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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)Financial liabilities at FVTPLFinancial liabilities are classified as at FVTPL where the financial liability is either held for trading or it is designated asat FVTPL.A financial liability is classified as held for trading if:• it has been incurred principally for the purpose of repurchasing in the near future; or• it is a part of an identified portfolio of financial instruments that the Group manages together and has a recentactual pattern of short-term profit-taking.A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initialrecognition if:• such designation eliminates or significantly reduces a measurement or recognition inconsistency that wouldotherwise arise; or• the financial liability forms a part of a group of financial instruments, which are managed and performance isevaluated on a fair value basis, in accordance with the Group’s documented risk management or investmentstrategy, and information about the grouping is provided internally on that basis.Financial liabilities at FVTPL are stated at fair value, with any resultant gain or loss recognized in profit or loss. The netgain or loss recognized in profit or loss incorporates any interest paid on the financial liability.Other financial liabilitiesOther financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Borrowingcosts on loans specifically for the purchase or construction of a qualifying asset are capitalized as a part of the cost ofthe asset they are financing.Other financial liabilities are subsequently measured at amortized cost using the effective interest method, withinterest expense recognized in the income statement.Derecognition of financial liabilitiesThe Group derecognizes financial liabilities when, and only when, the Group’s obligations are discharged, cancelled orthey expire.l. Hedging instrumentsThe Group holds cash flow hedging instruments in order to hedge the exposure to variability in cash flows that isattributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transactionand could affect profit or loss.Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognized directlyin equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value arerecognized in profit or loss.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)recognized in equity is transferred to the carrying amount of the asset when it is recognized. In other cases the amountrecognized in equity is transferred to profit or loss in the same period that the hedged item affects profit or loss.m. Dividends payableDividends are recognized as a liability in the period in which they are authorized by the shareholders.n. Indirect taxes and contributionsIndirect taxes and contributions are taxes and mandatory contributions paid to the government, or governmentcontrolled agencies, that are calculated on a variety of bases, but exclude taxes calculated on profits, value addedtaxes calculated on revenues and purchases and social security costs calculated on wages and salaries. Socialsecurity costs are included in cost of sales, distribution expenses and general and administrative expenses inaccordance with the nature of related wages and salaries expenses.o. Income taxIncome tax on the profit for the year comprises current and deferred tax. Income tax is recognized in the incomestatement except to the extent that it relates to items recognized directly in equity, in which case it is recognized inequity.Current tax expense is calculated by each entity on the pre-tax income determined in accordance with the taxlaw of the country, in which the entity is incorporated, using tax rates enacted at the balance sheet date, and anyadjustment to tax payable in respect of previous years.Deferred tax is calculated using the balance sheet method, providing for temporary differences between the carryingamounts of assets and liabilities for financial reporting and taxation purposes. Deferred tax is measured at the taxrates that are expected to be applied to the temporary differences when they reverse, based on the laws that havebeen enacted or substantively enacted by the balance sheet date. Deferred tax assets and liabilities are offset ifthere is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes leviedby the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current taxliabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.Deferred tax assets are recognized only to the extent that it is probable that future taxable profits will be availableagainst which these assets can be utilized. Deferred tax assets are reviewed at each reporting date and are reducedto the extent that it is no longer probable that the related tax benefit will be realized.Deferred tax is not recognized in respect of the following:• investments in subsidiaries where the Group is able to control the timing of the reversal of the temporarydifferences and it is probable that the temporary difference will not reverse in the foreseeable future;• if it arises from the initial recognition of an asset or liability that is not a business combination and, at the time ofthe transaction, affects neither accounting profit nor taxable profit or loss,• initial recognition of goodwill.If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised,then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in equityremains there until the forecast transaction occurs. When the hedged item is a non-financial asset, the amount122123