IFRS vs VAS (Part 3): Standards Yet to be Issued in Vietnam

The article "IFRS vs VAS (Part 1): An Overview of Key Differences" highlighted that IFRS has issued and implemented 41 IAS standards and 16 IFRS standards, while Vietnam Accounting Standards (VAS) only applies 26 standards. This reflects that VAS is still lagging behind, lacking many standards equivalent to IFRS, creating a significant gap between these two accounting frameworks. In this article, we will continue to explore the core content of IFRS standards that have not yet been issued in Vietnam, in order to provide readers with a comprehensive and in-depth understanding when comparing IFRS vs VAS.

IFRS vs VAS (Part 3)

IFRS 1: First-time Adoption of International Financial Reporting Standards

IFRS 1 - First-time Adoption of IFRS was promulgated to establish a robust framework for an entity's inaugural IFRS financial statements and interim financial reports during the first IFRS reporting period. The standard aims to ensure transparent and comparable financial information for users, provide a reasonable starting point for IFRS accounting, and confirm that implementation costs do not outweigh the benefits.

To facilitate a consistent approach for all first-time IFRS adopters, the International Accounting Standards Board (IASB) has codified a set of "must-do" and "must-avoid" actions within the standard:

"Must-do" actions:

• Identify the IFRS transition date and prepare an opening IFRS balance sheet at that juncture.
• Apply the prevailing IFRS standards in effect at the time of first IFRS reporting.
• Select appropriate accounting policies and apply them uniformly throughout the financial statements.
• Recognize all assets and liabilities as stipulated by IFRS.
• Classify and present financial statement line items in accordance with IFRS.

"Must-avoid" actions:

• Refrain from using accounting policies from prior standards if they do not comply with IFRS.
• Abstain from offsetting assets and liabilities or income and expenses, unless permitted by IFRS.
• Refrain from retaining accounting estimates that fail to meet IFRS requirements.

In addition to the "must-do" and "must-avoid" actions, IFRS 1 introduces optional exemptions and mandatory exceptions to facilitate the transition to IFRS.

• The optional exemptions allow entities to elect not to apply certain IFRS requirements retrospectively, such as the revaluation of property, plant, and equipment. This helps reduce the burden and costs of transition while maintaining consistency and comparability.
• The mandatory exceptions require entities to apply certain IFRS principles prospectively, where retrospective application would be impracticable or too costly, such as for estimates or derivative financial instruments.

>>> Find out: What is IFRS? What is the significance of IFRS today?

What must an entity do when it begins applying IFRS?

IFRS 07: Financial Instruments: Disclosures

IFRS 7 requires entities to provide comprehensive and transparent disclosures about financial instruments, enabling financial statement users to better understand the risks and impacts of these instruments on the entity's financial position and performance. The key aspects of this Standard are as follows:

Scope:

IFRS 7 applies to all financial instruments, including investments in subsidiaries, associates, and joint ventures.

Disclosure Requirements:

• Information about the significance of financial instruments for the entity's financial position and performance.
• Information about the nature and extent of risks arising from financial instruments, including credit risk, liquidity risk, and market risk.
• Policies for managing risks and the measures taken to mitigate them.

Presentation of Financial Assets and Liabilities:

• Classification and presentation of financial assets and liabilities in different categories.
• Disclosures about the carrying amounts and fair values of financial instruments.
  

Risk Disclosures:

• Sensitivity analyses for different types of market risks, such as interest rate risk, foreign exchange risk, and price risk.
• Information about the management of credit risk, liquidity risk, and market risk.

IFRS 7 requires entities to provide comprehensive and transparent disclosures about financial instruments

IFRS 8: Operating Segments

IFRS 8 Operating Segments is an important accounting standard that governs the presentation and disclosure of information about an entity's operating segments in its financial statements.

According to IFRS 8, an operating segment is identified based on the following factors:

• The business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other parts of the same entity).
• Its operating results are regularly reviewed by the entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance.
• Discrete financial information is available about it.

IFRS 8 requires an entity to disclose the following information about its operating segments:

• Revenues from external customers and inter-segment revenues.
• Segment profit or loss.
• Segment assets and liabilities.

• Other information such as depreciation, capital expenditures, etc.

IAS 19: Emloyees Benefits

International Accounting Standard (IAS) 19 "Employee Benefits" addresses the accounting requirements and disclosures for employee benefits, including:

Distinguishing between different types of employee benefits:

• Short-term benefits (such as wages, paid leave, and medical benefits)
• Post-employment benefits (such as pensions and post-employment medical care)
• Other long-term benefits (such as long-service leave and jubilee or other long-service benefits)
• Termination benefits
• Share-based payment transactions

The recognition and measurement of these employee benefit obligations, including:

• Short-term benefits: Recognized when the employee renders the related service.
• Post-employment and other long-term benefits: Using actuarial assumptions (such as turnover rates, salary growth rates, discount rates, etc.) to estimate the present value of the future obligations owed to employees. The entity recognizes a liability corresponding to the present value of these obligations.

The entity is required to disclose information about these employee benefits in the financial statements, including the assumptions used and the related risks.

The objective of IAS 19 is to prescribe the accounting policies for the recognition and disclosure of employee benefits

IAS 20: Accounting for Government Grants and Disclosure of Government Assistance

This standard provides guidance on the disclosure of government grants and other forms of government assistance in the entity's financial statements. Accordingly, government grants are only recognized when the entity has reasonable assurance that it will comply with the associated conditions and will actually receive the grant.

Recognition methods:

• Grants related to assets are recognized as deferred income, and are amortized systematically into the income statement over the useful life of the asset.
• Grants intended to compensate costs are recognized systematically in the relevant accounting periods.
  

Presentation and disclosure:

• The entity must present and disclose the accounting policies applied to government grants.
• The entity needs to disclose the other forms of government assistance from which the entity has benefited.

IAS 20 provides guidance on the disclosure of government grants and other forms of government assistance in the entity's financial statements

IFRS 9: Financial instruments

IFRS 9 - Financial Instruments is a new accounting standard that replaces IAS 39, and it sets the principles for the recognition, measurement, classification, and presentation of financial instruments in financial statements.

According to IFRS 9, the main financial instruments include:

• Financial assets: cash, investments, receivables, etc.
• Financial liabilities: loans, bonds, payables, etc.
• Equity instruments: shares, rights and obligations arising from contracts.

IFRS 9 prescribes three ways to classify and measure financial instruments:

• Amortized cost: applied to financial instruments held to maturity.
• Fair value through profit or loss (FVTPL): applied to financial instruments held for trading.
• Fair value through other comprehensive income (FVOCI): applied to debt investments and equity instruments.

The classification of financial assets into these three categories is based on the business model for managing the assets and the contractual cash flow characteristics of the assets.

Additionally, IFRS 9 introduces a new impairment model based on expected credit losses (ECL), which replaces the incurred loss model under IAS 39.

IFRS 9 prescribes three ways to classify and measure financial instruments

IFRS 14: Regulatory Deferral Accounts

IFRS 14 Regulatory Deferral Accounts is a new accounting standard issued to improve the comparability of financial information related to regulatory deferral accounts. Regulatory deferral accounts are amounts that an entity can adjust in the future to affect the price charged to customers for the supply of goods or services.

According to IFRS 14, entities are allowed to continue applying the accounting policies they used before adopting IFRS for the recognition, measurement, presentation, and disclosure of regulatory deferral account balances. However, IFRS 14 also introduces presentation requirements to enhance the transparency and comparability of the information disclosed, including:

• Presenting regulatory deferral account balances separately in the statement of financial position and the statement of profit or loss and other comprehensive income
• Providing information about the nature, risks, and expected future cash flows related to these regulatory deferral accounts
• Explaining the changes in the regulatory deferral account balances during the reporting period

The application of IFRS 14 will provide users of financial statements with a clearer view of the role and impact of regulatory deferral accounts on the entity's financial position and financial performance.

IAS 26: Accounting and Reporting by Retirement Benefit Plans

IAS 26 Accounting and Reporting by Retirement Benefit Plans prescribes the requirements for the presentation of financial statements when retirement benefit plans prepare separate financial statements. This standard requires the investments of retirement benefit plans to be measured at fair value.

According to IAS 26, retirement benefit plans are classified into two main types:

• Defined Contribution Plans: In these plans, the contributions of the employees and/or the employer to the retirement fund are predetermined. The retirement benefits depend on the accumulated value of the fund.
• Defined Benefit Plans: These plans define the retirement benefits that employees will receive based on factors such as the number of years of service and the final salary.

IAS 26 requires retirement benefit plans to prepare and present separate financial statements, which include:

• Statement of Financial Position: This presents the net assets available to pay the retirement benefits.
• Statement of Changes in Net Assets: This reflects the changes in the net assets during the period.
• Notes: These explain the accounting policies, assumptions, and related risks.

IAS 26 requires the investments of retirement benefit plans to be measured at fair value

IAS 41: Agriculture

(IAS) 41 - Agriculture is a crucial standard for businesses operating in the agricultural sector. This standard establishes the principles and guidance for the recognition and measurement of biological assets and agricultural produce at the point of harvest.

One of the key highlights of IAS 41 is the requirement for biological assets (such as growing crops or livestock) to be recognized at fair value less estimated costs to sell. This allows for a more accurate reflection of the actual economic value of these assets, rather than just recording them at historical cost. The revaluation of biological assets to fair value also helps companies recognize the timely changes in the value of these assets during their growth and development.

Additionally, IAS 41 provides guidance on the recognition and measurement of agricultural produce at the point of harvest. Accordingly, agricultural produce harvested from the entity's biological assets must also be recognized at fair value less estimated costs to sell. This helps to accurately reflect the economic value of the agricultural produce, while also creating consistency in the recognition of the company's biological assets and agricultural produce.

IAS 41 - Agriculture is an important standard that provides specific guidance on the recognition and measurement of biological assets and agricultural produce in the agricultural industry

IFRS 06: Exploration for and Evaluation of Mineral Resources

IFRS 6 is a critical accounting standard for enterprises operating in the extractive industries. This standard provides detailed guidance on the recognition and measurement of costs related to the exploration and evaluation of mineral resources.

Under IFRS 6, costs incurred from activities such as geological research, exploratory drilling, sampling, and related operations are recognized as assets, provided they have the potential to generate future economic benefits. These assets are measured using either the cost model or the revaluation model.

Another key element is that exploration and evaluation assets must be assessed for impairment when there is evidence of potential insufficient recoverability. If the carrying amount exceeds the recoverable amount, the difference is recognized in the statement of profit or loss.

Additionally, IFRS 6 requires enterprises to disclose the accounting policies applied, as well as information on the carrying amounts, changes, and any impairment losses.

Overall, IFRS 6 is an important standard that contributes to enhanced reliability and transparency in the financial reporting of extractive industry companies.

IFRS 6 contributes to enhanced reliability and transparency in the financial reporting of extractive industry companies

IAS 29: Financial Reporting in Hyperinflationary Economies

When a country falls into a state of hyperinflation, the financial reports of domestic enterprises become less meaningful if they are not adjusted to reflect changes in prices. This is the purpose of the international accounting standard IAS 29 - Financial Reporting in Hyperinflationary Economies.

According to IAS 29, when inflation in a country exceeds 100% over a period of 3 consecutive years, the economy of that country is considered to be hyperinflationary. In this case, enterprises must apply the principles of IAS 29 to adjust their financial data.

The main principles include:

• Using the monetary unit that has purchasing power equivalent at the end of the reporting period to present items in the financial statements.
• Adjusting non-monetary items (such as fixed assets, inventory) based on the consumer price index.
• Recognizing the net gain/loss from the net monetary position in the reporting period.
• Presenting comparative information that has been restated.

Compliance with the requirements of IAS 29 will help the financial statements more accurately reflect the financial position and performance of the enterprise in the context of hyperinflation. This provides more useful information for investors and other stakeholders in the decision-making process.

IAS 29 will help the financial statements more accurately reflect the financial position and performance of the enterprise in the context of hyperinflation

IAS 36: Impairment of Assets

Assets are one of the most important items on a company's balance sheet. However, in some cases, the book value of these assets may not fully reflect their true value. This is the reason why the international accounting standard IAS 36 - Impairment of Assets was developed.

IAS 36 establishes the principles and procedures to ensure that a company's assets are recorded at a value not exceeding their recoverable amount. Accordingly, the company must perform the following steps:

1. Identify indicators of asset impairment: for example, a significant decline in market value, adverse changes in technology, markets, laws, etc.
2. Estimate the recoverable amount of the asset: this is the higher value between fair value less cost to sell and value in use.
3. Compare the book value and the recoverable amount. If the book value exceeds the recoverable amount, the company must recognize an impairment loss.
4. Allocate the impairment loss reasonably among the assets in a group.
5. Periodically reassess and adjust the impairment loss if necessary in subsequent periods.

Impairment loss under IFRS

IFRS 02: Share-based Payment

In many cases, businesses use shares or rights related to shares to compensate employees, contractors, or other parties. The IFRS 2 accounting standard provides principles and guidance for recognizing and presenting these transactions in the financial statements.

According to IFRS 2, share-based payment transactions include:

• Transactions in which the entity receives goods or services in exchange for its equity instruments.
• Transactions in which the entity incurs a liability to transfer cash or other assets to the supplier of those goods or services for amounts based on the price of the entity's shares or other equity instruments.

IFRS 2 requires the entity to recognize these transactions in the financial statements, specifically:

• Recognize the goods or services received, with a corresponding increase in equity (if paid with equity instruments) or a liability (if paid with cash).
• Determine the fair value of the goods or services received based on the fair value of the equity instruments at the grant date.
• Allocate the recognized amount over the period during which the services are received or the vesting conditions are met.

Complying with IFRS 2 helps businesses properly recognize share-based payment transactions, which provides accurate information about personnel expenses and the structure of equity in the financial statements.

IFRS 2 helps businesses properly recognize share-based payment transactions

IFRS 5: Non-current Assets Held for sales and Discontinued Operations

IFRS 5 provides guidance on the recognition and presentation of non-current assets held for sale and discontinued operations. These regulations are very important as they help businesses accurately reflect their financial position and performance.

According to IFRS 5, non-current assets held for sale are assets whose carrying amount will be recovered principally through a sale transaction rather than through continuing use. These assets must meet the following conditions:

• They must be available for immediate sale in their present condition.
• The sale must be highly probable, meaning there is a plan to sell and an active search for a buyer is in progress.
• These assets are presented separately on the balance sheet and measured at the lower of their carrying amount and fair value less costs to sell.

In addition, IFRS 5 also provides guidance on the recognition and presentation of discontinued operations. These are components of an entity that are either being liquidated or have ceased operations, and represent a separate major line of business or geographical area distinct from the rest of the entity.

IFRS 13: Fair value measurement

Fair value is an important concept in the field of accounting and financial reporting. The international accounting standard IFRS 13 provides a detailed definition and guidance on determining fair value.

According to IFRS 13, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This is a market-based concept, reflecting the estimated value of an asset or liability under prevailing market conditions at the time of the valuation.

The standard requires entities to use appropriate valuation techniques to determine fair value, based on observable market data. The valuation techniques include:

• Market approach: Using transaction prices in the market for similar assets or liabilities.
• Income approach: Discounting future cash flows to determine present value.
• Cost approach: Determining the replacement cost of the asset.

IFRS 13 also requires comprehensive disclosure of the valuation methods and inputs used, to enhance the transparency and reliability of financial information.

>>> See Also: Historical Cost vs Fair Value: Understanding the Differences

Fair value represents the estimated price at which an asset or liability could be exchanged in the market

IFRS 12: Disclosue of Interests in Other Entities

IFRS 12 is an important accounting standard that enhances the transparency of transactions and relationships with related parties. This standard requires companies to disclose detailed information about their interests in other entities, including subsidiaries, joint arrangements, associates, and structured entities.

According to IFRS 12, related parties include:

• Subsidiaries: entities that the company controls
• Joint arrangements and associates: entities over which the company has significant influence
• Unconsolidated structured entities: entities in which the company is involved

The information that needs to be disclosed about related parties includes:

• Name and description of the nature of the relationship
• Ownership interests and voting rights
• Investments, revenues, expenses, and other transactions
• Associated risks and commitments
• Restrictions on the ability to transfer funds, pay dividends, or conduct other transactions

Full disclosure of this information will help users of the financial statements better understand the relationships, transactions, and risks related to related parties. This allows them to make more informed economic decisions.

IFRS 12 contributes to increasing the transparency and reliability of financial information, in line with the trend of increasingly stringent corporate governance and the requirement for clearer disclosure of information.

IFRS 11: Joint Arrangements

IFRS 11 is an important accounting standard that provides guidance to companies on how to consolidate financial statements for investments in joint arrangements. This standard replaces IAS 31 Interests in Joint Ventures and sets out the accounting principles for parties involved in joint arrangements.

According to IFRS 11, the main types of joint arrangements are:

• Joint operations: where the parties have rights to the assets and obligations for the liabilities of the arrangement
• Joint ventures: where the parties have rights to the net assets of the arrangement

For joint operations, the company must recognize its share of the assets, liabilities, revenues and expenses. For joint ventures, the company must recognize the investment using the equity method.

IFRS 11 emphasizes the need to determine the rights and obligations of the parties to the joint arrangement based on the legal structure, not just the legal form. This helps companies properly reflect the economic substance of the joint arrangement.

This standard enhances the transparency and reliability of financial information related to joint arrangements, which is important given the increasing prevalence of such collaborative business structures.

IFRS 11 provides guidance to companies on how to consolidate financial statements for investments in joint arrangements

>>> See Also: List of International Financial Reporting Standards

Conclusion

The transition from VAS to IFRS represents a significant milestone for Vietnamese businesses, one that holds the promise of greater integration with the global economy. However, successfully implementing IFRS requires a deep understanding of the nuances that distinguish it from the familiar VAS. Through this series of articles comparing the two accounting standards, we aim to equip our readers with the insights necessary to navigate this transformative period. By bridging the gap between IFRS vs VAS, we empower Vietnamese enterprises to make informed decisions, strengthen their competitive edge, and solidify their position as global players.

>>> See Also: IFRS vs VAS (Part 2): Gaining Insight into the differences

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