Naftna Industrija Srbije : Consolidated financial statements for 2021 and independent auditor’s report

Naftna industrija Srbije A.D.

Novi Sad

Consolidated Financial Statements and

Independent Auditor's Report

31 December 2021

This version of the financial statements is a translation from the original, which is prepared in Serbian language. All possible care has been taken

to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or

opinions, the original Serbian language version of the document takes precedence over this translation

Contents
INDEPENDENT AUDITOR'S REPORT
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Financial Position	1
Consolidated Statement of Profit or Loss and Other Comprehensive Income	2
Consolidated Statement of Changes in Shareholders' Equity	3
Consolidated Statement of Cash Flows	4
Notes to the Consolidated Financial Statements
1.	General information	5
2.	Summary of significant accounting policies	5
3	Critical accounting estimates, assumptions and judgments	19
4.	Application of new IFRS	22
5.	New accounting standards	22
6.	Financial risk management	23
7.	Segment information	30
8.	Cash and cash equivalents	34
9.	Short-term financial assets	34
10.	Trade and other receivables	34
11.	Inventories	34
12.	Other current assets	35
13.	Property, plant and equipment	36
14.	Right-of-use assets	38
15.	Investment property	38
16.	Goodwill and other intangible assets	40
17.	Investments in associates and joint venture	41
18.	Long-term financial assets	43
19.	Deferred income tax	43
20.	Other non-current assets	44
21.	Short-term debt and current portion of long-term debt	44
22.	Trade and other payables	45
23.	Other current liabilities	45
24.	Other taxes payable	45
25.	Long-term debt	45
26.	Lease liabilities	47
27.	Other non-current financial liabilities	47
28.	Provisions for liabilities and charges	48
29.	Share capital	50
30.	Production and manufacturing expenses	50
31.	Selling, general and administrative expenses	50
32.	Employee costs	51
33.	Taxes other than income tax	51
34.	Other expenses, net	51
35.	Net foreign exchange loss	51
36.	Finance income	52
37.	Finance expenses	52
38.	Income taxes	52
39.	Contingencies and commitments	53
40.	Group entities	54
41.	Related party transactions	54
42.	Events after the reporting date	57
Contact information	58

Independent Auditor's Report

To the Shareholders and Board of Directors of Naftna Industrija Srbije a.d. Novi Sad:

Our opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Naftna Industrija Srbije a.d. (the "Company") and its subsidiaries (together - the "Group") as at 31 December 2021, and the Group's consolidated financial performance and consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards.

What we have audited

The Group's consolidated financial statements comprise:

• the consolidated statement of financial position as at 31 December 2021;
• the consolidated statement of profit or loss and other comprehensive income for the year then ended;
• the consolidated statement of changes in shareholders' equity for the year then ended;
• the consolidated statement of cash flows for the year then ended; and
• the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information.

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 believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Group in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code) and the ethical requirements of the Law on auditing in the Republic of Serbia that are relevant to our audit of the consolidated financial statements in the Republic of Serbia. We have fulfilled our other ethical responsibilities in accordance with the IESBA Code and the ethical requirements of the Law on auditing in the Republic of Serbia.

PricewaterhouseCoopers d.o.o.

Omladinskih brigada 88a, 11070 Belgrade, Republic of Serbia

T:: [phone], F:[phone], www.pwc.rs

Our audit approach

Overview

Materiality

Group

scoping

Key audit matters

• Overall Group materiality: 924 million Serbian dinars (hereafter "RSD"), which represents 5% of the average result before tax for the past three years, being absolute values of profit before tax for the current year and year ended on 31 December 2019 and loss before tax for year ended on 31 December 2020.
• We conducted audit work at 5 reporting units in 4 countries.
• The Group engagement team audited the Serbian subsidiaries and performed specified procedures for the Bulgarian and Romanian subsidiaries with the involvement of PwC network firms in the respective countries. Based on the engagement team's instructions, PwC network firm performed directed audit procedures over specific financial statement line items for subsidiary in Bosnia and Herzegovina.
• Our audit scope addressed 95% of the Group's revenues and 98% of the Group's absolute value of underlying result before tax.
• Estimation of decommissioning and environmental protection provision

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls including, among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

Materiality

The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.

Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, if any, both individually and in aggregate on the consolidated financial statements as a whole.

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Overall Group materiality	RSD 924 million (2020: RSD 1,019 million)
How we determined it	5% of the average result before tax for the past three years,
	being absolute values of profit before tax for the current year
	and year ended on 31 December 2019 and loss before tax for
	year ended on 31 December 2020.
Rationale for the materiality	Consistent with the benchmark used in prior year, we
benchmark applied	determined that our materiality should be based on three-year
	average result before taxation. This benchmark is supported by
	the significant fluctuations in the financial result due to the
	change of crude oil prices. We have chosen 5% which is
	consistent with quantitative materiality thresholds used for profit-
	oriented companies in this sector.

We agreed with the those charged with governance that we would report to them misstatements identified during our audit above RSD 46 million, as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

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.

Key audit matter

Estimation of decommissioning and environmental protection provisions

Provisions associated with decommissioning, environmental protection and restoration are disclosed in Note 28 to the consolidated financial statements; a description of the accounting policy and key judgements and estimates is included in Note 2 and Note 3.

The calculation of decommissioning and environmental protection provisions requires significant management judgement because of the inherent complexity in estimating future costs, discount rates and maturity of liabilities.

The decommissioning of oil and gas infrastructure is an evolving activity and consequently there is limited historical precedent against which to benchmark estimates of future costs. These factors increase the complexity involved in determining accurate accounting provisions

How our audit addressed the key audit matter

We critically assessed management's annual review of provisions recorded as at 31 December 2021. In particular, we focused on those assets where changes to the cost estimate directly impacted the consolidated statement of profit and loss and other comprehensive income rather than being recognised as an asset.

Testing involved understanding of the legal or constructive obligations with respect to the environmental protection and decommissioning of each asset based on the estimated useful life of assets and relevant cost to complete restoration. Of particular note, we performed the following procedures:

• Identified and tested the cost assumptions which have the most significant impact on provisions by reviewing the actual costs incurred during the year and comparing them to the prior years;

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