9. COMMITMENTS AND CONTINGENCIES

Operating Environment

Amendment to Mass Media law—In September 2014, the State Duma approved an amendment to the Russian law "On Mass Media", which will reduce the permitted level of foreign ownership in Russian mass media companies, including television broadcasters, from 50% direct ownership to 20% beneficial ownership, direct or indirect. On October 14, 2014, this amendment was signed by the Russian President. The law does not provide for "grandfathering" of existing foreign ownership interests. The law will come into force on January 1, 2016. In the event of non-compliance by the stated deadline, the Russian government would have the authority, among other things, to revoke the mass media registration and broadcasting licenses of the Company's business. If the Company is unable to take steps to restructure its operations in such a way that achieves compliance with this law while retaining its current ownership structure, the Company may be required to an effect a sale of 80 percent or more of its Russian businesses.

Economic environment—Significant uncertainty exists surrounding the current geopolitical situation in Ukraine. The United States, the European Union and other countries have imposed economic sanctions on certain Russian government officials, other individuals and certain Russian companies in connection with recent developments in Ukraine and Crimea. Neither the Company, nor any of its Russian subsidiaries or other operations or assets, are a target of current sanctions and the Company does not appear on the United States and European Union lists of sanctioned parties. However, there is significant uncertainty regarding the extent or timing of any potential further economic or trade sanctions, or the ultimate outcome of the Ukrainian crisis. The current situation in Ukraine has negatively affected the Company's sublicensing sales of certain programming in that country and has also had a broader impact on the macroeconomic environment of the region. These factors in conjunction with global macroeconomic weakness, may adversely affect the Company's business.

During the nine months ended September 30, 2014, Russia has experienced economic instability that has been characterized by a steep decline in the value of shares traded on its stock exchanges, depreciation of its currency and a forecasted decline in the growth of gross domestic product in 2014. Additionally, because Russia produces and exports large amounts of oil, its economy is particularly vulnerable to the price of oil on the world market and recent decreases in international oil prices may continue to adversely affect its economy. As a result of the current global economic instability and any further potential deterioration in the Russian economy, total television advertising spending in Russia may be adversely affected which, in turn, would materially adversely affect the Company's operating results.

Exchange Rate—Although the Company's reporting currency is the US dollar, it generates almost all of its revenues through the sale of advertising, which in Russia is sold primarily in rubles. The ruble is also the functional currency of the Company's principal operating subsidiaries. As a result, the Company's reported revenues and results of operations are impacted by fluctuations in the exchange rate between the US dollar and the Russian ruble. In the three months ended September 30, 2014, the Russian ruble depreciated against the US dollar by 15%, but was on average 9% lower than the average value of the Russian ruble compared to the US dollar during the three months ended September 30, 2013. In the nine months ended September 30, 2014, the Russian ruble depreciated against the US dollar by 17%, and was on average 11% lower than the average value of the Russian ruble compared to the US dollar during the nine months ended September 30, 2013. During the period from October 1, 2014 to October 27, 2014, the value of the Russian ruble depreciated further against the US dollar by approximately 6% to RUR 41.8 to $1.00.

Additionally, given that substantially all of the Company's revenues are generated in Russian rubles, the Company faces exchange rate risk relating to payments that the Company must make in currencies other than the Russian ruble. The Company generally pays for non-Russian produced programming in US dollars. As of September 30, 2014 the Company had US dollar denominated contractual commitments for the acquisition of approximately $25.0 million in programming rights in 2014, $45.7 million in 2015 and $9.1 million in 2016. In addition, on October 27, 2014, the Company's Board declared a dividend of $0.175 per outstanding share of common stock, or approximately $27.3 million in total. The record date is December 1, 2014 and the payment date is on or about December 26, 2014. As of September 30, 2014, US dollar-denominated cash and cash deposits comprised approximately $65 million; in addition, as of September 30, 2014, the Company had an outstanding foreign exchange forward contract to purchase approximately $25 million at an exchange rate of RUR 37.2 to $1 in December 2014, to reduce a portion of its foreign exchange risk related to US-dollar denominated payments. The Company has not entered into any arrangements to reduce the foreign exchange risk with respect to the remaining future US dollar denominated payments.

If the exchange rate between the Russian ruble and the US dollar remains at its current level or if the Russian ruble depreciates further, the Company's revenues and operating results for 2014, as reported in US dollars, will be materially adversely affected.

Transition to Digital Broadcasting—The Company believes that the introduction of digitalization will not adversely affect its ability to broadcast in the medium term, as its channels will continue to broadcast in the analog format under existing analog licenses until the transition to the digital format is completed. However, there is currently great uncertainty regarding the effect of the implementation of digital broadcasting on the Company's business models, as it is difficult to predict accurately how the digitalization of broadcasting may affect the market. While digital broadcasting would increase CTC's and Domashny's overall technical penetration, the necessary investments for digital migration may not be fully monetized. In addition, under Roskomnadzor's terms of participation in the second multiplex, the Company expects to encounter certain risks and uncertainties in the execution of the CTC and Domashny business models, which could significantly impact the operations and fair value of its reporting units and related assets. Also, uncertainty exists about Peretz's technical penetration and its impact on advertising revenues. Subject to the availability of further information from the government and market participants, and the Company's ability to make further assessments of the government's plans, impairments may be required in the foreseeable future.

On an ongoing basis, the Company meets key participants of the media industry and governmental representatives for discussion and analysis of the transition to digital broadcasting, as well as the development of current business and industry initiatives.

Goodwill and Long-Lived assets

The Company has assets recorded on its consolidated balance sheet, such as broadcasting licenses and goodwill, which represent a significant portion of the Company's total assets. If the Company determines that its estimate of the current value of a reporting unit is below the recorded value of that unit on its balance sheet, the Company may record an impairment loss for goodwill. As of September 30, 2014, the carrying values of goodwill related to CTC, Domashny and Peretz totaled $42.8 million, $21.6 million and $47.9 million, respectively. In addition, as of September 30, 2014, the Company had significant balances of amortizable broadcasting licenses totaling $41.4 million, including CTC licenses—$6.7 million; Domashny licenses—$8.7 million, and Peretz licenses—$21.3 million.

During the nine months ended September 30, 2014, the current geopolitical situation in Ukraine created economic instability in Russia. If Russia experiences significant economic instability or uncertainty, including continued or expanded international economic sanctions, advertisers may choose to reduce their advertising spending in Russia.

The fair value of the Peretz reporting unit is highly sensitive to changes in the television advertising market assumptions. As a result of the impairment review performed as of September 30, 2014, due to the revision of assumptions in the TV advertising market for 2015 and in the medium-term, the excess of fair values over the carrying value of Peretz reporting unit decreased from 48% to 7%, when compared with the fair values estimated during the annual 2013 impairment tests. Depending on further developments of the Ukrainian crisis and related geopolitical situation in the region and its impact on macroeconomic environment of Russia and, specifically, on the Russian TV advertising market in 2015 and medium term, the Company may need to further revise its projected cash flows, which could adversely impact the fair value of its reporting units and related assets, and it would then record impairment charges. See also "Note 2, Basis of Presentation and Summary of Significant Accounting Policies—Goodwill and Long-Lived Intangible Assets Impairment Tests" for sensitivity discussion analysis.

In addition, the Company's management also considers the developments in digital broadcasting and their potential impacts on revenues and costs. The fair value of the Peretz reporting unit is particularly sensitive to changes in revenues and costs that may result depending on its distribution model. Currently, the terms for participation in the third digital multiplex have not been specified. In addition, current Russian legislation does not provide 'must carry' obligations for cable and satellite operators, and accordingly the Company may be unable to secure or maintain carriage of its signal over cable in certain regions, or at transmission rates that are consistent with its historical experience. Depending on further information about the terms of the transition to digital broadcasting, terms of interaction with cable and satellite providers, as well as other future developments, the Company may need to further revise its projected cash flows, which could adversely impact the fair value of its reporting units and related assets, and the Company would then record impairment charges.

Derivative Financial Instruments

As part of its risk management strategy, the Company uses derivative financial instruments, primarily foreign exchange forward contracts, to mitigate its exposure to currency exchange risk related to US dollar denominated payments. The Company's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets and liabilities. It is the Company's policy to enter into foreign currency derivative transactions only to the extent considered necessary to meet its objectives as stated above.

The Company entered into certain foreign exchange forward contracts designated as fair value hedges to protect the value of its existing foreign currency liabilities and firm commitments. For derivative instruments with the notional amount of $56.6 million that were designated and qualify as fair value hedges, the Company recognized foreign currency gains on the derivative instruments of $2.2 million, as well as offsetting foreign currency losses on the hedged item in its condensed consolidated statement of income for the nine months ended September 30, 2014. For derivative instruments with the notional amount of $192.1 million that were designated and qualify as non-designated hedges related to US dollar denominated payments the Company recognized foreign currency gains of $4.1 million on derivative instruments in its condensed consolidated statement of income for the nine months ended September 30, 2014.

Purchase Commitments

The table below summarizes information with respect to the Company's commitments as of September 30, 2014:

	Total		Through 2014		2015		2016		2017		2018		2019

	(in thousands)
Acquisition of programming rights	$	179,555	$	82,879	$	84,077	$	12,599	$	—	$	—	$	—
Transmission and satellite fees		99,715		4,967		20,761		21,414		21,739		20,999		9,835
Leasehold obligations		34,670		1,626		6,773		6,965		7,225		5,908		6,173
Network affiliation agreements		14,066		678		2,868		3,025		3,183		3,344		968
Payments for intellectual rights		11,322		464		1,964		2,072		2,180		2,284		2,358
Other contractual obligations		22,582		1,113		4,279		4,311		4,093		4,291		4,495


Total	$	361,910	$	91,727	$	120,722	$	50,386	$	38,420	$	36,826	$	23,829

In addition, in connection with the planned digitalization in Russia and Kazakhstan, the Company will incur additional costs. In March 2013, the Company entered into 10-year transmission agreements with the Russian Television and Radio Network ("RTRS"). Under the terms of these agreements, RTRS will provide to CTC and Domashny all services required for the channels to broadcast their signals in digital format throughout Russia to approximately 141.6 million viewers. The agreements terminate on March 31, 2023. In July 2014, the Company amended the agreements to specify services fees for 2014 and cash payments for period from 2014 to 2018. The Company's digital transmission expense for 2014 related to broadcasting in the cities with populations more than 50,000 ("50+ coverage") will be approximately $5 million; the expense for 2015 and beyond will be calculated on an annual basis according to rates that RTRS will set by October 1st of the prior year. In addition, during the period 2015-2018, RTRS will construct the digital broadcasting infrastructure in smaller cities with populations less than 50,000 ("50- coverage"). It is expected that this infrastructure will be put into operation in 2019. According to the amended terms of agreements, in addition to the transmission services in the 50+ coverage cities described above, the Company expects to advance payments towards the construction of the digital infrastructure in the 50- coverage regions for CTC and Domashny channels. In aggregate we expect to advance approximately 390 million rubles in 2014, 644 million rubles in 2015, 271 million rubles in 2016, 68 million rubles in 2017 and 51 million rubles in 2018 resulting in total advances of approximately 1,424 million rubles or $36.2 million by the end of 2018 (at an exchange rate of RUR 39.4 to $1.00 as of September 30, 2014). Under the amended terms, these advances will be offset against service payments otherwise required for digital transmission services subsequent to 2018. In the nine months ended September 30, 2014, advance payments towards the construction of the digital infrastructure in the 50- coverage regions was approximately $3.3 million for CTC and Domashny channels in aggregate, which are presented as other non-current assets on the Company's balance sheets.

In addition, the Company expects to continue incurring analog transmission costs during the analog-to-digital transition period. In 2013, the Company incurred approximately $24 million of such expenses, excluding payments to RTRS for transmission of digital signal, for all of its channels in aggregate.

Legal and Tax Proceedings

In the ordinary course of business, the Company may be party to various legal and tax proceedings, including tax audits, and subject to claims, certain of which relate to the developing markets and evolving fiscal and regulatory environments in which the Company operates. In the opinion of management, the Company's liability, if any, in all pending litigation, other legal proceedings or other matters, will not have a material effect upon the financial condition, results of operations or liquidity of the Company.