Circular Brings Vietnamese Accounting Closer to IFRS
Circular No. 200/2014/TT-BTC provides guidelines on accounting policies for both local and foreign enterprises in Vietnam for the fiscal year beginning January 1, 2015. It applies to the selection of a foreign currency for accounting purposes, accounting principles for turnover from the sale of goods and services, and other areas. It replaced Circular No. 244/2009/TT-BTC and Decision No. 15/2006/QD-BTC.
Below are some of the major changes to the accounting and financial reporting rules in this Circular.
Selecting a foreign currency for accounting purposes:
Any business operating in Vietnam, whether foreign-invested or local, which mainly conduct transactions including sales, purchase, and provision of goods and services using foreign currencies are permitted to choose a foreign currency unit in accounting and must notify relevant tax authorities of their choice. Once a foreign currency is selected as an accounting currency unit, an enterprise cannot change it except for special circumstances, such as when there are significant alterations in the company’s transactions. It is also important to be aware that besides preparing a financial statement in the selected foreign currency, an enterprise must convert the statement into VND before publishing and submitting it to appropriate regulatory authorities.
The principles for converting financial statements under Circular No. 200 of 2014 are closer to the International Financial Reporting Standards (IFRS) than previously. Unlike the former Circular No. 244/2009/TT-BTC, which specified that all items in the financial statements of an enterprise must be converted using the average interbank exchange rate at the end of the accounting period, enterprises may now use different exchange rates for different items. In particular, assets and liabilities are converted into VND based on the exchange rate at the end of the period, while the equity of a company’s owner is converted at the exchange rate on the date of transaction (i.e. the date of contributing capital). This change may mainly affect foreign-invested companies, banks, and insurance companies since they are most likely to have varied exchange rate conversions for different items.
Accounting Principles for Turnover from Selling Goods and Provision of Services:
Under Circular No. 200, revenue must be recorded in accordance with the nature of the transaction, rather than its legal form, and only when the enterprise’s obligations are completely fulfilled. For real estate enterprises, such obligations might include completely handing the real estate and all risks and benefits associated with ownership of the real estate to the buyers. Thus, an enterprise shall not record the turnover received in advance of the payment schedule from customers. Furthermore, the revenue from selling real estate does not fall under accounting standards of construction contracts, but rather accounting policies for the sale of goods.
With regards to products provided for free, which are separate from other sales transactions, the costs of these goods are recorded as selling expenses. However, for products received upon the condition that customers purchase other goods, an enterprise must record revenue for both sold and promotional products. Specifically, the latter is recorded as cost of sales.
As the cost of goods sold and the cost of goods provided for promotion were not clearly defined previously, they were all recorded as selling expenses. Therefore, when enterprises apply Circular No. 200, those that operate mainly in manufacturing consumer goods will see their gross profit margin and selling expenses affected. When types of promotional goods are differentiated, reported revenue may decline while operating profit margin may increase, leaving the net profit unchanged.
Circular No. 200/2014/TT-BTC also introduces new accounts. For accounts used to record investments, “short-term” and “long-term” investment accounts are replaced with trading securities (Account 121), held-to-maturity investments (Account 128), and other investments (Account 228).
The Circular removes the Last-in First-out (LIFO) method for excluding the appropriation for bonus and welfare funds when calculating the earnings per share (EPS).
Furthermore, enterprises are permitted to design accounting forms as long as they meet the requirements of the Law on Accounting and satisfy the principles of transparency and easiness to verify.
Many of these changes bring Vietnam closer to meeting the requirements of the IFRS international standards, enhancing comparability and transparency.