Resolution of the Board of the Central Bank of the Republic of Uzbekistan No. 24/8 on Approving the Regulation on Commercial Banks Accounting for Investments in Subsidiary Enterprises

Resolution of the Board of the Central Bank of the Republic of Uzbekistan, registered on 19.11.2004, reg. number 1424

Date of Entry into Force

29.11.2004

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11.11.2021

25.11.2010

29.11.2004

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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:

Finances / Banks and other credit institutions. Credits;
Finances / Accounting]

Resolution

BOARD OF THE CENTRAL BANK OF THE REPUBLIC OF UZBEKISTAN

ON APPROVING THE REGULATION ON THE CONDUCT OF ACCOUNTING BY COMMERCIAL BANKS FOR INVESTMENTS IN SUBSIDIARY ENTERPRISES

[Registered by the Ministry of Justice of the Republic of Uzbekistan on November 19, 2004. Registration No. 1424]

Commentary LexUz

This Resolution ceases to be in force on November 11, 2021, in accordance with the Resolution of the Board of the Central Bank of the Republic of Uzbekistan dated July 15, 2021, No. 17/3 "On Recognizing Certain Regulatory Legal Acts Adopted by the Central Bank of the Republic of Uzbekistan as Having Lost Force" (reg. No. 3317 dated 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 the "Regulation on the Conduct of Accounting by Commercial Banks for Investments in Subsidiary Enterprises" 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 execution of this Resolution is entrusted to the First Deputy Chairman of the Central Bank M.R. Jumagaldiev.

Chairman of the Board of the Central Bank F. MULLAZHANOV

Tashkent,

November 6, 2004,

No. 24/8

APPROVED
Resolution of the Board of the Central Bank of November 6, 2004, No. 24/8

REGULATION

on the conduct of accounting by commercial banks for investments in subsidiary enterprises

I. General Provisions

This Regulation is developed in accordance with the Civil Code of the Republic of Uzbekistan, the laws of the Republic of Uzbekistan "On the Central Bank of the Republic of Uzbekistan", "On Banks and Banking Activity", "On Accounting", as well as taking into account the requirements of International Financial Reporting Standards (hereinafter referred to as IFRS).
The purpose of this Regulation is to define the accounting policy of commercial banks (hereinafter referred to as banks) regarding investments in subsidiary enterprises. This Regulation establishes the concept of a subsidiary enterprise for accounting purposes and requires the use of the cost method for accounting for investments in subsidiary enterprises.
The following concepts are used for the purposes of this Regulation:

control — the authority to manage the financial and operating policy of an entity to obtain benefits from its activities;

subsidiary enterprise — a business partnership or company under the control of the parent bank;

parent bank — a bank owning one or more subsidiary enterprises;

group — the parent bank with all its subsidiary enterprises;

[SPiT:

Accounting in banks / Cost method]

cost method — an accounting method according to which investments are recognized at the cost of acquisition. The investor recognizes income from investments only to the extent that it receives distributions from the accumulated net profit of the investment entity arising after the date of acquisition;

impairment (reduction in value) — a situation where the recoverable amount of an investment in a subsidiary enterprise becomes lower than its carrying amount;

recoverable amount — the higher of the following two amounts: the fair value of the asset less costs to sell or its value in use;

value in use — the discounted value of the estimated future cash flows expected to be derived from the continuing use of the asset and its disposal at the end of its useful life.

If at the time of acquisition the bank decides that the cost of the investment will be recovered primarily through sale rather than through continuing to hold it as an asset, then the bank must classify it as a non-current asset held for sale. In this case, the asset is measured at the lower of its carrying amount or fair value less costs to sell.
Control is presumed to exist when the parent bank owns, directly or indirectly through subsidiary enterprises, more than half of the voting shares of another entity, except in cases where, due to certain circumstances, such ownership does not provide control. Control may also exist when the parent bank owns less than half of the voting shares of another entity. In this case, the bank must have:

1) the ability to manage more than half of the voting shares by agreement with other investors;

2) the authority to determine the financial and operating policy of this entity according to the articles of association or agreement;

3) the ability to appoint or remove the majority of the members of the board of directors and control the entity through this governing body;

4) the ability to have the majority of votes at board of directors meetings and control the entity through this governing body.

In cases where the bank has the ability to control a subsidiary enterprise, it must apply the requirements of this Regulation, even if the bank does not actively exercise control.
When assessing the bank's authority to determine the financial and operating policy of another entity, in addition to ordinary shares, the presence and influence of "potential voting rights" belonging to the bank and other investors, which allow the holder to obtain additional voting rights or reduce the voting rights of the other party in decision-making, should be taken into account. "Potential voting rights" are defined by the presence of equity warrants (share certificates), equity options, debt or equity instruments convertible into ordinary shares, or other similar instruments. Only instruments that can be exercised or converted at the present time are taken into account. Instruments representing potential voting rights are not considered currently convertible if they are subject to exercise or conversion only upon the occurrence of a specific date in the future or only when a certain future event occurs.
When determining whether "potential voting rights" contribute to control, the bank examines all facts and circumstances (including the terms of exercise of instruments representing "potential voting rights" and other contractual arrangements, whether considered individually or together) that affect the "potential voting rights", excluding the intention of the bank's management and the financial ability to exercise or convert.
The parent bank loses control when it ceases to possess the authority to manage the financial and operating policy of the investment object for the purpose of deriving benefits from its activities. Loss of control may occur with or without a change in the absolute or relative degree of ownership. This may occur, for example, when a subsidiary enterprise comes under the control of a state or judicial authority, as well as as a result of contractual arrangements.

II. Recognition and Measurement

§ 1. Initial Recognition

An investment in a subsidiary enterprise is accounted for using the cost method starting from the date it falls under the definition of a subsidiary enterprise.

Upon acquisition of an investment, any difference (positive or negative) between the cost of acquisition and the investor's share in the fair value of the net assets of the subsidiary enterprise is accounted for in accordance with IFRS requirements.

Investments in subsidiary enterprises must be initially recognized at the cost of acquisition, which represents the sum of cash or cash equivalents paid or the fair value (at the transaction date) of equity instruments issued or liabilities assumed by the buyer in exchange for control over the net assets of another entity, plus any costs directly attributable to the acquisition.
The acquisition date is the date of actual transfer of control over the net assets and operations of the acquired entity to the buyer. Essentially, the acquisition date is the date from which the buyer has the right to manage the financial and operating policy of the entity to obtain benefits from its activities. When assessing the fact of transfer of control, the substance of the acquisition transaction must be taken into account.
When an acquisition involves more than one transaction, the actual cost of acquisition is the aggregate actual cost of the individual transactions. If the acquisition is carried out in stages, it is important to distinguish between the acquisition date and the transaction date. Although accounting for the acquisition begins from the acquisition date, information on the actual cost or fair value at the date of each transaction is used for it.
Transferred monetary assets and assumed liabilities are measured at their fair value on the transaction date. When payment for the purchase is deferred, the actual cost of acquisition is the discounted value of this payment amount (taking into account any discount or premium that is likely to occur in the calculation), and not the nominal amount of the payable.
In determining the initial actual cost of acquisition, securities issued by the buyer that are traded on the market are measured at their fair value, which is their market value on the date of the exchange transaction, provided that unforeseen fluctuations or market illiquidity do not make the market value an unreliable indicator. When the market value on a specific date is not a reliable indicator, it is necessary to consider fluctuations in this value over a reasonable period before and after the announcement of the acquisition terms. If the market is unreliable or there are no quotes, the fair value of securities issued by the buyer is assessed relative to their proportional shares in the fair value of the buyer's capital or relative to the proportional share in the fair value of the acquired entity, depending on which is more obvious.
The buyer may also incur direct costs related to the acquisition. These direct costs include costs for registration and issuance of equity securities, and payment for services of lawyers, appraisal organizations, and other consultants involved in the acquisition process. These direct costs are included in the cost of acquisition.

(item 16 in the edition of the [Resolution](/docs/1703300?ONDATE=25.11.2010 00#1703319) of the Board of the Central Bank of the Republic of Uzbekistan dated October 23, 2010, No. 34/5 (reg. No. 1424-1 dated November 15, 2010) — SZ RU, 2010, No. 46, art. 421)

General administrative costs, including costs for maintaining the department involved in acquisitions, and other costs that cannot be directly attributed to a specific recorded purchase are not included in the initial cost of the purchase but are recognized as expenses as they occur.
Investments in subsidiary enterprises are accounted for on accounts: 15817 — "Investments in subsidiary enterprises — Financial institutions" and 15821 — "Investments in subsidiary enterprises — Others" respectively. Analytical accounting is maintained by type of subsidiary enterprise.
To reflect the initial purchase of an investment, the following entry is made:

dt. 15817 — "Investments in subsidiary enterprises — Financial institutions" or

15821 — "Investments in subsidiary enterprises — Others";

ct. 10101 — Cash in the operational cash register, correspondent account of the bank, or client account, or

(fourth paragraph of item 19 in the edition of the [Resolution](/docs/1703300?ONDATE=25.11.2010 00#1703319) of the Board of the Central Bank of the Republic of Uzbekistan dated October 23, 2010, No. 34/5 (reg. No. 1424-1 dated November 15, 2010) — SZ RU, 2010, No. 46, art. 421)

30318 — "Issued charter capital — Ordinary".

§ 2. Subsequent Accounting

Investments in subsidiary enterprises must be reflected by banks in their balance sheet using the cost method.
According to the cost method, the bank reflects its investment in a subsidiary enterprise at its actual cost.
After the subsidiary enterprise declares dividends, the bank makes the following accounting entry:

dt. 19939 — "Dividends receivable";

ct. 45717 — "Dividends and profit from investments in subsidiary enterprises — Financial institutions",

or 45721 — "Dividends and profit from investments in subsidiary enterprises — Others".

Upon receipt of dividends from a subsidiary enterprise, the bank makes the following accounting entries:

dt. — Correspondent account of the bank or account of the subsidiary enterprise;

ct. 19939 — "Dividends receivable".

The bank recognizes profit from this investment only to the extent that it receives distributions from the net profit of the subsidiary enterprise arising after the date of acquisition of this enterprise by the bank. Distributions received from profits earned in periods prior to the acquisition date are treated as a return of investment and reduce the cost of the investment.

Example:

Suppose Bank "A" acquired 70,000 shares of Investment Fund "B" on January 1, 20x2 at a price of 150 sums per share. This constitutes 70% of all issued shares of Investment Fund "B". For 20x2, the net profit of IF "B" amounted to 3,000,000 sums. And for the previous year 20x1, this fund received a net profit of 2,000,000 sums, however, dividends for this year were not paid. Shareholders decided to pay dividends for the results of the activities of IF "B" for two years. The total amount of dividends declared for payment by Investment Fund "B" amounted to 4,000,000 sums. Based on the fact that the net profit of Investment Fund "B" earned since the acquisition date amounts to 3,000,000 sums, Bank "A"'s share in this profit amounted to 2,100,000 sums. Consequently, Bank "A" can recognize as profit received from investments only this amount. The entire remaining part of the received funds will be treated as a reduction of investments, as this part of dividends relates to the period before the acquisition date. On the date of dividend declaration, Bank "A" makes the following accounting entries:

dt. 19939 — "Dividends receivable" 4,000,000;

ct. 45717 — "Dividends and profit from investments in subsidiary enterprises — Financial institutions" 2,100,000;

ct. 15817 — "Investments in subsidiary enterprises — Financial institutions" 1,900,000.

§ 3. Impairment of Investments

Banks must assess the existence of indicators of impairment of an investment in a subsidiary enterprise at each reporting date. If there are indicators of possible impairment of an investment in a subsidiary enterprise, the bank applies IFRS requirements for asset impairment. When determining the value in use of the investment, the bank assesses:

1) its share in the discounted value of expected future cash flows that the investment object as a whole is expected to generate, including cash flows from its operations and proceeds from its final disposal;

2) the discounted value of expected future cash flows arising from dividends to be received from the investment and from its final disposal.

With correct assumptions, both methods yield the same results.

The recoverable amount of an investment in a subsidiary enterprise is assessed for each subsidiary enterprise separately.

III. Disposal

If the parent bank sells its share in a subsidiary enterprise but still retains directly or indirectly through its subsidiary enterprises 20% or more of the voting shares in the investment object, or retains significant influence, then such an investment ceases to be considered an investment in a subsidiary enterprise and must be accounted for as an investment in an associated enterprise.
From the date when the investment ceases to be accounted for as a subsidiary enterprise and does not become an investment in an associated enterprise or joint venture, the investor bank accounts for this investment on the corresponding account 10700 — "Securities for trading" or 10800 — "Investments in securities available for sale". The carrying amount of the investment on the date it ceases to be a subsidiary enterprise is treated as its actual cost upon initial recognition of the financial asset and is transferred to the corresponding account of section 10700 — "Securities for trading" or 10800 — "Investments in securities available for sale" or 15800 — "Investments in associated enterprises, joint ventures, and subsidiary enterprises".
Income and expenses of the subsidiary enterprise are included in financial reporting from the date of acquisition, which is the date when the buyer obtains control over the acquisition object. The results of operations of the disposed subsidiary enterprise are included in the income statement up to the date of disposal, i.e., the date when the parent bank loses control over the subsidiary enterprise. The difference between the proceeds from the disposal of the subsidiary enterprise and the carrying amount of the investment as of the disposal date, including the total amount of any exchange differences related to the subsidiary enterprise recognized in equity in accordance with IFRS requirements for accounting for the effects of changes in foreign exchange rates, is recognized in the income statement as profit or loss from the disposal of the subsidiary enterprise.

IV. Disclosures

The bank must disclose the following information regarding investments in subsidiary enterprises:

1) a relevant list and description of significant subsidiary enterprises, including the share of participation and the share in the total number of voting shares, if these two quantities differ;

2) the methods used to account for such investments;

3) its share in the contingent liabilities of the subsidiary enterprise for which it also bears a contingent liability;

4) contingent liabilities arising because the bank is separately liable for all obligations of the subsidiary enterprise.

Investments in subsidiary enterprises accounted for using the cost method must be classified as non-current assets and disclosed as a separate line item in the balance sheet.
If a subsidiary enterprise uses accounting policies different from the accounting policies adopted by the bank for similar transactions and events under similar conditions, and if it is practically infeasible to calculate the corresponding adjustments to the financial reporting of the subsidiary enterprise for use by the investor, then this fact is disclosed.

APPENDIX No. 1
to the Regulation on the conduct of accounting by commercial banks for investments in subsidiary enterprises

Example of accounting for an investment in a subsidiary enterprise

On January 1, 20x1, Bank "A" acquired 1,000 shares of Joint Stock Company "B" at a price of 500 sums per share. This constitutes 60% of all issued shares of Joint Stock Company "B". For 20x1, the net profit of Joint Stock Company "B" amounted to 500,000 sums. On March 1, 20x2, Joint Stock Company "B" declared dividends for 20x1 in the amount of 400,000 sums, of which 240,000 sums (60%) are due to Bank "A". Dividends were paid on March 15, 20x2. Bank "A" makes the following entry on the acquisition date:

dt. 15821 — "Investments in subsidiary enterprises — Others" 500,000;

ct. — Correspondent account or client account 500,000.

On March 1, 20x2, upon declaration of dividends, Bank "A" makes the following entry:

dt. 19939 — "Dividends receivable" 240,000;

ct. 45721 — "Dividends and profit from investments in subsidiary enterprises — Others" 240,000

On March 15, 20x2, upon receipt of dividends, Bank "A" makes the following entry:

dt. — Correspondent account or account of the subsidiary enterprise 240,000;

Ct. 19939 — "Dividends receivable" 240,000.

(Collection of Legislation of the Republic of Uzbekistan, 2004, No. 45-46, art. 484; 2010, No. 46, art. 421)

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