MTA » Topics » U.S. GAAP

This excerpt taken from the MTA 20-F filed May 11, 2005.

U.S. GAAP

        In December 2004, the FASB issued Statement 153 ("SFAS 153"), "Exchanges of Non-monetary Assets — an amendment of APB Opinion No. 29". The guidance in Accounting Principles Board Opinion No. 29 ("APBO 29"), "Accounting for Non-monetary Transactions" is based on the general principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in APBO 29 included certain exceptions to that principle. SFAS 153 amends APBO 29 by eliminating the narrow exception for non-monetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of non-monetary assets that do not have commercial substance (that is, transactions where future cash flows are not expected to significantly change as a result of the exchange). We will adopt the provisions of SFAS 153 for non-monetary asset exchange transactions after December 31, 2005. We do not expect the adoption of SFAS 153 to have a material impact on our consolidated financial position or results of operations.

        In December 2004, the FASB issued Statement No. 123 (revised 2004) ("SFAS 123(R)"), "Share-Based Payment". Statement 123(R) replaces FASB Statement No. 123, "Accounting for Stock-Based Compensation", supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and amends FASB Statement No. 95, "Statement of Cash Flows". SFAS 123(R) requires all share-based awards to employees, including grants of employee stock options, to be recognized in the financial statements based on their grant-date fair values. The related compensation costs are to be recognized over the period during which an employee is required to provide service in exchange for the award. Excess tax benefits are to be recognized as an addition to paid-in capital and reflected as financing cash inflows in the statement of cash flows. We will adopt the prospective provisions of SFAS 123(R) to new and existing plans as of January 1, 2006. The grant-date fair values of unvested awards that are outstanding on the date of adoption will be charged to expense over their remaining vesting periods. We are assessing the impact that the implementation of SFAS 123(R) will have on our consolidated financial position or results of operations.

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RESEARCH AND DEVELOPMENT

Hungarian Fixed Line Operations

        Magyar Telekom Rt. has a separate organization called PKI Telecommunications Development Institute for performance of research and development ("R&D") projects to meet the demands of the rapidly changing market, such as development of our telecommunications networks and service platforms. The institute works in close cooperation with educational institutions (such as Budapest University of Technical and Economic Sciences, Technical College of Budapest, etc.), strategic investors and suppliers and domestic and international development organizations. According to the Act XC of 2003 on Research and Technological Innovation Fund, simultaneously with our accession to the European Union, several funds aimed to encourage research and development activities became available for us as well; this encouraged us to intensify our participation in national and international consortiums engaged in R&D.

        Our R&D effort is facing new challenges due to the convergence of telecommunications, media and information technology.

        Significant resources are devoted to the upgrading of our digital backbone network. The DWDM technology was introduced to satisfy the backbone network demands that arose in connection with broadband services, such as fast Internet access and broadband IP-VPN. In the last three years we rolled out a wide range of broadband access technologies (e.g., ADSL, cable television, optical access network and managed leased line technologies) to satisfy the increased bandwidth demand. To widen the choice of broadband services, we examined the possibilities of implementing triple-play solutions. The close cooperation with Emitel and Budapest University of Technical and Economic Sciences led to a successful R&D pilot test, in which we gained the technical knowledge and experience necessary for developing real triple-play products, including native and IP based voice transmission, Video on Demand service and Internet access possibilities.

        We are continuously developing our data communications and IP network and services to meet broadband demands. We developed our first concept of a national, high-speed IP network built on DWDM and Gigabit Ethernet. Under this program the components of our IPv6 protocol pilot network were identified. We made preparations to introduce Layer 2 VPN service in our network.

        In 2005, we intend to study closely the usability of World Interoperability for Microwave Access ("WiMAX") technology. WiMAX can provide wireless broadband access with effective radius of up to several kilometers with up to 75 Mbit/s radio throughput. WiMAX is in a standardization phase, so commercialized WiMAX devices will only be available in 2006. We also plan to implement the new generation xDSL technologies (ADSL2, ADSL2+) in the access network to extend the ADSL coverage and provide higher bit-rate.

        PKI developed a public Internet terminal which can process payment made by chip cards. In addition to its traditional telephony and Internet browser function, the terminal is capable of supporting data transfer of almost all existing multimedia forms, such as Internet telephony, video telephony and downloading of data even to mobile phones. The public payphone system has been upgraded to support the new Eurochip III type phone-cards, which offer more advanced security features.

        The usage of the existing PSTN/ISDN network can be significantly increased by introducing new services. We started to develop the MMS for fixed line customers, a fixed-mobile convergence application, and a special tool to support disabled users. A Micropayment service prototype was established to test the feasibility of a payment system through which customers can purchase low-value consumer goods (e.g., cinema tickets, flowers) and be later invoiced with a telephone bill.

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        We are making preparations for interconnection and convergence of voice and data networks, which are currently separate. The Next Generation Network ("NGN") concept has been espoused as a long-term project. We do not plan to develop our traditional (such as PSTN/ISDN) network further except for maintenance and legal compliance purposes. The key focus instead will be on development of technologies and networks compatible with or forming a part of NGN, such as VoIP. To investigate effects of the implementation, we started several R&D initiatives: an Electronic Numbering Telephone Number Mapping ("ENUM") pilot has been established; several IP telephony service prototypes have been implemented; and a Session Initiation Protocol/H.323 ("SIP/H323") gateway prototype has been established. In addition, we launched a study on the potential interconnection of the Next Generation fixed and mobile networks.

        As a part of the NGN Project, PKI co-operated with T-Kábel Hungary and T-Online Hungary to introduce a high-quality voice service on the cable television network. After analyzing a number of alternative technologies, a successful pilot test has been performed, which will be the basis of a new service planned to be launched in 2005.

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