Joint-Stock Commercial Bank “BANKank OFof INVESTMENTS AND SAVINGSIinvestments and Ssavings “Investsberbank” (Open Joint Stock Company ОAO) (стр. 2 )

Functional currency - The functional currency of these financial statements is the Russian Rouble.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recognition and measurement of financial instruments - - The Bank recognizes financial assets and liabilities on its balance sheet when, and only when, it becomes a party to the contractual provisions of the instrument. Regular way purchase and sale of the financial assets and liabilities are recognized using settlement date accounting.

FIFinancial assets and liabilities are recognized at initial recognition of financial assets and liabilities are initially recognized atis valued by Bank in the amount of actual costscost, which is the fair value of consideration given or received, respectively, including or net of any transaction costs incurred, respectively. The accounting policies for subsequent measurement of these items are disclosed in the respective accounting policies set out below.

Cash and cash equivalents - Cash and cash equivalents are represented by balances which may be convertibleed into cash during 1 day, including demand deposits with banks which can be repaid on the next day after the Balance sheet date. Amounts with any restrictions are not included in cash and cash equivalents category.

Obligatory reserves with CBR -– Amounts of deposits with the CBR not used in the day-to-daycurrent activities of the Bbank represent the Obligatory reserves with the CBR. These amounts are excluded from cash and cash equivalents for the purposes of cash flow statement and are recorded separately in Balance sheet.due to restrictions on its availability.

Loans and advances to banks - In the normal course of business, the Bank maintains advances or deposits for various periods of time with other banks. Loans and advances to banks with a fixed maturity term are subsequently re-measured at amortized cost using the effective interest rate method. Those that do not have fixed maturities are carried at cost. Amounts due from credit institutions are carried net of provision for losses.

Trading securities - Trading securities represent debt and equity securities held for trading that are acquired principally for the purpose of generating a profit from short-term fluctuations in price or dealer’s margin. Trading securities are initially recorded at cost which approximates fair value of the consideration given and subsequently measured at fair value. The Bank uses quoted market prices to determine fair value for the Bank’s trading securities. When reliable information about market prices is not available or if liquidating the Bank’s position would reasonably be expected to impact market prices, fair value is determined by reference to price quotations for similar instruments traded in different markets or management’s estimates of the amounts that can be realized from an orderly disposition over a period of time, assuming current market conditions. Fair value adjustment on trading securities is recognized in profit and loss for the period.

Loans and advances to customers - Loans originated by the Bank are financial assets that are created by the Bank by providing money directly to a borrower or by participating in loan facility, other that those that are originated with the intent to be sold immediately or in the short term, which are classified as held-for-trading.

Loans granted by the Bank are initially recognized in accordance with the policy stated above. The difference between the nominal amount of consideration given and the amortized cost of loans issued at other than market terms is recognized in the period the loan is issued as initial recognition adjustment discounting using market rates at inception and included in profit and loss account. Loans to customers with fixed maturities are recorded at amortized cost using the effective interest method. Those that do not have fixed maturities are carried at cost. Loans and advances to customers are carried net of any allowance for loan losses.

Write off of loans - Loans are written off against allowance for loan losses in case of uncollectibility of loans and advances, including through repossession of collateral. Loans shall be written off with the resolution of the Board of DirectorsBank’s management and, in certain cases, with the respective decision of the court after the Bank’s management after takesing all possible steps to collect the amounts due to the Bank including sale by the Bank of the available collateral. Management’s evaluation of the allowance is based on the Bank’s past loss experience, analysis of known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions.

Allowance for losses - The Bank establishes an allowance for losses on financial assets when it is probable that the Bank will not be able to collect the principal and interest according to the contractual terms of financial assets, which are carried at cost or amortized cost. The allowance for losses is defined as the difference between carrying amounts and the present value of expected future cash flows, including amounts recoverable from guarantees and collateral, discounted at the original effective interest rate of the financial asset. For financial assets that do not have fixed maturities, expected future cash flows are discounted using periods during which the Bank expects to realize the loan.

The determination of the allowance for loan losses is based on an analysis of the specific assets and risks related to loan portfolio, unfavorable circumstances which can affect the financial performance of the borrower, the cost of pledged assets or the economic situation as a whole as well as Bank’s past loss experience.

The loan loss provisionloan portfolio and created reflects the amount which, in the judgment of management, is sufficient to provide for losses inherent in the loan portfolio. Allowances are made as a result of a detailed appraisal of risk assets.

The total change in the allowance for loan losses is charged to profit and loss account. The total of allowance for loan losses is deducted in the balance sheet from the amount of loans and advances to customers and banks. Management’s evaluation of the allowance is based on the Bank’s past loss experience, analysis of known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions.

It should be understood that estimates of loan losses involve an exercise of judgment. While it is possible that in particular periods the Bank may sustain losses, which are substantial relative to the allowance for loan losses, it is the judgment of management that the allowance for loan losses is adequate to absorb losses inherent in the loan portfolio.

Fixed and intangible assets – Fixed and intangible assets acquired after 1 January 2003 are carried at historical cost less accumulated depreciation and any accumulated impairment loss. Fixed and intangible assets, acquired before 1 January 2003 are carried at historical cost restated

for inflation less accumulated depreciation and any accumulated impairment loss. Depreciation on assets under construction and those not placed in service is not charged. commences from the date the assets are ready for their intended use. Depreciation of fixed and intangible assets commences from the date the assets are ready for their intended use, it is designed to write off assets over their useful economic lives. It is calculated on a straight line basis at the following annual prescribed rates:

Buildings	%
Equipment	%
Vehicles	1%
Intangible assets	10-100 %

The carrying amounts of fixed and intangible assets are reviewed at each balance sheet date to assess whether they are recorded in excess of their recoverable amounts. Where carrying values exceed this estimated recoverable amount, fixed and intangible assets are written down to their recoverable amount. An impairment of fixed and intangible assets is recognized in the respective reporting period and is included in operating expenses. After the recognition of an impairment loss the depreciation charge for fixed assets is adjusted in subsequent periods to allocate the assets’ revised carrying value, less its residual value (if any), on a systematic basis over its remaining useful life.

Leasehold improvements are amortized over the life of the related leased asset. Expenses related to repairs and renewals are charged when incurred and included in operating expenses unless they qualify for capitalization.

Impairment loss - If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable value. The difference being an impairment loss is recognized as an expense in the profit and loss account for the year in which it arises.

Operating leases - Leases of assets under which the risks and rewards of ownership are effectively retained with the lessor are classified as operating leases. The Bank, which acts as lessee under operating lease contracts, includes relevant lease payments in operating expenses using straight-line method.

When the Bank acts as a lessor, the assets transferred under the operating lease contracts are recorded on the balance sheet, and the income received is included in the operating income on the straight-line basis through the valid period of contract. The depreciation policy applied for leased assets complies with the bank’s policy used for similar assets. If the operating lease is cancelled before the maturity date upon the contract, then any payment due to lessor as the penalty is recorded as income/(expense) in the period of actual ending of operating lease.

Taxation - Income tax represents amount of current and deferred taxes.

Income tax expense for the current period is determined on the basis of the taxable profit received in the year. Taxable profit is different from net profit shown on the profit and loss account as it does not include income and expense items taxable or deductible in other years, and also does not include non-taxable and non-deductible items. Income tax expenses in the profit and loss account include the current year tax expense and changes in deferred tax. The Bank’s income tax expense is calculated in the current year using tax rate enacted at the balance sheet datein the reporting period.

Deferred tax represents income tax assets or liabilities and is accounted for using the asset and liability method in respect of temporary differences between the financial reporting carrying amounts and tax bases of assets and liabilities, as well as respective tax accounting data used for taxable income computation. Deferred tax liabilities, if any, which result from temporary differences, are provided for in full. Deferred tax assets are recognized to the extent that there is a reasonable expectation that the asset will be realized.

The carrying value of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that a related tax benefit will be realized sufficient for full or partial recovery of the asset.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realized. Deferred tax is recorded in the profit and loss account, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred income tax assets and liabilities are offset when:

·  the Bank has a legally enforceable right to set off the recognized amounts of current tax assets and current tax liabilities;

·  the Bank has an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously;

·  the deferred tax assets and the deferred tax liabilities relate to income taxes levied by
the same taxation authority in the each future period in which significant amounts of deferred tax liabilities and assets are expected to be settled or recovered.

Russia also has various other taxes, which are assessed on the Bank’s activities. These taxes are included as a component of operating expenses in profit and loss account.

Deposits from banks and customers - Customers and bank deposits are initially recognized at cost, which amounts to the issue proceeds less transaction costs incurred. Subsequently, amounts due to banks and customers are stated at amortized cost and any respective difference between net proceeds and the redemption value is recognized in the profit and loss account over the period of the borrowings using the effective interest rate method.

Debt securities issued - Debt securities issued represent promissory notes and certificates of deposit issued by the Bank to customers. They are accounted for according to the same principles used for customer and bank deposits.

Provisions - Provisions are recognized when the Bank has a current legal or implied obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the obligation can be made.

Share capital - Contributions to share capital, made after 1 January 2003 are recognized at cost. Contributions to share capital, made before 1 January 2003 are recognized at their cost restated for inflation. Share capital contributions made in the form of assets other than cash are stated at their fair value at the date of contribution. Treasury stock is recorded at the carrying value. Gains and losses on sales of treasury stock are charged or credited to share premium.

Dividends on ordinary shares are recognized in shareholders’ equity as a reduction in the period in which they are declared. Dividends that are declared after the balance sheet date are treated as a subsequent event under IAS 10 “Events After the Balance Sheet Date” and disclosed accordingly.

Retirement obligations - The Bank contributes into the social fund, medical insurance fund, pension fund and employment fund. Such expense is charged in the period when the related salaries are earned and are included into staff costs.

Contingencies - Contingent liabilities are not recognized in the financial statements, unless it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made. A contingent asset is not recognized in the financial statements but disclosed when an inflow of economic benefits is probable.

Recognition of income and expense - Interest income and expense are recognized on an accrual basis calculated using the effective interest rate method based on the actual cost. Interest income includes interest income earned on securities, coupon interest on a fixed yield securities, amortisedamortized discount on promissory notes and other discount securities. Commissions and other income are credited to income when the related transactions are carriedmissions income and expense are reflected in the profit and loss account according to the agreement terms, tariffs and other documents regulating the respective missions on one-off deals are reflected

in the profit and loss account at the deal settlement mission charged proportionally according to the volume of services provided is reflected in the profit and loss account mission charged proportionally is reflected in the period to which it relates. Commission income is recorded in the profit and loss statement in accordance with the terms of agreements, tariffs and other documents regulating the commission claims and liabilities. Income less losses from operations with securities include realized gains / losses from trading and the changes in market value of quoted securities. Loan origination fees for loans issued to customers (when significant), are deferred (together with related direct costs) and recognized as an adjustment to the loans effective yield. Non-interest expenses are recognized on an accrual basis.Interest part of income from operations with trading securities are included in the “Interest income” line.

Foreign currency translation - Monetary assets and liabilities denominated in foreign currencies are translated into Russian Roubles at the appropriate spot rates of exchange ruling at the balance sheet date. Foreign currency transactions are accounted for at the exchange rates prevailing at the date of transaction. Profits and losses arising from the translations are included in net gain on foreign exchange operations.

Rates of exchange - The exchange rates of the CBR at period end used by the Bank in the preparation of the financial statements are as follows:

	31 December 2004	31 December 2003
RUR/USD	27.7487	29.4545
RUR/EUR	37.8104	36.8240

Offset of financial assets and liabilities - Financial assets and liabilities are offset and reported net on the balance sheet when the Bank has a legally enforceable right to set off the recognized amounts and the Bank intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

Fiduciary activities - The Bank renders depositary services to its customers, providing customers’ securities custody and performing transactions with securities on deposit accounts. Assets accepted and liabilities incurred under the fiduciary activities are not included in the Bank’s financial statements. The Bank accepts the operational risk on these activities, but the Bank’s customers bear the credit and market risks associated with such operations.

INTEREST INCOME

	2004		2003
Interest income
Interest on loans and advances to customers	559916687,248584513173		238463846,40731 40731
Interest on debt securities	70387038,0740742828		88728872,535270535270
Interest on loans and advances to banks	124,837517		17251725,233168233168
Total interest income	64451,710112		344,169
Interest expenses
Interest on customer accounts	230293029,150992150992		147,448014801
Interest on debt securities issued	55,938		28,846
Interest on deposits from banks	3,290448290448		1,482529482529
Total interest expenses	289,378		177,776
Net interest income before provision for loan losses	36155,332734		166,393

5. ALLOWANCE FOR LOSSES AND OTHER PROVISIONS