Beeline AR 2005 - VimpelCom

Notes to Consolidated Financial Statements
86 VimpelCom
Notes to Consolidated Financial Statements
ВымпелКом
Annual Report 2005 Годовой отчет 2005 87
Statements”. These judgments are subjective based on the status of the legal or
regulatory proceedings, the merits of its defenses and consultation with in-house
and external legal counsel. The actual outcomes of these proceedings may differ
from the Company’s judgments.
Recent Accounting Pronouncements
On December 16, 2004, FASB issued Statement No. 123 (revised 2004), “Share Based
Payment” (“SFAS No. 123R”), which is a revision of SFAS No. 123. Statement No.
123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”
and amends Statement No. 95, “Statement of Cash Flows”. Under SFAS No. 123R,
companies must calculate and record the cost of equity instruments, such as stock
options or restricted stock, awarded to employees for services received in the
income statement; pro forma disclosure is no longer permitted. The cost of the
equity instruments is to be measured based on fair value of the instruments on the
date they are granted (with certain exceptions) and is required to be recognized
over the period during which the employees are required to provide services in
exchange for the equity instruments. SFAS No. 123R is effective in the first annual
reporting period beginning after June 15, 2005.
SFAS No. 123R provides two alternatives for adoption: (1) a “modified prospective”
method in which compensation cost is recognized for all awards granted
subsequent to the effective date of this statement as well as for the unvested
portion of awards outstanding as of the effective date and (2) a “modified
retrospective” method which follows the approach in the “modified prospective”
method, but also permits entities to restate prior periods to reflect compensation
cost calculated under SFAS No. 123 for pro forma amounts disclosure. The company
plans to adopt SFAS No. 123R using the modified prospective method. The
adoption of SFAS No. 123R is expected to have an impact on results of operations.
On March 30, 2005, the SEC released Staff Accounting Bulletin No. 107, “Share-
Based Payment,” (“SAB 107”), which expresses the views of the SEC staff regarding
the application of SFAS No. 123R. The impact of adopting SFAS No. 123R and SAB
107 has not been accurately estimated at this time, as it will depend on the amount
of share based awards granted in future periods. However, had we adopted SFAS
No. 123R and SAB 107 in a prior period, the impact would approximate the impact
of SFAS No. 123 as described in the disclosure of pro forma net income and earnings
per share in Note 2 to the Consolidated Financial Statements.
In addition to its stock option plans, VimpelCom also has a “phantom” stock plan
for members of its Board of Directors and senior management. This plan is discussed
in Note 23. This plan is currently accounted for as stock appreciation rights in
accordance with FASB Interpretation No. 28, “Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans”. The accounting for this
phantom stock plan will also be impacted by the adoption of FAS 123R. While the
ultimate compensation cost recorded for any liability award will be measured as the
cash ultimately paid to settle the award, the periodic accounting for the liability
awards will change from an intrinsic value approach to a periodic fair value
measurement using a lattice model. The Company has yet to quantify the potential
impact of FAS 123R as it relates to its outstanding liability awards.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets”. SFAS No. 153 addresses the measurement of exchanges of nonmonetary
assets. The guidance in APB Opinion No. 29, “Accounting for Nonmonetary
Transactions” (“APB No. 29”), is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. The guidance in APB No. 29, however, included certain exceptions to
that principle. SFAS No. 153 amends APB No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the exchange.
These provisions of SFAS No. 153 are effective for financial statements for fiscal
years beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges incurred during fiscal years beginning after the date
SFAS No. 153 was issued. The adoption of the provisions of SFAS No. 153 is not
expected to have a material impact on VimpelCom’s results of operations or financial
position.
In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN No. 47”),
“Accounting for Conditional Assets Retirement Obligations”. FIN No. 47 clarifies
that an entity must record a liability for a “conditional” asset retirement obligation
if the fair value of the obligation can be reasonably estimated. FIN No. 47 was
adopted at December 31, 2005. The adoption of FIN No. 47 did not have any effect
on the financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections”, which is a replacement of APB Opinion No. 20, “Accounting Changes”
and SFAS No. 3, “Reporting Changes in Interim Financial Statements”. SFAS No. 154
applies to all voluntary changes in accounting principle and changes the accounting
for and reporting of a change in accounting principle. SFAS No. 154 requires
retrospective application to prior periods’ financial statements of a voluntary
change in accounting principle unless it is impracticable. In addition, SFAS No. 154
requires that a change in method of depreciation, amortization or depletion for
long-lived, nonfinancial assets be accounted for as a change in accounting estimate
that is effected by a change in accounting principle. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The impact of adopting SFAS No. 154 cannot be accurately
estimated at this time as no such accounting changes are currently contemplated.
In June 2005, the FASB issued EITF 05-6 “Determining the Amortization Period for
Leasehold Improvements”. EITF 05-6 clarifies that leasehold improvements
acquired in a business combination or purchased subsequent to the inception of
the lease should be amortized over the lesser of the useful life of the asset or the
lease term that includes reasonably assured lease renewals as determined on the
date of the acquisition of the leasehold improvement. The guidance is applied
prospectively, thus it should be considered in determining the amortization period
of leasehold improvements acquired (either directly or in business combinations)
in periods beginning after July 1, 2005. The adoption of EITF 05-6 is not expected
to have a material effect on the financial position or results of operations.
Reclassifications
Certain reclassifications have been made to the prior years’ consolidated financial
statements to conform to the current year’s presentation. Unamortized debt issue
costs were included in other assets. Software was presented separately from other
non-current assets. The cost of content revenue relating to VAS was reclassified
from service costs to service revenues and connection fees to present content
revenue net of related costs. Costs of sim-cards sold were reclassified from cost of
telephones and accessories sold to service costs and from sales of telephones and
accessories to service revenues.
3. Changes in Estimates
At the beginning of the third quarter 2003, VimpelCom changed the estimated
remaining useful life of DAMPS telecommunications equipment from 2.5 to one
year. The change decreased net income for the year ended December 31, 2003 by
approximately US$4,626 (equivalent to US$0.12 per share of common stock – basic
and US$0.11 per share of common stock – diluted). The change occurred due to
VimpelCom’s continuing evaluation of its use of various technologies combined
with management’s decision not to develop the DAMPS network beyond the
revised estimated remaining useful life.
In January 2004, VimpelCom changed the estimated useful life of GSM
telecommunications equipment from 9.5 to 7 years. The change decreased net
income for the fiscal year ended December 31, 2004 by approximately US$31,469
(equivalent to US$0.76 per share of common stock – basic and US$0.76 per share of
common stock – diluted). This change occurred due to VimpelCom’s continuing
evaluation of its use of various technologies combined with the January 2004
announcements of the plans of the Russian Government to initiate the process of
awarding licenses for new mobile communications technologies.
On January 1, 2004, a new federal law on telecommunications (the “Law”) came
into effect in Russia. The Law sets the legal basis for the telecommunications
business in Russia and defines the status that state bodies have in the telecommunications
sector. The Law was designed to create new interconnect and federal
telephone line capacity pricing regimes in 2004 that should be more transparent
and unified, if fairly implemented. In particular, before the Law was introduced,
licenses did not provide for clear renewal procedure upon expiration, the
telecommunications industry in Russia did not have sufficient experience with the
renewal of licenses and prior legislation did not specify any bases for refusal to
renew a license. The Law explains the process for renewing a license and also
includes a basis for refusal to renew a license. Specifically, article 33 of the Law,
“Term of Validity of the License”, states that “the term of validity of a license may
be extended at the licensee’s application for the same term for which it was issued, or
for a different term which shall not exceed 25 years… An application for the
extension of the term of validity of a license shall be filed with the licensing body not
later than two months, and not earlier than six months, before the end of the term of
validity of the license… An extension of the term of validity of the license may be
refused if, on the date of submission of the application, there are violations of the
licensing terms which have not been eliminated.” In accordance with the Law the
prolongation of license terms can be refused if, as of the date of application, the
violations of licensing terms were determined but not eliminated. Based on this
provision VimpelCom’s management believes that VimpelCom’s licenses would be
prolonged.
The Law, by its terms, requires numerous additional regulations to be adopted.
However, as of December 31, 2004, the Russian Government had not yet adopted
many of these regulations, including the required regulation setting forth the
types of telecommunications activities and related terms and conditions.
VimpelCom’s management had been accumulating information and analysing the
situation during 2004. To date, many such regulations have been adopted resulting
in greater clarity in terms of implementation of the Law; however, some of the
implementing regulations required in connection with the Law have not yet been
adopted and some of the adopted regulations will come into effect on January 1,
2006, and some on July 1, 2006.
As a result of the implementation of the Law, effective January 1, 2005, VimpelCom
changed the estimated remaining useful life of GSM telecommunications licenses
and allocation of frequencies from the initial expiration dates of the GSM licenses
in Russia (held by VimpelCom and its subsidiaries), which varied from August 2006
to November 2012, to December 31, 2012. While under the Law, there is no
limitation on the number of times a license may be renewed, VimpelCom cannot
currently accurately predict related GSM cash flows in Russia beyond that date.
This change in estimate has increased net income for the year ended December 31,
2005 by US$59,725 (equivalent to US$1.17 per share of common stock – basic and
US$1.17 per share of common stock – diluted) in comparison to previous amortization
periods.
These above changes reflect comprehensive management analysis, involving future
estimated usage of and cash flows from this telecommunications equipment. Such
analysis are performed by the management of the Company on a regular basis (at
least quarterly). In each of the instances discussed above, the analyses indicated
that respective telecommunications licenses and equipment would not be
necessary generate revenue over a period beyond the revised estimated remaining
useful life. Thus, the aforementioned changes were made.
4. Acquisitions and Dispositions
StavTeleSot
In January 2003, VimpelCom-Region acquired 90% of common stock of
StavTeleSot, a cellular operator in the Stavropol region, for US$38,801. The primary
reason for the acquisition was obtaining the frequencies allocated to
StavTeleSot under its mobile telecommunications license. The acquisition was
recorded under the purchase method of accounting. The results of operations of
StavTeleSot were included in the accompanying consolidated statement of income
from the date of acquisition. The fair value of net assets acquired comprised
US$43,500. The difference of US$4,699 between the amount paid and the fair
value of net assets acquired was allocated as pro rata reduction of the acquired
license, allocation of frequencies and property and equipment. On September 19,
2003, VimpelCom-Region increased its share of ownership in StavTeleSot to 100%
by acquiring the remaining 10% of StavTeleSot common stock, which VimpelCom-
Region did not previously own, for US$4,312. The acquisition was recorded under
the purchase method of accounting. The fair value of 10% of net assets acquired
approximated the cost of acquisition.
The following table presents the condensed balance sheet disclosing the amount
assigned to each major asset and liability caption of StavTeleSot at the acquisition
date.