Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697753327647.pdf (Georgia)
Georgian Oil and Gas Corporation JSC Consolidated Financial Statements for 2014 Georgian Oil and Gas Corporation JSC Contents Independent Auditors’ Report Consolidated Statement of Financial Position 3 4 Consolidated Statement of Profit or Loss and Other Comprehensive Income 5 Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements 6 7 8 ’000 GEL Assets Property, plant and equipment Prepayments for non-current assets Intangible assets Finance lease receivable Loans given Term deposits Deferred tax assets Non-current assets Loans given Assets held for distribution Inventories Current tax assets Taxes other than on income Prepayments Trade and other receivables Term deposits Cash and cash equivalents Current assets Total assets Equity Share capital Additional paid in capital Fair value reserve for non-cash owner contributions Retained earnings Equity attributable to owners of the Company Non-controlling interests Total equity Liabilities Loans and borrowings Deferred tax liabilities Non-current liabilities Loans and borrowings Trade and other payables Taxes other than on income Current tax liabilities Provisions Current liabilities Total liabilities Total equity and liabilities Georgian Oil and Gas Corporation JSC Consolidated Statement of Financial Position as at 31 December 2014 Note 2014 2013 12 23 13 14 15 11 14 16 15 17 18 20 11 20 21 590,592 96,632 101 52,041 138,765 44,372 2,063 924,566 16,482 - 198 - 14,573 23,348 69,942 - 181,799 306,342 1,230,908 572,691 71,718 (282,181) 230,420 592,648 83,316 675,964 456,910 14,203 471,113 8,299 67,106 5,181 1,559 1,686 83,831 554,944 1,230,908 269,576 199,832 114 48,864 89,136 40,083 - 647,605 47,055 1,141 657 1,081 732 20,058 63,530 78,493 194,541 407,288 1,054,893 509,550 71,718 (282,181) 186,393 485,480 83,443 568,923 425,699 16,486 442,185 6,126 30,656 5,317 - 1,686 43,785 485,970 1,054,893 4 The consolidated statement of financial position is to be read in conjunction with the notes to, and
 forming part of, the consolidated financial statements set out on pages 8 to 40.
Georgian Oil and Gas Corporation JSC Consolidated Statement of Changes in Equity for 2014 Attributable to owners of the Company ’000 GEL Balance at 1 January 2013 509,298 71,718 Share capital Additional paid in capital Fair value reserve for non-cash owner contributions (282,181) Retained earnings 99,924 Total Non- controlling interests Total equity 398,759 - 398,759 Total comprehensive income Profit and total comprehensive income for the year Transactions with owners of the Company Contributions and distributions Dividends (see note 18(c)) Increase in share capital (see note 12) Total contributions and distributions Changes in ownership interests Foundation of subsidiary with non-controlling interests (see note 23) Balance at 31 December 2013 - - - 94,828 94,828 (535) 94,293 - 252 252 - - - - - - (8,359) (8,359) - - 252 - - (8,359) 252 - 86,469 86,721 (535) 86,186 - - - 83,978 83,978 509,550 71,718 (282,181) 186,393 485,480 83,443 568,923 Balance at 1 January 2014 509,550 71,718 (282,181) 186,393 485,480 83,443 568,923 Total comprehensive income Profit and total comprehensive income for the year Transactions with owners of the Company Contributions and distributions Dividends (see note 18(c)) Distribution of non-cash assets, net of tax (see note 18(c)) Increase in share capital (see note 12) Transfer of subsidiary, net of tax (see note 7) Other contributions Total contributions and distributions Balance at 31 December 2014 - - - 85,655 85,655 (1,766) ) 83,889 - - 63,141 - - 63,141 - - - - - - - (33,000) (33,000) - (33,000) - - - - - (970) (970) - 63,141 (7,658) (7,658) - - - (970) 63,141 (7,658) - - 1,639 1,639 (41,628 ) 21,513 1,639 23,152 572,691 71,718 (282,181) 230,420 592,648 83,316 675,964 The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 8 to 40.
6 Georgian Oil and Gas Corporation JSC Consolidated Statement of Cash Flows for 2014 Note 2014 2013 ’000 GEL Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Value added tax refund from the State Cash from operations before income taxes and interest Income tax paid Interest paid Interest received Net cash from operating activities Cash flows from investing activities Acquisition of property, plant and equipment Decrease in term deposit Repayment of loans given Net cash used in investing activities Cash flows from financing activities Dividends paid Proceeds from borrowings Repayment of borrowings Cash distributed on the transfer of subsidiaries Net cash used in financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January Effect of exchange rate fluctuations on cash and cash equivalents Cash and cash equivalents at 31 December 17 370,055 (285,830) 15,000 99,225 (7,769) (30,406) 18,815 79,865 (137,285) 74,204 - (63,081) (33,000) 29,875 (29,765) (9,395) (42,285) (25,501) 194,541 12,759 181,799 373,138 (222,161) - 150,977 (4,460) (28,512) 34,076 152,081 (117,525) 49,081 3,707 (64,737) (40,359) - (628) - (40,987) 46,357 142,672 5,512 194,541 During 2013 and 2014 the Group received non-cash contributions and made non-cash distributions to the Government of Georgia (see notes 12 and 18).
The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 8 to 40.

7 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 Note Page Note Page 1.

Reporting entity 2.

Basis of accounting 3.

Functional and presentation currency 4.

Use of estimates and judgments 5.

Operating segments 6.

Revenue 7.

Distribution of subsidiary 8.

Other expenses 9.


Other income 10.

Finance income and finance costs 11.

Income tax expense 12.

Property, plant and equipment 13.

Finance lease receivable 14.

Loans given 15.

Term deposits 16.

Trade and other receivables 9 9 17.

Cash and cash equivalents 18.

Equity 19.

Capital management 20.

Loans and borrowings 21.

Trade and other payables 22.

Fair values and risk management 23.

Significant subsidiaries 24.


Capital commitments 25.

Contingencies 26.

Related party transactions 27.

Subsequent events 28.

Basis of measurement 29.

Changes in accounting policies 30.

Significant accounting policies 31.

New standards and interpretations not yet adopted 20 20 21 21 22 22 27 29 29 30 31 31 31 32 39 8 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 1.
Reporting entity (a) Organisation and operations Georgian Oil and Gas Corporation JSC (the “Company”) and its subsidiaries (the “Group”) comprise Georgian Joint Stock and Limited Liability Companies as defined in the Law of Georgia on Entrepreneurs.

The Company was established as a 100% state-owned enterprise by the order of the Ministry of Economy of Georgia on 21 March 2006, on the basis of three Georgian state-owned companies: Georgian Corporation JSC and Teleti Oil Company JSC.
International Oil Corporation JSC, Georgian Gas International In 2006 and 2007, respectively, Georgian International Oil Corporation JSC and Georgian Gas International Corporation JSC ceased legal existence and the assets and liabilities were transferred to the Company.

In November 2007 the shares in Teleti Oil Company JSC were taken over by the Government of Georgia.

Related party transactions are detailed in note 26.

The Company’s registered office is 21 Kakheti Highway, Tbilisi 0190, Georgia.
The Group’s principal activities are natural gas import and sale, rent of gas pipelines and the oil and gas exploration and extraction in Georgia.

The Group is in the process of constructing the Gardabani Combined Cycle Power Plant (CCPP).

The construction is expected to be completed in July 2015.
Since December 2006, when the Company has been granted the status of National Oil Company on behalf of the State of Georgia, the Company receives and sells the State’s share of extracted oil and gas in Georgia in accordance with Production Sharing Agreements signed between the State and investors.

(b) Business environment The Group’s operations are located in Georgia.

Consequently, the Group is exposed to the economic and financial markets of Georgia which display characteristics of an emerging market.
The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in Georgia.

The consolidated financial statements reflect management’s assessment of the impact of the Georgian business environment on the operations and the financial position of the Group.

The future business environment may differ from management’s assessment.

2.
2.

Basis of accounting (a) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”).

3.

Functional and presentation currency The national currency of Georgia is the Georgian Lari (“GEL”), which is the Company’s functional currency and the currency in which these consolidated financial statements are presented.

All financial information presented in GEL has been rounded to the nearest thousand.
9 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 4.

Use of estimates and judgments The preparation of consolidated financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses.

Actual results may differ from those estimates.


Estimates and underlying assumptions are reviewed on an ongoing basis.

Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in the following notes:  Note 13 Finance lease receivable – determination of whether the initial arrangement contains a finance lease and the fair value of the unguaranteed residual value at the end of the lease term;  Note 17 Cash and cash equivalents – classification of term deposits with original maturities of more than three months as cash and cash equivalents;  Note 11 Deferred tax assets and liabilities – determination of whether to recognise a temporary difference on initial recognition of the financial lease receivable;  Note 23 Significant subsidiaries – determination of control over subsidiaries.
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year is included in the following notes:  Note 15 Term deposits - recoverability of the term deposit pledged as collateral for a loan obtained by a state controlled entity;  Note 22 (b) Credit risk – recoverability of trade and other receivables and loans given;  Note 25 Contingencies – litigations.
Measurement of fair values Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:  Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

 Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e.

as prices) or indirectly (i.e.

derived from prices).


 Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.
The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

Further information about the assumptions made in measuring fair values is included in note 22 (a) - financial instruments.

10 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 5.

Operating segments The Group has four reportable segments, as described below, which are the Group’s strategic business units.
The strategic business units offer different products and services, and are managed separately.

For each of the strategic business units, the Company’s General Director reviews internal management reports on at least a quarterly basis.

The following summary describes the operations in each of the Group’s reportable segments:  Gas Supply.

Includes purchase and sale of gas.

 Pipeline rental.
 Pipeline rental.

Includes rental income earned by the Company from the lease of gas pipelines to Georgian Gas Transportation Company LLC (a related party).

 Upstream activities.

Includes sale of oil from production sharing arrangements.

 Oil transportation.

Includes rental income from transportation of oil through the territory of Georgia.

The Group is in the process of constructing the Gardabani Combined Cycle Power Plant (CCPP).
The construction is expected to be completed no later than July 2015.

Upon completion of the construction and launch of the plant, the Group will create a strategic business unit related to Gardabani CCPP – ‘Electricity generation and supply’.

Information regarding the results of each reportable segment is included below.
Performance is measured based on segment profit before personnel expenses, depreciation, finance income and cost and income tax, as included in the internal management reports that are reviewed by the Company’s General Director.

The management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries.

The Company’s General Director does not monitor segment assets or liabilities.
(i) Information about reportable segments Gas supply Pipeline rental Upstream activities Oil transportation Total ’000 GEL External revenues Cost of gas and oil Reportable segment profit before unallocated costs, net finance cost and income tax 2014 269,791 (224,346) 2013 2014 2013 2014 2013 2014 2013 240,619 50,785 42,666 23,584 30,524 13,653 11,952 (198,483) - - - - - 2014 357,813 325,761 - (224,346) (198,483) 2013 45,445 42,136 50,785 42,666 23,584 30,524 13,653 11,952 133,467 127,278 11 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 ’000 GEL Revenues 2014 2013 Total revenue for reportable segments 357,813 325,761 Profit or loss Reportable segments profit Unallocated amounts: Depreciation Personnel costs Net finance income Taxes other than on income Other expenses Other income Consolidated profit before income tax (ii) Geographical information 133,467 127,278 (20,056) (9,216) 1,429 (6,659) (7,908) 2,408 93,465 (18,241) (7,303) 20,640 (6,096) (9,185) 4,510 111,603 All of the Group’s revenues are generated in Georgia and all non-current assets are located in Georgia.
(iii) Major customer In 2014 sales to one customer in the gas supply segment represented GEL 267,190 thousand which represents approximately 75 % of the Group’s total revenue (2013: GEL 238,309 thousand and 73%).

6.
6.

Revenue ’000 GEL Sale of natural gas Income from rent of gas pipelines Income from crude oil sales Oil transportation fee Total revenues 2014 2013 269,791 240,619 50,785 23,584 13,653 42,666 30,524 11,952 357,813 325,761 The Company rents its gas pipeline to Georgian Gas Transportation Company LLC.

The rent agreement is valid until 1 January 2020.

The lease payments are contingent on the volume of gas transported through the pipeline.

Transactions with related parties are disclosed in note 26.
Oil transportation fee is received for the oil transit from Azerbaijan to Turkey through the Baku- Supsa pipeline.

12 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 7.

Distribution of subsidiary On 3 April 2014 the Group distributed its wholly owned non-operating subsidiary, Namakhvani HPP JSC, to the State of Georgia (National Agency of State Property).

The subsidiary contributed GEL 78 thousand to the net profit for the year.
The distribution of the subsidiary had the following effect on the Group’s assets and liabilities at the date of distribution.
’000 GEL Non-current assets Property, plant and equipment Current assets Inventories VAT recoverable Cash and cash equivalents Current liabilities Trade and other payables VAT and other taxes payable Net identifiable assets and liabilities distributed Tax effect on nominal amount of investment distributed Net identifiable assets and liabilities distributed, net of tax Cash and cash equivalents disposed of 8.
Other expenses ’000 GEL Legal fees Regulatory fees Write off and disposal of assets Office expenses and office equipment maintenance Professional services Benefits to employees Representative and business trip expenses Transportation, materials, repair and maintenance Litigation provision Other Carrying amount at the date of distribution 146 92 1,148 9,395 (5) (118) 10,658 3,000 7,658 9,395 190 731 372 748 971 370 517 328 1,686 3,272 9,185 13 2014 2013 1,888 802 786 682 491 469 290 286 - 2,214 7,908 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 9.
Other income ’000 GEL Customer penalties for late payment Oil processing Other 2014 2013 166 856 1,386 2,408 765 1,109 2,636 4,510 In 2014, management presented customer late payment penalties of GEL 8,793 thousand in finance income, which they believe is more consistent with their nature.

Customer late payment penalties of GEL 9,396 thousand, previously reported in other income in the comparative period, were reclassified to finance income for consistency in presentation.

10.
Finance income and finance costs ’000 GEL Recognised in profit or loss Interest income on bank deposits Interest income on loans given Customer late payment penalties Unwinding of discount on finance lease receivable (note 13) Finance income 2014 2013 - - 8,792 3,177 11,969 24,450 13,295 9,396 2,982 50,123 Interest expense on loans and borrowings - (29,032) Net foreign exchange loss Interest expense on bank overdrafts Finance costs Net finance income recognised in profit or loss (10,416) (124) (10,540) 1,429 (451) - (29,483) 20,640 In 2014 the Group capitalised net interest on bonds issued in the amount of GEL 3,592 thousand.
This is the net result of interest expense on bonds issued of GEL 32,174 thousand and interest income on bank deposits and loans given of GEL 15,336 thousand and GEL 13,246 thousand, respectively.

Interest income was received from funds temporarily invested from the bond issuance proceeds in bank deposits and loans issued.

14 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 11.
Income tax expense (a) Amount recognized in profit and loss The Group’s applicable tax rate is the income tax rate of 15% for Georgian companies.
’000 GEL Current tax expense Current year (Over)/under provided in prior years Deferred tax (benefit)/expense Origination and reversal of temporary differences (b) Amount recognized in equity 2014 2013 16,861 (2,938) 13,923 (4,347) 9,576 8,225 2,165 10,390 6,920 17,310 In 2014 a current tax deduction of GEL 171 thousand related to distribution of non-cash assets and GEL 3,000 thousand related to distribution of a subsidiary (see note 7) was recognized directly in equity.
Reconciliation of effective tax rate: 2014 2013 ’000 GEL % ’000 GEL % Profit before income tax 93,465 100 111,603 Income tax at applicable tax rate Non-deductible expenses (Over)/under provided in prior years Change in unrecognised temporary differences on finance lease receivable 14,020 574 (2,938) (2,080) 9,576 15 0 (3) (2) 10 16,740 648 2,165 (2,243) 17,310 100 15 1 2 (2) 16 (c) Unrecognised deferred tax assets No deferred tax asset has been recognized for the temporary difference between the tax and accounting base of the finance lease receivable that was contributed during 2010 (see note 13).
Management has not recognized deferred tax on this temporary difference as the initial recognition of the financial lease affected neither accounting nor taxable profit or loss.

The unrecognised deferred tax asset on the above transaction as at 31 December 2014 is GEL 22,342 thousand (2013: GEL 24,422 thousand).
15 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 (d) Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Assets Liabilities Net ’000 GEL 2014 2013 2014 2013 2014 2013 Property, plant and equipment Inventories Trade and other receivables Loans and borrowings Tax loss carry-forwards Tax (assets)/liabilities - 279 216 620 2,243 3,358 - (15,498) (17,306) (15,498) (17,306) 280 203 337 - - - - - - - - - 279 216 620 2,243 280 203 337 - 820 (15,498) (17,306) (12,140) (16,486) Set off of tax (1,295) (820) 1,295 820 - - Net tax (assets)/liabilities 2,063 - (14,203) (16,486) (12,140) (16,486) Movement in temporary differences during the year: ’000 GEL 1 January 2014 Recognised in profit or loss 31 December 2014 Property, plant and equipment (17,306) 1,808 (15,498) Inventories Trade and other receivables Loans and borrowings Tax loss carry-forwards 280 203 337 - (16,486) (1) 13 283 2,243 4,347 279 216 620 2,243 12,140 ’000 GEL 1 January 2013 Recognised in profit or loss 31 December 2013 Property, plant and equipment Inventories Trade and other receivables Loans and borrowings (11,281) 1,466 174 75 (6,025) (1,186) 29 262 (17,306) 280 203 337 (9,566) (6,920) (16,486) 16 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 12.
Property, plant and equipment ’000 GEL Cost Gas and oil pipelines Land and buildings Oil wells Plant and equipment Other Under construction Total Balance at 1 January 2013 259,272 33,859 29,834 51 43,853 - 1,626 - (481) - - - 6,383 807 - (203) 4,712 616 - (537) 60,520 394,580 3,263 (43,853) - 6,363 - (1,221) Additions Transfers Disposals Balance at 31 December 2013 303,176 35,004 29,834 6,987 4,791 19,930 399,722 Balance at 1 January 2014 303,176 35,004 29,834 6,987 4,791 19,930 399,722 Additions Transfers Disposals Balance at 31 December 2014 Depreciation and impairment losses Balance at 1 January 2013 Depreciation for the year Impairment loss Balance at 31 December 2013 60,947 3,259 30 188 234 277,105 341,763 2,655 - - - - - (335) (180) - (2,320) - (131) (6,597) (6,908) 366,778 38,263 29,864 6,660 4,894 288,118 734,577 77,192 15,297 - 3,828 17,481 4,726 2,524 6,179 111,930 622 - 1,603 - 322 - 385 (13) - - 18,229 (13) 92,489 4,450 19,084 5,048 2,896 6,179 130,146 Balance at 1 January 2014 92,489 4,450 19,084 5,048 2,896 6,179 130,146 Depreciation for the year 16,549 690 2,054 349 414 - 20,056 Disposals - - - - (38) (6,179) (6,217) 109,038 5,140 21,138 5,397 3,272 - 143,985 Balance at 31 December 2014 Carrying amounts At 1 January 2013 At 31 December 2013 At 31 December 2014 257,740 33,123 8,726 182,080 210,687 30,031 30,554 12,353 10,750 1,657 1,939 1,263 2,188 1,895 54,341 13,751 282,650 269,576 1,622 288,118 590,592 During 2014 the State of Georgia contributed gas pipelines and land plots in the amount of GEL 62,799 thousand and GEL 342 thousand respectively (2013: land plots of GEL 252 thousand) in the form of an increase in share capital.
The nominal value of these assets approximates their fair value.

GEL 259,797 thousand of assets under construction relates to the Construction of Gardabani Combined Cycle Power Plant (see note 23).

17 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 13.
Finance lease receivable In 1996 the State of Georgia entered into a 30 year arrangement with a consortium of oil companies that undertook the construction and development of an oil pipeline system from the Georgian- Azerbaijan state border to the Supsa oil terminal on the Georgian Black Sea coast.

The arrangement granted the oil companies the right to transport oil across the territory of Georgia through that pipeline system that became the property of the State of Georgia.
The ownership of this pipeline was transferred to the Company in June-July 2010 as a contribution to the charter capital of the Company at a nominal value of GEL 269,299 thousand.

In exchange for the oil companies using the pipeline, the Group receives a transit fee for each barrel of oil transported.

Management has determined that the initial arrangement contained a finance lease at inception date.
The Group has recognized the finance lease receivable of GEL 39,229 thousand at the date when the title of the pipelines was transferred to the Group.

The finance lease receivable is the present value of the net investment in the lease comprising the present value of the assets’ unguaranteed residual value at the end of the lease term.
The difference of GEL 230,070 thousand between the nominal and the present value of the net investment in the lease has been recognised in equity as a fair value adjustment for non-cash owner contributions.
’000 GEL 2014 2013 Finance lease receivable at 1 January Unwinding of discount on finance lease receivable Finance lease receivable at 31 December 48,864 3,177 52,041 45,882 2,982 48,864 Contingent rent related to oil transportation recognized in the consolidated statement of profit or loss and comprehensive income during 2014 amounted to GEL 13,653 thousand (2013: GEL 11,952 thousand).

14.
Loans given ’000 GEL Non-current assets Loan given to the shareholder Loan given to the state controlled entity Total non-current Current assets Short term-part of loan given to shareholder Short term part of loan given to the state controlled entity Total current 2014 2013 89,887 48,878 138,765 14,793 1,689 16,482 89,136 - 89,136 - 47,055 47,055 155,247 136,191 The unsecured loan given to the shareholder bears a contractual rate of interest of 9% per annum and is repayable in equal semi-annual instalments from 2015 to 2019.
The loan was given for the purpose of construction of Gardabani Combined Cycle Power Plant (CCPP).

The loan given to the state controlled entity, originally bearing a contractual rate of interest of 11% per annum, was restructured in May 2014.

As a result the rate of interest was changed to 9.5% and the principal repayments were rescheduled from 2014 to 2017.
As at 31 December 2014 100% of shares of a wholly owned subsidiary of the borrower with an estimated fair value approximately the 18 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 same as the carrying value of the loan were pledged to secure the loan given to the state controlled entity.

In February 2015 in accordance with the decision of the Government of Georgia, the key asset of that subsidiary was sold to third party.
The loan to the state controlled entity was not overdue and payments were made in accordance with loan repayment schedule.

The management believes that, if required, the State of Georgia (National Agency of State Property of the Ministry of Economy and Sustainable Development) will provide support to the extent permitted by the Georgian legislation to the state controlled entity to enable it to repay the loan.
The Group’s exposure to credit risks and impairment losses related to loans are disclosed in note 22.

15.
Term deposits Terms and conditions of the term deposits are as follows: ’000 GEL Currency Nominal interest rate Year of maturity Face value Carrying amount Face Carrying amount value 31 December 2014 31 December 2013 Non-current term deposit Current term deposits USD 7.125% 2017 44,372 44,372 40,083 USD 8% 2014 44,372 44,372 40,083 - - - - 78,493 78,493 40,083 40,083 78,493 78,493 The Group’s non-current term deposits include GEL 18,636 thousand (2013: GEL 17,363 thousand) which have been pledged as collateral for a loan obtained by a state controlled entity in the agriculture sector.
The Ministry of Agriculture of Georgia has confirmed its intent to provide support to the state controlled entity to enable it to repay the loan.

The loan was not overdue at 31 December 2014.

The management believes that, if required, The Ministry of Agriculture of Georgia will provide support to the extent permitted by the Georgian legislation to the state controlled entity and that there is no impairment risk.
The Group’s exposure to credit and currency risks and impairment losses related to term deposits are disclosed in note 22.

16.

Trade and other receivables ’000 GEL Trade receivables Other receivables 2014 2013 69,576 366 69,942 63,143 387 63,530 The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in note 22.

19 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 17.
Cash and cash equivalents ’000 GEL Bank balances Call deposits Cash and cash equivalents in the consolidated statement of cash flows and in the consolidated statement of financial position 2014 2013 97,235 84,564 42,710 151,831 181,799 194,541 Call deposits represent term deposits with banks with maturities greater than three months from the acquisition date but for which the Group has the unilateral right to withdraw the deposits within a few days of providing notification without incurring significant penalties or loss of interest.
Consequently, these term deposits have been classified in accordance with their nature which is that of a call deposit.

The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 22.

18.
18.

Equity (a) Share capital Number of shares unless otherwise stated Par value On issue at 1 January Issue of shares in exchange for non-cash assets contributed On issue at 31 December Ordinary shares Ordinary shares 2014 2013 GEL 20 25,477,476 3,157,053 28,634,529 GEL 20 25,464,900 12,576 25,477,476 The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Company.
(b) Additional paid in capital Additional paid in capital represents benefits provided to the Group by the State of Georgia acting in its role of the shareholder and non-cash assets transferred by the Group to the State of Georgia.

(c) Dividends and other distribution to shareholders In 2014 dividends of GEL 33,000 thousand were declared and paid (2013: GEL 8,359 thousand were declared and GEL 40,359 thousand were paid).
In 2014 non-cash assets with a carrying amount of GEL 1,141 thousand (2013: nil) were transferred to the shareholder.

The related tax effect on the distribution was GEL 171 thousand.

See also note 7, Distribution of subsidiary.


20 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 (d) Non-controlling interests Non-controlling interest represents the Partnership Fund JSC’s contribution to the charter capital and its share of the cumulative retained earnings of Gardabani TPP LLC, a subsidiary of the Group (see note 23).

19.
19.

Capital management The Group has no formal policy for capital management but management seeks to maintain a sufficient capital base for meeting the Group’s operational and strategic needs, and to maintain confidence of market participants.

This is achieved with efficient cash management, constant monitoring of Group’s revenues and profit, and long-term investment plans mainly financed by the Group’s operating cash flows.

With these measures the Group aims for steady profits growth.
There were no changes in the Group’s approach to capital management during the year.

Neither the Company nor its subsidiary are subject to externally imposed capital requirements.

20.

Loans and borrowings This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings, which are measured at amortised cost.

For more information about the Group’s exposure to interest rate, foreign currency and liquidity risk, see note 22.
’000 GEL Non-current liabilities Unsecured bond issue Current liabilities Current portion of unsecured bond issue 2014 2013 456,910 456,910 8,299 8,299 425,699 425,699 6,126 6,126 Terms and debt repayment schedule Terms and conditions of outstanding loans were as follows: 31 December 2014 31 December 2013 Nominal interest rate 6.875% Currency ’000 GEL Unsecured bond issue USD Total interest- bearing liabilities Year of maturity 2017 Face value 465,900 Carrying amount 465,209 Face value 434,075 Carrying amount 431,825 465,900 465,209 434,075 431,825 In May 2012, the Group issued Eurobonds on the London Stock Exchange with a face value of USD 250 million maturing in May 2017.
The bonds bear a contractual rate of interest of 6.875% per annum on the nominal amount.

Initially, the proceeds were planned to be used for the Namakhvani Hydro Power Plant cascade construction and for general corporate purposes.

The Namakhvani Hydro Power Plant was put on hold and subsequently, on 3 April 2014, the Group transferred its wholly owned subsidiary Namakhvani HPP JSC to the State (see note 7).
The bond proceeds are instead being used for the Gardabani Combined Cycle Power Plant (CCPP) construction (see note 23).

21 21.
21 21.

Trade and other payables ’000 GEL Construction payables Trade payables Other payables Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 2014 2013 34,784 32,261 61 67,106 - 30,597 59 30,656 Construction payables are related to the construction of Gardabani CCPP and gas pipelines in the amounts of GEL 28,002 thousand and GEL 6,782 thousand, respectively.
The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 22.

22.

Fair values and risk management (a) Accounting classifications and fair values The estimates of fair value are intended to approximate 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.
However given the uncertainties and the use of subjective judgment, the fair value should not be interpreted as being realisable in an immediate sale of the assets or transfer of liabilities.
(i) Measurement of fair values Financial instruments not measured at fair value Type Fair value Valuation technique Significant unobservable inputs Financial assets Level 2 Discounted cash flows Not applicable Financial liabilities Level 2 Discounted cash flows Not applicable The carrying values of financial assets and liabilities of the Group are a reasonable approximation of their fair values.
(b) Financial risk management The Group has exposure to the following risks from its use of financial instruments:  credit risk (see 22 (b)(ii));  liquidity risk (see 22 (c));  market risk (see 22 (d)).

(i) Risk management framework The Supervisory Board has overall responsibility for the establishment and oversight of the Group’s risk management framework.
22 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits.

Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities.
(ii) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers, loans given, term deposits and cash and cash equivalents.

The carrying amount of financial assets represents the maximum credit exposure.
The maximum exposure to credit risk at the reporting date was as follows: ’000 GEL Trade and other receivables Loans given Term deposits Cash and cash equivalents (iii) Trade and other receivables Carrying amount 2014 2013 69,942 155,247 44,372 181,799 451,360 63,530 136,191 118,576 194,541 512,838 Credit risk is managed by requesting prepayments from customers or assessing their creditworthiness prior to extending credit.

No collateral in respect of trade and other receivables is generally required.
The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables.
The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: ’000 GEL Domestic Euro-zone countries CIS countries Carrying amount 2014 2013 69,913 63,044 8 21 8 91 69,942 63,143 The maximum exposure to credit risk for trade receivables at the reporting date by type of customer was: ’000 GEL Gas distributors Carrying amount 2014 2013 67,509 61,935 23 ’000 GEL Others Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 Carrying amount 2014 2013 2,433 69,942 1,595 63,530 As at 31 December 2014 the Group had one customer whose balances exceeded 10% of total trade receivables (31 December 2013: one customer).
The carrying value of these balances as of 31 December 2014 was GEL 67,509 thousand (31 December 2013: GEL 61,866 thousand).
Impairment losses The ageing of trade and other receivables at the reporting date was as follows: ’000 GEL Not past due Past due 0-30 days Past due 31-365 days Past due more than one year Gross 2014 Impairment 2014 Gross 2013 Impairment 2013 55,764 13,509 158 3,981 73,412 - - - 3,470 3,470 50,042 12,538 950 1,444 64,974 - - - 1,444 1,444 The Group believes that the unimpaired amounts that are past due by more than 30 days are still collectible, based on historic payment behaviour and analysis of customer credit risk.
(iv) Loans given The Group provided loans to the shareholder (see note 14) and a state controlled entity.

The loan to the shareholder is not overdue and management expects that the amount is collectible based on an analysis of the borrower’s credit risk and financial performance.

The loan to the state controlled entity was not past due as at 31 December 2014.

In May 2014, the Group signed a restructuring agreement with the borrower.
The management believes that, if required, the State of Georgia (National Agency of State Property of the Ministry of Economy and Sustainable Development) will provide support to the extent permitted by the Georgian legislation to the state controlled entity to enable it to repay the loan.

(v) Term deposits and cash and cash equivalents As at 31 December 2014 the Group had placements with 5 banks whose balances exceeded 10% of total term deposits and cash and cash equivalents (31 December 2013: 2 banks).
The carrying value of these balances as of 31 December 2014 was GEL 200,665 thousand (31 December 2013: GEL 223,617 thousand).

The long-term credit rating of the Banks according to Fitch Ratings as at 31 December 2014 was BB-.

(c) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.
The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient 24 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.

The Group’s liquidity management also involves monitoring the covenants embedded in the bond issue agreement.
Typically the Group ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 60 days, including the servicing of financial obligations; for the construction of Gardabani CCPP the Company also carries out regular cash flow forecasting to ensure sufficient cash to meet obligations; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters.
The Group has contractual commitments for the construction of the combined cycle power plant and the purchase of inventory (see note 24).

Exposure to liquidity risk The following are the contractual maturities of financial liabilities at the reporting date.

The amounts include estimated interest payments.

It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts.
2014 Non-derivative financial liabilities Carrying amount Contractual cash flows 0-6 mths 6-12 mths 1-2 yrs 2-3 yrs 3-5 yrs Unsecured bond issues 465,209 545,976 16,015 16,015 32,031 481,915 Trade and other payables 67,106 532,315 67,106 39,104 28,002 - 613,082 55,119 44,017 32,031 481,915 - - - - 2013 Non-derivative financial liabilities Carrying amount Contractual cash flows 0-6 mths 6-12 mths 1-2 yrs 2-3 yrs 3-5 yrs Unsecured bond issues 431,825 538,524 14,921 14,921 29,843 29,843 448,996 Trade and other payables 30,656 462,481 (d) Market risk 30,656 30,656 569,180 45,577 14,921 29,843 29,843 - 448,996 - - - Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments.
The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.

(i) Currency risk The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of Group entities.

The currency in which these transactions primarily are denominated is USD.
Generally, the Group’s borrowings are 25 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 denominated in currencies that match the cash flows generated by the underlying operations of the Group.

This provides an economic hedge without a need to enter into derivatives contracts.
The Group’s exposure to foreign currency risk was as follows: Exposure to currency risk ’000 GEL Trade and other receivables Loans given Term deposits Cash and cash equivalents Trade and other payables Loans and borrowings Net exposure USD-denominated USD-denominated 2014 2013 1,946 155,247 44,372 82,083 (42,360) (465,209) (223,921) 1,569 136,191 118,576 171,176 (25,847) (431,825) (30,160) The following significant exchange rates have been applied during the year: in GEL USD Sensitivity analysis Average rate Reporting date spot rate 2014 2013 2014 2013 1.7659 1.6634 1.8636 1.7363 A reasonably possible 30% strengthening of the GEL, as indicated below, against USD at 31 December would have affected the measurement of financial instruments denominated in a foreign currency and increased/(decreased) profit or loss by the amounts shown below.
The analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecast sales and purchases.

’000 GEL 31 December 2014 31 December 2013 Profit or loss 57,100 7,691 A weakening of the GEL against USD at 31 December would have had the equal but opposite effect to the amounts shown above, on the basis that all other variables remain constant.

There would be no impact directly in equity as a result of foreign currency fluctuations.
(ii) Interest rate risk Changes in interest rates impact primarily loans and borrowings by changing either their fair value (fixed rate debt) or their future cash flows (variable rate debt).

Management does not have a formal policy of determining how much of the Group’s exposure should be to fixed or variable rates.
However, at the time of raising new loans or borrowings management uses its judgment to decide 26 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 whether it believes that a fixed or variable rate would be more favourable to the Group over the expected period until maturity.
Exposure to interest rate risk At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments was as follows: ’000 GEL Fixed rate instruments Loans given Term deposits Cash and cash equivalents Loans and borrowings Carrying amount 2014 2013 155,247 44,372 181,799 (465,209) (83,791) 136,191 118,576 194,541 (431,825) 17,483 Fair value sensitivity analysis for fixed rate instruments The Group does not account for any fixed-rate financial instruments as fair value through profit or loss or as available-for-sale.
Therefore a change in interest rates at the reporting date would not have an effect in profit or loss or in equity.

23.

Significant subsidiaries In October 2013 a new subsidiary, Gardabani TPP LLC, was created by the Company and Partnership Fund JSC with 51% and 49% interest, respectively.

The charter capital was defined at USD 100,000 thousand (paid charter capital as at 31 December 2014 and 2013: GEL 170,296 thousand).
In accordance with the charter of the subsidiary, unanimous agreement is required for certain decisions.

Management has concluded that the Group has control over the subsidiary because the Group is exposed to (has rights to) variable returns from its involvement with the subsidiary, and has the ability to affect those returns through its power over the subsidiary.
The conclusion is based on the percentage of the ownership interest and the significance of decisions defined in the charter of the subsidiary for which only a simple majority of votes is required.

The subsidiary was created for the construction of Gardabani Combined Cycle Power Plant (CCPP).

The construction works are planned to be completed by the end of July 2015.

The Gardabani CCPP is expected to be fully operational from September 2015.
As at 31 December 2014, the prepayment of GEL 96,632 thousand (2013: GEL 199,832 thousand) represents amounts paid for the construction of the plant.

27 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 The following table summarises the information relating to the Group’s subsidiary Gardabani TPP LLC that has material NCI.
31 December 2014 ’000 GEL NCI percentage Non-current assets Current assets Non-current liabilities Current liabilities Net assets Carrying amount of NCI Revenue Loss Total comprehensive loss Loss allocated to NCI Cash flows used in operating activities Cash flows used in investment activities Cash flows from financing activities (dividends to NCI: nil) Net increase in cash and cash equivalents 31 December 2013 ’000 GEL NCI percentage Non-current assets Current assets Non-current liabilities Current liabilities Net assets Carrying amount of NCI Revenue Loss Total comprehensive loss Loss allocated to NCI Cash flows used in operating activities Before intra group eliminations Intra-group eliminations After intra-group eliminations 49% 356,429 22,615 (206,140) (29,843) 143,061 71,767 - (27,174) (27,174) (13,315) (30,268) (126,537) 164,371 7,566 11,549 83,316 11,549 (1,766) Before intra group eliminations Intra-group eliminations After intra-group eliminations 49% 201,738 169 (32,048) (658) 169,201 83,443 - (1,091) (1,091) (535) (162) - - Cash flows used in investment activities (117,315) Cash flows from financing activities (dividends to NCI: nil) Net decrease in cash and cash equivalents 32,048 (85,429) 83,443 (535) 28 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 24.
Capital commitments The Group had entered into contracts for construction of the Gardabani Combined Cycle Power Plant (CCPP) with outstanding capital commitments of GEL 49,968 thousand at 31 December 2014 (2013: GEL 149,719 thousand).

As at 31 December 2013 the Group had commitments related to the construction of Namakhvani HPP cascade of GEL 18,056 thousand.

In April 2014 JSC Namakhvani HPP was transferred to the Government of Georgia.
Related commitments were also transferred to the Government of Georgia.

25.

Contingencies (a) Insurance The insurance industry in the Georgia is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available.

The Group does not have full coverage for its plant facilities, business interruption, or third party liability in respect of property or environmental damage arising from accidents on Group property or relating to Group operations.
Until the Group obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on the Group’s operations and financial position.
(b) Litigation The Group is defending a claim brought to the courts in 2010 by a foreign company that is seeking contractual payments and interest accrued for non-payment as well as other damages and lost profits from non-performance of a contract allegedly concluded in 2003 to 2004 by the predecessor of the Company.

In 2010, the Group hired legal advisors to represent the Group in the dispute.

The Group disputes the validity of the claim.


Management assesses the likelihood that the Group will be required to make a contractual payment of up to USD 5 million to the foreign company as possible.

Management assesses the probability that the Group will also be required to pay accrued interest as well as other damages and lost profits as remote.
(c) Taxation contingencies The taxation system in Georgia is relatively new and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are sometimes unclear, contradictory and subject to varying interpretation.

In the event of a breach of tax legislation, no liabilities for additional taxes, fines or penalties may be imposed by the tax authorities after six years have passed since the end of the year in which the breach occurred.
These circumstances may create tax risks in Georgia that are more significant than in other countries.

Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Georgian tax legislation, official pronouncements and court decisions.

However, the interpretations of the relevant authorities could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant.
(d) Environmental matters The enforcement of environmental regulation in Georgia is evolving and the enforcement posture of government authorities is continually being reconsidered.

The Company periodically evaluates its obligations under environmental regulations.

As obligations are determined, they are recognized immediately.

Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be estimated but could be material.
In the current enforcement 29 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 climate under existing legislation, management believes that there are no significant liabilities for environmental damage.

26.

Related party transactions (a) Control relationships As at 31 December 2014 and 2013 Georgian Oil and Gas Corporation JSC is wholly owned by Partnership Fund JSC.

The ultimate controlling party of the Group is the Government of Georgia.
The Group’s parent company produces publicly available financial statements.
(b) Transactions with key management personnel (i) Key management remuneration Key management received the following remuneration during the year, which is included in personnel costs: ’000 GEL Salaries and bonuses 2014 2013 697 435 (c) Other related party transactions The Group transacts in its daily operations with a number of entities that are either controlled, jointly controlled or under significant influence of the Government of Georgia.
The Group has opted to apply the exemption in IAS 24 Related Party Disclosures that allows the presentation of reduced related party disclosures regarding transactions with government-related entities.

Management estimates that the aggregate amounts of other income and expenses and the related balances with Government-related entities, except as disclosed below are not significant.

The Group’s other related party transactions are disclosed below.
Transactions with the Government of Georgia are disclosed in notes 12, 13 and 18 of these consolidated financial statements.
(i) Revenue ’000 GEL 2014 2013 2014 2013 Transaction value for the year ended 31 December Outstanding balance as at 31 December State controlled entities: Rent of pipelines 50,785 50,785 42,666 42,666 - - - - 30 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 (ii) Expenses ’000 GEL 2014 2013 2014 2013 Transaction value for the year ended 31 December Outstanding balance as at 31 December State controlled entities: Purchase of gas (iii) Loans 49,253 49,253 33,918 33,918 8,755 8,755 608 608 ’000 GEL Interest accrued Outstanding balance 2014 2013 2014 2013 Loans given: Shareholder State controlled entity 27.
Subsequent events 8,573 4,673 7,832 5,463 104,680 50,567 89,136 47,055 13,246 13,295 155,247 136,191 In March 2015, the Group management started negotiations with potential buyers related to the disposal of Gardabani Combined Cycle Power Plant (CCPP).

As at the date these consolidated financial statements were approved and authorized for issue there was no signed agreement for the disposal of the plant and there was no commitment for its sale.

28.
28.

Basis of measurement The consolidated financial statements are prepared on the historical cost basis.

29.

Changes in accounting policies Except for the changes below, the Group has consistently applied the accounting policies set out in Note 30 to all periods presented in these consolidated financial statements.
The Group has adopted the following amendment to standards, with a date of initial application of 1 January 2014: Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32 Financial Instruments: Presentation).

The nature and the effect of the changes are explained below.
Amendments to IAS 32 Financial Instruments: Disclosure and Presentation - Offsetting Financial Assets and Financial Liabilities do not introduce new rules for offsetting financial assets and liabilities; rather they clarify the offsetting criteria to address inconsistencies in their application.
The Amendments specify that an entity currently has a legally enforceable right to set-off if that right is not contingent on a future event; and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties.

The amended standard did not have a material impact on the Group consolidated financial statements 31 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 30.
Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities, except as explained in note 29, which addresses changes in accounting policies.

(a) Basis of consolidation (i) Non-controlling interests Non-controlling interests are measured at their proportionate share of the acquiree’s identifiable net assets at the acquisition date.
(ii) Subsidiaries Subsidiaries are entities controlled by the Group.

The Group controls an entity when it 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.

The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group.

Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance.

(iii) Jointly controlled operations A jointly controlled operation is a joint venture carried on by each venturer using its own assets in pursuit of the joint operations.
The consolidated financial statements include the assets that the Group controls and the liabilities that it incurs in the course of pursuing the joint operation, and the expenses that the Group incurs and its share of the income that it earns from the joint operation.

(iv) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated.
(b) Revenue (i) Sale of gas and oil Revenue from the sale of gas and oil in the course of ordinary activities is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates.
Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably.
If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognized as a reduction of revenue as the sales are recognized.

The timing of the transfers of risks and rewards varies depending on the individual terms of the sales agreement.

For sales of gas, the sale is recognized on the basis of metered usage of gas by customers.
32 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 For sales of oil, transfer occurs upon loading the product onto the relevant carriers, inspection by an independent inspector and sealing of carriers based on FCA (Incoterms 2000) at Vaziani or Supsa (Georgia) stations.

The seller is responsible for delivery of goods to the named points, uploading goods to the buyer’s wagons and customs registration.
(ii) Rent of pipelines Revenue from rent of gas pipelines is recognized in profit or loss on the basis of the metered gas transferred through the pipelines at the contract rate.

(iii) Services Revenue from services rendered is recognized in profit or loss in proportion to the stage of completion of the transaction at the reporting date.

The stage of completion is assessed by reference to surveys of work performed.
Oil transportation fees received in cash are recognized on the basis of the metered oil transferred through the pipelines at the contract rate for barrels of oil.

(c) Finance income and costs The Group’s finance income and finance costs include: interest income;   unwinding of discount on finance lease receivable;  interest expense.

Interest income or expense is recognised using the effective interest method.
Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method.

(d) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date.

The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period.
Non-monetary items in a foreign currency that are measured based on historical cost are translated using the exchange rate at the date of the transaction.

Foreign currency differences arising in retranslation are recognised in profit or loss.

(e) Employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.
A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive 33 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

(f) Income tax Income tax expense comprises current and deferred tax.
It is recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in other comprehensive income.

(i) Current tax Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
(ii) Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
Deferred tax is not recognised for:   temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; temporary differences related to investments in subsidiaries and joint arrangements to the extent that the Group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future.
A deferred tax asset is recognised for unused tax losses, unused tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be used.

Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

(g) Inventories Inventories are measured at the lower of cost and net realisable value.
The cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition.

In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity.
Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

34 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 (h) Property, plant and equipment (i) Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.
Property, plant and equipment contributed by the shareholder are initially measured at fair value.

The cost of property, plant and equipment at the date of adopting IFRS, 1 January 2008, was determined by reference to its fair value at that date (“deemed cost”).

Cost includes expenditure that is directly attributable to the acquisition of the asset.
The cost of self- constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and capitalized borrowing costs.

Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.
If significant parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

Any gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and is recognized net within other income/other expenses in profit or loss.
(ii) Subsequent expenditure The cost of replacing a component of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the component will flow to the Group, and its cost can be measured reliably.

The carrying amount of the replaced component is derecognised.

The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred.
(iii) Depreciation Items of property, plant and equipment are depreciated from the date that they are installed and are ready for use, or in respect of internally constructed assets, from the date that the asset is completed and ready for use.

Depreciation is based on the cost of an asset less its residual value.
Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset.

Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term.

Land is not depreciated.


The estimated useful lives of significant items of property, plant and equipment for the current and comparative periods are as follows:  gas and oil pipelines  buildings  oil wells  plant and equipment  other 30-35 years; 50 years; 4-9 years; 2-14 years; 1-6 years.
35 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.

(i) Financial instruments The Group classifies non-derivative financial assets into the loans and receivables.

The Group classifies non-derivative financial liabilities into the other financial liabilities category.
(i) Non-derivative financial assets The Group initially recognizes loans and receivables and deposits on the date that they are originated.

All other financial assets and financial liabilities are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.
The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred.

Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability.
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legally enforceable right to set off the recognised amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.
Loans and receivables Loans and receivables are a category of financial assets with fixed or determinable payments that are not quoted in an active market.

Such assets are recognized initially at fair value plus any directly attributable transaction costs.

Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses.
Loans and receivables category comprise loans given, trade and other receivables, term deposits and cash and cash equivalents.

Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits and highly liquid investments with maturities of three months or less from the acquisition date that are subject to insignificant risk of changes in their fair value.
(ii) Non-derivative financial liabilities-measurement The Group classifies non-derivative financial liabilities into the other financial liability category.

Such financial liabilities are recognized 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.

Other financial liabilities comprise loans and borrowings and trade and other payables.
36 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 (j) Share capital Ordinary shares Ordinary shares are classified as equity.

Incremental costs directly attributable to issue of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects.

Reduction of share capital Share capital reductions and non-cash distributions are recognized at the carrying amount of the assets distributed.
Non-cash distributions of the Company are out of scope of IFRIC 17 Distributions of Non-cash Assets to Owners since the ultimate controlling party controls the assets before and after the distribution.

Increase of share capital Share capital increase is effected through issuance of new shares.
When share capital is increased, any difference between the registered amount of share capital and the fair value of the assets contributed is recognized as a separate component of equity as fair value adjustment reserve for non- cash owner contributions.

(k) Impairment (i) Non-derivative financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired.
A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.
Objective evidence that financial assets are impaired can include:  default or delinquency by a debtor;  restructuring of an amount due to the Group on terms that the Group would not consider otherwise; indications that a debtor or issuer will enter bankruptcy; adverse changes in the payment status of borrowers or issuers in the Group; economic conditions that correlate with defaults; or     observable data indicating that there is measurable decrease in expected cash flows from a group of financial assets.
Financial assets measured at amortised cost The Group considers evidence of impairment for these assets at both an individual asset and a collective level.

All individually significant loans and receivables are individually assessed for impairment.

Those found not to be impaired are then collectively assessed for any impairment that has been incurred but not yet identified.
Assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics.

In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.
37 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 An impairment loss is calculated as the difference between an asset’s carrying amount, and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate.

Losses are recognized in profit or loss and reflected in an allowance account.

When the Group considers that there are no realistic prospects of recovery of the asset, the relevant amounts are written off.
Interest on the impaired asset continues to be recognized through the unwinding of the discount.

When a subsequent event causes the amount of impairment loss to decrease and the decrease can be related objectively to an event occurring after the impairment was recognised, the decrease in impairment loss is reversed through profit or loss.
(ii) Non-financial assets The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment.

If any such indication exists, then the asset’s recoverable amount is estimated.

An impairment loss is recognized if the carrying amount of an asset or its related cash-generating unit (CGU) exceeds its estimated recoverable amount.
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGU.

The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell.
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 CGU.

Impairment losses are recognized in profit or loss.

Impairment losses recognized in respect of CGUs are allocated to reduce the carrying amounts of the assets in the CGU on a pro rata basis.
Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists.

An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognized.
(l) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.

Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.
The unwinding of the discount is recognised as finance cost.

(m) Leased assets Assets held by the Group under leases that transfer to the Group substantially all the risks and rewards of ownership are classified as finance leases.

Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments.
Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.
When the Group is the lessor in a lease agreement that transfers substantially all of the risks and rewards incidental to ownership of the asset to the lessee, the arrangement is classified as a finance 38 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 lease and a receivable equal to the net investment in the lease is recognized and presented within loans and receivables.
Subsequently the recognition of finance income is based on a pattern reflecting a constant periodic rate of return on the Group’s net investment in the finance lease.

Other leases are operating leases and the leased assets are not recognised on the Group’s statement of financial position.
(n) Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components.

All operating segments’ operating results are reviewed regularly by the General Director to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.
Segment results that are reported to the General Director include items directly attributable to a segment.

31.

New standards and interpretations not yet adopted A number of new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December 2014, and have not been applied in preparing these consolidated financial statements.

Of these pronouncements, potentially the following will have an impact on the Group’s operations.
The Group plans to adopt these pronouncements when they become effective.

New or amended standard IFRS 9 Financial Instruments Summary of the requirements IAS 39 Financial IFRS 9, published in July 2014, replaces the existing guidance Instruments: Recognition and in Measurement.
IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets, and the new general hedge accounting requirements.

It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39.

IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted.
Possible impact on consolidated financial statements The Group is assessing the its on impact potential consolidated financial statements resulting from the application of IFRS 9.

39 Georgian Oil and Gas Corporation JSC Notes to the Consolidated Financial Statements for 2014 IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised.
It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes.

The core principle of the new standard is that an entity recognises revenue to depict the transfer of promised goods or services the consideration to which the entity expects to be entitled in exchange for those goods or services.
The new standard results in enhanced disclosures about revenue, provides guidance for transactions addressed comprehensively and improves guidance for multiple-element arrangements.

IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2017, with early adoption permitted.

in an amount to customers that reflects that were previously not The Group is assessing the its impact on potential consolidated financial statements resulting from the application of IFRS 15.

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