In part three of this three-part series, Vietnam Briefing discusses the impact of differences between IFRS and VAS on companies’ income statements.
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.
The goal of the income statement in a company’s financial statements is to reflect the profit and loss of an enterprise over a certain period of time, helping investors understand the financial situation and operating performance of a business.
Consolidated financial statements
According to VAS 25, a parent company is not required to submit consolidated financial statements if it is a wholly-owned subsidiary. A virtually wholly-owned company also does not have to present its financial statements if the parent company owns at least 90 percent of voting power and receives the approval of the owners of the minority stocks.
Under IAS 27, a parent company is not obligated, but may choose to report consolidated financial statements if the following conditions are satisfied:
- The parent’s debt or equity instruments are not publicly traded;
- The parent neither filed nor in the process of filling its financial statements to issue any class of instruments in a public market; and
- The ultimate or any intermediate parent of the entity publishes consolidated financial statements in accordance with IFRS.
Similar to VAS 25, the minority shareholders do not have the right to object to the parent’s decision whether it will present the consolidated financial statements.
While VAS 25 stipulates that unrealized losses arising from intercompany transactions are eliminated unless costs cannot be recovered, according to IAS 27, the losses within the parent may imply a reduction and must be reported in the consolidated financial statements.
IAS 27 requires the presentation of minority interests under equity in the consolidated balance sheet. However, this amount is separate from shareholders’ equity of the parent. Minority interests in the profit or loss of the group are also presented separately. Different to IAS, VAS 25 only requires separate presentation of liabilities and the equity of the parent’s shareholders.
With regards to financial statements of an associate or a jointly controlled entity, VAS 25, on the other hand allows the parent to record investments at cost
When businesses lose control of a subsidiary,VAS 25 does not provide any implementing guidance for this circumstance; however, the parent is not allowed to record the remaining residual holding based on the fair value.
Measurement and presentation of basic earning per share (EPS)
Basic EPS is one of the most popular figures to use for investors, which might influence the stock price in the market.
VAS 30 stipulates that net profit of ordinary shareholders is the total net interest after tax that includes reward fund and employee welfare, but excludes non-shareholder funds. VAS requires stocks to be calculated from the first day of the period in the stock split and stock bonus events.2
Under IAS 33, for the purpose of calculating EPS, the amount attributable to ordinary equity holders of the parent entity in respect of gain or loss from continuing operation attributable to the parent entity and gain or loss attributable to parent entity will be the total amount for both cases, adjusted for the after-tax amounts of preference dividends, differences arising on the settlement of preference shares, and other similar effects of preference shares classified as equity.
The main difference between IAS 33 and VAS 30 is while the stock dividend is clearly stated in IAS 33, VAS 30 does not mention it.
Financial Revenue and Financial Expenses
Financial revenue and financial expense are calculated in the amount of gain or loss from the ordinary business under VAS 16. However, in accordance with IFRS, financial revenue and financial expenses are recorded separately from business operation, which are specified as follows.
Financial expenses under IAS 23 are borrowing and direct costs related to the loan, including gain and loss due to changes in foreign currency exchange rate. Other expenses and other incomes such as real estate investments must be in accordance with the fair value model. The difference of fair value between the beginning of period and the end of period must be recorded as a gain and loss in the financial statement of the reporting period. In contrast, VAS only applies original cost minus accumulated depreciation, so no gain or loss arises.
In terms of unrealized profits or losses on investment, according to IAS 32 and IAS 39 about financial instrument, the difference between market value and previous book value will be recorded in unrealized gain and loss. In the case of sale investment, the variance between market price and capital cost or book value will be recorded in unrealized gain and loss on investment, but the owner’s equity in balance sheet and equity’s change will not be included in an income statement.
Under VAS, when the market price falls below capital cost, accountants have to record the provision for credit account of financial expenses and provision for debit account of short- and long-term investment deduction.
Events After the Reporting Period
Based on the adjusting events following the balance sheet date, an enterprise needs to adjust the amounts recorded in the financial statements to reflect any changes, according to IAS 10. This statement does not apply to non-adjusting events.
On the other hand, VAS 23 only requires adjustment for events at the end of a full fiscal and does not obligate the adjustment for temporarily monthly and quarterly financial statements.
Source: Vietnam Briefing
Key words: IFRS and VAS, Part 3, Income Statements
