On the sixteenth of March, 2020 the Ministry of Finance issued Decision 345/QD-BTC approving for application of financial reporting standards (“FRS”) in Vietnam.
The objectives of the scheme are to (1) Develop measures and route, publicize and provide assistance regarding the application of international financial reporting standards (IFRS) in Vietnam for each defined entity satisfactory to international regulations to enhance transparency and trustworthiness of the financial statements and raise the accountability of the enterprises; and (ii) Issue anew and organize the implementation of Vietnamese financial reporting standards (VFRS) following the principles of acknowledging international practices to the maximum satisfactory to characteristics of the Vietnamese economy and enterprise demand while ensuring feasibility during implementation.
Roadmap for application of IFRS:
- 2019 – 2020: Preparation phase;
- 2022 – 2025: Voluntary application – Enterprises having the need and resources shall inform the Ministry of Finance before voluntarily apply IFRS to prepare consolidated financial statements;
- After 2025:Compelled application
Small and medium enterprises that are not subject to IFRS shall apply the new Vietnam Financial Reporting Standards which is adjusted according to IFRS and international norms. Very small enterprises that do not have the need and resources to apply IFRS and VFRS shall be instructed by the Ministry of Finance.
The influence of the Scheme to enterprises in Vietnam:
IFRS has become an international accounting language for years. According to IFRS.org’s statistics, 144 jurisdictions (87%) out of 166 jurisdictions in which surveys are taken require IFRS Standards for all or most domestic publicly accountable entities. Most of the jurisdictions in the remaining 22 have permitted or been in the process of implementing IFRS. There are only 7 jurisdictions (including Vietnam) that are currently applying their own account standard.
The application of IFRS in Vietnam may create positive impacts and bring more opportunities for enterprises to engage in the global economy. The most prominent are: reducing capital mobilization costs, enhancing internal management capacity and improving the transparency of enterprises, specifically:
- According to the PwC’s observation on a global scale, businesses owners notice the cost of raising capital decreases when applying IFRS standards. IFRS standards provide companies with “passport” to penetrate many capital markets around the world, including Europe and the United States. When a company applies IFRS standards, it publicly commits itself to the highest standards of financial information and investor protection. Enterprises with a high demand for capital, especially from foreign-invested capital, will see this effect after conversion.
- IFRS standards require a close association of internal management processes with established financial information. The IFRS financial information will have a critical impact on the effectiveness of the internal governance processes, creating positive changes.
- By updating the standards of fair value and attaching importance to nature, many assets or business activities of the enterprise will be re-evaluated on a regular basis by various valuation models to ensure that the figures presented in the financial statements are appropriate for the profitability of these assets, instead of using the cost-accounting method such as Vietnamese Accounting Standards.
The conversion of Vietnam Accounting Standards to IFRS shows the efforts of the Government of Vietnam in reducing accounting discrepancies between Vietnam and the jurisdictions applying IFRS. As a result, Vietnamese businesses can improve the transparency and efficiency of financial information as well as integration with the international financial reporting framework.
Apart from all those positive impacts, the implementation of IFRS in Vietnam may encounter a fair number of challenges such as:
- Human resources: The human resources ready for the implementation of IFRS, in fact, are lacking at the present. Institutions (i.e. universities, VACPA and domestic institutions) in Vietnam have not developed a systematic IFRS program. There are several international professional organizations such as the British Association of Accountants (ACCA), the Association of Certified Public Accountants of Australia (CPA Australia), the Institute of Certified Public Accountants of England and Wales (ICAEW) have IFRS training available for a small number of students.
- Internal procedures: Existing internal processes may no longer be appropriate and need to be adjusted, as IFRS implementation requires close alignment between operational divisions and financial information. An effective organizational chart that eliminates cumbersome and focuses on increasing productivity will be the step that businesses need to take.
- Basic differences between VAS and IFRS: The main reason why businesses are not willing to apply IFRS is the basic differences between VAS and IFRS. For example, VAS accounting is based on the cost principle, while IFRS is based on the fair value principle. Although determining fair value is not easy in some cases, especially in the context of the Vietnamese market, it is being widely supported. Recording on a cost basis will not provide an accurate view of the financial position of the business, especially for asset portfolios, where the fair value changes over time, such as real estate, equipment, …
- Financial information system: The application of IFRS requires an advanced information technology system to support the process of collecting, processing the information as well as connecting all activities from all departments. internally as well as outside the business. The current financial information system may not provide all the information necessary to calculate differences, which may result in an audit opinion being excluded. ERP concept – Enterprise resource planning is not too strange for most businesses in Vietnam, however, to deploy IFRS integration is really a huge challenge.