Uzbekistan Regulation on Cost Composition (CM Resolution No. 54)

Four groups of costs

The Regulation groups all costs by where they appear in the income statement:

• costs included in production cost — direct and indirect material costs, labour costs, other direct and indirect costs, including production overheads;
• period expenses — selling expenses, administrative expenses, other operating expenses and losses; they reduce profit from core activities;
• financial expenses — interest, negative exchange differences, revaluation of investments in securities, and others;
• extraordinary losses — taken into account when calculating profit before tax.

How costs build up to profit

The Regulation describes a cascade of indicators. Gross profit is the difference between net sales revenue and the production cost of goods sold. Profit from core activities is gross profit less period expenses, plus other income and less other losses from core activities. Financial income is then added and financial expenses deducted, then extraordinary gains and losses are taken into account — giving profit before tax, and after profit tax and other payments, net profit.

Net revenue is determined excluding VAT and excise tax included in the price, and excluding returns and customer discounts. So misclassifying a cost does not change the bottom line, but it distorts gross margin and unit cost.

What goes into production cost

Production cost includes costs directly related to production and determined by the technology and organisation of production. By economic nature they are grouped into five elements.

• production material costs (net of recoverable waste): raw materials, purchased components and semi-finished goods, production-related works and services of third parties, fuel and energy for technological purposes, losses and shortages in production;
• pay of production staff: wages for work performed, including incentive payments under the bonus policy, allowances for night and overtime work and hazardous conditions, holiday pay;
• social tax at the established rates on the employment income of production staff;
• depreciation and amortisation of production fixed assets and intangibles;
• other production costs: repair and rent of production fixed assets, occupational safety, business trips of production staff, insurance of production staff and assets, losses from defects and in-house downtime, warranty repairs.

Period expenses

Period expenses are costs not directly related to the production process: management, selling and other general expenses. They are not included in product cost and are expensed in the period in which they arise.

• selling expenses: transporting goods, marketing and advertising, and in retail and catering — sales staff pay, rent of retail premises, storage, loss of goods;
• administrative expenses: pay of management staff and the related social tax, company cars, communications and internet, office rent, management business trips, entertainment expenses;
• other operating expenses: staff training, consulting, information and audit services, bank charges, one-off bonuses and year-end awards, financial aid to employees, legal costs, the allowance for doubtful debts, prior-year losses identified in the reporting year, fines and penalties.

Financial expenses and extraordinary losses

Financial expenses include interest on bank loans (except interest on investment loans, which forms part of capital investment during the investment period), lease interest, negative exchange differences, losses on revaluation of investments, and costs of issuing the company's own securities.

An extraordinary loss must meet three criteria at once: it is not typical of ordinary activity, is not expected to recur for several years, and does not depend on management decisions. The Regulation gives an example: if a company operates in a zone with special climatic conditions, downtime due to the climate is not extraordinary.

The Regulation and profit tax

The Regulation answers the question "where does this cost go in the books", but not "does it reduce the tax base". For profit tax, the Tax Code of the Republic of Uzbekistan applies: justified and documented expenses are deductible (Article 305), and where accounting recognition differs from the Code, the Code's treatment applies for tax purposes.

So some costs that the Regulation classifies as period expenses are not deductible. Under Article 317 of the Tax Code, the following, among others, are not deductible:

• certain types of financial aid to employees (Article 317(6));
• losses from theft and shortages where the culprits are not identified (Article 317(10));
• taxes and levies assessed as a result of tax audits (Article 317(12));
• penalty interest, fines and other sanctions payable to the budget (Article 317(19)), as well as fines and sanctions for breach of commercial contracts (Article 317(36));
• expenses on events unrelated to business activity — leisure, sports, cultural events (Article 317(13)), unless the law requires the company to hold them.