Framework

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Framework

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(Issued and promulgated in pursuance of the Minister of Finance Decision No 165/2002/QD-BTC dated December 31, 2002)

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  1. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE STANDARD 01 FRAMEWORK (Issued and promulgated in pursuance of the Minister of Finance Decision No 165/2002/QD-BTC dated December 31, 2002) GENERAL Internally Distributed by VACO-Member of Deloitte touche Tohmatsu 01. The objective of this standard is to prescribe the basic accounting principles and requirements and the elements of financial statements and recognition of these elements in order to: a) set a framework for consistent development and review of accounting standards and regulations; b) assist business entities in keeping records and preparing financial statements following established accounting standards and regulations in a uniform manner and in dealing with topics to which no clear answer is available under the current regulations to ensure the true and fair disclosure of financial information; c) assist auditors and reviewers in forming an opinion as to whether financial statements conform with the accounting standards and regulations; and d) assist users of financial statements in interpreting the financial information disclosed in accordance with the accounting standards and regulations. 02. The accounting principles and requirements and the elements of financial statements which are prescribed in this standard and dealt with in individual accounting standards shall be applicable nation-wide to enterprises of all economic sectors in Vietnam. The framework does not override any specific accounting standards, which shall apply in respective circumstances. If the topics have yet to form the subject of an accounting standard, the framework will prevail. CONTENT OF THE STANDARD BASIC ACCOUNTING PRINCIPLES Accrual Basis 03. Transactions which have effects on assets, liabilities, equities, revenues and expenses of an enterprise are recognised when they occur, not at the time cash or cash equivalents are received or paid. The financial statements prepared on the accrual basis reflect the past, present and future business performance of the enterprise. Going Concern 04. Financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue business for a foreseeable future, that is, the enterprise is assumed to have neither the intention nor the need to liquidate or curtail materially the scale of its operations. If such an intention or need exists, the financial statements may have to be prepared on a different basis and accordingly that fact is disclosed. 1
  2. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE Historical Cost 05. Assets are recognised at historical cost. The historical cost of an asset is the amount of cash or cash equivalents paid, or payable, or fair value of the asset at the time the asset is recognised. Cost is not changed unless otherwise required under specific standards. Matching Principle 06. Revenues should match with expenses. The recognition of revenue should be combined Internally Distributed by VACO-Member of Deloitte touche Tohmatsu with the recognition of expenses incurred to earn the revenue. Expenses matching with revenue include those incurred in the period the revenue is generated and those incurred in prior periods or accruals which are associated with the revenue of the current period. Consistency 07. The accounting policies and practices selected by an enterprise should be applied consistently for at least one accounting period. The causes and effects of any change in the current accounting policies and practices should be disclosed in a note to the financial statements. Prudence 08. Prudence is the inclusion of a degree of caution in the exercise of the judgement needed in making estimates in the event of uncertainty. The prudence concept requires that: a) Provisions should be made, however, excessive provision is not allowed; b) Assets and incomes should not be overstated; c) Liabilities and expenses should not be understated; d) Revenues and incomes are recognised if, and only if, it is probable that economic benefits will flow to the enterprise while expenses should be recognised when there is evidence that economic outflows are probable. Materiality 09. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Materiality of information is considered in both qualitative and quantitative terms. REQUIREMENTS ON ACCOUNTING INFORMATION Integrity 10. Accounting information should be recorded and disclosed as supported by sufficient valid evidence and represents the substance of economic transactions in terms of nature and value. Objectivity 11. Accounting information to be recorded and disclosed should be factual, truthful and unbiased. 2
  3. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE Completeness 12. Transactions arising in an accounting period should be completely recorded and reported. Timeliness 13. Accounting information should be reported on a timely basis, i.e. on or before the due date. Internally Distributed by VACO-Member of Deloitte touche Tohmatsu Understandability 14. Information presented in financial statements should be straightforward and understandable. Users are assumed to have a reasonable knowledge of business, economics, finance and accounting. Information about complex matters is presented in the notes to the financial statements. Comparability 15. Accounting information should be produced and presented in a consistent manner to enable users to interpret the enterprise’s financial performance for a period in relation with other enterprises. Otherwise, explanatory notes should be used to disclose the inconsistency to facilitate comparison by users of the enterprise’s accounting information with other enterprises, of the current period with the prior periods and of the financial performance with the budget plan. 16. The requirements on accounting information prescribed in the preceding paragraphs 10, 11, 12, 13, 14 and 15 should be exercised simultaneously. For example, integrity will imply objectivity and timeliness will not override completeness, understandability and comparability. ELEMENTS OF FINANCIAL STATEMENTS 17. Financial statements present the financial position and performance results of an enterprise by grouping financial transactions into elements according to their economic characteristics. The elements directly related to the measurement of the financial position in the balance sheet are assets, liabilities and equities and those elements directly related to the measurement of performance results in the income statement are revenues, expenses and incomes. Financial Position 18. The elements directly related to the measurement of financial position are assets, liabilities and equity. They are defined as follows: (a) An asset is a resource which is controlled by the enterprise and from which future economic benefits are expected to flow to the enterprise. (b) A liability represents a present obligation of the enterprise arising from past transactions or events, the settlement of which is expected to result in an outflow of resources from the enterprise. 3
  4. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE (c) Equity refers to the enterprise’s net assets, that is, the residual interest in the assets after all its liabilities. 19. In assessing whether an item meets the definition as an asset, liability or equity, attention needs to be given to its ownership title and economic reality. In some circumstances, however, assets that are not legally owned by the enterprise are presented in its financial statements by reason of economic reality. For example, in the case of finance leases, the substance and economic reality are that the lessee acquires Internally Distributed by VACO-Member of Deloitte touche Tohmatsu the economic benefits of the use of the leased asset for the major part of its useful life in return for entering into an obligation to pay for that right an amount approximating to the fair value of the asset and the related finance charge. Hence, the finance lease gives rise to items that satisfy the definition of an asset and a liability recognised in the lessee's balance sheet. Assets 20. The future economic benefits embodied in an asset represent the potential contribution to the flow of cash and cash equivalents to, or the potential reduction of cash outflows from, the enterprise. 21. The future economic benefits embodied in an asset may flow to the enterprise when the asset is: (a) used separately or in combination with other assets in the production of goods or rendering of services by the enterprise; (b) exchanged for other assets; (c) used to settle a liability; or (d) distributed to the owners of the enterprise. 22. Assets may have physical substance, for example, property, plant and equipment, or a non-physical substance such as patents and copyrights, from which future economic benefits are expected to flow to the enterprise, and are controlled by the enterprise. 23. Assets of an enterprise may include items which are not owned, but are controlled, by the enterprise, to which future benefits are expected to flow from the assets, for example finance lease assets. Assets may be ones which are owned by the enterprise and expected to generate future benefits for the enterprise but over which the enterprise has no legal control. For example, know-how obtained from a development activity may meet the definition of an asset when, by keeping that know-how secret, an enterprise controls the benefits that are expected to flow from it. 24. Assets of an enterprise result from past transactions or events, such as contribution, acquisition, production, endowment and donation. Transactions or events expected to occur in the future do not in themselves give rise to assets. 25. Incurrence of expenses may give rise to assets. Expenses which do not embody future economic benefits will not constitute assets. The absence of a related expense does not preclude an item from satisfying the definition of an asset for example, items contributed, granted or donated to the enterprise. 4
  5. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE Liabilities 26. A liability represents a present obligation of the enterprise to another entity for an asset received or a binding contract entered into. 27. Settlement of a present obligation may occur in a number of ways, namely, (a) payment of cash; (b) transfer of other assets; Internally Distributed by VACO-Member of Deloitte touche Tohmatsu (c) provision of services; (d) replacement of one obligation with another; or (e) conversion of the obligation into equity. 28. Liabilities are incurred as a result of past transactions and events, for example, accounts payable for acquisition of goods and services, receipt of borrowing, commitment to a post-sale service and contractual obligations; payables to employees, taxes payable and other statutory obligations. Equity 29. Equity presented in the balance sheet includes paid-in capital, premium reserve, retained earnings, enterprise funds, undistributed profits, foreign exchange differences and revaluation gains/losses. a) Paid-in capital include proprietor’s capital, contributed capital, share capital and state funds; b) Premium reserve is the difference between the par value and the selling price of shares; c) Retained earnings is profit after tax intended as an additional source of capital; d) Enterprise funds include financial reserves, business development funds; e) Undistributed profits is the profit after tax before any dividends to shareholders and allocation to enterprise funds; f) Foreign exchange differences include: + Foreign exchange differences which arise in the construction phase; + Foreign exchange differences which arise upon consolidation of an overseas operation’s financial statements using a currency other than that of the reporting enterprise. g) Revaluation gains/losses represent the difference between the book value of an asset and the amount re-valued upon authoritative decisions or by the time the asset is transferred for contribution purposes. Performance Results 30. Profits serve as a measure of an enterprise’s performance. The elements directly related to the measurement of profit are revenues, other incomes and expenses. Revenues, other incomes and expenses are indicators of the enterprise’s business performance. 5
  6. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE 31. Revenues, other incomes and expenses are defined as follows: (a) Revenues and other incomes are increases in economic benefits as a result of ordinary activities and other events of the enterprise during the accounting period. Revenues and other incomes result in an increase in equity other than owner and shareholder equity. (b) Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than dividends paid to owners and shareholders. Internally Distributed by VACO-Member of Deloitte touche Tohmatsu 32. Revenues, other incomes and expenses are presented in the income statement as a source of information for evaluating the enterprise’s ability to generate cash and cash equivalents in the future. 33. Revenues, other incomes and expenses may be presented in the income statement in different ways so as to disclose the performance results of the enterprise, such as sales revenues, expenses, operating profit and non-operating profit. Revenues and Other Incomes 34. Revenue arises in the ordinary course of business and is made up by sales, royalties, interest and dividends. 35. Other incomes represent items arising from activities other than those generating revenues, for example, disposals of fixed assets, receipts from penalties…. Expenses 36. Expenses include items that are incurred in the ordinary course of business and other costs. 37. Expenses that are incurred in the ordinary course of business include, for example, cost of sales, selling and administrative expenses, interest expense, royalties and items associated with the use of the enterprise’s assets by others for a profit. They usually take the form of cash and cash equivalents, inventory, depreciation of plant and equipment. 38. Other expenses include items other than those arising in the ordinary course of business, for example expenses related to disposals of fixed assets, penalties for contract breaches…. RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS 39. Financial statements recognize the elements of the financial position and business performance of an enterprise in monetary terms for each item. An item is recognised in the financial statements when it concurrently meets the following criteria: (a) it is probable that any future economic benefit associated with the item will flow to or from the enterprise; and (b) the item has a cost or value that can be measured with reliability. 6
  7. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE Recognition of Assets 40. An asset is recognised in the balance sheet when it is probable that future economic benefits will flow to the enterprise and the asset has a cost or value that can be measured reliably. 41. An asset is not recognised in the balance sheet when it is not probable that the economic benefits from an expense will flow to the enterprise, to which extent, such an expense will be recognised in the income statement as incurred. Internally Distributed by VACO-Member of Deloitte touche Tohmatsu Recognition of Liabilities 42. A liability is recognised in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably. Recognition of Revenues and Other Incomes 43. Revenues and other incomes are recognised in the income statement when the increase in future economic benefits related to the increase in an asset or the decrease of a liability that has arisen can be measured reliably. Recognition of Expenses 44. Expenses are recognised in the income statement when the decrease in future economic benefits related to the decrease in an asset or the increase of a liability that has arisen can be measured reliably. 45. Expenses are recognised in the income statement in conformity with the matching concept. 46. When economic benefits expected to arise over several accounting periods and related to revenues and other incomes are indirectly measured, related expenses are recognised in the income statement by means of systematic or rational allocation. 47. An expense should be recognised immediately in the income statement if it is unlikely that it will bring future economic benefits to the enterprise. 7
  8. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE STANDARD 06 LEASES (Issued and promulgated in pursuance of the Minister of Finance Decision No. 165/2002/QD-BC dated December 31, 2002) GENERAL Internally Distributed by VACO-Member of Deloitte touche Tohmatsu 01. The objective of this Standard is to prescribe, for lessees and lessors, the accounting policies and procedures in relation to finance and operating leases for bookkeeping and financial reporting purposes. 02. This Standard should be applied in accounting for all leases other than: (a) lease agreements to explore or use natural resources, such as oil, gas, timber, metals and other mineral rights; and (b) licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights. 03. This Standard applies to agreements that transfer the right to use assets even though substantial services by the lessor may be called for in connection with the operation or maintenance of such assets. This Standard does not apply to agreements that do not transfer the right to use assets. 04. The following terms are used in this Standard with the meanings specified: A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. A finance lease is a lease in which the lessor transfers substantially to the lessee all the risks and rewards incident to ownership of an asset. Title may be transferred at the end of leased period. An operating lease is a lease other than a finance lease. A non-cancelable lease is a lease that is not unilaterally canceled, except (a) upon the occurrence of some remote contingency, such as: - The lessor does not deliver the leased asset in time; - The lessee does not make payments in accordance with the lease agreement; - Either the lessor or the lessee has been in breach of the lease agreement; - The lessee is bankrupt or dissolved; - The guarantor is bankrupt or dissolved and the lessor does not accept the proposal of the lessee to terminate the guarantee clause or to change the guarantor; - The leased asset has been lost or is so damaged that it becomes unfixable. 8
  9. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE (b) with the permission of the lessor; (c) if both parties enter into a new lease for the same or an equivalent asset; or (d) upon payment the lessee of an additional payment at inception. The inception of the lease is the earlier of the date the right to use the asset is transferred or the date the lease begins to be charged in accordance with the lease agreement. Internally Distributed by VACO-Member of Deloitte touche Tohmatsu The lease term is the non-cancelable period plus (+) any further terms for which the lessee has the option to continue to lease the asset, as specified in the agreement, with or without further payment, if this option can be reasonably defined at the inception of the lease agreement. Minimum lease payments: a) In the case of the lessee, are the payments over the lease term that the lessee is required to make (excluding costs for services and taxes paid by, and reimbursed to, the lessor and any contingent rent) together with any amounts guaranteed by the lessee or a party related to the lessee. b) In the case of the lessor, are the payments over the lease term that the lessee is required to make (excluding costs for services and taxes paid by, and reimbursed to, the lessor and any contingent rent) plus (+) any residual value guaranteed to the lessor by either: - the lessee; - a party related to the lessee; or - an independent third party financially capable of meeting this guarantee. c) Where the lease agreement contains a provision which allows the lessee to purchase the asset at a price lower than the fair value at the exercise date, the minimum lease payments (for both the lessor and lessee) comprise the minimum payments specified in the lease agreement over the lease term and the necessary payment for the purchase of that asset. Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm's length transaction. Residual value is the value estimated at the inception of the lease term that the lessor expects collect from the leased asset at the end of the lease term. Guaranteed residual value is: (a) in the case of the lessee, that part of the residual value which is guaranteed by the lessee or by a party related to the lessee (the amount of the guarantee being the maximum amount that could, in any event, become payable); and (b) in the case of the lessor, that part of the residual value which is guaranteed by the lessee or by a third party unrelated to the lessor who is financially capable of discharging the obligations under the guarantee. 9
  10. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE Unguaranteed residual value is that portion of the residual value of the leased asset the realization of which by the lessor is not assured or is guaranteed by the lessee or a party related to the lessor. Economic life is either the period over which an asset is expected to be economically usable by one or more users, or the number of production or similar units expected to be obtained from the asset by one or more users. Useful life is the estimated remaining economic life, from the beginning of the lease Internally Distributed by VACO-Member of Deloitte touche Tohmatsu term, without limitation by the lease term. Gross investment in the lease is the aggregate of the minimum lease payments under a finance lease (from the standpoint of the lessor) plus (+) any unguaranteed residual value. Unearned finance income is the difference between the aggregate of the minimum lease payments under a finance lease plus (+) any unguaranteed residual value less (-) the present value of the above amounts, at the interest rate implicit in the lease. Net investment in the lease is the gross investment in the lease less unearned finance income. The interest rate implicit in the finance lease is the discount rate that, at the inception of the lease, causes the aggregate present value of the minimum lease payments and the unguaranteed residual value to be equal to the fair value of the leased asset. The incremental borrowing rate of interest is the rate of interest the lessee would have to pay on a similar finance lease or, the rate that, at the inception of the lease, the lessee would incur to borrow over a similar term, and with a similar security, the funds necessary to purchase the asset. Contingent rent is that portion of the lease payments that is not fixed in amount but is based on a factor other than just the passage of time (e.g., percentage of sales, amount of usage, price indices, market rates of interest). 05. A lease agreement that contains a provision giving the hirer an option to acquire title to the asset upon the fulfillment of agreed conditions is sometimes known as a hire purchase contract. CONTENT OF THE STANDARD Classification of Leases 06. The classification of leases adopted in this Standard is based on the extent to which risks and rewards incident to ownership of a leased asset lie with the lessor or the lessee. Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return due to unfavorable changing economic conditions. Rewards may be represented by the estimated earnings from the operation of the leased asset over the asset's economic life and of gain from appreciation in value or realization of a residual value. 10
  11. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE 07. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incident to ownership. 08. The lessor and the lessee should classify the lease as finance lease or operating lease at the inception of the lease term. 09. Whether a lease is classified as finance lease or operating lease depends on the substance of provisions of the lease agreement. Examples of situations which would Internally Distributed by VACO-Member of Deloitte touche Tohmatsu normally lead to a lease being classified as a finance lease are: (a) the lease transfers ownership of the asset to the lessee by the end of the lease term; (b) the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the end of the lease term; (c) the lease term is for the major part of the economic life of the asset even if title is not transferred; (d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and (e) the leased assets are of a specialised nature such that only the lessee can use them without major modifications being made. 10. A lease could be classified as a finance lease if the lease agrees with one of the following indicators of situation: (a) if the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee; (b) gains or losses from the fluctuation in the fair value of the residual fall to the lessee; and (c) the lessee has the ability to continue the lease for a secondary period at a rent which is substantially lower than market rent. 11. Lease classification is made at the inception of the lease. If at any time the lessee and the lessor agree to change the provisions of the lease, other than by renewing the lease, in a manner that would have resulted in a different classification of the lease under the criteria in paragraphs 06 to 10 at the inception of the lease, the revised agreement is considered as a new agreement over its term. Changes in estimates (for example, changes in estimates of the economic life or of the residual value of the leased property) or changes in the lessee’s ability to pay do not give rise to a new classification of a lease for accounting purposes. 12. Leases of land-use rights and buildings are classified as operating or finance leases. However, a characteristic of land is that it normally has an indefinite economic life and, if title is not expected to pass to the lessee by the end of the lease term, the lessee does not receive substantially all of the risks and rewards incident to ownership, and thus, lease of land-use rights is often classified as operating lease. The lease payment for such lease of land-use rights is amortised over the lease term. 11
  12. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE LEASES IN THE FINANCIAL STATEMENTS OF LESSEES Finance Leases 13. Lessees should recognize finance leases as assets and liabilities in their balance sheets at amounts equal at the inception of the lease to the fair value of the leased property. If the fair value of the leased property is higher than the present value of the minimum lease payments, the lessee should recognize finance lease at that present value. In calculating the present value of the minimum lease payments the Internally Distributed by VACO-Member of Deloitte touche Tohmatsu discount factor is the interest rate implicit in the lease, or the interest rate in the lease agreement, if this is practicable to determine. If it is not practicable to determine the interest rate implicit in the lease the lessee's incremental borrowing rate should be used to calculate the present value of the minimum lease payments. 14. For the presentation in the balance sheet of liabilities incurred for a finance lease, a distinction is made between current and non-current liabilities. 15. Initial costs directly attributable to a finance lease, such as costs incurred during the negotiation stage, are included as part of the cost of the lease asset. 16. Lease payments should be apportioned between the finance charge and the reduction of the outstanding liability. The finance charge should be allocated to periods during the lease term at a constant periodic rate of interest on the remaining balance of the liability for each period. 17. A finance lease gives rise to a depreciation expense for the asset as well as a finance expense for each accounting period. The depreciation policy for leased assets should be consistent with that for similar depreciable assets which are owned by the lessee. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset should be fully depreciated over the shorter of the lease term or its useful life. 18. In presenting the leased asset in the financial statements, compliance is required with VAS “Tangible Fixed Assets”. Operating Leases 19. Lease payments under an operating lease (excluding costs for services such as insurance and maintenance) are recognised as an expense in the income statement on a straight-line basis over the lease term, regardless of the mode of payment, unless another systematic basis is more relevant. LEASES IN THE FINANCIAL STATEMENTS OF LESSORS Finance Leases 20. Lessors should recognise assets held under a finance lease in their balance sheets and present them as a receivable at an amount equal to the net investment in the lease. 12
  13. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE 21. Under a finance lease substantially all the risks and rewards incident to legal ownership are transferred by the lessor, and thus the lease payment receivable is treated by the lessor as an account receivable of principal and finance income from its investment and services. 22. The recognition of finance income should be based on a pattern reflecting a constant periodic rate of return on the lessor's net investment outstanding in respect of the finance lease. Internally Distributed by VACO-Member of Deloitte touche Tohmatsu 23. A lessor aims to allocate finance income over the lease term based on a pattern reflecting a constant periodic return on the lessor's net investment outstanding in respect of the finance lease. Lease payments relating to the accounting period, excluding costs for services, are applied against the gross investment in the lease to reduce both the principal and the unearned finance income. 24. Initial direct costs, such as commissions and legal fees, are often incurred by lessors in negotiating and arranging a lease and are either recognised immediately or deferred over the lease term in matching with the associated income. Operating Leases 25. Lessors should present assets subject to operating leases in their balance sheets according to the nature of the asset. 26. Lease income from operating leases should be recognized on a straight-line basis over the lease term regardless the mode of payment, unless another systematic basis is more relevant. 27. Costs, including depreciation, incurred in earning the lease income are recognized as an expense in the period. 28. Initial direct costs incurred specifically to earn revenues from an operating lease are either immediately recognised or deferred over the lease term in matching with the associated operating lease income. 29. The depreciation of depreciable leased assets should be on a basis consistent with the lessor’s normal depreciation policy for similar assets, and the depreciation charge should be calculated on the basis set out in VAS “Tangible Fixed Assets” and VAS "Intangible Fixed Assets". 30. A manufacturer or dealer lessor recognizes revenue from operating lease activities upon the appropriate leasing period. Sale and Leaseback Transactions 31. A sale and leaseback transaction involves the sale of an asset by the vendor and the leasing of the same asset back to the vendor. The accounting treatment of a sale and leaseback transaction depends upon the type of lease involved. 32. If a sale and leaseback transaction results in a finance lease, any excess of sales proceeds over the carrying amount should be deferred and amortised over the lease term. 13
  14. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE 33. If the leaseback is a finance lease, the transaction is a means whereby the lessor provides finance to the lessee, with the asset as security. For this reason it is not appropriate to regard an excess of sales proceeds over the carrying amount as income. Such excess is deferred and amortised over the lease term. 34. A sale and leaseback transaction resulting in an operating lease is recognised as follows: - If the price is established at fair value, any profit or loss should be recognised Internally Distributed by VACO-Member of Deloitte touche Tohmatsu immediately; - If the sale price is below fair value, any profit or loss should be recognised immediately except that, if the loss is compensated by future lease payments at below market price, it should be deferred and amortised in proportion to the lease payments over the period for which the asset is expected to be used; or - If the sale price is above fair value, the excess over fair value should be deferred and amortised in proportion to the lease payments over the period for which the asset is expected to be used. 35. If the leaseback is an operating lease, and the lease payments and the sale price are established at fair value, there has in effect been a normal sale transaction and any profit or loss is recognised immediately. 36. For operating leases, if the fair value at the time of a sale and leaseback transaction is less than the carrying amount of the asset, a loss equal to the amount of the difference between the carrying amount and fair value should be recognized immediately. 37. Disclosure requirements for lessees and lessors apply equally to sale and leaseback transactions. Any special requirements established in the lease agreement should also be disclosed in the financial statements. DISCLOSURE Lessees 38. Lessees should make the following disclosures for finance leases: (a) the net carrying amount of each asset at the balance sheet date; (b) contingent rent recognised in expenses for the period; (c) the basis on which contingent rent payments are determined; (d) provisions on further leasing or right to purchase leased assets. 39. Lessees should make the following disclosures for operating leases: (a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods: (i) not later than one year; (ii) later than one year and not later than five years; or (iii) later than five years. (b) the basis on which contingent rent payments are determined. 14
  15. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE Lessors 40. Lessors should make the following disclosures for finance leases: (a) a reconciliation between the total gross investment and the present value of minimum lease payments receivable at the balance sheet date for each of the following periods: (i) not later than one year; Internally Distributed by VACO-Member of Deloitte touche Tohmatsu (ii) later than one year and not later than five years; or (iii) later than five years. (b) unearned finance income; (c) unguaranteed residual values accruing to the benefit of the lessor; (d) accumulated allowance for uncollectible minimum lease payments receivable; and (e) contingent rent recognised in income. 41. Lessors should make the following disclosures for operating leases: (a) The future minimum lease payments under non-cancellable operating leases in the aggregate for each of the following periods: (i) not later than one year; (ii) later than one year and not later than five years; or (iii) later than five years. (b) Total contingent rent recognised in income in the period. 15
  16. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE STANDARD 10 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES (Issued and promulgated in pursuance of Minister of Finance Decision No. 165 /2002/QD-BTC dated December 31, 2002) GENERAL Internally Distributed by VACO-Member of Deloitte touche Tohmatsu 01. The objective of this standard is to prescribe the accounting policies and procedures in relation to effects of changes in foreign exchange rates where an enterprise has transactions in foreign currencies or foreign operations. Such foreign currency transactions and financial statements of foreign operations must be expressed in, and translated into, the enterprise’s reporting currency. This would cover initial recognition and reporting at the balance sheet date, recognition of foreign exchange differences and translation of the financial statements of foreign operations for record keeping and financial reporting purposes. 02. This Standard should be applied: (a) in accounting for transactions in foreign currencies; and (b) in translating foreign operations’ financial statements that are included in the financial statements of the enterprise by consolidation or by the equity method. 03. Enterprises are required to use Vietnamese Dong (VND) as the reporting currency unless otherwise permitted to use another currency which is commonly used. 04. This Standard does not deal with the restatement of an enterprise's financial statements in a currency other than its reporting currency for use by those accustomed to that currency or for similar purposes. 05. This Standard does not deal with the presentation in a cash flow statement of cash flows arising from foreign currency transactions and from the translation of cash flows of a foreign operation (see VAS “Cash Flow Statement”). 06. The following terms are used in this Standard with the meanings specified: Foreign operation is a branch, subsidiary, associate, joint venture, business co- operation or joint operation of the reporting enterprise, the activities of which are based or conducted in a country other than Vietnam. Foreign entity is a foreign operation, the activities of which are not an integral part of those of the reporting enterprise. Accounting currency is the currency used in keeping records and in presenting the financial statements. Foreign currency is a currency other than the reporting currency of an enterprise. Exchange rate is the ratio for exchange of two currencies. Exchange difference is the difference resulting from translating the same number of units of a foreign currency into the reporting currency at different exchange rates. Closing rate is the exchange rate at the balance sheet date. 16
  17. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE Net investment in a foreign entity is the reporting enterprise's share in the net assets of that entity. Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money. Non-monetary items are those items other than monetary items. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. Internally Distributed by VACO-Member of Deloitte touche Tohmatsu CONTENT OF THE STANDARD FOREIGN CURRENCY TRANSACTIONS Initial Recognition 07. A foreign currency transaction is a transaction which is denominated in or requires settlement in a foreign currency, including transactions arising when an enterprise either: (a) buys or sells goods or services whose price is denominated in a foreign currency; (b) borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; (c) becomes a party to an unperformed foreign exchange contract; (d) acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency; or (e) otherwise uses one currency to buy or exchange for another currency. 08. A foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying the exchange rate between the reporting currency and the foreign currency at the date of the transaction. 09. The exchange rate at the date of the transaction is often referred to as the spot rate. An enterprise could use a rate that approximates the actual rate at the date of the transaction. For example, an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. However, if exchange rates fluctuate significantly, the enterprise does not use the average exchange rate for accounting purposes during that week or month. Reporting at Subsequent Balance Sheet Dates 10. At each balance sheet date: (a) foreign currency monetary items should be reported using the closing rate; (b) non-monetary items denominated in a foreign currency should be reported using the exchange rate at the date of the transaction; and (c) non-monetary items which are carried at fair value denominated in a foreign currency should be reported using the exchange rates that existed when the values were determined. 17
  18. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE 11. The carrying amount of an item is determined in accordance with the relevant accounting standards. For example, inventory is measured at cost and fixed assets at historical cost. Whether the carrying amount is determined based on historical cost or fair value, the amounts so determined for foreign currency items are then reported in the reporting currency in accordance with this Standard. Recognition of Exchange Differences 12. Exchange differences arising on the settlement of foreign currency monetary items Internally Distributed by VACO-Member of Deloitte touche Tohmatsu or on reporting an enterprise's foreign currency monetary items at rates different from those at which they were initially recorded or reported in previous financial statements, should be recognised as follows: a) During the construction stage to form fixed assets of a new enterprise, exchange differences arising from the settlement of foreign currency monetary items serving the construction purpose and from the translation of foreign currency monetary items at the balance sheet date are recorded cumulatively and presented as a separate component on the balance sheet. When the construction work is completed and the fixed assets are put into use, the exchange differences arising during the construction phase are deferred and amortised to production and operating costs over a maximum period of five years. b) During the course of the business, including the construction of fixed assets of an active enterprise, exchange differences arising from the settlement of foreign currency monetary items and from the translation of foreign currency monetary items at the balance sheet date are recognised as incomes or expenses of the period, except when dealt with in accordance with paragraphs 12c, 14 and 16. c) For enterprises that use financial instruments for hedging against foreign exchange risk, the foreign currency loans or liabilities will be recorded using the exchange rate ruling at the date of transaction. The enterprise is not allowed to re-translate the foreign currency loans or liabilities that have been hedged against foreign currency risk using financial instruments. 13. An exchange difference results when there is a change in the exchange rate between the transaction date and the date of settlement of any monetary items arising from a foreign currency transaction. When the transaction is settled within the same accounting period as that in which it occurs, all the exchange differences are recognised in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognised in each intervening period up to the period of settlement is determined by the change in exchange rates during that period. Net Investment in a Foreign Entity 14. Exchange differences arising on a monetary item that, in substance, forms part of an enterprise's net investment in a foreign entity should be classified as equity in the enterprise's financial statements until the disposal of the net investment, at which time they should be recognised as income or as expenses in accordance with paragraph 30. 15. An enterprise may have a monetary item that is receivable from, or payable to, a foreign entity. An item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, an extension to, or deduction from, the enterprise's 18
  19. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE net investment in that foreign entity. Such monetary items may include long-term receivables or loans but do not include trade receivables or trade payables. 16. Exchange differences arising on a foreign currency liability accounted for as a hedge of an enterprise's net investment in a foreign entity should be classified as equity in the enterprise's financial statements until the disposal of the net investment, at which time they should be recognized as income or as expenses in accordance with paragraph 30. FINANCIAL STATEMENTS OF FOREIGN OPERATIONS Internally Distributed by VACO-Member of Deloitte touche Tohmatsu Classification of Foreign Operations 17. The method used to translate the financial statements of a foreign operation depends on the way in which it is financed and operates in relation to the reporting enterprise. For this purpose, foreign operations are classified as either "foreign operations that are integral to the operations of the reporting enterprise" or "foreign entities". 18. A foreign operation that is integral to the operations of the reporting enterprise carries on its business as if it were an extension of the reporting enterprise's operations. For example, such a foreign operation might only sell goods imported from the reporting enterprise and remit the proceeds to the reporting enterprise. In such cases, a change in the exchange rate between the reporting currency and the currency in the country of foreign operation has an almost immediate effect on the reporting enterprise's cash flow from operations. Therefore, the change in the exchange rate affects the individual monetary items held by the foreign operation rather than the reporting enterprise's net investment in that operation. 19. A foreign entity is an independent business entity which has full legal status in the country in which it is based and adopts the currency of that country as its reporting currency. It may also enter into transactions in foreign currencies, including transactions in the reporting currency. When there is a change in the exchange rate between the reporting currency and the local currency, there is little or no direct effect on the present and future cash flows from operations of either the foreign entity or the reporting enterprise. The change in the exchange rate affects the reporting enterprise's net investment in the foreign entity rather than the individual monetary and non- monetary items held by the foreign entity. 20. The following are indications of a foreign entity: (a) the activities of the foreign operation are carried out with a significant degree of autonomy from those of the reporting enterprise; (b) transactions with the reporting enterprise are not a high proportion of the foreign operation's activities; (c) the activities of the foreign operation are financed mainly from its own operations or local borrowings rather than from the reporting enterprise; (d) costs of labour, material and other components of the foreign operation's products or services are primarily paid or settled in the local currency rather than in the reporting currency; (e) the foreign operation's sales are mainly in currencies other than the reporting currency; and (f) cash flows of the reporting enterprise are insulated from the day-to-day activities of the foreign operation rather than being directly affected by the activities of the foreign operation. 19
  20. SYSTEM OF VIETNAMESE ACCOUNTING STANDARDS SECOND ISSUANCE The appropriate classification for each operation can, in principle, be established from factual information related to the indicators listed above. In some cases, the classification of a foreign operation as either a foreign entity or an integral operation of the reporting enterprise may not be clear, and judgement is necessary to determine the appropriate classification. Foreign Operations that are Integral to the Operations of the Reporting Enterprise 21. The financial statements of a foreign operation that is integral to the operations of Internally Distributed by VACO-Member of Deloitte touche Tohmatsu the reporting enterprise should be translated using the standards and procedures in paragraphs 7 to 16 as if the transactions of the foreign operation had been those of the reporting enterprise itself. 22. The individual items in the financial statements of the foreign operation are translated as if all its transactions had been entered into by the reporting enterprise itself. The cost and depreciation of a fixed asset is translated using the exchange rate at the date of purchase of the asset or, if the asset is carried at fair value, using the rate that existed on the date of the valuation. The cost of inventories is translated at the exchange rates that existed when those costs were incurred. The recoverable amount or realisable value of an asset is translated using the exchange rate that existed when the recoverable amount or net realisable value was determined. 23. For practical reasons, a rate that approximates the actual rate at the date of the transaction is often used, for example, an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. However, if exchange rates fluctuate significantly, the use of the average rate for a period is unreliable. Foreign Entities 24. In translating the financial statements of a foreign entity for incorporation in its financial statements, the reporting enterprise should use the following procedures: (a) the assets and liabilities, both monetary and non-monetary, of the foreign entity should be translated at the closing rate; (b) revenue, income and expense items of the foreign entity should be translated at exchange rates at the dates of the transactions, except when the foreign entity reports in the currency of a hyperinflationary economy, in which case revenue, income and expense items should be translated at the closing rate; and (c) all resulting exchange differences should be classified as equity of the reporting entity until the disposal of the net investment. 25. In case the average exchange rate for a period approximates the actual exchange rate, it will be used to translate revenue, income and expense items of a foreign entity. 26. The translation of the financial statements of a foreign entity results in the recognition of exchange differences arising from: (a) translating revenue, income and expense items at the exchange rates at the dates of transactions and assets and liabilities at the closing rate; (b) translating the opening net investment in the foreign entity at an exchange rate different from that at which it was previously reported; and (c) other changes to equity in the foreign entity. 20
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