Organisation and principal business activities

Public Joint Stock Company “Mining and Metallurgical Company Norilsk Nickel” (the “Company” or “MMC Norilsk Nickel”) was incorporated in the Russian Federation on 4 July 1997. The principal activities of the Company and its subsidiaries (the “Group”) are exploration, extraction, refining of ore and nonmetallic minerals and sale of base and precious metals produced from ore. Further details regarding the nature of the business and structure of the Group are presented in note 33.

Major production facilities of the Group are located in Taimyr and Kola Peninsulas of the Russian Federation and in Finland. The registered office’s location is Russian Federation, Krasnoyarsk region, Dudinka, postal address: 2, Gvardeyskaya square, Norilsk, Russian Federation.

Basis of preparation

Statement of compliance

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”).

The entities of the Group maintain their accounting records in accordance with the laws, accounting and reporting regulations of the jurisdictions in which they are incorporated and registered. Accounting principles in certain jurisdictions may differ substantially from those generally accepted under IFRS. Financial statements of such entities have been adjusted to ensure that the consolidated financial statements are presented in accordance with IFRS.

The Group issues a separate set of IFRS consolidated financial statements to comply with the requirements of Russian Federal Law No 208-FZOn consolidated financial statements (“Law 208-FZ”)dated 27 July 2010.

Basis of measurement

The consolidated financial statements of the Group are prepared on the historical cost basis, except for:

• mark-to-market valuation of by-products, in accordance with IAS 2 Inventories;
• mark-to-market valuation of certain classes of financial instruments, in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

Reclassification

Для приведения в соответствие структуры выручки от реализации металлов с управлен

At 31 December 2015 management presented semi-products sales separately within metal sales in order to better align metal revenue structure with management accounts and reporting (refer to note 6). Information for the year ended 31 December 2014 has been reclassified to conform with the current period presentation.

Certain other items presented in the consolidated financial statements were also reclassified to conform with current year presentation.

Standards and interpretations effective in the current year

Adoption of an Interpretation and amendments to the existing Standards detailed below did not have significant impact on the accounting policies, financial position or performance of the Group:

• IFRS 2 Share-based Payment (amended);
• IFRS 3 Business Combinations (amended);
• IFRS 7 Financial Instruments: Disclosures (amended);
• IFRS 8 Operating Segments (amended);
• IFRS 9 Financial Instruments (amended);
• IFRS 13 Fair Value Measurement (amended);
• IAS 16 Property, Plant and Equipment (amended);
• IAS 19 Employee Benefits(amended);
• IAS 24 Related Party Disclosures (amended);
• IAS 38 Intangible Assets (amended);
• IAS 40 Investment Property (amended).

Standards and interpretations in issue but not yet effective

At the date of authorisation of these consolidated financial statements, the following Standards and Interpretations or amendments to them were in issue but not yet effective:

Management of the Group expects that all of the above standards and interpretations will be adopted in the Group’s consolidated financial statements for the respective periods. The impact of adoption of those standards and interpretations on the consolidated financial statements of future periods is currently being assessed by management.

Basis of consolidation

Subsidiaries

The consolidated financial statements incorporate financial statements of the Company and its subsidiaries, from the date that control effectively commenced until the date that control effectively ceased. Control is achieved where the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

Non-controlling interests in the net assets (excluding goodwill) of consolidated subsidiaries are identified separately from the Group’s equity therein. Non-controlling interests include interests at the date of the original business combination and non-controlling share of changes in net assets since the date of the combination. Total comprehensive income must be attributed to the interest of the Group and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Non-controlling interests may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognised amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis.

All intra-group balances, transactions and any unrealised profits or losses arising from intra-group transactions are eliminated in full on consolidation.

Changes in the Group’s ownership interest in a subsidiary that do not result in the Group losing control are accounted for within the equity.

When the Group loses control of a subsidiary it derecognises the assets and liabilities and related equity components of the former subsidiary. Any gain or loss is recognised in the consolidated income statement. Any investment retained in the former subsidiary is measured at its fair value at the date when control is lost.

Associates

An associate is an entity over which the Group exercises significant influence, but not control or joint control, through participation in financing and operating policy decisions, in which it normally owns between 20% and 50% of the voting equity. Associates are equity accounted for from the date significant influence commenced until the date that significant influence effectively ceased.

Investments in associates are carried at cost, including goodwill, as adjusted for the Group’s share of
post-acquisition changes in associate’s retained earnings and other movements in reserves. The carrying value of investments in associates is reviewed on a regular basis and if any impairment in value has occurred, it is written down in the period in which these circumstances are identified. The results of associates are equity accounted for based on their most recent financial statements.

Losses of associates are recorded in the consolidated financial statements until the investment in such associates is written down to nil value. Thereafter losses are only accounted for to the extent that the Group is committed to provide financial support to such associates.

Profits and losses resulting from transactions with associates are eliminated to the extent of the Group’s interest in the relevant associates. When significant influence over an associate is lost, any investment retained in the former associate is stated at fair value, with any consequential gain or loss recognised in the consolidated income statement.

Business combinations

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group at the date of acquisition in exchange for control of the acquiree.

Where an investment in a subsidiary or an associate is made, any excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the fair value of the identifiable assets acquired and the liabilities assumed at the acquisition date is recognised as goodwill. Goodwill in respect of subsidiaries is disclosed separately and goodwill relating to associates is included in the carrying value of the investment in associates. Goodwill is reviewed for impairment at least annually. If impairment has occurred, it is recognised in the consolidated income statement during the period in which the circumstances are identified and is not subsequently reversed.

If, after reassessment, the net amounts of the identifiable assets acquired and liabilities assumed at the acquisition date exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised in the consolidated income statement immediately as a bargain purchase gain.

Acquisition-related costs are generally recognised in the consolidated income statement as incurred.

When a business combination is achieved in stages, the Group’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date and the resulting gain or loss, is recognised in the consolidated income statement. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in comprehensive income are reclassified to the consolidated income statement where such treatment would be appropriate if that interest were disposed of.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (a maximum of twelve months from the date of acquisition), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognised at that date.

Assets classified as held for sale

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered primarily through a sale transaction rather than through continuing use. This condition is regarded as met only when sale is highly probable within one year from the date of classification and the asset or disposal group is available for immediate sale in its present condition and management has committed to the sale.

Non-current assets and disposal groups classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell.

Assets held for sale and related liabilities are presented in the consolidated statement of financial position separately from other assets and liabilities. Comparative information related to assets held for sale is not amended in the consolidated statement of financial position for the prior period.

Functional and presentation currency

The individual financial statements of each Group entity are presented in its functional currency.

The Russian Rouble (“RUB”) is the functional currency of the Company, all of its subsidiaries located in the Russian Federation and all foreign subsidiaries of the Group, except for the following subsidiaries operating with a significant degree of autonomy:

The presentation currency of the consolidated financial statements of the Group is US Dollar (“USD”). Using USD as a presentation currency is common practice for global mining companies. In addition, USD is a more relevant presentation currency for international users of the consolidated financial statements of the Group. The Group also issues consolidated financial statements to comply with Law 208-FZ,which use the Russian Rouble as the presentation currency (refer to note 1).

The translation into presentation currency is made as follows:

• all assets and liabilities, both monetary and non-monetary, are translated at closing exchange rates at the dates of each statement of financial position presented;
• income and expense items are translated at the average exchange rates for the period;
• all equity items are translated at the historical exchange rates;
• all resulting exchange differences are recognised as a separate component in other comprehensive income; and
• in the consolidated statement of cash flows, cash balances at beginning and end of each period presented are translated at exchange rates at the respective dates. All cash flows are translated at the average exchange rates for the periods presented, with the exception of borrowings, dividends and advances received, gains and losses from disposal of subsidiaries, which are transated using the prevailing exchange rates at the dates of transactions;
• resulting exchange differences are presented in the consolidated statement of cashflows as effects of foreign exchange differences on balances of cash and cash equivalents.

Foreign currency transactions

Transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the exchange rates prevailing at the date of transactions. All monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates prevailing at each reporting date. Non-monetary items carried at historical cost are translated at the exchange rates prevailing at the date of transactions. Non-monetary items carried at fair value are translated at the exchange rate prevailing at the date on which the most recent fair value was determined. Exchange differences arising from changes in exchange rates are recognised in the consolidated income statement.

Exchange rates used in the preparation of the consolidated financial statements were as follows:

Revenue recognition

Metal sales revenue

Revenue from metal sales is recognised when the significant risks and rewards of ownership are transferred to the buyer and represents invoiced value of all metal products shipped to customers, net of value added tax.

Revenue from contracts that are entered into and continue to meet the Group’s expected sale requirements designated for that purpose at their inception, and are expected to be settled by physical delivery, are recognised in the consolidated financial statements as and when they are delivered.

Certain contracts are provisionally priced so that price is not settled until a predetermined future date based on the market price at that time. Revenue from these transactions is initially recognised at the current market price. Provisionally priced metal sales are marked-to-market at each reporting date using the forward price for the period equivalent to that outlined in the contract. This mark-to-market adjustment is recorded in revenue.

Other revenue

Revenue from sale of goods, other than metals, is recognised when significant risks and rewards of ownership are transferred to the buyer in accordance with the shipping terms specified in the sales agreements.

Revenue from service contracts is recognised when the services are rendered and the outcome can be reliably measured.

Dividends and interest income

Dividends from investments are recognised when the Group’s right to receive payment has been established.

Interest income is accrued based on effective interest method.

Leases

Leases under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Assets subject to finance leases are capitalised as property, plant and equipment at the lower of fair value or present value of future minimum lease payments at the date of acquisition, with the related lease obligation recognised at the same value. Assets held under finance leases are depreciated over their estimated economic useful lives or over the term of the lease, if shorter. If there is reasonable certainty that the lessee will obtain ownership at the end of the lease term, the period of expected use is the useful life of the asset.

Finance lease payments are allocated using the effective interest rate method, between the lease finance cost, which is included in finance costs, and the capital repayment, which reduces the related lease obligation to the lessor.

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the consolidated income statement on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are expensed in the period in which they are incurred.

Finance costs

Finance costs mostly comprise interest expense on borrowings and unwinding of discount on decommissioning obligations.

Finance costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time when the assets are substantially ready for their intended use or sale.

Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

Government grants

Government grants are recognised when there is reasonable assurance that the grant will be received and all conditions and requirements attaching to the grant will be met. Government grants related to assets are deducted from the cost of these assets in arriving at their carrying value.

Employee benefits

Remuneration to employees in respect of services rendered during a reporting period is recognised as an expense in that period.

Defined contribution plans

The Group contributes to the following major defined contribution plans:

• Pension Fund of the Russian Federation;
• Mutual accumulated pension plan.

The only obligation of the Group with respect to these and other defined contribution plans is to make specified contributions in the period in which they arise. These contributions are recognised in the consolidated income statement when employees have rendered services entitling them to the contribution.

Share appreciation rights

At 31 December 2014 the Group terminated its share appreciation rights programme and settled substantially all of the outstanding obligations.

Income tax expense

Income tax expense represents the sum of the tax currently payable and deferred tax.

Income tax is recognised as an expense or income in the consolidated income statement, except when it relates to other items recognised directly in other comprehensive income, in which case the tax is also recognised directly in other comprehensive income. Where current or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.

Current tax

Current tax is based on taxable profit for the year. Taxable profit differs from profit for the year as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.

Deferred tax

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in computation of taxable profit. Deferred tax liabilities are recognised for all taxable temporary differences, and deferred tax assets are recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if a temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit nor accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries, joint ventures and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each statement of financial position date and adjusted to the extent that it is probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

The measurement of deferred tax liabilities and assets reflects the tax consequences of the manner in which the Group expects at the reporting date to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority. The Group offsets deferred tax assets and liabilities for the subsidiaries which entered into the tax consolidation group.

Property, plant and equipment and mining development costs

Mining assets

Mine development costs are capitalised and comprise expenditures directly related to:

• acquiring mining and exploration licences;
• developing new mining operations;
• estimating revised content of minerals in the existing ore bodies; and
• expanding capacity of a mine.

Mine development costs include interest capitalised during the construction period, when financed by borrowings.

Mine development costs are transferred to mining assets and start to be depreciated when a new mine reaches commercial production quantities.

Mining assets are recorded at cost less accumulated amortisation and impairment losses. Mining assets include cost of acquiring and developing mining properties, pre-production expenditure, mine infrastructure, plant and equipment that process extracted ore, mining and exploration licenses and present value of future decommissioning costs.

Depreciation of mining assets is charged from the date on which a new mine reaches commercial production quantities and is included in the cost of production. Mining assets are depreciated on a straight-line basis over the lesser of their economic useful lives or the life of mine, varying from 2 to 45 years.

Non-mining assets

Non-mining assets include metallurgical processing plants, buildings, infrastructure, machinery and equipment and other non-mining assets. Non-mining assets are stated at cost less accumulated depreciation and impairment losses.

Non-mining assets are depreciated on a straight-line basis over their economic useful lives.

Depreciation is calculated over the following economic useful lives:

• plant, buildings and infrastructure 5 — 50 years
• machinery and equipment 3 — 30 years
• other non-mining assets 2 — 20 years

Capital construction-in-progress

Capital construction-in-progress comprises costs directly related to construction of buildings, processing plant, infrastructure, machinery and equipment, it also includes amounts of irrevocable letters of credit opened for future fixed assets deliveries and secured with deposits placed in banks. Cost also includes finance charges capitalised during construction period where such costs are financed by borrowings. Depreciation of these assets commences when the assets are put into production.

Research and exploration expenditure

Research and exploration expenditure, including geophysical, topographical, geological and similar types of expenditure, is capitalised, if it is deemed that such expenditure will lead to an economically viable capital project, and begins to be amortised over the life of mine, when commercial viability of the project is proved. Otherwise it is expensed in the period in which it is incurred.

Research and exploration expenditure written-off before development and construction starts is not subsequently capitalised, even if a commercial discovery subsequently occurs.

Investment property

Investment property recognised at historical cost less accumulated depreciation. Investment property is depreciated on a straignt-line basis.

Intangible assets, excluding goodwill

Intangible assets are recorded at cost less accumulated amortisation and impairment losses. Intangible assets mainly include patents, licences, software and rights to use software and other intangible assets.

Amortisation of patents, licenses and software is charged on a straight-line basis over 1 — 10 years.

Impairment of tangible and intangible assets, excluding goodwill

At each reporting date, the Group analyses the triggers of impairment of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not practical to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the higher of fair value less cost to sell and value-in-use. In assessing value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or cash-generating unit. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in the consolidated income statement immediately.

Where an impairment loss subsequently reversed, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the original carrying amount that would have been determined had no impairment loss been recognised in prior periods. A reversal of an impairment loss is recognised in the consolidated income statement immediately.

Inventories

Refined metals

Main produced metals include nickel, copper, palladium, platinum; by-products include gold, rhodium, silver and other minor metals. Main products are measured at the lower of net cost of production or net realisable value. The net cost of production of main products is determined as total production cost, allocated to each joint product by reference to their relative sales value. By-products are measured at net realisable value, through a mark-to-market valuation.

Work-in-process

Work-in-process includes all costs incurred in the normal course of business including direct material and direct labour costs and allocation of production overheads, depreciation and amortisation and other costs, incurred for producing each product, given its stage of completion.

Materials and supplies

Materials and supplies are valued at the weighted average cost less allowance for obsolete and slow-moving items.

Financial assets

Financial assets are recognised when the Group has become a party to the contractual arrangement of the instrument and are initially measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value.

Financial assets are classified into the following specified categories:

• financial assets at fair value through profit or loss
• held-to-maturity investments;
• available-for-sale financial assets; and
• loans and receivables.

The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period.

Income is recognised on an effective interest basis for debt securities other than those financial assets designated as at fair value through profit or loss.

Financial assets at fair value through profit or loss

Financial assets are classified as at fair value through profit or loss where the financial asset is either held for trading or it is designated as at fair value through profit or loss.

A financial asset is classified as held for trading if:

• it has been acquired principally for the purpose of selling in the near future; or
• it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or
• it is a derivative.

Financial assets at fair value through profit or loss are stated at fair value, with any resultant gain or loss recognised in the consolidated income statement. The net gain or loss recognised in the consolidated income statement incorporates any dividend or interest earned on the financial asset.

Loans and receivables

Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

Available-for-sale financial assets

Available-for-sale financial assets mainly include investments in listed and unlisted equity securities, that are not classified in other categories.

Listed equity securities held by the Group that are traded in an active market are measured at their market value. Gains and losses arising from changes in fair value are recognised in other comprehensive income in the investments revaluation reserve with the exception of impairment losses, interest calculated using the effective interest method and foreign exchange gains and losses on monetary assets, which are recognised directly in the consolidated income statement. Where an investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in the investment revaluation reserve is included in the consolidated income statement for the period.

Investments in unlisted equity securities that do not have a quoted market price in an active market are recorded at management’s estimate of fair value.

Impairment of financial assets

Financial assets, other than those at fair value through profit or loss, are assessed for indicators of impairment at each statement of financial position date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been negatively impacted.

The Group has fully provided for all trade and other receivables which were due in excess of 365 days. Trade and other receivables that are past due for less than 365 days are provided according to expected probability of repayment and the length of the overdue period.

Objective evidence of impairment for a accounts receivable could include the Group’s past experience of collecting payments, an increase in the number of delayed payments as well as observable changes in economic conditions that correlate with defaults on receivables.

For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade and other receivables, where the carrying amount is reduced through the use of an allowance for doubtful debts. When trade and other receivables are considered uncollectible, it is written off against the allowance. Subsequent recoveries of amounts previously written off are credited against the allowance. Changes in the allowance are recognised in the consolidated income statement.

With the exception of available-for-sale debt and equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through the consolidated income statement to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

When a decline in fair value of an available-for-sale investment has been recognised in other comprehensive income and there is objective evidence that investment is impaired, the cumulative loss that had been recognised in other comprehensive income is reclassified from other comprehensive income and recognised in the consolidated income statement even though the investment has not been derecognised. Impairment losses previously recognised through consolidated income statement are not reversed. Any increase in fair value subsequent to an impairment loss is recognised in other comprehensive income.

Derecognition of financial assets

The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

Financial liabilities

The Group classifies financial liabilities into loans and borrowings, trade and other payables. Such financial liabilities are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or where appropriate, a shorter period.

Derecognition of financial liabilities

The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire.

Derivative financial instruments

The Group primarily uses derivative financial instruments to manage its exposure to the risk of changes in metal prices.

Derivative financial instruments are initially measured at fair value on the contract date, and are remeasured to fair value at subsequent reporting dates. The resulting gain or loss is recognised in the consolidated income statement immediately.

The Group does not apply hedge accounting.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances, cash deposits in banks, brokers and other financial institutions and highly liquid investments with original maturities of three months or less and demands deposits, which are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

Provisions

Provisions are recognised when the Group has a legal or constructive obligations as a result of a past event for which it is probable that an outflow of economic benefits will be required to settle the obligations, and the amount of the obligations can be reliably estimated.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the statement of financial position date, taking into account the risks and uncertainties surrounding obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

Decommissioning obligations

Decommissioning obligations include direct asset decommissioning costs as well as related land restoration costs.

Future decommissioning obligations, discounted to net present value, are recognised as soon as the legal or constructive obligation to incur such costs arises (generally when the related asset is put into operation) and the future cost can be reliably estimated. This cost is capitalised as part of the initial cost of the related asset (i.e. a mine) and is depreciated over the useful life of the asset. The unwinding of the decommissioning obligations is included in the consolidated income statement as finance costs. Decommissioning obligations are periodically reviewed in light of current laws and regulations, and adjustments are made as necessary.

Preparation of the consolidated financial statements in accordance with IFRS requires the Group’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The determination of estimates requires judgements which are based on historical experience, current and expected economic conditions, and all other available information. Actual results could differ from those estimates.

The most significant areas requiring the use of management estimates and assumptions relate to:

• useful economic lives of property, plant and equipment;
• impairment of assets, including fair value of assets held for sale;
• allowances;
• decommissioning obligations;
• income taxes; and
• contingencies.

Useful economic lives of property, plant and equipment

The Group’s mining assets, classified within property, plant and equipment, are amortised on a straight-line basis over the lesser of their economic useful lives or the life of mine. When determining the life of a mine, assumptions that were valid at the time of estimation, may change when new information becomes available.

The factors that could affect the estimation of the life of mine include the following:

• changes in proved and probable ore reserves;
• the grade of mineral reserves varying significantly from time to time;
• differences between actual commodity prices and commodity price assumptions used in the estimation and classification of ore reserves;
• unforeseen operational issues at mine sites; and
• changes in capital, operating, mining, processing and reclamation costs, discount rates and foreign exchange rates could possibly adversely affect the economic viability of ore reserves.

Any of these changes could affect prospective amortisation of mining assets and their carrying value. Useful economic lives of non-mining property, plant and equipment are reviewed by management periodically. The review is based on the current condition of the assets and the estimated period during which they will continue to bring economic benefit to the Group.

Impairment of assets

The Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets are impaired or indication of reversal of impairment. In making the assessment for impairment, assets that do not generate independent cash flows are allocated to an appropriate cash-generating unit. Management necessarily applies its judgement in allocating assets that do not generate independent cash flows to appropriate cash-generating units, and also in estimating the timing and value of the underlying cash flows within the value-in-use calculation. Subsequent changes to the cash-generating unit allocation or to the timing of cash flows could impact the carrying value of the respective assets.

Allowances

The Group creates allowance for doubtful debts to account for estimated losses resulting from the inability of customers to make the required payments. When evaluating the adequacy of an allowance for doubtful debts, management bases its estimate on current overall economic conditions, ageing of the accounts receivable balances, historical write-off experience, customer creditworthiness and changes in payment terms. Changes in the economy, industry or specific customer conditions may require adjustments to the allowance for doubtful debts recorded in the consolidated financial statements.

The Group also creates an allowance for obsolete and slow-moving raw materials and supplies. In addition, certain finished goods of the Group are carried at net realisable value. Estimates of net realisable value of inventories are based on the most reliable evidence available at the time the estimates are made. These estimates take into consideration fluctuations of price or cost directly relating to events occurring subsequent to the statement of financial position date to the extent that such events confirm conditions existing at the end of the period.

Decommissioning obligations

The Group’s mining and exploration activities are subject to various environmental laws and regulations. The Group estimates decommissioning obligations based on management’s understanding of the current legal requirements in the various jurisdictions in which it operates, terms of the license agreements and internally generated engineering estimates. Provision is made, based on net present values, for decommissioning and land restoration costs as soon as the obligation arises. Actual costs incurred in future periods could differ materially from the amounts provided. Additionally, future changes to environmental laws and regulations, life of mine estimates and discount rates could affect the carrying amount of this provision.

Income taxes

The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining provision for income taxes due to the complexity of legislation in some jurisdictions. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises provisions for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

Deferred tax assets are reviewed at each statement of financial position date and adjusted to the extent that it is probable that sufficient taxable income will be available to allow all or part of the deferred tax asset to be utilised. The estimation of that probability includes judgements based on the expected performance.

Various factors are considered to assess the probability of the future utilisation of deferred tax assets, including past operating results, operational plans, expiration of tax losses carried forward, and tax planning strategies. If actual results differ from these estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be affected.

Contingencies

By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of such contingencies inherently involves the exercise of significant judgement and estimates of the outcome of future events.

Operating segments are identified on the basis of internal reports on components of the Group that are regularly reviewed by the Management Board.

Management has determined the following operating segments:

• “GMK Group” segment, which includes mining and metallurgy operations, transport services, energy, repair and maintenance services located at Taimyr Peninsula;
• “Group KGMK” segment, which includes mining and metallurgy operations, energy, exploration activities located at Kola Peninsula;
• “NN Harjavalta” segment, which includes refinery operations located in Finland;
• “Other metallurgical” segment, which includes other metallurgy operations and exploration activities located in Russia and abroad;
• “Other non-metallurgical” segment, which includes metal and other trading, supply chain management, transport services, energy and utility, research and other activities located in Russia and abroad.

Corporate activities of the Group do not represent an operating segment, include primarily headquarters’ general and administrative expenses and treasury operations of the Group and are included in unallocated line. Assets classified as held for sale and liabilities associated with assets classified as held for sale are also included in unallocated line.

The amounts in respect of operating segments in the disclosure below are stated before intersegment eliminations, excluding:

• balances of intercompany loans and borrowings and interest accruals;
• intercompany investments;
• accrual of intercompany dividends;
• intercompany metal sales and unrealised profit on metal inventory balance.

Amounts are measured on the same basis as those in the consolidated financial statements.

The following tables present revenue, measure of segment profit or loss (EBITDA) and other segmental information from continuing operations regarding the Group’s reportable segments for the years ended 31 December 2015 and 2014, respectively.

The following tables present assets and liabilities of the Group’s operating segments at 31 December 2015 and 31 December 2014, respectively.

The Group’s non-current assets are primarily located in the Russian Federation and Finland.

The Group’s metal sales to external customers are detailed below (based on external customers’ locations):

A reconciliation of theoretic income tax, calculated at the statutory rate in the Russian Federation, the location of major production assets of the Group, to the amount of actual income tax expense recorded in the consolidated income statement is as follows:

The corporate income tax rates in other countries where the Group has a taxable presence vary from 0% to 40%.

Deferred tax balances

Certain deferred tax assets and liabilities have been offset to the extent they relate to taxes levied in the same jurisdiction and on the Group’s entities which can pay taxes on a consolidated basis. Deferred tax balances (after offset) presented in the consolidated statement of financial position were as follows:

Unrecognised deferred tax assets

Deferred tax assets have not been recognised as follows:

Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profit will be available against which the Group can utilise the benefits therefrom.

At 31 December 2015 deferred tax asset in amount of USD 138 million related to tax loss arising on disposal of OJSC „Third Generation Company of the Wholesale Electricity Market” ("OGK-3 (31 December 2014: USD 179 million) was not recognised as it was incurred by the Company prior to setting up of the tax consolidation group. This deferred tax asset can be utilized only if the Company exits the tax consolidation group within nine years after the exit (2014: within nine years after the exit). Unrecognised deferred tax assets in the amount of USD 49 million related to other tax losses will expire in ten years (31 December 2014: USD 43 million — ten years).

During the year ended 31 December 2015 previously unrecognised deferred tax assets arising on an impairment of available-for-sale investments in securities in amount of USD 96 million was utilised, following changes in tax legislation.

At 31 December 2015, the Group did not recognise a deferred tax liability in respect of taxable temporary differences of USD 1,191 million (31 December 2014: USD 1,581 million) associated with investments in subsidiaries, because management believes that it is in a position to control the timing of reversal of such differences.

At 31 December 2015 capital construction-in-progress included USD 107 million of irrevocable letters of credit opened for fixed assets purchases (31 December 2014: USD 60 million), representing security deposits placed in banks. For the year ended 31 December 2015 purchases of property, plant and equipment in the consolidated statement of cashflows includes USD 103 million related to these irrevocable letters of credit (for the year ended 31 December 2014: nil).

Capitalized borrowing costs for the year ended 31 December 2015 amounted to USD 153 million (for the year ended 31 December 2014: USD 145 million). Capitalization rate used to determine the amount of borrowing costs equals to 5.14% per annum (2014: 3.98%).

At 31 December 2015 mining assets and mine development cost included USD 2,026 million of mining assets under development (31 December 2014: USD 2,033 million).

Impairment

During the year ended 31 December 2015 the Group revised its intention on the further use of the gas extraction assets. As a result, these assets were assessed as a separate cash generating unit. At 31 December 2015 the Group identified indicators of the impairment of gas production assets and determined their reсoverable amount based on the value-in-use estimate. As a result, impairment loss in the amount of USD 266 million was recognized in Impairment of property, plant and equipment in the consolidated income statement. The most significant estimates and assumptions used in determination of value in use are as follows:

• Future сash flows were projected based on budgeted amounts, taking into account actual results for the previous years. Forecasts were assessed up to 2100. Measurements were performed based on discounted cash flows expected to be generated by gas—producting assets.
• Management estimates prices for natural gas and gas-concentrate based on commodities price forecasts. Commodities price forecast was based on consensus forecast.
• Production forecasts were primarily based on internal production reports available at the date of impairment test and management’s assumptions regarding future production levels.
• The amounts and timing of capital investments were based on management’s forecast.
• Inflation indices and foreign currency rate forecasts were sourced from Economist Intelligence Unit report. Inflation used was projected within 4-7%. Forecast for exchange rates was made based on expected RUR and USD inflation indices.
• A pre-tax nominal RUR discount rate of 17.4% was estimated by the reference to the weighted average cost of capital for the Group and reflects management’s estimates of the risks specific to production units.

During the year ended 31 December 2015 additional impairment losses in the amount of USD 18 million (for the year ended 31 December 2014: USD 130 million) were recognised in respect of specific individual assets, primarily construction-in-progress and related equipment for installation.

At 31 December 2015 no indicators of a reversal of previously recognised impairment losses have been identified.

During the year ended 31 December 2015 management of the Group reclassified certain assets located in the Russian Federation (primarily, office property) in the amount of USD 83 million previously presented within assets classified as held for sale and held for use to the investment property based on their intended use. Investment property is recognised in the consolidated statement of financial position at historical cost less accumulated depreciation. Carrying value of investment property approximates its fair value.

Available-for-sale investments in securities

During the year ended 31 December 2015 the Group sold its 12.35% stake in PJSC Inter RAO UES for the total consideration in the amount of USD 204 million. Gain on disposal in the amount of USD 75 million was recognised in the consolidated income statement.

During the year ended 31 December 2014 as a result of continuing decline in prices, impairment loss on available-for-sale investments of USD 123 million was recognised in the consolidated income statement.

During the year ended 31 December 2014, investments in companies which own various real estate properties were fully impaired based on the available DCF models and management assessment of their recoverability. Impairment loss in amount of USD 121 million was recognised in the consolidated income statement.

Bank deposits

Interest rate on long-term RUB-denominated deposits held in banks was 5.1% (31 December 2014: 5.1%) per annum.

In 2015 and 2014, the average credit period on metal sales varied from 0 to 30 days. Trade receivables are generally non-interest bearing.

At 31 December 2015 and 2014, there were no material trade accounts receivable which were overdue or individually determined to be impaired.

The average credit period on sales of other products and services for the year ended 31 December 2015 was 27 days (2014: 24 days). No interest was charged on these receivables.

Included in the Group’s other receivables at 31 December 2015, were debtors with a carrying value of USD 45 million (31 December 2014: USD 23 million) that were past due but not impaired. Management of the Group believes that these amounts are recoverable in full.

The Group did not hold any collateral for accounts receivable balances.

Ageing of other receivables past due but not impaired was as follows:

Movement in the allowance for doubtful debts was as follows:

In December 2013, the Group made a decision to dispose of the following assets:

• Nkomati Nickel Mine, a South Africa mining company, which is an associate of the Group.
• Assets located in Western Australia.
• Certain other non-core assets located in the Russian Federation.

During the year ended 31 December 2014, management of the Group made a decision to dispose of Tati Nickel Mining Company, a subsidiary of the Group, located in Botswana.

During the year ended 31 December 2015, management of the Group made a decision to dispose of OJSC “Arkhangelsk Sea Commercial Port”, a subsidiary of the Group located in the Russian Federation.

During the year ended 31 December 2015, management of the Group made a decision to reclassify certain other non-core assets located in the Russian Federation from assets classified as held for sale to investment property (refer to note 15) or to the assets classified as held for use. Reclassification does not have significant effect on current and previous period operations of the Group.

Management of the Group is actively searching for buyers for all of the assets classified as held for sale and/or is waiting for necessary regulatory approvals, and expects that disposals will be completed during the next twelve months. Disposal of these assets is consistent with the Group’s long-term strategy.

All of the above assets classified as held for sale have been measured at the lower of their fair values less costs to sell and their carrying values. The Group has assessed fair value of assets classified as held for sale at 31 December 2015 and 31 December 2014 based on price offers available. Assets classified as held for sale have been included in Level 2 of fair value hierarchy.

Management of the Group concluded that the sale of assets in Western Australia and South Africa and disposal of other assets referred to above does not constitute discontinued operations.

At 31 December 2015 and 31 December 2014 major classes of assets and liabilities related to assets classified as held for sale are presented below:

Disposal of Tati Nickel Mining Company during the year ended 31 December 2015

On 17 October 2014, the Group entered into binding agreements to sell its assets in South Africa, comprising its 50% participation interest in Nkomati Nickel Mine (“Nkomati”) and its 85% stake in Tati Nickel Mining Company (“TNMC”) (together “African assets”). The total expected consideration for the assets amounts to USD 337 million. Under the terms of the agreements, the buyers will assume all attributable decommissioning rehabilitation obligations related to the assets.

On 2 April 2015, the Group sold its 85% stake in TNMC located in Botswana. The carrying value of the Group’s share in net assets including decommissioning obligations at the date of disposal was negative in the amount of USD 20 million. Financial result from the disposal includes negative impact due to write down of the historical amount of the foreign currency translation reserve representing cumulative exchange differences between the presentation currency — the US dollar and the Botswana Pula.

Disposal of assets located in Western Australia during the year ended 31 December 2014

On 7 May 2014, the Group sold goldfields assets in Western Australia held by North Eastern Goldfields Operations (“NEGO”), a subsidiary of the Group, for a cash consideration of USD 19 million (AUD 20 million). The carrying value of assets including decommissioning obligations at the date of disposal was negative in the amount of USD 28 million. Gain on disposal in the amount of USD 47 million was recognised in the consolidated income statement.

On 4 July 2014 the Group announced that it entered into binding agreements to sell its nickel assets Black Swan and Silver Swan in Western Australia held by MPI Nickel Pty Ltd and Black Swan Nickel Pty Ltd, subsidiaries of the Group. On 27 March 2015 the Group completed the transaction. The Group recognised disposal of assets in the consolidated financial statements for the year ended 31 December 2014. Gain on disposal in the amount of USD 48 million primarily due to write down of decommissioning obligations was recognised in the consolidated income statement.

On 12 November 2014, the Group sold Lake Johnston Nickel Project (“LJNP”) in Western Australia held by Lake Johnston Pty Ltd and Lake Johnston Operations Pty Ltd, subsidiaries of the Group. Gain on disposal in the amount of USD 81 million primarily due to write down of decommissioning obligations was recognised in the consolidated income statement.

On 17 December 2014, the Group sold nickel assets Avalon and Cawse (“A&C”) in Western Australia held by Norilsk Nickel Avalon Pty Ltd and Norilsk Nickel Cawse Pty Ltd, subsidiaries of the Group. Gain on disposal in the amount of USD 158 million primarily due to write down of decommissioning obligations was recognised in the consolidated income statement.

Financial result from the disposal of the Australian assets includes negative impact due to a write down of the foreign currency translation reserve representing cumulative exchange differences between the presentation currency — the US dollar and the Australian dollar.

Authorised and issued ordinary shares

During the period from 1 July to 31 December 2015 the Group acquired 1,250,075 ordinary shares for a cash consideration of USD 196 million.

Earnings per share

The earnings and weighted average number of shares used in the calculation of earnings per share are as follows:

As at 31 December 2015 and 31 December 2014, the Group had no securities, which would have a dilutive effect on earnings per share of ordinary stock.

The Group is obliged to comply with a number of restrictive financial and other covenants, including maintaining certain financial ratios and restrictions on pledging and disposal of certain assets.

Defined contribution plans

Amounts recognised within continuing operations in the consolidated income statement in respect of defined contribution plans were as follows:

Decommissioning obligations

Key assumptions used in estimation of decommissioning obligations were as follows:

Present value of expected cost to be incurred for settlement of decommissioning obligations was as follows:

In 2015 the Group approved a programme for reconfiguration of production facilities located in the Taimyr Peninsula. The programme starts in 2016 and also includes activites related to closure and liquidation of the Nickel plant which in the the past were partially provided for within the Decommisioning obligations. The revised provision was calculated based on the best estimate of the amount and timing of future expenditures included in the detailed liquidation programme, and accounted for accordingly. Furher, additional expenses on reconfiguration of production facilities were recognised within Other net operating expenses.

Social commitments

In 2010 the Group entered into several multilateral agreements with the Government of the Russian Federation, the Krasnoyarsk Regional Government and the Norilsk Municipal Authorities for construction of pre-schools and other items of social infrastructure in Norilsk and Dudinka, and resettlement of families currently residing in these cities to other Russian regions with more favorable living conditions during 2015–2020. The provision represents present value of the best estimate of the future outflow of economic benefits to settle these obligations.

The maturity profile of the Group’s financial liabilities was as follows:

On 13 May 2015, the Annual General shareholder’s meeting declared final dividends for the year ended 31 December 2014 in the amount of RUB 670.04 (USD 13.2) per share with the total amount of USD 2,083 million. The dividends were paid to the shareholders in May and June 2015 in the amount of USD 2,126 million recognised in the consolidated cash flow statement, using prevailing RUB/USD rates on the payment dates.

On 14 September 2015, the Extraordinary General shareholder’s meeting declared interim dividends in respect of the 6 months ended 30 June 2015 in the amount of RUB 305.07 (USD 4.49) per share with the total amount of USD 710 million, including USD 4 million in respect of Treasury shares. The dividends were paid to the shareholders from September to December 2015 in the amount of USD 731 million, recognised in the consolidated cash flow statement using prevailing RUB/USD rates on the payment dates.

On 19 December 2015, the Extraordinary General shareholder’s meeting declared interim dividends in respect of the 9 months ended 30 September 2015 in the amount of RUB 321.95 (USD 4.51) per share with the total amount of USD 714 million, including USD 6 million in respect of Treasury shares.

The dividends in respect of 9 months ended 30 September 2015 were paid to the shareholders in January 2016 in the amount of USD 665 million using prevailing RUB/USD rates on the payment dates.

On 6 June 2014, the Annual General shareholder’s meeting declared final dividends for the year ended 31 December 2013 in the amount of RUB 248.48 (USD 7.1) per share with the total amount of USD 1,127 million. The dividends were paid to the shareholders in June and July 2014 in the amount of USD 1,146 million recognised in the consolidated cash flow statement using prevailing RUB/USD rates on the payment dates.

On 11 December 2014, the Extraordinary General shareholder’s meeting declared interim dividends in respect of the 9 months ended 30 September 2014 in the amount of RUB 762.34 (USD 14.05) per share with the total amount of USD 2,222 million. The dividends were paid to the shareholders in December 2014 in the amount of USD 2,135 million recognised in the consolidated cash flow statement using prevailing RUB/USD rates on the payment dates.

Related parties include shareholders, associates and entities under common ownership and control of the Group’s major shareholders and key management personnel. The Company and its subsidiaries, in the ordinary course of their business, enter into various sale, purchase and service transactions with related parties. Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below.

Terms and conditions of transactions with related parties

Sales to and purchases from related parties of electricity, heat energy and natural gas supply were made at prices established by the Federal Tariff Service, government regulator responsible for establishing and monitoring prices on the utility and telecommunication markets in the Russian Federation.

Compensation of key management personnel

Key management personnel of the Group consists of members of the Management Board and the Board of Directors. For the year ended 31 December 2015 remuneration of key management personnel of the Group included salary and performance bonuses amounted to USD 61 million (for the year ended 31 December 2014: USD 37 million).

Capital commitments

At 31 December 2015, contractual capital commitments amounted to USD 798 million (31 December 2014: USD 1,058 million).

Operating leases

The land in the Russian Federation on which the Group’s production facilities are located is owned by the state. The Group leases land through operating lease agreements, which expire in various years through 2064. According to the terms of lease agreements rent fees are revised annually by reference to an order issued by the relevant local authorities. The Group entities have a renewal option at the end of lease period and an option to buy land at any time, at a price established by the local authorities.

During the year ended 31 December 2014 the Group entered into a long-term operating lease agreement for its headquarters building.

Future minimum lease payments due under non-cancellable operating lease agreements for land and buildings were as follows:

At 31 December 2015, the Group entered into nine aircraft lease agreements. The respective lease agreements have an average life of eight-years with renewal option at the end of the term. There are no restrictions placed upon the lessee by entering into these agreements. At 31 December 2014, nine aircraft lease agreements belonged to entities classified as held for sale.

Future minimum lease payments due under non-cancellable operating lease agreements for aircrafts were as follows:

Social commitments

The Group contributes to mandatory and voluntary social programs and maintains social assets in the locations where it has its main operating facilities. The Group’s social assets as well as local social programs benefit the community at large and are not normally restricted to the Group’s employees.

The Group’s commitments are funded from its own cash resources.

Litigation

At 31 December 2015 the Group has unresolved legal disputes with the state authorities due to non-approval of the reduction of the negative environmental impact charge in relation to the environmental protection expenditure incurred by the Group. Management believes that the Group complied with all relevant regulations to be eligible for the reduction and that no provision for these disputes is required. Additionally, the Group is involved in other legal disputes in the ordinary course of its operations, with the probability of their unfavorable resolution being assessed as possible. At 31 December 2015, total claims under unresolved litigation amounted to approximately USD 53 million (31 December 2014:

Taxation contingencies in the Russian Federation

The Russian Federation currently has a number of laws related to various taxes imposed by both federal and regional governmental authorities. Applicable taxes include value-added (VAT), corporate income tax, mandatory social security contributions, together with others. Tax returns, together with other legal compliance areas (for example, customs and currency control matters), are subject to review and investigation by a number of authorities which are authorised by law to impose severe fines, penalties and interest charges. Generally, tax returns remain open and subject to inspection for a period of three years following the fiscal year.

While management of the Group believes that it has adequately provided for tax liabilities based on its interpretation of current and previous legislation, the risk remains that tax authorities in the Russian Federation could take differing positions with regard to interpretive issues. This uncertainty may expose the Group to additional taxation, fines and penalties.

Transfer pricing legislation enacted in the Russian Federation starting from 1 January 2012 provides for major modifications making local transfer pricing rules closer to OECD guidelines, but creating additional uncertainty in practical application of tax legislation in certain circumstances.

These transfer pricing rules provide for an obligation for the taxpayers to prepare transfer pricing documentation with respect to controlled transactions and prescribe the basis and mechanisms for accruing additional taxes and interest in case prices in the controlled transactions differ from the market level.

Currently there is lack of practice of applying the transfer pricing rules by the tax authorities and courts, however, it is anticipated that transfer pricing arrangements will be subject to very close scrutiny potentially having effect on the financial results and the financial position of the Group.

Environmental matters

The Group is subject to extensive federal, state and local environmental controls and regulations in the countries in which it operates. The Group’s operations involve pollutant emissions to air and water objects as well as formation and disposal of production wastes.

Management of the Group believes that its mining and production technologies are in compliance with all current existing environmental legislation in the countries in which it operates. However, environmental laws and regulations continue to evolve. The Group is unable to predict the timing or extent to which those laws and regulations may change. Such change, if it occurs, may require that the Group modernise technology to meet more stringent standards.

Russian Federation risk

As an emerging market, the Russian Federation does not possess a fully developed business and regulatory infrastructure including stable banking and judicial systems which would generally exist in a more mature market economy. The economy of the Russian Federation is characterised by a currency that is not freely convertible outside of the country, currency controls, low liquidity levels for debt and equity markets, and continuing inflation. As a result, operations in the Russian Federation involve risks that are not typically associated with those in more developed markets. Stability and success of Russian economy and the Group’s business mainly depends on the effectiveness of economic measures undertaken by the government as well as the evelopment of legal system.

The recent conflict in Ukraine and related events has increased the perceived risks of doing business in the Russian Federation. The imposition of economic sanctions on Russian individuals and legal entities has resulted in increased economic uncertainty including more volatile equity markets, a depreciation of the Russian Ruble, a reduction in both local and foreign investment inflows and a significant tightening in the availability of credit. The consolidated financial statements reflect management’s assessment of the impact of the Russian business environment on the financial results and the financial position of the Group.

Capital risk management

The Group manages its capital structure in order to safeguard the Group’s ability to continue as a going concern and to maximise the return to shareholders through the optimisation of debt and equity balance.

The capital structure of the Group consists of debt, which includes long and short-term borrowings, equity attributable to shareholders of the parent company, comprising share capital, other reserves and retained earnings.

Management of the Group regularly reviews its level of leverage, calculated as the proportion of Net Debt to EBITDA, to ensure that it is in line with the Group’s financial policy aimed at preserving investment grade credit ratings.

As at 15 March 2016 the Сompany maintains BBB- investment grade ratings, assigned by rating agencies S&P’s and Fitch, despite S&P’s downgrade of Russian sovereign rating below the investment grade level to BB+ on 26 January 2015. The Company’s rating from Moody’s is restrained by Russia’s country ceiling at Ba1 level.

Financial risk factors and risk management structure

In the normal course of its operations, the Group is exposed to a variety of financial risks: market risk (including interest rate and currency risk), credit risk and liquidity risk. The Group has an explicit risk management structure aligned with internal control procedures that enable it to assess, evaluate and monitor the Group’s exposure to such risks.

Risk management is carried out by financial risk management. The Group has adopted and documented policies covering specific areas, such as market risk management system, credit risk management system, liquidity risk management system and use of derivative financial instruments.

Interest rate risk

Interest rate risk is the risk that changes in interest rates will adversely impact the financial results of the Group. The Group’s interest rate risk arises from long- and short-term borrowings at floating rates.

The Group performs thorough analysis of its interest rate risk exposure regularly. Various scenarios are simulated. The table below details the Group’s sensitivity to a 2 percentage points increase in those borrowings subject to a floating rate. The sensitivity analysis is prepared assuming that the amount of liabilities at floating rates outstanding at the reporting date was outstanding for the whole year.

Management believes that the Group’s exposure to interest rate risk fluctuations does not require additional hedging activities.

Currency risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument denominated in foreign currency will fluctuate because of changes in exchange rates.

The major part of the Group’s revenue and related trade accounts receivable is denominated in US dollars and therefore the Group is exposed primarily to USD currency risk. Foreign exchange risk arising from other currencies is assessed by management of the Group as immaterial.

The carrying amounts of monetary assets and liabilities denominated in foreign currencies other than functional currencies of the individual Group entities at 31 December 2015 and 2014 were as follows:

Currency risk is monitored on a monthly basis utilising sensitivity analysis to assess if a risk for a potential loss is at an acceptable level. The Group calculates the financial impact of exchange rate fluctuations on USD-denominated monetary assets and liabilities in respect of the Group entities where functional currency is the Russian Rouble. The following table presents the decrease of the Group’s profit before tax to a 20% weakening of the Russian Rouble against USD.

Given that the Group’s exposure to currency risk at the monetary assets and liabilities level is offset by the revenue denominated in USD, management believes that the Group’s exposure to currency risk is acceptable. The Group does not apply hedge instruments.

Credit risk

Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Group. Credit risk arises from cash and cash equivalents, deposits with banks as well as credit exposures to customers, including outstanding uncollateralised trade and other receivables. The Group’s exposure to credit risk is continuously monitored and controlled.

A dealing with new counterparty, management assesses the creditworthiness of a potential customer or financial institution. Where the counterparty is rated by major independent credit-rating agencies, this rating is used to evaluate creditworthiness; otherwise it is evaluated using an analysis of the latest available financial statements of the counterparty and other publically available information.

The balances of ten major counterparties are presented below. The banks have a minimum of ВВ+ credit rating.

The Group is not economically dependent on a limited number of customers because majority of its products are highly liquid and traded on the world commodity markets. Metal and other sales to the Group’s customers are presented below:

Management of the Group believes that except as indicated above in respect of bank balances there is no significant concentration of credit risk.

The maximum exposure to credit risk for cash and cash equivalents, loans, irrevocable letters of credit, representing security deposits placed in banks, and trade and other receivables is as follows:

Liquidity risk

Liquidity risk is the risk that the Group will not be able to settle all liabilities as they fall due.

The Group has a well-developed liquidity risk management structure to exercise control over its short-, medium- and long-term funding. The Group manages liquidity risk by maintaining adequate reserves, committed and uncommitted banking facilities and reserve borrowing facilities. Management continuously monitors rolling cash flow forecasts and performs analysis of maturity profiles of financial assets and liabilities, and undertakes detailed annual and quarterly budgeting procedures.

Presented below is the maturity profile of the Group’s borrowings (maturity profiles for other liabilities presented in note 26) based on contractual undiscounted payments, including interest:

At 31 December 2015 the Group had available financing facilities for the management of its day to day liquidity requirements of USD 2,847 million (31 December 2014: USD 2,157 million) which reflects the initiative of the Groups’s prudent financial policy through the increase of undrawn commited credit facilities as an additional source of medium term liquidity.

Management believes that the carrying value of financial instruments such as cash and cash equivalents (refer to note 20), short-term accounts receivable (refer to note 19) and payable (refer to note 26), short-term loans given (refer to note 16), long-term available-for-sale investments (refer to note 16) which values were mainly determined with reference to quoted market prices, approximates their fair value.

Certain financial instruments such as long-term accounts receivable, long-term promissory notes receivable and finance leases obligations were excluded from fair value analysis either due to their insignificance or due to the fact that assets were acquired or liabilities were assumed close to the reporting dates and management believes that their carrying value either approximates their fair value or may not significantly differ from each other.

Financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable as follows:

• Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly or indirectly; and
• Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data.

At 31 December 2015, the Group had derivative financial instruments amounting to USD 2 million (31 December 2014: USD 5 million) recognised within Level 2.

Presented below is information about loans and borrowings, whose carrying values differ from their fair values.

The fair value of financial assets and liabilities presented in table above is determined as follows:

• the fair value of corporate bonds was determined based on market quotations existing at the reporting dates;
• the fair value of variable-rate and fixed rate loans and borrowings at 31 December 2015, was calculated based on the present value of future cash flows (principal and interest), discounted at the best management estimation of market rates, taking into consideration currency of the loan, expected maturity and risks attributable to the Group existing at the reporting date. The discount rates ranged from 4.00% to 5.55% for USD-denominated loans and borrowings (2014: from 2.50% to 4.50%) and 11.60% (2014: 15.81%) for RUB-denominated loans.

In January 2016 the Group obtained a 5 year syndicated committed revolving credit facility with Industrial and Commercial Bank of China Limited, Bank of China Limited, Shanghai Branch, China Construction Bank Corporation, Beijing Branch as original lenders and Bank ICBC (JSC) as agent amounted to USD 730 million and obtained a 5 year loan from ING Bank in the amount of USD 100 million.

In February 2016 the Group redeemed exchage-traded bonds including payment of coupon income in the amount of USD 499 million and completed placement of 10 year non-convertible interest-bearing documentary exchange bearer bonds amounted to USD 199 million.

In December 2015 the Group has entered into binding agreements with Highland Fund to sell 13.33% share in Bystrinskoye project for USD 100 million. The sale is subject to regulatory approvals and is expected to be closed after the consolidated financial statements approval date.