Telenor ASA – Annual report – 31 December 2016
NOTE 3 Critical accounting judgements and key sources of estimation uncertainty (extract)
Key sources of estimation uncertainty – critical accounting estimates (extract)
Associated companies, see note 19
As of 31 December 2016, the Group has an ownership interest of 23.7% in VimpelCom Ltd. (VimpelCom) and accounts for the investment in VimpelCom in accordance with the equity method. VimpelCom is listed (New York Stock Exchange) and the company is not able to provide financial information to one investor without providing equivalent information to all other investors at the same time. The most recent financial information for VimpelCom available at the time of issuance of Telenor’s quarterly interim financial statements are the financial information for the previous quarter. As a consequence, the share of net income from VimpelCom has been recognised in the quarterly interim financial statements of the Group with a one quarter lag. At the time of approval of the Group’s annual report for 2016 on 14 March 2017, VimpelCom had released their fourth quarter 2016 interim financial information. To be consistent between interim and annual financial reporting the share of net income from VimpelCom has been recognised in the annual financial statements of the Group with a one quarter lag and only significant transactions or events reported by VimpelCom in their fourth quarter 2016 interim financial information are reflected. Thus, share of net income from VimpelCom for the year includes share of net income for the period 1 October 2015 to 30 September 2016.
Adjustments are made for the effects of publicly available information on any significant transactions and events that occur between the latest interim financial reporting from VimpelCom and the date of the Group’s consolidated financial statements. Such adjustments require significant judgement. For 2016, an estimate of the translation differences related to the Russian Ruble and Ukrainian Hryvnia has been made based on currency rates as of 31 December 2016 and the reported figures for VimpelCom as of 30 September 2016.
On 5 October 2015, the Group announced its intention to divest all its shares in VimpelCom Ltd. Accordingly, the impairment assessment of VimpelCom Ltd. is based on quoted prices as of the balance sheet date. 163.9 million shares were disposed during 2016 reducing the Group’s ownership from 33.0% to 23.7%. The carrying amount of the investment in VimpelCom Ltd. Is NOK 13.8 billion as of 31 December 2016, equivalent to USD 3.85 per share.
NOTE 16 Impairment testing (extract)
On 5 October 2015, the Group announced its intention to divest all its shares in VimpelCom Ltd. Accordingly, the impairment assessment of VimpelCom Ltd. Is based on the market value of the shares, and an impairment loss of NOK 2.8 billion has been recognised in the income statement as share of net income (loss) from associated companies and joint ventures during 2016 (an impairment of NOK 5.5 billion in 2015). During the third quarter of 2016, Telenor sold shares in Vimpelcom taking Telenor’s ownership interest down from 33.0% to 23.7%. The carrying amount of the investment in VimpelCom Ltd. as of 31 December 2016 after impairment is NOK 13.8 billion, equivalent to USD 3.85 per share (NOK 16.7 billion as of 31 December 2015, equivalent to USD 3.28 per share).
NOTE 19 Associated companies and joint arrangements (extract)
During 2016, the Group disposed of a portion of its ownership in VimpelCom corresponding to approximately 163.9 million VimpelCom ADSs or 9.3% of the total share capital of VimpelCom for a price of USD 3.50 per share before transaction costs, resulting in net proceeds to the Group of NOK 4.6 billion. After the disposal, the Group’s ownership of VimpelCom reduced from 33% to 23.7%. Loss of NOK 3.2 billion was recognised in income statement upon disposal of 163.9 million VimpelCom ADSs relating to reclassification of translation differences previously recognised in other comprehensive income. Concurrently with the disposal of 163.9 million VimpelCom ADSs, the Group issued bonds of USD 1 billion exchangeable into VimpelCom ADSs and having a maturity of 3 years, see note 27 for further information relating to the bonds.
During 2016, the Group disposed of its entire ownership interest in Amedia for net cash consideration of NOK 180 million. Loss of NOK 71 million was recognised which represents reclassification of accumulated loss in other comprehensive income to income statement upon disposal of the investment.
During 2015, the Group disposed of its entire ownership interest in Evry ASA for a cash consideration of NOK 1.3 billion and a gain of NOK 224 million was recognised in the income statement.
VimpelCom Ltd. (“VimpelCom”) is an associated company to the Group which is accounted for using the equity method. VimpelCom is incorporated in Bermuda, headquartered in the Netherlands, and is listed on the NASDAQ-100 Index. VimpelCom is a telecommunication company providing a range of wireless, fixed and broadband internet services in 13 markets across Europe, Africa and Asia.
On 5 October 2015, the Group announced its intention to divest all its VimpelCom American Depository Shares (ADSs). Accordingly, the carrying amount of VimpelCom is measured at the lower of carrying amount based on the equity method before impairment and market value.
VimpelCom continues to be classified as an associated company until it is highly probable that sale within 12 months will occur for the remaining VimpelCom ADSs. As a consequence of using market value as a basis for recoverable amount, the carrying amount of VimpelCom fluctuates in accordance with the share price development if the market value remains below the carrying amount based on the equity method before impairment. As of 31 December 2016, the cumulative income and expenses recognised in other comprehensive income amounts to a net loss of NOK 7.1 billion. This will be proportionately reclassified to the income statement upon disposal. Total equity for the Group will not be impacted by the reclassification.
As of 31 December 2016, the Group’s economic and voting share in VimpelCom was 23.7%. During 2016, the Group’s earlier investment in 305 million convertible preferred shares of VimpelCom were redeemed for a nominal amount of USD 0.1 cents per share. During 2016, dividend of NOK 0.1 billion was received from VimpelCom (NOK 0.2 billion during 2015).
During 2015, the Group recognised its share of equity transactions of NOK 1.7 billion primarily related to the gain on VimpelCom’s partial disposal of ownership in Omnium Telecom Algerie which was accounted for as transaction with non-controlling interest by VimpelCom. During 2016, the Group recognised its negative share of equity transactions of NOK 0.2 billion primarily related to adjustment of the gain on VimpelCom’s partial disposal of ownership in Omnium Telecom Algerie.
Total share of net income related to VimpelCom recognised during 2016 amounts to a net income of NOK 2.1 billion including impairment loss of NOK 2.8 billion. The Group includes VimpelCom’s published results with a one quarter lag, see note 3 for further details. Accordingly, share of net income from VimpelCom in 2016 consists of share of net income for the fourth quarter of 2015, share of the first three quarters of 2016 and share of significant transactions and events for the fourth quarter of 2016 amounting to NOK 2.9 billion, see below for further details.
On 27 February 2017, VimpelCom released financial information for the fourth quarter of 2016. Reported net income attributable to VimpelCom’s shareholders for the fourth quarter was USD 1.6 billion, which includes a fair value gain of USD 1.8 billion related to completion of the WIND Italy joint venture transaction and a loss of USD 0.4 billion primarily related to impairment of several assets. In accordance with the accounting policy for associated companies, the Group has adjusted for its share of significant transactions and events amounting to NOK 2.9 billion.
The Group recognised translation difference gain of NOK 610 million in other comprehensive income during 2016 related to its share of VimpelCom’s translation differences arising mainly from appreciation of Russian Ruble against USD. This includes NOK 471 million for the Group’s share of translation difference gain upto third quarter of 2016, in accordance with Telenor’s accounting policy of one quarter lag. In addition, due to further appreciation of Russian Ruble against USD during the fourth quarter of 2016, the Group recognised NOK 139 million for the fourth quarter of 2016 based on an estimate.
The translation difference gain of NOK 610 million recognised during 2016 in other comprehensive income is more than offset by NOK 663 million due to appreciation of NOK against USD by 2%.
The following table sets forth summarised financial information of VimpelCom, and reconciliation with the carrying amount of the investment for the Group:
1) Excluding non-controlling interests.
2) This includes impairment loss of NOK 2.8 billion (NOK 5.5 billion impairment loss in 2015) based on the market value.
The Group’s share of net income (loss) from discontinued operations relates to WIND Italy which was classified as discontinued operation by VimpelCom upon entering into joint venture agreement with CK Hutchison in 2015. Under the agreement, VimpelCom was to merge WIND with 3 Italia with a joint control over the merged entity. During the fourth quarter of 2016, it was announced that the transaction is completed. Upon completion of the transaction, VimpelCom measured its ownership interest in the merged entity at fair value and recognised a gain of USD 1.8 billion. The Group’s share of the fair value gain was NOK 3.7 billion recognised as a significant transaction when VimpelCom released its financial information for the fourth quarter of 2016 on 27 February 2017.