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PAO Severstal and subsidiaries
Notes to the
consolidated ﬁnancial statements
(Amounts expressed in thousands of US dollars, except as otherwise stated)
These consolidated ﬁnancial statements of PAO Severstal and subsidiaries comprise the parent company, PAO Severstal (‘Severstal’ or ‘the Parent Company’) and its subsidiaries (collectively ‘the Group’) as listed in Note 28.
Severstal began operations on August 24, 1955 and completed the development of an integrated iron and steel mill in Cherepovets during February 1959 when the ﬁrst steel was rolled. On September 24, 1993, as a part of the Russian privatization program, Severstal was registered as an Open Joint Stock Company (‘OAO’) and privatized. Through participating in Severstal’s privatization auctions and other purchases, Alexey Mordashov (the ‘Majority Shareholder’) purchased shares in Severstal such that as at December 31, 2015 he controlled indirectly 79.18% (December 31, 2014, 2013: 79.17%) of Severstal’s share capital. In November, 2014, Severstal changed its legal form from OAO to PAO (Public Joint Stock Company) following the requirements of the amended Russian Civil Code.
Severstal’s global depositary receipts (GDRs) have been quoted on the London Stock Exchange since November 2006. Severstal’s shares are quoted on the Moscow Exchange (‘MICEX’). Severstal’s registered ofﬁce is located at Ul. Mira 30, Cherepovets, Russia.
The Group comprises the following segments:
A segmental analysis of the consolidated statements of ﬁnancial position and consolidated income statements is given in Note 29.
The major part of the Group is based in the Russian Federation and is consequently exposed to the economic and political effects of the policies adopted by the Russian government. These conditions and future policy changes could affect the operations of the Group and the realization and settlement of its assets and liabilities.
The recent conﬂict in Ukraine and related events has increased the perceived risks of doing business in the Russian Federation. The imposition of economic sanctions on Russian individuals and legal entities by the European Union, the United States of America, Japan, Canada, Australia and others, as well as retaliatory sanctions imposed by the Russian government, has resulted in increased economic uncertainty including more volatile equity markets, a depreciation of the Russian Ruble, a reduction in both local and foreign direct investment inﬂows and a signiﬁcant tightening in the availability of credit. This development in the environment did not have a signiﬁcant effect on the Group’s operations, however, the longer-term effect of implemented sanctions, as well as the threat of additional future sanctions, is difﬁcult to determine.
International sales of rolled steel from the Group’s Russian operations have been the subject of several anti-dumping and countervailing investigations. The Group has taken steps to address the concerns of such investigations and participates actively in their resolution.
A brief description of protective measures effective in Severstal’s key export markets is given below:
2. Basis for preparation of the consolidated ﬁnancial statements
Statement of compliance
These consolidated ﬁnancial statements are prepared in accordance with International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board.
The Group additionally prepared IFRS consolidated ﬁnancial statements presented in the Russian rubles and in the Russian language in accordance with the Federal Law No. 208 – FZ ‘On consolidated ﬁnancial reporting’.
Basis of measurement
The consolidated ﬁnancial statements are prepared on the historic cost basis except for ﬁnancial assets at fair value through proﬁt and loss and available-for-sale ﬁnancial assets stated at fair value.
The Group’s statutory ﬁnancial records are maintained in accordance with the legislative requirements of the countries in which the individual entities are located, which differ in certain respects from IFRS. The accounting policies applied in the preparation of these consolidated ﬁnancial statements are set out in Note 3.
Critical accounting judgments, estimates and assumptions
Preparation of the consolidated ﬁnancial statements in accordance with IFRS requires the Group’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the ﬁnancial statements, and the reported amounts of revenues and expenses during the reporting period. The determination of estimates requires judgments which are based on historical experience, current and expected economic conditions, and other available information. Actual results could differ from those estimates.
The most signiﬁcant areas requiring the use of management estimates and assumptions relate to:
Useful lives of property, plant and equipment
The Group assesses the remaining useful lives of items of property, plant and equipment at least at each ﬁnancial year-end and, if expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’. These estimates may have a material impact on the amount of the carrying values of property, plant and equipment and on depreciation expense for the period.
Impairment of assets
The Group reviews the carrying amount of its tangible and intangible assets to determine whether there is any indication that those assets are impaired. In making the assessments for impairment, assets that do not generate independent cash ﬂows are allocated to an appropriate cash-generating unit. Subsequent changes to the cash-generating unit allocation or to the timing of cash ﬂows could impact the carrying value of the respective assets.
Allowance for doubtful debts
The Group makes allowance for doubtful receivables to account for estimated losses resulting from the inability of customers to make required payments. When evaluating the adequacy of an allowance for doubtful debts, management bases its estimates on the current overall economic conditions, the ageing of accounts receivable balances, historical write-off experience, customer creditworthiness and changes in payment terms. Changes in the economy, industry or speciﬁc customer conditions may require adjustments to the allowance for doubtful accounts recorded in the consolidated ﬁnancial statements.
Allowance for obsolete and slow-moving inventories
The Group makes allowance for obsolete and slow-moving raw materials and spare parts. In addition, certain ﬁnished goods of the Group are carried at net realizable value. Estimates of net realizable value of ﬁnished goods are based on the most reliable evidence available at the time the estimates are made. These estimates take into consideration ﬂuctuations of price or cost directly relating to events occurring subsequent to the end of the reporting period to the extent that such events conﬁrm conditions existing at the end of the period.
The Group reviews its decommissioning liabilities, representing site restoration provisions, at each reporting date and adjusts it to reﬂect the current best estimate in accordance with IFRIC 1 ‘Changes in Existing Decommissioning, Restoration and Similar Liabilities’. The amount recognized as a provision is the best estimate of the expenditures required to settle the present obligation at the reporting date based on the requirements of the current legislation of the country where the respective operating assets are located. The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Considerable judgment is required in forecasting future site restoration costs. Future events that may affect the amount required to settle an obligation are reﬂected in the amount of a provision when there is sufﬁcient objective evidence that they will occur.
Retirement beneﬁt liabilities
The Group uses an actuarial valuation method for measurement of the present value of post-employment beneﬁt obligations and related current service cost. This involves the use of demographic assumptions about the future characteristics of the current and former employees who are eligible for beneﬁts (mortality, both during and after employment, rates of employee turnover, disability and early retirement, etc.) as well as ﬁnancial assumptions (discount rate, future salary and beneﬁt levels, etc.).
The Group exercises judgment in measuring and recognizing provisions and the exposure to contingent liabilities related to pending litigations or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgment is necessary in assessing the likelihood that a pending claim will succeed, or liability will arise, and to quantify the possible range of the ﬁnal settlement. Because of the inherent uncertainties in this evaluation process, actual losses may be different from the originally estimated provision. These estimates are subject to change as new information becomes available, primarily with the support of internal specialists or with the support of outside consultants. Revisions to the estimates may signiﬁcantly affect future operating results.
Deferred income tax assets
Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that sufﬁcient taxable proﬁt will be available to allow all or part of the deferred tax asset to be utilized. The estimation of that probability includes judgments based on the expected performance. Various factors are considered to assess the probability of the future utilization of deferred tax assets, including past operating results, operational plans, expiration of tax losses carried forward, and tax planning strategies. If actual results differ from these estimates or if these estimates must be adjusted in future periods, the ﬁnancial position, results of operations and cash ﬂows may be negatively affected. In the event that the assessment of future utilization of deferred tax assets must be reduced, this reduction will be recognized in the income statement.
Functional and presentation currency
The presentation currency of these consolidated ﬁnancial statements is the US dollar.
The functional currency is determined separately for each of the Group’s entities. For the Russian entities the functional currency is the Russian ruble. The functional currency of the Group’s entities which were located in North America was the US dollar. The functional currency of the majority of the Group’s entities located in Western Europe is the Euro.
The translation into the presentation currency is made as follows:
The following exchange rates were used in the consolidated ﬁnancial statements:
Any conversion of amounts into US dollars should not be construed as a representation that such amounts have been, could be, or will be in the future, convertible into US dollars at the exchange rates used, or at any other exchange rate.
Adoption of amended Standards
A number of amended Standards were adopted for the year ended December 31, 2015, and have been applied in these consolidated ﬁnancial statements.
New accounting pronouncements
A number of new Standards and amendments to Standards were not yet effective for the year ended December 31, 2015, and have not been applied in these consolidated ﬁnancial statements.
The adoption of the pronouncements listed above is not expected to have a signiﬁcant impact on the Group’s consolidated ﬁnancial statements in future periods except for those discussed below.
IFRS 9 Financial Instruments is intended to replace IAS 39 Financial Instruments: Recognition and Measurement. Amended IFRS 7 Financial Instruments: Disclosure requires additional disclosure on transition from IAS 39 to IFRS 9. The standard provides amended guidance on the recognition and measurement of ﬁnancial assets and liabilities. The Group recognises that the new standard introduces many changes to the accounting for ﬁnancial instruments and is likely to have a signiﬁcant impact on the Group’s consolidated ﬁnancial statements.
During the current year the Group changed its methodology for calculating unrealized gain in inventory.
Accordingly the following adjustments were made to the prior periods:
3. Summary of the principal accounting policies
The following signiﬁcant accounting policies have been consistently applied in the preparation of these consolidated ﬁnancial statements throughout the Group.
a. Basis of consolidation
Subsidiaries are those enterprises controlled, directly or indirectly, by the Parent Company. Consolidation of an investee begins from the date the Group obtains control over the investee and ceases when the Group loses control over the investee. The non-controlling interests represent the non-controlling proportion of the net identiﬁable assets of the subsidiaries, including the non-controlling share of fair value adjustments on acquisitions. The Group presents non-controlling interests in its consolidated statement of ﬁnancial position within equity, separately from the parent’s shareholders’ equity. Changes in the Group’s interest in a subsidiary that do not result in losing control of the subsidiary are equity transactions.
Intra-group balances and transactions, and any unrealized gains arising from intra-group transactions, are eliminated in preparing these consolidated ﬁnancial statements; unrealized losses are also eliminated unless the transaction provides an evidence of impairment of the asset transferred.
Acquisition of Subsidiaries
The purchase method of accounting was used to account for the acquisition of subsidiaries by the Group.
The initial accounting for a business combination involves identifying and determining the fair values to be assigned to the acquiree’s identiﬁable assets, the liabilities assumed and the consideration transferred. If the initial accounting for a business combination is incomplete by the end of the period in which the combination is effected, the Group accounts for the combination using the provisional values for the items for which the accounting is incomplete. The Group recognizes any adjustments to those provisional values as a result of completing the initial accounting within twelve months from the acquisition date. As a result goodwill or gain from bargain purchase is adjusted accordingly.
Comparative information for the periods before the completion of the initial accounting for the acquisition is presented as if the initial accounting had been completed at the acquisition date.
Accounting for business combinations of entities under common control
IFRS provides no guidance on accounting for business combinations of entities under common control. Management adopted the accounting policy for such transactions based on the relevant guidance of accounting principles generally accepted in the United States (‘US GAAP’). Management believes that this approach and the accounting policy disclosed below are in compliance with IFRS.
Acquisitions of controlling interests in companies that were previously under the control of the Majority Shareholder are accounted for as if the acquisition had occurred at the beginning of the earliest comparative period presented or, if later, at the date on which control was obtained by the Majority Shareholder. The assets and liabilities acquired are recognized at their book values. The components of equity of the acquired companies are added to the same components within Group equity, except that any share capital of the acquired companies is recorded as a part of additional capital. The cash consideration for such acquisitions is recognized as a liability to or a reduction of receivables from related parties, with a corresponding reduction in equity, from the date the acquired company is included in these consolidated ﬁnancial statements until the cash consideration is paid. Parent Company shares issued in consideration for the acquired companies are recognized from the moment the acquired companies are included in these ﬁnancial statements.
No goodwill is recognized where the Group acquires additional interests in the acquired companies from the Majority shareholder. The difference between the share of the net assets acquired and consideration transferred is recognized directly in equity.
Business combination achieved in stages
In a business combination achieved in stages, the Group remeasures its previously held equity interest in the associates or joint ventures at its acquisition date fair value and recognizes the resulting gain or loss, if any, in proﬁt or loss in the income statement.
Investments in associates
Associates are those enterprises in which the Group has signiﬁcant inﬂuence, but does not have control or joint control over the ﬁnancial and operating policies.
Investments in associates are accounted for under the equity method and are initially recognized at cost, from the date that signiﬁcant inﬂuence commences until the date that signiﬁcant inﬂuence ceases. Subsequent changes in the carrying value reﬂect the post-acquisition changes in the Group’s share of net assets of the associate and goodwill impairment charges, if any, after adjustments to align the accounting policies with those of the Group. When the Group’s share of losses exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued, except to the extent that the Group has incurred obligations in respect of the associate.
Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
A joint arrangement is an arrangement of which two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. A joint arrangement is either a joint operation or a joint venture.
The classiﬁcation of a joint arrangement as a joint operation or a joint venture depends upon the rights and obligations of the parties to the arrangement.
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.
A joint arrangement that is not structured through a separate vehicle is a joint operation. A joint arrangement in which the assets and liabilities relating to the arrangement are held in a separate vehicle can be either a joint venture or a joint operation.
The Group applies the following accounting to joint operations and joint ventures.
The Group recognises in relation to its interest in a joint operation:
The Group accounts for joint ventures using the equity method.
Unrealized gains on transactions between the Group and its jointly controlled vehicle are eliminated to the extent of the Group’s interest in a joint venture and a joint operation; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Goodwill is measured as the difference between:
Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill in respect of subsidiaries is disclosed as an intangible asset and goodwill relating to associates and jointly controlled entities is included within the carrying value of the investments in these entities.
No goodwill is recognized where the Group acquires additional interests in the acquired companies (acquisitions of non-controlling interest). The difference between the share of the net assets acquired and the consideration transferred is recognized directly in equity.
Where goodwill forms a part of a cash-generating unit and the part of the operations within that unit is disposed of, the goodwill associated with that operation is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation.
Gain from bargain purchase represents the excess of the Group’s share in the fair value of acquired identiﬁable assets and the liabilities assumed over the consideration transferred, and in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously-held equity interest in the acquire. It is recognized in the income statement at the date of the acquisition.
b. Foreign currency transactions
Transactions in foreign currencies are translated to the functional currency of each entity at the foreign exchange rate ruling on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency of each entity at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies are translated to the functional currency of the entity at the foreign exchange rate ruling at the date of the transaction. Foreign exchange gains and losses arising on the translation are recognized in the income statement.
c. Exploration for and evaluation of mineral resources
Expenditures associated with search for speciﬁc mineral resources are recognized as exploration and evaluation assets. The following expenditure comprises cost of exploration and evaluation assets:
Administration and other overhead costs are charged to the cost of exploration and evaluation assets only if directly related to an exploration and evaluation project.
If a project does not prove viable, all irrecoverable exploration and evaluation expenditure associated with the project net of any related impairment allowances is written off to the income statement.
The Group measures its exploration and evaluation assets at cost and classiﬁes as tangible or intangible according to the nature of the assets acquired and applies the classiﬁcation consistently. Exploration and evaluation assets considered to be tangible are recorded as a component of property, plant and equipment at cost less impairment charges. Otherwise, they are recorded as intangible assets, such as licenses. To the extent that tangible asset is consumed in developing an intangible asset, the amount reﬂecting that consumption is capitalized as a part of the cost of the intangible asset.
As the asset is not available for use, it is not depreciated. All exploration and evaluation assets are monitored for indications of impairment.
An exploration and evaluation asset is no longer classiﬁed as such when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable and the development of the deposit is sanctioned by management. The carrying amount of such exploration and evaluation asset is reclassiﬁed into development asset.
d. Development expenditure
Development expenditure includes costs directly attributable to the construction of a mine and the related infrastructure and is accumulated separately for each area of interest. Development expenditure is capitalized and is recorded as a component of property, plant and equipment or intangible assets, as appropriate. No depreciation is charged on the development expenditure before the start of commercial production.
To the extent that revenue arises from test production during the development stage, an amount is charged from development expenditure to the cost of sales so as to reﬂect a zero net margin.
e. Stripping costs
The Group separates two different types of stripping costs that are incurred in surface mining activity:
Stripping activity asset is created as part of usual surface activity in order to obtain improved access to further quantities of minerals that will be mined in future periods.
Current stripping costs are costs that are incurred in order to mine the mineral ore only in current period.
The Group recognizes a stripping activity asset if, and only if, all of the following are met:
After initial recognition, stripping activity assets are carried at cost less accumulated depreciation and impairment loss. Depreciation is calculated using the units of production method.
f. Property, plant and equipment
Property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset and, for qualifying assets, borrowing costs capitalized. In the case of assets constructed by the Group, related works and direct project overheads are included in cost. The cost of replacing part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic beneﬁts embodied within the part will ﬂow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. Repair and maintenance expenses are charged to the income statement as incurred. Gains or losses on disposals of property, plant and equipment are recognized in the income statement.
Depreciation is provided so as to write off property, plant and equipment over its expected useful life. Depreciation is calculated using the straight-line basis, except for depreciation on vehicles and certain metal-rolling equipment, which is calculated on the basis of mileage and units of production, respectively. The estimated useful lives of assets are reviewed regularly and revised when necessary.
The principal periods over which assets are depreciated are as follows:
Leases are classiﬁed as ﬁnance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classiﬁed as operating leases.
Assets held under ﬁnance leases are initially recognized as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of ﬁnancial position as a ﬁnance lease obligation.
Lease payments are apportioned between ﬁnance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the income statement as a part of interest expense.
The depreciation policy for depreciable leased assets is consistent with that for depreciable assets, which are owned. If there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is fully depreciated over the shorter of the lease term or its useful life.
Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic beneﬁts from the leased asset are consumed.
h. Intangible assets (excluding goodwill)
Intangible assets acquired by the Group are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less accumulated amortization and accumulated impairment losses.
Intangible assets are amortized over their estimated useful lives using the straight-line basis and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The estimated useful life and amortization method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.
The table below presents the useful lives of intangible assets:
The coal mining mineral rights of PBS Coals Limited constituted the major component of the mineral rights prior to the disposal of this entity in August 2014 (Note 28). The major component of the software is the SAP business system. The major component of the other intangible assets is land lease rights. Amortization of intangible assets is included in the captions “Cost of sales” and “General and administrative expenses” in the consolidated income statement.
i. Impairment of assets
The carrying amount of goodwill is tested for impairment annually. At each reporting date the Group assesses whether there is any indication of impairment of the Group’s other assets. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.
Calculation of recoverable amount
For ﬁnancial assets carried at amortized cost, the amount of the impairment is the difference between the asset’s carrying amount and its recoverable amount that is the present value of estimated future cash ﬂows, discounted at the ﬁnancial asset’s original effective interest rate. For other assets the recoverable amount is the greater of the fair value less cost to sell and value in use. In assessing value in use, the estimated future cash ﬂows are discounted to their present value using a pre-tax discount rate that reﬂects current market assessments of the time value of money and the risks speciﬁc to the asset. For an asset that does not generate cash inﬂows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
Reversals of impairment
An impairment loss in respect of a held-to-maturity investment, loan or receivable is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognized. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
Inventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories is based on the weighted average principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads.
Allowances are recorded against slow-moving and obsolete inventories.
k. Financial assets
Financial assets include cash and cash equivalents, investments, and loans and receivables.
Cash and cash equivalents comprise cash balances, bank deposits and highly liquid investments with original maturities of three months or less, that are readily convertible to known amounts of cash and are subject to an insigniﬁcant risk of changes in value.
Financial assets are classiﬁed into the following speciﬁed categories: ﬁnancial assets ‘at fair value through proﬁt or loss’ (FVTPL), ‘held-to-maturity’ investments, ‘available-for-sale’ (AFS) ﬁnancial assets and ‘loans and receivables’. The classiﬁcation depends on the nature and purpose of the ﬁnancial assets and is determined at the time of initial recognition.
Effective interest method
The effective interest method is a method of calculating the carrying value of a ﬁnancial asset held at amortized cost and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the ﬁnancial asset, or, where appropriate, a shorter period.
Income is recognized on an effective interest basis for debt instruments other than those ﬁnancial assets designated as at FVTPL.
Financial assets at FVTPL
Financial assets are classiﬁed as at FVTPL where the ﬁnancial asset is either held for trading or it is designated as at FVTPL.
A ﬁnancial asset is classiﬁed as held for trading if:
A ﬁnancial asset other than a ﬁnancial asset held for trading may be designated as at FVTPL upon initial recognition if:
Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognized in proﬁt or loss. The net gain or loss recognized in the income statement incorporates any dividend or interest earned on the ﬁnancial asset.
Non-derivative ﬁnancial assets with ﬁxed or determinable payments and ﬁxed maturity dates that the Group has the positive intent and ability to hold to maturity are classiﬁed as held-to-maturity investments. Held-to-maturity investments are recorded at amortized cost using the effective interest method less any impairment.
Loans and receivables
Trade receivables, loans, and other receivables that have ﬁxed or determinable payments that are not quoted in an active market are classiﬁed as loans and receivables. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.
AFS ﬁnancial assets
Available for sale ﬁnancial assets are those non-derivative ﬁnancial assets that are not classiﬁed as ﬁnancial assets at FVTPL, held-to-maturity or loans and receivables and are stated at fair value. Listed shares that are traded in an active market are stated at their market value. Investments in unlisted shares that do not have a quoted market price in an active market are measured at management’s estimate of fair value. Gains and losses arising from changes in fair value are recognized in other comprehensive income with the exception of impairment losses, which are recognized directly in the income statement. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognized in the equity is included in the income statement for the period.
Dividends on AFS equity instruments are recognized in the income statement when the Group’s right to receive the dividends is established.
Derecognition of ﬁnancial assets
The Group derecognizes a ﬁnancial asset only when the contractual rights to the cash ﬂows from the asset expire or it transfers the ﬁnancial asset and substantially all the risks and rewards of ownership of the asset to another entity.
l. Financial liabilities
Financial liabilities are classiﬁed as either ﬁnancial liabilities ‘at FVTPL’ or ‘other ﬁnancial liabilities’.
Financial liabilities at FVTPL
Financial liabilities are classiﬁed as at FVTPL where the ﬁnancial liability is either held for trading or it is designated as at FVTPL.
A ﬁnancial liability is classiﬁed as held for trading if:
A ﬁnancial liability other than a ﬁnancial liability held for trading may be designated as at FVTPL upon initial recognition if:
Financial liabilities at FVTPL are stated at fair value, with any resultant gain or loss recognized in proﬁt or loss. The net gain or loss recognized in proﬁt or loss incorporates any interest paid on the ﬁnancial liability.
Other ﬁnancial liabilities
Other ﬁnancial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Borrowing costs on loans speciﬁcally for the purchase or construction of a qualifying asset are capitalized as a part of the cost of the asset they are ﬁnancing.
Other ﬁnancial liabilities are subsequently measured at amortized cost using the effective interest method, with interest expense recognized in the income statement.
Derecognition of ﬁnancial liabilities
The Group derecognizes ﬁnancial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire.
m. Hedging instruments
The Group holds derivative ﬁnancial instruments primarily to hedge its foreign currency and interest rate risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if certain criteria are met.
Derivatives are initially measured at fair value; any directly attributable transaction costs are recognized in proﬁt or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are generally recognized in proﬁt or loss.
n. Dividends payable
Dividends are recognized as a liability in the period in which they are authorized by the shareholders.
o. Other taxes and contributions
Other taxes and contributions are taxes and mandatory contributions paid to the government, or government controlled agencies, that are calculated on a variety of bases, but exclude taxes calculated on proﬁts, value added taxes calculated on revenues and purchases and social security costs calculated on wages and salaries. Social security costs are included in cost of sales, distribution expenses and general and administrative expenses in accordance with the nature of related wages and salaries expenses.
p. Income tax
Income tax on the proﬁt for the year comprises current and deferred tax. Income tax is recognized in the income statement except to the extent that it relates to items recognized in other comprehensive income, in which case it is recognized in other comprehensive income.
Current tax expense is calculated by each entity on the pre-tax income determined in accordance with the tax law of the country, in which the entity is incorporated, using tax rates enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is calculated using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for ﬁnancial reporting and taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
Deferred tax assets are recognized only to the extent that it is probable that future taxable proﬁts will be available against which these assets can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax income will be realized.
Deferred tax is not recognized in respect of the following:
The Group pays retirement, healthcare and other long-term beneﬁts to its employees.
The Group has two types of retirement beneﬁts: deﬁned contribution plans and deﬁned beneﬁt plans. Deﬁned contribution plans are post-employment beneﬁt plans under which the Group pays ﬁxed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts in respect of those beneﬁts. The Group’s only obligation is to pay contributions as they fall due, including contributions to the Russian Federation State pension fund. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available.
Deﬁned beneﬁt plans are post-employment beneﬁts plans other than deﬁned contribution plans. The Group uses an actuarial valuation method for measurement of the present value of post-employment beneﬁt obligations and related current service cost. This involves the use of demographic assumptions about the future characteristics of the current and former employees who are eligible for beneﬁts (mortality, both during and after employment, rates of employee turnover, disability and early retirement, etc.) as well as ﬁnancial assumptions (discount rate, future salary and beneﬁt levels, etc.). For Russia-based Group’s entities, the discount rate used is the yield at the balance sheet date on government bonds that have maturity dates approximating the terms of the Group’s obligations. The calculation of the Group’s net obligation in respect of deﬁned retirement beneﬁt plans is performed annually using the projected unit credit method. In accordance with this method, the Group’s net obligation is calculated separately for each deﬁned beneﬁt plan. Any actuarial gain or loss arising from the calculation of the retirement beneﬁt liability is fully recognized in other comprehensive income.
Other long-term employee beneﬁts include various compensations, non-monetary beneﬁts and a long-term cash-settled share-based incentive program.
The Group has environmental liabilities related to restoration of soil and other related works, which are due upon the closure of certain of its production sites. Decommissioning liabilities are estimated case-by-case based on available information, taking into account applicable local legal requirements. The estimation is made using existing technology, at current prices, and discounted using a real discount rate. Future decommissioning costs, discounted to net present value, are capitalized and the corresponding decommissioning liability raised as soon as the constructive obligation to incur such costs arises. Future decommissioning costs are capitalized in property, plant and equipment and are depreciated over the life of the related asset. The effect of the time value of money on the decommissioning liability is recognized in the consolidated income statement as an interest expense. Ongoing rehabilitation costs are expensed when incurred.
A provision for onerous contracts is recognized when the expected beneﬁts to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognizes any impairment loss on the assets associated with that contract.
Other provisions are recognized in the statement of ﬁnancial position when the Group has a legal or constructive obligation as a result of a past event, it is probable that an outﬂow of economic beneﬁts will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
r. Share capital
Ordinary shares are classiﬁed as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects.
Repurchase of issued shares
When share capital recognized as equity is repurchased, the amount of the consideration paid which includes directly attributable costs, is net of any tax effects, and is recognized as a deduction from equity. Repurchased shares are classiﬁed as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity, and the resulting surplus or deﬁcit on the transaction is transferred to/from retained earnings.
s. Operating income and expenses
The Group presents proﬁt or loss from operations, which includes various types of income and expenses arising in the course of production and sale of the Group’s products, disposal of property, plant and equipment, participation in joint ventures and associates and other Group’s regular activities.
Certain items are presented separately from proﬁt or loss from operations by virtue of their size, incidence or nature to enable a full understanding of the Group’s ﬁnancial performance. Such items, which are included in proﬁt or loss before ﬁnancing and taxation, primarily include impairment of non-current assets, negative goodwill and other non-operating income and expenses, as, for example, gain or loss on disposal of subsidiaries and associates and charitable donations.
t. Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances.
When goods are sold or services are rendered in exchange for dissimilar goods or services, the revenue is measured at the fair value of the goods or services received, adjusted by the amount of cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred.
Sale of goods
Revenue from the sale of goods is recognized in the income statement when the signiﬁcant risks and rewards of ownership have been transferred to the buyer; the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; the amount of revenue can be measured reliably; it is probable that the economic beneﬁts associated with the transaction will ﬂow to the entity; and the costs incurred or to be incurred in respect of the transaction can be measured reliably.
Rendering of services
Revenue from a contract to provide services is recognized by reference to the stage of completion of the contract.
u. Finance costs, net
Interest income is recognized in the income statement on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the ﬁnancial asset to that asset’s net carrying amount.
Interest expense is recognized in the income statement as it accrues, taking into account the effective yield on the liability.
Gain/(loss) on remeasurement and disposal of ﬁnancial investments
Gain/(loss) on remeasurement and disposal of ﬁnancial investments comprises dividend income (except for dividends from equity associates and joint ventures), realized and unrealized gains on ﬁnancial assets at fair value through proﬁt or loss, realized gains and impairment losses on available-for-sale and held-to-maturity investments.
Other ﬁnance costs
Other ﬁnance costs include costs incurred for bank operating services and other related charges.
v. Earnings per share
Earnings per share is calculated by dividing the net proﬁt by the weighted average number of shares outstanding during the year, assuming that shares issued in consideration for the companies acquired from the Majority Shareholder were issued from the moment these companies are included in these consolidated ﬁnancial statements.
w. Discontinued operations
Discontinued operations are disclosed when a component of the Group either has been disposed of during the reporting period, or is classiﬁed as held for sale at the reporting date. This condition is regarded as met only when the disposal is highly probable within one year from the date of classiﬁcation.
The comparative income statement is presented as if the operation had been discontinued from the beginning of the comparative period.
Assets and liabilities of a disposal group are presented in the statement of ﬁnancial position separately from other assets and liabilities. Comparative information related to discontinued operations is not amended in the statement of ﬁnancial position.
x. Segment reporting
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. An operating segment’s operating results are reviewed regularly by the CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete ﬁnancial information is available.
The reportable segments’ amounts in the disclosure are stated before intersegment elimination and are measured on the same basis as those in the consolidated ﬁnancial statements, except that:
Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill.
y. Government grants
Government grants are recognized when there is a reasonable assurance that they will be received and the Group will comply with the conditions associated with the grant. Government grants related to assets are presented as a deduction from the cost of the asset.
Revenue by product was as follows:
Revenue by delivery destination was as follows:
5. Staff costs
Employment costs were as follows:
Key management personnel include the following positions within the Group:
Key management’s remuneration for the year ended December 31, 2015, consisting of salaries and bonuses, totalled US$ 9.5 million (2014: US$ 23.3 million; 2013: US$ 38.9 million).
Additionally, in 2015, a provision for their long-term cash-settled share-based incentive programmes of US$ 2.2 million was accrued (in 2014 the provision accrued was US$ 6.8 million and in 2013 the provision reversed was US$ 6.4 million). This provision is subject to further adjustments, depending on a range of the Group’s ﬁnancial indicators.
6. Finance costs, net
The impairment of available-for-sale ﬁnancial assets in 2015 relates to a greenﬁeld iron ore deposit in Brazil, SPG Mineracao SA, and is the result of iron ore prices decline.
7. Foreign exchange loss
8. Impairment of non-current assets
For the purpose of impairment testing, the recoverable amount of each cash-generating unit, except PBS Coals Limited in 2014 and Severstal Liberia Iron Ore Ltd in 2015 and 2014, has been determined based on value in use calculations. The value in use calculation uses cash ﬂow projections based on actual operating results and the business plan approved by management and a corresponding discount rate which reﬂects the time value of money and risks associated with each individual cash-generating unit.
Key assumptions management used in their value in use calculations are as follows:
Values assigned to key assumptions and estimates used to measure the unit’s recoverable amount are consistent with external sources of information and historic data for each cash-generating unit. Management believes that the values assigned to the key assumptions and estimates represent the most realistic assessment of future trends.
Severstal Resources segment
PBS Coals Limited (disposed in 2014)
An impairment loss was recognized in 2013 of US$ 217.7 million and US$ 63.0 million was allocated to goodwill and US$ 154.7 million to intangible assets.
The carrying amount of goodwill allocated to the cash-generating unit before the impairment loss was US$ 63.0 million as of December 31, 2013.
The following assumptions were used in the impairment test:
The above estimates are particularly sensitive in the following areas:
An impairment loss of US$ 153.9 million was recognized in 2014 and was allocated to property, plant and equipment. Further disclosures are available in Note 28 of these consolidated ﬁnancial statements.
Severstal Liberia Iron Ore Ltd
During 2014, due to the decrease in iron ore prices the Group assessed the recoverable amount of Severstal Liberia Iron Ore Ltd. As a result, in 2014 the Group recognized an impairment loss of US$ 123.0 million in relation to non-current assets of Severstal Liberia Iron Ore Ltd based on its fair value less costs to sell. US$ 7.5 million of the loss was allocated to goodwill and US$ 115.5 million to evaluation and exploration assets.
The carrying amount of goodwill allocated to the cash-generating unit before the impairment loss was US$ 7.5 million as of December 31, 2014.
During 2015, due to the uncertain prospects for the development of the ﬁeld the Group assessed the recoverable amount of Severstal Liberia Iron Ore Ltd. As a result, in 2015 the Group recognized an impairment loss of US$ 100.0 million, which was fully allocated to intangible assets and reduced the carrying amount of the cash generating unit to US$ nil.
During 2015, due to the decrease in iron ore concentrate prices the Group assessed the recoverable amount of AO Olcon. As a result, an impairment loss was recognized in 2015 of US$ 79.9 million and US$ 76.3 million was allocated to property, plant and equipment and US$ 3.6 million to intangible assets. The carrying amount of the cash generating unit is US$ 79.8 million as of December 31, 2015.
The following assumptions were used in the impairment test:
The above estimates are particularly sensitive in the following areas:
A reversal of impairment loss related to other cash-generating units within the segment of US$ 0.2 million was recognised in 2013 in relation to speciﬁc items of property, plant and equipment.
A reversal of impairment loss related to other cash-generating units within the segment of US$ 0.1 million was recognized in 2014 in relation to speciﬁc items of property, plant and equipment.
An impairment loss of US$ 0.6 million was recognized in 2015 in relation to speciﬁc items of property, plant and equipment.
Severstal Russian Steel segment
Redaelli Tecna S.p.A.
As a result of a value in use calculation no impairment loss was recognized in 2015, and the recoverable amount of the CGU exceeded its carrying amount by US$ 51.5 million.
The carrying amount of goodwill allocated to the cash-generating unit was US$ 25.6 million as of December 31, 2015.
The following assumptions were used in the impairment test:
The above estimates are particularly sensitive in the following areas:
An impairment loss of US$ 24.2 million was recognized in 2013 in relation to speciﬁc items of property, plant and equipment.
An impairment loss of US$ 14.8 million was recognized in 2014 in relation to speciﬁc items of property, plant and equipment.
An impairment loss of US$ 2.2 million was recognized in 2015 in relation to speciﬁc items of property, plant and equipment.
9. Net other non-operating expenses
The following is an analysis of the income tax expense:
The following table is a reconciliation of the reported net income tax expense and the amount calculated by applying the Russian statutory tax rate of 20% to reported proﬁt before income tax.
The composition of the net deferred tax liability based on the temporary differences arising between the ﬁscal and reporting balance sheets of the consolidated companies, is given below:
The movement in the net deferred tax liability was as follows:
The Group has not recognized cumulative tax-loss carry forwards in the following amounts and with the following expiry dates (stated in millions of US dollars):
Taxable differences, related to investments in subsidiaries where the Group is able to control the timing of the reversal and it is probable that the temporary difference will not reverse in the foreseeable future, amounted to US$ 5,525.0 million at December 31, 2015 (December 31, 2014: US$ 5,307.4 million; December 31, 2013: US$ 6,449.8 million).
11. Related party transactions
12. Related party balances
The amounts outstanding are expected to be settled in cash. The Group did not hold any collateral for amounts owed by related parties.
Loans given to related parties were provided at interest rates ranging from nil to 13% per annum and were given to ﬁnance working capital and investments.
13. Cash and cash equivalents
14. Short-term ﬁnancial investments
15. Trade accounts receivable
Of the above amounts US$ 10.2 million (December 31, 2014: US$ 24.1 million; December 31, 2013: US$ 21.3 million) were stated at net realizable value.
During the year ended December 31, 2015, the Group recognized a US$ 24.1 million release and a US$ 32.6 million allowance to reduce the carrying amount to net realizable value (2014: US$ 39.5 million and US$ 65.6 million, respectively; 2013: US$ 52.4 million and US$ 50.3 million, respectively).
17. Other current assets
18. Long-term ﬁnancial investments
19. Investments in associates and joint ventures
The Group’s investments in associates and joint ventures companies are described in the table below. The Group structure and certain additional information on investments in associates and joint ventures, including ownership percentages, are presented in Note 28.
In 2014, the Group wrote off its other non-current liabilities related to the acquisition of Iron Mineral Beneﬁciation Services (Proprietary) Ltd and recognized the corresponding impairment loss of US$ 23.9 million in respect of its investment in this company.
The following is summarized ﬁnancial information in respect of associates:
The following is summarized ﬁnancial information in respect of joint ventures:
20. Property, plant and equipment
Of the above amounts of additions to construction-in-progress US$ 15.8 million (2014: US$ 33.3 million, 2013: US$ 54.7 million) is capitalized interest.
The Group applied a weighted average capitalization rate of 5.8% to determine the amount of borrowing costs eligible for capitalization for the year ended December 31, 2015 (2014: 5.9%; 2013: 7.2%).
Other productive assets include transportation equipment and tools.
21. Intangible assets
22. Debt ﬁnance
In April 2004, Citigroup Germany, a non-related party, issued US dollar-denominated loan participation notes with an aggregate principal amount of US$ 375.0 million for the sole purpose of ﬁnancing a loan facility between the Group and Citigroup Germany. The loan was due in April 2014 and bears interest at an annual rate of 9.25% payable semi-annually in April and in October each year. As at December 31, 2015 the amount outstanding under this facility was US$ nil.
In February 2010, the Group’s subsidiary Severstal Columbus issued US dollar-denominated bonds with an aggregate principal amount of US$ 525.0 million maturing in 2018. These bonds bear an interest rate of 10.25% per annum, which is payable semi-annually in February and August each year, beginning in August 2010. As at December 31, 2015 the amount outstanding under this facility was US$ nil.
In October 2010, the Group issued US$ 1.0 billion US dollar-denominated bonds maturing in 2017. Bonds bearing an interest rate of 6.7% per annum which is payable semi-annually in April and October each year, beginning in April 2011. These bonds were issued under the Group’s newly established US$ 3.0 billion Loan Participation Note Programme. The proceeds from the bonds issuance were used to fund the purchase of US$ 706.4 million nominal of Group’s US$ 1,250.0 million Eurobonds in US dollars and for reﬁnancing of certain other Group’s debts. As at December 31, 2015 the amount outstanding under this facility was US$ 620.7 million.
In July 2011, the Group issued US$ 500.0 million bonds denominated in US dollars maturing in 2016. These bonds bear an interest rate of 6.25% per annum, which is payable semi-annually in January and July each year, beginning in January 2012. The proceeds from the bonds issuance were partially utilized to reﬁnance short-term loan facilities. As at December 31, 2015 the amount outstanding under this facility was US$ 255.1 million.
In September 2012, the Group issued US$ 475.0 million senior unsecured convertible bonds maturing in 2017. The initial conversion price was set at US$ 19.08 per share. The conversion rights may be exercised at any time on or after November 5, 2012. The bonds bear an interest rate of 1.0% per annum, which is payable semi-annually in March and September each year, beginning in March 2013, and a yield-to-maturity of 2.0% per annum. Holders of the bonds had an option to require an early redemption of their bonds in September 2015 at the accreted principal amount at such time plus accrued interest. The Group also has an option for early redemption, exercisable starting from October 2015, provided the market value of the Group’s GDRs deliverable on conversion of the bonds exceeds 140.0% of the accreted principal amount of the bonds over a period speciﬁed in terms and conditions of the bonds. The proceeds from the bonds issuance were mainly used to reﬁnance existing indebtedness and for other general corporate purposes. The equity component of the convertible bonds was US$ 47.1 million as at December 31, 2015 (December 31, 2014: US$ 63.5 million, December 31, 2013: US$ 66.8 million), determined based on the market rate of 5.3% per annum. In September 2015, the holders requested an early redemption of their bonds through the put option. As a result of this transaction US$ 16.4 million was recognized as a reduction in equity. As at December 31, 2015 the amount outstanding under this facility was US$ 61.8 million.
In October 2012, the Group issued US$ 750.0 million bonds denominated in US dollars maturing in 2022. These bonds bear an interest rate of 5.9% per annum, which is payable semi-annually in April and October each year, beginning in April 2013. The proceeds from the bonds issuance were used for general corporate purposes, including reﬁnancing of debt maturing in 2013. As at December 31, 2015 the amount outstanding under this facility was US$ 676.0 million.
In March 2013, the Group issued US$ 600.0 million bonds denominated in US dollars maturing in 2018. These bonds bear an interest rate of 4.45% per annum, which is payable semi-annually in March and September each year, beginning in September 2013. The proceeds from the bonds issuance were used for general corporate purposes, including reﬁnancing of debt maturing in 2013. As at December 31, 2015 the amount outstanding under this facility was US$ 570.6 million.
Debt ﬁnance arising from banks and committed unused credit lines were secured by the following charges:
Compliance with Covenants
A part of the Group’s debt ﬁnancing is subject to certain covenants. These covenants imply ﬁnancial and operating limitations relating mostly to PAO Severstal and its material subsidiaries.
Among other things, these covenants with certain carve-outs and subject to material adverse effect where applicable, impose restrictions on encumbrances of the assets, mergers, acquisitions and reorganization procedures, disposals of material assets, change of business, maintenance of property and insurance, payment of taxes and other claims as well as the incurrence of additional indebtedness. Financial covenants require compliance with certain ﬁnancial ratios pursuant to the latest Group’s consolidated ﬁnancial statements. The Group complied with all debt covenants during the years ended December 31, 2015, 2014 and 2013 and does not expect any of the terms and conditions of its debt agreements to affect or limit its ability to conduct its business in the ordinary course.
At the reporting date the Group had US$ 682.5 million (December 31, 2014: US$ nil; December 31, 2013: US$ nil) of committed unused short-term сredit lines and US$ nil (December 31, 2014: US$ 388.2 million; December 31, 2013: US$ 1,517.6 million) of committed unused long-term credit lines available to it.
23. Other current liabilities
24. Retirement beneﬁt liabilities
The Group provides for its employees the following retirement beneﬁts, which are actuarially calculated as deﬁned beneﬁt obligations: lump sums payable to employees on retirement, monthly pensions, jubilee beneﬁts, invalidity and death lump sums, burial expenses compensations, healthcare beneﬁts, life insurance and other beneﬁts.
The current portion of retirement beneﬁt liabilities is included in caption ‘Other current liabilities’. The total amount of the retirement beneﬁt liabilities is presented in the table below:
The following assumptions were used to calculate the retirement beneﬁt liability:
The Group’s weighted average remaining life of the pensioners and employees, receiving the retirement beneﬁts equaled to 16 years as at December 31, 2015.
The present value of the deﬁned beneﬁt obligation less the fair value of plan assets is recognized as a retirement beneﬁt liability in the statement of ﬁnancial position.
The movements in the deﬁned beneﬁt obligation were as follows:
The movements in the plan assets were as follows:
The deﬁned beneﬁt obligation analysis was as follows:
The plan assets analysis was as follows:
The Group’s best estimate of contributions expected to be paid to the plan in 2016 is US$ 6.0 million.
The Group’s retirement beneﬁt service costs are allocated and recognized in the income statement as part of ‘Cost of sales’ and ‘General and administrative expenses’ proportionally to related salary expenses, except service costs related to the Severstal International segment which were recognized in discontinued operation.
Interest cost and return on plan assets are recognized as part of ‘Finance costs, net’, except interest cost related to the Severstal International segment which was recognized in discontinued operation; actuarial (losses)/gains are recognized as a separate component in other comprehensive income.
25. Other non-current liabilities
The Group has environmental liabilities related to restoration of soil and other related works, which are due upon the closures of its mines and production facilities. These costs are expected to be incurred between 2018 – 2045. The present value of expected cash outﬂows were estimated using existing technology, and discounted using a real discount rate. These rates are as follows:
The movements in the decommissioning liabilities were as follows:
The change in assumptions related to the re-scheduling of the decommissioning of Vorkutaugol in 2014 and 2013 and PBS Coals mines in 2013 and the change in the discount rate.
The current portion of provisions is included in the caption ‘Other current liabilities’. The total amount of the provisions is presented in the table below:
These provisions represent management’s best estimate of the potential losses arising in these cases, calculated based on available information and appropriate assumptions used. The actual outcome of those cases is currently uncertain and might differ from the recorded provisions.
The movements in the provisions were as follows:
26. Shareholders’ equity
The Parent Company’s share capital consists of ordinary shares with a nominal value of RUB 0.01 each. The authorized share capital of Severstal at December 31, 2015, 2014 and 2013 comprised 837,718,660 issued and fully paid shares.
The nominal amount of initial share capital was converted into US dollars using exchange rates during the Soviet period, when the Government contributed the original capital funds to the enterprise. These capital funds were converted into ordinary shares on September 24, 1993 and sold by the Government at privatization auctions.
The total value of issued share capital presented in these consolidated ﬁnancial statements comprised:
All shares carry equal voting and distribution rights.
Earnings/(loss) per share
In 2012 the Group issued US$ 475.0 million convertible bonds (Note 22), which had an accretive effect on earnings/(loss) per share as demonstrated below:
The Group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market conﬁdence and to sustain future development of the business. This policy includes compliance with certain externally imposed minimum capital requirements. The Group’s management constantly monitors proﬁtability and leverage ratios and compliance with the minimum capital requirements. The Group also monitors closely the return on capital employed ratio which is deﬁned as proﬁt before ﬁnancing and taxation for the last twelve months divided by capital employed and the leverage ratio calculated as net debt, comprising of long-term and short-term indebtedness less cash, cash equivalents and short-term bank deposits, divided by shareholder’s equity. The level of dividends is also monitored by the Board of Directors of the Group.
There were no changes in the Group’s approach to capital management during the year.
The maximum dividend payable is restricted to the total accumulated retained earnings of the Parent Company determined according to Russian law.
On June 13, 2013 the Meeting of Shareholders approved an annual dividend of RUB 1.89 (US$ 0.06 at June 13, 2013 exchange rate) per share and per GDR for the year 2012 and an interim dividend of RUB 0.43 (US$ 0.01 at June 13, 2013 exchange rate) per share and per GDR for the ﬁrst quarter of 2013.
On September 30, 2013 an Extraordinary Meeting of Shareholders approved an interim dividend of RUB 2.03 (US$ 0.06 at September 30, 2013 exchange rate) per share and per GDR for the ﬁrst six months of 2013.
On December 17, 2013 an Extraordinary Meeting of Shareholders approved an interim dividend of RUB 2.01 (US$ 0.06 at December 17, 2013 exchange rate) per share and per GDR for the nine months of 2013.
On June 11, 2014 the Meeting of Shareholders approved an annual dividend of RUB 3.83 (US$ 0.11 at June 11, 2014 exchange rate) per share and per GDR for the year 2013 and an interim dividend of RUB 2.43 (US$ 0.07 at June 11, 2014 exchange rate) per share and per GDR for the ﬁrst quarter of 2014.
On September 10, 2014 an Extraordinary Meeting of Shareholders approved an interim dividend of RUB 2.14 (US$ 0.06 at September 10, 2014 exchange rate) per share and per GDR for the ﬁrst six months of 2014.
On November 14, 2014 an Extraordinary Meeting of Shareholders approved an interim dividend of RUB 54.46 (US$ 1.18 at November 14, 2014 exchange rate) per share and per GDR for the nine months of 2014.
On May 25, 2015 the Meeting of Shareholders approved an annual dividend of RUB 14.65 (US$ 0.29 at May 25, 2015 exchange rate) per share and per GDR for the year 2014 and an interim dividend of RUB 12.81 (US$ 0.26 at May 25, 2015 exchange rate) per share and per GDR for the ﬁrst quarter of 2015.
On September 15, 2015 an Extraordinary Meeting of Shareholders approved an interim dividend of RUB 12.63 (US$ 0.19 at September 15, 2015 exchange rate) per share and per GDR for the ﬁrst six months of 2015.
On December 10, 2015 an Extraordinary Meeting of Shareholders approved an interim dividend of RUB 13.17 (US$ 0.19 at December 10, 2015 exchange rate) per share and per GDR for the nine months of 2015.
27. Discontinued operation
The Group’s discontinued operation represented the Severstal International segment, following the management’s decision to dispose of this business.
The results of discontinued operation was as follows:
Severstal International segment
In September 2014, the Group sold its 100% stakes in Severstal Dearborn LLC and Severstal Columbus LLC comprising, together with their subsidiaries and investments in joint ventures and associates, the Severstal International reporting segment. The cash consideration received by the Group under the respective sale agreements amounted to US$ 2,024.4 million, after settlement of US$ 385.3 million of external debt. A cumulative net loss on the disposal of US$ 811.4 million was recognized in these consolidated ﬁnancial statements, of which the loss of US$ 911.9 million was primarily recognized as impairment of property, plant and equipment in June, 2014 and included into the expenses of discontinued operation, and net gain on the disposal of US$ 100.5 million recognized in 2014.
A summary of assets and liabilities disposed during the years ended December 31, 2015, 2014 and 2013 is presented below:
28. Subsidiaries, associates and joint ventures
The following is a list of the Group’s signiﬁcant subsidiaries, associates and joint ventures and the effective ownership holdings therein:
In addition, at the reporting date, a further 31 (December 31, 2014: 35; December 31, 2013: 49) subsidiaries, associates and a joint venture, which are not material to the Group, either individually or in aggregate, have been included in these consolidated ﬁnancial statements.
Information on carrying amounts of associates and joint ventures is disclosed in Note 19 of these consolidated ﬁnancial statements.
Disposal of associate
In September 2013, the Group exercised its put option to sell back a 12.8% stake in SPG Mineracao SA by setting off its US$ 25.0 million deferred consideration payable. As a result, the Group’s ownership interest decreased from 25.0% to 12.2%. Additionally, the Group cancelled a call option agreement to purchase an additional 50.0% stake in this company.
Disposal of subsidiary (other than discontinued operation)
In August 2014, the Group sold its 100% stake in PBS Coals Ltd for a consideration of US$ 57.1 million. A cumulative net loss on the disposal of US$ 177.3 million was recognized in these consolidated ﬁnancial statements, of which US$ 153.9 million was recognized as impairment of property, plant and equipment in June, 2014 and US$ 23.4 million recognized as part of net other non-operating expense upon the disposal.
In July 2015, the Group received the contingent consideration for the PBS Coals Ltd sale of US$ 4.0 million after settlement with the purchaser.
A summary of assets and liabilities disposed during 2015, 2014 and 2013 is presented below:
Transaction within discontinued operation
In July 2014, the Group acquired an additional 50% stake in Mountain State Carbon LLC from a third party for a total consideration of US$ 30.0 million, increasing its ownership interest up to 100%. The consideration paid by the Group also included cancellation of the promissory note receivable from the same third party with a face value of US$ 100.0 million and a carrying value of nil.
29. Segment information
In January, 2015 some of the Group’s entities were transferred from the Severstal Resources segment to the Severstal Russian Steel segment following a change in the Group’s management structure. The comparative information had been presented as if the transfer occurred at the beginning of the earliest comparative period presented.
Segmental statements of ﬁnancial position as at December 31, 2015:
*This amount includes US$ 47.1 million effect of convertible bonds issue (Note 22).
Segmental statements of ﬁnancial position as at December 31, 2014:
* This amount includes US$ 63.5 million effect of convertible bonds issue (Note 22).
Segmental statements of ﬁnancial position as at December 31, 2013:
* This amount includes US$ 66.8 million effect of convertible bonds issue (Note 22).
Segmental income statements for the year ended December 31, 2015:
* These amounts are related to the discontinued operation represented the Severstal International segment (Note 27).
Segmental income statements for the year ended December 31, 2014:
Segmental income statements for the year ended December 31, 2013:
The following is a summary of non-current assets other than ﬁnancial instruments, investments in associates and joint ventures and deferred tax assets by location:
The locations are primarily represented by the following countries:
30. Financial instruments
The Group’s risk management policies are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reﬂect changes in market conditions and the Group’s activities.
The Group’s Board of Directors oversees how management monitors compliance with the Group’s risk management policies and procedures. The Group’s Audit Committee reviews the adequacy of the risk management framework in relation to the risks faced by the Group on a quarterly basis.
Exposure to credit, liquidity, interest rate and currency risk arises in the normal course of the Group’s business. The Severstal Resources segment of the Group has not used derivative ﬁnancial instruments to reduce exposure to ﬂuctuations in foreign exchange rates and interest rates. The Severstal Russian Steel segment uses derivatives to hedge their interest rates and foreign exchange rate exposures.
Management believes that the fair value of its ﬁnancial assets and liabilities approximates their carrying amounts except for the following borrowings:
The above amounts exclude accrued interest. The market value of the Group’s bonds was determined based on London Stock Exchange quotations.
The maximum exposure to credit risk is represented by the carrying amount of each ﬁnancial asset in the statement of ﬁnancial position and guarantees (Note 31e).
Part of the Group’s sales are made on terms of letters of credit. In addition, the Group requires prepayments from certain customers. The Group also holds bank and other guarantees provided as a collateral for certain ﬁnancial assets. The amount of collateral held does not fully cover the Group’s exposure to credit risk.
The Group has developed policies and procedures for the management of credit exposure, including the establishment of a credit committee that actively monitors credit risk. Additionally, in order to minimize credit risk of the counterparty banks, the Group has a centralized Treasury function which carries out analysis of banks in respect of their ﬁnancial stability, deﬁnes and reviews the risks limits for banks on a quarterly basis and executes the Group’s operations within those established limits.
The maximum exposure to credit risk for ﬁnancial instruments, including accounts receivable from related parties, was:
The maximum exposure to credit risk for trade receivables, including trade receivables from related parties by geographic region, was:
The maximum exposure to credit risk for trade receivables, including trade receivables from related parties by type of customer, was:
The ageing of trade receivables, including trade receivables from related parties, was:
The impairment allowance at December 31, 2015 included an impairment allowance in respect of trade receivables from related parties for US$ nil (December 31, 2014: US$ nil; December 31, 2013: US$ 2.0 million).
The movement in allowance for impairment in respect of trade receivables, including trade receivables from related parties, during the years was as follows:
The allowance account in respect of trade receivables, including trade receivables from related parties, is used to record impairment losses unless the Group is satisﬁed that no recovery of the amount owing is possible; at that point the amount is considered irrecoverable and is written off against the ﬁnancial asset directly.
The allowance for doubtful debts contains primarily individually impaired trade receivables from debtors placed under liquidation or companies which are in breach of contract terms.
Concentration of credit risk
The Group has a concentration of cash and short-term bank deposits with Sberbank of Russia, AO Bank VTB and AO Metcombank that at December 31, 2015 represented US$ 1,106.7 million, US$ 198.5 million and US$ 162.9 million, respectively.
The Group has a concentration of cash and short-term bank deposits with Sberbank of Russia and OAO Metcombank that at December 31, 2014 represented US$ 1,448.3 million and US$ 309.1 million, respectively.
The Group has a concentration of cash and short-term bank deposits with OAO Metcombank, ОАО Gazprombank, OAO Bank VTB and AB Russia that at December 31, 2013 represented US$ 373.1 million, US$ 289.4 million, US$ 144.3 million and US$ 100.7 million, respectively.
Liquidity risk arises when the Group encounters difﬁculties to meet commitments associated with liabilities and other settlements.
The Group manages liquidity risk with the objective of ensuring that funds will be available at all times to honour all cash obligations as they become due by preparing annual budgets, by continuously monitoring forecast and actual cash ﬂows and matching the maturity proﬁles of ﬁnancial assets and liabilities.
The Group also maintains committed credit lines and overdraft facilities that can be drawn down to meet short-term ﬁnancing needs. This enables the Group to maintain an appropriate level of liquidity and ﬁnancial capacity as to minimize borrowing costs and to achieve an optimal debt proﬁle.
The following are the contractual maturities of ﬁnancial liabilities, including estimated interest payments and excluding the impact of netting agreements:
At December 31, 2015, the Group has a concentration of bank ﬁnancing with Sberbank of Russia of US$ 205.8 million.
At December 31, 2014, the Group has a concentration of bank ﬁnancing with Sberbank of Russia, Citibank and ING Bank (Evraziya) of US$ 266.6 million, US$ 100.0 million and US$ 100.0 million, respectively.
At December 31, 2013, the Group has a concentration of bank ﬁnancing with European Bank for Reconstruction and Development and Bank of America N.A. of US$ 222.3 million and US$ 226.2 million, respectively.
Covenant compliance risk
The Group actively monitors compliance with all debt covenants and, in case of the risk of default, approaches the lenders to amend the respective facility agreement, before any event of default occurs.
Currency risk arises when a Group entity enters into transactions and balances denominated in a currency other than its functional currency. The Group has assets and liabilities denominated in several foreign currencies. Foreign currency risk arises when the actual or forecasted assets in a foreign currency are either greater or less than the liabilities in that currency.
In order to reduce sensitivity to currency risk the Group matches incoming and outgoing cash ﬂows in the same currency such as sales proceeds and debt service, investment activity payments.
The Group’s exposure to foreign currency risk was as follows based on notional amounts:
A 10 percent strengthening of the following currencies against the functional currency at December 31, 2015 would have increased/ (decreased) proﬁt and equity by the amounts shown below.
This analysis assumes that all other variables, in particular interest rates, remain constant and no translation difference into the presentation currency is included. The analysis is performed on the same basis for 2014 and 2013.
A 10 percent weakening of these currencies against the functional currency at December 31, 2015 would have had the equal but opposite effect to the amounts shown above, on the basis that all other variables remain constant.
Commodity price risk
Commodity price risk is a risk arising from possible changes in price of raw materials and metal products, and it has impact on the Group’s operational results.
The Group has a high degree of vertical integration which allows it to control and effectively manage the entire production process: from mining of raw materials to production, processing and distribution of metal products. This reduces the Group’s exposure to the commodity price risk.
Interest rate risk
The largest part of the Group’s public debt has ﬁxed rate. Other part has variable rate which has a ﬁxed spread over LIBOR, EURIBOR and MOSPRIME for the duration of each contract.
The Group’s interest-bearing ﬁnancial instruments at variable rates were:
Other Group’s interest-bearing ﬁnancial instruments are at ﬁxed rate.
Fair value sensitivity analysis for ﬁxed rate instruments
The Group does not account for any ﬁxed rate ﬁnancial assets and liabilities at fair value through proﬁt or loss. Therefore a change in interest rates would not affect proﬁt or loss.
Cash ﬂow sensitivity analysis for variable rate instruments
A change of 100 basis points in interest rates would have increased/(decreased) proﬁt and equity by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2014 and 2013.
Fair value hierarchy
The table below analyzes ﬁnancial instruments carried at fair value, except ﬁnancial instruments measured at amortized cost, by valuation method. The levels in the fair value hierarchy into which the fair value measurements are categorized were disclosed in accordance with IFRS.
The description of the levels is presented below:
Level 1 – quoted prices in active markets for identical assets or
The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurement in Level 3 of the fair value hierarchy:
31. Commitments and contingencies
a. For litigation, tax and other liabilities
The taxation system and regulatory environment of the Russian Federation are characterized by numerous taxes and frequently changing legislation, which is often unclear, contradictory and subject to varying interpretations between the differing regulatory authorities and jurisdictions, who are empowered to impose signiﬁcant ﬁnes, penalties and interest charges. Events during recent years suggest that the regulatory authorities within this country are adopting a more assertive stance regarding the interpretation and enforcement of legislation. This situation creates substantial tax and regulatory risks. In addition, a number of new laws introducing changes to Russian tax legislation were adopted in the fourth quarter of 2014 and were effective from January 1, 2015. In particular, those changes are aimed at regulating transactions with offshore companies and their activities, including the withholding of dividends tax, which may potentially impact the Group’s tax position and create additional tax risks going forward. At the reporting date, the actual and potential contingent claims for taxes, ﬁnes and penalties made by the Russian tax authorities to certain Group’s entities amounted to approximately US$ 43.5 million (December 31, 2014: US$ 2.0 million; December 31, 2013: US$ 19.6 million). Management does not agree with the tax authorities’ claims and believes that the Group has complied in all material respects with all existing, relevant legislation. Management is unable to assess the ultimate outcome of the claims and the outﬂow of ﬁnancial resources to settle such claims, if any. Management believes that it has made adequate provision for other probable tax claims.
As of December 31, 2015 a claw-back claim had been made by Lucchini S.p.A’s (‘Lucchini’) extraordinary commissioner against the Group’s subsidiary amounting to approximately US$ 141.8 million. The bankruptcy claw-back action is a remedy offered by the Italian Bankruptcy Act to allow commissioners to declare ineffective, vis-à-vis all creditors of a bankrupt company, certain payments and transactions executed in the period preceding the insolvency declaration that altered the equal treatment of all the unsecured creditors of an insolvent debtor. Lucchini was previously the Group’s subsidiary and was deconsolidated in 2011 and currently is under the bankruptcy procedure. This claim relates to cash received by the Group’s subsidiary for supplies of raw materials to Lucchini primarily during the period when Lucchini was already not part of the Group. Management does not agree with this claim and believes strongly it has made all necessary steps to protect its position. Management is unable to assess the ultimate outcome of the claim, including the outﬂow of the ﬁnancial resources to settle the claim, if any, because it depends on multiple circumstances concerning the facts and the applicability and interpretation of the relevant statutes. In case the Group has to make any payment, the relevant amount paid will be included into Lucchini’s creditors’ list and will be settled in whole or part in course of the bankruptcy procedure.
As of December 31, 2015, claims related to utilities’ supply agreements and factoring agreements made by the counterparties to certain Group’s entities amounted to US$ nil (December 31, 2014: approximately US$ 24.4 million and US$ 15.8 million, respectively, December 31, 2013: US$ 31.2 million, US$ 43.8 million and US$ 26.9 million related to land rent agreements, utilities supply agreements and post-retirement obligation, respectively).
b. Long-term purchase and sales contracts
In the normal course of business group companies enter into long-term purchase contracts for raw materials, and long-term sales contracts. These contracts allow for periodic adjustments in prices dependent on prevailing market conditions.
c. Capital commitments
At the reporting date the Group had contractual capital commitments of US$ 188.7 million (December 31, 2014: US$ 244.0 million; December 31, 2013: US$ 488.3 million).
The Group has insured the major part of its property and equipment to compensate for expenses arising from accidents. In addition, certain Group’s entities have insurance for business interruption on various basis, from reimbursement of certain ﬁxed costs to a gross proﬁt reimbursement and/or insurance of a third party liability in respect of property or environmental damage. The Group believes that, with respect to each of its production facilities, it maintains insurance at levels generally in line with the relevant local market standards. However, the Group does not have full insurance coverage.
At the reporting date the Group had US$ 2.8 million (December 31, 2014: US$ 15.4 million; December 31, 2013: US$ 21.3 million) of guarantees issued, including guarantees issued for related parties, of US$ 1.0 million (December 31, 2014: US$ 3.9 million; December 31, 2013: US$ 8.5 million).