Figure 3.7 Current status of financial asset identification 77
Figure 3.8 Current status of financial liability identification 78
Figure 3.9 Current status of financial asset classification 80
Chart 3.10 Current status of classification of financial liabilities 80
Figure 3.11 Current status of identifying derivative financial instruments 81
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Chart 3.12 Use of derivative financial instruments in enterprises. 82
Figure 3.13 Initial measurement of financial assets 83
Figure 3.14 Post-initial measurement of financial assets 85
Figure 3.15 Initial Measurement of Financial Liabilities 87
Figure 3.16 Measurement after initial recognition of financial liabilities 88
Figure 3.17: Initial Measurement of Equity Instruments 89
Figure 3.18 Timing of recognition of underlying financial instruments 90
Chart 3.19 Current status of recording Convertible bonds 91
Chart 3.20 Current status of recording Preferred shares 92
Chart 3.21 Current status of financial asset recognition 93
Figure 3.22 Complexity of basic financial instrument accounting operations 109
Figure 3.23 Complexity of accounting for derivative financial instruments 109
Figure 3.24 Causes of limitations in financial instrument accounting..110 Figure 3.25 Level of satisfaction with financial instrument accounting 111
Figure 4.1 Key information for accounting for financial instruments. 143
Diagram:
Figure 2.1: Sequence of determining fair price 30
Figure 2.2 Recording of derivative financial instruments 43
Figure 2.3 Factors affecting the level of presentation and disclosure of information on financial instruments 51
Figure 4.1 Relationship between financial instrument accounting information and business decision making 115
Figure 4.2 Characteristics of Convertible Bonds 126
CHAPTER 1
INTRODUCTION TO RESEARCH ON FINANCIAL INSTRUMENTS ACCOUNTING IN NON-FINANCIAL ENTERPRISES IN VIETNAM
1.1 Necessity of research topic
Vietnam's economy is increasingly integrating into the world economy, reflected in the strong flow of capital, technology and goods. There are many foreign enterprises investing in Vietnam and preparing financial statements for corporations according to international practices. On the other hand, Vietnamese enterprises are increasing exports and establishing operations abroad and therefore, they will be subject to closer supervision and must prepare financial statements according to international practices. To meet the requirements of information users, accounting must continuously innovate. As a management tool, accounting is also transforming to meet the requirements of enterprises and investors in the integration process. Accounting innovation towards integration not only provides enterprises with a useful management tool but also creates the ability to provide quality accounting and auditing services to domestic and international enterprises. In response to the demands of business management, the current state of the profession requires the development of accounting science compatible with the current state of business operations and international requirements.
Currently, according to international practice, accounting for financial instruments must comply with the following standards: IAS32 “Presentation of financial instruments”; IAS 39 “Recognition and measurement of financial instruments”; IFRS7 “Disclosure of information on financial instruments”
On the Vietnamese side, there is currently no separate standard for accounting for financial instruments: Accounting for financial instruments has been regulated scatteredly in standards VAS01, VAS10, VAS16... which in fact leads to many difficulties in management, standardization of information as well as implementation of accounting work in enterprises. Financial instruments account for a fairly large proportion of items on the Balance Sheet: For investors - financial instruments are in the items of cash, receivables, investments; For issuers - financial instruments are in the items of loans, bonds
issued, payable, equity. The change in the value of this item greatly affects the indicators of the financial situation and business results of the enterprise. With the current state of accounting for financial instruments, the data on the Financial Statements does not meet the requirements of usefulness and comparability of accounting information.
Especially in the current economy, there are many transactions on derivative financial instruments such as: Forward contracts, Future contracts, Swap contracts, Option contracts. Meanwhile, the Accounting Regime for non-financial enterprises has not mentioned it, causing confusion and inconsistency in reflecting and reporting the financial situation, affecting the reliability and comparability of indicators on the financial statements.
For financial service providers, there are documents: Decision 29/2006/QD-NHNN of the Governor of the State Bank promulgating the accounting regime for currency derivatives applicable to credit institutions; Decision 16/2007/QD-NHNN of the Governor of the State Bank regulating the financial reporting regime on the disclosure of information on derivative financial instruments. However, when non-financial enterprises sign derivative contracts with banks and financial institutions, they account in different ways because there are no accounting guidance documents from the Ministry of Finance. Therefore, it is necessary to survey the current situation of accounting for derivative financial instruments in non-financial enterprises to help build and promulgate regimes and guide accounting templates for enterprises.
Based on the practice of enterprises, the need to provide useful information of investors, from the reality of integration of the accounting profession, after a period of research, the author chose the topic " Improving financial instrument accounting in non-financial enterprises in Vietnam" to do his doctoral thesis.
1.2 Overview of research situation
1.2.1 The situation of financial instrument accounting research in the world
1.2.1.1. On identifying financial instruments
There are many studies on the nature, characteristics and accounting regulations of each type of financial instrument, but rarely give a general definition: According to Lanny G. Chasteen, Richard E. Flaherty, Melvin CO'Connor (1998):
Intermediate accounting, 6th ed , financial instruments include: Cash, evidence of the owner's interest in the organization, contracts under which one party is responsible for transferring cash or other financial instruments [27, p608]. With PT Lopes, LL Rodrigues (2007), financial instruments include both contractual rights and obligations that help directly or indirectly exchange payment instruments [53]. According to HS Houthakker and PJ Williamsen, the owner of a financial instrument has contractual rights to interest and principal when holding bonds, rights to dividends that can be refunded in the future [45].
Thus, most studies agree with the characteristics of financial instruments: it is a contract between parties; financial instruments include rights (assets) or obligations (liabilities) under the contract; under this contract, payment instruments can be directly or indirectly exchanged.
1.2.1.2. On measuring financial instruments
The authors ME Barth, WH Beaver, W. Landman in the article "The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting: Another View" in the Journal of Accounting and Economics, 2001 pointed out the need for conformity in accounting for financial instruments, especially using fair value accounting[18].
Author Karen K. Nelson in the article “Fair Value Accounting for Commercial Bank: An Empirical Analysis of SFAS No.107”, published in The Accounting Review (1996) pointed out the need for fair value accounting and the principles of fair value accounting at commercial banks, thereby serving as a basis for other businesses in the economy [58].
Studies on the basis of measuring financial instruments at fair value by Morris and Selon (1991)[57]; Nelson (1996)[58]; Burkhardt (2006)[15]; Aslanertik (2009)[13]. Although there are many different opinions, the above authors all support measuring financial instruments at fair value and at the same time point out the weakness of this measurement basis is the reliability of the data used in estimating fair value in practice.
According to Bradbury (2003), there are three issues related to the use of fair value: attributes to measure value, the meaning of fair value, and the method of accounting for transaction costs of purchasing assets[14].
Hague (2004) and Bradbury (2003) argue that measuring financial instruments at fair value is most appropriate, especially for derivative financial instruments. Hague and Bradbury explain that derivative financial instruments have very small or no original cost, but the benefits and losses they cause as well as the settlement value of these instruments depend on their fair value. Therefore, not measuring the fair value of these financial instruments means not presenting them on the Balance Sheet while they have a significant impact on the financial position of the organization. In addition, information about the fair value of derivative instruments helps users of financial statements understand the nature of risks and how the enterprise manages the risks that may arise from these instruments[42].
Fair value is the most appropriate basis for recording derivative financial instruments. According to the conclusion of the study group on accounting for derivative financial instruments (JWG, 2000), fair value is the basis for recording and measuring financial assets and liabilities, including derivative financial instruments. The reason for this choice is that fair value provides an honest and objective assessment of financial instruments based on market factors and is not affected by the subjective will of the organization imposing on the way of calculating the value of assets.
According to Jemarkowicz and Gornik Tomaszewski (2006), a problem related to the fair value method is the instability in accounting principles. While financial instruments are recorded at fair value, financial assets are recorded at cost. On the other hand, enterprises face many difficulties in presenting information because IAS32, IAS 39 require regular updates of changes in fair value on Financial Statements. The fair value method is also difficult to apply in practice due to the lack of risk assessment models and valuation methods for financial instruments that are difficult to determine market prices[40]. At the same time, there are opinions that fair value is partly the cause of the financial crisis.
The economic recession of the late 2000s was an economic recession and a decline in economic growth that occurred simultaneously in many countries and regions around the world[12], [39], [56]. In the United States, the economic recession of the late 2000s and the financial crisis of 2007-2010 caused many US economic sectors to shrink production. And this reality has caused credit market planners, stock market makers as well as managers to ask the question "Is the collapse of the US financial system due to the fault of fair value accounting?"
One of the central issues in financial instrument accounting is the basis for measuring and applying fair value accounting. In the process of reforming the accounting system in China, the most controversial issue is the application of fair value accounting. WenJing Li, Xiaoyan Lu, Minghai Wei(2007) evaluated the process of accounting reform in China through studying the application of fair value accounting over a quarter of a century and concluded that: This model has been accepted and gradually applied to the Chinese Accounting System [52].
Among the few studies in transition countries, Songlan Peng's (2005) study on the harmonization of Chinese accounting standards with IAS/IFRS[58]; Zeghal and Mhedbi's (2006) study on factors affecting the application of IAS/IFRS in countries with transition economies[71]. Based on the viewpoint of Tay & Parker (1990), the success of the accounting harmonization process is assessed in both aspects of harmonization of standards and harmonization of accounting practices in enterprises. Songlan Peng summarized the studies on harmonization between Chinese accounting standards (CAS) and IAS/IFRS and concluded that the harmonization of CAS standards with IAS/IFRS is high, but the implementation of these standards in practice still has many problems, especially the application of the basis for measuring fair value in practice. If the above changes are not just aimed at polishing the image of Chinese accounting to attract foreign investment, this will be a milestone marking a comprehensive transformation of Chinese enterprises in particular, the economy and the Chinese Government in general.
Thus, most scientists emphasize the advantages of fair value accounting method - this is still a new scientific research in Vietnam, especially in financial instrument accounting. Therefore, the author of the thesis wants to study fair value accounting to find solutions to improve financial instrument accounting in non-financial enterprises in Vietnam.
1.2.1.3. On recording financial instruments
Recognition of financial instruments depends on the classification of financial instruments. Financial instruments not only help businesses create capital, use capital, and bring
business opportunities but also contain many types of risks, from credit risk, liquidity risk to market risk. The role of derivative financial instruments in risk prevention is very necessary, besides there is also the speculative goal of enterprises to seek profits. L.EC.Wilson & Bryan (1997) said that it is necessary to develop accounting regulations for derivative financial instruments according to the purpose of use instead of each type so that new derivative instruments can be applied to ensure the principle of usefulness of information while minimizing the cost of developing principles for new derivative financial instruments[69].
Therefore, accounting for derivative financial instruments according to US.GAAP and IAS/IFRS are both built on the basis of the purpose of using these instruments, including:
Accounting principles for derivative financial instruments used for trading purposes Accounting principles for derivative financial instruments used for hedging purposes
risk prevention
Studies on hedging accounting and derivative financial instruments by Wilson and Bryan (1997); Heranandez (2003): researchers believe that hedging accounting and derivative financial instruments are necessary, but the conditions for practical application are not easy because there are different options leading to different processing results of the same type of derivative instrument[44].
1.2.1.3. On presentation of financial instruments
Financial instruments are increasingly complex due to the combination of many different financial instruments, typically: convertible bonds, preferred stocks (both
characteristics of liabilities and equity; new derivative financial instruments (combined from different derivative transactions), complex instruments with accompanying derivative instruments... Therefore, the recognition and presentation of financial instruments is becoming more and more difficult.
According to Young (1996), preferred stocks are often presented with a lack of clarity between liabilities and equity; and Young (1996) pointed out the difficulty in distinguishing new financial instruments when they combine options with futures, or combine equity with financial debt[70].
IAS 32 requires that when presenting financial instruments, the accounting issuer itself must comply with the principle of respecting substance over form; Treasury shares purchased by the enterprise must be directly recorded as a reduction in equity; Financial assets or financial liabilities can only be offset against each other and recorded at net value in the report when and only when the enterprise has the legal right to offset or intends to settle on a net basis because the assets and liabilities are settled at the same time.
1.2.1.4. On disclosure of information on financial instruments
Financial instruments are increasingly diverse and complex, so information users are increasingly demanding information disclosure on financial instruments. According to Caedo and Tirado (2004), information on risks that a business is taking on can affect future profits, so it needs to be disclosed to users of financial statements. At the same time, Caedo and Tirado (2004) believe that information on risks affecting businesses, measuring these risks will improve the usefulness of financial statements for users[22]
IFRS 7 requires sufficient disclosure of information about financial instruments to enable users of financial statements to assess:
The importance of financial instruments to the financial situation and business results of an enterprise
The nature and scale of risks arising from financial instruments affecting the enterprise during the business period and on the reporting date, together with the enterprise's risk management methods.