Tài liệu Fair value in the case of vietnam

FAIR VALUE IN THE CASE OF VIETNAM BY LE MAI TRANG Graduation Project Submitted to the Department of Business Studies, HELP University College, in Partial Fulfilment of the Requirements for the Degree of Bachelor of Business (Accounting) Hons OCTOBER 2011 i DECLARATION OF ORIGINALITY AND WORD COUNT I hereby declare that the graduation project is based on my original work except for quotations and citations which have been duly acknowledged. I also declare that it has not been previously or concurrently submitted for any other course/degree at Help University College or other institutions. The word count is 10,723 words. ______________________ LE MAI TRANG 17 October, 2011 ii ACKNOWLEDGEMENT This project would not have been made possible without the assistance, support and encouragement of many people. I wish to take this opportunity to thank all the people who have helped me during the time of completing the dissertation. Firstly, I would like to express my deep gratitude to my supervisor Dr. Pham Duc Hieu, International School, Vietnam National University Hanoi. He has kindly helped me and supported me all the way through. For that, I am very grateful. I also would like to extend my special thanks to managers, accountants, my friends, and other people who have help me to carry out the survey. I want to thank them for all their support, interest and valuable hints. iii FAIR VALUE IN THE CASE OF VIETNAM By LE MAI TRANG October 2011 Supervisor: Dr. Pham Duc Hieu ABSTRACT The recent financial crisis has led to various arguments for and against fair-value accounting. These arguments focus on the possibility of applying this accounting method, at the same time challenge the accounting setters to extend the application of FVA in other areas. The financial crisis is the first, and also the biggest, challenge for fair-value accounting ; it also lays the foundation for experimental research on fairaccounting in the coming years, helping researchers and accountants better their understanding on the pros and cons of this method. This paper studies fair-value accounting and investigates the application of fair value in Vietnam companies, from which brings the appropriateness of accounting valuation between Vietnam and international to narrow the gap in the integration process. iv TABLE OF CONTENTS DECLARATION OF ORIGINALITY AND WORD COUNT ............................... i ACKNOWLEDGEMENT ......................................................................................... iii ABSTRACT ................................................................................................................ iv TABLE OF CONTENTS ............................................................................................ v LIST OF FINGURES & CHARTS ........................................................................ viii LIST OF ABBREVIATIONS ................................................................................... ix CHAPTER 1: INTRODUCTION .............................................................................. 1 1.1. Background .................................................................................................. 2 1.2. Problem statement ...................................................................................... 3 1.3. Structure of Study ...................................................................................... 4 CHAPTER 2: LITERATURE REVIEW .................................................................. 6 2.1 Definition and conceptualization of Fair value ...................................... 6 2.2 Fair value vs. historical cost ...................................................................... 6 2.2.1 Argument for and against HC ................................................................. 6 2.2.1.1 Argument for HC ...................................................................................... 6 2.2.1.2 Argument against HC ............................................................................... 6 2.2.2 The argument for and against FVA ........................................................ 6 2.2.2.1 Argument for FVA.................................................................................... 6 2.2.2.2 Arguments against FVA ........................................................................... 6 2.3 Method to determine the FV .................................................................... 6 2.3.1 Valuation premise ..................................................................................... 6 2.3.2 Fair Value Hierarchy................................................................................ 6 2.3.3 Valuation Techniques ............................................................................... 6 2.4 Practical application of FV in the world ................................................. 6 v 2.4.1 FVA in the USA......................................................................................... 6 2.4.2 Application of fair value as required in the international accounting standards. .................................................................................................................... 6 2.5 The formation and development of FVA in Vietnam ............................ 6 2.5.1 History form .............................................................................................. 6 2.5.2 In common standard - model theory ....................................................... 6 2.5.3 Comparison between IAS and VAS on FVA .......................................... 6 2.1. Definition and conceptualization of Fair value ..................................... 7 2.2.1. Argument for and against HC ................................................................. 9 2.2.1.1. Argument for HC ...................................................................................... 9 2.2.1.2. Argument against HC ............................................................................. 10 2.2.2. The argument for and against FVA ...................................................... 11 2.2.2.1. Argument for FVA.................................................................................. 11 2.2.2.2. Arguments against FVA ......................................................................... 13 2.3. Method to determine the FV .................................................................. 15 2.3.1. Valuation premise ................................................................................... 15 2.3.2. Fair Value Hierarchy.............................................................................. 15 2.3.3. Valuation Techniques ............................................................................. 17 2.4. Practical application of FV in the world ............................................... 18 2.4.1. FVA in the USA....................................................................................... 18 2.4.2. Application of fair value as required in the international accounting standards 20 2.5. The formation and development of FVA in Vietnam .......................... 22 2.5.1. History form ............................................................................................ 22 2.5.2.1. In common standard - model theory ..................................................... 24 vi 2.5.3. Comparison between IAS and VAS on FVA ........................................ 26 CHAPTER 3: RESEARCH METHODOLOGY ................................................... 28 3.1. Research objective .................................................................................. 29 3.2. Research Methodology........................................................................... 29 3.3. Data source ............................................................................................. 29 3.3.1. Secondary data ........................................................................................ 29 3.3.2. Primary data ........................................................................................... 30 3.4. Research method .................................................................................... 30 3.5. Research tool........................................................................................... 31 3.6. Data collection ........................................................................................ 31 3.7. Limitations .............................................................................................. 31 4.1. Finding from accountants’ survey questionnaires ............................... 34 4.1.1. Description of Respondents’ information ............................................. 34 4.1.2. Description and Analysis of respondents’ understanding about FV concept 35 4.1.3. Description and Analysis of respondents about FV recognition ........ 36 4.2. Findings from managers & accountants interview .............................. 39 4.2.1. Disadvantages and challenge of FV in VN ........................................... 39 4.2.2. Future of FV in Vietnam ........................................................................ 40 CHAPTER 5: CONCLUSION ................................................................................. 42 REFERENCES .......................................................................................................... 44 APPENDICES: QUESTIONNAIRE ....................................................................... 49 vii LIST OF FINGURES & CHARTS Figure 2.1 List of standards require the use of fair value ................................. 22 Figure 2.2 The comparison between IAS and VAS on FVA ........................... 26 Figure 4.1 Accountant category ........................................................................ 34 Chart 4.1 Description of Result – Question 1 ................................................... 35 Chart 4.2 Description of Result – Question 2 ................................................... 36 Chart 4.3 Description of Result – Question 3 ................................................... 36 Chart 4.4 Description of Result – Question 4 ................................................... 37 Chart 4.5 Description of Result – Question 5 ................................................... 38 Chart 4.6 Description of Result – Question 6 ................................................... 38 viii LIST OF ABBREVIATIONS GAAP Generally Accepted Accounting Principles FASB Financial Accounting Standards Board IASB International Accounting Standards Board IAS International Accounting Standard VAS Vietnam Accounting Standard IFRS International Financial Reporting Standards SFAS Statement of Financial Accounting Standards SEC Securities and Exchange Commission NASDAQ National Association of Securities Dealers Automated Quotations FVA Fair Value Accounting FV Fair Value HCA Historical Cost Accounting HC Historical Cost ix CHAPTER 1: INTRODUCTION 1.1 Background 1.2 Problem statement 1.3 Structure of study 1 1.1. Background Historical cost accounting (HCA) is a system where liabilities and assets are presented and recorded at the monetary amount paid or the consideration given at the time of their acquisition. According to Generally Accepted Accounting Principles (GAAP), assets and liabilities have been recording through this system. People are common working with HCA because this is so conventional method. However, it bears some strong flaws in context of the current business environment, which have made accounting bodies, especially IASB & FASB, to search for a number of other accounting methods. One of these alternatives is fair (market) value accounting that has been thinking as the best alternative to the HCA. The FV of an asset (liability) is the amount at which that asset (liability) could be sold or bought (settled or incurred) in a current transaction between willing parties. The strongest argument for a move to FVA is that investors need to know what an asset is currently worth is rather than is worth when it was acquired. But the patrons of HC have strongly disagreed with this movement to FVA. Therefore, there is an ongoing argument between HCA and FVA. FV is a required measure for many financial instruments. Determining whether a financial instrument should be recorded at FV in a company‟s financial statements depends in part on what type of institution owns the instrument and the intended use of that instrument. For example, in the case of a broker-dealer, a high percentage of its assets typically are traded and must therefore be accounted for at FV. Other institutions record financial instruments at FV depending on what their intent is for holding the instrument or the nature of the business activity. 2 In addition to using FV measures to comply with public reporting requirements, business determine their financial instruments at FV for a number of internal processes, including: making investing and trading decisions, managing and measuring risks, determining how much capital to devote to various lines of business, and to calculate compensation. The use of FV measurements is deemed to be relevant in these areas. FV provides important information about financial liabilities and assets as compared to values based only on their HC (original price paid or received). Since FV reflects current market conditions, it provides comparability of the value of financial instruments bought at different times. In addition, financial disclosures that use FV provide investors with insight into prevailing market values, further helping to make sure the usefulness of financial reports. The recent financial crisis has led to a main argue about FVA. Many critics have debated that FVA, often also called market-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. Through the quality of presentation and compliance of studies results, which related to the reduced assets value in the world, the debates do not come to an end in these studies. The purpose of the dissertation research is oriented to use of fair value accounting to more suited in Vietnamese situations. 1.2. Problem statement Using of fair values which is one of the measurement objectives in financial statement has a tendency in recent years. Although FV are used to measure some assets and liabilities, a trend for standard-setters is proposed for using FV more 3 pervasively. It is believed that the most relevant information to financial statement users is given by fair values. The IASB and the FASB play an important role in improving a fair-value hierarchy, which indicates that when a price for the liability or asset exists in deep and liquid markets, that price is the liability or asset‟s FV. Therefore, the assets are recorded in financial reporting may not really close to its recoverable, although there are many factors leading to the decline of property values, especially in economic crisis. So the direction on determining the fair value accounting in Vietnam‟ enterprises is an essential issue in the current period to clarify the nature of fair value and confirm a new valuation tool for accounting in Vietnam. Beside, bring the appropriateness of accounting valuation between Vietnam and international to narrow the gap in the integration process. The study focuses on research and addresses the following key issues. Firstly, Study on the history, nature and contents of fair value, as well as its application in the world. Next, study on the characteristics of FV in theory and practical application of survey FVA in Vietnamese enterprises enhances the role of fair value. Lastly, orientation on the use of FV in Vietnam and international practices in the short term as well as long term. 1.3. Structure of Study This paper describes a framework of the FV in the case of Vietnam and the effects of using the FVA alter for the historical one. Therefore, the research questions will be as the following: 4 - Defined the fair value accounting. - What is the status of application of FV in Vietnam? - What are the advantages and disadvantages of FVA especially in Vietnam? - How does fair value use the most suitably for the characteristics of Vietnam? These above questions will be answered in the following chapters. In chapter two, literature review gives an overview about FVA, its application in the world through the concepts and examples of FVA. Beside this, the challenges that Vietnam‟s companies facing when using FVA also discussed. To assess this situation, the paper uses quantitative tool such as analysis, synthesis, comparison and matching in the next chapter. From the method in chapter three, chapter four will give detail about survey questionnaire, test hypothesis to discuss these problems. Study will complete with concluding remarks in chapter five. 5 CHAPTER 2: LITERATURE REVIEW 2.1 Definition and conceptualization of Fair value 2.2 Fair value vs. historical cost 2.2.1 Argument for and against HC 2.2.1.1 Argument for HC 2.2.1.2 Argument against HC 2.2.2 The argument for and against FVA 2.2.2.1 Argument for FVA 2.2.2.2 Arguments against FVA 2.3 Method to determine the FV 2.3.1 Valuation premise 2.3.2 Fair Value Hierarchy 2.3.3 Valuation Techniques 2.4 Practical application of FV in the world 2.4.1 FVA in the USA 2.4.2 Application of fair value as required in the international accounting standards 2.5 The formation and development of FVA in Vietnam 2.5.1 History form 2.5.2 In common standard - model theory 2.5.3 Comparison between IAS and VAS on FVA 6 2.1. Definition and conceptualization of FV The FASB has recently issued Statement of Financial Accounting Standards No. 157 Fair Value Measurements (SFAS 157), on which work was well advanced before the Memorandum of Understanding was published. SFAS 157 establishes a single definition of FV together with a framework for measuring FV for US GAAP. The IASB recognized the need for guidance on measuring fair value in IFRSs and for increased convergence with US GAAP. Consequently, the IASB decided to use the FASB‟s standard as the starting point for its deliberations. As the first stage of its project, the IASB is publishing in this discussion paper its preliminary views on the principal issues contained in SFAS 157. Paragraph 5 of SFAS 157 defines fair value as „the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.‟ By comparison, fair value is generally defined in IFRSs as „the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm‟s length transaction‟ (with some slight variations in wording in different standards). The definition in SFAS 157 differs from the definition in IFRSs in three important ways: (a) The definition in SFAS 157 is explicitly an exit (selling) price. The definition in IFRSs is neither explicitly an exit price nor an entry (buying) price. (b) The definition in SFAS 157 explicitly refers to market participants. The definition in IFRSs refers to knowledgeable, willing parties in an arm‟s length transaction. 7 (c) For liabilities, the definition of fair value in SFAS 157 rests on the notion that the liability is transferred (the liability to the counterparty continues; it is not settled with the counterparty). The definition in IFRSs refers to the amount at which a liability could be settled between knowledgeable, willing parties in an arm‟s length transaction. The definition of FV in IFRSs refers to „knowledgeable, willing parties in an arm‟s length transaction‟. This description is provided in IAS 40 Investment Property, paragraphs 42-44: The definition of fair value refers to „knowledgeable, willing parties‟. In this context, „knowledgeable‟ means that both the willing buyer and the willing seller are reasonably informed about the nature and characteristics of the investment property, its actual and potential uses, and market conditions at the balance sheet date. A willing buyer is motivated, but not compelled, to buy. This buyer is neither overeager nor determined to buy at any price. The assumed buyer would not pay a higher price than a market comprising knowledgeable, willing buyers and sellers would require. A willing seller is neither an over-eager nor a forced seller, prepared to sell at any price, nor one prepared to hold out for a price not considered reasonable in current market conditions. The willing seller is motivated to sell the investment property at market terms for the best price obtainable. The factual circumstances of the actual investment property owner are not a part of this consideration because the willing seller is a hypothetical owner (eg a willing seller would not take into account the particular tax circumstances of the actual investment property owner). 8 The definition of fair value refers to an arm‟s length transaction. An arm‟s length transaction is one between parties that do not have a particular or special relationship that makes prices of transactions uncharacteristic of market conditions. The transaction is presumed to be between unrelated parties, each acting independently. 2.2. Fair value vs. historical cost 2.2.1. Argument for and against HC 2.2.1.1. Argument for HC Although historical cost accounting still exist several limitations as well as flaws, we cannot deny that some patrons believe that it is considered as standard form of accounting by unique features and conventions. Moreover, they still think that fair value statement cannot more reliable than historical financial. There are some unique advantages that make many people support history cost accounting, including: Managers can depend on the historical cost to know past data. From there, they will forecast future operational cost. Future projections are maybe wrong, even hampered if without information about the historical cost. - The recorded amount from HCA often is verifiable and reliable as well as avoiding management bias. This is because they are based on actual transactions. - HCA bring absolute certainly results and it also fits with the cash flow statement in perfectly. According to Williamson (2003), HCA always help to balance sheet amount because of it tells exactly what has been received or received Historical cost accounting uses invoice, receipts...as ample evidences to support for avoid scope for manipulation. 9 For fixed interest debt, HCA measures financial instruments at its issuance yield to maturity over its life, regardless of market yield movements. This constant yield to maturity approach produces a smooth and predictable interest cost or return outcome and valuation. (Australian Office of Financial Management: 2004-05) 2.2.1.2. Argument against HC Historical Basis approach is one of the foundations of American accounting. Following this approach, assets on the balance sheet will be presented the value at the time of acquisition- is known as the purchase cost. However, many people think that with the widespread use of complicated financial tools as well as risk strategies of management that can make/render yesterday's prices to become/ becoming obsolete. Thus, many people require historical cost should be abandoned or modified, and even replaced by new method- is called as current- cost system. Besides, there is the strongest argument that shows that HCA do not provide needed information that is relevant to them. To prove these things, critics bring significant advantages as well as disadvantage in HCA. The transaction can be related in a year or ten years by HCA values. According to Williamson (2003), the acquisition value may be out of date and thus balance sheet represents out of date values. HCA is only paying attention on cost allocation and not on the value of an asset. So, it discloses the acquisition cost of an asset and its depreciation in the following year, but ignores the possibility that the disclosed amount of the asset may be higher or lower than the present market value. 10 There is also flaw when using HCA in terms of inflations. It is based on the assumption that the purchasing power is not change over a time period. However in reality, price at current point of time may be more expensive effect by inflation in future. This inflation is unadjusted in HC financial statement. As a result, in the time of high inflation, profits are inflated and thus the tax bill tends to increase. When an entity‟s financial instruments are concerned, HC prices reflect both an old interest rate and an outdate assessment of the amounts, timing & hesitation of cash flows in future. (Hague & Willis: 1999) Intangible assets acquired outside of business combination (internally generated) are not reported in historical financial statements. Reliable forecast of the future income effects of a financial instrument is unlikely to be possible from the simple extrapolation of past gain and losses based on historical cost. 2.2.2. The argument for and against FVA 2.2.2.1. Argument for FVA Supporters of FVA argues that this measurement is more appropriate than HC as it provides up-to-date information consistent with market and as it takes into account the inflationary adjustment to the acquired cost. Opponents have argued that this method increases volatility and thus reduces stock price. Its patrons contend that HCA hides economic realities while FV reveals. 11