Saint-Petersburg Commercial Bank “Tavrichesky” (joint-stock) (стр. 3 )

IAS Amendment 1 “Financial Reporting Principles – Capital Reporting Disclosure”;

IFRIC Interpretation 8 “IFRS 2 Application Area”;

IFRIC Interpretation 9 “Built-in Derivatives Reconsideration”;

IFRIC Interpretation 10 “Interim Financial Reports and Loss of Value”;

IFRIC Interpretation 11 ‘”FRS 2 – In-group and Own Shares Trading”;

IFRIC Interpretation 12 “Service Concessions”.

Therefore, the Bank believes that the application of the above-mentioned concepts will not in any major way modify its financial statements during the initial stage of use.

The Russian ruble (RUR) is supposed to be the Bank’s reporting currency. If not stated otherwise, the figures relate to the thousands of RUR.

The annual accounts formation involves drawing on specific assumptions which affect assets and liabilities amounts stated, contingent assets and liabilities disclosed under the statement make-up date as well as earnings and expenditure amounts over the accounting period. Moreover, the Bank’s executives are expected to exploit personal assumptions while they tap the accounting policy of their choice. Occasionally, the actual results may differ from the assumptions made.

The ownership capital and profit are agreed within the financial results along the IFRS and the Russian legislation lines as follows:

	2006	2005
	Capital	Profit	Capital	Profit
Russian legislation-agreed	1,144,471	83,315	1,	31 183
Funds value outside fixed assets (in compliance with Russian Accounting Standards)	17,602	-	14,538	-
Statement of AFS assets at fair value	1,619	-	-	-
Subordinated deposit	(97,500)	-	(136,500)	-
Inflation effect arising from non-monetary balance entries	11,958	-	12,244	-
Dividends paid from current receipts	-	33,140	-	-
Taxation	(2,769)	1,065	(3,784)	260
Fixed assets depreciation	1,545	(3,443)	4,702	1 367
Provisions and reserves	(18,322)	(17,324)	(998)	(1 508)
Expenses from assets floated/valued below market rates	-	(42,384)	-
Interest gained/paid	(9,661)	(3,919)	3,231	808
Expenses paid from past years’ retained profits	-	(6,384)	-	(1 783)
Other	(4,770)	(54)	1,475	1 386
IFRS-agreed	1,044,173	44,012	1,059,106	13,968

NOTE 4 – BASIC PRINCIPLES OF ACCOUNTING POLICY

Monetary funds and their equivalents

Monetary funds and their equivalents are assets which can be converted into monetary funds within one day and are not subject to significant changing of value. All short-term interbank allocations except for “overnight” allocations are shown as funds in other banks. Sums which have any limitations in their use are excluded from monetary funds and their equivalents.

Obligatory reserves in the Bank of Russia

Obligatory reserves on the accounts in the Bank of Russia are the funds deposited in the Bank of Russia and are not subject to financing of current operations. Size of the obligatory reserves depends on the volume of client’s funds attracted by the Bank. There is no interest rate for obligatory reserves. The current legislation imposes significant limits on the Bank to use these funds. Owing to this they are excluded from monetary funds and their equivalents for accounting concerning funds flow.

Financial assets estimated according to fair value via profit or loss

Financial assets are classified into this category if they are obtained with the purpose of sale in a short-term period. Derivative financial instruments that have positive fair value are also estimated according to fair value via profit or loss only if they are not derivative instruments established as effective hedging instruments. Primarily and thereafter, the financial assets estimated according to fair value via profit or loss are counted according to fair value which is calculated either on the grounds of market quotations or by using different methods of estimation with allowance for possibility of sale of these financial assets in future. When estimating market quotations, the price of the last bidding is used if the financial assets estimated according to fair value via profit or loss are rated at exchange or according to the price of the last quotation for purchasing if transactions are made at over-the-counter market. In case of absence of active market, the methods are used that contain information about the latest market transactions between independent parties that are well aware of the case and are willing to make such transactions, the appeal to current fair value of the other identical to great extent instrument, the results of analysis of discounted funds flow and the model of price determination of options.

The realized and non-realized incomes and expenses for operation with financial assets estimated according to fair value via profit or loss are represented in the profit-and-loss account within the period when they occurred, as a part of incomes with deduction of expenses for operations with financial assets estimated according to fair value via profit or loss. Interest profits from financial assets estimated according to fair value via profit or loss are represented in the profit-and-loss account as the interest income from financial assets estimated according to fair value via profit or loss.

Purchase and sale of financial assets estimated according to fair value via profit or loss, the delivery of which is to be fulfilled within the certain terms determined by the legislation or convention for this market (purchase or sale according to “standard contracts”), are represented as of the transaction date, i. e. the day when the Bank is to buy or to sell the asset. In all other cases these operations are represented as derivative financial instruments up to the moment of payment.

The Bank classifies financial assets estimated according to fair value via profit or loss into the corresponding category at the moment of their acquisition. Financial assets classified into this category are not subject to re-classification.

Funds in other banks

Within its activities, the Bank places monetary funds in other banks for various periods. These funds are considered as loans provided by the Bank and are represented as for depreciable cost (see “Credits and receivables”). As such allocation in most cases does not have any provision, administration makes reserves for devaluation. Reserves are formed according to the same principles as for reserves for devaluation of credits and receivables.

Credits and receivables, reserve for devaluation of credit portfolio.

This category consists of non-derivative financial assets with established or determined payments which are not rated at active market except for:

-  which are intended to be sold immediately or in the nearest future and which are to be classified as subject for commerce estimated primarily according to fair value via profit or loss;

-  which are primarily estimated as available for sale;

-  for which an owner cannot cover the whole significant amount of his\her primary investment for the reasons other than reduction of creditability and which are to be classified as available for sale.

Primary estimation of credits and receivables is made according to fair value plus expenditures from a transaction (i. e. fair value of paid or received recovery). Credits and receivables are represented from the moment of providing monetary funds to borrowers. Credits given according to interest rates different from the market interest rates are estimated as of the issue date according to fair value which represents future interest payments and sum of the main debt discounted with consideration of market interest rates for similar credits. Difference between fair value and nominal cost of the credit is represented in profit-and-loss account as an income from assets placed at rates which are higher than the market ones or as expenses from assets placed at rates which are lower the market ones. Further balance cost of these credits is corrected with consideration of income (expenses) depreciation according to the credit, and corresponding income is represented in profit-and-loss account by using the method of efficient interest rate.

Method of efficient interest rate is the method of calculation of depreciated cost of financial asset or financial obligation and distribution of interest income and expenses for corresponding period. Efficient interest rate is the rate which is applied at accurate discounting of expected sum of future money payments up to the payment period or next date of re-estimation of the rate up to the current balance cost. All commissions and other sums paid or obtained by parties of a contract are included into account. The efficient interest rate is sometimes called the level of income for repayment or for the moment of the next re-estimation of the rate and is an inner norm of profitability for such period.

The Bank avoids occurrence of losses from devaluation at primary admission of credits and receivables. Credits and receivables are devaluated only if objective signs for devaluation exist as a result of events taking place after primary admission of an asset and the losses which influence the predicted future flow of monetary funds for financial asset or a group of financial assets are subject to true estimation. The balance cost of credits and receivables is reduced by means of reserve account for devaluation. After determination of objective signs for devaluation on individual grounds and under condition of absence of such signs, credits are included into a group of financial assets with similar characteristics of credit risk for the purpose of determination of signs for devaluation on combined basis. The amount of this reserve is determined depending on loss history for credit portfolio for every category of borrowers, on credit rating assigned to borrowers which represents current economic situation that influence the borrowers’ activity.

If a credit cannot be returned, the sum of the credit is written off, thus causing reduction of the reserve for devaluation. Writing-off is carried out only after completion of all necessary procedures. Sums levied for the written-off credit are represented as reduction of losses for loans in the profit-and-loss account.

Recovery of the sums having been written off earlier is represented in the profit-and-loss account for the credit line “Reserve changing for devaluation of credit portfolio”. Reduction of the earlier formed reserve for devaluation of credit portfolio is represented in the profit-and-loss account for the credit line “Reserve changing for devaluation of credit portfolio”.

Periods for loan repayment

Periods for loan repayment are given in the table in Appendix 25 and represent the period between the date of drawing-up a balance and the repayment period determined by the contract. Long-term credits or overdrafts are not enough widespread in Russia nowadays. Nevertheless, prolongation of short-term credits is possible. As a result, actual period for credit repayment may be longer than that mentioned in the contracts.

Other obligations of credit nature

Within its current activities, the Bank takes on the responsibilities of credit nature, including letters of credit and warranties. The Bank represents special reserves for other obligations of credit nature if the possibility of loss is quite high for such obligations.

Bills acquired

Acquired bills are classified depending on purpose of acquisition into categories of financial assets: financial assets estimated according to fair value via profit or loss, financial assets withheld up to repayment, funds in other banks, credits and receivables, financial assets available for sale, and are, subsequently, taken into account according to the accounting policy in relation to particular category of assets.

Financial assets available for sale

This category includes non-derivative financial assets which are determined as available for sale or which are not classified as credits and receivables, financial assets withheld up to repayment, financial assets estimated according to fair value via profit or loss. The administration classifies financial assets into corresponding category at the moment of their acquisition.

Financial assets available for sale are primarily estimated according to fair value plus transaction costs directly bound to acquisition of a financial asset. In this case, as a rule, the fair value is the price of transaction of the financial asset acquisition. Further estimation of financial assets available for sale is carried out according to the fair value based on quotations for purchase of financial assets. Some of financial assets available for sale which have no quotations from external independent sources are estimated according to the fair value based on the results of a recent sale of similar financial assets to third persons, on the analysis of other information such as discounted money flow and financial information about object of investments and also on use of other estimation methods. Investments into share instruments which have no rated market prices are estimated according to their costs.

Non-realized income and expenses having occurred as a result of changing of fair value of the financial assets available for sale are represented in the account of changing of the own capital. Upon withdrawal of financial assets available for sale, the corresponding accumulated non-realized income and expenditures are included into the profit-and-loss account for line “income with deduction of expenditures for operations with financial assets available for sale”. Devaluation and recovery of the earlier devaluated cost of financial assets available for sale is represented in the profit-and-loss account.

Interest income from the financial assets available for sale is represented in the profit-and-loss account as interest income from financial assets available for sale.

On availability of standard conditions of payment, purchasing and sale of financial assets available for sale are represented as of the transaction date, i. e. the date when the Bank undertakes to buy or to sell such an asset (as an alternative, the Bank can use the method of representation in the account for the date of payment). All other purchases and sales are represented as forwarding operation up to the moment of payment according to the transaction.

Capital assets

Capital assets are accounted according to the cost of acquisition corrected up to the equivalent purchasing capacity of the Russian ruble as for the 31st of December 2002 with deduction of accumulated depreciation and reserve for devaluation (where necessary). If the balance cost of an asset is higher than its estimated cost to be compensated, then the balance cost of the asset decreases to its cost to be compensated and the difference is represented in the profit-and-loss account. The estimated cost to be compensated is determined as the highest one from fair value of an asset with deduction of the expenses for sale and the value of its use.

Unfinished construction works are accounted according to the primary cost corrected up to the equivalent purchasing capacity of the Russian ruble as for the 31st of December 2002 with deduction of reserve for devaluation (where necessary). Upon completion of construction works, the assets are transferred into the group of capital assets and represented with their balance cost for the moment of transfer. The unfinished construction is not subject to amortization until the moment of putting the asset into service.

Profit and loss occurring as a result of withdrawal of capital assets are determined according to their balance cost and are accounted when calculating the sum of profit (loss). Expenditures for repair and maintenance are represented in the profit-and-loss account at the moment when they take place.

Depreciation is calculated by lineal method considering the useful application of capital assets. Periods of useful application are represented in the table below:

	Years
Buildings	50
Vehicles	5
Computers	5
Office equipment and furniture	6
Capital investments into rented assets	10
Other	7

Depreciation is taken into account even if the fair value of an asset is higher than its balance cost, provided that the asset liquidation cost is not higher than its balance cost. Repair and servicing of an asset do not exclude the necessity of its amortization. Amortization of an asset starts when it becomes accessible for use, i. e. when location and condition of an asset provide for its use according to the Bank’s intention. The amortization terminates when the asset recognition ends.

Operational leasing

When the Bank acts as a leaseholder, the sum of payments for contracts of operational leasing is represented by the leaseholder in the profit-and-loss account by the method of straight line depreciation within the period of leasing.

Loans

Loans are funds of clients, funds of other banks, other loans. Loans are primarily estimated according to fair value which is a sum of obtained funds with deduction of expenses made for the transaction. Subsequently, the loans are represented according to the depreciated cost and the difference between the sum of obtained funds and the cost of repayment is represented in profit-and-loss account within the loan period by method of efficient interest rate (see “Credits and receivables”).

Loans with interest rates different from the market interest rates are estimated at the moment of acquisition at fair value including future interest payments and the sum of main debt discounted with consideration of market interest rates for similar loans. Difference between the fair value and the nominal cost of loans for the moment of acquisition is represented in profit-and-loss account as income from attraction of loans at rates lower than the market ones or as expenditure from loans at rates higher than the market ones. Subsequently, the balance cost of loans is corrected with consideration of depreciation of primary income (expenditure) for loans and the corresponding expenditures are represented as interest expenditures in the profit-and-loss account by the method of efficient profitability.

Issued debt securities

Issued debt securities consist of bills of exchange and certificates issued by the Bank. Debt securities are primarily represented according to the actual cost which is a sum of obtained funds (fair value of obtained property) with deduction of expenses made according to the transaction. Subsequently, the issued debt securities are represented according to the depreciated cost and any difference between the net gain and the cost of repayment is represented in profit-and-loss account during the period of circulation of security by the method of efficient profitability.

If the Bank obtains its own issued debt securities, they are excluded from the balance and the difference between the balance cost of obligation and the paid sum is included into the income from debt repayment.

Share capital and share premium

Share capital is accounted according to its historical cost and, if paid with monetary funds invested before January 1st, 2003, with consideration of inflation. Expenses directly connected to issuing new securities are represented as reduction of the own funds of shareholders with deduction of the income tax. The share premium is the excess of contribution into the share capital over the nominal cost of issued securities.

Dividends

Dividends are represented as reduction of the shareholders' own funds in the period when they are declared. Dividends which are declared after the date of drawing up of the accountancy balance are represented in remarks on events having occurred after the accounting date.

Payment of dividends and other distribution of profit are made on the grounds of the net profit of the current year according to the accounting reports drawn up in accordance with the Russian legislation.

Income tax

In financial accounting reports, the expenditures are represented concerning taxation in accordance with requirements of the Russian legislation. Expenditures for the profit tax in the profit-and-loss account for a year include current taxation and changes in deferred taxation. Current taxation is calculated on the basis of expected taxed profit for a year with application of the tax rates valid on the date of drawing up of the accounting balance. Expenditures for taxes excluding profit tax are represented in the operational expenditures.

Deferred taxation for profit tax is calculated by the method of balance assets and obligations in relation to all time differences between the tax base of assets and obligations and their balance cost in accordance with financial accounts. Assets and obligations for deferred taxation are determined by using the tax rates which are supposed to be used in the period when the assets would be realized and the obligations would be fulfilled basing on the tax rates which were determined in this period or actually determined for the accounting date. Assets for deferred taxation are represented in the degree in which there is a probability for acquisition of taxed profit against which the time differences could be used.

The deferred taxation occurring at re-estimation according to the fair value of securities available for sale with relation of this re-estimation for increase or decrease of own funds of the shareholders is also referred to the shareholders own funds. On sale of these securities, the corresponding sums of deferred taxation are represented in the profit-and-loss account. The deferred tax assets and obligations are created in relation to time difference.

Representation of income and expenditures

Interest incomes and expenditures are represented in the profit-and-loss account for all interest instruments by method of charging with the use of the method of efficient profitability on the basis of actual price of purchase. Interest incomes include the coupon income obtained from securities with fixed income, increased discount and bonus from bills of exchange and other discount instruments. In case if there are any doubts about timely repayment of the credits issued, they are re-estimated up to the cost to be recovered with subsequent representation of the interest income on the basis of the interest rate used for discounting of further funds flow with the purpose of estimation of the cost to be mission income and other incomes and expenditures are represented by the method of charging within the period when the service is mission income from providing credits, which have not been issued yet but which are likely to be issued, are represented in other assets (in line with corresponding direct expenses) and are subsequently considered on calculation of efficient profitability for the mission income from control of the investment portfolio and other managing and consultancy services are represented in accordance with contractual terms for services provision.

Reserves

Reserves are recognized in the case if the Bank has a current obligation (legal of resulting from business) as a result of latest events if there is a strong probability that withdrawal of resources profitable from the economic point of view would be needed to fulfill this obligation and if a reliable estimation of the sum of the obligation can be made.

Re-estimation of foreign currency

Financial accounts are represented in the currency of the Russian Federation which is a functional currency of the Bank and the currency for accounting. Operations in foreign currency are represented at the official rate of the Bank of Russia valid for the day of operation. Rate difference occurring at payment in foreign currency is included in profit-and-loss account at official rate of the Bank of Russia valid for the date of operation. Monetary assets and obligations in foreign currency are converted into the currency of the Russian Federation at official rate of the Bank of Russia for the date of drawing up the balance. Rate differences connected to debt securities and other monetary financial assets represented according to the fair value are included in income and expenditures from re-estimation of foreign currency. Rate differences connected to non-monetary articles, such as shares, included into the category of financial assets estimated according to fair value via profit and loss are represented as a part of income or expenditures from re-estimation at fair value. Rate differences for non-monetary assets available for sale are included into the own capital via the fund of re-estimation of financial assets available for sale.