8-K/A

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K/A

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of Earliest Event Reported) – April 30, 2009

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

(Exact Name of Registrant as Specified in Charter)

DELAWARE	0-24341	54-1865271
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

Two Bala Plaza, Suite 300 Bala Cynwyd, Pennsylvania	19004
(Address of Principal Executive Offices)	(Zip Code)

(610) 660-7817

(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.01. Completion of Acquisition or Disposition of Assets.

On April 30, 2009, Central European Distribution Corporation (the “Company”) filed a Current Report on Form 8-K (the “Initial Form 8-K”) reporting the amendment of its investment in the Russian Alcohol Group (“RAG”) with Lion Capital LLP and certain of Lion’s affiliates (collectively with Lion Capital LLP, “Lion”) and certain other investors, pursuant to which the Company expects, through a multi-stage equity purchase, to acquire over the next five years (including 2009) all of the equity interests in RAG held by Lion. This Amendment No. 1 to the Initial Form 8-K amends and supplements the Initial Form 8-K to include financial statements and pro forma financial information required by Items 9.01(a) and 9.01(b) of Form 8-K.

Item 9.01. Financial Statements and Exhibits.

(a) Financial statements of business acquired.

The audited consolidated and combined financial statements of RAG as at and for the two years ended December 31, 2007 and 2006 are contained in Exhibit 99.1, which is incorporated herein by reference. The audited consolidated financial statements of Lion/Rally Cayman 2 (the parent company of the Russian Alcohol Group) as at December 31, 2008, and for the period since incorporation, are contained in Exhibit 99.2 hereto, which is incorporated herein by reference. The audited combined interim financial statements of RAG as at July 8, 2008 and for the period from January 1, 2008 to July 8, 2008 are contained in Exhibit 99.3 hereto, which is incorporated herein by reference.

(b) Pro forma financial information.

The required pro forma financial information is contained in Exhibit 99.4 hereto, which is incorporated herein by reference.

(d) Exhibits.

Exhibit No.	Description
23.1	Consent of ZAO PricewaterhouseCoopers Audit.
23.2	Consent of BDO Unicon.
99.1	Audited consolidated and combined financial statements of the Russian Alcohol Group as at and for the two years ended December 31, 2007 and 2006.
99.2	Audited consolidated financial statements of Lion/Rally Cayman 2 (the parent company of the Russian Alcohol Group) as at December 31, 2008 and for the period since incorporation.
99.3	Audited combined interim financial statements of the Russian Alcohol Group as at July 8, 2008 and for the period from January 1, 2008 to July 8, 2008.
99.4	Unaudited pro forma financial statements relating to the acquisition of the Russian Alcohol Group.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, Central European Distribution Corporation has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

CENTRAL EUROPEAN DISTRIBUTION CORPORATION
By:	/s/ Christopher Biedermann
	Christopher Biedermann
	Vice President and Chief Financial Officer

Date: July 10, 2009

EXHIBIT INDEX

Exhibit No.	Description
23.1	Consent of ZAO PricewaterhouseCoopers Audit.
23.2	Consent of BDO Unicon.
99.1	Audited consolidated and combined financial statements of the Russian Alcohol Group as at and for the two years ended December 31, 2007 and 2006.
99.2	Audited consolidated financial statements of Lion/Rally Cayman 2 (the parent company for the Russian Alcohol Group) as at December 31, 2008 and for the period since incorporation.
99.3	Audited combined interim financial statements of the Russian Alcohol Group as at July 8, 2008 and for the period from January 1, 2008 to July 8, 2008.
99.4	Unaudited pro forma financial statements relating to the acquisition of the Russian Alcohol Group.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the registration statements on Form S-8 (No. 333-146375) and Form S-3 (Nos. 333–129073, 333–138809 and 333-149487) of Central European Distribution Corporation of our report dated July 10, 2009 relating to the financial statements of the Russian Alcohol Group, which appears in this Current Report on Form 8-K/A.

/s/ ZAO PricewaterhouseCoopers Audit

Moscow, Russia

July 10, 2009

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

Central European Distribution Corporation

Bala Cynwyd, Pennsylvania

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333–129073, 333–138809 and 333-149487) and Form S-8 (No. 333 – 146375) of Central European Distribution Corporation of our report dated 10 July 2009 relating to the consolidated and combined financial statements of Russian Alcohol Group as at 31 December 2007 and 2006, which appears in this Form 8-K/A. Our report is qualified as to the preparation of combined financial statements. Such application is a departure from IFRS as issued by the IASB.

/s/ BDO Unicon

Moscow, Russian Federation

10 July 2009

EX-99.1

Exhibit 99.1

Russian Alcohol Group

Consolidated and combined financial

statements for the two years ended

31 December 2007

CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS FOR THE TWO YEARS ENDED 31 DECEMBER 2007

INDEPENDENT AUDITOR’S REPORT	3
CONSOLIDATED AND COMBINED INCOME STATEMENTS	4
CONSOLIDATED AND COMBINED BALANCE SHEETS	5
CONSOLIDATED AND COMBINED CASH FLOWS STATEMENTS	6
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN EQUITY	8
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS	9

Independent Auditor’s Report

To the Shareholders of Russian Alcohol Group:

We have audited the accompanying consolidated and combined balance sheets of the Russian Alcohol Group (the “Group”) as at 31 December 2007 and 2006 and the related consolidated and combined statements of income, changes in equity, and cash flows for the years then ended. These consolidated and combined financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the consolidated and combined Group’s internal controls over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in Note 3 to the consolidated and combined financial statements, International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS as issued by the IASB”) do not provide for the preparation of combined financial statements and accordingly in preparing the consolidated and combined financial statements certain accounting conventions used in combining financial statements have been applied. The application of these conventions results in a departure from IFRS as issued by the IASB.

In our opinion, except for the effects on the consolidated and combined financial statements of the preparation of combined financial statements which is not provided for in IFRS as issued by the IASB as discussed in the preceding paragraph, the consolidated and combined financial statements referred to above present fairly, in all material respects, the financial position of Russian Alcohol Group at 31 December 2007 and 2006, and the results of its operations and its cash flows for the years then ended in conformity with IFRS as issued by the IASB.

/s/ BDO Unicon

Moscow, Russian Federation

10 July 2009

3

RUSSIAN ALCOHOL GROUP

CONSOLIDATED AND COMBINED INCOME STATEMENTS

(in thousands of USD)

		Year ended 31 December
	Notes	2007		2006
Sales	18	458,117		262,232
Cost of sales	19	(302,100	)	(178,058	)
Gross profit		156,017		84,174
Selling, distribution and marketing expense	20	(71,088	)	(34,271	)
Administrative expenses	21	(34,221	)	(16,679	)
Other operating expenses	22	(16,887	)	(19,418	)
Operating profit		33,821		13,806
Interest income	23	371		3,914
Interest expense	23	(11,645	)	(7,243	)
Foreign exchange gain, net		215		752
Profit before income tax		22,762		11,229
Income tax expense	24	(15,494	)	(21,906	)
Profit/(loss) for the year		7,268		(10,677	)
Attributable to:
Equity holders of the Group		7,268		(10,677	)

The notes form an integral part of these consolidated and combined financial statements.

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RUSSIAN ALCOHOL GROUP

CONSOLIDATED AND COMBINED BALANCE SHEETS

(in thousands of USD)

		31 December
	Note	2007	2006
Non-current assets
Property, plant and equipment	7	69,316	37,155
Intangible assets	8	2,627	1,796
Available-for-sale financial assets	9	—	550
Deferred tax assets	17	3,009	2,332
		74,952	41,833
Current assets
Inventories	10	51,505	31,116
Trade receivables	11	207,039	123,203
Taxes receivable (other than income tax)		8,653	1,394
Income tax receivable		3,004	65
Other non-financial current assets	11	22,554	13,024
Other financial current assets	11	9,175	5,109
Cash and cash equivalents	12	10,228	5,934
		312,158	179,845
TOTAL ASSETS		387,110	221,678
Equity
Share capital	13	17,229	14,535
Treasury shares		—	(257	)
Foreign currency translation reserve	13	4,985	2,538
Retained earnings		15,601	10,188
		37,815	27,004
Non-current liabilities
Borrowings	16	—	9,282
		—	9,282
Current liabilities
Borrowings	16	186,755	80,855
Trade payables	14	48,412	22,276
Income tax payable		23,422	17,636
Other taxes payable	15	78,983	58,422
Other payables	14	11,723	6,203
		349,295	185,392
TOTAL EQUITY AND LIABILITIES		387,110	221,678

These financial statements were approved and authorised for issue by the Board on 10 July 2009 and were signed on its behalf by:

Chief Executive Officer	Interim Chief Financial Officer
Carlo Radicati	Chris Biedermann

The notes form an integral part of these consolidated and combined financial statements.

5

RUSSIAN ALCOHOL GROUP

CONSOLIDATED AND COMBINED CASH FLOW STATEMENTS

(in thousands of USD)

	Notes	Year ended 31 December
		2007		2006
Cash flows from operating activities
Profit before income tax		22,762		11,229
Adjustments for:
Depreciation of property, plant and equipment	7	4,569		4,689
Amortization of intangible assets	8	394		225
Gain on sale of property, plant and equipment	22	(10	)	(1,742	)
Gain on sale of financial assets available-for-sale	22	(211	)	—
Impairment of inventory and receivables	22	1,789		2,019
Interest expense, net	23	11,274		3,329
Foreign exchange gain, net		(215	)	(752	)
Cash flows from operating activities before working capital changes		40,352		18,997
Increase in inventories		(21,066	)	(15,019	)
Increase in trade receivables net of allowance for doubtful debts		(401,474	)	(244,596	)
Increase in other receivables		(16,110	)	(4,584	)
Increase in trade payables		31,711		6,172
Increase in other payables		24,943		56,353
Cash used in operations		(341,644	)	(182,677	)
Interest paid		(6,674	)	(5,265	)
Income tax paid		(14,327	)	(8,075	)
Net cash used in operating activities		(362,645	)	(196,017	)
Cash flows from investing activities
Purchase of property, plant and equipment and intangible assets		(36,849	)	(17,321	)
Proceeds from disposal of property, plant and equipment		205		2,701
Proceeds from sales of investments available-for-sale		810		372
Loans issued		(7,335	)	(5,619	)
Proceeds from repayments of loans issued		3,132		53,513
Interest received		355		4,205
Net cash (used in)/generated from investing activities		(39,682	)	37,851
Cash flows from financing activities
Proceeds from borrowings		675,118		300,752
Repayments of borrowings		(269,770	)	(143,388	)
Payments under finance lease		—		(1,971	)
Contributions from parent company	25	815		4,159
Payments received for shares issued		2,564		1,127
Dividends paid to parent company	25	(480	)	(740	)
Dividends paid to not combined subsidiaries of the parent company	25	(1,368	)	—
Net cash generated from financing activities		406,879		159,939

The notes form an integral part of these consolidated and combined financial statements.

6

RUSSIAN ALCOHOL GROUP

CONSOLIDATED AND COMBINED CASH FLOW STATEMENTS

(in thousands of USD)

	Notes	Year ended 31 December
		2007		2006
Net increase in cash and cash equivalents		4,552		1,773
Translation difference		(258	)	404
Cash and cash equivalents at the beginning of year		5,934		3,757
Cash and cash equivalents at the end of year		10,228		5,934

	Year ended 31 December
	2007	2006
Non-cash operations
Non-cash repayments of borrowings (factoring loans offset with accounts receivables)	307,972	135,192
Non-cash repayments of interest (bank’s interest on factoring offset with accounts receivables)	5,198	1,963
Offsetting of accounts receivables and accounts payables	8,741	3,659

The notes form an integral part of these consolidated and combined financial statements.

7

RUSSIAN ALCOHOL GROUP

CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN EQUITY

(in thousands of USD)

	Attributable to shareholders of the Group:					Retained earnings		Total
	Share capital		Treasury shares		Foreign currency translation reserve
Balance at 1 January 2006	14,535		—		—	17,446		31,981
Effect of translation to presentation currency	—		—		2,538	—		2,538
Net income recognized directly in equity	—		—		2,538	—		2,538
Loss for the year	—		—		—	(10,677	)	(10,677	)
Total recognized income and expense for the period	—		—		2,538	(10,677	)	(8,139	)
Acquisition of treasury shares	—		(257	)	—	—		(257	)
Contributions from parent company	—		—		—	4,159		4,159
Dividends to parent company	—		—		—	(740	)	(740	)
Balance at 31 December 2006	14,535		(257	)	2,538	10,188		27,004
Effect of translation to presentation currency	—		—		2,447	—		2,447
Net income recognized directly in equity	—		—		2,447	—		2,447
Net profit for the year	—		—		—	7,268		7,268
Total recognized income and expense for the period	—		—		2,447	7,268		9,715
Shares issue	2,951		—		—	—		2,951
Contributions from parent company	—		—		—	815		815
Dividends to parent company	—		—		—	(520	)	(520	)
Dividends to not combined subsidiary of parent company	—		—		—	(2,150	)	(2,150	)
Shares redeemed	(257	)	257		—	—		—
Balance at 31 December 2007	17,229		—		4,985	15,601		37,815

The notes form an integral part of these consolidated and combined financial statements.

8

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

1. The reporting entity and statement of directors’ responsibility

Russian Alcohol Group (the “Group”) is a consolidation and combination of 16 companies that constituted the alcohol production, distribution and sales businesses owned by Cirey Holdings Inc., a private company domiciled in the British Virgin Islands. The companies were domiciled mainly in the Russian Federation (see Note 6 for further details on the entities that comprise the Russian Alcohol Group) and were owned either directly or indirectly by Cirey Holdings Inc. throughout the periods presented in these consolidated and combined financial statements. Prior to the acquisition of the 16 companies in July 2008 through an investment vehicle owned by Central European Distribution Corporation, a Delaware corporation and Lion Capital LLC a private equity partnership based in London, England (the “Acquisition”) these 16 companies were part of a larger group headed by Cirey Holdings Inc. (See Note 27 for further information on this Acquisition).

Principal activity

The Group’s principal business activity is production of vodka and low alcohol beverages within the Russian Federation and their sales in the Russian Federation and abroad. The Group is the largest Russian producer and distributor of vodka. The Group’s manufacturing facilities are primarily based in Russia.

Address of registration and business

The company which bears all the management functions of the Group (ZAO Group of companies Russian Alcohol) is registered at the following address: 1 Eniseyskaya Street, Moscow, 129344.

Statement of directors’ responsibility

The directors are responsible for preparing these consolidated and combined financial statements of the Group as at 31 December 2007 and 2006 and for each of the two years in the period ended 31 December 2007, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS as issued by IASB”).

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group, and for identifying and ensuring that the Group complies with the law and regulations applicable to their activities. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors confirm that suitable accounting policies have been used and applied consistently for the periods presented. They also confirm that reasonable and prudent judgments and estimates have been made in preparing the consolidated and combined financial statements and that IFRS as issued by IASB have been followed as described in the basis of preparation in Note 3 to these combined and consolidated financial statements.

2. Operating environment of the Group

The Group through its operations has significant exposure to Russia’s economy and financial markets.

Russian Federation

The Russian Federation displays certain characteristics of an emerging market, including relatively high inflation. Despite strong economic growth in the year 2006 and 2007, the financial situation in the Russian market significantly deteriorated during 2008, particularly in the fourth quarter. As a result of global volatility in financial and commodity markets, among other factors, there has been a significant decline in the Russian

9

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

stock market since mid-2008. Since September 2008, there has been increased volatility in currency markets and the Russian Rouble (RR) has depreciated significantly against some major currencies. The official US Dollar (USD) exchange rate of the Central Bank of the Russian Federation (“CBRF”) increased from RR 25.37 at 1 October 2008 to RR 29.38 at 31 December 2008 and RR 31.29 at 30 June 2009.

The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations and frequent changes, 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 the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments.

Management is unable to predict all developments in the economic environment which could have an impact on the Group’s operations and consequently what effect, if any, they could have on the financial position of the Group.

Impact of the ongoing global financial and economic crisis

The ongoing global financial and economic crisis that emerged out of the severe reduction in global liquidity which commenced in the middle of 2007 (often referred to as the “Credit Crunch”) has resulted in, among other things, a lower level of capital market funding, lower liquidity levels across the banking sector and wider economy, and, at times, higher interbank lending rates and very high volatility in stock and currency markets. The uncertainties in the global financial markets have also led to failures of banks and other corporations, and to bank rescues in the United States of America, Western Europe, Russia and elsewhere. The full extent of the impact of the ongoing financial crisis is proving to be difficult to anticipate or completely guard against.

The availability of external funding in financial markets has significantly reduced since August 2007. Such circumstances may affect the ability of the Group to obtain new borrowings and re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions.

Debtors of the Group may be adversely affected by the financial and economic environment, which could in turn impact their ability to repay the amounts owed. Deteriorating economic conditions for customers may also have an impact on management’s cash flow forecasts and assessment of the impairment of financial and non-financial assets. To the extent that information is available, management has properly reflected revised estimates of expected future cash flows in its impairment assessments.

Management is unable to determine reliably the effects on the Group’s future financial position of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets. Management believes it is taking all the necessary measures to support the sustainability and development of the Group’s business in the current circumstances.

3. Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated and combined financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Basis of preparation

The Group has prepared these financial statements on a consolidated and combined basis (the “consolidated and combined financial statements”). These consolidated and combined financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) as modified by the preparation of combined financial statements arising therefrom as described below.

In all other respects IFRSs have been applied.

The deemed date of transition to IFRS for the consolidated and combined Group was 1 January 2006 (the “transition date”). In accordance with the provisions of IFRS 1 ‘First Time Adoption of International Financial Reporting Standards,’ comparative information has been presented on an IFRS basis for 2006.

Consolidated and combined financial statements

The entities which comprise the Group have been under common management and control throughout the periods presented in these consolidated and combined financial statements, but they did not form a legal group during any period presented.

10

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

These consolidated and combined financial statements comprise the 16 companies included in Note 6, which were acquired by CEDC, Lion Capital LLP and certain of Lion’s affiliates in July 2008 (See Note 26 Events After Balance Sheet Date). These consolidated and combined financial statements reflect the assets, liabilities and results of operations of the components of Russian Alcohol Group that constituted the alcohol production, distribution and sales businesses acquired.

Where some of these 16 companies that make up the Group are in a parent/subsidiary relationship, firstly they have been consolidated under the guidance provided in IAS 27 (“intermediate consolidation”). After intermediate consolidation, the entities remaining (including consolidated sub-groups and stand-alone entities), that are all under common control in the periods presented, have been combined by aggregating the assets, liabilities, results, share capital and reserves of the relevant common control entities, after eliminating intercompany balances and unrealized profits. Transactions involving Cirey Holdings Inc. (the controlling company) and other entities under common control that were not acquired and therefore were not part of this Group, are disclosed as transactions with related parties (see Note 25 for further information on related party transactions).

Management has used these accounting conventions for the preparation of consolidated and combined financial statements of the Group for purposes of inclusion in a Form 8-K to be filed with the SEC. Management have prepared these financial statements on a combined basis as an alternative to the presentation of the financial information for the 16 companies which make up Russian Alcohol as 10 sets of separate or consolidated financial statements (intermediate consolidations only) for the companies acquired.

Such separate or consolidated financial statements that would have been provided as an alternative to the consolidated and combined financial statements would have been each individual entity’s, or intermediate group’s first set of financial statements that comply with IFRS. Each of those financial statements would have contained an explicit and unreserved statement of compliance with IFRS and the transition date for the adoption of IFRS would have been 1 January 2006.

The application of the accounting conventions set out above for the consolidated and combined financials statements of the Group results in the following departure from IFRS:

Combined financial statements

IFRS contains guidance in IAS 27 regarding the basis for presenting consolidated financial statements. Such consolidated financial statements are required to be presented by a parent company when there is a parent/subsidiary relationship.

IFRS does not currently provide for the preparation of combined financial statements in a situation where there is not a parent-subsidiary relationship. When aggregating financial information such as separate entities or groups of entities under common control without such a parent, as is the case with our basis of presentation, the combined Group fails to meet the definition of a group as set out in IAS 27. Combined financial statements, which present financial information for certain entities that comprise part of a group which meets the IAS 27 definition of a group, are not precluded from being described as in compliance with IFRS, provided that transactions between combined entities and other holding companies that are not being combined are not substantive. However, in the case of the Group, such substantive transactions exist during the periods presented. As a consequence, these consolidated and combined financial statements do not comply with IFRS.

For the reasons described above, management believe that the presentation of these consolidated and combined financial statements on the basis set out above is appropriate.

IFRS 1 exemptions

IFRS 1, ‘First-time Adoption of International Financial Reporting Standards,’ permits those companies adopting IFRS for the first time to take certain exemptions from the full requirements of IFRS as of the transition date. The following exemptions have been taken:

• fair value or revaluation as deemed cost – certain property, plant and equipment (land, buildings, machinery and equipment and vehicles) were measured at fair value in late 2005 and these values were used as the deemed cost at the date of revaluation for preparation of these consolidated and combined financial statements. The fair values for all other property, plant and equipment were determined to be comparable to the net book value at the date of transition to IFRS. Management deems these fair value estimates to be reasonable;

• business combinations – any business combinations prior to 1 January 2006 have not been restated on an IFRS basis;

• currency translation differences – currency translation differences prior to 1 January 2006 have not been restated on an IFRS basis.

The Group has not prepared consolidated or combined financial statements under local GAAP for any previous periods. Non-preparation of consolidated financial statements under local GAAP has required the Group in consolidation to adjust subsidiaries’ assets and liabilities to the amounts that IFRS would require in the subsidiary’s individual balance sheet to identify the deemed cost of goodwill at the date of transition. Such adjustments created an excess of the parent’s interest in the subsidiary’s value of assets and liabilities over cost and has been written off to reserves at the date of transition. Further, as there is no relevant previous local GAAP consolidated and/or combined financial statements from which the Group is transitioning, the reconciliations from local GAAP to IFRS on first-time adoption have not been made.

Adoption of new and revised standards

11

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

The Group has adopted all IFRSs and interpretations issued by International Financial Reporting Interpretation Committee (“IFRIC”) that are mandatory for adoption in the annual periods beginning on or after 1 January 2007.

Certain new standards and interpretations have been published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2008 or later periods and which the Group has not early adopted.

IFRIC 11, IFRS 2—Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007). This interpretation requires arrangements whereby an employee is granted rights to an entity’s equity instruments to be accounted for as an equity-settled scheme, even if the entity buys the instruments from another party, or the shareholders provide the equity instruments needed. The Group does not expect the standard to affect its financial statements.

IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008). Service concessions are arrangements whereby a government or other public sector entity grants contracts for the supply of public services – such as roads, airports and other facilities – to private sector operators. The interpretation addresses how service concession operators should apply existing IFRSs to account for the obligations they undertake and rights they receive in service concession agreements. The application of IFRIC 12 is not expected to affect the Group’s financial statements.

IFRIC 14, IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2008). The Group does not expect the standard to affect its financial statements.

IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). The standard applies to entities whose debt or equity instruments are traded in a public market or that file, or are in the process of filing, their financial statements with a regulatory organization for the purpose of issuing any class of instruments in a public market. IFRS 8 requires an entity to report financial and descriptive information about its operating segments, with segment information presented on a similar basis to that used for internal reporting purposes. The Group does not expect the standard to affect its financial statements.

Puttable Financial Instruments and Obligations Arising on Liquidation—IAS 32 and IAS 1 Amendment (effective for annual periods beginning on or after 1 January 2009). The amendment requires classification as equity of some financial instruments that meet the definition of financial liabilities. The Group does not expect the amendment to affect its financial statements.

IAS 23, Borrowing Costs (revised March 2007; effective for annual periods beginning on or after 1 January 2009). The main change to IAS 23 is the removal of the option of immediately recognizing as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. An entity is, therefore, required to capitalize such borrowing costs as part of the cost of the asset. The revised standard applies prospectively to borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after 1 January 2009. The Group does not expect the amendment to affect its financial statements as the option of interest immediate recognition as an expense was not used.

IAS 1, Presentation of Financial Statements (revised September 2007; effective for annual periods beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also

12

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Group expects the revised IAS 1 to affect the presentation of its financial statements but to have no impact on the recognition or measurement of specific transactions and balances.

IAS 27, Consolidated and Separate Financial Statements (revised January 2008; effective for annual periods beginning on or after 1 July 2009). The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the non-controlling interests (previously “minority interests”) even if this results in the non-controlling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Group is currently assessing the impact of the amended standard on its financial statements.

Vesting Conditions and Cancellations—Amendment to IFRS 2, Share-based Payment (issued in January 2008; effective for annual periods beginning on or after 1 January 2009). The amendment clarifies that only service conditions and performance conditions are vesting conditions. Other features of a share-based payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group does not expect the amendment to have a material effect on its financial statements.

IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised IFRS 3 will allow entities to choose to measure non-controlling interests using the existing IFRS 3 method (proportionate share of the acquiree’s identifiable net assets) or at fair value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, in a business combination achieved in stages, the acquirer will have to re-measure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss. Acquisition-related costs will be accounted for separately from the business combination and therefore recognized as expenses rather than included in goodwill. An acquirer will have to recognize at the acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be recognized in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. Any business combinations after 1 July 2009 will be accounted for under new standard.

IFRIC 13, Customer Loyalty Programs (effective for annual periods beginning on or after 1 July 2008). IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. IFRIC 13 is not relevant to the Group’s operations because no Group companies operate any loyalty programs.

IFRIC 15, Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1 January 2009). The interpretation applies to the accounting for revenue and associated expenses by

13

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

entities that undertake the construction of real estate directly or through subcontractors, and provides guidance for determining whether agreements for the construction of real estate are within the scope of IAS 11 or IAS 18. It also provides criteria for determining when entities should recognize revenue on such transactions. The amendments will not have any impact on the Group’s financial statements.

IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1 October 2008). The interpretation explains which currency risk exposures are eligible for hedge accounting and states that translation from the functional currency to the presentation currency does not create an exposure to which hedge accounting could be applied. The IFRIC allows the hedging instrument to be held by any entity or entities within a group except the foreign operation that itself is being hedged. The interpretation also clarifies how the gain or loss recycled from the currency translation reserve to profit or loss is calculated on disposal of the hedged foreign operation. Reporting entities will apply IAS 39 to discontinue hedge accounting prospectively when their hedges do not meet the criteria for hedge accounting in IFRIC 16. IFRIC 16 does not have any impact on the Group’s financial statements as the Group does not apply hedge accounting.

Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate—IFRS 1 and IAS 27 Amendment (issued in May 2008; effective for annual periods beginning on or after 1 January 2009). The amendment allows first-time adopters of IFRS to measure investments in subsidiaries, jointly controlled entities or associates at fair value or at previous GAAP carrying value as deemed cost in the separate financial statements. The amendment also requires distributions from pre-acquisition net assets of investees to be recognized in profit or loss rather than as a recovery of the investment. The amendments will not have any impact on the Group’s financial statements.

Eligible Hedged Items—Amendment to IAS 39, Financial Instruments: Recognition and Measurement (effective with retrospective application for annual periods beginning on or after 1 July 2009). The amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The amendment is not expected to have any impact on the Group’s financial statements as the Group does not apply hedge accounting.

Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading as non-current under IAS 1; accounting for sale of IAS 16 assets which were previously held for rental and classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of definition of a curtailment under IAS 19; accounting for below market interest rate government loans in accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through profit or loss category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40; and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes have no or minimal effect on accounting. The Group does not expect the amendments to have any material effect on its financial statements.

14

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009). The amendment clarifies when and how distribution of non-cash assets as dividends to the owners should be recognized. An entity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash assets will be recognized in profit or loss when the entity settles the dividend payable. IFRIC 17 is not relevant to the Group’s operations because it does not distribute non-cash assets to owners.

IFRS 1, First-time Adoption of International Financial Reporting Standards (following an amendment in December 2008, effective for the first IFRS financial statements for a period beginning on or after 1 July 2009). The revised IFRS 1 retains the substance of its previous version but within a changed structure in order to make it easier for the reader to understand and to better accommodate future changes. The Group concluded that the revised standard does not have any effect on its financial statements.

IFRIC 18, Transfers of Assets from Customers (effective for annual periods beginning on or after 1 July 2009). The interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. IFRIC 18 is not expected to have any impact on the Group’s financial statements.

Improving Disclosures about Financial Instruments—Amendment to IFRS 7, Financial Instruments: Disclosures (issued in March 2009; effective for annual periods beginning on or after 1 January 2009). The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The entity will be required to disclose an analysis of financial instruments using a three-level fair value measurement hierarchy. The amendment (a) clarifies that the maturity analysis of liabilities should include issued financial guarantee contracts at the maximum amount of the guarantee in the earliest period in which the guarantee could be called; and (b) requires disclosure of remaining contractual maturities of financial derivatives if the contractual maturities are essential for an understanding of the timing of the cash flows. An entity will further have to disclose a maturity analysis of financial assets it holds for managing liquidity risk, if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk. The Group is currently assessing the impact of the amendment on disclosures in its financial statements.

Embedded Derivatives—Amendments to IFRIC 9 and IAS 39 (effective for annual periods ending on or after 30 June 2009). The amendments clarify that on reclassification of a financial asset out of the ‘at fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary, separately accounted for. This amendment is not expected to have any impact on the Group’s financial statements.

Group Cash-settled Share-based Payment Transactions (Amendments to IFRS 2) (effective for annual periods ending on or after 1 January 2010). The amendment clarifies that, where a parent (or another group entity) has an obligation to make a cash-settled share-based payment to another group entity’s employees or suppliers, the entity receiving the goods or services should account for the transaction as equity-settled. The amendment also moves the IFRIC 11 requirements in respect of equity-settled share-based payment transactions among group entities and the clarification of the scope of IFRS 2 contained within IFRIC 8 into IFRS 2 itself. This amendment is not expected to have any impact on the Group’s financial statements.

Going concern

The accompanying consolidated and combined financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of

15

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

business. The recoverability of the Group’s assets, as well as the future operation of the Group may be significantly affected by the current and future economic environment in Russia. The accompanying consolidated and combined financial statements do not include any adjustments should the Group be unable to continue as a going concern.

Foreign currency translation

(a) functional and presentation currency

Items included in the consolidated and combined financial statements are measured using the currency of the primary economic environment in which the Group operates (“the functional currency”). The functional currency is Russian Rouble (RUB). The accompanying consolidated and combined financial statements are presented in US dollars (USD), which is the Group’s presentation currency.

At 31 December the exchange rates set by the Central Bank of Russia were as follows:

2007: RUB 24.5462 = USD 1

2006: RUB 26.3311 = USD 1

2005: RUB 28.7825 = USD 1

The Russian Rouble is not a freely convertible currency outside of the Russian Federation. Accordingly, any translation of Russian Rouble amounts to US dollars should not be construed as a representation that such Russian Rouble amounts have been, could be, or will in the future be, converted into US dollars at the exchange rate shown or at any other exchange rate.

(b) foreign currency transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised through profit or loss.

The results of the Group operations expressed in the functional currency are translated into the presentation currency as follows:

• assets and liabilities for each balance sheet date presented are translated at the closing rate at the date of that balance sheet;

• income and expenses for each consolidated and combined income statement are translated at average exchange rates for the period;

• all resulting translation differences are recognized as a separate component of equity (“Foreign currency translation reserve”).

The translation differences referred to in the preceding paragraph result from:

• translating income and expenses at average exchange rates for the period and assets and liabilities at the closing rate. Such translation differences arise both from recognizing income and expense items reflected in the income statement and those recognized directly in equity.

• translating the opening net assets at a closing rate that differs from the previous closing rate.

16

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

Financial reporting in hyperinflationary economy

Prior to 31 December 2002, the Russian Federation experienced relatively high inflation rates. The analysis of the changes in inflation rates indicates that inflation in Russia is subsiding. Below are the inflation rates for the last five years:

2007 – 11.9%

2006 – 9.0%

2005 – 10.9%

2004 – 11.7%

2003 – 12.0%

The management believes that currently there are no substantial inflation risks which may have an adverse effect on the financial indicators and position of the Group.

IAS 29 “Financial Reporting in Hyperinflationary Economies” requires that the financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the balance sheet date. Prior to 31 December 2002 the Russian economy was considered to be hyperinflationary for purposes of IAS 29, and the Group presented the values of non-monetary items in the consolidated and combined financial statements acquired prior to 31 December 2002 in accordance with IAS 29.

The Group applied the consumer price index of the Russian Federation published by the State Statistics Committee (Goskomstat) to determine the current purchasing power of the Russian Rouble at year-end and during the period when the functional currency was recognized as a currency of the hyperinflationary economy.

Property, plant and equipment

Property, plant and equipment is stated at the actual cost of acquisition or production of an asset, less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition or production of the items.

Subsequent costs are included in the asset carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the asset can be measured reliably. All other repairs and maintenance are charged to the consolidated and combined income statement during the financial period in which they are incurred.

Land included in property, plant and equipment is freehold. Freehold land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:

Buildings	20 – 50 years
Machinery and equipment	10 – 20 years
Vehicles	10 – 15 years
Other	5 – 8 years

Where an item of property, plant and equipment comprises several components having different useful lives, such components are accounted for as separate items of property, plant and equipment.

At each balance sheet date the assets’ residual values and useful lives are reviewed for the purpose of identifying economic impairment, and if such impairment is identified in the course of such review the carrying value of such assets is adjusted. An asset’s carrying amount is written down immediately to its recoverable amount if the asset carrying amount is greater than its recoverable amount. The recoverable amount is the higher of the asset fair value less cost to sell and its value in use. Gains and losses caused by such impairment are recognized in the income statement within ‘Other operating expenses’.

17

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

Construction in progress includes assets in the process of acquisition or under construction, and is accounted for at the amount of expenditures incurred. This amount includes cost of assets acquired, construction expenses and other direct expenses. Construction in progress is not depreciated until construction is complete and the item is ready for use.

Intangible assets

Patents and trademarks

Patents and trademarks and other intangible assets are measured initially at purchase cost and are amortized on a straight-line basis over their estimated useful lives (5—20 years). In addition, legal costs incurred due to establishing and registering trademarks are capitalized and amortized over the same period.

Licenses

The Group recognizes licences for producing, storage and distribution of alcohol products and other licences which are essential for the Group to perform its main activity as intangible assets in accordance with IAS 38. Licences are measured initially at cost. After initial recognition licences are carried at its cost less any accumulated amortization. Useful lives of the licences are determined on the basis of licence’s term (usually, 5 years).

Software licenses

Intangible assets include acquired computer software licences, which are capitalised on the basis of the costs incurred to acquire and bring to use. These costs are amortised over their estimated useful lives (3 to 5 years).

Expenditure on internally developed intangible assets is capitalised if it can be demonstrated that:

• it is technically feasible to develop the product for it to be sold;

• adequate resources are available to complete the development;

• there is an intention to complete and sell the product;

• the group is able to sell the product;

• sale of the product will generate future economic benefits; and

• expenditure on the project can be measured reliably.

Capitalised development costs are amortised over the periods the Group expects to benefit from using or selling the products developed. Development expenditure not satisfying the above criteria and expenditure on the research phase of internal projects are recognised in the combined income statement within administrative expenses as incurred.

Impairment of property, plant and equipment and intangible assets

Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels, in separate units or groups of units generating funds for which there are separately identifiable cash flows. The value in use is determined by reference to estimated future cash flows discounted to their present (discounted) value.

Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset’s cash-generating unit (the lowest group of assets in which the asset belongs for which there are separately identifiable cash flows). The Group considers two cash generating units: producing of vodka and producing of low alcohol beverages.

18

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

Financial instruments: recognition and measurement

Financial assets

Financial assets are recognized and derecognized on a trade date where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value.

The Group’s financial assets are classified as loans and receivables and available-for-sale (AFS) financial assets.

The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Effective interest method

The effective interest method is a method of calculating the amortized cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period.

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. Trade loans and receivables are recognized and carried at original invoice amount less provision for impairment. Long-term receivables are recognized at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

Recourse factoring

If the Group factors its accounts receivable, but the factor has recourse against the Group for uncollectible amounts, then the Group still is construed as having retained control over the receivables until the end of the period of possible recourse. In this case the factoring arrangement is considered to be a secured loan rather then a sale of receivables resulting in the retention of the accounts receivable on the Group’s balance sheet as well as the addition of a loan liability. The factor’s commission for the factoring is accounted as interest expense in the Group’s income statement.

AFS financial assets

The Group’s AFS financial assets include only equity investments. These investments in the consolidated and combined financial statements are measured at cost as investments in equity instruments which do not have a quoted market price and whose fair value cannot be reliably measured.

Cash and cash equivalents

Cash and cash equivalents include cash in hand, rouble and foreign currency accounts held with banks, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.

Impairment of financial assets

Accounts receivable are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows from the asset have been impacted.

19

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

The carrying amount of trade and other receivables is reduced through the use of an impairment provision account. When a trade or other receivable is uncollectible, it is written off against the impairment provision account. Subsequent recoveries of amounts previously written off are credited against the impairment provision account. Changes in the carrying amount of the impairment provision account are recognized in the consolidated and combined income statement within “Other operating expenses”.

AFS financial assets carried at cost are assessed for impairment at each balance sheet date. The amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Any such impairment loss is recognized in the consolidated and combined income statement and shall not be reversed.

Derecognizing of financial assets

The Group derecognizes 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.

Financial liabilities and equity instruments issued by the Group’s companies

Classification as debt or equity

Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.

Financial liabilities

The Group has the following financial liabilities:

• loans and borrowings,

• trade and other payables.

All of these financial liabilities are classified as other financial liabilities.

These financial liabilities are initially measured at fair value, net of transaction costs. Financial liabilities are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis.

The Group derecognizes financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire.

Inventories

Inventories comprise the following categories: raw materials and consumables, work in progress, finished goods and other. Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in progress comprises raw material, direct labour, other direct costs and related production overheads. Net realisable value is the estimated selling price in the ordinary course of business, less applicable selling expenses.

20

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

Share capital

Ordinary shares are classified as share capital. Incremental costs directly attributable to the issue of new shares are shown in equity as a reduction, net of tax, from the proceeds.

When the Group’s companies purchase their own shares (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Group’s equity holders until the shares are cancelled, reissued or disposed of in accordance with the applicable legislation during the period of 1 year. Where such shares are redeemed, the cost of the share capital is decreased by the nominal amount of the redeemed shares and the difference between the nominal and redemption values of the redeemed shares is included in equity, net of the related expenses and tax payments.

Borrowing costs

Borrowing costs comprise interest payable on bank borrowings, loans and finance leases. Interest payable is recognized in the income statement as it accrues, using the effective interest method unless such interest is directly attributable to the acquisition, construction or production of a qualifying asset. A qualifying asset is one that takes a substantial period of time to get ready for its intended use or sale.

Current and deferred income tax

The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognized directly in equity. In this case, the tax is also recognized in equity.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Group companies operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the balance sheet. Deferred income tax is determined using tax rates that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred tax assets and liabilities are recognized in the balance sheet within non-current assets and liabilities, respectively, and the change in their values is recognised as income tax expense in the consolidated and combined income statement. The change in deferred tax assets and liabilities caused by equity movements, for example by revaluation of property, plant and equipment, is reflected within equity as adjusted value of the respective transaction.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

If the difference between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases does not result in taxable income and deductible expenses, it is recognised as permanent and does not influence the amounts of deferred assets or liabilities.

In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill.

21

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

Employee benefit obligations

Remuneration to employees in respect of services rendered during reporting period, including accrual for unused vacations and bonuses and related unified social tax (“UST”), is recognized as an expense in the period when it is incurred within cost of sales, selling, distribution and marketing expenses and administrative expenses.

In the Russian Federation all obligatory social contributions, including contributions to the State Pension Fund, are collected through a UST calculated by the application of a regressive rate varying from 2% to 26% of the annual gross remuneration of each employee. UST is allocated to three state social funds, including the State Pension Fund at rates varying from 2% to 20% of the annual gross remuneration of each employee.

The Group does not have any pension arrangements separate from the State pension system of the Russian Federation. The Group has no post-retirement benefits or significant other compensated benefits requiring accrual.

Subject to applicable legislation the Group is obliged to provide termination benefits to its employees retired due to particular circumstances. The management believes that in relation to the Group the probability of the occurrence of such circumstances is low. Therefore, this has no material effect on the financial statements and operations of the Group.

Provisions

Provisions are recognized 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 recognized as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet 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 recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

Revenue recognition

Revenue comprises the fair value of the sold products, and works and services performed, net of value-added tax, excise duties and other taxes collected on behalf of third parties and discounts. Revenue of the entities that resell the alcohol products includes excise duties which the group pays as principal and which are included in the price of the goods sold to the final customer.

Revenue is recognized when all the following conditions have been satisfied:

• the title to goods has been transferred to the buyer;

• 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.

Wholesale trading

The Group companies are engaged in wholesale trading. Sales of goods are recognised when the Group has delivered products to the customer, the customer has accepted the products signing a delivery report, by which the ownership and risks transfer is provided, and collectibles of the related receivables is reasonably assured.

22

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

It is the Group’s policy to sell its products to the end customer on the basis of full transfer of title. Where the customer raises claims in the normal course of business, and these claims are accepted by the Group, any resulting returns are accounted for as a reduction in sales and cost of sales.

Leases

The Group acts principally as a lessee.

Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated and combined income statement on a straight-line basis over the period of the lease.

Finance leases

Leases in which a significant portion of the risks and rewards of ownership are transferred to the lessee at inception are classified as finance leases. The Group recognizes assets and liabilities at inception of the lease. Recognised assets and liabilities are measured at the value, which is the lower of current market value of the leased items and present value of future payments made under the finance lease. Interest cost is recognised in the consolidated and combined income statement within finance costs.

Dividends

Dividend distribution to the Group’s shareholders is recognised as a liability in the Group’s consolidated and combined financial statements in the period in which the dividends are approved by the Group’s shareholders.

Segment reporting

The Group does not prepare segment reporting because the Group companies’ equity or debt securities are not publicly traded and none of the companies is intending to issue equity or debt securities in a public market.

4. Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group’s accounting policies, described in Note 3, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities and recognized amounts of income and expenses that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

The most significant areas requiring the use of management estimates are disclosed below.

23

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

Useful economic lives of property, plant and equipment

Useful lives were determined based on the technical characteristics of assets and the technological nature of their utilization. Changes in the production technology and other factors could have an impact on the length of use of the Group’s assets. Management periodically reviews the appropriateness of the remaining useful lives of the property, plant and equipment.

Impairment of non-financial assets

The Group annually reviews the carrying amounts of its tangible and intangible 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. Management necessarily applies its judgment in allocating assets that do not generate independent cash flows to appropriate cash-generating units, and also in estimating the timing and value of underlying cash flows within the value in use calculation. In determining the value in use calculation, future cash flows are estimated at each cash-generating unit based on a cash flow projection utilizing the latest budget information available.

The Group operates in the fast moving consumer goods sector. Stock holding policies are maintained and enforced to minimise the risk of obsolescence. Where obsolescence arises this is normally the result of management decisions to discontinue or update particular stock keeping units (SKUs). In this case the transition is planned so as to minimise obsolete materials and/or finished goods, and any obsolete stock remaining is written down to net realisable value

Fair value of financial instruments

Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price. The estimated fair values of financial instruments are determined by the Group using available market information, where it exists, and appropriate valuation methodologies. However, judgment is necessarily required to interpret market data to determine the estimated fair value. The Russian Federation continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments.

Allowances for doubtful debts, obsolete and slow-moving inventories

The Group creates allowances for doubtful debts to account for estimated losses resulting from the inability of customers to make required payments. When evaluating the adequacy of an allowance for doubtful debts,

24

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

management bases its estimates on the current overall economic conditions, the ageing of accounts receivable balances, historical write-off experience, customer creditworthiness and changes in payment terms. Changes in the economy, industry or specific customer conditions may require adjustments to the estimated allowance for doubtful debts.

The Group creates an allowance for obsolete and slow-moving inventories. Estimates of net realizable value of inventories are based on the most reliable evidence available at the time the estimates are made. These estimates take into consideration fluctuations of price or cost directly relating to events occurring subsequent to the balance sheet date, to the extent that such events confirm conditions existing at the end of the reporting period.

Taxation

Russian tax, currency and customs legislation is subject to varying interpretations (See Note 26).

Deferred tax assets are reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. The estimation of that probability includes judgments based on expected performance. Various factors are considered to assess the probability of the future utilization of deferred tax assets, including past operating results, operational plans, expiration of tax losses carried forward, and tax planning strategies. If actual results differ from these estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be negatively affected.

Initial recognition of related party transactions

In the normal course of business the Group enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgment is applied to determine whether transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgment is pricing for similar types of transactions with unrelated parties and effective interest rate analyses.

5. Financial risk management

Principal financial instruments

The principal financial instruments used by the Group, from which financial instrument risk arises, are the following:

• investments available-for-sale

• loans issued

• trade and other receivables

• cash and cash equivalents

• trade and other payables

• fixed and floating rate loans and borrowings

25

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

Financial instruments by category

31 December 2007

	Loans and receivables	Available for sale	Total
Assets as per balance sheet
Trade receivables	207,039	—	207,039
Other financial current assets	9,175	—	9,175
Cash and cash equivalents	10,228	—	10,228
Total	226,442	—	226,442

	Other financial liabilities at amortized cost
Liabilities as per balance sheet
Borrowings	186,755
Trade payables	48,412
Other financial liabilities	5,241
Total	240,408

31 December 2006

	Loans and receivables	Available for sale	Total
Assets as per balance sheet
Available-for-sale financial assets	—	550	550
Trade receivables	123,203	—	123,203
Other financial current assets	5,109	—	5,109
Cash and cash equivalents	5,934	—	5,934
Total	134,246	550	134,796

	Other financial liabilities at amortized cost
Liabilities as per balance sheet
Borrowings	90,137
Trade payables	22,276
Other financial liabilities	3,893
Total	116,306

The Group is exposed through its operations to the following financial risks:

• Credit risk

• Liquidity risk

• Fair value of cash flow interest risk

• Foreign exchange risk

Credit risk

Credit risk is the risk that a customer may default or not meet its obligations to the Group in time, leading to financial losses to the Group.

Before accepting any new customer, the management uses internal procedures to assess its credit quality. The Group takes into account the customer’s reputation, external information about customer’s involvement in legal proceedings, etc. No formal credit limits are established for each customer though the Group’s management monitors the concentration of credit risks and maintains it at acceptable level. The major Group’s customers are entities with low credit risk.

The average credit period for the Group’s customers varies from 30 to 90 days. During this period no interest is charged on the outstanding balances.

26

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

Quantitative disclosures of the credit risk exposure in relation to Trade and other receivables are disclosed in the Note 11.

The Group has provided fully for all trade and other receivables where the Group considers the amounts not to be recoverable.

Credit risk also arises from cash and cash equivalents. For banks, only banks out of Russian Top 50 rating list with reliable guarantee of funds safety are accepted.

The Group does not enter into derivatives to manage credit risk.

Group’s maximum exposure to credit risk by class of financial assets is as follows:

	31 December
	2007	2006
Available for sale financial assets	—	550
Trade receivables and other current financial assets, net of allowance for impairment	216,214	128,312
Cash and cash equivalents	10,228	5,934
Total maximum exposure to credit risk	226,442	134,796

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 has a detailed budgeting and cash forecasting process to help ensure that it has adequate cash available to meet its payment obligations.

Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed borrowing facilities.

The table below analyses the Group’s financial assets and liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table below are the contractual undiscounted cash flows.

	Less then 3 months	Between 3 and 6 months	Between 6 and 12 months
As at 31 December 2007
Financial assets:
Trade receivables	206,694	345	—
Other financial current assets	1,377	1,500	6,298
	208,071	1,845	6,298
Financial liabilities:
Borrowings	119,682	19,334	54,500
Trade payables	47,195	1,217	—
Other financial liabilities	2,651	1,353	1,237
	169,528	21,904	55,737

	Less then 3 months	Between 3 and 6 months	Between 6 and 12 months	Between 1 and 2 years
As at 31 December 2006
Financial assets:
Investments available-for-sale	—	550	—	—
Trade receivables	123,005	198	—	—
Other financial current assets	1,006	1,895	2,208	—
	124,011	2,643	2,208	—
Financial liabilities:
Borrowings	66,987	6,704	8,877	10,788
Trade payables	21,541	735	—	—
Other financial liabilities	1,553	292	2,048	—
	90,081	7,731	10,925	10,788

27

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

Cash flow and fair value interest rate risk

The Group is exposed to fair value interest rate risk through market value fluctuations of interest-bearing long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The average rates for fixed rate and floating-rate borrowings are disclosed in Note 16.

The Group does not use any hedging instruments to manage its exposure to changes in interest rates because management considers that the risk is not significant due to insignificant volume of floating rate borrowings.

The total amount of variable-rate borrowings is 11,000 and 6,141 as at 31 December 2007 and 2006, respectively. At 31 December 2007, if interest rates on these borrowings had been 2.0% higher with all other variables held constant, profit before tax would have been lower by 19. At 31 December 2006, if interest rates on these borrowings had been 1.0% higher with all other variables held constant, profit before tax would have been lower by 6. The effect of a corresponding decrease in interest rate is approximately equal and opposite.

Foreign exchange risk

The Group has an insignificant volume of trading activity in foreign currencies. The foreign exchange risk arises on borrowings denominated in USD and Euro (see Note 16) and other assets and liabilities denominated in USD, GBP and Euros. Currency exposure arising from borrowings in foreign currency is not hedged as management of the Group believes that it may not have a significant adverse effect on the Group’s performance.

The carrying amounts of the Group’s foreign currency denominated monetary assets and liabilities were as follows:

	USD denominated 31 December				Euro denominated 31 December				GBP denominated 31 December
	2007		2006		2007		2006		2007		2006
Assets
Loans issued	4,004		—		—		—		—		—
Trade receivables	1,841		198		3,151		790		—		—
Other financial current assets	70		15		—		—		—		—
Cash and cash equivalents	147		2,046		—		246		1		1
Total assets	6,063		2,259		3,151		1,036		1		1
Liabilities
Loans and borrowings	(18,961	)	(8,554	)	(8,407	)	—		—		—
Trade payables	(2,757	)	(1,561	)	(741	)	(514	)	(56	)	—
Other financial liabilities	(117	)	(59	)	(62	)	(67	)	—		(69	)
Total liabilities	(21,835	)	(10,174	)	(9,210	)	(581	)	(56	)	(69	)
Total net position	(15,772	)	(7,915	)	(6,059	)	455		(55	)	(68	)

28

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

As at 31 December 2007, if the functional currency (RUB) had weakened by 10% against the US dollar with all other variables held constant, post-tax profit for the year would have been 1,199 (2006: 602) lower, mainly as a result of foreign exchange gains on translation of US dollar denominated borrowings. Profit is more sensitive to movement in US dollar exchange rates in 2007 than 2006 because of the increased amount of US-dollar denominated borrowings.

Capital management

Capital includes equity attributable to the equity holders of the Group’s entities. Equity attributable to shareholders comprises issued share capital, retained earnings and other reserves. See also Note 13.

The management manages capitals of the Group companies to ensure that each entity can continue to operate and expand their operations while at the same time maximizing returns to shareholders. The Group’s entities are mainly financed by borrowings and loans, including loans from related parties.

Borrowings comprise bank borrowings and other loans (as disclosed in Note 16) and are monitored net of bank and cash balances.

The Group is not subject to externally imposed capital requirements.

The management of the Group monitors the capital structure of the Group on an informal basis taking into account the costs and risks associated with each category of capital. The net debt to equity ratio of the entities is the primary tool used in the monitoring process. No formal targets have been set.

The combined net debt to equity ratio at the year end was as follows:

	31 December
	2007		2006
Net Debt
Short-term and long term borrowings and loans	186,755		90,137
Less: bank and cash balances	(10,228	)	(5,934	)
Net Debt	176,527		84,203
Equity	37,815		27,004
Net debt to equity ratio	4.67		3.12

6. Group companies

Consolidated and combined companies:
As at 31 December 2007	As at 31 December 2006	Type of activity	Date of establishment or acquisition
AUK Holdings Ltd. (Cyprus)	AUK Holdings Ltd. (Cyprus)	Holding company	12.07.2005
OOO Bravo Premium*	OOO Bravo Premium*	Production of alcohol drinks	12.07.2005
ZAO Group of companies Russian Alcohol	ZAO Group of companies Russian Alcohol	Management services	18.03.2003
OOO CHOP Rapid BP*	OOO CHOP Rapid BP*	Security	08.12.2005

OOO CHOP SCHIT Topaz*		Security	10.03.2005
ZAO LVZ Topaz	ZAO LVZ Topaz	Production of alcohol drinks	15.11.2004
ZAO Srednerussky LVZ	ZAO Srednerussky LVZ	Holding company	05.06.2005
ZAO Pervy Kupazhny Zavod*	ZAO Pervy Kupazhny Zavod*	Production of alcohol drinks	12.10.2005
ZAO Sibirskiy LVZ	ZAO Sibirskiy LVZ*	Production of alcohol drinks	16.02.2006
Ushba Distillery	Ushba Distillery	Production of alcohol drinks	18.08.2005
Vlaktor Trading Ltd. (Cyprus)	Vlaktor Trading Ltd. (Cyprus)	Holding company	25.04.2005
OOO Chorniy & Mikola*	OOO Chorniy & Mikola*	Trading	15.11.2005
OOO Gravspirttrest*	OOO Gravspirttrest	Trade marks hold	15.12.2004
OOO Trade House Russian Alcohol	OOO Trade House Russian Alcohol	Trading	16.09.2004
OOO Trade House Russian Alcohol Centre		Trading	15.10.2007
OOO Trade House Russian Alcohol North West		Trading	15.10.2007

* Subsidiaries of an intermediate parent company within the Group. All subsidiaries of companies included in the Group are 100% controlled by their parent companies.

29

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

7. Property, plant and equipment

	Land		Buildings		Machinery and equipment		Vehicles		Other		Construction in progress		Total
Cost
As at 1 January 2006	17		10,446		11,599		1,102		826		1,491		25,481
Additions	—		—		—		—		—		16,682		16,682
Transfers	—		1,163		5,808		1,371		1,395		(9,737	)	—
Disposals	—		(563	)	(1,894	)	(125	)	(232	)	(442	)	(3,256	)
Translation difference	1		992		1,206		143		114		349		2,805
As at 31 December 2006	18		12,038		16,719		2,491		2,103		8,343		41,712
Additions	400		—		—		—		—		33,594		33,994
Transfers	—		737		7,364		3,297		1,632		(13,030	)	—
Disposals	(10	)	(274	)	(665	)	(449	)	(108	)	(123	)	(1,629	)
Translation difference	1		896		1,496		301		218		1,481		4,393
As at 31 December 2007	409		13,397		24,914		5,640		3,845		30,265		78,470
Depreciation
As at 1 January 2006	—		—		—		—		—		—		—
Depreciation charge	—		1,389		2,094		471		735		—		4,689
Disposals	—		(5	)	(245	)	(15	)	(9	)	—		(274	)
Translation difference	—		44		60		15		23		—		142
As at 31 December 2006	—		1,428		1,909		471		749		—		4,557
Depreciation charge	—		836		2,265		832		636		—		4,569
Disposals	—		(120	)	(175	)	(147	)	(33	)	—		(475	)
Translation difference	—		134		226		63		80		—		503
As at 31 December 2007	—		2,278		4,225		1,219		1,432		—		9,154
Net book amount
As at 1 January 2006	17		10,446		11,599		1,102		826		1,491		25,481
As at 31 December 2006	18		10,610		14,810		2,020		1,354		8,343		37,155
As at 31 December 2007	409		11,119		20,689		4,421		2,413		30,265		69,316

30

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

The property, plant and equipment include machinery and equipment under finance lease as at 1 January 2006 in amount of 1,151; nil as at 31 December 2007 and 2006.

Depreciation in the amounts of 2,565 (2006: 3,934), 795 (2006: 179) and 878 (2006: 359) were included in costs of sales, selling, distribution and marketing expense and administrative expense, respectively. Depreciation in the amounts of 331 and 217 is included in the cost of inventory as at 31 December 2007 and 2006, respectively.

Bank borrowings (Note 16) were secured by property, plant and equipment pledges. The net book amounts of assets pledged were as follows:

	Land	Buildings	Machinery and equipment	Total
As at 31 December 2007	10	1,639	29,465	31,113
As at 31 December 2006	9	2,856	10,430	13,295

8. Intangible assets

	Software		Patents		Licenses		Trademarks		Others		Total
Cost
As at 1 January 2006	51		1,034		84		107		27		1,303
Additions	70		—		497		382		—		949
Disposals	—		—		—		(21	)	(10	)	(31	)
Translation difference	(12	)	(160	)	(34	)	9		(3	)	(200	)
As at 31 December 2006	109		874		547		477		14		2,021
Additions	568		1		12		340		147		1,068
Disposals	—		—		—		(1	)	—		(1	)
Translation difference	31		63		40		49		7		190
As at 31 December 2007	708		938		599		865		168		3,278
Amortization
As at 1 January 2006	18		235		52		12		5		322
Amortization charge	49		63		96		12		5		225
Disposals	—		—		—		(7	)	—		(7	)
Translation difference	(16	)	(233	)	(49	)	(12	)	(5	)	(315	)
As at 31 December 2006	51		65		99		5		5		225
Amortization charge	104		68		110		72		40		394
Disposals	—		—		—		—		—		—
Translation difference	8		7		12		3		2		32
As at 31 December 2007	163		140		221		80		47		651
Net book amount
As at 1 January 2006	33		799		32		95		22		981
As at 31 December 2006	58		809		448		472		9		1,796
As at 31 December 2007	545		798		378		785		121		2,627

31

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

As at 31 December 2007 and 2006, the carrying amount of intangible assets equals its acquisition (historical) cost which approximates to its fair value. Amortization in the amounts of 218 (2006: 164), 72 (2006: 12) and 104 (2006: 49) were included in costs of sales, selling, distribution and marketing expense and administrative expense, respectively.

9. Available-for-sale financial assets

Available-for-sale (“AFS”) financial assets include Group’s investments measured at cost as investments in equity instruments that do not have a quoted market price and whose fair value cannot be reliably measured.

	Share		Carrying value
As at 31 December 2007			—
As at 31 December 2006
OAO Morskoy Joint-Stock Bank	19.50	%	550

Shares of OAO Morskoy Joint-Stock Bank were sold in June 2007 to Habies LLC for consideration of 810.

10. Inventories

	31 December
	2007		2006
Raw materials	15,223		13,427
Finished goods	35,333		17,513
Work in progress	596		505
Provision for obsolete and slow-moving inventories	(1,063	)	(386	)
Other inventories	1,416		57
	51,505		31,116

32

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

Movements on the provision for obsolete and slow-moving inventories are as follows:

	Year ended 31 December
	2007	2006
As at 1 January	386	102
Additional slow-moving provision for inventories, net	622	266
Translation difference	55	18
As at 31 December	1,063	386

An impairment loss of 622 and 266 excluding the amount of the deferred tax asset was included in the consolidated and combined income statement within “Other operating expenses” (Note 22) for the years ended 31 December 2007 and 2006, respectively.

The Group had inventories in amounts of 26,864 and 10,086 used as collateral for borrowings (see Note 16) as at 31 December 2007 and 2006.

The cost of goods stocked at the counterparties as at 31 December 2007 was 13,890 (2006: 533).

11. Trade receivables and other current assets

	31 December
	2007		2006
Trade receivables
Trade receivables	210,637		125,424
Less provision for trade receivables impairment	(3,598	)	(2,221	)
Net trade receivables	207,039		123,203
	31 December
	2007		2006
Other current assets
Other non-financial current assets
Prepayments	19,815		7,144
Input VAT refund due	2,738		5,782
Other current assets	1		98
	22,554		13,024
Other financial current assets
Loans receivable	5,406		536
Loans receivable from related parties	49		—
Interest receivable	64		4
Other receivables	3,656		4,569
	9,175		5,109

Loans receivable as at 31 December 2007 include loan to Gran Cru Ltd. in amount of 4,004 which is repayable in July 2008 and bears interest of 5%. Other loans receivable include banks’ promissory notes purchased with discount and redeemable in less than 12 months.

Movements on the group provision for impairment of trade and other receivables are as follows:

	Year ended 31 December
	2007	2006
As at 1 January	2,221	376
Change in provision for receivables impairment	1,166	1,753
Translation difference	211	92
As at 31 December	3,598	2,221

33

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

Recoverable VAT includes VAT related to purchases of raw materials and consumables, services and goods for resale that in accordance with the Tax Code of the Russian Federation can be or was reclaimed from budget through tax returns but was not physically settled as at the reporting date.

The carrying value of trade and other current receivables approximates to their fair value.

The average credit period on sales of goods is 60 days. No interest is charged on late payment of the trade receivables.

The table below includes customers who represent the largest balances of trade receivables.

	31 December
	2007			2006
Vostok-Distribution	5,381	11	%	—	—
Klin kombinat	7,084	14	%	6,055	19	%
Marti	7,699	15	%	1,563	5	%
Omega Spirits	14,626	29	%	4,369	14	%

There is no significant concentration of credit risk with respect to trade receivables, as the Group has a large number of customers dispersed across Russia.

Included in the Group’s trade receivable balance is a debt from related party with a carrying amount of 5,889 (2006: 5,191) which is past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. The Group does not hold any collateral over these balances. The average age of these receivables is 360 days (2006: 350 days).

The Group is giving a part of its receivables to bank Petrokommertz according to regression factoring contracts. The receivables amount, being a pledge upon the factoring contracts amounts to 85,818 (2006: 67,111).

12. Cash and cash equivalents

	31 December
	2007	2006
Cash and cash equivalents	10,228	5,934

13. Equity

Reserves

The following describes the nature and purpose of each reserve within shareholders’ equity:

Reserve	Description and purpose
Share capital	Sum of the amounts subscribed for share capital at nominal value of the combined companies
Foreign currency translation reserve	Gains/losses arising on retranslating the consolidated and combined net assets into presentation currency
Retained earnings	Cumulative net gains and losses recognized in the consolidated and combined income statement and cumulative contributions from shareholders received except for shares issued

34

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

	31 December
	2007	2006
Share capital
Share capital	17,229	14,535

In accordance with the principles of combination (see Note 3) the share capital disclosed in the consolidated and combined financial statements represents the sum of share capitals of the combined entities.

Dividends

In January 2006 AUK Holdings has accrued dividends for the year 2005 to Cirey Holdings Ltd. in amount of amount of 740, the full amount of the dividend was paid in 2006.

In June 2007 AUK Holdings Ltd. has accrued dividends for the year 2006 to Cirey Holdings Ltd. in amount of 520, 480 of these dividend was paid in the year 2007.

In November 2007 LVZ Topaz has accrued dividends to its parent company LVZ Holdings Ltd. in amount of 2,150, 1,368 of the dividend was paid in 2007 and the rest was paid in 2008.

Balances not yet paid at year end are included in “Other payables”.

Foreign currency translation reserve

Translation differences included in the foreign currency translation reserve arise as a result of translating the financial statement items from the functional currency into the presentational currency using the exchange rate at the balance sheet date, which differs from the rate in effect at the last measurement date of the respective item.

Total translation differences of 4,985 (2006: 2,538) include the following amounts:

• 5,024 (2006: 2,882) – the difference arising from fluctuations in currency exchange rates in restating the retained earnings at the end and the beginning of the reporting year;

• (39) (2006: (344)) – the difference arising from fluctuations in currency exchange rates in restating the net loss at the balance sheet date and the date of recognition in the consolidated and combined income statement.

14. Trade and other payables

	31 December
	2007	2006
Trade payables	48,412	22,276
Other payables
Other non-financial liabilities and accruals
Prepayments received	5,381	614
Unearned income	5	5
Deferred VAT	769	1,034
Other liabilities	327	657
	6,482	2,310
Other financial liabilities
Wages and salaries payable	2,087	1,051
Accrual for unused vacations liability	1,610	1,167
Northern pay accrual	583	—
Dividends payable	822	—
Other financial liabilities	139	1,675
	5,241	3,893
	11,723	6,203

35

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

The carrying value of trade and other payables approximates their fair value. Management believes that trade and other payables will be fully settled within 12 months of the balance sheet date.

15. Other taxes payable

	31 December
	2007	2006
Value added tax	27,870	20,314
Excise duties	49,618	36,998
Personal income tax	418	361
Property tax	176	135
Land tax	9	2
Unified social tax	880	605
Other taxes	12	7
	78,983	58,422

Value added tax (“VAT”) and excise duties liability include liabilities accrued as a result of a tax inspection which occurred in 2008 that identified additional liabilities of 21,428 and 14,644 for VAT and 320 and 291 for excise duties for the years ended 31 December 2007 and 2006, respectively.

16. Borrowings

As at 31 December 2007 and 2006 the Group had the following borrowings:

	31 December
	2007	2006
Non-current borrowings:
Bank borrowings	—	6,415
Loans from related parties	—	1,836
Other loans	—	1,031
Total non-current borrowings	—	9,282
Current borrowings:
Bank borrowings	108,906	14,310
Factoring with recourse	73,653	55,916
Loans from related parties	2,372	10,230
Other loans	1,081	76
	186,012	80,532
Interest:
Interest payable to banks	321	36
Interest payable to related parties	422	287
	743	323
Total current borrowings	186,755	80,855

36

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

The maturity of non-current borrowings is as follows:

	31 December
	2007	2006
Between 1 and 2 years	—	9,282

The carrying amount of the Group’s borrowings (excluding interest) is denominated in the following currencies:

	31 December
	2007	2006
Russian Rouble	159,570	81,535
US Dollar	18,074	8,279
Euro	8,368	—
	186,012	89,814

As at 31 December 2007 and 2006 the fair value of borrowings was not materially different from their carrying amounts.

The weighted average effective interest rates at the balance sheet dates were as follows:

	31 December
	2007		2006
Fixed rate RUB denominated borrowings	11.87	%	11.26	%
Variable rate RUB denominated borrowings	9.00	%	9.01	%
Fixed rate foreign currency denominated borrowings	10.10	%	8.55	%
Variable rate foreign currency denominated borrowings	8.65	%	10.25	%

As of 31 December 2007 and 2006, the Group did not have hedging arrangements to mitigate its foreign exchange risk or interest rate risk.

As at 31 December 2007 and 31 December 2006, borrowings from banks are secured by the following assets in pledge:

	Carrying value of collateral
As at 31 December 2007
Land	10
Buildings	1,639
Machinery and equipment	29,465
Inventories	26,864
	57,978
As at 31 December 2006
Land	9
Buildings	2,856
Machinery and equipment	10,430
Inventories	10,086
	23,381

17. Deferred tax assets

Temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes gave rise to deferred tax assets and liabilities as shown below. All the deferred tax movement is origination or reversal of temporary differences.

37

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

	1 January 2006		Tax credited/ (charged) to income statement		Translation difference		31 December 2006		Tax credited/ (charged) to income statement		Translation difference		31 December 2007
Deferred tax asset:
Property, plant and equipment	1		26		1		28		79		5		112
Intangible assets	—		—		—		—		123		5		128
Inventories	298		251		36		585		604		68		1,257
Trade receivables	120		3,699		130		3,949		(1,488	)	225		2,686
Prepayments	—		3		—		3		—		—		3
Taxes recoverable	16		(16	)	1		1		12		1		14
Loans receivable	—		13		—		13		(13	)	—		—
Trade payables	275		48		27		350		58		28		436
Accruals	—		97		3		100		98		12		210
Total	710		4,121		198		5,029		(527	)	344		4,846
Deferred tax liabilities:
Property, plant and equipment	(823	)	(178	)	(82	)	(1,083	)	58		(76	)	(1,101	)
Intangible assets	(10	)	(44	)	(2	)	(56	)	58		(2	)	—
Loans receivable	—		—		—		—		(32	)	(1	)	(33	)
Short-term borrowings	(25	)	26		(1	)	—		—		—		—
Current tax liabilities	—		(1,483	)	(48	)	(1,531	)	930		(73	)	(674	)
Other payables	—		(26	)	(1	)	(27	)	—		(2	)	(29	)
Total	(858	)	(1,705	)	(134	)	(2,697	)	1,014		(154	)	(1,837	)
Net deferred tax assets/(liabilities)	(148	)	2,416		64		2,332		487		190		3,009

18. Sales

	Year ended 31 December
	2007	2006
Sales of goods including:
Domestic sales:
- sales of alcohol products	387,803	212,129
- sales of low-alcohol products	54,765	42,009
Export sales	15,317	6,415
	457,885	260,553
Other sales	232	1,679
	458,117	262,232

38

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

As a result of occurrence of material intercompany sales within the Group during the reporting period, the amounts of domestic sales of the entities which are not excise payers include an excise duty in amounts approximately of 115,195 (2006: 47,446).

19. Cost of sales

Cost of sales comprise the following:

	Year ended 31 December
	2007		2006
Raw materials and supplies	(154,949	)	(88,058	)
Payroll	(21,345	)	(6,104	)
Unified social tax (UST)	(5,090	)	(1,491	)
Depreciation and amortization	(2,783	)	(4,098	)
Goods for resale	(94,955	)	(75,436	)
Other	(22,978	)	(2,871	)
	(302,100	)	(178,058	)

20. Selling, distribution and marketing expenses

Selling, distribution and marketing expenses comprise the following:

	Year ended 31 December
	2007		2006
Payroll	(12,738	)	(6,820	)
Unified social tax (UST)	(2,694	)	(1,578	)
Materials and supplies	(2,987	)	(1,018	)
Advertising expenses	(14,719	)	(5,829	)
Transportation costs	(24,662	)	(13,903	)
Depreciation and amortization	(867	)	(191	)
Marketing expenses	(3,700	)	(1,703	)
Other	(8,721	)	(3,229	)
	(71,088	)	(34,271	)

21. Administrative expenses

Administrative expenses comprise the following:

	Year ended 31 December
	2007		2006
Payroll	(18,238	)	(8,655	)
Unified social tax (UST)	(3,448	)	(1,920	)
Materials and supplies	(1,925	)	(1,258	)
Offices and warehouses rent	(953	)	(418	)
Professional services	(1,383	)	(2,063	)
Depreciation and amortization	(982	)	(408	)
Other	(7,292	)	(1,957	)
	(34,221	)	(16,679	)

39

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

22. Other operating expenses

Other operating income/ (expenses) comprise the following elements:

	Year ended 31 December
	2007		2006
Gain on sale of property, plant and equipment	10		1,742
Loss on disposal of raw materials	(320	)	(151	)
Gain on sale of financial assets available-for-sale	211		—
Taxes other than income tax	(6,693	)	(15,006	)
Bank charges	(2,176	)	(669	)
Social expenses	(2,174	)	(1,189	)
Charity	(544	)	(278	)
Fines and penalties paid and received, net	242		(139	)
Change in allowance for doubtful debts	(1,167	)	(1,753	)
Change in provision for impairment of inventories	(622	)	(266	)
Other	(3,654	)	(1,709	)
	(16,887	)	(19,418	)

Taxes other than income tax include tax charges arising as a result of a tax inspection which occurred in 2008 that identified additional charges of 5,499 and 14,469 for the years ended 31 December 2007 and 2006, respectively (see Note 27).

23. Interest income and expense

	Year ended 31 December
	2007		2006
Interest income	371		3,914
Interest expense	(11,645	)	(7,243	)
Interest expense, net	(11,274	)	(3,329	)

24. Income tax expense

	Year ended 31 December
	2007		2006
Current tax expense	(15,981	)	(24,322	)
Deferred tax benefit	487		2,416
	(15,494	)	(21,906	)

The corporate income tax rate in the Moscow region of the Russian Federation, the primary location of the Group’s production entities, is 24% (2006: 24%). The corporate income tax rate in Cyprus is 10% (2006: 10%).

Current income tax expense includes income tax charges arising as a result of a tax inspection which occurred in 2008 that identified additional charges of 5,563 and 12,897 for the years ended 31 December 2007 and 2006, respectively.

40

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

Profit before tax is reconciled to income tax expense as follows:

	Year ended 31 December
	2007		2006
Profit before tax	22,762		11,229
Tax rate	24	%	24	%
Theoretical profit tax amount	(5,463	)	(2,695	)
Increase / (reduction) due to:
Staff costs, social and other expenses not deductible for tax purposes	(8,947	)	(18,791	)
Effect of the difference in tax rate in Cyprus	399		343
Losses in subsidiaries	(1,483	)	(763	)
Income tax expense	(15,494	)	(21,906	)

25. Related party transactions

Parties are generally considered to be related if the parties are under common control, or if one party has the ability to control the other party or can exercise significant influence or joint control over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the nature of the relationship, not merely the legal form.

The nature of the related party relationships for those related parties with whom the Group entered into significant transactions or had significant balances outstanding at 31 December 2008 are detailed below.

As at 31 December 2007 and 2006 the parent of the Group is Cirey Holdings Inc. The ultimate controlling party of the Group is “Industrial Investors Group”, which is controlled by Mr. Sergey Generalov. Transactions between common control entities that comprise the Group have been eliminated on combination.

Other related parties include companies in the same group of companies controlled by Cirey Holdings Inc., but not combined as these were not part of the Acquisition, as well as other companies under common control with Cirey Holdings Inc.

List of related parties, which entered in transactions with the Group in the years ended 31 December 2007 and 2006:

Name	Nature of relationship
Cirey Holdings Inc.	Parent company
ZAO NPK Topaz	Non-combined subsidiary of the controlling company
OOO Top-Rei	Non-combined subsidiary of the controlling company
OOO Russian Alcohol – Sibirskaya	Non-combined subsidiary of the controlling company
LVZ Holdings Ltd.	Non-combined subsidiary of the controlling company
Black Gold Trading and Finance Corp.	Party under common control
Guento Portfolio Corp.	Party under common control
Arden Global S.A.	Party under common control
OOO “NIT”	Party under common control
OOO Ecotorg	Party under common management
OAO Morskoy Joint-Stock Bank	Party under common control

Transactions with the above related party entities are disclosed below:

(a) Sales

An entity within the Group on occasion may enter into unique agreements with related parties such as for the sale of property, plant and equipment, raw material and distribution and marketing services. Revenue and gains earned from these activities are reported in “Other sales” (Note 18) or in “Other operating expenses” (Note 22).

41

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

In 2005, an entity within the Group performed marketing services for ZAO NPK Topaz. At 31 December 2007 and 2006, the outstanding balance for these services was 2,779 and 2,609, respectively. Increase of the amount occurred only due to translation to presentation currency at the respective year end rates. During fiscal year 2008, ZAO NPK Topaz paid the balance in full. The balance at 2007 is reported within “Trade receivables” (see note (d) below).

(b) Purchases and cost of sales

Entities within the Group purchased production materials from OOO Ecotorg in the years 2007 and 2006. Purchases from OOO Ecotorg amounted to 21,158 and 33,310 during the years ended 31 December 2007 and 2006, respectively. Balances not yet paid for these purchases at year end are included in note (e) below.

An entity within the Group on occasion may purchase marketing services from other related parties. These services costs are reported in cost of sales in amounts of 108 and 249 for the years ended 31 December 2007 and 2006, respectively. Balances not yet collected at year end are included in note (e) below.

(c) Other operating expenses

The Group pays bank commission to OAO Morskoy Joint-Stock Bank for maintaining the current accounts and for guarantees issued by the bank for the Group’s entities during the year. These costs are reported in other operating expenses in amounts of 24 and 21 for the years ended 31 December 2007 and 2006, respectively.

(d) Trade and other receivables

An entity within the Group may occasionally fund a related party entity for capital management purposes for either operations or capital improvement, as well as for services as described above in note (a). These loans and receivables are typically short-term in nature.

In 2007 and 2006, the Group provided capital management funds to ZAO NPK Topaz which bears interest of 0% and matures within 12 months since the date of issue.

In 2007 and 2006 the Group purchased promissory notes from OAO Morskoy Joint-Stock Bank with average discount of 5% p.a. The promissory notes are short-term and are recognized in these consolidated and combined financial statements as loans receivable.

Year-end balances are as follows:

	31 December
	2007	2006
Trade receivable from ZAO NPK Topaz	2,779	2,609
Loans receivable from ZAO NPK Topaz	49	—
Loans receivable from OAO Morskoy Joint-Stock Bank	668	1,064
	3,357	3,123

(e) Trade payables

Year-end balances arising from purchases and cost of sales and included within “Trade payables” is as follows:

	31 December
	2007	2006
Trade payables to OOO Ecotorg	9	7,282
Trade payables to not combined subsidiaries of Cirey Holdings Inc.	83	31

(f) Borrowings

An entity within the Group may occasionally receive a loan from a related party for capital management purposes for either operations or capital improvement, as well as for services the Group received from related parties. These loans are typically short-term in nature.

During 2007 and 2006, entities within the Group received unsecured loans from the Cirey Holdings Inc., bearing interest rates from 0% to 1%. The range of maturity dates on these loans is from October 2007 to June 2008.

During 2007 and 2006, entities within the Group received unsecured loans from the other related parties - not combined subsidiaries of the controlling company and other related parties – parties under common control with maturities of 1 to 2 years, bearing interest rates from 0% to 10%.

42

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

Balances included in Borrowings (Note 16) are as follows:

	31 December
	2007	2006
Non-current borrowings:
Loans payable to not combined subsidiaries of Cirey Holdings Inc.	—	1,143
Long-term loans payable to other related parties	—	693
Total non-current loans from related parties	—	1,836
Current borrowings:
Short-term loans payable to Cirey Holdings Inc.	—	7,957
Loans payable to not combined subsidiaries of Cirey Holdings Inc.	1,679	241
Loans payable to other related parties	693	2,032
	2,372	10,230
Interest:
Interest on loans payable to Cirey Holdings Inc.	110	77
Interest on loans payable to not combined subsidiaries of Cirey Holdings Inc.	104	15
Interest on loans payable to other related parties	208	195
	422	287
Total current loans from related parties	2,794	10,517

(g) Cash and cash equivalents

The Group has open current RUB and USD accounts in OAO Morskoy Joint-Stock Bank, which are used for cash settlements with counterparties in the normal course of business. Year-end cash and cash equivalents balances on these accounts are as follows:

	31 December
	2007	2006
Cash and cash equivalents	421	1,044

(h) Equity

Cirey Holdings Inc contributed additional capital to the Group in amounts of 815 and 4,159 for the years ended 31 December 2007 and 2006, respectively. The contributions were received in cash by the Group and are recognized directly in equity within the retained earnings.

In 2006 Cirey Holdings Inc. has transferred USD 361 thousand to one of the Group’s entities and the entity increased its share capital in 2007 for this amount. As at 31 December 2006 the balance is included in Other payables in these consolidated and combined financial statements.

Dividends accrued and paid

In January 2006 AUK Holdings has accrued dividends for the year 2005 to Cirey Holdings Ltd. in amount of 740, the full amount of the dividend was paid in 2006.

In June 2007 AUK Holdings Ltd. has accrued dividends for the year 2006 to Cirey Holdings Ltd. in amount of 520, 480 of these dividends were paid in the year 2007.

In November 2007 LVZ Topaz has accrued dividends to its parent company LVZ Holdings Ltd. in amount of 2,150, 1,368 of the dividend was paid in 2007 and the rest was paid in 2008.

Balances not yet paid at year end are included in “Other payables”.

43

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

Year-end balances arising from dividends accrual:

	31 December
	2007	2006
Dividends payable to Cirey Holdings Ltd.	40	—
Dividends payable to LVZ Holdings Ltd.	782	—
	822	—

(i) Financial assets available-for-sale

The Group has investment in 19.5% shares in OAO Morskoy Joint-Stock Bank recorded at cost within financial assets available-for-sale. See Note 9.

Operations with key management personnel

In the reporting period the amount of salary paid to the Group’s key management personnel, which includes the management of the managing company ZAO Group of Companies Russian Alcohol (the general director and his deputies), totalled to 332 (2006: 183). No other compensation to the key management personnel were accrued and/or paid.

26. Contingencies and commitments

Legal proceedings

From time to time and in the normal course of business, claims against the Group are received. On the basis of its own estimates and both internal and external professional advice the Management is of the opinion that no material losses will be incurred in respect of claims in excess of provisions which have been made in these consolidated financial statements.

Tax legislation

Russian tax and customs legislation is subject to varying interpretations and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant authorities. The Russian tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged.

In October 2006, the Supreme Arbitration Court issued guidance to lower courts on reviewing tax cases providing a systemic roadmap for anti-avoidance claims, and it is possible that this will significantly increase the level and frequency of scrutiny by the tax authorities. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open for review by the tax authorities for three calendar years preceding the year of review. In certain circumstances such review may cover longer periods.

Russian transfer pricing legislation introduced 1 January 1999 provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controllable transactions, provided that the transaction price differs from the market price by more than 20%. Controllable transactions include transactions with interdependent parties, as determined under the Russian Tax Code, all cross-border transactions (irrespective whether performed between related or unrelated parties), transactions where the price applied by a taxpayer differs by more than 20% from the price applied in similar transactions by the same taxpayer within a short period of time, and barter transactions. There is no formal guidance as to how these rules should be applied in practice. In the past, the arbitration court practice in this respect has been contradictory.

Tax liabilities arising from inter-company transactions are determined using actual transaction prices. It is possible with the evolution of the interpretation of the transfer pricing rules in the Russian Federation and the changes in the approach of the Russian tax authorities, that such transfer prices could be challenged. Given the brief nature of the current Russian transfer pricing rules, the impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the entity.

44

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

The Group includes companies incorporated outside Russia. Tax liabilities of the Group are determined on the assumptions that these companies are not subject to Russian profits tax because they do not have a permanent establishment in Russia. Russian tax laws do not provide detailed rules on taxation of foreign companies. It is possible that with the evolution of the interpretation of these rules and the changes in the approach of the Russian tax authorities, the non-taxable status of some or all of the foreign companies of the Group in Russia may be challenged. The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the entity.

Russian tax legislation does not provide definitive guidance in certain areas. From time to time, the Group adopts interpretations of such uncertain areas that reduce the effective income tax rate of the Group. As noted above, such tax positions may come under heightened scrutiny as a result of recent developments in administrative and court practices. The impact of any challenge by the tax authorities cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the Group.

Assets pledged and restricted

As at 31 December 2007 and 2006 the Group has items of property, plant and equipment and inventories pledged as collateral (Note 16).

Operating lease commitments

The Group entities lease property under short-term cancellable operating lease agreements. There were no breaches of the agreements, including those related to unauthorized improvements of leased property.

Capital commitments

In the normal course of business, the Group prepares a plan for construction of new plants and buildings, and revises it periodically during the year. As at 31 December 2007, capital commitments were 28,500.

Environmental matters

The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognized immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be reliably estimated but could be material. In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage.

27. Events after the balance sheet date

Acquisition of the Group

On 9 July 2008, CEDC completed an investment with Lion Capital LLP and certain of Lion’s affiliates and funds managed and advised by Lion Capital LLP (together referred to as “Lion”), pursuant to which CEDC and Lion acquired all of the outstanding equity of the Russian Alcohol Group (“RAG”) via shareholdings in the holding company Lion/Rally Lux 1 SA. In connection with that investment, CEDC acquired an indirect equity stake in RAG of approximately 42%, and Lion acquired substantially all of the remainder of the equity of RAG. The agreements governing that investment gave CEDC the right to acquire, and gave Lion the right to require CEDC to acquire Lion’s equity stake in RAG (the “Prior Agreement”).

45

RUSSIAN ALCOHOL GROUP

NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(in thousands of USD)

On 24 April 2009, CEDC and Lion entered into new agreements with Lion to replace the Prior Agreement, which requires CEDC, through a multi-stage equity purchase, to acquire over the next five years (including 2009) all of the equity interests in RAG held by Lion (the “Acquisition”), including Option Agreements and a Note Purchase and Share Subscription Agreement between CEDC, Carey Agri International – Poland Sp. z o.o., a Polish limited liability company and subsidiary of CEDC (“Carey Agri”), Lion/Rally Cayman 2 and Lion/Rally Cayman 5, a company incorporated in the Cayman Islands and an affiliate of Lion (“Cayman 5”), such agreements being termed the Option Agreements” and the “Note Purchase Agreement”, collectively the “New Agreements”.

Under the terms of the Note Purchase Agreement CEDC converted loan notes to Lion/Rally Lux 3 SA of USD 103,500,000 into share capital of Lion/Rally Cayman 2, as a result increasing its percentage ownership of shares to 52.86%. As a result of the Option Agreements CEDC has a right to receive all dividends giving CEDC an effective economic interest from 24 April 2009 of 100% in Lion/Rally Cayman 2, whilst management control continues to ultimately rest with Lion Capital LLP, exercised via its participation in several affiliates including limited partnerships. The economic interest of CEDC in Lion/Rally Cayman 2 has been pledged as collateral in respect of payment obligations under the New Agreements.

Loans repayments and receipts

As a consequence of the Acquisition and the re-financing all of the loans and borrowings outstanding as at 31 December 2007 were repaid including loans from the related parties.

In July 2008 the Group re-financed and obtained a loan facility from a new related party (subsidiary of new parent company after Acquisition) with limit of 315,000. The loan was received in several tranches which are repayable within from 15 to 84 months. The loan bears floating rate interest based on LIBOR (EURIBOR) plus from 5.5% to 7% depending on a particular tranche conditions. The amount of the loan drawdown to 30 June 2009 including respective interest was 287,728.

Accrual of additional tax liabilities

As a result of a tax inspection which occurred in 2008 additional tax liabilities were assessed to the Group including taxes other than income tax of 21,748 and 14,935 and also additional income tax liabilities of 21,373 and 14,613 as at 31 December 2007 and 2006 respectively.

46

EX-99.2

Exhibit 99.2

LION/RALLY CAYMAN 2 and its subsidiaries

International Financial Reporting Standards

Consolidated Financial Statements and

Independent Auditor’s Report

31 December 2008

Contents

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheet		1
Consolidated Income Statement		2
Consolidated Statement of Changes in Equity		3
Consolidated Cash Flow Statement		4
Notes to the Consolidated Financial Statements
1.	Lion/Rally Cayman 2 Group and its operations	5
2.	Operating environment of the Group	6
3.	Summary of significant accounting policies	7
4.	Critical accounting estimates and judgements in applying accounting policies	14
5.	Adoption of new or revised standards and interpretations	16
6.	Balances and transactions with related parties	18
7.	Property, plant and equipment	19
8.	Goodwill	19
9.	Other intangible assets	20
10.	Inventory	20
11.	Trade and other accounts receivable and advances	20
12.	Taxes, other than income tax prepayments	21
13.	Cash and cash equivalents	21
14.	Share capital	22
15.	Borrowings and loans	22
16.	Taxes, other than income tax payable	23
17.	Provisions	23
18.	Trade and other accounts payable	24
19.	Revenue	24
20.	Cost of Sales	24
21.	Selling and distribution expenses	25
22.	General and administrative expenses	25
23.	Finance income	25
24.	Finance costs	25
25.	Income tax	26
26.	Contingencies, commitments and operating risks	27
27.	Business combinations	28
28.	Financial risk management	29
29.	Events after the balance sheet date	31

ZAO PricewaterhouseCoopers Audit

Kosmodamianskaya Nab. 52, Bld. 5

115054 Moscow

Russia

Telephone +7 (495) 967 6000

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Lion/Rally Cayman 2

We have audited the accompanying consolidated balance sheet of Lion/Rally Cayman 2 and its subsidiaries (hereinafter referred to as “the Group”) as at December 31, 2008 and the related consolidated statements of income, cash flow and changes in equity for the period since incorporation. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of the financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Group at December 31, 2008 and the results of their operations and their cash flows for the period since incorporation, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

ZAO PricewaterhouseCoopers Audit

Kosmodamianskaya Nab., 52, Bldg. 5

115054 Moscow

Russian Federation

June 30, 2009

Lion/Rally Cayman 2 and its subsidiaries

Consolidated Balance Sheet

ALL ITEMS ARE PRESENTED IN THOUSANDS OF US DOLLARS UNLESS OTHERWISE STATED

	Note	31 December 2008
Assets
Non-Current Assets
Property, plant and equipment	7	126,590
Goodwill	8	190,653
Other intangible assets	9	203,092
Deferred income tax assets	25	26,702
Total non-current assets		547,037
Current assets
Inventories	10	65,923
Trade accounts receivable	11	209,021
Other accounts receivable and advances	11	22,787
Current income tax prepayments		6,097
Taxes, other than income tax prepayment	12	21,479
Cash and cash equivalents	13	117,425
Total current assets		442,732
Total assets		989,769
EQUITY
Share capital	14	382,500
Accumulated deficit		(38,259	)
Currency translation reserve		(69,758	)
Equity attributable to equity holders of the Company		274,483
Minority interest		35,881
Total equity		310,364
Liabilities
Non–current liabilities
Loans and borrowings	15	369,333
Contingent consideration	17	33,402
Deferred income tax liabilities	25	51,591
Total non-current liabilities		454,326
Short-term liabilities
Loans and borrowings	15	43,348
Trade accounts payable	18	38,797
Other accounts payable	18	34,983
Current income tax liability		1,861
Current income tax provision	17	20,000
Taxes, other than income tax payable	16	64,952
Other provisions for liabilities and charges	17	21,138
Total current liabilities		225,079
Total liabilities		679,405
Total liabilities and equity		989,769

Approved for issue and signed on behalf of the Board of Directors on 30 June 2009.

Hayley Tanguy	Rob Jones
Director	Director

The attached notes from page 5 to page 34 are an integral part of the

consolidated financial statements.

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Lion/Rally Cayman 2 and its subsidiaries

Consolidated Income Statement

ALL ITEMS ARE PRESENTED IN THOUSANDS OF US DOLLARS UNLESS OTHERWISE STATED

	Note	For the period ended 31 December 2008
Revenue	19	342,714
Cost of sales	20	(176,622	)
Gross margin		166,092
Selling and distribution expenses	21	(103,641	)
General and administrative expenses	22	(33,115	)
Operating profit		29,336
Finance income	23	1,144
Finance costs – foreign currency translation		(70,368	)
Finance costs – interests	24	(20,306	)
Loss before income tax		(60,194	)
Income tax credit	25	16,934
Loss for the year		(43,260	)
Loss attributable to:
Shareholders of the Group		(38,259	)
Minority interest		(5,001	)

The attached notes from page 5 to page 34 are an integral part of the

consolidated financial statements.

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Lion/Rally Cayman 2 and its subsidiaries

Consolidated Statement of Changes in Equity

IN THOUSANDS OF UNITED STATES DOLLARS

	Attributable to shareholders of the Group							Minority interest		Total equity
	Share capital	Currency translation reserve		Accumulated deficit		Total
Share capital	382,500	—		—		382,500				382,500
Minority interest arising on business combination								50,000		50,000
Currency translation adjustment	—	(69,758	)	—		(69,758	)	(9,118	)	(78,876	)
Loss for period to 31 December	—	—		(38,259	)	(38,259	)	(5,001	)	(43,260	)
Balance at 31 December 2008	382,500	(69,758	)	(38,259	)	274,483		35,881		310,364

The attached notes from page 5 to page 34 are an integral part of the

consolidated financial statements.

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Lion/Rally Cayman 2 its subsidiaries

Consolidated Cash Flow Statement

IN THOUSANDS OF UNITED STATES DOLLARS

	Note	For the period ended 31 December 2008
Cash flows from operating activities:
Loss before income tax		(60,194	)
Adjustments for:
Depreciation of property, plant and equipment and amortisation of other intangible assets	7,9	6,618
Provision of accounts receivable	11	14,105
Other assets provision		273
Amortisation of bank charges	24	1,204
Tax penalties	24	1,978
Finance costs, net	23,24	15,980
Foreign exchange translation differences		70,368
Losses from sale of property, plant and equipment		1,616
Gain from sale of inventory		(21	)
Gain from sale of other assets		(117	)
Operating cash flows before working capital changes		51,810
Decrease in trade accounts receivable		41,301
Decrease in other accounts receivable		5,002
Decrease in advances		2,772
Increase in other current assets		(6,237	)
Increase in VAT recoverable		(1,885	)
Increase in inventories		(37,699	)
Decrease in trade accounts payable		(53,245	)
Increase in other accounts payable		1,943
Cash used in operations		3,762
Income taxes paid		(15,203	)
Interest paid		(8,362	)
Net cash used in operating activities		(19,803	)
Cash flows from investing activities:
Purchases of property, plant and equipment		(13,743	)
Repayments of loans receivable		325
Consideration for acquisition paid (less cash acquired at purchased business combinations)		(390,865	)
Loans receivable		(122	)
Net cash used by investing activities		(404,405	)
Cash flows from financing activities:
Proceeds from borrowings and loans		456,428
Repayment of loans and borrowings		(237,922	)
Contributions to share capital		382,500
Net cash received from financing activities		601,006
Effect of exchange rate changes from functional into presentational currency		(59,373	)
Net increase in cash and cash equivalents	13	117,425
Cash and cash equivalents, at the beginning of the period		—
Cash and cash equivalents, at the end of the period	13	117,425

Cashflow statement represents initial financing and post-acquisition (see note 27) cash movements for the period from 9 July 2008 till 31 December 2008

The attached notes from page 5 to page 34 are an integral part of the present

consolidated financial statements.

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Lion/Rally Cayman 2 and its subsidiaries

Notes to the Consolidated Financial Statements – 31 December 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

1. Lion/Rally Cayman 2 Group and its operations

These consolidated financial statements for the period from incorporation to 31 December 2008 are prepared for Lion/Rally Cayman 2 (the Company) and its subsidiaries (hereinafter referred to as the Group).

The Company was incorporated and domiciled in the Cayman Islands on 27 May 2008. The Company is a limited liability company and was set up in accordance with the legislation of the Cayman Islands.

Lion/Rally Cayman 2 was dormant until the issue of shares to Lion/Rally Cayman 1 Limited Partnership and Carey Agri International – Poland SP ZOO on 8 July 2008 and the acquisition of the group of companies (Note 27 Business Combinations) involved in distilled alcohol and low alcohol beverages production and sale headed by Lion/Rally Lux 1 SA on 9 July 2008. Therefore the income statement represents the period from 9 July 2008 to 31 December 2008 as there were no operating activities prior to this.

As from 8 July 2008 and throughout the period to 31 December 2008, the shareholders of Lion/Rally Cayman 2 were Lion/Rally Cayman 1 Limited Partnership (52.55%) registered in the Cayman Islands, and Carey Agri International – Poland SP ZOO, (Carey Agri) registered in Poland (47.45%). Ultimate controlling Party is considered to be Lion Capital LLP, registered in the United Kingdom who exercises management control through its effective participation in Lion/Rally Cayman 1 Limited Partnership. Central European Distribution Corporation (CEDC), through the share holdings of Carey Agri exercises influence on the operations of Lion/Rally Cayman 2.

For information regarding changes in the group structure subsequent to the balance sheet date, refer to Note 29.

Principal activity

The Group’s principal business activity is production of vodka and low alcohol beverages within the Russian Federation and their sales in the Russian Federation and abroad. The Group is the largest Russian producer and distributor of vodka. The Group’s manufacturing facilities are primarily based in Russia.

Address of registration and business. The Company is registered at the following address, Stuarts Corporate Services, Cayman Financial Centre, 36A Dr Roys Drive, PO Box 2510 George Town, Grand Cayman KY 1104, Cayman Islands. The Group’s principal place of business is Russia.

Lion/Rally Cayman 2 purchased its ownership interests in subsidiaries on 9 July 2008 under the contracts for purchasing ownership interests. See Note 27 Business Combinations.

The principal subsidiaries consolidated within the Group and percentage of ownership interest held by the Company are as follows:

	Companies	Country of incorporation	Activities	Share, ownership at 31.12.2008
1	ZAO Group of companies Russian Alcohol and its subsidiaries	Russian Federation	Sale of distilled alcohol and low alcohol beverages	100.0	%
2	Vlactor Trading Ltd and its subsidiaries	Cyprus	Trademark ownership	100.0	%
3	AUK Holding Ltd	Cyprus	Trademark ownership	100.0	%
4	Latchey and its subsidiaries	Cyprus	Investments holder	100.0	%
5	Ushba Distilly and its subsidiaries	Georgia	Production and sale of distilled alcohol beverages	100.0	%
6	OOO Chorniy & Mikola	Ukraine	Sales of distilled alcohol beverages	100.0	%
7	ZAO LVS Topaz	Russian Federation	Production and sale of distilled alcohol beverages	100.0	%
8	OOO Pervy Kupazhny Zavod	Russian Federation	Production and sale of distilled alcohol beverages	100.0	%
9	ZAO Sibirsky LVZ	Russian Federation	Production and sale of distilled alcohol beverages	100.0	%
10	OOO Bravo Premium	Russian Federation	Production and sale of low alcohol beverages	100.0	%
11	OOO CHOP RAPID BP	Russian Federation	Investigations and security assurance	100.0	%
12	OOO CHOP SCHIT Topaz	Russian Federation	Investigations and security assurance	100.0	%

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1. Lion/Rally Cayman 2 Group and its operations (Continued)

	Companies	Country of incorporation	Activities	Share, ownership at 31.12.2008
13	ZAO Srednerussky LVS	Russian Federation	Investments holder	100.0	%
14	OOO Trade House Russian Alcohol North West	Russian Federation	Sale of distilled alcohol and low alcohol beverages	100.0	%
15	OOO Trade House Russia Alcohol	Russian Federation	Sale of distilled alcohol and low alcohol beverages	100.0	%
16	OOO Trade House Russia Alcohol Center	Russian Federation	Sale of distilled alcohol and low alcohol beverages	100.0	%
17	Nowdo Limited	Cyprus	Financing	0.0	%
18	Pasalba Limited	Cyprus	Investments Holder	100	%
19	Lion/Rally Lux 1 SA	Luxembourg	Investments Holder	88.44	%
20	Lion/Rally Lux 2 SA	Luxembourg	Investments Holder	100	%
21	Lion/Rally Lux 3 SA	Luxembourg	Investments Holder	100	%
22	Lion/Rally Lux 4 SA	Luxembourg	Investments Holder	100	%
23	Lion/Rally Cayman 3	Cayman Islands	Management Remuneration	100	%

2. Operating environment of the Group

The Group through its operations has significant exposure to Russia’s economy and financial markets.

Russian Federation. The Russian Federation displays certain characteristics of an emerging market, including relatively high inflation. Despite strong economic growth in recent years, the financial situation in the Russian market significantly deteriorated during 2008, particularly in the fourth quarter. As a result of global volatility in financial and commodity markets, among other factors, there has been a significant decline in the Russian stock market since mid-2008. Since September 2008, there has been increased volatility in currency markets and the Russian Rouble (RR) has depreciated significantly against some major currencies. The official US Dollar (USD) exchange rate of the Central Bank of the Russian Federation (“CBRF”) increased from RR 25.37 at 1 October 2008 to RR 29.38 at 31 December 2008 and RR 31.24 at 23 June 2009.

The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations and frequent changes, 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 the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments.

Management is unable to predict all developments in the economic environment which could have an impact on the Group’s operations and consequently what effect, if any, they could have on the financial position of the Group.

Impact of the ongoing global financial and economic crisis. The ongoing global financial and economic crisis that emerged out of the severe reduction in global liquidity which commenced in the middle of 2007 (often referred to as the “Credit Crunch”) has resulted in, among other things, a lower level of capital market funding, lower liquidity levels across the banking sector and wider economy, and, at times, higher interbank lending rates and very high volatility in stock and currency markets. The uncertainties in the global financial markets have also led to failures of banks and other corporates, and to bank rescues in the United States of America, Western Europe, Russia and elsewhere. The full extent of the impact of the ongoing financial crisis is proving to be difficult to anticipate or completely guard against.

The availability of external funding in financial markets has significantly reduced since August 2007. Such circumstances may affect the ability of the Group to obtain new borrowings and re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions.

Debtors of the Group may be adversely affected by the financial and economic environment, which could in turn impact their ability to repay the amounts owed. Deteriorating economic conditions for customers may also have an impact on management’s cash flow forecasts and assessment of the impairment of financial and non-financial assets. To the extent that information is available, management has properly reflected revised estimates of expected future cash flows in its impairment assessments.

Management is unable to reliably determine the effects on the Group’s future financial position of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets. Management believes it is taking all the necessary measures to support the sustainability and development of the Group’s business in the current circumstances.

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3. Summary of significant accounting policies

Basis of preparation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board including International Accounting Standards (“IAS”) issued by the International Accounting Standards Committee and Interpretations issued by the Standing Interpretations Committee and International Financial Reporting Interpretations Committee. These policies have been consistently applied to all the periods presented, unless otherwise stated. See Note 5, Adoption of New or Revised Standards and Interpretations.

Going concern

The accompanying financial statements have been prepared on the basis that the Group will continue as a going concern, whereby the realization of assets and the settlement of liabilities takes place in the regular course of business. These financial statements do not contain any adjustments that could have been required, if the Group were not able to continue as a going concern.

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented herein, unless otherwise stated.

Consolidated financial statements. Subsidiaries are those companies and other entities (including special purpose entities) in which the Group directly or indirectly has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain economic benefits. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are removed from the consolidation from the date that control ceases.

The Group holds 0% of voting rights in Nowdo Ltd., a fully consolidated subsidiary. Nowdo Ltd has been recognised as a Special Purpose Entity (SPE) due to a number of indications for such recognition including conducting activities on behalf of the Group and in accordance with its needs and obtaining finance for the Group.

The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. If the combination of businesses takes place as a result of one transaction, then the transfer date shall be the acquisition date. If the combination of businesses takes place gradually by a sequential purchase of shares, the date of transfer shall be the date of purchase of each equity interest.

The excess of the cost of acquisition over the fair value of the net assets of the acquiree at each exchange transaction represents goodwill. The excess of the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired over cost (“negative goodwill”) is recognised immediately in consolidated income statement.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any minority interest, except for contingent income tax liabilities, which are measured in accordance with IAS 12, Income Taxes.

Inter-company transactions, balances and unrealized gains on transactions between the Group companies are eliminated. Unrealized losses are also eliminated unless the value of assets transferred can be recovered. The Company and all its subsidiaries use uniform accounting policies, consistent with the Group’s policies.

Financial instruments – key measurement terms. Depending on their classification, financial instruments are carried at fair value or amortised cost as described below.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Fair value is the current bid price for financial assets and current asking price for financial liabilities which are quoted in an active market. For assets and liabilities with offsetting market risks, the Group may use mid-market prices as a basis for establishing fair values for the offsetting risk positions and apply the bid or asking price to the net open position as appropriate. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arm’s length basis.

7

Valuation techniques such as discounted cash flows models or models based on recent arm’s length transactions or consideration of financial data of the investees are used to fair value certain financial instruments for which external market pricing information is not available. Valuation techniques may require assumptions not supported by observable market data. Disclosures are made in these financial statements if changing any such assumptions to a reasonably possible alternative would result in significantly different profit, income, total assets or total liabilities.

Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisers, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related consolidated balance sheet items.

The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate (refer to income and expense recognition policy).

Classification of financial assets. The Group classifies its financial assets into the following measurement categories: loans and receivables and available-for-sale investments.

Loans and receivables are unquoted non-derivative financial assets with fixed or determinable payments other than those that the Group intends to sell in the near term.

All other financial assets are included in the available-for-sale category.

Classification of financial liabilities. The Group classifies its financial liabilities into the following measurement categories: (a) borrowings and payables and (b) other financial liabilities, all of which are carried at amortised cost.

Initial recognition of financial instruments. Borrowings, payables and other liabilities are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets.

All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is the date that the Group commits to deliver a financial asset. All other purchases and sales are recognised on the settlement date with the change in value between the commitment date and settlement date not recognised for assets carried at cost or amortised cost and recognised in equity for assets classified as available for sale

Derecognition of financial assets. The Group derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale.

Available for sale investments. Available for sale investments are carried at fair value. Interest income on available-for-sale debt securities is calculated using the effective interest method and recognised in the consolidated income statement. Dividends on available-for-sale equity instruments are recognised in profit or loss when the Group’s right to receive payment is established and inflow of benefits is probable. All other elements of changes in the fair value are deferred in equity until the investment is derecognised or impaired at which time the cumulative gain or loss is removed from equity to profit or loss.

8

Impairment losses are recognised in income statement when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of available-for-sale investments. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss – is removed from equity and recognised in profit or loss. Impairment losses on equity instruments are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in consolidated income statements, the impairment loss is reversed through current period’s consolidated income statement.

Loans given and receivables. Loans given and receivables represent non-derivative financial assets with fixed or determinable payments unquoted in the market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. The Group’s loans and receivables comprise ‘trade and other receivables’ and cash and cash equivalents in the balance sheet.

Loans given and receivables are carried at amortized cost which approsimates to the amount of the invoice issued less impairment provision. Long-term accounts receivable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. Interest income is recognized using the effective interest method. For short-term accounts receivable the recognition of interest is not material.

Property, plant and equipment. Property, plant and equipment are stated at cost less accumulated depreciation and provision for impairment, where required. Due to the business combination property, plant and equipment have been recognized at fair value on the date of acquisition and consequently that fair value is considered as deemed cost for the Group. Valuation was carried out by independent appraisors on July 9, 2008. Combination of sales comparison approach and replacement methods were applied for estimation of the fair value of the assets. Market value is assumed the best approximation if it could be estimated reliably. Sales comparison approach has been used for the assets that are actively traded (certain equipment, land, vehicles). Income approach was used to check whether economic impairment has taken place.

Costs of minor repairs and maintenance are expensed when incurred. Costs of replacing major parts or components of property, plant and equipment items are capitalised and the replaced part is retired.

At each reporting date management assesses whether there is any indication of impairment of property, plant and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in the consolidated income statement. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell.

Gains or losses on disposal of an asset shall be determined as the difference between the proceeds and the carrying amount of the asset and are recognised in the consolidated income statement.

Depreciation. Land and construction in progress are not depreciated. Depreciation of other assets is calculated using the straight-line method by writing-off evenly their historical cost, less residual value, over their useful lives, namely:

	Useful life in years
Buildings and facilities	8-45
Machinery and equipment	2-25
Motor vehicles	2-12
Other	2-16

If an asset includes several components having different useful lives, these components are recorded as separate assets.

The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

Incomplete capital expenditures are represented by assets under acquisition or construction and recorded at actual cost. The cost includes cost of purchased assets, construction assets and other direct expenses. Incomplete capital expenditures are not depreciated until completion of acquisition (construction) and adjusting the asset to the condition suitable for operation.

9

Operating leases. Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments are charged to income statement on a straight-line basis over the period of the lease. The lease term is the non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option.

Goodwill. Goodwill represents the excess of the cost of an acquisition over the fair value of the acquirer’s share of the net identifiable assets of the acquired subsidiary or associate. Goodwill on acquisition of subsidiaries is presented separately in the consolidated balance sheet. Goodwill is carried at cost less accumulated impairment losses, if any.

The Group tests goodwill for impairment at least annually and whenever there are indications that goodwill may be impaired. Goodwill is allocated to the cash-generating units (groups of assets generating cash) or groups of cash-generating units that are expected to benefit from the synergies of the business combination. Such units or groups of units represent the lowest level at which the Group monitors goodwill and are not larger than a segment. Gains or losses on disposal of an operation within a cash generating unit to which goodwill has been allocated include the carrying amount of goodwill associated with the operation disposed of, generally measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit which is retained.

Other Intangible assets. The Group’s intangible assets comprise trademarks, computer software and licenses. Some trademarks have indefinite useful lives.

In connection with business combination (Note 27) intangibles of the acquired companies were revalued and recognized at fair value and subsequently accounted for at historical cost. Revaluation of the assets has been performed by independent certified appraisors using an Income Approach – Relief from Royalty Method – for trademarks, core technology and patents. For valuation of licenses and software cost approach has been used based on costs necessary for replacing or reproducing an asset in its existing state. Trademarks are allocated by segments: vodka (Economy, Middle class, Subpremium, Premium) and low-alcohol products. Other acquired trademarks had no value and are not being used by the Group.

Management determined two key trademarks – “Green Mark” (in the market since 2003) and “Zhuravli” (in the market since 2006) as having indefinite useful lives. The group decision to account for these trademarks as intangibles with indefinite useful lives was driven by the following factors: (I) Those two trademarks are well-known in Russia and the Group intends to continue production under those trademarks and their further promotion; (ii) the trademarks are strategic and sales of products under those trademarks comprise 80% of the Group revenue; (iii) the Group intends to continue to support the development of these brands by various marketing activities. Accordingly, the Group does not amortise those trademarks, but tests for impairment at each reporting date or more frequently, if there are indications of impairment.

Useful lives of the other trademarks were determined based on the operating environment and management’s plans to develop and promote those trademarks. The useful life of licenses is the period of their validity, useful life of software corresponds to its economic feasibility.

Development costs that are directly associated with identifiable and unique software controlled by the Group are recorded as intangible assets if an inflow of incremental economic benefits exceeding costs is probable. Capitalised costs include staff costs of the software development team and an appropriate portion of relevant overheads. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred.

The Group acquired recipies for producing certain types of vodka. Recipies are inseparable parts of the products and their values were taken into account in estimation of the fair value of corresponding trademarks.

Intangible assets, which are amortised, are subject to a straight-line amortization over their useful lives:

	Useful lives in years
Trademarks	5-15
Licenses	3
Software	1-2

The Group investigates if there are indications of impairment at each reporting date or more frequently. If impaired, the carrying amount of intangible assets is written down to the higher of value in use and fair value less costs to sell.

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Income tax. Income taxes have been provided for in the consolidated financial statements in accordance with legislation of the state, in which the Group companies are registered or operate at the rates that are enacted or substantively enacted by the balance sheet date. The income tax charge comprises current tax and deferred tax and is recognised in the consolidated income statement except if it is recognised directly in equity because it relates to transactions that are also recognised, in the same or a different period, directly in equity.

Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxes other than on income are recorded within operating costs.

Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill and subsequently for goodwill which is not deductible for tax purposes. Deferred tax balances are measured at tax rates enacted or substantively enacted at the balance sheet date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.

Uncertain tax position. The Group’s uncertain tax positions are reassessed by management at every balance sheet date. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the balance sheet date and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle the obligations at the balance sheet date.

Inventories. Inventories include raw and other materials, work in progress, finished goods, goods for resale. Inventories are recorded at the lower of cost and net realisable value. Cost of inventory is determined on the weighted average basis. The cost of finished goods and work in progress comprises raw material, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses.

Trade and other receivables. Trade and other receivables are carried at amortised cost using the effective interest method. A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision 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 change in the provision is recognised in the consolidated income statement. The primary factors that the Group considers in determining whether a financial asset is impaired are its overdue status and realisability of related collateral, if any. The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred.

• any portion or instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems;

• the counterparty experiences a significant financial difficulty as evidenced by its financial information that the Group obtains;

• the counterparty considers bankruptcy or a financial reorganisation;

• there is adverse change in the payment status of the counterparty as a result of changes in the national or local economic conditions that impact the counterparty; or

• the value of collateral, if any, significantly decreases as a result of deteriorating market conditions.

The Group assesses receivables from its major customers for impairment on a case by case basis at each reporting date. For other customers an overall assessment approach is adopted taking account of receivables aging and of any increase or reduction in risks associated with the changes in overall economic conditions prevailing in Russia.

If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the counterparty, impairment is measured using the original effective interest rate before the modification of terms.

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Impairment losses are always recognised through an allowance account to write down the asset’s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

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 (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss.

Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries, which is cash receipts, of amounts previously written off are credited to impairment loss account in the income statement.

Prepayments. Prepayments are carried at cost less provision for impairment. A prepayment is classified as non-current when the goods or services relating to the prepayment are expected to be obtained after one year, or when the prepayment relates to an asset which will itself be classified as non-current upon initial recognition. Prepayments to acquire assets are transferred to the carrying amount of the asset once the Group has obtained control of the asset and it is probable that future economic benefits associated with the asset will flow to the Group. Other prepayments are written off to profit or loss when the goods or services relating to the prepayments are received. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly and a corresponding impairment loss is recognised in profit and loss.

Cash and cash equivalents. Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at amortised cost using the effective interest method.

Share capital. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is presented in the notes as a share premium.

Dividends. Dividends are recognised as a liability and deducted from equity at the balance sheet date only if they are declared on or before the balance sheet date. Dividends are disclosed when they are proposed before the balance sheet date or proposed or declared after the balance sheet date but before the consolidated financial statements are authorised for issue.

Value added tax. Output value added tax related to sales is payable to tax authorities on the earlier of (a) collection of receivables from customers or (b) delivery of goods or services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases is recognised in the balance sheet on a gross basis and disclosed separately as an asset and liability. Where provision has been made for impairment of receivables impairment loss is recorded for the gross amount of the debtor including VAT.

Borrowings. Borrowings are carried at amortised cost using the effective interest method. Interest costs on borrowing to finance construction of property, plant and equipment are recognized as an expense on a time proportion basis using the effective interest method. The Group does not capitalise borrowing costs.

Trade and other accounts payable. Trade payables are accrued when the counterparty performs its obligations under the contract and are carried at amortised cost using the effective interest method

Provisions for liabilities and charges. Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.

When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the Group includes the amount of that adjustment in the cost of the combination at the acquisition date if, at the time of the acquisition, the adjustment is probable and can be measured reliably. Where adjustments only subsequently become probable and can be measured reliably, the additional consideration is treated as an adjustment to the cost of the combination. If the future events do not occur or the estimate needs to be revised, the cost of the business combination is adjusted accordingly.

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Financial guarantees. Financial guarantees are contracts that require the company to make specified payments to reimburse the holder of the guarantee for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantees are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the guarantee. At each balance sheet date, the guarantees are measured at the higher of (i) the unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the commitment at the balance sheet date.

Foreign currency translation. At 31 December 2008, the official rate of exchange, as determined by the Central Bank of the Russian Federation, was US dollar (USD) 1=RR 29.3804. The official Euro to RR exchange rate at 31 December 2008, as determined by the Central Bank of the Russian Federation, was Euro (EUR) 1=RR 41.4411. Exchange restrictions and currency controls exist relating to converting the RR into other currencies. The RR is not freely convertible in most countries outside of the Russian Federation.

The functional currency of each of the Group’s consolidated entities is the currency of the primary economic environment in which the entity operates, which is the Russian Federation. The Company’s functional currency is Russian Roubles and the Group’s presentation currency is the United States Dollar. Such a decision was adopted by the Group since the initial investment (purchase) was executed in USD, so it will provide financial statements users with more relevant information.

Monetary assets and liabilities are translated into the Group’s functional currency at the official exchange rate of the Central Bank of the Russian Federation (CBRF) at the respective balance sheet dates. Foreign exchange gains and losses resulting from the settlement of the transactions and from the translation of monetary assets and liabilities into each entity’s functional currency at year-end official exchange rates of the CBRF are recognised in profit or loss.

Translation at year-end rates does not apply to non-monetary items that are measured at historical cost. Effects of exchange rate changes on non-monetary items measured at fair value in a foreign currency are recorded as part of the fair value gain or loss.

Translation from functional into presentation currency. The results and financial position of each group entity (the functional currency of none of which is a currency of a hyperinflationary economy) are translated into the presentation currency as follows:

(i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

(ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions);

(iii) all resulting exchange differences are recognised as a separate component of equity, currency translation adjustment.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. When a subsidiary is disposed of through sale, liquidation, repayment of share capital or abandonment of all, or part of, that entity, the related part of the exchange differences deferred in equity is reclassified to profit or loss.

At 31 December 2008 the rate of exchange used for translating foreign currency balances was USD 1 = RR 29.3804 From 9 July 2008 through 31 December 2008 the average rate of exchange used for translating income and expenses was USD 1 = RR 25.7567.

Revenue recognition. Revenues from sales of goods are recognised at the point of transfer of risks and rewards of ownership of the goods. If the Group agrees to transport goods to a specified location revenue is recognised when the goods are passed to the customer at the destination point.

Sales of services are recognised in the accounting period in which the services are rendered, by reference to stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided.

Revenues are recognised net of value added tax, excise and discounts.

Revenues are measured at the fair value of the consideration received or receivable. When the fair value of products received in a barter transaction cannot be measured reliably, the revenue is measured at the fair value of the products or service given up.

Interest income is recognised on a time-proportion basis using the effective interest method.

Employee benefits. Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave and sick leave, bonuses, termination benefits, and non-monetary benefits (such as health services and kinder garden services) are accrued in the year in which the associated services are rendered by the employees of the Group. No discretionary pensions and other post-employment benefits are provided by the Group.

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Offsetting. Financial assets and liabilities are offset and net amount is recorded in the balance sheet only when there is a legally enforceable right to offset the recognized amounts, and there is intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously.

Segment reporting. The Group does not prepare segment reporting as equity and debt securities of the Group entities are not quoted and the Group entities do not issue equity or debt securities in open securities markets.

4. Critical accounting estimates and judgements in applying accounting policies

The Group makes estimates and assumptions that affect the amounts recognised in the financial statements and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management’s experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements apart from those involving estimations in the process of applying the accounting policies. Judgements which have the most significant effect on the amounts recognised in the consolidated financial statements and estimates which can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year, include:

a) Estimated goodwill impairment. The Group tests goodwill for impairment at least annually. The recoverable amounts of cash-generating units (CGUs) have been determined based on value-in-use calculations. The recoverable amount was determined based on pre-tax discounted cash flows. These calculations use cash flow projections of business units of the Group based on actual information according to the IFRS financial statements and management accounts of the Group’s companies for 2006-2008 and financial budget for 2009 as well as assumptions approved by the Company’s management. Available macroeconomic and industry information from open sources was also used for the purposes of the above work.

Financial budgets were prepared in nominal Russian roubles as the Group’s significant income and expenses are denominated in roubles.

The forecasting period assumed is from 2009 to 2013 (inclusive) (hereinafter “Forecasting period”.) It is assumed that by the end of 2013 the Group’s cash flows will stabilise. The post forecasting period starts from 2014. Growth in cash flows in the post forecasting period is 3.5% and is consistent with the expected long-term level of inflation based on the Russian Ministry of Economic Development forecast of the financial results based on the assumption that the Group will continue its operations retaining its preliminary specialisation and new activities will not be introduced.

Cash flows beyond the five-year period are extrapolated using the estimated growth rates. The growth rates used do not exceed the long-term average growth rate for the business sector of the economy as set out by official forecasts in which the CGU operates.

Assumptions used for value-in-use calculations to which the recoverable amount is most sensitive include:

forecasting production and sales volumes;

price forecast;

forecast of production cost and other expenses;

forecasting capital expenditures and depreciation;

forecast of working capital.

b) Special Purpose Entities (SPEs). Judgement is required to determine whether the substance of the relationship between the Group and a special purpose entity indicates that the special purpose entity is controlled by the Group.

The group does not consolidate SPEs that it does not control. As it can sometimes difficult to determine whether the Group does control an SPE, management makes judgements on its exposure to the risks and rewards, as well as about its ability to make or predetermine operation al decisions for the SPE in question. In many instances, elements are present that, considered in isolation, indicate control or lack of control over an SPE, but considered together make it difficult to reach a clear conclusion. In cases where more arguments are in place towards existence of control, the SPE is consolidated.

The Group has consolidated Nowdo, a SPE created primarily to obtain and provide financing for the Group to facilitate the funding of the acquisition of the Russian Alcohol Group of companies. Although the Group has no equity investment in the SPE, the activities of the SPE are being conducted on behalf of the Group according to its specific business needs so that the Group obtains benefits from its operation.

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c) Tax legislation. Russian tax, currency and customs legislation is subject to varying interpretations (See Note 26).

d) Deferred income tax asset recognition. The net deferred tax asset represents income taxes recoverable through future revenues and is recorded on the consolidated balance sheet. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on medium term business plan prepared by management and extrapolated results thereafter. The business plan is based on management expectations that are believed to be reasonable under the circumstances. Key assumptions used for business plan are:

• continued growth in the sales of the Group’s core brands,

• no significant or step changes in rules and methods of collection of taxes in Russian Federation,

• ability to “pass through” normal inflationary cost increase,

• no significant changes in the way that the Group does business, and distributes its products.

e) Initial recognition of related party transactions. In the normal course of business the Group enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied to determine whether transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analyses.

f) Valuation assets for the purpose of the business combination. For the business combination that took place on July 09, 2008 the Group engaged professional evaluators/appraisers in order to determine fair value of property, plant and equipment and intangible assets.

g) Valuation of property, plant and equipment. Valuation has been performed using cost and markets approaches. Income approach has been used to assess economic impairment of the assets.

Due to the fact, that majority of the Group’s property, plant and equipment and construction – in – progress consist of specialized assets which are not actively traded in the market, mainly cost approach has been used. For the objects presented in active markets market approach has been applied (some equipment, vehicles and land).

h) Discounted cash flow approach. Management has reviewed the appraisers’ assumptions underlying discounted cash flow models used in the valuation, and confirmed that factors such as the discount rate applied have been appropriately determined considering the market conditions at the balance sheet date

The principal assumptions made and the impact on the aggregate valuations of reasonably possible changes in these assumptions, with all other variables held constant, are as follows:

• forecast period used from 2009 up to 2013;

• commercial and marketing costs include advertising, marketing logistics and other selling expenses and assumed to take 20.6% of sales based on historical data of 2007-first quarter 2008;

• other operating costs assumed to take 2.5% of sales based on historical data of 2007-first quarter 2008;

• administrative expenses based on historical data of 2007-first quarter 2008 and predicted for certain types of expenses;

• operating rate of return is assumed to increase from 19.3% for second half of 2008 up to 20.3% in 2013;

• The discount rate was assumed to be 16.4% for 2009 – 2013;

• The growth rate of production was assumed to be 3.5%.

i) Assumptions to determine provisions. The Group accrued provisions for contingent consideration under contract conditions for purchase of control over the Group’s companies by Pasalba LTD (see Note 26).

Tax provisions are accrued based on estimates of the probability of an event, existing practice of tax litigations and legislation related to penalties and interest.

j) Useful lives of property, plant and equipment. Useful lives were determined based on technical characteristics of assets and technological nature of their utilisation. Changes in the production technology and other factors could have an impact on the length of use of the Group’s assets.

k) Inventory obsolescence. The Group operates in the fast moving consumer goods sector. Stock holding policies are maintained and enforced to minimise the risk of obsolescence. Where obsolescence arises this is normally the result of management decisions to discontinue or update particular stock keeping units (SKUs). In this case the transition is planned so as to minimise obsolete materials and/or finished goods, and any obsolete stock remaining is written down to net realisable value

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l) Growth rates and discount rates used in PP&E and goodwill impairment calculations. Calculation of recoverable amount was made at 16.5% for forecasting period and 3.5% for terminal value. Sensitivity analysis performed shows that an increase in discount rate by 1% causes drop below the base value of value in use amount up to 14.3% for cash generating unit 1 (vodka) and 16.6% for cash generating unit 2 (low alcohol beverages) and decrease in discount rate by 1% results in increase of value in use by 15.3% for cash generating unit 1 (vodka) and correspondingly for cash generating unit 2 (low alcohol beverages) 17.3%.

5. Adoption of new or revised standards and interpretations

The following interpretations of the issued standards are mandatory for accounting periods beginning from 1 January 2008. These interpretations did not have significant effect on the Group’s consolidated financial statements.

• IFRIC 11, IFRS 2—Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007);

• IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008); and

• IFRIC 14, IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2008).

Certain new standards and interpretations have been published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2009 or later periods and which the Group has not early adopted:

IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). The standard applies to entities whose debt or equity instruments are traded in a public market or that file, or are in the process of filing, their financial statements with a regulatory organisation for the purpose of issuing any class of instruments in a public market. IFRS 8 requires an entity to report financial and descriptive information about its operating segments, with segment information presented on a similar basis to that used for internal reporting purposes. The Group does not expect the standard to affect its financial statements.

Puttable Financial Instruments and Obligations Arising on Liquidation—IAS 32 and IAS 1 Amendment (effective for annual periods beginning on or after 1 January 2009). The amendment requires classification as equity of some financial instruments that meet the definition of financial liabilities. The Group does not expect the amendment to affect its financial statements.

IAS 23, Borrowing Costs (revised March 2007; effective for annual periods beginning on or after 1 January 2009). The main change to IAS 23 is the removal of the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. An entity is, therefore, required to capitalise such borrowing costs as part of the cost of the asset. The revised standard applies prospectively to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after 1 January 2009. The Group’s is currently assessing the impact of the amended standard on its financial statements.

IAS 1, Presentation of Financial Statements (revised September 2007; effective for annual periods beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Group expects the revised IAS 1 to affect the presentation of its financial statements but to have no impact on the recognition or measurement of specific transactions and balances.

IAS 27, Consolidated and Separate Financial Statements (revised January 2008; effective for annual periods beginning on or after 1 July 2009). The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the non-controlling interests (previously “minority interests”) even if this results in the non-controlling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Group is currently assessing the impact of the amended standard on its financial statements.

Vesting Conditions and Cancellations—Amendment to IFRS 2, Share-based Payment (issued in January 2008; effective for annual periods beginning on or after 1 January 2009). The amendment clarifies that only service conditions and performance conditions are vesting conditions. Other features of a share-based payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group does not expect the amendment to have a material effect on its financial statements.

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IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised IFRS 3 will allow entities to choose to measure non-controlling interests using the existing IFRS 3 method (proportionate share of the acquiree’s identifiable net assets) or at fair value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, in a business combination achieved in stages, the acquirer will have to remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss. Acquisition-related costs will be accounted for separately from the business combination and therefore recognised as expenses rather than included in goodwill. An acquirer will have to recognise at the acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be recognised in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. Any business combinations after 1 July 2009 will be accounted for under new standard.

IFRIC 13, Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008). IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. IFRIC 13 is not relevant to the Group’s operations because no Group companies operate any loyalty programs.

IFRIC 15, Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1 January 2009). The interpretation applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors, and provides guidance for determining whether agreements for the construction of real estate are within the scope of IAS 11 or IAS 18. It also provides criteria for determining when entities should recognise revenue on such transactions. The amendments will not have any impact on the Group’s consolidated financial statements.

IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1 October 2008). The interpretation explains which currency risk exposures are eligible for hedge accounting and states that translation from the functional currency to the presentation currency does not create an exposure to which hedge accounting could be applied. The IFRIC allows the hedging instrument to be held by any entity or entities within a group except the foreign operation that itself is being hedged. The interpretation also clarifies how the gain or loss recycled from the currency translation reserve to profit or loss is calculated on disposal of the hedged foreign operation. Reporting entities will apply IAS 39 to discontinue hedge accounting prospectively when their hedges do not meet the criteria for hedge accounting in IFRIC 16. IFRIC 16 does not have any impact on these financial statements as the Group does not apply hedge accounting.

Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate—IFRS 1 and IAS 27 Amendment (issued in May 2008; effective for annual periods beginning on or after 1 January 2009). The amendment allows first-time adopters of IFRS to measure investments in subsidiaries, jointly controlled entities or associates at fair value or at previous GAAP carrying value as deemed cost in the separate financial statements. The amendment also requires distributions from pre-acquisition net assets of investees to be recognised in profit or loss rather than as a recovery of the investment. The amendments will not have any impact on the Group’s consolidated financial statements.

Eligible Hedged Items—Amendment to IAS 39, Financial Instruments: Recognition and Measurement (effective with retrospective application for annual periods beginning on or after 1 July 2009). The amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The amendment is not expected to have any impact on the Group’s financial statements as the Group does not apply hedge accounting.

Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading as non-current under IAS 1; accounting for sale of IAS 16 assets which were previously held for rental and classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of definition of a curtailment under IAS 19; accounting for below market interest rate government loans in accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through profit or loss category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40; and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes have no or minimal effect on accounting. The Group does not expect the amendments to have any material effect on its financial statements.

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IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009). The amendment clarifies when and how distribution of non-cash assets as dividends to the owners should be recognised. An entity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash assets will be recognised in profit or loss when the entity settles the dividend payable. IFRIC 17 is not relevant to the Group’s operations because it does not distribute non-cash assets to owners.

IFRS 1, First-time Adoption of International Financial Reporting Standards (following an amendment in December 2008, effective for the first IFRS financial statements for a period beginning on or after 1 July 2009). The revised IFRS 1 retains the substance of its previous version but within a changed structure in order to make it easier for the reader to understand and to better accommodate future changes. The Group concluded that the revised standard does not have any effect on its financial statements.

IFRIC 18, Transfers of Assets from Customers (effective for annual periods beginning on or after 1 July 2009). The interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. IFRIC 18 is not expected to have any impact on the Group’s financial statements.

Improving Disclosures about Financial Instruments—Amendment to IFRS 7, Financial Instruments: Disclosures (issued in March 2009; effective for annual periods beginning on or after 1 January 2009). The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The entity will be required to disclose an analysis of financial instruments using a three-level fair value measurement hierarchy. The amendment (a) clarifies that the maturity analysis of liabilities should include issued financial guarantee contracts at the maximum amount of the guarantee in the earliest period in which the guarantee could be called; and (b) requires disclosure of remaining contractual maturities of financial derivatives if the contractual maturities are essential for an understanding of the timing of the cash flows. An entity will further have to disclose a maturity analysis of financial assets it holds for managing liquidity risk, if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk. The Group is currently assessing the impact of the amendment on disclosures in its financial statements.

Embedded Derivatives—Amendments to IFRIC 9 and IAS 39 (effective for annual periods ending on or after 30 June 2009). The amendments clarify that on reclassification of a financial asset out of the ‘at fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary, separately accounted for. This amendment is not expected to have any impact on the Group’s financial statements.

Unless otherwise described above, the new standards and interpretations are not expected to significantly affect the Group’s financial statements.

6. Balances and transactions with related parties

Parties are generally considered to be related if the parties are under common control, or if one party has the ability to control the other party or can exercise significant influence or joint control over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the nature of the relationship, not merely the legal form. Information about the immediate parent and the ultimate controlling party of the Company is disclosed in Note 1.

The nature of the related party relationships for those related parties with whom the Group entered into significant transactions or had significant balances outstanding at 31 December 2008 are detailed below.

31 December 2008	Shareholder and minority interest	Other related parties
Loans provided to related parties (individuals)	—	37
Payables to shareholders, Carey Agri International Poland SP ZOO	103,500	—
Payables to Cirey Holding Inc (minority interest shareholder)	35,500	—

Expense items with related parties from the acquisition date of 9 July 2008 till 31 December 2008 were as follows:

	Shareholder and minority interest	Other related parties
Interest expense	5,388	—

18

Key management compensation is presented below:

	Period ended 31 December 2008
	Expense
Short-term benefits:
- Salaries	562
- Termination indemnity benefits	446
Total	1,008

7. Property, plant and equipment

Movements in the carrying amount of property, plant and equipment were as follows:

	Land plots		Buildings and constructions		Machinery and equipment		Motor vehicles		Other		Construction in progress		Total
Cost of property, plant and equipment acquired through business combination at 9 July 2008	24,776		49,404		52,197		7,988		2,870		13,929		151,164
Additions	—		8,366		8,513		1,434		755		2,773		21,841
Disposal	—		(1,128	)	(490	)	(811	)	(16	)	(4,277	)	(6,722	)
Translation difference	(4,957	)	(11,875	)	(11,814	)	(2,307	)	(873	)	(3,104	)	(34,930	)
Cost at 31 December 2008	19,819		44,767		48,406		6,304		2,736		9,321		131,353
Depreciation since acquisition at 9 July 2008
Depreciation for the period:	—		(883	)	(2,715	)	(652	)	(1,341	)	—		(5,591	)
Depreciation of disposed assets	—		2		17		68		21		—		108
Translation difference	—		152		333		72		163		—		720
Depreciation at 31 December 2008	—		(729	)	(2,365	)	(512	)	(1,157	)	—		(4,763	)
Net book value at 31 December 2008	19,819		44,038		46,041		5,792		1,579		9,321		126,590

Construction in progress includes advances to construction companies and suppliers of property, plant and equipment of USD 386 thousand (net of VAT) as of 31 December 2008.

At 31 December 2008 a part of property, plant and equipment has been pledged to third parties as collateral for borrowings (See Note 15). The amount of collateralised loans is USD 267,828 thousand as at 31 December 2008.

Pledged assets	31 December 2008 Carrying amount
Machinery and equipment	32,405
Buildings & Construction	14,629
Land plots	17,676
Construction in progress	29
Other	6,901
Total	71,640

8. Goodwill

Movements in goodwill on acquisition of the subsidiaries:

Amount arising at 9 July 2008	230,597
Translation to presentation currency	(39,944	)
Carrying amount at 31 December 2008	190,653

Goodwill is allocated to cash-generating units (CGUs), which represent the lowest level within the Group at which the goodwill is monitored by management and which are not larger than a segment as follows—CGU of low-alcoholic beverages and CGU of vodka.

Basis for calculation and underlying assumptions are disclosed in Note 4.

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9. Other intangible assets

	Trade mark Premium		Trade mark Sub premium		Trade mark Average		Trade mark Economy		Trade marks of low-alcoholic beverages		Licences		Software		Total
Cost of other intangible assets acquired through business combination at 9 July 2008	5,982		75,005		167,134		1,965		3,601		353		598		254,638
Additions	—		—		—		—		—		94		117		211
Translation difference	(1,197	)	(15,006	)	(33,438	)	(393	)	(720	)	(44	)	(134	)	(50,932	)
Cost at 31 December 2008	4,785		59,999		133,696		1,572		2,881		403		581		203,917
Amortisation:
Amortization for the period	(273	)	—		—		(179	)	(219	)	(54	)	(217	)	(942	)
Translation difference	34		—		—		22		27		7		27		117
At 31 December 2008	(239	)	—		—		(157	)	(192	)	(47	)	(190	)	(825	)
At 31 December 2008	4,546		59,999		133,696		1,415		2,689		356		391		203,092

10. Inventory

	31 December 2008
Materials and supplies	24,599
Work in progress	133
Finished goods	49,798
Inventory provision	(8,607	)
Total inventories	65,923

As of 31 December 2008 the Group did not have any pledged inventories.

The cost of inventories in the custody of third parties as of 31 December 2008 was USD 718 thousand

11. Trade and other accounts receivable and advances

Trade accounts receivable are presented below:

	31 December 2008
Accounts receivable	220,352
Less: impairment provision	(11,331	)
Total trade accounts receivable	209,021

Other accounts receivable are presented below:

	31 December 2008
Financial assets
Other accounts receivable	4,900
Less: impairment provision	(674	)
Other accounts receivable, net	4,226
Loans receivable	468
Non-financial assets
VAT Recoverable	5,272
Advances issued	12,595
Prepaid bank arrangement fees	226
Total other accounts receivable and advances	22,787

The Group does not hold any collateral for financial assets.

	Other accounts receivable	Trade accounts receivable
	—	—
Provision for impairment charge for the period	674	13,431
Translation difference		(2,100	)
Provision for impairment at 31 December 2008	674	11,331

20

Management believes that advances issued to suppliers, VAT recoverable from the budget related to purchased property, plant and equipment, and goods and services, and other accounts receivable net of provision for bad debt are not exposed to value risk and are to be recovered within 12 months after the reporting date.

The debt repayment period is from 30 to 120 days, depending upon the counterparty (retail-wholesale trading). The average period of payment delay provided after the sale of goods is 60 days. Interest is not accrued on trade receivables, since those are of current nature. The Group has past due accounts receivable in the amount of USD 65,719 thousand as at 31 December 2008.

While choosing each new customer, the Group applies internal procedures for the assessment of their creditworthiness. The Group takes into account the client’s reputation, external information on the client’s involvement in legal proceedings etc. Credit limits are set for all major clients as an absolute amount of credit that can be advanced and also separately in terms of the credit terms that must be adhered to. The Group has a number of clients with which it has cooperated for several years. According to internal assessments of Group’s management all the outstanding accounts receivable are “A” rated, which implies business relationship history of greater than one year, and no history of default.

Advances issued as of 31 December 2008 represented prepayments for materials and component parts in the amount of USD 5,908 thousand, for marketing expenses in the amount of USD 2,883, for rent expenses USD 710 thousand.

12. Taxes, other than income tax prepayments

Prepayments of taxes other than income tax are presented below:

	31 December 2008
VAT and excise duties	17,943
Unified Social Tax (UST)	630
Other taxes	2,906
Total other taxes, other than income tax prepayments	21,479

13. Cash and cash equivalents

	31 December 2008
Cash in hand	31
Bank balances payable on demand	42,089
Deposits with contractual repayment period of less than 3 months	75,305
Total cash and cash equivalents	117,425

All the bank balances and deposits are neither past due nor impaired.

Analysis of the credit quality of bank balances and deposits is as follows:

	31 December 2008
Rating	Bank balances payable on demand	Term deposits
AA-*	624	59,165
A+/A-*	—	3,000
B+*	1,163	—
B+/B**	81	—
B++***	1,096	—
BB*	89	—
BB-*	6	—
BB+	34	4,765
BBB*	32,489	8,374
BBB/F3**	5,857	—
Other unrated	650	1
Total	42,089	75,305

Ratings:

* - Standard & Poor’s

** - Fitch’s

*** - Rating agency «Expert RA»

21

14. Share capital

	Number of outstanding ordinary shares (in thousands units)	Share capital
At 31 December 2008
A ordinary shares	201,000	201,000
B ordinary shares	181,500	181,500
Total	382,500	382,500

The Company was established in Cayman Islands by the issue of a USD 1 subscriber share on 27 May 2008. On 30 May 2008 the subscriber share was transferred to Lion/Rally Cayman 1 LP.

On 2 July 2008 54,999 additional USD1 ordinary shares were issued to Lion/Rally Cayman 1 LP. On 7 July 2008 ordinary shares were redesignated as A ordinary shares by shareholders’ resolution.

On 8 July 2008 200,945,000 A Ordinary Shares were issued to Lion/Rally Cayman 1 LP at USD1 and 181,500,000 B Ordinary Shares were issued at USD1 to Carey Agri International - Poland SP ZOO. The Company did not actively operate until 9 July 2008.

All shares were fully paid.

15. Borrowings and loans

	31 December 2008
Non-current borrowings and loans
Borrowings	139,005
Loans	248,500
(Less deferred bank arrangement fees)	(18,172	)
Net loans	230,328
Total non-current borrowings and loans	369,333
Current borrowings and loans and current portion of non-current loans
Borrowings	—
Loans	37,500
Factoring	—
Interest payable	5,842
Overdraft	6
Total current borrowings and loans and current portion of non-current loans	43,348
Total borrowings and loans	412,681

Property, plant and equipment were pledged as collateral for loans and borrowing as of 31 December 2008 in the amount of USD 42,736 thousand, several significant revenue contracts and shares of subsidiaries in the amount of USD 19,816 thousand were pledged as collateral. See Notes 7 and 10.

The Group has not entered into any hedging arrangements in respect of its foreign currency obligations or interest rate exposure, and therefore does not apply hedge accounting.

The carrying value of borrowings and loans approximates fair values.

Breakdown of the borrowings and loans are presented in the table below:

Non-current loans and borrowings

Bank/type of borrowing	Currency	Interest rate		Date of repayment	31 December 2008
Shareholder, Carey Agri International Poland SP ZOO	USD	8.03	%	30.06.2011	103,500
Minority interest, Cirey Holding Inc	USD	8.03	%	30.06.2011	35,500
Individual	RUR	0.00	%	09.03.2009	5
Raiffeisen Bank (facility agent)	USD	LIBOR +3.50-5.85	%	31.10.2014	230,328
Total non-current borrowing and loans					369,333

22

Current loans and borrowings and current portion of non-current loans

Bank/type of borrowing	Currency	Interest rate		Date of repayment	31 December 2008
Raiffeisen Bank (current portion)	USD	LIBOR +3.50-5.85	%	31.10.2014	37,500
Agricole (overdraft)	Euro				6
Other parties
Short -term interest payable					5,842
Total current borrowings and loans and current portion of non-current loans					43,348

16. Taxes, other than income tax payable

	31 December 2008
Excise	42,249
VAT	20,764
Property tax	232
Social tax	1,442
Personal income tax	134
Other taxes payable	131
Total taxes, other than income tax payable	64,952

17. Provisions

Provisions for future liabilities and charges are presented below:

	31 December 2008
Non-current provisions
Contingent consideration	33,402
Total non-current provisions	33,402
Current provisions
Income tax provision	20,000
Other taxes provision	20,491
Total current provisions	41,138
Total provisions	74,540

Contingent consideration. The Group has recorded a provision for contingent consideration that is provided for within the framework of transactions related to the acquisition of control over the Group entities in case the appropriate EBITDA level based on 2008 and 2009 results is reached. At 31 December 2008 the total contingent consideration is estimated at USD 33,402 thousand payable in July 2010. See Note 27 Business Combinations.

Tax risks. The Group management has assessed, based on its interpretation of the relevant legislation that it is probable that certain tax positions taken by the Group would not be sustained if challenged by the tax authorities. Accordingly, the Group has created provisions for the associated undeclared taxes and the related penalties and interest (presented in the table above).

Legal claims. The Group is not involved in any legal proceedings with regard to which provisioning would be required.

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18. Trade and other accounts payable

	31 December 2008
Financial liabilities
Trade accounts payable	38,797
Accounts payable for marketing services	11,255
Other accounts payable	10,297
Non-financial liabilities
Other non-financial accounts payable	7,218
Accrued employee benefit costs	4,193
Advances received	2,020
Total other accounts payable	34,983
Total trade and other accounts payable	73,780

Advances received mainly consists of prepayments for inventories (alcohol and water).

19. Revenue

	For the period ended 31 December 2008
Sales of goods
- sales of vodka	311,400
- sales of low-alcohol beverages	29,938
Other sales	776
Total revenue	342,714

Revenue attributable to sales of goods was primarily received from sales in the domestic market. Export transactions represent an insignificant part of total revenue. Revenue is stated net of excise taxes of USD 181,518 thousand.

20. Cost of Sales

	For the period ended 31 December 2008
Cost of produced vodka by elements of sales:
- raw materials and supplies	134,012
- salaries, wages and social taxes	12,184
- depreciation	5,498
Total cost of produced vodka	151,694
Cost of produced low-alcohol beverages by elements of sales:
- raw materials and supplies	16,090
- salaries, wages and social taxes	1,319
- depreciation	718
Total cost of produced low-alcoholic products	18,127
Other expenses	6,801
Total cost of sales	176,622

24

21. Selling and distribution expenses

	For the period ended 31 December 2008
Marketing expenses	27,042
Transportation expenses	26,409
Bad debt provision	14,105
Salaries and wages	12,077
Lease expense	5,421
Unified social tax	1,806
Depreciation and amortisation	943
Material expenses	514
Business expenses	294
Professional services (consulting services)	217
Insurance expenses	158
Other	14,655
Total selling and distribution expenses	103,641

22. General and administrative expenses

	For the period ended 31 December 2008
Salaries and wages	13,992
Professional services	3,024
Utilities	2,021
Depreciation and amortisation	1,547
Transportation expenses	1,494
Unified social tax - UST	1,174
Material expenses	1,111
Administrative expenses	680
Management fees	335
Insurance	203
Other general and administrative expenses	7,534
Total general and administrative expenses	33,115

23. Finance income

	For the period ended 31 December 2008
Interest income on loans issued	1,144
Total finance income	1,144

24. Finance costs

	For the period ended 31 December 2008
Interest expense	19,347
Unwinding of discount	959
	20,306

25

25. Income tax

Income tax credit comprises the following elements:

	For the period ended 31 December 2008
Income tax expense – current	10,447
Deferred tax credit	(27,381	)
Income tax (credit) for the period	(16,934	)

The expected tax charges are reconciled to the actual tax charges as follows.

	For the period ended 31 December 2008
Loss before income tax	(60,194	)
Estimated income tax credit at statutory rate (2008: 24%)	(14,447	)
Tax effect of items which are not deductible for taxation purposes:	2,438
Corporate Income tax rate change effect	(4,925	)
Income tax (credit) for the period	(16,934	)

Differences between IFRS and Russian and other countries’ statutory taxation regulations give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below and is recorded at the rate of 20%. On 26 November 2008, the Russian Federation reduced the standard corporate income tax rate from 24% to 20% with effect with 1 January 2009. The impact of the change in tax rate presented above represents the effect of applying the reduced 20% tax rate to deferred tax balances at 31 December 2008.

	31 December 2008
Tax effect of deductible/(taxable) temporary differences and tax loss carry forwards
PP&E	520
Accruals	2,496
Bonus and unused vacation	650
Inventory provision	2,651
Bad debt provision	7,076
Tax losses brought forward	11,595
Other	1,714
Recognised deferred tax asset	26,702
Property, plant and equipment	(11,358	)
Intangible assets	(40,233	)
Other	—
Recognised deferred tax liability	(51,591	)
Net deferred tax assets/(liabilities)	(24,889	)

In the context of the Group’s current structure, tax losses and current tax assets of different Group entities may not be offset against current tax liabilities and taxable profits of other group companies and, accordingly, taxes may accrue even where there is a consolidated tax loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity.

The Group has not recorded deferred tax liabilities in respect of taxable temporary differences of USD 3,718 thousand associated with investments in subsidiaries as the Group is able to control the timing of the reversal of those temporary differences and does not intend to reverse them in the foreseeable future.

26

26. Contingencies, commitments and operating risks

Legal proceedings. From time to time and in the normal course of business, claims against the Group are received. On the basis of its own estimates and both internal and external professional advice the Management is of the opinion that no material losses will be incurred in respect of claims in excess of provisions which have been made in these consolidated financial statements.

Tax legislation. Russian tax and customs legislation is subject to varying interpretations and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant authorities.

The Russian tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. In October 2006, the Supreme Arbitration Court issued guidance to lower courts on reviewing tax cases providing a systemic roadmap for anti-avoidance claims, and it is possible that this will significantly increase the level and frequency of scrutiny by the tax authorities.

As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open for review by the tax authorities for three calendar years preceding the year of review. In certain circumstances such review may cover longer periods.

Russian transfer pricing legislation introduced 1 January 1999 provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controllable transactions, provided that the transaction price differs from the market price by more than 20%.

Controllable transactions include transactions with interdependent parties, as determined under the Russian Tax Code, all cross-border transactions (irrespective whether performed between related or unrelated parties), transactions where the price applied by a taxpayer differs by more than 20% from the price applied in similar transactions by the same taxpayer within a short period of time, and barter transactions. There is no formal guidance as to how these rules should be applied in practice. In the past, the arbitration court practice in this respect has been contradictory.

Tax liabilities arising from inter-company transactions are determined using actual transaction prices. It is possible with the evolution of the interpretation of the transfer pricing rules in the Russian Federation and the changes in the approach of the Russian tax authorities, that such transfer prices could be challenged. Given the brief nature of the current Russian transfer pricing rules, the impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the entity.

The Group includes companies incorporated outside Russia. Tax liabilities of the Group are determined on the assumptions that these companies are not subject to Russian profits tax because they do not have a permanent establishment in Russia. Russian tax laws do not provide detailed rules on taxation of foreign companies. It is possible that with the evolution of the interpretation of these rules and the changes in the approach of the Russian tax authorities, the non-taxable status of some or all of the foreign companies of the Group in Russia may be challenged. The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the entity.

Russian tax legislation does not provide definitive guidance in certain areas. From time to time, the Group adopts interpretations of such uncertain areas that reduce the effective income tax rate of the Group. As noted above, such tax positions may come under heightened scrutiny as a result of recent developments in administrative and court practices. The impact of any challenge by the tax authorities cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the Group.

In addition to the above transfer pricing matters, management estimates that the Group has other possible obligations from exposure to other than remote risks in respect of income tax of USD 1,665 thousand, in respect of VAT of USD 1,298 thousand. These exposures primarily relate to recognition of expenses in respect of income tax and, accordingly, to VAT recovery in the area of ambiguous interpretation of a number of transactions.

Assets pledged and restricted. At 31 December 2008 the Group has items of property, plant and pledged as collateral. See Note 15.

Operating lease commitments. The Group entities lease property under short-term operating lease agreements. There were no breaches of the agreements, including those related to unauthorised improvements of leased property.

27

Environmental matters. The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognised immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be reliably estimated but could be material. In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage.

Compliance with loan agreement covenants. The Group is subject to certain covenants related primarily to its borrowings. Non-compliance with these covenants may lead to negative consequences for the Group. The Group is in compliance with the covenants.

27. Business combinations

On 9 July 2008 Lion/Rally Cayman 2 acquired 88,44% of Lion/Rally Lux1 SA. Lion/Rally Lux 1 SA was established to acquire 100% of ZAO Russian Alcohol Group via intermediate sub holding companies includes Pasalba Limited, the immediate parent company of ZAO Russian Alcohol Group.

Details of assets and liabilities acquired and the related goodwill are as follows:

In thousands US dollars	Note	Attributable fair value
Cash and cash equivalents		47,300
Property, plant and equipment		151,163
Intangibles		254,639
Inventories		26,250
Trade accounts receivables		261,566
Other accounts receivables and prepayments		44,655
Short-term investments		793
Deferred tax assets		15,727
Other assets		1,295
Loans		(187,557	)
Trade and other accounts payable		(246,874	)
Deferred tax liabilities		(78,946	)
Fair value of net assets of subsidiaries		290,011
Goodwill arising from the acquisition	8	230,597
Total fair value of net assets and goodwill		520,608
Attributable to Minority interests		50,000
Fair value of acquired interest in subsidiaries		470,608
Total purchase consideration		520,608
Less: Minority interest contribution		(50,000	)
Less: Deferred consideration		(32,443	)
Less: Cash and cash equivalents in subsidiary acquired		(47,300	)
Outflow of cash and cash equivalents on acquisition		390,865

IFRS carrying amounts immediately before business combination are not presented as audited financial statements are not available and it is impractical to present such information.

The purchase consideration of USD 520,608 thousand include other costs attributable to the business combination of USD 22,963 thousand.

The fair values of assets and liabilities acquired are based on discounted cash flow models which approximate carrying value of the assets and liabilities. Identifiable intangible assets, property, plant and equipment including construction in progress were revalued by an independent professional appraiser (See accounting policies for assumptions and approaches applied).

28

28. Financial risk management

The risk management function within the Group is carried out in respect of financial risks, operational risks and legal risks. Financial risk comprises market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. The operational and legal risk management functions are intended to ensure proper functioning of internal policies and procedures to minimise operational and legal risks.

Credit risk. The Group takes on exposure to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Exposure to credit risk arises as a result of the Group’s sales of products on credit terms and other transactions with counterparties giving rise to financial assets.

The Group’s maximum exposure to credit risk in each class of assets as follows:

	31 December 2008
Trade and other receivables
Trade receivables	209,021
Loans receivable	468
Other accounts receivable	4,215
Cash and cash equivalents
Bank balances payable on demand	42,089
Term deposits with contractual repayment period of less than 3 months	75,305
Total maximum exposure to credit risk	331,098

The Group controls the level of credit risk which faces by firstly setting credit limits for each major counter-party. These limits are set both in terms of the maximum allowable credit in money term, and in term of the number of days within which the counter-party must settle each invoice. These limits are set independently of the sales force and approved by senior management.

In the event of a counter-party breaching its credit term further shipments to that counter-party are automatically stopped, and a credit collection procedure commences based on standard procedures.

Each week a credit committee comprising representatives of sales, finance and logistics meet and review all receivables balances. In addition the most significant 35 balances in terms of value are subject to additional review at a senior credit committee including representatives of sales, finance and legal departments and CEO and COO of the Group.

Reliable financial information on counter-parties is not always available in the Russian market. Accordingly, the Group maintains a department of internal auditors whose role is to perform regular audits of all significant counter-parties in order to provide additional information for consideration by the credit committee.

Credit risks concentration. In current world economic conditions credit risk is the major concern of Group management. Credit risk in respect of the Group’s customers is addressed above. Credit risk in respect of Group’s partners has been addressed: (i) in respect of availability of funding required by the Group to finance its operations, by entering into long-term financing agreements with a consortium of reputable western financing institutions; (ii) in respect of bank deposits, by focusing on and working with those financial institutions considered to offer minimum risk, and where possible, by working with the institutions participating in the lending consortium referred to above.

Market risk. The Group takes on exposure to market risks. Market risks arise from open positions in (a) foreign currencies, (b) interest bearing assets and liabilities, all of which are exposed to general and specific market movements. However, the use of this approach does not prevent losses outsides of these limits in the event of more significant market movements.

Sensitivities of market risks included below are based on a change in the relevant factor while holding all other factors constant. In practice this is unlikely to occur and changes in some factor can be correlated.

Foreign exchange risk. The Group is currently exposed to significant foreign exchange risk in respect of its non-current borrowings. The Group monitors these risks on a monthly basis, and regularly conducts market research on exposure to foreign exchange movements and adjusts its currency portfolio accordingly.

29

The tables below summarise the Group’s exposure to foreign currency exchange rate risk at the balance sheet date.

As of 31 December 2008:

Currency	Cash and cash equivalents	Trade and other receivables	Loans receivable	Loans and borrowings		Trade and other payables		Net balance sheet position
RUR	24,282	229,709	384	(353	)	(60,949	)	193,073
USD	93,045	1,250	84	(412,328	)	(12,160	)	(330,109	)
Euro	98	849	—	—		(671	)	276
TOTAL	117,425	231,808	468	(412,681	)	(73,780	)	(136,760	)

The Group operates predominantly in Russia and other countries of CIS. The Group is therefore exposed to market risk associated with those economies. The Group actively manages these risks by maintaining a portfolio of brands with different price positioning. In addition, as the Group’s cash flows are mainly generated in roubles, the Group works actively to identify and cooperate with suppliers who can supply rouble priced products.

At 31 December 2008, if the US dollar had strengthened by 30% against the Russian Rouble with all other variables held constant, post tax loss for the period would be higher by 114,650 th. USD

Interest rate risk. The Group obtains borrowings from and deposits surplus funds with banks at current market interest rates. The Group is exposed to interest rate risk through market value fluctuations of interest bearing borrowings.

The Group’s interest rate risk arises from long term borrowings (Note 15). Borrowings issued at variable rates expose the group to cash flow interest rate risk. Borrowings issued at fixed rates expose the group to fair value interest rate risk.

The Group analyses its interest rate exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, renewal of existing options and alternative financing. Based on these scenarios, the Group calculates the impact on profit and loss of a defined interest rate shift. For each simulation, the same interest rate shift is used for all currencies. The scenarios are run only for liabilities that represent the major interest-bearing positions.

Liquidity risk. Prudent liquidity risk management includes maintaining sufficient cash and the availability of funding from an adequate amount of committed credit facilities.

The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant.

At 31 December 2008	Less than 1 year	Between 1 and 2 years	Between 2 and 5 years	More than 5 years
Trade accounts payable	38,797	—	—	—
Other accounts payable	34,983	—	—	—
Borrowings (principal)	37,506	20,414	135,570	219,382
Borrowings (interest)	13,298	29,162	182,736	141,561
Bank overdraft	13	—	—	—

Capital risk management. The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The amount of capital that the Group managed as of 31 December 2008 was USD 226,477 thousand.

Consistent with others in the industry, the Group monitors capital on a gearing ratio basis. This ratio is calculated as total net debt divided by total capital under management. Net debt is calculated as total borrowings (including “current and non-current borrowings” as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital under management is calculated as “equity” as shown in the consolidated balance sheet plus net debt. The Group has complied with all externally imposed capital requirements throughout 2008. These are set out in the Group’s loan agreements.

30

	31 December 2008
Total loans and borrowings (Note 15)	412,681
Less: Cash and cash equivalents (Note 13)	(117,425	)
Net debt	295,296
Total equity	310,364
Total capital	605,620
Gearing ratio	48	%

29. Events after the balance sheet date

On July 9, 2008, CEDC completed an investment with Lion Capital LLP and certain of Lion’s affiliates and funds managed and advised by Lion Capital LLP (together referred to as “Lion”), pursuant to which CEDC and Lion acquired all of the outstanding equity of the Russian Alcohol Group (“RAG”) via shareholdings in the holding company Lion/Rally Lux 1 SA. In connection with that investment, CEDC acquired an indirect equity stake in RAG of approximately 42%, and Lion acquired substantially all of the remainder of the equity of RAG. The agreements governing that investment gave CEDC the right to acquire, and gave Lion the right to require CEDC to acquire Lion’s equity stake in RAG (the “Prior Agreement”).

On April 24, 2009, CEDC and Lion entered into new agreements with Lion to replace the Prior Agreement, which requires CEDC, through a multi-stage equity purchase, to acquire over the next five years (including 2009) all of the equity interests in RAG held by Lion (the “Acquisition”), including Option Agreements and a Note Purchase and Share Subscription Agreement between CEDC, Carey Agri International – Poland Sp. z o.o., a Polish limited liability company and subsidiary of CEDC (“Carey Agri”), Lion/Rally Cayman 2 and Lion/Rally Cayman 5, a company incorporated in the Cayman Islands and an affiliate of Lion (“Cayman 5”), such agreements being termed the Option Agreements” and the “Note Purchase Agreement”, collectively the “New Agreements”.

Under the terms of the Note Purchase Agreement CEDC converted loan notes to Lion/Rally Lux 3 SA of USD103,500,000 into share capital of Lion/Rally Cayman 2, as a result increasing its percentage ownership of shares to 52.86%. As a result of the Option Agreements CEDC has a right to receive all dividends giving CEDC an effective economic interest from 24 April 2009 of 100% in Lion/Rally Cayman 2, whilst management control continues to ultimately rest with Lion Capital LLP, exercised via its participation in several affiliates including limited partnerships. The economic interest of CEDC in Lion/Rally Cayman 2 has been pledged as collateral in respect of payment obligations under the New Agreements.

31

EX-99.3

Exhibit 99.3

Russian Alcohol Group

International Financial Reporting Standards

Combined Interim Financial Statements

for the period ended 8 July 2008

and Independent Auditor’s Report

Russian Alcohol Group

International Financial Reporting Standards

Combined Interim Financial Statements

Contents

Independent Auditor’s Report

Combined Interim Balance Sheet	2
Combined Interim Income Statement	3
Combined Interim Statement of Changes in Equity	4
Combined Interim Cash Flow Statement	5
Notes to the Combined Interim Financial Statements
Note 1. Russian Alcohol Group and its operations	6
Note 2. Operating environment of the Group	7
Note 3. Summary of significant accounting policies	7
Note 4. Critical accounting estimates and judgements in applying accounting policies	13
Note 5. Adoption of new or revised standards and interpretations	14
Note 6. Balances and transactions with related parties	17
Note 7. Property, plant and equipment	19
Note 8. Intangible assets	20
Note 9. Inventories	20
Note 10. Trade and other accounts receivable and advances	20
Note 11. Taxes, other than income tax prepayment	22
Note 12. Cash and cash equivalents	22
Note 13. Share capital	23
Note 14. Loans and borrowings	23
Note 15. Taxes, other than income tax payable	25
Note 16. Provisions for liabilities and charges	25
Note 17. Trade and other accounts payable	26
Note 18. Revenue	26
Note 19. Cost of sales	27
Note 20. Selling and distribution expenses	27
Note 21. General and administrative expenses	28
Note 22. Income tax expense	28
Note 23. Contingencies, commitments and operating risks	29
Note 24. Financial risk management	30
Note 25. Fair value of financial instruments	33
Note 26. Presentation of financial instruments by measurement category	34
Note 27. Events after reporting period	34

The attached notes from page 6 to page 34 are an integral part of the present combined interim financial statements i

Russian Alcohol Group

Combined Interim Balance Sheet

IN THOUSANDS OF UNITED STATES DOLLARS

	Note	8 July 2008
ASSETS
Non-current assets
Property, plant and equipment	7	88,408
Intangible assets	8	2,759
Deferred income tax assets	22	16,451
Total non-current assets		107,618
Current assets
Inventories	9	26,250
Trade accounts receivable	10	266,837
Other accounts receivable and advances	10	42,288
Current income tax prepayments		—
Taxes, other than income tax prepayments	11	1,418
Cash and cash equivalents	12	12,334
Total current assets		349,127
Total assets		456,745
EQUITY AND LIABILITIES
Share capital	13	17,342
Additional paid-in capital		4,975
Retained earnings		6,275
Currency translation reserve		5,755
Total equity		34,347
LIABILITIES
Non-current liabilities
Loans and borrowings	14	2,104
Deferred income tax liabilities	22	418
Total non-current liabilities		2,522
Current liabilities
Loans and borrowings	14	184,247
Trade accounts payable	17	91,897
Other accounts payable	17	18,559
Current income tax liability		2,549
Taxes, other than income tax payable	15	74,252
Current income tax provision	16	23,914
Other provisions for liabilities and charges	16	24,458
Total current liabilities		419,876
Total liabilities		422,398
Total liabilities and equity		456,745

Approved for issue and signed on behalf of the Board of Directors on 10 July 2009.

General Director Finance director

The attached notes from page 6 to page 34 are an integral part of the present

combined interim financial statements

Russian Alcohol Group

Combined Interim Income Statement

IN THOUSANDS OF UNITED STATES DOLLARS

	Note.	For the period ended 8 July 2008
Revenue	18	237,942
Cost of sales	19	(125,772	)
Gross margin		112,140
Selling and distribution expenses	20	(61,834	)
General and administrative expenses	21	(41,403	)
Other operating income		1,147
Operating profit		10,080
Foreign exchange loss, net		(119	)
Interest expense		(11,478	)
Loss before income tax		(1,517	)
Income tax benefit	22	573
Loss for the year		(944	)

The attached notes from page 6 to page 34 are an integral part of the present combined interim financial statements 3

Russian Alcohol Group

Combined Interim Statement of Changes in Equity

IN THOUSANDS OF UNITED STATES DOLLARS

	Share capital	Additional paid-in capital	Currency translation reserve	Retained earnings		Total equity
Balance at 31 December 2007	17,229	4,975	4,985	10,626		37,815
Currency translation reserve	—	—	770	—		770
Loss for the period ended 8 July 2008	—	—	—	(944	)	(944	)
Total profit / (loss) recognized for the period ended 8 July 2008	—	—	770	(944	)	(174	)
Shares issued	113	—	—	—		113
Distribution of dividends	—	—	—	(3,407	)	(3,407	)
Balance at 8 July 2008	17,342	4,975	5,755	6,275		34,347

The attached notes from page 6 to page 34 are an integral part of the present combined interim financial statements 4

Russian Alcohol Group

Combined Interim Cash Flow Statement

IN THOUSANDS OF UNITED STATES DOLLARS

Cash flows from operating activities:	For the period ended 8 July 2008
Loss before income tax	(1,517	)
Adjustments for:
Depreciation of property, plant and equipment and amortisation of intangible assets	2,797
Loss on sale of property,plant and equipment and other assets	39
Impairment of inventories	9,037
Impairment of trade and other accounts receivable	13,245
Interest expense	11,710
Interest income	(232	)
Tax provisions	4,451
Foreign exchange translation differences	(119	)
Operating cash flows before working capital changes	39,649
Increase in trade and other accounts receivable	(84,930	)
Decrease in inventories	16,036
Decrease in taxes, other than income taxes	16,716
Decrease in taxes, other than income tax prepayments	7,235
Increase in trade and other accounts payable	46,227
Cash generated by operations	40,933
Income taxes paid	(7,815	)
Interest paid	(7,375	)
Net cash received from operating activities	25,743
Cash flows from investing activities:
Interest received	232
Purchases of property, plant and equipment	(14,806	)
Disposal of property, plant and equipment	540
Loans repaid	233
Purchases of intangible assets	(171	)
Net cash used by investing activities	(13,972	)
Cash flows from financing activities:
Proceeds from loans and borrowings	152,985
Repayment of loans and borrowings	(162,297	)
Contributions to share capital	113
Distribution of dividends	(3,407	)
Net cash used in financing activities	(12,606	)
Effect of foreign exchange rate changes on cash and cash equivalents	2,942
Net increase in cash and cash equivalents	2,106
Cash and cash equivalents, at the beginning of the period	10,228
Cash and cash equivalents, at the end of the period	12,334

The attached notes from page 6 to page 34 are an integral part of the present combined interim financial statements 5

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Note 1. Russian Alcohol Group and its operations

These combined interim financial statements for the period ended 8 July 2008 are prepared for Group of companies Russian Alcohol (hereinafter referred to as the Group) managed by ZAO Group of Companies Russian Alcohol (the Management Company). The ultimate controlling party of the Group is Cirey Holdings Inc., a private company domiciled in the British Virgin Islands. The combined companies are domiciled mainly in the Russian Federation and were owned either directly or indirectly by Cirey Holdings Inc. throughout the period presented in these combined financial statements.

The Group was established during 2000-2005 as a result of integration of the companies engaged in production and sales of vodka and low-alcohol products. Currently, the Group’s production enterprises are the following: CJSC LVZ Topaz (Pushkino, Moscow region), LLC Pervy Kupazhny Zavod (Tula), LLC Ushba Distillery (Tbilisi, Georgia), CJSC Sibirskiy LVZ (Novosibirsk region) and LLC Bravo Premium low-alcohol cocktail producer (Saint-Petersburg).

The Group has prepared these combined interim financial statements for purposes of inclusion in a Form 8-K to be filed with the SEC as a result of Central European Distribution Corp (“CEDC”) increasing its percentage of ownership of shares to 52.8%. See Note 27, “Events after reporting period”. The reporting period covers the period from 1 January 2008 to the date of the acquisition. Therefore, management of the Group consider that presentation of the combined interim financial statements for the period ended 8 July 2008 with no comparatives is appropriate in the circumstances.

Principal activity

The Group’s principal business activity is production of vodka and low alcohol beverages within the Russian Federation and their sales in the Russian Federation and abroad. The Group is one of the largest Russian producers and distributors of vodka. The Group’s manufacturing facilities are primarily based in the Russian Federation.

Address of registration and business

The Management company is registered at the following address: 1 Eniseyskaya Street, Moscow, 129344, The Russian Federation. The Group’s principal place of business is the Russian Federation.

The principal entities combined within the Group and percentages of direct and indirect ownership interest by Cirey Holdings Inc are as follows:

	Companies	Country of incorporation	Activities	Share of ownership 8 July 2008 and 31 December 2008
1	ZAO Group of Companies Russian Alcohol	Russian Federation	Production and sale of vodka and low alcohol beverages	100.0%
2	Vlaktor Trading Ltd	Cyprus	Trademark ownership	100.0%
3	AUK Holdings Ltd	Cyprus	Trademark ownership	100.0%
4	Ushba Distillery	Georgia	Production and sale of vodka	100.0%
5	OOO Chorniy & Mikola	Ukraine	Sales of vodka	100.0%
6	ZAO LVZ Topaz	Russian Federation	Production and sale of vodka	100.0%
7	OOO Pervy Kupazhny Zavod	Russian Federation	Production and sale of vodka	100.0%
8	ZAO Sibirsky LVZ	Russian Federation	Production and sale of vodka	100.0%
9	OOO Bravo Premium	Russian Federation	Production and sale of low alcohol beverages	100.0%
10	OOO CHOP RAPID BP	Russian Federation	Investigations and security assurance	100.0%
11	OOO CHOP SCHIT Topaz	Russian Federation	Investigations and security assurance	100.0%
12	ZAO Srednerussky LVS	Russian Federation	Investments holder	100.0%
13	OOO Trade House Russian Alcohol North West	Russian Federation	Sale of vodka and low alcohol beverages	100.0%
14	OOO Trade House Russian Alcohol	Russian Federation	Sale of vodka and low alcohol beverages	100.0%
15	OOO Trade House Russian Alcohol Center	Russian Federation	Sale of vodka and low alcohol beverages	100.0%
16	OOO Glavspirttrest	Russian Federation	Patents ownership	100.0%

6

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Note 2. Operating environment of the Group

The Group through its operations has significant exposure to Russia’s economy and financial markets.

Russian Federation. The Russian Federation displays certain characteristics of an emerging market, including relatively high inflation. Despite strong economic growth in recent years, the financial situation in the Russian market significantly deteriorated during 2008, particularly in the fourth quarter. As a result of global volatility in financial and commodity markets, among other factors, there has been a significant decline in the Russian stock market since mid-2008. Since September 2008, there has been increased volatility in currency markets and the Russian Rouble (RR) has depreciated significantly against some major currencies. The official US Dollar (USD) exchange rate of the Central Bank of the Russian Federation (CBRF) increased from RR 25.37 at 1 October 2008 to RR 29.38 at 31 December 2008.

The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations and frequent changes, 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 the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments.

Management is unable to predict all developments in the economic environment which could have an impact on the Group’s operations and consequently what effect, if any, they could have on the financial position of the Group.

Impact of the ongoing global financial and economic crisis. The ongoing global financial and economic crisis that emerged out of the severe reduction in global liquidity which commenced in the middle of 2007 (often referred to as the “Credit Crunch”) has resulted in, among other things, a lower level of capital market funding, lower liquidity levels across the banking sector and wider economy, and, at times, higher interbank lending rates and very high volatility in stock and currency markets. The uncertainties in the global financial markets have also led to failures of banks and other corporates, and to bank rescues in the United States of America, Western Europe, Russia and elsewhere. Since September 2008 several large Russian banks have been acquired by state-controlled banks and companies due to their liquidity problems. The full extent of the impact of the ongoing financial crisis is proving to be difficult to anticipate or completely guard against.

The availability of external funding in financial markets has significantly reduced since August 2007. Such circumstances may affect the ability of the Group to obtain new borrowings and re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions.

Debtors of the Group may be adversely affected by the financial and economic environment, which could in turn impact their ability to repay the amounts owed. Deteriorating economic conditions for customers may also have an impact on management’s cash flow forecasts and assessment of the impairment of financial and non-financial assets. To the extent that information is available, management has properly reflected revised estimates of expected future cash flows in its impairment assessments.

Management is unable to determine reliably the effects on the Group’s future financial position of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets. Management believes it is taking all the necessary measures to support the sustainability and development of the Group’s business in the current circumstances.

Seasonality of operations. The Group operations are subject to seasonal fluctuations with sales volumes biased to the second half of the year. The first half year typically results in lower revenues and results for the Group.

Note 3. Summary of significant accounting policies

Basis of preparation

These Combined Interim Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board including International Accounting Standards (“IAS”) issued by the International Accounting Standards Committee and Interpretations issued by the Standing Interpretations Committee and International Financial Reporting Committee. These policies have been consistently applied, unless otherwise stated. See Note 5, Adoption of New or Revised Standards and Interpretations.

Going concern

The accompanying financial statements have been prepared on the basis that the Group will continue as a going concern, whereby the realization of assets and the settlement of liabilities takes place in the regular course of business. These financial statements do not contain any adjustments that could have been required, if the Group were not able to continue as a going concern.

6

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

The principal accounting policies applied in the preparation of these combined interim financial statements are set out below. These policies have been consistently applied, unless otherwise stated.

Basis of combination. The Combined Interim Financial Statements present the financial position, results of operations, changes in equity and cash flows of the group of companies and their subsidiaries as if they comprise a reporting entity, owned by the same ultimate shareholder – Cirey Holdings Inc (either directly or through private companies) constituting the alcohol production, distribution and sales businesses acquired by Pasalba Limited on 9 July 2008. As the management company company Cirey Holdings Inc and an intermediate holding company LVZ Holdings were not aquired by Pasalba Limited the accompanying combined interim financial statements contain only data of subsidiaries. The combined entities have been managed together as a single economic entity during the reporting period, therefore the management believes that the Group can be seen as a reporting entity. Certain companies owned by Cirey Holdings Inc were not part of this acquisition and have not been managed together hence were not included in these Combined Interim Financial Statements.

The combination has been achieved by adding together the assets, liabilities, revenues and expenses of the companies under the common control, subject to elimination of transactions between combined entities. The components of equity of the combined entities that are not subsidiaries or sub-subsidiaries of any of the Group entities are added to the same components within Group equity.

Financial instruments – key measurement terms. Depending on their classification financial instruments are carried at fair value or amortised cost as described below.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Fair value is the current bid price for financial assets and current asking price for financial liabilities which are quoted in an active market. For assets and liabilities with offsetting market risks, the Group may use mid-market prices as a basis for establishing fair values for the offsetting risk positions and apply the bid or asking price to the net open position as appropriate. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arm’s length basis.

Valuation techniques such as discounted cash flow models or models based on recent arm’s length transactions or consideration of financial data of the investees are used to fair value certain financial instruments for which external market pricing information is not available. Valuation techniques may require assumptions not supported by observable market data. Disclosures are made in these financial statements if changing any such assumptions to a reasonably possible alternative would result in significantly different profit, income, total assets or total liabilities.

Classification of financial assets. The Group classifies its financial assets into the following measurement categories: loans and receivables and available-for-sale investments.

Loans and receivables are unquoted non-derivative financial assets with fixed or determinable payments other than those that the Group intends to sell in the near term.

All other financial assets are included in the available-for-sale category.

Classification of financial liabilities. The Group classifies its financial liabilities into the following measurement categories: (a) borrowings and payables and (b) other financial liabilities, all of which are carried at amortised cost.

Initial recognition of financial instruments. Borrowings, payables and other liabilities are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets.

All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is the date that the Group commits to deliver a financial asset. All other purchases and sales are recognised on the settlement date with the change in value between the commitment date and settlement date not recognised for assets carried at cost or amortised cost; recognised in profit or loss for trading investments; and recognised in equity for assets classified as available for sale.

Derecognition of financial assets. The Group derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially

7

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

all the risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale.

Transaction costs. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs.

Amortised cost. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related balance sheet items.

The effective interest method. The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate.

Available for sale investments. Available for sale investments are carried at fair value. Interest income on available-for-sale debt securities is calculated using the effective interest method and recognised in comprehensive income statement. Dividends on available-for-sale equity instruments are recognised in profit or loss when the Group’s right to receive payment is established and inflow of benefits is probable. All other elements of changes in the fair value are deferred in equity until the investment is derecognised or impaired at which time the cumulative gain or loss is removed from equity to profit or loss.

Impairment losses are recognised in the combined interim income statement when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of available-for-sale investments. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss – is removed from equity and recognised in profit or loss. Impairment losses on equity instruments are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in income statements, the impairment loss is reversed through current period’s income statement.

Loans given and receivable. Loans given and receivables represent non-derivative financial assets with fixed or determinable payments unquoted in the market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. The Group’s loans and receivables comprise ‘trade and other receivables’ and cash and cash equivalents in the balance sheet.

Loans given and receivables are carried at amortized cost which approximates to the amount of the invoice issued less impairment provision. Long-term accounts receivable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. Interest income is recognized using the effective interest method less short-tem accounts receivable when the recognition of interest is not material.

Property, plant and equipment. Property, plant and equipment are stated at the actual cost of acquisition or production of an asset, less depreciation and impairment loss. Historical cost includes expenditure that is directly attributable to the acquisition or production of assets.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the asset can be measured reliably. All other repairs and maintenance are charged to the combined income statement during the financial period in which they incurred.

8

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Costs of minor repairs and maintenance are expensed when incurred. Costs of replacing major parts or components of property, plant and equipment items are capitalised and the replaced part is retired.

At each reporting date management assesses whether there is any indication of impairment of property, plant and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in the combined income statement. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell.

Gains or losses on disposal of an asset shall be determined as the difference between the proceeds and the carrying amount of the asset and are recognised in the combined interim income statement.

Depreciation. Land and construction in progress are not depreciated. Depreciation of other assets is calculated using the straight-line method by writing-off evenly their historical cost over their estimated useful lives, namely:

	Useful life in years
Buildings and constructions	20-50
Machinery and equipment	10-20
Motor vehicles	10-15
Other	5-8

If an asset includes several components having different useful lives, these components are recorded as separate assets.

The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

Incomplete capital expenditures are represented by assets under acquisition or construction and recorded at actual cost. The cost includes cost of purchased assets, construction assets and other direct expenses. Incomplete capital expenditures are not depreciated until completion of acquisition (construction) and adjusting the asset to the condition suitable for operation.

Operating leases. Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments are charged to income statement on a straight-line basis over the period of the lease. The lease term is the non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option.

Intangible assets. The Group’s intangible assets comprise trademarks, computer software and licenses.

Development costs that are directly associated with identifiable and unique software controlled by the Group are recorded as intangible assets if an inflow of incremental economic benefits exceeding costs is probable. Capitalised costs include staff costs of the software development team and an appropriate portion of relevant overheads. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred.

Useful lives of the trademarks were determined based on the operating environment and management’s plans to develop and promote those trademarks. The useful life of licenses is the period of their validity, useful life of software corresponds to its economic feasibility.

Intangible assets are amortised on a straight-line basis over their estimated useful lives:

	Useful lives in years
Trade marks	5-20
Licenses	5
Software	3-5

The Group investigates if there are indications of impairment at each reporting date or more frequently. If impaired, the carrying amount of intangible assets is written down to the higher of value in use and fair value less costs to sell.

9

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Income tax. Current income tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods.

Income taxes have been provided for in the financial statements in accordance with legislation enacted or substantively enacted by the balance sheet date. The income tax charge comprises current tax and deferred tax and is recognised in the income statement except if it is recognised directly in equity because it relates to transactions that are also recognised, in the same or a different period, directly in equity.

Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the balance sheet date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.

Uncertain tax positions. The Group’s uncertain tax positions are reassessed by management at every balance sheet date. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the balance sheet date and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle the obligations at the balance sheet date.

Inventories. Inventories include raw and other materials, work in progress, finished goods, goods for resale. Inventories are recorded at the lower of cost and net realisable value. Cost of inventory is determined on the weighted average basis. The cost of finished goods and work in progress comprises raw material, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses.

Share capital. Ordinary shares of each entity combined are classified as share capital. Incremental costs directly attributable to the issue of new shares are shown in equity as a reduction, net of tax, from the proceeds. The components of equity of the combined entities that are not subsidiaries or sub-subsidiaries of any of the Group entities are added to the same components within Group equity.

Trade and other receivables. Trade and other receivables are carried at amortised cost using the effective interest method. A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision 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 change in the provision is recognised in the combined interim income statement . The primary factors that the Group considers in determining whether a financial asset is impaired are its overdue status and realisability of related collateral, if any. The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred:

• any portion or instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems;

• the counterparty experiences a significant financial difficulty as evidenced by its financial information that the Group obtains;

• the counterparty considers bankruptcy or a financial reorganisation;

• there is adverse change in the payment status of the counterparty as a result of changes in the national or local economic conditions that impact the counterparty; or

• the value of collateral, if any, significantly decreases as a result of deteriorating market conditions.

The Group assesses receivables from its major customers for impairment on a case by case basis at each reporting date. For other customers an overall assessment approach is adopted taking account of receivables ageing and of any increase or reduction in risks associated with the changes in overall economic conditions prevailing in Russia.

If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the counterparty, impairment is measured using the original effective interest rate before the modification of terms.

10

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Impairment losses are always recognised through an allowance account to write down the asset’s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

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 (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss.

Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to impairment loss account in the income statement.

Prepayments. Prepayments are carried at cost less provision for impairment. A prepayment is classified as non-current when the goods or services relating to the prepayment are expected to be obtained after one year, or when the prepayment relates to an asset which will itself be classified as non-current upon initial recognition. Prepayments to acquire assets are transferred to the carrying amount of the asset once the Group has obtained control of the asset and it is probable that future economic benefits associated with the asset will flow to the Group Other prepayments are written off to profit or loss when the goods or services relating to the prepayments are received. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly and a corresponding impairment loss is recognised in profit and loss.

Cash and cash equivalents. Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at amortised cost using the effective interest method.

Value added tax. Output value added tax related to sales is payable to tax authorities on the earlier of (a) collection of receivables from customers or (b) delivery of goods or services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases is recognised in the balance sheet on a gross basis and disclosed separately as an asset and liability. Where provision has been made for impairment of receivables impairment loss is recorded for the gross amount of the debtor including VAT.

Borrowings. Borrowings are carried at amortised cost using the effective interest method. Interest costs on borrowing to finance construction of property, plant and equipment are recognized as an expense on a time proportion basis using the effective interest method. The Group does not capitalise borrowing costs.

Trade and other accounts payable. Trade accounts payable are accrued when the counterparty performs its obligations under the contract and are carried at amortised cost using the effective interest method

Provisions for liabilities and charges. Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.

Functional and Presentation currency. The functional currency of each of the Group’s combined entities is the currency of the primary economic environment in which the entity operates which is generally the Russian Federation. The Management Company’s functional currency is Russian roubles (RR) and the Group’s presentation currency is the Dollar of the United States of America (USD). The use of presentation currency that is different from functional currency is made due to the requirements of shareholders. All financial information presented in USD has been rounded to the nearest thousand.

11

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Foreign currency translation. At 8 July 2008, the official rate of exchange of the Russian Rouble (“RR”), as determined by the Central Bank of the Russian Federation (CBRF), was US dollar (USD) 1=RR 23.5589 (31 December 2007 USD 1=RR 24.5462). The official Euro to RR exchange rate at 8 July 2008, as determined by the CBRF, was Euro (EUR) 1=RR 36.8131 (31 December 2007 EUR 1=RR 35.9332). Exchange restrictions and currency controls exist relating to converting the RR into other currencies. The RR is not freely convertible in most countries outside of the Russian Federation.

The functional currency of each of the Group’s combined entities is the currency of the primary economic environment in which the entity operates which is generally the Russian Federation.

Monetary assets and liabilities denominated in foreign currencies are translated into the Group entity’s functional currency at the official exchange rate of the CBRF at the respective balance sheet dates. Foreign exchange gains and losses resulting from the settlement of the transactions and from the translation of monetary assets and liabilities denominated in foreign currencies into functional currency at official exchange rates of the CBRF at balance sheet date are recognised in profit or loss.

Translation at period end rates does not apply to non-monetary items that are measured at historical cost. Effects of exchange rate changes on non-monetary items measured at fair value in a foreign currency are recorded as part of the fair value gain or loss.

Translation from functional into presentation currency. The results and financial position of each group entity (the functional currency of none of which is a currency of a hyperinflationary economy) are translated into the presentation currency as follows:

(i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

(ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions);

(iii) all resulting exchange differences are recognised as a separate component of equity.

At 8 July 2008 the rate of exchange used for translating foreign currency balances was USD 1 = RR 23.5589 (31 December 2007: USD 1 = RR 24.5462).

From 31 December 2007 through 8 July 2008 the principal average rate of exchange used for translating income and expenses was USD 1 = RR 23.9185.

Revenue recognition. Revenues from sales of goods are recognised at the point of transfer of risks and rewards of ownership of the goods. If the Group agrees to transport goods to a specified location revenue is recognised when the goods are passed to the customer at the destination point.

Sales of services are recognised in the accounting period in which the services are rendered, by reference to stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided.

Revenues are recognised net of value added tax, excise and discounts.

Revenues are measured at the fair value of the consideration received or receivable. When the fair value of products received in a barter transaction cannot be measured reliably, the revenue is measured at the fair value of the products or service given up.

Interest income is recognised on a time-proportion basis using the effective interest method.

Dividends. Dividend distribution to the Group’s shareholders is recognised as a liability in the Group’s combined financial statements in the period in which the dividends are approved by the Group entities’ shareholders.

Employee benefits. Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave and sick leave, bonuses, termination benefits and non-monetary benefits (such as health services and kindergarten services) are accrued in the period in which the associated services are rendered by the employees of the Group. No discretionary pensions and other post-employment benefits are provided by the Group.

Offsetting. Financial assets and liabilities are offset and a net amount is recorded in the balance sheet only when there is a legally enforceable right to offset the recognized amounts, and there is intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously.

Segment reporting. The Group does not prepare segment reporting as equity and debt securities of the Group entities are not quoted and the Group entities do not issue equity or debt securities in open securities markets.

12

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Note 4. Critical accounting estimates and judgements in applying accounting policies

The Group makes estimates and assumptions that affect the amounts recognised in the financial statements and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management’s experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements apart from those involving estimations in the process of applying the accounting policies. Judgments which have the most significant effect on the amounts recognised in the combined financial statements and estimates which can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year, include:

Tax legislation. Russian tax, currency and customs legislation is subject to varying interpretations (See Note 26).

Deferred income tax asset recognition. The net deferred tax asset represents income taxes recoverable through future revenues and is recorded on the combined balance sheet. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on medium term business plan prepared by management and extrapolated results thereafter. The business plan is based on management expectations that are believed to be reasonable under the circumstances. Key assumptions used for business plan are:

• continued growth in the sales of the Group’s core brands,

• no significant or step changes in rules and methods of collection of taxes in Russian Federation,

• ability to “pass through” normal inflationary cost increase,

• no significant changes in the way that the Group does business, and distributes its products.

Initial recognition of related party transactions. In the normal course of business the Group enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied to determine whether transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analyses.

Assumptions to determine provisions. Tax provisions are accrued based on estimates of the probability of an event, existing practice of tax litigations and legislation related to penalties and interest (See Note 16).

Useful lives of property, plant and equipment. Useful lives were determined based on the technical characteristics of assets and the technological nature of their utilisation. Changes in the production technology and other factors could have an impact on the length of use of the Group’s assets.

Inventory obsolescence. The Group operates in the fast moving consumer goods sector. Stock holding policies are maintained and enforced to minimise the risk of obsolescence. Where obsolescence arises this is normally the result of management decisions to discontinue or update particular stock keeping units (SKUs). In this case the transition is planned so as to minimise obsolete materials and/or finished goods, and any obsolete stock remaining is written down to net realisable value.

Note 5. Adoption of new or revised standards and interpretations

The following interpretations of the issued standards are mandatory for accounting periods beginning from 1 January 2008. These interpretations did not have a significant effect on the Group’s Combined Interim Financial Statements.

IFRIC 11, IFRS 2—Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007);

IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008); and

IFRIC 14, IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2008).

The following new Amendment to Standard is not yet effective for accounting periods beginning from 1 January 2008 and was early adopted in preparing these Combined Interim Financial Statements.

Puttable Financial Instruments and Obligations Arising on Liquidation—IAS 32 and IAS 1 Amendment (effective for annual periods beginning on or after 1 January 2009). The amendment requires classification as equity of some financial instruments that meet the definition of financial liabilities.

13

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Certain new standards and interpretations have been published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2009 or later periods and which the Group has not early adopted:

IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). The standard applies to entities whose debt or equity instruments are traded in a public market or that file, or are in the process of filing, their financial statements with a regulatory organisation for the purpose of issuing any class of instruments in a public market. IFRS 8 requires an entity to report financial and descriptive information about its operating segments, with segment information presented on a similar basis to that used for internal reporting purposes. The Group does not expect the standard to affect its financial statements.

IAS 23, Borrowing Costs (revised March 2007; effective for annual periods beginning on or after 1 January 2009). The main change to IAS 23 is the removal of the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. An entity is, therefore, required to capitalise such borrowing costs as part of the cost of the asset. The revised standard applies prospectively to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after 1 January 2009. The Group is currently assessing the impact of the amended standard on its financial statements.

IAS 1, Presentation of Financial Statements (revised September 2007; effective for annual periods beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Group expects the revised IAS 1 to affect the presentation of its financial statements but to have no impact on the recognition or measurement of specific transactions and balances.

IAS 27, Consolidated and Separate Financial Statements (revised January 2008; effective for annual periods beginning on or after 1 July 2009). The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the non-controlling interests (previously “minority interests”) even if this results in the non-controlling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Group is currently assessing the impact of the amended standard on its financial statements.

Vesting Conditions and Cancellations—Amendment to IFRS 2, Share-based Payment (issued in January 2008; effective for annual periods beginning on or after 1 January 2009). The amendment clarifies that only service conditions and performance conditions are vesting conditions. Other features of a share-based payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group does not expect the amendment to have a material effect on its financial statements.

IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised IFRS 3 will allow entities to choose to measure non-controlling interests using the existing IFRS 3 method (proportionate share of the acquiree’s identifiable net assets) or at fair value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, in a business combination achieved in stages, the acquirer will have to remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss. Acquisition-related costs will be accounted for separately from the business combination and therefore recognised as expenses rather than included in goodwill. An acquirer will have to recognise at the acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be recognised in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. Any business combinations after 1 July 2009 will be accounted for under new standard.

IFRIC 13, Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008). IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. IFRIC 13 is not relevant to the Group’s operations because no Group companies operate any loyalty programs.

14

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

IFRIC 15, Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1 January 2009). The interpretation applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors, and provides guidance for determining whether agreements for the construction of real estate are within the scope of IAS 11 or IAS 18. It also provides criteria for determining when entities should recognise revenue on such transactions. The amendments will not have any impact on the Group’s combined financial statements.

IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1 October 2008). The interpretation explains which currency risk exposures are eligible for hedge accounting and states that translation from the functional currency to the presentation currency does not create an exposure to which hedge accounting could be applied. The IFRIC allows the hedging instrument to be held by any entity or entities within a group except the foreign operation that itself is being hedged. The interpretation also clarifies how the gain or loss recycled from the currency translation reserve to profit or loss is calculated on disposal of the hedged foreign operation. Reporting entities will apply IAS 39 to discontinue hedge accounting prospectively when their hedges do not meet the criteria for hedge accounting in IFRIC 16. IFRIC 16 will not have any impact on the financial statements as the Group does not apply hedge accounting.

Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate—IFRS 1 and IAS 27 Amendment (issued in May 2008; effective for annual periods beginning on or after 1 January 2009). The amendment allows first-time adopters of IFRS to measure investments in subsidiaries, jointly controlled entities or associates at fair value or at previous GAAP carrying value as deemed cost in the separate financial statements. The amendment also requires distributions from pre-acquisition net assets of investees to be recognised in profit or loss rather than as a recovery of the investment. The amendments will not have any impact on the Group’s combined financial statements.

Eligible Hedged Items—Amendment to IAS 39, Financial Instruments: Recognition and Measurement (effective with retrospective application for annual periods beginning on or after 1 July 2009). The amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The amendment is not expected to have any impact on the Group’s financial statements as the Group does not apply hedge accounting.

Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading as non-current under IAS 1; accounting for sale of IAS 16 assets which were previously held for rental and classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of definition of a curtailment under IAS 19; accounting for below market interest rate government loans in accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through profit or loss category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40; and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes have no or minimal effect on accounting. The Group does not expect the amendments to have any material effect on its financial statements.

IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009). The amendment clarifies when and how distribution of non-cash assets as dividends to the owners should be recognised. An entity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash assets will be recognised in profit or loss when the entity settles the dividend payable. IFRIC 17 is not relevant to the Group’s operations because it does not distribute non-cash assets to owners.

IFRIC 18, Transfers of Assets from Customers (effective for annual periods beginning on or after 1 July 2009). The interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. IFRIC 18 is not expected to have any impact on the Group’s financial statements.

Improving Disclosures about Financial Instruments—Amendment to IFRS 7, Financial Instruments: Disclosures (issued in March 2009; effective for annual periods beginning on or after 1 January 2009). The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The entity will be required to disclose an analysis of financial instruments using a three-level fair value measurement hierarchy.

15

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

The amendment (a) clarifies that the maturity analysis of liabilities should include issued financial guarantee contracts at the maximum amount of the guarantee in the earliest period in which the guarantee could be called; and (b) requires disclosure of remaining contractual maturities of financial derivatives if the contractual maturities are essential for an understanding of the timing of the cash flows. An entity will further have to disclose a maturity analysis of financial assets it holds for managing liquidity risk, if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk. The Group is currently assessing the impact of the amendment on disclosures in its financial statements.

Embedded Derivatives—Amendments to IFRIC 9 and IAS 39 (effective for annual periods ending on or after 30 June 2009). The amendments clarify that on reclassification of a financial asset out of the ‘at fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary, separately accounted for. This amendment is not expected to have any impact on the Group’s financial statements.

Improvements to International Financial Reporting Standards (issued in April 2009; amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after 1 July 2009; amendments to IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods beginning on or after 1 January 2010). The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: clarification that contributions of businesses in common control transactions and formation of joint ventures are not within the scope of IFRS 2; clarification of disclosure requirements set by IFRS 5 and other standards for non-current assets (or disposal groups) classified as held for sale or discontinued operations; requiring to report a measure of total assets and liabilities for each reportable segment under IFRS 8 only if such amounts are regularly provided to the chief operating decision maker; amending IAS 1 to allow classification of certain liabilities settled by entity’s own equity instruments as non-current; changing IAS 7 such that only expenditures that result in a recognised asset are eligible for classification as investing activities; allowing classification of certain long-term land leases as finance leases under IAS 17 even without transfer of ownership of the land at the end of the lease; providing additional guidance in IAS 18 for determining whether an entity acts as a principal or an agent; clarification in IAS 36 that a cash generating unit shall not be larger than an operating segment before aggregation; supplementing IAS 38 regarding measurement of fair value of intangible assets acquired in a business combination; amending IAS 39 (i) to include in its scope option contracts that could result in business combinations, (ii) to clarify the period of reclassifying gains or losses on cash flow hedging instruments from equity to profit or loss and (iii) to state that a prepayment option is closely related to the host contract if upon exercise the borrower reimburses economic loss of the lender; amending IFRIC 9 to state that embedded derivatives in contracts acquired in common control transactions and formation of joint ventures are not within its scope; and removing the restriction in IFRIC 16 that hedging instruments may not be held by the foreign operation that itself is being hedged. The Group does not expect the amendments to have any material effect on its financial statements.

Unless otherwise described above, the new standards and interpretations are not expected to significantly affect the Group’s financial statements.

Note 6. Balances and transactions with related parties

Parties are generally considered to be related if the parties are under common control, or if one party has the ability to control the other party or can exercise significant influence or joint control over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the nature of the relationship, not merely the legal form. Information about the immediate parent and the ultimate controlling party of the Group is disclosed in Note 1.

The nature of the related party relationships for those related parties with whom the Group entered into significant transactions or had significant balances outstanding at 8 July 2008 are detailed below.

List of related parties:

Name	Nature of relationship
Cirey Holdings Inc.	Ultimate controlling party
ZAO NPK Topaz,	Entity under common control
OOO Top-Rei,	Entity under common control
OOO Russian Alcohol – Sibirskaya	Entity under common control
LVZ Holdings Ltd.	Immediate parent company
Black Gold Trading and Finance Corp.	Entity under common control
Guento Portfolio Corp.	Entity under common control
Arden Global S.A.	Entity under common control
OOO “NIT”	Entity under common control
OOO Ecotorg	Other related party

17

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

At 8 July 2008 the outstanding balances with related parties were as follows:

	Ultimate and intermediate controlling party	Entities under common control	Other related parties
Accounts receivable	—	1,581	22
Accounts payable	1,711	—	—
Advances received	—	5	—

At 31 December 2007 the outstanding balances with related parties were as follows:

	Ultimate and intermediate controlling party	Entities under common control	Other related parties
Loans provided to related parties	103	1,251	—
Accounts receivable	823	2,811	—
Accounts payable	1,243	83	9

Other related parties are mainly represented by the parties, which control or exercise significant influence over the entities combined.

Key management compensation is presented below:

	For the period ended 8 July 2008
	Expense	Accrued liability
Short-term benefits:
- Salaries	378	409
Total	378	409

17

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Note 7. Property, plant and equipment

Movements in the carrying amount of property, plant and equipment were as follows:

	Land plots	Buildings and Constructions		Machinery and equipment		Motor vehicles		Other		Construction in progress		Total
Cost at 31 December 2007	409	13,397		24,914		5,640		3,845		30,265		78,470
Additions	375	472		2,033		663		436		15,229		19,208
Transfers	—	13,948		15,109		501		142		(29,700	)	—
Disposal	—	(1	)	(828	)	(226	)	(329	)	402		(982	)
Translation difference	24	884		1,273		254		245		901		3,581
Cost at 8 July 2008	808	28,700		42,501		6,832		4,339		17,097		100,277
Depreciation at 31 December 2007	—	2,278		4,225		1,219		1,432		—		9,154
Depreciation for the period:	—	429		1,271		439		509		—		2,648
Depreciation of disposed assets	—	(1	)	(283	)	(70	)	(49	)	—		(403	)
Translation difference	—	143		214		56		57		—		470
Depreciation at 8 July 2008	—	2,849		5,427		1,644		1,949		—		11,869
Net book value at 31 December 2007	409	11,119		20,689		4,421		2,413		30,265		69,316
Net book value at 8 July 2008	808	25,851		37,074		5,188		2,390		17,097		88,408

Construction in progress includes advances to construction companies and suppliers of property, plant and equipment of USD 5,786 thousand (net of VAT) and USD 2,309 thousand (net of VAT) as of 8 July 2008 and 31 December 2007 respectively.

Depreciation expense for the period ended 8 July 2008 has been charged to the cost of sales in the amount of 1,421 USD thousand, to selling expenses in the amount of 339 USD thousand, to administrative expenses in the amount of 1,037 USD thousand.

At 8 July 2008 and 31 December 2007 part of property, plant and equipment has been pledged to third parties as collateral for borrowings (See Note 14).

	8 July 2008
	Carrying amount	Collateral value
Machinery and equipment	21,280	20,606
Buildings, Constructions and
Land plots	3,275	6,857
Total	24,555	27,463

The amount of collateralized loans is USD 84,786 thousand as at 8 July 2008.

18

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Note 8. Intangible assets

	Trademarks and Patents	Licenses		Software		Other		Total
Cost at 31 December 2007	1,803	599		708		168		3,278
Additions	2	36		249		149		436
Disposals	—	(46	)	(93	)	(126	)	(265	)
Translation difference	25	75		8		31		139
Cost at 8 July 2008	1,830	664		872		222		3,588
Amortisation at 31 December 2007	220	221		163		47		651
Amortization for the period	3	69		44		33		149
Translation effect	—	22		2		5		29
At 8 July 2008	223	312		209		85		829
Net book value at 31 December 2007	1,583	378		545		121		2,627
Net book value at 8 July 2008	1,607	352		663		137		2,759

Note 9. Inventories

	8 July 2008
Materials and supplies	14,548
Work in progress	291
Finished goods	20,079
Other inventories	1,614
Less: impairment provision	(10,282	)
Total inventories	26,250

As of 8 July 2008 inventories in the amount of USD 3,408 thousand of carrying value (pledged value of USD 2,212 thousand) were pledged as collateral under bank loan facilities. As of 31 December 2007 inventories in the amount of USD 26,864 thousand of carrying value (pledged value of USD 17,488 thousand) were pledged as collateral under bank loan facilities.

The cost of inventories in the custody of third parties as of 8 July 2008 was USD 16,491 thousand (as of 31 December 2007 USD 13,890 thousand).

Note 10. Trade and other accounts receivable and advances

Trade accounts receivable are presented below:

	8 July 2008
Accounts receivable	282,883
Less: impairment provision	(16,046	)
Total trade accounts receivable	266,837

20

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Other accounts receivable are presented below:

	8 July 2008
Financial assets
Other accounts receivable	11,262
Less: impairment provision	—
Other accounts receivable, net	11,262
Loans receivable	5,286
Less: impairment provision	(1,131	)
Loans receivable, net	4,155
Non-financial assets
VAT Recoverable	15,231
Advances issued	10,410
Prepaid expenses	969
Other current assets	261
Non-financial assets	26,871
Total other accounts receivable and advances	42,288

	For the period ended 8 July 2008
Impairment provision for trade accounts receivable at 31 December 2007	(3,598	)
Impairment charge during the period	(12,114	)
Translation effect	(334	)
Provision for impairment for trade accounts receivable at 8 July 2008	(16,046	)

Management believes that advances issued to suppliers, VAT recoverable from the budget related to purchased property, plant and equipment, goods and services, other accounts receivable net of expenses for bad debt are not exposed to the value risk and are recoverable within 12 months after the reporting date.

The debt repayment period is from 30 to 120 days, depending on a customer (retail-wholesale trading). The average period of payment delay provided after the sale of goods is 60 days. Interest is not accrued on trade receivables.

Included in the Group’s trade receivable balance are debtors with a carrying amount of USD 63,512 thousand at 8 July 2008 (31 December 2007: USD 9,403 thousand) which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. The Group does not hold any collateral over these balances. The average age of these receivables is 87 days. Accounts receivable which are past due but not impaired are aged between 60 and 90 days.

While choosing each new buyer, the Group applies internal procedures for the assessment of their creditworthiness. The Group takes into account the client’s reputation, external information on the client’s involvement in legal proceedings etc. Credit limits are set for all major clients as an absolute amount of credit that can be advanced and also separately in terms of the credit terms that must be adhered to. The Group has a number of clients with which it cooperates for several years. According to assessments by Group’s management all the outstanding accounts receivable are “A” rated, which implies prior business relationship and no history of default.

20

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Note 11. Taxes other than income tax prepayment

Prepayments for taxes other than income tax are presented below:

	8 July 2008
VAT and excise duties	100
Unified Social Tax (UST)	53
Other taxes	1,265
Total taxes other than income tax prepayment	1,418

Note 12. Cash and cash equivalents

	8 July 2008
Cash in hand	94
Bank balances payable on demand	12,240
Total cash and cash equivalents	12,334

All the bank balances and deposits are neither past due nor impaired.

Analysis of the credit quality of bank balances and deposits is as follows:

	8 July 2008
Rating	Bank balances payable on demand
AA-*	290
B+*	177
B+/B**	85
B++***	2,353
BB*	236
BB-*	4
BB+	469
BBB*	544
BBB/F3**	3,869
Other unrated	4,213
Total	12,240

Ratings:

* - Standard & Poor’s

** - Fitch’s

*** - Rating agency «Expert RA»

22

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Note 13. Share capital

	Companies	Share capital as at 08 July 2008
1	ZAO LVZ Topaz	10,278
2	ZAO Srednerussky LVS	3,576
3	ZAO Sibirsky LVZ	1,773
4	OOO Trade House Russia Alcohol Center	758
5	ZAO Group of companies Russian Alcohol	422
6	OOO Trade House Russian Alcohol North West	407
7	OOO Glavspirttrest	104
8	Ushba Distilly and its subsidiaries	12
9	OOO Chorniy & Mikola	7
10	Vlaktor Trading Ltd	2
11	AUK Holding Ltd	2
	Total share capital	17,342

Note 14. Loans and borrowings

Breakdown of the non-curent loans and borrowings is presented in the table below:

Non-current loans and borrowings
Bank/type of borrowing	Currency	Interest rate	Date of repayment	8 July 2008
MDM Bank	EUR	EURIBOR + 4.20%	20/12/2012	1,391
MDM Bank	EUR	EURIBOR + 4.20%	20/12/2012	426
MDM Bank	EUR	EURIBOR + 4.20%	20/12/2012	41
MDM Bank	EUR	EURIBOR + 4.20%	20/12/2012	242
Other				4
Total non-current loans and borrowings				2,104
Current loans and borrowings and current portion of non-current loans and borrowings				—
Total non-current loans and borrowings net of current portion				2,104

Property, plant and equipment were pledged as collateral for loans and borrowings. See Notes 7 and 9.

100% percent of shares of ZAO Sibirsky LVZ were pledged as collateral for loans as of 8 July 2008 and 31 December 2007. See note 13 Share Capital.

The Group has not entered into any hedging arrangements in respect of its foreign currency obligations or interest rate exposure, and therefore does not apply hedge accounting.

The carrying value of borrowings and loans approximates fair values.

23

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Current loans and borrowings
Bank/type of borrowing	Currency	Interest rate	Date of repayment	8 July 2008	31 December 2007
MDM Bank	USD	11.37%	14/01/2011	—	1,011
MDM Bank	USD	9.99%	27/11/2009	—	2,422
MDM Bank	USD	10.50%	27/11/2009	—	1,616
MDM Bank	USD	11.37%	14/01/2011	—	4,099
MDM Bank	EUR	10.31%	27/11/2009	—	1,588
MDM Bank	EUR	9.10%	10/10/2010	—	1,725
MDM Bank	EUR	9.10%	10/10/2010	—	2,547
MDM Bank	EUR	9.10%	10/10/2010	—	88
MDM Bank	EUR	9.02%	28/12/2009	—	439
MDM Bank	USD	EURIBOR + 4,20%	22/01/2011	—	1,560
MDM Bank	EUR	EURIBOR + 4,20%	22/01/2011	—	477
MDM Bank	USD	LIBOR + 5.00%	27/11/2009	1,806	—
MDM Bank	USD	LIBOR + 5.00%	27/11/2009	1,204	—
MDM Bank	USD	LIBOR + 6.50%	14/01/2011	4,077	—
MDM Bank	USD	LIBOR + 6.50%	14/01/2011	1,019	—
MDM Bank	EUR	LIBOR + 6.50%	27/11/2009	1,275	—
MDM Bank	EUR	EURIBOR + 4.20%	10/10/2010	1,539	—
MDM Bank	EUR	EURIBOR + 4.20%	10/10/2010	2,273	—
MDM Bank	EUR	EURIBOR + 4.20%	10/10/2010	79	—
MDM Bank	EUR	EURIBOR + 6.50%	28/02/2011	964	—
MDM Bank	USD	EURIBOR + 6.50%	01/06/2011	1,880	—
MDM Bank	EUR	EURIBOR + 4.25%	29/12/2009	352	—
NPK Topaz	RUR	5.00%	18/10/2009	—	518
NPK Topaz	RUR	5.00%	06/09/2008	—	737
Sberbank RF	RUR	10.00%	10/06/2008	—	6,114
Sberbank RF	RUR	9.00%	11/01/2008	—	6,114
Sberbank RF	RUR	10.50%	11/02/2008	—	9,783
Sberbank RF	RUR	11.00%	05/11/2008	10,615	10,191
Sberbank RF	RUR	10.50%	12/03/2008	—	6,114
Sberbank RF	RUR	11.00%	11/08/2008	10,615	10,191
Sberbank RF	RUR	10.50%	04/04/2008	—	5,707
Sberbank RF	RUR	10.50%	14/04/2008	—	5,707
Sberbank RF	RUR	11.00%	05/11/2008	—	—
Sberbank RF	RUR	11.00%	11/08/2008	—	—
Sberbank RF	RUR	10.50%	13/11/2008	6,369	—
Sberbank RF	RUR	12.00%	18/07/2008	5,945	—
Sberbank RF	RUR	12.00%	22/08/2008	4,245	—
Sberbank RF	RUR	12.00%	26/09/2008	2,548	—
Sberbank RF	RUR	12.00%	11/09/2008	4,034	—
Sberbank RF	RUR	12.00%	10/10/2008	9,766	—
Sberbank RF	RUR	12.00%	08/12/2008	6,369	—
Sberbank RF	RUR	12.00%	20/11/2008	2,335	—
Sberbank RF	RUR	12.00%	18/12/2008	849	—
Sberbank RF	RUR	11.00%	21/03/2008	—	1,226

23

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Gazprombank	RUR	11.40%	07/03/2008	—	3,673
Gazprombank	RUR	11.60%	07/03/2008	—	2,449
Grand Invest Bank	RUR	12.50%	22/02/2008	—	6,111
Gazprombank	RUR	11.50%	01/07/2009	8,503	—
Gazprombank	RUR	11.40%	07/03/2008	—	2,449
Alfa Bank	USD	10.94%	29/02/2008	—	6,810
Raiffeisen Bank Spb	RUR	10.83%	10/07/2008	—	4,496
Raiffeisen Bank Spb	RUR	10.58%	01/05/2009	—	4,517
Raiffeisen Bank Spb	RUR	MOSPRIME + 3.75%	10/07/2008	3,948	—
Raiffeisen Bank Spb	RUR	MOSPRIME + 3.50%	30/04/2009	4,669	—
HSBC	RUR	MOSPRIME + 3.00%	15/07/2008	21,263	—
Tulskiy RF	RUR	10.50%	05/06/2008	1,957	—
Volupte Investments LTD	USD	0.00%	22/02/2008	—	1,193
Petrocommerz	RUR	10.00%	29/12/2008	22	—
Petrocommerz	RUR			61,125	65,872
Petrocommerz	RUR			2,445	7,781
Other				157	1,430
Total current loans and borrowings				184,247	186,755
Total loans and borrowings				186,351	186,755

Note 15. Taxes, other than income tax payable

	8 July 2008
Excise	44,807
VAT	28,256
Property tax	201
Personal income tax	648
Other taxes payable	340
Total taxes, other than income tax payable	74,252

Note 16. Provisions for liabilities and charges

Provisions for future liabilities and charges are presented below:

	8 July 2008	Increase in provision	Translation effect		31 December 2007
Other provisions for liabilities and charges
Current income tax provisions	23,914	3,490	(949	)	21,373
VAT provisions	24,458	3,724	(1,013	)	21,747
Total current provisions	48,372	7,214	(1,962	)	43,120

Tax risks. The Group management has assessed, based on its interpretation of the relevant legislation that it is probable that certain tax positions taken by the Group would not be sustained against challenge by the tax authorities. Accordingly, the Group has created provisions for the associated undeclared taxes and the related penalties and interest (presented in the table above).

24

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Legal claims. The Group is not involved in any legal proceedings with regard to which provisioning would be required.

Note 17. Trade and other accounts payable

	8 July 2008
Financial liabilities
Trade accounts payable	91,897
Other accounts payable	13,585
Non-financial liabilities
Accrued employee benefit costs	3,018
Advances received	1,956
Total other accounts payable	18,559
Total trade and other accounts payable	110,456

Advances received mainly consist of prepayments for inventories (alcohol and water).

Note 18. Revenue

	For the period ended 8 July 2008
Sales of goods
- sales of vodka	194,814
- sales of low-alcohol beverages	42,919
Other sales	209
Total revenue	237,942

Revenue attributable to sales of goods was primarily received from sales in the domestic market. Export transactions represent an insignificant part of total sales. Revenue is stated net of exise taxes of USD 78,939 thousand.

25

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Note 19. Cost of sales

	For the period ended 8 July 2008
Cost of produced vodka by elements:
- raw materials and supplies	61,454
- salaries and social taxes	20,903
- depreciation	654
Total cost of produced vodka	83,011
Cost of produced low-alcohol beverages by elements:
- raw materials and supplies	24,512
- salaries and wages and social taxes	1,674
- depreciation	767
Total cost of produced low-alcoholic products	26,953
Impairment loss on inventory	9,037
Other expenses	6,771
Total cost of sales	125,772

Note 20. Selling and distribution expenses

	For the period ended 8 July 2008
Marketing expenses	18,897
Transportation expenses	15,959
Salaries and wages	8,836
Impairment loss for loans and accounts receivable	13,245
Depreciation and amortisation	339
Material expenses	523
Professional services (consulting services)	180
Other	3,855
Total selling and distribution expenses	61,834

27

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Note 21. General and administrative expenses

	For the period ended 8 July 2008
Salaries and wages	24,290
Professional services	1,267
Depreciation and amortisation	1,037
Loss on sale and disposal of PPE and other assets	39
Taxes other then income tax	666
Bank charges	1,575
Material expenses	1,210
Other general and administrative expenses	11,319
Total general and administrative expenses	41,403

Note 22. Income tax expense

Income tax expense comprises the following elements:

	For the period ended 8 July 2008
Total Income tax expense - current	(11,825	)
Deferred tax benefit	12,398
Income tax expense for the period	573

The expected tax charges are reconciled to the actual tax charges as follows.

	For the period ended 8 July 2008
Loss before income tax	(1,517	)
Theoretical tax credit at the statutory tax rate of 24%	364
Tax effect of non-deductible expenses	(950	)
Tax effect of non-taxable income	1,159
Income tax benefit for the period	573

Unrecognized prior year deferred tax benefit

28

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Differences between IFRS and Russian statutory taxation regulations give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below and is recorded at the rate of 24% (31 December 2007: 24%). On 26 November 2008, the Russian Federation reduced the standard corporate income tax rate from 24% to 20% with effect with 1 January 2009. The Company will apply the reduced 20% tax rate to deferred tax balances as at 31 December 2008.

	08 July 2008		Credited to profit or loss: Expense/ (income)		Translation difference		31 December 2007
Tax effect of deductible/(taxable) temporary differences and tax loss carry forwards
Accruals	7,852		6,913		310		629
Accounts receivable impairment provision	3,668		2,633		132		903
Inventories impairment provision	2,939		2,505		123		311
Non-realized profit	273		(1,176	)	11		1,438
Tax losses carry forward	521		156		20		345
Other	1,198		850		22		316
Recognised deferred tax asset	16,451		11,881		628		3,942
Recognised deferred tax liability	(418	)	517		(2	)	(933	)
Net deferred tax assets/(liabilities)	16,033		12,398		626		3,009

In the context of the Group’s current structure, tax losses and current tax assets of different Group entities may not be offset against current tax liabilities and taxable profits of other group companies and, accordingly, taxes may accrue even where there is a combined tax loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity.

Note 23. Contingencies, commitments and operating risks

Legal proceedings. From time to time and in the normal course of business, claims against the Group are received. On the basis of its own estimates and both internal and external professional advice the Management is of the opinion that no material losses will be incurred in respect of claims in excess of provisions which have been made in these combined financial statements.

Tax legislation. Russian tax and customs legislation is subject to varying interpretations and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant authorities.

The Russian tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. In October 2006, the Supreme Arbitration Court issued guidance to lower courts on reviewing tax cases providing a systemic roadmap for anti-avoidance claims, and it is possible that this will significantly increase the level and frequency of scrutiny by the tax authorities.

28

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open for review by the tax authorities for three calendar years preceding the year of review. In certain circumstances such review may cover longer periods.

Russian transfer pricing legislation introduced 1 January 1999 provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controllable transactions, provided that the transaction price differs from the market price by more than 20%.

Controllable transactions include transactions with interdependent parties, as determined under the Russian Tax Code, all cross-border transactions (irrespective whether performed between related or unrelated parties), transactions where the price applied by a taxpayer differs by more than 20% from the price applied in similar transactions by the same taxpayer within a short period of time, and barter transactions. There is no formal guidance as to how these rules should be applied in practice. In the past, the arbitration court practice in this respect has been contradictory.

Tax liabilities arising from inter-company transactions are determined using actual transaction prices. It is possible with the evolution of the interpretation of the transfer pricing rules in the Russian Federation and the changes in the approach of the Russian tax authorities, that such transfer prices could be challenged. Given the brief nature of the current Russian transfer pricing rules, the impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the entity.

The Group includes companies incorporated outside Russia. Tax liabilities of the Group are determined on the assumptions that these companies are not subject to Russian profits tax because they do not have a permanent establishment in Russia. Russian tax laws do not provide detailed rules on taxation of foreign companies. It is possible that with the evolution of the interpretation of these rules and the changes in the approach of the Russian tax authorities, the non-taxable status of some or all of the foreign companies of the Group in Russia may be challenged. The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the entity.

Russian tax legislation does not provide definitive guidance in certain areas. From time to time, the Group adopts interpretations of such uncertain areas that reduce the effective income tax rate of the Group. As noted above, such tax positions may come under heightened scrutiny as a result of recent developments in administrative and court practices. The impact of any challenge by the tax authorities cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the Group.

In addition to the above transfer pricing matters, management estimates that the Group has other possible obligations from exposure to other than remote risks in respect of taxes of USD 6,942 thousand (31 December 2007: USD 5,731 thousand). These exposures primarily relate to recognition of expenses in respect of income tax and to VAT recovery in the area of ambiguous interpretation of a number of transactions.

Assets pledged and restricted. At 8 July 2008 and 31 December 2007 the Group has items of property, plant and equipment and inventories pledged as collateral. See Notes 7, 9 and 14.

Operating lease commitments. The Group entities lease property under current cancellable operating lease agreements. There were no breaches of the agreements, including those related to unauthorised improvements of leased property.

Environmental matters. The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognised immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be reliably estimated but could be material. In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage.

Compliance with loan agreement covenants. The Group is subject to certain covenants related primarily to its borrowings. Non-compliance with these covenants may lead to negative consequences for the Group. The Group has breached certain covenants, thus non-current loans in the amount of USD 16,291 thousand were reclassed to current loans as at 08 July 2008 (31 December 2007: USD 15,328 thousand).

29

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Note 24. Financial risk management

The risk management function within the Group is carried out in respect of financial risks, operational risks and legal risks. Financial risk comprises market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. The operational and legal risk management functions are intended to ensure proper functioning of internal policies and procedures to minimise operational and legal risks.

Credit risk. The Group takes on exposure to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Exposure to credit risk arises as a result of the Group’s sales of products on credit terms and other transactions with counterparties giving rise to financial assets.

The Group’s maximum exposure to credit risk is each class of assets as follows:

	8 July 2008
Trade and other accounts receivable
Trade accounts receivable	266,837
Loans receivable	4,155
Other accounts receivable	11,262
Cash and cash equivalents
Cash with bank accounts payable on demand	12,334
Total maximum exposure to credit risk	294,588

The Group controls the level of credit risk it faces by firstly setting credit limits for each major counter-party. These limits are set both in terms of the maximum allowable credit in money term, and in term of the number of days within which the counter-party must settle each invoice. These limits are set independently of the sales force and approved by senior management.

In the event of a counter-party breaching credit terms further shipments to that counter-party are automatically stopped, and a credit collection procedure commences based on standard procedures.

Each week a credit committee comprising representatives of sales, finance and logistics meet and review all receivables balances. In addition the most significant 35 balances in terms of value are subject to additional review at a senior credit committee including representatives of sales, finance, legal and the CEO and COO of the Group.

Reliable financial information on a counter-party is not always available in the Russian market. Accordingly, the Group maintain a department of internal auditors whose role is to perform regular audits of all significant counter-parties in order to provide additional information for consideration by the credit committee.

Credit risks concentration. In the current world economic conditions credit risk is the major concern of Group management. Credit risk in respect of the Group’s customers is addressed above. Credit risk in respect of Group’s partners has been addressed in respect of availability of funding required by the Group to finance its operations, by entering into long-term financing agreements with a consortium of reputable western financing institutions by focusing on and working with those financial institutions considered to offer minimum risk, and where possible, by working with the institutions participating in the lending consortium referred to above.

Market risk. The Group takes on exposure to market risks. Market risks arise from open positions in (a) foreign currencies, (b) interest bearing assets and liabilities, all of which are exposed to general and specific market movements. However, the use of this approach does not prevent losses outsides of these limits in the event of more significant market movements.

Sensitivities to market risks included below are based on a reasonably possible change in factor while holding all other factors constant. In practice, this is unlikely to occur and changes in some factor can be correlated.

31

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Foreign exchange risk. The Group is currently exposed to significant foreign exchange risk in respect of its non-current borrowings. The Group monitors these risks on a monthly basis, and regularily conducts market research to exposure to foreign exchange movements and adjusts its currency portfolio accordingly.

The tables below summarise the Group’s exposure to foreign currency exchange rate risk at the balance sheet date.

As of 8 July 2008:

Currency	Cash and cash equivalents	Trade and other accounts receivable	Loans and borrowings		Trade and other accounts payable		Net balance sheet position
RUR	6,706	232,436	(167,028	)	(72,545	)	(431	)
USD	3,270	4,352	(9,577	)	(329	)	(2,284	)
Euro	693	4,438	(10,507	)	(772	)	(6,148	)
Other	1,665	—	—		(410	)	1,255
Total	12,334	309,125	(186,351	)	(110,456	)	(7,608	)

As of 31 December 2007:

Currency	Cash and cash equivalents	Trade and other accounts receivable	Loans and borrowings		Trade and other accounts payable		Net balance sheet position
RUR	10,048	230,036	(161,689	)	(56,896	)	21,512
USD	146	1,872	(18,201	)	(1,300	)	(17,483	)
Euro	1	6,860	(6,865	)	(1,048	)	(1,052	)
Other	33	—	—		(591	)	(558	)
Total	10,228	238,768	(186,755	)	(59,835	)	2,419

The Group operates predominantly in Russia and other countries of CIS. The Group is therefore exposed to market risk associated with those economies. The Group actively manages these risks by maintaining a portofolio of brands with different price positioning. In addition, mainly the Group’s cash flows are generated in roubles, the Group works actively to identify and cooperate with suppliers who can supply rouble priced products.

At 8 July 2008, if the US dollar had strengthened by 30% against the Russian Roubles with all other variables held constant, post tax profit for the period would be lower by USD 685 thousand.

At 8 July 2008, if the Euro had strengthened by 30 % against the Russian Roubles with all other variables held constant, post tax profit for the period would be lower by USD 1,844 thousand.

Interest rate risk. The Group obtains borrowings from and deposits surplus funds with banks at current market interest rates. The Group is exposed to interest rate risk through market value fluctuations of interest bearing borrowings.

The Group’s interest rate risk arises from borrowings (Note 14). Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk.

As at 8 July if the interest rate on variable rate loans and borrowings had increased by 5% with all other variables held constant, post tax profit for the period would be lower by USD 1,942 thousand.

The Group analyses its interest rate exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, renewal of existing options and alternative financing. Based on these scenarios, the Group calculates the impact on profit and loss of a defined interest rate shift. For each simulation, the same interest rate shift is used for all currencies. The scenarios are run only for liabilities that represent the major interest-bearing positions.

32

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Liquidity risk. Prudent liquidity risk management includes maintaining sufficient cash and the availability of funding from an adequate amount of committed credit facilities.

The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 6 months equal their carrying balances, as the impact of discounting is not significant.

	Less than 1 year	Between 1 and 2 years	Between 2 and 5 years
As at 8 July 2008
Trade accounts payable	51,897	—	—
Other accounts payable	18,559	—	—
Borrowings (principal)	184,297	4	2,100
Borrowings (interest)	13,470	—	805
As at 31 December 2007
Trade accounts payable	47,781	—	—
Other accounts payable	12,054	—	—
Borrowings (principal)	169,355	6,046	11,354
Borrowings (interest)	11,362	—	—

Capital risk management. The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The amount of capital that the Group managed as of 30 June 2008 was USD 207,051 thousand (31 December 2007: USD 214,340 thousand).

Consistent with others in the industry, the Group monitors capital on a gearing ratio basis. This ratio is calculated as total net debt divided by total capital under management. Net debt is calculated as total borrowings (including “current and non-current borrowings” as shown in the combined balance sheet) less cash and cash equivalents. Total capital under management is calculated as “equity” as shown in the combined balance sheet plus net debt. The Group has breached certain covenants which are set in the Group’s loan agreements (See Notes 14 and 23).

	8 July 2008
Total loans and borrowings (Note 14)	184,247
Less: Cash and cash equivalents (Note 12)	(12,334	)
Net debt	171,913
Total equity	34,347
Total capital	206,260
Gearing ratio	83	%

Note 25. Fair value of financial instruments

Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The best evidence of the fair value is an active quoted market price of a financial instrument.

The estimated fair value of a financial instrument has been determined by the Group using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. The Russian Federation continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments.

33

Russian Alcohol Group

Notes to the Combined Interim Financial Statements for the period ended 8 July 2008

(All items are presented in thousands of US Dollars unless otherwise stated)

Financial assets carried at amortised cost. The fair value of floating rate instruments is normally their carrying amount. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on credit risk of the counterparty.

Carrying amounts of financial receivables approximate their fair values.

Liabilities carried at amortised cost. Fair values of other liabilities are determined using valuation techniques. The estimated fair value of fixed interest rate instruments with stated maturity was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The fair value of liabilities repayable on demand or after a notice period (“demandable liabilities”) is estimated as the amount payable on demand, discounted from the first date that the amount could be required to be paid. Refer to Note 14 for the estimated fair values of borrowings. Carrying amounts of trade and other payables approximate their fair values.

Note 26. Presentation of financial instruments by measurement category

For the purposes of measurement, IAS 39, Financial Instruments: Recognition and Measurement, classifies financial assets into the following categories: (a) loans and receivables; (b) available-for-sale financial assets; (c) financial assets held to maturity and (d) financial assets at fair value through profit or loss (“FVTPL”). All of the Group financial assets are classified within “Loans and receivables” category both as at 8 July 2008 and as at 31 December 2007. All of the Group’s financial assets are carried at amortised cost.

All of the Group’s financial liabilities are carried at amortised cost.

Note 27. Events after reporting period

Acquisition of the Group

On July 9, 2008, CEDC completed an investment with Lion Capital LLP and certain of Lion’s affiliates and funds managed and advised by Lion Capital LLP (together referred to as “Lion”), pursuant to which CEDC and Lion acquired all of the outstanding equity of the Russian Alcohol Group (“RAG”) via shareholdings in the holding company Lion/Rally Lux 1 SA. In connection with that investment, CEDC acquired an indirect equity stake in RAG of approximately 42%, and Lion acquired substantially all of the remainder of the equity of RAG. The agreements governing that investment gave CEDC the right to acquire, and gave Lion the right to require CEDC to acquire Lion’s equity stake in RAG (the “Prior Agreement”).

On April 24, 2009, CEDC and Lion entered into new agreements with Lion to replace the Prior Agreement, which requires CEDC, through a multi-stage equity purchase, to acquire over the next five years (including 2009) all of the equity interests in RAG held by Lion (the “Acquisition”), including Option Agreements and a Note Purchase and Share Subscription Agreement between CEDC, Carey Agri International – Poland Sp. z o.o., a Polish limited liability company and subsidiary of CEDC (“Carey Agri”), Lion/Rally Cayman 2 and Lion/Rally Cayman 5, a company incorporated in the Cayman Islands and an affiliate of Lion (“Cayman 5”), such agreements being termed the Option Agreements” and the “Note Purchase Agreement”, collectively the “New Agreements”.

Under the terms of the Note Purchase Agreement CEDC converted loan notes to Lion/Rally Lux 3 SA of USD 103,500,000 into share capital of Lion/Rally Cayman 2, as a result increasing its percentage ownership of shares to 52.86%. As a result of the Option Agreements CEDC has a right to receive all dividends giving CEDC an effective economic interest from 24 April 2009 of 100% in Lion/Rally Cayman 2, whilst management control continues to ultimately rest with Lion Capital LLP, exercised via its participation in several affiliates including limited partnerships. The economic interest of CEDC in Lion/Rally Cayman 2 has been pledged as collateral in respect of payment obligations under the New Agreements.

Early redemption of debt

As a consequence of the Acquisition and the re-financing all of the loans and borrowings outstanding as at 8 July 2008 were repaid.

In July 2008 the Group re-financed and obtained a loan facility from a third party lending institution with limit of USD 315 thousand. The loan was received in several tranches which are repayable within from 15 to 84 months. The loan bears floating rate interest based on LIBOR plus from 5.50% to 7.00% depending on a particular tranche conditions.

34

EX-99.4

Exhibit 99.4

Central European Distribution Corporation

Pro Forma Combined Condensed Financial Information

The unaudited pro forma combined condensed income statements combine the historical consolidated statements of income of Central European Distribution Corporation (“CEDC”) and consolidated financial statements of Lion/Rally Cayman2 (“Cayman2”), being the holding company of the Russian Alcohol Group (“RAG”) and combined financial statements of Russian Alcohol Group, giving effect to the acquisitions as well as other relevant events if they had occurred on January 1, 2008. The unaudited pro forma condensed combined balance sheet combines the historical consolidated balance sheet of Central European Distribution Corporation and the historical consolidated balance sheet of Cayman2 giving effect to the acquisitions as well as other relevant events as if they had occurred on March 31, 2009.

CEDC has accounted for the acquisition of RAG using the purchase method in accordance with SFAS 141R, “Business Combinations”, and has allocated the aggregate purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date.

The pro forma combined condensed financial information does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and therefore should be read in conjunction with:

• historical financial statements of CEDC for the year ended December 31, 2008 included in its Current Report on Form 8-K filed with the Securities and Exchange Commission on July 10, 2009;

• unaudited interim financial statements of CEDC for the three months ended March 31, 2009 included in its Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 11, 2009;

• the other audited financial statements included in this Current Report on Form 8-K.

The consolidated historical financial statements for Cayman2 for the period from July 9, 2008 to December 31, 2008, and the combined interim financial statements of RAG for the period from January 1, 2008 to July 8, 2008 have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Appropriate adjustments were made to convert this information to be compliant with US GAAP presentation.

The unaudited consolidated financial information for Cayman2 for the three month period ended March 31, 2009 was prepared in accordance with US GAAP.

The pro forma adjustments do not reflect operating efficiencies and cost savings that may be achievable with respect to the newly acquired company or costs to integrate the acquired company or achieve operating efficiencies and cost savings. No assurances can be made that CEDC will realize any such efficiencies or cost savings. The pro forma adjustments do not include any adjustments to the historical operating data for future changes in selling prices or changes in operations.

The allocation of the purchase price in the acquisitions as reflected in these unaudited pro forma combined condensed financial statements has been based upon preliminary estimates of the fair value of assets acquired and liabilities assumed as of the date of the acquisition. This preliminary allocation of the purchase price is based on available public information and is dependent upon certain estimates and assumptions, which are preliminary may change in a material way and have been made solely for the purpose of developing such pro forma combined condensed financial information.

The pro forma combined condensed financial information is presented for illustrative purposes only and is not intended to be indicative of the financial position and operating results that would have occurred if the acquisition had been consummated in accordance with the assumptions set forth below nor is it intended to be a forecast of future operating results or financial position.

Central European Distribution Corporation

Unaudited Pro Forma Condensed Combined Balance Sheet Information

March 31, 2009

Amounts in columns expressed in thousands of USD

	Historical CEDC Consolidated			Cayman2 Consolidated			Pro forma Adjustments				Total Pro forma
ASSETS
Current Assets
Cash and cash equivalents	$	64,295		$	154,276		($	13,250	)	A	$	205,321
Accounts receivable, net of allowance for doubtful accounts		250,506			147,196			—				397,702
Inventories		147,155			40,902			—				188,057
Prepaid expenses and other current assets		25,561			52,310			—				77,871
Deferred income taxes		29,682			31,184			—				60,866
Total Current Assets		517,199			425,868			(13,250	)			929,817
Intangible assets, net		481,482			175,334			0				656,816
Goodwill, net		630,291			145,074			929,071		B		1,704,436
Property, plant and equipment, net		75,614			105,238			—				180,852
Deferred income taxes		19,479			—			—				19,479
Equity method investment in affiliates		127,244			25			(72,490	)	B		54,779
Subordinated loans to affiliates		109,845			—			(109,845	)	A,E		—
		1,443,955			425,671			746,736				2,616,362
Total Assets	$	1,961,154		$	851,539		$	733,486			$	3,546,179
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Trade accounts payable	$	137,591		$	42,894		$	—			$	180,485
Bank loans and overdraft facilities		50,022			37,500			—				87,522
Income taxes payable		665			3,825			—				4,490
Taxes other than income taxes		74,808			—			—				74,808
Deferred consideration		—			—			39,077		A		39,077
Other accrued liabilities		66,004			113,918			—				179,922
Current portions of obligations under capital leases		1,436			—			—				1,436
Deferred income taxes		—			42,556			—				42,556
Current portion of long-term debt		—			6,868			—				6,868
Total Current Liabilities		330,526			247,561			39,077				617,164
Long-term debt, less current maturities		174,390			386,907			(109,845	)	E		451,452
Long-term obligations under capital leases		1,653			—			—				1,653
Long-term obligations under Senior Notes		614,622			—			—				614,622
Deferred consideration		—			—			441,576		A		441,576
Deferred income taxes		96,669			—			79,862		H		176,531
Total Long Term Liabilities		887,334			386,907			411,593				1,685,834
Redeemable noncontrolling interests in Whitehall Group		19,015			—			—				19,015
Stockholders’ Equity
Common Stock		494			382,500			(382,500	)			494
Additional paid-in-capital		816,285			—			—				816,285
Retained earnings		98,927			(79,366	)		453,918				473,479
Accumulated other comprehensive income		(203,991	)		(121,095	)		196,430				(128,656	)
Less Treasury Stock at cost		(150	)		—			—				(150	)
Total CEDC Stockholders’ Equity		711,565			182,039			267,848		D		1,161,452
Noncontrolling interests in subsidiaries		12,714			35,032			14,968		B		62,714
Total Equity		724,279			217,071			282,816				1,224,166
Total Liabilities and Stockholders’ Equity	$	1,961,154		$	851,539		$	733,486			$	3,546,179

Central European Distribution Corporation

Unaudited Pro Forma Condensed Combined Income Statement Information

Three months ended March 31, 2009

Amounts in columns expressed in thousands of USD (except per share data)

	Historical CEDC Consolidated			Cayman2 Consolidated			Pro forma Adjustments				Total Pro forma
Net Sales	$	217,892		$	80,790		$	—			$	298,682
Cost of goods sold		156,730			38,622			—				195,352
Gross Profit		61,162			42,168			—				103,330
Operating expenses		40,856			32,473			—				73,329
Operating Income		20,306			9,695			—				30,001
Non operating income /(expense)
Interest income/ (expense), net		(11,740	)		(970	)		58		C		(12,652	)
Other financial income/ (expense), net		(96,220	)		(51,176	)		—				(147,396	)
Amortization of deferred charges		—			—			(13,216	)	A		(13,216	)
Other income/ (expense), net		(162	)		(3,686	)		—				(3,848	)
Income before taxes		(87,816	)		(46,137	)		(13,158	)			(147,111	)
Income tax expense		17,564			3,879			2,500		F		23,943
Equity in net earnings of affiliates		(18,421	)		—			17,724		B		(697	)
Net income / (loss)	$	(88,673	)	$	(42,258	)	$	7,066			$	(123,865	)
Less: Net income / (loss) attributable to noncontrolling interests in subsidiaries		(111	)		—			(3,968	)	G		(4,079	)
Less: Net income / (loss) attributable to redeemable noncontrolling interests in Whitehall Group		(901	)		—			—				(901	)
Net income /(loss) attributable to CEDC	$	(87,661	)	$	(42,258	)	$	11,034			$	(118,885	)
Weighted average number of shares outstanding		47,916										51,682
Net income per share of common stock, basic	$	(1.83	)								$	(2.30	)
Net income per share of common stock, diluted	$	(1.83	)								$	(2.30	)

Central European Distribution Corporation

Unaudited Pro Forma Condensed Combined Income Statement Information

Twelve months ended December 31,2008

Amounts in columns expressed in thousands of USD (except per share data)

	Historical CEDC			RAG Total J			Pro forma Adjustments				Total Pro forma
Net Sales	$	1,647,004		$	580,656		$	—			$	2,227,660
Cost of goods sold		1,224,899			302,394			—				1,527,293
Gross Profit		422,105			278,262			—				700,367
Operating expenses		223,373			230,839			—				454,212
Operating Income		198,732			47,423			—				246,155
Non operating income /(expense)
Interest income/ (expense), net		(50,360	)		(29,661	)		(75	)	C		(80,096	)
Other financial income/ (expense), net		(132,936	)		(70,487	)		—				(203,423	)
Amortization of deferred charges		—			—			(56,378	)	A		(56,378	)
Other income/ (expense), net		410			(20	)		—				390
Income before taxes		15,846			(52,745	)		(56,453	)			(93,352	)
Income tax expense		(12,952	)		16,398			10,726		F		14,172
Equity in net earnings of affiliates		(9,002	)		—			17,521		B		8,519
Net income / (loss)	$	(6,108	)	$	(36,347	)	$	(28,206	)		$	(70,661	)
Less: Net income / (loss) attributable to noncontrolling interests in subsidiaries		3,680			—			(3,413	)	G		267
Less: Net income / (loss) attributable to redeemable noncontrolling interests in Whitehall Group		6,803			—			—				6,803
Net income /(loss) attributable to CEDC	$	(16,591	)	$	(36,347	)	$	(24,793	)		$	(77,731	)
Weighted average number of shares outstanding		44,088										49,858
Net income per share of common stock, basic	$	(0.38	)								$	(1.56	)
Net income per share of common stock, diluted	$	(0.38	)								$	(1.56	)

Central European Distribution Corporation

Notes to the Unaudited Pro Forma Condensed Combined Financial Information

Amounts in columns expressed in thousands of USD (except per share data)

A. AQUISITIONS AND CONSIDERATION

Cayman2 – Russian Alcohol Group

On July 9, 2008, the Company closed on its acquisition of approximately 47.5% of the common equity of a Cayman Islands company, referred to as Cayman 2, for approximately $181.5 million in cash, and purchased $103.5 million in subordinated exchangeable loan notes from a subsidiary of Cayman 2. Lion Capital LLP (“Lion”) and certain of its affiliates and other financial investors acquired the remaining common equity of Cayman 2, which indirectly owned approximately 88.4% of the outstanding equity of the Russian Alcohol Group. The Russian Alcohol Group, also referred to as “RAG,” is the leading vodka producer in Russia.

On April 24, 2009, the Company and Lion entered into new agreements to govern the Company’s acquisition of all of the outstanding equity of Cayman 2 held by Lion. In connection with those new agreements, on April 29, 2009 the Company acquired certain equity interests in Cayman 2 from Lion in exchange for $13,250,000 in cash, and sold the subordinated exchangeable loan notes to Cayman 2 and used the proceeds to acquire additional equity interests in Cayman 2. After these transactions, the Company’s indirect equity interest in RAG increased from 42% to approximately 54%. The Company is obligated to make certain other cash payments to Lion, and make certain issuances of shares of its common stock to Lion, through 2013 in exchange for the remainder of the equity of Cayman 2 held by Lion. These new arrangements are described in more detail in our current report on Form 8-K filed with the US SEC on April 30, 2009.

The Company entered into an Option Agreement (the “Option Agreement”) with certain companies we refer to herein as Cayman 4, Cayman 5, and Cayman 6 (that holds the restructured investment in RAG) and Cayman Exempted Limited Partnership, of which the Company and Cayman 2 are limited partners (“Cayman 7”). The Option Agreement governs the Company’s acquisition of the remaining equity interests in RAG held by Lion over the following four years.

Pursuant to the Option Agreement, Cayman 4 and Cayman 5 granted Cayman 7 a series of options entitling Cayman 7 to acquire, subject to the receipt of certain antitrust approvals, the remaining equity interests of RAG held by Lion through Cayman 4 and Cayman 5 (the “Cayman 7 Call Options”). In connection with the exercise of these options, Cayman 7 will receive certain equity interests in RAG, and will pay to Cayman 4 and Cayman 5 consideration as follows: (1) 1,000,000 shares of Common Stock issuable on or within 30 days after October 31, 2009, (2) 1,575,000 shares of Common Stock issuable on June 15, 2010 and $25,330,517 and €22,822,679 payable in cash on or within 30 days after June 30, 2010 ($15,000,000 of which may, at the Company’s election, be replaced with an equivalent amount of Common Stock), (3) $69,083,229 and €62,243,670 payable in cash on or within 60 days after May 31, 2011 ($15,000,000 of which may, at the Company’s election, be replaced with an equivalent amount of Common Stock), (4) 751,852 shares of Common Stock issuable, and $70,019,690 and €63,087,417 payable in cash, on or within 90 days after July 31, 2012, and (5) $69,083,229 and €62,243,670 payable in cash on or within 120 days after May 31, 2013 (subject to reduction by up to $10,000,000, and up to $20,000,000 of which may, at the Company’s election, be replaced with an equivalent amount of Common Stock, in each case based upon the date on which such Cayman 7 Call Option is exercised and consummated) (all such Common Stock issuable pursuant to (1) – (5), above, the “Option Share Consideration”). The amounts of cash payable, and number of shares issuable, are subject to certain adjustments based on the price of one share of Common Stock, and reduction in the event of early payment by the Company, in each case over the course of the Acquisition. The Company also will be able to apply the value of any dividends from RAG, in respect of its and Lion’s equity stakes, to prepayment of the consideration. Upon the consummation of all of the transactions contemplated above, the Company will hold all of the equity interests in RAG previously held by Lion, and will hold substantially all of the equity interests in RAG.

As consideration for Cayman 4 and Cayman 5 granting to Cayman 7 the Cayman 7 Call Options, the Company within 30 days after the execution of the Option Agreement, granted to Cayman 4 and Cayman 5 warrants to acquire Common Stock as follows: (1) warrants to acquire, in the aggregate, 1,490,550 shares of Common Stock at an exercise price of $22.11, exercisable on May 31, 2011, (2) warrants to acquire, in the aggregate, 300,000 shares of Common Stock at an exercise prices of $26.00, exercisable on July 31, 2012, and (3) warrants to acquire, in the aggregate, 1,803,813 shares of Common Stock at an exercise prices of $26.00, exercisable on May 31, 2013 (all such warrants, the “Warrants” and all Common Stock issuable pursuant to the exercise of the Warrants, together with the Note Share Consideration and the Option Share Consideration, the “Share Consideration”). Each of the Warrants may be settled, at the Company’s option, in cash or on a net shares basis.

Based on the guidelines from FAS 141R and FAS 150 business combination is considered a 100 percent acquisition of the shareholding we are committed to buy. We disclosed in the consolidated pro forma balance sheet full liability for such commitment, meaning that CEDC consolidates full profit and loss results for Cayman 2 except for the 9.4% interest owned by Russian Minority Shareholders. The shareholding that we are committed to buy is 90.6% of total shareholding in RAG. We account for the 9.4% of non-controlling interest being presented under the Equity section in the consolidated balance sheet of CEDC.

Under the requirements of FAS 150, mandatorily redeemable financial instruments are initially measured at fair value and subsequently measured at each period end at the present value of the amount to be paid at settlement (discounted at the rate implicit at inception), if both the amount of cash and the settlement date are fixed, or, otherwise, at the amount that would be paid under the conditions specified in the contract if settlement occurred at the reporting date. Present value was determined using 14.5% discount rate.

Total consideration for the acquisition consisted of the following:

Cash consideration – already paid	$	194,750
Consideration from conversion of subordinated loan notes		109,845
Cash consideration to be paid (deferred consideration stated at present value)		360,026
Consideration in shares (deferred consideration stated at present value)		69,819
Consideration in warrants (deferred consideration stated at present value)		17,405
	$	751,845

The Pro forma condensed combined financial information excludes any effects of the foreign currency changes or any hedge transactions the company may enter into.

The table below presents interest expenses on amortization of discount related to deferred charges.

Adjustment for the year ended December 31, 2008	$	56,378
Adjustment for the three months ended March 31, 2009	$	13,216

B. DETERMINATION OF GOODWILL AND ADJUSTMENTS TO EQUITY IN AFFILIATES

In connection with the preparation of the Pro Forma Condensed Combined Balance sheet information at March 31, 2009 the book values of certain assets are adjusted to estimated fair values as follows:

Fair value of consideration	$	571,138
Fair value of non-controlling interest		50,000
Fair value of previously held equity		492,818
Fair value of contingent consideration		33,402
less: 100% of Net Identifiable Assets		(73,213	)
Preliminary Goodwill from Acquisition		1,074,145
less: RAG historical goodwill		(145,074	)
Preliminary Pro Forma Goodwill Adjustment	$	929,071

In accordance with SFAS 142, “Goodwill and Other Intangible Assets”, goodwill is not amortized. The allocation of the excess purchase price to goodwill may be revised upon completion of an independent valuation with regards to the acquisition of the tangible and intangible business assets acquired. CEDC does not expect material adjustments from the completion of this process.

The following adjustments are made to eliminate the March 31, 2009 and December 31, 2008 income from RAG consolidated under equity method from the income statement:

	March 31, 2009			December 31, 2008
Elimination of equity in net earnings of affiliates	$	(17,724	)	$	(17.521	)

The carrying book value of previously held equity as of March 31, 2009 amounted to $72,490k that was eliminated as a pro forma adjustment.

C. FINANCING OF ACQUISITION

To finance a portion of the cash consideration for the Russian Alcohol Group acquisition our subsidiary, Carey Agri borrowed USD 40 million pursuant to a Term Facility. The Term Loan bears interest at a rate equal to the London Interbank Rate plus 2.5%. The Term Loan is guaranteed by CEDC and a number of our subsidiaries and is secured by all of the shares of capital stock of Carey Agri and subsequently will be further secured by shares of capital stock in certain other subsidiaries of CEDC. As the interest rate on this loan is variable we present in the below table the impact in USD on net result as if the interest rate would have changed by  ¹/8 percent.

	March 31, 2009			December 31, 2008
Impact on interest	$	12,500		$	50,000
Tax		(2,375	)		(9,500	)
Net Income		10,125			40,500
Non-controlling interest		951			3,803
Net income attributable to CEDC	$	9,174		$	36,697

Represents the impact of equalizing the historical interest rates to current market rates as well as including full period of interest expense in 2008. The pro forma impact for the twelve months ended December 31, 2008 was an expense of $75k and for the three months ended March 31, 2009 was an income of $58k.

D. ELIMINATION OF ACQUIRED COMPANIES’ SHAREHOLDERS’ EQUITY ACCOUNTS

The following adjustments are made to eliminate the March 31, 2009 stockholders’ equity accounts of RAG:

	March 31, 2009
Common Stock	$	(382,500	)
Retained earnings		79,366
Accumulated other comprehensive income		121,095
	$	(182,039	)
Additional eliminations made to equity:
Other adjustments including other comprehensive income on previously held investment		74,176
Elimination from retained earnings the results of RAG being previously consolidated under equity method		35,245
Gain from business combination (see Note I for details)		420,328
Deferred tax calculated on the gain from business combination (see Note I for details)		(79,862	)
		267,848

E. ELIMINATION OF INTERCOMPANY TRANSACTIONS

The following adjustments are made to eliminate the March 31, 2009 and December 31, 2008 intercompany transactions in the consolidated income statement and balance sheet:

	March 31, 2009			December 31, 2008
Interest accrued on loan notes	$	(2,138	)	$	(4,207	)
Loan notes as at March 31, 2009	$	(103,500	)
Interest accrued on loan notes as at March 31, 2009		(6,345	)
	$	109,845

F. INCOME TAX

The pro forma income tax adjustments takes into consideration for the following items:

	March 31, 2009			December 31, 2008
Tax impact on amortization of deferred consideration	$	2,511		$	10,712
Tax impact on additional finance costs		(11	)		14
	$	2,500		$	10,726

The pro forma adjustment reflect the impact of Polish tax calculated at the Polish statutory tax rate of 19%.

G. NON-CONTROLLING INTERESTS

As a result of consolidation of Cayman2 and its subsidiaries the adjustments to reflect the 9.4% minority interest in the Combined Condensed Income Statement were as follows:

	March 31, 2009		December 31, 2008
Net result attributable to Non-controlling interests	$	3,968	$	3,413

H. NON-RECURING ITEMS EXCLUDED FROM PRO FORMA

As a result of business combination under FAS 141R CEDC remeasured previously held equity in Cayman2 to fair value and the difference between the carrying value and the fair value of the previously held equity interest should be recognized as a gain of $340,466k net of deferred tax liability amounting to $79,862k in the income statement. However the pro forma income statement does not disclose this gain, since such gain is non-recurring and directly attributable to the transaction for which pro forma financial statements are prepared.

I. CONTINGENCIES

CEDC may be required to seek for approvals from appropriate regulatory agencies prior to completing this acquisition. The management is unable at this stage of the process to assess the potential impact on the financial statements.

J. RAG 2008 FINANCIAL DATA

The following table shows split of income statement data presented for the period from January 1, 2008 to December 31, 2008 into combined income statement of Russian Alcohol Group for the period from January 1, 2008 to July 8, 2008, consolidated income statement of Cayman2 for the period from July 9, 2008 to December 31, 2008 as well as US GAAP adjustments applied to these IFRS financial statements.

	RAG combined IFRS 1H 2008			Cayman2 consolidated IFRS 2H 2008			US GAAP Adjustments			RAG Total for twelve months ended December 31, 2008
Net Sales	$	237,942		$	342,714		$	—		$	580,656
Cost of goods sold		125,772			176,622			—			302,394
Gross Profit		112,170			166,092			—			278,262
Operating expenses		102,090			136,756			(8,007	)		230,839
Operating Income		10,080			29,336			8,007			47,423
Non operating income /(expense)		(11,597	)		(89,530	)		959			(100,168	)
Income before taxes		(1,517	)		(60,194	)		8,966			(52,745	)
Income tax expense		573			16,934			(1,109	)		16,398
Net income / (loss)	$	(944	)	$	(43,260	)	$	7,857		$	(36,347	)

The US GAAP adjustments related to transaction costs that were expensed as part of business combination for IFRS purposes are capitalized for US GAAP purposes.