REG - IG Seismic Services - FY2014 Financial Report <Origin Href="QuoteRef">IGSSq.L</Origin> - Part 4

IG Seismic ServicesAnnouncement

15/07/2015 15:13

- Part 4: For the preceding part double click  ID:nRSc6525Lc 

potential losses that could arise from
adverse changes in market conditions. 
 
Liquidity risk 
 
Liquidity risk is the risk that the Group will encounter difficulty in raising
funds to meet commitments associated with its financial liabilities. Liquidity
requirements are monitored on a regular basis and management ensures that
sufficient funds are available to meet any commitments as they arise. 
 
The following table shows the undiscounted contractual maturities of
liabilities as at 31 December 2014: 
 
                         0-6months   7-12months  2 to 5 years  Over 5 years  Total       
 Bank loans              4,057,479   3,425,495   4,968,264     −             12,451,238  
 Bonds                   −           −           3,000,000     −             3,000,000   
 Interest payable        966,151     750,003     2,404,398     −             4,120,552   
 Notes payable           395,788     645,518     −             −             1,041,306   
 Lease liabilities       1,634       849         4,589         −             7,072       
 Trade accounts payable  4,203,236   78,360      626,878       −             4,908,474   
 Payables to employees   991,684     −           −             −             991,684     
 Other payables          98,344      −           −             −             98,344      
 Total                   10,714,316  4,900,225   11,004,129    −             26,618,670  
 
 
32.          Financial instruments (continued) 
 
Liquidity risk (continued) 
 
The following table shows the undiscounted contractual maturities of
liabilities as at 31 December 2013: 
 
                         0-6months  7-12months  2 to 5 years  Over 5 years  Total       
 Bank loans              279,502    1,797,609   7,366,469     −             9,443,580   
 Bonds                   −          −           3,000,000     −             3,000,000   
 Interest payable        637,270    466,227     1,479,065     −             2,582,562   
 Notes payable           230,250    230,250     605,785       −             1,066,285   
 Lease liabilities       2,029      2,029       1,931         −             5,989       
 Trade accounts payable  3,145,162  −           −             −             3,145,162   
 Payables to employees   843,843    −           −             −             843,843     
 Other payables          73,899     −           −             −             73,899      
 Total                   5,211,955  2,496,115   12,453,250    −             20,161,320  
 
 
Foreign currency risk 
 
The Group is not engaged in hedging activity to mitigate its foreign currency
risk. The Group limits foreign currency risk by monitoring changes in exchange
rates in the currencies in which its loans and borrowings are denominated. 
 
The Group has the following USD-denominated financial assets and liabilities: 
 
                            (in thousands of US dollars)  
                            As at 31 December             
                            2014                          2013      
 Accounts receivable        37                            1,300     
 Cash and cash equivalents  4,712                         354       
 Promissory notes           (13,426)                      (23,542)  
 Accounts payable           (6,799)                       (28,417)  
 
 
As at 31 December 2014 and 2013 the Group has the following EUR-denominated
financial assets and liabilities: 
 
                            (in thousands of EUR)  
                            As at 31 December      
                            2014                   2013      
 Accounts receivable        2,006                  −         
 Cash and cash equivalents  26                     39        
 Loans and borrowings       (8,941)                (11,913)  
 Accounts payable           (11,602)               −         
 
 
Sensitivity analysis 
 
The following demonstrates the sensitivity to a reasonably possible change in
the US dollar exchange rate, 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). 
 
As at 31 December 2014, it is estimated that a 28.54% strengthening of RUR
against USD, with all other variables held constant, would increase the
Group's profit for the year ended 31 December 2014 by 248,490 (31 December
2013: 10.21% increase by 167,310). 
 
32.       Financial instruments (continued) 
 
Sensitivity analysis (continued) 
 
This analysis has been determined assuming that the change in foreign exchange
rates had occurred at the reporting date and had been applied to the foreign
currency balances to which the Group has significant exposure as stated above,
and that all other variables, in particular interest rates, remain constant. 
 
Respective 28.54% and 20.00% weakening of the RUR against USD at 31 December
2014 and 2013 would have had the opposite effect on the amounts shown above in
the amount of 248,490 and 327,737 respectively, on the basis that all other
variables remain constant. 
 
       Change of    Effect on income/(loss)  
       RUR to USD                            
 2014  '+28.54%     (248,490)                
       -28.54%      248,490                  
 2013  '+20.00%     (327,737)                
       -10.21%      167,310                  
 
 
The following demonstrates the sensitivity to a reasonably possible change in
the EUR exchange rate, 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). 
 
As at 31 December 2014, it is estimated that a 29.58% strengthening of RUR
against EUR, with all other variables held constant, would increase the
Group's profit for the year ended 31 December 2014 by 374,214 (31 December
2013: 8.63% increase by 46,233). This analysis has been determined assuming
that the change in foreign exchange rates had occurred at the reporting date
and had been applied to the foreign currency balances to which the Group has
significant exposure as stated above, and that all other variables, in
particular interest rates, remain constant. 
 
Respective 29.58% and 20.00% weakening of the RUR against EUR at 31 December
2014 and 2013 would have had the opposite effect on the amounts shown above in
the amount of 374,214 and 107,145 respectively, on the basis that all other
variables remain constant. 
 
       Change of    Effect on income/(loss)  
       RUR to EUR                            
 2014  +29.58%      (374,214)                
       -29.58%      374,214                  
 2013  +20.00%      (107,145)                
       -8.63%       46,233                   
 
 
Fair value of financial instruments 
 
The management believes that the fair value of the Group's financial assets
and liabilities approximates their carrying amounts except for bonds. The
difference between fair value and carrying value of Group's rouble-denominated
bonds issued at 10.5% p.a arises due to higher cost of capital, increased
inflation and uncertainty regarding economic growth discussed in Note 33.
Carrying value of bonds as of 31 December 2014 amounted to 2,971,379 while
their fair value amounted to 2,553,901. 
 
32.       Financial instruments (continued) 
 
Capital management 
 
The primary objective of the Group's capital management is to ensure that it
maintains a strong credit rating and healthy capital ratios in order to
maintain an optimal capital structure to reduce cost of capital and to support
its business and maximize shareholder value. 
 
The Group manages its capital structure and makes adjustments to it, in light
of changes in economic conditions. To maintain or adjust the capital
structure, the Group may adjust the dividend payment to shareholders, return
capital to shareholders or issue new shares. The Group's current policy is not
to pay any dividends. 
 
The Group monitors capital using a range of ratios, including gearing ratio,
which is net debt divided by total capital plus net debt. The Group includes
the following within net debt: loans payable, finance lease obligations, less
cash and cash equivalents and other financial instruments easily convertible
to cash. 
 
                                  As at 31 December  
                                  2014               2013        
 Loans and borrowings payable     15,422,617         12,407,421  
 Notes issued                     961,864            1,059,298   
 Finance lease obligations        7,072              5,989       
 Less: cash and cash equivalents  (1,206,691)        (711,396)   
 Net debt                         15,184,862         12,761,312  
                                                                 
 Equity                           8,814,759          10,980,584  
 Capital and net debt             23,999,621         23,741,896  
 Gearing ratio                    0.63               0.54        
 
 
33.       Risks, commitments and contingencies 
 
Operating environment of the Group 
 
In 2014 Russian economy was negatively impacted by a significant drop in crude
oil prices and a significant devaluation of the Russian Rouble, as well as
sanctions imposed on Russia by several countries. In December 2014, the Rouble
interest rates have increased significantly after the Central Bank of Russia
raised its key rate to 17 percent. The combination of the above resulted in
reduced access to capital, a higher cost of capital, increased inflation and
uncertainty regarding economic growth, which could negatively affect the
Group's future financial position, results of operations and business
prospects. As of the date of the issuance of these consolidated financial
statements the key rate of the Central Bank of Russia reduced to 14 percent.
Management believes it is taking appropriate measures to support the
sustainability of the Group's business in the current circumstances. 
 
In March-September 2014, the United States, European Union and other countries
have introduced a series of unilateral restrictive political and economic
actions against the Russian Federation and a number of Russian and Ukrainian
individuals and organizations. These official actions, particularly in the
case of a further escalation, may result in reduction of economic cooperation
between business of before mentioned countries and Russian companies on the
international capital markets, as well as other economic consequences. The
impact of these events on the future results of operations and financial
position of the Company at this time is difficult to determine. 
 
33.       Risks, commitments and contingencies (continued) 
 
Liquidity 
 
The Russian economy is vulnerable to market downturns and economic slowdowns
elsewhere in the world. The global financial crisis has resulted in capital
markets instability, significant deterioration of liquidity in the banking
sector, and tighter credit conditions within Russia. While the Russian
Government has introduced a range of stabilization measures aimed at providing
liquidity and supporting debt refinancing for Russian banks and companies,
there continues to be uncertainty regarding the access to capital and cost of
capital for the Group and its counterparties, which could affect the Group's
financial position, results of operations and business prospects. 
 
While management believes it is taking appropriate measures to support the
sustainability of the Group's business in the current circumstances,
unexpected further deterioration in the areas described above could negatively
affect the Group's results and financial position in a manner not currently
determinable. 
 
Taxation 
 
Legislation and regulations regarding taxation in Russia continue to evolve.
The various legislation and regulations are not always clearly written and
their interpretation is subject to the opinions of the local, regional and
national tax authorities. Instances of inconsistent opinions are not unusual. 
 
The current regime of penalties and interest related to reported and
discovered violations of Russia's laws, decrees and related regulations is
severe. Interest and penalties are levied when an understatement of a tax
liability is discovered. As a result, the amounts of penalties and interest
can be significant in relation to the amounts of unreported taxes. 
 
In Russia tax returns remain open and subject to inspection for a period of up
to three years. The fact that a year has been reviewed does not close that
year, or any tax return applicable to that year, from further review during
the three-year period. 
 
The new Russian transfer pricing legislation, which came into force on 1
January 2012, allows the Russian tax authority to apply transfer pricing
adjustments and impose additional profits tax liabilities in respect of all
"controlled" transactions if the transaction price differs from the market
price. 
 
The list of "controlled" transactions includes transactions performed with
related parties and foreign trade transactions. The adopted Russian transfer
pricing rules have considerably increased the compliance burden for the
taxpayer compared to the transfer pricing rules which were in effect before
2012 due to, inter alia, shifting the burden of proof from the Russian tax
authorities to the taxpayers. Pursuant to the new rules, the taxpayer shall
justify the prices applied for such transactions. These rules are applicable
not only to the transactions taking place in 2012 but also to the prior
transactions with related parties if related income and expenses were
recognized in 2012. The new provisions apply for both foreign trade and
domestic transactions. For domestic transactions the transfer pricing rules
apply only if the amount of all transaction with related party exceeds RUR 3
billion in 2012, RUR 2 billion in 2013 and RUR 1 billion in 2014 and further.
In cases where the domestic transaction resulted in an accrual of additional
tax liabilities for one party, another party could correspondingly adjust its
profit tax liabilities. Special transfer pricing rules apply to transactions
with securities and derivatives. 
 
33.       Risks, commitments and contingencies (continued) 
 
Taxation (continued) 
 
In 2014, the Group determined its tax liabilities arising from these
"controlled" transactions using actual transaction prices under such loan
agreements. As for other controlled transactions, control procedures to ensure
consistency between the prices used in the controlled transaction prices and
the level of market prices for the purposes of taxation have been developed
and approved. The activities performed focus on minimizing tax risks. 
 
On 24 November 2014 Federal Law No. 376-FZ of the Russian Federation,
effective 1 January 2015, concerning the introduction of amendments to part
one and two of the Tax Code of the Russian Federation (regarding the taxation
of profit of Controlled Foreign Companies and tax residence of Foreign
Companies in Russia) was enacted. The Company management does not expect the
above amendments would have a material impact on the Company's financial
position or results of operations. 
 
Overall, management believes that the Group has paid or accrued all taxes that
are applicable. For taxes where uncertainty exists, the Company has accrued
tax liabilities based on management's best estimate of the probable outflow of
resources embodying economic benefits, which will be required to settle these
liabilities. 
 
Possible liabilities which were identified by management at the reporting date
as those that can be subject to different interpretations of the tax laws and
regulations and are not accrued in the consolidated financial statements as of
the reporting date could be up to 1,641,700 (1,491,830 as of 31 December
2013). 
 
Compliance with covenants 
 
The Group is obliged to comply with a number of restrictive financial and
other covenants contained in its loan agreements. Such covenants include
maintaining certain financial ratios. As of 31 December 2014 and 2013, the
Group was in compliance with all restrictive financial and other covenants
contained in its loan agreements. 
 
Insurance 
 
The insurance industry in the Russian Federation is in a developing state and
many forms of insurance protection common in other parts of the world are not
yet generally available. The Group does not have full coverage for its plant
facilities, business interruption, or third party liability in respect of
property or environmental damage arising from accidents on Group property or
relating to Group operations. Until the Group obtains adequate insurance
coverage, there is a risk that the loss or destruction of certain assets could
have a material adverse effect on the Group's operations and financial
position. 
 
Litigation 
 
Group companies remain as a defendant in legal actions filed through 2012-2014
against them by a number of third parties. 
 
Management believes that there are no current claims outstanding, which could
have a material effect on the consolidated results of operations or
consolidated financial position of the Group and which have not been accrued
or disclosed in these consolidated financial statements. 
 
33.       Risks, commitments and contingencies (continued) 
 
Pledge obligations 
 
Pledged property, plant and equipment 
 
As at 31 December 2014, the Group entered into a number of loan agreements and
revolving credit line agreements, which were secured by the Group's property,
plant and equipment. 
 
The carrying value of the property, plant and equipment pledged at the
reporting date amounts to 1,865,065 (31 December 2013: 556,986). 
 
Pledged rights to claim cash 
 
As at 31 December 2014, the Group entered into a number of loan agreements and
revolving credit line agreements, which were secured by the pledge of property
rights representing rights to claim cash under the customer agreements for
conducting seismic works. The pledged rights to claim cash at the reporting
date amounted to 3,836,179 (31 December 2013: 5,617,214). 
 
34.      Related party transactions 
 
The following table provides the total amount of transactions that have been
entered into with related parties (Note13) during years ended 31 December 2014
and 2013, as well as balances with related parties as of 31 December 2014 and
31 December 2013: 
 
Revenue 
 
                           Associated company  
                           2014                2013    
 Field seismic operations  31,789              21,593  
 Operating lease services  295                 −       
 Total                     32,084              21,593  
 
 
Expenses 
 
                    Associated company  
                    2014                2013   
 Services rendered  2,360               3,726  
 Total              2,360               3,726  
 
 
Outstanding balances 
 
                      Associated company  
                      31 December2014     31 December2013  
 Accounts receivable  7,800               35,981           
 Advances issued      600                 600              
 Accounts payable     (3,194)             (27,096)         
 Advances received    (1,611)             (1,611)          
 Total                3,595               7,874            
 
 
All outstanding balances with related parties are to be settled in cash or
through services rendered in case of advances within six months after the
reporting date. None of the balances is secured. 
 
34.      Related party transactions(continued) 
 
Pricing policy 
 
Related party transactions are based on market prices and are effected on an
arm's length basis in a manner similar to transactions with third parties. 
 
Key management personnel 
 
The Company enters into transactions with its directors and other key
management personnel in the normal course of business. Key management
personnel are those persons having authority and responsibility for planning,
directing and controlling the activities of the entity, directly or indirectly
and includes Chief Executive Officer, Executive Director, members of the Board
of Directors, Chief Financial Officer and Vice-Presidents of the Company. 
 
In 2014, remuneration paid to key management personnel amounted to 81,081
(2013: 111,946). 
 
35.       Events subsequent to the reporting date 
 
On April 2015 IGSS sent a request to the London Stock Exchange and the
Financial Conduct Authority to cancel the listing and trading of Global
Depositary Receipts. IGSS intends to terminate GDR program and cancel the
listing and trading of GDRs as it wishes to be listed in Russia. 
 
This information is provided by RNS
The company news service from the London Stock Exchange