Fianancial reporting quality and lease propensity in vietnammese listed company and implication for adoption ò ifrs16 lease,graduation théis

BANKING ACADEMY ADVANCED PROGRAM FACULTY OF ACCOUNTING AND AUDITING  GRADUATION THESIS Title: Financial reporting quality and lease propensity in Vietnamese listed companies and implication for adoption of IFRS 16 – Leases Student: Pham Mai Anh Class: K19-CLC-KTA Cohort: 2016-2020 Student code: 19a4030040 Supervisor: Ph.D Dao Nam Giang Hanoi, June 2020 ACKNOWLEDGEMENTS I am grateful to Ph.D Dao Nam Giang, lecturer in the Faculty of Accounting and Auditing, who instructs me throughout this Thesis I am extremely thankful and indebted to her for spending valuable time to share expertise, precious guidance and encouragement extended to me I take this opportunity to express gratitude to all of the lecturers in Banking Academy in general and Accounting and Auditing Faculty lecturers in particular for their conscientious and support I also thank my parents for the unceasing encouragement, support and attention I also place on record, my sense of gratitude to one and all, who directly or indirectly, have lent their hand in this thesis STATEMENT OF AUTHORSHIP Name: Pham Mai Anh Class: K19-CLC-KTA Students’ Numbers: 19A4030040 Supervisor: Ph.D Dao Nam Giang Name of research paper: Financial reporting quality and lease versus buy decision in Vietnamese listed companies and implication for adoption of IFRS 16 – Leases Declaration I declare that this thesis has been composed solely by myself and that it has not been submitted, in whole or in part, in any previous application for a degree Except where states otherwise by reference or acknowledgment, the work presented is entirely my own Signed _ Date : 7th June, 2020 Graduation Thesis Supervisor: Ph.D Dao Nam Giang TABLE OF CONTENTS LIST OF ACRONYMS i TABLE OF FIGURES ii INTRODUCTION CHAPTER 1: OVERVIEW OF LEASE ACCOUNTING 1.1 The evolution of lease activities and lease accounting 1.1.1 The evolution of lease activities 1.1.2 The evolution of lease accounting 1.1.3 Introduction of IAS 17 and its drawbacks 1.2 The reform of lease accounting and IFRS 16 .9 1.2.1 Overview of the reform of lease accounting 1.2.2 The content of IFRS 16 11 1.2.3 The effects of IFRS 16 14 CHAPTER 2: LITERATURE REVIEW ON LEASE ACCOUNTING AND FINANCIAL REPORTING QUALITY 19 2.1 The empirical researches on lease accounting 19 2.1.1 Loophole of lease accounting under IAS 17 19 2.1.1 Off-balance sheet financing 20 2.1.3 The capitalization of operating lease and impact on financial ratios 21 2.2 Financial reporting quality and lease propensity 22 2.3 Research hypothesis development 24 CHAPTER 3: RESEARCH BACKGROUND AND METHODOLOGY 27 3.1 Lease activities and lease accounting in Vietnam .27 3.2 Research methodology 33 Pham Mai Anh – 19a4030040 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang 3.2.1 Empirical model 34 3.2.2 Data collection .37 CHAPTER 4: EMPIRICAL RESULTS, DISCUSSION AND IMPLICATION 39 4.1 Empirical results 39 4.1.1 Descriptive statistic and correlation .39 4.1.2 Regression results 43 4.2 Discussion on the results .46 4.3 Limitation of the research 49 4.4 Implication and recommendation for adoption of IFRS 16 – Leases 50 CONCLUSION 53 REFERENCE 54 APPENDIX 57 Pham Mai Anh – 19a4030040 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang LIST OF ACRONYMS FASB Financial Accounting Standards Board IAS International Accounting Standards IASB International Accounting Standards Board IFRS International Financial Reporting Standards PPE Property, plant and equipment PV Present value VAS Vietnamese Accounting Standards Pham Mai Anh – 19a4030040 i K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang TABLE OF FIGURES List of Table Name Page Table 1: The difference between IAS 17 and IFRS 16 Table 2: The use of off balance sheet leases by listed companies throughout the world Table 3: The use of off-balance sheet leases within industry sector 12 Table 4: Summary of the lease capitalization impact for industries 16 Table 5: Comparison between IAS 17 and VAS 06 30 Table 6: Differences between the Law on Credit Institutions and VAS 06 33 Table 7: Variable calculation 37 Table 8: Sample distribution 38 Table 9: Summarize of lease model variables 39 Table 10: Pearson correlation coefficients for lease model variables 42 Table 11: Coefficients from OLS estimations 43 Table 12: Test for Multicollinearity 44 Table 13: Breusch-Pagan / Cook-Weisberg test for Heteroskedasticity 44 Table 14: Breusch-Godfrey LM test for Autocorrelation 45 Table 15: Coefficients from regression using Robust Standard errors 45 Table 16: The results of Hypothesis 46 14 15 List of Figure Name Page Figure 1: Lease by Sector 40 Figure 2: The trend of Lease and AccQual for the years period 41 Figure 3: Financial situation of companies for the years period 42 Pham Mai Anh – 19a4030040 ii K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang INTRODUCTION Novelty of the topic Lease activities is becoming more popular in Vietnam these days as it bring about conveniences and benefits over buying However, the treatments for this transactions maintain loopholes that firm lean on to manage their financial results Beside that, leasing activities in Vietnam tend be simple and not be regarded importantly in many enterprises Therefore, while in the world, lease and off-balance sheet financing is a hot topic, the impact of that in Vietnam has not been properly considered with just few mentions The flaws in the current standard is theoretically discussed recently but there has been very few evidence given Dig into the directions in researches about lease, previous researches and discussion agreed that IAS 17 contains loopholes that result in off-balance sheet financing There are two outstanding approaches for this issue While the number of research approach on lease capitalization and its impact on financial ratio is numerous, research on the lease propensity is much fewer More particular, whether leasing propensity is increased as the quality of accounting is low is an interesting topic This is even more urgent since (1) accounting quality is becoming an important matter, the reason why standard setter put much effort to improve the quality of information reported and (2) very few researches were carried out on this subject, and all of which are executed in developed country while none is in developing/ underdeveloped country That is why this thesis want to focus on this direction to contribute to the inadequate of the approach on lease and accounting quality in Vietnam The purpose of the topic This research present the overview of lease accounting, including the evolution of lease activities, the accounting for lease with IAS 17 and its drawbacks, the reform to IFRS 16 and its approach Then, researches on such matter of leasing and accounting quality is reviewed to an overview of how these issue was discussed and analyzed in order to extract the relevant basis for this thesis All come to the major purpose of the topic – to provide evidence of whether lower accounting quality Pham Mai Anh – 19a4030040 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang firms will prefer leasing over buying Additionally, this aimed to find out the association of tax rate, gearing ratio, ROE, and size with the propensity of leasing instead of buying By doing so, I want to provide the quantitative proves of how firms in Vietnam did take advantage of the lack in the current lease standard – VAS 16 to serve for their intended purposes Vietnam is also under the circumstance that on March 16, 2020, the Minister of Finance issued “Decision No.345/QD-BTC” to approve the "Scheme for Application of Financial Reporting Standards in Vietnam" With the new set of standard to be applied in just a few years, what should the regulators, businesses, users and preparers in order to face with this massive change, particularly with lease accounting, shall be discussed Research questions Leasing activities few year lately have been growing dramatically, but it is still a new field Despite that the popularity and scale of lease transactions is quite limited in terms of market participants and guiding regulations, leasing activity is starting to spread across all sectors and sizes of business However, it has not been received the appropriate attention by both regulators and entities that take part in leasing activities when the regulations for this matter are very simple and sometimes, even conflict with each other Within that circumstance, the current standard used to account for lease is VAS 06, which is based almost completely on IAS 17, carry the same loopholes and all the opportunities for firm to manipulate financial statement as its origin And as mention above, the direction to focus on the relation of accounting quality and other factors on leasing propensity are still very few, and all of that are in developed country Therefore, this thesis is trying to answer the question that whether that evidence can be found in Vietnam? Under a developing market, where leasing is still relatively new, whether companies in Vietnam make use of the loophole in the current standard, making the association of lease propensity and accounting quality existed? And whether improving the debt ratios contribute to the tendency of leasing assets? Pham Mai Anh – 19a4030040 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang All of that questions lead to the main question, also the hypothesis of this research, that is: (1) Whether a firm’s tendency to lease instead of buying declines in its accounting quality? Besides, I try to figure out (2) Whether other factors like tax rate, gearing, ROA, size, growth have correlations with leasing propensity? To be detailed: (2.1) Whether lease propensity decrease when tax rate increase? (2.2) Whether lease propensity increase when gearing/ leverage increase? (2.3) Whether lease propensity increase when ROA increase? (2.4) Whether lease propensity increase when size increase? (2.5) Whether lease propensity increase when growth increase? These questions shall be solve within a single model Research object and scope The object of this thesis is the financial information collected from the statements of firms public on Cafef database, which audited by Big4 and Baker and Tilly as only companies that audited by these audit firms disclose extensively the lease commitment in their notes Data from companies represent for seven sectors: retail, manufacturing, service, medical, information technology, energy and airline After randomly observing about 40 companies in Retailers sectors, 25-30 companies in the remaining sectors for the years period 2014 - 2018 (because many companies have not release the reports for the year 2019 due to Covid-19), those that not disclose operating lease in their financial statement for the full year period will be excluded Therefore, the data shrink to 45 firms for the period 2014-2018, resulting to the final total observation is 225 Research methodology The methodology being used in this research is multivariate regression analysis, which is performed with Stata software Variables are chosen after the review of former researches Lease tendency play the role of dependent variable, while Accounting quality, Tax rate, Gearing ratio, ROE, Size and Growth are Pham Mai Anh – 19a4030040 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang For Vietnamese enterprises, it is necessary to be prepared for change by starting to take actions: - Understand the financial impact of IFRS 16 on the financial statements and the main measures of the company; - Promptly assess issues related to the capital structure and stakeholders affected by changing financial indicators and measures to help enterprises take the initiative if necessary and negotiate with related parties; - Examine whether IFRS 16 will impact their future financial structure to avoid disadvantages and difficulties in negotiations with lenders; - Assess whether the current system and process is fit for IFRS 16 and gradually makes changes if necessary; - Start sorting the current leased asset portfolio and identifying gaps in the data need to be fulfilled For related individuals such as accountants, auditors, analysts and investors, it is necessary to quickly learn, equip and improve knowledge about new standards Educating and training are significantly essential because these people will directly apply IFRS in preparing and using accounting information Overall, for many industries and businesses, IFRS 16 imposes significant changes The change is inevitable for all related entities to be prepared for the mandatory application of IFRS from 2025 In particular, enterprises are the most directly affected and need to prepare the most In case the enterprise has a large number of lease contracts, the application of this new Standard will be complicated and time consuming Therefore, Vietnamese businesses need to thoroughly understand and be willing to effectively apply the IFRS 16 standard for accounting of leased assets at their units in a very near future Pham Mai Anh – 19a4030040 52 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang CONCLUSION The weaknesses in IAS 17 has lead to the reform of lease accounting IFRS 16 issued with the effective date from beginning of 2019 With the elimination of operating lease, it is expected to strongly impact the information reported of many firms Many researches has been carried out, and all agree that this change will result in more transparency, thus, higher accounting quality The mandatory adoption of IFRS and IAS in Vietnam from 2025 will accompany with this new lease standard And same other IFRS adopter in the world, it is believed that accounting quality in Vietnam after application of new standard will be improved, including accounting for lease, as VAS 06 was built on IAS 17 Using the data of 45 listed companies for the period from 2014 to 2018, this research has pointed out that firm with worst accounting quality, represented by accrual quality, will have more tendency in leasing as opposed to buying With the same sign, lower tax rate is also lead to higher lease propensity By contract, solvency and profitability ratios, size and growth show positive association with leasing Indicating that firms in Vietnam might using the loophole in current lease standard to managing their reporting information This contribute to the opinion that the current lease standard has drawbacks and the upcoming adoption of IFRS and IAS will bring about higher quality of information reported Vietnam is an the preparing state of the IFRS adoption, many change and preparation must be carried out Regulators, businesses, users and preparers must all quickly take actions The update show be make gradually as soon as possible to reduce the workload and expense when the application become mandatory Pham Mai Anh – 19a4030040 53 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang REFERENCE Balakrishnan, K., Core, J E and Verdi, R S (2014) ‘The Relation Between Reporting Quality and Financing and Investment: Evidence from Changes in Financing Capacity’, Journal of Accounting Research John Wiley & Sons, Ltd, 52(1), pp 1–36 doi: 10.1111/1475-679X.12031 Beatty, A., Liao, S and Weber, J (2010) ‘Financial reporting quality, private information, monitoring, and the lease-versus-buy decision’, Accounting Review, 85(4), pp 1215–1238 doi: 10.2308/accr.2010.85.4.1215 Bohušová, H (2015) ‘Is capitalization of operating lease way to increase of comparability of financial statements prepared in accordance with IFRS and US GAAP?’, Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 63(2), pp 507–514 doi: 10.11118/actaun201563020507 Bohušová, H., Svoboda, P and Blašková, V (2014) ‘The Uncertainty Associated with the Estimated Lease Term and its Impact on Financial Statements Items’, Procedia Economics and Finance Elsevier B.V., 12(March), pp 76–84 doi: 10.1016/s2212-5671(14)00322-0 Bunea, S (2017) ‘Analysis of conceptual and technical in consistencies in the IFRS 16 “Lease” accounting model’, The Annals of the University of Oradea Economic Sciences, 26(1), pp 247–258 Dechow, P., Ge, W and Schrand, C (2010) ‘Understanding earnings quality: A review of the proxies, their determinants and their consequences’, Journal of Accounting and Economics North-Holland, 50(2–3), pp 344–401 doi: 10.1016/j.jacceco.2010.09.001 Dechow, P M and Dichev, I D (2002) ‘The quality of accruals and earnings: The role of accrual estimation errors’, in Accounting Review American Accounting Association, pp 35–59 doi: 10.2308/accr.2002.77.s1.35 Dechow, P M., Sloan, R G and Sweeney, A P (1995) ‘Detecting Earnings Management’, The Accounting Review American Accounting Association, 70, pp 193–225 doi: 10.2307/248303 Duke, J C et al (2002) ‘Firm-Specific Determinants of Off-Balance Sheet Leasing: A Test of the Smith/Wakeman Model’, Journal of Business & Management, 8(4), p 335 Available at: http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=9533025 &site=ehost-live&scope=site 10 El-Gazzar, S., Lilien, S and Pastena, V (1986) ‘Accounting for leases by lessees’, Journal of Accounting and Economics North-Holland, 8(3), pp 217–237 doi: 10.1016/0165-4101(86)90004-2 11 Francis, J et al (2004) ‘Costs of equity and earnings attributes’, Accounting Review American Accounting Association, 79(4), pp 967–1010 doi: 10.2308/accr.2004.79.4.967 12 Francis, J et al (2005) ‘The market pricing of accruals quality’, Journal of Accounting and Economics North-Holland, 39(2), pp 295–327 doi: 10.1016/j.jacceco.2004.06.003 13 Francis, J., Olsson, P and Schipper, K (2008) Earnings quality Now Pham Mai Anh – 19a4030040 54 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang Publishers 14 Franzen, L., Cornaggia, K R and Simin, T T (2009) ‘Capital Structure and the Changing Role of Off-Balance-Sheet Lease Financing’, SSRN Electronic Journal, (August) doi: 10.2139/ssrn.1452971 15 Fülbier, R U., Silva, J L and Pferdehirt, M H (2008) ‘Impact of Lease capitalization on financial Ratios of Listed German companies’, 3(2), pp 39– 45 16 G4+1 (1999) Leases: Implementation of a New Approach 17 Ge, W (2006) ‘Off-Balance-Sheet Activities, Earnings Persistence and Stock Prices: Evidence from Operating Leases’, SSRN Electronic Journal doi: 10.2139/ssrn.816044 18 Goodacre, A (2003a) ‘Assessing the potential impact of lease accounting reform: A review of the empirical evidence’, Journal of Property Research, 20(1), pp 49–66 doi: 10.1080/0959991032000051962 19 Goodacre, A (2003b) ‘Operating lease finance in the UK retail sector’, International Review of Retail, Distribution and Consumer Research, 13(1), pp 99–125 doi: 10.1080/0959396032000065373 20 Goodacre, A., Beattie, V A and Thomson, S J (2005) ‘Lease Accounting Reform and Economic Consequences: The Views of Preparers and Users’, SSRN Electronic Journal doi: 10.2139/ssrn.294624 21 IAS (1997) IAS 17 — Leases Available at: https://www.iasplus.com/en/standards/ias/ias17 (Accessed: 27 April 2020) 22 IASB (2016) ‘IFRS 16 Leases - Effects Analysis’, International Financial Reporting Standard, (January), p 104 Available at: https://cdn.ifrs.org//media/project/leases/ifrs/published-documents/ifrs16-effects-analysis.pdf 23 Imhoff, Eugene A, J., Lipe, R C and Wright, D W (1991) ‘Operating Leases: Impact of Constructive Capitalization’, Accounting Horizons, 5(1), pp 51–63 24 Imhoff, E J., Lipe, R and Wright, D (1997) ‘Operating Leases: Income Effects of Constructive Capitalization’, Accounting Horizons , 11(2), pp 12– 32 25 PwC (2016) A study on the impact of lease capitalisation Available at: www.pwc.com (Accessed: 29 April 2020) 26 PwC Vietnam (2018) Similarities and Differences A comparison of International Financial Reporting Standards (IFRS) and Vietnamese GAAP Available at: www.pwc.com (Accessed: 27 April 2020) 27 SBV - Ngân Hàng Nhà Nước (2020) ‘Danh sách cơng ty cho th tài chính’ http://sbv.gov.vn 28 Schipper, K and Vincent, L (2003) ‘Earnings Quality’, Accounting Horizons, 17, p 97 Available at: https://www.questia.com/library/journal/1G1-105368177/earnings-quality (Accessed: 29 April 2020) 29 Singh, A (2011) ‘A restaurant case study of lease accounting impacts of proposed changes in lease accounting rules’, International Journal of Contemporary Hospitality Management, 23(6), pp 820–839 doi: 10.1108/09596111111153493 Pham Mai Anh – 19a4030040 55 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang 30 Teoh, S H., Welch, I and Wong, T J (1998) ‘Earnings management and the underperformance of seasoned equity offerings’, Journal of Financial Economics North-Holland, 50(1), pp 63–99 doi: 10.1016/S0304405X(98)00032-4 31 Trifts, J and Porter, G (2017) ‘The Impact of the Capitalization of Operating Leases: A Guide for Individual Investors’, Financial Services Review, 26(2), p 205 32 VGS (2017) Báo cáo phân tích cổ phiếu CTCP hàng khơng Vietjet - VJC 33 Wong, K and Joshi, M (2015) ‘The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia’, Australasian Accounting, Business and Finance Journal, 9(3), pp 27–44 doi: 10.14453/aabfj.v9i3.3 34 Y Tai, B (2013) ‘Constructive Capitalization of Operating Leases in the Hong Kong Fast-Food Industry’, International Journal of Accounting and Financial Reporting, 3(1), p 128 doi: 10.5296/ijafr.v3i1.3270 Pham Mai Anh – 19a4030040 56 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang APPENDIX Appendix A: IAS 17 Leases – Guidance of IAS Overview IAS 17 Leases prescribes the accounting policies and disclosures applicable to leases, both for lessees and lessors Leases are required to be classified as either finance leases (which transfer substantially all the risks and rewards of ownership, and give rise to asset and liability recognition by the lessee and a receivable by the lessor) and operating leases (which result in expense recognition by the lessee, with the asset remaining recognized by the lessor) IAS 17 was reissued in December 2003 and applies to annual periods beginning on or after January 2005 IAS 17 will be superseded by IFRS 16 Leases as of January 2019 Objective of IAS 17 The objective of IAS 17 (1997) is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosures to apply in relation to finance and operating leases Scope IAS 17 applies to all leases other than lease agreements for minerals, oil, natural gas, and similar regenerative resources and licensing agreements for films, videos, plays, manuscripts, patents, copyrights, and similar items [IAS 17.2] However, IAS 17 does not apply as the basis of measurement for the following leased assets: [IAS 17.2]  Property held by lessees that is accounted for as investment property for which the lessee uses the fair value model set out in IAS 40;  Investment property provided by lessors under operating leases (see IAS 40);  Biological assets held by lessees under finance leases (see IAS 41); and  Biological assets provided by lessors under operating leases (see IAS 41) Pham Mai Anh – 19a4030040 57 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang Classification of leases A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership All other leases are classified as operating leases Classification is made at the inception of the lease [IAS 17.4] Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form Situations that would normally lead to a lease being classified as a finance lease include the following: [IAS 17.10]  The lease transfers ownership of the asset to the lessee by the end of the lease term;  The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised;  The lease term is for the major part of the economic life of the asset, even if title is not transferred;  At the inception of the lease, the PV of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset;  The lease assets are of a specialized nature such that only the lessee can use them without major modifications being made Other situations that might also lead to classification as a finance lease are: [IAS 17.11]  If the lessee is entitled to cancel the lease, the lessor's losses associated with the cancellation are borne by the lessee;  Gains or losses from fluctuations in the fair value of the residual fall to the lessee (for example, by means of a rebate of lease payments);  The lessee has the ability to continue to lease for a secondary period at a rent that is substantially lower than market rent Pham Mai Anh – 19a4030040 58 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang When a lease includes both land and buildings elements, an entity assesses the classification of each element as a finance or an operating lease separately In determining whether the land element is an operating or a finance lease, an important consideration is that land normally has an indefinite economic life [IAS 17.15A] Whenever necessary in order to classify and account for a lease of land and buildings, the minimum lease payments (including any lump-sum upfront payments) are allocated between the land and the buildings elements in proportion to the relative fair values of the leasehold interests in the land element and buildings element of the lease at the inception of the lease [IAS 17.16] For a lease of land and buildings in which the amount that would initially be recognized for the land element is immaterial, the land and buildings may be treated as a single unit for the purpose of lease classification and classified as a finance or operating lease [IAS 17.17] However, separate measurement of the land and buildings elements is not required if the lessee's interest in both land and buildings is classified as an investment property in accordance with IAS 40 and the fair value model is adopted [IAS 17.18] Accounting by lessees The following principles should be applied in the financial statements of lessees:  At commencement of the lease term, finance leases should be recorded as an asset and a liability at the lower of the fair value of the asset and the PV of the minimum lease payments (discounted at the interest rate implicit in the lease, if practicable, or else at the entity's incremental borrowing rate) [IAS 17.20];  Finance lease payments should be apportioned between the finance charge and the reduction of the outstanding liability (the finance charge to be allocated so as to produce a constant periodic rate of interest on the remaining balance of the liability) [IAS 17.25];  The depreciation policy for assets held under finance leases should be consistent with that for owned assets If there is no reasonable certainty that the lessee will obtain ownership at the end of the lease – the asset should be Pham Mai Anh – 19a4030040 59 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang depreciated over the shorter of the lease term or the life of the asset [IAS 17.27];  For operating leases, the lease payments should be recognized as an expense in the income statement over the lease term on a straight-line basis, unless another systematic basis is more representative of the time pattern of the user's benefit [IAS 17.33] Incentives for the agreement of a new or renewed operating lease should be recognized by the lessee as a reduction of the rental expense over the lease term, irrespective of the incentive's nature or form, or the timing of payments [SIC-15] Accounting by lessors The following principles should be applied in the financial statements of lessors:  At commencement of the lease term, the lessor should record a finance lease in the balance sheet as a receivable, at an amount equal to the net investment in the lease [IAS 17.36];  The lessor should recognise finance income based on a pattern reflecting a constant periodic rate of return on the lessor's net investment outstanding in respect of the finance lease [IAS 17.39];  Assets held for operating leases should be presented in the balance sheet of the lessor according to the nature of the asset [IAS 17.49] Lease income should be recognized over the lease term on a straight-line basis, unless another systematic basis is more representative of the time pattern in which use benefit is derived from the leased asset is diminished [IAS 17.50] Sale and leaseback transactions For a sale and leaseback transaction that results in a finance lease, any excess of proceeds over the carrying amount is deferred and amortized over the lease term [IAS 17.59] For a transaction that results in an operating lease: [IAS 17.61] Pham Mai Anh – 19a4030040 60 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang If the transaction is clearly carried out at fair value - the profit or loss should be recognized immediately; If the sale price is below fair value - profit or loss should be recognized immediately, except if a loss is compensated for by future rentals at below market price, the loss should be amortized over the period of use; If the sale price is above fair value - the excess over fair value should be deferred and amortized over the period of use; If the fair value at the time of the transaction is less than the carrying amount – a loss equal to the difference should be recognized immediately [IAS 17.63] Disclosure: lessees – finance leases [IAS 17.31]  Carrying amount of asset;  Reconciliation between total minimum lease payments and their PV  Amounts of minimum lease payments at balance sheet date and the PV thereof, for: - The next year - Years through combined - Beyond five years  Contingent rent recognized as an expense;  Total future minimum sublease income under noncancellable subleases;  General description of significant leasing arrangements, including contingent rent provisions, renewal or purchase options, and restrictions imposed on dividends, borrowings, or further leasing Disclosure: lessees – operating leases [IAS 17.35]  Amounts of minimum lease payments at balance sheet date under noncancellable operating leases for: - The next year; - Years through combined; - Beyond five years Pham Mai Anh – 19a4030040 61 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang  Total future minimum sublease income under noncancellable subleases;  Lease and sublease payments recognized in income for the period;  Contingent rent recognized as an expense;  General description of significant leasing arrangements, including contingent rent provisions, renewal or purchase options, and restrictions imposed on dividends, borrowings, or further leasing Disclosure: lessors – finance leases [IAS 17.47]  Reconciliation between gross investment in the lease and the PV of minimum lease payments;  Gross investment and PV of minimum lease payments receivable for: - The next year; - Years through combined; - Beyond five years  Unearned finance income;  Unguaranteed residual values;  Accumulated allowance for uncollectible lease payments receivable;  Contingent rent recognized in income;  General description of significant leasing arrangements Disclosure: lessors – operating leases [IAS 17.56]  Amounts of minimum lease payments at balance sheet date under noncancellable operating leases in the aggregate and for: - The next year; - Years through combined; - Beyond five years  Contingent rent recognized as in income;  General description of significant leasing arrangements (IAS, 1997) Pham Mai Anh – 19a4030040 62 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang Appendix B: Accounting standards and discussions of standard organizations for lease accounting in the world Year Organization Document Title 1949 AICPA ARB 38 Disclosure of Long-Term Leases in Financial Statements of Lessees 1962 AICPA ARS 1964 APB APB Opinion 1966 APB APB Opinion Reporting of Leases in Financial Statements Reporting of Leases in Financial Statements of Lessee Accounting for Leases in Financial Statements of Lessors 1972 APB APB Opinion 27 Accounting for Lease Transactions by Manufacturer or Dealer Lessors 1973 SEC ASR 132 Accounting for lease transactions in the financial statements of the lessee 1973 SEC ASR 141 Interpretation and minor amendments Applicable to certain amendments to the S-X Regulation 1973 APB APB Opinion 31 1973 SEC ASR 147 Disclosure of lease commitments for lessees Notice of amendments to the S-X Regulation requires disclosure of changes of a lease 1974 FASB DM Analysis of issues related to accounting for asset leasing 1975 1976 1976 1980 1982 1996 FASB FASB FASB IASC IASC G4+1 ED ED(revised) FAS 13 ED (E19) IAS 17 Special Report 1997 1997 1999 IASC IASC G4+1 ED (E56) IAS 17 (revised) Special Report 2013 IASB IAS 17 (revised) Accounting for lease Accounting for lease Accounting for lease Accounting for lease Accounting for lease Accounting for Leases: A New Approach Lease Lease Leases: Implementation of a New Approach Lease 2016 IASB IFRS 16 Lease (IASB, 2007) Pham Mai Anh – 19a4030040 63 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang Appendix C: List of Financial leasing companies in Vietnam Unit: billion VND No Company VINASHIN Finance Leasing Company Limited Kexim Vietnam Leasing Company License number and date Address Charter capital 2nd Floor, 120 Hang Trong 79 / GP-NHNN Street, Hoan Kiem, Hanoi March 19, 2008 300.0 9th Floor Diamond Plaza, 34 Le Duan, District 1, Ho Chi Minh City 72 / GP-NHNN July 2, 2018 (renewal) 158.7 158.7 Asia Commercial Bank 131 Chau Van Liem, Ward 06 / GP-NHNN Leasing Company 14, District 5, Ho Chi Minh dated 22/5/2007 Limited City 300.0 Industrial and Commercial Bank of Vietnam Leasing Company Limited VCB Leasing Company Limited 16 Phan Dinh Phung, Ba Dinh District, Hanoi 25T1, N05, Hoang Dao Thuy Street, Trung Hoa Ward, Cau Giay District, Hanoi Agribank no.1 Leasing No Pham Ngoc Thach, Company Dong Da, Hanoi 05 / GPCTCTTC Sacombank Leasing Limited Company Vietnam International Leasing Company Limited Chailease International Room 2801-04 28th floor, Leasing Company Saigon Trade Center, 37 Limited Ton Duc Thang, Ben Nghe Ward, District 1, Ho Chi Minh City BIDV - Sumi Trust Level 20, Tower A, Leasing Co., Ltd Vincom, No 191 Ba Trieu, Le Dai Hanh Ward, Hai Ba Trung District, Hanoi 1,000.0 500.0 06 / GPCTCTTC dated August 27, 1998 230 Nam Ky Khoi Nghia, 65a / GP-NHNN District 3, Ho Chi Minh dated October City 31, 2017 (renewed) P 902, Center Tower 72-74 117 / GP-NHNN Nguyen Thi Minh Khai, dated April 24, Ward 6, District 3, Ho Chi 2008 (renewed) Minh City 10 04 / GPCTCTTC March 20, 1998 200.0 300.0 350.0 09 / GP-NHNN dated 09/10/2006 580.7 33 / GP-NHNN dated 12/4/2017 895.6 (SBV - Ngân Hàng Nhà Nước, 2020) Pham Mai Anh – 19a4030040 64 K19-CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang Appendix D: Average interest rate for mid and long term for the years periods (2014-2018) The mid and long term interest rates were extracted from the last weekly reports on banking activities by the State Bank of Vietnam of each years from 2014 to 2018 Unit: % Year 2014 2015 2016 2017 2018 Interest rate range 9.5-11 11-12.5 9.3-11 10-10.5 9-11 Average 10.25 10.15 10.15 10.15 10.00 (Figures by the State Bank of Vietnam and calculated by author) Pham Mai Anh – 19a4030040 65 K19-CLC-KTA SUPERVISOR'S COMMENTS In the course of doing this thesis, student Pham Mai Anh actively contact and seek guidance from instructors Student show a serious, positive attitude and a willingness to learn during the implementation of the thesis This thesis has presented the evolution of lease activities and lease accounting; introduction of IAS 17 and its drawbacks; and the reform of lease accounting and IFRS 16; reviewed the empirical researches on lease accounting, especially on accounting quality and lease propensity and the development of research hypothesis base on the gap of previous researches and the current background of lease activities and accounting in Vietnam Using regression results and descriptive statistic analysis, this thesis has answered and discuss on the possible reasons for the following questions: (1) Whether a firm’s tendency to lease instead of buying declines in its accounting quality? (2.1) Whether lease propensity decrease when tax rate increase? (2.2) Whether lease propensity increase when gearing/ leverage increase? (2.3) Whether lease propensity increase when ROA increase? (2.4) Whether lease propensity increase when size increase? (2.5) Whether lease propensity increase when growth increase? Thus, this thesis has pointed out the implication and some recommendations of the adoption of IFRS 16 in Vietnam Supervisor Ph.D Dao Nam Giang