Earning persistence and enhancing accounting regulations towards í empirical evidence from real estate firms listed on the vietnamese stock market,graduation théis

BANKING ACADEMY FACULTY OF ACCOUNTING – AUDITING ADVANCED PROGRAM - - GRADUATION THESIS TOPIC : EARNING PERSISTENCE AND ENHANCING ACCOUNTING REGULATIONS TOWARDS IFRS – EMPIRICAL EVIDENCE FROM REAL ESTATE FIRMS LISTED ON THE VIETNAMESE STOCK MARKET Student Nguyễn Phương Loan Student ID 19A4000375 Class K19 CLC - KTA Supervisor PhD Đào Nam Giang Hà Nội, June 2020 DECLARATION I assure that this paper is my own independent research The data used for analysis in the thesis have clear origins and was published in accordance with regulations The research results in the thesis are analyzed in an honest, objective, and consistent manner with Vietnamese practices These results have never been published in any other study Hà Nội, June 2020 Student Nguyễn Phương Loan i ACKNOWLEDGEMENT In the process of completing this graduation thesis, I have received a great deal of guidance, support, and encouragement from teachers and friends First and foremost, I would like to give my deepest thank and sincere appreciation to my supervisor, PhD Đào Nam Giang who gave me initial suggestion, ideas about research paper, led my way to develop and construct my study, gave me valuable advice, comments and helpful correction I appreciate her support and guidance during the time of doing and finishing the research paper Next, I would like to express my gratitude to all teachers in Accounting and Auditing faculty for their lectures in four years, their dedication in my university learning journey which inspire and equip me with valuable knowledge and learning ability to complete the graduation thesis Last but not least, I would like to thank my family and friends who always encouraged, supported me to complete the research paper Hà Nội, … June 2020 Student Nguyễn Phương Loan ii TABLE OF CONTENT ABBREVIATION V LIST OF TABLES AND FIGURES VI INTRODUCTION 1 Rationale Research objectives .2 Research topic and the scope of study Research questions .2 Research methodology .3 Structure of the Thesis CHAPTER 1: EARNING PERSISTENCE, LITERATURE REVIEW EFFECT OF IFRS ADOPTION ON EARNINGS PERSISTENCE 1.1 Earnings persistence 1.1.1 Concept of earnings persistence 1.1.2 Determinants of Earnings persistence .8 1.2 Literature review effect of IFRS adoption on earnings persistence .10 1.2.1 International IFRS harmonization 10 1.2.2 Literature review on empirical research on the effect of IFRS adoption on earnings persistence 13 CHAPTER 2: BACKGROUND ANALYSIS AND RESEARCH HYPHOTHESES 16 2.1 Accounting development in Vietnam and international accounting standards harmonization 16 2.2 Novelty of Circular No.200/2014 and No.202/2014 closely approach to international accounting standards 19 2.2.1 Circular 200/2014/TT-BTC 20 2.2.2 Circular 202/2014 compared to Circular 161/2007 and comparable international accounting standards 24 2.3 Reason of researching impact of Circular implementation on Real estate industry 27 2.4 Research hypotheses .29 CHAPTER 3: RESEARCH METHODOLOGY 32 iii 3.1 Proposed research model 32 3.2 Sample selection .35 3.3 Overview of operating characteristics of real estate firm compared to other industries 36 CHAPTER 4: EMPIRICAL ANALYSIS 41 4.1 Descriptive statistics and correlation matrix 41 4.2 Empirical results of earnings persistence and influencing factors 44 CHAPTER 5: DISCUSSION AND RECOMMENDATION 49 5.1 Discussion .49 5.2 Recommendation for enhancing earnings quality in Vietnam IFRS convergence 53 REFERENCE 57 iv ABBREVIATION IFRS International Financial Reporting Standards US SEC The United State Securities and Exchange Commission MoF Ministry of Finance IASB International Accounting Standards Board GAAP Generally Accepted Accounting Principles UAS Uniform Accounting System IAS International Accounting Standards VAS Vietnamese Accounting Standards WTO World Trade Organization HOSE Ho Chi Minh Stock Exchange HNX Hanoi Stock Exchange FASB Financial Accounting Standards Board v LIST OF TABLES AND FIGURES LIST OF TABLES Table The weight of capitalization market according to industry sectors 36 Table Descriptive statistics .42 Table OLS Regression 45 Table Test confidence level of model applied for the real estate data .46 Table 4 Test confidence level of model applied for the other industries data 46 LIST OF FIGURES Figure Operating Cycle of Real Estate compared to other industries 37 Figure Return on Asset .38 Figure 3 Capital intensity 39 Figure Leverage ratio (Debt ratio) 39 Figure Variability of cash flow and sale 40 Figure Correlation coefficients for variable of real estate data 43 Figure Correlation coefficients for variable of other industries data .44 Figure Profitability of listed companies on HOSE (ROAE) (2015 – 2019) 51 Figure ROAE distribution of companies listed on HOSE by industry (20152019) 51 Figure Bankruptcy risk by Altman Z score of listed companies on HOSE from 2015 to 2019 52 vi INTRODUCTION Rationale In recent years, Vietnam is appraised as one of fastest-growing economies among developing countries This successful culmination reasons by a confluence of multidimensional factors, such as timely and appropriated stimulating macro- and microeconomic policies from government in supporting economic growth, where development and enhancement of accounting policies play an important role Comprehensive accounting regime not only facilitates efficient and effective operating and managing internal companies’ activities, but also brings sustainable and transparency financial market Therefore, accounting informativeness is one of the most concerned topics among financial information users and academic literature Qualitative information from public reports plays key role in making decision of investors for many industry segments, where real estate industry can be regarded as the most critical segments in Vietnam economies for some reasons Firstly, real estate industries is “traction force” of the national economy, its development has great effect and close relationship with other industries’ sections, being the motivation for development of industries, such as construction material (iron, steel, cement and ceramic tiles), travel, construction, consultant, sale, etc Secondly, in recent years, investment properties accounts a majority part of market capitalization, so its changes have significant impact on economy as a whole Last but not least, one of the main causes for global financial crisis 2007-2008 is housing bubble, together with incomplete financial oversight in the United States Furthermore, under the circumstance of transition in Vietnam accounting regime, especially accounting regulations toward IFRS, research impact on real estate accounting informativeness necessitate Based on this rational interpretation and practical rationale, I choose topic “Earning persistence and enhancing accounting regulations towards IFRS – Empirical evidence from real estate firms listed on the Vietnamese stock market” as researching affair for graduation thesis Research objectives In the context of real estate industry, the paper focuses on impact of Vietnam accounting regime transition and analyze some matters as follows: Firstly, interpreting IFRS implementation road map, especially the characteristics of accounting regime transitioning towards IFRS in the period from 2010 to 2019 Secondly, researching relation of accounting information under Vietnam accounting regulations and earning persistence, a benchmark of earning quality, and accounting informativeness Thirdly, analyzing the impact of Vietnam accounting transition in recent years on earning persistence, then combined with extant characteristic of accounting regulation to propose recommendation for enhancing earning quality in Vietnam IFRS adoption road map Research topic and the scope of study Researching object is earning persistence and Vietnam accounting transition from 2010 to 2019 Therefore, the topic is “Earning persistence and enhancing accounting regulations towards IFRS – Empirical evidence from real estate firms listed on the Vietnamese stock market” The scope of study confines in real estate industry and transition of accounting policies, the implementation if Circular 200/2014/TT-BTC “Circular on guidelines for accounting policies for enterprises” and Circular 202/2014/TT-BTC “Guiding on preparation and presentation of consolidated financial statements” in specific Research questions In our study, we try to answer the following questions: First, are reported earnings of real estate companies persistent? Secondly, where does the persistence of earnings come from, fundamental performance or earning management? Thirdly, did implementation of Circulars increase earning quality, especially earnings persistence? Research methodology The paper uses some quantitative research methodologies as listed below:  Collection financial information of Vietnamese listed companies  Statistical method  Analyzing method from regression results Structure of the Thesis The remainders of the paper is organized as follows: Chapter 1: Earning persistence, literature review effect of IFRS adoption on earnings persistence Chapter 2: Background analysis and research hypotheses Chapter 3: Research methodology Chapter 4: Empirical analysis Chapter 5: Discussion and recommendation Therefore, the model is appropriate in analysis the earnings persistence for two dataset Following, the paper presents the detailed commentary for the results According to regression results shown in the Table 4.2, earnings in the current year and future earnings has close relationship The coefficient of lagPBT for real estate industry is 0,441, and the results is much higher for other industries, which is 0,672, both with high statistical significance (0,001) If current earnings increases 1%, the future earnings in investment properties industry rises 0,441%, and 0,672% for future earnings in other industries This results indicates earnings of companies in other segments is more persistent than that of real estate industry Therefore, earnings of companies in other industries segments is more useful in predicting and understand future earnings pattern The coefficient of lagPBT:factor(Post)1 indicates the effect of Circular implementation to earnings persistence The coefficients of model applied for two dataset are negative and has statistical significant Therefore, different from initial expectation the coefficient is negative for both dataset The R2 of regression model for real estate industry is quite low, approximately at 0,1393, meanwhile it is significant higher for model applied for other industries, at 0,5035 R2 shows that independent variables in model applied for real estate dataset has much lower explanation power for future earnings than model applied for other industries sample In regression for real estate, there are no firms characteristic can be used to explain future earnings Meanwhile, for other industries segments, operating cycle and leverage ratio have statistical significance to explain future earnings Compared with the expectation, operating cycle and leverage ratio negatively correlated to future earnings It means that if operating cycle and leverage ratio increase 1%, the future earnings decrease 0,035% and 0,0496%, respectively Based on the regression results, we have ground to come into conclusion for final hypotheses: Firstly, the paper proves the Hypothesis that listed real estate companies’ current reported earnings can explain for future earnings with high statistical significance 47 Secondly, hypothesis is negated, after Circular implementation, the explanation power of current earnings to future one does not increase, even current earnings cannot used to explain the changes of future earnings Thirdly, the paper negates remaining hypotheses (H2, H3, H4, H5, H6) It means that firms characteristics, such as firm size, operating cycle, capital intensity, sale variability and leverage ratio cannot explain the changes of future earnings 48 CHAPTER 5: DISCUSSION AND RECOMMENDATION 5.1 Discussion From the empirical results mentioned in section 4, there are some comments about factors affecting to earnings persistence for real estate industry compared to other industries as follows: Firstly, based on regression results, current earnings have explanation power for future earnings (0,441) with high statistical significant (0,001) The persistent level of earnings is even higher for companies in other industries sectors (0,672) The results indicates that if current earnings increases 1%, the future earnings rises 0,441 and 0,672 for companies in real estate and for other industries, respectively The difference in the level of earnings persistence among industrial market segmentation corroborates for the empirical results of Do et al (2020), which show that earnings persistence level varies according industries, even the differentiation of firms in the industry shows large gaps and uneven changes in profit sustainability However, earnings persistence reduced significantly in the period of post Circulars application Regression results for both dataset, the Circulars have no effect on enhancing the persistence of earnings, even earnings years after the implementation current earnings cannot explain the changes of future earnings, with high statistical significance Secondly, we document that observable firm characteristics in real estate industry cannot explain for the changes of future earnings Meanwhile, for other industries, operating cycle and leverage ratio can use to predict future earnings pattern In general, the majority firms and industrial characteristics cannot explain for the future earnings The regression results pose a question for earnings informativeness in general and earnings persistence in specific for real estate industry Based on regression results, the paper comes into conclusion that earnings for real estate industry is persistent, and the level of earnings persistence reduce in the post period of Circular application Additionally, there are no firm and industrial characteristics explaining for changes of future earnings For that reasons, it is high possibility that the persistence is caused by earnings management, “creative accounting” 49 and technique, in other words, earnings persistence does not come from sustainability of companies’ operating activities or the relevant and faithfully accounting information On the one hand, circulars implementation has brought more stringent regulations, which caused decline in earnings management, as the result, earnings was not persistent in the period of post application Circular 200/2014 and Circular 202/2014 have impact on accounting information, particularly earnings quality They make companies in real estate industries and other industries engage in less earnings management than previous period Therefore, earnings in five years after Circulars implementation is less persistent, due to decrease in using accounting technique for earnings management On the other hand, IFRS direct accounting standards for timely recognition and relevance, so it is common that earning volatility increases The previous researches (Dichev & Tang, 2009; Frankel & Litov, 2009) proved inverse relationship between volatility of earnings and earnings persistence As a result, Circulars, which have direction towards IFRS, make earnings more volatile and less persistent These results indicate an emergency accounting informativeness for real estate companies and for market as the whole Unfaithful and irrelevant accounting information covers true companies’ financial health, comforts investors, then it misleads their investment decision It cause not only damages for individuals, but also the sustainable growth of the whole national economic According to Nam Giang Dao’s analysis (2020) of bankruptcy risk and earnings management, she indicates real estate has clear signs of earnings management and face high risk of insolvency Based on dataset of 162 listed companies on HOSE in years from 2015 to 2010, relevant to 808 firm year observations, including 21 investment properties enterprises – 105 firm year observation, she show clear lost avoidance of real estate companies: 50 Figure Profitability of listed companies on HOSE (ROAE) (2015 – 2019) Figure ROAE distribution of companies listed on HOSE by industry (20152019) Source: Research study manuscript – PhD Nam Giang Dao (2020) There is a note that small profit margin defined as ROAE within the range of 02% As the figures above, real estate companies have lower level of ROAE compared to the others industries Furthermore, histogram distribution for real estate companies has right skewed distribution and steeped at Therefore, the companies show clears 51 indications of earnings management to meet market expectation Additionally, she also used the Alman Z-score to gauges companies’ likelihood of bankruptcy, which uses five financial ratios, namely working capital (A), retained earnings (B), profit before interest and taxes (C), net revenue (E) deflated by total assets and market value of equity (D) deflated by total liability By formula Z-Score = 1.2A + 1.4B + 3.3 C + 0.6D +1.0E, the output of credit-strength test as follow: Figure Bankruptcy risk by Altman Z score of listed companies on HOSE from 2015 to 2019 Source: Research study manuscript – PhD Nam Giang Dao (2020) There are some notes that if Z score of companies is below 1,8, they head high risk for bankruptcy, while companies with score above are not likely to go solvency As figure above, it is obvious that, real estate companies with very low Z-score, below 1,8, so they include for group with high risk of bankruptcy These empirical results also corroborates the consequence of earnings management and window dressing real estate financial statement Currently, investment properties industry account for larger amount of capitalization and related to development many others industries, so potential crisis with this segment can lead to economic shock For that reason, promulgating and more stringent supervision for real estate accounting is necessary, especially in the process of internal accounting convergence onwards in Vietnam 52 In conclusion, these conclusions imply several matters Firstly, earnings persistence is not the appropriate criteria to assess the reported earnings informativeness for real estate companies Secondly, the reported earnings of investment properties companies does not reflect faithfully financial position and financial performance, the accounting figures were managed and adjusted according the managements’ expectation The preliminary hypothesis of earnings management existing in real estate companies is appropriate as basing on industry characteristics, such as high requirement for capital intensity, reliance on the financing by debt The mentioned matters are high potential motivation for management adjusting accounting information to meet expectation from investors, bankers, creditors, stockholders, and other stakeholders On the one hand, the reality puts investors in more risky condition for using irrelevant and unfaithful financial information, especially the information of earnings in their making decision purpose On the other hand, earnings management cause lowering accounting informativeness, eroding pubic belief and interest to the financial accounting informativeness and market transparency, at the same time, it encourage management to accept more risky in companies’ operating activities, and optimize accounting choice to produce the most persistent number possible The results raise additional issues for future researches They can test persistent level of different earnings component, by decomposing earnings into cash flow with different using purpose and accrual Then, accounting tools for earnings management, the frequency and level they use these techniques, which are reference for accounting standards setter to pay attention when building, implementing and guiding doers 5.2 Recommendation for enhancing earnings quality in Vietnam IFRS convergence Based on discussion section, earnings persistence in real estate industry is not driven by fundamental performance, it results from earnings management Circulars have reduced the persistence of earnings, it is also sign for earnings management restriction However, earnings persistence is one of most important criteria for earnings quality, and IFRS adoption is expected to improve the persistence of earnings given the nature of operation So, how Vietnam IFRS convergence can enhance earning sustainability and earning stream reflect underlying fundamental performance of 53 companies The paper proposes some recommendation for the improvement of earnings quality in Vietnam IFRS adoption road map, as follows: Firstly, comprehensive and exhaustive IFRS adoption need to be considered, instead of implementation with some adjustments In approved IFRS adoption road map, IFRS is regarded to adopt comprehensively and translated from the original version in supporting the understanding and applying of enterprises, besides the plan of Vietnam financial reporting standards (VFRS) for other entities However, translation and application different standards for different entities may cause some problems, such as cumbersome accounting standards, difficulty in terminologies translation, or measuring the impact on different industries sectors, etc Therefore, the work of Vietnam accounting transitioning to international accounting standards should be supervised closely by different related-parties and cooperated with international professional accounting bodies and professional associates in formulating and implementing Although Vietnamese Circular drafters and publishers have inherited and referenced to international accounting standards in many respects, such as fair value option for investment properties, accounting for inventory, reporting currency, revenue recognition, other definitions and terminologies However, they are not comprehensive application, and having adjustments to national financial market characteristics As the result, this amendments reduce the expected impact of initial original and implication, and it can be reasons for the less effective of new regulations adoption Additionally, the fair value option (particularly for investment properties or goodwill) still has not adopted effectively in Vietnam context A qualitative study, which was conducted in Vietnam, pointed the unsuitability of fair value accounting in emerging economies, and Vietnam is a researched case (Lisa, 2019) The research indicates that business and institutional environment in Vietnam exits several impediments to fair value accounting being adopted effectively and transparently Until now, there is no detail legal base guiding the fair value application, despite the urgency of this matter in IFRS adoption The fair value is mentioned in the Accounting Law 2015, which permits the asset and liabilities revaluation in accordance with fair value, where fair value is defined as “the price appropriate to market price that would be received for sale of an asset or paid to transfer a liability at the measurement date” Otherwise, there is no legal base, so an 54 accounting entity is not allowed to revalue its assets unless otherwise stipulated by other laws and regulations Therefore, close approach to IFRS can be seen in the regulation, but application is restricted in practice The major challenges identified by the infrastructure necessary for valuation system The premature adoption of fair value and the lack of thorough guidance can become a catalyst for corporate misconduct Secondly, the weaknesses in accounting standards development in Vietnam are weak accounting professions and unexperienced regulation setters It has been over six years from the Circulars implementation date, the long period of time for training and developing the well-trained, good quantitative and qualitative accounting professional to prepare IFRS roadmap onwards However, the role and position of profession and professional judgment need to be concerned from the regulators’ perspective and being interested and respected among the financial information users Because with their knowledge, experience and analysis as position of public accountant, they will give their assessment and advice in the manners of integrity and objectivity about varied matters based on public interest, which companies usually get into difficulty in applying regulations into practice They also the advisors, and facilitators in supporting regulators and expediting long Vietnamese IFRS adoption roadmap ahead Thirdly, IFRS has developed accounting methods with comprehensive and broad existing financial issues, so they include various new measurement, principles, concept, which need more detailed guidance in understanding and applying into practice As mentioned above, fair value accounting is also a crucial matter in applying IFRS Despite the method is mentioned in accounting legal base, but there is no further guidance explaining about this brand-new accounting method, other than definition Therefore, the accounting standard setters should also watch out implementing further guidance for entity applying new concepts, new accounting method, and avoiding existing accounting standards, but not being applied into practice Last but not least, in the road map of IFRS adoption, it is unavoidable some averse or timely effect, so the conversations between accounting standard-setter, regulators and executor need to be conducted for updating, understanding and giving the up-to-date amendments and guidance for entities The researches and analyses should be encourage incrementally, in measuring and assessing the effectiveness of applying 55 the new accounting standards Communication is also useful source of reference for both regulators about standards’ impacts and executors for notes in applying strategically for their own business contexts In perspective of investors, relation IFRS adoption and earnings quality is probably the most interested topic For decision making purposed, measuring earning quality based on reported financial information of enterprises makes investor give more precise and profitable investing decisions Therefore, studies related to accounting academic, especially earnings quality, play important role for stakeholders in providing empirical results and an overview of accounting practice Earning persistence is associated with many practical financial application, namely profit forecasting, earning predictability, earnings volatility, security valuation, business enterprise valuation Together with other researching branches, earnings persistence and IFRS adoption road map are expected to prosper in Vietnam, to provide useful and comprehensive overview of Vietnam accounting context As a results, they support in adjusting investors’ behaviors and regulators actions, enhancing and improving the accounting system and quality Conclusion: Empirical results indicate earnings for real estate firms is persistent, but it is not driven by the firm’s fundamental performance The impact of Circular implementation causes earning less persistent, as more stringent regulations and accounting towards IFRS restrict earnings management among companies This is an alarming reality for accounting informativeness and sustainable growth of real estate entities Regulators should take into account some issues in IFRS implementation in Vietnam, for example comprehensive IFRS adoption; providing more detail guidance and supporting 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