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FAIR VALUE MEASUREMENT AND LIMITATIONS IN APPLYING IN
UZBEKISTAN
Khasanboeva Bakhora Farkhodjon qizi
Master’s student, National Research University "Tashkent Institute of Irrigation and
Agricultural Mechanization Engineers institute "
bahorabahronova732@gmail.com
Annotation:
The article examines theoretical and practical aspects of fair value measurement in
accounting. Particular attention is paid to the application of International Financial Reporting
Standards 13 “Fair value measurement” in the context of the Republic of Uzbekistan. Key
limitations and problems are identified: lack of active markets, limited number of specialists and
shortcomings of the regulatory framework. Proposals are given for improving the methods of
measurement and regulatory support.
Key words:
fair value, IFRS 13, present value, Uzbekistan, asset valuation, market value,
limitations.
Introduction.
With the transition of the Republic of Uzbekistan to International Financial
Reporting Standards (IFRS), the role of fair value measurement in the accounting system is
increasing. However, the application of this measurement is accompanied by a number of
limitations associated with the insufficient maturity of the national financial market, a shortage
of qualified appraisers and gaps in legislations.
Fair value is recognized in international practice as a key element in the assessment of assets
and liabilities, especially in relation to financial instruments. Fair value is a fundamental concept
enshrined in IFRS 13 “Fair value measurement”.
Fair value does not depend on the individual views of a particular company or accountant. It is
formed on the basis of information available in active markets and should reflect what an
independent market participant would pay for a given asset or liability under current conditions.
The purpose of this article is to provide a brief description of the concept of fair value, describe
the approaches used to measure it and identify the obstacles that exist in the Republic of
Uzbekistan to its effective application in relation to financial investments.
Methods.
The methodological basis of this study is based on the use of a set of analytical,
comparative and applied methods aimed at identifying institutional, regulatory and practical
factors that impede an objective and reliable assessment of the fair value of financial
investments in the Republic of Uzbekistan.
The key theoretical reference is International Financial Reporting Standard (IFRS) 13 «Fair
Value Measurement», which defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date.
According to this standard, three levels of input data hierarchy are considered within the study:
Level 1 inputs are quoted prices (unadjusted) in active markets for assets or liabilities
identical to those being measured. An active market is one in which transactions in identical
assets or liabilities occur regularly between independent parties, and prices are publicly
available and reflect current market values. Such markets are characterized by a sufficient
number of buyers and sellers, which ensures liquidity and reliability of the prices obtained. In
1
IFRS 13 “Fair Value Measurement”
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181
the context of fair value assessment, an active market allows quoted prices to be used as an
objective reference, without the need to resort to models or professional judgment.
Level 2 inputs are inputs that are not quoted prices included in Level 1 and that are
directly or indirectly observable for the asset or liability. These are likely to be prices quoted for
similar assets or liabilities in active markets or supported by market data. For example, interest
rates, credit spreads or yield curves. Adjustments may be necessary for Level 2 inputs and, if the
adjustment is significant, the fair value may need to be categorised as Level 3.
Level 3 inputs are unobservable inputs. These inputs should be used only when it is not
possible to use Level 1 or 2 inputs. An entity should maximize the use of appropriate observable
inputs and minimize the use of unobservable inputs.
In the context of Uzbekistan, the main emphasis is placed on Level 2 and especially Level 3, as
the country's capital market does not provide sufficient liquidity and transparency for
widespread use of Level 1 assessments.
To determine the deviations between international practice and the national situation, a
comparative analysis method was used, which allowed:
Compare the requirements of IFRS and National Accounting Standards (NAS) in terms
of fair value assessment;
To assess the compliance of the legislative and institutional framework of Uzbekistan
with international standards;
To identify practical differences in the use of valuation methods in companies with
different levels of access to the capital market.
The secondary data analysis is based on the study of the following sources:
Reports of the Agency for the Development of the Stock Market of the Republic of
Uzbekistan;
Annual reports of companies that have switched to IFRS;
Publications of scientific journals and dissertations;
Materials of audit and appraisal companies;
Data from the Unified Portal of Corporate Reporting.
In addition, publications from leading international organizations (IFRS Foundation, World
Bank, OECD) were used, which made it possible to give an objective assessment of the state of
national practice in a global context.
To enhance the applied aspect, the study includes a hypothetical case study on assessing the fair
value of a private company using a discounted cash flow (DCF) model based on Level 3 input
data. This allows to demonstrate the real difficulties in collecting data and selecting model
parameters, analyze the sensitivity of the result to changes in assumptions, show the dependence
of the quality of the assessment on the transparency and availability of information.
To interpret the obtained data, methods of logical analysis and expert synthesis were used,
including identification of key barriers (infrastructure, personnel, regulatory); establishing
cause-and-effect relationships between the level of development of the stock market and the
applicability of assessment methods; formulating proposals to eliminate the identified
limitations.
Thus, the research methodology combines the theoretical foundations of international standards,
a systemic analysis of the regulatory environment of Uzbekistan and practical assessment
methods, which provides a comprehensive approach to the issues under study.
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Results.
The conducted analysis showed that the application of the fair value measurement in
the conditions of Uzbekistan faces a number of significant limitations caused by both
institutional and methodological reasons.
One of the main factors limiting the possibility of fair value measurement is the weak
development of the stock market. According to the Agency for the Development of the Stock
Market of the Republic of Uzbekistan, only 0.2% of Gross Domestic Product (GDP) is
accounted for by stock market capitalization (as of the end of 2023), which is several times
lower compared to countries with developed market economies.
Country
Market Capitalization (% of GDP)
USA
165%
Kazakhstan
25%
Uzbekistan
0.2%
Table 1. Comparison of stock market capitalization level (% of GDP)
The lack of an active market makes it impossible to use stock and bond prices as a fair value
(IFRS 13 Level 1). This forces companies to resort to more complex models that require
increased expertise and access to alternative data.
The correct application of level 2 and 3 assessment models requires the participation of
professional appraisers, financiers, and analysts who are proficient in modern approaches: DCF
models, multipliers, realistic calibration of parameters (WACC, growth rate, risk level).
However, there is an acute shortage of such personnel in Uzbekistan.
According to the Association of Professional Accountants of Uzbekistan, at the beginning of
2024, the share of specialists who had passed international certification (for example, ACCA,
CFA) was less than 1% of the total number of economists in the country.
Fair value requires transparent and reliable data on financial position, market activity, expected
income. However, corporate reporting of most companies in Uzbekistan still does not meet the
requirements of either IFRS or XBRL standards.
Absence of a unified register of transactions
↓
Unpublished contract prices
↓
Lack of availability of independent market sources
↓
Undervaluation or overvaluation of assets
Diagram 1. Factors of insufficient transparency of information
Thus, a weak information infrastructure reduces the reliability of input data, which is especially
critical for building level 2 and 3 models in fair value measurement.
2
Prepared by author based on data of World Bank, 2023; Stock Market Development Agency of the Republic of
Uzbekistan, 2023
3
Prepared by author
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183
The current legislation of the Republic of Uzbekistan does not have a clearly established
methodology for measuring the fair value of assets, nor are there any mechanisms for mandatory
verification of the correctness of its application. For example, the Law on Valuation Activities
of the Republic of Uzbekistan (2021 edition) does not contain direct references to the
requirements of IFRS 13; National Accounting Standards (NAS) do not cover all aspects and
levels of fair value assessment; the participation of certified appraisers in the mandatory
procedure for calculating fair value for major transactions or when consolidating financial
statements is not provided.
This creates legal uncertainty and leaves organizations with too much scope for subjective
interpretation, which reduces the comparability and reliability of financial information.
According to IFRS 13 “Fair Value Measurement” when assets do not have an active market,
companies are forced to use valuation models such as:
Discounted Cash Flow (DCF)
Multiplier Method (EV/EBITDA, P/E)
Options and Stochastic Models Method
However, these models require reliable revenue and profit forecasts, accurate calculation of the
discount rate, understanding of industry risks. In an unstable economic environment, high
inflation and lack of market benchmarks, it becomes extremely difficult to achieve a realistic
model. As an example, the following section presents a DCF calculation for a private company
not represented on the market.
In order to demonstrate the applicability of fair value assessment in practice in the Uzbek market,
this section provides a hypothetical example of valuation of a private manufacturing company
that is not listed on the stock exchange.
Case Study: Fair Value Measurement Based on DCF Model.
In order to demonstrate the
applicability of fair value assessment in practice in the Uzbek market, the article provides a
hypothetical example of valuation of a private manufacturing company that is not listed on the
stock exchange. Due to the absence of quoted market prices (Level 1) and limited comparable
information (Level 2), the valuation is performed using a DCF model, which is a Level 3 input
under IFRS 13.
For the purposes of the measuring, the following conditions are accepted:
Indicator
Note
Revenue (Current Year)
12 000 mln sum
Average level for small
businesses
Revenue growth (average
annual)
8%
Moderate realistic growth
Operating Margin (EBIT)
18%
Typical for light industry
Income tax rate
15%
According to the Tax Code
of
the
Republic
of
Uzbekistan
Investments in non-current
assets
500 million sum per year
Continuous investment in
equipment upgrades
Changes in working capital
2% of revenue
Growth of current assets
4
Ministry of Finance of the Republic of Uzbekistan.
Concept for the Development of the Accounting and Reporting
System for 2020–2030
. – Tashkent, 2020.
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184
Discount rate (WACC)
22%
Taking
into
account
premium for country and
industry risk
Forecasting horizon
5 year
Typical evaluation period in
the absence of long-term
contracts
Growth rate in the post-
forecast period (g)
3%
Corresponds to the rate of
inflation
FCFF (Free Cash Flow to Firm) is the free cash flow for the entire company, that is, the cash
flow that remains with the enterprise after covering all operating expenses, taxes and necessary
investments (capital investments and changes in working capital), but before taking into account
the payment of interest and dividends.
This indicator reflects the real ability of the company to generate cash available to all investors -
both debt holders (banks, bondholders) and shareholders.
FCFF calculation formula:
FCFF = EBIT × (1 − Tax rate) + Depreciation − CAPEX − ΔWorking Capital
Where:
EBIT
— Earnings Before Interest and Taxes;
Tax rate
— income tax rate (e.g. 15%);
Depreciation
— depreciation;
CAPEX
— capital expenditures;
ΔWorking Capital
— change in working capital (Working Capital = Current Assets −
Current Liabilities, minus short-term debt).
FCFF is used in the discounted cash flow (DCF) model - to calculate the fair value of an
enterprise (the entire business); to assess the value of a company regardless of its capital
structure (without reference to debt or shareholder interest); in investment analysis, it allows you
to understand how much a company can invest or distribute among all its financing parties.
Below is a table of projected free cash flows for our example:
Year
Revenue
EBIT (18%)
Income tax
FCFF
1
12 960
2 333
350
1 350
2
13 997
2 519
378
1 471
3
15 116
2 720
408
1 613
4
16 335
2 940
441
1 774
5
17 662
3 179
477
1 955
Note: FCFF is calculated in a simplified manner, without taking into account depreciation, to
simplify the example.
Calculation of the Net Present Value of FCFF (in million sum):
Year
FCFF
Discount factor
(1/(1+WACC)^t)
Net Present
Value
1
1 350
(1/(1+22%)^1)
1 106
5
Calculations made by author
6
Calculations made by author
Volume 4, issue 5, 2025
185
2
1 471
(1/(1+22%)^2)
988
3
1 613
(1/(1+22%)^3)
884
4
1 774
(1/(1+22%)^4)
791
5
1 955
(1/(1+22%)^5)
709
Total
4 478
Terminal Value (TV) is an estimate of the value of a business (or investment project) at the end
of the forecast period, i.e. the period for which detailed monetary forecasts are made. It is a key
element in calculating the present value (DCF), since the majority of the project's value may be
accounted for by the residual value.
Infinite Growth Model (Gordon Growth Model, GGM)
Free cash flow is assumed to grow forever at a constant rate g.
Formula:
Where:
g
– the rate of constant growth of cash flows (Growth rate in the post-forecast period).
Calculation of Terminal Value (in million sum):
Present Value of Termination Value (in million sum):
Total fair value of the business:
So,
Business Value
= 4 478 + 3 941 =
8 419 mln sum
.
The given practical example of calculating the fair value of an enterprise based on the
discounted cash flow (DCF) model demonstrates the versatility and analytical power of this
approach. Using the projected cash flow over a 5-year horizon and calculating the residual value
allowed us to obtain a reasonable fair value of the company in the amount of 8.42 billion sum.
The example clearly shows how key parameters such as operating margin, tax rate, investment
expenses, changes in working capital and discount rate critically influence the final valuation.
In addition, the example emphasizes the importance of transparent financial information and a
professional approach when applying the DCF model, especially in emerging markets such as
Uzbekistan.
7
Ermakov, S.A.
Features of Using the DCF Model in Developing Countries
//
Accounting
. – 2020. – No. 5.
Volume 4, issue 5, 2025
186
Discussion.
The results of the conducted analysis and practical assessment based on the DCF
model allow us to make a number of general conclusions about the applicability of the fair value
concept in the conditions of Uzbekistan.
Fair value, as an economic category, implies market objectivity, i.e. the presence of reliable
benchmarks for determining the value of an asset or liability. However, in the real conditions of
Uzbekistan, such benchmarks are often absent, especially with respect to unquoted financial
instruments and investments in private enterprises.
The practical example demonstrated that the application of the discounted cash flow model is
also possible in domestic conditions, but requires the appraiser to have high professional
competence, access to market information and the ability to adapt international approaches to
the specifics of the national economy.
The fair value calculated in Case study (8,419 million sums) is based on a number of internal
assumptions as:
the revenue forecast is built without taking into account seasonality and external shocks;
the discount rate includes a conditional premium for country risk, which may change;
the growth rate in the post-forecast period is based on average macroeconomic indicators.
This makes the final assessment sensitive to the slightest deviations in the input parameters. The
analysis carried out confirms the vulnerability of Level 3 input data models (IFRS 13),
especially in countries with insufficient information infrastructure.
Systematization of the identified obstacles allows us to structure the key risks that enterprises
and auditors face in Uzbekistan:
Problem
Consequences in assessment practice
Stock Market Weakness
No market prices → impossible Level 1
Shortage of specialists
Increased risk of errors in the DCF model
Limitations of financial reporting
Difficulty of validating assumptions
Regulatory gaps
Discrepancies in the interpretation of
concepts and methods
Lack of benchmarks
Difficulties in calibrating multipliers
The DCF model, despite its universality, requires a number of conditions that are not always met
in Uzbekistan:
stability of the operating environment;
availability of long-term forecasts;
transparency of reporting;
reliable industry multipliers.
There is also a risk of manipulation of assumptions (for example, overstating the growth rate or
understating the WACC) in order to distort value, which could influence the decisions of
investors and regulators.
Taking into account the identified barriers and assumptions, the following areas are possible for
increasing the objectivity of fair value assessment in the Republic of Uzbekistan:
Development of the stock market — creation of platforms with public reporting and
active trading.
Strengthening professional training — implementation of international programs (ACCA,
CFA) at the university level.
Legislative adaptation of IFRS 13 — inclusion of requirements for valuation levels in
NAS.
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187
Creation of a database of transactions and multiples — a national repository of
comparable valuations.
Institutional independent verification of models — participation of certified appraisers in
mandatory examinations.
Thus, the successful implementation of fair value measurement of financial investments in the
Republic of Uzbekistan is possible only with the simultaneous solution of a set of institutional,
legal and methodological problems.
References:
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Ministry of Finance of the Republic of Uzbekistan. Concept for the Development of the
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