State Oil Company of the Azerbaijan Republic

Consolidated financial statements prepared under

International Financial Reporting Standards
31 December 2020
State Oil Company of the Azerbaijan Republic Consolidated financial statements

Contents

Independent auditor’s report

Consolidated financial statements

Consolidated statement of financial position ...................................................................................................... 1

Consolidated statement of profit or loss and other comprehensive income ...................................................... 3
Consolidated statement of changes in equity..................................................................................................... 4
Consolidated statement of cash flows ................................................................................................................ 5

Notes to the consolidated financial statements

1. The Group and its operations ................................................................................................................... 6

2. Significant accounting policies ................................................................................................................. 6
3. Critical accounting estimates and judgments ......................................................................................... 30
4. Adoption of new or revised standards and interpretations and new accounting pronouncements........ 34
5. Segment information .............................................................................................................................. 39
6. Financial risk management .................................................................................................................... 46
7. Balances and transactions with related parties ...................................................................................... 55
8. Cash and cash equivalents and short-term deposits ............................................................................. 58
9. Restricted cash ....................................................................................................................................... 59
10. Trade and other receivables .................................................................................................................. 59
11. Inventories .............................................................................................................................................. 60
12. Other current assets and other current financial assets ........................................................................ 60
13. Other non-current assets ....................................................................................................................... 61
14. Other non-current financial assets ......................................................................................................... 61
15. Property, plant and equipment ............................................................................................................... 62
16. Intangible assets other than goodwill ..................................................................................................... 63
17. Investments in joint ventures .................................................................................................................. 64
18. Investments in associates ...................................................................................................................... 68
19. Trade and other payables and contract liabilities ................................................................................... 71
20. Borrowings ............................................................................................................................................. 72
21. Taxes payable ........................................................................................................................................ 76
22. Asset retirement obligations ................................................................................................................... 76
23. Other provisions for liabilities and charges ............................................................................................ 77
24. Deferred income ..................................................................................................................................... 78
25. Other current and non-current liabilities and put option liabilities .......................................................... 78
26. Deferred acquisition consideration payable ........................................................................................... 80
27. Leases .................................................................................................................................................... 81
28. Charter capital, additional paid-in capital, retained earnings and gain on sale of subsidiary share ...... 82
29. Analysis of revenue by categories ......................................................................................................... 83
30. Analysis of expenses by nature ............................................................................................................. 84
31. Other operating income .......................................................................................................................... 84
32. Interest revenue calculated using effective interest rate and other finance income .............................. 84
33. Finance costs ......................................................................................................................................... 85
34. Income taxes .......................................................................................................................................... 85
35. Advances received for sale of interest in PSA ....................................................................................... 88
36. Significant non-cash investing and financing activities .......................................................................... 88
37. Changes in liabilities arising from financing activities ............................................................................ 89
38. Contingences, commitments and operating risks .................................................................................. 90
39. Business combination, acquisition of non-controlling interests, acquisition of subsidiary which
is not a business, goodwill and intangible asset with indefinite useful life ............................................. 97
40. Material partly-owned subsidiaries ....................................................................................................... 104
41. Events after reporting date ................................................................................................................... 107
 Ernst & Young Holdings (CIS) B.V. Ernst & Yanq Holdinqs (SiAyEs) Bi.Vi.
Port Baku Towers Business Centre Port Baku Tauers Biznes Mərkəzi
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Tel: +994 (12) 490 70 20 Tel: +994 (12) 490 70 20
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www.ey.com/az

Independent auditor’s report

To the Management Board and Supervisory Board of the

State Oil Company of the Azerbaijan Republic

Opinion

We have audited the consolidated financial statements of the State Oil Company of
the Azerbaijan Republic and its subsidiaries (the Group), which comprise the consolidated
statement of financial position as at 31 December 2020, and the consolidated statement of
profit or loss and other comprehensive income, consolidated statement of changes in equity and
consolidated statement of cash flows for the year then ended, and notes to the consolidated
financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material
respects, the consolidated financial position of the Group as at 31 December 2020 and its
consolidated financial performance and its consolidated cash flows for the year then ended in
accordance with International Financial Reporting Standards (IFRSs).

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs).

Our responsibilities under those standards are further described in the Auditor’s responsibilities
for the audit of the consolidated financial statements section of our report. We are independent
of the Group in accordance with the International Ethics Standards Board for Accountants’
International Code of Ethics for Professional Accountants (including International Independence
Standards) (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance
with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the consolidated financial statements of the current period. These
matters were addressed in the context of our audit of the consolidated financial statements as a
whole, and in forming our opinion thereon, and we do not provide a separate opinion on these
matters. For each matter below, our description of how our audit addressed the matter is
provided in that context.

A member firm of Ernst & Young Global Limited

We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of
the consolidated financial statements section of our report, including in relation to these matters.
Accordingly, our audit included the performance of procedures designed to respond to our
assessment of the risks of material misstatement of the consolidated financial statements.
The results of our audit procedures, including the procedures performed to address the matters
below, provide the basis for our audit opinion on the accompanying consolidated financial
statements.

Key audit matter How our audit addressed the key audit matter
Impairment of oil and gas assets
We considered this matter to be one of most We evaluated the change in risk profile of the Group’s
significance in the audit due to the significance of assets and assessed impairment indicators. We
the Group’s oil and gas assets, the high level of involved our internal valuation experts and compared
subjectivity in respect of assumptions underlying assumptions used in impairment testing such as oil
impairment analysis and significant judgements prices forecast, reserves and resources volumes and
made by management. In addition, volatility of oil discount rates with available external data. We
prices over the last few years impacts the Group’s checked mathematical accuracy of impairment
operations and cash flows and triggers potential models and sensitivity analysis. We compared
impairment. calculated amounts of impairment charge and
unsuccessful exploration assets write offs to amounts
The key assumptions used by management and
recorded in the Group’s accounting records. We
results of impairment tests are disclosed in
analyzed significant judgement made by
Notes 3, 15 and 30 to the consolidated financial
management. We analyzed disclosure of impairment
statements.
in the notes to the consolidated financial statements.
Estimation of oil and gas reserves
The estimate of oil and gas reserves has a We compared the assumptions used by the reserve
significant impact on the impairment test and engineers with the Group’s approved budget and
depreciation and decommissioning provisions. historical data. We assessed the underlying
The Group involved internationally recognized assumptions and compared estimates of reserves and
independent reserves engineers to evaluate its oil resources provided by reserves engineers to the
and gas reserves. amounts included in the calculation of impairment,
depreciation, depletion and amortization and
Information on oil and gas reserves is disclosed in
decommissioning provisions. We analyzed disclosure
Note 3 to the consolidated financial statements.
of oil and gas reserves in the notes to the
consolidated financial statements.

Other information included in the Group’s 2020 Annual Report

Other information consists of the information included in the Group’s 2020 Annual Report, other
than the consolidated financial statements and our auditor’s report thereon. Management is
responsible for the other information. The Group’s 2020 Annual Report is expected to be made
available to us after the date of this auditor’s report.

Our opinion on the consolidated financial statements does not cover the other information and
we will not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read
the other information identified above when it becomes available and, in doing so, consider
whether the other information is materially inconsistent with the consolidated financial
statements or our knowledge obtained in the audit or otherwise appears to be materially
misstated.

A member firm of Ernst & Young Global Limited

Responsibilities of the Management Board and Supervisory Board for the consolidated
financial statements

Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with IFRSs, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the
Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends to
liquidate the Group or to cease operations, or has no realistic alternative but to do so.

The Supervisory Board is responsible for overseeing the Group’s financial reporting process.

Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial
statements as a whole are free from material misstatement, whether due to fraud or error, and
to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always
detect a material misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these consolidated financial
statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
► Identify and assess the risks of material misstatement of the consolidated financial
statements, whether due to fraud or error, design and perform audit procedures responsive
to those risks, and obtain audit evidence that is sufficient and appropriate to provide a
basis for our opinion. The risk of not detecting a material misstatement resulting from
fraud is higher than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control.
► Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Group’s internal control.
► Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
► Conclude on the appropriateness of management’s use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the Group’s ability
to continue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our auditor’s report to the related disclosures in the
consolidated financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to the date of our
auditor’s report. However, future events or conditions may cause the Group to cease to
continue as a going concern.

A member firm of Ernst & Young Global Limited

► Evaluate the overall presentation, structure and content of the consolidated financial
statements, including the disclosures, and whether the consolidated financial statements
represent the underlying transactions and events in a manner that achieves fair
presentation.
► Obtain sufficient appropriate audit evidence regarding the financial information of the
entities or business activities within the Group to express an opinion on the consolidated
financial statements. We are responsible for the direction, supervision and performance of
the group audit. We remain solely responsible for our audit opinion.

We communicate with the Supervisory Board regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in
internal control that we identify during our audit.

We also provide the Supervisory Board with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships
and other matters that may reasonably be thought to bear on our independence, and where
applicable, actions taken to eliminate threats or safeguards applied.

From the matters communicated with the Supervisory Board, we determine those matters that
were of most significance in the audit of the consolidated financial statements of the current
period and are therefore the key audit matters. We describe these matters in our auditor’s report
unless law or regulation precludes public disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be communicated in our report because
the adverse consequences of doing so would reasonably be expected to outweigh the public
interest benefits of such communication.

The partner in charge of the audit resulting in this independent auditor’s report is
Nargiz Karimova.

30 June 2021

Baku, Azerbaijan

A member firm of Ernst & Young Global Limited

State Oil Company of the Azerbaijan Republic Consolidated financial statements
Consolidated statement of financial position
as at 31 December 2020
(Amounts presented are in millions of Azerbaijani Manats)

31 December 31 December
31 December 2019 2018
Note 2020 (Reclassified*) (Reclassified*)
Assets
Current assets
Cash and cash equivalents 8 6,153 7,084 6,640
Restricted cash 9 166 187 276
Deposits 8 658 106 151
Trade and other receivables 10 7,477 8,919 8,395
Inventories 11 2,783 2,067 2,979
Other current financial assets 12 907 755 851
Other current assets 12 111 49 −
Total current assets 18,255 19,167 19,292

Non-current assets
Property, plant and equipment 15 31,344 31,548 28,259
Goodwill 39 313 317 301
Intangible assets other than goodwill 16 937 1,055 714
Investments in joint ventures 17 4,942 5,398 5,301
Investments in associates 18 4,173 4,208 4,359
Right-of-use assets 27 717 599 −
Deferred tax assets 34 1,012 762 700
Other non-current financial assets 14 1,859 1,421 1,323
Other non-current assets 13 603 900 1,887
Total non-current assets 45,900 46,208 42,844
Total assets 64,155 65,375 62,136

Equity
Charter capital 28 4,696 4,323 4,147
Additional paid-in capital 28 5,302 5,576 5,299
Retained earnings 5,376 7,576 7,659
Other capital reserves (133) (83) (51)
Put option on company’s shares (1,310) (1,310) (1,310)
Gain on sale/purchase of subsidiary share 28 1,045 1,127 1,168
Cumulative translation differences 5,951 5,932 5,900
Equity attributable to equity holders of
the Group 20,927 23,141 22,812

Non-controlling interests 996 1,187 1,132

Total equity 21,923 24,328 23,944
* Certain amounts shown here do not correspond to the 2019 and 2018 Financial Statements and reflect reclassifications made
as detailed in Note 2.

The accompanying notes are an integral part of these consolidated financial statements. 1
State Oil Company of the Azerbaijan Republic Consolidated financial statements
Consolidated statement of profit or loss and other comprehensive income
for the year ended 31 December 2020
(Amounts presented are in millions of Azerbaijani Manats)

Note 2020 2019

Revenue 29 49,607 83,752

Cost of sales 30 (44,552) (77,960)
Gross profit 5,055 5,792

Distribution expenses 30 (1,367) (1,240)

General and administrative expenses 30 (1,483) (1,462)
Gain/(loss) on disposals of property, plant and equipment 3 (10)
Social expenses (171) (118)
Exploration and evaluation expenses 30 (13) (65)
Expected credit loss (ECL) 30 (119) (49)
Other operating expenses 30 (1,930) (605)
Other operating income 31 504 341
Operating profit 479 2,584

Interest revenue calculated using effective interest method 32 171 163

Other finance income 32 25 47
Finance costs 33 (1,187) (1,160)
Foreign exchange losses, net (614) (315)
Share of result of joint ventures 17 (411) 14
Share of result of associates 18 100 (5)
(Loss)/profit before income tax (1,437) 1,328

Income tax expenses 34 (297) (677)

(Loss)/profit for the year (1,734) 651

Other comprehensive loss

Other comprehensive loss to be reclassified to profit or loss
in subsequent periods – currency translation differences
and losses from cash flow hedges (199) (90)
Other comprehensive loss not to be reclassified to profit or
loss in subsequent periods − loss on investments at FVOCI 12 (32) (22)
Other comprehensive loss for the year (231) (112)
Total comprehensive (loss)/income for the year (1,965) 539

(Loss)/profit is attributable to:

Equity holders of the Group (1,749) 602
Non-controlling interests 15 49
(1,734) 651
Total comprehensive (loss)/income attributable to:
Equity holders of the Group (1,780) 599
Non-controlling interests (185) (60)
(1,965) 539

The accompanying notes are an integral part of these consolidated financial statements. 3
State Oil Company of the Azerbaijan Republic Consolidated financial statements
Consolidated statement of changes in equity
for the year ended 31 December 2020
(Amounts presented are in millions of Azerbaijani Manats)

Attributable to the equity holders of the parent

Gain/(loss)
on sale/
Put (purchase)
Additional option on of Other Currency Non-
Charter paid-in company’s subsidiary capital Retained translation controlling Total
Note capital capital shares share reserves earnings differences Total interests equity

Balance at 1 January 2019 4,147 5,299 (1,310) 1,168 (51) 7,659 5,900 22,812 1,132 23,944

Profit for the year − − − − − 602 − 602 49 651

Other comprehensive (loss)/gain − − − − (32) − 29 (3) (109) (112)
Total comprehensive (loss)/income
for 2019 − − − − (32) 602 29 599 (60) 539

Acquisition of non-controlling interest

in subsidiary − − − (41) − − 3 (38) 38 −
Additional paid-in capital 28 − 453 − − − − − 453 − 453
Increase in charter capital 28 176 (176) − − − − − − − −
Non-controlling interests arising on
a business combination − − − − − − − − 80 80
Contribution in charter capital of
subsidiaries by non-controlling
shareholder − − − − − − − − 8 8
Distribution to the Government 28 − − − − − (685) − (685) − (685)
Dividends declared by subsidiaries − − − − − − − − (11) (11)
Balance at 31 December 2019 4,323 5,576 (1,310) 1,127 (83) 7,576 5,932 23,141 1,187 24,328

(Loss)/profit for the year − − − − − (1,749) − (1,749) 15 (1,734)

Other comprehensive (loss)/gain − − − − (50) − 19 (31) (200) (231)
Total comprehensive (loss)/income
for 2020 − − − − (50) (1,749) 19 (1,780) (185) (1,965)

Acquisition of non-controlling interest 28 − − − (82) − − − (82) 26 (56)

Additional paid-in-capital 28 − 99 − − − − − 99 − 99
Increase in charter capital 28 373 (373) − − − − − − − −
Distribution to the Government 28 − − − − − (451) − (451) − (451)
Dividends declared by subsidiaries − − − − − − − − (32) (32)
Balance at 31 December 2020 4,696 5,302 (1,310) 1,045 (133) 5,376 5,951 20,927 996 21,923

The accompanying notes are an integral part of these consolidated financial statements. 4
State Oil Company of the Azerbaijan Republic Consolidated financial statements
Consolidated statement of cash flows
for the year ended 31 December 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2019
Note 2020 (Reclassified*)
Cash flows from operating activities
(Loss)/profit before income tax (1,437) 1,328
Adjustments for:
Depreciation of property, plant and equipment 30 1,936 1,603
Depreciation of right-of-use assets 27 90 89
Amortisation of intangible assets 16 75 61
Impairment of fixed assets 30 1,654 286
ECL 30 119 49
Gain/(loss) on disposals of property, plant and equipment and
intangible assets (3) 10
Other finance income 32 (25) (47)
Interest revenue calculated using effective interest method 32 (171) (163)
Finance costs 33 1,187 1,160
Foreign exchange rate differences 1,024 208
Share of result of associates and joint ventures 17, 18 311 (9)
Gain on bargain purchase 39 − (19)
Fair value gain on equity instrument at FVPL 31 (273) (117)
Other non-cash transactions 3 183
Operating cash flows before working capital changes 4,490 4,622
Decrease/(increase) in trade and other receivables 1,037 (527)
Decrease/(increase) in inventories (1,014) 670
Decrease in trade and other payables and contract liabilities (1,310) (414)
Change in provisions (28) 56
Change in other assets and liabilities 613 230
Cash generated from operations 3,788 4,637
Income taxes paid (650) (598)
Interest paid (912) (973)
Net cash flows from operating activities 2,226 3,066
Cash flows from investing activities
Acquisitions of subsidiary (net of cash acquired) − (215)
Additional contribution in associates and joint ventures (22) (103)
Purchase of property, plant and equipment (2,918) (3,946)
Purchase of intangible assets (48) (44)
Placement of deposits (690) (138)
Withdrawal of deposits 43 109
Interest received 96 107
Dividends received from associates and joint ventures 175 148
Proceeds from disposal of subsidiaries 16 −
Proceeds from disposal of associates and JVs 4 9
Proceeds from sale of property, plant and equipment 44 36
Proceeds from sale of other fixed assets 7 −
Loan issued to related parties (65) (29)
Sale of financial instruments 37 (33)
Purchase of financial instruments (8) −
Net cash flows used in investing activities (3,329) (4,099)
Cash flows from financing activities
Proceeds from borrowings 7,168 7,270
Repayment of borrowings (6,048) (5,394)
Contribution to subsidiary by non-controlling shareholder − 8
Payment of lease liabilities 27 (80) (59)
Increase in charter capital and additional paid-in capital 28 52 453
Distribution to the Government 28 (442) (685)
Net cash flows from financing activities 650 1,593
Net foreign exchange difference on cash and cash equivalents (447) (120)
ECL for cash and cash equivalents 8 (31) 4
Net (decrease)/increase in cash and cash equivalents (931) 444
Cash and cash equivalents at the beginning of the year 8 7,084 6,640
Cash and cash equivalents at the end of the year 8 6,153 7,084
* Certain amounts shown here do not correspond to the 2019 Financial statements and reflect reclassifications made as detailed
in Note 2.
The accompanying notes are an integral part of these consolidated financial statements. 5
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

1. The Group and its operations

The State Oil Company of the Azerbaijan Republic (“SOCAR”) was established by the Presidential Decree on
13 September 1992 in accordance with Azerbaijani legislation and is domiciled in the Azerbaijan Republic.
SOCAR is involved in upstream, midstream and downstream operations. SOCAR’s main functions pertain to
the extraction, refining, transportation of oil, gas and gas condensates, and sale of oil, gas and oil products.
SOCAR is 100 per cent owned by the Government of the Azerbaijan Republic (the “Government”).

SOCAR’s registered address is 121, Heydar Aliyev Avenue, AZ 1029 Baku, Azerbaijan Republic.

Information about subsidiaries

The consolidated financial statements of the Group include the following material subsidiaries:

Principal Country of % equity interest

Name activities incorporation 2020 2019

SOCAR Turkey Enerji A.Ş. Refinery Turkey 100% 100%

Azerbaijan (ACG) Ltd Oil production Cayman Islands 100% 100%
Azerbaijan (Shah Deniz) Ltd Gas production Cayman Islands 100% 100%
Caspian Drilling Company (CDC) Drilling operations Azerbaijan 92% 92%
SOCAR Energy Georgia LLC Sales and distribution Georgia 91.8% 75.5%
SOCAR Overseas LLC Sales and distribution UAE 100% 100%
SOCAR Trading Holding Sales and distribution Malta 100% 100%
Azerbaijan (BTC) Ltd Sales and distribution Cayman Islands 100% 100%
Cooperative Menkent U.A. Sales and distribution Netherlands 100% 100%
SOCAR Energy Holdings AG Sales and distribution Switzerland 100% 100%
SOCAR Energy Ukraine Sales and distribution Ukraine 100% 100%
Azerbaijan (SCP) LTD Sales and distribution Cayman Islands 100% 100%
SOCAR Petroleum CJSC Sales and distribution Azerbaijan 100% 100%
Baku Shipyard LLC Construction Azerbaijan 87% 87%
SOCAR Polymer Investments LLC Chemicals production Azerbaijan 57% 57%
BOS Shelf LLC Construction Azerbaijan 90% 90%
Gacrux Middle East Investment
Holding LTD Construction UAE 100% 100%

On 1 October 2020, the Group sold SOCAR LPG, subsidiary of SOCAR Energy Holdings AG for the consideration
of AZN 16. At the date of disposal, SOCAR LPG had negative net assets in the amount of AZN 16.

2. Significant accounting policies

2.1 Basis of preparation

These consolidated financial statements of SOCAR and its subsidiaries, associates, joint ventures and joint
operations (collectively referred to as “the Group”) have been prepared in accordance with International
Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
The principal accounting policies applied in the preparation of these consolidated financial statements are set
out below. These policies have been consistently applied to all the periods presented.

2.2 Basis of consolidation

The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as
at 31 December 2020.

6
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.2 Basis of consolidation (continued)

Subsidiaries are all entities (including special-purpose entities) over which the Group has control. Control is
achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over the investee. Specifically, the Group controls
an investee if and only if the Group has:
► Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities
of the investee);
► Exposure, or rights, to variable returns from its involvement with the investee; and
► The ability to use its power over the investee to affect its returns.

When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all
relevant facts and circumstances in assessing whether it has power over an investee, including:
► The contractual arrangement(s) with the other vote holders of the investee;
► Rights arising from other contractual arrangements;
► The Group’s voting rights and potential voting rights.

The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there
are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the
Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets,
liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the
consolidated financial statements from the date the Group gains control until the date the Group ceases to
control the subsidiary.

Profit or loss and each component of other comprehensive income (“OCI”) are attributed to the equity holders
of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests
having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries
to bring their accounting policies in line with the Group’s accounting policies. Inter-company transactions,
balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses
are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of
subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the
Group.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity
transaction.

If the Group loses control over a subsidiary, it derecognizes the related assets (including goodwill), liabilities,
non-controlling interest and other components of equity, while any resultant gain or loss is recognized in profit
or loss. Any investment retained is recognized at fair value. Total comprehensive income within a subsidiary
is attributed to the non-controlling interests even if that results in a deficit balance.

2.3 Summary of significant accounting policies

Business combinations

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured
as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the
amount of any non-controlling interests in the acquiree. For each business combination, the acquirer measures
the non-controlling interests in the acquiree at the proportionate share of the acquiree’s identifiable net assets.
Acquisition costs incurred are expensed and included in administrative expenses.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate
classification and designation in accordance with the contractual terms, economic circumstances and pertinent
conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts
by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the
acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date
through profit or loss.
7
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition
date. Contingent consideration classified as equity is not remeasured and its subsequent settlement is
accounted for within equity. Contingent consideration classified as an asset or liability that is a financial
instrument and within the scope of IFRS 9 Financial Instruments, is measured at fair value with the changes
in fair value recognized in the statement of profit or loss in accordance with IFRS 9. Other contingent
consideration that is not within the scope of IFRS 9 is measured at fair value at each reporting date with
changes in fair value recognized in profit or loss.

Transactions with non-controlling interests

Changes in the Group’s ownership interest in a subsidiary that do not result in a loss of control are accounted
for as equity transactions (i.e. transactions with owners in their capacity as owners). In such circumstances
the carrying amounts of the controlling and non-controlling interests shall be adjusted to reflect the changes in
their relative interests in the subsidiary.

Any difference between the amount by which the non-controlling interests are adjusted and the fair value of
the consideration paid or received is recognized directly in equity and attributed to the owners of the Group.

Business combinations with entities under common control

The Group applies acquisition method of accounting for business combinations with entities under the common
control.

Investments in associates and joint ventures

An associate is an entity over which the Group has significant influence. Significant influence is the power to
participate in the financial and operating policy decisions of the investee, but is not control or joint control over
those policies.

A joint venture (“JV”) is a type of joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing
of control of an arrangement, which exists only when decisions about the relevant activities require unanimous
consent of the parties sharing control.

The considerations made in determining significant influence or joint control is similar to those necessary to
determine control over subsidiaries.

The Group’s investments in its associate and joint venture are accounted for using the equity method. Under
the equity method, the investment in an associate or a joint venture is initially recognized at cost. The carrying
amount of the investment is adjusted to recognize changes in the Group’s share of net assets of the associate
or joint venture since the acquisition date. Goodwill relating to the associate or joint venture is included in the
carrying amount of the investment and is neither amortised nor individually tested for impairment.

The statement of profit or loss reflects the Group’s share of the results of operations of the associate or joint
venture. Any change in OCI of those investees is presented as part of the Group’s OCI. Any gain or loss on
sale of share that was recognized directly in the equity of the associate or joint venture is reflected as a gain
or loss within the Group share of associate’s or joint venture’s profit or loss. Unrealised gains and losses
resulting from transactions between the Group and the associate or joint venture are eliminated to the extent
of the interest in the associate or joint venture.

The aggregate of the Group’s share of profit or loss of an associate and a joint venture is shown on the face
of the statement of profit or loss outside operating profit and represents profit or loss after tax and non-
controlling interests in the subsidiaries of the associate or joint venture.

The financial statements of the associate or joint venture are prepared for the same reporting period as the
Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.

8
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

After application of the equity method, the Group determines whether it is necessary to recognize an
impairment charge on its investment in its associate or joint venture. At each reporting date, the Group
determines whether there is objective evidence that the investment in the associate or joint venture is impaired.
If there is such evidence, the Group calculates the amount of impairment as the difference between
the recoverable amount of the associate or joint venture and its carrying value, and then recognizes the loss
as ‘Share of profit of an associate and a joint venture’ in the statement of profit or loss.

Upon loss of significant influence over the associate or joint control over the joint venture, the Group measures
and recognizes any retained investment at its fair value. Any difference between the carrying amount of the
associate or joint venture upon loss of significant influence or joint control and the fair value of the retained
investment and proceeds from disposal is recognized in profit or loss.

Investments in Production Sharing Agreements (“PSAs”)

Certain of the Group’s upstream activities are governed by the PSAs. According to the terms of PSAs,
the Group owns the portion of project’s assets and liable for its portion of project’s liabilities. At the same time
the Group is entitled to its portion of expenses incurred and revenues earned by the whole project. Therefore,
the Group accounts for its investment in PSA’s by recognizing the portion of underlying assets, liabilities,
expenses incurred and income earned by the projects using undivided interest method.

PSA is the method to execute exploitation of mineral resources by taking advantage of the expertise of a
commercial oil and gas entity. The Government retains title to the mineral resources (whatever the quantity
that is ultimately extracted) and often the legal title to all fixed assets constructed to exploit the resources.
The Government takes a percentage share of the output which may be delivered in product or paid in cash
under an agreed pricing formula. The contracting parties may only be entitled to recover specified costs plus
an agreed profit margin. It may have the right to extract resources over a specified period of time. Operating
company is a legal entity created by one or more contracting parties to operate PSA.

As a contracting party to various PSAs the Group evaluates and accounts for the PSAs in accordance with the
substance of the arrangement. It records only its own share of oil and gas under a PSA as revenue. Neither
revenue nor cost is recorded by the Group for the oil and gas extracted and sold on behalf of the Government.
The Group acts as the Government’s agent to extract, deliver or sell the oil and gas and remit the proceeds.

Costs that meet the recognition criteria as intangible or fixed assets in accordance with IAS 38 and IAS 16,
respectively, are recognized where the entity is exposed to the majority of the economic risks and has access
to the probable future economic benefits of the assets. Acquisition, development and exploration costs are
accounted for in accordance with policies stated herein.

Assets subject to depreciation, depletion or amortization are expensed using the appropriate depletion or
depreciation method stipulated by the present accounting policies over the shorter of the PSA validity period
or the expected useful life of the related assets.

Current versus non-current classification

The Group presents assets and liabilities in the statement of financial position based on current/non-current
classification. An asset is current when it is:
► Expected to be realised or intended to be sold or consumed in the normal operating cycle;
► Held primarily for the purpose of trading;
► Expected to be realised within twelve months after the reporting period; or
► Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least
twelve months after the reporting period.

All other assets are classified as non-current.

9
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

A liability is current when:

► It is expected to be settled in the normal operating cycle;
► It is held primarily for the purpose of trading;
► It is due to be settled within twelve months after the reporting period; or
► There is no unconditional right to defer the settlement of the liability for at least twelve months after
the reporting period.

The terms of the liability that could, at the option of the counterparty, result in its settlement by the issue of
equity instruments do not affect its classification. The Group classifies all other liabilities as non-current.
Deferred tax assets and liabilities are classified as non-current assets and liabilities.

Foreign currency translation

All amounts in these consolidated financial statements are presented in millions of Azerbaijani Manats (“AZN”),
unless otherwise stated.

The functional currencies of the Group’s consolidated entities are the currencies of the primary economic
environments in which the entities operate. The functional currency of SOCAR and its 24 business units and
the Group’s presentation currency is the national currency of the Azerbaijan Republic, AZN. However,
US Dollar (“USD”), Swiss Franc (“CHF”), Georgian Lari (“GEL”), Ukrainian Hryvnia (“UAH”) and Turkish Lira
(“TRY”) are considered the functional currency of the Group’s certain subsidiaries, associates and joint
ventures as majority of these investments’ receivables, revenues, costs and debt liabilities are either priced,
incurred, payable or otherwise measured in these currencies.

The transactions executed in foreign currencies are initially recorded in the functional currencies of respective
Group entities by applying the appropriate rates of exchanges prevailing at the date of transaction.

Monetary assets and liabilities denominated in foreign currencies other than functional currency of respective
Group entity are translated into the functional currency of that entity at the appropriate exchange rates
prevailing at the reporting date. Foreign exchange gains and losses resulting from the re-measurement into
the functional currencies of respective Group’s entities are recognized in profit or loss.

Non-monetary items that are measured at historical cost in a foreign currency are translated using the
exchange rates at the date of the initial transaction. Non-monetary items measured at fair value in a foreign
currency are translated using the exchange rates at the date when the fair value was determined.

The results and financial position of the Group entities which functional currency differ from the presentation
currency of the Group and not already measured in the Group’s presentation currency (functional currency of
none of these entities is a currency of a hyperinflationary economy) are translated into the presentation
currency of the Group as follows:
(i) Assets and liabilities for each statement of financial position are translated at the closing rate at the date
of that statement of financial position;
(ii) Income and expenses for each statement of profit or loss and other comprehensive income are
translated at average exchange rates (unless this average is not a reasonable approximation of the
cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses
are translated at the dates of the transactions); and
(iii) All resulting exchange differences are recognized as a separate component of equity − currency
translation difference.

At 31 December 2020, the principal rate of exchange used for translating foreign currency balances was
USD 1 = AZN 1.7000, EUR 1 = AZN 2.0890, CHF 1 = AZN 1.9280, GEL 1 = AZN 0.5193, UAH 1 = AZN 0.0603,
TRY 1 = AZN 0.2305, JPY 100 = AZN 1.6456 (31 December 2019: USD 1 = AZN 1.7000, EUR 1 = AZN 1.9035,
CHF 1 = AZN 1.7479, GEL 1 = AZN 0.5936, UAH 1 = AZN 0.0714, TRY 1 = AZN 0.2858, JPY 100 = AZN 1.5578).

10
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

Financial instruments − measurement bases

Fair value

The Group measures financial instruments such as derivatives, and non-financial assets such as investment
properties, at fair value at each balance sheet date.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The fair value measurement is based on
the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal
market for the asset or liability, or in the absence of a principal market, in the most advantageous market for
the asset or liability. The principal or the most advantageous market must be accessible to by the Group.
The fair value of an asset or a liability is measured using the assumptions that market participants would use
when pricing the asset or liability, assuming that market participants act in their economic best interest.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data
are available to measure fair value, maximising the use of relevant observable inputs and minimising the use
of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised
within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the
fair value measurement as a whole:
Level 1 − quoted (unadjusted) market prices in active markets for identical assets or liabilities;
Level 2 − valuation techniques for which the lowest level input that is significant to the fair value
measurement is directly or indirectly observable;
Level 3 − valuation techniques for which the lowest level input that is significant to the fair value
measurement is unobservable.

For assets and liabilities that are recognized in the financial statements at fair value on a recurring basis, the
Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing
categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at
the end of each reporting period.

Amortised cost

Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a
financial instrument. An incremental cost is one that would not have been incurred if the transaction had not
taken place. Transaction costs include fees and commissions paid to agents (including employees acting as
selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and
transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or
internal administrative or holding costs.

Amortised cost is the amount at which the financial instrument was recognized at initial recognition less any
principal repayments, plus accrued interest, and for financial assets less any allowance for expected credit
losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any
premium or discount to maturity amount using the effective interest rate method. Accrued interest income and
accrued interest expense, including both accrued coupon and amortised discount or premium (including fees
deferred at origination, if any), are not presented separately and are included in the carrying values of related
financial assets or liabilities presented in the statement of financial position.

The effective interest rate method is a method of allocating interest income or interest expense over the
relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying
amount of financial asset or financial liability. The effective interest rate is the rate that exactly discounts
estimated future cash payments or receipts (excluding future credit losses) through the expected life of the
financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument.

11
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

The effective interest rate discounts cash flows of variable interest instruments to the next interest re-pricing
date except for the premium or discount which reflects the credit spread over the floating rate specified in the
instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised
over the whole expected life of the instrument. The present value calculation includes all fees paid or received
between parties to the contract that are an integral part of the effective interest rate.

Financial assets

Initial recognition and measurement

Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value
through other comprehensive income (OCI), and fair value through profit or loss.

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow
characteristics and the Group’s business model for managing them.

With the exception of trade receivables that do not contain a significant financing component or for which the
Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus,
in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that
do not contain a significant financing component or for which the Group has applied the practical expedient
are measured at the transaction price determined under IFRS 15.

In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs
to give rise to cash flows that are ‘solely payments of principal and interest (SPPI)’ on the principal amount
outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. Financial
assets with cash flows that are not SPPI are classified and measured at fair value through profit or loss,
irrespective of the business model.

The Group’s business model for managing financial assets refers to how it manages its financial assets in
order to generate cash flows. The business model determines whether cash flows will result from collecting
contractual cash flows, selling the financial assets, or both. Financial assets classified and measured at
amortised cost are held within a business model with the objective to hold financial assets in order to collect
contractual cash flows while financial assets classified and measured at fair value through OCI are held within
a business model with the objective of both holding to collect contractual cash flows and selling.

Purchases or sales of financial assets that require delivery of assets within a time frame established by
regulation or convention in the market place (regular way trades) are recognized on the trade date, i.e., the date
that the Group commits to purchase or sell the asset.

Subsequent measurement

For purposes of subsequent measurement, financial assets are classified in four categories:
► Financial assets at amortised cost (debt instruments);
► Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt
instruments);
► Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses
upon de-recognition (equity instruments);
► Financial assets at fair value through profit or loss.

12
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

Financial assets at amortised cost (debt instruments)

This category is the most relevant to the Group. The Group measures financial assets at amortised cost if both
of the following conditions are met:
► The financial asset is held within a business model with the objective to hold financial assets in order to
collect contractual cash flows;
► The contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding.

Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and
are subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized,
modified or impaired.

The Group’s financial assets at amortised cost includes current and deposit accounts as well as restricted
accounts at several local and international banks, trade and loan receivables from third parties, loan
receivables from associates and long-term deposit accounts classified as other non-current financial assets.

Financial assets at fair value through OCI (debt instruments)

The Group measures debt instruments at fair value through OCI if both of the following conditions are met:
► The financial asset is held within a business model with the objective of both holding to collect
contractual cash flows and selling;
► The contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding.

For debt instruments at fair value through OCI, interest income, foreign exchange revaluation and impairment
charge or reversals are recognized in the profit or loss and computed in the same manner as for financial
assets measured at amortised cost. The remaining fair value changes are recognized in OCI. Upon
de-recognition, the cumulative fair value change recognized in OCI is recycled to profit or loss.

The Group’s debt instruments at fair value through OCI includes group of trade and other receivables that are
hold for both collecting contractual cash flows and selling to manage short-term liquidity needs.

Financial assets designated at fair value through OCI (equity instruments)

Upon initial recognition, the Group can elect to classify irrevocably its equity investments as equity instruments
designated at fair value through OCI when they meet the definition of equity under IAS 32 Financial
Instruments: Presentation and are not held for trading. The classification is determined on an instrument-by-
instrument basis.

Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognized as
other income in the profit or loss when the right of payment has been established, except when the Group
benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains
are recorded in OCI. Equity instruments designated at fair value through OCI are not subject to impairment
assessment.

13
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss include financial assets held for trading, financial assets
designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required
to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the
purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives,
are also classified as held for trading unless they are designated as effective hedging instruments. Financial
assets with cash flows that are not solely payments of principal and interest are classified and measured at
fair value through profit or loss, irrespective of the business model. Notwithstanding the criteria for debt
instruments to be classified at amortised cost or at fair value through OCI, as described above, debt
instruments may be designated at fair value through profit or loss on initial recognition if doing so eliminates,
or significantly reduces, an accounting mismatch.

Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value
with net changes in fair value recognized in the profit or loss.

This category includes derivative instruments and listed equity investments which the Group had not
irrevocably elected to classify at fair value through OCI. Dividends on listed equity investments are also
recognized as other income in the statement of profit or loss when the right of payment has been established.

Derecognition

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets)
is primarily derecognized (i.e., removed from the Group’s consolidated statement of financial position) when:
► The rights to receive cash flows from the asset have expired; or
► The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation
to pay the received cash flows in full without material delay to a third party under a ‘pass-through’
arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the
asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the
asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through
arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it
has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred
control of the asset, the Group continues to recognize the transferred asset to the extent of its continuing
involvement. In that case, the Group also recognizes an associated liability. The transferred asset and the
associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower
of the original carrying amount of the asset and the maximum amount of consideration that the Group could
be required to repay.

Impairment of financial assets

Further disclosures relating to impairment of financial assets are also provided in the following notes:
► Critical accounting estimates and judgments (Note 3);
► Debt instruments at fair value through OCI and trade and other receivables (Note 10).

The Group recognizes an allowance for ECLs for all debt instruments not held at fair value through profit or
loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract
and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective
interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit
enhancements that are integral to the contractual terms.

14
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

ECLs are recognized in two stages. For credit exposures for which there has not been a significant increase
in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that
are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been
a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses
expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).

For financial assets other than trade receivables and contract assets, the Group applies general approach in
calculating ECLs.

For trade and other receivables and contract assets, the Group applies a simplified approach in calculating
ECLs. Therefore, the Group does not track changes in credit risk, but instead recognizes a loss allowance
based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on
its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the
economic environment.

The Group’s debt instruments at fair value through OCI solely comprise trade and other receivables that are
held for both collecting contractual cash flows and selling to manage its everyday liquidity needs. For debt
instruments at fair value through OCI, the Group applies the same methodology that is applied to financial
assets measured at amortized cost.

Financial liabilities

Initial recognition and measurement

Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss,
loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge,
as appropriate.

All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and
payables, net of directly attributable transaction costs.

The Group’s financial liabilities include trade and other payables, loans and borrowings including bank
overdrafts, and derivative financial instruments.

Subsequent measurement

The measurement of financial liabilities depends on their classification, as described below:

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial
liabilities designated upon initial recognition as at fair value through profit or loss.

Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the
near term. This category also includes derivative financial instruments entered into by the Group that are not
designated as hedging instruments in hedge relationships as defined by IFRS 9. Separated embedded
derivatives are also classified as held for trading unless they are designated as effective hedging instruments.

Gains or losses on liabilities held for trading are recognized in the statement of profit or loss.

Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the
initial date of recognition, and only if the criteria in IFRS 9 are satisfied. The Group has not designated any
financial liability at fair value through profit or loss.

15
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

Loans, borrowings and payables

This is the category most relevant to the Group. After initial recognition, interest-bearing loans and borrowings
and payables are subsequently measured at amortised cost using the Effective Interest Rate (“EIR”) method
taking into account any discount or premium on acquisition and fees or costs that are an integral part of the
EIR. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through
the EIR amortisation process. The EIR amortisation is included as finance costs in the statement of profit or
loss and other comprehensive income.

Derecognition

A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires.
When an existing financial liability is replaced by another from the same lender on substantially different terms,
or the terms of an existing liability are substantially modified, such an exchange or modification is treated as
the derecognition of the original liability and the recognition of a new liability. The difference in the respective
carrying amounts is recognized in the statement of profit or loss.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement
of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is
an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously.

Financial guarantee contracts

Financial guarantee contracts issued by the Group are those contracts that require a payment to be made to
reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in
accordance with the terms of a debt instrument. Financial guarantee contracts are recognized initially as a
liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee.
Subsequently the liability is measured at the higher of the amount of the ECL allowance and the amount initially
recognized less, when appropriate, the cumulative amount of income recognized in accordance with IFRS 15.

Derivative financial instruments

Oil and Gas derivative financial instruments, including paper and physical contracts, are initially measured at
fair value on the date on which a derivative contract is entered into and subsequently accounted for at fair
value through profit or loss. Derivatives are recognized as financial assets when the fair value is positive and
as financial liabilities when the fair value is negative.

Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly
liquid investments with original maturities of three months or less.

Restricted cash

Restricted cash is presented separately from cash and cash equivalents. Restricted balances are excluded
from cash and cash equivalents for the purposes of cash flow statement.

Trade payables

Trade payables are accrued when the counterparty performed its obligations under the contract. Trade
payables are recognized initially at fair value and subsequently measured at amortised cost using the effective
interest rate method.

16
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

Borrowings

All borrowings are initially recognized at fair value net of issue costs associated with the borrowing. Borrowings
are carried at amortised cost using the effective interest rate method.

Interest costs on borrowings directly attributable to the construction of qualifying property, plant and equipment
are capitalised, during the period of time that is required to complete and prepare the asset for its intended
use. All other borrowing costs are expensed.

Property, plant and equipment

The initial cost of an asset purchased comprises its purchase price or construction cost, any costs directly
attributable to bringing the asset into operation, the initial estimate of decommissioning obligation, if any, and,
for qualifying assets, borrowing costs. As of 31 December 2018, the assets held under finance lease are also
included within property, plant and equipment. Non-recoverable value-added tax related to the acquisition of
property, plant and equipment is capitalized by the Group. Non-recoverable value-added tax related to
operational activities is charged to profit or loss. Subsequently, property, plant and equipment are stated at
cost as described below, less accumulated depreciation and provision for impairment, where required.

Exploration and evaluation costs

The Group accounts for exploration and evaluation activities, expensing exploration and evaluation costs until
such time as the economic viability of producing the underlying resources is determined.

Exploration and evaluation costs related to resources determined to be not economically viable are expensed
through operating expenses in the consolidated statement of profit or loss and other comprehensive income.

Development costs

Expenditure on the construction, installation or completion of infrastructure facilities such as platforms,

pipelines and the drilling of commercially proven development wells is capitalised within tangible and intangible
assets according to nature. When development is completed on a specific field, it is transferred to production
assets (oil and gas properties).

The present value of the estimated costs of dismantling oil and gas production facilities, including
abandonment and site restoration costs, are recognized when the obligation is incurred and are included within
the carrying value of property, plant and equipment, subject to depletion using unit-of-production method.

All minor repair and maintenance costs are expensed as incurred. Cost of replacing major parts or components
of property, plant and equipment items are capitalized and the replaced part is retired.

At each reporting date management assesses whether there is any indication of impairment of property, plant
and equipment. If any such indication exists, management estimates the recoverable amount, which is
determined as the higher of an asset’s or cash generating unit’s fair value less costs to sell and its value in
use. The carrying amount is reduced to the recoverable amount and the impairment charge, if any, is
recognized in the statement of profit or loss and other comprehensive income. An impairment charge
recognized for an asset or cash generating unit in prior years is reversed if there are indicators that impairment
charge may no longer exist or may have decreased.

Gains and losses on disposals are determined by comparing proceeds with the carrying amount. Gains and
losses are recognized in profit or loss.

17
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

Depreciation

Property, plant and equipment related to oil and natural gas properties are depreciated using the unit-of-
production method.

Depreciation of oil and gas assets is computed on a field-by-field basis over proved developed reserves.
Shared oil and gas properties and equipment (e.g. internal delivery systems, processing units, etc.) are
depleted over total proved reserves.

Land is not depreciated. Property, plant and equipment other than oil and gas properties and equipment, are
depreciated on a straight-line basis over their estimated useful lives. Assets under construction are not
depreciated.

Leases

The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract
conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Group as a lessee

The Group applies a single recognition and measurement approach for all leases, except for short-term leases
and leases of low-value assets. The Group recognizes lease liabilities to make lease payments and right-of-
use assets representing the right to use the underlying assets.

Right-of-use assets

The Group recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying
asset is available for use). The cost of a right-of-use asset comprises:
► The amount of the initial measurement of the lease liability;
► Any lease payments made at or before the commencement date, less any lease incentives received;
► Any initial direct costs incurred by the lessee; and
► An estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset,
restoring the site on which it is located or restoring the underlying asset to the condition required by the
terms and conditions of the lease, unless those costs are to produce inventories. The lessee incurs the
obligation for those costs either at the commencement date or as a consequence of having used the
underlying asset during a particular period.

A lessee recognizes dismantling, removal and restoration costs above as part of the cost of the right-of-use
asset when it incurs an obligation for those costs. A lessee applies IAS 2 Inventories to costs that are incurred
during a particular period as a consequence of having used the right-of-use asset to produce inventories during
that period. The obligations for such costs are recognized and measured applying IAS 37 Provisions,
Contingent Liabilities and Contingent Assets.

Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and
adjusted for any remeasurement of lease liabilities. Right-of-use assets are depreciated on a straight-line basis
over the shorter of the lease term and the estimated useful lives of the assets. If ownership of the leased asset
transfers to the Group at the end of the lease term or the cost reflects the exercise of a purchase option,
depreciation is calculated using the estimated useful life of the asset. Right-of-use assets are subject to the
impairment requirements of IAS 36 Impairment of Assets.

18
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

Lease liabilities

At the commencement date, the lease payments included in the measurement of the lease liability comprise
the following payments for the right to use the underlying asset during the lease term that are not paid at the
commencement date:
► Fixed payments (including in-substance fixed payments), less any lease incentives receivable;
► Variable lease payments that depend on an index or a rate, initially measured using the index or rate
as at the commencement date;
► Amounts expected to be payable by the lessee under residual value guarantees;
► The exercise price of a purchase option if the lessee is reasonably certain to exercise that option;
► Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option
to terminate the lease. The variable lease payments that do not depend on an index or a rate are
recognized as expense in the period on which the event or condition that triggers the payment occurs.

In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease
commencement date if the interest rate implicit in the lease is not readily determinable. After the
commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced
for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a
modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in
the assessment to purchase the underlying asset. When the lease liability is remeasured as described above,
a corresponding adjustment is made to the carrying amount of the right-of-use asset or is recorded in profit or
loss if the carrying amount of the right-of-use asset has been reduced to zero. When there is a modification of
a lease that decreases the scope of the lease, the Group also recognizes gain or loss in the profit or loss equal
to the difference between carrying amounts of portions of lease liability and right-of-use asset derecognized.

Short-term leases and leases of low-value assets

The Group applies the short-term lease recognition exemption to its short-term leases that have a lease term
of 12 months or less from the commencement date and do not contain a purchase option. The Group also
applies the lease of low-value assets recognition exemption to leases that are considered to be low value.
Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-
line basis over the lease term.

Group as a lessor

Leases in which the Group does not transfer substantially all the risks and rewards incidental to ownership of
an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over
the lease term and is included in lease revenue in the statement of profit or loss and other comprehensive
income due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease
are added to the carrying amount of the leased asset and recognized over the lease term on the same basis
as rental income. Contingent rents are recognized as revenue in the period in which they are earned.

Goodwill

Goodwill is initially measured at cost being, the excess of the aggregate of the consideration transferred and
the amount recognized for non-controlling interests over the net identifiable assets acquired and liabilities
assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the
difference is recognized in profit or loss. After initial recognition, goodwill is measured at cost less any
accumulated impairment charge.

19
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition
date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination,
irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill
forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill
associated with the operation disposed of is included in the carrying amount of the operation when determining
the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on
the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Intangible assets

Intangible assets are stated at cost, less accumulated amortization and accumulated impairment charge.
Intangible assets include rights and computer software, patents, licences, customer relationships, trade name,
water rights and development projects.

The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives
are amortised on a straight-line basis over the useful economic life and assessed for impairment whenever
there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation
method for an intangible asset with a finite useful life is reviewed at least at the end of each reporting period.
Changes in the expected useful life or the expected pattern of consumption of future economic benefits
embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and
are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives
is recognized in the statement of profit or loss and other comprehensive income in the expense category
consistent with the function of the intangible assets.

Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually, either
individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to
determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite
to finite is made on a prospective basis.

Development projects

Cost incurred on development projects (relating to the design and testing of new or improved products) are
recognized as intangible assets when it is probable that the project will be operational considering its
commercial and technological feasibility, and only if the cost can be measured reliably. Other expenditures on
research and development activities are recognized as an expense in the period in which they incurred. When
there is an impairment, the carrying values of the intangible assets are written down to their recoverable
amounts. Intangible assets not yet ready for use are not amortized, however are tested for impairment
annually.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date.

Corporate income taxes

Corporate income taxes have been provided for in the consolidated financial statements in accordance with
the applicable legislation enacted or substantively enacted by the reporting date. The income tax charge
comprises current tax and deferred tax and is recognized in the profit or loss unless it relates to transactions
that are recognized, in the same or a different period, in other comprehensive income or directly in equity.

Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable
profits or losses for the current and prior periods.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between
the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements.
Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted
by the reporting date and are expected to apply when the related deferred income tax asset is realized or the
deferred income tax liability is settled.

20
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current
tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to
income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities
where there is an intention to settle the balances on a net basis. Deferred income tax assets are recognized
to the extent that it is probable that future taxable profit will be available against which the temporary differences
can be utilised.

Deferred income tax asset is provided on deductible temporary differences arising on investment in
subsidiaries, joint ventures and associates, except where taxable profit will not be available against which the
temporary differences can be utilized and it is probable that the temporary difference will not reverse in the
foreseeable future.

Deferred income tax liability is provided on taxable temporary differences arising on investments in
subsidiaries, joint ventures and associates, except where the timing of the reversal of the temporary difference
is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable
future.

Deferred tax relating to items recognized outside profit or loss is recognized either in OCI or directly in equity.

Deferred income taxes are provided in full on temporary differences arising on recognition and subsequent
measurement of provision for asset retirement obligation and related adjustments to cost of property, plant and
equipment, as well as on temporary differences arising on right-of-use assets and lease liabilities.

Taxes other than corporate income tax

Taxes, other than on income, are recorded within operating expenses.

Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is assigned by the weighted average
method. Cost comprises direct purchase costs, cost of production, transportation and manufacturing expenses
(based on normal operating capacity).

Government grants

Grants from the Government are recognized at their fair value where there is a reasonable assurance that the
grant will be received and the Group will comply with all attached conditions. Government grants relating to
the purchase of property, plant and equipment are included in non-current liabilities as deferred income and
are credited to profit or loss on a straight-line basis over the expected lives of the related assets.

When the grant relates to an expense item, it is recognized as income on a systematic basis over the periods
that the related costs, for which it is intended to compensate, are expensed.

Asset retirement obligations

Liabilities for asset retirement obligation costs are recognized when the Group has an obligation to dismantle
and remove a facility or an item of plant and to restore the site on which it is located, and when a reasonable
estimate of that liability can be made. Where an obligation exists for a new facility, such as oil and natural gas
production or transportation facilities, this will be on construction or installation. An obligation for asset
retirement may also crystallize during the period of operation of a facility through a change in legislation. The
amount recognized is the present value of the estimated future expenditure determined in accordance with
local conditions and requirements.

The cost of property, plant and equipment is also adjusted for amounts of estimated liabilities for asset
retirement obligations.

21
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

Any change in the present value of the obligation resulting from changes in estimates of the amounts or timing
of future expenditures is reflected as an adjustment to the provision and the corresponding capitalized costs
within property, plant and equipment. Changes in estimates of the amounts or timing of future expenditures to
dismantle and remove fully depreciated plant or facility is recognized in the statement of profit or loss and other
comprehensive income. Changes in the present value of the obligation resulting from unwinding of the discount
are recognized as finance costs in the statement of profit or loss and other comprehensive income.

Provisions for liabilities and charges

Provisions for liabilities and charges are liabilities of uncertain timing or amount. They are accrued when the
Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the
amount of the obligation can be made. Provisions are not recognized for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is
determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood
of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the
obligation using a pre-tax rate that reflects current market assessments of the time value of money and the
risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest
expense.

Distribution to the Government

Distribution to the Government represent cash distributions or financing which the Group may be required to
make to the state budget, various government agencies and projects administered by the Government based
on the particular decisions of the Government. Such distributions are recorded as a reduction of equity.
Distributions in the form of transfers of non-monetary assets are recognized at the carrying value of transferred
assets.

Contributions by the Government

Contributions by the Government are made in the form of cash contributions, transfer of other state-owned
entities or transfer of all or part of the Government’s share in other entities. Transfer of the state-owned entities
to the Group is recognized as contribution through equity statement in the amount being the fair value of the
transferred entity.

Value-added tax

The tax authorities permit the settlement of sales and purchases value-added tax (“VAT”) on a net basis.

VAT payable

VAT payable represents VAT related to sales net of VAT on purchases which have been settled at the reporting
date. Following the updates in Tax Code of Azerbaijan Republic, starting from 1 January 2020, VAT related to
sales is payable to tax authorities upon receipt of payment. Where ECL has been recognized for impairment
of receivables, impairment charge is recorded for the gross amount of the receivable, including VAT where
applicable. The related VAT payable is maintained until the receivable is written off for tax purposes.

VAT related to sales, which has already been collected from the clients and VAT related to purchases, which
has already been settled, is recognized in the statement of financial position on a net basis and disclosed as
an asset or liability. VAT related to sales which have not been settled at the reporting date (VAT accrual) is
also included in VAT payable.

22
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

VAT recoverable

VAT recoverable relates to purchases which have not been settled at the reporting date. VAT recoverable is
claimable against VAT on sales upon payment for the purchases.

In accordance with the terms of Shah Deniz, Absheron, ACG PSAs, Karabakh and Umid Babek Risk Service
Agreements (RSA), the provision of goods and services in connection with hydrocarbon activities to
Azerbaijan Shah Deniz Limited (“AzSD”), SOCAR Absheron LLC, Azerbaijan ACG Limited (“AzACG”),
SOCAR Karabakh LLC and Umid Babek Exploration Production Company (“UBEP”) should be charged with
zero per cent VAT by goods and service suppliers, provided that respective companies have duly obtained
VAT Exemption Certificate from the tax authorities.

Revenue from contracts with customers

The Group is in the business of selling ranges of oil and oil products, petroleum products and natural gas as
well as providing mainly construction services. Revenue from contracts with customers is recognized when
control of the goods or services are transferred to the customer at an amount that reflects the consideration to
which the Group expects to be entitled in exchange for those goods or services.

Revenues from sales of crude oil are recognized normally when the oil is loaded into the oil tanker or other
transportation facilities. Revenues from sales of petroleum products are recognized when the products are
shipped. Revenue from sales of natural gas are recorded on the basis of regular meter readings (monitored
on a monthly basis) and estimates of customer usage from the last meter reading to the end of the reporting
period. Natural gas prices and gas transportation tariffs to the final consumers in the Azerbaijan Republic are
established by the Tariff Council of the Azerbaijan Republic. Revenues from construction activities are
recognized either at the point of time or overtime basis depending on terms of the contracts with customers.

Interest income is recognized on a time-proportion basis using the effective interest rate method.

Variable consideration

If the consideration promised in a contract includes a variable amount, the Group shall estimate the amount of
consideration to which the Group will be entitled in exchange for transferring the promised goods or services
to a customer.

The Group is required to estimate an amount of variable consideration by using either of the following methods,
depending on which method the Group expects to better predict the amount of consideration to which it will be
entitled:
► The expected value – the expected value is the sum of probability-weighted amounts in a range of
possible consideration amounts. An expected value may be an appropriate estimate of the amount of
variable consideration if the Group has a large number of outcomes with similar characteristics.
► The most likely amount – the most likely amount is the single most likely amount in a range of possible
consideration amounts (i.e. the single most likely outcome of the contract). The most likely amount may
be an appropriate estimate of the amount of variable consideration if the contract has only two possible
outcomes (e.g. the Group either achieves a performance bonus or does not).

The Group selects the method that is best suited, based on the specific facts and circumstances of the contract.

The Group applies the selected method consistently to each type of variable consideration throughout the
contract term and updates the estimated variable consideration at the end of each reporting period. It may also
be appropriate for the Group to use different methods (i.e. expected value or most likely amount) for estimating
different types of variable consideration within a single contract.

23
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

Significant financing component

For some transactions, the receipt of the consideration does not match the timing of the transfer of goods or
services to the customer (e.g. the consideration is prepaid or is paid after the services are provided). When
the customer pays in arrears, the Group is effectively providing financing to the customer. Conversely, when
the customer pays in advance, the Group has effectively received financing from the customer.

IFRS 15 states that in determining the transaction price, the Group shall adjust the promised amount of
consideration for the effects of the time value of money if the timing of payments agreed to by the parties to
the contract (either explicitly or implicitly) provides the customer or the Group with a significant benefit of
financing the transfer of goods or services to the customer. In those circumstances, the contract contains a
significant financing component. A significant financing component may exist regardless of whether the
promise of financing is explicitly stated in the contract or implied by the payment terms agreed to by the parties
to the contract.

Contract balances

Contract assets

Contract assets represent Group’s right to consideration in exchange for goods or services that the Group has
transferred to a customer when that right is conditioned on something other than the passage of time
(for example, the Group’s future performance). The Group’s contract assets are presented within Other current
assets line.

Contract liabilities

Contract liabilities are Group’s obligation to transfer goods or services to a customer for which the Group has
received consideration (or the amount is due) from the customer.

Assets and liabilities arising from rights of return

Right of return asset

Right of return asset represents the Group’s right to recover the goods expected to be returned by customers.
The asset is measured at the former carrying amount of the inventory, less any expected costs to recover
the goods, including any potential decreases in the value of the returned goods. The Group updates
the measurement of the asset recorded for any revisions to its expected level of returns, as well as any
additional decreases in the value of the returned products.

Refund liabilities

A refund liability is the obligation to refund some or all of the consideration received (or receivable) from the
customer and is measured at the amount the Group ultimately expects it will have to return to the customer.
The Group updates its estimates of refund liabilities (and the corresponding change in the transaction price)
at the end of each reporting period.

Principal versus agent considerations

The determination of whether the Group is acting as a principal or an agent affects the amount of revenue
the Group recognizes. The Group is a principal (and, therefore, records revenue on a gross basis) if it controls
a promised good or service before transferring that good or service to the customer. The Group is an agent
(and, therefore, records as revenue the net amount that it retains for its agency services) if its role is to arrange
for another entity to provide the goods or services.

24
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

Accounting for underlift and overlift positions

The Group has shareholding interests in the joint operations. The Group may be in the overlift and underlift
position in the mentioned joint arrangements. The Group is in the overlift position, when the Group lifted and
sold to a customer more product than its proportionate entitlement based on its share in the joint operation.
The Group is in the underlift position, when the Group lifted and sold less product than its proportionate
entitlement based on its share in the joint operation.

The Group recognizes revenue from contracts with customers under IFRS 15 based on its actual sales to
customers in that period. No adjustments are recorded in revenue to account for any variance between the
actual share of production volumes sold to date and the share of production which the Group has been entitled
to sell to date.

The Group adjusts production costs to align volumes for which production costs are recognized with volumes
sold (for which revenue has been recognized in accordance with IFRS 15).

The Group applies the physical settlement. In case of physical settlement:

► An overlift liability is recorded in accordance with the provisions under IAS 37 Provisions, Contingent
Liabilities and Contingent Assets. The overlift liability is recorded at cost.
► An underlift asset gives the Group the right to receive a quantity of product from another participant.
This right is equivalent to a prepaid forward commodity purchase or represents a right to additional
physical inventory and therefore, IAS 2 Inventories is applied. The underlift asset is measured at the
lower of cost or net realisable value.

Employee benefits

Wages, salaries, contributions to the State Social Protection Fund of the Azerbaijan Republic, paid annual
leave and sick leave, bonuses, and non-monetary benefits (e.g. health services and kindergarten services)
are accrued in the year in which the associated services are rendered by the employees of the Group.

Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the Group’s
chief operating decision maker. The Group reports separate information about an operating segment that
meets any of the following quantitative thresholds:
► Its reported revenue, including both sales to external customers and intersegment sales or transfers,
is 10 per cent or more of the combined revenue, internal and external, of all operating segments.
► The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute
amount, of the combined reported profit of all operating segments that did not report a loss and
the combined reported loss of all operating segments that reported a loss.
► Its assets are 10 per cent or more of the combined assets of all operating segments.

No operating segments have been aggregated to form the above reportable operating segments.

Related parties

Related parties are defined in IAS 24 Related Party Disclosures.

Governmental economic and social policies affect the Group’s financial position, results of operations and cash
flows. The Government imposed an obligation on the Group to provide an uninterrupted supply of oil and gas
to customers in the Azerbaijan Republic at government-controlled prices. Transactions with the state include
taxes which are detailed in Note 21.

25
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

Related parties may enter into transactions which unrelated parties might not, and transactions between
related parties may not be affected on the same terms, conditions and amounts as transactions between
unrelated parties.

It is the nature of transactions with related parties that they cannot be presumed to be carried out on an arm’s
length basis.

Carried interest arrangements

A carried interest arrangement where the Group participate as carried party is an agreement under which the
carrying party agrees to pay for a portion or all of the pre-production costs of the carried party on a project in
which both parties own participating interest. If the project is unsuccessful then the carrying party will not be
reimbursed for the costs that it has incurred on behalf of the carried party. If the project is successful then the
carrying party will be reimbursed either in cash out of proceeds of the share of production attributable to the
carried party, or by receiving a disproportionately high share of the production until the carried costs are fully
recovered.

Depending on the terms of the carried interest agreements the Group recognizes them either as financing-
type arrangement or purchase / sale-type arrangement.

The finance-type arrangements presume that carrying party provides funding to the carried party and receives
a lender’s return on the funds provided, while the right to additional production acts as a security that underpins
the arrangement.

In the purchase/sale-type arrangement, the carried party effectively sells an interest or a partial interest in a
project to the carrying party. The carrying party will be required to fund the project in exchange for an increased
share of any proceeds if the project succeeds, while the carried party retains a much reduced share of any
proceeds. The Group does not have any purchase / sale-type arrangement recognized in these consolidated
financial statements.

During exploration stage of projects when the outcome of projects and probability of the carrying party to
recover costs incurred on behalf of the carried party are not certain the Group does not recognize any carry
related transactions and balances in the consolidated financial statements.

Acquisition of an entity that is not a business

When the Group acquires an entity that is not a business, it allocates the cost of acquisition between the
individual identifiable assets and liabilities of the acquired entity as following:
► For identifiable asset and liability initially measured at an amount other than cost, an entity initially
measures that asset or liability at the amount specified in the applicable IFRS Standard;
► The entity deducts from the transaction price of the acquired entity the amounts allocated to the assets
and liabilities initially measured at an amount other than cost, and then allocates the residual transaction
price to the remaining identifiable assets and liabilities based on their relative fair values at the date of
the acquisition.

Step-acquisition of subsidiary that is not a business

Step-acquisition of subsidiary which has been previously accounted for as investment in associates and joint
ventures (“the investee”) are recognized in the amount being the carrying value under the equity method
related to the original interest in the investee plus cost of additional investments made by the Group in order
to obtain control over the investee (“deemed cost”). Upon obtaining control over the investee it becomes
subsidiary of the Group and deemed cost is allocated to the individual identifiable assets and liabilities of the
subsidiary applying the same approach used for acquisition of an entity that is not a business.

26
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.3 Summary of significant accounting policies (continued)

Non-current assets held for sale or for distribution to equity holders of the parent and discontinued
operations

The Group classifies non-current assets and disposal groups as held for sale or for distribution to equity holders
of the parent if their carrying amounts will be recovered principally through a sale or distribution rather than
through continuing use. Such non-current assets and disposal groups classified as held for sale or as held for
distribution are measured at the lower of their carrying amount and fair value less costs to sell.

The criteria for held for distribution classification is regarded as met only when the distribution is highly probable
and the asset or disposal group is available for immediate distribution in its present condition. Actions required
to complete the distribution should indicate that it is unlikely that significant changes to the distribution will be
made or that the decision to distribution will be withdrawn. Management must be committed to the distribution
expected within one year from the date of the classification. Similar considerations apply to assets or a disposal
group held for sale.

Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held
for sale or as held for distribution. Assets and liabilities classified as held for sale or for distribution are
presented separately in the statement of financial position.

A disposal group qualifies as discontinued operation if it is:

► Represents a separate major line of business or geographical area of operations;
► Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area
of operations; or
► Is a subsidiary acquired exclusively with a view to resale.

Discontinued operations are excluded from the results of continuing operations and are presented as a single
amount as profit or loss after tax from discontinued operations in the statement of profit or loss. All notes to
the consolidated financial statements include amounts for continuing operations.

2.4 Changes in accounting policies and disclosures

Reclassification and voluntary change in accounting policy

When preparing the financial statements as of and for the year ended 31 December 2020, the Group made
following reclassifications:

a) Obligations for disability benefit payments

In prior reporting periods, the Group aggregated the short-term and long-term portion of liabilities for disability
benefit payments within current and non-current portion of other provisions for liabilities and charges. In current
year, the Group decided to present these liabilities within trade and other payables and other non-current
liabilities, respectively.

b) Reverse factoring arrangements

In the normal course of its business, the Group enters into reverse factoring arrangements with financial
institutions, in which a financial institution agrees to pay the amounts the Group owes to the suppliers for the
purchased goods on invoice due date. The Group repays these amounts together with interest accrued to the
financial institution at a date later than, suppliers have been paid by the financial institution.

In prior years, balances related to the reverse factoring arrangements were presented by the Group within
trade and other payables. Accordingly, the cash flows related to the reverse factoring arrangements were
presented in the Group’s consolidated financial statements within cash flows from operating activities.
Following the publication of IFRIC decision in December 2020, the Group analysed the terms and conditions
of reverse factoring arrangements to which it is a party and concluded to change its accounting policy in respect
of the presentation of liabilities and cash flows related to these arrangements.
27
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.4 Changes in accounting policies and disclosures (continued)

Under the new accounting policy, the balances arising from reverse factoring arrangements are presented as
short-term borrowings and the related cash flows are presented in the consolidated financial statements as
follows:
► At the date when financial institutions pay to the suppliers − both as cash inflows from financial
institutions in a financing cash flows section and as cash outflows to suppliers in an operating cash flows
section; and
► At the date when the Group pays to the financial institutions − as cash outflows in a financing cash flows
section.

Management believes that the new accounting policy is more relevant than the previous one, as it reflects the
substance and economic reality of such transactions more accurately.

In reaching that conclusion management noted that:

► The Group is legally released from its obligation to the supplier upon the financial institutions’ payments
to the supplier;
► The arrangements provide the Group with the extended credit terms;
► Interests charged under the arrangements are consistent with the Group’s general borrowing rates for
short-term loans from financial institutions rather than with interest rates payable on overdue invoices
from its suppliers;
► The arrangements reduce ability of the Group to borrow additional funds, i.e. reduce existing credit line
limits;
► The terms and conditions of the arrangements are negotiated between the financial institutions and the
Group (purchaser) and in case the Group did not repay its obligation to the financial institution, the latter
does not have the right to request its repayment from the supplier.

In addition, the arrangements allow the Group to request the financial institution to pay directly to its own
account and then they can make immediate payment to the supplier. Management believes that presentation
of the cash flows should not depend solely on the fact whether it would decide to use its right to receive cash
on its bank account before transferring funds to the supplier or not, as economically it has the same rights and
obligations attached to the funds irrespectively of which way of transfer it selects. Management believes that
the fact that it cannot use funds received for any other purpose than for paying to supplier does not preclude
them from classifying these funds as a cash. This is consistent with treatment of any specific loans received
by the entity that can be used only for a defined purpose or project. Management also believes that “net”
presentation of cash flows (i.e. treatment of payment by financial institution to the supplier as non-cash
transaction) would result in an “artificial” increase in operating cash flows and, therefore, would distort both
comparability with other entities involved in the same activities (which do not use reverse factoring) and reduce
the forecasting value of the information presented in the statement of cash flows.

Management also noted that there is no specific guidance in IFRS for determination of the agent-principal
relationships in transactions involving transfer of cash on behalf of the other party but based on the general
control notion. Therefore, management concluded that because they have control over the funds before they
are transferred to the supplier (which is evidenced by their right to request their payment to the Group’s current
account rather than directly to the current account of the supplier), the Group actually acts as a principal for
this payments and the financial institution acts as its agent. This would be different from the situation when,
according to the contract, the Group does not have the right to receive cash on its own current account.

28
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

2. Significant accounting policies (continued)

2.4 Changes in accounting policies and disclosures (continued)

The effects of reclassification and voluntary change in accounting policy made on prior reporting periods are
presented below:

Consolidated statement of financial position as at 31 December 2019

As reported (a) (b) As reclassified

Other provisions for liabilities and charges
(current) 75 (21) − 54
Trade and other payables 11,334 21 (514) 10,841
Short-term and current portion of long-term
borrowings 4,173 − 514 4,687
Total current liabilities 17,283 − − 17,283

Other provisions for liabilities and charges

(non-current) 163 (117) − 46
Other non-current liabilities 881 117 − 998
Total non-current liabilities 23,764 − − 23,764

Consolidated statement of cash flows for the period ended 31 December 2019

Cash flows from operating activities As reported (a) (b) As reclassified

Change in provisions 85 (29) − 56

Decrease in trade and other payables and
contract liabilities (417) 4 (1) (414)
Change in other assets and liabilities 205 25 − 230
Net cash flows from operating activities 3,067 − (1) 3,066

Cash flows from financing activities As reported (a) (b) As reclassified

Proceeds from borrowings 6,744 − 526 7,270

Repayment of borrowings (4,869) − (525) (5,394)
Net cash flows from financing activities 1,592 − 1 1,593

Consolidated statement of financial position as at 31 December 2018

As reported (a) (b) As reclassified

Other provisions for liabilities and charges
(current) 56 (15) − 41
Trade and other payables 11,780 15 (573) 11,222
Short-term and current portion of long-term
borrowings 4,013 − 573 4,586
Total current liabilities 17,367 − − 17,367

Other provisions for liabilities and charges

(non-current) 152 (85) − 67
Other non-current liabilities 910 85 − 995
Total non-current liabilities 20,825 − − 20,825

29
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

3. Critical accounting estimates and judgments

The preparation of the Group’s consolidated financial statements requires management to make judgements,
estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and
the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these
assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount
of assets or liabilities affected in future periods. In the process of applying the Group’s accounting policies,
management has made judgements, which have the most significant effect on the amounts recognized in the
consolidated financial statements.

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting
date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year, are described below. The Group based its assumptions and estimates
on parameters available when the consolidated financial statements were prepared. Existing circumstances
and assumptions about future developments, however, may change due to market changes or circumstances
arising that are beyond the control of the Group. Such changes are reflected in the assumptions when they
occur.

Estimation of oil and gas reserves

Oil and gas reserves are key elements in the Group’s investment decision-making process. Changes in proved
oil and gas reserves, particularly proved developed reserves, will affect unit-of-production depreciation charges
in the statement of profit or loss and other comprehensive income.

Proved oil and gas reserves are the estimated quantities of crude oil and natural gas which geological and
engineering data demonstrate with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e. prices and costs as of the date the estimate
is made. Proved developed reserves are reserves that can be expected to be recovered through existing wells
with existing equipment and operating methods. Estimates of oil and gas reserves are inherently imprecise,
require the application of judgment and are subject to future revision based on new information such as
information about drilling and production activities, changes in economic factors like product prices, contract
terms and development plans.

Accordingly, financial and accounting measures (such as depletion and amortization charges and provision for
asset retirement obligations) that are based on proved developed or proved reserves are also subject to change.

In general, estimates of reserves for undeveloped or partially developed fields are subject to greater
uncertainty over their future life than estimates of reserves for fields that are developed and being depleted.
As a field goes into production, the amount of proved reserves will be subject to future revision once additional
information becomes available through, for example, the drilling of additional wells or the observation of
long-term reservoir performance under producing conditions. As those fields are further developed, new
information may lead to revisions.

Proved reserves of SOCAR were based on the reserve report as of 31 December 2020. The report was
prepared by independent reservoir engineers in accordance with Petroleum Resources Management System
rules. For certain assets proved reserves are based on estimation of internal geologists.

Asset retirement obligations

Management makes provision in respect of the Group’s legal and constructive obligations for the future costs
of decommissioning oil and gas production and storage facilities, pipelines and related support equipment and
site restoration based on the estimates of future cost and economic lives of those assets. Estimating future
asset retirement obligations is complex and requires management to make estimates and judgments with
respect to removal obligations that will occur in the future. Changes in the measurement of existing obligations
can result from changes in estimated timing, future costs or discount rates used in valuation. These costs are
expected to be incurred over the useful life of the fields and properties ranging between 7 and 62 years from
the reporting date.

30
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

3. Critical accounting estimates and judgments (continued)

Asset retirement obligations (continued)

The Group assesses its asset retirement obligation liabilities in accordance with the guidelines of International
Financial Reporting Interpretations Committee (“IFRIC”) 1 Changes in Existing Decommissioning, Restoration
and Similar Liabilities. The amount recognized as a provision is the best estimate of the expenditures required
to settle the present obligation at the reporting date based on current applicable legislation and regulations,
and is subject to changes because of modifications, revisions and changes in laws and regulations and
respective interpretations thereof. Governmental authorities are continually considering applicable regulations
and their enforcement. Consequently, the Group’s ultimate asset retirement liabilities may differ from the
recorded amounts. Considering subjectivity of these provisions, there is uncertainty regarding both the amount
and estimated timing of incurring such costs. The key assumptions used to measure the amount of the
estimated asset retirement obligations and sensitivity analysis, are disclosed in Note 22.

Environmental obligations

The Group records a provision in respect of constructive obligations related to costs of remediation of
the damage caused to the natural environment primarily in the Absheron area both by the activities of
the Group and its legacy operations in periods preceding the formation of the Group.

The amount recognized as a provision is the best estimate of the expenditures required to settle the present
obligation at the reporting date based on current applicable legislation and regulations, and is also subject to
changes because of modifications, revisions and changes in laws and regulations and respective
interpretations thereof. Governmental authorities are continually considering applicable regulations and their
enforcement. Consequently, the Group’s ultimate liability for environmental remediation may differ from the
recorded amounts. Considering subjectivity of these provisions, there is uncertainty regarding both the amount
and estimated timing of incurring such costs. The key assumptions used to measure the amount of the
estimated environmental obligations and sensitivity analysis, are disclosed in Note 23.

Obligation for disability benefits

The Group records a provision in accordance with Azerbaijan Labour Code and has an obligation to pay
compensation for employees damaged at work. The amount recognized as a provision is the best estimate of
the expenditures required to settle the present obligation at the reporting date based on current applicable
legislation and regulations, and is also subject to changes because of modifications, revisions and changes in
laws and regulations and respective interpretations thereof. Governmental authorities are continually
considering applicable regulations and their enforcement. Considering subjectivity of these provisions, there
is uncertainty regarding both the amount and estimated timing of incurring such costs. The key assumptions
used to measure the amount of the estimated disability benefit obligations and sensitivity analysis, are
disclosed in Note 25A.

Useful lives and residual value of property, plant and equipment

Management determines the expected useful lives and related depreciation and amortisation charges for its
property, plant and equipment and intangible assets. This estimate is based on projected period over which
the Group expects to consume economic benefits from the asset. Management increases the depreciation
charge where the useful lives are less than previously expected lives. The expected useful lives are reviewed
at least at each financial year-end. Changes in any of the above conditions or estimates may result in
adjustments to future depreciation rates.

The expected useful lives of the Group’s property, plant and equipment (other than oil and gas properties) are
as follows:
Buildings and constructions 5 to 40 years
Plant and machinery 3 to 50 years
Vessels 25 to 30 years

The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of
the asset less the estimated costs of disposal, if the asset were of the age and in the condition expected at the
end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of
its physical life unless scrap value is significant. The assets’ residual values are reviewed, and adjusted if
appropriate, at each reporting date.
31
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

3. Critical accounting estimates and judgments (continued)

Recognition of deferred income tax assets

The net deferred tax assets represent income taxes recoverable through future deductions from taxable profits
and is recorded on the statement of financial position. Deferred income tax assets are recorded to the extent
that realisation of the related tax benefit is probable. In determining future taxable profits and the amount of
tax benefits whose realisation is probable in the future management makes judgments and applies estimation
based on expectations of future income that are believed to be reasonable under the circumstances.

Impairment of non-financial assets

Management assesses whether there are any indicators of possible impairment of all non-financial assets
each reporting date based on events or circumstances that indicate the carrying value of assets may not be
recoverable. Such indicators include changes in the Group’s business plans, changes in commodity prices
leading to unprofitable performances, changes in product mixes, and for oil and gas properties, significant
downward revisions of estimated proved reserves. Goodwill and intangible assets with indefinite useful life are
tested for impairment annually and at other times when impairment indicators exist. Other non-financial assets
are tested for impairment when there are indicators that the carrying amounts may not be recoverable.

Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount,
which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of
disposal calculation is based on available data from binding sales transactions, conducted at arm’s length, for
similar assets or observable market prices less incremental costs of disposing of the asset. The value in use
calculation is based on a Discounted Cash Flow (DCF) model. The cash flows are derived from the budget for
the next five years and do not include restructuring activities that the Group is not yet committed to or significant
future investments that will enhance the performance of the assets of the CGU being tested. The recoverable
amount is sensitive to the discount rate used for DCF model as well as the expected future cash inflows and
the growth rate used for extrapolation purposes.

In 2020, as a result of underperformance of some CGUs, the Group carried out testing of the recoverable
amounts of those CGUs resulting in impairment charge amounting to AZN 1,654 (2019: AZN 286) which was
recognized within other operating expenses.

The impairment loss of AZN 975 represented the write-down of certain property, plant and equipment in the
refining segment to the recoverable amount due to the lack of probability of the future economic benefits from
their use. The assets are mainly represented by plant & machinery and building & construction classes of
assets of one of the plants located in the Republic of Azerbaijan in the amounts of AZN 886 and AZN 77,
respectively. The recoverable amount of nil as at 31 December 2020 was based on value in use and was
determined at the level of the CGU. In determining value in use for the CGU, the cash flows were discounted
at a rate of 9.69 per cent on a pre-tax basis.

The impairment loss of AZN 164 represented the write-down of certain property, plant and equipment in the
refining segment to the recoverable amount as a result of the change in the manner that the assets operates.
The assets are mainly represented by plant & machinery class of one of the plants located in the Republic of
Azerbaijan. The recoverable amount of AZN 448 as at 31 December 2020 was based on value in use and was
determined at the level of the CGU. In determining value in use for the CGU, the cash flows were discounted
at a rate of 13.37 per cent on a pre-tax basis (31 December 2019: 11.87 per cent).

The impairment loss of AZN 163 represented the write-down of certain property, plant and equipment in the
construction segment to the recoverable amount as a result of adverse changes in the scope of business and
timing of cash inflows related to the CGU. The assets are mainly represented by building & construction and
vessels & port facilities classes of one of the plants located in the Republic of Azerbaijan in the amounts of
AZN 121 and AZN 26, respectively. The recoverable amount of AZN 140 as at the reporting date was based
on value in use and was determined at the level of the CGU. In determining value in use for the CGU, the cash
flows were discounted at a rate of 12.87 per cent on a pre-tax basis (31 December 2019: 11.07 per cent).

Impairment amount of AZN 139 is represented by write-down of oil & gas properties and equipment &
construction in progress classes located in the Republic of Azerbaijan, associated with oil & gas segment of
the Group in the amounts of AZN 110 (2019: AZN 283) and AZN 29 (2019: nil), respectively. The impairment
relates to investments in the non-profitable oil fields located in the Republic of Azerbaijan. The Group does not
expect future economic benefits from non-profitable fields and recoverable amounts of oil fields were nil as at
31 December 2020 and 2019.
32
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

3. Critical accounting estimates and judgments (continued)

Impairment of non-financial assets (continued)

The impairment loss of AZN 105 represented the write-down of certain property, plant and equipment in the
refining segment to the recoverable amount due to the lack of probability of the future economic benefits from
their use. The assets are mainly represented by construction in progress class of one of the plants located in
the Republic of Azerbaijan. The recoverable amount of the CGU is nil at the reporting date.

The impairment loss of AZN 108 mainly represented the write-down of certain property, plant and equipment
mainly in the sales and distribution and oil & gas segment to the recoverable amount as a result of change in
market conditions which affected the future cash projections related to the CGUs. The assets are mainly
represented by vessels & port facilities and oil & gas properties and equipment classes of several CGUs
located in the United Arab Emirates and in Georgia in the amounts of AZN 73 and AZN 18, respectively.

Provision for expected credit losses of financial assets

Trade receivables

The Group uses a provision matrix to calculate ECLs for trade receivables and contract assets. The provision
rates are based on days past due for the groupings of various customer segments that have similar loss
patterns (i.e., by geography, product type, customer type and rating, and coverage by letters of credit and
other forms of credit insurance).

The provision matrix is initially based on the Group’s historical observed default rates. The Group calibrates
the matrix to adjust the historical credit loss experience with forward-looking information. For instance,
if forecast economic conditions (i.e., gross domestic product) are expected to deteriorate over the next year
which can lead to an increased number of defaults in the manufacturing sector, the historical default rates are
adjusted. At every reporting date, the historical observed default rates are updated and changes in the forward-
looking estimates are analyzed.

The assessment of the correlation between historical observed default rates, forecast economic conditions
and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and forecast
economic conditions. The Group’s historical credit loss experience and forecast of economic conditions may
also not be representative of customer’s actual default in the future. The information about the ECLs on the
Group’s trade receivables is disclosed in Note 10.

Other financial assets recognized at amortized cost

The Group calculated ECL for financial assets that met the SPPI criterion other than trade and other
receivables using the general approach as disclosed in Note 2. The assessment of ECLs is significant estimate
considering that it is sensitive to changes in circumstances and conditions.

Leases

Significant judgement in determining the lease term of contracts with renewal options

The lessee and lessor need to determine whether a contract is a lease at inception of the lease. The inception
date is the earlier of the date of a lease agreement and the date of commitment by the parties to the principal
terms and conditions of the lease. The underlying asset is the asset that is subject to a lease, for which the
right to use that asset has been provided by a lessor to a lessee. The commencement date of the lease is the
date on which the lessor makes an underlying asset available for use by a lessee.

The lease term begins at the commencement date and includes any rent-free periods provided to the lessee
by the lessor.

The Group determines the lease term as the non-cancellable period of the lease, together with both:
► Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that
option; and
► Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise
that option.
33
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

3. Critical accounting estimates and judgments (continued)

Leases (continued)

Purchase options are assessed in the same way as options to extend or terminate the lease. An option to
purchase an underlying asset is economically similar to an option to extend the lease term for the remaining
economic life of the underlying asset.

The Group determines the lease term as the non-cancellable term of the lease, together with any periods
covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by
an option to terminate the lease, if it is reasonably certain not to be exercised. The Group considers all relevant
facts and circumstances that create an economic incentive for the lessee to exercise, or not to exercise, the
option, including any expected changes in facts and circumstances from the commencement date until the
exercise date of the option.

Incremental borrowing rate (IBR)

The Group cannot readily determine the interest rate implicit in lease, therefore it uses incremental borrowing
rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to
borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value
to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group ‘would
have to pay’, which requires estimation when no observable rates are available (such as for subsidiaries that
do not enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions
of the lease (for example, when leases are not in the subsidiary’s functional currency). The Group estimates
the IBR using observable inputs (such as market interest rates) when available and is required to make certain
entity-specific estimates (such as the subsidiary’s stand-alone credit rating).

4. Adoption of new or revised standards and interpretations and new accounting pronouncements

The Group applied for the first-time certain amendments to the standards, which are effective for annual
periods beginning on or after 1 January 2020. The Group has not early adopted any standards, interpretations
or amendments that have been issued but are not yet effective, except for Amendments to IFRS 16 COVID-19
Related Rent Concessions effective from annual reporting periods beginning on or after 1 June 2020, which
the Group applied earlier.

Amendments to IFRS 3 Definition of a Business

The amendment to IFRS 3 Business Combinations clarifies that to be considered a business, an integrated
set of activities and assets must include, at a minimum, an input and a substantive process that, together,
significantly contribute to the ability to create output. Furthermore, it clarifies that a business can exist without
including all of the inputs and processes needed to create outputs. These amendments had no impact on the
consolidated financial statements of the Group, but may impact future periods should the Group enter into any
business combinations.

Amendments to IFRS 7, IFRS 9 and IAS 39 Interest Rate Benchmark Reform

The Phase 1 of amendments to IFRS 9 and IAS 39 Financial Instruments are effective for years beginning
after 1 January 2020, but with early application permitted. Recognition and measurement provide a number of
reliefs which apply to all hedging relationships that are directly affected by interest rate benchmark reform.
A hedging relationship is affected if the reform gives rise to uncertainty about the timing and/or amount of
benchmark-based cash flows of the hedged item or the hedging instrument. The amendments set out triggers
for when the reliefs will end which include the uncertainty arising from interest rate benchmark reform no longer
being present. The Group’s associate that entered into hedge relations to hedge the risk arising from its loans
adopted these amendments. In assessing whether the hedge is expected to be highly effective on a forward-
looking basis the Group’s associate assumed that the EURIBOR interest rate on which the cash flows of the
hedged debt and the interest rate swap that hedges it are based is not impacted by the reform. The Group’s
associate will not recycle the cash flow hedge reserve relating to the period after the reforms are expected to
take effect, will monitor the development of the IBOR reform and will pro-actively discuss the matter with the
lenders.

34
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

4. Adoption of new or revised standards and interpretations and new accounting pronouncements
(continued)

Amendments to IAS 1 and IAS 8 Definition of Material

The amendments provide a new definition of material that states, “information is material if omitting, misstating
or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose
financial statements make on the basis of those financial statements, which provide financial information about
a specific reporting entity.” The amendments clarify that materiality will depend on the nature or magnitude of
information, either individually or in combination with other information, in the context of the financial
statements. A misstatement of information is material if it could reasonably be expected to influence decisions
made by the primary users. These amendments had no impact on the consolidated financial statements of,
nor is there expected to be any future impact to the Group.

Amendments to IFRS 16 COVID-19 Related Rent Concessions

On 28 May 2020, the IASB issued COVID-19 Related Rent Concessions – amendment to IFRS 16 Leases.
The amendments provide relief to lessees from applying IFRS 16 guidance on lease modification accounting
for rent concessions arising as a direct consequence of the COVID-19 pandemic. As a practical expedient,
a lessee may elect not to assess whether a COVID-19 related rent concession from a lessor is a lease
modification. A lessee that makes this election accounts for any change in lease payments resulting from
the COVID-19 related rent concession the same way it would account for the change under IFRS 16,
if the change were not a lease modification.

The amendment applies to annual reporting periods beginning on or after 1 June 2020. Earlier application is
permitted. The Group decided to apply the amendment earlier in these consolidated financial statements.
The application of the amendment did not have any material effect on the consolidated financial statements.

Conceptual Framework for Financial Reporting issued on 29 March 2018

The Conceptual Framework is not a standard, and none of the concepts contained therein override the
concepts or requirements in any standard. The purpose of the Conceptual Framework is to assist the IASB in
developing standards, to help preparers develop consistent accounting policies where there is no applicable
standard in place and to assist all parties to understand and interpret the standards. This affects those entities
which developed their accounting policies based on the Conceptual Framework. The revised Conceptual
Framework includes some new concepts, updated definitions and recognition criteria for assets and liabilities
and clarifies some important concepts. These amendments had no impact on the consolidated financial
statements of the Group.

Standards issued but not yet effective

The new and amended standards and interpretations that are issued, but not yet effective, up to the date of
issuance of the Group’s consolidated financial statements are disclosed below. The Group intends to adopt
these new and amended standards and interpretations, if applicable, when they become effective.

IFRS 17 Insurance Contracts

In May 2017, the IASB issued IFRS 17 Insurance Contracts, a comprehensive new accounting standard for
insurance contracts covering recognition and measurement, presentation and disclosure, which replaces
IFRS 4 Insurance Contracts.

IFRS 17 applies to all types of insurance contracts (i.e., life, non-life, direct insurance and re-insurance),
regardless of the type of entities that issue them, as well as to certain guarantees and financial instruments
with discretionary participation features. A few scope exceptions will apply. The overall objective of IFRS 17 is
to provide an accounting model for insurance contracts that is more useful and consistent for insurers. In
contrast to the requirements in IFRS 4, which are largely based on grandfathering previous local accounting
policies, IFRS 17 provides a comprehensive model for insurance contracts, covering all relevant accounting
aspects. The core of IFRS 17 is the general model, supplemented by:
► A specific adaptation for contracts with direct participation features (the variable fee approach);
► A simplified approach (the premium allocation approach) mainly for short-duration contracts.
35
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

4. Adoption of new or revised standards and interpretations and new accounting pronouncements
(continued)

Standards issued but not yet effective (continued)

IFRS 17 is effective for reporting periods beginning on or after 1 January 2023, with comparative figures
required. Early application is permitted, provided the entity also applies IFRS 9 and IFRS 15 on or before
the date it first applies IFRS 17. This standard is not applicable to the Group as it does not have any insurance
contracts.

Amendments to IAS 1 Classification of Liabilities as Current or Non-current

In January 2020, the IASB issued amendments to paragraphs 69 to 76 of IAS 1 to specify the requirements
for classifying liabilities as current or non-current. The amendments clarify:
► What is meant by a right to defer settlement;
► That a right to defer must exist at the end of the reporting period;
► That classification is unaffected by the likelihood that an entity will exercise its deferral right;
► That only if an embedded derivative in a convertible liability is itself an equity instrument would the terms
of a liability not impact its classification.

The amendments are effective for annual reporting periods beginning on or after 1 January 2023 and must be
applied retrospectively. The Group is currently assessing the impact the amendments will have on current
practice and whether existing loan agreements may require renegotiation.

Reference to the Conceptual Framework – Amendments to IFRS 3

In May 2020, the IASB issued Amendments to IFRS 3 Business Combinations − Reference to the Conceptual
Framework. The amendments are intended to replace a reference to the Framework for the Preparation and
Presentation of Financial Statements, issued in 1989, with a reference to the Conceptual Framework for
Financial Reporting issued in March 2018 without significantly changing its requirements. The Board also
added an exception to the recognition principle of IFRS 3 to avoid the issue of potential ‘day 2’ gains or losses
arising for liabilities and contingent liabilities that would be within the scope of IAS 37 or IFRIC 21 Levies,
if incurred separately. At the same time, the Board decided to clarify existing guidance in IFRS 3 for contingent
assets that would not be affected by replacing the reference to the Framework for the Preparation and
Presentation of Financial Statements. The amendments are effective for annual reporting periods beginning
on or after 1 January 2022 and apply prospectively. These amendments are not expected to have a material
impact on the consolidated financial statements of the Group.

Property, Plant and Equipment: Proceeds before Intended Use – Amendments to IAS 16

In May 2020, the IASB issued Property, Plant and Equipment − Proceeds before Intended Use, which prohibits
entities deducting from the cost of an item of property, plant and equipment, any proceeds from selling items
produced while bringing that asset to the location and condition necessary for it to be capable of operating in
the manner intended by management. Instead, an entity recognizes the proceeds from selling such items, and
the costs of producing those items, in profit or loss.

The amendment is effective for annual reporting periods beginning on or after 1 January 2022 and must be
applied retrospectively to items of property, plant and equipment made available for use on or after the
beginning of the earliest period presented when the entity first applies the amendment. These amendments
are not expected to have a material impact on the consolidated financial statements of the Group.

36
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

4. Adoption of new or revised standards and interpretations and new accounting pronouncements
(continued)

Standards issued but not yet effective (continued)

Onerous Contracts – Costs of Fulfilling a Contract – Amendments to IAS 37

In May 2020, the IASB issued amendments to IAS 37 to specify which costs an entity needs to include when
assessing whether a contract is onerous or loss-making. The amendments apply a “directly related cost
approach”. The costs that relate directly to a contract to provide goods or services include both incremental
costs and an allocation of costs directly related to contract activities. General and administrative costs do not
relate directly to a contract and are excluded unless they are explicitly chargeable to the counterparty under
the contract.

The amendments are effective for annual reporting periods beginning on or after 1 January 2022. The Group
will apply these amendments to contracts for which it has not fulfilled yet all its obligations at the beginning of
the annual reporting period in which it first applies the amendments.

Disclosure of Accounting Policies − Amendments to IAS 1 and IFRS Practice Statement 2

In February 2021, the IASB issued amendments to IAS 1 and IFRS Practice Statement 2 Making Materiality
Judgements, in which it provides guidance and examples to help entities apply materiality judgements to
accounting policy disclosures. The amendments aim to help entities provide accounting policy disclosures that
are more useful by:
► Replacing the requirement for entities to disclose their “significant” accounting policies with a
requirement to disclose their “material” accounting policies; and
► Adding guidance on how entities apply the concept of materiality in making decisions about accounting
policy disclosures.

The amendment is effective for annual periods beginning on or after 1 January 2023. Earlier application is
permitted. These amendments are not expected to have a material impact on the consolidated financial
statements of the Group.

Definition of Accounting Estimates − Amendments to IAS 8

In February 2021, the IASB issued amendments to IAS 8, in which it introduces a new definition of “accounting
estimates”. The amendments clarify the distinction between changes in accounting estimates and changes in
accounting policies and the correction of errors. Additionally, they clarify how entities use measurement
techniques and inputs to develop accounting estimates.

The amendment is effective for annual periods beginning on or after 1 January 2023. Earlier application is
permitted. These amendments are not expected to have a material impact on the consolidated financial
statements of the Group.

IFRS 1 First-time Adoption of International Financial Reporting Standards – Subsidiary as a first-time adopter

As part of its 2018-2020 annual improvements to IFRS standards process, the IASB issued an amendment to
IFRS 1 First-time Adoption of International Financial Reporting Standards. The amendment permits a
subsidiary that elects to apply paragraph D16(a) of IFRS 1 to measure cumulative translation differences using
the amounts reported by the parent, based on the parent’s date of transition to IFRS. This amendment is also
applied to an associate or joint venture that elects to apply paragraph D16(a) of IFRS 1.

The amendment is effective for annual reporting periods beginning on or after 1 January 2022 with earlier
adoption permitted. This standard is not applicable to the Group.

37
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

4. Adoption of new or revised standards and interpretations and new accounting pronouncements
(continued)

Standards issued but not yet effective (continued)

Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform – Phase 2

On 27 August 2020, the IASB published Interest Rate Benchmark Reform – Phase 2, Amendments to IFRS 9,
IAS 39, IFRS 7, IFRS 4 and IFRS 16. The amendments provide temporary reliefs which address the financial
reporting effects when an interbank offered rate (“IBOR”) is replaced with an alternative nearly risk-free interest
rate (“RFR”). The amendments include a practical expedient to require contractual changes, or changes to
cash flows that are directly required by the reform, to be treated as changes to a floating interest rate,
equivalent to a movement in a market rate of interest. Inherent in allowing the use of this practical expedient
is the requirement that the transition from an IBOR benchmark rate to an RFR takes place on an economically
equivalent basis with no value transfer having occurred. Any other changes made at the same time, such as
a change in the credit spread or maturity date, are assessed. If they are substantial, the instrument is
derecognised. If they are not substantial, the updated effective interest rate (“EIR”) is used to recalculate
the carrying amount of the financial instrument, with any modification gain or loss recognised in profit or loss.
The amendments permit changes required by IBOR reform to be made to hedge designations and hedge
documentation without the hedging relationship being discontinued. Permitted changes include redefining the
hedged risk to reference an RFR and redefining the description of the hedging instruments and/or the hedged
items to reflect the RFR. Entities are allowed until the end of the reporting period, during which a modification
required by IBOR reform is made, to complete the changes. While application is retrospective, an entity is not
required to restate prior periods. The amendment is effective for annual periods beginning on or after 1 January
2021.

The Group continues to monitor the development of Interest Rate Benchmark Reform and to assess the impact
of reform on the Group’s hedging relationships and borrowings. The Group conducts discussions with lenders.

Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or
Joint Venture

The amendments address the conflict between IFRS 10 Consolidated Financial Statements and IAS 28
Investments in Associates and Joint Ventures in dealing with the loss of control of a subsidiary that is sold or
contributed to an associate or joint venture. The amendments clarify that a full gain or loss is recognized when
a transfer to an associate or joint venture involves a business as defined in IFRS 3. Any gain or loss resulting
from the sale or contribution of assets that does not constitute a business, however, is recognized only to the
extent of unrelated investors’ interests in the associate or joint venture. The amendments must be applied
prospectively. In December 2015, the IASB decided to defer the effective date of the amendments until such
time as it has finalised any amendments that result from its research project on the equity method. Early
application is permitted and must be disclosed. These amendments are not expected to have a material impact
on the consolidated financial statements of the Group.

IFRS 9 Financial Instruments – Fees in the ’10 per cent’ test for derecognition of financial liabilities

As part of its 2018-2020 annual improvements to IFRS standards process the IASB issued amendment to
IFRS 9. The amendment clarifies the fees that an entity includes when assessing whether the terms of a new
or modified financial liability are substantially different from the terms of the original financial liability. These
fees include only those paid or received between the borrower and the lender, including fees paid or received
by either the borrower or lender on the other’s behalf. An entity applies the amendment to financial liabilities
that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first
applies the amendment.

The amendment is effective for annual reporting periods beginning on or after 1 January 2022 with earlier
adoption permitted. The Group will apply the amendments to financial liabilities that are modified or exchanged
on or after the beginning of the annual reporting period in which the entity first applies the amendment. These
amendments are not expected to have a material impact on the consolidated financial statements of the Group.

38
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

4. Adoption of new or revised standards and interpretations and new accounting pronouncements
(continued)

Standards issued but not yet effective (continued)

IAS 41 Agriculture – Taxation in fair value measurements

As part of its 2018-2020 annual improvements to IFRS standards process the IASB issued amendment to
IAS 41 Agriculture. The amendment removes the requirement in paragraph 22 of IAS 41 that entities exclude
cash flows for taxation when measuring the fair value of assets within the scope of IAS 41. An entity applies
the amendment prospectively to fair value measurements on or after the beginning of the first annual reporting
period beginning on or after 1 January 2022 with earlier adoption permitted. This standard is not applicable to
the Group.

Illustrative Examples accompanying IFRS 16 Leases

As part of its 2018-2020 annual improvements to IFRS standards process the IASB issued amendment to
Illustrative Example 13 accompanying IFRS 16. The amendment removes the illustration of payments from
the lessor relating to leasehold improvements in Illustrative Example 13 accompanying IFRS 16. This removes
potential confusion regarding the treatment of lease incentives when applying IFRS 16. This amendment is
not expected to have a material impact on the consolidated financial statements of the Group.

Amendments to IFRS 16 COVID-19 Related Rent Concessions beyond 30 June 2021

In March 2021, the Board amended IFRS 16 to extend the availability of the practical expedient by one year
(2021 amendment). The practical expedient in the 2021 amendment applies to rent concessions for which any
reduction in lease payments affects only payments originally due on or before 30 June 2022, provided the
other conditions for applying the practical expedient are met. The amendment applies to annual reporting
periods beginning on or after 1 April 2021. Lessees shall apply the 2021 amendment retrospectively,
recognising the cumulative effect of initially applying it as an adjustment to the opening balance of retained
earnings (or other component of equity, as appropriate) at the beginning of the annual reporting period in which
they first apply the amendment. In the reporting period in which a lessee first applies the 2021 amendment,
the lessee is not required to disclose the information required by paragraph 28(f) of IAS 8. In accordance with
paragraph 2 of IFRS 16, a lessee is required to apply the relief consistently to eligible contracts with similar
characteristics and in similar circumstances, irrespective of whether the contract became eligible for the
practical expedient as a result of the lessee applying the 2020 amendment or 2021 amendment.

These amendments are not expected to have a material impact on the consolidated financial statements of
the Group.

5. Segment information

Operating segments are components that engage in business activities that may earn revenue or incur
expenses, whose operating results are regularly reviewed by the management of the Group and for which
discrete financial information is available.

The Group has four reportable segments:

► Oil and gas – representing extraction of oil and gas products;
► Refining – representing refining of crude oil and gas condensate;
► Construction – representing construction of administrative premises and assets for extraction of oil and
gas condensate;
► Sales and distribution – representing transportation and marketing of crude oil, natural gas, oil products
and gas condensate.

No operating segments have been aggregated to form the above reportable operating segments.

Management monitors the operating results of its business units and subsidiaries separately for the purpose
of making decisions about resource allocation and performance assessment.
39
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

5. Segment information (continued)

Management evaluates performance of each segment based on profit after tax.

Information about reportable segment profit or loss, assets and liabilities

Segment information for the reportable segments for the year ended 31 December 2020 is set out below:

Adjust-
ments and
Construc- Sales and Unalloca- elimina-
Oil and gas Refining tion distribution ted (*) tions (**) Total
2020
Revenues
External customers 3,337 7,204 935 38,066 65 − 49,607
Inter-segment 2,410 820 566 12,130 481 (16,407) −
Total revenue 5,747 8,024 1,501 50,196 546 (16,407) 49,607
Other operating income 44 322 21 102 125 (110) 504
Interest revenue calculated
using effective interest
method 4 432 21 58 788 (1,132) 171
Other finance income − 25 − − − − 25
Foreign exchange gains and
losses, net (14) (553) (8) (65) 26 − (614)
Raw materials and
consumables used (972) (6,883) (192) (47,093) (45) 15,135 (40,050)
Wages, salaries and social
security costs (301) (441) (369) (703) (319) 116 (2,017)
Depreciation of property, plant
and equipment (1,220) (341) (118) (254) (53) 50 (1,936)
Transportation and vehicle
maintenance (552) (28) (123) (825) (25) 437 (1,116)
ECL − (5) (75) (37) (11) 9 (119)
Impairment of fixed assets (148) (1,181) (163) (91) (71) − (1,654)
Mining tax (125) − − − − − (125)
Depreciation of right-of-use
assets (20) (15) (5) (55) (1) 6 (90)
Taxes other than on income (78) (32) (3) (31) (42) − (186)
Amortization expense − (52) (3) (20) (7) 7 (75)
Repairs and maintenance
expenses (247) (60) (155) (72) (38) 148 (424)
Utilities expense (10) (303) (2) (51) (3) 5 (364)
Change in other provisions
for liabilities and charges (6) − (13) (35) 11 − (43)
Gain/(loss) on disposal of
property, plant and
equipment and intangible
assets 23 − − (2) (18) − 3
Finance costs (157) (492) (13) (170) (586) 231 (1,187)
Social expenses (13) (7) (23) (6) (122) − (171)
Share of result of joint ventures (1) (427) (5) 1 21 − (411)
Share of result of associates − − − 96 4 − 100
Income tax expenses (300) 135 (51) (61) (20) − (297)
Other (287) (241) (342) (573) (529) 707 (1,265)
Net profit/(loss) for the year 1,367 (2,123) (120) 309 (369) (798) (1,734)
(*) These figures include unallocated revenues and expenses related to research and development, IT, security and other functions
that are not managed at the group level.
(**) Inter-segment revenues and expenses are eliminated on consolidation. Amounts shown as eliminations include intercompany
transactions.

40
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

5. Segment information (continued)

Information about reportable segment profit or loss, assets and liabilities (continued)

Adjust-
ments and
Oil Construc- Sales and Unalloca- elimina-
and gas Refining tion distribution ted (*) tions (**) Total
Investments in associates − − − 4,142 31 − 4,173
Investments in joint ventures 30 4,640 190 5 77 − 4,942
Other reportable segment
assets 27,096 16,483 2,777 16,850 21,686 (29,852) 55,040
Total reportable segment
assets 27,126 21,123 2,967 20,997 21,794 (29,852) 64,155
Total reportable segment
liabilities (13,484) (12,976) (1,687) (16,443) (17,662) 20,020 (42,232)

Capital expenditure (***)

Additions − business units,
JV and associates 498 1,204 6 127 39 38 1,912
Additions − subsidiaries 1,819 559 11 156 18 (47) 2,516
Total capital expenditures 2,317 1,763 17 283 57 (9) 4,428
(*) These figures include unallocated assets and liabilities related to research and development, IT, security and other functions that
are not managed at the group level.
(**) Inter-segment balances are eliminated on consolidation. Amounts shown as eliminations include intercompany balances.
(***) Capital expenditure represents additions to non-current assets other than financial instruments, deferred tax assets and
post-employment benefit assets.

41
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

5. Segment information (continued)

Information about reportable segment profit or loss, assets and liabilities (continued)

Segment information for the reportable segments for the year ended 31 December 2019 is set out below:

Adjust-
ments and
Oil Construc- Sales and Unalloca- elimina-
and gas Refining tion distribution ted (*) tions (**) Total
2019
Revenues
External customers 2,518 9,418 1,085 70,680 51 − 83,752
Inter-segment 3,156 747 828 21,701 522 (26,954) −
Total revenue 5,674 10,165 1,913 92,381 573 (26,954) 83,752
Other operating income 10 171 31 100 115 (86) 341
Interest revenue calculated
using effective interest
method 6 161 31 46 1,669 (1,750) 163
Other finance income − 47 − − − − 47
Foreign exchange losses, net (7) (256) (7) (36) (9) − (315)
Raw materials and
consumables used (692) (8,634) (392) (89,746) (48) 25,541 (73,971)
Wages, salaries and social
security costs (262) (417) (349) (559) (307) 154 (1,740)
Depreciation of property, plant
and equipment (978) (258) (118) (252) (59) 62 (1,603)
Transportation and vehicle
maintenance (446) (22) (205) (716) (33) 338 (1,084)
ECL (3) (2) (1) (30) (4) (9) (49)
Impairment of fixed assets (283) − − (3) − − (286)
Mining tax (125) − − − − − (125)
Depreciation of right-of-use
asset (29) (23) (5) (40) − 8 (89)
Taxes other than on income (83) (25) (3) (28) (58) − (197)
Amortization expense − (33) (1) (19) (9) 1 (61)
Repairs and maintenance
expenses (295) (41) (113) (66) (72) 229 (358)
Utilities expense (14) (318) (3) (58) (3) 2 (394)
Change in other provisions for
liabilities and charges (10) (8) (46) (3) (6) − (73)
Loss on disposal of property,
plant and equipment and
intangible assets − (7) − 1 (4) − (10)
Finance costs (144) (210) (36) (175) (609) 14 (1,160)
Social expenses (13) (10) (3) (6) (86) − (118)
Share of result of joint ventures 10 (32) 2 − 34 − 14
Share of result of associates − − − (6) 1 − (5)
Income tax expenses (387) (49) (85) (88) (68) − (677)
Other (372) (297) (293) (644) (332) 587 (1,351)
Net profit/(loss) for the year 1,557 (98) 317 53 685 (1,863) 651
(*) These figures include unallocated revenues and expenses related to research and development, IT, security and other functions
that are not managed at the group level.
(**) Inter-segment revenues and expenses are eliminated on consolidation. Amounts shown as eliminations include intercompany
transactions.

42
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

5. Segment information (continued)

Information about reportable segment profit or loss, assets and liabilities (continued)

Adjust-
ments and
Oil Construc- Sales and Unalloca- elimina-
and gas Refining tion distribution ted (*) tions (**) Total
Investments in associates − − − 4,181 27 − 4,208
Investments in joint ventures 39 5,057 222 4 76 − 5,398
Other reportable segment
assets 25,553 16,170 3,197 18,453 20,174 (27,778) 55,769
Total reportable segment
assets 25,592 21,227 3,419 22,638 20,277 (27,778) 65,375
Total reportable segment
liabilities (12,402) (11,648) (1,677) (18,317) (15,600) 18,597 (41,047)

Capital expenditure (***)

Additions − business units,
JV and associates 1,030 2,088 5 212 42 (73) 3,304
Additions − subsidiaries 1,749 665 21 159 1 (56) 2,539
Acquisition through business
combination (EWE Holding) − − − 672 − − 672
Total capital expenditures 2,779 2,753 26 1,043 43 (129) 6,515
(*) These figures include unallocated assets and liabilities related to research and development, IT, security and other functions that
are not managed at the group level.
(**) Inter-segment balances are eliminated on consolidation. Amounts shown as eliminations include intercompany balances.
(***) Capital expenditure represents additions to non-current assets other than financial instruments, deferred tax assets and
post-employment benefit assets.

Geographical information

Revenues for each individual country are reported separately as follows:

2020 2019
Switzerland 30,478 63,735
Turkey 7,618 9,377
Azerbaijan 6,311 6,145
UAE 2,223 1,722
Georgia 1,045 1,172
Other 1,932 1,601
Total consolidated revenues 49,607 83,752

The analysis is based on the country of incorporation of the selling entity.

43
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

5. Segment information (continued)

Geographical information (continued)

Set out below is the disaggregation of the Group’s revenue from contracts with customers for the year ended
31 December 2020:

Oil Construc- Sales and Unalloca-

Segments and gas Refining tion distribution ted (*) Total
Sale of crude oil, net 2,387 − − 24,032 − 26,419
Sale of oil products, net 499 2,747 − 10,132 − 13,378
Sale of natural gas 349 900 − 2,766 − 4,015
Sale of petrochemicals − 2,899 − 382 − 3,281
Rent income − 16 453 − − 469
Other revenue 102 642 482 754 65 2,045
Total 3,337 7,204 935 38,066 65 49,607

Switzerland − − − 30,478 − 30,478

Turkey 489 7,129 − − − 7,618
Azerbaijan 2,848 75 778 2,546 64 6,311
UAE − − 157 2,066 − 2,223
Georgia − − − 1,044 1 1,045
Other − − − 1,932 − 1,932
Total 3,337 7,204 935 38,066 65 49,607

Good transferred at a point

in time 3,337 7,035 − 37,729 56 48,157
Services transferred over time − 169 935 337 9 1,450
Total revenue from contracts
with customers 3,337 7,204 935 38,066 65 49,607

Revenue
External customer 3,337 7,204 935 38,066 65 49,607
Inter-segment 2,410 820 566 12,130 481 16,407
Total 5,747 8,024 1,501 50,196 546 66,014
Adjustment and eliminations (2,410) (820) (566) (12,130) (481) (16,407)
Total revenue from contracts
with customers 3,337 7,204 935 38,066 65 49,607

44
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

5. Segment information (continued)

Geographical information (continued)

Set out below is the disaggregation of the Group’s revenue from contracts with customers for the year ended
31 December 2019:

Oil Construc- Sales and Unalloca-

Segments and gas Refining tion distribution ted (*) Total
Sale of crude oil, net 1,930 − − 49,191 − 51,121
Sale of oil products, net 55 4,785 − 17,344 − 22,184
Sale of natural gas 340 651 − 3,132 − 4,123
Sale of petrochemicals − 3,609 − 319 − 3,928
Rent income − 16 400 − − 416
Other revenue 193 357 685 694 51 1,980
Total 2,518 9,418 1,085 70,680 51 83,752

Switzerland − − − 63,735 − 63,735

Azerbaijan 2,518 41 914 2,623 49 6,145
Turkey − 9,377 − − − 9,377
UAE − − 171 1,551 − 1,722
Georgia − − − 1,170 2 1,172
Other − − − 1,601 − 1,601
Total 2,518 9,418 1,085 70,680 51 83,752

Good transferred at a point

in time 2,518 9,378 − 69,847 48 81,791
Services transferred over time − 40 1,085 833 3 1,961
Total revenue from contracts
with customers 2,518 9,418 1,085 70,680 51 83,752

Revenue
External customer 2,518 9,418 1,085 70,680 51 83,752
Inter-segment 3,156 747 828 21,701 522 26,954
Total 5,674 10,165 1,913 92,381 573 110,706
Adjustment and eliminations (3,156) (747) (828) (21,701) (522) (26,954)
Total revenue from contracts
with customers 2,518 9,418 1,085 70,680 51 83,752

Non-current assets other than financial instruments, deferred tax assets and post-employment benefit assets
for each individual country is reported separately as follows:

2020 2019
Azerbaijan 32,888 32,847
Turkey 7,933 8,838
Switzerland 955 977
Georgia 475 548
UAE 439 522
Other 325 269
Total 43,015 44,001

The analysis is based on location of assets.

45
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

6. Financial risk management

Financial risk factors

The Group’s principal financial liabilities other than derivatives comprise trade and other payables and
borrowings. The main purpose of these financial liabilities is to finance the Group’s operations. The Group’s
principal financial assets include cash and cash equivalents and short-term deposits and trade and other
receivables that are generated directly from its operations. The Group also holds investments in debt and
equity instruments and enters into derivative transactions.

In the ordinary course of business, the Group is exposed to market, credit and liquidity risks. The Group’s
overall risk management program focuses on the unpredictability of financial markets and seeks to minimise
potential adverse effects on the Group’s financial performance. To effectively manage the variety of exposures
that may impact financial results, the Group’s overriding strategy is to maintain a strong financial position.
Although there are no structured formal management procedures, management of the Group identifies and
evaluates financial risks with reference to the current market position.

Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market prices. Market risk comprises three types of risk: foreign exchange risk, commodity price
risk and interest rate risk. Financial instruments affected by market risk include cash and cash equivalents and
short-term deposits, trade and other receivables, trade and other payables, borrowings and derivatives.

(i) Foreign exchange risk

The Group is exposed to foreign exchange risk arising from various exposures in the normal course of
business, primarily with respect to USD. Foreign exchange risk arises primarily from future commercial
transactions, recognized assets and liabilities when assets and liabilities are denominated in a currency other
than the functional currency of the Group companies.

The majority of the Group’s cash and cash equivalents and short-term deposits, trade and other receivables,
trade and other payables and borrowings are denominated in USD.

The following table demonstrates the sensitivity to a reasonably possible change in the USD, EUR, TRY, GEL,
CHF exchange rates, with all other variables held constant, of the Group’s profit before tax:

Change Effect on
2020 in rates (+/-) profit before tax
USD/AZN 20.00%/-3.00% (1,977)/297
EUR/AZN 22.00%/-10.00% (179)/81
USD/TRY 10.00%/-10.00% (122)/122
USD/GEL 15.00%/-7.00% (42)/19
EUR/USD 10.00%/-9.00% 20/(18)
EUR/TRY 10.00%/-10.00% (7)/7
USD/CHF 7.00%/-8.00% 1/(1)

Change Effect on profit

2019 in rates (+/-) before tax
USD/AZN 10.00%/-3.00% (816)/245
EUR/AZN 10.00%/-6.00% (104)/62
USD/TRY 10.00%/-10.00% (120)/120
USD/GEL 10.00%/-5.00% (24)/12
EUR/USD 8.00%/-8.00% 5/(5)
EUR/TRY 10.00%/-10.00% (11)/11
USD/CHF 6.50%/-6.50% 4/(4)

46
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

6. Financial risk management (continued)

Market risk (continued)

Group’s exposure to foreign currency changes for all other currencies is not material.

(ii) Commodity price risk

The Group is exposed to certain price risk due to volatility of oil prices. Due to the risk the Group’s management
has developed and enacted a risk management strategy regarding oil price risk and its mitigation.

Based on forecasts about oil purchases and sales, the Group hedges the price using futures, swaps and
forward contracts.

As at 31 December 2020, sensitivity of the Group’s pre-tax loss, based upon derivative price exposures,
whereby if oil future prices had moved up or down, with all other variables held constant, was insignificant.

(iii) Interest rate risk

Changes in interest rates impact primarily debt by changing either their fair value (fixed rate debt) or their future
cash flows (variable rate debt). The Group’s exposure to the risk of changes in market interest rates relates
primarily to the Group’s financial assets and financial liabilities with floating interest rates. To mitigate this risk,
the Group’s management performs periodic analysis of the current interest rate environment and depending
on that analysis management makes decisions whether it would be more beneficial to obtain financing on a
fixed-rate or variable-rate basis. In case where the change in the current market fixed or variable interest rates
is considered significant, management may consider refinancing a particular debt on more favourable interest
rate terms. Management does not have a formal policy of determining how much of the Group’s exposure
should be to fixed or variable rates.

The floating rate for majority of interest-bearing liabilities and assets exposes the Group to fluctuation in interest
payments and receipts mainly due to changes in London Inter-Bank Offered Rate (LIBOR) and Euro Inter-bank
Offered Rate (EURIBOR).

The following table demonstrates the sensitivity to a reasonably possible change in interest rates on loans and
borrowings, net of loans receivable:

Increase/ Effect
decrease on profit
2020 in basis points before tax
Loans and borrowings, net of loans receivable
USD +100/-25 (50)/12
EUR +20/-20 (2)/2

Increase/ Effect
decrease on profit
2019 in basis points before tax
Loans and borrowings, net of loans receivable
USD +35/-35 (19)/19
EUR +15/-15 (1)/1

47
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

6. Financial risk management (continued)

Credit risk and concentration of credit risk

Credit risk refers to the risk exposure that a potential financial loss to the Group may occur if a counterparty
defaults on its contractual obligations.

The Group’s financial instruments that are exposed to the concentration of credit risk primarily comprise cash
and cash equivalents, restricted cash, and trade receivables and loans receivable.

The Group’s maximum exposure to credit risk is represented by gross carrying amount of financial assets and
is presented by class of assets as shown in the table below:
2020 2019
Cash and cash equivalents excluding cash on hand (Note 8) 6,187 7,086
Restricted cash 161 150
Deposits (Note 8) 665 107
Trade and other receivables (Note 10) 6,018 7,940
Other current financial assets 369 304
Other non-current financial assets 870 681
Financial guarantees given (Note 38) 975 1,042
Total exposure to credit risk 15,245 17,310

The Group places its cash with reputable financial institutions in the Azerbaijan Republic. The Group’s cash is
placed with the International Bank of Azerbaijan (“IBA”) which is controlled by the Azerbaijani Government.
The balance of cash and cash equivalents and deposit held with the IBA at 31 December 2020 was AZN 2,053
(31 December 2019: AZN 2,684). The Group continually monitors the status of the banks where its accounts
are maintained. In addition, the Group’s restricted cash balance in the amount of AZN 43 (31 December 2019:
AZN 37) was represented by VAT deposit account.

Trade receivables primarily comprise balances with local and foreign customers, including related parties, for
crude oil, oil products and natural gas sold. The Group’s credit risk arising from its trade balance with customers
is mitigated by continuous monitoring of their creditworthiness. Management of the Group believes that the Group
is not exposed to high credit risk as the impairment provision has already been accrued in the accompanying
consolidated financial statements for all debtors which are not expected to be recovered in future.

The Group categorized its financial assets as follows:

Past due but
31 December 2020 Standard Sub-standard not in default In default
Cash and cash equivalents excluding
cash on hand (Note 8) 6,158 − − 29
Restricted cash 123 − − 38
Deposits (Note 8) 665 − − −
Trade and other receivables (Note 10) 4,873 405 386 354
Other current financial assets − 369 − −
Other non-current financial assets − 870 − −
Total 11,819 1,644 386 421

Past due but

31 December 2019 Standard Sub-standard not in default In default
Cash and cash equivalents excluding
cash on hand (Note 8) 7,086 − − −
Restricted cash 150 − − −
Deposits (Note 8) 107 − − −
Trade and other receivables (Note 10) 6,644 226 525 545
Other current assets − 304 − −
Other non-current financial assets − 681 − −
Total 13,987 1,211 525 545
48
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

6. Financial risk management (continued)

Credit risk and concentration of credit risk (continued)

The standard grade includes counterparties with stable financial position and debt service, which have minimal
credit risk exposure. In addition, counterparties in these financial assets normally have a high credit rating or
are sufficiently collateralized. Sub-standard grade is represented by financial assets, that are neither past due
nor in default, of counterparties not having high credit rating.

The Group considers that there has been a significant increase in credit risk if one of the following criteria is
met:
Contractual payments are more than 30 days past due from the date specified in the contract;
An external credit rating provided by international rating agencies downgrade for the counterparty
for 3 and more notches, relative to the risk grade of the counterparty as of initial recognition date;
Moody’s external rating “Caa1” (or equivalent for S&P or Fitch) and below.

The Group considers a financial asset in default if one of the following criteria is met:
Contractual payments are more than 90 days past due from the date specified in the contract;
Existing of information that counterparty will or has enter bankruptcy, insolvency or a similar condition;
Announcement of default grade to counterparty by international credit rating agencies.

Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due.
The Group’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or
risking damage to the Group’s reputation. In managing liquidity risk, the Group maintains adequate cash
reserves and debt facilities, continuously monitors forecast and actual cash flows.

Prudent liquidity risk management includes maintaining sufficient working capital and the ability to close out
market positions. Management monitors rolling forecasts of the Group’s liquidity reserve on the basis of
expected cash flows.

The Group’s financial liabilities represent both derivative and non-derivative financial instruments. The table
below analyzes the Group’s financial liabilities into relevant maturity groupings based on the remaining period
from the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual
undiscounted cash flows. For issued financial guarantee contracts, the maximum amount is allocated to the
earliest period in which the contract could be called.

The maturity analysis of financial liabilities as of 31 December 2020 and 2019 was as follows:

Less than More than

At 31 December 2020 3 months 3-12 months 1-5 years 5 years Total
Trade and other financial
payables 9,126 − − − 9,126
Lease liabilities 42 124 328 865 1,359
Deferred acquisition
consideration payable − 212 − 841 1,053
Other current financial liabilities − 575 − − 575
Interest-bearing borrowings 2,698 3,628 10,375 3,673 20,374
Other non-current financial
liabilities − − 818 63 881
Put option liabilities 32 2,760 − − 2,792
Financial guarantees given
(Note 38) 975 − − − 975
Total undiscounted
financial liabilities 12,873 7,299 11,521 5,442 37,135

49
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

6. Financial risk management (continued)

Liquidity risk (continued)

Less than More than

At 31 December 2019 3 months 3-12 months 1-5 years 5 years Total
Trade and other financial
payables 10,600 − − − 10,600
Lease liabilities 31 92 378 748 1,249
Deferred acquisition
consideration payable − 157 − 841 998
Other current financial liabilities − 305 − − 305
Interest-bearing borrowings 2,383 2,768 10,010 4,359 19,520
Other non-current financial
liabilities − − 687 50 737
Put option liabilities 57 116 2,812 − 2,985
Financial guarantees given
(Note 38) 1,042 − − − 1,042
Total undiscounted
financial liabilities 14,113 3,438 13,887 5,998 37,436

The Group expects that not all financial guarantees will be called before the expiry date of the contracts which
varies from one to five years.

Capital management

The primary objective of the Group’s capital management policy is to ensure a strong capital base to fund and
sustain its business operations through prudent investment decisions and to maintain government, investor
and creditor confidence to support its business activities.

The Group considers total capital under management to be as follows:

2020 2019
Total borrowings (Note 20) 17,129 16,056
Total equity 21,923 24,328
Less: cash and cash equivalents (Note 8) (6,153) (7,084)
Total capital under management 32,899 33,300

The Group is periodically mandated to contribute to the state budget and finance various projects undertaken
by the Government of the Azerbaijan Republic. There were no changes to the Group’s approach to capital
management during the year.

Fair value of financial instruments

The fair value of the financial assets and liabilities is included at the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. The estimated fair values of financial instruments have been determined by the Group using available
market information, where it exists, and appropriate valuation methodologies. However, the judgment is
necessarily required to interpret market data to determine the estimated fair value. Management has used all
available market information in estimating the fair value of financial instruments.

50
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

6. Financial risk management (continued)

Fair value of financial instruments (continued)

Set out below is a comparison by class of the carrying amounts and fair value of the Group’s financial
instruments that are carried in the consolidated financial statements.

31 December 2020
Carrying Fair
amounts values
Cash and cash equivalents (Note 8) 6,153 6,153
Deposits (Note 8) 658 658
Restricted cash 123 123
Trade and other receivables 5,340 5,340
Other current financial assets 907 907
Other non-current financial assets 1,859 1,827
Total financial assets 15,040 15,008

Trade and other payables (Note 19) (9,126) (9,126)

Other current financial liabilities (Note 25A) (575) (575)
Put option liabilities (Note 25B) (2,728) (2,728)
Short-term and current portion of long-term borrowings (Note 20) (5,910) (5,910)
Long-term borrowings (Note 20) (11,219) (11,516)
Current portion of deferred acquisition consideration payable (212) (212)
Non-current portion of deferred acquisition consideration payable (574) (584)
Other non-current liabilities (881) (815)
Total financial liabilities (31,225) (31,466)

31 December 2019
Carrying Fair
amounts values
Cash and cash equivalents (Note 8) 7,084 7,084
Deposits (Note 8) 106 106
Restricted cash 150 150
Trade and other receivables 7,292 7,292
Other current financial assets 755 755
Other non-current financial assets 1,421 1,387
Total financial assets 16,808 16,774

Trade and other payables (Note 19) (10,600) (10,600)

Other current financial liabilities (Note 25A) (305) (305)
Put option liabilities (Note 25B) (2,737) (2,737)
Short-term and current portion of long-term borrowings (Note 20) (4,687) (4,687)
Long-term borrowings (Note 20) (11,369) (11,602)
Current portion of deferred acquisition consideration payable (157) (157)
Non-current portion of deferred acquisition consideration payable (570) (562)
Other non-current liabilities (737) (654)
Total financial liabilities (31,162) (31,304)

51
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

6. Financial risk management (continued)

Fair value of financial instruments (continued)

The following methods and assumptions were used to estimate the fair values:
(i) Fair value of current financial assets and liabilities approximate their carrying amounts largely due to the
short maturities of these instruments;
(ii) Long-term fixed-rate and variable-rate receivables/borrowings are evaluated by the Group using Level 3
inputs based on parameters such as interest rates, specific country risk factors, individual
creditworthiness of customers and the risk characteristics of the financed project.
(iii) The Group enters into derivative financial instruments with various counterparties, principally financial
institutions with investment grade credit ratings. Futures, swaps and commodity forward contracts are
valued using valuation techniques, which employ the use of market observable inputs. The most
frequently applied valuation techniques include forward pricing and swap models using present value
calculations. The models incorporate various inputs including the credit quality of counterparties, interest
rate curves and forward rate curves of the underlying commodity. Some derivative contracts are fully
cash collateralised, thereby eliminating both counterparty risk and the Group’s own non-performance
risk.

Fair value hierarchy

The following table provides the fair value measurement hierarchy of the Group’s assets and liabilities as at
31 December 2020:

Quoted prices Significant Significant

in active observable unobservable
markets inputs inputs
Total (Level 1) (Level 2) (Level 3)
Assets measured at fair value
Other current financial assets at FVPL 468 − 458 10
Other current financial assets at FVOCI 67 67 − −
Trade receivables at FVOCI 256 − 256 −
Other non-current financial assets at FVPL 1,050 − 194 856
Liabilities measured at fair value
Other current financial liabilities at FVPL (536) (150) (370) (16)
Other non-current financial liabilities at FVPL (178) − (167) (11)
Assets for which fair value are disclosed
Deposits 658 − 658 −
Trade and other receivables 5,084 − − 5,084
Other current financial assets 372 − − 372
Other non-current financial assets 777 − − 777
Liabilities for which fair values are
disclosed
Trade and other payables (9,126) − − (9,126)
Other current financial liabilities (39) − − (39)
Put option liabilities (2,728) − − (2,728)
Short-term and current portion of long-term
borrowings (5,910) − − (5,910)
Long-term borrowings (11,516) (3,338) − (8,178)
Deferred acquisition consideration payable (796) − − (796)
Other non-current financial liabilities (637) − − (637)

52
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

6. Financial risk management (continued)

Fair value hierarchy (continued)

The following table provides the fair value measurement hierarchy of the Group’s assets and liabilities as at
31 December 2019:

Quoted prices Significant Significant

in active observable unobservable
markets inputs inputs
Total (Level 1) (Level 2) (Level 3)
Assets measured at fair value
Other current financial assets at FVPL 372 23 337 12
Other current financial assets at FVOCI 81 81 − −
Trade receivables at FVOCI 1,072 − 1,072 −
Other non-current financial assets at FVPL 809 − 89 720
Liabilities measured at fair value
Other current financial liabilities at FVPL (301) (36) (265) −
Other non-current financial liabilities at FVPL (34) (2) (32) −
Assets for which fair value are disclosed
Deposits 106 − 106 −
Trade and other receivables 6,220 − − 6,220
Other current financial assets 302 − − 302
Other non-current financial assets 578 − − 578
Liabilities for which fair values are
disclosed
Trade and other payables (10,600) − − (10,600)
Other current financial liabilities (4) − − (4)
Short-term and current portion of long-term
borrowings (4,687) − − (4,687)
Long-term borrowings (11,602) (3,572) − (8,030)
Deferred acquisition consideration payable (719) − − (719)
Other non-current financial liabilities (620) − − (620)
Put option liabilities (2,737) − − (2,737)

The following tables show a reconciliation of the opening and closing amount of Level 3 financial assets and
liabilities which are recorded at fair value:
Other Other
current non-current
assets financial assets
at FVPL at FVPL
At 1 January 2019 − 581
Purchases 12 93
Remeasurement recognized in PL (Note 31) − 117
Translation to presentation currency − (71)
At 1 January 2020 12 720
Purchases − 13
Settlements (2) (10)
Remeasurement recognized in PL (Note 31) − 273
Translation to presentation currency − (140)
At 31 December 2020 10 856

53
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

6. Financial risk management (continued)

Fair value hierarchy (continued)

Other
Other non-current
current financial
liabilities liabilities
at FVPL at FVPL
At 1 January 2019 − −
Purchases − −
At 1 January 2020 − −
Purchases (16) (11)
At 31 December 2020 (16) (11)

The following table shows the impact on the fair value of level 3 instruments of using reasonably possible
alternative assumptions as at 31 December 2020:

Significant
Carrying Valuation unobservable Sensitivity of
value technique inputs Range the input to fair value
Equity investment 784 Discounted Discount From 10.7% 1% variation in cost of equity
in TANAP dividend rate to 12.7% would result in an
model increase/decrease in fair value
by AZN + 94/- 99
Investment 59 Discounted Discount From 10.4% 2% variation in cost of equity
in preferred shares dividend rate to 15% would result in an
model increase/decrease in fair value
by AZN + 2/- 2

The following table shows the impact on the fair value of level 3 instruments of using reasonably possible
alternative assumptions as at 31 December 2019:

Significant
Carrying Valuation unobservable Sensitivity of
value technique inputs Range the input to fair value
Equity investment 651 Discounted Discount rate From 12.06% 1% variation in cost of equity
in TANAP dividend to 14.06% would result in an
model increase/decrease in fair value
by AZN + 63/- 65
Investment 69 Discounted Discount From 10.7% 2% variation in cost of equity
in preferred shares dividend rate to 14.7% would result in an
model increase/decrease in fair value
by AZN +2/- 2

Financial assets classified under IFRS 9 as of 31 December 2020 were as follows:

Amortized cost FVOCI FVPL

Cash and cash equivalents 6,153 − −
Restricted cash 123 − −
Deposits 658 − −
Trade and other receivables 5,084 256 −
Other current financial assets 372 67 468
Other long-term financial assets 809 − 1,050
Total financial assets after ECL 13,199 323 1,518

54
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

6. Financial risk management (continued)

Fair value hierarchy (continued)

Financial assets classified under IFRS 9 as of 31 December 2019 were as follows:

Amortized cost FVOCI FVPL

Cash and cash equivalents 7,084 − −
Restricted cash 150 − −
Deposits 106 − −
Trade and other receivables 6,220 1,072 −
Other current financial assets 302 81 372
Other long-term financial assets 612 − 809
Total financial assets after ECL 14,474 1,153 1,181

7. Balances and transactions with related parties

Key management compensation

Key management of the Group includes the President of SOCAR and its twelve Vice-Presidents. All of the
Group’s key management are appointed by the President of the Azerbaijan Republic. Key management
individuals are entitled to salaries and benefits of SOCAR in accordance with the approved payroll matrix as
well as to compensation for serving as members of the Boards of directors for certain Group companies. During
2020, compensation of key management personnel totalled to AZN 1.376 (2019: AZN 1.404).

The nature of the related party relationships for those related parties with whom the Group entered into
significant transactions or had significant balances outstanding are detailed below.

Significant balances and transactions with related parties

At 31 December 2020, the outstanding balances with related parties were as follows:

Government and
entities under
government Associates,
Note control joint ventures
Trade and other financial receivables 172 2,189
ECL (34) (6)
Total financial receivables 138 2,183
Cash and cash equivalents 1,932 −
Deposits 121 −
Restricted cash 83 −
Other current financial assets − 6
Total current assets 2,274 2,189
Other non-current financial assets − 615
Total assets 2,274 2,804
Trade and other payables to SOFAZ 2,566 −
Trade and other payables 438 763
Total financial payables 3,004 763
Advances received for the sale of interest in PSA 35 − 4,308
Lease liabilities 236 −
Long-term payables to SGC − 91
Deferred consideration payable to SGC 26 − 574
Deferred consideration payable for Methanol Plant 74 −
Other provisions for liabilities and charges, current 41 −
Total liabilities (excluding borrowings) 3,355 5,736
55
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

7. Balances and transactions with related parties (continued)

Significant balances and transactions with related parties (continued)

As at 31 December 2020, borrowings balances with related parties were as follows:

Bank name Interest rate Maturity date 2020

International Bank of Azerbaijan 4%-4.8% 21 July 2022 −
23 August 2026 559
Ministry of Finance of Azerbaijan Republic 0.1%-3.8% 12 January 2024 −
1 April 2039 354
Total borrowings 913

As at 31 December 2020, outstanding bonds payable balances with related parties were as follows:

Bond holder Coupon rate Maturity date 2020

Azerbaijan Investment Company 4% 30 December 2027 175
SOFAZ LIBOR + 1% 1 December 2024 240
SOFAZ LIBOR + 1.335% 30 December 2027 258
SOFAZ LIBOR + 4% 31 December 2029 821
SOFAZ 3.80% 1 September 2028 865
SOFAZ 3.80% 1 November 2029 341
SOFAZ 4.60% 31 December 2029 435
Total bonds payable 3,135

The transactions with related parties for the year ended 31 December 2020 were as follows:

Government and
entities under
government Associates,
control joint ventures
Sales of natural gas 594 681
Sales of oil products 249 82
Sales of crude oil − 5,552
Service rendered 1 92
Interest income on loan receivables from related parties − 53
Finance cost on loans from related parties (171) −
Utilities costs (65) (4)
Other operating expenses (66) (5)
Other operating income − 5
Social expenses (58) −
Transportation expenses (90) (436)
Security expenses (22) −
Purchases of PPE and inventory (6,685) (3,854)
Dividends received from joint ventures − 40
Dividends received from associates − 135

56
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

7. Balances and transactions with related parties (continued)

Significant balances and transactions with related parties (continued)

At 31 December 2019, the outstanding balances with related parties were as follows:

Government and
entities under
government Associates,
Note control joint ventures
Trade and other financial receivables 156 1,987
ECL (44) (12)
Total financial receivables 112 1,975
Cash and cash equivalents 2,677 −
Deposits 7 −
Restricted cash 82 −
Other current financial assets − 63
Total current assets 2,878 2,038
Other non-current financial assets − 542
Total assets 2,878 2,580

Trade and other payables to SOFAZ 2,645 −

Trade and other payables 516 931
Total financial payables 3,161 931
Advances received for the sale of interest in PSA 35 − 4,313
Lease liabilities 264 −
Long-term payables to SGC − 103
Deferred consideration payable to SGC 26 − 570
Deferred consideration payable for Methanol Plant 67 −
Other provisions for liabilities and charges, current 22 −
Total liabilities (excluding borrowings) 3,514 5,917

As at 31 December 2019, borrowings balances with related parties were as follows:

Bank name Interest rate Maturity date 2019

International Bank of Azerbaijan 4%-4.8% 21 July 2022 −
23 August 2026 627
Ministry of Finance of Azerbaijan Republic 1.5%-3% 30 June 2023 −
1 April 2039 271
Total borrowings 898

As at 31 December 2019, outstanding bonds payable balances with related parties were as follows:

Bond holder Coupon rate Maturity date 2019

Azerbaijan Investment Company 4% 30 December 2027 169
SOFAZ LIBOR + 1% 1 December 2024 301
SOFAZ LIBOR + 1.335% 30 December 2027 272
SOFAZ LIBOR + 4% 31 December 2029 786
SOFAZ 3.80% 1 September 2028 969
SOFAZ 4.60% 31 December 2029 414
Total bonds payable 2,911

57
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

7. Balances and transactions with related parties (continued)

Significant balances and transactions with related parties (continued)

The transactions with related parties for the year ended 31 December 2019 were as follows:

Government and
entities under
government Associates,
control joint ventures
Sales of natural gas 602 390
Sales of oil products 378 31
Sales of crude oil − 6,351
Service rendered 1 87
Interest income on loan receivables from related parties − 34
Finance cost on loans from related parties (98) −
Utilities costs (70) (5)
Other operating expenses (39) (6)
Other operating income 27 −
Social expenses (54) −
Transportation expenses (183) (339)
Security expenses (16) −
Purchases of PPE and inventory (14,952) (5,626)
Dividends received from joint ventures − 31
Dividends received from associates − 117

Terms and conditions of transactions with related parties

Main sales to and purchases from the Government and entities under government control are made at prices
regulated by the Azerbaijani Government. Outstanding balances at the year-end are unsecured and settlement
occurs in cash.

8. Cash and cash equivalents and short-term deposits

2020 2019
USD denominated bank balances 4,157 5,646
AZN denominated bank balances 933 827
TRY denominated bank balances 369 287
EUR denominated bank balances 270 151
CHF denominated bank balances 78 100
Other currencies’ denominated bank balances 67 75
Cash in transit 313 −
Cash on hand 10 11
ECL (44) (13)
Total cash and cash equivalents 6,153 7,084

At 31 December 2020, USD denominated bank balance included AZN 29 in one of the local banks license of
which was revoked by Central Bank of Azerbaijan due to failed capital adequacy test. Accordingly, the Group
recognized 100 per cent ECL on mentioned bank balance.

Deposits

At 31 December 2020, term deposits included placements in the total amount of AZN 665 with maturity of
one year, under fixed contractual interest rates ranging from 0.5 per cent to 3 per cent per annum.

At 31 December 2019, term deposits included placements in the total amount of AZN 107 with maturity of
one year, under fixed contractual interest rates ranging from 1 per cent to 3 per cent per annum.

At 31 December 2020, the Group recognized ECL on deposits in the amount of AZN 7 (31 December 2019:
AZN 1).
58
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

9. Restricted cash

At 31 December 2020, restricted cash was mainly represented by two blocked accounts. The Group had
blocked amount of AZN 63 (USD 37 million) in Deutsche Bank (31 December 2019: AZN 63) as a guarantee
of minimum return payments payable to Goldman Sachs International (“GSI”) according to the Put Option
Agreement in relation to 13 per cent shares of STEAS (Note 25B). At 31 December 2020, the Group had
blocked amount of AZN 40 in International Bank of Azerbaijan (31 December 2019: AZN 45) as an irrevocable
letter of credits for the foreign purchases related to modernization of Azerikimya plant. In addition, the Group
had VAT deposit account in the amount of AZN 43 (31 December 2019: AZN 37) for the operations associated
with receipt and payment of VAT to state budget.

At 31 December 2020, restricted cash balance included AZN 38 in one of the local banks license of which was
revoked by Central Bank of Azerbaijan due to failed capital adequacy test. Accordingly, the Group recognized
100 per cent ECL on mentioned bank balance.

10. Trade and other receivables

2020 2019
Trade receivables 5,613 7,714
Other receivables 405 226
Less: ECL (678) (648)
Total financial receivables 5,340 7,292
VAT recoverable 1,025 922
Prepayments 731 357
Taxes receivable 162 113
Underlift oil balance 114 181
Other 105 54
Total trade and other receivables 7,477 8,919

Trade receivables are mainly represented by receivables from sales of crude oil, oil products and natural gas
sold to customers of the Group.

At 31 December 2020, financial receivables of AZN 4,440 (31 December 2019: AZN 7,363) were denominated
in foreign currencies, mainly in USD.

VAT recoverable relates to purchases, which have not been settled at the reporting date. VAT recoverable is
reclaimable against VAT on sales upon payment for the purchases.

Set out below is the movement in the allowance for ECL of trade receivables:

2020 2019
At 1 January 648 766
ECL 29 51
Write-off (1) (160)
Currency translation difference 2 (9)
At 31 December 678 648

59
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

11. Inventories

2020 2019
Goods in transit 678 231
Raw materials and spare parts 665 704
Crude oil 662 351
Finished goods 583 598
Work in progress 126 128
Other 69 55
Total inventories 2,783 2,067

As at 31 December 2020 and 2019, all inventory balances were measured at cost.

During 2020, AZN 40,050 (2019: AZN 73,971) was recognised as an expense for inventories. This is
recognised in cost of sales (Note 30).

12. Other current assets and other current financial assets

Other current assets

Contract assets

At 31 December 2020, other current non-financial assets mainly comprised of contract assets in the amount
of AZN 63 (31 December 2019: AZN 28), which were represented by transportation and demurrage services.

Vessels held for sale

According to sale and purchase agreement subject to certain conditions and dated on 21 December 2020,
the Group agreed to sell its vessel for the total consideration of AZN 45 (USD 26 million). At 31 December
2020, mentioned vessels were classified as disposal group held for sale. Disposal group was recognized at
the lower of carrying value and fair value less cost to sell as at 31 December 2020 and impairment loss from
re-measurement to fair value was charged to profit or loss.

Note
Carrying value of vessels 90
Fair value of disposal group 45
Impairment loss 30 45

Other current financial assets

At 31 December 2020 and 2019, other current financial assets mainly comprised derivative instruments and
equity investments at FVOCI.

At 31 December 2020, the Group had balances related to margin deposits and financial derivatives in
the amount of AZN 785 (31 December 2019: AZN 548).

At 31 December 2020, the Group had equity investments at FVOCI in the amount of AZN 67 (31 December
2019: AZN 81).

At 31 December 2019, loan from third party was AZN 63. The Group had no such balance as at 31 December
2020.

60
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

13. Other non-current assets

At 31 December 2020, other non-current assets were mainly represented by long-term prepayments
for purchase of property, plant and equipment in the amount of AZN 468 (31 December 2019: AZN 731),
non-current VAT receivable in the amount of AZN 88 (31 December 2019: AZN 99), net defined benefit assets
in the amount of AZN 14 (31 December 2019: AZN 24), long-term prepaid expenses in the amount of AZN 6
(31 December 2019: AZN 13).

14. Other non-current financial assets

At 31 December 2020 and 2019, other non-current financial assets mainly comprised loan receivables from
related parties, loan receivables from third parties, equity investment at FVPL, long-term deposits and
derivative instruments.

At 31 December 2020, the Group held 7 per cent equity interest in TANAP Doğalgaz İletim A.Ş (TANAP) fair
value of which was AZN 784 (31 December 2019: AZN 651). Additionally, the Group had loan receivable from
TANAP in the amount of AZN 429 as at 31 December 2020 (31 December 2019: AZN 448).

At 31 December 2020, the Group’s loan receivable from its associates and joint operations was equal to
AZN 186 (31 December 2019: AZN 94).

At 31 December 2020, the Group had long-term deposits placed in local banks in the amount of AZN 179
(31 December 2019: AZN 74).

The Group has entered into a series of commodity swaps, futures, forward contracts and foreign exchange
futures to mitigate price and foreign exchange risks. At 31 December 2020, the Group had derivative
instruments fair value of which was equal to AZN 204 (31 December 2019: AZN 86). The fair value was
determined based on the difference between the market value and contracted fixed value of buy and sell
contracts.

61
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

15. Property, plant and equipment

Movements in the carrying amount of property, plant and equipment (“PPE”) were as follows:

Oil & gas

Buildings and properties and Plant and Vessels and Development Construction
constructions equipment machinery port facilities costs in progress Other Total
Cost
At 1 January 2019 3,695 27,014 4,418 1,011 − 4,370 1,640 42,148
Additions 21 1,912 1,286 − 276 1,797 69 5,361
Acquisition through business
combination (Note 39) 20 178 4 − − 11 3 216
Disposals (22) (27) (44) − − (16) (9) (118)
Transfers from PPE to ROU (20) − (3) − − − − (23)
Transfers 203 775 834 − − (1,848) 36 −
Translation to presentation currency (41) (36) (126) 17 − (83) (77) (346)
At 31 December 2019 3,856 29,816 6,369 1,028 276 4,231 1,662 47,238
Additions 60 1,600 68 20 450 1,925 104 4,227
Disposals (8) (35) (58) (201) − (180) (17) (499)
Transfers (532) 724 1,987 3 − (2,654) 472 −
Translation to presentation currency (77) (122) (209) 22 − (126) (149) (661)
At 31 December 2020 3,299 31,983 8,157 872 726 3,196 2,072 50,305

Depreciation and impairment

At 1 January 2019 (1,369) (9,181) (2,011) (101) − (427) (800) (13,889)
Depreciation charge for the year (134) (1,073) (348) (50) − − (61) (1,666)
Disposal 7 26 33 − − − 7 73
Impairment (2) (283) − − − − (1) (286)
Transfers (2) 2 − − − − − −
Translation to presentation currency 2 10 60 − − − 6 78
At 31 December 2019 (1,498) (10,499) (2,266) (151) − (427) (849) (15,690)
Depreciation charge for the year (152) (1,318) (390) (50) − − (77) (1,987)
Disposal 4 27 47 81 − − 8 167
Impairment (Note 3,15) (219) (126) (1,036) (54) − (135) (32) (1,602)
Transfers 52 − (52) − − − − −
Translation to presentation currency 10 21 105 − − − 15 151
At 31 December 2020 (1,803) (11,895) (3,592) (174) − (562) (935) (18,961)

Net book value

At 1 January 2019 2,326 17,833 2,407 910 − 3,943 840 28,259

At 31 December 2019 2,358 19,317 4,103 877 276 3,804 813 31,548

At 31 December 2020 1,496 20,088 4,565 698 726 2,634 1,137 31,344
62
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

15. Property, plant and equipment (continued)

The Group capitalized finance costs in the amount of AZN 121 as of 31 December 2020, which were
attributable to the construction of assets (31 December 2019: AZN 165), out of which AZN 110 was paid during
the year (2019: AZN 111).

During 2020, the Group acquired assets in the amount of AZN 4,227 (2019: AZN 5,361).

16. Intangible assets other than goodwill

Movements in the carrying amount of intangible assets, other than goodwill were as follows:

Land and Licence and Other

property Water Trade Customer concession intangible
rights rights name relationship rights assets Total
Cost
At 1 January 2019 127 122 32 302 105 299 987
Additions − − − − 1 51 52
Acquisitions through business
combinations (Note 39) − − − − 447 7 454
Transfers to Right-of-use asset (21) − − − − − (21)
Disposal − − − − − (57) (57)
Translation to presentation currency (18) (13) (3) (4) (5) (1) (44)
At 31 December 2019 88 109 29 298 548 299 1,371

Additions − − − − 1 77 78
Disposal − − − − − (15) (15)
Translation to presentation currency (17) (21) (3) 14 (86) (10) (123)
At 31 December 2020 71 88 26 312 463 351 1,311

Amortization and impairment

At 1 January 2019 (35) (29) (2) (99) − (108) (273)
Amortization charge for the year
(Note 30) (2) (2) (2) (13) (17) (25) (61)
Translation to presentation currency 11 3 − 2 1 1 18
At 31 December 2019 (26) (28) (4) (110) (16) (132) (316)

Amortization charge for the year

(Note 30) (2) (2) (1) (14) (27) (29) (75)
Disposal − − − − − 3 3
Translation to presentation currency 5 5 − (4) 5 3 14
At 31 December 2020 (23) (25) (5) (128) (38) (155) (374)

Net book value

At 1 January 2019 92 93 30 203 105 191 714

At 31 December 2019 62 81 25 188 532 167 1,055

At 31 December 2020 48 63 21 184 425 196 937

At 31 December 2020, carrying value of intangible assets included licence of “Umid Babek Exploration and
Production Company” (“UBEP”) in the amount of AZN 105 (31 December 2019: AZN 105) and trade name of
Petkim in the amount of AZN 17 (31 December 2019: AZN 21) acquired through business combination in
August 2017 and May 2008, respectively. These intangible assets have indefinite useful life and were tested
for impairment as part of recoverability analysis of related CGUs. Additionally, carrying value of intangible
assets included concession rights of EWE Holding in the amount of AZN 320 (31 December 2019: AZN 427)
acquired through business combination on 17 June 2019 and amortised over the remaining useful lives of
15 years commencing from the date of the acquisition (Note 39).

During 2020, total amortization expense amounting to AZN 75 (2019: AZN 61) have been allocated to general
and administrative expenses by AZN 27 (2019: AZN 25), cost of sales by AZN 41 (2019: AZN 31) and to
marketing, selling and distribution expenses by AZN 7 (2019: AZN 5).

63
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

16. Intangible assets other than goodwill (continued)

Rights and computer software

Software is carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line
method over the estimated useful lives of such assets. Land property rights comprise the rights over the
general infrastructure. Land property rights obtained at the acquisition of Petkim Petrokimya Holding A.Ş.
(“Petkim”) were initially recognized at their fair values in accordance with IFRS 3 as at 30 May 2008 and
amortised over their remaining useful lives commencing from the date of acquisition, except for the water
transmission line which is not amortised as it is deemed to have an indefinite useful life.

Customer relationships

Customer relationships acquired as part of net assets of Petkim were initially recognized at their fair values in
accordance with IFRS 3 as at 30 May 2008 and amortised over their remaining useful lives of 22 years
commencing from the date of the acquisition.

Customer relationships acquired as part of net assets of SOCAR Energy Holdings AG were initially recognized
at their fair values in accordance with IFRS 3 as at 30 June 2012 and amortised over their remaining useful
lives commencing from the date of acquisition. The estimated useful life of retail card customers is 18 years,
retail distribution network and fuel customers are 30 years.

Petkim trade name

Petkim trade name acquired at the Petkim acquisition was initially recognized at its fair value in accordance
with IFRS 3 as at 30 May 2008. Petkim trade name is not amortised as it is deemed to have an indefinite useful
life.

Water rights

Water rights acquired with the Petkim acquisition were initially recognized at their fair value in accordance with
IFRS 3 as at 30 May 2008 and amortised over their remaining useful lives of 47 years commencing from the
date of the acquisition.

17. Investments in joint ventures

The table below summarizes movements in the carrying amount of the Group’s investment in joint ventures:

Note 2020 2019

Carrying amount at 1 January 5,398 5,301
Additions to investments in joint ventures 22 103
Share of after-tax results of joint ventures (411) 14
Dividends received from joint ventures (45) (28)
Derecognition of joint ventures − (15)
Impairment of investments in joint ventures 30 (7) −
Exchange differences (17) 20
Other 2 3
Carrying amount at 31 December 4,942 5,398

64
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

17. Investments in joint ventures (continued)

At 31 December 2020, the summarized financial information of the Group’s principal joint ventures, based on
their IFRS financial statements, and reconciliation with the carrying amount of the investment in consolidated
financial statements was as follows:

Azeri MI
Azgerneft Drilling SOCAR Azerbaijan SOCAR
LLC AZFEN Fluids AQS Rigs CAPE STYAS
Country of incorporation Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Turkey
Current assets 63 230 95 440 114 48 1,902
including cash and cash equivalents 2 46 4 52 98 7 416
Non-current assets 70 37 18 291 905 10 13,512
Current liabilities (58) (201) (57) (267) (5) (17) (3,765)
including current financial liabilities
(except trade and other payables
and provisions) − (52) (2) (98) (5) − (1,600)
Non-current liabilities − − (6) (122) (19) − (4,253)
including non-current financial
liabilities (except other payables
and provisions) − − (6) (6) (19) − (4,251)
Net assets 75 66 50 342 995 41 7,396
Proportion of the Group’s ownership 40% 60% 51% 13.4% 10% 51% 60%
Interest in the net assets 30 40 26 46 100 21 4,438
Adjustments 3 (1) 1 − (1) − 206*
Carrying value 33 39 27 46 99 21 4,644

Dividends received (7) (18) − − − (14) −

* The adjustment includes additional contributions in share capital of Group’s joint ventures, which is represented by inception-to-
date commission paid on letter of credit in the amount of AZN 191. Remaining amount of AZN 15 represents over-financing by
the Group since the other shareholder did not make capital injections in line with its proportionate shareholding interest.

Azeri MI
Azgerneft Drilling SOCAR Azerbaijan SOCAR
LLC AZFEN Fluids AQS Rigs CAPE STYAS
Revenue 33 364 172 278 91 94 5,866
Cost of sales (27) (347) (148) (254) (33) (72) (6,135)
including depreciation (7) (7) (3) (20) (33) (4) (339)
General and administrative
expenses − (12) (4) (13) (8) (5) (95)
Other income − 1 − 24 − − 8
Other expense − (15) (1) − − − (122)
Forex gain/(loss) − 4 − (11) − − (95)
Interest revenue calculated using
effective interest method − − − − − − 26
Finance costs − − − (7) − − (467)
Profit/(loss) before tax 6 (5) 19 17 50 17 (1,014)
Income tax (expense)/benefit (2) (8) (2) (12) (10) (3) 304
Profit/(loss) for the year 4 (13) 17 5 40 14 (710)
Group’s share of profit/(loss)
for the year 2 (8) 9 1 4 7 (426)

65
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

17. Investments in joint ventures (continued)

At 31 December 2020, the Group’s interests in other joint ventures that are not significant both individually and
in aggregate and their summarised aggregate financial information, including total assets, liabilities, revenues
and profit or loss, were as follows:

Non- Non- Country of

Current current Current current Profit/ Interest incorpo-
Name assets assets liabilities liabilities Revenue (loss) held ration
Oil and Gas ProServ LLC 22 − (9) (4) 3 1 55% Azerbaijan
SOCAR STP LLC 9 1 (9) (1) 4 (3) 50% Azerbaijan
Sarmatia LLC − − (1) − − − 27% Poland
SOCAR Baglan LLC 1 14 (13) (6) − − 51% Azerbaijan
SOCAR Foster Wheeler
Engineering 5 1 (3) − 10 − 65% Azerbaijan
SOCAR KBR 92 − (77) − 195 9 51% Azerbaijan
SOCAR Dalgic LLC 13 8 (3) (14) 15 2 51% Azerbaijan
AAS-Ekol 4 1 (1) − 8 2 48% Azerbaijan
SOCAR Uniper 19 65 (24) (32) 39 1 51% Azerbaijan
SOCAR Fugro 15 − (6) − 22 2 51% Azerbaijan
SOCAR Construction 1 8 (1) − 1 − 97% Azerbaijan
SOCAR KCM Adi Ortaklığı 12 − (12) − 98 7 10% Turkey
SOCAR Petrofac 11 1 (12) (3) 21 (2) 51% Azerbaijan
Caspian Geo 50 31 (64) − 128 9 51% Azerbaijan
SOCAR-Nefteqazstroy LLC 2 − − − 4 − 25% Azerbaijan
Caspian Shipyard Company − − − − − − 20% Azerbaijan
AGRI LNG PROJECT
COMPANY − − − − − − 33% Romania
Neftegaztexnologiya LLC − − − − − − 50% Uzbekistan
Total 256 130 (235) (60) 548 28

At 31 December 2019, the summarized financial information of the Group’s principal joint ventures, based on
their IFRS financial statements, and reconciliation with the carrying amount of the investment in consolidated
financial statements was as follows:

Azeri MI
Azgerneft Drilling SOCAR Azerbaijan SOCAR
LLC AZFEN Fluids AQS Rigs CAPE STYAS
Country of incorporation Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan Turkey
Current assets 68 163 99 499 84 59 2,195
including cash and cash equivalents 9 43 − − 69 21 359
Non-current assets 65 23 22 229 939 11 13,547
Current liabilities (43) (77) (80) (324) (9) (17) (2,948)
including current financial liabilities
(except trade and other payables
and provisions) − (30) − (87) − − (575)
Non-current liabilities − − (8) (68) (19) − (4,666)
including non-current financial
liabilities (except other payables
and provisions) − − (8) (35) − − (4,664)
Net assets 90 109 33 336 995 53 8,128
Proportion of the Group’s ownership 40% 60% 51% 13.4% 10% 51% 60%
Interest in the net assets 36 65 17 45 100 27 4,877
Adjustments 3 − 1 − (1) 1 183*
Carrying value 39 65 18 45 99 28 5,060

Dividends received (9) (13) − − (2) − −

* The adjustment includes additional contributions in share capital of Group’s joint ventures, which is represented by inception-to-
date commission paid on letter of credit in the amount of AZN 163. Remaining amount of AZN 20 represents over-financing by the
Group since the other shareholder did not make capital injections in line with its proportionate shareholding interest.

66
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

17. Investments in joint ventures (continued)

Azeri MI
Azgerneft Drilling SOCAR Azerbaijan SOCAR
LLC AZFEN Fluids AQS Rigs CAPE STYAS
Revenue 60 206 166 275 98 95 −
Cost of sales (28) (187) (139) (207) (34) (57) −
including depreciation (6) (10) (3) (22) (33) − −
General and administrative
expenses − (7) (3) (19) − (5) (61)
Other income − − − 11 − − 10
Other expense − (1) (9) (2) (81) − (70)
Forex gain/(loss) − (1) − 1 − − (45)
Interest revenue calculated using
effective interest method − − − − − − 30
Finance costs − − (1) (4) − − (70)
Profit/(loss) before tax 32 10 14 55 (17) 33 (206)
Income tax (expense)/benefit (7) (4) (3) (14) (9) (4) 152
Profit/(loss) for the year 25 6 11 41 (26) 29 (54)
Group’s share of profit/(loss)
for the year 10 4 6 5 (3) 15 (32)

At 31 December 2019, the Group’s interests in other joint ventures that are not significant both individually and
in aggregate and their summarised aggregate financial information, including total assets, liabilities, revenues
and profit or loss, were as follows:

Non- Non- Country of

Current current Current current Profit/ Interest incorpo-
Name assets assets liabilities liabilities Revenue (loss) held ration
Oil and Gas ProServ LLC 19 − (7) (3) 4 1 30% Azerbaijan
Sarmatia LLC 1 − (1) − − − 27% Poland
SOCAR Baglan LLC 1 14 (13) (6) − − 51% Azerbaijan
SOCAR Foster Wheeler
Engineering 4 − (2) − 17 1 65% Azerbaijan
SOCAR KBR 87 − (74) − 186 11 51% Azerbaijan
SOCAR Dalgic LLC 10 10 (2) (15) 17 2 51% Azerbaijan
AAS-Ekol 3 − (1) − 8 2 48% Azerbaijan
SOCAR Uniper 15 64 (42) (11) 42 5 51% Azerbaijan
SOCAR Fugro 15 − (8) − 16 − 51% Azerbaijan
SOCAR Construction 1 8 (1) − − (1) 97% Azerbaijan
Caspian Innovation Center 20 − (16) − 27 3 90% Azerbaijan
SOCAR Petrofac − − (2) − 1 (2) 51% Azerbaijan
Caspian Geo 33 − (25) − 39 8 51% Azerbaijan
SOCAR-Nefteqazstroy LLC 2 − − − 2 1 25% Azerbaijan
Caspian Shipyard Company − − − − − (1) 20% Azerbaijan
AGRI LNG PROJECT
COMPANY − − − − − − 33% Romania
Neftegaztexnologiya LLC − − − − − − 50% Uzbekistan
Total 211 96 (194) (35) 359 30

During 2019, the Group has made additional contributions in share capital of its joint venture, SOCAR Turkey
Yatırım A.Ş. (“STYAS”) in the amount AZN 76. No significant capital contributions have been made during
2020.

In 2015, the Group signed letters of credit agreements in relation to the construction of Star Refinery complex
(subsidiary of STYAS). Commission and interest expenses paid by the Group in 2020 in total amount of AZN 28
(2019: AZN 27) were recognized as additional investment in STYAS. Contingent liabilities and commitments
of joint ventures are described in Note 38.

Accounting for investments with the ownership interest of more than 50 per cent or less than 20 per cent as
joint ventures is based on the fact that decisions about the relevant activities require the unanimous consent
of the parties sharing control.
67
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

18. Investments in associates

The table below summarizes movements in the carrying amount of the Group’s investment in associates.

2020 2019
Carrying amount at 1 January 4,208 4,359
Additions to investments in associates − −
Share of after-tax results of associates 100 (5)
Dividends received from associates (141) (126)
Exchange differences 23 (3)
Other (17) (17)
Carrying amount at 31 December 4,173 4,208

At 31 December 2020, the summarized financial information of the Group’s principal associates, based on
their IFRS financial statements, and reconciliation with the carrying amount of the investment in consolidated
financial statements was as follows:

2020 SCPC BTC Co SGC

Country of incorporation Cayman Islands Cayman Islands Azerbaijan
Current assets 413 174 843
Non-current assets 8,357 8,174 20,707
Current liabilities (409) (289) (1,812)
Non-current liabilities (413) (346) (14,251)
Net assets attributable to the Group 7,948 7,713 3,023
Net assets attributable to the NCI − − 2,464
Proportion of the Group’s ownership 10% 25% 49%
Interest in the net assets 795 1,928 1,481
Adjustments − 4 (77)*
Carrying value 795 1,932 1,404
Dividends received (91) (49) −
* At 31 December 2020, the adjustment included the amount of AZN 34 which represents over-financing to SGC by the Group, and
AZN 16 represented the Group’s share in loss on sale of its additional interests in Shah Deniz PSA to SGC in 2014. In addition,
the amount of AZN 127 represented elimination of unrealised gain arisen from sale of SGC’s 7% equity interest in TANAP Doğalgaz
İletim A.Ş in 2018.

2020 SCPC BTC Co SGC

Revenue 1,220 1,147 1,465
Cost of sales (472) (763) (502)
General and administrative expenses − − (347)
Distribution expenses − − (31)
Other expenses − − (15)
Other income − 15 49
Interest revenue calculated using effective
interest method 1 − 64
Finance costs − (37) (672)
Forex loss − − (3)
Share of results of associates − − 29
Profit before tax 749 362 37
Income tax expense (211) − (14)
Profit for the year 538 362 23
Profit attributable to NCI − − 133

Group’s share of profit/(loss) for the year 54 91 (54)

Adjustments (1) 3 −
Total 53 94 (54)
68
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

18. Investments in associates (continued)

At 31 December 2020, the Group’s interests in other associates that are not significant both individually and
in aggregate and their summarised aggregate financial information, including total assets, liabilities, revenues
and profit or loss, were as follows:

Total Total Profit/ Interest Country of

Name assets liabilities Revenue (loss) held incorporation
Caspian Geophysical Company 1 − − − 45% Azerbaijan
AzLab 5 (4) 4 − 50% Azerbaijan
Cross Caspian Oil and
Gas Logistics LLC 3 (2) − − 34% Azerbaijan
Ateshgah Insurance Company 37 (21) 33 4 10% Azerbaijan
Caspian Pipe Coatings LLC 33 (17) 32 4 50% Azerbaijan
Tankanlagen Mellingen AG
(“TAMAG”) 15 (3) − − 33% Switzerland
Tanklager Taegerschen AG (“TLT”) 2 − − − 21% Switzerland
SOGEP AG 6 (6) − − 34% Switzerland
UBAG AG 8 (5) − − 24% Switzerland
SAPPRO SA 23 (22) − − 17% Switzerland
SARACO SA 42 (36) − − 20% Switzerland
Azerbaijan Gas Supply Company 838 (838) 5,585 − 28% Cayman Islands
Electrogas Malta 1,168 (1,419) 368 (49) 33% Malta
Octogone 46 (57) 5 (1) 20% Benin
CI GNL 3 (42) − (2) 26% Ivory Coast
Total 2,230 (2,472) 6,027 (44)

At 31 December 2019, the summarized financial information of the Group’s principal associates, based on
their IFRS financial statements, and reconciliation with the carrying amount of the investment in consolidated
financial statements was as follows:

2019 SCPC BTC Co SGC

Country of incorporation Cayman Islands Cayman Islands Azerbaijan
Current assets 281 171 558
Non-current assets 8,677 8,476 20,955
Current liabilities (256) (773) (552)
Non-current liabilities (381) (328) (15,506)
Net assets attributable to the Group 8,321 7,546 3,124
Net assets attributable to the NCI − − 2,331
Proportion of the Group’s ownership 10% 25% 49%
Interest in the net assets 832 1,887 1,531
Adjustments (1) − (77)*
Carrying value 831 1,887 1,454
Dividends received (69) (53) −
* At 31 December 2019, the adjustment included the amount of AZN 34, which represents over-financing to SGC by the Group and
AZN 16 represented the Group’s share in loss on sale of its additional interests in Shah Deniz PSA to SGC in 2014. In addition,
the amount of AZN 127 represented elimination of unrealised gain arisen from sale of SGC’s 7% equity interest in TANAP Doğalgaz
İletim A.Ş in 2018.

69
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

18. Investments in associates (continued)

2019 SCPC BTC Co SGC

Revenue 997 1,389 769
Cost of sales (426) (873) (420)
General and administrative expenses − − (162)
Distribution expenses − − (9)
Other expenses − − (2)
Other income − 10 41
Interest revenue calculated using effective
interest method 2 − 76
Finance costs − (41) (748)
Forex loss − − (5)
Share of results of associates − − (15)
Profit/(loss) before tax 573 485 (475)
Income tax expense (91) − (2)
Profit/(loss) for the year 482 485 (477)
Loss attributable to NCI − − (121)

Group’s share of profit/(loss) for the year 48 121 (174)

Adjustments (1) − −
Total 47 121 (174)

At 31 December 2019, the Group’s interests in other associates that are not significant both individually and
in aggregate and their summarised aggregate financial information, including total assets, liabilities, revenues
and profit or loss, were as follows:

Total Total Profit/ Interest Country of

Name assets liabilities Revenue (loss) held incorporation
Caspian Geophysical Company 2 (1) 2 1 45% Azerbaijan
AzLab 5 (5) 6 − 50% Azerbaijan
Cross Caspian Oil and Gas
Logistics LLC 3 (2) − − 34% Azerbaijan
Ateshgah Insurance Company 41 (28) 39 1 10% Azerbaijan
Caspian Pipe Coatings LLC 24 (9) 24 2 50% Azerbaijan
Tankanlagen Mellingen AG
(“TAMAG”) 13 (3) − − 33% Switzerland
Tanklager Taegerschen AG (“TLT”) 2 − − − 21% Switzerland
SOGEP AG 6 (5) − − 34% Switzerland
UBAG AG 7 (5) − − 24% Switzerland
SAPPRO SA 21 (20) − − 17% Switzerland
SARACO SA 38 (33) − − 20% Switzerland
Azerbaijan Gas Supply Company 555 (555) 4,809 − 28% Cayman Islands
Electrogas Malta 1,114 (1,279) 352 (48) 33% Malta
Octogone 45 (50) 5 (1) 20% Benin
CI GNL 3 (36) − (5) 26% Ivory Coast
Total 1,879 (2,031) 5,237 (50)

The Group had unrecognized share of losses of associates in the amount of AZN 92 as of 31 December 2020
(31 December 2019: AZN 52). Contingent liabilities and commitments of associates are described in Note 38.

Accounting for investments with the ownership interest of less than 20 per cent as associates is based on the
fact that the Group is represented on the board of directors of the investee, participates in policy-making
processes and due to provision of essential technical information.

70
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

19. Trade and other payables and contract liabilities

2020 2019
Trade payables 5,754 6,144
Accrued liabilities 2,095 3,164
Other payables 1,277 1,292
Total financial payables 9,126 10,600
Payable to employees 335 235
Liabilities for overlift of oil − 6
Total trade and other payables 9,461 10,841

Financial payables in the amount of AZN 8,207 (31 December 2019: AZN 9,606) are denominated in foreign
currencies, mainly in USD. Trade payables mainly represent payables for crude oil, oil products, gas,
construction, drilling, transportation and utilities provided by vendors of the Group.

Accrued liabilities of the Group represent obligations to purchase crude oil and oil products, for which invoices
have not been received yet.

As at 31 December 2020, current portion of liabilities for disability benefit payments in the amount of AZN 20
(31 December 2019: AZN 21) was included in payables to employees (Note 25A).

Contract liabilities

The transaction price allocated to the remaining performance obligations (unsatisfied or partially unsatisfied)
as at 31 December are, as follows:

2020 2019
Within one year 535 525
More than one year 67 75
Total contract liabilities 602 600

Short-term contract liabilities are mainly represented by advances received for construction projects and sale
of goods and services in the amounts of AZN 194 (31 December 2019: AZN 187) and AZN 327 (31 December
2019: AZN 330), respectively.

During 2020, short-term contract liabilities balance increased by AZN 559 due to additions mainly from
construction contracts. Upon satisfaction of performance obligations, AZN 549 of contract liabilities was
released to statement of profit or loss and other comprehensive income and recognized as revenue during
2020.

The remaining performance obligations expected to be satisfied in more than one year relate to the fees
received for gasification works by Bursagaz and Kayserigaz. These liabilities are presented within other
non-current liabilities.

71
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

20. Borrowings

At 31 December 2020, short-term borrowings and current portion of long-term borrowings of the Group were
represented by the following facilities:

Total borrowed Balance as at

Interest in original 31 December
Facilities rate Maturity currency 2020
Short-term facilities in USD 0.44%-18.58% January 2021 −
December 2021 3,073 3,819
Short-term facilities in TRY 7.44%-21.10% January 2021 −
December 2021 2,470 480
Short-term facilities in GEL 11%-14% January 2021 −
December 2021 662 109
Short-term facilities in EUR 2.5%-4.5% January 2021 –
December 2021 74 66
Short-term facilties in other 2%-13% January 2021 −
currencies December 2021 2,221 62
Current portion of long-term
borrowings 1,374
Total short-term borrowings
and current portion of
long-term borrowings 5,910

72
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

20. Borrowings (continued)

At 31 December 2020, long-term borrowings of the Group were represented by the following facilities:

Balance as at 31 December 2020

Facilities Interest rate* Maturity Non-current portion Current portion
USD 750 million 6.95% March 2030 1,217 27
USD 1,000 million 4.75% March 2023 1,087 25
USD 565 million 3.80% September 2028 747 117
USD 500 million 5.88% January 2023 713 21
USD 427 million LIBOR + 2.70% February 2024 598 129
USD 489 million LIBOR + 6.95% June 2025 514 −
USD 300 million LIBOR + 2.50% November 2024 504 4
USD 238 million LIBOR + 4.00% December 2029 458 −
USD 242 million 4.60% December 2029 435 −
USD 193 million LIBOR + 4.00% December 2029 363 −
EUR 251 million EURIBOR + 3.03% January 2027 348 59
USD 200 million 3.80% November 2029 340 1
USD 200 million 5.00% June 2025 340 −
EUR 249 million EURIBOR + 0.95% January 2027 321 58
USD 212 million 4.92% March 2028 302 14
USD 150 million 4.60% December 2024 255 6
USD 200 million LIBOR + 1.335% December 2027 245 14
USD 150 million LIBOR + 2.70% June 2024 212 42
USD 190 million LIBOR + 2.20% November 2023 196 101
USD 485 million LIBOR + 1.00% December 2024 177 64
USD 90 million 4.80% August 2026 153 3
JPY 15,398 million 1.50% April 2039 151 8
TRY 600 million LIBOR + 5.20% June 2027 126 8
USD 110 million 4.80% December 2023 125 63
USD 82 million 0.10% December 2029 109 −
USD 260 million LIBOR + 3.95% December 2024 101 38
USD 78 million 4.00% December 2027 98 77
USD 52 million 4.40% May 2024 89 1
USD 77 million 4.80% December 2023 87 44
USD 68 million LIBOR + 3.00% January 2026 87 10
AZN 144 million 0.16% (0.15% + 0.01%) January 2041 67 6
AZN 460 million 4.00% July 2022 58 69
AZN 350 million 3.00% January 2024 57 28
USD 300 million LIBOR + 3.25% March 2022 54 115
CHF 22 million LIBOR + 0.0714% or 0% July 2022 43 −
USD 65 million LIBOR + 4.95% December 2024 40 17
USD 29 million 4.00% December 2027 36 29
USD 55 million LIBOR + 5.25% September 2024 32 15
USD 100 million LIBOR + 3.25% April 2022 27 57
USD 38 million 4.01% December 2023 23 11
GEL 45 million 14.00% August 2024 21 2
CHF 10 million 3.00% October 2027 19 −
USD 10 million 4.50% June 2023 17 −
EUR 35 million 0.23% November 2023 16 9
USD 8 million 4.26% December 2022 14 15
USD 100 million LIBOR + 3.25% February 2022 13 29
GEL 79 million 13.50% October 2022 13 13
EUR 20 million 1.64% September 2023 13 6
USD 20 million LIBOR + 2.00% April 2023 11 −
GEL 30 million 12.98% June 2023 9 5
USD 5 million 1.68% April 2022 8 −
USD 5 million 1.66% April 2022 8 −
USD 5 million 1.61% April 2022 8 −
USD 5 million 1.59% April 2022 8 −
USD 5 million 1.55% April 2022 8 −
USD 5 million 1.43% April 2022 8 −
USD 5 million 1.52% April 2022 8 −
USD 5 million 1.51% April 2022 8 −
USD 5 million 1.37% May 2022 8 −
USD 5 million 1.38% May 2022 8 −
USD 5 million 4.50% June 2023 7 −
GEL 18 million 13.50% November 2024 6 2
USD 3 million 7.00% August 2022 5 −
AZN 4 million 7.00% August 2022 4 −
GEL 11 million 13.34% September 2023 3 2
GEL 10 million 12.93% November 2022 3 2
EUR 2 million EURIBOR + 2.375% March 2031 3 −
CHF 2 million 0.85% December 2031 2 −
Other long-term borrowings 25 8
Total long-term borrowings 11,219 1,374
(*) LIBOR and EURIBOR vary from 3 to 12 months.
73
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

20. Borrowings (continued)

At 31 December 2019, short-term borrowings and long-term borrowings of the Group were represented by the
following facilities:
Total borrowed Balance as at
Interest in original 31 December
Facilities rate Maturity currency 2019
Short-term facilities in USD 1.95%-17.50% January 2020 −
December 2020 2,392 2,856
Short-term facilities in TRY 8.47%-44.17% January 2020 −
December 2020 1,146 293
Short-term facilities in GEL 11%-14% January 2020 −
December 2020 486 190
Short-term facilities in EUR 2.50%-3.90% January 2020 −
December 2020 99 127
Short-term facilties in other 10.25%-19% January 2020 −
currencies December 2020 612 9
Current portion of long-term
borrowings 1,212
Total short-term borrowings
and current portion of
long-term borrowings 4,687

74
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

20. Borrowings (continued)

At 31 December 2019, long-term borrowings of the Group were represented by the following facilities:

Balance as at 31 December 2019

Facilities Interest rate* Maturity Non-current portion Current portion
USD 750 million 6.95% March 2030 1,235 27
USD 1,000 million 4.75% March 2023 1,204 24
USD 565 million 3.80% September 2028 854 115
USD 500 million 5.88% January 2023 848 21
USD 427 million LIBOR + 2.70% February 2024 716 12
USD 489 million LIBOR + 6.95% June 2025 666 101
USD 238 million LIBOR + 4.00% December 2029 438 −
USD 242 million 4.60% December 2029 414 −
EUR 251 million EURIBOR + 3.03% June 2028 368 54
USD 193 million LIBOR + 4.00% December 2029 346 −
EUR 249 million EURIBOR + 0.95% June 2028 337 53
USD 212 million LIBOR + 4.675% March 2028 317 5
USD 190 million LIBOR + 2.20% November 2023 294 26
USD 200 million LIBOR + 1.335% December 2027 258 14
USD 150 million LIBOR + 2.50% November 2024 252 1
USD 150 million LIBOR + 2.70% June 2024 252 −
USD 485 million LIBOR + 1.00% December 2024 236 66
USD 110 million 4.80% December 2023 187 −
USD 260 million LIBOR + 5.55% December 2022 172 −
USD 100 million 5.00% October 2021 170 2
TRY 600 million LIBOR + 5.20% June 2027 165 6
USD 90 million 4.80% August 2026 153 2
JPY 15,398 million 1.50% April 2039 151 8
USD 300 million LIBOR + 3.25% March 2022 133 151
USD 77 million 4.80% December 2023 130 1
AZN 460 million 4.00% July 2022 125 70
USD 78 million 4.00% December 2027 103 67
USD 68 million LIBOR + 3.00% January 2026 97 9
USD 52 million 4.40% May 2024 88 −
USD 100 million LIBOR + 3.25% April 2022 84 58
USD 100 million LIBOR + 3.25% February 2022 72 51
USD 101 million LIBOR + 2.30% December 2021 67 37
AZN 144 million 0.16% (0.15% + 0.01%) January 2045 56 11
USD 65 million LIBOR + 4.95% December 2024 53 18
USD 55 million LIBOR + 5.25% September 2024 44 16
CHF 22 million LIBOR + 0.0714% or 0% July 2021 40 −
USD 29 million 4.00% December 2027 38 25
USD 38 million 4.01% December 2023 34 10
EUR 35 million LIBOR + 0.072% November 2025 23 8
EUR 20 million 1.64% September 2023 18 6
CHF 10 million 3.00% October 2027 17 −
USD 24 million 4.26% December 2022 16 8
GEL 30 million 12.50% June 2023 15 3
AZN 350 million 3.00% June 2023 13 100
USD 20 million LIBOR + 2.00% April 2023 11 −
GEL 18 million 13.50% November 2024 9 2
GEL 11 million 13.33% September 2023 6 −
GEL 10 million 13.50% November 2022 6 −
USD 6 million 4.26% December 2022 4 2
USD 5 million 4.26% December 2022 4 2
USD 4 million 4.26% December 2022 3 1
EUR 2 million EURIBOR + 2.375% March 2031 3 −
CHF 2 million 0.85% December 2031 3 −
Other long-term borrowings 21 19

Total long-term borrowings 11,369 1,212

(*) LIBOR and EURIBOR vary from 3 to 12 months.

75
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

21. Taxes payable

2020 2019
Accrued VAT 361 −
Payable to SOFAZ 185 255
Corporate income tax payable 64 194
Social security contributions 13 16
Other taxes payable 327 107
Total taxes payable 950 572

In 2008, in addition to regular export tax the Group was liable to transfer a certain share of proceeds from sales
of crude oil priced at the level exceeding the price determined by the government (USD 50 per barrel for 2009)
to SOFAZ. No such taxes were imposed on the Group in 2009-2020.

Taxpayers components of the Group operating under the Azerbaijani tax legislation are eligible for offsetting
their taxes payable with taxes receivable and tax prepayments. Other taxes payable balance consists of VAT,
property tax, excise tax, personal income tax, price margin tax liabilities offset with tax receivables and
prepayments.

22. Asset retirement obligations

The Group has a legal and constructive obligation with respect to decommissioning of oil and gas production
and storage facilities and environmental clean-up. Movements in provisions for the related asset retirement
obligations are as follows:

Note 2020 2019

Carrying amount at 1 January 1,545 1,079
Additions 96 26
Unwinding of the present value discount 33 80 71
Effect of change in estimates 234 369
Carrying amount at 31 December 1,955 1,545

Asset retirement obligations related to the PSAs are determined with reference to capital costs incurred by
contractor parties and they are limited to the maturities of respective PSAs.

The maximum costs in respect of asset retirement obligations of the Group mainly represented by the following
oil and gas exploration, evaluation and development fields in the Azerbaijan Republic:

The maximum estimated cost to Azneft PU to abandon the production facilities employed was AZN 1,444
as at 31 December 2020 (31 December 2019: AZN 1,472). The Company used 6.22 per cent rate to discount
this obligation (31 December 2019: 6.93 per cent).

The maximum estimated cost to AzACG to abandon the production facilities employed in ACG project was
AZN 1,764 as at 31 December 2020 (31 December 2019: AZN 1,688). The Company used 4.30 per cent rate
to discount this obligation (31 December 2019: 4.90 per cent).

The maximum estimated cost to AzSD to abandon the production facilities employed in Shah Deniz project
was AZN 579 as at 31 December 2020 (31 December 2019: AZN 548). The Company used 4.10 per cent rate
to discount this obligation (31 December 2019: 4.76 per cent).

The maximum estimated cost to the Group to abandon the production facilities employed in Absheron project
was AZN 215 as at 31 December 2020 (31 December 2019: AZN 191). The Company used 4.10 per cent rate
to discount this obligation (31 December 2019: 4.76 per cent).

The maximum estimated cost to the Group to abandon the production facilities employed in Umid-Babek
Exploration and Production project was AZN 121 as at 31 December 2020 (31 December 2019: AZN 96).
The Company used 4.10 per cent rate to discount this obligation (31 December 2019: 4.76 per cent).

76
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

22. Asset retirement obligations (continued)

Estimated costs of dismantling oil and gas production facilities, pipelines and related processing and storage
facilities, including abandonment and site restoration costs amounting to AZN 1,023 at 31 December 2020
(31 December 2019: AZN 777) were included in the cost of oil and gas properties and equipment.

Asset retirement obligations are measured by the Group using the present value of the estimated future costs
of decommissioning of the assets. Management determines discount rates that reflect current market
assessments of the time value of money and where appropriate, the risks specific to the liability. Discount rates
are reviewed at each reporting date and used for discounting abandonment and site restoration costs.
The discount rate used as at 31 December 2020 was in range of 4.10-6.22 per cent (31 December 2019:
4.76-6.93 per cent).

If the estimated discount rate used in the calculation had been 1 per cent higher/lower than management’s
estimate, the carrying amount of the provision would have been AZN 311 lower / AZN 537 higher, respectively.

The following inflation rates were applied in calculation of discounted cash flows in respect of abandonment
and site restoration costs:

2026
Year 2021 2022 2023 2024 2025 and later
Inflation rate 2.65% 2.95% 3.25% 3.55% 3.50% 4.00%

If the estimated inflation rates used in the calculation had been 1 per cent higher/lower than management’s
estimate, the carrying amount of the provision would have been AZN 309 higher / AZN 182 lower, respectively.

While the provision is based on the best estimate of future costs and the economic lives of the facilities and
pipelines, there is uncertainty regarding both the amount and timing of incurring these costs.

23. Other provisions for liabilities and charges

Movements in other provisions for liabilities and charges are as follows:

Environmental Other
Note obligations provisions Total
Carrying amount at 1 January 2019 93 15 108
Additions/(disposals) (5) 27 22
Utilisation (19) (20) (39)
Unwinding of the present value discount 33 7 − 7
Effect of change in estimates 2 − 2
Carrying amount at 31 December 2019 78 22 100

Of which:
Current 32 22 54
Non-current 46 − 46

Carrying amount at 1 January 2020 78 22 100

Additions 16 31 47
Utilisation (17) (9) (26)
Unwinding of the present value discount 33 5 − 5
Effect of change in estimates 1 − 1
Carrying amount at 31 December 2020 83 44 127

Of which:
Current 53 44 97
Non-current 30 − 30

77
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

23. Other provisions for liabilities and charges (continued)

Environmental obligation

In 2018, the Management approved Action Plan (2019-2023) in respect of environmental restoration related
to expected damage and contamination caused to the environment as a result of activities within Absheron
area. Management estimated the Group’s environmental obligations based on historic trend of respective
expenses and estimated production profile of the Group’s oil and gas assets.

Environmental obligations are measured by the Group using the present value of the estimated future costs of
environmental restorations. Management determines discount rate that reflects current market assessments
of the time value of money and where appropriate, the risks specific to the liability as of the reporting date.
The Group calculated the present value of the environmental obligation using a discount rate of 3.88 per cent
(31 December 2019: 6.05 per cent).

If the estimated discount rate used in the calculation had been 1 per cent higher/lower than management’s
estimate, the carrying amount of the environmental provision would have been AZN 1 lower / AZN 1 higher,
respectively.

24. Deferred income

2020 2019
Carrying amount at 1 January 70 69
Offset with tax overpayments − (11)
Released to the consolidated statement of profit or loss (12) (8)
Received during the year 17 20
Carrying amount at 31 December 75 70
Of which:
Current − −
Non-current 75 70

Non-current
At 31 December 2020 and 2019, the non-current portion of deferred income mainly represented government
grants obtained in 2006 for the purpose of gasification of Baku sub-urban area and regions of the Azerbaijan
Republic and grant received for the purpose of gasification of rural areas of Georgia in the amounts of AZN 43
and AZN 32, respectively.

25. Other current and non-current liabilities and put option liabilities

25A. Other current and non-current liabilities

Other liabilities comprise the followings:

2020 2019
Derivative liabilities 710 335
Liabilities under carried interest arrangements 607 582
Long-term payables to the related party 91 103
Other liabilities 48 22
Total other financial liabilities 1,456 1,042
Of which:
Current 575 305
Non-current 881 737
Disability benefit 114 117
Contract liability (Note 19) 67 75
Net defined benefit liability 30 34
Other liabilities 48 35
Total other non-current non-financial liabilities 259 261
Total other liabilities 1,715 1,303

78
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

25. Other current and non-current liabilities and put option liabilities (continued)

25A. Other current and non-current liabilities (continued)

Derivative liabilities

The Group has financial liabilities related to margin calls in the amount of AZN 81 (31 December 2019:
AZN 32), unrealized losses on paper positions in the amount of AZN 383 (2019: AZN 108) and unrealized
losses on physical positions in the amount of AZN 246 (2019: AZN 195). Current portion of these liabilities
as of 31 December 2020 was AZN 553 (31 December 2019: AZN 305).

Liabilities under carried interest arrangements

In February 2017, exploration and evaluation stage of Absheron PSA was completed successfully and
the Group started to recognize liability with respect to its participating interest Absheron Offshore 2 PSA
(“Absheron PSA”) which was carried by other parties under the carried arrangement until the commencement
of development stage. Pursuant to Absheron PSA, at 31 December 2020 the Group’s carried liability under
Absheron PSA was AZN 437 (31 December 2019: AZN 426).

Provision for post-employment benefit – defined benefit plan

Under Turkish Labour Law, the Group is required to pay termination benefits to each employee who has
completed one year of service and whose employment is terminated without due cause, is called up for military
service, dies or who retires after completing 25 years of service (20 years for women). The provision is
calculated by estimating the present value of the future probable obligation of the Group arising from the
retirement of the employees. IAS 19 requires actuarial valuation methods to be developed to estimate the
companies’ obligation under defined benefit plans. Accordingly, the following actuarial assumptions were used
in the calculation of the total liability:

2020 2019
Discount rate (per cent) 4.6 3.5
Probability of retirement (per cent) 100 100

The principal assumption is that the maximum liability for each year of service will increase in line with inflation.
Thus, the discount rate applied represents the expected real rate after adjusting for the anticipated effects of
future inflation.

Movement of the net defined benefit liability was as follows:

2020 2019
Carrying amount at 1 January 34 31
Actuarial (gains)/losses (2) 5
Payments during the year (3) (6)
Interest cost 3 4
Current service costs 4 3
Acquisition through business combination − 3
Translation to presentation currency (6) (6)
Carrying amount at 31 December 30 34

79
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

25. Other current and non-current liabilities and put option liabilities (continued)

25A. Other current and non-current liabilities (continued)

Liabilities for disability benefit payments

Note 2020 2019

Carrying amount at 1 January 138 100
Additions − 37
Utilisation (21) (19)
Unwinding of the present value discount 33 9 8
Effect of change in estimates 8 12
Carrying amount at 31 December 134 138

Of which:
Current 20 21
Non-current 114 117

The Group has an obligation to compensate its employees for the damage caused to their health at workplace
up to January 2012 (payments to employees injured after January 2012 are made by insurance company,
based on insurance contract), as well as to compensate dependants of died employees. The compensations
provided are linked to the salaries paid to the affected employees. The Group calculated the present value of
the disability benefit to employees using a discount rate of 5.95 per cent (31 December 2019: 6.78 per cent).
For the purpose of calculation of the lifetime payments to injured employees, the Group estimated a life
expectancy as 71 and 76 for men and women, respectively. If the estimated discount rate used in the
calculation had been 1 per cent higher/lower than management’s estimate, the carrying amount of the provision
would have been AZN 8 lower / AZN 10 higher, respectively.

The inflation rates in Note 22 were applied to reflect the escalation in average salaries.

25B. Put option liabilities

On 12 August 2015, 891 million newly issued shares, representing 13 per cent of capital of STEAS,
a subsidiary of the Group, were purchased by GSI in exchange for AZN 1,364 (USD 1,300 million).

At the same time, the Group entered into a put option agreement with GSI, whereby the Group has committed
to purchase back the shares held by GSI, at a specified price, in case the planned initial public offering of
STEAS does not occur, or to settle the put option in case certain conditions provided by the put option
agreement are not met. Put option provided by the Group to GSI would be valid for 6 years following the signing
of the put option agreement and until 2020 was presented as a non-current financial liability. As the put option
liability will be settled within 12 months from the reporting date, it was presented within current liabilities. As at
31 December 2020, carrying value of put option liability over 13 per cent STEAS shares was equal to AZN
2,220 (31 December 2019: AZN 2,228).

The Group had the financial liability in the amount of AZN 508 (USD 300 million) (31 December 2019: AZN 509
(USD 300 million)) related to the put option agreement signed between STEAS and GSI in 2014 regarding 30
per cent shares of Petlim Limancılık Ticaret A.Ş.

26. Deferred acquisition consideration payable

At 31 December 2020, the Group had current deferred consideration payable in the amount of AZN 65
(31 December 2019: AZN 65) and AZN 65 (31 December 2019: AZN 65) for the purchase of remaining
49 per cent shares of SOCAR Petroleum CJSC and acquisition of SOCAR Trading, respectively. In current
year, the Group recognized deferred consideration payable in the amount of AZN 56 (31 December 2019: nil)
in respect of increase in ownership in SOCAR Energy Georgia LLC by 16.3 per cent as of 31 December 2020.

Additionally, the Group had non-current deferred consideration payable in the amount of AZN 574
(31 December 2019: AZN 570) for the acquisition of 7 per cent equity interest in TANAP Doğalgaz İletim A.Ş.
(Note 7).
80
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

27. Leases

The following tables show the carrying amounts of the Group’s right-of-use assets and lease liabilities and the
movements during the period:

Oil & gas

Buildings properties Vessels
and con- and Plant and and port
Right-of-use-assets structions equipment machinery facilities Other Total
Balance at 1 January 2019 192 137 23 260 92 704
Additions 23 2 10 − 8 43
Early terminated lease contracts (1) (2) − (8) (38) (49)
Depreciation charge for the period
(Note 30) (24) (11) (20) (27) (7) (89)
Translation to presentation
currency 1 (9) (2) (1) 1 (10)
Balance at 31 December 2019 191 117 11 224 56 599
Additions 18 − 94 92 32 236
Transfers (4) (99) 86 − 17 −
Early terminated lease contracts (3) − − − (1) (4)
Remeasurement during the year 2 1 − (5) (2) (4)
Depreciation charge for the period
(Note 30) (25) (15) (7) (28) (15) (90)
Translation to presentation
currency 10 (3) (23) − (4) (20)
Balance at 31 December 2020 189 1 161 283 83 717

Oil & gas

Buildings properties Vessels
and con- and Plant and and port
Lease liabilities structions equipment machinery facilities Other Total
Balance at 1 January 2019 192 136 25 276 56 685
Additions 24 2 10 − 7 43
Early terminated lease contracts − (6) − (8) (26) (40)
Interest expense 11 11 2 19 2 45
Payments (32) (15) (11) (12) (8) (78)
Translation to presentation
currency 1 (20) (2) − (3) (24)
Balance at 31 December 2019 196 108 24 275 28 631
Additions 18 − 94 92 32 236
Transfers (1) (93) 75 − 19 −
Early terminated lease contracts (3) − − (12) (1) (16)
Remeasurement during the year 2 1 − (5) (2) (4)
Interest expense 12 1 27 19 3 62
Payments (33) (11) (23) (36) (17) (120)
Foreign exchange losses − − 47 − 1 48
Translation to presentation
currency 18 − (25) − (1) (8)
Balance at 31 December 2020 209 6 219 333 62 829

Of which: 2020 2019

Current lease liabilities 165 123
Non-current lease liabilities 664 508

81
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

27. Leases (continued)

The following are the amounts recognized in profit or loss and other comprehensive income:

2020 2019
Interest expense on lease liabilities (Note 33) 62 45
Foreign exchange losses 48 −
Depreciation expense of right-of-use assets (Note 30) 90 89
Expense relating to variable lease payments (included in
general and administrative expenses) 5 10
Translation to presentation currency, net 12 (14)
Expenses relating to short-term leases (included in cost of sales) 233 199
Total 450 329

The following are the amounts recognized in the statement of cash flows:

2020 2019
Cash payments for the principal portion of the lease liability
within financing activities (80) (59)
Cash payments for the interest portion of the lease liability
for interest paid within operating activities (40) (19)
Short-term lease payments within operating activities (126) (135)
Variable lease payments within operating activities (5) (10)
Total (251) (223)

Group as a lessor

The Group has entered into operating leases mainly consisting of drilling units in the amount of AZN 345
(31 December 2019: AZN 403) which are classified as building and construction within property, plant and
equipment. The drilling units are used to carry out drilling works in oil and gas fields in Azerbaijan sector of
Caspian Sea.

Future rentals receivable under

non-cancellable operating leases
as at 31 December 2020 2019
Less than one year 278 250
One to two years 30 100
Two to three years 26 8
Three to four years 25 5
Four to five years 27 6
More than five years 11 14
Total 397 383

28. Charter capital, additional paid-in capital, retained earnings and gain on sale of subsidiary share

Charter capital

SOCAR as a holding company of the Group has a legal status of a state enterprise. The increase in charter
capital was registered by Ministry of Economy of Azerbaijan Republic in the year ended 31 December 2020
and accordingly the additional paid in capital of AZN 373 was reclassified from additional paid in capital to
the charter capital (31 December 2019: AZN 176).

82
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

28. Charter capital, additional paid-in capital, retained earnings and gain on sale of subsidiary share
(continued)

Additional paid-in capital (“APIC”)

During the year ended 31 December 2020, the Government contributed to the charter capital of the Group
AZN 52 in cash (31 December 2019: AZN 453). Until registration of the increase in the charter capital this
amount was included in APIC.

In 2020, Ministry of Finance provided the loan to the Group in the amount of AZN 139 (USD 82 million) with
interest rate of 0.1 per cent and maturity date of 15 December 2029. The difference between fair value and
carrying value of the loan in the amount of AZN 31 (USD 18 million) was recognized as APIC addition.

Distribution to the Government

Based on decisions of the Government, the Group is periodically mandated to make direct cash contributions
or finance construction and repair works for the Government (including transfer of assets). During 2020, such
direct cash transfers to the Government amounted to AZN 442 (31 December 2019: AZN 680), which is mainly
for repair, construction and reconstruction of recreational, transport, educational and medical infrastructure of
the Azerbaijan Republic.

Loss on purchase of subsidiary shares

On 21 January 2020, the Group increased its ownership in SOCAR Energy Georgia LLC by 16.3 per cent for
the consideration of AZN 56 (USD 33 million) and recognized loss in the amount of AZN 82 (USD 48 million)
(Note 39).

29. Analysis of revenue by categories

2020 2019
Crude oil, net 26,419 51,121
Oil products, net 13,378 22,184
Natural gas 4,015 4,123
Petrochemicals 3,281 3,928
Rent income 469 416
Other revenue 2,045 1,980
Total revenue 49,607 83,752

Revenue from crude oil and natural gas sales is stated net of export tax which is levied in the Azerbaijan Republic
on the margins between the international market price and internal state-regulated price on crude oil.
The difference between the market price and the internal state-regulated price is taxed at the rate of 30 per cent
and the amount of tax is transferred to the State Budget.

Revenue from oil product sales is stated net of excise tax of AZN 417 (2019: AZN 468).

Revenue from sales of crude oil produced under ACG PSA and condensate produced under Shah Deniz PSA
is not subject to excise tax mentioned above.

83
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

30. Analysis of expenses by nature

The table below summarizes expenses by nature of the Group:

Note 2020 2019

Raw materials and consumables used 40,050 73,971
Wages, salaries and social security costs 2,017 1,740
Depreciation of property, plant and equipment 1,936 1,603
Transportation and vehicle maintenance 1,116 1,084
Repairs and maintenance expenses 424 358
Impairment of fixed assets 1,654 286
Utilities expense 364 394
Taxes other than on income 186 197
Mining tax 125 125
ECL 119 49
Depreciation of right-of-use assets 27 90 89
Amortization expense 16 75 61
Change in other provisions for liabilities and charges 43 73
Other 1,265 1,351
Total cost of sales, exploration and evaluation,
distribution, general and administrative, ECL and
other operating expenses 49,464 81,381

The table below summarizes impairment of fixed assets of the Group:

Note 2020 2019

Impairment of property, plant and equipment 15 1,602 286
Impairment of assets held for sale 12 45 −
Impairment of investment in joint ventures 17 7 −
Total 1,654 286

31. Other operating income

Note 2020 2019

Fair value gain on equity instrument at FVPL 273 117
Government grant 12 35
Gain on bargain purchase 39 − 19
Other 219 170
Total other operating income 504 341

32. Interest revenue calculated using effective interest rate and other finance income

Interest revenue calculated using effective interest rate method

2020 2019
Interest income on time deposits and bank accounts 96 107
Other 75 56
Total interest revenue calculated using effective
interest rate method 171 163

Other finance income

Other finance income represents realized income from interest rate swaps in the amount of AZN 25 (2019:
AZN 47).

84
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

33. Finance costs

Note 2020 2019

Interest expenses 1,031 1,029
Provisions for asset retirement obligations: unwinding of
the present value discount 22 80 71
Lease liability: unwinding of the present value discount 27 62 45
Obligation for disability payments: unwinding of the present
value discount 25A 9 8
Environmental provision: unwinding of the present value
discount 23 5 7
Total finance costs 1,187 1,160

34. Income taxes

Income tax expense comprises the following:

2020 2019
Current tax expense 520 573
Deferred tax charge (223) 104
Income tax expense reported in profit or loss 297 677
Deferred tax recognized in OCI (4) −

Reconciliation between the expected and the actual tax charge is provided below:

2020 2019
(Loss)/profit before tax (1,437) 1,328
Theoretical tax (benefit)/charge at statutory rate of 20 per cent (287) 266
Effects of different tax rates for certain subsidiaries
(22, 25 and 27 per cent) 25 57
Undistributed profits of JVs and associates taxed at 10 per cent (2) (5)
Tax effect of items which are not deductible or assessable for
taxation purposes:
- loss/(income) which is exempt from taxation 120 (2)
- non-deductible expenses 141 121
Deferred tax asset not recognized 230 187
Recognition of previously unrecognized deferred tax asset (19) (12)
Unused investment incentives on which deferred income tax assets
are recognized − (35)
Potential income tax on retained profit of subsidiaries 60 65
Other 29 35
Income tax expense reported in profit or loss 297 677

Non-deductible expenses mainly comprise the social and employee-related expenses. Unrecognized deferred
tax assets mainly relate to the current year tax losses of the Group’s subsidiaries which are not expected to
utilize these losses.

At 31 December 2020, cumulative balance of unrecognized deferred tax asset was AZN 1,821 (31 December
2019: AZN 1,610).

The benefits arising from previously unrecognized deferred tax assets were used during the year to reduce
current tax expenses by the amount of AZN 19 (2019: AZN 12).

85
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

34. Income taxes (continued)

Differences between IFRS and applicable domestic tax regulations give rise to temporary differences between
the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect
of the movements in these temporary differences is detailed below:

Credited/ Credited/
1 January (charged) to (charged) 31 December
2020 profit or loss to OCI 2020
Tax effect of deductible/(taxable)
temporary differences
Carry forward tax losses 37 25 (4) 58
Trade and other receivables 33 (2) − 31
Trade and other payables 27 (7) − 20
Inventory − 18 (1) 17
Property, plant and equipment 506 187 (2) 691
Provisions for liabilities and charges 96 25 − 121
Unused Investment incentives 50 (1) 1 50
Net defined benefit liability 1 − − 1
Other 12 6 5 23
Deferred tax assets 762 251 (1) 1,012

Credited/ Credited/
1 January (charged) to (charged) 31 December
2020 profit or loss to OCI 2020
Tax effect of deductible/(taxable)
temporary differences
Accruals 31 6 (2) 35
Investments in associates and
joint ventures (104) 2 − (102)
Intangible assets (125) 9 13 (103)
Trade and other payables 26 12 (4) 34
Trade and other receivables (106) 20 − (86)
Inventory (50) (14) (1) (65)
Property, plant and equipment (1,216) (93) 16 (1,293)
Provisions for liabilities and charges 193 47 1 241
Unused Investment incentives 13 (12) (1) −
Other (289) (5) (1) (295)
Deferred tax liabilities (1,627) (28) 21 (1,634)

Credited/ Credited/
1 January (charged) to (charged) 31 December
2019 profit or loss to OCI 2019
Tax effect of deductible/(taxable)
temporary differences
Carry forward tax losses 51 (23) 9 37
Trade and other payables 12 15 − 27
Trade and other receivables 22 11 − 33
Inventory 4 (4) − −
Property, plant and equipment 443 65 (2) 506
Provisions for liabilities and charges 68 28 − 96
Unused investment incentives 75 (17) (8) 50
Net defined benefit liability 7 (6) − 1
Other 18 (4) (2) 12
Deferred tax assets 700 65 (3) 762

86
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

34. Income taxes (continued)

Acquisition
Credited/ Credited/ through
1 January (charged) to (charged) business 31 December
2019 profit or loss to OCI combination 2019
Tax effect of deductible/
(taxable) temporary differences
Accruals 17 − − 14 31
Investments in associates and
joint ventures (102) (2) − − (104)
Intangible assets (42) 7 1 (91) (125)
Trade and other payables 6 (1) − 21 26
Trade and other receivables (79) (27) − − (106)
Inventory (38) (12) − − (50)
Property, plant and equipment (1,084) (142) 12 (2) (1,216)
Provisions for liabilities and
charges 136 60 (3) − 193
Unused Investment incentives − 15 (2) − 13
Other (226) (67) 1 3 (289)
Deferred tax liabilities (1,412) (169) 9 (55) (1,627)

The Group does not file a consolidated tax return. In the context of the Group’s current structure, tax losses
and current tax assets of different Group companies may not be offset against current tax liabilities and taxable
profits of other Group companies and, accordingly, taxes may accrue even when there is a consolidated tax
loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity.

In accordance with Azerbaijani tax legislation, tax losses arising in one period can be carried forward for five
years.

The Group is a participant to ACG PSA through its subsidiary AzACG. During 2020, AzACG accrued and paid
its income tax at the rate of 25 per cent.

The governments of the Azerbaijan Republic, Turkey and Georgia together with the Group’s subsidiary AzBTC
and other BTC Project participants entered into Host Government Agreements (“HGAs”). The HGAs set out
the legal and fiscal regime for the BTC Project and the mutual rights and obligations of the parties, including
grants of rights and guarantees from the respective Countries to the investors in respect of matters necessary
to ensure the success of the BTC Project. In accordance with the provisions of the HGAs, the BTC Project
participants are individually liable for income taxes in Georgia and the Azerbaijan Republic and are responsible
for filing returns for each taxable period. Accordingly, the Company is liable for Azerbaijani income taxes arising
from participation in the BTC Project. In accordance with the provisions of the HGA, Azerbaijani income tax
rate is twenty-seven per cent (27 per cent) which was effective at 31 December 2020 and 2019.

In addition, the Group is a participant to Shah Deniz PSA through its subsidiary AzSD. According to the
provisions of Shah Deniz PSA, AzSD is liable for corporate income tax payments. However, in accordance
with PSA, the Government makes profit tax payments on behalf of contractor parties from the proceeds from
sales of profit petroleum attributable to the Government. Therefore, no corporate income tax related to Shah
Deniz project was recognized for 2020 and 2019. At 31 December 2020 and 2019, deferred tax balance of
AzSD was nil. AzSD is also exempt from certain ordinary operational taxes in the Azerbaijan Republic.

The Group operates in the tax environment of Turkey through its subsidiary, STEAS. Income tax rate in Turkey
was 22 per cent as of 31 December 2020 (2019: 22 per cent). According to the amendments on tax legislation
of Turkey published on December 5, 2017, the corporate income tax rate levied on business profits was
temporarily increased from 20 per cent to 22 per cent for the periods of 2018, 2019 and 2020. The tax rate of
20 per cent will again be applied to corporate earnings for 2021 onward. As new tax rate was enacted only in
2021, it has no impact on income tax expense for 2020. Additionally, for the financial statements ended after
December 5, 2017, the rate of 22 per cent was used for the temporary differences that are likely to be recovered
in 2018, 2019 and 2020, and 20 per cent for the temporary difference expected to be reversed after 2020.
Corporate income taxes are payable quarterly.

87
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

34. Income taxes (continued)

The Group operates in tax environment of Switzerland through its subsidiaries, SOCAR Energy Holding AG
and SOCAR Trading. According to new amendments on tax legislation of Switzerland, corporate tax rate in
the canton of Zurich, which is applied to SOCAR Energy Holding AG has been reduced to 19.7 per cent
(2019: 20.2 per cent) of profits related to 2020 and future tax periods. The tax rate applied to SOCAR Trading,
which is register in the canton of Geneva, was set up at 13.9 per cent as of 31 December 2020 (2019:
11.64 per cent).

The Group’s subsidiaries − SOCAR Overseas LLC, Gacrux Middle East Investments Holding LTD, Azerbaijan
(SCP) LTD, Sermaye Investment Limited, SOCAR Polymer LLC and Carbamide Plant are exempt from
taxation.

As at 31 December 2020, the Group did not recognize deferred tax liability in the amount of AZN 56 (as at
31 December 2019: AZN 56) in respect of taxable temporary differences associated with investments in
subsidiaries as the Group is able to control the timing of the reversal of those temporary differences and does
not expect to reverse them in the foreseeable future.

35. Advances received for sale of interest in PSA

In July 2014, the Company signed a Deferred Sales Purchase Agreement (“DSPA”) to sell SOCAR’s
10 per cent interest in Shah Deniz PSA and 10 per cent interest in SCPC (together referred as “Interest”).
According to the terms of this agreement SGC shall pay advance for these acquisitions to SOCAR while the
control will pass to SGC in 2023 upon meeting of the conditions preceding sale. In addition, DSPA specifies
certain progress payments related to the acquisition consideration payable annually till the end of 2020. As of
31 December 2020, total consideration received for the interest in Shah Deniz PSA and SCPC amounted to
AZN 4,308 (USD 2,534 million) (2019: AZN 4,313 (USD 2,537 million)).

36. Significant non-cash investing and financing activities

Investing and financing transactions that do not require the use of cash and cash equivalents and were
excluded from the cash flow statement are as follows:

Note 2020 2019

Non-cash investing and financing activities
Non-cash capital expenditures 265 224
Additions to assets purchased on lease 236 43
Disposal of PPE 130 −
Acquisition of shares from non-controlling interest 26 56 −
(Decrease)/Increase in loan receivable from TANAP due to
cash calls made by SGC on behalf of Group (46) 25
Additions to investment in TANAP due to cash calls made by
SGC on behalf of Group − 26
Decrease in loan payable to SGC due to cash calls made on
behalf of Group (41) −
Capital expenditures under carried interest arrangement 14 6
Early termination of lease contracts (4) (49)
Conversion of borrowings from the Government to the equity 37 47 −
Non-cash investing and financing activities 657 275

88
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

37. Changes in liabilities arising from financing activities

Foreign
1 January Cash Finance exchange 31 December
2020 flows cost movement Other 2020
Short-term interest-bearing
borrowings 4,687 (19) 187 (185) 1,240 5,910
Non-current interest-bearing
borrowings 11,369 406 650 61 (1,267) 11,219
Put option liabilities 2,737 (204) 198 (3) − 2,728
Deferred consideration payable 727 − 33 (3) 29 786
Lease liabilities 631 (120) 62 37 219 829
Financing of the Group by SGC
for cash calls of TANAP 103 − 7 − (19) 91
Dividend payable to NCI 32 − − − 32 64
Total liabilities from
financing activities 20,286 63 1,137 (93) 234 21,627

The “Other” column of non-current interest-bearing borrowings represented by classification of current portion
of AZN 1,240 of non-current borrowings as short-term in 2020 and conversion of borrowings from the Ministry
of Finance to the equity in the amount of AZN 27. The “Other” column of dividend payable included dividends
declared to the non-controlling shareholders during 2020 which were not paid as of 31 December 2020. The
“Other” column of financing of Group by SGC for cash calls of TANAP included the amount of cash payment
by TANAP to SGC on behalf of the Group. The “Other” column of deferred consideration payable included the
amount payable to third parties in respect of acquisition of additional 16.3 per cent shares of SOCAR Energy
Georgia LLC. The “Other” column of lease liabilities included new leases.

Changes in liabilities arising from financing activities as at 31 December 2019 were as follows:

Foreign Acquisition
1 January Cash Finance exchange of new 31 December
2019 flows cost movement business Other 2019
Short-term interest-
bearing borrowings 4,586 (1,024) 240 (201) 18 1,068 4,687
Non-current interest-
bearing borrowings 9,659 2,220 579 (25) 4 (1,068) 11,369
Put option liabilities 2,784 (387) 335 5 − − 2,737
Financing of Group by
SGC for cash calls of
TANAP 55 − − (3) − 51 103
Deferred consideration
payable 686 − 38 3 − − 727
Dividend payable to NCI 21 − − − − 11 32
Lease liabilities 685 (78) 45 (24) − 3 631
Total liabilities from
financing activities 18,476 731 1,237 (245) 22 65 20,286

The “Other” column of short-term and non-current interest-bearing borrowings represented by classification of
current portion of AZN 1,068 of non-current borrowings as short-term in 2019. The “Other” column of dividend
payable included dividends declared to the non-controlling shareholders during 2019 which were not paid
as of 31 December 2019. The “Other” column of financing of the Group by SGC for cash calls of TANAP
represented liabilities which will result in future cash outflows recognized by the Group for the payments made
on behalf of the Group by SGC to respond cash call requests of TANAP.

89
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

38. Contingences, commitments and operating risks

Operating environment

Azerbaijan

The Group’s operations are mainly conducted in the Azerbaijan Republic. Azerbaijan continues economic
reforms and development of its legal, tax and regulatory frameworks. The future stability of the Azerbaijan
economy is largely dependent upon these reforms and the effectiveness of economic, financial and monetary
measures undertaken by the government as well as crude oil prices and stability of Azerbaijani Manat.

The Azerbaijan economy has been negatively impacted by decline of oil prices and devaluation of Azerbaijani
Manat during 2015. This resulted in reduced access to capital, a higher cost of capital, inflation and uncertainty
regarding economic growth. In response to these challenges, Azerbaijani government announced plans to
accelerate reforms and support financial system. On 6 December 2016 President of the Azerbaijan Republic
approved “Strategic road maps for the national economy and main economic sectors of Azerbaijan”. The road
maps cover 2016-2020 development strategy, long-term outlook up to 2025 and vision beyond.

Furthermore, during 2020 the government continued its monetary policy with respect to stability of Azerbaijani
Manat as well as allocated foreign currency resources which stabilized Azerbaijani Manat. This policy is
expected to continue in 2021 with the aim of maintaining macroeconomic stability.

The Group’s management is monitoring changes in macroeconomic environment and taking precautionary
measures it considers necessary in order to support the sustainability and development of the Group’s
business in the foreseeable future.

International credit rating agencies regularly evaluate credit rating of the Group and the Azerbaijan Republic.
Fitch evaluated rating of the Group and rating of the Azerbaijan Republic as “BB+”, however, S&P evaluated
the Group with “BB-” and the Azerbaijan Republic with “BB+”. Moody’s Investors Service set “Ba2” credit rating
for the Group and Azerbaijan.

Environmental matters

The enforcement of environmental regulation in the Azerbaijan Republic is evolving and the enforcement
posture of government authorities is continually being reconsidered. The Group periodically evaluates its
obligations under environmental regulations. As obligations are determined, they are recognized immediately.
Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation,
cannot be estimated but could be material. In the current enforcement climate under existing legislation,
management believes that there are no significant liabilities for environmental damage above environmental
obligation provision currently made by the Group (Note 23).

The Group is subject to numerous national and local environmental laws and regulations concerning its
products, operations and other activities. These laws and regulations may require the Group to take future
action to remediate the effects on the environment of prior disposal or release of chemicals or petroleum
substances by the Group or other parties. Such contingencies may exist for various sites including refineries,
chemical plants, oil fields, service stations, terminals and waste disposal sites. In addition, the Group may have
obligations relating to prior asset sales or closed facilities. The ultimate requirement for remediation and its
cost are inherently difficult to estimate. However, the estimated cost of known environmental obligations has
been provided in the consolidated financial statements in accordance with the Group’s accounting policies.
While the amounts of future costs could be significant and could be material to the Group’s results of operations
in the period in which they are recognized, it is not practical to estimate the amounts involved. The Group does
not expect these costs to have a material effect on the Group’s financial position or liquidity.

The Group also has obligations to decommission oil and natural gas production facilities and certain of related
pipelines. Provision is made for the estimated costs of these activities, however there is uncertainty regarding
both the amount and timing of these costs, given the long-term nature of these obligations (Note 22).

The Group believes that the impact of any reasonably foreseeable changes to these provisions on the Group’s
results of operations, financial position or liquidity will not be material.

90
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

38. Contingences, commitments and operating risks (continued)

Risks and opportunities associated with climate change

Within the framework of its corporate risk management and internal control systems, the Group on an annual
basis identifies and evaluates risks and opportunities related to climate change impact on its business
activities. In the process of investment decision making, the risks associated with health, safety and
environment (HSE), ecology, and climate change are analysed. For large projects, the analysis of the
alignment with the Company’s strategic goals, environmental standards and requirements of the Azerbaijan
and international legislation is performed, as well as the analysis and assessment of external risks related to
the impact on the environment (changes in legislation, changes in technologies, market risks, reputation risks,
etc.). In addition, the risks and opportunities associated with climate change and the transition to low-carbon
energy are considered in the Group’s long-term strategic management and business planning processes.

Effect of COVID-19 pandemic

The spread of COVID-19 since March 2020, has had a material adverse effect on the world economy.
Measures taken to combat the spread of the virus have caused material economic downturn. Global oil and
gas markets experienced high volatility of demand and prices. Further, the pandemic-induced uncertainty
about future economic growth led to the capital flight from emerging markets, including Turkey (where the
Group has significant operations). Capital outflows in its turn, played crucial role in depreciation of TRY against
USD and EUR in 2020.

COVID-19 related restrictive measures and volatile oil markets have negatively affected Azerbaijani economy.
As crude oil and oil products comprise significant part of the country’s export, depressed oil prices had negative
impact on Azerbaijan’s current account balance. As a result, value of Azerbaijani Manat was under pressure
against USD and EUR in 2020. However, timely interventions made by the Government and Central Bank of
Azerbaijan Republic kept Azerbaijani Manat stable throughout the year.

COVID-19 related restrictive measures has negatively affected Georgian economy as well. Negative
developments in economy, in turn, led to the depreciation of Georgian Lari against USD and EUR in 2020.

The duration and consequences of the COVID-19 pandemic, as well as, the efficiency of the measures taken
are currently unclear. The long-run impact of COVID-19 pandemic on Group’s financial position, cash flows
and results of operations will depend on the development of the pandemic and how effectively it will be
contained.

Turkish Economy

The Group’s activities in Turkey were affected by the instability of Turkish economy during 2020. Such
instability was followed by significant inflation and devaluation of local currency against major foreign
currencies, such as, USD and EUR by 24 per cent (2019: 13 per cent) and 37 per cent (2019: 10 per cent),
respectively.

While management believes it is taking appropriate measures to support the sustainability of Group’s business
in the current circumstances, unexpected further deterioration in the areas described above could negatively
affect the Group’s results and financial position in a manner not currently determinable.

Georgian Economy

The Group’s activities in Georgia were affected by the instability of Georgian economy during 2020. Such
instability was followed by significant inflation and devaluation of local currency against major foreign
currencies, such as, USD and EUR by 14 per cent (2019: 7 per cent) and 25 per cent (2019: 5 per cent),
respectively.

While management believes it is taking appropriate measures to support the sustainability of Group’s business
in the current circumstances, unexpected further deterioration in the areas described above could negatively
affect the Group’s results and financial position in a manner not currently determinable.

91
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

38. Contingences, commitments and operating risks (continued)

Tax legislation

Azerbaijan tax, currency and customs legislation are subject to varying interpretations, and changes, which
may occur frequently. Management’s interpretation of such legislation as applied to the transactions and
activity of the Group may be challenged by the relevant authorities.

Fiscal periods remain open to review by the tax authorities in respect of taxes for three calendar years
preceding the year of tax audit. Under certain circumstances such reviews may cover longer periods.

The Group’s management believes that its interpretation of the relevant legislation is appropriate and
the Group’s tax, currency legislation and customs positions will be sustained, and potential tax liabilities of
the Group will not exceed the amounts recorded in these consolidated financial statements. Accordingly, at
31 December 2020 and 2019 no provision for potential tax liabilities was recorded.

Black Sea Terminal tax case

In 2018, Black Sea Terminal – subsidiary of the Group was inspected by the Revenue Service (“RS”) which
covered the period starting from 1 January 2015 up to 1 January 2018 for corporate income tax, personnel
income tax and withholding tax. As a result of inspection, RS accrued additional WHT and respective fines and
sanctions in total amount of AZN 95 (GEL 183 million). The Group did not agree with results of the inspection
and appealed to Ministry of Finance for further investigation. The hearings were held several times, however
no final decision was made as of 31 December 2020. Management believes the base for noted fine will be
deemed as invalid and thus, no financial exposure is deemed probable.

Ongoing cases against Petkim

On 25 August 2017, Petkim was notified by Turkish Tax Authority about the additional VAT charge and fine
which was calculated based on Special Consumption Tax (“SCT”) regime as a result of the investigation related
to pyrolysis gasoline (“pygas”) consumption during 2014. Three ongoing legal cases with respect to the
application of SCT regime for pygas, have been recently resulted in favour of the Petkim. A compromise
meeting was attended for the tax and penalties communicated and no compromise was achieved. The case
was filed on 22 January 2020 regarding the issue and no final decision was made as of 31 December 2020.
Management believes the base for noted fine will be deemed as invalid, and so no financial exposure is
deemed probable.

Legal proceedings

From time to time and in the normal course of business, claims against the Group are received. On the basis
of its own estimates and both internal and external professional advice management is of the opinion that no
material losses will be incurred in respect of claims in excess of provisions that have been made in these
consolidated financial statements.

Legal proceedings related to gas purchase

According to the terms of gas purchase agreements, the Group’s supplier importing natural gas to Turkey have
the right to charge the Group with retrospective price adjustments, in case if certain contractual conditions are
met. At 31 December 2020, the Group’s maximum exposure to the contractual obligations is AZN 36 (USD 21
million). No provision is recognized in respect of these liabilities in the consolidated statement of financial
position as of 31 December 2020 and 2019.

92
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

38. Contingences, commitments and operating risks (continued)

Compliance with financial covenants

At 31 December 2020, the Group had loans payable in total amount of AZN 17,129 which were received for
financing its investing and operating activities. The Group is subject to certain financial covenants related to
these borrowings. Non-compliance with such covenants may result in negative consequences for the Group
including growth in the cost of borrowings and declaration of default. Management believes that, as of
31 December 2020 and 2019 the Group was in compliance with all applicable financial covenants.

Financial guarantees, collaterals, pledges and mortgages

The Group pledged its future cash inflows in respect of proceeds to be received from sales of natural gas and
crude oil in the amount of AZN 320 for loan received from related party (31 December 2019: AZN 418).

SOCAR Head Office

According to Equity Subscription Support and Retention Agreement (“ESSRA”) which had been signed as part
of STAR Project Finance deal, the Group concluded letter of credit (“LC”) facility agreements in total amount
of AZN 865 (USD 509 million) with certain banks (31 December 2019: AZN 865) (Note 6).

STEAS

The following table demonstrates guarantees received and given by the Group at 31 December 2020:

2020 2019
Guarantees received
Letters of guarantee received from customers 343 296
Bank guarantees within the context of direct order collection system
(DOCS) 293 321
Receivable Insurance 178 291
Letters of guarantee received from suppliers 154 130
Letters of credit received 32 38
Other 7 26
Total guarantees received 1,007 1,102
Guarantees given
Letters of guarantee given 110 177
Total guarantees given 110 177
Collaterals, pledges and mortgages (CPMs)
CPMs given by Petkim on Petlim loan* 316 322
CPMs given for Petkim 690 718
Total CPMs given by Petkim 1,006 1,040
* During 2015, Petlim Limancılık Ticaret A.Ş., where Group subsidiary Petkim owns 70 per cent shares, has signed a project finance
credit agreement with a financial institution in the amount of AZN 360 (USD 212 million) which has 13 years of maturity with no
repayment during first 3 years period, for the external funding of the container port project. At 31 December 2020, Petlim had
remaining loan balance amounting to AZN 260 (USD 153 million). Petkim pledged its shares in Petlim amounting to AZN 24
(TRY 105 million) and a mortgage amounting to AZN 595 (USD 350 million) as a guarantee for the loan repayment. The project has
financial covenants that are valid during the operating period.

Capital commitments

Participating interest in ACG PSA

Azerbaijan International Operating Company, the Operator of the ACG PSA has entered into a number of
capital commitments as at 31 December 2020. The Group estimated its 25 per cent (31 December 2019:
25 per cent) share of these commitments to be AZN 1,894 (USD 1,114 million) (31 December 2019: AZN 2,373
(USD 1,396 million)).

93
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

38. Contingences, commitments and operating risks (continued)

Capital commitments (continued)

Participating interest in Shah Deniz PSA

BP Exploration Shah Deniz Limited, the Operator of the Shah Deniz PSA has entered into a number of capital
commitments as at 31 December 2020. The Group estimated its 13.27 per cent share of these capital
commitments through its subsidiary and associate to be AZN 371 (USD 218 million) (31 December 2019:
AZN 673 (USD 396 million)).

Construction of TAP

In late 2018 TAP AG reached financial close under the project financing, provided by a large group of financial
institutions. The Group acted as one of the guarantors of the loan facilities for the 20 per cent shares that it
holds in TAP AG and continues to provide required equity financing to TAP AG pro-rata to its equity share.
Financial Completion under the project financing (as defined therein) was reached on 31 March 2021 and
some of the guarantees of the guarantors, including that of the Group, were released on the same date. As of
31 December 2020, the commercial operations under TAP project had already started and going forward no
further equity financing is expected to be provided by the Group in respect of the initial design capacity of the
pipeline.

Commitments of Baku Shipyard LLC

As at 31 December 2020, the Group had capital commitments to third parties in the amount of AZN 11
(31 December 2019: AZN 43) in respect of construction contracts.

Commitments of SOCAR Energy Holdings AG

The Group has number capital commitments for the next years. The Group estimated its capital commitments
to be AZN 60 (CHF 31 million) (31 December 2019: AZN 63 (CHF 36 million)).

Gas purchase commitments

Gas purchase commitment

Based on the Gas Sales and Purchase Agreement signed on 27 February 2003 between Azerbaijan Gas
Supply Company (“AGSC”) and the Ministry of Energy of the Azerbaijan Republic (currently purchase rights
under this agreement are executed by the Group), the Group has obligation to purchase seller’s minimum
annual quantity as indicated in the agreement for the period beginning from signing of the contract up to the
termination date of Shah Deniz PSA.

SOCAR – AGSC Gas sales agreement

The Group is obliged under the agreement signed with AGSC to purchase minimum annual quantity of gas till
December 2020 (with earlier termination or possible extension of the agreement in accordance with provisions
of the agreement) at a price which is stipulated in the contract.

Commitments related to participating interest in AGSC

The Group holds 28 per cent direct interest in AGSC and indirect 2.62 per cent through its associate. In
accordance with the agreements of AGSC the Group has 13.27 per cent share of the following commitments
relating to AGSC’s activity.

BOTAS SPA 1

AGSC is obliged under the gas contract signed with BOTAS to make available a maximum of approximately
6.6 billion Contract Cubic Meters (“BCcm”) of gas annually until the expiry of the contract at a price calculated
based on a formula established by the gas contract. The agreement will be expired in April 2021.

94
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

38. Contingences, commitments and operating risks (continued)

Commitments related to participating interest in AGSC (continued)

BOTAS SPA 2

On 25 October 2011 the Group and BOTAS executed a gas Sale and Purchase Agreement (“BOTAS SPA 2”)
with respect to the sale by the Group to BOTAS of certain volumes of Shah Deniz Stage 2 Gas (2 BCcm first
year, 4 BCcm second year, 6 BCcm plateau period). In December 2012 the Group transferred and assigned
the rights and obligations under the Stage 2 SPA to AGSC. The commencement date under BOTAS SPA 2
was 30 June 2018.

BOTAS contract for BTC fuel gas (BIL GSA)

AGSC is obliged under the agreement with BOTAS to make available 0.15 BCcm of gas annually until
the expiry of the contract at a price, which is calculated based on a formula established in the contract.

Georgian Supplemental Gas SPA with GOGC

AGSC is obliged under the agreement signed with Georgian Oil and Gas Corporation (“GOGC”) and
the government of Georgia to make available 0.5 BCcm of gas annually in 2021 and until the end of 2026,
at a price which is calculated based on a formula established in the contract.

Sale and purchase agreement with OptionCo

AGSC is obliged under the agreement signed with OptionCo to make available during each contract year a
maximum of five percent of the volumes transported in the previous calendar years by AGSC via the SCP
pipeline through territory of Georgia, at a price, which is calculated based on a formula established in the
contract.

Shah Deniz Stage 2 EU Long term Gas Sales Agreements (“GSA”)

In September 2013, several EU GSAs were signed by the Group with EU Buyers (currently: DEPA, Bulgargaz
Shell, Uniper, Axpo, ENGIE, Edison, Enel, Hera) and in December 2013 the GSAs were assigned to AGSC
until Shah Deniz PSA expiry with re-assignment to the Group as Shah Deniz Production declines.
The commencement date for DEPA, Uniper, Shell (1st contract), Axpo (two contracts) and Bulgargaz GSAs
was 31 December 2020. The commencement dates under the remaining GSAs (including 2nd Shell contract)
was set between 1 April 2021 and 30 June 2021.

Transportation agreement with SCPC

AGSC is party to SCPC Gas Transportation Agreement (“GTA”), dated 27 February 2003 which was
subsequently amended and re-stated (“SCP GTA”) with effect from 17 December 2013 in order to provide
additional transportation services in respect of Shah Deniz Stage 2 volumes. AGSC is obliged to pay certain
tariffs, as calculated in accordance with the agreement, to SCPC starting from the commencement date, which
is 1 October 2006. AGSC is obliged to provide SCPC, free of charge, the natural gas necessary to fill and
pressurize the pipeline to its designed operating pressure and used as fuel gas. The SCP GTA provides for
Minimum Monthly Payments (“MMP”), as calculated in accordance with the subject agreement, payable by
AGSC to SCPC, regardless of whether natural gas is shipped or not, in respect of each contract year until the
termination or expiry of the GTA.

Framework agreement

A fully-termed Framework Agreement related to the novation of long-term GSAs and transfer of GTA capacity
from AGSC to SOCAR after 2036 was executed on 19 October 2015 and further amended and restated on
28 September 2018.

95
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

38. Contingences, commitments and operating risks (continued)

Commitments related to participating interest in AGSC (continued)

Trans Anatolian Pipeline Gas Transportation Agreement (TANAP GTA)

AGSC is a party to TANAP GTA with annual reserved capacity as defined in the contract. The commencement
date under the GTA was 1 July 2020. Physical commercial deliveries of natural gas started on 31 December
2020.

BOTAS is a party to TANAP GTA with annual reserved capacity during the build-up period, as defined in
the contract, of 1.9 BCcm (12-month period commencing on start date), 3.8 BCcm (next 12-month period) and
plateau of 5.7 BCcm 24 months after the start date. The start date was 30 June 2018.

Trans Adriatic Pipeline Gas Transportation Agreement (TAP GTA)

AGSC and SOCAR are parties to TAP GTA with annual capacity as defined in the contract. The actual
commercial operations date was 15 November 2020. Physical commercial deliveries of natural gas started on
31 December 2020.

Societa Nazionale Metanodotti GTA (SNAM GTA)

AGSC is a party to SNAM GTA with annual reserved capacity as defined in the contract. The start date (as well
as physical commercial deliveries of natural gas) was 31 December 2020.

Sale and purchase agreement with Baku-Tbilisi-Ceyhan Pipeline Company (“BTC Co”)

AGSC is obliged under an agreement signed with BTC Co to make available 0.16 bcm in 2021 and during the
following years until the termination of the contract subject to the right of BTC Co to reduce annual off take, at
a price which is calculated based on the formula established in the contract.

TAP Operational Gas Sales Agreement

In accordance with the TAP Operational Gas Sales Agreement (“TAP OGSA”), AGSC is obliged to deliver up to
1,864,000 MWh gas volumes necessary for operations of the TAP transportation system until 1 October 2021.

Deferred Sale and Purchase Agreement with SGC

According to Deferred Sale and Purchase Agreement (“DSPA”) signed with SGC Upstream LLC and SGC
Midstream LLC the Group agrees to sell its whole interest in Shah Deniz PSA, AGSC and SCPC in March 2023
upon meeting of the following conditions preceding sale:
► The full and unconditional repayment of the notes and fulfilment of other obligations under the
Eurobonds agreements by SOCAR; and
► Confirmation of the payment of full consideration amount in accordance with agreement terms.

Other commitments

Commitment of Azerigas PU

Based on Presidential Decree number 118 dated 27 February 2014, directed to social-economic development
of Baku area and regions of the Azerbaijan Republic, Azerigas PU has certain commitments with respect to
gasification in the mentioned areas. After completion of the first gasification program which covered the period
from 2014 to 2018, the company continues the gasification process within implementation of new “State
Program on Socio-Economic Development of Regions of the Republic of Azerbaijan for 2019-2023 years”.
As at 31 December 2020 gasification in the country was completed by 96.2 per cent (31 December 2019:
96.01 per cent). Management believes that expenditures related to remaining gasification in the country will
continue to be financed by the Government through contributions into capital.

96
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

38. Contingences, commitments and operating risks (continued)

Other commitments (continued)

Oil shipment commitment

On 1 August 2002 the Group and other participants under the ACG PSA (the “Shipper Group”) have entered
into the ACG Field Production Transportation Agreement (“ACG TA”) with the BTC Co which was amended
on 3 February 2004. Under this Agreement, the Shipper Group have committed to ship through the BTC
Pipeline all of their crude oil entitlement from the ACG field, other than any production which each participant
may ship through the Western Export Route. The Group has agreed not to transport its crude oil by rail unless
BTC Co is operating at its full capacity. In accordance with ACG TA the Group has agreed not to use other
transportation options, if capacity of the BTC Co is sufficient. The BTC Pipeline was put into operation in May
2006. The BTC Pipeline, with a throughput capacity of more than 1,200,000 barrels per day, is used as the
Shipper Group’s main export route. In accordance with the Transportation Agreement, the Shipper Group, the
Group representative, the lenders and security trustee to BTC Co, and the lenders and security trustee to
certain participants of the ACG Shipper Group have agreed that payment of BTC Co tariff has a first priority
claim on oil sale proceeds.

Commitment of SOCAR Ukraine

The Group had short-term contractual obligations on the purchase of inventory in the amount of AZN 185
(UAH 3,073 million) as of 31 December 2020.

Commitment under crude supply agreement relating to the STAR Refinery

On 29 May 2014 SOCAR and Star Refinery signed Crude Supply Agreement for sales and delivery of crude
oil to STAR Refinery. According to the agreement, SOCAR has a commitment for providing STAR Refinery
crude feedstock requirement from the commencement of the agreement. In the event of a supply shortfall,
SOCAR shall be liable to pay any excess costs reasonably incurred by STAR Refinery. Management expects
no further cash outflows in connection with the Crude Supply Agreement.

Gas sales in Azerbaijan

According to the Decree No 513 of the Cabinet of Ministers of the Republic of Azerbaijan dated on 28
December 2020, total volumes of the natural gas extracted by Azneft PU should be sold to the state-owned
company, “Azerkontrakt” OJSC after fulfilling the export commitments according to the approved State Energy
Balance.

39. Business combination, acquisition of non-controlling interests, acquisition of subsidiary which

is not a business, goodwill and intangible asset with indefinite useful life

Goodwill and intangible assets with indefinite useful lives

For impairment testing goodwill acquired through business combinations and intangible assets with indefinite
useful lives were allocated to CGUs at 31 December 2020 and 2019 as following:

SOCAR SOCAR Energy

Trading Holdings AG Petkim UBEP Other
2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
Goodwill 106 106 135 122 42 56 − − 30 33
Trade name − − − − 17 20 − − − −
Licence − − − − − − 105 105 − −

97
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

39. Business combination, acquisition of non-controlling interests, acquisition of subsidiary which

is not a business, goodwill and intangible asset with indefinite useful life (continued)

Goodwill and intangible assets with indefinite useful lives (continued)

Movement in the carrying amount of goodwill was as follows:

2020 2019
Carrying amount at 1 January 317 301
Acquisition of subsidiary − 21
Translation difference (2) (5)
Other (2) −
Carrying amount at 31 December 313 317

The carrying amounts of goodwill as of 31 December 2020 and 2019 included an accumulated goodwill
impairment of AZN 4 and AZN 3, respectively.

Testing of the carrying value of goodwill related to acquisition of Petkim

The carrying value of the goodwill at 31 December 2020 was tested for impairment through comparison with
its recoverable amount. Based on the value-in-use calculations of Petkim and its subsidiaries, recoverable
amount was equal to AZN 1,710 as of 31 December 2020. Pre-tax cash flows projections used for this purpose
are based on the business plan approved by management covering 10-year period which is an industry
practice. Management believes that the underlying cash flows projections represent accurate and reliable
forecast. Cash flow projections beyond 10-year period are extrapolated by terminal growth rates of 3.0 per cent
and then discounted to their net present value, applying WACC, used as a discount rate of 8.0 per cent. As a
result of the test performed, no impairment has been identified. Valuation exercise is highly sensitive to WACC
and terminal growth rate.

If the estimated discount rate used in the calculation had been 0.5 per cent higher/lower than management’s
estimate, the value in use would have been AZN 172 lower / AZN 210 higher, respectively.

If the terminal growth rate used in the calculation had been 0.5 per cent higher/lower than management’s
estimate, the value in use would have been AZN 154 higher / AZN 126 lower, respectively.

As a result of the sensitivity analysis, no impairment charge was identified.

Testing of the carrying value of goodwill related to acquisition of SOCAR Energy Holdings AG

The carrying value of the goodwill at 31 December 2020 was tested for impairment through comparison with
its recoverable amount. Based on the value-in-use calculations of SOCAR Energy Holdings AG and its
subsidiaries, recoverable amount was equal to AZN 991 as of 31 December 2020. Pre-tax cash flows
projections used for this purpose are based on the business plan approved by management covering 5-year
period. Management believes that the underlying cash flows projections represent accurate and reliable
forecast. Cash flow projections beyond 5-year period are extrapolated by terminal growth rates of 1.5 per cent
and then discounted to their net present value, applying WACC, used as a discount rate of 6 per cent. As a
result of the test performed, no impairment has been identified. Valuation exercise is highly sensitive to WACC
and terminal growth rate.

If the estimated discount rate used in the calculation had been 1 per cent higher/lower than management’s
estimate, the value in use would have been AZN 181 lower / AZN 285 higher, respectively.

If the terminal growth rate used in the calculation had been 0.25 per cent higher/lower than management’s
estimate, the value in use would have been AZN 48 higher / AZN 42 lower, respectively.

As a result of the sensitivity analysis, no potential impairment charge was identified.

98
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

39. Business combination, acquisition of non-controlling interests, acquisition of subsidiary which

is not a business, goodwill and intangible asset with indefinite useful life (continued)

Testing of the carrying value of goodwill related to acquisition of SOCAR Trading

The carrying value of the goodwill at 31 December 2020 was tested for impairment through comparison with
its recoverable amount. Based on the value-in-use calculations of SOCAR Trading and its subsidiaries,
recoverable amount was equal to AZN 1,268 as of 31 December 2020. Pre-tax cash flows projections used
for this purpose are based on the business plan approved by management covering 5-year period.
Management believes that the underlying cash flows projections represent accurate and reliable forecast.
Cash flow projections beyond 5-year period are extrapolated by terminal growth rates of 1 per cent and then
discounted to their net present value, applying WACC, used as a discount rate of 12 per cent. As a result of
the test performed, no impairment has been identified. Valuation exercise is highly sensitive to WACC and
terminal growth rate.

If the estimated discount rate used in the calculation had been 0.25 per cent higher/lower than management’s
estimate, the value in use would have been AZN 25 lower / AZN 26 higher, respectively.

If the terminal growth rate used in the calculation had been 0.25 per cent higher/lower than management’s
estimate, the value in use would have been AZN 15 higher / AZN 15 lower, respectively.

As a result of the sensitivity analysis, no impairment charge was identified.

Testing of the licence related to UBEP

The license of UBEP gives right to the Group to produce and sell natural gas and condensate from Umid field
and exploit Babek field. Carrying value of the license at 31 December 2020 was tested for impairment through
comparison with its recoverable amount. Recoverable amount was determined based on the value-in-use
calculations of UBEP as AZN 825 as of 31 December 2020. Cash flow projections used for this purpose are
based on financial forecast covering PSA life which is 28 years. As a result of the test performed, no impairment
was identified.

The valuation exercises are sensitive to the change in WACC, which was taken into account by the Group,
as 13.60 per cent throughout the projection period.

If WACC used in the calculation had been 1 per cent higher/lower than management’s estimate, the value in
use would have been AZN 128 lower / AZN 145 higher, respectively. As a result of the sensitivity analysis, no
impairment was identified.

Acquisition of non-controlling interest

On 21 January 2020, the Group entered into the share purchase agreement to purchase 16.3 per cent share
of SOCAR Energy Georgia LLC for AZN 56 (USD 33 million at the exchange rate as of the acquisition date).
The difference between the 16.3 per cent of consolidated balance sheet value of net liabilities (AZN 26) of
SOCAR Energy Georgia LLC and the consideration payable (AZN 56) is recognized as loss on purchase of
subsidiary shares within consolidated statement of changes in equity in the amount of AZN 82 (Note 28). As a
result, the Group’s controlling ownership in SOCAR Energy Georgia LLC increased from 75.5 per cent to
91.8 per cent.

99
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

39. Business combination, acquisition of non-controlling interests, acquisition of subsidiary which

is not a business, goodwill and intangible asset with indefinite useful life (continued)

Acquisitions in 2019

On 17 June 2019, the Group acquired controlling interest in Bursagaz, Kayserigaz, EWE Enerji, Enervis,
Milenicom and Kay Solar Projects. The Group considered this acquisition as an opportunity to expand to
natural gas distribution, energy trade, solar power and telecommunication businesses in Turkey. The fair
values of the acquirees’ assets and liabilities as at the date of acquisition are presented below:

Fair value
recognized on
Bursagaz Note acquisition
Assets
Cash and cash equivalents 64
Trade and other receivables 9
Other current assets 7
Property, plant and equipment 117
Intangible assets other than goodwill 16 228
Right-of-use asset 1
Total assets at fair value 426

Liabilities
Trade and other payables 147
Other current liabilities 1
Deferred tax liabilities 28
Non-current lease liability 1
Other non-current liabilities 48
Total liabilities at fair value 225
Total identifiable net assets at fair value 201
Non-controlling interest (44)
Gain on bargain purchase 31 (5)
Purchase consideration transferred (152)

Analysis of cash flow on acquisition

Net cash acquired with subsidiary 64
Cash paid (152)
Net cash flow on acquisition (88)

From the date of acquisition, Bursagaz has contributed AZN 146 of revenue from the continuing operations of
the Group. If the acquisition had taken place at the beginning of 2019, the Group’s revenue from continuing
operations for 2019 would have been AZN 83,943 and the profit before tax from continuing operations for 2019
would have been AZN 1,344.

100
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

39. Business combination, acquisition of non-controlling interests, acquisition of subsidiary which

is not a business, goodwill and intangible asset with indefinite useful life (continued)

Acquisitions in 2019 (continued)

Fair value
recognized on
Kayserigaz Note acquisition
Assets
Cash and cash equivalents 18
Trade and other receivables 15
Other current assets 6
Property, plant and equipment 94
Intangible assets other than goodwill 16 217
Right-of-use asset 1
Total assets at fair value 351

Liabilities
Trade and other payables 90
Deferred tax liabilities 32
Non-current lease liability 1
Other non-current liabilities 38
Total liabilities at fair value 161
Total identifiable net assets at fair value 190

Non-controlling interest (36)

Gain on bargain purchase 31 (9)
Purchase consideration transferred (145)

Analysis of cash flow on acquisition

Net cash acquired with subsidiary 18
Cash paid (145)
Net cash flow on acquisition (127)

From the date of acquisition, Kayserigaz has contributed AZN 91 of revenue from the continuing operations of
the Group. If the acquisition had taken place at the beginning of 2019, the Group’s revenue from continuing
operations for 2019 would have been AZN 83,861 and the profit before tax from continuing operations for 2019
would have been AZN 1,336.

101
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

39. Business combination, acquisition of non-controlling interests, acquisition of subsidiary which

is not a business, goodwill and intangible asset with indefinite useful life (continued)

Acquisitions in 2019 (continued)

Fair value
recognized on
EWE Enerji acquisition
Assets
Cash and cash equivalents 1
Trade and other receivables 29
Other current assets 3
Deferred tax asset 5
Total assets at fair value 38

Liabilities
Trade and other payables 51
Other non-current liabilities 1
Total liabilities at fair value 52
Total identifiable net liabilities at fair value (14)
Non-controlling interest −
Goodwill arising on acquisition 14
Purchase consideration transferred −

Analysis of cash flow on acquisition

Net cash acquired with subsidiary 1
Cash paid −
Net cash flow on acquisition 1

From the date of acquisition, EWE Enerji has contributed AZN 364 of revenue from the continuing operations
of the Group. If the acquisition had taken place at the beginning of 2019, the Group’s revenue from continuing
operations for 2019 would have been AZN 83,875 and the profit before tax from continuing operations for 2019
would have been AZN 1,322.

Fair value
recognized on
Enervis Note acquisition
Assets
Trade and other receivables 2
Total assets at fair value 2

Liabilities
Other non-current liabilities 1
Total liabilities at fair value 1
Total identifiable net assets at fair value 1
Non-controlling interest −
Gain on bargain purchase 31 (1)
Purchase consideration transferred −

102
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

39. Business combination, acquisition of non-controlling interests, acquisition of subsidiary which

is not a business, goodwill and intangible asset with indefinite useful life (continued)

Acquisitions in 2019 (continued)

Fair value
recognized on
Milenicom Note acquisition
Assets
Cash and cash equivalents 2
Trade and other receivables 19
Other current assets 1
Property, plant and equipment 2
Intangible assets other than goodwill 16 8
Total assets at fair value 32
Liabilities
Trade and other payables 24
Non-current lease liability 1
Other non-current liabilities 3
Total liabilities at fair value 28
Total identifiable net assets at fair value 4
Non-controlling interest −
Gain on bargain purchase 31 (4)
Purchase consideration transferred −

Analysis of cash flow on acquisition

Net cash acquired with subsidiary 2
Cash paid −
Net cash flow on acquisition 2

From the date of acquisition, Milenicom has contributed AZN 28 of revenue from the continuing operations of
the Group. If the acquisition had taken place at the beginning of 2019, the Group’s revenue from continuing
operations for 2019 would have been AZN 83,776 and the profit before tax from continuing operations for 2019
would have been AZN 1,326.
Fair value
recognized on
Kay Solar Projects Note acquisition
Assets
Trade and other receivables 1
Property, plant and equipment 3
Intangible assets other than goodwill 16 1
Total assets at fair value 5
Liabilities
Trade and other payables 1
Other non-current liabilities 4
Total liabilities at fair value 5
Total identifiable net assets at fair value −
Non-controlling interest −
Goodwill arising on acquisition 3
Purchase consideration transferred (3)
Analysis of cash flow on acquisition
Net cash acquired with subsidiary −
Cash paid (3)
Net cash flow on acquisition (3)

103
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

39. Business combination, acquisition of non-controlling interests, acquisition of subsidiary which

is not a business, goodwill and intangible asset with indefinite useful life (continued)

Acquisitions in 2019 (continued)

The goodwill recognized is primarily attributed to the expected synergies and other benefits from combining
the assets and activities of EWE Turkey Holding A.Ş. and Kay Solar Projects with those of the Group.
The goodwill is not deductible for income tax purposes.

40. Material partly-owned subsidiaries

Financial information of subsidiaries that have material non-controlling interests is provided below:

Proportion of equity interest held by non-controlling interests:

Country of Country of
Name incorporation operation 2020 2019
Petkim Turkey Turkey 49% 49%
SOCAR Polymer LLC Azerbaijan Azerbaijan 43% 43%

Accumulated balances of material non-controlling interests:

Name 2020 2019

Petkim 824 912
SOCAR Polymer LLC 132 180

Profit/(loss) allocated to material non-controlling interests:

Name 2020 2019

Petkim 100 96
SOCAR Polymer LLC (48) (37)

The summarised financial information of these subsidiaries is provided below. This information is based on
amounts before inter-company eliminations:

Summarised statement of profit or loss and other comprehensive income for 2020:
SOCAR
Petkim Polymer LLC
Revenue 2,952 200
Cost of sales (2,505) (171)
General and administrative expenses (85) (36)
Distribution expenses (33) (14)
Other operating income 16 5
Other operating expense (24) (29)
Interest revenue calculated using effective interest method 38 −
Finance costs (113) (58)
Foreign exchange loss 3 −
Profit/(loss) before tax 249 (103)
Income tax expense (44) (9)
Profit/(loss) for the year from continuing operations 205 (112)
Other comprehensive loss to be reclassified to profit or loss
in subsequent periods (384) −
Total comprehensive loss (179) (112)

Attributable to non-controlling interests (88) (48)

104
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

40. Material partly-owned subsidiaries (continued)

Summarised statement of profit or loss and other comprehensive income for 2019:
SOCAR
Petkim Polymer LLC
Revenue 3,495 52
Cost of sales (3,043) (36)
General and administrative expenses (87) (27)
Distribution expenses (32) (8)
Other operating income 111 −
Other operating expense (104) (14)
Interest revenue calculated using effective interest method 39 2
Finance costs (133) (19)
Foreign exchange gain (22) −
Profit/(loss)before tax 224 (50)
Income tax expense (28) (36)
Profit/(loss) for the year from continuing operations 196 (86)
Other comprehensive loss to be reclassified to profit or loss
in subsequent periods (229) −
Total comprehensive loss (33) (86)

Attributable to non-controlling interests (16) (37)

Summarised statement of financial position as at 31 December 2020:

SOCAR
Petkim Polymer LLC
Current assets 2,738 167
including:
Cash and cash equivalents 1,268 13
Trade and other receivables 397 27
Inventories 225 50
Other current assets 848 77
Non-current assets 1,836 1,297
including:
Property, plant and equipment 1,542 1,218
Intangible assets 162 25
Other non-current assets 132 54
Current liabilities (1,367) (60)
including:
Short-term borrowings and current portion of long-term borrowings (538) −
Lease liability, current (17) −
Trade and other payables (812) (60)
Non-current liabilities (1,527) (1,048)
including:
Long-term borrowings (1,319) (1,004)
Deferred income (84) −
Other provisions for liabilities and charges (41) −
Deferred tax liabilities (83) (42)
Lease liability, non-current − (2)
Total equity 1,680 356

Attributable to:
Equity holders of parent 856 224
Non-controlling interests 824 132
105
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

40. Material partly-owned subsidiaries (continued)

Summarised statement of financial position as at 31 December 2019:

SOCAR
Petkim Polymer LLC
Current assets 2,732 112
including:
Cash and cash equivalents 1,154 1
Trade and other receivables 446 55
Inventories 270 50
Other current assets 862 6
Non-current assets 2,071 1,367
including:
Property, plant and equipment 1,715 1,350
Intangible assets 204 10
Other non-current assets 152 7
Current liabilities (1,467) (308)
including:
Short-term borrowings and current portion of long-term borrowings (708) (101)
Lease liability, current (14) −
Trade and other payables (745) (207)
Non-current liabilities (1,475) (705)
including:
Long-term borrowings (1,282) (666)
Deferred income (56) −
Other provisions for liabilities and charges (41) −
Deferred tax liabilities (96) (33)
Lease liability, non-current − (6)
Total equity 1,861 466

Attributable to:
Equity holders of parent 949 286
Non-controlling interests 912 180

Summarised cash flow information for year ended 31 December 2020:

SOCAR
Petkim Polymer LLC
Operating 620 36
Investing (191) (57)
Financing 4 33
Net foreign exchange difference on cash and cash equivalents (319) −
Net increase in cash and cash equivalents 114 12

Summarised cash flow information for year ended 31 December 2019:

SOCAR
Petkim Polymer LLC
Operating 414 40
Investing (187) (10)
Financing 53 (34)
Net foreign exchange difference on cash and cash equivalents (93) −
Net increase/(decrease) in cash and cash equivalents 187 (4)

106
State Oil Company of the Azerbaijan Republic Notes to the consolidated financial statements for 2020
(Amounts presented are in millions of Azerbaijani Manats, unless otherwise stated)

41. Events after reporting date

SOCAR Russia

Subsequent to reporting period, the Group sold its preference shares in SOCAR Russia Investment Ltd to a
third party for the consideration of AZN 26 (USD 15 million).

New loans

Subsequent to reporting period, the Group obtained new long-term and short-term loans in the amount of AZN
1,082 from international banks.

Loan repayments

Subsequent to reporting period, the Group repaid its outstanding loans in the amount of AZN 1,562 to several
international and local banks.

107