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Is the foreign exchange difference recognized as income or expense?
One of the issues that has recently attracted the attention of taxpayers is whether certain foreign exchange differences can be deducted from income. In particular, when receivables and payables are denominated in foreign currency, foreign currency funds may remain as a balance in a bank account. Are foreign exchange gains and losses arising from the conversion of foreign currency into manats, the calculation in manats of debts to non-residents denominated in foreign currency, and the conversion into manats of loans obtained in foreign currency recognized as income or expense? Auditor Altay Jafarov provides clarification on these questions.
According to Article 69.1 of the Tax Code, any taxable transaction carried out in foreign currency is calculated in manats at the official exchange rate of the Central Bank of the Republic of Azerbaijan on the date of the transaction. Article 69.2 of the Code provides that the exchange difference arising from taxable transactions carried out in foreign currency is determined based on the difference between the exchange rate on the date of the transaction and the exchange rate on the date when the value of the goods, works or services is paid. At the end of the reporting year, exchange differences arising from receivables and payables related to goods, works and services acquired or supplied in foreign currency are valued at the exchange rate announced by the Central Bank and recognized as income or loss. The taxpayer's monetary funds denominated in foreign currency are also determined at the official exchange rate announced by the Central Bank as of the end of the calendar year.
As can be seen, Article 69 of the Tax Code applies to transactions involving the conversion of foreign currency into manats. The first requirement is that the conversion of foreign currency into manats must constitute a taxable transaction. The second requirement is that the taxable transaction must be carried out in foreign currency.
Article 69.2 does not apply to all transactions conducted in foreign currency, but only to a specific part of them. More specifically, it provides for the recognition as income or loss of exchange differences arising from specific goods, works and services. This provision also addresses the conversion into manats of funds remaining in a foreign currency account.
Therefore, the accounting of many transactions conducted in foreign currency is not regulated by this article. For this reason, one of the important points to consider is that Article 69 of the Tax Code belongs to Chapter VII of the Code, entitled “General Rules for the Payment of Taxes.” This chapter regulates only the general rules for tax payments. However, the treatment of expenses deductible from taxable income is regulated not by Chapter VII, but by Chapter X of the Tax Code.
Chapter X is entitled “Articles Relating to Personal Income Tax and Corporate Profit Tax.” According to Article 108.1 of this chapter, except for expenses that are not deductible from income under the relevant provisions, all expenses related to earning income, as well as mandatory payments provided for by law, are deductible from income. Deductible expenses must be properly documented in accordance with the procedure established by law. Expenses that are not properly documented may not be deducted from income.
It is clear from this provision that all expenses related to earning income are deductible. Therefore, when Articles 69 and 108 of the Tax Code are considered together, Article 108 provides the more specific basis concerning expenses deductible from income.
Now let us examine what is meant by an “expense.” The Tax Code does not contain a specific definition of the term “expense.” Under the requirements of the Code, terms and expressions that are not defined therein are interpreted in accordance with their definitions in other normative legal acts.
The Conceptual Framework for the Preparation and Presentation of Financial Statements and International Accounting Standards define expenses as decreases in economic benefits during the reporting period resulting from the outflow or depletion of assets or the increase in liabilities, which result in a decrease in equity, other than distributions to owners.
Finally, let us examine all of these issues through examples involving foreign exchange differences.
Example: “AA” LLC is a legal entity engaged in foreign trade. In January 2026, the company exported goods worth EUR 10,000. On the export date, the euro exchange rate was 2 manats. In February, the buyer fully paid for the exported goods. On the payment date, the exchange rate was 1.90 manats.
In addition, the LLC imported goods worth EUR 20,000. On the import date, the exchange rate was 2 manats. The value of the goods was paid one month later, when the exchange rate was 1.90 manats.
Furthermore, to strengthen its financial position, the company obtained a loan of EUR 100,000 from abroad. The exchange rate on the date the loan was received was 1.80 manats. At the end of the reporting year, the exchange rate was 2 manats. The loan was used to acquire goods and equipment for the purpose of strengthening the company's business activities.
In addition, EUR 10,000 was credited to the bank account of “AA” LLC as payment for exported goods. The exchange rate on the date of receipt was 1.90 manats, at the end of the year it was 2 manats, and at the end of the following year it was 1.70 manats. The EUR 10,000 remained as a balance in the account.
Let us now determine the accounting treatment of the exchange differences.
First transaction — export:
On the export date: 10,000 × 2 = 20,000 manats;
On the payment date: 10,000 × 1.90 = 19,000 manats;
Foreign exchange loss: 20,000 – 19,000 = 1,000 manats.
Second transaction — import:
On the import date: 20,000 × 2 = 40,000 manats;
On the payment date: 20,000 × 1.90 = 38,000 manats;
Foreign exchange gain: 40,000 – 38,000 = 2,000 manats.
Third transaction — foreign currency loan:
On the date the loan was received: 100,000 × 1.80 = 180,000 manats;
At the end of the reporting year: 100,000 × 2 = 200,000 manats;
Exchange difference: 200,000 – 180,000 = 20,000 manats negative exchange difference.
What happens to this negative exchange difference of 20,000 manats?
As noted above, Article 69 of the Tax Code and IAS 21 provide that foreign currency transactions are recorded at the official exchange rate on the date of the transaction. In addition, expenses related to earning income are deductible from income. An increase in a specific liability is also considered an expense under the definition of expenses.
In our example, the loan obtained from abroad was initially related to earning income and was not used for non-commercial purposes. Since the liability associated with the loan increased by 20,000 manats at the end of the reporting year, this amount should be recognized as an expense. Accordingly, such expenses should be recognized as expenses in both accounting and tax records.
Fourth transaction — foreign currency account balance:
Funds credited to the foreign currency account: 10,000 × 1.90 = 19,000 manats;
At the end of the first year: 10,000 × 2 = 20,000 manats;
Positive exchange difference: 20,000 – 19,000 = 1,000 manats;
At the end of the second year: 10,000 × 1.70 = 17,000 manats;
Negative exchange difference: 20,000 – 17,000 = 3,000 manats.
How should these positive and negative exchange differences be accounted for?
According to Article 13.2.12 of the Tax Code, non-operating income includes, among other things, increases in exchange differences arising from foreign currency transactions.
It is therefore clear that any positive exchange difference should be recognized as non-operating income. This applies not only to exchange differences arising from receivables and payables under Article 69 of the Tax Code, but also to positive exchange differences arising from balances in foreign currency accounts and balances of liabilities denominated in foreign currency. Accordingly, the 1,000-manat exchange difference in our example will be recognized as income.
If a positive exchange difference arising from a foreign currency transaction is recognized as income, why should the negative exchange difference arising from the same transactions not be recognized as an expense? The 3,000-manat negative exchange difference arising from the account balance at the end of the second year represents a decrease in assets and should therefore be recognized as an expense. It should also be recognized as an expense in accounting and reporting.
One of the issues that has recently attracted the attention of taxpayers is whether certain foreign exchange differences can be deducted from income. In particular, when receivables and payables are denominated in foreign currency, foreign currency funds may remain as a balance in a bank account. Are foreign exchange gains and losses arising from the conversion of foreign currency into manats, the calculation in manats of debts to non-residents denominated in foreign currency, and the conversion into manats of loans obtained in foreign currency recognized as income or expense? Auditor Altay Jafarov provides clarification on these questions.
According to Article 69.1 of the Tax Code, any taxable transaction carried out in foreign currency is calculated in manats at the official exchange rate of the Central Bank of the Republic of Azerbaijan on the date of the transaction. Article 69.2 of the Code provides that the exchange difference arising from taxable transactions carried out in foreign currency is determined based on the difference between the exchange rate on the date of the transaction and the exchange rate on the date when the value of the goods, works or services is paid. At the end of the reporting year, exchange differences arising from receivables and payables related to goods, works and services acquired or supplied in foreign currency are valued at the exchange rate announced by the Central Bank and recognized as income or loss. The taxpayer's monetary funds denominated in foreign currency are also determined at the official exchange rate announced by the Central Bank as of the end of the calendar year.
As can be seen, Article 69 of the Tax Code applies to transactions involving the conversion of foreign currency into manats. The first requirement is that the conversion of foreign currency into manats must constitute a taxable transaction. The second requirement is that the taxable transaction must be carried out in foreign currency.
Article 69.2 does not apply to all transactions conducted in foreign currency, but only to a specific part of them. More specifically, it provides for the recognition as income or loss of exchange differences arising from specific goods, works and services. This provision also addresses the conversion into manats of funds remaining in a foreign currency account.
Therefore, the accounting of many transactions conducted in foreign currency is not regulated by this article. For this reason, one of the important points to consider is that Article 69 of the Tax Code belongs to Chapter VII of the Code, entitled “General Rules for the Payment of Taxes.” This chapter regulates only the general rules for tax payments. However, the treatment of expenses deductible from taxable income is regulated not by Chapter VII, but by Chapter X of the Tax Code.
Chapter X is entitled “Articles Relating to Personal Income Tax and Corporate Profit Tax.” According to Article 108.1 of this chapter, except for expenses that are not deductible from income under the relevant provisions, all expenses related to earning income, as well as mandatory payments provided for by law, are deductible from income. Deductible expenses must be properly documented in accordance with the procedure established by law. Expenses that are not properly documented may not be deducted from income.
It is clear from this provision that all expenses related to earning income are deductible. Therefore, when Articles 69 and 108 of the Tax Code are considered together, Article 108 provides the more specific basis concerning expenses deductible from income.
Now let us examine what is meant by an “expense.” The Tax Code does not contain a specific definition of the term “expense.” Under the requirements of the Code, terms and expressions that are not defined therein are interpreted in accordance with their definitions in other normative legal acts.
The Conceptual Framework for the Preparation and Presentation of Financial Statements and International Accounting Standards define expenses as decreases in economic benefits during the reporting period resulting from the outflow or depletion of assets or the increase in liabilities, which result in a decrease in equity, other than distributions to owners.
Finally, let us examine all of these issues through examples involving foreign exchange differences.
Example: “AA” LLC is a legal entity engaged in foreign trade. In January 2026, the company exported goods worth EUR 10,000. On the export date, the euro exchange rate was 2 manats. In February, the buyer fully paid for the exported goods. On the payment date, the exchange rate was 1.90 manats.
In addition, the LLC imported goods worth EUR 20,000. On the import date, the exchange rate was 2 manats. The value of the goods was paid one month later, when the exchange rate was 1.90 manats.
Furthermore, to strengthen its financial position, the company obtained a loan of EUR 100,000 from abroad. The exchange rate on the date the loan was received was 1.80 manats. At the end of the reporting year, the exchange rate was 2 manats. The loan was used to acquire goods and equipment for the purpose of strengthening the company's business activities.
In addition, EUR 10,000 was credited to the bank account of “AA” LLC as payment for exported goods. The exchange rate on the date of receipt was 1.90 manats, at the end of the year it was 2 manats, and at the end of the following year it was 1.70 manats. The EUR 10,000 remained as a balance in the account.
Let us now determine the accounting treatment of the exchange differences.
First transaction — export:
On the export date: 10,000 × 2 = 20,000 manats;
On the payment date: 10,000 × 1.90 = 19,000 manats;
Foreign exchange loss: 20,000 – 19,000 = 1,000 manats.
Second transaction — import:
On the import date: 20,000 × 2 = 40,000 manats;
On the payment date: 20,000 × 1.90 = 38,000 manats;
Foreign exchange gain: 40,000 – 38,000 = 2,000 manats.
Third transaction — foreign currency loan:
On the date the loan was received: 100,000 × 1.80 = 180,000 manats;
At the end of the reporting year: 100,000 × 2 = 200,000 manats;
Exchange difference: 200,000 – 180,000 = 20,000 manats negative exchange difference.
What happens to this negative exchange difference of 20,000 manats?
As noted above, Article 69 of the Tax Code and IAS 21 provide that foreign currency transactions are recorded at the official exchange rate on the date of the transaction. In addition, expenses related to earning income are deductible from income. An increase in a specific liability is also considered an expense under the definition of expenses.
In our example, the loan obtained from abroad was initially related to earning income and was not used for non-commercial purposes. Since the liability associated with the loan increased by 20,000 manats at the end of the reporting year, this amount should be recognized as an expense. Accordingly, such expenses should be recognized as expenses in both accounting and tax records.
Fourth transaction — foreign currency account balance:
Funds credited to the foreign currency account: 10,000 × 1.90 = 19,000 manats;
At the end of the first year: 10,000 × 2 = 20,000 manats;
Positive exchange difference: 20,000 – 19,000 = 1,000 manats;
At the end of the second year: 10,000 × 1.70 = 17,000 manats;
Negative exchange difference: 20,000 – 17,000 = 3,000 manats.
How should these positive and negative exchange differences be accounted for?
According to Article 13.2.12 of the Tax Code, non-operating income includes, among other things, increases in exchange differences arising from foreign currency transactions.
It is therefore clear that any positive exchange difference should be recognized as non-operating income. This applies not only to exchange differences arising from receivables and payables under Article 69 of the Tax Code, but also to positive exchange differences arising from balances in foreign currency accounts and balances of liabilities denominated in foreign currency. Accordingly, the 1,000-manat exchange difference in our example will be recognized as income.
If a positive exchange difference arising from a foreign currency transaction is recognized as income, why should the negative exchange difference arising from the same transactions not be recognized as an expense? The 3,000-manat negative exchange difference arising from the account balance at the end of the second year represents a decrease in assets and should therefore be recognized as an expense. It should also be recognized as an expense in accounting and reporting.