Notes to the Consolidated Financial Statements

Currency — ₽ millions (unless otherwise stated)

1. General

Description of business

PJSC Gazprom Neft (the «Company») and its subsidiaries (together referred to as the «Group») is a vertically integrated oil company operating in the Russian Federation, CIS and internationally. The Group’s principal activities include exploration, production and development of crude oil and gas, production of refined petroleum products and distribution and marketing operations through its retail outlets.

The Company was incorporated in 1995 and is domiciled in the Russian Federation. The Company is a public joint stock company and was set up in accordance with Russian regulations. PJSC Gazprom («Gazprom», a state controlled entity), the Group’s ultimate parent company, owns 95.7% of the shares in the Company.

2. Summary of significant accounting policies

Basis of preparation

The Group maintains its books and records in accordance with accounting and taxation principles and practices mandated by legislation in the countries in which it operates (primarily the Russian Federation). The accompanying Consolidated Financial Statements were primarily derived from the Group’s statutory books and records with adjustments and reclassifications made to present them in accordance with International Financial Reporting Standards («IFRS»).

Subsequent events occurring after 31 December 2018 were evaluated through 20 February 2019, the date these Consolidated Financial Statements were authorised for issue.

The principal accounting policies are set out below. Apart from the accounting policies changes resulting from adoption of IFRS 9 and IFRS 15 effective from 1 January 2018, these policies have been consistently applied to all periods presented, unless otherwise stated.

Basis of measurement

The Consolidated Financial Statements are prepared on the historical cost basis except that derivative financial instruments, equity investments at fair value through other comprehensive income (OCI) and obligations under the Stock Appreciation Rights plan (SAR) are stated at fair value.

Foreign currency translation

The functional currency of each of the Group’s consolidated entities is the currency of the primary economic environment in which the entity operates. In accordance with IAS 21 the Group has analysed several factors that influence the choice of functional currency and, based on this analysis, has determined the functional currency for each entity of the Group. For the majority of the entities the functional currency is the local currency of the entity.

Monetary assets and liabilities have been translated into the functional currency at the exchange rate as of the reporting date. Non-monetary assets and liabilities have been translated at historical rates. Revenues, expenses and cash flows are translated into functional currency at average rates for the period or exchange rates prevailing on the transaction dates where practicable. Gains and losses resulting from the re-measurement into functional currency are included in profit and loss, except when deferred in other comprehensive income as qualifying cash flow hedges.

The presentation currency for the Group is the Russian Rouble. Gains and losses resulting from the re-measurement into presentation currency are included in a separate line of equity in the Consolidated Statement of Financial Position.

The translation of local currency denominated assets and liabilities into functional currency for the purpose of these Consolidated Financial Statements does not indicate that the Group could realise or settle, in functional currency, the reported values of these assets and liabilities. Likewise, it does not indicate that the Group could return or distribute the reported functional currency value of capital to its shareholders.

Principles of consolidation

The Consolidated Financial Statements include the accounts of subsidiaries in which the Group has control. Control implies rights or exposure to variable returns from the involvement with the investee and the ability to affect those returns through the power over the investee. An investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities, i.e. the activities that significantly affect the investee’s returns. An investor is exposed, or has the rights to variable returns from its involvement with investee when the investor’s return from its involvement has the potential to vary as a result of the investee’s performance. The financial statements of subsidiaries are included in the Consolidated Financial Statements of the Group from the date when control commences until the date when control ceases.

In assessing control, the Group takes into consideration potential voting rights that are substantive. Investments in entities that the Group does not control, but where it has the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method except for investments that meet criteria of joint operations, which are accounted for on the basis of the Group’s interest in the assets, liabilities, expenses and revenues of the joint operation. All other investments are classified either as held-to-maturity or as available for sale.

Business combinations

The Group accounts for its business combinations according to IFRS 3 Business Combinations. The Group applies the acquisition method of accounting and recognises identifiable assets acquired and liabilities and contingent liabilities assumed in the acquiree at the acquisition date, measured at their fair values as of that date. Determining the fair value of assets acquired and liabilities assumed requires Management’s judgment and often involves the use of significant estimates and assumptions. Non-controlling interest is measured at fair value (if shares of acquired company have public market price) or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets (if shares of acquired company do not have public market price).

Goodwill

Goodwill is measured by deducting the fair value net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and the fair value of an interest in the acquiree held immediately before the acquisition date. Any negative amount («bargain purchase») is recognised in profit or loss, after Management identified all assets acquired and all liabilities and contingent liabilities assumed and reviewed the appropriateness of their measurement.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination, are expensed as incurred.

Non-controlling interest

Ownership interests in the Group’s subsidiaries held by parties other than the Group entities are presented separately in equity in the Consolidated Statement of Financial Position. The amount of consolidated net income attributable to the parent and the non-controlling interest are both presented on the face of the Consolidated Statement of Profit and Loss and Other Comprehensive Income.

Changes in ownership interests in subsidiaries without change of control

Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions — that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

Disposals of subsidiaries

When the Group ceases to have control any retained interest in the entity is remeasured to its fair value at the date when control is lost, with the change in carrying amount of the investment to the entity recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequent accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.

Acquisitions from entities under common control

Business combinations involving entities under common control are accounted for by the Group using the predecessor accounting approach from the acquisition date. The Group uses predecessor carrying values for assets and liabilities, which are generally the carrying amounts of the assets and liabilities of the acquired entity from the Consolidated Financial Statements of the highest entity that has common control for which Consolidated Financial Statements are prepared. These amounts include any goodwill recorded at the consolidated level in respect of the acquired entity. When these transactions represent transactions with owners in their capacity as owners, the effect on such transactions is included in Additional paid-in capital in Equity.

Investments in associates

An associate is an entity over which the investor has significant influence. Investments in associates are accounted for using the equity method and are recognised initially at cost. The Consolidated Financial Statements include the Group’s share of the profit or loss and other comprehensive income of equity accounted investees, after adjustments to align accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases.

Joint operations and joint ventures

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

Where the Group acts as a joint operator, the Group recognises in relation to its interest in a joint operation:

  • Its assets, including its share of any assets held jointly;
  • Its liabilities, including its share of any liabilities incurred jointly;
  • Its revenue from the sale of its share of the output arising from the joint operation;
  • Its share of the revenue from the sale of the output by the joint operation; and
  • Its expenses, including its share of any expenses incurred jointly.

With regards to joint arrangements, where the Group acts as a joint venturer, the Group recognises its interest in a joint venture as an investment and accounts for that investment using the equity method.

Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the Consolidated Financial Statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

Cash and cash equivalents

Cash represents cash on hand and in bank accounts, that can be effectively withdrawn at any time without prior notice. Cash equivalents include all highly liquid short-term investments that can be converted to a certain cash amount and mature within three months or less from the date of purchase. They are initially recognised based on the cost of acquisition which approximates fair value and carried at amortised cost as are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

Non-derivative financial assets

From 1 January 2018, the Group classifies its financial assets in the following measurement categories:

  • those to be measured subsequently at fair value (either through OCI or through profit or loss), and
  • those to be measured at amortised cost.

At initial recognition, the Group measures a financial asset at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset (in the case of the financial asset not at fair value through profit or loss (FVPL)). Transaction costs of financial assets carried at FVPL are expensed in profit or loss.

The Group initially recognises financial assets on trade-date (the date on which the Group commits to purchase or sell the asset). Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.

For assets measured at fair value gains and losses will either be recorded in profit or loss or OCI. The classification of financial assets depends on:

  • the entity’s business model for managing the financial assets and
  • the contractual cash flow characteristics of the financial asset.

In particular, debt financial assets in the Group are usually held to obtain contractual cash flows that are solely payments of principal and interest. In rare cases, debt financial assets are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.

The Group reclassifies debt investments when and only when its business model for managing those assets changes. Business model is determined for a group of assets (on a portfolio level) based on all relevant evidence about the activities that the Group undertakes to achieve the objective set out for the portfolio available at the date of the assessment. Factors considered by the Group in determining the business model include the purpose and composition of a portfolio, past experience on how the cash flows for the respective assets were collected, how risks are assessed and managed, how the assets’ performance is assessed.

Equity securities at initial recognition are usually accounted at FVOCI. These are strategic investments and the Group considers this classification to be more relevant.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest («SPPI»).

The SPPI assessment is performed on initial recognition of an asset and it is not subsequently reassessed.

Debt instruments

Subsequent measurement of debt instruments depends on the group’s business model for managing the asset and the cash flow characteristics of the asset. There are three measurement categories into which the group classifies its debt instruments:

  • Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in other gains/(losses) together with foreign exchange gains and losses. Impairment losses are presented as separate line item in the statement of profit or loss if material or presented within «Other loss, net» in the Consolidated Statement of Profit and Loss and Other Comprehensive Income. Financial assets at amortised cost comprise trade receivables, other financial assets, cash and cash equivalents.
  • FVOCI: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest income and foreign exchange gains and losses which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in other gains / (losses). Interest income from these financial assets is included in finance income using the effective interest rate method. Foreign exchange gains and losses are presented in other gains / (losses) and impairment expenses are presented as separate line item in the statement of profit or loss. The changes in fair value will no longer be reclassified to profit or loss when they are impaired or disposed. These assets are non-material for the Group.
  • FVPL: Assets that do not meet the criteria for amortised cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL is recognised in profit or loss and presented net within other gains / (losses) in the period in which it arises. These assets are non-material for the Group.

Equity instruments

The group subsequently measures all equity investments at fair value. Where the group’s management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognised in profit or loss as other income when the group’s right to receive payments is established. Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI are not reported separately from other changes in fair value.

Other equity instruments are recognised at FVPL. Changes in the fair value of financial assets at FVPL are recognised in other gains/(losses) in the statement of profit or loss as applicable. The assets are not significant for the Group.

Accounting policies for non-derivative financial assets applied until 31 December 2017

The group has applied IFRS 9 prospectively and not restated comparative information. As a result, the comparative information provided continues to be accounted for in accordance with the group’s previous accounting policy.

Until 31 December 2017 the Group had the following non-derivative financial assets: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and available-for-sale financial assets.

The Group initially recognised loans and receivables on the date that they originated. All other financial assets (including assets designated as at fair value through profit or loss) were recognised initially on the trade date, which was the date that the Group became a party to the contractual provisions of the instrument.

The Group derecognised a financial asset when the contractual rights to the cash flows from the asset expired, or it transferred the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset were transferred. Any interest in such transferred financial assets that was created or retained by the Group was recognised as a separate asset or liability.

Financial assets at fair value through profit or loss

A financial asset was classified at fair value through profit or loss category if it was classified as held for trading or is designated as such upon initial recognition. Financial assets were designated at fair value through profit or loss if the Group manages such investments and made purchase and sale decisions based on their fair value in accordance with the Group’s documented risk management or investment strategy. Financial assets at fair value through profit or loss were measured at fair value, and changes therein were recognised in profit and loss.

Held-to-maturity financial assets

If the Group had the positive intent and ability to hold to maturity debt securities that were quoted in an active market, then such financial assets were classified to held-to-maturity category. Held-to-maturity financial assets were recognised initially at fair value. Subsequent to initial recognition held-to-maturity financial assets were measured at amortised cost using the effective interest method, less any impairment losses. Any sale or reclassification of a more than insignificant amount of held-to-maturity investments not close to their maturity were result in the reclassification of all held-to-maturity investments as available-for-sale, and prevent the Group from classifying investment securities as held-to-maturity for the current and the following two financial years.

Loans and receivables

Loans and receivables was a category of financial assets with fixed or determinable payments that were not quoted in an active market. Such assets were recognised initially at fair value. Subsequent to initial recognition loans and receivables were measured at amortised cost using the effective interest method, less any impairment losses. Allowances were provided for doubtful debts based on estimates of uncollectible amounts. These estimates were based on the aging of the receivable, the past history of settlements with the debtor and current economic conditions. Estimates of allowances required the exercise of judgment and the use of assumptions.

Available-for-sale financial assets

Available-for-sale financial assets were non-derivative financial assets that are designated as available-for-sale or are not classified in any of the above categories of financial assets. Such assets were recognised initially at fair value. Subsequent to initial recognition, they were measured at fair value and changes therein, other than impairment losses and foreign currency differences on available-for-sale debt instruments, were recognised in other comprehensive income and presented within equity in the other reserves line. When an investment is derecognised or impaired, the cumulative gain or loss in equity was reclassified to profit and loss.

Non-derivative financial liabilities

The Group initially recognises debt securities issued, loans and borrowings on the date that they are originated (in particular, date of bond issue or receiving of cash). Financial liabilities also include bank overdrafts, trade and other payables and finance lease liabilities. These financial liabilities recognised initially on the trade date on which the Group becomes a party to the contractual provisions of the instrument. The financial liabilities are recognised initially at fair value minus (in the case of a financial liability that is not at FVTPL) transaction costs that are directly attributable to issuing the financial liability. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expired.

Financial liabilities previously classified in accordance with IAS 39 as financial liabilities measured at amortised cost using the effective interest method, in accordance with IFRS 9 «Financial instruments» are classified as financial liabilities carried at amortised cost.

Derivative financial instruments

Derivative instruments are recorded at fair value in the Consolidated Statement of Financial Position in either financial assets or liabilities. Realised and unrealised gains and losses are presented in profit and loss on a net basis, except for those derivatives, where hedge accounting is applied.

The estimated fair values of derivative financial instruments are determined with reference to various market information and other valuation methodologies as considered appropriate, however significant judgment is required in interpreting market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts that the Group could realise in a current market situation.

Hedge accounting

The Group applies hedge accounting policy for those derivatives that are designated as a hedging instrument (currency exchange forwards and interest-rate swaps).

The Group has designated only cash flow hedges — hedges against the exposure to the variability of cash flow currency exchange rates on a highly probable forecast transaction.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. Changes in the fair value of certain derivative instruments that do not qualify for hedge accounting are recognised immediately in profit and loss.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity until the forecast transaction occurs. Any ineffective portion is directly recognised in profit and loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss on any associated hedging instrument that was reported in equity is immediately transferred to profit and loss.

The fair value of the hedge instrument is determined at the end of each reporting period with reference to the market value, which is typically determined by the credit institutions.

Inventories

Inventories, consisting primarily of crude oil, refined oil products and materials and supplies are stated at the lower of cost and net realisable value. The cost of inventories is assigned on a weighted average basis, and includes expenditure incurred in acquiring the inventories, production or conversion costs, and other costs incurred in bringing them to their existing location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

Intangible assets

Goodwill that arises on the acquisition of subsidiaries is included in intangible assets. Subsequently goodwill is measured at cost less accumulated impairment losses.

Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment loss.

Intangible assets that have limited useful lives are amortised on a straight-line basis over their useful lives. Useful lives with respect to intangible assets are determined as follows:

Intangible asset group Average useful life
Licenses and software 1-5 years
Land rights 25 years

Property, plant and equipment

Property, plant and equipment is stated at cost, net of accumulated depreciation and any impairment. The cost of maintenance, repairs and replacement of minor items of property, plant and equipment are expensed when incurred; renewals and improvements of assets are capitalised. Costs of turnarounds and preventive maintenance performed with respect to oil refining assets are expensed when incurred if turnaround does not involve replacement of assets or installation of new assets. Upon sale or retirement of property, plant and equipment, the cost and related accumulated depreciation and impairment losses are eliminated from the accounts. Any resulting gains or losses are recorded in profit and loss.

Oil and gas properties

Exploration and evaluation assets

Acquisition costs include amounts paid for the acquisition of exploration and development licenses.

Exploration and evaluation assets include:

  • Costs of topographical, geological, and geophysical studies and rights of access to properties to conduct those studies that are directly attributable to exploration activity;
  • Costs of carrying and retaining undeveloped properties;
  • Bottom hole contribution;
  • Dry hole contribution;
  • Costs of drilling and equipping exploratory wells.

The costs incurred in finding, acquiring, and developing reserves are capitalised on a ‘field by field’ basis.

Costs of topographical, geological, and geophysical studies, rights of access to properties to conduct those studies are considered as part of oil and gas assets until it is determined that the reserves are proved and are commercially viable. On discovery of a commercially-viable mineral reserve, the capitalised costs are allocated to the discovery.

If no reserves are found, the exploration asset is tested for impairment. If extractable hydrocarbons are found then it should be subject to further appraisal activity, which may include drilling of further wells. If they are likely to be developed commercially (including dry holes), the costs continue to be carried as oil and gas asset as long as some sufficient/continued progress is being made in assessing the commerciality of the hydrocarbons. All such carried costs are subject to technical, commercial and Management review as well as review for impairment at least once a year to confirm the continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs are written off.

Other exploration costs are charged to expense when incurred.

An exploration and evaluation asset is reclassified to property, plant and equipment and intangible assets when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Exploration and evaluation assets are assessed for impairment, and any impairment loss is recognised, before reclassification. Exploration and development licenses are classified as property, plant and equipment after transfer from exploration and evaluation assets.

Development costs

Development costs are incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing oil and gas. They include the costs of development wells to produce proved reserves as well as costs of production facilities such as lease flow lines, separators, treaters, heaters, storage tanks, improved recovery systems, and nearby gas processing facilities.

Expenditures for the construction, installation, or completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells are capitalised within oil and gas assets.

Depreciation, depletion and amortisation

Depletion of acquisition and development costs of proved oil and gas properties is calculated using the unit-of-production method based on proved reserves and proved developed reserves. Acquisition costs of unproved properties are not amortised.

Depreciation and amortisation with respect to operations other than oil and gas producing activities is calculated using the straight-line method based on estimated economic lives. Depreciation rates are applied to similar types of buildings and equipment having similar economic characteristics, as shown below:

Asset group Average useful life
Buildings and constructions 8-35 years
Machinery and equipment 8-20 years
Vehicles and other equipment 3-10 years

Catalysts and reagents mainly used in the refining operations are treated as other assets.

Capitalisation of borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of assets (including oil and gas properties) that necessarily take a substantial time to get ready for intended use or sale (qualifying assets) are capitalised as part of the costs of those assets. Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs are included in the borrowing costs eligible for capitalisation.

Impairment of non-current assets

The carrying amounts of the Group’s non-current assets, other than assets arising from goodwill, inventories, long-term financial assets and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment.

Goodwill is tested for impairment annually or more frequently if impairment indicators arise. An impairment loss recognised for goodwill is not reversed in a subsequent period.

If any indication of impairment exists, the group makes an estimate of the asset’s recoverable amount. Individual assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets (cash-generating units — CGUs). The carrying amount of the CGUs (including goodwill) is compared with their recoverable amount. The recoverable amount of CGUs to which goodwill is allocated is the higher of value in use and fair value less costs of disposal. Where the recoverable amount of the CGUs to which goodwill has been allocated is less than the carrying amount, an impairment loss is recognised.

An impairment loss is recognised in profit and loss. Prior impairments of non-financial assets (other than goodwill) are reviewed for possible reversal at each reporting date.

Impairment of non-derivative financial assets

From 1 January 2018, the group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk till the initial recognition.

For all trade receivables the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables, in respect of credit risk see note 34 for further details.

To measure the expected credit losses, trade receivables are grouped based on shared credit risk characteristics, type of products or services and the days past due. The Group calculates expected loss rates for trade receivables based on historical data which are a reasonable approximation of current loss rates.

The group has the following types of financial assets that are subject to the expected credit loss model: trade receivables, debt investments carried at amortised cost and cash and cash equivalents.

Accounting policies for non-derivative financial assets applied until 31 December 2017

Financial assets were assessed at each reporting date to determine whether there was any objective evidence of impairment. A financial asset was impaired if objective evidence indicates that a loss event had occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

The Group considered evidence of impairment for loans and receivables and held-to-maturity investments at both a specific asset and collective level. All individually significant loans and receivables and held-to maturity investments were assessed for specific impairment. Loans and receivables and held-to-maturity investments that were not individually significant were collectively assessed for impairment by grouping together loans and receivables and held-to-maturity investments with similar risk characteristics.

An impairment loss in respect of a financial asset measured at amortised cost was calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses were recognised in profit and loss and reflected in an allowance account against loans and receivables or held-to-maturity investments.

Decommissioning obligations

The Group has decommissioning obligations associated with its core activities. The nature of the assets and potential obligations is as follows:

Exploration and production: the Group’s activities in exploration, development and production of oil and gas in the deposits are related to the use of such assets as wells, well equipment, oil gathering and processing equipment, oil storage tanks and infield pipelines. Generally, licenses and other permissions for mineral resources extraction require certain actions to be taken by the Group in respect of liquidation of these assets after oil field closure. Such actions include well plugging and abandonment, dismantling equipment, soil recultivation, and other remediation measures. When an oil field is fully depleted, the Group will incur costs related to well retirement and associated environmental protection measures.

Refining, marketing and distribution: the Group’s oil refining operations are carried out at large manufacturing facilities that have been operated for several decades. The nature of these operations is such that the ultimate date of decommissioning of any sites or facilities is unclear. Current regulatory and licensing rules do not provide for liabilities related to the liquidation of such manufacturing facilities or of retail fuel outlets. Management therefore believes that there are no legal or contractual obligations related to decommissioning or other disposal of these assets.

Management makes provision for the future costs of decommissioning oil and gas production facilities, wells, pipelines, and related support equipment and for site restoration based on the best estimates of future costs and economic lives of the oil and gas assets. Estimating future asset retirement obligations is complex and requires Management to make estimates and judgments with respect to removal obligations that will occur many years in the future. The Group applies risk-free rate adjusted for specific risks of the liability for the purpose of estimating asset retirement obligations.

Changes in the measurement of existing obligations can result from changes in estimated timing, future costs or discount rates used in valuation.

The amount recognised as a provision is the best estimate of the expenditures required to settle the present obligation at the reporting date based on current legislation in each jurisdiction where the Group’s operating assets are located, and is also subject to change because of revisions and changes in laws and regulations and their interpretation. As a result of the subjectivity of these provisions there is uncertainty regarding both the amount and estimated timing of such costs.

The estimated costs of dismantling and removing an item of property, plant and equipment are added to the cost of the item either when an item is acquired or as the item is used during a particular period. Changes in the measurement of an existing decommissioning obligation that result from changes in the estimated timing or amount of any cash outflows, or from changes in the discount rate are reflected in the cost of the related asset in the current period.

Income taxes

Currently some Group companies including PJSC Gazprom Neft exercise the option to pay taxes as a consolidated tax-payer and are subject to taxation on a consolidated basis. The majority of the Group companies do not exercise such an option and current income taxes are provided on the taxable profit of each subsidiary. Most subsidiaries are subject to the Russian Federation Tax Code, under which income taxes are payable at a rate of 20% after adjustments for certain items, that are either not deductible or not taxable for tax purposes. In some cases income tax rate could be set at lower level as a tax concession stipulated by regional legislation. Subsidiaries operating in countries other than the Russian Federation are subject to income tax at the applicable statutory rate in the country in which these entities operate.

Deferred income tax assets and liabilities are recognised in the accompanying Consolidated Financial Statements in the amounts determined by the Group using the balance sheet liability method in accordance with IAS 12 Income Taxes. This method takes into account future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities for the purpose of the Consolidated Financial Statements and their respective tax bases and in respect of operating loss and tax credit carry-forwards. Deferred income tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to reverse and the assets recovered and liabilities settled. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that sufficient future taxable profit will be available against which the deductions can be utilised.

Mineral extraction tax and excise duties

Mineral extraction tax and excise duties, which are charged by the government on the volumes of oil and gas extracted or refined by the Group, are included in operating expenses. Taxes charged on volumes of goods sold are recognised as a deduction from sales.

Export duties

Export duties, which are charged by the government on the volumes of crude oil and petroleum products transferred abroad by the Group, are included in operating expenses.

Share capital

Share capital represents the authorised capital of the Company, as stated in its charter document. The common shareholders are allowed one vote per share. Dividends paid to shareholders are determined by the Board of Directors and approved at the annual shareholders’ meeting.

Treasury stock

Common shares of the Company owned by the Group as of the reporting date are designated as treasury shares and are recorded at cost using the weighted-average method. Gains on resale of treasury shares are credited to additional paid-in capital whereas losses are charged to additional paid-in capital to the extent that previous net gains from resale are included therein or otherwise to retained earnings.

Dividends

Dividends are recorded as a liability and deducted from equity in the period in which they are declared and approved. Any dividends declared after the reporting period and before the Consolidated Financial Statements are authorised for issue are disclosed in the subsequent events note.

Earnings per share

Basic and diluted earnings per common share are determined by dividing the available income to common shareholders by the weighted average number of shares outstanding during the period. There are no potentially dilutive securities.

Stock-based compensation

The Group accounts for its best estimate of the obligation under cash-settled stock-appreciation rights («SAR») granted to employees at fair value on the date of grant. The estimate of the final liability is re-measured to fair value at each reporting date and the compensation charge recognised in respect of SAR in profit and loss is adjusted accordingly. Expenses are recognised over the vesting period.

Retirement and other benefit obligations

The Group and its subsidiaries do not have any substantial pension arrangements separate from the State pension scheme of the Russian Federation, which requires current contributions by the employer calculated as a percentage of current gross salary payments; such contributions are charged to expense as incurred. The Group has no significant employee-benefit programs requiring accrual.

Leases

Leases under the terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Other leases are operating leases and the leased assets are not recognised in the Group’s Consolidated Statement of Financial Position. The total lease payments are charged to profit and loss for the year on a straight-line basis over the lease term.

Recognition of revenues

Revenue is an income arising in the course of the Group’s ordinary activities. Revenue is recognised in the amount of transaction price. Transaction price is the amount of consideration to which the Group expects to be entitled in exchange for transferring control over promised goods or services to a customer, excluding the amounts collected on behalf of third parties.

The Group recognizes Revenue from sales of crude oil, petroleum products, gas and other products and services when it satisfies a performance obligation and control over goods and services is passed. For the most contracts control over goods or services passes to a customer at point of time and consideration is unconditional because only the passage of time is required before the payment is due. Specifically:

  • For export contracts control generally passes to buyer on the border of the Russian Federation, the Group is not responsible for transportation,
  • For domestic contracts control generally passes when products are dispatched or delivered to customer. When control passes on delivery to customer transportation is not considered as a distinct performance obligation. In most contracts when control passes on dispatch the Group is not responsible for transportation or transportation is a distinct service provided to customer within a separate contract. In case of sales of petroleum products and transportation by railway performance obligation for transportation is considered to be distinct and excluded from contract price. The Group recognizes this type of revenue within Other revenue line.

The transaction price excludes amounts collected on behalf of third parties such as value added tax and sales related tax. The Group doesn’t consider export duties as a part of transaction price and includes expenses with regard to export duties within operating expenses.

Revenue is recognised net of value added tax (VAT), excise taxes calculated on revenues based on the volumes of goods sold, customs duties and other similar compulsory payments.

The contract liability balance presented as advances received at the beginning of the reporting period was short-term by nature and was recognized as revenue during the period.

The Group applies a practical expedient which allows entity not to disclose the information of its remaining performance obligations at the end of the reporting period as the performance obligation is part of a contract that has an original expected duration of less than one year.

Accounting policies for recognition of revenues applied until 31 December 2017

Revenues from the sales of crude oil, petroleum products, gas and all other products were recognised when deliveries were made to final customers, title passed to the customer, collection was reasonably assured, and the sales price to final customers was fixed or determinable. Specifically, domestic crude oil sales and petroleum product and materials sales were recognised when they are shipped to customers, which was generally when title passes. For export sales, title generally passed at the border of the Russian Federation and the Group was responsible for transportation, duties and taxes on those sales.

Revenue was recognised net of value added tax (VAT), excise taxes calculated on revenues based on the volumes of goods sold, customs duties and other similar compulsory payments.

Sales included revenue, export duties and sales related excise tax.

Buy / sell transactions

Purchases and sales under the same contract with a specific counterparty (buy / sell transaction) are eliminated under IFRS. The purpose of the buy-sell operation, i.e. purchase and sale of same type of products in different locations during the same reporting period from / to the same counterparty, is to optimise production capacities of the Group rather than generate profit. After elimination, any positive difference is treated as a decrease in transportation costs and any negative difference is treated as an increase in transportation costs.

Transportation costs

Transportation expenses recognised in profit and loss represent expenses incurred to transport crude oil and oil products through the PJSC «AK «Transneft» pipeline network, costs incurred to transport crude oil and oil products by maritime vessel and railway and all other shipping and handling costs.

Other comprehensive income / loss

All other comprehensive income / loss is presented by the items that are or may be reclassified subsequently to profit or loss, net of related income tax.

3. Critical accounting estimates, assumptions and judgments

Preparing these Consolidated Financial Statements in accordance with IFRS requires Management to make judgements on the basis of estimates and assumptions. These judgements affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the reporting date, and the reported amounts of revenues and expenses during the reporting period.

Management reviews the estimates and assumptions on a continuous basis, by reference to past experiences and other factors that can reasonably be used to assess the book values of assets and liabilities. Adjustments to accounting estimates are recognised in the period in which the estimate is revised if the change affects only that period or in the period of the revision and subsequent periods, if both periods are affected.

Actual results may differ from the judgements, estimates made by the Management if different assumptions or circumstances apply.

Judgments and estimates that have the most significant effect on the amounts reported in these Consolidated Financial Statements and have a risk of causing a material adjustment to the carrying amount of assets and liabilities are described below.

Impairment of non-current assets

The following are examples of impairment indicators, which are reviewed by the Management: changes in the Group’s business plans, changes in oil and commodity prices leading to sustained unprofitable performance, low plant utilisation, evidence of physical damage or, for oil and gas assets, significant downward revisions of estimated reserves or increases in estimated future development expenditure or decommissioning costs. In case any of such indicators exist the Group makes an assessment of recoverable amount.

The long-term business plans (models), which are approved by the Management, are the primary source of information for the determination of value in use. They contain forecasts for oil and gas production, refinery throughputs, sales volumes for various types of refined products, revenues, costs and capital expenditure.

As an initial step in the preparation of these plans, various market assumptions, such as oil prices, refining margins, refined product margins and inflation rates, are set by the Management. These market assumptions take into account long-term oil price forecasts by the research institutions, macroeconomic factors such as inflation rate and historical trends.

In assessing value in use, the estimated future cash flows are adjusted for the risks specific to the asset group or CGU and are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money.

Estimation of oil and gas reserves

Engineering estimates of oil and gas reserves are inherently uncertain and are subject to future revisions on annual basis. The Group estimates its oil and gas reserves in accordance with rules promulgated by the US Securities and Exchange Commission (SEC) for proved reserves. Oil and gas reserves are determined with use of certain assumptions made by the Group, for future capital and operational expenditure, estimates of oil in place, recovery factors, number of wells and cost of drilling. Accounting measures such as depreciation, depletion and amortisation charges that are based on the estimates of proved reserves are subject to change based on future changes to estimates of oil and gas reserves.

Proved reserves are defined as the estimated quantities of oil and gas which geological and engineering data demonstrate recoverability in future years from known reservoirs under existing economic conditions with reasonable certainty. In some cases, substantial new investment in additional wells and related support facilities and equipment will be required to recover such proved reserves. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are subject to change over time as additional information becomes available.

Oil and gas reserves have a direct impact on certain amounts reported in the Consolidated Financial Statements, most notably depreciation, depletion and amortisation as well as impairment expenses. Depreciation rates on oil and gas assets using the units-of-production method for each field are based on proved developed reserves for development costs, and total proved reserves for costs associated with the acquisition of proved properties. Moreover, estimated proved reserves are used to calculate future cash flows from oil and gas properties, which serve as an indicator in determining whether or not property impairment is present.

Useful lives of property, plant and equipment

Management assesses the useful life of an asset by considering the expected usage, estimated technical obsolescence, residual value, physical wear and tear and the operating environment in which the asset is located. Differences between such estimates and actual results may have a material impact on the amount of the carrying values of the property, plant and equipment and may result in adjustments to future depreciation rates and expenses for the period.

Contingencies

Certain conditions may exist as of the date of these Consolidated Financial Statements are issued that may result in a loss to the Group, but one that will only be realised when one or more future events occur or fail to occur. Management makes an assessment of such contingent liabilities that is based on assumptions and is a matter of judgement. In assessing loss contingencies relating to legal or tax proceedings that involve the Group or unasserted claims that may result in such proceedings, the Group, after consultation with legal and tax advisors, evaluates the perceived merits of any legal or tax proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a loss will be incurred and the amount of the liability can be estimated, then the estimated liability is accrued in the Group’s Consolidated Financial Statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. If loss contingencies cannot be reasonably estimated, Management recognises the loss when information becomes available that allows a reasonable estimation to be made. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee is disclosed. However, in some instances in which disclosure is not otherwise required, the Group may disclose contingent liabilities of an unusual nature which, in the judgment of Management and its legal counsel, may be of interest to shareholders or others.

Joint arrangements

Upon adopting of IFRS 11 the Group applied judgement when assessing whether its joint arrangements represent a joint operation or a joint venture. The Group determined the type of joint arrangement in which it is involved by considering its rights and obligations arising from the arrangement including the assessment of the structure and legal form of the arrangement, the terms agreed by the parties in the contractual arrangement and, when relevant, other facts and circumstances.

Leases

Leases under the terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Risks include the possibilities of losses from idle capacities or technological obsolence and of variations in return because of changing economic conditions. Rewards may be represented by the expectation of profitable operation over the asset’s economic life and of gain from appreciation in value or realization of a residual value.

Other leases are classified as operating leases. In most cases leasing of vessels under time-charter agreements are accounted for as operating leases under IAS 17 Leases.

4. Application of new IFRS

The following standards or amended standards became effective for the Group from 1 Januar 2018:

  • IFRS 9 — Financial Instruments (amended in July 2014 and effective for annual periods beginning on or after 1 January 2018),
  • IFRS 15 — Revenue from Contracts with Customers (amended in April 2016 and effective for annual periods beginning on or after 1 January 2018),
  • IFRIC 22 — Foreign currency transactions and advance consideration (issued on 8 December 2016 and effective for annual periods beginning on or after 1 January 2018),
  • Amendments to IFRS 2 — Share-based Payment (issued on 20 June 2016 and effective for annual periods beginning on or after 1 January 2018),
  • Annual Improvements to IFRSs 2014-2016 cycle ‒ Amendments to IFRS 1 an IAS 28 (issued on 8 December 2016 and effective for annual periods beginning on or after 1 January 2018).

Impact of adoption

The Group has adopted IFRS 9 — Financial instruments and IFRS 15 — Revenue from contracts with Customers from 1 January 2018 which resulted in changes in accounting policies and adjustments to the amounts recognized in the Consolidated Financial Statements.

  • IFRS 9 was adopted without restating comparative information; no significant adjustments were recognized in Consolidated Financial Statements. The changes in classification categories didn’t result in changes of presentation in Consolidated Statement of Financial Position. Consequently, the revised requirements of IFRS 7 have only been applied to the current period. The comparative period disclosures repeat those disclosures made in the prior year.
  • In accordance with the transition provisions in IFRS 15, the Group has adopted the new rules retrospectively and has restated comparatives for 2017 financial year.

IFRS 15 — Revenue from contracts with Customers (amended in April 2016 and effective for annual periods beginning on or after 1 January 2018). In summary, the following adjustments were made to amounts recognized in Consolidated Statement of Profit and Loss and Other Comprehensive Income:

Year ended 31 December 2017 Reclassification Year ended 31 December 2017 (restated)
Revenue
Crude oil, gas and petroleum products sales 1,796,124 74,666 1,870,790
Other revenue 61,807 1,992 63,799
Total revenue from sales 1,857,931 76,658 1,934,589
Costs and other deductions
Export duties - (76,658) (76,658)
Total operating expenses (1,555,408) (76,658) (1,632,066)
Operating profit 302,523 - 302,523
  • Reclassification of expenses with regard to export duties in the amount of ₽ 76.7 billion,
  • Reclassification of revenue from transportation services included in contract price from Crude oil, gas and petroleum products sales to Other revenue in the amount of ₽ 2.0 billion,
  • Crude oil, gas and petroleum products sales are presented net of sales related excises in the amount of ₽ 69.0 billion.

IFRS 9 — Financial Instruments (amended in July 2014 and effective for annual periods beginning on or after 1 January 2018). Financial assets and liabilities previously classified in accordance with IAS 39 «Financial Instruments: Recognition and Measurement» within categories loans and receivables, investments held to maturity and other financial liabilities measured at amortised cost using the effective interest method, in accordance with IFRS 9 «Financial instruments» are classified as financial assets and financial liabilities carried at amortised cost. Measurement of cash and cash equivalents, trade and other receivables and payables, long-term and short-term loans and investments, held-to-maturity investments has not changed and these financial instruments are measured at amortised cost.

The adoption of IFRS 9 did not significantly impact balance sheet classification of financial assets and liabilities in the Consolidated Financial Statements of the Group. At 31 December 2017, all of the Group’s financial liabilities except for derivatives were carried at amortised cost. The derivatives belonged to the FVTPL measurement category under IAS 39. There were no changes to the classification and measurement of financial liabilities.

New model for recognition of impairment losses — expected credit losses (ECL) model was introduced within the Group which is disclosed at Note 2 «Summary of significant accounting policies» and 34 «Financial risk management» in respect of credit risk. The amount of expected credit losses as at 1 January 2018 does not materially differ from the amount of recognized provisions and allowances in the Consolidated Financial Statements as at 31 December 2017 and therefore there is no quantitative effect of transition as of 1 January 2018.

In the reporting period the Group continued to apply IAS 39 for hedge accounting. In case of new hedging instruments arise the Group may revise its plans to switch to IFRS 9 in respect of hedging instruments in the following reporting periods.

IFRIC 22 — Foreign currency transactions and advance consideration (issued on 8 December 2016 and effective for annual periods beginning on or after 1 January 2018). This interpretation considers how to determine the date of the transaction when applying the standard on foreign currency transactions, IAS 21. The interpretation applies where an entity either pays or received consideration in advance for foreign currency-denominated contracts. The interpretation specifies that the date of transaction is the date on which the entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the Interpretation requires an entity to determine the date of transaction for each payment or receipt of advance consideration. This interpretation does not have any material impact on the Group.

5. New accounting standards

Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2019 or later, and that the Group has not early adopted. The group’s assessment of the impact of these new standards and interpretations is set out below.

IFRS 16 — Leases (issued on 13 January 2016 and effective for annual periods beginning on or after 1 January 2019). IFRS 16 will result in almost all leases being recognised on the balance sheet by lessees, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases.

Impact of adoption

The group has set up a project team which has reviewed all of the group’s leasing arrangements over the last year in light of the new lease accounting rules in IFRS 16. The standard will affect primarily the accounting for the group’s operating leases.

As at the reporting date, the group has non-cancellable operating lease commitments of ₽ 124 billion, see note 35. Part of these commitments relate to short-term leases and low value leases which will both be recognised on a straight-line basis as expense in profit or loss. For the remaining lease commitments the Group intends to recognise lease liabilities in the expected amount of ₽ 61 billion on 1 January 2019. The amount may be corrected due to the management decision about lease terms and the finalization of discount rate calculation.

The Group’s activities as a lessor are not material and hence the Group does not expect any significant impact on the financial statements.

Date of adoption by the Group

The Group will apply the standard from its mandatory adoption date of 1 January 2019. The Group intends to apply the simplified transition approach retrospectively with the cumulative effect of initially applying the Standard recognised at the date of initial application. Right-of-use assets under time-charter agreements will be measured on transition since the commencement date. All other right-of-use assets will be measured at the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses).

The following other new standards and pronouncements are not expected to have any material impact on the Group when adopted:

  • IFRS 17 — Insurance Contracts (issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 2021),
  • IFRIC 23 — Uncertainty over Income Tax Treatments (issued on 7 June 2017 and effective for annual periods beginning on or after 1 January 2019),
  • Sale or Contribution of Assets between an Investor and its Associate or Joint Venture — Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB),
  • Prepayment Features with Negative Compensation — Amendments to IFRS 9 (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019),
  • Long-term Interests in Associates and Joint Ventures — Amendments to IAS 28 (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019),
  • Amendments to the Conceptual Framework for Financial Reporting (issued in March 2018 and effective for annual periods beginning on or after 1 January 2020),
  • Definition of a Business — Amendments to IFRS 3 (issued in October 2018 and effective for annual periods beginning on or after 1 January 2020),
  • Definition of Material — Amendments to IAS 1 and IAS 8 (issued in October 2018 and effective for annual periods beginning on or after 1 January 2020),
  • Annual Improvements to IFRSs 2015-2017 cycle — Amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23 (issued on 12 December 2017 and effective for annual periods beginning on or after 1 January 2019).

6. Cash and cash equivalents

Cash and cash equivalents as of 31 December 2018 and 2017 comprise the following:

31 December 2018 31 December 2017
Cash on hand 753 946
Cash in bank 50,897 46,107
Deposits with original maturity of less than three months 191,827 28,816
Other cash equivalents 4,108 14,739
Total cash and cash equivalents 247,585 90,608

7. Trade and other receivables

Trade and other receivables as of 31 December 2018 and 2017 comprise the following:

31 December 2018 31 December 2017
Trade receivables 129,520 107,758
Other financial receivables 2,060 2,071
Less credit loss allowance (2,430) (7,567)
Total trade and other receivables 129,150 102,262

8. Inventories

Inventories as of 31 December 2018 and 2017 consist of the following:

31 December 2018 31 December 2017
Petroleum products and petrochemicals 70,385 55,828
Crude oil and gas 34,601 28,200
Materials and supplies 27,416 23,143
Other 17,554 11,151
Total inventory 149,956 118,322

9. Other taxes receivable

Other taxes receivable as of 31 December 2018 and 2017 comprise the following:

31 December 2018 31 December 2017
Value added tax receivable 79,921 50,163
Prepaid custom duties 7,232 5,076
Other taxes prepaid 4,776 3,120
Total other taxes receivable 91,929 58,359

10. Other current assets

Other current assets as of 31 December 2018 and 2017 comprise the following:

31 December 2018 31 December 2017
Advances paid 25,191 24,503
Prepaid expenses 1,662 1,955
Other assets 13,630 13,589
Total other current assets, net 40,483 40,047

11. Property, plant and equipment

Movements in property, plant and equipment for the years ended 31 December 2018 and 2017 are presented below:

Cost O&G properties Refining assets Marketing and distribution Other assets Assets under construction Total
As of 1 January 2018 1,772,103 347,738 189,603 26,638 538,965 2,875,047
Additions 9,029 1,699 - - 395,112 405,840
Acquisitions through business combinations - - 1,108 - - 1,108
Changes in decommissioning obligations (8,885) - - - - (8,885)
Capitalised borrowing costs - - - - 37,670 37,670
Transfers 251,966 25,450 35,969 3,447 (316,832) -
Internal movement 137 (1,028) 1,167 98 (374) -
Reclassification from other non-current assets 1,003 5,160 602 13 (2,040) 4,738
Disposals (13,841) (1,987) (1,865) (2,879) (9,623) (30,195)
Translation differences 72,696 10,067 10,802 341 12,894 106,800
As of 31 December 2018 2,084,208 387,099 237,386 27,658 655,772 3,392,123
Depreciation and impairment
As of 1 January 2018 (649,937) (105,090) (60,290) (7,455) - (822,772)
Depreciation charge (131,293) (16,930) (12,801) (2,600) - (163,624)
Impairment (4,340) - - - - (4,340)
Acquisitions through business combinations - - (110) - - (110)
Internal movement 229 102 (546) 215 - -
Reclassification from other non-current assets (175) (1,600) - - - (1,775)
Disposals 7,891 1,569 1,511 849 - 11,820
Translation differences (38,250) (3,240) (3,573) (190) - (45,253)
As of 31 December 2018 (815,875) (125,189) (75,809) (9,181) - (1,026,054)
Net book value
As of 1 January 2018 1,122,166 242,648 129,313 19,183 538,965 2,052,275
As of 31 December 2018 1,268,333 261,910 161,577 18,477 655,772 2,366,069

Capitalized borrowing costs for the year ended 31 December 2018 include interest expense in the amount of ₽ 31.6 billion and exchange losses arising from foreign currency borrowings in the amount of ₽ 6.1 billion.

Cost O&G properties Refining assets Marketing and distribution Other assets Assets under constru-ction Total
As of 1 January 2017 1,569,525 308,192 152,871 23,531 369,304 2,423,423
Additions 2,921 1,572 - - 403,860 408,353
Changes in decommissioning obligations 20,152 - - - - 20,152
Capitalised borrowing costs - - - - 29,562 29,562
Transfers 191,205 32,548 34,120 3,562 (261,435) -
Internal movement (1,230) (724) (72) 591 1,435 -
Disposals (7,101) (699) (1,913) (1,329) (2,212) (13,254)
Translation differences (3,369) 6,849 4,597 283 (1,549) 6,811
As of 31 December 2017 1,772,103 347,738 189,603 26,638 538,965 2,875,047
Depreciation and impairment
As of 1 January 2017 (553,140) (89,106) (49,052) (5,780) - (697,078)
Depreciation charge (107,119) (14,787) (11,140) (2,336) - (135,382)
Impairment 256 - - - - 256
Internal movement 444 157 (44) (557) - -
Disposals 4,611 601 1,110 1,313 - 7,635
Translation differences 5,011 (1,955) (1,164) (95) - 1,797
As of 31 December 2017 (649,937) (105,090) (60,290) (7,455) - (822,772)
Net book value
As of 1 January 2017 1,016,385 219,086 103,819 17,751 369,304 1,726,345
As of 31 December 2017 1,122,166 242,648 129,313 19,183 538,965 2,052,275

Capitalisation rate for the borrowing costs related to the acquisition of property, plant and equipment equals to 6% for the year ended 31 December 2018 (7% for the year ended 31 December 2017).

The information regarding Group’s exploration and evaluation assets (part of O&G properties) is presented below:

2018 2017
Net book value as of 1 January 94,027 75,343
Additions 26,363 22,283
Unsuccessful exploration expenditures derecognised (9,532) (337)
Transfer to proved property (2,886) (2,522)
Disposals (407) (143)
Translation differences 6,721 (597)
Net book value as of 31 December 114,286 94,027

During 2018 the Group performed impairment testing and recognised impairment in relation to upstream oil and gas assets in the amount of ₽ 4.3 billion (net reversal of impairment in relation to upstream oil and gas assets in the amount of ₽ 0.3 billion was recognised for the year ended 31 December 2017). The impairment loss is included in Depreciation, depletion and amortisation line item in the Consolidated Statement of Profit and Loss and Other Comprehensive Income.

The book value of these assets is equal to ₽ 56.6 billion and exceeded its recoverable amount. The impairment loss for these assets was recognized by the Group. Revision of the expected economic and technical performance of the assets in result of changes in exploration information, development programs, investment plans and international oil prices affected estimated value in use of these assets.

The recoverable amount was determined as the present value of estimated future cash flows using available forecasts of oil prices from globally recognised research institutions and production quantities based on reserve reports and long-term strategic plans. The pre-tax discount rate reflects current market assessments of the time value of money and the risks specific to the asset and amounts to 11.4% per annum in real terms.

12. Goodwill and other intangible assets

The information regarding movements in Group’s intangible assets is presented below:

Cost Goodwill Software Land rights Other IA Total
As of 1 January 2018 34,100 33,376 17,611 17,012 102,099
Additions - 5,781 824 5,307 11,912
Acquisitions through business combinations - - - 99 99
Internal movement - 788 11 (799) -
Disposals - (373) (1,727) (261) (2,361)
Translation differences 2,927 1,107 75 225 4,334
As of 31 December 2018 37,027 40,679 16,794 21,583 116,083
Amortisation and impairment
As of 1 January 2018 (201) (16,708) (5,916) (5,087) (27,912)
Amortisation charge - (5,228) (696) (1,563) (7,487)
Internal movement - 328 - (328) -
Disposals - 369 359 (246) 482
Translation differences (33) (859) (3) (132) (1,027)
As of 31 December 2018 (234) (22,098) (6,256) (7,356) (35,944)
Net book value
As of 1 January 2018 33,899 16,668 11,695 11,925 74,187
As of 31 December 2018 36,793 18,581 10,538 14,227 80,139
Cost Goodwill Software Land rights Other IA Total
As of 1 January 2017 32,106 26,979 17,521 16,006 92,612
Additions - 4,659 9 3,038 7,706
Internal movement - 1,202 27 (1,229) -
Disposals - (68) (2) (900) (970)
Translation differences 1,994 604 56 97 2,751
As of 31 December 2017 34,100 33,376 17,611 17,012 102,099
Amortisation and impairment
As of 1 January 2017 (180) (13,060) (5,214) (4,007) (22,461)
Amortisation charge - (3,770) (702) (1,400) (5,872)
Internal movement - 519 - (519) -
Disposals - - - 767 767
Translation differences (21) (397) - 72 (346)
As of 31 December 2017 (201) (16,708) (5,916) (5,087) (27,912)
Net book value
As of 1 January 2017 31,926 13,919 12,307 11,999 70,151
As of 31 December 2017 33,899 16,668 11,695 11,925 74,187

Goodwill acquired through business combination has been allocated to Upstream and Downstream in the amounts of ₽ 29.7 billion and ₽ 7.1 billion as of 31 December 2018 (₽ 27.0 billion and ₽ 6.9 billion as of 31 December 2017). Goodwill was tested for impairment and no impairment was identified.

13. Investments in associates and joint ventures

The carrying values of the investments in associates and joint ventures as 31 December 2018 and 2017 are summarised below:

31 December 2018 31 December 2017
Ownership percentage Carrying value Ownership percentage Carrying value
Slavneft Joint venture 49.9 126,835 49.9 111,679
Arcticgas Joint venture 50.0 146,246 46.7 105,157
Messoyakha Joint venture 50.0 36,837 50.0 17,965
Northgas Joint venture 50.0 7,767 50.0 12,568
Others 11,252 9,389
Total investments 328,937 256,758

The principal place of business of the most significant joint ventures and associates disclosed above is the Russian Federation.

The total amount of dividends received from joint ventures in 2018 amounts to ₽ 20,028 million (₽ 5,531 million in 2017).

Slavneft

PJSC NGK Slavneft and it’s subsidiaries (Slavneft) are engaged in exploration, production and development of crude oil and gas and production of refined petroleum products. The control over Slavneft is divided equally between the Group and PJSC NK Rosneft.

Arcticgas

In January 2018 SeverEnergy LLC and Yamal Razvitie LLC were merged to JSC Arctic Gas Company (Arcticgas, an entity jointly controlled by the Group and PJSC NOVATEK). In March 2018 the loans issued by Gazprom Neft were converted to ordinary shares from additional share emission of Arcticgas. As result the Group’s share in Arcticgas (previously was held through SeverEnergy LLC and Yamal Razvitie LLC) increased to 50.0% as of 31 March 2018.

Arcticgas is developing the Samburgskoye, Urengoiskoe and Yaro-Yakhinskoye oil and gas condensate fields and some other small oil and gas condensate fields located in the Yamalo-Nenetskiy autonomous region of the Russian Federation.

Northgas

CJSC Northgas (Northgas) is engaged in development of Severo-Urengoiskoe natural gas and oil field. The Group’s investment in Northgas is held through Gazprom Resource Northgas LLC which is controlled by the Group and owns a 50% share in Northgas. The control over Northgas is divided equally between the Group and PJSC NOVATEK.

Messoyakha

JSC Messoyakhaneftegas (Messoyakha) is developing the Vostochno-Messoyakhskoe and Zapadno-Messoyakhskoe oil and gas condensate fields. The control over Messoyakha is divided equally between the Group and PJSC NK Rosneft.

The summarised financial information for the significant associates and joint ventures as of 31 December 2018 and 2017 and for the years ended 31 December 2018 and 2017 is presented in the tables below.

31 December 2018 Slavneft Arcticgas Messoyakha Northgas
Cash and cash equivalents 3,448 38,132 1 1,151
Other current assets 89,057 18,430 23,977 3,560
Non-current assets 379,881 382,586 178,452 41,785
Current financial liabilities (31,609) (40,645) (10,063) (8,002)
Other current liabilities (30,902) (11,055) (8,810) (83)
Non-current financial liabilities (126,151) (65,160) (99,000) (15,522)
Other non-current liabilities (42,469) (51,637) (11,302) (5,982)
Net assets 241,255 270,651 73,255 16,907
31 December 2017 Slavneft SeverEnergy (Arcticgas) Messoyakha Northgas
Cash and cash equivalents 4,153 8,658 1 1,409
Other current assets 54,479 133,617 18,654 3,256
Non-current assets 344,997 259,175 152,469 54,065
Current financial liabilities (34,666) (49,851) (4,913) (6,379)
Other current liabilities (29,617) (18,495) (4,812) (77)
Non-current financial liabilities (88,198) (91,811) (116,815) (21,109)
Other non-current liabilities (41,229) (52,465) (9,072) (4,656)
Net assets 209,919 188,828 35,512 26,509
Year ended 31 December 2018 Slavneft Arcticgas Messoyakha Northgas
Revenue 314,332 195,581 125,521 23,337
Depreciation and amortisation (38,713) (21,100) (19,692) (2,554)
Finance income 371 1,243 - 679
Finance expense (9,246) (10,215) (7,531) (2,113)
Total income tax expense (7,682) (16,926) (11,656) (1,951)
Profit for the period 31,235 81,823 56,344 7,399
Total comprehensive income for the period 31,372 81,823 56,344 7,399
Year ended 31 December 2017 Slavneft SeverEnergy (Arcticgas) Messoyakha Northgas
Revenue 241,253 147,204 61,030 23,079
Depreciation and amortisation (37,984) (23,357) (12,489) (2,561)
Finance income 989 966 3 1,153
Finance expense (6,781) (17,759) (6,559) (2,784)
Total income tax expense (4,429) (7,210) (4,615) (1,726)
Profit for the period 21,648 42,365 19,952 6,868
Total comprehensive income for the period 21,707 42,365 19,952 6,868

Others

The aggregate carrying amount of all individually immaterial associates and joint ventures as well as the Group’s share of those associates’ and joint ventures’ profit or loss and other comprehensive income are not significant for both reporting dates and periods.

14. Joint operations

Under IFRS 11 Joint Arrangements the Group assessed the nature of its 50% share in joint arrangements and determined investments in Tomskneft and Salym Petroleum Development as Joint operations. Tomskneft and Salym Petroleum Development are engaged in production of oil and gas in the Russian Federation and all of the production is required to be sold to the parties of the joint arrangement (that is, the Group and its partners).

15. Long-term financial assets

Long-term financial assets as of 31 December 2018 and 2017 comprise the following:

31 December 2018 31 December 2017
Long-term loans issued 7,846 27,895
Equity investments at fair value through OCI 3,083 2,911
Deposits with original maturity more than 1 year - 1,181
Less credit loss allowance (584) (694)
Total long-term financial assets 10,345 31,293

As of 31 December 2017 equity investments at fair value through OCI was recorded as available for sale financial assets.

16. Deferred income tax assets and liabilities

Recognised deferred tax assets and liabilities are attributable to the following:

As of 31 December 2018 Assets Liabilities Net
Property, plant and equipment 3,869 (149,449) (145,580)
Intangible assets - (3,875) (3,875)
Investments 515 (9) 506
Inventories 1,047 (1,902) (855)
Trade and other receivables 2,595 (15) 2,580
Loans and borrowings - (286) (286)
Provisions 6,063 (251) 5,812
Tax loss carry-forwards 24,387 - 24,387
Finance lease 5,264 - 5,264
Other 5,002 (1,276) 3,726
Net-off (29,615) 29,615 -
Tax assets / (liabilities) 19,127 (127,448) (108,321)
As of 31 December 2017
Property, plant and equipment 4,965 (126,842) (121,877)
Intangible assets 1 (3,536) (3,535)
Investments 358 (340) 18
Inventories 828 (1,369) (541)
Trade and other receivables 2,838 (28) 2,810
Loans and borrowings - (276) (276)
Provisions 6,598 (24) 6,574
Tax loss carry-forwards 23,255 - 23,255
Finance lease 4,866 - 4,866
Other 4,938 (948) 3,990
Net-off (30,780) 30,780 -
Tax assets / (liabilities) 17,867 (102,583) (84,716)

Movement in temporary differences during the period:

As of 1 January 2018 Recognised in profit or loss Recognised in other comprehensive income Acquired/ disposed of As of 31 December 2018
Property, plant and equipment (121,877) (21,073) (2,479) (151) (145,580)
Intangible assets (3,535) (340) - - (3,875)
Investments 18 2,293 (1,805) - 506
Inventories (541) (314) - - (855)
Trade and other receivables 2,810 (316) 86 - 2,580
Loans and borrowings (276) (10) - - (286)
Provisions 6,574 (853) 91 - 5,812
Tax loss carry-forwards 23,255 1,098 34 - 24,387
Finance lease 4,866 398 - - 5,264
Other 3,990 (427) 162 1 3,726
(84,716) (19,544) (3,911) (150) (108,321)
As of 1 January 2017 Recognised in profit or loss Recognised in other comprehensive income Acquired/ disposed of As of 31 December 2017
Property, plant and equipment (91,162) (31,087) 372 - (121,877)
Intangible assets (3,661) 126 - - (3,535)
Investments (269) 267 20 - 18
Inventories (68) (473) - - (541)
Trade and other receivables 2,291 460 59 - 2,810
Loans and borrowings (2,152) 1,876 - - (276)
Provisions 7,250 (736) 60 - 6,574
Tax loss carry-forwards 14,152 9,146 (43) - 23,255
Finance lease - 4,866 - - 4,866
Other 311 3,728 (49) - 3,990
(73,308) (11,827) 419 - (84,716)

17. Other non-current assets

Other non-current assets are primarily comprised of advances provided on capital expenditures (₽ 42.8 billion and ₽ 69.3 billion as of 31 December 2018 and 2017, respectively).

18. Short-term debt and current portion of long-term debt

As of 31 December 2018 and 2017 the Group has short-term debt and current portion of long-term debt outstanding as follows:

31 December 2018 31 December 2017
Current portion of long-term debt 90,263 131,360
Other borrowings 660 400
Total short-term debt and current portion of long-term debt 90,923 131,760

19. Trade and other payables

Accounts payable as of 31 December 2018 and 2017 comprise the following:

31 December 2018 31 December 2017
Trade accounts payable 185,269 118,151
Dividends payable 106,713 49,520
Forward contracts — cash flow hedge - 16,758
Other accounts payable 15,622 10,009
Total trade and other payables 307,604 194,438

Other accounts payable are mainly represented by short-term part of liability to PJSC Gazprom for assets relating to Prirazlomnoye project.

20. Other current liabilities

Other current liabilities as of 31 December 2018 and 2017 comprise the following:

31 December 2018 31 December 2017
Advances received 25,599 21,972
Payables to employees 3,878 3,182
Other non-financial payables 10,033 7,346
Total other current liabilities 39,510 32,500

21. Other taxes payable

Other taxes payable as of 31 December 2018 and 2017 comprise the following:

31 December 2018 31 December 2017
VAT 42,580 27,515
Mineral extraction tax 33,782 31,807
Excise tax 11,001 13,201
Social security contributions 6,051 6,974
Other taxes 5,671 5,336
Total other taxes payable 99,085 84,833

Tax expense other than income tax expense for the years ended 31 December 2018 and 2017 comprise the following:

Year ended 31 December 2018 Year ended 31 December 2017
Mineral extraction tax 487,492 329,579
Excise tax 126,779 128,229
Social security contributions 22,113 20,433
Other taxes 16,400 14,028
Total taxes other than income tax 652,784 492,269

22. Provisions and other accrued liabilities

Movement in provisions and other accrued liabilities for the years ended 31 December 2018 and 2017 is below:

Decommissioning and environmental provision Other accrued liabilities Total
Carrying amount as of 1 January 2017 36,361 24,987 61,348
Short-term part 151 15,255 15,406
Long-term part 36,210 9,732 45,942
New obligation incurred 5,790 11,711 17,501
Utilisation of provision / accrual (684) (3,301) (3,985)
Change in estimates 14,326 - 14,326
Unwind of discount 2,785 - 2,785
Translation differences 23 449 472
Carrying amount as of 31 December 2017 58,601 33,846 92,447
Short-term part 151 29,722 29,873
Long-term part 58,450 4,124 62,574
New obligation incurred 9,323 9,917 19,240
Utilisation of provision / accrual (2,422) (16,972) (19,394)
Change in estimates (11,857) - (11,857)
Unwind of discount 3,809 - 3,809
Translation differences 2,176 814 2,990
Carrying amount as of 31 December 2018 59,630 27,605 87,235
Short-term part 1,771 18,272 20,043
Long-term part 57,859 9,333 67,192

Change in estimates was mainly caused by revision of discount and inflation rates.

23. Long-term debt

As of 31 December 2018 and 2017 the Group has long-term outstanding debt as follows:

31 December 2018 31 December 2017
Bank loans 424,447 303,173
Loan participation notes 209,426 226,110
Bonds 132,719 143,007
Other borrowings 8,201 7,724
Less current portion of long-term debt (90,263) (131,360)
Total long-term debt 684,530 548,654

Bank loans

In March and September 2018 the Group performed principal repayment in the total amount of $ 614.3 million (₽ 38.9 billion) under the Club term loan facility with the syndicate of international banks (facility agent — Mizuho) according to the payment schedule.

In March and September 2018 the Group performed principal repayment in the total amount of $ 200 million (₽ 12.4 billion) under the Club term loan facility with the syndicate of international banks (facility agent — Commerzbank) according to the payment schedule.

In January 2018 the Group borrowed ₽ 51.3 billion under long-term facility agreements due payable in January 2023. In July 2018 the Group performed pre-scheduled principal repayment in the total amount of ₽ 48.0 billion due to borrowing ₽ 48.0 billion under long-term facility agreement due payable in July 2023.

In December 2017 the Group signed several long-term facility agreements with final maturity date in December 2022 — June 2023. In June 2018 the Group performed pre-scheduled principal repayment in the total amount of ₽ 102.0 billion due to borrowing ₽ 102.0 billion under long-term facility agreement due payable in June 2023.

In September 2018 the Group borrowed ₽ 10.0 billion under long-term facility agreement with Alfa-Bank due payable in September 2023.

In first half 2015 the Group signed several long-term facility agreements with one of the Russian banks with final maturity date in August 2019. In October and November the Group performed pre-scheduled principal repayment in the total amount of ₽ 15.0 billion and ₽ 5.0 billion respectively.

In October 2018 the Group borrowed ₽ 15.0 billion under long-term facility agreement with Gazprombank due payable in October 2021.

In November 2018 the Group borrowed ₽ 5.0 billion under long-term facility agreement with Gazprombank due payable in November 2021.

In December 2018 the Group borrowed ₽ 50.0 billion under long-term facility agreements due payable in December 2023.

In December 2018 the Group borrowed ₽ 30.0 billion under long-term facility agreement with one of the Russian banks due payable in June 2021.

The loan agreements contain financial covenant that limits the Group’s ratio of «Consolidated financial indebtedness to Consolidated EBITDA». The Group is in compliance with all covenants as of 31 December 2018 and 2017 and during the year ended 31 December 2018.

Bonds

In March 2018 the Group placed six-year Rouble Bonds (001P-06R series) with the total par value of ₽ 25.0 billion. The bonds bear interest of 7.2% per annum.

In March 2018 the Group exercised the call option on Rouble bonds (series BO-02 and BO-07) in the total amount of ₽ 25.0 billion. The bonds are fully repaid.

In April 2018 the Group exercised the put option on Rouble bonds (series 4-04) in the total amount of ₽ 9.9 billion.

Loan participation notes

In April 2013 the Group raised € 750 million (₽ 30.6 billion) financed by 2.9% Loan Participation Notes (LPN) due payable in April 2018 (Series 2). In April 2018 the Group performed principal repayment of LPN (series 2) in the total amount of € 750 million (₽ 56.6 billion). The LPN are fully repaid.

24. Finance lease

Since 2017 the Group has finance lease agreements regarding vessels. As of 31 December 2018 net book value of the leased assets which are pledged for finance lease is ₽ 24.2 billion (₽ 24.8 billion as of 31 December 2017). At the end of lease term ownership title to the vessels transfers to the Group. The lease contract also contains an option for early purchase of the assets by the Group.

Net book value of other items of property, plant and equipment under finance lease contracts is non significant.

The reconciliation between future minimum lease payments and their present value as of 31 December 2018 and 2017 is presented in the table below:

Minimum lease payments Present value of minimum lease payments
31 December 2018
Less than one year 3,392 3,282
Between one and five years 13,792 11,462
More than five years 17,627 10,739
Total minimum lease payments 34,811 25,483
31 December 2017
Less than one year 2,784 2,693
Between one and five years 11,204 9,273
More than five years 17,355 10,257
Total minimum lease payments 31,343 22,223

The difference between the minimum lease payments and their present value represents future finance charges on finance lease liabilities.

25. Other non-current financial liabilities

Other non-current financial liabilities as of 31 December 2018 and 2017 comprise the following:

31 December 2018 31 December 2017
Deferred consideration 43,407 47,245
Forward contracts — cash flow hedge 1,623 1,295
Other liabilities (173) 29
Total other non-current financial liabilities 44,857 48,569

Deferred consideration represents liability to PJSC Gazprom for assets relating to Prirazlomnoye project. Payments of the principal amount of the liability are presented as financing activities at line «Repayment of long-term borrowings» in Consolidated Statement of Cash Flows.

26. Share capital and treasury shares

Share capital as of 31 December 2018 and 2017 comprise the following:

Ordinary shares Treasury shares
31 December 2018 31 December 2017 31 December 2018 31 December 2017
Number of shares (million) 4,741 4,741 23 23
Authorised shares (million) 4,741 4,741 23 23
Par value (₽ per share) 0.0016 0.0016 0.0016 0.0016
On issue as of 31 December, fully paid (₽ million) 8 8 (1,170) (1,170)

The nominal value of share capital differs from its carrying value due to the effect of inflation.

On 14 December 2018 the general shareholders’ meeting of PJSC Gazprom Neft approved an interim dividend on the ordinary shares for the nine months ended 30 September 2018 in the amount of ₽ 22.05 per share.

On 9 June 2018 the annual general shareholders’ meeting of PJSC Gazprom Neft approved a dividend on the ordinary shares for 2017 in the amount of ₽ 15.00 per share including an interim dividend on the ordinary shares in the amount of ₽ 10.00 per share.

On 9 June 2017 the annual general shareholders’ meeting of PJSC Gazprom Neft approved a dividend on the ordinary shares for 2016 in the amount of ₽ 10.68 per share.

27. Employee costs

Employee costs for the years ended 31 December 2018 and 2017 comprise the following:

Year ended 31 December 2018 Year ended 31 December 2017
Wages and salaries 84,902 75,153
Other costs and compensations 12,269 11,357
Total employee costs 97,171 86,510
Social security contributions (social taxes) 22,113 20,433
Total employee costs (with social taxes) 119,284 106,943

28. Other loss, net

Other loss, net for the years ended 31 December 2018 and 2017 comprise the following:

Year ended 31 December 2018 Year ended 31 December 2017
Write-off of assets (13,330) (3,727)
Impairment of advances and other receivables (699) (345)
Penalties (116) 595
Write-off payables 651 234
Other losses, net (6,302) (4,314)
Total other loss, net (19,796) (7,557)

29. Net foreign exchange loss

Net foreign exchange loss for the years ended 31 December 2018 and 2017 comprise the following:

Year ended 31 December 2018 Year ended 31 December 2017
Net foreign exchange (loss) / gain on financing activities, including: (72,735) 8,686
foreign exchange gain 5,506 20,419
foreign exchange loss (78,241) (11,733)
Net foreign exchange gain / (loss) on operating activities 39,177 (8,927)
Net foreign exchange loss (33,558) (241)

30. Finance income

Finance income for the years ended 31 December 2018 and 2017 comprise the following:

Year ended 31 December 2018 Year ended 31 December 2017
Interest income on loans issued 1,512 7,185
Interest on cash and cash equivalents 5,923 2,886
Other financial income 71 27
Total finance income 7,506 10,098

31. Finance expense

Finance expense for years ended 31 December 2018 and 2017 comprise the following:

Year ended 31 December 2018 Year ended 31 December 2017
Interest expense 49,250 47,373
Decommissioning provision: unwinding of discount 3,809 2,785
Less: capitalised interest (31,583) (25,031)
Finance expense 21,476 25,127

32. Income tax expense

The Group’s applicable income tax rate for the companies located in the Russian Federation is 20%.

Year ended 31 December 2018 Year ended 31 December 2017
₽ million % ₽ million %
Total income tax expense 98,701 20 64,558 20
Profit before income tax excluding share of profit before tax of associates and joint ventures 389,418 279,696
Profit before income tax of associates and joint ventures 109,676 51,988
Profit before income tax 499,094 331,684 -
Tax at applicable domestic tax rate (20%) 99,819 20 66,337 20
Effect of tax rates in foreign jurisdictions 1,133 - (388) -
Difference in statutory tax rate in domestic entities (9,423) (2) (2,918) (1)
Non-deductible and deductible items (including Intragroup) 7,882 2 (2,813) (1)
Adjustment for prior years 360 1 3,934 2
Change in tax rate (1,167) - 428 -
Foreign exchange (gain) / loss of foreign non-operating units 97 - (22) -
Total income tax expense 98,701 20 64,558 20

Reconciliation of effective tax rate:

Year ended 31 December 2018 Year ended 31 December 2017
Current income tax expense
Current year 60,177 40,053
Adjustment for prior years (592) 3,642
59,585 43,695
Deferred income tax expense
Origination and reversal of temporary differences 20,711 11,399
Change in tax rate (1,167) 428
19,544 11,827
Total income tax expense 79,129 55,522
Share of tax of associates and joint ventures 19,572 9,036
Total income tax expense including share of tax of associates and joint ventures 98,701 64,558

33. Cash flow hedges

The following table indicates the periods in which the cash flows associated with cash flow hedges are expected to occur and the fair value of the related hedging instrument:

Fair value Less than 6 month From 6 to 12 months From 1 to 3 years Over 3 years
As of 31 December 2018
Forward exchange contracts and interest rate swaps
Liabilities (1,493) - - - (1,493)
Total (1,493) - - - (1,493)
As of 31 December 2017
Forward exchange contracts and interest rate swaps
Liabilities (17,928) (16,758) - - (1,170)
Total (17,928) (16,758) - - (1,170)

As of 31 December 2018 and 2017 the Group has outstanding forward currency exchange contracts and interest rate swaps for a total notional value of $ 140 million and $ 1,742 million respectively. During the year ended 31 December 2018 loss in the amount of ₽ 16,758 million was reclassified from equity to net foreign exchange (loss) / gain in the Consolidated Statement of Profit and Loss and Other Comprehensive Income (₽ 9,984 million for the year ended 31 December 2017).

The impact of foreign exchange cash flow hedges recognized in other comprehensive income is set out below:

2018 2017
Before income tax Income tax Net of tax Before income tax Income tax Net of tax
Total recognised in other comprehensive (loss) / income as of the beginning of the year (17,928) 2,103 (15,825) (39,282) 5,023 (34,259)
Foreign exchange effects recognised during the year (323) 65 (258) 11,370 (1,914) 9,456
Recycled to Net foreign exchange gain / (loss) on operating activities 16,758 (1,870) 14,888 9,984 (1,006) 8,978
Total recognised in other comprehensive income / (loss) for the year 16,435 (1,805) 14,630 21,354 (2,920) 18,434
Total recognised in other comprehensive (loss) / income as of the closing of the year (1,493) 298 (1,195) (17,928) 2,103 (15,825)

The accumulated foreign exchange loss will be reclassified from other comprehensive income / (loss) to profit and loss in 2022.

The Group uses an estimation of the fair value of forward currency exchange contracts prepared by independent financial institutes. Valuation results are regularly reviewed by the Management. No significant ineffectiveness occurred during the reporting period.

34. Financial risk management

Risk Management Framework

Gazprom Neft Group has a risk management policy that defines the goals and principles of risk management in order to make the Group’s business more secure in both the short and the long term.

The Group’s goal in risk management is to increase effectiveness of Management decisions through detailed analysis of related risks.

The Group’s Integrated Risk Management System (IRMS) is a systematic continuous process that identifies, assesses and manages risks. Its key principle is that responsibility to manage different risks is assigned to different management levels depending on the expected financial impact of those risks. The Group is working continuously to improve its approach to basic IRMS processes, with special focus on efforts to assess risks and integrate the risk management process into such key corporate processes as business planning, project management and mergers and acquisitions.

Financial Risk Management

Management of the Group’s financial risks is the responsibility of employees acting within their respective professional spheres. The Group’s Financial Risk Management Panel defines a uniform approach to financial risk management at the Company and its subsidiaries. Activities performed by the Group’s employees and the Financial Risk Management Panel minimise potential financial losses and help to achieve corporate targets.

In the normal course of its operations the Group has exposure to the following financial risks:

  • market risk (including currency risk, interest rate risk and commodity price risk);
  • credit risk; and
  • liquidity risk.

Market risk

Currency Risk

The Group is exposed to currency risk primarily on borrowings that are denominated in currencies other than the respective functional currencies of Group entities, which are primarily the local currencies of the Group companies, for instance the Russian Rouble for companies operating in Russia. The currencies in which these borrowings are denominated in are mainly USD and EUR.

The Group’s currency exchange risk is considerably mitigated by its foreign currency assets and liabilities: the current structure of revenues and liabilities acts as a hedging mechanism with opposite cash flows offsetting each other. The Group applies hedge accounting to manage volatility in profit and loss with its cash flows in foreign currency.

The carrying amounts of the Group’s financial instruments by currencies they are denominated in are as follows:

As of 31 December 2018 Russian Rouble USD EURO Serbian dinar Other currencies
Financial assets
Current
Cash and cash equivalents 144,352 88,487 6,304 4,896 3,546
Bank deposits - - - - -
Loans issued 838 - 17 - -
Trade and other financial receivables 33,389 76,676 1,503 15,624 1,958
Non-current
Trade and other financial receivables 980 - - - -
Bank deposits - - - - -
Loans issued 7,846 - - - -
Equity investments at fair value through other comprehensive income (OCI) 2,433 - - 66 -
Financial liabilities
Current
Short-term debt (21,077) (67,171) (2,683) - 8
Trade and other financial payables (269,489) (20,452) (4,944) (10,387) (2,332)
Forward exchange contracts - - - - -
Finance lease liability (38) (1,742) (48) - (1)
Non-current
Long-term debt (401,315) (208,617) (74,433) - (165)
Forward exchange contracts (130) (1,493) - - -
Finance lease liability (65) (23,082) (385) - (122)
Other non-current financial liabilities (41,818) (1,413) - - (3)
Net exposure (544,094) (158,807) (74,669) 10,199 2,889
As of 31 December 2017 Russian Rouble USD EURO Serbian dinar Other currencies
Financial assets
Current
Cash and cash equivalents 38,700 34,902 6,540 6,679 3,787
Bank deposits 1,323 - 13 4,443 -
Loans issued 4,669 - - 1 -
Trade and other financial receivables 41,240 43,484 3,117 12,433 1,988
Non-current
Trade and other financial receivables 901 - - - -
Bank deposits - - - 1,181 -
Loans issued 27,695 - 200 - -
Available for sale financial assets 2,157 - - 60 -
Financial liabilities
Current
Short-term debt (28,630) (48,360) (54,751) - (19)
Trade and other financial payables (145,576) (16,008) (5,478) (9,191) (1,427)
Forward exchange contracts - (16,758) - - -
Finance lease liability - (1,367) (30) - -
Non-current
Long-term debt (240,920) (257,377) (50,196) - (161)
Forward exchange contracts (126) (1,169) - - -
Finance lease liability (23) (20,582) (114) - (107)
Other non-current financial liabilities (47,271) - - - (3)
Net exposure (345,861) (283,235) (100,699) 15,606 4,058

The following exchange rates applied during the period:

Reporting date spot rate
31 December 2018 31 December 2017
USD 1 69.47 57.60
EUR 1 79.46 68.87
RSD 1 0.67 0.58
Sensitivity analysis

The Group has chosen to provide information about market and potential exposure to hypothetical gain / (loss) from its use of financial instruments through sensitivity analysis disclosures.

The sensitivity analysis shown in the table below reflects the hypothetical effect on the Group’s financial instruments and the resulting hypothetical gains/losses that would occur assuming change in closing exchange rates and no changes in the portfolio of investments and other variables at the reporting dates.

Weakening of ₽
Equity Profit or (loss)
31 December 2018
USD/RUB (20% increase) 4,323 (37,950)
EUR/RUB (20% increase) 23 (15,008)
RSD/RUB (20% increase) (18,932) -
31 December 2017
USD/RUB (20% increase) 1,883 (55,520)
EUR/RUB (20% increase) 9 (20,158)
RSD/RUB (20% increase) (16,650) -

Decrease in the exchange rates will have the same effect in the amount, but the opposite effect on Equity and Profit and loss of the Group.

Interest Rate Risk

Part of the Group’s borrowings is at variable interest rates (linked to the Libor, Euribor or key rate of the Bank of Russia). To mitigate the risk of unfavourable changes in the Libor or Euribor rates, the Group’s treasury function monitors interest rates in debt markets and based on it decides whether it is necessary to hedge interest rates or to obtain financing on a fixed-rate or variable-rate basis.

Changes in interest rates primarily affect debt by changing either its fair value (fixed rate debt) or its future cash flows (variable rate debt). However, at the time of any new debts Management uses its judgment and information about current/expected interest rates on the debt markets to decide whether it believes fixed or variable rate (in aggregate with other conditions) would be more favourable.

The interest rate profiles of the Group are presented below:

Carrying amount
31 December 2018 31 December 2017
Fixed rate instruments
Financial assets 256,286 130,133
Financial liabilities (681,008) (564,730)
(424,722) (434,597)
Variable rate instruments
Financial liabilities (119,928) (137,907)
(119,928) (137,907)
Cash flow sensitivity analysis for variable rate instruments

The Group’s financial results and equity are sensitive to changes in interest rates. If the interest rates applicable to floating debt increase by 100 basis points (bp) at the reporting dates, assuming all other variables remain constant, it is estimated that the Group’s profit before taxation will change by the amounts shown below:

Profit or (loss)
31 December 2018
Increase by 100 bp (1,199)
31 December 2017
Increase by 100 bp (1,379)

A decrease by 100 bp in the interest rates will have the same effect in the amount, but the opposite effect on Profit and loss of the Group.

Commodity Price Risk

The Group’s financial performance relates directly to prices for crude oil and petroleum products. The Group is unable to fully control the prices of its products, which depend on the balance of supply and demand on global and domestic markets for crude oil and petroleum products, and on the actions of supervisory agencies.

The Group’s business planning system calculates different scenarios for key performance factors depending on global oil prices. This approach enables Management to adjust cost by reducing or rescheduling investment programs and other mechanisms.

Such activities help to decrease risks to an acceptable level.

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and in connection with investment securities.

Credit risk arises from cash and cash equivalents, contractual cash flows of debt investments carried at amortised cost, at fair value through other comprehensive income (FVOCI), favourable derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables.

The Group is exposed to credit risk due to sales with deferred payment terms which are usual and customary in the market. There is risk of non-timely receipt of payments for crude oil and petroleum products (risk of tiding up of working capital) and risk of default of counterparty.

Sales to retail customers are required to be settled in cash or using major credit cards, mitigating credit risk. There are no significant concentrations of credit risk, whether through exposure to individual customers, specific industry sectors and/or regions. The Group’s trade and other receivables relate to a large number of customers, spread across diverse industries and geographical areas. The Group has taken a number of steps to manage credit risk, including: counterparty solvency evaluation; individual credit limits and payment conditions depending on each counterparty’s financial situation; controlling advance payments; controlling accounts receivable by lines of business, etc.

The carrying amount of financial assets represents the maximum credit exposure.

Trade and Other Receivables

The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each counterparty.

Credit limit is established for each customer individually as maximum amount of credit risk taking into account a number of characteristics, such as:

  • financial statements of the counterparty;
  • history of relationships with the Group;
  • credit profile of the customer;
  • duration of relationships with the Group, including ageing profile.

The compliance with credit limits by wholesale customers is automatically controlled.

As a rule, an excess of receivables over approved credit limit is secured by either bank guarantee, letter of credit from a bank, pledge or third party guarantee.

The Group regularly assesses the credit quality of trade and other receivables taking into account analysis of ageing profile of receivables and duration of relationships with the Group. To assess whether there is a significant increase in credit risk the Group compares the solvency data occurring as at the reporting date with the same data as at the date of initial recognition. The Group considers available reasonable and supportable forwarding-looking information.

The Management believes that not impaired trade and other receivables are fully recoverable.

The Group recognises an allowance for impairment that represents its best estimate of incurred losses in respect of trade and other receivables.

Trade receivables representing due from customers in the ordinary course of business are short-term by nature and do not contain the significant financial component. Lifetime expected credit loss estimation is equal 12-months measure. The Group makes forward looking information adjustment, if changes between prior year macroparameters’ level and its forecast for next 12 months are significant.

Estimated provision matrixes have been prepared for separate portfolios of receivables, homogeneous in terms of credit risk. Types of products sold, geographical specificity of distributional channels, ageing period of receivables and other factors were taken into account to separate individual portfolios.

As of 31 December 2018 and 2017, the ageing analysis of financial receivables is as follows:

Gross Credit loss allowance Gross Credit loss allowance
31 December 2018 31 December 2018 31 December 2017 31 December 2017
Not past due 122,674 (65) 99,834 (109)
Past due 0 — 30 days 2,282 (3) 1,933 (59)
Past due 31 — 90 days 3,775 (31) 307 (3)
Past due 91 — 180 days 944 (70) 98 (38)
Past due 181 — 365 days 533 (124) 619 (167)
Past due more than 1 year 2,352 (2,137) 7,939 (7,191)
132,560 (2,430) 110,730 (7,567)

The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for trade and other receivables.

The movement in the credit loss allowance for impairment in respect of trade and other receivables during the period was as follows:

31 December 2018 31 December 2017
Balance at the beginning of the year 7,567 12,274
Increase during the year 461 796
Amounts written off against receivables (5,766) (46)
Decrease due to reversal (236) (366)
Reclassification to other lines 191 (5,677)
Other movements 9 (2)
Translation differences 204 588
Balance at the end of the year 2,430 7,567
Other current assets

The movement in the credit loss allowance for impairment in respect of other current assets during the period was as follows:

31 December 2018 31 December 2017
Balance at the beginning of the year 12,288 11,970
Increase during the year 172 345
Amounts written off against receivables (532) (192)
Decrease due to reversal (92) (142)
Reclassification to other lines (199) 296
Other movements (7) (2)
Translation differences 97 13
Balance at the end of the year 11,727 12,288
Investments

The Group limits its exposure to credit risk mainly by investing in liquid securities. Management actively monitors credit ratings and does not expect any counterparty to fail to meet its obligations.

The Group does not have any loans issued measured at amortized cost that were past due but not impaired as of 31 December 2018.

Credit quality of financial assets

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates:

BBB Less than BBB Without rating Total
As of 31 December 2018
Cash and cash equivalents 11,671 190,856 45,058 247,585
Short-term loans issued - - 855 855
Long-terms loans issued - - 7,846 7,846
As of 31 December 2017
Cash and cash equivalents 7,571 74,402 8,635 90,608
Short-term loans issued - - 4,67 4,67
Deposits with original maturity more than 3 months less than 1 year 3,293 2,485 1 5,779
Deposits with original maturity more than 1 year 1,179 - 2 1,181
Long-terms loans issued - - 27,895 27,895

The Group uses lifetime expected credit loss approach to measure expected credit losses for most of its financial assets.

As of 31 December 2018 and 2017 no significant credit loss allowance for impairment in respect of these assets was recognized.

Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.

The Group’s approach to managing liquidity and monitoring liquidity risks is to ensure that sufficient financial resources (including cash position and available unused credit facilities) are maintained and available to meet upcoming liabilities under normal and stressed conditions without incurring unacceptable losses or risking damage to the Group’s reputation.

The following are the contractual maturities of financial liabilities, including estimated interest payments:

Carrying amount Contractual cash flows Less than 6 months 6 — 12 months 1 — 2 years 2 — 5 years Over 5 years
As of 31 December 2018
Bank loans 424,447 526,423 32,310 63,181 27,733 398,655 4,544
Bonds 132,719 173,579 15,548 4,915 9,627 85,206 58,283
Loan Participation Notes 209,426 257,913 5,406 5,406 10,812 236,289 -
Other borrowings 8,861 13,249 9,487 981 333 710 1,738
Other non-current financial liabilities 43,234 62,643 5 - 11,057 34,779 16,802
Finance lease liabilities 25,483 34,809 1,694 1,697 3,414 10,080 17,924
Trade and other payables 307,604 307,604 296,839 10,552 28 163 22
1,151,774 1,376,220 361,289 86,732 63,004 765,882 99,313
As of 31 December 2017
Bank loans 303,173 363,557 31,966 32,262 104,621 191,009 3,699
Bonds 143,007 192,023 26,665 5,681 20,856 104,049 34,772
Loan Participation Notes 226,110 277,970 57,052 4,482 8,965 113,295 94,176
Other borrowings 8,124 9,929 369 590 285 6,403 2,282
Other non-current financial liabilities 47,274 74,384 - - 11,580 14,173 48,631
Finance lease liabilities 22,223 31,307 1,385 1,386 5,511 5,564 17,461
Trade and other payables 177,680 177,680 173,660 4,020 - - -
927,591 1,126,850 291,097 48,421 151,818 434,493 201,021

Reconciliation of liabilities arising from financing activities

The table below sets out an analysis of net debt and the movements in the Group’s liabilities from financing activities for each of the years presented. The items of these liabilities are those that are reported as financing in the Consolidated Statement of Cash Flows:

Short-term and long-term debt Financial lease Other liabilities from financing activities Total
As of 1 January 2018 680,414 22,223 122,332 824,969
Cash flows, including: (16,432) (3,129) (105,822) (125,383)
Proceeds from borrowings 366,544 - - 366,544
Repayment of borrowings (340,459) - (20,601) (361,060)
Repayment of finance lease liabilities - (1,579) - (1,579)
Interest paid (42,359) (1,550) (2,583) (46,492)
Transaction costs directly attributable

to the borrowings received

(158) - - (158)
Dividends paid - - (82,638) (82,638)
Finance expense 41,302 1,550 5,269 48,121
Dividends declared - - 139,389 139,389
Changes in fair values, cash flow hedge - - (323) (323)
(Gain) / Loss on foreign exchange differences 63,651 4,361 - 68,012
Currency translation differences 6,073 61 442 6,576
Change in contract terms - - 2,819 2,819
Other non-cash movements 445 417 (535) 327
As of 31 December 2018 775,453 25,483 163,571 964,507
Short-term and long-term debt Financial lease Other liabilities from financing activities Total
As of 1 January 2017 676,408 - 101,781 778,189
Cash flows, including: (24,957) (1,955) (63,058) (89,970)
Proceeds from borrowings 356,370 - - 356,370
Repayment of borrowings (342,680) - (10,134) (352,814)
Repayment of finance lease liabilities - (893) - (893)
Interest paid (38,387) (1,062) - (39,449)
Transaction costs directly attributable

to the borrowings received

(260) - - (260)
Dividends paid - - (52,924) (52,924)
Finance expense 40,713 1,062 5,585 47,360
Dividends declared - - 99,986 99,986
Changes in fair values, cash flow hedge - - (11,370) (11,370)
(Gain) / Loss on foreign exchange differences (16,062) 419 - (15,643)
Currency translation differences 4,312 - 342 4,654
Assets received under finance lease - 22,410 - 22,410
Change in contract terms - - (11,209) (11,209)
Other non-cash movements - 287 275 562
As of 31 December 2017 680,414 22,223 122,332 824,969

Capital management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, to provide sufficient return for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure the Group may revise its investment program, attract new or repay existing loans or sell certain non-core assets.

On the Group level capital is monitored on the basis of the net debt to EBITDA ratio and return on the capital on the basis of return on average capital employed ratio (ROACE). Net debt to EBITDA ratio is calculated as net debt divided by EBITDA. Net debt is calculated as total debt, which includes long and short term loans, less cash and cash equivalents and short term deposits. EBITDA is defined as earnings before interest, income tax expense, depreciation, depletion and amortisation, foreign exchange gain (loss), other non-operating expenses and includes the Group’s share of profit of equity accounted investments. ROACE is calculated in general as Operating profit adjusted for income tax expense divided by the average for the period figure of Capital Employed. Capital Employed is defined as total equity plus net debt.

The Group’s net debt to EBITDA ratios at the end of the reporting periods were as follows:

Year ended 31 December 2018 Year ended 31 December 2017
Long-term debt 684,530 548,654
Short-term debt and current portion of long-term debt 90,923 131,760
Less: cash, cash equivalents and deposits (247,585) (96,387)
Net debt 527,868 584,027
Total EBITDA 722,897 489,025
Net debt to EBITDA ratio at the end of the reporting period 0.7 1.2
Operating profit 456,742 302,523
Operating profit adjusted for income tax expenses 363,933 242,470
less share of profit of associates and joint ventures 90,704 45,504
Average capital employed 2,381,424 2,164,614
ROACE 19.1% 13.3%

There were no changes in the Group’s approach to capital management during the period.

Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants at the measurement date.

The different levels of fair value hierarchy have been defined as follows:

  • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities
  • Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices)
  • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The following assets and liabilities are measured at fair value in the Group’s Consolidated Financial Statements: derivative financial instruments, equity investments and Stock Appreciation Rights plan (SARs).

Derivative financial instruments and SARs refer to Level 2 of the fair value measurement hierarchy, i.e. their fair value is determined on the basis of inputs that are observable for the asset or liability either directly (as prices) or indirectly (derived from prices). Equity investments represented by unlisted equity securities and refer to Level 3 of the fair value measurement hierarchy. The Group determines fair value for unlisted equity securities considering different scenarios of future capital distributions for such investments. There were no significant changes in fair values for the reporting period. There were no transfers between the levels of the fair value hierarchy during the years ended 31 December 2018 and 2017. There are no significant assets or liabilities measured at fair value categorised within Level 1 or Level 3 of the fair value hierarchy. The fair value of the foreign exchange contracts is determined by using forward exchange rates at the reporting date with the resulting value discounted back to present value.

As of 31 December 2018 the fair value of bonds and loan participation notes is ₽ 338,324 million (₽ 378,085 million as of 31 December 2017). The fair value is derived from quotations in active market from external source of financial information and related to Level 1 of the fair value hierarchy. The carrying value of other financial assets and liabilities measured at amortised cost approximates their fair value. The fair values were calculated based on cash flows discounted using a current lending rate. They are classified as level 3 fair values in the fair value hierarchy due to the inclusion of unobservable inputs including counterparty credit risk.

The table below analyses financial instruments carried at fair value, which refer to Level 2 of the fair value hierarchy.

Level 2
As of 31 December 2018
Forward exchange contracts (1,493)
Other financial liabilities (4,652)
Total liabilities (6,145)
As of 31 December 2017
Forward exchange contracts (17,928)
Other financial liabilities (5,726)
Total liabilities (23,654)

The Company implements a cash-settled stock appreciation rights (SAR) compensation plan. The plan forms part of the long term growth strategy of the Group and is designed to reward Management for increasing shareholder value over a specified period. Shareholder value is measured by reference to the Group’s market capitalisation. The plan is open to selected Management provided certain service conditions are met. The awards are fair valued at each reporting date. The awards are subject to certain market and service conditions that determine the amount that may ultimately be accrued to eligible employees. The expense recognised is based on the vesting period.

The fair value of the liability under the plan is estimated using the Black-Scholes-Merton option-pricing model by reference primarily to the Group’s share price, historic volatility in the share price, dividend yield and interest rates for periods comparable to the remaining life of the award. Any changes in the estimated fair value of the liability award will be recognised in the period the change occurs subject to the vesting period. During the reporting period there were no changes in conditions for SAR compensation plan.

The following assumptions are used in the Black-Scholes-Merton model as of 31 December 2018 and 2017:

31 December 2018 31 December 2017
Volatility 3.2% 3.7%
Risk-free interest rate 8.1% 8.0%
Dividend yield 7.3% 5.4%

In the Consolidated Statement of Profit and Loss and Other Comprehensive Income for the years ended 31 December 2018 and 2017 the Group accrued expenses related to SAR provision due to the growth in the value of Company’s shares in the amount of ₽ 4,652 million and ₽ 5,727 million, respectively. This expense is presented within selling, general and administrative expenses. In the Consolidated Statement of Financial Position as of 31 December 2018 and 31 December 2017 the Group recognised accrued liability in amount of ₽ 4,652 million and ₽ 10,114 million, respectively.

35. Operating leases

Non-cancellable operating lease rentals are payable as follows:

31 December 2018 31 December 2017
Less than one year 15,744 12,939
Between one and five years 44,417 37,474
More than five years 63,439 91,278
123,600 141,691

The Group rents mainly land plots under pipelines, office premises and vessels under time-charter agreements.

In the Consolidated Statement of Profit and Loss and Other Comprehensive Income for the years ended 31 December 2018 and 2017 the Group accrued rent expenses in the amount of ₽ 18,269 million and ₽ 15,917 million, respectively.

36. Commitments and contingencies

Taxes

Russian tax and customs legislation is subject to frequent changes and varying interpretations. Management’s treatment of such legislation as applied to the transactions and activity of the Group, including calculation of taxes payable to federal, regional and municipal budgets, may be challenged by the relevant authorities. The Russian tax authorities may take a more assertive position in their treatment of legislation and assessments, and there is a risk that transactions and activities that have not been challenged in the past may be challenged later. As a result, additional taxes, penalties and interest may be accrued. Generally, taxpayers are subject to tax audits for a period of three calendar years immediately preceding the year in which the decision to carry out a tax audit has been taken. Under certain circumstances tax audits may cover longer periods. The field tax audit with regard to the years 2015-2017 is performing now, the 2018 year is currently open for tax audit. Management believes it has adequately provided for any probable additional tax accruals that might arise from these tax audits.

The Russian transfer pricing legislation is generally aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development (OECD), although it has specific features. This legislation provides for the possibility of additional tax assessments for controlled transactions (transactions between related parties and certain transactions between unrelated parties) if such transactions are not on an arm’s-length basis.

The compliance of the prices of the Group’s controllable transactions with related parties with the transfer pricing rules is subject to regular internal control. Management believes that the transfer pricing documentation that the Group has prepared to confirm its compliance with the transfer pricing rules provides sufficient evidence to support the Group’s tax positions and related tax returns. In addition in order to mitigate potential risks, the Group regularly negotiates approaches to defining prices used for tax purposes for major controllable transactions with tax authorities in advance. Nineteen pricing agreements between the Group and tax authorities regarding major intercompany transactions have been concluded in 2012-2018.

As Russian tax legislation does not provide definitive guidance in certain areas, the Group adopts, from time to time, interpretations of such uncertain areas that reduce the overall tax rate of the Group. While Management currently estimates that the tax positions and interpretations that it has taken can probably be sustained, there is a possible risk that an outflow of resources will be required should such tax positions and interpretations be challenged by the tax authorities. The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the Group.

Economic environment in the Russian Federation

The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and are subject to frequent changes and varying interpretations. The Russian economy was growing in 2017 and 2018, after overcoming the economic recession of 2015 and 2016. The economy is negatively impacted by volatility of oil prices, ongoing political tension in the region and international sanctions against certain Russian companies and individuals. The financial markets continue to be volatile. This operating environment has a significant impact on the Group’s operations and financial position. Management is taking necessary measures to ensure sustainability of the Group’s operations. However, the future effects of the current economic situation are difficult to predict and management’s current expectations and estimates could differ from actual results.

In 2014 the U.S., the EU and certain other countries imposed sanctions on the Russian energy sector that partially apply to the Group. The information on the main restrictions related to sanctions was disclosed in the Consolidated Financial Statements as of and for the year ended 31 December 2014. In August 2018 the U.S. signed an act to impose further sanctions against the Russian Federation. The Group assessed that the new sanctions don’t have significant impact on its activity.

Environmental matters

The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its potential obligations under environmental regulation. Management is of the opinion that the Group has met the government’s requirements concerning environmental matters, and therefore the Group does not have any material environmental liabilities.

Capital commitments

As of 31 December 2018 the Group has entered into contracts to purchase property, plant and equipment for ₽ 363,690 million (₽ 328,697 million as of 31 December 2017).

37. Group entities

The most significant subsidiaries of the Group and the ownership interest are presented below:

Ownership interest
Subsidiary Country of incorporation 31 December 2018 31 December 2017
Exploration and Production
JSC Gazpromneft-NNG Russian Federation 100% 100%
Gazpromneft-Orenburg LLC Russian Federation 100% 100%
Gazprom Neft Shelf LLC Russian Federation 100% 100%
Gazpromneft-Khantos LLC Russian Federation 100% 100%
Gazpromneft-Yamal LLC Russian Federation 90% 90%
JSC Uzhuralneftegaz Russian Federation 87.5% 87.5%
Gazpromneft-Vostok LLC Russian Federation 51% 100%
Refining
JSC Gazpromneft Omsk Refinery Russian Federation 100% 100%
JSC Gazpromneft Moscow Refinery Russian Federation 100% 100%
Marketing
Gazpromneft-Centre LLC Russian Federation 100% 100%
Gazpromneft Regional Sales LLC Russian Federation 100% 100%
JSC Gazpromneft-Aero Russian Federation 100% 100%
Gazpromneft Marin Bunker LLC Russian Federation 100% 100%
Gazpromneft Corporate Sales LLC Russian Federation 100% 100%
Other Operations
Gazpromneft-Lubricants LLC Russian Federation 100% 100%
Gazpromneft-Bitumen Materials LLC Russian Federation 100% 100%
Gazpromneft-NTC LLC Russian Federation 100% 100%
GPN-Finance LLC Russian Federation 100% 100%
GPN-Invest LLC Russian Federation 100% 100%
Gazpromneft Shipping LLC Russian Federation 100% 100%
Multibusiness companies
Naftna industrija Srbije A.D. Serbia 56.2% 56.2%

In September 2018 the Group completed deal on disposal of non-controlling interest equal to 49% of share capital of Gazpromneft-Vostok LLC to third parties. The Group maintained control over the Company. In result non-controlling interest in the amount of ₽ 21.3 billion was recognized. Excess of the payment over non-controlling interest was recognized at additional paid-in capital attributable to Gazprom Neft shareholders.

The following table summarises the information relating to the non-controlling interest of Naftna industrija Srbije A.D. and its subsidiaries, Gazpromneft-Vostok LLC and Gazprom Resource Northgas LLC. The carrying amount of non-controlling interests of all other subsidiaries is not significant individually.

Carrying amount of non-controlling interest Profit for the period attributable to non-controlling interest
31 December 2018 31 December 2017 Year ended 31 December 2018 Year ended 31 December 2017
Naftna industrija Srbije A.D. and its subsidiaries 87,815 71,599 6,641 6,132
Gazpromneft-Vostok 24,176 - 909 -
Gazprom Resource Northgas 18,374 22,672 3,806 3,665

The table below summarises financial information for Naftna industrija Srbije A.D. and its subsidiaries, Gazpromneft-Vostok LLC and Gazprom Resource Northgas LLC as of 31 December 2018 and 2017 and for the years ended 31 December 2018 and 2017:

31 December 2018 Naftna industrija Srbije A.D. and its subsidiaries Gazpromneft-Vostok Gazprom Resource Northgas
Current assets 66,310 9,631 14,715
Non-current assets 262,190 56,454 7,767
Current liabilities (37,010) (4,657) (21)
Non-current liabilities (69,569) (12,091) -
31 December 2017 Naftna industrija Srbije A.D. and its subsidiaries Gazpromneft-Vostok Gazprom Resource Northgas
Current assets 61,658 5,558 15,171
Non-current assets 218,321 53,926 12,568
Current liabilities (36,160) (6,599) (23)
Non-current liabilities (61,812) (14,883) -
Year ended 31 December 2018 Naftna industrija Srbije A.D. and its subsidiaries Gazpromneft-Vostok Gazprom Resource Northgas
Revenue 270,427 34,268 -
Profit 15,166 5,922 4,652
Year ended 31 December 2017
Revenue 195,130 24,474 -
Profit 13,997 3,024 4,481

Dividends paid in 2018 by Naftna industrija Srbije A.D. to the non-controlling share comprised ₽ 1.9 billion (₽ 0.9 billion in 2017).

Dividends paid in 2018 by Gazprom Resource Northgas LLC to the non-controlling share comprised ₽ 8.1 billion (₽ 0.5 billion in 2017).

38. Related party transactions

For the purpose of these Consolidated Financial Statements parties are considered to be related if one party has the ability to control or jointly control the other party or exercise significant influence over the other party in making financial and operational decisions as defined by IAS 24 — Related Party Disclosures. Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties.

The Group has applied the exemption as allowed by IAS 24 not to disclose all government related transactions, as the parent of the Company is effectively being controlled by the Russian Government. In the course of its ordinary business the Group enters into transactions with natural monopolies, transportation companies and other government-related entities. Such purchases and sales are individually insignificant and are generally entered into on market or regulated prices. Transactions with the state also include taxes which are detailed in Notes 9, 21 and 32. The Group also leases vessels under time-charter agreements with a government related entity (lease expense amounted ₽ 5.7 billion and ₽ 5.3 billion for the years ended 31 December 2018 and 2017 respectively). The tables below summarise transactions in the ordinary course of business with either the parent company or parent’s subsidiaries and associates or associates and joint ventures of the Group.

The Group enters into transactions with related parties based on market or regulated prices. Short-term and long-term loans provided as well as debt are based on market conditions available for not related entities.

As of 31 December 2018 and 2017 the outstanding balances with related parties were as follows:

31 December 2018 Parent company Parent’s subsidiaries and associates Associates and joint ventures
Cash and cash equivalents - 82,184 -
Short-term financial assets - 3 -
Trade and other receivables 12 10,254 9,188
Other current assets 63 2,669 1,319
Long-term financial assets - - 7,827
Other non-current assets - 498 -
Total assets 75 95,608 18,334
Short-term debt and other current financial

liability

- 48,519 627
Trade and other payables 111,862 2,605 88,028
Other current liabilities 10 398 500
Long-term debt and other non-current financial

liability

43,618 20,000 -
Other non-current liabilities 17,055 - -
Total liabilities 172,545 71,522 89,155
31 December 2017 Parent company Parent’s subsidiaries and associates Associates and joint ventures
Cash and cash equivalents - 27,201 -
Short-term financial assets - 1,322 3,776
Trade and other receivables 4,567 4,172 9,813
Other current assets 23 2,708 783
Long-term financial assets - - 27,673
Other non-current assets - 309 -
Total assets 4,590 35,712 42,045
Short-term debt and other current financial

liability

- - 367
Trade and other payables 52,970 2,257 38,173
Other current liabilities 130 318 137
Long-term debt and other non-current financial

liability

47,480 57,600 -
Other non-current liabilities 6,394 - -
Total liabilities 106,974 60,175 38,677

For the years ended 31 December 2018 and 2017 the following transactions occurred with related parties:

Year ended 31 December 2018 Parent company Parent’s subsidiaries and associates Associates and joint ventures
Crude oil, gas and petroleum products sales 24,338 77,292 65,527
Other revenue 142 5,182 7,039
Purchases of crude oil, gas and petroleum products - 48,579 211,626
Production related services 49 26,795 23,341
Transportation costs 9,009 1,922 9,243
Interest expense 5,269 2,550 168
Interest income - 619 1,063
Year ended 31 December 2017 Parent company Parent’s subsidiaries and associates Associates and joint ventures
Crude oil, gas and petroleum products sales 36,721 39,507 53,398
Other revenue 103 6,613 9,226
Purchases of crude oil, gas and petroleum products - 40,895 137,919
Production related services 33 29,219 21,185
Transportation costs 9,776 1,692 10,115
Interest expense 5,585 2,871 39
Interest income - 302 6,484

Transactions with Key Management Personnel

For the years ended 31 December 2018 and 2017 remuneration of key management personnel (members of the Board of Directors and the Management Committee) such as salary and other contributions amounted ₽ 2,681 million and ₽ 2,934 million, respectively. Key management remuneration includes salaries, bonuses, quarterly accruals of SAR and other contributions.

39. Segment information

Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM), and for which discrete financial information is available.

The Group manages its operations in 2 operating segments: Upstream and Downstream.

Upstream segment (exploration and production) includes the following Group operations: exploration, development, production and sale of crude oil and natural gas (including joint ventures results), oil field services. Downstream segment (refining and marketing) processes crude into refined products and purchases, sells and transports crude oil and refined petroleum products.

The information about the Group’s operating segments for the years ended 31 December 2018 and 2017 is presented below:

Year ended 31 December 2018 Upstream Downstream Eliminations Total
Revenue from sales:
External customers 57,575 2,431,717 - 2,489,292
Inter-segment 1,135,245 20,630 (1,155,875) -
Total revenue from sales 1,192,820 2,452,347 (1,155,875) 2,489,292
Adjusted EBITDA 679,751 119,755 - 799,506
Depreciation, depletion and amortisation 137,076 38,375 - 175,451
Impairment of assets 4,340 - - 4,340
Capital expenditure 194,621 180,576 - 375,197
Year ended 31 December 2017 Upstream Downstream Eliminations Total
Revenue from sales:
External customers 214,811 1,719,778 - 1,934,589
Inter-segment 617,838 27,531 (645,369) -
Total revenue from sales 832,649 1,747,309 (645,369) 1,934,589
Adjusted EBITDA 433,036 117,931 - 550,967
Depreciation, depletion and amortisation 108,087 32,911 - 140,998
Impairment of assets (256) - - (256)
Capital expenditure 208,133 148,957 - 357,090

Intersegment revenues are based upon prices effective for local markets and linked to market prices.

Eliminations and other adjustments section encompasses elimination of inter-segment sales and related unrealised profits, mainly from the sale of crude oil and petroleum products, and other adjustments.

Adjusted EBITDA represents the Group’s EBITDA and its share in associates’ and joint ventures’ EBITDA. Management believes that adjusted EBITDA represents useful means of assessing the performance of the Group’s ongoing operating activities, as it reflects the Group’s earnings trends without showing the impact of certain charges. EBITDA is defined as earnings before interest, income tax expense, depreciation, depletion and amortisation, net foreign exchange gain (loss), other non-operating expenses and includes the Group’s share of profit of associates and joint ventures. EBITDA is a supplemental non-IFRS financial measure used by Management to evaluate operations.

The geographical segmentation of the Group’s revenue and capital expenditures for the years ended 31 December 2018 and 2017 is presented below:

Year ended 31 December 2018 Russian Federation CIS Export and international operations Total
Sales of crude oil 88,848 38,993 590,630 718,471
Sales of petroleum products 1,075,927 91,334 496,170 1,663,431
Sales of gas 35,805 - 1,010 36,815
Other sales 54,801 2,498 13,276 70,575
Revenues from external customers, net 1,255,381 132,825 1,101,086 2,489,292
Year ended 31 December 2017
Sales of crude oil 83,393 30,117 436,142 549,652
Sales of petroleum products 866,234 76,058 341,258 1,283,550
Sales of gas 36,351 - 1,237 37,588
Other sales 49,690 2,130 11,979 63,799
Revenues from external customers, net 1,035,668 108,305 790,616 1,934,589

For the years ended 31 December 2018 and 2017 export sales of crude oil include sales from upstream segment in the amount of ₽ 36,981 million and ₽ 196,518 million, respectively. The remaining amount of ₽ 553,649 million for the year ended 31 December 2018 (₽ 239,624 million for the year ended 31 December 2017) represents sales from downstream segment.

Russian Federation CIS Export and international operations Total
Non-current assets as of 31 December 2018 2,478,517 12,520 347,633 2,838,670
Capital expenditures for the year ended

31 December 2018

340,919 1,448 32,830 375,197
Impairment of assets for the year ended

31 December 2018

- - 4,340 4,340
Non-current assets as of 31 December 2017 2,159,510 11,097 318,947 2,489,554
Capital expenditures for the year ended

31 December 2017

330,916 1,464 24,710 357,090
Impairment of assets for the year ended

31 December 2017

- - (256) (256)

Adjusted EBITDA for the years ended 31 December 2018 and 2017 is reconciled below:

Year ended 31 December 2018 Year ended 31 December 2017
Profit for the period 400,993 269,678
Total income tax expense 79,129 55,522
Finance expense 21,476 25,127
Finance income (7,506) (10,098)
Depreciation, depletion and amortisation 175,451 140,998
Net foreign exchange loss 33,558 241
Other loss, net 19,796 7,557
EBITDA 722,897 489,025
less share of profit of associates and joint ventures (90,704) (45,504)
add share of EBITDA of associates and joint ventures 167,313 107,446
Total adjusted EBITDA 799,506 550,967

40. Subsequent events

In January 2019 the Group borrowed ₽ 19.9 billion under long-term facility agreement with one of the Russian banks due payable in June 2021.

In the beginning of 2019 the object of capital construction MFC «Lahta Center» was transferred to new owner based on agreement requirements. In accordance with completion stage of works at the object and clarification of the settlements amounts with contractors the final determination of total cost of the object is expected in the second half of 2019. Respectively, the Group cannot reliably estimate financial result and impact of this event as at the date of issue of these Consolidated Financial Statements.

41. Supplementary information on oil and gas activities (unaudited)

The accompanying Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards («IFRS»). In the absence of specific IFRS guidance, the Group has reverted to other relevant disclosure standards, mainly US GAAP, that are consistent with practices established for the oil and gas industry. While not required under IFRS, this section provides unaudited supplemental information on oil and gas exploration and production activities.

The Group makes certain supplemental disclosures about its oil and gas exploration and production that are consistent with practices. While this information was developed with reasonable care and disclosed in good faith, it is emphasised that some of the data is necessarily imprecise and represents only approximate amounts because of the subjective judgments involved in developing such information. Accordingly, this information may not necessarily represent the current financial condition of the Group or its expected future results.

The Group voluntarily uses the SEC definition of proved reserves to report proved oil and gas reserves and disclose certain unaudited supplementary information associated with the Group’s consolidated subsidiaries, share in joint operations, associates and joint ventures.

The proved oil and gas reserve quantities and related information regarding standardised measure of discounted future net cash flows do not include reserve quantities or standardised measure information related to the Group’s Serbian subsidiary, NIS, as disclosure of such information is prohibited by the Government of the Republic of Serbia. The disclosures regarding capitalised costs relating to and results of operations from oil and gas activities do not include the relevant information related to NIS.

Presented below are capitalised costs relating to oil and gas producing activities:

31 December 2018 31 December 2017
Consolidated subsidiaries and share in joint operations
Unproved oil and gas properties 103,983 89,558
Proved oil and gas properties 1,852,270 1,584,543
Less: Accumulated depreciation, depletion and amortisation (783,343) (628,226)
Net capitalised costs of oil and gas properties 1,172,910 1,045,875
Group’s share of associates and joint ventures
Proved oil and gas properties 623,845 553,553
Less: Accumulated depreciation, depletion and amortisation (203,268) (168,373)
Net capitalised costs of oil and gas properties 420,577 385,180
Total capitalised costs consolidated and equity interests 1,593,487 1,431,055

Presented below are costs incurred in acquisition, exploration and development of oil and gas reserves for the years ended 31 December:

Year ended 31 December 2018 Year ended 31 December 2017
Consolidated subsidiaries and share in joint operations
Exploration costs 22,301 20,281
Development costs 191,420 193,540
Costs incurred 213,721 213,821
Group’s share of associates and joint ventures
Exploration costs 459 608
Development costs 69,833 59,877
Total costs incurred consolidated and equity interests 284,013 274,306

Results of operations from oil and gas producing activities for the years ended:

Year ended 31 December 2018 Year ended 31 December 2017
Consolidated subsidiaries and share in joint operations
Revenues:
Sales 339,424 235,645
Transfers 629,183 438,921
Total revenues 968,607 674,566
Production costs (104,072) (103,739)
Exploration expenses (1,411) (963)
Depreciation, depletion and amortisation (131,293) (107,119)
Taxes other than income tax (507,190) (345,160)
Pretax income from producing activities 224,641 117,585
Income tax expenses (65,969) (39,708)
Results of oil and gas producing activities 158,672 77,877
Group’s share of associates and joint ventures
Total revenues 296,568 214,960
Production costs (25,567) (23,133)
Exploration expenses (533) (495)
Depreciation, depletion and amortisation (36,237) (34,446)
Taxes other than income tax (122,260) (87,038)
Pretax income from producing activities 111,971 69,848
Income tax expenses (16,758) (6,188)
Results of oil and gas producing activities 95,213 63,660
Total consolidated and equity interests in results of oil and gas producing activities 253,885 141,537

Proved oil and gas reserve quantities

Proved reserves are defined as the estimated quantities of oil and gas, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. In some cases, substantial new investment in additional wells and related support facilities and equipment will be required to recover such proved reserves. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are subject to change over time as additional information becomes available.

Proved developed reserves are those reserves, which are expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are those reserves which are expected to be recovered as a result of future investments to drill new wells, to recomplete existing wells and/or install facilities to collect and deliver the production from existing and future wells.

As determined by the Group’s independent reservoir engineers, DeGolyer and MacNaughton, the following information presents the balances of proved oil and gas reserve quantities (in millions of barrels and billions of cubic feet respectively):

Proved Oil Reserves Quantities — in MMBbl 31 December 2018 31 December 2017
Consolidated subsidiaries and share in joint operations
Beginning of year 4,849 4,853
Production (356) (357)
Purchases of minerals in place - -
Revision of previous estimates 347 353
End of year 4,840 4,849
Minority’s share included in the above proved reserves (42) (35)
Proved reserves, adjusted for minority interest 4,798 4,814
Proved developed reserves 2,630 2,660
Proved undeveloped reserves 2,210 2,189
Group’s share of associates and joint ventures
Beginning of year 1,445 1,451
Production (103) (99)
Purchases of minerals in place 31 -
Revision of previous estimates 189 93
End of yearIncluding 82% NCI share in Gazprom Resource Northgas 1,562 1,445
Proved developed reserves 735 680
Proved undeveloped reserves 826 765
Total consolidated and equity interests in reserves — end of year 6,402 6,294
Proved Gas Reserves Quantities — in Bcf 31 December 2018 31 December 2017
Consolidated subsidiaries and share in joint operations
Beginning of year 8,785 6,387
Production (665) (579)
Purchases of minerals in place - -
Revision of previous estimates 2,098 2,977
End of year 10,218 8,785
Minority’s share included in the above proved reserves (489) (314)
Proved reserves, adjusted for minority interest 9,729 8,471
Proved developed reserves 4,006 4,150
Proved undeveloped reserves 6,212 4,635
Group’s share of associates and joint ventures -
Beginning of year 12,972 13,201
Production (624) (602)
Purchases of minerals in place 705 -
Revision of previous estimates 877 373
End of yearIncluding 82% NCI share in Gazprom Resource Northgas 13,930 12,972
Proved developed reserves 8,435 7,612
Proved undeveloped reserves 5,495 5,360
Total consolidated and equity interests in reserves — end of year 24,148 21,757

Standardised measure of discounted future net cash flows relating to proved oil and gas reserves

Estimated future cash inflows from production are computed by applying average first-day-of-the-month price for oil and gas for each month within the 12 month period before the balance sheet date to year-end quantities of estimated proved reserves. Adjustment in this calculation for future price changes is limited to those required by contractual arrangements in existence at the end of each reporting period. Future development and production costs are those estimated future expenditures necessary to develop and produce year-end proved reserves based on year-end cost indices, assuming continuation of year-end economic conditions. Estimated future income taxes are calculated by applying appropriate year-end statutory tax rates. These rates reflect allowable deductions and tax credits and are applied to estimated future pre-tax cash flows, less the tax bases of related assets. Discounted future net cash flows have been calculated using a 10% discount factor. Discounting requires a year-by-year estimate of when future expenditures will be incurred and when reserves will be produced.

The information provided in tables set out below does not represent Management’s estimate of the Group’s expected future cash flows or of the value Group’s proved oil and gas reserves. Estimates of proved reserves quantities are imprecise and change over time, as new information becomes available. Moreover, probable and possible reserves, which may become proved in the future, are excluded from the calculations. The calculations should not be relied upon as an indication of the Group’s future cash flows or of the value of its oil and gas reserves.

31 December 2018 31 December 2017
Consolidated subsidiaries and share in joint operations
Future cash inflows 18,695,537 10,303,365
Future production costs (11,427,272) (5,945,717)
Future development costs (892,476) (832,377)
Future income tax expenses (2,057,005) (479,352)
Future net cash flow 4,318,784 3,045,919
10% annual discount for estimated timing of cash flow (2,188,299) (1,584,751)
Standardised measure of discounted future net cash flow 2,130,485 1,461,168
Group’s share of associates and joint ventures
Future cash inflows 4,660,776 2,662,993
Future production costs (2,867,502) (1,468,966)
Future development costs (251,088) (217,726)
Future income tax expenses (265,892) (157,227)
Future net cash flow 1,276,294 819,074
10% annual discount for estimated timing of cash flow (501,792) (308,142)
Standardised measure of discounted future net cash flow 774,502 510,932
Total consolidated and equity interests in the standardised measure of discounted future net cash flow 2,904,987 1,972,100