SUMMARY OF DIFFERENCES
BETWEEN VAS AND IFRS – PART 1
INVENTORIES
FIXED ASSETS AND
INVESTMENT PROPERTY
Reference source: Project on applying International Financial Reporting Standards in Vietnam, Ministry of Finance.
1. Vietnam has now issued Accounting Standard No. 02 – Inventories (VAS 02) corresponding to International Accounting Standard on Inventories (IAS 2).
Compared to VAS 02, IAS 2 has a major difference in scope of application. Specifically, IAS 2 excludes the scope of application for financial instruments, biological assets and agricultural products at the time of harvest (implemented according to the Agricultural Standard IAS 41).
Meanwhile, VAS 02 does not exclude the scope of application, so the above-mentioned special assets have not been adjusted and reflected correctly in nature, in some cases there is no basis for determining value, such as:
• The exclusion of derivative financial instruments from the scope of the Standard is inconsistent with contracts for the purchase and sale of derivative instruments (such as futures, forward agreements or options), cannot fully reflect the gains and losses arising from the contracts, and is inconsistent with accounting models for the use of derivative instruments for hedging purposes.
• Biological assets of agricultural activities such as crops, livestock and unprocessed products obtained from biological assets (meat, crops, wood, rubber latex, etc.) need to be determined at fair value less estimated selling costs at the time of harvest according to international practice and not reflected like other goods.
2. Accounting Standards for Tangible Fixed Assets (VAS 03 and IAS 16)
Vietnam has now issued Accounting Standard No. 03 – Tangible Fixed Assets (VAS 03) corresponding to the International Accounting Standard on Tangible Fixed Assets (IAS 16).
Compared with VAS 03, IAS 16 has the following differences:
SCOPE OF APPLICATION
• Tangible fixed assets are classified as non-current assets held for sale in discontinuance conditions: In some cases, when the enterprise no longer expects to continue operating, the fixed assets are no longer used to generate economic benefits as in the normal course of business but instead these assets are in a state of availability for sale. This leads to the way of recovering the assets being different in nature (liquidation) compared to other fixed assets and therefore, the application of accounting principles for tangible fixed assets is no longer appropriate.
• Biological assets related to agricultural activities: These assets such as industrial plants (rubber, pepper, coffee, etc.) or breeding animals (dairy cows, breeding pigs, etc.) have different characteristics from normal fixed assets because they can reproduce during the growth process and lead to costs directly related to breeding and cultivation that do not reflect the value of these assets. IAS 41 requires biological assets to be recorded at fair value minus selling costs while fixed assets require recording at cost, which are costs directly related to putting the assets into a state of readiness for use. Therefore, not excluding biological assets from VAS 03 causes these assets to not be properly reflected in the financial statements.
• Land use rights: According to IAS 16, land is accounted for as tangible fixed assets while Vietnam is accounting for intangible fixed assets because it is a right to use. If land used for re-leasing is classified as investment property along with infrastructure as a tangible asset, it leads to inconsistent classification of assets as land in Vietnam.
• The value of resources, minerals or mineral rights and mineral reserves such as oil, natural gas and similar non-renewable resources have many economic and technical characteristics that are different from other manufacturing industries. Because minerals are often underground or under the sea, the costs of searching, exploring, appraising and exploiting have specific characteristics according to the regulations of the mining industry. The recognition, assessment and determination of the value of mines need to consider both the reserve and economic efficiency factors, for example, if the reserves are not sufficient for commercial operation, the mine is not qualified for exploitation. Therefore, a separate Accounting Standard is needed to regulate mineral resource exploitation activities (IFRS 6).
The cost of tangible fixed assets
VAS 03 does not mention the initial estimates of the costs of dismantling, removing assets, restoring the site, and reinstating the original condition upon the acquisition of assets, which are included in the cost of tangible fixed assets as stipulated by IAS 16.
Initial estimates of the costs of dismantling, relocating assets, restoring the site, and reinstating the original condition incurred during the acquisition or use of assets are often legal and unavoidable obligations at the end of the asset’s lifecycle. For instance, the Coal Corporation has an obligation to restore the environment after mining coal and bauxite, while the Oil and Gas Corporation is responsible for decommissioning offshore oil rigs after extraction. If these costs are not anticipated and included in the cost of tangible fixed assets and gradually depreciated, businesses may lack the necessary resources to cover them, leading to financial risks during certain periods.
Subsequent Measurement of Value
According to IAS 16, a company’s tangible fixed assets can be recognized and presented using either the cost model or the revaluation model. However, VAS 03 currently stipulates that both the initial recognition and subsequent measurement of tangible fixed assets must follow the cost model. It does not provide guidance on recognizing and presenting tangible fixed assets using the revaluation model, except in cases such as equitization, contribution of assets as capital, dissolution, division, or merger.
We know that fixed assets have both a value and a utility value. In some cases, the value of fixed assets can differ significantly from their utility value. If fixed assets are always recognized at cost minus accumulated depreciation, this may not accurately reflect the company’s actual capacity.
Thus, if fixed assets are only recognized under the cost model without being reassessed, financial statements in such cases clearly fail to provide useful information for users to evaluate and make decisions that align with real-world circumstances.
Asset Impairment
VAS 03 currently does not address the recognition of impairment losses for tangible fixed assets. This lack of regulation poses significant risks for businesses, as in some cases, the carrying value of tangible fixed assets can far exceed their recoverable amount. In essence, the company may be financially hollow, while its books still reflect assets, creating a situation of “false profit – real loss.”
Furthermore, the absence of guidelines on recognizing asset impairments violates one of the fundamental accounting principles, which states that assets should not be recorded at amounts higher than their recoverable value. Recording at inflated values constitutes misrepresentation and also breaches the accounting principle of prudence.
3. Accounting Standards for Intangible Assets (IAS 38 and VAS 04)
Vietnam has currently issued Accounting Standard No. 04 – Intangible Fixed Assets (VAS 04), corresponding to the International Accounting Standard on Intangible Assets (IAS 38).
Compared to VAS 04, IAS 38 has the following differences:
Scope of Application of the Standard
IAS 38 excludes exploration and extraction assets related to mineral resources, as well as expenditures for exploration or development and extraction of mineral resources, oil, gas, and other non-renewable resources, because these are covered by IFRS 6.
In contrast, VAS 04 does not have an exclusion provision, as Vietnam has not issued a separate standard for exploration and evaluation of mineral resources, which have specific characteristics regarding the determination of reserves and value.
Classification of Land Use Rights
As explained in the section on tangible fixed assets, land use rights are currently considered intangible assets, while international practice classifies land as a tangible fixed asset.
Determining the Value After Initial Recognition
IAS 38 allows the use of either the cost model or the revaluation model for subsequent measurement after initial recognition. According to VAS 04, only the cost model is used for recognition (which includes the acquisition cost, accumulated depreciation, and the remaining value of fixed assets), and impairment losses are not recognized because the revaluation model is not applied for subsequent measurement.
In the context of the Fourth Industrial Revolution, where technological changes occur rapidly, not applying the revaluation model to certain high-tech assets makes financial statements lose their reliability and relevance.
Depreciation Period
According to VAS 04, intangible fixed assets must be amortized over a useful life not exceeding 20 years, unless there is convincing evidence that a longer period is appropriate.
At the same time, VAS 04 also specifies that certain pre-operational costs, such as expenses related to business formation, training activities, advertising, research, and the relocation of business premises, may be deferred and recognized gradually in the income statement over a period not exceeding 3 years.
4. Accounting Standard on Investment Property (IAS 40 and VAS 05)
Vietnam has currently issued Accounting Standard No. 05 – Investment Property (VAS 05), corresponding to the international Accounting Standard on Investment Property (IAS 40).
Compared to VAS 05, IAS 40 has a key difference in the valuation model as follows: IAS 40 allows companies the option to revalue investment property at fair value, while VAS 05 only permits investment property to be recognized at cost.
This leads to less reliable financial statements for Vietnamese companies, as one of the purposes of holding investment property is to benefit from potential appreciation. If revaluation is not conducted regularly, the true value of this type of asset is not accurately reflected.
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