International Financial Reporting Standards (IFRS) will enable these businesses to meet the demands of investors and contribute to enhancing their corporate management capabilities. Therefore, many organizations have voluntarily adopted IFRS to enhance transparency, accuracy, and reliability in the financial reporting of companies. However, the process of transitioning to IFRS in Vietnam comes with numerous difficulties and challenges that businesses need to understand in order to formulate successful conversion plans.
Table of contents:
Transitioning to IFRS - The Current State of Accounting Standards Application in Vietnam
Challenges and Difficulties in Adopting IFRS in Vietnam
What Can RSM Vietnam Do to Assist Your Business in Transitioning to IFRS?
1. Transitioning to IFRS - The Current State of Accounting Standards Application in Vietnam
Since Vietnam has not officially declared the adoption of IFRS, currently, all businesses in Vietnam prepare their financial statements according to VAS. Some large domestic enterprises and FDI enterprises, as per the requirements of investors or parent companies abroad, and international funding organizations, are in the process of converting their financial statements from VAS to IFRS, but they have not yet directly prepared financial statements according to IFRS. The conversion of financial statements is still facing various limitations because many businesses lack fundamental training in this area, relying heavily on accounting and auditing service providers. Additionally, there is no official guidance from the government at this point.
In 2018, with the support of the Japan International Cooperation Agency (JICA), the Ministry of Finance in Vietnam collaborated with an independent consulting unit to conduct a survey on the demand and feasibility of applying IFRS in 46 entities in Vietnam, including more than 27 large-scale listed companies. The survey results indicated that many large listed companies were under pressure from foreign investors or international financial institutions, particularly the 22 FDI companies facing pressure from their foreign parent companies to adopt IFRS. Since Vietnam does not currently permit the application of IFRS, these entities are required to convert their financial statements from VAS to IFRS to meet the demands of foreign investors and creditors. However, these businesses still encounter various challenges in preparing financial statements according to IFRS due to the absence of detailed application guidelines from the relevant authority (the Ministry of Finance). As a result, many companies have to engage auditing firms to assist in the process of transitioning their financial statements to IFRS.
Therefore, it can be seen that the demand for the application of IFRS in Vietnam is an objective reality, primarily focusing on large-scale listed companies and FDI enterprises. However, due to the lack of training in IFRS, most of these businesses are not truly prepared to implement it and require time to prepare the necessary conditions in terms of human resources, infrastructure, information systems, and software upgrades. Based on the experience of Japanese and European companies, to ensure feasibility, businesses typically need a preparation period (usually 2 - 3 years from the announcement) to transition from applying national accounting standards to IFRS.
>>> Read more Things businesses should pay attention to when transitioning to IFRS
2. Challenges and Difficulties in Adopting IFRS in Vietnam
The adoption of IFRS and the development and implementation of VFRS (Vietnamese Financial Reporting Standards) will encounter certain difficulties and challenges, as reflected in the following points:
First, the establishment of the Vietnamese Financial Reporting Standards (VFRS) framework is an extremely challenging task that requires a concentrated allocation of resources and the involvement of experts. In a context where financial policy mechanisms and tax regulations may vary significantly, this can lead to substantial hurdles not only in the documentation phase but, more importantly, in the implementation phase. Incorporating IFRS provisions into Vietnam's financial reporting standards presents a significant difficulty and a major challenge.
Second, the capital market and financial market in Vietnam are not yet sufficiently developed. IFRS aims to present financial statement items at fair values, reflecting the economic conditions in the market at the reporting date (Mark to Market). To meet the requirements of IFRS, there needs to be an active market that can provide reliable financial data when performing techniques such as determining fair values, effective interest rates, impairment of assets, and more. Furthermore, since IFRS is designed to reflect transactions in a developed economy with various complex financial instruments (which are not widely used in Vietnam), the short-term application of IFRS in a transitioning economy like Vietnam may encounter certain difficulties.
Third, professional ethics and reluctance to disclose the financial status of certain businesses are significant challenges. When applying IFRS, a company's financial information is presented more accurately and conservatively, which may result in financial statements that are not as favorable as they are under the current practices. If the leadership of a company lacks legal compliance and professional ethics or is unwilling to publicly disclose its financial situation, this can pose a barrier to adopting international standards. The apprehension of some less-efficient businesses, especially state-owned enterprises, may impact their ratings, classifications, and evaluations, both for state representatives in these enterprises and for their leadership. For listed companies, continuous financial losses could affect their ability to maintain listing conditions as per securities regulations. To address this issue, the criteria for evaluating the efficiency, classification, and rating of state-owned enterprises, as well as the requirements for maintaining listing conditions, should be reviewed and adjusted to be more in line with the context of businesses applying IFRS.
Fourth, the accounting workforce in Vietnam has not received extensive training in IFRS. In general, accounting professionals in Vietnam have not been adequately trained in IFRS. The number of experts who understand, have experience with, and possess the skills to prepare financial statements under IFRS is limited, primarily consisting of some researchers and auditors from large auditing firms. Even the faculty members at universities have not been fully equipped with IFRS knowledge, so only a very few educational institutions have incorporated IFRS into their curricula. Consequently, the accounting workforce in enterprises (the direct users of IFRS) and most students do not yet meet the requirements.
Fifth, language barriers are another consideration. Language barriers pose a challenge because IFRS is drafted in English, and for widespread dissemination and promotion of IFRS to the public, it needs to be translated into the languages of different countries. However, accurately translating technical terms and continually updating and maintaining the changing content of IFRS is not an easy task. The language translation not only impacts the adoption of IFRS but also affects the development and implementation of VFRS.
Sixth, cultural, mental, and legal factors play a role. IFRS is based on a principles-based approach, whereas Vietnamese accounting regulations are typically rule-based (laws) to a high degree. Moreover, Vietnamese culture tends to favor prescriptive approaches, citing specific sentences and words from documents, rather than applying principles to specific situations. Therefore, during the initial adoption of IFRS, some financial and accounting professionals, as well as government regulatory bodies, may struggle to adapt to the international approach, especially when IFRS requires judgment-based assessments such as making estimates for fair values, recoverable amounts, impairment of assets, intangible assets, and determining the present values of future cash flows, among others.
Seventh, the difference between financial mechanisms and financial reporting standards: In most countries around the world, there are only two sets of documents: financial reporting standards and tax policies. Unlike Vietnam, these countries have fewer state-owned enterprises, and the government typically manages macroeconomics, providing public services rather than directly controlling business operations. Financial matters are mostly addressed through financial reporting standards, while other aspects related to business management and operations, such as profit distribution, investment decisions, borrowing, etc., are determined by individual entities themselves.
Vietnam currently has three types of legal documents that affect a company's financial matters: financial reporting standards, tax policies, and financial mechanisms. These overlapping and inconsistent approaches in how these policies are applied stem from a lack of clear differentiation between the scope of financial reporting standards, tax policies, and financial mechanisms for both businesses and state regulatory agencies. This situation creates challenges for businesses because the same issue can be treated differently under financial reporting standards and financial mechanisms. For example, inconsistencies in provisions regarding provisions for bad debts, depreciation of fixed assets, and handling of exchange rate differences can lead to confusion when businesses apply the law and reduce the comparability of financial information among different companies, as they may apply different regulations for preparing and presenting financial statements.
Reference source: "Project for the Application of Financial Reporting Standards in Vietnam" (Department of Accounting and Auditing Management - Ministry of Finance, 2020).
3. What Can RSM Vietnam Do to Assist Your Business in Transitioning to IFRS?
At RSM Vietnam, we have a team of experts in IFRS who are actively involved in the drafting, research, implementation, and review of projects related to IFRS adoption in Vietnam, under the direction of the Ministry of Finance as per Decision 345/QĐ-BTC. Additionally, we have experts in IAS/IFRS who have been involved in converting financial statements to IAS/IFRS for large state-owned corporations since 1999.
Our team of IFRS experts at RSM Vietnam is here to support and guide your business in addressing a wide range of potential complexities associated with IFRS. Our IFRS services include:
Transitioning financial reporting from VAS to IFRS.
Auditing financial statements according to IFRS.
Complex accounting advisory.
Training and updates on IFRS.
>>> See more about our IFRS support services
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