Edgar Filing: MOBILE TELESYSTEMS PJSC

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FORM 6-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Issuer
August 30, 2016

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

Commission file number: 333-12032

Mobile TeleSystems PJSC

(Exact name of Registrant as specified in its charter)

Russian Federation

(Jurisdiction of incorporation or organization)

4, Marksistskaya Street
Moscow 109147
Russian Federation

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F x Form 40-F o

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o No x

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

Interim Condensed Consolidated Financial Statements

As of June 30, 2016 and December 31, 2015 and for the Six Months Ended June 30, 2016 and 2015 (unaudited)

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

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			Page

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2016 AND DECEMBER 31, 2015 AND FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015:

	Unaudited interim condensed consolidated statement of financial position		1-2
	Unaudited interim condensed consolidated statement of profit or loss		3
	Unaudited interim condensed consolidated statement of comprehensive income		4
	Unaudited interim condensed consolidated statement of changes in shareholders’ equity		5
	Unaudited interim condensed consolidated statement of cash flows		6-7

Notes to the unaudited interim condensed consolidated financial statements:			8-25

	1.	General information and description of business	8
	2.	Summary of significant accounting policies and new accounting pronouncements	8
	3.	Short-term investments	12
	4.	Investments in associates	12
	5.	Other investments	12
	6.	Borrowings	13
	7.	Fair value of financial instruments	15
	8.	Income tax	17
	9.	Related parties	17
	10.	Segment information	20
	11.	Commitments and contingencies	21
	12.	Subsequent events	24

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(Amounts in millions of Russian Rubles)

	Notes	June 30, 2016	December 31, 2015

ASSETS

NON-CURRENT ASSETS:

Property, plant and equipment		288,402	302,662
Investment property		359	364
Goodwill		33,980	34,468
Other intangible assets		76,629	74,596
Investments in associates	4	8,545	9,299
Other investments	5	34,386	34,667
Deferred tax assets		8,816	9,287
Accounts receivable, related parties	9	3,513	3,335
Other financial assets		17,773	25,203
Other non-financial assets		682	480

Total non-current assets		473,085	494,361

CURRENT ASSETS:

Inventories		12,813	14,510
Trade and other receivables		37,252	34,542
Accounts receivable, related parties	9	2,447	6,326
Short-term investments	3	27,978	49,840
Advances paid and prepaid expenses		5,665	4,781
VAT receivable		7,041	9,815
Income tax assets		3,655	5,190
Assets held for sale		461	549
Cash and cash equivalents		24,956	33,464

Total current assets		122,268	159,017

TOTAL ASSETS		595,353	653,378

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(CONTINUED)

(Amounts in millions of Russian Rubles)

	Notes	June 30, 2016		December 31, 2015

EQUITY AND LIABILITIES

EQUITY:

Common stock		207		207
Treasury stock		(24,255	)	(24,468	)
Retained earnings		168,780		173,200
Accumulated other comprehensive income		484		11,176

Equity attributable to owners of the Company		145,216		160,115
Non-controlling interests		6,218		8,256

Total equity		151,434		168,371

NON-CURRENT LIABILITIES:

Borrowings	6	234,634		292,168
Deferred tax liabilities		29,094		27,346
Provisions		2,221		2,565
Other non-financial liabilities		4,182		4,342
Other financial liabilities		554		676

Total non-current liabilities		270,685		327,097

CURRENT LIABILITIES:

Trade and other payables		82,981		57,756
Accounts payable, related parties	9	1,702		1,809
Subscriber prepayments		13,994		17,451
Borrowings	6	49,009		53,701
Income tax liabilities		1,045		831
Provisions		5,691		7,863
Other non-financial liabilities		10,821		8,721
Other financial liabilities		7,991		9,778

Total current liabilities		173,234		157,910

TOTAL EQUITY AND LIABILITIES		595,353		653,378

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS

(Amounts in millions of Russian Rubles, except per share amounts)

	Notes	Six months ended June 30, 2016		Six months ended June 30, 2015

Service revenue		195,007		188,831
Sales of goods		21,219		14,042
	10	216,226		202,873

Cost of services		68,374		63,400
Cost of goods		20,053		11,729

Selling, general and administrative expenses		47,579		44,745
Depreciation and amortization		41,080		40,669
Operating share of the profit of associates	4	(1,462	)	(1,643	)
Other (income) / expenses		(482	)	2,309

Operating profit		41,084		41,664

Finance income		(3,005	)	(4,763	)
Finance costs		16,057		12,609
Currency exchange gains		(3,270	)	(107	)
Non-operating share of the loss of associates	4	1,020		804
Change in fair value of financial instruments		178		(91	)
Other expenses/(income)		96		(114	)

Profit before tax		30,008		33,326

Income tax expense	8	6,720		6,649

Profit for the period		23,288		26,677

Profit / (loss) for the period attributable to:
Owners of the Company		23,563		27,961
Non-controlling interests		(275	)	(1,284	)

Earnings per share (basic and diluted), Russian Rubles:		11.85 and 11.84		14.06 and 14.05

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Amounts in millions of Russian Rubles)

	Six months ended June 30, 2016		Six months ended June 30, 2015

Profit for the period	23,288		26,677

Other comprehensive loss

Items that may be reclassified subsequently to profit or loss:
Exchange differences on translating foreign operations	(8,412	)	(10,016	)
Net fair value loss on financial instruments	(1,736	)	(3,402	)

Share of other comprehensive income of associates and joint ventures
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translating foreign operations in associates and joint ventures	(1,190	)	(2,026	)

Other comprehensive loss for the period, net of income tax	(11,338	)	(15,444	)

Total comprehensive income for the period	11,950		11,233

Total comprehensive income / (loss) for the period attributable to:
Owners of the Company	12,871		12,837
Non-controlling interests	(921	)	(1,604	)

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Amounts in millions of Russian Rubles, except share amounts)

									Accumulated other comprehensive income / (loss)
	Common stock		Treasury stock				Additional paid-in		Investments revaluation		Foreign currency translation		Remeasurements of the net defined	Retained		Equity attributable to		Non-controlling		Total
	Shares	Amount	Shares		Amount		capital		reserve		reserve		benefit liability	earnings		equity holders		interests		equity

Balances at January 1, 2015	2,066,413, 562	207	(77,501,432	)	(24,464	)	5,052		4,268		8,803		407	174,556		168,829		9,793		178,622

Profit / (loss) for the period	—	—	—		—		—		—		—		—	27,961		27,961		(1,284	)	26,677
Other comprehensive loss for the period, net of income tax	—	—	—		—		—		(3,402	)	(11,722	)	—	—		(15,124	)	(320	)	(15,444	)
Total comprehensive (loss) / income for the period	—	—	—		—		—		(3,402	)	(11,722	)	—	27,961		12,837		(1,604	)	11,233
Issuance of stock options	—	—	—		—		79		—		—		—	—		79		—		79
Dividends declared by MTS	—	—	—		—		—		—		—		—	(38,903	)	(38,903	)	—		(38,903	)
Dividends to non-controlling interest	—	—	—		—		—		—		—		—	(82	)	(82	)	(257	)	(339	)
Disposal of Intellect Telecom	—	—	—		—		252		—		—		—	—		252		14		266
Disposal of Rent Nedvizhimost	—	—	—		—		6,003		—		—		—	—		6,003		342		6,345
Acquisition of NIS	—	—	—		—		(506	)	—		—		—	—		(506	)	(29)		(535	)
Changes in ownership interest with no gain/loss of control — MGTS and NIS	—	—	—		—		—		—		—		—	—		—		89		89

Balances at June 30, 2015	2,066,413,562	207	(77,501,432	)	(24,464	)	10,880		866		(2,919	)	407	163,532		148,509		8,348		156,857

Balances at January 1, 2016	2,066,413,562	207	(77,521,163	)	(24,468	)	—		1,045		9,638		493	173,200		160,115		8,256		168,371

Profit / (loss) for the period	—	—	—		—		—		—		—		—	23,563		23,563		(275	)	23,288
Currency translation adjustment, net of income tax	—	—	—		—		—		—		(8,956	)	—	—		(8,956	)	(646	)	(9,602	)
Change in fair value of derivatives, net of income tax	—	—	—		—		—		(1,736	)	—		—	—		(1,736	)	—		(1,736	)
Total comprehensive (loss) / income for the period	—	—	—		—		—		(1,736	)	(8,956	)	—	23,563		12,871		(921	)	11,950
Issuance of stock options	—	—	—		—		(101	)	—		—		—	—		(101	)	3		(98	)
Dividends declared by MTS	—	—	—		—		—		—		—		—	(27,879	)	(27,879	)	—		(27,879	)
Dividends to non-controlling interest	—	—	—		—		—		—		—		—	—		—		(1,120	)	(1,120	)
Unclaimed dividends	—	—	—		—		—		—		—		—	2		2		—		2
Sale of own stock	—	—	1,024,587		214		—		—		—		—	—		214		—		214
Purchase of own stock	—	—	(6,986	)	(1	)	—		—		—		—	—		(1	)	—		(1	)
Changes in ownership interest with no gain/loss of control — MTS Bank additional share issuance	—	—	—		—		(5	)	—		—		—	—		(5	)	—		(5	)
Reclassification to retained earnings	—	—	—		—		106		—		—		—	(106	)	—		—		—

Balances at June 30, 2016	2,066,413,562	207	(76,503,562	)	(24,255	)	—		(691	)	682		493	168,780		145,216		6,218		151,434

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Amounts in millions of Russian Rubles)

	Six months ended		Six months ended
	June 30, 2016		June 30, 2015

CASH FLOWS FROM OPERATING ACTIVITIES:

Profit for the period	23,288		26,677

Adjustments for:
Depreciation and amortization	41,080		40,669
Finance income	(3,005	)	(4,763	)
Finance costs	16,057		12,609
Income tax expense	6,720		6,649
Currency exchange gain	(3,270	)	(107	)
Amortization of deferred connection fees	(491	)	(569	)
Share of the profit of associates	(442	)	(839	)
Change in fair value of financial instruments	179		(91	)
Inventory obsolescence expense	621		86
Allowance for doubtful accounts	1,131		1,483
Change in provisions	6,317		4,752
Other non-cash items	(793	)	(294	)

Movements in operating assets and liabilities:
Increase in trade and other receivables	(7,458	)	(4,824	)
Decrease/(increase) in inventory	950		(2,516	)
Decrease in advances paid and prepaid expenses	843		3,113
Decrease/(increase) in VAT receivable	461		(1,599	)
(Decrease)/Increase in trade and other payables and other current liabilities	(3,337	)	2,103

Dividends received	1,181		1,471
Income tax paid	(2,960	)	(4,207	)
Interest received	2,081		2,062
Interest paid, net of interest capitalized	(15,479	)	(9,849	)

NET CASH PROVIDED BY OPERATING ACTIVITIES	63,674		72,016

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property, plant and equipment	(25,545	)	(40,921	)
Purchases of other intangible assets	(14,126	)	(12,720	)
Purchase of 4G and 3G licenses in Russia and Ukraine	(2,598	)	(7,044	)
Proceeds from sale of property, plant and equipment and assets held for sale	1,300		1,326
Purchases of short-term and other investments	(7,482	)	(68,657	)
Proceeds from sale of short-term and other investments	22,042		4,519
Investments in associates	(1,326	)	—

NET CASH USED IN INVESTING ACTIVITIES	(27,735	)	(123,497	)

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(CONTINUED)

(Amounts in millions of Russian Rubles)

	Six months ended		Six months ended
	June 30, 2016		June 30, 2015

CASH FLOWS FROM FINANCING ACTIVITIES:

Repayment of notes	(17,904	)	(479	)
Notes and debt issuance cost paid	—		(1,213	)
Finance lease obligation principal paid	(168	)	(224	)
Dividends paid	—		(82	)
Cash flows from transactions under common control	3,063		4,252
Proceeds from loans	1,036		43,818
Repayment of loans	(26,035	)	(9,009	)
Cash inflow under credit guarantee agreement related to foreign-currency hedge	(1,034	)	—
Other financial activities	—		5

NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES	(41,042	)	37,068

Effect of exchange rate changes on cash and cash equivalents	(3,405	)	(2,924	)

NET DECREASE IN CASH AND CASH EQUIVALENTS	(8,508	)	(17,337	)

CASH AND CASH EQUIVALENTS, beginning of the period, including cash and cash equivalents within assets held for sale nill and 156, respectively	33,464		61,566

CASH AND CASH EQUIVALENTS, end of the period	24,956		44,229

Less cash and cash equivalents within assets held for sale	—		(109	)

CASH AND CASH EQUIVALENTS, end of the period	24,956		44,120

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

1. GENERAL INFORMATION AND DESCRIPTION OF BUSINESS

Public Joint-Stock Company Mobile TeleSystems (“MTS PJSC”, or “the Company”) is a company incorporated under the laws of the Russian Federation and having its registered address at 4, Marksistskaya Street, 109147, Moscow, Russian Federation.

Business of the Group — MTS PJSC was incorporated on March 1, 2000, through the merger of MTS CJSC and Rosico TC CJSC, its wholly-owned subsidiary. MTS CJSC started its operations in the Moscow license area in 1994 and then began expanding through Russia and the CIS. MTS PJSC’s majority shareholder is Public Joint-Stock Financial Corporation Sistema or “Sistema”, whose controlling shareholder is Vladimir P. Yevtushenkov.

In these notes, “MTS” or “the Group” refers to the Company and its subsidiaries.

The Group provides a wide range of telecommunications services including voice and data transmission, internet access, pay TV, various value added services through wireless and fixed lines, as well as selling equipment and accessories. The Group’s principal operations are located in Russia, Ukraine, Turkmenistan, Uzbekistan and Armenia.

MTS completed its initial public offering in 2000 and listed its shares of common stock, represented by American Depositary Shares, or ADSs, on the New York Stock Exchange under the symbol “MBT”. Since 2003 common shares of MTS PJSC have been traded on the Public Joint-Stock Company “Moscow Exchange MICEX-RTS” (“Moscow Exchange”).

Since 2009, the Group has been developing its own retail network, operated by Russian Telephone Company JSC (“RTC”), a wholly owned subsidiary of MTS PJSC.

Seasonality — The Group’s financial results are impacted by seasonality through the calendar year. Higher consumption of roaming services in May-September and increased demand for handsets and accessories before winter holidays enhance revenue from services and sales of goods for the second half-year. However, the Group doesn’t view its business as highly seasonal as defined by IAS 34, Interim Financial Reporting.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS

Basis of preparation — These interim condensed consolidated financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting, and should be read in conjunction with the annual consolidated statements of the Group for the year ended December 31, 2015.

These interim condensed consolidated financial statements are unaudited and do not include all the information and disclosures required in the annual IFRS financial statements. The Group omitted disclosures which would substantially duplicate the information contained in its 2015 audited consolidated financial statements, such as accounting policies and details of accounts which have not changed significantly in amount or composition. Additionally, the Group has provided disclosures where significant events have occurred subsequently to the issuance of its annual consolidated statements of the Group for the year ended December 31, 2015.

Management believes that the disclosures in these interim condensed consolidated financial statements are adequate to make the presented information not misleading if these interim condensed consolidated financial statements are read in conjunction with the annual consolidated statements of the Group for the year ended December 31, 2015 and the notes related thereto. In the opinion of management, the financial statements reflect all adjustments necessary to present fairly the Group’s financial position, financial performance and cash flows for the interim reporting period in accordance with IAS 34, Interim Financial Reporting. Operating results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016.

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

These consolidated financial statements are prepared on a historical cost basis, unless disclosed otherwise. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.

Amounts in the consolidated financial statements are stated in millions of Russian Rubles, unless indicated otherwise.

The interim condensed consolidated financial statements of the Group as of June 30, 2016 and December 31, 2015 and for the six months ended June 30, 2016 and 2015 were authorized for issue by the Company’s Chief Executive Officer on August 29, 2016.

Basis of consolidation — The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company. Control is achieved only where the Company has the power over the entity, is exposed and has rights to variable returns, and is able to use its power over the entity to affect its amount of variable returns. The results of the controlled entities acquired or disposed of during the reporting period are included in the consolidated financial statements from the date, the Group achieves control over the entity, or until the date on which the Company ceases to control the entity. If necessary, the accounting policies of controlled entities’ are aligned with the accounting policy applied by the Group. All intra-group balances, income, expenses and cash flows are eliminated on consolidation.

Those entities where the Group exercises significant influence are recognized as associates and accounted for using the equity method. Significant influence is the power to participate in the financial and operating policies decisions of the investee but is not to control those policies. Investments in these entities are recognized at cost at the time of acquisition and adjusted thereafter to recognize the Group’s share of the profit or loss and other comprehensive income. The carrying amount of the investment in such entities may include goodwill as the positive difference between the cost of the investment and Group’s proportionate share in the fair values of the entity’s identifiable assets and liabilities. The carrying amount of the investment accounted for using the equity method is tested for impairment provided there are indications of impairment. If the carrying amount of the investment exceeds its recoverable amount, an impairment loss is recognized in the amount of the difference. The recoverable amount is measured at the higher of fair value less costs of disposal and value in use. The Group presents its share in profits or losses in associates within operating profit if those interests are viewed as part of Group’s core operations. As of June 30, 2016, only MTS Belarus was considered to be a part of Group’s core operating activity. Shares in profits and losses of other Group’s associates were presented as non-operating items.

The Group has joint operations with MTS Bank, a Group associate, relating to the development of the MTS Dengi project and with Vimpelcom, relating to construction of LTE base stations. Joint operations are characterized by the fact that the operators that have joint control over the arrangement have a right to the assets, and obligations for the liabilities, relating to the arrangement. Respectively, each operator accounts for its share of the joint assets and liabilities, and recognizes its share of the output, revenues and expenses incurred under the arrangement.

Investments in shares of the companies over which the Group does not have control or ability to exercise significant influence are accounted for using the cost method. The Group does not evaluate cost-method investments for impairment unless there is an indicator of impairment.

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

As of June 30, 2016 and December 31, 2015, the Company had investments in the following significant entities:

	Accounting method	June 30, 2016		December 31, 2015
MTS Turkmenistan	Consolidated	100.0	%	100.0	%
MTS Bermuda (1)	Consolidated	100.0	%	100.0	%
MTS Ukraine	Consolidated	100.0	%	100.0	%
RTC	Consolidated	100.0	%	100.0	%
Sibintertelecom	Consolidated	100.0	%	100.0	%
Sputnikovoe TV	Consolidated	100.0	%	100.0	%
Dega	Consolidated	100.0	%	100.0	%
NVision Group	Consolidated	100.0	%	100.0	%
Stream	Consolidated	100.0	%	100.0	%
Metro-Telecom	Consolidated	95.0	%	95.0	%
MGTS Group	Consolidated	94.7	%	94.7	%
K-Telecom	Consolidated	80.0	%	80.0	%
Navigation Information Systems Group	Consolidated	77.7	%	77.7	%
UMS (2)	Consolidated	50.01	%	50.01	%
MTS International Funding Limited (3) (“MTS International”)	Consolidated	SE		SE
MTS Belarus	Equity	49.0	%	49.0	%
MTS Bank	Equity	26.8	%	27.0	%
Zifrovoe TV	Equity	20.0	%	20.0	%
OZON Holdings Limited	Equity	10.8	%	10.8	%

(1) A wholly-owned subsidiary established to repurchase the Group’s ADSs. Liquidated in May 2016.

(2) On August 5, 2016 the Group sold its stake in UMS (Note 12).

(3) A private company organized and existing as a private limited company under the laws of Ireland. The Group does not have any equity in MTS International. It was established for the purpose of raising capital through the issuance of debt securities on the Irish Stock Exchange followed by transferring the proceeds through a loan facility to the Group. In 2010 and 2013, MTS International issued $750 million 8.625% notes due in 2020 and $500 million 5.0% notes due in 2023, respectively (Note 6). The notes are guaranteed by MTS PJSC in the event of default. MTS International does not perform any other activities except those required for notes servicing. The Group bears all costs incurred by MTS International in connection with the notes’ maintenance activities. Accordingly, the Group concluded that it exercises control over the entity.

Functional currency translation methodology — As of June 30, 2016, the functional currencies of Group entities were as follows:

· For entities incorporated in the Russian Federation, MTS Finance, Dega and MTS International — the Russian Ruble (“RUB”);

· For MTS Ukraine — the Ukrainian Hryvna;

· For MTS Turkmenistan — the Turkmenian Manat;

· For K-Telecom — the Armenian Dram;

· For Universal Mobile Services (“UMS”) — the Uzbek Sum;

· For MTS Belarus — the Belorussian Ruble,

· For Nvision Czech Republic A.S. — the Czech Koruna.

Foreign-currency transactions are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. At the reporting date, monetary items denominated in foreign currencies are translated at the closing rate, whereas non-monetary items are stated at the exchange rate at the date of their recognition. Exchange rate differences are recognized in profit or loss.

For entities whose records are maintained in their functional currency, which is other than the reporting currency, all year-end assets and liabilities have been translated into U.S. Dollars at the period-end exchange rate set by local central banks. Subsequently, U.S. Dollars balances have been translated into Russian Rubles at the period-end exchange rate set by the Central Bank of Russia. Revenues and expenses have been translated at the average exchange rate for the period using cross-currency exchange rate via U.S. Dollar as described above. Translation differences resulting from the use of these rates are reported as a component of other comprehensive income.

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

Management estimates — The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates include allowance for doubtful accounts and inventory obsolescence, the valuation of assets acquired and liabilities assumed in business combinations, the recoverability of investments and the valuation of goodwill, property, plant and equipment and intangible assets, liability under put option agreement, certain provisions and financial instruments.

Significant accounting policies — The accounting policies and methods of computation applied in the preparation of these interim condensed consolidated financial statements are consistent with those disclosed in the annual consolidated financial statements of the Group for the year ended December 31, 2015.

Standards, interpretations and amendments in issue but not yet effective — The Group has not applied the following new and revised IFRSs that have been issued but not yet effective:

Amendments to IAS 12		Recognition of Deferred Tax Assets for Unrealized Losses (1)
IFRS 9		Financial Instruments (2)
Amendments to IFRS 2		Classification and measurement of Share-based Payment Transactions (2)
IFRS 15		Revenue from contracts with Customers (2)
IFRS 16		Leases (3)
Amendments to IFRS 10 and IAS 28		Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (4)

(1) Effective for annual periods beginning on or after January 1, 2017, with earlier application permitted

(2) Effective for annual periods beginning on or after January 1, 2018, with earlier application permitted

(3) Effective for annual periods beginning on or after January 1, 2019, with earlier application permitted

(4) Effective date is not currently determined

IFRS 9, Financial Instruments. IFRS 9 governs the classification and measurement of financial assets and liabilities, derecognition, impairment and hedge accounting matters. The Group is currently evaluating the impact of these amendments on the Group’s consolidated financial statements.

IFRS 15, Revenue from Contracts with Customers. This standard provides a single, principles-based five-step model for the determination and recognition of revenue to be applied to all contracts with customers. It replaces the existing standards IAS 18, Revenue, and IAS 11, Construction Contracts. The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under the standard, an entity recognizes revenue when (or as) a performance obligation is satisfied, i. e. when “control” of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15. The Group is currently evaluating the impact of these amendments and the transition alternatives on the consolidated financial statements.

IFRS 16, Leases. This standard principally requires lessees to recognize assets and liabilities for all leases and to present the rights and obligations associated with these leases in the statement of financial position. Going forward, lessees will therefore no longer be required to make the distinction between finance and operating leases. For all leases, the lessee will recognize a lease liability in its statement of financial position for the obligation to make future lease payments. At the same time, the lessee will capitalize a right of use to the underlying asset which is generally equivalent to the present value of the future lease payment plus directly attributable expenditures. The standard also includes new provisions on the definition of a lease and its presentation, on disclosures in the notes, and on sale and leaseback transactions. The Group is currently evaluating the impact of these amendments on the consolidated financial statements.

Other mentioned IFRS pronouncements do not have a material impact on the Group’s consolidated financial statements.

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

3. SHORT-TERM INVESTMENTS

The Group’s short-term investments comprised the following:

	Category	June 30, 2016	December 31, 2015

Deposits	Loans and receivables	19,115	42,492
Assets in Sistema-Capital trust management (Notes 7, 9)	Financial asset at fair value through profit or loss	2,603	—
Loans	Loans and receivables	6,191	7,082
Notes	Available for sale	69	266

Total short-term investments		27,978	49,840

4. INVESTMENTS IN ASSOCIATES

The Group’s investments in associates (all accounted for using the equity method) comprised the following:

	Country of operations	Operating activity	June 30, 2016	December 31, 2015

MTS Belarus	Belarus	telecommunications	4,610	5,407
MTS Bank	Russia	banking	1,244	1,120
Equity investments in other unquoted companies	Russia	e-commerce, digital TV, etc.	2,691	2,772

Total investments in associates			8,545	9,299

On February 25, 2016 the Group acquired 946,347 ordinary shares of MTS Bank of 3,588,347 shares, placed as a part of an earlier approved additional share issuance, for a total consideration of RUB 1,325 million. As the result of the transaction, the Group’s share in the capital of MTS Bank decreased from 27.0% to 26.8%.

The Group’s share in the profit of MTS Belarus was included in operating share of the profit of associates in the accompanying consolidated statement of profit or loss in amount of RUB 1,462 million and RUB 1,643 million for the six months ended June 30, 2016 and 2015, respectively.

The Group’s share in the net losses of other associates was included in the line “non-operating share of the loss of the associates” in the accompanying consolidated statement of profit or loss in amount of RUB 1,020 million and RUB 804 million for the six months ended June 30, 2016 and 2015, respectively.

5. OTHER INVESTMENTS

The Group’s other investments comprised the following:

		June 30,	December 31,
	Category	2016	2015

Deposits	Loans and receivables	30,409	30,677
Loans/Unquoted Notes	Loans and receivables	2,802	2,787
Other	-	1,175	1,203

Total other investments		34,386	34,667

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NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

6. BORROWINGS

The Group’s borrowings comprised the following:

	June 30, 2016		December 31, 2015

Notes	73,416		100,034
Bank and other loans	199,244		234,040
Finance lease obligations	10,983		11,795

Total borrowings	283,643		345,869

Less: current portion	(49,009	)	(53,701	)

Total borrowings, non-current	234,634		292,168

Notes — The reconciliation between opening and closing balance of the Group’s Notes for the six months ended June 30, 2016 was the following:

	Currency	Interest rate (actual at June 30, 2016)		Carrying amount

Balance at January 1, 2016				100,034
*Repayments*
MTS International Notes due 2020 (Note 2)	USD	8.625	%	(17,904	)
*Currency exchange gain*				(8,739	)
*Other movement*				25

Balance at June 30, 2016				73,416

Less: current portion				(3,854	)

Total notes, non-current				69,562

During the six months ended June 30, 2016 the Group repurchased 274 029 MTS International Notes due 2020 with nominal value of 1,000 USD. The Group has recognized an excess of notes purchase price over its principal amount of RUB 3,045 million as a finance expense within the consolidated statement of profit or loss.

The fair values of the Notes based on the market quotes as of June 30, 2016 at the stock exchanges where they are traded were as follows:

	Stock exchange	% of par	Fair value

MTS International Notes due 2023	Frankfurt stock exchange	102.50	30,728
MTS International Notes due 2020	Frankfurt stock exchange	117.00	23,072
MTS PJSC Notes due 2017	Moscow Exchange	98.65	9,865
MTS PJSC Notes due 2023	Moscow Exchange	97.00	9,700
MTS PJSC Notes due 2020	Moscow Exchange	100.50	2,120
MTS PJSC Notes due 2016	Moscow Exchange	99.95	1,787
MTS PJSC Notes due 2018	Moscow Exchange	103.89	6

Total notes			77,278

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

Bank and other loans — The reconciliation between opening and closing balance of the Group’s loans from banks and financial institutions for the six months ended June 30, 2016 was the following:

	Currency	Interest rate (actual at June 30, 2016)	Carrying amount

Balance at January 1, 2016			234,040
*New loans*
Loans	various	various	1,036

*Repayments*
Notes in REPO	RUB	-	(10,005	)
Sberbank	RUB	8.45%	(10,000	)
Calyon, ING Bank N.V, Nordea Bank AB, Raiffeisen Zentralbank Osterreich AG	USD	LIBOR + 1.15% (2.07%)	(4,487	)
Other financial institutions			(3,858	)
*Currency exchange gain*			(6,984	)
*Other movement*			(498	)

Balance at June 30, 2016			199,244

Less: current portion			(44,469	)

Total bank and other loans, non-current			154,775

Compliance with covenants — Covenants related to Group notes and bank loans did not change during six months ended June 30, 2016. The Group was in compliance with all existing covenants as of June 30, 2016.

Pledges — The credit facility agreements of UMS are secured by telecommunication equipment and premises with carrying value of RUB 1,701 million and RUB 2,271 million as of June 30, 2016 and December 31, 2015 respectively.

Available credit facilities — As of June 30, 2016, the Group’s total available unused credit facilities amounted to RUB 27,475 million and related to the following credit lines:

	Currency	Maturity	Interest rate	Available till	Available amount

Aloqabank	UZS	2022	12%	September 2017	6,796
China Development Bank	USD	2022	6M Libor + 3.25%	May 2017	6,426
China Development Bank	CNY	2022	6M Shibor + 3.52%	May 2017	5,995
Sberbank	RUB	To be agreed	Central Bank key rate + max.5.00%	June 2019	5,000
Absolut Bank	RUB	2019	CBR(1) auction rate + 1.25%-1.8%	December 2019	3,000
Uzpromstroibank	UZS	2017	9%	December 2017	258

Total					27,475

(1) CBR — Central Bank rate

In addition, the Group has a credit facility made available by Citibank at MosPrime + 1.50% interest rate with the available amount set up on request and to be repaid within 182 days.

Scheduled maturities — Except for the non-scheduled reduction of Notes in respect of the purchase of MTS International Notes due 2020, there were no other changes in scheduled maturities of the Group’s borrowings (gross of debt issuance costs) outstanding.

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NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

Finance lease obligations — The following table presents a summary of net book value of leased property, plant and equipment:

	June 30, 2016	December 31, 2015

Network and base station equipment	6,354	6,352
Office equipment, vehicles and other	81	54

Leased assets, net	6,435	6,406

Depreciation of the assets under finance leases for the six months ended June 30, 2016 and 2015 amounted to RUB 301 million and RUB 285 million, respectively, and was included in depreciation and amortization expense in the accompanying consolidated statement of profit or loss.

Interest expense accrued on finance lease obligations for the six months ended June 30, 2016 and 2015 amounted to RUB 450 million and RUB 342 million, respectively, and was included in finance costs in the accompanying consolidated statement of profit or loss.

The following table presents future minimum lease payments under capital leases together with the present value of the net minimum lease payments as at June 30, 2016 and December 31, 2015:

	June 30, 2016		December 31, 2015

Minimum lease payments, including:
Current portion (less than 1 year)	1,446		1,366
More than 1 to 5 years	5,854		6,243
Over 5 years	10,675		11,022
Total minimum lease payments	17,975		18,631

Less amount representing interest	(6,992	)	(6,836	)

Present value of net minimum lease payments, including:
Current portion (less than 1 year)	686		564
More than 1 to 5 years	3,037		3,334
Over 5 years	7,260		7,897
Total present value of net minimum lease payments	10,983		11,795

Less current portion of lease obligations	(686	)	(564	)

Non-current portion of lease obligations	10,297		11,231

No significant changes in the composition of assets in lease and average lease terms occurred during the six months ended June 30, 2016 and 2015.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

Group financial instruments are represented by various financial assets and liabilities, principal types of which are trade and other receivables and payables, cash and cash equivalents, investments, derivative instruments, notes and bank loans and put option over non-controlling interests.

The Group accounts for its financial assets and liabilities at amortized cost, except for derivative instruments, several marketable securities and liability under put option agreement, which are accounted for at fair value.

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

The table below presents the fair value of financial instruments:

	Level of inputs	June 30, 2016		December 31, 2015

*Assets*
Sistema International Funding S.A. Bonds due 2019 (related party) (Note 3, 9)	Level 1	69		75
Sistema Notes due in 2016 (series 04) (related party) (Notes 3,9)	Level 1	—		191
Derivative instruments	Level 2	17,569		25,027
Cross-currency interest rate swap		17,427		25,027
Interest rate swap		142		—
Assets in Sistema-Capital trust management (related party) (Note 3, 9)	Level 2	2,603		—

*Liabilities*
Derivative instruments	Level 2	(554	)	(676	)
Interest rate swap		(554	)	(676	)
Liability under put option agreement	Level 3	(2,932	)	(2,925	)
Contingent consideration	Level 3	(128	)	(115	)

Changes in the Group’s net assets and earnings resulted from fair value measurements of Level 3 liabilities were not significant for the six months ended June 30, 2016 and 2015.

In May 2016, the Group entered into trust agreement with the asset management company Sistema-Capital. The trust agreement provided for short-term profit-taking on operations with securities. This contract was not designated for hedge accounting purposes.

The fair value measurement of the Group’s derivative instruments and assets in Sistema-Capital trust management is based on the observable yield curves for similar instruments and represents the estimated amount the Group would receive or pay to terminate these agreements at the reporting date, taking into account current interest rates, foreign exchange spot and forward rates.

The liability under put option agreement is measured at fair value using a discounted cash flow technique. The most significant quantitative inputs used to measure the fair value of the liability under put option agreement are presented in the table below:

Unobservable inputs	June 30, 2016	December 31, 2015

Discount rate	13%	15%
Revenue growth rate	(1.4) – (1.6)% (av. -1.5%)	(1.6) – (4.6)% (av. -2.2%)
OIBDA margin	42.9-43.8% (av. 43.4%)	44.7-46.1% (av. 45.4%)

Carrying value of the Group’s financial instruments accounted for at amortized cost approximates their fair value due to their short-term nature and market interest rates, except for issued loans and borrowings as disclosed in the table below:

	June 30, 2016				December 31, 2015
	Fair value		Carrying value		Fair value		Carrying value

Borrowings	(284,742	)	(285,452	)	(340,201	)	(348,012	)

While management has used available market information in estimating the fair value of its financial instruments, the market information may not be fully reflective of the value that could be realized in the current circumstances.

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

There were no transfers between levels of inputs within the hierarchy for the six months ended June 30, 2016 and 2015.

There were no transfers between the accounting categories of financial instruments during the six months ended June 30, 2016 and 2015.

8. INCOME TAX

Significant components of income tax expense for the six months ended June 30, 2016 and 2015 were as follows:

	Six months ended June 30
	2016		2015

Current income tax charge	4,895		6,808
Adjustments recognised for current tax of prior periods	(126	)	54

Total current income tax	4,769		6,862

Deferred tax	1,951		(213	)

Income tax expense	6,720		6,649

The statutory income tax rates in jurisdictions in which the Group operated during six months ended June 30, 2016 did not change significantly in comparison to the statutory income tax rates effective at December 31, 2015. The Russian statutory income tax rate of 20% reconciled to the Group’s effective income tax rate for the six months ended June 30, 2016 and 2015 was as follows:

	Six months ended June 30
	2016		2015

Statutory income tax rate for the period	20.0	%	20.0	%
Adjustments:
Expenses not deductible for tax purposes	2.1		3.0
Settlements with tax authorities	(0.4	)	0.2
Different tax rate of foreign subsidiaries	(0.4	)	(0.3	)
Earnings distribution from subsidiaries	0.6		(3.2	)
Change in fair value of derivative financial instruments	0.4		0.0
Other	0.1		0.3

Effective income tax rate	22.4	%	20.0	%

9. RELATED PARTIES

Related parties include entities under common ownership with the Group, affiliated companies and associated companies.

Terms and conditions of transactions with related parties — Outstanding balances as of June 30, 2016 were unsecured and settlements are made on a cash basis. There have been no guarantees provided or received for any related party receivables or payables. As of June 30, 2016 and December 31, 2015 the Group had no impairment of receivables relating to amounts owed by related parties as well as expenses recognized during the periods of six months ended June 30, 2016 and 2015 in respect to bad or doubtful debts from related parties.

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NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

Accounts receivable from and accounts payable to related parties were as follows:

	June 30, 2016	December 31, 2015

Accounts receivable:
Business Nedvizhimost, a subsidiary of Sistema	3,515	7,511
MTS Belarus, the Group’s associate	1,505	1,226
MTS Bank, the Group’s associate	623	693
Other related parties	317	231

Total accounts receivable, related parties	5,960	9,661