Pathway of transition to IFRS in Vietnam and important matters for attention

1. Pathway of transition to IFRS in Vietnam

Source: Decision 345/QĐ-BTC)

2. Matters that companies need to pay attention when planning to implement IFRS.

2.1. Consider the benefits, costs and changes when implementing IFRS.

The benefits of adopting IFRS:

• The quality of the company's financial statements (FS) would improve significantly, whereby the information in the FS would have a much higher level of completeness and relevance than current standards. This would help businesses build a reputation in the market, as well as improve management efficiency and business efficiency.
• Companies will have more advantages in international transactions because foreign partners can easily read and understand the information on the company's financial statements.
• FDI enterprises in Vietnam will reduce costs for converting financial statements prepared under VAS into IFRS for consolidation with overseas parent companies.

However, before deciding to adopt IFRS, businesses need to consider:

a. Cost and benefit issues: In order to convert and operate the accounting system and prepare financial statements according to IFRS, enterprises will have to accept a significant investment (cost, time, effort) for upgrading/adjusting related components such as: professional qualifications of personnel, accounting information systems, accounting policies, databases, data conversion processes, business contracts with partners. This cost will depend on the current capacity of the business, the further the capacity is to reach the minimum required, the higher the cost will incur. Businesses need to estimate these costs and compare them with the benefits before making a decision.

b. And the following material changes:

• Tax bases will have differences with tax authorities. When applying IFRS, some transactions are accounted for and reflected in the financial statements using different methods other than the historical cost method. This leads to the difference between the accounting-based data and the tax-based data (following historical cost method). This will create certain difficulties in maintaining parallel accounting books according to IFRS and accounting subsidiary books to keep track of tax-based data as well as any deferred tax arising from the difference between tax and accounting.
• Terms on business contracts may have to be changed in accordance with IFRS. Accordingly, the accounting department and the legal department need to coordinate to equip themselves with knowledge related to the legal rights and obligations of the contract and related regulation in IFRS, thereby determine correctly and fully the arising financial rights and obligations to serve as the basis for accounting.
• Enterprises need to be ready to comply with the requirements of providing complete and detailed information as required by IFRS. The amount of information required by IFRS reflect and disclose much more than VAS, therefore, the accounting department needs to work closely with other departments in the company to collect all required information. Examples include:

• IFRS 15 – Revenue from customer contracts, requiring a comprehensive revenue recognition model, require the accounting department to have a very clear understanding of the terms of providing goods and services in revenue contract, and then to exchange and coordinate with related departments (sales department, delivery department, maintenance department ...) to collect sufficient information for booking purposes as well as necessary amendments to the contract if necessary.
• IAS 19 - Employee benefits, requiring to accurately and fully reflect the obligations arising to employees, require the accounting department to be knowledgeable about the welfare policies applied to employees, thereby coordinating with the human resources department to collect sufficient information for booking purposes.

2.2 Determine the first reporting period in accordance with IFRS to develop a corresponding disclosure pathway.

Once it has been decided that the IFRS will be applied, the next thing companies need to do is determine the year of the first application of IFRS as it will relate to the requirements of disclosing information in previous years (See also IFRS 1).

For example, if 2026 is determined to be the first IFRS reporting period, the information disclosure schedule will be as follows:

2023:

• Present in the financial statements the expected effects of the transition to IFRS on the financial statements.

2024:

• Present on the financial statements the expected effects and the impact assessment of the transition to IFRS on the financial statements.

2025:

• Presenting opening data of the Balance Sheet at the conversion date (January 1, 2025*).
• Present comparative data for the entire financial year (in 2025).
• Presenting "Notes to Financial Statements" for the fiscal year of the conversion, complying with the requirements of IFRS1 – First time applying IFRS.

2026:

• The first IFRS reporting period.
  

2.3. If companies decide to apply IFRS, they need to gradually prepare the following:

Firstly, businesses need to review and identify the gap between VAS and IFRS in reality of their own businesses in order to prepare the most appropriate and effective plans. (See the comparison of the differences between VAS and IFRS here).

Depending on the scale of operations, economic sectors, and stages of development, this gap will vary between enterprises, therefore the level of investment (in terms of cost, time, human and material resources) for the application of IFRS should be matched accordingly to ensure efficiency instead of spreading investment.

However, in general, it will include the following main content:

• Develop a process to convert data from VAS to IFRS in compliance with IFRS Standard 1 – First time applying IFRS. This Standard is issued to apply to entities preparing financial statements in accordance with IFRS for the first time. Accordingly, Vietnamese enterprises will apply the instructions in this standard to convert their financial statements for the first time into IFRS according to the plan of the MoF. Data conversion requires a step-by-step process and takes time to prepare the relevant content, and businesses should hire IFRS experts to consult the implementation in the most accurate and effective way to ensure the businesses do it right from the very first step.

  See more of this standard here.

  See instructions on the steps to convert financial statements from VAS to IFRS here.

• Improve understanding of IFRS and finance for relevant personnel: training should be provided to relevant personnel, not just accounting department staff, including the Board of Directors and key managers to ensure they have good coordination with the accounting department when required to provide or explain relevant information and data. Businesses need to require employees to attend courses on IFRS and how to apply it in practice.

  For a comprehensive and systematic view of IFRS, please see here.

• Reorganizing and upgrading the accounting information system: The preparation of financial statements in accordance to IFRS will be very different in many aspects (in terms of recognition, measurement, presentation and disclosure of information). Therefore, enterprises need to review and make changes (if necessary) to the following contents of the accounting information system to ensure the appropriateness and stability when officially applying IFRS:

• Building a new chart of account and financial statement preparation process in accordance with IFRS.
• Reorganize the process of processing and gathering data from all relevant departments, as well as clearly defining the relevant responsibilities of those departments in coordinating with the accounting department.
• Reorganized the accounting-finance personnel to ensure that the positions are suitable for the new requirements.
• Upgrade accounting and business administration software (ERP) to meet higher requirements of IFRS.
• Upgrading the database for the measurement and valuation of items in the financial statements according to the guidance of IFRS.

However, the above changes need to be implemented in a timely and sufficient manner instead of consuming more resources than necessary. Accordingly, businesses should have experts on IFRS to support and advise on this matter to ensure its effectiveness.

• Adjust the terms in business contracts with partners: IFRS have very strict requirements in determining the responsibility for the delivery of goods or the completion of services. Therefore, enterprises need to review their business contracts with their suppliers and customers and compare them with the contract-related standard of the IFRS to make suitable adjustments. This should be done in consultation with IFRS experts and lawyers to ensure accuracy and relevance from the outset.
• Anticipate negative effects (if any) on financial ratios when the financial statements are converted to IFRS in order to have appropriate response plans timely. For example, assets are impaired due to revaluation at fair value, unsecured ratios, impaired revenue when recognized under the new accounting policy, etc.