Strategic report
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Financial
statements

Consolidated
Financial Statements

Consolidated Statement
of Financial Position

At 31 december 2019

(expressed in millions of russian roubles, unless otherwise stated)

Note 31 December
2019
31 December
2018
Assets
Non-current assets
Property, plant and equipment 10 315,257 303,802
Right-of-use assets 11 428,166
Investment property 12 5,564 6,173
Goodwill 13 101,927 94,627
Other intangible assets 14 24,338 22,126
Investments in associates and joint ventures 200 203
Other non-current assets 2,646 8,015
Deferred tax assets 30 16,478 5,013
30 894,576 439,959
Current assets
Inventories 15 127,462 115,990
Indemnification asset 7 140
Trade, other accounts receivable and prepayments 17 15,853 14,172
Current income tax receivable 5,631 6,167
VAT and other taxes receivable 18 12,066 10,143
Cash and cash equivalents 9 18,602 24,368
179,754 170,840
Total assets 1,074,330 610,799
Equity and liabilities Equity attributable to equity holders of the parent
Share capital 22 2,458 2,458
Share premium 46,150 46,192
Retained earnings 67,843 116,707
Share-based payment reserve 29 105 118
116,556 165,475
Total equity 116,556 165,475
Non-current liabilities
Long-term borrowings 21 153,178 147,329
Long-term lease liabilities 11 427,173
Deferred tax liabilities 30 5,501 6,166
Other non-current liabilities 3,349 626
589,201 154,121
Current liabilities
Trade accounts payable 160,434 154,873
Short-term borrowings 21 74,755 60,435
Interest accrued 1,734 1,770
Short-term lease liabilities 11 57,622
Short-term contract liabilities 20 2,206 1,664
Current income tax payable 750 725
Provisions and other liabilities 19 71,072 71,736
368,573 291,203
Total Liabilities 957,774 445,324
Total equity and liabilities 1,074,330 610,799

Igor Shekhterman

Chief Executive Officer

18 March 2020

Svetlana Demyashkevich

Chief Financial Officer

18 March 2020

Consolidated Statement
of Profit or Loss

For the year ended 31 December 2019

(expressed in millions of Russian Roubles, unless otherwise stated)

Note 2019 2018
Revenue 24 1,734,347 1,532,537
Cost of sales 25 (1,301,868) (1,162,817)
Gross profit 432,479 369,720
Selling, general and administrative expenses 25 (356,890) (323,358)
Net impairment losses on financial assets 17 (215) (501)
Lease/sublease and other income 26 14,024 12,293
Operating profit 89,398 58,154
Finance costs 27 (56,957) (18,846)
Finance income 27 54 178
Net foreign exchange gain/(loss) 2,203 (447)
Profit before tax 34,698 39,040
Income tax expense 30 (15,191) (10,398)
Profit for the year 19,507 28,642
Profit for the year attributable to:
Equity holders of the parent
19,507 28,642
Basic earnings per share for profit attributable to the equity holders of the parent (expressed in RUB per share) 23 287.33 421.90
Diluted earnings per share for profit attributable to the equity holders of the parent (expressed in RUB per share) 23 287.33 421.87

Igor Shekhterman

Chief Executive Officer

18 March 2020

Svetlana Demyashkevich

Chief Financial Officer

18 March 2020

Consolidated Statement
of Comprehensive Income

For the year ended 31 December 2019

(expressed in millions of Russian Roubles, unless otherwise stated)

2019 2018
Profit for the year 19,507 28,642
Total comprehensive income for the year, net of tax 19,507 28,642
Total comprehensive income for the year attributable to:
Equity holders of the parent
19,507 28,642

Igor Shekhterman

Chief Executive Officer

18 March 2020

Svetlana Demyashkevich

Chief Financial Officer

18 March 2020

Consolidated Statement
of Cash Flows

For the year ended 31 December 2019

(expressed in millions of Russian Roubles, unless otherwise stated)

Note 2019 2018
Profit before tax 34,698 39,040
Adjustments for:
Depreciation, amortisation and impairment of property, plant and equipment, right-of-use assets, investment property and intangible assets 25 122,085 49,474
Gain on disposal of property plant and equipment, investment property and intangible assets and gain on derecognition of right-of-use assets (1,470) (213)
Finance costs, net 27 56,903 18,667
Net impairment losses on financial assets 17 215 501
Impairment of prepayments 17 134 216
Share-based compensation expense 29 63 72
Net foreign exchange (gain)/loss (2,203) 447
Other non-cash items 1,225 (377)
Net cash from operating activities before
changes in working capital
211,650 107,827
(Increase)/decrease in trade, other accounts receivable and prepayments and VAT and other taxes receivable (5,938) 4,360
Increase in inventories (11,472) (16,690)
Increase in trade payable 5,604 24,183
Increase in other accounts payable and contract liabilities 1,157 7,756
Net cash flows from operations 201,001 127,436
Interest paid (55,664) (16,893)
Interest received 48 75
Income tax paid (14,922) (12,584)
Net cash flows from operating activities 130,463 98,034
Cash flows from investing activities
Purchase of property, plant and equipment and initial direct costs associated with right-of-use assets (64,222) (73,494)
Acquisition of businesses, net of cash acquired 7 (8,426) (14,524)
Proceeds from disposal of property, plant and equipment, investment property and intangible assets 784 735
Purchase of other intangible assets (9,290) (5,274)
Acquisition of interest in associates and joint ventures (203)
Proceeds from sale of interest in associates and joint ventures 3
Net cash flows used in investing activities (81,151) (92,760)
Cash flows from financing activities
Proceeds from loans 21 97,540 108,054
Repayment of loans 21 (77,502) (94,810)
Purchase of treasury shares (118) (90)
Payments of principal portion of lease liabilities 11 (50,059)
Dividends paid to equity holders of the parent 22 (25,000) (21,590)
Net cash flows used in financing activities (55,139) (8,436)
Effect of exchange rate changes on cash and cash equivalents 61 (75)
Net decrease in cash and cash equivalents (5,766) (3,237)
Movements in cash and cash equivalents
Cash and cash equivalents at the beginning of the year 9 24,368 27,605
Net decrease in cash and cash equivalents (5,766) (3,237)
Cash and cash equivalents at the end of the year 9 18,602 24,368

Igor Shekhterman

Chief Executive Officer

18 March 2020

Svetlana Demyashkevich

Chief Financial Officer

18 March 2020

Consolidated Statement
of Changes In Equity

For the year ended 31 December 2019

(expressed in millions of Russian Roubles, unless otherwise stated)

Attributable to equity holders of the parent
Number of shares Share capital Share premium Share-based payment reserve Retained earnings Total shareholders’ equity Total
Balance as at 1 January 2018 67,886,748 2,458 46,212 117 109,655 158,442 158,442
Profit for the period 28,642 28,642 28,642
Total comprehensive income for the period 28,642 28,642 28,642
Dividends (21,590) (21,590) (21,590)
Share-based payment compensation (Note 29) 72 72 72
Transfer and waiving of vested equity rights (Note 29) 3,351 (20) (71) (91) (91)
Balance as at 31 December 2018 67,890,099 2,458 46,192 118 116,707 165,475 165,475
Effect of adoption of new accounting standards (Note 4) (43,371) (43,371) (43,371)
Balance as at 1 January 2019 Restated 67,890,099 2,458 46,192 118 73,336 122,104 122,104
Profit for the period 19,507 19,507 19,507
Total comprehensive income for the period 19,507 19,507 19,507
Acquisition of treasury shares (11,719) (75) (75) (75)
Dividends (Note 22) (25,000) (25,000) (25,000)
Share-based payment compensation (Note 29) 63 63 63
Transfer and waiving of vested equity rights (Note 29) 11,674 33 (76) (43) (43)
Balance as at 31 December 2019 67,890,054 2,458 46,150 105 67,843 116,556 116,556

Igor Shekhterman

Chief Executive Officer

18 March 2020

Svetlana Demyashkevich

Chief Financial Officer

18 March 2020

Notes to the Consolidated
Financial Statements

For the year ended 31 december 2019

(expressed in millions of russian roubles, unless otherwise stated)

Principal activities and the Group structure

1 .

These consolidated financial statements are for the economic entity comprising X5 Retail Group N.V. (the “Company”) and its subsidiaries, as set out in Note 6 (the “Group”).

X5 Retail Group N.V. is a joint stock limited liability company established in August 1975 under the laws of the Netherlands. The principal activity of the Company is to act as a holding company for a group of companies that operate retail grocery stores. The Company’s address and tax domicile is Zuidplein 196, 1077 XV Amsterdam, the Netherlands.

The main activity of the Group is the development and operation of grocery retail stores. As at 31 December 2019 the Group operated a retail chain of 16,297 proximity stores, supermarket and hypermarket stores under the brand names “Pyaterochka”, “Perekrestok” and “Karusel” (each representing separate format) in major population centres in Russia, including but not limited to Moscow, St. Petersburg, Nizhniy Novgorod, Rostov-on-Don, Kazan, Samara, Lipetsk, Chelyabinsk, Perm, Ekaterinburg (31 December 2018: 14,431 proximity stores, supermarket, hypermarket and express stores under the brand names “Pyaterochka”, “Perekrestok”, “Karusel” and “Perekrestok Express”), with the following number of stores:

Federal district 31 December 2019 31 December 2018
"Perekrestok" — Supermarket
Central FD 503 449
Volga FD 128 119
North-western FD 116 98
Ural FD 48 42
Southern FD 49 43
Northern Caucasus 8 9
Total 852 760
"Pyaterochka" — Proximity stores
Central FD 5,759 5,279
Volga FD 4,153 3,676
North-western FD 1,703 1,552
Ural FD 1,306 1,120
Southern FD 1,447 1,174
Siberian FD 702 479
Northern Caucasus 284 242
Total 284 242
"Karusel" — Hypermarket
Central FD 39 39
Volga FD 25 25
North-western FD 17 18
Ural FD 4 6
Southern FD 5 5
Northern Caucasus 1 1
Total 91 94
"PEREKRESTOK EXPRESS" — EXPRESS - 55
Total stores 16,297 14,431

As at 31 December 2019 and 31 December 2018 the principal shareholder exerting significant influence over the Company was CTF Holdings S.A. (“CTF”). CTF owns 47.86% of total issued shares in the Company, indirectly through Luxaro Retail Holding S.a.r.l. As at 31 December 2019 and 31 December 2018 the Company’s shares were listed on the London and Moscow Stock Exchanges in the form of Global Depositary Receipts (GDRs) with each GDR representing an interest of 0.25 in an ordinary share (Note 22).

X5 Retail Group N.V. has issued a liability statement as mentioned in article 403 sub 1f of Book 2 of the Dutch Civil Code regarding its subsidiary X5 Finance B.V. In compliance with these and other conditions as included in article 403, the financial statements of X5 Finance B.V. for the year ended 31 December 2019 will be prepared on a condensed basis and will not be audited.

Summary of significant accounting policie

2 .

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.

2.1 Basis of preparation

These consolidated financial statements for the year ended 31 December 2019 have been prepared in accordance with and comply with International Financial Reporting Standards as adopted by the European Union and with Part 9 Book 2 of the Dutch Civil Code.

The consolidated financial statements have been prepared under the historical cost convention, except for financial assets and financial liabilities (including derivative instruments) that have been measured at fair value. The preparation of the consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3.

On 18 March 2020, the Management Board authorised the consolidated financial statements for issue. Publication is on 19 March 2020.

2.2 Basis of consolidation

Subsidiaries are those investees, including structured entities, that the Group ­controls because the Group (i) has power to direct relevant activities of the investees that significantly affect their returns, (ii) has exposure, or rights, to variable returns from its involvement with the investees, and (iii) has the ability to use its power over the investees to affect the amount of investor’s returns. The existence and effect of substantive rights, including substantive potential voting rights, are considered when assessing whether the Group has power over another entity. For a right to be substantive, the holder must have practical ability to exercise that right when decisions about the direction of the relevant activities of the investee need to be made. The Group may have power over an investee even when it holds less than majority of voting power in an investee. In such a case, the Group assesses the size of its voting rights relative to the size and dispersion of holdings of the other vote holders to determine if it has de-facto power over the investee. Protective rights of other investors, such as those that relate to fundamental changes of investee’s activities or apply only in exceptional circumstances, do not prevent the Group from controlling an investee. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are deconsolidated from the date on which control ceases.

The acquisition method of accounting is used to account for the acquisition of businesses other than those acquired from parties under common control. The consideration transferred is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed at the date of exchange, including fair value of assets or liabilities from contingent consideration arrangements but excludes acquisition related costs such as advisory, legal, valuation and similar professional services. Transaction costs related to the acquisition and incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt as part of the business combination are deducted from the carrying amount of the debt and all other transaction costs associated with the acquisition are expensed. The date of exchange is the acquisition date where a business combination is achieved in a single transaction. However, when a business combination is achieved in stages by successive share purchases, the date of exchange is the date of each exchange transaction; whereas the acquisition date is the date on which acquirer obtains control of the subsidiary.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date.

Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests and any previous interest held over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in profit or loss.

Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The Company and all of its subsidiaries use uniform accounting policies consistent with the Group’s policies.

Purchases of subsidiaries from parties under common control are accounted for using the pooling of interest method (also referred as “the predecessor values method”). Under this method the consolidated financial statements of the combined entity are presented as if the businesses had been combined from the beginning of the earliest period presented or, if later, the date when the combining entities were first brought under common control. The assets and liabilities of the subsidiary transferred under common control are at the predecessor entity’s carrying amounts.

The predecessor entity is considered to be the highest reporting entity in which the subsidiary’s IFRS financial information was consolidated. Related goodwill inherent in the predecessor entity’s original acquisitions is also recorded in these consolidated financial statements. Any difference between the carrying amount of net assets, including the predecessor entity’s goodwill, and the consideration for the acquisition is accounted for in these consolidated financial statements as an adjustment to other reserve within equity

2.3 Foreign currency translation and transactions
(a) Functional and presentation currency

The functional currency of the Group’s entities is the national currency of the Russian Federation, the Russian Rouble (“RUB”). The presentation currency of the Group is the Russian Rouble (“RUB”), which management believes is the most useful currency to adopt for users of these consolidated financial statements.

(b) Transactions and balances

Monetary assets and liabilities denominated in foreign ­currencies are translated into the functional currency at the official exchange rate of the Central Bank of Russian Federation (“CBRF”) at the respective reporting dates. Foreign exchange gains and losses resulting from the settlement of the transactions and from the translation of monetary assets and liabilities into the functional currency at period-end official exchange rates of the CBRF are recog­nised in profit or loss. Translation at period-end rates does not apply to non-monetary items.

2.4 Segment reporting

Operating segment is reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker has been identified as the Management Board. The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments. The Group identifies retail chains of each format (see Note 1) as separate operating segments in accordance with the criteria set forth in IFRS 8. Reportable segments whose revenue, result or assets are ten percent or more of all the segments are reported separately.

2.5 Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment, where required. Cost includes expenditure that is directly attributable to the acquisition or construction of the item.

Costs of minor repairs and maintenance are expensed when incurred. Costs of replacing major parts or components of property, plant and equipment are capitalised and the replaced parts are retired. Capitalised costs are depreciated over the remaining useful life of the property, plant and equipment or part’s estimated useful life whichever is sooner.

Leasehold improvements are capitalised when it is probable that future economic benefits associated with the improvements will flow to the Group and the cost can be measured reliably.

At each reporting date management assesses whether there is any indication of impairment of property, plant and equipment including construction in progress. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs of disposal and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in the consolidated statement of profit or loss. An impairment loss recognised for an asset in prior years is reversed if there has been a favourable change in circumstances affecting estimates used to determine the asset’s value in use or fair value less costs of disposal.

Gains and losses on disposals determined by comparing the proceeds with the carrying amount are recognised in profit or loss.

Land and assets under construction are not depreciated. Depreciation on other items of property, plant and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives. Buildings are divided into foundation and frame with a depreciation period of 40–50 years and other parts of 7–8 years. Other parts mainly include fixtures and fitting.

The depreciation periods, which approximate the estimated useful economic lives of the respective assets, are as follows:

Useful lives
Buildings (foundation and frame) 40–50 years
Buildings (other parts) 7–8 years
Machinery and equipment 5–10 years
Refrigerating equipment 7–10 years
Vehicles 5–7 years
Other 3–5 years

The residual value of an asset is the estimated amount that the Group would currently obtain from the disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life. The assets’ residual values and useful lives are reviewed, and adjusted prospectively if appropriate, at each reporting date.

2.6 Investment property

Investment property consists of buildings held by the Group to earn rental income or for capital appreciation, or both, and which are not occupied by the Group. The Group recognises the part of owned shopping centres that are leased to third party retailers as investment property, unless they represent insignificant portions of the property and are used primarily to provide auxiliary services to retail customers not provided by the Group rather than to earn rental income. After purchase or construction of the building the Group assesses the main purpose of its use and, if the main purpose is to earn rental income or for capital appreciation, or both, the building is classified as investment property.

Investment properties are stated at cost less accumulated depreciation and provision for impairment, where required. If any indication exists that investment properties may be impaired, the Group estimates the recoverable amount as the higher of value in use and fair value less costs of disposal. Subsequent expenditure is capitalised only when it is probable that future economic benefits associated with it will flow to the Group and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred.

Transfers are made to (or from) investment property only when there is a change in use. Transfers between investment property and owner occupied property do not change the carrying amount of the property transferred and they do not change the cost of that property for measurement or disclosure purposes. Depreciation on items of investment property is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives. The depreciation periods, which approximate the ­estimated useful economic lives of the respective assets, are 40–50 years.

Investment properties are derecognised either when they have been disposed of (i.e., at the date the recipient obtains control) or when they are permanently withdrawn from use and no future economic benefit is expected from their disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognised in profit or loss in the period of derecognition. The amount of consideration to be included in the gain or loss arising from the derecognition of investment property is determined in accordance with the requirements for determining the transaction price in IFRS 15.

Fair value determined for the disclosure purposes (Note 12) represents the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. The measurement is classified in level 3 of the fair value hierarchy.

2.7 Intangible assets
(a) Goodwill

Goodwill is carried at cost less accumulated impairment losses. Goodwill represents the excess of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date over the fair value of the net assets of the acquired subsidiary at the date of exchange. Goodwill is not deductible for tax purposes.

The Group tests goodwill for impairment at least annually and whenever there are indications that goodwill may be impaired. Goodwill is tested on the operating segment level.

(b) Brand and private labels

Brand and private labels acquired in a business combination are recognised initially at fair value. Private labels are amortised using the straight-line method over their useful lives. The useful life of “Pyaterochka” and “Karusel” brands are estimated to be indefinite-lived as there is no foreseeable limit to the period over which the brands are expected to generate net cash inflows for the Group. Change in estimate was based on the demonstration of the brands’ ability to survive changes in the economic environment.

Useful lives
Private labels 1–8 years
(c) Software and other intangible assets

Expenditure on acquired patents, licenses and software development is capitalised and amortised using the straight-line method over their useful lives ranging from 1 to 10 years (5 on average).

Research costs related to software development are expensed as incurred. Software development expenditures on an individual project are recognised as an intangible asset when the following criteria are met:

  • It is technically feasible to complete the intangible asset so that the asset will be available for use or sale;
  • The Group intends to complete the asset and use or sell it;
  • There is an ability to use or sell the asset;
  • It can be demonstrated how the asset will generate probable future economic benefits;
  • Adequate technical, financial and other resources to complete the development and to use or sell the asset are available;
  • The expenditure attributable to the asset during its development can be reliably measured.

Following initial recognition of the development expenditure as an asset, the asset is carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins when development is complete and the asset is ready for use.

(d) Impairment of intangible assets

Where an indication of impairment exists, the recoverable amount of any intangible asset, including goodwill, is assessed and, when impaired, the asset is written down immediately to its recoverable amount. Goodwill and intangible assets not yet available for use are tested for impairment at least annually and whenever impairment indicators exist.

2.8 Leases

The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Group as a lessee
Right-of-use assets

The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. The Group’s right-of-use assets comprise leased land and buildings with depreciation periods mostly ranging from 5 to 45 years.

Right-of-use assets obtained as part of acquisition of business are recognised at an amount equal to the lease liabilities and lease payments made at or before the acquisition date and adjusted to reflect the favourable terms of the lease relative to market terms.

Where an indication of impairment exists, the recoverable amount of any right-of-use assets is assessed and, when impaired, the asset is written down to its recoverable amount (Note 3).

Lease liabilities

At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expense in the period on which the event or condition that triggers the payment occurs.

Lease liabilities obtained as part of acquisition of business are recognised at the present value of the remaining lease payments at the date of acquisition.

In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.

In the consolidated financial statement of cash flows payments of principal portion of lease liabilities are recognised as cash outflows related to financing activities, payments of interest portion of the lease liabilities are recognised within operating cash flows.

Short-term leases

The Group applies the short-term lease recognition exemption to its short-term leases of assets other than land and buildings (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). Lease payments on short-term leases are recognised as expense on a straight-line basis over the lease term.

Group as a lessor

Leases in which the Group does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms and is included in Lease/sublease and other income in the consolidated statement of profit or loss. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rent is recognised as income in the period in which it is earned.

Operating leases before 1 January 2019

Leases of assets under which substantially all the risks and benefits of ownership were effectively retained by the lessor were before 1 January 2019 classified as operating leases. Payments made under operating leases were charged to the consolidated statement of profit or loss on a straight-line basis over the period of the lease except preopening rentals, which were directly attributable to bringing the asset to the condition necessary for it to be capable of operating in the manner intended by management, capitalised as a part of retail store or distribution centre construction costs.

Initial direct costs incurred by the Group in negotiating and arranging an operating lease including key money paid to previous tenants for entering into lease contracts were recognised as lease rights.

2.9 Inventories

Inventories at distribution centres and retail outlets are stated at the lower of cost and net realisable value. Cost comprises direct costs of goods, transportation and handling costs. Cost is determined by the weighted average method. Net realisable value is the estimate of the selling price in the ordinary course of business, less selling expenses.

The Group provides for estimated inventory losses (shrinkage) between physical inventory counts on the basis of a percentage of cost of sales. The provision is adjusted to actual shrinkage based on regular inventory counts. The provision is recorded as a component of cost of sales. The Group also provides for aged stock provision where the expected selling price is below cost.

2.10 Financial instruments

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

(a) Financial assets
Initial recognition and measurement

The Group classifies its financial assets as those to be measured subsequently at amortised cost, fair value through other comprehensive income or fair value through profit and loss. The classification depends on the financial asset’s contractual cash flow characteristics and the business model for managing the financial assets.

With the exception of trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15. Refer to the accounting policies in section 2.24 (a) Revenue from contracts with customers.

Management determines the classification of its financial assets at initial recognition and re-evaluates this designation at every reporting date, if required under IFRS. In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are “solely payments of principal and interest (SPPI)” on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level.

The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recogni­sed on the trade date, i.e., the date that the Group commits to purchase or sell the asset.

Subsequent measurement

For purposes of subsequent measurement, ­financial assets are classified in four categories:

  • Financial assets at amortised cost (debt instruments);
  • Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments);
  • Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments);
  • Financial assets at fair value through profit or loss.

Financial assets at amortised cost (debt instruments) is the most relevant to the Group. The Group  measures financial assets at amortised cost if both of the following conditions are met:

  • The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows, and
  • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.

Derecognition

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Group’s consolidated statement of financial position) when:

  • The rights to receive cash flows from the asset have expired, or
  • The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of its continuing involvement. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

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

Impairment of financial assets

The Group recognises an allowance for expected credit losses (ECLs) for all debt ­instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the ­original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).

For trade and other receivables the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

(b) Financial liabilities

Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

The Group’s financial liabilities include trade and other payables, loans and borrowings. For more information refer to Note 2.11 and Note 2.12.

Derecognition

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss.

2.11 Borrowings

Borrowings are initially recognised at their fair value, net of transaction costs, and are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated statement of profit or loss over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to get ready for intended use or sale (qualifying assets) are capitalised as part of the costs of those assets.

The commencement date for capitalisation is when (a) the Group incurs expenditures for the qualifying asset; (b) it incurs borrowing costs; and (c) it undertakes activities that are necessary to prepare the asset for its intended use or sale.

Capitalisation of borrowing costs continues up to the date when the assets are substantially ready for their use or sale.

The Group capitalises borrowing costs that could have been avoided if it had not made capital expenditure on qualifying assets. Borrowing costs capitalised are calculated at the Group’s average funding cost (the weighted average interest cost is applied to the expenditures on the qualifying assets), except to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset. Where this occurs, actual borrowing costs incurred less any investment income on the temporary investment of those borrowings are capitalised.

After initial recognition, interest-bearing borrowings are subsequently measured at amortised cost using the effective interest (“EIR”) method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the consolidated statement of profit or loss.

2.12 Trade and other payables

Trade and other payables are accrued when the counterparty performs its obligation under the contract and are carried at amortised cost using the effective interest method. Trade payables are recognised initially at fair value and measured subsequently at amortised cost.

2.13 Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments used for meeting short term cash commitments.

2.14 Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Provisions are measured as the best estimate of the expenditure required to settle the present obligation at the reporting date.

2.15 Value added tax

Output VAT related to sales is payable to tax authorities on the earliest of (a) collection of the receivables from customers or (b) delivery of the goods or services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice and fulfilment of other conditions in compliance with Russian tax legislation.

The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases is recognised in the consolidated statement of financial position on a gross basis and disclosed separately as an asset and liability, except for VAT, presented within other non-current assets. Where a provision has been made for the impairment of receivables, the impairment loss is recorded for the gross amount of the debtor, including VAT.

2.16 Employee benefits

Wages, salaries, bonuses, paid annual leave and sick leave are accrued in the period in which the associated services are rendered by the employees of the Group. The Group’s entities contribute to the Russian Federation’s state pension and social insurance funds in respect of their employees. These contributions are accrued when incurred. The Group’s commitment ends with the payment of these contributions.

2.17 Share-based payments
Employee stock plan

The Group receives services from employees as consideration for conditional rights to receive GDRs after vesting period of 3 years and fulfilment of certain predetermined performance conditions.

Share-based payment transactions under the employee stock plan are accounted for as equity-settled transactions.

The fair value of the employee services received in exchange for the grant of the conditional rights is recognised as an expense over the vesting period with the corresponding increase in equity (Share-based payment reserve) and measured by reference to the market price of the GDRs which is determined at grant date.

Service and non-market performance conditions are not taken into account when determining the grant date fair value of awards, but the likelihood of the conditions being met is assessed as part of the Group’s best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant date fair value. Any other conditions attached to an award, but without an associated service requirement, are considered to be non-vesting conditions. Non-vesting conditions are reflected in the fair value of an award and lead to an immediate expensing of an award unless there are also service and/or performance conditions. No expense is recognised for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Where awards include a market or non-vesting condition, the transactions are treated as vested irrespective of whether the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.

The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the statement of profit or loss for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.

2.18 Share capital

Ordinary shares are classified as equity. External costs directly attributable to the issue of new shares are shown as a deduction in equity from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is recognised as share premium.

2.19 Dividends

Dividends are recognised as a liability and deducted from equity at the reporting date only if they are declared on or before the reporting date. Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the consolidated financial statements are authorised for issue.

2.20 Treasury shares

Where any group company purchases the Company’s equity share capital, the paid consideration, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any received consideration, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders.

2.21 Earnings per share

Earnings per share are determined by dividing the profit or loss attributable to equity holders of the Company by the weighted average number of participating shares outstanding during the reporting period. Diluted earnings per share are calculated by adjusting the earnings and the number of shares for the effects of dilutive options.

2.22 Taxes

Current tax is the amount expected to be paid to, or recovered from, the state budget in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if consolidated financial statements are authorised prior to filing relevant tax returns. Taxes other than on income are recorded within operating expenses.

Current income tax liabilities (assets) are measured in accordance with IAS 12 Income Taxes and IFRIC 23 Uncertainty over Income Tax Treatments, based on legislation that is enacted or substantively enacted at the reporting date, taking into consideration applicable tax rates and tax exemptions.

Deferred income tax is provided using the reporting liability method for temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. In accordance with the initial recognition exception, deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill and subsequently for goodwill which is not deductible for tax purposes. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period in which the asset is realised or the liability is settled, based on tax rates which are enacted or substantially enacted at the reporting date.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Deferred tax assets and liabilities are netted within the consolidated group of taxpayers (CGT) and within individual companies of the Group for the entities that are not members of the CGT.

The Group considers whether it is probable that a taxation authority will accept an uncertain tax treatment. If the Group concludes it is probable that the taxation authority will accept an uncertain tax treatment, the Group determines the taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates consistently with the tax treatment used or planned to be used in its income tax filings.

If the Group concludes it is not probable that the taxation authority will accept an uncertain tax treatment, the Group reflects the effect of uncertainty in determining the related taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates. The Group reflects the effect of uncertainty for each uncertain tax treatment by using either of the following methods, depending on which method the entity expects to better predict the resolution of the uncertainty: the most likely amount or the expected value.

If an uncertain tax treatment affects current tax and deferred tax (for example, if it affects both taxable profit used to determine current tax and tax bases used to determine deferred tax), the Group makes consistent judgements and estimates for both current tax and deferred tax

The Group’s uncertain tax positions are reassessed by management at the end of each reporting period. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period, any known court or other rulings on such issues, and relevance and effect of a change in facts and circumstances or of new information in the context of applicable tax laws. Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle the obligations at the end of the reporting period. Adjustments for uncertain income tax positions are recorded within the income tax charge and included in current income tax payable line of the consolidated statement of financial position. Interest incurred in relation to taxation is included in finance costs in the consolidated statement of profit or loss. Provisions are maintained, and updated if necessary, for the period over which the respective tax positions remain subject to review by the tax and customs authorities, being 3 years from the year of filing.

2.23 Fair value measurement

Fair values of financial instruments measured at amortised cost are disclosed in Note 34.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

  • In the principal market for the asset or liability, or
  • In the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible by the Group.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

  • Level 1 — quoted (unadjusted) market prices in active markets for identical assets or liabilities;
  • Level 2 — valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable;
  • Level 3 — valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

2.24 Income and expense recognition

Income and expenses are recognised on an accrual basis as earned or incurred. Recognition of the principal types of income and expenses is as follows:

(a) Revenue from contracts with customers

The Group is in the retail business and sells its goods both through stores operated by the Group and through franchisees (agents) acting as a principal. The revenue recognised by the Group meets the definition of revenue from contracts with customers as per IFRS 15. The Group recognises revenue when control of goods and services is transferred to the customer, generally for the retail customers it is occurred in the stores at the point of sale. Payment of the transaction price is due immediately when the customer purchases goods.

The Group has loyalty points programmes, which allow customers to accumulate points that can be redeemed for free products. The loyalty points give rise to a separate performance obligation as they provide a material right to the customer. A portion of the transaction price is allocated to the loyalty points awarded to customers based on relative stand-alone selling price and recognised as a contract liability until the points are redeemed. Revenue is recognised upon redemption of products by the customer.

When estimating the stand-alone selling price of the loyalty points, the Group considers the likelihood that the customer will redeem the points. The Group updates its estimates of the points that will be redeemed on a monthly basis and any adjustments to the contract liability balance are charged against revenue.

(b) Cost of sales

Cost of sales includes the purchase price of the products sold and other costs incurred in bringing the inventories to the location and condition ready for sale, i.e. retail outlets. These costs include costs of purchasing, storing, rent, salaries and transporting the products to the extent it relates to bringing the inventories to the location and condition ready for sale.

The Group receives various types of allowances from suppliers in the form of volume discounts and other forms of payment. In accounting for supplier bonuses received by the Group, the Group determined that these bonuses are a reduction in prices paid for the product and are reported as part of the cost of sales as the related inventory is sold. Bonuses receivable from suppliers in cash are presented as trade receivables.

(c) Interest income and expense

Interest income and expense are recognised on an effective yield basis.

(d) Selling, general and administrative expenses

Selling expenses consist of salaries and wages of stores employees, store expenses, variable lease expenses, depreciation of stores, utilities, advertising costs and other selling expenses. General and administrative expenses include costs of salaries and wages of support office employees, depreciation of support offices, impairment and amortisation charges of non-current assets and other general and administrative expenses. Selling, general and administrative expenses are recognised on an accrual basis as incurred.

2.25 Contract liability

A contract liability is the obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. If a customer pays consideration before the Group transfers goods or services to the customer, a contract liability is recognised when the payment is made or the payment is due (whichever is earlier). Contract liabilities are recognised as revenue when the Group performs under the contract.

2.26 Impairment of non-current assets other than goodwill

The Group periodically assesses whether there is any indication that non-current assets may be impaired. If any such indicators exist, the Group estimates the recoverable amount of the asset. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash generating unit to which it belongs. Individual stores are considered separate cash-generating units for impairment testing purposes. Impairment loss is recognised whenever the carrying amount of an asset or the related cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the consolidated statement of profit or loss. Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

2.27 Fair value of assets and liabilities at the acquisition date

A primary valuation of assets and liabilities of acquired companies was performed on a provisional basis. Once the valuation is finalised, any adjustments arising are recognised retrospectively.

2.28 Indemnification asset

The indemnification asset equivalent to the fair value of the indemnified liabilities is included in net assets acquired in the business combination if the selling shareholders of the acquiree agreed to compensate possible claims or contingencies. Subsequent measurement of the indemnification asset and contingent liability does not have any impact on future earnings, unless the indemnification asset becomes impaired.

2.29 Offsetting of financial assets and financial liabilities

Accounts receivable and accounts payable are offset and the net amount is presented in the consolidated statement of financial position when, and only when, the Group currently has a legally enforceable right to set off the recognised amounts and intends to settle on a net basis.

2.30 Long-term employee benefits

The Group recognises the liability and respective expenses in relation to long-term employee benefits when there is a present obligation as a result of past events and a reliable estimate of the obligation can be made. The Group recognises the net total of the following amounts in profit or loss:

  • Service cost;
  • Net interest on the net defined benefit liability;
  • Remeasurements of the net defined benefit liability.

Critical accounting estimates and judgements in applying accounting policies

3 .

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management’s experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying accounting policies. Judgements that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities include:

Impairment of goodwill

The Group tests goodwill for impairment at least annually. The recoverable amount of a cash-generating unit has been determined based on the higher of fair value less costs to sell or value-in-use calculations. These calculations require the use of estimates as further detailed in Note 13.

Identifying a business combination

The Group enters into transactions to acquire integrated set of assets and operations of retail stores. The Group determines whether such transactions represent a business combination or assets acquisitions. The Group treats such transactions as business combinations when the integrated set of activities and assets acquired is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to the Group. In making this judgment the Group considers whether it acquired inputs and processes applied to the inputs that have ability to create output. All acquisitions of assets and operations of retail stores occurred in 2019 and 2018 were treated by the Group as business combinations.

Litigations

The Group exercises considerable 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. Judgement is necessary in assessing the likelihood that a pending claim will succeed, or a 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, if available, or with the support of outside consultants, such as actuaries or legal counsel. Revisions to the estimates may significantly affect future operating results.

Tax legislation

Russian tax, currency and customs legislation is subject to varying interpretations (Note 35).

Deferred tax assets and liabilities

Group’s management judgment is required for the calculation of current and deferred income taxes. Deferred tax assets are recognised to the extent that their utilisation is probable. The utilisation of deferred tax assets will depend on whether it is possible to generate sufficient taxable income in respective tax type and jurisdiction. Various factors are used to assess the probability of the future utilisation of deferred tax assets, including past operating results, the operational plan, expiration of tax losses carried forward, and tax planning strategies. In the event that an assessment of future utilisation indicates that the carrying amount of deferred tax assets must be reduced, this reduction is recognised in profit or loss.

IAS 12 requires a deferred tax liability to be recognised for all taxable temporary differences associated with investments in subsidiaries unless: (a) the parent, investor joint venturer or joint operator is able to control the timing of the reversal of the temporary difference; and (b) it is probable that the temporary difference will not reverse in the foreseeable future. The Group exercises significant judgment in assessing the amount of taxable temporary differences associated with investments in subsidiaries (unremitted earnings) that will not reverse in the foreseeable future.

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.

Property, plant and equipment

The Group’s management determines the estimated useful lives and related depreciation charges for its plant and equipment (Note 10). The estimation of the useful life of the asset is a matter of judgement based on the experience of the entity with similar assets. Management increases the depreciation charge where useful lives are less than previously estimated lives or it writes-off or writes-down technically obsolete or non-strategic assets that have been abandoned or reclassified as held for sale.

The Group periodically assesses whether there is any indication that property, plant and equipment may be impaired. The Group performs assets impairment testing (Note 10). The Group estimates the recoverable amount of the asset or cash generating unit and if it is less than the carrying amount of an asset or cash generating unit an impairment loss is recognised in the consolidated statement of profit or loss. For the year ended 31 December 2019 the Group recognised an impairment loss in the amount of RUB 4,333 (year ended 31 December 2018: a net impairment loss in the amount of RUB 4,117).

Investment property

The Group’s management determines the estimated useful lives and related depreciation charges for its investment properties (Note 12). Management increases the depreciation charge where useful lives are less than previously estimated lives or it writes-off or writes-down technically obsolete or non-strategic assets that have been abandoned or reclassified as held for sale.

The Group periodically assesses whether there is any indication that investment property may be impaired. The Group performs assets impairment testing (Note 12). The Group estimates the recoverable amount of the asset or cash generating unit and if it is less than the carrying amount of an asset or cash generating unit an impairment loss is recognised in the consolidated statement of profit or loss. For the year ended 31 December 2019 the Group recognised a net impairment loss in the amount of RUB 434 (year ended 31 December 2018: a net impairment gain in the amount of RUB 72).

Right-of-use assets

The Group periodically assesses whether there is any indication that right-of-use assets may be impaired. The Group performs assets impairment testing (Note 11). The Group estimates the recoverable amount of the asset or cash generating unit and if it is less than the carrying amount of an asset or cash generating unit an impairment loss is recognised in the consolidated statement of profit or loss. For the year ended 31 December 2019 the Group recognised a net impairment loss in the amount of RUB 1,805.

Inventories of goods for resale provisions

The Group provides for estimated inventory shrinkage on the basis of historical shrinkage as a percentage of cost of sales. This provision is adjusted at the end of each reporting period to reflect the historical trend of the actual physical inventory count results. The Group also provides for aged stock where the expected selling price is below cost (Note 15).

Revenue recognition — Loyalty programmes

The Group estimates the amount of obligations related to customer loyalty programmes by allocating transaction price to loyalty points based on the standalone selling price of the points. The standalone selling price of the points is reduced for the expected amount of the points that will expire unredeemed.

The Group estimates the stand-alone selling price of the loyalty points awarded under loyalty programmes. The stand-alone selling price of the loyalty points issued is calculated by multiplying to the estimated redemption rate and to the monetary value assigned to the loyalty points. In estimating the redemption rate, the Group considers breakage which represents the portion of the points issued that will never be redeemed. The Group applies statistical projection methods in its estimation using customers’ historical redemption patterns as the main input. The redemption rate is updated monthly and the liability for the unredeemed points is adjusted accordingly. The Group ensures that the value assigned to the loyalty points is commensurate to the stand-alone selling price of the products eligible for redemption (i.e., the value of each point is equivalent to the stand-alone selling price of any product eligible for redemption divided by number of points required).

Points issued under the loyalty programmes normally expires in twelve months from their recognition. However due to periodic changes in customer redemption patterns estimates of the stand-alone selling price are subject to significant uncertainty.

Any significant changes in customers’ redemption patterns will impact the estimated redemption rate. As at 31 December 2019, the estimated liability for unredeemed points was RUB 1,836 (31 December 2018: RUB 1,489).

Provision for expected credit losses of trade and other receivables

The Group uses a provision matrix to calculate ECLs for trade and other receivables. The provision rates are based on days past due for groupings of various customer segments that have similar loss patterns (by customer type). The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Generally, trade and other receivables are written-off if past due for more than 3 years and are no subject to enforcement activity. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets.

The provision matrix is initially based on the Group’s historical observed default rates. The Group calibrates the matrix to adjust the historical credit loss experience with forward-looking information. For instance, if forecast economic conditions (i.e., gross domestic product) are expected to deteriorate over the next year which can lead to an increased number of defaults, the historical default rates are adjusted. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analysed.

The assessment of the correlation between historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Group’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the future. The information about the ECLs on the Group’s trade and other receivables is disclosed in Note 17.

Brand and private labels

The Group periodically assesses whether there is any indication that brand and private labels may be impaired. The Group performs assets impairment testing of brands with indefinite useful lives at least annually (Note 14). The Group estimates the recoverable amount of the asset and if it is less than the carrying amount an impairment loss is recognised in the consolidated statement of profit or loss. For the years ended 31 December 2019 and 31 December 2018 the Group did not recognise any impairment of brand and private labels.

Lease term of contracts with extension options and termination options

In determining the lease term, the Group considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. For leases of retail stores the most relevant factors are profitability and revenue of particular stores, the value to the business in a particular region and investment ­strategy. For leases of distribution centres and offices the most relevant factors are the value to the business, significance of termination penalties and significance of leasehold improvements’ remaining value. At commencement of the lease such considerations generally result in determining the lease term equal to the non-cancellable lease period including the period covered by an option to terminate. The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs, which affects this assessment, and that is within the control of the lessee.

Incremental borrowing rates for calculation of lease liability

Incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. Because there are normally no absolutely similar to lease agreements borrowings, which interest rates are observable in open market, the Group derives incremental borrowing rates from both internal and external data sources applying significant judgement in such calculations. The Group estimates incremental borrowing rates by adjusting Russian government risk-free bonds in a relevant currency by the risk-premium inherent to the Group which in turn is determined by comparing Group’s rate of borrowing with Russian government risk-free bonds of the same duration. Incremental borrowing rates are calculated on a monthly basis.

Adoption of new and revised standards and interpretations and new accounting pronouncements

4 .

In the preparation of these consolidated financial statements, the Group followed the same accounting policies and methods of computation as compared with those applied in the previous year, except for the adoption of new standards and interpretations and revision of the existing standards as of 1 January 2019. Standards, Interpretations and amendments other than those described below effective 1 January 2019 did not have a material impact on the financial position or performance of the Group.

IFRS 16 Leases

IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement Contains a Lease, SIC-15 Operating Leases — Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17.

The Group has adopted IFRS 16 using the modified retrospective approach with the date of initial application of 1 January 2019. Under this approach the Group has not restated comparatives for the 2018 reporting period. The reclassifications and the adjustments arising from the new leasing rules were therefore recognised in the opening balance sheet on 1 January 2019.

On adoption of IFRS 16 the Group recognised lease liabilities in relation to leases which had previously been classified as operating leases under the principles of IAS 17 Leases. The Group measured these lease liabilities at the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 8.58%.

For leases previously classified as operating leases applying IAS 17 the Group at the date of transition to IFRS 16 measured right-of-use assets on a lease-by-lease basis at either:

  • Its carrying amount as if IFRS 16 had been applied since the commencement date, but discounted using the Group’s applicable incremental borrowing rate at the date of transition to IFRS 16
  • An amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the consolidated statement of financial position immediately before the date of transition to IFRS 16.

The Group has elected to use the following practical expedients proposed by the standard:

  • On initial application initial direct costs excluded from the measurement of the right-of-use asset;
  • On initial application IFRS 16 was only applied to contracts that were previously classified as leases;
  • For all classes of underlying assets each lease component and any associated non-lease components were accounted as a single lease component;
  • Lease payments for contracts with a lease term of 12 months or less for the classes of underlying assets other than land and buildings continue to be expensed to the statement of profit or loss on a straight-line basis over the lease term.

Based on the foregoing, as at 1 January 2019:

  • Right-of-use assets of RUB 386,903 and lease liabilities of RUB 433,813 were recognised and presented separately in the statement of financial position;
  • Prepayments of RUB 7,697 (included previously to other non-current assets and trade, other receivable and prepayments) related to previous operating leases were derecognised and added to the carrying amounts of the relevant right-of-use assets;
  • Property, plant and equipment and Investment property increased by RUB 3,888 and RUB 24 respectively due to the effect of reallocation of certain part of impairment provision at transition date to right-of-use assets;
  • Lease rights of RUB 4,186 (included previously in other intangible assets) were derecognised and in the part, which arose as a result of previous business combinations of RUB 2,512, were added to the carrying amount of the relevant right-of-use assets;
  • Deferred tax assets increased by RUB 9,270 and deferred tax liabilities decreased by 1,485 because of the deferred tax impact of the changes in assets and liabilities;
  • There were no changes in classification of subleases as a result of IFRS 16 adoption. All sublease agreements continue to qualify for recognition as operating leases;
  • The net effect of these adjustments had been adjusted to retained earnings of RUB 43,371.
Impact on the statement of financial position (increase/(decrease)) as at 1 January 2019
1 January 2019
Assets
Property, plant and equipment 3,888
Right-of-use assets 386,903
Investment property 24
Other intangible assets (4,186)
Other non-current assets (6,484)
Deferred tax assets 9,270
Trade, other accounts receivable and prepayments (1,213)
VAT and other taxes receivable 185
Total assets 388,387
Equity
Retained earnings (43,371)
Total equity (43,371)
Liabilities
Lease liabilities 433,813
Deferred tax liabilities (1,485)
Provisions and other liabilities (570)
Total liabilities 431,758
Total equity and liabilities 388,387

As 31 December 2018 the Group’s outstanding short and long-term lease agreements were cancellable. IAS 17 requires disclosing operating lease commitments only for non-cancellable leases, while under IFRS 16 the Group is also required to include in lease term periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. The lease liabilities as at 1 January 2019 can be reconciled to the operating lease commitments as of 31 December 2018, as follows:

Operating lease commitments as at 31 December 2018 38,303
Reassessment of options to extend and terminate lease agreements 555,470
Impact of discounting (159,960)
Lease liabilities recognised as at 1 january 2019 433,813

The following other new standards and amendments to IFRSs effective for the financial year beginning 1 January 2019 did not have a material impact on the Group and did not result in change of the Group’s accounting policy:

  • Amendments to IFRS 9 Prepayment Features with Negative Compensation;
  • IFRIC 23 Uncertainty over Income Tax Treatments;
  • Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures;
  • Amendments to IAS 19 Plan Amendment, Curtailment or Settlement;
  • Annual Improvements to IFRS Standards 2015–2017 cycle (IFRS 3 Business Combination, IFRS 11 Joint Arrangements, IAS 12 Income Taxes, IAS 23 Borrowing Costs).

The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective:

Standards issued but not yet effective
in the European Union
Effective for annual periods beginning on or after
Amendments to References to the Conceptual Framework in IFRS Standards 1 January 2020
Amendments to IFRS 3 Business Combinations 1 January 2020
Amendments to IAS 1 and IAS 8 Definition of Material 1 January 2020
Amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform 1 January 2020
Amendments to IAS 1 Presentation of Financial Statements: Classification of Liabilities as Current or Non-current (issued on 23 January 2020) 1 January 2022
IFRS 17 Insurance Contracts 1 January 2021

The Group is currently assessing the impact of the amendments to IFRS 3 "Business Combinations" on its consolidated financial statements.

The Group expects that the adoption of other amendments and pronouncements listed above will not have a significant impact on the Group’s results of operations and financial positions in the period of initial application.

Segment reporting

5 .

The Group identifies retail chains of each format (see Note 1) as separate operating segments in accordance with the criteria set forth in IFRS 8.

The following significant operating ­functions are ­decentralised by formats:

  • Category management, including purchasing, pricing, assortment management, promotion management;
  • Distribution centres logistics;
  • Development function.

The formats’ general managers are determined as segment managers in accordance with IFRS 8. The chief operating decision-maker has been determined as the Management Board. The Management Board reviews each format’s internal reporting in order to assess performance and allocate resources.

Upon adoption of IFRS 16 the Management Board continued assessment of the performance of the operating segments based on a measure of sales and adjusted earnings before interest, tax, depreciation, amortisation and impairment (EBITDA). The Group continued to apply IAS 17 for leases in calculation of segments EBITDA and capital expenditure. Other information provided to the Management Board is measured in a manner consistent with that in the consolidated financial statements. Capital expenditures include additions of property, plant and equipment, investment properties and intangible assets, acquisitions of property, plant and equipment, investment properties and intangible assets through business combinations as well as goodwill acquired through such business combinations.

The accounting policies used for segments are the same as accounting policies applied for these consolidated financial statements except for the accounting of leases under IAS 17 instead of IFRS 16.

The segment information for the year ended 31 December 2019, comparative figures for earlier periods and reconciliation of EBITDA to profit for the year is provided as follows:

Year ended 31 December 2019 Pyaterochka Perekrestok Karusel Other
segments
Corporate
centre
Total
Revenue (Note 24) 1,370,414 274,761 88,459 713 1,734,347
Ebitda under IAS 17 107,907 17,981 2,198 14 (5,515) 122,585
Fixed lease expenses and gain on derecognition of right-of-use assets and lease liabilities 88,898
Depreciation, amortisation and impairment (122,085)
Operating profit 89,398
Finance cost, net (56,903)
Net foreign exchange result 2,203
Profit before income tax 34,698
Income tax expense (15,191)
Profit for the year 19,507
Capital expenditure under IAS 17 57,471 18,982 2,018 2,656 81,127
31 December 2019
Inventories 100,281 20,166 7,015 127,462
Year ended 31 December 2018 Pyaterochka Perekrestok Karusel Other
segments
Corporate
centre
Total
Revenue (Note 24) 1,200,457 232,490 92,458 7,132 1,532,537
Ebitda 92,910 15,550 4,423 (235) (5,020) 107,628
Depreciation, amortisation and impairment (49,474)
Operating profit 58,154
Finance cost, net (18,667)
Net foreign exchange result (447)
Profit before income tax 39,040
Income tax expense (10,398)
Profit for the year 28,642
Capital expenditure 60,863 16,869 3,914 5 2,017 83,668
31 December 2019
Inventories 88,923 16,609 10,063 395 115,990

Subsidiaries

6 .

Details of the Company’s significant subsidiaries at 31 December 2019 and 31 December 2018 are as follows:

Ownership (%)
Company Country Nature of operations 31 December 2019 31 December 2018
Agrotorg LLC Russia Retailing 100 100
Trade House PEREKRIOSTOK JSC Russia Retailing 100 100
Agroaspect LLC Russia Retailing 100 100
X5 Nedvizhimost CJSC Russia Assets holding company 100 100
KOPEYKA-MOSCOW Ltd Russia Retailing 100 100
Krasnoborskoe LLC Russia Assets holding company 100 100
Perekrestok Holdings B.V. The Netherlands Holding company 100
PEREKRESTOK HOLDINGS Ltd Gibraltar Holding company 100
PEREKRIOSTOK-2000 LLC Russia Assets holding company 100 100
ALPEGRU RETAIL PROPERTIES Ltd Cyprus Assets holding company 100 100
Beta Estate LLC Russia Assets holding company 100 100
SPEAK GLOBAL Ltd Cyprus Assets holding company 100 100
X5 FINANSE LLC Russia Bond issuer 100 100
X5 Finance B.V The Netherlands Bond issuer 100 100
Agro-Avto LLC Russia Assets holding company 100 100

Acquisition of businesses

7 .

Acquisitions in 2019
Acquisition of business from Polushka retail chain

During 2019 the Group acquired a number of stores from Polushka retail chain in St. Petersburg and Leningrad region.

In the year ended 31 December 2019 the acquired business contributes revenue of RUB 3,775 from the date of acquisition. Net loss from the date of acquisition comprised RUB 914. The business did not prepare relevant financial information immediately before the acquisition, therefore, it is impracticable to disclose revenue and net profit of the Group for the year ended 31 December 2019 as though the acquisition date had been the beginning of that period.

Details of assets and liabilities of acquired business and the related goodwill are as follows:

Provisional fair values
at the acquisition date
Right-of-use assets (Note 11) 6,235
Indemnification asset 140
Trade, other accounts receivable and prepayments 171
VAT and other taxes receivable 10
Cash and cash equivalents 3
Lease liabilities (Note 11) (6,182)
Current income tax payable (55)
Provisions and other liabilities (329)
Net assets acquired (7)
Goodwill (Note 13) 2,549
purchase consideration 2,542
Net cash outflow arising from the acquisition 2,197

The Group assigned provisional fair values to net assets acquired. The Group will finalise the purchase price allocation within 12 months from the acquisition date which is not yet finished at the date of approval of these consolidated financial statements.

The purchase consideration for the reporting period comprised RUB 2,200 and RUB 342 as cash consideration and deferred consideration respectively.

The goodwill recognised was attributable to: i) the business concentration in the Russian regions; ii) expected cost synergies from the business combination and iii) acquired traffic from existing customers. The goodwill related to these acquisitions was allocated to Pyaterochka segment in amount of RUB 2,263 and Perekrestok segment in amount of RUB 286 .

Other acquisitions

In 2019 the Group acquired 100% of several businesses of other retail chains in Russian regions. The acquisitions were individually immaterial.

In the year ended 31 December 2019 the acquired businesses contributed revenue of RUB 10,555 from the date of acquisition. As the businesses were not acquired as separate legal entities, it is impracticable to disclose net profit from the date of acquisition. These businesses did not prepare relevant financial information immediately before the acquisition, therefore, it is impracticable to disclose revenue and net profit of the Group for the year ended 31 December 2019 as though the acquisition date had been the beginning of that period.

Details of assets and liabilities of acquired businesses and the related goodwill are as follows:

Provisional fair values
at the acquisition date
Property, plant and equipment (Note 10) 284
Right-of-use assets (Note 11) 13,269
Deferred tax assets (Note 30) 1,187
Lease liabilities (Note 11) (13,248)
Net assets acquired 1,492
Goodwill (Note 13) 4,751
Purchase consideration 6,243
Net cash outflow arising from the acquisition 5,926

The Group assigned provisional fair values to net assets acquired. In estimating provisional values of property, plant and equipment direct references to observable prices in an active market and estimates of the independent appraisal were used (market approach). The Group will finalise the purchase price allocation within a 12-month period from the acquisition date which is not yet finished at the date of approval of these consolidated financial statements.

The purchase consideration for the reporting period comprised consideration paid in cash of RUB 5,926 and RUB 317 as deferred consideration measured at fair value.

The goodwill recognised was attributable to: i) the business concentration in the Russian regions; ii) expected cost synergies from the business combination and iii) acquired traffic from existing customers. The goodwill related to these acquisitions was allocated to Pyaterochka segment in amount of RUB 2,166 and Perekrestok segment in amount of RUB 2,585.

During the 12 months ended 31 December 2019 the Group transferred RUB 303 as deferred payments for the prior periods acquisitions.

Acquisitions in 2018

In 2018 the Group acquired 100% of several businesses of other retail chains in Russian regions. The acquisitions were individually immaterial.

In the year ended 31 December 2018 the acquired businesses contributed revenue of RUB 8,320 from the date of acquisition. As the businesses were not acquired as separate legal entities, it is impracticable to disclose net profit from the date of acquisition. The businesses did not prepare relevant financial information immediately before the acquisition, therefore, it is impracticable to disclose revenue and net profit of the Group for the year ended 31 December 2018 as though the acquisition date had been the beginning of that period.

At 31 December 2018 the Group assigned provisional fair values to net assets acquired, in estimating provisional fair values of acquired assets. In 2019 the Group completed the purchase price allocation, which resulted in no changes in fair values at the acquisition date:

Finalised fair values at
the acquisition date
Property, plant and equipment (Note 10) 805
Other intangible assets (Note 14) 88
Deferred tax assets (Note 30) 896
Trade, other accounts receivable and prepayments 63
VAT and other taxes receivable 71
Cash and cash equivalents 28
Deferred tax liabilities (Note 30) (47)
Provisions and other liabilities (72)
Net assets acquired 1,832
Goodwill (Note 13) 4,351
Purchase consideration 6,183
Net cash outflow arising from the acquisition 4,982

The purchase consideration comprised the transfer of cash and cash equivalents of RUB 5,010 and RUB 1,173 as deferred consideration.

The goodwill recognised is attributable to: i) the business concentration in the Russian regions; ii) expected cost synergies from the business combination and iii) acquired traffic from existing customers. The goodwill related to these acquisitions was allocated to Pyaterochka and Perekrestok segments.

Cash and cash equivalents

9 .

31 December
2019
31 December
2018
Bank current account — Roubles 533 2,518
Bank current account — other currencies 2
Cash in transit — Roubles 11,459 16,523
Cash in hand — Roubles 6,608 5,327
Total 18,602 24,368

The bank accounts represent current accounts. Interest income on overnights/term deposits was immaterial. Cash in transit is cash transferred from retail outlets to bank accounts and bank card payments being processed.

The Group assessed credit quality of outstanding cash and cash equivalents balances as high and considered that there was no significant individual exposure. The maximum exposure to credit risk at the reporting date was the carrying value of cash and bank balances.

Credit quality of cash and cash equivalents balances are summarised as follows (current ratings):

Bank Moody’s Fitch S&P 31 December
2019
31 December
2018
Alfa-Bank Ba1 BB+ BB+ 31 945
Sberbank Baa3 BBB 5 1,533
Gazprombank Ba1 BBB- BB+ 251 28
Vneshtorgbank Baa3 BBB- 239 10
Other banks 9 2
Cash in transit and in hand 18,067 21,850
Total 18,602 24,368

Property, plant and equipment

10 .

Land and
buildings
Machinery and
equipment
Refrigerating
equipment
Vehicles Other Construction
in progress
Total
Cost
At 1 January 2018 238,966 40,333 47,573 16,658 34,658 13,600 391,788
Additions 72,089 72,089
Transfers 38,185 10,144 11,797 6,372 11,531 (78,029)
Transfers to investment property (Note 12) (986) (986)
Assets from acquisitions (Note 7) 452 78 57 6 212 805
Disposals (2,035) (3,037) (2,391) (1,457) (1,953) (299) (11,172)
At 31 December 2018 274,582 47,518 57,036 21,573 44,242 7,573 452,524
Additions 63,186 63,186
Transfers 29,604 10,985 10,096 5,189 10,340 (66,214)
Transfers to investment property (Note 12) (40) (40)
Assets from acquisitions (Note 7) 284 284
Disposals (4,331) (3,186) (2,475) (1,215) (2,154) (192) (13,553)
At 31 December 2019 299,815 55,317 64,657 25,547 52,428 4,637 502,401
Accumulated depreciation and impairment
At 1 January 2018 (59,162) (15,001) (15,217) (5,843) (17,211) (426) (112,860)
Depreciation charge (18,840) (6,332) (6,527) (2,468) (8,309) (42,476)
Impairment charge (5,795) (597) (489) (131) (576) (7,588)
Reversal of impairment 3,303 49 119 3,471
Transfers to investment property (Note 12) 20 20
Disposals 1,982 2,884 2,332 1,374 1,928 211 10,711
At 31 December 2018 (78,492) (19,046) (19,901) (6,888) (23,723) (672) (148,722)
Effect of adoption of new accounting standards (Note 4) 3,819 69 3,888
At 1 January 2019 Restated (74,673) (19,046) (19,901) (6,888) (23,723) (603) (144,834)
Depreciation charge (22,372) (7,404) (8,293) (3,115) (9,587) (50,771)
Impairment charge (5,546) (762) (541) (21) (227) (20) (7,117)
Reversal of impairment 2,495 79 210 2,784
Transfers to investment property (Note 12) 9 9
Disposals 3,935 2,991 2,416 1,098 2,153 192 12,785
At 31 December 2019 (96,152) (24,221) (26,319) (8,847) (31,384) (221) (187,144)
Net book value at 31 December 2019 203,663 31,096 38,338 16,700 21,044 4,416 315,257
Net book value at 31 December 2018 196,090 28,472 37,135 14,685 20,519 6,901 303,802
Net book value at 1 January 2019 Restated (Note 4) 199,909 28,472 37,135 14,685 20,519 6,970 307,690
Net book value at 1 January 2018 179,804 25,332 32,356 10,815 17,447 13,174 278,928

Depreciation charge, impairment charge and reversal of impairment were included in selling, general and administrative expenses in the consolidated statement of profit or loss for the years ended 31 December 2019 and 31 December 2018.

Construction in progress predominantly related to the development of stores through the use of sub-contractors.

The buildings are mostly located on leased land. No loans were collateralised by land and buildings including investment property as of 31 December 2019.

Impairment test

At the end of 2019 management performed an impairment test of property, plant and equipment, right-of-use assets, other intangible assets and investment property. The approach for determination of the recoverable amount of an asset was different for each class of property, plant and equipment, right-of-use assets and investment property.

The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows, which is generally at the individual store/unit level (cash generating unit — CGU). The variability of these factors depends on a number of conditions, including uncertainty about future events and changes in demand.

The impairment review has been carried out by comparing recoverable amount of the individual store/unit with their carrying values. The recoverable amount of store/unit is determined as the higher of fair value less cost of disposal or value in use.

The resulting impairment charge arose primarily from underperforming stores and Karusel transformation. At the same time the Group recognised the reversal of previously recorded impairment charges due to improved performance of certain stores. Due to the great number of CGUs being tested for impairment it is considered impracticable to disclose detailed information for each individual CGU.

Fair value less costs of disposal

Fair value of land and buildings and construction in progress is determined by management internal specialists by reference to current observable prices on an active market subsequently adjusted for specific characteristics of respective assets. The fair value measurement of these assets is classified at level 3 of the fair value hierarchy.

Value in use

For property, plant and equipment, right-of-use assets, other intangible assets and investment property the discounted future cash flow approach is applied and covers a 10-year period from 2020 onwards. The Group believes that use of 10 year forecast better reflects expected future cash flows of its cash generating units due to cyclical nature of their renovation expenditures. The future cash flows are based on the current budgets and forecasts approved by the management. For the forecast period, the data of the strategic business plan is extrapolated based on the consumer price indices as obtained from external resources and key performance indicators inherent to the strategic plan. One of the main assumptions used for the forecast period is revenue growth being in the range from 3.74% to 7.15% in accordance with the internal forecasts based on budget and consumer price index projections (31 December 2018: 4% to 6.38%). For the years beyond the forecast period the long term consumer price index forecast of 4% at 31 December 2019 is used (31 December 2018: 4%). The projections are made in the functional currency of the Group’s entities, being Russian Rouble, on a pre-tax basis and discounted at the Group pre-tax weighted average cost of capital which is then adjusted to reflect the risks specific to the respective assets (cash-generating units (CGUs)) — 11.43% (31 December 2018: 14.46%). Inflation rates are in line with the consumer price index forecast published by the Ministry of Economic Development of Russian Federation. The Group’s management believes that all of its estimates are reasonable and consistent with the internal reporting and reflect management’s best knowledge.

The result of applying discounted cash flows model reflects expectations about possible variations in the amount and timing of future cash flows and is based on reasonable and supportable assumptions that represent management’s best estimate of the range of uncertain economic conditions. If the revised estimated discount rate consistently applied to the discounted cash flows had been 200 b.p. higher than management’s estimates, the Group would need to reduce the carrying value of property, plant and equipment, right-of-use assets, investment property and intangible assets by RUB 2,383 (31 December 2018: RUB 1,738), if 200 b.p. lower — increase by RUB 2,452 (31 December 2018: RUB 1,620). If the annual revenue growth rate used in calculations of value in use had been 200 b.p. higher, the Group would need to increase the carrying value of property, plant and equipment, right-of-use assets, investment property and intangible assets by RUB 856 (31 December 2018: RUB 2,879), lower — decrease by RUB 1,052 (31 December 2018: RUB 3,904).

Leases

11 .

Group as a lessee

The Group has lease contracts for land and buildings used in its operations. Leases of land and buildings generally have fixed lease terms between 5 and 45 years and contain extension options provided by the law. However vast majority of lease contracts include cancellation options on 2–12 months notice.

Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor.

Set out below, are the carrying amounts of the Group’s right-of-use assets and lease liabilities and the movements during the period:

Right-of-use assets
(land and buildings)
Lease
liabilities
At 1 January 2019 386,903 (433,813)
Additions 92,373 (91,998)
Acquisition of businesses (Note 7) 19,504 (19,430)
Depreciation expense (61,581)
Impairment charge (3,723)
Reversal of impairment 1,918
Derecognition (decrease in the scope of the lease and terminations of lease agreements) (7,228) 8,706
Interest accrued (38,772)
Payments 88,831
Effect of changes in foreign exchange rates 1,671
At 31 December 2019 428,166 (484,795)

The expenses related to short-term leases for the year ended 31 December 2019 amounted to RUB 39. The expense related to variable lease payments not included in the measurement of lease liabilities for the year ended 31 December 2019 amounted to RUB 7,950. Variable lease payments are mainly linked to sales generated from a store. Variable payment terms are used for a variety of reasons, including minimising the fixed costs base.

Lease expenses in 2018 included RUB 76,956 of minimum lease payments and contingent rent of RUB 3,789 relating to operating leases.

Maturity analysis of the lease liabilities is disclosed in the Note 31.

As at 31 December 2019 potential future cash outflows of RUB 4,164 (undiscounted) have not been included in the lease liability because it was assessed reasonably certain that the leases will be terminated.

In an ordinary course of the business the Group constantly arranges for leases of new premises and land. As at 31 December 2019 the Group had a certain amount of leases to which the Group was committed but the lease did not commence. The Group assesses that the amount of future cash outflows to which the lessee is potentially exposed is not significant.

Group as a lessor

The lease arrangements are operating leases, the majority of which are short-term. The future minimum lease and sublease payments receivable under operating leases were as follows:

31 December 2019 31 December 2018
Within 1 year 2,967 2,966
Between 1 and 2 years 869 873
Between 2 and 3 years 777 741
Between 3 and 4 years 633 659
Between 4 and 5 years 523 559
Later than 5 years 1,330 1,691
Total 7,099 7,489

The rental income from operating leases recognised in the consolidated statement of profit or loss for the year ended 31 December 2019 amounted to RUB 7,592 (2018: RUB 7,262). The contingent rents recognised in the consolidated statement of profit or loss in the year ended 31 December 2019 amounted to RUB 138 (2018: 123).

Income from subleasing right-of-use assets under operating lease agreement for the year ended 31 December 2019 amounted to RUB 2,921.

Impairment test

At the end of 2019 management performed an impairment test of right-of-use assets. The evaluation performed and reasons for it are consistent with the approach for impairment testing of Property, Plant and Equipment (Note 10).

Investment property

12 .

The Group held the following investment properties at 31 December 2019 and 31 December 2018:

2019 2018
Cost
Cost at 1 January 9,392 8,916
Transfer from fixed assets (Note 10) 40 986
Disposals (49) (510)
Cost at 31 December 9,383 9,392
Accumulated depreciation and impairment
Accumulated depreciation and impairment at 1 January (3,219) (3,428)
Effect of adoption of new accounting standards (Note 4) 24
Accumulated depreciation and impairment at 1 January Restated (3,195) (3,428)
Depreciation charge (213) (219)
Impairment charge (474) (64)
Reversal of impairment 40 136
Transfer from fixed assets (Note 10) (9) (20)
Disposals 32 376
Accumulated depreciation and impairment at 31 December (3,819) (3,219)
Net book value at 31 December 5,564 6,173
Net book value at 1 January 6,173 5,488
Net book value at 1 January Restated 6,197 5,488

Depreciation charge, impairment charge and ­reversal of impairment are included in selling, general and administrative expenses in the consolidated statement of profit or loss for the years ended 31 December 2019 and 31 December 2018.

Rental income from investment property amounted to RUB 1,642 (2018: RUB 1,591). Direct operating expenses incurred by the Group in relation to investment property amounted to RUB 916 (2018: RUB 686). There were no significant direct operating expenses incurred by the Group in relation to investment property that did not generate rental income.

Management estimates that the fair value of investment property at 31 December 2019 amounted to RUB 8,223 (31 December 2018: RUB 9,760). The fair value was estimated using market approach with key inputs being rent income rates and market value of comparable assets.

Impairment test

At the end of 2019 management performed an impairment test of investment property. The evaluation performed and reasons for it are consistent with the approach for impairment testing of Property, Plant and Equipment (Note 10).

Goodwill

13 .

Movements in goodwill arising on the acquisition of businesses at 31 December 2019 and 31 December 2018 are:

Cost 2019 2018
Gross book value at 1 January 161,225 156,874
Acquisition of businesses (Note 7) 7,300 4,351
Disposal (286)
Gross book value at 31 December 168,239 161,225
Accumulated impairment losses
Accumulated impairment losses at 1 January (66,598) (66,598)
Disposal 286
Accumulated impairment losses at 31 December (66,312) (66,598)
Carrying amount at 1 January 94,627 90,276
Carrying amount at 31 December 101,927 94,627
Goodwill impairment test

For the purposes of impairment testing, goodwill is allocated to groups of cash-generating units (groups of CGUs) being store chains of each format. This represents the lowest level within the Group at which the goodwill is monitored for internal management purposes.

The group of CGUs to which goodwill has been allocated is tested for impairment annually or more frequently if there are indications that the particular group of CGUs might be impaired. Goodwill is tested for impairment at the group of CGUs level by comparing carrying values of particular group of CGU assets including allocated goodwill to their value in use. The Karusel group of CGUs was reorganised during 2019. The reorganisation is expected to be finalised in 2021. The reorganisation did not result in an impairment charge for the goodwill for the year ended 31 December 2019.

The allocation of carrying amounts of goodwill to each group of CGUs is as follows:

Year ended 31 December 2019 Pyaterochka Perekrestok Karusel Total
Goodwill 78,551 18,826 4,550 101,927
Year ended 31 December 2018 Pyaterochka Perekrestok Karusel Total
Goodwill 74,122 15,955 4,550 94,627
Value in use

For items of land, buildings and construction in progress the discounted future cash flow approach is applied and covers a 10-year period from 2020 onwards. The Group believes that use of 10 year forecast better reflects expected future cash flows of its cash generating units due to cyclical nature of their renovation expenditures. The future cash flows are based on the current budgets and forecasts approved by the management. For the forecast period, the data of the strategic business plan are extrapolated based on the consumer price indices as obtained from external resources and key performance indicators inherent to the strategic plan. One of the main assumptions used for the forecast period is revenue growth being in the range from 3.74% to 7.15% in accordance with the internal forecasts based on budget and consumer price index projections (31 December 2018: 4% to 6.38%). For the years beyond the forecast period the long term consumer price index forecast of 4% at 31 December 2019 is used (31 December 2018: 4%). The projections are made in the functional currency of the Group’s entities, being Russian Rouble, on a pre-tax basis and discounted at the Group pre-tax weighted average cost of capital which is then adjusted to reflect the risks specific to the respective assets (cash-generating units (CGUs)) — 11.43% (31 December 2018: 14.46%). Inflation rates are in line with the consumer price index forecast published by the Ministry of Economic Development of Russian Federation. The Group’s management believes that all of its estimates are reasonable and consistent with the internal reporting and reflect management’s best knowledge.

The changes in assumptions applied in the model used for impairment testing do not indicate any trigger for impairment because the fair value less cost of disposal and the value in use are significantly higher than the carrying values of the cash generating unit assets.

The result of applying discounted cash flows model reflects expectations about possible variations in the amount and timing of future cash flows and is based on reasonable and supportable assumptions that represent management’s best estimate of the range of uncertain economic conditions.

Impairment test

The recoverable amount of the groups of CGUs calculated exceeds their carrying amounts and therefore no impairment was recognised for them during the year ended 31 December 2019 (year ended 31 December 2018: Nil).

Other intangible assets

14 .

Other intangible assets comprise the following:

Brand and
private labels
Software
and other
Lease
rights
Total
Cost
At 1 January 2018 17,136 14,581 13,281 44,998
Additions 6,178 157 6,335
Acquisition of businesses (Note 7) 88 88
Disposals (293) (70) (370) (733)
At 31 December 2018 16,843 20,689 13,156 50,688
Effect of adoption of new accounting standards (Note 4) (13,156) (13,156)
At 1 January 2019 Restated 16,843 20,689 37,532
Additions 10,055 10,055
Disposals (240) (240)
At 31 December 2019 16,843 30,504 47,347
Accumulated amortisation and impairment
At 1 January 2018 (11,816) (6,041) (8,699) (26,556)
Amortisation charge (19) (2,068) (672) (2,759)
Impairment charge (11) (274) (285)
Reversal of impairment 310 310
Disposals 293 70 365 728
At 31 December 2018 (11,542) (8,050) (8,970) (28,562)
Effect of adoption of new accounting standards (Note 4) 8,970 8,970
At 1 January 2019 Restated (11,542) (8,050) (19,592)
Amortisation charge (12) (3,201) (3,213)
Impairment charge (424) (424)
Disposals 220 220
At 31 December 2019 (11,554) (11,455) (23,009)
Net book value at 31 December 2019 5,289 19,049 24,338
Net book value at 31 December 2018 5,301 12,639 4,186 22,126
Net book value at 1 January 2019 Restated 5,301 12,639 17,940
Net book value at 1 January 2018 5,320 8,540 4,582 18,442

Brand and private labels includes brand “Pyaterochka” with the carrying amount of RUB 4,029 (31 December 2018: RUB 4,029) and brand “Karusel” with the carrying amount of RUB 1,258 (31 December 2018: RUB 1,258). The Karusel operating segment was reorganised during 2019. The reorganisation is expected to be finalised in 2021. The reorganisation did not result in an impairment charge for the brand for the year ended 31 December 2019.

Amortisation charge, impairment charge and reversal of impairment are included in selling, general and administrative expenses in the consolidated statement of profit or loss for the years ended 31 December 2019 and 31 December 2018.

Impairment test

At the end of 2019 management performed an impairment test of brands.

For private labels the evaluation performed and reasons for it are consistent with the approach for impairment testing of property, plant and equipment (Note 10). For brands, which are tested annually for impairment evaluation performed, is consistent with the approach for goodwill (Note 13).

Also the Group recognised an impairment of software which was no longer used.

Inventories

15 .

At 31 December 2019 inventories in the amount of RUB 127,462 were accounted at the lower of cost and net realisable value (31 December 2018: RUB 115,990). Write-off of inventory to net realisable value at 31 December 2019 amounted to RUB 2,412 (31 December 2018: RUB 2,274). At 31 December 2019 and 31 December 2018 inventories consisted mainly of goods for resale.

Financial instruments by category

16 .

Financial assets
at amortised cost
31 December 2019
Assets as per consolidated statement of financial position
Trade and other receivables excluding prepayments 13,907
Cash and cash equivalents 18,602
Total 32,509
Financial liabilities
at amortised cost
31 December 2019
Liabilities as per consolidated statement of financial position
Lease liabilities 484,795
Borrowings 227,933
Interest accrued 1,734
Trade, other current and non-current payables excluding statutory liabilities and advances 217,999
Total 932,461
Financial assets
at amortised cost
31 December 2018
Assets as per consolidated statement of financial position
Trade and other receivables excluding prepayments 10,900
Cash and cash equivalents 24,368
Total 35,268
Financial liabilities
at amortised cost
31 December 2018
Liabilities as per consolidated statement of financial position
Borrowings 207,764
Interest accrued 1,770
Trade, other current and non-current payables excluding statutory liabilities and advances 208,758
Total 418,292

Trade, other accounts receivable and prepayments

17 .

31 December
2019
31 December
2018
Trade accounts receivable 12,501 10,218
Other receivables 2,465 1,780
Allowance for expected credit losses of trade and other receivables (1,059) (1,098)
Total trade and other accounts receivable 13,907 10,900
Prepayments 2,097 3,310
Advances made to trade suppliers 341 589
Allowance for impairment of prepayments and advances (492) (627)
Total prepayments 1,946 3,272
Total 15,853 14,172

The carrying amounts of the Group’s trade and other receivables were primarily denominated in Russian Roubles. Trade receivables and other receivables are non-interest bearing and are generally on terms of 30 to 90 days.

Trade receivables

Trade receivables are mainly bonuses from ­suppliers of goods for resale with a low historic default rate. The maximum exposure to credit risk at the reporting date was the carrying amount of each class of receivable. The Group did not hold any collateral as security.

Set out below is the information about the credit risk exposure on the Group’s trade receivables using a provision matrix:

Expected
credit loss rate at
31 December 201
Estimated total gross
carrying amount at
default 31 December 2019
Expected
credit loss
31 December 2019
Expected
credit loss rate at
31 December 2018
Estimated total gross
carrying amount at
default 31 December 2018
Expected
credit loss
31 December 2018
Not overdue — 1 month 0.09% 11,915 11 1.27% 9,422 120
1–6 months 34.38% 64 22 25.28% 269 68
6–12 months 57.14% 35 20 67.13% 216 145
Over 1 year 81.72% 487 398 69.13% 311 215
Total 12,501 451 10,218 548

Movements on the allowance for expected credit losses of trade receivables were as follows:

2019 2018
At 1 January (548) (688)
Addition of allowance for expected credit losses (86) (417)
Release of allowance for expected credit losses 68 41
Trade receivables written off as uncollectable 115 516
At 31 December (451) (548)

The creation and release of the allowance for expected credit losses have been included in net impairment losses on financial assets in the consolidated statement of profit or loss.

Other receivables

The maximum exposure to credit risk at the reporting date was the carrying amount of each class of receivable. The Group did not hold any collateral as security.

Set out below is the information about the credit risk exposure on the Group’s other receivables using a provision matrix:

Expected
credit loss rate at
31 December 201
Estimated total gross
carrying amount at
default 31 December 2019
Expected
credit loss
31 December 2019
Expected
credit loss rate at
31 December 2018
Estimated total gross
carrying amount at
default 31 December 2018
Expected
credit loss
31 December 2018
Not overdue — 1 month 10.53% 1,377 145 7.91% 860 68
1–6 months 15.82% 335 53 10.19% 265 27
6–12 months 26.47% 204 54 45.05% 182 82
Over 1 year 64.85% 549 356 78.86% 473 373
Total 2,465 608 1,780 550

Movements on the allowance for expected credit losses of other receivables were as follows:

2019 2018
At 1 January (550) (780)
Addition of allowance for expected credit losses (326) (437)
Release of allowance for expected credit losses 129 312
Other receivables written off as uncollectable 139 355
At 31 December (608) (550)

The creation and release of the allowance for expected credit losses have been included in net impairment losses on financial assets in the consolidated statement of profit or loss.

Prepayments and advances made to trade suppliers

Movements on the allowance for impairment of prepayments and advances made to trade suppliers were as follows:

2019 2018
At 1 January (627) (695)
Addition of allowance for prepayments and advances to trade suppliers impairment (330) (438)
Release of allowance for prepayments and advances to trade suppliers impairment 196 222
Prepayments and advances to trade suppliers written off as uncollectable 269 284
At 31 December (492) (627)

The creation and release of the allowance for impaired prepayments have been included in general and administrative costs in the consolidated statement of profit or loss.

The individually impaired prepayments mainly related to debtors that expected financial difficulties or there was likelihood of the debtor’s insolvency. It was assessed that a portion of the prepayments was expected to be recovered.

VAT and other taxes receivable

18 .

31 December 2019 31 December 2018
VAT receivable 11,551 9,856
Other taxes receivable 515 287
Total 12,066 10,143

Provisions and other liabilities

19 .

31 December 2019 31 December 2018
Other accounts payable and accruals 20,689 18,545
Accrued salaries and bonuses 20,656 19,194
Accounts payable for property, plant and equipment 12,371 13,823
Taxes other than income tax 12,452 16,488
Advances received 1,649 1,773
Payables to landlords 961 1,780
Provisions and liabilities for tax uncertainties (Note 35) 2,294 133
Total 71,072 71,736

There were no significant amounts of other payables to foreign counterparties as at 31 December 2019 and 31 December 2018.

Сontract liabilities

20 .

31 December 2019 31 December 2018
Short-term contract liabilities
Short-term contract liabilities related to loyalty programmes 1,836 1,489
Advances received from wholesales customers 116 54
Advances received from other customers 254 121
Total 2,206 1,664

Movements in short-term contract liabilities related to loyalty programmes comprise the following:

31 December 2019 31 December 2018
At 1 January 1,489 1,665
Deferred during the year 1,836 1,489
Recognised as revenue during the year (1,489) (1,665)
At 31 December 1,836 1,489

Borrowings

21 .

The Group had the following borrowings at 31 December 2019 and 31 December 2018:

Final
maturity
year
Fair value Carrying value
2019 2018 2019 2018
Current
RUB Bonds X5 FINANSE LLC series BО-04 2020 2,013 5,250 2,150 4,999
RUB Bonds X5 FINANSE LLC series BО-06 5,025 4,999
RUB Bonds X5 FINANSE LLC series BО-07 5,004 5,000
UB Bonds X5 FINANSE LLC series 001P-01 15,072 14,994
RUB Bonds X5 FINANSE LLC series 001P-02 2020 10,551 9,995
RUB Bonds X5 FINANSE LLC series 001P-03 2020 10,030 9,998
RUB Eurobond X5 Finance B.V. 2020 20,171 19,985
RUB Bilateral Loans 2020 32,627 30,443 32,627 30,443
Total current borrowings 75,392 60,794 74,755 60,435
Non-current
RUB Bonds X5 FINANSE LLC series BО-05 2021 2365 410 390 390
RUB Bonds X5 FINANSE LLC series BО-06 2022 1,257 1,201
RUB Bonds X5 FINANSE LLC series BО-07 2022 5,175 4,996
RUB Bonds X5 FINANSE LLC series 001P-01 2023 98 96
RUB Bonds X5 FINANSE LLC series 001P-02 10,000 9,990
RUB Bonds X5 FINANSE LLC series 001P-03 9,908 9,988
RUB Bonds X5 FINANSE LLC series 001P-04 2021 5,148 4,994
RUB Bonds X5 FINANSE LLC series 001P-05 2022 5,255 4,995
RUB Bonds X5 FINANSE LLC series 001P-06 2022 10,044 9,998
RUB Bonds X5 FINANSE LLC series 001P-07 2022 4,994 4,999
RUB Bonds X5 FINANSE LLC series 001P-08 2022 4,950 4,999
RUB Bonds X5 FINANSE LLC series 001P-09 2022 4,994 4,999
RUB Eurobond X5 Finance B.V. 20,092 19,937
RUB Bilateral Loans 2022 111,972 103,254 111,511 107,024
Total non-current borrowings 154,252 143,664 153,178 147,329
Total borrowings 229,644 204,458 227,933 207,764

In February 2019 the Group issued RUB 5,000 exchange-registered corporate bonds series 001P-04 with 8.50% coupon rate and put-option in 2.5 years.

In February 2019 the Group successfully passed the put-option on the exchange-registered corporate bonds series BO-07 in the amount of RUB 5,000 with the new annual rate for the next 6 semi-annual coupon periods fixed at 8.55%.

In April 2019 the Group issued RUB 5,000 exchange-registered corporate bonds series 001P-05 with 8.45% coupon rate and put-option in 3 years.

In April 2019 the Group successfully passed the put-option on the exchange-registered corporate bonds series BO-04 in the amount of RUB 5,000 and bought back RUB 2,850 from the issue. For the remaining RUB 2,150 the new annual rate for the next 3 semi-annual coupon periods was fixed at 8.35%.

In May 2019 the Group successfully passed the put-option on the exchange-registered corporate bonds series BO-06 in the amount of RUB 5,000 and bought back RUB 3,799 from the issue. For the remaining RUB 1,201 the new annual rate for the next 7 semi-annual coupon periods was fixed at 8.45%.

In September 2019 the Group issued RUB 10,000 exchange-registered corporate bonds series 001P-06 with 7.40% coupon rate and put-option in 2.5 years.

In October 2019 the Group successfully passed the put-option on the exchange-registered corporate bonds series 001P-01 in the amount of RUB 15,000 and bought back RUB 14,904 from the issue. For the remaining RUB 96 the new annual rate for the next 7 semi-annual coupon periods was fixed at 7.30%.

In November 2019 the Group issued RUB 5,000 exchange-registered corporate bonds series 001P-07 with 6.65% coupon rate and put-option in 2.5 years.

In December 2019 the Group issued two exchange-registered corporate bonds series 001P-08 and 001P-09 in the total amount of RUB 10,000 with 6.70% coupon rate and put-option in 3 years.

The weighted average effective interest rate on X5’s total borrowings for the year ended 31 December 2019 comprised 7.94% per annum (year ended 31 December 2018: 8.39%).

All borrowings at 31 December 2019 are shown net of related transaction costs of RUB 134 which are amortised over the term of the loans using the effective interest method (31 December 2018: RUB 166). Borrowing costs capitalised for the year ended 31 December 2019 amounted to RUB 71 (for year ended 31 December 2018: RUB 314). The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation was approximate to weighted average effective interest rate for the period.

Change in total borrowings in amount of RUB 20,169 in 2019 equals to the proceeds from borrowings in amount of RUB 97,540, repayment of borrowings in amount of RUB 77,502 (the Consolidated Statement of Cash Flows) plus amortisation of transaction costs in amount of RUB 131. Changes in lease liabilities which also form liabilities arising from financing activities are disclosed in the Note 11.

Change in total borrowings in amount of RUB 13,468 in 2018 equals to the proceeds from borrowings in amount of RUB 108,054, repayment of borrowings in amount of RUB 94,810 (the Consolidated Statement of Cash Flows) plus amortisation of transaction costs in amount of RUB 210 and other non-cash changes of RUB 14.

In accordance with a few loan agreements the Group maintains an optimal leverage ratio by tracking covenant: the maximum level of Net Debt/EBITDA (4.00/4.25 during 2 quarters after acquisition). The Group’s Eurobond documentation implies 3.75 leverage ratio threshold but with additional permitted indebtedness baskets and exclusions. At 31 December 2019 the Group complied with this covenant and Net Debt/EBITDA was equal to 1.71 (31 December 2018: 1.70). According to all loan agreements and Eurobond documentation EBITDA is calculated under IAS 17.

Share capital

22 .

As at 31 December 2019 the Group had 190,000,000 authorised ordinary shares (31 December 2018: 190,000,000) of which 67,890,054 ordinary shares were outstanding (31 December 2018: 67,890,099) and 3,164 ordinary shares were held as treasury stock (31 December 2018: 3,119). The nominal par value of each ordinary share is EUR 1.

Dividends approved for distribution at the General Meeting in May 2019 have been paid in the amount of RUB 25,000 during the year ended 31 December 2019 (RUB 368.23 per share).

The Supervisory Board proposed to the General Meeting to distribute in 2020 current year profit in the amount of RUB 30,000 (441.89 RUB per ordinary share) to shareholders

Earnings per share

23 .

Basic earnings per share are calculated by dividing the profit or loss attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year, excluding treasury shares.

Earnings per share were calculated as follows:

2019 2018
Profit attributable to equity holders of the parent 19,507 28,642
Weighted average number of ordinary shares in issue 67,890,071 67,888,863
Effect of share options granted to employees, number of shares 238 4,533
Weighted average number of ordinary shares for the purposes of diluted earnings per share 67,890,309 67,893,396
Basic earnings per share for profit (expressed in RUB per share) 287.33 421.90
Diluted earnings per share for profit (expressed in RUB per share) 287.33 421.87

Revenue

24 .

2019
Pyaterochka Perekrestok Karusel Other segments Total
Revenue from sale of goods through own stores (at a point of time) 1,355,849 272,743 87,397 479 1,716,468
Revenue from sale of goods through franchisees (at a point of time) 10,808 438 11,246
Revenue from wholesale of goods (at a point of time) 3,092 1,293 919 202 5,506
Revenue from other services (over time) 665 287 143 32 1,127
Total 1,370,414 274,761 88,459 713 1,734,347
2018
Pyaterochka Perekrestok Karusel Other segments Total
Revenue from sale of goods through own stores (at a point of time) 1,188,207 229,689 90,818 5,577 1,514,291
Revenue from sale of goods through franchisees (at a point of time) 9,565 1,159 10,724
Revenue from wholesale of goods (at a point of time) 2,256 1,435 1,442 1,549 6,682
Revenue from other services (over time) 429 207 198 6 840
Total 1,200,457 234,490 92,458 7,132 1,532,537

Expenses by nature

25 .

2019 2018
Cost of goods sold 1,257,565 1,116,264
Staff costs (Note 28) 165,245 139,456
Lease expenses (Note 11) 7,989 80,745
Depreciation, amortisation 115,089 45,454
Impairment of non-current assets 6,996 4,020
Other store costs 25,234 23,996
Utilities 38,128 33,401
Net impairment losses on financial assets 215 501
Other 42,512 42,839
Total 1,658,973 1,486,676

Impairment of prepayments amounted to RUB 134 for the year ended 31 December 2019 (2018: RUB 216).

The fees listed below related to the procedures applied to the Group by Ernst & Young Accountants LLP and Other EY Network as referred to in article 1(1) of the Dutch Accounting Firms Oversight Act (Dutch acronym: Wta):

2019 2018
Statutory audit of financial statements performed by Ernst & Young Accountants LLP 22 16
Statutory audit of financial statements performed by Other EY Network 47 47
Non-audit services by Other EY Network 42 32
Total 111 95

In addition to the statutory audit of the financial statements the EY member firm in Russia provided non-audit services in the areas of supply chain network design, retail pricing proof, business trainings and tax advisory.

The external auditor of the Group is Ernst & Young Accountants LLP.

Lease/sublease and other income

26 .

2019 2018
Lease/sublease income (Note 11) 7,592 7,262
Income from sales of waste 2,631 2,267
Other 3,801 2,764
Total 14,024 12,293

Finance income and costs

27 .

2019 2018
Interest expense on lease liabilities 38,739
Interest expense on borrowings 16,889 17,021
Interest income (48) (73)
Other finance costs, net 1,323 1,719
Total 56,903 18,667

Staff costs

28 .

2019 2018
Wages and salaries 128,950 108,753
Social security costs 36,232 30,631
Share-based payments expense 63 72
Total 165,245 139,456

Wages and salaries in 2019 included expenses of RUB 2,407 related to the long-term incentive programme (LTI) for key employees, including members of the Management Board, other key management and other key employees (2018: RUB 2,128).

Social security costs in 2019 included pension contributions amounted to RUB 24,253 (2018: RUB 20,422).

The number of employees as at 31 December 2019 amounted to 307,444 (31 December 2018: 278,399).

Key management personnel

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group. The Group considers all members of the Management Board. Executive Board and the Supervisory Board to be key management personnel as defined in IAS 24 “Related Party Disclosures”. The CEO is a member of both the Management Board and the Executive Board.

At the end of 2019 the Executive Board consisted of nine members. The total direct ­compensation for the CEO and other Executive Board members consists of a base salary, a performance related annual cash incentive (STI) and a performance related long-term cash incentive (LTI). Members of the Supervisory Board receive an annual base compensation in cash and share-based payments.

Total compensation of key management personnel:

2019 2018
Management Board and Executive Board 1,182 1,121
Supervisory Board 162 178
Total 1,344 1,299
Remuneration of the Management Board
Service agreements with individual Management Board members
Igor Shekhterman

In 2019 the Company provided Igor Shekhterman with an annual base salary, participation in the annual cash incentive plan and participation in the Company’s long-term incentive plan. For 2019 Igor’s annual base salary was RUB 70 million. The target payout under the annual cash incentive plan is 100% of base salary and is capped at 140% in the event of above-target performance. The target award under the long-term incentive plan is 133% of base salary per year for the period of the implementation of the long-term incentive plan. Igor Shekhterman was re-appointed in 2019 for another two-year term, until the annual General Meeting of Shareholders in 2021. As disclosed when Mr. Shekhterman entitled to a minimum annual compensation package of USD 4,000,000. Should the minimum annual compensation exceed the total annual remuneration based on fixed and variable components, Mr. Shekhterman shall be entitled to the difference upon completion of his full term as CEO. Furthermore, Mr. Shekhterman is eligible to a termination compensation of up to USD 5,000,000 at the discretion of the Supervisory Board. Upon contract termination and subsequent compliance with non-competition obligations, Igor Shekhterman shall be entitled to an amount equal to the net annual base salary under his contract, payable in four quarterly instalments. In case of breach of the non-competition obligations, the agreement provides for a penalty in the amount of two annual base salaries on a net basis, and repayment of the termination compensation. The agreement with Igor Shekhterman may be terminated by either party with a notice period of three months.

Frank Lhoëst

In 2019, the Company provided Frank Lhoëst with an annual base salary and participation in the annual cash incentive plan. Frank Lhoëst was re-appointed in 2019 for another four-year term, until the annual General Meeting of Shareholders in 2023. His annual base salary of EUR 275,000 was increased by 14.5% to EUR 315,000 effective 1 April 2019. The target payout under the annual cash incentive plan is 60% of base salary and is capped at 120% in the event of above-target performance. The agreement with Frank Lhoëst provides for a severance payment of six month’s base salary, and may be terminated by either party with a notice period of two months.

Quinten Peer

In 2019, the Company provided Quinten Peer with an annual base salary and participation in the annual cash incentive plan. Quinten Peer was appointed in 2019 for a four-year term, until the annual General Meeting of Shareholders in 2023. Quinten Peer was appointed on a 50% full time equivalent (FTE) basis, with an annual base salary of EUR 137,500. As at 1 January 2020 Quinten Peer’s annual base salary amounts to EUR 275,000 on a 100% FTE basis. The target payout under the annual cash incentive plan is 60% of base salary and is capped at 120% in the event of above-target performance. The agreement with Quinten Peer provides for a severance payment of six month’s base salary and may be terminated by either party with a notice period of two months.

Expenses recognised for remuneration of the members of the Management Board:

Name Year Base salary Short-term
incentive
Long-term
incentive
Share based
compensation
Social
security cost
Total
I. Shekhterman 2019 76 53 97 33 259
2018 60 59 183 1 44 347
F. Lhoëst 2019 22 13 35
2018 20 13 33
Q. Peer 2019 6 4 10
2018
Total 2019 104 70 97 33 304
2018 80 72 183 1 44 380

Restricted Stock Units (RSUs) awarded and outstanding to members of the Management Board:

Name Tranche RSUs
awarded
in 2014
RSUs
awarded
in 2015
RSUs
awarded
in 2016
Year of
vesting
RSUs
vested
Value on
vesting
date
GDRs
locked-up as
at 31.12.2019
End of
lock-up
period
RSUs
outstanding as
at 31.12.2019
RSUs
outstanding as
at 31.12.2018
I. Shekhterman 4 7,384 2016 7,384 9 2018
5 15,793 2017 15,793 33 2019
6 2018 11,396 21 11,396 2020
Remuneration of the Executive Board (‘Other key management personnel’)

Other key management personnel comprises all members of the Executive Board excluding the CEO. In comparison to the previous year one executive was added to the Executive Board, i.e. the Director of Business Support. Also, in view of the Karusel transformation plan announced in September 2019, the general director of Karusel was no longer a member of the Executive Board. In accordance with the remuneration policy for the Executive Board, the total direct compensation of other key management personnel consists of a base salary, a performance-related annual cash incentive (STI) and a performance-related long-term cash incentive (LTI).

Expenses recognised for remuneration of the Executive Board members (excluding the CEO):

Year Base
salary
Short-term
incentive
Long-term
incentive
Share based
compensation
Non-competition
reward
Social
security cost
Total
Other key management personnel 2019 259 173 276 6 48 116 878
2018 228 167 235 42 69 741
Remuneration of the Supervisory Board

The table below specifies the remuneration of the members of the Supervisory Board. In 2019, adjusted remuneration principles for members of the Supervisory Board were approved by the Annual General Meeting of Shareholders held on May 10, 2019. Details on Supervisory Board remuneration in 2019 are reflected in the Remuneration Report.

In accordance with the remuneration policy for the Supervisory Board, members of the Supervisory Board receive remuneration in cash and an annual award of Restricted Stock Units (RSUs). Also, in line with the Remuneration Policy, any member of the Supervisory Board who represents a legal entity holding at least thirty per cent of the voting rights in the Company, shall waive his/her entitlement to remuneration for acting as a member of the Supervisory Board.

Expenses recognised for remuneration of the members of the Supervisory Board:

Base remuneration Share-based compensation
2019 2018 2019 2018
S. DuCharme 19 20 21 19
A. Elinson
M. Fridman
G. King 18 19 18 16
P. Demchenkov 17 15 14 9
M. Kuchment 8 7 7 6
K.-H. Holland 7 4 4
N. Shouraboura 8 4 4
A. Torbakhov 14 3
C. Couvreux 41 4
P. Musial 12 2
Total 91 122 71 56
Restricted Stock Units

Following the appointment of Karl-Heinz Holland and Nadia Shouraboura as Supervisory Board members in 2018, the General Meeting approved that Mr. Holland and Mrs. Shouraboura were awarded a number of RSUs with award date 20 May 2019, equal to 100% of the pro rata annual remuneration of the relevant Supervisory Director in 2018, divided by USD 30.00, the average market value of one GDR as of 21 May 2018. These RSUs are awarded under tranche 9 and will vest on 19 May 2021, followed by a lock-in period ending on 19 May 2023.

Furthermore, in 2019 the Annual General Meeting of Shareholders approved the RSU awards under tranche 10, meaning that the Supervisory Board members Stephan DuCharme, Peter Demchenkov, Geoff King, Mikhail Kuchment, Karl-Heinz Holland, Nadia Shouraboura and Alexander Torbakhov were awarded a number of RSUs with award date 20 May 2019, equal to 100% of the gross annual remuneration of the relevant Supervisory Director in 2019, divided by USD 30.87, the average market value of one GDR as of 20 May 2019. The RSUs awarded under tranche 10 will vest on 19 May 2022, followed by a lock-in period ending on 19 May 2024.

The number of RSUs awarded and outstanding to the members of the Supervisory Board is shown below. For the calculation of the intrinsic value and further details please refer to Note 29.

Restricted Stock Units awarded and outstanding to members of the Supervisory Board:

Tranche RSUs
awarded
in 2016
RSUs
awarded
in 2017
RSUs
awarded
in 2018
RSUs
awarded
in 2019
Year of
vesting
RSUs
vested
Value
on
vesting
date
Vested
GDRs
after
tax
GDRs
locked-up
as at
31.12.2019
End of
lock-up
period
RSUs
outstanding
as at
31.12.2019
RSUs
outstanding
as at
31.12.2018
S. DuCharme 7 25,703 2019 25,703 53 13,257 13,257 2021 25,703
8 9,631 2020 2022 9,631 9,631
9 9,977 2021 2023 9,977 9,977
10 9,722 2022 2024 9,722
G. King 6 13,250 2018 13,250 25 8,749 8,749 2020
7 14,280 2019 14,280 29 9,449 9,449 2021 14,280
8 8,026 2020 2022 8,026 8,026
9 9,977 2021 2023 9,977 9,977
10 9,373 2022 2024 9,373
P. Demchenkov 6 5,698 2018 5,698 11 3,762 3,762 2020
7 5,712 2019 5,712 12 3,779 3,779 2021 5,712
8 5,618 2020 2022 5,618 5,618
9 7,982 2021 2023 7,982 7,982
10 8,942 2022 2024 8,942
M. Kuchment 7 5,712 2019 5,712 12 3,779 3,779 2021 5,712
8 3,210 2020 2022 3,210 3,210
9 3,991 2021 2023 3,991 3,991
10 4,099 2022 2024 4,099
K.-H. Holland 9 1,995 2021 2023 1,995
10 3,749 2022 2024 3,749
N. Shouraboura 9 1,995 2021 2023 1,995
10 4,099 2022 2024 4,099
A. Torbakhov 10 7,365 2022 2024 7,365

Share-based payments

29 .

Restricted Stock Unit plan

Members of the Supervisory Board are entitled to annual awards of restricted stock units (RSUs) under the Group’s Restricted Stock Unit Plan (RSU Plan) approved at the AGM in 2010. RSU awards to members of the Supervisory Board are not subject to performance criteria, and determined by the General Meeting of Shareholders.

During the year ended 31 December 2019, a total number of 51,339 RSUs were awarded under tranche 9 and 10 of the RSU Plan and will vest in 2021 and 2022 respectively. In 2019 51,407 RSUs vested. Upon vesting these RSUs were converted into GDRs registered in the participant’s name. The GDRs are kept in custody during a two-year lock-in period during which the GDRs cannot be traded. In accordance with the RSU Plan rules the lock-in restrictions do not apply in case of accelerated release of GDRs, if and when a Supervisory Board member ceases to be a member of the Supervisory Board.

During the year ended 31 December 2018, a total number of 35,918 RSUs were awarded under tranche 9 of the RSU Plan and will vest in 2021. In 2018 62,072 RSUs vested. Upon vesting these RSUs were converted into GDRs registered in the participant’s name. The GDRs are kept in custody during a two-year lock-in period during which the GDRs cannot be traded. In accordance with the RSU Plan rules the lock-in restrictions do not apply in case of accelerated release of GDRs, if and when a Supervisory Board member ceases to be a member of the Supervisory Board.

In total, during the year ended 31 December 2019 the Group recognised expense related to the RSU Plan in the amount of RUB 63 (expense during the year ended 31 December 2018: RUB 72). At 31 December 2019 the equity component was RUB 105 (31 December 2018: RUB 118). The fair value of services received in return for the conditional RSUs granted to employees is measured by reference to the market price of the GDRs which is determined at grant date.

Details of the conditional rights outstanding were as follows:

2019 2018
Number of
conditional rights
Weighted average
fair value, RUB
Number of
conditional rights
Weighted average
fair value, RUB
Outstanding at the beginning of the period 109,819 1,645.55 152,097 1,397.63
Awarded during the period 51,339 2,003.03 35,918 1,858.22
Vested during the period (51,407) 1,272.00 (62,072) 1,133.34
Forfeited during the period (16,124) 1,752.51
Outstanding at the end of the period 109,751 1,987.74 109,819 1,645.55

Income tax

30 .

2019 2018
Current income tax charge 15,379 8,923
Deferred income tax (benefit)/charge (188) 1,475
Income tax charge for the year 15,191 10,398

The theoretical and effective tax rates are reconciled as follows:

2019 2018
Profit before taxation 34,698 39,040
Theoretical tax at the effective statutory rate 6,940 7,808
Tax effect of items which are not deductible or assessable for taxation purposes
Effect of income taxable at rates different from standard statutory rates (18) 4
Expenses on inventory shortage 165 200
Change in unrecognised tax loss carry forwards for the year 699 650
Other non-deductible expense 5,826 442
Income tax charge for the year 15,191 10,398

As at 31 December 2019 37 Russian subsidiaries of the Group were the members of the CGT (consolidated group of taxpayers) with Agroaspect LLC acting as a responsible CGT member.

Deferred income tax

Deferred tax assets and liabilities and the deferred tax charge in the consolidated statement of profit or loss were attributable to the following items for the year ended 31 December 2019:

31 December
2018
Effect of adoption
of new accounting
standards (Note 4)
1 January
2019
Restated
Credited/
(debited) to
profit and loss
Deferred tax on
business combinations
(Note 7)
31 December
2019
Tax effects of deductible temporary differences and tax loss carry forwards
Tax losses available for carry forward 4,893 4,893 644 5,537
Right-of-use assets and lease liabilities 11,130 11,130 1,825 12,955
Property, plant and equipment and Investment property 467 (2) 465 (144) 81 402
Other intangible assets 601 392 993 (1,876) 1,106 223
Inventories 1,701 1,701 406 2,107
Accounts receivable 41 41 (30) 11
Accounts payable 5,600 5,600 1,021 6,621
Other 605 1 606 (231) 375
Gross deferred tax assets 13,908 11,521 25,429 1,615 1,187 28,231
Less offsetting with deferred tax liabilities (8,895) (2,251) (11,146) (607) (11,753)
Recognised deferred tax assets 5,013 9,270 14,283 1,008 1,187 16,478
Tax effects of taxable temporary differences
Right-of-use assets and lease liabilities (14) (14) (26) (40)
Property, plant and equipment and Investment property (11,389) (782) (12,171) 1,046 (11,125)
Investments into subsidiary (2,452) (2,452) (1,579) (4,031)
Other intangible assets (218) 29 (189) (719) (908)
Accounts receivable (705) (705) (144) (849)
Accounts payable (7) (1) (8) 5 (3)
Other (290) 2 (288) (10) (298)
Gross deferred tax liabilities (15,061) (766) (15,827) (1,427) (17,254)
Less offsetting with deferred tax assets 8,895 2,251 11,146 607 11,753
Recognised deferred tax liabilities (6,166) 1,485 (4,681) (820) (5,501)

Deferred tax assets and liabilities and the deferred tax charge in the consolidated statement of profit or loss were attributable to the following items for the year ended 31 December 2018:

31 December
2017
Credited/(debited)
to profit and loss
Deferred tax on business
combinations (Note 7)
31 December
2018
Tax effects of deductible temporary differences and tax loss carry forwards
Tax losses available for carry forward 4,980 (87) 4,893
Property, plant and equipment and Investment property 585 (143) 25 467
Other intangible assets 808 (1,078) 871 601
Inventories 1,026 675 1,701
Accounts receivable 103 (62) 41
Accounts payable 5,092 508 5,600
Other 750 (145) 605
Gross deferred tax assets 13,344 (332) 896 13,908
Less offsetting with deferred tax liabilities (8,201) (694) (8,895)
Recognised deferred tax assets 5,143 (1,026) 896 5,013
Tax effects of taxable temporary differences
Property, plant and equipment and Investment property (10,971) (371) (47) (11,389)
Investments into subsidiary (1,158) (1,294) (2,452)
Other intangible assets (451) 233 (218)
Accounts receivable (837) 132 (705)
Accounts payable (10) 3 (7)
Other (444) 154 (290)
Gross deferred tax liabilities (13,871) (1,143) (47) (15,061)
Less offsetting with deferred tax assets 8,201 694 8,895
Recognised deferred tax liabilities (5,670) (449) (47) (6,166)

Unrecognised deferred tax liability on unremitted earnings of certain subsidiaries amounted to RUB 2,579 (2018: RUB 4,968) for which the deferred tax liability was not ­recognised as such amounts are being reinvested for the foreseeable future.

Management believes that the future taxable profits in tax jurisdictions that suffered a loss in the current or preceding years will be available to utilise the deferred tax asset of RUB 5,537 recognised at 31 December 2019 for the carry forward of unused tax losses (31 December 2018: RUB 4,893).

The Group estimated unrecognised potential deferred tax assets in respect of unused tax loss carry forwards at 31 December 2019 of RUB 3,941 (31 December 2018: RUB 3,966).

At 31 December 2019 these unused tax losses in the amount of 1,462 were available for carry forward for a period not less than three years, unused tax losses in the amount of 2,479 have no time restrictions for carry forward.

Financial risk management

31 .

Financial risk management is a part of integrated risk management and internal control framework described in “Corporate Governance” section of this Annual Report. The primary objectives of the financial risk management are to establish risk limits, and then ensure that exposure to risks stays within these limits.

Financial risk management is carried out by the Group’s centralised Finance Department. The Finance Department monitors and measures financial risks and undertakes steps to limit their influence on the Group’s performance.

(a) Market risk
Currency risk

The Group is exposed to foreign exchange risk arising from foreign currency denominated assets and liabilities with respect to import purchases and lease liabilities. As at 31 December 2019 the Group had trade accounts payable denominated in foreign currency in the amount of RUB 3,813 (31 December 2018: RUB 3,071) and leases in the amount of RUB 10,857. As at 31 December 2019 the Group did not have any other significant assets and liabilities denominated in foreign currency and the exposure for the Group was estimated as not significant.

Interest rates risk

As at 31 December 2019 the Group had no floating interest-bearing assets, but had 18% share of borrowings with floating interest rates based on the Key rate of the Central Bank of the Russian and financial instruments limiting the corridor of rate fluctuations for 6% share of borrowings. If the Key rate had been 100 b.p. higher the profit before tax for the year ended 31 December 2019 had been RUB 141 lower. If the Key rate had been 100 b.p. lower the profit before tax for the year ended 31 December 2019 had been RUB 126 higher. The Group’s income and operating cash inflows were largely independent of changes in market interest rates but part of The Group’s interest expenses was marginally exposed to changes in market interest rates.

(b) Credit risk

Financial assets, which are potentially subject to credit risk, consisted principally of cash and cash equivalents held in banks, trade and other receivables (Note 9 and Note 17). Due to the nature of its main activities (retail sales to individual customers) the Group had no significant concentration of credit risk. Cash was placed in financial institutions which were considered at the time of deposit to have low risk of default (Note 9).

The Group has policies in place to ensure that in case of credit sales of products and services to wholesale customers and reverse franchise schemes only those counteragents with an appropriate credit history are selected. Although collection of receivables could be influenced by economic factors, management believes that there was no significant risk of loss to the Group beyond the allowance already recorded. In accordance with the Group treasury policies and exposure management practices, counterparty credit exposure limits were continually monitored and no individual exposure was considered significant.

(c) Liquidity risk

Liquidity risk is defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is managed by the Corporate Finance Department.

The Group finances its operations by a combination of cash flows from operating activities and long-term and short-term debt. The objective is to ensure continuity of funding on the best available market terms. The policy is to keep the Group’s credit portfolio diversified structure, continue to improve the debt maturity profile, to arrange funding ahead of requirements and to maintain sufficient undrawn available bank lines/limits, and a strong credit rating so that maturing debt may be refinanced as it falls due.

The following is an analysis of the contractual undiscounted cash flows payable under financial liabilities as at the reporting date at spot foreign exchange rates:

Year ended 31 December 2019 During 1 year In 1 to 5 years Over 5 years
Lease liabilities 96,142 340,765 232,559
Borrowings 89,343 162,621
Trade payables 160,434
Other financial liabilities 54,677 2,888
Total 400,596 506,274 232,559
Year ended 31 December 2018 During 1 year In 1 to 5 years Over 5 years
Borrowings 76,196 158,865
Trade payables 154,873
Other financial liabilities 53,342 543
Total 284,411 159,408

At 31 December 2019 the Group had net current liabilities of RUB 188,819 (31 December 2018: RUB 120,363) including short-term borrowings of RUB 74,755 (31 December 2018: RUB 60,435). At 31 December 2019 the Group had available bank credit lines of RUB 415,592 (31 December 2018: RUB 341,502). At 31 December 2019 the Group had RUB registered bonds programme available for issue on MOEX of RUB 30,000 (31 December 2018: RUB 15,000).

Management regularly monitors the Group’s operating cash flows and available credit lines/limits to ensure that these are adequate to meet the Group’s ongoing obligations and its expansion programmes. Part of the existing lines is provided on rolling basis which is closely monitored by detailed cash flow forecasts and are managed by the Corporate Finance Department.

The Group’s capital expenditure programme is highly discretionary. The Group optimises its cash outflows by managing the speed of execution of current capex projects and by delaying future capital extensive programmes, if required.

The Group is carefully monitoring its liquidity profile by optimizing the cost of funding and the drawdown periods within revolving credit facilities as well as extending existing credit facilities or obtaining new credit lines. The Group manages liquidity requirements by the use of both short-term and long-term projections and maintaining the availability of funding. Based on the review of the current liquidity position of the Group management considers that the available credit lines and expected cash flows are more than sufficient to finance the Group’s current operations.

Operating environment of the Group

32 .

Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of ­economic, financial and monetary measures undertaken by the government.

The Russian economy has been negatively impacted by highly volatile oil prices and sanctions imposed on Russia by a number of countries. The Rouble interest rates remained relatively high. The combination of the above resulted in reduced access to capital, a higher cost of capital and uncertainty regarding economic growth, which could negatively affect the Group’s future financial position, results of operations and business prospects. Management believes it is taking appropriate measures to support the sustainability of the Group’s business in the current circumstances.

Capital risk management

33 .

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Group manages total equity attributable to equity holders recognised under IFRS requirements. The Group is in compliance with externally imposed capital requirements.

In accordance with a few loan facilities the Group maintains an optimal leverage ratio by tracking covenant: the maximum level of Net Debt/EBITDA (4.00/4.25 during two quarters after acquisition). The Group’s Eurobond documentation implies 3.75 leverage ratio threshold but with additional permitted indebtedness baskets and exclusions. Net debt is calculated as the sum of short-term and long-term ­borrowings less cash and cash equivalents. Reconciliation of EBITDA to operating profit is performed in Note 5. This ratio is included as covenants into some of Group’s loan agreements (Note 21). At 31 December 2019 the Group complied with the requirements under the loan facilities and Eurobond documentation.

Fair value of financial instruments

34 .

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is price in an active market. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

The estimated fair values of financial instruments have been determined by the Group using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value.

Financial assets carried at amortised cost

The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on credit risk of the counterparty.

The carrying amount of cash and cash equivalents and trade and other financial receivables approximates their fair value.

Liabilities carried at amortised cost

The fair value of bonds is based on quoted market prices. Fair values of other liabilities are determined using valuation techniques.

The fair value of bonds traded on the MOEX and the SE is determined based on active market quotations and amounted to RUB 85,045 at 31 December 2019 (31 December 2018: RUB 70,761). The measurement is classified in level 1 of the fair value hierarchy. The carrying value of these bonds amounted to RUB 83,795 at 31 December 2019 (31 December 2018: RUB 70,297) (Note 21). The fair value of long-term borrowings amounted to RUB 111,972 at 31 December 2019 (31 December 2018: RUB 103,254). The measurement is classified in level 3 of the fair value hierarchy and is determined based on expected cash flows discounted using interest rate of similar instruments available on the market. The sensitivity analysis shows that the increase/decrease of the market interest rate by 10% leads to the decrease/increase of fair value of long-term borrowings by RUB 738 at 31 December 2019. The fair value of short-term borrowings was not materially different from their carrying amounts.

Commitments and contingencies

35 .

Capital expenditure commitments

At 31 December 2019 the Group contracted for capital expenditure for the acquisition of property, plant and equipment and intangible assets of RUB 7,386 (net of VAT) (31 December 2018: RUB 10,801).

Legal contingencies

The Group has been and continues to be the subject of legal proceedings and adjudications from time to time. Management believes that there are no current legal proceedings or other claims outstanding, which could have a material effect on the result of operations or financial position of the Group and which have not been accrued at 31 December 2019.

Tax contingencies, commitments and risks

Russian tax, customs, and currency legislation allows for various interpretations and is subject to frequent amendments. Relevant regional and federal authorities can challenge the Group management interpretation of legislation provisions in the context of the Group’s transactions and operations. The Group includes companies incorporated outside Russia. These companies are subject to tax at the rates prescribed by the legislation of the jurisdiction where the companies are tax residents. According to the Russian legislation, foreign companies of the Group are not subject to profit tax except for cases of withholding tax (i.e. ­dividends, interest, capital gain, etc.), since tax obligations of the foreign companies of the Group are determined on the assumption that the foreign companies of the Group are not Russian tax residents.

In 2019 Russian legislative authorities performed further update of state taxation system and implementation of mechanisms directed against tax evasion and avoidance through low-tax jurisdictions and aggressive tax planning. These amendments covered further development of the concept of beneficiary ownership, legal entities’ tax residency according to the place of economic activity, and approach to taxation of controlled foreign companies in Russia.

Russian tax authorities continue to diligently collaborate with foreign tax authorities in the framework of an international tax information exchange which makes corporate operations more transparent. In the context of tax management procedures, it also requires a comprehensive consideration of the reasonability of an economic purpose for the formation of an international business structure.

The Russian transfer pricing legislation is to the large extent aligned with the international transfer pricing principles developed by the Organization for Economic Cooperation and Development. Starting from 1 January 2019, a significant number of domestic transactions was excluded from the transfer pricing control in Russia. Only transactions between ussian companies that apply different tax rates on profits or special tax regimes are subject to the rules, and only if income from those transactions exceeds 1 billion rubles per year. Moreover, starting from 1 January 2019, a threshold of RUB 60 million applies for cross-border transactions to be classified as controlled for transfer pricing purposes.

The amendments described above as well as recent trends of interpretation and application of particular provisions of the Russian tax legislation highlight the fact that tax authorities can enter the more rigid position with regards to the interpretation of the legislation and tax calculations. Therefore, tax authorities can dispute lawfulness of transactions and accounting methods that have not been previously under cloud. As a result, material additional taxes, penalties, and fines can be charged. It is impossible to forecast the amount of potential claims and to evaluate the probability of an unfavorable outcome. Generally tax audits can cover three calendar years preceding the year in which the decision on the performance of audit is adopted. In certain circumstances, a tax audit can cover earlier tax periods.

Management regularly reviews the Group’s taxation compliance with applicable legislation, laws and decrees and current interpretations published by the authorities in the jurisdictions in which the Group has operations. Furthermore, management regularly assesses the potential financial exposure relating to tax contingencies not only for the periods open for tax audit but also for which the three years tax inspection right has expired but which, under certain circumstances, may be challenged by the regulatory bodies. From time to time potential exposures and contingencies are identified and at any point in time a number of open matters may exist.

Management estimates that possible exposure in relation to the aforementioned risks, as well as other profits tax and non-profits tax risks (e.g. imposition of additional VAT liabilities), that are more than remote, but for which no liability is required to be recognised under IFRS, could be several times more than accrued liabilities and provisions reflected on the statement of financial position at that date. This estimation is provided for the IFRS requirement for disclosure of possible taxes and should not be considered as an estimate of the Group’s future tax liability.

In 2019 the Group made net accrual of provisions and liabilities for tax uncertainties attributable to income tax and non-income tax risks in amount of RUB 5,879 including net accrual of non-income tax provision of RUB 2,176 and income tax provision of RUB 3,583. This accrual of provision also includes tax provision recognised as a result of business combinations (Note 7) of RUB 120 with simultaneous recognition of indemnification asset of RUB 120.

In 2018 the Group made net release of provisions and liabilities for tax uncertainties attributable to income tax and non-income tax risks in amount of RUB 626 including net release of non-income tax provision of RUB 463, income tax provision of RUB 67 with simultaneous release of indemnification asset of RUB 96.

At the same time management has recorded liabilities for income taxes in the amount of RUB 444 (31 December 2018: RUB 384) and provisions for taxes other than income taxes in the amount of RUB 2,294 at 31 December 2019 (31 December 2018: RUB 133) in these consolidated financial statements as their best estimate of the Group’s liability related to tax uncertainties as follows:

Balance at 31 December 2017 883
Release of provision (1,113)
Accrual of provision 487
Offset of provision 260
Balance at 31 December 2018 517
Release of provision (718)
Accrual of provision 6,597
Offset of provision (3,658)
Balance at 31 December 2019 2,738

Subsequent events for the group

36 .

The Group is continuously assessing the effect of coronavirus outbreak and the fall in oil prices on the financial statements and the business as a whole. The share of direct purchases from China and other countries subject to virus outbreak is not significant and can be substituted. In the coming year the fluctuation of Russian Rouble exchange rate as a consequence of oil prices drop is not expected to affect the Group's operations deeply as the Group does not have significant foreign currency exposure. However other effects, such as a potential decrease in consumer purchasing power or other impacts from measures that may be taken in the future to prevent the spread of the virus cannot be readily determined.

Company Statement of Financial Position

Note 31 December 2019 31 December 2018
Assets
Non-current assets
Financial fixed assets 38 205,067 210,867
205,067 210,867
Current assets
Amounts due from subsidiaries 2,031 7,977
Prepaid expenses 12 5
Other receivables 220 244
2,263 8,226
Total assets 207,330 219,093
Equity and liabilities
Paid up and called up share capital 39 4,708 5,395
Share premium account 39 46,150 46,192
Share-based payment reserve 42 105 118
Legal reserve 39 6,772 (1,593)
Retained earnings 39 39,314 86,721
Profit for the year 19,507 28,642
Total equity 116,556 165,475
Provisions
Deferred tax liabilities 44 4,031 2,452
4,031 2,452
Non-current liabilities
Loans from group companies 40 3,784 18,873
Bank loan 41 46,531 21,572
50,315 40,445
Current liabilities
Loans from group companies 40 3,706
Amounts due to group companies 32,479 10,611
Accrued expenses and other liabilities 243 93
VAT and other taxes payable 17
36,428 10,721
Total liabilities 90,774 53,618
Total equity and liabilities 207,330 219,093

Igor Shekhterman

Chief Executive Officer

18 March 2020

Svetlana Demyashkevich

Chief Financial Officer

18 March 2020

Company Statement of Profit or Loss

Note 2019 2018
General and administrative expenses 43 (655) (431)
Other income 450 359
Operating loss (205) (72)
Finance costs (3,698) (2,705)
Finance income 1,397 817
Net foreign exchange gain/(loss) 182 (210)
Loss before tax (2,324) (2,170)
Income tax expense 44 (1,579) (1,294)
Income on participating interest after tax 23,410 32,106
Profit for the year 19,507 28,642

Igor Shekhterman

Chief Executive Officer

18 March 2020

Svetlana Demyashkevich

Chief Financial Officer

18 March 2020

Accounting principles

37 .

General

The Company was incorporated as a limited liability Company under the laws of The Netherlands on 13 August 1975 and has its statutory seat in Amsterdam. The Company is publicly owned. The principal activity of the Company is to act as the listed holding company for retail chains operating mainly in Russia. The number at Chamber of Commerce is 33143036.

Basis of presentation

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the Netherlands, in accordance with Part 9 of Book 2 of the Dutch Civil Code (art 362.8).

Accounting principles

Unless stated otherwise below, the accounting principles applied for the Company accounts are similar to those used in the IFRS Consolidated Financial Statements (refer to Note 2.1 to the Consolidated Financial Statements). The consolidated accounts of companies publicly listed in the European Union must be prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB and adopted by the European Commission.

As the Company mainly exploits Russian grocery stores in three formats (proximity stores, supermarket and hypermarket stores), the functional currency of the Company is the Russian Rouble as this is the currency of its primarily business environment and reflects the economic reality. Unless stated otherwise all amounts are in millions of Russian Rouble (“RUB”).

Investments in group companies

Investments in group companies are entities (including intermediate subsidiaries and special purpose entities) over which the Company has control, because the Company (i) has power to direct relevant activities of the investees that significantly affect their returns, (ii) has exposure, or rights, to variable returns from its involvement with the investees, and (iii) has the ability to use its power over the investees to affect the amount of investor’s returns. Group companies are recognised from the date on which control is transferred to the Company or its intermediate holding entities. They are derecognised from the date that control ceases.

The Company applies the acquisition method to account for acquiring group companies, consistent with the approach identified in the consolidated financial statements. Investments in group companies are presented in accordance with the net asset value method. When an acquisition of an investment in a group company is achieved in stages, any previously held equity interest is remeasured to fair value on the date of acquisition. The measurement against the book value is accounted for in the statement of profit and loss.

When the Company ceases to have control over a group company, any retained interest is remeasured to its fair value, with the change in carrying amount to be accounted for in the statement of profit or loss. When parts of investments in group companies are bought or sold, and such transaction does not result in the loss of control, the difference between the consideration paid or received and the carrying amount of the net assets acquired or sold, is directly recognised in equity.

When the Company’s share of losses in an investment in a group company equals or exceeds its interest in the investment (including separately presented goodwill or any other unsecured non-current receivables being part of the net investment), the Company does not recognise any further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the investment. In such case the Company will recognise a provision.

Amounts due from group companies

Amounts due from group companies are stated initially at fair value and subsequently at amortised cost. Amortised cost is determined using the effective interest rate.

To avoid the difference between equity in the Consolidated and the Company’s Financial Statements any expected credit losses on intercompany receivables recognised in the Company’s statement of Profit and Loss are eliminated (reversed) through the respective intercompany receivable account.

Financial guarantee

On subsequent measurement financial guarantees contacts are measured at the “higher of”: The expected credit losses allowance as defined above, and the amount initially recognised (i.e. fair value) less any cumulative amount of income amortisation recognised

For intercompany financial guarantees issued by the Company, the expected default is not significant and therefore the financial guarantees are not recognised.

Shareholders’ equity

Issued and paid up share capital, which is denominated in Euro, is restated into Russian Rouble (“RUB”) at the official exchange rate of the Central Bank of the Russian Federation as at reporting date in accordance with section 373 sub 5 of book 2 of the Dutch Civil Code. The difference is settled in the legal reserve.

Financial fixed assets

38 .

31 December 2019 31 December 2018
A. Movements in the interests in group companies have been as follows
Opening balance 203,434 171,312
Effect of adoption of new accounting standards (Note 4) (43,371)
Balance as at 1 January 2019 Restated 160,063 171,312
Acquisitions/capital contribution 8 16
Profit from group companies for the year 23,410 32,106
Closing balance 183,481 203,434

The list of significant group companies was disclosed in the consolidated financial statements (refer to Note 6 of the consolidated financial statements).

31 December 2019 31 December 2018
b. Movements in the loans to group companies were as follows
Opening balance 7,433 7,321
Additions 35,079 77
Settlement/repayment (20,903)
Foreign exchange differences (23) 35
Closing balance 21,586 7,433
Non-current financial assets 205,067 210,867
Total financial fixed assets 205,067 210,867
31 December 2019 Loan
currency
Carrying
value
Interest
rate, % p.a
Maturity
date
Borrowing group company
Agrotorg LLC RUB 19,398 9% December 2024
Kelwin Ltd RUB 1,252 10.5% December 2022
GSWL Finance Ltd RUB 662 11% December 2021
Perekrestok Holdings B.V USD 169 11% December 2022
ALPEGRU RETAIL PROPERTIES Ltd RUB 66 11% December 2022
SPEAK GLOBAL Ltd RUB 29 0% December 2022
Perekrestok Holdings B.V. EUR 9 11% December 2022
Retail Express Ltd RUB 1 11% December 2022
Total loans to group companies 21,586
31 December 2019 Loan
currency
Carrying
value
Interest
rate, % p.a
Maturity
date
Borrowing group company
GSWL Finance Ltd RUB 4,601 11% December 2022
GSWL Finance Ltd RUB 2,612 Mosprime 1m
+ 3.6%
December 2021
PEREKRESTOK HOLDINGS Ltd USD 190 11% December 2022
X5 Capital S.A.R.L EUR 29 4.5% December 2023
X5 Capital S.A.R.L EUR 1 4% December 2022
Total loans to group companies 7,433

The total amount of the loans provided to group companies was RUB 21,586 (2018: RUB 7,433) and it approximated the fair value. The loans have not been secured.

Shareholders' equity

39 .

Share capital Share
premium
Legal
reserve
Retained
earnings
Profit
for the
year
Share-based
payment
(equity)
Total
Balance as at 1 January 2018 4,675 46,212 (1,700) 77,744 31,394 117 158,442
Share-based payment compensation (Note 29) 72 72
Transfer 827 30,567 (31,394)
Currency translation 720 (720)
Transfer of vested equity rights (20) (71) (91)
Profit for the year 28,642 28,642
Dividends (21,590) (21,590)
Balance as at 1 January 2019 5,395 46,192 (1,593) 86,721 28,642 118 165,475
Effect of adoption of new accounting standards (Note 4) (43,371) (43,371)
Balance as at 1 January 2019 Restated 5,395 46,192 (1,593) 43,350 28,642 118 122,104
Acquisition of treasury shares (75) (75)
Share-based payment compensation (Note 29) 63 63
Transfer 7,678 20,964 (28,642)
Currency translation (687) 687
Transfer of vested and waived equity rights (Note 29) 33 687 (76) (43)
Result for the year 19,507 19,507
Dividends (25,000) (25,000)
Balance as at 31 December 2019 4,708 46,150 6,772 39,314 19,507 105 116,556
Share capital issued

As at 31 December 2019 the Company had 190,000,000 authorised ordinary shares (31 December 2018: 190,000,000) of which 67,890,054 ordinary shares were outstanding (31 December 2018: 67,890,099) and 3,164 ordinary shares held as treasury stock (31 December 2018: 3,119). The nominal par value of each ordinary share is EUR 1.

Legal reserve as at 31 December 2019 included translation reserve of RUB (2,250) (2018: RUB (2,937)) and reserve for internally developed software of RUB 9,022 (2018: RUB 1,344).

Statutory profit appropriation

Dividends approved for distribution at the General Meeting in May 2019 have been paid in the amount of RUB 25,000 during the year ended 31 December 2019 (RUB 368.23 per share).

The Supervisory Board proposed to the General Meeting to distribute in 2020 current year profit in the amount of RUB 30,000 (441.89 RUB per ordinary share) to shareholders.

Loans from group companies

40 .

Loan
currency
31 December
2019
Interest
rate, % p.a.
Final
maturity date
Trade House PEREKRIOSTOK JSC RUB 1,150 6.5% December 2020
Trade House PEREKRIOSTOK JSC EUR 1,347 5% December 2020
Trade House PEREKRIOSTOK JSC USD 1,209 7% December 2020
X5 FINANSE LLC RUB 3,784 7.5% December 2022
Total 7,490
Loan
currency
31 December
2018
Interest
rate, % p.a.
Final
maturity date
Trade House PEREKRIOSTOK JSC RUB 16,570 10% December 2020
Trade House PEREKRIOSTOK JSC USD 1,515 10% December 2020
Trade House PEREKRIOSTOK JSC EUR 788 10% December 2020
Total 18,873

The loan payable to Trade House PEREKRIOSTOK JSC denominated in RUB/USD/EUR. RUB facility amounted to 1,150 (2018: RUB 16,570), USD 19.5 million (2018: USD 21.8 million) and EUR 19.4 million (2018: EUR 9.9 million).

Bank loan

41 .

31 December 2019 31 December 2018
Balance as at 1 January
Opening balance 21,572
Proceeds from the bank loan 24,938 21,568
Amortisation of transaction costs 21 4
Closing balance 46,531 21,572

In May X5 Retail Group N.V. made several loan drawdowns in the total amount of RUB 24,938 with the maturity in July 2022.

Share-based payments

42 .

X5 Retail Group N.V. operates equity settled share based compensation plan in the form of its Restricted Stock Unit Plan.

The Restricted Stock Unit Plan consists of performance based awards and awards subject to the employment condition only. For employees of the Company an expense is recorded in the profit and loss account.

The receivable or expense is accounted for at the fair value determined in accordance with the policy on share-based payments as included in the consolidated financial statements, including the related liability for cash settled plans or as equity increase for equity settled plans (Note 29).

The following is included in the entity’s accounts for the Restricted Stock Unit Plan:

2019 2018
Equity share-based payment reserve as at 31 December 105 118
Expenses for the year ended 31 December 63 72

General and administrative expenses

43 .

2019 2018
Other expenses 570 343
Audit expenses 22 16
RSU 63 72
Total 655 431

In accordance with the Dutch legislation article 2:382a the total audit fees related to the accounting organisation Ernst & Young Accountants LLP amounted to RUB 22 (2018: RUB 16).

Income tax expense

44 .

2019 2018
Current income tax charge
Deferred income tax charge 1,579 1,294
Income tax charge for the year 1,579 1,294

Theoretical and effective tax rates are reconciled as follows:

2019 2018
Loss before taxation (2,324) (2,170)
Theoretical tax at the effective statutory rate (581) (543)
Tax effect of items which are not deductible or assessable for taxation purposes
Unrecognised tax loss carry forwards for the year 564 526
Change in deferred tax liability associated with investments in subsidiaries 1,579 1,294
Other non-deductible expense 17 17
Income tax charge for the year 1,579 1,294

No deferred tax asset has been recognised due to uncertainty of future taxable income to offset the current tax losses.

Deferred income tax

Deferred tax liabilities and the deferred tax charge in the company statement of profit or loss were attributable to the following items for the year ended 31 December 2019:

31 December
2018
Credited/(debited)
to profit and loss
31 December
2019
Tax effects of taxable temporary differences
Investments into subsidiary (2,452) (1,579) (4,031)
Gross deferred tax liabilities (2,452) (1,579) (4,031)
Recognised deferred tax liabilities (2,452) (1,579) (4,031)

Deferred tax liabilities and the deferred tax charge in the company statement of profit or loss were attributable to the following items for the year ended 31 December 2018:

31 December
2017
Credited/(debited)
to profit and loss
31 December
2018
Tax effects of taxable temporary differences
Investments into subsidiary (1,158) (1,294) (2,452)
Gross deferred tax liabilities (1,158) (1,294) (2,452)
Recognised deferred tax liabilities (1,158) (1,294) (2,452)

The Company estimates that part of temporary difference related to investments in subsidiaries will be reversed in the foreseeable future and therefore accrued related deferred tax liability.

The Company estimated temporary differences related to unrecognised potential deferred tax assets in respect of unused tax loss carry forwards of RUB 4,880 (2018: RUB 5,280) and unused tax credits of RUB 2,004 (2018 RUB: 0).

At 31 December 2019 temporary differences related to unrecognised potential deferred tax assets in respect of unused tax loss carry forwards in the amount of 4,880 were available for carry forward for a period not less than three years, temporary differences related to unrecognised potential deferred tax assets in respect of unused tax credits in the amount of 2,004 have no time restrictions for carry forward.

Staff numbers and employee expenses

45 .

The number of persons having a contract with the Company is seven, one of them has a services contract, and six of them have a contract of employment. One of them was posted outside of the Netherlands. For the remuneration of past and present members of the Management Board, please refer to Note 28 in the consolidated financial statements, which are deemed incorporated and repeated herein by reference. Incurred wages, salaries and related social security charges in relation to the other five employees comprise RUB 16 (2018: RUB 12) (included former employee).

Contingent rights and liabilities

46 .

Guarantees are irrevocable assurances that the Company will make payments in the event that another party cannot meet its obligations. The Company had the following guarantees issued under obligations of its group companies:

31 December 2019 31 December 2018
Irrevocable offer to holders of X5 FINANSE LLC bonds 64,920 51,424
Irrevocable offer to holders of X5 Finance B.V. Eurobonds 20,375 520,375
Suretyship for Trade House PEREKRIOSTOK JSC 22,458
Suretyship for Agrotorg LLC 25,054 25,054
Total 110,349 119,311

The guarantees issued mature as follows:

31 December 2019 31 December 2018
Not later than 1 year 42,840 44,690
Later than 1 year and no later than 5 years 67,509 74,621
Total 110,349 119,311

Subsequent events for the company

48 .

There were no significant events after the reporting date.

Amsterdam, 18 March 2020
Management Board: Supervisory Board:
Frank Lhoëst Stephan DuCharme
Igor Shekhterman Mikhail Fridman
Quinten Peer Andrei Elinson
Geoff King
Peter Demchenkov
Michael Kuchment
Karl-Heinz Holland
Nadia Shouraboura
Alexander Torbakhov
Other information
Auditor’s report

The auditor’s report is available in this report.

Statutory profit appropriation

In Article 30 of the Company’s Articles of Association the following has been stated concerning the appropriation of result:

On proposal of the Supervisory Board, the General Meeting shall determine which part of the profits earned in a financial year shall be added to the reserves and the allocation of the remaining profits.

The Supervisory Board proposed to the General Meeting to distribute in 2020 current year profit and part of prior year retained earnings in the amount of RUB 30,000 million (441.89 RUB per ordinary share) to shareholders.

Subsequent events

For subsequent events, please refer to Notes 36 and 48 of the financial statements.

Independent
auditor’s report

Report on the audit of the financial statements 2019
included in the annual report

Our opinion

We have audited the financial statements 2019 of X5 Retail Group N.V., based in Amsterdam, the Netherlands. The financial statements include the consolidated financial statements and the company financial statements.

In our opinion:

  • The accompanying consolidated financial statements give a true and fair view of the financial position of X5 Retail Group N.V. as at 31 December 2019, and of its result and its cash flows for 2019 in accordance with International Financial Reporting Standards as adopted by the European Union (EU-IFRS) and with Part 9 of Book 2 of the Dutch Civil Code.
  • The accompanying company financial statements give a true and fair view of the financial position of X5 Retail Group N.V. as at 31 December 2019, and of its result for 2019 in accordance with Part 9 of Book 2 of the Dutch Civil Code.

The consolidated financial statements comprise:

  • The consolidated statement of financial position as at 31 December 2019;
  • The following statements for 2019: the consolidated statement of profit or loss, the consolidated statement of comprehensive income, the consolidated statement of cash flows, and the consolidated statement of changes in equity;
  • The notes comprising a summary of the significant accounting policies and other explanatory information

The company financial statements comprise:

  • The company statement of financial position as at 31 December 2019;
  • The company statement of profit or loss for 2019;
  • The notes comprising a summary of the accounting policies and other explanatory information.

Basis for our opinion

We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. Our responsibilities under those standards are further described in the Our responsibilities for the audit of the financial statements section of our report.

We are independent of X5 Retail Group N.V. in accordance with the EU Regulation on specific requirements regarding statutory audit of public-interest entities, the “Wet toezicht accountantsorganisaties” (Wta, Audit firms supervision act), the “Verordening inzake de onafhankelijkheid van accountants bij assurance-opdrachten” (ViO, Code of Ethics for Professional Accountants, a regulation with respect to independence) and other relevant independence regulations in the Netherlands. Furthermore we have complied with the “Verordening gedrags- en beroepsregels accountants” (VGBA, Dutch Code of Ethics).

We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Our audit approach

X5 Retail Group N.V. is at the head of a group of subsidiaries operating food retail stores in Russia. Taking into account the structure of the group, we have determined the nature, timing and extent of the audit procedures for the subsidiaries as described in the section ‘Scope of the group audit’. In our audit we have paid specific attention to various topics based on the activities of the group, significant developments during the year and our risk assessment as described in the section ‘Our key audit matters’.

As part of designing our audit, we determined materiality and identified and assessed the risks of material misstatement of the financial statements, whether due to fraud, non-compliance with laws and regulations or error in order to design audit procedures responsive to those risks, and to obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

Materiality

Materiality

RUB 3.1 billion (2018: RUB 2.7 billion)

Benchmark
applied

2.5% of EBITDA (under IAS 17)

Explanation

Based on our professional judgment, we consider an earnings-based measure as the most appropriate basis to determine materiality. On the basis of our analysis of stakeholders’ needs and main KPIs set for the Management Board, we believe that EBITDA, adjusted for IFRS 16 impact, is an important benchmark for the financial performance of the Group. The materiality and applied benchmark are in line with the 2018 audit.

We have also taken into account misstatements and/or possible misstatements that in our opinion are material for the users of the financial statements for qualitative reasons.

We agreed with the Supervisory Board that misstatements in excess of RUB 150 million, which are identified during the audit, would be reported to them, as well as smaller misstatements that in our view must be reported on qualitative grounds.

Our focus on fraud and non-compliance with laws and regulations
Our responsibility

Although we are not responsible for preventing fraud or non-compliance and cannot be expected to detect non-compliance with all laws and regulations, it is our responsibility to obtain reasonable assurance that the financial statements, taken as a whole, are free from material misstatement, whether caused by fraud or error. Non-compliance with laws and regulations may result in fines, litigation or other consequences for the company that may have a material effect on the financial statements.

Our audit response related to fraud risks

In order to identify and assess the risks of material misstatements of the financial statements due to fraud, we obtained an understanding of the entity and its environment, including the entity’s internal control relevant to the audit and in order to design audit procedures that are appropriate in the circumstances. As in all of our audits, we addressed the risk of management override of internal control. We do not audit internal control per se for the purpose of expressing an opinion on the effectiveness of the company’s internal control.

We considered available information and made enquiries of relevant executives, directors (including internal audit, legal, tax, security and risk management) and the Supervisory Board. As part of our process of identifying fraud risks, we evaluated fraud risk factors with respect to financial reporting fraud, misappropriation of assets and bribery and corruption in close co-operation with our forensic and legal specialists.

We evaluated the design and the implementation and, where considered appropriate, tested the operating effectiveness, of internal controls that mitigate fraud risks. In addition, we performed procedures to evaluate key accounting estimates for management bias in particular relating to important judgment areas and significant accounting estimates as disclosed in Note 3 to the financial statements. We have also used data analysis to identify and address high-risk journal entries.

We incorporated elements of unpredictability in our audit. We considered the outcome of our other audit procedures and evaluated whether any findings were indicative of fraud or non-compliance. If so, we reevaluate our assessment of fraud risk and its resulting impact on our audit procedures.

Our audit response related to risks of non-compliance with laws and regulations

We assessed factors related to the risks of non-compliance with laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general industry experience, through discussions with the management board, reading minutes, inspection of internal audit and compliance reports, inspection of legal claims reports and performing substantive tests of details of classes of transactions, account balances or disclosures.

We also inspected lawyers’ letters and correspondence with regulatory authorities and remained alert to any indication of (suspected) non-compliance throughout the audit. Finally we obtained written representations from the management board that all known instances of non-compliance with laws and regulations have been disclosed to us.

Going concern

In order to identify and assess the risks of going concern and to conclude on the on the appropriateness of management’s use of the going concern basis of accounting, we consider based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion.

Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause a company to cease to continue as a going concern.

Scope of the group audit

X5 Retail Group N.V. is at the head of a group of subsidiaries operating food retail stores in Russia. The financial information of this group is included in the consolidated financial statements of the Group. The Group’s accounting function is centralized in Moscow and Nizhny Novgorod in the Russian Federation and the Group is primarily managed as a single operating unit with multiple operating segments.

Because we are ultimately responsible for the opinion, we are also responsible for directing, supervising and performing the group audit. In this respect we have determined the nature and extent of the audit procedures to be carried out for group entities. We have used the work carried out by EY Moscow to perform full-scope audit procedures to obtain sufficient coverage for financial statement line items from a consolidated financial statement perspective. We executed a program of regular communication that has been designed to ensure that the audit progress and findings were discussed between us and the EY Moscow audit team. We have visited EY Moscow during planning and execution phases, as well as held meetings with the Group’s Management Board, finance and reporting, risk management, internal audit and legal representatives.

Due to the centralized accounting function and our corresponding audit approach, these procedures are performed on a consolidated level with the coverage that represents 100% of the group’s total assets, profit and gross revenues.

By performing the procedures mentioned above, we have been able to obtain sufficient and appropriate audit evidence about the group’s financial information to provide an opinion about the consolidated financial statements.

Teaming and use of specialists

We ensured that our team and the EY Moscow team included the appropriate skills and competences which are needed for the audit of a listed client in the food retail industry. We included specialists in our audit team in the areas of IT audit, forensics, tax, real estate and business valuations, corporate governance (including remuneration) and IFRS reporting.

General audit procedures

Our audit further included among others:

  • Performing audit procedures responsive to the risks identified, and obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion
  • Evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management
  • Evaluating the overall presentation, structure and content of the financial statements, including the disclosures
  • Evaluating whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation
Our key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements. We have communicated the key audit matters to the Supervisory Board. The key audit matters are not a comprehensive reflection of all matters discussed.

The key audit matter, Long-term incentive program (“LTI”), which was included in our last year’s auditor’s report, is not considered a key audit matter for this year as the current LTI was initiated in 2018, which required significant judgment. The accounting for the LTI program in 2019 required less judgment.

A new key audit matter this year relates to the recognition of right-of-use assets and lease liabilities as part of the first-year adoption of IFRS 16 (‘Leases’). We consider this a key audit matter due to the magnitude of the amounts involved, the implementation process required to identify and process all relevant data associated with leases and management’s judgment applied in estimating matters, such as discount rates and lease terms. The effect of IFRS 16 transition on disclosure in the financial statements was included as a key audit matter in the last year’s auditor’s report.

These matters were addressed in the context of our audit of the financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Impairment of goodwill

(see note 13 to the financial statements)

Risk

As a result of past acquisitions, the Group carries capitalized goodwill with a value of RUB 102 billion as at 31 December 2019. In accordance with the requirements of IAS 36 Impairment of Assets, management performs an impairment assessment of the capitalized goodwill on an annual basis.

The Group identifies separate operating segments for each of its retail formats. The goodwill impairment assessment is performed at the level of operating segments.

The impairment assessment includes the assessment of the recoverable amount based on expected cash flows. These cash flows are based on current budgets and forecasts approved by the Management Board and are extrapolated for subsequent years based on consumer price index.

Key assumptions used are revenue growth, projected EBITDA margin and the discount rate.

We consider this a key audit matter as the goodwill amount is significant, the assessment requires significant judgment in relation to the assumptions used in the model, and there is complexity in the valuation methodology used to determine whether the carrying amount of goodwill is recoverable.

Our audit
approach

We obtained an in-depth understanding of the Group’s methodology used for performing the goodwill impairment test and ensured it is in accordance with EU-IFRS. We challenged management’s key assumptions used in the goodwill impairment test and compared the assumptions used with industry trends and forecasts developed by independent analysts.

Regarding the key assumptions used and methodology applied, we involved internal valuation experts, who compared assumptions used in the model with observable market data. They also verified the methodology applied is compliant with EU-IFRS. We also verified that the Group’s restructuring of its Karusel retail format has been appropriately taken into account in the goodwill impairment test.

We tested accuracy of prior year estimates and assumptions used by management to identify potential bias.

We tested mathematical accuracy of the goodwill impairment test, reconciled internal inputs in the model with audited accounting records and ensured consistency of data used for goodwill impairment testing with other information obtained during the audit.

We considered the adequacy of the disclosures to the financial statements.

Key
observations

We consider management‘s key assumptions to be within a reasonable range of our own expectations and goodwill to be appropriately accounted. Additionally, we consider the related disclosures in note 13 to the financial statements to be adequate.

Impairment of stores and other non-current assets

(see notes 10, 11, 12, and 14 to the financial statements)

Risk

The Group operates more than 16,000 retail stores in Russia. The associated valuation of stores and other non-current assets, such as right-of-use assets, property, equipment and intangible assets, excluding goodwill, approximated RUB 773 billion as at 31 December 2019 and is considered a key audit matter due to the magnitude of the carrying value as well as the judgment involved in assessing the recoverability of the invested amounts.

Management assesses annually the existence of triggering events for impairment of assets or reversals thereof. For the impairment assessment that is performed in accordance with Group policies and procedures, management first determines the value in use for each store and compares this to the carrying value. Where the carrying value is higher than the value in use, the fair value less cost of disposal is determined.

The judgment involved focuses predominantly on the discount rate and future store performance, which is, among others, dependent on the expected revenue and the local competition. The expected revenue is determined based on strategic growth plan prepared with reference to macroeconomic forecasts. Management assesses the impairment and impairment reversal on an annual basis using an internal calculation model.

Judgment is also involved in determination of the fair value of property undertaken on the basis of internal and external property valuation reports.

Our audit
approach

We assessed appropriateness of the Group’s policies and procedures to identify triggering events for (reversal of) impairment of stores and other non-current assets.

We challenged management’s key assumptions used in the cash flow forecast such as revenue growth and compared the assumptions used with internal forecasts, external data and historical performance. We also verified that the Group’s restructuring of its Karusel retail format has been taken into account in managements key assumptions and forecasts.

We also assessed accuracy of management’s forecasts used in prior year to identify potential bias.

We involved our business valuation experts to evaluate the methodology, inputs and assumptions used in the model for consistency with general practice and market observable data.

The audit of the model also included verification that the impairment methodology is consistently applied and that the model is mathematically accurate.

We involved our real estate valuation experts to assess the (market) property valuations performed by the Group. We also assessed objectivity and competency of external appraisers engaged by the Group.

We considered the adequacy of the disclosures to the financial statements.

Key
observations

We consider management’s key assumptions to be within a reasonable range of our own expectations and stores and other non-current assets to be appropriately accounted. Additionally, we find the related disclosures in notes 10, 11, 12 and 14 to the financial statements to be adequate.

Recognition of vendor allowances

(see note 2.24 to the financial statements)

Risk

The Group receives various types of vendor allowances such as rebates and service fees. Rebates largely depend on volumes of products purchased and service fees are received for promotional activities that the Group undertakes with respect to certain products.

These allowances represent a significant component of cost of sales and are recognized as a reduction of the inventory cost value. While the majority of the allowances are settled during the financial year, a significant amount remains outstanding at each year-end and is recognized as part of trade receivables.

We consider this a key audit matter because the arrangements in respect of these allowances are individually different and can be complex to quantify. Due to this, recognition of vendor allowances income and related receivables requires, to some extent, judgment from management — for example, concerning delivery of the service and evidence thereof. The allocation of the allowances to inventory cost value also has an element of judgment.

The Group evaluates all required disclosures for vendor allowances to determine that they are appropriately included in the financial statements.

Our audit
approach

Our procedures included testing of internal controls related to occurrence, completeness and measurement of the allowances recorded in the accounting system and covered both IT application and manual controls, including controls related to periodic reconciliations with vendors.

We selected a sample of vendors and obtained direct confirmations from vendors of their settlements with the Group as of 30 September 2019. We performed roll-forward procedures over vendor rebates including substantive analytical procedures and test of details over a sample of vendor rebates transactions and settlements.

We also tested on a sample basis documents supporting journal entries regarding the recognition of vendor rebates and services fees. In addition, we performed a margin analysis and reviewed subsequent collections on prior period vendor allowance receivables and subsequent collections of the vendor allowances receivable in the current year.

We verified that the accounting policy for the reduction of inventory cost related to vendor allowances is appropriate and has been applied correctly.

Key
observations

We did not identify material exceptions and we found the management’s recognition of vendor allowances to be reasonable. Additionally, we found the related disclosures in note 2.24 to the financial statements to be adequate.

IFRS 16 implementation

(see notes 11, 26, and 31 to the financial statements)

Risk

IFRS 16 “Leases”, became effective for annual reporting periods beginning on or after 1 January 2019. The application of this new standard has a material effect on components of the financial statements and the presentation of the net assets, financial position and results of operations of the Group. The Group applied the ‘modified retrospective approach’ whereby the comparative figures 2018 were not restated.

We consider this a key audit matter because of the magnitude of the amounts involved, management’s judgment required in estimating matters such as discount rates (incremental borrowing rates), lease terms (including extension and renewal options) and the separation of lease and non-lease elements.

Our audit
approach

We have reviewed accounting position papers prepared by the Group to determine whether the accounting is in accordance with IFRS 16.

We have involved our IFRS technical specialists to assist us in reviewing and challenging management’s key assumptions and judgments including those used in determination of the lease term and discount rates.

Our procedures included evaluating the design and operating effectiveness of management’s controls around the completeness and accuracy of the contractual lease agreements recognized in the lease accounting system, as well as recognition, processing and reporting of lease contracts under IFRS 16. Our testing procedures covered both IT application and manual controls.

We selected samples of lease contracts and recalculated their right-of-use assets and lease liabilities calculated by the system for each material type lease contract.

We also tested the IFRS 16 lease contracts database for completeness through reconciliation of this database to the list of open(ed) stores and warehouses and analysis of lease charges subsequent to 31 December 2019.

We also performed substantive analytical procedures over expenses related to right-of-use assets and lease liabilities during the year.

We considered the adequacy of the disclosures to the financial statements under IFRS 16.

Key
observations

We did not identify material exceptions and we found the Group’s recognition of right-of-use assets and lease liabilities to be reasonable. Additionally, we found the related disclosures in notes 11, 26 and 31 to the financial statements to be adequate.

Report on other information included in the annual report

In addition to the financial statements and our auditor’s report thereon, the annual report contains other information that consists of:

  • The Chairman’s statement;
  • The Management Report;
  • The Supervisory Board Report;
  • The Remuneration Report;
  • Other information as required by Part 9 of Book 2 of the Dutch Civil Code.

Based on the following procedures performed, we conclude that the other information:

  • Is consistent with the financial statements and does not contain material misstatements
  • Contains the information as required by Part 9 of Book 2 and Section 2:135b of the Dutch Civil Code

We have read the other information. Based on our knowledge and understanding obtained through our audit of the financial statements or otherwise, we have considered whether the other information contains material misstatements. By performing these procedures, we comply with the requirements of Part 9 of Book 2 and Section 2:135b sub-Section 7 of the Dutch Civil Code and the Dutch Standard 720. The scope of the procedures performed is substantially less than the scope of those performed in our audit of the financial statements.

The Management Board is responsible for the preparation of the other information, including the Management Report in accordance with Part 9 of Book 2 of the Dutch Civil Code, other information required by Part 9 of Book 2 of the Dutch Civil Code and the remuneration report in accordance with Section 2:135b of the Dutch Civil Code.

Description of responsibilities for the financial statements

Responsibilities of the Management Board and the
Supervisory Board for the financial statements

The Management Board is responsible for the preparation and fair presentation of the financial statements in accordance with EU-IFRS and Part 9 of Book 2 of the Dutch Civil Code. Furthermore, the Management Board is responsible for such internal control as the Management Board determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error.

As part of the preparation of the financial statements, the Management Board is responsible for assessing the company’s ability to continue as a going concern. Based on the financial reporting frameworks mentioned, the Management Board should prepare the financial statements using the going concern basis of accounting unless the Management Board either intends to liquidate the company or to cease operations, or has no realistic alternative but to do so. The Management Board should disclose events and circumstances that may cast significant doubt on the company’s ability to continue as a going concern in the financial statements.

The Supervisory Board is responsible for overseeing the company’s financial reporting process.

Our responsibilities for the audit of the financial statements

Our objective is to plan and perform the audit engagement in a manner that allows us to obtain sufficient and appropriate audit evidence for our opinion.

Our audit has been performed with a high, but not absolute, level of assurance, which means we may not detect all material errors and fraud during our audit.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. The materiality affects the nature, timing and extent of our audit procedures and the evaluation of the effect of identified misstatements on our opinion.

We have exercised professional judgment and have maintained professional skepticism throughout the audit, in accordance with Dutch Standards on Auditing, ethical requirements and independence requirements. The Our audit approach section above includes an informative summary of our responsibilities and the work performed as the basis for our opinion.

Communication

We communicate with the Audit and Risk Committee, the Supervisory Board and the Management Board and regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant findings in internal control that we identify during our audit.

In this respect we also submit an additional report to the Audit and Risk Committee in accordance with Article 11 of the EU Regulation on specific requirements regarding statutory audit of public-interest entities. The information included in this additional report is consistent with our audit opinion in this auditor’s report.

We provide the Audit and Risk Committee, the Supervisory Board and the Management Board with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Audit and Risk Committee, the Supervisory Board and the Management Board we determine the key audit matters: those matters that were of most significance in the audit of the financial statements. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, not communicating the matter is in the public interest.

Amsterdam, 18 March 2020

Ernst & Young Accountants LLP

Signed by

G.A. Arnold

The Group made a transition to IFRS 16 using the modified retrospective approach under which the comparative information was not restated (refer to Note 4).
Subject to EU endorsement.
This category also includes machinery and equipment, refrigerating equipment, ­vehicles and other items of property, plant and equipment not yet available for use.
In case of the Group’s Bonds — the next put-option date.
The table reflects actual base salary amounts, including adjustments based on number of days spent on vacation, in accordance with Russian labour law. Quinten Peer was appointed as member of the Management Board effective 10 May 2019. His 2019 remuneration reported as member of the Management Board reflects a partial year.
Short-term incentives are based on results achieved in 2019 and payable in 2020. The short-term incentive levels are based on achievement of individual and group targets, resulting in payouts of 76% of base salary for Mr. Shekhterman (31 December 2018: 103%), 60% of base salary for Mr. Lhoëst (31 December 2018: 58%) and 60.6% of base salary for Mr. Peer.
For Igor Shekhterman the expense recognised in 2019 for the long-term incentive award is composed of two elements: (i) the second payout under the second stage of the 2015–2018 LTI programme and (ii) an accrual based on the probability of achieving the targets under the 2018–2020 LTI programme.
Since 2013 members of the Management Board no longer participate in the Company’s Restricted Stock Unit Plan. The share based compensation reflects the accrued amounts related to previous awards under the Restricted Stock Unit Plan (see table below) and includes benefits resulting from the reduction in the value of the cash settled share-based payment compensation.
For the year ended 31 December 2019 statutory pension contributions amounted to RUB 21 (2018: RUB 29).
Vesting date is 19 May of each respective year of vesting. If 19 May falls in a weekend, vesting date is the immediately following business day (in 2018: 21 May).
Number of GDRs held during lock-up period equal the number of vested RSUs minus GDRs sold to cover taxes, if any.
B ase salary remuneration reflects the increase in salary for some key management personnel, as well as fluctuation in base salary due to the number of days spent on vacation, in accordance with Russian labor law.
Short-term incentive for performance in the year 2019 (2018) paid in cash in 2020 (2019).
The expense recognised in 2019 for the long-term incentive award is composed of two elements: (i) the second payout under the second stage of the 2015–2018 LTI programme and (ii) an accrual based on the probability of achieving the targets under the 2018–2020 LTI programme.
For other key management personnel the severance payment is structured as a non-competition reward payable in two equal installments payable after the expiry of the period of three months from the Termination Date and after the expiry of the period of six months from the Termination Date following contract termination, subject to compliance with non-competition conditions. The non-competition period for other key management personnel is six months.
For the year ended 31 December 2019 statutory pension contributions amounted to RUB 80 (2018: RUB 45).
The annual membership allowance for independent Supervisory Board members is determined and paid in Euro, as follows: chairman EUR 250,000; members EUR 100,000; additional fee for vice-chair EUR 50,000; members chairing a committee EUR 100,000 and committee members EUR 16,000 per committee. Mikhail Fridman and Andrei Elinson, in their role as representatives of CTF Holdings S.A., have waived any entitlement to Supervisory Board remuneration, whether in cash or restricted stock units.
Share-based compensation in the form of Restricted Stock Units (RSUs). The number of RSUs awarded in each given year is based on 100% of the board member’s fixed annual remuneration, divided by the average market value of a GDR on the relevant award date. RSU awards are subject to a three-year vesting period and a further two-year lock-in period. RSU awards to members of the Supervisory Board are not subject to performance criteria, and determined by the General Meeting of Shareholders. The share-based compensation reflects the accrued amounts related to the Restricted Stock Unit Plan and includes benefits resulting from the reduction in the value of the cash settled share-based payment compensation.
Alexander Torbakhov was appointed as member of the Supervisory Board on 10 May 2019.
Christian Couvreux and Pawel Musial stepped down from the Supervisory Board on, respectively, 10 May 2018 and 22 June 2018.
Vesting date is 19 May of each respective year of vesting. If 19 May falls in a weekend, ­vesting date is the immediately following business day (in 2018: 21 May, in 2019: 20 May).
Number of GDRs held during lock-up period equal the number of vested RSUs minus GDRs sold to cover taxes, if any.
2018 RSUs for Karl-Heinz Holland and Nadia Shouraboura were effectively awarded in 2019, as both were appointed as Supervisory Board member after the award date in 2018. The awards were based on a 6/12 pro rata factor.
For Alexander Torbakhov a pro rata factor of 11/12 was applied for the 2019 RSU award.
Profit before taxation on Russian operations is assessed based on the statutory rate of 20%.
Share capital translated at the year-end exchange rate EUR/RUB of 69.3406 (2018: 79.4605).
Profit before taxation on operations in Netherlands is assessed based on the statutory rate of 25%.