INTRODUCTION OF THE SYSTEM OF ACCOUNTS AND SUB-ACCOUNTS ENERGY COMPANIES Mr. Armen Arshakyan Head of the Tariff Policy Department Public Services Regulatory Commission Republic of Armenia ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 2 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 2 INTRODUCTION It is necessary to know the financial and economic situation of industrial licensed sector participants, To have an objective picture of the financial situation of companies in terms of profits and losses, in terms of changes made in assets and liabilities, To identify causal relationships between them. For implementation of the tariff policy:

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 3 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 3 Financial statements allowed the commission to have a clear picture with respect to: Accrued income and expenses, Acquired fixed assets, intangible assets, Cash flows, Executed current and capital repairs, Information on credits and loans.

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 4 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 4 However: With respect to most of production assets of companies there was no clear accounting in terms of areas of use of these assets (for licensed and non-licensed activities), In the energy field there were companies, which according to the Law on Energy carried out more than one type of licensed activities.

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 5 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 5 That is why a need occurred to introduce a new accounting system for companies: Improvement of the existing Chart of Accounts for accounting purposes, Supplementing it with accounts and sub-accounts related to regulated activities.

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 6 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 6 The new system allowed to distinguish: A specific licensed activity by certain functional features, And if a company carried out more than one type of licensed activity – certain types licensed activities.

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 7 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 7 LEGAL FRAMEWORK FOR INTRODUCTION OF ACCOUNTS AND SUB-ACCOUNTS 1. According to Article 10 of the Law on Energy, one of the main means of regulation is: For the purpose of reporting to the regulator, introduction for licensees of accounts and sub- accounts in accordance with the national Chart of Accounts and legal acts and regulations related to accounting, 2. According to Article 17 of the Law on Energy: For the purpose of presenting reports related to regulation, the Commission sets accounts and sub- accounts that comply with the laws of the Republic of Armenia, the national Chart of Accounts and other legal acts.

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 8 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 8 3. According to the Law on Accounting of the RA: In the Republic of Armenia, the national Chart of Accounts and rules for its application are set by the state body responsible for regulation of accounting, which is the Ministry of Finance and Economy in the republic. For energy companies the Commission set accounts and sub-accounts on the basis of the Chart of Accounts.

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 9 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 9 Energy sector of the RA consists of: Electric system, Heat supply system, Gas supply system.

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 10 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 10 In the Republic of Armenia, accounting for financial and economic activities in accordance with accounts and sub-accounts approved by the Commission is maintained by: Power generators (except for small hydro power plants), Power transmission companies, Power distribution companies Power system operator and also those that provide services of the contract and clearing centers. From January 1, 2004, the following companies operating in the electricity sector:

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 11 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 11 That hold a license for import of natural gas, Transmission of natural gas, Distribution of natural gas, Those that provide services of a system operator. From January 1, 2005, the following gas supply companies:

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 12 SYSTEM OF ACCOUNTS AND SUB-ACCOUNTS For companies operating in the electricity sector

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 13 SYSTEM OF ACCOUNTS AND SUB-ACCOUNTS For gas supply companies

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 14 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 14 RESULTS Introduction of the system of accounts and sub- accounts in energy companies allowed: Significant improvement of the results of financial- economic analysis, Evaluation of the financial situation and results of activities of both one single company and the grid as a whole, Introduction of efficient mechanisms of production planning, managerial accounting and supervision by areas of expenses.

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 15 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 15 FIXED ASSETS In the developed Chart of Accounts fixed assets are classified in especially detailed way.

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 16 FIXED ASSETS IN THE NEW CHART OF ACCOUNTS FOR THE POWER SYSTEM GENERATION OF ELECTRICITY GENERATION OF HEAT TRANSMISSION OF ELECTRICITY DISTRIBUTION OF ELECTRICITY NON-LICENSED TYPE OF ACTIVITY NON-LICENSED TYPE OF ACTIVITY FIXED ASSETS HPP s NPP, TPPs TPPs PROVISION OF SERVICES

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 17 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 17 The next phase of division of sub- accounts was carried out based on the specifics and functional characteristics of the company. In a similar way, accounts and sub- accounts for accounting of fixed asset depreciation were divided.

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 18 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 18 PROBLEMS 1) The need of participation of technical staff in maintenance of accounting using the new Chart of Accounts and preparation of updated financial statements, 2) A psychological problem, as between personnel of different specialized departments a new model for organizing shared work should be implemented, 3) Introduction of new accounting software, 4) Issue of use of resources of the company simultaneously in several areas in case of their shared use.

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 19 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 19 AREAS OF SOLVING PROBLEMS Introduction of new methods: Preparation of primary accounting documents, Filling in writs of execution on fulfilled work and provided services, accounting for inventories, Filling in source documents that would allow for creation of the information base for carrying out accounting for financial-economic activities.

ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 20 ERRA Tariff/Pricing Committee Meeting Budva, Montenegro February 4-5, 2008 Page 20 THANK YOU FOR ATTENTION!