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OAO Severstal and subsidiariesOAO Severstal and subsidiariesNotes to the consolidated financial statementsfor the years ended December 31, 2008, 2007 and 2006(Amounts expressed in thousands of US dollars, except as stated otherwise)included in these consolidated financial statements until the cash consideration is paid. Parent Company sharesissued in consideration for the acquired companies are recognized from the moment the acquired companies areincluded in these financial statements.No goodwill is recognized where the Group acquires additional interests in the acquired companies from theMajority shareholder. The difference between the share of net assets acquired and the cost of investment isrecognized directly in equity.Investments in associatesAssociates are those enterprises in which the Group has significant influence, but does not have control over thefinancial and operating policies.Notes to the consolidated financial statementsfor the years ended December 31, 2008, 2007 and 2006(Amounts expressed in thousands of US dollars, except as stated otherwise)GoodwillGoodwill arising on the acquisition of a subsidiary, associate or a jointly controlled entity represents the excessof the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities andcontingent liabilities of the subsidiary, associate or jointly controlled entity recognized at the date of acquisition.Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulatedimpairment losses. Goodwill in respect of subsidiaries is disclosed as an intangible asset and goodwill relating toassociates and jointly controlled entities is included within the carrying value of the investments in these entities.Where goodwill forms a part of a cash generating unit and the part of the operations within that unit is disposed of,the goodwill associated with that operation is included in the carrying amount of the operation when determiningthe gain or loss on disposal of the operation.Investments in associates are accounted for under the equity method and are initially recognized at cost, from thedate that significant influence commences until the date that significant influence ceases. Subsequent changesin the carrying value reflect the post-acquisition changes in the Group’s share of net assets of the associate andgoodwill impairment charges, if any, after adjustments to align the accounting policies with those of the Group.When the Group’s share of losses exceeds the carrying amount of the associate, the carrying amount is reduced tonil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations inrespect of the associate.Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’sinterest in the associates; unrealized losses are also eliminated unless the transaction provides evidence of animpairment of the asset transferred.Interests in joint venturesA joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activitywhen the strategic financial and operating policy decisions relating to the activities of the joint venture require theunanimous consent of the parties sharing control.Where a Group entity undertakes its activities under joint venture arrangements directly, the Group’s share of jointlycontrolled assets and any liabilities incurred jointly with other venturers are recognized in its financial statementsand classified according to their nature. Liabilities and expenses incurred directly in respect of interests in jointlycontrolled assets are accounted for on the accrual basis. Income from the sale or use of the Group’s share of theoutput of jointly controlled assets, and its share of joint venture expenses, are recognized when it is probable thatthe economic benefits associated with the transactions will flow to the Group and their amount can be measuredreliably.Negative goodwill represents the excess of the Group’s share in fair value of acquired identifiable assets, liabilitiesand contingent liabilities over the cost of an acquisition. It is recognized in the income statement at the date of theacquisition.b. Foreign currency transactionsTransactions in foreign currencies are translated to the functional currency of each entity at the foreign exchangerate ruling on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at thebalance sheet date are translated to the functional currency of each entity at the foreign exchange rate ruling at thatdate. Non-monetary assets and liabilities denominated in foreign currencies are translated to the functional currencyof the entity at the foreign exchange rate ruling at the date of the transaction. Foreign exchange gains and lossesarising on the translation are recognized in the income statement.c. Exploration for and evaluation of mineral resourcesExpenditures associated with search for specific mineral resources are recognized as exploration and evaluationassets. The following expenditure comprises cost of exploration and evaluation assets:• acquisition of rights to explore;• researching and analyzing existing exploration data;• conducting geological studies, exploratory drilling and sampling;• examining and testing extraction and treatment methods; and/or• compiling prefeasibility and feasibility studies.If a project does not prove viable, all irrecoverable exploration and evaluation expenditure associated with theproject net of any related impairment allowances is written off to the income statement.Joint venture arrangements that involve the establishment of a separate entity in which each venturer has an interestare referred to as jointly controlled entities. The Group reports its interests in jointly controlled entities usingthe equity method of accounting whereby an interest in jointly controlled entities is initially recorded at cost andadjusted thereafter for post-acquisition changes in the Group’s share of net assets of theе joint venture. The incomestatement reflects the Group’s share of the results of operations of the joint venture.Unrealized gains on transactions between the Group and its jointly controlled entities are eliminated to the extentof the Group’s interest in the joint venture; unrealized losses are also eliminated unless the transaction providesevidence of an impairment of the asset transferred.The Group measures its exploration and evaluation assets at cost and classifies as tangible or intangible accordingto the nature of the assets acquired and applies the classification consistently. Exploration and evaluation assetsconsidered to be tangible are recorded as a component of property, plant and equipment at cost less impairmentcharges. Otherwise, they are recorded as intangible assets, such as licenses. To the extent that tangible asset isconsumed in developing an intangible asset, the amount reflecting that consumption is capitalized as a part of thecost of the intangible asset. As the asset is not available for use, it is not depreciated. All exploration and evaluationassets are monitored for indications of impairment.116117