31 DECEMBER 1995

1. Principal activities

The Center for the Study of Democracy (hereafter "CSD" or the "Center") is an independent not for profit, public policy research organization founded in late 1989.

Its main activities are concentrated in the organization and operation of programs including economic, law reform, sociological, information resources and ethnic relations aiming at speeding up the market oriented development of the Bulgarian economy and democratization of the Bulgarian society. The programs are financed by West European and American not for profit organizations, governmental institutions and private companies such as American Bar Association, Center for International Private Enterprise (U.S.A.), Commission of the European Communities, Council of Europe, C. S. Mott Foundation, Hanns Seidel Foundation (Germany), International Center for Economic Growth, International Development Law Institute (Italy), US Agency for International Development and World Bank. Other activities include publishing of materials and distribution.

2. Principal Accounting Policies

CSD's accounting policies are established in compliance with the Bulgarian Accountancy Act, the Bulgarian National Accounting Standards, and the United States Circular A-133 Standard concerning "grants and agreements with Institutions of Higher Education, Hospitals and other Nonprofit Organizations", as well as with the requirements set under Standard A-122 (Cost Principles for Nonprofit Organizations).

Revenue recognition

The Center's revenue arises from its activities relating to projects financed by third parties. The activity can be divided into the following types:

&emdash; restricted funds, representing funding for specific projects; and

&emdash; unrestricted funds for general expenditures and maintenance.

Project revenue is recognized based upon stipulations and duration of the contract with the organization requesting the project. Project revenue can be recognized upon completion of a stage in the project or upon completion of the project and submission of the final report.

At the end of each year a review of each project is performed. Amounts received in excess of the estimated work performed are deferred and disclosed in the balance sheet as part of deferred revenue. The estimated value of work performed in excess of the amounts received is recorded as project receivables and disclosed as part of prepayments at the balance sheet date.

Revenue earned from the act of publishing and distributing of books is recognized at the point of sale.

Taxation

The CSD is a not for profit organisation and is exempt from corporate taxation and VAT on its not for profit activities.

Foreign currency

Transactions in other currencies have been translated into Bulgarian Leva at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into Bulgarian Leva at the exchange rate ruling at that date. All resulting exchange differences are recognised in arriving at the result for the year and are disclosed in other income (expense). Foreign currency accounts are maintained by using the FIFO method.

USD to Leva foreign exchange rates were the following for the respective periods:

Inflation accounting

Consistent with other entities operating in Bulgaria, International Accounting Standard No 29 "Financial Reporting in Hyper-inflationary Economics" has not been applied despite the hyper-inflationary environment, as defined by IAS 29, in Bulgaria. The annualized rate of inflation for 1995 was 32.9% (1994 121.9%).

Reclassifications

Certain balances and amounts in 1994 have been reclassified to conform with the disclosures in the 1995 accounts.

Related party transactions

The Center for the Study of Democracy has had transactions with the Applied Research and Communications Fund (ARC) during 1995. The two have different members of the Board of Directors, different operational employees but occupy the same premises. Amounts receivable from and payable to the ARC as at 31 December 1995 were as follows:

3. Other income

Other income in Leva'000 for the period included the following:

4. Cash at bank and in hand

5. Receivables

6. Fixed assets

The Center acquires its fixed assets through purchases with its own funds or by obtaining the fixed assets upon the completion of projects. Assets are valued on the basis of acquisition cost and are shown at cost less accumulated depreciation. Depreciation is charged on a straight-line basis and the following rates are applied:

The activity for tangible assets for 1995 is as follows:

7. Long-term liabilities

8. Reconciliation between local statutory reporting and these financial statements