Vietnam Accounting Standard

VIETNAMESE ACCOUNTING STANDARDS

Standard No. 01 GENERAL STANDARD ........................................................................................ 2 Standard No. 02 INVENTORIES....................................................................................................... 9 Standard No. 03 TANGIBLE FIXED ASSETS ............................................................................... 15 Standard No. 04 INTANGIBLE FIXED ASSETS............................................................................ 22 Standard No. 05 INVESTMENT PROPERTY................................................................................. 33 Standard No. 06 LEASES............................................................................................................... 39 Standard No. 07 ACCOUNTING FOR INVSTMENTS IN ASSOCIATES ...................................... 47 Standard No. 08 FINANCIAL REPORTING OF INTEREST IN JOINT VENTURES ..................... 51 Standard No. 10 EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES .......................... 57 Standard No. 11 BUSINESS COMBINATION................................................................................ 64 Standard No. 14 TURNOVER AND OTHER INCOMES ................................................................ 81 Standard No. 15 CONSTRUCTION CONTRACTS ........................................................................ 87 Standard No. 16 BORROWING COSTS ........................................................................................ 95 Standard No. 17 INCOME TAXES................................................................................................ 105 Standard No. 18 PROVISIONS, CONTINGENT ASSETS AND LIABILITIES ............................ 117 Standard No. 19 INSURANCE CONTRACT ................................................................................ 128 Standard No. 21 PRESENTATION OF FINANCIAL STATEMENTS........................................... 138 Standard No. 22 DISCLOSURES IN FINANCIAL STATEMENTS OF BANKS AND SIMILAR FINANCIAL INSTITUTIONS.......................................................................................................... 152 Standard No. 23 EVENTS AFTER THE BALANCE SHEET DATE............................................ 160 Standard No. 25 CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING FOR INVSTMENTS IN SUBSIDIARIES................................................................................................. 164 Standard No. 26 RELATES PARTY DISCLOSURES.................................................................. 169 Standard No. 27 INTERIM FINANCIAL REPORTING ................................................................. 174 Standard No. 28 SEGMENT REPORTING................................................................................... 180 Standard No. 29 CHANGES IN ACCOUNTING POLICIES, ACCOUNTING ESTIMATES AND ERRORS ........................................................................................................................................ 192 Standard No. 30 EARNING PER SHARE .................................................................................... 200

Standard No. 01 GENERAL STANDARD

(Promulgated and publicized together with the Finance Minister’s Decision No. 165/2002/QD-BTC of December 31, 2002)

GENERAL PROVISIONS

01. This standard aims to prescribe and guide the basic accounting principles and requirements, elements of the enterprises’ financial statements and the recognition thereof, in order to:

a/ Serve as a basis for formulating and perfecting specific accounting standards and accounting regimes after uniform models.

b/ Assist enterprises in making accounting entries and financial statements in a uniform manner according to the promulgated accounting standards and accounting regimes and handle matters not yet specified in order to ensure true and reasonable information in the financial statements.

c/ Assist auditors and accounting controllers in giving comments on the conformity of the financial statements with the accounting standards and accounting regimes.

d/ Assist users of the financial statements in understanding and evaluating financial information supplied in accordance with the accounting standards and accounting regimes.

02. The basic accounting principles and requirements as well as elements of the financial statements, which are prescribed in this standard and specified in each accounting standard must be applied to all enterprises of all economic sectors nationwide.

This standard shall not replace specific accounting standards. Implementation shall be based on specific accounting standards. For cases not yet prescribed in specific accounting standards, they shall comply with the general standard.

STANDARD CONTENTS

BASIC ACCOUNTING PRINCIPLES

Accrual basis

03. All economic and financial operations of enterprises, which are related to assets, liabilities, owners’ equity, revenues, and costs must be recorded in accounting books at the time they arise, not at the time of the actual receipt or payment of cash or cash equivalents. Financial statements made on the basis of accrual shall reflect the financial status of enterprises in the past, at present and in the future.

Continuous operation

04. Financial statements must be made on the basis of the assumption that enterprises are operating continuously and will continue business activities normally in the near future, i.e., they have no intention or are not compelled to cease operation or to substantially downscale their operation. Where reality differs from the continuous operation assumption, the financial statements must be made on another basis, which must be explained.

Historical cost

05. Assets must be recognized according to their historical cost. The historical cost of an asset shall be calculated according to the cash amount or cash equivalent already

paid or to be paid, or according to the reasonable value of the asset at the time the asset is recognized. The assets’ historical costs must not be modified except otherwise prescribed in specific accounting standards .

Matching

06. The recognition of revenues and that of costs must match. When a revenues is recognized, a corresponding cost related to the creation of such revenue must be recognized. Costs corresponding to revenues include costs of the period in which revenues are created and costs of the previous periods or payable costs related to the revenues of such period.

Consistency

07. The accounting policies and methods selected by enterprises must be applied consistently within at least one accounting year. Where appear changes in the selected accounting policies or methods, the reasons for and impacts of such changes must be presented in the explanations of financial statements.

Prudence

08. Prudence means the examination, consideration and anticipation needed to establish accounting estimates under uncertain conditions. The prudence principle requires that:

a/ The reserves must be set up, which must not be too big;

b/ The values of assets and incomes are not overestimated;

c/ The values of liabilities and costs are not underestimated;

d/ Revenues and incomes shall be recognized only when there are solid evidences of the possibility of obtaining economic benefits, while costs must be recognized when there are evidences of the possibility of arising costs.

Materiality

09. Information shall be considered material in cases where the insufficiency or inaccuracy of such information may distort significantly the financial statements, thus affecting the economic decisions of the users of the financial statements. Materiality depends on the amount and nature of information or errors assessed in particular circumstances. The materiality of information must be examined both quantitatively and qualitatively.

BASIC REQUIREMENTS FOR ACCOUNTING

Honesty

10. Accounting information and data must be recorded and reported on the basis of adequate and objective evidences and true to the actual situation, content, nature and values of arising economic operations.

Objectivity

11. Accounting information and data must be recorded and reported according to reality, not be distorted nor falsified.

Fullness

12. All arising economic and financial operations related to the accounting period must be recorded

and reported in full, not be omitted.

Timeliness

13. Accounting information and data must be recorded and reported in time, according to or ahead of prescribed schedule, without delay.

Understandability

14. Accounting information and data presented in the financial statements must be explicit and easily understandable to users. Users mean people with average knowledge about business, economics, finance and accounting. Information on complicated matters in the financial statements must be expounded in the explanation part.

Comparability

15. Accounting information and data of different accounting periods of an enterprise and of different enterprises may be comparable only when they are calculated and presented in an uniform way. In case of lack of uniformity, expositions must be given in the explanation part so that the users of the financial statements may compare information of different accounting periods, different enterprises, or between execution information and projected or planned information.

16. The accounting requirements mentioned in paragraphs 10, 11, 12, 13, 14 and 15 above must be satisfied simultaneously. For example: The honesty requirement also embraces the objectivity, timeliness, fullness, understandability and comparability requirements.

ELEMENTS OF FINANCIAL STATEMENTS

17. The financial statements reflect the financial status of enterprises through summing up economic and financial operations of the same economic nature in their elements. The elements directly related to the determination of the financial status in the balance sheets include assets, liabilities and owners’ equity. The elements directly related to the assessment of the business situation and results in the statements on business results are revenues, other incomes, costs and business results.

Financial status

18. The elements directly related to the determination and evaluation of the financial status are assets, liabilities and owners’ equity. These elements are defined as follows:

a/ Assets mean resources that are controlled by enterprises and may yield future economic benefits.

b/ Liabilities mean the current obligations of an enterprise, arising from the past transactions and events, which must be settled by the enterprise with its own resources.

c/ Owners’ equity means the value of the enterprises’ capital, being equal to the difference between the value of the enterprise’s assets minus (-) its liabilities.

19. When determining the items in the elements of a financial statement, attention must be paid to their ownership forms and economic contents. In some cases, though assets do not fall under the enterprises’ ownership, they are still reflected in the elements of the financial statements due to their economic contents. For example, in case of financial leases, the economic form and content are that the lessee-enterprises obtain economic benefits from the use of leased assets during most of the useful life of the assets; in return the lessee-enterprises are obliged to pay a sum that approximates the reasonable value of the assets as well as related financial costs. The financial leasing operation gives rise to the item "Assets" and the item "Liabilities" in the balance sheets of

the lessee-enterprises.

Assets

20. Future economic benefits of an asset are the potential to increase the sources of cash and cash equivalents of an enterprise or to reduce cash amounts to be paid by the enterprise.

21. Future economic benefits of an asset are demonstrated in such cases as :

a/ Being used in isolation or in combination with other assets in the manufacture of products for sale or in the provision of services for customers;

b/ For sale or exchange for another asset;

c/ For payment of liabilities;

d/ For distribution to the enterprise’s owners.

22. Assets may have the physical form such as workshops, machinery, equipment, supplies, goods or the non-physical form, such as copyright or patents but must gain future economic benefits and are under the control of enterprises.

23. Assets of enterprises also include assets that enterprises do not own but can control them and gain future economic benefits therefrom, such as assets given for financial leases; or assets that enterprise own and can gain future economic benefits therefrom but may not control them legally, such as technical know-hows obtained from development activities, which may satisfy the conditions required in the asset definition when they are still kept secret and enterprises can still gain economic benefits therefrom.

24. Assets of enterprises are formed from the past transactions or events, such as capital contribution, procurement, self-production, grants or donations. Transactions or events expected to arise in future will not lead to an increase in assets.

25. Normally, when costs are incurred, they will create assets. Costs which do not bring about future economic benefits will not create assets; or in other cases, no costs are incurred but assets are still created, such as contributed capital, allocated or donated assets.

Liabilities

26. Liabilities determine the current obligations of an enterprise when it receives an asset, participates in a commitment or is bound to legal obligations.

27. The settlement of current obligations may be effected in many ways, such as:

a/ Payment in cash;

b/ Payment with another asset;

c/ Provision of a service;

d/ Replacement of this obligation with another;

e/ Conversion of the liability obligation into owners’ equity.

28. Liabilities arise from past transactions and events, such as purchase of goods without payment, use of services without payment, borrowing, to merchandise warranty commitment, contractual obligation commitment, payables to employees, remittable taxes, and other payables.

Owners’ equity

29. Owners’ equity is reflected in the balance sheets, including investors’ capital, equity surplus, retained profits, funds, undistributed profits, exchange rate differences and differences from asset revaluation.

a/ Investors’ capital may be enterprise owners’ capital, contributed capital, equities, and the State’s capital.

b/ Equity surplus is the difference between the share par value and the actual issuance prices;

c/ Retained profits are after-tax profits retained for capital supplementation;

d/ Funds include reserve fund, stand-by fund, development investment fund;

e/ Undistributed profits are after-tax profits not yet distributed to owners or not yet deducted to set up funds;

f/ Exchange rate differences include:

+ Exchange rate difference arising in the construction investment process;

+ Exchange rate difference arising when enterprises in the country include the financial statements of their activities carried out abroad using accounting currency other than the accounting currency of the reporting enterprises.

g/ Difference from the asset revaluation is the difference between the book value of assets and the revalued value of assets under the State’s decisions, or when assets are contributed as joint-venture capital or shares.

Business situation

30. Profits are used as a measure of the business results of enterprises. The elements directly related to the profit determination are revenues, other incomes and costs. Revenues, other incomes, costs and profits are criteria reflecting the business situation of enterprises.

31. The elements of revenues, other incomes and costs are defined as follows:

a/ Revenues and other incomes: are the total value of economic benefits earned by an enterprise in the accounting period, arising from the enterprise’s normal production, business and other operations, contributing to increasing the owners’ equity, excluding capital contributions made by shareholders or owners.

b/ Costs are the total value of amounts which reduce economic benefits in the accounting period in the forms of amounts spent, asset depreciation amounts, or give rise to liabilities leading to a decrease in the owners’ equity, excluding amounts distributed to shareholders or owners.

32. Revenues, other incomes and costs are presented in the reports on business results so as to supply information in service of the assessment of the enterprises’ capability to create cash sources and cash equivalents in the future.

33. The elements of revenues, other incomes and costs may be presented in many ways in the reports on business results so as to describe the business situation of enterprises, such as revenues, costs and profits of normal business and other operations.

Revenues and other incomes

34. Revenues arises in the process of normal business operations of enterprises and often include: sales revenues, service provision revenues, interests, royalties, dividends and shared profits…

35. Other incomes include incomes arising from operations other than revenues-generating operations, such as incomes from liquidation or sale of fixed assets, fines collected from customers for their contract breaches…

Costs

36. Costs include production and business costs arising in the process of normal business operations of enterprises, and other costs.

37. Production and business costs arising in the process of normal business operations of enterprises, such as cost of goods sold, sale costs. enterprise management costs, costs for loan interests, and costs related to letting other parties use assets with yields, royalties… These costs arise in the form of cash and cash equivalents, inventories, machinery and equipment depreciation.

38. Other costs include costs other than production and business costs arising in the process of normal business operations, such as costs for liquidation and sale of fixed assets, fines imposed by customers for contract breaches, etc.

RECOGNITION OF THE ELEMENTS OF THE FINANCIAL STATEMENTS

39. The financial statements must recognize the elements on the financial status and business situation of enterprises; such elements must be recognized item by item. Each item shall be recognized in the financial statements if satisfying concurrently the following two criteria:

a/ Being certain to gain or reduce future economic benefits;

b/ Such item has some value which can be determined in a reliable manner.

Recognition of assets

40. Assets will be recognized in the balance sheets when enterprises are certain to gain future economic benefits therefrom and the value of such assets are determined in a reliable way.

41. Assets will not be recognized in the balance sheets when costs incurred are not certain to yield future economic benefits for enterprises and these costs will be recognized in the reports on business results as soon as they arise.

Recognition of liabilities

42. Liabilities will be recognized in the balance sheets when there are adequate conditions to ascertain that enterprises will have to spend a cash amount on the current obligations they have to pay for, and such liabilities must be determined in a reliable way.

Recognition of revenues and other incomes

43. Revenues and other incomes will be recognized in the reports on business results when they gain future economic benefits related to the increase in assets or decrease in liabilities, and such increased value must be determined in a reliable way.

Recognition of costs

44. Production, business and other costs will be recognized in the reports on business results when these costs reduce future economic benefits related to the decrease in assets or increase in liabilities, and these costs must be determined in a reliable way.

45. Costs recognized in the reports on business results must comply with the principle of matching between revenues and cost.

46. When economic benefits expected to be obtained over many accounting periods are related to revenues and other incomes which are determined indirectly, the related costs will be recognized in the reports on business results on the basis of systematic or proportional amortization.

47. A cost will be immediately recognized in the reports on business results in the period if it fails to bring about economic benefits in subsequent periods.

Standard No. 02 INVENTORIES (Issued and publicized together with Decision No. 149/2001/QD-BTC of December 31, 2001 of the

Minister of Finance)

GENERAL PROVISIONS

01. This standard aims to prescribe and guide the principles and method of accounting the inventories, including: determination of the value of inventories and accounting it as expense; the marking-down of inventories to suit the net realizable value and the method of calculating the value of inventories to serve as basis for recording accounting books and making financial statements.

02. This standard shall apply to accounting inventories on the original price principle, except when other prescribed accounting standards permit the application of other accounting methods to inventories.

03. For the purposes of this standard, the terms used herein are understood as follows:

Inventories: are assets which are:

a/ held for sale in the normal production and business period;

b/ in the on-going process of production and business;

c/ raw materials, materials, tools and instruments for use in the process of production and business or provision of services.

Inventories consist of:

- Goods purchased for sale: goods in stock, purchased goods being transported en route, goods sent for sale, goods sent for processing;

- Finished products in stock and finished products sent for sale;

- Unfinished products: uncompleted products and completed products not yet going through the procedures for being put into stores of finished products;

- Raw materials, materials, tools and instruments in stock, sent for processing, and already purchased but being transported en route;

- Costs of unfinished services.

Net realizable value means the estimated selling price of inventories in a normal production and business period minus (-) the estimated cost for completing the products and the estimated cost needed for their consumption.

Current price means a sum of money payable for the purchase of a similar kind of inventory on the date the accounting balance sheet is made.

CONTENTS OF THE STANDARD

DETERMINATION OF THE VALUE OF INVENTORIES

04. Inventories are valued according to their original prices. Where the net realizable value is lower

than the original price, they must be valued according to the net realizable value.

Original prices of inventories

05 The original price of inventories consists of the purchasing cost, processing cost and other directly-related costs incurred for having the inventories stored in the present place and conditions.

Purchasing cost

06. The purchasing cost of inventories consists of the buying price, non-refundable taxes, transportation cost, loading and unloading cost, preservation cost incurred in the buying process and other costs directly related to the purchase of the inventories. Trade discounts and reductions in the prices of purchased goods due to their wrong specifications and/or inferior quality, shall be deducted from the purchasing cost.

Processing cost

07. The processing costs of inventories consist of those directly related to the manufactured products, such as cost of direct labor, fixed and variable general production costs incurred in the process of turning raw materials and materials into finished products.

Fixed general production costs means indirect production costs, which are often invariable regardless of the volume of manufactured products, such as depreciation cost, maintenance cost of machinery, equipment, workshops… and administrative management cost at production workshops.

Variable general production costs means indirect production costs, which often change directly or almost directly according to the volume of manufactured products, such as costs of indirect raw materials and materials, cost of indirect labor.

08. Fixed general production costs shall be allocated into the processing cost of each product unit on the basis of the normal production capacity of machinery. Normal capacity is the average quantity of products turned out under normal production conditions.

- Where the quantity of actually-manufactured products is higher than the normal capacity, the fixed general production costs shall be allocated to each product unit according to actually incurred costs.

- Where the quantity of actually-manufactured products is lower than the normal capacity, the fixed general production costs shall be allocated into the processing cost of each product unit only according to the normal capacity. The unallocated amount of general production costs shall be recognized as production and business expense in the period.

The variable general production costs shall be entirely allocated into the processing cost of each product unit according to the actually incurred costs.

09. Where various kinds of products are manufactured in a single production process in the same duration of time and the processing cost of each kind of product is not separately expressed, the processing cost shall be allocated to those kinds of products according to appropriate and consistent norms in all accounting periods.

Where by-products are turned out, their value shall be calculated according to the net realizable value and subtracted from the processing cost already calculated for the principal products.

Other directly-related costs

10. Other directly-related costs shall be incorporated into the original prices of inventories, including costs other than the purchasing cost and processing cost of inventories. For example, the original

price of finished products may consist of the product-designing cost for a particular order.

Costs not permitted to be incorporated in the original price of inventories

11. Costs not permitted to be incorporated into the original price of inventories, are:

a/ Costs of raw materials, materials, labor and other production and business costs incurred at a level higher than normal;

b/ Costs of inventories preservation minus the inventories preservation cost needed for subsequent production processes and the preservation cost prescribed in paragraph 06;

c/ Sale cost;

d/ Enterprise management costs.

Service provision cost

12. Service provision cost consists of personnel costs and other costs directly related to the service provision, such as supervision cost and related general costs.

Personnel costs and other costs related to goods sale and enterprise management shall not be included in the service provision cost.

METHOD OF CALCULATING THE VALUE OF INVENTORIES

13. The value of inventories shall be calculated according to one of the following methods:

a/ Specific identification method;

b/ Weighted average method;

c/ First-in, First-out method;

d/ Last-in, First-out method.

14. The specific identification method shall apply to enterprises having a few goods items or stable and identifiable goods items.

15. By the weighted average method, the value of each kind of inventories shall be calculated according to the average value of each similar kind of goods at the beginning of the period and the value of each kind of inventories purchased or manufactured in the period. The average value may be computed either according to periods or the time when a goods lot is warehoused, depending on the enterprise’s situation.

16. The First-in, First-out method shall apply upon the assumption that the first inventories purchased or manufactured is the first inventories delivered, and the inventories left at the end of the period are those purchased or produced at a time close to the end of the period. By this method, the value of the delivered goods shall be computed according to the price of the lot of goods warehoused at the beginning of the period or at a time shortly after the beginning of the period, the value of the inventories shall be computed according to the price of the goods warehoused at the end of the period or at a time shortly before the end of the period.

17. The Last-in First-out method shall apply upon the assumption that the most recently purchased or manufactured inventories are delivered first, and the inventories left at the end of the period are those which are purchased or produced earlier. By this method, the value of the delivered goods shall be computed according to the price of the lot of goods warehoused most recently or shortly earlier; the value of the inventories shall be computed according to the price of the goods

warehoused at the beginning of the period or shortly after the beginning of the period, which still remain in stock.

NET REALIZABLE VALUE AND SETTING UP OF THE INVENTORY PRICE DECREASE RESERVE

18. The value of inventories cannot be fully recovered when they become damaged, outmoded, their selling prices fall or the finishing and/or sale costs rise. The marking-down of inventories to the level equal to the net realizable value is compliant with the principle that assets must not be shown at a value higher than the realized value estimated from their sale or use.

19. At the end of the accounting period of the year, when the net realizable value of inventories is lower than their original price, the reserve for inventory price decrease must be set up. The amount of the to be-set up inventory price decrease reserve is the difference between the original price of inventories and their net realizable value. The inventory price decrease reserve shall be set up for each kind of inventories. For services incompletely provided, the inventory price decrease reserve shall be set up for each type of service with different charges.

20. The estimation of the net realizable value of inventories must be based on reliable evidences gathered at the time of estimation. Such estimation must take into account price fluctuations or costs directly related to events occurring after the ending day of the fiscal year, which have been anticipated through conditions existing at the time of estimation.

21. When estimating the net realizable value, the purpose of the storage of inventories must be taken into account. For example, the net realizable value of the inventories reserved to ensure the performance of uncancellable sale or service provision contracts must be based on the values inscribed in such contracts. If the volume of inventories is bigger than that of goods needed for a contract, the net realizable value of the difference between these two volumes shall be appraised on the basis of the estimated selling price.

22. Raw materials, materials, tools and instruments reserved for use in the manufacture of products must not be valued lower than their original price if the products which have been manufactured with their contributions are to be sold at prices equal to or higher than their production costs. Where there appear decreases in the prices of raw materials, materials, tools and/or instruments but the production costs of products are higher than their net realizable value, the raw materials, materials, tools and instruments left in stock may have their value lowered to be equal to their net realizable value.

23. At the end of the accounting period of the subsequent year, a new appraisal of the net realizable value of inventories by the end of such year must be conducted. Where at the end of the accounting period of the current year, if the to be-set up reserve for inventory price decrease is lower than the inventory price decrease reserve already set up at the end of the accounting period of the previous year, the difference thereof must be added thereto (under the provisions in paragraph 24) in order to ensure that the value of inventories shown on financial statements is computed according to the original price (if the original price is lower than the net realizable value) or according to the net realizable value (if the original price is higher than the net realizable value).

RECOGNITION OF COSTS

24. When selling inventories, the original price of goods sold shall be recognized as production and business expense in the period in consistence with the recognized turnover related thereto. All the difference between the higher inventory price decrease reserve to be set up at the end of the current year’s accounting period and the lower inventory price decrease reserve already set up at the end of the previous year’s accounting period, volumes of damaged and lost inventories, after subtracting the compensations paid by individuals due to their liabilities, and unallocated general production costs, shall be recognized as production and business expense in the period. Where the inventory price decrease reserve to be set up at the end of the current year’s accounting period is lower than the inventory price decrease reserve already set up at the end of the previous year’s accounting period, the difference thereof must be added and recorded as decrease in production

and business expense.

25. Recognition of the value of goods sold as expense incurred in the period must ensure the expense - turnover matching principle.

26. Where some kinds of inventories are used for manufacture of fixed assets or use like self-manufactured workshops, machinery and/or equipment, the original price of these inventories shall be accounted into the fixed asset value.

PRESENTATION OF FINANCIAL STATEMENTS

27. In their financial statements, the enterprises must present:

a/ Accounting policies applied in the appraisal of inventories, including the method of computing the value of inventories;

b/ The original prices of the total inventories and of each kind of inventories classified in a way suitable to the enterprise;

c/ The value of the inventory price decrease reserve;

d/ The value re-included from the inventory price decrease reserve;

e/ Cases or events resulting in the addition to or re-inclusion from the inventory price decrease reserve;

f/ The book value of inventories (the original price minus (-) the inventory price decrease reserve) already mortgaged or pledged for payable debts.

28. Where the enterprises compute the value of inventories by the Last-in, First-out method, their financial statements must show the difference between the value of inventories presented in the accounting balance sheet and:

a/ The period-end value of inventories, which is calculated by the First-in, First-out method (if this value is lower than the period-end value of inventories calculated by the weighted average method as well as the net realizable value); or

And the period-end value of inventories which is calculated by the weighted average method (if this value is lower than the period-end value of inventories calculated by the First-in, Fist-out method as well as the net realizable value); or

And the period-end value of inventories which is calculated according to the net realizable value (if this value is lower than the value of inventories calculated by the First-in, First-out method and the weighted average method); or

b/ The period-end current value of inventories on the date the accounting balance sheet is made (if this value is lower than the net realizable value); or, and the net realizable value (if the period-end value of inventories which is calculated according to the net realizable value is lower than the period-end value of inventories which is calculated according to the current value on the date the accounting balance sheet is made).

29. Presentation of inventories costs in the reports on the production and business results, which are classified functionally.

30. Functional classification of costs means that inventories are presented in the section “Original price of goods sold” in the business result reports, including the original price of goods sold, the inventory price decrease reserve, damaged and lost volumes of inventories after subtracting the

compensations paid by individuals due to their liabilities, and unallocated general production costs.

Standard No. 03 TANGIBLE FIXED ASSETS (Issued and publicized together with Decision No. 149/2001/QD-BTC of December 31, 2001 of the


GENERAL PROVISIONS

01. This standard aims to prescribe and guide the accounting principles and methods applicable to tangible fixed assets, including criteria of tangible fixed assets, the time of recognition and determination of initial value, costs incurred after initial recognition, determination of value after initial recognition, depreciation, liquidation of tangible fixed assets and some other regulations serving as basis for recording accounting books and making financial statements.

02. This standard applies to the accounting of tangible fixed assets, except where other accounting standards permit the application of other accounting principles and methods to tangible fixed assets.

03. Where other accounting standards prescribe methods of determining and recognizing the initial value of tangible fixed assets other than the methods defined in this standard, other contents of tangible fixed asset accounting shall still comply with the regulations of this standard.

04. Enterprises must apply this standard even when they are affected by price changes, except otherwise prescribed by State decisions related to the re-appraisal of tangible fixed assets.

05. For the purpose of this standard, the terms used herein are construed as follows:

Tangible fixed assets means assets in physical forms which are possessed by the enterprises for use in production and business activities in conformity with the recognition criteria of tangible fixed assets.

Historical cost means all the costs incurred by the enterprises to acquire tangible fixed assets as of the time of putting such assets into the ready-for-use state.

Depreciation means the systematic allocation of the depreciable value of tangible fixed assets throughout the useful life of such assets.

Depreciable value means the historical cost of tangible fixed assets recorded on financial statements, minus (-) the estimated liquidation value of such assets.

Useful life means the duration in which the tangible fixed assets produce their effect on production and business, calculated by:

a/ The duration the enterprise expects to use the tangible fixed assets, or:

b/ The volume of products, or similar calculating units which the enterprise expects to obtain from the use of assets.

Liquidation value means the value estimated to be obtained at the end of the useful life of the assets, after subtracting the estimated liquidation cost.

Reasonable value means the value of assets, which may be exchanged among knowledgeable parties in the par value exchange.

Residual value means the historical cost of tangible fixed assets after subtracting the accumulated depreciation thereof.

Recoverable value means the value estimated to be obtained in future from the use of the assets, including their liquidation value.


RECOGNITION OF TANGIBLE FIXED ASSETS

06. Criteria for recognition of tangible fixed assets:

To be recognized as tangible fixed assets, assets must meet simultaneously all the following four (4) recognition criteria:

a/ Future economic benefits will surely be obtained;

b/ Their historical cost has been determined in a reliable way;

c/ Their useful life is estimated at more than one year;

d/ They meet all value criteria according to current regulations.

07. Tangible asset accounting is classified by groups of assets of the same nature and use purposes in the enterprises’ production and business operations, including:

a/ Houses and architectural objects;

b/ Machinery and equipment;

c/ Means of transport, conveyance equipment;

d/ Managerial equipment and instruments;

e/ Perennial tree garden, animals reared to labor for humans and to yield products.

f/ Other tangible fixed assets.

08. Tangible fixed assets often constitute a key component in the total assets and play an important role in the reflection of the financial situation of enterprises. Therefore, the determination of an asset whether or not to be recognized as tangible fixed asset or a production or business expense in the period shall greatly affect the reporting of the enterprises’ operation and business results.

09. When determining the first criterion (prescribed in Section a, paragraph 06) of each tangible fixed asset, the enterprises must determine the degree of certainty of the acquisition of future economic benefits, on the basis of evidences available at the time of initial recognition, and must bear all related risks.

Though being unable to directly yield economic benefits like other tangible fixed assets, those assets used for the purposes of ensuring production and business safety or protecting the environment are necessary for enterprises to achieve more economic benefits from other assets. However, only if their historical cost and that of related assets do not exceed the total value recoverable from them and other related assets shall these assets be recognized as tangible fixed assets. For example, a chemical plant may have to install equipment and carry out new chemical-storing and-preserving processes in order to comply with the environmental protection requirements in the production and storage of toxic chemicals. Any related installed accompanying fixed assets shall only be accounted as tangible fixed assets if without them the enterprises would not be able to operate and sell their chemical products.

10. The second criterion (prescribed in Section b, paragraph 06) for recognizing tangible fixed

assets is often satisfied since the historical cost of the fixed assets has been already determined through procurement, exchange, or self-construction.

11. When determining components of tangible fixed assets, the enterprises must apply the criteria of tangible fixed asset on a case-by-case basis. The enterprises may consolidate secondary, separate parts, such as molds, tools, swages, and apply the criteria of tangible fixed asset to such aggregate value. Accessories and auxiliary equipment are often seen as movables and thereby accounted into use costs. Major accessories and maintenance equipment shall be determined as tangible fixed assets when the enterprises estimate that their useful life would last for over one year. If they are only used in association with tangible fixed assets irregularly, they shall be accounted as separate tangible fixed assets and depreciated over a period shorter than the useful life of related tangible fixed assets.

12. In each specific case, the total cost of assets may be allocated to their components and separately accounted for each component. This case shall apply when each component of an asset has a different useful life, or contributes to creating for the enterprise economic benefits which are assessed according to different prescribed criteria so it may use different depreciation rates and methods. For example, an aircraft body and engine should be accounted as two separate tangible fixed assets with different depreciation rates if they have different useful lives.

DETERMINATION OF INITIAL VALUE

13. Tangible fixed assets must have their initial value determined according to their historical cost

DETERMINATION OF HISTORICAL COST OF TANGIBLE FIXED ASSETS ON A CASE-BY-CASE BASIS

Procured tangible fixed assets

14. The historical cost of a procured tangible fixed asset consists of the buying price (minus (-) trade discounts and price reductions), taxes (excluding reimbursed tax amounts) and expenses directly related to the putting of the assets into the ready-for-use state, such as ground preparation expense; initial transportation, loading and unloading expense; installation and trial operation expense (minus (-) amounts recovered from products and wastes turned out from trial operation); expert cost and other directly-related expenses.

For tangible fixed assets formed from construction investment by contractual mode, their historical costs are the settled costs of the invested construction projects, other directly-related expenses and registration fee (if any).

15. Where procured tangible fixed assets are houses, architectural objects associated with the land use right, the land use right value must be separately determined and recognized as intangible fixed asset.

16. Where procured tangible fixed assets are paid by deferred payment mode, their historical cost shall be shown at the buying price promptly paid at the purchase time. The difference between the payable total amount and the promptly-paid buying price shall be accounted as expense in the payment period, except where such difference is included into the historical cost of tangible fixed assets (capitalization) according to the regulations of the accounting standard “Borrowing expenses.”

17. Incurred costs, such as administrative management cost, general production costs, trial operation cost and other costs…, if not directly related to the procurement and the putting of fixed assets into the ready-for-use state, shall not be included into the historical cost of tangible fixed assets. Initial losses caused by the machinery’s failure to operate as planned shall be accounted into production and business expenses in the period.

Self-constructed or self-made tangible fixed assets

18. The historical cost of a self-constructed or self-made tangible fixed asset is its actual cost plus (+) the installation and trial operation cost. Where the enterprises turn the products made by themselves into fixed assets, the historical costs shall be the production costs of such products plus (+) the expenses directly related to the putting of the fixed assets into the ready-for-use state. In these cases, all internal profits must not be included in the historical cost of these assets. Unreasonable expenses, such as wasted materials and supplies, labor or other costs in excess of the normal levels arising in the self-construction or self-generating process must not be included in the historical cost of tangible fixed assets.

Financial-leasing tangible fixed assets

19. Where tangible fixed assets are leased in the form of financial lease, their historical cost shall be determined according to the regulations of the accounting standard “Asset lease.”

Tangible fixed assets purchased in the exchange form

20. The historical cost of a tangible fixed asset purchased in the form of exchange for a dissimilar tangible fixed asset or other assets shall be determined according to the reasonable value of the received tangible fixed assets, or that of the exchanged ones, after adjusting the cash amounts or cash equivalents which are additionally paid or received.

21. The historical cost of a tangible fixed asset purchased in the form of exchange for similar one, or possibly formed through its sale in exchange for the right to own similar ones (similar assets are those with similar utilities, in the same business field and of equivalent value). In both cases no profit or loss is recognized in the exchange process. The historical cost of the received fixed asset shall be the residual value of the exchanged one. For example, the exchange of tangible fixed assets is similar to exchange of machinery, equipment, means of transport, service establishments or other tangible fixed assets.

Tangible fixed assets augmented from other sources

22. The historical cost of a tangible fixed asset which is donated or presented shall be initially recognized according to the initial reasonable value. Where it is not recognized according to the initial reasonable value, the enterprises may recognize it according to the nominal value plus (+) the expenses directly related to the putting of the assets into the ready-for-use state.

COSTS INCURRED AFTER INITIAL RECOGNITION

23. The costs incurred after the initial recognition of tangible fixed assets shall be recorded as increase in their historical cost if these costs are certain to augment future economic benefits obtained from the use of these assets. Those incurred costs which fail to meet this requirement must be recognized as production and business expenses in the period.

24. The costs incurred after the initial recognition of tangible fixed assets shall be recorded as increase in their historical cost if these costs have practically improved the current conditions of the assets as compared to their original standard conditions, such as:

a/ Replacing parts of the tangible fixed assets, thereby prolonging their useful life or increasing their use capacity;

b/ Renovating parts of the tangible fixed assets, thereby considerably improving the quality of manufactured products;

c/ Applying new technological production processes, thereby reducing the operational costs of the assets.

25. The repair and maintenance costs of tangible fixed assets for the purpose of restoring or sustaining their capability to bring about economic benefits as in their original operating conditions

shall be included into production and business expenses in the period.

26. The accounting of the costs incurred after the initial recognition of tangible fixed assets must be based on each particular case and the recoverability of these costs. When the residual value of the tangible fixed assets has already been composed of reductions in economic benefits, those costs incurred afterwards to restore economic benefits from these fixed assets shall be included in the historical cost of the fixed assets if their residual value does not exceed their recoverable value. Where the buying price of a tangible fixed asset has already covered the enterprises’ obligation to incur those costs for putting the assets into the ready-for-use state, the capitalization of the costs incurred afterwards must be also based on the recoverability of these costs. For example, an enterprise buys a house which needs some repair before it can be used. The house repair cost shall be included in the historical cost of the asset if such cost is recoverable from the future use of the house.

27. Where some parts of tangible fixed assets need to be replaced on a regular basis, they shall be accounted as independent fixed assets if they satisfy all the four (4) criteria of a tangible fixed asset. For example, air-conditioners in a house may be replaced many times throughout the useful life of the house. The costs incurred in the replacement or restoration of these air-conditioners shall be accounted as an independent asset and the value of the replaced air-conditioners shall be recorded as a decrease.

DETERMINATION OF VALUE AFTER INITIAL RECOGNITION

28. After initial recognition, during their use process, tangible fixed assets shall be determined according to their historical costs, accumulated depreciation and residual values. Where they are re-appraised according to the State’s regulations, their historical cost, accumulated depreciation and residual value must be adjusted according to the re-appraisal results. The difference resulting from the re-valuation of tangible fixed assets shall be handled and accounted according to the State’s regulations

DEPRECIATION

29. The depreciable value of tangible fixed assets shall be allocated systematically during their useful life. The depreciation method must be suited to the economic benefits yielded by the assets to the enterprises. The depreciated amount of each period shall be accounted into the production and business expenses in the period, unless they are included in the value of other assets, such as depreciation of tangible fixed assets used for activities in the development stage is a cost component of the historical cost of intangible fixed assets (according to the regulations of the standard intangible fixed assets), or the depreciation cost of tangible fixed assets used in the process of self-constructing or self-making other assets.

30. Economic benefits yielded by tangible fixed assets shall be gradually exploited by the enterprises through the use of these assets. Nevertheless, other factors, like technical backwardness, wear-and-tear of these fixed assets due to their non-use, often cause reductions in the economic benefits which the enterprises expect these assets would bring about. Therefore, when determining the useful life of tangible fixed assets, the following factors must be taken into account:

a/ The extent of use of such asset, estimated by the enterprise. The extent of use is assessed according to the estimated capacity or output;

b/ The extent of wear-and-tear, depending on the related elements in the asset’s use process, such as the number of working shifts, the enterprise’s repair and maintenance of the asset as well as its upkeep when not in operation;

c/ Invisible wear-and-tear arising from the replacement or renovation of the technological chain or changes in the market demand for the products or service turned out by the asset;

d/ Legal constraints in the asset use, such as the date of expiry of the contract of financial-leasing

fixed assets.

31. The useful life of tangible fixed assets shall be determined by the enterprises mainly on the expected use extent of the assets. However, due to the asset management policy of the enterprises, the estimated useful life of fixed assets may be shorter than their actual useful life. Therefore, the estimation of the useful life of a tangible fixed asset must be also based on the enterprise’s experiences on assets of the same type.

32. Three methods of depreciation of tangible fixed assets are:

- Straight-line depreciation method;

- Declining-balance depreciation method; and

- Units-of-output depreciation method.

By the straight-line depreciation method, the annual depreciation amount is kept unchanged throughout the useful life of assets. By the declining-balance depreciation method, the annual depreciation amount gradually declines throughout the useful life of assets. The units-of-output depreciation method is based on the estimated total quantity of product units the assets may turn out. The depreciation method applied by the enterprises to each tangible fixed asset must be implemented consistently, except where appear changes in the mode of its use.

The enterprises must not continue depreciating tangible fixed assets which have been entirely depreciated but still used for production and business operations.

RECONSIDERATION OF USEFUL LIFE

33. The useful life of tangible fixed assets must be reconsidered periodically, usually at the end of the fiscal year. If there is any considerable change in the estimation of the useful life of assets, the depreciation rate must be adjusted.

34. In the process of using fixed assets, once it has been determined with certainty that the useful life is no longer suitable, it must be adjusted together with the depreciation rate for the current year and subsequent years, which shall be expounded in the financial statements. For example: The useful life may be extended as a result of the improvement of the asset’s conditions as compared with their initial standard conditions; technical modifications or changes in the demands for products produced by a machine may also shorten the useful life of the assets.

35. The tangible fixed asset repair and maintenance regime may help prolong the actual useful life or increase the estimated liquidation value of assets but the enterprises must not change the depreciation rate of these assets.

RECONSIDERATION OF THE DEPRECIATION METHOD

36. The method of depreciation of tangible fixed assets must be reconsidered periodically, usually at the end of the fiscal year; if there is any change in the way of using the assets, which brings about benefits for the enterprises, the depreciation method and rate may be changed for the current year and subsequent years.

SALE AND LIQUIDATION OF TANGIBLE FIXED ASSETS

37. Tangible fixed assets which are liquidated or sold shall be recorded as a decrease.

38. Profits or losses arising from liquidation or sale of tangible fixed assets shall be determined as differences between incomes and liquidation or sale costs plus (+) the residual value of the tangible fixed assets. These profits or losses shall be recognized as an income or an expense on the

reports on the business results in the period.


39. In their financial statements, the enterprises must present the following information on each type of tangible fixed asset:

a/ Method of determination of the historical cost of the tangible fixed asset;

b/ Method of depreciation, the useful life or depreciation rate;

c/ The historical cost, accumulated depreciation and residual value at the beginning of the year and at the end of the period;

d/ A written explanation of the financial statement (the section Tangible Fixed Assets) must cover the following information:

- The historical cost of the tangible fixed asset, any increase and/or decrease in the period;

- The depreciated amount in the period, any increase, decrease and the accumulated amount by the end of the period;

- The residual value of the tangible fixed assets mortgaged or pledged for loans;

- Investment costs of unfinished capital constructions;

- Commitments to the future purchase or sale of tangible fixed assets of big value;

- The residual value of tangible fixed assets temporarily not in use;

- The historical cost of fully-depreciated tangible fixed assets which are still in use;

- The residual value of tangible fixed assets awaiting liquidation;

- Other changes in tangible fixed assets.

40. The determination of the depreciation method and the estimation of the useful life of tangible fixed assets bear a purely presumptive nature. Therefore, the presentation of the applied depreciation methods and the estimated useful life of tangible fixed assets permits the users of financial statements to examine the correctness of the policies set out by the enterprise management and have basis for comparison with other enterprises.

41. The enterprises must present the nature and impact of the changes in accounting estimation which bear a crucial influence in the current accounting period or subsequent periods. The information must be presented when there arise changes in the accounting estimates related to the already liquidated or to be-liquidated tangible fixed assets, their useful life and depreciation methods.

Standard No. 04 INTANGIBLE FIXED ASSETS (Issued and publicized together with Decision No. 149/2001/QD-BTC of December 31, 2001 of the


GENERAL PROVISIONS

01. This standard aims to prescribe and guide the principles and methods of accounting intangible fixed assets, including: criteria of intangible fixed assets, time of recognition and determination of the initial value, costs incurred after initial recognition, determination of the value after initial recognition, depreciation, liquidation of intangible fixed assets and some other regulations serving as basis for recording accounting books and making financial statements.

02. This standard applies to the accounting of intangible fixed assets, except where other standards permit the application of other accounting principles and methods to intangible fixed assets.

03. A number of intangible fixed assets may be contained within or on physical objects like compact discs (in cases where computer software is recorded in compact discs), legal documents (in cases of licenses or invention patents). In order to determine whether or not an asset containing both intangible and tangible elements is accounted according to the regulations of the tangible fixed asset standard or intangible fixed asset standard, the enterprises must base themselves on the determination of which elements being important. For example, if computer software is an integral part of the hardware of a computer, without it the computer cannot operate, such software is a part of the computer and thus it is considered a part of tangible fixed asset. In cases where software is a part detachable from the related hardware, it is an intangible fixed asset.

04. This standard prescribes the expenses related to the advertisement, personnel training, enterprise establishment, research and development. Research and development activities oriented at the knowledge development may create an asset in a physical form (i.e. models) but the physical element only plays a secondary role as compared with the intangible component being knowledge embedded in such asset.

05. Once the financial-leasing intangible fixed assets have been initially recognized, the lessees must account them in the finance-leasing contracts according to this standard. The rights under licensing contracts to films, video programs, plays, manuscripts, patents and copyright shall fall within the scope of this standard.


Asset is a resource which is:

a/ controllable by the enterprise; and

b/ expected to yield future economic benefits for the enterprise.

Intangible fixed assets mean assets which have no physical form but the value of which can be determined and which are held and used by the enterprises in their production, business, service provision or leased to other subjects in conformity with the recognition criteria of intangible fixed assets.

Research means a planned initial survey activity carried out to obtain new scientific or technical understanding and knowledge.

Development means an activity of applying research results or scientific knowledge to a plan or design so as to make products of a new kind or to substantially renovate materials, tools, products,

processes, systems or new services before their commercial production or use.

Historical cost means all costs incurred by the enterprises to acquire intangible fixed assets as of the time of putting these assets into use as expected.

Depreciation means the systematic allocation of the depreciable value of intangible asset throughout their useful life.

Depreciable value means the historical cost of an intangible asset recorded in the financial statement minus (-) the estimated liquidation value of the asset.

Useful life means the duration in which intangible fixed assets promote their effects on production and business, calculated by:

a/ The time for which the enterprise expects to use the intangible asset; or

b/ The quantity of products, or similar calculating units which the enterprise expects to obtain from the use of the assets.

Liquidation value means the value estimated to be acquired upon the expiry of the useful life of an asset, after subtracting (-) the estimated liquidation cost.

Residual value means the historical value of an intangible fixed asset after subtracting (-) the accumulated depreciation of the asset.

Reasonable value means the value of assets which may be exchanged between the knowledgeable parties in the par value exchange.

Operating market means a market which meets simultaneously all the following three (3) conditions:

a/ Products sold on the market are homogenous;

b/ Purchaser and seller may find each other at any time;

c/ Prices are made public.

INTANGIBLE FIXED ASSETS

07. The enterprises often make investment in order to acquire intangible resources such as the right to use land for a definite term, computer software, patent, copyright, aquatic resource exploitation permit, export quota, import quota, right concession permit, business relations with customers or suppliers, customers’ loyalty, market shares, the marketing right…

08. In order to determine whether or not intangible resources specified in paragraph 07 meet the definition of an intangible fixed asset, the following factors shall be considered: Identifiability, resource controllability and certainty of future economic benefits. If an intangible resource fails to satisfy the intangible fixed asset definition, the costs incurred in the formation of such intangible resource must be recognized as production and business expenses in the period or as pre-paid expenses. Particularly for those intangible resources the enterprises have acquired through enterprise merger of re-purchase character, they shall be recognized as goodwill on the date of arising of the purchase operation (under the regulations in paragraph 46).

Identifiability

09. Intangible fixed assets must be separately identifiable so that they can be clearly distinguished from goodwill. Goodwill arising from the enterprise merger of re-purchase character is shown with a

payment made by the asset purchaser in order so as to possibly obtain future economic benefits.

10. An intangible fixed asset is considered identifiable when the enterprises may lease, sell or exchange it or acquire concrete future economic benefits therefrom. Those assets which can only generate future economic benefits when combined with other assets shall be still seen as separately identifiable if the enterprises can determine with certainty future economic benefits to be brought about by such assets.

Controllability

11. An enterprise is in control of an asset if it has the right to acquire future economic benefits yielded by such asset and, at the same time, is able to limit other subjects’ access to these benefits. The enterprise’s controllability of future economic benefits from intangible fixed assets, often derives from legal rights.

12. Market knowledge and expertise may bring about future economic benefits. The enterprise may control these benefits if they have legal right, for example: Copyright, aquatic resource exploitation permit.

13. If an enterprise has a contingent of skilled employees and through training, it may ascertain that improvement of their employees’ knowledge would bring about future economic benefits, but it is unable to control these economic benefits, therefore the enterprise cannot recognize such as an intangible fixed asset. Leadership talent and professional techniques shall not be recognized as intangible fixed assets except where these assets are secured with legal rights to use them and acquire future economic benefits and, at the same time, meet all the requirements of the intangible fixed asset definition and recognition criteria.

14. For enterprises which have customers’ name lists or market shares, if they have neither legal rights nor other measures to protect or control economic benefits from the relations with customers and their loyalty, they must not recognize these as intangible fixed assets.

Future economic benefits

15. Future economic benefits yielded by intangible fixed assets for the enterprises may include: Turnover increase, saved costs, or other benefits originating from the use of intangible fixed assets.


RECOGNITION AND DETERMINATION OF INITIAL VALUE

16. To be recognized as intangible fixed asset, an intangible asset must simultaneously satisfy:

- The definition of an intangible fixed asset; and

- Four (4) recognition criteria below:

+ The certainty to acquire future economic benefits brought about by the asset;

+ The asset’s historical cost must be determined in a reliable way;

+ The useful life is estimated to last for over one year;

+ All value criteria prescribed by current regulations are met.

17. The enterprises must determine the degree of certainty to acquire future economic benefits through using reasonable and grounded assumptions on the economic conditions which will exist throughout the useful life of the assets.

18. Intangible fixed assets must have their initial value determined according to their historical cost.

DETERMINATION OF HISTORICAL COST OF INTANGIBLE FIXED ASSETS IN EACH CASE

Purchase of separate intangible fixed assets

19. The historical cost of a separately-purchased intangible fixed asset consists of the buying price (minus (-) trade discounts or price reductions), taxes (excluding reimbursed tax amounts) and expenses directly related to the putting of the asset into use as planned.

20. Where the land use right is purchased together with houses and architectural objects affixed on the land, its value must be separately determined and recognized as intangible fixed asset.

21. Where a procured intangible asset is paid by deferred payment mode, its historical cost shall be shown at the purchasing price which should have been promptly paid at the time of purchase. The difference between the total amount payable and the promptly-paid purchase price shall be accounted into the production and business expense according to the payment period, except where such difference is included in the historical cost of the intangible asset (capitalization) under the regulations of the accounting standard “Costs of borrowing.”

22. If an intangible fixed asset is formed from the exchange involving payment accompanied with vouchers related to the capital ownership of the establishment, its historical cost is the reasonable value of vouchers issued in relation to capital ownership.

Purchase of intangible fixed assets through enterprise merger

23. The historical cost of an intangible fixed asset formed from the process of enterprise merger of re-purchase character is the reasonable value of such asset on the date of purchase (the date of enterprise merger).

24. The enterprises must determine the historical cost of intangible fixed assets in a reliable way for separate recognition of these assets.

The reasonable value may be:

- The price posted up on the operating market;

- The price of the operation of trading in similar intangible fixed assets.

25. If the operating market for assets does not exist, the historical costs of intangible fixed assets shall be equal to the amounts the enterprises should have paid on the date of purchase of the fixed assets under the condition that such operation is carried out objectively on the basis of available reliable information. In this case, the enterprises should consider carefully the results of these operations in correlation with similar assets.

26. Upon enterprise merger, intangible fixed assets shall be recognized as follows:

a/ The purchaser shall recognize assets as intangible fixed assets if they meet the intangible fixed asset definition and recognition criteria specified in paragraphs 16 and 17, even if such intangible fixed assets were not recognized in the financial statements of the asset seller;

b/ If an intangible asset is purchased through enterprise merger of re-purchase character but its historical cost cannot be determined reliably, the asset shall not be recognized as a separate intangible fixed asset but accounted as goodwill (under the regulations in paragraph 46).

27. Where no operating market exists for intangible fixed assets purchased through enterprise merger of re-purchase character, the historical cost of intangible fixed assets shall be the value at

which they do not create negative-value goodwill which arises on the date of enterprise merger.

Intangible fixed assets being the right to use land for a definite term

28. The historical cost of an intangible fixed asset is the right to use land for a definite term when the land is allocated or the payment made when receiving the land use right lawfully transferred from other persons, or the land use right value contributed to joint-venture capital.

29. Where the land use right is transferred together with the purchase of houses and/or architectural objects on the land, the value of houses and/or architectural objects must be determined separately and recognized as tangible fixed assets.

Intangible fixed assets allocated by the state or donated or presented

30. The historical cost of an intangible fixed asset which is allocated by the State, donated or presented, is determined according to the initial reasonable value plus (+) the expenses directly related to the putting of the assets into use as planned.

Intangible fixed assets purchased in the form of exchange

31. The historical cost of an intangible fixed asset purchased in the form of exchange for a dissimilar intangible or another asset is determined according to the reasonable value of the received intangible fixed asset or equal to the reasonable value of the exchanged asset, after adjusting the cash amounts or cash equivalents additionally received or paid.

32. The historical cost of an intangible fixed asset purchased in the form of exchange for a similar intangible fixed one, or possibly formed through its sale in exchange for the right to own a similar assets (similar asset are those with similar utilities, in the same business field and of equivalent value). In both cases, no profit or loss is recognized in the exchange process. The historical cost of the received intangible fixed asset is equal to the residual value of the exchanged intangible fixed asset.

Goodwill created from within the enterprises

33. Goodwill created from within the enterprises shall not be recognized as assets.

34. Costs incurred to generate future economic benefits but not form intangible fixed assets because they fail to satisfy the definition and recognition criteria in this standard but to create goodwill within the enterprises. The goodwill created within the enterprises shall not be recognized as assets since they are not identifiable resources, nor appraisable in a reliable way nor controllable by the enterprises.

35. The difference between the market value of an enterprise and the value of its net asset value recorded on the financial statement, which is determined at a certain point of time, shall not be recognized as an intangible fixed asset controlled by the enterprise.

Intangible fixed assets created from within the enterprises

36. In order to assess whether or not an intangible asset created from within an enterprise on the date of arising of the operation meets the intangible fixed asset definition and recognition criteria, the enterprise must divide the asset-forming process into:

a/ The research stage; and

b/ The development stage.

37. If the enterprise cannot distinguish the research stage from the development stage of an internal intangible asset-creating project, it must account all incurred costs related to such project

as expenses so as to determine the business results in the period.

Research stage

38. All costs incurred in the research stage shall not be recognized as intangible fixed assets but as production and business expenses in the period.

39. Examples of activities in the research stage:

a/ Activities of researching into and developing new knowledge, and activities of exploring, evaluating and selecting final options;

b/ The application of research results, or other knowledge;

c/ The exploration of alternative methods for materials, tools, products, processes, services;

d/ Formulas, designs, evaluation and final selection of alternative methods for materials, tools, products, processes, systems, services, new or further improved.

Development stage

40. Intangible assets created in the development stage shall be recognized as intangible fixed assets if they meet all the following seven (7) conditions:

a/ Their technical feasibility assures the finishing and putting of the intangible assets into use as planned or for sale;

b/ The enterprises intend to finish the intangible assets for use or sale;

c/ The enterprises are capable of using or selling the intangible assets;

d/ The intangible assets must generate future economic benefits;

e/ There are adequate technical, financial and other resources for completion of the development stage, sale or use of such intangible assets;

f/ Being capable of determining with certainty all costs in the development stage for creating the intangible assets;

g/ They are estimated to meet all criteria for use duration and value prescribed for intangible fixed assets.

41. Examples of development activities:

a/ Designing, constructing and experimenting prototypes or models before they are put into production or use;

b/ Designing tools, molds, jigs and swages related to new technologies;

c/ Designing, constructing and operating economically infeasible trial workshops for commercial production operations;

d/ Designing, developing and manufacturing on a trial basis substitute materials, tools, products, processes, systems and services, new or improved.

42. Trademarks, distribution right, customers’ name list and similar items formed from within the

enterprises shall not be recognized as intangible fixed assets.

Historical costs of intangible fixed assets created from within the enterprises

43. Intangible fixed assets created from within the enterprises shall be initially appraised according to their historical costs consisting of all costs incurred from the time the intangible assets satisfy the intangible fixed asset definition and recognition criteria prescribed in paragraphs 16, 17 and 40 until they are put into use. The costs incurred before this point of time must be included in production and business expenses in the period.

44. The historical cost of an intangible fixed asset created from within an enterprise consists of all directly related expenses or allocated according to rational and consistent norms at all stages from designing, construction, trial production to preparation for putting the asset into use as planned.

The historical cost of an intangible fixed asset created from within the enterprises consists of:

a/ Costs of raw materials, materials or services already used in the creation of the intangible fixed assets;

b/ Salaries, wages and other expenses related to the hiring of employees personally involved in the creation of such asset;

c/ Other expenses directly related to the creation of the asset, such as expenses for registration of legal rights, depreciation of patent and license used in the creation of such asset;

d/ General production costs allocated into the asset according to rational and consistent norms (for example: allocation of the depreciation of workshops, machinery, equipment, insurance premiums, and rents of workshops and equipment).

45. The following costs must not be included in the historical cost of intangible fixed assets created from within the enterprises:

a/ Sale cost, enterprise management cost and general production costs not directly related to the putting of the assets into use;

b/ Unreasonable expenses such as those for wasted raw materials and materials, labor and other expenses in excess of the normal level;

c/ Cost of training of employees to operate the assets.

RECOGNITION OF COSTS

46. Those costs related to intangible assets must be recognized as production and business expenses in the period or pre-paid expenses, except the following cases:

a/ Costs of creating part of the historical cost of an intangible fixed asset satisfying the intangible fixed asset definition and recognition criteria (prescribed from paragraph 16 to 44).

b/ Intangible assets formed from the process of enterprise merger of re-purchase character, which fail to satisfy the intangible fixed asset definition and recognition criteria, these costs (included in the asset re-purchase expenses) shall form part of the goodwill (including cases where goodwill bear a negative value) on the date of decision of enterprise merger.

47. Those costs incurred to yield future economic benefits for the enterprises but not recognized as intangible fixed assets, shall be recognized as production and business expenses in the period, excluding those costs specified in paragraph 48.

48. Those costs incurred to generate future economic benefits for the enterprises, including

enterprise establishment cost, personnel-training cost and advertising cost incurred before the newly-set up enterprises start to operate, costs for the research stage, relocation cost, shall be recognized as production and business expenses in the period or gradually allocated into production and business expenses in the maximum period of three years.

49. Costs related to intangible assets, which have been recognized by the enterprises as costs of determining the business operation results in the previous period, shall not be re-recognized as part of the historical cost of intangible fixed assets.

COST INCURRED AFTER INITIAL RECOGNITION

50. Costs related to intangible fixed assets, which are incurred after initial recognition, must be recognized as production and business expenses in the period; if they meet simultaneously the two following conditions, they shall be included into the historical costs of intangible fixed assets:

a/ These costs can help intangible fixed assets generate more future economic benefits than the original operation evaluation;

b/ These costs are appraised in a certain way and associated with a specific intangible asset.

51. Those costs which are related to intangible fixed assets and incurred after initial recognition shall be recognized as production and business expenses in the period, except when these costs are associated with a specific intangible fixed asset and help increase economic benefits from such asset.

52. Those costs which are incurred after the initial recognition and related to trademarks, distribution right, customers’ name list and items of similar nature (including those purchased from outside or created from within the enterprise) shall be always recognized as production and business expenses in the period.

DETERMINATION OF VALUE AFTER INITIAL RECOGNITION

53. After initial recognition, in their use process, the intangible fixed assets shall be determined according to their historical cost, accumulated depreciation and residual value.

DEPRECIATION

Depreciation period

54. The depreciable value of an intangible fixed asset must be systematically allocated throughout its estimated reasonable useful life. The depreciation period of an intangible asset shall not exceed 20 years. Depreciation shall start from the time the intangible fixed asset is put into use.

55. When determining the useful life of an intangible fixed asset as basis for calculating depreciation, the following factors must be taken into account:

a/ The estimated usage of the asset;

b/ The life circle of products and general information on the estimates related to the useful life of identical types of fixed assets which are used under similar conditions.

c/ Technical or technological obsoleteness;

d/ Stability of the sector using this asset and the change in the market demand for products or the provision of services brought about by such asset;

e/ Projected activities of existing or potential competitors;

f/ Necessary maintenance cost;

g/ The asset control period, legal constraints and other constraints in the process of using the asset;

h/ The dependence of the useful life of the intangible fixed asset on other assets in the enterprise.

56. For computer software and other intangible fixed assets which may become technically obsolete rapidly, their useful life is often shorter.

57. In some cases, the useful life of intangible fixed assets may exceed 20 years upon reliable evidences but must be specified. In this case, the enterprises must:

a/ Depreciate the intangible fixed assets according to their most accurately-estimated useful life;

b/ Justify the reasons for the estimation of the assets’ useful life in the financial statements.

58. If the control of future economic benefits from intangible fixed assets is made possible by virtue of legal rights granted within a given period, the useful life of the intangible fixed assets shall not exceed the effective time of the legal rights, except when such rights are extended.

59. Economic and legal factors affecting the useful life of intangible fixed assets include: (1) Economic factors decisive to the period in which future economic benefits are obtained; (2) Legal factors restricting the period during which the enterprise controls these economic benefits. The useful life is a period shorter than the above-said periods.

Depreciation methods

60. The depreciation methods applicable to intangible fixed assets must reflect the mode of recovering economic benefits from such intangible fixed assets of the enterprises. The depreciation method used for each intangible fixed asset shall apply uniformly in many periods and may be changed when there appears a significant change in the enterprise’s mode of recovering economic benefits. The depreciation cost for each period must be recognized as a production and business expense, unless it is included in the value of other assets.

61. There are three (3) depreciation methods for intangible fixed assets, including:

Straight-line depreciation method;

Declining-balance depreciation method;

Units-of-output depreciation method.

- By to the straight-line depreciation method, the annual depreciated amount is kept unchanged throughout the intangible fixed asset’s useful life.

- According to the declining-balance method, the annual depreciated amount gradually declines throughout the asset’s useful life.

- The units-of-output method is based on the estimated total quantity of products the asset will create.

Liquidation value

62. An intangible fixed asset has a liquidation value when:

a/ There is a third party agreeing to re-purchase the asset at the end of its useful life; or

b/ There is an operating market at the end of the asset’s useful life and the liquidation value may be identified through the market price.

When none of the above-mentioned two conditions exists, the liquidation value of an intangible fixed asset is determined as zero (0).

63. The depreciable value is determined as equal to the historical cost minus (-) the estimated liquidation value of the asset.

64. The liquidation value is estimated when an intangible fixed asset is created and put into use on the basis of the prevailing selling price at the end of the useful life of a similar asset which has been operating under similar conditions. The estimated liquidation value shall not rise when there appear changes in price or value.

Reconsideration of the depreciation period and depreciation method

65. The period and methods of depreciation of intangible fixed assets must be reconsidered at least at the end of every fiscal year. If the estimated useful life of an asset sees a big difference from the previous estimates, the depreciation period must be modified accordingly. The method of depreciation of intangible fixed assets may be changed when there emerges a significant change in the way of estimating the economic benefits recoverable for the enterprises. In this case, the depreciation cost in the current year and subsequent years must be adjusted, which must be justified in the financial statements.

66. Throughout the time of using intangible fixed assets when it is deemed that the estimated useful life of an asset is no longer suitable, the depreciation period must be adjusted. For example, the useful life may prolong as a result of more investment in raising the asset’s capability as compared with the original operating capability appraisal.

67. Throughout the useful life of intangible fixed assets, the way of estimating future economic benefits which the enterprises expect to obtain may be changed, and so the method of depreciation need to be changed accordingly. For example, the declining balance depreciation method proves more suitable than the straight-line depreciation method.

SALE AND LIQUIDATION OF INTANGIBLE FIXED ASSETS

68. Intangible fixed assets shall be recorded as decrease when they are liquidated, sold or deemed to generate no economic benefits in subsequent use.

69. Profits or losses arising from the liquidation or sale of intangible fixed assets shall be the difference between incomes and liquidation or sale costs plus (+) the residual value of the intangible assets. Such profits or losses shall be recognized as an income or a cost on the in the business result report in the period.


70. In financial statements, the enterprises must present the following information on each type of intangible fixed assets created from within the enterprises and each type of intangible fixed assets formed from other sources:

a/ Method of determining the historical cost of the intangible fixed asset;

b/ Depreciation method; the useful life or depreciation rate;

c/ The historical cost; accumulated depreciation and residual value at the beginning of the year and at the end of the period;

d/ The written explanation of the financial statement (section intangible fixed assets) must cover the following information:

- Increase in the historical cost of intangible fixed assets, of which the value of intangible fixed assets increases from activities in the development stage or enterprise merger;

- Decrease in the historical cost of intangible fixed assets;

- Depreciation in the period, any increase, decrease and accumulated amount at the end of the period;

- Reasons for an intangible fixed asset to be depreciated in over 20 years (when giving these reasons, the enterprises must point out the important factors in the determination of the useful life of the asset).

- The historical cost, accumulated depreciation, residual value and remaining depreciation duration of each intangible fixed asset holding an important position or representing a large proportion in the enterprises’ fixed assets;

- Reasonable value of the intangible fixed assets allocated by the State (as stipulated in paragraph 30), explicitly stating the reasonable value upon initial recognition; accumulated depreciation value; residual value of the fixed assets;

- Residual value of intangible fixed assets already mortgaged for payable debts;

- Commitments to future sale and purchase of intangible fixed assets of big value ;

- Residual value of intangible fixed assets temporarily not in use;

- Historical cost of fully-depreciated intangible fixed assets which are still in use;

- Residual value of intangible fixed assets awaiting liquidation;

- Justification of the costs incurred in the research and development stages, which have been recognized as production and business expenses in the period;

- Other changes concerning intangible fixed assets.

71. Accounting of intangible fixed assets which are classified by groups of fixed assets of the same nature and use purposes in the enterprises’ operations, including:

a/ The right to use land for a definite term;

b/ Trademarks;

c/ Distribution rights;

d/ Computer software;

e/ Licenses and right concession permits;

f/ Copyright, patents;

g/ Preparation formulas and methods, models, designs and prototypes;

h/ Intangible fixed assets being developed.

Standard No. 05 INVESTMENT PROPERTY

(Issued in pursuance of the Minister of Finance Decision No. 234/2003/QD-BTC

dated 30 December 2003)

GENERAL PROVISIONS

01. The objective of this standard is to prescribe the accounting policies and procedures in relation to investment property including recognition criteria, initial measurement, subsequent expenditure, transfer, disposal and other guidelines for bookkeeping and financial reporting purposes.

02. This Standard should be applied in accounting for investment property, unless otherwise provided for under other VASs concerning an accounting method therefor.

03. This standard also prescribes determination and recognition of investment property disclosed in the financial statements of a lessee under a finance lease and calculation of investment property for lease presented in the financial statements of a lessor under operating lease.

This Standard does not deal with matters covered in VAS 06, Leases, including:

(a) classification of leases as finance leases or operating leases;

(b) recognition of lease income earned on investment property (see also VAS 14, Revenue and Other Income);

(c) measurement in a lessee’s financial statements of property held under an operating lease;

(d) measurement in a lessor’s financial statements of property leased out under a finance lease;

(e) accounting for sale and leaseback transactions; and

(f) disclosure about finance leases and operating leases.

04. This Standard does not apply to:

(a) biological assets attached to land related to agricultural activity; and

(b) mineral rights, the exploration for and extraction of minerals, oil, natural gas and similar non-regenerative resources.

05. The following terms are used in this Standard with the meanings specified:

Investment property is property being land-use rights or a building - or part of a building - or both, infrastructure held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both, rather than for:

(a) use in the production or supply of goods or services or for administrative purposes; or

(b) sale in the ordinary course of business.

Owner-occupied property is property held by the owner or by the lessee under a finance lease for use in the production or supply of goods or services or for administrative purposes.

Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction.

Net-book value represent the cost of an investment property less (-) accumulated depreciation

06. The following are examples of investment property:

(a) land-use rights (as a consequence of an enterprise’s purchase) held for long-term capital appreciation;

(b) land use-rights (as a consequence of an enterprise’s purchase) held for a currently undetermined future use;

(c) a building owned by the reporting enterprise (or held by the reporting enterprise under a finance lease) and leased out under one or more operating leases;

(d) a building that is vacant but is held to be leased out under one or more operating leases; and

(e) infrastructure that is held to be leased out under one or more operating leases.

07. The following are examples of items that are not investment property:

(a) property held for sale in the ordinary course of business or in the process of construction or development for such sale (see VAS 02, Inventories);

(b) property being constructed or developed on behalf of third parties (see VAS 15, Construction Contracts);

(c) owner-occupied property (see VAS 03, Tangible Fixed Assets), including, among other things, property held for future use as owner-occupied property, property held for future development and subsequent use as owner-occupied property, property occupied by employees (whether or not the employees pay rent at market rates) and owner-occupied property awaiting disposal; and

(d) property that is being constructed or developed for future use as investment property.

08. Certain properties include a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in the production or supply of goods or services or for administrative purposes. If these portions could be sold separately (or leased out separately under a finance lease), an enterprise accounts for the portions separately. If the portions could not be sold separately, the property is investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes.

09. In certain cases, an enterprise provides ancillary services to the occupants of a property held by the enterprise. An enterprise treats such a property as investment property if the services are a relatively insignificant component of the arrangement as a whole. An example would be where the owner of an office building provides security and maintenance services to the lessees who occupy the building.

10. In other cases where the services provided are a more significant component, an enterprise treats such a property as owner-occupied property. For example, if an enterprise owns and manages a hotel, services provided to guests are a significant component of the arrangement as a whole. Therefore, an owner-managed hotel is owner-occupied property, rather than investment property.

11. It may be difficult to determine whether a property qualifies as investment property. An enterprise develops criteria so that it can exercise that determination consistently in accordance with the definition of investment property and with the related guidance in paragraphs 06, 07, 08, 09 and 10. Paragraph 31(d) requires an enterprise to disclose these criteria when classification is

difficult.

12. In some cases, an enterprise owns property that is leased to, and occupied by, its parent or another subsidiary. The property does not qualify as investment property in consolidated financial statements that include both enterprises. However, from the perspective of the individual enterprise that owns it, the property is investment property if it meets the definition. Therefore, the lessor treats the property as investment property in its individual financial statements.


Recognition

13. Investment property should be recognised as an asset when the following conditions are met:

(a) it is probable that the future economic benefits associated with the investment property will flow to the enterprise; and

(b) the cost of the investment property can be measured reliably.

14. In determining whether an item satisfies the first criterion for recognition, an enterprise needs to assess the degree of certainty attaching to the flow of future economic benefits on the basis of the available evidence at the time of initial recognition. The second criterion for recognition is usually readily satisfied because the exchange transaction evidencing the purchase of the asset identifies its cost.

Initial Measurement

15. An investment property should be measured initially at its cost. Transaction costs should be included in the initial measurement.

16. The cost of a purchased investment property comprises its purchase price, and any directly attributable expenditure. Directly attributable expenditure includes, for example, professional fees for legal services, property transfer taxes and other transaction costs.

17. The cost of a self-constructed investment property is its cost at the date when the construction or development is complete. Until that date, an enterprise applies VAS 03, Tangible Fixed Assets and VAS 04, Intangible Fixed Assets. At that date, the property becomes investment property and this Standard applies (see paragraphs 23(e) below).

18. The cost of an investment property is not increased by:

- start-up costs (unless they are necessary to bring the property to its working condition);

- initial operating losses incurred before the investment property achieves the planned level of occupancy;

- abnormal amounts of wasted material, labour or other resources incurred in constructing or developing the property.

19. If payment for an investment property is deferred, its cost is the cash price equivalent. The difference between this amount and the total payments is recognised as interest expense over the period of credit, except when the difference is charged to cost of investment property in accordance with VAS 16, Borrowing Costs. .

Subsequent Expenditure

20. Subsequent expenditure relating to an investment property that has already been

recognised should be added to the net-book value of the investment property when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing investment property, will flow to the enterprise.

21. The appropriate accounting treatment for expenditure incurred subsequently to the acquisition of an investment property depends on the circumstances which were taken into account on the initial measurement and recognition of the related investment. For instance, when the purchase price of an asset reflects the enterprise’s obligation to incur expenditure that is necessary in the future to bring the asset to its working condition. An example of this might be the acquisition of a building requiring renovation. In such circumstances, the subsequent expenditure is added to the net-book value.

Measurement Subsequent to Initial Recognition

22. After initial recognition, investment property should be measured at cost, less accumulated depreciation to arrive at net book value in the holding period.

Transfers

23. Transfers to, or from, investment property should be made when, and only when, there is a change in use, evidenced by:

(a) commencement of owner-occupation, for a transfer from investment property to owner-occupied property;

(b) commencement of development with a view to sale, for a transfer from investment property to inventories;

(c) end of owner-occupation, for a transfer from owner-occupied property to investment property;

(d) commencement of an operating lease to another party, for a transfer from inventories to investment property; or

(e) end of construction or development, for a transfer from property in the course of construction or development (covered by VAS 03, Tangible Fixed Assets) to investment property.

24. Paragraph 23(b) above requires an enterprise to transfer a property from investment property to inventories when, and only when, there is a change in use, evidenced by commencement of development with a view to sale. When an enterprise decides to dispose of an investment property without development, the enterprise continues to treat the property as an investment property until it is derecognised (eliminated from the balance sheet) and does not treat it as inventory. Similarly, if an enterprise begins to redevelop an existing investment property for continued future use as investment property, it remains an investment property and is not reclassified as owner-occupied property during the redevelopment.

25. Transfers between investment property, owner-occupied property and inventories do not change the net-book value of the property transferred and they do not change the cost of that property for measurement or disclosure purposes.

Disposals

26. An investment property should be de-recognized (eliminated from the balance sheet) on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal.

27. The disposal of an investment property may occur by sale or by entering into a finance lease. In determining the date of disposal for investment property and for recognising

revenue from the sale of goods, an enterprise applies the criteria in VAS 14, Revenue and Other Income, VAS 06, Leases, applies on a disposal by entering into a finance lease or by a sale and leaseback.

28. Gains or losses arising from the retirement or disposal of investment property should be determined as the difference between the net disposal proceeds and the net-book value of the asset and should be recognised as income or expense in the income statement (unless VAS 06, Leases, requires otherwise on a sale and leaseback).

29. The consideration receivable on disposal of an investment property is recognised initially at fair value. In particular, if payment for an investment property is deferred, the consideration received is recognised initially at the cash price equivalent. The difference between the nominal amount of the consideration and the cash price equivalent is recognised as interest revenue under VAS 14, Revenue and Other Income.

Disclosure

30. The disclosures set out in this VAS apply in addition to those in VAS 06, Leases, under which the lessor is to disclose operating leases and the lessee finance lease.

31. An enterprise should disclose:

(a) the depreciation methods used;

(b) the useful lives or the depreciation rates used;

(c) the gross net-book value and the accumulated depreciation at the beginning and end of the period;

(d) when classification is difficult, the criteria developed by the enterprise to distinguish investment property from owner-occupied property and from property held for sale in the ordinary course of business;

(e) Income and expense items relating to property lease including:

- rental income from investment property;

- direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period; and

- direct operating expenses (including repairs and maintenance) arising from investment property that did not generate rental income during the period;

(f) Reasons of and affects on income from investment property trading;

(g) material contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements;

(h) The followings should be disclosed (comparative information is not required):

- additions, disclosing separately those additions resulting from acquisitions and those resulting from capitalised subsequent expenditure;

- additions resulting from acquisitions through business combinations;

- disposals; and

- transfers to and from inventories and owner-occupied property; and

(i) the fair value of investment property at the end of a period. When an enterprise cannot determine the fair value of the investment property reliably, the enterprise should disclose:

- a description of the investment property; and

an explanation of why fair value cannot be determined reliably.

Standard No. 06 LEASES (Promulgated and publicized together with the Finance Minister’s Decision No. 165/2002/QD-BTC

of December 31, 2002)

GENERAL PROVISIONS

01. This standard aims to prescribe and guide for lessees and lessors the accounting principles and methods for financial lease and operating lease, serving as a basis for making accounting entries and financial statements.

02. This standard shall apply to the accounting of all leases, excluding:

a/ Lease contracts for exploiting or using natural resources, such as oil, gas, timber, metals and other minerals;

b/ Lease contracts for using copyrights of items such as motion picture films, video tapes, operas, copyrights and patents.

03. This standard shall apply also to the transfer of the right to use assets even when the lessors are requested to provide services mostly related to the operation, repair or maintenance of the leased assets. This standard shall not apply to service contracts not involving the transfer of the right to use assets.

04. The terms used in this standard are construed as follows:

A lease means an agreement between the lessor and the lessee whereby the lessor transfers the right to use an asset to the lessee for a certain period of time in return for a lease payment made in a lump sum or installments.

A financial lease is a lease whereby the lessor transfers most of the risks and rewards associated with the ownership over an asset to the lessee. The ownership over the asset may be transferred at the end of the lease term.

An operating lease is a lease other than a financial lease.

A non-cancelable lease contract is the one that the two involved parties cannot unilaterally terminate, except in the following cases:

a/ Upon the occurrence of unusual events, such as:

- The lessor fails to hand the leased asset on schedule;

- The lessee fails to make lease payments according to the provisions of the lease contract;

- The lessee or lessor breaches the contract;

- The lessee goes bankrupt or is dissolved;

- The guarantor goes bankrupt or is dissolved while the lessor rejects the lessee’s proposal on guaranty termination or substitute guarantor;

- The leased asset is lost or irreparably damaged.

b/ With the consent of the lessor;

c/ If the two parties enter into a new contract on lease of the same or similar asset;

d/ The lessee pays an additional amount immediately at the start of the lease.

The inception of the lease is the earlier date of either of the two dates: The date when the right to use the asset is transferred to the lessee and the date when the lease payment begins to be calculated under the provisions of the lease contract.

The lease term is the period of the non-cancelable lease contract plus (+) the duration for which the lessee have the option to continue leasing the asset as prescribed in the contract, with or without additional payment; this option is determined with relative certainty right at the inception of the lease.

Minimum lease payments:

a/ For the lessee: They are the payments which the lessee must make to the lessor for a lease over the lease term (excluding service costs and taxes which have been paid by the lessor and must be reimbursed by the lessee, and a contingent rent), plus any value that the lessee or a party related to the lessee has guaranteed to pay.

b/ For the lessor: They are the payments which the lessee must make to the lessor over the lease term (excluding service costs and taxes which have been already paid by the lessor and must be reimbursed by the lessee, and a contingent rent) plus (+) any residual value of the leased asset, which has been guaranteed to be paid by:

- The lessee;

- A party related to the lessee; or

- An independent financially capable third party.

c/ Where the lease contract contains the provision on the lessee’s right to purchase the leased asset at a price lower than the reasonable value on the date of purchase, the minimum lease payments (for both lessor and lessee) shall include the minimum payment inscribed in the contract for the lease term and the payment required for the purchase of such asset.

Reasonable value is the amount for which an asset can be exchanged or the value of a liability which may be settled voluntarily between the knowledgeable parties in the par value exchange.

Residual value of a leased asset is the estimated value at the inception of the lease, which the lessor expects to obtain from the leased asset at the end of the lease.

Guaranteed residual value of a leased asset:

a/ For the lessee: It is the residual value of a leased asset, which is guaranteed to be paid by the lessee or by a party related to the lessee to the lessor (the guaranteed value is the maximum amount that the lessee must pay in any circumstances).

b/ For the lessor: It is the residual value of a leased asset, which is guaranteed to be paid by the lessee or a financially capable third party not related to the lessor.

Unguaranteed residual value of a leased asset: is the residual value of a leased asset, which is determined by the lessor and is not guaranteed to be paid by the lessee or a party related thereto or is guaranteed to be paid only by one party related to the lessor.

Economic life: is the period over which an asset is expected to be economically usable or the

number of products or similar units expected to be obtained from the leased asset by one or more users.

Useful life is the remaining economic life of the leased asset, counting from the inception of the lease, but not restricted by the lease term.

Gross investment in the financial lease contract is the aggregate of the minimum lease payments under a financial lease contract (for the lessor) plus (+) the unguaranteed residual value of the leased asset.

Unearned financial revenue is the aggregate of the minimum lease payments plus (+) the unguaranteed residual value and minus (-) the present value of these amounts, calculated at the interest rate implicit in the financial lease.

Net investment in the financial lease is the difference between the gross investment in the financial lease and the unearned financial revenue.

The interest rate implicit in the financial lease contract is the discount rate used, at the inception of the asset lease, to calculate the present value of the minimum lease payment and the present value of the unguaranteed residual value to ensure that their aggregate is equal to the reasonable value of the leased asset.

Incremental borrowing interest rate is the interest rate the lessee must pay for a similar financial lease or that at the inception of the asset lease the lessee must pay to borrow for a similar term and with a similar security an amount necessary to purchase the asset.

Contingent rent is part of the lease payments, which is not fixed in amount but is based on a factor other than the passage of time, for example: percentage (%) of revenue, used amount, price indices, market interest rates.

05. Lease contracts that include provisions permitting the lessees to purchase the assets upon the satisfaction of all conditions agreed in such contracts are called hire purchase contracts.


Classification of leases

06. The classification of leases adopted in this standard is based on the extent to which risks and rewards associated with the ownership of a leased asset are transferred from the lessors to the lessees. Risks include the possibilities of losses from idle production capacity or technological backwardness and of unfavorable changes in the economic situation, thus affecting the capital recoverability. Rewards are profits expected to be earned from the operation of the leased assets over their economic life and incomes expected to be gained from the increased value of the assets or the value recoverable from the assets’ liquidation.

07. Leases will be classified as financial leases if the contents of the lease contracts include the transfer of most of risks and rewards associated with the assets’ ownership. Leases will be classified as operating leases if the contents of the lease contracts do not include the transfer of most of risks and rewards associated with the assets’ ownership.

08. The lessors and lessees must determine the leases as financial or operating leases right at the inception of the asset lease.

09. The classification of leases as financial or operating leases must be based on the nature of the provisions of the contracts. Below are the examples of cases that normally lead to financial leases:

a/ The lessor transfers the asset’s ownership to the lessee at the end of the lease term;

b/ At the inception of the lease, the lessee has the right to purchase the leased asset at a price expected to be lower than the reasonable price at the end of the lease term;

c/ The lease term accounts for most of the economic life of the asset even if the ownership is not transferred;

d/ At the inception of the lease, the present value of the minimum lease payment accounts for most of the reasonable value of the leased asset;

e/ The leased asset is of a special-use type which can be used only by the lessee without major modification or overhaul.

10. Lease contracts will be also considered financial lease contracts if they fall into at least one of the following three cases:

a/ If the lessee cancels the contract and pays compensation for damage associated with the contract cancellation to the lessor;

b/ Incomes or losses from the change in the reasonable value of the residual value of the leased asset are associated with the lessee;

c/ The lessee is able to continue leasing the asset after the lease contract expires at a rent lower than market rents.

11. Lease classification shall be made at the inception of the lease. If at any time the lessee and the lessor agree to change the provisions of the contract (but not on the renewal of the contract), which leads to a different classification of the lease under the criteria in paragraphs 06 thru 10 at the inception of the lease, the revised provisions shall apply to the entire lease term. Changes in estimates (for example, changes in estimates of the economic life or of the residual value of the leased asset) or changes in the lessees’ payment capability, however, shall not result in a new classification of the lease.

12. Lease of assets being the right to use land and houses will be classified as operating or financial lease. Nevertheless, as land normally has an indefinite economic life and the ownership is not transferred to the lessees at the end of the lease term and the lessees do not accept most of risks and rewards associated with the land ownership, the lease of assets being the land use right will be usually classified as operating lease. The rents paid for assets being the land use right shall be amortized over the entire lease term.

Recognition of leases in the financial statements of lessees

Financial leases

13. At the inception of a financial lease, the lessee will recognize the financial leased asset as an asset and liability in its balance sheet with the same value equal to the reasonable value of the leased asset. If the reasonable value of the leased asset exceeds the present value of the minimum lease payments for the lease, the present value of the minimum lease payments shall be recorded. The discount rate used for calculating the present value of the minimum lease payments for the lease will be the interest rate implicit in the asset lease contracts or the interest rate inscribed therein. If the interest rate implicit in the lease contract is undeterminable, the lessee’s incremental borrowing interest rate will be used for calculating the present value of the minimum lease payments.

14. When presenting liabilities concerning financial leases in the financial statements, short-term and long-term liabilities must be distinguished.

15. Initial direct costs incurred in connection with financial leasing activities, such as costs for lease

contract negotiation and signing will be recognized into the historical costs of the leased assets.

16. Payments for a financial lease of assets will be apportioned between financial costs and the amounts payable for debt principals. Financial costs must be calculated according to each accounting period of the entire lease term at a constant periodic interest rate on the remaining debit balance of each accounting period.

17. A financial lease shall give rise to asset depreciation costs as well as financial costs in each accounting period. The depreciation policy for a leased asset must be consistent with the depreciation policy for assets of the same kind under the ownership of the lessee-enterprises. If it is uncertain that the lessees would obtain the assets’ ownership by the end of the lease term, the leased asset will be depreciated over the shorter duration between the lease term and its useful life.

18. When presenting leased assets in the financial statements, the provisions of the accounting standard "Tangible fixed assets" must be complied with.

Operating leases

19. Payments for an operating lease (excluding service, insurance and maintenance costs) must be recognized as production and business costs by the straight line method during the entire asset lease term regardless of the payment mode, unless more reasonable calculation methods are applied.

Recognition of asset leases in the financial statements of lessors

Financial leases

20. The lessors must recognize the value of financial leased assets in their balance sheets as a receivable equal to the value of net investment stated in the financial lease contracts.

21. For financial leases, most of risks and economic rewards are associated with the assets’ ownership transferred to the lessees, and, therefore, all receivables therefrom must be recognized as receivables for principal capital and financial revenues from the lessors’ investments and services.

22. The recognition of financial revenues must be based on the constant periodic interest rate on the total balance of net investment in financial leases.

23. The lessors shall amortize financial revenues over the entire lease term on the basis of the constant periodic interest rate over the balance of net investment in financial leases. Payments paid for financial leases in each accounting period (excluding costs for the provision of services) shall be allowed to be reduced from gross investment in order to reduce both the principal capital and the unearned financial revenues.

24. Initial direct costs to create financial revenues, such as commissions and legal fees incurred in the contract negotiation and signing, are often paid by lessors and shall be recognized as cost in the period as soon as they are incurred or be amortized into costs over the lease term in a way suitable to the recognition of revenues.

Operating leases

25. The lessors must recognize assets under operating leases in their balance sheets, using the method of classification of enterprises’ assets.

26. Revenues from operating leases must be recognized by the straight line method over the entire lease term, regardless of the payment modes, unless more reasonable calculation methods are

applied.

27. Costs of operating leases, including depreciation of leased assets, will be recognized as costs in the period during which they are incurred.

28. Initial direct costs to create revenues from operating leases shall be immediately recognized as costs in the period during which they are incurred or be amortized into the costs over the entire lease term in a way suitable to the recognition of revenues from operating leases.

29. The depreciation of leased assets must be on a basis consistent with the lessors’ depreciation policy applicable to similar assets, and the depreciation costs must be calculated under the provisions of the accounting standards "Tangible fixed assets" and "Intangible fixed assets."

30. The lessors being manufacturing or trading enterprises shall recognize revenues from operating leases according to each lease term.

Asset sale and leaseback transactions

31. A asset sale and leaseback transaction is effected when an asset is sold then leased back by the same seller. The accounting method applicable to sale and leaseback transactions depends on the type of lease.

32. If an asset sale and leaseback transaction is a financial lease, the difference between the sale proceeds and the residual value of the asset must be amortized over the entire lease term.

33. If the asset leaseback is a financial lease, whereby the lessor provides finance for the lessee, with asset security. The difference between the proceeds from the sale of the asset and the residual value of the asset in the accounting books shall not be immediately recognized as a profit from the sale of the asset; instead it must be recognized as unearned income and amortized over the entire lease term.

34. Sale and leaseback transactions being operating leases will be recognized when:

- The sale price is agreed upon at the reasonable value, any profit or loss must be recognized immediately in the period during which it arises;

- If the sale price is lower than the reasonable value, any profit or loss must be also recognized immediately in the period during which it arises, except where the loss is offset with future lease payments lower than the market rent. In this case, the loss shall not be immediately recognized but must be amortized into costs corresponding to the lease payments over the entire period during which the asset is expected to be used;

- If the sale price is higher than the reasonable value the excess over the reasonable value must be amortized into incomes corresponding to the lease payments over the entire period during which the asset is expected to be used.

35. If an asset leaseback is an operating lease, and the rent and sale price are agreed at the reasonable value, that is, a normal sale transaction has been conducted, any profit or loss will be accounted immediately in the period during which it arises.

36. For operating leases, if the reasonable value of assets at the time of sale and leaseback is lower than the residual value thereof, the loss being the difference between the residual value and the reasonable value must be recognized immediately in the period during which it arises.

37. The requirements on the presentation of the financial statements of lessees and lessors regarding asset sale and leaseback operations must be alike. Where the lease agreements contain a special provision, it must be presented in the financial statements.


For the lessees

38. The lessees must present the following information on financial leases:

a/ The residual value of the leased asset on the financial statement date;

b/ Contingent rent recognized as a cost in the period;

c/ Bases for determining the contingent rent;

d/ Provision on continued lease or the right to purchase the asset.

39. The lessees must present the following information on operating leases:

a/ The total future minimum lease payments under non-cancelable operating lease contracts with the following terms:

- Of one year or under;

- Of between over one year and five years;

- Of over five years.

b/ Bases for determining contingent rent.

For the lessors

40. The lessors must present the following information on financial leases:

a/ The table of comparison between the total gross investment in leases and the present value of the minimum lease payments receivable on the financial statement date of the reporting periods, with the following terms:




b/ Unearned revenues from financial leases;

c/ The unguaranteed residual value of leased assets, calculated by the lessor;

d/ Accumulated reserve for the bad receivables regarding the minimum lease payments;

e/ Contingent rent recognized as revenues in the period.

41. The lessors must present the following information on operating leases:

a/ Future minimum lease payments under non-cancelable operating lease contracts with the following terms:




b/ Total contingent rent recognized as revenues in the period.

Standard No. 07 ACCOUNTING FOR INVSTMENTS IN ASSOCIATES



GENERAL

01. The objective of this Standard is to prescribe the accounting policies and procedures in relation to investments in associates, including: recognition of investments in associates in separate financial statement of investor and consolidated financial statement as the basis for bookkeeping, preparation and presentation of financial statements.

02. This Standard should be applied in accounting by an investor who has significant influence for investments in associates.


An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor.

Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control over those policies.

Control is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.

A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).

The equity method is a method of accounting whereby the investment is initially recorded at cost and adjusted thereafter for the post acquisition change in the investor's share of net assets of the investee. The income statement reflects the investor's share of the results of operations of the investee.

The cost method is a method of accounting whereby the investment is recorded at cost without adjustment thereafter for the post acquisition change in the investor's share of net assets of the investee. The income statement reflects income from the investment only to the extent that the investor receives distributions from accumulated net profits of the investee arising subsequent to the date of acquisition.

Net asset is the total assets less (-) liabilities.

Content of the standard

Significant Influence

04. If an investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the investee, it is presumed that the investor does have significant influence, unless otherwise regulated or agree upon. Conversely, if the investor holds, directly or indirectly through subsidiaries, less than 20% of the voting power of the investee, it is presumed that the investor does not have significant influence, unless otherwise regulated or agree upon.

05. The existence of significant influence by an investor is usually evidenced in one or more of the following ways:

(a) representation on the board of directors or equivalent governing body of the investee;

(b) participation in policy making processes;

(c) material transactions between the investor and the investee;

(d) interchange of managerial personnel; or

(e) provision of essential technical information.

Equity Method

06. Under the equity method, the investment is initially recorded at cost and the carrying amount is increased or decreased to recognise the investor's share of the profits or losses of the investee after the date of acquisition. Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the carrying amount have to be made for alterations in the investor's proportionate interest in the investee arising from changes in the investee's equity that have not been included in the income statement. Such changes include those arising from the revaluation of property, plant, equipment and investments, from foreign exchange translation differences and from the adjustment of differences arising on business combinations.

Cost Method

07. Under the cost method, an investor records its investment in the investee at cost. The investor recognises income in its Income Statement only to the extent that it receives distributions from the accumulated net profits of the investee arising subsequent to the date of acquisition by the investor. Distributions received in excess of such profits are considered a recovery of investment and are recorded as a reduction of the cost of the investment.

Separate Financial Statements of the Investor

08. An investment in an associate that is included in the separate financial statements of an investor should be accounted for under the cost method.

Consolidated Financial Statements

09. An investment in an associate should be accounted for in consolidated financial statements under the equity method except when

(a) The investment is acquired and held exclusively with a view to its disposal in the near future ( under 12 months), or;

(b) The associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor. In this case, an investment in the associate is accounted for using the cost method in the consolidated financial statements.

10. The recognition of income on the basis of distributions received may not be an adequate measure of the income earned by an investor on an investment in an associate because the distributions received may bear little relationship to the performance of the associate. As the investor has significant influence over the associate, and has responsibility for the associate's performance, the investor accounts for this stewardship by extending the scope of its consolidated financial statements to include the returns on its investment commensurate with its share of results of such an associate. The application of the equity method provides more informative reporting of the net assets and net income of the investor than that of the cost method.

11. An investor should discontinue the use of the equity method from the date that:

(a) it ceases to have significant influence in an associate but retains, either in whole or in

part, its investment; or

(b) the use of the equity method is no longer appropriate because the associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor.

The carrying amount of the investment at that date should be regarded as cost thereafter.

Application of the Equity Method

12. An investment in an associate is accounted for under the equity method from the date on which it falls within the definition of an associate. On acquisition of the investment any difference (whether positive or negative) between the cost of acquisition and the investor's share of the fair values of the net identifiable assets of the associate is accounted for in accordance with Accounting Standard, “Business Combinations”. Appropriate adjustments to the investor's share of the profits or losses after acquisition are made to account for:

(a) depreciation of the depreciable assets, based on their fair values; and

(b) amortisation of the difference between the cost of the investment and the investor's share of the fair values of the net identifiable assets.

13. Financial statements of the associate used by the investor in applying the equity method must be drawn up to the same date as that of the financial statements of the investor. When it is impracticable to do this, financial statements drawn up to a different reporting date may be used.

14. When financial statements with a different reporting date are used, adjustments are made for the effects of any significant events or transactions between the investor and the associate that occur between the date of the associate's financial statements and the date of the investor's financial statements.

15. The investor's financial statements are prepared using uniform accounting policies for like transactions and events in similar circumstances. If an associate uses accounting policies other than those adopted by the investor for like transactions and events in similar circumstances, appropriate adjustments are made to the associate's financial statements when they are used by the investor in applying the equity method. If it is not practicable for such adjustments to be calculated, that fact should be disclosed.

16. If an associate has outstanding cumulative preferred shares held by outside interest, the investor computes its share of profits or losses after adjusting for the preferred dividends, whether or not the dividends have been declared.

17. If, under the equity method, an investor's share of losses of an associate equals or exceeds the carrying amount of an investment, the investor ordinarily discontinues including its share of further losses in its consolidated financial statements, except when the investor has obligations to pay on behalf of the associate to satisfy obligations of the associate that the investor has guaranteed or otherwise committed.The investment is then reported at nil (0) value. If the associate subsequently reports profits, the investor resumes including its share of those profits only after its share of the profits equals the share of net losses not recognised.

Impairment Losses

18. If there is an indication that an investment in an associate may be impaired, an enterprise applies Accounting Standard “Impairment of Assets”.

Income Taxes

19. Income taxes arising from investments in associates (if any) are accounted for in accordance

with Accounting Standard “Income Taxes”.

Contingencies

20. When contingent items incurred unexpectedly, the investor should disclose them in accordance with Accounting Standard “ Impairment Loss”

Disclosure

21. In financial statement, the following disclosures should be made:

(a) an appropriate listing and description of significant associates including the proportion of ownership interest and, if different, the proportion of voting power held; and

(b) the methods used to account for such investments.

22. Investments in associates accounted for using the equity method should be classified as long-term assets and disclosed as a separate item in the consolidated balance sheet. The investor's share of the profits or losses of such investments should be disclosed as a separate item in the consolidated income statement.

Standard No. 08 FINANCIAL REPORTING OF INTEREST IN JOINT VENTURES



GENERAL

01. The objective of this standard is to prescribe the accounting policies and procedures in relation to interests in joint ventures, including the forms of joint venture, and venturers’ separate financial statements and consolidated financial statements for their bookkeeping and financial reporting purposes.

02. This Standard should be applied in accounting for interests in joint ventures including jointly controlled operations, jointly controlled assets and jointly controlled entities.


A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control. Jointly controlled activities referred to herein include

- business cooperation contract involvement in the form of jointly controlled operations;

- business cooperation contract involvement in the form of jointly controlled assets;

- joint venture contract involvement in the establishment of jointly controlled entities.

Control is the power to govern the financial and operating policies of an economic activity relating to interests in joint ventures so as to obtain benefits from it.

Joint control is the power to jointly govern the financial and operating policies of an economic activity on a contractual basis.

Significant influence is the power to participate in the financial and operating policy decisions of an economic activity but is not control or joint control over those policies.

A venturer is a party to a joint venture and has joint control over that joint venture.

An investor in a joint venture is a party to a joint venture and does not have joint control over that joint venture.

The equity method is a method of accounting and reporting whereby an interest in a jointly controlled entity is initially recorded at cost and adjusted thereafter for the post acquisition change in the venturer's share of net assets of the jointly controlled entity. The income statement reflects the venturer's share of the results of operations of the jointly controlled entity.

The cost method is a method of accounting and reporting whereby an interest in a jointly controlled entity is initially recorded at cost and kept unadjusted thereafter for the post acquisition change in the venturer's share of net assets of the jointly controlled entity. The income statement only reflects the venturer's share of the net accumulated profits of the jointly controlled entity arising as from the contribution date.

Contents of the standard

Forms of Joint Venture

04. This Standard identifies three broad types of joint venture: business co-operation contract in the form of jointly controlled operation (jointly controlled operations), business cooperation contract in the form of jointly controlled assets (jointly controlled assets) and establishment of jointly controlled entities (jointly controlled entities).

The following characteristics are common to all joint ventures:

(a) two or more venturers are bound by a contractual arrangement; and

(b) the contractual arrangement establishes joint control

Contractual Arrangement

05. The existence of a contractual arrangement distinguishes interests which involve joint control from investments in associates in which the investor has significant influence (see VAS 07, Accounting for Investments in Associates).

Activities which have no contractual arrangement to establish joint control are not joint ventures for the purposes of this VAS.

06. The contractual arrangement may be evidenced in a number of ways, for example by a contract between the venturers or minutes of discussions between the venturers. In some cases, the arrangement is incorporated in the articles or other by-laws of the joint venture. The contractual arrangement is usually in writing and deals with such matters as:

(a) the activity and duration the joint venture and reporting obligations of venturers;

(b) the appointment of the board of directors of the joint venture and the voting rights of the venturers;

(c) capital contributions by the venturers; and

(d) the sharing by the venturers of the output, income, expenses or results of the joint venture.

07. The contractual arrangement establishes joint control over the joint venture. Such a requirement ensures that no single venturer is in a position to control unilaterally the activity. The arrangement identifies those decisions in areas essential to the goals of the joint venture which require the consent of all the venturers and those decisions which may require the consent of a specified majority of the venturers.

08. The contractual arrangement may identify one venturer as the operator or manager of the joint venture. The operator does not control the joint venture but acts within the financial and operating policies which have been agreed by the venturers in accordance with the contractual arrangement and delegated to the operator. If the operator has the power to govern the financial and operating policies of the economic activity, it controls the venture and the venture is a subsidiary of the operator and not a joint venture.

Business Cooperation Contract Involvement in the Form of Jointly Controlled Operations

09. The operation of some joint ventures involves the use of the assets and other resources of the venturers rather than the establishment of a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. Each venturer uses its own property, plant and equipment and carries its own inventories. It also incurs its own expenses and liabilities and raises its own finance, which represent its own obligations. The joint venture activities may be carried out by the venturer's employees alongside the venturer's similar activities. The business cooperation contract usually provides a means by which the revenue from the sale of the joint

product and any expenses incurred in common are shared among the venturers

10. An example of a jointly controlled operation is when two or more venturers combine their operations, resources and expertise in order to manufacture, market and distribute jointly a particular product, such as an aircraft. Different parts of the manufacturing process are carried out by each of the venturers. Each venturer bears its own costs and takes a share of the revenue from the sale of the aircraft, such share being determined in accordance with the contractual arrangement.

11. In respect of its interests in jointly controlled operations, a venturer should recognise in its separate financial statements and consequently in its consolidated financial statements:

(a) the assets that it controls and the liabilities that it incurs; and

(b) the expenses that it incurs and its share of the income that it earns from the sale of goods or services by the joint venture.

12. Separate accounting records may not be required for the joint venture itself and financial statements may not be prepared for the joint venture. However, the venturers may prepare management accounts so that they may assess the performance of the joint venture.

Business Cooperation Contract Involvement in the Form of Jointly Controlled Assets

13. Some joint ventures involve the joint control, and often the joint ownership, by the venturers of one or more assets contributed to, or acquired for the purpose of, the joint venture and dedicated to the purposes of the joint venture. The assets are used to obtain benefits for the venturers. Each venturer may take a share of the output from the assets and each bears an agreed share of the expenses incurred.

14. These joint ventures do not involve the establishment of a new entity. Each venturer has control over its share of future economic benefits through its share in the jointly controlled asset.

15. Many activities in the oil, gas and mineral extraction industries involve jointly controlled assets; for example, a number of oil production companies may jointly control and operate an oil pipeline. Each venturer uses the pipeline to transport its own product in return for which it bears an agreed proportion of the expenses of operating the pipeline. Another example of a jointly controlled asset is when two enterprises jointly control a property, each taking a share of the rents received and bearing a share of the expenses.

16. In respect of its interest in jointly controlled assets, a venturer should recognise in its separate financial statements:

(a) its share of the jointly controlled assets, classified according to the nature of the assets;

(b) any liabilities which it has incurred;

(c) its share of any liabilities incurred jointly with the other venturers in relation to the joint venture;

(d) any income from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture; and

(e) any expenses which it has incurred in respect of its interest in the joint venture.

17. In respect of its interest in jointly controlled assets, each venturer recognises in its separate financial statements:

(a) its share of the jointly controlled assets, classified according to the nature of the assets rather than as an investment. For example, a share of a jointly controlled oil pipeline is classified as

property, plant and equipment;

(b) any liabilities which it has incurred, for example those incurred in financing its share of the assets;

(c) its share of any liabilities incurred jointly with other venturers in relation to the joint venture;

(d) any income from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture; and

(e) any expenses which it has incurred in respect of its interest in the joint venture, for example those related to financing the venturer's interest in the assets and selling its share of the output.

18. The treatment of jointly controlled assets reflects the substance and economic reality and, usually, the legal form of the joint venture. Separate accounting records for the joint venture itself may be limited to those expenses incurred in common by the venturers and ultimately borne by the venturers according to their agreed shares. Management accounts and financial statements may not be prepared for the joint venture, although the venturers may prepare management accounts so that they may assess the performance of the joint venture.

Joint Venture Contract Involvement in Establishment of Jointly Controlled Entities

19. A jointly controlled entity is a joint venture which involves the establishment of a new entity in which each venturer has an interest. The entity operates in the same way as other enterprises, except that a contractual arrangement between the venturers establishes joint control over the economic activity of the entity.

20. A jointly controlled entity controls the assets of the joint venture, incurs liabilities and expenses and earns income. It may enter into contracts in its own name and raise finance for the purposes of the joint venture activity. Each venturer is entitled to a share of the results of the jointly controlled entity, although some jointly controlled entities also involve a sharing of the output of the joint venture.

21. A common example of a jointly controlled entity is

(a) when two domestic enterprises combine their activities in a particular line of business by transferring the relevant assets and liabilities into a jointly controlled entity.

(b) when an enterprise commences a business in a foreign country in conjunction with an agency in that country, by establishing a separate entity which is jointly controlled by the enterprise and the agency.

(c) when a foreign investor commences a business in conjunction with a domestic enterprise, by establishing a separate entity which is jointly controlled by these enterprises.

22. Many jointly controlled entities are similar in substance to those joint ventures referred to as jointly controlled operations or jointly controlled assets. For example, the venturers may transfer a jointly controlled asset, such as an oil pipeline, into a jointly controlled entity, for other reasons. Similarly, the venturers may contribute into a jointly controlled entity assets which will be operated jointly. Some jointly controlled operations also involve the establishment of a jointly controlled entity to deal with particular aspects of the activity, for example, the design, marketing, distribution or after-sales service of the product.

23. A jointly controlled entity maintains its own accounting records in the same way as other enterprises in conformity with the appropriate prevailing law on accounting.

24. Each venturer usually contributes cash or other resources to the jointly controlled entity. These contributions are included in the accounting records of the venturer and recognised in its separate

financial statements as an investment in the jointly controlled entity.

Separate Financial Statements of a Venturer

25. A venturer should prepare and disclose its interest in a joint venture in its separate financial statements in accordance with the cost method.

Consolidated Financial Statements of a Venturer

26. Where a venturer is to consolidate its financial statements, the venturer should report in its consolidated financial statements its interest in a jointly controlled entity using the equity method.

27. A venturer should discontinue the use of the equity method from the date on which it ceases to have joint control over or clases to maintain significant influence on a jointly controlled entity.

Exceptions to the Equity method:

28. A venturer should account for the following interests in accordance with the cost method:

(a) an interest in a jointly controlled entity which is acquired and held exclusively with a view to its subsequent disposal in the near future, normally 12 months; and

(b) an interest in a jointly controlled entity which operates under severe long-term restrictions that significantly impair its ability to transfer funds to the venturer.

29. The use of the equity method is inappropriate when the interest in a jointly controlled entity is acquired and held exclusively with a view to its subsequent disposal in twelve months. It is also inappropriate when the jointly controlled entity operates under severe long-term restrictions which significantly impair its ability to transfer funds to the venturer.

30. From the date on which a jointly controlled entity becomes a subsidiary of a venturer, the venturer accounts for its interest in accordance with VAS 25, Consolidated Financial Statements and Accounting for Investments in Subsidiaries.

Transactions between a Venturer and a Joint Venture

31. When a venturer contributes or sells assets to a joint venture, recognition of any portion of a gain or loss from the transaction should reflect the substance of the transaction.

Where the venturer has transferred the significant risks and rewards of ownership, the venturer should recognise only that portion of the gain or loss which is attributable to the interests of the other venturers.

The venturer should recognise the full amount of any loss when the contribution provides evidence of a reduction in the net realisable value of current assets or the net book value of fixed assets.

32. When a venturer sells assets to a joint venture, recognition of any portion of a gain or loss from the transaction should reflect the substance of the transaction.

Where a venturer has transferred the reward of ownership and the assets are retained by the joint venture without selling to an independent third party, the venturer should recognise only that portion of the gain or loss which is attributable to the interests of the other venturers.

Where the joint venture resells the assets to an independent third party, the venturer is entitled to recognise that portion of the actual gain or loss which is arise from the sale of asset to Joint Venture.

The venturer should recognise the full amount of any loss when the sale provides evidence of a

reduction in the net realisable value of current assets or net-book value of fixed assets.

33. When a venturer purchases assets from a joint venture, recognition of any portion of a gain or loss from the transaction should reflect the substance of the transaction.

The venturer should not recognise its share of the profits of the joint venture from the transaction until it resells the assets to an independent party.

Where the venturer sells the assets to an independent third party, the venturer is entitled to recognise that portion of the actual gain attributable to its interests in the joint venture.

A venturer should recognise its share of the losses resulting from these transactions in the same way as profits except that losses should be recognised immediately when they represent a reduction in the net realisable value of current assets or the net-book value of fixed assets.

Reporting Interests in Joint Ventures in the Financial Statements of an Investor

34. An investor in a joint venture, which does not have joint control, should report its interest in a joint venture in accordance VAS, Financial Instruments: Recognition and Measurement, or, if it has significant influence in the joint venture, in accordance with VAS 07, Accounting for Investments in Associates.

Disclosure

35. A venturer should disclose the aggregate amount of the following contingent liabilities, unless the probability of loss is remote, separately from the amount of other contingencies:

(a) any contingent liabilities that the venturer has incurred in relation to its interests in joint ventures and its share in each of the contingencies which have been incurred jointly with other venturers;

(b) its share of the contingent liabilities of the joint ventures themselves for which it is contingently liable; and

(c) those contingent liabilities that arise because the venturer is contingently liable for the liabilities of the other venturers of a joint venture.

36. A venturer should disclose the aggregate amount of the following commitments in respect of its interests in joint ventures separately from other commitments:

(a) any capital commitments of the venturer in relation to its interests in joint ventures and its share in the capital commitments that have been incurred jointly with other venturers; and

(b) its share of the capital commitments of the joint ventures themselves

37. A venturer should disclose a listing and description of interests in significant joint ventures held in jointly controlled entities.

38. A venturer which does not issue consolidated financial statements, because it does not have subsidiaries, should disclose the information required in paragraphs 35, 36 and 37.

It is appropriate that a venturer which does not prepare consolidated financial statements because it does not have subsidiaries provides the same information about its interests in joint ventures as those venturers that have subsidiaries.

Standard No. 10 EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES (Promulgated and publicized together with the Finance Ministers Decision No. 165/2002/QD-BTC


GENERAL PROVISIONS

01. This standard aims to prescribe and guide the principles and methods of accounting the effects of changes in foreign exchange rates, applicable to enterprises which have foreign currency transactions or overseas activities. Foreign currency transactions and financial statements of overseas activities must be converted into the enterprises’ accounting currency, including initial recognition and reporting on the balance sheet date; recognition of the foreign exchange rate difference; and conversion of the financial statements of overseas activities as a basis for making entries in accounting books, making and presenting the financial statements.

02. This standard applies to:

a/ The accounting of foreign currency transactions;

b/ The conversion of the financial statements of overseas activities for inclusion of these statements in the financial statements of the enterprises by the inclusion or owners’ equity method.

03. Enterprises must use Vietnam dong as an accounting currency, unless they are permitted to use another common currency.

04. This standard does not prescribe the conversion of an enterprise’ financial statements from an accounting currency into another so as to facilitate the users that have been accustomed to the such converted currency or for similar purposes.

05. This standard does not mention the presentation of cash flows arising from foreign currency transactions and from the conversion of cash flow statements of an overseas activity in the cash flow statements (prescribed in the standard "Cash flow statements").

06. The terms in this standard are construed as follows:

Overseas activities are branches, subsidiaries, partnerships, joint-venture companies, business cooperation, and business association of the reporting enterprises, which operate in countries other than Vietnam.

Foreign-based establishments means activities in foreign countries, which operate independently from the reporting enterprises.

Accounting currency is a currency officially used in the making of accounting entries and financial statements.

Foreign currency is a currency other than the accounting currency of an enterprise.

Exchange rate is the rate of exchange between two currencies.

Exchange rate difference is the difference arising from the actual exchange or conversion of the same amount of a foreign currency into the accounting currency at different exchange rates.

Closing exchange rate is the exchange rate used on the balance sheet date.

Net investment in a foreign-based establishment is the portion of capital of the reporting enterprise

in the total net asset of such foreign-based establishment.

Monetary items are current cash and cash equivalents, receivables or liabilities in fixed or determinable cash amounts.

Non-monetary items are items other than monetary items.

Reasonable value is the value for which an asset can be exchanged or the value of a liability which may be settled voluntarily between knowledgeable parties in the par value exchange.


FOREIGN CURRENCY TRANSACTIONS

Initial recognition

07. Foreign currency transactions are transactions determined in foreign currencies or requested to be paid for in foreign currencies, including transactions that arise when an enterprise:

a/ Purchases or sells products, goods or services with prices denominated in foreign currencies;

b/ Borrows or lends money amounts to be paid or received in foreign currencies;

c/ Becomes a partner (one party) to an unperformed foreign exchange contract;

d/ Purchases or liquidates assets; incurs or repays debts denominated in foreign currencies;

e/ Uses a currency for purchasing, selling or exchanging for another currency.

08. A foreign currency transaction must be accounted and initially recognized in the accounting currency by applying the exchange rate between the accounting currency and the foreign currency on the date of the transaction.

09. The exchange rate on the date of the transaction will be regarded as spot exchange rate. Enterprises may use an exchange rate that approximates the actual exchange rate on the date of the transaction. For example, the average exchange rate of a week or a month may be used for all transactions in each kind of foreign currency arising in such week or month. If the exchange rate fluctuates greatly the enterprises must not use the average exchange rate for the accounting work in the accounting week or month involved.

Reporting at the balance sheet date

10. On the balance sheet date:

a/ Monetary items of foreign currency origin must be reported at the closing exchange rate;

b/ Non-monetary items of foreign currency origin must be reported at the exchange rate on the date of the transaction;

c/ Non-monetary items determined according to the reasonable value in foreign currencies must be reported at the exchange rate on the date of determination of the reasonable value.

11. The book value of an item will be determined in accordance with the relevant accounting standards. For example, inventories will be determined according to their original prices, fixed assets according to their historical costs even if their book values has been determined on the basis of the original prices, historical costs or reasonable values, the determined book values of items of foreign currency origin will then be reported in the accounting currency in accordance with

the provisions of this standard.

Recognition of the exchange rate difference

12. The exchange rate difference that arises upon the settlement of monetary items of foreign currency origin or as a result of the reporting on monetary items of foreign currency origin by an enterprise using exchange rates different from the exchange rate initially recognized or already reported in the previous financial statements, shall be handled as follows:

a/ At the construction investment stage to form fixed assets of newly established enterprises, the exchange rate difference arising upon settlement of monetary items of foreign currency origin for making construction investment and the exchange rate difference arising upon re-valuation of monetary items of foreign currency origin at the end of the fiscal year will be reflected accumulatively and separately on the balance sheets.

When completely constructed fixed assets are put into use, the exchange rate arising at the construction investment stage will be amortized into income or production and business costs over the maximum period of five years.

b/ At the stage of production and business, including the construction investment to form fixed assets of the operating enterprises, the exchange rate difference arising upon settlement of monetary items of foreign currency origin and re-valuation of currency of foreign currency origin at the end of the fiscal year shall be recognized as income or costs in the fiscal year, except for the exchange rate difference prescribed in paragraphs 12c, 14 and 16.

c/ For enterprises using financial instruments for exchange rate risk reserve, all loans and liabilities of foreign currency origin shall be accounted according to the actual exchange rate at the time they occur. Enterprises must not re-valuate loans and liabilities of foreign currency origin for which they have used financial instruments for exchange rate risk reserve.

13. The arising exchange rate difference shall be recognized when the exchange rate changes between the transaction date and the date of settlement for all monetary items of foreign currency origin. When transactions occur and are settled in the same accounting period, exchange rate differences will be accounted in such period. If transactions are settled in subsequent accounting periods, exchange rate differences will be calculated on the basis of the change in the foreign exchange rate in each period till the period during which such transactions are settled.

Net investment in foreign-based establishments

14. Exchange rate differences arising from monetary units of foreign exchange origin, which, in nature, belong to the reporting enterprises’ portion of net investment in foreign-based establishments shall be classified as owners’ equity in the enterprises’ financial statements till such investment is liquidated. At that point of time, all these exchange rate differences will be accounted as income or cost in accordance with paragraph 30.

15. An enterprise may have monetary items receivable from or payable to a foreign-based establishment. An item the settlement of which is not determined yet or is unlikely in an anticipated duration in future will, in nature, result in an increase or decrease in the enterprises’ net investment in such foreign-based establishment. These monetary items may include long-term receivables or loans but not commercial receivables and commercial payables.

16. Exchange rate differences arising from liabilities of foreign currency origin, which are accounted as an amount for restricting risks of the enterprise’s net investment in a foreign-based establishment, will be classified as owners’ equity on the enterprise’s financial statements till the net investment is liquidated. At that point of time, these exchange rate differences will be accounted as income or cost in accordance with paragraph 30.

THE FINANCIAL STATEMENTS OF OVERSEAS ACTIVITIES

Classification of overseas activities

17. The method of conversion of the financial statements of overseas activities will depend on their financial and operational dependence on the reporting enterprises. For this purpose, overseas activities shall be classified into two types: "Overseas activities inseparable from the operations of the reporting enterprises" and "foreign-based establishments."

18. Overseas activities inseparable from the operation of the reporting enterprises shall conduct their business operations as a component of the reporting enterprises. For example, the foreign-based enterprises sell imported goods and transfer the proceeds therefrom to the reporting enterprises. In this case, any change in the rate of exchange between the reporting currency and the currency of the foreign country where activities are carried out shall directly affect the cash flows from the reporting enterprises’ operation. Therefore, changes in the exchange rate will affect each specific monetary item of overseas activities more than the reporting enterprise’s net investment in such activities will.

19. Foreign-based establishments are independent business units, having the legal person status in the host countries and using the currencies of the host countries as their accounting currencies. These establishments may participate in foreign currency transactions, including transactions in the reporting currency. Any change in the rate of exchange between the reporting currency and the currency of the host country will only slightly affect or not directly at present or in future cash flows from the operations of the foreign-based establishments as well as of the reporting enterprises. Changes in the exchange rate will affect the reporting enterprises’ net investment more than specific monetary or non-monetary items of foreign-based establishments.

20. Characteristics for identification of a foreign-based establishment:

a/ Overseas activities are carried out with a high degree of independence from the reporting enterprise;

b/ Transactions with the reporting enterprise account for not a large proportion in overseas activities;

c/ Foreign-based activities are mainly self-financed or financed with foreign loans more than from the reporting enterprises;

d/ Costs of labor, materials and raw materials and other components of products or services of overseas activities are paid and settled more in the currencies of the host countries than in the currency of the reporting enterprise;

e/ Revenues from overseas activities are mainly in currency other than the currency of the reporting enterprise;

f/ Cash flows of the reporting enterprise are separate from the daily operation of overseas activities and are not directly affected by the operation of overseas activities.

The reasonable classification of each overseas activity may be based on the above-said characteristics. In some cases, the classification of an activity carried out abroad as a foreign-based establishment or an overseas activity inseparable from the reporting enterprise may be unclear, it is, therefore, necessary to evaluate such activity to ensure reasonable classification thereof.

Overseas activities inseparable from the operation of the reporting enterprises

21. The financial statements of overseas activities inseparable from the operation of the reporting enterprises will be converted under the provisions in paragraphs 7 to 16 as for operations of the reporting enterprises.

22. Each item in the financial statements of overseas activities will be converted like transactions of

overseas activities conducted by the reporting enterprises. The historical costs and depreciation of fixed assets will be converted at the exchange rate on the date the assets are purchased. If the assets are calculated according to their reasonable values, the exchange rate on the date such reasonable values are determined will be used. The value of inventories shall be converted at the exchange rate of the time such value is determined. Recoverable amounts or realizable values of an asset will be converted at the actual exchange rate at the time these amounts are determined.

23. In practice, an exchange rate that approximates the actual exchange rate on the date on which the transaction occurs is often used. For example, the average exchange rate in a week or a month may be used for all foreign currency transactions occurring in such period. However, if the exchange rate fluctuates greatly, the average exchange rate for the period cannot be used.

Foreign-based establishments

24. When converting the financial statements of foreign-based establishments for inclusion in the financial statements of the reporting enterprises, the following provisions must be complied with:

a/ All assets and liabilities (including both monetary and non-monetary items) of foreign-based establishments will be converted at the closing exchange rate;

b/ Items of revenues, other incomes and costs of foreign-based establishments shall be converted at the exchange rate on the date of the transactions. If the reports of foreign-based establishments are denominated in the currency of a hyper-inflationary economy, revenues, other incomes and costs shall be converted at the closing exchange rate;

c/ All exchange rate differences arising upon the conversion of the financial statements of foreign-based establishments for inclusion in the financial statements of the reporting enterprises must be classified as owners’ equity of the reporting enterprises till such net incomes are liquidated.

25. Where the average exchange rate approximates the actual one, it will be used for converting the items of revenues, other incomes and costs of foreign-based establishments.

26. For cases where exchange rate differences arise upon the conversion of the financial statements of foreign-based establishments:

a/ Conversion of the items of revenues, other incomes and costs at the exchange rate on the date of the transaction; assets and liabilities at the closing exchange rate;

b/ Conversion of net investments at the beginning of a period in foreign-based establishments at an exchange rate other than the exchange rate already used in the previous period.

c/ Other revised items related to the owners’ equity in foreign-based establishments.

These exchange rate differences shall not be recognized as income or cost in the period. They often exert little or indirect impact on cash flows from present and future activities of foreign-based establishments as well as of reporting enterprises. When a foreign-based establishment is consolidated, which, however, does not result in entire ownership, the accumulated exchange rate difference arising from the conversion and associated with the minority shareholders’ investments in the foreign-based establishments must be amortized and reported as part of ownership of minority shareholders at the foreign-based establishments in the consolidated balance sheet.

27. All the values of commercial advantages arising from the purchase of foreign-based establishments and all adjustments of the reasonable value of the book value of assets and liabilities arising from the process of purchasing foreign-based establishments will be handled like:

a/ Assets and liabilities of foreign-based establishments will be converted at the closing exchange rate as prescribed in paragraph 23.

b/ Assets and liabilities of the reporting enterprises already denominated in the reporting foreign currency, or non-monetary items will be reported at the exchange rate on the date of the transaction as prescribed in paragraph 10 (b).

28. The inclusion of the financial statements of foreign-based establishments in those of the reporting enterprises must comply with the common inclusion procedures, such as exclusion of balances in a group and a subsidiary’s operations with companies in the group (see the accounting standard "Consolidated financial statements and accounting of capital contributed in subsidiaries" and the accounting standard "Financial information on capital contributions to joint ventures"). However, an exchange rate difference arising in a monetary item in the group, whether short-term or long-term, cannot be excluded into a corresponding item in another balance in the group because this monetary item demonstrates the commitment to convert one foreign currency into another foreign currency, thus giving rise to a profit or loss to the reporting enterprise as a result of the change in the foreign exchange rate. Therefore, in the consolidated financial statements of the reporting enterprises, exchange rate differences shall be accounted as income or as cost, or if they arise from the cases mentioned in paragraphs 14 and 16, they shall be classified as owners’ equity till the net investments are liquidated.

29. The financial statement dates of foreign-based establishments must match the financial statement dates of the reporting enterprises. Where financial statements cannot be made on the same day, it is permitted to consolidate financial statements with dates differing within three months. In this case, assets and liabilities of foreign-based establishments shall be converted at the exchange rate on the date of the balance sheets of foreign-based establishments. Where the exchange rate on the date of the balance sheet of a foreign-based establishment differs greatly from that on the date of the financial statement of the reporting enterprise, an appropriate adjustment must be made from such date to the date of the balance sheet of the reporting enterprise according to the accounting standard "Consolidated financial statements and accounting of capital contributed in subsidiaries" and the accounting standard "Financial information on capital contributions to joint ventures."

Liquidation of foreign-based establishments

30 When liquidating foreign-based establishments, the accumulated exchange rate differences already postponed (under the provisions in paragraph 24.c) and related to such foreign-based establishments will be recognized as income or as costs in the same period during which profits or losses from the liquidation are recognized.

31. An enterprise may liquidate its investment in a foreign-based establishment by selling, auctioning, repaying equities or abandon all or part of its capital in the establishment concerned. Settlement of dividends is a form of liquidation only when it is a recovery of investment. For partial liquidation, only the accumulated exchange rate difference related to owners’ equity can be calculated as profit or loss. The recording of a decrease in the accounting value of a foreign-based establishment will not constitute partial liquidation. In this case, no profit or loss regarding the postponed exchange rate difference shall be recognized at the time a decrease is recorded.

New classification of overseas activities

32. When there is a new classification of overseas activities, the provisions on conversion of the financial statements of overseas activities will apply from the date of the new classification.

33. Overseas activities may be re-classified upon the change in the degree of financial and operational dependence on the reporting enterprises. When overseas activities constitute a part inseparable from the operation of the reporting enterprises are classified as foreign-based establishments, the exchange rate difference arising from the conversion of non-monetary assets will be classified as owners’ equity on the date of the re-classification. When a foreign-based establishment is classified as an overseas activity inseparable from the operation of the reporting enterprises, the converted values of non-monetary asset items on the date of the conversion shall be regarded as their historical costs in the period during which the change occurs and in subsequent periods. Postponed exchange rate differences will not be recognized as income or cost

till the liquidation of the activities.

PRESENTATION OF THE FINANCIAL STATEMENTS

34. Enterprises must present in their financial statements the following:

a/ The amount of exchange rate difference already recognized in the net profit or loss in the period;

b/ The net exchange rate difference classified as owners’ equity (according to paragraphs 12a and 14) and reflected as a separate portion of the owners’ equity and the exchange rate differences at the beginning and the end of the period must be presented.

35. When the reporting currency is different from the currency of the country where the enterprises are operating, the enterprises must clearly state the reason therefor, even when they change the reporting currency.

36. Where the new classification of overseas activities greatly affects the reporting enterprises, the enterprises must present:

a/ The nature of the new classification;

b/ Reasons for the new classification;

c/ Effects of the new classification on the owners equity;

d/ Impacts on the net profit or loss of the previous period, which affect the classification occurring at the beginning of the nearest period.

37. The enterprises must present the selected method (as prescribed in paragraph 27) for converting the adjustments of the value of commercial advantages and the reasonable value arising in the purchase of foreign-based establishments.

Standard No. 11 BUSINESS COMBINATION

(Issued in pursuance of the Minister of Finance

Decision No. 100/2005/QD-BTC dated 28 December 2005)

GENERAL

01. The objective of this Standard is to prescribe the accounting policies and procedures in relation to business combinations using the purchase method. The acquirer recognizes identifiable assets and liabilities and contingent liabilities at their fair value on the acquisition date, thereby goodwill is recognized.

02. This Standard should be applied to business combinations using the purchase method.

03. This Standard does not apply to:

(a) Business combinations in which separate entities or businesses are brought together to form a joint venture.

(b) Business combinations involving entities or businesses under common control.

(c) Business combinations involving two or more mutual entities.

(d) Business combinations in which separate entities or businesses are brought together to form a reporting entity by contract alone without the obtaining of an ownership interest.

Identifying a business combination

04. A business combination is the bringing together of separate entities or businesses into one reporting entity. The result of nearly all business combinations is that one entity, the acquirer, obtains control of one or more other businesses, the acquiree. If an entity obtains control of one or more other entities that are not businesses, the bringing together of those entities is not a business combination. When an entity acquires a group of assets or net assets that does not constitute a business, it shall allocate the cost of the group between the individual identifiable assets and liabilities in the group based on their relative fair values at the date of acquisition.

05. A business combination may be structured in a variety of ways. It may involve the purchase by an entity of the equity of another entity, the purchase of all the net assets of another entity, the assumption of the liabilities of another entity, or the purchase of some of the net assets of another entity that together form one or more businesses. It may be effected by the issue of equity instruments, the transfer of cash, cash equivalents or other assets, or a combination thereof. The transaction may be between the shareholders of the combining entities or between one entity and the shareholders of another entity. It may involve the establishment of a new entity to control the combining entities or net assets transferred, or the restructuring of one or more of the combining entities.

06. A business combination may result in a parent-subsidiary relationship in which the acquirer is the parent and the acquiree a subsidiary of the acquirer. In such circumstances, the acquirer applies this Standard in its consolidated financial statements. The parent includes its interest in the acquiree in any separate financial statements it issues as an investment in a subsidiary (see VAS 25- “Consolidated Financial Statements and Accounting for Investments in Subsidiaries”).

07. A business combination may involve the purchase of the net assets, including any goodwill, of another entity rather than the purchase of the equity of the other entity. Such a combination does

not result in a parent-subsidiary relationship.

08. Included within this Standard are business combinations in which one entity obtains control of another entity but for which the date of obtaining control (ie the acquisition date) does not coincide with the date or dates of acquiring an ownership interest (ie the date or dates of exchange). This situation may arise, for example, when an investee enters into share buy-back arrangements with some of its investors and, as a result, control of the investee changes.

09. This Standard does not specify the accounting by venturers for interests in joint ventures (see VAS 08- “Financial Reporting of Interests in Joint Ventures”).

Business combinations involving entities under common control

10. A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory.

11. A group of individuals shall be regarded as controlling an entity when, as a result of contractual arrangements, they collectively have the power to govern its financial and operating policies so as to obtain benefits from its activities. Therefore, a business combination is outside the scope of this Standard when the same group of individuals has, as a result of contractual arrangements, ultimate collective power to govern the financial and operating policies of each of the combining entities so as to obtain benefits from their activities, and that ultimate collective power is not transitory.

12. An entity can be controlled by an individual, or by a group of individuals acting together under a contractual arrangement, and that individual or group of individuals may not be subject to the financial reporting requirements of VASs. Therefore, it is not necessary for combining entities to be included as part of the same consolidated financial statements for a business combination to be regarded as one involving entities under common control.

13. The extent of minority interests in each of the combining entities before and after the business combination is not relevant to determining whether the combination involves entities under common control. Similarly, the fact that one of the combining entities is a subsidiary that has been excluded from the consolidated financial statements of the group in accordance with VAS 25 “Consolidated Financial Statements and Accounting for Investments in Subsidiaries” is not relevant to determining whether a combination involves entities under common control.

The following terms are used in this Standard with the meanings specified:

Acquisition date: The date on which the acquirer effectively obtains control of the acquiree.

Agreement date: The date that a substantive agreement between the combining parties is reached and, in the case of publicly listed entities, announced to the public. In the case of a hostile takeover, the earliest date that a substantive agreement between the combining parties is reached is the date that a sufficient number of the acquiree’s owners have accepted the acquirer’s offer for the acquirer to obtain control of the acquiree.

Business: An integrated set of activities and assets conducted and managed for the purpose of providing:

(a) A return to investors; or

(b) Lower costs or other economic benefits directly and proportionately to policyholders or participants.

A business generally consists of inputs, processes applied to those inputs, and resulting outputs that are, or will be, used to generate revenues. If goodwill is present in a transferred set of activities and assets, the transferred set shall be presumed to be a business.

Business combination: The bringing together of separate entities or businesses into one

reporting entity.

Business combination involving entities or businesses under common control: A business combination in which all of the combining entities or businesses ultimately are controlled by the same party or parties both before and after the combination, and that control is not transitory.

Contingent liability: Contingent liability has the meaning given to it in VAS 18 Provisions, Contingent Liabilities and Contingent Assets, ie:

(a) A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or

(b) A present obligation that arises from past events but is not recognised because:

(i) It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or

(ii) The amount of the obligation cannot be measured with sufficient reliability.

Control: The power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities.

Date of exchange: When a business combination is achieved in a single exchange transaction, the date of exchange is the acquisition date. When a business combination involves more than one exchange transaction, for example when it is achieved in stages by successive share purchases, the date of exchange is the date that each individual investment is recognised in the financial statements of the acquirer.

Fair value: The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Goodwill: Future economic benefits arising from assets that are not capable of being individually identified and separately recognised.

Intangible fixed asset: An identifiable asset which is without physical substance but can be measured and is held for use in the production or business, for rental to others by the enterprise and satisfy the recognition criteria of intangible fixed assets.

Joint venture: A contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control.

Minority interest: That portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.

Mutual entity: An entity other than an investor-owned entity, such as a mutual insurance company or a mutual cooperative entity, that provides lower costs or other economic benefits directly and proportionately to its policyholders or participants.

Parent: An entity that has one or more subsidiaries.

Reporting entity: A single entity or a group comprises a parent and all of its subsidiaries which is to present financial statements according to the provisions of law.

Subsidiary: An entity that is controlled by another entity (known as the parent).

CONTENT OF THE STANDARD

Method of Accounting

14. All business combinations shall be accounted for by applying the purchase method.

15. The purchase method views a business combination from the perspective of the combining entity that is identified as the acquirer. The acquirer purchases net assets and recognises the assets acquired and liabilities and contingent liabilities assumed, including those not previously recognised by the acquiree. The measurement of the acquirer’s assets and liabilities is not affected by the transaction, nor are any additional assets or liabilities of the acquirer recognised as a result of the transaction, because they are not the subjects of the transaction.

Application of the purchase method

16. Applying the purchase method involves the following steps:

(a) Identifying an acquirer;

(b) Measuring the cost of the business combination; and

(c) Allocating, at the acquisition date, the cost of the business combination to the assets acquired and liabilities and contingent liabilities assumed.

Identifying the acquirer

17. An acquirer shall be identified for all business combinations. The acquirer is the combining entity that obtains control of the other combining entities or businesses.

18. Because the purchase method views a business combination from the acquirer’s perspective, it assumes that one of the parties to the transaction can be identified as the acquirer.

19. Control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities. A combining entity shall be presumed to have obtained control of another combining entity when it acquires more than one-half of that other entity’s voting rights, unless it can be demonstrated that such ownership does not constitute control. Even if one of the combining entities does not acquire more than one-half of the voting rights of another combining entity, it might have obtained control of that other entity if, as a result of the combination, it obtains:

(a) Power over more than one-half of the voting rights of the other entity by virtue of an agreement with other investors; or

(b) Power to govern the financial and operating policies of the other entity under a statute or an agreement; or

(c) Power to appoint or remove the majority of the members of the board of management or equivalent governing body of the other entity; or

(d) Power to cast the majority of votes at meetings of the board of management or equivalent governing body of the other entity.

20. Although sometimes it may be difficult to identify an acquirer, there are usually indications that one exists. For example:

(a) If the fair value of one of the combining entities is significantly greater than that of the other combining entity, the entity with the greater fair value is likely to be the acquirer;

(b) If the business combination is effected through an exchange of voting ordinary equity

instruments for cash or other assets, the entity giving up cash or other assets is likely to be the acquirer; and

(c) If the business combination results in the management of one of the combining entities being able to dominate the selection of the management team of the resulting combined entity, the entity whose management is able so to dominate is likely to be the acquirer.

21. In a business combination effected through an exchange of equity interests, the entity that issues the equity interests is normally the acquirer. However, all pertinent facts and circumstances shall be considered to determine which of the combining entities has the power to govern the financial and operating policies of the other entity (or entities) so as to obtain benefits from its (or their) activities. In some business combinations, commonly referred to as reverse acquisitions, the acquirer is the entity whose equity interests have been acquired and the issuing entity is the acquiree. This might be the case when, for example, an entity arranges to have itself ‘acquired’ by a smaller public entity as a means of obtaining a stock exchange listing. Although legally the issuing public entity is regarded as the parent and the other entity is regarded as the subsidiary, the legal subsidiary is the acquirer if it has the power to govern the financial and operating policies of the legal parent so as to obtain benefits from its activities. Commonly the acquirer is the larger entity; however, the facts and circumstances surrounding a combination sometimes indicate that a smaller entity acquires a larger entity. Guidance on the accounting for reverse acquisitions is provided in paragraphs A1-A15 of Appendix A.

22. When a new entity is formed to issue equity instruments to effect a business combination, one of the combining entities that existed before the combination shall be identified as the acquirer on the basis of the evidence available.

23. Similarly, when a business combination involves more than two combining entities, one of the combining entities that existed before the combination shall be identified as the acquirer on the basis of the evidence available. Determining the acquirer in such cases shall include a consideration of, amongst other things, which of the combining entities initiated the combination and whether the assets or revenues of one of the combining entities significantly exceed those of the others.

Cost of a business combination

24. The acquirer shall measure the cost of a business combination as the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree plus (+) any costs directly attributable to the business combination.

25. The acquisition date is the date on which the acquirer effectively obtains control of the acquiree. When this is achieved through a single exchange transaction, the date of exchange coincides with the acquisition date. However, a business combination may involve more than one exchange transaction, for example when it is achieved in stages by successive share purchases. When this occurs:

(a) The cost of the combination is the aggregate cost of the individual transactions; and

(b) The date of exchange is the date of each exchange transaction (ie the date that each individual investment is recognised in the financial statements of the acquirer), whereas the acquisition date is the date on which the acquirer obtains control of the acquiree.

26. Assets given and liabilities incurred or assumed by the acquirer in exchange for control of the acquiree are required by paragraph 24 to be measured at their fair values at the date of exchange. Therefore, when settlement of all or any part of the cost of a business combination is deferred, the fair value of that deferred component shall be determined by discounting the amounts payable to their present value at the date of exchange, taking into account any premium or discount likely to be incurred in settlement.

27. The published price at the date of exchange of a quoted equity instrument provides the best evidence of the instrument’s fair value and shall be used, except in rare circumstances. Other evidence and valuation methods shall be considered when the acquirer can demonstrate that the published price at the date of exchange is an unreliable indicator of fair value, and that the other evidence and valuation methods provide a more reliable measure of the equity instrument’s fair value. The published price at the date of exchange is an unreliable indicator only when it has been affected by the thinness of the market. If the published price at the date of exchange is an unreliable indicator or if a published price does not exist for equity instruments issued by the acquirer, the fair value of those instruments could, for example, be estimated by reference to their proportional interest in the fair value of the acquirer or by reference to the proportional interest in the fair value of the acquiree obtained, whichever is the more clearly evident. The fair value at the date of exchange of monetary assets given to equity holders of the acquiree as an alternative to equity instruments may also provide evidence of the total fair value given by the acquirer in exchange for control of the acquiree. In any event, all aspects of the combination, including significant factors influencing the negotiations, shall be considered. Further guidance on determining the fair value of equity instruments is set out in standard on Financial Instruments.

28. The cost of a business combination includes liabilities incurred or assumed by the acquirer in exchange for control of the acquiree. Future losses or other costs expected to be incurred as a result of a combination are not liabilities incurred or assumed by the acquirer in exchange for control of the acquiree, and are not, therefore, included as part of the cost of the combination.

29. The cost of a business combination includes any costs directly attributable to the combination, such as professional fees paid to accountants, legal advisers, valuers and other consultants to effect the combination. General administrative costs and other costs that cannot be directly attributed to the particular combination being accounted for are not included in the cost of the combination: they are recognised as an expense when incurred.

30. The costs of arranging and issuing financial liabilities are an integral part of the liability issue transaction, even when the liabilities are issued to effect a business combination, rather than costs directly attributable to the combination. Therefore, entities shall not include such costs in the cost of a business combination.

31. The costs of issuing equity instruments are an integral part of the equity, even when the equity instruments are issued to effect a business combination, rather than costs directly attributable to the combination. Therefore, entities shall not include such costs in the cost of a business combination.

Adjustments to the cost of a business combination contingent on future events

32. When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the acquirer shall include the amount of that adjustment in the cost of the combination at the acquisition date if the adjustment is probable and can be measured reliably.

33. A business combination agreement may allow for adjustments to the cost of the combination that are contingent on one or more future events. The adjustment might, for example, be contingent on a specified level of profit being maintained or achieved in future periods, or on the market price of the instruments issued being maintained. It is usually possible to estimate the amount of any such adjustment at the time of initially accounting for the combination without impairing the reliability of the information, even though some uncertainty exists. If the future events do not occur or the estimate needs to be revised, the cost of the business combination shall be adjusted accordingly.

34. When a business combination agreement provides for such an adjustment, that adjustment is not included in the cost of the combination at the time of initially accounting for the combination if it either is not probable or cannot be measured reliably. If that adjustment subsequently becomes probable and can be measured reliably, the additional consideration shall be treated as an adjustment to the cost of the combination.

35. In some circumstances, the acquirer may be required to make a subsequent payment to the seller as compensation for a reduction in the value of the assets given, equity instruments issued or liabilities incurred or assumed by the acquirer in exchange for control of the acquiree. This is the case, for example, when the acquirer guarantees the market price of equity or debt instruments issued as part of the cost of the business combination and is required to issue additional equity or debt instruments to restore the originally determined cost. In such cases, no increase in the cost of the business combination is recognised. In the case of equity instruments, the fair value of the additional payment is offset by an equal reduction in the value attributed to the instruments initially issued. In the case of debt instruments, the additional payment is regarded as a reduction in the premium or an increase in the discount on the initial issue.

Allocating the cost of a business combination to the assets acquired and liabilities and contingent liabilities assumed

36. The acquirer shall, at the acquisition date, allocate the cost of a business combination by recognising the acquiree’s identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria in paragraph 37 at their fair values at that date, except for non current assets (or disposal groups) that are classified as held for sale, which shall be recognised at fair value less costs to sell. Any difference between the cost of the business combination and the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities so recognised shall be accounted for in accordance with paragraphs 50-54.

37. The acquirer shall recognise separately the acquiree’s identifiable assets, liabilities and contingent liabilities at the acquisition date only if they satisfy the following criteria at that date:

(a) In the case of a tangible fixed asset, it is probable that any associated future economic benefits will flow to the acquirer, and its fair value can be measured reliably;

(b) In the case of an identifiable liability (other than a contingent liability), it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and its fair value can be measured reliably;

(c) In the case of an intangible fixed asset or a contingent liability, its fair value can be measured reliably.

38. The acquirer’s income statement shall incorporate the acquiree’s profits and losses after the acquisition date by including the acquiree’s income and expenses based on the cost of the business combination to the acquirer. For example, depreciation expense included after the acquisition date in the acquirer’s income statement that relates to the acquiree’s depreciable assets shall be based on the fair values of those depreciable assets at the acquisition date, ie their cost to the acquirer.

39. Application of the purchase method starts from the acquisition date, which is the date on which the acquirer effectively obtains control of the acquiree. Because control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities, it is not necessary for a transaction to be closed or finalised at law before the acquirer obtains control. All pertinent facts and circumstances surrounding a business combination shall be considered in assessing when the acquirer has obtained control.

40. Because the acquirer recognises the acquiree’s identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria in paragraph 37 at their fair values at the acquisition date, any minority interest in the acquiree is stated at the minority’s proportion of the net fair value of those items. Paragraphs A16 and A17 of Appendix A provide guidance on determining the fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities for the purpose of allocating the cost of a business combination.

Acquiree’s identifiable assets and liabilities

41. In accordance with paragraph 36, the acquirer recognises separately as part of allocating the cost of the combination only the identifiable assets, liabilities and contingent liabilities of the acquiree that existed at the acquisition date and satisfy the recognition criteria in paragraph 37. Therefore:

(a) The acquirer shall recognise liabilities for terminating or reducing the activities of the acquiree as part of allocating the cost of the combination only when the acquiree has, at the acquisition date, an existing liability for restructuring recognised in accordance with VAS 18- “Provisions, Contingent Liabilities and Contingent Assets”; and

(b) The acquirer, when allocating the cost of the combination, shall not recognise liabilities for future losses or other costs expected to be incurred as a result of the business combination.

42. A payment that an entity is contractually required to make, for example, to its employees or suppliers in the event that it is acquired in a business combination is a present obligation of the entity that is regarded as a contingent liability until it becomes probable that a business combination will take place. The contractual obligation is recognised as a liability by that entity in accordance with VAS 18- “Provisions, Contingent Liabilities and Contingent Assets” when a business combination becomes probable and the liability can be measured reliably, therefore, when the business combination is effected, that liability of the acquiree is recognised by the acquirer as part of allocating the cost of the combination.

43. However, an acquiree’s restructuring plan whose execution is conditional upon its being acquired in a business combination is not, immediately before the business combination, a present obligation of the acquiree. Nor is it a contingent liability of the acquiree immediately before the combination because it is not a possible obligation arising from a past event whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the acquiree. Therefore, an acquirer shall not recognise a liability for such restructuring plans as part of allocating the cost of the combination.

44. The identifiable assets and liabilities that are recognised in accordance with paragraph 36 include all of the acquiree’s assets and liabilities that the acquirer purchases or assumes, including all of its financial assets and financial liabilities. They might also include assets and liabilities not previously recognised in the acquiree’s financial statements, eg because they did not qualify for recognition before the acquisition. For example, a tax benefit arising from the acquiree’s tax losses that was not recognised by the acquiree before the business combination qualifies for recognition as an identifiable asset in accordance with paragraph 36 if it is probable that the acquirer will have future taxable profits against which the unrecognised tax benefit can be applied.

Acquiree’s intangible assets

45. In accordance with paragraph 37, the acquirer recognises separately an intangible asset of the acquiree at the acquisition date only if it meets the definition of an intangible asset in VAS 04 Intangible Fixed Assets and its fair value can be measured reliably. VAS 04 provides guidance on determining whether the fair value of an intangible asset acquired in a business combination can be measured reliably.

Acquiree’s contingent liabilities

46. Paragraph 37 specifies that the acquirer recognises separately a contingent liability of the acquiree as part of allocating the cost of a business combination only if its fair value can be measured reliably. If its fair value cannot be measured reliably:

(a) There is a resulting effect on the amount recognised as goodwill or accounted for in accordance with paragraph 55; and

(b) The acquirer shall disclose the information about that contingent liability required to be disclosed by VAS 18- “Provisions, Contingent Liabilities and Contingent Assets”.

Paragraph A16(k) of Appendix A provides guidance on determining the fair value of a contingent liability.

47. After their initial recognition, the acquirer shall measure contingent liabilities that are recognised separately in accordance with paragraph 36. The amount of contingent liabilities would be recognised in accordance with VAS 18- “Provisions, Contingent Liabilities and Contingent Assets”.

48. The requirement in paragraph 47 does not apply to contracts accounted for in accordance with Standard on Financial Instruments. However, loan commitments excluded from the scope of Standard on Financial Instruments that are not commitments to provide loans at below-market interest rates are accounted for as contingent liabilities of the acquiree if, at the acquisition date, it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or if the amount of the obligation cannot be measured with sufficient reliability. Such a loan commitment is, in accordance with paragraph 37, recognised separately as part of allocating the cost of a combination only if its fair value can be measured reliably.

49. Contingent liabilities recognised separately as part of allocating the cost of a business combination are excluded from the scope of VAS 18- “Provisions, Contingent Liabilities and Contingent Assets”. However, the acquirer shall disclose for those contingent liabilities the information required to be disclosed by VAS 18 for each class of provision.

Goodwill

50. The acquirer shall, at the acquisition date:

(a) Recognise goodwill acquired in a business combination as an asset; and

(b) Initially measure that goodwill at its cost, being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised in accordance with paragraph 36.

51. Goodwill acquired in a business combination represents a payment made by the acquirer in anticipation of future economic benefits from assets that are not capable of being individually identified and separately recognised.

52. To the extent that the acquiree’s identifiable assets, liabilities or contingent liabilities do not satisfy the criteria in paragraph 37 for separate recognition at the acquisition date, there is a resulting effect on the amount recognised as goodwill (or accounted for in accordance with paragraph 55). This is because goodwill is measured as the residual cost of the business combination after recognising the acquiree’s identifiable assets, liabilities and contingent liabilities.

53. Goodwill is recognised in expenses (if it is of small value) and otherwise amortised in a uniform manner during its estimated useful life (If it is a big value). The useful life of goodwill should be properly estimated as with the time during which sources embodying economic benefits are recovered by the entity. Such useful life is not beyond 10 years from the date of recognition.

The amortisation method represents the manner in which sources embodying economic benefits from goodwill can be recovered. The straight-line method is commonly used unless persuasive evidence exists to support another method seen as more appropriate. It is required that the amortisation method be consistent from one period to another unless there is a change in the manner of recovering sources embodying economic benefits from such goodwill.

54. The time and method of goodwill amortisation is re-assessed as the year ends. Where there is big difference of goodwill’s economic life from the initial estimate, the amortization time is necessarily changed. So is the method of amortisation in the case of large variation of the manner of recovering future economic benefits from goodwill. If this is the case, adjustment is necessary of the amortised expense for the current year and thereafter and the fact is disclosed in a note to the

financial statements.

Excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost

55. If the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised in accordance with paragraph 36 exceeds the cost of the business combination, the acquirer shall:

(a) reassess the identification and measurement of the acquiree’s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination; and

(b) recognise immediately in profit or loss any excess remaining after that reassessment.

56. A gain recognised in accordance with paragraph 55 could comprise one or more of the following components:

(a) Errors in measuring the fair value of either the cost of the combination or the acquiree’s identifiable assets, liabilities or contingent liabilities. Possible future costs arising in respect of the acquiree that have not been reflected correctly in the fair value of the acquiree’s identifiable assets, liabilities or contingent liabilities are a potential cause of such errors.

(b) A requirement in an accounting standard to measure identifiable net assets acquired at an amount that is not fair value, but is treated as though it is fair value for the purpose of allocating the cost of the combination, for example, the guidance in Appendix A on determining the fair values of the acquiree’s identifiable assets and liabilities requires the amount assigned to deferred tax assets and liabilities to be undiscounted.

(c) A bargain purchase.

Business combination achieved in stages

57. A business combination may involve more than one exchange transaction, for example when it occurs in stages by successive share purchases. If so, each exchange transaction shall be treated separately by the acquirer, using the cost of the transaction and fair value information at the date of each exchange transaction, to determine the amount of any goodwill associated with that transaction. This results in a step-by-step comparison of the cost of the individual investments with the acquirer’s interest in the fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities at each step.

58. When a business combination involves more than one exchange transaction, the fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities may be different at the date of each exchange transaction. Because:

(a) The acquiree’s identifiable assets, liabilities and contingent liabilities are notionally restated to their fair values at the date of each exchange transaction to determine the amount of any goodwill associated with each transaction; and

(b) The acquiree’s identifiable assets, liabilities and contingent liabilities must then be recognised by the acquirer at their fair values at the acquisition date.

59. Before qualifying as a business combination, a transaction may qualify as an investment in an associate and be accounted for in accordance with VAS 07 Accounting for Investments in Associates using the cost method.

Initial accounting determined provisionally

60. The initial accounting for a business combination involves identifying and determining the fair

values to be assigned to the acquiree’s identifiable assets, liabilities and contingent liabilities and the cost of the combination.

61. If the initial accounting for a business combination can be determined only provisionally by the end of the period in which the combination is effected because either the fair values to be assigned to the acquiree’s identifiable assets, liabilities or contingent liabilities or the cost of the combination can be determined only provisionally, the acquirer shall account for the combination using those provisional values. The acquirer shall recognise any adjustments to those provisional values as a result of completing the initial accounting:

(a) Within twelve months of the acquisition date; and

(b) From the acquisition date. Therefore:

(i) The carrying amount of an identifiable asset, liability or contingent liability that is recognised or adjusted as a result of completing the initial accounting shall be calculated as if its fair value at the acquisition date had been recognised from that date.

(ii) Goodwill or any gain recognised in accordance with paragraph 55 shall be adjusted from the acquisition date by an amount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent liability being recognised or adjusted.

(iii) Comparative information presented for the periods before the accounting for the combination is complete shall be presented as if the initial accounting had been completed from the acquisition date. This includes any depreciation, amortisation or other profit or loss effect recognised as a result of completing the initial accounting.

Adjustments after the initial accounting is complete

62. Except as outlined in paragraphs 33, 34 and 64, adjustments to the initial accounting determined provisionally for a business combination after that initial accounting is complete shall be recognised only to correct an error in accordance with VAS 29- “Changes in Accounting Policies, Accounting Estimates and Errors”. Adjustments to the initial accounting for a business combination after that accounting is complete shall not be recognised for the effect of changes in estimates. In accordance with VAS 29 effect of a change in estimates shall be recognised in the current and future periods.

63. VAS 29- “Changes in Accounting Policies, Accounting Estimates and Errors” requires an entity to account for an error correction retrospectively, and to present financial statements as if the error had never occurred by restating the comparative information for the prior period(s) in which the error occurred. Therefore, the carrying amount of an identifiable asset, liability or contingent liability of the acquiree that is recognised or adjusted as a result of an error correction shall be calculated as if its fair value or adjusted fair value at the acquisition date had been recognised from that date. Goodwill or any gain recognised in a prior period in accordance with paragraph 55 shall be adjusted retrospectively by an amount equal to the fair value at the acquisition date (or the adjustment to the fair value at the acquisition date) of the identifiable asset, liability or contingent liability being recognised (or adjusted).

Recognition of deferred tax assets after the initial accounting is complete

64. If the potential benefit of the acquiree’s income tax loss carry-forwards or other deferred tax assets did not satisfy the criteria in paragraph 37 for separate recognition when a business combination is initially accounted for but is subsequently realised, the acquirer shall recognise that benefit as defer tax income in accordance with VAS 17 – “Income Taxes”. In addition, the acquirer shall:

(a) Reduce the carrying amount of goodwill to the amount that would have been recognised if the deferred tax asset had been recognised as an identifiable asset from the acquisition date; and

(b) Recognise the reduction in the carrying amount of the goodwill as an expense.

However, this procedure shall not result in the creation of an excess, nor shall it increase the amount of any gain previously recognised in accordance with paragraph 55.

Disclosure

65. An acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combinations that were effected:

(a) During the period.

(b) After the balance sheet date but before the financial statements are authorised for issue.

66. The acquirer shall disclose the following information for each business combination that was effected during the period:

(a) The names and descriptions of the combining entities or businesses.

(b) The acquisition date.

(c) The percentage of voting equity instruments acquired.

(d) The cost directly attributable to the combination. When equity instruments are issued or issuable as part of the cost, the following shall also be disclosed:

(i) The number of equity instruments issued or issuable; and

(ii) The fair value of those instruments and the basis for determining that fair value. If a published price does not exist for the instruments at the date of exchange, the significant assumptions used to determine fair value shall be disclosed. If a published price exists at the date of exchange but was not used as the basis for determining the cost of the combination, that fact shall be disclosed together with: the reasons the published price was not used; the method and significant assumptions used to attribute a value to the equity instruments; and the aggregate amount of the difference between the value attributed to, and the published price of, the equity instruments.

(e) Details of any operations the entity has decided to dispose of as a result of the combination.

(f) The amounts recognised at the acquisition date for each class of the acquiree’s assets, liabilities and contingent liabilities, and, unless disclosure would be impracticable, the carrying amounts of each of those classes, determined in accordance with a relevant accounting standard, immediately before the combination. If such disclosure would be impracticable, that fact shall be disclosed, together with an explanation of why this is the case.

(g) The amount of any excess recognised in profit or loss in accordance with paragraph 55, and the line item in the income statement in which the excess is recognised.

(h) A description of the factors that contributed to a cost that results in the recognition of goodwill - description of each intangible asset that was not recognised separately from goodwill and an explanation of why the intangible asset’s fair value could not be measured reliably - or a description of the nature of any excess recognised in profit or loss in accordance with paragraph 55.

(i) The amount of the acquiree’s profit or loss since the acquisition date in the period. If disclosure would be impracticable, an explanation should be given of why this is the case.

67. The information required to be disclosed by paragraph 66 shall be disclosed in aggregate for business combinations effected during the reporting period that are individually immaterial.

68. If the initial accounting for a business combination that was effected during the period was determined only provisionally as described in paragraph 61, that fact shall also be disclosed together with an explanation of why this is the case.

69. The acquirer shall disclose the following information:

(a) The revenue of the combined entity for the period before the acquisition date;

(b) The profit or loss of the combined entity for the period before the acquisition date.

If disclosure of this information would be impracticable, that fact shall be disclosed together with an explanation of why this is the case..

70. The acquirer shall disclose the information required by paragraph 66 for each business combination effected after the balance sheet date but before the financial statements are authorised for issue.

71. An acquirer shall disclose information that enables users of its financial statements to evaluate the financial effects of gains, losses, error corrections and other adjustments recognised in the current period that relate to business combinations that were effected in the current or in previous periods.

72. The acquirer shall disclose the following information:

(a) The amount and an explanation of any gain or loss recognised in the current period that:

(i) Relates to the identifiable assets acquired or liabilities or contingent liabilities assumed in a business combination that was effected in the current or a previous period; and

(ii) Is of such size, nature or incidence that disclosure is relevant to an understanding of the combined entity’s financial performance.

(b) if the initial accounting for a business combination that was effected in the immediately preceding period was determined only provisionally at the end of that period, the amounts and explanations of the adjustments to the provisional values recognised during the current period.

(c) the information about error corrections required to be disclosed by VAS 29 Changes in Accounting Policies, Accounting Estimates and Errors for any of the acquiree’s identifiable assets, liabilities or contingent liabilities, or changes in the values assigned to those items, that the acquirer recognises during the current period in accordance with paragraphs 62 and 63.

73. For goodwill that exists, the entity shall disclose:

(a) The time of amortisation.

(b) the method used and the reason for not using the straight-line method where the straight-line method is not used for amortisation.

(c) The portion of goodwill charged to expenses in the period.

(d) A reconconciliation of the carrying amount of goodwill at the beginning and end of the period which discloses:

(i) The gross amount and the accumulated amortized portion at the beginning of the period;

(ii) The amount which resulted in the period;

(iii) Any adjustment made as a result of change or noticed changes in the amount of identifiable assets and liabilities;

(iv) The amount given up subsequent to disposals and sales of the whole or part of business in the period;

(v) the amount which was amortised in the period;

(vi) Other relevant changes in the period;

(vi) The total amount which remains unamortized as accumulated at the end of the period.

74. The entity shall disclose such additional information as is necessary to meet the objectives set out in paragraphs 65, 71 and 73.

APPENDIX A

Supplemental guidance

Reverse acquisitions

A1. As noted in paragraph 21, in some business combinations, commonly referred to as reverse acquisitions, the acquirer is the entity whose equity interests have been acquired and the issuing entity is the acquiree. This might be the case when, for example, a private entity arranges to have itself ‘acquired’ by a smaller public entity as a means of obtaining a stock exchange listing. Although legally the issuing public entity is regarded as the parent and the private entity is regarded as the subsidiary, the legal subsidiary is the acquirer if it has the power to govern the financial and operating policies of the legal parent so as to obtain benefits from its activities.

A2. An entity shall apply the guidance in paragraphs A3-A15 when accounting for a reverse acquisition.

A3. Reverse acquisition accounting determines the allocation of the cost of the business combination as at the acquisition date and does not apply to transactions after the combination.

Cost of the business combination

A4. When equity instruments are issued as part of the cost of the business combination, paragraph 24 requires the cost of the combination to include the fair value of those equity instruments at the date of exchange. Paragraph 27 notes that, in the absence of a reliable published price, the fair value of the equity instruments can be estimated by reference to the fair value of the acquirer or the fair value of the acquiree, whichever is more clearly evident.

A5. In a reverse acquisition, the cost of the business combination is deemed to have been incurred by the legal subsidiary (ie the acquirer for accounting purposes) in the form of equity instruments issued to the owners of the legal parent (ie the acquiree for accounting purposes). If the published price of the equity instruments of the legal subsidiary is used to determine the cost of the combination, a calculation shall be made to determine the number of equity instruments the legal subsidiary would have had to issue to provide the same percentage ownership interest of the combined entity to the owners of the legal parent. The fair value of the number of equity instruments so calculated shall be used as the cost of the combination.

A6. If the fair value of the equity instruments of the legal subsidiary is not otherwise clearly evident, the total fair value of all the issued equity instruments of the legal parent before the business combination shall be used as the basis for determining the cost of the combination.

Preparation and presentation of consolidated financial statements

A7. Consolidated financial statements prepared following a reverse acquisition shall be issued under the name of the legal parent, but described in the notes as a continuation of the financial statements of the legal parent (ie the acquirer for accounting purposes). Because such consolidated financial statements represent a continuation of the financial statements of the legal subsidiary:

(a) The assets and liabilities of the legal subsidiary shall be recognised and measured in those consolidated financial statements at their pre-combination carrying amounts.

(b) The retained earnings and other equity balances recognised in those consolidated financial statements shall be the retained earnings and other equity balances of the legal subsidiary immediately before the business combination.

(c) The amount recognised as issued equity instruments in those consolidated financial statements shall be determined by adding to the issued equity of the legal subsidiary immediately before the business combination the cost of the combination determined as described in paragraphs A4-A6. However, the equity structure appearing in those consolidated financial statements (ie the number and type of equity instruments issued) shall reflect the equity structure of the legal parent, including the equity instruments issued by the legal parent to effect the combination.

(d) Comparative information presented in those consolidated financial statements shall be that of the legal subsidiary.

A8. Reverse acquisition accounting applies only in the consolidated financial statements. Therefore, in the legal parent’s separate financial statements, if any, the investment in the legal subsidiary is accounted for in accordance with the requirements in VAS 25 Consolidated Financial Statements and Accounting for Investments in Subsidiaries.

A9. Consolidated financial statements prepared following a reverse acquisition shall reflect the fair values of the assets, liabilities and contingent liabilities of the legal parent (ie the acquiree for accounting purposes). Therefore, the cost of the business combination shall be allocated by measuring the identifiable assets, liabilities and contingent liabilities of the legal parent that satisfy the recognition criteria in paragraph 37 at their fair values at the acquisition date. Any excess of the cost of the combination over the acquirer’s interest in the net fair value of those items shall be accounted for in accordance with paragraphs 50-54. Any excess of the acquirer’s interest in the net fair value of those items over the cost of the combination shall be accounted for in accordance with paragraph 55.

Minority interest

A10. In some reverse acquisitions, some of the owners of the legal subsidiary do not exchange their equity instruments for equity instruments of the legal parent. Although the entity in which those owners hold equity instruments (the legal subsidiary) acquired another entity (the legal parent), those owners shall be treated as a minority interest in the consolidated financial statements prepared after the reverse acquisition. This is because the owners of the legal subsidiary that do not exchange their equity instruments for equity instruments of the legal parent have an interest only in the results and net assets of the legal subsidiary, and not in the results and net assets of the combined entity. Conversely, all of the owners of the legal parent, notwithstanding that the legal parent is regarded as the acquiree, have an interest in the results and net assets of the combined entity.

A11. Because the assets and liabilities of the legal subsidiary are recognised and measured in the consolidated financial statements at their pre-combination carrying amounts, the minority interest shall reflect the minority shareholders’ proportionate interest in the pre-combination carrying amounts of the legal subsidiary’s net assets.

Earnings per share

A12. As noted in paragraph A7(c), the equity structure appearing in the consolidated financial statements prepared following a reverse acquisition reflects the equity structure

of the legal parent, including the equity instruments issued by the legal parent to effect the business combination.

A13. For the purpose of calculating the weighted average number of ordinary shares outstanding (the denominator) during the period in which the reverse acquisition occurs:

(a) The number of ordinary shares outstanding from the beginning of that period to the acquisition date shall be deemed to be the number of ordinary shares issued by the legal parent to the owners of the legal subsidiary; and

(b) The number of ordinary shares outstanding from the acquisition date to the end of that period shall be the actual number of ordinary shares of the legal parent outstanding during that period.

A14. The basic earnings per share disclosed for each comparative period before the acquisition date that is presented in the consolidated financial statements following a reverse acquisition shall be calculated by dividing the profit or loss of the legal subsidiary attributable to ordinary shareholders in each of those periods by the number of ordinary shares issued by the legal parent to the owners of the legal subsidiary in the reverse acquisition.

A15. The calculations outlined in paragraphs A13 and A14 assume that there were no changes in the number of the legal subsidiary’s issued ordinary shares during the comparative periods and during the period from the beginning of the period in which the reverse acquisition occurred to the acquisition date. The calculation of earnings per share shall be appropriately adjusted to take into account the effect of a change in the number of the legal subsidiary’s issued ordinary shares during those periods.

Allocating the cost of a business combination

A16. This Standard requires an acquirer to recognise the acquiree’s identifiable assets, liabilities and contingent liabilities that satisfy the relevant recognition criteria at their fair values at the acquisition date. For the purpose of allocating the cost of a business combination, the acquirer shall treat the following measures as fair values:

(a) For financial instruments traded in an active market the acquirer shall use current market values.

(b) For financial instruments not traded in an active market the acquirer shall use estimated values that take into consideration features such as price-earnings ratios, dividend yields and expected growth rates of comparable instruments of entities with similar characteristics.

(c) For receivables, beneficial contracts and other identifiable assets the acquirer shall use the present values of the amounts to be received, determined at appropriate current interest rates, less allowances for uncollectibility and collection costs, if necessary. However, discounting is not required for short-term receivables, beneficial contracts and other identifiable assets when the difference between the nominal and discounted amounts is not material.

(d) For inventories of:

(i) Finished goods and merchandise the acquirer shall use selling prices less the sum of (1) the costs of disposal and (2) a reasonable profit allowance for the selling effort of the acquirer based on profit for similar finished goods and merchandise;

(ii) Work in progress the acquirer shall use selling prices of finished goods less the sum of (1) costs to complete, (2) costs of disposal and (3) a reasonable profit allowance for the completing and selling effort based on profit for similar finished goods; and

(iii) Raw materials the acquirer shall use current replacement costs.

(e) For land and buildings the acquirer shall use market values.

(f) For plant and equipment the acquirer shall use market values, normally determined by appraisal. If there is no market-based evidence of fair value because of the specialised nature of the item of plant and equipment and the item is rarely sold, except as part of a continuing business, an acquirer may need to estimate fair value using an income or a depreciated replacement cost approach.

(g) For intangible fixed assets the acquirer shall determine fair value:

(i) By reference to an active market as defined in VAS 04 Intangible Fixed Assets; or

(ii) If no active market exists, on a basis that reflects the amounts the acquirer would have paid for the assets in arm’s length transactions between knowledgeable willing parties, based on the best information available (see VAS 04 for further guidance on determining the fair values of intangible fixed assets acquired in business combinations).

(h) For deferred tax assets and liabilities the acquirer shall use the amount of the tax benefit arising from tax losses or the taxes payable in respect of profit or loss in accordance with VAS 17- “Income Taxes”, assessed from the perspective of the combined entity. The deferred tax asset or liability is determined after allowing for the tax effect of restating identifiable assets, liabilities and contingent liabilities to their fair values and is not discounted.

(i) For accounts and notes payable, long-term debt, liabilities, accruals and other claims payable the acquirer shall use the present values of amounts to be disbursed in settling the liabilities determined at appropriate current interest rates. However, discounting is not required for short-term liabilities when the difference between the nominal and discounted amounts is not material.

(j) For onerous contracts and other identifiable liabilities of the acquiree the acquirer shall use the present values of amounts to be disbursed in settling the obligations determined at appropriate current interest rates.

(k) For contingent liabilities of the acquiree the acquirer shall use the amounts that a third party would charge to assume those contingent liabilities.

A17. Some of the above guidance requires fair values to be estimated using present value techniques. If the guidance for a particular item does not refer to the use of present value techniques, such techniques may be used in estimating the fair value of that item.

Standard No. 14 TURNOVER AND OTHER INCOMES

(Issued and publicized together with Decision No. 149/2001/QD-BTC of December 31, 2001 of the Minister of Finance)

GENERAL PROVISIONS

01. This standard aims to prescribe and guide the principles and methods of accounting turnover and other incomes, including turnover of different kinds, time of recognition of turnover, methods of accounting turnover and other incomes as basis for recording accounting books and making financial statements.

02. This standard applies to accounting turnover amounts and other incomes arising from the following transactions and operations:

a/ Goods sale: Selling products manufactured by the enterprises and bought-in goods;

b/ Provision of services: Performing the work agreed upon in the contracts in one or many accounting periods;

c/ Interests, royalties, distributed dividends and profits.

Interests mean sums of money earned from letting other persons use cash, cash equivalents or debts owed to the enterprises such as loan interest, deposit interest, securities investment profit, payment discount…;

Royalty means a sum of money earned from letting other persons use one’s fixed assets such as patent, trademark, copyright, computer software…;

Distributed dividends and profits mean profits distributed from the stock holding or capital contribution.

d/ Other incomes not arising from the above turnover-generating transactions and operations (the contents of other incomes are stipulated in paragraph 30).

This standard does not apply to accounting other turnover and incomes prescribed in other accounting standards.


Turnover means the total value of economic benefits gained by an enterprise in an accounting period, which arise from the enterprise’s normal production and business operations, contributing to increasing the owner’s capital.

Trade discount means a reduction of the listed price granted by the selling enterprises to the buyers of large volumes of goods.

Reduction of the price of goods sold means a price reduction granted to the buyers due to the goods’ inferior quality, wrong specifications or old-fashionedness.

Value of returns of goods sold means the value of the volume of goods sold already determined as consumed, but then returned by the buyers who declined making payment therefor.

Payment discount means a sum of money reduced by the sellers for the buyers who make full payment for the goods before the contractual deadline.

Other incomes mean revenues contributing to increasing the owner’s capital, which are generated from operations other than turnover-generating operations.

Reasonable value means the value of an asset exchangeable or the value of a debt voluntarily paid between the knowledgeable parties in par value exchange.


04. Turnover shall consist of only the total value of economic benefits the enterprises have gained or will gain. Amounts collected for a third party, which do not constitute a source of economic benefits nor increase the owner’s capital of the enterprises, shall not be considered turnover (for example: Where an agent collects proceeds from goods sale for the goods owner, his/her turnover shall only be earned commissions). Shareholders’ or owners’ capital contributions which help increase owner’s capital shall not be turnover.

DETERMINATION OF TURNOVER

05. Turnover is determined according to the reasonable value of received or receivable amounts.

06. Turnover arising from transactions is determined under the agreement between the enterprise and the buyer or the asset user. It is determined as the reasonable value of received or receivable amounts minus (-) trade discount, payment discount, reductions in the price of goods sold and value of returns of goods sold.

07. For cash amounts or cash equivalents not yet immediately received, turnover shall be determined by converting the nominal value of amounts receivable in future into the actual value at the time of turnover recognition at the current interest rates. The actual value at the time of turnover recognition may be smaller than the nominal value receivable in future.

08. When goods or services are exchanged for goods or services of similar nature and value, such exchange shall not be regarded as a turnover-generating transaction.

When goods or services are exchanged for goods or services of dissimilar nature and value, such exchange shall be regarded as a turnover-generating transaction. In this case, turnover shall be determined as reasonable value of the received goods or services after adjusting cash amounts or cash equivalents additionally paid or received. Where it is impossible to determine the reasonable value of the received goods or services, turnover shall be determined as equal to the reasonable value of the exchanged goods or services, after adjusting cash amounts or cash equivalents additionally paid or received.

RECOGNITION OF TRANSACTIONS

09. The transaction recognition criteria in this standard shall apply separately to each transaction. In a number of cases, the transaction recognition criteria should apply separately to each component of a single transaction in order to reflect the nature of such transaction. For example, when the selling price of a product already covers a pre-set amount for the post-sale service provision, turnover from the post-sale service provision shall be postponed until the enterprise performs such service. The transaction recognition criteria shall also apply to two or many transactions which are commercially interrelated. In this case they must be examined in an overall relationship. For example, if an enterprise sells the goods and at the same time signs another contract for re-purchase of the same goods after some time, these two contracts must be examined simultaneously and turnover therefrom shall not be recognized.

Sale turnover

10. Sale turnover shall be recognized if it simultaneously meets the following five (5) conditions:

a/ The enterprise has transferred the majority of risks and benefits associated with the right to own

the products or goods to the buyer;

b/ The enterprise no longer holds the right to manage the goods as the goods owner, or the right to control the goods;

c/ Turnover has been determined with relative certainty;

d/ The enterprise has gained or will gain economic benefits from the good sale transaction;

e/ It is possible to determine the costs related to the goods sale transaction.

11. The enterprises must determine the time of transfer of the majority of risks and benefits associated with the right to own the goods to the buyers in each specific case. In most cases, this time shall coincide with the time of transfer of the benefits associated with the lawful ownership right or the goods-controlling right to the buyers.

12. Where the enterprises still bear the majority of risks associated with the right to own the goods, the concerned transactions shall not be regarded as good sale operations nor shall turnover therefrom be recognized. The enterprises must also bear any risks associated with the right to own the goods in different forms such as:

a/ The enterprises shall be also responsible for ensuring the normal operation of the fixed assets, which is not included in normal warranty provisions.

b/ When the payment for the sale of goods remains uncertain as it depends on the buyer of such goods;

c/ When the delivered goods are to be installed and such installation is an important part of the contract which the enterprise has not yet completed;

d/ When the buyer is entitled to cancel the goods purchase for some reason already stated in the purchase and sale contract and the enterprise is not sure whether or not the goods shall be returned.

13. If the enterprises have to bear only minor risks associated with the right to own the goods, the goods sale shall be determined and turnover therefrom recognized. For example, the enterprises still hold papers pertaining to the goods ownership only to ensure receipt of full payments.

14. Sale turnover shall be recognized only when there is assurance that the enterprises will receive economic benefits from the transactions. Where the economic benefits from the goods sale transactions still depend on uncertain factors, turnover therefrom shall be recognized only after these uncertain factors have been dealt with (for example, when the enterprise is not sure whether or not the Government of the host country would permit the remittance of money earned from the goods sale therein). If turnover has been recognized in cases where money has not yet been collected, once such debt is determined irrecoverable, it must be accounted into the production and business expense in the period but not recorded as a decrease in turnover. When a receivable amount is determined unlikely to be received (bad debts) it must not be recorded as a decrease in turnover, and a bad debt reserve must be set up. Bad debts, once actually determined as irrecoverable, shall be offset with the bad debt reserve.

15. Turnover and cost related to the same transaction must be simultaneously recognized according to the matching principle. The costs, including those incurred after the goods delivery date (such as warranty and other costs), are often determined with certainty when the turnover recognition conditions are met. Those sums of money prepaid by the customers shall not be recognized as turnover but as a payable debt at the time of receipt thereof from the customers. The payable debts for the sums of money prepaid by the customers shall be recognized as turnover if they simultaneously satisfy all the five conditions specific in paragraph 10.

Turnover from the service provision

16. Turnover from service provision transactions shall be recognized when the results of these transactions are determined in a reliable way. Where a service provision transaction relates to many periods, turnover shall be recognized in each period according to the results of the work volume finished on the date of making of such period’s accounting balance sheet. The result of a service provision transaction shall be determined only when it satisfies all the four (4) conditions below:

a/ Turnover is determined with relative certainty;

b/ It is possible to obtain economic benefits from the service provision transaction;

c/ The work volume finished on the date of making the accounting balance sheet can be determined;

d/ The costs incurred from the service provision transaction and the costs of its completion can be determined.

17. Where the service provision transaction is carried out over many accounting periods, the determination of service turnover in each period shall be made by the percentage-of-completion method. By this method, turnover recognized in the accounting period shall be determined as a percentage of the completed work portion.

18. Turnover from the provision of services shall be recognized only when there is assurance that enterprises shall receive economic benefits from the transactions. If a recognized turnover cannot be recovered, it must be accounted as expense but not recorded as decrease in turnover. When it is uncertain to recover an amount which was already recorded into turnover (bad debts), such amount must not be recorded as decrease in turnover and a bad debt reserve must be set up therefor. When a bad debt is actually determined as irrecoverable, it shall be offset with the bad debt reserve source.

19. The enterprises may estimate turnover from the provision of services if they can negotiate with their transaction counterparts the following conditions:

a/ Liabilities and rights of each party in the provision or receipt of services;

b/ Payment prices;

c/ Payment deadline and mode;

In order to estimate turnover from the service provision, the enterprises must keep an appropriate financial planning and accounting system. When necessary, they may consider and modify the way of estimating turnover in the service-providing process.

20. The completed work portion shall be determined according to one of the following methods, depending on the nature of services:

a/ Evaluation of the completed work portion;

b/ Comparison of the percentage (5) of the completed work portion with the total work volume to be completed;

c/ The percentage (%) of the incurred costs against the estimated total cost needed for completion of the whole service-providing transaction.

The completed work portion does not depend on the periodic payments or advances of the

customers.

21. Where services are provided through different but indivisible activities and over many certain accounting periods, the turnover in each period shall be recognized according to the average method. When there is a basic activity compared with other activities, the turnover recognition shall be effected according to such basic activity.

22. When the result of a service-providing transaction cannot be determined with certainty, turnover therefrom shall be recognized corresponding to the recognized and recoverable costs.

23. In the initial phase of a service-providing transaction, when its result cannot be determined with certainty, the turnover therefrom shall be recognized as equal to the recognized and recoverable costs. If costs related to such service are surely irrecoverable, the turnover therefrom shall not be recognized, and the costs already incurred shall be accounted as expense so as to determine the business results in the period. Where there are reliable evidences that the incurred costs are recoverable, the turnover therefrom shall be recognized according to the provisions in paragraph 16.

Turnover from interests, royalties, distributed dividends and profits

24. Turnover arising from interests, royalties, distributed dividends and profits of the enterprises shall be recognized if they simultaneously satisfy the two (2) conditions below:

a/ It is possible to obtain economic benefits from the concerned transactions;

b/ Turnover is determined with relative certainty.

25. Turnover from interests, royalties, distributed dividends and profits of the enterprises shall be recognized on the basis of:

a/ Interests recognized on the basis of the actual time and interest rates in each period;

b/ Royalties recognized on the basis of accruement in compliance with the contracts.

c/ Distributed dividends and profits shall be recognized when shareholders are entitled to receive dividends or the capital-contributing parties are entitled to receive profits from the capital contribution.

26. Actual interest rates are interest rates used in the conversion of sums of money receivable in future throughout the duration in which fixed assets are used by other parties into the initially-recognized value at the time the fixed assets are handed over to the users. Interest turnover consists of the allocated amounts of assorted discounts, additional amounts, pre-paid interests or differences between the initial book value of debt tools and their value upon maturity.

27. Where uncollected interests on an investment have been accrued before the enterprise purchases such investment, if the enterprise manages to collect interests on the investment, it must allocate such interests to the periods prior to the investment purchase. Only the interest portion of the periods after the purchase of the investment shall be recognized as the enterprise’s turnover. The interest portion in the periods prior to the purchase of the investment shall be accounted as decrease in the value of such investment.

28. Royalties may be accrued under the provisions of the contracts (for example, the royalty of a book is accrued on the basis of the quantity of copies per publication and on the publication times) or calculated on the basis of each contract.

29. Turnover shall be recognized when there is assurance that the enterprises shall receive economic benefits from the transactions. When an amount which has been recorded as turnover becomes irrecoverable, such irrecoverable or uncertainly recoverable amount must be accounted

as expense incurred in the period, but not recorded as turnover decrease.

Other incomes

30. Other incomes prescribed in this standard include revenues from irregular- activities other than turnover-generating activities, including:

- Revenues from the asset liquidation and sale;

- Fines paid by customers for their contract breaches;

- Collected insurance compensation;

- Collected debts which had been written off and included in the preceding period’s expenses;

- Payable debts now recorded as revenue increase as their owners no longer exist;

- Collected tax amounts which now are reduced and reimbursed;

- Other revenues.

31. Revenue from the asset liquidation and sale is the total amount received and receivable from the buyers through asset liquidation and sale. The asset liquidation and sale costs shall be recognized as expenses so as to determine the business results in the period.

32. Collected debts which had been written off and included in the preceding period’s expenses are bad debts which had been determined as irrecoverable, written-off and included in the expenses so as to determine the business results in the preceding periods, but now recovered.

33. Payable debts whose owners no longer exist are payable debts whose owners are unidentifiable or no longer exist.


34. In the financial statements, the enterprises must present:

a/ Accounting policies applied in the turnover recognition, including the method of determining the completed work portions of service-providing transactions;

b/ Turnover of each type of transaction and events:

- Sale turnover;

- Service provision turnover;

- Interests, royalties, distributed dividends and profits.

c/ Turnover from the exchange of goods or services according to each type of activity mentioned above.

d/ Other incomes, irregular incomes presented in detail.

Standard No. 15 CONSTRUCTION CONTRACTS (Promulgated and publicized together with the Finance Minister’s Decision No. 165/2002/QD-BTC


GENERAL PROVISIONS

01. This standard aims to prescribe and guide the principles and methods for accounting revenues and costs related to construction contracts, including: contents of revenues and costs of construction contracts; recognition of revenues and costs of construction contracts to serve as basis for recording accounting books and compiling financial statements.

02. This standard applies to the accounting of construction contracts and compilation of financial statements by contractors.


A construction contract is written contract for the construction of an asset or combination of assets which are closely interrelated or interdependent in terms of their designing, technology, function or basic use purposes.

A fixed price construction contract is a construction contract whereby the contractor agrees to a fixed price for the whole contract or a fixed unit price on a finished product unit. In some cases where prices rise high, such fixed price may change depending on contract clauses;

A cost plus contract is a construction contract whereby the contractor is reimbursed the actual costs allowed to be paid, plus (+) an amount calculated in percentage (%) of these costs or a fixed amount of charge.

04. A construction contract may be reached to construct a single asset, such as: a bridge, a building, an oil pipeline or a road or to construct a combination of assets which are closely interrelated or interdependent in their designing, technology, function or basic use purposes, such as: an oil refinery, complex of textile and garment plants.

05. In this standard, construction contracts also include:

(a) Contracts for provision of services directly relating to the construction of assets, such as: consultancy, designing and survey contract; contract for project and architecture management services;

(b) Contracts for restoration or destruction of assets and rehabilitation of environment after the asset destruction.

06. Construction contracts specified in this standard are classified into fixed price construction contracts and cost plus construction contracts. A number of construction contracts have the characteristics of both fixed price construction contracts and cost plus construction contracts. For instance, cost plus construction contracts contain agreement on the maximum price. In this case, contractors need to consider all the conditions prescribed in paragraphs 23 and 24 for recognizing construction contract revenues and costs.

COMBINATION AND DIVISION OF CONSTRUCTION CONTRACTS

07. This standard’s requirements often apply separately to each construction contract. In a number of cases, this standard shall be applied to separate recognizable parts of a separate contract or a group of contracts to reflect the nature of construction contract or group of construction contracts.

08. For a construction contract relating to the construction of a number of assets, the construction of each asset shall be considered a separate construction contract when it simultaneously meets the following three (3) conditions:

(a) Designs and cost estimates are determined separately for each asset and each asset can operate independently;

(b) Each asset may be separately negotiated with each contractor, and the customer may accept or reject the contractual part related to each asset;

(c) The cost and revenue of each asset can be determined.

09. A group of contracts signed with one customer or a number of customers shall be considered a construction contract when they simultaneously meet the following three (3) conditions:

(a) These contracts are negotiated as a package contract;

(b) These contracts are so closely interrelated that they are in fact different components of a project with equivalent estimated gross profits;

(c) These contracts are performed simultaneously or in a continuous process.

10. One contract may include the construction of one more asset at the request of customers or it may be amended to include the construction of such asset. The construction of one more asset shall be only considered a separate construction contract when:

(a) Such asset is greatly different and independent from assets specified in the initial contract in terms of designing, technology and function; or

(b) The price of the contract for construction of such asset is agreed upon, which is not related to the price of the initial contract.


REVENUES OF CONSTRUCTION CONTRACTS

11. Revenues of a construction contract include:

(a) Initial revenue inscribed in the contract; and

(b) Increase and decrease amounts in the contract performance, bonuses and other payments, provided that these amounts are capable of changing the revenue and can be reliably determined.

12. Revenue of a construction contract is determined as the reasonable value of received or to be-received amounts. The determination of the contractual revenue is affected by many uncertain factors which depend on future events. The estimation must often be corrected upon the occurrence of such events and the settlement of uncertain factors. As a result, the contractual revenue may be increased or decreased in each specific period. For example:

(a) Contractors and customers may agree upon changes and requirements resulting in the increase or decrease of contractual revenue in the next period as compared with the initially agreed contract;

(b) Revenue already agreed upon in the fixed price contract may increase for the reason that prices rise high;

(c) Contractual revenue may decrease due to the contractor’s failure to keep up with the set

schedule or to ensure construction quality as agreed upon in the contract;

(d) When the fixed price contract sets a fixed price for a finished product unit, the contractual revenue shall increase or decrease when the product volume increases or decreases.

13. Changes at customers’ requests in the scope of works to be done under the contract. For example: changes in technical or designing requirements of assets and other changes in the contract performance. Such changes shall be accounted into the contractual revenue only when:

(a) It is highly probable that customers accept such changes and revenues arising therefrom; and

(b) Revenue can be reliably determined.

14. Bonuses are supplementary amounts to be paid to contractors if they perform the contracts according to or beyond the requirements. For example, the contract anticipates to pay the contractor a bonus for early contract fulfillment. Such bonus shall be accounted into the contract revenue when:

(a) A number of specific standards inscribed in the contract are surely attained or surpassed; and

(b) The bonus can be reliably determined.

15. Another payment received by the contractor from the customer or another party to offset costs is not included in the contractual price. For example: Delay caused by the customer; errors in technical or designing specifications, and disputes over changes in the contract performance. The determination of increased revenue from the above-said payments depends on numerous uncertain factors and usually depends on the results of many negotiations. Therefore, other payments shall only be accounted into the contractual revenue when:

(a) It is agreed that the customer will accept to make compensation;

(b) Other payments are accepted by the customer and reliably determined.

Costs of construction contracts

16. Costs of construction contracts include:

(a) Costs directly related to each specific contract;

(b) General costs related to activities of the contracts and can be distributed to each specific contract;

(c) Other costs which may be recovered from customers under contractual clauses.

17. Costs directly related to each specific contract include:

(a) Construction site labor costs, including cost for project supervision;

(b) Costs of raw materials and materials, including project equipment;

(c) Depreciation of machinery, equipment and other fixed assets used for the contract performance;

(d) Costs of transport, installation and removal of machines, equipment, raw materials and materials to and from the project site;

(e) Rent for workshops, machinery and equipment for the contract performance;

(f) Expenses for designing and technical assistance directly related to the contract;

(g) Estimated expenses for project repair and maintenance;

(h) Other directly related costs.

Costs directly related to each contract shall decrease when there exist other incomes not included in the contractual revenue. For example: proceeds from the sale of superfluous raw materials and materials, liquidation of construction machines and equipment upon the contract conclusion.

18. General costs related to the activities of construction contracts and can be allocated to each specific contract, include:

(a) Insurance premiums;

(b) Costs for designing and technical assistance not directly related to a specific contract;

(c) General management costs in construction.

The above-said costs shall be allocated by appropriate methods, in a systematic manner and according to rational percentages, and uniformly apply to all costs with similar characteristics. The allocation must be based on the common levels applicable to construction activities. (General costs which are related to activities of contracts and can be allocated to each specific contract, also include borrowing costs if they satisfy the conditions on borrowing costs capitalized under the provisions in the standard "Borrowing costs").

19. Other costs which may be retrieved from customers under contract clauses such as ground clearance cost, implementation cost that customers must reimburse to the contractors as provided for in the contract.

20. Costs which are not related to activities of contracts or cannot be allocated to construction contracts shall not be accounted into construction contract costs. These costs shall include:

(a) General administrative management costs, or research and development costs which must not be paid by customers to contractors as stated;

(b) Selling costs;

(c) Depreciation of machinery, equipment and other fixed assets not used for construction contracts.

21. Contract costs include costs related to contract throughout the period from the contract signing to the contract conclusion. Costs directly related to contract arising in the course of contract negotiation shall also be considered part of the contract costs if they can be separately identified, reliably estimated and it is highly probable that the contract will be signed. If costs arising in the course of contract negotiation have already been recognized as production and business costs in the period when they arise, they shall no longer be considered the construction contract costs when such contract is signed in the next period.

RECOGNIZATION OF CONTRACT REVENUES AND COSTS

22. Construction contract revenues and costs are recognized in the following two cases:

(a) Where a construction contract stipulates that the contractor is allowed to make payments according to the set schedule, and when the construction contract performance result is reliably estimated, the revenues and costs related to the contract shall be recognized by reference to the completed volume determined by the contractor on the date of compiling financial statement, regardless of whether invoices for payments according to the set schedule have been billed or not

and how much money is inscribed on invoices.

(b) Where a construction contract stipulates that the contractor is allowed to make payments according to the value of performed work volume, and when the contract performance result is reliably determined and certified by customers, the revenues and costs related to such contract shall be recognized by reference to the completed work volume certified by the customers in the period and reflected in the billed invoices.

23. For fixed price construction contracts, the contract results shall be reliably estimated when the following four (4) conditions are simultaneously met:

(a) Total contract revenue can be reliably calculated;

(b) Enterprises can get economic benefits from the contract;

(c) Costs for completing the contract and the work already completed at the time of compiling financial statements can be reliably calculated;

(d) Costs related to the contract can be clearly identified and reliably calculated so that actual total contract cost can be compared with the total cost estimates.

24. For cost plus construction contracts, the contractual results shall be reliably estimated when the following two conditions are simultaneously met:

(a) Enterprises can get economic benefits from the contract;

(b) Costs related to the contract can be clearly identified and reliably estimated regardless of whether they are reimbursed or not.

25. The method of recognizing revenues and costs according to the completed contractual work volume is called the completion percentage method. By this method, revenues shall be determined to match arising costs of the completed work volume reflected in the business operation result report.

26. By the completion percentage (%) method, contractual revenues and costs recognized in the business operation result report are revenues and costs of the work volume completed in the reporting period.

27. A contractor may pay for the costs related to the formulation of a contract. These costs shall be recognized as advances if they can be reimbursed. These costs reflect money amounts to be paid by customers and classified as uncompleted construction projects.

28. Construction contract performance results shall only be reliably determined when the enterprises can receive economic benefits from the contracts. In cases where exist doubts about irrecoverability of certain amounts already counted into the contractual revenues and inscribed in the business result reports, such irrecoverable amounts must be recognized as costs.

29. Enterprises can only make reliable estimates of construction contract revenues when reaching agreement in contracts upon the following:

(a) Legal liability of each party for the constructed assets;

(b) Conditions for change of contract value;

(c) Payment mode and time limit.

Enterprises must regularly review and, when necessary, readjust the estimates of contractual

revenues and costs in the course of contract performance.

30. Completed work volumes of contracts to serve as basis for determining revenues may be determined by different methods. Enterprises should use appropriate calculation methods to determine the completed work volume. Depending on the nature of construction contracts, enterprises shall select to apply one of the following three (3) methods to determine completed work volumes:

(a) Percentage (%) of costs of the work volume completed at a certain time on the total estimated costs of the contract;

(b) Appraisal of the completed work volume; or

(c) Percentage (%) of the completed construction and installation volume on the total construction and installation volume which must be completed under the contract.

The work-in-progress payments and advances received from the customers usually do not reflect the completed work volume.

31. When the completed work volume is determined by method of percentage (%) between costs of the work volume completed at a certain time and the total estimated costs of the contract, the costs related to the completed work volume shall be accounted into costs until that time. Costs not counted into the contract’s completed work volume may be:

(a) Costs of the construction contract related to future activities of the contract, such as: costs of raw materials and materials already transported to the construction site or spared for use in the contract but not yet installed or used in the course of contract performance, except for cases where such materials are exclusively manufactured for the contract;

(b) Advances to sub-contractors before the sub-contracted works are completed.

32. When the construction contract performance result cannot be reliably estimated:

(a) Revenue shall only be recognized to match the already arising contract costs, the reimbursement thereof is relatively sure;

(b) Contract costs shall only be recognized as in-period costs when they have already arisen.

33. In the initial stage of a construction contract, cases where contract performance results cannot be reliably estimated may often occur. In cases where enterprises can recover already paid contract costs, the contract costs shall only be recognized to the extent that the paid costs can be recovered. When contract performance results cannot be reliably estimated, no profit amount shall be recognized, even though the total costs for contract performance may exceed the total contract revenues.

34. Irrecoverable costs related to a contract must be immediately recognized as in-period costs in the following cases:

(a) There are not enough legal conditions for continuing the contract performance;

(b) The continued contract performance depends on results of the settlement of petitions or opinions by competent agencies;

(c) The contract involves assets, which are likely to be requisitioned or confiscated;

(d) Contracts where the customers cannot perform their obligations;

(e) Contracts where the contractors cannot fulfill or perform their obligations inscribed therein.

35. When uncertain factors related to the reliable estimation of contract performance results are eliminated, revenues and costs related to construction contracts shall be recognized to match the completed work volume.

CHANGES IN ESTIMATIONS

36. The completion percentage (%) method shall be based on accumulation from the construction commencement to the end of each accounting period in respect of estimates of construction contract revenues and costs. Effect of each change in the estimation of contract revenues or costs, or effect of each change in the estimation of contract performance results shall be accounted as an accounting estimation change. Changed estimates shall be used in determining revenues and costs recognized in the business result report in the period when such changes occur or in subsequent periods.


37. Enterprises shall have to present in their financial statements:

(a) Method for determining revenues recognized in the period and method for determining the completed work volume of a construction contract;

(b) Construction contract revenues recognized in the reporting period;

(c) Total accumulated construction contract revenue recognized up to the reporting time;

(d) Payables to customers;

(e) Receivables from customers;

For contractors receiving work-in-progress payments as provided for in construction contracts (except for cases specified in Paragraph 22a), the following norms shall also be reported:

(f) Receivables according to scheduled progress;

(g) Payables according to scheduled progress.

38. Payables to customers are amounts received by contractors before corresponding work of the contract is performed.

39. Receivables from customers are amounts already inscribed in invoices of payments according to the scheduled progress or value of performed volume, which shall not be paid until the payment conditions prescribed in contracts are fully met or errors are corrected.

40. Receivables according to the scheduled progress is the difference between the total accumulated revenues of the construction contract recognized up to the reporting time, which is larger than the accumulated amount inscribed in invoices of payments according to the scheduled progress of the contract.

This norm applies to on-going construction contracts whereby accumulated revenues already recognized are larger than accumulated amounts inscribed in invoices of progress payments up to the reporting time.

41. Payables according to the scheduled progress is the difference between the total accumulated revenues of the construction contract recognized up to the reporting time, which is smaller than the accumulated amount inscribed in invoices of payments according to the scheduled progress of the

contract.

This norm applies to on-going construction contracts whereby accumulated amounts inscribed in invoices of progress payments exceed accumulated revenues recognized up to the reporting time.

Standard No. 16 BORROWING COSTS (Promulgated and publicized together with the Finance Minister’s Decision No. 165/2002/QD-BTC


GENERAL PROVISIONS

01. This standard aims to prescribe and guide the principles and methods for accounting borrowing costs, including: recognition of borrowing costs into production and/or business costs in the period; capitalization of borrowing costs when these costs directly relate to the construction investment or production of uncompleted assets which serve as basis for recording accounting books and compiling financial statements

02. This standard applies to the accounting of borrowing costs.

03. The terms in this standard shall be construed as follows:

Borrowing costs are loan interest and other costs incurred in direct relation to borrowings of an enterprise.

Uncompleted assets are assets in the construction investment process and assets in the production process, which need a duration long enough (over 12 months) to be put to use according to the set purposes or to sale.

04. Borrowing costs include:

(a) Interests on short-term and long-term borrowings, including borrowing interest on overdraft amounts;

(b) Amortization of discounts or premiums related to borrowings through bond issuance;

(c) Amortization of ancillary costs incurred in relation to the arrangement of borrowing procedures;

(d) Financial costs of financial leasing assets.

05. For example: Uncompleted assets are those being in the construction investment process, which are either unfinished or finished but not yet put into production or use; unfinished products being in the production process of production lines with a production cycle of over 12 months.


Recognition of borrowing costs

06. Borrowing costs should be recognized into production or business costs in the period in which they are incurred, unless they are capitalized according to provisions in paragraph 07.

07. Borrowing costs directly related to the construction investment or production of uncompleted assets shall be accounted into the value of such assets (capitalized) when the conditions prescribed in this standard are fully met.

08. Borrowing costs directly related to the construction investment or production of uncompleted assets shall be accounted into the value of such assets. Borrowing costs shall be capitalized when it is highly probable that enterprises can get future economic benefits from the use of such assets and the costs can be reliably determined.

Determination of borrowing costs to be capitalized

09. In cases where a particular borrowing is used only for the purpose of construction investment or production of an uncompleted asset, the borrowing cost fully eligible for capitalization for such uncompleted asset shall be determined as borrowing cost actually arising from borrowings minus (-) incomes earned from temporary investments of such borrowings.

10. Incomes from temporary investments of particular borrowings shall, pending the use thereof for the purpose of obtaining uncompleted assets, be offset against borrowing costs incurred upon the capitalization.

11. In case of joint capital borrowings, which are used for the purpose of investment in construction or production of an uncompleted asset, the borrowing costs eligible for capitalization in each accounting period shall be determined according to the capitalization rate for weighted average accumulated costs incurred to the investment in construction or production of such asset. The capitalization rate shall be calculated according to the weighted average interest rate applicable to the enterprise’s borrowings unrepaid in the period, except for particular borrowings for purpose of obtaining an uncompleted asset. The amount of borrowing costs capitalized during a period must not exceed the amount of borrowing costs arising during that period.

12. If any discount or premium arises upon the issuance of bonds, the borrowing interest shall be readjusted by amortizing the value of such discount or premium and readjusting capitalization rate in an appropriate manner. The amortization of the discount or premium may be effected by the actual interest rate method or straight line method. Borrowing interests and amortized discounts or premiums capitalized in each period must not exceed the actual borrowing interest amount and amortized discount or premium amount in that period.

Time of commencing capitalization

13. The capitalization of borrowing costs into the value of an uncompleted asset shall commence when the following conditions are simultaneously satisfied:

(a) Expenses for investment in construction or production of the uncompleted asset start to arise;

(b) Borrowing costs are arising;

(c) Activities that are necessary to prepare the uncompleted asset for its intended use or sale are being conducted.

14. Costs of the investment in construction or production of an uncompleted asset include costs which must be paid in cash, transfer of other assets or the acceptance of interest-bearing liabilities, excluding subsidies or supports related to the asset.

15. Activities necessary to prepare the asset for its intended use or sale include the activities of construction, production, technical and general management prior to the commencement of construction or production, such as the activities related to the application for permits prior to the commencement of construction or production. However, such activities do not cover the holding of an asset when no construction or production that changes the asset’s state is taking place. For example, borrowing costs related to the purchase of a land plot requiring site preparation activities shall be capitalized in the period during which activities of preparing such site are conducted. However, borrowing costs incurred while such land plot is purchased for the purpose of holding without construction activities related to such land plot, shall not be capitalized.

Temporary cessation of capitalization

16. The capitalization of borrowing costs shall be temporarily ceased in periods during which the investment in construction or production of uncompleted assets is interrupted, except for cases where such interruption is necessary.

17. The capitalization of borrowing costs shall be temporarily suspended when the investment in construction or production of uncompleted assets is abnormally interrupted. At that time, incurred borrowing costs shall be recognized as in-period production or business costs until the investment in construction or production of uncompleted assets resume.

Termination of capitalization

18. The capitalization of borrowing costs shall terminate when the major activities necessary to prepare the uncompleted asset for its intended use or sale are completed. Borrowing costs arising afterward shall be recognized as in-period production or business costs.

19. An asset is ready for its intended use or sale when its construction or production is complete even though general management works might still continue. In cases where due to minor changes (such as the asset decoration at the purchaser’s or user’s request) these activities are not yet completed, the major activities are still considered complete.

20. When the investment in construction of an uncompleted asset is completed in parts and each completed part is capable of being used while the construction investment continues for the other parts, the capitalization of borrowing costs shall terminate when all major activities necessary to prepare that part for its intended use or sale are completed.

21. For a trade quarter comprising many buildings, each of which can be used separately, the capitalization shall terminate for borrowed capital used for each particular completed work. However, for the construction of an industrial plant involving many production items which are carried out in sequence, the capitalization shall terminate only when all production items are completed.

Presentation of financial statements

23. Enterprises must present in their financial statements:

(a) Accounting policy applicable to borrowing costs;

(b) Total amount of borrowing costs capitalized in the period; and

(c) Capitalization rate used for determining borrowing costs capitalized in the period.

Standard No. 24

CASH FLOW STATEMENTS

(Promulgated and publicized together with the Finance Minister’s Decision No. 165/2002/QD-BTC of December 31, 2002)

GENERAL PROVISIONS

01. This standard aims to prescribe and guide the principles and methods for compiling and presenting cash flow statements.

02. This standard applies to the compilation and presentation of cash flow statements.

03. The cash flow statement is a constituent of a financial statement, it provides information to help users assess changes in net assets, financial structure, cash liquidity of assets, solvency and capability of enterprises for creating cash flows in their operations. Cash flow statements enhance the ability to objectively assess the business operation situation of enterprises and the comparability among enterprises because it can eliminate effects of the use of different accounting methods for the same transactions and events

The cash flow statement is used in assessing and forecasting the possibilities in terms of amount, timing and certainty of future cash flows; it is also used in re-checking the previous assessments and forecasts of cash flows, and examining the relationship between profitability and net cash flow as well as impacts of price fluctuation.


Cash comprises cash in funds, cash on transfer and demand deposits.

Cash equivalents are short-term (not exceeding 3 months) investments, which can be easily converted into known amounts of cash and are subject to an insignificant risk of conversion into cash.

Cash flows are inflows and outflows of cash and cash equivalents, excluding internal transfers between cash and cash equivalent amounts within enterprises.

Business activities are principal revenue-earning activities of enterprises and activities other than investment or financial ones.

Investment activities are activities of procuring, constructing, liquidating, assigning or selling long-term assets and other investments other than cash equivalents.

Financial activities are activities that result in changes in size and structure of the owners’ equity and borrowed capital of enterprises.


Presentation of cash flow statements

05. Enterprises shall have to present in-period cash flows in their cash flow statements upon three types of activities: business, investment and financial activities.

06. Enterprises may present their cash flows from business, investment and financial activities in a manner which is most appropriate to their business characteristics. The classification of and reporting on cash flows by activities shall provide information which help users assess impacts of those activities on the enterprises’ financial positions and on cash and cash equivalent amounts generated by the enterprises in the period. This information may also be used to evaluate the relationships among the above-said activities.

07. A single transaction may involve cash flows in different types of activities. For example, the repayment of a borrowing including both the principal and interest, in which the interest belongs to business activities and the principal belongs to financial activities.

Cash flows from business activities

08. Cash flows arising from business activities are those relating to principal revenue-earning activities of an enterprise, and providing basic information to evaluate the enterprise’s capability to generate cash from their business activities to repay debts, maintain operation, pay dividends and make new investments without external financing sources. Information on cash flows from business activities, when being used in conjunction with other information, shall help users forecast cash flows from future business activities. Principal cash flows from business activities include:

(a) Cash receipts from the sale of goods and the provision of services;

(b) Cash receipts from other revenue-earning activities (royalties, fees, commissions and other revenues other than received cash amounts determined being cash flows from investment and financial activities);

(c) Cash payments to goods suppliers and service providers;

(d) Cash payments to employees as wages and bonuses, and those on behalf of employees such as insurance premiums, allowances, etc.;

(e) Cash payments of loan interests;

(f) Cash payment of enterprise income tax;

(g) Cash receipts from tax reimbursements;

(h) Cash receipts from compensations or fines paid by customers violating economic contracts;

(i) Cash payments to insurance companies as insurance premiums, indemnities and other cash amounts under insurance policies;

(j) Cash payments of fines or compensations imposed on enterprises for their breaches of economic contracts.

09. Cash flows relating to the purchase and sale of securities for commercial purposes shall be classified as cash flows from business activities.

Cash flows from investment activities

10. Cash flows arising from investment activities are those relating to the procurement, construction, assignment, sale or liquidation of long-term assets and investments other than cash equivalents. The principal cash flows from investment activities include:

(a) Cash payments to procure and/or construct fixed assets and other long-term assets, including those relating to development costs already capitalized as intangible fixed assets;

(b) Cash receipts from the liquidation, assignment or sale of fixed assets and other long-term assets;

(c) Cash payments to provide loans to third parties, other than loans of banks, credit institutions and financial institutions; cash paid to acquire debt instruments of other units, other than payments for those debt instruments considered to be cash equivalents and those for commercial purposes;

(d) Cash receipts from the recovery of loans provided to third parties, other than recovered loans of banks, credit institutions and financial institutions; cash receipts from the re-sale of debt instruments of other units, other than receipts from the sale of those instruments considered to be cash equivalents and those for commercial purposes;

(e) Cash payments of investments in capital contributions to other units, other than payments for the purchase of shares for commercial purposes;

(f) Cash recovered from investments in capital contributions to other units, other than cash receipts from the re-sale of already purchased shares for commercial purposes;

(g) Cash receipts from loan interests, dividends and earned profits.

Cash flows from financial activities

11. Cash flows arising from financial activities are those relating to the change in size and structure of owners’ equity and borrowed capital of enterprises. The principal cash flows from financial activities include:

(a) Cash proceeds from the issuance of shares or reception of capital contributed by owners;

(b) Cash repayments of contributed capital to owners or for redemption of shares by the issuing enterprises;

(c) Cash receipts from short- or long-term borrowings;

(d) Cash repayments of principals of borrowings;

(e) Cash repayments of financial leasing debts;

(f) Cash payments of dividends or profits to owners or shareholders.

Cash flows from business activities of banks, credit institutions, financial institutions and insurance enterprises

12. For banks, credit institutions, financial institutions and insurance enterprises, their arising cash flows bear distinct characteristics. When making their cash flow statements, these organizations shall have to base themselves on their operation natures and characteristics to classify cash flows in an appropriate manner.

13. For banks, credit institutions and financial institutions, the following cash flows shall be classified as cash flows from business activities:

(a) Provided loan cash;

(b) Received loan cash;

(c) Cash receipts from capital mobilization (including deposits or savings received from other organizations and/or individuals);

(d) Cash refunds of mobilized capital (including repayments of deposits or savings of other organizations and/or individuals);

(e) Receipt of deposits from and repayment of deposits to other financial and credit institutions;

(f) Deposits and receipt of deposits at other financial and credit institutions;

(g) Receipts and payments of assorted service charges and commissions;

(h) Receipts from interests on loans and/or interests on deposits;

(i) Payment of interests on borrowings and/or deposits;

(j) Profits or losses from the purchase and sale of foreign currencies;

(k) Receipts or payments in the purchase and sale of securities at securities-trading enterprises;

(l) Payments for the purchase of securities for commercial purposes;

(m) Proceeds from the sale of securities for commercial purposes;

(n) Recovery of bad debts already written off;

(o) Other receipts from business activities;

(p) Other payments for business activities.

14. For insurance enterprises, received insurance premiums and paid insurance indemnities as well as receipts and payments related to clauses of insurance policies shall all be classified as cash flows from business activities.

15. For banks, credit institutions, financial institutions and insurance enterprises, cash flows from investment activities and financial activities shall be similar to those of other enterprises, except for loans provided by banks, credit institutions and financial institutions, which are already classified as cash flows from business activities for the reason that they relate to principal revenue-generating activities of enterprises.

METHODS OF MAKING CASH FLOW STATEMENTS

Cash flows from business activities

16. Enterprises shall have to report their cash flows from business activities by one of the following two methods:

(a) The direct method: Under this method, the norms indicating cash inflows and cash outflows are presented on statements and determined by one of the following two ways:

- Direct analysis and synthesis of cash receipts and payments upon each receipt or payment item according to the accounting records of enterprises.

- Readjustment of revenues, cost of goods sold and other items in the business result report, for:

+ Changes in the period in inventories, and receivables and payables from business activities;

+ Other non-cash items;

+ Cash flows relating to investment and financial activities.

(b) The indirect method: Norms indicating cash flows are determined on the basis of total before-tax profit and readjusted from the following:

- Non-cash revenues and costs, such as depreciation of fixed assets, reserves, etc.;

- Gains and losses of unrealized exchange rate difference;

- Paid enterprise income tax amounts;

- Changes in the period in inventories, and receivables and payables from business activities (other than income tax and other payables after enterprise income tax);

- Profits or losses from investment activities.

Cash flows from investment and financial activities

17. Enterprises shall have to report separately cash inflows and cash outflows from investment and financial activities, except for those cash flows which are reported on a net basis and mentioned in paragraphs 18 and 19 of this standard.

Reporting on cash flows on a net basis

18. Cash flows arising from the following business, investment or financial activities shall be

reported on a net basis:

(a) Cash receipts and payments on behalf of customers:

- Rentals received or paid on behalf of asset owners and those returned to them;

- Investment funds held for customers;

- Acceptance and repayment of demand deposits by banks, amounts transferred or paid via banks.

(b) Cash receipts and payments for items of which the turnover is quick and the maturities are short:

- Purchase and sale of foreign currencies;

- Purchase and sale of investments;

- Other borrowings and loans of a short-term of 3 months or less.

19. Cash flows arising from the following activities of banks, credit institutions and financial institutions shall be reported on a net basis:

(a) Acceptance and repayment of time deposits with fixed maturity dates;

(b) Placement of deposits at and withdrawal of deposits from other financial institutions;

(c) Provision of loans to customers and repayment of those loans by customers.

Foreign currency-related cash flows

20. Cash flows arising from foreign-currency transactions must be converted into the accounting currency at the foreign exchange rates at the time such transactions arise. Currencies in cash flow statements of institutions operating overseas must be converted into the accounting currency of the parent companies at the actual exchange rate of the cash flow statement date.

21. Unrealized exchange rate difference arising from the changes in exchange rates for converting foreign currencies into the accounting currency are not cash flows. However, the exchange rate difference due to the conversion of cash and cash equivalents currently deposited in foreign currencies must be separately presented on cash flow statements in order to compare cash and cash equivalents at the beginning and the end of the reporting period.

Cash flows relating to received interests, dividends and profits

22. For enterprises (other than banks, credit institutions and financial institutions), cash flows relating to already paid loan interests shall be classified as cash flows from business activities. Cash flows relating to received loan interests, dividends and profits shall be classified as cash flows from investment activities. Cash flows relating to already paid dividends and profits shall be classified as cash flows from financial activities. These cash flows must be presented as separate norms suitable to each type of activities on cash flow statements.

23. For banks, credit institutions and financial institutions, the already paid or received interests shall be classified as cash flows from business activities, other than received interests definitely identified to be cash flows from investment activities. The received dividends and profits shall be classified as cash flows from investment activities. The paid dividends and profits shall be classified as cash flows from financial activities.

24. The total amount of loan interest paid in the period must be presented in the cash flow statement whether it has been recognized as a cost in the period or capitalized in accordance with

accounting standard No. 16 "Borrowing costs."

Cash flows relating to enterprise income tax

25. Cash flows relating to enterprise income tax shall be classified as cash flows from business activities (except for cases where they are determined as cash flows from investment activities) and presented as separate norms on cash flow statements.

Cash flows relating to the acquisition and liquidation of subsidiary companies or other business units

26. Cash flows arising from the acquisition and liquidation of subsidiary companies or other business units shall be classified as cash flows from investment activities and presented as separate norms on cash flow statements.

27. The total amount of payments for and/or receipts from the acquisition and liquidation of subsidiary companies or other business units shall be presented in cash flow statements in net cash and cash equivalents paid for or received from the acquisition and liquidation.

28. Enterprises shall have to synthetically present in their financial statement explanations the following information on both the acquisition and liquidation of subsidiary companies or other business units in the period:

(a) Total purchase or liquidation value;

(b) Value portion of the purchase or liquidation paid in cash and cash equivalents;

(c) Cash and cash equivalent amounts actually available at subsidiary companies or other business units acquitisioned or liquidated;

(d) Value portion of assets and liabilities other than cash and cash equivalents at subsidiary companies or other business units acquitisioned or liquidated in the period. Value of such assets must be synthesized upon each type of asset.

Non-cash transactions

29. Investment and financial transactions that do not require the direct use of cash or cash equivalents shall not be presented in cash flow statements.

30. Many investment and financial activities do not have a direct impact on current cash flows although they do affect the asset and capital source structure of enterprises. Therefore, they shall not be presented in cash flow statements but in financial statement explanations. For example:

(a) The purchase of assets by accepting related liabilities directly or through financial leasing operation;

(b) The acquisition of an enterprise by means of share issuance;

(c) The conversion of debts into owners’ equity.

Components of cash and cash equivalents

31. Enterprises shall have to present in their cash flow statements the norms of cash and cash equivalents at the beginning and the end of the period, effects of changes in foreign exchange rates for converting the currently held cash and cash equivalents in foreign currencies for comparison of the data in cash flow statements with the corresponding items on the balance sheets.

Other explanations

32. Enterprises shall have to present the value of and reasons for large cash and cash equivalent amounts that they have held and not been used due to limitations prescribed by law or other commitments which must be fulfilled by enterprises.

33. There are many circumstances in which cash and cash equivalent balances held by enterprises are not available for use for business activities. For example: Cash amounts accepted as deposits or into escrow accounts; special-use funds; project funding, etc.

Standard No. 17 INCOME TAXES


dated 15 February 2005)

GENERAL

01. The objective of this standard is to prescribe accounting principles and accounting treatment for income taxes. Accounting for income taxes includes accounting for the current and future income tax consequences of:

a) the future recovery or settlement of the carrying amount of assets or liabilities that are recognized in an enterprise’s balance sheet; and

b) Transactions and other events of the current period that are recognized in an enterprise’s income statement.

It is inherent in the recognition of an asset or liability in the financial statements, enterprise expects to recover or settle the carrying amount of that asset or liability. If it is probable that recovery or settlement of that carrying amount will make future tax payments larger or smaller than they would be if such recovery or settlement were to have no tax consequences, this Standard requires an enterprise to recognize a deferred tax liability or deferred tax asset, with certain limited exceptions.

This Standard requires an enterprise to account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves. Thus, for transactions and other events recognized in the income statement, any related tax effects are also recognized in the income statement. For transactions and other events recognized directly in equity, any related tax effects are also recognized directly in equity.

This Standard also deals with the recognition of deferred tax assets arising from unused tax losses or unused tax credits and the presentation of income taxes in the financial statements and the disclosure of information relating to income taxes.

02. This standard should be applied in accounting for income taxes

Income taxes include all income taxes which are based on taxable profits including profits generated from production and trading activities in other countries that the Socialist Republic of Vietnam has not signed any double tax relief agreement. Income taxes also include other related taxes, such as withholding taxes on foreign individuals or organizations with no permanent standing in Vietnam when they receives dividends or distribution from their partnership, associates, joint venture or subsidiary; or making a payment for services provided by foreign contractors in accordance with regulations of the prevailing Law on corporate income taxes.


Accounting profit: is net profit or loss for a period before deducting tax expense, determined in accordance with the rules of accounting standards and accounting system.

Taxable profit: is the taxable profit for a period, determined in accordance with the rules of the current Law on Income taxes, upon which income taxes are payable or recoverable.

Income tax expense (tax income): is the aggregate amount of current income tax expense (income) and deferred income tax expense (income) included in the determination of profit or loss for the period.

Current income tax:is the amount of income taxes payable or recoverable in respect of the current year taxable profit and the current tax rates.

Deferred income tax liabilities:are the amounts of income taxes payable in future periods in respect of taxable temporary differences in the current year.

Deferred income tax assets: are the amounts of income taxes recoverable in future periods in respect of:

a) deductible temporary differences;

b) the carry forward of unused tax losses; and

c) the carry forward of unused tax credits.

Temporary differences: are differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Temporary differences may be either:

a) Taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit of future periods when the carrying amount of the asset or liability is recovered or settled; or

b) Deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit of future periods when the carrying amount of asset of liability is recovered or settled.

The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.

Income tax expense comprises current tax expense and deferred tax expense. Tax income comprises current tax income and deferred tax income.

CONTENT

Tax base

04. The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an enterprise when it recovers the carrying amount of the asset. If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount.

Examples:

(1) A fixed asset has historical cost of 100: for tax purposes, depreciation of 30 has already been deducted in the current and prior periods and the remaining cost will be deductible in future periods, either as depreciation or through a deduction on disposal. Revenue generated by using the asset is taxable, any gain on disposal of the machine will be taxable and any loss on disposal will be deductible for tax purposes. The tax base of the asset is 70.

(2) Trade receivables have a carrying amount of 100. The related revenue has already been included in taxable profit (tax loss). The tax base of the trade receivables is 100.

(3) Dividends receivable from a subsidiary have a carrying amount of 100. The dividends are not taxable. In substance, the entire carrying amount of the asset is deductible against the economic benefits. Consequently, the tax base of the dividends receivable is 100.

(In the above example, there is no taxable temporary difference. It could also be explained as follows: the tax base of dividends receivable is nil and tax rate of 0% applied to taxable temporary

difference of 100. Under both cases, there is no deferred tax liability).

(4) A loan receivable has a carrying amount of 100. The repayment of the loan will have no tax consequences. The tax base of the loan is 100.

05. The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods. In the case of revenue which is received in advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods.

Examples:

(1) Current liabilities include accrued expenses for employment benefits with a carrying amount of 100. The related expense will be deducted for tax purposes on a cash basis. The tax base of the accrued expenses is nil.

(2) Current liabilities include interest revenue received in advance, with a carrying amount of 100. The related interest revenue was taxes on a cash basis. The tax base of the interest received in advance is nil.

(3) Current liabilities include accruals for telephone, water and electricity expenses, with a carrying amount of 100. The accrued expenses have already been deducted for tax purposes in the current year. The tax base of the accrued expenses is 100.

(4) Current liability includes accrued fines with a carrying amount of 100. Fines are not deductible for tax purposes. The tax base of the accrued fines is 100.

In the above example, there is no deductible temporary difference. It could also be explained as follow: tax base of the fine is nil and tax rate of 0% applied to deductible temporary difference of 100. Under both cases, there is no deferred tax asset.

(5) A loan payable has a carrying amount of 100. The repayment of the loan will have no tax consequences. The tax base of the loan is 100.

06. Some items have a tax base but are not recognized as assets and liabilities in the balance sheet. For example, cost of supplies and tools are recognized as an expense in determining accounting profit in the period in which they are incurred but will only be permitted as a deduction in determining taxable profit (tax loss) until a later period. The difference between the tax base of the cost of supplies and tools, being the amount the taxation authorities will permit as a deduction in future periods, and the carrying amount of nil is a deductible temporary difference that results in a deferred tax asset.

07. Where the tax base of an asset or liability is not immediately apparent, it is helpful to consider the fundamental principle upon which this Standard is based: that an enterprise should, with certain limited exceptions, recognize a deferred tax liability (asset) whenever recovery or settlement of the carrying amount of an asset or liability would make future tax payments larger (smaller) than income tax payable in the current year if such recovery or settlement were to have no tax consequences.

Recognition of current tax liabilities and current tax assets

08. Current tax for current and prior periods should, to the extent unpaid, be recognized as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess should be recognized as an asset.

Recognition of deferred tax liabilities and deferred tax assets.

Taxable Temporary Differences

09. A deferred tax liability should be recognized for all taxable temporary differences, unless the deferred tax liability arises from the initial recognition of an asset or liability in a transaction which at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

10. The recognition base of an asset is the carrying amount of that asset that will be recovered in the form of economic benefits that flow to the enterprise in future periods. When the carrying amount of the asset exceeds its tax base, the amount of taxable economic benefits will exceed the amount that will be allowed as a deduction for tax purposes. This difference is a taxable temporary difference and the obligation to pay the resulting income taxes in future periods is a deferred tax liability. As the enterprise recovers the carrying amount of the asset, the taxable temporary difference will reserve and the enterprise will have taxable profit. This makes it probable that economic benefits will be decreased due to tax payments. Therefore, this Standard requires the recognition of all deferred tax liabilities, except in certain circumstances described in paragraph 09.

Example:

A fixed asset which cost 150 has a carrying amount of 100. Cumulative depreciation for tax purposes is 90 and the tax rate is 28%.

The tax base of the asset is 60 (cost of 150 less cumulative tax depreciation of 90). To recover the carrying amount of 100, the enterprise must earn taxable income of 100, but will only be able to deduct tax depreciation of 60. Consequently, the enterprise will pay income taxes of 11.2 (40 at 28%) when it recovers the carrying amount of the asset. The difference between the carrying amount of 100 and the tax base of 60 is a taxable temporary difference of 40. Therefore, the enterprise recognizes a deferred tax liability of 11.2 (40 at 28%) representing the income taxes that it will pay when it recovers the carrying amount of the asset.

11. Some temporary differences arise when income or expense is included in accounting profit in one period but is included in taxable profit in a different period. Such temporary differences are often described as timing differences. These temporary differences are taxable temporary differences and will result in deferred tax liabilities.

Example:

Depreciation used in determining taxable profit (tax loss) may differ from that used in determining accounting profit. The temporary difference is the difference between the carrying amount of the asset and its tax base which is the original cost of the asset less all deductions in respect of that asset permitted by the tax law in determining taxable profit of the current and prior periods. A taxable temporary difference arises, and results in a deferred tax liability, when tax depreciation is more accelerated than accounting depreciation (if tax depreciation is less rapid than accounting depreciation, a deductible temporary difference arises, and results in a deferred tax asset).

Initial recognition of an asset and liability

12. A temporary difference may arise on initial recognition of an asset or liability, for example if part or all of the cost of an asset will not be deductible for tax purposes. The method of accounting for such a temporary difference depends on the nature of the transaction which led to the initial recognition of the asset.

If the transaction affects either accounting profit or taxable profit, an enterprise recognizes any deferred tax liability or asset and recognizes the resulting deferred tax expense or income in the income statement (see paragraph 41)

Deductible Temporary Differences

13 A deferred tax asset shall be recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless the deferred tax asset arises from the initial

recognition of an asset or liability in a transaction which at the time of transaction, affects neither accounting profit nor taxable profit (tax loss).

14. It is inherent in the recognition of a liability that the carrying amount will be settled in future periods through an outflow from the enterprise of resources embodying economic benefits. When resources flow from the enterprise, part or all of their amounts may be deductible in determining taxable profit of a period later than the period in which the liability is recognized. In such cases, a temporary difference exists between the carrying amount of the liability and its tax base. Accordingly, a deferred tax asset arises in respect of the income taxes that will be recoverable in the future periods when that part of the liability is allowed as a deduction in determining taxable profit.

Similarly, if the carrying amount of an asset is less than its tax base, the difference gives rise to a deferred tax asset in respect of the income taxes that will be recoverable in future periods.

Example:

An enterprise recognizes a liability of 100 for accrued product warranty costs. For tax purposes, the product warranty costs will not be deductible until the enterprise pays claims. The tax rate is 28%.

The tax base of the liability is nil (carrying amount of 100, less the amount that will be deductible for tax purposes in respect of that liability in future periods). In settling the liability for its carrying amount, the enterprise will reduce its future taxable profit by an amount of 100 and, consequently, reduce its future tax payments by 28 (100 at 28%). The difference between the carrying amount of 100 and the tax base of nil is a deductible temporary difference of 100. Therefore, the enterprise recognizes a deferred tax asset of 28 (100 at 28%), provided that it is probable that the enterprise will earn sufficient taxable profit in future periods to benefit from a reduction in tax payments.

15.Deductible temporary differences result in deferred tax assets, for instance:

Accrual maintenance expense for fixed assets may be deducted in determining accounting profit but deducted in determining taxable profit when these costs are actually paid by the enterprise. In this case, a temporary difference exists between the carrying amount of the accrual expense and its tax base. Such a deductible temporary difference results in a deferred tax assets as economic benefits will flow to the enterprise in the form of a deduction from taxable profits when accrual expense is paid.

16. The reversal of deductible temporary differences results in deductions in determining taxable profits in future periods. However, economic benefits in the form of reductions in tax payments will flow to the enterprise only if it earns sufficient taxable profits against which the deductions can be offset. Therefore, an enterprise recognizes deferred tax assets only when it is probable that taxable profits will be available against which the deductible temporary differences can be utilised.

17. It is probable that taxable profit will be available against which a deductible temporary difference can be utilised when there are sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity which are expected to reverse:

a. in the same period as the expected reversal of the deductible temporary difference; or

b. in periods into which a tax loss arising from the deferred tax asset can be carried forward.

In such circumstances, the deferred tax asset is recognized in the period in which the deductible temporary differences arise.

18. When there are insufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, the deferred tax asset is recognized to the extent that:

a) it is probable that the enterprise will have sufficient taxable profit relating to the same taxation authority and the same taxable entity in the same period as the reversal of the deductible

temporary difference (or in the periods into which a tax loss arising from the deferred tax asset can be carried forward). In evaluating whether it will have sufficient taxable profit in future periods, an enterprise ignores taxable amounts arising from deductible temporary differences that are expected to originate in future periods, because the deferred tax asset arising from these deductible temporary differences will itself require future taxable profit in order to be utilised; or

b) tax planning opportunities are available to the enterprise that will create taxable profit in appropriate periods.

19. Tax planning opportunities are actions that the enterprise would take in order to create or increase taxable income in a particular period before the expiry of a tax loss or tax credit carry forward. For example, in some circumstances, taxable profit may be created or increased by:

(a) deferring the claim for certain deductions from taxable profit;

(b) selling, and leasing back assets that have appreciated but for which the tax base has not been adjusted to reflect such appreciation; and

(c) selling an asset that generates non-taxable income (such as a government bond) in order to purchase another investment that generates taxable income.

When tax planning opportunities advance taxable profit from a later period to an earlier period, the utilisation of a tax loss or tax credit carry forward still depends on the existence of future taxable profit from sources other than future originating temporary differences.

20. When an enterprise has a history of recent losses, the enterprise considers the guidance in paragraphs 22 and 23

Unused Tax Losses and Unused Tax Credits

21. A deferred tax asset should be recognized for the carry forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised.

22. The criteria for recognising deferred tax assets arising from the carryforward of unused tax losses and tax credits are the same as the criteria for recognising deferred tax assets arising from deductible temporary differences. However, the existence of unused tax losses is strong evidence that future taxable profit may not be available. Therefore, when an enterprise has a history of recent losses, the enterprise recognizes a deferred tax asset arising from unused tax losses or tax credits only to the extent that the enterprise has sufficient taxable temporary differences or there is convincing other evidence that sufficient taxable profit will be available against which the unused tax losses or unused tax losses or unused tax credits can be utilised by the enterprise. In such circumstances, the Standard requires disclosure of the amount of the deferred tax asset and the nature of the evidence supporting its recognition (see paragraph 59).

23.An enterprise considers the following criteria in assessing the probability that taxable profit will be available against which the carry forward tax losses or unused tax credits can be utilises:

a) whether the enterprise has sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, which will result in taxable amounts against which the unused tax losses or unused tax credits can be utilised before they expire;

b) whether it is probable that the enterprise will have taxable profits before the carry forward tax losses or unused tax credits expire;

c) whether the unused tax losses result from identifiable causes which are unlikely to recur; and

d) whether tax planning opportunities (see paragraph 19) are available to the enterprise that will

create taxable profit in the period in which the unused tax losses or unused tax credits can be utilised.

To the extent that it is not probable that taxable profit will be available against which the unused tax losses or unused tax credits can be utilised, the deferred tax asset is not recognized.

Re-assessment of unrecognized deferred tax assets

24. At each balance sheet date, an enterprise re-assesses unrecognized deferred tax assets. The enterprise recognizes a previously unrecognized deferred tax asset to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. For example, an improvement in trading conditions may make it more probable that the enterprise will be able to generate sufficient taxable profit in the future for the deferred tax asset to meet the recognition criteria set out in paragraphs 13 or 21.

Investments in subsidiaries, branches and associates and interests in Joint Ventures

25. An enterprise should recognize a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, except to the extent that both of the following conditions are satisfied:

(a) the parent, investor or venturer is able to control the timing of the reversal of the temporary difference; and

(b) it is probable that the temporary difference will not reverse in the foreseeable future.

26. As a parent controls the dividend policy of its subsidiary, it is able to control the timing of the reversal of temporary differences associated with that investment (including the temporary differences arising not only from undistributed profits but also from any foreign exchange translation differences). Furthermore, it would often be impracticable to determine the amount of income taxes that would be payable when the temporary difference reverses. Therefore, when the parent has determined that those profits will not be distributed in the foreseeable future the parent does not recognize a deferred tax liability. The same considerations apply to investments in branches.

27. An enterprise accounts in its own currency for non-monetary assets and liabilities of a foreign operation that is integral to the enterprise’s operations (see VAS 10, The Effects of Changes in foreign exchange rates).

Where the foreign operation’s taxable profit or tax loss (and, hence, the tax base of its non-monetary assets and liabilities) is determined in foreign currency, changes in the exchanges rate give rise to temporary differences. Because such temporary differences relate to the foreign operation’s own assets and liabilities, rather than to the reporting enterprise’s investment in that foreign operation, the reporting enterprise should recognizes the resulting deferred tax liability or (subject to paragraph 13) asset. The resulting deferred tax is reflected into the income statement (see paragraph 40).

28. An investor in an associate does not control that enterprise and is usually not in a position to determine its dividend policy. Therefore, in the absence of an agreement requiring that the profits of the associate will not be distributed in the foreseeable future, an investor recognizes a deferred tax liability arising from taxable temporary differences associated with its investment in the associate. In some cases, an investor may not be able to determine the amount of tax that would be payable if it recovers the cost of its investment in an associate, but can determine that it will equal or exceed a minimum amount. In such cases, the deferred tax liability is measured at this amount.

29. The arrangement between the parties to a joint venture usually deals with the sharing of the profits and identifies whether decisions on such matters require the consent of all the ventures or a

specified majority of the ventures. When the venturer can control the sharing of

profits and it is probable that the profits will not be distributed in the foreseeable future, a deferred tax liability is not recognized.

30. An enterprise should recognize a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint ventures, to the extent that, and only to the extent that, it is probable that:

a) the temporary difference will reverse in the foreseeable future; and

b) taxable profit will be available against which the temporary difference can be utilised.

31. In deciding whether a deferred tax asset is recognized for deductible temporary differences associated with its investments in subsidiaries, branches and associates, and its interests in joint ventures, an enterprise considers the guidance set out in paragraph 17 to 20.

Measurement

32. Current tax liabilities (assets) for the current and prior periods should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date.

33. Deferred tax assets and liabilities should be measured at the tax rates that are expected to apply to the financial year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date.

34. Current and deferred tax assets and liabilities are usually measured using the tax rates that have been enacted.

35. The measurement of deferred tax liabilities and deferred tax assets should reflect the tax consequences that would follow from the manner in which the enterprise expects, at the balances sheet date, to recover or settle the carrying amount of its assets and liabilities.

36. Deferred tax assets and liabilities should not be discounted.

37. The reliable determination of deferred tax assets and liabilities on a discounted basis requires detailed scheduling of the timing of the reversal of each temporary difference. In many cases such scheduling is impracticable or highly complex. Therefore, it is inappropriate to require discounting of deferred tax assets and liabilities. To permit, but not to require, discounting would result in deferred tax assets and liabilities which would not be comparable between enterprises. Therefore, this Standard does not require or permit the discounting of deferred tax assets and liabilities.

38. The carrying amount of a deferred tax asset should be reviewed at each balance sheet date. An enterprise should reduce the carrying amount of a deferred tax asset to the extent that is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Any such reduction should be reversed to the extent that it becomes probable that sufficient taxable profit will be available.

Recognition of Current and Deferred Tax

39. Accounting for the current and deferred tax effects of a transaction or other event is consistent with the accounting for the transaction or even itself which is addressed from paragraph 40 to 47.

Income Statement

39. Current and deferred tax should be recognized as income or an expense and included in profit or loss for the period, except to the extend that the tax arises from a transaction or

event which is recognized, in the same or a different period, directly in equity (see paragraphs 43 to 47).

40. Most deferred tax liabilities and deferred tax assets arise where income or expense is included in the accounting profit in one period, but is included in taxable profit (tax loss) in a different period. The resulting deferred tax is recognized in the income statement. Examples are when:

(a) Foreign exchange gain from revaluation at the end of the fiscal year is included in accounting profit in accordance with VAS 10 “Effects of Changes in foreign exchange rates”, but is included in taxable profit (tax loss) on a cash basis; and

(b) Cost of tools and supplies is charged to the income statement in accordance with VAS 02 “Inventory” but should be regularly allocated for tax purposes.

42. The carrying amount of deferred tax assets and liabilities may change even though there is no change in the amount of the related temporary differences. This can result, for example, from:

(a) A change in tax rates or corporate income tax law;

(b) Re-assessment of the recoverability of deferred tax assets; or

(c) A change in the manner of recovery of an asset.

The resulting deferred tax is recognized in the income statement, except to the extent that it relates to items previously charged or credited to equity (see paragraph 45).

Items Credited or Charged Directly to Equity

43. Current tax and deferred tax should be charged or credited directly to equity if the tax relates to items that are credited or charged, in the same or a different period, directly to equity.

44. Vietnamese Accounting Standards require or permit certain items to be credited or charged to equity. Examples of such items are:

(a) An adjustment to the opening balance of retained earnings resulting from either a change in accounting policies that is applied retrospectively or the correction of an error (see VAS 29 “Changes in accounting policies, accounting estimates and errors”);

(b) Exchange differences arising on the translation of the financial statements of a foreign entity (see VAS 10 “Effects of Changes in foreign exchange rates”).

45. In exceptional circumstances it may be difficult to determine the amount of current and deferred tax that relates to items credited or charged to equity. This may be the case, for example, when:

(a) A change in tax rates or other tax rules affects a deferred tax asset or liability relating (in whole or in part) to an item that was previously charged or credited to equity; or

(b) An enterprise determines that a deferred tax asset should be recognized, or should no longer be recognized in full, and the deferred tax asset relates (in whole or in part) to an item that was previously charged or credited to equity.

In such cases, the current and deferred tax related to items that are credited or charged to equity is based on a reasonable pro- rata allocation of the current and deferred tax of the entity in the tax jurisdiction concerned, or other methods that achieve a more appropriate allocation in the circumstances.

46. When an asset is revaluated for tax purposes and that revaluation relates to an accounting

revaluation of an earlier period, or to one that is expected to be carried out in a future period, the tax effects of both the asset revaluation and the adjustment of the tax base are credited or charged to equity in the periods in which they occur. However, if the revaluation for tax purpose is not related to an accounting revaluation of an earlier period, or to one that is expected to be carried out in a future period, the tax effect of the adjustment of the tax base is recognized in the income statement.

47. When an enterprise pays to any foreign organizations, foreign individuals that are non-resident in Vietnam, it must be required to pay a portion of income tax to tax authorities on behalf of these foreign organizations or individuals. In current jurisdictions, this amount is referred to as a withholding tax. Such amounts paid or payable to taxation authority is charged to equity as a part of dividends or interests.

Presentation

Deferred tax assets and deferred tax liabilities

48. Deferred tax assets and deferred tax liabilities should be presented separately from other assets and liabilities in the balance sheet. Deferred tax assets and deferred tax liabilities should be distinguished from current tax assets and current tax liabilities.

49. When an enterprise classifies its assets and liabilities as current and non-current assets and liabilities in its financial statements, the enterprise should not classify deferred tax assets (liabilities) as current assets (liabilities)

Offset

50. An enterprise should offset current tax assets and current tax liabilities if, and only if, the enterprise:

a) has a legally enforceable right to set off the recognized amounts; and

b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

51. An enterprise should offset deferred tax assets and deferred tax liabilities if, and only if:

a) the enterprise has a legally enforceable right to set off current tax assets against current tax liabilities; and

b) the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either:

i) the same taxable entity; or

ii) different taxable entities which intend either settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

52. To avoid the reversal of each temporary difference, this Standard requires an enterprise to set off a deferred tax asset against a deferred tax liability of the same taxable entity if, and only if, they relate to income taxes payable levied by the same taxation authority and the enterprise has a legally enforceable right to set off current tax assets against current tax liabilities.

53. In rare circumstances, an enterprise may have a legally enforceable right of set-off on a net basis for some particular financial years. In such rare circumstances, detailed scheduling may be required to establish reliably whether the deferred tax liability of one taxable entity will result in

increased tax payments in the same period in which a deferred tax asset of

another taxable entity will result in decreased payments by that second taxable entity.

Tax expense

Tax Expense (Income) related to Profit or Loss from Ordinary Activities.

54. The tax expense (income) related to profit or loss from ordinary activities shall be presented in the income statement.

Foreign exchange differences arising from deferred tax liabilities or assets in oversea

55. VAS 10, “The Effects of Changes in foreign exchange rates”, requires certain foreign exchange differences to be recognized as income or expense but does not specify where such differences should be presented in the income statement. Accordingly, foreign exchange differences arising from deferred tax liabilities or assets in oversea are recognized in the income statement and they may be classified as deferred tax expense (income) if that presentation is considered to be the most useful to financial statement users.

Disclosure

56. The major components of tax expense (income) should be disclosed separately.

57. The major components of tax expense (income) may include:

a) current tax expense (income);

b) any adjustments recognized in the period for current tax of prior periods;

c) the amount of deferred tax expense (income) relating to the origination and reversal of temporary differences;

d) the amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes;

e) the amount of the benefit arising from a previously unrecognized tax loss, tax credit or temporary difference of a prior period that is used to reduce current tax expense;

f) the amount of the benefit from a previously unrecognized tax loss, tax credit or temporary difference of a prior period that is used to reduce deferred tax expense;

g) deferred tax expense arising from the write-down, or reversal of a previous write-down, of a deferred tax asset in accordance with paragraph 38.

58. The following should also be disclosed separately:

a) the aggregate current and deferred tax relating to items that are charged or credited to equity;

b) an explanation of the relationship between tax expense (income) and accounting profit in either or both of the following forms:

(i) a numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rate(s), disclosing also the basis on which the applicable tax rate(s) is (are) computed; or

(ii) a numerical reconciliation between the average effective tax rate and the applicable tax

rate, disclosing also the basis on which the applicable tax rate is computed;

c) an explanation of changes in the applicable tax rate(s) compared to the previous accounting period;

d) the amount (and expiry date, if any) of deductible temporary differences, unused tax losses, and unused tax credits for which no deferred tax asset is recognized in the balance sheet;

e) Temporary differences, each type of unused tax losses and tax credits:

f) the amount of the deferred tax assets and liabilities recognized in the balance sheet for each period presented;

g) the amount of the deferred tax income or expense recognized in the income statement, if this is not apparent from the changes in the amounts recognized in the balance sheet; and

h) in respect of discontinued operations. the tax expense relating to:

(i) the gain or loss on discontinuance; and

(ii) the profit or loss for the period of the discontinued operation, together with the corresponding amounts for each prior period presented

59. An enterprise should disclose the amount of a deferred tax asset and the nature of the evidence supporting its recognition, when:

a) the utilisation of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences.

b) the enterprise has suffered a loss in either the current or preceding period in the tax jurisdiction to which the deferred tax asset relates.

60. The disclosure required by paragraph 58 (c) enable users of financial statement to understand whether the relationship between tax expense (income) and accounting profit is unusual and to understand the significant factors that could affect that relationship in the future. The relationship between tax expense (income) and accounting profit may be affected by such factors as revenue that is exempt from taxation, expenses that are not deductible in determining taxable profit (tax loss), the effect of tax losses and the effect of foreign tax rates.

61. In explaining the relationship between tax expense (income) and accounting profit at current tax rate, it provides the most meaningful information to the users of enterprise’s financial statements.

62. The average effective tax rate is the tax expense (income) divided by the accounting profit.

63. It would often be impracticable to compute the amount of unrecognized deferred tax liabilities arising from investments in subsidiaries, branches and associates and interests in joint venture. Therefore, this Standard requires an enterprise to disclose the aggregate amount of the underlying temporary differences but does not require disclosure of the deferred tax liabilities. Nevertheless, where practicable, enterprises are encouraged to disclose the amounts of the unrecognized deferred tax liabilities because financial statement users may find such information useful.

Where changes in tax rates or tax laws are enacted or announced after the balance sheet date, an enterprise discloses any significant effect of those changes on its current and deferred tax assets and liabilities (see VAS 23 “Events after the balance sheet date”).

Standard No. 18 PROVISIONS, CONTINGENT ASSETS AND LIABILITIES



GENERAL

01. The objective of this Standard is to prescribe the accounting policies and procedures in relation to provisions, contingent liabilities and contingent assets in terms of Recognition, Measurement, Reimbursements, Changes in Provisions, Use of Provisions, and Application of the Recognition and Measurement Rules as a basis for the presentation and disclosure of financial statements.

02. This Standard shall be applied by all entities in accounting for provisions, contingent liabilities and contingent assets, except:

a) those resulting from executory contracts, except where the contract is onerous;

b) those covered by another Standard.

03. This Standard does not apply to financial instruments (including guarantees) that are within the scope of VAS on Financial Instruments.

04. Where another Standard deals with a specific type of provision, contingent liability or contingent asset, an enterprise applies that Standard instead of this Standard. For example, VAS 11 “Business Combinations” addresses the treatment by an acquirer of contingent liabilities assumed in a business combination. Similarly, certain types of provisions are also addressed in Standards on:

(a) VAS 15, Construction Contracts;

(b) VAS 17, Income Taxes;

(c) VAS 06, Leases. However, for operating leases that have become onerous, this Standard shall apply.

05. Some amounts treated as provisions may relate to the recognition of revenue, for example warranty. VAS 14 “Revenue and Other Incomes” shall apply in the circumstances.

06. This Standard applies to provisions for business restructuring (including discontinued operation). Where a restructuring meets the definition of a discontinued operation, additional disclosure is required in accordance with the guidance of current accounting standards.


A provision is a liability of uncertain timing or amount.

A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

An obligating event is an event that creates a legal or constructive obligation that results in an enterprise having no realistic alternative to settling that obligation.

A legal obligation is an obligation that derives from:

(a) A contract;

(b) Legislation.

A constructive obligation is an obligation that derives from an enterprise’s actions where by published policies or a sufficiently specific current statement, the enterprise has indicated to other parties that it will accept and discharge certain responsibilities.

A contingent liability is:

(a) A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or

(b) A present obligation that arises from past events but is not recognised because:

(i) It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or

(ii) The amount of the obligation cannot be measured with sufficient reliability.

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.

An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

A restructuring is a programme that is planned and controlled by management, and materially changes either:

(a) The scope of a business undertaken by an enterprise; or

(b) The manner in which that business is conducted.


Provisions and Liabilities

08. Provisions can be distinguished from liabilities such as accounts payable-trade, borrowing… because payables are almost certain in timing and amount while for provisions there is no such certainty.

Relationship between Provisions and Contingent Liabilities

09. In a general sense, all provisions are contingent because they are uncertain in timing or amount. However, within this Standard the term ‘contingent’ is used for liabilities and assets that are not recognised because their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise. In addition, the term ‘contingent liability’ is used for liabilities that do not meet the recognition criteria.

10. This Standard distinguishes between:

(a) Provisions - which are recognised as liabilities (assuming that a reliable estimate can be made) because they are present obligations and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations; and

(b) Contingent liabilities - which are not recognised as liabilities because liabilities are normal occurrence while contingent liabilities are not possible obligations.

Recognition

Provisions

11. A provision shall be recognised when:

(a) An enterprise has a present obligation (legal or constructive) as a result of a past event;

(b) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

(c) A reliable estimate can be made of the amount of the obligation.

Present Obligation

12. In rare cases it is not clear whether there is a present obligation. In these cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is certain that a present obligation exists at the balance sheet date.

13. In almost all cases it will be clear whether a past event has given rise to a present obligation. In rare cases, for example in a law suit, it may be disputed either whether certain events have occurred or whether those events result in a present obligation. In such a case, an enterprise determines whether a present obligation exists at the balance sheet date by taking account of all available evidence, including, for example, the opinion of experts. The evidence considered includes any additional evidence provided by events after the balance sheet date. On the basis of such evidence:

(a) Where it is certain that a present obligation exists at the balance sheet date, the enterprise recognises a provision (if the recognition criteria are met); and

(b) Where it is certain that no present obligation exists at the balance sheet date, the enterprise discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote (see paragraph 81).

Past Event

14. A past event that leads to a present obligation is called an obligating event. For an event to be an obligating event, it is necessary that the enterprise has no realistic alternative to settling the obligation created by the event. This is the case only:

(a) Where the settlement of the obligation can be enforced by law; or

(b) In the case of a constructive obligation, where the event (which may be an action of the enterprise) creates valid expectations in other parties that the enterprise will discharge the obligation.

15. Financial statements deal with the financial position of an enterprise at the end of its reporting period and not its possible position in the future. Therefore, no provision is recognised for costs that need to be incurred to operate in the future. The only liabilities recognised in an enterprise’s balance sheet are those that exist at the balance sheet date.

16. It is only those obligations arising from past events existing independently of an enterprise’s future actions that are recognised as provisions. Examples of such obligations are penalties or clean-up costs for unlawful environmental damage, both of which would lead to an outflow of resources embodying economic benefits in settlement regardless of the future actions of the

enterprise. Similarly, an enterprise recognises a provision for the

decommissioning costs as a consequence of reallocation or restructuring. In contrast, for expenditure carried out by an enterprise to operate in a particular way in the future (for example, by fitting smoke filters in a certain type of factory) because of commercial pressures or legal requirements, no provision is recognised. Because the enterprise can avoid the future expenditure by its future actions, for example by changing its method of operation, it has no present obligation for that future expenditure and no provision is recognised.

17. An obligation always involves another party to whom the obligation is owed. It is not necessary, however, to know the identerprise of the party to whom the obligation is owed - indeed the obligation may be to the public at large. Because an obligation always involves a commitment to another party, it follows that a management or board decision does not give rise to a constructive obligation at the balance sheet date unless the decision has been communicated before the balance sheet date to those affected by it.

18. An event that does not give rise to an obligation immediately may do so at a later date, because of changes in the law or because an act by the enterprise gives rise to a constructive obligation. For example, when environmental damage is caused there may be no obligation to remedy the consequences. However, the causing of the damage will become an obligating event when a new law requires the existing damage to be rectified or when the enterprise publicly accepts responsibility for rectification in a way that creates a constructive obligation.

Probable Outflow of Resources Embodying Economic Benefits

19. For a liability to qualify for recognition there must be not only a present obligation but also the probability of an outflow of resources embodying economic benefits to settle that obligation. For the purpose of this Standard, an outflow of resources or other event is regarded as probable if the event is more likely than not to occur. Where it is not probable that a present obligation exists, an enterprise discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote (see paragraph 81).

20. Where there are a number of similar obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Although the likelihood of outflow for any one item may be small, it may well be probable that some outflow of resources will be needed to settle the class of obligations as a whole. If that is the case, a provision is recognised (if the other recognition criteria are met).

Reliable Estimate of the Obligation

21. The use of estimates is an essential part of the preparation of financial statements and does not undermine their reliability. This is especially true in the case of provisions, which by their nature are more uncertain than most other balance sheet items. Except in extremely rare cases, an enterprise will be able to determine a range of possible outcomes and can therefore make an estimate of the obligation that is sufficiently reliable to use in recognising a provision.

22. In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be recognised. That liability is disclosed as a contingent liability (see paragraph 81).

Contingent Liabilities

23. An enterprise shall not recognise a contingent liability.

24. A contingent liability is disclosed, as required by paragraph 81, unless an outflow of resources embodying economic benefits has occurred.

25. Where an enterprise is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is treated as a contingent liability. The enterprise recognises a provision for the part of the obligation for which an outflow of resources embodying economic benefits is probable, except in the extremely rare circumstances where no reliable

estimate can be made.

26. Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable. If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability, a provision is recognised in the financial statements of the period in which the change in probability occurs (except in the extremely rare circumstances where no reliable estimate can be made).

Contingent Assets

27. An enterprise shall not recognise a contingent asset.

28. Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise. An example is a claim that an enterprise is pursuing through legal processes, where the outcome is uncertain.

29. Contingent assets are not recognised in financial statements since this may result in the recognition of income that may never be realised. However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.

30. A contingent asset is disclosed, as required by paragraph 84, where an inflow of economic benefits is probable.

31. Contingent assets are assessed continually to ensure that developments are appropriately reflected in the note to financial statements. If it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognised in the financial statements of the period in which such inflow of economic benefits is probable (see paragraph 84).

Measurement

Best Estimate

32. The amount recognised as a provision shall be the best estimate of the expenditure required to settle the present obligation at the balance sheet date.

33. The best estimate of the expenditure required to settle the present obligation is the amount that an enterprise would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party at that time. It will often be impossible or prohibitively expensive to settle or transfer an obligation at the balance sheet date. However, the estimate of the amount that an enterprise would rationally pay to settle or transfer the obligation gives the best estimate of the expenditure required to settle the present obligation at the balance sheet date.

34. The estimates of outcome and financial effect are determined by the judgement of the management of the enterprise, supplemented by experience of similar transactions and, in some cases, reports from independent experts. The evidence considered includes any additional evidence provided by events after the balance sheet date.

35. Uncertainties surrounding the amount to be recognised as a provision are dealt with by various means according to the circumstances. Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities (‘expected value’ method). The provision will therefore be different depending on whether the probability of a loss of a given amount is, for example, 60 per cent or 90 per cent. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the mid-point of the range is used.

Example

An enterprise sells goods with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within the first six months after purchase. If minor defects were detected in all products sold, repair costs of 1 million would result. If major defects were detected in all products sold, repair costs of 4 million would result. The enterprise's past experience and future expectations indicate that, for the coming year, 75 per cent of the goods sold will have no defects, 20 per cent of the goods sold will have minor defects and 5 per cent of the goods sold will have major defects. In accordance with paragraph 20, an enterprise assesses the probability of an outflow for the warranty obligations as a whole.

The expected value of the cost of repairs is:

(75% of nil) + (20% of 1m) + (5% of 4m) = 0.4m

36. Where a single obligation is being measured, the individual most likely outcome may be the best estimate of the liability. However, even in such a case, the enterprise considers other possible outcomes. Where other possible outcomes are either mostly higher or mostly lower than the most likely outcome, the best estimate will be a higher or lower amount. For example, if an enterprise has to rectify a serious fault in a major plant that it has constructed for a customer, the individual most likely outcome may be for the repair to succeed at the first attempt at a cost of 1m but a provision for a larger amount is made if there is a significant chance that further attempts will be necessary.

37. The provision is measured before tax, as the tax consequences of the provision, and changes in it, are dealt with under VAS 17 Income Taxes.

Risks and Uncertainties

38. The risks and uncertainties that inevitably surround many events and circumstances shall be taken into account in reaching the best estimate of a provision.

39. Risk describes variability of outcome. A risk adjustment may increase the amount at which a liability is measured. Caution is needed in making judgements under conditions of uncertainty, so that income or assets are not overstated and expenses or liabilities are not understated. However, uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities. For example, if the projected costs of a particularly adverse outcome are estimated on a prudent basis, that outcome is not then deliberately treated as more probable than is realistically the case. Care is needed to avoid duplicating adjustments for risk and uncertainty with consequent overstatement of a provision.

40. Disclosure of the uncertainties surrounding the amount of the expenditure is made under paragraph 80(b).

Present Value

41. Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation.

42. Because of the time value of money, provisions relating to cash outflows that arise soon after the balance sheet date are more onerous than those where cash outflows of the same amount arise later. Provisions are therefore discounted, where the effect is material.

43. The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted.

Future Events

44. Future events that may affect the amount required to settle an obligation shall be reflected in the amount of a provision where there is sufficient objective evidence that they

will occur.

45. Expected future events may be particularly important in measuring provisions. For example, an enterprise may believe that the cost of disposing of an asset at the end of its life will be reduced by future changes in technology. The amount recognised reflects a reasonable expectation of technically qualified, objective observers, taking account of all available evidence as to the technology that will be available at the time of the disposal. Thus it is appropriate to include, for example, expected cost reductions associated with increased experience in applying existing technology or the expected cost of applying existing technology to a larger or more complex disposing operation than has previously been carried out. However, an enterprise does not anticipate the development of a completely new technology for the disposing unless it is supported by sufficient objective evidence.

46. The effect of possible new legislation is taken into consideration in measuring an existing obligation when sufficient objective evidence exists that the legislation is virtually certain to be enacted. The variety of circumstances that arise in practice makes it impossible to specify a single event that will provide sufficient, objective evidence in every case. Evidence is required both of what legislation will demand and of whether it is virtually certain to be enacted and implemented in due course. In many cases sufficient objective evidence will not exist until the new legislation is enacted.

Expected Disposal of Assets

47. Gains from the expected disposal of assets shall not be taken into account in measuring a provision.

48. Gains on the expected disposal of assets are not taken into account in measuring a provision, even if the expected disposal is closely linked to the event giving rise to the provision. Instead, an enterprise recognises gains on expected disposals of assets at the time specified by a relevant accounting standard dealing with the assets concerned.

Reimbursements

49. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognised when, and only when, it is virtually certain that reimbursement will be received if the enterprise settles the obligation. The reimbursement shall be treated as a separate asset. The amount recognised for the reimbursement shall not exceed the amount of the provision.

50. In the income statement, the expense relating to a provision may be presented net of the amount recognised for a reimbursement.

51. Sometimes, an enterprise is able to look to another party to pay part or all of the expenditure required to settle a provision (for example, through insurance contracts, indemnity clauses or suppliers’ warranties). The other party may either reimburse amounts paid by the enterprise or pay the amounts directly.

52. In most cases the enterprise will remain liable for the whole of the amount in question so that the enterprise would have to settle the full amount if the third party failed to pay for any reason. In this situation, a provision is recognised for the full amount of the liability, and a separate asset for the expected reimbursement is recognised when it is virtually certain that reimbursement will be received if the enterprise settles the liability.

53. In some cases, the enterprise will not be liable for the costs in question if the third party fails to pay. In such a case the enterprise has no liability for those costs and they are not included in the provision.

54. As noted in paragraph 25, an obligation for which an enterprise is jointly and severally liable is a contingent liability to the extent that it is expected that the obligation will be settled by the other

parties.

Changes in Provisions

55. Provisions shall be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision shall be reversed.

56. Where discounting is used, the carrying amount of a provision increases in each period to reflect the passage of time. This increase is recognised as borrowing cost.

Use of Provisions

57. A provision shall be used only for expenditures for which the provision was originally recognised.

58. Only expenditures that relate to the original provision are set against it. Setting expenditures against a provision that was originally recognised for another purpose would conceal the impact of two different events.

Application of the Recognition and Measurement Rules

Future Operating Losses

59. Provisions shall not be recognised for future operating losses.

60. Future operating losses do not meet the definition of a liability in paragraph 07 and the general recognition criteria set out for provisions in paragraph 11.

61. An expectation of future operating losses is an indication that certain assets of the operation may be impaired. The enterprise shall conduct tests of these assets for impairment.

Onerous Contracts

62. If an enterprise has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a provision.

63. Many contracts (for example, some routine purchase orders) can be cancelled without paying compensation to the other party, and therefore there is no obligation. Other contracts establish both rights and obligations for each of the contracting parties. Where events make such a contract onerous, the contract falls within the scope of this Standard and a liability exists which is recognised. Executory contracts that are not onerous fall outside the scope of this Standard.

64. This Standard defines an onerous contract as a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it.

65. Before a separate provision for an onerous contract is established, an enterprise recognises any impairment loss that has occurred on assets dedicated to that contract.

Restructuring

66. The following are examples of events that may fall under the definition of restructuring:

(a) Sale or termination of a line of business;

(b) The closure of business locations in a country or region or the relocation of business activities from one country or region to another;

(c) Changes in management structure, for example, eliminating a layer of management; and

(d) Fundamental reorganization that have a material effect on the nature and focus of the enterprise's operations.

67. A provision for restructuring costs is recognised only when the general recognition criteria for provisions set out in paragraph 11 are met. Paragraphs 69-78 set out how the general recognition criteria apply to restructurings.

68. A constructive obligation to restructure arises only when an enterprise:

(a) Has a detailed formal plan for the restructuring identifying at least:

(i) The business or part of a business concerned;

(ii) The principal locations affected;

(iii) The location, function, and approximate number of employees who will be compensated for terminating their services;

(iv) The expenditures that will be undertaken; and

(v) When the plan will be implemented; and

(b) Has raised a valid expectation in those affected that it carries out the restructuring by starting to implement that plan or announcing its main features to those affected by it.

69. Evidence that an enterprise has started to implement a restructuring plan would be provided, for example, by dismantling plant or selling assets or by the public announcement of the main features of the plan. A public announcement of a detailed plan to restructure constitutes a constructive obligation to restructure only if it is made in such a way and in sufficient detail (i.e. setting out the main features of the plan) that it gives rise to valid expectations in other parties such as customers, suppliers and employees (or their representatives) that the enterprise will carry out the restructuring.

70. For a plan to be sufficient to give rise to a constructive obligation when communicated to those affected by it, its implementation needs to be planned to begin as soon as possible and to be completed within a given timeframe. If it is expected that there will be a long delay before the restructuring begins or that the restructuring will take an unreasonably long time, it is unlikely that the plan will be implemented within that timeframe.

71. A management or board decision to restructure taken before the balance sheet date does not give rise to a constructive obligation at the balance sheet date unless the enterprise has, before the balance sheet date:

(a) Started to implement the restructuring plan; or

(b) Announced the main features of the restructuring plan to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the enterprise will carry out the restructuring.

An enterprise starts to implement a restructuring plan or announces its main features to those affected only disclosure in the note to financial statements after the balance sheet date is required under VAS 23 Events after the Balance Sheet Date. If the restructuring is material but is not disclosed, the fact could influence the economic decisions of users taken on the basis of the

financial statements.

72. Although a constructive obligation is not created solely by a management decision, an obligation may result from other earlier events together with such a decision. For example, negotiations with employee representatives for termination payments, or with purchasers for the sale of an operation, may have been concluded subject only to board approval. Once that approval has been obtained and communicated to the other parties, the enterprise has a constructive obligation to restructure, if the conditions of paragraph 68 are met.

73. No obligation arises for the sale of an operation until the enterprise is committed to the sale, i.e. there is a binding sale agreement.

74. Even when an enterprise has taken a decision to sell an operation and announced that decision publicly, it cannot be committed to the sale until a purchaser has been identified and there is a binding sale agreement. Until there is a binding sale agreement the enterprise will be able to take another course of action if a purchaser cannot be found on acceptable terms. When a sale is only part of a restructuring, the assets of the operation need to be reviewed for impairment and a constructive obligation can arise for the other parts of the restructuring before a binding sale agreement exists.

75. A restructuring provision shall include only the direct expenditures arising from the restructuring, which are those that are both:

(a) necessarily entailed by the restructuring; and

(b) not associated with the ongoing activities of the enterprise.

76. A restructuring provision does not include such costs as:

(a) Retraining or relocating continuing staff;

(b) Marketing; or

(c) Investment in new systems and distribution networks.

These expenditures relate to the future conduct of the business and are not liabilities for restructuring at the balance sheet date. Such expenditures are recognised on the same basis as if they arose independently of a restructuring.

77. Identifiable future operating losses up to the date of a restructuring are not included in a provision, unless they relate to an onerous contract as defined in paragraph 07.

78. As required by paragraph 47, gains on the expected disposal of assets are not taken into account in measuring a restructuring provision, even if the sale of assets is envisaged as part of the restructuring.

Disclosure

79. For each class of provision, an enterprise shall disclose:

(a) The carrying amount at the beginning and end of the period;

(b) Additional provisions made in the period, including increases to existing provisions;

(c) Amounts used (i.e. incurred and charged against the provision) during the period;

(d) Unused amounts reversed during the period; and

(e) The increase during the period in the discounted amount arising from the passage of time and the effect of any change in the discount rate.

Comparative information is not required.

80. An enterprise shall disclose the following for each class of significant provision:

(a) A brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits;

(b) An indication of the uncertainties about the amount or timing of those outflows. Where necessary to provide adequate information, an enterprise shall disclose the major assumptions made concerning future events, as addressed in paragraph 44; and

(c) The amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement.

81. Unless the possibility of any outflow in settlement is remote, an enterprise shall disclose for each class of contingent liability at the balance sheet date the following:

(a) An estimate of the financial effect of the contingent liability, measured under paragraphs 32-48;

(b) An indication of the uncertainties relating to the amount or timing of any outflow; and

(c) The possibility of any reimbursement.

82. In determining which provisions or contingent liabilities may be aggregated to form a class, it is necessary to consider whether the nature of the items is sufficiently similar for a single statement about them to fulfill the requirements of paragraphs 80(a) and (b) and 81(a) and (b). Thus, it may be appropriate to treat as a single class of provision amounts relating to warranties of different products, but it would not be appropriate to treat as a single class amounts relating to normal warranties and amounts that are subject to legal proceedings.

83. Where a provision and a contingent liability arise from the same set of circumstances, an enterprise makes the disclosures required by paragraphs 79-81 in a way that shows the link between the provision and the contingent liability.

84. Where an inflow of economic benefits is probable, an enterprise shall disclose a brief description of the nature of the contingent assets at the balance sheet date, and, where practicable, an estimate of their financial effect, measured using the principles set out for provisions in paragraphs 32-48.

85. It is important that disclosures for contingent assets avoid giving misleading indications of the likelihood of income arising.

86. Where any of the information required by paragraphs 81 and 84 is not disclosed because it is not practicable to do so, that fact shall be stated.

87. In extremely rare cases, disclosure of some or all of the information required by paragraphs 79-84 can be expected to prejudice seriously the position of the enterprise in a dispute with other parties on the subject matter of the provision, contingent liability or contingent asset. In such cases, an enterprise need not disclose the information, but shall disclose the general nature of the dispute, together with the fact that, and reason why, the information has not been disclosed.

Standard No. 19 INSURANCE CONTRACT



GENERAL

01. The objective of this Standard is to prescribe the accounting policies and procedures in relation to relevant elements and the recognition of these elements in the financial statements of an insurance company, including

a) The method of accounting for insurance contracts in insurance companies;

b) Presentation and explanation of data in the financial statements of an insurance company resulting from an incurrence contract.

02. An entity shall apply this Standard to:

(a) Insurance contracts (including reinsurance contracts) that it issues and reinsurance contracts that it holds.

(b) Financial instruments under insurance contracts that it issues with a discretionary participation feature

03. This Standard does not address other aspects of accounting by insurers, such as accounting for financial assets held by insurers and financial liabilities issued by insurers which do not relate to insurance contracts.

04. An entity shall not apply this Standard to:

(a) Product warranties issued directly by a manufacturer, dealer or retailer;

(b) Employers’ assets and liabilities under employee benefit plans;

(c) Contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item (for example, some licence fees, royalties, contingent lease payments and similar items), as well as a lessee’s residual value guarantee embedded in a finance lease (see VAS 06 Leases, VAS 14 Revenue and Other Incomes and VAS 04 Intangible Fixed Assets).

(d) Financial guarantees that an entity enters into or retains on transferring to another party financial assets or financial liabilities within the scope of VAS on Financial Instruments regardless of whether the financial guarantees are described as financial guarantees or letters of credits.

(e) Contingent consideration payable or receivable in a business combination (see VAS 11 Business Combinations).

(f) Direct insurance contracts in which the entity is the policyholder.


Insurer: The party that has an obligation under an insurance contract to compensate a policyholder if an insured event occurs.

Insurance contract: A contract under which the insurer agrees to a certain amount (ie insurance fee) accepts significant insurance risk from a customer (the

policyholder) by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder.

Direct insurance contract: An insurance contract that is not a reinsurance contract.

Policyholder: A party that has a right to compensation under an insurance contract if an insured event occurs.

Reinsurance contract: An insurance contract issued by the reinsurer to compensate the cedant for losses on one or more contracts issued by the cedant.

The policyholder under a reinsurance contract: A direct insurance company which transfers risk under a reinsurance contract.

Insurance risk: Risk, other than financial risk, transferred from the holder of a contract to the insurer.

Insurance liability: An insurer’s net contractual obligations under an insurance contract.

Deposit component: A contractual component that is not accounted for as a derivative under standard on Financial Instruments and would be within the scope of standard on Financial Instruments if it were a separate instrument.

Guaranteed element: An obligation to pay guaranteed benefits, included in a contract.

Guaranteed benefits: Payments or other benefits to which a particular policyholder or investor has an unconditional right that is not subject to the contractual discretion of the insurer.

Insurance asset: An insurer’s net contractual rights under an insurance contract.

Reinsurance assets: A cedant’s net contractual rights under a reinsurance contract.

Discretionary participation feature: A contractual right to receive, as a supplement to guaranteed benefits, additional benefits:

(a) that is likely to be a significant portion of the total contractual benefits;

(b) Whose amount or timing is contractually at the discretion of the insurer; and

(c) that is contractually based on:

(i) The performance of a specified pool of contracts or a specified type of contract;

(ii) Realised and/or unrealised investment returns on a specified pool of assets held by the insurer; or

(iii) The profit or loss of the company, fund or other entity that issues the contract.

Unbundle: Account for the components of a contract as if they were separate contracts.

Fair value: The amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Financial risk: The risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial

variable that the variable is not specific to a party to the contract.

Financial instrument: Any contract in which one contracting party (an enterprise) creates a financial asset and the other party incurs a corresponding financial liability or an equity instrument.

A derivative: A financial instrument whose value changes in response to the change in an underlying unit that requires no initial net investment or little initial net investment relative to the other type of contracts and is settled at a future date.

Insured event: An uncertain future event that is covered by an insurance contract and creates insurance risk.

Liability adequacy test: An assessment of whether the carrying amount of an insurance liability needs to be increased (or the carrying amount of related deferred acquisition costs or related intangible assets decreased), based on a review of future cash flows.


Embedded derivatives

06. The standard on Financial Instruments requires an entity to separate some embedded derivatives from their host contract, measure them at fair value and include changes in their fair value in profit or loss. Standard on Financial Instruments applies to derivatives embedded in an insurance contract unless the embedded derivative is itself an insurance contract.

07. As an exception to the requirement in standard on Financial Instruments, an insurer need not separate, and measure at fair value, a policyholder’s option to surrender an insurance contract for a fixed amount (or for an amount based on a fixed amount and an interest rate), even if the exercise price differs from the carrying amount of the host insurance liability. However, the requirement in standard on Financial Instruments does apply to a put option or cash surrender option embedded in an insurance contract if the surrender value varies in response to the change in a financial variable (such as an equity or commodity price or index), or a nonfinancial variable that is not specific to a party to the contract. Furthermore, that requirement also applies if the holder’s ability to exercise a put option or cash surrender option is triggered by a change in such a variable (for example, a put option that can be exercised if a stock market index reaches a specified level).

08. Paragraph 07 applies equally to options to surrender a financial instrument containing a discretionary participation feature.

Unbundling of deposit components

09. Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components:

(a) Unbundling is required if both the following conditions are met:

(i) The insurer can measure the deposit component (including any embedded surrender options) separately (ie without considering the insurance component).

(ii) The insurer’s accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component as shown in paragraph 10 as an example.

(b) Unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i) but its accounting policies require it to recognise all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and

obligations.

(c) Unbundling is prohibited if an insurer cannot measure the deposit component separately as in (a)(i).

10. The following is an example of a case when an insurer’s accounting policies do not require it to recognise all obligations arising from a deposit component. A cedant receives compensation for losses from a reinsurer, but the contract obliges the cedant to repay the compensation in future years. That obligation arises from a deposit component. If the cedant’s accounting policies would otherwise permit it to recognise the compensation as income without recognising the resulting obligation, unbundling is required.

11. To unbundled a contract, an insurer shall:

(a) Apply this Standard to the insurance component.

(b) Apply standard on Financial Instruments to the deposit component.

Recognition and Measurement

Accounting application

12. An insurer:

(a) Shall not recognize as a liability any provisions for possible future claims, if those claims arise under insurance contracts that are not in existence at the reporting date (such as catastrophe provisions and equalisation provisions).

(b) Shall carry out the liability adequacy test described in paragraphs 13-17.

(c) Shall remove an insurance liability (or a part of an insurance liability) from its balance sheet when, and only when, it is extinguished.

(d) Shall not offset:

(i) Reinsurance assets against the related insurance liabilities; or

(ii) Income or expense from reinsurance contracts against the expense or income from the related insurance contracts.

(e) Shall consider whether its reinsurance assets are impaired (see paragraph 18).

Liability adequacy test

13. An insurer shall assess at each reporting date whether its recognised insurance liabilities are adequate, using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of its insurance liabilities (less related deferred acquisition costs and related intangible assets, such as those discussed in paragraphs 27 and 28) is inadequate in the light of the estimated future cash flows, the entire deficiency shall be recognised in profit or loss.

14. An insurer shall apply a liability adequacy test that meets specified minimum requirements that follow:

(a) The test considers current estimates of all contractual cash flows, and of related cash flows such as claims handling costs, as well as cash flows resulting from embedded options and guarantees.

(b) If the test shows that the liability is inadequate, the entire deficiency is recognised in profit or

loss.

In presenting profit and loss to the insurance administration (the Ministry of Finance), insurers shall follow all financial guidelines and regulations on exploitation costs.

15. If an insurer’s accounting policies do not require a liability adequacy test that meets the minimum requirements of paragraph 14, the insurer shall:

(a) Determine the carrying amount of the relevant insurance liabilities less the carrying amount of:

(i) Any related deferred acquisition costs; and

(ii) Any related intangible assets, such as those acquired in a business combination or portfolio transfer (see paragraphs 27 and 28). However, related reinsurance assets are not considered because an insurer accounts for them separately (see paragraph 18).

(b) Determine whether the amount described in (a) is less than the carrying amount that would be required if the relevant insurance liabilities were within the scope of VAS 18, Provisions, Contingent Liabilities and Contingent Assets. If it is less, the insurer shall recognise the entire difference in profit or loss and decrease the carrying amount of the related deferred acquisition costs or related intangible assets or increase the carrying amount of the relevant insurance liabilities.

16. If an insurer’s liability adequacy test meets the minimum requirements of paragraph 14, the test is applied at the level of aggregation specified in that test. If its liability adequacy test does not meet those minimum requirements, the comparison described in paragraph 15 shall be made at the level of a portfolio of contracts that are subject to broadly similar risks and managed together as a single portfolio.

17. The amount described in paragraph 15(b) (ie the result of applying VAS 18 Provisions, Contingent Liabilities and Contingent Assets) shall reflect future investment margins (see paragraphs 24-26) if, and only if, the amount described in paragraph 15(a) also reflects those margins.

Impairment of reinsurance assets

18. If a cedant’s reinsurance asset is impaired, the cedant shall reduce its carrying amount accordingly and recognise that impairment loss in profit or loss. A reinsurance asset is impaired if, and only if:

(a) There is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the cedant may not receive all amounts due to it under the terms of the contract; and

(b) That event has a reliably measurable impact on the amounts that the cedant will receive from the reinsurer.

Changes in accounting policies

19. An insurer may change its accounting policies for insurance contracts if, and only if, the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs. An insurer shall judge relevance and reliability by the criteria in VAS 29 Changes in Accounting Policies, Accounting Estimates and Errors.

20. To justify changing its accounting policies for insurance contracts, an insurer shall show that the change brings its financial statements closer to meeting the criteria in VAS 29, but the change need not achieve full compliance with those criteria. The following specific issues are discussed

below:

(a) Current interest rates (paragraph 21);

(b) Continuation of existing practices (paragraph 22);

(c) Prudence (paragraph 23);

(d) Future investment margins (paragraphs 24-26);

Current market interest rates

21. An insurer is permitted, but not required, to change its accounting policies so that it remeasures designated insurance liabilities to reflect current market interest rates and recognises changes in those liabilities in profit or loss. At that time, it may also introduce accounting policies that require other current estimates and assumptions for the designated liabilities. The election in this paragraph permits an insurer to change its accounting policies for designated liabilities, without applying those policies consistently to all similar liabilities as VAS 29 would otherwise require. If an insurer designates liabilities for this election, it shall continue to apply current market interest rates (and, if applicable, the other current estimates and assumptions) consistently in all periods to all these liabilities until they are extinguished.

Continuation of existing practices

22. An insurer may continue the following practices, but the introduction of any of them does not satisfy paragraph 19:

(a) Measuring insurance liabilities on an undiscounted basis.

(b) Measuring contractual rights to future investment management fees at an amount that exceeds their fair value as implied by a comparison with current fees charged by other market participants for similar services. It is likely that the fair value at inception of those contractual rights equals the origination costs paid, unless future investment management fees and related costs are out of line with market comparables.

(c) Using non-uniform accounting policies for the insurance contracts (and related deferred acquisition costs and related intangible assets, if any) of subsidiaries, except as permitted by paragraph 21. If those accounting policies are not uniform, an insurer may change them if the change does not make the accounting policies more diverse and also satisfies the other requirements in this Standard.

Prudence

23. Applying prudence as a principle, an insurer need not change its accounting policies for insurance contracts to eliminate excessive prudence. However, if an insurer already measures its insurance contracts with sufficient prudence, it shall not introduce additional prudence.

Future investment margins

24. An insurer need not change its accounting policies for insurance contracts to eliminate future investment margins. However, there is a rebuttable presumption that an insurer’s financial statements will become less relevant and reliable if it introduces an accounting policy that reflects future investment margins in the measurement of insurance contracts, unless those margins affect the contractual payments.

Two examples of accounting policies that reflect those margins are:

(a) Using a discount rate that reflects the estimated return on the insurer’s assets; or

(b) Projecting the returns on those assets at an estimated rate of return, discounting those

projected returns at a different rate and including the result in the measurement of the liability.

25. An insurer may overcome the rebuttable presumption described in paragraph 24 if, and only if, the other components of a change in accounting policies increase the relevance and reliability of its financial statements sufficiently to outweigh the decrease in relevance and reliability caused by the inclusion of future investment margins.

For example, suppose that an insurer’s existing accounting policies for insurance contracts involve excessively prudent assumptions set at inception and a discount rate prescribed by a regulator without direct reference to market conditions, and ignore some embedded options and guarantees. The insurer might make its financial statements more relevant and no less reliable by switching to a comprehensive investor-oriented basis of accounting that is widely used and involves:

(a) Current estimates and assumptions;

(b) A reasonable (but not excessively prudent) adjustment to reflect risk and uncertainty;

(c) Measurements that reflect both the intrinsic value and time value of embedded options and guarantees; and

(d) A current market discount rate, even if that discount rate reflects the estimated return on the insurer’s assets.

26. In some measurement approaches, the discount rate is used to determine the present value of a future profit margin. That profit margin is then attributed to different periods using a formula. In those approaches, the discount rate affects the measurement of the liability only indirectly. In particular, the use of a less appropriate discount rate has a limited or no effect on the measurement of the liability at inception. However, in other approaches, the discount rate determines the measurement of the liability directly. In the latter case, because the introduction of an asset-based discount rate has a more significant effect, it is highly unlikely that an insurer could overcome the rebuttable presumption described in paragraph 24.

Insurance contracts acquired in a business combination or portfolio transfer

27. To comply with VAS 11 Business Combinations, an insurer shall, at the acquisition date, measure at fair value the insurance liabilities assumed and insurance assets acquired in a business combination. However, an insurer is permitted, but not required, to use an expanded presentation that splits the fair value of acquired insurance contracts into two components:

(a) A liability measured in accordance with the insurer’s accounting policies for insurance contracts that it issues; and

(b) An intangible asset, representing the difference between

(i) The fair value of the contractual insurance rights acquired and insurance obligations assumed; and

(ii) The amount described in (a).

The subsequent measurement of this asset shall be consistent with the measurement of the related insurance liability.

28. An insurer acquiring a portfolio of insurance contracts may use the expanded presentation described in paragraph 27.

29. The intangible assets described in paragraphs 27 and 28 are excluded from the scope of VAS on Impairment of Assets and VAS on Intangible Fixed Assets. However, these VASs apply to customer lists and customer relationships reflecting the expectation of future contracts that are not

part of the contractual insurance rights and contractual insurance obligations that existed at the date of a business combination or portfolio transfer.

Discretionary participation features

Discretionary participation features in insurance contracts

30. Some insurance contracts contain a discretionary participation feature as well as a guaranteed element. The insurer of such a contract:

(a) May, but need not, recognise the guaranteed element separately from the discretionary participation feature. If the insurer does not recognise them separately, it shall classify the whole contract as a liability. If the insurer classifies them separately, it shall classify the guaranteed element as a liability.

(b) Shall, if it recognises the discretionary participation feature separately from the guaranteed element, classify that feature as either a liability or a separate component of equity. This Standard does not specify how the insurer determines whether that feature is a liability or equity. The insurer may split that feature into liability and equity components and shall use a consistent accounting policy for that split. The insurer shall not classify that feature as an intermediate category that is neither liability nor equity.

(c) May recognise all premiums received as revenue without separating any portion that relates to the equity component. The resulting changes in the guaranteed element and in the portion of the discretionary participation feature classified as a liability shall be recognised in profit or loss. If part or the entire discretionary participation feature is classified in equity, a portion of profit or loss may be attributable to that feature (in the same way that a portion may be attributable to minority interests). The insurer shall recognise the portion of profit or loss attributable to any equity component of a discretionary participation feature as an allocation of profit or loss, not as expense or income (see VAS 21 Presentation of Financial Statements).

(d) Shall, if the contract contains an embedded derivative, apply VAS on Financial Instruments to that embedded derivative.

(e) Shall, in all respects not described in paragraphs 12-18 and 30(a)-(d), continue its existing accounting policies for such contracts, unless it changes those accounting policies in a way that complies with paragraphs 19-26.

Discretionary participation features in financial instruments

31. The requirements in paragraph 30 also apply to a financial instrument that contains a discretionary participation feature. In addition:

(a) If the insurer classifies the entire discretionary participation feature as a liability, it shall apply the liability adequacy test in paragraphs 14-17 to the whole contract (ie both the guaranteed element and the discretionary participation feature). The insurer need not determine the amount that would result from applying VAS on Financial Instruments to the guaranteed element.

(b) If the insurer classifies part or that entire feature as a separate component of equity, the liability recognised for the whole contract shall not be less than the amount that would result from applying VAS on Financial Instruments to the guaranteed element. That amount shall include the intrinsic value of an option to surrender the contract, but need not include its time value if paragraph 08 exempts that option from measurement at fair value. The insurer need not disclose the amount that would result from applying VAS on Financial Instruments to the guaranteed element, nor need it present that amount separately. Furthermore, the insurer need not determine that amount if the total liability recognised is clearly higher.

(c) Although these contracts are financial instruments, the insurer may continue to recognise the premiums for those contracts as revenue and recognise as an expense the resulting increase in

the carrying amount of the liability.

Disclosure

Explanation of recognised amounts

32. An insurer shall disclose information that identifies and explains the amounts in its financial statements arising

from insurance contracts.

33. To comply with paragraph 32, an insurer shall disclose:

(a) Its accounting policies for insurance contracts and related assets, liabilities, income and expense.

(b) The recognised assets, liabilities, income and expense (and, if it presents its cash flow statement using the direct method, cash flows) arising from insurance contracts. Furthermore, if the insurer is a cedant, it shall disclose:

(i) Gains and losses recognised in profit or loss on buying reinsurance; and

(ii) if the cedant defers and amortises gains and losses arising on buying reinsurance, the amortisation for the period and the amounts remaining unamortised at the beginning and end of the period.

(c) The process used to determine the assumptions that have the greatest effect on the measurement of the recognised amounts described in (b). When practicable, an insurer shall also give quantified disclosure of those assumptions.

(d) The effect of changes in assumptions used to measure insurance assets and insurance liabilities, showing separately the effect of each change that has a material effect on the financial statements.

(e) Reconciliations of changes in insurance liabilities, reinsurance assets and, if any, related deferred acquisition costs.

Amount, timing and uncertainty of cash flows

34. An insurer shall disclose information that helps users to understand the amount, timing and uncertainty of future

cash flows from insurance contracts.

35. To comply with paragraph 34, an insurer shall disclose:

(a) Its objectives in managing risks arising from insurance contracts and its policies for mitigating those risks.

(b) Those terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of the insurer’s future cash flows.

(c) Information about insurance risk (both before and after risk mitigation by reinsurance), including information about:

(i) The sensitivity of profit or loss and equity to changes in variables that have a material effect on them.

(ii) Concentrations of insurance risk.

(iii) Actual claims compared with previous estimates (ie claims development). The disclosure about claims development shall go back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments, but need not go back more than ten years. An insurer need not disclose this information for claims for which uncertainty about the amount and timing of claims payments is typically resolved within one year.

(d) the information about interest rate risk and credit risk that VAS on Financial Instruments would require if the insurance contracts were within the scope of the VAS.

(e) Information about exposures to interest rate risk or market risk under embedded derivatives contained in a host insurance contract if the insurer is not required to, and does not, measure the embedded derivatives at fair value.

Standard No. 21 PRESENTATION OF FINANCIAL STATEMENTS



GENERAL

01. The objective of this Standard is to prescribe guidelines on general considerations and policies for the preparation and presentation of financial statements setting out the purposes, requirements and principles on and the structure and basis contents of the financial statements.

02. This Standard should be applied in the presentation of financial statements prepared and presented in accordance with Vietnamese Accounting Standards.

03. This Standard applies to the financial statements of an individual enterprise and to the consolidated financial statements for a group of enterprises. This Standard also applies to condensed interim financial information.

04. This Standard applies to all types of enterprises. Additional requirements for banks, credit institutions and financial institutions are set out in Standard “Disclosures in the Financial Statements of Banks and Similar Financial Institutions”.

CONTENTS OF the STANDARD

PURPOSE OF FINANCIAL STATEMENTS

05. Financial statements are a structured financial representation of the financial position of and the transactions undertaken by an enterprise. The objective of general-purpose financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions. To meet this objective, financial statements provide information about an enterprise’s:

(a) assets;

(b) liabilities;

(c) equity;

(d) revenue, other income, expenses, gains and losses;

(e) cash flows.

This information, along with other information in the notes to financial statements, assists users in predicting the enterprise’s future cash flows and in particular the timing and certainty of the generation of cash and cash equivalents.

RESPONSIBILITY FOR PREPARATION AND PRESENTAION OF FINANCIAL STATEMENTS

06. The director (or leader) of an enterprise is responsible for the preparation and presentation of its financial statements.

COMPONENTS OF FINANCIAL STATEMENTS

07. A complete set of financial statements includes the following components:

(a) Balance sheet;

(b) Income statement;

(c) Cash flow statement;

(d) Notes to the financial statements.

08. Enterprises are encouraged to present, outside the financial statements, a review by management which describes and explains the main features of the enterprise’s financial performance and financial position and the principal uncertainties it faces if management believes they will assist users in making economic decisions.

REQUIREMENTS FOR PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

09. Financial statements should present fairly the financial position, financial performance and cash flows of an enterprise. To achieve a fair presentation, financial statements should be prepared and presented in compliance with prevailing accounting standards, accounting policies and related regulations.

10. An enterprise whose financial statements comply with Vietnamese accounting standards and accounting policies should disclose that fact in the notes to the financial statements. Financial statements should not be described as complying with Vietnamese accounting standards and accounting policies unless they comply with all the requirements of each applicable standard and policy and each applicable regulations of the Ministry of Finance guiding the implementation of the Vietnamese Accounting Standards.

In case that an enterprise applies accounting policies which are not in accordance with Vietnamese accounting standards and accounting policies, it is not then considered as complying with prevailing accounting standards even though it is fully disclosed in the Notes to the financial statements.

11. A fair presentation of financial statements requires:

(a) selecting and applying accounting policies in accordance with paragraph 12;

(b) presenting information, including accounting policies, in a manner which provides relevant, reliable, comparable and understandable information;

(c) providing additional disclosures when the requirements in Vietnamese Accounting Standards are insufficient to enable users to understand the impact of particular transactions or events on the enterprise’s financial position and financial performance.

Accounting Policies

12. An enterprise should select and apply accounting policies so that the financial statements comply with all requirements of each applicable Vietnamese accounting standard. Where there is no specific requirement, the enterprise should develop policies based upon the Framework to ensure that the financial statements provide information that is:

(a) relevant to the decision-making needs of users;

(b) reliable in that they:

- represent fairly the results and financial position of the enterprise;

- reflect the economic substance of events and transactions and not merely the legal form;

- are neutral, that is free from bias;

- are prudent;

- are complete in all material respects.

13. Accounting policies are the specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and presenting financial statements.

14. In the absence of a specific accounting standard, in developing an accounting policy, an enterprise considers:

(a) the requirements and guidance in accounting standards dealing with similar and related issues;

(b) the definitions, recognition and measurement criteria for assets, liabilities, income and expenses set out in the Framework;

(c) Particular regulations of the industry which are accepted only to the extent that they are consistent with (a) and (b) of this paragraph.

Requirements in preparation and presentation of financial statements:

Going concerns

15. When preparing financial statements, the Director (or leader) of an enterprise should make an assessment of the enterprise’s ability to continue as a going concern. Financial statements should be prepared on a going concern basis unless the enterprise either intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do so. When the Director (or leader) of the enterprise is aware, in making its assessment, of material uncertainties related to events or conditions which may cast significant doubt upon the enterprise’s ability to continue as a going concern, those uncertainties should be disclosed. When the financial statements are not prepared on a going concern basis, that fact should be disclosed, together with the basis on which the financial statements are prepared and the reason why the enterprise is not considered to be a going concern.

16. In assessing whether the going concern assumption is appropriate, the Director (or leader) of an enterprise takes into account all available information for the foreseeable future, which should be at least twelve months from the balance sheet date.

Accrual basis of accounting

17. An enterprise should prepare its financial statements, except for cash flow information, under the accrual basis of accounting.

18. Under the accrual basis of accounting, transactions and events are recognised when they occur and not as cash or its equivalent is received or paid; and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Expenses are recognised in the income statement on the basis of a direct association between the costs incurred and the earning of specific items of income (matching). However, the application of the matching concept does not allow the recognition of items in the balance sheet which do not meet the definition of assets or liabilities.

Consistency of presentation

19. The presentation and classification of items in the financial statements should be retained from

one period to the next unless:

(a) a significant change in the nature of the operations of the enterprise or a review of its financial statement presentation demonstrates that the change will result in a more appropriate presentation of events or transactions; or

(b) a change in presentation is required by another accounting standard

20. A significant acquisition or disposal, or a review of the financial statement presentation, might suggest that the financial statements should be presented differently. Only if the revised structure is likely to continue, or if the benefit of an alternative presentation is clear, should an enterprise change the presentation of its financial statements. When such changes in presentation are made, an enterprise reclassifies its comparative information in accordance with paragraph 30 and discloses the reasons for changes together with the impacts on the financial statements in the accompanying notes.

Materiality and aggregation

21. Each material item should be presented separately in the financial statements. Immaterial amounts should be aggregated with amounts of a similar nature or function and need not be presented separately.

22. In presenting financial statements, information is material if its non-disclosure or improper presentation could cause material misstatements and influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the item judged in the particular circumstances of its omission. In deciding whether an item or an aggregate of items is material, the nature and the size of the item are evaluated together. Depending on the circumstances, either the nature or the size of the item could be the determining factor. For example, individual assets with the same nature and function are aggregated even if the individual amounts are large. However, large items which differ in nature or function are presented separately.

23. If an item is not individually material, it is aggregated with other items either on the face of the financial statements or in the notes to the financial statements. An item that is not sufficiently material to warrant separate presentation on the face of the financial statements may nevertheless be sufficiently material that it should be presented separately in the notes to the financial statements.

24. Materiality provides that the specific disclosure requirements of accounting standards need not be met if the resulting information is not material.

Offsetting

25. Assets and liabilities should not be offset except when offsetting is required or permitted by another accounting standard.

26. Items of revenue, other income and expense should be offset when, and only when:

(a) an accounting standard requires or permits it; or

(b) gains, losses and related expenses arising from the same or similar transactions and events are not material. Such amounts should be aggregated in accordance with paragraph 21.

27. It is important that assets and liabilities, and income and expenses, when material, are reported separately. Offsetting in either the income statement or the balance sheet, except when offsetting reflects the substance of the transaction or event, detracts from the ability of users to understand the transactions undertaken and to assess the future cash flows of the enterprise.

28. VAS 14, “Revenue and other income”, defines the term revenue and requires it to be measured at the fair value of consideration received or receivable, taking into account the amount of any trade discounts and volume rebates allowed by the enterprise. An enterprise undertakes, in the course of its ordinary activities, other transactions which do not generate revenue but which are incidental to the main revenue generating activities. The results of such transactions are presented, when this presentation reflects the substance of the transaction or event, by netting any income with related expenses arising on the same transaction. For example:

(a) gains and losses on the disposal of non-current assets, including investments and operating assets, are reported by deducting from the proceeds on disposal the carrying amount of the asset and related selling expenses;

(b) expenditure that is reimbursed under a contractual arrangement with a third party (a sub-letting agreement, for example) is netted against the related reimbursement

29. Gains and losses arising from a group of similar transactions are reported on a net basis, for example foreign exchange gains and losses or gains and losses arising on financial instruments held for trading purposes. Such gains and losses are, however, reported separately if their size, nature or incidence is such that separate disclosure is required by Accounting Standard “Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies”.

Comparative Information

30. Comparative numerical information should be disclosed in respect of the previous period for all numerical information in the financial statements. Comparative information should be included in narrative and descriptive information when it is relevant to an understanding of the current period’s financial statements.

31. When the presentation or classification of items in the financial statements is amended, comparative amounts should be reclassified (unless it is impracticable to do so) to ensure comparability with the current period, and the nature, amount of, and reason for, any reclassification should be disclosed. When it is impracticable to reclassify comparative amounts, an enterprise should disclose the reason for not reclassifying and the nature of the changes that would have been made if amounts were reclassified.

32. Circumstances may exist when it is impracticable to reclassify comparative information to achieve comparability with the current period. For example, data may not have been collected in the previous periods in a way which allows reclassification, and it may not be practicable to recreate the information. In such circumstances, the nature of the adjustments to comparative amounts that would have been made is disclosed. Accounting Standard “Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies” deals with the adjustments required to comparative information following a change in accounting policy that is applied retrospectively.

STRUCTURE AND BASIC CONTENT OF FINANCIAL STATEMENTS

General information about an enterprise

33. In financial statements, the following information should be prominently displayed:

(a) the registered name and address of the reporting enterprise;

(b) whether the financial statements are separate financial statements of the reporting enterprise or consolidated financial statements for a group of enterprises;

(c) the date of the financial statements;

(d) the reporting currency.

34. The requirements in paragraph 33 are presented in the financial statements. Depending on the circumstances, judgement is required in determining the best way of presenting such information. In case the financial statements are read electronically, separate pages may not be used; the above items are then presented frequently enough to ensure a proper understanding of the information given.

Reporting Period

35. Financial statements should be presented at least annually. When, in exceptional circumstances, an enterprise’s balance sheet date changes and annual financial statements are presented for a period longer or shorter than one year, an enterprise should disclose, in addition to the period covered by the financial statements:

(a) the reason for the change in balance sheet date; and

(b) the fact that comparative amounts for the income statement, cash flows statement and related notes to the financial statements are not comparable to those of the current period.

36. In exceptional circumstances an enterprise may be required to, or decide to, change its balance sheet date, for example following the acquisition of the enterprise by another enterprise with a different balance sheet date. In this is the case, the current period figures and the comparative amounts are not comparable, and the reason for the change of the balance sheet date is disclosed by the enterprise.

Balance Sheet The Current/Non-current Distinction

37. Each enterprise should present current and non-current assets and current and non-current liabilities as separate classifications on the face of the balance sheet. When an enterprise is unable to make this classification due to the nature of its operation, assets and liabilities should be presented descending in order of their liquidity.

38. Whichever method of presentation is adopted, an enterprise should disclose, for each asset and liability item that combines amounts expected to be recovered or settled both before and after twelve months from the balance sheet date, the amount expected to be recovered or settled after more than twelve months.

39. When an enterprise supplies goods or services within a clearly identifiable operating cycle, separate classification of current and non-current assets and liabilities on the face of the balance sheet provides useful information by distinguishing the net assets that are continuously circulating as working capital from those used in the enterprise’s long-term operations. It also highlights assets that are expected to be realised within the current operating cycle, and liabilities that are due for settlement within the same period.

Current and Non-current Assets

40. An asset should be classified as a current asset when it:

(a) is expected to be realised in, or is held for sale or consumption in, the normal course of the enterprise’s operating cycle; or

(b) is held primarily for trading purposes or for the short-term and expected to be realised within twelve months of the balance sheet date; or

(c) is cash or a cash equivalent asset which is not restricted in its use.

41. All other assets should be classified as non-current assets.

42. Non-current assets include tangible, intangible, financial assets of a long-term nature and other non-current assets.

43. The operating cycle of an enterprise is the time between the acquisition of materials entering into a process and its realisation in cash or an instrument that is readily convertible into cash. Current assets include inventories and trade receivables that are sold, consumed and realised as part of the normal operating cycle even when they are not expected to be realised within twelve months of the balance sheet date. Marketable securities are classified as current assets if they are expected to be realised within twelve months of the balance sheet date; otherwise they are classified as non-current assets.

Current and Non-current Liabilities

44. A liability should be classified as a current liability when it:

(a) is expected to be settled in the normal course of the enterprise’s operating cycle; or

(b) is due to be settled within twelve months of the balance sheet date.

45. All other liabilities should be classified as non-current liabilities.

46. Current liabilities can be categorised in a similar way to current assets. Some current liabilities, such as trade payables and accruals for employee and other operating costs, form part of the working capital used in the normal operating cycle of the business. Such operating items are classified as current liabilities even if they are due to be settled after more than twelve months from the balance sheet date.

47. Other current liabilities are not settled as part of the current operating cycle, but are due for settlement within twelve months of the balance sheet date. Examples are the current portion of interest-bearing liabilities, bank overdrafts, taxes and other non-trade payables. Interest-bearing liabilities that provide the financing for working capital on a long-term basis, and are not due for settlement within twelve months, are non-current liabilities.

48. An enterprise should continue to classify its long-term interest-bearing liabilities as non-current, even when they are due to be settled within twelve months of the balance sheet date if:

(a) the original term was for a period of more than twelve months;

(b) the enterprise intends to refinance the obligation on a long-term basis and that intention is supported by an agreement to refinance, or to reschedule payments, which is completed before the financial statements are authorised for issue.

The amount of any liability that has been excluded from current liabilities in accordance with this paragraph, together with information in support of this presentation, should be disclosed in the notes to the balance sheet.

49. Some obligations that are due to be repaid within the next operating cycle may be expected to be refinanced or ‘rolled over’ at the discretion of the enterprise and, therefore, are not expected to use current working capital of the enterprise. Such obligations are considered to form part of the enterprise’s long-term financing and should be classified as non-current. However, in situations in which refinancing is not at the discretion of the enterprise (as would be the case if there were no agreement to refinance), the obligation is classified as current unless the completion of a refinancing agreement before the authorisation of the financial statements for issue provides evidence that the substance of the liability at the balance sheet date was long-term.

50. Some borrowing agreements incorporate undertakings by the borrower (covenants) which have the effect that the liability becomes payable on demand if certain conditions related to the borrower’s financial position are breached. In these circumstances, the liability is classified as non-

current only when:

(a) the lender has agreed, prior to the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach; and

(b) it is not probable that further breaches will occur within twelve months of the balance sheet date.

Information to be presented on the Face of the Balance Sheet

51. As a minimum, the face of the balance sheet should include line items which present the following amounts:

1. Cash and cash equivalents;

2. Short-term financial investments;

3. Trade and other receivables;

4. Inventories;

5. Other current assets;

6. Tangible fixed assets;

7. Intangible fixed assets;

8. Long-term financial investments;

9. Construction in progress;

10. Other non-current assets

11. Short-term loan;

12. Trade and other payables;

13. Taxes payable;

14. Long-term loans and other long-term liabilities;

15. Provisions;

16. Minority interest;

17. Paid -in capital;

18. Reserves;

19. Undistributed earnings.

52. Additional line items, headings and sub-totals should be presented on the face of the balance sheet when an accounting standard requires it, or when such presentation is necessary to present fairly the enterprise’s financial position.

53. The format in which items are to be presented on the face of the Balance Sheet applied for each type of enterprise will be prescribed in the applicable regulations providing

implementation guidance to this standard. (Paragraph 51 simply provides a list of items that are so different in nature or function that they deserve separate presentation on the face of the Balance Sheet). Adjustments to the line items presented on the face of the Balance Sheet include the followings:

(a) line items are added when another accounting standard requires separate presentation on the face of the balance sheet, or when the size, nature or function of an item is such that separate presentation would assist in presenting fairly the enterprise’s financial position;

(b) the descriptions used and the ordering of items may be amended according to the nature of the enterprise and its transactions, to provide information that is necessary for an overall understanding of the enterprise’s financial position. For example, for a bank or a similar financial institution, the presentation of the balance sheet will be more specifically prescribed in paragraphs Accounting Standard “Disclosures in the Financial Statements of Banks and Similar Financial Institutions”.

Information to be Presented Either on the Face of the Balance Sheet or in the Notes to the Financial Statements

54. An enterprise should disclose, either on the face of the balance sheet or in the notes to the balance sheet, further sub-classifications of the line items presented, classified in a manner appropriate to the enterprise’s operations. Each item should be sub-classified, when appropriate, by its nature and, amounts payable to and receivable from the parent enterprise, fellow subsidiaries and associates and other related parties should be disclosed separately.

55. The detail provided in sub-classifications, either on the face of the balance sheet or in the notes depends on the requirements of Vietnamese Accounting Standards and the size, nature and function of the amounts involved. The disclosures will vary for each item, for example:

(a) tangible fixed assets are classified as described in VAS 03 “Tangible fixed assets” into Buildings, structures; Machinery and equipments; Means of transportation, and transmission; Management tools and devices; Perennial trees, working and/or product animals; Other tangible fixed assets.

(b) receivables are analysed between amounts receivable from trade customers, inter-company receivables, receivables from related parties, prepayments and other amounts;

(c) inventories are sub-classified, in accordance with VAS 02, “Inventories”, into classifications such as materials, tools and supplies, work in progress and finished goods etc;

(d) provisions are analysed showing separately the various classes in a manner appropriate to the enterprise’s operations; and

(e) equity capital and reserves from profits are analysed showing separately the various classes of paid – in capital, share premium and reserves.

Income Statement Information to be presented on the face of the Income Statement

56. As a minimum, the face of the income statement should include line items which present the following amounts:

1. Revenue from sales of goods and rendering of services;

2. Deductible items;

3. Net revenue from sales of goods and rendering of services;

4. Cost of goods sold;

5. Gross profit from sale of goods and rendering of services;

6. Income from financial activities;

7. Expenses from financial activities;

8. Selling expenses;

9. General and administration expenses;

10. Other income;

11. Other expenses;

12. Share of profits and losses of associates and joint ventures accounted for using the equity method (in the case of consolidated income statement);

13. Operating profit;

14. Enterprise income tax;

15. Profit after tax;

16. Minority interest in profit after tax (in the case of consolidated income statements);

17. Net profit/loss for the period.

57. Additional line items, headings and sub-totals should be presented on the face of the income statement when required by another Vietnamese Accounting Standard, or when such presentation is necessary to present fairly the enterprise’s financial performance.

58. Descriptions used and the ordering of items are amended when this is necessary to explain the elements of performance. Factors to be taken into consideration include materiality and the nature and function of the various components of income and expenses. For example, for a bank or a similar financial institution, the presentation of the balance sheet will be more specifically prescribed in Accounting Standard “Disclosures in the Financial Statements of Banks and Similar Financial Institutions”.

59. If, due to the operation nature of an enterprise, items on the face of the income statement could not be presented based on the function of expenses, they will be presented based on the nature of expenses.

Information to be presented either on the face of the Income statement or in the Notes to the Financial statements.

60. Enterprises classifying expenses by function should disclose additional information on the nature of expenses, for example, depreciation and amortisation expenses and staff costs.

61. An enterprise should disclose in the notes the amount of dividends per share, declared or proposed, for the period covered by the financial statements.

Cash Flow Statement

62. Cash flow statement is prepared and presented in accordance with the requirements set out in VAS 24 “Cash flow statement”.

Notes to the Financial Statements Structure

63. The notes to the financial statements of an enterprise should:

(a) present information about the basis of preparation of the financial statements and the specific accounting policies selected and applied for significant transactions and events;

(b) disclose the information required by Vietnamese Accounting Standards that is not presented elsewhere in the financial statements;

(c) provide additional information which is not presented on the face of the financial statements but that is necessary for a fair presentation.

64. Notes to the financial statements should be presented in a systematic manner. Each item on the face of the balance sheet, income statement and cash flow statement should be cross-referenced to any related information in the notes.

65. Notes to the financial statements include narrative descriptions or more detailed analyses of amounts shown on the face of the balance sheet, income statement, cash flow statement, as well as additional information. They include information required to be disclosed by others accounting standards, and other disclosures necessary to achieve a fair presentation.

66. Notes to the financial statements are normally presented in the following order and should be presented consistently in this order in order to assist users in understanding the financial statements and comparing them with those of other enterprises:

(a) statement of compliance with Vietnamese accounting standards;

(b) statement of the measurement basis (bases) and accounting policies applied;

(c) supporting information for items presented on the face of each financial statement in the order in which each line item and each financial statement is presented;

(d) statement of changes in equity;

(e) other disclosures, including:

(i) contingencies, commitments and other financial disclosures; and

(ii) non-financial disclosures.

Presentation of Accounting Policies

67. The accounting policies section of the notes to the financial statements should describe the following:

(a) the measurement basis (or bases) used in preparing the financial statements; and

(b) each specific accounting policy that is necessary for a proper understanding of the financial statements.

68. In addition to the specific accounting policies used in the financial statements, it is important for users to be aware of the measurement basis (bases) used (historical cost, current cost, realisable value, fair value or present value) because they form the basis on which the whole of the financial statements are prepared. When more than one measurement basis is used in the financial statements, for example when certain assets are revalued as required by statutes, it is sufficient to provide an indication of the categories of assets and liabilities to which each measurement basis is applied.

69. In deciding whether a specific accounting policy should be disclosed in the financial statements,

the Director (or leader) of an enterprise considers whether disclosure would assist users in understanding the way in which transactions and events are reflected in the reported performance and financial position. The accounting policies that an enterprise might consider presenting include, but are not restricted to, the following:

(a) revenue recognition;

(b) consolidation principles, including subsidiaries and associates;

(c) business combinations;

(d) joint ventures;

(e) recognition and depreciation/amortisation of tangible and intangible assets; amortization of prepaid expense and goodwill;

(f) capitalisation of borrowing costs and other expenditure;

(g) construction contracts;

(h) investment properties;

(i) financial instruments and investments;

(j) leases;

(k) research and development costs;

(l) inventories;

(m) taxes, including deferred taxes;

(n) provisions;

(o) foreign currency translation and hedging;

(p) definition of business and geographical segments and the basis for allocation of costs between segments;

(q) definition of cash and cash equivalents;

(r) government grants.

Other accounting standards specifically require disclosure of accounting policies in many of these areas.

70. Each enterprise considers the nature of its operations and the policies which the user would expect to be disclosed for that type of enterprise. When an enterprise has significant foreign operations or transactions in foreign currencies, disclosure of accounting policies for the recognition of foreign exchange gains and losses and the hedging of such gains and losses would be expected. In consolidated financial statements, the policy used for determining goodwill and minority interest is disclosed.

71. An accounting policy may be significant even if amounts shown for current and prior periods are not material. It is also appropriate to disclose an accounting policy for each policy not covered by existing Vietnamese Accounting Standards, but selected and applied in accordance with

paragraph 12.

Presentation of changes in equity

72. An enterprise should disclose in the notes to the financial statements the information regarding changes in equity as following:

(a) the net profit or loss for the period;

(b) each item of income and expense, gain or loss which, as required by other Standards, is recognised directly in equity, and the total of these items; and

(c) the cumulative effect of changes in accounting policy and the correction of fundamental errors dealt with under the accounting treatments in Accounting Standard “Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies”.

(d) capital transactions with owners and distributions to owners;

(e) the balance of accumulated profit or loss at the beginning of the period and at the balance sheet date, and the movements for the period; and

(f) a reconciliation between the carrying amount of each class of equity capital, share premium and each reserve at the beginning and the end of the period, separately disclosing each movement.

73. An enterprise should disclose the following in the notes to the financial statements:

(a) for each class of share:

(i) the number of shares authorised;

(ii) the number of shares issued and fully paid, and issued but not fully paid;

(iii) par value per share, or that the shares have no par value;

(iv) a reconciliation of the number of shares outstanding at the beginning and at the end of the year;

(v) the rights, preferences and restrictions attaching to that class including restrictions on the distribution of dividends and the repayment of capital;

(vi) shares in the enterprise held by the enterprise itself or by subsidiaries or associates of the enterprise; and

(vii) shares reserved for issuance under options and sales contracts, including the terms and amounts;

(b) a description of the nature and purpose of each reserve within owners’ equity;

(c) the amount of dividends that were proposed or declared after the balance sheet date but before the financial statements were authorised for issue; and

(d) the amount of any cumulative preference dividends not recognised.

An enterprise without share capital, such as a partnership, a state-owned enterprise or a limited liability company should disclose information equivalent to that required above, showing movements during the period in each category of equity interest and the rights, preferences and

restrictions attaching to each category of equity interest.

Other Disclosures

74. An enterprise should disclose the following if not disclosed elsewhere in information published with the financial statements:

(a) the domicile and legal form of the enterprise, its country of incorporation and the address of the registered office (or principal place of business, if different from the registered office);

(b) a description of the nature of the enterprise’s operations and its principal activities;

(c) the name of the parent enterprise and the ultimate parent enterprise of the group; and

(d) either the number of employees at the end of the period or the average for the period.

Standard No. 22 DISCLOSURES IN FINANCIAL STATEMENTS OF BANKS AND SIMILAR FINANCIAL INSTITUTIONS



GENERAL

01. The objective of this Standard is to prescribe and guide the presentation of additioanl information in the financial statements of banks and similar financial institutions.

02. This Standard should be applied for banks and similar financial institutions (hereinafter referred to as banks), including banks, credit institutions, non-banking credit institutions, similar financial institutions whose principal operations are to take deposits and borrow with the objective of lending and investing within the scope of banking operations as stipulated by the Law on Credit Institutions and other related legislations.

03. This Standard provides guidance in the presentation of nessecary information in separate financial statements and consolidated financial statements of banks. In addition, banks are encouraged to disclose information on their liquidity and risk management capability. This Standard should be also applied on consolidated basis for groups undertaking banking operations.

04. This Standard supplements other standards applicable for banks unless they are specifically exempted in a standard.

CONTENT Accounting policies

05. In order to comply with VAS 21, “Presentation of Financial Statements”, and thereby enable users to understand the basis on which the financial statements of a bank are prepared, accounting policies dealing with the following items need to be disclosed:

a) the recognition of the principal types of income (see paragraphs 07 and 08);

b) the valuation of investment and dealing securities;

c) the distinction between those transactions and other events that result in the recognition of assets and liabilities on the balance sheet and those transactions and other events that only give rise to contingencies and commitments (see paragraphs 20 to 22);

d) the basis for the determination of losses on loans and advances and for writing off uncollectible loans and advances (see paragraphs 36 to 40);

e) the basis for the determination of charges for general banking risks and the accounting treatment of such charges (see paragraphs 41 to 43).

Income Statement

06. A bank should present an income statement which groups income and expenses by nature and discloses the amounts of the principal types of income and expenses

07. In addition to the requirements of other Vietnamese Accounting Standards, the disclosures in the income statement or the notes to the financial statements should include, but are not limited to, the following items of income and expenses:

- Interest and similar income;

- Interest expense and similar charges;

- Dividend;

- Fee and commision income;

- Fee and commision expense;

- Net gains or losses arising from dealing securities;

- Gains less losses arising from investment securities;

- Gains less losses arising from dealing in foreign currencies;

- Other operating income;

- Losses on loans and advances

- General administrative expenses; and

- Other operating expenses.

08. The principal types of income arising from the operations of a bank include interest, fees for services, commissions and other business operating results. Each type of income is separately disclosed in order that users can assess the performance of a bank. Such disclosures are in addition to those of the source of income required by VAS 28, Segment Reporting.

09. The principal types of expenses arising from the operations of a bank include interest, commissions, losses on loans and advances, impairment losses of investments and general administrative expenses. Each type of expense is separately disclosed in order that users can assess the performance of a bank.

10. Income and expense items should not be offset except for those relating to assets and liabilities and to hedges which have been offset in accordance with paragraph 19.

11. Offsetting in cases other than those relating to hedges and to assets and liabilities which have been offset as described in paragraph 19 prevents users from assessing the performance of the separate activities of a bank and the return that it obtains on particular classes of assets.

12. Gains and losses arising from each of the following should be reported on a net basis:

(a) disposals of dealing securities;

(b) disposals of investment securities; and

(c) dealings in foreign currencies.

13. Interest income and interest expense are disclosed separately in order to give a better understanding of the composition of, and reasons for changes in, net interest.

14. Net interest is a result of both interest rates and the amounts of borrowing and lending. It is very useful if management provides a commentary about average interest rates, average interest earning assets and average liabilities for the period. In cases where government provides interest subsidization, the extent of subsidized deposits and facilities and their effect on net income should

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be disclosed in the financial statements.

Balance sheet

15. A bank should present a balance sheet that groups assets and liabilities by nature and lists them in the descending order of their relative liquidity.

16. In addition to the requirements of other Vietnamese accounting standards, the disclosures in the balance sheet or the notes to the financial statements should include, but are not limited to, the following assets and liabilities:

Assets

- Cash, jewels and gemstones;

- Deposits at State Bank;

-Treasury bills and other bills eligible for rediscounting with the State Bank;

- Government bonds and other securities held for trading;

- Placements with, and loans and advances to other banks;

- Other money market placements;

- Loans and advances to customers; and

- Equity investment.

Liabilities

- Deposits from other banks;

- Other money market deposits;

- Deposits from customers;

- Certificates of deposits;

- Promissory notes and other liabilities evidenced by paper; and

- Other borrowed funds.

17. The most useful approach to the classification of the assets and liabilities of a bank is to group them by their nature and list them in the approximate order of their liquidity which may equate broadly to their maturities. Current and non-current items are not presented separately because most assets and liabilities of a bank can be realised or settled in the near future.

18. The distinction between balances with other banks and those with other parts of the money market and from other depositors is relevant information because it gives an understanding of a bank's relations with, and dependence on, other banks and the money market. Hence, a bank discloses separately:

(a) balances with the State Bank;

(b) placements with other banks;

(c) other money market placements;

(d) deposits from other banks;

(e) other money market deposits; and

19. Any asset or liability in the balance sheet should not be offset by the deduction of another liability or asset unless a legal right of set-off exists and the offsetting represents the expectation as to the realisation or settlement of the asset or liability.

Off Balance Sheet Contingencies and Commitments

20. A bank should disclose the following contingent liabilities and commitments:

(a) the nature and amount of commitments to extend credit that are irrevocable because they cannot be withdrawn at the discretion of the bank without the risk of incurring significant penalty or expense; and

(b)the nature and amount of contingent liabilities and commitments arising from off balance sheet items including those relating to:

(i) credit substitutes including general guarantees of indebtedness, bank acceptance guarantees and standby letters of credit serving as financial guarantees for loans and securities;

(ii)certain transaction-related contingent liabilities including performance bonds, bid bonds, other warranties and standby letters of credit related to particular (special) transactions;

(iii) short-term contingent liabilities arising from the movement of goods, such as documentary credits where the underlying shipment is used as security;

(vi)other commitments, note issuance facilities.

21. Many banks also enter into transactions that are presently not recognised as assets or liabilities in the balance sheet but which give rise to contingencies and commitments. Such off balance sheet items often represent an important part of the business of a bank and may have a significant bearing on the level of risk to which the bank is exposed. These items may add to, or reduce, other risks, for example by hedging assets or liabilities on the balance sheet.

22.The users of the financial statements need to know about the contingencies and irrevocable commitments of a bank in order to assess its liquidity and solvency and the inherent possibility of potential losses.

Maturities of Assets and Liabilities

23. A bank should disclose an analysis of assets and liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date.

24. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of a bank. It is unusual for banks ever to be completely matched since business transacted is often of uncertain term and of different types. An unmatched position potentially enhances profitability but can also increase the risk of losses.

25. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of a bank and its exposure to changes in interest rates and exchange rates. In order to provide information that is relevant for the assessment of its liquidity, a bank discloses, as a minimum, an analysis of assets

and liabilities into relevant maturity groupings.

26. The maturity groupings applied to individual assets and liabilities differ between banks and in their appropriateness to particular assets and liabilities. Examples of periods used include the following:

(a) up to 1 month;

(b) from 1 month to 3 months;

(c) from 3 months to 1 year;

(d) from 1 year to 3 years; and

(e) from 3 years to 5 years; and.

(e) from 5 years and over.

Frequently the periods are combined, for example, in the case of loans and advances, by grouping those under one year and those over one year. When repayment is spread over a period of time, each instalment is allocated to the period in which it is contractually agreed or expected to be paid or received.

27. The maturity periods adopted by a bank should be the same for assets and liabilities. This makes clear the extent to which the maturities are matched and the consequent dependence of the bank on other sources of liquidity.

28. Maturities could be expressed in terms of:

(a) the remaining period to the repayment date;

(b) the original period to the repayment date; or

(c) the remaining period to the next date at which interest rates may be changed.

The analysis of assets and liabilities by their remaining periods to the repayment dates provides the best basis to evaluate the liquidity of a bank. A bank may also disclose repayment maturities based on the original period to the repayment date in order to provide information about its funding and business strategy. In addition, a bank may disclose maturity groupings based on the remaining period to the next date at which interest rates may be changed in order to demonstrate its exposure to interest rate risks. Management may also provide, in its commentary on the financial statements, information about interest rate exposure and about the way it manages and controls such exposures.

29. In practice, demand deposits and advances are often maintained for long periods without withdrawal or repayment; hence, the effective date of repayment is later than the contractual date. Nevertheless, a bank discloses an analysis expressed in terms of contractual maturities even though the contractual repayment period is often not the effective period because contractual dates reflect the liquidity risks attaching to the bank's assets and liabilities.

30. Some assets of a bank do not have a contractual maturity date. The period in which these assets are assumed to mature is usually taken as the expected date on which the assets will be realised.

31. The evaluation of the liquidity of a bank from its disclosure of maturity groupings should be made in the context of local banking practices, including the availability of funds to banks.

32. In order to provide users with a full understanding of the maturity groupings of assets and

liabilities, the disclosures in the financial statements may need to be supplemented by information as to the likelihood of repayment within the remaining period. Hence, management may provide, in its commentary on the financial statements, information about the effective periods and about the way it manages and controls the risks and exposures associated with different maturity and interest rate profiles.

Concentrations of Assets, Liabilities and Off Balance Sheet Items

33. A bank should disclose any significant concentrations of its assets, liabilities and off balance sheet items. Such disclosures should be made in terms of geographical areas, customer or industry groups or other concentrations of risk. A bank should also disclose any significant net foreign currency exposures.

34. A bank should disclose significant concentrations in the distribution of its assets and liabilities because it is a useful indication of the potential risks inherent in the realisation of the assets and liabilities of the bank. Such disclosures are made in terms of geographical areas, customer or industry groups or other concentrations of risk which are appropriate in the circumstances of the bank. A similar analysis and explanation of off balance sheet items is also important. Such disclosures are made in addition to any segment information required by VAS 28, Segment Reporting.

35. The disclosure of significant net foreign currency exposures is also a useful indication of the risk of loan losses arising from changes in exchange rates.

Loss on Loans and Advances

36. A bank should disclose in its financial statements the following:

(a) the accounting policy which describes the basis on which uncollectible loans and advances are recognised as an expense and written off;

(b) details of the movements in the provision for losses on loans and advances during the period. It should disclose separately the amount recognised as an expense in the period for losses on uncollectible loans and advances, the amount charged in the period for loans and advances written off and the amount credited in the period for loans and advances previously written off that have been recovered;

(c) the aggregate amount of the provision for losses on loans and advances at the balance sheet date.

37. Any amounts set aside in respect of loss provision on loans and advances in addition to those losses that have been recognised in accordance with Accounting standard on Financial Instruments should be accounted for as appropriations of retained earnings. Any credits resulting from the reduction of such amounts should be accounted for as an increase in retained earnings and are not included in the determination of net profit or loss for the period.

38. A bank is allow to set aside amounts for losses on loans and advances in addition to those losses that have been recognised in accordance with Accounting standard on Financial Instruments. Any such amounts should be accounted for as appropriations of retained earnings. Any credits resulting from the reduction of such amounts should be accounted for as an increase in retained earnings and are not included in the determination of net profit or loss for the period.

39. Users of the financial statements of a bank need to know the impact that losses on loans and advances have had on the financial position and performance of the bank. This helps them judge the effectiveness with which the bank has employed its resources. Therefore a bank discloses the aggregate amount of the provision for losses on loans and advances at the balance sheet date and the movements in the provision during the period. The movements in the provision, including the amounts previously written off that have been recovered during the period, are shown separately.

40. When loans and advances cannot be recovered, they are written off and charged against the provision for losses. In some cases, they are not written off until all the necessary legal procedures have been completed and the amount of the loss is finally determined. In other cases, they are written off earlier, for example when the borrower has not paid any interest or repaid any principal that was due in a specified period. As the time at which uncollectable loans and advances are written off differs, the gross amount of loans and advances and of the provisions for losses may vary considerably in similar circumstances. As a result, a bank discloses its policy for writing off uncollectable loans and advances

General Banking Risks

41. Any amounts set aside for general banking risks, including future losses and other unforeseeable risks or contingencies should be separately disclosed as appropriations of retained earnings. Any credits resulting from the reduction of such amounts result in an increase in retained earnings and should not be included in the determination of net profit or loss for the period.

42. A bank is allowed to set aside amounts for general banking risks, including future losses or other unforeseeable risks, in addition to the charges for losses on loans and advances determined in accordance with paragraph 38. A bank is also allowed to set aside amounts for contingencies. Such amounts for general banking risks and contingencies do not qualify for recognition as provisions under Accounting standard Provisions, Contingent Liabilities and Contingent Assets. Therefore, a bank recognises such amounts as appropriations of retained earnings. This is necessary to avoid the overstatement of liabilities, understatement of assets, undisclosed accruals and provisions which create the opportunity to distort net income and equity.

43. The income statement cannot present relevant and reliable information about the performance of a bank if net profit or loss for the period includes the effects of undisclosed amounts set aside for general banking risks or additional contingencies, or undisclosed credits resulting from the reversal of such amounts. Similarly, the balance sheet cannot provide relevant and reliable information about the financial position of a bank if the balance sheet includes overstated liabilities, understated assets or undisclosed accruals and provisions.

Assets Pledged as Security

44. A bank should disclose the aggregate amount of secured liabilities and the nature and carrying amount of the assets pledged as security.

45. Banks are required to pledge assets as security to support certain deposits and other liabilities. The amounts involved are often substantial and so may have a significant impact on the assessment of the financial position of a bank.

Trust Activities

46. Banks commonly act as trustees that result in the holding or placing of assets on behalf of individuals, trusts and other institutions. Provided the trustee or similar relationship is legally supported, these assets are not assets of the bank and, therefore, are not included in its balance sheet. If the bank is engaged in significant trust activities, disclosure of that fact and an indication of the extent of those activities is made in its financial statements because of the potential liability if it fails in its fiduciary duties. For this purpose, trust activities do not encompass safe custody functions.

Related Party Transactions

47. Certain transactions between related parties may be effected on different terms from those with unrelated parties. For example, a bank may advance a larger sum or charge lower interest rates to a related party than it would in otherwise identical circumstances to an unrelated party. Similarily, advances or deposits may be moved between related parties more quickly and with less formality than is possible when unrelated parties are involved. Even when related party transactions arise in the ordinary course of a bank's business, information about such transactions is relevant to the

needs of users and its disclosure is required by VAS 26 – Related Party Disclosure.

48. When a bank has entered into transactions with related parties, it should disclose the nature of the related party relationship, the types of transactions, and the existing balances necessary for an understanding of significant impacts and relation to the financial statements of the bank. The elements that would normally be disclosed to conform with VAS 26 include a bank's lending policy to related parties.

In respect of related party transactions, the banks should disclosure the following quantitative information:

(a)each of loans and advances, deposits, acceptances and issued notes; disclosures include the aggregate amounts outstanding at the beginning and end of the period, as well as advances, deposits, repayments and other changes during the period;

(b)each of the principal types of income, interest expense and commissions payable;

(c)the aggregate amount of the expense recognised in the period for losses on loans and advances and the aggregate amount of the provision at the balance sheet date; and

(d)irrevocable commitments and contingencies and commitments arising from off balance sheet items.

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Standard No. 23 EVENTS AFTER THE BALANCE SHEET DATE



GENERAL

01. The objective of this standard is to prescribe and provide guidelines for cases when an enterprise should adjust its financial statements, principles and method to adjust the financial statements for events after the balance sheet date and disclosures about the date when the financial statements were authorized for issue and about events after the balance sheets date.

If events occurring after the balance sheet date indicate that the going concern assumption is not appropriate the enterprise should not prepare its financial statements on a “going concern” basis.

02. This Standard should be applied in the accounting for, and disclosure of, events after the balance sheet date.


Events after the balance sheet date are those events, both favourable or unfavourable, that occur between the balance sheet date and the date when the financial statements are authorised for issue.

Two types of events can be identified:

(a) Adjusting events after the balance sheet date: those events that provide evidence of conditions that existed at the balance sheet date.

(b) Non-Adjusting events after the balance sheet date: those events that are indicative of conditions that arose after the balance sheet date.

The date when the financial statements were authorized for issue is: The date when the enterprise’s Finance Director (or someone who is authorized by the Finance Director) signs on financial statements for distributing to external parties.

04. The process involved in authorising the financial statements for issue will vary depending upon the management structure, statutory requirements and procedures followed in preparing and finalising the financial statements.

05. Events after the balance sheet date include all events up to the date when the financial statements are authorised for issue.

CONTENT

Recognition and measurement

Adjusting events after the balance sheet date

06. An enterprise should adjust the amounts recognised in its financial statements to reflect adjusting events after the balance sheet date.

07. The following are examples of adjusting events after the balance sheet date that require an enterprise to adjust the amounts recognised in its financial statements, or to recognise items that

were not previously recognised:

(a) The resolution after the balance sheet date of a court case which, because it confirms that an enterprise already had a present obligation at the balance sheet date, requires the enterprise to adjust a provision already recognised, or to recognise a new provision or recognize new receivables or payables;

(b) The receipt of information after the balance sheet date indicating that an asset was impaired at the balance sheet date, or that the amount of a previously recognised impairment loss for that asset needs to be adjusted. For example:

(i) the bankruptcy of a customer which occurs after the balance sheet date usually confirms that a loss already existed at the balance sheet date on a trade receivable account;

(ii)the sale of inventories after the balance sheet date may give evidence about their net realisable value at the balance sheet date;

(c) The determination after the balance sheet date of the cost of assets purchased, or the proceeds from assets sold before the balance sheet date;

(d) The discovery of fraud or errors that show that the financial statements were incorrect.

Non-adjusting events after the balance sheet date

08. An enterprise should not adjust the amounts recognised in its financial statements to reflect non-adjusting events after the balance sheet date.

09. An example of a non-adjusting event after the balance sheet date is a decline in market value of investments such as capital contributions in join ventures and Investments in Associates between the balance sheet date and the date when the financial statements are authorised for issue. The fall in market value does not normally relate to the condition of the investments at the balance sheet date, but reflects circumstances that have arisen in the following period. An enterprise does not adjust the amounts recognised in its financial statements for the investments although it may need to give additional disclosure under paragraph 19.

Dividends

10. If dividends to holders of equity instruments are proposed or declared after the balance sheet date, an enterprise should not recognise those dividends as a liability at the balance sheet date.

11. If dividens are declared after the balance sheet date but before the financial statements are authorized for issue the dividends are not recognized as liability on the balance sheet but should be disclosed in the notes in accordance with VAS 21 “Presentations of financial statements”.

12. An enterprise should not prepare its financial statements on a going concern basis if management determines after the balance sheet date either that it intends to liquidate the enterprise or to cease trading, or that it has no realistic alternative but to do so.

13. Deterioration in operating results and financial position after the balance sheet date may indicate a need to consider whether the going concern assumption is still appropriate. If the going concern assumption is no longer appropriate, the effect is so pervasive that this Standard requires a fundamental change in the basis of accounting, rather than an adjustment to the amounts recognised within the original basis of accounting.

14. VAS 21 “Presentation of Financial Statements” specifies required disclosures if:

(a) the financial statements are not prepared on a going concern basis; or

(b) management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the enterprise's ability to continue as a going concern. The events or conditions requiring disclosure may arise after the balance sheet date.

Disclosure

Date of authorisation for issue

15. An enterprise should disclose the date when the financial statements were authorised for issue and who gave that authorisation. If the enterprise's owners or others have the power to amend the financial statements before issuance, the enterprise should disclose that fact.

16. It is important for users to know when the financial statements were authorised for issue, as the financial statements do not reflect events after this date.

Updating disclosure about conditions at the balance sheet date

17. If an enterprise receives information after the balance sheet date about conditions that existed at the balance sheet date, it should update disclosures that relate to these conditions, in the light of the new information.

18. In some cases, an enterprise needs to update the disclosures in its financial statements to reflect information received after the balance sheet date, even when the information does not affect the amounts that the enterprise recognises in its financial statements. one example of the need to update disclosures is when evidence becomes available after the balance sheet date about a contingent liability that existed at the balance sheet date.

Non-adjusting events after the balance sheet date

19. If non-adjusting events after the balance sheet date are material, non-disclosure could influence the economic decisions of users taken on the basis of the fiancial statements. Accordingly, an enterprise should disclose the following information for each material category of non-adjusting event after the balance sheet date:

(a) the nature and amount of the event; and

(b) an estimate of its financial effect, or a statement that such an estimate cannot be made.

20. The following are examples of non-adjusting events after the balance sheet date that would generally result in disclosure:

(a) a major business combination (VAS Business combinations, requires specific disclosures in such cases) or disposing of a major subsidiary;

(b) announcing a plan to discontinue an operation, disposing of assets or settling liabilities attributable to a discontinuing operation or entering into binding agreements to sell such assets or settle such liabilities;

(c) major purchases and disposals of assets;

(d) the destruction of a major production plant by a fire or flood;

(e) announcing a major restructuring;

(f) major ordinary share transactions and potential ordinary share transactions after the balance sheet date;

(g) abnormally large changes in asset prices or foreign exchange rates;

(h) changes in tax rates or tax laws enacted that have a significant effect on current and deferred tax assets and liabilities;

(i) entering into significant commitments or contingent liabilities; and

(j) commencing major litigation arising solely out of events.

Standard No. 25 CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING FOR INVSTMENTS IN SUBSIDIARIES



GENERAL

01. The objective of this Standard is to prescribe the principles and methods of preparing and presenting the consolidated financial statements of a group composing subsidiaries controlled by a parent company and accounting for investments in subsidiaries on the separate financial statements of the parent company.

02. This Standard should be applied in:

- the preparation and presentation of consolidated financial statements for a group of enterprises under the control of a parent.

- accounting for investments in subsidiaries in a parent's separate financial statements.

02. This Standard does not deal with:

(a) methods of accounting for business combinations and their effects on consolidation, including goodwill arising on a business combination (see VAS Business Combinations);

(b) accounting for investments in associates (see VAS 07, Accounting for Investments in Associates); and

(c) accounting for investments in joint ventures (see VAS 08, Financial Reporting of Interests in Joint Ventures).

The consolidated financial statements are covered by the definition of “financial statements” specified in VAS 01, Frameworks. Therefore, The consolidated financial statements are prepared in compliance with Vietnamese Accounting Standards.


Control is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.

A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).

A parent is an enterprise that has one or more subsidiaries.

A group is a parent and all its subsidiaries.

Consolidated financial statements: are the financial statements of a group presented as those of a single enterprise. These financial statements are prepared based on the consolidation of financial statements of a parent and those of its subsidiaries in accordance with this VAS.

Minority interest is that part of the net results of operations and of net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiaries, by

the parent.


Presentation of Consolidated Financial Statements

04. A parent, other than a parent mentioned in paragraph 05, should present consolidated financial statements.

05. A parent that is a wholly owned subsidiary, or is virtually wholly owned, need not present consolidated financial statements provided, in the case of one that is virtually wholly owned, the parent obtains the approval of the owners of the minority interest. Such a parent should disclose the reasons why consolidated financial statements have not been presented together with the bases on which subsidiaries are accounted for in its separate financial statements. The name and registered office of its parent that publishes consolidated financial statements should also be disclosed.

06. Users of the financial statements of a parent are usually concerned with, and need to be informed about, the financial position, results of operations and changes in financial position of the group as a whole. This need is served by consolidated financial statements, which present financial information about the group as that of a single enterprise without regard for the legal boundaries of the separate legal entities.

07. A parent that is itself wholly owned by another enterprise may not always present consolidated financial statements since such statements may not be required by its parent and the needs of other users may be best served by the consolidated financial statements of its parent. Virtually wholly owned is often taken to mean that the parent owns 90% or more of the voting power.

Scope of Consolidated Financial Statements

08. A parent which issues consolidated financial statements should consolidate all subsidiaries, foreign and domestic, other than those referred to in paragraph 10.

09. The consolidated financial statements include all enterprises that are controlled by the parent, other than those subsidiaries excluded for the reasons set out in paragraph 10. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of the voting power of an enterprise unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Below are the conditions where control also exists even when the parent owns less than one half of the voting power of an enterprise:

(a) power over more than one half of the voting rights by virtue of an agreement with other investors;

(b) power to govern the financial and operating policies of the enterprise under a statute or an agreement;

(c) power to appoint or remove the majority of the members of the Board of Management or equivalent governing body; or

(d) power to cast the majority of votes at meetings of the Board of Management or equivalent governing body.

10. A subsidiary should be excluded from consolidation when:

(a) control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future (normally under twelve months); or

(b) it operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent.

Such subsidiaries should be accounted for in accordance with Accounting Standard “Financial Instruments: Recognition and Measurement”.

11. A subsidiary is not excluded from consolidation because its business activities are dissimilar from those of the other enterprises within the group. Better information is provided by consolidating such subsidiaries and disclosing additional information in the consolidated financial statements about the different business activities of subsidiaries. For example, the disclosures required by VAS Segment Reporting, help to explain the significance of different business activities within the group.

Consolidation Procedures

12. In preparing consolidated financial statements, the financial statements of the parent and its subsidiaries are combined on a line-by-line basis by adding together like items of assets, liabilities, equity, income and expenses. In order that the consolidated financial statements present financial information about the group as that of a single enterprise, the following steps are then taken:

(a) the carrying amount of the parent's investment in each subsidiary and the parent's portion of equity of each subsidiary are eliminated (see Accounting Standard “Business Combinations”, which also describes the treatment of any resultant goodwill);

(b) minority interests in the net income of consolidated subsidiaries for the reporting period are identified and adjusted against the income of the group in order to arrive at the net income attributable to the owners of the parent; and

(c) minority interests in the net assets of consolidated subsidiaries are identified and presented in the consolidated balance sheet separately from liabilities and the parent shareholders' equity. Minority interests in the net assets consist of:

(i) the amount at the date of the original combination calculated in accordance with Accoungting Standard “Business Combinations”; and

(ii) the minority's share of movements in equity since the date of the combination.

13. Taxes payable by either the parent or its subsidiaries on distribution to the parent of the profits retained in subsidiaries are accounted for in accordance with Accoungting Standard “Income Taxes”.

14. Intra-group balances in the balance sheet and intra-group transactions and resulting unrealised profits should be eliminated in full. Unrealised losses resulting from intra-group transactions should also be eliminated unless cost cannot be recovered.

15. Intra-group balances in the balance sheet and intra-group transactions, including sales, expenses and dividends, are eliminated in full. Unrealised profits resulting from intra-group transactions that are included in the carrying amount of assets, such as inventory and fixed assets are eliminated in full. Unrealised losses resulting from intra-group transactions that are deducted in arriving at the carrying amount of assets are also eliminated unless cost cannot be recovered. Timing differences that arise from the elimination of unrealised profits and losses resulting from intra-group transactions are dealt with in accordance with Acounting Standard “Income Taxes”.

16. When the financial statements used in the consolidation are drawn up to different reporting dates, adjustments should be made for the effects of significant transactions or

other events that occur between those dates and the date of the parent's financial statements. In any case the difference between reporting dates should be no more than three months.

17. The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements are usually drawn up to the same date. When the reporting dates are different, the subsidiary often prepares, for consolidation purposes, statements as at the same date as the group. When it is impracticable to do this, financial statements drawn up to different reporting dates may be used provided the difference is no greater than three months. The consistency principle dictates that the length of the reporting periods and any difference in the reporting dates should be the same from period to period.

18. Consolidated financial statements should be prepared using uniform accounting policies for like transactions and other events in similar circumstances. If it is not practicable to use uniform accounting policies in preparing the consolidated financial statements, that fact should be disclosed together with the proportions of the items in the consolidated financial statements to which the different accounting policies have been applied.

19. In many cases, if a member of the group uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements when they are used in preparing the consolidated financial statements.

20. The results of operations of a subsidiary are included in the consolidated financial statements as from the date of acquisition, which is the date on which control of the acquired subsidiary is effectively transferred to the buyer, in accordance with Accounting Standard “Business Combinations”. The results of operations of a subsidiary disposed of are included in the consolidated income statement until the date of disposal which is the date on which the parent ceases to have control of the subsidiary. The difference between the proceeds from the disposal of the subsidiary and the carrying amount of its assets less liabilities as of the date of disposal is recognised in the consolidated income statement as the profit or loss on the disposal of the subsidiary. In order to ensure the comparability of the financial statements from one accounting period to the next, supplementary information is often provided about the effect of the acquisition and disposal of subsidiaries on the financial position at the reporting date and the results for the reporting period and on the corresponding amounts for the preceding period.

21. An investment in an enterprise should be accounted for in accordance with VAS Financial Instruments: Recognition and Measurement, from the date that it ceases to fall within the definition of a subsidiary and does not become an associate as defined in VAS 07, Accounting for Investments in Associates.

22. The carrying amount of the investment at the date that it ceases to be a subsidiary is carried using the cost method.

23. Minority interests should be presented in the consolidated balance sheet separately from liabilities and the parent shareholders' equity. Minority interests in the income of the group should also be separately presented.

24. The losses applicable to the minority in a consolidated subsidiary may exceed the minority interest in the equity of the subsidiary. The excess, and any further losses applicable to the minority, are charged against the majority interest except to the extent that the minority has a binding obligation to, and is able to, make good the losses. If the subsidiary subsequently reports profits, the majority interest is allocated all such profits until the minority's share of losses previously absorbed by the majority has been recovered.

25. If a subsidiary has outstanding cumulative preferred shares which are held outside the group, the parent computes its share of profits or losses after adjusting for the subsidiary's preferred dividends, whether or not dividends have been declared.

Accounting for Investments in Subsidiaries in a Parent's Separate Financial Statements

26. In a parent's separate financial statements, investments in subsidiaries that are included in the consolidated financial statements should be carried using the cost method;

27. Investments in subsidiaries that are excluded from consolidated financial statements should be carried using the cost method;

Disclosure

28. In addition to those disclosures required by paragraphs 05 and 18, the following disclosures should be made:

(a) in consolidated financial statements a listing of significant subsidiaries including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held;

(b) in consolidated financial statements, where applicable:

i) the reasons for not consolidating a subsidiary;

ii) the nature of the relationship between the parent and a subsidiary of which the parent does not own, directly or indirectly through subsidiaries, more than one half of the voting power;

iii) the name of an enterprise in which more than one half of the voting power is owned, directly or indirectly through subsidiaries, but which, because of the absence of control, is not a subsidiary; and

iv) the effect of the acquisition and disposal of subsidiaries on the financial position at the reporting date, the results for the reporting period and on the corresponding amounts for the preceding period; and

(c) in the parent's separate financial statements, a description of the method used to account for subsidiaries.

Standard No. 26 RELATES PARTY DISCLOSURES



GENERAL

01. The objective of this Standard is to prescribe accounting principles and treatment for related party disclosures and transactions between a reporting enterprise and its related parties in the financial statements.

02. This Standard should be applied in dealing with related parties and transactions between a reporting enterprise and its related parties. The requirements of this Standard apply to the financial statements of each reporting enterprise.

This Standard applies only to those related party relationships described in paragraph 04, as modified by paragraph 07.

03. This Standard deals only with those related party relationships described below:

(a) enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise. (This includes holding companies, subsidiaries and fellow subsidiaries);

(b) associates (see VAS 07 “Accounting for Investments in Associates”);

(c) individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them significant influence over the enterprise, and close members of the family of any such individual. Close members of the family of an individual are those that may be expected to influence, or be influenced by, that person in their dealings with the enterprise, for examples: parent, spouse, progeny, siblings, etc;

(d) key management personnel, that is, those persons having authority and responsibility for planning, directing and controlling the activities of the reporting enterprise, including directors and officers of companies and close members of the families of such individuals; and

(e) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise.

In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form.

04. No disclosure of transactions is required:

(a) in consolidated financial statements in respect of intra-group transactions;

(b) in parent financial statements when they are made available or published with the consolidated financial statements; and

(c) in financial statements of a wholly-owned subsidiary if its parent is incorporated in Vietnam and provides consolidated financial statements in Vietnam.


Related party: parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions.

Related party transaction: a transfer of resources or obligations between related parties, regardless of whether a price is charged.

Control: ownership, directly, or indirectly through subsidiaries, of more than one half of the voting power of an enterprise, or a substantial interest in voting power and the power to direct, by statute or agreement, the financial and operating policies of the management of the enterprise.

Significant influence: participation in the financial and operating policy decisions of an enterprise, but not control of those policies. Significant influence may be exercised in several ways, such as representation on the Board of Directors, participation in the policy making process, material inter-company transactions, interchange of managerial personnel or dependence on technical information. Significant influence may be gained by share ownership, statute or agreement. With share ownership, significant influence is presumed in accordance with the definition contained in VAS 07 “Accounting for Investments in Associates”.

06. In the context of this Standard, the following are deemed not to be related parties:

(a) two companies simply because they have a director in common, notwithstanding paragraphs 4 (d) and (e) above, (but it is necessary to consider the possibility, and to assess the likelihood, that the director would be able to affect the policies of both companies in their mutual dealings);

(b) Organizations and individuals maintaining normal dealings with an enterprise, namely:

- providers of finance;

- social organizations, unions and societies;

- public utilities;

- government departments and agencies,

(c) a single customer, supplier, franchisor, distributor, or general agent with whom an enterprise transacts a significant volume of business merely by virtue of the resulting economic dependence.


The Related Party Issue

07. Related party relationships are a normal feature of commerce and business. For example, enterprises frequently carry on separate parts of their activities through subsidiary or associated enterprises and acquire interests in other enterprises - for investment purposes or for trading reasons - that the investing company can control or exercise significant influence on the financial and operating decisions of its investee.

08. A related party relationship could have an effect on the financial position and operating results of the reporting enterprise. Related parties may enter into transactions which unrelated parties would not enter into. Also, transactions between related parties may not be effected at the same amounts as between unrelated parties.

09. The operating results and financial position of an enterprise may be affected by a related party relationship even if related party transactions do not occur. The mere existence

of the relationship may be sufficient to affect the transactions of the reporting enterprise with other parties.For example, a subsidiary may terminate relations with a trading partner on acquisition by the parent of a fellow subsidiary engaged in the same trade as the former partner. Alternatively, one party may refrain from acting because of the significant influence of another - for example, a subsidiary may be instructed by its parent not to engage in research and development.

10. Because there is an inherent difficulty for management to determine the effect of influences which do not lead to transactions, disclosure of such effects is not required by this Standard.

11. Accounting recognition of a transfer of resources is normally based on the price agreed between the parties. Between unrelated parties the price is an arm's length price. Related parties may have a degree of flexibility in the price-setting process that is not present in transactions between unrelated parties.

12. To determine a price for a transaction between related parties, the following methods can be used:

(a) comparable uncontrolled price method

(b) resale price method

(c) cost-plus method

13. Comparable uncontrolled price method sets the price by reference to comparable goods sold in an economically comparable market to a buyer unrelated to the seller.

This method is often used where the goods or services supplied in a related party transaction, and the conditions relating thereto, are similar to those in normal trading transactions. It is also often used for determining the cost of finance.

14. Under the resale price method, the transfer price to the reseller is determined by reducing the resale price by a margin, representing an amount from which the re-seller would seek to cover his costs and make an appropriate profit. There are problems of judgment in determining a compensation appropriate to the re-seller's contribution to the process.

This method is often used where goods are transferred between related parties before they are sold to an independent party. This method is also used for transfers of other resources, such as rights and services.

15. The cost-plus method seeks to add an appropriate mark-up to the supplier's cost. Difficulties may be experienced in determining both the elements of cost attributable and the mark-up. Among the yardsticks that may assist in determining transfer prices are comparable returns in similar industries on turnover or capital employed.

16. Sometimes prices of related party transactions are not determined under one of the methods described in paragraphs 14, 15, 16 above. Sometimes, no price is charged - as in the examples of the free provision of management services and the extension of free credit on a debt.

17. Sometimes, transactions would not have taken place if the relationship had not existed. For example, a company that sold a large proportion of its production to its parent company at cost might not have found an alternative customer if the parent company had not purchased the goods.

Disclosure

18. Financial statements are required to give disclosures about certain categories of related parties. Attention is focused on transactions with the directors of an enterprise, especially their remuneration and borrowings, because of the fiduciary nature of their relationship with the enterprise, as well as disclosures of significant inter-company transactions and investments in and

balances with group and associated companies and with directors. VAS 25

“Consolidated Financial Statements and Accounting for Investments in Subsidiaries”, and VAS 07 “Accounting for Investments in Associates” require disclosure of a list of significant subsidiaries and associates. Accounting Standard “Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies” requires disclosure of items of income and expense within profit or loss from ordinary activities that are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period.

19. The following are examples of situations where related party transactions may lead to disclosures by a reporting enterprise in the period which they affect:

- purchases or sales of goods (finished or unfinished);

- purchases or sales of property and other assets;

- rendering or receiving of services;

- agency arrangements;

- leasing arrangements;

- transfer of research and development;

- license agreements;

- finance (including loans and equity contributions in cash or in kind);

- guarantees and collaterals; and

- management contracts.

20. Related party relationships where control exists should be disclosed irrespective of whether there have been transactions between the related parties.

21. In order for a reader of financial statements to form a view about the effects of related party relationships on a reporting enterprise, it is appropriate to disclose the related party relationship where control exists, irrespective of whether there have been transactions between the related parties.

22. If there have been transactions between related parties, the reporting enterprise should disclose the nature of the related party relationships as well as the types of transactions and the elements of the transactions.

23. The elements of transactions would normally include:

(a) an indication of the volume of the transactions, either as an amount or as an appropriate proportion;

(b) amounts or appropriate proportions of outstanding items; and

(c) pricing policies.

24. Items of a similar nature may be disclosed in aggregate except when separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements of the reporting enterprise.

Disclosure of transactions between members of a group is unnecessary in consolidated financial statements because consolidated financial statements present information about the parent and subsidiaries as a single reporting enterprise. Transactions with associated enterprises accounted for under the equity method are not eliminated and therefore require separate disclosure as related party transactions.

Standard No. 27 INTERIM FINANCIAL REPORTING



GENERAL

1. The objective of this Standard is to prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in preparing and presenting financial statements for an interim period. Timely and reliable interim financial reporting improves the abilities of investors, creditors, and other users to understand an enterprise’s capacity to generate earnings, cash flows and its financial condition and liquidity.

2. This Standard applies if an enterprise is required to publish an interrim financial report in accoradance with law and regulations.

The Standard also applies if an enterprise elects to publish an interim financial report. Enterprises should publish interim financial reports in accordance with law and regulations.

3. The following terms are used in this Standard with the meanings specified :

Interim period: is a financial reporting period shorter than a full financial year.

Interim financial report: is a financial report containing either a complete set of financial statements as described in VAS 21 “Presentation of financial statements” or a set of condensed financial statements as described in this Standard for an interim period.

CONTENTS

Content of an Interim Financial Report

4. VAS 21 “Presentation of Financial Statement” defines a set of financial statements as including the following components:

(a) a balance sheet;

(b) an income statement;

(c) a cash flows statement; and

(d) notes to the financial statements.

5. This Standard defines the minimum content of an interim financial report as including condensed financial statements and selected explanatory notes. The interim financial report is intended to provide an update on the latest complete set of annual financial statements. Therefore, it focuses on events, new activities and does not duplicate the information previously reported.

6. This Standard encourages the enterprise to publish a complete set of financial statements in its interim financial report. This Standard encourages an enterprise to include in a condensed interim financial statement more than the minimum line items or selected explanatory notes as set out in this Standard. The recognition and measurement principles in this Standard apply also to the complete financial statements for an interim period, and such statements would include all of those disclosures required by this Standard (particularly the selected note disclosure in paragraph 13) as

well as those required by other Standards.

Minimum components of an interim financial report:

7. A condensed financial statements for an interim period includes:

(a) condensed balance sheet;

(b) condensed income statement;

(c) condensed cash flows statement; and

(d) selected explanatory notes

Form and content of interim financial statements

8. If an enterprise publishes a complete set of financial statements in its interim financial report, the form and content of those statements should conform to the requirements of VAS 21 “Presentation of financial statements”.

9. If an enterprise publishes a set of condensed financial statements in its interim financial report, those statements should include, at a minimum, each of the heading and subtotals that were included in its most recent annual financial statements and the selected explanatory notes as required by this Standard. Additional line items or notes should be included if their omission would make the condensed interim financial statements misleading.

10. Basic and diluted earnings per share should be presented on the face of an income statement, complete or condensed, for an interim period.

11. A parent company publishes the consolidated financial statements in accordance with VAS 25 “Consolidated financial statement and accounting for investment to subsidiaries” should prepare the condensed consolidated financial report for in interim period together with its separate interim financial report.

Selected explanatory notes

12. A user of an enterprise’s interim financial report will also have access to the most recent annual financial report of that enterprise. It is unnecessary, therefore, for the notes to an interim financial report to provide relatively insignificant updates to the information that was already reported in the notes to the most recent annual report. At an interim date, an explanation of events and transactions that are significant to the understanding of changes in financial position and performance of the enterprise since the last annual reporting date is more useful.

13. An enterprise should include the following information in the notes to its interim financial statements, if material and if not disclosed elsewhere in the interim financial report. The information should normally be reported on the financial year-to-date basic. However, the enterprise should also disclose any events or transactions that are material to an understanding of the current t interim period:

(a) a statement that the same accounting policies and methods of computation are followed in the interim financial statements as compared with the most recent annual financial statements or, if those policies and methods have been changed, a description of the nature and effect of the change;

(b) explanatory comments about the seasonality and cyclicality of interim operations;

(c) the nature and amount of items affecting assets, liabilities, equity, net income or cash flows that are unusual because of their nature, size, or incidence;

(d) note disclosure of changes in accumulated owner equity for the period to the date of interim financial report and corresponding notes that are comparable to the same period of the most recent financial year;

(e) nature and amount of changes in accounting estimates of amounts reported in prior interim period of the current financial year or changes in estimates of amounts reported in prior financial years if those changes have a material effect in the current interim period;

(f) issuances, repurchases, and repayments of debt and equity securities;

(g) dividend paid (aggregate or per share) separately for ordinary shares and other shares;

(h) segment revenue and segment results from business segments or geographial segments, whichever is the enterprise’s primary basis of segment reporting;

(i) the material events subsequent to the end of the interim period that have not been reflected in the financial statements for the interim period;

(j) effect of the changes in the composition of the enterprise during the interim period, including business combinations, acquisition or disposal of subsidiaries, long-term investments, restructings, and discontinuing operations; and

(j) the changes in the contingent liabilities and contingent assets since the last annual balance sheet date.

14. Other accounting standard specifies disclosure that should be made in financial statements. In that context, financial statements means complete sets of financial statements of the type normally included in an annual financial report and sometimes included in other reports. The disclosures required by those other Standards are not required if an enterprise’s interim financial report includes only condensed financial reports and selected explanatory notes rather than a full set of financial statements.

Disclosure of compliance with Vietnamese Accounting Standards and System.

15. If an enterprise’s interim financial report is in compliance with this standard, that fact should be disclosed. An interim financial report should not be described as complying the Vietnamese Accounting Standards unless it complies with the Vietnamese accounting standard and the guideline on implementation of Vietnamese accounting standard of Ministry of Finance.

Periods for which interim financial statements are required to be presented

16. interim financial report should interim financial statements (condensed or complete) for as follow:

(a) balance sheet as of the end of the current interim period and comparative balance sheet as of the end of the immediately preceding financial year;

(b) income statements for the current interim period and cumulatively for the current financial year to date, with comparative income statements for the comparable interim periods of the immediately preceding financial year;

(c) cash flow statement cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year.

17. For an enterprise whose business is highly seasonal, financial information for the twelve months ending on the interim reporting date and comparative information for the prior twelve-month

period may be useful.

Materiality

18. In deciding how to recognise, measure, classify, or disclose an item for interim financial reporting purposes, materiality should be assessed in relation to the interim period financial data. In making assessments of materiality, it should be recognised that interim measurements may rely on estimates to a greater extent than measurements of annual financial data.

19. VAS 01 “Framework” defines “An intem is material if its omission or misstatement could significantly misstate the financial statements influencing the economic decision of users of the financial statements”. VAS 29 “Changes in accounting policies, accounting estimate and the fundamental errors” requires disclosure changes in accounting estimates, fundamental errors, and changes in accounting policies. VAS 29 does not privide quantitative guidance as to materiality.

20. While judgement is always required in assessing materiality for financial statements preparation purposes, this Standard bases the recognition and disclosure decision on data for the interim period by itself for reasons of understandability of the interim figures. Thus, for example, unusual or extraordinary items, changes in accounting policies or estimates, and fundamental errors are recognised and disclosed on the basis of materiality in relation to interim period data to avoid misleading inferences that might result from non-disclosure. The overriding goal is to ensure that an interim financial report includes all information that is relevant to understanding an enterprise’s financial position and performance during the interim period.

Disclosure in annual financial statements

21. If an estimate of an amount reported in an interim period is changed significantly during the final interim period of the financial year but a separate financial report is not published for that final interim period, the nature and amount of that change in estimate should be disclosed in a note to the annual financial statements for that financial year.

22. VAS 29 “Changes in accounting policies, estimates and fundamental errors” requires disclosure of the nature and (if practicable) the amount of a change in accounting estimate that either has a material effect in the current period or is expected to have material effect in subsequent periods. The paragraph 13 d) of this Standard requires similar disclosure in an interim financial report. Examples, include changes in the estimate in the final interim period relating to inventory write down, restructurings that were reported in an earlier interim period of the financial year. The disclosure required in the preceding paragraph is consistent with VAS 29 “Changes in accounting policies, estimates, and fundamental errors” to narrow in scope-relating only to the changes in estimate.

Recognition and measurement

Same accounting policies as annual financial statements

23. An enterprise should apply the same accounting policies in its interim financial statements as are applied in its annual financial statements, except for accounting policy changes made after the date of the most recent annual financial statements that are to be reflected in the next annual financial statements. However, the annual and interim reports of enterprise should not affect the measurement of its annual results. To achieve that objective, measurements for interim reporting purposes should be made on a year-to-date basis.

24. Requiring that an enterprise apply the same accounting policies in its interim financial statements as in its annual statements may seem to suggest that interim period measurements are made as if each interim period stands alone as an independent reporting period. However, by providing that the frequency of an enterprise’s reporting should not affect the measurement of its annual results. Year-to-date measurements may involve changes in estimates of amounts reported

in prior interim periods of the current financial year. But the principles for

recognising assets, liabilities, income, and expenses for interim periods are the same as in annual financial statements.

25. The rules for recognition and measurement for interim reporting are:

(a) the principles for recognising and measuring losses from inventory write-downs, restructurings, or impairments in an interim period are the same as those that an enterprise would follow if it prepared only annual financial statements. However, if such items are recognised and measured in one interim period and the estimate changes in a subsequent interim period of that financial year, the original estimate is changed in the subsequent interim period either by accrual of an additional amount of loss or by reversal of the previously recognised amount;

(b) a cost that does not meet the definition of an asset at the end of an interim period is not deferred on the balance sheet either to await future information as to whether it has met the definition of an asset or to smooth earnings over interim periods within a financial year; and

(c) income tax expense is recognised in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year. Amounts accrued for income tax expense in one interim period may have to be adjusted in a subsequent interim period of that financial year if the estimate of the annual income tax rate changes.

26. Under VAS 01 “Framework”, the financial statements should reflect factos relating to the enterprise’s financial position and performance, and such factors should be reported item by item. The definitions of assets, liabilities, revenue, and other income and expenses are fundamental to recognition, both at annual and interim financial reporting dates.

27. For assets, the same tests of future economic benefits apply at interim dates and at the end of an enterprise’s financial year. Costs that, by their nature, would not qualify as assets at financial year end would not qualify at interim dates either. Similarly, a liability at an interim reporting date must represent an existing obligation at that date, just as it must at an annual reporting date.

28. An essential characteristic of income (revenue) and expenses is that the related inflows and outflows of assets and liabilities have already taken place. If those inflows or outflows have taken place, the related revenue and expense are recognised; otherwise they are not recognised. The Framework says that “expenses are recognised in the income statement when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably.... The Framework does not allow the recognition of items in the balance sheet which do not meet the definition of assets or liabilities.”

29. In measuring the assets, liabilities, income, expenses, and cash flows reported in its financial statements, an enterprise that reports only annually is able to take into account information that becomes available throughout the financial year. Its measurements are, in effect, on a yearto-date basis.

30. An enterprise that reports for interim period uses information available at that preiod in making the measurements in its financial statements for the period and information available by year-end or shortly thereafter for the twelve-month period. The twelvemonth measurements will reflect possible changes in estimates of amounts reported for the period. The amounts reported in the interim financial report for the first six-month period are not retrospectively adjusted. Paragraphs 13(d) and 21 require, however, that the nature and amount of any significant changes in estimates be disclosed.

31. An enterprise that reports for the period measures income and expenses on a year-to-date basis for each interim period using information available when each set of financial statements is being prepared. Amounts of revenue, other income and expenses reported in the current interim period will reflect any changes in estimates of amounts reported in prior interim periods of the financial year. The amounts reported in prior interim periods are not retrospectively adjusted. Paragraphs 13(d) and 21 require, however, that the nature and amount of any significant changes

in estimates be disclosed.

Revenues received seasonally, cyclically, and occasionally

32. Revenues that are received seasonally, cyclically, or occasionally within a financial year should not be anticipated or deferred as of an interim date if anticipation or deferral would not be appropriate at the end of the enterprise’s financial year.

33. Examples include dividend, seasional revenue, royalties, and government grants. Additionally, some enterprises consistently earn more revenues in certain interim periods of a financial year than in other interim periods, for example, seasonal revenues of retailers. Such revenues are recognised when they occur.

Costs incurred unevenly during the financial year

34. Costs that are incurred unevenly during an enterprise’s financial year should be anticipated or deferred for interim reporting purposes if, and only if, it is also appropriate to anticipate or defer that type of cost at the end of the financial year.

Uses of estimates

35. The measurement procedures to be followed in an interim financial report should be designed to ensure that the resulting information is reliable and that all material financial information that is relevant to enterprise is appropriately disclosed. While measurements in both annual and interim financial reports are often based on reasonable estimates, the preparation of interim financial reports generally will require a greater use of estimation methods than annual financial reports.

Restatement of previously reported interim periods

36. A change in accounting policy, other than one for which the transition is specified by a new Accounting Standard, should be reflected by:

(a) restating the financial statements of the prior interim periods of the current financial year and the comparable interim periods of any prior financial years (see paragraph 16) in accordance with VAS 29 “Changes in accounting policies, estimates, and fundamental errors”; or

(b) when it is impracticable to determine the effect ofapplying a new accounting policy to prior periods, adjusting the financial statements of prior interim periods of the current financial year, and comparable interim periods of prior financial years to apply the new accounting policy prospectively from the earliest date practicable.

37. One objective of the paragraph 36 is to ensure that a single accounting policy is applied to a particular class of transactions throughout an entire financial year. Under VAS 29 “Changes in accounting policies, estimates, and fundamental errors”, a change in accounting policy is reflected by retrospective application, with restatement of prior period financial data, if practicable. However, if the amount of the adjustment relating to prior financial years is not reasonably determinable, then under VAS 29 “Changes in accounting policies, estimates, and fundamental errors” the new policy is applied prospectively. An allowed alternative is to include the entire cumulative retrospective adjustment in the determination of net profit or loss for the period in which the accounting policy is changed. The effect of the principle in paragraph 36 is to require that within the current financial year any change in accounting policy be applied retrospectively to the beginning of the financial year.

38. To allow accounting changes to be reflected as of an interim date within the financial year leading to two differing accounting policies to be applied to a particular class of transactions within a single financial year would be interim allocation difficulties, obscured operating results, and complicated analysis and understandability of interim period information.

Standard No. 28 SEGMENT REPORTING



GENERAL

01. The objective of this Standard is to establish principles for reporting financial information by segment information about the different types of products and services an enterprise produces and the different geographical areas in which it operates to help users of financial statements:

(a) better understand the enterprise’s past performance;

(b) better assess the enterprise’s risks and returns; and

(c) make more informed judgements about the enterprise as a whole.

Many enterprises provide groups of products and services or operate in geographical areas that are subject to differing rates of profitability, opportunities for growth, future prospects, and risks. Information about an enterprise’s different types of products and services and its operations in different geographical areas often called segment information is relevant to assessing the risks and returns of a diversified or multinational enterprise but may not be determinable from the aggregated data. Therefore, segment information is widely regarded as necessary to meeting the needs of users of financial statements

02. This Standard should be applied in complete sets of published financial statements that comply with Vietnamese Accounting Standards.

03. A complete set of financial statements includes a balance sheet, income statement, cash flow statement and notes, as provided in VAS 21 “Presentation of Financial Statements”.

04. This Standard should be applied by enterprises whose equity or debt securities are publicly traded and by enterprises that are in the process of issuing equity or debt securities in public securities markets.

05. If an enterprise whose securities are not publicly traded prepares financial statements that comply with Vietnamese Accounting Standards, that enterprise is encouraged to disclose financial information by segment voluntarily.

06. If an enterprise whose securities are not publicly traded chooses to disclose segment information voluntarily in financial statements, that enterprise should comply fully with the requirements of this Standard.

07. If a single financial report contains both consolidated financial statements of an enterprise whose securities are publicly traded and the separate financial statements of the parent or one or more subsidiaries, segment information need be presented only on the basis of the consolidated financial statements. If a subsidiary is itself an enterprise whose securities are publicly traded, it will present segment information in its own separate financial report.

08. The following terms are used in this Standard:

Operating activities are the principal revenue-producing activities of an enterprise and other activities that are not investing or financing activities.

Accounting policies are the specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and presenting financial statements.

Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an enterprise when those inflows result in increases in equity

Definitions of Business Segment and Geographical Segment

09. A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. Factors that should be considered in determining whether products and services are related include:

(a) the nature of the products or services;

(b) the nature of the production processes;

(c) the type or class of customer for the products or services;

(d) the methods used to distribute the products or provide the services; and

(e) the nature of the regulatory environment, for example, banking, insurance, or public utilities.

A geographical segment is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. Factors that should be considered in identifying geographical segments include:

(a) similarity of economic and political conditions;

(b) relationships between operations in different geographical areas;

(c) proximity of operations;

(d) special risks associated with operations in a particular area;

(e) exchange control regulations; and

(f) the underlying currency risks.

A reportable segment is a business segment or a geographical segment identified based on the above-specified definitions.

10. A single business segment does not include products and services with significantly differing risks and returns. While there may be dissimilarities with respect to one or several of the factors in the definition of a business segment, the products and services included in a single business segment are expected to be similar with respect to a majority of the factors.

11. A geographical segment does not include operations in economic environments with significantly differing risks and returns. A geographical segment may be a single country, a group of two or more countries, or a region within a country.

12. The predominant sources of risks affect how most enterprises are organised and managed. Therefore, paragraph 25 of this Standard provides that an enterprise’s organisational structure and its internal financial reporting system is the basis for identifying its segments. The risks and returns of an enterprise are influenced both by the geographical location of its operations (where its products are produced or where its service delivery activities are based) and also by the location of its markets (where its products are sold or services are rendered). The definition allows

geographical segments to be based on either:

(a) the location of an enterprise’s production or service facilities and other assets; or

(b) the location of its markets and customers

13. An enterprise’s organisational and internal reporting structure will normally provide evidence of whether its dominant source of geographical risks results from the location of its assets (the location of its operations) or the location of its customers (the location of its sales). Enterprise uses organisational and internal reporting structure or the location of its assets or its customers to determine the geographical segments of its business.

14. Determining the composition of a business or geographical segment involves a certain amount of judgement of the enterprise management. In making that judgement, enterprise management takes into account the objective of reporting financial information by segment as set forth in this Standard and other Standards.

Definitions of Segment Revenue, Expense, Result, Assets, and Liabilities

15. The following additional terms are used in this Standard with the meanings specified:

Segment revenue is revenue reported in the enterprise’s income statement that is directly attributable to a segment and the relevant portion of enterprise revenue that can be allocated on a reasonable basis to a segment, whether from sales to external customers or from transactions with other segments of the same enterprise. Segment revenue does not include:

(a) Other incomes;

(b) interest or dividend income, including interest earned on advances or loans to other segments, unless the segment’s operations are primarily of a financial nature; or

(c) gains on sales of investments or gains on extinguishment of debt unless the segment’s operations are primarily of a financial nature.

Segment revenue includes an enterprise’s share of profits or losses of associates, joint ventures, or other investments accounted for under the equity method only if those items are included in consolidated enterprise revenue

Segment expense is expense resulting from the operating activities of a segment that is directly attributable to the segment and the relevant portion of anexpense that can be allocated on a reasonable basis to the segment, including expenses relating to sales to external customers and expenses relating to transactions with other segments of the same enterprise. Segment expense does not include:

(a) Other items;

(b) interest, including interest incurred on advances or loans from other segments, unless the segment’s operations are primarily of a financial nature;

(c) losses on sales of investments or losses on extinguishment of debt unless the segment’s operations are primarily of a financial nature;

(d) an enterprise’s share of losses of associates, joint ventures, or other investments accounted for under the equity method;

(e) income tax expense; or

(f) general administrative expenses, head-office expenses, and other expenses that arise at the

enterprise level and relate to the enterprise as a whole. However, costs are sometimes incurred at the enterprise level on behalf of a segment. Such costs are segment expenses if they relate to the segment’s operating activities and they can be directly attributed or allocated to the segment on a reasonable basis.

For a segment’s operations that are primarily of a financial nature, interest income and interest expense may be reported as a single net amount for segment reporting purposes only if those items are netted in the consolidated or enterprise financial statements.

Segment result is segment revenue less segment expense. Segment result is determined before any adjustments for minority interest.

Segment assets are those operating assets that are employed by a segment in its operating activities and that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis.

If a segment’s segment result includes interest or dividend income, its segment assets include the related receivables, loans, investments, or other income-producing assets.

Segment assets do not include deferred tax assets.

Segment assets are determined after deducting related allowances that are reported as direct offsets in the enterprise’s balance sheet.

Segment liabilities are those operating liabilities that result from the operating activities of a segment and that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis.

If a segment’s segment result includes interest expense, its segment liabilities include the related interest-bearing liabilities.

Segment liabilities do not include deferred tax liabilities.

Segment accounting policies are the accounting policies adopted for preparing and presenting the financial statements of the consolidated group or enterprise as well as those accounting policies that relate specifically to segment reporting.

16. The definitions of segment revenue, segment expense, segment assets, and segment liabilities include amounts of such items that are directly attributable to a segment and amounts of such items that can be allocated to a segment on a reasonable basis. An enterprise looks to its internal financial reporting system as the starting point for identifying those items that can be directly attributed, or reasonably allocated, to segments.

17. A revenue, expense, asset, or liability should not be allocated to segments for internal financial reporting purposes on a basis that could be deemed subjective or arbitrary. Such an item should be allocated reasonably pursuant to the definitions of segment revenue, segment expense, segment assets, and segment liabilities in this Standard.

18. Segment assets include current assets that are used in the operating activities of the segment, tangible fixed assets, assets that are the subject of finance leases, and intangible fixed assets. If a particular item of depreciation or amortisation is included in segment expense, the related asset is also included in segment assets. Segment assets do not include assets used for general enterprise or head-office purposes. Segment assets include operating assets shared by two or more segments if a reasonable basis for allocation exists, including goodwill.

19. Segment liabilities include trade and other payables, accrued liabilities, customer advances. Segment liabilities do not include borrowings, liabilities related to assets that are the subject of finance leases, and other liabilities that are incurred for financing rather than operating purposes. If interest expense is included in segment result, the related interest-bearing liability is included in

segment liabilities. The liabilities of segments whose operations are not primarily of a financial nature do not include borrowings and similar liabilities because segment result represents an operating, rather than a net-of-financing, profit or loss. Further, because debt is often issued at the head-office level on an enterprise-wide basis, it is often not possible to directly attribute, or reasonably allocate, the interest-bearing liability to the segment.

20. Measurements of segment assets and liabilities include adjustments to the prior carrying amounts of the identifiable segment assets and segment liabilities of a company acquired in a business combination accounted for as a purchase, even if those adjustments are made only for the purpose of preparing consolidated financial statements and are not recorded in either the parent’s or the subsidiary’s separate financial statements.

21. Some guidance for cost allocation can be found in other Vietnamese Accounting Standards. VAS 2 “Inventories” provide guidance for attributing and allocating costs to inventories, and VAS 15 “Construction Contracts” provide guidance for attributing and allocating costs to contracts. That guidance may be useful in attributing or allocating costs to segments.

22. Segment revenue, segment expense, segment assets, and segment liabilities are determined before intra-group balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intra-group balances and transactions are between group enterprises within a single segment.

23. While the accounting policies used in preparing and presenting the financial statements of the enterprise as a whole are also the fundamental segment accounting policies, segment accounting policies include, in addition, policies that relate specifically to segment reporting, such as identification of segments, method of pricing inter-segment transfers, and basis for allocating revenues and expenses to segments.

Identifying reportable segments Primary and Secondary Segment Reporting Formats

24. The dominant source and nature of an enterprise’s risks and returns should govern whether its primary segment reporting format will be business segments or geographical segments. If the enterprise’s risks and rates of return are affected predominantly by differences in the products and services it produces, its primary format for reporting segment information should be business segments, with secondary information reported geographically. Similarly, if the enterprise’s risks and rates of return are affected predominantly by the fact that it operates in different countries or other geographical areas, its primary format for reporting segment information should be geographical segments, with secondary information reported for groups of related products and services.

25. An enterprise’s internal organisational and management structure and its system of internal financial reporting to the management should normally be the basis for identifying the predominant source and nature of risks and differing rates of return facing the enterprise and, therefore, for determining which reporting format is primary and which is secondary, except as provided in subparagraphs (a) and (b) below:

(a) if an enterprise’s risks and rates of return are strongly affected both by differences in the products and services it produces and by differences in the geographical areas in which it operates, as evidenced by a “matrix approach” to managing the company and to reporting internally to the board of directors and the chief executive officer, then the enterprise should use business segments as its primary segment reporting format and geographical segments as its secondary reporting format; and

(b) if an enterprise’s internal organisational and management structure and its system of internal financial reporting to the the management are based neither on individual products or services or on groups of related products/services nor on geography, the management of the enterprise should determine whether the enterprise’s risks and returns are related more to the products and services it produces or more to the geographical areas in which it operates and, as a consequence, should choose either business segments or geographical segments as the enterprise’s primary segment

reporting format.

26. For most enterprises, the predominant source of risks and returns determines how the enterprise is organised and managed.An enterprise’s organisational and management structure and its internal financial reporting system normally provide the best evidence of the enterprise’s predominant source of risks and returns for purpose of its segment reporting. Therefore, except in rare circumstances, an enterprise will report segment information in its financial statements on the same basis as it reports internally to top management. Its predominant source of risks and returns becomes its primary segment reporting format. Its secondary source of risks and returns becomes its secondary segment reporting format.

27. A “matrix presentation” - both business segments and geographical segments as primary segment reporting formats with full segment disclosures on each basis - often will provide useful information if an enterprise’s risks and rates of return are strongly affected both by differences in the products and services it produces and by differences in the geographical areas in which it operates. This Standard does not require, but does not prohibit, a “matrix presentation”.

28. In some cases, an enterprise’s organisation and internal reporting may have developed along lines unrelated either to differences in the types of products and services they produce or to the geographical areas in which they operate. For instance, internal reporting may be organised solely by legal entity, resulting in internal segments composed of groups of unrelated products and services. In those unusual cases, the internally reported segment data will not meet the objective of this Standard. Accordingly, paragraph 25(b) requires the directors and management of the enterprise to determine whether the enterprise’s risks and returns are more product/service driven or geographically driven and to choose either business segments or geographical segments as the enterprise’s primary basis of segment reporting. The objective is to achieve a reasonable degree of comparability with other enterprises, enhance understandability of the resulting information, and meet the expressed needs of investors, creditors, and others for information about product/service-related and geographically-related risks and returns.

Business and Geographical Segments

29. An enterprise’s business and geographical segments for external reporting purposes should be those organisational units for which information is reported to the management for the purpose of evaluating the unit’s past performance and for making decisions about future allocations of resources, except as provided in paragraph 30.

30. If an enterprise’s internal organisational and management structure and its system of internal financial reporting to the management are based neither on individual products or services or on groups of related products/services nor on geography, paragraph 25(b) requires that the directors and management of the enterprise should choose either business segments or geographical segments as the enterprise’s primary segment reporting format. In that case, the directors and management of the enterprise must determine its business segments and geographical segments for external reporting purposes based on the factors in the definitions in paragraph 9 of this Standard, rather than on the basis of its system of internal financial reporting to the board of directors and chief executive officer, consistent with the following:

a) if one or more of the segments reported is a business segment or a geographical segment based on the factors in the definitions in paragraph 9, the internally reported segment that meets the definition should not be further segmented for reporting purposes;

b) for those segments that do not satisfy the definitions in paragraph 9, management of the enterprise should look to the next lower level of internal segmentation that reports information along product and service lines or geographical lines as appropriate under the definitions in paragraph 9; and

c) if such an internally reported lower-level segment meets the definition of business segment or geographical segment based on the factors in paragraph 9, the criteria in paragraphs 32 and 33 for identifying reportable segments should be applied to that

segment.

31. Under this Standard, most enterprises will identify their business and geographical segments as the organisational units for which information is reported to the management for the purpose of evaluating each unit’s past performance and for making decisions about future allocations of resources. If an enterprise reports its internal segments not along product/service or geographical lines, it will look to the next lower level of internal segmentation that reports information along product and service lines or geographical lines.

Reportable Segments

32. Two or more internally reported business segments or geographical segments that are substantially similar may be combined as a single business segment or geographical segment. Two or more business segments or geographical segments are substantially similar only if:

(a) they exhibit similar financial performance; and

(b) they are similar in all of the factors in the appropriate definition in paragraph 9.

33. A business segment or geographical segment should be identified as a reportable segment if a majority of its revenue is earned from sales to external customers and meets one of following criteria:

(a) its revenue from sales to external customers and from transactions with other segments is 10 per cent or more of the total revenue, external and internal, of all segments; or

(b) its segment result, whether profit or loss, is 10 per cent or more of the combined result of all segments in profit or the combined result of all segments in loss, whichever is the greater in absolute amount; or

(c) its assets are 10 per cent or more of the total assets of all segments.

34. If an internally reported segment is below all of the thresholds of significance in paragraph 33:

(a) that segment may be designated as a reportable segment despite its size if the segment information considered useful for the financial statement users;

(b) if that segment can be combined into a separately reportable segment with one or more other similar internally reported segment(s) and

(c) the remaining segment(s) can be reported as a seprate item.

35. If total external revenue attributable to reportable segments constitutes less than 75 per cent of the total consolidated or enterprise revenue, additional segments should be identified as reportable segments, even if they do not meet the 10 per cent thresholds in paragraph 33, until at least 75 per cent of total consolidated or enterprise revenue is included in reportable segments.

36. The 10 per cent thresholds in this Standard are not intended to be a guide for determining materiality for any aspect of financial reporting other than identifying reportable business and geographical segments.

37. By limiting reportable segments to those that earn a majority of their revenue from sales to external customers, this Standard does not require that the different stages of vertically integrated operations be identified as separate business segments. However, in some industries, current practice is to report certain vertically integrated activities as separate business segments even if they do not generate significant external sales revenue. For instance, Vietnam Oil and Gas Corporation reports its upstream activities (exploration and production) and its downstream

activities (refining and marketing) as separate business segments even if most

or all of the upstream product (crude petroleum) is transferred internally to the enterprise’s refining operation.

38. This Standard encourages, but does not require, the voluntary reporting of vertically integrated activities as separate segments.

39. If an enterprise’s internal reporting system treats vertically integrated operation activities as separate segments and the enterprise does not choose to report them externally as business segments, the selling segment should be combined into the buying segment(s) in identifying externally reportable business segments unless there is no reasonable basis for doing so.

40. A segment identified as a reportable segment in the immediately preceding period because it satisfied the relevant 10 per cent thresholds should continue to be a reportable segment for the current period notwithstanding that its revenue, result, and assets all no longer exceed the 10 per cent thresholds, if the management of the enterprise judges the segment to be of continuing significance.

41. If a segment is identified as a reportable segment in the current period because it satisfies the relevant 10 per cent thresholds, prior period segment data that is presented for comparative purposes should be restated to reflect the newly reportable segment as a separate segment, even if that segment did not satisfy the 10 per cent thresholds in the prior period, unless it is impracticable to do so.

Segment Accounting Policies

42. Segment information should be prepared in conformity with the accounting policies adopted for preparing and presenting the financial statements of the consolidated group or enterprise.

43. The accounting policies that the directors and management of an enterprise have chosen to use, in preparing its consolidated or enterprise-wide financial statements, are those that the directors and management believe are the most appropriate for external reporting purposes. Since the purpose of segment information is to help users of financial statements better understand and make more informed judgements about the enterprise as a whole, this Standard requires the use, in preparing segment information, of the accounting policies that the directors and management have chosen.

44. This Standard allows the disclosure of additional segment information that is prepared on a basis other than the accounting policies adopted for the consolidated or enterprise financial statements provided that

(a) the information is reported internally to the management for purposes of making decisions about allocating resources to the segment and assessing its performance and

(b) the basis of measurement for this additional information is clearly described.

45. Assets that are jointly used by two or more segments should be allocated to segments if, and only if, their related revenues and expenses also are allocated to those segments.

46. The way in which asset, liability, revenue, and expense items are allocated to segments depends on such factors as the nature of those items, the activities conducted by the segment, and the relative autonomy of that segment. It is not possible or appropriate to specify a single basis of allocation that should be adopted by all enterprises. Allocation of enterprise asset, liability, revenue, and expense items that relate jointly to two or more segments should also be on a reasonable basis. At the same time, the definitions of segment revenue, segment expense, segment assets, and segment liabilities are interrelated, and the resulting allocations should be consistent. Therefore, jointly used assets are allocated to segments if, and only if, their related revenues and expenses also are allocated to those segments. For example, an asset is included in segment

assets if, and only if, the related depreciation or amortisation is deducted in measuring segment result.

Disclosure

47. In this Standard, Paragraphs 48-61 specify the disclosures required for reportable segments for an enterprise’s primary segment reporting format. Paragraphs 62-66 identify the disclosures required for an enterprise’s secondary reporting format. Enterprises are encouraged to present all of the primary-segment disclosures identified in paragraphs 48-61 for each reportable secondary segment. Paragraphs 67-76 address several other segment disclosure matters.

Primary Reporting Format

48. The disclosure requirements in paragraphs 49-61 should be applied to each reportable segment based on an enterprise’s primary reporting format.

49. An enterprise should disclose segment revenue for each reportable segment. Segment revenue from sales to external customers and segment revenue from transactions with other segments should be separately reported.

50. An enterprise should disclose segment result for each reportable segment.

51. If an enterprise can compute segment net profit or loss or some other measure of segment profitability other than segment result without arbitrary allocations, reporting of such amount(s) is encouraged in addition to segment result, appropriately described. If that measure is prepared on a basis other than the accounting policies adopted for the consolidated or enterprise financial statements, the enterprise will include in its financial statements a clear description of the basis of measurement.

52. The Standard encourgages enterprises provide additional business indicators in order to assess segment performance including: profit or loss from ordinary activities (either before or after income taxes) and net profit or loss.

53. An enterprise should disclose the total carrying amount of segment assets for each reportable segment.

54. An enterprise should disclose segment liabilities for each reportable segment.

55. An enterprise should disclose the total cost incurred during the period to acquire segment assets that are expected to be used during more than one period (property, plant, equipment, and intangible assets) for each reportable segment.

56. An enterprise should disclose the total amount of expense included in segment result for depreciation and amortisation of segment assets for the period for each reportable segment.

57. An enterprise is encouraged, but not required to disclose the nature and amount of any items of segment revenue and segment expense that are of such size, nature, or incidence that their disclosure is relevant to explain the performance of each reportable segment for the period.

58. Items of income or expense within profit or loss from ordinary activities are of such size, nature, or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately. Paragraph 57 is not intended to change the classification of any such items of revenue or expense from ordinary to extraordinary or to change the measurement of such items.

59. An enterprise should disclose, for each reportable segment, the total amount of

significant non-cash expenses, other than depreciation and amortisation for which separate disclosure is required by paragraph 56.

60. An enterprise that provides the segment cash flow disclosures as required by VAS 24 "Cash Flow Statements" need not also disclose depreciation and amortisation expense pursuant to paragraph 56 or non-cash expenses pursuant to paragraph 59.

61. An enterprise should present a reconciliation between the information disclosed for reportable segments and the aggregated information in the consolidated or enterprise financial statements. The reconciliation contains a seprate column for information not belonging to the reported segments. In presenting the reconciliation, segment revenue should be reconciled to enterprise revenue from external customers (including disclosure of the amount of enterprise revenue from external customers not included in any segment’s revenue); segment result should be reconciled to a comparable measure of enterprise operating profit or loss as well as to enterprise net profit or loss; segment assets should be reconciled to enterprise assets; and segment liabilities should be reconciled to enterprise liabilities.

Secondary Segment Information

62. Paragraphs 63-66 identify the disclosure requirements to be applied to each reportable segment based on an enterprise’s secondary reporting format, as follows:

(a) if an enterprise’s primary format is business segments, the required secondary-format disclosures are identified in paragraph 63;

(b) if an enterprise’s primary format is geographical segments based on location of assets (where the enterprise’s products are produced or where its service delivery operations are based), the required secondary-format disclosures are identified in paragraphs 64 and 65;

(c) if an enterprise’s primary format is geographical segments based on the location of its customers (where its products are sold or services are rendered), the required secondary-format disclosures are identified in paragraphs 64 and 66.

63. If an enterprise’s primary format for reporting segment information is business segments, it should also report the following information:

(a) segment revenue from external customers by geographical area based on the geographical location of its customers, for each geographical segment whose revenue from sales to external customers is 10 per cent or more of total enterprise revenue from sales to all external customers;

(b) the total carrying amount of segment assets by geographical location of assets, for each geographical segment whose segment assets are 10 per cent or more of the total assets of all geographical segments; and

(c) the total cost incurred during the period to acquire segment assets that are expected to be used during more than one period (tangible fixed assets, intangible fixed assets and other non-current assets) by geographical location of assets, for each geographical segment whose segment assets are 10 per cent or more of the total assets of all geographical segments.

64. If an enterprise’s primary format for reporting segment information is geographical segments (whether based on location of assets or location of customers), it should also report the following segment information for each business segment whose revenue from sales to external customers is 10 per cent or more of total enterprise revenue from sales to all external customers or whose segment assets are 10 per cent or more of the total assets of all business segments:

(a) segment revenue from external customers;

(b) the total carrying amount of segment assets; and

(c) the total cost incurred during the period to acquire segment assets that are expected to be used during more than one period (tangible fixed assets, intangible fixed assets and other non-current assets).

65. If an enterprise’s primary format for reporting segment information is geographical segments that are based on location of assets, and if the location of its customers is different from the location of its assets, then the enterprise should also report revenue from sales to external customers for each customer-based geographical segment whose revenue from sales to external customers is 10 per cent or more of total enterprise revenue from sales to all external customers.

66. If an enterprise’s primary format for reporting segment information is geographical segments that are based on location of customers, and if the enterprise’s assets are located in different geographical areas from its customers, then the enterprise should also report the following segment information for each asset-based geographical segment whose revenue from sales to external customers or segment assets are 10 per cent or more of related consolidated or total enterprise amounts:

(a) the total carrying amount of segment assets by geographical location of the assets; and

(b) the total cost incurred during the period to acquire segment assets that are expected to be used during more than one period (tangible fixed assets, intangible fixed assets and other non-current assets) by location of the assets.

Other Disclosure Matters

67. If a business segment or geographical segment for which information is reported to the board of directors and chief executive officer is not a reportable segment because it earns a majority of its revenue from sales to other segments, but nonetheless its revenue from sales to external customers is 10 per cent or more of total enterprise revenue from sales to all external customers, the enterprise should disclose that fact and the amounts of revenue from sales to external customers and internal sales to other segments.

68. In measuring and reporting segment revenue from transactions with other segments, inter-segment transfers should be measured on the basis that the enterprise actually used to price those transfers. The basis of pricing inter-segment transfers and any change therein should be disclosed in the financial statements.

69. Changes in accounting policies adopted for segment reporting that have a material effect on segment information should be disclosed, and prior period segment information presented for comparative purposes should be restated unless it is impracticable to do so. Such disclosure should include a description of the nature of the change, the reasons for the change, the fact that comparative information has been restated or that it is impracticable to do so, and the financial effect of the change, if it is reasonably determinable. If an enterprise changes the identification of its segments and it does not restate prior period segment information on the new basis because it is impracticable to do so, then for the purpose of comparison the enterprise should report segment data for both the old and the new bases of segmentation in the year in which it changes the identification of its segments.

70. Changes in accounting policy should be made only if required by statute, or by an accounting standard-setting body, or if the change will result in a more appropriate presentation of events or transactions in the financial statements of the enterprise.

71. Changes in accounting policies adopted at the enterprise level that affect segment information should be applied retrospectively and that prior period information be restated unless it is impracticable to do so. If this treatment is followed, prior period segment information will be

restated.

72. Some changes in accounting policies relate specifically to segment reporting. Examples include changes in identification of segments and changes in the basis for allocating revenues and expenses to segments. Such changes can have a significant impact on the segment information reported but will not change aggregate financial information reported for the enterprise. To enable users to understand the changes and to assess trends, prior period segment information that is included in the financial statements for comparative purposes is restated, if practicable, to reflect the new accounting policy.

73. Paragraph 68 requires that, for segment reporting purposes, inter-segment transfers should be measured on the basis that the enterprise actually used to price those transfers. If an enterprise changes the method that it actually uses to price inter-segment transfers, that is not a change in accounting policy for which prior period segment data should be restated pursuant to paragraph 69. However, paragraph 68 requires disclosure of the change.

74. An enterprise should indicate the types of products and services included in each reported business segment and indicate the composition of each reported geographical segment, both primary and secondary, if not otherwise disclosed in the financial statements or elsewhere in the financial report.

75. To assess the impact of such matters as shifts in demand, changes in the price of inputs or other factors of production, and the development of alternative products and processes on a business segment, it is necessary to know the activities encompassed by that segment. Similarly, to assess the impact of changes in the economic and political environment on the risks and rates of returns of a geographical segment, it is important to know the composition of that geographical segment.

Previously reported segments that no longer satisfy the quantitative thresholds are not reported separately. They may no longer satisfy those thresholds, for example, because of a decline in demand or a change in management strategy or because a part of the operations of the segment has been sold or combined with other segments. An explanation of the reasons why a previously reported segment is no longer reported may also be useful in confirming expectations regarding declining markets and changes in enterprise strategies./.

Standard No. 29 CHANGES IN ACCOUNTING POLICIES, ACCOUNTING ESTIMATES AND ERRORS



GENERAL

01. The objective of this Standard is to prescribe the guidance on accounting principles, accounting treatments and presentation of changes in accounting policies, changes in accounting estimates and correction of errors so that enterprise can prepare and present its financial statements on a consistent basis. This standard also enhances relevancy, reliability of the enterprise’s financial statements as well as enhances comparability of enterprise's financial statements from period to other periods and with the financial statements of other enterprises.

02. This Standard should be applied in accounting for changes in accounting policies, changes in accounting estimates and correction of errors of the previous periods.

03. Except for changes in accounting policies, disclosures and application of accounting policies are complied with the requirements of Vietnamese Accounting Standard 21 “Presentation of Financial Statements”. The tax effects of correction of errors and of retrospective adjustments made to apply changes in accounting policies are accounted for and disclosed in accordance with VAS 17 “Income Taxes”.


Accounting policies are the specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and presenting financial statements.

A Change in Accounting Estimates is an adjustment of the carrying amounts of an asset or a liability, or the amount of the periodic consumption of an asset that results from the assessment of the current status and of expected future benefits as well as the obligations relating to that asset and liability. Changes in accounting estimates result from new information are not corrections of errors.

Materiality: Omissions or misstatements of items are material if they could make significant misstatements to financial statements and individually or collectively influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omissions and misstatements judged in the particular circumstances. The size or nature of the item could be the determining factor of materiality.

Prior period errors are omissions from and misstatements in the financial statements of an enterprise for one or more prior periods arising from a failure to use or misuse of reliable information that:

(a) was available when financial statements for those periods were authorized for issue; and

(b) collectible and usable in preparing and presenting those financial statements.

Such errors include the effect of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts, fraud or oversights.

Retrospective application is applying a new accounting policy standard to transactions or other events as if it had always been applied.

Retrospective restatement is correcting the recognition, measurement and presentation of amounts of elements of the financial statements as if a prior period error had never occurred.

Impracticability: A requirement is impracticable when an enterprise can not apply it after making every reasonable effort to do so. It is impracticable to apply a change in accounting policy retrospectively or to make a retrospective restatement to correct an error if:

(a) The effects of the retrospective application and retrospective restatement are not determinable;

(b) The retrospective application or retrospective restatement requires assumptions about what management’s intent would have been in that period;

(c) The retrospective application or retrospective restatement requires significant estimates and it is impossible to distinguish objectively information about those estimates that:

(i) Provides evidence of circumstances that existed on the date as at which those amounts are to be recognized, measured and disclosed; and

(ii) Would have been available when the financial statements for that prior period were authorized for issue.

Prospective application of the change in accounting policy and of recognizing the effects of a change in an accounting estimate, respectively, are:

(a) Applying the new accounting policy to transactions and events incurring after the date as at which the policy is changed; and;

(b) Recognizing the effects of the change in the accounting estimates in the current and future periods affected by the change.

CONTENTS

Changes in Accounting Policies

Consistency of Accounting Policies

05. The accounting policies and practices selected by an enterprise should be applied consistently for all the similar transactions and events unless being required or permitted by another standard for classifying that similar transactions/events into groups with different accounting treatments for different groups. In this case, an appropriate accounting policy will be selected and applied consistently for each group.

Changes in Accounting Policies

06. A change in accounting policy should be made by the enterprise only if:

(a) There is requirement of changes by statute, or by an accounting standard;

(b) If the change will result in the financial statements providing reliable and more relevant information about the effects of events or transactions on the financial positions, financial performance and the cash flows of the enterprise.

07. Users of financial statements need to be able to compare the financial statements of an enterprise over time to identify trends in its financial position, financial performance and cash flows. Therefore, the same accounting policies are consistently adopted within each period and from one period to the next unless the changes in accounting policies made under conditions specified in

paragraph 06.

08. The following are not changes in accounting policies:

(a) the application of an accounting policy for events or transactions that differ in substance from previously occurring events or transactions; and

(b) the application of new accounting polies for events or transactions which did not occur previously or that were immaterial.

09. The adoption of a policy to carry assets at revalued amounts under the VAS 03 “Tangible Fixed Assets”, VAS 04 “Intangible Fixed Assets” is a change in accounting policy but it is dealt with as a revaluation in accordance with VAS 03 or VAS 04 rather than in accordance with this Standard.

Applying changes in Accounting Policies

10. Applying changes in accounting policies is dealt with as follows:

(a) An enterprise shall account for a change in accounting policy resulting from the initial application of alegal regulation or a standard in accordance with the specific transitional provisions, if any, in that regulation or standard.

(b) When an enterprise changes an accounting policy upon initial application of a legal regulation or standard that does not include specific transitional provisions applying to that change; or change an accounting policy voluntarily, it shall apply the change retrospectively.

Retrospective Application

11. When a change in accounting policies is applied retrospectively in accordance with paragraph 10(a) and 10(b), the enterprise shall adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative information disclosed for each prior period presented as if the new accounting policy had always been applied.

Limitations on retrospective application

12. Following the retrospective application specified in paragraph 10(a) and 10(b), a change in accounting policy should be applied retrospectively unless it is impacticable to determine either the period-specific effects or the cumulative effects of the change.

13. At the beginning of current period, If it is impracticable to determine the cumulative effects of applying a new accounting policy to the prior periods, the enterprise should adjust the comparative information to apply the new accounting policy prospectively from the earliest period practicable.

14. When it is impossible to apply a new accounting policy retrospectively because cumulative effects of applying that accounting policy is not determined to all prior periods, the enterprise, in accordance with paragraph 13, should apply that new accounting policy retrospectively from the start of the earliest period practicable. The change in accounting policies is permitted even if it is impracticable to apply the policy retrospectively for any prior period. Paragraphs 30 to 33 provide further guidances for the circumstances when it is impracticable to apply a new accounting policy to one or more prior periods.

Changes in Accounting Estimates

15. Many items in financial statement can not be measured with precision but can only be

estimated. Estimation involves judgements based on the latest information available, reliable information. Estimates may be required, for example:

(a) bad debts;

(b) inventory obsolescence;

(c) The useful lives of, or expected pattern of consumption of the future economic benefits embodied in, depreciable assets; and

(d) Warranty obligation.

16. The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability.

17. An estimate may have to be revised if changes occur regarding the circumstances on which the estimate was based or as a result of new information or more experience or subsequent developments. By its nature, the revision of an estimate neither relates to prior period nor correction of an error.

18. A Change in the measurement basis of information is a change in an accounting policies rather than a change in an accounting estimates. If it is difficult to distinguish between a change in an accounting policy and a change in an accounting estimate, the change is treated as a change in an accounting estimate.

19. The effects of a change in an accounting estimate, except for those specified in paragraph 20, should be applied prospectively and included in the income statement in:

(a) the period of the change, if the change affects that period only; or

(b) the period of the change and future periods, if the change affects both.

20. If a change in an accounting estimates gives rise to changes in assets, liabilities or an item in equity, it should be recognised by adjusting the carrying amount of the related assets, liabilities or equity item.

21. Prospective adjustment of the effect of a change in an accounting estimate means that the change is applied to transactions, other events from the date of the change in estimate. A change in an accounting estimate may affect only income statement of the current period or income statement of both the current period and future periods.

For example, a change in the estimate of the amount of bad debts affects only the current period’s profit or loss and therefore is recognized in the current period. However, a change in the estimated useful life of, or the expected pattern of consumption of the future economic benefits embodied in, a depreciable asset affects the depreciation expense for the current period and for each future period during the remaining useful life of the asset. In both cases, the effect of the change relating to the current period is recognized as income or expense in the current period. The effect, if any, on future periods is recognized as income or expense in those future periods.

Errors

22. Errors may occur as a result of recognitions measurement, presentation and disclosures of items reported in the financial statements. Financial statements are considered misstated and incompliant with the accounting standards and accounting policy if they contain material errors or immaterial errors made intentionally to achieve a particular presentation of financial position, financial performance or cash flow of an enterprise. Current period errors discovered in that periods should be corrected before the financial statements are authorized for issue. If material errors are discovered in a subsequent periods, these prior period errors should be corrected in the

comparative information presented in the financial statements for that subsequent period (see paragraph 23-28).

23. An enterprise should correct material prior period errors retrospectively in the financial statements authorised for issue after their discovery by:

(a) Restating the comparative amounts for the prior periods presented in which the errors occurred; or

(b) Adjusting the opening balances of assets, liabilities and items of equity for the earliest prior period presented if the errors occurred before that period.

Limitations on Retrospective restatement

24. A prior period errors should be corrected by retrospective adjustments unless it is impracticable to determine either the period-specific effects or the cumulative effects of the errors.

25. When it is impracticable to determine the period-specific effects of an errors, the enterprise should restatet the opening balances of assets, liabilities and equity of the earliest period (can be the current period) for which retrospective restatement is practicable .

26. When it is impracticable to determine the cumulative effects, at the beginning of the current period, of an errors on all prior periods, the enterprise needs to restate the comparative information to correct the errors retrospectively from the earliest period practicable.

27. The Correction of a prior period errors should not be included in the income statement of the period when the errors are discovered. Comparative information should be restated if it is practical to do so.

28. When it is impracticable to determine the error effects (e.g. an error in applying an accounting policy) for all prior periods, the enterprise should restate the comparative information retrospectively in the financial statements of the earliest period practicable in accordance with paragraph 26. Correction of an error should be made together with the cumulative restatement of assets, liabilities and equity of the prior period. Paragraphs 30 to 33 provide further guidance for the circumstances when it is impossible to correct an error for one or more prior periods.

29. The correction of errors can be distinguished from changes in accounting estimates. Accounting estimates by their nature are approximations that may need revision as additional information becomes known. For example, the gain or loss arising from a specific conclusion in respect of a non-identified liability is not the correction of an error.

Impracticability in respect of retrospective application and restatement

30. In some cases, it is impossible to restate the comparative information for one or more than one prior periods for comparison purposes. For example, it is impossible to collect information of prior periods for retrospective or prospective application of a new accounting policy (including for the purpose of paragraph 32 to 33); or to make a retrospective adjustments to correct prior period errors or it is impossible to establish these information.

31. In many cases, accounting estimate is required in applying a new accounting policies in presentation and disclosures of economic transactions and events in the financial statements. The estimate made after balance sheet date is subjective in nature. The estimation becomes more difficult in retrospective applying an accounting policy or making a retrospective restatement to correct a prior period error because of the longer period of time that might have passed since the affected transaction, other events occurred. However, the objective of estimates related to prior periods remains the same as for estimate made in the current periods to reflect the circumstances

when transactions and other events occurred.

32. When retrospectively applying a new accounting policy or retrospectively restating an error, the following information should be distinguished from others:

(a) Information providing evidences of circumstances on the date as at which the transactions or events occurred.

(b) Information available when the prior periods’ financial statements were authorized for issue.

For certain types of the accounting estimates, for example fair value estimate, it is impossible to distinguish these information without reference to the market prices or the observable information. It is impossible to apply a new accounting policy retrospectively or correct an error retrospectively involving if material accounting estimates were made without distinguishing these two sources of information.

33. Hindsight should not be used when:

(a) applying a new accounting policy or correcting an error of prior periods;

(b) establishing the assumption on the management’s intentions in the prior periods;

(c) estimating the value measured, disclosed and reported in the prior period.

Example 1: When an enterprise corrects a prior period error in recognizing the value of a financial asset which is classified as held-to-maturity investment under the accounting standard “Financial instruments: Recognition and Measurement”, it cannot change the measurement basis for the reporting period even when the management has subsequently decided not to hold the asset until its maturity date.

Example 2: An enterprise corrects a prior period error in calculating the obligations relating to the accumulated sick leaves, it should exclude the flu-virus epidemic happened after financial statements were authorized for issue. When restating the comparative information of prior periods, the significant estimate is required. However, this does not prevent adjusting or correcting the comparative information.

Disclosure

Disclosure of changes in accounting policy

34. When initial application of a new accounting policy has an effect on the current period or any prior period or any future period, an enterprise should disclose the following:

(a) The title of the accounting policy;

(b) Interpretation of change in accounting policies;

(c) Nature of change in accounting policies;

(d) The description of the interpretation of change (if any);

(e) The effects of the change in accounting policies on the future periods (if any);

(f) The amounts adjusted to the current period and each prior period such as:

- Each financial statement items affected;

- Basis and diluted earnings per Share if the enterprise applies accounting standard “Earnings per Share”;

(g) The amounts of the adjustment relating to the prior periods presented in the financial statements;

(h) The reasons and description of the accounting policy application of how and from when should be presented if the retrospective application is impracticable in accordance with the paragraphs 10(a) or 10(b) for a particular prior period or the earliest possible period.

The information is not required for disclosure in the financial statements of the subsequent periods.

35. When the enterprise changes its accounting policies voluntarily that affect on the current period or a particular prior period or future periods, the following information needs to be disclosed:

(a) The nature of the change in accounting policies;

(b) The reason for the applying a new accounting policy provides more reliable and appropriate information;

(c) The amounts adjusted to the current period and each prior period such as:



(d) The amount of adjustment relating to the earliest possible period (if possible);

(e) The reasons and description of the accounting policy application of how and from when should be presented if the retrospective application is impracticable in accordance with the paragraphs 10(a) or 10(b) for a particular prior period or the earliest possible period.


Disclosure of Change in Accounting Estimates

36. The enterprise is required to disclose the nature and value of any change in accounting estimates that affects to the current period or is effects expected to the future periods unless it is impracticable to determine. In such case, the reason is disclosed.

Disclosure of prior period errors

37. In accordance with paragraph 23, the enterprise is required to disclose the following:

(a) the nature of the prior period errors;

(b) The amounts adjusted in the financial statements to each prior period such as:



(c) the adjusted amount to the opening balances of the comparative period presented in the financial statements;

(d) If the retrospective restatement on a particular prior period is impracticable, the reason and description of how and when the correction of error should be disclosed.


Standard No. 30 EARNING PER SHARE



GENERAL

01. The objective of this Standard is to prescribe the accounting policies and procedures in relation to measurement and presentation of earnings per share for comparison of business results among joint-stock enterprises in one reporting period and the business results of one enterprise through reporting periods.

02. This Standard shall be applied by entities:

- whose ordinary shares or potential ordinary shares are publicly traded; and

- that are in the process of issuing ordinary shares or potential ordinary shares in public markets.

03. When an entity presents both consolidated financial statements and separate financial statements, the disclosures required by this Standard need be presented only on the basis of the consolidated information.

An entity that is not required to prepare consolidated financial statements shall present such earnings per share information only on the face of its separate income statement.


Dilution is a reduction in earnings per share or an increase in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.

Antidilution is an increase in earnings per share or a reduction in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.

A contingent share agreement is an agreement to issue shares that is dependent on the satisfaction of specified conditions.

An ordinary share is an equity instrument that provides for a dividend subordinate to all other classes of equity instruments.

A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares.

Contingently issuable ordinary shares are ordinary shares issuable for little or no cash or other consideration upon the satisfaction of specified conditions in a contingent share agreement.

Options, warrants and their equivalents are financial instruments that give the holder the right to purchase ordinary shares at a specified price and within a given period.

Put options on ordinary shares are contracts that give the holder the right to sell ordinary

shares at a specified price within a given period.

05. Ordinary shares participate in profit for the period only after other types of shares such as preference shares have participated. Ordinary shares of the same class have the same rights to receive dividends.

06. Examples of potential ordinary shares are:

(a) Financial liabilities or equity instruments, including preference shares, that are convertible into ordinary shares;

(b) Options and warrants;

(c) Shares that would be issued upon the satisfaction of specified conditions resulting from contractual arrangements, such as the purchase of a business or other assets.


Measurement

Basic Earnings per Share

07. An entity shall calculate basic earnings per share amounts for profit or loss attributable to ordinary equity holders of the parent entity.

08. Basic earnings per share shall be calculated by dividing profit or loss attributable to ordinary equity holders of the parent entity (the numerator) by the weighted average number of ordinary shares outstanding (the denominator) during the period .

09. Basic earnings per share information is to provide a measure of the interests of each ordinary share of a parent entity in the performance of the entity over the reporting period.

Profit or loss for the purpose of calculating basic earning per share

10. For the purpose of calculating basic earnings per share, the amounts attributable to ordinary equity holders of the parent entity shall be after-tax amounts of profit/loss attributable to parent entity adjusted by preference dividends, differences arising on the settlement of preference shares, and other similar effects of preference shares classified as equity.

11. All items of income and expense attributable to ordinary equity holders of the parent entity that are recognised in a period, including corporate income tax expense and dividends on preference shares classified as liabilities are included in the determination of profit or loss for the period attributable to ordinary equity holders of the parent entity.

12. Preference dividends that is deducted from profit or loss after tax for the purpose of calculating basic earning per share is:

(a) Preference dividends on non-cumulative preference shares declared in respect of the period; and

(b) Preference dividends for cumulative preference shares required for the period, whether or not the dividends have been declared. The amount of preference dividends for the period does not include the amount of any preference dividends for cumulative preference shares paid or declared during the current period in respect of previous periods.

13. Preference shares that provide for a low initial dividend to compensate an entity for selling the preference shares at a discount, or an above-market dividend in later periods to compensate

investors for purchasing preference shares at a premium, are sometimes referred to as increasing rate preference shares. Any original issue discount or premium on increasing rate preference shares is amortised to retained earnings using the effective interest method and treated as a preference dividend for the purposes of calculating earnings per share.

14. Preference shares may be repurchased under an entity’s tender offer to the holders. The excess of the fair value of the consideration paid to the preference shareholders over the carrying amount of the preference shares represents a return to the holders of the preference shares and a charge to retained earnings for the entity. This amount is deducted in calculating profit or loss attributable to ordinary equity holders of the parent entity.

15. Early conversion of convertible preference shares may be induced by an entity through favourable changes to the original conversion terms or the payment of additional consideration. The excess of the fair value of the ordinary shares or other consideration paid over the fair value of the ordinary shares issuable under the original conversion terms is a return to the preference shareholders. This excess is deducted from profit or loss attributable to ordinary equity holders of the parent entity.

16. Any excess of the carrying amount of preference shares over the fair value of the consideration paid to settle them is added in calculating profit or loss attributable to ordinary equity holders of the parent entity.

Number of shares for the purpose of calculating basic earning per share

17. For the purpose of calculating basic earnings per share, the number of ordinary shares shall be the weighted average number of ordinary shares outstanding during the period.

18. The weighted average number of ordinary shares outstanding during the period issued because the amount of shareholders’ capital varied during the period as a result of increased or decreased number of shares being outstanding at any time. The weighted average number of ordinary shares outstanding during the period is the number of ordinary shares outstanding at the beginning of the period, adjusted by the number of ordinary shares bought back or issued during the period multiplied by a time-weighting factor. The time-weighting factor is the number of days that the shares are outstanding as a proportion of the total number of days in the period.

19. Ordinary shares are usually included in the weighted average number of shares from the date consideration is receivable (which is generally the date of their issue), for example:

(a) Ordinary shares issued in exchange for cash are included when cash is receivable;

(b) Ordinary shares issued on the voluntary reinvestment of dividends on ordinary or preference shares are included when dividends are reinvested;

(c) Ordinary shares issued as a result of the conversion of a debt instrument to ordinary shares are included from the date that interest ceases to accrue;

(d) Ordinary shares issued in place of interest or principal on other financial instruments are included from the date that interest ceases to accrue;

(e) Ordinary shares issued in exchange for the settlement of a liability of the entity are included from the settlement date;

(f) Ordinary shares issued as consideration for the acquisition of an asset other than cash are included as of the date on which the asset is recognised; and

(g) Ordinary shares issued for the rendering of services to the entity are included as the services are rendered.

The timing of the inclusion of ordinary shares is determined by the terms and conditions attaching to their issue. Entity must consider carefully the substance of any contract associated with the issue.

20. Ordinary shares issued as part of the cost of a business combination are included in the weighted average number of shares from the acquisition date, because the acquirer incorporates into its income statement the acquiree’s profits and losses from that date.

21. Ordinary shares that will be issued upon the conversion of a mandatorily convertible instrument are included in the calculation of basic earnings per share from the date the contract is entered into.

22. Contingently issuable shares are treated as outstanding and are included in the calculation of basic earnings per share only from the date when all necessary conditions are satisfied (ie the events have occurred). Shares that are issuable solely after the passage of time are not contingently issuable shares, because the passage of time is a certainty.

23. Outstanding ordinary shares that are contingently returnable are not treated as oustanding and are excluded from the calculation of basic earnings per share until the date the shares are no longer subject to recall.

24.The weighted average number of ordinary shares outstanding during the period and for all periods presented shall be adjusted for events, other than the conversion of potential ordinary shares, that have changed the number of ordinary shares outstanding without a corresponding change in resources.

25. The number of ordinary shares outstanding may be increased or reduced, without a corresponding change in resources. Examples include:

(a) A capitalization or bonus issue (sometimes referred to as a stock dividend);

(b) A bonus element in any other issue, for example a bonus element in a rights issue to existing shareholders;

(c) A share split; and

(d) Consolidation of shares.

26. In a capitalisation or bonus issue or a share split, ordinary shares are issued to existing shareholders for no additional consideration. Therefore, the number of ordinary shares outstanding is increased without an increase in resources. The number of ordinary shares outstanding before the event is adjusted for the proportionate change in the number of ordinary shares outstanding as if the event had occurred at the beginning of the earliest period presented. For example, on a two-for-one bonus issue, the number of ordinary shares outstanding before the issue is multiplied by three to obtain the new total number of ordinary shares, or by two to obtain the number of additional ordinary shares.

27. A consolidation of ordinary shares generally reduces the number of ordinary shares outstanding without a corresponding reduction in resources. However, when the overall effect is a share repurchase at fair value, the reduction in the number of ordinary shares outstanding is the result of a corresponding reduction in resources.

Diluted Earnings per Share

28. An entity shall calculate diluted earnings per share amounts for profit or loss attributable to ordinary equity holders of the parent entity.

29. For the purpose of calculating diluted earnings per share, an entity shall adjust profit or loss attributable to ordinary equity holders of the parent entity, and the

weighted average number of shares outstanding, for the effects of all dilutive potential ordinary shares.

30. The objective of diluted earnings per share is consistent with that of basic earnings per share to provide a measure of the interest of each ordinary share in the performance of an entity while giving effect to all dilutive potential ordinary shares outstanding during the period. As a result:

(a) Profit or loss attributable to ordinary equity holders of the parent entity is increased by the amount of dividends and interest recognised in the period in respect of the dilutive potential ordinary shares and is adjusted for any other changes in income or expense that would result from the conversion of the dilutive potential ordinary shares; and

(b) The weighted average number of ordinary shares outstanding is increased by the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares.

Earnings

31. For the purpose of calculating diluted earnings per share, an entity shall adjust profit or loss after tax attributable to ordinary equity holders of the parent entity, as calculated in accordance with paragraph 10, by the after-tax effect of:

(a) Dividends or other items related to dilutive potential ordinary shares deducted in arriving at profit or loss attributable to ordinary equity holders of the parent entity as calculated in accordance with paragraph 10;

(b) Any interest recognised in the period related to dilutive potential ordinary shares; and

(c) Other changes in income or expense that would result from the conversion of the dilutive potential ordinary shares.

32. After the potential ordinary shares are converted into ordinary shares, the items identified in paragraph 31(a)-(c) no longer arise. Instead, the new ordinary shares are entitled to participate in profit or loss attributable to ordinary equity holders of the parent entity. Therefore, profit or loss attributable to ordinary equity holders of the parent entity calculated in accordance with paragraph 10 is adjusted for the items identified in paragraph 31(a)-(c). The expenses associated with potential ordinary shares include transaction costs and discounts accounted for in accordance with the effective interest method.

33. The conversion of potential ordinary shares may lead to consequential changes in income or expenses. For example, the reduction of interest expense related to potential ordinary shares and the resulting increase in profit or reduction in loss may lead to an increase in the share profit. For the purpose of calculating diluted earnings per share, profit or loss attributable to ordinary equity holders of the parent entity is adjusted for any such consequential changes in income or expense.

Number of shares for the purpose of calculating diluted earning per share

34. For the purpose of calculating diluted earnings per share, the number of ordinary shares shall be the weighted average number of ordinary shares calculated in accordance with paragraphs 17 and 24, plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. Dilutive potential ordinary shares shall be deemed to have been converted into ordinary shares at the beginning of the period or, if later, the date of the issue of the potential ordinary shares.

35. Dilutive potential ordinary shares shall be determined independently for each period presented. The number of dilutive potential ordinary shares included in the year-to-date period is not a weighted average of the dilutive potential ordinary shares included in each interim computation.

36. Potential ordinary shares are weighted for the period they are outstanding. Potential ordinary shares that are cancelled or allowed to lapse during the period are included in the calculation of diluted earnings per share only for the portion of the period during which they are outstanding. Potential ordinary shares that are converted into ordinary shares during the period are included in the calculation of diluted earnings per share from the beginning of the period to the date of conversion; from the date of conversion, the resulting ordinary shares are included in both basic and diluted earnings per share.

37. The number of ordinary shares that would be issued on conversion of dilutive potential ordinary shares is determined from the terms of the potential ordinary shares. When more than one basis of conversion exists, the calculation assumes the most advantageous conversion rate or exercise price from the standpoint of the holder of the potential ordinary shares.

38. A subsidiary, joint venture or associate may issue to parties other than the parent, venturer or investor potential ordinary shares that are convertible into either ordinary shares of the subsidiary, joint venture or associate, or ordinary shares of the parent, venturer or investor. If these potential ordinary shares of the subsidiary, joint venture or associate have a dilutive effect on the basic earnings per share of the reporting entity, they are included in the calculation of diluted earnings per share.

Dilutive Potential Ordinary Shares

39. Potential ordinary shares shall be treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share or increase loss per share.

40. An entity uses profit or loss attributable to the parent entity as the control number to establish whether potential ordinary shares are dilutive or antidilutive. Profit or loss attributable to the parent entity is adjusted in accordance with paragraph 10.

41. Potential ordinary shares are antidilutive when their conversion to ordinary shares would increase earnings per share or decrease loss per share. The calculation of diluted earnings per share does not assume conversion, exercise, or other issue of potential ordinary shares that would have an antidilutive effect on earnings per share.

42. In determining whether potential ordinary shares are dilutive or antidilutive, each issue or series of potential ordinary shares is considered separately rather than in aggregate. The sequence in which potential ordinary shares are considered may affect whether they are dilutive, therefore, to maximize the dilution of basic earnings per share, each issue or series of potential ordinary shares is considered in sequence from the most dilutive to the least dilutive, ie dilutive potential ordinary shares with the lowest ‘earnings per incremental share’ are included in the diluted earnings per share calculation before those with a higher earnings per incremental share. Options and warrants are generally included first because they do not affect the profit or loss distributed to holders of common shares.

Options, Warrants and Their Equivalents

43. For the purpose of calculating diluted earnings per share, an entity shall assume the exercise of dilutive options and warrants of the entity. The assumed proceeds from these instruments shall be regarded as having been received from the issue of ordinary shares at the average market price of ordinary shares during the period. The difference between the number of ordinary shares issued and the number of ordinary shares that would have been issued at the average market price of ordinary shares during the period shall be treated as an issue of ordinary shares for no consideration.

44. Options and warrants are dilutive when they would result in the issue of ordinary shares for less than the average market price of ordinary shares during the period. The amount of the dilution is the average market price of ordinary shares during the period minus the issue price. Therefore, to calculate diluted earnings per share, potential ordinary shares are treated as consisting of both the

following:

(a) A contract to issue a certain number of the ordinary shares at their average market price during the period. Enterprise should ignore these ordinary shares in the calculating of diluted earning per share because these shares are assumed to be fairly priced and to be neither dilutive nor antidilutive.

(b) A contract to issue the remaining ordinary shares for no consideration. Such ordinary shares generate no proceeds and have no effect on profit or loss attributable to ordinary shares outstanding. Therefore, such shares are dilutive and are added to the number of ordinary shares outstanding in the calculation of diluted earnings per share.

45. Options and warrants have a dilutive effect only when the average market price of ordinary shares during the period exceeds the exercise price of the options or warrants (ie they are ‘in the money’). Previously reported earnings per share are not retroactively adjusted to reflect changes in prices of ordinary shares.

46. Employee share options with fixed or determinable terms and non-vested ordinary shares are treated as options in the calculation of diluted earnings per share, even though they may be contingent on vesting. They are treated as outstanding on the grant date. Performance-based employee share options are treated as contingently issuable shares because their issue is contingent upon satisfying specified conditions in addition to the passage of time.

Convertible Instruments

47. The dilutive effect of convertible instruments shall be reflected in diluted earnings per share in accordance with paragraphs 31 and 34.

48. Convertible preference shares are antidilutive whenever the amount of the dividend on such shares declared in or accumulated for the current period per ordinary share obtainable on conversion exceeds basic earnings per share. Similarly, convertible debt is antidilutive whenever its interest (net of tax and other changes in income or expense) per ordinary share obtainable on conversion exceeds basic earnings per share.

49. The redemption or induced conversion of convertible preference shares may affect only a portion of the previously outstanding convertible preference shares. In such cases, any excess consideration referred to in paragraph 15 is attributed to those shares that are redeemed or converted for the purpose of determining whether the remaining outstanding preference shares are dilutive. The shares redeemed or converted are considered separately from those shares that are not redeemed or converted.

Contingently Issuable Shares

50. As in the calculation of basic earnings per share, contingently issuable ordinary shares are treated as outstanding and included in the calculation of diluted earnings per share if the conditions are satisfied (ie the events have occurred). Contingently issuable shares are included from the beginning of the period (or from the date of the contingent share agreement, if later). If the conditions are not satisfied, the number of contingently issuable shares included in the diluted earnings per share calculation is based on the number of shares that would be issuable if the end of the period were the end of the contingency period. Restatement is not permitted if the conditions are not met when the contingency period expires.

51. If attainment or maintenance of a specified amount of earnings for a period is the condition for contingent issue and if that amount has been attained at the end of the reporting period but must be maintained for an additional period, then the additional ordinary shares are treated as outstanding, if the effect is dilutive, when calculating diluted earnings per share. In that case, the calculation of diluted earnings per share is based on the number of ordinary shares that would be issued if the amount of earnings at the end of the reporting period were the amount of earnings at the end of the contingency period. Because earnings may change in a future period, the calculation

of basic earnings per share does not include such contingently issuable

ordinary shares until the end of the contingency period because not all necessary conditions have been satisfied.

52. The number of ordinary shares contingently issuable may depend on the future market price of the ordinary shares. In that case, if the effect is dilutive, the calculation of diluted earnings per share is based on the number of ordinary shares that would be issued if the market price at the end of the reporting period were the market price at the end of the contingency period. If the condition is based on an average of market prices over a period of time that extends beyond the end of the reporting period, the average for the period of time that has lapsed is used. Because the market price may change in a future period, the calculation of basic earnings per share does not include such contingently issuable ordinary shares until the end of the contingency period because not all necessary conditions have been satisfied.

53. The number of ordinary shares contingently issuable may depend on future earnings and future prices of the ordinary shares. In such cases, the number of ordinary shares included in the diluted earnings per share calculation is based on both conditions. Contingently issuable ordinary shares are not included in the diluted earnings per share calculation unless both conditions are met.

54. In other cases, the number of ordinary shares contingently issuable depends on a condition other than earnings or market price. In such cases, assuming that the present status of the condition remains unchanged until the end of the contingency period, the contingently issuable ordinary shares are included in the calculation of diluted earnings per share according to the status at the end of the reporting period.

55. Contingently issuable potential ordinary shares (other than those covered by a contingent share agreement, such as contingently issuable convertible instruments) are included in the diluted earnings per share calculation as follows:

(a) An entity determines whether the potential ordinary shares may be assumed to be issuable on the basis of the conditions specified for their issue in accordance with the contingent ordinary share provisions in paragraphs 50-54; and

(b) If those potential ordinary shares should be reflected in diluted earnings per share, an entity determines their impact on the calculation of diluted earnings per share by following the provisions for options and warrants in paragraphs 43-46, the provisions for convertible instruments in paragraphs 47-49, the provisions for contracts that may be settled in ordinary shares or cash in paragraphs 56-59, or other provisions, as appropriate.

However, exercise or conversion is not assumed for the purpose of calculating diluted earnings per share unless exercise or conversion of similar outstanding potential ordinary shares that are not contingently issuable is assumed.

Contracts that may be settled in ordinary shares or cash

56. When an entity has issued a contract that may be settled in ordinary shares or cash at the entity’s option, the entity shall presume that the contract will be settled in ordinary shares, and the resulting potential ordinary shares shall be included in diluted earnings per share if the effect is dilutive.

57. When such a contract is presented for accounting purposes as an asset or a liability, or has an equity component and a liability component, the entity shall adjust the numerator for any changes in profit or loss that would have resulted during the period if the contract had been classified wholly as an equity instrument. That adjustment is similar to the adjustments required in paragraph 31.

58. For contracts that may be settled in ordinary shares or cash at the holder's option, the more dilutive of cash settlement and share settlement shall be used in calculating diluted earnings per share.

59. Examples of a contract that may be settled in ordinary shares or cash include:

(a) A debt instrument that, on maturity, gives the entity the unrestricted right to settle the principal amount in cash or in its own ordinary shares.

(b) A written put option that gives the holder a choice of settling in ordinary shares or cash.

Purchased options

60. Contracts such as purchased put options and purchased call options (ie options held by the entity on its own ordinary shares) are not included in the calculation of diluted earnings per share because including them would be antidilutive. The put option would be exercised only if the exercise price were higher than the market price and the call option would be exercised only if the exercise price were lower than the market price.

Written put options

61. Contracts that require the entity to repurchase its own shares, such as written put options and forward purchase contracts, are reflected in the calculation of diluted earnings per share if the effect is dilutive. If these contracts are ‘in the money’ during the period (ie the exercise or settlement price is above the average market price for that period), the potential dilutive effect on earnings per share shall be calculated as follows:

(a) It shall be assumed that at the beginning of the period sufficient ordinary shares will be issued (at the average market price during the period) to raise proceeds to satisfy the contract;

(b) It shall be assumed that the proceeds from the issue are used to satisfy the contract (ie to buy back ordinary shares); and

(c) the incremental ordinary shares (the difference between the number of ordinary shares assumed issued and the number of ordinary shares received from satisfying the contract) shall be included in the calculation of diluted earnings per share.

Retrospective adjustments

62. If the number of ordinary or potential ordinary shares outstanding increases as a result of a capitalisation, bonus issue or share split, or decreases as a result of a reverse share split, the calculation of basic and diluted earnings per share for all periods presented shall be adjusted retrospectively. If these changes occur after the balance sheet date but before the financial statements are authorised for issue, the per share calculations for those and any prior period financial statements presented shall be based on the new number of shares. The fact that per share calculations reflect such changes in the number of shares shall be disclosed. In addition, basic and diluted earnings per share of all periods presented shall be adjusted for the effects of errors and adjustments resulting from changes in accounting policies accounted for retrospectively.

63. An entity does not restate diluted earnings per share of any prior period presented for changes in the assumptions used in earnings per share calculations or for the conversion of potential ordinary shares into ordinary shares.

Presentation of financial statements

64. An entity shall present on the face of the income statement basic and diluted earnings per share for profit or loss attributable to the ordinary equity holders of the parent entity for the period for each class of ordinary shares that has a different right to share in profit for the period. An entity shall present basic and diluted earnings per share with equal

prominence for all periods presented.

65. Earnings per share is presented for every period for which an income statement is presented. If diluted earnings per share is reported for at least one period, it shall be reported for all periods presented, even if it equals basic earnings per share. If basic and diluted earnings per share are equal, dual presentation can be accomplished in one line on the income statement.

66. An entity shall present basic and diluted earnings per share, even if the amounts are negative (ie a loss per share).

Disclosure

67. An entity shall disclose the following:

(a) The amounts used as the numerators in calculating basic and diluted earnings per share, and a reconciliation of those amounts to profit or loss attributable to the parent entity for the period. The reconciliation shall include the individual effect of each class of instruments that affects earnings per share.

(b) The weighted average number of ordinary shares used as the denominator in calculating basic and diluted earnings per share, and a reconciliation of these denominators to each other. The reconciliation shall include the individual effect of each class of instruments that affects earnings per share.

(c) Instruments (including contingently issuable shares) that could potentially dilute basic earnings per share in the future, but were not included in the calculation of diluted earnings per share because they are antidilutive for the period(s) presented.

(d) A description of ordinary share or potential ordinary share transactions, other than those accounted for in accordance with paragraph 62, that occur after the balance sheet date. If those transactions had occurred before the end of the reporting period, that transactions would have changed significantly the number of ordinary shares or potential ordinary shares outstanding at the end of the period .

68. Examples of transactions in paragraph 67(d) include:

(a) An issue of shares for cash;

(b) An issue of shares when the proceeds are used to repay debt or preference shares outstanding at the balance sheet date;

(c) The redemption of ordinary shares outstanding;

(d) The conversion of potential ordinary shares outstanding at the balance sheet date into ordinary shares;

(e) An issue of options, warrants, or convertible instruments; and

(f) The achievement of conditions that would result in the issue of contingently issuable shares.

Earnings per share amounts are not adjusted for such transactions occurring after the balance sheet date because such transactions do not affect the amount of capital used to produce profit or loss for the period.

69. Financial instruments and other contracts generating potential ordinary shares may incorporate terms and conditions that affect the measurement of basic and diluted earnings per share. These terms and conditions may determine whether any potential ordinary shares are dilutive and, if so, the effect on the weighted average number of shares outstanding and any consequent adjustments

to profit or loss attributable to ordinary equity holders.

70. If an entity discloses, in addition to basic and diluted earnings per share, amounts per share using a reported component of the income statement other than one required by this Standard, such amounts shall be calculated using the weighted average number of ordinary shares determined in accordance with this Standard. Basic and diluted amounts per share relating to such a component shall be disclosed with equal prominence and presented in the notes to the financial statements. An entity shall indicate the basis on which the numerator(s) is (are) determined, including whether amounts per share are before tax or after tax.

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