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35. Explanation to transition to IFRS

As stated in Note 2 these are the first Consolidated Financial Statements prepared in accordance with IFRS. The date of the Group transition to IFRS is January 1, 2011 (the “Transition date”).

Accounting policies described in Note 2 were applied when preparing Consolidated Financial Statements for the years ended December 31, 2012 and the comparative information and Consolidated Statement of Financial Position as at the Transition Date.

In preparing its opening IFRS Consolidated Statement of Financial Position and adjusting amounts reported previously in the financial statements prepared in accordance with US GAAP (Generally accepted Accounting principles of USA, previous GAAP), the Group has applied IFRS 1 First-Time Adoption of International Financial Reporting Standards, which contains a number of voluntary exemptions and mandatory exceptions from the requirement to apply IFRS retrospectively.

Exemptions used during transition to IFRS

The Group has applied the following exemptions allowed by IFRS 1:

a. Business combinations

The Group elected to apply IFRS 3 (R) prospectively to business combinations occurring after its transition date. All business combinations, which occurred prior to the Transition Date, have not been restated. Correspondingly, any goodwill recognised under previous GAAP has not been restated as of the Transition Date. The Group tested goodwill for impairment as of the Transition Date and no impairments were recognised.

The exemption was also applied to associates and joint ventures.

b. Deemed cost

As deemed cost as of January 1, 2011 the Group measured certain items of property, plant and equipment at fair value or at fair value based on previous acquisition. All other items of property, plant and equipment as well as investments in jointly controlled entities and associates have been accounted under the historical cost convention.

c. Cumulative Translation Differences

Cumulative translation differences are deemed to be zero at the Transition Date.

d. Decommissioning liabilities included in the cost of property, plant and equipment

When accounting for decommissioning liability, the Group applied a shortcut method by:

  • measuring the liability as of the transition date in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets based on the new functional currency; and
  • recognising in retained earnings the difference between that amount of the liability at the date of transition and the amount determined under the Group’s previous GAAP.

Adjustments Made in Connection with Transition to IFRS

The financial statements under US GAAP were presented in US Dollars. In presenting the reconciliation of the transition to IFRS and the Russian Ruble as the presentation currency for the financial statements, the following rules were followed:

  • all items in the statement of financial position were translated using closing exchange rates at the end of the year;
  • all items in the statement of comprehensive income were translated using the average exchange rate for the year.

The following material adjustments were made to the US GAAP financial statements in connection with the transition to IFRS:

a. Reclassifications

To align the presentation of certain items of assets and liabilities, income and expenses with the requirements of IFRS, the Group made a number of reclassifications from US GAAP financial statements.

The major reclassifications were:

  • export duties and excise tax related to sales volumes are presented as deductions from sales in IFRS financial statements rather than operating expenses;
  • part of transportation expenses (regarding transportation to refinery) was transferred to production and manufacturing expenses;
  • tax prepayments were reclassified from trade and other receivables to other current assets and investments in associates were separated from long-term financial assets.

b. Functional Currency

This assessment of functional currency under IFRS required significant judgement by Management considering how the markets have been evolving during the last years and expectation for future. It was concluded that for the majority of the Group entities including JSC Gazprom Neft the functional currency is the Russian Rouble, as that is considered the currency of the primary economic environment affecting the businesses of those entities. The functional currency for the international operations was assessed as US dollar or local currency. The determination of the functional currency might have significant impact in the future, depending on how the exchange rates between the main currencies affecting the Group will develop.

Under US GAAP the Group’s functional currency was US Dollar. For the purposes of reporting under IFRS the local currency was determined to be the functional currency for most group entities. The Russian Ruble was set as the functional currency of JSC Gazprom Neft and its subsidiaries operating in Russian Federation and as the presentation currency for the whole Group.

c. Deemed Cost

As described above the Group applied the exemption allowed by IFRS to the measurement of certain items of property, plant and equipment. The fair values of assets were determined by an independent appraiser to be RUB 171,532 million. The aggregate adjustment to the amounts presented in US GAAP financial statements comprised RUB (16,173) million as of January 1, 2011.

As of January 1, 2011 the deferred taxes relate to changes in temporary differences between the accounting and tax base of the assets as a result of the fair value as deemed cost adjustment (increase in deferred tax asset of RUB 3,235 million) and the change in translation difference between the calculation of deferred tax in US Dollars under US GAAP compared to Russian Rubles under IFRS (decrease in net deferred tax of RUB 3,694 million).

As of December 31, 2011 the deferred taxes relate to changes in temporary differences between the accounting and tax base of the assets as a result of the fair value as a deemed cost adjustment (increase in deferred tax asset of RUB 5,683 million) and the change in translation difference between the calculation of deferred tax in US Dollars under US GAAP compared to Russian Rubles under IFRS (decrease in net deferred tax of RUB 8,948 million).

d. Historical cost

Except as described in paragraph c. Deemed Cost above, the Group applied historical cost for measurement of items of property, plant and equipment. Several subsidiaries operating in the Russian Federation had used Russian Rubles as their functional currency since their acquisition dates. As several non-monetary assets were purchased before January 1, 2002 the Group applied IAS 29 Financial reporting in Hyper-Inflationary Economies to inflate items purchased during 1995 – 2002.

As of January 1, 2011 the deferred taxes relate to changes in temporary differences between the accounting and tax base of the assets as a result of the historical cost adjustment (increase in deferred tax asset of RUB 320 million) and the change in translation difference between the calculation of deferred tax in US Dollars under US GAAP compared to Russian Rubles under IFRS (increase in net deferred tax of RUB 4,119 million).

As of December 31, 2011 the deferred taxes relate to changes in temporary differences between the accounting and tax base of the assets as a result of the historical cost adjustment (increase in deferred tax asset of RUB 3,936 million) and the change in translation difference between the calculation of deferred tax in US Dollars under US GAAP compared to Russian Rubles under IFRS (increase in net deferred tax of RUB 1,020 million).

e. Measurement of financial liabilities

Under US GAAP short-term and long-term debt were reported at book value and related transaction costs were accounted for separately. In accordance with IFRS financial liabilities are stated at amortised cost.

f. Hedge accounting

As allowed by IAS 39 the Group applied hedge accounting in financial statements prepared in accordance with IFRS. For accounting policy please refer to Note 2 “Summary of Significant Accounting Policies”.

g. Decommissioning obligation

The decommissioning obligation reported under US GAAP was measured using a discount rate of 8% and a US dollar inflation rate of 2.5%. For the purposes of these Consolidated Financial Statements the Group changed the discount and inflation rates based on the conditions existing for the Russian Ruble as of the Transition Date to 11% and 5%, respectively.

h. Accounting for Transactions under Common Control

Under previous US GAAP the Group was obliged to present results of the acquisitions under common control as if the acquired assets and liabilities had always been under control of the Group. Under IFRS accounting policies the Group decided to account for business combinations under common control from the date when control was obtained by the Group.

In the fourth quarter of 2011, the group had acquired certain entities under common control which were accounted for retrospectively under US GAAP. For the purpose of the IFRS financial statements these acquisitions have been accounted for from the date control was obtained. Hence, the effects of retrospective consolidation in US GAAP have been eliminated in these IFRS financial statements.

i. Other adjustments

Other adjustments include all other individually insignificant adjustments required to make the financial statements compliant with IFRS and adjustments to deferred taxes necessary as a consequence of previous adjustments.

Reconciliations to IFRS of data provided under previous GAAP are provided in the tables below.

Impact on the cash flow statements

The Group has made a number of reclassifications to the numbers reported under US GAAP in order to present its operating cash flows in accordance with IFRS. These reclassification adjustments have no significant impact on the results presented for each type of the Group’s activities.

Below the reconciliations of Statement of financial position as of December 31, 2011; January 1, 2011 and comprehensive income for the year ended December 31, 2011 are provided.

Reconciliation of shareholders’ equity as of January 1, 2011

Adjustments

Under previous US GAAP,USD million

US GAAP converted to presentation currency

Reclassification

Fair value as deemed cost

Historical cost

Amortised cost

Hedge accounting

Decommissioning obligation

Transaction under common control

Other adjustments

Total impact of change to IFRS

Under IFRS

Assets

Current assets

Cash and cash equivalents

1,146

34,927

(7)

(7)

34,920

Short-term financial assets

218

6,644

5,029

61

5,090

11,734

Trade and other receivables

2,600

79,240

(30,233)

(1,036)

39

(31,230)

48,010

Inventories

1,874

57,114

(212)

(366)

(578)

56,536

Current income tax prepayments

3,657

(35)

3,622

3,622

Other current assets

1,112

33,891

29,227

(287)

(283)

28,657

62,548

Assets classified as held for sale

189

5,760

1,706

1,706

7,466

Total current assets

7,139

217,576

7,680

1,207

(283)

(1,402)

58

7,260

224,836

Non-current assets

Property, plant and equipment

16,466

501,833

1,189

(16,173)

(1,602)

(16,823)

(33,409)

468,424

Goodwill and other intangible assets

1,274

38,828

450

450

39,278

Investments in associates

188,896

(9,595)

179,301

179,301

Long-term trade and other receivables

274

(18)

256

256

Long-term financial assets

6,994

213,155

(189,505)

(1,440)

80

(190,865)

22,290

Deferred income tax asset

220

6,705

1,054

2,016

105

(52)

27

3,150

9,855

Other non-current assets

569

17,341

(4,419)

(4)

(1,756)

(6,179)

11,162

Total non-current assets

25,523

777,862

(3,565)

(15,119)

(10,175)

(1,756)

105

(52)

(16,823)

89

(47,296)

730,566

Total assets

32,662

995,438

4,115

(15,119)

(8,968)

(2,039)

105

(52)

(18,225)

147

(40,036)

955,402

Reconciliation of shareholders’ equity as of January 1, 2011

Adjustments

Under previous US GAAP, USD million

US GAAP converted to presentation currency

Reclassification

Fair value as deemed cost

Historical cost

Amortised cost

Hedge accounting

Decommissioning obligation

Transaction under common control

Other adjustments

Total impact of change to IFRS

Under IFRS

Liabilities and shareholders’ equity

Current liabilities

Short-term debt and current portion of long-term debt

1,740

53,030

1,402

(409)

(1,402)

239

(170)

52,860

Trade and other payables

2,216

67,537

(28,526)

(2,042)

26

(30,542)

36,995

Other current liabilities

20,694

691

21,385

21,385

Current income tax payable

4,175

(36)

4,139

4,139

Other taxes payable

884

26,942

(4,175)

(305)

(4)

(4,484)

22,458

Provisions for liabilities and charges

10,545

6

10,551

10,551

Liabilities associated with assets classified held for sale

134

4,084

(211)

(211)

3,873

Total current liabilities

4,974

151,593

4,115

(409)

(3,749)

711

668

152,261

Non-current liabilities

Long-term debt

4,942

150,617

(1,190)

(3)

(1,193)

149,424

Deferred income tax liability

816

24,869

1,513

(2,423)

88

(1,158)

(33)

(2,013)

22,856

Provisions for liabilities and charges

429

13,075

6,644

(262)

(427)

(13)

5,942

19,017

Other non-current liabilities

428

13,044

(6,644)

(4,511)

(9)

(11,164)

1,880

Total non-current liabilities

6,615

201,605

1,513

(2,423)

(1,102)

(262)

(6,096)

(58)

(8,428)

193,177

Equity

Share capital

2

61

37

37

98

Treasury shares

(45)

(1,371)

201

201

(1,170)

Additional paid-in capital

677

20,631

(15,453)

(5,178)

(20,631)

Retained earnings

18,223

555,381

(16,632)

5,481

(528)

(5,873)

210

(506)

(17,848)

537,533

Other reserves

5,978

5,978

5,978

Equity attributable to the Company’s owners

18,857

574,702

(16,632)

(9,734)

(528)

105

210

(5,178)

(506)

(32,263)

542,439

Non-controlling interest

2,216

67,538

3,189

(3,202)

(13)

67,525

Total equity

21,073

642,240

(16,632)

(6,545)

(528)

105

210

(8,380)

(506)

(32,276)

609,964

Total liabilities and shareholders’ equity

32,662

995,438

4,115

(15,119)

(8,968)

(2,039)

105

(52)

(18,225)

147

(40,036)

955,402

Reconciliation of shareholders’ equity as of December 31, 2011

Adjustments

Under previous US GAAP, USD million

US GAAP converted to presentation currency

Reclassification

Fair value as deemed cost

Historical cost

Amortised cost

Hedge accounting

Decommissioning obligation

Other adjustments

Total impact of change to IFRS

Under IFRS

Assets

Current assets

Cash and cash equivalents

914

29,427

8

8

29,435

Short-term financial assets

529

17,032

1,932

(13)

1,919

18,951

Trade and other receivables

3,562

114,683

(43,851)

(52)

(43,903)

70,780

Inventories

2,343

75,435

(1,234)

(1,234)

74,201

Current income tax prepayments

12,267

110

12,377

12,377

Other current assets

1,642

52,866

37,605

(66)

(887)

36,652

89,518

Assets classified as held for sale

81

2,608

(579)

(579)

2,029

Total current assets

9,071

292,051

7,953

(1,879)

(887)

53

5,240

297,291

Non-current assets

Property, plant and equipment

19,313

621,803

1,352

(28,417)

(19,682)

(74)

(46,821)

574,982

Goodwill and other intangible assets

1,275

41,050

(856)

(856)

40,194

Investments in associates

195,269

(19,954)

175,315

175,315

Long-term trade and other receivables

225

(6)

219

219

Long-term financial assets

6,453

207,761

(196,042)

(2,269)

37

(198,274)

9,487

Deferred income tax asset

214

6,890

(460)

1,774

3,649

175

(94)

5,044

11,934

Other non-current assets

357

11,494

(1,578)

(1,411)

232

(2,757)

8,737

Total non-current assets

27,612

888,998

(774)

(28,877)

(40,987)

(1,411)

3,649

175

95

(68,130)

820,868

Total assets

36,683

1,181,049

7,179

(28,877)

(42,866)

(2,298)

3,649

175

148

(62,890)

1,118,159

Reconciliation of shareholders’ equity as of December 31, 2011

Adjustments

Under previous US GAAP, USD million

US GAAP converted to presentation currency

Reclassification

Fair value as deemed cost

Historical cost

Amortised cost

Hedge accounting

Decommissioning obligation

Other adjustments

Total impact of change to IFRS

Under IFRS

Liabilities and shareholders’ equity

Current liabilities

Short-term debt and current portion of long-term debt

1,277

41,114

3,574

(368)

10

3,216

44,330

Trade and other payables

2,126

68,449

(26,790)

(463)

(27,253)

41,196

Other current liabilities

23,246

1,919

25,165

25,165

Current income tax payable

1,996

(2)

1,994

1,994

Other taxes payable

997

32,100

(1,996)

(15)

(2,011)

30,089

Provisions for liabilities and charges

7,148

(260)

6,888

6,888

Liabilities of disposal groups classified as held for sale

17

547

120

120

667

Total current liabilities

4,417

142,210

7,178

(368)

1,309

8,119

150,329

Non-current liabilities

Long-term debt

5,420

174,503

3,220

(707)

(37)

2,476

176,979

Deferred income tax liability

1,014

32,647

2,805

(3,182)

245

(72)

(204)

32,443

Other non-current financial liabilities

6,858

(34)

6,824

6,824

Provisions for liabilities and charges

393

12,653

3,703

1,109

(7)

4,805

17,458

Other non-current liabilities

493

15,873

(13,780)

(137)

(13,917)

1,956

Total non-current liabilities

7,320

235,676

1

2,805

(3,182)

(462)

1,109

(287)

(16)

235,660

Equity

Share capital

2

64

34

34

98

Treasury shares

(45)

(1,449)

279

279

(1,170)

Additional paid-in capital

731

23,535

(13,513)

(13,513)

10,022

Retained earnings

22,824

734,844

(31,682)

(26,152)

(1,468)

768

(934)

1,571

(57,897)

676,947

Other reserves

2,881

(3,821)

(940)

(940)

Equity attributable to the Company’s owners

23,512

756,994

(31,682)

(39,352)

(1,468)

3,649

(934)

(2,250)

(72,037)

684,957

Non-controlling interest

1,434

46,169

(332)

1,376

1,044

47,213

Total equity

24,946

803,163

(31,682)

(39,684)

(1,468)

3,649

(934)

(874)

(70,993)

732,170

Total liabilities and shareholders’ equity

36,683

1,181,049

7,179

(28,877)

(42,866)

(2,298)

3,649

175

148

(62,890)

1,118,159

Reconciliation of comprehensive income for the year ended December 31, 2011

Adjustments

Under previous US GAAP,USD million

US GAAP converted to presentation currency

Reclassification

Fair value as deemed cost

Historical cost

Amortised cost

Hedge accounting

Decommissioning obligation

Transaction under common control

Other adjustments

Total impact of change to IFRS

Under IFRS

Sales

44,172

1,297,666

(3,685)

(2,385)

(6,070)

1,291,596

Less export duties and excise tax

(8,092)

(238,076)

(24,568)

851

(23,717)

(261,793)

Total revenue from sales

36,080

1,059,590

(24,568)

(3,685)

(1,534)

(29,787)

1,029,803

Costs and other deductions

Purchases of oil, gas and petroleum products

(10,817)

(317,272)

1,573

1,295

205

3,073

(314,199)

Production and manufacturing expenses

(3,039)

(89,354)

(19,316)

500

647

(18,169)

(107,523)

Selling, general and administrative expenses

(1,779)

(52,482)

1,345

156

(449)

1,052

(51,430)

Transportation expenses

(3,391)

(99,542)

17,246

361

17,607

(81,935)

Depreciation, depletion and amortization

(1,963)

(57,688)

(351)

1,334

906

1,889

(55,799)

Taxes other than income tax

(8,038)

(235,967)

24,745

2,155

871

27,771

(208,196)

Exploration expenses

(74)

(2,203)

(88)

186

98

(2,105)

Total operating expenses

(29,101)

(854,508)

25,505

(351)

2,629

3,717

1,821

33,321

(821,187)

Other income, net

39

1,212

1,556

(2,204)

361

(287)

925

Operating profit

7,018

206,294

2,493

(351)

425

32

648

3,247

209,541

Share of profit of equity accounted investments

248

7,234

(97)

(263)

(360)

6,874

Net foreign exchange (loss) gain

(172)

(4,700)

(1,556)

11,170

31

(4,205)

5,440

740

Finance income

66

1,844

97

15

112

1,956

Finance expense

(329)

(9,669)

(937)

(442)

(385)

(156)

143

(1,777)

(11,446)

Total income tax expenses

(187)

(5,291)

(2,493)

(442)

11,170

(385)

(125)

(4,310)

3,415

(1,876)

Profit before income tax

6,831

201,003

(351)

425

(442)

11,170

(385)

(93)

(3,662)

6,662

207,665

Current profit tax expense

(1,173)

(34,217)

489

489

(33,728)

Deferred profit tax expense

(71)

(2,018)

(2,846)

(1,066)

(88)

(250)

(4,250)

(6,268)

Total income tax expenses

(1,244)

(36,235)

(2,846)

(1,066)

(88)

(250)

489

(3,761)

(39,996)

Profit for the year

5,587

164,768

(3,197)

(641)

(530)

11,170

(385)

(343)

(3,173)

2,901

167,669

Attributable to:

  • Gazprom Neft shareholders

5,354

157,826

(3,197)

(641)

(530)

11,170

(385)

(374)

(3,507)

2,536

160,362

  • Non-controlling interest

233

6,942

31

334

365

7,307

Other comprehensive income:

Currency translation differences

3,526

3,526

3,526

Share of other comprehensive income of associates

7

7

7

Cash flow hedge

(9,075)

(9,075)

(9,075)

Other comprehensive income for the year

(9,075)

3,533

(5,542)

(5,542)

Total comprehensive income for the year

5,587

164,768

(3,197)

(641)

(530)

2,095

(385)

(343)

360

(2,641)

162,127

Attributable to:

  • Gazprom Neft shareholders

5,354

157,826

(3,197)

(641)

(530)

2,095

(385)

(343)

(1,381)

(4,382)

153,444

  • Non-controlling interest

233

6,942

1,741

1,741

8,683

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