NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2017

(in thousand Tajik somoni, unless otherwise stated)

1. GENERAL INFORMATION

Open Joint Stock Holding Company “Barqi Tojik” (the “Company”) was registered in the Ministry of Justice of the Republic of Tajikistan on June 3, 1999. The Company and its subsidiaries (the “Group”) carry out its activity in the Republic of Tajikistan. The Group is a joint stock company and was established in accordance with the legislation of the Republic of Tajikistan.

The Group’s principal activity is generation, transmission and distribution of electricity and thermal energy in the Republic of Tajikistan. The Group also sells electricity to neighboring countries due to its operational needs. Electricity is generated on five hydropower stations, which are the structural units of the Group. Operating activity of the Group is regulated by the Law of the Republic of Tajikistan “On natural monopolies” (the “Law”), as the Group is the dominant in the generation and supply of electricity in the Republic of Tajikistan. In accordance with the Law tariffs of the Group must be coordinated and agreed with the Agency for regulation of natural monopolies of the Republic of Tajikistan (the “Agency”). The main customers are SUE “Tajik Aluminum Company”, OJSC “Rogun HPS”, OJSC “Tojikcement”, OJSC “Tojikhimprom”, OJSC “Pamir Energy Company”, «Da Afghanistan Breshna Sherkat», LLC and the population of the Republic of Tajikistan.

The Group’s Head office is located in the Republic of Tajikistan, Dushanbe, I. Somoni ave, 64.

As at December 31, 2017 and 2016, the sole shareholder of the Group was the Government of the Republic of Tajikistan. Ultimate control of the Group is carried out by the Government of the Republic of Tajikistan.

Property of the Group was formed from the assets which were on the books of Open Joint Stock Holding Company “Barqi Tojik”. The Group owns the property transferred by its founder, except the property of legal entities listed as joint stock companies, state enterprises, organizations and institutions which are under the management of the Group.

Open Joint Stock Holding Company “Barqi Tojik” is the holder of shares of joint stock companies, granted by the Government of the Republic of Tajikistan, operating in the energy sector and performs the right of possession, use and disposition of property, businesses and institutions were provided for management in accordance with the article 232 of the Civil Code of the Republic of Tajikistan.

The property of the Group includes the following branches and representative offices:

Nurek branch Nurek hydropower station

Baipaza branch Baipaza hydropower station

Varzob branch Cascade of Varzob hydropower stations

Vakhsh branch Cascade of Vakhsh hydropower stations

Kairakkum branch Kairakkum hydropower station

Dushanbe branch Central electric networks

Sogd branch Sogd electric networks

Khujand branch Khujand electric networks

Rasht branch Rasht electric networks

Kurgan Tube branch Kurgan Tube city electric networks

Chkalovsk branch Chkalovsk city electric networks

The following organizations are under control of the Group:

OJSC “Shabakahoi Barqii Istaravshan”

OJSC “Shabakahoi Barqii Panjakent”

OJSC ‘Shabakahoi Barqii Shahri Dushanbe”

OJSC “Shabakahoi Barqii Shahri Kulob”

OJSC “Shabakahoi Barqii Kulob”

OJSC “Shabakahoi Barqii Tursunzoda”

OJSC “Shabakahoi Barqii Janubi”

OJSC “Dushanbinskaya Heat Station”

OJSC “Shabakahoi Barqii Yavon”

OJSC “Remontno-Mekhanicheskiy Zavod”

OJSC “Shabakahoi Barqii Dangara”

OJSC “Shabakahoi Barqii Isfara”

OJSC “Shabakahoi Barqii Norak”

OJSC “Yavanskaya Heat Station”

DPMTO “Tajikenergosnab”

OJSHC “Barqi Tojik” has a subsidiary – Limited Liability Company “Barq – Servis”. The main activity of the subsidiary is providing electrical equipment repair and maintenance services. The share of OJSHC “Barqi Tojik” in the authorized capital of the subsidiary is 100%..

As at December 31, 2017 and 2016 the Group had 11,178 and 12,208 employees, respectively.

The consolidated financial statements were authorized for issue by the Group’s management on July 20, 2018.

2. OPERATING ENVIRONMENT

In contrast to the more developed markets emerging markets, such as the Republic of Tajikistan, are exposed to various risks, including economic, political and social, and legal and legislative risks. As has happened in the past, actual or perceived financial problems or an increase in the perceived risks associated with investing in emerging economies could adversely affect the investment climate in countries and the countries’ economy in general.

Laws and regulations affecting businesses in the Republic of Tajikistan continue to change rapidly. Tax, currency and customs legislation within the country are subject to varying interpretations, and other legal and fiscal difficulties leading to the challenges faced by the Group. The future economic direction of the Republic of Tajikistan is largely dependent on economic, fiscal and monetary measures undertaken by the government, together with legal, regulatory developments.

These consolidated financial statements do not include any adjustments that would have been required due resolution of the uncertainty in the future. Possible adjustments may be made to the consolidated statements in that period in which necessity of their reflection will become evident, and it will be possible to estimate their numerical values.

Changes in the energy sector

Industry as well as the other systems of the Republic of Tajikistan is experiencing significant restructuring and reform (the process of transformation of the country with a planned economy into a state with a market economy), and the future direction of reforms and results are unknown at this time. Potential reforms in tariff policy, repayment of debt by state enterprises, reorganization of the market of gross sale and implementation of measures to promote competition in gross sale market, can have a significant impact on companies in this industry.

According to the Decree of the Government of the Republic of Tajikistan # 234 of April 28, 2018 "On the reorganization of joint-stock companies" the following organizations will be merged into OJSC

"Transmission electrical grids" and OJSC "Distribution electric grids ":

Due to uncertainty regarding the ongoing changes in the industry, management is unable to assess the impact of reforms on the present and future financial position of the Group. However, Management believes that these uncertainties will not have a significant impact on operational activity compared to other companies operating in the Republic of Tajikistan.

3. PRESENTATION OF FINANCIAL STATEMENTS Report on compliance

These financial statements have been prepared in accordance with the International Financial Reporting Standards (the “IFRS”) issued by the International Accounting Standards Board (the “IASB”) and Interpretations issued by the International Financial Reporting Interpretations Committee (the “IFRIC”).

Use of estimates and assumptions

The preparation of the financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Due to the inherent uncertainty in making those estimates, actual results reported in future periods could differ from such estimates.

Basis of presentation

The consolidated financial statements have been prepared on the historical cost basis except for revaluation of property, plant and equipment and certain financial instruments. The principal accounting policies applied in preparation of the consolidated financial statements are set out below. These accounting policies were consistently applied in all periods covered in this consolidated financial statements, unless otherwise stated.

These consolidated financial statements have been prepared on the historical cost basis except for the following lines:

Non-current financial liabilities at amortized cost;

Fixed assets and construction in progress are stated at revalued cost based on revaluation carried by an independent consulting company LLC “BDO Consulting” as at December 31, 2013.

Going concern

These consolidated financial statements have been prepared on the assumption that the Group is a going concern and will continue its operation for the foreseeable future. Despite the fact that the Group incurred

a loss of 3,406,157 and 2,339,218 thousand somoni for the years ended December 31, 2017 and 2016, and, as at that date its current liabilities exceeded its current assets by 8,560,048 thousand somoni, the management and shareholder have the intention to further develop the Group’s activities in the Republic of Tajikistan. The Group is owned by the Government of the Republic of Tajikistan and generates, distributes and sells the major share of electricity consumed in the Republic of Tajikistan. Electric power generated by the Group remains the key element for the economy of the Republic of Tajikistan, as well as fundamental for the Government’s social and economic objectives.

Based on above, the Management believes that the going concern assumption is appropriate for the Group due to continuing financing from the sole shareholder of the Group.

Functional and presentation currency

The functional currency of each of the Group’s consolidated entities is the currency of the primary economic environment in which the entity operates. The functional currency of the Group and the Group’s presentation currency is national currency of the Republic of Tajikistan Tajik somoni (the “somoni”).

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries), which are recorded as branches for the purpose of the consolidated financial statements as at December 31, 2017 and 2016.

The subsidiary is consolidated from the date of acquisition, which is the date when control is obtained over the subsidiary, and discontinued from consolidation when the control is lost. The consolidated financial statements of the subsidiaries are prepared for the same period as for the Company, based on consistently applied accounting policy for all branches of the Company.

Changes in ownership of subsidiaries without loss of control are treated as transactions equity. If the Group loses control over the subsidiary the following is reflected:

· discontinues recognition of assets and liabilities of the subsidiary;

· records the fair value of proceeds received in exchange;

· records fair value of outstanding portion of the investment;

· records gains or losses in statement of comprehensive income;

· reclassifies interest of the Company in subsidiaries, recognised in other comprehensive income before to statement of comprehensive income or retained earnings in accordance with particular requirements.

The consolidated financial statements of the subsidiaries are prepared for the same period as the Group, based on consistently applied accounting policy for all branches of the Group.

All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.

4. SIGNIFICANT ACCOUNTING POLICIES

Foreign currency transactions

The functional currency of the Group and the Group’s presentation currency is national currency of the Republic of Tajikistan Tajik somoni (the “somoni”). The Group applies direct method of consolidation, and upon disposal of foreign investment performs the reclassification of gains and losses from translation differences to the consolidated statement of profit or loss and other comprehensive income.

Transactions in foreign currency are initially recognised by the companies of the Group in functional currency at exchange rate at the date of transaction.

Monetary assets and liabilities denominated in foreign currency are revalued at spot rate of functional currency effective at the reporting date.

All foreign currency differences are transferred to the consolidated statement of profit or loss and other comprehensive income.

Non-monetary lines at historical cost in foreign currency are recognised at exchange rate effective at the date of initial transaction. Non-monetary lines at revalued method in foreign currency are recognised at the exchange rate effective at the date of consideration of fair value. Gains and losses arising from non-monetary items are treated same as gains and losses from foreign currency transactions.

Assets and liabilities in foreign investments are translated to somoni at the exchange rate effective at the reporting date, and statement of comprehensive income of such subsidiaries, are recorded at the rate effective on the date of transaction. Translation differences arising from such treatment are recorded in other comprehensive income. Upon disposal of foreign investment the component of other comprehensive income, related to this foreign investment are transferred to the consolidated statement of profit or loss and other comprehensive income.

Until 1 January 2010, the date of transition to IFRS, the Group considered adjustments to the carrying value of assets and liabilities to fair value arising on the acquisition, as assets and liabilities of the Group. Therefore, these assets and liabilities are non-monetary items that are already expressed in the functional currency of the Group and, therefore, the additional exchange rate differences do not occur.

Revenue recognition

Revenue is recognized only if inflow of economic benefits to the Group is probable, and if revenue can be reliably measured, despite of the timing of cash proceeds. The revenue is measured at fair value of the consideration received or receivable, in accordance with contractual terms of payments.

Electricity sales

Revenue from sale of electricity is recognised when customers on post-paid metering are billed for the power consumed. The billing is done for each monthly billing cycle based on the units consumed as read on the customers’ electricity meters and the approved customer tariffs. Revenue from sale of electricity is recognised in the consolidated financial statements net of valued added tax (VAT).

Interest income

Interest income and expense on financial instruments held at amortised cost, and interest bearing financial assets, classified as held-for-sale are recognised based on effective interest rate method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount on initial recognition. The interest income is added to finance income in the consolidated statement of profit or loss and other comprehensive income.

Taxes

Current income tax

Current tax assets and liabilities for the current period as measured at recoverable from or payable to taxation authorities. The tax rates and tax legislation applied for calculations are the rates and legislation accepted or factually adopted as at reporting date in the countries, where the Group performs its activities and has taxable income.

Deferred taxes

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit.

Deferred tax liabilities are recognised for all taxable temporary differences, except for cases when:

Deferred tax liabilities arising at initial recording of goodwill, asset or liability as a result of transaction other than business combination, and at transaction date does not impact accounting profit nor taxable profit or loss;

Taxable temporary differences in respect of investments in subsidiaries, associates, as well as interest in joint ventures, and if possible to control distribution by periods related to recoverability of temporary differences, and there is high probability of recovery of temporary difference in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, unused tax incentives and unused tax losses, to the extent of highly probable upcoming profits, against which the recovery of deductible temporary differences, unused tax incentives and unused tax losses will take place, except for:

Deferred tax asset, related to temporary difference as a result of initial recognition of asset or liability arising from business combinations, which at the date of transaction does not impact accounting nor tax profit or losses;

Deductible temporary differences as a result of investments in subsidiaries, associated companies, as well as interest in joint venture where the deferred tax assets are recognised to the extend of highly probable upcoming profits, against which the recovery of deductible temporary differences, unused tax incentives and unused tax losses will take place.

The book value of deferred tax assets is reviewed at each reporting date and decreased to the extent of sufficient profits, which will allow to use all or part of the deferred tax assets, are assessed as unlikely. Deferred tax assets not recognised in the statements are reviewed at each reporting date and are recognised to the extent, when there is high probability of upcoming profits, allowing to recover such tax assets.

Deferred tax assets and liabilities are valued at tax rates, which are expected to be applied in the period, when such asset will be recovered or liability settled at tax rates (tax regulation), which were accepted or factually adopted at the reporting date.

Deferred tax, related to the components other than statement of comprehensive income, as also not recorded in statement of comprehensive income. The deferred taxes are recognised in accordance with underlying transactions or in as a component of other comprehensive income, or directly on equity.

Deferred tax assets and liabilities are offset only if there are legal right for offset of current income tax assets and liabilities, and deferred taxes are related to the same company and tax authority.

Property, plant and equipment

After initial recognition as an asset, property, plant and equipment are carried at revalued cost, being the fair value of the object on the date of revaluation less any subsequent accumulated depreciation and impairment losses.

The equipment is held at revalued amount less accumulated depreciation and/or accumulated loss from impairment, if any. This cost includes cost of replaced spare parts, as well as borrowing costs, in case of non-current construction projects, when certain criteria are met. When there is a need for significant component replacement within defined period the Group disposes the replaced component and recognizes new components in accordance with useful life and depreciation. Expenses related to major technical check are included to the cost of the asset, as replaced equipment, when related criteria are met. All other expenses for maintenance are included in the consolidated statement of profit or loss and other comprehensive income as incurred.

The buildings are held at revalued amount less accumulated depreciation and impairment losses.

Depreciation is charged on the carrying value of property, plant and equipment to write off assets over their useful life. Depreciation is charged at straight line method at the following rates:

In 2015, the useful life of property, plant and equipment were reconsidered and increased. Changes in depreciation accruals were made on perspective basis.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss, and presented in the consolidated statement of comprehensive income for the period, when derecognition took place.

The useful life term and depreciation method are annually reassessed, and adjusted if needed. Intangible assets

Intangible assets with finite useful lives that are acquired separately are carried at cost. Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date. Subsequent to initial recognition, intangible assets acquired are recorded at cost less accumulated amortisation and accumulated impairment losses (if any). Internally generated intangible assets, except for development costs included to the cost of an asset are not capitalized, and related expenses included in the consolidated statement of comprehensive income in the period, when incurred.

The useful life of intangible assets can be definite or indefinite.

Intangible assets with definite useful life are amortised during the period of this period and subject for impairment assessment if such indicators exist. The period and amortisation method for all intangible asset with definite useful life are reassessed at least at each reporting date. Changes in estimated useful life or structure of inflow of future benefits inherent to the asset are added to the consolidated financial statements as changes in period and method of amortisation, depending on situation, and disclosed as changes in estimates. The amortisation expenses for intangible assets with definite useful life recognised in the consolidated statement of comprehensive income in the category, which relates to the function of the intangible asset.

Intangible assets with indefinite useful life are not amortised, rather tested separately for impairment on an annual basis. The useful life term of intangible assets with indefinite useful life is reviewed on an annual basis in order to determine whether it is reasonable to continue classify the asset as intangible asset with indefinite useful life. If it is not acceptable, the change in useful life of an asset is prospectively changed from indefinite to definite.

Gains and losses from disposal of intangible assets are measured as difference from proceeds and book value of the asset and recognised in the consolidated statement of comprehensive income at the date of disposal of use asset.

Patents and licenses

Patents are issued for the period of 10 years by the relevant state body with a right to prolong. License on right for intellectual property issued from 5-10 years, depending on type of license.

Licenses can be prolonged in the end of the term, if the Group will comply with preset conditions. Prolongation can be made for notional fee or free of charge. Therefore the useful life of these licenses is treated as indefinite.

Impairment of tangible and intangible assets

At the end of each reporting period, the Group assesses whether there is any indication that fixed and intangible assets may be impaired. If any such indication exists evaluation is carried out for a possible reduction in the recoverable amount of assets (if any). If it is impossible to estimate the recoverable amount of an individual asset, the Group determines the recoverable amount of the cash-generating unit to which the asset belongs.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately as an expense, except where the relevant asset (land, buildings, or equipment) carried at a revalued amount. In this case the impairment loss is recognized as a reduction of revaluation of the respective fund.

If an impairment loss subsequently reverses, the carrying amount of an asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined if the asset was not recognized an impairment loss (cash-generating unit) in prior years. Reversal of an impairment loss is recognized immediately in the statement of profit or loss and other comprehensive income, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

During write-off of a revalued property, plant and equipment, the amounts included in the revaluation reserve are transferred to retained earnings.

Government grants

Government grants are not recognized until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received.

Government grants are recognised in profit or loss on a systematic basis over the periods in which the Group recognises as expenses the related costs for which the grants are intended to compensate. Specifically, government grants whose primary condition is that the Group should purchase, construct or otherwise acquire non-current assets are recognised as deferred revenue in the consolidated statement of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets.

Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised in profit or loss in the period in which they become receivable.

The benefit of a government loan at a below-market rate of interest is treated as a government grant, measured as the difference between proceeds received and the fair value of the loan based on prevailing market interest rates.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognized as expenses, in the period when such expenses incurred. Borrowing costs include the payment for interest and other expenses, incurred by the Group in respect of borrowings.

Financial instruments – initial recognition and subsequent measurement

(а) Financial assets

Initial recognition and measurement

Financial assets within the scope of IAS 39 are classified into the following specified categories: financial assets ‘at fair value through profit or loss' (FVTPL), financial assets and ‘loans and receivables', ‘held-to-maturity' investments, ‘available-for-sale' (AFS). The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Financial assets initially recognised at fair value plus, in case of investments not at fair value through profit or loss, the transaction costs.

Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Financial assets of the Group includes the cash and current deposits, trade and other receivables, loans and other amounts receivables and unquoted financial instruments.

Subsequent measurement

Subsequent measurement of financial assets is subject of its classification in a following way:

Accounts receivable

Accounts receivable are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition, such financial assets are measured at amortized cost using effective interest rate method, less any impairment losses. Amortized cost is calculated considering any discount or premium on acquisition and fee or costs that are an integral part of the effective interest rate. Amortization based on the use of the effective interest rate is included in finance income in the consolidated statement of profit or loss and other comprehensive income. The losses arising from impairment are recognized in the consolidated statement of profit or loss and other comprehensive income.

Current trade accounts receivable recognizes at cost less allowance on doubtful debts.

Available-for-sale financial assets

Available-for sale financial assets include equity and promissory notes. Equity investments classified as available-for-sale are the investments, are those not classified as held for trading, nor at fair value through profit or loss. Promissory notes within this category are instruments without defined term of sale and can be sold for liquidity purposes as a result of changing market conditions.

Subsequent to initial recognition the financial investments available-for-sale are measured at fair value, and resulting gains and losses are recorded as component of other comprehensive income as reserve for available-for-sale instruments. The instrument is held within this classification until derecognition or impairment adjustment, upon which the accumulated gains and losses from reserve on available-for-sale investments are reclassified to other operating gains and losses of statement of comprehensive income. Interest income on promissory notes available-for-sale are recorded at effective interest rate method and added to the statement of comprehensive income.

The Group has assessed its financial assets, available-for-sale for assumption of ability an intention to sell in the foreseeable future.

Derecognition

Derecognition of financial asset (or if applicable –part of the financial asset or part of the group of financial assets) performed if:

The rights for cash proceeds and asset matured;

The Group has transferred its rights for cash proceeds from the asset, or has accepted the liability to perform the payment to the third party in full and without any delays; or if (a) the Group has transferred substantially all risks and rewards from such asset, or (b) Group did not transfer, but also did not retain risks and rewards from such asset, therefore transferred the control over such asset.

If the Group has transferred all rights for cash proceeds from asset, or has concluded an agent agreement, but did not retain all risks and rewards from such asset, as well as did not transfer control over such asset, the new asset is recognised to the extend the Group continues its participation in the asset.

In this case the Group also recognizes related liabilities. The transferred asset and related liabilities are valued based rights and liabilities retained by the Group.

The continuous participation in form of guarantee on asset transferred is recognised at lower of initial book value and maximum possible amount to be claimed from the Group.

Impairment of financial assets

At each reporting date the Group performs the assessment of indicators of impairment of financial asset or group of financial assets. Financial asset or group of financial assets can be impaired if, and only if, when there is a reliable evidence of impairment as a result of one of number of events taking place subsequent to initial recognition (the “event resulting the loss”), which resulted the impact, which can be reliably measured, on expected future cash flows of the financial asset or group of financial assets. The indicators of impairment can include the fact that debtor or group of debtors are experiencing insolvency issues, and cannot repay the debt or has delays is repayment of interest or principal amount of debt, as well as probability of insolvency and upcoming liquidation process or financial restructuring. Moreover, such indicators include observable evidence, indicating existence of reliably measured decrease in expected cash flows of the financial instrument, in particular, the changes in overdue debts or economic environment, which has certain dependencies with defaults in repayments of debt.

Financial assets recorded at amortized cost

The Group performs the assessment of indicators of impairment financial assets recorded at amortised cost if individually significant or if individually insignificant, than by groups. If the Group identifies the reliable evidence of absence of impairment, despite of the significance, such asset is included in the group of financial assets with similar characteristic of credit risk, and subsequently reviews this group for impairment indicators in aggregate. Assets, individually assessed as impaired are not included in aggregate assessment of the group for impairment.

When there is reliable evidence of incurred losses from impairment, the amount of loss is recognised as a difference of book value and discounted expected future cash flows (without expected future credit losses not yet incurred).

Present value of expected future cash flows are discounted at initial effective interest rate of the financial asset. If the interest rate of borrowing is a floating rate, the discount rate for impairment loss calculation is current effective interest rate.

The book value of the asset decreases through reserve account, and amount of loss added to the consolidated statement of comprehensive income. Accrual of interest income on decreased book value continued based on rate, used for discounting future cash flows for the purpose of assessing losses from impairment. Interest income is included in financial income in the consolidated statement of profit or loss and other comprehensive income. Loans along with related provisions are not included in the consolidated statement of financial position if there is no evidence of recoverability of such and all available security was sold or transferred to the Group. If during the subsequent period the amount of calculated losses from impairment increases or decreases as a result of an event taking place after recognition of impairment, the amount of losses recognised increase or decrease by means of reserve account adjustment. If the subsequently the write-off of value of financial asset recovers, the amount of recovery recognised as decrease of finance costs in the consolidated statement of profit or loss and other comprehensive income.

Financial investments, available-for-sale

The Group performs the annual assessment for impairment indicators for the investments held-for-sale.

If the investments in equity instruments, classified as available-for-sale, the reliable evidence of impairment would be significant and continuous decrease in fair value of the investment below its initial acquisition cost. The significance is measured in comparison to initial acquisition cost, continuous means the comparison to the period, when decrease below initial acquisition cost took place. When reliable evidence of impairment is identified the amount of comprehensive loss, calculated as difference of book value and current fair value, less any other impairment loss recognised in the statement of comprehensive income, the loss is reclassified from other comprehensive income to the consolidated statement of comprehensive income.

The promissory notes classified as available-for-sale are subject of same impairment criteria applied to financial assets recorded at amortised cost. However, the amount of impairment loss recognised is the difference of amortised cost and current fair value, less accumulated impairment loss for this investment, recognised previously in the consolidated statement of comprehensive income.

Accrual of interest income on decreased book value continued based on rate, used for discounting future cash flows for the purpose of assessing losses from impairment. Interest income is included in financial income in the consolidated statement of comprehensive income. If during the subsequent period the fair value of the promissory note will increase and this increase can be reliably tied with event taking place after initial loss recognition in the consolidated statement of comprehensive income, the impairment losses are recovered in profit and loss.

(b) Financial liabilities

Initial recognition and measurement

Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit and loss and borrowings. Group classifies the financial liabilities at initial recognition.

Financial liabilities initially recorded at fair value and in case of borrowings and loans, which are recorded at amortised costs its initial recognition includes the transaction costs directly related to issue and acquisition.

Financial liabilities of the Group include the trade and other accounts payable, loans and borrowings.

Subsequent measurement

Subsequent measurement of financial liabilities depends on classification as follows:

Loans and borrowings

Subsequent to initial recognition interest bearing loans and borrowings are measured at amortized cost based on effective interest rate method. Gains and losses resulting from these instruments included in consolidated statement of profit or loss and other comprehensive income at derecognition, as well as amortizing at effective interest rate.

Amortized cost includes the discounts and premiums at acquisition, as well as commissions or other fees, which are integral part of the effective interest rate. Amortization based on effective interest rate method is included in finance income in the consolidated statement of profit or loss and other comprehensive income.

Derecognition

The financial liabilities in consolidated statement of financial position is derecognised when liability is settled, cancelled or the matured.

If the existing financial liability is substituted by another liability with the same counterparty with substantially different terms, or if existing liability terms are substantially changed, than such change is treated as derecognition of initial instrument and recognition of the instrument, and difference of book value are recorded in consolidated statement of profit or loss and other comprehensive income.

(c) Offset of financial instruments

Financial assets and financial liabilities are offset and net amount is presented in the consolidated statement of financial position if, and only if there is existing contractual and legal right to offset these instruments, as well as intention to recognize as net amount, or dispose assets simultaneously with liabilities.

(d) Fair value of financial instruments

Fair value of financial instruments, which are quoted on active marketplace at each reporting date, determined based on market quotes or dealer quotes (quotes for bid for long position and quotes for ask for short position), without transaction costs consideration.

Financial instruments which are not quoted on an active marketplace the fair value is determined based on application of valuation methods. These methods include use of prices recently performed transactions based on market conditions, use of current fair value of similar instruments, analysis of discounted cash flows and other valuation models.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost of inventories is determined using the FIFO method.

Impairment of non-financial assets

The Group performs the assessment of impairment indicators of the assets at each reporting date. If such indicators exist or if there is a requirement to perform impairment test, than Group perform the assessment of recoverability of asset. The recoverable amount of the asset or component, generating cash flows (the “CGCF”) is higher of fair value of the asset less cost to sell and value in use of the asset. Recoverable amount is determined for separate asset, except for cases, when such asset does not generate cash flows, which dependent on cash flows generated by other assets or group of assets. If the book value of the asset or CGCF exceeds its recoverable amount, the asset is impaired and written off to recoverable amount. When estimated value in use future cash flows are discounted at the discount rate before taxation, which reflects the current market estimate of time value of money and risks related to the asset. When determining fair value of the asset less cost to sell recent market deals (if any) are taken into account. If no such information is available, appropriate valuation model is used. These calculations are supported by valuation coefficients, market prices of freely convertible shares of the subsidiaries or other available indicators of the fair value.

If the book value of the asset or CGCF exceeds its recoverable amount, the asset is considered as impaired and written down to recoverable amount. Under assessment of value in use the future cash flows are discounted at the rate net of tax, which reflects the present market value of cash flows and risks inherent to the asset. Under assessment of the fair value less cost to sell, the recent market transactions (if were existent) are taken into consideration. If no such transaction took place the relevant valuation model is applied. These computations are supported by estimated coefficients, active market quotes of subsidiaries shares and other available indicators of fair value.

Impairment losses from ongoing activities (including inventory impairment) are included in the consolidated statement of comprehensive income as a component of those expenses, which are related to the function of the asset, except for previously revalued real estate if revaluation was recognised in other comprehensive income. In such cases the impairment loss is deducted from other comprehensive income to the extent the revaluation gain was recognised.

The Group performs assessment of indicators whether indicators of impairment loss still exist or decreased on each reporting dates. If such indicator exists the Group assesses the recoverable amount of the asset or cash generating component. Previously recorded impairment losses recovered only if the changes in applied estimate of the recoverability of the asset, since most recent impairment loss recorded. The recovery is limited to the book have not exceeding its recoverable amount, as well as not exceeding book value less depreciation, which would be charged if such impairment loss would not be recorded. This recovery of loss is included in the consolidated statement of profit or loss and other comprehensive income.

Cash and current deposits

Cash and current deposits in the consolidated statement of financial position include the cash in banks and cash on hands.

Provisions

Provision are recorded if the Group has current liabilities (legal or constructive), as a result of the past events, with a probable outflow economic benefits required to settle liability, and such liability can be reliably measured. If the Group expects to recover all or part of the provisions, e.g. under insurance

contracts, the recovery is recorded as a separate asset, but only when such recovery inflow is not doubted. Expenses, related to the provision, are added to the consolidated statement of comprehensive income less recovery.

Pensions and another employee benefits post-employment benefits

The Group performs payments to social fund in accordance with pension scheme of the Republic of Tajikistan. The payments to social fund are fixed. The Group will not have any further legal or constructive liabilities to the Fund in relation to the retirement benefits if Fund will not have sufficient resources to perform payments to employees for services performed in current and previous years.

The Group performs fixed payments to the State social fund amounting to 25% of salaries of the employees and recorded in the period as incurred. The Group does not have any other pension or other schemes or liabilities to perform pension payments to its employees.

Application of new and revised international financial reporting standards

A number of new Standards and Interpretations has been issued and not yet adopted as at December 31, 2017 and had not been applied in preparation of these consolidated financial statements. Following Standards and Interpretations are relevant to operations of the Group. The Group intends to adopt these Standards and Interpretations from their effective dates. The Group has not analyzed potential effect of adoption of these standards on its consolidated financial statements.

The Group has adopted the following new or revised standards and interpretations issued by International Accounting Standards Board and the International Financial Reporting Interpretations Committee (the “IFRIC”) which became effective for the Group’s consolidated financial statements for the year ended December 31, 2017:

Amendments to IAS 7 “Statement of cash flows” the amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes.

Amendments to IAS 12 “Income tax” the amendment clarifies the accounting for deferred tax assets for unrealised losses on debt instruments should be clarified by a separate narrow-scope project.

Amendments to IFRS 12 “Disclosure of interests in other entities” states that an entity need not provide summarised financial information for interests in subsidiaries, associates or joint ventures that are classified as held for sale.

The adoption of the new or revised standards did not have significant effect on the financial position or performance of the Group.

New and revised IFRSs in issue but not yet effective

At the date of authorization of this financial information, the following new standards and interpretations were in issue, but not mandatorily yet effective, and which the Group has not early adopted:

IFRS 15 “Revenue from contracts with customers” provides a single model of Revenue accounting. It will replace all actual standards on Revenue recognition including IAS 18 “Revenue” and IAS 11 “Construction contracts” and corresponding interpretations.

IFRS 16 “Leases” provides a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lessees and lessors.

Amendments to IFRS 2 “Share-based payment” clarify the following: the accounting for cash-settled share-based payment transactions that include a performance condition; the classification of share-based payment transactions with net settlement features; the accounting for modifications of share-based payment transactions from cash-settled to equity-settled.

Amendments to IFRS 10 “Consolidated financial statements” and IAS 28 “Investments in associates and joint ventures” - the amendments deal with situations where a sale or contribution of assets between an investor and its associate or joint venture is in place.

Amendments to IAS 40 “Investment property” clarify transfers of property assets to, or from, investment property.

IFRIC 22 “Foreign currency transactions and advance consideration” addresses how to determine the ‘date of transaction’ for the purpose of determining the exchange rate to use on initial recognition of an asset, expenses or income.

In 2014 the International Accounting Standards Board replaced IAS 39 "Financial Instruments: Recognition and Measurement" by issuing a new standard IFRS 9 "Financial Instruments" which contains updated requirements for the recognition and measurement of financial instruments and requirements for hedge accounting. The new standard is effective starting from January 1, 2018.

Classification and measurement

Significant changes were introduced to classification and measurement of financial assets. IFRS 9 introduces new requirements for classification and measurement of financial instruments based on the results of SPPI tests and selected business model.

SPPI test (Solely payments of principal and interest) is the verification of the contractual terms of the loan for compliance with the basic terms of the loan agreement. Cash flows represent solely repayment of principal and payment of interest on the outstanding principal amount.

Business model is determined at a level that reflects how groups of financial instruments are managed together to achieve a particular business objective. Business model used by the Company describes the way how the Company manages its financial assets in order to generate cash flows.

Expected credit losses definition

IFRS 9 introduces new impairment estimation approach that is based on expected losses (rather than incurred losses model in accordance with IAS 39) and provides for wider scope of application in comparison with IAS 39. General approach implies that expected credit losses to be recognized for losses equal to the expected credit losses within 12 months after the reporting date and expected credit losses throughout the lifetime period of the financial instrument in case of significant increase of default risk since initial recognition.

IFRS 9 establishes new model for recognition and measurement of impairment based on expected credit losses considering probability of default and its change over the period of the financial instruments. The expected loss model uses a dual measurement approach:

Stage 1: 12-month expected credit losses - expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date;

Stage 2: full lifetime expected credit losses - expected credit losses that result from all possible default events over the life of the financial instrument;

Stage 3: same as Stage 2 where interest income is calculated based on the gross carrying amount of the financial asset (using effective interest rate) less impairment allowance.

The amount of credit losses is the present value of all cash shortfalls over the expected life of financial instrument. Estimated expected credit losses are calculated using probability-weight over expected life of the financial instrument.

Financial reporting disclosures

IFRS 9 introduces new requirements for classification, accounting and disclosure of financial instruments. The carrying amount of the following categories of financial assets and financial liabilities is obligatory for disclosure either in the statement of financial position or in the notes to the financial statements:

Financial assets measured at FVTPL, showing separately:

designated into the category at initial recognition or subsequently; and mandatorily measured at FVTPL.

Financial assets measured at amortised cost.

Financial assets measured at FVOCI, showing separately: measured at FVOCI - debt instruments;

investments in equity instruments designated as such on initial recognition.

Financial liabilities measured at FVTPL, showing separately:

designated into the category at initial recognition or subsequently; and

financial liabilities that are correspond to the definition "held-for-trading". Financial liabilities measured at amortised cost.

As at the date of issue of these financial statements the Company was in the process of implementation of IFRS 9 and the Company’s Management at the time of issue of financial statements is not able to fully evaluate the effect and impact of new standard on all types of financial instruments.

The Group intends to adopt these new standards and amendments, if applicable, when they become effective.

5. CRITICAL ACCOUNTING ESTIMATES AND PROFESSIONAL JUDGEMENTS IN APPLYING ACCOUNTING POLICY

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

Significant accounting judgments, estimates and assumptions

The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions at the end of the reporting period that affect the amounts of revenue, costs, assets and liabilities, presented in statements. However, uncertainty of these assumptions and estimates could result outcomes, that could require in future material adjustments of book value of asset or liability in respect of which such assumptions and estimates are made.

Judgments

In the process of applying the Group’s accounting policy, management has used the following judgments, which have the most significant effect on the amounts recognized in the consolidated financial statements:

Estimates and assumptions

The key assumptions about the future and other key sources of estimation of uncertainty at the reporting date, which may cause significant adjustments of the carrying value of assets and liabilities during the next financial year, are discussed below. Assumptions and estimates are based on the Group’s source data, which it had at the time of preparation of the consolidated financial statements. However, current circumstances and assumptions regarding the future are subject to change due to market changes or circumstances beyond the control of the Group. Such changes are reflected in the assumptions as they occur.

Impairment of non-financial assets

Impairment occurs when the carrying amount of an asset or the cash-generating unit, exceeds its recoverable amount, which is the higher of fair value less costs to sell and value in use. The fair value less costs to sell is based on available information on commercial deals of sales of similar assets or observable market prices less incremental costs incurred in connection with the disposal of an asset. The calculation of value in use is based on a discounted cash flow model. Cash flows are taken from the budget for the next five years and do not include restructuring activity, in conducting of which the Group does not have obligations or significant investment in future, which will improve the asset tested for impairment of cash generating unit. The recoverable amount is most sensitive to the discount rate used in the discounted cash flow model, and also to the expected cash inflows and the growth rate, used for extrapolation. More information about the key assumptions used to determine the recoverable amount of the various units, generating cash, including sensitivity analysis, is provided in below.

Revaluation and impairment of property, plant and equipment

The following assumptions were used by the Management of the Group during the impairment test of property, plant and equipment:

f) General and administrative expenses

EBITDA* - EBITDA is not including operational results from HPP “Sangtuda-1” and HPP “Sangtuda-2”.

Group doesn’t own property, plant and equipment related to the CGU Sangtuda 1 and 2.

Useful lives of property, plant and equipment

The Group estimates the useful lives of fixed assets at each reporting date. The estimation of the useful lives of fixed assets depends on factors such as economical use, repair and customer service programs, technological progress and other business conditions. Management’s assessment of the useful lives of fixed assets reflects the relevant information available to management as at the date the consolidated financial statements.

The fair value of financial instruments

In cases when the fair value of financial instruments and financial liabilities recorded in the consolidated statement of financial position cannot be derived from active markets, they are determined using valuation techniques, including discounted cash flow model. As a source data for these models is used information from observable markets, but in those cases where this is not feasible, a certain proportion of judgment is required to determine fair value. The judgments include considerations of such data as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the fair value of financial instruments, recognised in the consolidated financial statements.

Market rate of borrowings received

The Group uses valuation techniques that include inputs that are not based on observable market date to estimate the fair value of non-current borrowings. Borrowings are discounted at a rate of 4.19% per annum as at December 31, 2017 (4.12% as at December 31, 2016), which the Management of the Group has defined as the market rates on non-current borrowings.

Allowance for doubtful debts, advances paid, investments and allowance for cost decrease to net realizable value and obsolete inventories

Determining the direction of allowance for doubtful debts, advances paid, investments and allowance for cost decrease to net realizable value and obsolete inventories requires management to make assumptions based on the best estimates of the Group’s ability to realize these assets. As a result of the general changes in the economy or other similar circumstances after the reporting date, management may draw conclusions that may differ from the finding made in the preparation of these consolidated financial statements.

6. PROPERTY, PLANT AND EQUIPMENT

As at December 31, 2017 and 2016 property, plant and equipment of the Group are presented as follows:

As at December 31, 2017 and 2016 fixed assets and construction in progress were not insured.

The Group monitors the use of its assets, but because the Group’s sole shareholder is the Government of the Republic of Tajikistan, it is not able to write-off fixed assets without the permission of the State Committee on Investments and Property Management of the Republic of Tajikistan.

Fixed assets received as grant mostly consist of electrical equipment and power transmission devices transferred under the control of the Group by the Government of the Republic of Tajikistan and by electricity consumers - legal entities and individuals of the Republic of Tajikistan. These grants were recognized as deferred income in accordance with IAS 20 “Accounting for government grants and disclosure of government assistance” which is amortized over the useful life of the associated granted assets. As at December 31, 2017 and 2016 amount of deferred income equaled to 86,377 thousand somoni and 84,077 thousand somoni, respectively (Note 15).

The Group borrows funds to acquire assets and capitalizes the interest on assets that meets certain requirements prescribed in IAS 23 “Borrowing costs”. In 2017 and 2016 the Group capitalized 113,552 thousand somoni and 128,838 thousand somoni, respectively, on the cost of construction in progress.

As at December 31, 2017 and 2016 Group’s assets were pledged as collateral on borrowings comprised of buildings and constructions, machinery and equipment, other fixed assets, construction in progress and equipment for installation of subsidiary of the Group - Baipaza hydropower station. As at December 31, 2017 and 2016 net book value of Baipaza hydropower station fixed assets equaled to 440,653 thousand somoni and 449,452 thousand somoni, respectively.

As at December 31, 2017 and 2016 amount of fully depreciated property, plant and equipment equaled to 419,162 thousand somoni and 257,131 thousand somoni, respectively.

The Group adopted revaluation model for property, plant and equipment accounting in accordance with IAS 16 Property, plant and equipment. In 2014 the Group performed and recognized revaluation of property, plant and equipment as at December 31, 2013. Before recognition of revaluation results the carrying value of fixed assets as at December 31, 2013 equaled to 6,883,777 thousand somoni, accumulated depreciation equaled to 1,806,854 thousand somoni.

The Company performs the impairment test and estimates the recoverable value of the assets on annually basis. As ar December 31, 2017 carried impairment test were based on assumptions disclosed in Note 5.

The Group was granted temporary permission to operate the new thermal electric power plant Dushanbe-2 (the “TPP Dushanbe-2”). Since Dushanbe-2 TPP was not adopted by the State Acceptance Commission, the cost of this facility has not been officially indicated to the Group. However, the Group received a letter from the Ministry of Energy and Water Resources of the Republic of Tajikistan about the approximate cost of the Dushanbe-2 TPP in the amount of 905,479 thousand somoni and recognized the Dushanbe-2 TPP as fixed assets of Group ans also recognized long-term liabilities from Government of Republic of Tajikistan. The Group recognized all income and expenses related to the use and operations of TPP Dushanbe-2.

7. NON-CURRENT ADVANCES PAID

As at December 31, 2017 and 2016 the Group’s non-current advances paid are as follows:

As at December 31, 2017 and 2016 non-current advances paid include advances for the construction of production facilities and supply of equipment.

8. NON-CURRENT INVESTMENTS

As at December 31, 2017 and 2016 the Group’s non-current investments are as follows:

In 2006 the Group has signed agreement with OJSC “Sangob” on financing of the construction of HPP Sangtuda-2 in the amount of 40,000 thousand US dollars. In accordance with the agreement after 12 years of use the Hydropower Plant would be transferred to the Group. As at December 31, 2012 the Group has fully paid obligations under the agreement. In accordance with terms of the agreement on purchase of electricity the Group has to purchase electricity from HPP Sangtuda-2 at fixed price which should be increased by 5% annualy starting from 2015.

In 2010 the Group acquired the shares of OJSC “Rogun HPP” amounting to 23,700 thousand somoni. The obligations of OJSC “Roghun HPS” to the Group in the amount of 7,933 thousand somoni were converted into shares at the agreement of both parties and the Ministry of Finance of the Republic of Tajikistan.

The movement in allowance for impairment of non-current investments for the years ended December 31, 2017 and 2016 is presented as follows:

9. INVENTORIES

As at December 31, 2017 and 2016 inventories of the Group are as follows:

The movement in allowance for cost decrease to net realizable value and obsolete inventories for the years ended December 31, 2017 and 2016 is presented as follows:

10. TRADE AND OTHER ACCOUNTS RECEIVABLE

As at December 31, 2017 and 2016 trade and other accounts receivable of the Group are as follows:

The movement in the allowance for doubtful debts for the years ended December 31, 2017 and 2016 is presented as follows:

11. CURRENT ADVANCES PAID

As at December 31, 2017 and 2016 current advances paid of the Group are as follows:

The movement in allowance for doubtful advances paid for the years ended December 31, 2017 and 2016 is presented as follows:

12. CASH AND CASH EQUIVALENTS

As at December 31, 2017 and 2016 cash and cash equivalents of the Group are as follows:

13. SHARE CAPITAL

As at December 31, 2017 and 2016 announced, issued and paid share capital of the Group amounted to 505,216 and 410,101 thousand somoni respectively.

In 2017 share capital of the Group was increased by 29,759 thousand somoni in accordance with the Decrees of the Government of the Republic of Tajikistan # 42 dated January 25, 2017 (12,495 thousand somoni) and #500 dated October 26, 2017 (17,264 thousand somoni). The increase was made through offsetting accounts payable for electricity of the Group to OJSC “Sangtuda HPP-1” and tax liabilities of the OJSC “Sangtuda HPP-1” to the state budget of the Republic of Tajikistan.

In 2017 and 2016 the Group did not announce any dividends.

14. BORROWED FUNDS

As at December 31, 2017 and 2016 non-current borrowed funds of the Group are as follows:

The Group uses valuation techniques that include inputs that are not based on observable market date to estimate the fair value of non-current borrowings. Borrowings are discounted at a rate of 4.19% per annum as at December 31, 2017 (4.12% as at December 31, 2016), which the Management of the Group has defined as the market rates on non-current borrowings.

Movement of discount on non-current borrowed funds for the years ended December 31, 2017 and 2016 is presented as follows:

As at December 31, 2017 and 2016 current borrowed funds of the Group are as follows:

As at December 31, 2017 and 2016 weighted average interest rate on borrowed funds was 6.7% and 6.5%, respectively.

Current portion of non-current borrowings is allocated in accordance with the repayment schedule of principal on loans.