Regulation on the Accounting of Financial Assets in Commercial Banks

Resolution of the Board of the Central Bank of the Republic of Uzbekistan, registered on November 30, 2005, under registration number 1528

Date of Entry into Force

10.12.2005

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25.04.2023

26.10.2015

10.12.2005

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Document lost its force 25.04.2023

[
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 / 07.29.04.00 Accounting for Funds, Currency, Low-Value and Fast-Wearing Items]
[
TSZ:
1.
Finance / Accounting]

RESOLUTION OF THE BOARD OF THE CENTRAL BANK OF THE REPUBLIC OF UZBEKISTON

ON APPROVING THE REGULATION ON THE PROCEDURE FOR MAINTAINING ACCOUNTING OF FINANCIAL ASSETS IN COMMERCIAL BANKS

[Registered by the Ministry of Justice of the Republic of Uzbekistan on November 30, 2005, under No. 1528]

This resolution has lost its force in accordance with the Resolution of the Board of the Central Bank of the Republic of Uzbekistan dated March 7, 2023, No. 4/7 "On Recognizing Certain Regulatory Legal Acts Adopted by the Central Bank of the Republic of Uzbekistan as Having Lost Their Force" (registration number 3428, dated April 20, 2023).

Based on Articles 7 and 51 of the Law of the Republic of Uzbekistan "On the Central Bank of the Republic of Uzbekistan," the Board of the Central Bank of the Republic of Uzbekistan resolves:

Approve the "Regulation on the Procedure for Maintaining Accounting of Financial Assets in Commercial Banks" in accordance with the Appendix.
This resolution shall enter into force ten days after its state registration by the Ministry of Justice of the Republic of Uzbekistan.
Control over the execution of this resolution is entrusted to the Deputy Chairman of the Central Bank, A.Q. Qodirov.

Chairman of the Central Bank Board F. MULLAJONOV

Tashkent city,
September 10, 2005,
No. 19/5

APPROVED

by the Resolution of the Board of the Central Bank dated September 10, 2005, No. 19/5

REGULATION

ON THE PROCEDURE FOR MAINTAINING ACCOUNTING OF FINANCIAL ASSETS IN COMMERCIAL BANKS

I. General Provisions

This Regulation is developed on the basis of 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 establishes the procedure for maintaining accounting of financial assets in commercial banks of the Republic of Uzbekistan (hereinafter referred to as "banks") in accordance with International Financial Reporting Standards (hereinafter referred to as "IFRS").
The requirements of this Regulation do not apply to the bank's own shares, accounts for credits and funds to be received, as well as to derivatives of securities.

II. Terms and Definitions

The following terms are used in this Regulation for its purposes:
[
SPiT:
1.
Accounting in Banks / Financial Instruments]

Financial Instruments — any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial Asset — cash, a contractual right to receive cash or another financial asset from another entity, or an equity instrument of another entity.

Monetary Items of a Financial Asset (Liability) — cash held (owned), as well as assets and liabilities to be received or paid in a fixed or determinable amount of cash. Not all financial assets are monetary items.

Financial Liability — any liability to deliver cash or another financial asset to another entity under a contractual obligation.

Equity Instruments — any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities; [ SPiT:
1.
Accounting in Banks / Fair Value]

Fair (True) Value — the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.

Amortized Cost of a Financial Asset — the amount at which the asset is measured at initial recognition (i.e., the amount reflected in the account balance, plus/minus the amount reflected in the premium/discount account, plus the amount of transaction costs reflected in the account, plus the amount of accrued interest receivable and separately accrued interest reflected in the account), minus the principal repayments made, plus/minus the accumulated amortization of premiums/discounts using the effective interest rate method, minus the amortization of transaction costs, and minus the allowance for possible losses.

Carrying Amount of a Financial Asset — the balance in the financial asset account, plus/minus the balance in the premium/discount account, plus the balance of transaction costs for acquiring the asset in the asset account, plus the balance of accrued interest receivable in the account, plus/minus the balance in the fair value adjustment account, minus the allowance for possible losses.

"Carrying Amount" — the amount compared with the current fair value for the purpose of re-measuring (adjusting) the fair value of a financial asset.

Premium — the amount by which the sum paid (excluding acquisition costs) for a debt security exceeds the sum of the asset's nominal value and any acquired interest receivable. [Acquisition Price – (Nominal Value + Acquired Interest Receivable)]. The premium has a debit balance and reduces interest income through amortization using the effective interest rate method.

Discount — the amount by which the sum of the nominal value of a debt security and any acquired interest receivable exceeds the amount paid for the debt security (excluding acquisition costs). [(Nominal Value + Acquired Interest Receivable) – Acquisition Price]. The discount has a credit balance and increases interest income through amortization using the effective interest rate method.

Acquired Interest Receivable — any accrued but unpaid interest on debt securities. These are interests that must be paid to the issuer of the security and transfer to the buyer starting from the acquisition date.

Effective Interest Rate Method — the method of calculating the amortized cost of a financial asset or financial liability and allocating interest income and expenses (including the amortization of premiums and discounts on debt securities available for sale and held to maturity, as well as acquisition costs) over the relevant period.

Effective Interest Rate — the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or, where appropriate, a shorter period, to the net carrying amount of the financial asset.

Derecognition — the removal of a previously recognized financial asset from the bank's balance sheet.

Trade Date — the date on which the bank enters into a commitment to purchase or sell an asset.

Trade Date Accounting — recognizing or derecognizing an asset on the trade date, rather than at the time of final settlement.

Transaction Costs — incremental costs directly attributable to the acquisition (acquisition costs) or derecognition (selling costs) of a financial asset.

Allowance for Possible Losses — the amount by which the carrying amount of a financial asset exceeds its recoverable (repayable) value.

III. Initial Recognition and Measurement of Financial Assets

§ 1. Classification of Financial Assets

Financial assets are divided into three categories:

1) Trading securities;

2) Investments in debt securities held to maturity;

3) Investments in securities available for sale.

Trading securities include securities intended for trading, where changes in fair value are reflected in profit and loss, and financial assets classified as "trading securities" at initial recognition in the bank's balance sheet. Furthermore, there are 2 sub-types of financial assets classified in the "trading securities" category.

A financial asset is classified as a trading asset if it is acquired with the intention of selling it in the near future, or if it is part of a portfolio of financial assets managed together as a group with evidence of a real intention to profit in the short term.

If a bank acquires other securities with the intention of accounting for them at fair value, provided their fair value can be reliably determined and changes in fair value are to be reflected in the profit and loss statement, the bank may classify them in the "trading securities" category. The bank's decision in this regard must remain unchanged subsequently.

Debt securities held to maturity are financial assets with fixed or determinable payments and fixed maturity dates, for which the bank has the intention and ability to hold until maturity.
Banks classify financial assets into the categories specified in paragraph 4 of this Regulation.
Banks shall classify debt instruments in the "held to maturity" category only if they have the intention and ability to hold them until maturity (Appendix 1).
Banks shall not classify equity instruments in the "held to maturity" category. This is because equity instruments do not have a maturity date.
If a bank has sold or reclassified a significant amount of debt securities held to maturity before their maturity date, it is prohibited from classifying such financial assets in the "held to maturity" category. However, the following cases are exceptions:

1) If it is carried out shortly before the financial asset's maturity date. This is because changes in market interest rates may not have had a significant impact on the fair value of this financial asset during the remaining period until maturity (Appendix 2);

2) If it is carried out after the bank has collected substantially all of the initial principal amount based on scheduled payments (Appendix 2);

3) If it is carried out due to significant events that are unrelated to the bank and of an extraordinary nature, for which the bank could not reasonably act (Appendix 3).

Banks shall classify all financial assets not classified in the "trading securities" or "held to maturity" categories as "securities available for sale."
When transferring a financial asset from one category to another (for example, from "securities available for sale" to "debt securities held to maturity"), the bank reflects this asset in the new type of account in accordance with Section VII of this Regulation.

§ 2. Timing of Recognition and Determination of Value of a Financial Asset

A bank recognizes a financial asset in its balance sheet only when it becomes a party to the provisions of the contract.
Banks shall recognize financial assets in the balance sheet based on trade date accounting. Both the financial asset and the obligation to pay for the asset are reflected on the trade date.
Banks initially measure acquired financial assets at fair value, which reflects their actual value. For financial assets classified as securities available for sale or debt securities held to maturity, all costs directly related to their acquisition are also reflected as assets and included in the "amortized cost" of the security. Costs related to the acquisition of financial assets classified as "trading securities" are recognized as current expenses of the bank and reflected in the profit and loss statement.

§ 3. Accounting Entries upon Recognition of Financial Assets

When acquiring financial assets, banks reflect their nominal value in the corresponding balance sheet accounts of the chart of accounts of commercial banks in accordance with their classification. In this case, premiums, discounts, and any other acquired accrued interest are accounted for in separate accounts in accordance with Appendix 4 of this Regulation.
When acquiring equity securities classified as "trading" or "securities available for sale," banks shall reflect them in the corresponding balance sheet account in accordance with Appendix 5 of this Regulation at their actual value.
Costs related to the acquisition of debt securities classified in the "securities available for sale" or "held to maturity" categories are reflected in balance sheet accounts 10889 — "Costs for Purchasing Securities Available for Sale" or 15989 — "Costs for Purchasing Securities Held to Maturity." Costs related to the acquisition of debt securities classified in the "trading securities" category and all costs related to the acquisition of equity securities are reflected in balance sheet account 55110 — "Service and Brokerage Costs Payable for Securities Trading Operations."

IV. Amortization of Discounts, Premiums, and Costs in the Acquisition of Financial Assets

Banks amortize premiums or discounts on all financial assets using the effective interest rate method. Banks also amortize acquisition costs of debt securities classified in the "securities available for sale" or "held to maturity" categories using the effective interest rate method.
Amortization of discounts is reflected in accordance with Appendices 6, 7, and 8 of this Regulation by debiting the corresponding "Discount" accounts and crediting "Interest Income" accounts.
Amortization of premiums and acquisition costs is reflected in accordance with Appendix 8 of this Regulation by debiting the corresponding "Interest Income" accounts and crediting "Premium" or "Costs for Purchasing Debt Securities" accounts.

V. Subsequent Measurement of Financial Assets

§ 1. Subsequent Measurement of Assets Classified in the "Trading Securities" Category

After initial recognition, banks measure financial assets classified in the "trading securities" category at fair value, without deducting the bank's costs that could be incurred upon selling or derecognizing these assets. Adjustments are made directly through the profit and loss statement.
Banks have the right to calculate adjustment amounts resulting from changes in fair value either on a portfolio basis or on the basis of each individual security. The final amount of the adjustment resulting from these optional methods is the same.
The calculation of the adjustment amount resulting from changes in fair value is carried out as follows: Fair Value – Carrying Amount = Adjustment Amount.

In applying this formula, a positive difference indicates an increase in fair value, and a negative difference indicates a decrease in fair value.

Adjustment for changes in fair value is carried out at least before preparing the monthly financial report. To reflect an increase in fair value, the following accounting entry is made:

Dr 10795 — "Changes in Fair Value of Trading Securities"

Cr 45609 — "Profit from Changes in Fair Value of Trading Securities" or Cr 45611 — "Profit from Changes in Fair Value of Trading Securities" (excluding trading securities)

To reflect a decrease in fair value, the following accounting entry is made (Appendix 6):

Dr 55610 — "Losses from Changes in Fair Value of Trading Securities" or Dr 55614 — "Losses from Changes in Fair Value of Trading Securities" (excluding Trading Securities)

Cr 10795 — "Changes in Fair Value of Trading Securities"

§ 2. Subsequent Measurement of Assets Classified in the "Securities Available for Sale" Category

After initial recognition, banks measure financial assets classified in the "securities available for sale" category at fair value. In this case, the bank's costs that could be incurred upon selling or derecognizing these assets are not deducted from the fair value. Adjustments are made not directly to the bank's profit and loss, but in its capital account.
The requirements set forth in the above paragraph do not apply, by way of exception, to equity instruments that are not quoted in the market and whose fair value cannot be reliably measured. Such assets, even if they are classified in the "securities available for sale" category, are reflected at their actual value net of the allowance for possible losses. If, subsequently, the opportunity to reliably measure the fair value of the asset arises, banks shall account for such assets at fair value. If an equity security is accounted for at fair value, but subsequently the opportunity to reliably measure its fair value ceases to exist, such an asset is reflected at its actual value. In such a case, the accounting method described in this paragraph is applied, but unamortized profits and losses reflected in a separate capital account are not amortized. In this case, they remain in the capital account until the sale of this asset.
Adjustment amounts related to changes in the fair value of financial assets are determined on a portfolio basis or on the basis of each individual security. The final amount of the adjustment resulting from these methods is the same.
The calculation of the adjustment amount based on changes in fair value is carried out as follows:

Fair Value – Carrying Amount = Adjustment Amount

In applying this formula, a positive difference indicates an increase in fair value, and a negative difference indicates a decrease in fair value.

To reflect an increase in fair value, the following accounting entry is made:

Dr 10895 — "Changes in Fair Value of Investments in Securities Available for Sale"

Cr 30907 — "Unrealized Profits and Losses from Changes in Fair Value of Securities Available for Sale (Asset-Liability)"

To reflect a decrease in fair value, the following accounting entry is made (Appendix 7):

Dr 30907 — "Unrealized Profits and Losses from Changes in Fair Value of Securities Available for Sale (Asset-Liability)"

Cr 10895 — "Changes in Fair Value of Investments in Securities Available for Sale"

§ 3. Subsequent Measurement of Assets Classified in the "Held to Maturity" Category

Financial assets classified in the "held to maturity" category are reflected in financial reports at amortized cost, net of the allowance for possible losses.
Adjustments (corrections) related to changes in their fair value are not made.

§ 4. Financial Assets Expressed in Foreign Currency

For financial assets classified in the "trading securities" or "securities available for sale" categories and expressed in foreign currency, banks must first determine the adjustment amount of their fair value based on foreign currency. Then, any profits and losses arising from exchange rate differences are determined by re-evaluating the open currency position at the Central Bank's exchange rate.

VI. Derecognition of Financial Assets

§ 1. Conditions for Derecognition of Financial Assets

A bank derecognizes a financial asset in the following cases:

1) When the period specified in the contract for receiving cash flows from this asset has expired;

2) When the bank transfers the financial asset and this situation corresponds to a case requiring derecognition.

When transferring a financial asset, the bank must be able to assess the level of risks and rewards associated with the management of this asset (Appendix 9).
If the bank transfers all risks and rewards associated with the management of the financial asset, it shall derecognize this asset and recognize any rights (or obligations) arising and retained upon its transfer as separate assets (liabilities) (Appendix 10).
If the bank retains all risks and rewards associated with the management of the financial asset, it shall not derecognize the financial asset.
Banks reflect any income during the period of operations that do not meet derecognition requirements as a liability in account 22896 — "Other Deferred Income."

§ 2. Sale of Financial Assets

The amount of profit or loss upon selling or derecognizing a financial asset classified in the "trading securities" category is calculated as follows:

Proceeds from Sale – Carrying Amount = Profit (Loss)

If the fair value adjustment amount was reflected before the sale of the financial asset, the formula above indicates that profit or loss is equal to zero. However, daily fair value adjustment is not required. If profit or loss arises as a result of the sale, such profit or loss is reflected in the accounts where profits and losses from fair value adjustments are reflected.

For example, if a bank sells state bonds classified in the "trading securities" category, the profit is calculated as follows:

Proceeds from Sale

885

Minus: Carrying Amount:

10705 — "State Bonds"
1.000

10791 — "Discount on Trading Securities (contra-asset)" (100)

10795 — "Changes in Fair Value of Trading Securities" (20)

10799 — "Allowance for Possible Losses from Trading Securities (contra-asset)" 0

16305 — "Accrued Interest on Trading Securities (by coupons)" 3

Carrying Amount =

883

Profit from Sale

The accounting entry to reflect the profit is as follows:

Dr Corresponding Account of Funds

885

Dr 10791 — "Discount on Trading Securities (Contra-Asset)"

100

Dr 10795 — "Change in Fair Value of Trading Securities"

Cr 10705 — "Government Bonds"

1,000

Cr 16305 — "Accrued Interest on Trading Securities"

Cr 45609 — "Profit from Changes in Fair Value of Securities Held for Trading" OR Cr 45611 — "Profit from Changes in Fair Value of Trading Securities (excluding securities held for trading)"

Profit or loss from the sale or derecognition of a financial asset classified in the "Available for Sale" category is calculated as follows:

Proceeds from Sale – Carrying Amount (after deducting the amount reflected as "Change in Fair Value of Investments in Securities Available for Sale") = Profit (Loss)

For example, when a bank sells government treasury bills classified in the "Available for Sale" category, the profit is calculated as follows:

Proceeds from Sale

1,150

Less: Carrying Amount (after deducting the fair value adjustment)

10801 — "Government Treasury Bills"

1,000

10889 — "Expenses on Purchase of Securities Available for Sale"

10893 — "Premium on Investments in Securities Available for Sale"

100

10899 — "Allowance for Impairment Losses on Investments in Securities Available for Sale (Contra-Asset)"

16307 — "Accrued Interest on Investments in Securities Available for Sale (Coupons)"

Carrying Amount (after deducting the fair value adjustment) =

1,110

Profit from Sale

The accounting entry to reflect the profit is as follows:

Dr Corresponding Cash Account

1,150

Cr 10801 — "Government Treasury Bills"

1,000

Cr 10889 — "Expenses on Purchase of Securities Available for Sale"

Cr 10893 — "Premium on Investments in Securities Available for Sale"

100

Cr 45803 — "Profit from Sale or Disposal of Securities Available for Sale"

The bank must also perform an accounting entry to reverse the amount previously reflected in fair value adjustments and recorded in the separate capital account.

For example, if the adjustment amount resulted in a total increase in fair value of 200 sum, the following accounting entry must be made:

Dr 30907 — "Unrealized Profits or Losses from Changes in Fair Value of Securities Available for Sale (Asset-Liability)"

200

Cr 10895 — "Change in Fair Value of Investments in Securities Available for Sale"

200

Profit or loss resulting from the sale or derecognition of financial assets classified in the "Held to Maturity" category is calculated as follows:

Proceeds from Sale – Amortized Cost = Profit (Loss)

For example, when a bank sells government treasury bills classified in the "Held to Maturity" category, the profit is calculated as follows:

Proceeds from Sale

1,020

Less: Amortized Cost

15901 — "Government Treasury Bills"

1,000

15991 — "Discount on Securities Held to Maturity"

(20)

15989 — "Expenses on Purchase of Debt Securities Held to Maturity"

15999 — "Allowance for Impairment Losses on Investments in Debt Securities Held to Maturity (Contra-Asset)"

16311 — "Accrued Interest on Investments in Debt Securities Held to Maturity (Coupons)"

Amortized Cost =

990

Profit from Sale

The accounting entry to reflect the profit is as follows:

Dr Corresponding Cash Account

1,020

Dr 15991 — "Discount on Securities Held to Maturity (Contra-Asset)"

Cr 15901 — "Government Treasury Bills"

1,000

Cr 15989 — "Expenses on Purchase of Debt Securities Held to Maturity"

Cr 45805 — "Profit from Sale or Disposal of Securities Held to Maturity"

VII. Reclassification of Financial Assets

§ 1. Transfer of Financial Assets to or from the "Trading Securities" Category

While a financial asset is under the bank's control, banks are prohibited from transferring it to the "Trading Securities" category or from this category to another, except in cases where the initial classification was incorrect.
If a bank later determines that assets classified in the "Trading Securities" category were incorrectly classified, any subsequent reclassifications are treated as error corrections. This situation requires the recalculation of previously issued financial reports.
If a bank classifies a financial asset in the "Trading Securities" category but does not sell it within 12 months, and if this asset falls into categories such as "Investments in Joint Ventures, Joint Operations, and Branch Economic Societies" that should be accounted for differently, the bank must transfer this financial asset from the "Trading Securities" category to the corresponding investment account. This situation is also treated as an error correction and requires the recalculation of previous financial reports.

§ 2. Transfer of Financial Assets from the "Held to Maturity" Category to the "Available for Sale" Category

If a bank determines that, due to changes in its intentions and capabilities, it cannot hold a financial asset classified as "Held to Maturity," it must transfer it to the "Available for Sale" category and revalue it to fair value. The fair value adjustment in the revaluation is reflected in the separate capital account 30907 — "Unrealized Profits or Losses from Changes in Fair Value of Securities Available for Sale (Asset-Liability)."
If a significant amount of held-to-maturity financial assets are sold or reclassified and do not meet any of the conditions specified in paragraph 7, all remaining held-to-maturity financial assets must be transferred to the "Available for Sale" category and revalued to fair value. The fair value adjustment in the revaluation is reflected in the separate capital account 30907 — "Unrealized Profits or Losses from Changes in Fair Value of Securities Available for Sale (Asset-Liability)."
In any case where a significant amount of held-to-maturity financial assets are sold or reclassified and do not meet any of the conditions specified in paragraph 10, all securities purchased subsequently within 24 months must be classified in the "Trading Securities" or "Securities Available for Sale" categories.

§ 3. Transfer of Financial Assets from the "Available for Sale" Category to the "Held to Maturity" Category

Banks may transfer financial assets from the "Available for Sale" category to the "Held to Maturity" category due to changes in their intentions and capabilities, or as specified in paragraph 10 regarding financial assets with specified maturity dates transferred in the previous two financial years.
When transferring a financial asset from the "Available for Sale" category to the "Held to Maturity" category, the fair value of this asset on the date of reclassification is considered its amortized cost.
Any previously recognized unrealized (arising from changes in fair value) profits or losses in capital for financial assets transferred from the "Available for Sale" category to the "Held to Maturity" category must be accounted for as follows:

1) Unrealized profits or losses are amortized over the remaining useful life of these securities using the effective interest method and reflected in the profit and loss statement;

2) Any difference between the new amortized cost and the amount to be amortized is amortized over the remaining useful life using the effective interest method in accordance with Appendix 12.

If financial assets transferred to the "Held to Maturity" category subsequently become impaired, any previously directly recognized profits or losses in capital must be recognized in the profit and loss statement in accordance with Section VIII of this Regulation.

VIII. Impairment of Financial Assets

§ 1. General Characteristics of Impairment of Financial Assets

Banks must assess at each reporting date whether there is objective evidence of impairment of a financial asset or a group of financial assets and determine the need to assess expected credit losses or increase the allowance for impairment losses.
Changes in interest rates affect the fair value of debt securities. However, changes in fair value associated with changes in interest rates do not lead to impairment.
Banks, using the rules established in this section for impairment of financial assets, as well as in accordance with the Regulation on the Classification of Asset Quality in Commercial Banks and the Formation, Use, and Management of Reserves for Potential Losses on Assets (Registry No. 2696, July 14, 2015) and Appendix 13 of this Regulation, assess the amount of expected credit losses. Banks reflect the assessment of expected credit losses equal to the significant loss determined based on the specified procedure.

(P. 58 amended by Resolution No. 29/2 of the Board of the Central Bank of the Republic of Uzbekistan dated October 10, 2015 (Registry No. 1528-1, 20.10.2015) — O'zbekiston Respublikasi Qonun hujjatlari to'plami, 2015 y., 42-son, 543-modda)

§ 2. Held-to-Maturity Financial Assets

If there is objective evidence of impairment of investments in securities held to maturity reflected at amortized cost, this loss is assessed as the difference between the carrying amount of this asset and the present value of expected future cash flows (excluding future losses not yet incurred). This present value is calculated by applying a discount rate equal to the initial effective interest rate (i.e., the real interest rate calculated at initial recognition).
The accounting entry for establishing an allowance for impairment losses on held-to-maturity financial assets is as follows:

Dr 56826 — "Assessment of Expected Losses on Investments in Securities Held to Maturity"

Cr 15999 — "Allowance for Impairment Losses on Investments in Debt Securities Held to Maturity (Contra-Asset)"

§ 3. Securities Available for Sale

When there is objective evidence of impairment of a financial asset classified in the "Available for Sale" category, the cumulative loss related to fair value adjustments and previously reflected directly in capital is derecognized and reflected in the profit and loss statement. The following accounting entry is made:

For reversing the fair value adjustment:

Dr 10895 — "Change in Fair Value of Investments in Securities Available for Sale"

Cr 30907 — "Unrealized Profits or Losses from Changes in Fair Value of Securities Available for Sale (Asset-Liability)"

For establishing an allowance for impairment losses:

Dr 56808 — "Assessment of Expected Losses on Investments in Securities Available for Sale"

Cr 10899 — "Allowance for Impairment Losses on Investments in Securities Available for Sale (Contra-Asset)"

The cumulative loss amount derecognized from capital and recognized in the profit and loss statement is equal to the difference between the asset's carrying amount (after deducting the optional fair value adjustment) and its current fair value.
If the amount of expected losses exceeds the previously recognized negative (loss) fair value adjustment in capital, banks reflect the additional amount of expected losses as follows:

Dr 56808 — "Assessment of Expected Losses on Investments in Securities Available for Sale"

Cr 10899 — "Allowance for Impairment Losses on Investments in Securities Available for Sale (Contra-Asset)"

§ 4. Allowance for Impairment Losses on Trading Securities

An allowance for impairment losses on securities classified in the "Trading Securities" category is established only in rare cases. In any case, as objective evidence of impairment of the financial asset becomes clearer, the current fair value of this security must not reflect this impairment.
The accounting entry for establishing an allowance for impairment losses on securities classified in the "Trading Securities" category is as follows:

Dr 56806 — "Assessment of Expected Losses on Trading Securities"

Cr 10799 — "Allowance for Impairment Losses from Trading Securities (Contra-Asset)"

Appendix 1 to the Regulation on the Accounting of Financial Assets in Commercial Banks

Purpose and Capability of Holding Financial Assets to Maturity

Purpose

A bank is considered to have no firm intention to hold financial assets with specified maturity dates to maturity in the following cases:

1) If the bank intends to hold the financial asset only for an indefinite period;

2) If the bank is ready to sell the asset in response to changes in market interest rates or risks, or changes in the attractive opportunities or profitability levels of alternative investments, or changes in financing terms or sources, or changes in currency risks, except in cases where the bank could not take any reasonable action due to significant events of an extraordinary nature that were not foreseeable and not within the bank's control (see Appendix 3);

3) If the issuer has the right to redeem the financial asset at a price significantly lower than its amortized cost.

Capability

A bank is considered to have no capability to hold financial assets with specified maturity dates to maturity if:

1) The bank does not have the necessary financial resources to hold the investment in these funds until their maturity;

2) The bank's activities are subject to legal or other restrictions that could disrupt its intention to hold these financial assets to maturity.

Appendix 2 to the Regulation on the Accounting of Financial Assets in Commercial Banks

Sale of Securities Held to Maturity "Near Maturity Date" and "When Almost All Principal Debt Has Been Collected"

A bank may classify a financial asset as "Held to Maturity" only if it has a firm intention and capability to hold it to maturity. The sale of held-to-maturity assets before maturity casts doubt on the holding to maturity of all other remaining assets classified as "Held to Maturity." Therefore, all other remaining held-to-maturity financial assets must be transferred to the category of assets classified as "Available for Sale." The application of this rule is exempted in the following two cases of selling held-to-maturity assets:

1) Near the maturity date;

2) After almost all of the principal debt has been collected.

This exception is relevant for cases where the main part of the debt has been collected or the maturity date of the asset is near, as this does not significantly affect its fair value and makes no difference for the bank whether to hold the financial asset or sell it in response to changes in market interest rates. In such cases, the sale does not affect the net profit or loss, and no price changes are expected during the period until maturity. The following basic principles for applying these exceptions are provided below:

Near Maturity Date:

This exception applies in cases where the risk of interest rates is not recognized as a factor forming the price of this security. This can be seen in the following example: if a bank sells a financial asset less than 3 months before maturity, this case generally falls under this exception. This is because the impact of the difference between the interest rate set for an asset with a maturity of less than 3 months and the market rate on fair value is generally lower compared to assets with a maturity of 1 year or more.

Collection of All Debt:

This exception is based on the concept of materiality. If a bank sells an asset after almost 90% or more of the principal debt has been collected, including planned payments or prepayments, this case generally falls under this exception. Such a sale is not considered significant and does not cast doubt on the bank's confidence in holding all other "Held to Maturity" assets to maturity.

Appendix 3 to the Regulation on the Accounting of Financial Assets in Commercial Banks

Sale of "Securities Held to Maturity by the Bank" Due to Significant Events of an Extraordinary Nature Not Foreseeable and Not Within the Bank's Control

The sale of "Securities Held to Maturity by the Bank" due to significant events of an extraordinary nature not foreseeable and not within the bank's control does not cast doubt on the confidence in holding all other securities held to maturity under the bank's control. Examples of such sales include:

1) A significant deterioration in the issuer's creditworthiness. For example, a downgrade in the credit rating assessed by external rating agencies. If, at the time of the rating downgrade, there is evidence confirming a significant deterioration in the issuer's credit capability compared to the initial recognition indicators, it does not cast doubt on the bank's intention to hold other held-to-maturity investments. Similarly, if the bank uses an internal rating in assessing external influences, changes in indicators in this internal rating may help identify issuers with a significant deterioration in credit capability, provided that the bank's methodology for internal rating assessment allows for consistent, reliable, and objective conclusions regarding the issuer's credit capability. If there is evidence confirming the impairment of a financial asset, the deterioration of credit capability is usually considered a significant factor;

2) Changes in tax legislation related to the abolition or significant reduction of tax exemption for part of the interest on securities held to maturity (excluding changes related to changes in the tax rate applied to interest income in tax legislation);

3) The sale and disposal of investments in securities held to maturity by banks (economic entities) resulting from major mergers or major derecognition (e.g., sale of many branches) to support the bank's position in its existing interest and credit risk policies (if major mergers or derecognition events are under the bank's control, changes in the investment portfolio made to support the bank's existing credit risk and credit risk policies should be accepted as a consequence, not as a foreseeable event);

4) The sale of securities held to maturity from investment portfolios resulting from significant changes in requirements established by legislative acts for permission granted to investments or the maximum level of their separate types;

5) A significant increase in normative requirements imposed on the capital of all banks leads to banks reducing the volume of their held-to-maturity investments by selling them;

6) A significant increase in the assessment of risks on investments in securities held to maturity, which is used in calculating regulatory capital taking into account risks.

Appendix 4 to the Regulation on the Accounting of Financial Assets in Commercial Banks

Accounting Entries for the Purchase of Debt Securities

On February 1, the bank purchased a government bond with a nominal value of 1,000,000 sum. This bond was issued on January 1 and matures on December 31. Interest is paid quarterly (to the bondholder) at an annual rate of 14%. The purchase price for the bank is 911,890 sum. The purchase price includes 11,890 sum (1,000,000 x 14% x 31/365) of accrued interest to be received. Expenses related to this purchase operation amount to 10,000 sum.

Below are the accounting entries for the purchase of the bond and discount calculation operations based on the above conditions for three categories of financial assets:

For Trading Securities:

Discount = 1,000,000 – (911,890 – 11,890) = 100,000

Accounting entry for purchase:

Dr 10705 — "State Bonds"

1,000,000

Dr 16305 — "Accrued Interest on Trading Securities"

11,890

Cr 10791 — "Discount on Trading Securities (contra-asset)"

100,000

Cr Bank's representative or client's deposit account

911,890

Purchase costs are reflected through the following accounting entry:

Dr 55110 — "Service and Brokerage Fees Payable for Securities Trading Operations"

10,000

Cr Bank's representative or client's deposit account

10,000

For securities held for sale:

Discount = 1,000,000 – (911,890 – 11,890) = 100,000

Accounting entry for purchase (including purchase costs):

Dr 10805 — "State Bonds"

1,000,000

Dr 16307 — "Accrued Interest on Investments in Securities Held for Sale"

11,890

Dr 10889 — "Costs of Purchasing Securities Held for Sale"

10,000

Cr 10891 — "Discount on Investments in Securities Held for Sale (contra-asset)"

100,000

Cr Bank's representative or client's deposit account

921,890

For securities held to maturity:

Discount = 1,000,000 – (911,890 – 11,890) = 100,000

Accounting entry for purchase (including purchase costs):

Dr 15905 — "State Bonds"

1,000,000

Dr 16311 — "Accrued Interest on Investments in Debt Securities Held to Maturity"

11,890

Dr 15989 — "Costs of Purchasing Debt Securities Held to Maturity"

10,000

Cr 15991 — "Discount on Securities Held to Maturity"

100,000

Cr Bank's representative or client's deposit account

921,890

Appendix 5 to the Regulation on Accounting for Financial Assets in Commercial Banks

Accounting Entries for Purchasing Equity Securities

The bank is purchasing 100 shares of "A" Joint Stock Company at 10,000 sum per share. The costs associated with this operation amount to 20,000 sum.

Below, accounting entries are presented separately for each category of financial assets:

For Trading Securities:

Accounting entry for purchase:

Dr 10719 — "Equity Securities of Enterprises"

1,000,000

Cr Bank's representative or client's deposit account

1,000,000

Entry to reflect costs of the operation:

Dr 55110 — "Service and Brokerage Fees Payable for Securities Trading Operations"

20,000

Cr Bank's representative or client's deposit account

20,000

For Securities Held for Sale:

Accounting entry for purchase:

Dr 10821 — "Equity Securities of Enterprises"

1,000,000

Cr Bank's representative or client's deposit account

1,000,000

Entry to reflect costs of the operation:

Dr 55110 — "Service and Brokerage Fees Payable for Securities Trading Operations"

20,000

Cr Bank's representative or client's deposit account

20,000

For Debt Securities Held to Maturity:

Equity securities cannot be classified in the "held to maturity" category because they do not have a fixed maturity date.

Appendix 6 to the Regulation on Accounting for Financial Assets in Commercial Banks

Accounting for Debt Securities Held for Trading

7) On December 1, 2003, the bank purchased 12-month state treasury bills with a nominal value of 100,000,000 for 93,000,000. The maturity date is November 30, 2004. These securities were subsequently purchased for resale purposes and are therefore classified in the "held for trading" category. Accounting for held-for-trading securities is reflected in the account group 10700 — "Trading Securities". (Regardless of how much the securities are held for trading, costs associated with their purchase are charged to account 55110 — "Service and Brokerage Fees Payable for Securities Trading Operations", and thus are not considered in this example). The purchase operation is reflected as follows:

Dr 10701 — "State Treasury Bills"(*)

100,000,000

Cr 10791 — "Discount on Trading Securities"

7,000,000

Cr Bank's representative or client's deposit account

93,000,000

(*) In analytical accounting, the bank classifies these treasury bills in the "held for trading" category to distinguish them from other treasury bills not held for trading, because the bank has decided to classify treasury bills not held for trading in the "trading securities" category for the purpose of establishing accounting.

8) On December 31, 2003, the bank revalued the securities at fair value. As of December 31, 2003, the fair value of these treasury bills amounted to 92,500,000 sum. To determine the adjustment amount in revaluation, it is necessary to compare the fair value with the carrying value, if necessary:

(a) First, the balance sheet value must be recalculated by amortizing the discount using the effective interest rate method for the reporting period. (See the discount amortization schedule using the Excel IRR function). The accounting entry for discount amortization is carried out as follows:

Dr 10791 — "Discount on Trading Securities"

564,127

Cr 40601 — "Interest Income on State Treasury Bills"

564,127

(b) Now, to determine the required adjustment amount, it is necessary to equate the balance sheet value to the fair value.

The balance sheet value of the securities as of December 31, 2003 amounted to 93,564,127 sum. (100,000,000 – 6,435,873 = 93,564,127).

As a result, the loss amounted to:

92,500,000 – 93,564,127 = (1,064,127)

The fair value adjustment is reflected through the following accounting entry:

Dr 55610 — "Losses Resulting from Changes in Fair Value of Securities Held for Trading"

1,064,127

Cr 10795 — "Changes in Fair Value of Trading Securities"

1,064,127

9) On January 1, 2004, the bank sold these treasury bills for 92,600,000 sum. The sale operation is reflected as follows:

Dr Bank's representative or client's deposit account

92,600,000

Dr 10795 — "Changes in Fair Value of Trading Securities"

1,064,127

Dr 10791 — "Discount on Trading Securities"

6,435,873

Cr 10701 — "State Treasury Bills"

100,000,000

Cr 45609 — "Profit Resulting from Changes in Fair Value of Securities Held for Trading"

100,000

This example reflects accounting for a single security. If the bank has a whole portfolio of securities held for trading, it is generally not accepted to adjust the balance in the fair value adjustment account after the sale of each individual security. Instead, the fair value adjustment method changes in accounting for the portfolio, whereby the entire portfolio is adjusted to fair value. Regardless of which of these methods is applied voluntarily, the impact on the income and expense report is the same and reflects the sum of the net income (loss) from derecognition and the sum of fair value adjustments during the reporting period.

Treasury Bills — Calculation of the Real Interest Rate of State Treasury Bills Using an Excel Spreadsheet

Procedure: Use the "IRR" formula in Excel. This formula indicates the variable profitability amount (level) (for example, for cash flows). To find this formula, go to the main menu of Excel, "Insert (Вставка)", "Function (Функция)...", "Financial (Финансовые)", "IRR". This formula asks for the range of cash flows (cells C2:C14). The formula asks for "Guess (Предположение)" to limit the number of necessary search processes (cycles) for the real interest rate. Usually, entering 1% into the "Guess (Предположение)" field is sufficient.

A B C D
1 Date Cash flows Notes
2 01.12.x3 -93,000,000 Initial cash outflow entered as a negative magnitude 3 31.12.x3 Leave the cell empty, you need to enter "zero" 4 31.01.x4 0 5 28.02.x4 0 6 31.03.x4 0 7 30.04.x4 0 8 31.05.x4 0 9 30.06.x4 0 10 31.07.x4 0 11 31.08.x4 0 12 30.09.x4 0 13 31.10.x4 0 14 30.11.x4 100,000,000 Redemption at maturity 15 16 0.6065881% Monthly real interest amount 17 =IRR(C2:C14,1%) 18 19 Note: The annual real interest rate amount is 7.279% (0.6065881 x 12) compared to the established annual interest rate of 14%. The real interest rate amount is lower due to the change in the time value of money. No interest comes until the maturity date. The longer the maturity date, the lower the real interest rate amount. 20 21 22 Amortization Schedule of State Treasury Bill Discount

After calculating the real interest rate, it is possible to prepare the discount amortization schedule:

Date Nominal Discount Amortization (*) Remaining Discount Net Balance Sheet Value 01.12.x3 – Purchase 100,000,000 7,000,000 93,000,000 31.12.x3 100,000,000 564,127 6,435,873 93,564,127 31.01.x4 100,000,000 567,549 5,868,324 94,131,676 28.02.x4 100,000,000 570,992 5,297,332 94,702,668 31.03.x4 100,000,000 574,455 4,722,877 95,277,123 30.04.x4 100,000,000 577,940 4,144,937 95,855,063 31.05.x4 100,000,000 581,445 3,563,492 96,436,508 30.06.x4 100,000,000 584,972 2,978,520 97,021,480 31.07.x4 100,000,000 588,521 2,389,999 97,610,001 31.08.x4 100,000,000 592,091 1,797,908 98,202,092 30.09.x4 100,000,000 595,682 1,202,226 98,797,774 31.10.x4 100,000,000 599,296 602,930 99,397,070 30.11.x4 100,000,000 602,930 0 100,000,000 30.11.x4 – Redemption 0 0 Total 7,000,000

(*) Discount Amortization = Net Balance Sheet Value (previous row) x Monthly Real Interest Amount (0.6065881%)

Appendix 7 to the Regulation on Accounting for Financial Assets in Commercial Banks

Accounting for Available-for-Sale Bonds with Interest Coupons

On March 1, 2003, the bank purchased the Central Bank of the Republic of Uzbekistan (CBRU) bonds issued on January 1, 2003, with a nominal value of 1,000,000 sum and an annual interest rate of 12%, with interest coupons. Interest is paid to the bondholder quarterly. At the time of purchase, interest had accrued for 2 months on these bonds [1,000,000 x 12% x (59 days / 365) = 19,397]. The total amount paid at purchase was 979,397 (1,000,000 nominal plus 19,397 accrued interest for 2 months purchased minus 40,000 discount reflecting the current market interest amount). The maturity date is December 31, 2003. The bank plans to hold these bonds until maturity, but if an opportunity arises to invest funds in other financial instruments yielding higher income, it may sell them; therefore, the bank classifies these bonds in the "available for sale" category.

(In this example, purchase costs are not considered. See Appendix 8 for the procedure for amortizing purchase costs).

Purchase is accounted for as follows:

Dr 10809 — "Bonds and Other Debt Securities of the Republic of Uzbekistan Central Bank"

1,000,000

Dr 16307 — "Accrued Interest on Investments in Securities Held for Sale"

19,397

Cr 10891 — "Discount on Investments in Securities Held for Sale (contra-asset)"

40,000

Cr Bank's representative or client's deposit account

979,397

Accounting Entries for Discount Amortization, Accrual and Receipt of Interest

March 31, 2003

The discount is amortized using the effective interest rate method, and interest payable under the contract is accrued monthly.

Discount amortization is reflected through the following accounting entry (see the attached amortization schedule and calculation):

Dr 10891 — "Discount on Investments in Securities Held for Sale (contra-asset)"

3,739

Cr 40709 — "Interest Income on Bonds and Other Debt Securities of the CBRU"

3,739

Accrual of interest payable under the contract as of March 31, 2003 is reflected through the following accounting entry:

Dr 16307 — "Accrued Interest on Investments in Securities Held for Sale"

10,192

Cr 40709 — "Interest Income on Bonds and Other Debt Securities of the CBRU"

10,192

April 1, 2003.

Receipt of interest payments accrued under the contract (19,397 accrued interest purchased plus 10,192 interest accrued for March):

Dr — Bank's representative or client's deposit account

29,589

Cr 16307 — "Accrued Interest on Investments in Securities Held for Sale"

29,589

April 30, 2003.

Discount amortization:

Dr 10891 — "Discount on Investments in Securities Held for Sale (contra-asset)"

3,846

Cr 40709 — "Interest Income on Bonds and Other Debt Securities of the CBRU"

3,846

Accrual of interest under the contract:

Dr 16307 — "Accrued Interest on Investments in Securities Held for Sale"

9,862

Cr 40709 — "Interest Income on Bonds and Other Debt Securities of the CBRU"

9,862

Accounting Entries for Adjustments in Revaluation to Fair Value of Securities

The bank performs monthly revaluation of securities held for sale to prepare reliable reports for its management. Revaluation is carried out at the end of each month so that changes in fair value are appropriately reflected in the balance sheet report. On March 31, 2003, the fair value of the Central Bank bond was 992,000 sum, and the balance sheet value (including accrued interest) was 963,739 sum (table attached). The accounting entry to reflect the revaluation adjustment is as follows:

March 31, 2003.

Dr 10895 — "Changes in Fair Value of Investments in Securities Held for Sale"

28,261

Cr 30907 — "Unrealized Profits or Losses Resulting from Changes in Fair Value of Securities Held for Sale (Asset-Liability)"

28,261

As of April 30, 2003, the balance sheet value (including accrued interest) was 1,005,708 (977,447 from the table in the appendix + 28,261 fair value adjustment amount), and the fair value was 995,057 (note, the fair value includes interest accrued for one month, because if the bond were sold, this interest would pass to the bondholder). The decrease in the fair value of the bonds is reflected through the following accounting entry:

April 30, 2003.

Dr 30907 — "Unrealized Profits or Losses Resulting from Changes in Fair Value of Securities Held for Sale (Asset-Liability)"

10,651

Cr 10895 — "Changes in Fair Value of Investments in Securities Held for Sale"

10,651

Sale of Bonds

On May 17, 2003, the bank sold the bonds for 990,000 sum, including accrued interest on them. Before this, it was necessary to amortize the discount and additionally accrue interest on these bonds until the time of sale.

May 17, 2003.

Discount amortization (17/31 x 3,711):

Dr 10891 — "Discount on Investments in Securities Held for Sale (contra-asset)"

2,035

Cr 40709 — "Interest Income on Bonds and Other Debt Securities of the CBRU"

2,035

Accrual of interest (17/31 x 10,192):

Dr 16307 — "Accrued Interest on Investments in Securities Held for Sale"

5,589

Cr 40709 — "Interest Income on Bonds and Other Debt Securities of the CBRU"

5,589

Sale of bonds is reflected as follows:

Dr Relevant cash funds account (a)

1,005,451

Dr 10891 — "Discount on Investments in Securities Held for Sale (contra-asset)" (b)

30,380

Dr 30907 — "Unrealized Profits or Losses Resulting from Changes in Fair Value of Securities Held for Sale (Asset-Liability)" (c)

17,610

Cr 10809 — "Bonds and Other Debt Securities of the Republic of Uzbekistan Central Bank"

1,000,000

Cr 16307 — "Accrued Interest on Investments in Securities Held for Sale" (d)

15,451

Cr 10895 — "Changes in Fair Value of Investments in Securities Held for Sale" (c)

17,610

Cr 45803 — "Profit from Sale or Disposal of Securities Held for Sale"

20,380

(a) Proceeds from sale = 990,000 + 15,451 (accrued interest sold) (b) Discount balance = 32,415 (amount in the amortization table as of April 30) minus amortization accrued for May 17 (2,035).
(c) The cumulative fair value increased by 28,261 (reflected on March 31) and decreased by 10,651 (reflected on April 30) = net positive adjustment value of 17,610.
(d) Accrued interest to be received = 9,862 (April) + 5,589 (May) = 15,451.

Calculation of the Real Interest Rate of Bonds of the Central Bank of the Republic of Uzbekistan Using an Excel Spreadsheet

Procedure: Use the "IRR" formula in Excel. This formula indicates the variable profitability amount (level) (for example, for cash flows). To find this formula, go to the main menu of Excel, "Insert (Вставка)", "Function (Функция)...", "Financial (Финансовые)", "IRR". This formula asks for the range of cash flows (cells C2:C12). The formula asks for "Guess (Предположение)" to limit the number of necessary search processes (cycles) for the real interest rate. Usually, entering 1% into the "Guess (Предположение)" field is sufficient.

A B C D
1 Date Cash flow Explanation
2 01.03.x3 -979,397 Initial cash outflow entered as a negative magnitude 3 31.03.x3 29,589 Payments received for interest 4 30.04.x3 0 Leave the cell empty, you need to enter "zero" 5 31.05.x3 0 6 30.06.x3 29,917 Payments received for interest 7 31.07.x3 0 8 31.08.x3 0 9 30.09.x3 30,247 Payments received for interest 10 31.10.x3 0 11 31.10.x3 0 12 31.12.x3 1,030,247 Payments received for interest and redemption payments at maturity 13 14 1.422357% Annual real interest amount 15 =IRR(C2:C12, 1%) 16 17 Note: The annual real interest amount is 7.068% (1.422357 x 12) compared to the established annual interest amount of 12%. The real interest amount is higher because the bond is purchased at a discount.

Amortization Schedule of Discount on CBRU Bonds

After calculating the real interest rate, it is possible to prepare the amortization schedule. The "Net Balance" column reflects the accrued interest including interest, because interest is paid to the bondholder. Therefore, it is necessary to take into account the value of accrued interest to be received for the purpose of fair value adjustment.

(Summary amounts are rounded)

Date Nominal Value Accrued Interest to be Received Balance in Account ... from which annual interest income Discount Balance Net Balance Sheet Value (b) (a) Coupons Accrued Discount Amortization (b) 1.03.x3 – Purchased 1,000,000 19,397 40,000 979,397 31.03.x3 1,000,000 0 10,192 3,739 36,261 963,739 30.04.x3 1,000,000 9,862 9,862 3,846 32,415 977,447 31.05.x3 1,000,000 20,054 10,192 3,711 28,704 991,350 30.06.x3 1,000,000 0 9,863 4,238 24,466 975,534 31.07.x3 1,000,000 10,192 10,192 3,684 20,782 989,410 31.08.x3 1,000,000 20,384 10,192 3,881 16,901 1,003,483 30.09.x3 1,000,000 0 9,863 4,410 12,491 987,509 31.10.x3 1,000,000 10,192 10,192 3,854 8,637 1,001,555 30.11.x3 1,000,000 20,055 9,863 4,383 4,254 1,015,801 31.12.x3 1,000,000 0 10,192 4,254 0 1,000,000 31.12.x3 Redeemed 0 0 0 0 0 0 Total 100,603 40,000

10) It is assumed that interest on coupons will be received by the last day of each quarter.
11) Discount Amortization = Net Balance Sheet Value (previous row) x Monthly Real Interest Rate (1.4223570%) minus interest accrued on coupons for that month).
12) Net Balance Sheet Value must include accrued interest to be received, but does not reflect adjustment amounts that may have been made previously as a result of changes in fair value.

Appendix 8 to the Regulation on Accounting for Financial Assets in Commercial Banks

Amortization of Costs Related to Purchase

On January 1, 2003, the bank purchases state bonds with a term of 12 months, with a maturity date of June 30, 2003 (6 months remaining until maturity).

Nominal amount 1,000,000

Purchase costs 18,000
– Discount (50,000)
= 968,000

Interest payments on bonds at an annual rate of 12% are made at the end of each month.

Interest income must be calculated using the effective interest amount method. Discount amortization increases interest income, and amortization of purchase costs decreases interest income. The calculations in this example are applicable to bonds classified in the "held for trading" or "held to maturity" categories. Purchase costs for bonds classified in the "trading securities" category are immediately charged to bank expenses. The calculation of the real interest amount using Excel is shown in the table in the appendix.

At the same time, schedules for discount amortization and purchase cost amortization are attached. Purchase cost amortization is shown using the straight-line method to simplify accounting. In substance, this method takes into account the total net amortization calculated using the effective interest amount and splits it into two sums for the sake of simplifying accounting; these sums are fully amortized when the bond's maturity date arrives. This situation does not cast doubt on the reliability of the effective interest rate method, because the total monthly interest income equals the carrying amount of the bonds multiplied by the real interest rate.

For example, the total interest income for January consists of the following (see the attached amortization schedule):

Contractual Interest
10,192
Minus Purchase Cost Amortization
(3,000)
Plus Discount Amortization
7,854
Total Interest Income for January =
15,046

The total interest income amount presented above can also be calculated as follows:

Carrying Amount at Beginning of Month
968,000 x Monthly Real Interest Rate x 1.5543787% Interest Income Calculated for January Using the Effective Interest Rate Method 15,046

If it is assumed that the bonds are classified in the "held-to-maturity" category, then the interest income for January is reflected through the following accounting entry:

Discount Amortization is reflected as follows:
Dr 15991 — "Discount on Held-to-Maturity Securities (Contra-Asset)" 7,854 Cr 44805 — "Interest Income on Investments in Government Bonds" 7,854

To reflect the amortization of purchase costs, the following accounting entry is made:
Dr 44805 — "Interest Income on Investments in Government Bonds" 3,000 Cr 15989 — "Purchase Costs of Held-to-Maturity Debt Securities" 3,000

To reflect contractual interest (assuming interest is received at the end of the month), the following accounting entry is made:
Dr Bank’s or Client’s Deposit Account
10,192
Cr 44805 — "Interest Income on Investments in Government Bonds" 10,192

Calculation of the real interest rate on government bonds using an Excel table

Procedure: Use the "IRR" formula in Excel. This formula represents the variable yield amount (level) (for example, according to cash flows). To find this formula, go to the main menu of Excel, select "Insert", "Function"..., "Financial", "IRR". This formula requests a range of cash flows (cells C2:C18). The formula requests a "Guess" to limit the number of necessary search cycles (iterations) for the real interest rate. Usually, entering 1% into the "Guess" field is sufficient.

A B C D
1 Date Cash Flows Explanation
2 01.01.x3 -968,000 Initial cash outflow entered as negative value (a) 3 31.01.x3 10,192 Payments received for interest 4 28.02.x3 9,205 Payments received for interest 5 31.03.x3 10,192 Payments received for interest 6 30.04.x3 9,863 Payments received for interest 7 31.05.x3 10,192 Payments received for interest 8 30.06.x3 1,009,863 Payments received for interest and redemption at maturity 9 10 1.5543787% Monthly real interest amount (b) 11 =IRR(C2:C8, 1%)

3) Initial cash flow = nominal sum of 1,000,000 som, minus a discount of 50,000 som, plus
The annual real interest amount relative to the established annual rate of 12% constitutes 18.653% (1.554787 x 12). Regardless of how much net discount the bonds were purchased with (50,000 – 18,000 = 32,000 net discount), the real interest amount is higher than the established interest amount. (If the IRR calculation had been performed without considering purchase costs, the annual real interest amount would have constituted 22.57%.)

Amortization Schedule for Government Bonds

(Amounts are rounded)

Date Monthly Interest Income [Negative amount (debit interest income account) shown in parentheses] Net Discount Balance (d) Remaining Value (e) Purchase Cost Amortization (a) Discount Amortization (b) Contractual Interest Received (c) Total Recognized Monthly Interest Income (g)

01.01.x3 – Purchase (3,000) 32,000 968,000
31.01.x3 (3,000) 7,854 10,192 15,046 27,146 972,854 28.02.x3 (3,000) 8,917 9,205 15,122 21,229 978,771 31.03.x3 (3,000) 8,022 10,192 15,214 16,207 983,793 30.04.x3 (3,000) 8,429 9,863 15,292 10,778 989,222 31.05.x3 (3,000) 8,184 10,192 15,376 5,594 994,406 30.06.x3 (3,000) 8,594 9,863 15,457 0 1,000,000 Redemption on 30.06.x3 (3,000) 0 0 Total (18,000) 50,000 59,507 91,507

3) For simplicity, purchase costs are amortized using the straight-line method. Total monthly income is reflected using the effective interest rate method.
4) Discount amortization (previous row's net carrying value x monthly real interest amount) plus 3,000 som, etc., is calculated.
5) It is assumed that contractual interest payments are received on the last day of each month.
6) Total = (a) + (b) + (c)
7) Net Discount = previous balance + (a) – (b). Note that "net discount" reflects the balance amounts in accounts 15991 (discount) and 15989 (purchase costs). For financial reporting, these two accounts do not reflect the difference between the money spent on acquisition and the nominal sum of the security, but rather the net value.
8) Carrying Value = 1,000,000 som nominal sum – (d). This carrying value equals the value obtained by subtracting balances:
Account 15905 (nominal sum)

Account 15989 (purchase costs)
– Account 15991 (discount)

Regulation on the Procedure for Accounting of Financial Assets in Commercial Banks

APPENDIX 9

Assessment of Risks and Rewards Associated with Establishing Control and Ownership over Given Assets

Risks and Rewards
Risks and rewards are assessed by comparing the bank's exposure to external factors before and after transferring the given asset, taking into account the change in the sum and timing distribution of net cash flows related to the given asset.

If the result of transferring this asset is such that the risk borne by the bank regarding changes in the present value of future net cash flows related to this financial asset remains unchanged, then the bank is considered to have retained all risks and rewards associated with ownership of the financial asset (for example, if the bank sold the financial asset under a single condition, i.e., the right to repurchase at a specified price or with creditor income added to the purchase price).

If such risk changes regarding the overall final changes in the present value of future net cash flows related to such a financial asset are not significant, then the bank is considered to have transferred all risks and rewards associated with ownership of the financial asset (for example, if the bank sold the financial asset under a single condition, i.e., the right to repurchase at fair value, or if the bank fully transfers all proportional shares of all cash flows in a large financial asset where it participated partially in lending, meeting the conditions of clause 36 of this Regulation).

Often, it becomes clear that all risks and rewards associated with ownership of the financial asset by the bank have either been transferred or retained, in which case there is no need to perform calculations.

In other cases, it is necessary to verify and calculate the bank's change in exposure to risks regarding the present value of future net cash flows before and after transferring the asset. Calculations and comparisons are carried out using the current market interest rate as the discount rate. All possible significant changes in net cash flows are reviewed along with major probable outcomes.

Control
The bank retaining control over the transferred asset depends on the transferee's ability to sell this asset. If the transferee has a real opportunity to sell this asset entirely to any other independent third party, and can do so unilaterally and without additional restrictions relative to the transfer of this asset, then the bank loses the authority to control this asset. In all other cases, the bank retains control.

Regulation on the Procedure for Accounting of Financial Assets in Commercial Banks

APPENDIX 10

Basic Rules for Transferring Financial Assets Leading to the Emergence of a New Asset or Liability

If the bank transfers a financial asset under the requirements of a category that requires full derecognition and retaining the right to service this asset for payment (reward), then the bank recognizes an asset or liability for servicing under this contract. If the compensation to be received is insufficient to provide adequate compensation to the bank for servicing, then this contractual obligation is recognized at its fair value. If the compensation to be received is sufficient to provide adequate compensation to the bank for servicing, then the amount of this contractual right is equal to the sum determined based on the allocated share of the remaining value of the acquired financial asset in accordance with paragraph 3 below.
If the transfer of the asset results in the full derecognition of the financial asset, then as a result of this, the bank acquires a new financial asset, assumes a financial liability, or incurs servicing obligations, but the bank recognizes them at their fair values.
If the asset being transferred is part of some large financial asset and full derecognition of this part is required, then the previous carrying value of the large asset continues to be allocated between the parts to be continued and derecognized based on their relative fair values at the transfer date (see the example provided below). The difference in the middle, i.e.:
1) the carrying value of the derecognized part;
2) the difference between the sum of the following magnitudes:
a) the payment received for the derecognized part (along with any voluntarily acquired new asset, less any voluntarily assumed new liability); b) the voluntary accumulated (cumulative) profit or loss directly recognized in capital attributable to the derecognized part. is recognized in the statement of profit or loss. The sums of voluntary accumulated (cumulative) profit or loss recognized in capital are allocated between the parts to be continued and derecognized based on their relative fair values (see the example provided below).

Example
Bank "A" purchases bonds yielding 11% with interest coupons at a market interest rate equal to the purchase date. Later, the bank sells the total principal amount of these bonds to a third party. According to the terms of the sale agreement, the third party purchases 80% of the bonds with a 6% yield, while providing a guarantee to Bank "A" for receiving 6% yield. Bank "A" retains the remaining 20% of the bonds and an additional 5% yield on the bonds sold to the third party. The remaining share of Bank "A" in these bonds serves as collateral security to cover losses related to the 80% share sold to the third party. This operation meets the derecognition criteria, and Bank "A" accounts for this operation as held for sale.

Question: How much of the financial asset did the bank transfer and how much did it retain? The carrying value of this asset should be allocated between the retained and sold parts based on their relative fair values at the sale date. Profit or loss should be recognized based on the proceeds from the sold part. In such a case, how should the bank allocate the carrying value of this asset?

In this example, the fair value of the sold part of the bonds is paid by the third party and constitutes 80% of the bonds. There is no demand in the market for the remaining part of the bonds held by the bank, nor has the bank sold them previously. Also, there are no comparable market quotations for the bonds to be sold. Consequently, there are no opportunities to assess the fair value of these bonds.

Solution: Bank "A" evaluates the future cash flows of the bonds under consideration based on the payments due to them under the contract and deducts from these expected cash flows the amounts of expected impairment and potential losses. Then, it discounts these cash flows at the market interest rate, taking into account appropriate adjustments for expected risks.

Let us assume that under this method, the fair value of the retained share is equal to 25% of the principal amount. Then, the amount attributable to the sold component is calculated as follows:
80% / (80% + 25%) = 76.19% (this forms the derecognized asset amount).
The proceeds from the sale are calculated as follows:
80% of Principal – 76.19% of Principal = 3.81% of Principal

Regulation on the Procedure for Accounting of Financial Assets in Commercial Banks

APPENDIX 11

Transfer of Financial Assets Where Control and Participation in Ownership Remain

If the bank does not transfer or retain all risks and rewards related to the transferred assets in general, and retains control over the transferred assets, then the bank continues to recognize the asset to the extent of its participation in ownership. The degree of the bank's participation in the transferred assets depends on the level of confirmation of the risk of change in the value of the transferred assets.

Examples:
1) If the bank's participation in ownership is in the form of a guarantee for the transferred assets, then the degree of the bank's participatory share is equal to the lesser of two magnitudes: (a) the asset amount or (b) the maximum guarantee amount requested for repayment from the bank.
2) If the bank's participation in ownership is in the form of a written option or a purchased option (or similar and otherwise) on the transferred asset, then the degree of the bank's participatory share in the transferred asset is equal to the amount of the transferred asset that the bank can repurchase. Sometimes, in the case of a written option to sell an asset evaluated at fair value, the degree of the bank's participatory share is limited by the lesser of two magnitudes: the fair value of the transferred asset or the price of the used option.
3) If the bank's participatory share in ownership is accepted in the form of a cash settlement or an option with matching terms on the transferred asset, then the bank's participatory degree is evaluated similarly to the non-cash option coverage established above.

Recognition of Related Liabilities:
If the bank continues to recognize within the scope of its participatory share in ownership, then the bank also recognizes the related liability. The transferred asset and the related liability are evaluated such that the rights and obligations retained by the bank are also reflected. Related liabilities are evaluated such that the net carrying value of the transferred asset and the related liability:
1) if the transferred asset is accounted for at amortized cost, should be the amortized cost of the rights and obligations retained by the bank;
2) if the transferred asset is accounted for at fair value, should be equal to the fair value of the rights and obligations retained by the bank in separate valuation.
The bank continues to recognize all income arising from the transferred asset within the scope of its participation in ownership and all expenses arising from the related liability.

For subsequent evaluation purposes, the recognized changes in the fair value of the transferred asset and the related liability are accounted for separately and not offset (i.e., they are not shown net against each other in the balance sheet report). If the bank's participatory share in ownership relates only to a part of the financial asset, then the bank allocates the previous remaining value of the financial asset among such parts, i.e., between the parts to be continued and those not recognized, based on their relative fair values at the transfer date (see Appendix 10 of this Regulation).

Regulation on the Procedure for Accounting of Financial Assets in Commercial Banks

APPENDIX 12

Accounting for Transfer of Assets from "Held-for-Sale" Category to "Held-to-Maturity" Category

Asset with Established Maturity
The following balances exist in accounts related to treasury bills classified in the "held-for-sale" securities category under the bank's management:

Account Description Balance in Account
Debit Credit
10801 — "Government Treasury Bills" (held-for-sale) 1,000,000 10893 — "Premium on Investments in Held-for-Sale Securities" 18,500 10895 — "Change in Fair Value of Investments in Held-for-Sale Securities" 25,000 30907 — "Unappropriated Profit or Loss Resulting from Change in Fair Value of Held-for-Sale Securities (Asset-Liability)" 25,000

The bank decided to transfer these treasury bills to the "held-to-maturity" category. Before reflecting this reclassification, the fair value adjustment of securities in the "held-for-sale" category must be performed. Let us assume that this adjustment was performed and reflected in the accounts mentioned above. Then, in turn, the fair value of the treasury bill at the date of transfer to another category constitutes 993,500 som (1,000,000 + 18,500 - 25,000).

To reflect the reclassification, the following accounting entry is made:
Dr 15901 — Government Treasury Bills (Held-to-Maturity) 1,000,000 Dr 10895 — "Change in Fair Value of Investments in Held-for-Sale Securities" 25,000 Cr 10801 — "Government Treasury Bills" (Held-for-Sale) 1,000,000 Cr 10893 — "Premium on Investments in Held-for-Sale Securities" 18,500 Cr 15991 — "Discount on Held-to-Maturity Securities (Contra-Asset)" 6,500

The new amortized cost of the held-to-maturity treasury bill constitutes 1,000,000 – 6,500 = 993,500 som. The discount amount of 6,500 som will be amortized over the remaining maturity period of this bill by adjusting income (crediting interest income) using the effective interest method.

The debit balance in account 30907 — "Unappropriated Profit or Loss Resulting from Change in Fair Value of Held-for-Sale Securities (Asset-Liability)" is not cleared. This balance amount will be amortized over the remaining maturity period of this bill by adjusting income (debiting interest income) using the effective interest method.

Regulation on the Procedure for Accounting of Financial Assets in Commercial Banks

APPENDIX 13

Impairment of Financial Assets

Banks must comply with the requirements established in the Regulation on Classification of Asset Quality in Commercial Banks and Formation of Reserves for Covering Potential Losses on Assets and Their Use (registry number 2696, July 14, 2015). This appendix generalizes the methodology for assessing impairment of financial assets in accordance with IPSAS. Although there may be slight differences between the methodologies used in these documents, the basic principles in both documents are the same. When evaluated based on both methodologies, the sum of losses should not differ significantly, and banks should reflect large loss amounts. (The first paragraph of Appendix 13 was edited by Resolution No. 29/2 dated October 10, 2015 of the Board of the Central Bank of the Republic of Uzbekistan (registry number 1528-1, 20.10.2015) — UR Laws, 2015, No. 42, Art. 543)

The term "impairment loss" is used in IPSAS, which corresponds to the term "expected credit losses" in accordance with this Regulation.

According to IPSAS, a financial asset or group of financial assets is considered impaired and this situation leads to the emergence of losses when there is objective evidence indicating that one or more events occurred after initial recognition that have a negative impact on the estimated future cash flows of this financial asset or group of financial assets, and this impact can be reliably estimated.

It may be impossible to identify individual, single events leading to impairment. Impairment is most likely to arise due to several events having a general impact. Expected losses resulting from future events are not recognized.

The following objective evidence observed by the bank and based on available data confirming the impairment of a financial asset or group of financial assets serves as events leading to expected credit losses:
1) Significant financial difficulties experienced by the issuer or the person who incurred the obligation;
2) Breach of contract, for example, failure or delay in making payments on principal or interest;
3) Concession granted by the creditor to the debtor experiencing financial difficulties due to economic or legal reasons, which would not otherwise be considered;
4) Emergence of probabilities of bankruptcy or other financial restructuring of the debtor;
5) Closure of the active market for this financial asset due to financial difficulties;

6) The observed indicators indicate a reduction in the estimated future cash flows of the group of financial assets from the initial recognition of the financial asset, even if this reduction cannot be identified with respect to individual financial assets in the group, provided that:

a) There is a deterioration in the payment capacity of the debtors in this group (for example, an increase in the amount of delayed payments or the number of debtors with expired credit card limits, and the payment of monthly minimum amounts);

b) National or local economic conditions related to the non-fulfillment of obligations on the assets in this group (for example, an increase in the number of unemployed in the geographic environment where the debtor is located, a decrease in the value of mortgaged property in the relevant region, a decrease in oil prices for loans (and similar assets) granted to oil extraction companies, or the difficult situation of debtors in this group as a result of adverse changes in the industry).

The closure of an active market that freely affects the free sale of the economic entity's financial instruments cannot serve as evidence of the impairment of these financial instruments. A decrease in the creditworthiness rating of the economic entity cannot serve as evidence of self-impairment, even if the impairment information is considered together with other existing information as impairment information. If the fair value of a financial asset is less than its actual value or amortized cost, it cannot serve as any evidence of its impairment (for example, a decrease in the fair value of investments in debt instruments (instruments) as a result of an increase in reliable (safe) interest rates).

In addition to the above, information about significant changes that have an adverse effect when the issuer carries out its activities under technological, market, economic, or legal conditions may also serve as objective evidence of impairment of investments in equity instruments, indicating that investments in debt instruments may not be recovered. A significant and prolonged decrease in the fair value of investments in equity instruments, i.e., being less than its actual value, may also serve as objective evidence of impairment.

In some cases, the observable data required to estimate the amount of loss from impairment of a financial asset may be limited or may not fully correspond to current obligations. For example, this may occur when the debtor (borrower) falls into a difficult financial situation and there is very little statistical information about similar debtors (analogous borrowers). In such cases, the bank must use its professional judgment to estimate the amount of loss from impairment. Of course, the bank must use its professional judgment to adjust the observed data on the group of financial assets to current conditions. The conscious use of expected estimates is an integral part of the financial reporting preparation process and in no way undermines its reliability. (Compilation of Legislation of the Republic of Uzbekistan, 2005, No. 47-48, Article 363; 2015, No. 42, Article 543)

Lineage: Superseded

Timeline