A company buys shares of another company: how is it accounted for? (NAS No. 12)

«Ipaksoy Tekstil» LLC has built up spare cash. The director made two decisions: put part of it into another company's shares for a few months, and part into a partner factory's shares for many years. For accountant Komila this means two different accounts, two different measurements and two different questions at year-end. Below we walk through it step by step using the paragraphs of NAS No. 12 "Accounting for Financial Investments" and the rows of NAS No. 21.

First, the scope. Under paragraph 5 of NAS No. 12 the standard does not apply to investments in subsidiaries and joint activities, or to the bases for recognising income such as dividends. So the example uses small, non-controlling stakes.

Step 1. Short-term or long-term?

Paragraph 6 of NAS No. 12 defines a short-term (current) financial investment as an "easily realisable" investment with a circulation period of no more than 12 months, and all others as long-term. Paragraph 7 requires the former to be shown as current assets and the latter as long-term assets.

	Short-term	Long-term
Definition (NAS No. 12, paragraph 6)	up to 12 months, easily realisable	all others
Account (NAS No. 21)	5810 "Securities" (paragraph 241)	0610 "Securities" (paragraph 55)
Balance sheet line (Order No. 181)	370	040
Carrying amount (NAS No. 12)	market value or the lower of cost and market value (paragraph 13)	cost, revalued amount or the lower amount under the portfolio method (paragraph 15)
Change in value	income or loss in the period of change (paragraph 14)	on revaluation through equity (paragraph 21)

Step 2. What goes into the purchase cost?

Paragraph 9 of NAS No. 12: a financial investment is measured at purchase cost, which includes fees paid for brokers' services, bank charges, duties and other expenses.

Short-term purchase. Komila bought 8,000 shares of «Kumushkon Oyna» JSC at 1,500 soums and paid the broker 120,000 soums:

Calculation	Soums
Price of shares: 8,000 × 1,500	12,000,000
Broker's fee	120,000
Purchase cost	12,120,000

Journal entry: paragraph 244, row 5 "Purchase of securities paid from the bank account" Dr 5810 – Cr 5110: 12,120,000.

Long-term purchase. «Ipaksoy Tekstil» bought 20,000 shares of its partner «Zarafshon Keramika» JSC at 2,300 soums, broker's fee 300,000 soums. Purchase cost: 20,000 × 2,300 + 300,000 = 46,300,000 soums.

Journal entry: paragraph 60, row 6 "When securities are purchased" Dr 0610 – Cr 5010–5530; under paragraph 58, account 0610 is kept at purchase price. Dr 0610 – Cr 5110: 46,300,000.

Step 3. Year-end: the market price has changed

Short-term shares. On 31 December the market price of a «Kumushkon Oyna» share is 1,620 soums. The accounting policy uses the "market value" method from paragraph 13: - market value: 8,000 × 1,620 = 12,960,000 soums; - increase: 12,960,000 − 12,120,000 = 840,000 soums.

Under paragraph 14 of NAS No. 12 this change is recognised as income in the current reporting period (paragraph 20 also lets the accounting policy choose the paragraph 21 route). Journal entry: paragraph 421, row 6 "Revaluation of securities (increase in value)" Dr 5810 – Cr 9560 "Income from revaluation of securities": 840,000.

When the price falls: paragraph 427, row 4: Dr 9690 – Cr 5810.

Long-term shares. The accounting policy uses the revalued amount method from paragraph 15 and, as paragraph 16 requires, sets the revaluation frequency at once a year. At year-end a «Zarafshon Keramika» share is worth 2,550 soums: - new value: 20,000 × 2,550 = 51,000,000 soums; - increase: 51,000,000 − 46,300,000 = 4,700,000 soums.

Paragraph 21 of NAS No. 12: a revaluation surplus is added to equity. Journal entry: paragraph 358, row 1 "d" (long-term investments) Dr 0610 – Cr 8510: 4,700,000.

If the price falls the next year, the order under paragraph 21 and paragraph 358 is: - first within the revaluation surplus for that investment in equity: Dr 8510 – Cr 0610 (paragraph 358, row 2 "d"); - any excess is an expense: Dr 9430 – Cr 0610 (paragraph 358, row 3 "d").

If the company carries long-term investments at cost, under paragraph 19 a temporary decline is not recorded, and under paragraph 18, if the value falls irreversibly, the carrying amount is reduced for each investment separately. NAS No. 21 has no separate row for such a reduction: set the entry in the accounting policy.

Step 4. A dividend is declared

«Zarafshon Keramika» declared a dividend of 150 soums per share: 20,000 × 150 = 3,000,000 soums.

Journal entry: paragraph 415 and paragraph 421, row 2 (the same as item "b" of row 5 of paragraph 216): Dr 4840 "Dividends receivable" – Cr 9520 "Income in the form of dividends": 3,000,000.

The tax side: under Article 343, part one, of the Tax Code, dividends paid by a legal entity to a tax resident of Uzbekistan are taxed at source in the manner of Article 345, and the recipient excludes this income when determining its tax base. The rate for a resident legal entity is in Article 337, part one, item 11: 5%. So «Zarafshon Keramika» withholds 3,000,000 × 5% = 150,000 soums, and 2,850,000 soums arrive at the bank.

When the money arrives: paragraph 216, row 6 Dr 5110 – Cr 4840: 2,850,000. NAS No. 21 has no separate row for which account the 150,000 soums left on 4840 (the tax withheld by the payer) should be transferred to; set this in the accounting policy.

Step 5. The shares are sold

In March «Ipaksoy Tekstil» sold all its «Kumushkon Oyna» shares at 1,700 soums, broker's fee 100,000 soums:

Calculation	Soums
Proceeds: 8,000 × 1,700	13,600,000
Carrying amount (market value on 31 December)	12,960,000
Broker's fee	100,000
Gain on sale: 13,600,000 − 12,960,000 − 100,000	540,000

Paragraph 22 of NAS No. 12: the difference between the proceeds and the carrying amount, after deducting the broker's or dealer's fee, is recognised as income or expense.

Under NAS No. 21 the sale is recorded through 9220 "Disposal of other assets": - writing off the carrying amount: paragraph 394, row 26 "Sale of securities" Dr 9220 – Cr 5810: 12,960,000; - amount due from the buyer (proceeds): paragraph 394, row 21 Dr 4010 – Cr 9220: 13,600,000; when the money comes in Dr 5110 – Cr 4010; - broker's fee: paragraph 393 says costs related to the disposal (commissions and the like) are debited to 9220: Dr 9220 – Cr 6990 (or a cash account if paid at once): 100,000; - result: paragraph 394, row 27 "a" Dr 9220 – Cr 9320 "Gain on disposal of other assets": 540,000 (for a loss, row 27 "b": Dr 9430 – Cr 9220).

Worth knowing: row 8 of paragraph 244 also offers a short route: "Sale of securities" Dr 5110 – Cr 5810. So that the two methods are not mixed in one company, state in the accounting policy which one applies.

Long-term shares are sold in the same way (paragraph 60, row 15: Dr 9220 – Cr 0610). If they were revalued earlier, paragraph 22 of NAS No. 12 requires the accounting policy to confirm one option: transfer the remaining revaluation surplus on 8510 to income or to retained earnings.

Decisions to write into the accounting policy

Short-term investments: at market value or at the lower of cost and market value (paragraph 13).
Change in market value: income or expense, or the paragraph 21 procedure (paragraph 20).
Long-term investments: cost, revalued amount or the portfolio method (paragraph 15) and the revaluation frequency (paragraph 16).
Where the remaining revaluation surplus goes when a revalued investment is sold (paragraph 22).
Whether to record a sale through 9220 or by the short route of row 8 of paragraph 244.
Journal entries for withheld dividend tax and for an irreversible decline in value.

The full list of what must be disclosed in the financial statements is in paragraph 28 of NAS No. 12; decisions 1–4 above are on that list too (decisions 5 and 6 are for internal procedure).