33.

Financial instruments

Credit risk

Exposure to credit risk:

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date is:


		2017		2016
Trade receivables	19		3,004,206		3,525,297
Receivables from financial services	20		4,248,120		2,396,372
Cash and cash equivalents*	23		4,712,141		6,052,129
Participating cross currency swap and FX swap contracts	32		981,396		390,958
Other current assets**	22		316,042		93,376
Held to maturity investments			11,992		—
Due from related parties	37		5,299		5,861

			13,279,196		12,463,993

Cash in hand is excluded from cash and cash equivalents.

Prepaid expenses and advances given are excluded from other current assets and other non-current assets.

Credit quality:

The maximum exposure to credit risk for trade receivables and receivables from financial services arising from sales transactions including those classified as due from related parties at the reporting date by type of customer is:


	2017		2016
Receivable from subscribers		2,472,596		3,061,130
Receivables from financial services		4,248,120		2,396,372
Receivables from distributors and other operators		516,352		376,204
Other		20,557		93,824

		7,257,625		5,927,530

The aging of trade receivables and due from related parties at 31 December 2017 and 2016:


	2017		2016
Not past due		2,124,719		3,138,043
Past due up to 3 months		317,649		285,561
Past due 3 to 6 months		95,738		48,775
Past due over 6 months		471,399		58,779

		3,009,505		3,531,158

The aging of receivables from financial services at 31 December 2017 and 2016:


	2017		2016
Not past due		3,659,521		2,350,375
Past due up to 3 months		513,925		16,533
Past due 3 to 6 months		39,233		20,227
Past due over 6 months		35,441		9,237

		4,248,120		2,396,372

As at 31 December 2017, trade receivables, due from related parties and receivables from financial services of TL 1,473,385 (2016: TL 439,112) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default.

The other classes within trade receivables, due from related parties and receivables from financial services do not contain impaired assets and are not past due. Based on the credit history of these other classes, it is expected that these amounts will be received when due. The Group holds TL 339,543 (2016: TL 156,647) collateral in relation to these receivables.

Impairment losses

Individual receivables which are known to be uncollectible are written off by reducing the carrying amount directly. The other receivables are assessed collectively to determine whether there is objective evidence that an impairment has been incurred but not yet been identified. The Group considers that there is evidence of impairment if any of the following indicators are present:

•

significant financial difficulties of the customer

•

probability that the customer will enter bankruptcy or financial reorganisation, and

•

default or delinquency in payments

Receivables for which an impairment provision was recognized are written off against the provision when there is no expectation of recovering additional cash.

Impairment losses are recognized in profit or loss within administrative expense (Note 10). Subsequent recoveries of amounts previously written off are credited against administrative expense (Note 10).

Movements in the provision for impairment of trade receivables and due from related parties are as follows:


	31 December 2017			31 December 2016
Opening balance		964,311			816,373
Provision for impairment recognized during the year		180,948			452,767
Amounts collected		(224,460	)		(251,553	)
Exchange differences		3,128			5,038
Receivables written off during the year as uncollectible		(138,529	)		(58,314	)
Unused amount reversed (*)		(79,958	)		—

Closing balance		705,440			964,311

(*)

The Company signed a transfer of claim agreement with a debt management company to transfer some of its doubtful receivables stemming from the years between 1998 to 2016. Transferred doubtful receivables comprise of balances that the Company started legal proceedings.

Movements in the provision for impairment of receivables from financial services are as follows:


	31 December 2017			31 December 2016
Opening		10,170			—
Provision for impairment recognized during the year		117,293			11,593
Amounts collected		(37,503	)		(1,423	)
Unused amount reversed (*)		(16,968	)		—

Closing balance		72,992			10,170

(*)

The Company signed a transfer of claim agreement with a debt management company to transfer some of its doubtful receivables stemming from the year 2017. Transferred doubtful receivables comprise of balances that the Company started legal proceedings.

Liquidity risk

The table below analyses the Group’s financial liabilities into relevant maturity groupings based on their contractual maturities for:

all non-derivative financial liabilities, and

gross settled derivative financial instruments for which the contractual maturities are essential for an understanding of the timing of the cash flows.


	31 December 2017																				31 December 2016
	Carrying Amount		Contractual cash flows			6 months or less			6-12 Months			1-2 years			2-5 years			More than 5 Years			Carrying Amount		Contractual cash flows			6 months or less			6-12 months			1-2 years			2-5 years			More than 5 Years
Non-derivative financial liabilities
Secured bank loans		4,390		(5,011	)		—			(1,117	)		(2,045	)		(1,849	)		—			5,634		(7,691	)		(1,123	)		(1,077	)		(2,015	)		(3,476	)		—
Unsecured bank loans		10,533,518		(11,094,697	)		(3,275,230	)		(955,637	)		(2,575,807	)		(3,035,914	)		(1,252,109	)		7,804,758		(8,458,901	)		(1,332,478	)		(1,330,322	)		(1,433,790	)		(3,187,687	)		(1,174,624	)
Finance lease liabilities		122,720		(133,570	)		(18	)		(17,429	)		(16,789	)		(38,933	)		(60,401	)		48,114		(54,273	)		(70	)		(7,837	)		(6,648	)		(19,859	)		(19,859	)
Debt securities issued		1,875,521		(2,753,486	)		(54,221	)		(54,221	)		(108,442	)		(325,326	)		(2,211,276	)		1,922,656		(2,824,066	)		(298,767	)		(48,767	)		(97,535	)		(292,604	)		(2,086,393	)
Trade and other payables*		2,527,152		(2,548,365	)		(2,548,365	)		—			—			—			—			3,241,403		(3,266,123	)		(3,266,123	)		—			—			—			—
Due to related parties		6,980		(6,980	)		(6,980	)		—			—			—			—			11,201		(11,201	)		(11,201	)		—			—			—			—
Consideration payable in relation to acquisition of Belarusian Telecom (Note 31)		323,691		(377,190	)		—			—			—			(377,190	)		—			295,062		(351,920	)		—			—			—			(351,920	)		—
Derivative financial liabilities Participating Cross Currency Swap and FX swap contracts		107,862		23,428			18,982			—			4,446			—			—			40,440		46			46			—			—			—			—
Buy				1,838,554			1,471,106			—			367,448			—			—			—		28,059			28,059			—			—			—			—
Sell				(1,815,126	)		(1,452,124	)		—			(363,002	)		—			—			—		(28,013	)		(28,013	)		—			—			—			—
Currency forward contracts		2,246		(2,246	)		(2,246	)		—			—			—			—			1,286		(1,286	)		(1,286	)		—			—			—			—
Buy				190,185			190,185			—			—			—			—			—		105,826			105,826			—			—			—			—
Sell				(192,431	)		(192,431	)		—			—			—			—			—		(107,112	)		(107,112	)		—			—			—			—

TOTAL		15,504,080		(16,898,117	)		(5,868,078	)		(1,028,404	)		(2,698,637	)		(3,779,212	)		(3,523,786	)		13,370,554		(14,975,415	)		(4,911,002	)		(1,388,003	)		(1,539,988	)		(3,855,546	)		(3,280,876	)

Advances received, license fee accruals, taxes and withholding taxes payable are excluded from trade and other payables.

Foreign exchange risk

The Group’s exposure to foreign exchange risk at the end of the reporting period, based on notional amounts, was as follows:


	31 December 2016
	USD			EUR
Foreign currency denominated assets
Other non-current assets		244			2,131
Due from related parties		1,210			388
Trade receivables and accrued income		14,178			61,841
Other current assets		19,929			7,144
Cash and cash equivalents		807,372			378,057

		842,933			449,561

Foreign currency denominated liabilities
Loans and borrowings-non-current		(483,910	)		(959,482	)
Debt securities issued-non-current		(451,588	)		—
Other non-current liabilities		(99,273	)		—
Loans and borrowings-current		(80,029	)		(21,985	)
Debt securities issued-current		(26,845	)		—
Trade and other payables-current		(175,083	)		(425,992	)
Due to related parties		(398	)		(334	)

		(1,317,126	)		(1,407,793	)

Derivative financial instruments
Participating cross currency swap and FX swap contracts		257,960			525,000
Currency forward contracts		(30,071	)		—

Net exposure		(246,304	)		(433,232	)


	31 December 2017
	USD			EUR
Foreign currency denominated assets
Other non-current assets		72			2,681
Due from related parties		571			407
Trade receivables and accrued income		18,890			57,283
Other current assets		43,039			35,049
Cash and cash equivalents		688,717			237,697

		751,289			333,117

Foreign currency denominated liabilities
Loans and borrowings-non-current		(557,180	)		(960,629	)
Debt securities issued-non-current		(469,387	)		—
Other non-current liabilities		(85,816	)		—
Loans and borrowings-current		(206,535	)		(285,827	)
Debt securities issued-current		(27,848	)		—
Trade and other payables-current		(328,323	)		(29,442	)
Due to related parties		(1,172	)		(394	)

		(1,676,261	)		(1,276,292	)

Derivative financial instruments
Participating cross currency swap and FX swap contracts		937,011			748,650
Currency forward contracts		50,000			—

Net exposure		62,039			(194,525	)

Exposure to currency risk (continued)

Sensitivity analysis

The basis for the sensitivity analysis to measure foreign exchange risk is an aggregate corporate-level currency exposure. The aggregate foreign exchange exposure is composed of all assets and liabilities denominated in foreign currencies. The analysis excludes net foreign currency investments.

10% strengthening of the TL, UAH, BYN against the following currencies at 31 December 2017 and 31 December 2016 would have increased/(decreased) profit or loss before by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant.


	Profit or loss
	31 December 2017			31 December 2016
USD		(23,400	)		86,679
EUR		87,838			160,725

10% weakening of the TL, UAH, BYN against the following currencies at 31 December 2017 and 31 December 2016 would have increased/(decreased) profit or loss before tax by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant.


	Profit or loss
	31 December 2017			31 December 2016
USD		23,400			(86,679	)
EUR		(87,838	)		(160,725	)

Interest rate risk

As at 31 December 2017 and 2016 the interest rate profile of the Group’s interest-bearing financial instruments was as follows:


			31 December 2017						31 December 2016
	Note		Effective Interest Rate			Carrying Amount			Effective interest rate			Carrying Amount
Fixed rate instruments
Time deposits		23
USD				5.8	%		2,590,025			3.6	%		2,817,650
EUR				2.2	%		1,069,303			2.0	%		1,383,978
TL				14.3	%		436,224			11.0	%		1,243,843
Other				12.9	%		13,036			11.1	%		36,175
Restricted cash		22
USD				—			64,503			—			—
EUR				—			118,983			—			—
TL				—			—			—			—
Other				—			320			—			—
Finance lease obligations		27
USD				28.1	%		(41	)		20.7	%		(80	)
EUR				3.4	%		(116,797	)		3.4	%		(48,034	)
TL				27.6	%		(5,882	)		—			—
Unsecured bank loans		27
TL fixed rate loans				14.7	%		(1,620,391	)		12.1	%		(1,819,944	)
UAH fixed rate loans				13.9	%		(520,933	)		15.0	%		(407,171	)
Secured bank loans
BYN fixed rate loans				11.6	%		(4,390	)		11.9	%		(5,634	)
Trade and other payables
EUR fixed rate payables		31		—			—			2.6	%		(1,522,615	)
Debt securities issued		27
USD				5.8	%		(1,875,521	)		5.8	%		(1,683,700	)
TL				—			—			10.7	%		(238,956	)
Variable rate instruments		27
USD floating rate loans				3.2	%		(2,880,615	)		3.2	%		(1,984,533	)
EUR floating rate loans				2.1	%		(5,511,579	)		2.3	%		(3,593,110	)

(*)

Includes 4.5G license payables related to the frequency bands which the Company has been awarded with. The last instalment of 4.5G license payable amounting to TL 1,534,702 was paid on 26 April 2017.

Sensitivity analysis

Cash flow sensitivity analysis for variable rate instruments:

An increase/decrease of interest rates by 100 basis points would have (decreased)/increased equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign exchange rates, remain constant. The analysis is performed on the same basis at 31 December 2017 and 2016:


	Profit or loss					Equity
	100 bps increase			100 bps decrease		100 bps increase		100 bps decrease
31 December 2017
Variable rate instruments (financial liability)		(83,922	)		83,922		—		—

Cash flow sensitivity (net)		(83,922	)		83,922		—		—

31 December 2016
Variable rate instruments (financial liability)		(55,776	)		55,776		—		—

Cash flow sensitivity (net)		(55,776	)		55,776		—		—

Fair values

Fair value of the Group’s financial assets and financial liabilities that are measured at fair value on a recurring basis

This section explains the judgements and estimates made in determining the fair values of the financial instruments that are recognized and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified its financial instruments into the three levels prescribed under the accounting standards. An explanation of each level is as follows:

•

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

•

Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

•

Level 3 inputs are unobservable inputs for the asset or liability.

Fair values

31 December
2017

31 December
2016

Fair value
hierarchy

Valuation techniques

FX swap contracts

(4,675

)

611

Level 2

Present value of the estimated future cash flows based on observable yield curves and end period FX rates

Participating cross currency swap contracts (*)

950,862

382,054

Level 3

Present value of the estimated future cash flows based on unobservable yield curves and end period FX rates

Currency forward contracts

(2,246

)

(1,286

)

Level 2

Forward exchange rates at the balance sheet date

(*)

Participating cross currency swap contracts include EUR-TL interest and currency swap contracts, EUR put and call options, amounting to nominal value of EUR 560,000 and also USD-TL interest and currency swap contracts and put and call options amounting to nominal value of USD 400,000 in total. The EUR-TL participating cross currency swap contracts, which are EUR 100,000, EUR 150,000 and EUR 250,000, was combined into one contract as of 26 May 2017 and the maturity of the contracts was extended to 23 October 2025. Additionally, cross currency swap contracts include EUR-TL interest and currency swap contracts nominal value of EUR 43,585 and USD-TL interest and currency swap contracts amounting to nominal value of USD 298,611 in total. Cross currency swap contracts include EUR-TL, cross currency swap contracts nominal value of EUR 184,900 and USD-TL currency swap contracts amounting to nominal value of USD 238,400 in total. Regarding these contracts, TL 92,384 accrual of interest expense and TL 19,731 accrual of interest income has been reflected to consolidated financial statements as at 31 December 2017 (31 December 2016: TL 40,367 and TL 8,220 respectively). Since bid-ask spread is unobservable input; in valuation of participating cross currency swap contracts, prices in bid- ask price range which were considered the most appropriate were used instead of mid prices. If mid prices were used in the valuation the fair value of participating cross currency swap contracts would have been TL 129,870 lower as at 31 December 2017 (31 December 2016: TL 23,291).

There were no transfers between fair value hierarchy levels during the year.

Movements in the participating cross currency swap contracts for the years ended 31 December 2017 and 31 December 2016 are stated below:


	31 December 2017		31 December 2016
Opening balance		382,054		—
Fair value gains recognized in profit or loss		568,808		382,054

Closing balance		950,862		382,054

Valuation inputs and relationships to fair value

The following table summarizes the quantitative information about the significant unobservable inputs used in level 3 fair value measurement of contingent consideration.

Fair value at

Inputs

31 December
2017

31 December
2016

Unobservable
Inputs

31 December
2017

31 December
2016

Relationship of unobservable
inputs to fair value

Contingent consideration

323,691

295,062

Risk-adjusted
discount rate

4.8%

5.6%

A change in the discount rate by 100 bps would increase/decrease FV by TL (9,834) and TL 10,241 respectively.

Expected
settlement
date

first
quarter of
2021

first
quarter of
2020

If expected settlement date changes by 1 year FV would increase/decrease by TL (14,884) and TL 15,602 respectively.

Changes in the consideration payable in relation to acquisition of Belarusian Telecom for the years ended 31 December 2017 and 31 December 2016 are stated below:


	2017		2016
Opening balance		295,062		235,281
Gains recognized in profit or loss		28,629		59,781

Closing balance		323,691		295,062

Financial assets:

Carrying values of significant portion of financial assets do not differ significantly from their fair values due to their short-term nature.

Financial liabilities:

Fair values of financial liabilities are assumed to approximate their carrying values due to their short term nature and floating interest rates.

As at 31 December 2017, the fair value of debt securities issued by the Company with a nominal value of USD 500,000 and fixed interest rate (Note 27), is TL 2,063,972.

As at 31 December 2016, the fair value of debt securities issued by the Company and Turkcell Finansman, with a nominal value of USD 500,000 and TL 500,000 comparatively, and fixed interest rate (Note 27), is TL 1,921,199.