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2. Basis for preparation of the consolidated financial statements

Statement of compliance

These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board.

Basis of measurement

The consolidated financial statements are prepared on the historic cost basis except for financial instruments at fair value through profit and loss and available-for-sale financial assets stated at fair value.

The Group’s statutory financial records are maintained in accordance with the legislative requirements of the countries in which the individual entities are located, which differ in certain respects from IFRS. The accounting policies applied in the preparation of these consolidated financial statements are set out in Note 3.

Critical accounting judgments, estimates and assumptions

Preparation of the consolidated financial statements in accordance with IFRS requires the Group’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The determination of estimates requires judgments which are based on historical experience, current and expected economic conditions, and other available information. Actual results could differ from those estimates.

The most significant areas requiring the use of management estimates and assumptions relate to:

  • useful lives of property, plant and equipment;
  • impairment of assets;
  • allowances for doubtful debts, obsolete and slow-moving inventories;
  • decommissioning liability;
  • retirement benefit liabilities;
  • litigations;
  • deferred income tax assets.

Useful lives of property, plant and equipment

The Group assesses the remaining useful lives of items of property, plant and equipment at least at each financial year-end and, if expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’. These estimates may have a material impact on the amount of the carrying values of property, plant and equipment and on depreciation expense for the period.

Impairment of assets

The Group reviews the carrying amount of its tangible and intangible assets to determine whether there is any indication that those assets are impaired. In making the assessments for impairment, assets that do not generate independent cash flows are allocated to an appropriate cash-generating unit. Subsequent changes to the cash generating unit allocation or to the timing of cash flows could impact the carrying value of the respective assets.

Allowance for doubtful debts

The Group makes allowance for doubtful receivables to account for estimated losses resulting from the inability of customers to make required payments. When evaluating the adequacy of an allowance for doubtful debts, management bases its estimates on the current overall economic conditions, the ageing of accounts receivable balances, historical write-off experience, customer creditworthiness and changes in payment terms. Changes in the economy, industry or specific customer conditions may require adjustments to the allowance for doubtful accounts recorded in the consolidated financial statements.

Allowance for obsolete and slow-moving inventories

The Group makes allowance for obsolete and slow-moving raw materials and spare parts. In addition, certain finished goods of the Group are carried at net realizable value. Estimates of net realizable value of finished goods are based on the most reliable evidence available at the time the estimates are made. These estimates take into consideration fluctuations of price or cost directly relating to events occurring subsequent to the end of the reporting period to the extent that such events confirm conditions existing at the end of the period.

Decommissioning liability

The Group reviews its decommissioning liability, representing site restoration provisions, at each reporting date and adjusts it to reflect the current best estimate in accordance with IFRIC 1 ‘Changes in Existing Decommissioning, Restoration and Similar Liabilities’. The amount recognized as a provision is the best estimate of the expenditures required to settle the present obligation at the reporting date based on the requirements of the current legislation of the country where the respective operating assets are located. The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Considerable judgment is required in forecasting future site restoration costs. Future events that may affect the amount required to settle an obligation are reflected in the amount of a provision when there is sufficient objective evidence that they will occur.

Retirement benefit liabilities

The Group uses an actuarial valuation method for measurement of the present value of post-employment benefit obligations and related current service cost. This involves the use of demographic assumptions about the future characteristics of the current and former employees who are eligible for benefits (mortality, both during and after employment, rates of employee turnover, disability and early retirement, etc.) as well as financial assumptions (discount rate, future salary and benefit levels, expected rate of return on plan assets, etc.).

Litigations

The Group exercises judgment in measuring and recognizing provisions and the exposure to contingent liabilities related to pending litigations or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgment is necessary in assessing the likelihood that a pending claim will succeed, or liability will arise, and to quantify the possible range of the final settlement. Because of the inherent uncertainties in this evaluation process, actual losses may be different from the originally estimated provision. These estimates are subject to change as new information becomes available, primarily with the support of internal specialists or with the support of outside consultants. Revisions to the estimates may significantly affect future operating results.

Deferred income tax assets

Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. The estimation of that probability includes judgments based on the expected performance. Various factors are considered to assess the probability of the future utilization of deferred tax assets, including past operating results, operational plans, expiration of tax losses carried forward, and tax planning strategies. If actual results differ from that estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be negatively affected. In the event that the assessment of future utilization of deferred tax assets must be reduced, this reduction will be recognized in the income statement.

Functional and presentation currency

The presentation currency of these consolidated financial statements is the US dollar.

The functional currency is determined separately for each of the Group’s entities. For all Russian entities the functional currency is the Russian ruble. The functional currency of the Group’s entities located in North America is the US dollar. The functional currency of the majority of the Group’s entities located in Western Europe is the Euro.

The translation into the presentation currency is made as follows:

  • all assets and liabilities, both monetary and non-monetary, are translated at the closing exchange rates at the dates of each statement of financial position presented;
  • all income and expenses in each income statement are translated at the average exchange rates for the periods presented;
  • all resulting exchange differences are recognized as a separate component in other comprehensive income.

Any conversion of amounts into US dollars should not be construed as a representation that such amounts have been, could be, or will be in the future, convertible into US dollars at the exchange rates used, or at any other exchange rate.

Adoption of new and revised IFRS

A number of new Standards, amendments to Standards and Interpretations were adopted for the year ended December 31, 2009, and have been applied in these consolidated financial statements.

The adoption of the pronouncements did not have a significant impact on the Group’s consolidated financial statements except for those discussed below.

The Group implemented IFRS 8 ‘Operating segments’ which requires segment disclosure based on the internal reporting system.

The comparative information has been presented as if the implementation was adopted at the beginning of the earliest comparative period presented.

The Group applied revised IAS 1 Presentation of Financial Statements (2007), which became effective as at 1 January 2009. The revised standard requires all owner changes in equity to be presented in the statement of changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income.

Comparative information has been re-presented so that it also is in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share.

New accounting pronouncements

A number of new Standards, amendments to Standards and Interpretations were not yet effective for the year ended December 31, 2009, and have not been applied in these consolidated financial statements.

Standards and Interpretations

Effective for annual periods beginning on or after

IAS 1 (Amended) ‘Presentation of Financial Statements’

July 1, 2009 and January 1, 2010

IAS 7 (Amended) ‘Statement of cash flows’

July 1, 2009 and January 1, 2010

IAS 12 (Amended) ‘Income taxes’

July 1, 2009

IAS 16 (Amended) ‘Property, Plant and Equipment’

July 1, 2009

IAS 17 (Amended) ‘Leases’

January 1, 2010

IAS 21 (Amended) ‘The effects of changes in foreign exchange rates’

July 1, 2009

IAS 24 (Revised) ‘Related party disclosure’

January 1, 2011

IAS 27 (Amended) ‘Consolidated and Separate Financial Statements’

July 1, 2009

IAS 28 (Amended) ‘Investments in Associates’

July 1, 2009

IAS 31 (Amended) ‘Interests in Joint Ventures’

July 1, 2009

IAS 32 (Amended) ‘Financial instruments: Presentation’

July 1, 2009 and February 1, 2010

IAS 34 (Amended) ‘Interim financial reporting’

July 1, 2009

IAS 36 (Amended) ‘Impairment of Assets’

July 1, 2009 and January 1, 2010

IAS 38 (Amended) ‘Intangible Assets’

July 1, 2009

IAS 39 (Amended) ‘Financial Instruments: Recognition and Measurement’

July 1, 2009 and January 1, 2010

IFRS 1 (Revised, amended) ‘First-time Adoption of International Financial Reporting Standards’

July 1, 2009, January 1, 2010 and July 1, 2010

IFRS 2 (Amended) ‘Share-based Payment’

July 1, 2009 and January 1, 2010

IFRS 3 (Revised) ‘Business Combinations’

July 1, 2009

IFRS 5 (Amended) ‘Non-current Assets Held for Sale and Discontinued Operations’

July 1, 2009 and January 1, 2010

IFRS 7 (Amended) ‘Financial instruments: disclosures’

July 1, 2009

IFRS 8 (Amended) ‘Operating Segments’

January 1, 2010

IFRS 9 ‘Financial instruments’

January 1, 2013

IFRIC 9 ‘Reassessment of Embedded Derivatives’

July 1, 2009

IFRIC 14 ‘Prepayments of a Minimum Funding Requirement’

January 1, 2011

IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’

July 1, 2009

IFRIC 17 ‘Distributions of Non-cash Assets to Owners’

July 1, 2009

IFRIC 18 ‘Transfers of assets from customers’

July 1, 2009

IFRIC 19 ‘Extinguishing financial liabilities with equity’

July 1, 2010

The adoption of the pronouncements listed above is not expected to have a significant impact on the Group’s consolidated financial statements in future periods except for those discussed below.

Revised IFRS 3 Business Combinations incorporates the following changes that are likely to be relevant to the Group’s operations:

  • The definition of a business has been broadened, which is likely to result in more acquisitions being treated as business combinations.
  • Contingent consideration will be measured at fair value, with subsequent changes therein recognized in profit or loss.
  • Transaction costs, other than share and debt issue costs, will be expensed as incurred.
  • Any pre-existing interest in the acquiree will be measured at fair value with the gain or loss recognized in profit or loss.
  • Any non-controlling interest will be measured at either fair value or at its proportionate interest in the identifiable assets and liabilities of the acquiree, on a transaction-by-transaction basis.

Revised IFRS 3 becomes mandatory for the Group’s 2010 annual consolidated financial statements and will be applied prospectively and therefore there will be no impact on prior periods in the Group’s 2010 consolidated financial statements.

IFRS 9 Financial Instruments will be effective for annual periods beginning on or after 1 January 2013. The new standard is to be issued in several phases and is intended to replace International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement once the project is completed by the end of 2010.

The first phase of IFRS 9 was issued in November 2009 and relates to the recognition and measurement of financial assets. The Group recognises that the new standard introduces many changes to the accounting for financial instruments and is likely to have a significant impact on Group’s consolidated financial statements. The impact of these changes will be analysed during the course of the project as further phases of the standard are issued.

Revised IAS 24 Related party disclosure provides a revised definition of a related party which includes new relationships and will likely lead to the increased number of related parties of the Group.

Revised IAS 24 becomes mandatory for the Group’s 2011 annual consolidated financial statements and requires retrospective application.

Management has not yet decided on the initial application date.

Restatement

As discussed in Note 29, these consolidated financial statements have been adjusted on the effects of the final purchase price allocation.

Change in an accounting estimate

During 2009 the Group revised the useful lives of its property, plant and equipment. The effect of the change in accounting estimate was a decrease in depreciation expense of US$55 million.