Beeline AR 2005 - VimpelCom

Notes to Consolidated Financial Statements
82 VimpelCom
Notes to Consolidated Financial Statements
ВымпелКом
Annual Report 2005 Годовой отчет 2005 83
Foreign Currency Translation
The functional currency of VimpelCom and its subsidiaries, except for Closed Joint
Stock Company “Cellular Company” (“Cellular Company”), Orensot, StavTeleSot, DTI,
STM, KaR-Tel, URS and Tacom, is the US dollar because the majority of their
revenues, costs, property and equipment purchased, debt and trade liabilities are
either priced, incurred, payable or otherwise measured in US dollars. Accordingly,
transactions and balances not already measured in US dollars (primarily Russian
roubles and Euros) have been re-measured into US dollars in accordance with the
relevant provisions of US Statement of Financial Accounting Standards (“SFAS”)
No. 52, “Foreign Currency Translation”.
Under SFAS No. 52, revenues, costs, capital and non-monetary assets and liabilities
are translated at historical exchange rates prevailing on the transaction dates.
Monetary assets and liabilities are translated at exchange rates prevailing on the
balance sheet date. Exchange gains and losses arising from re-measurement of
monetary assets and liabilities that are not denominated in US dollars are credited
or charged to operations.
Cellular Company’s, Orensot’s, StavTeleSot’s, STM’s and DTI’s functional currency is the
Russian rouble, KaR-Tel’s functional currency is the Kazakhstani tenge, URS’s functional
currency is the Ukrainian hryvnia and Tacom’s functional currency is the Tajikistani
somoni because the majority of their revenues, costs, property and equipment
purchased, debt and trade liabilities are either priced, incurred, payable or otherwise
measured in Russian roubles, Kazakstani tenge, Ukrainian hryvnia and Tajikistani
somoni, respectively. Assets and liabilities of these companies are translated into US
dollars at exchange rates prevailing on the balance sheet date; revenues, expenses,
gains and losses are translated into US dollars at historical exchange rates prevailing on
the transactions dates. Translation adjustments resulting from the process of
translating their financial statements into US dollars are reported in other
comprehensive income, a separate component of shareholders’ equity.
The rouble is not a fully convertible currency outside the territory of the Russian
Federation. Within the Russian Federation, official exchange rates are determined
daily by the Central Bank of Russia (“CBR”). Market rates may differ from the official
rates but the differences are, generally, within narrow parameters monitored
by the CBR.
The Kazakhstani tenge, Ukrainian hryvnia, and Tajikistani somoni are not fully convertible
currencies outside the territories of Kazakhstan, Ukraine and Tajikistan,
respectively. Within the Republic of Kazakhstan, transactions denominated in foreign
currencies are recorded using the market exchange rates quoted by the
Kazakhstani Stock Exchange (“KASE”). Official exchange rates for Ukrainian hryvnia
are determined daily by the National Bank of Ukraine (“NBU”). Within the
Republic of Tajikistan, official exchange rates are determined daily by the National
Bank of the Republic of Tajikistan (“NBT”).
As of December 31, 2005 and 2004, the official rates of exchange were 28.78 roubles
= US$1 and 27.75 roubles = US$1, respectively. As of December 31, 2005 and
December 31, 2004, the official KASE’s rates of exchange were 133.77 tenge = US$1
and 130.00 tenge = US$1, respectively. As of December 31, 2005 the official NBU’s
rate of exchange was 5.05 hryvnias = US$1. As of December 31, 2005 the official
NBT’s rate of exchange was 3.20 somoni = US$1. The translation of roubledenominated,
tenge-denominated, hryvnia-denominated and somoni-denominated
assets and liabilities into US dollars for the purposes of these consolidated
financial statements does not indicate that VimpelCom could realize or settle, in US
dollars, the reported values of these assets and liabilities. Likewise, it does not
indicate that VimpelCom could return or distribute the reported US dollar value of
capital to its shareholders.
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results may differ from those estimates.
Cash and Cash Equivalents
VimpelCom considers all highly liquid investments with a remaining maturity of 90
days or less at the time of purchase to be cash equivalents. Cash equivalents are
carried at cost which approximates fair value.
Accounts Receivable and Doubtful Accounts
Accounts receivable are shown at their net realizable value which approximates
their fair value. VimpelCom reviews the valuation of accounts receivable on a
monthly basis. The allowance for doubtful accounts is estimated based on historical
experience of cash collections and future expectations of conditions that might
impact the collectibility of accounts.
Inventory
Inventory consists of telephone handsets and accessories for resale and is stated at
the lower of cost or market. Cost is computed using the average cost method.
Input Value Added Tax
Value Added Tax (“VAT”) related to sales is payable to the tax authorities on an
accrual basis based upon invoices issued to customers. VAT incurred on purchases
may be offset, subject to certain restrictions (one of which is that the offset could
be made only after the payment is made), against VAT related to sales, or could be
reclaimed in cash from the tax authorities under certain circumstances. VAT related
to purchase transactions, which will be offset against VAT related to sales within the
following year, is recognized in the balance sheets on a gross basis. In the Russian
Federation the VAT rate was 20% for the year ended December 31, 2003. Starting
January 1, 2004, the VAT rate decreased to 18%, although this 2% decrease in the
VAT rate on January 1, 2004 had no impact on the ability of VimpelCom to recover
VAT receivables existing prior to that date. As of December 31, 2005, the VAT rate in
Kazakhstan was 15%, and the VAT rate in Ukraine and Tajikistan was 20%.
Property and Equipment
Property and equipment is stated at historical cost. Telecommunications equipment,
including equipment acquired under capital leases, is depreciated using the
straight-line method over its estimated useful life of seven years. Capitalized
leasehold improvement expenses for base station positions is depreciated using the
straight-line method over the estimated useful life of seven years, or the lease
term, whichever is shorter. Buildings are depreciated using the straight-line
method over estimated useful lives of twenty years. Office and measuring equipment,
and vehicles and furniture are depreciated using the straight-line method
over estimated useful lives ranging from five to ten years.
Repair and maintenance costs are expensed as incurred. Interest costs are capitalized
with respect to qualifying construction projects.
Intangible Assets
Intangible assets consist primarily of telephone line capacity, wireless licenses,
goodwill and other intangible assets. VimpelCom capitalizes payments made to
third party suppliers to acquire access to and for use of telephone lines (telephone
line capacity). These payments are accounted for as intangible assets and are
amortized on a straight-line basis over ten years. Licenses are amortized on a
straight-line basis until the initial expiration date of the licenses. Other intangible
assets are amortised on a straight-line basis over their estimated useful lives,
generally from four to ten years.
Goodwill represents the excess of consideration paid over the fair value of net
assets acquired in purchase business combinations and is not amortized.
VimpelCom has acquired identifiable intangible assets through its acquisition of
interests in various enterprises. The cost of acquired entities at the date of
acquisition is allocated to identifiable assets and the excess of the total purchase
price over the amount assigned to identifiable assets is recorded as goodwill.
In accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”,
VimpelCom continues to evaluate the amortization period for intangible assets
with finite lives to determine whether events or circumstances warrant revised
amortization periods. In accordance with SFAS No. 142, VimpelCom tests goodwill
for impairment on an annual basis. Additionally, goodwill is tested for impairment
between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of an entity below its carrying value. These
events or circumstances would include a significant change in the business climate,
legal factors, operating performance indicators, competition, sale or disposition of
a significant portion of the business or other factors.
Software Costs
Under the provision of Statement of Position No. 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use”, VimpelCom capitalizes
costs associated with software developed or obtained for internal use when both
the preliminary project stage is completed and VimpelCom management has
authorized further funding of the project which it deems probable will be completed
and used to perform the function intended. Capitalization of such costs ceases
no later than the point at which the project is substantially complete and ready for
its intended purpose.
Research and development costs and other computer software maintenance costs
related to software development are expensed as incurred. Capitalized software
development costs are amortized using the straight-line method over the expected
life of the product.
Long-Lived Assets
VimpelCom accounts for impairment of long-lived assets, except for goodwill, in
accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” SFAS No. 144 requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to sell.
During the second quarter of 2004, certain impairment indicators were present
which indicated that the carrying amount of certain assets in Bee-Line Samara may
not be recoverable. VimpelCom then determined that an impairment of certain
assets had in fact occurred and recorded an impairment charge in the
accompanying consolidated statement of income. (Note 10)
Revenue Recognition
VimpelCom earns service revenues for usage of its cellular system, which include
airtime charges from contract and prepaid subscribers, monthly contract fees,
roaming charges and charges for value added services (“VAS”). Roaming revenues
include revenues from VimpelCom customers who roam outside their selected home
coverage area and revenues from other wireless carriers for roaming by their
customers on VimpelCom’s network. Value added services include short messages
(“SMS”), multimedia messages (“MMS”), caller number identification, voice mail, call
waiting and data transmission. Generally, these features generate additional
revenues through monthly subscription fees or increased wireless usage through
utilization of the features. Infotainment services are provided to subscribers
through the BeeOnline portal via SMS, MMS, wireless application protocol (“WAP”),
general packet radio service (“GPRS”) and other channels. VimpelCom charges
subscribers a fixed monthly fee for the use of the service, which is recognized as
revenue in the respective month.
In 2002 VimpelCom launched the Beebonus program – the “Loyalty Program”. With
a beebonus card subscribers accumulate bonus points by purchasing goods from
participating vendors. Bonus points can only be used to pay for services and have
no expiration date. The bonus points are accounted for as customer advances and
recognized as revenue when the advances are used.
Service revenue is generally recognized when the services (including value added
services and roaming revenue) are rendered. VimpelCom used prepaid cards as a
method of cash collection. Sold prepaid cards are accounted as customer advances
for future services. These prepaid cards have expiration dates. When a card expires,
unused balances are added to service revenue. Revenues from equipment sales are
recognized in the period in which the equipment is sold. Revenues are stated net
of value-added tax and sales tax charged to customers.
VimpelCom determined that the sale of wireless services through VimpelCom’s
direct sales channel with an accompanying handset constitutes a revenue arrangement
with multiple deliverables. In accordance with the provisions of EITF No. 00-
21 “Revenue Arrangements with Multiple Deliverables”, VimpelCom allocates the
arrangement consideration to the separate units of accounting, including the wireless
service and handset, based on their relative fair values.
In accordance with the provisions of the US SEC Staff Accounting Bulletin (“SAB”)
No. 104, “Revenue Recognition in Financial Statements”, VimpelCom defers telecommunications
connection fees. The deferral of revenue is recognized over the estimated
average subscriber life, which is generally three years.