Open Joint Stock Company Gazprom

OAO GAZPROMNOTES TO THE IAS CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(In millions of Russian Roubles in terms of the equivalent purchasing power of the Rouble at31 December 2001, except as noted)4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—(Continued)Revenue recognitionSales are recognised for financial reporting purposes when products are delivered to customersand title passes and are stated net of value-added tax ("VAT"), excise taxes and other similarcompulsory payments.Interest income is recognised as it accrues (taking into account the effective yield on the asset),unless collectibility is in doubt.Research and developmentResearch and development expenditure is recognised as an expense except that costs incurredon development projects are recognised as development assets to the extent that such expenditure isexpected to have future benefits. However, development costs initially recognised as an expense arenot recognised as an asset in a subsequent period.Development costs that have been capitalised are amortised from the commencement of thecommercial production of the product to which they relate on a straight line basis over estimated usefullives.Financial instrumentsFinancial instruments carried on the balance sheet include cash and bank balances, investments,receivables, trade creditors and borrowings. The particular recognition methods adopted are disclosedin the individual policy statements associated with each item.The Group is also party to derivative financial instruments including forward and spot transactionsand option contracts in foreign exchange, gold and securities markets. The Group's normal policy is tomeasure these instruments using contractual rates, with resultant gains or losses being reported withinthe consolidated statement of operations. Following the financial crisis of August 1998, the Groupadopted specific accounting methods as follows:Index ForwardsThe Group has either paid the amount due under index contracts, and realised a loss (gain), ornegotiated a settlement for a lesser amount and has recognised a loss (gain) based on the agreedterms, or has not settled with the counterparty. Where no settlements or agreements have been reachedthe loss on the index contracts has been recognised by applying the rate of exchange ruling at the dateof the contract maturity, for domestic counterparties, and the year end exchange rate, for foreigncounterparties. This difference in the application of exchange rates is due to the fact that settlementswith domestic counterparties in the normal course of business have been performed in RR, and withforeign counterparties in foreign currency. Management has not recorded a gain where no settlementor agreements have been reached due to the uncertainty of collectibility.Gains and losses recognised on the index contracts have been offset within each counterpartysince management believes that there is a legally enforceable right to offset these amounts, and itintends to settle all the contracts with the same counterparty on a net basis.F-13