Warning: Boring. IFRS and Vietnam

Just kidding. What could be more exciting than accounting rules! Any accountant will tell you that accounting is basically the most exciting thing there is. It’s just a lot of fun to look at numbers, add them up, subtract them, make estimations that people argue about.

There is a big push in the world to have one set of international financial reporting standards (IFRS). Back in 2005 there was a “big bang” with all EU countries adopting IFRS at once. Lots of other countries also adopted it. As of now, there are 166 jurisdictions recognized by the IASB (the International Accounting Standards Board), and 156 support a global standard. Only 8 have not publicly made statements in support, and 144 countries require IFRS for all or most domestic companies. (These figures are all provided by the IFRS Foundation - other sources have different figures, but basically all in the same direction: the world has generally adopted IFRS).

Vietnam does not! But there have been a few articles (here, and more recently here) about the government’s support for IFRS. In the latter story, the Deputy Minister of Finance Đỗ Hoàng Anh Tuấn said that the adoption of IFRS “would help Việt Nam create a more transparent business environment to attract foreign direct investment.” There is a stepped approach in the country according to EY in the first article. Basically, they are going to start with a few (30) key entities adopt IFRS, then have all companies adopt 10 to 20 IFRS standards by 2020. Full adoption by 2025.

The benefit of international standards is that global companies will have just one standard to apply across all of their subsidiaries, and investors will better be able to compare companies worldwide. But actually, it’s very unclear if the benefits actually accrue. A lecture on IFRS adoption has this to say about potential benefits:

A priori, there were many conjectured benefits from IFRS adoption, including more efficient cross-border transacting, enhanced informativeness of financial reports (increased transparency), greater inter-company comparability of financial data, better asset prices (efficiency), lower cost of capital, and balance sheets that facilitate more efficient contracting between companies and lenders. Whether these benefits have in fact materialized is difficult to say. For reasons discussed below, there is limited evidence to go on, and many of the studies are flawed or have been misconstrued.

One of the key issues is that while standards are adopted, they are not uniformly applied because of both politics (big and little, so from the state as well as politics within the company) and how commerce is done in each locality. This is particularly important for a big change in IFRS, fair-value accounting. This can often require estimates that cause significant variances between companies even in the same country. These differences can limit comparability across countries, which hurts some of the benefits.

But Vietnam also sees IFRS as helpful to increase transparency and accountability in the country among corporations. This only works if the adoption of these include lots of training and education. Plus a push by the government to actually enforce these standards.

I think it is going to be tough to reach the announced 2020 timetable of using certain standards, but we could see adoption by 2025, if Vietnam gets its act together. It needs the following:

• IFRS guidelines translated into Vietnamese. This is basic but doesn’t seem to be there yet.

• Accountants that understand the rules

• Some of the issues that might arise is over valuing certain instruments that are not widely used in Vietnam now. So, it would be helpful for the markets to develop further before the rules come into account. But the market may need IFRS before we see these instruments gain share.

• Plus regulators need to be trained in these issues as well and may be hired.

I think all of these are possible to overcome. But better education of everyone involved in the market is going to take time. The rewards should be positive, but in some ways we are going on faith.