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

Scope

• Exclusions from the scope of application include financial instruments, biological assets related to agricultural activity, and agricultural produce at the point of harvest. These assets are covered by separate standards such as IAS 41 - Agriculture, IFRS 9 - Financial Instruments, etc.
• Financial instruments and biological assets are presented separately from the Inventories line item on the financial statements.
• Agricultural produce at the point of harvest is presented under the Inventories line item on the financial statements, similar to VAS 02.
  

• Derivatives, biological assets related to agricultural activities, and agricultural produce at the time of harvest are all covered under the general scope of VAS 02.
• Financial instruments and biological assets related to agricultural activities are presented together under the Inventories line item on the financial statements.
  

The unique characteristics of agricultural produce and biological assets often have long growth and maturation cycles, and their values can change continuously. The value of agricultural produce and biological assets is often difficult to reliably determine based on historical cost or production costs. Therefore, according to IAS 41, these assets are valued at Fair Value Less Costs to Sell.

In contrast, under VAS 02, agricultural produce and biological assets are valued similarly to other inventory items, determined based on historical cost principles, which does not accurately reflect the constantly fluctuating true values of these assets.

The recognition criteria

Equipment, tools and instruments that meet the recognition criteria for tangible fixed assets (Property, Plant and Equipment), are recognized as Property, Plant and Equipment (PPE), without the need to consider the asset's value.

Assets with original cost below 30 million VND (as per current regulations), such as tools, equipment, etc., are recognized as Inventory.

Initial Recognition

Measurement subsequent to initial recognition

Cost calculation method

• The same costing method is applied for inventory items of similar nature and intended use.
• Inventory groups with different characteristics may apply different costing methods.
  

Scope

• Exclude the scope of application for Biological Assets related to agricultural activities, which have been separately regulated in IAS 41 - Agriculture.
  
• Exclude assets arising from exploration and evaluation activities (separately regulated in IFRS 6 Exploration for and Evaluation of Mineral Resources).
• Exclude Property, Plant and Equipment classified as held for sale, which are specifically regulated under IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations.
  

Does not exclude.

Industrial crops such as rubber, coffee, etc. or breeding livestock such as dairy cows, pigs, etc. have a process of growth and reproduction during the growth process. The directly related costs such as breeding, planting cannot reflect the value of these specific assets. IAS 41 requires biological assets to be recognized at Fair Value Less Costs to Sell, while VAS 03 requires recognition at historical cost, which are the directly related costs of breeding and planting these assets. Therefore, under VAS 03, biological assets are not properly reflected in the financial statements.

The recognition criteria

Recognition of PPE that is purchased, but the PPE itself does not generate economic benefits, but is necessary to enable other assets to generate economic benefits.

There is no similar requirement.

A chemical manufacturer may install new chemical processing procedures to comply with environmental requirements for the production and storage of hazardous chemicals; the related upgrades to the plant are recognized as an asset because without them, the entity cannot produce and sell the chemicals.

There is no standard for the value of tangible fixed assets.

Must meet the required value criteria under current regulations.

According to Circular 45/2013/TT-BTC , the original cost of fixed assets must be 30 million VND or higher.

Initial Recognition

Include the costs of dismantling, removing and restoring the asset in the initial recognition value of PPE.

Do not include the costs of dismantling, removing and restoring the asset in the initial recognition value of PPE.

A company purchases an old office building and plans to renovate and refurbish the building for use.

According to IFRS, the expected costs of dismantling, removing the parts of the old building, and restoring the site after the completion of the renovation work must be included in the initial purchase price of the office building.

These costs may include:

• Costs of hiring services to dismantle, remove old materials and equipment
• Costs of transporting and handling the excess materials
• Costs of site leveling and site restoration after the work is completed

When recognizing the building asset, the company will add these costs to the initial purchase price of the building. These costs will be depreciated together with the building over the useful life of the asset.

Measurement subsequent to initial recognition

Allowed to choose 1 of the following 2 models when determining the value of PPE:

• Revaluation model at fair value.
• Cost model.

If choose the revaluation model at fair value, it must be applied to all PPE within the same class of assets.

According to VAS, fixed assets are typically recognized using the cost model. However, this does not always accurately reflect the true value and earning potential of the asset. 

For example: Vinalines' buoy 83M has a book value of hundreds of billions of Vietnamese dong, but the actual economic benefits generated are very low. Conversely, some real estate fixed assets may have increased significantly in value compared to their original cost. Solely recording fixed assets at cost without revaluation can lead to significant discrepancies that do not accurately reflect the true potential of the business.

Each component of a PPE (Property, Plant, and Equipment) that has a significant cost relative to the total cost of the asset must be depreciated separately.

There is no clear regulation on the depreciation cost for each significant component within a PPE.

The aircraft frame and engine can be depreciated separately, as both of these components have a significant value relative to the total original cost of the aircraft.

Recognize the loss from impairment of PPE (Property, Plant, and Equipment) in the Income Statement in the period the loss is incurred.

Not been mentioned in Standard

Definition of Borrowing Costs

Borrowing costs include:

• Interest expense calculated using the effective interest method as described in IFRS
• Interest in respect of lease liabilities recognised in accordance with IFRS 16 Leases; and
• Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
  

Borrowing costs do not include exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

Definition of Qualifying Assets

Unlike VAS, IAS 23 does not specify a specific period of more than 12 months as the definition of a "substantial period of time" for a qualifying asset. 

A qualifying asset is an asset that:

• Is under construction or production, and
• Takes a substantial period of time (more than 12 months) to get ready for its intended use or sale.
  

Cost of Acquisition Achieved in a step acquisition​

• If the business combination is achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss.
• Acquisition-related costs (e.g. advisory fees, legal,...) are excluded from the purchase price. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception.
  
• The purchase price includes any contingent consideration payments. 

• The cost of the business combination is the aggregate of the exchange transactions, without remeasuring to fair value at the date of gaining control (acquisition date or date of completing the business combination).
• The purchase price is allowed to include directly related costs.
• There are no similar requirements regarding contingent consideration payments.
  

The measurement and recognition of goodwill impairment

IFRS 3 provides the option to measure and recognize goodwill using either the full goodwill method (including the non-controlling interest's share) or the partial goodwill method. 

Goodwill is only associated with the parent company's ownership portion (Part goodwill).

Determination of goodwill impairment

It does not allow for the amortization of goodwill, but rather requires the annual assessment of goodwill impairment in accordance with IAS 36 Impairment of Assets.

Amortization of goodwill over a maximum period of 10 years.