N ational electrical grid o f K yrgyzstan OJSC Financial statements F or the y e a r end ed 31 D ecem ber 2020 with independent a u d ito r's report EY Building a better working world N ational electrical grid o f K yrgyzstan OJSC Financial statem ents C ONTENTS Independent auditor’s report Financial statem ents Statem ent o f financial p o s itio n ......................................................................................................................................................................1 Statem ent o f com prehensive lo ss.................................................................................................................................................................. 2 Statem ent o f cash flo w s ............................................................................................................................................................................... 3-4 Statem ent o f changes in e q u ity ......................................................................................................................................................................5 N otes to the financial sta te m e n ts............................................................................................................................................................ 6-35 т п т гт т го т гш -т т ггш гш го т гг EY Building a better «Эрнст энд Янг Аудит» Ж ЧК Абдрахманов к., 191 ООО «Эрнст энд Янг Аудит» ул. Абдрахманова, 191 Ernst & Young Audit LLC Abdrakhmanov Str., 191 working world Бишкек ш., 720011 г. Бишкек, 720011 Bishkek, 720011 Кыргыз Респубпикасы Кыргызская Республика Kyrgyz Republic Independent auditor's report To the S hareholders and Board o f D irectors of Open J o in t Stock Company N ational E lectric Grid of Kyrgyzstan Qualified opinion We have audited the financial statem ents of OJSC N ational Electric Grid of Kyrgyzstan (hereinafte r, the "C om pany"), w hich com prise the statem ent of financial position as at 31 December 2 0 2 0 , and the statem ent of com prehensive loss, statem ent of changes in eguity and statem ent of cash flows fo r the year then ended, and notes to the financial statem ents, including a sum m ary of sig n ifican t accounting policies. In our opinion, except fo r the possible e ffe cts of th e m a tte r described in the "Basis fo r a qualified opin ion " section of our report, the accom panying financial statem ents present fairly, in all m aterial respects, the financial position o f the Company as at 31 December 2 0 2 0 and its financial perform ance and its cash flows fo r the year then ended in accordance w ith Internation al Financial R eporting Standards (IFRSs). Basis for a qualified opinion As at 31 Decem ber 2 0 2 0 and 31 Decem ber 2 0 1 9 the Com pany recognized deferred tax asset in respect of tax losses carried fo rw a rd fro m p rio r periods o f 1 ,2 0 1 ,6 7 8 thousand soms and 1 ,0 7 3 ,3 7 3 thousand soms, respectively. We were unable to obtain su fficie n t app ro p ria te audit evidence in respect of certain assum ptions used by the Company in the projections o f taxable incom e. C onsequently, we w ere unable to d e term ine w hether any adjustm ents to these am ounts w ere necessary. We conducted our audit in accordance w ith In te rn a tio n a l Standards on A uditing (ISAs). Our responsibilities under those standards are fu rth e r described in the A u d ito r's responsibilities fo r the au d it o f the financial statem ents section of our report. We are independent of the Company in accordance w ith the In ternation al Ethics Standards Board fo r A ccountants' Code of Ethics fo r Professional A ccountants (in cluding In te rn a tio n a l Independence Standards) (IESBA Code), and we have fu lfille d our o th e r ethical responsibilities in accordance w ith the IESBA Code. We believe th a t the audit evidence we have obtained is su fficie n t and appropriate to provide a basis fo r our qualified opinion. Responsibilities of m anagem ent and the Board of directors for the financial statem ents M anagem ent is responsible fo r the preparation and fa ir presentation of the financial statem ents in accordance w ith IFRSs, and fo r such internal control as m anagem ent determ ines is necessary to enable the preparation of financial statem ents th a t are free from m aterial m isstatem ent, w h e th er due to fraud or error. In preparing the financial statem ents, m anagem ent is responsible fo r assessing the Company's a b ility to continue as a going concern, disclosing, as applicable, m atters related to going concern and using the going concern basis of accounting unless m anagem ent e ith e r intends to liquidate the Company or to cease operations, or has no realistic alte rn a tive but to do so. The Board of D irectors is responsible fo r overseeing the Company's financial re p o rtin g process. A member firm of Ernst & Young Global Limited -rjrrrrrrjn rn rrrrrrrO -rOT'irTTTirTirO‘inr EY Building a better working world Auditor's responsibilities for the au dit of the financial statem en ts Our objectives are to obtain reasonable assurance about w hether the financial statem ents as a whole are free from m aterial m isstatem ent, w h e th e r due to fraud or error, and to issue an auditor's re po rt th a t includes o ur opinion. Reasonable assurance is a high level of assurance, but is not a guarantee th a t an audit conducted in accordance w ith ISAs will always detect a m aterial m isstatem ent when it exists. M isstatem ents can arise fro m fraud or e rro r and are considered m aterial if, individually or in the aggregate, they could reasonably be expected to influence the econom ic decisions of users taken on the basis of these financial statem ents. As p a rt of an audit in accordance w ith ISAs, we exercise professional judgm ent and m aintain professional skepticism th ro u g h o u t the audit. We also: ► Id e n tify and assess the risks o f m aterial m isstatem ent of the financial statem ents, w hether due to fraud or e rro r, design and p e rfo rm audit procedures responsive to those risks, and obta in audit evidence th a t is s u fficie n t and a p p ro p ria te to provide a basis fo r our opinion. The risk o f not d etecting a m aterial m isstatem ent resulting fro m fraud is higher than fo r one resulting fro m e rro r, as fraud m ay involve collusion, fo rg e ry, intention al om issions, m isrepresentations, or the o verride of in te rn a l co n tro l. ► O btain an understanding o f in ternal co n tro l re le va n t to the audit in o rd e r to design audit procedures th a t are a pp ro pria te in the circum stances, but not fo r the purpose of expressing an opinion on the e ffectiveness of the Com pany's internal co n tro l. ► Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estim ates and related disclosures made by m anagem ent. ► Conclude on th e appropriateness o f m anagem e nt’s use of the going concern basis of accounting and, based on the audit evidence obtained, w hether a m aterial u n ce rta in ty exists related to events or conditions th a t m ay cast sig n ifica n t doubt on the Company's a b ility to continue as a going concern. If we conclude th a t a m aterial u n ce rta in ty exists, we are reguired to draw a tte n tio n in our a u d ito r's re p o rt to the related disclosures in the financial statem ents or, if such disclosures are inadeguate, to m odify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our a uditor's re p o rt. However, fu tu re events or condition s may cause the Company to cease to continue as a going concern. ► Evaluate the overall presentation, stru ctu re and content of the financial statem ents, including the disclosures, and w hether the financial statem ents represent the underlying transactions and events in a m anner th a t achieves fa ir presentation. A member firm of Ernst & Young Global Limited Building a better working world We com m unicate w ith the Board of directors regarding, am ong o th e r m atters, th e planned scope and tim in g of the audit and sig nifica nt audit findings, including any sig n ifica n t deficiencies in internal co ntro l th a t we id e n tify during our audit. Paul Cohn A u d ito r / General D irector Ernst & Young A udit LLC Q ua lificatio n c e rtific a te of the auditor: License to pe rfo rm audit a ctivitie s series Series A, No.0 3 6 6 , re g istra tio n num ber A № 0 0 3 6 re g is tra tio n No. 0 0 6 5 dated No.0 4 4 6 of February 22, 2 0 1 8 2 0 February 2 0 1 0 issued by The State Service fo r Financial M arket R egulation and Supervision under the G overnm ent of Kyrgyz Republic A bdrakhm anov S tr., 191 Bishkek 7 2 0 0 1 1 , Kyrgyz Republic 2 6 M arch 2 0 2 1 A member firm of Ernst & Young Global Limited National electrical grid of Kyrgyzstan OJSC Financial statements STATEMENT OF FINANCIAL POSITION As at 31 December 2020 31 December 31 December In thousands o f soms Notes 2020 2019 A ssets Non-current a ssets Property, plant and equipment 5 37,636,313 36,488,657 Intangible assets 47,969 54,812 Advances paid for non-current assets 6 1,441,464 1,990,501 Non-current trade receivables 7 471,901 - Investments 18,399 18,399 Other non-current assets 2,453 2,675 39,618,499 38,555,044 Current a sse ts Inventory 8 300,488 363,460 Trade accounts receivable 9 446,784 1,029,645 VAT receivable and other prepaid taxes 10 140,307 151,266 Advances paid and other current assets 9,517 7,740 Restricted cash 11 1,399,781 - Cash and cash equivalents 12 535,928 465,800 2,832,805 2,017,911 Total a ssets 42,451,304 40,572,955 Equity and liabilities Equity Share capital 13 1,597,377 1,597,377 Reserve capital 13 159,738 159,738 Accumulated deficit (9,695,030) (2,233,615) (7,937,915) (476,500) Non-current liabilities Borrowings - non-current portion 14 48,110,076 38,457,126 Contract liabilities 15 234,319 44,186 Employee benefits obligations 16 39,344 45,694 Other non-current liabilities 15,824 96,221 48,399,563 38,643,227 Current liabilities Borrowings - current portion 14 1,346,937 1,840,428 Trade and other accounts payable 17 266,344 174,407 Taxes and other liabilities to state budget 18 209,752 207,166 Other current liabilities 19 166,623 184,227 1,989,656 2,406,228 Total liabilities 50,389,219 41,049,455 Total equity and liabilities General director C hief accountant Batyrbekbva N.K. The explanatory notes 1-31 are an integral part o f these financial statements. 1 National electrical grid of Kyrgyzstan OJSC Financial statements STATEMENT OF COMPREHENSIVE LOSS For the year ended 31 December 2020 In thousands o f soms Notes 2020 2019 Revenue from contracts with customers 20 3,782,779 3,662,913 Cost o f sales 21 (3,437,763) (3,489,115) G ro ss p ro fit 345,016 173,798 General and administrative expenses 22 (259,626) (280,707) Reversal of provision for expected credit losses and contract assets 180,776 1,121,844 Other operating income 39,177 48,812 Other operating expenses (14,711) (20,683) O pe ra ting p ro fit 290,632 1,043,064 Finance income 23 2,608,216 14,671 Finance costs 24 (2,661,434) (2,356,355) Foreign exchange, net 25 (7,930,108) 108,630 Other income 26 120,055 56,109 Other expenses 27 (98,863) (34,638) L o ss be fore ta x (7,671,502) (1,168,519) Income tax benefit 28 - 41,610 L o ss fo r th e year_____________________________________________________________(7,671,502)________ (1,126,909) O th e r co m p re h e n sive in com e O ther comprehensive income that will not be reclassified to profit o r loss in subsequent periods Remeasurement gain on employee benefits obligations 16 5,696 6,759 O th e r co m p re h e n sive in com e fo r th e year, net o f tax 5,696 6,759 T otal co m p re h e n sive lo ss fo r th e year, net o f ta x (7,665,806) (1,120,150) General director Chief accountant _______ У Ь / BatyrbekovtfN. K. The explanatory notes 1-31 are an integral part o f these financial statements. 2 National electrical grid of Kyrgyzstan OJSC Financial statements STATEMENT OF CASH FLOWS For the year ended 31 December 2020 In thousands o f soms Notes 2020 2019 Cash flows from operating activities Proceeds from the sale of electricity transmission services 3,789,997 3,788,311 Other proceeds 21,374 41,376 Interest received 16,870 14,318 Payments to suppliers for goods and services (412,334) (772,186) Payments of payroll and related taxes (1,165,397) (952,480) O ther payments to the budget (356,173) (402,104) Other payments (60,896) Net cash flows received from operating activities 1,833,441 1,717,235 Cash flows from investing activities Purchase of fixed and intangible assets (1,833,317) (2,630,229) Received dividends 384 353 Net cash flows used in investing activities (1,832,933) (2,629,876) Cash flows from financing activities Proceeds from borrowings 2,605,420 2,199,047 Repayment of borrowings (1,155,536) (1,293,817) Interest paid (320,277) (206,987) Dividends paid (138) (101) Net cash flows used from financing activities 1,129,469 698,142 Net change in cash and cash equivalents 1,129,977 (214,499) Foreign exchange, net 339,932 Cash and cash equivalents, as at 1 January 465,800 680,299 Restricted cash, as at 1 January 11 (1,399,781) Cash and cash equivalents, as at 31 December 12 535,928 465:800 General director Chief accountant The explanatory notes 1-31 are an integral part o f these financial statements. 3 National electrical grid of Kyrgyzstan OJSC Financial statements STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2020_____________ Share Reserve Accumula­ In thousands of soms capital capital ted loss Total As at 1 January 2019 1,597,377 159,738 (1,895,208) (138,093) Loss for the year - - (1,126,909) (1,126,909) Other comprehensive income for the year, net of tax - - 6,759 6,759 Total com prehensive loss - - (1,120,150) (1,120,150) Modification o f a loan received from the Ministry of Finance o f the Kyrgyz Republic - - 781,743 781,743 As at 31 December 2019 1,597,377 159,738 (2,233,615) (476,500) As at 1 January 2020 1,597,377 159,738 (2,233,615) (476,500) Loss for the year - - (7,671,502) (7,671,502) Other comprehensive income for the year, net of tax - - 5,696 5,696 Total com prehensive lo ss for the year - - (7,665,806) (7,665,806) Modification of a loan received from the Ministry of Finance of the Kyrgyz Republic “ “ 302,821 302,821 Recognition o f discount on receivables from related parties - - (98,430) (98,430) As at 31 December 2020 1,597,377 159,738 (9,695,030) (7,937,915) General director Chief accountant The explanatory notes 1-31 are an integral part o f these financial statements. 4 National electrical grid o f Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2020 1. GENERAL INFORMATION National electrical grid o f Kyrgyzstan OJSC (hereinafter - the “Company” or “NEGK”) was established on 7 September 2001 as a result o f reorganization o f Kyrgyzenergo JSC. During 2001 division o f “Kyrgyzenergo” was formed in accordance withlong-term governmental program “Reorganization and privatization o f Kyrgyzenergo JSC” appointed by the decision o f Government No. 333 dated 5 July 1998. As a result o f reorganization, Kyrgyzenergo JSC was divided into seven newly formed companies, becoming successors o f assets and liabilities, as well as operating activity o f Kyrgyzenergo JSC. Shareholders o f Kyrgyzenergo JSC received equivalent share in newly formed companies. The Company was initially registered on 25 December 2001, certificate No. 16742-3301-A0 and reincorporated on 16 May 2007, certificate No. 16742-3300-AO. The Company consists o f 6 branches, training center and head office located in Bishkek, conducting administrative and coordinative control on operational and maintenance field activities o f the branches. Registered office o f the Company is located in the Kyrgyz Republic, Bishkek, Zhibek Zholu Avenue, 326. The Company is a legal entity, registered in accordance with the law o f the Kyrgyz Republic. Apart from transmission o f electric power, the Company is responsible for the following activities: • Operational and dispatch control o f national electrical grids; • Administration o f production and consumption schedules o f electric power and capacity in the Kyrgyz energy system in real time mode, implementing the terms o f contracts for the sale and purchase o f electricity; • Administration o f inter-state flows o f electric power and its capacity in real time mode in accordance with electric power sales-purchase agreements; • Provision o f services to the fellow power systems related to frequency control (covering the disbalance o f daily schedules o f power flow and transit o f electric power through national electrical grids); • Administration o f trading on wholesale market o f electricity in accordance with concluded contracts; • Ensuring reliable and safe operation o f its energy assets in accordance with applicable regulations and rules, carrying out repair work and tests, performing construction and installation works, reconstruction and modernization o f equipment; • Sale o f electricity to Kumtor Gold Company CJSC under perpetual license No. 1 - GAE No. 00312 dated 29 March 2002 ; • In case o f emergency, taking measures to ensure the safety o f the household, the Company’s assets and guaranteed electricity supply, as specified in the Rules o f the National Electrical Grid; • Participation in the development and implementation o f the National Electric Power Program. The Company consists o f the following branches: Chui, Osh, Naryn, Jalal-Abad, Issyk-Kul and Talas high-voltage electrical grids plants. Company is a natural monopolist and a substantial component o f the energy sector and implementation o f the energy development strategy o f the Kyrgyz Republic. As part o f the strategy, the Company carries out a significant works to reorganize and modernize its technical facilities. The Company constructed new substation “Datka” in 2013 and new high-voltage electrical grid “Datka-Kemin”. Most o f the construction, reconstruction and modernization works held by the Company are financed by means o f long-term loans provided by the Government o f the Kyrgyz Republic, which obtained the funds from international financial donors. As o f 31 December 2020 and 2019, Company owned 1.225% and 10% ordinary shares o f Optima Bank JSC and Sredazenergosetproject JSC, accordingly. The financial statements were approved for issue by the General director and Chief accountant o f the Company on 26 March 2021. 2. BASIS OF PREPARATION The financial statements o f the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). These financial statements have been prepared on a historical cost basis, except for certain financial instruments in accordance with IFRS 9, which are measured at fair value. The financial statements are presented in Kyrgyz som and all amounts have been rounded to the nearest thousand, unless otherwise indicated. 5 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 2. BASIS OF PREPARATION (continued) COVID-19 commentary In connection with the recent rapid development o f the coronavirus (COVID-19) pandemic, many countries, including the Kyrgyz Republic, have introduced quarantine measures, which had a significant impact on the level and scale of business activity o f market participants. Since March 2020, there has been significant volatility in the stock, foreign exchange and commodity markets, including the fall in oil prices and the depreciation o f the som against the US dollar and euro. In addition, due to the recent rapid spread o f the coronavirus (COVID-19) pandemic, the country’s government has imposed a state o f emergency, including quarantines in major cities, which continues as o f the date o f the financial statements, which has affected the level and scale o f business activity. It is expected that both the pandemic itself and the measures to mitigate its consequences have affected the activities o f companies from various industries. The Company analyzed the impact o f changing micro and macroeconomic conditions on the Company’s financial position and results o f operations. The Company estimated the quantitative effect o f the pandemic on the Com pany’s financial position as o f 31 December 2020. There was a decrease in revenue, but this factor did not have a negative impact, in addition, an increase in the tariff for the transmission o f electricity was approved from 1 October 2020 from 21 tyin / kWh to 22 tyin / kWh. The Company’s management assessed that the coronavirus (COVID-19) pandemic did not adversely affect consumer demand for electricity. In addition, the Company analyzed any possible impact o f insulation worldwide on the import and supply o f goods and services, including equipment and maintenance and technical support services required for equipment and support systems. The Company believes that there is no significant risk in the operation o f the equipment required for the transmission o f electricity due to the availability o f an emergency stock o f equipment and spare parts that the Company plans to use in emergency situations. All repair and maintenance works planned in the budget remained at the planned levels, however, some works were postponed to a later date, by now all the postponed works have been completed. When assessing the impact o f the pandemic, the company’s management considered the following factors: supply and logistics factor - timely delivery o f inventories and equipment. Given the strategic importance, there were no restrictions on supplies, including from outside the Kyrgyz Republic, there were minor delays due to the unstable work schedule o f manufacturers, transport companies, suppliers, border and customs points. Regarding the timeliness o f payments, in accordance with the resolution o f the Parliament o f the Kyrgyz Republic dated 1 April 2020 No. 3659-VI, consumers were given a deferral to pay utility bills until 30 June 2020 without charging a penalty for the late payment. The accumulated debt on the part o f electricity consumers was repaid as production processes were restored and consumers’ solvency increased, and now the main debt o f that period has been repaid. For distribution electric companies - when distributing the percentage o f funds received, the accumulated debt is taken into account. In connection with the restructuring o f part o f the obligations on loans attributable to 2020-2022 in accordance with the order o f the Government o f the Kyrgyz Republic No. 222-r dated 18 June 2020 and the Resolution o f the Parliament o f the Kyrgyz Republic No. 3968-VI dated 20 June 2020, OJSC “NEG o f Kyrgyzstan” agreed on repayment schedules for 2020-2022 with the State Agency for the Management o f Budget Loans under the Ministry o f Finance, for which the Company ensured timely payment without overdue amounts by the end o f the year. The most significant impact o f the pandemic is the depreciation o f the som against the US dollar and euro for the year ended 31 December 2020, which was reflected by an increase in the cost o f negative exchange rate differences on loans in foreign currencies. As a result, management performed impairment testing o f the Company’s property, plant and equipment within a single cash-generating unit. The company estimated that the quantitative effect o f the pandemic cannot be estimated with enough confidence at this time due to the uncertainty and duration o f the pandemic. In addition, the electricity sector in the Kyrgyz Republic remains vulnerable to political, legislative, tax and regulatory changes in the country. The prospects for economic stability o f the Kyrgyz Republic largely depend on the effectiveness o f economic measures taken by the Government, as well as on the development o f legal, control and political systems, that is, on circumstances that are beyond the control o f the Company. Management believes it is taking all the necessary measures to maintain the sustainability and growth o f the Com pany’s business in the current circumstances. The company will continue to monitor the situation closely. 6 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 2. BASIS OF PREPARATION (continued) Going concern The financial statements have been prepared on the basis o f going concern principle, which implies a continuation o f the normal course o f business, sale o f assets and settlement o f obligations in the normal course o f business. As at the reporting date, the Company’s current assets exceeded its current liabilities by 843,149 thousand soms and for the year then ended the Company incurred net loss o f 7,671,502 thousand soms (for the year ended 31 December 2019: net loss o f 1,126,909 thousand soms). Management anticipates that the Company will continue its activities in accordance with the principle o f going concern, and by accepting this judgment, management took into account the current intent and the financial position o f the Company. In particular, the following factors were considered in assessing the Company’s ability to continue as going concern: • The Company is a strategic asset for the Kyrgyz Republic, which transmits electric power throughout the country, from the producers to distributing entities and major production facilities. In addition, the Company is a system operator, performing centralized operational and dispatching management o f the national energy system o f the Kyrgyz Republic. • According to Article 5 o f the Law o f the Kyrgyz Republic On the Special Status o f the Cascade o f Toktogul Hydroelectric Power Plants and the National High-Voltage Transmission Line, one o f the principles o f the state policy towards the Company is state incentives, which the management believes will enable the Company to continue its operations in the foreseeable future. • The Company actively participates in the implementation o f the C A SA -1000 project with the support o f the World Bank Group, the Islamic Development Bank, European Investment Bank, as well as a number o f other international donor organizations. The purpose o f the Project is to create conditions for sustainable electricity trade conditions between Tajikistan and the Kyrgyz Republic in Central Asia and Afghanistan and Pakistan in South Asia, as a result o f which the Company expects a significant increase in revenues from the transportation o f electrical energy from export. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES New and amended standards and interpretations The Company applied for the first-time certain standards and amendments, which are effective for annual periods beginning on or after 1 January 2020. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. Amendments to IFRS 3: Definition o f a Business The amendment to IFRS 3 Business Combinations clarifies that to be considered a business, an integrated set o f activities and assets must include, at a minimum, an input and a substantive process that, together, significantly contribute to the ability to create output. Furthermore, it clarifies that a business can exist without including all o f the inputs and processes needed to create outputs. These amendments had no impact on the financial statements o f the Company, but may impact future periods should the Company enter into any business combinations. Amendments to IFRS 7, IFRS 9 and IAS 39 Interest Rate Benchmark Reform The amendments to IFRS 7, IFRS 9 and IAS 39 Financial Instruments: Recognition and Measurement provide a number o f reliefs, which apply to all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainty about the timing and/or amount o f benchmark-based cash flows o f the hedged item or the hedging instrument. These amendments have no impact on the financial statements o f the Company as it does not have any interest rate hedge relationships. Amendments to IAS 1 and IAS 8 Definition o f Material The amendments provide a new definition o f material that states, “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users o f general purpose financial statements make on the basis o f those financial statements, which provide financial information about a specific reporting entity.” The amendments clarify that materiality will depend on the nature or magnitude o f information, either individually or in combination with other information, in the context o f the financial statements. A misstatement o f information is material if it could reasonably be expected to influence decisions made by the primary users. These amendments had no impact on the financial statements of, nor is there expected to be any future impact to the Company. 7 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) New and amended standards and interpretations (continued) Conceptual Framework fo r Financial Reporting issued on 29 M arch 2018 The Conceptual Framework is not a standard, and none of the concepts contained therein override the concepts or requirements in any standard. The purpose o f the Conceptual Framework is to assist the IASB in developing standards, to help preparers develop consistent accounting policies where there is no applicable standard in place and to assist all parties to understand and interpret the standards. This will affect those entities which developed their accounting policies based on the Conceptual Framework. The revised Conceptual Framework includes some new concepts, updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts. These amendments had no impact on the financial statements o f the Company. Amendments to IFRS 16 COVID-19 Related Rent Concessions On 28 May 2020, the IASB issued COVlD-19-Related Rent Concessions - amendment to IFRS 16 Leases. The amendments provide relief to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence o f the COVID-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a COVID-19 related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the COVID-19 related rent concession the same way it would account for the change under IFRS 16, if the change were not a lease modification. The amendment applies to annual reporting periods beginning on or after 1 June 2020. Earlier application is permitted. This amendment had no impact on the financial statements o f the Company. Standards issued but not yet effective The new and amended standards and interpretations that are issued, but not yet effective, up to the date o f issuance o f the Company’s financial statements are disclosed below. The Company intends to adopt these new and amended standards and interpretations, if applicable, when they become effective. IFRS 1 7 Insurance Contracts In May 2017, the IASB issued IFRS 17 Insurance Contracts, a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. Once effective, IFRS 17 will replace IFRS 4 Insurance Contracts that was issued in 2005. IFRS 17 applies to all types o f insurance contracts (i.e., life, non­ life, direct insurance and re-insurance), regardless o f the type o f entities that issue them, as well as to certain guarantees and financial instruments with discretionary participation features. A few scope exceptions will apply. The overall objective o f IFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers. In contrast to the requirements in IFRS 4, which are largely based on grandfathering previous local accounting policies, IFRS 17 provides a comprehensive model for insurance contracts, covering all relevant accounting aspects. The core o f IFRS 17 is the general model, supplemented by: • A specific adaptation for contracts with direct participation features (the variable fee approach); • A simplified approach (the premium allocation approach) mainly for short-duration contracts; IFRS 17 is effective for reporting periods beginning on or after 1 January 2023, with comparative figures required. Early application is permitted, provided the entity also applies IFRS 9 and IFRS 15 on or before the date it first applies IFRS 17. This standard is not applicable to the Company. Amendments to IAS 1: Classification o f Liabilities as Current or Non-current In January 2020, the IASB issued amendments to paragraphs 69 to 76 o f IAS 1 to specify the requirements for classifying liabilities as current or non-current. The amendments clarify: • What is meant by a right to defer settlement; • That a right to defer must exist at the end o f the reporting period; • That classification is unaffected by the likelihood that an entity will exercise its deferral right; • That only if an embedded derivative in a convertible liability is itself an equity instrument would the terms o f a liability not impact its classification. The amendments are effective for annual reporting periods beginning on or after 1 January 2023 and must be applied retrospectively. The Company is currently assessing the impact the amendments will have on current practice and whether existing loan agreements may require renegotiation. 8 National electrical grid o f Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Standards issued but not yet effective (continued) Reference to the Conceptual Framework - Amendments to IFRS 3 In May 2020, the IASB issued Amendments to IFRS 3 Business Combinations - Reference to the Conceptual Framework. The amendments are intended to replace a reference to the Framework for the Preparation and Presentation o f Financial Statements, issued in 1989, with a reference to the Conceptual Framework for Financial Reporting issued in March 2018 without significantly changing its requirements. The Board also added an exception to the recognition principle o f IFRS 3 to avoid the issue o f potential ‘day 2 ’ gains or losses arising for liabilities and contingent liabilities that would be within the scope o f IAS 37 or IFRIC 21 Levies, if incurred separately. At the same time, the Board decided to clarify existing guidance in IFRS 3 for contingent assets that would not be affected by replacing the reference to the Framework for the Preparation and Presentation o f Financial Statements. The amendments are effective for annual reporting periods beginning on or after 1 January 2022 and apply prospectively. Property, Plant and Equipment: Proceeds before Intended Use - Amendments to IAS 16 In May 2020, the IASB issued Property, Plant and Equipment - Proceeds before Intended Use, which prohibits entities deducting from the cost o f an item o f property, plant and equipment, any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable o f operating in the manner intended by management. Instead, an entity recognizes the proceeds from selling such items, and the costs o f producing those items, in profit or loss. The amendment is effective for annual reporting periods beginning on or after 1 January 2022 and must be applied retrospectively to items o f property, plant and equipment made available for use on or after the beginning o f the earliest period presented when the entity first applies the amendment. The amendments are not expected to have a material impact on the Company. Onerous Contracts - Costs o f Fulfilling a Contract - Amendments to IAS 37 In May 2020, the IASB issued amendments to IAS 37 to specify which costs an entity needs to include when assessing whether a contract is onerous or loss-making. The amendments apply a “directly related cost approach”. The costs that relate directly to a contract to provide goods or services include both incremental costs and an allocation o f costs directly related to contract activities. General and administrative costs do not relate directly to a contract and are excluded unless they are explicitly chargeable to the counterparty under the contract. The amendments are effective for annual reporting periods beginning on or after 1 January 2022. The Company will apply these amendments to contracts for which it has not yet fulfilled all its obligations at the beginning o f the annual reporting period in which it first applies the amendments. IFRS 1 First-time Adoption o f International Financial Reporting Standards - Subsidiary as a first-tim e adopter As part o f its 2018-2020 annual improvements to IFRS standards process, the IASB issued an amendment to IFRS 1 First-time Adoption o f International Financial Reporting Standards. The amendment permits a subsidiary that elects to apply paragraph D16(a) o f IFRS 1 to measure cumulative translation differences using the amounts reported by the parent, based on the parent’s date o f transition to IFRS. This amendment is also applied to an associate or joint venture that elects to apply paragraph D16(a) o f IFRS 1. The amendment is effective for annual reporting periods beginning on or after 1 January 2022 with earlier adoption permitted. 9 National electrical grid o f Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Standards issued but not yet effective (continued) IFRS 9 Financial Instruments - Fees in the ‘10 per c e n t’ test fo r derecognition offinancial liabilities As part o f its 2018-2020 annual improvements to IFRS standards process the IASB issued amendment to IFRS 9. The amendment clarifies the fees that an entity includes when assessing whether the terms o f a new or modified financial liability are substantially different from the terms o f the original financial liability. These fees include only those paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf. An entity applies the amendment to financial liabilities that are modified or exchanged on or after the beginning o f the annual reporting period in which the entity first applies the amendment. The amendment is effective for annual reporting periods beginning on or after 1 January 2022 with earlier adoption permitted. The Company will apply the amendments to financial liabilities that are modified or exchanged on or after the beginning o f the annual reporting period in which the entity first applies the amendment. The amendments are not expected to have a material impact on the Company. Classification of assets and liabilities to current or non-current Company presents assets and liabilities in statement o f financial position based on current/non-current classification. An asset as current when it is: • Expected to be realized or intended to sold or consumed in normal operating cycle; • Held primarily for the purpose o f trading; • Expected to be realized within 12 (twelve) months after the reporting period; or cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 (twelve) months after the reporting period. All other assets are classified as non-current. A liability is current when: • It is expected to be settled in normal operating cycle; • It is held primarily for the purpose o f trading; • It is due to be settled within 12 (twelve) months after the reporting period; or • There is no unconditional right to defer the settlement o f the liability for at least 12 (twelve) months after the reporting period. The Company classifies all other liabilities as non-current. Deferred tax assets and liabilities are classified as non-current assets and liabilities. Foreign currency transactions The Company’s financial statements are presented in Kyrgyzstan soms, which is also the Company’s functional currency. Transactions in foreign currencies are initially recorded by the Company’s subsidiaries at their respective functional currency spot rates, determined by the National Bank of the Kyrgyz Republic (NBKR), at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate o f exchange at the reporting date. All differences arising on settlement or translation o f monetary items are recognized in statement o f comprehensive income with the exception o f monetary items that are designated as part o f the hedge o f the Company’s net investment o f a foreign operation. These are recognized in other comprehensive income until the net investment is disposed of, at which time, the cumulative amount is reclassified to profit or loss. Tax charges and credit attributable to exchange differences on those monetary items are also recognized in other comprehensive income. Non-monetary items that are measured in terms o f historical cost in a foreign currency are translated using the exchange rates as at the dates o f the initial transactions. 10 "ггггггггггггтгггггггтаггтггтгг National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Foreign currency transactions (continued) Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation o f non-monetary items is treated in line with the recognition o f gain or loss on change in fair value o f the item (i.e., translation differences on items whose fair value gain or loss is recognized in other comprehensive income or profit or loss is also recognized in other comprehensive income or profit or loss, respectively). Exchange rates for foreign currencies in which the Company had significant transactions are represented as follows: 31 December 31 December 2020 2019 USD 1 82.6498 69.6439 SDR 1 117.9311 96.0159 CHF 1 92.0642 71.243 KWD 1 268.1487 229.7729 EUR 1 101.3204 77.9803 KZT 1 0.1966 0.1828 RUR 1 1.1188 1.125 Average exchange rate for the year (to som) 2020 2019 USD 1 77.3616 69.7895 SDR 1 107.8584 96.4385 CHF 1 82.6084 70.2216 KWD 1 252.4357 229.6716 EUR 1 88.4016 78.1518 KZT 1 0.1871 0.1823 RUR 1 1.0732 1.0785 Property, plant and equipment Property, plant and equipment is stated at cost, net o f accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost o f replacing part o f the property, plant and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts o f property, plant and equipment are required to be replaced at intervals, the Company recognizes such parts as individual assets with specific useful lives and depreciates them accordingly. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount o f the property, plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognized in profit or loss as incurred. Property, plant and equipment transferred from customers or other parties is initially measured at the fair value at the date on which control is obtained. Depreciation is calculated over the estimated useful lives set out in the following table: Useful life Buildings and constructions 5-100 years Machinery and equipment 2-45 years Transfer devices 15-59 years Vehicles 5-15 years Other 3-10 years Subsequent expenditures are included in the carrying amount o f this asset or reflected as a separate asset providing only that there is probability that the Company will have economic benefits from the usage o f this asset, and its cost can be reliably measured. Special spare parts and auxiliary equipment with significant initial cost and useful life over one year are reflected within property, plant and equipment. Other spare parts and auxiliary equipment are reflected within inventories in the statement o f comprehensive income upon transfer to operation. Land and construction in progress are not depreciated. 11 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued)_______________________________ 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Property, plant and equipment (continued) For depreciation, it applies a straight-line depreciation method for all groups o f fixed assets. The useful life o f an item o f property, plant and equipment is periodically reviewed and if assumptions differ materially from previous estimates, the depreciation charge for the current and iiiture periods is adjusted. Depreciation is charged on a monthly basis, starting from the month in which the facility was put into operation.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 amounts o f the carrying amount o f property, plant and equipment and on depreciation expenses recognized in the statement o f comprehensive income. An item o f property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on de-recognition o f the asset (calculated as the difference between the net disposal proceeds and the carrying amount o f the asset) is included in the profit or loss in the year the asset is derecognized. Estimated useful lives and methods for calculating depreciation o f assets are reviewed annually and, if necessary, relevant changes are made prospectively. Intangible assets Intangible assets are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses. Internally generated intangible assets o f the Company, excluding capitalised development costs, are not capitalised and related expenditure is reflected in the profit or loss in the period in which expenditure is incurred. Intangible assets o f the Company consist primarily o f licenses and software. Intangible assets are amortized on a straight- line basis over their estimated useful lives, generally from 5 to 10 years. Borrowing costs directly attributable to the acquisition, construction or production o f an asset that necessarily takes a substantial period o f time to get ready for its intended use or sale are capitalised as part o f the cost o f the asset. All other borrowing costs are expensed in the period they occur. Borrowing costs consist o f interest and other costs that the Company incurs in connection with the borrowing o f funds. Impairment of non-financial assets At each reporting date, the Company assesses whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher o f an asset’s or cash-generating unit’s (CGU) fair value less costs o f disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent o f those from other assets or groups o f assets. When the carrying amount o f an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value o f money and the risks specific to the asset. In determining fair value less costs o f disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. The Company bases its impairment calculation on value in use, which are prepared separately for each o f the Company’s CGUs to which the individual assets are allocated. The calculations generally cover a period o f at least 5 (five) years. For longer periods, a long-term growth rate is calculated and applied to project future cash flows after the fifth year. Impairment losses o f continuing operations, including impairment on inventories, are recognized in the statement of comprehensive income in expense categories consistent with the function o f the impaired asset, except for properties revalued with the revaluation taken to other comprehensive income. For such properties, the impairment is recognised in other comprehensive income up to the amount o f any previous revaluation. For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the Company estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount o f the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net o f depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement o f comprehensive income. 12 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments - initial recognition and subsequent measurement A financial instrument is any contract that gives rise to a financial asset o f one entity and a financial liability or equity instrument o f another entity. Financial assets Initial recognition and measurement Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, fair value through other comprehensive income and fair value through profit or loss. The classification o f financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Company’s business model for managing them. With the exception o f trade receivables that do not contain a significant financing component or for which the Company has applied the practical expedient, the Company initially measures a financial asset at its fair value plus, in the case o f a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Company has applied the practical expedient are measured at the transaction price determined in accordance with IFRS 15. In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are ‘solely payments o f principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. The Company’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Purchases or sales o f financial assets that require delivery o f assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Company commits to purchase or sell the asset. The Com pany's financial assets include cash and cash equivalents, restricted cash and trade receivables. Subsequent measurement For purposes o f subsequent measurement, financial assets are classified in four categories: • Financial assets at amortised cost (debt instruments); • Financial assets at fair value through OCI with recycling o f cumulative gains and losses (debt instruments); • Financial assets designated at fair value through OCI with no recycling o f cumulative gains and losses upon derecognition (equity instruments); • Financial assets at fair value through profit or loss. Financial assets at amortised cost (debt instruments) Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired. The Company classifies trade receivables as financial assets at amortized cost. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose o f selling in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments o f principal and interest are classified and measured at fair value through profit or loss, irrespective o f the business model. Notwithstanding the criteria for debt instruments to be classified at amortized cost or at fair value through other comprehensive income, as 13 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments - initial recognition and subsequent measurement (continued) Financial assets (continued) described above, debt instruments may be designated at fair value through profit or loss on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch. Financial assets at fair value through profit or loss are carried in the statement o f financial position at fair value with net changes in fair value recognized in the statement o f profit or loss. Despite the criteria for classifying debt instruments as measured at amortized cost or fair value through other comprehensive income as described above, upon initial recognition the Company may, at its sole discretion, classify debt instruments as measured at fair value through profit or loss if such classification removes or significantly reduces the accounting discrepancy. Financial assets at fair value through profit or loss are carried in the statement o f financial position at fair value and net changes in their fair value are recognized in the statement o f profit or loss. This category includes derivative instruments and listed equity investments which the Company had not irrevocably elected to classify at fair value through other comprehensive income. Dividends on listed equity investments are also recognized as other income in the statement o f profit or loss when the right o f payment has been established. A derivative embedded in a hybrid contract, with a financial liability or non-financial host, is separated from the host and accounted for as a separate derivative if: the economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the embedded derivative would meet the definition o f a derivative; and the hybrid contract is not measured at fair value through profit or loss. Embedded derivatives are measured at fair value with changes in fair value recognized in profit or loss. Reassessment only occurs if there is either a change in the terms o f the contract that significantly modifies the cash flows that would otherwise be required or a reclassification o f a financial asset out o f the fair value through profit or loss category. A derivative embedded within a hybrid contract containing a financial asset host is not accounted for separately. The financial asset host together with the embedded derivative is required to be classified in its entirety as a financial asset at fair value through profit or loss. 14 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments - initial recognition and subsequent measurement (continued) Financial assets (continued) Derecognition A financial asset (or, where applicable, a part o f a financial asset or part o f a group o f similar financial assets) is primarily derecognized (i.e., removed from the Company’s statement o f financial position) when: • The rights to receive cash flows from the asset have expired; • The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Company has transferred substantially all the risks and rewards o f the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards o f the asset, but has transferred control o f the asset. When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards o f ownership. When it has neither transferred nor retained substantially all o f the risks and rewards o f the asset, nor transferred control o f the asset, the Company continues to recognize the transferred asset to the extent o f its continuing involvement. In that case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained. Continuing involvement that takes the form o f a guarantee over the transferred asset is measured at the lower o f the original carrying amount o f the asset and the maximum amount o f consideration that the Company could be required to repay. Impairment o f financial assets The Company recognizes an allowance for ECLs for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive, discounted at an approximation o f the original effective interest rate. The expected cash flows will include cash flows from the sale o f collateral held or other credit enhancements that are integral to the contractual terms. ECLs are recognized in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life o f the exposure, irrespective o f the timing o f the default (a lifetime ECL). For trade receivables, the Company applies a simplified approach in calculating ECLs. Therefore, the Company does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Company has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. Financial liabilities Initial recognition and measurement Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification o f its financial liabilities at initial recognition. All financial liabilities are recognized initially at fair value and, in the case o f loans and borrowings, net o f directly attributable transaction costs. The Company’s financial liabilities include trade and other payables and borrowings. 15 Иf I National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued)________________________ T IT I 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) T i Financial instruments - initial recognition and subsequent measurement (continued) T IT iTj TJTj Tj TJTj Tj U j T J !J L T j L IT J L iL11j Tj T -IIJ j T -IIj Tj T -B - Financial liabilities (continued) Subsequent measurement For purpose o f subsequent measurement, financial liabilities are classified in two categories: • Financial liabilities at fair value through profit or loss; • Financial liabilities at amortized cost (loans and borrowings). Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated by the Company upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are incurred for the purpose o f repurchasing in the near term. This category also includes derivative financial instruments entered into by the Company that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognized in the statement o f profit or loss. Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date o f recognition, and only if the criteria in IFRS 9 are satisfied. The Company has not designated any financial liability as at fair value through profit or loss. Financial liabilities at amortized cost (loans and borrowings) After initial recognition, interest bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in the statement o f comprehensive income when the liabilities are derecognized as well as through the EIR amortization process, except the loans received from the ultimate controlling party or other related parties, gains and losses on substantial derecognition and/or insignificant modification o f loan terms o f which are recognized in equity. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part o f the EIR. The EIR amortization is included as finance costs in the statement o f comprehensive income. Trade accounts payable Liabilities for trade accounts payable are recognized at cost which is the fair value o f the consideration to be paid in the future for goods and services received, whether billed to the Company. Derecognition A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms o f an existing liability are substantially modified, such an exchange or modification is treated as the derecognition o f the original liability and the recognition o f a new liability. The difference in the respective carrying amounts is recognized in the statement o f comprehensive income, except for loans received from the ultimate controlling party or from other related parties for which profits and losses from derecognition and/or from minor modification o f the terms o f the loans are recognized as equity. Offsetting of financial instruments Financial assets and financial liabilities are offset, and the net amount is reported in the statement o f financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously. 16 т г т т г National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued)_______________________________ 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair value of financial instruments The fair value o f financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques. Such techniques may include: • Using recent arm ’s length market transactions; • Reference to the current fair value o f another instrument that is substantially the same; • A discounted cash flow analysis or other valuation models. т г т г т т т г ш An analysis o f fair values o f financial instruments and further details as to how they are measured are provided in Note 30. Equity Share capital External costs directly attributable to the issue o f new shares, other than on a business combination, are shown as a deduction from the proceeds in equity. Any excess o f the fair value o f consideration received over the par value o f shares issued is recognized as an additional paid-in capital. Dividends Dividends are recognized as a liability and deducted from equity at the reporting date only if they are approved before or on the reporting date. Dividends are disclosed when they are proposed before the reporting date, proposed, or declared after the reporting date but before the financial statements are authorized for issue. Leases The Company assesses at contract inception whether a contract is, or contains a lease. That is, if the contract conveys the right to control the use o f an identified asset for a period o f time in exchange for consideration. Company as a lessee The Company applies a single recognition and measurement approach for all leases, except for short-term leases and leases o f low-value-assets. The Company recognises lease liabilities to make lease payments and right-of-use assets representing the right to use underlying assets. i) Right-of-use assets The Company recognises right-of-use assets at the commencement date o f the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement o f lease liabilities. The cost o f right-of-use assets includes the amount o f lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-used assets are depreciated on a straight-line basis over the shorter o f the lease term and estimated useful lives o f the assets. т т г т т ш If ownership o f the leased asset transfers to the Company at the end o f lease term or the cost reflects the exercise o f a purchase option, depreciation is calculated using the estimated useful life o f the asset. ii) Lease liabilities At the commencement date o f the lease, the Company recognises lease liabilities measured at the present value o f lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price o f a purchase option reasonably certain to be exercised by the Company and payments o f penalties for terminating the lease, if the lease term reflects the Company exercising the option to terminate. Variable lease payments that do not depend on an index or a rate are recognised as expenses (unless they are incurred to produce inventories) in the period in which the event or condition that triggers the payment occurs. 17 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Leases (continued) Company as a lessee (continued) ii) Lease liabilities (continued) In calculating the present value o f lease payments, the Company uses EIR method at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount o f lease liabilities is increased to reflect the accretion o f interest and reduced for the lease payments made. In addition, the carrying amount o f lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (i.e., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment o f an option to purchase the underlying asset. Hi) Short-term leases and lease o f low-value assets The Company applies the short-term lease recognition exemption to its short-term leases o f machinery and equipment (i.e., those leases that have a lease term o f 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease o f low-value assets recognition exemption to leases o f office equipment that are considered to be low value. Lease payments on short-term leases and lease o f low-value assets are recognised as expense on a straight-line basis over the lease term. Company as a lessor Leases in which the Company does not transfer substantially all the risks and rewards o f ownership o f an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement o f profit or loss due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount o f the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned. Inventory Inventories are accounted for on a FIFO basis, except for fuel and lubricants, which are accounted for on a weighted average cost method. Inventories are valued at the lower o f cost and net realizable value. N et realisable value is the estimated selling price in the ordinary course o f business, less estimated costs o f completion and the estimated costs necessary to make the sale. Cash and cash equivalents Cash and cash equivalents in the statement o f financial position comprise cash at banks and on hand and short-term deposits with a maturity till 3 (three) months or less. For the purpose o f the statement o f cash flows, cash and cash equivalents consist o f cash and short-term deposits as defined above, net o f outstanding bank overdrafts. Advances paid Advances paid are recorded at initial cost less impairment provision. Advances given are classified as non-current when goods or services associated with advances are to be received in more than a year, or if advances are associated with an asset, which at the initial recognition is classified as non-current. Advances for PPE are charged to the cost o f these PPE when the Company obtains control over these assets and there is a probability that future economic benefits associated with these assets will flow to the Company. When there are indications o f inability to receive goods or services related to advances paid, the carrying amount o f advances paid is decreased and related impairment loss is recognized through profit or loss in the statement o f comprehensive income. 18 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured, regardless o f when the payment is being made. Revenue is measured at the fair value o f the consideration received or receivable, considering contractually defined terms o f payment and excluding taxes or duty. The Company assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent. The Company has concluded that it is acting as a principal in all o f its revenue arrangements. The specific recognition criteria described below must also be met before revenue is recognized: Transmission o f electricity Electricity transmission contracts provide for only one performance obligation, since electricity transmission obligation does not include any other performance obligations. Revenue from the sale o f electric power is recognized based on the accrual method when the electric power is transmitted. Revenue from the sale o f electric power is recognized when the significant risks and rewards have passed to the buyer, usually now o f transfer o f electricity. Revenue is recorded net o f VAT. Trade receivable A receivable is recognized if an amount o f consideration that is unconditional (i.e., only the passage o f time is required before payment o f the consideration is due). Refer to accounting policies o f financial assets in section Financial assets - initial recognition and subsequent measurement. Contract liabilities A contract liability is the obligation to transfer goods or services to a customer for which the Company has received consideration (or an amount o f consideration is due) from the customer. If a customer pays consideration before the Company transfers goods or services to the customer, a contract liability is recognized by contract when the payment is made or becomes payable (whichever is earlier). Contract liabilities are recognized as revenue when the Company performs under the contract. Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) as a result o f a past event, it is probable that an outflow o f resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made o f the amount o f the obligation. When the Company expects some or all o f a provision to be reimbursed, for example, under contract on transmission o f electricity, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement o f comprehensive income, net o f any reimbursement. Employee defined benefit liability The Company offers its employees defined benefits after retirement in accordance with the collective agreement. In particular, the agreement stipulates payment o f one-time retirement benefit and 50-year anniversary. Right to receipt o f benefit is usually granted depending on the period remaining to retirement and availability o f minimum length o f service. Accrual o f expected expenses on the benefits is carried out during employee labor activity in accordance with technique, which is used in calculation o f post-employment defined benefit liability. In respect o f defined benefit liability the difference between the fair value o f pension assets, if any, and current cost o f pension liabilities is recognized as asset o r liability in the statement o f financial position. Remeasurement gains and losses arising during a period are recorded through other comprehensive income. For this purpose, remeasurement gains and losses include the impact o f changes in actuarial assumptions, and the impact o f past experience on differences between actuarial assumptions and actual data. Remeasurement gains and losses are not reclassified to profit or loss in subsequent periods. Net interest is determined using discounting in relation to the net liability or net defined benefit asset. The company recognizes the mentioned changes in the net defined benefit obligation in the statement o f comprehensive income. Other changes in net surplus or deficit are recognized in the statement o f comprehensive income, including the cost o f current services and impact o f any reduction of staff or dismissal. All assumptions are reviewed at each reporting date. 19 National electrical grid o f Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Pension obligations In accordance with the legislation o f the Kyrgyz Republic, the Company makes payments in the amount o f 10% o f employees’ salaries to accumulative pension funds. Pension fund payments are withheld from em ployees’ salaries and included within payroll expenses in the statement o f comprehensive income when they are incurred. The Company does not have any other pension obligations. Current income tax Current income tax assets and liabilities for the current and previous periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date in the countries where the Company operates and generates taxable income. Current income tax relating to items recognized directly in equity is recognized in equity and not in the statement o f comprehensive income. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred tax Deferred tax is provided using the liability method on temporary differences between the tax bases o f assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred income tax liabilities are recognized for all taxable temporary differences, except: • When the deferred tax liability arises from the initial recognition o f goodwill or o f an asset or liability in a transaction that is not a business combination and, at the time o f the transaction, affects neither the accounting profit nor taxable profit or loss; • In respect o f taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, when the timing o f the reversal o f the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognized for all deductible temporary differences, the carry forward o f unused tax credits and unused tax losses: • When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition o f an asset or liability in a transaction that is not a business combination and, at the time o f the transaction, affects neither the accounting profit nor taxable profit or loss; • In respect o f deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount o f deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part o f the deferred tax asset to be utilised. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction either in other comprehensive income or directly in equity. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set o ff current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. 20 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Value added tax (VAT) Revenues, expenses and assets are recognized net o f the amount o f VAT, except: • When the VAT incurred on a purchase o f assets or services is not recoverable from the taxation authority, in which case, the VAT is recognized as part o f the cost o f acquisition o f the asset or as part o f the expense item, as applicable; • Receivables and payables that are stated with the amount o f VAT included. VAT recoverable relates to purchases. VAT recoverable is reclaimable against VAT related to sales upon payment for the purchases, as well as VAT recoverable is recoupable by claiming o f cash refund from tax authorities o f the country. In the case o f non-recoverability, VAT recoverable amount is expensed in the statement o f comprehensive income. Contingent liabilities and contingent assets Contingent liabilities are not recognized in the financial statements but are disclosed in the financial statements unless the possibility o f any outflow in settlement is remote. A contingent asset is not recognized in the financial statements but disclosed in the financial statements when an inflow o f economic benefits is probable. 4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The preparation o f the Company’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts o f revenues, expenses, assets and liabilities, and the disclosures, and the disclosure o f contingent liabilities and assets. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount o f assets or liabilities affected in future periods. The key assumptions concerning the future and other key sources o f estimation uncertainty at the reporting date, that have a significant risk o f causing a material adjustment to the carrying amounts o f assets and liabilities within the next financial year, are described below. The Company based its assumptions and estimates on parameters available when the financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control o f the Company. Such changes are reflected in the assumptions when they occur. Useful life of property, plant and equipment The Company assesses the remaining useful lives o f items o f 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 amount o f the carrying values o f property, plant and equipment and on depreciation recognized in the statement o f comprehensive income. Impairment o f non-financial assets The Company assesses, at each reporting date, whether there is an indicator that an asset may be impaired. If any indicators exist, and in case, when circumstances indicate the carrying value may be impaired, the Company estimates the asset’s recoverable amount. The Company’s impairment test for assets is based on value-in-use calculations. The Company considers dynamics o f the electricity tariffs and demand from the major participants o f electricity market, among other factors, when reviewing for indicators o f impairment. The management performed an impairment test as at 31 December 2020 for property, plant and equipment o f the Company within single cash generating unit. The Company used the cash-generating unit’s value-in-use to determine the recoverable amount. As a result o f the test, the Company identified that no impairment o f property, plant and equipment is necessary as o f 31 December 2020. Considering uncertainties associated with future growth in electricity transmission tariffs the Company performed value in use calculation based in real cash flows discounted at real discount rate, with no consideration o f growth in cash flows by future inflation index. 21 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS (continued) Impairment of non-Iinancial assets (continued) The key assumptions for the recoverable amount are discussed below: Long-term growth rate - in estimation o f recoverable amount o f the assets, management o f the Company used long-term growth rate o f 2.7%. The forecast o f long-term growth rate was made on the basis o f management’s expectations in respect o f average historical growth for previous years and perspective increase in sales volume within expected GPD o f Kyrgyz Republic. Discount rate - discount rates o f 6.42% and 5.6% for terminal value, which were calculated to reflect the current market assessment o f the risks specific to the Company, and were estimated based on the weighted average cost o f capital, excluding inflation effect. Further changes to the discount rate may be necessary in the future to reflect changing risks for the industry and changes to the weighted average cost o f capital. Provision for expected credit losses on trade receivables The Company uses a provision matrix to calculate expected credit losses ECLs for trade receivables and contract assets. The provision rates are based on days past due for groupings o f various customer segments that have similar loss patterns. The provision matrix is initially based on the Company’s historical observed default rates. The Company will calibrate the matrix to adjust the historical credit loss experience with forward-looking information. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analyzed. The assessment o f the correlation between historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount o f ECLs is sensitive to changes in circumstances and o f forecast economic conditions. The Company’s historical credit loss experience and forecast o f economic conditions may also not be representative o f customer’s actual default in the future (Note 9). Taxes Uncertainties exist with respect to the interpretation o f complex tax regulations and the amount and timing o f future taxable income. Given the wide range o f international business relationships and the long-term nature and complexity o f existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and benefit already recorded. The Company establishes provisions, based on reasonable estimates, for possible consequences o f audits by the tax authorities. The amount o f such provisions is based on various factors, such as experience o f previous tax audits and differing interpretations o f tax regulations by the taxable entity and the responsible tax authority. Such differences o f interpretation may arise on a wide variety o f issues depending on the conditions prevailing in the country where the Company is registered with the relevant companies. In assessing tax risks, management considers to be probable obligations the known areas o f tax positions that the Company would not appeal or does not believe it could successfully appeal, if assessed by tax authorities. Such determinations inherently involve significant judgment and are subject to change as a result o f changes in tax laws and regulations, the determination o f expected outcomes from pending tax proceedings and the outcome o f ongoing compliance audits by tax authorities. Management believes that as o f 31 December 2020 and 2019, the interpretation o f the applicable law is appropriate and there is a probability that the Company’s tax position will be confirmed. As the Company assesses the probability for litigation and subsequent cash outflow with respect to taxes as remote, no contingent liability has been recognized. Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount o f deferred tax assets that can be recognized in the financial statements, based upon the likely timing and the level o f future taxable profits together with future tax planning strategies. The Company recognizes a deferred tax asset for losses to the extent necessary to fully cover the deferred tax liability on other items. 22 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS (continued) Employee defined benefit liability The cost o f the employee defined benefit liability and the present value o f the defined benefit liability are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination o f the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity o f the valuation and its long-term nature, a defined benefit liability is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. In determining the appropriate discount rate, management considers the interest rates o f risk-free government bonds and extrapolated maturity corresponding to the expected duration o f the defined benefit obligation. The mortality rate is based on publicly available mortality tables for the specific countries. Future salary increases and pension increases are based on expected future increase in salaries. The employee benefit obligations as at 31 December 2020 amounted to 44,295 thousand soms (31 December 2019: 50,617 thousand soms). More details are provided in Note 16. Fair value of financial instruments Where the fair value o f financial assets and financial liabilities recorded in the statement o f financial position cannot be derived from active markets, their fair value is 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 o f judgment is required in establishing fair values. The judgements include considerations o f inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the fair value reported in the financial statements. 5. PROPERTY, PLANT AND EQUIPMENT Buildings Machinery C ons­ and co n s­ and truction in In thousands of soms tructions equipment Vehicles Other progress Total Cost At 1 January 2019 727,353 45,574,512 185,337 135,443 347,012 46,969,657 Additions 111,507 - 4,646 - 760,040 876,193 T ransfers 14,460 563,322 40,179 3,535 (621,496) - Disposals (162) (134,455) (953) (5,687) - (141,257) At 31 December 2019 853,158 46,003,379 229,209 133,291 485,556 47,704,593 Additions 732 3,627 3,971 574 2,455,352 2,464,256 Transfers 3,927 188,800 37,415 7,102 (237,244) - Income from exchange transactions 10,315 173,058 - 197 639 184,209 Disposals (762) (22,418) (3,980) (3,118) (332) (30,610) At 31 December 2020 867,370 46,346,446 266,615 138,046 2,703,971 50,322,448 Accumulated depreciation At 1 January 2019 (187,707) (9,404,011) (90,234) (77,505) - (9,759,457) Charge for the period (37,130) (1,442,659) (16,889) (12,813) - (1,509,491) Disposals 27 48,810 953 3,222 - 53,012 At 31 December 2019 (224,810) (10,797,860) (106,170) (87,096) - (11,215,936) Charge for the period (22,895) (1,433,895) (18,656) (12,865) - (1,488,311) Disposals 325 15,438 12 2,337 - 18,112 At 31 December 2020 (247,380) (12,216,317) (124,814) (97,624) - (12,686,135) Net book value At 31 December 2019 628,348 35,205,519 123,039 46,195 485,556 36,488,657 At 31 December 2020 619,990 34,130,129 141,801 40,422 2,703,971 37,636,313 23 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 5. PROPERTY, PLANT AND EQUIPMENT (continued) As o f 31 December 2020, construction in progress consisted o f equipment, materials and capitalized interest in the amount o f 1,407,173 thousand soms as part o f the CASA-1000 project for the transmission o f electricity from Central Asia to South Asia. The CASA-1000 project is the largest energy project, which involves the construction o f a 500 kV high voltage grids with a length o f 450 km from the 500 kV Datka substation to the Kyrgyz-Tajik border. The project will connect the energy systems o f Kyrgyzstan and Tajikistan with Afghanistan and Pakistan for the further organization o f a single electricity market. The company capitalized the interest on the loans into the construction-in-progress cost. The amount o f capitalized borrowing costs for the year ended 31 December 2020 amounted to 81.325 thousand soms (10.464 thousand soms). The rates used to determine the amount o f borrowing costs eligible for capitalization was 1.7% under the credit lines shown in Note 14, which is the effective interest rates on these loans. As o f 31 December 2020, the value o f fully depreciated, but still in use, property, plant and equipment amounted to 956.845 thousand soms. The Company does not have property, plant and equipment that are temporarily out o f use, or are inoperative and must be written off. 6. ADVANCES PAID FOR NON-CURRENT ASSETS As at 31 December 2020, advances for non-current assets in the amount o f 1,441,464 thousand soms comprise advances to suppliers for the construction of 500 kV high-voltage grids with a length o f 450 km from the 500 kV Datka substation to the Kyrgyz-Tajik border, within the project for the transmission o f electricity from Central Asia to South Asia CASA-1000. As at 31 December 2020, the major part o f the advances was paid to companies Mitas Energy and Metal Construction Company which is the main contractor for the construction o f C A SA -1000. 7. NON-CURRENT TRADE RECEIVABLE As o f 31 December 2020, the Company recognized non-current trade receivables at amortized cost by discounting expected cash inflows from debtors at a rate o f 9.14% per annum, which reflects the market borrowing rate at the date the receivables originated. These receivables represent amounts receivable from related parties, accordingly, the Company recognized the amount from discounting receivables in equity in the amount o f 98,430 thousand som for the year ended 31 December 2020. 8. INVENTORIES As at 31 December 2020 and 2019, inventories comprised: 31 December 31 December In thousands of soms 2020 2019 Raw and other materials 152,974 227,344 Spare parts 120,934 99,202 Construction materials 17,851 29,542 Fuel and lubricants 1,619 2,073 Others inventory 7,110 5,299 300,488 363,460 Raw and other materials are represented by inventory items that are used as consumables for high-voltage electrical grids and substations during the ordinary course o f the Company’s business activity. 9. TRADE ACCOUNTS RECEIVABLE As at 31 December 2020 and 2019, trade accounts receivable comprised: 31 December 31 December In thousands of soms 2020 2019 Trade accounts receivable from related parties 307,423 1,106,134 Trade accounts receivable from third parties 171,649 136,200 Less: allowance for expected credit losses (ECL) (32,288) (212,689) 446,784 1,029,645 24 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 9. TRADE ACCOUNTS RECEIVABLE (continued) Movement in the provision for ECL was as follows: In thousands of soms 2020 2019 At 1 January (212,689) (1,333,775) Provisions for ECL (43,702) (53,020) Reversal from actual cash receipts 180,983 273,896 Reversal due to change o f ECL model 43,120 900,210 At 31 December (32,288) (212,689) The ageing analysis o f trade receivables is as follows: Days past due Total Current <90 days >90 days >360 days 31 December 2020 Expected credit loss rate 1% 34.27% 22.30% 30.54% Estimated total gross carrying amount at default 479,072 388,387 51,484 14,720 24,481 Expected credit loss 32,288 3,884 17,645 3,283 7,476 Days past due Total Current <90 days >90 days >360 days 31 December 2019 Expected credit loss rate 1.26% 1.26% 45% 100% Estimated total gross carrying amount at default 1,242,334 448,536 362,449 416,078 15.271 Expected credit loss 212,689 5,632 4,551 187,235 15.271 As at 31 December 2020 and 2019, trade accounts receivables were denominated in: 31 December 31 December In thousands o f soms 2020 2019 Soms 431,149 1,009,888 US dollars 9,511 16,203 Tenge 6,124 3,554 446,784 1,029,645 10. VAT RECEIVABLE AND OTHER PREPAID TAXES As at 31 December 2020 and 2019, VAT receivable and other prepaid taxes comprised: 31 December 31 December In thousands of soms 2020 2019 VAT 124,143 135,102 Other 16,164 16,164 140,307 151,266 11. RESTRICTED CASH As at 31 December 2020, restricted cash represents tranches received under the loan agreement between the Government o f the Kyrgyz Republic and the European Investment Bank for the implementation o f the CASA-1000 project. These funds are used to pay for supplies from Mitas Energy and Metal Construction Company. These funds are expected to be spent within 12 months after the reporting date. 25 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 12. CASH AND CASH EQUIVALENTS As at 31 December 2020 and 2019, cash and cash equivalents comprised: 31 December 31 December In thousands o f soms 2020 2019 Current accounts with banks, in foreign currencies 255,471 217,438 Current accounts with banks, in soms 245,829 194,542 Cash in transit 34,412 53,120 Cash on hand, soms 216 700 535,928 465,800 Current bank accounts in soms and in foreign currencies accrue finance income at 6% and 2% per annum, respectively. As at 31 December 2020 and 2019, cash and cash equivalents were denominated in: 31 December 31 December In thousands o f soms 2020 2019 US dollars 280,458 217,436 Som 255,464 248,362 Russian rouble 4 - Euro 2 2 535,928 465,800 13. EQUITY As at 31 December 2020 and 2019 the share capital o f the Company was equal to 1,597,377 thousand soms. As at the indicated dates the number o f common shares was 965,237,234 with par value equal to 1.65490642 soms. As at 31 December 2020 and 2019, issued shares o f the Company belonged to the following shareholders: Quantity of Share of In thousands o f soms shares ownership (%) National Energy Holding Company JSC 776,873,392 80.49% Social Fund o f the Kyrgyz Republic 127,040,460 13.16% Other legal entities 14,456,343 1.49% Individual shareholders 46,867,039 4.86% 965,237,234 100% The capital structure includes authorized capital, reserve capital and retained earnings. The reserve capital was formed in accordance with the law o f the Kyrgyz Republic on Joint Stock Companies based on the decision o f the General Meeting o f Shareholders, and equal to 10% o f the authorized capital and with the purpose to cover the losses o f the Company. 14. BORROWINGS As at 31 December 2020 and 2019 borrowings comprised: Nominal Effective 31 December 31 December In thousands o f soms interest rate interest rate 2020 2019 Borrowings denominated in US dollars 0%-4% 4.81%-8.96% 44,940,713 38,275,572 Borrowings denominated in Special drawing right 0%-5% 6.38%-7.82% 1,068,086 906,329 Borrowings denominated in Euro 1.5% 1.71% 2,968,876 760,280 Borrowings denominated in Swiss franc 0%-7% 4.85%-7.82% 451,970 332,448 Borrowings denominated in Kuwaiti dinar 0% 6.38%-8.09% 24,607 18,509 Borrowings denominated in Kyrgyz soms 0% 6.38% 2,761 4,416 49,457,013 40,297,554 Less: current portion (1,346,937) (1,840,428) Borrowings, non-current portion 48,110,076 38,457,126 26 тгп тп ггп гтгп гттгтгггтагп гттп г National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued)__________________________ 14. BORROWINGS (continued) The total balance o f the borrowings, presented in the table above, has been provided by the Government o f the Kyrgyz Republic, represented by the Ministry o f finance, for construction, reconstruction and modernization o f the electrical grids and related components. The Government o f the Kyrgyz Republic obtained the funds, provided to the Company, from the international financial donors such as Asian Development Bank, European Investment Bank, Export-Import Bank o f China, Islamic Development Bank, grant o f Swiss Confederation, Kuwaiti Fund o f Arabic Economic Development, Export-Import Bank o f Turkey, International Development Association and North Fund for Development. As the total amount o f the borrowings bear interest rate below-market, as at 31 December 2020 amortized cost o f the borrowings were determined by discounting future cash flows at market interest rate determined at loans origination, which are within the range, indicated in the table above. Correspondingly, finance costs, accrued on the borrowings for the year ended 31 December 2020 were based on effective interest rate method and was equal to 2,739,710 thousand soms (2019: 2,350,536 thousand soms). In accordance with the order o f the Government o f the Kyrgyz Republic No. 222-r dated 18 June 2020 and the Resolution o f the Jogorku Kenesh o f the Kyrgyz Republic No. 3968-VI dated 25 June 2020, NEG Kyrgyzstan OJSC restructured part o f its loan liabilities for 2020-2022. New promissory notes with agreed repayment schedules for Swiss grants and two loans from the Export Import Bank o f China were signed between NEG Kyrgyzstan OJSC and the State Agency for Budgetary Loans Management under the Ministry o f Finance o f the Kyrgyz Republic. This restructuring resulted in significant changes in the amortized cost o f loans, therefore the Company recognized income from derecognition o f the existing debt and recognition o f a new loan in the amount o f 302,821 thousand soms in equity (2019: 781,743 thousand soms). Also, the Company recognized gain on loan modification in the amount o f 2,590,963 thousand soms in the statement o f comprehensive income. The borrowings do not include any financial covenants. As at 31 December 2020 and 2019, the Company met the repayment terms o f the loan agreements concluded with the Government o f the Kyrgyz Republic presented by the Ministry o f Finance. As at 31 December 2020, the nominal value o f the restructured loans equals to 66,304,838 thousand soms (as at 31 December 2019: 53,331,292 thousand soms). As at 31 December 2020 and 2019, the Company did not have pledged fixed assets within the loan agreements. 15. CONTRACT LIABILITIES 31 December 31 December In thousands of soms 2020 2019 Contract liabilities with suppliers 153,040 44,186 Warranty liability 81,279 - 234,319 44,186 The main amount o f the contractual obligations is related to the long-term provision o f services in exchange for gratuitous fixed assets received from these suppliers. Warranties include the supplier’s bank guarantee in the event o f late delivery or contractual services. 16. EMPLOYEE BENEFITS OBLIGATIONS The Company has employee benefits obligations, mainly consisting from pension supplementary payments that cover all o f its employees. Employee benefits obligations comprised: In thousands of soms 2020 2019 Present value of em ployee benefits obligations as at 1 January 50,617 55,260 Accretion expense (Note 24) 4,271 5,819 Current service cost 2,135 2,613 Past service cost - - Actuarial gain (5,696) (6,759) Benefits paid (7,032) (6,316) Present value of em ployee benefits obligations as at 31 December 44,295 50,617 Less: current portion (Note 19) (4,951) (4,923) Non-current portion of present value of em ployee benefits obligations as at 31 December 39,344 45,694 27 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 16. EMPLOYEE BENEFITS OBLIGATIONS (continued) Principal actuarial assumptions used for valuation o f employee benefit obligations were as follows: 31 December 31 December 2020 2019 Discount rate 9.10% 9.8% Average salary increase 3.29% 5.68% Mortality rate 8.95% 8.95% Employee turnover rate 4.08% 4.08% 17. TRADE AND OTHER ACCOUNTS PAYABLE As at 31 December 2020 and 2019 trade and other accounts payable comprised: 31 December 31 December In thousands o f soms 2020 2019 Accounts payable to third parties 184,646 111,562 Accounts payable to related parties (Note 29) 81,698 62,845 266,344 174,407 As at 31 December 2020 and 2019 trade and other accounts payable were denominated in following currencies: 31 December 31 December In thousands o f soms 2020 2019 US dollars 165,908 69,629 Som 96,394 70,253 Euro 3,397 34,525 Tenge 645 - 266,344 174,407 18. TAXES AND OTHER LIABILITIES TO STATE BUDGET As at 31 December 2020 and 2019, taxes and other liabilities to state budget comprised: 31 December 31 December In thousands o f soms 2020 2019 VAT provision 179,927 179,927 Social insurance obligations 20,151 20,194 Income tax 9,674 7,044 Other - 1 209,752 207,166 As at 31 December 2020, the Company did not accrue an additional reserve for VAT payable claimed by the tax authorities in respect o f frequency control services to a counterparty from Kazakhstan due to the lack o f such services at the reporting year. Also, the Company has excess amount o f advance paid to the state budget in respect o f services provided in previous years. 19. OTHER CURRENT LIABILITIES As at 31 December 2020 and 2019, other current liabilities comprised: 31 December 31 December In thousands of soms 2020 2019 Due to employees 133,713 136,392 Dividends payable 8,552 8,670 Current portion of employee benefits obligations 4,951 4,923 Other 19,407 34,242 166,623 184,227 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 20. REVENUE FROM CONTRACTS WITH CUSTOMERS In thousands o f soms 2020 2019 Transmission of electricity to distribution companies 2,607,555 2,447,788 Sales of electricity 829,170 798,730 Transmission of export electricity 63,009 56,565 Realization of unplanned electricity 2,817 8,307 Frequency control services - 27,821 Other transmission of electricity 280,228 323,702 3,782,779 3,662,913 In thousands o f soms 2020 2019 Geographical area Northern zone 1,229,577 1,173,462 Eastern zone 1,200,875 1,148,962 Southern zone 1,006,273 924,095 Export 63,009 56,565 Other 283,045 359,829 3,782,779 3,662,913 In thousands o f soms 2020 2019 Type of customers Electricity distributing companies 2,607,555 2,447,788 Mining companies 829,170 798,730 Large industrial entities 273,467 323,701 Electricity production companies - 26 Other 72,587 92,668 3,782,779 3,662,913 In thousands o f soms 2020 2019 Terms of revenue recognition Services transferred over time 3,782,779 3,662,913 3,782,779 3,662,913 21. COST OF SALES In thousands o f soms 2020 2019 Depreciation 1,481,209 1,490,935 Payroll and related taxes 958,055 961,515 Purchased electricity for Kumtor Gold Company 581,500 581,040 Recovery of transit losses 158,917 152,265 Materials 119,391 131,568 Business trip expenses 34,259 42,061 Coordination services 30,632 29,421 Fuel 21,967 30,140 Repair works 6,216 9,336 Current transit expenses 4,856 9,182 Unplanned electricity flow expenses 4,086 3,942 Frequency control share - 13,911 Other 36,675 33,799 3,437,763 3,489,115 29 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 22. GENERAL AND ADMINISTRATIVE EXPENSES In thousands o f soms 2020 2019 Salary and related taxes 211,356 217,903 Materials 8,226 9,718 Taxes, other than income tax 7,070 6,921 Business trip expenses 3,652 6,215 Vacation package reimbursement 2,978 12,596 Repair and maintenance 743 3,105 Other 25,601 24,249 259,626 280,707 23. FINANCE INCOME In thousands o f soms 2020 2019 Gain on modification of loans 2,590,963 Interest income 16,870 14,318 Dividends 383 353 2,608,216 14,671 24. FINANCE COSTS In thousands o f soms 2020 2019 Interest expenses on borrowings (Note 14) 2,657,163 2,350,536 Accretion expenses on employee benefits obligation (Note 16) 4,271 5,819 2,661,434 2,356,355 25. FOREIGN EXCHANGE (LOSS)/GAIN, NET In 2020, fluctuation o f the Kyrgyz som led to foreign exchange loss, since the Company has significant amount o f borrowings, denominated in foreign currencies. 26. OTHER INCOME In thousands of soms 2020 2019 Exchange on contracts with customers 74,462 _ Grant of W orld Bank for preparation o f the CASA-1000 project 35,063 24,238 Gain on sale of inventory 5,879 8,203 Fines - 20,596 Other 4,651 3,072 120,055 56,109 27. OTHER EXPENSES In thousands o f soms 2020 2019 Expenses on grant of Word bank for the preparation of the CASA-1000 project 37,396 18,175 Provision for inventory 37,714 - Loss on disposal of property, plant and equipment 4,446 772 Other 19,307 15,691 98,863 34,638 30 National electrical grid o f Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 28. INCOME TAX EXPENSE In thousands o f soms 2020 2019 Current income tax Current income tax expense (41,610) Deferred tax Deferred income tax expense/(benefit) Income tax expense/(benefit) (41,610) The income tax rate in the Kyrgyz Republic is 10% in 2020 and 2019. The reconciliation o f the 10% income tax rate and actual income tax recorded in the statement o f profit or loss and other comprehensive income is provided below: In thousands o f soms 2020 2019 Loss before income tax (7.671,502) (1,168,519) Tax benefit at statutory income tax rate of 10% (767,150) (116,852) Change in allowance for unrecognized tax assets 766,297 (43,666) Adjustm ent of declarations of previous periods (41,610) Amortization of discount on borrowings (15,406) 128,997 Other permanent differences 16,259 31,521 Income tax expense/(benefit) - (41,610) Tax effect on temporary differences leading to deferred income tax assets and liabilities at 31 December 2020 and 2019 is provided below: Changes Changes Changes through other 31 December through profit 31 December through comprehensive 31 December In thousands of soms 2020 or loss 2019 profit or loss income 2018 Deferred tax asset Tax losses carried forward 1,201,678 128,305 1,073,373 352,426 - 720,947 Provision for ECL 3,229 (18,040) 21,269 (112,109) - 133,378 Accruals 34,406 1,541 32,865 24,856 - 8,009 Employee benefits obligations 3,934 (1,128) 5,062 (464) - 5,526 Contract liabilities 15,304 10,885 4,419 (190) - 4,609 1,258,551 121,563 1,136,988 264,519 _ 872,469 Deferred tax liability Property, plant and equipment (1,258,551) (121,563) (1,136,988) (264,519) - (872,469) (1,258,551) (121,563) (1,136,988) _ (264,519) (872,469) - _ - _ _ _ Deferred tax expense Net deferred tax (liabilities)/assets - - - - - - The Company offsets tax assets and liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority. As at 31 December 2020, the Company had significant tax losses that can be carried forward and used against future taxable profit arising from operations. The Company is expecting that its operating activity will be loss making within foreseeable future and will not generate taxable income, against which tax losses could be utilized. Accordingly, as at 31 December 2020 deferred tax asset was recognized amounted to 1,201,678 thousand soms in respect o f tax losses (31 December 2019: 1,073,373 thousand soms). 29. TRANSACTIONS WITH RELATED PARTIES Related parties include key management personnel o f the Company, enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by the Company’s key management personnel and other entities controlled by the Government. The related party transactions were made on terms agreed between the parties that may not necessarily be at market rates, except for regulated services, which are provided based on tariffs available to related and third parties. 31 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 29. TRANSACTIONS WITH RELATED PARTIES (continued) The following table provides the balances o f accounts with related parties as at 31 December 2020 and 2019: 31 December 31 December In thousands of soms 2020 2019 Cash and cash equivalents 501,301 411,885 Trade accounts receivable, net of allowance for ECL 779,324 919,049 Trade and other accounts payable 81,698 62,845 Borrowings 49,457,013 40,297,554 The Company had operations with related parties during the years ended 31 December 2020 and 2019 comprised: In thousands of soms 2020 2019 Revenue 2,614,326 2,457,498 Finance costs related to borrowings 2,657,163 2,350,536 Compensation to key management personnel As at 31 December 2020 and 2019, the key management personnel o f the Company consisted o f 7 persons (as at 31 December 2019: 6 people), and the amount o f compensation paid to key management personnel is 9,460 thousand soms and 8,503 thousand soms, respectively. 30. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Company’s principal financial liabilities comprise borrowings, trade and other payables. The main purpose o f these financial liabilities is to finance the Company’s operations and construction o f equipment. The Company’s financial assets comprise trade and other accounts receivable, cash and cash equivalents that arrive directly from its operations. The Company has also investments held for sale. The Company is exposed to foreign currency risk, credit risk and liquidity risk. Foreign currency risk Foreign currency risk is the risk that the fair value or future cash flows o f a financial instrument will fluctuate because o f changes in foreign exchange rates. The Company’s exposure to the risk o f changes in foreign exchange rates relates primarily to the Company’s financing activities. Also, the Company’s exposure to the risk o f changes in foreign exchange rates relates to the Company’s operating activities (when revenue or expense is denominated in a different currency from the Company’s functional currency). The following tables demonstrate the sensitivity to a reasonably possible change in the US dollar, Swiss franc and euro exchange rate, with all other variables held constant. The Company’s exposure to foreign currency changes for all other currencies is not material. Increase/ Effect on (decrease) in (loss)/profit In thousands of soms exchange rate before tax At 31 December 2020 US dollar 14% (6,277,830) US dollar (11%) 4,932,581 Euro 14% (416,118) Euro (11%) 326,950 Swiss Frank 14% 63,276 Swiss Frank (11%) (49,717) At 31 December 2019 US dollar 14% (4,573,387) US dollar (10%) 3,430,040 Euro 14% (95,376) Euro (10%) 71,532 Swiss Frank 14% (39,894) Swiss Frank (10%) 29,920 32 National electrical grid of Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 30. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) Credit risk The Company is exposed to credit risk from its operating activities. The Company holds cash and cash equivalents at Optima Bank OJSC and RSK Bank OJSC. The indicated banks were not assigned credit ratings. Liquidity risk The management o f the Company has built an appropriate liquidity risk management framework in accordance with the short, medium and long-term funding and liquidity management requirements. The Company manages its liquidity risk by maintaining adequate reserves, bank loans and credit lines, by monitoring projected and actual cash flows and comparing maturity dates o f financial assets and liabilities. The Company assessed the concentration o f risk with respect to refinancing its debt and concluded it to be low. The Company has access to a sufficient variety o f sources o f funding and debt maturing within 12 (twelve) months can be rolled over with existing lenders. The table below summarises the maturity profile o f the Company’s financial liabilities based on contractual undiscounted payments. Due more than Due more than Due more than 1 month but 3 months but 1 year but not later than not later than not later than Due more than In thousands of soms On demand 3 months 1 year 5 years 5 years Total At 31 December 2020 Borrowings 173,233 362,620 1,589,307 20,033,495 54,377,277 76,535,932 Trade and other accounts payable 266,344 - - - - 266,344 439,577 362,620 1,589,307 20,033,495 54,377,277 76,802,276 At 31 December 2019 Borrowings 98,718 761,438 1,738,830 18,358,211 39,469,244 60,426,441 Trade and other accounts payable 174,407 - - - - 174,407 273,125 761,438 1,738,830 18,358,211 39,469,244 60,600,848 Capital management The primary objective o f the Company’s capital management is to ensure that it will be able to keep abiding going concern principle maximising the shareholder’s value by the leverage optimization. The Company manages its capital structure and adjusts it in light o f changes in economic conditions. No changes were made in the objectives, policies or processes for managing capital during the year ended 31 December 2020. Fair value hierarchy The fair value o f the financial assets and liabilities is included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair values: • Cash and cash equivalents, trade accounts receivable, trade and other accounts payable approximate their carrying amounts largely due to the short-term maturities o f these instruments; • The fair value o f unquoted instruments, borrowings from the Government o f the Kyrgyz Republic, represented by the Ministry o f Finance, is estimated by discounting future cash flows using rates currently available for debt on similar terms, credit risk and remaining maturities. The Company uses the following hierarchy for determining and disclosing the fair value o f financial instruments by valuation technique: • Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities. • Level 2: other techniques for which all inputs that have a significant effect on the recorded fair value are observable, either directly or indirectly. • Level 3: techniques that use inputs that have a significant effect on the recorded fair value that are not based on observable market data. 33 National electrical grid o f Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 30. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) Fair values of financial instruments As at 31 December 2020 and 2019, the Company did not have financial instruments, classified as financial instruments o f 1 or 3 level. For the years ended 31 December 2020 and 2019, there were no transfers o f financial instruments fair value between the 1, 2 and 3 levels. As at 31 December 2020 and 2019 the management assessed that the fair value o f financial instruments o f the Company, such as trade accounts receivable and payable, other financial assets, cash and cash equivalents, approximates their carrying amounts largely due to the short-term maturities o f these instruments. Borrowings are stated at amortized costs which approximate their fair values. Changes in finance liabilities Foreign 1 January Loan Finance Discount Amortisation Gain on exchange, 31 December In thousand soms 2020 Repayment increase costs recognition of discount modification net 2020 Borrowings 40,297,554 (1,475,813) 2,605,420 1,301,237 (302,821) 1,438,473 (2,590,963) 8,183,926 49,457,013 Gain on subsequent modification of Accrual Foreign 1 January loan terms and of finance exchange New 31 December In thousand soms 2019 derecognition costs movement tranches Repayments 2019 Borrowings 38,121,206 (781,743) 2,361,002 (101,154) 2,199,047 (1,500,804) 40,297,554 31. COMMITMENTS AND CONTINGENCIES Operating environment The Kyrgyz Republic continues economic reforms and development o f its legal, tax and regulatory frameworks as required by a market economy. The future stability o f the country’s economy is largely dependent upon these reforms and developments and the effectiveness o f economic, financial and monetary measures undertaken by the government. Interest rates in soms remain high. This factor resulted in a reduced access to capital, a higher cost o f capital, increased uncertainty regarding further economic growth, which could negatively affect the Com pany’s financial position, results o f operations and business prospects. Management o f the Company believes it is taking appropriate measures to support the sustainability o f the Company’s business in the current circumstances. Taxation Various types o f legislation and regulations in the Kyrgyz Republic are not always clearly written and their interpretation is subject to the opinions of the local tax inspectors o f the Kyrgyz Republic. Instances o f inconsistent opinions between laws and regulations are not unusual, including opinions on interpretations o f IFRS with regard to revenue, expenses and other items o f the financial statements. The current regime o f penalties and interest related to reported and discovered violations o f the Kyrgyz Republic’s law, are severe. Penalties generally can be 100% o f principal tax amounts and interest is assessed at the rate o f 0.09% established by Tax Code. As a result, penalties and interest can amount to multiples o f any assessed taxes. The Company believes that it has paid or accrued all taxes that are applicable. Where legislation concerning the provision o f taxes is unclear, the Company has accrued tax liabilities based on management’s best estimate. The Company’s policy is to accrue contingencies in the accounting period in which a loss is deemed probable and the amount is reasonably determinable. Because o f the uncertainties associated with the Kyrgyz Republic’s tax system, the ultimate amount o f taxes, penalties and interest, if any, may be in excess o f the amount expensed to date and accrued at 31 December 2020. The resulting effect o f this matter is that additional tax liabilities may arise. However, due to the range o f uncertainties described above in assessing any potential additional tax liabilities, it is not practicable for the management to estimate the financial effect in terms o f the amount o f additional tax liabilities, if any, together with any associated penalties and charges for which the Company may be liable. 34 National electrical grid o f Kyrgyzstan OJSC Financial statements NOTES TO THE FINANCIAL STATEMENTS (continued) 31. COMMITMENTS AND CONTINGENCIES (continued) Environmental matters As the environmental regulation o f the Kyrgyz Republic on payments for environmental pollution and remedial actions is evolving, the Company may incur losses in the future, amount o f which is impossible to reasonably estimate due to impact o f such factors as vagueness in determination o f parties responsible for these losses and the Government’s assessment o f the involved parties’ opportunities to compensate the losses on environment recovery. From the management’s point, such losses unlikely have material effect on the financial position o f the Company, and consequently do not result in creation o f additional provision for probable claims or penalties o f state conservation authorities in the financial statements. Antimonopoly legislation The Company’s transactions are subject to antitrust legislation control. It is possible, with the evolution o f the interpretation o f antitrust law in the Kyrgyz Republic and the changes in the approach o f the Antimonopoly Agency, that such transactions could be challenged in the future. Currently, the impact o f such issues on financial statements cannot be reliably estimated and, therefore, no provision for any liability has been made in these financial statements. Insurance The Kyrgyz Republic insurance market is in the process o f development, and many forms o f insurance common in other countries are not yet available in the Kyrgyz Republic. However, the Company has insurance coverage for ongoing operations, employee’s insurance against accident at work, industrial injury and industrial disease as well as civil liability to third parties at the level o f generally accepted principles in the energy industry. Management o f the Company believes that, as at 31 December 2020, the Company’s insurance program complies with the main provisions o f the regulations related to Company’s business. Contractual commitments As at 31 December 2020, the Company has contractual commitments to purchase property, plant and equipment in the amount of9,620,828 thousand soms (as at 31 December 2019: 10,931,195 thousand soms). 35 EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build tru st and confidence in the capital markets and in economies the world over. 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