On March 16, 2020, the Minister of Finance issued Decision No.345/QD-BTC approving the plan to apply international reporting standards (IFRS) in Vietnam.
This implementation plan consists of three phases:
Preparation Phase: from 2020 to the end of 2021.
Voluntary application Phase: from 2022 to the end of 2025. This phase involves applying IFRS at the consolidated financial reporting level for specific entities such as state-owned economic groups' parent companies, listed parent companies, large-scale publicly traded parent companies that are not yet listed, and other large-scale parent companies.
Mandatory application phase: after 2025, this requires applying IFRS at the consolidated financial reporting level for entities in the voluntary application group mentioned above.
As we know, the set of International Financial Reporting Standards (IFRS) comprises over 40 standards, including some newly issued and implemented standards in recent years such as IFRS 9 (Financial Instruments), IFRS 15 (Revenue from Contracts with Customers), and IFRS 16 (Leases). In contrast, the 26 Vietnamese Accounting Standards (VAS) were developed and issued between 2001 and 2005. Therefore, there is a significant gap between VAS and IFRS. To successfully implement IFRS in Vietnam, substantial efforts are required to compile a complete set of IFRS and guidance materials in Vietnamese, both from government regulatory agencies responsible for issuing standards and financial reporting regulations and from the entities subject to voluntary and mandatory IFRS adoption.
Setting aside the challenges related to the process of compiling and issuing IFRS in Vietnam, in this article, we will focus on the difficulties and challenges that entities applying IFRS will face during the transition from VAS to IFRS in the near future.
Transitioning to IFRS affects all aspects of an entity's operations
According to surveys on IFRS adoption in various countries worldwide, many entities have faced failures or significant challenges during the transition period. One of the main reasons is that the leadership of these entities simplifies the transition to IFRS, thinking it's merely a change in accounting policies and the responsibility of the accounting department. However, in reality, IFRS requires substantial changes within an entity and demands understanding and cooperation from various departments.
After identifying the significant differences between VAS and IFRS, entities need to assess how these differences impact their business processes. They should define specific requirements for relevant departments. For example, the accounting department must identify the information needed for IFRS accounting that is not currently available in the VAS-based reporting system. Coordination with sales and legal departments is required to review and modify sales contracts, purchase contracts, loan agreements, lease contracts, and more. Following this, collaboration with the IT department is necessary to modify and update data fields and new information in the company's IT systems to provide complete data for IFRS accounting.
Human Resources
Human resources in this context encompass not only the accounting staff of entities subject to IFRS adoption but also their leadership, as they are responsible for approving financial reports.
Entities adopting IFRS will need to establish a separate project team for IFRS implementation, including staff trained extensively in IFRS. This is because it will be challenging for the current accounting teams of these entities to simultaneously perform VAS accounting (during the transition period) and undertake IFRS training to independently handle IFRS accounting and reporting. Additionally, personnel involved in IFRS implementation will need to have a relatively high level of proficiency in English to independently research IFRS regulations and interpretations, especially if comprehensive IFRS guidance in Vietnamese has not been issued.
Furthermore, according to Decision No. 345/QD-BTC, entities applying IFRS must prepare consolidated financial statements under IFRS. This means that their subsidiaries and associates must also prepare financial information for the purpose of consolidated financial reporting by the parent company under IFRS. Therefore, these subsidiaries and associates need to recruit and train accounting staff capable of preparing financial information for consolidated reporting under IFRS.
Speaking of human resources with deep knowledge of IFRS, we cannot ignore the role of auditors, who will directly participate in auditing the consolidated financial statements under IFRS of entities subject to voluntary and mandatory IFRS adoption in Vietnam. Currently, most auditors with in-depth IFRS knowledge are found in large audit firms because they have many clients that have adopted IFRS, and some work for audit firms affiliated with international audit firms. Even in large audit firms, the number of auditors involved in auditing complete financial reports prepared under IFRS is not large because many foreign-invested companies are only required to prepare financial reports for their parent companies under IFRS rather than full financial reports. Therefore, the number of auditors with in-depth IFRS knowledge is currently limited and not sufficient to meet market demand as the mandatory IFRS adoption begins in 2025. Audit firms also need to start implementing training programs for their staff to meet the auditing requirements of their clients in the next following years.
IT infrastructure and systems
To be able to prepare financial reports in accordance with IFRS, at a minimum, at the parent company level, entities applying IFRS will need to establish and maintain an accounting software system and accounting records based on IFRS. A challenge for Vietnam is that, in the initial phase, entities will continue to prepare separate financial statements under VAS (Vietnamese Accounting Standards) and only consolidate financial statements under IFRS. This means they will have to maintain two parallel accounting systems and accounting records under VAS and IFRS.
In the initial transition phase, entities have two options:
Option 1: Manually record conversion entries from VAS to IFRS solely for the purpose of preparing financial statements based on IFRS while continuing to report financial statements under VAS. However, this is only a temporary solution in the early stages because there are significant differences between VAS and IFRS. Therefore, manual conversion will become impractical as the number of transactions increases over the years.
Option 2: Implement an accounting software system capable of serving accounting in accordance with IFRS concurrently with accounting under VAS during the transition period and voluntary adoption, eventually moving towards the sole application of an IFRS accounting system. In this way, entities will have to incur additional costs for changing their existing accounting software or purchasing new accounting software that can simultaneously meet the requirements of both VAS and IFRS accounting. Additionally, during this phase, the accounting team will have to work at a higher intensity since they will need to simultaneously maintain accounting records in two different accounting systems, in addition to reconciling financial reporting data under IFRS with accounting data for corporate income tax calculation purposes.
Negative impact on financial statements when adopting IFRS for the first time
There have been numerous seminars and articles highlighting the benefits of adopting IFRS, which served as the basis for the Vietnamese government's initiative to implement financial reporting standards in Vietnam. However, one undeniable fact is that when preparing financial statements for the first year under IFRS, many businesses must prepare themselves to face the negative impacts on financial statements due to significant differences between the current Vietnamese Accounting Standards (VAS) and IFRS. For example:
Impairment of Assets: According to International Accounting Standard 36 (IAS 36) - Impairment of Assets, if the carrying amount of an entity's asset exceeds its recoverable amount, the entity must recognize an impairment loss in the comprehensive income statement for the period. Currently, there is no equivalent accounting standard to IAS 36 in Vietnam. Therefore, this standard could have negative implications for the first-time IFRS financial statements of businesses that are operating at a loss or have subsidiaries or segments that are incurring losses, indicating potential asset impairment.
Example: Company A, a parent company, chooses to prepare its first-time consolidated financial statements under IFRS for the year ending December 31, 2023. Company A has a subsidiary, Company B, which is currently performing poorly and records an annual loss of 10 billion VND. Company A's consolidated financial statements under VAS only recognize the 10 billion VND loss from the subsidiary. However, if IAS 36 is applied, assuming that the carrying amount of Company B's assets as of January 1, 2021 (the date of transition to IFRS for Company A) exceeds the recoverable amount of related assets by 100 billion VND. Therefore, when preparing the first-time consolidated financial statements under IFRS, Company A will have to immediately recognize a loss due to asset impairment in Company B of 100 billion VND in the retained earnings balance at the transition date to IFRS, which is January 1, 2021.
Leasing of Assets: According to VAS 06 - Leasing of Assets, leased assets used in operations are not recognized on the balance sheet. However, under International Financial Reporting Standard 16 (IFRS 16) - Leases, lease obligations are recognized directly on a company's financial statements as Right-of-Use Assets and Lease Liabilities. For businesses that lease assets from foreign lessors, the lease liability will be considered a financial liability denominated in a foreign currency. According to financial reporting requirements, this foreign currency financial liability must be revalued at the actual exchange rate at the company's financial reporting date. For airlines, the adoption of IFRS 16 can have a significant impact because a substantial portion of their fleet consists of leased aircraft with lease payments in foreign currencies.Let's assume that the average balance of lease liabilities for an airline's fleet in 2023 is $1 billion USD, and during 2023, the VND depreciates against the USD by 100 VND. This adverse exchange rate fluctuation will result in the company incurring a loss due to the exchange rate difference of 100 billion VND.
Since companies will prepare separate financial statements under VAS and consolidated financial statements under IFRS, there can be situations where the standalone VAS financial statement shows a profit while the consolidated IFRS financial statement indicates a loss. This could create challenges in profit distribution to shareholders because, according to Vietnamese regulations, the post-tax profit used for dividend distribution is calculated based on the smaller of the profit figures from standalone and consolidated financial statements.
Preparing for the initial application of IFRS
According to Decision No. 345/QD-BTC, the preparation phase will take place from 2020 until the end of 2021, followed by the voluntary adoption phase from 2022 until the end of 2025. It can be understood that the preparation phase is the period during which the Ministry of Finance will compile and provide guidance on IFRS in Vietnamese. This period does not include the time for businesses to familiarize themselves with IFRS, recruit, and train personnel in IFRS. Based on our experience, companies implementing IFRS for the first time will need at least 2-3 years for training and data preparation for their initial IFRS financial reporting.
According to the provisions of IFRS 1 - First-time adoption of IFRS:
Companies prepare and present an IFRS statement of financial position at the date of transition to IFRS. The company will consistently apply accounting policies in the initial IFRS statement of financial position and in all periods presented in the first set of IFRS financial statements.
The first-time IFRS financial statements of a company will include three (03) statements of financial position, two (02) statements of comprehensive income, two (02) statements of cash flows, two (02) statements of changes in equity, and related notes (IFRS 1.21).
For example, Company A intends to prepare and present first-time IFRS financial statements for the year ending December 31, 2023, with one year of comparative figures. The diagram below illustrates key timelines and periods related to Company A's first-time IFRS adoption:
According to the diagram, if a company decides to voluntarily apply IFRS for the first time for the year ending December 31, 2023, they will need to begin converting financial statement data from January 1, 2022. This means that, starting from today, they have just over 1 year to prepare for all activities such as recruiting and training accounting personnel specialized in IFRS, setting up and implementing accounting software for IFRS financial reporting purposes, and identifying significant differences between VAS and IFRS to establish a conversion plan for opening balances to IFRS. This timeframe is quite short for transitioning to IFRS, so companies need to carefully consider their approach to the first-time application of IFRS.
Key factors for a successful transition to IFRS
Based on the analysis presented here and the results of surveys conducted on companies that have successfully transitioned from domestic accounting standards to IFRS, we believe that for an effective and successful transition to IFRS, companies need to pay attention to the following fundamental points:
Start Early: Companies should establish a conversion timeline to IFRS as soon as the decision to transition is made. This allows for the development of plans to change business processes, recruit personnel, and allocate financial resources for the IFRS transition, rather than waiting until the first year of IFRS financial reporting.
Create a Conversion Project Team: The project leader should be a member of the company's leadership team and should involve key departments within the company, such as accounting, finance, legal, and IT.
Assess the Impact: Evaluate the impact of transitioning to IFRS on all units within the group that could significantly affect the consolidated financial statements of the Parent Company. This assessment helps in planning the training of accounting personnel in these companies to prepare financial statements in accordance with IFRS for consolidation purposes.
Build a Knowledgeable Accounting Team: Develop a team of accountants with expertise in IFRS, both at the Parent Company and critical subsidiaries within the group.
Collaborate with Experienced Consultants and Auditors: Work with consulting and auditing firms with extensive experience in auditing financial statements prepared in accordance with IFRS. This will provide timely support for critical technical issues when preparing IFRS financial statements.
In Conclusion:
The transition from Vietnamese accounting standards to Vietnamese IFRS is an important factor that allows Vietnamese companies to integrate and engage more extensively with international financial markets. In addition to the positive impacts of applying IFRS to companies, there will be many significant challenges ahead. Leadership with a proper understanding of the difficulties and challenges of transitioning to IFRS, along with a well-planned and clear conversion roadmap, will be prerequisites for companies to implement IFRS smoothly, efficiently, and effectively, both within individual entities and across the entire group.