Glossary ........................................................................................................................................................................... 2
1.
Objective of Accounting Separation Guidelines ...................................................................................................... 3
2.
Principles of Accounting Separation ...................................................................................................................... 4
3.
Accounting separation model ............................................................................................................................... 6
3.1
3.2
3.3
3.4
Overview ....................................................................................................................................................... 6
Business Units .............................................................................................................................................. 6
Transfer charges............................................................................................................................................ 8
FAC methodology .......................................................................................................................................... 8
3.4.1
Traffic conversion factors ....................................................................................................................... 10
3.4.1.1
Conversion factors – RAN network ................................................................................................ 10
Conversion factor VoIP ................................................................................................................. 11 3.4.1.2
3.4.1.3
Conversion factor circuit switched network ................................................................................... 11
4.
Cost calculation approach .................................................................................................................................. 13
4.1
4.2
HCA methodology ....................................................................................................................................... 13
CCA methodology ....................................................................................................................................... 13
4.3
Cost calculation under CCA ......................................................................................................................... 17
5.
The reporting requirements ................................................................................................................................. 20
5.1
5.2
5.3
5.4
General requirements.................................................................................................................................. 20
Regulatory Financial Statement................................................................................................................... 20
Accounting Document ................................................................................................................................. 21
Audit........................................................................................................................................................... 22
Annex A - Formats of Regulatory Financial Statement ....................................................................................................... 23
Tables prepared for each Business Unit ....................................................................................................................... 24
Reconciliation statements........................................................................................................................................... 27

Notified Operator Operator who is obliged under Georgian law of electronic communication to prepare 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 statement financial Financial statement prepared in accordance with IFRS or other GAAP

1.
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.
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.
3.1
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.
ROCE

I

C
CE 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.
3.2
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 nonrelevant 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.
To retail customers To wholesale customers
E.g. Retail mobile,
Retail Internet
Transfer charges
E.g. Call origination and call termination in Mobile
Network
E.g. BTS, BSC,
MSC
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.
3.3
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.
3.4
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.

3.4.1
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.
3.4.1.1
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: f voice

 f
2 G

P
2 G
 f
3 G

P
3 G

Where:
 f
2G
– voice to Mbyte conversion factor for 2G network (Mbyte)
 f
3G
– voice to Mbyte conversion factor for 3G network (Mbyte)
 P
2G
– percentage of the voice traffic provided over 2G network (%)
 P
3G
– percentage of the voice traffic provided over 3G network (%)
Voice to Mbyte conversion factor for 2Gnetwork (f
2G
) should be calculated according to the following formula: f
2 G

 
G

P
G
 
E

P
E

 t

60

8
1024
Where:
 P
G
– GPRS data traffic proportion in GSM network (%),
 P
E
– EDGE data traffic proportion in GSM network (%).
 ρ
G
– GPRS bit rate per timeslot (kbit/s),
 ρ
E
– 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 (f
3G
) should be calculated according to the following formula: f
3 G

  umts

P umts
 
HSDPA

P
HSDPA

 n
CE

60

8
1024
Where:

 P umts
– UMTS R99 data traffic proportion in UMTS network (%)
 P
HSDPA
– HSDPA data traffic proportion in UMTS network (%)
 ρ umts
– UMTS bit rate per channel element (kbit/s)
 ρ
HSDPA
– HSDPA bit rate per channel element (kbit/s)
 n
CE
– number of CE required per one voice call
Conversion of SMS
In order to convert the SMSservice volume to Mbytes the yearly volume of SMS should be multiplied by the average length of
SMS in Mbytes.
Conversion of MMS
In order to convert the MMSservice volume to Mbytes the yearly volume of MMS should be multiplied by the average length of MMS in Mbytes.
3.4.1.2
The conversion factor for VoIP should be use to convert the voice traffic in IP based and Wimax networkspresented in minutes to Mbytes.
In order to convert the voice VoIP traffic to Mbytes the average yearly traffic expressed in minutes should be multiplied by the voice to Mbyte conversion factor calculated according to the following formula:
VoIP bit
 rate

( IP

UDP

RTP

ETH

PLS )

PPS

1
1024 2

60
Where,
 IP - IP header (bytes);
 UDP
- UDP header (bytes);
 RTP - RTP header (bytes);
 ETH - Ethernet header (bytes);
 PLS - Voice payload size (bytes) – VoIP codec related value;
 PPS - Packets per second (packets) – codec bit rate related value;
3.4.1.3
The conversion factor for circuit switched network should be use to convert the voice traffic inPSTN and mobile core circuit switched networkpresentedin minutes to Mbytes.
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 calculatedtaking into account the average throughout of voice call in the core layer of

thecircuit switched network.

4.
The Notified Operators should prepare the Regulatory Financial Statement for the year 2015 according to the HCA cost calculation approach. The Regulatory Financial Statement for the subsequent periods, starting from the year 2016, should be prepared underCCA approach.
4.1
According to the HCA methodology, gross value of the assets is determined by its historical purchasing price and further value adjustments are not necessary. Depreciation is calculated based on the gross value of the assets, and net value of the assets is calculated by deducting the cumulated depreciation from gross value.
Cost basis in HCA is calculated based on the following formula:
Cost basis = Opex (t) + Depreciation (t) + WACC * (NBVav + WCav)
Where:
Opex (t) = Operating expenses
Depreciation (t) = Depreciation for the observed period
NBVav = Average net book value of the assets
WCav = Average working capital
WACC = Weighted average cost of capital
4.2
Current cost accounting is a convention devised for financial reporting in an environment of rapidly changing prices, where traditional historical cost accounting (HCA) was considered inadequate. CCA, contrary to traditional HCA takes into account the impact made by inflationary tendencies on shareholders’ interests. Telecommunication is an industry that experiences a rapid rate of technological change. The new technologies are usually far superior to the old technologies in terms of functionality and efficiency and may have different cost structures.
Valuation of assets under current cost accounting is based on so called “deprival” method of valuation.
The current cost accounting theory recognizes three different decisions on use of assets, which might be considered by operators, and consequently three alternatively, methods of valuation:
► Asset can be sold.
Net realizable value (NRV) is the value the asset would realize if sold (less all discounts and sale costs).
► Other similar asset can be purchased.
Net replacement cost (NRC) is the cost of replacing an asset by another one of similar characteristics and age.

► Asset still might be used by the business.
Economic value (EV), also called “value in use” is the net present value of future cash flows arising from the asset.
Based on the above definitions it is possible to estimate current cost of an asset by reference to its “deprival value”. Deprival value of an asset is defined as the loss the operator would suffer if deprived of an asset.
According to International Accounting Standards deprival value must be calculated as the lower from Net Replacement Cost
(NRC) and Recoverable Amount (RA), whereas Recoverable Amount is defined as the higher of Net Realizable Value (NRV) and Economic Value (EV). This can be illustrated graphically as the current cost decision tree presented in figure below.
Economic Value (Value in use) is a method of valuation, in which the value of an asset is equal to the sum of discounted future cash inflows generated by further usage of an asset or the center that generates the cash inflows. The center that generates cash inflows is the smallest group of assets that can be defined, which generate an inflow of money. It is assumed, that generated inflow is significantly independent from the inflows generated by other assets or groups of assets.
Net Realizable Value is a method of valuation, in which the value of an asset is equal to the sum of money that is possible to gain from the sales of an asset at the market, less the costs of sales.
NRV = Revenues from sales − Costs of sales
Costs of sales are all direct costs that can be allocated to the process of selling of the assets, excluding financial costs and income tax.
In practice it is hard to apply the NRV methodology since there is no broadly developed market of used telecommunication equipment and the reliable benchmarks are not available.
Recoverable Amount (RA) is higher value between Net Realizable Value and Economic Value. Since the NRV method is hard to apply, Notified Operators should adopt the EV to determine value of the Recoverable Amount, where appropriate.
Net Replacement Cost is a method of valuation, in which the value of an asset is equal to the current value of the asset at the moment of revaluation, less the sum of accumulated depreciation and accumulated write-downs due to impairment losses.

Economic Value as well as Net Realisable Value are usually hard to obtain (i.e. telecommunication asset itself does not generate revenue nor is easy to sell) therefore the Net Replacement Cost should be the first choice for assets valuation.
The asset valuation under the Net Replacement Cost can be based on four approaches:
► Adoption of historical cost values (HCA);
► Specific Asset Price Indexation (SAPI);
► Detailed Asset Revaluation (DAR);
► Modern Equivalent Asset (MEA) revaluation.
Adoption of historical costs
The adoption of historical costs (HCA) should be used for groups of assets that:
► value are significantly low or have a short lifetime;
► are not a subject of significant price changes;
► are not a subject of significant technological changes;
Adoption of historical costs for cost calculation and regulatory reporting purposes for groups of assets involves use of values of costs which were really incurred by operator and taking them directly from accounting data (i.e. fixed assets register, general ledger or trial balance). It requires:
► analysis of price changes undergoing for the category of assets;
► analysis of technological changes undergoing for the category of assets;
► determining for which services the category of assets is used;
► analysis if the useful life of assets are “short” (useful life of an asset should be compared to the useful life of assets that are used for provision of the same services and their value constitute to the significant part of the cost of services);
► analysis if the value of the category of assets is “low” (total initial value of the assets within the category is relatively lower than the assets that are used for provision of the same services and their value constitute to the significant part of the cost of services).
The newly acquired assets (during the reported year),intangible assets, leasehold improvements and long-term leases will be valued at historical costs.
In order to rationalize the time required for valuation, and the costs incurred thereby, the NRA and the Notified Operator should agree on the materiality limit (property value) of the assets subject to valuation. In this case not all assets in the
Notified Operator’s assets register should be valuated, but only those assets that exceed the set limit in value.
Specific Asset Price Indexation
Specific Asset Price Indexation should be used for groups of assets that:
► are not a subject to rapid technological changes;
► data bases and FAR have enough correct information about the assets;

► are homogenous in terms of price change.
The following specific groups of fixed assets should be valuated according to SAPI method:
► Support systems, inventory systems, network management systems;
► Office equipment and materials;
► Computers and IT equipment;
Specific Asset Price Indexation of groups of assets involves application of price growth index to the value of an asset based on accounting data including activation dates of assets within useful life. Price index should be specific for type of asset which is subject of valuation wherever it is possible, when index for specific type of asset is not available, for valuation should be use one of general price index published by Statistical Office of Georgia. Annual price growth index should be gathered for the period of useful life of the asset if data is publicly available but at least for five years period.
Detailed Asset Revaluation
Detailed Asset Revaluation should be used for groups of assets that:
► are not homogenous in terms of price change;
► are subject to rapid technological changes;
► data bases and FAR don’t have enough correct information about the assets.
The following specific groups of fixed assets should be valuated according to DAR method:
► Active network equipment (eg. BTS/NodeB, BSC, RNC, MSC/MGW, IP/MPLS, DSLAM/OLT, SDH/DWDM,
ATM/Etheret).
► Power supply equipment.
Detailed Asset Revaluation of groups of assets involves multiplication of the volume of each asset or their components by their most accurate current prices. Volume can be derived directly from inventory, warehouse system or estimated on the basis of sampling or with engineering models. Engineering models however can be derived from technical specifications of telecommunication equipment, data from suppliers and can be based on in depth interviews with operators’ network specialists responsible for specific technologies and equipment. Engineering model is a tool that defines relationship between asset or its components for which current price can be obtained and asset’s parameters representing capacity or functionality of the equipment.
Current price is defined as a price of component at the date of valuation.
Modern Equivalent Asset revaluation
Modern Equivalent Asset is usually used for assets when:
► asset is not available on the market (it cannot be replaced by identical asset);
► asset will be changed within defined period.
Modern Equivalent Asset should have similar functionality and capacity as revaluated asset. If modern equivalent asset has

different functionality than currently used asset, appropriate adjustments can be made:
► adjustment on operating costs
► adjustments that are caused by extended functionality;
► adjustments on extended capacity.
4.3
Notified Operators should use Financial Capital Maintenance (FCM) as a capital maintenance model. Financial Capital
Maintenance (FCM) is concerned with maintaining the real financial capital of the company and with its ability to continue financing its functions. Capital is assumed to be maintained if shareholders’ funds at the end of the period are maintained in real terms at the same level as at the beginning of the period. Under FCM, profit is therefore only measured after provision has been made to maintain the purchasing power of opening financial capital. FCM addresses the concerns of shareholders by ensuring that the real value of shareholders’ funds is maintained. Therefore, profit is only measured after provision has been made to maintain the purchasing power of opening financial capital. Any increase or decrease in the value of assets forms part of reported gains/losses in the P&L account. FCM therefore makes a number of adjustments to current depreciation:
► Holding Gains or Losses (HG) that arise due to the effect of asset-specific inflation on the current cost value of assets; and
► Backlog Depreciation represents the correction of the accumulated depreciation from the previous period so that it equals the current gross value of assets subject to valuation on the balance day (new valuation day).
According to the above mentioned statement selling prices of services have to be adjusted in such manner to target revenue covers:
► operating costs;
► annualized costs of assets i.e.: o depreciation based on current cost accounting; o backlog depreciation ; o cost of capital; o holding gain or loss.
The formula presenting the target revenue is as follows:
R = OPEX + D
CCA
+ BD + CC
CCA
∓ HG/L where:
R
OPEX
D
CCA
BD
- target revenue,
- operating costs (excluding depreciation),
- depreciation based on current cost accounting,
- backlog depreciation,

CC
CCA
HG/L
- cost of capital based on current cost accounting,
- holding gains / losses.
Depreciation based on current cost accounting can be derived according to the following formula:
D
CCAt
=
GRC t
GBV t
× D
HCAt where:
GRC t
GBV t
D
HCAt
– Gross Replacement Cost at the end of financial year;
– Gross Book Value of asset at end of financial year;
– Depreciation based on historic cost accounting.
Backlog depreciation calculation
Backlog Depreciation is the difference between required depreciation and cumulative depreciation and arises where the prior period current cost depreciation shows a shortfall or surplus due to asset price changes. It can be calculated on the basis of following equation:
BD t
= GRC t
− CAD t−1
−
GRC t
GRC t−1
∙ NRC t−1 where:
GRC t
GRC t−1
CAD t−1
NRC t−1
– Gross Replacement Cost of asset at the end of financial year;
– Gross Replacement Cost at the beginning of financial year.
– Current Accumulated Depreciation of asset at the beginning of financial year;
– Net Replacement Cost of asset at the beginning of financial year.
Holding gain / loss calculation
Gross value of Holding Gain/Loss resulting from the revaluation of an asset is calculated as a difference between Gross
Replacement Cost of an asset at the end of the financial year and Gross Replacement Cost at the beginning of financial year, excluding the change of the GRC value due to the volume increase/decrease:
HG/L(gross) t
= GRC t
− GRC t−1 where:

GRC t
GRC t−1
– Gross Replacement Cost at the end of financial year;
– Gross Replacement Cost at the beginning of financial year.
Cost of capital calculation
Cost of capital based on current cost accounting can be derived according to the following formula:
CC
CCA
= WACC × (NRC t
+ WC t
) where:
CC
CCA
NRC t
WC t
WACC
- cost of capital based on current cost accounting,
– yearly average Net Replacement Cost,
– yearly average Working Capital,
– Weighted Average Cost of Capital.
Working capital should be calculated as average of opening balance and closing balance.

5.
5.1
The Notified Operator should:
► prepare the Regulatory Financial Statements in accordance with the Accounting Document;
► secure an expression of an audit opinion upon the Regulatory Financial Statements;
► deliver to NRA and publish the Regulatory Financial Statements, AccountingDocument and corresponding audit opinion within 6 months of the financial year end;
► deliver to NRA a report detailing any changes in the Accounting Documents ,any Process and any other methodology which caused any figure presented on any one of the Regulatory Financial Statements to change by more than 5% from the figure that would have been presented had such a change not been made.
The output of the Accounting Separation is the Regulatory Financial Statements. It is necessary for the Regulatory Financial
Statements to be prepared and delivered on a proper, appropriate, reliable, consistent and understandable basis. Therefore the Regulatory Financial Statements should be produced in compliance with the Accounting Documents and that independent audit reports and opinions be prepared. In addition the Notified Operator will publish a Directors’ Statement of
Responsibility with the accounts which would serve inter alia to confirm the Directors’ responsibility for the Regulatory
Financial Statements.
The publication of annual Regulatory Financial Statements provides assurance to other communications providers that the services they are priced appropriately and that NRAhas sufficient information to monitor the Notified Operators’ compliance with relevant obligations. However, constraints imposed by commercial confidentiality will mean that not all the information can be published. The Annex A presents the format of financial statements thatshould be published and the financial statements that should be confidential.
5.2
The Notified Operator should prepare, consistent with normal accounting practice, prior year comparative statements on a consistent basis to the current year figures and that where there are no specific regulatory principles the Notified
Operatorshould follow Accounting Standards and generally accepted accounting practices as applicable to companies in
Georgia.
The Regulatory Financial Statements should include:
► Introduction;
► Directors Statement of Responsibility;
► Report of the Regulatory Auditors;
► Profit and Loss statements and Mean Capital Employed Statements reconciled to the Historical cost accounts; where appropriate these will also be presented on a CCA basis
► Reconciliation Statements - Business Units to the statutory accounts;

► Statements of transfer charges;
► Additional information by way of notes;
► Other supporting schedules;
5.3
The Accounting Document should present the basis of preparation of the Regulatory Financial Statements. It should allow users to have confidence that costs are non-discriminatorily allocated, and be confident that granular, by service, outputs are appropriately calculated. The documentation should be prepared in order to ensure that the data, information, descriptions, material or explanatory documents prepared for the cost accounting systems is sufficiently transparent so that a suitably informed reader can easily gain a clear understanding of such documentation. The Accounting Document should include:
► Regulatory Accounting Principles - set out the principles applied in the production of the regulatory statements, in the application of the attribution methods, of the transfer charging systems and of the accounting policies.
► Definitions of the markets - define the market and set out the relevant products/services within the market.
► Attribution Method - describe the attribution methodologies used to allocate costs, revenues, assets and liabilities to the products/services within the markets.
► Transfer Charges - describe the basis for transfer charging. Describe the source or calculation method for each transfer price.
► Historical Accounting Policies - describe the Historical accounting policies.
► Current Cost Valuation Methods (where CCA information is required) - set out the basis of preparation of the current cost financial statements.
► Description of the calculation model – the input groups of costs, revenues, assets and liabilities, the flow of the model, the aggregation of costs, revenues, assets and liabilities on each stage of the model.
► The technical input parameters (e.g. routing factors, technical standards, source of service volumes, network statistics).
The Notified Operator should prepare two versions of the Accounting Documentation:
► Confidential - for the purpose of NRA review and acceptance.
► Non confidential – to be published along with the Regulatory Financial Statement.
The Notified Operator should prepare the Accounting Document and provide it for NRA review, not later than 8 month before thepublication of the Regulatory Financial Statement. NRA may propose amendments within two months from receiving the
Accounting Document. Then Notified Operator should consult the amendments with NRA and provide the final version of the
Accounting Document two months after receiving the proposition of amendments from NRA.
TheNotified Operator should publish the public version of the Accounting Documentation, on an annual basis within four months of the financial year end.

5.4
It is considered that effective and rigorous auditing is necessary to ensure that regulatory financial information is reliable.
Additionally, an adequate audit will provide NRA with assurance about the quality of the regulatory financial information when making decisions based on that information.
Each Notified Operator should notify NRA in writing of the Auditor appointed at least 28 days before Auditor carries out any work for that purpose.
The event that the Regulatory Auditor is in the opinion of NRA unsatisfactory, the Notified Operator shall appoint and instruct an Alternative Regulatory Auditor that is at all times satisfactory to NRA having regard to such reasonable matters as NRA considers appropriate.
Regulatory Auditor of Notified Operatorshould be obligated to provide clarification or participate in meetings upon request of the NRA.

Main purpose of preparing separated accounts is to calculate return on mean capital employed for each of separated
Businesses. Two components of ROCE: return and mean capital employed, should be clearly disclosed so that the calculation can be re-performed by any user of separated accounts.
This re-performance is made through preparation of three “basic” reporting formats for each of Business Unit and Sub-
Business Units:
► Profit and loss account;
► Statement of mean capital employed;
► Calculation of return on mean capital employed (ROCE).
Format of separated reports should allow the reconciliation of numbers presented to those published in the audited financial statements of operator in full.
Requirement on reconciliation to statutory accounts is fulfilled in two ways:
► Basic separated reports (profit and loss account, statement of mean capital employed) should wherever possible enable to reconcile main positions of balance sheet and profit and loss to the statutory accounts;
► Notes to accounting separation reports should further facilitate final reconciliation.
There shall be consistency of treatment from year to year. Where there are material changes to the accounting principles, the attribution methods, or the presentation of items that have an effect on the information reported in the Regulatory Financial
Statements of the Business Unit, the parts of the previous year’s Regulatory Financial Statements affected by the changes shall be restated. That is why all separated accounts should present current year information and comparative previous year figures. If, for some reason, the current year figures are not comparable to previous year figures and the restatement couldn’t be made, it should be clearly disclosed in separated accounts.
All adjustments made to statutory financial reports of operators must be clearly and separately disclosed. Especially, all internal transfers charges must be explicit presented as separate positions in costs and revenue. Furthermore, current cost adjustments should be separately disclosed.
The transparency between adjustments made explicit for the purpose of accounting separation and items included in statutory accounts should be achieved

BUSINESS PROFIT AND LOSS (public)
C. Operating return
D. Current Costs Adjustments (+/-)

STATEMENT OF MEAN CAPITAL EMPLOYED (public)
D. Total Assets (A + B + C)
RETURN ON MEAN CAPITAL EMPLOYED (public)
TRANSFER CHARGES – TURNOVER TO BUSINESS UNIT XX (confidential)

RECONCILIATION STATEMENT – MEAN CAPITAL EMPLOYED (public)

RECONCILIATION STATEMENT – PROFIT AND LOSS ACCOUNT (public)
Business Unit 1
Business Unit 2
…..
Business Unit XX
Total
Adjustments
Revenue Operating
Costs
HCA profit before tax
Holding Gain Supplementary
Depreciation
Current Year Current Year Current Year Current Year Current
Year
CCA Return
Current Year
GEL GEL GEL GEL GEL GEL
Elimination of Inter
Business turnover and costs
Not allocated turnover
*
Not allocated costs *
As in the Annual Report

RECONCILIATION OF INTER BUSINESS TURNOVER (public)
Business Unit 1
Business Unit 2
…..
Business Unit XX
Business
Unit 1
Business
Unit 2
… Business
Unit XX