CIRCULAR

GUIDING THE IMPLEMENTATION OF FOUR ACCOUNTING STANDARDS PROMULGATED TOGETHER WITH DECISION NO. 100/2005/QD-BTC DATED DECEMBER 28, 2005 OF THE MINISTER OF FINANCE

Pursuant to the Decision No. 100/2005/QD-BTC dated December 28, 2005 of the Minister of Finance on the issuance and publication of six Vietnamese standards on accounting (batch 5);

The Ministry of Finance guides the implementation of three accounting standards (batch 5) applicable nationwide to enterprises of all industries and economic sectors. Standard 19 “Insurance contract" will be guided later.

I/ GUIDANCE OF THE IMPLEMENTATION OF ACCOUNTING STANDARD “BUSINESS CONSOLIDATION”

A- GENERAL PROVISIONS

1/ Types of business consolidation

- Business consolidation is done as a method of forming one or many business activities that can be performed in many forms, such as:

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+ An enterprise purchases all net assets of another enterprise;

+ An enterprise assumes the liabilities of another enterprise;

+ An enterprise purchases some of the net assets of another enterprise.

- The payment of the trading during the business consolidation shall be conducted in the form of issuance of quality instrument, cash or cash equivalent payment, transfer of other assets or a combination thereof. The transaction may be between the shareholders of the consolidating enterprises or between one enterprise and the shareholders of another enterprise. The business consolidation may involve the establishment of a new enterprise to control the consolidating enterprises, control the transferred net assets or restructure one or more of the consolidating enterprises.    

- A business consolidation may result in a parent-subsidiary relationship in which the acquirer is the parent company and the acquired is the subsidiary company. The consolidation may not result in a parent-subsidiary relationship, such as the business consolidation related to the purchase of net assets, including the goodwill (if any) of another enterprise which are not the purchase of shares of such enterprise. 

2/ Accounting method of business consolidation

All business consolidations shall be accounted for using the purchase method.

The purchase method is comprised of 3 steps:

Step 1: Indentify the acquirer;

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Step 3: At the acquisition date, the acquirer shall allocate the cost of business consolidation to the acquired assets, liabilities and assumed contingent liabilities.

Step 1: Indentify the acquirer

All business consolidations shall identify the acquirer. The acquirer is a consolidating enterprise that obtains control over other consolidating enterprises or consolidating business activities. The identification of the acquirer shall comply with the regulations from paragraph 17 to 23 of accounting standard 11 – Business consolidation.

Step 2: Determine the cost of the business consolidation

The acquirer shall determine the cost of a business consolidation including: the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer in exchange for control of the acquired plus (+) any costs directly attributable to the business consolidation.

The acquirer shall determine the cost of the business consolidation in accordance with the regulations from paragraph 24 to 35 of accounting standard 11 – Business consolidation in which the following contents shall be noted:

1- The acquirer may transfer the following assets in a business consolidation: cash, bonds, shares or other assets used in business activities of the acquired. Except for cash payment, any payment by other assets usually results in a difference between the fair value and the book value of these assets.

- If the payment is made in the form of bonds (the interest rates of bonds may differ from market rates), the premium or discount (if any) must be included in the value of the bond and record the increase or decrease of the value of the investment.

- If the payment is made in the form of shares (the par value of shares is often different from the market value):

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+ If there is evidence and other calculation method proved that the price published at the exchange date is unreliable or if there is no published price of the shares issued by the acquirer, the fair value of the shares can be estimated according to the interest in the fair value of the acquirer or the interest in the fair value of the acquired that was acquired by the acquirer as long as it has clearer evidence.

- If the payment is made in the form of assets used in business activities, even depreciable assets, investment securities or other investment assets (such as investment properties) must be determined according to the fair value.

2- If the payment of all or any part of the cost of a business consolidation is deferred, the fair value of that deferred part shall be determined by discounting the amounts payable to their present value at the date of exchange. In that case, the cost of the business consolidation shall be added (+) the premium or be deducted (-) the discount likely to be incurred in payment.

3- Costs directly attributable to the consolidation, such as fees paid to auditors, legal consultants, price verifiers and other consultants shall be included in the cost of the business consolidation.  

Step 4-: Do not include the following contents in the cost of the business consolidation:

- Future losses or other costs expected to be incurred as a result of a consolidation which is not treated as liabilities incurred or assumed by the acquirer in exchange for control of the acquired;

- General administrative costs and other costs that are not directly related to the business consolidation;

- Costs of agreement and issuance of financial liabilities;

- Costs of issuance of equity instruments.

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Acquired identifiable assets and liabilities and assumed contingent liabilities in a business consolidation shall be recorded according to the fair value. The determination of fair value of each type of assets, liabilities and contingent liabilities shall comply with the guidance specified in paragraph A16 of Annex A Accounting standard 11 – business consolidation.

1- If the business consolidation does not result in a parent-subsidiary relationship (The acquirer purchases the entire net assets of the acquired or the acquirer purchases all shares of the acquired and the acquired disappears after the consolidation).

If the business consolidation does not result in a parent-subsidiary relationship, the acquirer shall only prepare the financial statement at the acquisition date, specifically for each form as follows:

1.1- After the consolidation, if only the acquirer remains and the acquired disappears, all assets and liabilities of the acquired are transferred to the acquirer and the acquired is dissolved (Ex: Company A purchases all net assets of Company B, after the consolidation, Company B dissolves and Company A remains with a reformed structure). Or after consolidation, a number of net assets of the acquired are transferred to the acquirer to form one or more business activities of the acquirer. The acquirer shall recognize identifiable assets, liabilities and contingent liabilities at their fair value at the acquisition date on the separate financial statements. The positive difference between the cost of business consolidation and the equity of the acquirer in the net fair value of identifiable assets, liabilities and assumed contingent liabilities is goodwill. This is then amortized over its useful life in operating expenses of the acquirer (Company A) within 10 years.

If a negative goodwill arises because the cost of a business consolidation is less than the equity of the acquirer in the net fair value of identifiable assets, liabilities assumed contingent liabilities, the buyer must review the determination of the fair value of the identifiable assets, liabilities, contingent liabilities and the determination of the cost of the business consolidation. After reviewing and adjusting, if the difference still remains, the acquirer shall immediately recognize all remained differences in the profit or loss after revaluation.

1.2- After the consolidation, if the consolidating enterprises disappear and a new enterprise is established, all assets and liabilities of consolidating enterprises are transferred to the new enterprise (Ex: Company A and Company B is consolidated to establish Company C. After the consolidation, both Company A and Company B are dissolved and Company C has a new name. The business activities of Company C are a combination of the activities of Company A and B). In this case, one of the consolidating enterprise (Ex: Company A) is determined as the acquirer. At the acquisition date, the acquirer recognizes identifiable assets, liabilities, contingent liabilities and goodwill (if any) in the separate financial statements as case (1.1).

2- If the business consolidation results in a parent-subsidiary relationship, in which the acquirer is the parent company and the acquirer is the subsidiary company (The acquirer purchases all shares of the acquired and after consolidation, both companies still remain and operate separately):

- After the consolidation, if both enterprises operate separately but involve in common control, the parent-subsidiary relationship are established. The enterprise that obtains control of the other enterprise is the parent company (acquirer) and the controlled enterprise is the subsidiary company (acquired). The parent company shall accounted for its equity in the subsidiary as an investment in a subsidiary in the separate financial statements and recognizes identifiable assets and liabilities acquired and assumed contingent liabilities in the consolidated financial statements at fair value. The difference between the cost of business consolidation and the equity of the acquirer in the net fair value of identifiable assets, liabilities and contingent liabilities is goodwill. This appears the same as case (1.1) but in the consolidated financial statements of the Group, not reflected in the separate financial statements. 

- If the business consolidation results in a parent-subsidiary relationship, the acquirer which is the parent company shall not prepare separate financial statements and consolidated financial statements at the acquisition date but shall prepare separate financial statements and consolidated financial statements at the earliest time according to effective regulations.

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1/ If the business consolidation results in a parent-subsidiary relationship

1.1- Account for the cost of the business consolidation of the acquirer

At the acquisition date, the acquirer shall determine and reflect the cost of a business consolidation including: the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer in exchange for control of the acquired plus (+) any costs directly attributable to the business consolidation. At the same time, the acquirer which is also the parent company shall record its equity in the subsidiary company as an investment in a subsidiary company.

- If the trading in business consolidation is paid in cash or cash equivalents by the acquirer:

Debit 221 – Investment in subsidiaries

Credit 111, 112, 121...

- If the trading in business consolidation is carried out by the share issuance of the acquirer, if the issue price (according to fair value) of the shares at the date of the exchange is greater than the par value of the share:

Dr 221 – Investment in subsidiaries (according to fair value)

Cr 4111 – Contributed capital (according to face value)

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- If the issue price (according to fair value) of the shares at the date of the exchange is smaller than the par value of the share, record:

Dr 221 – Investment in subsidiaries (at the fair value)

Dr 4112 – Capital surplus (negative difference between the fair value and the face value of the share).

Cr 4111 – Contributed capital (according to face value)

- Stock floatation cost actually induced will be recorded as follows:

Dr 4112 – Capital surplus

Cr 111, 112, etc.

- If the business consolidation is carried out by exchange of assets between the acquirer and the acquired:

 + When exchanging fixed assets, the decrease in fixed assets shall be recorded as follows:

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Dr 214 – Depreciation of fixed assets (depreciation value)

Cr 211 – Tangible fixed asset (cost).

At the same time the increase in other income and investments in subsidiaries due to exchange of fixed assets shall be recorded as follows:

Dr 221 – Investment in subsidiaries (Total payment)

Cr 711 – Other expenses (fair value of the exchanged fixed assets)

Cr 3331 – VAT payables (Account 33311) (if any).

+ When dispatching goods for exchange, the following accounts shall be recorded as follows:

Dr 632 – Costs of goods sold

Cr 155, 156, etc.

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Debit 221- Investment in subsidiaries

Cr 511 - Revenues

Cr 333 – Taxes and other payables to the State (33311) (if any).

- If the trading in business consolidation is carried out by the bond issuance of the acquirer:

+ When paying by bonds at par value, the following accounts shall be recorded:

Dr 221 – Investment in subsidiaries (at the fair value)

Cr 343 – Bonds released (3431 – Par value of bonds).

+ When paying by premium bonds, the following accounts shall be recorded:

Dr 221 – Investment in subsidiaries (at the fair value)

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Cr 3433- Bond premium (Premium amount).

+ When paying by discount bonds, the following accounts shall be recorded:

Dr 221 – Investment in subsidiaries (at the fair value)

Dr 3432 – Bonds discount (discount amount)

Cr 3431 – Par value of bonds (According to par value of bonds)

- Costs directly attributable to the consolidation, such as legal services, price appraisal, etc, the following accounts shall be recorded by the acquirer:

Dr 221 – Investment in subsidiaries

Cr 111, 112, 331...

1.2- Account for the adjustments to the cost of a business consolidation contingent on future events

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(1)- It is usually possible to estimate in a reliable way the amount of such adjustment at the time of initially accounting for the consolidation even though some uncertainty may exist. If the future events do not occur or the estimate needs to be revised, the cost of the business consolidation shall be adjusted accordingly.

(2)- When the business consolidation agreement allows such adjustment, that adjustment is not included in the cost of consolidation at the time of initially accounting if it either is not probable or cannot be measured reliably. If that adjustment subsequently becomes probable and can be measured reliably, the additional consideration shall be treated as an adjustment to the cost of the consolidation.

- Depending on future events according to the business consolidation agreement, when adjusting the cost of business consolidation because the acquirer has to pay more cash or shares to the acquired, the following accounts shall be recorded by the acquirer:

Dr 4112 – Capital surplus (if the acquirer issues more shares- record according to the positive difference between the fair value and the face value of the share)

Dr 221 – Investment in subsidiaries (The increase amount of the cost of business consolidation) (according to the fair value of the share)

Cr 4111 – Contributed capital (according to face value) (If the acquirer issues more shares – record according to the par value)

Cr 4112 – Capital surplus (if the acquirer issues more shares- record according to the negative difference between the fair value and the face value of the share)

Cr 111, 112, etc. (if the payment is made by cash).

- When paying the additional amount to the acquired by goods and products, the following accounts shall be recorded by the acquirer:

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Cr 511 – Revenues (according to net of VAT)

Cr 333 – Taxes and other payables to the State (33311).

At the same time, reflect the costs of products and goods dispatched to the acquired as follows:

Dr 632 – Costs of goods sold

Cr 155, 156.

- When paying the additional amount to the acquired by fixed assets, the following accounts shall be recorded by the acquirer:

Dr 221 – Investment in subsidiaries (The increase amount of the cost of business consolidation)

711 – Other income

Cr 333 – Taxes and other payables to the State (33311).

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Dr 811 – Other expenses (residual value)

Dr 214 – Depreciation of fixed assets (depreciation value)

Cr 211- Tangible fixed asset (cost).

- The decreasing adjustments in the cost of business consolidation because the acquirer may collect more cash or assets of the acquired shall be recorded by the acquirer as follows:

Dr 111, 112, 152, 155, 156, 211...

Cr 221 – Investment in subsidiaries

(3) In case the acquirer is required to make a subsequent payment to the acquired as compensation for a reduction in the value of the assets given, equity instruments issued or liabilities incurred or assumed by the acquirer in exchange for control of the acquired. (For example, when the acquirer guarantees the market price of equity or debt instruments issued as part of the cost of the business consolidation and when the acquirer is required to issue additional equity or debt instruments to restore the originally determined cost). In such cases, no increase in the cost of the business consolidation is recognized. In case of equity instruments, the fair value of the additional payment is offset by an equal reduction in the value attributed to the instruments initially issued. In case of debt instruments, the additional payment is regarded as a reduction in the premium or an increase in the discount on the initial issuance.

Depending on future events according to the business consolidation agreement, the following accounts shall be recorded by the acquirer according to each case:

- If the acquirer has to issue additional shares to restore the initial value of the shares to the acquired due to the discount, the following accounts shall be recorded:

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Cr 4111 – Contributed capital

- If the acquirer has to issue additional bonds to restore the initial value of the bonds to the acquired due to the discount, the following accounts shall be recorded:

+ When reducing the bond premium, the following accounts shall be recorded:

Dr 3433 - Bond premium

Cr 3431 – Par value of bonds

+ When increasing the bond discount, the following accounts shall be recorded:

Dr 3432 – Bonds discount

Cr 3431 – Par value of bonds

+ If the additional payment to the acquired is recorded as a decrease in bond premium or recorded as an increase in the bond discount corresponding to the amount of bond issued, the following accounts shall be recorded:

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Dr 3433 – Bonds premium (if recorded as a decrease)

Cr 111, 112, etc.

2/ If the business consolidation does not result in a parent-subsidiary relationship

2.1- General principles

- At the acquisition date, the acquirer shall determine and reflect the cost of a business consolidation similar to the case where the business consolidation results in a parent-subsidiary relationship. At the same time, the acquirer shall record purchased assets, liabilities and contingent liabilities at fair value at the acquisition date in separate financial statements, including assets and liabilities and contingent liabilities (if any) that are not yet recorded by the acquired. The positive difference between the cost of business consolidation and the equity of the acquirer in the net fair value of identifiable assets, liabilities and contingent liabilities is goodwill. This appears as an asset in the financial statements of the acquirer and is then amortized in operating expenses of the acquirer within 10 years.

- If the cost of the business consolidation is less than the equity of the acquirer in the net fair value of identifiable assets, liabilities assumed contingent liabilities, the acquirer must review the determination of the fair value of the identifiable assets, liabilities, contingent liabilities (if any) and the determination of the cost of the business consolidation. After reviewing and adjusting, if the difference still remains, the acquirer shall immediately recognize the all the remained differences in the profit or loss after revaluation.

2.2- Accounting method

- If the goodwill is created on the acquisition date, the following accounts shall be recorded by the acquirer according to each case:

+ If the trading in business consolidation is paid in cash or cash equivalents by the acquirer:

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Dr 242 – Prepaid expenses (goodwill in details)

Cr 311, 331, 341, 342, etc. (according to fair value of liabilities and assumed contingent liabilities)

Cr 111, 112, 121 (amounts of cash or cash equivalents paid by the acquirer).

+ If the trading in business consolidation is carried out by the bond issuance of the acquirer:

Dr 131, 138, 152, 153, 155, 156, 211, 213, 217, etc (according to fair value of purchased assets)

Dr 242 – Prepaid expenses (goodwill in details)

Dr 4112 – Capital surplus (The fair value is smaller than the face value) (if the issue price according to the fair value is smaller than the face value of the share)

Cr 4111 – Contributed capital (according to face value)

Cr 311, 315, 331 341, 342, etc. (according to fair value of liabilities and assumed contingent liabilities)

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Stock floatation cost actually induced will be recorded as follows:

Dr 4112 – Capital surplus

Cr 111, 112

- Periodically, the acquirer amortizes goodwill in operating expenses as follows:

Dr 642 - General administration expenses

Cr 242 – Prepaid expenses (goodwill in details)

- If the negative goodwill is created on the acquisition date, the following accounts shall be recorded by the acquirer according to each case:

+ If the trading in business consolidation is paid in cash or cash equivalents by the acquirer:

Dr 152, 153, 155, 156, 211, 212, 213, etc (according to fair value of purchased assets)

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Cr 311, 315, 331 341, 342, etc. (according to fair value of liabilities and assumed contingent liabilities)

Cr 111, 112, 121... (Amounts of cash or cash equivalents paid by the acquirer).

Cr 711 – Other incomes (Record profit – if any after reviewing the value of the identifiable assets, liabilities, contingent liabilities and the cost of the business consolidation when a negative goodwill arises)

+ If the trading in business consolidation is carried out by the bond issuance of the acquirer:

Dr 111, 112, or

Dr 131, 138, 152, 153, 155, 156, 211, 212, 213, 217, etc (according to fair value of purchased assets)

Dr 4112 – Capital surplus (The fair value is smaller than the face value) (if the issue price according to the fair value is smaller than the face value of the share)

Dr 811 – Other expenses (Record losses – if any after reviewing the value of the identifiable assets, liabilities, contingent liabilities and the cost of the business consolidation when a negative goodwill arises)

Cr 311, 331, 341 342, 342, etc. (according to fair value of liabilities and assumed contingent liabilities)

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Cr 4112 – Capital surplus (The fair value is greater than the face value) (if the issue price according to the fair value is greater than the face value of the share)

Cr 711 – Other incomes (Record profit – if any after reviewing the value of the identifiable assets, liabilities, contingent liabilities and the cost of the business consolidation when a negative goodwill arises)

Stock floatation cost actually induced will be recorded as follows:

Dr 4112 – Capital surplus

Cr 111, 112.

- The trading in business consolidation may be carried out by exchange of assets between the acquirer and the acquired. These transactions shall be recorded in the same way as that specified in Point 1 Section B Part I.

Example 1: Business consolidation involves the acquisition of all net assets, which results in goodwill and not results in a parent-subsidiary relationship:

On January 1, X1, Company P purchased all assets and liabilities of Company S by issuing 10,000 shares of VND 10,000 par value to Company S. The market value of this stock is 60,000 per share. Expenditure incurred for valuation and audit related to the purchase of assets and liabilities of Company S which Company P has to pay in cash is VND 40,000,000. The cost of issuance of shares of Company P in cash is 25,000,000 VND. After the acquisition, only Company P exists and Company S is dissolved.

In this case, the cost of the business consolidation is determined as follows:

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VND 60,000 x 10,000 = VND 600,000,000

- Costs directly related to the business consolidation

VND 40,000,000

Total cost of the business consolidation:

VND 640,000,000

The value of issued shares of Company P is determined by their fair value minus (-) the cost of issuance of shares:

- Market value of 10,000 shares issued by Company P

VND 600,000,000

- Stock floatation cost:

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Value of shares issued:

VND 575,000,000

As soon as the business consolidation cost is determined (640 million), it must be allocated to identifiable assets, liabilities and contingent liabilities (if any). Acquired assets and liabilities are determined according to their fair value at the acquisition date. The positive difference between the cost of business consolidation and the equity of the acquirer in the net fair value of identifiable assets, liabilities and assumed contingent liabilities is goodwill. This is then amortized in operating expenses and recognized in income statements of the acquirer within 10 years.

Assuming that at December 31, X0, the Balance Sheet of Company S is as follows:

Unit: VND

Items

Book value

Fair value

ASSET

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- Cash

20,000,000

20,000,000

- Account receivable

25,000,000

25,000,000

- Inventory

65,000,000

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- Intangible fixed assets (land use rights)

40,000,000

70,000,000

- Tangible fixed asset

   (Buildings, machines, equipment)

400,000,000

350,000,000

- Accumulated depreciation

(150,000,000)

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- Patent

(*) 80,000,000

Total assets

400,000,000

620,000,000

LIABILITIES

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100,000,000

110,000,000

OWNER’S EQUITY

- Contributed capital

 (VND 10,000 par value)

100,000,000

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50,000,000

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- Retained earnings

150,000,000

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Total equity

400,000,000

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Fair value of net assets

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510,000,000

Note: (*) The patent value of the acquired has not been recognized as an intangible fixed asset, but upon acquisition, because the acquirer determines that it satisfies the criteria prescribed in accounting standard No. 04- Intangible fixed assets, it will be recognized as an intangible fixed asset

In this case, at the acquisition date (January 01, X0), Company P shall record the value of each asset, each liability and the value of transferred shares as follows:

Dr 111, 112                                                                 20,000,000        (According to fair value)

Dr 131                                                 25,000,000                            -

Dr 152                                                75,000,000                            -

Dr 2131 (land use rights)                       70,000,000                            -   

Dr 2133 (Patent)                       80,000,000                                 -

Dr 211 (tangible fixed assets)                          350,000,000               -

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 (= 640,000,000 VND - 510,000,000 VND)

Cr 311                                                            110,000,000

Cr 4111                                                           100,000,000

Cr 4112                                                           475,000,000

Cr 111                                                     65,000,000

Example 2: Business consolidation involves the acquisition of all net assets, which results in negative goodwill and not results in a parent-subsidiary relationship:

On January 1, X1, Company P purchased all assets and liabilities of Company S by issuing 10,000 shares of 10,000D par value to Company S. The market value of this stock is 42,000 per share. Expenditure incurred for valuation and audit related to the purchase of assets and liabilities of Company S which Company P has to pay in cash is VND 40,000,000. The cost of issuance of shares of Company P in cash is 25,000,000 VND. After the acquisition, only Company P exists and Company S is dissolved.

In this case, the cost of the business consolidation is determined as follows:

- Market value of 10,000 shares issued by Company P

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- Costs directly related to the business consolidation

VND 40,000,000

Total cost of the business consolidation:

VND 460,000,000

The value of issued shares of Company P is determined by their fair value minus (-) the cost of issuance of shares:

- Market value of 10,000 shares issued by Company P

VND 420,000,000

- Stock floatation cost:

(VND 25,000,000)

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VND 395,000,000

The cost of business consolidation when purchasing Company S's net assets is VND 460,000,000; The total fair value of Company S's net assets is still VND 510,000,000 (the Company's Balance Sheet at December 31, X0 is similar to Example 1).The difference of 510,000,000 - 460,000,000 = 50,000,000 VND shall be recorded as follows:

Company P shall review the fair value of assets and liabilities of company S and carried out some adjustments as follows:

- Fair value of land use rights is VND 63,000,000 (formerly VND 70,000,000) (decrease VND 7,000,000);

- Fair value of buildings, machines and equipment is VND 315,000,000 (formerly VND 350,000,000) (decrease VND 35,000,000);

- The fair value of other assets and liabilities remains the same.

Total fair value of net assets of company S after review and re-evaluation is decreased by VND 42,000,000 (7,000,000 +35,000,000), the difference of 50,000,000 – 42,000,000 = VND 8,000,000 is recorded as profits within the period (Account 711).

In this case, at the acquisition date (January 01, X0), Company P shall record the value of each asset, each liability and the value of transferred shares as follows:

Dr 111, 112                              20,000,000        (according to the fair value)

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Dr 152                                                75,000,000

Dr 2131 (land use rights)                       63,000,000                -

Dr 2133 (Patents)                     80,000,000                -

Dr 211 (intangible fixed assets)           315,000,000               -

Cr 311                                                 110,000,000

Cr 4111                                                           100,000,000

Cr 4112                                                           295,000,000

Cr 111                                                 65,000,000

Cr 711              (468,000,000 - 460,000,000)         8,000,000      

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1- The acquirer which is the parent company shall not prepare consolidated financial statements at the acquisition date but shall prepare consolidated financial statements at the earliest time according to effective regulations.

2- The acquirer which is the parent company shall comply with the principles on preparation and disclosure of consolidated financial statements as specified in accounting standard 25 - Consolidated Financial Statements and Accounting for Investments in Subsidiaries and the Circular guiding the implementation of accounting standard 25. In order to prepare the consolidated financial statements, the acquirer which is the parent company shall comply with the following regulations:

2.1- At the acquisition date, the acquirer (parent company) shall calculate, determine and record the following adjustments in the consolidated accounting book:

a) Record the difference between fair value and book value of identifiable assets and liabilities of the acquired (subsidiary) at the acquisition date:

In order to recognize all acquired assets and identifiable liabilities at the acquisition date according to fair value, the parent company shall determine and record the difference between the fair value and book value of identifiable assets and liabilities of the subsidiary at the acquisition date.

The adjustments are as follows:

Increase assets (Positive difference between fair value and book value of each acquired asset)

Decrease liabilities (Negative difference between fair value and book value of each acquired liability)

Decrease assets (Negative difference between fair value and book value of each acquired asset)

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Increase (or decrease) difference in asset revaluation (The difference between fair value and book value of identifiable assets and liabilities acquired from the subsidiary at the acquisition date) 

b) Record book value of the investment by the parent company (acquirer) in the subsidiary (acquired) and capital amount of the parent company contributed in the owner’s equity of the subsidiary at the acquisition date to exclude them when consolidating. At the same time determine the amount of goodwill derived from business consolidation (if any) to record in the consolidated financial statement. Goodwill is the difference between the cost of business consolidation and the equity of the acquirer in net fair value of identifiable assets, liabilities and contingent liabilities (if any), it shall be adjusted as follows:

Decrease - Contributed capital

Decrease – Difference in asset revaluation

Decrease – Financial reserve fund

Decrease – Development investment fund

Decrease – Undistributed profits

Increase - Goodwill

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c) Determine benefits of minor shareholders in the value of net assets of the subsidiary to record them in the consolidated balance sheet. Benefits of minor shareholders in the value of net assets of the subsidiary at the acquisition date is determined as a part of the value of net assets according to fair value of the subsidiary respectively to benefits that are not owned by the parent company attributable to the results of the business consolidation.

The adjustments are as follows:

Decrease - Contributed capital

Decrease – Difference in asset revaluation

Decrease – Financial reserve fund

Decrease – Development investment fund

Decrease – Undistributed profits

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Increase – Benefits of minor shareholders.

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2.2- In order to prepare the consolidated financial statements, the acquirer shall follow, collect and fully store information and documents on changes in financial situation and business situation of the subsidiary from the date of business consolidation (date of acquisition) to the consolidated financial statement preparation date.

2.3- When preparing the consolidated financial statements, the adjustments determined by the acquirer shall comply with changes in financial situation and business situation of the parent company and the subsidiary from the date of business consolidation to the consolidated financial statement preparation date according to accounting standard 25 - Consolidated Financial Statements and Accounting for Investments in Subsidiaries and the Circular guiding the implementation of accounting standard 25.

2.4- Income statements of the subsidiary shall be included in the consolidated financial statements from the acquisition date.

Example 3: Acquire all shares, no goodwill derived

On January 1, X1, Company P purchased all shares outstanding of Company S at the price of VND 300,000,000, paid in cash. At the acquisition date, the fair value of assets and liabilities of Company S is equal to its book value. The data on balance sheets of Company P and Company S as at December 31, X0 are as follows:

Unit: VND

Items

Balance sheet of Company P

Balance sheet of Company S

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...

- Cash

350,000,000

50,000,000

- Account receivable

75,000,000

50,000,000

- Inventory

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...

60,000,000

- Intangible fixed assets (land use rights)

175,000,000

40,000,000

- Tangible fixed asset

 (Buildings, machines, equipment)

800,000,000

600,000,000

- Accumulated depreciation

...

...

...

(300,000,000)

Total assets

1,100,000,000

500,000,000

LIABILITIES

300,000,000

200,000,000

- Account payable

100,000,000

...

...

...

- Long-term debts

200,000,000

100,000,000

OWNER’S EQUITY

800,000,000

300,000,000

- Contributed capital

(VND 10,000 par value)

500,000,000

...

...

...

- Retained earnings

300,000,000

100,000,000

Total equity

1,100,000,000

500,000,000

* When purchasing all shares of Company S on January 1, X1 and becoming the parent company, Company P shall record the following contents on its accounting book:

Dr 221 – Investment in subsidiaries       300,000,000 (Company S in details)

Cr 111,112                                           300,000,000   

...

...

...

Unit: VND

Items

Balance sheet of Company P
(After acquiring shares of Company S)

Balance sheet of Company S

ASSET

- Cash

50,000,000

...

...

...

- Account receivable

75,000,000

50,000,000

- Inventory

100,000,000

60,000,000

- Intangible fixed assets (land use rights)

175,000,000

40,000,000

...

...

...

800,000,000

600,000,000

- Accumulated depreciation

(400,000,000)

(300,000,000)

- Investment in subsidiaries

300,000,000

Total assets

...

...

...

500,000,000

LIABILITIES

300,000,000

200,000,000

- Account payable

100,000,000

100,000,000

- Long-term debts

200,000,000

...

...

...

OWNER’S EQUITY

800,000,000

300,000,000

- Contributed capital (VND 10,000 par value)

500,000,000

200,000,000

- Retained earnings

300,000,000

100,000,000

...

...

...

1,100,000,000

500,000,000

* In order to prepare the consolidated financial statement, at the acquisition date (January 01, X1), Company P shall record the adjusting entry (on the consolidated accounting book) excluding the book value of the investment by the parent company in the subsidiary and the capital of the parent company in the equity of the subsidiary at acquisition date as follows:

Adjusting entry:

Decrease - Contributed capital (of subsidiary S)                                200,000,000

Decrease – Undistributed profits (of subsidiary S)                                            100,000,000

Decrease – Investment in subsidiaries (of parent company P)                              300,000,000

Example 4: Acquire all shares, goodwill derived

On January 1, X1, Company P purchased all shares outstanding of Company S at the price of VND 400,000,000, paid in cash. The fair value and book value of assets and liabilities of Company S at December 31, X0 are as follows:

...

...

...

Items

Balance sheet

(Book value)

Balance sheet

(Fair value)

Difference

ASSET

...

...

...

- Cash

50,000,000

50,000,000

- Account receivable

50,000,000

50,000,000

- Inventory

...

...

...

75,000,000

15,000,000

- Intangible fixed asset

 (Land use rights)

40,000,000

100,000,000

60,000,000

- Tangible fixed asset

 (Buildings, machines, equipment)

...

...

...

590,000,000

(10,000,000)

- Accumulated depreciation

(300,000,000)

(300,000,000)

Total assets

500,000,000

565,000,000

...

...

...

LIABILITIES

200,000,000

235,000,000

(35,000,000)

- Account payable

100,000,000

100,000,000

- Long-term debts (Issued bonds)

...

...

...

135,000,000

(35,000,000)

OWNER’S EQUITY

300,000,000

- Contributed capital (VND 10,000 par value)

200,000,000

...

...

...

- Retained earnings

100,000,000

Total equity

500,000,000

(35,000,000)

Net assets

...

...

...

330,000,000

30,000,000

Thus Company P acquires more than the book value of the net asset of Company S an amount of VND 100,000,000 (400,000,000 - 300,000,000) and more than the fair value of the net asset of Company S an amount of VND 70,000,000 (400,000,000 - 330,000,000).

* When purchasing all shares of Company S on January 1, X1 and becoming the parent company, Company P shall record the following contents on its accounting book:

Dr 221 – Investment in subsidiaries                   400,000,000 (Company S in details)

Cr 111, 112                                          400,000,000

* In order to prepare the consolidated financial statement, at the acquisition date (January 01, X1), Company P shall record adjusting entries as follows:

a) Record the difference between fair value and book value of identifiable assets and liabilities of Company S at the acquisition date (January 01, X1):

Increase – Inventory (= 75,000,000 - 60,000,000)                                      15,000,000

...

...

...

(= 100,000,000 – 40,000,000)

Decrease – Tangible fixed assets (= 590,000,000 - 600,000,000)              10,000,000

Increase – Long-term debts (= 135,000,000 - 100,000,000)                    35,000,000

Increase – Difference in asset revaluation                               30,000,000

(The difference between the fair value and the book value of identifiable assets and liabilities acquired of the subsidiary at the acquisition date) 

Exclude book value of the investment by the parent company in the subsidiary and capital amount of the parent company contributed in the owner’s equity of the subsidiary at the acquisition date, at the same time record the amount of goodwill derived:

Decrease – Contributed capital (of subsidiary S)                                 200,000,000

Decrease – Undistributed profits (of subsidiary S)                              100,000,000

Increase – Difference in asset revaluation                                   30,000,000

...

...

...

Decrease – Investment in subsidiaries (of parent company P)                             400,000,000

Example 5: Acquire less than 100% shares, goodwill derived

On January 1, X1, Company P purchased 80% shares outstanding of Company S at the price of VND 320,000,000, paid in bank deposit. The fair value and book value of assets and liabilities in the balance sheet of Company S at December 31, X0 are as follows:

Unit: VND

Items

Book value

Fair value

Difference

ASSET

...

...

...

- Cash

50,000,000

50,000,000

- Account receivable

50,000,000

50,000,000

...

...

...

- Inventory

60,000,000

75,000,000

15,000,000

- Intangible fixed asset

  (Land use rights)

40,000,000

100,000,000

60,000,000

...

...

...

  (Buildings, machines, equipment)

600,000,000

590,000,000

(10,000,000)

- Accumulated depreciation

(300,000,000)

(300,000,000)

Total assets

...

...

...

565,000,000

65,000,000

LIABILITIES

200,000,000

235,000,000

(35,000,000)

- Account payable

100,000,000

100,000,000

...

...

...

- Long-term debts (Issued bonds)

100,000,000

135,000,000

(35,000,000)

OWNER’S EQUITY

...

...

...

- Contributed capital (VND 10,000 par value)

200,000,000

- Retained earnings

100,000,000

...

...

...

Total equity

500,000,000

Net assets

300,000,000

330,000,000

30,000,000

- Cost of the business consolidation:

...

...

...

- Equity of Company P in the net asset value of Company S: 80% x 330,000,000

264,000,000

- Goodwill

  56,000,000

- Benefits of minor shareholders: 20% x 330,000,000 =

  66,000,000

* Company P, when buying shares of Company S on January 1, X1, shall record the following contents (on the accounting book of company P):

221 – Investment in subsidiaries             320,000,000 (Company S in details)

Cr 112                                                  320,000,000

...

...

...

a) Record the difference between fair value and book value of identifiable assets and liabilities of Company S at the acquisition date (January 01, X1):

Increase - Inventory (= 75,000,000 - 60,000,000)                                       15,000,000

Increase = Intangible fixed assets (land use rights)                                 60,000,000

(= 100,000,000 - 40,000,000)

Decrease – Tangible fixed assets (= 590,000,000 - 600,000,000)              10,000,000

Increase – Long-term debts (= 135,000,000 - 100,000,000)                     35,000,000

Increase - Difference in asset revaluation (The difference between fair value and book value of identifiable assets and liabilities acquired from the subsidiary at the acquisition date)

                                                                                                               30,000,000

b) Exclude book value of the investment by the parent company in the subsidiary and capital amount of the parent company contributed in the owner’s equity of the subsidiary at the acquisition date, at the same time record the amount of goodwill derived:

...

...

...

Decrease – Undistributed profits (of subsidiary S) (80%)                             80,000,000

Decrease – Difference in asset revaluation                                                  24,000,000

Increase – Goodwill                                                                                  56,000,000

Decrease – Investment in subsidiaries (of parent company P)                             320,000,000

c) Determine benefits of minor shareholders in the value of net assets of the consolidated subsidiary at the acquisition date:

Decrease – Contributed capital (of subsidiary S) (20%)                                40,000,000

Decrease – Undistributed profits (of subsidiary S) (20%)                             20,000,000

Decrease – Difference in asset revaluation                                                   6,000,000

Increase – Benefits of minor shareholders.                                               66,000,000

...

...

...

Unit: VND

Items

Balance sheet of Company P

Balance sheet of Company S

Adjusting entry

Consolidated balance sheet

Increase

Decrease

...

...

...

- Cash

10,000,000

50,000,000

...

...

...

60,000,000

- Account receivable

75,000,000

50,000,000

125,000,000

- Inventory

100,000,000

...

...

...

(a) 15,000,000

175,000,000

- Intangible fixed asset

(Land use rights)

175,000,000

40,000,000

(a) 60,000,000

...

...

...

- Tangible fixed asset

(Buildings, machines, equipment)

800,000,000

600,000,000

(a) 10,000,000

1,390,000,000

- Accumulated depreciation

(400,000,000)

...

...

...

(700,000,000)

- Investment in subsidiaries

320,000,000

(b) 320,000,000

-

...

...

...

(b) 56,000,000

56,000,000

Total assets

1,080,000,000

500,000,000

...

...

...

1,381,000,000

LIABILITIES

280,000,000

200,000,000

515,000,000

- Account payable

100,000,000

...

...

...

200,000,000

- Long-term debts (Issued bonds)

180,000,000

100,000,000

(a) 35,000,000

315,000,000

...

...

...

800,000,000

300,000,000

300,000,000

800,000,000

- Contributed capital (VND 10,000 par value)

500,000,000

200,000,000

...

...

...

(c) 40,000,000

500,000,000

- Retained earnings

300,000,000

100,000,000

(b) 80,000,000

(c) 20,000,000

300,000,000

...

...

...

(a) 30,000,000

(b) 24,000,000

(c) 6,000,000

-

BENEFITS OF MINOR SHAREHOLDERS

...

...

...

66,000,000

Total equity

1,080,000,000

500,000,000

1,381,000,000

II. GUIDANCE OF THE IMPLEMENTATION OF ACCOUNTING STANDARD “PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITIES”

...

...

...

1. A provision is a liability of uncertain timing or amount.

Enterprises shall recognize provisions if they fully meet the conditions stipulated in paragraph 11 accounting standard 18 – Provisions, contingent assets and contingent liabilities.

2. Contingent liability:

2.1. A contingent liability is: 

a. A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or

b. A present obligation that arises from past events but is not recognized because:

It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or

The amount of the obligation cannot be measured with sufficient reliability.

2.2. An enterprise shall not recognize a contingent liability.

...

...

...

3. Contingent asset:

3.1. A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.

3.2. An enterprise shall not recognize a contingent asset.

Contingent assets shall not be recognized in financial statements since this may result in the recognition of income that may never be realized.

4. Provisions for payables often include:

- Payable provisions for product warranty;

- Payable provisions for enterprise restructure;

- Payable provisions for contracts with major risk in which the payable costs for the obligations relating to the contract exceed the economic benefits expected to be obtained from such contracts;

- Other payable provisions.

...

...

...

B. SPECIFIC PROVISIONS

Accountants shall use account 352 – Provisions for payables to record provisions.

Account 352 – Provisions for payable reflects the enterprise’s provisions and use for payables.

1. Accounting methods for account 352 – Provisions for payables shall comply with the following regulations:

1.1. A payable provision shall be recorded when the following regulations are satisfied:

a. The enterprise’s liability (legal liability or joint liability) is the result of a previous event;

b. An outflow of resources embodying economic benefits will be probable that leads to the settlement of the obligation; and

c. The amount of the obligation can be measured with sufficient reliability.

1.2. The recorded value of a payable provision is the most reasonable amount that will be spent to fulfill the liability at the end of the accounting period.

...

...

...

Provision for payable on construction warranty is set up for each construction and is set up at the end of an accounting year or at the end of an interim accounting period. In case the amount of provision for payable on construction warranty set up is higher than real expenses incurred, the difference refunded shall be recorded as an increase in other income (Cr Account 711 - Other income).

1.4. Only the expenses related to the provision may be covered by such provision.

1.5. Do not record a provision for future loss on operation unless it is related to a high-risk contract and is qualified as a provision.

1.6. If the enterprise enters into a high-risk contract, the current liability under the contract shall be determined and recorded as a provision. In this case, each high-risk contract shall have a separate provision.

1.7. A provision for expenses of enterprise restructuring are only recorded if it fully meets the conditions stipulated in paragraph 11 accounting standard 18 – Provisions, contingent assets and contingent liabilities.

1.8. When conducting the enterprise restructuring, jointly liable obligation only incurred when enterprises:

a. Have an official and specific plan to clearly determine the enterprise restructuring, which include at least the following 5 contents:

- All or a part of a business related;

- Influenced important positions;

...

...

...

- Expenses that will be paid; and

- Time when the plan is performed.

b. Give a reliable estimation on affected subjects and conduct restructuring process by starting to implement that plan, or noticing important issues of restructure to affected subjects.

1.9. A provision for restructuring is only estimated for expenses directly incurred from restructuring activities; which are expenses that meet both conditions:

a. Necessary for restructuring activities; and

b. Not related to regular activities of the enterprise.

1.10. A provision for restructuring excludes the following expenses:

a. Re-training or transferring existing employees;

b. Marketing;

...

...

...

2. Structure and contents of account 352 – Provision for payables

Debit:

- Record a decrease in provision for payables when incurring expenses related to the provision formed initially;

- Record a decrease in (refund) provision for payables when the enterprise suffering from an outflow of resources embodying economic benefits due to not paying debt obligation;

- Record a decrease in provision for payables on the negative difference between the provisions for payable formed this year and the unspent provision for payables established for previous year.

Credit: Record provision for payables to expenses

Credit balance: Record current provision for payables at the end of term.

3. Accounting methods for major transactions:

3.1. When the enterprise determines a provision for the cost of restructuring the enterprise and satisfies the conditions for recognition of the provision, when setting up a provision for the cost of enterprise restructuring, record:

...

...

...

Cr 352 - Payable provisions.

3.2. If the enterprise enters into contracts with major risk in which the payable costs for the obligations relating to the contract exceed the economic benefits expected to be obtained from such contracts. Mandatory costs under contract terms such as indemnity or compensation for failure to perform the contract, when setting up a provision for a high-risk contract, record:

Dr 642 - General administration expenses (6426)

Cr 352 - Payable provisions.

3.3. In case the enterprise sells goods for customers including warranty for repairing fails due to production fault, discovered in the warranty period of products, goods, the enterprise shall determine the cost of repair for the entire warranty obligation. When setting up provisions for the cost of repairing and maintenance of products and goods, record:

Dr 641 – Selling expenses

Cr 352 - Payable provisions.

When setting up provisions for the cost of warranty for construction works, record:

Dr 627 - General production expenses

...

...

...

3.4. When setting up other provisions included in the general administrative expense, record:

Dr 642 - General administration expenses (6426)

Cr 352 - Payable provisions.

3.5. When incurring expenses related to the provision formed initially:

(1) When incurring cash expenses related to the repayment of liabilities which have been formed provisions, record:

Dr 352 - Payable provisions.

Cr 111, 112, 331...

(2) When incurring expenses on warranty of products, goods and construction works related to the payable provision established initially (such as material costs, labor costs, fixed-asset depreciation expenses, outsourced services expenses, etc), record:

(3) In case of not having the independent section on warranty of products, goods and construction works:

...

...

...

Dr 621, 622, 623, 627

Dr 133 – Deductible VAT (if any) Cr 152, 153, 214, 331, 334, 338,...

At the end of term, the accountant transfers expenses as follows:

Dr 154 – Work in progress Cr 621, 622, 623, 627.

+ When completing the repairing of products, goods, construction works and transferring them to customer, record:

Cr 352 - Payable provisions.

Dr 641 – Selling expenses (Insufficient payable provision for warranty of products, goods)
Cr 154 – Work in progress.

(4) In case of having the independent section on warranty of products, goods and construction works:

+ Payable for subordinate units, internal units on warranty expenses of products, goods, construction works completed and transferred to customers, record:

...

...

...

Dr 641 – Selling expenses (Insufficient payable provision for warranty of products, goods)
Cr 336 – Internal payable

+ When paying subordinate units, internal units on warranty expenses of products, goods, construction works, record:

Cr 336 – Internal payable

Cr 111, 112.

3.6. At the end of the accounting year or the interim accounting period (hereinafter referred to as accounting period), the enterprise must calculate and determine the amount of payable provisions needs to be set up:

(1) In case the provision for payables needs to be set up in this accounting period is higher than the unspent provision for payables set up in the previous accounting period, the difference is accounted into expenses, record:

Dr 642 - General administration expenses (6426)

Dr 641 – Selling expenses (According to payable provision for warranty of products, goods)

Cr 352 - Payable provisions.

...

...

...

Cr 352 - Payable provisions.

Cr 642 - General administration expenses (6426) Cr 641 – Selling expenses (According to payable provision for warranty of products, goods)

(3) At the end of an accounting year or at the end of an interim accounting period, when determining the payable provision on construction warranty for each construction, record:

Dr 627 - General production expenses              Cr 352 – Provisions for payables

3.7. At the end of the warranty period of the construction, if the construction does not need a warranty, or the amount of provision for payable on construction warranty is higher than real expenses incurred, the difference shall be refunded as follows:

Dr 352 – Provision for payables Cr 711 – Other income.

3.8. In some cases, the enterprise may seek for a third party to pay a part or total expenses of the provision (for example, through insurance contracts, compensations or warranty of suppliers), the third party may refund the amount paid by the enterprises. When the enterprise receives the compensation of a third party to pay a part or total expenses for provision, the accountant shall record:

Dr 111, 112, etc. Cr 711 – Other income.

3.9. Contingent assets shall not be recognized in financial statements since this may result in the recognition of income that may never be realized (For example, an indemnity is being taken legal action by the enterprise when the outcome is uncertain). However, when the acquisition of these items is almost certain, the assets associated with them are no longer a contingent asset (as the enterprise is almost certainly earning the economic benefits from it), assets and income related must be recognized in the financial statements, the accountant shall record:

...

...

...

3.10. When implementing Accounting Standard 18 – Provisions, contingent assets and contingent liabilities", if there is credit balance on the details of the pre-deducted amounts for warranty expenses for products, goods and construction works on account 335 – Expense payable, the accountant shall transfer the credit balance of account 335 (details of the pre-deducted amounts for warranty expenses for products, goods and construction works) to account 352 - Provisions for payables.

C. DISCLOSURE IN FINANCIAL STATEMENT

1. For each type of provision, the enterprise shall disclose:

a. The carrying amount at the beginning and end of the period;

b. Additional provisions made in the period, including increases to existing provisions;

c. The decrease in provision during the period due to incurring expenses related to the provision formed initially;

d. The decrease in unused provision during the period.

2. Enterprises must disclose in the notes to the financial statements the non-comparative financial information as provided in paragraph 80 to paragraph 87 of Accounting Standard 18 - Provisions, contingent assets and contingent liabilities.

III- GUIDANCE OF THE IMPLEMENTATION OF ACCOUNTING STANDARD

...

...

...

* Adapting to paragraph 14 of Accounting Standard 30 - Earnings per share (promulgated together with Decision No. 100/2005/QD-Btc dated December 28, 2005 of the Minister of Finance): the phrase “và là khoản giảm trừ vào lợi nhuận chưa phân phối của doanh nghiệp” is abrogated.

I. GENERAL PROVISIONS

1. Scope

This part of the Circular provides and guides the method of calculating basic earnings per share and discloses this indicator in the financial statement. If the enterprise must prepare both separate financial statements and consolidated financial statements, the information on the earnings per share under this accounting standard shall be disclosed in the consolidated financial statements. If the enterprise does not need to prepare the consolidated financial statements, the information on the earnings per share shall be disclosed in the separate financial statements and notes for financial statements.

The objective of diluted earnings per share and disclosure of this indicator in financial statements and other contents specified in accounting standard 30 – Earnings per share will be guided specifically after the Law on Securities and the guiding documents of the Law on Securities have provisions on financial instruments.

2. Calculating method for earnings per share

The enterprise shall calculate and disclose in financial statement the basic earnings per share amounts for profit or loss attributable to shareholders holding common shares of the enterprise. Basic earnings per share shall be calculated by dividing profit or loss allocated to shareholders holding common shares of the enterprise by the weighted average number of ordinary shares outstanding during the period.

Basic earnings per share

=

...

...

...

Weighted average number of ordinary shares outstanding during the period

“Profit or loss allocated to shareholders holding common shares” refers to the after-tax profits or losses after being adjusted by preferred share dividends, differences arising from the settlement of preferred shares and similar effects of preferred shares classified as equity.

“The number of ordinary shares used to calculate basic earnings per share” shall be the weighted average number of ordinary shares outstanding during the period. The weighted average number of ordinary shares outstanding during the period and all periods shall be adjusted for events, other than the conversion of potential ordinary shares, that have changed the number of ordinary shares outstanding without a corresponding change in resources.

3. Disclose earnings per share in financial statement

3.1. Joint-stock companies which are parent companies that have to prepare the consolidated financial statements shall disclose the basic earnings per share in the consolidated financial statements but not disclose it in the separate financial statements. In this case, the profit or loss allocated to shareholders holding common shares of the parent company is the profit or loss on the basis of information consolidation in accordance with Accounting Standard 25 - Consolidated Financial Statements and Accounting for Investments in Subsidiaries.

3.2. Joint-stock companies which are independent companies that do not have to prepare the consolidated financial statements shall disclose the basic earnings per share in the separate financial statements but not disclose it in the separate financial statements. In this case, the profit or loss allocated to shareholders holding common shares of the company is the profit or loss of this joint-stock company.

II. Specific provisions

1. Determine the profit or loss allocated to common shares

The profit or loss allocated to shareholders holding common shares shall be calculated by using the profit or loss after corporate income tax during the period minus (-) the decrease amounts adjusted plus (+) the increase amounts adjusted. If the company discloses earnings per share in the consolidated financial statements, the profit or loss after corporate income tax in the period is the profit or loss after corporate income tax calculated on the basis of consolidated information. In case the company discloses in the separate financial statements, the profit or loss after corporate income tax in the period is the profit or loss after tax of the company. The accountants shall, base on the detailed accounting book, monitor the preferred shares and determine the following indicators:

...

...

...

a. Dividends of preferred shares: Dividends of preferred shares include: Dividends of non-cumulative preferred shares which are not cumulative notified during the reporting period and dividends of cumulative preferred shares arising during the reporting period. Dividends of preferred shares are calculated as follows:

Dividends of preferred shares

=

Rates of dividends of preferred shares

x

Face value of preferred shares

- Non-cumulative preferred share refers to the share that if the company fails to declare dividend payment to the holders of preferred shares due to losses or other reasons, such dividends will not be transferred to  the next period. When determining the profit or loss after tax allocated to common shares, it is necessary to derive profit (loss) during the period minus the dividend of preference shares not accrued that were noticed during the period.

Example: Truong Son Joint Stock Company has an amount of non-cumulative preferred shares of not more than 100 million VND, preferential dividends of 15% per year. Profits (or losses) allocated to shareholders holding common shares in 2002 - 2005 are as follows:

Unit: VND 1,000,000

...

...

...

2002

2003

2004

2005

Profit (loss) after corporate income tax

(50)

10

90

200

...

...

...

-

-

15

15

The profit (or loss) allocated to common shares

(50)

10

75

185

...

...

...

2004: VND 90,000,000 - VND 15,000,000 = VND 75,000,000

2005: VND 200,000,000 - VND 15,000,000 = VND 185,000,000

- Cumulative preferred share is the type of share that is guaranteed to be paid dividends, even in some accounting periods that the company does not announce payment or just announces partial payment, the outstanding dividends is accrued and the company must pay this dividend before paying dividends of common shares. When calculating the profit or loss after tax allocated to common shares, the profit (loss) after corporate income tax shall be deducted from the preferential dividends arising during the period. This value does not include cumulative preference dividends related to previous periods.

Example: Truong Son Joint Stock Company has an amount of cumulative preference shares of not more than 100 million VND, preferential dividends of 15% per year. Profits (or losses) allocated to shareholders holding common shares in 2002 - 2005 are as follows:

Unit: VND 1,000,000

Indicator

2002

2003

2004

...

...

...

Profit (loss) after corporate income tax

(50)

10

90

200

Cumulative preferred shares arising during the period

15

15

15

...

...

...

Cumulative preferential dividends

15

30

45

60

The profit (or loss) allocated to common shares

(65)

(5)

75

...

...

...

According to the above example, in those years, the cumulative preferential dividend is VND 15,000,000. The cumulative preferential shares are gradually increased during the years, but are only adjusted as a decrease in the profit or loss after the corporate income tax during the period. Excluding other factors, the profit or loss allocated to shareholders holding common shares is:

2002: - VND 50,000,000 - VND 15,000,000 = - VND 65,000,000

2003: VND 10,000,000 - VND 15,000,000 = - VND 5,000,000

2004: VND 90,000,000 - VND 15,000,000 = VND 75,000,000

2005: VND 200,000,000 - VND 15,000,000 = VND 185,000,000

b. The positive difference between the fair value of payments to the owner and the book value of preference shares when joint-stock companies repurchase the preference shares of owners.

When joint-stock companies repurchase the preference shares of owners, the positive difference between the fair value of payments to the owner and the book value of preference shares is deducted (-) from profit (or loss) allocated to shareholders holding common shares of the company to calculate basic earnings per share.

Example: In 2005, Truong Son Joint Stock Company acquired an amount of preferred shares with par value of VND 50,000,000 at the price of VND 80,000,000. The after-tax profit of the company is VND 200,000,000.

According to this example, the positive difference between the fair value of the payment to the owner and the book value of preferred shares = 80,000,000 VND - 50,000,000 VND = 30,000,000 VND. The difference is recognized as a decrease in equity, so it does not affect the income statements of the period. Therefore it must be adjusted as a decrease when calculating the profit or loss allocated to common shares. Excluding other factors, the profit or loss allocated to shareholders holding common shares is calculated as follows:

...

...

...

c. The positive difference between the fair value of common shares or other payments made under conditions for beneficial conversion at the time of payment and the fair value of the common shares issued under original converting condition.

The positive difference between the fair value of common shares or other payments made under conditions for beneficial conversion is deducted (-) from profit (or loss) allocated to shareholders holding common shares of the company to calculate basic earnings per share.

Example: In 2005, Truong Son Joint Stock Company acquired an amount of preferred shares before due date. In order to do this, the company must pay the holder an additional charge apart from the original commitment of VND 20,000,000. The after-tax profit of the company is VND 200,000,000.

According to this example, the additional charge is recorded as a decrease in owner’s equity and does not affect the income statements of the period. Therefore it must be adjusted as a decrease when calculating the profit or loss allocated to common shares. Excluding other factors, the profit or loss allocated to shareholders holding common shares is calculated as follows:

The profit (or loss) allocated to common shares during the period is VND 200,000,000 - VND 20,000,000 = VND 180,000,000.

1.2 Amounts of increase adjustments in profit or loss after tax:

When joint-stock companies repurchase the preference shares of owners, the positive difference between the fair value of payments to the owner and the book value of preference shares is added the profit (or loss) allocated to shareholders holding common shares of the company to calculate basic earnings per share.

Example: In 2005, Truong Son Joint Stock Company acquired an amount of preferred shares with par value of VND 50,000,000 at the price of VND 40,000,000. The after-tax profit of the company is VND 200,000,000.

According to this example, the positive difference between the fair value of the payment to the owner and the book value of preferred shares = 50,000,000 VND - 40,000,000 VND = 10,000,000 VND. The difference is recognized as an increase in equity, so it does not affect the income statements during the period. Therefore it must be adjusted as an increase when calculating the profit or loss allocated to common shares. Excluding other factors, the profit or loss allocated to shareholders holding common shares is calculated as follows:

...

...

...

1.3. The profit (or loss) allocated to common shares calculating chart

After calculating the adjusted indicators, the accountant shall make calculating chart for the profit or loss allocated to common shares statement as follows:

Truong Son joint-stock company

THE PROFIT (OR LOSS) ALLOCATED TO COMMON SHARES CALCULATING CHART

Unit: ....

Indicator

Value

A

1

...

...

...

2. Decreasing adjustment

- Dividends of preferred shares

+ Non-cumulative preferred shares

First time:

...

...

...

 ...

+ Non-cumulative preferred shares

First time:

Second time:

...

...

...

- The positive difference between the fair value of payments to the owner and the book value of preference shares

First time:

Second time:

...

...

...

...

First time:

Second time:

- ...

Total decreasing adjustments

...

...

...

- The positive difference between the fair value of payments to the owner and the book value of preference shares

First time:

Second time:

- ...

...

...

...

4. The profit (or loss) allocated to common shares

Profit or loss allocated to common shares = profit or loss after corporate income tax – total decreasing adjustments + total increasing adjustments

Example: In the case of Truong Son Joint Stock Company, assuming that the abovementioned cases occur, the profit or loss allocated to common shares is determined as follows:

Truong Son joint-stock company

THE PROFIT (OR LOSS) ALLOCATED TO COMMON SHARES CALCULATING CHART

Unit: VND

Indicator

...

...

...

A

1

1. Profit or loss after corporate income tax

200,000,000

2. Decreasing adjustment

- Dividends of preferred shares

+ Non-cumulative preferred shares

...

...

...

+ Non-cumulative preferred shares

15,000,000

- The positive difference between the fair value of payments to the owner and the book value of preference shares

30,000,000

- The positive difference between the fair value of common shares or other payments made under conditions for beneficial conversion

20,000,000

Total decreasing adjustment

80,000,000

3. Increasing adjustment

...

...

...

- The positive difference between the fair value of payments to the owner and the book value of preference shares

10,000,000

Total increasing adjustment

10,000,000

4. The profit (or loss) allocated to common shares

130,000,000

The profit (or loss) allocated to common shares = VND 200,000,000 - VND 80,000,000 + VND 10,000,000 = VND 130,000,000.

2. Determine the number of shares for the purpose of calculating basic earnings per share

2.1. Issuance or re-acquirement of shares:

...

...

...

Average number of ordinary shares outstanding during the period

=

 Number of common shares outstanding at the beginning of the period

+

Number of common shares issued during the period

x

 Number of days the shares are outstanding during the period

-

Number of common shares re-acquired during the period

...

...

...

Number of days the shares are bought during the period

Total number of days in the period

Total number of days in the period

Example: In 2005, Truong Son Joint Stock Company has the numbers of common shares changed as follows: (for simplicity, the number of days in the period is calculated according to the number of months in the period)

Date

Transaction

Number of shares

Par value of shares

(VND 1,000)

...

...

...

(VND 1,000)

Average number of shares

1/1

Beginning of the period

1,000

10

10,000

1,000 x 12/12 = 1,000

31/3

...

...

...

600

10

6,000

600 x 9/12 = 450

30/8

acquirement of treasury shares

(150)

10

(1,500)

...

...

...

Total

1,450

14,500

1,400

According to the data of the above example:

- The average number of 1,000 shares issued at the beginning of the period is 1,000 x 12/12 = 1,000 shares

- The average number of 600 shares issued from March 31 is 600 x 9/12 = 450 shares

...

...

...

Weighted average number of common shares outstanding during the period is 1,000 + 450 – 50 = 1,400 shares. Meanwhile, the number of shares outstanding at the end of the period is 1,450.

2.2. Consolidation, split and bonus of shares

a. When splitting shares outstanding, the number of common shares increased is corresponding to the share split ratio. In this case there is no corresponding change in capital. In order to calculate the average number of shares outstanding during the period, the company assumes the split of shares occurred at the beginning of the reporting period.

Example: Continuing the example of Truong Son Joint Stock Company, if on October 30, 2005 Truong Son Joint Stock Company decides to split the number of shares outstanding with the criteria of one share outstanding split into two new shares then after splitting, the company will have 1,450 x 2 = 2,900 shares outstanding with par value of VND 5,000 per share.

When calculating the number of shares for calculation of earnings per share, the company must assume that the share split has been made since January 1, 2005, in which the company calculates the weighted average number of shares as follows:

Date

Transaction

Number of shares

Par value of shares

...

...

...

Value

(VND 1,000)

Average number of shares

1/1

Beginning of the period

2,000

5

10,000

2,000 x 12/12 = 2,000

...

...

...

Issuance

1.200

5

6,000

1,200 x 9/12 = 900

30/8

Acquirement of treasury shares

(300)

5

...

...

...

(300) x 4/12 = (100)

Total

2,900

14,500

2,800

According to the data of the above example:

...

...

...

- Par value of each share decreases 2 times = VND 10,000 : 2 = VND 5,000

- Total par value = VND 14,500,000, no changes after the split.

- The weighted average number of shares increases 2 times = 1,400 x 2 = 2,800 shares.

b. When consolidating shares, the number of common shares decreased is corresponding to the share consolidation ratio. In this case there is no corresponding change in capital. In order to calculate the average number of shares outstanding during the period, the company assumes the consolidation of shares occurred at the beginning of the reporting period.

Example: Continuing the example of Truong Son Joint Stock Company, if on October 30, 2005 Truong Son Joint Stock Company does not split but consolidates the number of shares outstanding with the criteria of two share outstanding consolidated into one new shares then after the consolidation, the company will have 1,450 : 2 = 725 shares outstanding with par value of VND 20,000 per share.

When calculating the number of shares for calculation of earnings per share, the company must assume that the share consolidation has been made since January 1, 2005, in which the company calculates the weighted average number of shares as follows:

Date

Transaction

Number of shares

...

...

...

(VND 1,000)

Value

(VND 1,000)

Average number of shares

1/1

Beginning of the period

500

20

10,000

...

...

...

31/3

Issuance

300

20

6,000

300 x 9/12 = 225

30/8

Acquirement of treasury shares

(75)

...

...

...

(1,500)

(75) x 4/12 = (25)

Total

725

14,500

700

According to the data of the above example:

...

...

...

- Par value of each share increases 2 times = VND 10,000 x 2 = VND 20,000

- Total par value = VND 14,500,000, no changes after the consolidation.

- The weighted average number of shares decreases 2 times = 1,400 : 2 = 700 shares.

c. When issuing bonus shares, the number of common shares will increase corresponding to the total number of bonus shares for one share outstanding. In this case there is no corresponding change in the capital because the company issues common shares for existing shareholders from undistributed profits without collecting any money.

Example: Continuing the example of Truong Son Joint Stock Company, if at the end of 2005 Truong Son Joint Stock Company decides to issue bonus shares from undistributed profits with the criteria of one share outstanding will be rewarded with 1 new share then after the split, the company will have 1,450 + 1,450 = 2,900 shares with par value of VND 10,000 per share

When calculating the number of shares for calculation of basic earnings per share, the company must assume that the issuance of bonus shares has been performed since January 1, 2005, in which the company calculates the weighted average number of shares as follows:

Date

Transaction

Number of shares

...

...

...

(VND 1,000)

Value

(VND 1,000)

Average number of shares

1/1

Beginning of the period

2,000

10

20,000

...

...

...

31/3

Issuance

1,200

10

12,000

1,200 x 9/12 = 900

30/8

Acquirement of treasury shares

(300)

...

...

...

(3,000)

(300) x 4/12 = (100)

Total

2,900

29,000

2,800

According to the data of the above example:

...

...

...

- Par value of each share does not change = VND 10,000

- Total par value of shares increases VND 14,500,000. However, the undistributed profits also decrease by VND 14,500,000, so the total equity of the company remained unchanged.

- The weighted average number of shares increases 1,400 shares = 1,400 + 1,400 = 2,800 shares.

3. Calculation of basic earnings per share

Basic earnings per share shall be calculated by dividing profit or loss allocated to shareholders holding common shares of the enterprise by the weighted average number of common shares outstanding during the period. Profit or loss allocated to common shares = profit or loss after corporate income tax – total number of decreasing adjustments + total number of increasing adjustments.

Basic earnings per share

=

Profit or loss allocated to common shares (= profit or loss after corporate income tax – total decreasing adjustments + total increasing adjustments)

Weighted average number of ordinary shares outstanding during the period

...

...

...

- Issuance or re-acquirement of shares:

Earnings per share = 130,000,000/1,400 = VND 92,800 per share

- Issuance, re-acquirement and split of shares:

Earnings per share = 130,000,000/2,800 = VND 46,400 per share

- Issuance, re-acquirement and consolidation of shares:

Earnings per share = 130,000,000/700 = VND 185,600 per share

- Issuance, re-acquirement and of shares and issuance of bonus shares:

Earnings per share = 130,000,000/2,800 = VND 46,400 per share

4. Retroactive adjustment

...

...

...

The results of calculation per share reflecting the changes in the number of shares shall be disclosed. In addition, the basic earnings per share shall be adjusted due to the effects of errors and adjustments arising from changes in accounting policies according to retroactive regulations and effects of the business consolidation.

5. Disclosure in financial statement

The joint stock company shall disclose additional contents on the income statement such as profit or loss allocated to common shares, average number of shares outstanding during the period and basic earnings per share from the profit (loss) after corporate income tax allocated to shareholders holding common shares of the parent company for all reporting periods. The joint stock company shall disclose basic earnings per share even if the amounts are negative (loss per share).

On the income statement, the joint stock company shall disclose the indicators on basic earnings per share as follows:

When disclosing in the consolidated income statement:

- Profit or loss allocated to shareholders holding common shares calculated on the basis of consolidated information.

-  Average number of ordinary shares outstanding during the period of the parent company;

- Basic earnings per shares disclosed on the basic of consolidated information.

When disclosing in the separate income statement:

...

...

...

-  Average number of ordinary shares outstanding during the period of the independent joint stock company;

-  Basic earnings per share of the independent joint stock company.

6. Disclosure in notes to financial statement

In order to explain the indicators disclosed in the income statement, in the notes to the financial statement, the joint stock company shall disclose additional information as follows:

- Basic earnings per share

Current year

Previous year

+ Profit after corporate income tax

+ Increasing or decreasing adjustments to determine profit or loss allocated to shareholders holding common shares:

...

...

...

Decreasing adjustments

+ Profit or loss allocated to shareholders holding common shares

+ Average common shares outstanding during the period

+ Basic earnings per share

...

...

...

...

...

...

...

...

Recording method:

+ Profits after corporate income tax: According to the data in the income statement.

+ Increasing or decreasing adjustments to determine profit or loss allocated to shareholders holding common shares:

Increasing adjustments: Use data of Column 2 – Increasing adjustments, line Total in the chart of adjusting data.

Decreasing adjustments: Use data of Column 1 – Decreasing adjustments, line Total in the chart of adjusting data.

+ Profit or loss allocated to shareholders holding common shares = profit after corporate income tax – decreasing adjustments + increasing adjustments.

+ Average common shares outstanding during the period.

+ Basic earnings per share.

- Other information:

...

...

...

+ A detailed report on the impact of each type of financial instrument that affects the basic earnings per share.

IV- IMPLEMENTATION ORGANIZATION

1- This Circular shall enter into force after 15 days from the date of being published on the Official Gazette. Any regulations contrary to this Circular shall be annulled. Other related accounting issues not guided in this Circular shall comply with effective accounting regimes.

2- Companies and corporations that have specific accounting regimes approved by the Ministry of Finance must, based on 04 accounting standards (batch 5) issued together with Decision No. 100/2005/QD-BTC dated December 28, 2005 and this Circular, issue appropriate guidelines and supplements.

3- Ministries, People’s Committees, Finance Services and Tax Departments of the provinces shall guide the implementation of this Circular. Any problems arising in the course of implementation should be reported to the Ministry of Finance for study and settlement.

PP THE MINISTER
DEPUTY MINISTER




Le Thi Bang Tam

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