ISSUES OF ACCOUNTING FOR EXCHANGE DIFFERENCES AND

ISSUES OF ACCOUNTING FOR EXCHANGE DIFFERENCES AND
EXPENSES ON LOANS IN THE FORMATION OF THE COST OF
RESERVES IN ACCORDANCE WITH NAS AND IFRS
Yakubova Sh.Sh.
Project coordinator
online educational products LLC "NORMA"
Abstract : Synchronization of accounting standards is a continuous process in
the international community.
Convergence of national accounting with the
approaches of International Financial Reporting Standards (IFRS) simplifies
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international comparisons on the elements of financial statements. This empowers
global investors to make effective financial decisions so they can truly see and
understand what is going on with the company they want to invest in. This article
analyzes the main approaches to accounting
exchange rate differences and
borrowing costs in the formation of the cost of inventories according to NAS and
IFRS, recommendations are given on convergence of the requirements of the national
system for preparing financial statements of business entities with the concepts and
approaches of IFRS for accounting for reserves.
Keywords : International Financial Reporting Standards (IFRS), National
Accounting Standards (NAS), financial statements, stocks, accounting, assets,
exchange differences, borrowing costs, advances, monetary item, qualifying asset.
The introduction of international financial reporting standards (IFRS) in
Uzbekistan is one of the most important factors in improving the efficiency of
corporate governance, investment attractiveness, competitiveness and business
transparency. The transition to IFRS has both positive and negative sides for
companies. The process of transition to IFRS is a complex and multifaceted process,
which should occur in accordance with the pace of development of economic reality
and correlate with the readiness of the current national accounting system and
accounting practitioners for relevant innovations. As noted in their work, economists
T. Dargacheva and T. Shaydanov, the use of IFRS is necessary to make comparable
business standards and accounting systems both between companies and between
countries [9, 64].
The purpose of this article is to analyze the main approaches to accounting for
exchange rate differences and borrowing costs in the formation of the cost of
inventories according to national accounting standards (NAS) and IFRS,
recommendations are given for convergence of the requirements of the national
system for preparing financial statements of business entities with the concepts and
approaches of IFRS for accounting for reserves.
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In the process of research, general scientific methods and techniques of
research were applied: dialectical and historical methods of cognition, comparative,
economic and system analysis, expert assessments.
Inventories are an integral part of the financial statements of almost any
organization. The process of providing organizations with inventories and means of
production necessary for the implementation of economic activities is the most
important object of accounting for organizations. It has a direct impact on the cost of
organizations and on the cost of production [11]. It is difficult to overestimate the
importance of reserves valuation, since the reliability of the organization's financial
statements, presented as closely as possible to reality, depends on how objectively it
is determined.
For accounting purposes, inventories are assets that are consumed or sold in an
entity's normal operating cycle, or used for a period of up to 12 months.
A study of the requirements of national accounting documents shows that not
all issues of reserve valuation are resolved in the existing standards.
Basic provisions for accounting for inventory under NAS No. 4 "Inventory"
determine the procedure for maintaining accounting records of inventories owned by
the organization, and their reflection in the financial statements. The national
standard includes in the concept of inventories tangible assets stored for the purpose
of further sale in the course of business and in the process of production, as well as
used in the production of products, performance of work or provision of services, or
for the implementation of administrative and socio-cultural functions ( paragraph 3 of
NAS No. 4). This definition is generally not very different from the concept of
inventories under IFRS, where inventories are assets that are held for sale in the
ordinary course of an entity, are in the process of being built for subsequent sale, or
are intended for use in the production of goods or services (paragraph 6 IAS 2
Inventories). The economic goal of having stocks is to make money on the difference
between the sale price and the cost of the stock, that is, to make money on the sale of
stocks [3].
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However, the scope of NAS No. 4 also includes accounting for inventory and
household supplies, containers, animals for growing and fattening. There is no such
definition in IFRS as "inventory and household supplies". A common practice is that
fixed assets (eg spare parts, components) are treated as inventories and classified as
current assets in the statement of financial position. As a result, depreciation will be
understated in the income statement, as spare parts/components will only be
recognized as an expense when they are used, which may be several years after the
current reporting period. And when transforming financial reporting from the national
system into the international one, part of the inventory and household supplies will be
taken into account in the IFRS report as fixed assets if they meet the OS criteria [10].
Also, IAS 2 Inventories does not apply to biological assets related to
agricultural activities and agricultural products at the time of their collection. Raised
and fattened animals are subject to the accounting of another international financial
reporting standard - (IAS) 41 "Agriculture" [6].
When forming the cost of inventories purchased for foreign currency, national
accounting is based on the cost indicated in the primary documents confirming their
acquisition (accompanying documents or cargo customs declaration). It is determined
in the national currency at the rate of the Central Bank on the date of their acceptance
for accounting [2, paragraph 24]. Accordingly, if the supplier has been paid an
advance in foreign currency, then at the time of acceptance of the goods (services) for
accounting, there may be a difference recorded in the accounts of exchange rate
differences [8].
However, the procedure for accounting for exchange rate differences for
accounting purposes under NAS and IFRS is different. Accounting for foreign
exchange transactions is governed by IAS 21 The Effects of Changes in Foreign
Exchange Rates . According to it, exchange differences are determined only by
monetary items. These are units of available currency, as well as assets and liabilities
receivable (payment), expressed in a fixed or determinable number of currency units
[4, paragraph 8] . An advance paid for the supply of inventory is not a monetary item.
Since this operation does not involve further receipt of funds in foreign currency.
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Separate consideration requires the inclusion of expenses in the form of interest
for the use of loans in the cost of inventory, acquired in whole or in part at the
expense of borrowed funds. In accordance with paragraphs 5 and 7 of IAS 23
Borrowing Costs, interest and other costs that an entity incurs in connection with
borrowing funds are included in the cost of an inventory if it is a qualifying asset - an
asset that is being prepared for use on destination or for sale necessarily requires
considerable time [5]. According to paragraph 18 of NAS 4, when purchasing or
manufacturing inventories at the expense of borrowed funds, expenses in the form of
interest on the use of loans are not included in the cost of inventory acquired in whole
or in part at the expense of borrowed funds . In national accounting, there is a
separate standard - NAS N 24 "Accounting for borrowing costs", which determines
the procedure for accounting for borrowing costs. Paragraphs 12-20 of § 2 of this
NAS allow the capitalization of borrowing costs directly related to the acquisition,
construction or production of a qualifying asset. However, according to paragraph 5
NAS 24, depending on the specific circumstances, qualifying assets may be assets
that require a significant amount of time to bring them to a state that allows them to
be used for their intended purpose: buildings, structures, production machinery and
equipment, intangible assets, power plants, investment property, etc. n. Qualifying
assets do not include other investments and inventories that are routinely produced in
large quantities on a recurring basis, even if their production takes a long time (for
example, the production of whiskey, wine, cognac, etc.).
Let us also note some differences in the approaches to valuation of reserves
after recognition. According to national accounting, in order to determine net
realizable value, inventories are periodically revalued and their value is brought into
line with current value. Inventories are revalued by recalculating the cost of their
individual units at the documented current cost of inventory, similarly to the
estimated value prevailing on the date of the revaluation. [2, paragraph 50, 51].
Under IFRS, assets should not be reported at a cost greater than the economic
benefit that is expected from their sale or use. Therefore, if the cost of inventories
exceeds the net realizable value, it is necessary to post an impairment of the
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inventories in the period in which the impairment occurred. The practice of writing
down inventories below cost to net realizable value is consistent with the principle
that assets should not be carried at a cost in excess of the amount expected to be
realized from their sale or use [3, paragraph 28]. Estimates of net realizable value are
based on the best available evidence of the amount that can be obtained from the sale
of inventories at the time such estimates are made. These estimates take into account
fluctuations in price or cost directly attributable to events occurring after the end of
the period, to the extent that such events confirm the conditions that existed at the end
of the period [3, paragraph 30]. The fact that inventories are sold at a price below cost
after the reporting period (but before the financial statements are approved) is an
adjusting event in accordance with IAS 10 Events after the Reporting Period and
requires an impairment of inventories in the just ended reporting period. If in
subsequent periods the circumstances that led to the need to depreciate inventories to
net realizable value ceased to exist, and inventories have not yet been used up, then
the impairment of inventories must be reversed, but not above the original cost.
The transition to IFRS is an important step towards ensuring the openness and
transparency of domestic companies, increasing their competitiveness, reducing the
cost of borrowed funds and direct foreign investments. Using financial statements
prepared in accordance with national accounting standards (NAS), one cannot fully
guarantee sufficient understanding by foreign investors of all aspects of the financial
and production activities of companies in Uzbekistan. It is recommended to develop
and amend the methodology for forming the cost of purchased reserves in order to
bring the requirements of the national system for preparing financial statements of
economic entities closer to the concepts and approaches of IFRS.
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