Tóm tắt Luận án Completing the Financial instruments accounting for non-Financial firms in Vietnam

CHAPTER 1 INTRODUCTION OF THE STUDY ON FINANCIAL INSTRUMENTS ACCOUNTING FOR NON-FINANCIAL FIRMS IN VIETNAM 1.1 Necessities Vietnam is integrating more intensively and extensively into the global economy, demonstrated by the vigorous flows of capital, technology and products in and out of the country. Numerous foreign companies are investing in Vietnamese market; they formulate financial reports in accordance to international standards. On the other hand, Vietnamese companies are promoting export and establishing their business overseas; thus, they are put under a tighter supervision and must comply with international standards in formulating financial reports. According to the international accounting standards, financial instruments accounting (FIA) must comply with requirements of IAS32 on the “presentation of financial instrument”; IAS39 on the “recognition and measurement of financial instruments” and IFRS7 on the “disclosure of financial instrument information”. Vietnam has not yet succeeded in formulating a systematic standard for FIA. Instead, the regulations on the practice of FIA are scattered in several set of standards such as VAS01, VAS10, VAS16, etc. This situation are causing several difficulties in managing and standardizing the information, as well as in implementing accounting practices in a financial market with the operation of derivatives such as forwards, futures, swaps, options. Meanwhile, the corporate accounting for non-financial firms does not address FIA, resulting in the confusion and inconsistence in the reporting of firms’ financial situation, affecting the trustworthiness and comparativeness of the indexes in the financial reports. Based on the actual demand of businesses, investors’ requirement for information disclosure and the needs of the accounting profession in the context of integration, the author choose to work on the topic “Completing the Financial instruments accounting for non-financial firms in Vietnam” for the PhD. thesis. 1.2 Overview of research context 1.2.1 International research on FIA 1.2.1.1 Identification of financial instruments Most of the studies agree on the main features of a financial instrument, which 1 is a contract binding parties; the instrument implies both right (assets) and obligation (liabilities) in accordance with the contract; depending on the contract, the payment instrument can be exchanged directly or indirectly. 1.2.1.2 Measurement of financial instruments The scientific circle highlights the advantage of the fair value accounting, which still remains a new concept to Vietnamese accounting, particularly FIA. This motivates the author to study the fair value accounting to find a solution in order to complete the FIA for non-financial firms in Vietnam. 1.2.1.3 Recognition of financial instruments The recognition of financial instruments depends on the classification of the instruments. L.EC.Wilson & Bryan (1997) asserts that it is necessary to formulate accounting principles on financial instruments based on their purposes rather than imposing each instrument with specific principles, so that new instruments can be employed to ensure the usefulness of information and, at the same time, minimize the cost of establishing new principles. 1.2.1.3 Presentation of financial instrument Financial instruments are becoming more and more complicated since instruments are hybridized, for example: convertible bond, preferred dividend (possessing the characteristics of both liabilities and equity); new types of derivatives (hybridizing the derivatives), hybrid instrument with embedded derivatives, etc. Hence, the recognition of financial instruments becomes more difficult accordingly. 1.2.1.4 Information disclosure of financial instruments Financial instruments are becoming more and more diversifying and complicated; thus, the requirement for disclosure of information is also getting harsh. Caedo and Tirado (2004) stated that the information on the risks that the firm confronts may affect business’ future profit, and thus, it is necessary to disclose this information to users of the financial reports. 1.2.2 Status-quo of research on accounting financial instruments in non- financial firms in Vietnam There are quite a few scientific researches in Viet Nam focusing on the application of international accounting standards on FIA for Vietnamese firms, especially banks. Nevertheless, none of them comprehensively address the general principles of FIA from identification, measurement, recognition, presentation to disclosure of information of financial instruments. Particularly, none of these research evaluate the degree to which financial instruments are presented and disclosed on 2 firm’s financial reports, and figure out the link between this degree and specific characteristics of the firm. 1.3 Research objectives The overall objective of this thesis is to complete the practice of FIA for non- financial firms in Vietnam. In order to attain that objective, this thesis outlines the specific objectives as follows: Complete the identification, classification of basic financial instruments and derivatives; Complete the practice of recognizing basic financial instruments and derivatives; Complete the presentation and disclosure of information on basic financial instruments and derivatives; Identify the degree of presentation and disclosure of information of financial instruments of non-financial firms in Vietnam (based on the survey data from companies listed on Ho Chi Minh City Stock Exchange in 2010 -2012) Testify the link between the degree of presentation and disclosing information of financial instruments and the characteristics of the firms by formulating a model using data in 2010, 2011, and 2012. 1.4 Research subject and scope The subject of this research is FIA, including basic financial instruments and derivatives. Studying basic financial instruments and derivatives, the focuses of the research is the identification, measurement, recognition, presentation and disclosure of information of financial instruments. The research scope covers non-financial firms. From the perspective of supply and demand in the economy, businesses are categorized into two main types: financial institutions trading capital, such as commercial banks, finance companies, insurance companies, etc., which are not the target of this research; and non-financial firms manufacturing commodities and providing service. The latter is the focused target of this paper. The time frame of this research is from 2010 o 2012. The survey is on 82 non-financial firms listed on Ho Chi Minh City Stock Exchange. 1.5 Research questions On the foundation of the research objectives, the thesis aims to answer the following questions: 3 Question 1: What are the solutions for the completion of identification and classification of basic financial instruments and derivatives used in non-financial firms? Question 2: How to complete the measurement of basic financial instruments and derivatives used in non-financial firms in Vietnam? Question 3: What are the solution to complete the recognition of basic financial instruments and derivatives used in non-financial firms in Vietnam? Question 4: How to complete the presentation and disclosure of information on basic financial instruments and derivatives used in non-financial firms in Vietnam? Question 5: How to identify the degree to which financial instruments in non- financial firms in Vietnam are presented and disclosed on financial reports in 2010 -2012 period? Which factors affect the degree of presentation and information disclosure of financial instruments on the financial reports of non-financial firms in Vietnam? 1.6 Research methods In order to attain objectives mentioned above, based on the methodologies of dialectical materialism and historical materialism, this thesis employs several research approaches including investigation, survey, grouping, expert consultation, etc. The thesis synthesizes, analyzes and evaluates the achievements as well as limitations of the current practice of FIA for non-financial firms in Vietnam and recommends the solutions, accompanied by conditions, to complete the FIA for non-financial firms in Vietnam. The research methods are specified into research steps as follows: Step 1: Disseminate questionnaires to firms; Step 2: Disseminate questionnaire and conduct in-depth interview with individuals; Step 3: Collect financial reports; Step 4: Process survey data; Step 5: Recommend the solutions to complete FIA for non-financial firms in Vietnam. 1.7 Significances of the thesis Academic and theoretical significances Complete the theory framework on FIA for non-financial firms in Vietnam, including: Completing the recognition and measurement of basic financial instruments and derivatives; Completing the measurement of basic financial instruments and derivatives; Completing the presentation and information disclosure on basic financial 4 instruments and derivatives. Practical significance: Applying the theory framework on FIA for non-financial firms in Vietnam to complete the practice of FIA in surveyed firms; Identifying the degree of presentation and information disclosure of non- financial firms in Vietnam in 2010 - 2012 (DQ index). The DDQ index helps policy makers evaluate the impact of Circular 210/2009/TT-BTC (guiding the application of international accounting standards on the presentation and information disclosure of financial instruments) on the quality of financial reports. Figuring out the link among the degree of presentation and information disclosure of financial instruments to firm’s scale, business result and scale of the auditing firm so that the users of accounting information are more active in using the financial reports and making investment decision. 1.8 Structure of the thesis The thesis comprises of four Chapters: Chapter 1: Introduction of FIA for non-financial firms in Vietnam Chapter 2: Theoretical basis of FIA in non-financial firms Chapter 3: Analysis on the status – quo of FIA in non-financial firms in Vietnam Chapter 4: Solutions to complete FIA for non-financial firms in Vietnam. 5 CHAPTER 2 THEORETICAL BASIS OF FINANCIAL INSTRUMENTS ACCOUNTING IN NON-FINANCIAL FIRMS 2.1 Identification and classification of financial instruments 2.1.1 Identification of financial instruments 2.1.1.1 Basic financial instrument identification In financial terms, financial instruments refer to a specific financial category employed in order to achieve certain purposes. Hence, financial instruments those applied to explore mobilize and allocate financial sources. This, in fact, is a broad concept related to financial instruments, which is closely attached with the State’s utilization of financial instrument system to explore, motivate as well as apply financial resources in the most effective basis. Following is the definition of financial instruments from the micro-economics perspective: It is stated in the Business dictionary that financial instrument is a document (such as a check, draft, bond, share, bill of exchange, futures or options contract) that has a monetary value or represents a legally enforceable (binding) agreement between two or more parties regarding a right to payment of money. Characteristics to identify financial instruments is that it is an agreement binding two parties, which brings about asset to one party, but a financial liability or equity capital instrument to the other at the same time. Therefore, financial instruments are comprised of asset, financial liability and equity capital instrument. Derivatives are a special category of financial instruments which might be receivables (asset) or payables (financial liability). 2.1.1.2 Identification of derivatives According to IAS 39, derivatives are those: - of which, the prices change in accordance with price changes of another basic asset (securities, foreign exchange rate, commodities, limit or credit rate, etc) - of which, there is no or low initial investment costs - which are paid at a designated date in the future 6 Then, derivatives are closely linked with future receivables (assets) or liabilities. Therefore, it is essential to record them in the balance sheet. 2.1.2 Financial instrument classification The thesis presents financial instrument classification by different criteria, including by types of items in the balance sheet; by requirement on measurement and disclosure; by the origin of the basic financial instruments and derivatives. Basic financial instrument classification: Basic financial instruments are divided into asset, liability and equity capital instruments. Derivatives classification: Derivatives are divided into 4 basic types: forwards, futures, options and swaps contract. 2.2 Measurement of financial instrument 2.2.1 Measurement of basic financial instrument This thesis presents how to measure basic financial instruments including asset, liability, equity capital instruments; Measurement of assets; Measurement of liabilities; Measurement of equity capital instruments. 2.2.2 Derivatives measurement The basis for measurement of derivatives is fair value. In case that derivatives are regarded as assets: Fair value of the derivative is identified as the quoted market price. If quoted market price is not available, the enterprise itself has to identify the fair value through valuation techniques in order to specify the value of underlying assets on the valuing date of exchange of equal values. In the case that derivatives are regarded as liabilities: Fair value the derivatives regarded as a liability is no less than the value stated in the contract, calculated from the first day of payment. 2.3. Recognition of financial instruments 2.3.1. Recognition of basic financial instruments 2.3.1.1. Initial recognition of basic financial instruments 7 Assets and liabilities are recognized at the time the enterprise becomes a party of the contract. Hague (2004) explained this as the moment financial instruments bring about rights as well as obligations which are compatible with the definition of assets and liabilities [42]. 2.3.1.2. Subsequent recognition of basic financial instruments During the holding period, the value of basic financial instruments would be recognized in the balance sheet, either at fair value or amortized cost, and the recognition of the instrument shall be made accordingly. 2.3.1.3. Derecognition of basic financial instruments This means that the recognized assets and liabilities are derecognized in the balance sheet. The derecognition happens when: the right to collect money or assets as in the contract expires; or the asset has already been transferred under appropriate terms and conditions. An enterprise ceases the recognition of a liability in the balance sheet partially or completely when it not longer has the obligation to pay. In other words, the recognition ceases when all duties in the contract have been carried out, exempted, cancelled or expired. 2.3.2 The recognition of derivatives 2.3.2.1. Initial recognition of derivatives Recognition of derivatives requires specific categories of business instruments or risk hedging ones. The classification of these instruments used for business purpose or risk hedging purpose should be clarified when the contract takes effect. The enterprise should perform accounting practices for derivative consistently and must not reclassify these derivatives during their validity period, except when the derivative for the purpose of risk hedging no longer meet the requirements of risk hedging accounting. 2.3.2.2. Subsequent record of derivatives Derivatives are subsequently recognized according to fair value. Concerning those for business purpose, the value change is recognized in financial collection. Concerning those for risk hedging purpose, the value change is recognized in equity capital in the balance sheet. 2.3.2.3. Derecognition of derivatives. 8 Derivatives are derecognized when the contract expires or it is transferred to another party under the following conditions: - Most risks and benefits attached with ownership have been transferred - The right to control derivatives expires The difference in fair value of derivative already recognized into equity capital would be transferred into income/expense in income statement if there is a derecognition of derivatives for risk hedging purpose. 2.4 Financial instrument presentation and disclosure 2.4.1 Financial instrument presentation Following are rules to present financial instruments in the balance sheet: - General rule: A financial instruments issued or invested by an enterprise as a liability, asset or equity capital instrument has to respect the financial nature of the transaction rather than the formality. - Derivatives with underlying assets are treated as assets. The embedded derivatives are not separated from this contract. - Although most assets and liabilities are only deducted under certain circumstances, they are normally not deducted in the balance sheet presentation. 2.4.2 Financial instrument information disclosure 2.4.2.1 Main issues of information disclosure of financial instruments Financial instruments are more and more diversifying and complicated. This results in strict requirement for information disclosure, which should include the followings: - Disclosing additional information to clarify items of financial instruments presented on the balance sheet - Disclosing information on income, interest/interest income of current financial instrument; gain/loss of disposal financial instrument - Disclosing information (qualitative and quantitative) in terms of potential risks of financial instruments including credit risk, pay risk and market risk - For each individual risk hedging instrument, it is necessary to disclosure information describing the hedging measure, financial instrument employed to hedge risk and the nature of risk to be hedge. 9 2.4.2.2. Degree of presentation and information disclosure of financial instruments Financial reports are a channel for enterprises to announce their business results as well as financial status. The regulatory bodies, accounting associations always make best efforts to issue the most qualified accounting standards as well as more specific and widespread regulations on the practice of information disclosure related to financial instruments. HYPOTHESIS DEVELOPMENT Hypothesis 1: Degree of presentation and information disclosure of financial instruments in the financial statement closely connects to and parallels with the enterprise’s scale. Hypothesis 2: Degree of presentation and information disclosure of financial instruments in the financial statement is closely linked with the enterprise business results. Hypothesis 3: Degree of presentation and information disclosure of financial instruments in the financial statement has a close connection with the enterprise’s auditing firms. Figure 2.5 Elements of presentation and information disclosure degree of financial in- struments Those three hypotheses are testified by using the following function (1): DQ= α0 + α1 Size + α2 PTA + α3 PE + α4 DTA + α5 Audit + α6 Yafter + ε (1) Denote: 10 Degree of presentation and information disclosure (DQ) Enterprise scale (Size, DTA) Auditing firm (Audit) Enterprise business results (PTA, PE) DQ: Degree of presentation and information disclosure Size: logarithm value of total assets in 2010, 2011, 2012 PTA: price-to-assets ratio PE: price-earnings ratio DTA: debt-to-total assets ratio Audit: given value of 1 if the enterprise is audited by Big 4 (Deloitte; Ernst and Young; KPMG; PWH); given value of 0 if it is audited by others. Yafter: given value of 1 if occurred in 2011, 2012 (when Circular 210/2009/TT-BTC became effective), given value of 0 if occurred in 2010 ε : error term 2.5. Lessons learnt from international practice of FIA in nonfinancial firms. 2.5.1 FIA in some countries 2.5.1.1. FIA in USA 2.5.1.2. FIA in China 2.5.1.3. FIA in Malaysia 2.5.2 Lessons learnt for FIA in nonfinancial firms in Vietnam The advancement of FIA is considered as a significant milestone in economic reform as well as market development in Vietnam. Therefore, it is advisable to notify following issues when establishing and issuing standards for financial instrument accounting in nonfinancial firms: - Regulations on classification, initial recognition of basic financial instruments as well as derivatives need to be specified so that appropriate accounting processes could be built up. - Basic financial instruments are measured at fair value or amortized cost; derivatives must be measured at fair value. - In the process of formulating accounting standards for financial instruments, it is essential to focus on the requirements of recognition and presentation of financial instruments, rather than go into details of accounting methods for each financial instrument. 11 - The issuance of regulations related to presentation and information disclosure should address different needs of different users including enterprise managers, investors, partners, etc. The requirements on information should ensure: abstract (financial instruments need to be presented in groups having the same economic nature or purposes); usefulness, so that readers could evaluate the firm’s financial liquidity and flexibility. 12 CHAPTER 3: AN ANALYSIS ON THE STATUS-QUO OF FINANCIAL INSTRUMENTS ACCOUNTING IN NONFINANCIAL FRIMS IN VIETNAM 3.1 Overview of nonfinancial firms and financial instruments in nonfinancial firms in Vietnam 3.1.1 Overview of nonfinancial firms Along with the improvement of the economy and stock market, nonfinancial firms in Vietnam have developed dramatically through the process of state-owned firm equitization, creating favorable conditions for enterprise to take part in the stock market. Figure 3.2 Number of listed enterprises in HOSE and HNX (Source: State securities commission of Vietnam) 3.1.2 Financial instruments in nonfinancial firms in Vietnam 3.1.2.1 Basic financial instruments in nonfinancial firms in Vietnam Along with the state-owned enterprise equitization in 1990s, shares were introduced and started to develop. The launching of Ho Chi Minh City Stock Exchange on 20/7/2000 officially marked the start of stock market in Vietnam. At that time, there were only 2 listed enterprises with trading codes of REE and SAM with total capital of 13 270 billion VND and a small amount of government bonds for trading. In 2005, the number of listed firms increased to 41, at the end of 6/2013, this number was 737, not mention 135 ones in the UPCOM. However, the scale of stock market in Vietnam remains modest in comparison with the size of the stock market in ASEAN. 3.1.2.1 Derivatives in nonfinancial firms in Vietnam It has been 10 years since the stock market was launched and developed in Vietnam. However, due to the insufficiency in legal basis, technological infrastructure, traded commodities and stakeholders’ knowledge, the derivative stock market has not yet been established. Although the legal documents instructing the practice of derivative transactions are not yet available, the term contract, forwards, futures, options have been introduced and operated in Vietnam. 3.1.3 Overview of legislative framework for financial instrument accounting in nonfinancial firms in Vietnam 3.1.3.1 Prior to the issuance of Circular 210/2009/TT/BTC Prior to the issuance of circular 210/2009/TT-BTC on November 6, 2009; FIA was presented inconsistently, lack of focus on accounting standards in Vietnam. Some of these documents are: Accounting Law 2004; VAS 01 “General standards”; VAS 10 “The influence of change in foreign exchange rate” ; VAS 16 “Borrowing costs”; VAS 18 “Allowances, assets and potential liabilities”; VAS 21 “Financial statement presentation” and VAS 27 “Midyear financial statement” ; VAS 30 “Earning per share” 3.1.3.1 After the issuance of Circular 210/2009/TT/BTC The Circular No. 210/2009/TT-BTC guiding the application of international accounting standard to present financial statement and interpret financial instrument information is applicable to all entities of all fields and economic sectors in Vietnam which have transactions related to financial instruments; Circular No. 201/2009/TT- BTC dated on October, 15, 2009 guiding the recognition, evaluation and handle with changes in foreign exchange rate has taken effect since fiscal year 2010; Circular No. 179/2012/ TT- BTC dated on October 24, 2012 regulating the recognition, evaluation and dealing with foreign exchange rate replaced the circular number 210/2009/TT- BTC; Circular No. 228/2009/TT-BTC guiding the establishment and use of allowances for financial investment loss. 14 3.1.4 The relationship between FIA and financial risk management in nonfinancial firms in Vietnam Corporate finance management refers to the process of selecting and making financial decisions; implementing these decisions in order to maximize the profits and promote firm’s value as well as its competitiveness in the market. In business, there is always potential of risks, then, it is essential to manage them . Business risks involve the intrinsic volatility of business itself, financial risks are those involve the fluctuation in interest, share price, product price and exchange rate. Therefore, FIA should pay attention to provide information on different risks attached with financial instruments, which would provide useful information for leaders in their management of financial risks. 3.2 Status-quo of FIA in nonfinancial firms in Vietnam 3.2.1 The status-quo of identification and classification of financial instruments 3.2.1.1 The status of identification and classification of basic financial instruments The identification of financial instruments is the first and foremost step in accounting process, which decides how to measure, recognize and report. Assets cover only financial investments, foreign currencies; others have not been identified yet. Assets are divided into long-term and short-term ones. Most enterprises consider loans as liabilities but they have not mentioned other types of liabilities. At the same time, they categorize liabilities as long-term and short-term ones. Surveys reveal that most firms have clearly identified common stock as equity capital instruments. But they have not grouped preferred stock and treasury stock as financial instruments. 3.2.1.2 Status-quo of identification and classification of derivatives Some enterprises have been aware of derivatives as risk hedging tools for business. It is essential to raise awareness of derivatives. 3.2.2 Status-quo of financial instrument measurement 3.2.2.1 Status-quo of basic financial instrument measurement According to investigation, assets are initially and subsequently measured based on the basic price. Some enterprises use fair value method by subtracting the allowances from initial cost. In nonfinancial firms, liabilities are initially and subsequently measured at 15 initial cost. The initial cost is the basis for initial measurement and subsequent measurement of equity capital instrument. 3.2.2.2 Status-quo of derivatives measurement Currently, nonfinancial firms do not record derivatives in accounting books, so it is impossible to conduct initial and subsequent measure for the derivatives. 3.3.3 Recognition financial instruments 3.3.3.1 Recognition of basic financial instruments 100% of the firms in the survey did not recognize their financial assets in four groups with different functions and methods of measurement as above mentioned. Financial liabilities are not recognized in separated groups; they are measured at fair value and recognized at amortized value. Result of the survey on enterprises reveals an inconsistency in the recognition of convertible bond. 43% of the firms recognized it as both liability and equity capital; whereas 27% recognized it as liability only. These figures show a confusion of enterprises due to the lack of guiding documents on recognition of convertible bond. The same situation happened to the recognition of preferred stock, where 59% of the firms recognized it as equity capital while 29% did not give response. Based on the characteristic of this instrument it is valid to recognize preferred stock as either equity capital or liability. 3.3.3.2 Recognition of derivatives The survey on enterprises reveals a lack of guiding documents on FIA for derivatives, which causes difficulties and leads to the inconsistency when non- financial firms employ derivatives as hedging tools or as business activities. 3.3.4 Presentation and disclosure of financial instruments 3.3.4.1 Presentation and disclosure of basic financial instruments The research on financial reports of the surveyed firms reveals that 100% of these firms do not present basic financial instruments separately on the financial reports. 3.3.4.2 Presentation and disclosure of derivatives The firms did not recognize the derivatives at the effective date of the contracts. Instead, they recognize the derivatives when the value of the contracts was actually settled (i.e. received or paid). Therefore, there were just a few firms presenting and disclosing derivatives in their financial reports. Specifically, merely two out of 82 surveyed firms (code BMC and VNM) mentioned the derivatives in the Interpretation 16 of Financial Reports. 3.4 Limitation in the practice of FIA for non-financial firms in Vietnam 3.4.1 The insufficiency in legal framework of FIA for non-financial firms in Vietnam The principles on recognition, measuring, presenting and disclosing of financial instruments for non-financial firms in Vietnam is specified in Accounting Law of Vietnam, Vietnamese Accounting Standards, accounting management policy, general accounting policy and accounting policies for particular sectors. FIA is also regulated in several other standards, and these regulations do not follow international standards. FIA for derivatives remains a blank area that has not been addressed by policy making bodies. 3.4.2 Shortcomings of the firms One of the reasons for the limitations in the practice of FIA is that its complexity confuses the accounting practitioners. Though the practice of FIA in surveyed enterprises is complicated, introduces new terminologies, new methods, causing entanglements, etc., up to 61% of these firms did not assigned accountant staff to specialize in FIA; meanwhile, 39% did. The survey results on the enterprises’ satisfaction towards FIA show that 50 out of 82 enterprises, accounting for 61%, replied that they were not satisfied. 17 CHAPTER 4: SOLUTIONS TO COMPLETE THE FINANCIAL INSTRUMENTS ACCOUNTING FOR NON-FINANCIAL FIRMS IN VIETNAM 4.1 The necessity for completion of FIA for non-financial firms in Vietnam 4.1.1 The necessity for completion of FIA for non-financial firms in Vietnam Financial instruments appear in almost all sections of the financial reports of any firm because they are largely employed in capital mobilizing or risk hedging. Therefore, FIA plays an important role, affecting the quality of accounting information provided by the firm. The process to complete FIA for non-financial firms is illustrated in the following figure: Users of FIA information Practices of FIA FIA procedure Identification Classification Measurement Recognition Presentation and Disclosure External factors of FIA procedure Firm’s scale Business result Auditing firm Figure 4.1: The relationship between accounting information and the business decision making In order to provide adequate and useful information to users to make decision relating to financial instruments, it requires the accountants to have a high competency in presenting and disclosing the information on financial instruments. The quality of presentation and disclosure of financial instruments in a financial report depends on two main groups of factors: − The internal factors of FIA procedure, including particular technical practices of accounting such as the identification and classification of financial instruments; recognition of financial instruments; principles on presentation and 18 Degree of presentation and disclosure of financial instruments in financial reports disclosure of financial instruments. − The external factors of FIA procedure, including: business’ scale, demonstrate by the indicators such as total assets, total liabilities to total assets ratio, etc.); business result of the firm, demonstrated by the asset turnover ratio, price-earnings ratio, etc; and reputation of the auditing firm. 4.1.2 Requirement in the completion of FIA in non-financial firms in Vietnam FIA in non-financial firms in Vietnam does not only need to meet the users’ demand for information, but also has to be suitable with the management requirement in Vietnam and the development of the economy. The completion of FIA in non-financial firms should also be in harmonization with the international standards, such as IAS, IFRS. 4.2 Solutions to complete the FIA in non-financial firms in Vietnam 4.2.1 Identification and classification of financial instruments Based on the purpose and function of accounting practitioners, basic financial instruments can be classified into three groups as follows (see Annex 4.1: Classification of basic financial instruments). 4.2.2 Measurement of financial instruments 4.2.2.1 Measurement of basic financial instruments In order to identify the proper value of the financial instruments to present on the Balance sheet, the author recommends accountants to apply the steps in the following procedure: − Use the quoted market price − Use the equivalent price − Use the discounted cash flow method to discount future assets/liabilities to the present values. The procedure to measure financial assets is illustrated in Table 4.1 below: Table 4.1: Measure the financial instruments Asset group Main assets Initial measurement Subsequent measurement Calculation method I. Financial assets recognized at fair value 1. Security (shares, bonds) Fair value Fair value Quoted price 2. Derivatives for trading purpose Fair value Fair value Section 4.2.2.2 II. Hold to maturity 1. Bonds Fair value + transaction cost Amortized cost Annex 4.6 2. Financial investment Fair value + Amortized Annex 4.6 19 (deposits, loans) transaction cost cost III. Loans and receivables 1. Loans Fair value + transaction cost Amortized cost Annex 4.6 2. Receivables with clients, internal advancements, internal receivables, collaterals, deposits Fair value + transaction cost Amortized cost Annex 4.6 IV. Other assets 1. Foreign currencies, precious metal and gemstone Fair value Fair value Commercial bank’s exchange rate 2. Derivatives for hedging purpose Fair value Fair value Section 4.2.2.2 3. Other long-term investment (with voting rate <20%) Fair value + transaction cost Fair value or initial cost Quoted price Quoted price of similar financial instruments Initial cost if the value is unreliable Given the context of Vietnam, the author recommends the firms to understand the definition of quoted market price used in each circumstance as follows: Quoted market price on Hanoi Stock Exchange (HNX) is the average trading price at the day the fair value is measured; Quoted market price on Ho Chi Minh City Stock Exchange (HOSE) is the closing price at the day the fair value is measured; Quoted market price of the stock on the Unlisted Public Company Market (UPCom) is its average trading price at the day the fair value is measured; Quoted market price of the stock that has been cancelled or ceased trading from the sixth day on is the book value in the latest Balance sheet. Convertible bond is a hybrid financial instrument, which has the characteristics of both liability and equity capital. Firms must recognize it clearly. Equity capital is the left over of fair value of the bond after the deducting its fair value as a liability. 4.2.2.2 Measurement of derivatives This thesis introduces the measurement at fair value for each type of derivatives. 4.2.3 Recognition of financial instruments 4.2.3.1 Recognition of basic financial instruments and derivatives Recognition of the main assets The author recommends classifying the accounting for financial assets into 4 20 main groups, together with the recognition for each group as follows: Annex 4.7 Fair value accounting for stocks Annex 4.7: Accounting procedure for the stock held to maturity Annex 4.8: Accounting procedure for loans and receivables Annex 4.9: Accounting procedure for forex, gold and silver; Annex 10: Accounting procedure for forex receivables; 4.11 Accounting procedures for investment in joint venture. Recognition of financial liabilities Based on the accounting theory and practice in non-financial firms, the author recommends that financial liabilities should be classified into two main groups and the recognition of each group is illustrated as follows: Annex 4.13 Accounting procedure of forex liabilities; Annex 4.14 Accounting procedure of other liabilities; Annex 4.15 Accounting procedure for convertible bond Recognition of equity capital The procedures to recognize the transactions of preferred dividend and refundable preferred stock are described in Annex 4.16 Accounting procedure for preferred stock. 4.2.3.3 Recognition of derivatives The author recommends the accounting procedure for Term contract in Annex 4.17 and Annex 4.18; Accounting procedure for Futures contract is detailed in Annex 4.19 and Annex 4.20; Accounting procedure for Options contract is detailed in Annex 4.21, Annex 4.22, Annex 4.23 and Annex 4.24; Accounting procedure for Swaps contract in Annex 4.25 to Annex 4.28. 4.2.4 Presentation and disclosure of financial instruments In order to provide adequate information to managers, investors and other stakeholders, the regulations on presentation and disclosure of financial instruments must be issued as soon as possible. There is a strong relationship among financial instruments, financial reports and financial health. If provided with adequate information, users of the reports shall have a more comprehensive understanding about the financial health and business result of the firm. The quantitative results show that the degree of presentation and disclosure of financial instruments remains low. Thus, enterprises should improve their understanding about financial instruments so that they are able to provide useful information to financial managers. The author suggests that the indexes on financial instruments should be added into the Balance sheet (see more detail in Annex 4.29). At the same time, more 21 information on financial instruments should also be included in the Interpretation of Financial Reports (Annex 4.30, 4.31, 4.32 and 4.33). 4.3 Conditions to implement the solutions to complete FIA for non-financial firms in Vietnam In order to implement the solutions to complete FIA for non-financial firms in Vietnam, the collaboration among the Government, enterprises and training institutions is essential. The Government plays an important role in formulating a legal framework and providing guidance on the accounting policies. Enterprises are the implementers of these solutions, thus, this process does not only require the update of new practices by the firms’ accountants, but also the support from firms’ managers. The training institutions maintain their leading role in disseminating knowledge, updating FIA for accounting practitioners and the society in general. 22