LETTER OF NATIONAL BANK OF THE REPUBLIC OF KAZAKHSTAN

of December 21, 2006 No. 24131/2737

Present the Accounting department of National Bank of the Republic of Kazakhstan submits you for use in work recommendations about accounting of transactions of hedging by the accumulation pension funds.

Appendix

to the letter of December 21, 2006 No. 24131/2737

According to Items 22 and 27 of the Rules of implementation of activities for investment management of pension assets approved by the resolution of Board of the Agency of the Republic of Kazakhstan on regulation and supervision of the financial market and the financial organizations of November 26, 2005 No. 408 (further - Rules), hedging is understood as use of one or several hedging instruments for partial or total compensation of change of fair value of object of the hedging which is in investment portfolio of the accumulation pension fund, or related receipt of money determined according to accounting standards. Object of hedging (underlying asset) is understood as the financial instruments permitted to acquisition at the expense of pension assets. At the same time according to appendix 2 to Rules, can be hedging instruments: future, option, swap.

Accounting and reflection of transactions of hedging, and also income/expenses on them, in the financial reporting of the Organization (Fund) it is necessary to perform according to International accounting standards. Regarding hedging accounting implementation the main requirements contain in IFRS 39 "Financial instruments: recognition and assessment" (further - IFRS 39).

IFRS 39 allocate three types of the relations of hedging (hedging of fair value; cash flow hedging; hedging of net investments in the foreign organization) and for each of them establishes separate requirements for accounting. Thus, accounting of hedging of fair value needs to be performed as follows:

1) the income and expenses from revaluation of hedging instrument at fair value should be carried on the income and expenses;

2) book value of the hedged Article shall be adjusted taking into account referred to the hedged risk of profit or loss under the hedged Article, and these the profit or loss should be reflected in profits and loss accounts. It belongs to those cases when assessment of the hedged Article is carried out on actual costs. Profit or loss, referred to the hedged risk, are recognized on the profit and loss account if the hedged Article is the financial asset, available for sale.

The cash flow hedging which conforms to requirements of IFRS 39, is considered as follows:

1) part of profit or loss on hedging instrument which efficiency was established should be carried directly on accounts of the capital through the statement of changes in equity;

2) the inefficient part of profit or loss on hedging instrument is subject to reflection on the profit and loss account.

At the same time because according to existing rules of the legislation of the Republic of Kazakhstan on pension accruals of investors, the accumulation pension funds have no accounts of the capital, and also the Fund daily makes calculation of current value of conventional unit therefore the revaluation amounts daily are reflected in changes of net pension assets, the amounts of profit or loss relating to the effective relation of cash flow hedging are recommended to be carried into accounts of unrealized incomes and expenses.

It should be noted that IFRS 39 establish certain requirements for the purpose of differentiation of concept of the hedged tool and the derivative financial instrument. Use of the relation of hedging during the incomplete cycle time of hedging instrument is not allowed. Thus, availability between hedging instrument and the hedged Article of the relation of hedging can be determined only when all following conditions (the paragraph 88) are satisfied:

1) availability of the official documentation containing tasks of the organization in the field of risk management and the strategy of hedging (this requirement also contains in Item 22 of Rules);

2) forecasting of highly effective results as a result of hedging that is provided in case of accomplishment of the following two conditions:

- demonstration by various methods of expectation of high-efficiency of hedging from the point of view of compensation of changes of fair value or cash flows according to the strategy of risk management which is initially created for this specific relation of hedging;

- the actual results of hedging shall be in the range from 80 to 125 percent;

3) availability of possibility of reliable efficiency evaluation of hedging;

4) evaluating efficiency of hedging on permanent basis. IFRS 39 require carrying out two types of tests of efficiency of hedging:

 expected (prospective): testing regarding whether there will be hedging relation highly effective in future periods. This test is required to be carried out at least at the time of the beginning of the relations of hedging and for date of preparation by the organization of the intermediate or annual financial reporting.

 retrospective (retrospective): hedging relation efficiency evaluation based on the actual indicators. This test is required to be carried out, at least, for each date of preparation by the organization of the intermediate or annual financial reporting.

The accounting treatment when hedging is applied by the organization on condition of carrying out both above-stated tests.

IFRS 39 do not establish only sure method of carrying out the expected or retrospective efficiency evaluation of hedging. The method applied by the organization depends on the accepted strategy of risk management and shall be described in the official documentation from the very beginning of the hedging relations. In the first and second examples of these recommendations the efficiency evaluation is made on basis spot of the prices, however the Fund has the right to use the future prices (rates) under similar derivative contracts in case of determination of efficiency of hedging.

The most widespread methods is the following:

 comparison of emergency conditions (critical terms comparison): the method consists of comparison of so-called emergency conditions of hedging instrument and the hedged Article, such as conditional amount of hedging instrument and amount of principal debt of the hedged Article, credit risk (VV), term, dates of assessment and revaluation, date, the amount and currency of cash flows;

 method of dollar offset (dollar offset method): quantitative method in case of which are compared change in fair value or cash flows of hedging instrument to change in fair value or cash flows of the hedged Article. Depending on policy of the organization for risk management the test can be carried out or on cumulative basis (from the very beginning of hedging), or only for the accounting period (comparison is made, since the last date of the test).

 the recourse analysis (regression analysis) is the statistical technique determining force of statistical communication between the hedged Article and hedging instrument.

The accounting treatment for hedging provided by IFRS 39 shall be stopped if:

 hedging does not take test for efficiency (is beyond 80-125%);

 the hedged Article is sold or extinguished;

 the hedging instrument is sold, stopped or used;

 the management of the organization decides to cancel purpose of hedging.

If the relation of hedging does not meet requirements of efficiency, accounting of hedging stops, since the last date for which hedging was acknowledged effective, that is since the beginning of the period at which hedging does not take test for efficiency. However if the organization determines event or change in circumstances which resulted in inefficiency of hedging and shows that hedging was effective before there came this event or changes in circumstances, accounting of hedging stops, since date of such event or change in circumstances. All future changes of fair value of derivative hedging instrument are recognized the profit and loss statement. Future changes of fair value of the hedged Article and any non-productive hedging instrument, are considered as they would be considered for lack of the hedging relation (AG 113 IFRS 39).

According to IFRS 39, in case of initial recognition derivative financial instruments are reflected at fair value which is usually equal to the amount of remuneration, paid in case of their opening. Thus, in the opening day fair value of the derivative financial instrument is usually equal to zero, except for such tools as, for example, options which fair value in case of initial recognition will be equal to the amount of the paid award. In subsequent, assessment of derivative financial instruments is performed at fair value, except for derivative tools, calculations for which shall be made by delivery of not quoted equity instruments which shall be estimated at cost.

In case of assessment of fair value of derivative financial instruments fair price of underlying asset which, in turn, is determined taking into account requirements of IFRS on the basis of the established quotations in the active market is used. At the same time according to AG71 IFRS 39, the financial instrument is considered quoted in the active market if it is possible to receive information on price quotations quickly and regularly from the exchange, the dealer, the broker, industry group, price service or regulating authority, and these prices reflect the actual and regular market transactions made by independent participants of the market. Fair value is determined based on the price about which the buyer and the seller ready to transaction and independent from each other agree.

The purpose of determination of fair value of the financial instrument which is traded on the active market consists in receipt of the price at which the transaction with this tool on reporting date will be made (i.e. without change or reconfiguration of the tool) in the most favorable active market to which the organization has direct access. However the organization adjusts this price in more favorable market taking into account any distinctions in credit risk of the partner between the tools which are traded on this market and the estimated tool. Availability of the published price quotations of the active market is the best for determination of fair value of the tool and when such quotations are present, they are used for assessment of financial asset or the financial liability.

For lack of the active market for the financial instrument the organization determines fair value by application of one of assessment techniques. The technique of assessment is used to determine what would be transaction price for date of assessment between the independent parties movable by regular business reasons. Such techniques include information (in case of its availability) about the last market transactions between knowledgeable, wishing to make such transactions, the parties independent from each other, references on current fair costs of another, substantially the identical tool, the analysis of the discounted cash flows and model of determination of the price of options. In the presence of the technique of assessment which is widely applied by participants of the market to determination of the price of the tool and proved reliability of calculated values of the prices received in the context of the actual market transactions the organization uses such technique. Fair value is determined by results of application of technique of assessment in which basic market data are as much as possible considered and which in the minimum degree relies upon the data concerning only the organization. The technique of assessment includes all factors taken into account by participants of the market in case of price fixation and will be approved with the accepted pricing techniques on financial instruments. Periodically the organization makes checking of technique of assessment and tests its reliability by means of the prices used in any available current market transactions with the same tool (i.e. without change or reconfiguration), or on the basis of any available available market data.

Thus, the fund needs to determine independently technique of assessment of fair value of financial instruments in case of absence by them the active market and to describe it as appropriate in the accounting policy.

It should be noted that the stated below examples and calculations for them are simplified for increase in their presentation. In practice, parameters of financial instruments, methods and priority of charge of remuneration can differ considerably from considered in this letter, however it does not change accounting treatment for transactions of hedging.

At the same time, considering that transaction of hedging is performed with the pension assets which are not belonging to the accumulation pension funds, reflection of conditional requirements and obligations for hedging instrument on off-balance accounting is not required, however, we recommend to develop the corresponding form of the magazine of auxiliary accounting on transactions of hedging in which, among other things, conditional requirements and obligations for the concluded derivative financial instruments will be reflected for maintaining more disaggregated information.

Examples of hedging of various risks with use of main types of derivative tools are below included. At the same time, the cost of financial instruments is specified in examples without the principles of discounting (except for the third example on interest rate swap) which according to IFRS shall be used by the organizations in cases when influence of temporary factor is essential.

Example the first. Hedging of fair value of the acquired securities (currency risk).

1. Let's assume that on December 31, 2004 the pension accumulation fund (further - Fund) acquires 10 thousand pieces of 12 monthly bonds of the foreign issuer with nominal of 100 US dollars for the total amount of 1 000 000 US dollars from 12% rate which were qualified in category "securities, available for sale".

2. For the purpose of hedging of downside risk of bond value as a result of change of exchange (spot) rate of tenge to US dollar (currency risk) on December 31, 2004 the Fund signs the futures contract for sale of 1 million dollars on December 31, 2005 at the price of 131 tenge for 1 US dollar.

3. In this case the futures contract serves as hedging instrument of fair value of investment of Fund into securities of foreign issuers. According to organizational documentation of Fund, the test for the expected efficiency of hedging is carried out by method of comparison of emergency conditions. The retrospective test is carried out with use of method of dollar offset on cumulative basis by division of the amount of change of fair value spot of component of the futures contract on the amount of the change of fair value of bonds connected with change tenge rate spot to US dollar.

The change in fair value of the derivative connected with change of the exchange rate of tenge according to similar futures contracts is excluded from the relation of hedging and, thus, do not influence its efficiency. This part of change of fair value is reflected in the other income / expenses.

4. The test for the expected efficiency of hedging is below included.

Conclusion: all emergency conditions of the hedged tool correspond to emergency conditions of the hedged Article in this connection, the relation of hedging is expected highly effective.

5. Let's assume that for 31.12.04 and subsequent dates the following rates of tenge to US dollar are established:

6. Thus, on December 31, 2004 the Fund will perform the following accounting entry under the hedged Article: on the net value of the acquired bond:

On hedging instrument of record are not performed as its fair value for date of the conclusion of the contract is equal to zero.

7. With the frequency established by accounting policy, Fund remuneration charge is made by the following record:

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