Balances and Transactions with Related Parties

Parties are generally considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence or joint control over the other party in making financial and operational decisions.  In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.  The Group’s ultimate controlling party is TeliaSonera. Entities of TeliaSonera group include entities under common control and associates of TeliaSonera.

Amounts due from related parties at 31 December 2012 and 2011 are as follows:

In thousands of Kazakhstani Tenge   31 December
2012
31 December
2011
Kazakhtelecom (owner prior to 2 February 2012) Interconnect and transmission - 2,156,411
Turkcell (owner of Parent) Roaming 3,697 10,536
Entities of TeliaSonera group Roaming 25,849 29,837
Total due from related parties   29,546 2,196,784

Amounts due from related parties are neither past due nor impaired.  It represents receivables from related parties for roaming services.  These entities do not have credit ratings assigned but their reliability is determined by the Group on the basis of long-term cooperation and which have a good credit history.  The Group’s management believes that due from related parties in the amount of Tenge 29,546 thousand will be fully repaid in 2013.

Amounts due to related parties at 31 December 2012 and 2011 are as follows:

In thousands of Kazakhstani Tenge   31 December 2012 31 December
2011
Fintur Holding B.V. (Parent) Technical assistance 284,503 349,724
Kazakhtelecom (owner prior to 2 February 2012) Interconnect and transmission - 831
TeliaSonera (ultimate parent) Roaming 8,688 6,229
Turkcell (Owner of Parent) Roaming 4,464 6,138
Entities of TeliaSonera group Roaming 20,532 18,024
Total due to related parties   318,187 380,946

The income items with related parties for the years ended 31 December 2012 and 2011 were as follows:

In thousands of Kazakhstani Tenge   2012 2011
Revenues      
Kazakhtelecom (owner prior
2 February 2012)
Interconnect 232,297 4,448,717
Turkcell (owner of Parent) Roaming 48,481 66,445
Entities of TeliaSonera group Roaming 132,183 164,800
Total revenues – related parties   412,961 4,679,962

The expense items with related parties for the years ended 31 December 2012 and 2011 were as follows:

In thousands of Kazakhstani Tenge   2012 2011
Operating expenses      
Kazakhtelecom (owner prior
2 February 2012)
Interconnect and transmission 538,025 6,254,613
Turkcell (owner of Parent) Roaming 168,033 168,097
Fintur Holding B.V. (Parent) Technical assistance 92,454 66,045
Telia Sonera (ultimate parent) Roaming 21,054 39,087
Entities of TeliaSonera group Roaming 357,620 213,670
Total expenses – related parties   1,177,186 6,741,512

The Group has an interconnect contract with Kazakhtelecom dated 1 March 1999 (“Interconnect contract”).  Kazakhtelecom charges the Group for outgoing local and international public switched telephone networks (“PSTN”) calls and transit traffic from the Group’s networks. The Group charges Kazakhtelecom for incoming calls to our GSM networks from PSTN and international and local transit traffic through the equipment of Kazakhtelecom.  Additionally, the Group has entered into transmission contracts with Kazakhtelecom, dated 26 February 1999 and 18 January 2000, under which the Group leases international digital communication channels and digital duplex communication channels in Kazakhstan.

The contracts are valid for one year from the contract date.  If neither of the parties has declared its intention to discontinue the contract thirty days prior to expiry of this term, the contract automatically prolongs for one year.  The cancellation of the contract can take place thirty days after receipt of written notice by either of the parties.

The majority of transmission channels leased by the Group are rented from Kazakhtelecom.

On 22 December 2010, the Group signed a Telecommunication Services Agreement (the “Agreement”) with Kazakhtelecom and amended it in December 2011.  Based on this agreement the Group fixed the capacity and the annual costs of lease of digital transparent communication channels and IP VPN network except for the international channels and in-city channels till the year 2020. The Agreement is non-cancellable till 31 December 2015. (Note 18).

The Group has also roaming agreements with Latvijas Mobilais Telefons SIA (“Latvijas Mobilais”), Omnitel Telecommunication Networks (“Omnitel”), Sonera Carrier Networks Ltd. (“Sonera Carrier”), Sonera Corporation, Telia Mobile AB Finland (“Telia Mobile”), the subsidiaries of TeliaSonera, Megafon and Estonian Mobile Telephone Group (“Estonian Mobile”), the associates of TeliaSonera, Turkcell, and Fintur’s subsidiaries, which are as follows: Azercell Telecom B.M. (“Azercell”), Geocell Ltd. (“Geocell”), Moldcell Ltd. (“Moldcell”), Telia Denmark, NetCom ASA (Telia NetCom Holding AS), TOV Astelit (“TOV Astelit”), Indigo Tajikistan (“Indigo Tajikistan”), Coscom LLC and Spice Nepal Pvt. Ltd. (“Spice Nepal Pvt. Ltd.”) under which they earn and incur certain revenues and costs.  Since these revenues and costs occur continually, the balances between them are normally settled by means of mutual set-off.

In January 2003 the Group entered into a Technical and Management Support Agreement (“TMS Agreement”) with Fintur.  In accordance with the TMS Agreement, Fintur provides the Group with technical and management assistance.

Memorandum on Understanding

On 26 August 2012, Sonera and the Group entered into a memorandum of understanding (the Buy and Sell MoU). Under this MoU the Group has the right to require Sonera to sell to it, and Sonera has the right to require the Group to acquire from it, all participatory interests owned by Sonera in KazNet Media LLP (KazNet) and in Rodnik Inc LLP (Rodnik). Subject to satisfaction of the applicable conditions, each of Sonera and the Group is entitled to exercise its option at any time starting from nine months after the date of the planned offering of global depository receipts and listing on local stock exchange (Note 18).

The contractual right of Sonera to sell the underlying assets (debt and equity interests and related rights and obligations) to Kcell is a financial instrument (derivative) within the scope of IAS 39.  The derivative instrument should be measured at fair value, with the changes in fair value recognised in income statement. The Group does not have an unconditional right to avoid the settlement.

Therefore, the Group should recognise a liability for the written (contingent) put options and measure it at their fair value (i.e. at the future acquisition cost).  As of 31 December 2012 the value of the options was assessed as nil by management.

Directors’ compensation

Compensation paid to directors for their services in full time executive management positions consists of a contractual salary, performance bonus depending on financial performance of the Group, share options, and other compensation in form of reimbursement of apartment rent expenses from the Group and parent companies. Total directors’ compensation included in staff costs in the statements of comprehensive income is equal to 326,824 thousand Tenge for the year ended 31 December 2012 (2011: 182,408 thousand Tenge). Directors classified as key management personnel include ten positions for 2012, including six members of Board of Directors, and three positions for 2011.