IFRS and VAS Part 3: Income Statements
Contributed by Vinh Le, Manager, Corporate Accounting Services
In part three of this three-part series, Vietnam Briefing discusses the impact of differences between IFRS and VAS on companies’ income statements. Part 2 can be viewed here.
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.
In Vietnam, revenue is regulated by VAS 14 – revenue and other income and VAS 15 – construction contracts. These two standards are based on the old IAS 18 – revenue and IAS 11 – construction contracts.
In IFRS 15, revenue from the customer contract was issued to replace IAS 18 and IAS 11. IFRS 15 has made important changes in revenue recognition that differentiate IFRS from VAS as analyzed below:
- Any sales of goods and services must be recognized under separate performance obligations, any discounts are amortized to such separate performance obligations; and
- Revenue is recognized in proportion to the value of the obligation performed (when the obligation is fulfilled, there will be revenue recognized, not based on the amount of the periodic payment or the amount recorded in the sales invoice).
In addition, IFRS 15 has some separate regulations on sales when customers have the right to return goods, warranties, selling agents, etc.
Expenses for impairment of assets
According to IAS 36 – impairment of assets, an enterprise should immediately recognize losses due to a decrease in the value of tangible and intangible fixed assets and financial assets. The value of these expenses is equal to the difference between the carrying amount and the recoverable value of the asset.
Because there is no similar standard, the impairment of assets is not recognized in VAS.
Standard of assets to be capitalized for borrowing costs: As per IAS 23, qualifying assets from borrowing cost (including long-term assets and inventories) are required to be capitalized when needed considerable time to be ready for sale or use.
IAS 23 does not exactly specify this time period. However, VAS 16 requires this period to be more than 12 months and only allows capitalization of borrowing costs for long-term assets.
IAS 23 requires that interest expenses are calculated using the effective interest method in accordance with the accounting standards on financial instruments. Thus, interest is recognized periodically using the discounted cash flow method rather than the actual contractual payables.
Meanwhile, for VAS 16 (based on the old version of IAS 23), interest is determined on a linear basis (straight-line allocation), rather than the discounted cash flow method.
Regarding the capitalization of exchange rate losses incurred when borrowing in foreign currency, in case the borrowing interest rate in foreign currency is lower than the borrowing rate in domestic currency: IAS 23 states that if there is an exchange rate loss on loan revaluation corresponding to the interest rate difference, it may be capitalized into the value of the assets if the loan is directly related to the construction of the asset in progress.
VAS 16 does not distinguish between borrowing in foreign or local currency and therefore, there is no regulation on the capitalization of foreign exchange losses mentioned above.
Consolidated financial statements and accounting for investments in subsidiaries
In practice, the determination of control is quite complex, in many cases it is difficult to determine whether one party has control over the other. IFRS 10 (replacing IAS 27) has added a number of criteria to clearly define the control that VAS 25 has not mentioned, including:
- The right to dominate over the investee;
- The relationship between the right to dominate and the benefits.
Minority shareholder interests: IFRS 10 (replaces IAS 27) requires the presentation of minority interests under equity in the consolidated balance sheet. However, this amount is separate from the shareholders’ equity of the parent.
Minority interests in the profit or loss of the group are also presented separately. Different from IFRS 10, VAS 25 only requires a separate presentation of liabilities and the equity of the parent’s shareholders.
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.
Under IAS 33, the bonus fund for the board of management and the bonus and welfare fund for employees will be recorded as the expenses to deduct from profit for shareholders. VAS 30 does not mention that this amount is adjusted when calculating the profit to be distributed to shareholders.
However, Circular 200/2014/TT-BTC states that the bonus and welfare fund is deducted from profit after tax, which must be deducted from profit distributed to shareholders.
IAS 33 and its appendix mention the distribution of stock dividends and the issuance of call options. VAS 30 does not have definitions and guidelines for these cases at the moment.
According to IAS 33, enterprises that are going to cease operations in the future are also required to present basic EPS and diluted EPS respectively in the statement of income and the notes, whereas, VAS 30 does not refer to this issue.
Further support for your business
As all foreign and local companies operating in Vietnam are obliged to conform to VAS, foreign investors should be well aware of the unique fundamental characteristics of VAS to fully comprehend compliance requirements and make informed investment decisions.
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