To:

- Deloitte Vietnam Co., Ltd
\r\n - Ernst & Young Vietnam Co., Ltd
\r\n - KPMG Vietnam Co., Ltd
\r\n - PwC Vietnam Co., Ltd

The Ministry of Finance hereby responds\r\nto the official dispatch from Deloitte, E&Y, KPMG, and PwC dated June 26,\r\n2015. The dispatch requested clarification regarding certain contents specified\r\nin Circular No. 200/2014/TT-BTC dated December 22, 2014, which provides\r\nguidelines for accounting policies for enterprises. In light of this, the\r\nMinistry of Finance provides the following comments:

1. Enterprises that mainly conduct\r\nsales and purchases in foreign currencies, and meet the requirements for using\r\nforeign currency as the accounting currency, still have the option to choose\r\nVND as the accounting currency, without the obligation of selecting a foreign\r\ncurrency.

2. Enterprises are allowed to apply\r\nthe actual exchange rate on January 1, 2015 to convert undistributed after-tax\r\nprofits on January 1, 2015 in the notes to the financial statement because 2015\r\nis the first year of implementation of Circular No. 200 and there is no\r\nretroactive request on this matter.

The conversion of financial\r\nstatements prepared in foreign currencies into VND is done in the same method\r\nas VAS 10 and Circular 161/2007/TT-BTC when converting financial statements of\r\noverseas subsidiaries. Attributing conversion difficulties to the accounting\r\nsoftware's inability to meet requirements is not valid, as software is merely a\r\nsupporting tool. When accounting policies change, supporting tools must change\r\nwith them to ensure proper adherence to the updated policies. It is noted that\r\nthe above provisions of Circular No. 200 are completely consistent with IAS 21,\r\nso enterprises need to convert financial statements according to international\r\npractices.

3. Recognition of revenue and cost\r\nof intra-company transactions in purchase, sale and transfer of goods and\r\nservices

In addition to Clause 2, Article 8\r\nof Circular No. 200, this matter is also specified at Point e, Clause 3.2,\r\nArticle 20 as follows:  “e) When selling goods or providing services for\r\naffiliated units in the enterprise, according to operation and level in every\r\nunit, the revenue may be recognized either at the time in which the goods or\r\nservices are transferred to dependent accounting units or at the time in which\r\nthe dependent accounting units sell goods or services.”

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4. Notes regarding fair value and\r\nvalue decline

- Fair value of financial\r\ninvestments

When determining the fair value of\r\ntrading securities for presentation in the notes to the financial statement, the\r\nenterprise may use the market value of securities it holds, as outlined in\r\nPoint c, Clause 1, Article 15 and Point a, Clause 1.2, Article 45 of Circular\r\nNo. 200.

As for equity investments in\r\nunlisted entities, their fair values are determined based on valuation\r\ntechniques. If the fair value of the investments contributed as capital to\r\nanother entity cannot be reliably determined, the enterprise shall provide an\r\nexplanation in Section 2c, Part VI, pertaining to additional information to the\r\nfinancial investment item on the notes to the financial statement.

- Decline in the value of\r\ninvestment real estate

Clause 1.6, Article 39 of Circular\r\nNo. 200 on investment property stipulates “1.6. Enterprises do not depreciate\r\ninvestment property held for capital appreciation. In case it is evident that\r\nthe investment property falls against market fair value and the decrease is\r\ndetermined reliably, the decline in cost of the investment property and the\r\nloss shall be recorded to costs of goods sold (similarly to provision for\r\nproperties held for sale)”.

Thus, the assessment of value\r\ndecline must only be made when there are solid signs and evidence. If the\r\ndecline in value of the investment property cannot be reliably determined, the\r\nenterprise will not record the loss due to such reason, but provide an\r\nexplanation in Section 2c, Part VI, pertaining to additional information to the\r\nfinancial investment item on the notes to the financial statement.

5. Recording the environmental\r\nrestoration cost

Circular No. 200 only stipulates\r\nthe advance deduction of the environmental restoration cost and the use of\r\naccount 3524 for accounting. The amount of deduction, the time of starting and\r\nending the deduction... must comply with the mechanism and policy applicable to\r\neach industry and each unit. For example, the advance deduction for oilfield\r\ncleanup cost of PetroVietnam or the advance deduction for environmental\r\nrestoration cost of Vinacomin must comply with the specific provisions of the\r\nlaw applicable to each individual industry.

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According to Circular No. 200, when\r\ncalculating EPS, adjustments must be made to the amount already or to be\r\ndeducted from the Commendation and Welfare Fund. The amount deducted from the\r\nCommendation and Welfare Fund in the previous period is not used to determine\r\nEPS in this period. The difference (if any) between the expected deduction of\r\nthe previous period and the actual deduction (possibly in the next period) is\r\nadjusted to the EPS of the previous period (re-reported) and disclosed in the\r\nfinancial statement.

7. Exchange rate issues

a) Regulations on application of\r\nexchange rates to foreign currency transactions: According to Article 69 of\r\nCircular No. 200, enterprises must use different exchange rates related to\r\nforeign currency transactions. If a single exchange rate is applied to multiple\r\ntypes of transactions, it may not align with the specific financial nature and\r\ncontent of each transaction, leading to following potential issues for\r\nenterprises:

- Accounting software must meet the\r\nstandard set forth in Circular No. 103/2005/TT-BTC by allowing for upgrades,\r\nmodifications, and supplements that comply with changes in accounting\r\nregulations and financial policies, without disrupting existing databases. In\r\nfact, implementing regulations on exchange rates in Circular No. 200 does not\r\npose a problem for most enterprises, including 100% foreign-invested ones.\r\nHowever, a few enterprises are facing challenges due to their accounting\r\nsoftware not meeting the prescribed standards.

- The proposal to apply a single\r\nexchange rate to all types of intraday transactions will face the following\r\nproblems:

+ The use of a single exchange rate\r\nfrom a commercial bank or reliable issuing organization for accounting purposes\r\nmay not always provide an accurate depiction of the actual transaction. It is\r\ninappropriate for an enterprise to transact with one bank, yet use the exchange\r\nrate of another bank where the transaction did not take place. 

+ When following the interbank\r\naverage exchange rate as per Decision No. 15/2006/QD-BTC, only the exchange\r\nrate of Vietnamese dong and the US dollar is used. However, determining\r\nexchange rates of other currencies can be challenging due to cross-exchange,\r\nwhich may affect data’s reasonableness.

+ If only the buying rate or\r\nselling rate of a commercial bank is applied to various transactions, it would\r\ncreate inconsistency with reality. For example, for a purchase on credit for\r\ngoods or services, an enterprise must record a liability corresponding to\r\nrelated items. When repaying the debt to a supplier, the enterprise must\r\npurchase foreign currency from the bank at the selling rate, so the transaction\r\nwill be recorded at the bank's of foreign currency selling rate. When an\r\nenterprise receives foreign currency from sales, it must record the\r\ncorresponding sales revenue. Regulations on foreign exchange management require\r\nthe enterprise to sell the foreign currency to a bank and receive Vietnamese\r\nDong at the buying rate.

+ In the current complicated\r\nexchange rate situation, a single buying or selling rate, or even the average\r\nof both, may not provide an accurate reflection of the financial state and\r\nexchange rate discrepancies faced by enterprises, especially those whose\r\ntransactions involve large foreign currencies.

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- When foreign currency monetary\r\nitems are revaluated to recognize exchange rate differences at the time of\r\npreparation of the financial statement, the profit or loss resulting from\r\nexchange rate differences due to revaluation will be carried forward and\r\nreflected in the financial statements at the time of preparation, rather than\r\nsolely at the end of the financial year due to typos in Circular No. 200.

- The subsidiary company's use of\r\nthe exchange rate set by the parent company to re-evaluate foreign currency\r\nmonetary items only applies to the subsidiary having a parent company in\r\nVietnam. As for subsidiaries with overseas parent companies, this provision\r\napplies only to consolidated financial statements, not to financial statements\r\npublished in Vietnam.

8. Convertible bond issues

Circular No. 200 guides 02 methods\r\nof recording and allocating bond issuance costs:

+ In case bond issuance costs are\r\nallocated using the straight-line method, the determination of the present\r\nvalue of future cash flows must exclude bond issuance costs (should be a\r\nminus).

+ In case bond issuance costs are\r\nallocated using the actual interest method, the determination of the present\r\nvalue of future cash flows includes bond issuance costs (should be a plus).

However, due to negligence,\r\nCircular No. 200 has not clearly stated the difference between these two\r\nsituations. The audit firms are recommended to guide enterprises to clearly\r\ndistinguish between the two cases.

- Because issued bonds are always\r\ndetermined into 2 components: principal and options. The principal is always\r\nthe present value of the future payment (in which the cash flow is discounted),\r\nso there is no longer any concept of discount or premium. Discount or premium\r\nsolely applies to ordinary bonds.

- Bonds, as financial instruments\r\ntraded on the market and typically involving multilateral transactions, are\r\ngenerally relevant only to public interest entities Therefore, the accounting\r\nfor bond issuance costs should immediately comply with international accounting\r\nstandards.

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9. Issues of liabilities and\r\nprovisions

- According to International Accounting\r\nStandard No. 37 which Circular No. 200 has approached, the provision is a\r\nliability that:

+ Buyer has not received the\r\nservice provided (work has not been performed);

+ The liability amount can be\r\nreliably measured but is not completely certain;

+ The time for payment of the\r\nliability is uncertain.

Therefore, in light of IAS 37,\r\nCircular No. 200 stipulates that the advance for major repair of fixed assets\r\naccording to the technical requirements of fixed assets as a current obligation\r\nto ensure that the assets can operate normally as design standards is the\r\nprovision. Because it meets all 3 requirements of IAS. It also does not\r\ncontradict VAS 18 because VAS 18 has not mentioned this issue.

- The deduction from the Science\r\nand Technology Development Fund is made (although enterprises can choose) in\r\naccordance with the law (i.e., has legal obligations) and has been done since\r\n2009 in accordance with the Law on Science and Technology. The recent Circular\r\nNo. 200 simply inherits and upholds this regulation, rather than introducing\r\nanything new. Thus, the Circular does not go against VAS.

10. Guidelines for preparation of\r\ncash flow statements

According to regulations, Account\r\n242 includes a lump sum payment of land rent that cannot be recognized as an intangible\r\nfixed asset. In essence, the cash flow of lump sum payment of land rent or the\r\ncash flow arising from the purchase of land use rights for a definite term are\r\ncategorized as cash flows from investment activities. However, if the payment\r\nis made in installments, it is classified as operating cash flow. Therefore,\r\nthe item "increase and decrease in prepaid expenses" does not include\r\nthe difference between the closing balance and the opening balance of the\r\nlump-sum payment of land rent which is not eligible for recognition as\r\nintangible fixed assets (Circular No. 200 has a misspelling of the word “khong”\r\n(no)).

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- Circular No. 200 has a spelling\r\nerror that is the redundant word "BDSDT” (investment property). Only the\r\ndifference between revenue and expenditure on liquidation and sale of fixed\r\nassets is presented as the above net amount in “other income” item, while\r\nrevenue from investment property is presented in the “revenue” item, not in the\r\n“other income” item.

12. Prepaid expenses

Prepaid expenses are classified as\r\nshort-term or long-term based on their original term, not their remaining term.\r\nIt is important to note that long-term prepaid expenses should not be\r\nreclassified as short-term..

13. Notes to\r\nthe financial statements

The notes to the financial\r\nstatements can also apply the concept of materiality. The Ministry of Finance\r\ncannot respond to an unclear question. It should be noted that when applying\r\nthe concept of materiality, it must be disclosed in the “Other information”\r\nsection of Section IX.7 of the Notes to Financial Statements.

14. Revenue recognition

In light of the principle, revenue\r\nmust be recognized in proportion to the incurred liability. Therefore, the\r\nenterprise cannot recognize revenue from gifts and promotions until they have\r\nbeen delivered as it does not meet the requirement for revenue recognition.\r\nAccordingly, the enterprise may not record a deduction from cost of goods sold\r\nfor gifts and promotions.

15. Deduction in advance for sales\r\ndeductions

- According to the principle of\r\nprudence, only expenses can be deducted in advance, not the sales deductions\r\nbecause if the number of sales to be deducted has been determined, the sales\r\nmust be recognized at the net amount immediately.

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16. Account 413

- As for purchases of assets or\r\nexpenses paid immediately in a foreign currency (not through the accounts\r\npayable), the bank’s buying rate shall apply (Because the enterprise does not\r\nhave to spend VND to purchase foreign currency, as it can utilize the foreign\r\ncurrency fund or the foreign currency deposited for payments). This provision\r\nis intended to ensure that assets are not recognized above their recoverable\r\nvalue.

- As for asset purchase or incurred\r\nexpenses whose payment has not yet been made, the enterprise shall record the\r\nliability at the bank's selling rate to ensure the principle that liabilities\r\nare not recognized lower than payable obligations.

17. Investment property

Circular No. 200 does not require\r\nretroactive application, so the accumulated depreciation of investment property\r\nheld for capital appreciation is still presented in the entry “Accumulated\r\ndepreciation” and disclosed in a separate line in the notes to financial\r\nstatement (it is consistent with paragraph 25 of VAS No. 5 and Clause 1.8\r\nArticle 39 that the conversion of the use purpose of the investment property\r\ndoes not change the cost of the investment property in determining the value or\r\npreparing the financial statement).

18. Circular No. 200 stipulates\r\nthat enterprises must record losses due to decline in value of investment\r\nproperty in line with international practices and when the investment property\r\nincreases again, the enterprise is entitled to a maximum refund of the amount\r\nrecorded in the previous decrease.

19. Compliance with the Vietnamese\r\nAccounting System

Circular No. 200 states that\r\nenterprises are not obliged to include a column of corresponding accounts in\r\ntheir accounting books. This is because the Circular grants flexibility to\r\nenterprises to choose the format of their accounting books, as long as they\r\ngive a true and fair view of  their financial position.

20. Comparison in financial\r\nstatements

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- The accounting for convertible\r\nbonds in accordance with Circular No. 200 shall be carried out from 2015\r\nonwards. Convertible bonds issued in previous years are not required to apply\r\nretroactive regulations to recalculate the balance.

21. Capitalization of interest cost

- Pursuant to point g, Clause 1,\r\nArticle 54 of Circular No. 200, "The determination of capitalized interest\r\ncost must comply with the VAS "Borrowing costs". The capitalization\r\nof loan interest in some specific cases is as follows:  As for a loan\r\ndedicated to the construction of fixed assets and investment property, the loan\r\ninterest is capitalized even if the construction period is less than 12\r\nmonths”.

International practice does not\r\nspecify that the time for the construction of unfinished assets is over or\r\nunder 12 months, so to ensure that it reflects the true nature and is\r\nconsistent with international practices, fixed assets and investment property\r\nare usually not must be mass-produced assets such as inventories. Therefore,\r\nCircular No. 200 stipulates capitalization even if the construction period of\r\nthe property is less than 12 months.

Accounting standards and corporate\r\naccounting regulations are both promulgated by the Ministry of Finance, so\r\naccording to the Law on Promulgation of Legislative Documents, if there is any\r\ndiscrepancy between documents issued by the same agency regulating the same\r\nissue, the subsequent document will supersede the earlier document.

ON\r\n BEHALF OF MINISTER
\r\n DIRECTOR OF DEPARTMENT OF AUDIT AND ACCOUNTING REGULATION
\r\n
\r\n
\r\n
\r\n
\r\n Dang Thai Hung

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