PAO Severstal and subsidiaries
Notes to the consolidated financial
for the years ended 31 December 2017, 2016 and 2015
(Amounts expressed in millions 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 29.
Severstal began operations on 24 August 1955 and completed the development of an integrated iron and steel mill in Cherepovets during February 1959 when the first steel was rolled. On 24 September 1993, as a part of the Russian privatisation programme, Severstal was registered as an Open Joint Stock Company (‘OAO’) and privatised. Through participating in Severstal’s privatisation auctions and other purchases, Alexey Mordashov (the ‘Majority Shareholder’) purchased shares in Severstal such that as at 31 December 2017 he controlled indirectly 77.03% (31 December 2016: 79.18%, 31 December 2015: 79.18%) 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:
- Severstal Resources – this segment comprises three iron ore complexes, Karelsky Okatysh and Olcon in northwest Russia, LLC Metal-group in western Russia and a coal mining complex, Vorkutaugol in northwest Russia.
- Severstal Russian Steel – this segment consists primarily of the Group’s steel production and high-grade automotive galvanizing facilities in Cherepovets; rolling mill 5000 and large-diameter pipe mill in Kolpino, all in northwest Russia; metalware plant located in Russia; a ferrous scrap metal recycling business operating in northwest and central Russia, as well as various supporting functions for trading, maintenance and transportation, located in Europe. The segment also included Redaelli Tecna S.p.A. and PJSC Dneprometiz, a metalware plants, which were located in Italy and Ukraine, and were disposed in April and October 2017, respectively (Note 29).
A segmental analysis of the Group’s revenue, a reconciliation of profit from operations to EBITDA and total assets and liabilities are presented in Note 30.
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 realisation and settlement of its assets and liabilities.
The conflict in Ukraine in 2014 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 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:
- Due to termination of the Agreement suspending the anti-dumping investigation on certain hot-rolled flat-rolled carbon-quality steel products from the Russian Federation by the US Department of Commerce in December 2014, exports of hot-rolled coils and thin sheets from Russia to the USA are currently subject to antidumping duties. These duties were calculated in 1999 and based on non-market economy methodology. Severstal requested an administrative review of the recalculation of duty rate in December 2015. The US Department of Commerce published its final decision for the administrative review of hot-rolled steel from Russia and found that Severstal failed to cooperate with the review and assigned it a final antidumping rate of 184.56 percent in June 2017. The Group filed an appeal to the US Court of International Trade for the final results. The litigation is in process. The court decision is expected in 2018.
- Exports of hot-rolled plates from Russia to the USA are subject to minimum prices established based on the producer’s actual cost and profit in the domestic market. Severstal is the first and currently only Russian company, for which, since September 2005, the hot-rolled plates market is open.
- In 2016 the United States International Trade Commission completed the anti-dumping and countervailing investigations against Russian cold-rolled products with no anti-dumping or countervailing measures imposed as a result. US steel producers have appealed this decision in the US Court of International Trade and the Group has, in order to protect its legitimate interests, joined these appellate proceedings during 2017. The decision is expected in April 2018.
- In 2016 the European Commission introduced five-year anti-dumping duties against Russian cold-rolled steel products ranging from 18.7% to 36.1%, with a 34.0% duty imposed on the Group’s products. The Group believes that the relevant anti-dumping investigations were conducted by the EU authorities with violations. The Group appealed this regulatory decision to impose such duties in the relevant legal institutions and settlement bodies of the EU and the WTO. The court decision is expected in 2018.
- In October 2017, the European Commission imposed anti-dumping measures against hot-rolled steel products from a number of countries, including Russia. The measures are fixed duties from 17.6 to 96.5 euro per tonne, with a 17.6 euro per tonne duty imposed on the Group’s products.
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 Russian roubles 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 and liabilities at fair value through profit and loss and available-for-sale financial assets stated at fair value, and assets held for sale at fair value less costs to sell.
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 recognition/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.
Areas of judgement that have the most significant effect on the amounts recognised/disclosed in the consolidated financial statements are:
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.
The taxation system and regulatory environment of the Russian Federation are characterised by numerous taxes and frequently changing legislation, which is often unclear, contradictory and subject to varying interpretations by the various regulatory authorities and jurisdictions, who can impose significant fines and penalties. Management has to apply considerable judgement in determining the appropriate amounts of taxes payable.
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 realisable value. Estimates of net realisable 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 recognised 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 recognising 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 tax assets
Deferred tax assets on deductible temporary differences and tax loss carry forwards are reviewed at each reporting date and recorded only to the extent that it is probable that the temporary differences will reverse in the future and there is sufficient future taxable profit available against which they can be utilised. The estimation of that probability includes judgments based on the expected performance.
Various factors are considered to assess the probability of the future utilisation 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 utilisation of deferred tax assets must be reduced, this reduction will be recognised in the income statement.
For new investees or when there are changes in Group’s existing involvement with an investee the Group assess all facts and circumstances to determine whether it has control over the investee. There may be cases which require Management to exercise significant judgement to determine whether it is exposed or has the rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
The acquisition method
The acquisition method requires the Group for each business combination to identify the acquirer, date of acquisition, recoginising and measuiring the identified assets and liabilities assumed and any noncontrolling interest in the acquiree, and goodwill or gain from a bargain purchase. Assessment of the fair value of identifiable net assets along with resulted goodwill or gain from a bargain purchase based on applicable valuation techniques using market inputs and other assumptions involves significant judgement to determine appropriate amounts to include in the consolidated financial statements at acquisition date.
Functional currency determination
The Group exercises judgement to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions based on the specific facts and circumstances. This is a complex process and different factors are considered in determining the appropriate functional currency. Management regularly reviews the facts and circumstances, which may indicate that the functional currency of an entity should be changed.
The key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are:
- Useful lives of property, plant and equipment;
- Impairment of assets;
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. The functional currency of the major parts of the Group’s entities is the Russian rouble, except for entities located in Latvia and Poland, other entities and currencies are not material to the Group. As at 31 December 2017, the substantial part of the foreign operations had been disposed of or were in the process of being liquidated.
The translation into the presentation currency is made as follows:
- all assets and liabilities, both monetary and non-monetary, are translated at the closing exchange rates at the dates of each statement of financial position presented;
- all income and expenses in each income statement are translated at the average exchange rates for the periods presented; and
- all resulting exchange differences are recognised as a separate component in other comprehensive income.
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 31 December 2017 and have been applied in these consolidated financial statements.
These amended standards did not have a significant effect on the Group's consolidated financial statements.
New accounting pronouncements
A number of new and amended Standards were not yet effective for the year ended 31 December 2017 and have not been applied in these consolidated financial statements.
The adoption of the pronouncements 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 the current IAS 39 Financial instruments: Recognition and Measurement. The mandatory effective date is 1 January 2018, with earlier application allowed. The standard provides the amended guidance on the classification, recognition and measurement of financial assets and liabilities and hedge accounting. The major impact from the transition is related to the classification of financial assets and introduced expected credit loss model which results in the earlier recognition of credit losses and is more forward looking than the current incurred loss model.
The Group analysed the classification of all material financial assets and liabilities under the new standard and does not expect any significant effect on the Group’s consolidated financial statements. The Group is currently under assessment of the effect of implementation of the new expected credit losses model, including expected credit losses on accounts receivable.
IFRS 15 Revenue from contracts with customers is intended to replace the current IAS 11 Construction Contracts, IAS 18 Revenue and related IFRIC. The mandatory effective date is 1 January 2018, with earlier application allowed. The standard provides amended guidance on revenue recognition. To assess the effect of IFRS 15 on the consolidated financial statements the Group analysed all major contracts with customers. As a result of the analysis performed no significant effect of the adoption of new standard on the Group’s consolidated financial statements is expected.
IFRS 16 Leases is intended to replace the current IAS 17 Leases. The standard provides amended guidance on recognition, measurement, presentation and disclosure of leases. It states a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less. The Group recognises that the new standard introduces many changes to the accounting for leases. The Group is currently assessing the effect of IFRS 16.
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 unrealised gains arising from intra-group transactions, are eliminated in preparing these consolidated financial statements; unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred.
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 recognises 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 a 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.
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 recognised 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.
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.
The Group applies the following accounting to joint operations and joint ventures.
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.
The Group accounts for joint ventures using the equity method.
Goodwill is measured as the difference between:
- the aggregate of the acquisition-date fair value of the consideration transferred, the amount of any non-controlling interest, and in a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously-held equity interest in the acquiree; and
- the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
Goodwill is initially recognised 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 joint ventures is included within the carrying value of the investments in these entities.
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.
The gain from a 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. It is recognised 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 recognised in the income statement.
c. Exploration for and evaluation of mineral resources
Expenditures associated with search for specific mineral resources are recognised as exploration and evaluation assets. The following expenditure comprises cost of exploration and evaluation assets:
- obtaining of the rights to explore and evaluate mineral reserves and resources including costs directly related to this acquisition;
- researching and analysing existing exploration data;
- conducting geological studies, exploratory drilling and sampling;
- examining and testing extraction and treatment methods;
- compiling prefeasibility and feasibility studies;
- activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource.
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 capitalised 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 a 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 capitalised 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.
e. Stripping costs
The Group separates two different types of stripping costs that are incurred in surface mining activity:
- Stripping activity asset; and
- Current stripping costs.
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 the current period.
The Group recognises a stripping activity asset if, and only if, all of the following are met:
- it is probable that the future economic benefit (improved access to the ore body) associated with the stripping activity will flow to the entity;
- the entity can identify the component of the ore body for which access has been improved; and
- the costs relating to the improved access to that component can be measured reliably.
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 capitalised. 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 recognised 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 derecognised. Repair and maintenance expenses are charged to the income statement as incurred. Gains or losses on disposals of property, plant and equipment are recognised 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 recognised 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 recognised 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 amortisation and accumulated impairment losses.
Intangible assets are amortised 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 amortisation 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 major component of the software is the SAP business system. The major component of other intangible assets is land lease rights. Amortisation 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 recognised 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 amortised 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.
Inventories are stated at the lower of cost and net realisable value. Net realisable 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.
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 amortised cost using the effective interest method, less any impairment. Interest income is recognised 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 and other quoted instruments which are traded in an active market are stated at their market value.
Investments in unlisted shares or other instruments those 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 recognised in other comprehensive income with the exception of impairment losses, which are recognised directly in the income statement. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in the equity is included in the income statement for the period.
Dividends on AFS equity instruments are recognised in the income statement when the Group’s right to receive the dividends is established.
l. 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 capitalised as a part of the cost of the asset they are financing.
Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised in the income statement.
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 recognised in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are generally recognised in profit or loss.
n. Dividends payable
Dividends are recognised as a liability in the period in which they are authorised 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 recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income, in which case it is recognised 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 realised simultaneously.
Deferred tax assets on deductible temporary differences and tax loss carry forwards are reviewed at each reporting date and recorded only to the extent that it is probable that the temporary differences will reverse in the future and there is sufficient future taxable profit available against which they can be utilised.
Deferred tax is not recognised in respect of the following:
- investments in subsidiaries where the Group is able to control the timing of the reversal of the temporary differences and it is probable that the temporary difference will not reverse in the foreseeable future;
- if it arises from the initial recognition of an asset or liability that is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit or loss;
- initial recognition of goodwill.
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 recognised 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 the 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 recognised in other comprehensive income.
Other long-term employee benefits include various compensations, non-monetary benefits and a long-term cash-settled share-based incentive programme.
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 capitalised and the corresponding decommissioning liability raised as soon as the constructive obligation to incur such costs arises. Future decommissioning costs are capitalised 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 recognised in the income statement as an interest expense. Ongoing rehabilitation costs are expensed when incurred.
r. Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects.
Repurchase of issued shares
When share capital recognised as equity is repurchased, the amount of the consideration paid which includes directly attributable costs, net of any tax effects is recognised as a deduction from equity and classified as treasury shares. When treasury shares are sold or reissued subsequently, the amount received is recognised 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, gain from a bargain purchase 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 recognised 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 recognised by reference to the stage of completion of the contract.
u. Finance income and costs
Interest income is recognised 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 recognised 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), realised and unrealised gains on financial assets at fair value through profit or loss, realised 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.
Diluted earnings per share is calculated by dividing adjusted profit or loss attributable to ordinary equity holders of the parent entity by the weighted average number of shares outstanding, adjusted for the effect of all dilutive potential ordinary shares.
w. 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 key management 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 are stated before intersegment elimination and are measured on the same basis as those in the consolidated financial statements, except that:
- non-monetary long-term investments in subsidiaries are translated into the presentation currency at the historic exchange rate;
- no impairment is recognised on investments in subsidiaries;
- no discounting is applied for intersegment loans;
- in case of transfers of equity investments between segments, such investments are accounted at their historic cost.
Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill.
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:
- CEO and Senior Vice Presidents;
- Board of Directors of the Company.
Key management’s remuneration for the year ended 31 December 2017, consisting of salaries and bonuses, totalled US$ 11 million (2016: US$ 10 million; 2015: US$ 10 million).
Additionally, in 2017, a provision for their long-term cash-settled share-based incentive programmes of US$ 1 million was accrued (2016: US$ 3 million; 2015: US$ 2 million). This provision is subject to further adjustments, depending on a range of the Group’s financial indicators.
6. Finance income and costs
7. Loss on remeasurement and disposal of financial instruments
The impairment of available-for-sale financial assets in 2016 related to a greenfield iron ore deposit in the Republic of Congo, Core Mining, and was due to the uncertain prospects for the development of the field.
The impairment of available-for-sale financial assets in 2015 related to a greenfield iron ore deposit in Brazil, SPG Mineracao SA, and was the result of iron ore prices decline.
8. Foreign exchange gain/(loss)
9. Impairment of non-current assets
The recoverable amount of Redaelli Tecna S.p.A. in 2016 and Severstal Liberia Iron Ore Ltd in 2015 has been determined based on its fair value less costs to sell.
For the purpose of impairment testing, the recoverable amount of each cash generating unit except above 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:
- For all cash-generating units, apart from those included in the Severstal Resources segment, cash flow projections cover a period of five years. Cash flows beyond the five-year period have been extrapolated taking into account business cycles. Cash flow projections for cash-generating units of the Severstal Resources segment cover a period which corresponds to the contractual time remaining of the respective mining licenses.
- Cash flow projections were prepared in nominal terms.
- Cash flow projections during the forecast period are based on long-term
price trends for both sales prices and material costs specific for each segment
and geographic region and operating cost inflation in line with consumer price
inflation for each country. Consumer price inflation expectations (in local
currency) during the forecast period are as follows in percentage terms:
- Discount rates for each cash-generating unit were estimated in nominal
terms based on the weighted average cost of capital. These rates, presented by
segment, are as follows in percentage terms:
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
Severstal Liberia Iron Ore Ltd
During 2015, due to the uncertain prospects for the development of the field the Group again assessed the recoverable amount of Severstal Liberia Iron Ore Ltd. As a result, in 2015 the Group recognised an impairment loss of US$ 100 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 recognised in 2015 of US$ 80 million and US$ 76 million was allocated to property, plant and equipment and US$ 4 million to intangible assets. The carrying amount of the cash generating unit was US$ 80 million as at 31 December 2015.
The following assumptions were used in the impairment test:
- the forecast extraction volumes decrease by 1% in 2016, increase by 3% in 2017, decrease by 1% in 2018, increase by 2% in 2019, decrease on average by 3% p.a. in 2020 to 2026;
- the forecast iron ore concentrate prices increase by 3% in 2016, increase by 5% in 2017, increase by 4% in 2018, increase by 9% in 2019, grow thereafter on average by 2% p.a.;
- operating costs are forecast to decrease by 5% in 2016, increase by 19% in 2017, increase on average by 4% p.a. in 2018 to 2020, further decrease on average by 5% p.a.;
- pre-tax discount rate of 14.5% (in US$ terms).
The above estimates are particularly sensitive in the following areas:
- a 1% increase in discount rate increases the impairment loss by US$ 6 million;
- a 10% decrease in future planned revenues increases the impairment loss by US$ 79 million.
In February 2016, an explosion occurred at the Vorkutaugol’s Severnaya mine which is included in the Severstal Resources segment. In September 2016, the Group announced that the Severnaya mine will be sealed off to avoid the risk of airflow causing further underground fire and explosions in the mine. By 31 December 2016, the Group paid compensation of US$ 2 million to the injured workers and the relatives of those killed and recognised a provision for restructuring of staff of US$ 2 million. Loss on disposal of property, plant and equipment of US$ 41 million and an impairment loss of US$ 12 million was recognised in the period ended 31 December 2016, in relation to all relevant property, plant and equipment of the Severnaya mine.
In 2016, due to the existence of an internal indication of impairment as a result of an explosion occurred at the Vorkutaugol’s Severnaya mine the Group assessed the recoverable amount of AO Vorkutaugol, the carrying amount of which was US$ 279 million as at 31 December 2016.
As a result, based on a value in use calculation, no impairment loss was recognised in 2016.
Sensitivity analysis of the main assumptions of impairment test:
- a 1% increase in discount rate does not cause the impairment of the CGU;
- a 10% decrease in the coking coal concentrate prices does not cause the impairment of the CGU.
Additionally, an impairment loss of US$ 56 million and US$ 28 million was recognised in 2016 in relation to specific items of property, plant and equipment and intangible assets, respectively.
An impairment loss of US$ 1 million was recognised in 2015 in relation to specific items of property, plant and equipment.
An impairment loss of US$ 3 million was recognised in 2017 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 recognised in 2015, and the recoverable amount of the CGU exceeded its carrying amount by US$ 52 million.
The carrying amount of goodwill allocated to the cash-generating unit was US$ 26 million as at 31 December 2015.
The following assumptions were used in the impairment test:
- the forecast sales volumes increase by 3% in 2016, increase by 3% in 2017 and remain constant at the 2017 level thereafter;
- forecast sales prices decrease by 3% in 2016, increase by 2% in 2017, remain constant at the 2017 level in 2018, increase by 1% in 2019, increase by 3% in 2020 and grow thereafter on average by 2% p.a.;
- operating costs are forecast to decrease by 2% in 2016, increase by 4% in 2017, increase on average by 1% p.a. in 2018 and 2019, increase by 2% in 2020 and grow thereafter on average by 2% p.a.;
- pre-tax discount rate of 10.0% (in EUR terms).
The above estimates are particularly sensitive in the following areas:
- a 4% decrease in the steel prices would cause the CGU’s recoverable amount to be equal to its carrying amount.
In 2016 the Group recognised an impairment loss of US$ 30 million in relation to non-current assets of Redaelli Tecna S.p.A. based on its fair value less costs to sell. US$ 25 million of the loss was allocated to goodwill and US$ 5 million to property, plant and equipment (Note 28).
The carrying amount of goodwill allocated to the cash-generating unit before the impairment loss was US$ 25 million as at 31 December 2016.
An impairment loss of US$ 2 million was recognised in 2015 in relation to specific items of property, plant and equipment.
An impairment loss of US$ 9 million was recognised in 2016 in relation to specific items of property, plant and equipment.
10. Net other non-operating (expenses)/income
During 2017, as a result of an internal reorganisation of a number of foreign holding entities, US$ 307 million of translation reserves, arising from operations which had been liquidated or are in the process of being liquidated, were recognised in net other non-operating (expenses)/income.
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 following table sets out the composition of the net deferred tax liability and movements based on the temporary differences arising between the fiscal and reporting balance sheets:
The Group reassessed the recoverability of certain previously unrecognised deferred tax assets and accrued them in 2016 to the extent that it had become probable that future taxable profit would allow the deferred tax assets to be recovered. Amount of future taxable profit was based on the projections performed for the entities included in the consolidated group of taxpayers as defined by the Russian tax code. Main assumptions used related to the production level, costs, selling price and exchange rates.
The Group has not recognised cumulative tax loss carry forwards in the following amounts and with the following expiry dates:
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$ 2,497 million as at 31 December 2017 (31 December 2016: US$ 4,078 million; 31 December 2015: US$ 5,525 million).
12. Related party transactions
13. Related party balances
* Since October 2016 JSC Metcombank is no longer a related party to the Group.
The amounts outstanding are expected to be settled in cash. The Group does not hold any collateral for amounts owed by related parties.
Loans given to related parties were provided at interest rates ranging from nil to 10.5% per annum and were given to finance working capital and investments.
14. Cash and cash equivalents
15. Short-term financial investments
16. Trade accounts receivable
Of the above amounts US$ 7 million (31 December 2016: US$ 6 million; 31 December 2015: US$ 10 million) were stated at net realisable value.
During the year ended 31 December 2017, the Group recognised a US$ 37 million release and a US$ 28 million allowance to account for obsolete and slow-moving inventories and to reduce the carrying amount to net realisable value (2016: US$ 24 million and US$ 34 million, respectively; 2015: US$ 24 million and US$ 33 million, respectively).
18. Other current assets
19. Long-term financial investments
20. 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 29.
The following is summarised financial information in respect of associates:
The following is summarised financial information in respect of joint ventures:
None of the above associates and joint ventures is individually material to the Group.
21. Property, plant and equipment
Of the above amounts of additions to construction-in-progress, US$ 9 million (2016: US$ 6 million, 2015: US$ 16 million) is capitalised interest.
The Group applied a weighted average capitalisation rate of 5% to determine the amount of borrowing costs eligible for capitalisation for the year ended 31 December 2017 (2016: 5%; 2015: 6%).
Other productive assets include transportation equipment and tools.
22. Intangible assets
23. Debt finance
Total debt is denominated in the following currencies:
Total debt is contractually repayable after the balance sheet date as follows:
Reconciliation of movements of liabilities to cash flows arising from financing activities:
In April 2016, the Group issued US$ 200 million senior unsecured guaranteed convertible bonds maturing in 2021. The conversion rights may be exercised at any time on or after 9 June 2016. The initial conversion price was set at US$ 13.80 per GDR. If the conversion rights are exercised, it is at the Group’s discretion to determine whether to convert bonds into GDRs or to pay a cash amount as defined in the terms of the issue. This settlement option causes the conversion feature of the bond to be classified separately and measured at fair value through profit and loss, while the host liability is accounted for at amortised cost using the market interest rate of 5.1% per annum at the date of the issue. The bonds bear an interest rate of 0.5% per annum, which is payable semi-annually in April and October each year, beginning in October 2016. Holders of the bonds have an option to require an early redemption of their bonds on 29 April 2019 at the principal amount plus accrued interest. The Group also has an option for early redemption, exercisable starting from 20 May 2019 provided the value of the GDRs deliverable on conversion of the bonds exceeds 130 per cent of the principal amount of the bonds on a specified period of time. The proceeds from the bonds issuance were mainly used for general corporate purposes.
As at 31 December 2017, the value of conversion option of convertible bonds maturing in 2021 was US$ 109 million and was determined with reference to the quoted market price (level 2 of the fair value hierarchy) and included in other non-current liabilities (Notes 26) (31 December 2016: US$ 88 million was included in other current liabilities). As at 30 September 2017, the Group reclassified the conversion option of the convertible bonds from other current liabilities to other non-current liabilities as the Group does not expect the liability to be settled within twelve months after the reporting date.
In February 2017, the Group issued US$ 250 million senior unsecured guaranteed convertible zero-coupon bonds maturing in 2022. The conversion rights may be exercised at any time on or after 29 March 2017. The initial conversion price was set at US$ 20.33 per GDR. If the conversion rights are exercised, it is at the Group’s discretion to determine whether to convert bonds into GDRs or to pay a cash amount as defined in the terms of the issue. This settlement option causes the conversion feature of the bond to be classified separately and measured at fair value through profit and loss, whilst the host liability is accounted for at amortised cost using market interest rate at 3.9% per annum at the date of the issue. Holders of the bonds have an option to require an early redemption of their bonds on 16 February 2020 at the principal amount. The Group also has an option for early redemption, exercisable starting from 9 March 2020 provided the value of the GDRs deliverable on conversion of the bonds exceeds 130 per cent of the principal amount of the bonds for a specified period of time. The proceeds from the bonds issuance were mainly used for general corporate purposes.
As at 31 December 2017, the value of the conversion option of convertible bonds maturing in 2022 was US$ 48 million and was determined with reference to the quoted market price (level 2 of the fair value hierarchy) and included in other non-current liabilities (Note 26).
In February 2017, the Group issued US$ 500 million bonds denominated in US dollars maturing in 2021. These bonds bear an interest rate of 3.85% per annum, which is payable semi-annually in February and August each year, beginning in August 2017. The proceeds from the bonds issuance were used for general corporate purposes, including refinancing of debt maturing in 2018.
Bank financing security
Debt finance arising from banks and committed unused credit lines were secured by US$ nil as at 31 December 2017 (31 December 2016: US$ nil; 31 December 2015: US$ 16 million) of the net book value of plant and equipment.
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 reorganisation 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 as at 31 December 2017, 2016 and 2015.
At the reporting date the Group had US$ 1,072 million (31 December 2016: US$ 675 million; 31 December 2015: US$ 683 million) of committed unused long-term сredit lines.
24. Other current liabilities
25. 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 compensation, 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 liabilities:
The Group’s weighted average remaining life of the pensioners and employees, receiving the retirement benefits equaled to 17 years as at 31 December 2017.
The present value of the defined benefit obligation less the fair value of plan assets is recognised as a retirement benefit liabilities in the statement of financial position.
During 2016, the Group ceased its contract with pension fund Stalfond, which represented US$ 40 million pension liability of the Group. The Group held US$ 27 million of plan assets in Stalfond, which were transferred to personal accounts of current retirees to meet its pension obligation. Pension obligation to future retirees will be settled by the сharity fund Blago.
The movements in the defined benefit obligation were as follows:
*Actuarial losses arise primarily from changes in financial assumptions.
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 2018 is US$ 6 million.
The Group’s retirement benefit service costs are allocated and recognised in the income statement as part of ‘Cost of sales’ and ‘General and administrative expenses’ proportionally to related salary expenses.
Interest cost and return on plan assets are recognised as part of ‘Finance costs’; actuarial losses are recognised as a separate component in other comprehensive income.
26. 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 2023 – 2051. 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 2017 and 2016 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:
27. Shareholders’ equity
The Parent Company’s share capital consists of ordinary shares with a nominal value of RUB 0.01 each. The authorised share capital of Severstal as at 31 December 2017, 2016 and 2015 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 24 September 1993 and sold by the Government at privatisation auctions.
The total value of issued share capital presented in these consolidated financial statements comprised:
All shares carry equal voting and distribution rights.
Reconciliation between weighted average number of shares in issue and weighted average number of shares outstanding during the period (millions of shares):
Earnings per share
In 2017 the Group issued US$ 250 million convertible bonds and in 2016 issued US$ 200 million convertible bonds (Note 23), which had an effect on earnings 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 25 May 2015, the Meeting of Shareholders approved an annual dividend of RUB 14.65 (US$ 0.29 as at 25 May 2015 exchange rate) per share and per GDR for the year ended 31 December 2014 and an interim dividend of RUB 12.81 (US$ 0.26 as at 25 May 2015 exchange rate) per share and per GDR for the first quarter of the year ended 31 December 2015.
On 15 September 2015, an Extraordinary Meeting of Shareholders approved an interim dividend of RUB 12.63 (US$ 0.19 as at 15 September 2015 exchange rate) per share and per GDR for the first six months of the year ended 31 December 2015.
On 10 December 2015, an Extraordinary Meeting of Shareholders approved an interim dividend of RUB 13.17 (US$ 0.19 as at 10 December 2015 exchange rate) per share and per GDR for the nine months of the year ended 31 December 2015.
On 24 June 2016, the Meeting of Shareholders approved an annual dividend of RUB 20.27 (US$ 0.32 as at 24 June 2016 exchange rate) per share and per GDR for the year ended 31 December 2015 and an interim dividend of RUB 8.25 (US$ 0.13 as at 24 June 2016 exchange rate) per share and per GDR for the first quarter of the year ended 31 December 2016.
On 2 September 2016, an Extraordinary Meeting of Shareholders approved an interim dividend of RUB 19.66 (US$ 0.30 as at 2 September 2016 exchange rate) per share and per GDR for the first six months of the year ended 31 December 2016.
On 2 December 2016, an Extraordinary Meeting of Shareholders approved an interim dividend of RUB 24.96 (US$ 0.39 as at 2 December 2016 exchange rate) per share and per GDR for the nine months of the year ended 31 December 2016.
On 9 June 2017, the Meeting of Shareholders approved an annual dividend of RUB 27.73 (US$ 0.49 at 9 June 2017 exchange rate) per share and per GDR for the year ended 31 December 2016 and an interim dividend of RUB 24.44 (US$ 0.43 at 9 June 2017 exchange rate) per share and per GDR for the first quarter of the year ended 31 December 2017.
On 15 September 2017, an Extraordinary Meeting of Shareholders approved an interim dividend of RUB 22.28 (US$ 0.39 at 15 September 2017 exchange rate) per share and per GDR for the first six months of the year ended 31 December 2017.
On 24 November 2017, an Extraordinary Meeting of Shareholders approved an interim dividend of RUB 35.61 (US$ 0.61 at 24 November 2017 exchange rate) per share and per GDR for the first nine months of the year ended 31 December 2017.
28. Discontinued operation and assets held for sale
The Group’s discontinued operation represented the Severstal International segment, following the management’s decision to dispose of this business.
The results of the discontinued operation were as follows:
* This amount included US$ 13 million accrual for taxes receivable and a US$ 29 million adjustment in respect of the disposed SNA assets in the year ended 31 December 2015.
Redaelli Tecna S.p.A.
The Group’s assets held for sale represent Redaelli Tecna S.p.A., the Group’s subsidiary, that was classified as held for sale as at 31 December 2016.
The major classes of assets and liabilities of Redaelli Tecna S.p.A. measured at the lower of carrying amount and fair value less costs to sell determined based on price offer available as at 31 December 2016.
The loss on remeasurement of Redaelli Tecna S.p.A. to fair value less costs to sell recognised in 2016 was allocated US$ 5 million to property, plant and equipment and US$ 25 million to goodwill.
The major classes of assets and liabilities of Redaelli Tecna S.p.A. measured at the lower of carrying amount and fair value less costs to sell as at 31 December 2017, 2016 and 2015 were as follows:
29. 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:
1 – Severstal Russian Steel segment contains
foreign trading companies, which sell products primarily produced in
2 – Legal form was changed following the requirements of the amended Russian Civil Code.
3 – The entities were renamed.
4 – Merged with Severstal-Proekt LLC.
5 – Liquidated.
1 – Acquisition of rights (Note 29).
In addition, at the reporting date, a further 29 (31 December 2016: 30; 31 December 2015: 31) subsidiaries, associates and joint ventures, 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 20 of these consolidated financial statements.
Disposal of subsidiary (other than discontinued operation)
PBS Coals Ltd
In July 2015, the Group received an instalment of contingent consideration for the sale of PBS Coals Ltd of US$ 4 million.
In September 2016, the Group received a final instalment of contingent consideration for PBS Coals Ltd of US$ 3 million after final settlement with the purchaser.
Redaelli Tecna S.p.A.
In April 2017, the Group sold its 100% stake in Redaelli Tecna S.p.A. to a third party for consideration of EUR 37 million (US$ 40 million, at the transaction date exchange rate).
The loss on the disposal of US$ 43 million was recognised in these consolidated financial statements as part of net other non-operating expenses and mostly comprised Redaelli Tecna S.p.A.’s accumulated foreign exchange translation reserves as at the disposal date.
In October 2017, the Group sold its 98.7% stake in PJSC Dneprometiz to a third party for a total consideration of US$ 10 million.
The loss on the disposal of US$ 29 million was recognised in these consolidated financial statements as part of net other non-operating expenses and mostly comprised Dneprometiz’s accumulated foreign exchange translation reserves as at the disposal date.
A summary of assets and liabilities disposed during 2017, 2016 and 2015 is presented below:
*These amounts included foreign exchange translation reserves of disposed foreign subsidiaries reclassified to profit or loss from other comprehensive income/(loss).
Acquisitions of rights
In July 2017, the Group acquired rights from a third party to claim debt obligations of LLC Metal-group for a total consideration of 6 billion roubles (US$ 101 million at the transaction date exchange rate). Debt obligations were secured by 100% of LLC Metal–group’s participation rights and property.
In November 2017, the Group obtained the ability to exercise its legal rights arisen from acquired rights to claim debt obligations to direct relevant activities of LLC Metal-group and consequently consolidated LLC Metal-group’s net assets. As control was only obtained late in the financial year, the Group was unable to complete all its procedures in relation to the assessment of fair values and accordingly its assessment of the value of identifiable assets and liabilities on the date of obtaining control is only provisional at the reporting date. As a result, a provisional gain from a bargain purchase of US$ 135 million was recognised in the consolidated income statement.
The provisional gain represents the difference between LLC Metal-group’s provisional amounts of identifiable net assets of US$ 236 million, excluding loan payable which was eliminated on consolidation as an intercompany balance, over which the Group obtained control, and consideration paid of US$ 101 million on acquisition of rights for loans, accrued interest and penalties amounted of US$ 344.9 million ( 19.9 billion roubles at 31 December 2017 exchange rate).
LLC Metal-group is a mining company based in Russian Federation, which owns and operates iron ore deposits. LLC Metal-group revenue and net loss from the beginning of the period to the consolidation date comprised US$ 33 million and US$ 10 million, respectively. The revenue and net loss since the consolidation date included in the Group’s profit for the year ended 31 December 2017 amounted to US$ 4 million and US$ 6 million, respectively.
A summary of identifiable assets and liabilities of investee is presented below:
30. Segment information
The Group critically reassessed its performance measures and decision-making process and concluded EBITDA to be among the most appropriate segments’ profit or loss measure. Comparative information was changed respectively.
The following is an analysis of the Group’s total assets and liabilities by segments:
The following is an analysis of the Group’s revenue and a reconciliation of profit from operations to EBITDA by segments:
Twelve months ended 31 December 2017:
Twelve months ended 31 December 2016:
Twelve months ended 31 December 2015:
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:
In Europe and CIS the locations are primarily represented by the following countries:
- 31 December 2017: Latvia and Poland;
- 31 December 2016: Latvia, Ukraine and Poland;
- 31 December 2015: Latvia, Ukraine and Italy.
31. Financial instruments
The Group’s risk management policies are established to identify and analyse 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 include 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 consolidated statement of financial position and guarantees (Note 32e).
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 minimise credit risk of the counterparty banks, the Group has a centralised 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 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 of US$ 907 million at 31 December 2017.
The Group has a concentration of cash and short-term bank deposits with Sberbank of Russia, PJSC Bank VTB of US$ 714 million and US$ 316 million, respectively at 31 December 2016.
The Group has a concentration of cash and short-term bank deposits with Sberbank of Russia, PJSC Bank VTB and JSC Metcombank of US$ 1,107 million, US$ 199 million and US$ 163 million, respectively at 31 December 2015.
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 minimise 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:
As at 31 December 2017 and 2016, the Group has no significant bank financing.
As at 31 December 2015, the Group has a concentration of bank financing with Sberbank of Russia of US$ 206 million.
Covenant compliance risk
The Group actively monitors compliance with all debt covenants. In case of the risk of default, the Group uses its best effort to avoid or remedy (as the case may be) relevant default and seeks to approach the lenders as soon as possible in order to amend the respective facility agreement or waive a possible default, as the case may be (Note 23).
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:
A 10 percent strengthening of the following currencies against the functional currency as at 31 December 2017 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 2016 and 2015.
A 10 percent weakening of these currencies against the functional currency as at 31 December 2017 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
Group’s public debt has fixed rate. The variable rate instruments have 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 not have (decreased)/increased profit and equity. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2016 and 2015.
Fair value hierarchy
The table below analyses financial instruments carried at fair value, except financial instruments measured at amortised cost, by valuation method. The levels in the fair value hierarchy into which the fair value measurements are categorised were disclosed in accordance with IFRS.
Available-for-sale financial assets presented in Level 1 included mainly bonds quoted on an active market.
The description of the levels is presented below:
Level 1 - quoted prices in active markets for identical assets or
Level 2 - inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly;
Level 3 – inputs for the asset or liability that are not based on observable market data.
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:
32. Commitments and contingencies
a. For litigation, tax and other liabilities
The taxation system and regulatory environment of the Russian Federation are characterised 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 1 January 2015. In particular, those changes are aimed at regulating transactions with foreign 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 amounts of 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$ 2 million (31 December 2016: US$ 400 million, 31 December 2015: US$ 44 million) and management believes it made adequate provisions for other probable tax claims. 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.
As at 31 December 2017, 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$ 142 million (31 December 2016: US$ 142 million, 31 December 2015: US$ 142 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 in Lucchini’s creditors’ list and will be settled in the course of the bankruptcy procedure.
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$ 271 million (31 December 2016: 216 million; 31 December 2015: US$ 189 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$ nil (31 December 2016: US$ 2 million; 31 December 2015: US$ 3 million) of guarantees issued, including guarantees issued for related parties, of US$ nil (31 December 2016: US$ 1 million; 31 December 2015: US$ 1 million).