Rostelecom improves transparency of its financial statements

In order to improve transparency of Rostelecom’s financial statements in accordance with Russian Accounting Standards (RAS) and bring them more in line with the International Financial Reporting Standards, a number of decisions have been made that will have a significant impact on the Company’s 2002 full-year RAS financial statements:

1. In 2002 a new method of accounting for revenues from and payments to international operators in the RAS financial statements was developed: if in the previous reporting periods in its RAS financial statements (as opposed to IAS) the Company reported net revenues from international operators, i.e. revenues after deduction of payments to international operators for the outgoing international traffic, in 2002 full-year RAS financials Rostelecom will report total amounts of both revenues from and payments to international operators. In order to bring the opening (as of January 1, 2002) balances of accounts payable to and receivable from international operators into compliance with the new method of accounting, Rostelecom will have to recognize past reporting periods’ revenues from and payments to international operators in non-sales gains and losses. Expected negative effect on the 2002 RAS profit and loss statement will exceed RUR 700 mn, which will be reported in Q4 financials. This amount includes approximately RUR 120 mn of a net negative effect on the operating profit and over RUR 580 mn — on results from non-sales activities (for the past reporting years).
2. A decision has been made to form bad debts provision in the amount of over RUR 1,100 mn in Q4 2002 RAS financial statements (with full-year provision exceeding RUR 1,700 mn). Most of the provision corresponds to the overdue debt that emerged as a result of illegal access in Moscow and relates to the entire period of “Moscow Intercity and International Telephone” (MMT) existence.
3. In 2002 Rostelecom was performing physical observation and document collection to prove several amounts included in construction in progress in its RAS financial statements. Part of these amounts, approximately RUR 800 mn in total, represents interest on loans attracted by Rostelecom in 1996 — 2000 to finance equipment purchases. As a result, a decision has been made to include the above-mentioned amount in other non-sales expenses in the Company’s financial statements for 2002, including RUR 600 mn in Q4 2002.

Total negative effect of the above-mentioned decisions on the pre-tax RAS profits is expected at over RUR 2,400 mn for Q4 2002 (full-year effect — at over RUR 3,200 mn). The effect on net profits will be announced together with the full version of 2002 RAS financial statements.

We would like to draw your attention to the fact that the above-mentioned decisions apply to RAS financial statements only and will not affect Rostelecom’s 2002 IAS financials. Negative RAS P&L effects resulting from such decisions are of one-time nature. Rostelecom will release its full-year 2002 RAS results shortly.