An advance was paid to a foreign supplier in foreign currency and the goods arrived later: at which rate are they recorded?
An import batch paid half in advance and half afterwards is recorded at three rates. Under NAS No. 22 the advance part is not remeasured, while the remaining debt is remeasured every month. Step-by-step journal entries using the example of a textile mill.
The "Lola Tekstil" mill buys yarn from abroad. The contract is 40 000 euros: half is paid in advance, half after the goods arrive. For chief accountant Malika the main question is this: at which rate does the yarn enter the warehouse? The rate on the day of the advance, on the day the goods arrived or on the day of payment?
The answer: part by part. Each part has its own rule.
What does NAS No. 22 say about advances?
Three rules are enough: - In a purchase where money was paid in advance in foreign currency, the part of the asset's value corresponding to the advance is taken at the Central Bank rate on the day of the advance, and the remaining part at the rate on another date (paragraph 12). Paragraph 24 of NAS No. 4 points the same way: inventories are measured at the rate on the day of recognition, «except for the amount of the advance paid» - An advance given without a right of return is a non-monetary item (paragraph 10). It is not recalculated even if the rate changes - A payable in foreign currency, on the other hand, is a monetary item (paragraph 9). It is remeasured every month at the rate on the last date of the reporting month, and also at the rate on the transaction date (in our example, the payment date) (paragraph 8), and the difference is recorded in the result of financial activities (paragraph 11)
| Item | Type | Is it remeasured? |
|---|---|---|
| Advance paid (4310) | Non-monetary | No |
| Yarn received (1010) | Non-monetary | No |
| Remaining debt to the supplier (6010) | Monetary | Yes, every month and on the payment date |
| Money in the foreign currency account (5210) | Monetary | Yes |
Malika's batch: how do the journal entries go?
The rates are hypothetical, compiled by the author. The contract does not provide for a right to recover the advance, that is, the advance is a non-monetary item. For simplicity of the example, customs payments and carriage costs are not shown here. They are analysed separately in the article on the cost of imports.
| Date | Event | Rate (soum/EUR) |
|---|---|---|
| 5 March | Advance of 20 000 EUR paid | 13 800 |
| 20 March | Yarn arrived and was recognised | 14 000 |
| 31 March | End of month | 14 050 |
| 15 April | Remaining 20 000 EUR paid | 14 100 |
Value of the yarn: advance part 20 000 × 13 800 = 276 000 000 soum. Remaining part 20 000 × 14 000 = 280 000 000 soum. Total 556 000 000 soum.
| Date | Transaction | Debit | Credit | Amount | Basis (NAS No. 21) |
|---|---|---|---|---|---|
| 5 March | Advance transferred in foreign currency | 4310 | 5210 | 276 000 000 | paragraph 229, line 15 |
| 20 March | Yarn received | 1010 | 6010 | 556 000 000 | paragraph 257, line 3 |
| 20 March | Advance offset against the debt | 6010 | 4310 | 276 000 000 | paragraph 257, line 14 |
| 31 March | Remaining debt remeasured: 20 000 × (14 050 − 14 000) | 9620 | 6010 | 1 000 000 | paragraph 427, line 3 |
| 15 April | Remeasurement on the payment date: 20 000 × (14 100 − 14 050) | 9620 | 6010 | 1 000 000 | paragraph 427, line 3 |
| 15 April | Remaining debt paid: 20 000 × 14 100 | 6010 | 5210 | 282 000 000 | paragraph 229, line 14 |
Check: on 6010, 280 000 000 + 1 000 000 + 1 000 000 = 282 000 000 soum. The debt is fully closed. The value of the yarn, meanwhile, stayed at 556 000 000 soum: however much the rate changes afterwards, it is not recalculated.
What would happen if everything were recorded at one rate?
A common mistake: receiving the whole batch at the rate on the day the goods arrived.
| Method | Value of the yarn | Difference |
|---|---|---|
| Correct: advance part at 13 800, the rest at 14 000 | 556 000 000 | |
| Wrong: everything at 14 000 | 560 000 000 | +4 000 000 |
Under the wrong method the yarn is received 4 000 000 soum too expensive. And in the advance account an unclosed "balance" of 4 000 000 soum appears: 4310 holds 276 000 000, while 280 000 000 is written off. To close this, some other entry is invented and the error deepens.
Why is the soum amount in the CCD different?
For calculating customs payments, foreign currency is translated at the rate on the day the declaration is accepted (Customs Code, Article 326). If Malika's CCD was accepted on 19 March, the soum amount in it will be at that day's rate. It may be neither 13 800 nor 14 000. This is normal: the soum amount in the CCD is for calculating duty and VAT, while the value in the accounts is determined under NAS No. 22 and NAS No. 4. Do not try to "adjust" these two to each other.
What if the contract is cancelled?
If the supplier does not ship the goods and it is agreed to return the advance, the advance is no longer a right to receive goods but becomes a monetary claim. This is a reclassification from a non-monetary item to a monetary item. In such a case the exchange difference is calculated for the current and future periods (prospectively) (NAS No. 22, paragraph 15). When the money comes back, the entry is 5210 / 4310 (NAS No. 21, paragraph 229, line 6; paragraph 188, line 4).
Practical tips
- Keep the rate of each advance in the analytical accounts of 4310. When the goods arrive, which part is closed at which rate is taken from there
- If several advances have been paid, each of them is at the rate on its own date. On receipt, calculate them in separate lines
- At month end, remeasure only 6010 and 5210. Do not touch 4310 and 1010
Test yourself
5 questions on this topic: pick an option or reveal the answer.
A company owes a foreign supplier 5 000 US dollars (the rate on the day the goods were received was a notional 12 600 soums). At month-end the rate was a notional 12 700 soums, and the debt has not yet been paid. Under NAS No. 22, what is done at month-end?
Sirdaryo Agro LLC imported a combine harvester belonging to a foreign lessor under the temporary import customs regime. Before the period expires it wants to hand the combine over for use to the Baxmal Dala farm. When is this permitted under Article 67 of the Customs Code?
Ipak Yo'li Savdo LLC bought goods worth 10 000 US dollars from abroad. An advance of 4 000 dollars was paid in advance (the Central Bank rate on that day was a notional 12 000 soums), and on the day the goods were recognized the rate was a notional 12 500 soums. Excluding customs payments and transport costs, what is the cost of the goods in soums?
"Chorsu import" LLC recorded a debt of 4 000 US dollars to a foreign supplier at a hypothetical rate of 12 800 soum. On the day the debt was paid, the Central Bank rate was a hypothetical 12 650 soum. Under NAS No. 21, how is the exchange difference recorded?
VAT payer "Nurafshon metall" made products from a foreign customer's raw material placed under the processing within the customs territory procedure. The service fee excluding VAT is 45,000,000 soums. The products were not taken out: the customer placed them under the release for free circulation (import) procedure. How much VAT is charged on the service fee?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- NAS No. 22 "Accounting for Assets and Liabilities Denominated in Foreign Currency", paragraphs 7, 8, 9, 10, 11, 12 and 15 and the annex (dates of translation into soum) · rate on the transaction date; monthly remeasurement of monetary items; advances given without a right of return are non-monetary; exchange difference to the result of financial activities; the part equal to the advance at the rate on the advance date; prospective accounting on reclassification; date of recognition of inventories
- NAS No. 4 "Inventories", paragraph 24 · Central Bank rate on the date of recognition, except for the amount of the advance paid
- Customs Code of the Republic of Uzbekistan (approved by Law No. ZRU-400 of 20 January 2016), Article 326 · for calculating customs payments, foreign currency is translated at the rate on the day the customs declaration is accepted
- NAS No. 21 "Chart of Accounts": paragraph 188 (lines 2, 4, 5), paragraph 229 (lines 6, 14, 15), paragraph 257 (lines 3, 14), paragraph 427 (line 3) · 4310 / 5210; 5210 / 4310; 6010 / 4310; 1010 / 6010; 6010 / 5210; 9620 / liability accounts
- Example, exchange rates and amounts · compiled by the author, hypothetical (not a real rate)