The purpose of Standard No. 11 - Consolidated Financial Statements in the Vietnamese Accounting Standards (VAS) is to stipulate and guide the principles and methods of accounting for business consolidation using the acquisition method. The acquiring party records identifiable assets, liabilities assumed, contingent liabilities at reasonable values on the acquisition date, and recognizes goodwill.
According to the Circular guiding accounting implementation of the four (04) accounting standards issued under Decision No.100/2005/QD-BTC dated December 28, 2005 by the Minister of Finance, the method of business consolidation is stipulated as follows:
In all cases of business consolidation, accounting must be carried out using the acquistion method.
The acquisition method comprises 3 steps:
Step 1: Identify the acquiring party;
Step 2: Determine the consolidation fee;
Step 3: On the acquisition date, the acquiring party must allocate the consolidation fee to the purchased assets, liabilities assumed, and contingent liabilities.
Step 1: Identifying the acquiring party
In every business consolidation scenario, it is essential to ascertain the acquiring party. The acquiring party is an enterprise participating in the consolidation that gains control over other enterprises or participating business activities. The determination of the acquiring party must be carried out according to the regulations specified from paragraphs 17 to 23 of Accounting Standard No.11 - Consolidated Financial Statements.
Step 2: Determining the consolidation fee
The acquiring party will determine the consolidation fee, which includes: the fair value on the date of the exchange of the assets transferred, the liabilities assumed or acknowledged, and the equity instruments issued by the acquiring party to obtain control over the acquiree, plus (+) directly related costs of the business consolidation.
The acquiring party determines the consolidation fee in accordance with the provisions from paragraphs 24 to 35 of Accounting Standard No. 11 - Consolidated Financial Statements. It is important to pay attention to the following aspects:
1- The acquiring party can exchange the following assets in business consolidation: cash, bonds, stocks, or assets currently used in the acquiring party's business operations. Except in cash payments, any payment made with other assets often generates differences between the fair value and the book value of these assets.
-If payment is made using bonds (where the interest rate on the bonds may differ from the market rate), any premium or discount (if applicable) must be calculated into the value of the bonds and result in an increase or decrease in the value of the investment.
- If payment is made using stocks (where the face value of the stock often differs from the market value):
+ If the stock is already listed on the market, the publicly announced price on the date of exchange of the listed stock is considered the fair value of that stock.
+ If there is evidence and an alternative calculation method indicating that the publicly announced price on the date of exchange is unreliable or if there is no publicly announced price for that stock issued by the acquiring party, then the fair value of that stock can be estimated based on the proportionate interest in the fair value of the acquiring party or the fair value of the acquiree that the acquiring party has achieved, as long as there is clearer evidence supporting either basis.
- If payment is made using assets currently utilized in the acquiring party's business operations, including depreciable assets, investment securities, or other investment assets (such as investment real estate), they must all be valued at their fair value.
2- If the payment of all or part of the consolidation fee is deferred, the fair value of the deferred portion must be determined at its present value on the date of exchange. In such cases, the consolidation fee must be increased (+) by any premiums or decreased (-) by any discounts that will arise upon payment.
3- Directly related costs to the business consolidation, such as fees paid to auditors, legal consultants, appraisers, and other advisors for executing the business consolidation, are included in the consolidation fee.
4- The following should not be included in the consolidation fee:
- Future losses or other costs arising from the business consolidation that are not considered liabilities already incurred or acknowledged by the acquiring party to obtain control over the acquiree.
- General administrative costs and other costs not directly related to the business consolidation.
- Costs related to the negotiation and issuance of financial liabilities.
- Costs related to the issuance of equity instruments.
Step 3: On the acquisition date, the acquiring party must allocate the consolidation fee to the purchased assets, liabilities assumed, and contigent liabilities
The purchased assets and assumed liabilities, which are identifiable, and contingent liabilities to be borne in business consolidation, are all recognized at their fair values. The determination of the fair value of each type of asset, liability, and contingent liability follows the guidance provided in section A16 of Appendix A of Accounting Standard No. 11 - Consolidated Financial Statements.
1- In cases where the business consolidation does not result in a parent-subsidiary relationship (for example, the acquiring party purchases all the net assets of the acquiree or acquires all the shares of the acquiree, which ceases to exist after the consolidation):
If the business consolidation does not lead to a parent-subsidiary relationship, the acquiring party only prepares financial statements on the acquisition date, specifically for each form as follows:
1.1- If after the consolidation, only the acquiring entity remains while the acquired entity ceases to exist, all assets and liabilities of the acquired entity are transferred to the acquiring entity, and the acquired entity is dissolved. For instance, Company A acquires all the net assets of Company B; after the consolidation, Company B dissolves, leaving only Company A with a new structure. Or after the business consolidation, some net assets of the acquired entity transfer to the acquiring entity, forming one or more business activities of the acquiring entity. In such cases, the acquiring entity will recognize the identifiable assets, liabilities assumed, and contingent liabilities at their fair values on the acquisition date in its separate financial statements. The difference between the consolidation fee and the acquiring entity's share in the fair value of the identifiable assets, liabilities assumed, and recognized contingent liabilities is termed as goodwill. This goodwill is gradually allocated to the production or operating costs of the acquiring entity (Company A) over a maximum period of up to 10 years.
In the event of unfavorable commercial benefits due to the consolidation fee being less than the acquiring entity's share in the fair value of identifiable assets, assumed liabilities, and recognized contingent liabilities, the acquiring entity must reassess the determination of the fair value of identifiable assets, assumed liabilities, contingent liabilities, and the determination of the consolidation fee. If after reassessment and adjustments there still remains a difference, the acquiring entity must immediately recognize all remaining differences as profit or loss.
1.2- If after the consolidation, the participating entities no longer exist, and a new entity is formed, and all assets and liabilities of the participating entities are transferred to the new entity. For instance, Company A and Company B merge to form Company C. After the consolidation, both Company A and Company B dissolve, and Company C operates as a new entity combining the activities of Company A and Company B. In this case, one of the participating units that existed before the consolidation (e.g., Company A) will be identified as the acquiring entity. On the acquisition date, the acquiring entity will recognize the identifiable assets, assumed liabilities, contingent liabilities, and goodwill (if any) in its separate financial statements, as described in scenario (1.1).
2- In the case where business consolidation results in a parent-subsidiary relationship, where the acquiring party is the parent company, and the acquired party is the subsidiary company (for example, the acquiring party purchases all the shares of the acquired party, and after the consolidation, both entities continue to exist and operate separately):
- If after consolidation, both entities operate independently but have a controlling relationship, a parent-subsidiary relationship is established. The company with control over the other is the parent company (acquiring party), and the controlled company is the subsidiary (acquired party). In this scenario, the parent company will account for its ownership in the subsidiary as an investment in the subsidiary in its separate financial statements. It recognizes the identifiable acquired assets, assumed liabilities, and contingent liabilities at fair value in the consolidated financial statements. The difference between the consolidation fee and the acquiring party's ownership in the subsidiary's fair value of identifiable assets, assumed liabilities, and recognized contingent liabilities is termed goodwill and is treated similarly to scenario (1.1) but reflected in the consolidated financial statements of the Group rather than in the separate financial statements of the acquiring entity.
- In cases where business consolidation results in a parent-subsidiary relationship, the acquiring parent company does not prepare separate financial statements or consolidated financial statements on the acquisition date. Instead, it should prepare separate financial statements and consolidated financial statements at the earliest possible time as per the current regulations.
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