In part two of this three-part series, Vietnam Briefing introduces the impact of the differences between IFRS and VAS on the presentation of balance sheets.
International Financial Reporting Standards (IFRS) are global accounting standards issued and regulated 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), yet there are key differences between the two.
IFRS and VAS both require balance sheets as part of a company’s financial statements. A balance sheet reflects an enterprise’s financial situation, including assets, liabilities, and owners’ equity, at a particular time of the company’s fiscal year. Some balance sheet items are stipulated differently according to IFRS and VAS, which are specified as follows.
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.
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 only allows recording tangible fixed assets with the original cost method, whereas IAS 16 uses two methods that are recognition of assets based on the original cost method and revaluation of assets in accordance with fair value. The two methods are:
- 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 they request.
IAS 38 stipulates that land and the right to use land are considered as tangible assets, while VAS 04 view 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 investment must be reported in profit and loss statements, and the fair value of property investment need to reflect the market situation at the date stated on the balance sheet. Moreover; companies must inform investors, who evaluate and compare the accuracy of those financial statements, the original cost of properties.
Loss from Impairment
IAS 36 stipulates that in the 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.
Source: Vietnam Briefing
Key words: IFRS, VAS, Part 2, Presentation of Balance Sheets
