A state-owned conglomerate needs average US$10 million to adopt IFRS

TheLEADER had an interview with Tran Thi Phuong Mai – World Bank Senior Financial Management Specialist to clarify the importance as well as challenges in the process of updating Vietnam Accounting Standards (VAS) in line with International Financial Reporting Standards (IFRS).

What is the importance of financial report to businesses, especially to the equitization of state-owned enterprise (SOEs)?

Tran Thi Phuong Mai: The SOEs’ evaluation for equitization purposes is not just about the application of International Financial Reporting Standards (IFRS) but also another equally important factor, which is the valuation standard. The regulation of valuation standards in Vietnam is still very preliminary compared to that of other ecomonies.

In addition to providing a sound corporate valuation, IFRS also enhances the position of the business, because investors certainly want to acquire shares of business with transparent financial reporting system.

Therefore, having some accounting entries not in line with the international rules will make the enterprise less appreciated and thus become less compatitive in the process of equitization.

How do you evaluate the readiness of Vietnamese enterprises to update and apply the International Financial Reporting Standards (IFRS)?

Tran Thi Phuong Mai: All of the 50 enterprises that we selected and interviewed, including SOEs, private enterprises and listed ones, want to do IFRS.

I remember the saying of a large private corporation that 10 or 15 years ago, businesses could expect to benefit from non-transparent activities to some extent but things has changed. 

Businesses now notice that transparency is a must to protect themselves, because the less transparent the company is, the more risky it would get.

In banking sector, bad debts are being processed by Vitenam Asset Management Company (VAMC) under the regulations of the Ministry of Finance and the State Bank of Vietnam. How does its solution method affect transparency in banks' financial report?

Tran Thi Phuong Mai: VAMC’s method of dealing with bad debts has not posed any significant change in the process as bond transaction issued by VAMC is merely a mechanism that allows credit institutions to spread out their irrecoverable bad debts over a longer period and thus publish lower NPLs.

When the credit institutions sell bad debts to VAMC, this bad debt is no longer in the books of credit institutions. As a result, in the future, when the debenture (or ‘bond’) issued by VMAC to the business matures, if the bad debt has not been cleared out, VAMC will transfer it back to the credit institution.

As such, debt trading is essentially an entry to transform a debt-owning business into a normal corporate. This poses a negative impact on the health of the whole system.

The transparency of financial statements of Vietnamese enterprises is still weak, while the majority of stock market’s participants are independent investors who are likely to be vulnerable due to lack of necessary understanding about business finance. What do you think about this situation?

Tran Thi Phuong Mai: As of the beginning of 2016, there were more than 700 listed companies in the two exchanges. The total market capitalization of listed companies is over US$60 billion, equivalent to 34% of GDP.

However, Vietnam's capital market currently relies too much on individual investors, which is one of the reasons that restrain the capital market’s development.

Many retail investors are even not able to read financial statements. They only care about the numbers, up or down, to invest, without caring about the business’ health.

Institutional investors are accounting for a very small percentage. Besides, the practice of investment trust through institutional investors of Vietnamese market has not yet been common.

I think this is the situation that needs to be overcomed by facilitating and attracting investment funds to play the role of leading the market.

What are the challenges for Vietnamese enterprises in updating Vietnamese accounting standards in accordance with IFRS?

Tran Thi Phuong Mai: We have seen a very positive signal while surveying Vietnamese enterprises. ‘As soon as the Ministry of Finance gives the green light, we will apply the IFRA’, they affirmed.

As making changes is absolutely costly, they need to be legally favoured to embark on. According to our estimates, it takes a state-owned conglomerate average US$10 million to adopt the international standards.

I contend that the legal framework is the first and also biggest challenge.

Thank you very much!