Kyivstar Annual Report 2011

ANNUAL REPORT ISSUE

#1 2011

SHARE YOUR LOVE FOR UKRAINE ON T HE ONL INE P OR TA L IL OVE UK R A INE .C OM.UA

«KYIVSTAR» - THE BEST EMPLOYER IN UKRAINE

100

«KYIVSTAR» SMARTPHONES ARE ALREADY ON THE MARKET!

MAIN TOPIC

NEW CITIES WERE CONNECTED TO THE SERVICE «HOME INTERNET»

THE YEAR OF «KYIVSTAR» UNITED TEAM SUCCESS

Contents 2

Igor Litovchenko: «Kyivstar» in 2011 – the success of unique unified team»

4 6

Stability of «Kyivstar» business in figures Taras Parkhomenko: «Growth of services consumption and subscriber base increase»

10 16

Vitaly Vorozhbit: «The greatest growth of «Kyivstar» internet»

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Alexey Kireev: «2011 – the year of launching «Kyivstar» smartphones and growing multimedia content»

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Alexander Dorofiy: «Kyivstar» network is the leader in coverage among Ukrainian operators»

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Elena Kropivyanska: «Kyivstar» company – the unified team of professionals with best competencies»

36

Zhanna Parkhomenko: «Kyivstar» retained the highest reputation level among telecom operators of the world»

44

Tatyana Sumina: «Kyivstar» main goals – the leadership in segments of mobile business, high-speed internet and digital media»

48

Andrey Osadchuk: «The most important event of 2011 – obtaining the new license for providing mobile services in GSM 900-1800 standard for next 15 years»

52

Artem Nits: «Planned for 2011 economic effect was obtained in advance»

56

The consolidated financial statements of «Kyivstar»

Annual report – 2011

Andrey Milinevsky: «Sub-brand «Kyivstar Business» – the leader among business connections»

1

«Kyivstar» in 2011 – success of unique joint team The year 2011 was special for «Kyivstar». The company has successfully coped with the challenges of businesses integration and reached a new stage of its development. In autumn 2010, the decision to create the unified telecom operator VimpelCom Ltd by merging the assets of Telenor ASA and Altimo Holdings & Investments Ltd passed through AMC of Ukraine. From this point, on 19 October 2010, «Kyivstar» became united, representing Ukrainian business-unit of VimpelCom Ltd. The company set before itself ambitious tasks of strengthening its leading position in Ukrainian telecommunication market, maximizing the usefulness for customers, actively developing the direction of data transferring, and in a result – achieving the maximum economic benefit from the unification of Ukrainian assets of VimpelCom Ltd. The main instrument of integration was a creation of the company with unique competences, experience and reputation, combining the market leader in Ukrainian mobile communication «Kyivstar» with the experienced player on the market of FTTB and fixed-line B2B services «Beeline-Ukraine».

During 2011, there was done a lot of work: were united subscriber bases, were introduced unified for subscribers of both networks attractive tariffs, was made a national roaming for sub-

2

scribers «Beeline-Ukraine» in «Kyivstar» network, were also organized unified convenient systems for customer service and account replenishing, and has been guaranteed a high-quality connection of unified communication network. Under a united brand «Kyivstar», at a new level there was launched the service «Home Internet», which quickly became one of three leaders in Ukrainian market of fixed internet access. Also, within the framework of combined «Kyivstar», we effectively used our common network infrastructure and greatly increased the productivity of capital investments. The processes of IT-systems integration and juridical merger reached the final stage.

As a result of all the work, in 2011, «Kyivstar» clients got more services and new benefits. Consumption of services in the mobile segment (MOU) increased by 8%, in internet segment (ADPU) increased by 19%; people of 100 new cities got access to «Home Internet»; smartphones «Kyivstar» appeared on sale, at the best price with best in the market internet tariff. The focus on customers allowed «Kyivstar» in 2011 to obtain a stable growth of its business key indicators.

The revenue grew across all segments, especially in mobile and fixed internet; the customer base raised by almost 100% in «Internet Home» segment and by 2% – in the mobile segment, there

remained steadily high level of profitability – EBITDA margin amounted to more than 53%. Also in 2011, «Kyivstar» launched a unique image project «Share your love for Ukraine», which found a wide response in hearts of our clients and all Ukrainians in general.

The successful implementation of «Kyivstar» and «Beeline-Ukraine» unification, which became the consequence of cohesive and professional work of all the team, reflected in financial results that occurred considerably exceeding the target values. Planned for 2011, resulting from «Kyivstar» and «Beeline-Ukraine» integration, the economic effect was ahead of plan.

The vast experience, gained in the process of companies’ integration and success of a unique work of combined «Kyivstar» team in 2011, allows us to look confidently into the future. Here, embodying even the most difficult management decisions.

Igor Litovchenko, the president of «Kyivstar», head of business-unit «Ukraine» VimpelCom Ltd.

Annual report – 2011

Annual report – 2011

3

«Kyivstar» business stability and services consumption growth «Kyivstar» clients in 2011 received more services and new benefits:

People of

100

new cities received access to «Home Internet» service

Services consumption in the mobile segment (MOU) increased by

8%

«Kyivstar» smartphones appeared on sale, at the best price with best in the market internet tariff – UAH per day

1

Internet services consumption (ADPU) increased by

19% 4

Annual report – 2011

Profitability stable margin EBITDA – more than

Income

53%

growth in all segments, especially in mobile and fixed internet

Clients

100%

almost increase in «Home Internet» connections and 2% growth of subscriber base in the mobile segment

In 2011, «Kyivstar» showed steady growth of key indicators in business development Annual report – 2011

5

United marketing

In 2011, the united marketing team did everything possible for customers to have not only more mobile services, but also to discover «Home Internet» and «Kyivstar» smartphones 6

Annual report – 2011

Taras Parkhomenko, Chief Marketing Officer

Annual report – 2011

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«Kyivstar» clients in 2011 received more services One main challenge of Ukrainian telecom market in 2011 was the consumers’ expectation of new telecommunications services. Meanwhile, without a possibility to introduce new technologies, and firstly 3G, «Kyivstar» found its own solutions for business development. The market of mobile services is saturated, and it required us to create new pricing models that would allow customers to consume more services at the non-essential increase of average monthly bill.

Growth of services consumption and subscriber base enlargement A significant increase in consumption of services, especially data transmission, is the overall trend in 2011 of telecom in the world and Ukraine. Therefore, the work of combined «Kyivstar» was focused on offering to our customers a greater range of services, while saving an average subscriber's account. We managed to realize it in the full potential: an increase of voice services consumption by 8% and internet by 19%, average revenue per subscriber in 2011 increased by only 2%. In 2011, each «Kyivstar» subscriber average monthly talked by phone 467 minutes and was receiving the packet mobile internet, while paying only 40.8 UAH (about $5).

Subscribers fully appreciated such a friendly approach of «Kyivstar». In 2011, in the highly saturated market of mobile proposals «Kyivstar» mobile subscriber base grew by 386 000, up to 24.776 million people. Also, the number of fixed internet customers increased by 197 000.

This is a clear indication for customers to be satisfied with «Kyivstar» proposals.

42% respondents think «Kyivstar» communication services to be the best of price and quality

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Marketing and integration Separate important direction of 2011 was marketing initiatives within the framework of «Kyivstar» and «BeelineUkraine» integration. The operator provided the combined subscriber base with: unified scratch cards and vouchers for account replenishment; a free of charge national roaming to more than 500 000 «Beeline-Ukraine» and «Golden Telecom» subscribers within «Kyivstar» network; besides, for subscribers of «Beeline-Ukraine» and «Golden Telecom» was made available ​​ a variety of «Kyivstar» services. There was also carried out ​​the unification of all supporting services of three operators: call-centers, customer service centers, departments servicing business customers.

Multimedia and branded devices sale In 2011, the highest growth rate among all multimedia services was shown by direction of «Digital Music». In comparison with 2010 the users number of paid music content increased by 20 times, and the income from sales of digital music – by 11.5 times. Also, by 49% compared to 2010, there increased «Kyivstar» revenue from the sale of games. In 2011, «Kyivstar» was actively developing innovative products for mobile and fixed internet. The operator brought to market the line of most affordable smartphones under its own brand. Also, there started the sale of routers for «Internet Home» customers.

Annual report – 2011

Growth of market indicators In 2011, combined «Kyivstar» gained growth in all market indicators. For example, by results of IV quarter of 2011, according to Brand Progress Tracking research of GfK Ukraine Company, «Kyivstar» achieved the leadership among Ukrainian advertisers by indicator «Mostly preferred Brand», it reached 45%. Also, last year, the operator managed to combine high financial results with an audience perception of brand as «Best ratio of price and quality». According to studies, 42% of respondents think «Kyivstar» communication services to be the best of price and quality.

We expect «Kyivstar» sooner or later to obtain 3G license, and it is important to meet the moment with alacrity quickly to catch up with technological backwardness. For this purpose, in 2011, we continued to develop the segment of fixed Internet, multimedia services, and have entered the market of smartphones. In the current market conditions, we see operational efficiency and mastery of making business in better investment efficiency, as well as in finding additional income sources in new directions of telecommunication business.

Annual report – 2011

New communication platform 2011 was the year of new and price attractive product offerings of combined «Kyivstar», accompanied with updating of advertisement communications. In 2011, «Kyivstar» has worked out a new communication platform, which is based on human values – humanity, inspiration, active life, caring. Every «Kyivstar» advertising video in 2011 not only informed about the products and tariffs of the operator, but also told stories about the lives of other people, their relationships, about love, friendship and mutual assistance.

«Kyivstar» started shooting advertising in mini-movie format, inviting wellknown actors.

Growth of sales Attractive products and interesting advertisement have earned both the positive perception of operator’s offers by an audience and high sales figures, as well. Totally, in 2011, customers purchased more than 3 million «Kyivstar» starter packets (growth by 9%) and 1.2 million of Djuice. The volume of contractual connections in 2011 amounted to 52.5 thousand. Also, subscribers of combined «Kyivstar» bought scratch cards on 6.2 billion UAH and replenished accounts in electronic and other ways on 4.7 billion UAH. Overall, the share of electronic replenishments in 2011 grew from 39% to 43%. From sales of starter packets, replenishing codes, modems and smartphones, in 2011, «Kyivstar» gained more than 11 billion UAH revenue. Entirely, in 2011, «Kyivstar» obtained the growth of income in 589 million UAH and it reached 13 billion 078 million UAH.

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Vitaly Vorozhbit, Head of B2C

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Annual report – 2011

United marketing team of B2C

Development of service quality in retail outlets and the search for new and unique services – subjects of our team work in 2011 Annual report – 2011

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Mobile Internet In 2011, all indicators for «Mobile Internet» greatly grew up. Revenue increased by 35% and amounted up to 739.7 million UAH. Traffic volume increased by 43%, to 3315 TB. The total number of mobile internet customers by results of 2011 made 7.362 million, out of which 3.346 million – GPRS-internet users, and 4.016 million – users of WAP. The number of mobile internet customers, who use the service daily, increased by 45%, from 0.9 million to 1.3 million.

At the same time, «Kyivstar» paid attention to the quality of mobile Internet. In 2011, EDGE network capacity of «Kyivstar» has been increased by 25%, which allowed us to provide our customers with a stable access speed up to 140 kbit/s.

Greatest growth of «Kyivstar» internet 2011 for «Kyivstar» was the year of special emphasis on development of «Home Internet» service. Also, in 2011, «Kyivstar» focused on strengthening customer loyalty for mobile communication by launching a series of «packet» proposals (voice services + internet + multimedia products).

For users of social networks there has been updated service «VKontakte», tariff with daily payment «Mobile Internet XL».

For fans of games and entertainment, there was offered the service «Games Unlimited» – a subscription access to the portal with best mobile games, no fees for traffic.

Business customers received a new tariff packet «Business Internet» with no payment volume of services included in monthly fee.

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DJuice In 2011, the youth brand djuice updated tariffs «DJUICE Bomb» and «Speak and write»; started tariff «Breakthrough» with free of charge packet minutes for calls to all networks. In December, all djuice subscribers were proposed a new tariff «5+0» with a unique formula: 0 kopiyok per minute for calls to djuice numbers, 5 kopiyok – per minute price for all other directions. Also, there was launched a unique, having no analogues in Ukraine, service «Pay for me» with the ability to call at the other called side charge.

Mass segment «Kyivstar» subscribers were offered tariffs: «Long Conversations», «Talk Unlimited» and «Be Connected»; and then three tariffs without PFC (payment for connection): «Happy», «Easy» and «Maximum».

In the summer of 2011, «Kyivstar» has launched an updated Gratitude Program, in which every month subscribers receive a discount for mobile services up to 20%.

Annual report – 2011

Customer Service

Call-center

For united «Kyivstar», 2011 became the year of introduction of new solutions for customer service. Within the framework of integration with «Beeline-Ukraine», «Kyivstar» paid a great attention to unification of customer service – an introduction of uniform quality system, staff training, the unified structure of service channels.

In 2011, «Kyivstar» call-center processed over 33 million calls of mobile subscribers with an average response time on calling not exceeding 17 seconds. Also in 2011, «Kyivstar» realized a large-scale project on new, additional call center function – creation of sales direction. As such, the call-center generated an income in 14.7 million UAH from the sale of additional services by incoming calls and 17.0 million UAH by outgoing calls, which in general allowed the operator to earn additional 31.7 million UAH.

The external research TRI*M on assessment of customer satisfaction with «Kyivstar» services, conducted by TNS, showed the result of 90.6% (generally for all categories of operator subscribers), which confirmed the leadership of «Kyivstar» among mobile operators in Ukraine. This figure is five percentage points higher than an average on the market.

The high level of customer service was confirmed by a victory in the international competition «Crystal Headset», Moscow (nominated for «Best large contact center»).

«Kyivstar» significantly improved the level of telephone service of a new direction – «Home Internet» service. The average call-center response time on this customers’ calling category was reduced by three times. Also, by three times there was reduced the number of requests, not arranging matters with a caller at first contact. The satisfaction index of online customers, according to their survey, rose by 5 percentage points.

Annual report – 2011

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«Home Internet» on FTTB technology For 12 months «Kyivstar» connected to broadband Internet 103 new cities, laying more than 9.6 thousand km of fiber and expanding the capacity of external data channels from 170 GB to 291 GB. High-quality internet has become available to about five million Ukrainian households in 138 cities, almost half which – cities with a population from 15 to 50 thousand people.

Number of service users, in 2011, increased from 200 thousand to 397 thousand. The number of apartment buildings, connected to the broadband backbone network, more than doubled, growing from 21 thousand in 2010 to 46 thousand in 2011. «Kyivstar» revenues from broadband internet increased by 77% – up to 158 million UAH. In 2011, according to analysts data (iks-Consulting) the entire market of broadband internet in Ukraine increased by 33%. At the same time, the number of «Kyivstar» «Home Internet» users increased by 99%. This shows the rate of «Home Internet» subscriber growth to be ahead of market general growth pace by three times.

In 2011, for «Home Internet» clients there were introduced unique convergence tariffs. Service users get bonuses in the amount of a monthly payment, which can be transferred to «Kyivstar» or DJuice numbers and used for mobile service payment.

397 th

Users

200 th

Apartment buildings connected to the broadband backbone network

46 th

21 th

* iks-Consulting

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Annual report – 2011

Customer supporting centers and «Kyivstar» services sale points In 2011, for better clients’ service «Kyivstar» increased the number of customer supporting centers – from 215 to 229. By results of 2011, for «Kyivstar» subscribers throughout Ukraine there were available 470 exclusive points of client interaction, including 229 CSC (customer supporting centers) «Kyivstar», which provide a full range of customer service.

Also, throughout Ukraine for subscribers there are open more than 60 thousand retail outlets, where clients can buy starter packets and scratch cards to recharge «Kyivstar» accounts, and accessible 55 thousand points of electronic replenishment (terminals, banks, machines).

Annual report – 2011

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United marketing team of B2B

The union of teams in the business department enabled us to make a principle breakthrough and become the leading multi-service operator for corporate clients 16

Annual report – 2011

Andrey Milinevsky, Head of B2B

Annual report – 2011

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«Kyivstar» – leader of business connections Sub-brand «Kyivstar Business» in 2011 became the leader among business connections – over 50% of the market, and still confidently holds the number 1 position in the market of telecommunication services for business customers.

In 2011, after the integration of networks and teams, combined «Kyivstar» has become a truly multi-service operator, offering its customers, including business customers, a range of new fixed services. It particularly revealed itself in the segment of large enterprises, where a range of services and involved technologies are the most extensive.

In 2011, «Kyivstar Business» (the segment of large enterprises and the segment of small and medium-sized enterprises) created a new unified selling team intended to offer integrated services for corporate clients. In addition, there was launched and is being realized a structural reform of salesforce, intended to make the work of this team the most effective. Through the integration of «Kyivstar Business» and «Golden Telecom» subscriber bases, as well as teams of two operators, there was achieved a high level of cross-services sales: fixed to mobile subscribers and mobile services to fixed-line subscribers. During the information and image campaign "Universal operator", directed to existing and potential clients, customers were informed about a new qualitative state of “Kyivstar Business” and new opportunities offered in connection with this.

The segment of large enterprises In 2011, the subscriber base of the segment of large enterprises compared to 2010 increased by 9%, up to 981 081 users. The total income rose by almost 7% and amounted to 1411 million UAH, including revenue from mobile services increased to 1133 million and from fixed services – to 277 million UAH. In 2011, «Kyivstar Business» increased the number of fixed telephone lines by 15%, up to 77 372; and the number of Data- and Internet-ports increased by 27% – up to 7998.

The subscriber base of users

In 2011, «Kyivstar Business» signed cooperation agreements with owners of more than 30 commercial properties in Kyiv. The operator already built optic lines in more than 90% of Ukraine's business centers of Class A and B. «Kyivstar Business» – provider of integrated projects for services of fixed and mobile communications in commercial real estate sites, and is a major telecom partner in this business segment.

981 081 2011

900 074 2010

Transmission data lines, number

77 372 2011

67 280 2010

Data- and Internetports, number

7 998 2011

6 298 2010

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Annual report – 2011

The segment of small and mediumsized enterprises In the segment of small and medium enterprises, in 2011, there was launched a range of new tariffs, including a unique tariff-constructor «Unlimited Light +» with the optimal set of packages, which allows a subscriber to set tariff to fit one’s own needs. This tariff became extremely popular, about 30% of subscribers, serviced at unlimited tariff plans, joined or transferred to «Unlimited Light +».

Also, business customers of small and medium-sized enterprises were proposed several useful services, among which there are several unique on the market. One of them is the microcredit service that enables subscribers to stay connected, even when one had no time to replenish personal account.

Also, there was introduced the delivery service of starter packs to clients’ offices, through which organizations have an opportunity to connect new subscribers, without leaving the workplace. Demanded on the market (50% subscribers of the segment) there turned out the self-service management system, when the coordinator delegates the management of number to end user, it saves time and simplifies the connection of needed services.

In 2011, «Kyivstar Business» gave considerable attention to the development of internet proposals for customers of small and medium-sized enterprises: there were offered several internet packets, reduced fee for high-speed fixed internet access, and started a new campaign – «Internet-office for 1 UAH». In general, 83% of all new connections to fixed high-speed internet in the segment of medium and small enterprises fell on the «Internet-office for 1 UAH».

In 2011, the number of customers in the segment of small and mediumsized enterprises increased by 1.6%, up to 70 772 GCEO, while the number of lines and internet-ports for segment users increased to 10 542.

Annual report – 2011

Inter-operators’ business Inter-operators’ business (voice traffic transit and data services) – a promising direction of telecom companies in Ukraine. Revenue growth in this part of «Kyivstar» business in 2011 compared to 2010 made 26%.

Inter-operators’ business of «Kyivstar»: More than 40 international interconnections; More than 100 national interconnections (including all mobile networks); Outbound international traffic: more than 50 million minutes per month, of which 60% to Russia; Incoming international traffic: more than 80 million minutes per month; Voice transit traffic (national and international) – more than 30 million minutes per month;

«Kyivstar» network – the alternative way of crossing traffic between Europe and the CIS

An essential part of the inter-operators’ business market is the data transmission, and Ukraine in this regard is becoming more interesting for foreign partners. Currently, a significant portion of data traffic between Europe and Asia runs through the underwater sea cable systems. However, the exploitation of such networks is difficult.

In 2011, «Kyivstar» offered to the market the alternative international traffic transit by overland route through Ukraine, maintenance of which has obvious advantages. By the end of 2011, «Kyivstar» completed the first phase of the project «Ukraine-transit» – the construction of «South» route for traffic exchange between Europe and the CIS. Fiber-optic «Kyivstar» backbone, with a total length of 20 000 kilometers, has direct connections to telecommunications networks of Russia, Hungary, Belarus, Moldova, Slovakia, Poland and Romania. The total throughput of external network channels is more than 180 Gbit/s.

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Alexey Kireev, Director of product development and new business

United marketing team of product development and new business

Focus of new products' team in 2011 was the bringing to market of new ÂŤKyivstarÂť smartphones

Launching «Kyivstar» smartphones and the growth of multimedia content

Internet devices In 2011, «Kyivstar» was actively developing innovative products for mobile and fixed internet. The operator introduced to the market, under its own brand, a range of smartphones at the best and affordable price – from 699 UAH. Customers who purchased smartphones also got unlimited access to internet at the price of just 1 UAH per day – due to the innovative service «Internet without borders».

Also in 2011, there was introduced the new service – «router», providing wireless connection to internet within a client household. The service «router» was already purchased by 67 000 customers.

There remains a stable demand for modems «Kyivstar». At the end of 2011, the number of sold modems reached 775 000 sets «Kyivstar. Mobile Internet», when for the period 2008-2010, there were sold only 315 000 sets.

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More than 12 000 Multimedia content In 2011, the highest growth rate among all subscribers are multimedia services was shown by direcactive users of new tion of "Digital Music". Compared with 2010, the number of users of paid music content increased by 20 times and the income service «Mobile from sales of digital music – by 11.5 times.

Payment» During the year, there were downloaded

15 million music tracks. Such success was achieved through the unique subscription service for digital music, which allows subscribers to gain access to the directory with the best musical hits – both present and past. Another advantage of the service is an absence of traffic fee while browsing the catalog and downloading tracks to subscriber’s phone. Also, for Android-phone owners there was developed an application for quick and easy access to this service.

Annual report – 2011

«D-Jingle», users

6

mln 2011

4,38 mln

2010

Ordering «D-Jingle», count

22,8 mln 2011

17,9 mln

2010

Games, count

22,5 mln 2011

12,5 mln

In the framework of action "Music of Spring" of DJuice brand, users received free D-Jingles during a month. Also, for two months of «Free D-Jingles for a whole family» campaign there were given out 4.5 million items of promotional content. During special projects «X-Factor» and «Voice of country», users were able to order the music of show finalists instead of beeps, besides during the «X-Factor» voting there was offered opportunity immediately to set music of adored actor.

Also in 2011, «Kyivstar» customers downloaded 22.5 million games, which is 10 million more than in 2010. Compared to 2010, income of «Kyivstar» from games sales increased by 49%.

«Kyivstar» clients actively use the subscription service «Games Unlimited», which allows subscribers freely to download games from the catalog with the best collection of international and local manufacturers.

In 2011, also there was launched a multimedia service, by which «Kyivstar» customers can use the mobile application «Yandex.Maps» without paying for internet traffic.

In the first quarter of 2011, «Kyivstar» launched a new social service «Parental Control», intended to protect children from abuse and errors while using internet with a mobile phone. This service provides access only to a limited list of safe and useful sites for children, approved by experts of the Psychology Institute of G.S. Kostyuk.

Another important social project, launched in October 2011, was an online-portal iloveukraine.com.ua, which encourages everyone to share one’s love for Ukraine by publishing photos of the most striking and interesting, in their opinion, parts of Ukraine. The portal will become an all-embracing, created by Ukrainians, knowledge base of the country and its prominent places – popular and so far unknown.

Online portal iloveukraine.com.ua (passed through moderation) 6.5 million pages viewed 700 000 web visitors 1 million 113 thousand published photos

In the summer of 2011, «Kyivstar» started the service «Pay for me», unique for Ukrainian mobile communication market. Now, in case of insufficient account balance, DJuice subscribers can make calls for the other side payment. This service is provided in the automatic mode: one simply dials a recipient’s phone number and clicks «Call».

Since September 2011, we have offered our customers the new service «Mobile Payment», through which customers can afford: to recharge their own or anyone’s «Kyivstar» or Djuice mobile account; to replenish accounts of friends who may be subscribers of other operators; to pay for the service «Home Internet» and replenish their balances of internet providers «Volya», Ukrtelecom, «Triolan», MTS Connect; to pay utility bills and refill accounts on web-sites with a help of bank card. At the moment we have more than 12 000 active users of this service and more than 28 000 monthly transactions.

In November 2011, «Kyivstar» launched a first project of mobile advertising – the service «My discounts». This service allows all «Kyivstar» subscribers to receive SMS and MMS messages with exclusive discounts and offers from our partners.

2010

Annual report – 2011

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United team of technical directorate

Communication quality is the daily work of professional technical management. We know how to build and develop the best network in Ukraine 24

Annual report – 2011

Alexander Dorofiy, Deputy Technical Director

Annual report – 2011

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Integration brought «Kyivstar» to achieve even higher level of service quality «Kyivstar» network quality According to Ericsson company research, «Kyivstar» network is included in 25% of the world's best networks, built on Ericsson equipment. «Kyivstar» network – one of the biggest in Europe:

Has about 25 million subscribers, over 14 thousand base stations, over 137 thousand transceivers, 31 service platform, about 30 kilometers of fiber-optic network.

Works using the latest up-to-date technologies: DWDM, IP / MPLS, ALL IP. Provides the communication system reliability continuously involving the backup equipment: it has been realized and operating our own FMS (fault management system); technical staff of Rapid Response is working round the clock.

Compared with the world average indicators, «Kyivstar» demonstrates the best quality and performance:

0,64% 99,13% 135

Daily scope of services consumed within «Kyivstar» network keeps on growing up. In 2011, they amounted to

26

The breakage probability during the call amounts to 0.64%.

Percentage of calls with high quality voice goes up to 99.13%.

Average data transfer rate to client by EDGE technology equals 135 Kbit/s.

450

240

minutes

mln

mln

9

mln

16

connections

SMS

GB of data

th

Annual report – 2011

photo: iloveukraine.com.ua

«Kyivstar» – the best connection in Ukraine and excellent quality

Expanding the coverage geography and network upgrading «Kyivstar» network covers all cities and towns and more than 28 thousand rural settlements, all main national and regional roads; most of the sea and river coasts of Ukraine, and continues to expand its coverage. Now it reaches almost 100% of the territory of Ukraine.

In 2011, the modernization of «Kyivstar» network was carried out with taking into account the growth of traffic volume:

Built more than 1,300 new base stations across Ukraine.

To ensure the excellence of coverage, especially in difficult areas (cities with high population densities, complex terrain), «Kyivstar» monitors the signal level in different regions and, where necessary, increases the power of existing base stations or adds new base stations. For example, in 2011, 64 base stations were built on requests of corporate clients.

«Kyivstar» regularly makes upgrading of the network and updates equipment. In 2011, we completed a major project on modernization of IT infrastructure based on Oracle Exadata Database Machine.

Hardware-software complex Oracle Exadata is used to provide the highest level of reliability and performance of financial and analytical systems of «Kyivstar».

Today, «Kyivstar» network is the leader in coverage among Ukrainian operators.

The RF-planning department continues to study customer needs, and on their basis, carries out a planned expansion of the network. Now the network has been spread-out in hard-accessible places (subway, massive buildings, mountains, mines), also in resort areas (Crimea, Carpathians), and highly crowded places (shopping centers, bazaars, etc.).

Also in 2011, DRP-Lab (DRP – Disaster Recovery Plan) was established to ensure effective maintenance and recovery of key IT systems in the case of massive failures or disasters. DRP-Lab is a prepared tool to protect the company against data loss by means of regularly checking the integrity of data backups.

Besides, in 2011, there was realized an innovative project «EDGE 2011» to expand the capacity of the network and started the process of HLR modernization.

Equipment was upgraded at more than 600 base stations.

Increased capacity for voice services on 15% of base stations.

Increased capacity for data services on 57% of base stations.

Annual report – 2011

27

Networks combining In 2011, «Kyivstar» performed the key work on «Kyivstar» and “Beeline-Ukraine” networks unification. The integration process was thoroughly thought out beforehand and being carried out in coordination with the Directorate of Marketing and Customer Care. This allowed us to engage the radio network of “BeelineUkraine” in most effective and comfortable way for customers.

More than 500 «Beeline-Ukraine» base stations have been integrated into the network of «Kyivstar». These unique antenna towers allowed us to increase coverage of «Kyivstar» complex.

In 2011, there completed the billing system migration for customers of prepaid form and started the similar process for customers of contract form. The process of mobile billing merging – one of the key moments in the unification of two companies’ IT systems.

We constantly make subscribers’ monitoring in our call centers and control the network quality and its coverage.

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Annual report – 2011

Annual report – 2011

29

United HR-team

We managed to make «Kyivstar» and «Beeline-Ukraine» unification comfortable for people and efficient for business 30

Annual report – 2011

Elena Kropivyanska, Chief Human Resources Officer

United «Kyivstar» – the team of professionals with the best competencies Within «Kyivstar» and “Beeline-Ukraine" unification in 2011, the combined company successfully passed the integration of two strong teams. Today, «Kyivstar» is the cohesive team of professionals with the best competencies. The company achieved an ambitious goal in applying the unity of principles for personnel management. In accordance with the general «Kyivstar» standards, there were carried out a harmonization of working conditions, working hours and wages of employees «Beeline-Ukraine» and «Golden Telecom», which joined the «Kyivstar» team.

During 2011, 2464 employees received a salary increase at their current positions, 379 workers were moved to higher professional positions, and in addition, a third part of «Kyivstar» staff took advantage of training and development programs. Total number of «Kyivstar» combined staff in 2011 stood at 5739 persons.

The company carried out important organizational changes in the marketing management – a segment-oriented structure was created, consisting of divisions and focusing on corporate and mass market segments. There were formed strong teams, each of them operates in its own segment and is responsible for the results. Meantime the overall task of «Kyivstar» team remains the same – to provide its clients with products and solutions that make their lives much as possible comfortable.

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Personnel – above all One project of 2011 was a team building event for 400 employees of the combined marketing management. Tenkilometer distance under the slogan «Impossible is possible!», which was passed by all participants, allowed to establish more effective interaction and communication within the division, and also to rally the integrated team and give them a charge of positive emotions.

In 2011, «Kyivstar» started the unusual project skoBfotuA, demonstrating for development to be able to derive not only from professional trainings, but also from dialogues with famous people of other professions. Svyatoslav Vakarchuk, Igor Kondratyuk, Yaroslav Zablotsky, Isaac Kushnir, Aleksey Kogan, Anatoly Neyelov – series of meetings with them were intended to help employees to think more broadly, to go beyond standard patterns of thinking. There were 720 members of «Kyivstar» staff who took part in the series of meetings. They were able to ponder about leadership, efficient work and proactivity.

Annual report – 2011

«Kyivstar» is attentive to its employees’ balance between work and personal lives. In 2011, there was successfully applied the system of individual work schedule, which many employees took advantage of.

Also in 2011, about 750 employees’ children visited «Kyivstar» central office and all branch offices of the company to see where and how their parents work.

There was an office tour, entertainment and refreshments organized for them.

There were 322 babies born in employees families during 2011. Each of newly minted parents, «Kyivstar» members, got a financial aid from the company.

Also in 2011, the second season of intellectual game Kyivstar-and-me was successfully conducted. There were 56 teams from all branches of the company that took part in the game, which now became a tradition, an intellectual field of knowledge about the company and the history of industry as a whole, and became a continuation of projects on expanding personnel culture horizons and self-development.

Annual report – 2011

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In May 2011, within the framework of corporate culture development and involvement of the staff in the company life there was launched a unique project «Create Your Kyivstar». A mechanism of the project was quite simple: each employee was proposed to offer one’s own idea within the company business and later actively to participate in its implementation. There were not any restrictions on ideas: it might be, for example, proposals to improve business processes or ideas for improving products and services for the company and for society in general. For two and

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a half month, employees registered more than 350 unique ideas and wrote a half thousand comments on them.

After discussing all ideas by experts among managers of different functions, there were selected eight proposals, the most interesting and promising for the company development. Those were five new products for customers of the operator and three interesting projects for the company and employee development.

All projects were approved for implementation in 2012.

Totally about 40 ideas were either already realized or underway last year.

Annual report – 2011

«Kyivstar» strongly supports a sporting movement among the staff. For example, the company pays the sport premises rent for training football and participation of its teams in tournaments. Every year «Kyivstar» conducts a «corporate football tournament» for all comers from the staff. In the 7th «Kyivstar» «Corporate football tournament», in Kiev there took part teams of central and all branch offices. Totally more than 700 employees and their families were engaged in the action. In addition, football players of headquarters and branch offices represent the company in business tournaments throughout all Ukraine. In each playing season, the «Kyivstar» football team wins prizes, and in 2011, it won the Cup of tournaments.

In 2011, «Kyivstar» traditionally conducted the annual competition to select the best employees. There were 3406 colleagues chosen by employees themselves to enter the contest, 36 of whom were defined as winners of the «Constellation of «Kyivstar» 2011». In addition, 20 employees became winners of the competition «Best branch employee of 2011» and another 8 – winners of the «Best employee of telephone service center of 2011».

At the end of 2011 in the study of consulting company «Ernst & Young», «Kyivstar» won first place as the most attractive employer in Ukraine. The survey involved nearly 3000 respondents – representatives of top, senior and middle management; professionals, administrative and junior staff. In general, respondents described 464 companies as potential employers. Weighty position of «Kyivstar» in the market, an advanced corporate culture, stability, high wages and opportunity for growth – by such indicators Ukrainian professionals termed «Kyivstar» as the best company for employment.

For participation in «Constellation of «Kyivstar» 2011» contest employees nominated 3406 colleagues, out of whom there were determined 36 winners

Annual report – 2011

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Zhanna Parkhomenko, Chief Communications Officer

36

Annual report – 2011

United team of Corporate Affairs

Our task is protection and reputation development of «Kyivstar». In 2011, we retained the highest reputation among telecom operators of the world Annual report – 2011

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Reputation of the company and corporate social responsibility Throughout all «Kyivstar» history, the service quality has been and remains a basic priority of our company. Due to such policy, «Kyivstar» earned the respect and confidence of millions of people living in Ukraine. Just that is why, in 2011, under conditions of integration with «Beeline-Ukraine», it was fundamentally important to strengthen the reputation of combined «Kyivstar» – Ukrainian business unit of Vimpelcom LTD. Reputational Institute’s studies show our company successfully to have coped with this task.

«Kyivstar» has saved its high reputation level among telecomoperators in the world and won the 2-nd place within Ukrainian companies with the highest reputation in all industries. These results were achieved due to the right work with clients, high communication quality and service, useful modern products and facilities, a clear understanding of our goals, a responsible approach to work and competent reputation management.

Dialogue with consumers and the public in social networks Like • Comment • Share • 24 hours ago near Kyiv 4 587 people like this.

1 058 share Zhanna Parkhomenko. Internet provides us the great opportunity to dialogue directly with clients, to listen and hear their opinions, to get a feedback, to consult them on the operation of services and products, etc. It was in 2009, when «Kyivstar» began to work with social networks as a separate direction. During this time, there were built and adjusted the communication processes to dialogue with people in such a format. There was also developed and realized the «Kyivstar» communication strategy for social networks. At the moment, «Kyivstar» keeps communicating with customers on all key web sites, where the discussion of our products and services is occurring. There involved and actively operating the representatives of «Kyivstar» and mobile youth brand Djuice in Facebook, VKontakte, YouTube, and Twitter. At present, 17 employees, «Kyivstar» internet-volunteers, are expressing the interests of the company on social online venues. As a result, «Kyivstar» and Djuice are the most positively referred telecom-brands in Ukrainian Internet.

According to a study of the monitoring company SemanticForce, the references to «Kyivstar» in social networks increased by 12 times from 2009 to 2011. The total number of «Kyivstar» and Djuice adherents in social networks has exceeded 150 thousand people. A number of content viewings of «Kyivstar» video channel on YouTube resource overstepped the mark 500,000.

Among the major pro-active reputation management emphases, in 2011, were: the project «Share your love for Ukraine», a number of charitable projects, the development of dialogue with clients on social media sites.

23 hours ago • Like Comment

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Annual report – 2011

«Share your love for Ukraine» «Kyivstar» has been and remains the national telecom leader in Ukraine. The company truly loves Ukraine and makes every effort to support the development of the country. In 2011, «Kyivstar» decided to engage Ukrainians in practically the national internet movement, aiming to enhance the love of Ukrainian citizens for their country. For this purpose, the operator created a multi-functional internet portal iloveukraine.com.ua, where anyone can upload one’s own favorite photos of Ukraine, talk about interesting travel routes, and put curious historical facts. Today this area has become a huge database of knowledge about the country and its sights – as of quite popular ones, so of rare objects. During six months working period, nearly 850 thousand Ukrainians visited the portal and joined the project.

Annual report – 2011

The total number of «Kyivstar» and djuice adherents in social networks exceeded 150 thousand people

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The social program «Internet Child Safety» It was in 2009 when «Kyivstar» started the long-term social program «Internet Child Safety». The purpose of the program was to teach children the rules of online safety, contributing to the creation of internet territory for safe communication, education and development. In 2011, the work on this program continued.

Realized the unique in Ukrainian telecom-market social service – «Parental Control» for mobile internet, which allows access only to «white list» of safe children's sites.

Signed the Memorandum of Cooperation with the Ministry of Education and Science of Ukraine; more than 200 schools across the country were connected to a free high-speed internet.

5,000 teachers, working within in the program, instruct students about the basics of online security.

«Kyivstar» volunteers performed open lessons and game workshops about the online safety for more than 2,500 children in schools and summer camps.

As a result, the social program «Internet Child Safety» is recognized as the best volunteer project in Ukraine in the category «Education and Culture» by results of the All-Ukrainian competition «Corporate volunteerism in Ukraine – 2011», organized by the Eastern Europe Foundation.

The social program «Internet Child Safety» is recognized as the best volunteer project in Ukraine About 25 million Ukrainians consume «Kyivstar» telecommunication services, and relatively large proportion of customers is children. Responsibility for its own products and services is the main area of social responsibility of «Kyivstar». In 2011, «Kyivstar» systematically proceeded to develop social initiatives in its areas of responsibility: products and services, corporate philanthropy and also environmental responsibility.

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Annual report – 2011

On May 9th «Kyivstar» traditionally carried out a campaign «Call to a front-line friend». Veterans and children of war could call freely to all their friends and relatives in Ukraine, Belarus and Russia. Altogether, the war heroes made about 2,000 calls. As a gift to veterans, «Kyivstar» staff organized the voluntary concerts of wartime songs in 18 cities of Ukraine.

All-Ukrainian charitable initiative «For people, for country!»

«Kyivstar» for almost 10 years has been carrying out the large-scale charity initiative «For people, for country», systematically helping those, who are most in need – children with disabilities and children deprived of parental care.

The company works with 65 boarding schools and orphanages, where are learning and living more than 10 000 children with health problems and orphaned children too. The main focus in 2011 was directed to helping children and young people with disorders of the musculoskeletal system. For them «Kyivstar» settled down multimedia rooms in 10 special boarding schools and created a series of video master classes for professional orientation, inviting the best experts. By the New Year the staff of «Kyivstar» gathered more than 5,000 gifts, and 100 volunteers gave Christmas performances for the children of sponsored boarding schools. Altogether «Kyivstar» employees played 13 concerts in 10 cities of Ukraine for more than 1,500 children in orphanages and boarding schools. Also, «Kyivstar» regularly helps to 3500 elderly people, living alone in 11 geriatric centers throughout Ukraine. That contributes to solving a lot of current housing problems.

Annual report – 2011

The program of environmental responsibility Since 2008 «Kyivstar» has been realizing the program of environmental responsibility in three main areas: the use of energy-saving technologies in different parts of business, replacing a paperbased workflow with electronic one, environmental initiatives. In 2011, involved in «Kyivstar» environmental project volunteers gardened cities of Ukraine, planted trees and flowers, and cleaned green areas. Also, a bicycle parking was set in the chief office in Kyiv.

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«Kyivstar» activity closely connected with the life of society – every second Ukrainian already chose our services. We work hard to make modern telecommunication technologies accessible to everyone. By providing high quality services, we improve people's lives and all the country. We take the responsibility for business solutions, partake of solving urgent social problems and take care of those who are most in need.

Celebration of Independence Day

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Annual report – 2011

«Chestnut Run», Independence Square, Kyiv Annual report – 2011

43

Tatyana Sumina, Chief strategy officer

44

Annual report – 2011

United strategy team

The strategic result of «Kyivstar» and «Beeline-Ukraine» integration – from mobile operator the company turned into multi-service operator Annual report – 2011

45

Company strategy and development

Corporate strategy of «Kyivstar» always has been basing on philosophy of leadership, and 2011 was no exception.

The main objectives of the company were to offer the best in Ukrainian market customer experience by gaining leadership in segments of mobile business, high-speed internet and digital media. In all these areas «Kyivstar» managed to achieve its goals.

«Kyivstar» is №1 in mobile market as by the size of subscriber base, so by the level of customer loyalty. The index of «Kyivstar» brand preference showed the growth during 2011 and reached the highest value on Ukrainian market 45%. In high-speed internet segment there has been assured high dynamics of data traffic growth. In addition, the company is not only a leader but also the founder of multimedia services direction in Ukraine.

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In addition to the constant search of new opportunities for company development and strategic projects implementation, aimed at ensuring the long-term business stability, 2011 passed for «Kyivstar» under the sign of unification with «Beeline-Ukraine» and realization of a substantial amount of integration work.

The strategic integration changed «Kyivstar» business model: the mobile operator company evolved into a multi-service operator that provides a full range of telecom services from one source. This has allowed us to strengthen leadership in the mobile segment, and in the shortest terms to take a leading position in the market of fixed telephony and internet access.

The integration process included the implementation of 50 initiatives in three main areas – «Marketing and sales», «Network and IT», «Business Support» – bringing together all operation aspects of two companies.

The effective work of «Kyivstar» joint team enabled the integration of subscriber bases, technical infrastructure, processes of marketing and sales, as

well as other key business processes.

During 2011, «Kyivstar» ahead of time realized most of the 5-year unification project, which reflected in the confirmed financial synergy.

«Kyivstar» and «Beeline-Ukraine» integration gave a detailed look at all operation aspects of combined company. This project has strengthened the company culture of continuous improvement. Due to the project «Operational efficiency», at the end of 2011 the company felt 3% savings in operating costs. Subsequently, this culture will be the basis for sustainable efficiency of «Kyivstar» combined business in the use of operating and capital resources, finding new markets and directions for development, investments in new ideas.

Annual report – 2011

Number of initiatives:

58 Number of executed milestones: more than

800

Number of integration steering committees held with top management participation: more than

40

The brand preference index for «Kyivstar» showed growth during 2011 and reached the highest on Ukrainian market

45% Annual report – 2011

Number of involved «Kyivstar» and «Beeline-Ukraine» employees: more than

300

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United team of regulatorylegal support department

Success of unification depended on the coherence of teamwork, clear understanding of legal framework and opportunities, readiness to make non-trivial and timely decisions 48

Annual report – 2011

Andrey Osadchuk, Chief Legal and Regulatory Officer

Annual report – 2011

49

Integration as qualitative changes possibility 2011 was extremely intense in regulatory and legal aspects: there happened changes in the regulatory environment and composition of industry regulator; were changing legal requirements and processes, corporate and organizational structure of the company; relationships with partners were reformatting.

Catalyst for positive systemic changes, of course, was merging with «BeelineUkraine». It allowed us to achieve significant operational efficiency of combined business that proved a viability of the idea of ​​effective consolidation of VimpelCom telecom assets in Ukraine and the ability of «Kyivstar» team to cope with such consolidation work.

Positive annual results were achieved due to well-organized and professional work of the joint team, including legal and regulatory function.

Key challenges of the past year included: Full legal support of integration process with «Beeline-Ukraine».

Reorganization of the company, changing its name and legal form.

Changes in the regulatory environment.

Obtaining the new license for the basic activity.

50

Annual report – 2011

Integration The process, similar in scale and complexity, Ukrainian telecom market has not known. Success of unification depended on the coherence, clear understanding of legal framework and opportunities, readiness to make non-trivial and timely decisions. All integration processes and initiatives passed through mandatory legal expertise, which allowed preventing risks and avoiding undesirable consequences, choosing the best way to achieve the target. The strategy of combining VimpelCom businesses in Ukraine, initiated by lawyers of the company, based on the separation of assets’ consolidation process from the process of legal merger of discrete companies. It ensured an effective continuity of operations and made the union most comfortable for our customers and employees. There was successfully realized a national roaming for subscribers of «Beeline-Ukraine»; made transferring «Beeline-Ukraine» FTTB customer base on IT systems, contracts and service principles of «Kyivstar»; was legally supported the structural reorganization of merged company without prejudice to the business process.

The successful settlement of regulatory issues allowed optimizing «BeelineUkraine» network substantially ahead of schedule. It crucially impacted on the early receipt of above-plan synergy effect, expected by shareholders.

Annual report – 2011

Legal support of operations

Regulatory environment

The most important event of 2011 in ensuring the company business became obtaining a new license on providing mobile services in GSM 900-1800 standard for the next 15 years. It is the basis of «Kyivstar» business, so purity and professionalism in this process were extremely important. Not less important was the support of past year procedure of dividends payments to shareholders of the company in a timely manner, which allowed fully to satisfy the dividend obligations before investors of VimpelCom LTD. In early 2011, the company got another new challenge – a requirement to change the legal form of company. This process was carefully planned and prepared, which made possible in time to make all necessary corporate decisions, to conduct registrations, to make all needed changes in the workflow, title and licensing documents. Since the set of operator licenses became wider, and new business directions of the merged company developed on the basis of new technologies – fixed telephony and fixed internet – the acronym GSM was removed from the company's name. Thus, in 2011, the company received its new name – Private Joint Stock Company «Kyivstar».

A significant event in 2011 became the change in composition of industry regulator – NCCR (The National Commission of Communication Regulation). During the year, the legal-regulatory function of «Kyivstar» actively participated in the development and public discussion of dozens of industry regulations, has made a significant contribution to the formation of a new edition of Rules for the provision of telecommunications services. At the beginning of 2012, the market obtained the updated, meeting modern requirements, document.

2011 will remain the year of settlement between the market players and the industry regulator of vast majority of disputes on national interconnects, which lasted for the past few years and destabilized the market. Readiness of two sides to the permanent constructive dialogue and cooperation, collaboration between business and regulator can positively influence the development of Ukrainian telecom regulatory environment, and hence the ongoing development of the industry.

Changes in shareholders and in governance structure at VimpelCom LTD headquarters required from «Kyivstar», as the operating company, to update the basic management policies and reconfigure the system of corporate administration. Those changes, in 2011, allowed leading «Kyivstar» corporate management principles to the unified group standards.

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Artem Nits Chief Financial Officer

52

Annual report – 2011

United team of financial management

In the framework of «Kyivstar» and «Beeline-Ukraine» association, planned for 2011 economic effect was obtained in advance Annual report – 2011

53

Financial health of «Kyivstar» Earnings growth

Investments

Total «Kyivstar» revenue in 2011 grew by almost 5% compared with 2010 and amounted to 13.078 billion UAH. The main factors of total revenue growth were:

The growth of mobile and fixed-line business in 2011 was made due significant investments in network development and technology. «Kyivstar» proposal to its clients is a high quality connection and service. During 2011 investments amounted to almost 2.3 billion UAH, which was by 13% more than in 2010. More than half of our capital expenditures were invested in mobile communication: an expansion of network capacity, improvement of coverage and services’ quality. It made possible in 2011 to ensure 8% increase in consumption of voice services and 45% increase in consumption of mobile Internet.

★ An increase in revenue of mobile segment by 3%. ★ Growth by 26% in the fixed segment of business.

Key factors of the growth in mobile segment became: an increase of «Kyivstar» subscriber base by 2%, a significant increase in consumption of voice services, the growth in consumption and income from data transmission services.

The growth of voice traffic: by 8%.

The growth of data traffic: by 45%.

Growth of revenue from mobile internet showed increasing dynamics in 37% compared with 2010.

A significant growth showed the segment of fixed business. Revenue from fixed-line services grew by 26% due to the increase in income from the transit business by 36% and from broadband internet access by 84%. This positive trend became possible due to the 98% growth of «Home Internet» subscriber base. At the end of 2011, the service has been used by almost 400 thousand subscribers.

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Also in 2011, «Kyivstar» actively invested in new business – a fixed broadband internet access. About a quarter of capital costs we spent on the ambitious task – complete national coverage of fixed broadband access. During 2011, «Kyivstar» connected 100 new cities, which in total amounted to 46 thousand homes. This allowed us to double «Home Internet» subscriber base to nearly 400 thousand subscribers. «Kyivstar» continues to be the most significant investor in the telecom market of Ukraine.

Business efficiency

«Kyivstar» and «Beeline-Ukraine» integration The integration of «Kyivstar» and «Beeline-Ukraine» businesses was the key priority in 2011, in which it was critically important to unify the networks, systems and teams; not only without prejudice to our customers in terms of service quality, but also with the ambition to provide more services «from single hands». This approach was chosen due to our new corporate strategy – positioning the company as a multi-service operator. For 2011, we have successfully combined commercial structures and formed a joint function of sales in B2B segment; we also saw an opportunity to accelerate the integration of mobile networks. Instead of planned two years that were scheduled for the networks integration, we managed to complete the unification during 2011.

This became the main source of plan over-fulfillment on the economic effect from the association. In terms of financial performance, it allowed to release additional resources for investments.

Planned for 2011, in the framework of «Kyivstar» and «Beeline-Ukraine» association, the economic effect was obtained ahead of plan and amounted to 164 million U.S. dollars.

In 2011, «Kyivstar» ensured a stable level of financial effectiveness, which we traditionally measure by the indicator EBITDA margin (ratio of operating profit to gross receipt). Year after year this figure was remaining the highest in the market not only in Ukraine but in all other countries where is the presence of VimpelCom companies. For 2011, EBITDA in absolute terms increased by 5% and amounted to 6.953 billion UAH. Here, EBITDA margin for the whole year remained the same as in previous year – 53%, despite an increase in operating and production costs. Growth in spending was mainly caused by external factors: the five-fold increase in the state fee for frequencies usage, the increase in rent and energy costs.

Annual report – 2011

Annual report – 2011

55

Consolidated Financial Statements

56

Annual Report – 2011

Consolidated Financial Statements

Consolidated Financial Statements

Annual Report – 2011

57

Consolidated Financial Statements

Contents Independent auditors’ report Consolidated statement of comprehensive income

60

Consolidated statement of financial position

61

Consolidated cash flow statement

62

Consolidated statement of changes in equity

64

Notes to the consolidated financial statements

58

1. Corporate information

65

2. Operating environment, risks and economic conditions in Ukraine

65

3. Basis of preparation

66

4. Changes in accounting policies

66

5. Summary of significant accounting policies

67

6. Critical accounting judgements and key sources of estimation uncertainty

76

7. IFRSs and IFRIC Interpretations not yet effective

78

8. Revenues and expenses

79

9. Income tax

81

10. Property, plant and equipment

84

11. Intangible assets

85

12. Other non-current assets

87

13. Trade and other receivables

87

14. Prepayments

88

15. Reconciliation of allowance accounts

88

16. Deferred expenses

89

17. Cash and cash equivalents

89

18. Equity

90

19. Interest-bearing loans and borrowings

91

20. Employee benefit liability

91

21. Deferred revenue

93

22. Provisions

94

23. Taxes payable, other than income tax

95

24. Trade and other payables

95

25. Advances received

96

26. Other current liabilities

96

27. Related party disclosure

97

28. Commitments and contingencies

99

29. Fair value of financial instruments

100

30. Financial instruments and risk management

100

31. Earnings per share

103

32. Events after the reporting period

103

Annual Report – 2011

Consolidated Financial Statements

Annual Report – 2011

59

Consolidated Financial Statements

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2011 (in thousands of Ukrainian Hryvnia, except for earnings per share) Notes

2011

2010

Revenues

8

12,332,345

11,443,025

Costs of materials and traffic charges Salaries and personnel costs Other operating expenses Other income Other expenses Depreciation and amortisation Impairment losses

8 8 8

(2,192,911) (948,744) (2,325,816) 30,636 (59,917) (2,109,508) (12,476) 4,713,609

(1,939,528) (866,243) (2,078,358) 28,552 (64,373) (1,781,469) (3,414) 4,738,192

Finance income Finance costs Foreign exchange loss, net

8 8

946,127 (8,203) (7,889)

227,431 (7,217) (36,196)

5,643,644

4,922,210

(1,376,114)

(1,244,330)

Profit for the year

4,267,530

3,677,880

Total comprehensive income for the year, net of tax

4,267,530

3,677,880

417.97

344.13

8 8 8

Profit before tax Income tax expense

Earnings per share, UAH

9

31

Signed and authorised for release on behalf of management of Joint Stock Company Kyivstar on 26 March 2012: President

Igor Lytovchenko Chief Financial Officer

Artem Nitz Deputy Chief Financial Officer/Chief Accountant

Lesya Samoylovich  

60

Annual Report – 2011

Consolidated Financial Statements

CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2011 (in thousands of Ukrainian Hryvnia) ASSETS Non-current assets Property, plant and equipment Intangible assets Other non-current assets Deferred tax asset Current assets Inventories Trade and other receivables Prepaid income tax Prepaid taxes, other than income tax Prepayments Deferred expenses Other current financial assets Cash and cash equivalents

 

Notes

2011

2010

10 11 12 9

7,094,873 883,500 44,625 401,487 8,424,485

6,274,153 970,861 44,493 635,940 7,925,447

122,228 510,387 642,655 14,249 110,871 106,211 2,627,116 892,806 5,026,523

68,990 320,553 401 74,902 92,583 3,349,309 1,595,056 5,501,794

13,451,008

13,427,241

Notes

2011

2010

18

1,006,499 10,613,771 (370,398) 11,249,872

656,499 10,679,975 11,336,474

20 22

40,873 29,672 70,545

37,262 52,727 89,989

19 20 21 22

51,917 9,011 741,887 1,767 95,745 904,009 148,810 177,445 2,130,591

51,735 7,566 736,659 12,986 266,911 146,961 480,288 136,207 161,465 2,000,778

13,451,008

13,427,241

13

14 16 27 17

TOTAL ASSETS

As at 31 December 2011 (in thousands of Ukrainian Hryvnia) EQUITY AND LIABILITIES Equity Share capital Retained earnings Treasury shares Non-current liabilities Employee benefit liability Provisions Current liabilities Interest-bearing loans and borrowings Employee benefit liability Deferred revenue Provisions Income tax payable Taxes payable, other than income tax Trade and other payables Advances received Other current liabilities

TOTAL EQUITY AND LIABILITIES

Annual Report – 2011

18

23 24 25 26

61

Consolidated Financial Statements

CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2011 (in thousands of Ukrainian Hryvnia) Notes Operating activities Profit before tax Non-cash adjustments to reconcile profit before tax to net cash flows: Depreciation of property, plant and equipment Impairment of property, plant and equipment and intangible assets Amortisation of intangible assets Loss on disposal of property, plant and equipment and intangible assets Interest income Unwinding of discount on other current financial assets Interest expense related to bank loans Other finance costs Stock-based compensation expense Movements in provisions and employee benefit liability Unrealised foreign exchange loss Working capital adjustments: Increase in inventories (Increase)/decrease in trade and other receivables, prepayments and other assets Increase in deferred expenses Increase in trade and other payables and taxes payable, other than income tax Increase in deferred revenue Increase in advances received Increase/(decrease) in other current liabilities

Interest received Interest paid Income tax paid Net cash flows from operating activities

2011

2010

5,643,644

4,922,210

8 8 8

1,722,674 12,476 386,834

1,346,803 3,414 434,666

8

56,294

61,477

8 8 8 8

(226,390) (719,737) 3,959 4,244 1,167 (7,705) 3,767

(150,641) (76,790) 3,942 3,275 (6,254) 7,392

(53,238)

(4,501)

(244,618)

201,327

(13,628)

(14,671)

63,717

132,890

5,228 12,603 15,980 6,667,271

122,140 9 (13,843) 6,972,845

229,563 (3,957) (1,914,201) 4,978,676

144,821 (3,944) (234,233) 6,879,489

 

62

Annual Report – 2011

Consolidated Financial Statements

For the year ended 31 December 2011 (in thousands of Ukrainian Hryvnia) Notes

2011

2010

27 27 18

(2,369,543) (267,438) (105,000) 901,000 590 9,930 (1,830,461)

(1,356,578) (480,388) (4,000,000) 114,897 (5,722,069)

Financing activities Dividends paid to equity holders of the parent Withholding tax paid on dividends Net cash flows used in financing activities

(3,654,533) (192,344) (3,846,877)

(743,591) (21,625) (765,216)

Net (decrease)/increase in cash and cash equivalents Net foreign exchange difference Cash and cash equivalents as at 1 January

17

(698,662) (3,588) 1,595,056

392,204 (7,542) 1,210,394

Cash and cash equivalents as at 31 December

17

892,806

1,595,056

Investing activities Purchase of property, plant and equipment Purchase of intangible assets Reimbursable interest-free financial aid provided to related party Reimbursable interest-free financial aid repaid by related party Cash received from accession of Storm LLC Proceeds from sale of property, plant and equipment Net cash flows used in investing activities

Annual Report – 2011

63

Consolidated Financial Statements

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2011 (in thousands of Ukrainian Hryvnia)

Balance at 1 January 2010

Share capital (Note 18) 656,499

Attributable to the equity holders of the parent Treasury shares Retained earnings Total equity (Note 18) 8,322,298 8,978,797

Profit for the year Total comprehensive income for the year, net of tax

-

3,677,880

-

3,677,880

-

3,677,880

-

3,677,880

Dividends declared (Note 18)

-

(765,216)

-

(765,216)

Distributions to shareholders

-

(554,987)

-

(554,987)

Balance at 31 December 2010

656,499

10,679,975

-

11,336,474

Profit for the year Total comprehensive income for the year, net of tax

-

4,267,530

-

4,267,530

-

4,267,530

-

4,267,530

Dividends declared (Note 18)

-

(3,846,877)

-

(3,846,877)

Accession of Storm LLC (Note 18)

350,000

20,880

(370,398)

482

Share-based payment transactions

-

1,167

-

1,167

Distributions to shareholders (Note 27)

-

(508,904)

-

(508,904)

1,006,499

10,613,771

(370,398)

11,249,872

Balance at 31 December 2011  

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Annual Report – 2011

Consolidated Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS at 31 December 2011 (in thousands of Ukrainian Hryvnia)

1. Corporate information Joint Stock Company Kyivstar (hereinafter referred to as ‘Kyivstar’ or ’the Company’) was established and registered on 3 September 1997 under the laws of Ukraine. The Company is involved in the design, construction and operating of a dedicated cellular telecommunication network and provides a wide range of mobile communication services in Ukraine.

The Company has one wholly owned subsidiary Joint Stock Company Staravto, which was established in order to provide transportation services to the Company. The Company and its subsidiary are hereinafter together referred to as ‘the Group’.

The Company’s ultimate parent is VimpelCom Ltd., a company headquartered in Amsterdam, the Netherlands.

The Company’s registered legal address is at 51, Chervonozoryanyy Av., Kyiv, 03110, Ukraine.

The Company’s head office and principal place of business is at 53, Degtyarivska St., Kyiv, 03113, Ukraine.

As at 31 December 2011 and 2010 the Company’s direct shareholders and their respective declared interests were as follows:

VimpelCom Holdings B.V. (Netherlands) VimpelCom Ltd. (Bermuda) Storm LLC (Ukraine) Treasury shares

2011 Interest 73.723% 0.004% 26.273%

Number of shares 13,039,562 700 4,647,127

2010 Interest 56.520% 43.480% -

Number of shares 6,040,262 4,647,127 -

100.000%

17,687,389

100.000%

10,687,389

2. Operating environment, risks and economic conditions in Ukraine The Ukrainian economy while deemed to be of market status continues to display certain characteristics consistent with that of an economy in transition. These characteristics include, but are not limited to, low levels of liquidity in the capital markets, high inflation and the existence of currency controls which cause the national currency to be illiquid outside of Ukraine. The stability of the Ukrainian economy will be significantly impacted by the Government’s policies and actions with regard to administrative, legal, and economic reforms. As a result, operations in Ukraine involve risks that are not typical for developed markets.

The Ukrainian economy is vulnerable to market downturns and economic slowdowns elsewhere in

Annual Report – 2011

the world. The global financial crisis has resulted in a decline in the gross domestic product, instability in the capital markets, a significant deterioration in the liquidity of the banking sector, and tighter credit conditions within Ukraine. Whilst the Ukrainian Government continues to introduce various stabilisation measures aimed at supporting the banking sector and providing liquidity to Ukrainian banks and companies, there continues to be uncertainty regarding access to capital and its cost for the Group and its counterparties, which could affect the Group’s financial position, results of operations and business prospects.

Whilst management believes it is taking appropriate measures to support the sustainability of the Group’s business in the current circumstances, any unexpected further deterioration in the areas described above could negatively affect the Group’s results and financial position in a manner not currently determinable.

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Consolidated Financial Statements

3. Basis of preparation

Basis of consolidation

The consolidated financial statements have been prepared on a historical cost basis, except for certain financial instruments measured in accordance with the requirements of IAS 39 Financial instruments: recognition and measurement.

The consolidated financial statements comprise the financial statements of the Company and its wholly-owned subsidiary. The subsidiary is fully consolidated from the date it was incorporated by the Company. The subsidiary’s financial statements are prepared as at the same reporting date as the Company’s, using consistent accounting policies.

These consolidated financial statements are presented in Ukrainian Hryvnia (‘UAH’) and all values are rounded off to the nearest thousand, except when otherwise indicated.

Statement of compliance

All intra-group balances, income and expenses and unrealised gains and losses resulting from intragroup transactions are eliminated in full.

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

4. Changes in accounting policies The accounting policies adopted are consistent with those of the previous financial year, except for the following new and amended IFRS and IFRIC interpretations effective as of 1 January 2011: ‣ IAS 24 Related Party Disclosures (amendment) effective 1 January 2011 ‣ IAS 32 Financial Instruments: Presentation (amendment) effective 1 February 2010 ‣ IFRIC 14 Prepayments of a Minimum Funding Requirements (amendment) effective 1 January 2011 ‣ Improvements to IFRSs (May 2010) The adoption of the standards or interpretations is described below: IAS 24 Related Party Disclosures (amendment) The IASB issued an amendment to IAS 24 that clarifies the definitions of a related party. The new definitions emphasise a symmetrical view of related party relationships and clarifies the circumstances in which persons and key management personnel affect related party relationships of an entity. In addition, the amendment introduces an exemption from the general related party disclosure requirements for transactions with government and entities that are controlled, jointly controlled or significantly influenced by the same government as the reporting entity. The adoption of the amendment did not have any impact on the financial position or performance of the Group.

IAS 32 Financial Instruments: Presentation (amendment) The IASB issued an amendment that alters the definition of a financial liability in IAS 32 to enable entities to classify rights issues and certain

66

options or warrants as equity instruments. The amendment is applicable if the rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency.

The adoption of the amendment did not have any impact on the financial position or performance of the Group.

IFRIC 14 Prepayments of a Minimum Funding Requirement (amendment) The amendment removes an unintended consequence when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover such requirements.

The amendment permits a prepayment of future service cost by the entity to be recognised as a pension asset. The amendment of the interpretation had no effect on the financial position or performance of the Group as the Group’s employee benefit plans are unfunded.

Improvements to IFRSs (May 2010) In May 2010, the IASB issued its third omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard.

The adoption of the following amendments resulted in changes to accounting policies, but did not have a significant impact on the financial position or performance of the Group. ‣ IFRS 7 Financial Instruments — Disclosures: The amendment was intended to simplify the disclosures provided by reducing the volume of disclosures about collateral held and improving disclosures by requiring qualitative information to put the quantitative information in context. The Group has updated its accounting policies accordingly,

Annual Report – 2011

Consolidated Financial Statements

this amendment did not have an effect on the financial position or performance of the Group.

amendment did not have an effect on the financial position or performance of the Group.

‣ IAS 1 Presentation of Financial Statements: The amendment clarifies that an entity may present an analysis of each component of other comprehensive income either in the statement of changes in equity or in the notes to the financial statements.

The Group has updated its accounting policies accordingly, but the amendment had no effect on the 2011 financial statements as the Group did not have other comprehensive income.

Other amendments resulting from Improvements to the following standards and interpretations did not have any impact on the accounting policies, financial position or performance of the Group:

‣ IFRIC 13 Customer Loyalty Programmes (determining the fair value of award credits): The amendment clarifies that when the fair value of award credits is measured based on the value of the awards for which they could be redeemed, the amount of discounts or incentives otherwise granted to customers not participating in the award credit scheme, is to be taken into account.

The amendment is effective for annual periods beginning on 1 January 2011. The Group has updated its accounting policies accordingly, however, this

5. Summary of significant accounting policies Functional and presentation currencies The functional and presentation currency of each of the Group’s entities is Ukrainian Hryvnia.

Foreign currency translation Transactions denominated in currencies other than the relevant functional currency (foreign currencies) are initially recorded in the functional currency at the rate in effect at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rate of exchange at the reporting date. Non-monetary items that were measured in terms of historical cost in a foreign currency are retranslated using the exchange rate as at the date of the initial transaction. The resulting gains and losses are recognised in profit and loss.

Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair values were determined. The resulting gains and losses are recognised in line with the recognition of gain or loss on change in fair value of the item (i.e., translation difference on items whose fair value gain or loss is recognised in other comprehensive income or prof-

Annual Report – 2011

‣ IFRS 3 Business Combinations (Contingent consideration arising from business combination prior to adoption of IFRS 3 (as revised in 2008)) ‣ IFRS 3 Business Combinations (The measurement options available for non-controlling interest (NCI)) ‣ IFRS 3 Business Combinations (Un-replaced and voluntarily replaced share-based payment awards) ‣ IAS 27 Consolidated and Separate Financial Statements ‣ IAS 34 Interim Financial Statements ‣ IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

it or loss is also recognised in other comprehensive income or profit or loss respectively).

Revenue recognition and measurement Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured.

Revenues are measured at the fair value of the consideration received or receivable, excluding discounts, rebates and sales taxes. These taxes are regarded as collected on behalf on the authorities.

Revenues primarily comprise sales of: ‣ Services: revenue from air time charges, interconnection fees, periodic fees, connection and one-time subscription fees, FTTB internet, fixed lines revenues, roaming, value added services; ‣ Customer equipment: telephony handsets, modems, etc.

Air time revenue The Company earns air time revenue by providing its prepaid and post-paid subscribers with access to the cellular network and routing their calls through the network and its roaming partners’ networks.

Revenue from interconnection Revenue from interconnection represents the revenue earned for the termination of calls from other

67

Consolidated Financial Statements

telecommunications service providers’ networks on the Company’s network.

Air time and interconnection revenue is recognised in the period when the respective service is rendered.

Periodic fees Periodic fees include fees for subscription to new tariff plans and fees for supplementary subscriptions used by subscribers in particular period, such as periodic fees for subscription to voicemail, itemised invoice etc. Periodic fees also include fees for transfer of money between subscribers’ balances, extra money services and write-offs of unused advances of disconnected subscribers etc.

Periodic fees are recognised in the period when the respective service is rendered.

Connection and one-time subscription fees Connection fees are paid by subscribers for the first time activation of network service. Revenues from connection are deferred and recognised over the period that the fees are earned, which is the expected period of customer relationship and approximates 10 years for contract subscribers and 4 years for prepaid subscribers (2010: 7 years and 4 years, respectively). The expected period of customer relationship is based on the past history of churn and expected development of the Company.

One-time subscription fees mainly consist of onetime fees for various supplementary subscriptions and also include fees for change of subscription type and transfer of subscriptions from one location to another. One-time subscription fees are deferred and recognised over the period that the fees are earned, which is the subscription validity period or, in case of unlimited validity period, the expected period of customer relationship, which approximates 10 years for contract subscribers and 4 years for prepaid subscribers (2010: 7 years and 4 years, respectively).

FTTB internet revenues Revenue from FTTB services represents fixed monthly charges for the internet access provided to the Company’s subscribers. Such revenue is recognised in the period when the respective service is rendered to subscribers.

Fixed lines revenues Revenue from fixed lines services represents monthly charges to the Company’s subscribers for access to the fixed telephone lines network and for routing the subscribers’ calls through this network.

Such revenue is recognised in the period when the respective service is rendered to subscribers.

Roaming revenues Roaming revenues include (i) charges for services provided to the Company’s subscribers in the networks of its roaming partners and (ii) charges for services provided by the Company in its network to subscribers of the Company’s roaming partners.

Roaming revenues are recognised in the period when the respective services are rendered.

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Value added services Value added services include charges for outgoing SMS and MMS, circuit of switched data and packet switched data (WAP, GPRS, EDGE etc.). Revenues from value added services are recognised in the period when the respective services are rendered.

Sales of handsets and modems Revenues from sales of handsets and modems are normally recognised when the related significant risks and rewards are transferred to the buyer.

Discounts Discounts are often provided in the form of cash discount, free or discounted products or services delivered by external parties. Discounts are recorded in the period when they are earned. Discounts are recorded as revenue reductions. Free products or services delivered by external parties are recorded as expenses.

Presentation Where the Company’s role in a transaction is a principal, revenue is recognised on a gross basis.

In this case revenue comprises the gross value of the transaction billed to the customer, after trade discounts, with any related expenditure charged as an operating cost. Where the Company’s role in a transaction is that of an agent, revenue is recognised on a net basis and represents the margin earned. The evaluation of whether the Company is acting as principal or agent is based on the analysis of the substance of the transaction, the responsibility for providing the goods or services and setting prices and the underlying financial risks and rewards.

Interest income Interest income is recorded using the effective interest rate, which is the rate that exactly discounts the estimated future cash flows through the expected life of financial instruments or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income is included in finance income in the statement of comprehensive income.

Deferred revenue Cellular service revenue is recognised on the basis of actual airtime usage by the end customer.

Unused time on sold prepaid cards is recognised as deferred revenue until the related services have been provided to the subscribers or the prepaid card has expired.

Loyalty programs Customer loyalty credits are accounted for as a separate component of the sales transaction, in which they are granted. A portion of the fair value of the consideration received is allocated to the award credits and deferred, based on estimated number of award credits that will actually be redeemed by the customer. This is then recognised as revenue over the period that the award credits are redeemed.

Annual Report – 2011

Consolidated Financial Statements

Deferred connection costs Initial direct costs incurred in earning connection fees are deferred over the same period as connection revenue, limited to the amount of the deferred connection fees. Costs incurred consist primarily of the costs of the start packages and dealers’ bonuses. In some cases connection costs exceed the respective connection fees. Such excess is expensed as incurred.

Advertising costs, marketing and sales commissions Advertising costs, marketing and sales commissions are expensed as incurred, unless they form a part of the costs that are deferred in relation to deferral of connection fees as described above.

Expenditure on advertising and promotional activities is recognised as an expense when the Group either has the right to access the goods or has received the service.

Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Cost includes professional fees and, for qualifying assets, borrowing costs are capitalised. Depreciation is calculated to reduce the cost of assets, other than land, to their estimated residual value, if any, over their estimated useful lives. Depreciation commences when the assets are ready for their intended use.

benefits are expected to arise from the continued use of the asset or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit and loss in the year the item is derecognised.

Leasehold improvements are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.

Construction in progress Assets under construction are capitalised as a separate component of property, plant and equipment. On completion, the constructed asset at its cost is transferred to the appropriate category of property, plant and equipment. Construction in progress is not depreciated.

Uninstalled equipment Uninstalled equipment represents equipment purchased by the Group, but not yet put into operation. Uninstalled equipment is not depreciated.

Land Freehold land to which the Group has due legal title is included in the Group’s statement of financial position at its historical cost. Freehold land is not depreciated.

Leases

When the expected cost of decommissioning of an asset after its use is material to the financial statements, the present value of the expected cost of decommissioning of an asset after its use is included into the cost of the respective asset if the recognition criteria for a provision are met.

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The evaluation is based on the substance of the transaction. However, there are situations that individually would normally lead the Group to classify a lease as a finance lease, such as if the lease term is more than 75 percent of the estimated economic life or the present value of the minimum lease payments exceeds 90 percent of the fair value of the leased asset.

Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows:

The Group may enter into an arrangement that does not take the legal form of a lease but conveys a right to use an asset in return for a payment or

Repair and maintenance is expensed as incurred.

If new parts are capitalised, replaced parts are derecognised and any remaining net book value is recorded as loss on disposal.

Category Local, regional & trunk networks Mobile telephone network and switches Radio installations Buildings Corporate administrative assets

Useful life (years) 20 5-15 7 10-30 5-10

Depreciation method, estimated useful life and residual value are evaluated at least annually and adjusted prospectively, if appropriate. Residual value is estimated to be zero for most assets, except for vehicles, which are included in corporate administrative assets, as the Group does not expect to use the assets for their full economic life.

series of payments. Determining whether an arrangement contains a lease is based on the substance of the arrangement and requires an assessment of whether: (a) fulfilment of the arrangement is dependent on the use of a specific asset; and (b) the arrangement conveys a right to use the asset.

An item of property, plant and equipment is derecognised upon disposal or when no future economic

Property and equipment acquired by way of finance lease is capitalised and carried at the lower

Annual Report – 2011

The Group as lessee

69

Consolidated Financial Statements

of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses.

Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.

Operating lease payments are charged to profit and loss on a straight-line basis over the term of the relevant lease. Benefits received and incentives to enter into an operating lease are also amortised on a straight-line basis over the lease term. Advance lease payments made on entering into operating leases or acquiring leaseholds are amortised to profit and loss over the lease term.

Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective asset. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs incurred in connection with the borrowing of funds.

Intangible assets Intangible assets acquired are initially measured at cost. Following initial recognition, intangible assets are carried at cost less accumulated amortisation and any accumulated impairment losses.

Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is reflected in profit and loss in the period, in which the expenditure is incurred.

Intangible assets, all of which are determined as having finite useful lives, are amortised over their useful economic lives. The amortisation period and amortisation method for intangible assets is reviewed at least annually, and adjusted prospectively, if appropriate. Amortisation is provided using the straight-line basis over the estimated useful lives of the related assets as follows: Asset category Licenses Network and billing software Gains and losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised as other expenses in the statement of comprehensive income.

70

annual impairment testing for an asset is required, the Group makes an estimate of the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset or cash generating unit 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 of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples or other available fair value indicators. Impairment losses of continuing operations are recognised in profit and loss.

A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Based on the specifics of the Group’s operations, the management concluded that the Group has one cash generating unit, which is the Company’s network as a whole.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased.

If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such Useful life (years) 10-15 5-10 reversal is recognised in profit and loss. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset's revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

Financial assets

Impairment of non-financial assets

Initial recognition and measurement

The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any such indication exists, or when

Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-ma-

Annual Report – 2011

Consolidated Financial Statements

turity investments, available-for-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

The Group determines the classification of its financial assets at initial recognition.

and includes transaction costs and fees that are an integral part of the effective interest rate. The effective interest rate amortisation is included in finance costs in the statement of comprehensive income.

Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace (regular way purchases) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset.

Offsetting of financial instruments

The Group’s financial assets include cash and cash equivalents, trade and other receivables and interest-free reimbursable financial aid, all of which are classified as loans and receivables in accordance with IAS 39.

Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus directly attributable transaction costs, if any. In the case of transactions with entities under common control, any excess of nominal amount over the fair values at initial recognition is charged to retained earnings.

Subsequent measurement After initial measurement, loans and receivables are subsequently measured at amortised cost using the effective interest rate method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are integral part of the effective interest rate. The amortisation is included in finance income in the statement of comprehensive income.

Financial liabilities Initial recognition and measurement Financial liabilities within the scope of IAS 39 are classified 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 Group determines the classification of its financial liabilities at initial recognition.

Financial liabilities are recognised initially at fair value less, in the case of loans and borrowings, directly attributable transaction costs.

The Group’s financial liabilities mainly include trade and other payables and loans and borrowings.

Subsequent measurement After initial recognition, interest-bearing loans and borrowings and trade and other payables with fixed maturity are subsequently measured at amortised cost using the effective interest rate method.

Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the effective interest rate method amortisation process. Amortised cost is computed using the effective interest method by taking into account any premium or discount on acquisition

Annual Report – 2011

Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

Fair value of financial instruments The fair value of 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 deductions for transaction costs. For financial instruments not traded in an active market, 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 of another instrument that is substantially the same; discounted cash flow analysis or other valuation models.

Impairment of financial assets The Group assesses, at each reporting date, whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

For financial assets carried at amortised cost, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and

71

Consolidated Financial Statements

for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred).

The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If an instrument has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.

The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit and loss for all impaired financial assets, except for reimbursable interest-free financial aid provided to entity under common control, for which the difference between the carrying amount and fair value is recognised as equity distribution to the shareholders.

Loans and receivables together with the associated allowance are written off when there is no realistic prospect of future recovery and/or when the statute of limitation has expired. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to finance costs in the statement of comprehensive income.

Derecognition of financial instruments Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: ‣ the rights to receive cash flows from the asset have expired or ‣ the Group 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 ‘passthrough’ arrangement and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, a new asset is recognised to the extent of the Group’s continuing involvement in the

72

asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on the basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset, is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Financial liabilities A financial liability is derecognised 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 of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss.

Employee benefits The Group makes defined contributions to the State Pension fund at the relevant statutory rates in force during the year, based on gross salary payments; such an expense is charged in the period when the related salaries are earned.

In addition to the above, employees of the Group are entitled to jubilee and post-employment benefits.

Jubilee benefits are paid out on occasion of anniversary, while post-employment benefits are paid out as a one-off benefit upon retirement. The amount of those benefits depends on the tenure with the Company and the average salary. The benefits payable under these arrangements are unfunded. The expected cost of providing employee benefits is determined annually using the projected unit credit actuarial valuation method to calculate the net present value of benefit obligations at the reporting date.

The balance of employee benefit obligations equals discounted payments to be made in the future and accounts for staff turnover and relates to the period to the reporting date. Demographic information and information on staff turnover are based on historical data. Gains and losses resulting from the use of actuarial valuation methodologies to calculate post-employment benefits are recognised when the cumulative unrecognised actuarial gains or losses for the plan at the end of the previous reporting period exceed 10% of defined benefit obligation at that date. These gains or losses are recognised as income or expense over the expected average remaining working lives of the employees participating in the plan. Any actuarial gains or losses relating to jubilee benefits are recognised in profit or loss in the period in which they arise.

The past service cost is recognised as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested following the introduction of, Annual Report – 2011

Consolidated Financial Statements

or changes to, a pension plan, past service cost is recognised immediately.

The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognised reduced by past service cost not yet recognised.

Taxes Current income tax Current tax assets and liabilities for the current and prior 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 by the reporting date.

Deferred income tax Deferred income tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

to be utilised. Unrecognised deferred income tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income 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 recognised outside profit or loss is recognised outside profit or loss.

Deferred tax items are recognised 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 off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Value-added tax

Deferred tax liabilities are recognised for all taxable temporary differences, except:

Revenues, expenses and assets are recognised net of value-added tax (VAT) except:

‣ where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

‣ where VAT incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case VAT is recognised as part of the cost of acquisition of the asset or as part of expense item as applicable; and

‣ in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences and carry forward of unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax losses can be utilised, except: ‣ when the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and ‣ in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognised 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 of deferred income 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 of the deferred income tax asset

Annual Report – 2011

‣ receivables and payables are stated with the amount of VAT included.

The net amount of VAT recoverable from, or payable to, the taxation authority is disclosed in the notes to the consolidated statement of financial position.

Current/non-current classification An asset/liability is classified as current, when it is expected to be realised (settled) or is intended for sale or consumption within twelve months after the reporting date. Other assets/liabilities are classified as non-current. Financial instruments are classified based on expected life. Deferred revenues and respective costs of connection are classified as current.

Cash and cash equivalents Cash and cash equivalents include cash at banks and on hand and short-term deposits with an original maturity of three months or less.

For the purpose of consolidated cash flow statement, cash and cash equivalents consists of cash and cash equivalents as defined above, net of outstanding bank overdrafts, if any.

Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable esti-

73

Consolidated Financial Statements

mate can be made of the amount of the obligation.

Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in profit and loss net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

Contingent assets and liabilities A contingent asset is not recognised in the financial statements, but disclosed when an inflow of economic benefits is probable.

Contingent liabilities are not recognised in the financial statements unless it is probable that an outflow of economic resources will be required to settle the obligation and it can be reasonably estimated. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote.

Inventories Inventories are valued at the lower of cost or net realisable value for items that will be sold as a separate products. Inventories that will be sold as part

74

of a transaction with several components, which the Group expects to earn net income from, are valued at cost even if the selling price of the inventory is below cost price. Cost of inventories used is determined using the weighted average method.

Treasury shares Treasury shares are recognised at purchase price and are deducted from equity. No gain or loss is recognised in the profit and loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Any difference between the carrying amount and the consideration, if shares are reissued, is recognised in share premium. Voting rights related to treasury shares are nullified for the Group and no dividends are allocated to them.

Events after the reporting date Events after the reporting date that provide additional information on the Group’s position at the reporting date (adjusting events) are reflected in the consolidated financial statements. Events after the reporting date that are not adjusting events are disclosed in the notes when material.

Reclassification of comparative information In 2011 the Company has made certain reclassifications of comparative information for 2010 in order to conform with 2011 presentation.

Annual Report – 2011

Consolidated Financial Statements

6. Critical accounting judgements and key sources of estimation uncertainty Key sources of estimation uncertainty - critical accounting estimates Certain amounts included in or affecting the consolidated financial statements and related disclosures must be estimated, requiring management to make assumptions with respect to values or conditions which cannot be known with certainty at the time the consolidated financial statements are prepared.

A ‘critical accounting estimate’ is one, which is both important to the portrayal of the Group’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Management evaluates such estimates on an ongoing basis, based upon historical results and experience, consultation with experts, trends and other methods, which management considers reasonable in the particular circumstances, as well as the forecasts as to how these might change in the future. However, uncertainty about these estimates could result in outcomes that require a material adjustment to the carrying amount of an asset or liability affected in future periods.

Revenue recognition The main part of the Group’s revenues is earned from mobile services, such as airtime, one-time connection fees or periodic subscriptions. The Company has many subscribers and offers a number of different services with different tariff plans.

The Company also provides discounts of various types, often in connection with different campaigns. Revenues from one-time subscriptions or

Cost of dismantling per site Discount rate Inflation rate

connections to the Company's network are recognised as deferred revenue and released to the profit and loss in the periods when these revenues are earned, based on the average customer relationship period. The management regularly reviews its estimates in respect of customer relationship period, based on the historical experience and its plans for future development of the Company. As at 31 December 2011 the management estimated the customer relationship period to be equal to 10 years for contract subscribers and 4 years for prepaid subscribers (2010: 7 years and 4 years, respectively). As a result of change in the abovementioned accounting estimates starting from 1 January 2011, the Group’s profit before tax for the year 2011 decreased by UAH 1,487 thousand.

Employee benefits The cost of long-term employee benefits and other post employment benefits is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, future salary increases and future pension increases. All assumptions are reviewed at each reporting date.

In determining the discount rate, the management considers the market yields on government bonds extrapolated for the period of payments.

The turnover rate is calculated based on the past experience. Further details about the assumptions used are given in Note 20.

Provision for decommissioning In determining the carrying value of the provision for decommissioning associated with future dismantling of base stations from leased sites the Group has to make assumptions and estimates in relation to discount rates, probability of prolongation of operating lease agreements, the period till dismantling, the expected cost to dismantle the base stations from the sites and the expected timing of those costs. All assumptions are reviewed at each reporting date. As at 31 December 2011, the Group has revised its estimates in relation to discount rates and the expected cost to dismantle: Assumptions used as at 31 December 2010 UAH 36,000 10.70% 3.99%

Assumptions used as at 31 December 2011 UAH 38,300 13.57% 4.15%

The period till dismantling as at 31 December 2010 comprised 30 years. As at 31 December 2011 the Group has extended the estimated period till dismantling by one year.

Annual Report – 2011

75

Consolidated Financial Statements

Deferred tax assets

Impairment of non-financial assets

Deferred tax assets are recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. Please refer to Note 9 for additional information on the Group’s tax position.

The Group has made significant investments in property, plant and equipment and intangible assets. These assets are tested for impairment when circumstances indicate there may be a potential impairment. Factors considered important which could trigger an impairment evaluation include the following: significant fall in market values, significant underperformance relative to historical or projected future operating results, significant changes in the use of assets or the strategy for the Group’s overall business, including assets that are decided to be phased out or replaced and assets that are damaged or taken out of use, significant negative industry or economic trends and significant cost overruns in the development of assets.

Depreciation and amortisation Depreciation and amortisation methods are based on management estimates of the expected useful life of property, plant and equipment and intangible assets. Estimates may change due to technological developments, competition, changes in market conditions and other factors and may result in changes in the estimated useful lives and in the amortisation or depreciation charges. Some technological developments are difficult to predict and the Group’s views on the trends and pace of development may change over time. Some of the assets and technologies, in which the Group invested several years ago, are still in use and provide the basis for the new technologies.

The useful lives of property, plant and equipment and intangible assets are reviewed at least annually taking into consideration the factors mentioned above and all other important factors. In case of significant changes in estimated useful lives, depreciation and amortisation charges are adjusted prospectively.

In 2011 the Group has changed useful lives for the following groups for property, plant and equipment and intangible assets: Category of asset 4.1 - MSC/HLR/TSP/BSC 7.1 - Control and management systems 7.2 - Service platforms

Legal proceedings and claims The Group is a subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. Management evaluates, among other factors, the degree of probability of an unfavourable outcome and the ability to make a reasonable estimate of the amount of loss.

Unanticipated events or changes in these factors may require to increase or decrease the amount to be accrued for any matter or accrue for a mat-

Useful life before 1 January 2011 7 7 7

As a result of change in the abovementioned accounting estimates starting from 1 January 2011, the Company’s profit before tax for the year 2011 decreased by UAH 237,666 thousand.

76

Estimating recoverable amounts of assets must in part be based on management’s evaluations, including determining appropriate cash generating units, estimates of future performance, revenue generating capacity of the assets, assumptions of the future market conditions and the success in marketing of new products and services. Changes in circumstances and in management’s evaluations and assumptions may give rise to impairment losses in the relevant periods.

Useful life after 1 January 2011 5 5 5

ter that has not been previously accrued because it was not considered probable or a reasonable estimate could not be made.

Annual Report – 2011

Consolidated Financial Statements

7. IFRSs and IFRIC Interpretations not yet effective A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2011, and have not been applied in preparing these consolidated financial statements.

Standards issued but not yet effective up to the date of issuance of the Group’s consolidated financial statements are listed below. The Group intends to adopt those standards when they become effective.

IAS 1 Financial Statement Presentation – Presentation of Items of Other Comprehensive Income (OCI) The amendments to IAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or ‘recycled’) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has no impact on the Group’s financial position or performance.

The amendment becomes effective for annual periods beginning on or after 1 July 2012.

IAS 19 Employee Benefits (amendment) The IASB has issued numerous amendments to IAS 19. First, the corridor method is removed and, therefore, all changes in the present value of the defined benefit obligation and in the fair value of plan assets will be recognised immediately as they occur. Secondly, the amendment will eliminate the current ability for entities to recognise all changes in the defined benefit obligation and in plan assets in profit or loss. Thirdly, the expected return on plan assets recognised in profit or loss will be calculated based on the rate used to discount the defined benefit obligation. The amended standard shall be applied for annual periods beginning on or after 1 January 2013 and early adoption is permitted. The amendment generally applies retrospectively. The Group has not analysed the likely impact of the amended standard on its financial position or performance.

IFRS 7 Financial Instruments: Disclosures – Enhanced Derecognition Disclosure Requirements The amendment requires additional disclosure about financial assets that have been transferred but not derecognised to enable the users of the Group’s financial statements understand the relationship with those assets that have not been derecognised and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in derecognised assets to enable the user to evaluate the nature of, and risks associated with, the entity’s continuing involvement in those derecognised assets. The amendment becomes effective for annual periods beginning on or after 1 July 2011. The amendment will have no impact on the Group’s financial position or performance.

Annual Report – 2011

IFRS 9 Financial Instruments: Classification and Measurement IFRS 9 as issued reflects the first phase of the IASBs work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. In December 2011 the IASB issued Mandatory Effective Date and Trasition Disclosures (amendments to IFRS 9 and IFRS 7) according to which entities shall apply IFRS 9 as amended for annual periods beginning on or after 1 January 2015. In subsequent phases, the IASB will address hedge accounting and impairment of financial assets.

The completion of this project is expected in 2012.

The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Group’s financial assets, but will potentially have no impact on classification and measurements of financial liabilities. The Group will quantify the effect in conjunction with the other phases, when issued, to present a comprehensive picture.

IFRS 10 Consolidated Financial Statements IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the preparation of consolidated financial statements. It also includes the issues raised in SIC-12 Consolidation — Special Purpose Entities.

IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 will require entities to exercise judgement to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in IAS 27. This standard becomes effective for annual periods beginning on or after 1 January 2013. The Group expects that the amendment will have no impact on the Group’s financial position or performance.

IFRS 12 Disclosure of Involvement with Other Entities IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28.

These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities.

A number of new disclosures are also required.

This standard becomes effective for annual periods beginning on or after 1 January 2013. The Group expects that the amendment will require additional disclosures in its consolidated financial statements, but will have no impact on the Group’s financial position or performance.

IFRS 13 Fair Value Measurement IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The Group is currently assessing the impact that this standard will have on

77

Consolidated Financial Statements

the financial position and performance. This standard becomes effective for annual periods beginning on or after 1 January 2013.

The Group expects that new standards and amendments listed below will have no impact on its financial position, financial performance or disclosures in the consolidated financial statements: ‣ IFRS 1 First-Time Adoption of IFRSs (amended) ‣ IFRS 11 Joint Arrangements

‣ IAS 12 Income Taxes – Recovery of Underlying Assets ‣ IAS 27 Separate Financial Statements (as revised in 2011) ‣ IAS 28 Investments in Associates and Joint Ventures (as revised in 2011) ‣ IAS 32 Financial Instruments: Presentation ‣ IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

8. Revenues and expenses Revenues Air time charges Periodic fees Interconnection revenue Value added services Roaming and access to network Roaming revenue (subscribers) Connection and one-time subscription fees FTTB internet revenues Fixed lines Other revenue

Costs of materials and traffic charges Interconnection Cost of materials Roaming expenses Leased line costs

Salaries and personnel costs Salaries, holiday pay and other employee benefits Social security taxes Medical insurance Training

2011

2010

5,348,426 2,384,073 2,146,349 1,022,885 712,468 229,756 175,903 126,592 65,398 120,495

5,924,973 1,703,262 2,084,790 876,376 430,001 222,621 82,671 4,211 44,313 69,807

12,332,345

11,443,025

1,786,240 218,830 168,802 19,039

1,588,590 188,971 157,860 4,107

2,192,911

1,939,528

739,307 174,253 34,090 1,094

663,267 165,810 35,652 1,514

948,744

866,243

The average number of employees of the Group in 2011 is 4,502 (2010: 4,663).

78

Annual Report – 2011

Consolidated Financial Statements

2011

2010

712,021 340,688 320,958 265,650 247,718 171,192 92,096 68,201 30,476 24,254 18,962 9,100 3,508 20,992

620,090 314,110 290,126 190,420 187,213 133,547 168,857 74,844 22,976 19,493 14,401 7,861 6,003 20,920 7,497

2,325,816

2,078,358

Other expenses

2011

2010

Loss on disposal of property, plant and equipment and intangible assets Contributions and donations

56,294 3,623

61,477 2,896

59,917

64,373

Other operating expenses Repair and maintenance Marketing and sales commission Operating leases of land and buildings Advertising Local taxes and non-refundable VAT Electricity Consultancy fees and external personnel Insurance Materials and supplies License and research fees Business trip expenses Postage, freight, distribution and telecommunication Bank charges Bad debts Other operating expenses

Amortisation, depreciation and impairment losses Details of amortisation, depreciation and impairment losses are as follows:

Depreciation and amortisation Impairment losses, net of reversals

Annual Report – 2011

Property, plant and equipment 2011 2010

2011

Intangible assets 2010

1,722,674 12,476

1,346,803 3,414

386,834 -

434,666 -

1,735,150

1,350,217

386,834

434,666

79

Consolidated Financial Statements

In 2011 the Group recognised impairment losses on property, plant and equipment in amount of UAH 25,283 thousand (2010: UAH 14,076 thousand), based on internal indications of impairment for various individual components of network equipment, as the Group did not plan to use this equipment in future. Assets identified as no longer in use were written down to their recoverable amounts, which were based on value in use determined for individual assets, usually zero.

In addition, in 2011 the Group recognised reversal of impairment losses in respect of network equipment in amount of UAH 12,807 thousand (2010: UAH 10,662 thousand) as a result of changes in tariff policies and respective plans for future usage of previously impaired network equipment in accordance with adjusted capital expenditure budgets for future years.

Finance income 2011

2010

Interest income Total interest income

226,390 226,390

150,641 150,641

Unwinding of discount on other current financial assets

719,737

76,790

946,127

227,431

2011

2010

Interest charges related to bank loans Total interest charges

3,959 3,959

3,942 3,942

Other finance costs

4,244

3,275

8,203

7,217

Finance costs

9. Income tax The Group’s income was subject to taxation in Ukraine only. In 2010, the Ukrainian Parliament approved the Tax Code, which superseded the Law of Ukraine on Corporate Income Tax starting from 1 April 2011. New Tax Code significantly changed the rules for tax base calculation and provided for gradual decrease in tax rates from 25% to 16% over the next few years. During the first quarter of 2011, Ukrainian corporate income tax was levied on taxable income less deductible expenses and

depreciation charge at a rate of 25%. During the second – forth quarter of 2011, corporate income tax was levied on taxable income less deductible expenses at a rate of 23%.

The Group has calculated its deferred tax position as at 31 December 2011 in accordance with corporate income tax rates as set out by the effective Tax Code for the periods when the deferred tax assets and liabilities are expected to be utilised.

The major components of income tax expense for the years ended 31 December 2011 and 2010 are: 2011

2010

1 004 635

1 400 636

Relating to origination and reversal of temporary differences

371 479

(156 306)

Income tax expense

1 376 114

1 244 330

Current income tax: Current income tax charge Deferred tax:

80

Annual Report – 2011

Consolidated Financial Statements

Reconciliations between tax expense and the product of accounting profit multiplied by the tax rate for the years ended 31 December 2011 and 2010 are as follows:

Accounting profit before tax Income tax at actual rate (2011: till 1 April 2011 – 25%, starting from 1 April 2011 – 23%, 2010: 25%) Non - taxable income Non - deductible expenses for tax purposes Other changes (reassessment of temporary differences, effect of changes in tax rules, effect of changes in tax rates)

2011

2010

5 643 644

4 922 210

1 319 595

1 230 553

(5 619) 20 022

(12 966) 31 708

42 116

(4 965)

1 376 114

1 244 330

Deferred tax assets and liabilities relate to the following items in 2011:

Deferred tax liabilities: Deferred expenses (iii) Prepayments (iii) Trade and other receivables (iv) Deferred tax assets: Property, plant and equipment (i) Intangible assets (i) Other current financial assets (iv) Other current liabilities (iv) Employee benefits (iii) Advances received and deferred revenue (iii) Inventories (ii) Trade and other payables (iii) Provisions (iii) Taxes payable, other than income tax (iii) Other liabilities

Net deferred tax asset

Annual Report – 2011

31-Dec-11

Recognised in profit and loss

Recognised in 31-Dec-10 equity

17,395 627 7,226 25,248

(2,990) (16,012) 3,907 (15,095)

-

20,385 16,639 3,319 40,343

104,715 27,907 121,146 36,671 8,527 47,105 40 53,543 4,747 22,334 426,735

(43,698) (27,649) (169,176) (525) 568 (164,674) 40 2,599 (3,689) (2,704) 22,334 (386,574)

137,026 137,026

148,413 55,556 153,296 37,196 7,959 211,779 50,944 8,436 2,704 676,283

401,487

(371,479)

137,026

635,940

81

Consolidated Financial Statements

Deferred tax assets and liabilities relate to the following items in 2010:

Deferred tax liabilities: Intangible assets (i) Deferred expenses (iii) Prepayments (iii) Trade and other receivables (iv)

Deferred tax assets: Property, plant and equipment (i) Intangible assets (i) Other current financial assets (iv) Other current liabilities (iv) Employee benefits (iii) Advances received and deferred revenue (iii) Inventories (ii) Trade and other payables (iii) Provisions (iii) Taxes payable, other than income tax (iii)

Net deferred tax asset

31-Dec-10

Recognised in profit and loss

Recognised in 31-Dec-09 equity

20,385 16,639 3,319 40,343

(26,087) 907 (330) 1,613 (23,897)

-

26,087 19,478 16,969 1,706 64,240

148,413 55,556 153,296 37,196 7,959 211,779 50,944 8,436 2,704 676,283

22,578 55,556 (19,198) 34,887 (3,573) 24,101 (2,979) 9,897 8,436 2,704 132,409

172,494 172,494

125,835 2,309 11,532 187,678 2,979 41,047 371,380

635,940

156,306

172,494

307,140

The nature of the temporary differences is as follows: (i) Property, plant and equipment and intangible assets – differences in depreciation and amortisation patterns and estimates of the remaining useful lives, differences in capitalisation principles; (ii) Inventories - differences in inventories measurement basis and the periods of recognition; (iii) Advances received and deferred revenue, prepayments and deferred expenses, employee benefits, trade and other payables, provisions, taxes payable, other than income tax, other current financial assets – differences in period of recognition;

82

(iv) Trade and other receivables, other current financial assets and other current liabilities – differences in measurement and recognition principles.

As at 31 December 2011 the Company did not recognise deferred tax asset in respect of temporary differences of UAH 52,955 thousand (2010: UAH 50,502 thousand) related to the investment in JSC Staravto because the Company may control the period of realisation of such temporary differences.

Annual Report – 2011

Consolidated Financial Statements

10. Property, plant and equipment The movement of property, plant and equipment is as follows:

Cost: At 1 January 2010 Additions Disposals Transfers,re-classifica-tions and other changes (i) At 31 December 2010 Additions Disposals Transfers,re-classifica-tions and other changes (i) At 31 December 2011

Land

Corporate administrative assets

Construction in progress, uninstalled Total and dismantled equipment (ii)

949,592

104,004

671,057

1,311,294

11,605,367

77,616 (18,738)

(36,821)

2,505 -

10,042 (27,688)

1,244,628 (93,050)

1,362,574 (360,520)

635,342

139,726

361,693

-

76,628

(1,262,829) -

822,461

5,792,856

2,681,049

1,274,464

106,509

730,039

1,200,043

12,607,421

4,186 -

50,937 (277,363)

19,078 (306,022)

3,791 (490)

-

21,983 (35,778)

2,551,783 (24,329)

2,651,758 (643,982)

96,948

1,262,697

431,489

182,427

2

155,955

(2,160,989) (31,471)

923,595

6,829,127

2,825,594

1,460,192

106,511

872,199

1,566,508

14,583,726

181,219

-

447,051

430,057

5,256,336

Local, regional & trunk networks

Mobile telephone network and switches

Radio installations

Buildings

772,124

5,314,851

2,482,445

2,127 (1,230)

25,656 (182,993)

49,440

Accumulated depreciation and impairment losses: At 1 January 2010 123,070 2,707,356 1,367,583 Depreciation charge for the year Impairment (Note 8) Disposals Transfers,re-classifica-tions and other changes (i) At 31 December 2010 Depreciation charge for the year Impairment (Note 8) Disposals Transfers,re-classifica-tions and other changes (i) At 31 December 2011 Net book value: At 1 January 2010 At 31 December 2010 At 31 December 2011

Annual Report – 2011

39,510

702,017

326,954

84,428

-

129,766

64,128

1,346,803

(1,001)

(120,486)

(13,956)

(28,388)

-

(19,048)

3,414 (90,406)

3,414 (273,285)

1,004

(27,774)

(71,464)

2,844

-

(31,614)

127,004

-

162,583

3,261,113

1,609,117

240,103

-

526,155

534,197

6,333,268

42,614

1,056,608

352,221

69,656

-

106,436

95,139

1,722,674

-

(234,828)

(290,711)

(259)

-

(29,438)

12,476 (24,329)

12,476 (579,565)

(1)

(80,713)

93,162

(517)

-

20,424

(32,355)

-

205,196

4,002,180

1,763,789

308,983

-

623,577

585,128

7,488,853

649,054

2,607,495

1,114,862

768,373

104,004

224,006

881,237

6,349,031

659,878

2,531,743

1,071,932

1,034,361

106,509

203,884

665,846

6,274,153

718,399

2,826,947

1,061,805

1,151,209

106,511

248,622

981,380

7,094,873

83

Consolidated Financial Statements

(i) Transfers, reclassifications and other changes in 2011 include the change in provision for decommissioning costs in amount of UAH 31,471 thousand as a result of changes in estimates (i.e. discount rate, inflation rate and the cost of dismantling).

Please refer to Note 6 for further details.

(ii) Temporarily dismantled equipment is continued to be depreciated over the estimated remaining useful life.

11. Intangible assets The movement of intangible assets is as follows: Licenses

Network and billing Total software

Cost: At 1 January 2010

411,746

2,564,446

2,976,192

Additions Disposals

1,510 -

326,369 (38,012)

327,879 (38,012)

At 31 December 2010

413,256

2,852,803

3,266,059

Additions Disposals

18,848 (114,003)

282,432 (16,625)

301,280 (130,628)

At 31 December 2011

318,101

3,118,610

3,436,711

Accumulated amortisation and impairment losses: At 1 January 2010

197,199

1,698,427

1,895,626

Amortisation charge for the year Disposals

42,734 -

391,932 (35,094)

434,666 (35,094)

At 31 December 2010

239,933

2,055,265

2,295,198

Amortisation charge for the year Disposals

37,085 (113,317)

349,749 (15,504)

386,834 (128,821)

At 31 December 2011

163,701

2,389,510

2,553,211

Net book value: At 1 January 2010 At 31 December 2010 At 31 December 2011

214,547 173,323 154,400

866,019 797,538 729,100

1,080,566 970,861 883,500

84

Annual Report – 2011

Consolidated Financial Statements

The Group’s major licenses as at 31 December are as follows: License #

Coverage

N/A

National

N/A

National

АА № 009503

National

ЛВ № 593094

National

АВ № 593093

National

АГ № 506983

International

АГ № 506984

Inter city

АГ № 506986

City

N/A

National

1800 MHz (GSM) frequencies usage licenses 900 MHz (GSM) frequencies usage licenses 900 MHz (GSM) and 1800 MHz (GSM) cellular license 900 MHz (GSM) cellular license 1800 MHz (GSM) cellular license International communication Inter city communication Fixed city communication Other licenses

(i) 1800 MHz (GSM) frequencies usage licenses comprise a number of licenses that were acquired in the period from February 2001 to January 2007. The validity period of such licenses varies from 10 to 15 years. (ii) 900 MHz (GSM) frequencies usage licenses comprise a number of licenses that were acquired in the period from June 1999 to October 2008. The validity period of such licenses varies from 10 to 15 years.

Annual Report – 2011

Acquisition date

License

Net book value Net book value Expiration date as at 31 Deas at 31 December 2011 cember 2010

(i)

67,719

78,118

(ii)

15,269

18,519

Apr-01

Oct-11

-

6,756

Oct-11

Oct-26

9,078

-

Oct-11

Oct-26

9,078

-

Aug-04

Aug-19

4,588

5,187

Aug-04

Aug-19

4,684

5,295

Aug-10

Aug-15

1,010

1,285

Mar-01

Apr-26

42,974 154,400

58,163 173,323

In October 2011, the Company’s 900 MHz (GSM) and 1800 MHz (GSM) cellular licenses, which were granted in 2001, were expired. At the same time the Company acquired new 900 MHz (GSM) and 1800 MHz (GSM) cellular licenses for operation in Ukraine using GSM standard for the next 15 years.

85

Consolidated Financial Statements

12. Other non-current assets Other non-current assets as at 31 December are as follows:

Prepayments for property, plant and equipment Prepayments for intangible assets Other non-current assets

2011

2010

37 668 558 6 399

30 047 9 840 4 606

44 625

44 493

13. Trade and other receivables Trade and other receivables consist of the following as at 31 December: 2011

2010

Trade receivables - interconnection and access to network Trade receivables - subscribers Trade receivables - roaming Trade receivables - dealers for prepaid cards and packages Interest receivable Trade receivables - dealers for post-paid subscribers’ advances Other receivables

243 429 108 246 101 844 90 150 4 760 568 16 941 565 938

141 389 102 590 85 361 35 630 7 933 168 21 545 394 616

Allowance for impairment

(55 551)

(74 063)

510 387

320 553

Trade and other receivables, net of allowance for impairment as at 31 December are denominated in the following currencies:

UAH EUR USD

2011

2010

328 849 114 318 67 220

160 135 103 463 56 955

510 387

320 553

As at 31 December 2011 and 2010 trade and other receivables are non-interest bearing and are settled in the normal course of business.

86

Annual Report – 2011

Consolidated Financial Statements

14. Prepayments Prepayments as at 31 December are denominated in the following currencies:

UAH EUR USD RUR

2011

2010

110 122 389 348 12

74 597 215 69 21

110 871

74 902

15. Reconciliation of allowance accounts The reconciliation of changes in allowance accounts is as follows:

As at 1 January 2010

Trade and other receivables 76,854

Charge for the year Utilised Unused amounts reversed

21,929 (23,680) (1,040)

31 -

21,960 (23,680) (1,040)

As at 31 December 2010

74,063

547

74,610

Charge for the year Utilised Unused amounts reversed

8,353 (17,940) (8,925)

3 (465) (12)

8,356 (18,405) (8,937)

As at 31 December 2011

55,551

73

55,624

Prepayments

Total

516

77,370

In 2011 reversal of doubtful debt allowance in amount of UAH 581 thousand is included in other income (2010: bad debt expenses of UAH 20,920 thousand were recognised in other expenses, please refer to Note 8).

Annual Report – 2011

87

Consolidated Financial Statements

16. Deferred expenses As at 31 December deferred expenses consist of the following: Deferred connection costs Deferred costs of start packages and scratch-cards

(i) (ii)

(i) As at 31 December 2011 and 2010 deferred connection costs mainly consisted of costs of start packages and dealers’ bonuses for connection of new subscribers, limited to the amount of deferred connection fees.

2011 90 789 15 422

2010 80 928 11 655

106 211

92 583

(ii) Deferred costs of start packages and scratchcards represent costs of start packages and scratch-cards sold to dealers, but not yet activated by subscribers.

The movement in deferred connection costs is as follows: 2011

2010

At 1 January

80 928

68 052

Deferred during the year Released to profit and loss

50 782 (40 921)

43 907 (31 031)

At 31 December

90 789

80 928

88

Annual Report – 2011

Consolidated Financial Statements

17. Cash and cash equivalents Cash and cash equivalents consist of the following as at 31 December:

Short-term deposits Cash at banks Cash on hand

2011

2010

681 995 210 787 24

1 460 848 134 182 26

892 806

1 595 056

As at 31 December cash on hand and cash at banks are denominated in the following currencies:

UAH EUR USD

In 2011 and 2010 cash at current bank accounts earned interest at fixed rates varying from 0.25 to 2.00 % per annum. 

2011

2010

205 128 3 156 2 527

124 437 5 095 4 676

210 811

134 208

As at 31 December short-term deposits split by contractual maturity, currency and interest rate earned is as follows:

Currency UAH

Maturity date 0-30 days 31-60 days 61-92 days

Interest rate p.a.

8-25% 8-21% 10-22%

2011 110,000 140,000 145,000 395,000

2010 125,000 745,035 330,000 1,200,035

USD

31-60 days 61-92 days

5.5-6.5% 5.5-7%

175,776 175,776

54,936 123,406 178,342

EUR

31-60 days 61-92 days

3-10% 4-6.75%

111,219 111,219

82,471 82,471

681,995

1,460,848

Annual Report – 2011

89

Consolidated Financial Statements

18. Equity Share capital As at 31 December 2011 the authorised and fully paid share capital comprised 17,687,389 ordinary shares (2010: 10,687,389 ordinary shares) at a par value of UAH 50 each. The carrying value of share capital differs from par by UAH 122,130 thousand being the currency translation difference, accumulated till 1 May 2004 when the Company changed its functional currency from US dollar to Ukrainian Hryvnia.

Treasury shares and accession of Storm LLC On 19 October 2010 the Company’s shareholders approved the restructuring plan whereby Storm LLC, one of the Company's shareholders, shall be merged into Kyivstar and cease to exist as a legal entity.

On 21 October 2010 Kyivstar and Storm LLC entered into the accession agreement requiring Storm LLC to transfer to Kyivstar all its assets and liabilities, including the Company's shares it owned. At the same time, Kyivstar issued written commitments to VimpelCom Holdings B. V. and VimpelCom Ltd. to issue additional 7,000,000 of shares with total nominal value of UAH 350,000 thousand.

90

Pursuant to the abovementioned resolutions, on 18 January 2011 the Company obtained all property rights and liabilities of Storm LLC, including (i) treasury shares of Kyivstar with carrying value of UAH 370,398 thousand; (ii) retained earnings of Storm LLC in amount of UAH 20,880 thousand; (iii) cash in amount of UAH 590 thousand; (iv) property, plant and equipment in amount of UAH 189 thousand; (v) trade and other receivables in amount of UAH 42 thousand.

On 07 June 2011 the Company issued 7,000,000 of additional shares with total nominal value of UAH 350,000 thousand. These additional shares were allocated between Storm’s shareholders (VimpelCom Holdings B.V. (Netherlands) and VimpelCom Ltd. (Bermuda)) on a pro rata basis to their interests in Storm LLC. Dividends declared In 2011, the Company has declared dividends in total amount of UAH 3,846,877 thousand (UAH 295 per share) (2010: UAH 765,216 thousand (UAH 71.60 per share)). As at 31 December 2011 and 2010 dividends declared were fully paid by the Company to its shareholders in cash, net of withholding tax.

Annual Report – 2011

Consolidated Financial Statements

19. Interest-bearing loans and borrowings Current interest-bearing loans and borrowings consist of the following as at 31 December:

Interest-bearing borrowings from Commerzbank AG Bank, (USD-denominated, at 7.75% p. a., matures on 27 April 2012) Interest accrued

2011

2010

51 223 694

51 043 692

51 917

51 735

On 23 November 2010, the Company entered into the agreement to provide reimbursable interestfree financial aid of UAH 4,000,000 thousand to the entity under common control. As required by the terms of the loan agreement, for this type of transactions the Company should have provided Commerzbank AG Bank (‘the Bank‘) with a fairness opinion from an accounting, appraisal or investment banking firm of international standing.

However, this requirement was not met. Such noncompliance with the terms of the loan agreement gives the Bank the right, by notice to the Company, to demand at any time the accelerated or immediate repayment of the loan and accrued interest thereon. Accordingly, the loan was classified as current liability as at 31 December 2010 as the Company did not have an unconditional right to defer its settlement for at least twelve months.

20. Employee benefit liability

pension age and retire from the Group companies.

In addition, the Group pays jubilee benefits to its employees.

The Group, pursuant to the terms of personnel motivation programme, has established post-employment defined benefit pension plan, covering substantially all of its employees, who achieve regular

Employee benefit liability as at 31 December consists of the following: 2011

2010

Post-employment defined benefit liability Jubilee payments

30,547 19,337 49,884

27,935 16,893 44,828

Less: Current portion

(9,011)

(7,566)

Employee benefit liability – non-current portion

40,873

37,262

Annual Report – 2011

91

Consolidated Financial Statements

Post-employment defined employee benefits As at 31 December 2011 3,775 employees (2010: 3,675 employees) were entitled to benefits under post-employment defined employee benefit plan.

Changes in the present value of the defined benefit obligation as at 31 December are as follows: 2011

2010

Defined benefit obligation at 1 January Interest cost Current service cost Benefits paid Gains on curtailment Actuarial gain for the year

15,321 784 2,800 (25) (367) (569)

40,340 3,275 2,407 (214) (30,487)

Defined benefit obligation at 31 December

17,944

15,321

Unrecognised actuarial gain

12,603

12,614

Defined benefit liability at 31 December

30,547

27,935

6,090 24,457

4,650 23,285

2011

2010

Interest cost Current service cost Net actuarial (gains)/losses recognised in the year Gains on curtailment

784 2,800 (580) (367)

3,275 2,407 616 -

Total expenses recognised in the statement of comprehensive income

2,637

6,298

Classified as Defined benefit liability – current portion Defined benefit liability – non-current

Benefit expense

Net benefit expense is included into salaries and personnel costs, except for interest cost charged to finance costs.

Benefit liability

2011

2010

Net liability at 1 January Benefits expense Benefits paid

27,935 2,637 (25)

21,851 6,298 (214)

Net liability at 31 December

30,547

27,935

Jubilee payments As at 31 December 2011 3,745 employees are entitled to jubilee benefits (2010: 3,496 employees).

Present value of unfunded obligations Classified as Benefit liability - current portion Benefit liability - non-current

92

2011

2010

19,337

16,893

2,921 16,416

2,916 13,977

Annual Report – 2011

Consolidated Financial Statements

The principal assumptions used in determining the post-employment defined employee benefits are shown below: 2011

2010

Discount rate Future benefit increases

5.12% 5.92%

8.12% 6.99%

Defined benefit obligation at 31 December Experience adjustment

2011 17,944 (2,534)

2010 15,321 (5,226)

2009 40,340 (1,230)

2008 12,634 (549)

2007 13,856 965

21. Deferred revenue As at 31 December deferred revenue consists of the following:

Deferred revenue - dealers and subscribers Deferred connection and one-time subscription fees Customer loyalty programs

(i) Deferred revenue – dealers - represents deferred revenue from unused time on prepaid cards, which were sold to dealers, but have not yet been activated by subscribers. Deferred revenue – dealers is recognised in the statement of financial position until the prepaid cards have been activated by subscribers or the prepaid card has expired. Deferred revenue – subscribers - mainly consists of deferred revenue from unused time on prepaid cards, which were activated by subscribers. Deferred revenue – subscribers is recognised as revenue in the statement of comprehensive income on the basis of actual airtime usage by subscribers.

(i) (ii) (iii)

2011

2010

542,603 161,248 38,036

548,969 154,006 33,684

741,887

736,659

(ii) Deferred connection and one-time subscription fees – mainly consist of fees for initial connection to the network and one-off payments for subscription to additional services. Deferred connection and subscription fees are recognised in the statement of comprehensive income over the periods that the fees are earned. (iii) Customer loyalty programs – represent various loyalty programs, established by the Company, whereby enrolled mobile and FTTB subscribers are eligible for bonuses, which may then be used for discounts on future mobile calls, additional FTTB internet services or purchase of mobile handsets.

The movements in deferred connection and one-time subscription fees are as follows:

2011

2010

At 1 January

154,006

134,231

Deferred during the year Released to profit and loss

183,145 (175,903)

102,446 (82,671)

At 31 December

161,248

154,006

Annual Report – 2011

93

Consolidated Financial Statements

22. Provisions The movement in provisions is as follows: Decommissioning

Legal cases

Potential penalties

Total

At 1 January 2010

-

5,382

9,284

14,666

Arising during the year Utilised Unused amounts reversed

52,727 -

6,708 -

(8,388)

59,435 (8,388)

At 31 December 2010

52,727

12,090

896

65,713

Arising during the year Utilised Unused amounts reversed Change in estimates Discount rate adjustment

5,715 (758) (31,471) 3,459

448 (10,866) -

95 (896) -

6,258 (758) (11,762) (31,471) 3,459

At 31 December 2011

29,672

1,672

95

31,439

At 31 December 2010 Current Non-current

52,727 52,727

12,090 12,090 -

896 896 -

65,713 12,986 52,727

At 31 December 2011 Current Non-current

29,672 29,672

1,672 1,672 -

95 95 -

31,439 1,767 29,672

Provision for legal cases As at 31 December 2011 the Company recognised UAH 1,672 thousand of provision regarding legal proceeding initiated by its counterparty in respect of services provided by the counterparty, but not accepted by the Company. The management believes that the risk of losing this case is probable.

Provision for potential penalties As at 31 December 2010 the Group recognised provision in respect of potential penalties, which might have arisen on VAT paid to certain suppliers at 20% rate on purchase of assets and services in amount

94

of UAH 896 thousand. The Group has revised its assessment of risk exposure based on information available as at 31 December 2011 and reduced the provision to UAH 95 thousand.

Decommissioning liabilities As at 31 December 2011 the Group recognised UAH 29,672 thousand (2010: UAH 52,727 thousand) of provision for asset retirement obligation in respect of future dismantling costs related to its network equipment installed on leased sites. Please refer to Note 6 for additional information in respect of changes in estimates made by the Group.

Annual Report – 2011

Consolidated Financial Statements

23. Taxes payable, other than income tax Taxes payable, other than income tax consist of the following as at 31 December:

VAT payable Pension fund duty for mobile services Salary tax payable Frequency fee Miscellaneous other taxes

2011

2010

62,122 25,210 8,255 31 127

110,287 24,133 11,878 663

95,745

146,961

2011

2010

337,641 238,844 82,832 46,570 35,803 27,603 25,262 21,510 17,969 16,089 13,654 12,047 28,185

53,413 206,053 70,189 13,824 29,336 3,043 26,280 21,490 22,700 14,726 7,518 11,716

904,009

480,288

24. Trade and other payables As at 31 December trade and other payables consist of the following:

Equipment and construction works Roaming Technical support services Advertising and promotion Interconnection Software Content services Due to employees Inventory Dealers Professional fees Rent Other payables

  As at 31 December trade and other payables are denominated in the following currencies:

UAH EUR USD RUR

2011

2010

631,779 182,215 86,732 3,283

230,236 153,948 94,068 2,036

904,009

480,288

As at 31 December 2010 and 2009 trade and other payables are non-interest bearing and settled in the normal course of business.

Annual Report – 2011

95

Consolidated Financial Statements

25. Advances received As at 31 December advances received consist of the following:

Advances received from subscribers Advances received from partners Advances received from dealers Other advances received

2011

2010

120,001 26,940 1,852 17

106,657 23,407 5,650 493

148,810

136,207

As at 31 December advances received are denominated in the following currencies:

UAH USD

2011

2010

148,554 256

135,729 478

148,810

136,207

2011

2010

132,500 44,468 270 207

123,219 37,879 347 20

177,445

161,465

26. Other current liabilities As at 31 December other current liabilities consist of the following:

Bonuses accrued Accrual for unused vacations Accruals for future dealers' reimbursement Other

As at 31 December 2011 and 2010 other current liabilities are non-interest bearing and denominated in UAH.

96

Annual Report – 2011

Consolidated Financial Statements

27. Related party disclosure The Group’s transactions with its related parties for the years ended 31 December are as follows: Salaries and personnel costs

Other operating expenses

Finance income

Purchase of property, plant and equipment and intangible assets

2011

Revenue

Cost of materials and traffic charges

VimpelCom Ltd. Entities under common control Other related parties Key management personnel of the Group

-

-

-

22,439

-

-

892,437

282,889

-

64,518

719,737

782,701

86,897

10,912

-

1,369

56,875

-

-

-

67,503

-

-

-

979,334

293,801

67,503

88,326

776,612

782,701

Revenue

Cost of materials and traffic charges

Salaries and personnel costs

Other operating expenses

Finance income

Purchase of property, plant and equipment

177,436

-

488

76,790

36,199

360,152

-

79,006

69,215

-

-

75,712

-

-

-

537,588

75,712

79,494

146,005

36,199

2010

Entities under common 615,448 control Other related parties 341,883 Key management personnel of the Group 957,331  

The outstanding balances from related parties as at 31 December were as follows: 2011 Entities under common control Other related parties

2010 Entities under common control Other related parties

Annual Report – 2011

Trade and other receivables

Cash and cash equivalents

Other current financial assets

Total

165,969

-

2,627,116

2,793,085

17,580

220,154

-

237,734

183,549

220,154

2,627,116

3,030,819

Trade and other receivables

Prepayments

Cash and cash equivalents

Other current financial assets

Total

50,778

416

-

3,349,309

3,400,503

11,846

3,435

368,850

-

384,131

62,624

3,851

368,850

3,349,309

3,784,634

97

Consolidated Financial Statements

The outstanding amounts due to related parties as at 31 December are as follows: 2011 VimpelCom Ltd. Entities under common control Other related parties

6,965 98,192 6,167 111,324 2010

Entities under common control Other related parties

80,497 24,960 105,457

Terms and conditions of transactions with related parties Outstanding balances on settlements with related parties at the year-end are unsecured, interest free and settlement occurs in cash. There have been no financial guarantees received from any related party. For the years ended 31 December 2011 and 2010, the Group has not recorded any impairment of receivables as regards to the amounts owed by related parties.

Revenue and trade receivables In 2011 the Group sold to domestic and overseas telecom operators, being the Group’s related parties, roaming services, access to network, interconnection and rental services in total amount of UAH 979,334 thousand (2010: UAH 957,331 thousand).

Trade receivables as at 31 December 2011 and 2010 due from related parties are non-interest bearing, unsecured and are settled in the normal course of business.

Cost of materials and traffic charges and trade payables Cost of materials and traffic charges from related parties include roaming and interconnection services, provided by entities under common control and other related parties.

Trade payables to entities under common control and other related parties comprise amounts due for interconnection and roaming services. Trade payables to related parties are non-interest bearing and are settled in the normal course of business.

Other operating expenses Other operating expenses include consulting services provided by entities under common control and other related parties.

98

Finance income In 2011 finance income included UAH 56,875 thousand of interest on short-term deposits placed in Ukrainian bank, which is the Company’s other related party (2010: UAH 69,215 thousand). In addition, in 2011 finance income included UAH 719,737 thousand of unwinding of discount on interest-free financial aid provided to the entity under common control (2010: UAH 76,790 thousand).

Purchase of property, plant and equipment In 2011 the Group acquired fiber-to–the-building (FTTB) equipment from entity under common control for cash consideration of UAH 336,259 thousand (2010: 36,199 thousand), other property, plant and equipment for cash consideration of UAH 443,992 thousand (2010: nil) and intangible assets in amount of UAH 2,450 thousand (2010: nil).

Commitments to purchases from related parties As at 31 December 2011 the Group had outstanding commitments in respect of purchase of property, plant and equipment and construction services from entities under common control in amount of UAH 8,032 thousand (2010: nil) and from other related parties in amount of UAH 2,404 thousand (2010: UAH 2,986 thousand).

Other current financial assets On 23 November 2010 the Company provided short-term reimbursable interest-free financial aid (the loan) of UAH 4,000,000 thousand to the entity under common control. In 2011, the entity under common control repaid UAH 901,000 thousand of this interest-free financial aid according to the agreement terms. On 14 November 2011 the Company signed an amendment to the loan agreement, whereby maturity of the loan was prolonged to 31 December 2012.Therewith, the difference between fair value and nominal amount of the abovementioned interest-free financial aid, net of deferred tax effect, was charged directly to equity as distributions to shareholders.

Annual Report – 2011

Consolidated Financial Statements

On 9 December 2011 the Company provided the abovementioned entity under common control with the new tranche of reimbursable interestfree financial aid of UAH 105,000 thousand. At initial recognition this facility was stated at fair value of UAH 86,494 thousand. Loss on initial recognition at fair value, net of deferred tax effect,

was charged directly to equity as distributions to shareholders.

Cash and cash equivalents As at 31 December 2011 and 2010 some of the shortterm deposits and cash in bank were placed with Ukrainian bank, which is the Company’s other related party.

As at 31 December the split of the short-term deposits placed with related party bank by contractual maturity and interest rate earned is as follows:

Currency

Maturity date

Interest rate

2011

2010

UAH USD EUR

1-3 months 1-3 months 1-3 months

21-22% 7% 4.00-6.75%

50,000 36,354 62,818

365,000 -

149,172

365,000

Compensation to management personnel As at 31 December 2011 key management personnel consisted of 46 top executives of the Group (2010: 48).

For the years ended 31 December total compensation to key management personnel included in salaries and personnel costs comprises: 2011

2010

Short-term employee benefits Long-term employee benefits Share-based payment

65,974 362 1,167

75,474 238 -

Total compensation to key management personnel

67,503

75,712

28. Commitments and contingencies (i) Tax risks Ukrainian legislation and regulations regarding taxation and other operational matters, including currency exchange control and custom regulations, continue to evolve. Legislation and regulations are not always clearly written and are subject to varying interpretations by local, regional and national authorities, and other governmental bodies.

Instances of inconsistent interpretations are not unusual.

Management believes that the Group has complied with all regulations, and paid and accrued all taxes that are applicable. Where the risk of outflow of resources is probable, the Group has accrued provisions based on management’s best estimate.

The Group identified certain possible tax contingencies, which are not required to be accrued in the financial statements. Such possible tax contingencies could materialise and require the Group to pay additional amounts of tax. As at 31 December 2011 the Group estimates such tax contingencies

Annual Report – 2011

to be equal UAH 145,471 thousand (2010: UAH 45,448 thousand).

(ii) Legal matters In the ordinary course of business, the Group is subject to legal actions and complaints. As at 31 December 2011 the Group’s exposure to presented third parties’ claims is UAH 2,808 thousand (2010: UAH 11,993 thousand).

Management believes that the ultimate liability, arising from unasserted claims and complaints, if any, will not have a material adverse effect on the Group’s financial position or the results of its future operations and is less than probable, accordingly no corresponding accrual was provided in these consolidated financial statements.

(iii) Other capital commitments As at 31 December 2011 the Group had outstanding commitments in respect of purchase and construction of property, plant and equipment in

99

Consolidated Financial Statements

amount of UAH 406,600 thousand (2010: UAH 209,635 thousand).

As at 31 December 2011 the Group had outstanding commitments in respect of purchasing intangible assets in amount of UAH 69,183 thousand (2010: UAH 49,577 thousand).

(iv) Lease commitments Operating lease – the Group as a lessee The Group has entered into certain leases of land and buildings. These leases have an average life from one to five years with a renewal option included in the contracts.

Future minimum rentals payable under non-cancellable operating lease agreements as at 31 December are as follows:

Within one year After one year but not more than five years More than five years

2011

2010

214,346 179,710 96,003

165,414 144,823 153,197

490,059

463,434

(v) Commitment for additional issue of shares In 2011 the Company's shareholders approved the additional issue of 55,000 shares with a nominal value of UAH 50 (2010: 7,000,000 shares), which were not registered and paid by the reporting date.

29. Fair value of financial instruments Fair values As at 31 December 2011 and 2010 the carrying value of the Group’s financial instruments approximates their fair values.

30. Financial instruments and risk management The Group’s principal financial instruments comprise interest-bearing loans and borrowings, cash and cash equivalents and other current financial assets. The Group has various other financial instruments, such as trade payables and trade receivables, which arise directly from its operations.

It is the Group’s policy not to trade with financial instruments. The Group is exposed to market risk, credit risk and liquidity risk.

100

The fair value of financial assets and liabilities with a maturity of less than one year, less any estimated credit adjustments, approximate their carrying amounts due to the short-term maturities of these instruments. However, when the effect of time value of money is material, the fair value of short-term financial instruments is estimated by discounting of the future contractual cash flows related to those financial instruments at current market interest rates available to the Group for similar financial instruments.

The Group’s overall risk management program focuses on the unpredictability and inefficiency of the Ukrainian financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group’s senior management oversees the management of these risks and financial risk-taking activities are governed by appropriate policies and procedures so that financial risks are identified, measured and managed in accordance with the Group policies.

The policies for managing each of these risks are summarised below.

Annual Report – 2011

Consolidated Financial Statements

Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, currency risk and other price risk. The Group does not have significant exposure to interest rate risk as it normally borrows at fixed rates. Neither it has exposure to other price risk.

Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the Group’s operating activities (when the Group’s trade receivables and trade payables are denominated in foreign currencies) and financing activities (when interest-bearing borrowings are denominated in foreign currencies).

The exchange rates for foreign currencies, in which the Group’s financial assets and liabilities were denominated, against Ukrainian hryvnia, as declared by the National Bank of Ukraine as at the dates and periods stated, are as follows: 1 January 2010 Average for 2010 31 December 2010 Average for 2011 31 December 2011

USD 7.9850 7.9356 7.9617 7.9676 7.9898

Euro (‘EUR’) 11.4489 10.5329 10.5731 11.0918 10.2981

Russian ruble (‘RUR’) 0.2640 0.2614 0.2612 0.2717 0.2495

The following tables demonstrate the sensitivity to a reasonably possible change in the corresponding exchange rates, with all other variables held constant, of the Group’s profit before tax (due to changes in the fair value of monetary assets and liabilities).

The sensitivity analyses have been prepared on the basis that the proportion of financial instruments in foreign currencies are all constant at 31 December 2011 and 2010.

2011

Increase/ (decrease) in basis points

Increase/ (decrease) of profit before tax

Change in USD exchange rate Change in EUR exchange rate Change in RUR exchange rate

+23.25% +27.20% +26.95%

31,528 12,967 (975)

Change in USD exchange rate Change in EUR exchange rate Change in RUR exchange rate

-23.25% -27.20% -26.95%

(31,528) (12,967) 975

2010

Increase/ (decrease) in basis points

Increase/ (decrease) of profit before tax

Change in USD exchange rate Change in EUR exchange rate Change in RUR exchange rate

+29.50% +27.90% +29.70%

27,780 10,346 (605)

Change in USD exchange rate Change in EUR exchange rate Change in RUR exchange rate

-29.50% -27.90% -29.70%

(27,780) (10,346) 605

Liquidity risk The Group analyses the aging of its assets and the maturity of its liabilities and plans its liquidity depending on the expected repayment of various instruments. The Group’s short-term and long-term liquidity needs are funded largely through cash flow from operating activities.

Annual Report – 2011

101

Consolidated Financial Statements

The tables below show the maturity profile of the Group’s financial liabilities as at 31 December based on contractual undiscounted payments.

2011

On demand

Less than 3 months

3 to 6 months

6 to 12 months

Total

Interest-bearing loans and 51,223 borrowings Interest accrued 694 Trade and other payables -

-

-

-

51,223

855,693

20,424

6,382

694 882,499

51,917

855,693

20,424

6,382

934,416

On demand

Less than 3 months

3 to 6 months

6 to 12 months

Total

2010

Interest-bearing loans and 51,043 borrowings Interest accrued 692 Trade and other payables -

-

-

-

51,043

462,271

15,694

2,323

692 480,288

51,735

462,271

15,694

2,323

532,023

Credit risk Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss.

The Group is exposed to credit risk from its operating activities (primarily for trade receivables) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments.

Financial instruments, which potentially expose the Group to significant concentrations of credit risk, consist principally of cash in bank, short-term deposits, other current financial assets and trade and other receivables.

The Group’s maximum credit risk exposure at 31 December comprises:

Cash and cash equivalents Trade and other receivables Other current financial assets

The Group’s cash is primarily held with major reputable banks located in Ukraine.

Accounts receivable are presented net of allowances. The Group does not require collateral in respect of trade receivables. Concentrations of credit risk with respect to trade receivables are limited by the fact that the Company’s customer base contains significant number of small customers, which are considered unrelated.

102

2011

2010

892,806 510,387 2,627,116

1,595,056 320,553 3,349,309

4,030,309

5,264,918

Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed for all customers requiring credit over a certain amount. Credit risk arising from financial transactions is reduced through diversification, through accepting counterparties with high credit ratings only and through defining limits on aggregated credit exposure towards each counterparty. The Group’s credit risk exposure is monitored and analysed on a case-by-case basis, and the Group’s management believes that credit risk is appropriately reflected in impairment allowances recognised against assets.

Annual Report – 2011

Consolidated Financial Statements

As at 31 December 2011 and 2010, the ageing of the Group’s trade and other receivables and other current financial assets is as follows:

Total

2011 2010

3,137,503 3,669,862

Past due, but not impaired Neither past Less than 30 More than due, nor 30-60 days 60-90 days 90-120 days days 120 days impaired 3,081,733 3,645,030

Capital management The Group considers shareholders’ equity as primary capital source. Also the Group can incur debt either through shareholder loans or through external funding. The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other

41,233 6,087

2,417 4,828

1,385 2,479

152 2,386

10,583 9,052

stakeholders as well as to provide financing of its operating requirements, capital expenditures and sustain the Group’s development strategy.

Management monitors on a regular basis the Group’s capital structure and may adjust its capital management policies and targets following changes in its operating environment, market sentiment or its development strategy.

31. Earnings per share Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

Basic earnings per share for the years ended 31 December is as follows:

Net profit attributable to ordinary equity holders of the parent for basic earnings Weighted average number of ordinary shares for basic earnings per share Basic earnings per share, UAH

2011

2010

4,267,530

3,677,880

10,210,018

10,687,389

417.97

344.13

As at 31 December 2011 and 2010 there are no potential ordinary shares. On 7 June 2011, the State Securities and Exchange Commission of Ukraine registered issue of 7,000,000 shares made by the Company pursuant to the resolutions of the Company’s shareholders. Please refer to Note 18 for details.

32. Events after the reporting period (i) Additional share issue On 22 November 2011, the Company’s General Meeting of Shareholders has approved additional issue of 55,000 shares with nominal value of UAH 50 each. In February 2012, these shares were placed with the existing shareholder - VimpelCom Holdings B. V. in accordance with para. 22 of Law of Ukraine ’On Joint Stock Companies’ at their market price of UAH 1,910.69 per share, determined by an independent appraiser appointed by the Compa-

Annual Report – 2011

ny’s Board. In return for these shares, VimpelCom Holdings B. V. has invested into the Company USD 13,152,928.35, of which USD 13,152,210.72 were received as payment for 54,997 ordinary shares, which comprised UAH 105,082,217.99, based on the NBU exchange rate at the date of payment (7 February 2012), and USD 717.63 were received as payment for 3 ordinary shares, which comprised UAH 5,732.07, based on the NBU exchange rate at the date of payment (17 February 2012).

As a result of the additional issue of shares, the Company’s share capital was increased by UAH 2,750 thousand, while share premium was increased by UAH 102,338 thousand.

103

For notes

Consolidated Financial Statements

Annual Report – 2011

105

Consolidated Financial Statements

106

Annual Report – 2011