IFRS vs VAS (Part 1): An Overview of Key Differences

Comparing IFRS vs VAS is an important topic that captures the interest of individuals in the financial field and businesses in Viet Nam. Both IFRS and VAS play crucial roles in shaping accounting processes and financial reporting for companies. While VAS is making progress towards aligning with international standards, there are significant differences that persist between these two systems. In this article, we will delve into the fundamental disparities between IFRS and VAS, providing a comprehensive overview of these two accounting standards. 

Overview of IFRS vs VAS

IFRS (International Financial Reporting Standards) is a globally recognized system of accounting standards developed and maintained by the International Accounting Standards Board (IASB). It provides comprehensive guidelines for financial reporting on a global scale.

In Vietnam, the Ministry of Finance issued 26 Vietnamese Accounting Standards (VAS) between 2000 and 2005, aligning select international accounting standards with the country's economic, legal, and accounting practices. VAS has played a significant role in improving transparency and accuracy in financial reporting, contributing to accounting reform in Vietnam. However, over time, limitations have emerged, particularly in addressing complex economic transactions within a developing market.

When comparing IFRS vs VAS, notable differences arise in terms of scope and approaches to specific accounting issues. IFRS generally has broader coverage and more specific rules across various areas. In contrast, VAS places emphasis on Vietnam-specific issues and includes detailed regulations on taxation and legal provisions.

To ensure compliance and effective utilization of both standards in accounting and financial reporting processes, a comprehensive understanding of both is essential. This ensures the accuracy, reliability, and comparability of financial information while promoting compatibility and international standardization in Vietnam.

>>> See also:  What is IFRS? What is the significance of IFRS today?

What is diffences between IFRS & VAS?

IFRS vs VAS (Part 1)

Principles-based and Rules-based Approach 

One significant difference between VAS and IFRS is that IFRS is principles-based, while VAS is rules-based.

• IFRS based on principles-based providing a flexible legal framework, allowing for flexible evaluation and treatment of accounting transactions. These principles do not provide specific rules but focus on fundamental principles to guide financial reporting.
• VAS based on rule-based. It applies specific rules to determine how to evaluate and handle accounting issues. This can make VAS more rigid and less flexible in applying to complex accounting situations.

For example: Under IFRS, companies are free to design their Chart of Accounts and Financial statement templates to suit their business characteristics and needs. In Vietnam, companies are required to apply a unified Chart of Accounts, mandatory financial statement templates, and financial paper.

IFRS is principles-based, while VAS is rules-based 

Principles of Historical Cost and Fair Value 

The second difference when comparing IFRS vs VAS is the recognition and measurement of assets and liabilities at fair value.

• VAS: records assets and liabilities primarily at historical cost and changes in fair value are not reflected. Although some argue that trading securities are revalued at fair value through the establishment of impairment provisions, this is not a requirement of VAS but rather a provision of the Enterprise Accounting Regime and financial mechanisms. Additionally, the establishment of impairment provisions only reflects a one-way change in fair value (decrease), which is not sufficient for fair value revaluation as in IFRS.

• IFRS: emphasizes the use of fair value, enabling more accurate and reliable valuation of assets and liabilities. Standards such as IAS 16, IAS 38, IAS 40, and IFRS 9 regulate the recognition and measurement of assets and liabilities at fair value in IFRS.
  

VAS applies the principle of historical cost, which provides simplicity and safety for accounting as the information about historical cost is readily available. However, IFRS brings a different approach, providing more transparent and accurate financial information for businesses.

IFRS recogniting and measuring of assets and liabilities at fair value

>>> See Also: Historical Cost vs Fair Value: Understanding the Differences

Recognition of Asset Impairment

Another significant difference between IFRS and VAS is in the recognition of asset impairment.

• IFRS: asset impairment is recognized when the fair value of an asset is lower than its carrying amount. When an asset impairment occurs, the carrying amount is adjusted, resulting in an impairment loss in the financial statements.
• VAS: does not mention the requirements for recognizing asset impairment like IFRS does. It mainly applies the historical cost principle and does not provide specific guidelines for the recognition of impairment.

Impairment loss under IFRS

For example: A company owns a machinery asset with a carrying amount (book value) of $100,000. Due to technological advancements, the fair value of the machinery has significantly declined to $70,000.

• IFRS: the fair value ($70,000) is lower than the carrying amount ($100,000) ==> an impairment loss needs to be recognized. The carrying amount would be reduced to its recoverable amount, which is the higher of the fair value less costs to sell ($70,000) or the value in use (if applicable). Let's assume the value in use is also $70,000. This would result in recognizing an impairment loss of $30,000 ($100,000 - $70,000) in the income statement.
• VAS: The carrying amount would remain at $100,000, and no impairment loss would be recorded in the financial statements, unless there are specific circumstances or events triggering a revaluation or impairment assessment.

Transactions without sufficient basis for recognition

Currently, due to the incomplete issuance of VAS (Vietnamese Accounting Standards), some transactions in Vietnam lack sufficient basis for recognition or are temporarily recognized based on the principles of other items. For example:

• Transactions involving payment based on shares or employee benefits lack sufficient basis for recognition.
• Biological assets and agricultural products are being recognized and presented together with inventory or fixed assets without separate recognition.

In contrast, under IFRS, specific standards govern the recognition and presentation of these items, such as IAS 41 Agriculture, IFRS 2 Share-based Payment, and IAS 19 Employee Benefits.

Under VAS, Biological assets, agricultural products recognized and presented together with inventory or fixed assets

Requirements for Financial Statement presentation

Here is a comparison table outlining the requirements for financial statement presentation under IFRS vs VAS:

Vietnamese accounting standards that have not been issued compared to IFRS

 >>> See Also:  List of International Financial Reporting Standards

Conclusion

The article "IFRS vs VAS (Part 1): An Overview of Key Differences" provides an overview of the differences between the International Financial Reporting Standards (IFRS) and the Vietnamese Accounting Standards (VAS). Currently, Vietnam is approaching the transition to adopting IFRS, which requires professionals in finance, accounting, and auditing in Vietnam to quickly grasp the differences between these two standard systems. The next article, "IFRS vs VAS (Part 2): Gaining Insight into the differences" will continue to provide more detailed information on the differences between IFRS and VAS, offering specific comparisons between the standards to help readers gain a better understanding of these accounting standard systems.

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