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

Rationale

In recent years, Vietnam has emerged as one of the fastest-growing economies among developing nations, driven by a combination of effective macroeconomic and microeconomic policies that support growth, with accounting policy development playing a crucial role A robust accounting framework not only enhances the efficiency and management of internal company activities but also promotes a transparent and sustainable financial market Consequently, the informativeness of accounting has become a focal point for financial information users and researchers Qualitative data from public reports is vital for investor decision-making, particularly in the real estate sector, which serves as a "traction force" for the national economy, influencing various industries such as construction materials and travel Additionally, real estate investment significantly contributes to market capitalization, impacting the overall economy The 2007-2008 global financial crisis highlighted the risks associated with housing bubbles and inadequate financial oversight Given the ongoing transition in Vietnam's accounting regulations towards IFRS, it is essential to investigate the effects of real estate accounting informativeness Therefore, my graduation thesis will explore "Earning Persistence and Enhancing Accounting Regulations Towards IFRS – Empirical Evidence from Real Estate Firms Listed on the Vietnamese Stock Market."

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

Secondly, researching relation of accounting information under Vietnam accounting regulations and earning persistence, a benchmark of earning quality, and accounting informativeness

The recent transition to IFRS in Vietnam has significantly influenced earning persistence, necessitating an analysis of its impact By examining the current characteristics of accounting regulations, we can formulate recommendations aimed at improving earning quality in Vietnam's adoption of international financial reporting standards.

Research topic and the scope of study

This article explores the relationship between earning persistence and the transition of accounting regulations in Vietnam from 2010 to 2019, focusing on the adoption of International Financial Reporting Standards (IFRS) It provides empirical evidence from real estate firms listed on the Vietnamese stock market, highlighting the impact of enhanced accounting practices on financial reporting and earnings stability The findings aim to contribute to the understanding of how IFRS implementation influences earning persistence in the context of Vietnam's evolving financial landscape.

This study focuses on the real estate industry and the transition of accounting policies, specifically examining the implementation of Circular 200/2014/TT-BTC, which provides guidelines for accounting policies for enterprises, and Circular 202/2014/TT-BTC, which offers guidance on the preparation and presentation of consolidated financial statements.

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

 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

EARNING PERSISTENCE, LITERATURE REVIEW

Earnings persistence

Earnings quality is a significant and debated area of research within financial accounting, characterized by a lack of consensus on its definition Numerous studies explore various aspects of earnings quality, yet a unified understanding remains elusive It is often assessed based on how well reported earnings reflect a company's fundamental operations (Chan et al., 2004), as noted by Kirschenheiter and Melumad.

Higher quality earnings are considered more informative and align closely with a firm's long-term value (2004) According to Statement of Financial Accounting Concepts No 1, Dechow et al (2010) define earnings quality as the degree to which reported earnings reflect the true economic performance of a company.

Higher quality earnings offer valuable insights into a firm's financial performance, which are crucial for informed decision-making by specific stakeholders The evaluation of earnings quality is essential for understanding its implications on financial decisions.

5 any decision being made from an informativeness representative by financial performance, which does not constrain in the context of equity valuation decision

In accounting academia, two key empirical measurements assess earning quality related to decision usefulness: one from the Financial Accounting Standards Board's (FASB) Conceptual Framework and the other based on Hick's economics-driven definition of earnings from 1939 Hick (1946) defined "Income No 1" as the maximum spendable amount within a period while maintaining the capital value of future receipts This definition, initially focused on individual income, can be adapted for companies as the maximum distributable amount to equity shareholders while preserving the company's capital value However, Hick's income analysis does not support the IASB's balance sheet-focused financial reporting approach and fails to address the complexities of measuring business performance and identifying value creation drivers.

The decision usefulness approach is favored in academic accounting research for two main reasons Firstly, the FASB Conceptual Framework emphasizes that the primary purpose of financial reporting is to deliver information that aids in business decision-making, making it a critical criterion for evaluating accounting choices Secondly, decision usefulness is not only empirically manageable but also widely utilized in accounting research, reinforcing its significance in the field.

Earnings quality is a complex and multi-dimensional concept that cannot be measured directly, leading existing literature to focus on specific attributes of earnings quality The characteristics of earnings are influenced by a firm's fundamental performance and the effectiveness of its accounting system in measuring financial performance; however, these factors impact different properties of earnings to varying degrees Consequently, the diverse definitions of earnings quality result in a wide array of measures used to assess it.

Research indicates that earnings quality can be measured through two primary categories: accounting-based measures and market-based attributes (Dechow et al., 2010; Olsson et al., 2004) Accounting-based measures focus on aspects such as accrual quality, earnings persistence, predictability, and smoothness, operating under the premise that accurate accounting earnings effectively allocate cash flow across reporting periods This leads to a correlation between net income, cash flow, and other accounting information when earnings accurately reflect a company's performance Conversely, market-based measures assess value relevance, timeliness, and conversion, positing that earnings represent economic income, as evidenced by market returns or prices Additionally, Schipper and Vincent (2003) propose an alternative classification of earnings quality constructs, which includes the time-series properties of earnings, selected qualitative concepts from the FASB's conceptual framework, the relationships among cash, accruals, and income, and the decisions made during implementation.

This research focuses on earnings persistence, a crucial metric for assessing earnings quality Also referred to as "sustainability," earnings persistence is defined by the autocorrelation in earnings, indicating how current earnings innovations become permanent components of the earnings series (Kormendi & Lipe, 1987) Schipper and Vincent (2003) illustrate this concept as a measure of earnings quality that reflects sustainability Their findings highlight a proportional relationship between earnings persistence and investor responses to reported earnings, suggesting that informed investors who effectively analyze financial statements contribute to reduced mispricing in the market.

Earnings persistence remains a contentious issue in measuring earnings quality, as it is a key financial indicator for investors and stakeholders Management is incentivized to manipulate earnings to achieve stable levels A review of 30 years of empirical research by P Dechow et al (2010) highlights the importance of distinguishing between companies that generate consistent earnings due to their operational nature and those that actively manage earnings to present a more stable figure Earnings are considered persistent when current earnings are maintained in future periods However, the lack of correlation between earnings and a firm's operational and financial characteristics suggests that earnings persistence may be a result of earnings management practices.

The consequences of persistence in literature primarily examine its effects on equity markets and other markets (P Dechow et al., 2010) Research indicates that more persistent earnings lead to higher equity market valuations, resulting in a stronger response in stock prices (Collins & Kothari, 1989; Kormendi & Lipe).

Research has sought to predict earnings persistence and assess investors' awareness of how different variables affect it Sloan (1996) found that investors do not fully recognize the varying persistence levels between accrual and cash flow components of earnings Subsequent studies have further dissected these components, revealing that the levels of accruals and special items significantly influence earnings persistence (P M Dechow & Ge, 2006) Additionally, the higher persistence of cash earnings is largely due to cash distributions to equity holders (P M Dechow et al., 2011) However, there is a scarcity of studies examining the implications of earnings persistence beyond equity market decisions.

Earnings persistence is influenced by several determinants categorized into three main groups: financial performance, accounting methodology, and industry characteristics Research by Dichev & Tang (2009) explores the relationship between earnings volatility—shaped by economic and accounting factors—and earnings persistence Their findings indicate that low-volatility earnings exhibit significantly higher persistence than high-volatility earnings, which tend to revert quickly to the mean and lack reliable predictability.

Litov (2009) explores the concept of earnings persistence, highlighting a strong connection between past earnings volatility and earnings persistence, even after accounting for sampling bias and additional controls They emphasize that both the quantity and quality of cash flow components, similar to accruals, significantly influence earnings persistence Furthermore, the study incorporates various financial performance determinants to explain the negative relationship, including unsustainable extraordinary earnings driven by competitive pressures (Beaver & Kettler, 1970), fluctuations in profit margins and asset turnover (Chen, 2004), the positive effects of increased investment in net operating assets (Li, 2005), and considerations related to capital structure.

Sloan's research (1996) is a pivotal study in accounting that analyzes earnings persistence by breaking down total earnings into cash flow and accrual components This study investigates the information each component provides and its impact on stock prices, utilizing data from New York Stock Exchange and American Stock Exchange firms over a 30-year period from 1962 to 1991 It tests two hypotheses regarding the relationship between current earnings performance, the magnitude of accruals and cash flows, and how stock prices reflect the distinct characteristics of these components The findings indicate that earnings performance is significantly influenced by the accrual component of earnings.

Research indicates that cash flow components of earnings demonstrate lower persistence compared to overall earnings performance Despite this, investors often misinterpret the distinct characteristics of these earnings components, using stock prices as a proxy, which suggests a lack of market efficiency Building on Sloan's (1996) findings, subsequent studies have explored the implications of these results in greater depth.

Literature review effect of IFRS adoption on earnings persistence

Significant variations in accounting practices exist globally, leading to discrepancies in financial statement reporting A recent survey highlights five key factors that influence these accounting differences: the legal system, taxation, sources of financing, inflation, and political and economic relationships.

The diversity in accounting practices has led to significant challenges in the preparation and reporting of financial statements, particularly for multinational corporations This complexity increases costs and requires specialized expertise, making it difficult for companies to access foreign capital markets due to a lack of comparability in financial information Consequently, the need for high-quality accounting data has spurred global interest in the international convergence of financial reporting standards Multinational firms, stock exchanges, securities regulators, and international lending institutions are increasingly focused on reducing diversity and harmonizing accounting practices The establishment of the International Accounting Standards Committee and the International Accounting Standards Board, supported by various stakeholders, has played a crucial role in this convergence process The formation of the IASB in 2001 marked a significant shift from harmonization to global-setting, ushering in a new era in international financial reporting.

The International Accounting Standards Board (IASB), established by the private sector, is recognized by U.S standard-setters as the premier institutional structure for developing accounting standards Its framework comprises several key components, including the IASB, IFRS Foundation, Monitoring Board, IFRS Interpretations Committee, IFRS Advisory Council, and various Working Groups Each of these entities has distinct missions, functions, and objectives, contributing to the overarching goal of advancing global accounting standards.

The International Accounting Standards Board (IASB) comprises 11 members selected based on professional competence and practical experience, ensuring geographical and international diversity The IASB is responsible for developing and issuing International Financial Reporting Standards (IFRS) and Exposure Drafts, as well as approving Interpretations Their rigorous due process includes identifying and reviewing issues, consulting with the Advisory Council, and inviting public comments Following this, the IASB considers feedback, may hold public hearings and field tests, and ultimately approves and publishes standards through a majority vote Additionally, to overcome language barriers, the IASB collaborates with national accounting bodies to support the translation of standards into local languages.

Despite the noble objectives of establishing a dual process for developing standards and a stable structure, there are significant arguments against the international convergence of financial reporting standards Key obstacles include the substantial political costs of eliminating differences, nationalism, concerns over "standard overload," and the necessity to account for diverse environmental influences in accounting practices across countries However, the benefits of accounting convergence are compelling for stakeholders, such as reduced financial reporting costs, simplified preparation of worldwide consolidated financial statements, and enhanced comparability for multinational companies Additionally, the intangible benefits include improved quality of international accounting practices, which boosts the credibility of financial information and increases investor confidence in their evaluations Ultimately, the critical role of a unified accounting language is undeniable.

The International Accounting Standards Board (IASB) employs a principle-based approach to develop accounting standards, contrasting with the rules-based approach favored in many code law countries This approach emphasizes general principles derived from the IASB Framework, which outlines the recognition, measurement, and reporting requirements for various transactions Consequently, International Financial Reporting Standards (IFRS) provide limited guidance, promoting professional judgment in applying these general principles to specific transactions relevant to individual entities or industries.

The preparation and presentation of IFRS-based financial statements are grounded in 12 key concepts, which encompass objectives, underlying assumptions, qualitative characteristics, and the definition, recognition, and measurement of financial elements These principles also address the concepts of capital and capital maintenance Collectively, they establish the framework for individual IFRS, ensuring that the resulting financial statements are valuable tools for making informed investment decisions.

The IASB has garnered significant goodwill from various stakeholders by striving to identify the best global accounting standards and establishing a comprehensive set of standards that serve as the "highest common denominator" for financial reporting This innovative approach has led countries to pursue three main convergence strategies with IFRS: (1) replacing national GAAP with IFRS; (2) adopting IFRS as national GAAP on a standards-by-standard basis; and (3) minimizing differences between national GAAP and IFRS wherever feasible Although IFRS implementation and adoption, initiated by the private sector, lack a formal requirement, there is a growing trend towards voluntary and mandatory adoption of IFRS in many countries, often facilitated through agreements with the SEC (Securities and Exchange Commission).

In July 2002, the European Union mandated that all listed companies in member states prepare consolidated financial statements based on IFRS, effective January 2005, replacing national GAAP with IFRS for this purpose To ensure consistency, the European Parliament amended the EU Fourth and Seventh Directives in January 2003 to align them with IFRS Meanwhile, following the 2008 financial crisis, the United States faced increasing scrutiny over its rulemaking approach, prompting efforts to converge US GAAP with IFRS The SEC's actions towards IFRS convergence included removing the requirement for foreign private issuers to reconcile their financial statements with US GAAP.

Thirteen issuers utilize IFRS to reconcile their financial statements to US GAAP, highlighting the high quality of IFRS in providing adequate investor protection and promoting efficient markets Similarly, Japan prohibits domestic listed companies from adopting IASB standards; however, it permits foreign corporations on its stock exchanges to file IFRS-compliant financial statements without reconciling to Japanese GAAP Additionally, IFRS convergence is occurring in numerous developing countries, often with minimal changes to their national standards.

1.2.2 Literature review on empirical research on the effect of IFRS adoption on earnings persistence

International Financial Reporting Standards (IFRS) play a crucial role in enhancing the global economy by offering three significant benefits Firstly, they promote transparency by delivering high-quality, comparable financial information that aids investors in making informed decisions Secondly, IFRS bridges the gap between internal and external stakeholders, thereby improving accountability Lastly, the adoption of a single, trusted set of global standards enhances the operational efficiency of companies and markets Currently, around 120 countries permit or require the use of IFRS for domestic listed companies, with nearly half fully conforming to the standards set by the International Accounting Standards Board (IASB) and including a conformity statement in their audit reports.

Www.IFRS.Com : IFRS FAQs, n.d.) It is strong evidence for crucial value of IFRS

The practical impact of IFRS implementation remains a debated issue among standards-setters, financial users, investors, and researchers Various aspects, such as changes in accounting informativeness, corporate management activities, and user behavior regarding financial information, are considered when measuring the benefits of IFRS adoption This paper emphasizes academic research and empirical studies concerning the impact of IFRS on accounting informativeness Such empirical research is crucial not only for the accounting literature but also provides a strong foundation for accounting standard-setters, regulators, and financial analysts in evaluating accounting information.

Numerous research streams focus on the informativeness of accounting, particularly regarding the effects of IFRS application and the adoption experiences of various countries These studies are valuable as they provide timely insights into the international accounting standards roadmap A key topic of interest is earnings quality, which is closely linked to profit predictability—an essential criterion for decision-making that garners attention from multiple stakeholders Consequently, the examination of how IFRS impacts the enhancement of reported earnings quality has gained significant traction in accounting literature.

Research on the impact of IFRS adoption on accounting quality, particularly earnings quality, has gained momentum across various countries, examining both mandatory and voluntary adoption in developed and emerging markets Studies indicate that in the U.S market, earnings attributes such as accrual quality, predictability, and smoothness favor US GAAP, whereas IFRS excels in earnings persistence, cash persistence, and cash predictability (Gordon & Jorgensen, 2012) In cases of mandatory IFRS adoption, some countries in transition show limited improvements in earnings quality, while Canadian firms report enhanced earnings quality, particularly in persistence (Benites, 2016) Positive findings have also emerged from Germany (Hung & Subramanyam, 2007), several European nations (Zeghal et al., 2012), and Australia (Chua et al., 2012) In emerging markets like Malaysia, research reveals improved earnings quality, reduced earnings management, and increased value relevance In Vietnam, the trend towards international accounting convergence has prompted a rise in studies, providing empirical insights for regulators and users of financial information regarding the effects of accounting policy changes.

15 informativeness in general and earnings persistence in specific related to IFRS adoption in Vietnam are crucial parts in accounting academic research

In conclusion, earnings persistence plays a crucial role in assessing earnings informativeness, serving as a foundation for security valuation and earnings predictability for stakeholders With the ongoing IFRS convergence, the focus on earnings quality, particularly earnings persistence amidst accounting transitions, has intensified among researchers and accounting standard setters This highlights the need for further research in these areas to validate their impact and enhance the transparency and quality of accounting information.

BACKGROUND ANALYSIS AND RESEARCH

Accounting development in Vietnam and international accounting standards

The transitional reform of 1986 marked a significant turning point for institutional and economic changes in Vietnam, particularly impacting the social environment of accounting Following the launch of the "Doi Moi" program, accounting reform commenced in 1995, evolving through two distinct phases: the first from 1995 to 2001 and the second from 2002 onwards In the initial phase, the Enterprise Accounting System (UAS) was implemented on January 1, 1996, applying to enterprises across all industries and ownership types This new system introduced a structured chart of accounts, bookkeeping standards, and a standardized format for financial statements, along with clear definitions for capital, assets, income, revenue, and expenses While these changes represented a significant advancement over previous practices, challenges remained due to persistent state bureaucracy.

Vietnam's accounting landscape has undergone significant changes, driven by taxation and the need for new accounting regimes, particularly in the state sector The second stage of this evolution began in 1998 with support from the Euro-Tap Viet project, the World Bank, and the Asian Development Bank, leading to the implementation of four accounting standards on December 31, 2001, followed by 26 additional standards over the next six years These standards were largely based on the 2003 IASB standards, influenced by pressure from key commercial partners for Vietnam's accession to the WTO However, the focus on developing and promulgating these standards has led to criticisms regarding their effectiveness and potential benefits compared to original versions Challenges such as gaps in financial services evaluation, as noted by the World Bank in 2006, and the coexistence of multiple accounting standards hinder international convergence Additionally, the weak accounting profession and inexperienced regulators further complicate the establishment of robust accounting standards in Vietnam.

Vietnam, as a developing country with a code law system, sees the government playing a crucial role in regulating its financial market and accounting practices The Vietnamese accounting regime is heavily influenced by tax directives and fiscal policies, while cultural factors and political characteristics contribute to a cautious approach among professionals, limiting their judgment However, the rise of globalization, accounting convergence, and an influx of foreign investors have heightened the need for an accounting system that meets the demands of a developing market and aligns with international standards Consequently, authorities are actively working to bridge local practices with international accounting standards The transition and reform of Vietnam's accounting standards have been widely discussed in various forums, highlighting the growing interest in IFRS adoption among standard-setters, the Ministry of Finance, companies, investors, and other financial stakeholders in Vietnam.

On March 23, 2019, Vietnam initiated its convergence process with the issuance of a draft IFRS roadmap for public comment, leading to the implementation of Decision No 345/QĐ-BTC on March 1, 2020, which approved the application scheme for financial reporting standards The roadmap consists of three stages: Stage 1 (2020-2021) focuses on IFRS readiness preparation, including the translation of IFRS standards, personnel training, and the development of guidelines to support businesses in adopting IFRS Stage 2 (2022-2025) allows voluntary adoption of IFRS by certain companies, such as state-owned enterprises and listed companies, while foreign-invested enterprises may also adopt IFRS for separate financial statements, provided they report transparently to authorities Stage 3, commencing in 2025, mandates IFRS implementation for all state-owned enterprises, listed companies, and large unlisted public companies, with other businesses able to adopt IFRS voluntarily Concurrently, the development of Vietnam Financial Reporting Standards (VFRS) will occur in two phases: the preparation phase (2020-2024) focuses on drafting and establishing a VFRS board, while the application phase begins in 2025, encompassing all regulated entities.

19 fields and economic sectors in Vietnam, except ones subject to application of IFRS or accounting policies for small and medium companies.

Novelty of Circular No.200/2014 and No.202/2014 closely approach to

2.2 Novelty of Circular No.200/2014 and No.202/2014 closely approach to international accounting standards

The Accounting Law 2015 and the implementation of Vietnam's accounting standards are pivotal in aligning Vietnam's accounting practices with international standards amid globalization This transition, which began with the introduction of the first accounting standards in 2001 and the subsequent development of 26 additional standards, underscores Vietnam's commitment to international accounting convergence Currently, Vietnam's accounting framework operates through a combination of standards and regulations, including laws, decrees, and circulars that guide the application of accounting practices Despite challenges such as inconsistencies and a lack of detailed guidance, recent regulations like Circular No 200/2014/TT-BTC and Circular No 202/2014/TT-BTC have brought Vietnam's accounting definitions and measurement criteria closer to IFRS, offering comprehensive methods for various accounting scenarios and complex business transactions.

Enhancing the management of business combinations and operational activities is crucial for companies, as it ensures the informativeness of accounting practices This improvement facilitates stakeholders, including government supervisors and inspectors, in accessing essential financial information.

Circular 202 is primarily founded on IAS 27, IFRS 10, and IFRS 3 regarding measurement and recognition, specifically addressing the accounting for changes in a parent's ownership interest in a subsidiary that do not lead to the loss of control However, discrepancies in guidance remain for certain transactions.

The adoption of international accounting standards significantly enhances the transparency of financial statements for businesses, particularly for publicly listed companies This compliance not only aligns with global integration efforts but also attracts foreign investment This section analyzes and evaluates Circulars 200/2014 and 202/2014 in relation to international accounting standards.

On December 22, 2014, the Ministry of Finance (MoF) implemented Circular No 200/2014/TT-BTC, which established a new Vietnamese Corporate Accounting System, replacing Decision No 15/200/QD-BTC and Circular No 244/2009/TT-BTC This circular provides updated accounting policies for both local and foreign enterprises in Vietnam, effective from the fiscal year starting January 1, 2015 The new regulations introduce significant changes and a fresh approach to accounting practices, particularly in areas such as the accounting books system, foreign currency selection for accounting, principles for recognizing turnover from sales, and methods for accounting inventories and investment properties.

Under the guidance of the Circular, companies are allowed to choose their own accounting ledger format that not only aligns with their operational activities and internal management needs but also includes the necessary information as required.

Vietnam's Law on Accounting allows enterprises to create their own accounting formats, including General Ledgers, General Journals, Journal Vouchers, and other vouchers, as long as they ensure the information is complete, clear, and easily verifiable While the Chart of Accounts remains essential for journal entries, it has been updated to include new accounts, remove outdated ones, and incorporate amendments to accommodate new transaction types.

The selection of reporting currency in accounting enables enterprises engaged in foreign currency transactions to prepare financial reports in that currency, provided they notify the relevant tax authority Companies may also opt to use Vietnamese Dong as their reporting currency but are restricted from changing it, except under special circumstances, such as significant changes in transactions Before submitting financial statements to regulatory authorities, enterprises must convert these statements into VND, which must also be audited Effective from February 5, 2015, the Circular does not require retroactive application, allowing the opening balance of the first-year financial statement to be converted under Circular 244/2009 All items in financial statements should be converted using the average interbank exchange rate at the end of the accounting period, although different rates can be applied for various items—assets and liabilities can use the end-of-period rate, while equity can use the transaction date rate These regulations significantly impact foreign-invested companies, banks, and insurance firms due to the complexities of exchange rate-related conversions.

Circular 200/2014 emphasizes the principle of substance over form, particularly in relation to revenue recognition Revenue is recognized based on the nature of the transaction rather than its legal form, with five key conditions outlined One of these conditions is the transfer of most risks and benefits associated with ownership.

The article highlights key criteria for revenue recognition in real estate transactions, emphasizing that enterprises no longer retain ownership rights over goods and must reliably determine revenues and associated costs According to Decision 15, revenue can be recorded based on the completion percentage of construction contracts without relying solely on invoices Changes in Circular 200 primarily impact financial performance rather than operating cash flow Real estate obligations require the complete transfer of ownership and associated risks to the buyer, meaning enterprises cannot recognize revenue from advance payments Additionally, revenue from real estate sales is governed by accounting policies for goods rather than construction contracts, although revenue may be recorded upon handing over unfinished units if buyers have the right to customize their properties Overall, these changes reflect a shift towards more conservative accounting practices, enhancing the reliability and relevance of financial information.

Selling goods alongside promotional items or free products is a significant aspect of revenue management Companies must distinctly allocate revenue for both regular and promotional goods, essentially treating them as sale rebates Revenue from the sale of these goods is only recognized upon delivery to clients For free goods provided without conditions, their costs are recorded as selling expenses, separate from other sales transactions When it comes to sale discounts, companies should report revenue at net amounts without a separate line for discounts if the deduction amount is clear In instances where a sale discount is granted, it should be appropriately accounted for in the financial records.

In the next period, companies must adhere to accounting standards regarding Events after the balance sheet date If sales deductions qualify as adjustment events, they should be reflected in the revenue of the prior period; otherwise, they are accounted for in the current period This approach, aligned with the prudence concept, results in a reduction of revenue and gross profit margin without altering the cost of sales Consequently, the operating profit margin may rise, while the net profit remains unchanged.

The Last-in First-out (LIFO) inventory accounting method has been eliminated to enhance alignment with international accounting standards Additionally, provisions for environmental compliance are considered expenses that must adhere to industry-specific regulations However, the guidelines regarding the calculation of provision amounts remain ambiguous, particularly in relation to costs outlined in Circular 200 or their allocation over a specified time frame.

The Circular 200 has eliminated the requirement for depreciation on investment properties held for price appreciation, prohibiting the offsetting of accumulated depreciation against the historical cost of these properties It aligns more closely with International Financial Reporting Standards (IFRS) by allowing for the assessment of impairment losses on investment properties Companies may reverse previously made impairment provisions when there is reliable evidence of a decline in value compared to fair market value If a decrease in the investment property's cost is determined, it can be recorded as an expense for cost of goods sold; otherwise, it should be disclosed in the financial statement notes.

Circular 200 offers comprehensive regulations and guidance for various transactions, including the exclusion of bonus and welfare funds from earnings per share measurements, and the classification of short-term and long-term prepayments based on their original maturity It also emphasizes purpose-based classification for financial investments Overall, the implementation of Circular 200 provides extensive direction for different industries while facilitating a gradual application of these guidelines.

24 international accounting standards in some aspects, which show the international accounting convergence in mindset of Vietnam accounting standard-setter

2.2.2 Circular 202/2014 compared to Circular 161/2007 and comparable international accounting standards

Reason of researching impact of Circular implementation on Real estate

The transition to new accounting standards, particularly IFRS, has garnered significant attention from executives across various industries, with the real estate sector being particularly affected due to its unique characteristics that make it a prime candidate for early adoption Companies involved in investment properties, such as real estate investment trusts and private equity firms, operate on a global scale, meaning that accounting changes can significantly impact their financial reporting and investments The capital-intensive nature of this industry necessitates high levels of transparency and informativeness in financial reporting to maintain trust with capital providers Additionally, in a competitive market, real estate firms are undergoing transformations to stay ahead of rivals The sector's role in the 2007-2008 global financial crisis highlighted the need for improved accounting standards, emphasizing the importance of regulatory compliance to prevent future economic downturns Focusing on the implications of accounting regulations in real estate is essential for mitigating unforeseen risks.

The conversion to IFRS is a complex process that extends beyond merely adjusting the chart of accounts; it requires addressing various concerns including tax, valuation, treasury, legal, and technology issues Companies that develop tailored strategies can potentially benefit more than they incur in costs A Deloitte report highlights key actions for real estate CFOs, emphasizing the importance of assessing the benefits and impacts of IFRS reporting Factors such as earnings volatility and performance measurement are critical, as they influence investor and stakeholder interests The real estate sector faces intricate accounting challenges, including the acquisition and construction of properties, investment property classification, and revenue recognition A thorough understanding of these methods and their effects on operations is essential for executives to ensure sustainable business growth Notably, the investment property sector in Vietnam constitutes over 34% of the market capitalization, underscoring its significance.

The 2008 financial crisis has heightened concerns regarding the investment property industry among authorities and investors A key development is the implementation of Circular 22/2019/TT-NHNN, effective January 1, 2020, which establishes limits and prudential ratios for banks and foreign bank branches This regulation significantly tightens control over lending activities in the real estate sector, reducing the maximum ratio of short-term capital used for medium- and long-term loans from 40% to 30%, while increasing risk ratios from 150% to 200% As a result, the new rules are designed to filter out investors with weak financial capabilities who depend heavily on bank capital and risky investments Additionally, this requirement compels the real estate industry to grasp the implications of IFRS implementation in Vietnam and to strategically plan for the inevitable changes ahead.

Assessing the impact of sustainable growth on sectors with significant market capitalization is crucial, as it reflects the effectiveness of regulations and predicts broader market implications Understanding how IFRS adoption affects earnings persistence provides executives with valuable insights into the changes within their companies and industries amid international accounting convergence This paper specifically measures the impact on earnings persistence within the real estate industry, a key indicator of earnings quality, while also conducting comparative tests across other industries.

Research hypotheses

Research on earnings persistence in Vietnam has seen a notable increase across various industries, particularly in the financial services sector A study by Giang Nam Đào (2019) employed panel regression analysis on a sample of 23 Vietnamese commercial banks over a decade (2008-2017) to assess earnings persistence amid concerns about the informativeness of reported earnings The findings revealed a significant correlation between future and current earnings; however, this relationship could not be attributed to the banks' financial characteristics or the business cycle This suggests that the observed correlation may stem from accounting practices or income smoothing rather than true earnings persistence, indicating that reported earnings may not accurately reflect the banks' financial health and performance.

In 2020, a study analyzed the persistence of profits in the Vietnamese stock market, identifying key determinants that influence sustainable profitability and their impact on corporate profit sustainability Utilizing a comprehensive approach, the research examined influential factors across three determinant groups, based on a dataset of 1,278 companies categorized into nine sectors according to the Industry Classification Benchmark, while excluding finance, banking, and issuance sectors The findings revealed significant insights into sustainable earnings and predictability, indicating that the profits of firms in the Vietnamese market are unsustainable, as evidenced by a Perspectives index score of -0.0850.

The fluctuations in earnings and growth rates vary significantly across different sectors, with some industries exhibiting stability in their performance metrics Furthermore, an analysis of the components of past sustainable profits reveals that free cash flow plays a more crucial role in predicting future net income than accrued profit, aligning with findings from previous research.

M Dechow et al., 2011; Richardson et al., 2005; Sloan, 1996) The results of concentration of the industry, correlation between asset turnover and changes in income with asset growth during the period have negative impact relative to previous studies at some developed market The authors explained that businesses have not really positioned their business and mainly classified relative business industry based on the weight of revenue in the total revenue of the business, so the profitability in some industry is very low

Previous studies consistently show a correlation between current and future cash flows and the accrual components of earnings However, research on the impact of IFRS adoption in Vietnam, particularly through the implementation of two relevant Circulars, remains limited While international accounting convergence is an undeniable trend, it incurs significant costs Thus, assessing the impact before and after the implementation of these Circulars is essential for regulators, financial users, and stakeholders in evaluating financial information This research focuses on earnings persistence to determine if earnings have become more persistent following the Circulars' application Given that Vietnam is a developing market with a high reliance on bank financing and lower earnings quality, the study hypothesizes that earnings will show increased persistence post-implementation, influenced more by firm characteristics than by earnings smoothing Additionally, the research incorporates firm-specific determinants such as firm size, incidence of loss, operating cycle, capital intensity, cash flow variability, and leverage ratio, which significantly affect accounting measurement.

The study investigates the factors influencing earnings persistence in the real estate industry, emphasizing the role of supplementary variables in clarifying the connection between current and future earnings It explores whether this relationship stems from intrinsic financial performance or is a result of management's accounting practices aimed at earnings smoothness The research formulates specific hypotheses to analyze these dynamics.

H0: Current reported earnings can well explain for the future earnings

H1: The explanation power of current reported earnings for the future earnings increases in the post Circulars implementation

H2: Firm size correlates positively to future earnings

H3: Operating cycle correlates negatively to future earnings

H4: Capital intensity correlates positively to future earnings

H5: Variability of sale correlates negatively to future earnings

H6: Leverage ratio correlates negatively to future earnings

In recent years, Vietnamese authorities have introduced new accounting regulations aimed at enhancing the informativeness of financial reporting Given the significant role of the real estate industry in the economy, these changes in the accounting regime are particularly impactful This research develops a model to assess the influence of the implementation of these Circulars on earnings persistence within the real estate sector, hypothesizing a positive effect.

RESEARCH METHODOLOGY

Proposed research model

Earnings predictability and sustainability can be assessed through various methods depending on the research objectives According to Freeman et al (1982), the connection between current and future earnings performance can be articulated as a significant relationship.

Earnings are defined as operating income, typically scaled by assets or the number of shares, and are modeled as Earnings i,t+1 = α + β * Earnings i,t + ε t, where the coefficient β indicates the level of persistence in earnings performance A higher β signifies a more reliable indicator of future performance and fewer valuation errors compared to annuitizing current earnings Research often dissects earnings components to assess their impact on earnings persistence, with Sloan (1996) being a pivotal study that differentiates between cash flow components and total accruals Subsequent studies have expanded this analysis by incorporating variables beyond financial statements, such as disclosure notes (Ge, 2011) and industry characteristics (Chen, 2004) Due to the complexity of decomposing earnings components, this research focuses on the persistence of earnings from the previous year to the current year, establishing a model that considers past and current earnings along with influential factors related to financial performance, industry characteristics, and accounting items affected by regulatory Circulars Ultimately, this study aims to evaluate the impact on the real estate industry in comparison to other sectors, highlighting changes between the two.

Previous research, including studies by Collins et al (2003) and Sloan (1996), has utilized earnings before tax and extraordinary items as a key metric Consequently, both current and future earnings in this model are defined as earnings before tax and extraordinary items.

The model incorporates various determinants that affect earnings persistence, including intrinsic factors that control for inherent characteristics influencing this persistence Research by P M Dechow & Dichev (2002) identifies key innate factors such as accrual quality, firm size, sales variability, and the length of the operating cycle Additionally, the study considers other variables from the literature, including capital intensity, while also analyzing the impact of new regulations on profit margins and financial leverage A dummy variable for time is introduced to assess the effects of the period before and after the implementation of the Circular A summary of the measurement of control variables is provided.

𝑃𝐵𝑇: Profit before tax and extraordinary item in year t,

𝑙𝑎𝑔𝑃𝐵𝑇: Profit before tax and extraordinary item in year t-1,

𝑆𝑖𝑧𝑒: Firm size is calculated by the log of total asset in year t-1,

𝑆𝐴𝐿𝐸𝑉: sale variability is the standard deviation of the firm’s rolling three- years from year t-2 to year t sale revenue deflated by total asset,

𝑂𝑝𝑒𝑟𝐶𝑦𝑐: Length of operating cycle is measured by the log of sum of firm’s receivable days and inventory days in year t-1,

𝐶𝑎𝑝𝐼𝑛𝑡: Capital intensity is proxied by the ratio yotal asset to sale

𝑃𝑟𝑜𝑀𝑎𝑟: Profit margin is calculated by dividing gross profit by net sales in year t-1,

𝐿𝑒𝑣: Financial leverage is quotient of total liability over total asset in year t-1, 𝑃𝑜𝑠𝑡: a dummy variable coded 1 for observations in the post-Circular application period, and 0 otherwise

Overall, the proposed model is applying in two set of sample, real estate and other industries as follow:

Base on existing literature, theory, results and economic intuition, the paper expects that:

Earnings persistence increases when the coefficient of earnings from the previous year (𝛼 1) approaches 1 Following the implementation of the Circular, there is an expectation of a positive and significant impact on overall earnings quality, particularly in terms of earnings persistence It is anticipated that the coefficient of 𝑙𝑎𝑔𝑃𝐵𝑇 ∗ 𝑃𝑜𝑠𝑡 (𝛼 3) will exceed (𝛼 1) and be closer to 1, indicating that the Circular's implementation significantly enhances earnings persistence.

The research indicates that various factors influence future earnings, highlighting the significance of earnings persistence linked to firms' fundamental performance A longer operating cycle is associated with increased uncertainty, resulting in greater earnings volatility and diminished earnings persistence (Frankel & Litov, 2009) Additionally, firm size is inversely related to earnings variability due to diversified investments that reduce risk and enhance competitive strength (Frankel & Litov, 2009) Consequently, a positive relationship is anticipated for 𝛼 6 Moreover, high sales volatility reflects a turbulent operating environment, contributing to earnings variability Capital-intensive firms experience greater earnings volatility due to elevated operating leverage, leading to lower earnings persistence compared to less capital-intensive firms with smaller leverage Lastly, profit margin serves as an important metric for assessing the correlation with firms' earnings persistence.

Sample selection

Empirical tests were performed using a dataset comprising 99 Vietnamese companies listed on HOSE and HNX, categorized into 11 sectors based on the Industry Classification Benchmark published by FTSE Russell as of April 30, 2020.

This study excludes companies in the banking, insurance, and financial service sectors due to their distinct regulatory frameworks Utilizing lagged variables, we gathered data over an eleven-year period from 2009 to 2019, encompassing more than 100 companies During data processing, firms with excessive obsolete information were removed, resulting in a dataset of 1,089 firm-year observations sourced from the audited financial statements of listed companies on the Vietnam stock market The data was meticulously hand-collected from reputable financial data sources, including cophieu68.com and vietstock.com The dataset comprises 99 companies, proportionately collected from 11 sectors based on market capitalization weight, as illustrated in the accompanying table.

Table 3 1 The weight of capitalization market according to industry sectors

Sectors Weight of capitalization market Number of companies

Source: Author's analysis of collected dataset

The distribution of businesses by sector remains consistent over the years, with the Real Estate sector representing the largest share at 35.35% In contrast, the Telecommunications industry comprises only about 2% of the total companies in the dataset.

Overview of operating characteristics of real estate firm compared to other

This article provides an overview of real estate characteristics and their relation to other industries, focusing on four key areas: the properties of the operating cycle, profitability ratios, risk ratios (specifically the debt ratio), and operational volatility.

Figure 3 1 Operating Cycle of Real Estate compared to other industries

Source: Author’s analysis from public financial statement of listed companies

The operating cycle of the real estate industry, calculated as the logarithm of total inventory days and receivable days, is significantly higher than that of other sectors For investment property companies, this cycle showed a gradual increase from 2010 to 2012, followed by slight fluctuations in subsequent years In contrast, other industries exhibited a more stable operating cycle, with the lowest point occurring in 2012 This data highlights the unique nature of the real estate sector, which is characterized by extended periods of holding inventory before sales and longer durations for collecting outstanding customer invoices.

Source: Author’s analysis from public financial statement of listed companies

The return on assets (ROA) for the real estate industry is notably lower than that of other sectors, as illustrated in the data While the ROA for other industries remained relatively stable over the past decade, the real estate sector experienced a significant decline in 2011, followed by slight fluctuations in subsequent years In contrast, companies in other industries achieve higher ROA, indicating they generate more profit with less investment compared to real estate enterprises.

The boxplot illustrating the capital intensity ratio, defined as revenue divided by total assets, highlights the unique characteristics of the investment property industry In contrast, the capital intensity levels in other industries remain relatively stable, primarily fluctuating within a specific range.

0 to 4 (except of outliers) Meanwhile, the ratio for real estate businesses has significant level and varied in the much more wide range, it is about from 0 to over

50 It indicates that for investment properties industries, to engage in this business environment, companies are required with much higher capital According to the statistical of mean for capital intensity ratio, to earn one 1 million Vietnam dong, companies in other industries need just around 2,5 millions, while real estate companies need invest 120 millions

Source: Author’s analysis from public financial statement of listed companies c Risk ratio

Figure 3 4 Leverage ratio (Debt ratio)

Source: Author’s analysis from public financial statement of listed companies

The debt ratio for real estate companies is significantly elevated, often reaching 1 or exceeding 2, indicating a higher level of leverage compared to other sectors.

In contrast to the calculated figures from other industries, the investment properties sector has shown notably high numbers over the past three years, with some companies even reporting a negative debt ratio Furthermore, the variability among these firms is less than that observed in the broader investment properties industry.

The implementation of circular regulations has led to significant changes impacting cash flow variability and sales, particularly in terms of revenue recognition across various selling methods The following figures illustrate these characteristics for two datasets, comparing the pre- and post-implementation periods of the circular application.

Figure 3 5 Variability of cash flow and sale

Source: Author’s analysis from public financial statement of listed companies

Post-implementation of Circulars, cash flow variability has shown significant stability compared to the pre-implementation period, indicating that these Circulars effectively reduce cash flow fluctuations This trend is also reflected in the sales variability across various industries In contrast, the real estate sector experienced stable sales variability for three consecutive years (2013 to 2015) prior to the Circulars' enforcement; however, it is evident that the sales variability over the last five years has decreased compared to the pre-implementation phase.

EMPIRICAL ANALYSIS

Descriptive statistics and correlation matrix

The study employs ordinary least squares (OLS) regression to analyze real estate and other sectors, with Table 1 presenting descriptive statistics for the variables involved It reveals that real estate companies have a lower mean profit before tax and extraordinary items (0.041) compared to other industries (0.1) Firm size statistics are similar across datasets, averaging around 6, with minimum and maximum values of 4 and 8 However, capital intensity shows a significant disparity, with real estate companies averaging 120 compared to 2.432 for other sectors The operating cycle for real estate firms also exceeds that of other industries, with means of 3 and 2.095, respectively Both datasets exhibit a leverage ratio above 0.5, indicating a reliance on debt for financing operations, which necessitates careful capital management to mitigate financial risks Real estate companies also boast a higher average profit margin of 0.275 compared to 0.035 in other segments, with a maximum profit margin of 4.033, surpassing the 3.294 observed in other industries Conversely, sales variability is significantly greater in other sectors, with sales figures exceeding 3.294, over three times the 0.703 reported for the real estate industry, highlighting considerable fluctuations in revenue recognition over the 10-year research period.

RE Other RE Other RE Other RE Other RE Other RE Other

Author's analysis with support of R application

The correlation coefficients for variables used in the analysis is presented in Chart of correlation in Figure 4.1 for real estate and Figure 4.2 for other industries

Figure 4 1 Correlation coefficients for variable of real estate data

Source: Author’s analysis with R application support

In the real estate sector, the relationship between profit before tax and extraordinary items from the current and previous year is positively correlated but weak, with a coefficient of 0.24 and a high statistical significance (p < 0.01) Figure 4.1 illustrates that independent variables within the real estate sample exhibit low correlation with future earnings Notably, only the operating cycle shows a negative correlation to future earnings, albeit small at -0.13, while other variables lack statistically significant relationships Additionally, the correlation coefficients among the independent variables are below 0.47, suggesting that the model for real estate data is not influenced by multicollinearity.

Figure 4 2 Correlation coefficients for variable of other industries data

Source: Author’s analysis with R application support

In various industries, the correlation coefficients between independencies and dependencies are statistically significant, particularly highlighted by a strong correlation of 0.68 between current and past earnings, which is significantly higher than the 0.24 observed in real estate Other independent variables also demonstrate a clear relationship with future earnings Specifically, capital intensity, leverage ratio, and operating cycle exhibit negative correlations with future earnings, all at a high statistical significance of 0.01 Conversely, the profit margin ratio shows a positive correlation to future earnings at 0.35 Additionally, the coefficients among independencies remain below 0.68, suggesting that the real estate data model is not influenced by multicollinearity.

Empirical results of earnings persistence and influencing factors

The results of earnings persistence regression by OLS are presented in Table 4.2:

Table 4 2 OLS Regression PBT: Profit before tax and extraordinary items in year t

Source: Author's analysis with support of R application

The OLS regression analysis in Table 3 reveals that the model applied to both datasets is statistically significant, evidenced by the low p-value from the F test The positive and statistically significant coefficient of the variable lagPBT indicates a strong relationship between current and past earnings Overall, the model accounts for approximately 14% of the variance in future earnings for the real estate dataset and 50% for other industries, suggesting that the influencing variables in the model for other industries provide a more robust explanation of the dependent variables.

In our analysis, we assessed the reliability of the model and its regression outcomes The Durbin-Watson test yielded high p-values of 0.55 and 0.9555 for the two samples, indicating the absence of autocorrelation errors in the model Additionally, the Breusch-Pagan test produced p-values of 0.4007 for the real estate dataset and 0.04216 for the dataset from other industries These results demonstrate, with a confidence interval of 0.96, that the model is not affected by homoscedasticity errors.

Table 4 3 Test confidence level of model applied for the real estate data

## alternative hypothesis: true autocorrelation is greater than 0

Table 4 4 Test confidence level of model applied for the other industries data

## alternative hypothesis: true autocorrelation is greater than 0

Source: Author's analysis with support of R application

Therefore, the model is appropriate in analysis the earnings persistence for two dataset Following, the paper presents the detailed commentary for the results

Regression analysis reveals a strong correlation between current and future earnings, with the lagged profit before tax (lagPBT) coefficient for the real estate industry at 0.441, compared to 0.672 for other industries, both showing high statistical significance (p < 0.001) This indicates that a 1% increase in current earnings leads to a 0.441% rise in future earnings for the real estate sector, while other industries experience a 0.672% increase Consequently, the earnings of companies in other sectors demonstrate greater persistence, making them more valuable for predicting future earnings patterns.

The coefficient of lagPBT:factor(Post)1 reveals the impact of Circular implementation on earnings persistence, showing negative coefficients with statistical significance across both datasets Contrary to initial expectations, these findings indicate a negative relationship for both datasets.

A comparative analysis of regression models reveals a significant disparity in explanatory power between the real estate industry and other industries Notably, the R2 value for the real estate model is substantially lower at 0.1393, whereas it is considerably higher at 0.5035 for other industries This suggests that independent variables in the real estate model have limited capacity to explain future earnings, with no firm characteristics demonstrating statistical significance Conversely, operating cycle and leverage ratio exhibit statistical significance in explaining future earnings in other industries, albeit with a negative correlation, indicating a 0.035% and 0.0496% decrease in future earnings for a 1% increase in operating cycle and leverage ratio, respectively.

Firstly, the paper proves the Hypothesis 0 that listed real estate companies’ current reported earnings can explain for future earnings with high statistical significance

Following the implementation of the Circular, hypothesis 1 is disproven, as current earnings do not enhance the predictive power for future earnings, nor can they account for changes in future earnings.

The study dismisses hypotheses H2, H3, H4, H5, and H6, indicating that firm characteristics—such as size, operating cycle, capital intensity, sales variability, and leverage ratio—do not account for variations in future earnings.

DISCUSSION AND RECOMMENDATION

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:

Regression analysis reveals that current earnings significantly predict future earnings, with a coefficient of 0.441 and a p-value of 0.001 This predictive power is even stronger in other industry sectors, where the coefficient rises to 0.672 Specifically, a 1% increase in current earnings leads to a 0.441 increase in future earnings for real estate companies and a 0.672 increase for companies in other industries These findings align with Do et al (2020), highlighting that earnings persistence varies across industries, and significant disparities exist among firms within the same sector regarding profit sustainability.

Earnings persistence significantly declined following the implementation of Circulars Regression analysis indicates that these Circulars do not enhance earnings persistence, as even earnings from five years post-implementation fail to predict future earnings changes, achieving high statistical significance.

In the real estate industry, observable firm characteristics do not account for changes in future earnings, unlike in other sectors where factors such as operating cycle and leverage ratio can effectively predict earnings patterns Overall, most firm and industry characteristics fail to explain future earnings, raising concerns about the informativeness and persistence of earnings specifically within the real estate sector.

The study concludes that earnings in the real estate industry exhibit persistence; however, this persistence decreases following the implementation of the Circular Furthermore, the research indicates that neither firm-specific nor industry characteristics account for variations in future earnings Consequently, it is likely that this persistence is attributed to earnings management practices, often referred to as "creative accounting."

50 and technique, in other words, earnings persistence does not come from sustainability of companies’ operating activities or the relevant and faithfully accounting information

The implementation of Circulars 200/2014 and 202/2014 has led to stricter regulations, resulting in a decline in earnings management within the real estate and other industries Consequently, earnings have become less persistent in the five years following the Circulars' application due to reduced reliance on accounting techniques for earnings manipulation Additionally, the adoption of IFRS standards, which emphasize timely recognition and relevance, has contributed to increased earnings volatility Previous research indicates an inverse relationship between earnings volatility and persistence, suggesting that the Circulars, aligned with IFRS principles, have made earnings more volatile and less persistent.

The findings highlight the critical need for transparent accounting practices in real estate companies, as misleading financial information obscures their true financial health and misguides investor decisions, ultimately harming individuals and threatening national economic sustainability Nam Giang Dao's 2020 analysis reveals that the real estate sector exhibits significant signs of earnings management and faces a heightened risk of insolvency Utilizing a dataset of 162 listed companies on HOSE from 2015 to 2020, encompassing 808 firm-year observations, including 21 investment property enterprises, her research demonstrates a clear trend of loss avoidance among real estate companies.

Source: Research study manuscript – PhD Nam Giang Dao (2020)

Real estate companies exhibit a low return on average equity (ROAE), typically ranging from 0% to 2%, which is significantly lower than that of other industries Additionally, the histogram distribution of ROAE for these companies is right-skewed and steep at 0, indicating a clear trend in their financial performance.

Figure 5 1 Profitability of listed companies on HOSE (ROAE) (2015 – 2019)

Figure 5 2 ROAE distribution of companies listed on HOSE by industry (2015-

The article discusses 52 indicators of earnings management aimed at meeting market expectations It highlights the use of the Alman Z-score, which assesses a company's bankruptcy likelihood through five financial ratios: working capital (A), retained earnings (B), profit before interest and taxes (C), net revenue (E) adjusted for total assets, and market value of equity (D) adjusted for total liabilities The Z-Score formula is expressed as Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E, providing a comprehensive evaluation of a company's credit strength.

Figure 5 3 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 3 are not likely to go solvency

Real estate companies with Z-scores below 1.8 are classified as high bankruptcy risk, highlighting the impact of earnings management and financial statement manipulation in the industry The investment properties sector significantly contributes to overall capitalization and is interconnected with various other industries, meaning that a crisis in this area could trigger broader economic shocks Therefore, implementing stricter regulations and enhanced oversight of real estate accounting practices is essential, particularly during the ongoing process of internal accounting convergence in Vietnam.

In summary, the findings indicate that earnings persistence is not a suitable criterion for evaluating the informativeness of reported earnings in real estate companies The reported earnings of investment property firms often do not accurately represent their financial position and performance, as these figures are frequently manipulated to align with management's expectations This supports the hypothesis that earnings management is prevalent in real estate due to industry-specific factors such as high capital intensity and reliance on debt financing Such motivations may lead management to adjust accounting information to satisfy investors, bankers, creditors, and other stakeholders Consequently, investors face increased risks from relying on misleading financial data, particularly regarding earnings, which can impair decision-making Additionally, earnings management diminishes accounting informativeness, undermines public trust in financial reporting and market transparency, and encourages management to engage in riskier operational practices while optimizing accounting choices to present the most favorable earnings figures.

Future research should explore the persistent levels of various earnings components by breaking down earnings into cash flow for different purposes and accruals Additionally, it is essential to examine the frequency and extent of accounting tools used for earnings management, as these insights can inform accounting standard setters in their development, implementation, and guidance for practitioners.

Recommendation for enhancing earnings quality in Vietnam IFRS

Earnings persistence in the real estate industry is primarily influenced by earnings management rather than fundamental performance Recent circulars have diminished earnings persistence, indicating a restriction on earnings management practices Despite this, earnings persistence remains a crucial criterion for assessing earnings quality The adoption of IFRS is anticipated to enhance earnings persistence due to the operational characteristics of the industry Consequently, the convergence of IFRS in Vietnam could significantly improve earnings sustainability and ensure that earnings streams accurately reflect underlying fundamental performance.

54 companies The paper proposes some recommendation for the improvement of earnings quality in Vietnam IFRS adoption road map, as follows:

Comprehensive adoption of IFRS is essential, rather than a partial implementation with adjustments The approved IFRS adoption roadmap emphasizes a complete and accurate translation of the original standards to enhance understanding and application for enterprises, alongside the development of Vietnam Financial Reporting Standards (VFRS) for various entities However, differing standards for different entities can lead to challenges such as complex accounting practices, difficulties in terminology translation, and varied impacts across industry sectors Therefore, Vietnam's transition to international accounting standards must be closely monitored by relevant stakeholders and involve collaboration with international accounting bodies and professional associations to ensure effective formulation and implementation.

Vietnamese Circular drafters have referenced international accounting standards, particularly in areas like fair value for investment properties and revenue recognition However, these standards are not comprehensively applied and are adjusted to fit the national financial market, leading to a diminished impact of the original regulations and hindering the effective adoption of new rules The fair value option, especially for investment properties and goodwill, has not been effectively implemented in Vietnam A qualitative study highlighted the unsuitability of fair value accounting in emerging economies, with Vietnam facing several challenges that impede its transparent adoption Despite the mention of fair value in the Accounting Law 2015, which allows for asset and liability revaluation, there remains a lack of detailed legal guidance for its application, underscoring the urgency of aligning with IFRS standards.

An accounting entity is prohibited from revaluing its assets unless explicitly permitted by specific laws and regulations While there is an alignment with IFRS in the regulatory framework, practical application remains limited Key challenges include the inadequate infrastructure for a reliable valuation system Additionally, the hasty adoption of fair value standards, coupled with insufficient guidance, may lead to potential corporate misconduct.

The development of accounting standards in Vietnam faces significant challenges due to a lack of skilled accounting professionals and inexperienced regulators Despite the implementation of Circulars over six years ago, there has been insufficient progress in training qualified accountants to effectively prepare for the IFRS roadmap It is crucial for regulators to recognize and respect the role of professional judgment, as experienced public accountants can provide valuable assessments and advice rooted in integrity and objectivity Their expertise is essential in navigating the complexities of regulatory compliance, helping companies overcome challenges, and facilitating a smoother transition towards the adoption of IFRS in Vietnam.

IFRS has developed comprehensive accounting methods that address a wide range of existing financial issues, incorporating new measurement principles and concepts that require detailed guidance for practical application Fair value accounting is a significant aspect of IFRS, yet despite its inclusion in the accounting legal framework, there is a lack of comprehensive guidance beyond its definition Consequently, accounting standard setters must prioritize the development of additional guidance to assist entities in implementing these new concepts and methods, while also ensuring that existing accounting standards are effectively applied in practice.

In the journey towards IFRS adoption, it is essential to acknowledge potential challenges and delays Ongoing dialogue among accounting standard-setters, regulators, and practitioners is crucial for ensuring timely updates and guidance for entities Additionally, continuous research and analysis should be promoted to effectively measure and assess the impact of these standards in practice.

56 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

The relationship between IFRS adoption and earnings quality is a critical topic for investors, as it enables more accurate and profitable decision-making based on reported financial information Studies in accounting, particularly concerning earnings quality, provide essential empirical insights for stakeholders and enhance the understanding of accounting practices Earnings persistence plays a significant role in various financial applications, including profit forecasting, earnings predictability, earnings volatility, and security valuation As research in this area progresses alongside IFRS adoption in Vietnam, it is expected to offer a comprehensive overview of the local accounting landscape, ultimately guiding investor behavior and regulatory actions while improving the overall accounting system and quality.

Empirical findings reveal that earnings for real estate firms exhibit persistence, yet this is not linked to the firms' fundamental performance The implementation of Circular regulations has led to decreased earnings persistence, as stricter adherence to IFRS limits earnings management This situation raises concerns regarding the informativeness of accounting and the sustainable growth of real estate entities To address these issues, regulators in Vietnam should consider comprehensive IFRS adoption, provide detailed guidance and legal support for new concepts and measurements, strengthen the role of professional accountants, and promote communication among regulators, accounting standards setters, businesses, and information users These recommendations aim to optimize the impact of IFRS and enhance the quality of earnings.

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