COMMUNICATION OF THE FUTURE Contents
CONTENTS
1. Message from the Chairman of the Board of Directors 6 11. Unaudited consolidated balance sheet of Svyazinvest Group, IFRS, draft 52
2. Message from Director General 7 12. Unaudited consolidated P&L statement of Svyazinvest Group, IFRS, draft 57
3. Company Profile 10 13. Unaudited consolidated statement of changes in eguity of Svyazinvest Group, IFRS, draft 61 4. Reporting Procedure 14 14. Notes to unaudited consolidated financial statements of Svyazinvest Group 64 5. 2006 Major Results 15 15. Accounting policy and standards of Svyazinvest Group 79 6. Managerial Bodies 18 6.1 Board of Directors 18 16. Information for shareholders and investors 98 6.2 Management Board 19 16.1 Share Capital 98 16.2 Share Capital Structure 98 7. Profiles of Svyazinvest Group’s Largest Companies 22 16.3 Company appointed as registrar for the securities of Svyazinvest and its associates 98 7.1 Rostelecom 22 16.4 Auditor 98 7.2 CenterTelecom 23 16.5 Auditing Committee 98 7.3 North-West Telecom 24 16.6 Annual General Shareholders Meeting 99 7.4 VolgaTelecom 25 16.7 Contact Persons 99 7.5 Southern Telecommunications Company 26 16.8 Postal Addresses 99 7.6 Uralsvyazinform 27 16.9 Internet Addresses 100 7.7 Sibirtelecom 28 7.8 Dalsvyaz 29 7.9 The Group's Other Major Assets 30
8. Changes in the Telecommunications Industry 34 8.1 Liberalization of LD telephony market 34 8.2 New interconnect rules 35 8.3 Introduction of "Calling Party Pays" principle 35 8.4 Switch to tariff plan system 35
9. Business and Financial Performance of Svyazinvest Group’s Largest Companies 38 9.1 Market positioning 38 Market shares in key segments 38 Development of unregulated services 38 9.2 Investment Activity 38 Investment trends and structure 38 Rollout of telephony infrastructure 39 9.3 Financial Policy 40 9.4 Key facts and figures of financial and business performance and efficiency 41 9.5 Social responsibility 42 Universal service 42 National "Education" project 42
10. The Group’s Core Securities Business 46 10.1 Shares, ADR 46 10.2 Dividend history 47 10.3 Bonds 48 MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS
Annual report 2006 MESSAGE FROM DIRECTOR GENERAL 1. MESSAGE FROM THE CHAIRMAN OF THE BOARD 2. MESSAGE FROM DIRECTOR GENERAL OF DIRECTORS
I take pride in presenting the annual 2006 report on the financial and business performance of Russia’s largest telecommunications group of companies Svyazinvest. It is no exaggeration to say that 2006 was a year of great changes in the telecommunications indus- try. Telecommunications today is one of the leading sectors in the Russian economy, having dem- The market landscape is changing rapidly as the fixed-line telephony segment, which for many years onstrated a rapid pace of growth and development potential in recent years. The enactment of new generated the main cash flow for the Group, is nowadays close to saturation. In the new environment legislation placed all market players on an equal footing and stimulated a great deal of competition in much depends upon how quickly we can meet the challenge and focus our efforts on other most the industry, thereby sharpening its long-term investment appeal and enhancing the legal framework promising advanced services and technology. in accordance with global market standards. Our performance in 2006 was impressive: all regional telecom operators achieved great success When last year long-distance telephony market liberalization started, new interconnect rules took in rolling out broadband Internet access services (xDSL), the total subscriber base of the Group effect, and new interconnect tariffs were set. A major step was made in advancing the telecommuni- increased 2.7 times in 12 months and numbered 690,000 connections. This segment of the telecom cations industry by implementing Federal Law “On Telecommunications” in accordance with which all market is developing at a fast clip, and according to experts it is currently one of the most dynamic market players are to be treated on a non-discriminative equal footing and receive equal access to and lucrative market segments. public access networks. As a result, the number of alternative operators rose considerably. It is very encouraging that Svyazinvest Group holds leadership in the broadband Internet access All these changes have definitely had a substantial impact on Svyazinvest Group. The company’s services market and has been expanding aggressively into all regions of Russia. Nevertheless, we do business and financial performance indicators in 2006 suggest that being the largest player in the tele- realize that xDSL solutions are but the next step in a new technological revolution, a sort of halfway communications market it continues to expand at a fast pace; it is constantly phasing in new services house for the present market demand and the capability of Russia’s public access network. and technology and partnering with a growing number of market participants. Svyazinvest Group companies’ goal is to modernize and upgrade the infrastructure of fixed-line tele- It is also important to emphasize that Svyazinvest companies support economic and social progress communications nationwide and turn it into a next generation network using packet switching network in the community: they have taken an active part in developing national projects while assisting the technology. This is a daunting challenge, but much depends on its solution both for Svyazinvest itself government to implement a policy that hinges on equal access to telecommunications infrastructure. and the telecommunications industry, as a whole.
I feel very positive about Svyazinvest future; it will meet all its targets and achieve its long-term goal To sum up, the way ahead involves rolling out and phasing in the most advanced technologies and of providing customers with world-class infocom solutions. services that enjoy the strongest demand.
Leonid D. Reiman Alexander N. Kiselev
Chairman of the Board of Directors of Svyazinvest Chairman of the Management Board Minister of Information Technologies and Telecommunications Director General of Svyazinvest 6 7 Annual report 2006 3. COMPANY PROFILE Company Profile
3. COMPANY PROFILE
Telecommunications Investment Joint Stock Company (JSC Svyazinvest), formed by consolidating the controlling shares in 85 regional fixed-line operators nationwide, was incorporated on September Over 80% of the telecom- Coverage area: 18, 1995. munication infrastructure Svyazinvest’s key assets are composed of controlling stakes in the following companies: of the Russian Federation is controlled by Svyazinvest’s • Rostelecom; subsidiaries and affiliates. The Group's networks • CenterTelecom; provide services to more than 90% of the Russian • North-West Telecom; population. • VolgaTelecom;
• Southern Telecommunications Company;
• Uralsvyazinform;
• Sibirtelecom;
• Dalsvyaz.
Svyazinvest also owns equity positions in the following companies:
• Central Telegraph;
• Dagsvyazinform;
• Kostroma City Telephone Network (KGTS);
• Moscow City Telephone Network (MGTS);
• Giprosvyaz.
Over 80% of the telecommunication infrastructure of the Russian Federation is controlled by Svyazinvest’s subsidiaries and affiliates. The Group's networks provide services to more than 90% of the Russian population.
The Group’s companies are mainly composed of public network access operators. Svyazinvest's subsidiaries and affiliates are licensed to provide local and zonal telephony, datacom, Internet access, ISDN, wireless subscriber access and mobile services, telematic and telegraph services, wireline radio broadcasting, cable and live broadcasting telecom services.
Rostelecom is the flagship national operator providing international and long-distance telecommunica- tion services to its subscribers.
A majority stake in Svyazinvest enables the Russian government to exert considerable influence on the holding company's operations and management. It appoints representatives of federal executive bodies to Svyazinvest's Board of Directors, regulates ILD, DLD, zonal and local voice tariffs and imple- ments its licence policy. 10 11 REPORTING PROCEDURE
Annual report 2006 2006 MAJOR RESULTS Reporting procedure 2006 Major Results
4. REPORTING PROCEDURE 5. 2006 MAJOR RESULTS
In this annual report the analysis of financial and operating results of Svyazinvest's subsidiaries and The Group's revenue increased by 13% year-on-year and totaled RUR 218.3 billion. Income generated from As of December 31, 2006 affiliates (collectively, “the Group”), is made based on the Group's aggregate financial statements companies of Svyazinvest telecom services grew by 10.5% and reached RUR 208.1 billion. Net profit stood at RUR 19.6 billion, which compiled in accordance with Russian Accounting Standards, unless otherwise agreed in the text of Group participated in activi- the report. is an 8.8% rise compared to 2005. ties of 232 organisations; in 97 organisations they Russian Accounting Standards (RAS) are the balance sheets and profit and loss statements of all Based on the results of the Group's investment activity, capital investments amounted to RUR 38.1 billion, possessed the controlling Svyazinvest's subsidiaries and affiliates whose main type of activity is the provision of fixed-line tele- of which RUR 25.6 billion came from the companies' in-house funds and RUR 12.4 billion from borrowed stock, in 51 companies com services. The Group’s aggregate financial statements are made up of annual financial statements resources. Bank loans, bond issues and leasing schemes were used as tools for attracting investments. their stock included from 20% to 50% of shares. of Svyazinvest's subsidiary and affiliated companies totaled on a line-by-line basis. The total number of lines in service of local telephone networks reached 31.7 million compared to The companies whose financial statements form the Group's aggregate financial statements are listed 31.3 million lines at the beginning of the reporting period. The Group put into service 12,000 km of below: transmission lines. The capacity level of electronic exchanges to the total number of lines in service of local 1. Rostelecom telephone networks soared from 60.1% to 63.3%.
2. CenterTelecom In 2006 the company’s pricing policy underwent drastic changes:
3. North-West Telecom • on January 1, 2006, new interconnect and traffic transmission rules and fees took effect;
4. VolgaTelecom • tariffs for local telephony services were established and subscribers were asked to choose the
5. Southern Telecommucations Company system of payment for services;
6. Uralsvyazinform • a list of regulated local telephony services was prepared;
7. Sibirtelecom • the “Calling Party Pays” principle was launched (for intra-zonal calls made between fixed-line and mobile telecom networks); 8. Dalsvyaz • the cross-subsidization mechanism was laid out, which calls for financing revenue not received 9. Central Telegraph from local voice telephony by adding a compensatory surcharge to the price of local voice and zonal 10. Dagsvyazinform origination of services which aim to establish intra-zonal, DLD and ILD connections.
Aggregate financial statements include intra-Group turnovers for services sold and dividends calcu- A draft of the Group's IFRS Thus, not only was a new pricing and tariff approach introduced, but also the list of state-regulated telecom lated, as well as intra-Group investments and mutual receivables and payables of the Group's compa- consolidated financial statements was prepared services was broadened and qualitatively amended. nies. Aggregate financial statements are the traditional form of presentation for the Group's financial on the basis of projects of As of December 31, 2006 companies of Svyazinvest Group participated in activities of 232 organisations; performance with a view to informing the users of the Group's financial information about the role and IFRS consolidated financial positioning of the Group in the telecommunications sector of the Russian Federation. statements of companies in 97 organisations they possessed the controlling stock, in 51 companies their stock included from 20% included in the Group. to 50% of shares. A draft of the Group's IFRS consolidated financial statements was prepared on the basis of projects of IFRS consolidated financial statements of companies included in the Group. The draft was compiled In 2006 the average payroll headcount in the companies of Svyazinvest Group is 273,442 indivi- by: duals.
• totaling similar items of assets, liabilities, shareholders equity, revenues and expenses on a line- by-line basis with subsequent elimination of the book value of Svyazinvest's investments in every subsidiary and a portion of shareholders equity of every Svyazinvest subsidiary;
• calculating minority share in the net profit of subsidiaries included in the consolidated financial state- ments over the reporting period;
• eliminating intra-Group settlements.
This draft of the consolidated financial statements was prepared and adjusted for the effects of devia- tions indicated in the Notes to the draft Unaudited Consolidated Financial Statements of Svyazinvest (item 14). 14 15 Annual report 2006 MANAGERIAL BODIES Managerial Bodies
6. MANAGERIAL BODIES
6.1 COMPOSITION OF THE BOARD OF DIRECTORS OF SVYAZINVEST (AS ELECTED AT THE Karen P. Markaryan Aide to the Deputy Chief of the ANNUAL GENERAL SHAREHOLDERS MEETING OF JUNE 29, 2006) Presidential Executive Office of the Russian Federation
Leonid D. Reiman Minister of Information Technologies and Telecommunications of the Russian Federation Chairman of the Board of JSC Svyazinvest Lyudmila I. Pridanova Deputy Chief of the Federal Property Agency
Boris D. Antonyuk Deputy Minister of Information Technologies and Telecommunications of the Russian Federation
Vasily M. Popik Aide to the Expert Office of the President of the Russian Federation
Anatoly D. Akimenko Representative of Mustcom Ltd.
Vadim A. Stepanov Secretary of State, Deputy Director of the Federal Security Service
Kirill G. Androsov Deputy Minister of Economic Development and Trade of the Russian Federation
6.2 MANAGEMENT BOARD (AS OF DECEMBER 31, 2006)
Sergei V. Karpukhovich Representative of Mustcom Ltd. Chairman of the Management Board Alexander N. Kiselev Director General Management Board Members Stanislav N. Panchenko Deputy Director General Evgeny A. Chechelnitsky Deputy Director General Konstantin V. Belyaev Deputy Director General 18 Vladimir B. Zhelonkin Deputy Director General 19 PROFILES OF SVYAZINVEST GROUP’S Annual report 2006 LARGEST COMPANIES Profiles Of Svyazinvest Group's Largest Companies
7. PROFILES OF SVYAZINVEST GROUP'S LARGEST COMPANIES
7.1 ROSTELECOM 7.2 CENTERTELECOM
Branches: North-Western, Volga, Siberian, Southern, Ural, Far Branches: in the cities of Belgorod, Bryansk, Vladimir, Shareholder capital breakdown as of register Shareholder capital breakdown as of register Verkhnevolzhsk, Voronezh, Kaluga, Kursk, Lipetsk, Moscow, Orel, Eastern, and Central regions, Long-Distance and International closing date in 2006 (% of charter capital) closing date in 2006 (% of charter capital) Telephony (MMT), Training and Engineering Centre (UPC RT). Ryazan, Smolensk, Tambov, Tver, and Tula.
Rostelecom is the national DLD and ILD operator in Russia and CenterTelecom is one of the largest telecom companies in Eastern one of the country’s largest telecom companies. The company’s Europe. It has a well-developed telecom infrastructure in all regions own backbone network spans over 150,000 kilometres which of the Central Federal District (CFD) of the Russian Federation, enables it to provide modern telecommunication services to all excluding Moscow. The population of regions serviced by the constituent members of the Russian Federation. company is 36.5 million people.
The company provides DLD and ILD telecom services to its end The Central Federal District is one of the most densely populated users in all regions of the Russian Federation through its regional federal districts in Russia. Core industries are ferrous and non-ferrous telecom operators’ network. In addition to basic telecom services, metallurgy, ore production and enrichment, machine engineering the company offers a variety of value-added products on its own and metal working, chemical and petrochemical industries, radio intelligent platform and advanced multimedia services. electronics, tool engineering, and light industry.
Rostelecom is the largest operator for operators in Russia which, CenterTelecom operates in all segments of the telecommunications using its own trunk network, ensures transit of DLD and ILD market providing local voice, zonal telephony, data transfer, datacom, traffic and integrates a network of Russian operators into a single intelligent services, ISDN, Internet access, as well as wire, radio and nationwide network. The company provides telecommunications services to state entities, TV and cable TV broadcasting. The company is also engaged in channel rental business. radio companies and Internet providers. On the regional telecom market, CenterTelecom accounts for 90% of the local voice, 74% of the The company has direct access to the long-distance networks of over 100 operators located in domestic telecom, 36% of value-added services (dedicated Internet access, datacom, IPTV, and 72 countries, is a party to 27 international cable networks and deals with 400 foreign telecommunications intelligent telecom networks services). operators and companies. The company ensures transit of international traffic and leases out CenterTelecom is currently launching an ADSL2+ Internet access project under the DOMOLINK international digital telecom channels. trademark. Rostelecom as a leading telecommunications company of the Russian Federation is a standing member The company has launched a Level-1 ADR programme for common shares that are traded on the US of the International Telecommunication Union (ITU), a member of the Board of Operators of Regional OTC market and major European stock markets. J.P. Morgan Chase Bank is its custody bank. Commonwealth in the field of Communications (RCC) and other international organisations. The company’s S&P/Fitch international credit rating is B/B- with a stable/negative outlook. It’s noteworthy that 49.33% of the company’s common shares and 100% preferred shares are in free float. In 1998, the US Federal Securities and Exchange Commission registered the second-level ADR programme for Rostelecom’s common shares with a listing on the NYSE (ROS symbol). The Headline indicators 2006 2005 Chng, % company’s ADRs are also traded on major national and international stock exchange markets. Revenue (RUR, mln) 28,305 27,594 102.90 The company’s S&P international credit rating is BB- with a stable outlook. Expenses (RUR, mln) 21,212 21,662 97.90
Headline indicators 2006 2005 Chng, % Sales profit (RUR, mln) 7,183 5,931 121.10 Revenue (RUR, mln) 60,033 40,292 149.0 Net profit (RUR, mln) 2,048 655 312.67 Expenses (RUR, mln) 52,247 28,331 184.4 Number of lines (mln) 6.6 6.5 101.53 Sales profit (RUR, mln) 7,786 11,961 65.1
Net profit (RUR, mln) 7,185 9,028 79.6 Internet revenue (RUR, mln) 1,559 1,083 143.95
Headcount (individuals) 22,498 23,815 94.5 Headcount (individuals) 59,351 64,358 92.2
Revenue per line 4,288 4,268 100.47 22 Line per employee 111 100 111.00 23 Profiles Of Svyazinvest Group's Largest Companies
7.3 NORTH-WEST TELECOM
Branches: Arkhangelsk region, Vologda region, Kaliningrad region, 7.4 VOLGATELECOM Shareholder capital breakdown as of register closing date Shareholder capital breakdown as of register closing date Karelia, Komi Republic, Leningrad region, Murmansk region, in 2006 (% of charter capital) Branches: in the cities of Kirov, Nizhny Novgorod, Orenburg, in 2006 (% of charter capital) Novgorod region, Saint Petersburg, and Pskov region. Penza, Samara, Saratov, Ulyanovsk, and in the Republics of Mari- North-West Telecom is the largest fixed-line telephony operator El, Mordovia, Udmurtia, and Chuvashia. in the North-Western Federal District (NWFD) of the Russian VolgaTelecom is the largest fixed-line operator in the Volga Federal Federation. The population of regions serviced by the company is District (VFD) of the Russian Federation. Its branches are located 13.7 million people. in all constituent entities of VFD, excluding the Perm region and A diversified economy, sea ports, transit transport routes, as well the republics of Bashkortostan and Tatarstan. The population of as the largest portion of its urban population compared to other regions serviced by the company is 19.9 million people. federal districts are characteristic of the North-Western Federal VFD's core industries are machine engineering, as well as fuel District. The telecommunications market in this region is extremely and energy production. The district benefits from its geographical competitive. position linking the eastern and western parts of Russia. The company provides a wide range of telecom services including VolgaTelecom provides fixed-line telephony services to over local voice and intra-zonal services, Internet access, datacom, 4.8 million subscribers and has a cellular database in excess of channel leasing, etc. 2.5 million subscribers. The company focuses on further On the regional telecom market, North-West Telecom accounts for more than 80% of the local voice, development and modernization of telephone networks based on new technologies, active growth 62.5% of the dial-up Internet access and 37.7% of the dedicated Internet access segments. The and strengthening competitive positions on the high-tech services market. number of lines in service is 4.7 million. The digitalization rate of the local network is 56.6%. The On the regional telecom market the company accounts for 87% of the local voice, and is a leading company’s broadband subscriber base exceeds 91,000. internet provider with the market share over 70%. North-West Telecom has implemented a Level-1 ADR programme for its common shares. J.P. Morgan VolgaTelecom has launched a Level-1 ADR programme for its common shares that are traded on Chase Bank is the company's custody bank. ADRs are traded on the US OTC market, Frankfurt and the US OTC market and major European stock markets. J.P. Morgan Chase Bank is the company's Berlin stock markets. custody bank. The company’s S&P/Fitch international credit rating is BB-/B+ with a stable/stable outlook. Its S&P international credit rating is BB- with a stable outlook.
Headline indicators 2006 2005 Chng, % Headline indicators 2006 2005 Chng, %
Revenue (RUR, mln) 20,473 20,383 100.4 Revenue (RUR, mln) 21,691 21,348 101.6
Expenses (RUR, mln) 15,498 16,572 93.5 Expenses (RUR, mln) 16,950 16,059 105.5
Sales profit (RUR, mln) 4,974 3,810 130.5 Sales profit (RUR, mln) 4,742 5,289 89.7
Net profit (RUR, mln) 2,426 1,844 131.6 Net profit (RUR, mln) 2,454 2,256 108.8
Number of lines (mln) 4.4 4.3 102.3 Number of lines (mln) 4.9 4.6 104.3
Internet revenue (RUR, mln) 1,449 1,829 79.2 Internet revenue (RUR, mln) 1,858 1,157 160.6
Headcount (individuals) 26,596 31,647 84.0 Cellular profit (RUR, mln) 350 241 145.4
Revenue per line (RUR) 4,653 4,752 98.0 Headcount (individuals) 42,595 46,449 91.7
Line per employee 165 135 122.2 Revenue per line (RUR) 4,427 4,605 95.2 24 Line per employee 116 99.8 116.4 25 Profiles Of Svyazinvest Group's Largest Companies
7.5 SOUTHERN TELECOMMUNICATIONS COMPANY Shareholder capital breakdown as of register closing date Shareholder capital breakdown as of register closing date Branches: Krasnodar, Adygeya, Astrakhan, Volgograd, Kabardino- in 2006 (% of charter capital) 7.6 URALSVYAZINFORM in 2006 (% of charter capital) Balcaria, Kalmykia, Karachaevo-Circassia, Rostov, Northern Ossetia, and Stavropol. Branches: in the cities of Ekaterinburg, Kurgan, Perm, Tyumen, Chelyabinsk, and in the Khanty-Mansiysk and Yamal-Nenets Southern Telecommunications Company is the largest fixed-line autonomous districts, as well as Interregional Mobile Division and operator in the Southern Federal District (SFD) of the Russian the Interregional Data Division. Federation. Its branches are located in all constituent entities of the SFD, except for the republics of Dagestan, Ingushetia, and Uralsvyazinform is a leader in providing telecom services in the Ural Chechnya. The population of regions serviced by the company is Federal District (UFD) of the Russian Federation. Its branches are 18.7 million people. located in all constituent entities of the UFD, and in the Perm region as well. The population of regions serviced by the company is 15 SFD specializes in agro-industrial processing, as well as coal million people. production and tourism. The telecommunications market in the SFD has a great deal of potential due to the intensive business activity Most of Russia's oil and gas resources are located in the Ural of the population, a large number of resorts and seasonal demand Federal District. Therefore, oil and gas production plays a key role for telecom services. in the district's economy. Major oil and gas fields are concentrated in the Khanty-Mansiysk and Yamal-Nenets autonomous districts. The company provides a wide range of telecom services: zonal The Ural Federal District accounts for a fifth of the country's industrial output, and generates 40% of telephony and local voice, value-added services (Internet access, ISDN and intelligent services, federal tax levied. construction of VPNs, cable TV, call centres) and other services. Uralsvyazinform holds strong positions both in the basic telephony segment and value-added services The company has launched a Level-1 ADR programme for its common shares that are traded on market. On the regional telecom market the company services 3.7 million local service subscribers, the US OTC market and major European stock markets. J.P. Morgan Chase Bank is the company's 4.4 million Utel cellular subscribers, and 115,000 broadband access subscribers. The company’s custody bank. market share on the regional telecom market is 52%. The company’s S&P international credit rating is B- with a stable outlook. Uralsvyazinform's most important competitive advantage is its in-house digital interregional multi- service transport network with a total length spanning 17,500 km. Its digital lines reached all 205 towns Headline indicators 2006 2005 Chng, % and locations in the area serviced by the company.
Revenue (RUR, mln) 17,570 18,133 96.9 Headline indicators 2006 2005 Chng, % Expenses (RUR, mln) 12,785 13,952 91.6 Revenue (RUR, mln) 33,851 30,294 111.7 Sales profit (RUR, mln) 4,785 4,180 114.5 Expenses (RUR, mln) 26,218 22,880 114.6 Net profit (RUR, mln) 1,184 305 388.2 Sales profit (RUR, mln) 7,634 7,414 103.0 Number of lines (mln) 4.1 4 102.5 Net profit (RUR, mln) 2,085 2,195 95.0 Internet revenue (RUR, mln) 1,393 949.3 146.7 Number of lines (mln) 7.7 5.5 139.7 Headcount (individuals) 34,426 37,662 91.4 Internet revenue (RUR, mln) 1,669 978 170.6 Revenue per line (RUR) 4,285 4,541 94.3 Cellular revenue (RUR, mln) 10,269 5,920 173.5 Line per employee 119 106 112.3 Headcount (individuals) 30,619 33,197 92.2
Revenue per line (RUR) 4,395 5,494 80.0 26 Line per employee 251.5 166.1 151.4 27 Profiles Of Svyazinvest Group's Largest Companies
The company has launched a Level-1 ADR programme for its common and preferred shares. J.P. The cellular operators of the company provide services in 8 regions of Siberia. Subsidiaries of Morgan Chase Bank is the company's custody bank. Sibirtelecom – Yeniseitelecom, Baikalvestcom and its subdivision Ulan-Ude Cellular Networks hold leading positions on the GSM cellular market in Krasnoyarsk krai, the Irkutsk region and the Republic Its shares are traded on domestic and foreign stock exchanges such as MICEX, RTS, the US OTC of Buryatia. IMT-MC 450 (CDMA-2000) cellular services, under the Wellcom trade mark, are provided market, Frankfurt and Berlin stock markets. in Krasnoyarsk krai, Tomsk and Irkutsk regions. The company’s S&P/Fitch international credit rating is BB-/B+ with a stable/negative outlook. The company has executed a Level-1 ADR programme for its common shares that are traded on the US OTC market, Frankfurt and Berlin stock exchanges. J.P. Morgan Chase Bank is its custody bank. 7.7 SIBIRTELECOM Shareholder capital breakdown as of register closing date The company’s S&P/Fitch international credit rating is B+ with a stable outlook. Branches: in Altai krai, the republics of Khakassia and Buryatia, in 2006 (% of charter capital) in the Autonomous Republic of Gorno-Altai, in the cities of Irkutsk, Kemerovo, Krasnoyarsk, Novosibirsk, Omsk, Tomsk, and Chita. 7.8 DALSVYAZ
Sibirtelecom is the leading telecom company in the Siberian Branches: in Primorsky krai, Khabarovsky krai, Amur, Kamchatka, Shareholder capital breakdown as of register closing date Magadan, and Sakhalin regions. Federal District (SFD) of the Russian Federation. Its branches are in 2006 (% of charter capital) located in all constituent entities of the SFD, excluding the Tuva Dalsvyaz is the largest telecom operator in the Far-Eastern Republic. The population of regions serviced by the company Federal District (FEFD) of the Russian Federation. Its branches exceeds 20 million people. are located in all constituent entities of the FEFD, excluding the Siberia plays a decisive role in creating Russia’s nationwide fuel Sakha Republic (Yakutia) and Chukotka autonomous district. and electric power balance as the world's largest hydroelectric and The population of the regions serviced by the company is about thermal power plants are located in the Siberian Federal District. 6.6 million people. Coal production, ferrous and non-ferrous metallurgy are well- The Far-Eastern Federal District's economy depends mainly on developed industries. The Trans-Siberian railway, which stretches local natural resources. Non-ferrous metallurgy is the basic industry across the district, is one of Russia’s major transit railroads. of the Magadan and Amur regions. Fishery is well-developed in The company commands 43% of the regional telecommunications market. It accounts for 83% of the Kamchatka and Sakhalin regions, as well as in Primorsky krai. local voice, 95% of the intra-zonal traffic, 51% of the Internet access and datacom, and 23% of cellular A number of major oil deposits are being developed in Sakhalin services. The company’s operators service over 4.2 million fixed-line telephony subscribers and more region, and machine building is a leading industry in the economy than 3.1 million cellular subscribers. of Khabarovsk krai. The Republic of Sakha (Yakutia) is famous for its precious metals and diamond mining industries. The competitive advantage of Sibirtelecom is its well-developed network infrastructure and its ability to provide a comprehensive range of services to all subscribers throughout the service territory. Dalsvyaz possesses the basic telecom infrastructure in the Far-Eastern Federal district and has priority access to end users. Its subscriber base, which exceeds 1.3 million users, is the largest in the region. Headline indicators 2006 2005 Chng, %
Revenue (RUR, mln) 22,942 21,906 104.7 Headline indicators 2006 2005 Chng, %
Expenses (RUR, mln) 19,533 18,883 103.4 Revenue (RUR, mln) 10,291 10,513 97.9
Sales profit (RUR, mln) 3,409 3,023 112.7 Expenses (RUR, mln) 7,708 8,799 87.6
Net profit (RUR, mln) 1,254 706 177.4 Sales profit (RUR, mln) 2,583 1,714 150.7
Number of lines (mln) 4.5 4.1 109.8 Net profit (RUR, mln) 761 852 89.4
Internet revenue (RUR, mln) 1,436 949 151.2 Number of lines (mln) 1.4 1.3 107.5 Cellular revenue (RUR, mln) 1,012 721 140.2 Internet revenue (RUR, mln) 1,234 780.0 158.4 Headcount (individuals) 39,073 42,529 91.9 Headcount (individuals) 15,063 17,365 86.7 Revenue per line (RUR) 5,098 5,351 95.9 Revenue per line (RUR) 7,350 7,879 93.2 Line per employee 114 96.4 118.3 Line per employee 92.9 74.8 124.3 28 29 Profiles Of Svyazinvest Group's Largest Companies
The company provides a full array of telecom services ranging from fixed-line telephony to datacom services using cutting-edge technologies.
The company’s market share on the regional telecommunications market is 37%.
Dalsvyaz accounts for 84% of the local voice and 85% of broadband access services.
The company has launched a Level-1 ADR programme for its common shares that are traded on the US OTC market, Frankfurt and Berlin stock exchanges. The common and preferred shares of Dalsvyaz are also traded on the Russian stock markets such as RTS and MICEX.
J.P. Morgan Chase Bank is its custody bank.
The company’s Fitch international credit rating is B with a stable outlook.
7.9 THE GROUP'S OTHER MAJOR ASSETS
Central Telegraph (Svyazinvest owns 51% of its voting shares) is the major datacom service provider in the Moscow metropolitan area.
Its main services include: local voice, datacom, telematic, datacom services, channel and network leasing services.
Revenue in 2006 totaled RUR 2,536 million.
Dagsvyazinform (Svyazinvest owns 50.66% of its voting shares) is a telecommunications operator in the Republic of Dagestan. The company provides the following services: local and zonal telecom services, wire broadcasting, telematic and datacom services.
Population of the region – 2.06 million people.
Revenue in 2006 totaled RUR 469 million.
Giprosvyaz (Svyazinvest owns 50.66% of its voting shares) is a successor of the State Telecom Research and Design Institute. Under the Institute's projects the majority of large-size telecom systems and facilities in Russia and former Soviet republics were designed and constructed.
Revenue in 2006 totaled RUR 395 million.
30 31 Annual report 2006 CHANGES IN THE TELECOMMUNICATIONS INDUSTRY Changes in the Telecommunications Industry
8. CHANGES IN THE TELECOMMUNICATIONS INDUSTRY
The following external key factors determined the outcome of economic activities of Svyazinvest 8.2. NEW INTERCONNECT RULES Group in 2006: At the end of 2005 the companies of Svyazinvest Group were Interconnect fees and traffic transfer payments between • Liberalization of DLD telephony market. included in the Register of Telecom Operators that held significant Svyazinvest Group companies and other operators, positions in public telecom networks. In 2006 the activities of the • New interconnect rules. RUR, bln* companies of the Group were determined by the interconnect rules • Introduction of “Calling Party Pays” principle. for telecom operators assigned the status of an operator holding a significant position in the public telecom network. • Switch to flat tariff plans. In line with the new rules, the companies of the Group developed 8.1. LIBERALIZATION OF LD TELEPHONY MARKET new, uniform and indiscriminative conditions of connection service and traffic transfer, including economic terms established in accor- Outgoing DLD/ILD traffic dance with the regulatory principles of Rossvyaznadzor. Revenue from DLD/ILD traffic, RUR, bln Rostelecom, bln/min These new conditions of connection service and traffic transfer became the basis for renegotiated interconnect agreements between telecom operators, which translated into a change in interconnect fees for traffic transfer.
8.3. INTRODUCTION OF "CALLING PARTY PAYS" PRINCIPLE
Another major innovation on the telecom market was the introduc- tion of “Calling Party Pays” principle.
To implement this scheme, the companies of the Group intro- duced: Outgoing intrazonal traffic from fixed to cellular networks, bln/min* • Effective July 1, 2007, a “fixed-flexible” service billing plan deve- loped in accordance with the regulations of the Federal Tariff Service of the Russian Federation for intra-zonal connections within regional centre. The competitiveness of this billing plan against the tariffs of mobile network operators caused a positive The most important event on the telecommunications market in DLD/ILD services revenue “fixed-cellular” connection service trend. 2006 was liberalization of long-distance telephony market. For Breakdown between Rostelecom and RTOs The billing of the above-mentioned connections service enabled Svyazinvest Group liberalization resulted in: the companies of the Group to generate extra 6.4 billion rubles of • the emergence of competition with telecom operators not inclu- revenue in H206. ded in Svyazinvest Group. At the same, these activities had no • Renegotiation of interconnect service agreements between the negative impact on Rostelecom’s network traffic*. mobile networks operators on the basis of the new rules, inclu- • a situation where Rostelecom was the only telecom service ding calculation of zone call termination services fees. provider with a valid licence that conformed to governmental requirements. The change in licensing terms led to a change in 8.4. SWITCH TO TARIFF PLAN SYSTEM the company’s revenue and cost-side breakdown. At the end of 2006 the Federal Tariff Service of the Russian new relations between DLD/ILD operators and local and intra- • Federation established three compulsory tariffs on local telephony zonal operators in line with the new interconnect rules, as well as for networks with time-based billing schemes. These tariffs were time-based billing, a monthly line the use of agents (including RTO agents) by DLD/ILD operators rental fee, a combined tariff, and a number of other additional tariff plans (for Sibirtelecom and North- for providing their services. West Telecom).
A cross-subsidization mechanism was implemented for traffic pay- For those regions where technical conditions of the telecom networks did not enable the operators to ment calculations. offer their subscribers the right to choose the tariff, the Federal Tariff Service of the Russian Federation developed special tariffs for local telephony connections with a fixed monthly line rental fee. Under this mechanism, the DLD/ILD operators are to pay a compensatory surcharge on the price of zone call initiation. Starting in February 2007, most of the Group’s subscribers exercised their right to choose tariff plans for local telephone service.
* The interregional telecommunications companies. 34 35 BUSINESS AND FINANCIAL PERFORMANCE Annual report 2006 OF SVYAZINVEST GROUP’S LARGEST COMPANIES Business and Financial Performance of Svyazinvest Group’s Largest Companies
9. BUSINESS AND FINANCIAL PERFORMANCE OF SVYAZINVEST GROUP’S LARGEST COMPANIES
Out of the total amount of investments: Out of the total amount of investments 9.1. MARKET POSITIONING RUR 21.9 billion (or 54%) went to equipment, and RUR 13.0 billion (or 34.2%) was invested in RUR 21.9 billion (or 54%) construction and installation of telecom facilities. Market shares in key segments went to equipment, and Out of the total amount of capital expenditures, the Group's own resources stood at RUR 25.6 billion RUR 13.0 billion (or 34.2%) In 2006 the total market share of Svyazinvest Group of companies on the telecommunications market In 2006 the total market and RUR 12.4 billion was borrowed. was invested in construction of the Russian Federation was 26%. share of Svyazinvest and installation of telecom Group of companies on the RUR 3.7 billion worth of equipment was purchased through the financial leasing scheme to construct The intra-zonal, DLD and ILD networks segments retained their leading positions. The market share of facilities. backbone networks, facilities for local voice and datacom facilities, as well as to roll out rural networks the Group on this telecom market stood in excess of 80%. On the local telephony market the Group’s telecommunications market and multi-service telephony and launch value-added services. share was 54%. of the Russian Federation was 26%. Given that the main activities of Svyazinvest Group of companies on the telecom market was the basic telephony service, the companies’ market share on the mobile telephony service market increased Rollout of telephony infrastructure insignificantly (from 2.6% in 2005 up to 3.4% in 2006). Commissioning of DLD and ILD networks In the datacom segment, which was the most dynamic one, the market share of the Group was about 25%. In 2006 Svyazinvest Group entered 12,000 kilometres of fixed and intra-zone primary lines into Development of unregulated services service, including:
In 2006 the broadband access services segment of the market was on a fast-track growth track. The - 10,500 kilometres of fiber-optic lines; number of subscribers increased 4.5 times during the reporting period. Keeping pace with this industry trend is one of the company’s priorities in 2007. - 1,000 kilometres of radio relay lines.
In 2006 the TV cable service was developing at a fast pace with the number of subscribers Intra-zonal primary networks were rolled out by installing fiber-optic lines with synchronous data rising 20%. transmission (SDH) equipment. The company commenced construction of its networks using dense wavelength division multiplexing (DWDM) equipment; this technology made it possible to enhance the Growth in the mobile telephony segment was significant and amounted to 24%. communication system capacity, including the construction of corporate networks.
In 2006 Rostelecom commissioned fixed digital networks on the Skovorodino-Yakutsk, Kirov- 9.2. INVESTMENT ACTIVITY Syktyvkar, Chelyabinsk-Omsk line, which provided the republics of Sakha and Komi with connectivity to the trunk digital network, and enhanced the quality and safety of telecom facilities along the Investment trends and structure Moscow-Khabarovsk route. In 2006 the companies of Svyazinvest Group carried out their investment activities in accordance with investment priorities approved by the companies’ Boards of Directors. The investment priorities were Rostelecom continued to equip the existing fiber-optic lines using its DWDM networks and creating as follows: a dense wavelength division multiplex, which enabled the operator to increase the communication system capacity and safety of its networks, including those for Europe-Asia ILD traffic. • To maintain and expand the Group’s leading positions and market share on the regional telecom market; In 2006 Svyazinvest Group's companies continued to work out and implement new industry regulations and policies. At private branch exchanges (AMTS) companies updated their software To roll out and upgrade the transport network; • enabling subscribers to choose a DLD and ILD telecom operator. Switching capacity increased by • To modernize switching facilities; 54,980 channels, while total international exchange capacity surged by 35,940 channels, including the city of Moscow and the North-Western region. • To reduce the waiting list of subscribers which have applied for telephone installation; Fixed local networks • To enlarge the number of cities provided with telephony service. All in all, 2,419,107 fixed local lines were put into operation, including 1,434,107 urban and rural lines Out of the total amount of investments of the companies of Svyazinvest Group in 2006, (1,230,831 lines on urban networks, and 203,276 lines on rural networks); and 985,000 mobile lines capital investments amounted to RUR 38.0 billion: were put into service as well.
• RUR 12 billion was invested into the rollout of value-added products; A decrease in the expansion rate of the fixed-line telephony compared with the previous year is attributable to the fact that in 2006 a significant portion of investments went into projects with higher • RUR 10.8 billion was invested in traditional telephony; ROI and the rollout of value-added products. • RUR 10.6 billion was invested in backbone networks construction and telephony infrastructure; • Other investments amounted to RUR 4.6 billion. 38 39 Business and Financial Performance of Svyazinvest Group’s Largest Companies
Broadband access networks By the end of 2006 the accounts receivables for telecom services Ruble and hard-currency borrowings, Jan. 1, 2007 provided totaled RUR 2.6 billion. A significant amount of receivables In 2006 the Group continued to develop broadband access networks. The number of installed xDSL on the balance sheet is due to gross sales growth and the change in ports increased by 3.7 times and amounted to 978,000. In 2006 the total number of ports installed interconnect rules in 2006. equaled 718,000. The average accounts receivable turnover rate in 2006 was 43 days and remained at the same level. 9.3. FINANCIAL POLICY At year-end the structure of accounts receivables is characterized by In 2006 the financial priorities of the companies of Svyazinvest Group were as follows: high liquidity. Accounts receivable on the balance sheet for services provided to residential customers and organisations totaled RUR 1. Development and implementation of financial strategies targeting the financial position of a company 21 billion. comparable with the best global industry peers; Trends in ruble resources in 2006, % 2. Debt burden reduction and deleveraging;
3. Diversifying the debt portfolio; 9.4 KEY FACTS AND FIGURES OF FINANCIAL AND BUSINESS PERFORMANCE AND EFFICIENCY 4. Optimizing receivables. In 2006 the financial priorities of the companies of Svyazinvest In 2006 the accounts payable portfolio increased by 5.9%, which is 2.2 Group were as follows: times less than the capital gain rate. • Increase gross earnings by raising the number of services provided, including value-added The debt/EBITDA ratio decreased by 0.1% to 2.8. services;
The debt/equity ratio was 1.1, vs. 1.2 in 2005. • Implement cost-cutting measures, including workforce optimization and direct cost management; In 2006 return on equity and return on assets remained at high levels: • Maintain cost-effectiveness and value dynamics of key performance indicators (KPI) at a high • Return on equity (ROE) was 13.8%; level. • Return on assets (ROA) was 6.4%. Over the period under review, Svyazinvest's total gross earnings rose by more than 13% compared with 2005 and totaled RUR 218.3 billion. Gross income for telecom services provided rose 10.5% compared with Long-term debt stood at RUR 97.5 billion in 2006 (or 124% 2005 and totaled RUR 208.1 billion. compared with the previous year); short-term debt decreased by 11.4% and amounted to RUR 72.9 billion. Thus, there was a positive change in the structure of accounts payable: long-term debt to Revenue from value-added services provided (Internet, datacom, intelligent telecom networks ISDN, IP, etc.) total debt ratio in 2006 rose to 57.7% against 48.8% in 2005. rose 47.4% and accounted for 6.7% of total revenue earnings. This surge in value-added services income was due to active launch of broadband services, growth of paying capacity of customers, the company’s Efforts to reduce the cost of debt portfolio service led to a drop in rates of the following basic financial active marketing policy and its well-balanced investment programmes. instruments: The revenue breakdown of the company for service provided in 2006 is as follows: • Long-term debt decreased by 22.8%; • DLD and ILD telecom services – RUR 47.6 billion • Short-term debt decreased by 24.3%; • Urban and rural telecom services – RUR 69.8 billion • Bonded loans decreased by 13.5%. • Mobile networks, radio broadcasting, TV and satellite communication – RUR 1.2. billion This decrease was due to an improvement in RTO credit ratings and a favourable situation on the financial market. • Mobile communication – RUR 12.3 billion
The share of ruble borrowings did not change over the period and totaled 86%. Mid-term outlook: it was • Wire broadcasting – RUR 2.3 billion estimated that the level of currency risks for the Group was below the admissible limit. • Datacom – RUR 15.6 billion In 2006 the company continued to optimize its receivables. Svyazinvest’s efforts in 2006 led to the • Traffic connection and transmission – RUR 34.2 billion reduction of the period of accounts receivable turnover and reduction of overdue receivables. • Intra-zonal telephony – RUR 22.3 billion Over the reporting period, the size of the Federal Government’s accounts receivable for telecom services Other telecommunications services – RUR 2.8 billion provided to discount customers decreased by RUR 2.9 billion. 40 • 41 Business and Financial Performance of Svyazinvest Group’s Largest Companies
OIBDA increased by 3.6% and totaled RUR 66.8 billion. As a result of workforce optimization, headcount EBITDA amounted to RUR 61.6 billion or 110.2% compared with the previous year. EBITDA margin decreased by 9% and for all Svyazinvest companies totaled 28.2%, which is slightly lower than in 2005 and is due to the totaled 273,400. change in interconnect rules.
EBITDA/interest ratio reached 7.3 compared with 6.3 in 2005.
As a result of workforce optimization, headcount decreased by 9% and totaled 273,400.
In general, the liquidity ratios in 2006 showed a positive trend:
• Revenue per line – RUR 6,400, which is 2.1% higher than in the year-earlier period; • Revenue per employee – RUR 798,200, which is 24.1% higher than in the year-earlier period; • Lines per employee – 124.3 lines, which is 21.5% higher than in the year-earlier period.
9.5. SOCIAL RESPONSIBILITY
Universal service
In 2006 the companies of Svyazinvest Group won 52 tenders for the provision of universal telecom services. As a result of these tenders, 269 universal service agreements were signed.
CenterTelecom, North-West Telecom, Southern Telecommucations Company, Sibirtelecom, Dalsvyaz and Uralsvyazinform have started to provide universal telecommunications services. In accordance with the service agreements, 8,840 pay phones were entered into service.
In 2007 the companies of Svyazinvest Group plan to complete installation of pay phones under the agreements signed in 2006, and intend to participate in other universal telecom service tenders.
National "Education" project
In 2006 the companies of Svyazinvest Group were involved in implementing a higher priority national project “Education”, having provided Internet connectivity to educational institutions of Russia. Under this project, In 2006 more than 22,000 educational institutions received Internet access. by the end of Q3 07 more than 44,000 educational Under this project, by the end of Q3 07 more than 44,000 educational institutions located on the institutions located on the licensed territory of the Group will get access to the Internet, and 95% of all educational institutions licensed territory of the are to receive connectivity by September 2007. Group will get access
to the Internet, and 95%
of all educational institutions
are to receive connectivity
by September 2007. 42 43 Annual report 2006 THE GROUP’S CORE SECURITIES BUSINESS The group’s core securities business
10. THE GROUP’S CORE SECURITIES BUSINESS
10.1. SHARES, ADR In Q406 the growth trend in the estimated value of Svyazinvest companies was stable and at the end of 2006 it exceeded the RTS index. This was due to keen interest by the Russian investment community in the equity shares of RTOs and Svyazinvest.
Svyazinvest Estimated Value In general, in 2006 Svyazinvest's value performed in line with the Russian stock market. Rostelecom with a 197% increase in its stock value, Dalsvyaz with a 78% increase in its stock value, Uralsvyazinform with a 74% stock value increase, and North-West Telecom with a 67% stock value increase stood out as the top market cap advancers.
In 2006 there was a decrease in ADRs of Svyazinvest Group due to the investment activities of the banks: they tended to buy ADRs and transferred them into securities.
ADR'S
Svyazinvest Group, Capitalization trends
10.2. DIVIDEND HISTORY
Total amount of dividends declared (planned to be declared) by the companies of the Group, RUR
Name of company Dividends based Dividends based on 2006 results on 2005 results
Rostelecom 1,796,256.0 2,040,803.9
CenterTelecom 520,326.0 173,238.2
North-West Telecom 547,221.0 396,717.8
VolgaTelecom 633,402.0 588,792.4
Southern Telecommunications Company 261,672.0 61,043.6 In 2006 the estimated value of Svyazinvest almost doubled, from RUR 4.6 billion up to RUR Uralsvyazinform 726,870.0 737,958.5 9.1 billion. 46 47 The group’s core securities business
Sibirtelecom 338,253.0 234,971.6 Total amount of Svyazinvest Group bonds, RUR bln Corporate ruble bond market share of Svyazinvest Group, year-end 2006 Dalsvyaz 151,245.0 169,867.6
Central Telegraph 37,776.0 33,971.7
Dagsvyazinform 2,033.0 1,427.5
Group total: 5,015,054.0 4,438,792.8
10.3. BONDS
In 2006, the Group's eight bond issues with a circulation period of 3–7 years were placed on stoсk exchanges through public subscription.
Issuer Series Bond Offering Coupon Rate (RUR) Yield of Svyazinvest Group bonds, year-end 2006 Uralsvyazinform 07 3,000,000,000.00 8.40%
Central Telegraph 03 700,000,000.00 9.75%
Sibirtelecom 07 2,000,000,000.00 8.65%
Dalsvyaz Д2 2,000,000,000.00 8.85%
Dalsvyaz Д3 1,500,000,000.00 8.60%
CenterTelecom 05 3,000,000,000.00 8.09%
VolgaTelecom BT-4 3,000,000,000.00 7.99%
North-West Telecom 04 2,000,000,000.00 8.10%
Over the annual reporting period in 2006, the total amount of the Group’s bonded loans amounted to RUR 17.2 billion. The number of bonds issued by the Group declined by 22.9% in 2006 compared to 2005 due to a positive environment on the ruble lending market and the companies’ intent to create a flexible structure of debt portfolios.
In 2006 the activities of Svyazinvest Group’s companies remained at a high level: at the end of the year their corporate ruble bond market share was about 7%.
Over the annual reporting period, the Group lent support to the secondary ruble bond market with the help of professional stock market participants (including market makers) in order to prop up the Group's bond market liquidity during downturns and to ensure stable bond prices, especially in the run-up to new bond issues.
In general, the yield spread of the Group's bonds and highly secure Moscow bonds tended to narrow in 2006. 48 49 UNAUDITED CONSOLIDATED BALANCE SHEET Annual report 2006 OF SVYAZINVEST GROUP, IFRS, DRAFT (RUR, MLN) Unaudited consolidated balance sheet of Svyazinvest Group, IFRS, draft (RUR, mln)
11. UNAUDITED CONSOLIDATED BALANCE SHEET OF SVYAZINVEST GROUP, IFRS, DRAFT (RUR, MLN) Non-current liabilities
Long-term borrowings 11 80,469 59,911
Long-term finance lease obligations 6,985 8,024
Note December 31, 2006 December 31, 2005 Pension liabilities 10,585 6,975
ASSETS Long-term income tax payable 2 13 Non-current assets Other long-term taxes and social contri- 344 Property, plant and equipment 3 257,242 247,561 butions payable Deferred income 2,330 2,540 Intangible assets and goodwill 24,815 17,347 Deferred income tax liability 16,777 16,658 Investments in associates 4 10,778 8,852 Long-term provisions for contingencies 1,314 274 Long-term investments 5 20,430 11,264 Other long-term liabilities 465 803 Long-term accounts receivable and other 6 1,176 1,095 financial assets Total non-current liabilities 118,930 95,242
Long-term advances given — 3,878 CURRENT LIABILITIES
Total non-current assets 321,676 289,997 Accounts payable and accrued liabilities 12 32,017 23,953
Current assets Income tax payable 183 239 Inventories 7 4,259 4,764 Other taxes and social contributions 13 2,686 6,563 Accounts receivable 8 16,958 12,419 payable Dividends payable 328 356 Current income tax asset 1,928 1,056 Current borrowings 10,203 9,780 Short-term investments 5 10,319 13,528 Current portion of long-term borrowings 23,874 38,031 Other current assets 9 8,037 14,624 Current portion of long-term finance lease 4,834 3,806 Cash and cash equivalents 10 8,955 10,516 obligations
Total current assets 50,456 56,907 Current portion of long-term provisions for 103 — contingencies Total assets 372,132 346,904 Total current liabilities 74,227 82,728
EQUITY AND LIABILITIES Total liabilities 193,157 177,970 Equity attributable to equity holders of the parent Total equity and liabilities 372,132 346,904 Share capital 19,518 19,518
Additional capital, retained earnings and 54,955 51,130 other provisions Total equity attributable to equity hol- 74,473 70,648 ders of the parent Minority interest 104,502 98,286
Total equity 178,975 168,934 52 53 UNAUDITED CONSOLIDATED INCOME STATEMENT OF Annual report 2006 SVYAZINVEST GROUP, IFRS, DRAFT (RUR, MLN) Unaudited consolidated income statement of Svyazinvest Group, IFRS, draft (RUR, mln)
12. UNAUDITED CONSOLIDATED INCOME STATEMENT OF SVYAZINVEST GROUP, IFRS, DRAFT (RUR, MLN)
Note 2006 2005
REVENUE 14 209,611 185,389
Wages, salaries, other benefits and payroll taxes (66,632) (61,918)
Impairment of property, plant and equipment, construction in 189 (5,093) progress and intangible assets Depreciation and amortization (35,401) (30,265)
Materials, repair and maintenance, utilities (19,749) (16,229)
Taxes other than income tax (4,951) (4,442)
Interconnection charges – international companies (7,541) (7,184)
Interconnection charges – local companies (20,138) (11,610)
Recovery of bad debts 1,621 72
Loss on disposal of property, plant and equipment (1,094) (2,149)
Other operating expenses 15 (29,427) (24,778)
Operating profit 26,488 21,793
Share of result of associates 2,161 1,159
Interest expense, net 16 (9,879) (9,486)
Other income (expenses), net (403) 55
Income from investments, net 189 795
Foreign exchange gain, net 546 122
Profit before income tax 19,102 14,438
Income tax expense (6,783) (6,086)
Profit for the period 12,319 8,352
Profit for the period, attributable to equity holders of the parent 4,654 3,850
Profit for the period, attributable to minority shareholders 7,665 4,502
Basic and diluted earnings per share (in RUR), for profit for 17 0.238 0.197 the year, attributable to equity holders of the parent 57 UNAUDITED CONSOLIDATED STATEMENT OF CHANGES Annual report 2006 IN EQUITY OF SVYAZINVEST GROUP, IFRS, DRAFT (RUR, MLN) Unaudited consolidated statement of changes in equity of Svyazinvest Group, IFRS, draft (RUR, mln)
13. UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY, IFRS, DRAFT (RUR, MLN)
Share Retained earnings Total capital and other equity provisions Common shares December 31, 2004, balance 19,518 47,119 66,637
Profit for the year 3,850 3,850
Dividends declared (99) (99)
Change in fair value of available-for-sale 924 924 investments Reclassification of change in fair value of (94) (94) available-for-sale assets due to disposal Acquisition of minority interest 15 15
Effect from obtaining control over (314) (314) GlobalTel Other changes in shareholder equity (271) (271)
December 31, 2005, balance 19,518 51,130 70,648
Profit for the year 4,654 4,654
Dividends declared (243) (243)
Change in fair value of available-for-sale 1,671 1,671 investments Reclassification of change in fair value of (28) (28) available-for-sale assets due to disposal Acquisition of minority interest (11) (11)
Other changes (2,218) (2,218)
December 31, 2006, balance 19,518 54,955 74,473
61 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF SVYAZINVEST GROUP Annual report 2006 Notes to unaudited consolidated financial statements of Svyazinvest Group
14. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF SVYAZINVEST GROUP*
14.2 SUBSIDIARIES
14.1 PRINCIPLES FOR PREPARING UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS These draft unaudited consolidated financial statements include information on the assets, liabilities and results of Svyazinvest’s subsidiaries: The draft unaudited consolidated financial statements have been prepared on the basis of the
draft unaudited financial statements of Svyazinvest and its subsidiaries (hereinafter the Group) Name Activity/Service Shares, % Voting shares, % in accordance with International Financial Reporting Standards (IFRS) taking into account certain 2006 2005 2006 2005 restrictions described below. Rostelecom Telecommunications 38.01 38.01 50.66 50.66 These draft unaudited consolidated financial statements of the Group include unaudited consolidated CenterTelecom Telecommunications 38.02 38.02 50.69 50.69 balance sheets as per December 31, 2005 and December 31, 2006, unaudited consolidated income statements for 2005 and 2006, unaudited consolidated statements of changes in shareholders North-West Telecom Telecommunications 39.53 39.53 50.76 50.76 equity, and notes to unaudited consolidated financial statements. Certain restrictions relate to VolgaTelecom Telecommunications 38.00 38.00 50.67 50.67 reporting property, plant and equipment, defined benefit pension plans, acquisitions of subsidiaries Southern Telecommunications Telecommunications 38.16 38.16 50.69 50.69 and associates, consolidation procedures and disclosure of certain financial information. Company The unaudited consolidated financial statements of the Group may differ substantially from these Uralsvyazinform Telecommunications 41.38 41.38 51.42 51.42 draft unaudited consolidated financial statements of Svyazinvest due to the following possible Sibirtelecom Telecommunications 38.23 38.23 50.67 50.67 changes: Dalsvyaz Telecommunications 38.13 38.13 50.57 50.57
• adjustments made to financial statements of subsidiaries prepared in accordance with principles DagsvyazInform Telecommunications 38.00 38.00 50.66 50.66 which differ from IFRS; Central Telegraph Telecommunications 38.25 38.25 51.00 51.00
• structural changes of companies whose financial information was used to prepare the unaudited Giprosvyaz Engineering 46.52 46.52 80.00 80.00 consolidated financial statements of the Group; RusLeasingSvyaz Leasing — 49.62 — 67.40
• changes in consolidation procedures; Startcom Telecommunications 35.09 35.09 51.00 51.00 • changes in comparative figures for 2005 and as per December 31, 2005. Consulting Mobitel Telecommunications 100.00 100.00 100.00 100.00 These draft unaudited consolidated financial statements contain information about key figures Giprosvyaz – North-West Engineering 100.00 100.00 — — for 2005 and as per December 31, 2005. Due to certain restrictions in respect of this draft, the figures for 2005 and as per December 31, 2005 were not adjusted to reflect all possible changes in Giprosvyaz – Sibir Engineering 100.00 100.00 — — accounting policies of the Group, adjustment of errors for the previous years, and reclassification of Natsionalnaya Telecommunications 65.50 65.50 65.50 65.50 financial data to present these in accordance with the reporting principles used during the reporting Taksofonnaya Set period. South Giprosvyaz Engineering 100.00 100.00 — —
The notes to these draft unaudited consolidated financial statements do not disclose complete Svyazintek Software development 100.00 100.00 100.00 100.00 financial information of the Group, as required under International Financial Reporting Standards. and IT consulting Research Centre for Telecommunications ——— — The companies of the Group perform accounting and prepare their financial statements in Russian Problems Related to industry development rubles in accordance with the Federal Law of the Russian Federation “On accounting”. These the Development of draft unaudited consolidated financial statements have been prepared on the basis of accounting Telecommunications data of Svyazinvest and its subsidiaries; the adjustments to the statements have been made to provide reliable presentation of financial information In accordance with IFRS taking in account the restrictions described above . All of the above-mentioned companies are Russian legal entities that were registered in accordance with the legislation of the Russian Federation. The deadline for submission of financial reports is the same Key accounting principles used to compile annual financial statements of Svyazinvest and its as the Group’s. subsidiaries, annual consolidated financial statements of the Group are described in Chapter 15. In 2006 North-West Telecom, Sibirtelecom, Uralsvyazinform, Svyazinvest sold their shares in RusLeasingSvyaz.
Svyazinvest and its subsidiaries control the activity of Research Centre for Problems Related to the Development of Telecommunications (hereinafter, RCPRDT).
* Footnotes are an integral part of this unaudited consoldidated financial statement of Svyazinvest Group. All financial indicators of this section are shown in mln of RUR, unless stated otherwise. 64 65 Notes to unaudited consolidated financial statements of Svyazinvest Group
Vyatkasvyazservice In compliance with interpretation of SIC12 “Consolidation – Special Purpose Entities”, RCPRDT falls Izhcom under the definition of a special-purpose entity. Narodny Telephone Saratov As a result, RCPRDT is included in the financial statements of Svyazinvest Group as a wholly owned subsidiary. Nizhny Novgorod Cellular Communication
RCPRDT’s business focus involves researching problems in telecommunications development, working Nizhny Novgorod Radio Telephone out legislation as well as way and means to make the industry more efficient and enhance productivity; Nizhny Novgorod Teleservice consulting and other support for telecommunications companies. Omriks
The list of subsidiaries includes RTOs, Rostelecom, Central Telegraph which are included in the VolgaTelecom Orenburg GSM 2006 draft unaudited consolidated financial statements of Svyazinvest Group in IFRS format: Penza Mobile
RTKOM Vestelcom Saratov-Mobile GlobalTel Tatincom-T Globus-Telecom Telesvyazinform Rostelecom Zebra Telecom Transsvyaz Incom Ulyanovsk-GSM Kostars Digital Communications MTs NTT Chery-Page ATS Chuvashiya-Mobile Vladimir Taksophone Aktsent TO Vladimir-Teleservice Armavirskiy Zavod Svyazi CenterTelecom MobilCom Intmashservice Russian Telecommunications Network Orbita Fitness Centre Svyaz-Service-Irga PVP Southern Telecommunications Stavtelecom named after V. I. Kuzminov Tver Telecom Company Faktorial-99 Ryazan Region Telecom Foton TRK Telecom-Stroy Yugsvyazstroy Telecom-Terminal YuTK Finance Teleport Ivanovo (TPI) Association Canal TV AMT Firma Permtelecom Arttelecom Service AKIB Pochtobank KolaTelecom Svyazinformkomplekt North-West Telecom Novgorod Datacom Uralsvyazinform Telephone Company – Ural Parma Inform Ural Inform TV Saint Petersburg Information Company FK-Svyaz Svyaz IK 66 Centre for the Implementation of Specialized Customized Systems 67 Notes to unaudited consolidated financial statements of Svyazinvest Group
AK Mobiltelecom As a result of these operations, the net book value of property, plant and equipment reflected in the financial statements prepared under International Financial Reporting Standards was adjusted in Altai Investment Company accordance with the data submitted by the appraiser. As of December 31, 2006 work to assess the fair value of property, plant and equipment at other companies of the Group was not complete. Altai Telecommunications Company
ATS-32 14.4 FINANCIAL INVESTMENTS IN ASSOCIATES ATS-41 As of December 31, 2006 and 2005, investments in the associates of the Group comprised the following: Sibirtelecom Baikalvestcom
Eniseitelecom Company Activity 2006 2005
NGTS-PAGE Share of vot- Book Share of vot- Book ing stock, % value ing stock, % value Regional Information Networks MGTS Telecommunications services 28.00 9,334 28.00 7,558 Region Network Volgograd GSM Cellular services 50.00 586 50.00 545 Cellular Telephone of Kuzbass GSM RTComm.ru Internet services 31.49 263 31.49 222 Chita Net Samara Telecommunications services 28.00 109 28.00 97 А-Svyaz Telecom Dalsvyaz Wireless Information Technologies MMTS-9 Telecommunications services 49.00 88 49.00 73 Integrator.ru KGTS Telecommunications services 37.29 66 37.29 47 Sakhalinugol-Telecom VestBaltTelecom Telecommunications services 28.00 57 28.00 49 Open Communications Central Telegraph Tsentel RTK-Invest Financial services 20.00 25 20.00 11
Ural Telephone Telecommunications services 23.00 22 23.00 38 Company TeleRoss Kuban Telecommunications services 50.00 20 50.00 17 14.3 PROPERTY, PLANT AND EQUIPMENT Electrosvyaz Magalyascom Cellular services 50.00 18 50.00 18 Net book Land, buil- Switches and Construction in Vehicles and Total ATS-32 Telecommunications services — — 40.42 14 value of dings and transmission progress and other property Stavropol Cellular services 50.00 10 50.00 11 property, plant construc- devices equipment for Cellular (AMPS) and equipment tions installation Communication As of 99,373 108,367 15,562 24,259 247,561 Other 180 152 December 31, Total 10,778 8,852 2005 As of 103,479 106,676 18,585 28,505 257,242 December 31, All associates are registered in the Russian Federation unless otherwise specified, and their financial 2006 statements are prepared as of December 31, 2006. Investments in associates are recorded using the equity method.
As of December 31, 2006, the net book value of property, plant and equipment acquired to the Group on terms of financial lease totaled RUR 21,635 million (as of 2005 it was RUR 17,470 million).
Management suggests that the net book value of all property, plant and equipment of the Group as of the date of IFRS 1 application (“First-Time Adoption of International Financial Reporting Standards”, January 1, 2003) was broadly comparable to its fair value. In order to estimate the fair value of the property, plant and equipment of the Group, management retained an independent appraiser which completed work for North-West Telecom in 2005, and for Uralsvyazinform in 2006. 68 69 Notes to unaudited consolidated financial statements of Svyazinvest Group
14.5 FINANCIAL INVESTMENTS 14.8 ACCOUNTS RECEIVABLE
As of December 31, 2006 and 2005, financial investments comprised the following: As of December 31, 2006 and 2005, accounts receivable comprised the following:
2006 2005 2006 2005 Long-term investments held to maturity Corporate customers 11,899 5,384 Long-term available-for-sale investments 20,430 11,264 Residential customers 6,532 7,712 Total long-term financial investments 20,430 11,264 Government customers 2,390 5,573 Short-term available-for-sale investments 10,263 7,337 Accounts receivable for telecommunications and traffic services 20,821 18,669 Financial investments recorded at fair value with difference 52 – Trade receivables – other 1,327 1,618 through profit and loss Provision for impairment of receivables (5,190) (7,868) Short-term investments held to maturity 4 6,191 Total 16,958 12,419 Total short-term financial investments 10,319 13,528
Total financial investments 30,749 24,792 The Group’s companies bill subscribers on a monthly basis for telecom services in accordance with the ruble tariffs effective on the date of the service provided.
The accounts receivable from a discount category of subscribers are reimbursed by social security The fair values of quoted financial investments are measured based on their rate quotations. The fair agencies from regional and federal budgets. values of financial instruments which are not traded on the market are measured using the estimates based on the discounted cash flows for future periods. In some cases, the Group’s companies were able to collect a late fee for telecom services and collect overdue payments through an arbitration court.
14.6 LONG-TERM ACCOUNTS RECEIVABLE AND OTHER FINANCIAL ASSETS 14.9 OTHER CURRENT ASSETS As of December 31, 2006 and 2005, long-term accounts receivable and other financial assets comprised the following: As of December 31, 2006 and 2005 other current assets included:
2006 2005 2006 2005 Long-term VAT receivable 618 320 VAT receivable 4,189 8,853 Long-term accounts receivable 349 368 Prepayments and advance payments 1,913 2,231 Long-term loans 192 378 Deferred expenses 1,169 1,415 Other long-term financial assets 17 29 Other prepaid taxes 189 168 Total 1,176 1,095 Settlements with personnel 139 148 Short-term loans given 13 326 Other settlements and current assets 1,162 1,975 14.7 INVENTORY Provisions for impairment of other current assets (737) (492) As of December 31, 2006 and 2005, inventory comprised the following: Total 8,037 14,624 2006 2005
Cable, spare parts for telecommunications equipment 1,672 1,835 14.10 CASH AND CASH EQUIVALENTS
Finished goods and salable products 398 455 As of December 31, 2006 and 2005, cash and cash equivalents comprised the following: Other 2,189 2,474 Total 4,259 4,764 2006 2005 Cash on hand and at bank 7,413 9,589 Short-term deposits with a maturity of up to three months 439 902 Other cash and cash equivalents 1,103 25 70 Total 8,955 10,516 71 Notes to unaudited consolidated financial statements of Svyazinvest Group
14.11 LONG-TERM AND SHORT-TERM BORROWINGS
As of December 31, 2006 and 2005, borrowings comprised the following: Write-off of penalty interest of RUR 597 million (€ 17 million) is included in “Other income” as income from write-off of accounts payable. 2006 2005 As of December 31, 2006 the total amount of the restructured debt to the Ministry of Finance of the Long-term borrowings Russian Federation totals RUR 1,266 million (€ 36 million), including a RUR 253 million (€ 7 million) Bank and other companies loans 31,449 28,516 current portion of the loan.
Bond a issues 42,720 28,083 The annual interest of the restructured loan is 2% and is due annually, no later than December 31 Vendor financing 1,132 398 of each year. Other loans (including promissory notes) 5,168 2,914 To secure the amicable agreement the Group signed a pledge of property in the amount Total long-term borrowings 80,469 59,911 of RUR 2,463 million. Current portion of long-term borrowings
Bank and other companies loans 5,310 9,783 14.12 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Bond issues 12,785 21,787 As of December 31, 2006 and 2005 accounts payable and accrued liabilities included: Vendor financing 2,200 2,860 Other loans (including promissory notes) 3,579 3,601 2006 2005 Total long-term borrowings 23,874 38,031 Trade accounts payable 8,199 7,358 Short-term borrowings Salaries, wages and compensations 7,948 5,429 Bank and other companies loans 4,412 5,523 Accounts payable for capital investments 7,241 4,715 Bond issues — — Advances received from subscribers 5,093 3 680 Vendor financing 540 725 Other accounts payable 3,536 2,771 Other loans (including promissory notes) 5,251 3,532 Total 32,017 23,953 Total short-term borrowings 10,203 9,780 14.13 TAXES AND SOCIAL BENIFITS PAYABLE
As of December 31, 2006 and 2005, taxes payable comprised the following: Loans payable include accrued interest payable in the amount of RUR 2,479 mln as of December 31, 2006 (2005 – RUR 2,334 mln). 2006 2005 Property tax 1,069 983 VneshEconomBank (Bank of Foreign Trade) Value added tax 744 4,638
In 1995–1996 the Ministry of Finance of the Russian Federation provided long-term loans to the Unified social tax 572 635 companies of Svyazinvest Group for acquisition of telecommunications equipment from different Individual income tax 203 211 foreign suppliers. VneshEconomBank acted as the agent representing the government of the Russian Other taxes 98 96 Federation. Total 2,686 6,563
In July 2005 the Ministry of Finance of the Russian Federation filed a lawsuit against Svyazinvest Group companies (CenterTelecom, VolgaTelecom, Southern Telecommunications Company) to recover an overdue debt, which, as of the date when the law suit was filed amounted to RUR 1,831 million (€ 53 million).
In December 2006 CenterTelecom, VolgaTelecom, Southern Telecommunications Company signed an amicable agreement with the Ministry of Finance of the Russian Federation, the terms and conditions of which were approved of by the Arbitration Court of the Russian Federation in March 2007. The agreement came into effect on December 27, 2006 and provides for restructuring of the debt and its simultaneous write-off of accrued overdue interest. The restructured debt is to be repaid in annual equal installments until January 1, 2012. 72 73 Notes to unaudited consolidated financial statements of Svyazinvest Group
14.15 OTHER OPERATING EXPENSES
2006 2005 By revenue type 2006 2005 Interest income 1,443 1,326 Local telephone calls 58,486 50,924 Interest expenses (8,970) (8,159) Long-distance telephone services – domestic 25,853 40,044 Interest expenses accrued on financial leases (2,309) (2,515) Cellular services 23,398 19,340 Interest expenses on vendor financing (43) (138) Intra-zonal telephone calls 19,585 – Total (9,879) (9,486) Revenues from national operators 18,713 23,579 New services (Internet services, ISDN, ADSL, IP-telephony, etc.) 12,465 9,154 14.16 INTEREST EXPENSE, NET Long-distance telephone services – international 9,745 6,435 Rent of telephone channels 9,221 4,112 Revenues from services rendered to foreign operators 5,198 4,098 2006 2005 Installation and connection fees 5,032 7,327 Earnings in the reporting period related to the parent company’s 4,654 3,850 Datacom and telematic services 3,475 2,375 shareholders Radio and TV broadcasting 2,953 3,300 Average weighted number of outstanding ordinary shares and other equity 19,518 19,518 instruments contributing to earnings Documentary services 310 360 Basic and diluted earnings per share (in Russian rubles), for 0.238 0.197 Universal telecommunications services 135 – earnings for the year as per the parent company’s shareholders Other telecommunications services 5,164 4,849
Other revenues 9,878 9,492 14.17 EARNINGS PER SHARE Total 298,611 185,389 The companies of the Group do not have financial instruments that can be converted in common shares, thus diluted earnings per share equal basic earnings per share.
14.14 REVENUES
2006 2005 Agent fees (4,104) (2,720) Lease of premises (3,012) (2,497) Fire and other security services (2,695) (2,395) Audit and consulting fees (2,049) (1,687) Advertising expenses (2,407) (1,513) Property insurance (1,191) (1,403) Universal service fund payments (1,495) (1,118) Membership fees, charity donations, and contributions to trade unions (1,229) (972) Business travel expenses and representation costs (815) (750) Cost of goods sold (591) (705) Transportation expenses (510) (560) Education expenses (382) (378) Post services (317) (228) Loss on written-off property, plant and equipment, and inventories (15) (24) Tax fines and penalties (60) (25) Other expenses (8,555) (7,803) Total (29,427) (24,778) 74 75 ACCOUNTING POLICY AND STANDARDS Annual report 2006 OF SVYAZINVEST GROUP Accounting policy and standards of Svyazinvest Group
15. ACCOUNTING POLICY AND STANDARDS OF SVYAZINVEST GROUP
15.1 PROCEDURE FOR COMPILING CONSOLIDATED FINANCIAL REPORTS
The consolidated financial report represents the financial statements of the Group, i.e. the parent company and all its subsidiaries compiled as if the Group were an individual economic unit.
Subsidiaries
Subsidiaries, i.e. companies in which the Company owns over half of the voting shares or whose activities the Company controls on other grounds, are consolidated. Consolidation of subsidiaries begins as of the date of assignment of control over them and terminates as of the date when control is lost. All operations among the Company’s groups and balances on settlements and retained profit on such operations are excluded, and unrealized losses are excluded except for cases where such operation underscores devaluation of the assigned asset. If necessary, the accounting policy is amended to bring it into compliance with the Group’s accounting policy.
Acquisition of subsidiaries
The Company’s acquisition of subsidiaries is reflected using the acquisition method. Identified assets, liabilities and indirect liabilities of the acquired company are recorded at fair price as of the acquisition date, regardless of the existence or amount of minority shareholder stakes.
Any amount in excess of the acquisition price above and beyond the fair price of the Group’s stake in identified net assets is reflected as “Goodwill”. If the acquisition price is below the fair price of the Group’s stake in identified net assets of the acquired subsidiary, the difference is reflected directly in the P&L statement.
Upsizing stake in subsidiaries
The difference between the book value of an acquired stake in net assets of subsidiary and the acquisition price of this stake is reflected as an increase or decrease in retained profit.
Acquisition of subsidiaries from parties under joint control
Records of acquisition of subsidiaries from parties under joint control are kept using the combined interest method.
Assets and liabilities of a subsidiary transferred between the parties under joint control are reflected in this financial report at their book value in the financials of the assigning company (the previous owner) as of the assignment date. Goodwill which arises in the event of company acquisition by the previous owner is also reflected in this financial report. The difference between common book value of net assets including aggregate goodwill accumulated by the previous owner and the amount of compensation paid are recorded in this consolidated financial report as capital adjustment.
This financial report, including comparable data, is compiled as though a subsidiary was acquired by the Group as of the date of its initial acquisition by the previous owner. 78 79 Accounting policy and standards of Svyazinvest Group
Associates 15.3 PROPERTY, PLANT AND EQUIPMENT
Associates are companies in which the Group, as a rule, owns in the range of 20–50% of voting 15.3.1 HISTORICAL VALUE OF FIXED ASSETS shares or whose activities the Group could otherwise significantly impact, but are not controlled Fixed assets are reflected at the price of acquisition or construction, not including current maintenance by the Group or jointly controlled by the Group and other parties. Investments in associates are costs minus accumulated depreciation and accumulated devaluation. Such price includes expenses recorded using the participatory share method and are initially reflected at the acquisition price, related to the replacement of units and equipment if they correspond to recognition criteria. As of which includes goodwill. Subsequent changes in book value reflect changes of the Group’s share in each reporting date, the Group’s management identifies existing signs of fixed asset devaluation. net assets of the affiliated company which occurred after the acquisition. The Group’s share in profit If at least one such sign is identified, the management of the Group’s companies estimates the and losses of the affiliated companies is reflected in the P&L statement and its share in changed recoverable value which is determined as the greater of two values: the fair price of the asset minus reserves is recorded as shareholder equity. However, if the Group’s share in losses of the associate selling expenses, on the one hand, and opex, on the other. The book value of the asset is reduced equals or exceeds its stake in the associate, the Group does not recognize further losses, except for to recoverable value and the difference is reflected as an expense (loss from devaluation) in the P&L cases where the Group is obliged to make payments to the associate or on behalf of it. statement. Loss from asset devaluation recognized in the previous reporting periods is reversed in Unrealized profit from operations between the group and its associates is excluded insofar as the the event of changed estimates used to determine the recoverable value. part corresponding to the Group’s share in associates is concerned: unrealized losses are also excluded, except for cases where an operation relates to the devaluation of an assigned asset. 15.3.2 CONSTRUCTION IN PROGRESS
Construction in progress refers to facilities in the process of construction or other ways of bringing said Joint activities facilities to the place and in the condition required for operations of fixed asset facilities in accordance Companies jointly controlled by the Company and limited number of other shareholders are recorded with the management’s intentions. Facilities classifiable as construction in progress are reflected at using the participatory share method. actual cost minus cumulative devaluation losses.
No depreciation is accrued on facilities classifiable as construction in progress 15.2 KEEPING RECORDS IN ACCOUNTING POLICY, ACCOUNTING ESTIMATES AND ERROR CORRECTION 15.3.3 SERVICE LIFE AND FIXED ASSET DEPRECIATION Changes in accounting policy Fixed asset depreciation is calculated using the linear method. The depreciation period, which is nearly The Company keeps records of changes in the accounting policy due to the first use of IFRS equal to the estimated service life, is given below. Standard or Interpretation in accordance with special transitional provisions, if any, provided for under such Standard or Interpretation. Structures 20–50 years Analogue switching facilities 10–20 years
Changes in accounting estimates Other network equipment 10–20 years Vehicles 5 years The impact of changes in accounting estimates is subject to perspective recognition in the profit or loss of the period in which the change occurred in the event of an impact in accounting estimates Computers, office and other equipment 3–5 years exclusively on this period or period of changes in accounting estimates and subsequent periods if Land plots non-depreciable the change in accounting estimates impacts the total for these periods.
Residual value, service life and methods to accrue asset depreciation are analyzed at the end of each Errors in previous periods reporting year and adjusted, if necessary. Errors committed in previous periods are subject to correction by means of retrospective adjustment, except for cases where it is not possible to determine the impact of such errors in previous periods The timeframe of the Company’s operating licences is significantly shorter than the service life for on the data of financial report for individual previous periods represented in the financials or joint fixed assets used to calculate depreciation. Based on the statutory provisions which regulate licence impact of such errors in previous periods. activities and its previous experience, Management believes that operating licences will be extended without considerable financial expenses, which will enable the Company to unlock the value of fixed assets in the course of core economic activities.
Repair and maintenance expenses are recorded as expenses as and when they are carried out. Restructuring and upgrade expenses are capitalized and replaced items are written off. Profit or loss from writing off assets is recorded as financial indicators as they are written off.
Expenses for implementing large-scale inspections are reflected as part of the book value of fixed 80 assets if they comply with recognition criteria. 81 Accounting policy and standards of Svyazinvest Group
Interests on loans raised to finance fixed asset construction are capitalized as part of the value of Goodwill is analyzed with a view to devaluation on an annual basis or more often if any events or a fixed asset item during the period necessary to complete construction and prepare the item for changes in circumstances are indicative of a possible devaluation. For the purpose of analysis with a expected use. Other loan expenses are reflected in the P&L statement. view to devaluation, goodwill acquired as a result of operations to merge companies from the acquisition date is distributed among all units or groups of units which generate cash flows and are expected to derive benefit from the merger regardless of whether other assets and liabilities of the Company are 15.3.4 FIXED ASSETS RECEIVED WITHOUT CONSIDERATION attributed to the aforementioned units or groups of units. Each unit or group of units to which goodwill The cost of production equipment of other fixed asset items related to the Company’s core activities relates: assigned to the Company without consideration outside the privatisation procedure are capitalized as • represents an administrative unit of the lowest level as part of the Company from the standpoint of fixed assets at fair price as of the assignment date. Profit from receiving the aforementioned fixed asset goodwill for the purpose of internal management; and items is fully recognized in the P&L statement at the moment of assignment. An exception to this rule are cases where the assignment of fixed asset items is related to services provided by the Company • does not exceed the primary or secondary segment as part of the Company’s reports by segments as to the party which assigned them in the future using the assigned fixed asset items and in such case defined by IFRS 14 “Reports by segments”. the Company recognizes earnings of future periods as the fair price of equipment received and other Goodwill devaluation is determined by appraising the recoverable value of a unit (or group of units) fixed asset items. The aforementioned earnings of future periods are recognized in the P&L statement as and when received fixed asset items depreciate during the service life of such fixed asset items from which generates cash flows and to which goodwill is applicable. Loss from devaluation is recognized if the moment when the Company started to provide services to the party which assigned them. the recoverable value of a unit (or group of units) which generates cash flows is below its book value. If goodwill is part of a unit (or group of units) which generates cash flows and part of such unit retires, If fixed assets received without consideration do not result in the Company obtaining profit in the future goodwill related to the retired part is included in book value of this part when profit or loss from retirement they are not recognized in the financial report. is determined. In this case, the retired goodwill is appraised as the relative value of the retired part and part of unit which generates cash flows and remains part of the Company.
15.4 LEASE If the Company’s stake in net fair price of identified assets, liabilities and indirect liabilities of acquired
The definition of what the agreement represents or contains lease terms is based on the contents of the subsidiary or affiliated company exceeds expenses related to the merger, the identified assets, liabilities agreement as of the beginning of the lease term, i.e. whether fulfillment of the agreement depends on the and indirect liabilities are revalued and recalculated. Any additional value after revaluation is immediately use of a certain asset or assets or the agreement provides for the right to use such asset. recorded as the Company’s profit or loss.
Financial lease whose terms provide for assignment to the Group of all risks and profits associated with ownership of leased asset is capitalized as of the beginning of the lease term in an amount equal to 15.5.2 LICENCES the fair price of lease property or if this amount is lower than the discounted value of minimum lease payments. Lease payments are subject to distribution among financial payments and reduction in The cost of licences paid to the state for permission to offer telecommunications services within a outstanding lease liability in order to obtain permanent interest rate for the remaining surplus of liability. definite period of time is reflected as an intangible. After initial recognition, intangibles are reflected at the Financial payments are reflected in the P&L statement. acquisition price minus cumulative depreciation and cumulative losses from devaluation.
In the absence of justified certainty that the Group will receive the ownership title by the end of lease term, capitalized leased assets are depreciated within the shorter of two periods: lease or estimated 15.5.3 SOFTWARE AND OTHER INTANGIBLES service life. Software and other intangibles acquired separately are reflected at the acquisition price upon initial Lease payments during operating lease are recognized in the P&L statement as expenses distributed recognition. Other intangibles acquired during a merger are recognized at fair price as of the acquisition equally during the lease term. date. After initial recognition, intangibles are reflected at the acquisition price minus cumulative depreciation and cumulative losses from devaluation.
15.5 INTANGIBLES
15.5.1 GOODWILL 15.5.4 SERVICE LIFE AND DEPRECIATION OF INTANGIBLES
Goodwill represents surplus of the acquisition value over net fair value of the Company’s stake in The Company determines whether the useful life for intangibles facilities is terminal or indefinite and in identified assets, liabilities and indirect liabilities of a subsidiary or an affiliate as of the acquisition the former case, estimates its length or a number of production items or similar items which constitute date. Goodwill which arises upon acquisition of subsidiaries is reflected as intangibles. Goodwill this period. The useful life for intangibles is indefinite if the Company based on all important factors which arises during the acquisition of associated companies is reflected as part of investments in believes that the period within which intangibles item is expected to generate net cash flows to the affiliated companies. After initial recognition goodwill is reflected at COGS minus any cumulative organisation has no clearly definable limits. losses from devaluation. Intangibles with a definite useful life are amortized during the useful life and are analyzed with a view to 82 devaluation if the respective signs are available. 83 Accounting policy and standards of Svyazinvest Group
The Company revises the amortization period and amortization method for intangibles with a terminal participatory instruments are reversed as part of profit or loss if a rise in the fair price of the instrument useful life on an annual basis as of the reporting date. When the estimate of the useful life is changed, the is objectively attributable to an event which occurred after loss from devaluation was recognized in amortization period is also subject to change which is recorded as a change in accounting estimates. the P&L statement.
Licences and software are amortized in equal parts during the useful life of these assets, which is equal The fair price of investments which actively trade on organized markets is determined on the basis of to the term of validity of the licence or rights to use software. the bid price as of the closing of trading session at the reporting date. The fair price of investments Intangible assets with an unlimited useful life are not subject to amortization. However, an analysis is which do not actively trade on the market is determined by using valuation methods, including performed on an annual basis with a view to devaluation either on an individual basis or at the level comparative analysis of the most recent transactions performed on market terms and also based on of units generating cash flows. The company revises on an annual basis the useful life of intangibles the current market value of financial instrument nearly identical to the reviewed instrument or based with an unlimited useful life with a view to identifying events and circumstances which confirm useful on the discounted cash flow method or other valuation models. life estimates. In the absence of confirmation about unlimited useful life the Company changes its assessment of useful life – the Company upgrades its useful life estimate from indefinite to terminal and records such change as a change in accounting estimates by initiating the amortization of an intangible 15.7 INVENTORIES item. Inventories are recorded as the lesser of the two values: COGS and possible net selling price. The cost of inventories is determined by the weighted average pricing method. Cost of finished products 15.6 INVESTMENTS AND OTHER FINANCIAL ASSETS and construction in progress includes the cost of raw materials, direct labour input and other direct expenditures and also the respective share of production overhead (calculated based on standard In accordance with IFRS 39 financial assets are classified either as financial assets reflected at fair use of production facilities) but does not include the cost of loans. Net possible selling price is the price via profit or loss, loans, accounts receivable and investments recoverable prior to redemption or estimated price of sale during core activities minus estimated expenses to complete production and depending on circumstances available for sale. Initially, financial assets are valued at fair price. In the estimated selling expenses. event that all investments are not classified as financial assets at fair price via profit or loss, when they are reflected in the report directly related costs for a transaction are added to their fair price. When financial assets are reflected in accounting records for the first time, the Company assigns them to a 15.8 CASH AND EQUIVALENTS respective category. Cash includes cash in banks, petty cash and also short-term deposits with initial repayment date no longer than three months. All standard operations to buy and sell financial assets are recognized as of the date when the transaction is executed, i.e. the date on which the Company assumed obligations to acquire the respective asset. Standard operations to buy and sell financial assets are operations to buy and sell 15.9 ACCOUNTS RECEIVABLE financial assets which provide for delivery of assets within the period provided for under the current Accounts receivable, mainly short-term, are reflected as an invoice billed minus a reserve for reduction legislation or market procedures. of the value of accounts receivable. The reserve is recognized when objective evidence is available Investments classified as intended for trade are included in the line item “financial assets at fair price that the Group is unable to recover its debts. with changes in fair price reflected in the P&L statement”. Investments are classified as intended for sale if they are acquired for the purpose of sale in the near future. Profit and loss from investments intended for sale are reflected in the P&L statement. 15.10 VALUE-ADDED TAX
Non-derivative financial assets with a fixed or identifiable amount of payments and fixed date of In accordance with Russian tax legislation, value-added tax (VAT) on acquired goods and services is maturity are classified as assets that are to be held to maturity if the Company intends and is able to recoverable by offsetting against the amount of indebtedness for VAT accrued on the Group’s sold products and services. hold them until maturity.
Loans and accounts receivable are non-derivative financial assets which do not trade on the active Indebtedness for value-added tax market with a fixed or determinable amount of payments. Such assets are reflected at depreciation value using the effective interest rate method. Profits and losses from such assets are reflected in the Prior to 2006, VAT was payable to the federal budget after payments were received from the buyer P&L statement at the moment when recognition is terminated and if such assets are devalued and and customers minus VAT on acquired goods and services paid by the reporting date. In addition, VAT also by depreciation. related to the sale of goods and services, settlements for which were not completed as of the reporting date, was also reflected in the balance sheet as part of VAT indebtedness. Investments available for sale are non-derivative financial assets which are classified as saleable and Since 2006, VAT has been payable to the federal budget after sale of goods and services and issuing not included in any of the above three categories. After initial records are made, saleable investments invoices and also after advanced payments are received from buyers and customers. VAT on acquired are valued at fair price. In addition, profit and losses are reflected as a separate unit of capital until goods and services is deducted from the amount of VAT indebtedness, even if settlements for them recognition is terminated or investment is devalued. In this case, aggregate profit or loss previously were not completed as of the reporting date. reflected in capital is included in the P&L statement. Recovering losses from devaluation related to 84 85 Accounting policy and standards of Svyazinvest Group
The entire amount of doubtful indebtedness, including VAT, is reserved when a reserve is established to be handed out. The bulk of the Company’s employees are entitled to participate in this pension plans for the reduction of the value of accounts receivable. depending on a number of factors, including seniority, age and wage level.
The Company applies the following two pension plans: plans with established contributions and plans with established payouts. Recoverable VAT The Company’s liability under plans with established payouts is limited by the amount which the Company Recoverable VAT arises when value-added tax for goods and services acquired exceeds VAT related agrees to contribute to the fund. In this case, employees are exposed to actuarial and investment risks. to the sales of goods and services. Based on the terms of plans with established payouts, the Company is obliged to ensure indemnifications In addition, prior to 2006, recoverable VAT included value-added tax related to acquired goods and of the agreed amount to current and former employees. In this case, actuarial and investment risks lie services not paid for as of the reporting date, and also to fixed assets which are not commissioned. with the Company. However, the aforementioned amount was subject to offset against the amount of VAT debt only as received goods and services are paid for and also fixed assets are commissioned.
15.13.3.1 PLANS WITH ESTABLISHED PAYOUTS
15.11 MARKETABLE AND OTHER ACCOUNTS PAYABLE Assets and liabilities on plans with established payouts are valued separately for each plan as of each reporting date. Liabilities for plans with established payouts are appraised by professional Marketable and other accounts payable are reflected at the depreciated price using the effective interest rate method. Marketable and other accounts payable are reflected as part of current liabilities, independent actuaries retained by the Company. The fair price of assets under plans with except for cases when the amount is to be repaid more than 12 months after the reporting date. established payouts is assessed by actuaries or independent appraisers. Actuarial profits and losses are recognized as an income or expense when net accumulated unrecognized profit and loss for each separate plan as of the reporting year exceed 10% of the 15.12 CREDITS AND LOANS RECEIVED biggest value from liability on the plans with established payouts and the fair price of the plan’s asset Credits and loans received are recognized at a value equal to the fair price of obtained reserves minus as of this date. Such profits and losses are recognized as a profit or expense within the average expenses incurred for the transaction. In future periods, loans are reflected at depreciated value using the expected remaining period of work of employees participating in the plan. effective interest rate method, the difference between the fair price of resources received (minus expenses As a result of enacting a new plan with established payments or changes to the existing plan, the incurred for the transaction) and the amount payable is reflected as interest-bearing profit during the loan value of past services is recognized as an expense in equal parts during an average period of time period. after which changes are made to pension payouts. As long as pension payouts are guaranteed immediately after the plan with established payouts becomes effective or changes are made to 15.13 EMPLOYEE INCENTIVES the aforementioned plan, the Company immediately recognizes the value of past services as an expense. 15.13.1 CURRENT INCENTIVES FOR EMPLOYEES The Company recognizes profits and losses which arise as a result of sequestering or final Employee wages for labour activity performed is recognized as an expense during this reporting settlement against the pension plan with established contributions at the time when sequestering period. The Company also establishes expense reserves for upcoming vacations. or settlement occurs.
15.13.2 UNIFORM SOCIAL TAX 15.13.3.2 PLANS WITH ESTABLISHED CONTRIBUTIONS In accordance with the current legislation of the Russian Federation, the Company accrues the uniform social tax (UST) calculated using a regressive rate (from 26% to 2%) which is applied As the Company provides services to its employees, the Company accrues liabilities on contributions to aggregate annual compensation per employee. The Company pays UST amounts to three to the fund by recognition of liability (accrued liability) minus amounts of contributions made as of social funds (state pension fund, social and medical insurance funds). In addition, the share of the date of such accrual and in correspondence with recognition of expenses under the line item withholdings to the pension fund does not exceed 14% depending on aggregate annual payout and “Wages, other payments and social deductions” of the profit and loss statement. If the value of incentive amount per employee. contributions exceeds the liability on contributions to the fund as of the reporting date, the Company recognizes such surplus as an asset (expenses attributable to future periods) in the extent to which UST expenses accrued by the Company are recorded in the period to which they refer. such advance payment can be offset against future payments or returned to the Company. In cases where contributions for plans with established contributions relate to the period when services are provided and which exceeds 12 months after the period elapsed in which employees provided 15.13.3 SEVERANCE PAY OPTIONS services to the Company and amounts related to such period are subject to discounts at the rate According to the collective agreement and the statute about additional pension fund scheme, the established as market return on high-grade corporate bonds effective as of the reporting date. Company also ensures additional pension fund schemes, using incentive plans when severance pay is 86 87 Accounting policy and standards of Svyazinvest Group
15.14 TAXATION of such shares, the amount received is included in the share capital. Own shares bought back from shareholders are recorded at the weighted average price. 15.14.1 PROFIT TAX
Expense (gain) on profit tax is the aggregate amount of actual tax for the reporting period as well as the amount of deferred tax. Shares of minority shareholders
Actual tax represents a total of profit tax due (to reimbursement) in relation to taxable profit (tax loss) The shares of minority shareholders represent stakes in subsidiaries not owned by the Group. Shares for the period determined in accordance with rules established by tax authorities in relation to which of minority shareholders as of the reporting date represent the share of minority shareholders in the profit tax is paid (reimbursed). fair price of identified assets and liabilities of the subsidiary as of the acquisition date and also the share of minority shareholders in changes of capital since the time of the companies’ merger. The Liabilities (assets) on actual profit tax for the current and previous reporting periods is determined interest of minority shareholders is reflected in capital. as the amount payable (reimbursable) to tax authorities using profit tax rates and tax legislation established as of the reporting date. Losses attributable to minority shareholders do not exceed the interest of minority shareholders in capital of subsidiaries, except for cases when minority shareholders are bound by liability to finance losses. All similar losses are distributed among the Group’s companies. 15.14.2 DEFERRED PROFIT TAXES
Deferred tax assets and liabilities are calculated in relation to temporary differences using the Dividend payouts liability method. Deferred profit taxes are reflected for all temporary differences between the taxable base of assets and liabilities and their book value in the financial report, except for situations where Dividends are recognized as liabilities and deducted from the amount of capital as of the reporting deferred taxes arise during initial recognition of goodwill or an asset or liability as a result of an date if they were announced before the reporting date inclusive. Information about dividend payouts operation which is not a merger transaction and which produces no impact on accounting or tax is disclosed in the report if they were recommended for payout before the reporting date and profit or loss at the time when it is executed. also recommended or announced after the reporting date, however, before the financial report is approved. Deferred tax asset is recognized only to the extent to which a distinct possibility exists that taxable profit will be received that could be reduced by the amount of deductible temporary differences. Deferred tax assets and liabilities are calculated by tax rates which are expected to be applied 15.16 RECOGNITION OF REVENUE during the period of asset sale or liability settlement based on the current tax rates or announced (and essentially adopted) as of the reporting date. Revenue is recognized as the amount in which there is a probable inflow of economic profit to the Company when the amount of such revenue can be measured precisely. Deferred profit taxes are recognized in relation to all temporary differences related to investments in subsidiaries and affiliates and also joint activity, expect for cases when the Group controls Profit is recognized as an amount of cash or equivalents received or receivable. However, in the the deadline for decreasing temporary differences and in addition, the likelihood is essential that event of delay in receipt of cash or cash or equivalents, the fair price of remuneration can be lower temporary differences will not decrease in the foreseeable future. than received or receivable nominal amount of cash flows. When as a matter of fact, the agreement Assets and liabilities on deferred tax are not discounted. represents a financial transaction, the fair price of remuneration is determined by discounting all future receivables at the effective interest rate.
Interest profit is determined based on the accrual method. 15.15 CAPITAL Dividend profit is reflected at the time when the Company becomes entitled to it. Share capital When equipment and other fixed asset items are sold, revenue is reflected at the time when all Common shares and irredeemable preferred shares, dividends on which are paid out at the issuer’s economic profits and risks which relate to ownership of this asset are assigned to the seller or its discretion are reflected in capital. Costs of third-party services, directly related to new share issues, agent. except for cases involving a company merger are reflected in capital as a reduction in the amount received as a result of this issue. The amount exceeding the fair price of proceeds over the nominal Revenue from lease and other services provided is recognized during the period when services amount of issued shares is recorded as paid-in capital. were rendered.
Own shares bought back from minority shareholders 15.17 PROFIT PER SHARE In the event that the Company or its subsidiaries acquire the Company’s shares, the acquisition The Company calculates base profit per share based on profit or loss due to the parent Company’s price, including the relative transaction costs, minus profit tax is to be deducted from capital as own shareholders and also, if information is presented about ongoing activities based on profit or shares bought back from shareholders up to the time when they are redeemed or issued again. In loss from ongoing activity due to the parent Company’s shareholders. Base profit is calculated the event of acquisition, sale, issue or redemption of the Group’s own participatory instruments, as the relation of profit or loss due to the parent Company’s shareholders (the numerator) to the profit or loss is not recorded in the P&L statement. At the time of further sale or repeated redemption 88 89 Accounting policy and standards of Svyazinvest Group
weighted average of the number of Company’s shares outstanding during the reporting period (the 15.21 RELATED PARTY OPERATIONS denominator). The Company recognizes the following as signs of related parties: the party is related if: For the purpose of estimating profit per share, the Company classifies preferred shares as 1. such party, through one or several intermediaries controls the Company, is controlled by the participating share instruments. Company (including parent, subsidiaries and associates) or coupled with the Group’s companies is under the control of the same organisation;
15.18 RESERVES 2. such party is an associate (in accordance with IFRS 28 “Investments in associated organisations”); Reserves are recognized if the Group as a result of certain event in the past has legally or voluntarily assumed liabilities for the settlement of which cash outflow will most likely be required 3. such party is a joint venture to which the Company is party (IFRS 31 “Participation in joint and which can be estimated with a sufficient degree of reliability. In cases where the Groups expects activities”); reimbursement of expenses, e.g. under an insurance agreement, the amount of reimbursement is 4. such party is a member of the Company’s top management or its parent Company; reflected as a separate asset, however, only on condition that receipt of such reimbursement raises 5. such party is a close relative of the individual specified in Clauses 1 and 4; virtually no doubt. 6. such party is controlled, jointly controlled or essentially impacted by the individuals specified If the impact of the temporary cost of money is considerable, reserves are calculated by discounting in Clauses 4 and 5 or a considerable stake in which is owned, directly or indirectly by any such expected cash flows using a pre-tax rate which reflects the current market valuation of temporary individual; cost of money and, if applicable, specific risks related to liability. When discounting is used, a rise in reserve as time passes is recognized as interest expense. 7. such party is a pension fund with which the Company or any of the Company’s related parties has relations involving private pension fund schemes for its employees.
The Company does not disclose in its consolidated financial reports information about operations 15.19 INDIRECT LIABILITIES AND INDIRECT ASSETS between the Company and its subsidiaries and between subsidiaries. Contingent liabilities are the Company’s possible liabilities subject to past events, the existence of The Company discloses in the financial reports information about operations with related parties which will only be confirmed as a result of the occurrence or non-occurrence of one or more events which are commercial organisations controlled by the Russian Federation. in the future which are beyond the Company’s full control or current liability predetermined by past events and not recognized in the financial report, since the Company does not view resource outflow which carry economic profits and necessary to settle liability as likely or the value of liability 15.22 EVENTS AFTER THE REPORTING DATE cannot be determined precisely enough. The Company does not recognize contingent liabilities in The Company adjusts its financial indicators in the event that events after the reporting date are the financial report. The Company discloses information about contingent liabilities in notes to the such that it is necessary to adjust said indicators. Events after the reporting period which require financial report in the event that the likelihood of outflow of resources required for settlement of adjustment of financial indicators are related to confirmation or denial of circumstances which liability is weak. existed as of the reporting date and also the management’s estimates and comments performed in Contingent assets represent the Company’s possible assets subject to past events, the existence of conditions of uncertainty and incompleteness of information as of the reporting date. which will only be confirmed as a result of occurrence or non-occurrence of one or more events in If non-adjustment events which occurred after the reporting date are essential, non-disclosed the future which are beyond the Company’s full control. The Company does not recognize contingent information about them could impact economic decisions of users adopted based on these assets in the financial report. The Company discloses information about contingent assets in notes financials. Therefore, the Company discloses the nature of such events and an assessment of their to the financial report in the event that economic profits will likely be achieved. financial repercussions or states that such valuation is not possible for each essential category of non-adjustment events which occurred after the reporting date.
15.20 INFORMATION BY SEGMENTS
The Company differentiates between the following operating segments: 15.23 ESSENTIAL ACCOUNTING COMMENTS AND VALUATIONS
1. fixed-line (i.e. wireline) communications, 15.23.1 COMMENTS
2. portable (i.e. mobile) communications. In the process of implementing the accounting policy by the Company’s management, in addition to accounting estimates the following comments were made which have the strongest impact on the According to the management, the Company performs activities as part of the same geographical amounts reflected in the consolidated financial reports. and operational segment. The management estimates the results of activities and adopts investment and strategic decisions based on analysis of the results of the Company as a whole. 90 91 Accounting policy and standards of Svyazinvest Group
Lease classification Fair price of assets and liabilities acquired during company merger
A lease is classified as financial, if, based on the terms of the lease agreement, all essential risks The company is obliged to maintain separate records as of the acquisition date of identified assets, associated with ownership are assigned to the lessee, otherwise, it is classified as an operating lease. liabilities and contingent liabilities acquired or assumed as part of the transaction to merge the The answer to the question as to whether a lease is to be classified as financial or operating depends companies at their fair prices which provides for using estimates. Such estimates are based on on the content of the transaction rather than the form of the agreement. Unless reasonably proved valuation methods which provide for a considerable degree of subjective comments when estimating otherwise, in this case, a lease period of longer than 75% of the period of the service life of the asset future cash flows and working out other allowances. or as of the beginning of the lease period the discounted value of minimum lease payments is at least 90% of the fair price of leased asset, such lease is classified by the Company as a financial lease. Goodwill devaluation
The Company analyzes goodwill with respect to devaluation at least once a year. This requires an 15.23.2 UNCERTAINTY OF ESTIMATES estimate of value from the use of units generating cash flows to which this goodwill relates. In order to estimate the value from use the Company has to perform a valuation of future cash flows at the The main assumptions are given below concerning future events and also other sources of level of the business unit which generates cash flows and also select a justifiable discounting rate uncertainty in valuation as of the reporting date which involve significant risk of emergent necessity to calculate the net present value of cash flows. make considerable adjustments in the book value of assets within the next reporting period.
Fair price of non-traded investments available for sale Service life of fixed assets The fair price of investments which actively trade on organized stock markets is determined on The Company estimates the remaining service life of fixed assets at least on an annual basis at the basis of market valuations as of the market closing on the reporting date. The fair price of the end of the financial year. If expectations differ from the previous estimates, changes should be investments which do not actively trade on the market is determined using valuation methods, recorded as changes in accounting valuations in accordance with IFRS 8 “Accounting policy: changes including by analogy with the last transactions performed based on market conditions and based on in accounting valuations and errors”. The aforementioned estimates could produce a tangible impact the current market price of a financial instrument nearly identical to the instrument under analysis on the book value of fixed assets and depreciation recognized in the profit and loss statement. or based on an analysis of discounted cash flows or other valuation models. The aforementioned estimated assets are based on an assumption not confirmed by the available data about market Fixed asset devaluation prices and rates. According to management, the estimated fair price received as a result of using valuation methods and reflected in the balance sheet and respective changes in the fair price The Company shall be obliged to value asset with a view to available signs of possible devaluation. If reflected in the cash flow report are justified and the most precise as of the reporting date. such signs are visible, the Company performs valuation of the recoverable value of such value. The amount of the recoverable value is the biggest of the fair price of asset value and or the unit which generates cash flows minus selling expenses and opex. In addition, such amount is determined Reserve against doubtful accounts receivable for a separate asset, except for cases when an asset generates no incremental cash flow which Management establishes a reserve against doubtful accounts receivable to record estimated losses is largely independent of cash generated by other assets or groups of assets. If the book vale of which arose as a result of the client inability to effect the required payments. When the reserve an asset exceeds its recoverable amount, such asset is considered to be devalued and its value is against doubtful accounts receivable is deemed to be sufficient, the management proceeds from written off to recoverable value. When value from use is determined, estimated future cash flows are its own estimates for distributing the outstanding balance of accounts receivables into periods of reduced to their current value using the pre-tax discounting tax rate which reflects the current market limitations, accepted write-off practice, client solvency and changes in terms of payment. If the valuation of seasonal value of cash and risks associated with these assets. financial standing of clients continues to aggravate, the actual amount written off could exceed the anticipated level. Identifying signs of fixed asset devaluation provides for using valuations which include, in particular, the reason, timeframe and amount of devaluation. Devaluation is based on analysis of a significant amount of factors, such as changes in current terms of competition, expectations of an upturn Pension liabilities in the industry, higher capital value, changes in the possibility of raising financing in the future, Pension liabilities are often secured by plans which are classified and recorded as pension technological obsolescence, termination of service, current replacement value and other changes in plans with established payments. The discounted value of liabilities as part of pension plans with circumstances which point to existing devaluation. In order to determine the recoverable amount at established payments and the corresponding value of current services is determined based on the level of unit which generates cash flows, the management’s estimates are required. Determining actuarial estimates using demographic and financial assumptions, including the mortality rate during value from use requires methods based on estimate of expected future discounted cash flows and labor activity and after it, employee turnover, discounting rate, future wages level and pension fund urges the Company to estimate value of such flows at the level of the unit which generates cash scheme and at least, expected gains on the plan assets. If further amendments are required in key flows and also to select a justifiable discounting rate in order to calculate the net present value assumptions, this will produce a tangible impact on future expenses for pension liabilities. of cash flows. The aforementioned estimates, including the methodology used, could produce a significant impact on the fair price and finally, the amount of fixed asset devaluation. 92 93 Accounting policy and standards of Svyazinvest Group
Reserve for replacement of natural resources at the occupied block indicators and cash flows. If, as a result of any event, estimates of the amount of deferred tax assets which could materialize in the future decreases, this decline should be recognized in the The Company’s management analyzes reserves for replacement of natural resources at the P&L statement. occupied block as of each reporting date and adjusts them with a view to reflecting the current best estimate in accordance with Interpretation #1 of the Interpretation Committee of IFRS “Amendments in liabilities on dismantling and liquidation of fixed assets, environmental reclamation and other similar liabilities”. The amount of the reserve reflects the best estimate of costs required to settle the existing liability as of the reporting date. When the best estimate of the reserve is determined, risks and uncertainties are taken into account, which are unavoidably inherent in many events and circumstances. When future costs are estimated for environmental reclamation on the occupied block, management’s essential comments are to be applied. Future events which could impact the amount required to settle the liability, are recorded in the amount of the reserve, if objective evidence exists that they could occur.
Legal claims
The Company’s management applies essential comments during estimate and reflection in the accounting records of reserves and risks of emergent contingent liabilities associated with the existing litigation and other unsettled claims which are to be settled by means of negotiations, mediation, arbitration or state intervention and also other indirect liabilities. The management’s comments are necessary when estimating the likelihood that a claim against the Company or emergent material liability will be upheld and when determining the possible amount of the final settlement. As a result of uncertainty inherent in the valuation process, actual results could differ from the initial reserve estimate. Such preliminary estimates could differ as and when new information is received, first from in-house specialists, if there are any, or third-party consultants, such as actuaries or lawyers. The revision of such estimates could produce a tangible impact on future operating indicators.
Current taxes
Russian tax, foreign exchange and customs legislation allows various interpretations and is subject to frequent amendments. Interpretation of the tax legislation by tax authorities as applicable to operations and activities of the Group’s companies could be at odds with management’s opinion. As a result, the tax authorities could file claims concerning transactions and levy significant additional taxes, penalties and fines against the Group’s companies. Audits on the part of tax and customs authorities with a view to existing tax liabilities could include three calendar years of operations directly preceding the year of the audit. Under certain circumstances, earlier periods could also be subject to audit. Management believes that as of December 31, 2006 the respective provisions of the statutory framework were interpreted correctly and the likelihood is strong that the Company’s position with reference to tax, foreign exchange and customs legislation will remain the same.
Deferred tax assets
Management’s comments are required during calculations of current and deferred profit taxes. Deferred tax assets are only recognized to the extent to which they could materialize. Materialization of a deferred tax asset will depend on the possibility of obtaining sufficient taxable profit for the corresponding type of tax in the corresponding jurisdiction. When the likelihood is estimated of future materialization of a deferred tax asset, various factors are used, including previous operating indicators, operational plans, expiration of the deadline for carrying forward tax losses and tax planning strategy. If the actual results differ from these estimates or if these estimates are to be adjusted in the future, this could depress the Company’s financial performance, its operating 94 95 INFORMATION FOR SHAREHOLDERS Annual report 2006 AND INVESTORS Information for shareholders and investors
16. INFORMATION FOR SHAREHOLDERS AND INVESTORS
16.1. SHARE CAPITAL • Yegor N. Polyakov – Head of the Property Management Department of the Federal Property The share capital of Svyazinvest amounts to RUR 19,518,337,220 and consists of 19,518 337,220 Management Agency. common shares. Par value of common share is RUR 1. • Lyubov S. Timoshenko – Director of the Department of the State Economic, Financial and Investment Activities of the Ministry of IT and Telecommunications of the Russian Federation.
16.2. SHARE CAPITAL STRUCTURE
Svyazinvest Group share capital structure as of December 31, 2006 (as per data of the 16.6 ANNUAL GENERAL SHAREHOLDERS MEETING registrar company ORK) The annual extraordinary general shareholders meeting of Svyazinvest was held on June 2, 2006 at Deutsche Bank 25% + 1 share the following location: 55 bld. 2, Plyuschikha St., Moscow. The Russian Federation represented by the Federal 75% – 1 share The annual general shareholders meeting of Svyazinvest took place on June 29, 2006 at the following Property Management Agency location: 55 bld. 2, Plyuschikha St., Moscow. Svyazinvest Group share capital structure as of December 31, 2006 (as per data of the registrar company ORK) MUSTCOM Limited 25% + 1 share 16.7 CONTACT PERSONS The Russian Federation represented by the Federal 75% – 1 share Property Management Agency Sergey V. Chernogorodsky Head of Shareholder Capital and Equity Department Telephone: (495) 727-04-85, fax: (495) 248-06-41, 16.3. COMPANY APPOINTED AS REGISTRAR FOR THE SECURITIES OF SVYAZINVEST AND E-mail: [email protected] ITS ASSOCIATES Yuliana Y. Sokolenko Registrar: Deputy Director of the Information Department Legal name: Joint Stock Company "United Registrar Company". Head of the Investor Relations Division Telephone: (495) 727-04-73, fax: (495) 727-04-75, Licence: 10-000-1-00314. E-mail: [email protected] Licence date of issuance: March 30, 2004. Issuing organisation: The Federal Securities Commission of the Russian Federation.
Mailing address: 107078 Moscow PO Box 162. 16.8. POSTAL ADDRESSES Telephone/telefax: (495) 504-28-86, 933-42-21. Svyazinvest — 55 bld. 2, Plyuschikha St., Moscow, 119121 Russia E-mail: [email protected] Rostelecom — 14 1st Tverskaya-Yamskaya St., Moscow, 125047 Russia
CenterTelecom — 6 bld. 2, Degtiarny Pereulok, Moscow, 125993 Russia 16.4 AUDITOR North-West Telecom — 26 Bolshaya Morskaya St., Saint Petersburg, 191186 Russia The auditor of the Group is Ernst & Young. VolgaTelecom — Dom Svyazi, M. Gorkogo Square, Nizhny Novgorod, 603000 Russia Its legal and actual address is 115035, Moscow, 77 Sadovnicheskaya Naberezhnaya, building 1. Southern Telecommucations Company — 66 Karasunskaya St., Krasnodar, 350000 Russia Audit, general, bank, insurance and stock exchange audit licence # E003246 (Order # 9 of the Ministry of Finance of the Russian Federation dated January 17, 2003), valid for 5 years. Uralsvyazinform — 11 Moskovskaya St., Yekaterinburg, 620014 Russia
Sibirtelecom — 53 M. Gorkogo St., Novosibirsk, 630099 Russia
16.5 AUDITING COMMITTEE Dalsvyaz — 57 Svetlanskaya St., Vladivostok, 690950 Russia
Svyazinvest's auditing committee is made up of: Giprosvyaz — 11 3rd Khoroshevskaya St., Moscow 123298 Russia Evgeny F. Mikhailov – Chairman • KGTS — 6 Gagarina St., Kostroma, 156026 Russia Deputy Director of the State Tariff Department of the Ministry of Economic Development and Trade of Dagsvyazinform — 3 Lenin Square, Makhachkala, Dagestan Republic, 367012 Russia the Russian Federation.
• Dmitry A. Kononov – Deputy Head of the State Tariff Department of the Ministry of Economic Development and Trade of the Russian Federation. 98 99 16.9 INTERNET ADDRESSES
Svyazinvest www.svyazinvest.ru Investor Relations Division E-mail: [email protected] Telephone: (495) 727-04-73, fax: (495) 727-04-75
Rostelecom www.rt.ru Public Relations and Investor Relations Department E-mail: [email protected] Telephone: (499) 973-99-20, fax: (499) 787-28-50
CenterTelecom www.centertelecom.ru Investor Relations Department E-mail: [email protected] Telephone: (495) 209-57-21, 793-23-40, fax: (495) 209-57-85
North-West Telecom www.nwtelecom.ru Shareholders and Securities Department E-mail: [email protected] phone: (812) 119-92-33, fax: (812) 325-83-23
VolgaTelecom www.volgatelecom.ru Securities and Capital Markets Department E-mail: [email protected] Telephone: (831) 434-38-54, fax: (831) 434-38-54
Southern Telecommucations Company www.stcompany.ru Investor Relations Division E-mail: [email protected] Telephone: (861) 253-20-30, fax: (861) 253-19-69
Uralsvyazinform www.uralsviazinform.ru Investor Relations Division E-mail: [email protected] Telephone: (343) 379-12-17, 379-12-19 fax: (343) 376-81-71
Sibirtelecom www.sibirtelecom.ru Capital Markets and Investor Relations Division E-mail: [email protected] Telephone: (3832) 19-11-97, fax: (3832) 19-15-21
Dalsvyaz www.dsv.ru Investor Relations Division E-mail: [email protected] Telephone: (4232) 20-85-00 ext. 1306, fax: (4232) 22-52-00
Central Telegraph www.cnt.ru Public Relations and Advertising Department E-mail: [email protected]; [email protected] Telephone: (495) 504-40-19, fax: (495) 500-46-02
Dagsvyazinform www.dinet.ru Securities Group E-mail: [email protected] Telephone: (8722) 67-77-53, fax: (8722) 67-76-90
Giprosvyaz www.giprosvyaz.ru E-mail: [email protected] Telephone: (495) 197-12-31, fax: (495) 197-10-74 100