1.Objective of Accounting Separation Guidelines

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XX Month Year

Ernst & Young | 1

Table of contents

Glossary

1.Objective of Accounting Separation Guidelines

2.Principles of Accounting Separation

3.Accounting separation model

3.1Overview

3.2Business Units

3.3Transfer charges

3.4FAC methodology

3.4.1Traffic conversion factors

3.4.1.1Conversion factors – RAN network

3.4.1.2Conversion factor VoIP

3.4.1.3Conversion factor circuit switched network

4.Cost calculation approach

4.1HCA methodology

4.2CCA methodology

4.3Cost calculation under CCA

5.The reporting requirements

5.1General requirements

5.2Regulatory Financial Statement

5.3Accounting Document

5.4Audit

Annex A - Formats of Regulatory Financial Statement

Tables prepared for each Business Unit

Reconciliation statements

Glossary

Notified Operator / Operator who is obliged under Georgian law of electronic communication toprepare Accounting Separation
Accounting Document / Accounting Document shall be prepared by the Notified Operator in accordance with General Rules and principals outlined in Accounting Separation Guidelines.
Regulatory Financial Statement / Set of separate accounting statements which are imposed Notified Operator under Accounting Separation obligation.
Statutory financial statement / Financial statement prepared in accordance with IFRS or other GAAP

1.Objective of Accounting Separation Guidelines

The Accounting Separation Guidelinessets the general regulatory framework for preparation of theRegulatory Financial Statement and defines the reporting requirement towards theNotified Operators.

The Accounting Separation Guidelines includes the principles, rules and methodologieswhich should be used by the Notified Operators to prepare the Accounting Documentand the Regulatory Financial Statement. The detailed description ofregulatory accounting systems and the detailed approach to prepare the Regulatory Financial Statement should be presented by eachNotified Operatorsin the Accounting Document.

2.Principles of Accounting Separation

According to ERG Opinion “on the proposed Review of the Recommendation on cost accounting and accounting separation” Accounting Separation is defined as “a comprehensive set of accounting policies, procedures and techniques that can be applied to the preparation of financial information that demonstrates compliance with non-discrimination obligations and the absence of anticompetitive cross-subsidies. The outputs from such a system must be capable of independent verification (auditable) and fairly present the financial position and relationship (transfer charge arrangements) between product and service markets. Using accounting separation, a National Regulatory Authority (NRA) imposes on the Notified Operator a set of rules on how accounting information should be collected and reported.” Therefore in order to monitor compliance with nondiscrimination obligations, it will be necessary for Notified Operators to provide NRA with information which allows the extent of any price nondiscrimination to be monitored in order to determine its competitive effects.

The objective of accounting separation is to measure the performance of individual parts of Notified Operator’s business as they had operated separately like vertically disaggregated companies. The parts of Notified Operator’s business are called Business Units and the performance is measured in terms of return on mean capital employed (ROCE).

The Notified Operators while preparing Regulatory Financial Statements and the Accounting Document should rely on the following key principles:

Causality- revenues (including revenues from certain transfer charges), costs (including costs from certain transfer charges), property and liabilities of Notified Operator will be distributed to wholesale and retail products and services of Notified Operator, in accordance to activities which cause appearance of revenues, costs, purchase of property and generation of liabilities of Notified Operator.

Objectivity – allocation of revenues, costs, property and liabilities of Notified Operator should be objective and consistent during the business life cycle of operator.

Consistency – duties of accounting separation and cost accounting should be consistently implemented, year by year. In case of modification of regulatory accounting principles and policies, including methods of allocation, calculation of transfers or common accounting policies, which would have material impact on information contained in regulatory financial statements, Notified Operators are required to adjust parts of regulatory financial statements from previous period, which are impacted by modifications.

Materiality - it is allowed to use of certain simplifications in the measurement, recognition and allocation of revenues (including revenues from certain transfer charges), costs (including costs from certain transfer charges), property and liabilities of notified, if it does not distort figures significantly expressed in the statement of regulatory accounting. Consider that modification has material impact on regulatory financial statements if particular position of regulatory financial statements changes for more than 5% compared to its original value.

Transparency – Information derived from regulatory financial statements and methods that are used for allocation have to be transparent, which means that costs and revenues that are directly allocated to the markets, products and services of Notified Operator, should be separated from those with proportional allocation, according to sources of costs. Also, documentation that describes methodology and process of allocation should be complete and comprehensive.

IFRS application – if not explicitly specified otherwise, during the preparation of regulatory financial statements, Notified Operator will use, where possible, financial information from financial statements prepared in accordance with International Financial Reporting Standards (IFRS).

3.Accounting separation model

3.1Overview

Accounting Separation requires from the Notified Operator to disaggregate its financial statement into financial statements of its individual Business Units and to measure the ROCE for each defined Business Unit. In other words Accounting Separation requires determining revenue, cost and mean capital employed, of each individual Business Unit.

Revenue less cost stands for return of individual Business Units or Sub- Business Units and the ratio of return to mean capital employed stands for ROCE. Mean capital employed should be calculated as a simple mean of year-end balances.

where:

I – Revenue

C – Operating Cost plus Depreciation

CE – Mean Capital Employed

The resulting ROCE of each Business Unit can be compared with Weighted Average Cost of Capital (WACC) applied by National Regulatory Authorities for calculation the cost of access to the infrastructure (cost of interconnection rates, cost of local loop unbundling etc). Presentation of ROCE by each functional part of the telecommunication company is considered to ensure transparency and discourage cross-subsidization between activities or other anticompetitive pricing.

Allocation of revenue, cost and capital employed to each of individual Business Units is not a straight forward exercise. Usually the book ledgers, kept for statutory accounting purposes, do not recognize all revenues and costs associated with the revenues under the same cost center. For example revenue on retail calls can be recognized in marketing division, while the cost associated with providing the calls – the cost of network – can be recognized in network division.

The same relates to the capital employed. While revenue on retail calls is usually recognized in marketing division, the capital employed represented by the assets associated with providing the calls are recognized in network division.

Non-matching revenues on one side, and cost and capital employed on the other side have to be appropriately adjusted in order to produce correct values of ROCE for each Business Units. In theory this can be achieved in two ways:

• By reallocation of cost and capital employed or
• By implementing internal transfer system.

The objective of reallocation of cost and capital employed would be to tie revenue, cost and capital employed represented by assets associated with providing the service into the same Business Unit. This would mean that, if originally, revenue would be assigned to a different Business Unit than associated cost and capital employed, then a portion of cost and capital employed associated with providing the service would be reallocated into the Business Unit where the revenue has been assigned.

3.2Business Units

Each telecommunication operator operates at least two distinct businesses, the retail business and the network business. Operators may also operate other businesses which are not concerned with the telecommunication activities such as land and building investments, retail outlets, investments in non-associated third parties etc. Accounting Separation is only concerned with relevant telecommunication operation. It is not intended that financial information pertaining to non-relevant businesses be provided as part of this process, except insofar as it is required to enable the full reconciliation of the Financial Accounting figures to the Regulatory Accounting figures.

The Figure 1 below gives an overview of how the disaggregation process should work. Within the two main businesses, network and retail and other there are further major categories of disaggregation.

Figure 1.Overview of the business disaggregation process

The Business Units have to be defined in a way consistent with the concept of liberalization of telecommunication market, i.e. a clear border between service provision (retail activities) and network operation (network activities) should be made.

According to the “Recommendation on accounting separation and cost accounting systems under the regulatory framework for electronic communications 2005/698/EC of the Commission of the European Communities, National Regulatory Authorities should require from their Notified Operators the disaggregation of their operating costs, capital employed and revenues to the level required to be consistent with the principles of proportionality, transparency and regulatory objectives mandated by national law. It is widely accepted European practice to disaggregate the operators’ total activities into at least the following Business Units:

• Core-Network

The Core-Network covers the provision of interconnection services, transit services and carrier’s carrier services.

• Access-Network

The Access-Network covers the provision of connections to the telephony network (eg. local loops)

• Retail.

The Retail covers the activities mainly related to the commercial provision of services to end users. Separate accounts may be prepared for each activity within Retail that is subject to regulation (such as leased lines or telephony).

• Other.

The Other covers other activities provided by the Notified Operator, which may include unregulated activities as well as other type of regulated activities. Accounts for regulated and unregulated activities need to be kept separate.

The listed aboveBusiness Units represents the minimal scope of disaggregationwhich isrequiredto be reported by the Notified Operator.Further disaggregated accounts within these Business Units should be considered taking into account the obligations imposed on each Notified Operator. The detailed list and definition of Business Units should be presented by each Notified Operator in the Accounting Document and accepted by the National Regulatory Authority.

3.3Transfer charges

The transfer charges are used to calculate the internal transfers between Business Units. The internal transfers are generating revenues for the network business units and costs for the retail and other business unit. The value of the internal transfers is calculated by multiplying the annual volume of the particular service, provided to retail and other Business Unit by network Business Units.

There are two principles of how to establish transfer charges:

►Transfer charges based on external prices

The condition to set internal transactions between individual Business Units as they would operate as separate legal entities requires the transfer charges to be marked to market - external prices. The external charges meet the fundamental requirement of telecommunication market regulation on fair treatment of all parties and avoid discrimination and service cross-subsidizing practices. Therefore the external prices should be the main approach to establish the transfer charges.

The main assumption in calculating charges of transfer services is that they have to be identical with the market price. According to that, in case when Notified Operator provides certain services internal and at the external wholesale markets (provided services are comparable, which means that they consume this same amount of network resources), price of those services should be equal to the wholesale price of the external clients. Consequently, internal revenue of the wholesale segment will be equal to the wholesale price multiplied with the quantity of services provided to the retail segment.

►Transfer charges based on unit cost of service

In case when Notified Operator doesn`t provide transfer services both internal and external wholesale market, transfer fees for services will be equal to the unit cost of service calculated according to theFDCmethodology. The transfer charges should include the cost of capital calculated taking into account the WACC value set by the National Regulatory Authority.

Internal revenue from transfer services should be equal to transfer fees multiplied by the quantity of transactions in a year.

3.4FAC methodology

Using FAC methodology all incurred costs, realized revenues and cost of capital employed of the operator are distributed to associated services, using the principle of causality. All costs (direct costs, indirect costs and overheads) are fully allocated to and services for the purpose of assessing the underlying unit costs of provision. Accordingly, when assessed against allocated service revenues, this allows for assessment of the (absolute and relative) profitability of each individual service.

Costs may be allocated to services according to the following categories:

►Direct costs: Costs incurred exclusively for a particular service or product and are recorded in accounting to the appropriate product, service, asset or function.

►Directly allocated costs: Costs incurred exclusively for a particular service or product, but are not recorded in accounting to the appropriate product, service, asset or function.

►Indirect allocated costs: Costs that are part of the total common costs, but that can be attributed to a particular service or product on the basis of good cause and a clear relationship. It is not required to have an unambiguous connection but may have multiple steps.

►Common costs: Costs that are part of the total common costs and cannot be identified for a particular service, product, asset or function on the basis of reasonable cause and clearly demonstrable relationship.

Cost may be attributed to services or set of costs referred to as network components, related functions or other functions. They can be defined as follows:

►Services - This unit includes costs that can be directly linked to a particular service. For that purpose, the term "service" refers to serves provided to end users and network services.

►Network components -The unit includes costs related to different parts of transmission, broadcasting, and other parts of the network and systems. Costs will match parts of the network that are not directly attributable to a particular service, because they are used in the provision of multiple services.

►Related functions - this unit include especially the cost of retail and wholesale functions required for the provision of services to customers or end-users (e.g. billing, maintenance and customer service).

►"Other" functions - this unit contains the costs of functions that are not related to the provision of individual service, but an important part of business. Examples of such costs are planning, the cost of administration and finance.

As abovementioned, a number of steps exist to allocate individual groups of costs through a multifaceted approach in order to allocate costs to services. These allocation steps are performed using appropriate drivers. The detailed allocation rules and allocation steps should be defined in the Accounting Document.

The allocation drivers should be defined taking into account the causality principle – the cost should be allocated to Business Unitsin accordance to activities which cause the appearance of costs.Taking this into account the allocation drivers should be based on:

►Independent allocation – if there is a possibility to define thequantifiable factor which is driving the cost. E.g. network equipment should be allocated to Business Units taking into account the main factor defining its capacity(traffic or number of subscribers/services).

►Dependent allocation - if there is a no possibility to define the quantifiable factor which is driving the cost, the allocation drivercan be based on the allocation of other costs or revenues. However the total value of costs allocated using the dependent allocation drivers should not exceed 15% of the total value of costs.

3.4.1Traffic conversion factors

In order to determine the allocation drivers for the network elements utilized by the voice and data services it is necessary to convert the traffic of those services to homogenous unit.

3.4.1.1Conversion factors –RAN network

The conversion factor for RAN network should be use to convert the voice trafficin mobile RAN network presented in minutes to Mbytes.

Conversion of voice calls

The voice traffic conversion factor should be calculated taking into account the split of technologies used to provide the voice services in mobile network.

In order to convert the voice calls volumeto Mbytes the total yearly traffic expressed in minutes should be multiplied by the voice to Mbyte conversion factor calculated according to the following formula:

Where:

• f2G – voice to Mbyte conversion factor for 2G network (Mbyte)
• f3G – voice to Mbyte conversion factor for 3G network (Mbyte)
• P2G – percentage of the voice traffic provided over 2G network (%)
• P3G – percentage of the voice traffic provided over 3G network (%)

Voice to Mbyte conversion factor for 2Gnetwork (f2G) should be calculated according to the following formula:

Where:

• PG – GPRS data traffic proportion in GSM network (%),
• PE – EDGE data traffic proportion in GSM network (%).
• ρG – GPRS bit rate per timeslot (kbit/s),
• ρE– EDGE bit rate per timeslot (kbit/s).
• t- average number of timeslot per one voice call, depending on the mix of used voice modes (full rate, half rate, HD voice)

Voice to Mbyte conversion factor for 3G network (f3G) should be calculated according to the following formula: