International Financial Reporting Standards (IFRS) are global accounting standards issued by the International Accounting Standard Board (IASB) to guide the preparation and presentation of financial reports. Vietnam uses IFRS as a basis for its own system, the Vietnamese Accounting Standards (VAS).
To provide guidance for local and foreign enterprises in Vietnam, the Ministry of Finance recently issued circulars meant to enhance the comparability and transparency of corporate financial statements
But there are key differences between the two that CFOs and others on the finance team must know when setting up in Vietnam. All foreign and local companies operating in Vietnam are obliged to conform to VAS, so foreign investors should be well aware of unique fundamental characteristics of VAS to fully comprehend compliance requirements and make informed investment decisions.
To provide guidance for local and foreign enterprises in Vietnam on the 26 Vietnamese Accounting Standards so far issues, the Ministry of Finance recently issued Circulars No. 200/2014/TT-BTC and No. 202/2014/TT-BTC. These are meant to enhance the comparability and transparency of corporate financial statements and bring the two systems closer.
Key differences between IFRS and VAS include terminology, applied methods or presentation scope. Below are several critical differences between the two financial reporting systems.
Presentation of Financial Statements
A complete set of financial statements based on IASB’s International Accounting Standard (IAS) 1 includes the following:
- Balance Sheet
- Income Statement
- Cash Flow Statement
- Statement of Changes in Equity
- Notes, including a summary of significant accounting policies and other notes
The components of financial statements under VAS are:
- Balance Sheet
- Income Statement
- Cash Flow Statement
According to VAS 21, the Statement of Changes in Equity is part of Notes, rather than a primary component of the financial statement. Furthermore, VAS does not require disclosure of management’s key judgments, assumptions about the future and sources of estimation uncertainty.
Cash Flow Statements
Under IFRS 7, cash flow statements are based on the balance sheets from the first and final period accounting reports, and can include some information from the ledger. IFRS stipulate that receivable accounts and trade payables can be separated from receivable accounts and payables on the sale of fixed assets or long-term assets. Hence, cash flow from business is distinct from cash flow from financial investment.
In Vietnam, based on VAS 24, cash flow statements are taken from the cashbook and ledger bank deposits corresponding to the side account. VAS 24 gives guidance on setting up the cash flow statement using the indirect method starting from pre-tax profits plus or minus the adjustment, including differences of payables and excluding payables related to financial investment activities.
Chart of Accounts
Vietnam’s Ministry of Finance issued a uniform chart of accounts for enterprises’ financial statements. Circular No. 200/2014/TT-BTC introduced new accounts, including corporate restricting funds (Account 417) and price stabilization funds (Account 357), while some are omitted or amended.
IFRS and VAS both require balance sheets as part of a company’s financial statements. Some balance sheet items are stipulated differently according to IFRS and VAS
On inventories, IAS 02 uses the normal costing method to calculate the production costs. This method states that:
- Direct raw material and direct employee costs are calculated as actual costs, which do not exceed allowance restriction;
- “Last in – First out” (LIFO) method is not allowed to calculate the inventory valuation;
- Provision for devaluation of stocks is established on the date of balance sheet; and
- Costs of biological assets and agricultural products are recorded as fair value minus the sale of estimated costs. If the fair value is not determined reliably, this cost will be recorded as the original cost.
Vietnam’s VAS 02 applies the normal costing method to calculate the production costs. However, due to the lack of implementing guidance in Vietnam, most businesses still calculate production costs based on actual costs. In contrast to IAS 02, VAS 02 stipulates that:
- LIFO is used to calculate inventory valuation;
- Provision for devaluation of stocks is set up at the end of the year; and
- Costs of biological assets and agricultural products are recorded as the original costs (the total cost attributed to purchasing assets) or prime costs (the direct cost of commodities, including costs for material and labor involved in production, excluding fixed costs).
Tangible Fixed Assets
VAS 03 allows only recording tangible fixed assets with the original cost method. In contrast, IAS 16 uses two methods: recognition of assets based on the original cost method and revaluation of assets in accordance with fair value:
Cost method: Assets are recorded as its original price minus the deduction of accumulation and the amount of accumulated impairment losses.
Revaluation method: Assets are recorded under the revaluation amount, which is the fair value at the date of revaluation minus accumulated depreciation and accumulated devaluation losses. IAS 16 requires the revaluation method to be used only if fair value of property can be measured reliably. However, when using the fair value, enterprises still have to present the capital costs to investors if requested.
IAS 38 stipulates that land and the right to use land are considered as tangible assets, while VAS 04 views them as intangible fixed assets.
Real Estate Investment
Enterprises can use the fair value model to measure the value of real estate investment in accordance with IAS 40. But for VAS 05, fair value measurement is not allowed. Investment properties must be measured at cost less accumulated depreciation.
According to the fair value model, the change in the fair value of real estate investments must be reported in profit and loss statements, and the fair value of property investments need to reflect the market situation at the date stated on the balance sheet.
Moreover, companies must disclose the original cost of properties to investors, who evaluate and compare the accuracy of those financial statements.
Loss From Impairment
IAS 36 stipulates that, in case assets are impaired, companies must estimate the recoverable amount of the asset and record this value in the financial statements during the period the impairment loss arises. An impaired asset is defined as an asset carried at a cost exceeding the amount to be recovered through use or sale.
VAS, in contrast, does not require a record of this amount in the financial statements.
Funds Not Included in Equity
Distinct from the definition of equity in the Vietnamese Accounting system, equity in IAS 19 does not include bonus and welfare fund. This payment must be recorded and reported as staff costs and liabilities for employees.
About the Author
Dezan Shira & Associates, a specialist foreign direct investment practice that provides advisory services to multinationals investing in emerging Asia. This article was first published in Vietnam Briefing and was reedited for clarity and conciseness. For further details or to contact the firm, please visit www.dezshira.com.
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