On Approval of the Regulation on the Procedure for Accounting for Commercial Banks' Participation in Joint Activities

Resolution of the Board of the Central Bank of the Republic of Uzbekistan, registered on 23.11.2004, reg. number 1427

Date of entry into force

03.12.2004

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11.11.2021

03.12.2004

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Act lost force 11.11.2021

[OKOZ:

1.07.00.00.00 Legislation on finance and credit. Banking activity / 07.21.00.00 Banking activity / 07.21.17.00 Accounting and reporting in banks;

2.07.00.00.00 Legislation on finance and credit. Banking activity / 07.29.00.00 Accounting. Financial reporting / 07.29.07.00 Accounting in specific industries and spheres]

[TSZ:

1.Finance / Banks and other credit institutions. Credits;

2.Finance / Accounting]

Resolution

BOARD OF THE CENTRAL BANK OF THE REPUBLIC OF UZBEKISTAN

ON APPROVAL OF THE REGULATION ON THE PROCEDURE FOR ACCOUNTING FOR COMMERCIAL BANKS' PARTICIPATION IN JOINT ACTIVITIES

[Registered by the Ministry of Justice of the Republic of Uzbekistan on November 23, 2004. Registration No. 1427]

LexUz Commentary

This resolution will lose force on November 11, 2021 in accordance with the [resolution](/docs/5563535?ONDATE=11.11.2021 00#5566859) of the Board of the Central Bank of the Republic of Uzbekistan dated July 15, 2021 No. 17/3 "On recognizing certain normative legal acts adopted by the Central Bank of the Republic of Uzbekistan as invalid" (reg. No. 3317 from 10.08.2021).

In accordance with the laws of the Republic of Uzbekistan "On the Central Bank of the Republic of Uzbekistan", "On Banks and Banking Activity" and "On Accounting" the Board of the Central Bank of the Republic of Uzbekistan resolves:

Approve "Regulation on the procedure for accounting for commercial banks' participation in joint activities" according to the appendix.
This Regulation enters into force upon the expiration of ten days from the moment of its state registration in the Ministry of Justice of the Republic of Uzbekistan.
Control over the implementation of this resolution is entrusted to the First Deputy Chairman of the Central Bank M.R. Zhumagaliev.

Chairman of the Board of the Central Bank F. MULLAZHANOV

Tashkent,

November 6, 2004,

No. 24/11

APPROVED

resolution of the Board of the Central Bank

dated November 6, 2004 No. 24/11

REGULATION

on the procedure for accounting for commercial banks' participation in joint activities

I. General Provisions

This Regulation is developed in accordance with the laws of the Republic of Uzbekistan "On the Central Bank of the Republic of Uzbekistan", "On Banks and Banking Activity" and "On Accounting" and determines the accounting policy of commercial banks (hereinafter referred to as banks) for reflecting in accounting the bank's participation in joint activities in accordance with International Financial Reporting Standards (IFRS).

II. Definitions

For the purposes of this Regulation, the following concepts are used:

control — the ability to determine the financial and operating policy of an entity in order to obtain benefits from its activities;

[SPiT:

1.Accounting in banks / Equity method of accounting]

equity method of accounting — an accounting method by which the share in a joint venture is initially reflected at actual cost, and then adjusted for changes in the participant's share in the net assets of the joint venture that occurred after acquisition. The participant's profit or loss includes its share in the profits or losses of the joint venture;

investor in a joint venture — a party to joint activity that does not participate in joint control over this joint venture;

joint control — contractual sharing of control over economic activity. It exists only when strategic financial and operating decisions related to the activity require unanimous consent of the parties sharing control (participants);

joint activity — implies a contractual agreement under which two or more parties (two banks, or a bank and two or more non-bank institutions) carry out economic activity that is under their joint control;

separate financial reporting — reporting presented by a participant of a joint venture, in which investments are accounted for based on direct equity participation, and not based on reflected results of activities and net assets of these investment objects;

significant influence — the ability to participate in the decision-making process regarding the financial and operating policy of an investment object, but not to exercise control or joint control over these policies;

participant (bank or non-bank institution) — a party to joint activity that participates in joint control over this activity.

III. Forms of Joint Activity and Contractual Agreement

§ 1. Forms of Joint Activity

Joint activity has many different forms and structures. For accounting purposes, this Regulation defines three broad categories — jointly controlled operations, jointly controlled assets, and joint ventures, which are usually described as joint activity and meet its definition. The following general characteristics are inherent in all categories of joint activity:

1) two or more participants are bound by a contractual agreement;

2) the contractual agreement establishes joint control.

§ 2. Contractual Agreement

Joint activity implies a contractual agreement that establishes joint control over the joint activity. This requirement ensures that no single participant has the authority to control the activity alone.
Activity for which there is no contractual agreement to establish joint control is not considered joint activity under this Regulation.
The contractual agreement defines the differences between shares providing joint control and investments in dependent economic entities where the investor has significant influence.
The contractual agreement is usually confirmed by a written contract between participants and covers such issues as:

1) activity, duration, and reporting obligations of the joint activity;

2) appointment of a board of directors or similar governing body for the joint activity and voting rights belonging to participants;

3) participants' contributions to capital;

4) participants' participation in income, expenses, or results of the joint activity.

The contractual agreement may designate one participant as the manager of the joint activity. The manager does not control the joint activity, but acts within the financial and operating policy agreed upon by the participants in accordance with the contractual agreement, and delegated to him for execution.
If the manager has the authority to determine the financial and operating policy of the economic activity of an economic entity and exercises control over this economic entity, then this economic entity is its subsidiary, not a joint activity.

IV. Jointly Controlled Operations and Assets

§ 1. Jointly Controlled Operations of Banks

Bank operations, the execution of which implies the use of assets and other resources of two or more participants based on a contractual agreement, are jointly controlled operations.
Jointly controlled operations are carried out by participants, without creating a corporation, partnership, or other economic entity, or a financial structure separate from the participants themselves.
In jointly controlled operations, each participant uses its own fixed assets and creates its own resources. It also bears its own expenses and obligations and attracts independent financing represented by its own liabilities.
The joint activity agreement usually provides for ways in which revenue from the sale of jointly created products (provided services) and any jointly incurred expenses are shared among participants. Joint activity may be carried out by a participant alongside its regular activity.
An example of jointly controlled operations is a case where two or more participants combine their operations, resources, and experience to jointly provide certain banking or other services provided by legislation. Each participant carries out its part of the service provision process. Each participant bears its own costs and receives its benefits from the provision of the service, the share of which is determined in accordance with contractual agreements. In particular, the implementation of syndicated lending by several banks for large investment projects is their jointly controlled operation.
With regard to jointly controlled operations, the bank-participant recognizes in its financial reporting:

a) assets that it controls and liabilities that it assumes;

b) expenses that it bears and its share in income that it earns as a result of joint activity.

Since in jointly controlled operations assets, liabilities, income, and expenses are recognized in the financial reporting of the bank-participant, similar to bank operations, therefore, when the bank-participant presents consolidated financial reporting, no adjustments or other consolidation procedures regarding these items are required.

§ 2. Jointly Controlled Assets

Assets contributed or acquired by banks for joint activity imply joint control and joint ownership by participants.
Jointly controlled assets are used to obtain benefits by participants. Each participant may receive its share of the benefits of the assets, and each participant bears the corresponding part of the expenses. Each participant controls the share of future economic benefits through its share in the jointly controlled asset.
This joint activity does not require the establishment of a corporation, partnership, or other economic entity or other financial structure that is presented separately from the participants themselves.
An example of a jointly controlled asset is a situation where two bank-participants jointly control property, with each receiving a part of the rental income from this property and bearing a part of the expenses. Or another example — when two or more banks purchase ATMs and use them jointly to serve banking clients.
For jointly controlled assets, the participant must recognize in its financial reporting:

a) its share in jointly controlled assets as its own asset, classifying them by the nature of the assets, and not as an investment. For example, a share in a jointly controlled building is classified as fixed assets;

b) any liabilities it has assumed;

c) its share in liabilities that it bears jointly with other participants in connection with the joint activity;

d) income and expenses from joint activity;

e) any other additional expenses that were incurred to carry out the joint activity.

Since assets, liabilities, income, and expenses of joint activity are recognized in the financial reporting of the participant, similar to operations, therefore, when the participant presents consolidated financial reporting, no adjustments or other consolidation procedures regarding these items are required (Appendix No. 1).

V. Joint Venture and Financial Reporting of the Bank Being a Participant in the Joint Venture

§ 1. Joint Venture

A joint venture is a corporation, partnership, or other economic entity created by two or more participants (banks) for joint activity. Each participant has the right to a part of the results of the joint venture's activity in accordance with equity participation.
The established joint venture operates exactly like other enterprises, except that the agreement between participants establishes joint control over the economic activity of the joint venture. The joint venture controls the assets of the joint activity, assumes liabilities, bears expenses, and receives profit. It can conclude contracts and obtain financing in its own name for the benefit of the joint activity.
A common example of a joint venture is a case where two participants combine their activities in a specific area by transferring relevant assets and liabilities to the joint venture. Another example is a situation where a bank begins activity in another country in cooperation with the government or another agency of that country, by establishing a separate economic entity under the joint control of the bank and the government or other state bodies.
Contributions of the bank-participant to the joint venture are accounted for in the accounting records of the bank-participant and recognized in its financial reporting as an investment in the joint venture. The bank reflects contributions to the joint venture with the following accounting entry:

Dr 15809 — "Investments in joint ventures — Financial institutions"

or 15813 — "Investments in joint ventures — Others";

Cr 10301 — "To be received from the correspondent account of the CB RU — Nostro".

§ 2. Financial Reporting of the Bank Being a Participant in the Joint Venture

The bank-participant recognizes its share in the joint venture using the equity method of accounting.
When applying the equity method of accounting to joint ventures:

a) the investment is initially reflected by the participant at actual cost;

b) the initial balance of the investment account is increased by the participant's share in the income of the joint venture and decreased by the proportional share in the losses of the joint venture, as well as by the amount of income received in the form of dividends;

c) the balance of the investment account is adjusted for changes in the participant's share in the capital of the joint venture that occurred after the creation of the joint venture;

d) the participant's income statement shows the participant's share in the net profit or loss of the joint venture (Appendix No. 2).

The bank ceases to apply the equity method of accounting from the date when it loses control over the joint venture or ceases to exert significant influence on it.

§ 3. Operations Between the Bank and the Joint Venture

When the bank-participant contributes or sells assets to the joint venture, the bank recognizes only that part of the profit or loss from this operation that falls on other participants according to their equity shares. The bank recognizes the entire amount of any loss when the contribution or sale indicates a decrease in the net realizable value of short-term assets or a loss from impairment (Appendices No. 3, No. 4).
When a participant acquires assets of the joint venture, it must not recognize its share in the profit of the joint venture from this operation, unless it resells the assets to an independent party. The participant must recognize its share in losses from these operations in the same way as profit, except that losses must be recognized immediately when they represent a decrease in the net realizable value of short-term assets or a loss from impairment.

VI. Disclosures

The bank discloses the total amount of the following contingent liabilities, unless the possibility of loss is remote, separately from the amount of other contingent liabilities;

a) any contingent liabilities that may arise for the participant in connection with its equity interests in joint activity and its share in each of the contingent liabilities for which it is jointly liable with other participants;

b) its share of the contingent liabilities of the joint venture itself, for which it is potentially liable;

c) contingent liabilities that arise because the bank is potentially liable for the obligations of other participants in the joint activity.

The bank discloses the total amount of the following liabilities regarding equity interests in joint activity, separately from other liabilities:

a) any investment obligations of the participant regarding its equity interests in the joint venture and its share in investment obligations that have arisen for it and other participants;

b) its share in the investment obligations of the joint venture.

The bank presents a list and description of equity interests in significant joint activities, as well as the ratio of ownership shares held in joint ventures. The bank, which presents information about its equity interests using the equity method of accounting, must disclose the total amounts of each of the short-term and long-term assets, short-term and long-term liabilities, income, and expenses related to its equity interests in the joint venture.

The bank discloses the method used to recognize its share in joint ventures.

APPENDIX No. 1

to the Regulation on the procedure for accounting for commercial banks' participation in joint activities

Example 1. Jointly Controlled Assets

Bank A and Bank B concluded a contract stating that they purchase 20 (twenty) ATMs to serve their clients. According to the contract, Bank A bears 60% of the costs for purchasing ATMs, and the remaining 40% — Bank B. The total cost of purchasing ATMs, including installation, amounted to 40,000,000.

The useful life of the ATMs is 10 years, with no residual value, and both banks apply the straight-line method of depreciation.

Entries for the purchase of ATMs by banks:

Bank A (60% x 40,000,000 = 24,000,000)

Dr 16541 — "Equipment for payment card processing" 24,000,000;

Cr 10301 — "To be received from the correspondent account of the CB RU — Nostro" 24,000,000.

Bank B (40% x 40,000,000 = 16,000,000)

Dr 16541 — "Equipment for payment card processing" 16,000,000;

Cr 10301 — "To be received from the correspondent account of the CB RU — Nostro" 16,000,000.

Monthly depreciation accrual

Bank A (24,000,000/10/12 = 200,000)

Dr 56616 — "Depreciation — Equipment for payment card processing" 200,000;

Cr 16543 — "Accumulated depreciation — Equipment for payment card processing" 200,000.

Bank B (16,000,000/10/12 = 133,333)

Dr 56616 — "Depreciation — Equipment for payment card processing" 133,333;

Cr 16543 — "Accumulated depreciation — Equipment for payment card processing" 133,333.

When preparing consolidated reporting by Bank A and Bank B, no additional consolidation entries will be required for the ATMs, as the ATMs have already been recognized in the financial reporting of Bank A and Bank B.

APPENDIX No. 2

to the Regulation on the procedure for accounting for commercial banks' participation in joint activities

Example 2. Joint Venture — Equity Method of Accounting

1/1/20X1 Bank A began participating in a joint venture, paying 1,000,000. Bank A owns a 40% share in this joint venture and accounts for it using the equity method of accounting.

Upon acquiring the share in the joint venture (jointly controlled economic entity), Bank A will make the following entries:

Dr 15809 — "Investments in joint ventures — Financial institutions" or 15813 — "Investments in joint ventures — Others" 1,000,000;

Cr 10301 — "To be received from the correspondent account of the CB RU — Nostro" 1,000,000.

1/6/20X1 the joint venture declares dividends equal to 100,000. Bank A's 40% share in these dividends is 40,000, and Bank A makes the following entries:

Dr 19939 — "Dividends receivable" 40,000;

Cr 15809 — "Investments in joint ventures — Financial institutions" or 15813 — "Investments in joint ventures — Others" 40,000.

15/6/2004 Bank A receives cash paid as dividends.

Dr 10301 — "To be received from the correspondent account of the CB RU — Nostro" 40,000;

Cr 19939 — Dividends receivable 40,000.

For 20X1, the joint venture received a net profit of 300,000. Bank A reflects its 40% proportional share in income as follows. Note that Bank A does not receive any payment for this amount. This is simply an update of the balance in the investment account to reflect the increase in value resulting from the joint venture's profits.

Dr 15809 — "Investments in joint ventures — Financial institutions" or 15813 — "Investments in joint ventures — Others" 120,000;

Cr 45709 — "Profit from investments in joint ventures — Financial institutions" or 45713 — "Profit from investments in joint ventures — Others" 120,000.

As of 1/1/20X2, the balance in Bank A's "Investment in joint venture" account is as follows:

Initial investment 1,000,000

Plus: Proportional share in net profit

of the joint venture [40% x 300,000] 120,000

Minus: Proportional share in dividends

of the joint venture [40% x 100,000] 40,000

Investment balance 1/1/X2 1,080,000

APPENDIX No. 3

to the Regulation on the procedure for accounting for commercial banks' participation in joint activities

Example 3. Operations Between Participant and Joint Venture (Profit Situation)

a) Bank A jointly owns and exercises joint control (50% control) over a joint venture with Bank B. Bank A sells equipment to the joint venture with a book value of 200,000 (gross amount 300,000, accumulated depreciation 100,000) for 250,000. Bank A can realize only 50% of the profit, which amounted to 50,000. This equals 25,000.

In its balance sheet immediately after the sale, Bank A will reflect its share in the asset, which is now owned by the joint venture, in the amount of 100,000, calculated as follows:

step 1: 250,000 x 50% = 125,000;

step 2: 125,000 — unrealized profit of 25,000 = net asset balance 100,000.

Note that this exactly matches Bank A's 50% share in the book value of this asset before the sale, which was 200,000.

In fact, 50% of the asset was sold with a profit, while the other 50% continues to be reflected as an asset that will be operated and depreciated over its remaining useful life.

The entries will be as follows:

Dr 10301 — "To be received from the correspondent account of the CB RU — Nostro" 250,000;

Dr 16539 — "Accumulated depreciation — Furniture, fixtures, and equipment" 100,000;

Cr 22896 — "Other deferred income" 25,000;

Cr 45909 — "Profit from sale or disposal of fixed assets" 25,000;

Cr 16535 — "Furniture, fixtures, and equipment" 300,000.

b) Suppose that the joint venture amortizes an asset purchased from Bank A over a period of 5 years, using the straight-line amortization method (20% per year). Bank A will recognize the deferred portion of the unrealized profit from the sale of the asset on a proportional basis. Consequently, Bank A will recognize 20% of its deferred profit each year, or 5,000 per year (25,000 x 20%), as follows:

Dr 22896 — "Other Deferred Income" 5,000;

Cr 45909 — "Profit from Sale or Disposal of Fixed Assets" 5,000.

APPENDIX No. 4
to Regulation on the procedure for accounting for commercial banks' participation in joint activities

Example 4. Transactions between a participant and a joint venture (loss situation)

Bank A jointly owns and exercises joint control (50% control) over a joint venture with Bank B. Bank A sells equipment to the joint venture with a book value of 200,000 (gross amount 300,000, accumulated amortization 100,000) for 180,000. Bank A can recognize only 50% of the loss, which amounts to 20,000. This equals 10,000.

In its balance sheet immediately after the sale, Bank A will reflect its share in the asset, which is now held by the joint venture, at an amount of 100,000, calculated as follows:

step 1: 180,000 x 50% = 90,000;

step 2: 90,000 + unrealized loss of 10,000 = net assets balance 100,000.

Note that this exactly matches 50% of Bank A's share in the book value of this asset before the sale, which was 200,000.

In fact, 50% of the asset was sold at a loss, while the other 50% continues to be reflected as an asset that will be operated and amortized over its remaining useful life.

The journal entries will be as follows:

Dr 10301 — "Receivable from Correspondent Account of the Central Bank of RU — Nostro" 180,000;

Dr 16539 — "Accumulated Depreciation — Furniture, Fixtures and Equipment" 100,000;

Dr 55902 — "Losses from Sale or Disposal of Fixed Assets" 10,000;

Dr 19929 — Other Deferred Expenses 10,000;

Cr 16535 — Furniture, Fixtures and Equipment 300,000.

(Collection of Legislation of the Republic of Uzbekistan, 2004, No. 47, Art. 490)

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