open joint stock company russian helicopters

Open Joint Stock Company

Russian Helicopters Consolidated financial statements

for the years ended 31 December

2010, 2009 and 2008

OPEN JOINT STOCK COMPANY RUSSIAN HELICOPTERS

TABLE OF CONTENTS

Page

STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION

AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED 31 DECEMBER 2010, 2009 AND 2008 1

INDEPENDENT AUDITOR’S REPORT 2-3

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED 31 DECEMBER 2010, 2009 AND 2008:

Consolidated statements of comprehensive income/(loss) 4

Consolidated statements of financial position 5

Consolidated statements of changes in equity 6

Consolidated statements of cash flows 7

Notes to the consolidated financial statements 8-67

INDEPENDENT AUDITOR’S REPORT

To the shareholders of the Open Joint Stock Company Russian Helicopters:

We have audited the accompanying consolidated financial statements of the Open Joint Stock

Company Russian Helicopters and its subsidiaries (the “Group”), which comprise the consolidated

statements of financial position as at 31 December 2010, 2009 and 2008 and the consolidated

statements of comprehensive income/(loss), changes in equity and cash flows for the years

then ended and a summary of significant accounting policies and other explanatory notes.

Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of the accompanying consolidated

financial statements in accordance with International Financial Reporting Standards as issued by

the International Accounting Standards Board. This responsibility includes: designing, implementing

and maintaining internal control relevant to the preparation and fair presentation of consolidated

financial statements that are free from material misstatement, whether due to fraud or error; selecting

and applying appropriate accounting policies; and making accounting estimates that are reasonable

in the circumstances.

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those standards require

that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance

whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures

in the consolidated financial statements. The procedures selected depend on the auditors’ judgment,

including the assessment of the risks of material misstatement of the consolidated financial statements,

whether due to fraud or error. In making those risk assessments, the auditors consider internal control

relevant to the Group’s preparation and fair presentation of the consolidated financial statements

in order to design audit procedures that are appropriate in the circumstances, but not for the purpose

of expressing an opinion on the effectiveness of the Group’s internal control. An audit also includes

evaluating the appropriateness of accounting policies used and the reasonableness of accounting

estimates made by management, as well as evaluating the overall presentation of the consolidated

financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis

for our audit opinion.

Opinion

In our opinion, the accompanying consolidated financial statements present fairly, in all material

respects, the financial position of the Group as at 31 December 2010, 2009 and 2008, and the results of

its financial performance and its cash flows for the years then ended in accordance with International

Financial Reporting Standards as issued by the International Accounting Standards Board.

3

Emphasis of matter

Without qualifying our opinion, we draw attention to Notes 1 and 37 to the accompanying consolidated

financial statements, which indicate that the Government of the Russian Federation is the ultimate

controlling party of the Group and the Group has significant transactions with various parties, related

by means of common control and ownership by the Government of the Russian Federation. Accordingly,

the Government of the Russian Federation exercises direct and indirect influence over the financial

position of the Group, the results of its financial performance and its cash flows.

11 April 2011

Moscow, Russia

4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(in millions of Russian Roubles)

Notes

Year ended

31/12/2010

Year ended

31/12/2009

Year ended

31/12/2008

Revenue 8 67,202 47,305 31,698

Cost of sales 9 (40,964) (30,512) (22,376)

Gross profit 26,238 16,793 9,322

Selling, general and administrative expenses 10 (15,825) (9,134) (7,543)

Reversal of impairment of/(impairment of) property, plant and equipment 14 163 (628) (1,608)

Government grants 157 68 93

Other operating expenses, net 11 (913) (435) (363)

Operating profit/(loss) 9,820 6,664 (99)

Finance income 12 350 374 145

Finance costs 12 (3,474) (2,280) (1,691)

Excess of the Group's share in fair value of net assets acquired

over the costs of acquisition 7 277 ‒ ‒

Gain on revaluation of investments in associates due to business combination 7, 18 588 ‒ ‒

Share of results of associates 18 175 143 (49)

Foreign exchange (loss)/gain, net (394) 135 (1,147)

Profit/(loss) before income tax 7,342 5,036 (2,841)

Income tax (expense)/benefit 13 (1,501) (1,152) 907

Profit/(loss) and total comprehensive income/(loss) for the year 5,841 3,884 (1,934)

Profit/(loss) and total comprehensive income/(loss) for the year attributable to:

Shareholder of the Company 3,965 2,123 (1,644)

Non-controlling interests 1,876 1,761 (290)

5,841 3,884 (1,934)

Earnings/(losses) per share

Weighted average number of ordinary shares in issue during the year 27 3,318 1,000 1,000

Basic and diluted earnings/(losses) per share 27 1.20 2.12 (1.64)

5


CONSOLIDATED STATEMENTS OF FINANCIAL POSITION


Notes 31/12/2010 31/12/2009 31/12/2008

ASSETS

Non-current assets

Property, plant and equipment 14 31,532 20,340 20,534

Goodwill 16 913 913 138

Other intangible assets 17 2,509 973 317

Investments in associates 18 794 2,092 1,997

Trade receivables 19 172 63 87

Prepayments and other receivables 20 5,080 3,414 312

Other financial assets 21 1,356 1,243 337

Deferred tax assets 22 201 164 104

42,557 29,202 23,826

Current assets

Inventories 23 20,120 11,774 8,672

Amounts due from customers under construction contracts 24 6,336 3,015 2,596

Trade receivables 19 8,397 6,255 5,577

Prepayments and other receivables 20 19,856 16,244 6,191

Income tax receivable 65 117 103

Other taxes receivable 25 6,631 3,348 2,772

Other financial assets 21 413 2,482 1,291

Cash and cash equivalents 26 17,957 9,412 6,286

79,775 52,647 33,488

Non-current assets classified as held for sale 15 ‒ 971 ‒

79,775 53,618 33,488

TOTAL ASSETS 122,332 82,820 57,314

EQUITY AND LIABILITIES

Capital and reserves

Share capital 27 95 1 1

Additional paid-in capital 8,414 4,092 4,092

Oboronprom shares owned by the Group 7, 27 (231) ‒ ‒

Retained earnings 12,315 9,191 7,265

Attributable to the shareholder of the Company 20,593 13,284 11,358

Non-controlling interests 9,594 6,825 5,114

30,187 20,109 16,472

Non-current liabilities

Loans and borrowings 28 20,514 14,728 7,609

Obligations under finance leases 29 275 413 520

Retirement benefit obligations 30 324 213 186

Provisions 31 121 73 82

Deferred tax liabilities 22 3,850 2,896 2,689

25,084 18,323 11,086

Current liabilities

Loans and borrowings 28 25,377 15,261 9,919

Obligations under finance leases 29 192 234 102

Trade payables 32 4,806 2,501 4,729

Advances received and other payables 33 8,776 10,813 6,052

Amounts due to customers under construction contracts 24 24,202 14,476 8,041

Income tax payable 888 21 43

Other taxes payable 25 1,538 570 554

Provisions 31 1,282 512 316

67,061 44,388 29,756

TOTAL LIABILITIES 92,145 62,711 40,842

TOTAL EQUITY AND LIABILITIES 122,332 82,820 57,314

6


CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


Equity attributable to the shareholder of the Company

Notes

Share

capital

Additional

paid-in

capital

Oboronprom

shares owned

by the Group

Retained

earnings Total

Non-

controlling

interests Total

Balance at 1 January 2008 1 3,041 ‒ 9,157 12,199 5,259 17,458

Loss and total comprehensive loss for the year ‒ ‒ ‒ (1,644) (1,644) (290) (1,934)

Dividends 27 ‒ ‒ ‒ (79) (79) (31) (110)

Dividends declared by Rostvertol and paid to OAO OPK Oboronprom 18 ‒ ‒ ‒ (26) (26) ‒ (26)

Assets contributed to the Group’s subsidiary by OAO OPK Oboronprom 1 ‒ 220 ‒ ‒ 220 ‒ 220

Acquisition of subsidiaries:

OAO Reduktor-PM 7 ‒ 831 ‒ ‒ 831 196 1,027

OAO Novosibirsk Aircraft Repair Plant 7 ‒ ‒ ‒ ‒ ‒ 19 19

Increase of ownership in OAO Arsenyev Aviation Company PROGRESS 7 ‒ ‒ ‒ (143) (143) (39) (182)

Balance at 31 December 2008 1 4,092 ‒ 7,265 11,358 5,114 16,472

Profit and total comprehensive income for the year ‒ ‒ ‒ 2,123 2,123 1,761 3,884

Dividends 27 ‒ ‒ ‒ (158) (158) (50) (208)

Dividends declared by Rostvertol and paid to OAO OPK Oboronprom 18 (26) (26) ‒ (26)

Increase of ownership in OAO Arsenyev Aviation Company PROGRESS 7 ‒ ‒ ‒ (13) (13) ‒ (13)

Balance at 31 December 2009 1 4,092 ‒ 9,191 13,284 6,825 20,109

Profit and total comprehensive income for the year ‒ ‒ ‒ 3,965 3,965 1,876 5,841

Issuance of additional shares in exchange for assets contributed by

OAO OPK Oboronprom 1 94 2,723 ‒ ‒ 2,817 ‒ 2,817

Dividends 27 ‒ ‒ ‒ (453) (453) (217) (670)

Dividends declared by Rostvertol and paid to OAO OPK Oboronprom 18 ‒ ‒ ‒ (291) (291) ‒ (291)

Assets contributed to the Group’s subsidiaries by OAO OPK Oboronprom: 1

OAO Helicopter Service Company ‒ 105 ‒ ‒ 105 ‒ 105

OAO Kumertau Aviation Production Enterprise ‒ 153 ‒ ‒ 153 ‒ 153

OAO Kamov ‒ 136 ‒ ‒ 136 ‒ 136

Acquisition of OAO Rostvertol 7 ‒ ‒ (231) ‒ (231) 1,927 1,696

Decrease of ownership in subsidiaries:

OAO Kazan Helicopter Plant 7 ‒ ‒ ‒ (149) (149) 272 123

OAO Arsenyev Aviation Company PROGRESS 7 ‒ ‒ ‒ 202 202 14 216

Increase of ownership in subsidiaries:

OAO Kazan Helicopter Plant 7 ‒ 765 ‒ 251 1,016 (1,016) ‒

OAO Arsenyev Aviation Company PROGRESS 7 ‒ 440 ‒ (390) 50 (50) ‒

OAO MIL Moscow Helicopter Plant 7 ‒ ‒ ‒ (11) (11) (37) (48)

Balance at 31 December 2010 95 8,414 (231) 12,315 20,593 9,594 30,187

7


CONSOLIDATED STATEMENTS OF CASH FLOWS


Year ended

31/12/2010

Year ended

31/12/2009

Year ended

31/12/2008

Operating activities

Profit/(loss) for the year 5,841 3,884 (1,934) Adjustments for:

Income tax expense/(benefit) 1,501 1,152 (907) Finance income and costs, net 3,124 1,906 1,546 Depreciation and amortisation 1,767 1,728 1,538 (Reversal of impairment of)/impairment of property, plant and equipment (163) 628 1,608 Foreign exchange loss/(gain), net 394 (135) 1,147 Impairment of accounts receivable 162 210 212 Change in allowance for obsolete inventories 607 9 265 Loss on disposal of property, plant and equipment 182 97 120 Gain on revaluation of investments in associates due to business combination (588) ‒ ‒ Excess of the Group's share in fair value of net assets acquired over the costs of acquisition (277) ‒ ‒ Share of results of associates (175) (143) 49 Other (6) ‒ ‒

12,369 9,336 3,644 Movements in working capital:

Increase in inventories (5,105) (2,680) (1,515) Increase in amounts due from customers under construction contracts (340) (419) (38) Increase in trade receivables (2,444) (65) (3,801) Increase in prepayments and other receivables (3,484) (13,302) (706) Increase in other taxes receivables (2,662) (576) (490) Increase/(decrease) in trade payables 1,704 (2,852) 2,162 (Decrease)/increase in advances received and other payables (4,188) 4,761 3,544 Increase in amounts due to customers under construction contracts 6,063 6,435 2,961 Increase in provisions and retirement benefit obligations 624 214 114 Increase in other taxes payable 870 16 173

Cash generated from operations 3,407 868 6,048 Interest paid (3,934) (2,763) (1,640)

Government grants ‒ compensation of finance costs 520 592 21 Income tax paid (591) (1,047) (442)

Net cash (used in)/generated by operating activities (598) (2,350) 3,987

Investing activities

Purchases of property, plant and equipment (5,521) (2,977) (1,205) Proceeds from disposal of property, plant and equipment 932 88 64 Purchases of intangible assets (1,742) (1,105) (656) Government grants ‒ compensation of capitalised development costs 391 371 577 Loans provided (1) (230) (813) Loans repaid 43 873 141 Purchases of other financial assets (347) (3,585) (1,106) Proceeds from sale of other financial assets 3,713 782 764 Acquisitions of subsidiaries, net of cash acquired (2,241) (724) (429) Contribution to share capital of an associate ‒ ‒ (245) Proceeds from disposal of an associate 476 ‒ ‒ Interest received 350 374 145 Other ‒ 9 9

Net cash used in investing activities (3,947) (6,124) (2,754)

Financing activities

Proceeds from loans and borrowings 42,485 35,717 19,384 Repayments of loans and borrowings (31,739) (23,851) (17,768) Principal repayments of obligations under finance leases (374) (160) (24) Contribution to share capitals of the Company and Group’s subsidiaries

by OAO OPK Oboronprom 3,444 ‒ ‒ Dividends paid by the Company and Group’s subsidiaries to OAO OPK Oboronprom (453) (158) (79) Dividends paid to non-controlling shareholders (187) (50) (31)

Net cash generated by financing activities 13,176 11,498 1,482

Net increase in cash and cash equivalents 8,631 3,024 2,715 Effect of exchange rate changes on balance of cash held in foreign currencies (86) 102 128 Cash and cash equivalents at beginning of the year 9,412 6,286 3,443

Cash and cash equivalents at end of the year 17,957 9,412 6,286


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in millions of Russian Roubles, unless otherwise stated)

8

1. GENERAL INFORMATION

Open Joint Stock Company Russian Helicopters (the “Company”) was established on 9 January 2007 as a wholly-

owned subsidiary of OAO OPK Oboronprom (“Oboronprom”), a Russian state-controlled aerospace holding

company. The Company was founded with the aim to fully consolidate, manage and commercialise the Russian

helicopter industry, which had remained fragmented since the fall of the Soviet Union. In December 2010,

the Company became the legal holding company of all entities as detailed below.

On 8 December 2010, Oboronprom legally completed the formation of the Russian Helicopters Group

(the “Group”) by:

contributing a number of ownership interests in the Group’s subsidiaries into the Group as detailed in the

table below, in exchange for an additional issuance of 93,994 of the Company’s shares (refer to note 27)

as presented in the table below;

assigning rights to the Company for advances in the amounts of RUB 153 million and RUB 136 million,

which was paid by Oboronprom in cash as a contribution for additional shares to be issued by OAO

Kumertau Aviation Production Enterprise and OAO Kamov. As at 31 December 2010, the additional

issuances of shares were not duly authorised and registered. Such contributions have been reflected as a

contribution of assets within additional paid-in capital; and

cash contribution to the Company’s share capital in the amount of RUB 2,817 million, net of the amount

of RUB 233 million to be paid by the Company for 15.4% of OAO Reduktor-PM’s shares.

The Group is the producer of civil and military helicopters and military missile systems and includes engineering

centres and production plants which produce the full spectrum of helicopters under the Mi, Ka and Ansat brands.

The Group products are sold in the Russian Federation and internationally. The most significant production,

engineering and service operations of the Group are incorporated within the Russian Federation.

The head office of the Company is located at: 2a Sokolnichesky Val Str., Moscow, 107113, Russian Federation.

For the purpose of these consolidated financial statements, all prior period financial information has been presented on

a common control basis, as if the Russian Helicopters Group formation was effective from 1 January 2007, the date of

transition to International Financial Reporting Standards (“IFRS”). Further details in respect of the consolidation

process undertaken by the Group are disclosed within note 2 under Basis of Consolidation and Group Formation.

The entities included in the Group are as follows:

Effective ownership interest and voting rights, %

31/12/2010 31/12/2009 31/12/2008

Entity and its location Nature of business (1) (2) (1) (2) (1) (2)

Group subsidiaries OAO Kazan Helicopter Plant

(Kazan)1,5 Producer of helicopters:

Mi-8, Mi-17, Ansat 65.9 66.1 57.5 54.7 57.5 54.7

OAO Rostvertol (Rostov-on-Don)2 Producer of helicopters:

Mi-24, Mi-26, Mi-28, Mi-35 75.1 75.1 associate associate OAO Ulan-Ude Aviation Plant (Ulan-Ude) Producer of helicopters: Mi-8, Mi-17 75.1 75.1 75.1 75.1 75.1 75.1 OAO Kumertau Aviation Production

Enterprise (Kumertau) Producer of helicopters:

Ka-28, Ka-31, Ka-32, Ka-226 100.0 100.0 100.0 100.0 100.0 100.0 OAO Arsenyev Aviation Company

PROGRESS (Arseniev)3 Producer of helicopters: Ka-50, Ka-52,

producer of military missile systems 75.0 75.0 57.0 50.1 56.5 50.1 OAO MIL Moscow Helicopter Plant

(Moscow) 6 Engineering centre

(for helicopters brand Mi) 74.4 80.7 72.4 80.7 72.4 80.7

OAO KAMOV (Moscow) Engineering centre

(for helicopters brand Ka) 98.5 98.5 98.5 98.5 98.5 98.5 OAO Stupino Machine Production

Plant (Stupino) Producer of helicopter allied products

(for helicopter brands Mi and Ka) 61.2 80.5 61.2 80.5 61.2 80.5

OAO Reduktor-PM (Perm) Producer of helicopter allied products

(for helicopter brands Mi and Ansat) 80.8 80.8 80.8 80.8 80.8 80.8 ZAO Ulan-Ude Blade Plant

(Ulan-Ude) Producer of helicopter allied products

(for helicopter brand Mi) 75.1 75.1 75.1 75.1 ‒ ‒ OAO Helicopter Innovation Industrial

Company (Ulan-Ude) Producer of helicopter allied products

(for helicopter brand Mi) 75.1 75.1 75.1 75.1 ‒ ‒ OAO Novosibirsk Aircraft Repair

Plant (Novosibirsk) Helicopter repair and maintenance

services (for helicopter brand Mi) 95.1 95.1 95.1 95.1 95.1 95.1 OAO Helicopter Service Company

(Moscow) Supplier of materials 100.0 100.0 100.0 100.0 100.0 100.0




9

Effective ownership interest and voting rights, %

31/12/2010 31/12/2009 31/12/2008

Entity and its location Nature of business (1) (2) (1) (2) (1) (2)

Group associates

OAO Rostvertol (Rostov-on-Don)2 Producer of helicopters:

Mi-24, Mi-26, Mi-28, Mi-35 subsidiary 22.8 22.8 22.8 22.8 ZAO Activnye Operatsyi (Moscow)3 Holding company 49.0 49.0 49.0 49.0 49.0 49.0 OAO AKB Donkombank (Rostov-on-Don)4 Commercial bank 30.3 29.7 ‒ ‒ ‒ ‒ OAO AKB Zarechye (Kazan) Commercial bank 25.4 25.5 25.4 25.5 25.4 25.5 OOO TFK (Kazan)5 Holding company ‒ ‒ 48.2 48.2 48.2 48.2

_________________________ (1) Effective ownership interest (2) Voting rights 1 On 8 September 2010, OAO OPK Oboronprom acquired an additional 11.4% interest in OAO Kazan Helicopter Plant (refer to notes 7

and 18) from OAO TFK, a former associate of the Group (refer to note 18). Prior to this acquisition the Group had decreased its effective ownership interest by 3.0% as a result of OAO Kazan Helicopter Plant’s disposal of 48.2% interest in OOO TFK, having reciprocal

interest in OAO Kazan Helicopter Plant. As a result of the transactions the effective ownership in the subsidiary increased to 65.9%. 2 On 10 and 11 December 2010, the Company acquired an additional 52.3% interest in OAO Rostvertol and increased ownership to 75.1%.

Before that date OAO Rostvertol was an associate of the Group. 3 On 22 March 2010, OAO OPK Oboronprom acquired an additional 25.0% interest in OAO Arsenyev Aviation Company PROGRESS (refer to note 7) from ZAO Activnye Operatsyi, an associate of the Group (refer to note 18). As a result of transaction the Group’s effective

ownership in OAO Arsenyev Aviation Company PROGRESS increased to 75.0%. 4 As a result of acquiring the controlling stake in OAO Rostvertol in December 2010, the Group obtained a significant influence over OAO AKB Donkombank, which is an associate of Rostvertol (refer to note 18). 5 On 30 July 2010, OAO Kazan Helicopter Plant disposed of its 48.2% interest in OOO TFK (refer to notes 7 and 18). 6 On 27 February 2010, OAO Rostvertol, which was an associate of the Group at the time, acquired additional 2.6% shares of OAO MIL Moscow Helicopter Plant. Accordingly, the Group’s effective ownership was initially increased by 0.6%. On 11 December 2010, the Group’s effective

ownership increased further to 74.4%, as a result of the Group acquisition of the controlling interest in OAO Rostvertol (refer to note 7).

In 2008, the Russian Federation state agency transferred land with an estimated carrying value of RUB 220

million into the share capital of OAO Kumertau Aviation Production Enterprise. This contribution has been

reflected as a contribution of assets within additional paid-in capital.

In 2010, Oboronprom contributed RUB 153 million, RUB 136 million and RUB 105 million in cash as a

contribution for additional shares issued by OAO Kumertau Aviation Production Enterprise, OAO Kamov

and OAO Helicopter Service Company. As at 31 December 2010, such contributions have been reflected

as a contribution of assets within additional paid-in capital.

2. BASIS OF CONSOLIDATION AND GROUP FORMATION

As detailed in note 1, Oboronprom is a corporation controlled by the Government of the Russian Federation.

Oboronprom in turn, owned 100% of the share capital of the Company since the date of incorporation.

On 8 December 2010, Oboronprom contributed the possession of various entities in which it previously held

ownership interests into the Group. The Group accounted for this contribution as a transaction between entities

under common control, meaning that all transfers were done at the transferor cost.

For the purpose of these consolidated financial statements, all prior period information has been accounted for

as if the reorganisation was effective from the date of incorporation of the Company. This reflects the intent of

Oboronprom to eventually reorganise its own group structure and insert certain of its ownership interests into a

new group which specialises in producing of helicopters and related products. In this instance, Oboronprom’s

ownership interests have been presented as if they have always been held by the Group.

Following the above, the consolidated financial information for the periods up to the formal date of the Group

formation has been prepared based on the following assumptions:

the assets, liabilities and the profit or loss of the entities comprising the Group have been aggregated for

all periods presented, based on when Oboronprom and the Government of the Russian Federation

obtained their ownership interests in the entities;

all transactions and balances between Group entities have been eliminated;

transactions and balances with entities controlled by Oboronprom or the Government of the Russian

Federation that are not within the Group are classified as related party transactions;




10

the share capital presented represents that of the Company. The share capital of each of the remaining

Group entities has been combined and is included within retained earnings of the Group. The Group

retained earnings balance therefore represents the historical retained earnings of the entities comprising the

Group, and the historical value of the net assets contributed to Oboronprom by the Russian Federation state.

All other items within equity have been aggregated in a manner consistent with the assets and liabilities;

the non-controlling interests share, which has been increased and reduced throughout the periods

presented as a result of a number of further direct and indirect acquisitions and disposals by the Group

and Oboronprom; and

Oboronprom made certain acquisitions during the periods presented in these consolidated financial

statements, the acquisitions of which have been pushed down as if they occurred within the Group. These

are detailed in note 7 and have been recorded in accordance with the accounting policies provided in note 4.

3. ADOPTION OF NEW AND REVISED STANDARDS AND INTERPRETATIONS

Standards and Interpretations effective in the current year

In the current year, the Group adopted all new IFRSs and Interpretations issued by the International Financial

Reporting Committee (“IFRIC”) that are mandatory for adoption in the annual periods beginning on of after

1 January 2010.

The principal changes arising from the adoption of these Standards and Interpretations are as follows:

IFRS 3 Business Combinations (revised in 2008 and effective 1 July 2009)

IFRS 3 (2008) has been prospectively applied in the current year to business combinations for which

the acquisition date is on or after 1 January 2010 in accordance with relevant transitional provision.

Its adoption has affected the accounting for business combinations in the current year.

The impact of the application of IFRS 3 (2008) is as follows:

IFRS 3 (2008) allows a choice on a transaction-by-transaction basis for the method of measurement of non-

controlling interests at the date of acquisition (previously referred to as Minority Interests), to be done either

at fair value or at the non-controlling interests’ share of recognised identifiable net assets of the acquiree.

In the current year, in accounting for the acquisition of OAO Rostvertol, the Group has elected to measure

the non-controlling interests at its acquisition date fair value determined by an independent and qualified

appraiser. Consequently, the excess of the Group’s share in fair value of net assets acquired recognised

in profit or loss in respect of that acquisition reflects the impact of the difference between the fair value

of the non-controlling interests and their share of the recognised amount of the identifiable net assets

of the acquiree.

IFRS 3 (2008) changes the recognition and subsequent accounting requirements for contingent consideration.

Previously, contingent consideration was recognised at the acquisition date only if payment of the contingent

consideration was probable and it could be measured reliably; and subsequent adjustments to the contingent

consideration were always made against the cost of the acquisition. Under revised Standard, contingent

consideration is measured at fair value at the date of acquisition; subsequent adjustments to the consideration

are recognised against the cost of the acquisition only to the extent that they arise from new information

obtained within the measurement period (a maximum of twelve months from the acquisition date) about

the fair value at the date of acquisition. All other subsequent adjustments to contingent consideration are

recognised in profit or loss. This has had no impact on the Group in the reporting period.

IFRS 3 (2008) requires the recognition of a settlement gain or loss when the business combination in effect

settles a pre-existing relationship between the Group and the acquiree. This has had no impact on the Group

in the reporting period.

IFRS 3 (2008) requires acquisition-related costs to be accounted for separately from the business

combination, generally leading to those costs being recognised as an expense in profit or loss as incurred,

whereas previously they were accounted for as part of the cost of the acquisition. This has had no impact

on the Group in the reporting period.




11

In the current year, the above changes in accounting policies have affected the accounting for the acquisition of

OAO Rostvertol (refer to note 7) as follows:

Consolidated statement of changes in equity 31/12/2010

Gain on revaluation of investment in associate due to business combination (recognised in profit or loss) 588 Difference between the excess of the Group's share in the fair value of net assets acquired over the costs of

acquisition determined under IFRS 3 (2008) and IFRS 3 (2004) (recognised in profit or loss) (255)

Revaluation surplus (which is not recognised under IFRS 3 (2008)) (469)

Decrease in equity attributable to the shareholders of the Company (under IFRS 3 (2008)) (136) Difference in non-controlling interests (proportion of net assets acquired under IFRS 3 (2004) vs.

fair value under IFRS 3(2008)) 136

Effect on total capital and reserves (under IFRS 3 (2008)) ‒

Consolidated statement of comprehensive income/(loss)

Year ended

31/12/2010

Gain on revaluation of investment in associate due to business combination (reflected in profit or loss) 588 Difference between excess of the Group's share in fair value of net assets acquired over the costs of

acquisition determined under IFRS 3 (2008) and IFRS 3 (2004) (255)

Increase in profit or loss for the year as a result of application of IFRS 3 (2008) 333

Amendments to IAS 7 Statement of Cash Flow (effective from 1 January 2010)

The amendments to IAS 7 specify that only expenditure that results in a recognised asset in the statement

of financial position can be classified as an investing activity in the statement of cash flows. The application

of these amendments has resulted in a change of presentation of the cash outflows for the acquisition of non-

controlling interests.

During the years ended 31 December 2010, 2009 and 2008 all increases of ownership were done by Oboronprom

and reflected as Contribution in share capital of the Company and Group’s subsidiaries from Oboronprom within

financing activities.

IAS 27 Consolidated and Separate Financial Statements (revised in 2008 and effective 1 July 2009)

The application of IAS 27 (2008) has not resulted in any changes in the Group’s accounting policy for changes

in ownership interest in subsidiaries without the loss or obtaining of control. Under IAS 27 (2008) and Group’s

accounting policies, all changes in ownership (increases and decreases without the loss or obtaining of control)

are dealt within equity, with no impact on goodwill or profit or loss.

When control over a subsidiary is lost as a result of a transaction, event or other circumstances, the revised Standard

requires the Group to derecognise all assets, liabilities and non-controlling interests at their carrying amount and

to recognise the fair value of the consideration received. Any retained interest in the former subsidiary is recognised

at its fair value at the date control is lost. The resulting difference is recognised as a gain or loss in profit or loss.

The revision of IAS 27 also affects the accounting for non-controlling interests in the Group’s subsidiaries.

Under the revised Standard total comprehensive income is attributable to the owners of the Company and

to non-controlling interests even if this results in the non-controlling interests having a deficit balance.

These changes in accounting policies have been applied prospectively from 1 January 2010 in accordance with

relevant transitional provisions.

The adoption of the revised Standard has resulted in the recognition of accumulated deficit of RUB 104 million as

at 31 December 2010 within non-controlling interests, which would not have been recognised under the previous

version of the Standard. The adjustment was calculated as follows:

OAO Arsenyev

Aviation Company

PROGRESS OAO KAMOV

Accumulated deficit as at 31 December 2010 (317) (1,683) Non-controlling interests, % 25.0 1.5

Accumulated deficit allocated to non-controlling interests (79) (25)




12

IAS 28 Investments in Associates (revised in 2008 and effective 1 July 2009)

The principle adopted under IFRS 3 (2008) and IAS 27 (2008) (see above) that a loss of control or obtaining

control is recognised as a disposal and re-acquisition of respective interest at fair value is extended by

consequential amendments to IAS 28. Therefore, when the Group obtained control over OAO Rostvertol that

was previously accounted for as an associate, the Group measures the investment in its associate at fair value at

the date of business combination, with a difference between carrying value and fair value at that date recognised

in profit or loss. In the case when a significant influence over an associate is lost, the investor measures any

investment retained in the former associate at fair value, with any gain or loss recognised in profit or loss.

These changes in accounting policies have affected the accounting for the acquisition of the controlling interest

in OAO Rostvertol (refer to note 7 and 18) in the current year. In terms of OAO Rostvertol, the difference of

RUB 588 million between the carrying amount of the Group’s investment in OAO Rostvertol and its fair value

has been presented in the consolidated statement of comprehensive income/(loss) as Gain on revaluation of

investment in associate due to business combination.

The adoption of revisions and amendments to the following Standards and Interpretations detailed below

did not have any impact on the accounting policies, financial position or performance of the Group:

Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards

The amendments provide two exemptions when adopting IFRSs for the first time regarding to oil and gas

assets, and the determination as to whether an arrangement contains a lease.

Amendments to IFRS 2 Share-based Payments

The amendments clarify the scope of IFRS 2, as well as the accounting for the group cash-settled payment

transactions in the separate (or individual) financial statements of an entity received the goods and services

when another group entity or shareholder has the obligation to settle the award.

Amendments to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

The amendments clarify that the disclosure requirements in IFRSs other than IFRS 5 do not apply to non-

current assets (or disposal groups) classified as held for sale or discontinued operations unless those IFRSs

require: (i) specific disclosures in respect of non-current assets (or disposal groups) classified as held for sale

or discontinued operations, or (ii) disclosures about measurement requirement of IFRS 5 and the disclosures

are not already provided in the consolidated financial statements.

The amendments also clarify that all the assets and liabilities of a subsidiary should be classified as held

for sale when the Group is committed to a sale plan involving loss of control of that subsidiary, regardless

of whether the Group will retain a non-controlling interests in the subsidiary after that sale.

Amendments to IAS 1 Presentation of Financial Statements

The amendments clarify that the potential settlement of liability by the issue of equity is not relevant to its

classification as current and non-current.

Amendments to IAS 39 Financial Instruments: Recognition and Measurement

The amendments provide clarification on two aspects of hedge accounting: identifying inflation as a hedged

risk or portion, and hedging with options.

IFRIC 17 Distributions of Non-cash Assets to Owners

The Interpretation provides guidance on the appropriate accounting treatment when an entity distributes assets

other than cash as dividends to its shareholders.

IFRIC 18 Transfers of Assets from Customers

The Interpretation addresses the accounting by recipients for transfers of property, plant and equipment from

customers and concludes that when the item of property, plant and equipment transferred meets the definition

of an asset from the perspective of the recipient, the recipient should recognise the asset at fair value on

the date of the transfer, with the credit being recognised as revenue in accordance with IAS 18 Revenue.




13

Standards and Interpretations in issue but not yet effective

At the date of authorisation of these consolidated financial statements, certain new and revised Standards and

Interpretations have been issued but are not yet effective. The impact of adoption of these Standards and

Interpretations in the preparation of the Group financial statements in future periods is currently being assessed

by the management. Management anticipates that the adoption of certain Standards and Interpretation, as presented

below, may have significant impact on the consolidated financial statements of the Group in the following periods.

IFRS 9 Financial Instruments (issued in November 2010 and effective 1 January 2013)

New Standard introduces new requirements for the classification and measurement of financial assets and

liabilities and their derecognition. Specifically:

IFRS 9 requires all recognised financial assets that are within the scope of IAS 39 Financial Instruments:

Recognition and Measurement to be subsequently measured at amortised cost or fair value. Specifically,

debt investments that are held within a business model whose objective is to collect the contractual cash

flows, and that have contractual cash flows that are solely payments of principal and interest outstanding

are generally measured at amortised cost at the end of subsequent accounting periods. All other debt

investments and equity investments are measured at their fair value at the end of subsequent accounting

periods. At as 31 December 2010, certain Group equity investments are accounted for at cost, a method

that is not allowed under new IFRS 9. Management anticipate that upon adoption of IFRS 9 there will be

a significant increase in the volume of financial information used in and valuation technique applied in

regard of the fair value analysis of such investments. However, it is not practicable to provide reasonable

estimates of that effect until a detailed review has been completed.

The most significant effect of IFRS 9 regarding the classification and measurement of financial liabilities

relates to the accounting for changes in fair value of a financial liability designated as at fair value

through profit or loss attributable to changes in the credit risk of that liability. Specifically, under IFRS,

for a financial liability that is designated at fair value through profit or loss, the amount of the change

in the fair value of the financial liability that is attributable to changes in the credit risk of that liability

is recognised in other comprehensive income, unless the recognition of the effects of changes in the

liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch

in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently

reclassified to profit or loss. Previously, under IAS 39, the entire amount of change in the fair value of

the financial liability designated as at fair value through profit or loss was recognised in profit or loss.

IAS 24 Related Party Disclosures (revised in 2009 and effective 1 January 2011)

The revised Standard modifies the definition of a related party and simplifies disclosures for government-

related entities. Since the Group is ultimately controlled by the Government of the Russian Federation the

disclosure exemptions introduced in IAS 24 will be applicable for the Group consolidated financial statements

in the year ended 31 December 2011, when the revised Standard is effective.

Amendments to IFRIC 14 IAS 19 The Limit on a Defined Benefit Assets, Minimum Funding Requirements and

Their Interaction (revised in 2009 and effective 1 January 2011)

The amendment provides guidance regarding the assessment of the recoverable amount of a net pension asset.

The amendment permits an entity to treat the prepayment of a minimum funding requirement as an asset.

To date, the Group does not have funded or partially funded defined benefit plans. However, if into the future

the Group decided to enter into transactions which fall under the scope of this amendment, then IFRIC 14 will

affect the required accounting.

4. SIGNIFICANT ACCOUNTING POLICIES

Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting

Standards (“IFRS”) as adopted by the International Accounting Standards Board.

The entities of the Group maintain their accounting records in Russian Rouble (“RUB”) in accordance with

the laws, accounting and reporting regulations of the Russian Federation, where the majority of the Group

entities are incorporated.




14

Basis of presentation

The consolidated financial statements have been prepared on the historical cost basis except for:

mark-to-market valuation of certain classes of financial assets in accordance with IAS 39 Financial

Instruments: Recognition and Measurement;

fair value of the Group’s property, plant and equipment determined as at 1 January 2007, the date of

transition to IFRS, in accordance with exemption of IFRS 1 First-time Adoption of International

Financial Reporting Standards. The fair value was based upon a valuation performed by an independent

appraiser. The valuation conformed to International Valuation Standards. Fair value is defined as the

amount for which an asset could be exchanged between knowledgeable willing parties in an arm’s length

transaction. The fair value of marketable assets is normally determined as their market value. However,

as most of the Group’s property, plant and equipment are of a specialized nature the valuation was based

on replacement cost. That replacement cost was then adjusted for accumulated depreciation, including

physical depreciation and functional and economic obsolescence, to arrive at the fair value of the assets.

Basis of consolidation

An entity is consolidated when controlled by the Group. Control is achieved where the Company has the power

to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Income and expenses of subsidiaries acquired or disposed of during the year are included in the consolidated statement

of comprehensive income/(loss) from the effective date of acquisition and up to the effective date of disposal,

as appropriate. Total comprehensive income or loss of subsidiaries is attributed to the owners of the Company

and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting

policies into line with those used by the Group. All intra-group transactions, balances, income and expenses are

eliminated in full on consolidation.

Business combinations with third parties

Acquisitions of subsidiaries and businesses from third parties are accounted for using the acquisition method.

The consideration transferred in each business combination is measured at aggregate acquisition-date fair value

of the assets given, liabilities incurred or assumed and equity instruments issued by the Group, if any, in

exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred.

When the consideration transferred by the Group in a business combination includes any assets or liabilities

resulting from a contingent consideration arrangement, they are measured at the acquisition-date fair value and

included with the consideration transferred in a business combination. Subsequent changes in the fair value of

the contingent consideration are adjusted against the cost of the acquisition when they are qualify as

measurement period adjustments arising from additional information obtained during the measurement period,

which cannot exceed twelve months from the acquisition date, about facts and circumstances that existed at the

acquisition date. Contingent consideration classified as equity is not measured at subsequent reporting dates

and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or

liability is measured at subsequent reporting dates in accordance with the relevant IFRSs.

When a business combination is achieved in stages, the Group’s previously held equity interest in the acquiree

is measured to fair value at the acquisition date (i.e. the date when the Group obtains control) and the resulting

gain or loss, if any, is recognised in profit or loss. Amounts arising from the interests in the acquiree prior to

the acquisition date that have previously been recognised in other comprehensive income are reclassified to

profit or loss where such treatment would be appropriate if that interest were disposed of.

At the acquisition date, the acquiree’s identifiable assets acquired and the liabilities, meeting the recognition

criteria of IFRS 3 (2008), are recognised at their fair value, except that:

deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised

and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits, respectively;

liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-

based payment arrangements of the Group entered into to replace share-based payment arrangements of

the acquiree are measured in accordance with IFRS 2 Share-based Payment at the acquisition date; and




15

assets (or disposal group) that are classified as held for sale in accordance with IFRS 5 Non-current

Assets Held for Sale and Discontinued Operations are measured in accordance with IFRS 5.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which

the combination occurs, the Group reports provisional amounts for the items for which the accounting is

incomplete. Those provisional amounts are adjusted during the measurement period or additional assets

or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed

at the acquisition date that, if known, would have affected the amounts recognised at that date.

Goodwill is measured as the excess of the sum of consideration transferred, the amount of any non-controlling

interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree

(if any) over the net of the acquisition-date amount of identifiable assets acquired and the liabilities assumed.

If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities

assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in

the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess

is recognised immediately in profit or loss as bargain purchase gain.

Non-controlling interests, identified separately from the Group’s equity, may be initially measured either:

(i) at fair value; or (ii) at the non-controlling interests’ share of the fair value of the acquiree’s identifiable

net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Subsequent to

acquisition, the non-controlling interests carrying amount is the amount at initial recognition, plus the non-

controlling interests’ share of changes in equity. Total comprehensive income is attributable to non-controlling

interests even if this results in the non-controlling interests having a deficit balance.

Business combinations with third parties that took place prior to 1 January 2010 were accounted for in

accordance with IFRS 3 (2004) Business Combination.

Common control transactions

The assets (including goodwill, if any) and liabilities of businesses acquired from entities under common control

are recorded at the carrying value recognised by the transferor. The difference, if any, between the carrying value

of the net assets acquired and the consideration paid by the Group is accounted for as an adjustment to equity. When

the transferor contributes a subsidiary to the Group, the original cost paid by the transferor is recorded as additional

paid-in capital, less par value of the shares issued in exchange for assets contributed. The net assets of the subsidiary

and its results are recognised from the date on which control of the subsidiary was obtained by the transferor.

The investments in associates acquired from the entities under common control are recorded at the carrying

value recognised by the transferor. The difference, if any, between carrying value of investments in associates

and the consideration paid by the Group, the original cost paid by the transferor is recorded as additional paid-

in capital. The investment in associate and their results are recognised in the consolidated financial statements

from the date on which significant influence of the associate was obtained by the transferor.

Changes in the Group’s ownership interests in existing subsidiaries

Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control

over the subsidiaries are accounted for as equity transactions. The carrying amount of the Group’s interests

and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries.

Any difference between the amount by which the non-controlling interests are adjusted and the fair value of

the consideration paid or received is recognised directly in equity and attributed to owners of the Company.

When the Group loses control over a subsidiary, the profit or loss on disposal is calculated as the difference

between: (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest,

and (ii) the previous carrying amount of the assets (including goodwill), less liabilities of the subsidiary and

any non-controlling interests. Amounts previously recognised in other comprehensive income in relation to

the subsidiary are accounted for (i.e. reclassified to profit or loss or transferred directly to retained earnings)

in the same manner as would be required if the relevant assets or liabilities are disposed of. The fair value of any

investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial

recognition for subsequent accounting under IAS 39 Financial Instruments: Recognition and Measurement or,

when applicable, the cost on initial recognition of an investment in an associate or a jointly controlled entity.




16

Goodwill

Goodwill arising on an acquisition of a business as described in paragraphs Business combinations with third

parties and Common control transactions above is carried at cost as established at the acquisition date less

accumulated impairment loss, if any.

For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units

(or groups of cash-generating units) that are expected to benefit from the synergies of the combination.

A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more

frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-

generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying

amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on

the carrying amount of each asset in the unit. Impairment losses, if any, for goodwill are recognised

directly in profit or loss and are not reversed in subsequent periods.

On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or

loss on disposal.

Investments in associates

An associate is an entity over which the Group has significant influence, and that is neither a subsidiary nor an

interest in a joint venture. Significant influence is the power to participate in the financial and operating policy

decisions of the investee, but is not control or joint control over those policies.

The results and assets, and liabilities of associates are incorporated in these consolidated financial statements using

the equity method of accounting, except when the investment is classified as held for sale and accounted for in

accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method,

investments in associates are carried in the consolidated statement of financial position at cost as adjusted for post-

acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of

individual investments. Losses of an associate in excess of the Group’s interest in that associate (which includes any

long-term interests that, in substance, form part of the Group’s net investment in the associate) are recognised only to

the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.

Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets,

liabilities and contingent liabilities of the associate at the date of acquisition is recognised as goodwill.

The goodwill is included within the carrying amount of the investment and is assessed for impairment as part

of that investment. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and

contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.

The requirements of IAS 39 are applied to determine whether it is necessary to recognise any impairment loss with

respect to the Group’s investment in an associate. When necessary, the entire carrying amount of the investment

(including attributable goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single

asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying

amount. Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that

impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment

subsequently increased.

Where a Group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of

the Group’s interest in the relevant associate.

Non-current assets held for sale

Non-current assets and disposal groups are classified as current assets held for sale if their carrying amount will

be recovered principally through a sale transaction rather than through continuing use. This condition is regarded

as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its

present condition. Management must be committed to the sale, which should be expected to qualify for recognition

as a completed sale within one year from the date of classification. Non-current assets (or disposal group) classified

as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell.




17

Foreign currency transactions

Each entity in the Group determines its own functional currency and items included in the financial statements of

each entity are measured in that functional currency. The functional currency of the Company and its subsidiaries

registered and operating on the territory of the Russian Federation is the Russian Rouble (“RUB”). Transactions in

currencies other than the functional currency (“foreign currencies”) are recorded at the exchange rates prevailing at

the dates of the transactions. At each reporting date monetary assets and liabilities denominated in foreign currencies

are translated at the exchange rates prevailing at that date. Non-monetary items carried at historical cost are translated

at the exchange rate prevailing on the date of transaction. Non-monetary items carried at fair value are translated at

the exchange rate prevailing on the date on which the most recent fair value was determined. Exchange differences

arising from changes in exchange rates are recognised in the statement of comprehensive income/(loss).

Exchange rates for the currencies in which the Group transacts were as follows:

31/12/2010 31/12/2009 31/12/2008

Closing exchange rates at the year end – RUB

1 U.S. Dollar (“USD”) 30.48 30.24 29.38

1 Euro 40.33 43.39 41.44

Average exchange rates for the year ended – RUB

1 USD 30.37 31.72 24.86

1 Euro 40.30 44.13 36.43

Revenue recognition

The Group derives revenue from the sale of manufactured helicopters, helicopter repair and maintenance services,

research and development works and manufacturing of other products, such as helicopter spare parts and military

missile systems. Revenue is recognised to the extent that it is probable that the economic benefit arising from

the ordinary activities of the Group will flow to the Group, it can be measured reliably, and that the recognition

criteria as stated below have been met. Revenue is measured at the fair value of the consideration received

or receivable after deducting any discounts, rebates and value added tax.

Revenue from helicopter manufacturing

The Group conducts its helicopter manufacturing business under construction contracts with customers.

Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by

reference to the stage of completion of the contract activity at the end of the reporting period, measured based on

the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs.

Variations in contract work, claims and incentive payments are included to the extent that the amount can be

measured reliably and its receipt is considered probable. Where the outcome of a construction contract cannot be

estimated reliably (for example during the early stages of a construction contract), contract revenue is recognised

to the extent of contract costs incurred when it is deemed probable they will be recoverable and contract costs

are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs

will exceed total contract revenue, the total expected loss is recognised as an expense immediately.

Construction contract work-in-progress is recorded net of any write-downs, as well as progress billings related

to the construction contracts. The Group presents the amount due from customers under the construction

contracts as an asset and the amount due to customers under the construction contracts as a liability in the

statement of financial position. The amount due from customers is the amount of construction costs incurred

plus recognised profits less the sum of recognised losses and progress billings for all construction contracts

in progress for which costs incurred plus recognised profits (less recognised losses) exceed progress billings.

The amount due to customers is the amount of construction costs incurred plus recognised profits less the sum

of recognised losses and progress billings for all construction contracts in progress for which progress billings

exceed costs incurred plus recognised profits (less recognised losses).

The Group is required to sell its military helicopters for export through the State Corporation Rosoboronexport

(“Rosoboronexport”). Rosoboronexport charges a commission for this service. The Group recognises the commission

expense at the time of the sale and records the commission fee within Selling, general and administrative expenses.

In addition, the Group provides warranties on its helicopters and recognises the estimated warranty liability

at the time of sale. The warranty expense is recorded within Selling, general and administrative expenses.




18

Revenue from helicopter repair and maintenance services, and research and development works

Revenue from contracts to provide these services is recognised by reference to the stage of completion of

the contract at the end of the reporting period, determined based on the proportion of contract costs incurred

for work performed to date relative to the estimated total contract costs.

Revenue from manufacturing of other products

Revenue from the sale of goods is recognised when all the following conditions are satisfied:

the Group has transferred to the buyer the significant risks and rewards of ownership of the goods;

the Group retains neither continuing managerial involvement to the degree usually associated with

ownership nor effective control over the goods sold;

the amount of revenue can be measured reliably;

it is probable that the economic benefits associated with the transaction will flow to the Group; and

the costs incurred or to be incurred in respect of the transaction can be measured reliably.

The transfer of risks to the buyer is based on the shipping conditions, and is generally at the time of shipment. Dividend and interest income

Dividend income from investments is recognised when the shareholder’s right to receive payment has been

established (provided that it is probable that the economic benefits will flow to the Group and the amount of

revenue can be measured reliably).

Interest income is recognised when it is probable that the economic benefits will flow to the Group and

the amount of revenue can be measured reliably. Interest income is accrued on a time basis, by reference

to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts

estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount

on initial recognition.

Leasing

Leases are classified as finance leases whenever the contract terms of the lease transfer substantially all of

the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Leasing – the Group as lessor

Rental and sub-rental income from operating leases is recognised on a straight-line basis over the term

of the relevant lease. Initial direct costs incurred in negotiating and arranging lease are added to the carrying

amount of the leased asset and recognised in profit or loss on a straight-line basis over the lease term.

Leasing – the Group as lessee

Assets held under finance leases are recognised as assets of the Group at their fair value at the inception date of

the lease or, if lower, at present value of the minimum lease payments. The corresponding liability to the lessor

is included in the statement of financial position as a finance lease obligation.

Lease payments are apportioned between finance costs and reduction of the lease obligation so as to achieve

a constant rate of interest on the remaining balance of the liability. Finance costs are charged directly to profit

or loss, unless they are directly attributable to qualifying assets, in which case they are capitalised in

accordance with the Group’s general policy on finance costs (see below).

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except

where another systematic basis is more representative of the time pattern in which economic benefits from

the leased asset are consumed. Contingent rentals arising under operating leases are recognised in profit

or loss in the period in which they are incurred.




19

Finance costs

Net finance costs directly attributable to the acquisition, construction or production of qualifying assets, which

are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added

to the cost of those assets, until they are substantially ready for their intended use or sale. All other finance

costs are recognised as an expense in the year in which they are incurred.

Income tax

Income tax on the profit for the year represents the sum of the income tax currently payable and deferred income tax.

Current income tax

Current income tax has been computed in accordance with the Russian Federation tax law. Income tax

currently payable is based on taxable profit for the year, which differs from profit as reported in the statement

of comprehensive income/(loss) as it excludes items of income or expense that are taxable or deductible

in other years or excludes items that are not taxable or deductible. The Group’s liability for current tax

is calculated using enacted or substantially enacted tax rates by the end of the reporting period.

Deferred tax

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial

statements and the corresponding tax bases used in the computation of taxable profit and calculated on an

entity basis. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred

tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that

taxable profits will be available against which deductible temporary differences can be utilised. Such tax assets

and liabilities are not recognised if the related temporary difference arises from goodwill or from the initial

recognition (other than in a business combination) of other assets and liabilities in a transaction that affects

neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in

subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference

and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets

arising from deductible temporary differences associated with such investments and interests are only

recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise

the benefits of the temporary differences and they are expected to reverse in foreseeable future.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is

no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the rates that are expected to apply in the period in which

the liability is settled or the asset realised, based on tax rates enacted or substantively enacted by the end of

the reporting period. The measurement of deferred tax liabilities and assets reflects tax consequences that

would follow from the manner in which the Group expected, at the end of the reporting period, to recover

or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets

against current tax liabilities and when they relate to income taxes levied by the same taxation authority and

the Group intends to settle its current tax assets and liabilities on a net basis.

Property, plant and equipment

Owned assets

Property, plant and equipment of the Group acquired or constructed before 1 January 2007 are recognised

at the amounts determined by an independent appraiser. The basis for valuation was fair value. In some

instances, when items of property, plant and equipment are of a specialised nature, they were valued

at depreciated replacement cost. For each item of property, plant and equipment the new replacement cost was

estimated as the current cost to replace the assets with a functionally equivalent asset. The new replacement

cost was then adjusted for accrued depreciation, including physical depreciation and functional and economic

obsolescence. The result of this valuation comprised deemed cost as at 1 January 2007.




20

Items of property, plant and equipment acquired or constructed after 1 January 2007 are recorded at purchase

or constructed cost. Property, plant and equipment is stated at cost (deemed cost), net of accumulated

depreciation and any accumulated impairment losses.

Construction-in-progress represents capitalised costs directly attributable to the construction of property, plant and

equipment, including the cost of materials, direct labour, and other costs directly attributable to bringing the asset

to a working condition for its intended use. Finance costs that are directly attributable to the acquisition or

construction of assets, that necessarily takes a substantial period of time to get ready for its intended use or sale,

are capitalised as part of the cost of that asset.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as

separate items (major components) of property, plant and equipment.

Gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds

from disposal with the carrying amount of the asset, and is recognised within Other operating expenses

in the consolidated statement of comprehensive income/(loss).

Subsequent costs

The replacement cost for a part of a property, plant and equipment is recognised in the carrying value

of the item if it is probable that the future economic benefits of the part will flow to the Group and its cost

can be measured reliably. The carrying value of the replaced part is derecognised concurrently. Repair and

maintenance costs are expensed as incurred.

Depreciation

Depreciation is calculated over the cost of an asset, or other amount substituted for cost (i.e. deemed cost),

less its residual value.

Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part

of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term

and their useful lives unless it is reasonably certain that the entities of the Group will obtain ownership

by the end of the lease term. Land is not depreciated.

The estimated useful lives of major classes of property, plant and equipment are as follows:

Buildings 20-60 years

Machinery and equipment 15-40 years

Transport 8-40 years

Other assets 1-12 years

The estimated useful lives, residual values, and depreciation method are reviewed at each reporting date,

with the effect of any changes in estimate accounted for on a prospective basis.

Intangible assets

Intangible assets acquired separately

Separately acquired intangible assets are recorded at cost less accumulated amortisation and accumulated

impairment losses. These intangible assets primarily represent various purchased software costs.

Amortisation is charged on a straight-line basis over their estimated useful lives which are:

Purchased software 1-10 years

Other 1-5 years

The estimated useful lives and amortisation method are reviewed at each reporting date, with the effect of any

changes in estimate accounted for on a prospective basis.




21

Internally-generated intangible assets

Costs for self-initiated research and development activities are assessed as to whether they qualify for

recognition as internally-generated intangible assets. Apart from complying with the general requirements

for and initial measurement of an intangible asset, qualification criteria are met only when technical as well as

commercial feasibility can be demonstrated and cost can be measured reliably.

It must also be probable that the intangible asset will generate future economic benefits and that it is clearly

identifiable and allocable to a specific product. Further to meeting these criteria, only such costs that relate

solely to the development phase of a self-initiated project are capitalised. Any costs that are classified as part

of the research phase of a self-initiated project are expensed as incurred. If the research phase cannot be clearly

distinguished from the development phase, the respective project related costs are treated as if they were

incurred in the research phase only.

Capitalised development costs are generally amortised over the estimated number of units produced. In case

the number of units produced cannot be estimated reliably, capitalised development costs are amortised over

the estimated useful life. Amortisation of capitalised development costs is recognised in Cost of sales.

Internally-generated intangible assets are reviewed for impairment annually when the asset is not yet in use and

whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Intangible assets acquired in a business combination

Intangible assets acquired in a business combination and recognised separately from goodwill are initially

recognised at their fair value at the acquisition date (which is regarded as their cost).

Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less

accumulated amortisation and impairment loss, on the same basis as intangible assets that are acquired separately.

Impairment of tangible and intangible assets excluding goodwill

At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine

whether there is any indication that those assets have suffered an impairment loss. If any such indication exists,

the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any).

Where the assets do not generate cash flows that are independent from other assets, the Group estimates

the recoverable amount of the cash-generating unit to which the assets belong.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for

impairment at least annually, and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell or value in use. In assessing value in use,

the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects

current market assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount,

the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment

loss is recognised immediately in the consolidated statement of comprehensive income/(loss).

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is

increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does

not exceed the carrying amount that would have been determined had no impairment loss been recognised

for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately

in the consolidated statement of comprehensive income/(loss).

Inventories

Inventories are stated at the lower of cost or net realisable value. The cost of inventories is determined on

the weighted average basis and includes all costs in bringing the inventory to its present location and condition.

Costs of production in process and finished goods include the purchase costs of raw materials and conversion

costs such as direct labour and an allocation of fixed and variable production overheads. Raw materials are

valued at purchase cost inclusive of freight and other shipping costs.




22

Net realisable value represents the estimated selling price for inventories less estimated costs to completion

and selling costs. Where appropriate, an allowance for obsolete and slow-moving inventory is recognised.

The impairment charged to reduce the carrying amount of inventories to their net realisable value and an

allowance for obsolete and slow-moving inventory is included in the consolidated statement

of comprehensive income/(loss) as Cost of sales.

Cash and cash equivalents

Cash and cash equivalents is comprised of cash balances, cash deposits and highly liquid investments with

original maturities of three months or less, that are readily convertible to known amounts of cash and are

subject to an insignificant risk of changes in value.

Financial assets

Financial assets are recognised and derecognised on a trade date where the purchase or sale of a financial

asset is under contract whose terms require delivery of the investment within the timeframe established

by the market concerned, and are initially measured at fair value plus transaction costs.

Financial assets of the Group are classified into the following specific categories: (i) available-for-sale (“AFS”),

(ii) held-to-maturity, and (iii) loans and receivables.

The classification depends on the nature and purpose of the financial asset and is determined at the time of initial

recognition.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial instrument and allocating

interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts

estimated future cash receipts or payments through the expected life of the instrument, or where appropriate,

a shorter period to the net carrying amount on initial recognition.

AFS financial assets

Listed shares held by the Group that are traded in an active market are classified as AFS and are stated at fair

value. Unlisted shares for which there are no available market quotations and whose fair value cannot be

reliably measured, are accounted for at cost, net of accumulated impairment losses, if any.

The fair value for AFS financial assets with standard terms and conditions that are traded in active market is

determined based on quoted market prices.

Gain and losses arising from changes in fair value are recognised in the consolidated statement of comprehensive

income/(loss) and accumulated in the investments revaluation reserve. Where the investment is disposed of or

determined to be impaired, the cumulative gain or loss previously accumulated in the investment revaluation

reserve is reclassified to profit or loss.

Dividends on AFS equity instruments are recognised in profit or loss when the Group’s right to receive

the dividends is established.

Held-to-maturity investments

Promissory notes with fixed or determinable payments and fixed maturity dates for which the Group has the

positive intent and ability to hold to maturity are classified as held-to-maturity investments. Held-to-maturity

investments are recorded at amortised cost less accumulated losses, if any. Interest income is recognised using

the effective interest method.

Loans and receivables

Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an

active market are classified as loans and receivables. Loans and receivables are measured at amortised cost using

effective interest method, except for short-term receivables when the recognition of interest would be immaterial.




23

Impairment of financial assets

Financial assets are assessed for indicators of impairment at the end of each reporting period. Financial assets are

considered to be impaired when there is objective evidence that the estimated future cash flows of the investment

have been affected as a result of one or more events that occurring after initial recognition of the financial asset.

For equity securities classified as AFS, a significant and prolonged decline in the fair value of the security

below its costs is considered to be objective evidence of impairment.

For other financial assets objective evidence of impairment could include:

significant financial difficulty of the counterparty;

default or delinquency in interest or principle payments; or

it becoming probable that the counterparty will enter bankruptcy or financial re-organisation.

For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s

carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets

with the exception of trade and other receivables where the carrying amount is reduced through the use of

an allowance account. When trade and other receivables are uncollectible, they are written off against the

allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance

account. Changes in the carrying amount of the allowance account are recognised in profit or loss.

When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognised

in other comprehensive income are reclassified to profit or loss in the period.

With the exception of AFS equity securities, if, in a subsequent period, the amount of the impairment loss

decreases and the decrease can be related objectively to an event occurring after the impairment was recognised,

the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount

of the investment at the date of impairment does not exceed what the amortised cost would have been had

the impairment not been recognised.

In respect of AFS equity securities, impairment losses previously recognised in profit or loss are not reversed

through profit or loss. Any increase in fair value subsequent to an impairment loss is recognised in other

comprehensive income.

Derecognition of financial assets

The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset

expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset

to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership

and continues to control the transferred asset, the Group recognises its retained interest in the asset and an

associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards

of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also

recognises a collateralised borrowing for the proceeds received.

Financial liabilities

The Group’s financial liabilities are classified into the following specified categories: (i) financial guarantee

contract liabilities, and (ii) other financial liabilities.

Financial guarantee contract liabilities

Financial guarantee contract liabilities are measured initially at their fair values and are subsequently measured

at the higher of:

the amount of the obligation under the contract, as determined in accordance with IAS 37 Provisions,

Contingent Liabilities and Contingent Assets; and

the amount initially recognised less, where appropriate cumulative amortisation recognised in accordance

with the revenue recognition policies set out above.




24

Other financial liabilities

Other financial liabilities, including loans and borrowings, are initially measured at fair value, net of transaction

costs. Financial liabilities are subsequently measured at amortised cost using the effective interest method,

with interest expense recognised on an effective yield basis.

Derecognition of financial liabilities

The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged,

cancelled or they expire.

Provisions and contingencies

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past

event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made

of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present

obligation at the reporting date taking into account the risks and uncertainties surrounding the obligation.

Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying

amount is the present value of those cash flows.

When some or all of the economic benefits required to settle a provision are expected to be recovered from

a third party, the receivable is recognised as an asset if it is virtually certain that reimbursement will be

received and the amount of the receivable can be measured reliably.

Onerous contracts

Present obligations arising under onerous contracts are recognised and measured as a provision. An onerous

contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting

the obligations under the contract exceed the economic benefits expected to be received under such contract.

Warranty provisions

The Group provides warranties in connection with the sale of helicopters. The Group generally warrants its new

helicopters to be free from defects in materials and workmanship appearing within one to three and a half years

from the date of delivery or during the first three hundred to one thousand hours of operation, whichever event

occurs first. The warranty provision is recorded at the time of sale of the helicopter based on the best estimate of

the expected future costs. The warranty expense is included within Selling, general and administrative expenses

in the statement of comprehensive income/(loss).

Contingencies

Contingent liabilities are not recognised in these consolidated financial statements unless they are arise as a result

of a business combination. Contingencies attributable to specific events are disclosed unless the probability of an

outflow or resources embodying economic benefit is remote. Contingent assets are not recognised in these

consolidated financial statements but are disclosed when an inflow of economic benefits is probable.

Government grants

Deferred income attributable to the grants obtained from the government is not recognised until there is a reasonable

assurance that the Group will comply with the conditions attaching to them and that the grants will be receivable.

The Group receives government grants for partial compensation of development expenses capitalised within

intangible assets and recognised as a deduction from the full amount of development expenses incurred.

As part of such supporting programs the government also compensates for a portion of overhead expenses

associated with the execution and monitoring of such projects, which are presented within selling, general

and administrative expenses. Government grants that are receivable as compensation for overhead expenses

already incurred are recognised in profit or loss in the period in which they become receivable, and are

recorded as Other operating income.




25

The Group receives government grants for compensation of finance costs on borrowings used by the Group

for helicopter manufacturing. Government grants that are receivable as compensation for finance costs already

incurred are recognised in profit or loss in the period in which they become receivable, and are recorded as an

offset of the Finance costs that they are compensating.

Employee benefit obligations

Remuneration to employees in respect of services rendered during the reporting period, including accruals

for vacation and bonuses and the related social security taxes, is recognised as an expense in the period

when it is incurred.

Defined contribution plans

The Group’s entities are legally obliged to make defined contributions to the Russian Federation State Pension

Fund, a defined contribution plan. The Group’s contributions to the Russian Federation State Pension Fund are

recorded as an expense over the reporting period based on the related employee service rendered. Contributions

for each employee to the Russian Federation State Pension Fund vary from 0% to 20%, depending on

the annual gross remuneration of each employee.

In addition to the Russian Federation State Pension Fund during the year ended 31 December 2010,

OAO Rostvertol, a Group subsidiary as at 31 December 2010, introduced a defined contribution plan for its

employees. Contributions to the Rostvertol’s defined contribution plan are recorded and paid on a monthly

basis and are limited to RUB 3 million per month.

Defined benefit plans

The Group’s entities operate a number of unfunded defined benefit plans for its employees. Under these plans

employees are entitled to the following payments:

anniversary payments, which are generally in line with the average salary of the employee;

a one-time payment upon death that equals actual funeral expenses but is limited to twice monthly

employee’s monthly salary;

a one-time payment on retirement, which is generally in line with the employee’s base salary at the date

of retirement; and

monthly payments and other compensations and benefits (i.e. transport, welfare, etc.)

For defined benefit retirement plans, the cost of providing benefits is determined using the Project Unit Credit

Method, with actuarial valuations being carried out as at 31 December 2010, 2009 and 2008. Actuarial gains and

losses that exceed 10 per cent of the present value of the Group’s defined obligations at the end of the prior year

are amortised over the expected average remaining working lives of the participating employees. Past service cost

is recognised immediately to the extent that benefits are already vested, and otherwise amortised on a straight-line

basis over the average period until the benefit becomes vested.

The retirement benefit obligations recognised in the statement of financial position represent the present value

of the defined benefit obligations as adjusted for unrecognised actuarial gains and losses and unrecognised past

service costs.

Dividends

Dividends and the related taxes are recognised as a liability in the period in which they have been declared

and become legally payable. Dividends may only be paid out of legally distributable accumulated profits,

which are based on the amounts available for distribution in accordance with the applicable legislation and

as reflected in the standalone statutory financial statements of the Group entities. These amounts may differ

significantly from the amounts calculated on the basis of IFRS.




26

5. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Group’s accounting policies, management is required to make judgments, estimates

and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other

sources. The estimates and associated assumptions are based on historical experience and other factors that

are considered relevant. Actual results may differ from these estimates.

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting

date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and

liabilities within the next financial year are discussed below.

Revenue recognition on construction contracts

As described in the revenue recognition policy, the Group accounts for construction projects using the percentage

of completion method. Critical to the correct application of this method are the accuracy of estimates of the

financial outcome at completion, as well as the determination of the extent of progress towards completion.

In estimating the percentage of completion, the Group compares the estimated total cost of the project to

the costs incurred to date. The total estimated cost is based on historical experience for similar projects,

the remaining effort to complete the contract, and various other assumptions.

The Group has not historically had significant changes in its estimates of total costs during a project. To the extent

there is such a change, the amount of revenue and costs recognised in future periods may vary and if the total

estimated costs exceed the total revenue a loss would be recorded at the time such loss is revealed.

Valuation of trade and other receivables

Trade receivables, prepayments and other receivables are stated at their net realisable value after deducting

the Group’s best estimate of probable credit losses related to these assets.

In estimating the level of probable credit losses, management considers a number of factors, including current

overall economic conditions, industry-specific economic conditions and historical and anticipated customer

performance. Uncertainties regarding changes in the financial condition of customers, either adverse or positive,

could impact the amount and timing of any additional allowances for doubtful accounts that may be required.

This may have a negative impact on the financial results if additional losses occur that were not anticipated

in prior periods.

Inventory valuation

Inventory consists of finished goods, work-in-progress and raw materials which are stated at lower of cost or net

realisable value. In assessing the net realisable value of its inventory, management estimates the net realisable

value of finished goods and work-in-progress based on various assumptions including current market prices.

At each reporting date, the Group evaluates its inventory balance for excess quantities and obsolescence and,

if necessary, records an allowance to reduce inventory for obsolete and slow-moving raw materials and spare

parts. This allowance requires assumptions related to future inventory use. These assumptions are based on

inventory aging, forecasted consumer demands, and technological obsolescence. Any changes in the estimates

may impact the amount of the allowances for inventory that may be required.

Useful economic life and residual value of property, plant and equipment

The Group’s property, plant and equipment are depreciated using the straight-line method over their estimated

useful lives which are based on management’s business plans and operational estimates.

The factors that could affect the estimation of the life of a non-current asset and its residual value include

the following:

changes in asset utilisation rates;

changes in maintenance technology;

changes in regulations and legislation; and

unforeseen operational issues.




27

Any of the above could affect prospective depreciation of property, plant and equipment and their carrying

and residual values.

Management annually reviews the appropriateness of assets’ useful economic lives. The review is based on

the current condition of the assets and the estimated period during which they will continue to bring economic

benefit to the Group. Any change in estimated useful life or residual value is recorded on a prospective basis

from the date of the change.

Impairment of property, plant and equipment

Management reviews the carrying amounts of assets to determine whether there is any indication that those

assets are impaired. In making the assessment for impairment, assets that do not generate independent cash

flows are allocated to an appropriate cash-generating unit.

The assessment of whether there are indicators of a potential impairment are based on various assumptions including

market conditions, asset utilisation and the ability to utilise the asset for alternative purposes. If an indication of

impairment exists, the Group estimates the recoverable value (greater of fair value less cost to sell and value in use)

and compares it to the carrying value, and records impairment to the extent the carrying value is greater.

The value in use is based on estimated future cash flows that are discounted to their present value using a pre-

tax discount rate. The estimated future cash flows require management to make a number of assumptions

including customer demand and industry capacity, future growth rates and the appropriate discount rate.

Any change in these estimates may result in impairment in future periods.

During the years ended 31 December 2009 and 2008, the Group recorded impairment in the amount of

RUB 628 million and RUB 1,608 million, respectively, due to the increase of discount rates and decrease

of market rents for some properties of the Group located in Moscow and the Moscow region.

During the year ended 31 December 2010, the Group reversed an impairment recognised in the years ended

31 December 2009 and 2008 in the amount of RUB 163 million, due to recovery of the Russian market with

corresponding increase in prices for properties of the Group.

Employee benefit obligations

The Group’s recognition of the unfunded retirement benefit obligations for defined benefit plans depends

on a number of significant actuarial assumptions relating to:

discount rate;

inflation;

projected salary and pension increase;

mortality rates; and

participants turnover rate.

These assumptions are determined based on the current market conditions, historical information and through

consultation with the Group’s actuaries. Changes in the key assumptions can have a significant impact of on

the projected benefit obligations, funding requirements and periodic pension costs incurred.

Warranty provision

The Group provide warranties related to its helicopters sales and record a provision for the future cost

at the time of sale. Estimated warranty costs represent the contractual warranty, which provides against

any defects in materials and workmanship appearing within one to three and a half years from the date of

delivery, or during the first three hundred to one thousand hours of operation (whichever event occurs first).

Warranty provisions are estimated based on historical claims statistics, the warranty period, the average time-lag

between faults occurring and claims to the Group and anticipated changes in quality indexes. Differences between

actual warranty claims and the estimated claims will impact the recognised expense and provisions in future

periods. Refunds from suppliers, that decrease the Group’s warranty costs, are recognised to the extent these

are considered to be certain.




28

If actual results are not consistent with the assumptions and estimates used, the Group may be exposed to

additional adjustments that could materially, either positively or negatively, impact the Group’s profit.

Adjustments to the Group’s profit have historically not been material.

Contingencies

Legal contingencies

Legal proceedings covering a wide range of matters are pending or threatened in various jurisdictions against

the Group. Periodically, the status of each significant loss contingency is reviewed to assess the potential financial

exposure. The Group records provisions for pending litigation when it determines that an unfavourable outcome

is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertain nature of litigation,

the ultimate outcome or actual cost of settlement may materially vary from estimates. Provisions are based on

the best information available at the time. As additional information becomes available, the potential liability

related to pending claims and litigation is reassessed and, if required, estimates are revised. Such revisions

in estimates could have a material impact on the future results of the Group.

Tax contingencies

The Group is subject to income tax and other taxes in accordance with the legislation of the Russian

Federation. Significant judgement is required in determining the provision for income tax and other taxes due

to the complexity of the tax legislation in the Russian Federation. There are a number of transactions and

calculations for which the ultimate tax determination is uncertain. The Group recognises liabilities for

anticipated tax inspection issues based on management’s estimates of whether it is probable that additional

taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially

recorded, such differences will impact the amount of tax and tax provisions in the period in which such

determination is made.

Recognition of deferred tax assets

Deferred tax assets are assessed each period for recoverability and adjusted, as necessary, based on whether

it is probable the Group will generate sufficient profits in future periods to utilise the assets. Various factors

are considered in assessing the probability of future utilisation including past operating results, operational plans,

expiration of tax losses carry-forwards and tax planning strategies. If the actual results differ from these estimates

or if these estimates are adjusted in future periods, the result of operations may be impacted in those periods.

As at 31 December 2010, 2009 and 2008, the Group has RUB 752 million, RUB 487 million and RUB 466

million of unrecognised deferred tax assets based on the assumption that it is not probable it will be able to

utilise these assets in future periods.




29

6. SEGMENTAL INFORMATION

The Group has three reportable segments, the results of which are reported on a quarterly basis and reviewed by the General Director of the Company (the “chief operating

decision maker” or “CODM”). These internal reports are prepared on the same basis as the accompanying consolidated financial statements.

The segments are as follows:

Helicopters segment includes manufacturing of helicopters;

Services and support segment includes manufacturing of spare parts for helicopters and providing of helicopter repair and maintenance services;

Research and development segment includes the provision of research and development works mostly related to helicopter engineering and design.

In addition, the Group has various other operations that are not reported separately and has certain corporate costs that are not included in the reportable segments.

These are included as reconciling item between the total reportable segments and the consolidated results.

6.1 SEGMENT REVENUES

The following is the analysis of the Group’s revenue for the years ended 31 December 2010, 2009 and 2008:

Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008

Military Commercial Total Military Commercial Total Military Commercial Total

Helicopters 35,048 12,004 47,052 21,587 11,689 33,276 9,905 8,977 18,882 Services and support 7,744 6,320 14,064 2,822 6,525 9,347 2,007 5,049 7,056 Research and development 469 355 824 571 230 801 2,655 138 2,793 Other 4,639 623 5,262 3,281 600 3,881 2,317 650 2,967

Total 47,900 19,302 67,202 28,261 19,044 47,305 16,884 14,814 31,698

The segment revenue reported above represents revenue generated from external customers only. During the years ended 31 December 2010, 2009 and 2008 inter-segment sales

were RUB 9,313 million, RUB 5,474 million and RUB 3,960 million, respectively. Inter-segment revenue primarily consists of sales of semi-products and research and development

services for helicopter production.




30

6.2 SEGMENT OPERATING RESULTS

The measure of segment profitability separately reported to the CODM for purposes of allocating resources

and assessing segment performance is measured based on segment adjusted EBITDA, which the Group defines

as segment operating profit adjusted to exclude depreciation and amortisation, loss on disposal of property,

plant and equipment and loss on/(reversal of) impairment of property, plant and equipment and to include

the segment’s share of results of associates. Since adjusted EBITDA is not a standard measure under IFRS,

the Group’s definition of adjusted EBITDA may differ from that of other companies.

The following is analysis of operating results measured by adjusted EBITDA and its reconciliation to the

operating profit/(loss) and profit/(loss) before tax for the year ended 31 December 2010, 2009 and 2008:

Adjusted EBITDA Year ended 31/12/2010

Year ended 31/12/2009


Helicopters 9,574 7,139 1,553 Services and support 2,272 1,716 1,706

Research and development (1,200) (377) (332) Other 1,135 782 191

Total adjusted EBITDA 11,781 9,260 3,118

Depreciation and amortisation (1,767) (1,728) (1,538)

Loss on disposal of property, plant and equipment (182) (97) (120)

Reversal of impairment of/(impairment of) property, plant and equipment 163 (628) (1,608)

Share of results of associates (175) (143) 49

Operating profit/(loss) per IFRS financial statements 9,820 6,664 (99)

Finance income 350 374 145

Finance costs (3,474) (2,280) (1,691)

Excess of the Group's share in fair value of net assets acquired over

the costs of acquisition 277

‒

‒

Gain on revaluation of investments in associates due to business combination 588 ‒ ‒ Share of results of associates 175 143 (49)

Foreign exchange loss, net (394) 135 (1,147)

Profit/(loss) before income tax per IFRS financial statements 7,342 5,036 (2,841)

6.3 MAJOR CUSTOMERS

During the years ended 31 December 2010, 2009 and 2009, the Group’s most significant customers are state-

controlled entities, such as the Ministry of Defence and the Ministry of Emergency Situations of the Russian

Federation. The Russian Federation state-controlled entities represent significantly more than 10%

of the Group’s consolidated revenue for each of the years presented. Please also refer to note 8 for further

details in regard of other largest customers and countries where they are located.

6.4 OTHER SEGMENT INFORMATION

Substantially all assets and production, management and administrative facilities of the Group are located

in the Russian Federation. Geographical asset information is not reported to the CODM and accordingly

is not presented as part of segmental information.

Revenue by geographical regions is disclosed in note 8.




31

7. BUSINESS COMBINATIONS AND CHANGES IN OWNERSHIP

Acquisition of subsidiaries during the years ended 31 December 2010, 2009 and 2008

OAO Rostvertol (“Rostvertol”)

Rostvertol operates in the manufacturing of helicopters, with the production facilities located in Rostov-on-

Don, Russian Federation. On 10 and 11 December 2010, the Company acquired an additional 52.3% interest in

Rostvertol, formerly an associate of the Group, for cash consideration of RUB 3,230 million, increasing its

ownership to 75.1%. Following this acquisition the Group obtained control over Rostvertol. The purpose of

this acquisition was to obtain control over the last independent helicopter producer in the Russian Federation

and complete full consolidation of the industry in Russia.

This acquisition was accounted for using the acquisition method. The remaining non-controlling interests

of 24.9% and the previously held equity interest of 22.8% in Rostvertol were both measured at fair value

determined by independent appraiser at the date of acquisition.

The Group has determined the fair value of the identifiable assets and liabilities of Rostvertol at the date

of acquisition on a provisional basis. At the date of authorisation of these consolidated financial statements

the necessary fair value assessment for property, plant and equipment and certain other assessments had not

been finalised.

Carrying value

Provisional value

ASSETS Property, plant and equipment 5,175 7,231 Other intangible assets 160 278 Investments in associates 89 125 Other financial assets 1,596 1,765 Inventories 3,654 3,848 Amounts due from customers under construction contracts 2,981 2,981 Trade receivables 197 197 Prepayments and other receivables 1,752 1,752 Other taxes receivable 621 621 Cash and cash equivalents 989 989

Total assets 17,214 19,787

LIABILITIES Loans and borrowings 5,126 5,126 Retirement benefit obligations 76 76 Provisions 202 229 Deferred tax liabilities 372 899 Trade payables 588 588 Advances received and other payables 1,888 1,888 Amounts due to customers under construction contracts 3,663 3,663 Income tax payable 27 27 Other taxes payable 98 98

Total liabilities 12,040 12,594

Net assets at the date of acquisition 5,174 7,193 Less: Excess of the Group's share in fair value of net assets acquired

over the costs of acquisition

(277)

Less: Non-controlling interests (at fair value) (1,927)

Total consideration, satisfied by: 4,989

Cash consideration 3,230

Fair value of previously held interest in Rostvertol 1,759

Total consideration 4,989

Less: Fair value of previously held interest in Rostvertol (1,759)

Less: Cash and cash equivalents acquired (989)

Net cash outflow on acquisition of subsidiary 2,241




32

Trade and other receivables, acquired as part of the acquisition of controlling interest in Rostvertol, are presented at a

provisional fair value of RUB 210 million and are estimated to have a gross contractual amount of RUB 258 million.

The best estimate at the acquisition date of the contractual cash flows not expected to be collected is RUB 48 million.

The excess of the Group share in fair value of net assets acquired over the costs of acquisition in the amount

of RUB 277 million has been recorded in the consolidated statement of comprehensive income/(loss). This

gain arose because the terms in respect of this acquisition were formally agreed a number of months prior

to the actual acquisition date. Due to improvements in the Helicopter manufacturing industry in the latter half

of 2010, the fair value of net assets acquired had increased by the date of acquisition and a bargain purchase

was achieved, since the cost of the acquisition was never renegotiated.

As part of this business combination, which has been accounted for under IFRS 3 (2008), the Group recognised

a revaluation gain resulting from the remeasurement of its previously held interest. The difference in the amount

of RUB 588 million, between fair value of previously held interest of RUB 1,759 million and carrying value of

investment in Rostvertol of RUB 1,171 million has been recorded in the consolidated statement of comprehensive

income/(loss) within the line item Gain on revaluation of investments in associates due to business combination.

As part of the assets, which were acquired by the Group through the acquisition of the controlling interest in

Rostvertol, the Group obtained a 2.6% interest in OAO MIL Moscow Helicopter Plant (refer below). Accordingly,

the Group effective interest in OAO MIL Moscow Helicopter Plant increased to 74.4% with a corresponding

decrease in the non-controlling interests of RUB 37 million and a decrease in retained earnings of RUB 11 million.

In addition, the Group obtained a 0.62% interest in Oboronprom, the Group’s sole shareholder. Investments in

the shares of Oboronprom were measured at fair value (at the date of business combination) of RUB 231 million,

and presented as Oboronprom shares owned by the Group in the consolidated statement of financial position.

Due to impracticability of obtaining mid-month information for Rostvertol, the acquisition was accounted

for in these consolidated financial statements as if it had taken place on 31 December 2010 with no effect

on the consolidated profit or loss for the year ended 31 December 2010.

Pro forma operational results following the acquisition of Rostvertol (unaudited)

The pro forma effect of Rostvertol acquisition on the results of the Group’s operations, as if this subsidiary was

acquired at 1 January 2010, is presented as follows:


Revenue 81,307 Profit before income tax 7,980

Profit for the year 6,200

The pro forma disclosure reflects the elimination of transactions between the Group and Rostvertol, the elimination

of the Group’s share of Rostvertol’s results as an associate, and the additional depreciation and finance costs that

would have been incurred from 1 January 2010 if Rostvertol had been consolidated from that date.

This unaudited pro forma information is provided for illustrative purposes only and does not present the results

of the Group’s operations had the transaction assumed therein occurred on 1 January 2010, nor is it necessarily

indicative of the results of operations which may be achieved in the future.

OAO Helicopter Innovation Industrial Company

In April 2009, OAO Ulan-Ude Aviation Plant, a Group subsidiary, acquired a 100% interest in OAO

Helicopter Innovation Industrial Company, which holds a 100% interest in ZAO Ulan-Ude Blade Plant,

a producer of helicopter allied products, for a total cash consideration of RUB 744 million.

This acquisition was accounted for using the purchase method. The Group has determined the fair value of

identifiable assets, liabilities and contingent liabilities of the acquired company at the date of acquisition.

The purchase price allocation for the acquisition is as follows:

Fair value

ASSETS Property, plant and equipment 78

Inventories 431

Trade receivables 140

Cash and cash equivalents 20

Total assets 669




33

Fair value

LIABILITIES

Loans and borrowings 70

Trade payables 624

Deferred tax liabilities 6

Total liabilities 700

Net liabilities at the date of acquisition (31)

Add: Goodwill 775

Total consideration 744



Net cash outflow on acquisition of subsidiary 724

The goodwill arising on this acquisition primarily relates to increased security of supplies of key materials

for the production process of the Group. This goodwill will not be deductible for tax purposes.

At the date of acquisition, OAO Helicopter Innovation Industrial Company and ZAO Ulan-Ude Blade Plant

did not prepare financial statements in accordance with IFRS. Thus, it was not practicable to determine

the carrying values of all of the acquired assets, liabilities and contingent liabilities in accordance with

IFRS immediately before the acquisition.

OAO Helicopter Innovation Industrial Company and ZAO Ulan-Ude Blade Plant contributed RUB 568 million

of revenue and RUB 77 million of loss before tax from the date of acquisition to 31 December 2009. There is

no available information under IFRS in order to determine the impact this acquisition would have had if

occurred at the beginning of the period.

OAO Novosibirsk Aircraft Repair Plant

In August 2008, OAO Helicopter Service Company, a Group subsidiary acquired a 95.1% interest in OAO

Novosibirsk Aircraft Repair Plant, a helicopter repair and maintenance service provider, for a total cash

consideration of RUB 490 million.

This acquisition was accounted for using the purchase method. The Group has determined the fair value of

identifiable assets, liabilities and contingent liabilities of the acquired company at the date of acquisition.

The purchase price allocation for the acquisition is as follows:

Fair value

ASSETS Property, plant and equipment 941

Inventories 242


Other taxes receivable 47


Total assets 1,566

LIABILITIES


Retirement benefit obligations 24

Trade payables 534


Total liabilities 1,190

Net assets at the date of acquisition 376

Add: Goodwill 133

Less: Non-controlling interests (at proportion of net assets acquired) (19)




Net cash outflow on acquisition of subsidiary 484




34

The goodwill arising on this acquisition primarily relates to the workforce of the acquired subsidiary and will

not be deductable for tax purposes.

At the date of acquisition, OAO Novosibirsk Aircraft Repair Plant did not prepare financial statements in

accordance with IFRS. Thus, it was not practicable to determine the carrying values of all of the acquired

assets, liabilities and contingent liabilities in accordance with IFRS immediately before the acquisition. OAO Novosibirsk Aircraft Repair Plant contributed RUB 341 million of revenue and RUB 15 million of profit

before tax from the date of acquisition to 31 December 2008. There is no available information under IFRS

in order to determine the impact this acquisition would have had if occurred at the beginning of the period.

OAO Reduktor-PM – acquisition of controlling interest by Oboronprom

In March 2008, Oboronprom acquired Perm Motors Group from a third party. Perm Motors Group included

operations related to Oboronprom’s Engine-Building and Helicopter segments. Perm Motors Group held an

80.8% interest in OAO Reduktor-PM, a producer of helicopter allied products. The acquisition cost for

Perm Motors Group was based on a single valuation of net assets of the Perm Motors Group as a whole.

Oboronprom’s share ownership in OAO Reduktor-PM was transferred into the Group during the year ended

31 December 2010 in connection with the formation of the helicopter business (refer to note 1) and has been

included in these consolidated financial statements from the date of acquisition by Oboronprom. The cost of

the acquisition is estimated as approximately equal to the fair value of the net assets acquired.

The Group has determined the fair value of identifiable assets and liabilities of OAO Reduktor-PM at the date

of acquisition as follows:

Fair value

ASSETS Property, plant and equipment 1,223

Inventories 464



Total assets 2,036

LIABILITIES


Retirement benefit obligations 6

Trade payables 461


Total liabilities 1,014

Net assets at the date of acquisition 1,022

Add: Goodwill 5

Less: Non-controlling interests (at proportion of net assets acquired) (196)




Less: Consideration paid by Oboronprom (831)

Net cash inflow on acquisition of subsidiary (55)

At the date of acquisition, OAO Reduktor-PM did not prepare financial statements in accordance with IFRS.

Thus, it was not practicable to determine the carrying values of all of the acquired assets, liabilities and

contingent liabilities of OAO Reduktor-PM in accordance with IFRS immediately before the acquisition.

OAO Reduktor-PM contributed RUB 1,605 million of revenue and RUB 122 million of loss before tax from

the date of acquisition to 31 December 2008. There is no available information under IFRS in order to

determine the impact this acquisition would have had if occurred at the beginning of the period.




35

Change of ownership in subsidiaries during the years ended 31 December 2010, 2009 and 2008

OAO Kazan Helicopter Plant (“KHP”)

On 30 July 2010, KHP, a Group subsidiary, disposed of its 48.2% interest in share capital of OOO TFK,

an associate of the Group, for a cash consideration of RUB 476 million. Up to the date of disposal OOO TFK

held an 11.4% direct interest (which equates to the Group’s effective ownership of 3.0%, taking into account

the Group’s share ownership in KHP and OOO TFK) in the share capital of KHP. As a result of the disposal of

investment in OOO TFK, the Group’s effective ownership in KHP decreased from 57.5% to 54.5%. Disposal

of the reciprocal interest was accounted for by increasing the non-controlling interests by RUB 272 million,

increasing the carrying value of investment in OOO TFK by RUB 123 million, and decreasing in retained

earnings by RUB 149 million.

On 8 September 2010, Oboronpom acquired the aforementioned 11.4% interest in the share capital of KHP

from OOO TFK, the former associate of KHP, for a cash consideration of RUB 765 million. The consideration

paid by Oboronprom was presented as additional paid-in capital within the consolidated statement of changes

in equity. On the date of the transaction, the carrying value of KHP net assets in the consolidated financial

statements of the Group was approximately RUB 8,912 million. As a result of this transaction, the Group

recognised a decrease in non-controlling interests in the amount of RUB 1,016 million. The excess of the value

of non-controlling interests acquired over the consideration paid was recognised as an increase in retained

earnings in the amount of RUB 251 million.

OAO Arsenyev Aviation Company PROGRESS (“Progress”)

As at 1 January 2008, Oboronprom held 50.0% plus one ordinary shares of Progress. During the years ended

31 December 2009 and 2008, ZAO Activnye Operatsyi (“AO”), an associate of Progress, acquired an additional

1.7% and 23.3% interest, respectively, in share capital of Progress for a cash consideration of RUB 27 million and

RUB 370 million, respectively (refer to note 18). As a result of these transactions the Group’s effective interest in

Progress increased by 0.5% and 6.4%, respectively. The excess attributable to the Group portion of the consideration

paid by AO of RUB 13 million and RUB 182 million, for the years ended 31 December 2009 and 2008, respectively,

over the Group’s share in the non-controlling interests acquired of RUB 13 million and RUB 143 million was

recorded as a decrease in retained earnings for the years ended 31 December 2009 and 2008, respectively.

On 22 March 2010, Oboronprom acquired the entire 25.0% interest in share capital of Progress from AO for a

cash consideration of RUB 440 million. At the date of transaction, the carrying value of Progress’ net assets in

the consolidated financial statements of the Group was RUB 200 million. The results of this transaction were

presented as follows:

Decrease of ownership as a result of disposal of reciprocal interest from AO

As a result of the disposal of Progress shares, the Group effective ownership in Progress decreased from 57.0%

to 50.0% plus one share. Accordingly, the Group recognised an increase in non-controlling interests in the

amount of RUB 14 million and an increase of carrying value of investments in AO in the amount of RUB 216

million. The difference in the amount of RUB 202 million was recognised as an increase in retained earnings.

Increase of ownership as a result of acquisition of the additional shares of Progress from ZAO Activnye Operatsyi

Consideration in the amount of RUB 440 million paid by Oboronprom was presented as additional paid-in-capital

within the consolidated statement of changes in equity with a corresponding decrease in non-controlling interests

in the amount of RUB 50 million. The excess of consideration paid by Oboronprom over the Group’s share in non-

controlling interests acquired in the amount of RUB 390 million was recognised as a decrease in retained earnings.

OAO MIL Moscow Helicopter Plant (“MIL”)

On 27 February 2010, Rostvertol, which at the time was an associate of the Group, acquired an additional 2.6%

interest in share capital of MIL for cash consideration of RUB 48 million. As a result of the transaction the Group’s

effective interest in MIL (reflecting the Group’s 22.8% ownership interest in Rostvertol) initially increased by 0.6%.

In December 2010, as a result of the acquisition of the controlling interests in Rostvertol (as detailed above)

the Group’s effective interest in MIL increased by 1.4%. At the end of financial year, the Group held an

effective ownership in MIL of 74.4%. As a result of the transactions non-controlling interests and retained

earnings decreased by RUB 37 million and RUB 11 million, respectively.




36

8. REVENUE

By customer destination Year ended 31/12/2010



Russian Federation 28,557 23,295 16,303

Asia 18,437 9,032 6,020

Africa 9,957 4,729 191

Other CIS countries 5,413 3,311 976

Europe 2,884 985 2,040

America 1,813 5,898 5,824

Other 141 55 344

Total 67,202 47,305 31,698

The following is an analysis of the Group’s largest customers excluding the government of the Russian Federation

(revenue from each customer exceeding 10% of total revenue) mainly represented by government or state-

controlled entities, which are located in the following countries:




China (presented within Asia above) 9,157 less than 10% less than 10% United Arab Emirates (presented within Asia above) less than 10% 5,820 less than 10% Venezuela (presented within America above) less than 10% less than 10% 5,546

9. COST OF SALES




Cost of production, including:

Raw materials and manufacturing supplies used 29,506 20,057 13,842 Payroll and related social taxes 7,076 6,317 5,490 Production services 1,952 2,268 1,428 Depreciation and amortisation 1,359 1,327 1,157 Energy and utilities 827 675 504 Other 1,178 744 565

Total cost of production 41,898 31,388 22,986

Increase in work in progress and finished goods (934) (876) (610)

Total cost of sales 40,964 30,512 22,376

10. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES




Commission fee 5,389 2,608 1,841 Payroll and related social taxes 4,381 2,894 2,453 Professional services 906 711 676 Repair and maintenance expenses 751 148 192 Insurance expenses 540 109 70 Warranty expenses 507 320 284 Bank charges 492 179 150 Transport expenses 468 415 274 Depreciation and amortisation 408 401 381 Taxes other than income tax 352 185 212 Research and development expenditures 257 222 218 Advertising expenses 199 160 88 Impairment of accounts receivable 162 210 212 Other 1,013 572 492

Total 15,825 9,134 7,543




37

11. OTHER OPERATING EXPENSES, NET




Change in provision for litigations and claims 483 178 86

Maintenance of the local infrastructure 277 234 109

Loss on disposal of property, plant and equipment 182 97 120

Other (29) (74) 48

Total 913 435 363

12. FINANCE INCOME AND FINANCE COSTS

Finance income Year ended 31/12/2010



Interest income on financing provided 342 346 121

Effect of discounting the non-interest bearing long-term trade receivables 8 28 24

Total 350 374 145

Finance costs Year ended 31/12/2010



Interest expense on loans and borrowings 3,941 2,837 1,668

Interest expense on pension liabilities 23 17 14

Interest expense on obligations under finance leases 92 95 54

Total interest expense 4,056 2,949 1,736

Less: amounts included in the cost of qualifying assets (62) (77) (24)

Less: government grants ‒ compensation of finance costs (520) (592) (21)

Total finance costs 3,474 2,280 1,691

13. INCOME TAX EXPENSE/(BENEFIT)




Current income tax expense 1,474 1,000 373

Correction of income tax of prior periods 9 11 9

Total current income tax expense 1,483 1,011 382

Impact of change in income tax rate in the Russian Federation ‒ ‒ (425)

Deferred tax expense/(benefit) 18 141 (864)

Total deferred income tax expense/(benefit) 18 141 (1,289)

Total income tax expense/(benefit) 1,501 1,152 (907)

The corporate income tax rate in the Russian Federation, the primary location of the Group’s production entities,

for the years ended 31 December 2010 and 2009 was 20.0% (15.5% in the Perm region where Reduktor-PM is

located). For the year ended 31 December 2008 it was 24.0% (20.0% in the Perm region). During the year ended

31 December 2010, OAO Ulan-Ude Aviation Plant, a subsidiary of the Group, obtained a 4.5% income tax rate

reduction from the local tax authorities. Accordingly, for the year ended 31 December 2010, corporate income tax

for OAO Ulan-Ude Aviation Plant was at 15.5%. Such exemption depends on the volume of overall tax payments

made by the entity in a calendar year and its portion in relation to the regional government budget. In the

assessment of the applicable tax rate for deferred taxes attributable to OAO Ulan-Ude Aviation Plant,

the Group applied a 20.0% rate, as such tax rate is expected to apply in the following periods when the related

deferred taxes are realised.

Had the Group applied 15.5% in such calculations, the Group’s deferred tax liabilities would have decreased

by RUB 250 million as at 31 December 2010, with a corresponding decrease in deferred tax expenses for

the year then ended.




38

The deferred income tax benefit for the year ended 31 December 2008 includes RUB 425 million resulting

from a change in the income tax rate. In November 2008, an amendment to the Tax Code of the Russian

Federation was enacted to reduce the corporate income tax rate from 24% to 20% effective 1 January 2009.

The actual provision for income tax is different from that which would be obtained by applying the Russian

Federation statutory income tax rate to the accounting profit before tax.

A reconciliation between the statutory income tax rate and the effective rate was as follows:




Profit/(loss) before income tax 7,342 5,036 (2,841)

Income tax expense/(benefit) computed at statutory income tax rate

of 20% (for the year ended 31 December 2008: 24%) 1,468

1,007 (682)

Adjustments due to:

Effect on deferred tax balances due to the change

in income tax rate (see above) ‒

‒ (425)

Effect of different tax rates in different jurisdictions (254) (19) 5

Effect of previously unrecognised and unutilised tax losses and tax offsets

utilised in current year or recognised as deferred tax assets (4)

(97)

(10)

Expenses not deductible for tax purposes 246 250 135

Income not taxable for tax purposes (277) (118) (5)

Effect of unused tax losses not recognised as deferred tax assets and

change in allowance provision for deferred tax assets 313

118 66

Adjustments of prior years’ income tax 9 11 9

Total income tax expense/(benefit) 1,501 1,152 (907)




39

14. PROPERTY, PLANT AND EQUIPMENT

Land and

buildings

Machinery

and

equipment Transport Other

Construction

-in-progress Total

Cost At 1 January 2008 14,037 4,560 1,554 526 267 20,944

Additions 95 407 125 235 1,061 1,923

Transfers 137 337 64 108 (646) ‒

Acquisitions of subsidiaries 1,097 1,017 15 28 7 2,164

Disposals (41) (179) (85) (6) ‒ (311)

At 31 December 2008 15,325 6,142 1,673 891 689 24,720

Additions 434 919 45 494 1,270 3,162

Transfers 117 103 - 16 (236) ‒

Acquisitions of subsidiaries 16 30 2 30 ‒ 78

Disposals (71) (83) (23) (59) ‒ (236)

Transfer to assets held for sale (992) ‒ ‒ ‒ ‒ (992)

At 31 December 2009 14,829 7,111 1,697 1,372 1,723 26,732

Additions 455 1,178 113 462 3,507 5,715

Transfers 287 260 117 78 (742) ‒

Acquisitions of subsidiaries 2,820 2,808 215 584 804 7,231

Disposals (166) (304) (18) (27) ‒ (515)

At 31 December 2010 18,225 11,053 2,124 2,469 5,292 39,163

Accumulated depreciation

and impairment At 1 January 2008 (529) (487) (119) (102) ‒ (1,237)

Depreciation charge (549) (638) (125) (156) ‒ (1,468)

Disposals 6 112 7 2 ‒ 127

Impairment (1,608) ‒ ‒ ‒ ‒ (1,608)

At 31 December 2008 (2,680) (1,013) (237) (256) ‒ (4,186)


Disposals 4 17 12 39 ‒ 72

Transfer to assets held for sale 21 ‒ ‒ ‒ ‒ 21

Impairment (628) ‒ ‒ ‒ ‒ (628)

At 31 December 2009 (3,874) (1,722) (333) (463) ‒ (6,392)


Disposals 69 178 10 15 ‒ 272

Reversal of impairment 163 ‒ ‒ ‒ ‒ 163

At 31 December 2010 (4,239) (2,212) (437) (743) ‒ (7,631)

Carrying value

At 31 December 2008 12,645 5,129 1,436 635 689 20,534

At 31 December 2009 10,955 5,389 1,364 909 1,723 20,340

At 31 December 2010 13,986 8,841 1,687 1,726 5,292 31,532

As at 31 December 2010, 2009 and 2008, construction-in-progress included advances paid for acquisition of property,

plant and equipment in the amounts of RUB 1,858 million, RUB 319 million and RUB 1 million, respectively.

Certain property, plant and equipment have been pledged to secure bank loans and borrowings granted to the Group:

31/12/2010 31/12/2009 31/12/2008

Carrying value of property, plant and equipment (refer to note 28) 2,177 728 1,179

The Group leases machinery and equipment and transport under a number of finance lease agreements. At the end

of the term of the lease the Group takes automatic ownership of the assets or has an option to purchase leased

assets at a beneficial price. Finance leases obligations are secured by the lessors’ title to the leased assets.

31/12/2010 31/12/2009 31/12/2008

Carrying value of leased property, plant and equipment (refer to note 29) 803 682 590




40

Impairment test

As at 31 December 2009 and 2008, the Group carried out a review of the carrying value of its property, plant

and equipment. The market value of land and certain buildings primarily located in Moscow and Moscow region

suffered as a result of significant decline in market prices. The recoverable amounts of these assets were determined

on the basis of average prices used in transactions for similar property in Moscow and Moscow region. As a result

of valuation performed by independent appraiser the Group recognised impairment losses totalling RUB 628

million and RUB 1,608 million, for the year ended 31 December 2009 and 2008, respectively. These losses are

attributable to Research and Development segment (refer to note 6).

During the year ended 31 December 2010, due to the recovery of the Russian and worldwide economies,

the Group performed a re-assessment of the carrying value of property, plant and equipment previously

impaired. As at 31 December 2010, as a result of the re-assessment and new valuation performed by an

independent appraiser the Group reversed RUB 163 million of previously recognised impairment losses,

in the same segment as in previous years.

15. NON-CURRENT ASSETS CLASSIFIED AS HELD FOR SALE

As at 31 December 2009, the Group’s non-current assets held for sale with carrying value of RUB 971 million

represented certain office buildings, which the Group’s management planned to dispose of during the following

year. During the year ended 31 December 2010, the Group completed the sale of these assets, resulting in a loss

on disposal of RUB 108 million, which primary arose on other assets being sold as a combined package with

the held for sale assets. The loss from disposal of the assets was presented within Other operating expenses

within Loss from disposal of property, plant and equipment.

16. GOODWILL

31/12/2010 31/12/2009 31/12/2008

Balance at beginning of the year 913 138 ‒

Acquired on the acquisition of subsidiaries (refer to note 7) ‒ 775 138

Balance at end of the year 913 913 138

Allocation of goodwill to cash-generating units

The carrying amount of goodwill was allocated to the following separate cash generating units:

31/12/2010 31/12/2009 31/12/2008

OAO Helicopter Innovation Industrial Company 775 775 ‒

OAO Novosibirsk Aircraft Repair Plant 133 133 133

OAO Reduktor-PM 5 5 5

Total 913 913 138

Annual test for impairment

As at 31 December 2010 and at the end of each reporting period presented, the Group conducted an assessment

of the recoverable amount of goodwill. There were no impairments recognised in any of the periods presented.

As at 31 December 2010, the most significant estimates and assumptions used in the determination of the value

in use calculations are as follows:

Cash flows were projected based on the budgeted amounts for the year ending 31 December 2011 and forecasted

up to 2020. This period is generally in line with remaining weighted average useful life of property, plant and

equipment of the respective cash-generating units.

A post-tax discount rate of 15.0% was determined based on the Weighted Average Cost of Capital (“WACC”)

that reflects management’s assessment of the risks specific to the respective cash-generating units of the Group.




41

Inflation for the following 10 (ten) years was consistent with the external sources of information. Thereafter

a 3.5% p.a. inflation rate was applied.

Production growth rate (“PGR”) is based on management estimates of the growth in the helicopters industry,

taking into account the most recent industry statistics and information.

Increase in sales prices will be in line with increase of Spare parts price index (“SPPI”), which is subject

to indexation in line with the expected inflation. Accordingly, gross margin is expected to be relatively

stable and varies from 44.3% to 51.9%.

A summary of the most significant assumptions used in the calculation of value in use are presented as follows:

Inflation, % SPPI, %

PGR, y-o-y %

Gross margin, %

2011 7.7 6.9 18.3 51.9

2012 6.9 5.3 3.6 50.6

2013 6.4 5.2 (11.5) 49.1

2014 6.0 5.0 (6.5) 47.7

2015 5.8 4.7 ‒ 46.5

Thereafter (2016-2020) 4.4 4.1 3.5 44.3

Average for the period up to 2020 5.5 4.8 2.1 46.7

17. OTHER INTANGIBLE ASSETS

Capitalised development

costs

Purchased software

and other Total

Cost At 1 January 2008 643 55 698 Additions 578 78 656 Government grants received (577) ‒ (577)

At 31 December 2008 644 133 777 Additions 1,045 60 1,105 Government grants received (371) ‒ (371) Disposals (17) (13) (30)

At 31 December 2009 1,301 180 1,481 Additions 1,691 51 1,742 Government grants received (391) ‒ (391) Acquired on acquisition of Rostvertol (refer to note 7) 240 38 278

At 31 December 2010 2,841 269 3,110

Accumulated amortisation At 1 January 2008 (377) (13) (390) Amortisation charge (35) (35) (70)

At 31 December 2008 (412) (48) (460) Amortisation charge (31) (26) (57) Disposals 9 ‒ 9

At 31 December 2009 (434) (74) (508) Amortisation charge (56) (37) (93)

At 31 December 2010 (490) (111) (601)

Carrying value At 31 December 2008 232 85 317

At 31 December 2009 867 106 973

At 31 December 2010 2,351 158 2,509




42

18. INVESTMENTS IN ASSOCIATES

OAO

Rostvertol OOO TFK

ZAO

Activnye

Operatsyi

OAO AKB

Zarechye

OAO AKB

Doncombank Total

At 1 January 2008 1,258 327 245 188 ‒ 2,018

Share of results (27) 6 ‒ (28) ‒ (49)

Dividends (26) ‒ ‒ (9) ‒ (35)

Additional investments ‒ ‒ 245 ‒ ‒ 245

Acquisition of reciprocal interest ‒ ‒ (182) ‒ ‒ (182)

At 31 December 2008 1,205 333 308 151 ‒ 1,997

Share of results 127 ‒ 1 15 ‒ 143

Dividends (26) (4) ‒ (5) ‒ (35)

Acquisition of reciprocal interest ‒ ‒ (13) ‒ ‒ (13)

At 31 December 2009 1,306 329 296 161 ‒ 2,092

Share of results 156 23 (11) 7 ‒ 175

Dividends (291) ‒ ‒ ‒ ‒ (291)

Acquisition of reciprocal interest (11) ‒ ‒ ‒ ‒ (11)

Disposal of reciprocal interest 11 123 216 ‒ ‒ 350

Disposal of investments ‒ (475) ‒ ‒ ‒ (475)

Acquired on the business combination ‒ ‒ ‒ ‒ 125 125

Reclassified due to business combination (1,171) ‒ ‒ ‒ ‒ (1,171)

At 31 December 2010 ‒ ‒ 501 168 125 794


Rostvertol is a producer of helicopters, with a production facilities located in Rostov-on-Don, the Russian

Federation. In September 2007, Oboronprom acquired a 17.3% interest in Rostvertol for a total cash

consideration of RUB 723 million. As a result of this acquisition, the Group’s ultimate shareholding in

Rostvertol increased to 22.8%, which comprises 17.3% held by Oboronprom and an additional 5.5% held by

Russian Federation state bodies, at which point the Group obtained a significant influence over Rostvertol.

The acquisition cost paid by Oboronprom, along with the carrying value of the 5.5% held by the Russian Federation

state bodies, was recorded by the Group as a shareholder’s contribution in the amount of RUB 1,298 million.

The 5.5% legal interest held by the Russian Federation state bodies was transferred to Oboronprom in 2008

and 2009. In December 2010, the entire 22.8% interest was transferred from Oboronprom to the Company,

as a consideration for additional shares issued by the Company. This transfer was part of the Group formation

(refer to note 1).

The Group has accounted for Rostvertol using the equity method of accounting from September 2007

to December 2010, when the Group obtained control, through the acquisition of an additional 52.3%

of Rostvertol’s shares for a total cash consideration of RUB 3,230 million (refer to note 7).

Summarised financial information in respect of Rostvertol’s assets and liabilities is set out below:

31/12/2009 31/12/2008


Total liabilities (7,317) (6,303)

Net assets 5,617 5,301

Group interest, as % 22.8 22.8

Group’s share of net assets of associate 1,306 1,205

Summarised financial information in respect of Rostvertol’s revenue and net income to the date when

Rostvertol became a subsidiary of the Group is set out below:

From 01/01/2010

to 10/12/2010 Year ended 31/12/2009


Revenue 15,494 11,286 7,302

Profit/(loss) 696 567 (126)

Group interest, as % 22.8 22.8 22.8

Group’s share of profit/(loss) of associate 156 127 (27)




43

OOO TFK (“TFK”)

Before 1 January 2008, TFK, an associate of KHP, which in turn is a Group subsidiary, acquired an 11.4%

interest in KHP from non-controlling shareholders that resulted in a proportional decrease of the carrying

amount of the Group’s investment in TFK by RUB 123 million. As at 31 December 2009 and 2008,

the carrying amount of shares of KHP, held by TFK and accounted for as a reduction of the Group

investment in TFK, was RUB 123 million.

On 30 July 2010, KHP, a Group subsidiary, disposed of its 48.2% interest in share capital of OOO TFK,

an associate of the Group, for a cash consideration of RUB 476 million (refer to note 7).

Summarised financial information in respect of the TFK’s assets and liabilities is set out below:

31/12/2009 31/12/2008


Total liabilities (65) (63)

Net assets 940 947

Group interest, as % 48.2 48.2

Group’s share of net assets of associate 452 456

Less: reciprocal interest (123) (123)

Carrying value of investment in associate 329 333

Summarised financial information in respect of the TFK’s revenue and net income to the date of disposal of

investments in associate is set out below:

From 01/01/2010

to 30/07/2010 Year ended 31/12/2009


Revenue 134 284 241

Profit 48 1 12


Group’s share of profit of associate 23 ‒ 6

ZAO Activnye Operatsyi (“AO”)

In 2007, Progress, the Group subsidiary, established AO by contributing RUB 245 million in exchange for 49%

of its share capital. In 2008, Progress contributed RUB 245 million into the share capital of AO as result of its

additional share issuance.

In 2009 and 2008, AO acquired a 1.7% and 23.3% interest, respectively, in Progress from non-controlling

shareholders that resulted in a proportional decrease of the carrying amount of the Group investment in AO

by RUB 13 million and RUB 182 million, respectively. As at 31 December 2009 and 2008, the carrying

amount of shares of Progress, held by AO and accounted for as a reduction of the Group investment in AO,

was RUB 195 million and RUB 182 million, respectively.

On 22 March 2010, Oboronprom acquired the entire 25.0% interest in the share capital of Progress for a cash

consideration of RUB 440 million from AO. As a result of this transaction, the carrying value of the investment in

AO increased by RUB 216 million and was presented as disposal of reciprocal interest in Progress (refer to note 7).

Summarised financial information in respect of AO’s assets and liabilities is set out below:

31/12/2010 31/12/2009 31/12/2008

Total assets 1,029 999 998

Total liabilities (9) ‒ ‒

Net assets 1,020 999 998


Group’s share of net assets of associate 501 491 490

Less: reciprocal interest ‒ (195) (182)

Carrying value of investment in associate 501 296 308




44

Summarised financial information in respect of the AO’s revenue and net income is set out below:




Revenue 5 3 ‒

Profit/(loss) 21 1 (2)


Group’s share of profit of associate 10 1 ‒

Less: Group’s share in gain from disposal of reciprocal interest (21) ‒ ‒

Group’s result of (loss)/profit of associate (11) 1 ‒

OAO AKB Zarechye (“Zarechye”)

Zarechye, an associate of KHP, is a regional commercial bank providing financial services to businesses and

individuals in Tatarstan Republic.

Summarised financial information in respect of the Zarechye’s assets and liabilities is set out below:

31/12/2010 31/12/2009 31/12/2008

Total assets 4,871 3,218 3,129

Total liabilities (4,209) (2,582) (2,536)

Net assets 662 636 593


Group’s share of net assets of associates 168 161 151

Summarised financial information in respect of the Zarechye’s revenue and net income is set out below:




Revenue 239 205 125

Profit/(loss) 27 61 (117)


Group’s share of profit/(loss) of associate 7 15 (28)

OAO AKB Donkombank (“Donkombank”)

As a result of the acquisition of Rostvertol, which occurred in December 2010, the Group acquired a 30.3%

interest in Donkombank, an associate of Rostvertol. Donkombank is a regional commercial bank providing

financial services to businesses and individuals in Rostov-on-Don.

As at 31 December 2010, the total assets and liabilities of Donkombank were RUB 3,228 million and

RUB 2,807 million, respectively. Revenue, profit and the Group’s share of profit of Donkombank for

the year ended 31 December 2010 was RUB nil.

19. TRADE RECEIVABLES

31/12/2010 31/12/2009 31/12/2008

Trade receivables 9,062 6,790 6,073

Less: Allowance for doubtful trade receivables (493) (472) (409)

Total 8,569 6,318 5,664

Total non-current trade receivables 172 63 87

Total current trade receivables 8,397 6,255 5,577




45

The Group’s ageing of trade receivables is presented as follows:

31/12/2010 31/12/2009 31/12/2008

Past due, but not impaired

1 month 59 ‒ 3

1-3 months 110 203 236

3 months to 1 year 55 177 325

Thereafter 49 ‒ 65

Total past due, but not impaired 273 380 629

Due in:

1 month 263 625 226

1-3 months 3,034 4,871 3,825

3 months to 1 year 4,827 379 897

Thereafter 172 63 87

Total 8,569 6,318 5,664

Included in the trade receivables at 31 December 2010, 2009 and 2008 were debtors with amounts of RUB 273

million, RUB 380 million and RUB 629 million, respectively, that were past due but not impaired. The Group

does not hold any collateral over these balances. Management of the Group believes that these amounts are

recoverable in full.

The following is movement in the allowance for doubtful trade accounts receivable:

31/12/2010 31/12/2009 31/12/2008

Balance at beginning of the year 472 409 244

Impairment losses recognised 104 63 165

Amounts written-off as uncollected (83) ‒ ‒


At 31 December 2010, 2009 and 2008, long-term trade receivables were measured at amortised cost using

the weighted average discount rate of 13%. The Group does not hold any collateral over these balances.

20. PREPAYMENTS AND OTHER RECEIVABLES

31/12/2010 31/12/2009 31/12/2008

Non-financial assets

Advances paid to suppliers of inventory and services 21,646 14,353 5,029

Prepaid commission fee 2,666 4,417 546

Total non-financial assets 24,312 18,770 5,575

Total financial assets Other receivables 717 955 972

Less: Allowance for doubtful other receivables (93) (67) (44)

Total financial assets 624 888 928

Total non-current prepayments 5,080 3,414 312

Total current prepayments and other receivables 19,856 16,244 6,191

Advances paid to suppliers of inventories and services

As at 31 December 2010, 2009 and 2008, advances paid to suppliers of inventories and services are presented

net of impairment provision of RUB 348 million, RUB 313 million and RUB 189 million, respectively.

During the years ended 31 December 2010, 2009 and 2008, the Group recognised impairment losses in regard

of advances paid to suppliers of inventories and services in the amounts of RUB 16 million, RUB 124 million

and RUB 26 million, respectively.




46

As at 31 December 2010, 2009 and 2008, the Group five largest balances in advances paid to suppliers of

inventories and services (individually exceeding 2% of the total outstanding balance) represented 41%, 51% and

37% of the total balance, respectively and presented as follows:

Name of counterparty Customer location 31/12/2010 31/12/2009 31/12/2008

OAO Radiopribor, Vladivostok Russian Federation 4,796 3,181 778

Rosoboronexport Russian Federation 2,666 4,417 546

Motor Sich Ukraine 1,052 657 574

OAO Klimov Russian Federation 873 693 163

OAO Korporatsiy’a Fazotron NIIR Russian Federation 532 684 ‒

9,919 9,632 2,061

OAO Radiopribor (Radiopribor)

Radiopribor is a strategic supplier of homing systems to OAO Arsenyev Aviation Company PROGRESS.

The government of the Russian Federation is a holder of “golden share” in Radiopribor that allowed the Group to

nominate one representative to the Board of Directors of Radiopribor. During the years ended 31 December 2010,

2009 and 2008, Radiopribor supplied approximately RUB 1,176 million, RUB 663 million and RUB 912 million

of homing systems. As at 31 December 2010, 2009 and 2008, RUB 3,623 million, RUB 2,005 million and

RUB 130 million, respectively, of outstanding advances were presented as part of non-current prepayments.

Rosoboronexport

Rosoboronexport is a monopoly organisation established by the government of the Russian Federation to

control export sales of military and related products and an agent for a majority of the Group military and

related product export sales. During the years ended 31 December 2010, 2009 and 2008, 30%, 29% and 26%

of the Group sales were made through Rosoboronexport. The commission fee is established in each agreement

and varies from 5% to 30% of the selling price.

Motor Sich

The Motor Sich, an engine manufacturer in Ukraine, is the largest and strategic supplier of the engines. Historically,

Motor Sich has been responsible for the production of approximately 60% of all engines supplied to the Group.

OAO Klimov (“Klimov”)

Klimov is a related party of the Group and the biggest Russian engine manufacturer. It provides approximately

30% of the engines used by the Group. Klimov is also involved in a certain Group research and development

projects as a party mainly responsible for the development of new or modification of existing engines.

OAO Korporatsiy’a Fazotron NIIR (“NIIR Fazotron”)

NIIR Fazotron, a related party, is one of the key suppliers of radar guidance systems to the Group.

As at 31 December 2010 and 2009, RUB 387 million and RUB 363 million of advances were

presented as part of non-current prepayments.

Other receivables

The following is movement in the allowance for doubtful other receivables:

31/12/2010 31/12/2009 31/12/2008

Balance at beginning of the year 67 44 23

Impairment losses recognised 42 23 21

Amounts written-off as uncollected (16) ‒ ‒





47

21. OTHER FINANCIAL ASSETS

31/12/2010 31/12/2009 31/12/2008

Bank deposits 259 3,217 184

Advances paid for acquisition of subsidiaries 748 ‒ ‒

Available-for-sale investments in shares 456 81 48

Loans issued 198 46 689

Promissory notes 108 277 557

Other ‒ 104 150

Total 1,769 3,725 1,628

Total non-current other financial assets 1,356 1,243 337

Total current other financial assets 413 2,482 1,291

Bank deposits

Bank name Currency 31/12/2010 31/12/2009 31/12/2008

OAO AKB Donkombank, an associate of the Group RUB 150 ‒ ‒

OAO AKB Zarechye, an associate of the Group RUB 20 ‒ 108

OAO AKB Bank of Moscow, related party USD 18 128 66

OAO AKB Bank of Moscow, related party Euro 26 6 ‒

OAO AKB Bank of Moscow, related party RUB ‒ ‒ 10

OAO Bank Saint Petersburg USD ‒ 1,058 ‒

OAO Bank Saint Petersburg Euro ‒ 868 ‒

ZAO AKB Interprombank RUB 45 957 ‒

OAO AKB Rosbank RUB ‒ 200 ‒

259 3,217 184

OAO AKB Donkombank, an associate of OAO Rostvertol

As at 31 December 2010, 2009 and 2008, effective interest rates and maturity profile for the deposits placed

in OAO Donkombank were presented as follows:

31/12/2010 31/12/2009 31/12/2008

Effective interest rates, as % per annum ‒ RUB 1.8 N/A N/A

Due date (up to) 27/09/2013 N/A N/A

OAO AKB Zarechye, an associate of OAO Kazan Helicopter Plant


in OAO AKB Zarechye were presented as follows:

31/12/2010 31/12/2009 31/12/2008

Effective interest rates, as % per annum ‒ RUB 3.5 N/A 4.0

Due date (up to) 28/01/2011 N/A 20/01/2010

OAO AKB Bank of Moscow, a related party of the Group


in OAO Bank of Moscow were presented as follows:

31/12/2010 31/12/2009 31/12/2008

Effective interest rates, as % per annum ‒ USD 4.0 2.5 – 10.0 5.6 – 6.8

Effective interest rates, as % per annum ‒ Euro 2.4 – 3.9 3.9 N/A

Effective interest rates, as % per annum ‒ RUB N/A N/A 7.2 – 10.9

Due date (up to) 20/10/2011 26/08/2010 16/12/2009




48

OAO Bank Saint Petersburg


in OAO Bank Saint Petersburg were presented as follows:

31/12/2010 31/12/2009 31/12/2008

Effective interest rates, as % per annum ‒ USD N/A 4.7 N/A

Effective interest rates, as % per annum ‒ Euro N/A 5.5 N/A

Due date (up to) N/A 24/02/2010 N/A

ZAO AKB Interprombank


in ZAO AKB Interprombank were presented as follows:

31/12/2010 31/12/2009 31/12/2008

Effective interest rates, as % per annum ‒ RUB 6.5 3.0 – 12.0 N/A

Due date (up to) 31/07/2011 30/12/2011 N/A

OAO AKB Rosbank


in OAO AKB Rosbank were presented as follows:

31/12/2010 31/12/2009 31/12/2008

Effective interest rates, as % per annum ‒ RUB N/A 7.5 N/A

Due date (up to) N/A 30/06/2010 N/A

Advances paid for acquisition of subsidiaries

In December 2010, Rostvertol, the Group’s subsidiary, paid advances in the total amount of RUB 783 million for the

acquisition of 100% interest in ZAO Avia Company Rostvertol Avia and ZAO Sanatory Zor'ka. Up to 31 December

2010, Rostvertol obtained legal ownership of 5% and 2% of the shares in ZAO Avia Company Rostvertol Avia and

ZAO Sanatory Zor'ka, respectively, which have been presented as Available-for-sale investments in shares (see

below). The remaining shareholding interests in these entities were not transferred as at 31 December 2010 and are

therefore presented as Advances paid for acquisition of subsidiaries for the remaining amount of RUB 748 million.

After the reporting date, but before the date of authorisation for issuance of these consolidated financial statements,

the remaining shares have been received by the Group (refer to note 40).

Available-for-sale (“AFS”) investments in shares

The Group’s available-for-sale investments represent investments in listed and unlisted equity securities.

These shares are not held for trading purposes and are accordingly classified as available-for-sale.

Ownership, % 31/12/2010 31/12/2009 31/12/2008

AFS – measured at fair value

OAO TVTz 25.01 359 ‒ ‒

OAO AKB MMB Bank of Moscow 0.03 19 14 13

AFS – measured at cost

ZAO Avia Company Rostvertol Avia 5.0 32 ‒ ‒

ZAO Sanatory Zor'ka 2.0 3 ‒ ‒

Other various 43 67 35

Total 456 81 48

________________________ 1 In December 2010, as part of acquisition of 52.3% of Rostvertol’s shares, the Group acquired 100% preferred shares of OAO TVTz or 25% ownership in OAO TVTz.




49

Loans issued

Name of counterparty Currency 31/12/2010 31/12/2009 31/12/2008

Oboronprom RUB 96 30 339

LLC Ametist RUB 57 ‒ ‒

LLC Vega-Hotel RUB 30 ‒ ‒

OAO Radiopribor RUB ‒ ‒ 320

Other RUB 15 16 30

Total 198 46 689

Oboronprom

As at 31 December 2010, 2009 and 2008, RUB-denominated unsecured loans issued to Oboronprom, the Group

controlling shareholder, of which RUB 96 million is outstanding as at 31 December 2010, were assumed

as a result of the acquisition of controlling interest in Rostvertol (refer to note 7). The nominal interest rate

for the loan that was assumed on the acquisition of Rostvertol and still outstanding as at 31 December 2010

is 0.1% per annum. This loan was not presented at fair value on the date of the business acquisition since

the difference between the carrying and fair values is insignificant. The effective interest rates and maturities

for these loans are presented as follows:

31/12/2010 31/12/2009 31/12/2008

Effective interest rates, as % per annum 0.1 12.0 20.0

Due date 01/09/2011 31/12/2010 24/09/2010

LLC Ametist and LLC Vega-Hotel

As at 31 December 2010, RUB-denominated unsecured loans issued to LLC Ametist and LLC Vega-Hotel were

assumed as a result of the acquisition of controlling interest in OAO Rostvertol (refer to note 7). The nominal

interest rates vary from 0.1% to 7.0% per annum and mature from 31 May 2011 to 30 December 2011.

These loans were not presented at fair value on the date of the business acquisition since the difference

between the carrying and fair values is insignificant.

OAO Radiopribor

As at 31 December 2008, a RUB-denominated interest free unsecured loan was issued to OAO Radiopribor,

a supplier of homing systems for Progress (refer to note 20), the Group subsidiary. This loan was measured at

amortised cost using the effective interest rate of 13.0% per annum. During the year ended 31 December 2009,

OAO Radiopribor settled the loan in cash.

Promissory notes

As at 31 December 2010, 2009 and 2008, the major types of promissory notes, their currency and effective

interest rates were presented as follows:

Type of promissory note

Effective

interest rate 31/12/2010 31/12/2009 31/12/2008

RUB-denominated bank promissory notes 11.0 59 73 27

USD-denominated bank promissory notes 12.0 34 204 530

RUB-denominated promissory note Nil 15 ‒ ‒

Total 108 277 557

The maturity dates for RUB-denominated bank promissory notes vary from 15 January 2011 to 21 December 2011.

USD-denominated bank promissory notes were settled on 15 January 2011.




50

22. DEFERRED TAX ASSETS AND LIABILITIES

31/12/2010

Recognised

in profit

or loss

Acquisitions

(refer to

note 7) 31/12/2009

Recognised

in profit

or loss

Acquisitions

(refer to

note 7) 31/12/2008

Recognised

in profit

or loss

Acquisitions

(refer to

note 7) 31/12/2007

Inventories 2,119 (217) 227 2,109 396 ‒ 1,713 332 1 1,380

Loss carried forward ‒ (583) ‒ 583 583 ‒ ‒ ‒ ‒ ‒

Other financial assets 40 24 ‒ 16 (3) ‒ 19 3 11 5

Accounts receivable 1,460 1,373 10 77 (98) ‒ 175 (32) 23 184

Accounts payable 77 (29) ‒ 106 50 ‒ 56 35 9 12

Property, plant and equipment 193 105 ‒ 88 2 ‒ 86 (47) 5 128

Loans and leases payable 48 (83) ‒ 131 (32) ‒ 163 132 9 22

Less: allowance provision (306) (306) ‒ ‒ ‒ ‒ ‒ ‒ ‒ ‒

Deferred tax assets 3,631 284 237 3,110 898 ‒ 2,212 423 58 1,731

Property, plant and equipment (3,822) 256 (1,006) (3,072) 382 (6) (3,448) 1,129 (428) (4,149)

Accounts payable (2,213) (580) (105) (1,528) (827) ‒ (701) (273) (22) (406)

Commissions fee (772) 14 ‒ (786) (677) ‒ (109) (109) ‒ ‒

Accounts receivable (407) (117) ‒ (290) 59 ‒ (349) 149 (10) (488)

Inventories (24) 90 ‒ (114) 16 ‒ (130) (71) 22 (81)

Other financial assets (42) 35 (25) (52) 8 ‒ (60) 41 ‒ (101)

Deferred tax liabilities (7,280) (302) (1,136) (5,842) (1,039) (6) (4,797) 866 (438) (5,225)

Net deferred tax liabilities (3,649) (18) (899) (2,732) (141) (6) (2,585) 1,289 (380) (3,494)

Certain deferred tax assets and liabilities have been offset in accordance with the Group’s accounting policy. The following is the analysis of the deferred tax balances (after offset)

as they are presented in the consolidated statement of financial position:

31/12/2010 31/12/2009 31/12/2008

Deferred tax assets 201 164 104

Deferred tax liabilities (3,850) (2,896) (2,689)

Net deferred tax liabilities (3,649) (2,732) (2,585)

The aggregated amounts of temporary differences associated with undistributed earnings of subsidiaries and associates (mainly relates to subsidiaries and associates located on

the territory of the Russian Federation) were presented as follows:

31/12/2010 31/12/2009 31/12/2008

Subsidiaries 3,055 2,996 1,206

Associates 338 359 251

Total 3,393 3,355 1,457




51

As at 31 December 2010, 2009 and 2008, no deferred tax liabilities have been recognised in respect of these

differences because management believes that the Group is in the position to control the timing of reversal of

such differences and it is probable that such differences will not reverse in the foreseeable future. Unrecognised

differences relate to subsidiaries and associates registered on the territory of the Russian Federation.

As at 31 December 2010, 2009 and 2008, the Group recognised unused tax losses carried forward in the amount

of RUB nil, RUB 583 million and RUB nil, respectively. Unutilised tax losses for which deferred tax asset was

recognised attributable to OAO Kazan Helicopter Plant, a Group subsidiary, and fully utilised during the year

ended 31 December 2010.

The accumulated unused tax losses carried forward of the certain Group’s subsidiaries which were available for

offset against future taxable income and for which no deferred tax assets were recognised are presented as follows:

31/12/2010 31/12/2009 31/12/2008

OAO KAMOV 203 102 74

OAO Kumertau Aviation Production Enterprise 336 201 111

OAO Arsenyev Aviation Company PROGRESS 108 75 161

OAO Novosibirsk Aircraft Repair Plant 105 109 120

Total 752 487 466

Deferred tax assets in regard of unused tax losses carried forward were not recognised as it is not probable that

future profit will be available against which the unused tax losses can be utilised. The unused tax losses will

expire during the period up to 2019.

23. INVENTORIES

31/12/2010 31/12/2009 31/12/2008

Raw materials and manufacturing supplies 15,723 8,693 6,370

Less: Allowance for obsolete raw materials and manufacturing supplies (975) (404) (247)

14,748 8,289 6,123

Work-in-progress 4,902 3,516 2,543

Finished goods 1,061 383 568

Less: Allowance for obsolete work-in-progress and finished goods (591) (414) (562)

5,372 3,485 2,549

Total 20,120 11,774 8,672

Certain inventories have been pledged to secure bank loans and borrowings granted to the Group:

31/12/2010 31/12/2009 31/12/2008

Carrying value of inventories (refer to note 28) 2,669 9,827 4,000

The movement in the allowance for obsolete and slow-moving items was as follows:

31/12/2010 31/12/2009 31/12/2008

Balance at the beginning of the year 818 809 544

Increase in allowance 683 114 280

Acquired within the business combination 141 ‒ ‒

Reversal of allowance (76) (105) (15)

Balance at the end of the year 1,566 818 809




52

24. CONSTRUCTION CONTRACTS

31/12/2010 31/12/2009 31/12/2008

Construction costs incurred plus recognised profits less recognised losses to date 20,896 11,746 6,914

Less: Progress billings (38,762) (23,207) (12,359)

(17,866) (11,461) (5,445)

Recognised and included in the consolidated financial statements as:

Amounts due from customers under construction contracts 6,336 3,015 2,596

Amounts due to customers under construction contracts (24,202) (14,476) (8,041)

(17,866) (11,461) (5,445)

25. OTHER TAXES RECEIVABLE AND PAYABLE

Other taxes receivable 31/12/2010 31/12/2009 31/12/2008

VAT receivable 6,556 3,285 2,738

Other 75 63 34

Total 6,631 3,348 2,772

Other taxes payable 31/12/2010 31/12/2009 31/12/2008

VAT payable 1,158 376 234

Personal income tax and social taxes 262 137 226

Property tax 51 2 33

Other 67 55 61

Total 1,538 570 554

26. CASH AND CASH EQUIVALENTS

31/12/2010 31/12/2009 31/12/2008

Current bank accounts, including:

RUB-denominated 8,238 5,679 2,945

USD-denominated 1,701 408 983

Euro-denominated 922 1,559 1,539

Bank deposits, including:

RUB-denominated 6,423 1,747 802

Euro-denominated 645 ‒ ‒

USD-denominated ‒ 19 17

Other cash and cash equivalents 28 ‒ ‒

17,957 9,412 6,286

Bank deposits

31/12/2010 31/12/2009 31/12/2008

Bank name Currency Rate, % Balance Rate, % Balance Rate, % Balance

OAO Bank VTB RUB 3.7 ‒ 4.0 3,700 7.7 ‒ 10.0 751 ‒ ‒

OAO Sberbank of the Russian Federation RUB 2.3 ‒ 2.8 1,423 4.5 56 5.0 130

OAO AKB Zarechye RUB 0.2 ‒ 2.8 1,200 6.0 ‒ 7.2 830 ‒ ‒

OAO Bank Saint Petersburg Euro 2.3 645 ‒ ‒ ‒ ‒

ZAO AKB Novikombank RUB 4.5 100 9.0 10 ‒ ‒

OAO AKB International Financial Club RUB ‒ ‒ 5.0 ‒ 7.2 100 ‒ ‒

OAO Promstroybank USD ‒ ‒ 9.6 19 ‒ ‒

OAO AKB Bank of Moscow RUB ‒ ‒ ‒ ‒ 10.5 400

ZAO KB Nats Invest Prom Bank RUB ‒ ‒ ‒ ‒ 4.0 185

OAO AKB Moscow Credit Bank RUB ‒ ‒ ‒ ‒ 4.0 – 5.0 87

OAO AKB Bank of Moscow USD ‒ ‒ ‒ ‒ 3.9 17

Total 7,068 1,766 819

All bank deposits classified as cash and cash equivalents have an original maturity of less than three months.




53

27. SHARE CAPITAL

Ordinary shares

31/12/2010 31/12/2009 31/12/2008

Number

of shares Share

capital Number of shares

Share capital

Number of shares

Share capital

Balance at beginning of the year 1,000 1 1,000 1 1,000 1

23 December 2010

Issuance of additional shares (see below)

93,994 94 ‒ ‒ ‒ ‒

Balance at end of the year 94,994 95 1,000 1 1,000 1

The Company’s ordinary shares have a par value of RUB 1,000 and carry one vote per share on the shareholders

meetings and entitle the holder to receive dividends, which are subject for approval at a shareholder’s meeting.

At the general meeting held on 26 April 2010, Oboronprom decided to increase the share capital of the Company

by issuing 93,994 additional ordinary shares. The issuance was completed on 23 December 2010. All shares were

acquired by Oboronprom. As a consideration for the additional shares that were issued Oboronprom transferred

various controlling stakes in certain of the Group’s subsidiaries (refer to note 1), a 22.8% interest in Rostvertol

and cash contribution of RUB 3,050 million.

Oboronprom shares owned by the Group

As part of the assets, which were acquired by the Group through the acquisition of the controlling interest

in Rostvertol, the Group obtained 0.62% interest in Oboronprom, the Group sole shareholder. Oboronprom

shares were measured at fair value of RUB 231 million at the date of the business combination, and have

been presented as Oboronprom shares owed by the Group in the consolidated statement of changes in equity.

Dividends and retained earnings

The statutory financial statements of the Company are the basis for profit distribution and other appropriations.

As at 31 December 2010, 2009 and 2008, the Company’s retained earnings in the financial statements prepared

under reporting standards of the Russian Federation, which may be potentially distributed between shareholders in

the form of dividends, were RUB 612 million, RUB 323 million and RUB 68 million (all ‒ unaudited), respectively.

During the years ended 31 December 2010, 2009 and 2008, the Company and the Group entities declared

the following dividends:

Year ended 31/12/2010 Year ended 31/12/2009 Year ended 31/12/2008

Entity name

Total dividends declared

Attributable to non-

controlling interests







OAO Kazan Helicopter Plant 385 164 1 ‒ 5 2

OAO Ulan-Ude Aviation Plant 115 29 134 33 54 13

OAO Russian Helicopters 68 ‒ 17 ‒ ‒ ‒

OAO Stupino Machine Production Plant 35 14 19 8 20 8

OAO Reduktor-PM 30 6 17 3 14 3

OAO MIL Moscow Helicopter Plant 17 4 20 6 17 5

OAO KAMOV 12 ‒ ‒ ‒ ‒ ‒

OAO Helicopter Service Company 8 ‒ ‒ ‒ ‒ ‒

Total 670 217 208 50 110 31

Earnings/(losses) per share

Earnings/(losses) per share for the years ended 31 December 2010, 2009 and 2008 were calculated based

on the weighted average number of the Company’s ordinary shares outstanding during the respective periods

that are presented as follows:




Weighted average number of the Company’s ordinary shares 3,318 1,000 1,000




54

28. LOANS AND BORROWINGS

Interest

rate

31/12/2010 31/12/2009 31/12/2008

Rate, % Balance Rate, % Balance Rate, % Balance

Secured bank loans, including:

RUB-denominated

OAO Sberbank, related party Fixed 4 ‒ 11 6,406 4 ‒ 19 6,130 11 ‒ 16 3,937

OAO Alfa Bank Fixed 9 3,230 ‒ ‒ 14 100

OAO AKB Rosbank Fixed 10 ‒ 17 3,040 12 ‒ 18 3,910 10 ‒ 12 1,468

OAO Gazprombank, related party Fixed 9 ‒ 11 1,471 ‒ ‒ ‒ ‒

ZAO AKB Novikombank Fixed 10 ‒ 12 807 14 ‒ 20 81 ‒ ‒

OAO Bank VTB, related party Fixed 10 376 18 200 13 ‒ 17 60

ZAO KB Nats Invest Prom Bank Fixed 11 350 ‒ ‒ ‒ ‒

OAO Bank Saint Petersburg Fixed 10 300 17 300 ‒ ‒

OAO AKB Ural FD Fixed 13 200 18 200 ‒ ‒

OAO AKB Zarechye, related party Fixed 14 100 16 107 ‒ ‒

Vnesheconombank, related party Fixed ‒ ‒ 12 1,539 12 1,049

IFC Bank Fixed ‒ ‒ 18 500 ‒ ‒

ZAO TBK Fixed ‒ ‒ 14 300 ‒ ‒

ZAO Surgut Nefte Gaz Bank Fixed ‒ ‒ ‒ ‒ 10 920

OAO AKB Bank of Moscow, related party Fixed ‒ ‒ ‒ ‒ 19 550

OAO URSA Bank Fixed ‒ ‒ ‒ ‒ 12 201

OAO Promsvyazbank Fixed ‒ ‒ ‒ ‒ 12 ‒ 14 127

Other Fixed 9 ‒ 12 228 3 ‒ 18 223 12 ‒18 102

USD-denominated

OAO Sberbank, related party Fixed 9 5,708 7 ‒ 10 5,956 2 ‒ 11 957

OAO AKB Bank of Moscow, related party Fixed 9 3,871 9 ‒ 10 3,690 10 ‒ 17 1,471

Vnesheconombank, related party Floating Libor + 4.5 488 Libor + 4.5 484 Libor + 4.5 470

OAO AKB Spurt Fixed 9 427 10 302 14 323

OAO Promsvyazbank Fixed 10 274 ‒ ‒ 6 101

OAO AKB Rosbank Fixed ‒ ‒ 12 ‒ 13 499 6 579

ZAO AKB TransCapitalBank, related party Fixed ‒ ‒ 14 392 14 173

IFC Bank Fixed ‒ ‒ 14 242 ‒ ‒

OAO Bank Saint Petersburg Fixed ‒ ‒ 10 ‒ 14 45 14 492

Vnesheconombank, related party Fixed ‒ ‒ ‒ ‒ 9 269

OAO Uralsib Fixed ‒ ‒ ‒ ‒ 12 160

OAO URSA Bank Fixed ‒ ‒ ‒ ‒ 12 145

ZAO KB Nats Invest Prom Bank Fixed ‒ ‒ ‒ ‒ 17 103

Other 6 76 ‒ ‒ 16 41

EURO-denominated

OAO Bank Saint-Petersburg Fixed 9 3,227 ‒ ‒ ‒ ‒

OAO Gazprombank, related party Fixed 8 403 ‒ ‒ ‒ ‒

OAO Sberbank, related party Fixed 8 109 9 393 2 70

ZAO AKB TransCapitalBank, related party Fixed ‒ ‒ 14 304 ‒ ‒

OAO Khanty-Mansiyskiy bank Fixed ‒ ‒ ‒ ‒ 16 559

OAO AKB Zarechye, related party Fixed ‒ ‒ ‒ ‒ 16 56

Unsecured loans and borrowings,

including:

RUB-denominated

OAO Bank VTB, related party Fixed 12 ‒ 13 3,670 ‒ ‒ ‒ ‒

OAO AKB Rosbank Fixed 8 ‒ 15 2,175 ‒ ‒ ‒ ‒

OAO Sberbank, related party Fixed 9 2,149 ‒ ‒ ‒ ‒

Vnesheconombank, related party Fixed 12 1,883 ‒ ‒ ‒ ‒

IFC Bank Fixed 11 ‒ 12 1,180 ‒ ‒ ‒ ‒

Mustoe limited, related party Fixed 13 695 15 835 ‒ ‒

Oboronprom, related party Fixed 0 ‒ 9 331 0 ‒ 17 333 0 ‒ 9 107

OAO AKB Eurofinance Mosnarbank Fixed 8 325 ‒ ‒ ‒ ‒

LLC Korsa, related party Fixed 13 175 16 175 16 175

OAO Metkombank Fixed 11 150 ‒ ‒ ‒ ‒

Damocles Limited, related party Fixed ‒ ‒ ‒ ‒ 14 ‒ 16 695

Lordsburg Limited, related party Fixed ‒ ‒ ‒ ‒ 13 ‒ 14 225

Other Fixed 0 ‒ 10 27 ‒ ‒ ‒ ‒




55

Interest

rate

31/12/2010 31/12/2009 31/12/2008

Rate, % Balance Rate, % Balance Rate, % Balance

USD-denominated

UniCredit Bank Fixed 9 914 ‒ ‒ ‒ ‒

Rosoboronexport, related party Fixed 5 485 5 482 0 ‒ 5 1,752

BSGV Fixed 4 254 ‒ ‒ ‒ ‒

Mustoe limited, related party Fixed 11 171 10 ‒ 13 169 ‒ ‒

OAO Bank Saint Petersburg Fixed ‒ ‒ 10 ‒ 14 2,057 14 -

Damocles Limited, related party Fixed ‒ ‒ ‒ ‒ 15 59

EURO-denominated

OAO AKB Zarechye, related party Fixed 11 16 ‒ ‒ ‒ ‒

Accrued interest n/a n/a 200 n/a 141 n/a 32

Total 45,891 29,989 17,528

Long-term portion of loans

and borrowings

20,514 14,728 7,609

Current portion repayable in one

year and shown under current

liabilities

25,377 15,261 9,919

The bank loans are subject to certain covenants. These covenants impose restrictions in respect of certain

transactions and financial ratios, including, but not limited to restrictions in respect of indebtedness and

profitability. Certain loan agreements have minimum revenue quotas that Group entities must meet each year and

minimum cash that must pass through the bank current accounts of the respective Group’s subsidiaries each month.

The maturity profile of loans and borrowings is as follows:

31/12/2010 31/12/2009 31/12/2008

Due in one month 301 297 174

Due from one to three months 1,044 3,039 3,889

Due from three to twelve months 24,032 11,925 5,856

Total current portion repayable in one year 25,377 15,261 9,919

Due in the second year 9,787 9,449 2,661

Due in the third year 3,915 3,233 3,415

Due in the fourth year 485 43 ‒

Due in the fifth year and further 6,327 2,003 1,533

Total long-term portion of loans and borrowings 20,514 14,728 7,609

Total 45,891 29,989 17,528

The following items of property, plant and equipment and inventories were pledged to secure loans and borrowings:

31/12/2010 31/12/2009 31/12/2008

Inventories (refer to note 23) 2,669 9,827 4,000

Property, plant and equipment (refer to note 14) 2,177 728 1,179

Total 4,846 10,555 5,179

As at 31 December 2010, 2009 and 2008, Oboronprom and other related parties provided financial guarantees

in the amount of RUB 10,089 million, RUB 7,381 million and RUB 3,502, respectively, for certain Group’s

entities’ bank loans. The Company is due to receive an additional guarantee from Oboronprom in order to

secure loan provided by OAO Alfa-bank, the proceeds from which were used to acquire 52.3% interest

in Rostvertol. As at the date of authorisation of these consolidated financial statements for issuance,

this guarantee had not yet been received.




56

29. OBLIGATIONS UNDER FINANCE LEASES

Minimum lease payments

Present value of minimum

lease payments

31/12/2010 31/12/2009 31/12/2008 31/12/2010 31/12/2009 31/12/2008

Due within one year 250 303 166 192 234 102

Due in the second year 173 215 215 140 172 160

Due in the third year 144 133 171 132 111 134

Due in the fourth year 4 141 116 3 130 102

Due in the fifth year and further ‒ ‒ 132 ‒ ‒ 124

571 792 800 467 647 622

Less: future finance charges (104) (145) (178) N/A N/A N/A

Present value of lease obligations 467 647 622 467 647 622

Total short-term portion of obligations under financial leases 192 234 102

Total long-term portion of obligations under financial leases 275 413 520

The Group leases property, plant and equipment under a number of finance lease agreements. The average

lease term is 42 months. For the year ended 31 December 2010, 2009 and 2008, the weighted average effective

interest rate was 19%, 13% and 13%, respectively. All leases are on a fixed repayment basis and mostly

denominated in USD and Euro. The Group’s obligations under finance leases are secured by the lessors’

title to the leased assets, carrying value of which is presented as follows:

31/12/2010 31/12/2009 31/12/2008

Carrying value of leased property, plant and equipment (refer to note 14) 803 682 590

30. RETIREMENT BENEFIT OBLIGATIONS

Defined contribution plan

During the years ended 31 December 2010, 2009 and 2008, the entities of the Group made following contributions

to the Russian Federation State Pension Fund:

31/12/2010 31/12/2009 31/12/2008

Contributions to the Russian Federation State Pension Fund 1,513 1,000 789

Defined benefit plan

The substantially all the Group entities operates unfunded defined benefit pension plans for qualifying employees.

The actuarial valuation of the Group’s defined benefit obligations as at 31 December 2010, 2009 and 2008 was

performed by an independent actuary.

Amounts recognised in profit or loss in respect of defined benefit plan is presented as follows:




Current service cost 25 15 9

Interest on obligation 23 17 14

Actuarial losses recognised in profit and loss 7 12 3

Total 55 44 26

The amount included in the statement of financial position arising from the Group’s obligations in respect to its

defined benefit plan is presented as follows:

31/12/2010 31/12/2009 31/12/2008

Present value of unfunded defined benefit obligations 377 287 212

Actuarial losses not recognised (53) (74) (26)

Total 324 213 186




57

Movements in the present value of defined benefit obligations are presented as follows:

31/12/2010 31/12/2009 31/12/2008

Defined benefit obligations at beginning of the year 213 186 145

Current service cost 25 15 9

Interest on obligation 23 17 14

Actuarial losses recognised in profit and loss 7 12 3

Benefits paid (20) (17) (15)

Assumed on business combinations (refer to note 7) 76 ‒ 30

Defined benefit obligations at end of the year 324 213 186

During the year ending 31 December 2011, the Group expects to make payments to qualifying employees

in the amount of approximately RUB 19 million.

The principle assumptions used for the purpose of the actuarial valuation are as follows:

31/12/2010 31/12/2009 31/12/2008

Discount rate 8.0% 9.0% 9.0%

Expected salary increase 10.0% 10.0% 10.0%

Expected post retirement benefit increase 7.6% 9.0% 9.0%

Expected state minimum wage increase 16.0% 16.0% 16.0%

Inflation 6.5% 8.0% 8.0%

Mortality table Russia 1998 Russia 1998 Russia 1998

The history of experience adjustments is presented as follows:

31/12/2010 31/12/2009 31/12/2008 31/12/2007 31/12/2006

Present value of defined benefit obligations 377 287 212 170 135

Experience adjustments on plan liabilities (28) 51 27 21 ‒

31. PROVISIONS

Warranty

provision

Contract

losses

provision

Litigations

and claims Total

Balance at 1 January 2008 180 41 26 247

Increase in provision 284 71 86 441

Provision utilised (204) ‒ (86) (290)

Balance at 31 December 2008 260 112 26 398

Increase in provision 320 ‒ 178 498

Provision utilised (260) (42) (9) (311)

Balance at 31 December 2009 320 70 195 585

Increase in provision 507 ‒ 483 990

Provision utilised (257) (41) (103) (401)

Assumed on business combinations (refer to note 7) 139 ‒ 90 229

Balance at 31 December 2010 709 29 665 1,403

The following is the analysis of the short-term and long-term provisions as they are presented in the consolidated

statement of financial position:

31/12/2010 31/12/2009 31/12/2008

Long-term provisions 121 73 82

Short-term provisions 1,282 512 316

1,403 585 398




58

32. TRADE PAYABLES

31/12/2010 31/12/2009 31/12/2008

Trade payables 4,806 2,501 4,729

The maturity profile of the Group’s trade payables is presented as follows:

31/12/2010 31/12/2009 31/12/2008

Past due 1,578 657 861

Due in:

Within one month 1,403 841 1,887

From one to three months 1,227 598 1,303

From three to twelve months 598 405 678

4,806 2,501 4,729

33. ADVANCES RECEIVED AND OTHER PAYABLES

31/12/2010 31/12/2009 31/12/2008

Non-financial liabilities Advances received 4,772 9,312 4,298

Unused vacation accrual 564 279 224

Total non-financial liabilities 5,336 9,591 4,522


Unpaid salary 1,018 562 276

Dividend payable 919 ‒ ‒

Assumed obligation for 15.4% of Reduktor PM shares (refer to note 1) 233 ‒ ‒

Other payables 1,270 660 1,254

Total financial liabilities 3,440 1,222 1,530

Total 8,776 10,813 6,052

34. NON-CASH TRANSACTIONS

The following non-cash transactions were excluded from investing and financing activities presented

in the cash flows statement:

31/12/2010 31/12/2009 31/12/2008

Non-cash investing activities Property, plant and equipment acquired under finance lease agreements 194 185 478

Property, plant and equipment contributed to the share capital

of the Group’s subsidiary ‒

‒

220

Deferred proceeds from disposed property, plant and equipment (100) ‒ ‒

Total non-cash investing activities 94 185 698

Non-cash financing activities Finance leases (194) (185) (478)

Property, plant and equipment contributed to the share capital

of the Group’s subsidiary ‒

‒

(220)

Total non-cash financing activities (194) (185) (698)

Non-cash transactions also include payments made by Oboronprom for acquisition and increase of ownership in

certain Group subsidiaries during the years ended 31 December 2010, 2009 and 2008 as presented in notes 1 and 7.

35. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of certain financial instruments have been determined using available market

information or other valuation methodologies that require considerable judgment in interpreting market data

and developing estimates. Accordingly, the estimates applied are not necessarily indicative of the amounts that

the Group could realise in a current market exchange. The use of different assumptions and estimation

methodologies may have a material impact on the estimated fair values.




59

The estimated fair values of short-term financial assets and liabilities, which include cash and cash equivalents,

trade receivables, promissory notes, loans receivable, bank deposits, short-term borrowings, trade payables,

approximated their carrying values due to the short-term nature of these instruments. The estimated fair values

of long-term financial assets, which include promissory notes, loans receivable and bank deposits, approximated

their carrying values in the context of the significance of outstanding balances at the reporting date.

Detailed in the following table are the carrying and fair values of the Group’s financial assets and liabilities:

31/12/2010 31/12/2009 31/12/2008

Carrying

amount

Fair

value

Carrying

amount

Fair

value

Carrying

amount

Fair

value

Financial assets

Cash and cash equivalents 17,957 17,957 9,412 9,412 6,286 6,286

Trade receivables 8,569 8,569 6,318 6,318 5,664 5,664

Other receivables 624 624 888 888 928 928

Bank deposits 259 259 3,217 3,217 184 184

Available-for-sale investments 456 456 81 81 48 48

Loans issued 198 198 46 46 689 689

Promissory notes 108 108 277 277 557 557

Other financial assets ‒ ‒ 104 104 150 150

28,171 28,171 20,343 20,343 14,506 14,506


Loans and borrowings 45,891 45,555 29,989 29,393 17,528 16,930

Obligations under finance leases 467 467 647 647 622 622

Trade payables 4,806 4,806 2,501 2,501 4,729 4,729

Other payables 3,440 3,440 1,222 1,222 1,530 1,530

54,604 54,268 34,359 33,763 24,409 23,811

Valuation techniques

The fair value of financial liabilities for which the carrying value did not approximate fair value was determined

in accordance with generally accepted pricing models based on discounted cash flow analysis using interest rates

from observable current market conditions. As at 31 December 2010, 2009 and 2008, discount rates used to

determine fair value of long-term RUB-denominated loans and borrowings were 11.5%, 15.5% and 15.5%,

respectively, and the fair value of long-term USD-denominated borrowings were calculated by using a discount

rate of 9%, 13% and 13%, and the fair value of long-term Euro-denominated borrowings were calculated by using

a discount rate of 8.5%, 11% and 11%, respectively.

Management believes these discount rates represent the interest rates, which would be payable by the Group

on similar loan facilities at the end of each reporting period presented.

The following table provides an analysis of financial instruments that are measured at fair value and divided

into three valuation level based on the degree to which the fair value is observable.

Level 1 – quoted market price: financial instruments derived from quoted prices (unadjusted) in active markets

for identical instruments in active markets.

Level 2 – valuation technique using observable inputs: financial instruments with quoted market prices for

similar instruments in active markets or quoted market prices for similar instruments in inactive markets or

financial instruments valued using models where all significant inputs are observable in the market.

Level 3 – valuation technique with significant unobservable inputs: financial instruments valued using

valuation techniques where one or more significant inputs are unobservable.

As at 31 December 2010, 2009 and 2008 and during the years then ended, the Group had no financial

instruments categorised as Level 2, accordingly such information is not presented.

31/12/2010 31/12/2009 31/12/2008

Level 1 Level 3 Level 1 Level 3 Level 1 Level 3

Available-for-sale investments 19 359 14 ‒ 13 ‒




60

36. CAPITAL RISK MANAGEMENT

The Group has historically been part of the larger Oboronprom group, and accordingly did not have a consolidated

capital structure prior to 31 December 2010. After the completion of the formation of the Group, the primary objective

of the Group is to ensure that it is able to continue as a going concern by optimising its capital ratios in order to support

its business and maximise the return to its shareholder. Upon completion of the Group formation at the end of the 2010

financial year, management plans to reviews the capital structure on a regular basis. Based on the results of this

review, the Group plans to take steps to balance its overall capital structure through the payment of dividends,

new share issuances and share buy-backs as well the issuance of new debt or the redemption of existing debt.

The management of the Group is planning to monitor capital on the basis of the gearing ratio, and ensure that the ratio

is not more than 3.0. This ratio is calculated as net debt divided by equity attributable to shareholder. Net debt is

determined as total loans and borrowings (refer to note 28) and obligations under finance leases (refer to note 29)

less cash and cash equivalents (refer to note 26), as shown in the consolidated statement of financial position.

31/12/2010 31/12/2009 31/12/2008

Loans and borrowings 45,891 29,989 17,528

Obligations under finance leases 467 647 622

Less: cash and cash equivalents (17,957) (9,412) (6,286)

Net debt 28,401 21,224 11,864

Equity attributable to the shareholder of the Company 20,593 13,284 11,358

Gearing ratio 1.38 1.60 1.04

Significant fluctuation in the gearing ratio was due to the Group formation and significant movements

in the equity as a result of the share capital contributions from Oboronprom.

The Group’s policy of capital risk management (that was introduced at the end of the 2010 financial year) is based

on a net debt to adjusted EBITDA ratio. The management of the Group is planning to monitor the ratio on a regular

basis to ensure that the ratio is not more than 5.0. Adjusted EBITDA is calculated in the same way as defined

in the segment note (refer to note 6). The monitoring process is going to be performed based on the results

as presented in the consolidated financial statements and for individual Group entities.

31/12/2010 31/12/2009 31/12/2008

Adjusted EBITDA 11,781 9,260 3,118

Net debt 28,401 21,224 11,864

Net debt/Adjusted EBITDA 2.41 2.29 3.81

37. RELATED PARTIES

Related parties include shareholders, affiliates and entities under common ownership and control of

the Government of the Russian Federation and key management personnel.

In the ordinary course of their business, the Group entities enter into various sale, purchase and service

transactions with related parties. These transactions are primarily with state bodies of the Russian Federation,

other government controlled entities, or in areas the government is involved in the business. These transactions

are on terms that may not be available to third parties. The repayment terms related to these transactions are

consistent with those paid by third parties. In addition, the Group has received loans from and made deposits with

related parties, the terms of which are disclosed in the related notes in these consolidated financial statements.

Transactions between the Group entities, which are related parties, have been eliminated in full in these

consolidated financial statements and are not disclosed in this note.

Financial guarantees and secured loans

As at 31 December 2010, 2009 and 2008, Oboronprom and other related parties provided guarantees in

the amount of RUB 10,089 million, RUB 7,381 million and RUB 3,502 million, respectively, for certain

Group’s entities’ bank loans. The Company is due to receive an additional guarantee from Oboronprom,

in order to secure loan provided by OAO Alfa-bank, the proceeds from which were used to acquire 52.3%

interest in Rostvertol. As at the date of authorisation of these consolidated financial statements for issuance,

this guarantee had not yet been received.




61

The Group had the following significant transactions and balances with the Government of the Russian Federation, parties under control of the Government of the Russian Federation

and other related parties (as defined below).

Accounts receivable Advances paid Cash and deposits Other investments

31/12/2010 31/12/2009 31/12/2008 31/12/2010 31/12/2009 31/12/2008 31/12/2010 31/12/2009 31/12/2008 31/12/2010 31/12/2009 31/12/2008 31/12/2008

Group 1 4,476 4,324 3,004 11,046 10,656 2,296 12,400 10,467 5,278 140 164 415

Group 2 39 32 17 86 440 106 ‒ ‒ ‒ 30 17 18

Group 3 11 71 51 1 14 19 3,403 3,058 1,912 964 2,092 2,105

Total 4,526 4,427 3,072 11,133 11,110 2,421 15,803 13,525 7,190 1,134 2,273 2,538

Accounts payable Advances received

Loans and borrowings and

obligations under finance leases

31/12/2010 31/12/2009 31/12/2008 31/12/2010 31/12/2009 31/12/2008 31/12/2010 31/12/2009 31/12/2008 31/12/2008

Group 1 4,316 772 2,474 17,412 9,295 3,175 27,992 19,945 11,334

Group 2 84 67 51 54 9 1 1,046 1,185 1,097

Group 3 ‒ 46 82 1 243 230 117 108 97

Total 4,400 885 2,607 17,467 9,547 3,406 29,155 21,238 12,528

All balances are unsecured and are expected to be settled in cash. As at 31 December 2010, the Group recognised an impairment provision against account receivables from

related parties in the amount of RUB 108 million. No impairment provision was recognised as at 31 December 2009 and 2008. During the years ended 31 December 2010, 2009

and 2008, the Group received government grants as a compensation of finance costs in the amount of RUB 520 million, RUB 592 million and RUB 21 million, respectively.

Sales of goods and services Purchases of goods and services Finance costs Interest income

Year ended

31/12/2010

Year ended

31/12/2009

Year ended

31/12/2008

Year ended

31/12/2010

Year ended

31/12/2009

Year ended

31/12/2008

Year ended

31/12/2010

Year ended

31/12/2009

Year ended

31/12/2008

Year ended

31/12/2010

Year ended

31/12/2009

Year ended

31/12/2008

Group 1 19,827 12,308 9,754 20,817 11,632 6,952 2,687 1,143 901 144 87 112

Group 2 2 27 69 494 999 370 143 158 163 ‒ ‒ ‒

Group 3 1,506 1,063 849 1 22 52 16 16 15 41 19 ‒

Total 21,335 13,398 10,672 21,312 12,653 7,374 2,846 1,317 1,079 185 106 112

Group 1 consists of the Government of the Russian Federation and other entities under common control of the Government of the Russian Federation.

Group 2 consists of entities affiliated with Group management.

Group 3 consists of associates of the Group.

Remuneration of the Group’s key management personnel

During the years ended 31 December 2010, 2009 and 2008, key management personnel of the Group (who are considered to be the General Director, Deputy General Directors,

Directors of key departments and Members of the Board of Directors of the Company) received as compensation RUB 68 million, RUB 57 million and RUB 34 million, respectively.

Key management personnel received only short-term employment benefits.




62

38. RISK MANAGEMENT ACTIVITIES

The main risks inherent to the Group’s operations are those related to liquidity risk, credit risk, currency risk and

interest rate risk. A description of the Group’s risks and management policies in relation to these risks follows.

Liquidity risk

Liquidity risk is the risk that the Group will not be able to settle all liabilities as they fall due. The Group’s liquidity

position is carefully monitored and managed. The Group manages liquidity risk by maintaining adequate cash

reserves, by continuously monitoring forecasted and actual cash flows and matching the maturity profiles of financial

assets and liabilities. The Group prepares a twelve month financial plan to determine whether the Group has

sufficient cash to meet expected operational expenses, financial obligations and investing activities as they arise. Presented below is the maturity profile of the Group’s loans and borrowings (maturity profiles for obligations

under finance leases and trade payables are presented in note 33 and 29) based on contractual undiscounted cash

flows, including interest, based on the earliest date on which the Group may be required to pay. To the extent that

interest is based on a floating rate, the undiscounted amount is derived from interest rate at the reporting date.

Weighted Due in

At 31 December 2010

average

annual

interest rate

Total

One

month

One to

three

months

Three to

twelve

months

Second to

fifth years Thereafter

Fixed rate loans and borrowings 10%

Principal 45,169 100 1,044 23,522 18,620 1,883

Interest 8,091 386 724 2,909 3,869 203

53,260 486 1,768 26,431 22,489 2,086

Floating rate loans and

borrowings 5%

Principal 522 ‒ ‒ 522 ‒ ‒

Interest 26 2 4 20 ‒ ‒

548 2 4 542 ‒ ‒

53,808 488 1,772 26,973 22,489 2,086

At 31 December 2009


Principal 29,364 655 2,541 11,926 12,721 1,521

Interest 5,669 312 552 1,982 2,472 351

35,033 967 3,093 13,908 15,193 1,872


borrowings 6%

Principal 484 ‒ ‒ ‒ 484 ‒

Interest 57 2 5 22 28 ‒

541 2 5 22 512 ‒

35,574 969 3,098 13,930 15,705 1,872

At 31 December 2008


Principal 17,026 1,793 2,237 5,857 5,621 1,518

Interest 3,097 159 284 991 1,271 392

20,123 1,952 2,521 6,848 6,892 1,910


borrowings 8%

Principal 470 1 ‒ ‒ 469 ‒

Interest 113 5 6 28 74 ‒

583 6 6 28 543 ‒

20,706 1,958 2,527 6,876 7,435 1,910

At 31 December 2010, 2009 and 2008, the Group did not have any issued financial guarantees.




63

Credit risk

Credit risk is the risk that a customer may default or not meet its obligations to the Group on a timely basis, leading

to financial losses to the Group. A majority of the Group’s relationships with counterparties have been ongoing

for many years and in many cases the counterparties are government controlled entities of the Russian

Federation or other countries. As such, the Group has not historically performed a formal credit rating analysis.

Additionally, a majority of the Group’s export sales are overseen through the Group’s related party,

Rosoboronexport, a monopoly agent, controlled by the government of Russian Federation specifically for

the oversight of export sales of military and related products. The Group does not typically establish credit

limits as majority of the contracts are entered into by Group companies on a prepayment basis, except

for certain of its agreements with Ministry of Defence of the Russian Federation.

The average contractual credit period for sales of goods is 50 days. No interest is charged on trade receivables.

An allowance for trade receivables is established based on the estimated irrecoverable amounts from the sale of

goods, determined by reference to past default experience, but generally the Group has fully provided for all trade

receivables over 365 days, unless they relate to a contract whereby the agreement allows payment later than this

point. At 31 December 2010, 2009 and 2008, the weighted average age of trade receivables was 65 days, 53 days

and 49 days, respectively.

As at 31 December 2010, 2009 and 2008, the Group five largest customers (individually exceeding 2% of the total

outstanding balance) represented 55%, 78% and 76% of the total balance of trade receivables, respectively and is

presented as follows:

Name of counterparty Customer location 31/12/2010 31/12/2009 31/12/2008

Ministry of Defence of Russian Federation Russian Federation 2,709 3,667 1,307

Ministry of Defence of Ethiopia Republic of Ethiopia 783 ‒ ‒

Turkmenhovayllary Republic of Turkmenistan 522 ‒ ‒

Ministry of Defence of Brazil Republic of Brazil 437 ‒ ‒

Ministry of Defence of Ecuador Republic of Ecuador 274 ‒ ‒

Oboronprom Russian Federation ‒ 737 ‒

Rosoboronexport Russian Federation ‒ 222 92

Avia Company Skol Russian Federation ‒ 175 ‒

UTair-Leasing Russian Federation ‒ 145 ‒

Ministry of Defence of Venezuela Republic of Venezuela ‒ ‒ 2,523

Government of Indonesia Republic of Indonesia ‒ ‒ 202

Spetstechno Ltd. Russian Federation ‒ ‒ 175

4,725 4,946 4,299

The maximum exposure to credit risk arising from the Group’s financial assets is presented as follows:

31/12/2010 31/12/2009 31/12/2008

Cash 17,957 9,412 6,286

Trade and other receivables 9,193 7,206 6,592

Deposits 259 3,217 184

Loans issued 198 46 689

Promissory notes 108 277 557

Total 27,715 20,158 14,308

The Group holds cash and cash equivalents and places deposits mostly in Sberbank and VTB, banks related by

means of common control and ownership with the Government of the Russian Federation. From time to time the

Group holds cash and cash equivalents and place deposits in Zarechye and Donkombank, the Group’s associates.

Foreign currency risk

Foreign currency risk is the risk that the financial results of the Group will be adversely impacted by changes in exchange

rates to which the Group is exposed. The Group undertakes transactions denominated in foreign currencies and

consequently is exposed to foreign currency risk. Approximately 43% of its sales are denominated in USD and 15% of its

sales are denominated in Euro, 22% of its purchases are denominated in USD and 2% of its purchases are denominated in

Euro, 28% of its borrowings are denominated in USD and 8% are denominated in Euro. The Group does not have formal

arrangements to mitigate foreign currency risk. However, management of the Group believes that the foreign currency risk

is partly mitigated for the Group by the situation where approximately 60% of total sales of the Group are denominated in

foreign currencies that reduce negative impact of changes in exchange rates for the Group borrowings and purchases,

denominated mostly in USD. The Group does not currently use derivative instruments to manage exchange rate exposures.




64

The carrying amounts of the Group’s monetary assets and liabilities denominated in foreign currencies other

than its functional currency were as follows:

31/12/2010 31/12/2009 31/12/2008

USD Euro USD Euro USD Euro

Assets

Cash and cash equivalents 1,701 1,567 427 1,559 1,000 1,539

Other financial assets 37 26 1,390 6 596 ‒

Trade and other receivables 8,292 2,105 1,257 2,045 4,132 1,432

Total assets 10,030 3,698 3,074 3,610 5,728 2,971

Liabilities

Trade and other payables (1,599) (343) (44) (117) (408) (2)

Obligations under finance leases (410) (106) (514) (133) (494) (128)

Loans and borrowings (12,668) (3,755) (14,318) (697) (7,095) (685)

Total liabilities (14,677) (4,204) (14,876) (947) (7,997) (815)

Total net (liability)/asset position (4,647) (506) (11,802) 2,663 (2,269) 2,156

The table below details the Group’s sensitivity to a devaluation of the RUB against USD and Euro by 10%, which

management believes is an appropriate measure in the current market conditions and which would impact its operations.

USD-impact Euro-impact

31/12/2010 31/12/2009 31/12/2008 31/12/2010 31/12/2009 31/12/2008

(Loss)/profit (465) (1,180) (227) (51) 266 216

In case of an appreciation of RUB against USD and Euro, results of the sensitivity analysis will be opposite to

those presented above.

Interest rate risk

Interest rate risk is the risk that changes in floating interest rates will adversely impact the financial results of the Group.

The Group manages this risk through analysis of current interest rates, performed by the Group’s treasury

function. If there are significant changes in market interest rates management may consider refinancing

of a particular financial instrument on more favourable terms.

The table below details the Group’s sensitivity to change of floating rates by 1%, which management believes is

an appropriate measure of the current market conditions. The analysis was applied to borrowings based on the

assumptions that amount of liability outstanding at the reporting date was outstanding for the entire annual period.

MOSIBOR-impact LIBOR-impact

31/12/2010 31/12/2009 31/12/2008 31/12/2010 31/12/2009 31/12/2008

Profit or loss 3 ‒ ‒ 49 238 157

39. COMMITMENTS AND CONTINGENCIES

Contractual commitments

In the course of carrying out its operations and other activities, the Group enters into various agreements which

require the Group to invest in or provide financing to specific projects. In the opinion of the Group’s

management, these commitments are entered into under standard terms, which are representative

of each project’s feasibility and should not result in unreasonable losses for the Group.

Capital commitments

The Group’s capital commitments including both contractual commitments and capital expenditures provided

in the annual budget for the year ending 31 December 2011 amount to RUB 7,601 million for property, plant

and equipment and RUB 3,580 million for development costs.




65

Operating leases: Group as a lessee

The majority of land plots on which the Group’s production facilities are located owned by the state. The Group

therefore leases the land through operating lease agreements, which expire in various years through 2057.

According to the terms of the lease agreements rent fees are revised annually by reference to an order issued

by the relevant local authorities. The Group entities have a renewal option at the end of each lease period and an

option to buy land at any time, at a price established by the local authorities. The Group also leases other property,

plant and equipment. The respective lease agreements have an average life of 1 to 6 years and generally do not

have a renewal option at the end of the term. There are no restrictions placed upon the Group by entering into

these agreements.

Future minimum rental expenses under non-cancellable operating leases are as follows:

Due within one year 95

Due from second to fifth year 44

Due thereafter 30

Total 169

Social commitments

The Group contributes to the maintenance and upkeep of the local infrastructure and the welfare of its employees.

This includes making contributions to the development and maintenance of housing, hospitals, transport services,

recreation and other social needs in the geographical areas in which the Group operates.

Litigation

The Group has a number of claims and litigations relating to sale and purchases of goods and services.

Management believes that none of these claims, individually or in aggregate, will have a material adverse

impact on the Group.

Operating environment

Emerging markets such as the Russian Federation are subject to different risks than more developed markets,

including economic, political and social, and legal and legislative risks. As has happened in the past, actual or

perceived financial problems or an increase in the perceived risks associated with investing in emerging economies

could adversely affect the investment climate in the Russian Federation and Russia’s economy in general.

Laws and regulations affecting businesses in the Russian Federation continue to change rapidly. Tax, currency

and customs legislation within the Russian Federation are subject to varying interpretations, and other legal and

fiscal impediments contribute to the challenges faced by entities currently operating in the Russian Federation.

The future economic direction of the Russian Federation is largely dependent upon economic, fiscal and

monetary measures undertaken by the government, together with legal, regulatory, and political developments.

The global financial turmoil that has negatively affected Russian’s financial and capital markets in 2008 and 2009

has receded and Russia’s economy returned to growth in 2010. However, significant economic uncertainties

remain. Adverse changes arising from systemic risks in global financial systems, including any tightening of the

credit environment or from decline in the oil and gas prices could slow or disrupt Russia’s economy, adversely

affecting the Group’s access to capital and cost of capital for the Group and, more generally, its business, results

of operations, financial condition and prospects.

The Russian Federation is facing a relatively high level of inflation and according to the government’s statistical

data consumer price inflation for the years ended 31 December 2010, 2009 and 2008 was 8.8%, 8.8% and 13.3%,

respectively.

Because Russia produces and exports large volumes of oil and gas, Russia’s economy is particularly sensitive

to the price of oil and gas in the world market that fluctuated significantly during 2008-2010. Although recently

years there has been a general improvement in economic conditions in the Russian Federation, it continues to

display certain characteristics of an emerging market. These include, but are not limited to, currency controls

and convertibility restrictions, relatively high level of inflation and continuing efforts by the Government

of the Russian Federation to implement structural reforms.




66

Tax contingencies in the Russian Federation

The tax system in the Russian Federation is at a relatively early stage of development, and is characterised by numerous

taxes, frequent changes and inconsistent enforcement at federal, regional and local levels. The Government of the

Russian Federation has commenced a revision of the tax system and passed certain laws implementing tax reform.

The new laws reduce the number of taxes and overall tax burden on businesses and simplify tax legislation. However,

these new tax laws continue to rely heavily on the interpretation of local tax officials and fail to address many existing

problems. Many issues associated with practical implication of new legislation are unclear and complicate the Group’s

tax planning and related business decisions. In terms of Russian tax legislation, authorities have a period of up to three

years to re-open tax declarations for further inspection. Changes in the tax system that may be applied retrospectively

by authorities could affect the Group’s previously submitted and assessed tax declarations.

While management believes that it has adequately provided for tax liabilities based on its interpretation of current

and previous legislation, the risk remains that tax authorities could take differing positions with regard to interpretive

issues. This uncertainty may expose the Group to additional taxes, fines and penalties that could be significant.

At 31 December 2010, the Group assessed its tax contingent liabilities to be RUB 317 million.

Insurance

The Group’s entities do not have full coverage for property damage, business interruption and third party liabilities.

Losses from business interruption and third party liabilities could have a material adverse effect on the Group’s

operations and financial position.

40. EVENTS SUBSEQUENT TO THE REPORTING DATE

Acquisition of subsidiaries, increase of ownership in subsidiaries and mandatory offers for the acquisition

of remaining non-controlling interests in certain Group subsidiaries


On 21 February 2011, the Company made a mandatory offer of RUB 2.69 per ordinary share to acquire remaining

24.9% non-controlling interests in Rostvertol. The maximum cash outflow that the Group can potentially face

under this mandatory offer amounts to RUB 1,515 million. The mandatory offer was made in accordance with

the Russian Federal Law on Joint Stock Companies. The non-controlling shareholders have 70 (seventy) days

from mandatory offer receipt date to accept or decline such offer. OAO Alfa-bank acts as a guarantor

of the transaction for the total amount of RUB 1,543 million.

OAO Kazan Helicopters Plant (“KHP”)

On 24 January 2011, the Company acquired additional 33.2 million of ordinary shares of KHP for cash

consideration of RUB 3,403 million. As a result of the transaction the Group’s effective ownership in KHP

increased from 65.9% to 87.4%.

On 11 February 2011, as a consequence of the above mentioned transaction and in accordance with the Russian

Federal Law on Joint Stock Companies the Company made a mandatory offer of RUB 102.5 per ordinary share to

acquire the remaining non-controlling interests in KHP. The maximum amount of obligation which the Group may

potentially face under this mandatory offer amounts to RUB 1,944 million. The non-controlling shareholders have

70 (seventy) days from mandatory offer receipt date to accept such Offer. OAO Alfa-bank acts as a guarantor

of the transaction for the total amount of RUB 1,944 million.

OAO Kumertau Aviation Production Enterprise (“KUMAP”)

On 12 January 2011, additional 153,000 ordinary shares of KUMAP were issued and fully acquired

by the Group (refer to note 1). The effective ownership in KUMAP did not change as the entity is 100%

subsidiary of the Group.

OAO Kamov (“Kamov”)

On 27 January 2011, Kamov duly authorised and registered 1,362,899,771 of ordinary shares of which

1,360,000,000 shares were acquired by the Group (refer to note 1). As a result of the transaction the Group’s

effective ownership in Kamov increased from 98.5% to 99.8%.




67

Acquisition of 95% interest in ZAO Avia Company Rostvertol Avia and ZAO Sanatory Zor'ka

In January-March 2011, Rostvertol, a Group subsidiary, acquired remaining 95% interests in ZAO Avia Company

Rostvertol Avia (“Rostvertol Avia”) and ZAO Sanatory Zor'ka (“Zor’ka”) (refer to note 21). Upon completion of

these transactions, the Group had a 100% interests in Rostvertol Avia and Zor'ka. At the date of the approval of these

financial statements, the Group had not initiated valuation of the acquired assets. Additionally, Rostvertol Avia and

Zor'ka do not prepare financial statements in accordance with IFRS and as such there is no reliable information on

the carrying value of assets and liabilities of Rostvertol Avia and Zor'ka or their fair value on the date of the business

combination. Accordingly, the Group is not being able to disclose such information.

Establishment of share based stock option plan for top management of the Group

The Company is implementing certain plans to incentivise employees of the Group. This was approved by

Oboronprom’s Board of Directors on 18 March 2011. The intention is that the incentive plan will be implemented

through a mutual fund that will be responsible for administering the scheme under the management of ZAO

“VTB Capital Asset Management”.

Decrease of ownership in Group’s associate

On 31 March 2011, Zarechye issued an additional 2,003,250 ordinary shares (refer to note 18). The Group has not

exercised it’s preemptive right for the proportional acquisition of newly issued shares, which were fully acquired

by other independent shareholders. Upon completion of the transaction, the Group’s ownership decreased to

15.5%. Since that date, the Group lost significant influence over Zarechye and the investment will be accounted

for as an available-for-sale investment in shares.

Loans issued and repaid

Up to the date of approval of these consolidated financial statements the Group obtained bank loans in the total

amount of RUB 15,960 million and repaid RUB 15,700 million.

Split of the Company’s ordinary shares

On 21 March 2011, the Company completed a split of its ordinary shares. Upon completion of the split the Company

has 94,994,000 issued ordinary shares at RUB 1 par value.

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