries payable December 31, 2016 - - 7,294 7,294 Fair value of financial assets and liabilities not carried at fair value Set out below is a comparison by class of the carrying amounts and fair values of the Company’s financial instruments that are not carried at fair value in the statement of financial position. The table does not include the fair values of non-financial assets and non-financial liabilities. Carrying Fair value Unrecognized Carrying Fair value Unrecognized value 2017 2017 gain/(loss) value 2016 2016 gain/(loss) 2017 2016 Financial assets Cash and cash equivalents 49,388 49,388 - 147,757 147,757 - Loans receivable 49,352 49,352 - 60,817 60,817 - Trade and other receivables 61,973 61,973 - 31,562 31,562 - Other current assets (restricted current bank accounts) 53,372 53,372 - - - - Financial liabilities Borrowings 2,548,765 2,548,765 - 1,873,876 1,873,876 - Finance lease obligations 58,514 58,514 - 96,554 96,554 - Trade and other payables 153,808 153,808 - 396,687 396,687 - Salaries payable 8,788 8,788 - 7,294 7,294 - Total unrecognized change in unrealized fair value - - 78 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Assets and liabilities for which fair value approximates carrying value For financial assets and financial liabilities that are liquid or having a short term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits, without a specific maturity and variable rate financial instruments. Fixed and variable rate financial instruments For quoted debt instruments the fair values are determined based on quoted market prices. The fair values of unquoted debt instruments are estimated by discounting future cash flows using rates currently available for debt on similar terms, credit risk and remaining maturities. 35. EVENTS AFTER THE REPORTING PERIOD New borrowing from Asian Development Bank On January 29, 2018 the Group signed a new borrowing agreement with Asian Development Bank in the amount of USD 175 million. The amounts borrowed were directed for the restructuring of certain borrowings. The borrowing is guaranteed by the Government of the Republic of Azerbaijan. New borrowing from Credit Suisse AG On February 9, 2018 the Group signed a new borrowing agreement with Credit Suisse AG in the amount of CHF 134 million. The amounts borrowed were directed for the financing of delivery of 20 railroad passenger cars, 4 Stadler 4-Car double deck electrical multiple units type KISS trains and retrofitting of 5 KISS trains. The borrowing is guaranteed by the Government of the Republic of Azerbaijan. Change in legal structure of Freight Department Subsequent to the year end, the Group made structural changes in the Freight Department to increase operational effectiveness and efficiency. New structure of the Freight Department consists of 15 sub- departments. Transfer of departments On April 13, 2018 and March 16, 2018 East Wagon Depot and Bilajari Washing Station of Freight Department have been transferred to “ADY Express” LLC, respectively. Change in legal structure of “Capital Repairs” LLC On August 8, 2018 the status of “Capital Repairs” LLC as a limited liability entity has been ceased for the period from August 8, 2018 to August 8, 2022. Amendment to contract with Stadler Rail Group On January 18, 2018 the Group amended contract terms with “Stadler Rail Group” for purchase of 30 units of railroad passenger cars. According to new amendment the Group will purchase 20 railroad passenger cars, 4 Stadler 4-Car double deck electrical multiple units type KISS trains and have access to modernisation of 5 Stadler 4-Car double deck electrical multiple units type KISS trains instead of 30 railroad passenger cars. 79 “AZERBAIJAN RAILWAYS” CLOSED JOINT STOCK COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 (Continued) (In thousands of Azerbaijani Manats unless otherwise indicated) Construction of new railway locomotive depots Subsequent to the year end, the Group started construction of new railway locomotive depots in Bilajari and Ganja. The construction will be financed by the Government of the Republic of Azerbaijan and French Development Agency. Total expected cost of the project is AZN 270 million. Construction of Laki-Gabala railway Subsequent to the year end, the Group started the construction of Laki-Gabala railway. The construction will be financed by the Government of the Republic of Azerbaijan. Repair and modernisation of Baku-Yalama railway Subsequent to the year end, the Group commenced repair and modernisation of Baku-Yalama railway. The construction will be financed by the Government of the Republic of Azerbaijan. Total expected cost of the project is AZN 207 million. 80