OJSC Oil Company Rosneft Consolidated Financial Statements

OJSC Oil Company Rosneft
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Asset Retirement Obligations (continued)
The Company’s marine and other distribution terminals, including its retail network, operate under the
regulatory requirements of local authorities and lease arrangements. These requirements generally
provide for elimination of the consequences of the use of those assets, including dismantling of
equipment, restoration of land, etc. The Company’s estimate of asset retirement obligations takes into
account the above requirements.
SFAS 143 calls for measurements of asset retirement obligations to include, as a component of
expected costs, an estimate of the price that a third party would demand, and could expect to receive,
for bearing the uncertainties and unforeseeable circumstances inherent in the obligations, sometimes
referred to as a market-risk premium. To date, the oil and gas industry has few examples of creditworthy
third parties which are willing to assume this type of risk, for a determinable price, on major
oil and gas production facilities and pipelines. Therefore, because determining such a market-risk
premium would be an arbitrary process, it has been excluded from the SFAS 143 estimates.
Due to continuous changes in the Russian regulatory and legal environment, there could be future
changes to the requirements and contingencies associated with the retirement of long-lived assets.
Because of the reasons described above the fair value of an asset retirement obligation cannot be
reasonably estimated.
Fair Value of Financial Instruments
SFAS 107, Disclosures about Fair Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale.
Financial assets and financial liabilities recognized in the accompanying consolidated balance sheets
include cash and cash equivalents, short-term and long-term investments, accounts receivable and
payable, short-term and long-term debt and other current and non-current assets and liabilities.
The Company, using available market information, management's estimates and appropriate valuation
methodologies, has determined the approximate fair values of financial instruments.
Income Taxes
Russian legislation does not contain the concept of a ‘consolidated tax payer’ and, accordingly, the
Company is not subject to Russian taxation on a consolidated basis but rather on an individual company
basis. Income taxes are provided on taxable profit as determined under the Russian Federation Tax Code.
Deferred income tax assets and liabilities are recognized in the accompanying consolidated financial
statements in the amount determined by the Company using the liability method in accordance with
SFAS 109, Accounting for Income Taxes. This method takes into account future tax consequences, based
on the effective tax rate, associated with differences between the carrying values of assets and liabilities
and their taxable base, which gives immediate income statement effect to changes in income tax laws,
including changes in the tax rates. A valuation allowance for a deferred tax asset is recorded when
management believes that it is more likely than not that this tax asset will not be realized.
Starting from January 1, 2007 the Company accounts for uncertain tax positions in accordance with
FIN 48 Accounting for Uncertainty in Income Taxes. Under the provisions of FIN 48, liabilities for
unrecognized income tax benefits together with corresponding interest and penalties are recorded in the
consolidated statement of income and comprehensive income as income tax expense. The adoption of
FIN 48 had an insignificant impact on the consolidated financial statements.
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