No. I-08 are approved by the order of the Ministry of Finance of the Azerbaijan Republic of January 13, 2009

Comments and recommendations about application of the National accounting standard No. 2 for the commercial organizations for "Statement of changes in equity"

Section A. Comments

General provisions

According to the National accounting standard No. 1, the companies shall represent annually "Balance sheet" and "The report on profit or losses". Both reports play important role in providing users of financial statements with useful information. "Balance sheet" provides users of financial statements with information on financial condition of the company for certain date (the end of accounting year), and "The report on profit or losses" provides with information on profit or loss, received during the accounting period. But only two of these reports do not provide users with reports the complete information about financial condition or financial results of the company.

Main "problem" consists that in "The income statement or loss" only acknowledged and earned incomes reveal. In spite of the fact that information provided in this report is rather important, potential investors need more detailed information. Shareholders of the company are interested in general financial results of the company, and wish to know, the investments enclosed by them in the company how effectively are controlled.

In case of creation of "The report on profit or losses", certain profit and loss are not considered. For example, the profit which arose from revaluation is not considered when calculating the income because it is connected with owners. In the same way the announced dividends do not vychityvatsya from net profit on accounting year (the reason of it consists that dividends are not recognized quality of expenses because they are considered as the Section of retained earnings). In a word, in "The report on profit or losses" all income is not reflected.

The complete information is also not provided in "Balance sheet". Owners, generally, are interested in the total sum reflected in the line "Capital" of "Balance sheet". In spite of the fact that here comparative information both initial and final remaining balance of the capital is provided, information on structure and capital movement is not provided here. Therefore information provided in "Balance sheet" cannot be considered complete.

For the purpose of providing with the additional information, submission of "Statement of changes in equity" in which are reflected the National accounting standard No. 2, capital movement during the accounting period, change of its structure and not acknowledged profits/expenses in "The report on profit or losses" is required.

Purpose

In third Article of the Standard its purpose is determined and reported that the purpose of this standard "... ensuring recognition, assessment and representation of equity changes by the companies in consecutive and transparent procedure".

In this context, in the fourth Article of the standard the companies submitting the report" are determined "and it is noted that these companies are all commercial organizations, except for, stated below:

* The structures having social significance or

* Subjects of small property.

Having accepted application of these standards to all commercial organizations, including joint businesses and joint-stock companies, it is necessary to consider that number of the terms used here do not correspond to structures of some organizations.

For example, in this standard the term "capital" is often used. It is clear, what in the context of capital joint business is not considered corresponding. In case of discrepancy of the terms used in this standard, economic structure of the company, these terms shall be replaced with the terms corresponding to economic structure of the company. For example, the term "paid-in capital" used in this standard in joint business can be replaced with the term "capital investments by participants".

Thus, some terms used in the National accounting standard can not have equivalent in the organizations which are not joint-stock companies. Some parts of this National accounting standard are devoted "share premium" (share par value and difference between their selling prices). For example, the organizations which do not have the share have no relation with Articles about "share premium" which reveal in this standard and therefore such companies will not attach significance to these Articles.

In the fifth Article of the National accounting standard it is emphasized that this standard is applied to financial statements of private enterprises and the consolidated financial statement of group of companies.

The companies cannot make decisions based on own desire on application of some national and some international accounting standards. The companies shall make the decision on application of one of stated below:

* all National accounting standards, or

* all international accounting standards.

National accounting standards No. 2 are used only in preparation of the annual financial report which is subject to representation to shareholders of the company. This standard shall not be applied to the financial statements preparing for management and to financial statements of affiliated enterprises.

In 8 and 9 Articles of the National accounting standard No. 2 two forms of motion of the capital remaining away from scope of this standard are determined:

* expense allocation on share issue in connection with acquisition of other companies.

For example, the Turan company can acquire other company worth 300000 manats by means of 100000 manats cash and the shares on the amount of 200000 manats issued by the Turan company. Issued shares on the amount of 200000 manats are not regulated by this National accounting standard.

Changes on maintenance of the capital are regulated by other National accounting standards.

Capital tools

Tools of the capital include any shares issued by the company, the options and warrants stored by other parties for the purpose of acquisition of these shares. In the agreement which includes the financial liability the tool of the capital does not lead to increase in money or contractual commitments of the company for payment of other assets. In the future, after repayment of all obligations, all owners of these tools of the capital can expect the corresponding share from the company with residual cost.

But, if the owner of this tool of the capital is subject to risk on the capital, the obligation of the company for issue of personal financial instruments is considered in turn the capital tool. As example it is possible to show that the obligation is fulfilled not based on share value, and based on their quantity.

For example, the company issues 1000000 convertible preferred shares, the cost of everyone who are constituted by 1 manat. These shares have no secure dividend percent, but they shall be paid 5 years later after their transformation into regular shares. All preferred shares will turn for date of conversion into regular shares worth 1000000 manats.

Preferred shares are not considered as the capital. For the reason that convertible preferred shares create for the company which issued them, risk of the change in price for the period of date of issue of these shares before date of conversion, they are considered as the obligation of the company. On the contrary, for owners of convertible preferred shares conversion does not create risk of the change in price of regular shares because irrespective of market prices of date of conversion, for them the cost of regular shares will constitute 1000000 manats. In case the financial instrument is classified as the capital, he creates risk of the change in price for shareholders.

The paid authorized capital

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