The Significant Differences between VASs and IFRSs

VASs has changed greatly, helping enterprises prepare financial statements closely with IFRSs. This standards system has assisted Vietnam to integrate and develop strongly after its WTO accession, not only in the number of foreign business and economic groups to enter and do business in Vietnam, but also more and more Vietnamese ones are trying to increase exports and set up overseas business operations (Deloitte Vietnam, 2010). However, VASs still differ significantly from IFRSs (Tran Xuan Nam, 2010a). This section will present some significant differences that may influence the decisions of investors in some points of income statement and balance sheet.

Firstly, Tran Xuan Nam (2010a) noted that the significant differences between VAS and IAS in the items of the income statement are expressed through some points including: Interim Financial Reporting, consolidated financial statements, Earnings per Share (EPS), diluted EPS, and operating income.

Interim Financial Reporting: Under the VAS 02, VAS 07, and VAS 23 about making provision for the inventory price decrease reserve, the security price decrease reserve, or the adjusted profits and losses, investors’ share in associated companies or joint ventures and other events occurring after the date of the balance sheet accounting for only adjust the financial statements for the end of the reporting period of the year (year-to-date period). It means that it is not required to adjust for interim financial

29

statements for month, quarterly and half-year (Tran Xuan Nam, 2010a). This leads to this interim financial statements do not reflect the full and timely financial situation of enterprises. In this case, under IAS 10- Events after the balance sheet date: “If an entity receives information after the reporting period about conditions that existed at the end of the reporting period, it shall update disclosures that relate to those conditions, in the light of the new information” [IAS 10.19] (Deloitte IAS PLUS, 2010).

Consolidated financial statements: According to VAS 25 [Consolidated Financial Statements and Accounting for Investments in subsidiary], the consolidated financial statements of corporations are only mandatory at the end of the accounting period of the year, half-year period reports are not required but encouraged to prepare, the corporations must only publish their own report parent company. Under IAS 27 [Consolidated and Separate Financial Statements], the corporations must adjust, set and publish consolidated financial statements for end of the reporting period. [IAS 27.22; 23]

It means both financial statements at the end and half of the reporting period of the year.

Besides, PricewaterhouseCoopers (2008) asserted that “VAS 25 allows a subsidiary to be excluded from consolidation when it operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent. IAS 27 does not contain such exemption.” (PricewaterhouseCoopers, 2008)

Earnings per Share (EPS): EPS is one of the important indicators, the most frequently used for investors and it affects greatly to the company's stock price. The calculation of EPS under the VAS 30 and IAS 33 are the same: “Basic earnings per share shall be calculated by dividing profit or loss attributable to ordinary equity holders of the parent entity (the numerator) by the weighted average number of ordinary shares outstanding (the denominator) during the period.” [IAS 33.10; VAS 30.8]

However, under Circular No. 21/2006/TT-BTC guiding VAS 30, accounting profit before tax does not deduct bonus and welfare fund for staff and welfare fund is not for shareholders (MOF, 2006). This prescription did not reflect honestly and objectively the financial condition of the business. Under IAS, welfare is be calculated into the cost to reduce profit when calculate EPS. Usually after a year of profitable operations, the enterprises spend about 5-15% net profit after tax to give staffs in the form of the reward fund (Tran Xuan Nam, 2010b).

30

Diluted EPS: diluted EPS is an important indicator for investors which “ to provide a measure of the interest of each ordinary share in the performance of an entity - while giving effect to all dilutive potential ordinary shares outstanding during the period.” [IAS 33.32] Although the VAS 30 required to present diluted EPS but the circular to guiding this standard did not provide guidance on clear and the uniform form of income statement did not have this content, so almost Vietnamese enterprises is not presented diluted EPS. IAS prescribed “an entity shall present basic and diluted earnings per share with equal prominence for all periods presented.” [IAS 33.66]

The concept of operating income: Operating income of a company is important, which is the most important and stable earnings source of the business. Tran Xuan Nam (2010a) further opined that for comparison and better governance, IAS defines operating income is the profit or loss from ordinary business activities of enterprises; it does not include items of income and expenses of financial as in VASs.

Secondly, the significant differences between VAS and IAS in the items of the balance sheet are expressed through some points such as inventories (IAS 02 various VAS 02), tangible fixed assets (IAS 16 vs. VAS 03), and investment property (IAS 40 vs. VAS 05) (Tran Xuan Nam, 2010a).

Inventories: Key differences between IAS 2 and VAS 2 are about cost formulas (Deloitte Vietnam, 2010), techniques for the measurement of the cost of inventories (PricewaterhouseCoopers, 2008), and write down to net realizable value (Deloitte Vietnam, 2010).

- VASs and IFRSs is a difference about cost formulas. VAS 02 “inventories” permits

“the use of the last-in, first-out (LIFO) formula to measure the cost of inventories”

[VAS 02.13]. However IAS 02 “inventories” is “prohibition of LIFO as a cost formula” [IAS 02.13].

- “Techniques for the measurement of the cost of inventories, such as the standard cost method or the retail method, may be used for convenience if the results approximate cost” [IAS 02.21] but are not permitted under VAS 02.

- “Inventories are usually written down to net realizable value item by item. In some circumstances, however, it may be appropriate to group similar or related items.”

31

[IAS 02.29] In VAS 02, it is not permitted to write down to net realizable value to group similar or related items. “The inventory price decrease reserve shall be set up for each kind of inventories.” [VAS 02.19]

Tangible Fixed Assets: According to Deloitte Vietnam (2010) and PricewaterhouseCoopers (2008), main differences between IAS 16 (Property, Plant and Equipment) and VAS 03 (Tangible Fixed Assets) are at criteria for recognition of tangible fixed assets, and measurement after recognition.

- Criteria for recognition of tangible fixed assets: According to VAS 03, the assets are “be recognized as tangible fixed assets, assets must meet simultaneously all the following four recognition criteria: (a) future economic benefits will surely be obtained; (b) their historical cost has been determined in a reliable way; (c) their useful life is estimated at more than one year; and (d) they meet all value criteria according to current regulations” [VAS 03.06]. (The minimum value to recognize as fixed asset is 10 million VND [is equivalent 500 USD].) IAS 16 is not regulated to the minimum value to recognize of tangible fixed assets.

- Measurement after recognition: According to IAS 16, entity choice revaluation model as fair value which can be measured reliably for all items of property, plant and equipment. “The revalued amount is the fair value of the items at the date of the revaluation less any subsequent accumulated depreciation and accumulated impairment losses” [IAS 16.09,31]. In VAS 03.28, tangible fixed assets shall be determined according to their historical costs. “Enterprises must apply this standard even when they are affected by price changes, except otherwise prescribed by State decisions related to the re-appraisal of tangible fixed assets.” [VAS 03.04]

Investment Property: According to IAS 40.33, after initial recognition, an entity that chooses the fair value model shall measure all of its investment property at fair value. “VAS 05 is similar to IAS 40 except fair value measurement is prohibited under VAS 05” (PricewaterhouseCoopers, 2008). Investment property should be measured at cost, less accumulated depreciation to arrive at net book value in the holding period.

[VAS 05.22]