Applying international financial accounting standard on investment property (ias 40) to enterprises in vietnam – typical research at abc international trading company limited

BANKING ACADEMY FACULTY OF ACCOUNTING – AUDITNG GRADUATE THESIS APPLYING INTERNATIONAL ACCOUNTING STANDARD ON INVESTMENT PROPERTY IAS 40 TO ENTERPRISES IN VIETNAM – TYPICAL RESEARCH AT A

GENERAL THEORY OF ACCOUNTING FOR INVESTMENT

Theoretical basis of investment property in enterprises

1.1.1 Definition of investment property (Vietna mese Accounting Sta ndard 05 - Investme nt Property, 2005)

According to Circular 200/2014/TT-BTC issued by the Ministry of Finance on December 22, 2014, and aligned with Vietnamese Accounting Standard 05 from Decision No 234/2003/QD-BTC effective February 15, 2004, investment property encompasses land use rights, house use rights, parts or whole of houses, and infrastructure owned or leased under financial contracts for profit or capital appreciation purposes.

 Used for production, providing goods and services;

 Sold in the normal operating period

1.1.2 Characteristics of investment property (Ministry of Fina nce, Circ ular 200/2014/T T-BT C, 201 4)

VAS 05 has given some examples of assets that could be recognized as investment property It includes a variety of aspects as:

 Land use right (repurchased by enterprises) held for a long period capital appreciation;

 Land use right (repurchased by enterprises) held without clearly defined future use purposes;

 Houses owned by enterprises (or financially leased by the enterprises) for lease under one or more operating contracts;

 Houses held for lease under one or more operating contracts;

 Infrastructure held for lease under one or more operating contracts

1.1.3 Requirements and duties for investment property

According to Circular 200/2014/TT – BTC, investment property is recorded the current amount, the increase or decrease of investment property of the enterprise

5 at cost, and tracked in detail by each object as same as non-current assets under the account 217

Investment property is recorded at its historical cost, which includes the total expenditure (cash or cash equivalents) incurred by the enterprise to acquire the property or the fair value of any other consideration exchanged until the purchase or completion of construction Various methods can be employed to ascertain the historical cost of investment property, depending on the specific circumstances.

During the operating lease period, investment properties must be depreciated and recorded as operating expenses, including any postponement periods Companies can utilize the useful life and depreciation methods of owner-occupied properties to estimate the appropriate depreciation for their investment properties.

Investment properties intended for capital appreciation are not subject to depreciation However, if it becomes clear that the market value of the investment property has declined and this decrease can be reliably assessed, the company may reduce the carrying amount of the investment property and recognize the loss in its cost of goods sold, similar to the treatment of provisions for properties held for sale.

When acquiring investment property that requires construction, innovation, or upgrades before it can be utilized for investment, it's essential to assess the property's value and document the associated costs in account 241 – “Construction in progress.” Once the construction, innovation, or upgrades are finalized, the total cost of the investment property should be evaluated and subsequently transferred to account 217 – “Investment property.”

Accountants are responsible for meticulously tracking changes in investment properties throughout their operational period They must maintain a property book, based on relevant documentation, to effectively monitor the increase, decrease, and depreciation of these assets Each type of property may require its own dedicated book or several pages within a larger record.

1.1.4 Legal regulation of investment property (Summary of legal documents in the field of property that a re currently in force, 2022)

The National Assembly and the Government of Vietnam have enacted various laws, decrees, and circulars to address and clarify unresolved real property issues, ensuring the protection of legitimate rights.

Ensuring the rights and interests of individuals and businesses while eliminating barriers in the property sector is essential for creating a comprehensive and effective legal framework This framework will facilitate better management, minimize disputes, and guide the sustainable growth of the property and investment sectors Key components of this legal system include various laws specifically related to property.

On January 11, 2022, significant amendments were made to various laws, including the Law on Public Investment, the Law on Public-Private Partnership Investment, the Law on Investment, the Law on Housing, the Law on Procurement, the Law on Electricity, the Law on Enterprises, the Law on Special Excise Duties, and the Law on Civil Judgment Enforcement These changes aim to enhance the legal framework governing public and private investments, streamline procurement processes, and improve the overall efficiency of civil judgment enforcement.

- Law on Topography and Cartography 2018 dated 14 June 2018;

- Law on Real Estate Trading 2014 dated 25 November 2014;

- Land Law 2013 dated 29 November 2013; b Decrees in the field of property:

- Decree No 22/2022/ND – CP dated 06 January 2022 on Elaboration of certain articles of the Law on Real Estate Trading;

On January 6, 2022, Decree No 04/2022/ND-CP was issued, amending several articles related to penalties for administrative violations in areas such as land regulations, water resources, minerals, hydrometeorology, topography, and cartography This decree aims to enhance compliance and enforcement of environmental and resource management laws.

- Decree No 136/2021/ND – CP dated 31 December 2021 on Amending some certain articles of Decree No 27/2019/ND – CP on Guidelines of Law on Topography and Cartography;

- Decree No 52/2021/ND – CP dated 19 April 2021 on Deferral of Value added tax, Corporate Income Tax, Personal Income Tax and Land rents in 2021;

Decree No 30/2021/ND-CP, issued on March 26, 2021, amends certain articles of Decree No 99/2015/ND-CP, providing updated guidelines for the Law on Housing Additionally, Article 39 of Circular 200/2014/TT-BTC outlines the accounting principles for investment properties and specifies the structure and content of account 217, titled "Investment Property."

7 d Vietnamese Accounting Standard 05 stipulates and guides accounting principles and methods for investment property in the operating period.

Accounting for investment property under VAS 05

1.2.1 Accounting cycle for investment property in Vietnamese enterprises

The accounting cycle is a systematic process that businesses utilize to gather and organize all transaction information during an operational period to prepare accurate financial statements This cycle encompasses several key steps, including identifying, analyzing, measuring, recording transactions, adjusting balances, and ultimately closing the books.

Accounting cycle for investment property includes 5 steps:

Accountants meticulously gather and document all transactions related to investment properties, including purchases, liquidations, depreciations, upgrades, innovations, and repairs Each transaction is accompanied by various documents, such as Board of Management decisions, commercial contracts, invoices, acceptance certificates, and contract liquidation records.

Step 2: Record the transactions by using journal entries and post to the General Ledger

Based on all the receipt of the economic events, the accountant record transactions using journal entries and post to the Subsidiary Ledger, Depreciation Schedule and General Ledger

According to Article 39 of Circular 200/2014/TT – BTC, investment properties are recorded under account 217 in financial statements Increases in investment property costs during the period are reflected as debits, while decreases are recorded as credits At the end of the financial year, the debit balance represents the total cost of the existing investment properties.

According to Article 38 of Circular 200/2014/TT – BTC, the depreciation of investment property is recorded in account 2417, titled "Accumulated Depreciation of Investment Property." This account reflects the depreciation associated with investment properties that have been liquidated, transferred to other enterprises, or contributed as capital for investments in other ventures.

8 entities Credit of this account is all the depreciation of investment property The credit balance is the accumulated depreciation of investment property

At the end of the period, accountants make closing entries and close the book The purpose of this step is to determine the balance of all the accounts

Accountants prepare a Trial Balance from the General Ledger to verify that total debits equal total credits in financial statements If discrepancies arise, they must identify the errors and make necessary adjusting entries to ensure accuracy.

At the conclusion of the accounting period, accountants utilize the Trial Balance and General Ledger to prepare the company's financial statements, which include the Statement of Financial Position, Statement of Profit or Loss, Statement of Cash Flow, and accompanying notes The investment property balance is recorded as an asset on the Statement of Financial Position, while depreciation is listed as an expense on the Statement of Profit or Loss Additionally, any changes in investment property are reflected in the cash flow from investing activities on the Statement of Cash Flow.

1.2.2 Vietnamese accounting standard 05: Investment Property

VAS 05 was issued and published according to the Decision No 234/2003/QD – BTC dated 31 December 2003 of Minister of Ministry of Finance and took effect since 15 February 2002

The standard outlines the regulations and guidelines governing the accounting principles and methods for investment property It covers essential aspects such as the criteria for recognizing investment property, initial recognition procedures, subsequent expenditures related to initial recognition, measurement after initial recognition, transfer purposes, liquidation of investment property, and additional regulations for maintaining accounting records and preparing financial statements.

1.2.2.1 Conditions to be recognized as investment property

A property shall be recognized as investment property if it must satisfy simultaneously two conditions:

- It is certain that future economic benefits will be obtained; and

- Cost of investment property must be reliably determined

When evaluating if an investment property meets the criteria for asset recognition, businesses must assess the certainty of future economic benefits based on available information at the time of recognition The second criterion is generally easier to fulfill, as the processes of trading and transferring indicate that the investment property's cost has been reliably established.

VAS 05 also provides some cases that can make mistake when recognizing the investment property: a When a part of a property is for operating leases or capital appreciation and the other is for production, providing goods and services or administrative purposes, if those parts could be sold separately (or for leases separately according to one or more lease agreements), enterprises must account these assets separately In case those parts could not be sold separately, they will be recognized as investment property only if the part for production, providing goods and services or administrative purposes is trivial b In case the enterprises provide relatable services for property users held by the enterprises, which are trivial in the whole agreements, the asset shall be recognized as investment property For example, if the enterprise holds an office building for lease and provides the warranty and security services for lessees, the building can be recognized as Investment property

If the services offered by enterprises are integral to the overall agreements, the asset will be classified as owner-occupied property For instance, when an enterprise owns and operates a hotel, and the services provided to clients are essential to the agreements, the asset is recognized as owner-occupied property.

Investment property must be initially recognized at cost The cost of Investment property includes all the transaction costs directly related when recording at first

Cost of investment property consists of purchase price and the directly related costs, such as legal consulting fee, registration fee and transaction costs,…

The total cost of a self-constructed investment property includes all product costs and associated expenses incurred until construction is completed Throughout the construction process, businesses must adhere to VAS 03, which pertains to tangible non-current assets, and VAS 04, focusing on intangible non-current assets Once the property is classified as an investment property, VAS 05 will be applicable.

These expenses below will not be included in the cost of investment property:

- Initial expenses (except the case these expenses is crucial for the asset to ready- to-use condition;

- Initial operating losses incurred before the investment property achieves the designed level of occupancy;

- Abnormal waste of materials, labors or other resources in the process of investment property construction

When an investment property is acquired through deferred payment or installments, the entire purchase price must be recorded at the time of acquisition Any discrepancy between the total payables to the supplier and the recorded price should be classified as financial expenses based on the payment terms, unless this difference is incorporated into the investment property's cost under VAS 16 – "Borrowing Cost."

Expenditures for investment property incurred after initial measurement should be classified as revenue expenditures However, if these expenditures have the potential to generate future economic benefits exceeding the expected occupancy levels, they will be added to the cost of the investment property.

Subsequent expenditures after initial measurement are contingent on specific circumstances, requiring careful consideration of the initial assessment and recognition of the investment For instance, if the purchase price encompasses an obligation, it impacts the accounting treatment of these expenditures.

When enterprises incur necessary costs to prepare a property for use, these expenditures are classified as part of the asset's cost For instance, if a company purchases a house that requires upgrades, the expenses related to those upgrades are added to the investment property's overall cost.

After initial recognition, investment property is determined at cost, accumulated depreciation and carrying amount

International accounting standard 40: Investment property (IASB)

IAS 40 Investment Property governs the accounting treatment for properties held for rental income, capital appreciation, or both Initially, investment properties are valued at cost, with some exceptions, and can subsequently be measured using either a cost model or a fair value model Under the fair value model, any increases in fair value are recognized in profit or loss.

In December 2003, IAS 40 was updated and used for annual periods starting on or after 1 January 2005

In October 1984, International Accounting Standards Council published the Exposure Draft E26 Accounting for Investments

IAS 25 Accounting for Investments officially issued in March 1986 and took effect for the financial year start from and after 1 January 1987

In April 2000, IAS 40 – “Investment property” (2000) was issued to alternate the IAS 25 regarding investment property It was effective for the accounting period on and after 1 January 2001

With the establishment of IASB, on 18 December 2003, IAS 40 – “Investment property” (2003) was issued after the Improvements to International Accounting Standards 2000 published on May 2002

This standard has 3 amendments with the latest amendments was on 8 December 2016 It was amended by 2 Annual Improvement to IFRSs and Transfers of Investment Property

Investment property, as defined by IAS 40, refers to non-current assets, which may include land, buildings, or portions of buildings, that are owned or leased by individuals for the purpose of generating rental income or capital appreciation.

IASB gave some examples of investment property:

- Land held for capital appreciation in long – term;

- Land held for unplanned future use purpose;

- Building for lease under an operating lease;

- Available-to-be-used building for lease under an operating lease;

- Property that in constructing or developing period for future use as investment property

Besides, there are some specific cases that a property can be recognized as investment property

Property held under a operating lease can be determined as investment property if:

- It satisfy the definition of investment property;

- The operating lease complies with IAS 17 – “Leases”;

- The lessees use fair value model in this Standard for asset measurement

When a property serves dual purposes—both for personal use and for leasing or capital appreciation—and its sections can be sold or leased independently, these components are recorded separately The portion designated for leasing can be classified as investment property Conversely, if the owner-occupied segment is minimal, the entire property can be recognized as investment property.

When classifying property, if an enterprise offers additional services to lessees, it may be deemed investment property, particularly if these services are minor, such as security and maintenance Conversely, if the services provided are significant, as seen in owner-managed hotels, the property should be classified as owner-occupied.

In consolidated financial statements, property rented to a parent, subsidiary, or fellow subsidiary is deemed owner-occupied and not classified as an investment from the group's perspective Nevertheless, if the property meets all other criteria for investment property, it can be categorized as such in the lessor's separate financial statements.

Investment property should be recognized as an asset when it is probable that the entity will gain future economic benefits and when the cost of the property can be accurately assessed.

When considering the cost of investment property, it's essential to account for transaction costs However, start-up expenses, unusual waste, and initial operational losses incurred before achieving optimal occupancy should not be factored into these costs.

1.3.5 Subsequent expenditure to initial measurement

The entity is permitted to choose between:

All investment properties of an entity should be managed consistently, with changes permitted only if they enhance the presentation of financial statements According to IAS 40, transitioning from a fair value model to a cost model is considered highly unlikely.

Investment property is assessed at fair value, representing the price that would be received for selling the asset or the cost to transfer a liability in a structured transaction among market participants on the measurement date Any gains or losses from fluctuations in the fair value of investment property must be recognized in the net profit or loss for the reporting period.

As of the Statement of Financial Position date, fair value must accurately represent the current market conditions The best indicators of fair value are current prices for comparable properties in the same location and condition, subject to similar leases and contracts If such data is unavailable, entities may consider current prices for different types of properties, recent prices from less active markets with necessary adjustments for varying economic conditions, and discounted cash flow projections based on credible estimates of future cash flows.

A rebuttable presumption exists that the entity will be able to determine an investment property’s fair value based on continuing basis However:

An entity should account for an investment property under construction at cost until either its fair value can be reliably determined or construction is finished This applies when the fair value is currently not reliably determinable, but the entity anticipates that it will be once the construction is complete.

An entity should utilize the cost model in IAS 16 for measuring investment properties when the fair value cannot be reliably assessed on an ongoing basis, excluding investment properties under construction In this context, the residual value of the investment property is assumed to be zero Compliance with IAS 16 is required until the investment property is sold or liquidated.

Once a property is assessed at fair value, it should maintain that valuation until it is sold, regardless of the availability or frequency of comparable market transactions or values.

Investment property is accounted for using the cost model outlined in IAS 16 – “Property, Plant and Equipment” after initial recognition – cost less accumulated depreciation and less accumulated impairment losses

Investment property transfers should be conducted only when there is a change in use, which may encompass various scenarios This guideline was updated in December 2016, transitioning to a non-exhaustive list of examples effective from January 1, 2018.

- Initiation of owner-occupation (transfer from investment property to owner- occupied property);

- Initiation of development with a view to sale (transfer from investment property to inventories);

When an entity opts to sell an investment property without any development, the property remains classified as investment property rather than inventory, continuing this classification until it is derecognized.

- Finish of owner-occupation (transfer from owner-occupied property to investment property);

- Initiation of an operating lease to another party (transfer from inventories to investment property);

- Completion of construction or development (transfer from property in the course of construction/development to investment property

The rules for accounting for transfers between categories are as follows:

Comparison between VAS 05 and IAS 40

A comparison of global and Vietnamese accounting standards reveals that Vietnamese standards were developed from international guidelines, resulting in significant similarities However, to better align with Vietnam's unique economic, political, and environmental contexts, authorities have modified certain articles of the International Accounting Standards These adjustments aim to enhance the truthfulness, fairness, and transparency of financial reports, making them more suitable for the realities faced by Vietnamese businesses Consequently, some differences have arisen between Vietnamese accounting standards and their international counterparts.

Table 1.1 Comparison between VAS 05 and IAS 40

Investment property refers to real estate owned by an individual or leased under a finance lease, primarily for generating rental income, capital appreciation, or both This type of property can include land, buildings, or portions of buildings.

- These properties are not used for production, administrative purposes or supplying goods and services in the operating period

- The cost of property can be reliably determined;

- Certainly obtain future economic benefits

Investment properties should be recorded at their acquisition cost, which encompasses transaction expenses However, this cost should exclude start-up costs, extraordinary waste, and initial operational losses incurred prior to achieving the expected occupancy level.

When an investment property is sold or permanently removed from service, and no future financial benefits are anticipated from its sale, it must be derecognized The gain or loss from the disposal is calculated by determining the difference between the net proceeds from the sale and the carrying amount of the asset.

21 amount and recorded as an expense or income on the Statement of Profit or Loss

Subsequent measurement to initial recognition

Only cost model was set out in the VAS 05 IAS 40 gave permission for entities to choose between fair value model and cost model for subsequent measurement after initial recognition

Property in the constructing period for future use shall not be recognized as investment property

Property in the constructing period for future use shall be recognized as investment property

- The investment property is recorded to account 217 –

- Article 39 Circular 200/2014/TT – BTC regulates that this account record the value of assets that can be recognized investment property at cost

- All the transaction related to investment property, such as: increases, decreases, innovating, repairing, upgrading,…will be recorded to account

To differentiate between owner-occupied and investment properties, businesses must establish specific criteria for classifying investment properties Measurement should commence immediately after a property is designated as an investment, and it is essential that these properties generate cash flows independent of the enterprise's other assets.

- The transfer from owner-occupied property to investment property or from investment property to owner- occupied property or inventory only when there is a change in use

Only when there is a change in use should transfers be made to or from investment property

When the investment property is reclassified, the fair value can be change All the difference between fair

Transferring the use of investment property to owner-occupied or inventory status does not alter the asset's book value or property cost on financial statements The reclassification date determines the property's value, and any changes in the carrying amount will be reflected as profit or loss in the operating period.

Investment property must be reported using the cost method, according to VAS 05

Enterprises must disclose the fair value of investment property as of the financial statement date If the fair value cannot be determined, the reasons for this inability should be detailed in the notes accompanying the financial statements.

Businesses need to distinguish between investment properties, owner-occupied properties, and properties held for sale during regular operations The main methods and assumptions for calculating the fair value of investment properties are essential to understand Additionally, the fair value reported in financial statements significantly relies on assessments from independent valuation organizations.

- The business must provide information about:

 Rental income, direct operational expenses (including repair and maintenance costs);

 The existence and extent of restrictions on investment property, incomes

 Principal obligations of the contract for the purchase, construction or development, or repair, maintenance or upgrading of investment property;

 Enterprises must specify the use of the fair value method or cost method

(Source: Compiled by the author)

International experience in applying IAS 40

1.5.1 International experience in applying IFRS

Currently, countries all over the world have been applying IFRS according to one of the following four models:

Model 1: 100% IAS/IFRS application, no amendment and supplements If there are any standards that cannot be applied, the countries will develop their own standards (For example: South Africa, Switzerland, Mongolia…)

Countries in this group mandate that businesses prepare financial statements in strict adherence to IFRS without modifications Furthermore, any new IFRS standards issued by the IASB hold immediate legal authority.

In Switzerland, listed companies and financial institutions can use IFRS, the Swiss, American set of GAAP accounting principles, or banking standards

Model 2: IAS/IFRS are applied in whole, however, some standards may have an appendix that allows for the addition or removal of pertinent portions that need to be changed (Singapore, Malaysia,…)

Starting January 1, 2012, all Malaysian public companies, including financial institutions and listed firms, are required to adopt the Malaysian Financial Reporting Standards Framework (MFRS), which aligns with International Financial Reporting Standards (IFRS) However, certain businesses in the agriculture and property sectors are exempt and can either fully comply with MFRS or continue using the previous Malaysian standards until the end of the transition period.

In 2016, Malaysia adopted the Malaysian Framework for Reporting Standards (MFRS) for the 2017 fiscal year, aligning its national standards with the IASB's 2013 completion of new standards for agricultural and biological assets The MFRS is designed to assess audit reports for businesses that are not obligated to follow IFRS.

In Singapore, businesses must adhere to Singapore Financial Statement Standards (SFRS), with exceptions for listed companies, which can use IFRS for consolidated financial statements upon ACRA's approval Additionally, Singapore companies listed on the Singapore Stock Exchange or abroad must prepare consolidated financial statements under IFRS if mandated by foreign exchange regulations Starting in 2018, companies listed on the Singapore Exchange (SGX) will implement a new financial reporting framework akin to IFRS While SFRS is primarily derived from IFRS, it includes modifications such as the adjustment of IFRS 10 and IAS 28 to eliminate the requirement for consolidated financial statements and the application of the equity method for investments in associates and joint ventures, as well as the issuance of additional guidance documents equivalent to IFRS 15 for specific accounting practices in Singapore.

Model 3: Selectively implement the accounting standards' content while making some additions and modifications to fit the country economy's specifics, and simultaneously introduce the national accounting standards system (France, Germany, Belgium, the UK);

The state agency responsible for developing and enforcing accounting regulations is a common feature among these nations These organizations assess and approve the implementation of each new IFRS standard within businesses.

The Accounting Standards Committee (KSR) was established in Poland by the Ministry of Finance to oversee the development of the National Accounting Standards System The KSR, along with the Ministry of Finance, has issued guidelines that align with the Law on Accounting, ensuring compliance and standardization in financial reporting.

Companies in Pakistan have to prepare financial statements that adhere to the IFRS the country has adopted Some aspects of IFRS have been modified, including:

(1) Do not use IFRS 1, IFRIC 4, IFRIC 12, and (2) State Bank of Pakistan (SBP)

In Pakistan, the identification and measurement of financial instruments for most banks and financial institutions is governed by unique standards, distinct from IAS 39, IAS 40, and IFRS 7, specifically for those not regulated by the State Bank of Pakistan (SBP) The Securities & Exchange Commission of Pakistan (SECP) has adopted new IFRS standards, which took effect upon their publication in the official gazette, facilitated by the Institute of Chartered Accountants of Pakistan (ICAP).

Model 4: Do not apply IFRS (Thailand, China, Bolivia,…)

For these countries, the accounting standard for enterprises is the national accounting system, however, it is aimed at convergence with IFRS

China exemplifies a unique approach to accounting standards, as its businesses primarily adhere to the National Accounting Standards for Business Enterprises (ASBE) rather than International Financial Reporting Standards (IFRS) Despite significant convergence between ASBE and IFRS, approximately 250 Chinese enterprises prepare their financial statements according to IFRS for issuance on the Hong Kong Stock Exchange However, when these financial statements are released in Mainland China, they are prepared under ASBE.

1.5.2 International experience in applying IAS 40

The selection of a subsequent measurement model, whether the fair value model or the cost model, poses significant challenges for countries globally in the application of IAS 40.

A study by Ross Taplin, Wei Yuan, and Alistair Brown (2014) revealed that among a sample of 48 out of 96 listed enterprises in China, half used fair value accounting for their investment properties, while the other half relied on historical cost Companies with foreign revenue, those listed on global stock exchanges, higher profit volatility, and smaller sizes were more inclined to adopt fair value accounting, contrasting with domestic Chinese firms that preferred the cost model The authors noted that this discrepancy leads to sub-optimal information for investors, complicating the comparison of financial statements across different companies and potentially affecting investment decisions in Chinese firms.

If Chinese regulators fail to enhance the comparability of company accounts, businesses may shift to other markets where such comparisons are easier This trend aligns with the global movement towards adopting international standards like IFRS, which aim to improve financial transparency and consistency across companies.

To facilitate the early adoption of IFRS in China, several key measures have been implemented: a working group from the China Accounting Standards Committee has been established to address practical issues, on-site investigations are being conducted to analyze problems found in annual reports of listed companies, training sessions on the new PRC GAAP are being offered for accounting personnel, and there is an emphasis on enhancing collaboration between the Ministry of Finance, relevant authorities, and regulatory agencies.

THE CURRENT SITUATION OF ACCOUNTING FOR

Overview of property investment activities of Vietnamese enterprises

According to Mr Nguyen Thanh Nghi, Minister of the Ministry of Construction, the property market is crucial to the country's economy, attracting resources and supporting various sectors such as finance, construction, and manufacturing In recent years, the construction and real estate sectors have contributed an average of 11% to the national GDP, with real estate alone accounting for 4.5% and adding approximately 0.5 percentage points to GDP growth By September 2022, the market capitalization of the real estate sector is expected to reach between VND 1.7 and VND 1.8 million billion.

In 2023, the real estate market remains resilient despite facing challenges, with industrial real estate serving as a crucial support during the COVID-19 pandemic, achieving a growth rate of 15% to 18% The Vietnam National Real Estate Association reports that stable foreign direct investment (FDI) has contributed to an 18% growth in the country's economy Additionally, FDI inflows into the real estate sector surged by 213%, and the number of newly established real estate companies increased by 47% The return of international professionals and investors to Vietnam post-pandemic is expected to positively impact the industrial real estate market and stimulate growth across other sectors.

The rise of industrial real estate has also been credited with the rental property market continuing to "live well" after the pandemic

The rental market analysis by Batdongsan.com reveals a significant surge in online searches for rental homes, showing a remarkable 103% increase in the fourth quarter of 2022 Notably, the demand for office leases skyrocketed by 244%, highlighting a growing interest in rental properties during this period.

29 for businesses went up by 263%, and those for motels and apartments to rent went up by 57 and 84%, respectively

Predictions indicate that apartment asking prices in Ho Chi Minh City may increase by 4-6% in 2023, with rental profit margins also expected to rise By the fourth quarter of 2023, the city's apartment rental rates are anticipated to return to pre-pandemic levels of 4.7 to 4.9% Consequently, this resurgence in the rental market is likely to boost investment demand, enhancing liquidity in the sector.

The office leasing market is experiencing a robust recovery, evidenced by high occupancy rates and a slight increase in rental prices Data from VNO, which manages over 10 rental buildings in Ho Chi Minh City, indicates that the occupancy rate for affordable office spaces priced between $15-20/m²/month has reached 85-90%, depending on location and size Following the conclusion of the post-pandemic stimulus phase, office rents in this segment have risen by 3% to 5% compared to the same period last year.

The real estate sector is playing a crucial role in Vietnam's economy, particularly with the growth of rental properties such as industrial spaces and apartments This industry serves as a key driver for economic expansion, presenting a lucrative opportunity for businesses to explore Despite the lack of comprehensive research on the size and types of businesses involved in the property market, the positive economic outlook indicates a rising interest in real estate investment As the sector continues to thrive, it is expected that more companies will enter the market, leading to larger investments, improved product quality, and more competitive pricing.

As the industry expands and diversifies its products and services, authorities are required to issue and amend legal documents, including laws, decrees, and circulars, to effectively regulate the market These changes contribute to sustainable and healthy market growth in both scale and value.

Ensuring price stability is crucial as it minimizes disputes and confusion during transactions among participants, thereby promoting fairness and enhancing trust for both investors and consumers.

Reality of accounting for investment property in ABC international Trading

Researched company is an enterprise operating in many industry, mainly trading and services It was established in 2000 Head office of the Company is located at Ha Noi, Viet Nam

The principal activities under Enterprise Registration Certificate as follow:

- Import and distribution of liquefied petroleum gas (“LPG”);

- Hotel services and luxury apartment lease;

- Providing bonus game to foreigners;

- Leasing services and other services at X Residences Hotel

X Residences Hotel, located in Nam Tu Liem District, Ha Noi, comprises two buildings The office building features a gross floor area of 33,153 m² and spans 24 floors, housing a total of 392 rooms, including 247 Deluxe Rooms, 56 Premiere Rooms, 48 Club Rooms, 2 Special Rooms, 37 Corner Suites, 2 Executive Suites, and 1 President Suite The serviced apartment building serves as the company's head office, consisting of 19 floors with 135 apartments and a total gross floor area of 15,181 m² Additionally, the complex includes two basements.

The Company classified two buildings as houses and structures, recognizing them as tangible non-current assets in accordance with IAS 16: Property, Plant, and Equipment Additionally, the basement is categorized as investment property and is accounted for under IAS 40: Investment Property.

At the end of the accounting period ended 31 December 2021, capital structure of the Company is performed as figure 2.1

Figure 2.1 Asset Structure Ratio of ABC International Trading

(Source: RSM Vietnam Auditing & Consulting Company Limited – Ha Noi Branch)

As of December 31, 2021, total assets rose by over VND 185.5 billion, representing a 5% increase from January 1, 2021 However, trade account receivables, cash and cash equivalents, and other current assets saw significant declines of 15%, 60%, and 99.8%, respectively In contrast, inventories surged by 66%, and advances to suppliers increased by 173% Consequently, current assets decreased by approximately VND 65.2 billion by the end of the reporting period.

At the end of 2021, non-current assets saw a modest increase of 9%, driven by the growth in property, plants, and equipment (PPE), investment properties, and notably, intangible assets The value of PPE rose due to new acquisitions and transfers from work in progress, totaling approximately VND 242.6 billion Furthermore, the adoption of IFRS over VAS led to gains in the valuation of both PPE and investment properties, further enhancing the overall asset value.

In 2021, the Company faced significant challenges due to the impact of COVID-19, yet remained committed to building, acquiring, and innovating fixed assets for future business growth This resilience highlighted the stability of the Company's cash flow and financial situation, ensuring a solid foundation for ongoing operations.

Figure 2.2 Liabilities and Equity Ratio of ABC International Trading

(Source: RSM Vietnam Auditing & Consulting Company Limited – Ha Noi Branch)

The Company employed an equity financing policy, as evidenced by equity contributions exceeding half of total equity and liabilities The equity ratio rose from 63% in 2020 to 68% in 2021, while liabilities decreased by VND 108.6 billion, approximately 9% by the end of the period This strategy not only mitigated financial risks but also reduced debt leverage.

In 2021, the Company maintained its fiscal policy as Permanent Working Capital rose by 8%, while Temporary Working Capital experienced a 7% decline, attributed to a decrease in short-term liabilities.

The company utilized Permanent Working Capital to finance the acquisition or construction of non-current assets, enhancing its operational liquidity and minimizing financial risk while also lowering debt leverage.

2.2.2 Accounting for investment property in ABC International Trading

The audited financial statements for the year ended 31 December 2021 mark the Company's transition to International Financial Reporting Standards (IFRS) for the first time Prior to this, the Company had been preparing its financial statements in accordance with Vietnamese Accounting Standards (Local GAAP) up to and including the year ended 31 December 2020 This significant shift reflects the Company's commitment to aligning its financial reporting practices with international standards.

IFRS as of December 31, 2021 The financial statements were prepared using the company's opening statement of financial position as of 1 January, 2021, the company's conversion date for IFRS

Financial statements were primarily prepared using the historical cost convention, with the exception of certain revaluations of financial assets and liabilities at fair value through profit or loss, financial assets at fair value through other comprehensive income, investment properties, specific classes of property, plant, and equipment, and derivative financial instruments.

Investment properties are initially recorded at cost, including transaction expenses, and are subsequently revalued annually at fair value Starting January 1, 2021, under International Financial Reporting Standards (IFRS), any changes in fair value are immediately recognized in profit or loss for the year, and depreciation ceases upon recognition Investment properties are derecognized when they are liquidated or when the company determines that future economic benefits are indeterminable.

The Company’s investment property consists of the commercial basement area within the X Residences Hotel complex located in Nam Tu Liem District, Hanoi This space is designated for leasing purposes, offering amenities such as bonus gaming for foreign guests and parking facilities.

In accordance with definition and classification of investment property under IAS 40, those basements are eligible to be recognized as investment property

This property is recorded at cost as at 01/01/2011 It was indicated as Table 2.1:

Table 2.1 List of components of investment property

No Name of assets Depreciation periods (months) Depreciation start date Cost

(Source: RSM Vietnam Auditing & Consulting Company Limited – Ha Noi Branch)

This property was constructed by the other party form 2008 to end of 2010 It was transferred and has been recorded as investment property since 01 January 2011

On the recognition date, the essential documents for recording included the construction contract dated January 15, 2008, the Acceptance Certificate, the Contract Liquidation Minute, the Payment Request, the Commercial Invoice, and the Board of Directors' decision to put the property into use.

The Company utilized accounting documents such as the Book of Account Investment Property, General Ledger, and Trial Balance to accurately record and monitor transactions associated with investment properties.

The subsequent expenditure of investment property was depreciation expense

From January 1, 2011, to December 31, 2020, the Company employed the straight-line method for calculating depreciation The depreciation period ranged from 15 to 45 years, aligning with the guidelines established in Circular 45/2013/TT – BTC issued by the Ministry of Finance on April 25, 2013.

The accumulated depreciation and carrying amount of investment property as at 31 December 2019 as table 2.2:

Table 2.2 Depreciation Schedule of investment property

Depreciation start date Cost Accumulated depreciation

Basement 540 01/01/2011 34,441,134,191 7,653,585,376 26,787,548,815 Electrical system 180 01/01/2011 34,455,571,115 24,014,488,959 10,441,082,156 Water system 180 01/01/2011 842,833,572 587,429,459 255,404,113 Air conditioner system 180 01/01/2011 7,089,942,780 4,941,475,271 2,148,467,509 Fire suppression system 180 01/01/2011 8,175,105,561 5,697,800,846 2,477,304,715 BMS system 180 01/01/2011 20,891,879 14,561,007 6,330,872

(Source: RSM Vietnam Auditing & Consulting Company Limited – Ha Noi Branch) 2.2.2.4 Measurement after initial recognition

Comments on accounting for investment property at the Company

The analysis reveals that several aspects of the company align well with the International Financial Reporting Standards (IFRS).

- The definition and criteria to be recognized as investment property

Investment property is defined identically under IAS 40 and VAS 05 as "property (land or a building or part of a building or both) held to earn rentals or for capital appreciation or both." To be recognized as investment property, both international and Vietnamese accounting standards require that the initial cost is reliably estimated and that the asset is expected to generate future economic benefits for the company.

The lease agreement between the Company and the other party includes service terms, such as parking services Similar to IAS 40, VAS 05 classifies properties leased out with minimal ancillary services as investment property.

Due to the alignment in definition, recognition criteria, and classification, the Company was able to avoid reidentifying the investment property, which is a key advantage when implementing IAS 40.

The IASB does not offer specific regulations or guidance for bookkeeping systems related to investment property Companies adhering to IFRS are permitted to utilize their national GAAP to document transactions concerning investment property throughout the operating period.

The Company can maintain its bookkeeping system in compliance with the guidelines outlined in Circular 200/2014/TT – BTC, issued by the Ministry of Finance on December 22, 2014, eliminating the need for additional books or documents to track transactions and changes in investment property during the accounting period.

- Subsequent measurement to initial recognition

The primary distinction between IFRS and VAS lies in the measurement of investment property after initial recognition Under Vietnamese Accounting Standards, companies record the asset at cost and depreciate it over its useful life In contrast, IFRS requires companies to revalue the asset at the reporting date and cease depreciation.

Valuation in Vietnam faces challenges due to regulatory issues and the current economic and political climate When utilizing the fair value model for subsequent recognition, companies must adapt their methods to accurately reflect the updated asset values and any costs incurred post-valuation.

The financial reports for the year ending December 31, 2021, marked the Company's initial compliance with IFRS standards This transition posed challenges for the Accounting and Finance department, resulting in initial confusion and errors that extended the time required for accountants to accurately record and manage the investment property account.

To comply with IFRS, the Company was required to upgrade its accounting software, as the previous system was unable to accurately record investment properties and other accounts in accordance with IFRS standards This transition not only increased the Company's expenses but also demanded additional time for staff to familiarize themselves with the new system, leading to unavoidable mistakes during the initial implementation phase.

- Disclosure of investment property in the financial reports

To improve the quality and transparency of financial statements, IAS 40 requires companies to disclose more detailed information about assets compared to VAS 05 This includes additional notes on the recognition of value after initial measurement, valuation methods, and the acknowledgment of gains or losses from asset valuation However, the Vietnamese accounting system currently lacks regulations for the subsequent recognition of investment properties.

- Recording the value of assets after transferring purpose

According to IAS 40, if a company utilizes the fair value model for subsequent asset measurement, the book value of investment properties will be adjusted when there is a change in the intended use of the asset.

In accordance with VAS 05, the carrying amount of assets remains unchanged during category transfers, whereas IAS 40 mandates that the fair value of assets must be assessed upon a change in use Any differences identified at that time are recorded as revaluation adjustments or as gains or losses in the relevant accounting period.

This requires the company to revaluate the fair value at the date of conversion

The disparity between carrying amount and fair value can significantly impact the company's profit or loss during the operating period Additionally, when adhering to international accounting standards, modifications to accounting and tax regulations, including the recognition of deferred taxes on asset revaluations, are necessary However, it is important to note that the Vietnamese tax authorities have yet to implement these changes.

The absence of regulations regarding deferred tax assets and liabilities related to investment property revaluation creates confusion for the Company, preventing accurate representation in financial statements This lack of clarity compromises the quality of reports and accounting information, resulting in incomplete and inaccurate financial position disclosures for the enterprise.

SOLUTION TO APPLY IAS 40 AND IFRS FOR ABC

Vietnam’s orientation in applying IFRS

3.1.1 History of Vietnamese Accounting Standards

On 10 January 2001, a project for building a systems of accounting and auditing standards had been approved by Ministry of Finance of Vietnam

The Vietnamese Accounting Standards were established and published in five phases between 2001 and 2005 On December 31, 2001, the Ministry of Finance released Decision No 149/2001/QD-BTC, marking the first phase with the introduction of four accounting standards in Vietnam.

- VAS 03: Tangible Non – curent Assets;

- VAS 04 : Intangible Non – curent Assets;

- VAS 14 : Revenue and Other income;

One year later, the next Decision No.165/2002/QD - BTC of phase 2 had been issued consisting 6 standards:

- VAS 10: Effects of Changes in Foreign Exchange Rate;

- VAS 24: Statement of Cash flows;

The next 6 standards had been promulgated under Decision No 234/2003/QD – BTC dated 30 December 2003 and Circular 161/2007/TT – BTC dated 31 December 2007, which was:

- VAS 08: Financial Reporting of Interests in Joint Ventures;

- VAS 21: Presentation of Financial Statements;

- VAS 25: Consolidated Financial Statements and Accounting for Investments in Subsidiaries;

2005 is the last phase of the adoption with 10 accounting standards issued under 2 Decisions (Decision No 12/2005/QD – BTC dated 15 February 2005 and Decision

No 100/2005/QD – BTC dated 28 December 2005) and 2 Circulars (Circular 20/2006/TT – BTC and Circular No 21/2006/TT – BTC dated 20 March 2006 dated

- VAS 22: Disclosures in Financial Statements of Banks and Similar Financial Institutions;

- VAS 23: Adjusting events after the balance date;

- VAS 29: Changes in Accounting Policy, Estimates and Errors;

- VAS 18: Provisions, Contingent Liabilities and Contingent Assets ;

After 5 phase, Ministry of Finance issued total 26 Vietnamese Accounting Standards Besides, on 22 December 2014, Ministry of Finance promulgated Circular 200/2014/TT – BTC on Guidelines for Accounting Policies for Enterprises giving the chart of account, financial reports, accounting books and vouchers templates as well as thorough instructions journal entries for specific transactions VAS system and Circular 200 are crucial legal framework for in accounting for economic transactions incurred during the operation period, creating consistency in the accounting system among businesses Thereby, the accounting information user (owners, managers, investors, creditors,…) can easily make comparison of data between enterprises Together, the authorities are better in term of management, creating a uniform and transparent accounting system, eliminating any errors arisen from the accounting for economic events of the enterprises

3.1.2 IFRS application roadmap in Vietnam

In the Financial Strategy until 2020, approved by Decision No 450/QD – TTg on March 18, 2013, Prime Minister Nguyen Tan Dung emphasized the critical role of accounting and auditing in national finance He stated that these practices are essential not only for overseeing corporate and state financial activities but also serve as vital tools for managing, monitoring, and controlling the financial operations of businesses and various economic entities.

In the pursuit of a market economy aligned with integration and globalization, harmonizing Vietnamese and international accounting standards is crucial A study by Pham Hoai Thuong (2010) revealed an overall convergence rate of 68%, with measurement convergence at 81.2% and disclosure convergence at only 57% Despite multiple amendments to international accounting standards since 2010, the Ministry of Finance has not updated Vietnamese Accounting Standards, which were last published between 2001 and 2010.

2005 Thus, until now, the convergence degree of Vietnamese and International Accounting Standards might be lower

To resolve this situation, in 2021, Ministry of Finance approved the Scheme

The "Accounting – Auditing Strategy for the period 2021 – 2030" aims to implement the 13th National Party Congress's Resolution and the socio-economic strategy for the same period, focusing on the application of accounting, auditing, and statistical policies that align with international standards This initiative seeks to enhance the quality and transparency of economic, financial, and budgetary information, thereby supporting decision-making for state agencies, organizations, and enterprises By aligning with the Financial Strategy's guidelines and adapting to Vietnamese conditions, the strategy promotes production, trade, services, and investment, fostering socio-economic development and international economic integration.

On 16 March 2020, Ministry of Finance issued the Decision No 345/QD – BTC approving the scheme for application of financial reporting standards in Vietnam The specific objectives set out in the Decision were:

To enhance transparency and accountability in Vietnam's financial reporting, it is essential to implement measures and guidelines for the application of International Financial Reporting Standards (IFRS) tailored to specific entities By promoting awareness and providing assistance in adhering to these international regulations, we can improve the reliability of financial statements and foster greater trust among stakeholders.

Revise and implement Vietnamese Financial Reporting Standards (VFRS) by aligning them with international practices while tailoring them to the unique characteristics of the Vietnamese economy and business needs, ensuring that the implementation remains practical and feasible.

Entities in Vietnam that possess the necessary demands, capabilities, and resources to implement IFRS are encouraged to follow a phased approach as outlined in the published roadmap Additionally, various industries and economic sectors operating in Vietnam are also adopting IFRS standards.

- Educational institutions, professional associations, and other organizations providing services including: units having research combination, educating, providing services and supporting in applying IFRS and VFRS

- State authorities including: Ministry of Finance and other related units in establishing projects, roadmap and promulgating, supporting to apply IFRS; researching, setting up, training and guiding to implementing IFRS

- SME that do not have demand and condition to apply IFRS or VFRS do not subject to this Decision

The roadmap to apply IFRS was approved by Ministry of Finance as below: a Preparation phase (2020 – 2021)

- Develop and issue Scheme for applying financial reporting standards in Vietnam Deadline: Before March, 2020

- Establish Translation and Review Committee, accomplish the translation IFRS to Vietnamese Deadline: Before December, 2020

- Ministry of Finance elaborate, promulgate or submit to competent authorities for promulgation appropriate legal documents to announce the translation of IFRS into Vietnamese Deadline: Before March, 2021

The Ministry of Finance is tasked with developing and submitting appropriate legal documents for the implementation of IFRS, as well as amending and issuing new financial policies related to its application The deadline for these actions is set for November 15, 2021.

- Train the human resources, process to implement for entities b Phase 1: Voluntary application (2022 – 2025):

Entities that have demand, capacity announce to Ministry of Finance before voluntarily apply IFRS to prepare consolidated financial statements

- Parent company of State-owned economic groups with large scale or having loans funded by international financial institutions;

- Parent companies are listed companies;

- Large – scale public companies are unlisted parent companies;

- Entities with 100% FDI which are the subsidiaries of foreign parent companies, having demand and capacity, announce to Ministry of Finance before voluntarily apply IFRS to prepare separate financial statements

When implementing IFRS, organizations must provide clear and transparent information to tax authorities, management, and regulatory agencies while taking legal responsibility for their obligations to state budgets Phase 2 mandates compulsory application starting after 2025.

The Ministry of Finance will determine the methods and initial timeline for the mandatory adoption of IFRS based on the assessment of its application in Phase 1, taking into account the readiness and needs of enterprises, as well as the current conditions, to facilitate the preparation of consolidated financial statements.

- Parent companies of State-owned economic groups;

- Parent companies which are listed companies;

- Large – scale public companies which are unlisted parent companies;

- Other large – scale parent companies

Other parent companies not subject to this Decision having demands and capacity announce to Ministry of Finance before voluntarily apply IFRS to prepare consolidated financial statements

The Ministry of Finance will determine the methods and initial timeline for the mandatory or voluntary adoption of IFRS based on an assessment of its application in Phase 1, taking into account the needs and readiness of enterprises, relevant laws and regulations, and the current situational conditions to facilitate the preparation of separate financial statements by businesses.

When applying IFRS, enterprises are required to provide comprehensive, coherent, and transparent information to tax authorities and regulatory agencies responsible for overseeing and determining state budget obligations.

Requirement and methods for applying IFRS as below:

Enterprises are required to clearly explain any discrepancies between accounting-based profit and taxable income in their financial statements Additionally, they must ensure that their tax declarations and submissions adhere to applicable tax laws.

Advantages and disadvantages when applying IAS 40 in Vietnamese

Implementing IFRS significantly enhances the quality of financial statements by mandating enterprises to include comprehensive financial information, thereby improving transparency and accountability of the Board of Management IFRS requires that financial information be presented truthfully and fairly, ensuring objectivity Additionally, enterprises must disclose detailed explanations of the risks they may encounter during operations, including business, financial, and credit risks For instance, IAS 40 stipulates that disclosures related to investment property must encompass not only the value and measurement methods but also any income and expenses directly or indirectly associated with the assets.

- Limitations on capacity of investment property or remittance income and proceeds of liquidation

- Terms specified in the contract related to purchasing, constructing, or innovating, repairing or guarantee

- When using fair value method, the valuation must be implemented by professional and qualified independent valuer

- If the valuation was not implemented by independent valuer, this must be disclosed in the financial statements

When the quality of financial statements are improved, the financial information users such as managers, investors, creditors or the management authorities will be the one beneficiaries

Adopting IFRS for financial statement preparation marks a significant advancement in Vietnam's integration into the global economy Currently, IFRS is endorsed and utilized in 167 countries and territories, enhancing the comparability of accounting information among businesses worldwide The endorsement of IFRS by major international financial institutions, including the World Bank and WTO, further supports this transition As Vietnamese companies implement IFRS, the recognition of Vietnam's market economy by international organizations will accelerate, providing local enterprises with greater advantages and improved conditions in international negotiations.

Converting from VAS to IFRS in Vietnam is set to attract more multinational corporations (MNCs), leading to an increase in foreign direct investment (FDI) This surge in FDI will expand production across various economic sectors, fostering economic growth and enhancing Vietnam's trade balance, thus contributing to GDP growth The influx of MNCs will generate numerous job opportunities, elevate income levels, and improve labor skills Additionally, increased FDI will positively impact the development of science and technology and benefit the environment Furthermore, international enterprises investing in Vietnam will no longer need to prepare financial statements in both VAS and IFRS, reducing costs and human resource demands while minimizing conflicts in financial reporting.

The implementation of IFRS will enhance the quality of human resources in accounting and auditing by requiring professionals to expand their expertise beyond traditional boundaries This includes acquiring knowledge in related fields and improving language skills through participation in international career seminars As a result, the adoption of IFRS will create greater career opportunities for accountants and auditors.

54 expanded for accountants and auditors not only in Vietnam, but also other countries in the world

IFRS provides companies with the flexibility to select either the cost model or the fair value model for measuring assets and liabilities post-initial recognition This choice is seen as a significant advantage of adopting IFRS Numerous studies, including those by Christensen and Nikolaev, have highlighted the benefits that fair value measurements can bring to enterprises.

Incorporating fair value measurement enhances companies' ability to secure loans by accurately reflecting the present value of their assets and solvency (2012) According to Igeoma, N.B (2014) and Duong Thi Thao (2013), this approach aids management agencies in understanding the true value of businesses, facilitating better capital growth management By applying fair value, investors can clearly see declines in enterprise and bank equity due to poor business performance, which can prevent stock prices from maintaining their current levels Consequently, fair value application helps regulate the short-term capital increase of companies, enabling management agencies and investors to grasp the actual worth of enterprises, minimize the risk of income data manipulation, and enhance the clarity of financial statements, thereby fulfilling the objectives of financial reporting for users.

While adopting IFRS offers numerous advantages for companies and the Vietnamese economy, there are also significant disadvantages that businesses must consider when implementing these international standards.

The labor force in accounting and auditing poses a significant challenge for enterprises, particularly in the context of transitioning to International Financial Reporting Standards (IFRS) Research by PhD Phan Thi Anh Dao (2021) indicates that 95% of surveyed businesses identified the quality of human resources in this field as a major obstacle A substantial number of accounting professionals in Vietnam lack training in IFRS and hold no international accounting certifications, such as ACCA or ICAEW Currently, Vietnam has only 1,300 ACCA members and over 7,000 ACCA students, which is insufficient given the country's scale and needs in the accounting sector.

55 economy and quantity of labor force in this area This is a obstacle in the roadmap of applying IFRS in Vietnam

International standards demand high professional judgment and flexibility from accountants; however, Vietnamese accountants often exhibit caution in their decision-making This tendency may stem from the country's political and cultural background, where many management-level professionals have been shaped by a bureaucratic and subsidy-driven environment Consequently, they are accustomed to a risk-averse culture that prioritizes caution over uncertainty As a result, adapting to new accounting methods and policies can be a time-consuming process for them.

Many Vietnamese enterprises exhibit a reluctance to disclose their financial situations, often concealing weaknesses in business management and operations This mindset contributes to the slow adoption of International Financial Reporting Standards (IFRS).

Vietnamese Accounting Standards restrict companies to recognizing and measuring assets solely at cost value, creating a lack of legal foundation for the application of IFRS The absence of circulars or standards for fair value measurement and asset impairment assessments presents significant challenges for businesses As a developing country, Vietnam's economy exhibits many unpredictable variances, resulting in companies having to rely on the lowest and least reliable level (Level 3) of the fair value measurement hierarchy under IFRS 13 when implementing these standards This situation highlights a notable drawback in Vietnam's accounting legal framework.

Implementing IFRS in Vietnam presents challenges, particularly regarding the information technology system To comply with IFRS, companies must establish a robust accounting software system and maintain accurate financial records Many foreign accounting software solutions are designed based on IAS/IFRS but do not impose strict requirements on the Chart of Accounts or ledger formats, allowing for flexibility and customization As a result, companies using these foreign software programs can tailor their accounting practices to better suit their specific needs while adhering to IFRS standards.

56 accounting system to better fit the needs of financial statements as well as management report

Vietnam's financial accounting management software is designed in accordance with VAS, providing a comprehensive accounting system that includes various financial report layouts and management report formats However, foreign companies often face challenges with conversion and consistency when using these systems across different countries within the same corporation, which can negatively impact their operations in Vietnam Additionally, off-the-shelf accounting software may fall short for businesses requiring detailed management reports.

Solutions to apply IAS 40 and IFRS in Vietnamese enterprises

To enhance the quality of human resources in financial, accounting, and internal audit departments, it is crucial to organize specialized IFRS training sessions for internal staff, potentially utilizing IFRS experts for instruction Companies should also consider sending managers to IFRS seminars and workshops at academic institutions, which can later be used to train all employees To protect the rights of both employees and employers, training contracts should be signed, ensuring a commitment from trained staff For external recruitment, businesses should improve candidate quality by incorporating IFRS application standards and partnering with universities that offer internationally recognized training programs to attract final-year students and recent graduates, thus reducing training costs Additionally, attention should be given to developing soft skills such as computer proficiency and foreign language fluency.

Enhancing the quality of human resources is crucial for businesses transitioning from Vietnamese accounting standards to international accounting standards However, this process presents challenges, particularly in budgeting The high costs associated with international standard training courses in Vietnam can impose significant financial burdens on companies.

Training expenses for internal employees can be significant, leading to increased labor costs when hiring new staff due to improved human resource quality Companies lacking adequate resources may face financial strain from these expenditures Consequently, organizations must meticulously analyze and strategize for various challenges, including securing economic resources, when transitioning to international accounting standards.

To foster a proactive leadership mindset, the board of management must eliminate the fear associated with presenting financial and operational risks Transparency in financial reporting is crucial, especially during the transition from VAS to IFRS, which requires full disclosure of all financial information The executive board should engage actively in the IFRS implementation process, ensuring effective communication with policy-making agencies, auditing firms, and professional associations Additionally, it is essential for owners to differentiate between financial statements and tax reports, provide adequate resources for IFRS adoption, and maintain a consistent accounting policy across the parent company and its subsidiaries.

Establishing a robust data infrastructure is crucial for enterprises to accurately estimate fair value and assess asset and liability impairments, ensuring compliance with IFRS requirements This infrastructure must encompass both financial data—such as fair value of assets and liabilities, yield curves, interest rates, foreign exchange rates, market prices, and macroeconomic indicators—and non-financial data, including market share, customer insights, and consumption trends Collectively, this data serves as the foundation for precise fair value measurements within the company.

Enhancing the information technology system is crucial for successful IFRS implementation Companies should establish a strong IT infrastructure to ensure efficient internal management, facilitate seamless connectivity between accounting, finance, and other departments, and improve communication between the parent company and its subsidiaries.

Implementing IFRS is essential for organizations in developed countries, as it demands advanced accounting and business management software This framework requires a high degree of automation to provide timely financial information based on net assets Companies must ensure their IT systems can deliver this data to investors whenever needed Additionally, businesses using foreign accounting software should exercise caution, as the technology may not align with domestic infrastructure, potentially leading to underutilization of certain features within Vietnamese enterprises.

Companies must closely adhere to specific regulations for each standard, particularly IAS 40, which requires them to clearly differentiate between investment properties, owner-occupied assets, and inventory when classification issues arise It is essential for businesses to enhance their risk management strategies, addressing various risks such as business, credit, and market risks Additionally, enterprises should promptly review and update contract terms to reflect any adjustments in financial or management reports Regular updates to tax laws and regulations are necessary to identify any discrepancies between taxable income and accounting-based income.

Petition to authorities

VAS 05 should be amended When applying IFRS, Ministry of Finance must permit enterprises to determine subsequent value at fair value model, parallel to cost model measurement Authority should consider to adjust the classification of investment property Companies applying IFRS can classify constructing and developing property held for lease as investment property while VAS does not allow to identify this asset as investment property Besides, when enterprises can determine investment property at fair value at the reporting date, value of asset at transferring purpose day also must be adjusted Then, if the companies transfer purpose of property from investment property to property held for sales or owner-occupied property, the amount to prepare financial statement should be the fair value of

59 property Any difference between carrying amount and fair value at transferring date will recorded to the profit or loss in the operating period

To enhance value measurement and presentation, it is essential to implement changes in accordance with VAS 05, which currently lacks regulations for presenting value measurements When altering measurement methods, companies must disclose additional information regarding subsequent measurements Furthermore, effective risk management practices should be highlighted to ensure transparency and fairness in financial statements.

When fair value measurement is applied, it is essential to adjust tax law accordingly Currently, Vietnamese tax law lacks regulations for recognizing income, losses, and depreciation associated with asset revaluation As a result, deferred income tax assets and liabilities are not reflected in financial statements, which diminishes transparency and fails to accurately represent the financial position of enterprises, ultimately compromising the quality of financial reports.

The regulations surrounding fair value measurement in Vietnam are crucial and well-structured However, the definition of fair value within the Law on Accounting lacks clarity Consequently, companies in Vietnam face challenges when implementing International Accounting Standards (IAS).

In Vietnam, the application of IFRS has led to the use of the third level in the fair value measurement hierarchy for asset valuation, which is the least reliable stage This presents a significant drawback in the current accounting framework To address this issue, the Ministry of Finance should reevaluate fair value definitions within the Law on Accounting and establish clear guidelines and regulations for fair value measurement Additionally, enhancing the management of active markets is essential, as effective oversight can improve the reliability of fair value measurements, especially in the absence of established guidelines.

Ministry of Finance, Ministry of Construction and, Vietnam National Real Estate Association and other related units and associations need to collaborate to

To stabilize rental prices in the investment property market, it is essential to strengthen the legal framework that safeguards consumer interests while sustaining market demand Additionally, the Ministry of Finance must prioritize the development of the capital market, particularly the Vietnam bond market, as this is an urgent issue A robust capital market will foster a favorable investment environment, balance market supply, and ultimately lead to price stability.

The Ministry of Construction must expedite the revision of the Land Law 2023 by actively seeking feedback and contributing ideas that align with the current socio-economic landscape This amendment aims to strengthen the legal framework within the property industry and enhance state management in the real estate sector, fostering societal sustainability The revised Land Law should address existing weaknesses that do not align with current market conditions, while also safeguarding the interests of land users and minimizing disputes and challenges in land management and usage.

To address the growing need for skilled professionals in the implementation of IFRS in Vietnam, the Ministry of Education and Training should formulate a strategy that encourages universities offering accounting and auditing degrees to evaluate their faculty, facilities, and resources This initiative aims to enhance the quality of education and ensure that graduates are well-equipped to apply international accounting standards effectively in real-world scenarios.

To enhance students' understanding of the importance of IFRS and international professional qualifications in accounting and auditing, universities should organize competitions, workshops, and seminars Collaborating with other educational institutions, auditing firms, and enterprises will create opportunities for students to exchange knowledge and gain insights into international accounting standards Engaging in scientific research within this field will further enrich their learning experience.

Bridging the gap between businesses and students is essential for sharing real-world experiences in applying IFRS, along with future career opportunities In addition to specialized knowledge, universities and colleges must equip students with vital soft skills, including communication, presentation, teamwork, and critical thinking, which are crucial for success in the workplace.

The Vietnam Accounting – Auditing Association (VAA) must actively participate in the translation and review process of the International Financial Reporting Standards (IFRS) to ensure that the Vietnamese version is accurate, literal, and easily understandable, thereby preventing any potential misunderstandings in its application.

Abstracts: This chapter brought the overview of history of Vietnamese Accounting

This article examines the advantages and disadvantages of implementing IFRS in Vietnam, offering recommended solutions for enterprises during the adoption process Additionally, it presents suggestions for authorities and relevant organizations to facilitate the effective application of IFRS within the country.

Built and developed base on the International Accounting Standard 40 –

Since its introduction in 2000, VAS 05 has served as a crucial framework for accountants in the recognition and recording of investment property transactions The definition and criteria for investment property, as well as initial recognition values, align closely with IAS 40; however, VAS 05 has not undergone any amendments since its original issuance in 2003, under Decision No 234/2003/QD – BTC, which has been effective since February 15, 2004 In contrast, IAS 40 has seen four amendments over the years.

2004 This led to several differences between these standards such as in subsequent measurement to initial recognition and the disclosure of investment property in the financial statements

On 16 March 2020, Ministry of Finance issued the Decision No 345/QD – BTC on approving the application scheme of IFRS in Vietnam The Decision set out the roadmap with 3 phases: i) Phase 1: Presentation (from 2019 to 2021); ii) Phase 2: Voluntary application (from 2022 to 2025); iii) Phase 3: Compulsory application (after 2025) This is a move in the direction of the economic integration and globalization of the Party and State that was addressed during the 13th Party Congress Application of IFRS in Vietnam will improve the quality of financial statements In addition, applying IFRS will give Vietnam new chances to draw foreign direct investment and give Vietnamese companies access to the international capital market However, some rules in international standards in general and IAS 40 in particular are currently unsuitable for Vietnamese businesses due to disparities in political institutions and socioeconomic development

To enhance investment attraction and align with the Ministry of Finance's roadmap, ABC International Trading Company Limited's Board of Management has decided to adopt International Financial Reporting Standards (IFRS) for financial statement preparation, effective from the financial year ending December 31, 2021.