introduction of the study on financial instruments accounting for nonfinancial 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
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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
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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:
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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
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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.
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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
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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
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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.
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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.
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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= α
0
+ α
1
Size + α
2
PTA + α
3
PE + α
4
DTA + α
5
Audit + α
6
Yafter + ε (1)
Denote:
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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.
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- 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.
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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
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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.
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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
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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
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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.
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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
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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
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(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
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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
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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.
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