Audited H1 Results - Part 2

24th Sep 2007 11:34

X5 Retail Group N.V.24 September 2007 X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 1 PRINCIPLE ACTIVITIES AND THE GROUP STRUCTURE These consolidated interim financial statements are for the economic entitycomprising X5 Retail Group N.V. (the "Company") and its subsidiaries, as set outin Note 7 (the "Group"). X5 Retail Group N.V. is a joint stock limited liability company established inAugust 1975 under the laws of the Netherlands. The principal activity of theCompany is to act as a holding company for the group of companies that operateretail grocery stores. The Company's address and tax domicile is PrinsBernhardplein 200, 1097 JB Amsterdam, the Netherlands. On 18 May 2006, the Company acquired 100% of Perekrestok Holdings Ltd., theparent company for the group of companies that operate stores under the "Perekrestok" brand (Note 8). Although legally X5 Retail Group N.V. is regardedas the parent and Perekrestok Holdings Ltd. is regarded as the subsidiary,Perekrestok Holdings Ltd. is identified as the acquirer under IFRS 3 "BusinessCombinations" and the acquisition of Perekrestok Holdings Ltd. is accounted foras a reverse acquisition (Note 2.1). Consequently, through the period ended 18May 2006 Interim consolidated statement of income and consolidated statement ofcash flows relate only to the acquirer (Note 8). The main activity of the Group is the development and operation of groceryretail stores. As of 30 June 2007 and 30 June 2006 the Group operated a retailchain of soft-discount and supermarket stores under the brand names "Pyaterochka" and "Perekrestok" in major population centers in Russia, including but notlimited to Moscow, St. Petersburg, Nizhniy Novgorod, Krasnodar, Kazan, Samara,Chelyabinsk, Ekaterinburg and Kiev, Ukraine with the following number of stores: 30 June 2007 30 June 2006 Under "Pyaterochka" brand name Moscow 241 187 St. Petersburg 223 185 Chelyabinsk 45 0 Ekaterinburg 28 19 Nizhniy Novgorod 2 0 539 391Under "Perekrestok" brand name Moscow 98 78 St. Petersburg 18 14 N. Novgorod region 17 15 Samara region 8 6 South Russia region 7 6 Ukraine 4 4 Other 18 10 170 133Total stores 709 524 In addition, as of 30 June 2007 the Group's franchisees operated 591 storesunder the "Pyaterochka" brand name and 10 stores under the "Perekrestok" brandname (30 June 2006: 479 and 10 respectively) in Russia and neighbouringcountries, Kazakhstan and Ukraine. The Group is a member of the Alfa Group Consortium. As of 30 June 2007 theCompany's principal shareholders were Luckyworth Limited and Cesaro HoldingsLimited owning 32.4% and 22.2% of total issued shares, respectively. The Group owns 902,278 (1.76%) of its shares (Note 23). As of 30 June 2007 theCompany's shares are listed on the London Stock Exchange in form of GlobalDepositary Receipts (GDRs), with each GDR representing an interest of 0.25 in anordinary share. As of 30 June 2007 the ultimate parent company of the Group isCTF Holdings Ltd. ("CTF"), a company registered at Suite 2, 4 Irish Place,Gibraltar and the parent entity of the Alfa Group Consortium. CTF is under thecommon control of Mr Fridman, Mr Khan and Mr Kuzmichev (the "Shareholders").None of the Shareholders individually controls and/or owns 50% or more in CTF. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of theseconsolidated interim financial statements are set out below. These policies havebeen consistently applied to all years presented, unless otherwise stated. 2.1 Basis of preparation These consolidated interim financial statements for the year ended 30 June 2007have been prepared in accordance with, and comply with both: (a) InternationalFinancial Reporting Standards as adopted by the European Union applicable tointerim financial reporting and (b) IAS 34, Interim financial reporting, asissued by the International Accounting Standards Board ("IASB"). X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) All International Financial Reporting Standards issued by the IASB and effectiveat the time of preparing these consolidated interim financial statements havebeen adopted by the European Union through the endorsement procedure establishedby the European Commission, with the exception of certain provisions of IAS 39,Financial Instruments: Recognition and Measurement, on portfolio hedging. Thesefinancial statements comply with IFRS and it is the Group's intention, to theextent possible, to comply with IFRS, and IAS 34, Interim financial reporting,as adopted by the European Union and as issued by the IASB since the Group isnot affected by the hedging provisions. These consolidated financial statements are issued under the name of X5 RetailGroup N.V. but represent a continuation of the consolidated financial statementsof Perekrestok Holdings Ltd. accordingly: (a) the assets and liabilities of the legal subsidiary, i.e. PerekrestokHoldings Ltd., are recognised and measured at their pre-combination carryingamounts. The assets and liabilities of X5 Retail Group N.V. are recognised attheir fair value at the date of acquisition; (b) the consolidated retained earnings and other equity balances recognised atthe date of acquisition are the retained earnings and other equity balances ofPerekrestok Holdings Ltd. immediately before the business combination; (c) the equity structure reflects the equity structure of X5 Retail Group N.V.;and (d) the comparative information presented in these consolidated financialstatements is that of Perekrestok Holdings Ltd. 2.2 Accounting for the effects of inflation The Russian Federation was considered hyperinflationary prior to 1 January 2003.As a result, balances and transactions were restated for the changes in thegeneral purchasing power of the Russian Rouble up to 31 December 2002 inaccordance with IAS 29 ("Financial Reporting in Hyperinflationary Economies").IAS 29 requires that the financial statements prepared in the currency of ahyperinflationary economy be stated in terms of the measuring unit current atthe balance sheet date. As the characteristics of the economic environment ofthe Russian Federation indicate that hyperinflation has ceased effective from 1January 2003, the Group does not apply the provisions of IAS 29 to assetsacquired or revalued and liabilities incurred or assumed after that date. Forother assets and liabilities, the amounts expressed in the measuring unitcurrent at 31 December 2002 are treated as the basis for the carrying amounts inthese consolidated interim financial statements. 2.3 Consolidated interim financial statements Subsidiaries are those companies and other entities (including special purposeentities) in which the Group, directly or indirectly, has the power to governthe financial and operating policies generally accompanying a shareholding ofmore than one half of the voting rights. The existence and effect of potentialvoting rights that are presently exercisable or presently convertible areconsidered when assessing whether the Group controls another entity.Subsidiaries are consolidated from the date on which control is transferred tothe Group (acquisition date) and are de-consolidated from the date that controlceases. Associates are entities over which the Group has significant influence, but notcontrol, generally accompanying a shareholding of between 20 and 50 percent ofthe voting rights. Investments in associates are accounted for by the equitymethod of accounting and are initially recognised at cost. The carrying amountof associates includes goodwill identified on acquisition less accumulatedimpairment losses, if any. The Group's share of the post-acquisition profits orlosses of associates is recorded in the consolidated income statement, and itsshare of post-acquisition movements in reserves is recognised in reserves. Whenthe Group's share of losses in an associate equals or exceeds its interest inthe associate, including any other unsecured receivables, the Group does notrecognise further losses, unless it has incurred obligations or made payments onbehalf of the associate. The purchase method of accounting is used to account for the acquisition ofsubsidiaries. The cost of an acquisition is measured at the fair value of theassets given up, equity instruments issued and liabilities incurred or assumedat the date of exchange, plus costs directly attributable to the acquisition.The date of exchange is the acquisition date where a business combination isachieved in a single transaction. However, when a business combination isachieved in stages by successive share purchases, the date of exchange is thedate of each exchange transaction; whereas the acquisition date is the date onwhich acquirer obtains control of the subsidiary. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Identifiable assets acquired and liabilities and contingent liabilities assumedin a business combination are measured at their fair values at the acquisitiondate. The excess of the cost of acquisition over the fair value of the Group's sharein net assets of the acquiree at each exchange transaction represents goodwill.The excess of the acquirer's interest in the net fair value of the identifiableassets, liabilities and contingent liabilities acquired over cost ("negativegoodwill") is recognized immediately in the income statement. Intercompany transactions, balances and unrealized gains on transactions betweengroup companies are eliminated; unrealized losses are also eliminated unless thecost cannot be recovered. The Company and all of its subsidiaries use uniformaccounting policies consistent with the Group's policies. 2.4 Minority interest Minority interest is that part of the net results and of the net assets of asubsidiary, including the fair value adjustments, which is attributable tointerests which are not owned, directly or indirectly, by the Company. Minorityinterest forms a separate component of the Group's equity. When the Group purchases a minority interest, the difference between itscarrying amount and the amount paid to acquire it is recorded as goodwill. Gainsor losses on disposal of a minority interest, determined as the differencebetween its carrying amount and proceeds received or receivable, are recorded inthe statement of income. 2.5 Foreign currency translation and transactions (a) Functional and presentation currency Functional currency. The functional currency of each of the Group's consolidatedentities is the currency of the primary economic environment in which the entityoperates. The functional currencies of the Group's entities are the nationalcurrency of the Russian Federation, Russian Rouble ("RR") and the nationalcurrency of Ukraine, Ukrainian Hryvnia ("UAH"). The Group's presentationcurrency is the US Dollar ("USD"), which management believes is the most usefulcurrency to adopt for users of these consolidated interim financial statements. Translation from functional to presentation currency. The results and financialposition of each Group entity (none of which have a functional currency that isthe currency of a hyperinflationary economy) are translated into thepresentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated atthe closing rates at the date of that balance sheet; (ii) income and expenses for each income statement are translated at averageexchange rates (unless this average is not a reasonable approximation of thecumulative effect of the rates prevailing on the transaction dates, in whichcase income and expenses are translated at the dates of the transactions); and (iii) all resulting exchange differences are recognised as a separate componentof equity as a cumulative translation reserve. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the closing rate. When a subsidiary is disposed of through sale,liquidation, repayment of share capital or abandonment of all, or part of, thatentity, the exchange differences deferred in equity are reclassified to profitor loss. (b) Transactions and balances Monetary assets and liabilities denominated in foreign currencies are translatedinto each entity's functional currency at the official exchange rate of theCentral Bank of Russian Federation ("CBRF") at the respective balance sheetdates. Foreign exchange gains and losses resulting from the settlement of thetransactions and from the translation of monetary assets and liabilities intoeach entity's functional currency at period-end official exchange rates of theCBRF are recognized in profit or loss. Translation at period-end rates does notapply to non-monetary items, including equity investments. Effects of exchangerate changes on the fair value of equity securities are recorded as part of thefair value gain or loss. At 30 June 2007, the official rate of exchange, as determined by the CentralBank of the Russian Federation, was USD 1 = RR 25.8162 (31 December 2006: USD 1= RR 26.3311). Average rate for six months ended 30 June 2007 was USD 1 = RR26.0827 (6 months 2006: USD 1 = RR 27.6799). At 30 June 2007, the official rate of exchange, as determined by the CentralBank of Ukraine, was USD 1 = UAH 5.0500 (31 December 2006: USD 1 = UAH 5.0500).Average rate for 12 months 2006 was USD 1 = UAH 5.0500 (6 months 2006: USD 1 =UAH 5.0500). X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 Segment reporting A segment is a distinguishable component of the Group that is engaged either inproviding products or services (business segment) or in providing products orservices within a particular economic environment (geographical segment), whichis subject to risks and rewards that are different from those of other segments.Segments with a majority of its revenue earned from sales to external customersand whose internal and external revenue or result or assets are ten percent ormore of all segments are reported separately. 2.7 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciationand provision for impairment, where required. Cost includes expenditure that isdirectly attributable to the acquisition or construction of the item. The Groupdoes not capitalize borrowing costs but recognises them as an expense in theperiod in which they are incurred. Costs of minor repairs and maintenance are expensed when incurred. Costs ofreplacing major parts or components of property, plant and equipment items arecapitalised and the replaced parts are retired. Capitalised costs aredepreciated over the remaining useful life of property, plant and equipment orpart's estimated useful life whichever is sooner. At each reporting date management assesses whether there is any indication ofimpairment of property, plant and equipment. If any such indication exists,management estimates the recoverable amount, which is determined as the higherof an asset's fair value less costs to sell and its value in use. The carryingamount is reduced to the recoverable amount and the impairment loss isrecognised in the income statement. An impairment loss recognised for an assetin prior years is reversed if there has been a favourable change incircumstances affecting estimates used to determine the asset's value in use orfair value less costs to sell. Gains and losses on disposals determined by comparing the proceeds with thecarrying amount are recognised in profit or loss. Land is not depreciated. Depreciation on other items of property, plant andequipment is calculated using the straightline method to allocate their cost totheir residual values over their estimated useful lives. The depreciationperiods, which approximate the estimated useful economic lives of the respectiveassets, are as follows: Buildings 20-50 yearsMachinery and equipment 5-10 yearsRefrigerating equipment 7-10 yearsVehicles 5-7 yearsOther 3-5 years Leasehold improvements are capitalised when it is probable that future economicbenefits associated with the improvements will flow to the Company and the costcan be measured reliably. The capitalised leasehold improvements are depreciatedover their useful lives but not longer than the terms of the leases. The residual value of an asset is the estimated amount that the Group wouldcurrently obtains from the disposal of the asset less the estimated costs ofdisposal, if the asset were already of the age and in the condition expected atthe end of its useful life. The residual value of an asset is nil if the Groupexpects to use the asset until the end of its physical life. The assets'residual values and useful lives are reviewed, and adjusted if appropriate, ateach balance sheet date. 2.8 Investment property Investment property consists of buildings held by the Group to earn rentalincome or for capital appreciation, or both, and which is not occupied by theGroup. The Group recognises the part of an owned shopping center that is leasedto third party retailers as investment property, unless it represents aninsignificant portion of the property and is used primarily to provide auxiliaryservices to retail customers not provided by the Group rather than to earnrental income. The Group uses the ratio of leased out space to total store spaceas criteria to distinguish investment property from Group-occupied property. Investment properties are stated at cost less accumulated depreciation andprovision for impairment, where required. If any indication exists, thatinvestment properties may be impaired, the Group estimates the recoverableamount as the higher of value in use and fair value less costs to sell.Subsequent expenditure is capitalised only when it is probable that futureeconomic benefits associated with it will flow to the Group and the cost can bemeasured reliably. All other repairs and maintenance costs are expensed whenincurred. If an investment property becomes owner-occupied, it is reclassifiedto property, plant and equipment, and its carrying amount at the date ofreclassification becomes its deemed cost to be subsequently depreciated. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.9 Intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the acquirer's share of the net identifiable assets, liabilities andcontingent liabilities of the acquired subsidiary at the date of exchange.Goodwill on the acquisition of subsidiaries is presented as part of intangibleassets in the consolidated interim balance sheet. The Group tests goodwill forimpairment at least annually and whenever there are indications that goodwillmay be impaired. Goodwill is allocated to the cash-generating units, or groupsof cash-generating units, that are expected to benefit from the synergies of thebusiness combination. Such units or groups of units represent the lowest levelat which the Group monitors goodwill and are not larger than a segment. Gains orlosses on disposal of an operation within a cash generating unit to whichgoodwill has been allocated include the carrying amount of goodwill associatedwith the operation disposed of, generally measured on the basis of the relativevalues of the operation disposed of and the portion of the cash-generating unitwhich is retained. (b) Lease rights Lease rights represent rights for favourable operating leases acquired inbusiness combinations or purchased. Lease rights acquired in a businesscombination are recognised initially at fair value and acquired separately arerecognised initially at cost. Lease rights are amortised using the straight-linemethod over the lease term of the respective lease contracts - ranging from 10to 20 years (15 on average). Lease prepayments are amortised over the term ofthe lease. (c) Brand and private labels Brand and private labels acquired in a business combination are recognisedinitially at fair value. Brand and private labels are amortised using thestraight-line method over their useful lives: Useful livesBrand 20 yearsPrivate labels 5-8 years (d) Franchise agreements Franchise agreements represent rights to receive royalties. Franchise agreementsacquired in a business combination are recognised initially at fair value.Franchise agreements are amortised using straight-line method over their usefullives that are, on average, ranging from 5 to 10 years (8 on average). (e) Other intangible assets Expenditure on acquired patents, trademarks and licenses is capitalized andamortised using the straight-line method over their useful lives ranging from 3to 4 years. (f) Impairment of intangible assets Where an indication of impairment exists, the recoverable amount of anyintangible asset, including goodwill, is assessed and, when impaired, the assetis written down immediately to its recoverable amount. Goodwill and intangibleassets not yet available for use are tested for impairment at least annually andwhenever impairment indicators exist. 2.10 Operating leases Leases of assets under which all the risks and benefits of ownership areeffectively retained by the lessor are classified as operating leases. Paymentsmade under operating leases are charged to the income statement on astraight-line basis over the period of the lease. Assets leased out by the Group under operating leases are included in property,plant and equipment in the balance sheet. They are depreciated over theirexpected useful lives on a basis consistent with similar fixed assets. Rentalincome is recognised in the income statement on a straight-line basis over thelease term. The Group leases retail outlets under terms of fixed and variable leasepayments. The variable lease payments depend on revenue earned by the respectiveretail outlets. The Group classifies variable lease payments as contingent rentsunless the Group is virtually certain of the expected amount of the future leasepayments in which case they are classified as minimum lease payments (Note 35). X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.11 Finance lease liabilities Where the Group is a lessee in a lease, which transfers substantially all therisks and rewards incidental to ownership to the Group, the leased assets arecapitalized in property, plant and equipment at the commencement of the lease atthe lower of the fair value of the leased asset and the present value of theminimum lease payments. Each lease payment is allocated between the liabilityand finance charges so as to achieve a constant rate on the finance balanceoutstanding. The corresponding rental obligations, net of future financecharges, are included in borrowings. The interest cost is charged to the incomestatement over the lease period using the effective interest method. The assetsacquired under finance leases as well as leasehold improvements are depreciatedover their useful life or the lease term, if shorter and if the Group is notreasonably certain that it will obtain ownership by the end of the lease. 2.12 Trade receivables Trade receivables are initially recognised at their fair values and aresubsequently carried at amortised cost using the effective interest method. Aprovision for impairment of receivables is established when there is objectiveevidence that the Group will not be able to collect all amounts due according tothe original terms of the receivables. The Group determines that there isobjective evidence of impairment by assessing groups of receivables againstcredit risk factors established based on historical loss experience for eachgroup. Indications that the trade receivable may be impaired include financialdifficulties of the debtor, likelihood of the debtor's insolvency, and defaultor significant failure of payment. The amount of the provision is the differencebetween the asset's carrying amount and the present value of the estimatedfuture cash flows, discounted at the original effective interest rate. Theamount of the provision is recognised in the income statement. 2.13 Inventories of goods for resale Inventories at warehouses and retail outlets are stated at the lower of cost andnet realizable value. Cost comprises direct costs of goods, transportation andhandling costs. Cost is determined by the first-in, first-out (FIFO) method. Netrealizable value is the estimate of the selling price in the ordinary course ofbusiness, less selling expenses. The Group provides for estimated inventory losses (shrinkage) between physicalinventory counts on the basis of a percentage of cost of sales. The provision isadjusted to actual shrinkage based on regular inventory counts. The provision isrecorded as a component of cost of sales. 2.14 Financial assets and liabilities The Group classifies its financial assets into the following measurementcategories: at fair value through profit or loss, loans and receivables,held-to-maturity and available-for-sale investments. The classification dependson the purpose for which the financial assets were acquired. Managementdetermines the classification of its financial assets at initial recognition andre-evaluates this designation at every reporting date, if required under IFRS.The Group designates investments as available-for-sale only when they falloutside the other categories of financial assets. Initial recognition of financial instruments Financial assets at fair value through profit or loss are initially recorded atfair value. All other financial assets and liabilities are initially recorded atfair value plus transaction costs. Fair value at initial recognition is bestevidenced by the transaction price. Subsequent to initial recognition, the fairvalues of financial instruments measured at fair value are bid prices quoted atactive markets. A gain or loss on initial recognition is only recorded if thereis a difference between fair value and transaction price which can be evidencedby other observable current market transactions in the same instrument or by avaluation technique whose inputs include only data from observable markets. Impairment The Group reviews the carrying value of its financial assets on a regular basis.If the carrying value of an investment is greater than the recoverable amount,the Group records an impairment loss and reduces the carrying amount of assetsby using allowance account. The Group does not reduce the carrying amount ofimpaired financial assets directly but rather uses allowance account. Derecognition of financial assets The Group derecognises financial assets when (i) the assets are redeemed or therights to cash flows from the assets have otherwise expired or (ii) the Grouphas transferred substantially all the risks and rewards of ownership of theassets or (iii) the Group has neither transferred nor retained substantially allrisks and rewards of ownership but has not retained control. Control is retainedif the counterparty does not have the practical ability to sell the asset in itsentirety to an unrelated third party without needing to impose additionalrestrictions on the sale. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are trading investments,acquired principally for the purpose of selling in the short term, andderivatives. Derivative financial instruments are recognised initially on a settlement datebasis and subsequently remeasured at fair value. The Group generally acquiresderivative financial instruments quoted at active markets and thereforesubsequent remeasurement is based on active market quotations rather thanvaluation techniques. Gains and losses resulting from the fair valueremeasurement are recognised in the consolidated income statement as fair valuegains (losses) on financial instruments. Derivative financial instrumentsinclude foreign exchange contracts, forward rate agreements, interest rate swapsand currency options are carried as trading assets or liabilities at fair valuethrough profit or loss. All derivative instruments are carried as assets whenfair value is positive and as liabilities when fair value is negative. The Groupdoes not apply hedge accounting. Loans and receivables Loans and receivables are unquoted non-derivative financial assets with fixed ordeterminable payments other than those that the Group intends to sell in thenear term. Loans receivable and other receivables are carried at amortised costusing the effective interest rate method. Receivables are written off only incase of debtor's insolvency. Available for sale Available for sale investments are carried at fair value. Interest income onavailable for sale debt securities is calculated using the effective interestmethod and recognised in profit or loss. Dividends on available-for-sale equityinstruments are recognised in profit or loss when the Group's right to receivepayment is established. All other elements of changes in the fair value aredeferred in equity until the investment is derecognised or impaired at whichtime the cumulative gain or loss is removed from equity to profit or loss. Impairment losses are recognised in profit or loss when incurred as a result ofone or more events ("loss events") that occurred after the initial recognitionof available-for-sale investments. A significant or prolonged decline in thefair value of an equity security below its cost is an indicator that it isimpaired. The cumulative impairment loss - measured as the difference betweenthe acquisition cost and the current fair value, less any impairment loss onthat asset previously recognised in profit or loss - is removed from equity andrecognised in profit or loss. Impairment losses on equity instruments are notreversed through profit or loss. If, in a subsequent period, the fair value of adebt instrument classified as available for sale increases and the increase canbe objectively related to an event occurring after the impairment loss wasrecognised in profit or loss, the impairment loss is reversed through thecurrent period's profit or loss. Financial liabilities are classified according to the substance of thecontractual arrangements entered in to. The Group classifies its financialliabilities into the following measurement categories: financial liabilities atfair value through profit or loss and financial liabilities measured atamortised cost. 2.15 Cash Cash and cash equivalents include cash in hand, deposits held at call withbanks, and other short-term highly liquid investments with original maturitiesof three months or less. 2.16 Provisions Provisions are recognised when the Group has a present legal or constructiveobligation as a result of past events, it is probable that an outflow ofresources embodying economic benefits will be required to settle the obligation,and a reliable estimate of the amount of the obligation can be made. 2.17 Value added tax Value added tax related to sales is payable to tax authorities on the earliestof (a) collection of the receivables from customers or (b) delivery of the goodsor services to customers. Input VAT is generally recoverable against sales VATupon receipt of the VAT invoice. Input VAT on construction in progress can bereclaimed on receipt of VAT invoices for the particular stage of work performedor, if the construction in progress project can not be broken down into stages,on receipt of VAT invoices upon completion of the contracted work. The tax authorities permit the settlement of VAT on a net basis. VAT related tosales and purchases which have not been settled at the balance sheet date (VATdeferred) is recognised in the balance sheet on a gross basis and disclosedseparately as an asset and liability. Where a provision has been made for theimpairment of receivables, the impairment loss is recorded for the gross amountof the debtor, including VAT. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.18 Employee benefits Wages, salaries, bonuses, paid annual leave and sick leave are accrued in theperiod in which the associated services are rendered by the employees of theGroup. The Group's entities contribute to the Russian Federation's state pensionand social insurance funds in respect of its employees. These contributions areaccrued when incurred. The Group's commitment ends with the payment of thesecontributions. 2.19 Share-based payments The Group issues options to certain employees that give the employees the rightto choose whether a share-based payment transaction is settled in cash or byissuing equity instruments. Share-based payment transactions, or the components of such transactions, areaccounted for as a cash-settled share-based payment transaction if, and to theextent that, the entity has incurred a liability to settle in cash or otherassets, or as an equity-settled share-based payment transaction if, and to theextent that, no such liability has been incurred. Share-based payments transactions are measured at the fair value of the compoundfinancial instrument at the measurement date, taking into account the terms andconditions on which the rights to the cash or equity instruments were granted.The fair value is determined using the Black-Scholes pricing model. The expectedlife used in the model has been adjusted, based on management's best estimate,for the effects of non-transferability, exercise restrictions and behavioralconsiderations. A liability equal to the portion of the services received is recognised at thecurrent fair value determined at each balance sheet date. The Group records anexpense, based on its estimates of the difference between the market price andthe strike price related to the shares expected to vest, on a straight-linebasis over the vesting period. At the date of settlement, the Group will remeasure the liability to its fairvalue. If the Group issues equity instruments on settlement rather than payingcash, the liability will be transferred directly to equity, as the considerationfor the equity instruments issued. 2.20 Borrowings Borrowings are initially recognised at their fair value, net of transactioncosts, and are subsequently stated at amortised cost; any difference between theproceeds (net of transaction costs) and the redemption value is recognised inthe income statement over the period of the borrowings using the effectiveinterest method. Borrowings are classified as current liabilities unless theGroup has an unconditional right to defer settlement of the liability for atleast 12 months after the balance sheet date. 2.21 Trade and other payables Trade and other payables are accrued when the counterparty performed itsobligation under the contract and are carried at amortised cost using theeffective interest method. 2.22 Share capital Ordinary shares are classified as equity. External costs directly attributableto the issue of new shares are shown as a deduction in equity from the proceeds.Any excess of the fair value of consideration received over the par value ofshares issued is recognised as share premium. 2.23 Dividends Dividends are recognised as a liability and deducted from equity at the balancesheet date only if they are declared on or before the balance sheet date.Dividends are disclosed when they are proposed before the balance sheet date orproposed or declared after the balance sheet date but before the financialstatements are authorised for issue. 2.24 Treasury shares Where any Group company purchases the Company's equity share capital, theconsideration paid, including any directly attributable incremental costs (netof income taxes) is deducted from equity attributable to the Company's equityholders until the shares are cancelled, reissued or disposed of. Where suchshares are subsequently sold or reissued, any consideration received, net of anydirectly attributable incremental transaction costs and the related income taxeffects, is included in equity attributable to the Company's equity holders. 2.25 Earnings per share Earnings per share are determined by dividing the profit or loss attributable toequity holders of the Company by the weighted average number of participatingshares outstanding during the reporting period. Diluted earnings per share arecalculated by adjusting the earnings and the number of shares for the effects ofdilutive options. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) For the purpose of calculating the weighted average number of ordinary sharesoutstanding during the period in which the reverse acquisition occurs: - the number of ordinary shares outstanding from the beginning of that period to the acquisition date is the number of ordinary shares issued by the legal parent to the owners of the legal subsidiary - number of ordinary shares outstanding from the acquisition date to the end of that period is the actual number of ordinary shares of the legal parent outstanding during that period. 2.26 Taxes Current income tax liabilities (assets) are measured in accordance with IAS 12,Income Taxes, based on legislation that is enacted or substantively enacted atthe balance sheet date, taking into consideration applicable tax rates and taxexemptions. Deferred income tax is provided, using the balance sheet liability method, fortemporary differences arising between the tax bases of assets and liabilitiesand their carrying values for financial reporting purposes. A deferred tax assetis recorded only to the extent that it is probable that taxable profit will beavailable against which the deductible temporary differences can be utilised. Inaccordance with the initial recognition exemption, deferred tax liabilities arenot recorded for temporary differences on initial recognition of goodwill andsubsequently for goodwill which is not deductible for tax purposes. Deferred taxassets and liabilities are measured at tax rates that are expected to apply tothe period in which the asset is realised or the liability is settled, based ontax rates which are enacted or substantially enacted at the balance sheet date. Taxes other than on income, interest and penalties are measured in accordancewith IAS 37, Provisions, Contingent Liabilities and Contingent. The Groupprovides against tax contingencies and the related interest and penalties wheremanagement can make a reliable estimate of the amount of the additional taxesthat may be due. Provisions are maintained, and updated if necessary, for theperiod over which the respective tax positions remain subject to review by thetax and customs authorities, being 3 years from the year of filing. Upon expiryof the review period, the provisions are released and considered as a contingentliability until the accounting documentation maintenance period expires, beingan additional 2 years (i.e. 5 years in total). Liabilities for such taxes, interest and penalties are measured at the bestestimate of the expenditure required to settle the present obligation at the balance sheet date (Notes 31and 35). 2.27 Income and expense recognition Income and expenses are recognised on an accrual basis as earned or incurred.Recognition of the principal types of income and expenses is as follows: (a) Revenue Revenue from the sale of goods through retail outlets is recognised at the pointof sale. Revenue from franchisee fees is recognised based on contractualagreements over the term of the contracts. The up-front non-refundablefranchisee fees received by the Group are deferred and recognised over thestandard contractual term of 10 years. Revenue from advertising services isrecognised based on contractual agreements. Revenues are measured at the fairvalue of the consideration received or receivable. Revenues are recognised netof value added tax. The group launched a loyalty card scheme in 2007. Discounts earned by customersthrough loyalty cards, are recorded by the Group by allocating some of theconsideration received from the initial sales transaction to the award creditsand deferring the recognition of revenue. The allocation is made by thereference to the relative fair values of the components adjusted for expectedforfeitures. (b) Cost of sales Cost of sales include the purchase price of the products sold and other costsincurred in bringing the inventories to the location and condition ready forsale, i.e. retail outlets. These costs include costs of purchasing, storing,rent, salaries and transporting the products to the extent it relates tobringing the inventories to the location and condition ready for sale. The Group receives various types of allowances from suppliers in the form ofslotting fees, volume discounts, and other forms of payment. In accounting forsupplier bonuses received by the Group, the Group determined that these bonusesare a reduction in prices paid for the product and are reported as part of thecost of sales. Bonuses received from suppliers are recorded as a reduction in the price paidfor the products and are recognised in cost of sales as the related inventory issold. Bonuses receivable from suppliers in cash are presented as tradereceivables. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Interest income and expense Interest income and expense are recognised on an effective yield basis. (d) Selling, general and administrative expenses Selling expenses consist of salaries and wages of stores employees, storeexpenses, rent or depreciation of stores, utilities, advertising costs and otherselling expenses. General and administrative expenses include costs of salariesand wages of support office employees, rent and depreciation of support offices,impairment and amortisation charges of non-current charges and other general andadministrative expenses. Selling, general and administrative expenses arerecognised on an accrual basis as incurred. The Group recognised start-up costsof stores as an expense in the period in which they are incurred. 2.28 Impairment of non-current assets other than goodwill The Group periodically assesses whether there is any indication that non-currentassets may be impaired. If any such indicators exist, the Group estimates therecoverable amount of the asset. Where it is not possible to estimate therecoverable amount of an individual asset, the Group estimates the recoverableamount of the cash generating unit to which it belongs. Individual stores areconsidered separate cash-generating units for impairment testing purposes.Impairment loss is recognised whenever the carrying amount of an asset or therelated cash-generating unit exceeds its recoverable amount. Impairment lossesare recognised in the income statement. 2.29 Reclassifications Where necessary, corresponding figures have been adjusted to conform to changesin the presentation of the current year. The effect of reclassifications is asfollows: • The Group has disclosed Investment property (Note 12) separately fromproperty, plant and equipment. In the year ended 31 December 2007 investmentproperty in the amount of USD 40,020 was reclassified from property, plant andequipment to the separate line in the balance sheet. • The Group changed presentation of expenses reclassifying costs incurred inbringing the inventories to the location and condition ready for sale (Note 26).In the six months ended 30 June 2006 expenses of USD 9,397 were reclassifiedfrom selling, general and administrative expenses to cost of sales. Management of the Group believes that these reclassifications provide morerelevant and meaningful information about the financial position of the Group. 2.30 Fair value of assets and liabilities at the acquisition date On 18 May 2006, the Group acquired Pyaterochka Holding N.V. As no valuation wasperformed prior to acquisition fair values of assets and liabilities as at thedate of acquisition were determined on a provisional basis. The provisional andfinal fair values assigned to the acquired net assets reported were as follows. As a result of valuation the final value of net identifiable net assets as atthe date of acquisition increased. After the completion of the purchase priceallocation the aggregate fair value of the acquired net assets changed by USD379,947 and amounted to USD 479,678 (Note 8). As a consequence of the adjustment the previously reported Balance Sheet, IncomeStatement, Statement of Cash Flows and Statement of Changes in Equity for thesix months ended 30 June 2006 were changed to reflect the final values from thedate of acquisition. Consolidated Interim Balance Sheet 30 June 2006 30 June 2006 (adjusted)Property, plant and equipment 1,018,971 906,109Goodwill 2,472,369 2,852,316Intangible assets 455,850 21,143Deferred tax liability 152,071 24,906Prepaid leases 9,670 14,259Long-term borrowings 694,597 681,466Other liabilities 115,883 90,883Accumulated deficit 226,648 224,385 X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Consolidated Interim Income Statement Six months ended Six months ended 30June 2006 30June 2006 (adjusted) 202,197 199,220Selling, general and administrative expenses 49,672 52,649Operating profit 33,387 36,364Profit before tax 14,115 14,829Income tax expense 19,272 21,535 Consolidated Interim Statement of Cash Flows Six months ended Six months ended 30June 2006 30June 2006 (adjusted)Depreciation and amortisation 22,146 19,169Profit before tax 33,387 36,364 Consolidated Interim Statement of Changes in Equity Six months ended Six months ended 30June 2006 30June 2006 (adjusted)Accumulated deficit 226,648 224,385 2.31 Specific policies to interim reporting Tax charges are estimates of the likely effective tax rates for the year. Theinterim period income tax expense is recognised based on the best estimate ofthe weighted average annual income tax rate expected for the full financialyear. The calculation of the effective tax rate is based on an estimate of thetax charge or credit for the year expressed as a percentage of the expectedaccounting profit or loss. This percentage is then applied to the interimresult, and the tax is recognised rateably over the year as a whole. This amountis adjusted in subsequent periods if the estimate of the annual income tax ratechanges. 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES The Group makes estimates and assumptions that affect the reported amounts ofassets and liabilities within the next financial year. Estimates and judgementsare continually evaluated and are based on management's experience and otherfactors, including expectations of future events that are believed to bereasonable under the circumstances. Management also makes certain judgements,apart from those involving estimations, in the process of applying accountingpolicies. Judgements that have the most significant effect on the amountsrecognised in the consolidated interim financial statements and estimates thatcan cause a significant adjustment to the carrying amount of assets andliabilities within the next financial year include: Tax legislation. Russian tax, currency and customs legislation is subject tovarying interpretations (Note 35). Property, plant and equipment. The Group's management determines the estimateduseful lives and related depreciation charges for its plant and equipment (Note11). This estimate is based on projected product lifecycles and technicalrequirements. Management will increase the depreciation charge where usefullives are less than previously estimated lives, or it will write-off orwrite-down technically obsolete or non-strategic assets that have been abandonedor reclassified as held for sale. The Group periodically assesses whether there is any indication that property,plant and equipment may be impaired. In the current period no such indications exist and therefore no assetsimpairment testing was performed. In the opposite case, the Group estimates therecoverable amount of the asset or cash generating unit and if it is less thanthe carrying amount of an asset or cash generating unit an impairment loss isrecognised in the income statement. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES (continued) Fair value of lease rights. The Group's management determines the fair value oflease rights received. The assessment of the fair value of lease rights is basedon the estimate of the market rates of the lease prepared by an independentvaluation specialist. Inventory provisions. The Group provides for estimated inventory shrinkage onthe basis of a historical shrinkage as a percentage of cost of sales (Note 16).This provision is adjusted at the end of each reporting period to reflect thehistorical trend of the actual physical inventory count results. Provision for impairment of trade and other receivables. The Group determines anallowance for doubtful accounts receivable at the end of the reporting period(Note 17). In estimating an allowance for uncollectible accounts receivable theGroup takes into account the historical collectibility of the outstandingaccounts receivable balances supplemented by the judgement of management toexclude the impact of current conditions that did not affect past periods and toremove the effects of past conditions that do not exist currently. Classification of VAT. Recovery of VAT depends on the registration of certainproperty, plant and equipment (Note 18). Fair value of franchise agreements. The Group's management determines the fairvalue of franchise agreements acquired in business combinations. The assessmentof the fair value of franchise agreements is based on the income method usingdiscounted royalty payments during the period of the agreements. Fair value of brand and private labels. The Group' management determines thefair value of brand and private labels acquired in business combinations. Theassessment of the fair value of a brand is based on the income approach usingthe relief-from-royalty method. The assessment of fair value of private labelsis based on either the income method using discounted annual savings for theremaining useful life of the labels or the cost method. Valuation of Karusel option. As a result of the business combination withPyaterochka the Group obtained an option to acquire 100% of the shares ofFormata Holding BV (a chain of hypermarkets operating under "Karusel" brand inSaint Petersburg). The value of the option depends on the operating results ofFormata Holding BV. As a result of a valuation performed by an independentvaluation specialist the Group concluded that the fair value of the option iszero (Note 8). 4 ADOPTION OF NEW AND REVISED STANDARDS AND INTERPRETATIONS Certain new standards and interpretations became effective for the Group from 1January 2007. Unless otherwise described below, these new standards andinterpretations does not significantly affect the Group's consolidated financialstatements: • IFRS 7 Financial Instruments: Disclosures and a complementary Amendment toIAS 1 Presentation of Financial Statements - Capital Disclosures). The IFRS introduces newdisclosures to improve the information about financial instruments.Specifically, it requires disclosure of qualitative and quantitative informationabout exposure to risks arising from financial instruments, including specifiedminimum disclosures about credit risk, liquidity risk and market riskincluding sensitivity analysis to market risk. It replaces some of therequirements in IAS 32, Financial Instruments: Disclosure and Presentation. TheGroup added required disclosures to comply with IFRS 7 in these consolidatedinterim financial statements. • IFRIC 7, Applying the Restatement Approach under IAS 29 (effective from 1January 2007). The Interpretation clarifies the application of IAS 29in the reporting period in which hyperinflation is first identified. It statesthat IAS 29 should initially be applied as if the economy has always beenhyperinflationary. It further clarifies calculation of deferredincome taxes in the opening balance sheet restated for hyperinflation under withIAS 29. • IFRIC 8, Scope of IFRS 2 (effective from 1 January 2007). Theinterpretation states that IFRS 2 also applies to transactions in which theentity receives unidentifiable goods or services and that such items should bemeasured as the difference between the fair value of the share-based payment andthe fair value of any identifiable goods or services received (or to bereceived). • IFRIC 9, Reassessment of Embedded Derivatives (effective for periodsbeginning on or after 1 June 2006 that is from 1 January 2007). TheInterpretation clarifies that an entity should assess whether an embeddedderivative should be accounted for separately from the host contract when theentity first becomes party to the contact. • IFRIC 10 "Interim Financial Reporting and Impairment" (effective forperiods beginning on or after 1 November 2006, that is from 1 January 2007). Theinterpretation clarifies that an entity should not reverse an impairment lossrecognised in previous interim periods in respect of goodwill or an investmentin a financial asset carried at cost. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 5 NEW ACCOUNTING PRONOUNCEMENTS Certain new standards and interpretations have been published that are not yetmandatory for these financial statements, and which the Group has not earlyadopted: • IFRS 8 Operating Segments (effective for periods beginning on or after 1January 2009). This IFRS supersedes IAS 14 Segment reporting andrequires identification of operating segments on the basis of internal reportsthat are regularly reviewed by the chief operating decision maker in order toallocate resources to the segment and assess its performance. The Group iscurrently assessing what impact the new IFRS will have on disclosures inits financial statements. • IAS 23 Borrowing Costs (revised) (effective for periods beginning on orafter 1 January 2009). This IAS excludes the benchmark treatment of recognitionof borrowing costs as an expense in the period in which they are incurredregardless of how the borrowings are applied. The Group's policy was not tocapitalise borrowing costs attributable to acquisition and construction ofqualifying assets. The Group is currently assessing what impact the amendment toIAS23 will have on its financial statements. • IFRIC 11 "IFRS 2 - Group and Treasury Share Transactions" (effective forannual periods beginning on or after 1 March 2007). The interpretation clarifiesthe issue of classification as equity-settled or as cash settled transactionsunder the requirements of IFRS 2 when an entity has a right to buy treasuryshares to satisfy its obligations to its employees. • IFRIC 12 "Service Concession Arrangements" (effective for periodsbeginning on or after 1 January 2008). The Interpretation gives guidance on theaccounting by operators for public-to-private services concession arrangements. • IFRIC 13 "Customer Loyalty Programme" (effective for periods beginning onor after 1 January 2008). The Interpetation gives guidance on the accounting byentities that operate or otherwise participate in customer loyaltyprogrammes for their customers. It is the policy of the Group to recognisedeferred revenue on customer loyalty programme as a reduction of revenues. • IFRIC 14 "IAS 19 - The Limit on a Defined Benefit Asset, Minimum FundingRequirements and their Interaction" (effective for periods beginning onor after 1 January 2008). The Interpretation clarifies how entities shouldaccount for the effect of any statutory or contractual funding requirements, onhow to account for any restrictions that may be in place and when a surplus in apension plan can be recognised. • IAS 1 Presentation of Financial Statements (revised) (effective for annualperiods beginning on or after 1 January 2009). The Group is currently assessingwhat impact the amendment to IAS 1 will have on disclosures in its financialstatements. All of the above new standards and interpretations are not yet adopted by theEuropean Union. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 6 SEGMENT REPORTING The Group has one reportable business segment (retail trade). Retail trade Other Group Six months ended 30 June 2007 Sales - external 2,335,714 11,887 2,347,601Sales to other segments - - -Total revenue 2,335,714 11,887 2,347,601 Segment result 180,010 8,982 188,992Unallocated expenses (52,189)Operating profit 136,803 Finance costs, net (54,021)Share of result of associates -Unallocated expenses 9,947Profit before income tax 92,729Income tax expense (51,679)Profit for the period 41,050 Capital expenditure 182,287 7,822 190,109Depreciation and amortisation 69,346 5,839 75,185Doubtful debtors expense 70 - 70 As at 30 June 2007Segment assets 5,330,019 111,689 5,441,708Investment in associate 5,250 - 5,250Current and deferred tax assets 16,184Other unallocated assets 32,337Total assets 5,495,479 Segment liabilities 546,525 - 546,525Current and deferred tax liability 184,206Other unallocated liabilities 1,778,944Total liabilities 2,509,675 X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 6 SEGMENT REPORTING (continued) Retail Other Group Total revenue 891,341 7,442 898,783 Segment result 51,360 7,848 59,208Unallocated expenses (9,536) Operating profit 49,672 Finance costs, net (15,833)Share of result of associates -Unallocated expenses (452) Profit before income tax 33,387Income tax expense (14,115) Profit for the period 19,272 Capital expenditure 73,936 - 73,936Depreciation and amortisation 21,078 1,068 22,146Doubtful debtors expense 3,115 - 3,115As at 31 December 2006Segment assets 4,950,017 79,067 5,029,084Investment in associate - - -Current and deferred tax assets 18,626Other unallocated assets 44,756 Total assets 5,092,466 Segment liabilities 552,060 - 552,060Current and deferred tax liability 177,604Other unallocated liabilities 1,472,765 Total liabilities 2,202,429 The Group has one reportable geographical segment (Russia): Russia Other Group Six months ended 30 June 2007Sales - external 2,333,921 13,680 2,347,601Capital expenditure 189,615 494 190,109 As at 30 June 2007Segment assets 5,371,078 124,401 5,495,479 Six months ended 30 June 2006Sales - external 885,345 13,438 898,783Capital expenditure 73,834 102 73,936 As at 31 December 2006Segment assets 5,064,230 28,236 5,092,466 X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 7 SUBSIDIARIES Details of the Company's significant subsidiaries at 30 June 2007 are asfollows: Ownership (%)Company Country Nature of operations 30 June 2007 31 December 2006 OOO Agroaspekt Russia Retailing 100 100OOO Agroavto Russia Logistic operator 100 100ZAO Remtransavto Russia Real estate 100 100OOO Pyaterochka 2005 Russia Real estate 100 100OOO Set' Roznichnoy Torgovli Russia Real estate 100 100OOO Telprice Russia Real estate 100 100OOO Alliance Service Russia Real estate 100 100OOO Agrotorg Russia Retailing 100 100ZAO Agrostar Russia Logistic operator 100 100ZAO Ceizer Russia Real estate 100 100Speak Global Ltd. Cyprus Real estate and trade mark 100 100OOO Beta Estate Russia Real estate 100 100OOO Pyaterochka Finance Russia Bonds issuer 100 100OOO Elicon Russia Real estate 100 100OOO Ural Retail Russia Retailing 51 100OOO Ural-Agro-Torg Russia Retailing 51 26Perekrestok Holdings Ltd. Gibraltar Holding Company 100 100ZAO TH Perekrestok Russia Retailing 100 100OOO Perekrestok-2000 Russia Retailing 100 100OOO Discount-Invest Russia Retailing 100 100Rathmine Holdings Ltd Cyprus Holding Company 100 100ZAT Center SPAR Ukraine Ukraine Retailing 100 100Alpegru Retail Properties Ltd. Cyprus Real estate 100 100OOO Sladkaya Zhizn N.N. Russia Retailing 100 100OOO Metronom AG Russia Real estate 100 100OOO X5 Finance Russia Bonds issuer 100 100LLC Orient Nedvizhimost Russia Real estate 100 100 8 ACQUISITION OF SUBSIDIARIES Pyaterochka On 18 May 2006, the Group acquired Pyaterochka Holding N.V. The acquisition wasstructured as follows: • On 12 April 2006 and on 18 May 2006 the shareholders of Perekrestok Holdings Ltd. acquired 2,467,917 and 12,068,115 ordinary voting shares of Pyaterochka Holding N.V., respectively, for a cash consideration of USD 1,178,000. • Pyaterochka Holding N.V. acquired 100% of the ordinary voting shares of Perekrestok Holdings Ltd. for 15,813,253 newly issued shares of Pyaterochka Holding N.V. and a cash consideration of USD 300,000. On completion of the transaction, shareholders and other related parties ofPerekrestok Holdings Ltd. obtained control over 56% of Pyaterochka Holding N.V.shares. The cash consideration paid by Pyaterochka Holding N.V. for the shares ofPerekrestok Holdings Ltd. is treated as a distribution of Perekrestok HoldingsLtd's retained earnings to its shareholders. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 8 ACQUISITION OF SUBSIDIARIES (continued) Details of assets and liabilities acquired and the related goodwill are asfollows: Acquiree's carrying Fair values amount, IFRSCash and cash equivalents 327,504 327,504Inventory of goods for resale 58,750 58,750Trade and other accounts receivable 73,514 73,514Intangible assets (Note 14) 1,451 438,661Property, plant and equipment 524,873 638,209Derivative financial asset - -Long-term prepaid lease expenses 4,589 -Deferred tax asset 1,633 1,633Other assets 1,165 1,165Short-term borrowings (37,295) (37,295)Trade and other accounts payable (257,307) (252,307)Provisions for tax contingencies (Note 35) - (30,000)Long-term liability for share-based payments (42,288) (42,288)Long-term borrowings (544,034) (557,165)Non-current lease payable (3,714) (3,714)Deferred tax liability (9,110) (136,989)Net assets acquired 99,731 479,678Goodwill (Note 13) 2,446,960Total acquisition cost 2,926,638Net cash inflow arising from the acquisition 327,504 The total acquisition cost is determined based on the published share price ofthe ordinary voting shares of Pyaterochka Holding N.V. on 12 April 2006, theexchange date, and represents the market capitalisation of Pyaterochka HoldingN.V. on that date. The non-cash component of the cost of acquisition of Pyaterochka was excludedfrom the consolidated interim statement of cash flows. The provisional fair values assigned to the acquired net assets reported in theconsolidated interim financial statements for the six months ended 30 June 2006were USD 99,731. After the completion of the purchase price allocation theaggregate fair value of the acquired net assets changed by USD 379,947 andamounted to USD 479,678. As a result of the business combination with Pyaterochka the Group obtained anoption to acquire 100% of the shares of Formata Holding BV (a chain ofhypermarkets operating under "Karusel" brand in Saint Petersburg. It isexercisable in the period from 1 January 2008 until 1 July 2008 at a price thatis calculated based on the acquiree's sales, EBITDA and debt. The Group has usedmultipliers to assign a fair value to the option rather than applying othervaluation techniques. This is due to high volatility of the acquiree's sales andEBITDA for the recent period that made the results of applying other valuationtechniques highly dispersed. As a result of multipliers valuation performed byan independent valuation specialist the Group concluded that the fair value ofthe option is zero both at the acquisition date and at 30 June 2007. Pyaterochka goodwill is justified by the following factors i) know how anddeveloped technologies of Pyaterochka in retail business that contributed to thefact that it is one of the most profitable retailers in Russia, ii) qualifiedmanagement team and staff of Pyaterochka, iii) expected cost and revenuesynergies from the business combination, iv) business concentration v) businesscontacts acquired together with assets of Pyaterochka. Each of the factorscontributed to the acquisition cost that results in the recognition of goodwill.However, these intangible assets are not separately recognised in the balancesheet of the Company because they are either not separable or there are noreliable bases for estimating their fair values. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 8 ACQUISITION OF SUBSIDIARIES (continued) Merkado In November 2006, the Group acquired 100% of the voting shares of OAO MerkadoGroup and OOO Metronom AG for USD 101,061. OAO Merkado Group and OOO Metronom AG operate 17 retail grocery stores in Moscow. Details of assets and liabilities acquired and the related goodwill are asfollows: Acquiree's carrying Fair values amount, Russian GAAPCash and cash equivalents 1,488 1,489Inventory of goods for resale 6,823 3,611Trade and other accounts receivable 16,301 7,261Intangible assets (Note 14) 40,976 34,974Property, plant and equipment 29,730 121,855Other assets 1,239 1Short-term borrowings (3,740) (3,740)Trade and other accounts payable (12,245) (15,166)Provisions for tax contingencies (Note 35) - (10,000)Long-term borrowings (99,376) (99,376)Deferred tax liability 434 (30,445)Net assets acquired (18,370) 10,464Goodwill (Note 13) 90,597Total acquisition cost 101,061Net cash outflow arising from the acquisition 99,572 For identification of fair values the Group engaged an independent valuationspecialist. In estimating the fair values for the majority of Pyaterochka andMerkado's property, plant and equipment direct references to observable pricesin an active market were used (market approach). However, where there was noactive market providing reliable information of prices for certain items ofproperty, plant and equipment, then the depreciated replacement cost approachwas applied. Fair values of intangible assets were determined using thereplacement cost or discounted cash flows methods. These valuation techniqueswere used since there is no reliable information for market transactions. Several intangible assets cannot be separately recognised in the balance sheetof the Company because they are either not separable or there are no reliablebases for estimating their fair values. These intangible assets contributed tothe recognition of the Merkado goodwill: i) business concentration in Moscowregion ii) qualified management team of Merkado iii) expected cost synergiesfrom the business combination. Under the purchase agreement, the Group has an indemnity for all costs in excessof USD 1,000 that the Group may suffer, including claims in respect of any taxliability or indebtedness arising out of any matter that occurred prior to thedate of completion of the acquisition, 17 November 2006, up to a limit of USD20,000. Furthermore, if the aggregate amount of claims made by the Group to thesellers exceeds USD 20,000 the Group has an option to sell back 100% of thevoting shares of the Merkado Group to the former shareholders. The option may beexercised by the Group not later than 31 December 2007. Management estimatesthat the cost and fair value of the option on the date of acquisition and at theyear-end are insignificant. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 8 ACQUISITION OF SUBSIDIARIES (continued) Chelyabinsk At 1 January 2007 the Group obtained control over OOO "Ural-Agro-Torg" and OOO "Leto", entities of Chelyabinsk region. As at 30 June 2007 the Group increasedits shareholding in OOO "Ural-Agro-Torg" and OOO "Leto" from 26% to 51% inexchange of 49% of shares of OOO "Ural-Retail" and OOO "Legion" (share in netidentifiable assets in these entities amounted to USD 220 as at the date ofbusiness combination). Details of assets and liabilities acquired and the related goodwill are asfollows: Acquiree's carrying Fair values amount, Russian GAAPCash and cash equivalents 1,699 1,699Inventory of goods for resale 4,441 4,296Trade and other accounts receivable 4,466 2,961Intangible assets (Note 14) - 486Property, plant and equipment (Note 11) 6,763 11,172Derivative financial asset* - 1,500Deferred tax asset (Note 31) - 694Other assets 1,101 -Short-term borrowings (14,179) (12,974)Trade and other accounts payable (8,558) (10,406)Deferred tax liability (Note 31) - (1,882)Net assets acquired (4,267) (2,454)Goodwill (Note 13) 7,294Total acquisition cost 4,840 * under the Shareholders Agreement the Group also acquired an option to purchasethe remaining 49% of the share capital of OOO "Ural-Agro-Torg" , OOO "Leto", OOO "Ural-Retail" and OOO "Legion". The option is exercisable in the period from 1 January 2008 until 30 June 2009at a price that is calculated based on the acquiree's sales and debt. The Groupconsiders change in the value of the option between the date of acquisition andthe reporting date as insignificant. The goodwill recognised is attributable to: i) the business concentration inUral region and ii) expected cost synergies from the business combination. Acquired businesses contribution to financial results of the Group In the year ended 31 December 2006 the acquired business of Pyaterochkacontributed revenue of USD 1,291,074 and net profit of USD 63,542 from the dateof acquisition. In the year ended 31 December 2006 the acquired business ofMerkado contributed revenue of USD 16,599 and net loss of USD 3,481 from thedate of acquisition. In the six month period ended 30 June 2006 the acquired business of Pyaterochkacontributed revenue of USD 223,806 and net profit of USD 328 from the date ofacquisition. Since the Group acquired Merkado in November 2006 the acquiredbusiness of Merkado did not contribute neither revenue nor net profit in the sixmonth period ended 30 June 2006. If the acquisitions had occurred on 1 January 2006, the Group's profit for thesix months ended 30 June 2006 would have been USD 18,944 for the Group, notincluding Pyaterochka Holding N. V. operations and USD 25,304 for total Group;the Group's revenue for the same period would have been USD 674,977 and USD1,580,846 accordingly. In estimating effect of Pyaterochka and Merkado contribution to revenue and netprofit of the Group it is assumed that depreciation and amortization of fairvalued property, plant and equipment and intangibles was evenly chargedthroughout the period. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 9 RELATED PARTY TRANSACTIONS Parties are generally considered to be related if one party has the ability tocontrol the other party, is under common control or can exercise significantinfluence over the other party in making financial or operational decisions. Inconsidering each possible related party relationship, attention is directed tothe substance of the relationship, not merely the legal form. Related partiesmay enter into transactions which unrelated parties might not, and transactionsbetween related parties may not be effected on the same terms, conditions andamounts as transactions between unrelated parties. The nature of the relationships for those related parties with which the Groupentered into significant transactions or had significant balances outstanding at30 June are provided below. Alfa Group The following transactions were carried out with members of Alfa Group: Relationship Six months ended Six months ended 30 June 2007 30 June 2006 CTF Holdings Ltd. Ultimate parent companyManagement services received 519 322 OAO "Alfa-Bank" Under common controlInterest expense on loans received 1,673 83Bank charges 99 187Rent revenue 113 - VimpelCom Under significant influence of CTF Holdings Ltd.Communication services rendered by VimpelCom to 273 140the GroupCommission for mobile phone payments processing 294 200rendered by the Group to VimpelCom Golden Telecom Under significant influence of CTF Holdings Ltd.Communication services received 1,044 224 The consolidated interim financial statements include the following balanceswith members of the Alfa Group: 30 June 31 December 2007 2006 Cash and cash equivalentsOAO "Alfa-Bank" 43,771 20,173 Short-term loans payableOAO "Alfa-Bank" - 16,400 Receivable from related partyVimpelCom 81 109Golden Telecom 83 252OAO "Alfa-Bank" 86 - Other accounts payableVimpelCom 6 6CTF Holding Ltd. - 256 Alfa-Bank The Group has an open credit line with Alfa-Bank. This credit line has a maximumlimit of USD 150,000 and a floating interest rate. At 31 December 2006 theannual interest rate on this credit line was 6.9%-7.52% p.a. At 30 June 2007 theGroup had no balance under this credit line (31 December 2006: 40,000) (Note 33)and therefore had available credit lines of USD 150,000. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 9 RELATED PARTY TRANSACTIONS (continued) Other related parties The following transactions were carried out with other related partiescontrolled by management of the Group: ZAO "Novye Roznichnye Technologii" The following transactions were carried out with ZAO "Novye RoznichnyeTechnologii": Six months Six months ended ended 30 June 30 June 2006 2007 Operating lease expenses 597 428Communication services 43 - The consolidated interim financial statements include the following balanceswith ZAO "Novye Roznichnye Technologii": 30 June 2007 31 December 2006 Accounts payable 152 116 OOO "Rusel" and OOO "Rusel M" The following transactions were carried out with OOO "Rusel" and OOO "Rusel M": Six months ended Six months ended 30 June 2007 30 June 2006 Outsourcing services provided by the Group 472 214Rental income received by the Group 107 26 The consolidated interim financial statements include the following balanceswith OOO "Rusel" and OOO "Rusel M": 30 June 2007 31 December 2006 Accounts receivable 109 504 OOO "Media 5" and OOO "Media 5M" The following transactions were carried out with OOO "Media 5" and OOO "Media 5M": Six months ended Six months ended 30 June 2007 30 June 2006 Advertising services provided by the Group 269 268 The consolidated interim financial statements include the following balanceswith OOO "Media 5" and OOO "Media 5M": 30 June 2007 31 December 2006 Loans and receivables 79 115 The carrying value of loans and receivables approximates their fair value.Financial assets are not collateralised. None of the financial assets are either past due or impaired. The Group assessescredit quality of the investments as high. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 9 RELATED PARTY TRANSACTIONS (continued) OOO "Makromir" The following transactions were carried out with OOO "Makromir": Six months ended 30 Six months ended 30 June 2007 June 2006 Construction services provided to the Group 359 - The consolidated interim financial statements include the following balanceswith OOO "Makromir": 30 June 2007 31 December 2006 Loans and receivables 623 642 The carrying value of loans and receivables approximates their fair value.Financial assets are not collateralised. None of the financial assets are either past due or impaired. The Group assessescredit quality of the investments as high. Donette Investments Limited Investment in associate is disclosed in Notes 15, 19. The Group received 70% ofthe share capital of Donette Investments Limited as collateral from a relatedparty. Key management personnel compensation Key management personnel compensation is disclosed in Note 29. 10 CASH 30 June 2007 31 December 2006 Cash in hand - Roubles 8,976 6,207Cash in hand - Ukrainian Hryvnia 51 86Bank current account - Roubles 67,777 61,740Bank current account - Ukrainian Hryvnia 381 164Bank current accounts and deposits - US Dollars 112,947 32,075Cash in transit - Roubles 32,592 54,715Cash in transit - Ukrainian Hryvnia 381 354Short term deposits and other cash equivalents 111,563 12,647 334,668 167,988 The bank accounts represent current accounts with an effective interest rate ofnil. Cash in transit is cash transferred from retail outlets to bank accountsand bank card payments being processed. The Group assesses credit quality of outstanding cash and cash equivalentsbalances as high and considers no significant individual exposure. Maximumexposure to credit risk at the reporting date is the carrying value of cash andbank balances. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 11 PROPERTY, PLANT AND EQUIPMENT Machinery and Refrigerating Construction Buildings equipment equipment Vehicles Other in progress Total Cost: At 31 December 2006 857,421 143,257 90,091 12,690 94,030 209,078 1,406,567Additions 29,682 2,510 2,069 232 8,986 138,808 182,287Transfers 132,856 5,349 7,554 4,387 28,679 (178,825) -Assets from 7,949 694 1,942 66 279 242 11,172acquisitions (Note8)Disposals (17,357) (974) (800) (1,166) (1,083) (1,850) (23,230)Translation 17,756 3,585 1,916 285 2,258 2,248 28,048movementAt 30 June 2007 1,028,307 154,421 102,772 16,494 133,149 169,701 1,604,844 Accumulateddepreciation:At 31 December 2006 (47,351) (43,146) (16,869) (1,530) (25,741) - (134,637)Charge for the (19,732) (14,646) (12,111) (2,944) (4,344) - (53,777)periodDisposals 1,487 232 435 403 156 - 2,713Translation (1,137) (1,552) (453) (57) (482) - (3,681)movementAt 30 June 2007 (66,733) (59,112) (28,998) (4,128) (30,411) - (189,382) Net book value at 961,574 95,309 73,774 12,366 102,738 169,701 1,415,462 30 June 2007 Net book value at 810,070 100,111 73,222 11,160 68,289 209,078 1,271,930 31 December 2006 Cost:At 31 December 2005 212,996 80,375 23,522 2,002 12,022 50,165 381,082Additions 9,717 3,214 1,426 160 2,158 57,261 73,936Transfers 34,073 4,471 2,426 946 8,116 (50,032) -Assets from 377,687 11,637 37,099 5,492 29,241 177,053 638,209acquisitionsDisposals (4,510) (56) (69) (139) (264) (34) (5,072) Disposal of subsidiaries - (121) - - (18) - (139) Translation movement 13,111 4,770 1,382 111 770 2,338 22,482 At 30 June 2006 643,074 104,290 65,786 8,572 52,025 236,751 1,110,498 Accumulateddepreciation:At 31 December 2005 (24,389) (27,381) (9,844) (366) (6,159) - (68,139) Charge for the period (6,099) (7,286) (2,748) (435) (2,415) - (18,983) Disposals 252 5 69 66 62 - 454 Disposal of subsidiaries - 120 - (542) - 18 - 138 Translation -movement (2,522) (1,082) (13,065) (23) (828) - (4,997) At 30 June 2006 (32,758) (35,624) (13,065) (758) (9,322) - (91,527) Net book value at 30 June 2006 610,316 68,666 52,721 7,814 42,703 236,751 1,018,971 Net book value at 31 December 2005 188,607 52,994 13,678 1,636 5,863 50,165 312,943 X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 11 PROPERTY, PLANT AND EQUIPMENT (continued) Construction in progress predominantly relates to the development of storesthrough the use of sub-contractors. The buildings are mostly located on leased land. Land leases with periodic leasepayments are disclosed as part of commitments under operating leases (Note 35).Certain land leases are prepaid for the 49 year term. Such prepayments arepresented as non-current prepaid leases in the balance sheet and amount to USD15,762 (31 December 2006: USD 9,440). The Group leases certain assets under finance leases (Note 22). At 30 June 2007and 31 December 2006 the net book value of the property, plant and equipmentheld under finance lease arrangements was: 30 June 2007 31 December 2006Gross book value:Vehicles 1,784 2,699Refrigerating equipment 9,333 9,150 11,117 11,849Accumulated depreciation:Vehicles (354) (567)Refrigerating equipment (2,375) (1,873) (2,729) (2,440)Net book value of property, plant and equipment obtained under 8,388 9,409finance lease arrangements Refer to Note 21 for property, plant and equipment pledged as collateral forborrowings. 12 INVESTMENT PROPERTY The Group held the following investment properties at 30 June 2007 and 31December 2006: Cost:Cost at 31 December 2006 41,446Additions 7,822Translation movement 1,497Cost at 30 June 2007 50,765 Accumulated depreciation:Accumulated depreciation at 31 December 2006 (1,426)Charge for the period (1,068)Translation movement (39)Accumulated depreciation at 30 June 2007 (2,533) Net book value at 30 June 2007 48,232 Net book value at 31 December 2006 40,020 Cost:Cost at 31 December 2005 12,166Additions -Translation movement 765Cost at 30 June 2006 12,931 Accumulated depreciation:Accumulated depreciation at 31 December 2005 (511)Charge for the period (260)Translation movement (38)Accumulated depreciation at 30 June 2006 (809) Net book value at 30 June 2006 12,122 Net book value at 31 December 2005 11,655 X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 12 INVESTMENT PROPERTY (continued) Rental income from investment propertry amounted to USD 4,489 (six months ended30 June 2006: USD 1,624). Direct operating expenses incurred by the Group inrelation to investment property in the six month period ended 30 June 2007 wereUSD 1,555 (six months ended 30 June 2006: USD 150). Management estimates that the fair value of investment property at 30 June 2007amounted to USD 53,769 (30 June 2006: USD 14,535). Fair value represents the price at which a property could be sold to aknowledgeable, willing party and has generally been determined using thecomparative valuation approach. The Group did not engage an independentvaluation specialist to assess the fair value of investment properties. 13 GOODWILL Movements in goodwill arising on the acquisition of subsidiaries at 30 June 2007and 31 December 2006 are: Cost:Gross book value at 31 December 2006 2,622,949Acquisition of subsidiaries (Note 8) 7,294Translation to presentation currency 51,241Gross book value at 30 June 2007 2,681,484 Accumulated impairment losses:Accumulated impairment losses at 31 December 2006 -Impairment loss -Accumulated impairment losses at 30 June 2007 - Carrying amount at 30 June 2007 2,681,484 Carrying amount at 31 December 2006 2,622,949 Cost:Gross book value at 31 December 2005 24,153Acquisition of subsidiaries (Note 8) 2,446,960Translation to presentation currency 1,256Gross book value at 30 June 2006 2,472,369 Accumulated impairment losses:Accumulated impairment losses at 31 December 2005 -Impairment loss -Accumulated impairment losses at 30 June 2006 - Carrying amount at 30 June 2006 2,472,369 X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 13 GOODWILL (continued) Goodwill originated from the following operations. 30 June 2007 Acquisition of Translation movement 31 December 2006 subsidiaries (Note 8)Pyaterochka operations 2,562,817 7,294 50,729 2,504,794Merkado operations 92,222 - 77 92,145Operations in Moscow, Russia 3,066 - 60 3,006Operations in Nizhniy Novgorod, 13,062 - 255 12,807RussiaOperations in Yaroslavl, Russia 5,877 - 115 5,762Other operations 4,440 - 5 4,435 2,681,484 7,294 51,241 2,622,949 Goodwill Impairment Test For the purposes of impairment testing, goodwill is allocated to a singlecash-generating unit (CGU) being the retail trading in Russia. This levelrepresents the lowest level within the Group at which the goodwill is monitoredfor internal management purposes. The CGU to which goodwill has been allocated is tested for impairment annuallyor more frequently if there are indications that the CGU might be impaired.Goodwill is tested for impairment at the CGU level by comparing carrying valuesof CGU assets including allocated goodwill to their recoverable amounts. Therecoverable amount of CGU is determined as the higher of fair value less cost tosell or value in use. The Group will perform the annual impairment test at 31December 2007. The Group defines fair value less costs to sell of the CGU by reference to anactive market, i.e. as a market capitalization of the Group on the London stockexchange, since the Group's activities other than retail trade in Russiainsignificantly affects the fair value. The market capitalization of the Groupat 30 June 2007 significantly exceeded the carrying amount of the CGU. Forindication purposes fair value less costs to sell of the CGU will be lower thanits carrying amount if the share price falls below the level of USD 56 pershare. 14 INTANGIBLE ASSETS Intangible assets comprise the following: Brand and private Franchise Software labels agreements and other Lease rights TotalCost:At 1 January 2007 331,215 71,526 5,858 104,816 513,415Additions - - 735 - 735Acquisition of subsidiaries (Note 8) - - - 486 486Disposals - - (788) - (788)Transfer 1,529 - 1,771 (3,300) -Translation movement 6,629 1,427 268 2,060 10,384At 30 June 2007 339,373 72,953 7,844 104,062 524,232 Accumulated amortisation:At 1 January 2007 (10,434) (4,581) (2,680) (3,461) (21,156)Charge for the period (10,930) (4,771) (1,624) (3,015) (20,340)Disposals - - 1 - 1Transfer (779) - 779 - -Translation movement (421) (144) (822) 576 (811) At 30 June 2007 (22,563) (9,496) (4,346) (5,900) (42,306)Net book value at 316,810 63,457 3,498 98,162 481,926 30 June 2007Net book value at 320,781 66,945 3,178 101,355 492,25931 December 2006 X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 14 INTANGIBLE ASSETS (continued) Brand and private Franchise Software labels agreements and other Lease rights TotalCost:At 1 January 2006 - - 1,280 19,138 20,418Additions - 53 - 53Acquisition of subsidiaries (Note 8) 323,526 69,866 3,704 41,565 438,661Disposals - - (38) - (38) Translation movement - - 89 998 1,087At 30 June 2006 323,526 69,866 5,088 61,701 460,181 Accumulated amortisation:At 1 January 2006 - - (704) (674) (1,378)Charge for the period (1,478) (644) (226) (555) (2,903)Translation movement - - (51) 1 (50)At 30 June 2006 (1,478) (644) (981) (1,228) (4,331) Net book value at 322,048 69,222 4,107 60,473 455,85030 June 2006 Net book value at - - 576 18,464 19,04031 December 2005 15 INVESTMENT IN ASSOCIATE At 31 December 2006 the Group recorded a long-term loan issued to DonetteInvestments Limited in the amount of USD 5,250 with an interest rate of 10% p.a.In the current reporting period the Group has concluded an agreement withDonette Investments Limited by which the Group converts its loan into 30% in theshare capital of Donette Investments Limited. The Group does not recognise anygoodwill at the acquisition date. As at 30 June 2007 the Group has 30% of the share capital of Donette InvestmentsLimited. The amount of investment is USD 5,250. At 30 June 2007 and 31 December2006, summarised financial information of Donette Investments Limited, includingtotal assets, liabilities, revenues and profit or loss, were as follows: 30 June 2007 31 December 2006 Total assets 9,281 9,630Total liabilities 5 5Revenue - -Profit / (loss) (349) 882 16 INVENTORIES OF GOODS FOR RESALE Inventories as of 30 June 2007 and 31 December 2006 comprise the following: 30 June 2007 31 December 2006 Goods held for resale 214,960 210,543Less: provision for shrinkage (4,452) (1,967) 210,508 208,576 Refer to Note 21 for goods pledged as collateral for borrowings. Inventory shrinkage recognised as cost of sales in the consolidated interimincome statement amounted to USD 35,896 (six months ended 30 June 2006: USD10,715). X5 Retail Group N.V. Notes to Consolidated Interim Financial Statements Six months ended 30 June 2007 (expressed in thousands of US Dollars, unless otherwise stated) 17 TRADE AND OTHER ACCOUNTS RECEIVABLE 30 June 2007 31 December 2006Trade accounts receivable 53,449 38,442Advances made to trade suppliers 4,386 12,478Other receivables 13,985 32,411Deferred expenses and prepayments 59,805 67,717Accounts receivable for franchise services 4,722 1,287Receivables from related parties (Note 9) 907 1,622Provision for impairment of trade and other receivables (5,802) (5,732) 131,452 148,225 All classes of receivables are categorized as loans and receivables under IAS 39classification. The carrying amounts of the Group's trade and other receivables are primarilydenominated in Russian Roubles. Trade receivables There are no receivables that are past due but not impaired. As of 30 June 2007,trade receivables of USD 4,068 were impaired (31 December 2006: USD 4,832). The individually impaired trade receivables mainly relate to debtors that expectfinancial difficulties or there is likelihood of the debtor's insolvency. It wasassessed that a portion of the receivables is expected to be recovered. The ageing of these receivables is as follows: 30 June 2007 31 December 20063-6 months 806 875Over 6 months 3,262 3,957 4,068 4,832 Movements on the provision for impairment of trade receivables are as follows: For the six months ended 30 June 2007At 31 December 2006 4,832Accrual of provision for receivables impairment -Release of provision for receivables impairment (764)At 30 June 2007 4,068 For the six months ended 30 June 2006At 31 December 2005 1,555Accrual of provision for receivables impairment 3,115Release of provision for receivables impairment -At 30 June 2006 4,670 For those receivables that are neither past due nor impaired the Group considersthe credit quality as high. The maximum exposure to credit risk at the reportingdate is the carrying amount of each class of receivable mentioned above. TheGroup does not hold any collateral as security. The creation and release of provision for impaired receivables have beenincluded in general and administrative costs in the income statement. Other receivables and receivables for franchise services There are no receivables that are past due but not impaired. As of 30 June 2007,other receivables of USD 1,734 were impaired (31 December 2006: USD 900). The individually impaired other receivables mainly relate to debtors that expectfinancial difficulties or there is likelihood of the debtor's insolvency. It wasassessed that a portion of the receivables is expected to be recovered. All suchreceivables are over six months of age both as at 30 June 2007 and 31 December2006. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 17 TRADE AND OTHER ACCOUNTS RECEIVABLE (continued) Movements on the provision for impairment of other receivables for the six monthperiod ended 30 June 2007 are as follows: At 31 December 2006 900Accrual of provision for receivables impairment 834Release of provision for receivables impairment -At 30 June 2007 1,734 No provision for impairment of other receivables was made in the six monthperiod ended 30 June 2006. For those receivables that are neither past due norimpaired the Group considers the credit quality as high. The maximum exposure tocredit risk at the reporting date is the carrying amount of each class ofreceivable mentioned above. The Group does not hold any collateral as security. The creation and release of provision for impaired receivables have beenincluded in general and administrative costs in the income statement. 18 VAT AND OTHER TAXES RECOVERABLE 30 June 2007 31 December 2006VAT recoverable 118,736 85,771Other taxes receivable 1,246 3,663 119,982 89,434 VAT recoverable related to property, plant and equipment of USD 57,004 (31December 2006: USD 54,202) is recorded within current assets because managementexpects it will be recovered within 12 months after the balance sheet date.Timing of the VAT refund depends on the registration of certain property, plantand equipment, therefore there are risks that recovering the balance may takelonger than twelve months. 19 FINANCIAL ASSETS AND LIABILITIES Available-for-sale financial assets include the following: 30 June 2007 31 December 2006 Bank promissory notes RUB 5,939 -Other - 623 Changes in the fair value of securities classified as available for sale wereinsignificant during the six months ended 30 June 2007 (six months ended 30 June2006: nil). Included in the loans originated is an interest-bearing loan for USD 20,000nominated in Russian roubles with a less than 1 year maturity. Interest rate onthe loan is 13% per annum. The loan is collateralised with 70% of the sharecapital of Donette Investments Limited (Note 15). Derivative financial instruments The Group recognised the following derivative financial instruments as at 30June 2007: Financial assets at fair Financial liabilities at fair value through profit or loss value through profit or loss 30 June 2007 31 December 30 June 2007 31 December 2006 2006 Interest rate swap 2,694 - - -Equity swap - - 128 -Foreign exchange collar - - 2,399 -Forward sale contract - - 74,835 -Call option for 49% share in 1,500 - - -subsidiaries (Note 8) 4,194 - 77,362 - X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 19 FINANCIAL ASSETS AND LIABILITIES (continued) The Group has purchased an interest rate swap and a foreign exchange collar froma high-credit quality banking institution. LIBOR has been fixed at 5% per annumand the foreign exchange collar at 32.4 and 23.85 RR/US dollar. The Group doesnot formally designate the interest swap and the foreign exchange collar ashedging instruments and does not apply hedge accounting. The Group re-measuredthe interest rate swap and the foreign exchange collar as at 30 June 2007 basedon an active market quotations and recognized gain of USD 2,667 and loss of USD2,374 accordingly in the income statement. The Group entered into a pre-paid forward sale on the Company's GDRs. The amountof GDRs subject to the agreement is 2,555,366. The transaction is securitizedwith the Company's GDRs and is arranged in 2 tranches. The notional amount ofthe financial instrument is USD 74,963. At the inception of the transaction itis settled in cash. To offset exposure to the GDRs the Group purchased equityswap contract with the Company's GDRs as underlying assets. The transaction isalso arranged in 2 tranches and the Group pays interest of 5.35% / LIBOR +1.5%accordingly for each of the tranches. The effects of the above transactions ofpre-pair forward sale and equity swap in the income statement of the Groupoffset each other. The agreements are concluded with a high-credit quality banking institution fora short-term period. The Group recognized a gain on the pre-paid forward sale ofUSD 128 and loss of USD 128 on the equity swap in the income statement for thesix months ended 30 June 2007. The notional amounts of the outstanding interest rate swap and equity swapcontracts at 30 June 2007 were nil (2006: nil). The maturity of derivative financial instruments is as follows: Assets Liabilities In 1 year or less 4,194 77,3621-3 years - - None of the financial assets are either past due or impaired. The Group assessescredit quality of the investments as high. 20 OTHER LIABILITIES 30 June 2007 31 December 2006 Taxes other than income tax 20,207 21,836Provision for uncertain tax positions (Note 35) 55,773 55,773Accrued salaries and bonuses 41,043 61,366Payables to landlords 4,835 7,635Other accounts payable and accruals 10,797 16,675Accounts payable for services received 15,410 7,979Accounts payable for property, plant and equipment 8,613 20,005Advances received 15,744 9,441 172,422 200,710 X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 21 BORROWINGS Currency Interest 30 June 2007 31 December 2006 rate, % p.a.Short-term Current portion of Syndicated loan* USD LIBOR + 2.25% - 112,000Bridge facility**** USD LIBOR+0.75% 990,314 -Current portion of Perekrestok's 57,856 56,725bonds ** RR 8.15%Pyaterochka Finance's bonds - 1st RR 11.45% 61,286 -issue***Pyaterochka Finance's bonds - 2nd RR 9.30% 123,028 -issue***Commerzbank USD LIBOR+1.4% 100,000 -Barclays Bank Plc RR 6.50% 116,206 -Raiffeisenbank RR MOSPRIME1+1.20% 15,204 -Alfa-Bank USD 6.90%-7.52% - 16,400UralSib Bank USD 6.95% - 12,760UralSib Bank RR 12.50% 1,394 -Raiffeisenbank overdraft RR MOSPRIME1 581 - +1.25%Raiffeisenbank overdraft RR 7.19%-7.34% - 6,266Sberbank overdraft RR 10.00% 187 -Sberbank RR 12.00% 775 -Sberbank RR 11.00% - 11,431AKB BIN Bank RR 16.00% - 2,279Uralsib overdraft RR 11.00% 1,539 -Other RR - 14 152 1,468,385 218,013Long-term LIBOR + 2.25%/ Syndicated loan * USD 2.50% - 788,016 Pyaterochka Finance's bonds - 1st issue *** RR 11.45% - 60,667 Pyaterochka Finance's bonds - 2nd issue *** RR 9.30% - 121,590 Perekrestok's bonds ** RR 8.15% - 56,725Bank Petrocommerce RR 11.00% - 90,850Other loans RR 1,859 -Less:Current portion of Syndicated loan* USD LIBOR + 2.25% - (112,000)Current portion of Perekrestok's bonds ** RR 8.15% - (56,725) 1,859 949,123 Total borrowings 1,470,244 1,167,136 * In May 2006 the Company raised USD 800,000 from a consortium of banks. Theloan is divided into two tranches as follows: - USD 450,000 for three years bearing interest at LIBOR plus 2.25%, repayable asfollows: USD 112,000 on each of the 18th, 24th and 30th month of the loan and afinal payment of USD 114,000 on maturity, i.e. in May 2009. - USD 350,000 bearing interest at LIBOR plus 2.5% and increasing to LIBOR plus3% after one year and has a three-year maturity. The syndicated loan at 31 December 2006 is shown net of related transactioncosts of USD 11,984 which are amortised over the term of the loan using theeffective interest method. LIBOR rate is repriced every quarter. X5 Retail Group N.V. Notes to Consolidated Interim Financial Statements Six months ended 30 June 2007 (expressed in thousands of US Dollars, unless otherwise stated) 21 BORROWINGS (continued) The Group has pledged as collateral for the syndicated loan 100% of votingshares in its subsidiaries, including Speak Global Ltd., OOO Agrotorg, OOOAgroaspect, Perekrestok Holdings Ltd., Alpegru Retail Properties Ltd., ZAO TH "Perekrestok", OOO Perekriostok-2000, ZAO Ceizer, ZAO Remtransavto. ** In July 2005 the Group issued Russian Rouble denominated bonds in the amountof RR 1,500 million (USD 52,217 at the time of issue). The bonds have a maturityof 3 years. Coupon income is payable twice a year. The interest rate for thefirst and second coupon is 8.15% p.a. The bond origination costs amounted to USD400. They reduced the amount of bonds drawn down and are amortised over theestimated life of the bonds. In July 2007 bonds were redeemed by the Group,therefore all the bonds are classified as a current liability in theseconsolidated interim financial statements. *** Pyaterochka Finance's rouble-denominated bonds, issue 1 and 2, were acquiredby the Group in course of the acquisition (Note 8). - The first series of bonds was issued by Pyaterochka Finance in March 2005. Theaggregate nominal value of the first issue amounted to RR 1,500 million (USD58,103 as of 30 June 2007). The first series of bonds has a maturity of fiveyears and bears interest at a fixed rate of 11.45% per annum. Interest ispayable every six months. - The second series of bonds was issued by Pyaterochka Finance in December 2005.The aggregate nominal value of the second issue amounted to RR 3,000 million(USD 116,206 as of 30 June 2007). The second series of bonds has a maturity offive years and bears interest at a fixed rate of 9.3% per annum. Interest ispayable every six months. In June 2007 the Group announced its plan to refinance Pyaterochka Finance'sbond issues with the issuance of a new bond. Therefore the Group reportedPyaterochka Finance's rouble-denominated bonds in current liabilities. The newbond was successfully placed on 10 July 2007 in the amount of RR 9,000 (USD350,000 as at 10 July 2007). **** In June 2007 the Group raised a bridge facility of USD 1,000,000 from aconsortium of banks bearing interest at LIBOR plus 0.75% per annum andincreasing to LIBOR plus 2.5% per annum after first six months and has a yearmaturity with possibility of earlier redemption. Effective interest rate of thenew bridge facility is LIBOR + 0.75% p er annum. Part of the money raised wasused to refinance the existing syndicated loan with the principal amount of USD800,000 and other borrowings. The Group has pledged as collateral for thesyndicated loan 100% of voting shares, cash on the bank accounts and receivableaccounts in its subsidiaries, including OOO "Agrotorg", OOO "Agroaspect",Perekrestok Holdings Ltd., Alpegru Retail Properties Ltd., ZAO "TH "Perekrestok", OOO "Perekrestok-2000". LIBOR rate is repriced every interest period. The Group maintains optimal capital structure by tracing certain capitalrequirements based on the ratios included as covenants into loan agreements(Note 34). The new bridge facility includes the following covenants: maximumlevel of Debt/EBITDA is 4, minimum level of EBITDA/Interest expense is 3 andminimum level of EBITDAR/Fixed costs is 1.75. 22 OBLIGATIONS UNDER FINANCE LEASES The Group leases certain refrigerating equipment and vehicles under financelease terms. The agreements expire in 2007-2009 and assume a transfer ofownership for the leased assets to the Group at the end of the lease term. Theeffective borrowing rate on lease agreements as of 30 June 2007 varies from 9.0%to 13.0% per annum on USD agreements and from 23.0% to 31.0% per annum on RRagreements. The fair value of the finance lease liability as of 30 June 2007approximates its carrying amount. Lease obligations of the Group as of 30 June 2007 and 31 December 2006 consistedof the following: Minimum lease payments Present value of minimum lease payments 30 June 2007 31 December 2006 30 June 2007 31 December 2006Amounts payable :Within one year 3,090 3,261 2,373 2,271In the second to fifth years 2,374 3,879 2,024 2,913inclusive 5,464 7,140 4,397 5,184Less: future finance charges (1,067) (1,956) N/A N/APresent value of minimum lease 4,397 5,184 4,397 5,184payments X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 23 SHARE CAPITAL As described in Note 2.1 the equity structure of the Group represents the equitystructure of X5 Retail Group N.V. As of 1 January 2006 the Company had38,306,785 ordinary shares issued and fully paid. The nominal par value of eachordinary share is EUR 1. The Company has only one class of ordinary shares. Aspart of the acquisition (Note 8) in April 2006 the Group issued an additional15,813,253 ordinary shares. During the year 2006 the Group repurchased 902,278 ordinary shares for generalcorporate purposes, including funding the employees' share option program (ESOP)liabilities and potential acquisitions. As of 30 June 2007 the Group had190,000,000 authorised ordinary shares of which 53,217,760 ordinary shares areoutstanding. As of 30 June 2007 the fair value of outstanding shares amounted toUSD 6,237,121. No dividends were paid or declared during the six months ended 30 June 2007 orthe year ended 31 December 2006 other than the USD 300,000 payment to formershareholders of Perekrestok Holdings Ltd. as disclosed in note 8. 24 EARNINGS PER SHARE Basic earnings per share are calculated by dividing the profit or lossattributable to equity holders of the Company by the weighted average number ofordinary shares in issue during the year, excluding treasury shares. Earnings per share are calculated as follows: 30 June 2007 30 June 2006 Profit attributable to equity holders of the Parent 41,050 19,272 Weighted average number of ordinary shares in issue 53,217,760 25,161,907Weighted average number of ordinary shares for the purposes of 53,478,663 25,289,327diluted earnings per share Basic earnings per share for profit from continuing operations 0.77 0.77(expressed in USD per share)Diluted earnings per share for profit from continuing operations 0.77 0.76(expressed in USD per share) 25 REVENUE Six months ended 30 Six months ended 30 June 2007 June 2006 Revenue from sale of goods 2,335,714 891,341Revenue from franchise services 6,827 6,131Revenue from other services 5,060 1,311 2,347,601 898,783 26 EXPENSES BY NATURE Six months ended Six months ended 30 June 2007 30 June 2006 Cost of product 1,699,238 652,026Staff costs (Note 29) 247,235 93,974Operating lease expenses 87,122 34,586Other store costs 40,400 17,352Depreciation and amortisation 75,185 22,146Utilities 31,164 11,760Other 61,790 31,776 2,242,134 863,620 Operating lease expenses include USD 78,421(six months ended 30 June 2006: USD34,175) of minimum lease payments and contingent rents of USD 8,701 (six monthsended 30 June 2006: USD 411). Provision for impairment of trade and other receivables amounted to USD 70during the six months ended 30 June 2007 (six months ended 30 June 2006: USD3,396). X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 27 OPERATING LEASE INCOME The Group leases part of its store spaces to companies selling supplementarygoods and services to customers. The lease arrangements are operating leases,the majority of which are short-term. The future minimum lease paymentsreceivable under non-cancellable operating leases are as follows: 30 June 2007 30 June 2006Not later than 1 year 31,542 10,227Later than 1 year and no later than 5 years 18,820 1,125Later than 5 years 4,908 69 55,270 11,421 The rental income from operating leases recognised in the income statementamounted to USD 27,214 (30 June 2006: 12,844 USD). There were no contingentrents recognised in the income statement in the six months ended 30 June 2007(six months ended 30 June 2006: nil). 28 FINANCE INCOME AND COSTS Six months ended Six months ended 30 30 June 2007 June 2006 Interest expense 60,593 16,025Interest income (6,407) (192)Fair value loss on foreign exchange collar (2,667) -Fair value gain on interest rate swap 2,374 -Fair value loss on equity swap 128 - 54,021 15,833 29 STAFF COSTS Six months ended Six months ended 30 30 June 2007 June 2006 Wages and salaries 203,527 78,218Social security costs 22,008 11,903Share-based payments expense 21,700 3,853 247,235 93,974 Key executive management personnel Key management personnel and members of the Supervisory Board of the Companyreceive compensation in the form of short-term employee benefits and share-basedpayments (Note 30). At 30 June 2007 key management personnel of the Groupinclude 11 members (31 December 2006: 15). For the six months ended 30 June 2007key management personnel and members of the Supervisory Board of the Companywere entitled to total short-term compensation of USD 4,688 (six months ended 30June 2006: USD 4,622), including bonuses of USD 2,375 (six months ended 30 June2006: USD 3,604) and share-based payments of USD 18,628 (six months ended 30June 2006: nil). The compensation is made up of an annual remuneration and aperformance bonus depending on operating results. 30 SHARE-BASED PAYMENTS In February and June 2007 the Group paid the cancellation fees related to theemployee stock option program acquired in May 2006 with the acquisition ofPyaterochka Holding N.V. (Note 8). The amount of the cancellation feesoutstanding at 30 June 2007 totalled to USD 6,163 (31 December 2006: USD 69,990)and will be paid out within a year of the balance sheet date. In March 2007 the Group announced a new employee stock option program for itskey executives and employees. The total number of share options is capped at10,824,008 GDRs. Each option carries the right to one GDR. The program will runin four tranches that will be issued over the period to 18 May 2010. The first and second tranches were approved for granting at 15 June 2007. Thefirst tranche vests immediately and covers the period of service of optionholders from 1 January 2007 to 15 June 2007. The second tranche will vest on 18May 2008. The exercise price of the first grant is USD 18.00 per GDR. Theexercise price of the second option tranche equals to USD 30.53 per GDR.Participants of the ESOP can exercise the share option at any time over theperiod from vesting till 18 May 2010. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 30 SHARE-BASED PAYMENTS (continued) In total, during the six months ended 30 June 2007 the Group recognised expensesrelated to the ESOP in the amount of USD 21,700 (six months ended 30 June 2006:USD 3,853). At 30 June 2007 the share-based payments liability amounted to USD27,863 (31 December 2006: USD 69,990). Details of the share options outstanding during the six month period ended 30June 2007 are as follows: Number of share Weighted average options exercise price, USD Outstanding at the beginning of the period - -Granted during the period 4,238,003 26.4Cancelled during the year - - 4,238,003 26.4 Outstanding at the end of the periodExercisable at 30 June 2007 1,395,000 The fair value of services received in return for the share options granted toemployees is measured by reference to the fair value of the share optionsgranted. The estimate of the fair value of the services received is measuredbased on Black-Scholes model. Expected volatility is determined by calculatingthe historical volatility of the Group's share price over the period since May2006. Management assumes that holders will exercise the options on the lastpossible date, i.e. one year from the date of vesting, due to behavioralconsiderations. Other key inputs to the calculation of ESOP liability at 30 June2007 were as follows: GDR price at 30 June 2007 USD 29.3Expected volatility 30%Risk-free interest rate 5.68%Dividend yield 0% 31 INCOME TAX Six months ended Six months ended 30 30 June 2007 June 2006 Current income tax charge 46,963 17,296Deferred income tax charge / (benefit) 4,716 (3,181) Income tax charge for the period 51,679 14,115 The theoretical and effective tax rates are reconciled as follows: Six months ended Six months ended 30 June 2007 30 June 2006 Profit before taxation 92,729 33,387 Theoretical tax at the effective statutory rates * 22,255 8,014Tax effect of items which are not deductible or assessable fortaxation purposes:Effect of income taxable at rates different from standard (4,506)statutory rates (3,143)Inventory shrinkage expenses 14,132 2,029Not recognized deferred tax asset on loss 3,796 -Other non-deductible expenses 14,639 5,996Provision for uncertain tax positions (Note 35) - 2,582 Income tax charge for the period 51,679 14,115 * Profit before taxation on Russian operations is assessed based on thestatutory rate of 24%, profit before taxation on Ukrainian operations is assessed based on the statutory rate of 25%. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 31 INCOME TAX (continued) Deferred income tax Differences between financial reporting standards and taxation regulations giverise to certain temporary differences between the carrying value of certainassets and liabilities and their tax bases. The tax effect of the movement onthese temporary differences is recorded at the rate of 24% for Russianoperations and of 25% for Ukrainian operations. Deferred tax assets and liabilities and the deferred tax charge in the incomestatement are attributable to the following items for the year ended 30 June2007: Credited to Deferred tax on Recog-nised 31 December profit and combinations translation 30 June 2006 loss (Note 8) differences 2007 Tax effects of deductible temporarydifferences and tax loss carryforwards:Tax losses available for carry forward - - - - -Property, plant and equipment 7,675 2,295 - 177 10,147Intangible assets - 142 - 1 143Accounts Receivable 5,775 8,729 193 209 14,906Liability for share based expenses 16,284 (12,317) - 198 4,165Other 8,650 (5,760) 501 (156) 3,235Gross deferred tax asset 38,384 (6,911) 694 429 32,596Less offsetting with deferred tax (19,758) 3,702 - (356) (16,412) liabilities Recognised deferred tax asset 18,626 (3,209) 694 73 16,184 Tax effects of taxable temporarydifferences:Property, plant and equipment (84,545) (816) (1,435) (1,714) (88,510)Intangible assets (112,817) 10,193 - (1,794) (104,418)Accounts Receivable - (4,701) - (49) (4,750)Other - (2,481) (447) (12) (2,940)Gross deferred tax liability (197,362) 2,195 (1,882) (3,569) (200,618)Less offsetting with deferred tax 19,758 (3,702) - 356 16,412assetsRecognised deferred tax liability (177,604) (1,507) (1,882) (3,213) (184,206) Temporary differences on unremitted earnings of certain subsidiaries amounted toUSD 60,045 (31 December 2006: USD 162,573) for which the deferred tax liability was not recognised as suchamounts are being reinvested for the foreseeable future. The current portion of the deferred tax liability amounted to USD 16,379 (31December 2006: USD 13,420), the current portion of the deferred tax assetamounted to USD 8,021 (31 December 2006: USD 17,467). X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 31 INCOME TAX (continued) Deferred tax assets and liabilities and the deferred tax charge in the incomestatement are attributable to the following items for the six months ended 30June 2006: Deferred tax Recog-nised Charged to Deferred tax on asset in in equity for 31 December profit and business disposed translation 2005 loss combinations subsidiaries differences 30 June 2006 Tax effects of deductibletemporary differences andtax loss carryforwards:Tax losses available for 1,269 (1,320) - - 51 - carry forward Property, plant and - 202 4,090 - (22) 4,270equipment Accounts Receivable 3,001 1,917 1,170 - 128 6,216Other (1,131) 1,710 6,710 (76) 10 7,223 Gross deferred tax asset 3,139 2,509 11,970 (76) 167 17,709 Less offsetting with deferred tax liabilities (3,139) (1,532) (10,337) 76 (240) (15,172)Recognised deferred tax - 977 1,633 - (73) 2,537 asset Tax effects of taxabletemporary differences:Property, plant and (14,764) 56 (46,648) - (774) (62,130)equipmentIntangible assets (5,049) 617 (100,678) - (2) (105,112)Gross deferred tax (19,813) 672 (147,326) - (776) (167,243)liabilityLess offsetting with 3,139 1,532 10,337 (76) 240 15,172deferred tax assetsRecognised deferred tax (16,674) 2,204 (136,989) (76) (536) (152,071)liability 32 SEASONALITY The Group experiences seasonal effects on its business - increased customeractivity in December results in an increase of sales made by the Group. Themajority of expenses have the same trend as sales with the following exceptions: - volume of repair and maintenance work increases in the May-September period asthe ambient temperature is conducive to this activity. In addition, the lowerlevel of customer activity enables the Group to minimize missed profits; - utility expenses are normally higher during winter period due to increasedelectricity and heating service consumption. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 33 FINANCIAL RISKS MANAGEMENT The Group's activities expose it to a variety of financial risks: market risk(including currency risk and interest rate risk), credit risk and liquidityrisk. The Group recognises the critical importance of having efficient andeffective risk management systems in place. The overall risk management programof the Group focuses on the unpredictability of financial markets. Therefore theobjective of the Group's risk management is to minimise potential adverseeffects of the most significant risk factors on the Group's financial positionand results. Risk management is carried out by a central treasury department (Group Treasury)under policies approved by the Supervisory Board. Group Treasury monitors andmeasures financial risks and undertake steps to limit its influence on theGroup's performance. In this connection the Group uses certain derivativefinancial instruments to economically hedge financial risk exposures. Theseinstruments are primarily intended to cap risks associated with the mostsignificant foreign currency denominated long-term borrowings. All derivativetransactions are undertaken, or maintained, with a view to managing the interestor currency associated with the financing of business activities. (a) Market risk Currency risk The Group is exposed to foreign exchange risk arising from various currencyexposures, primarily with respect to the US dollar. The Group has a substantialamount of foreign currency denominated long-term borrowings, and is thus exposedto foreign exchange risk (Note 21). Therefore the Group Treasury's riskmanagement policy is primarily to economically hedge anticipated cash outflowsassociated with borrowings in US dollar. The Group uses a foreign exchangecollar with a leading banking institution to hedge foreign currency risksassociated with syndicated loan for USD 800,000 raised in May 2006. As a resultthe foreign exchange collar is fixed at 32.4 and 23.85 RUR/USD. Howevermanagement did not formally designate the foreign exchange collar as a hedginginstrument and did not apply hedge accounting. At 30 June 2007, if the Russian Rouble had weakened/strengthened by 5% againstthe US dollar with all other variables held constant, post-tax profit for theyear would have been USD 43,823 (30 June 2006: USD 29,489) lower/higher, mainlyas a result of foreign exchange losses/gains on US dollar denominatedborrowings. Interest rates risk As the Group has no significant interest-bearing assets, the Group's income andoperating cash flows are substantially independent of changes in market interestrates. The Group's interest rate risk arises from borrowings. Borrowings issued atvariable rates expose the Group to cash flow interest rate risk. It is the Grouppolicy to manage cash flow interest rate risk by using floating-to-fixedinterest rate swaps. Under the interest rate swaps, the Group agrees with otherparties to exchange, at specified intervals (primarily quarterly), thedifference between fixed contract rates and floating-rate interest amountscalculated by reference to the agreed notional amounts. The Group uses an interest rate swap with a leading banking institution to hedgethe interest rate of syndicated loan facility for USD 800,000 raised in May2006. As a result, LIBOR has been fixed at 5 per cent p.a. for the lifetime ofthe Syndicated loan (Note 21). However management did not formally designate theinterest rate swap as hedging instruments and did not apply hedge accounting. As a result of using interest rate swaps change in market interest rates withall other variables held constant would not significantly affect post-tax profitof the Group. At 30 June 2007, if LIBOR had increased/decreased by 5% with allother variables held constant, post-tax profit for the year would have been USD86 (30 June 2006: USD 199) lower/higher. Borrowings issued at fixed rates expose the Group to fair value interest raterisk. The fair value of bonds traded on the MICEX is determined based on activemarket quotations and amounted to USD 239,141 at 30 June 2007 (31 December 2006:USD 237,221). The carrying value of these bonds amounted to USD 232,412 at 30June 2007 (31 December 2006: USD 238,982) (Note 21). In assessing the fair value of non-traded financial instruments the Group uses avariety of methods including estimated discounted value of future cash flows,and making assumptions that are based on market conditions existing at eachbalance sheet date. X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 33 FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk Financial assets, which are potentially subject to credit risk, consistprincipally of cash and cash equivalents held in banks, trade and otherreceivables. Due to the nature of its main activities (retail sales toindividual customers) the Group has no significant concentration of credit risk.Cash is placed in financial institutions which are considered at the time ofdeposit to have minimal risk of default. The Group has policies in place toensure that in case of credit sales of products and services to wholesalescustomers only those with an appropriate credit history are selected. Althoughcollection of receivables could be influenced by economic factors, managementbelieves that there is no significant risk of loss to the Group beyond theprovision already recorded. In accordance with the Group treasury policies andexposure management practices, counterparty credit exposure limits arecontinually monitored and no individual exposure is considered significant inthe ordinary course of treasury management activity. (c) Liquidity risk The Group manages liquidity requirements by the use of both short- and long-termprojections and by maintaining the availability of funding from an adequateamount of committed credit facilities. The following is an analysis of the contractual undiscounted cash flows payableunder financial liabilities and derivative assets and liabilities as at thebalance sheet date: Six months ended 30 June 2007 During 1 year In 1 to 3 years In 3 to 5 years After 5 yearsBorrowings 1,468,385 1,859 - -Interest payments on borrowings 99,708 130 - -Derivative financial liabilities 76,239 - - - 1,644,332 1,989 - - Six months ended 30 June 2006 During 1 year In 1 to 3 years In 3 to 5 years After 5 yearsBorrowings 136,685 480,952 178,357 22,157Interest payments on borrowings 70,784 129,689 65,377 2,304Derivative financial liabilities - - - - 207,469 610,641 243,734 24,461 At 30 June 2007 the Group has negative working capital of USD 1,469,398 (31December 2006: USD 436,521) including short-term borrowings of USD 1,468,385 (31December 2006: USD 218,013). The Group plans to issue up to 25 billion RUR callable bonds in 3 tranchesduring 2007 - early 2008 to refinance the Group's existing debt and fund itsstore expansion. The Group has an intention to restructure the current short-term bridge facilityby extending its maturity. Furthermore, at 30 June 2007 the Group had availablecredit lines with Alfa-Bank (Note 9) of USD 150,000 (31 December 2006: nil). Management considers that the available credit lines and expected operating cashflows are sufficient to finance the Group's current operations. 34 CAPITAL RISK MANAGEMENT The Group's objectives when managing capital are to safeguard the Group'sability to continue as a going concern in order to provide returns forshareholders and benefits for other stakeholders and to maintain an optimalcapital structure to reduce the cost of capital. The Group manages total equityattributable to equity holders recognized under IFRS requirements. Capital management objectives are firstly met by refinancing existing debt andreducing debt servicing costs on the back of synergies of the Perekrestok andPyaterochka mergers. Under the new syndicated loan facility placed in June 2007will pay a margin of 0.75% over LIBOR, significantly lower than previousfacilities. Simultaneously, the Group maintains optimal capital structure by tracing certaincapital requirements based on ratios. The ratios are maximum level of Debt/EBITDA, minimum level of EBITDA/Interest expense and minimum level of EBITDAR/Fixed costs. These ratios are included as covenants into new loan agreements(Note 21). X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 35 COMMITMENTS AND CONTINGENCIES Commitments under operating leases At 30 June 2007, the Group operated 406 stores through rented premises (31December 2006: 353). There are two types of fees in respect of operating leasespayable by the Group: fixed and variable. For each store fixed rent payments aredefined in the lease contracts and denominated in USD. The variable part of rentpayments is predominantly denominated in RR and normally calculated as apercentage of turnover. The future minimum lease payments under non-cancellable operating leases ofproperty are as follows (net of VAT): 30 June 2007 30 June 2006 During 1 year 120,410 63,450In 2 to 5 years 309,376 210,555Thereafter 135,020 113,369 564,806 387,374 Capital expenditure commitments At 30 June 2007 the Group contracted for capital expenditure of USD 98,236(including VAT) (31 December 2006: USD 96,022). Taxation environment Russian tax, currency and customs legislation is subject to varyinginterpretations, and changes, which can occur frequently. Management'sinterpretation of such legislation as applied to the transactions and activityof the Group may be challenged by the relevant regional and federal authorities.Recent events within the Russian Federation suggest that the tax authorities maybe taking a more assertive position in their interpretation of the legislationand assessments, and it is possible that transactions and activities that havenot been challenged in the past may be challenged as not having been incompliance with Russian tax laws applicable at the relevant time. In particular,the Supreme Arbitration Court issued guidance to lower courts on reviewing taxcases providing a systematic roadmap for anti-avoidance claims, and it ispossible that this will significantly increase the level and frequency of taxauthorities scrutiny. As a result, significant additional taxes, penalties andinterest may be assessed. Fiscal periods remain open to review by theauthorities in respect of taxes for three calendar years proceeding the year ofreview. Under certain circumstances reviews may cover longer periods. Russian transfer pricing legislation introduced on 1 January 1999 provides thepossibility for tax authorities to make transfer pricing adjustments and imposeadditional tax liabilities in respect of all controllable transactions, providedthat the transaction price differs from the market price by more than 20%.Controllable transactions include transactions with interdependent parties, asdetermined under the Russian Tax Code, and all cross-border transactions(irrespective of whether performed between related or unrelated parties),transactions where the price applied by a taxpayer differs by more than 20% fromthe price applied in similar transactions by the same taxpayer within a shortperiod of time, and barter transactions. There is no formal guidance as to howthese rules should be applied in practice. The arbitration court practice inthis respect is contradictory. Tax liabilities arising from inter-company transactions are determined usingactual transaction prices. It is possible with the evolution of theinterpretation of the transfer pricing rules in the Russian Federation and thechanges in the approach of the Russian tax authorities, that such transferprices could potentially be challenged in the future. Given the brief nature ofthe current Russian transfer pricing rules, the impact of any such challengecannot be reliably estimated; however, it may be significant to the financialcondition and operations of the entity. Russian tax legislation does not provide definitive guidance in many areas. Fromtime to time, the Group adopts interpretations of such uncertain areas thatreduce the overall tax rate of the Group. As noted above, such tax positions maycome under heightened scrutiny as a result of recent developments inadministrative and court practices; the impact of any challenge by the taxauthorities cannot be reliably estimated; however, it may be significant to thefinancial condition and operations of the entity. Management regularly reviews the Group's taxation compliance with applicablelegislation, laws and decrees and current interpretations published by theauthorities in the jurisdictions in which the Group has operations. Furthermore,management regularly assesses the potential financial exposure relating to taxcontingencies for which the three years tax inspection right has expired butwhich, under certain circumstances, may be challenged by the regulatory bodies.From time to time potential exposures and contingencies are identified and atany point in time a number of open matters may exist. Management estimates thatpossible exposure in relation to profit tax and other non-profit tax risks thatare more than remote, but for which no liability is required to be recognisedunder IFRS, could be several times the additional accrued liabilities andprovisions reflected on the balance sheet at that date (and potentially inexcess of the Group's profit before tax for the year). This estimation is basedon IFRS requirement of possible tax risk disclosure and should not be consideredas an estimate of the Group's future tax liability. At the same time managementhas recorded liabilities for income taxes and provisions for taxes other thanincome taxes in the amount of USD 55,773 at June 30, 2007 (31 December 2006: USD55,773) in these consolidated financial statements as their best estimate of theGroup's liability related to tax uncertainties as follows: X5 Retail Group N.V.Notes to Consolidated Interim Financial StatementsSix months ended 30 June 2007(expressed in thousands of US Dollars, unless otherwise stated) 35 COMMITMENTS AND CONTINGENCIES (continued) Balance at 1 January 2006 8,000Increases due to acquisitions during the year recorded as 40,000part of the purchase price allocation (Note 8)Additional liabilities recorded during the year 7,773Reversals of prior year - accruals -Balance at 31 December 2006 55,773Additional liabilities recorded during the period -Balance at 30 June 2007 55,773 36 SUBSEQUENT EVENTS In July 2007 the Group issued Russian Rouble denominated bonds in the amount ofRR 9,000 million (USD 350,173 at the time of issue). The bonds have a maturityof 7 years. Coupon income is paid twice a year. The bond holders have a right toredeem the bonds in July 2010. The interest rate during first three years is7.6%. The interest rates on further coupon payments will be determined bymanagement of the Group based on current market conditions and these interestrates will be announced in July 2010. The Group has declared its intention torepurchase the issued bonds in July 2010 at nominal value. The Group used themoney raised from the issuance of the bonds to redeem the first and secondtranches of rouble bonds of OOO "Pyaterochka Finance" with a total amount of 4.5billion roubles and the first tranche of ZAO "TH "Perekrestok" rouble bonds witha total nominal value of RR 1,500 million. The rest of the money will be usedfor the further expansion of the Group. This information is provided by RNS The company news service from the London Stock Exchange

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