Nội dung toàn văn Decision No. 100/2005/QD-BTC of December 28, 2005, on the issuance and publication of six Vietnamese standards on accounting (batch 5).
THE MINISTRY OF FINANCE | SOCIALIST REPUBLIC OF VIET NAM |
No. 100/2005/QD-BTC | Hanoi, December 28, 2005 |
DECISION
ON THE ISSUANCE AND PUBLICATION OF SIX VIETNAMESE STANDARDS ON ACCOUNTING (BATCH 5)
THE MINISTER OF FINANCE
- Pursuant to the Law on Accounting No. 03/2003/QH11 dated June 17, 2003;
- Pursuant to Governmental Decree No. 77/2003/ND-CP dated July 1, 2003 on the functions, jurisdictions and organization of the Ministry of Finance;
- In response to the requirement of economic and financial management reform, improvement of the qulaity of accounting information provided in the mantional economy and examination and verification of accounting practice.
Upon the proposal of the Director of the Accounting and Auditing Policy Department and Chief of the Ministry Office,
DECIDES:
Article 1. To issue four (04) Vietnamese Standards on Accounting (Batch 5) with the codes and titles specified:
- Standard 11 Business Combination;
- Standard 18 Provisions, contingent assets and liabilities;
- Standard 19 Insurance Contract;
- Standard 30 Earning Per Share.
Article 2. Four (04) Vietnamese Standards on Accounting issued folowing this decision shall be applicable nation-wide to enterprises of all industries and economic sectors.
Article 3. This Decision shall come into effect 15 days after it is published in the Official Gazette. Individual accounting regulations and systems shall be amended and supplemented in accordance with the four (04) Vietnamese Standards on Accounting issued hereby.
Article 4. The Director of the Accounting and Auditing Policy Department, the Ministry Office Chief, and heads of relevant affiliate and subsidiary units of the Ministry of Finance shall be responsible for guiding
| FOR THE MINISTER OF FINANCE |
VIETNAMESE STANDARDS ON ACCOUNTING
STANDARD 11
BUSINESS COMBINATION
(Issued in pursuance of the Minister of Finance Decision No. 100/2005/QD-BTC dated 28 December 2005)
GENERAL
01. The objective of this Standard is to prescribe the accounting policies and procedures in relation to business combinations using the purchase method. The acquirer recognizes identifiable assets and liabilities and contingent liabilities at their fair value on the acquisition date, thereby goodwill is recognized.
02. This Standard should be applied to business combinations using the purchase method.
03. This Standard does not apply to:
(a) Business combinations in which separate entities or businesses are brought together to form a joint venture.
(b) Business combinations involving entities or businesses under common control.
(c) Business combinations involving two or more mutual entities.
(d) Business combinations in which separate entities or businesses are brought together to form a reporting entity by contract alone without the obtaining of an ownership interest.
Identifying a business combination
04. A business combination is the bringing together of separate entities or businesses into one reporting entity. The result of nearly all business combinations is that one entity, the acquirer, obtains control of one or more other businesses, the acquiree. If an entity obtains control of one or more other entities that are not businesses, the bringing together of those entities is not a business combination. When an entity acquires a group of assets or net assets that does not constitute a business, it shall allocate the cost of the group between the individual identifiable assets and liabilities in the group based on their relative fair values at the date of acquisition.
05. A business combination may be structured in a variety of ways. It may involve the purchase by an entity of the equity of another entity, the purchase of all the net assets of another entity, the assumption of the liabilities of another entity, or the purchase of some of the net assets of another entity that together form one or more businesses. It may be effected by the issue of equity instruments, the transfer of cash, cash equivalents or other assets, or a combination thereof. The transaction may be between the shareholders of the combining entities or between one entity and the shareholders of another entity. It may involve the establishment of a new entity to control the combining entities or net assets transferred, or the restructuring of one or more of the combining entities.
06. A business combination may result in a parent-subsidiary relationship in which the acquirer is the parent and the acquiree a subsidiary of the acquirer. In such circumstances, the acquirer applies this Standard in its consolidated financial statements. The parent includes its interest in the acquiree in any separate financial statements it issues as an investment in a subsidiary (see VAS 25- Consolidated Financial Statements and Accounting for Investments in Subsidiaries).
07. A business combination may involve the purchase of the net assets, including any goodwill, of another entity rather than the purchase of the equity of the other entity. Such a combination does not result in a parent-subsidiary relationship.
08. Included within this Standard are business combinations in which one entity obtains control of another entity but for which the date of obtaining control (ie the acquisition date) does not coincide with the date or dates of acquiring an ownership interest (ie the date or dates of exchange). This situation may arise, for example, when an investee enters into share buy-back arrangements with some of its investors and, as a result, control of the investee changes.
09. This Standard does not specify the accounting by venturers for interests in joint ventures (see VAS 08- Financial Reporting of Interests in Joint Ventures).
Business combinations involving entities under common control
10. A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory.
11. A group of individuals shall be regarded as controlling an entity when, as a result of contractual arrangements, they collectively have the power to govern its financial and operating policies so as to obtain benefits from its activities. Therefore, a business combination is outside the scope of this Standard when the same group of individuals has, as a result of contractual arrangements, ultimate collective power to govern the financial and operating policies of each of the combining entities so as to obtain benefits from their activities, and that ultimate collective power is not transitory.
12. An entity can be controlled by an individual, or by a group of individuals acting together under a contractual arrangement, and that individual or group of individuals may not be subject to the financial reporting requirements of VASs. Therefore, it is not necessary for combining entities to be included as part of the same consolidated financial statements for a business combination to be regarded as one involving entities under common control.
13. The extent of minority interests in each of the combining entities before and after the business combination is not relevant to determining whether the combination involves entities under common control. Similarly, the fact that one of the combining entities is a subsidiary that has been excluded from the consolidated financial statements of the group in accordance with VAS 25 Consolidated Financial Statements and Accounting for Investments in Subsidiaries is not relevant to determining whether a combination involves entities under common control.
The following terms are used in this Standard with the meanings specified:
Acquisition date: The date on which the acquirer effectively obtains control of the acquiree.
Agreement date: The date that a substantive agreement between the combining parties is reached and, in the case of publicly listed entities, announced to the public. In the case of a hostile takeover, the earliest date that a substantive agreement between the combining parties is reached is the date that a sufficient number of the acquirees owners have accepted the acquirers offer for the acquirer to obtain control of the acquiree.
Business: An integrated set of activities and assets conducted and managed for the purpose of providing:
(a) A return to investors; or
(b) Lower costs or other economic benefits directly and proportionately to policyholders or participants.
A business generally consists of inputs, processes applied to those inputs, and resulting outputs that are, or will be, used to generate revenues. If goodwill is present in a transferred set of activities and assets, the transferred set shall be presumed to be a business.
Business combination: The bringing together of separate entities or businesses into one reporting entity.
Business combination involving entities or businesses under common control: A business combination in which all of the combining entities or businesses ultimately are controlled by the same party or parties both before and after the combination, and that control is not transitory.
Contingent liability: Contingent liability has the meaning given to it in VAS 18 Provisions, Contingent Liabilities and Contingent Assets, ie:
(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 entity; or
(b) A present obligation that arises from past events but is not recognised because:
(i) It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
(ii) The amount of the obligation cannot be measured with sufficient reliability.
Control: The power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities.
Date of exchange: When a business combination is achieved in a single exchange transaction, the date of exchange is the acquisition date. When a business combination involves more than one exchange transaction, for example when it is achieved in stages by successive share purchases, the date of exchange is the date that each individual investment is recognised in the financial statements of the acquirer.
Fair value: The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arms length transaction.
Goodwill: Future economic benefits arising from assets that are not capable of being individually identified and separately recognised.
Intangible fixed asset: An identifiable asset which is without physical substance but can be measured and is held for use in the production or business, for rental to others by the enterprise and satisfy the recognition criteria of intangible fixed assets.
Joint venture: A contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control.
Minority interest: That portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.
Mutual entity: An entity other than an investor-owned entity, such as a mutual insurance company or a mutual cooperative entity, that provides lower costs or other economic benefits directly and proportionately to its policyholders or participants.
Parent: An entity that has one or more subsidiaries.
Reporting entity: A single entity or a group comprises a parent and all of its subsidiaries which is to present financial statements according to the provisions of law.
Subsidiary: An entity that is controlled by another entity (known as the parent).
CONTENT OF THE STANDARD
Method of Accounting
14. All business combinations shall be accounted for by applying the purchase method.
15. The purchase method views a business combination from the perspective of the combining entity that is identified as the acquirer. The acquirer purchases net assets and recognises the assets acquired and liabilities and contingent liabilities assumed, including those not previously recognised by the acquiree. The measurement of the acquirers assets and liabilities is not affected by the transaction, nor are any additional assets or liabilities of the acquirer recognised as a result of the transaction, because they are not the subjects of the transaction.
Application of the purchase method
16. Applying the purchase method involves the following steps:
(a) Identifying an acquirer;
(b) Measuring the cost of the business combination; and
(c) Allocating, at the acquisition date, the cost of the business combination to the assets acquired and liabilities and contingent liabilities assumed.
Identifying the acquirer
17. An acquirer shall be identified for all business combinations. The acquirer is the combining entity that obtains control of the other combining entities or businesses.
18. Because the purchase method views a business combination from the acquirers perspective, it assumes that one of the parties to the transaction can be identified as the acquirer.
19. Control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities. A combining entity shall be presumed to have obtained control of another combining entity when it acquires more than one-half of that other entitys voting rights, unless it can be demonstrated that such ownership does not constitute control. Even if one of the combining entities does not acquire more than one-half of the voting rights of another combining entity, it might have obtained control of that other entity if, as a result of the combination, it obtains:
(a) Power over more than one-half of the voting rights of the other entity by virtue of an agreement with other investors; or
(b) Power to govern the financial and operating policies of the other entity under a statute or an agreement; or
(c) Power to appoint or remove the majority of the members of the board of management or equivalent governing body of the other entity; or
(d) Power to cast the majority of votes at meetings of the board of management or equivalent governing body of the other entity.
20. Although sometimes it may be difficult to identify an acquirer, there are usually indications that one exists. For example:
(a) If the fair value of one of the combining entities is significantly greater than that of the other combining entity, the entity with the greater fair value is likely to be the acquirer;
(b) If the business combination is effected through an exchange of voting ordinary equity instruments for cash or other assets, the entity giving up cash or other assets is likely to be the acquirer; and
(c) If the business combination results in the management of one of the combining entities being able to dominate the selection of the management team of the resulting combined entity, the entity whose management is able so to dominate is likely to be the acquirer.
21. In a business combination effected through an exchange of equity interests, the entity that issues the equity interests is normally the acquirer. However, all pertinent facts and circumstances shall be considered to determine which of the combining entities has the power to govern the financial and operating policies of the other entity (or entities) so as to obtain benefits from its (or their) activities. In some business combinations, commonly referred to as reverse acquisitions, the acquirer is the entity whose equity interests have been acquired and the issuing entity is the acquiree. This might be the case when, for example, an entity arranges to have itself acquired by a smaller public entity as a means of obtaining a stock exchange listing. Although legally the issuing public entity is regarded as the parent and the other entity is regarded as the subsidiary, the legal subsidiary is the acquirer if it has the power to govern the financial and operating policies of the legal parent so as to obtain benefits from its activities. Commonly the acquirer is the larger entity; however, the facts and circumstances surrounding a combination sometimes indicate that a smaller entity acquires a larger entity. Guidance on the accounting for reverse acquisitions is provided in paragraphs A1-A15 of Appendix A.
22. When a new entity is formed to issue equity instruments to effect a business combination, one of the combining entities that existed before the combination shall be identified as the acquirer on the basis of the evidence available.
23. Similarly, when a business combination involves more than two combining entities, one of the combining entities that existed before the combination shall be identified as the acquirer on the basis of the evidence available. Determining the acquirer in such cases shall include a consideration of, amongst other things, which of the combining entities initiated the combination and whether the assets or revenues of one of the combining entities significantly exceed those of the others.
Cost of a business combination
24. The acquirer shall measure the cost of a business combination as 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 acquiree plus (+) any costs directly attributable to the business combination.
25. The acquisition date is the date on which the acquirer effectively obtains control of the acquiree. When this is achieved through a single exchange transaction, the date of exchange coincides with the acquisition date. However, a business combination may involve more than one exchange transaction, for example when it is achieved in stages by successive share purchases. When this occurs:
(a) The cost of the combination is the aggregate cost of the individual transactions; and
(b) The date of exchange is the date of each exchange transaction (ie the date that each individual investment is recognised in the financial statements of the acquirer), whereas the acquisition date is the date on which the acquirer obtains control of the acquiree.
26. Assets given and liabilities incurred or assumed by the acquirer in exchange for control of the acquiree are required by paragraph 24 to be measured at their fair values at the date of exchange. Therefore, when settlement of all or any part of the cost of a business combination is deferred, the fair value of that deferred component shall be determined by discounting the amounts payable to their present value at the date of exchange, taking into account any premium or discount likely to be incurred in settlement.
27. The published price at the date of exchange of a quoted equity instrument provides the best evidence of the instruments fair value and shall be used, except in rare circumstances. Other evidence and valuation methods shall be considered when the acquirer can demonstrate that the published price at the date of exchange is an unreliable indicator of fair value, and that the other evidence and valuation methods provide a more reliable measure of the equity instruments fair value. The published price at the date of exchange is an unreliable indicator only when it has been affected by the thinness of the market. If the published price at the date of exchange is an unreliable indicator or if a published price does not exist for equity instruments issued by the acquirer, the fair value of those instruments could, for example, be estimated by reference to their proportional interest in the fair value of the acquirer or by reference to the proportional interest in the fair value of the acquiree obtained, whichever is the more clearly evident. The fair value at the date of exchange of monetary assets given to equity holders of the acquiree as an alternative to equity instruments may also provide evidence of the total fair value given by the acquirer in exchange for control of the acquiree. In any event, all aspects of the combination, including significant factors influencing the negotiations, shall be considered. Further guidance on determining the fair value of equity instruments is set out in standard on Financial Instruments.
28. The cost of a business combination includes liabilities incurred or assumed by the acquirer in exchange for control of the acquiree. Future losses or other costs expected to be incurred as a result of a combination are not liabilities incurred or assumed by the acquirer in exchange for control of the acquiree, and are not, therefore, included as part of the cost of the combination.
29. The cost of a business combination includes any costs directly attributable to the combination, such as professional fees paid to accountants, legal advisers, valuers and other consultants to effect the combination. General administrative costs and other costs that cannot be directly attributed to the particular combination being accounted for are not included in the cost of the combination: they are recognised as an expense when incurred.
30. The costs of arranging and issuing financial liabilities are an integral part of the liability issue transaction, even when the liabilities are issued to effect a business combination, rather than costs directly attributable to the combination. Therefore, entities shall not include such costs in the cost of a business combination.
31. The costs of issuing equity instruments are an integral part of the equity, even when the equity instruments are issued to effect a business combination, rather than costs directly attributable to the combination. Therefore, entities shall not include such costs in the cost of a business combination.
Adjustments to the cost of a business combination contingent on future events
32. When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the acquirer shall include the amount of that adjustment in the cost of the combination at the acquisition date if the adjustment is probable and can be measured reliably.
33. A business combination agreement may allow for adjustments to the cost of the combination that are contingent on one or more future events. The adjustment might, for example, be contingent on a specified level of profit being maintained or achieved in future periods, or on the market price of the instruments issued being maintained. It is usually possible to estimate the amount of any such adjustment at the time of initially accounting for the combination without impairing the reliability of the information, even though some uncertainty exists. If the future events do not occur or the estimate needs to be revised, the cost of the business combination shall be adjusted accordingly.
34. When a business combination agreement provides for such an adjustment, that adjustment is not included in the cost of the combination at the time of initially accounting for the combination 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 combination.
35. In some circumstances, the acquirer may be required to make a subsequent payment to the seller 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 acquiree. This is the case, for example, when the acquirer guarantees the market price of equity or debt instruments issued as part of the cost of the business combination and 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 combination is recognised. In the 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 the case of debt instruments, the additional payment is regarded as a reduction in the premium or an increase in the discount on the initial issue.
Allocating the cost of a business combination to the assets acquired and liabilities and contingent liabilities assumed
36. The acquirer shall, at the acquisition date, allocate the cost of a business combination by recognising the acquirees identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria in paragraph 37 at their fair values at that date, except for non current assets (or disposal groups) that are classified as held for sale, which shall be recognised at fair value less costs to sell. Any difference between the cost of the business combination and the acquirers interest in the net fair value of the identifiable assets, liabilities and contingent liabilities so recognised shall be accounted for in accordance with paragraphs 50-54.
37. The acquirer shall recognise separately the acquirees identifiable assets, liabilities and contingent liabilities at the acquisition date only if they satisfy the following criteria at that date:
(a) In the case of a tangible fixed asset, it is probable that any associated future economic benefits will flow to the acquirer, and its fair value can be measured reliably;
(b) In the case of an identifiable liability (other than a contingent liability), it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and its fair value can be measured reliably;
(c) In the case of an intangible fixed asset or a contingent liability, its fair value can be measured reliably.
38. The acquirers income statement shall incorporate the acquirees profits and losses after the acquisition date by including the acquirees income and expenses based on the cost of the business combination to the acquirer. For example, depreciation expense included after the acquisition date in the acquirers income statement that relates to the acquirees depreciable assets shall be based on the fair values of those depreciable assets at the acquisition date, ie their cost to the acquirer.
39. Application of the purchase method starts from the acquisition date, which is the date on which the acquirer effectively obtains control of the acquiree. Because control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities, it is not necessary for a transaction to be closed or finalised at law before the acquirer obtains control. All pertinent facts and circumstances surrounding a business combination shall be considered in assessing when the acquirer has obtained control.
40. Because the acquirer recognises the acquirees identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria in paragraph 37 at their fair values at the acquisition date, any minority interest in the acquiree is stated at the minoritys proportion of the net fair value of those items. Paragraphs A16 and A17 of Appendix A provide guidance on determining the fair values of the acquirees identifiable assets, liabilities and contingent liabilities for the purpose of allocating the cost of a business combination.
Acquirees identifiable assets and liabilities
41. In accordance with paragraph 36, the acquirer recognises separately as part of allocating the cost of the combination only the identifiable assets, liabilities and contingent liabilities of the acquiree that existed at the acquisition date and satisfy the recognition criteria in paragraph 37. Therefore:
(a) The acquirer shall recognise liabilities for terminating or reducing the activities of the acquiree as part of allocating the cost of the combination only when the acquiree has, at the acquisition date, an existing liability for restructuring recognised in accordance with VAS 18- Provisions, Contingent Liabilities and Contingent Assets; and
(b) The acquirer, when allocating the cost of the combination, shall not recognise liabilities for future losses or other costs expected to be incurred as a result of the business combination.
42. A payment that an entity is contractually required to make, for example, to its employees or suppliers in the event that it is acquired in a business combination is a present obligation of the entity that is regarded as a contingent liability until it becomes probable that a business combination will take place. The contractual obligation is recognised as a liability by that entity in accordance with VAS 18- Provisions, Contingent Liabilities and Contingent Assets when a business combination becomes probable and the liability can be measured reliably, therefore, when the business combination is effected, that liability of the acquiree is recognised by the acquirer as part of allocating the cost of the combination.
43. However, an acquirees restructuring plan whose execution is conditional upon its being acquired in a business combination is not, immediately before the business combination, a present obligation of the acquiree. Nor is it a contingent liability of the acquiree immediately before the combination because it is not a possible obligation arising from a past event whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the acquiree. Therefore, an acquirer shall not recognise a liability for such restructuring plans as part of allocating the cost of the combination.
44. The identifiable assets and liabilities that are recognised in accordance with paragraph 36 include all of the acquirees assets and liabilities that the acquirer purchases or assumes, including all of its financial assets and financial liabilities. They might also include assets and liabilities not previously recognised in the acquirees financial statements, eg because they did not qualify for recognition before the acquisition. For example, a tax benefit arising from the acquirees tax losses that was not recognised by the acquiree before the business combination qualifies for recognition as an identifiable asset in accordance with paragraph 36 if it is probable that the acquirer will have future taxable profits against which the unrecognised tax benefit can be applied.
Acquirees intangible assets
45. In accordance with paragraph 37, the acquirer recognises separately an intangible asset of the acquiree at the acquisition date only if it meets the definition of an intangible asset in VAS 04 Intangible Fixed Assets and its fair value can be measured reliably. VAS 04 provides guidance on determining whether the fair value of an intangible asset acquired in a business combination can be measured reliably.
Acquirees contingent liabilities
46. Paragraph 37 specifies that the acquirer recognises separately a contingent liability of the acquiree as part of allocating the cost of a business combination only if its fair value can be measured reliably. If its fair value cannot be measured reliably:
(a) There is a resulting effect on the amount recognised as goodwill or accounted for in accordance with paragraph 55; and
(b) The acquirer shall disclose the information about that contingent liability required to be disclosed by VAS 18- Provisions, Contingent Liabilities and Contingent Assets.
Paragraph A16(k) of Appendix A provides guidance on determining the fair value of a contingent liability.
47. After their initial recognition, the acquirer shall measure contingent liabilities that are recognised separately in accordance with paragraph 36. The amount of contingent liabilities would be recognised in accordance with VAS 18- Provisions, Contingent Liabilities and Contingent Assets.
48. The requirement in paragraph 47 does not apply to contracts accounted for in accordance with Standard on Financial Instruments. However, loan commitments excluded from the scope of Standard on Financial Instruments that are not commitments to provide loans at below-market interest rates are accounted for as contingent liabilities of the acquiree if, at the acquisition date, it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or if the amount of the obligation cannot be measured with sufficient reliability. Such a loan commitment is, in accordance with paragraph 37, recognised separately as part of allocating the cost of a combination only if its fair value can be measured reliably.
49. Contingent liabilities recognised separately as part of allocating the cost of a business combination are excluded from the scope of VAS 18- Provisions, Contingent Liabilities and Contingent Assets. However, the acquirer shall disclose for those contingent liabilities the information required to be disclosed by VAS 18 for each class of provision.
Goodwill
50. The acquirer shall, at the acquisition date:
(a) Recognise goodwill acquired in a business combination as an asset; and
(b) Initially measure that goodwill at its cost, being the excess of the cost of the business combination over the acquirers interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised in accordance with paragraph 36.
51. Goodwill acquired in a business combination represents a payment made by the acquirer in anticipation of future economic benefits from assets that are not capable of being individually identified and separately recognised.
52. To the extent that the acquirees identifiable assets, liabilities or contingent liabilities do not satisfy the criteria in paragraph 37 for separate recognition at the acquisition date, there is a resulting effect on the amount recognised as goodwill (or accounted for in accordance with paragraph 55). This is because goodwill is measured as the residual cost of the business combination after recognising the acquirees identifiable assets, liabilities and contingent liabilities.
53. Goodwill is recognised in expenses (if it is of small value) and otherwise amortised in a uniform manner during its estimated useful life (If it is a big value). The useful life of goodwill should be properly estimated as with the time during which sources embodying economic benefits are recovered by the entity. Such useful life is not beyond 10 years from the date of recognition.
The amortisation method represents the manner in which sources embodying economic benefits from goodwill can be recovered. The straight-line method is commonly used unless persuasive evidence exists to support another method seen as more appropriate. It is required that the amortisation method be consistent from one period to another unless there is a change in the manner of recovering sources embodying economic benefits from such goodwill.
54. The time and method of goodwill amortisation is re-assessed as the year ends. Where there is big difference of goodwills economic life from the initial estimate, the amortization time is necessarily changed. So is the method of amortisation in the case of large variation of the manner of recovering future economic benefits from goodwill. If this is the case, adjustment is necessary of the amortised expense for the current year and thereafter and the fact is disclosed in a note to the financial statements.
Excess of acquirers interest in the net fair value of acquirees identifiable assets, liabilities and contingent liabilities over cost
55. If the acquirers interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised in accordance with paragraph 36 exceeds the cost of the business combination, the acquirer shall:
(a) reassess the identification and measurement of the acquirees identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination; and
(b) recognise immediately in profit or loss any excess remaining after that reassessment.
56. A gain recognised in accordance with paragraph 55 could comprise one or more of the following components:
(a) Errors in measuring the fair value of either the cost of the combination or the acquirees identifiable assets, liabilities or contingent liabilities. Possible future costs arising in respect of the acquiree that have not been reflected correctly in the fair value of the acquirees identifiable assets, liabilities or contingent liabilities are a potential cause of such errors.
(b) A requirement in an accounting standard to measure identifiable net assets acquired at an amount that is not fair value, but is treated as though it is fair value for the purpose of allocating the cost of the combination, for example, the guidance in Appendix A on determining the fair values of the acquirees identifiable assets and liabilities requires the amount assigned to deferred tax assets and liabilities to be undiscounted.
(c) A bargain purchase.
Business combination achieved in stages
57. A business combination may involve more than one exchange transaction, for example when it occurs in stages by successive share purchases. If so, each exchange transaction shall be treated separately by the acquirer, using the cost of the transaction and fair value information at the date of each exchange transaction, to determine the amount of any goodwill associated with that transaction. This results in a step-by-step comparison of the cost of the individual investments with the acquirers interest in the fair values of the acquirees identifiable assets, liabilities and contingent liabilities at each step.
58. When a business combination involves more than one exchange transaction, the fair values of the acquirees identifiable assets, liabilities and contingent liabilities may be different at the date of each exchange transaction. Because:
(a) The acquirees identifiable assets, liabilities and contingent liabilities are notionally restated to their fair values at the date of each exchange transaction to determine the amount of any goodwill associated with each transaction; and
(b) The acquirees identifiable assets, liabilities and contingent liabilities must then be recognised by the acquirer at their fair values at the acquisition date.
59. Before qualifying as a business combination, a transaction may qualify as an investment in an associate and be accounted for in accordance with VAS 07 Accounting for Investments in Associates using the cost method.
Initial accounting determined provisionally
60. The initial accounting for a business combination involves identifying and determining the fair values to be assigned to the acquirees identifiable assets, liabilities and contingent liabilities and the cost of the combination.
61. If the initial accounting for a business combination can be determined only provisionally by the end of the period in which the combination is effected because either the fair values to be assigned to the acquirees identifiable assets, liabilities or contingent liabilities or the cost of the combination can be determined only provisionally, the acquirer shall account for the combination using those provisional values. The acquirer shall recognise any adjustments to those provisional values as a result of completing the initial accounting:
(a) Within twelve months of the acquisition date; and
(b) From the acquisition date. Therefore:
(i) The carrying amount of an identifiable asset, liability or contingent liability that is recognised or adjusted as a result of completing the initial accounting shall be calculated as if its fair value at the acquisition date had been recognised from that date.
(ii) Goodwill or any gain recognised in accordance with paragraph 55 shall be adjusted from the acquisition date by an amount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent liability being recognised or adjusted.
(iii) Comparative information presented for the periods before the accounting for the combination is complete shall be presented as if the initial accounting had been completed from the acquisition date. This includes any depreciation, amortisation or other profit or loss effect recognised as a result of completing the initial accounting.
Adjustments after the initial accounting is complete
62. Except as outlined in paragraphs 33, 34 and 64, adjustments to the initial accounting determined provisionally for a business combination after that initial accounting is complete shall be recognised only to correct an error in accordance with VAS 29- Changes in Accounting Policies, Accounting Estimates and Errors. Adjustments to the initial accounting for a business combination after that accounting is complete shall not be recognised for the effect of changes in estimates. In accordance with VAS 29 effect of a change in estimates shall be recognised in the current and future periods.
63. VAS 29- Changes in Accounting Policies, Accounting Estimates and Errors requires an entity to account for an error correction retrospectively, and to present financial statements as if the error had never occurred by restating the comparative information for the prior period(s) in which the error occurred. Therefore, the carrying amount of an identifiable asset, liability or contingent liability of the acquiree that is recognised or adjusted as a result of an error correction shall be calculated as if its fair value or adjusted fair value at the acquisition date had been recognised from that date. Goodwill or any gain recognised in a prior period in accordance with paragraph 55 shall be adjusted retrospectively by an amount equal to the fair value at the acquisition date (or the adjustment to the fair value at the acquisition date) of the identifiable asset, liability or contingent liability being recognised (or adjusted).
Recognition of deferred tax assets after the initial accounting is complete
64. If the potential benefit of the acquirees income tax loss carry-forwards or other deferred tax assets did not satisfy the criteria in paragraph 37 for separate recognition when a business combination is initially accounted for but is subsequently realised, the acquirer shall recognise that benefit as defer tax income in accordance with VAS 17 Income Taxes. In addition, the acquirer shall:
(a) Reduce the carrying amount of goodwill to the amount that would have been recognised if the deferred tax asset had been recognised as an identifiable asset from the acquisition date; and
(b) Recognise the reduction in the carrying amount of the goodwill as an expense.
However, this procedure shall not result in the creation of an excess, nor shall it increase the amount of any gain previously recognised in accordance with paragraph 55.
Disclosure
65. An acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combinations that were effected:
(a) During the period.
(b) After the balance sheet date but before the financial statements are authorised for issue.
66. The acquirer shall disclose the following information for each business combination that was effected during the period:
(a) The names and descriptions of the combining entities or businesses.
(b) The acquisition date.
(c) The percentage of voting equity instruments acquired.
(d) The cost directly attributable to the combination. When equity instruments are issued or issuable as part of the cost, the following shall also be disclosed:
(i) The number of equity instruments issued or issuable; and
(ii) The fair value of those instruments and the basis for determining that fair value. If a published price does not exist for the instruments at the date of exchange, the significant assumptions used to determine fair value shall be disclosed. If a published price exists at the date of exchange but was not used as the basis for determining the cost of the combination, that fact shall be disclosed together with: the reasons the published price was not used; the method and significant assumptions used to attribute a value to the equity instruments; and the aggregate amount of the difference between the value attributed to, and the published price of, the equity instruments.
(e) Details of any operations the entity has decided to dispose of as a result of the combination.
(f) The amounts recognised at the acquisition date for each class of the acquirees assets, liabilities and contingent liabilities, and, unless disclosure would be impracticable, the carrying amounts of each of those classes, determined in accordance with a relevant accounting standard, immediately before the combination. If such disclosure would be impracticable, that fact shall be disclosed, together with an explanation of why this is the case.
(g) The amount of any excess recognised in profit or loss in accordance with paragraph 55, and the line item in the income statement in which the excess is recognised.
(h) A description of the factors that contributed to a cost that results in the recognition of goodwill - description of each intangible asset that was not recognised separately from goodwill and an explanation of why the intangible assets fair value could not be measured reliably - or a description of the nature of any excess recognised in profit or loss in accordance with paragraph 55.
(i) The amount of the acquirees profit or loss since the acquisition date in the period. If disclosure would be impracticable, an explanation should be given of why this is the case.
67. The information required to be disclosed by paragraph 66 shall be disclosed in aggregate for business combinations effected during the reporting period that are individually immaterial.
68. If the initial accounting for a business combination that was effected during the period was determined only provisionally as described in paragraph 61, that fact shall also be disclosed together with an explanation of why this is the case.
69. The acquirer shall disclose the following information:
(a) The revenue of the combined entity for the period before the acquisition date;
(b) The profit or loss of the combined entity for the period before the acquisition date.
If disclosure of this information would be impracticable, that fact shall be disclosed together with an explanation of why this is the case..
70. The acquirer shall disclose the information required by paragraph 66 for each business combination effected after the balance sheet date but before the financial statements are authorised for issue.
71. An acquirer shall disclose information that enables users of its financial statements to evaluate the financial effects of gains, losses, error corrections and other adjustments recognised in the current period that relate to business combinations that were effected in the current or in previous periods.
72. The acquirer shall disclose the following information:
(a) The amount and an explanation of any gain or loss recognised in the current period that:
(i) Relates to the identifiable assets acquired or liabilities or contingent liabilities assumed in a business combination that was effected in the current or a previous period; and
(ii) Is of such size, nature or incidence that disclosure is relevant to an understanding of the combined entitys financial performance.
(b) if the initial accounting for a business combination that was effected in the immediately preceding period was determined only provisionally at the end of that period, the amounts and explanations of the adjustments to the provisional values recognised during the current period.
(c) the information about error corrections required to be disclosed by VAS 29 Changes in Accounting Policies, Accounting Estimates and Errors for any of the acquirees identifiable assets, liabilities or contingent liabilities, or changes in the values assigned to those items, that the acquirer recognises during the current period in accordance with paragraphs 62 and 63.
73. For goodwill that exists, the entity shall disclose:
(a) The time of amortisation.
(b) the method used and the reason for not using the straight-line method where the straight-line method is not used for amortisation.
(c) The portion of goodwill charged to expenses in the period.
(d) A reconconciliation of the carrying amount of goodwill at the beginning and end of the period which discloses:
(i) The gross amount and the accumulated amortized portion at the beginning of the period;
(ii) The amount which resulted in the period;
(iii) Any adjustment made as a result of change or noticed changes in the amount of identifiable assets and liabilities;
(iv) The amount given up subsequent to disposals and sales of the whole or part of business in the period;
(v) the amount which was amortised in the period;
(vi) Other relevant changes in the period;
(vi) The total amount which remains unamortized as accumulated at the end of the period.
74. The entity shall disclose such additional information as is necessary to meet the objectives set out in paragraphs 65, 71 and 73.
APPENDIX A
SUPPLEMENTAL GUIDANCE
Reverse acquisitions
A1. As noted in paragraph 21, in some business combinations, commonly referred to as reverse acquisitions, the acquirer is the entity whose equity interests have been acquired and the issuing entity is the acquiree. This might be the case when, for example, a private entity arranges to have itself acquired by a smaller public entity as a means of obtaining a stock exchange listing. Although legally the issuing public entity is regarded as the parent and the private entity is regarded as the subsidiary, the legal subsidiary is the acquirer if it has the power to govern the financial and operating policies of the legal parent so as to obtain benefits from its activities.
A2. An entity shall apply the guidance in paragraphs A3-A15 when accounting for a reverse acquisition.
A3. Reverse acquisition accounting determines the allocation of the cost of the business combination as at the acquisition date and does not apply to transactions after the combination.
Cost of the business combination
A4. When equity instruments are issued as part of the cost of the business combination, paragraph 24 requires the cost of the combination to include the fair value of those equity instruments at the date of exchange. Paragraph 27 notes that, in the absence of a reliable published price, the fair value of the equity instruments can be estimated by reference to the fair value of the acquirer or the fair value of the acquiree, whichever is more clearly evident.
A5. In a reverse acquisition, the cost of the business combination is deemed to have been incurred by the legal subsidiary (ie the acquirer for accounting purposes) in the form of equity instruments issued to the owners of the legal parent (ie the acquiree for accounting purposes). If the published price of the equity instruments of the legal subsidiary is used to determine the cost of the combination, a calculation shall be made to determine the number of equity instruments the legal subsidiary would have had to issue to provide the same percentage ownership interest of the combined entity to the owners of the legal parent. The fair value of the number of equity instruments so calculated shall be used as the cost of the combination.
A6. If the fair value of the equity instruments of the legal subsidiary is not otherwise clearly evident, the total fair value of all the issued equity instruments of the legal parent before the business combination shall be used as the basis for determining the cost of the combination.
Preparation and presentation of consolidated financial statements
A7. Consolidated financial statements prepared following a reverse acquisition shall be issued under the name of the legal parent, but described in the notes as a continuation of the financial statements of the legal parent (ie the acquirer for accounting purposes). Because such consolidated financial statements represent a continuation of the financial statements of the legal subsidiary:
(a) The assets and liabilities of the legal subsidiary shall be recognised and measured in those consolidated financial statements at their pre-combination carrying amounts.
(b) The retained earnings and other equity balances recognised in those consolidated financial statements shall be the retained earnings and other equity balances of the legal subsidiary immediately before the business combination.
(c) The amount recognised as issued equity instruments in those consolidated financial statements shall be determined by adding to the issued equity of the legal subsidiary immediately before the business combination the cost of the combination determined as described in paragraphs A4-A6. However, the equity structure appearing in those consolidated financial statements (ie the number and type of equity instruments issued) shall reflect the equity structure of the legal parent, including the equity instruments issued by the legal parent to effect the combination.
(d) Comparative information presented in those consolidated financial statements shall be that of the legal subsidiary.
A8. Reverse acquisition accounting applies only in the consolidated financial statements. Therefore, in the legal parents separate financial statements, if any, the investment in the legal subsidiary is accounted for in accordance with the requirements in VAS 25 Consolidated Financial Statements and Accounting for Investments in Subsidiaries.
A9. Consolidated financial statements prepared following a reverse acquisition shall reflect the fair values of the assets, liabilities and contingent liabilities of the legal parent (ie the acquiree for accounting purposes). Therefore, the cost of the business combination shall be allocated by measuring the identifiable assets, liabilities and contingent liabilities of the legal parent that satisfy the recognition criteria in paragraph 37 at their fair values at the acquisition date. Any excess of the cost of the combination over the acquirers interest in the net fair value of those items shall be accounted for in accordance with paragraphs 50-54. Any excess of the acquirers interest in the net fair value of those items over the cost of the combination shall be accounted for in accordance with paragraph 55.
Minority interest
A10. In some reverse acquisitions, some of the owners of the legal subsidiary do not exchange their equity instruments for equity instruments of the legal parent. Although the entity in which those owners hold equity instruments (the legal subsidiary) acquired another entity (the legal parent), those owners shall be treated as a minority interest in the consolidated financial statements prepared after the reverse acquisition. This is because the owners of the legal subsidiary that do not exchange their equity instruments for equity instruments of the legal parent have an interest only in the results and net assets of the legal subsidiary, and not in the results and net assets of the combined entity. Conversely, all of the owners of the legal parent, notwithstanding that the legal parent is regarded as the acquiree, have an interest in the results and net assets of the combined entity.
A11. Because the assets and liabilities of the legal subsidiary are recognised and measured in the consolidated financial statements at their pre-combination carrying amounts, the minority interest shall reflect the minority shareholders proportionate interest in the pre-combination carrying amounts of the legal subsidiarys net assets.
Earnings per share
A12. As noted in paragraph A7(c), the equity structure appearing in the consolidated financial statements prepared following a reverse acquisition reflects the equity structure of the legal parent, including the equity instruments issued by the legal parent to effect the business combination.
A13. For the purpose of calculating the weighted average number of ordinary shares outstanding (the denominator) during the period in which the reverse acquisition occurs:
(a) The number of ordinary shares outstanding from the beginning of that period to the acquisition date shall be deemed to be the number of ordinary shares issued by the legal parent to the owners of the legal subsidiary; and
(b) The number of ordinary shares outstanding from the acquisition date to the end of that period shall be the actual number of ordinary shares of the legal parent outstanding during that period.
A14. The basic earnings per share disclosed for each comparative period before the acquisition date that is presented in the consolidated financial statements following a reverse acquisition shall be calculated by dividing the profit or loss of the legal subsidiary attributable to ordinary shareholders in each of those periods by the number of ordinary shares issued by the legal parent to the owners of the legal subsidiary in the reverse acquisition.
A15. The calculations outlined in paragraphs A13 and A14 assume that there were no changes in the number of the legal subsidiarys issued ordinary shares during the comparative periods and during the period from the beginning of the period in which the reverse acquisition occurred to the acquisition date. The calculation of earnings per share shall be appropriately adjusted to take into account the effect of a change in the number of the legal subsidiarys issued ordinary shares during those periods.
Allocating the cost of a business combination
A16. This Standard requires an acquirer to recognise the acquirees identifiable assets, liabilities and contingent liabilities that satisfy the relevant recognition criteria at their fair values at the acquisition date. For the purpose of allocating the cost of a business combination, the acquirer shall treat the following measures as fair values:
(a) For financial instruments traded in an active market the acquirer shall use current market values.
(b) For financial instruments not traded in an active market the acquirer shall use estimated values that take into consideration features such as price-earnings ratios, dividend yields and expected growth rates of comparable instruments of entities with similar characteristics.
(c) For receivables, beneficial contracts and other identifiable assets the acquirer shall use the present values of the amounts to be received, determined at appropriate current interest rates, less allowances for uncollectibility and collection costs, if necessary. However, discounting is not required for short-term receivables, beneficial contracts and other identifiable assets when the difference between the nominal and discounted amounts is not material.
(d) For inventories of:
(i) Finished goods and merchandise the acquirer shall use selling prices less the sum of (1) the costs of disposal and (2) a reasonable profit allowance for the selling effort of the acquirer based on profit for similar finished goods and merchandise;
(ii) Work in progress the acquirer shall use selling prices of finished goods less the sum of (1) costs to complete, (2) costs of disposal and (3) a reasonable profit allowance for the completing and selling effort based on profit for similar finished goods; and
(iii) Raw materials the acquirer shall use current replacement costs.
(e) For land and buildings the acquirer shall use market values.
(f) For plant and equipment the acquirer shall use market values, normally determined by appraisal. If there is no market-based evidence of fair value because of the specialised nature of the item of plant and equipment and the item is rarely sold, except as part of a continuing business, an acquirer may need to estimate fair value using an income or a depreciated replacement cost approach.
(g) For intangible fixed assets the acquirer shall determine fair value:
(i) By reference to an active market as defined in VAS 04 Intangible Fixed Assets; or
(ii) If no active market exists, on a basis that reflects the amounts the acquirer would have paid for the assets in arms length transactions between knowledgeable willing parties, based on the best information available (see VAS 04 for further guidance on determining the fair values of intangible fixed assets acquired in business combinations).
(h) For deferred tax assets and liabilities the acquirer shall use the amount of the tax benefit arising from tax losses or the taxes payable in respect of profit or loss in accordance with VAS 17- Income Taxes, assessed from the perspective of the combined entity. The deferred tax asset or liability is determined after allowing for the tax effect of restating identifiable assets, liabilities and contingent liabilities to their fair values and is not discounted.
(i) For accounts and notes payable, long-term debt, liabilities, accruals and other claims payable the acquirer shall use the present values of amounts to be disbursed in settling the liabilities determined at appropriate current interest rates. However, discounting is not required for short-term liabilities when the difference between the nominal and discounted amounts is not material.
(j) For onerous contracts and other identifiable liabilities of the acquiree the acquirer shall use the present values of amounts to be disbursed in settling the obligations determined at appropriate current interest rates.
(k) For contingent liabilities of the acquiree the acquirer shall use the amounts that a third party would charge to assume those contingent liabilities.
A17. Some of the above guidance requires fair values to be estimated using present value techniques. If the guidance for a particular item does not refer to the use of present value techniques, such techniques may be used in estimating the fair value of that item.
VIETNAMESE STANDARDS ON ACCOUNTING
STANDARD 18
PROVISIONS, CONTINGENT ASSETS AND LIABILITIES
(Issued in pursuance of the Minister of Finance Decision No. 100/2005/QD-BTC dated 28 December 2005)
GENERAL
01. The objective of this Standard is to prescribe the accounting policies and procedures in relation to provisions, contingent liabilities and contingent assets in terms of Recognition, Measurement, Reimbursements, Changes in Provisions, Use of Provisions, and Application of the Recognition and Measurement Rules as a basis for the presentation and disclosure of financial statements.
02. This Standard shall be applied by all entities in accounting for provisions, contingent liabilities and contingent assets, except:
a) those resulting from executory contracts, except where the contract is onerous;
b) those covered by another Standard.
03. This Standard does not apply to financial instruments (including guarantees) that are within the scope of VAS on Financial Instruments.
04. Where another Standard deals with a specific type of provision, contingent liability or contingent asset, an enterprise applies that Standard instead of this Standard. For example, VAS 11 Business Combinations addresses the treatment by an acquirer of contingent liabilities assumed in a business combination. Similarly, certain types of provisions are also addressed in Standards on:
- VAS 15, Construction Contracts;
- VAS 17, Income Taxes;
- VAS 06, Leases. However, for operating leases that have become onerous, this Standard shall apply.
05. Some amounts treated as provisions may relate to the recognition of revenue, for example warranty. VAS 14 Revenue and Other Incomes shall apply in the circumstances.
06. This Standard applies to provisions for business restructuring (including discontinued operation). Where a restructuring meets the definition of a discontinued operation, additional disclosure is required in accordance with the guidance of current accounting standards.
07. The following terms are used in this Standard with the meanings specified:
A provision is a liability of uncertain timing or amount.
A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
An obligating event is an event that creates a legal or constructive obligation that results in an enterprise having no realistic alternative to settling that obligation.
A legal obligation is an obligation that derives from:
(a) A contract;
(b) Legislation.
A constructive obligation is an obligation that derives from an enterprises actions where by published policies or a sufficiently specific current statement, the enterprise has indicated to other parties that it will accept and discharge certain responsibilities.
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 recognised because:
(i) It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
(ii) The amount of the obligation cannot be measured with sufficient reliability.
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.
An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
A restructuring is a programme that is planned and controlled by management, and materially changes either:
(a) The scope of a business undertaken by an enterprise; or
(b) The manner in which that business is conducted.
CONTENT OF THE STANDARD
Provisions and Liabilities
08. Provisions can be distinguished from liabilities such as accounts payable-trade, borrowing because payables are almost certain in timing and amount while for provisions there is no such certainty.
Relationship between Provisions and Contingent Liabilities
09. In a general sense, all provisions are contingent because they are uncertain in timing or amount. However, within this Standard the term contingent is used for liabilities and assets that are not recognised because their 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. In addition, the term contingent liability is used for liabilities that do not meet the recognition criteria.
10. This Standard distinguishes between:
(a) Provisions - which are recognised as liabilities (assuming that a reliable estimate can be made) because they are present obligations and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations; and
(b) Contingent liabilities - which are not recognised as liabilities because liabilities are normal occurrence while contingent liabilities are not possible obligations.
RECOGNITION
Provisions
11. A provision shall be recognised when:
(a) An enterprise has a present obligation (legal or constructive) as a result of a past event;
(b) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
(c) A reliable estimate can be made of the amount of the obligation.
Present Obligation
12. In rare cases it is not clear whether there is a present obligation. In these cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is certain that a present obligation exists at the balance sheet date.
13. In almost all cases it will be clear whether a past event has given rise to a present obligation. In rare cases, for example in a law suit, it may be disputed either whether certain events have occurred or whether those events result in a present obligation. In such a case, an enterprise determines whether a present obligation exists at the balance sheet date by taking account of all available evidence, including, for example, the opinion of experts. The evidence considered includes any additional evidence provided by events after the balance sheet date. On the basis of such evidence:
(a) Where it is certain that a present obligation exists at the balance sheet date, the enterprise recognises a provision (if the recognition criteria are met); and
(b) Where it is certain that no present obligation exists at the balance sheet date, the enterprise discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote (see paragraph 81).
Past Event
14. A past event that leads to a present obligation is called an obligating event. For an event to be an obligating event, it is necessary that the enterprise has no realistic alternative to settling the obligation created by the event. This is the case only:
(a) Where the settlement of the obligation can be enforced by law; or
(b) In the case of a constructive obligation, where the event (which may be an action of the enterprise) creates valid expectations in other parties that the enterprise will discharge the obligation.
15. Financial statements deal with the financial position of an enterprise at the end of its reporting period and not its possible position in the future. Therefore, no provision is recognised for costs that need to be incurred to operate in the future. The only liabilities recognised in an enterprises balance sheet are those that exist at the balance sheet date.
16. It is only those obligations arising from past events existing independently of an enterprises future actions that are recognised as provisions. Examples of such obligations are penalties or clean-up costs for unlawful environmental damage, both of which would lead to an outflow of resources embodying economic benefits in settlement regardless of the future actions of the enterprise. Similarly, an enterprise recognises a provision for the decommissioning costs as a consequence of reallocation or restructuring. In contrast, for expenditure carried out by an enterprise to operate in a particular way in the future (for example, by fitting smoke filters in a certain type of factory) because of commercial pressures or legal requirements, no provision is recognised. Because the enterprise can avoid the future expenditure by its future actions, for example by changing its method of operation, it has no present obligation for that future expenditure and no provision is recognised.
17. An obligation always involves another party to whom the obligation is owed. It is not necessary, however, to know the identerprise of the party to whom the obligation is owed - indeed the obligation may be to the public at large. Because an obligation always involves a commitment to another party, it follows that a management or board decision does not give rise to a constructive obligation at the balance sheet date unless the decision has been communicated before the balance sheet date to those affected by it.
18. An event that does not give rise to an obligation immediately may do so at a later date, because of changes in the law or because an act by the enterprise gives rise to a constructive obligation. For example, when environmental damage is caused there may be no obligation to remedy the consequences. However, the causing of the damage will become an obligating event when a new law requires the existing damage to be rectified or when the enterprise publicly accepts responsibility for rectification in a way that creates a constructive obligation.
Probable Outflow of Resources Embodying Economic Benefits
19. For a liability to qualify for recognition there must be not only a present obligation but also the probability of an outflow of resources embodying economic benefits to settle that obligation. For the purpose of this Standard, an outflow of resources or other event is regarded as probable if the event is more likely than not to occur. Where it is not probable that a present obligation exists, an enterprise discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote (see paragraph 81).
20. Where there are a number of similar obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Although the likelihood of outflow for any one item may be small, it may well be probable that some outflow of resources will be needed to settle the class of obligations as a whole. If that is the case, a provision is recognised (if the other recognition criteria are met).
Reliable Estimate of the Obligation
21. The use of estimates is an essential part of the preparation of financial statements and does not undermine their reliability. This is especially true in the case of provisions, which by their nature are more uncertain than most other balance sheet items. Except in extremely rare cases, an enterprise will be able to determine a range of possible outcomes and can therefore make an estimate of the obligation that is sufficiently reliable to use in recognising a provision.
22. In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be recognised. That liability is disclosed as a contingent liability (see paragraph 81).
Contingent Liabilities
23. An enterprise shall not recognise a contingent liability.
24. A contingent liability is disclosed, as required by paragraph 81, unless an outflow of resources embodying economic benefits has occurred.
25. Where an enterprise is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is treated as a contingent liability. The enterprise recognises a provision for the part of the obligation for which an outflow of resources embodying economic benefits is probable, except in the extremely rare circumstances where no reliable estimate can be made.
26. Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable. If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability, a provision is recognised in the financial statements of the period in which the change in probability occurs (except in the extremely rare circumstances where no reliable estimate can be made).
Contingent Assets
27. An enterprise shall not recognise a contingent asset.
28. Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise. An example is a claim that an enterprise is pursuing through legal processes, where the outcome is uncertain.
29. Contingent assets are not recognised in financial statements since this may result in the recognition of income that may never be realised. However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.
30. A contingent asset is disclosed, as required by paragraph 84, where an inflow of economic benefits is probable.
31. Contingent assets are assessed continually to ensure that developments are appropriately reflected in the note to financial statements. If it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognised in the financial statements of the period in which such inflow of economic benefits is probable (see paragraph 84).
MEASUREMENT
Best Estimate
32. The amount recognised as a provision shall be the best estimate of the expenditure required to settle the present obligation at the balance sheet date.
33. The best estimate of the expenditure required to settle the present obligation is the amount that an enterprise would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party at that time. It will often be impossible or prohibitively expensive to settle or transfer an obligation at the balance sheet date. However, the estimate of the amount that an enterprise would rationally pay to settle or transfer the obligation gives the best estimate of the expenditure required to settle the present obligation at the balance sheet date.
34. The estimates of outcome and financial effect are determined by the judgement of the management of the enterprise, supplemented by experience of similar transactions and, in some cases, reports from independent experts. The evidence considered includes any additional evidence provided by events after the balance sheet date.
35. Uncertainties surrounding the amount to be recognised as a provision are dealt with by various means according to the circumstances. Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities (expected value method). The provision will therefore be different depending on whether the probability of a loss of a given amount is, for example, 60 per cent or 90 per cent. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the mid-point of the range is used.
Example
An enterprise sells goods with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within the first six months after purchase. If minor defects were detected in all products sold, repair costs of 1 million would result. If major defects were detected in all products sold, repair costs of 4 million would result. The enterprise's past experience and future expectations indicate that, for the coming year, 75 per cent of the goods sold will have no defects, 20 per cent of the goods sold will have minor defects and 5 per cent of the goods sold will have major defects. In accordance with paragraph 20, an enterprise assesses the probability of an outflow for the warranty obligations as a whole.
The expected value of the cost of repairs is: (75% of nil) + (20% of 1m) + (5% of 4m) = 0.4m
36. Where a single obligation is being measured, the individual most likely outcome may be the best estimate of the liability. However, even in such a case, the enterprise considers other possible outcomes. Where other possible outcomes are either mostly higher or mostly lower than the most likely outcome, the best estimate will be a higher or lower amount. For example, if an enterprise has to rectify a serious fault in a major plant that it has constructed for a customer, the individual most likely outcome may be for the repair to succeed at the first attempt at a cost of 1m but a provision for a larger amount is made if there is a significant chance that further attempts will be necessary.
37. The provision is measured before tax, as the tax consequences of the provision, and changes in it, are dealt with under VAS 17 Income Taxes.
Risks and Uncertainties
38. The risks and uncertainties that inevitably surround many events and circumstances shall be taken into account in reaching the best estimate of a provision.
39. Risk describes variability of outcome. A risk adjustment may increase the amount at which a liability is measured. Caution is needed in making judgements under conditions of uncertainty, so that income or assets are not overstated and expenses or liabilities are not understated. However, uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities. For example, if the projected costs of a particularly adverse outcome are estimated on a prudent basis, that outcome is not then deliberately treated as more probable than is realistically the case. Care is needed to avoid duplicating adjustments for risk and uncertainty with consequent overstatement of a provision.
40. Disclosure of the uncertainties surrounding the amount of the expenditure is made under paragraph 80(b).
Present Value
41. Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation.
42. Because of the time value of money, provisions relating to cash outflows that arise soon after the balance sheet date are more onerous than those where cash outflows of the same amount arise later. Provisions are therefore discounted, where the effect is material.
43. The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted.
Future Events
44. Future events that may affect the amount required to settle an obligation shall be reflected in the amount of a provision where there is sufficient objective evidence that they will occur.
45. Expected future events may be particularly important in measuring provisions. For example, an enterprise may believe that the cost of disposing of an asset at the end of its life will be reduced by future changes in technology. The amount recognised reflects a reasonable expectation of technically qualified, objective observers, taking account of all available evidence as to the technology that will be available at the time of the disposal. Thus it is appropriate to include, for example, expected cost reductions associated with increased experience in applying existing technology or the expected cost of applying existing technology to a larger or more complex disposing operation than has previously been carried out. However, an enterprise does not anticipate the development of a completely new technology for the disposing unless it is supported by sufficient objective evidence.
46. The effect of possible new legislation is taken into consideration in measuring an existing obligation when sufficient objective evidence exists that the legislation is virtually certain to be enacted. The variety of circumstances that arise in practice makes it impossible to specify a single event that will provide sufficient, objective evidence in every case. Evidence is required both of what legislation will demand and of whether it is virtually certain to be enacted and implemented in due course. In many cases sufficient objective evidence will not exist until the new legislation is enacted.
Expected Disposal of Assets
47. Gains from the expected disposal of assets shall not be taken into account in measuring a provision.
48. Gains on the expected disposal of assets are not taken into account in measuring a provision, even if the expected disposal is closely linked to the event giving rise to the provision. Instead, an enterprise recognises gains on expected disposals of assets at the time specified by a relevant accounting standard dealing with the assets concerned.
Reimbursements
49. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognised when, and only when, it is virtually certain that reimbursement will be received if the enterprise settles the obligation. The reimbursement shall be treated as a separate asset. The amount recognised for the reimbursement shall not exceed the amount of the provision.
50. In the income statement, the expense relating to a provision may be presented net of the amount recognised for a reimbursement.
51. Sometimes, an enterprise is able to look to another party to pay part or all of the expenditure required to settle a provision (for example, through insurance contracts, indemnity clauses or suppliers warranties). The other party may either reimburse amounts paid by the enterprise or pay the amounts directly.
52. In most cases the enterprise will remain liable for the whole of the amount in question so that the enterprise would have to settle the full amount if the third party failed to pay for any reason. In this situation, a provision is recognised for the full amount of the liability, and a separate asset for the expected reimbursement is recognised when it is virtually certain that reimbursement will be received if the enterprise settles the liability.
53. In some cases, the enterprise will not be liable for the costs in question if the third party fails to pay. In such a case the enterprise has no liability for those costs and they are not included in the provision.
54. As noted in paragraph 25, an obligation for which an enterprise is jointly and severally liable is a contingent liability to the extent that it is expected that the obligation will be settled by the other parties.
Changes in Provisions
55. Provisions shall be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision shall be reversed.
56. Where discounting is used, the carrying amount of a provision increases in each period to reflect the passage of time. This increase is recognised as borrowing cost.
Use of Provisions
57. A provision shall be used only for expenditures for which the provision was originally recognised.
58. Only expenditures that relate to the original provision are set against it. Setting expenditures against a provision that was originally recognised for another purpose would conceal the impact of two different events.
APPLICATION OF THE RECOGNITION AND MEASUREMENT RULES
Future Operating Losses
59. Provisions shall not be recognised for future operating losses.
60. Future operating losses do not meet the definition of a liability in paragraph 07 and the general recognition criteria set out for provisions in paragraph 11.
61. An expectation of future operating losses is an indication that certain assets of the operation may be impaired. The enterprise shall conduct tests of these assets for impairment.
Onerous Contracts
62. If an enterprise has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a provision.
63. Many contracts (for example, some routine purchase orders) can be cancelled without paying compensation to the other party, and therefore there is no obligation. Other contracts establish both rights and obligations for each of the contracting parties. Where events make such a contract onerous, the contract falls within the scope of this Standard and a liability exists which is recognised. Executory contracts that are not onerous fall outside the scope of this Standard.
64. This Standard defines an onerous contract as a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it.
65. Before a separate provision for an onerous contract is established, an enterprise recognises any impairment loss that has occurred on assets dedicated to that contract.
Restructuring
66. The following are examples of events that may fall under the definition of restructuring:
(a) Sale or termination of a line of business;
(b) The closure of business locations in a country or region or the relocation of business activities from one country or region to another;
(c) Changes in management structure, for example, eliminating a layer of management; and
(d) Fundamental reorganization that have a material effect on the nature and focus of the enterprise's operations.
67. A provision for restructuring costs is recognised only when the general recognition criteria for provisions set out in paragraph 11 are met. Paragraphs 69-78 set out how the general recognition criteria apply to restructurings.
68. A constructive obligation to restructure arises only when an enterprise:
(a) Has a detailed formal plan for the restructuring identifying at least:
(i) The business or part of a business concerned;
(ii) The principal locations affected;
(iii) The location, function, and approximate number of employees who will be compensated for terminating their services;
(iv) The expenditures that will be undertaken; and
(v) When the plan will be implemented; and
(b) Has raised a valid expectation in those affected that it carries out the restructuring by starting to implement that plan or announcing its main features to those affected by it.
69. Evidence that an enterprise has started to implement a restructuring plan would be provided, for example, by dismantling plant or selling assets or by the public announcement of the main features of the plan. A public announcement of a detailed plan to restructure constitutes a constructive obligation to restructure only if it is made in such a way and in sufficient detail (i.e. setting out the main features of the plan) that it gives rise to valid expectations in other parties such as customers, suppliers and employees (or their representatives) that the enterprise will carry out the restructuring.
70. For a plan to be sufficient to give rise to a constructive obligation when communicated to those affected by it, its implementation needs to be planned to begin as soon as possible and to be completed within a given timeframe. If it is expected that there will be a long delay before the restructuring begins or that the restructuring will take an unreasonably long time, it is unlikely that the plan will be implemented within that timeframe.
71. A management or board decision to restructure taken before the balance sheet date does not give rise to a constructive obligation at the balance sheet date unless the enterprise has, before the balance sheet date:
(a) Started to implement the restructuring plan; or
(b) Announced the main features of the restructuring plan to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the enterprise will carry out the restructuring.
An enterprise starts to implement a restructuring plan or announces its main features to those affected only disclosure in the note to financial statements after the balance sheet date is required under VAS 23 Events after the Balance Sheet Date. If the restructuring is material but is not disclosed, the fact could influence the economic decisions of users taken on the basis of the financial statements.
72. Although a constructive obligation is not created solely by a management decision, an obligation may result from other earlier events together with such a decision. For example, negotiations with employee representatives for termination payments, or with purchasers for the sale of an operation, may have been concluded subject only to board approval. Once that approval has been obtained and communicated to the other parties, the enterprise has a constructive obligation to restructure, if the conditions of paragraph 68 are met.
73. No obligation arises for the sale of an operation until the enterprise is committed to the sale, i.e. there is a binding sale agreement.
74. Even when an enterprise has taken a decision to sell an operation and announced that decision publicly, it cannot be committed to the sale until a purchaser has been identified and there is a binding sale agreement. Until there is a binding sale agreement the enterprise will be able to take another course of action if a purchaser cannot be found on acceptable terms. When a sale is only part of a restructuring, the assets of the operation need to be reviewed for impairment and a constructive obligation can arise for the other parts of the restructuring before a binding sale agreement exists.
75. A restructuring provision shall include only the direct expenditures arising from the restructuring, which are those that are both:
(a) necessarily entailed by the restructuring; and
(b) not associated with the ongoing activities of the enterprise.
76. A restructuring provision does not include such costs as:
(a) Retraining or relocating continuing staff;
(b) Marketing; or
(c) Investment in new systems and distribution networks.
These expenditures relate to the future conduct of the business and are not liabilities for restructuring at the balance sheet date. Such expenditures are recognised on the same basis as if they arose independently of a restructuring.
77. Identifiable future operating losses up to the date of a restructuring are not included in a provision, unless they relate to an onerous contract as defined in paragraph 07.
78. As required by paragraph 47, gains on the expected disposal of assets are not taken into account in measuring a restructuring provision, even if the sale of assets is envisaged as part of the restructuring.
Disclosure
79. For each class of provision, an 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) Amounts used (i.e. incurred and charged against the provision) during the period;
(d) Unused amounts reversed during the period; and
(e) The increase during the period in the discounted amount arising from the passage of time and the effect of any change in the discount rate.
Comparative information is not required.
80. An enterprise shall disclose the following for each class of significant provision:
(a) A brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits;
(b) An indication of the uncertainties about the amount or timing of those outflows. Where necessary to provide adequate information, an enterprise shall disclose the major assumptions made concerning future events, as addressed in paragraph 44; and
(c) The amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement.
81. Unless the possibility of any outflow in settlement is remote, an enterprise shall disclose for each class of contingent liability at the balance sheet date the following:
(a) An estimate of the financial effect of the contingent liability, measured under paragraphs 32-48;
(b) An indication of the uncertainties relating to the amount or timing of any outflow; and
(c) The possibility of any reimbursement.
82. In determining which provisions or contingent liabilities may be aggregated to form a class, it is necessary to consider whether the nature of the items is sufficiently similar for a single statement about them to fulfill the requirements of paragraphs 80(a) and (b) and 81(a) and (b). Thus, it may be appropriate to treat as a single class of provision amounts relating to warranties of different products, but it would not be appropriate to treat as a single class amounts relating to normal warranties and amounts that are subject to legal proceedings.
83. Where a provision and a contingent liability arise from the same set of circumstances, an enterprise makes the disclosures required by paragraphs 79-81 in a way that shows the link between the provision and the contingent liability.
84. Where an inflow of economic benefits is probable, an enterprise shall disclose a brief description of the nature of the contingent assets at the balance sheet date, and, where practicable, an estimate of their financial effect, measured using the principles set out for provisions in paragraphs 32-48.
85. It is important that disclosures for contingent assets avoid giving misleading indications of the likelihood of income arising.
86. Where any of the information required by paragraphs 81 and 84 is not disclosed because it is not practicable to do so, that fact shall be stated.
87. In extremely rare cases, disclosure of some or all of the information required by paragraphs 79-84 can be expected to prejudice seriously the position of the enterprise in a dispute with other parties on the subject matter of the provision, contingent liability or contingent asset. In such cases, an enterprise need not disclose the information, but shall disclose the general nature of the dispute, together with the fact that, and reason why, the information has not been disclosed.
VIETNAMESE STANDARDS ON ACCOUNTING
STANDARD 19
INSURANCE CONTRACT
(Issued in pursuance of the Minister of Finance Decision No. 100/2005/QD-BTC dated 28 December 2005)
GENERAL
01. The objective of this Standard is to prescribe the accounting policies and procedures in relation to relevant elements and the recognition of these elements in the financial statements of an insurance company, including
a) The method of accounting for insurance contracts in insurance companies;
b) Presentation and explanation of data in the financial statements of an insurance company resulting from an incurrence contract.
02. An entity shall apply this Standard to:
(a) Insurance contracts (including reinsurance contracts) that it issues and reinsurance contracts that it holds.
(b) Financial instruments under insurance contracts that it issues with a discretionary participation feature
03. This Standard does not address other aspects of accounting by insurers, such as accounting for financial assets held by insurers and financial liabilities issued by insurers which do not relate to insurance contracts.
04. An entity shall not apply this Standard to:
(a) Product warranties issued directly by a manufacturer, dealer or retailer;
(b) Employers assets and liabilities under employee benefit plans;
(c) Contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item (for example, some licence fees, royalties, contingent lease payments and similar items), as well as a lessees residual value guarantee embedded in a finance lease (see VAS 06 Leases, VAS 14 Revenue and Other Incomes and VAS 04 Intangible Fixed Assets).
(d) Financial guarantees that an entity enters into or retains on transferring to another party financial assets or financial liabilities within the scope of VAS on Financial Instruments regardless of whether the financial guarantees are described as financial guarantees or letters of credits.
(e) Contingent consideration payable or receivable in a business combination (see VAS 11 Business Combinations).
(f) Direct insurance contracts in which the entity is the policyholder.
05. The following terms are used in this Standard with the meanings specified:
Insurer: The party that has an obligation under an insurance contract to compensate a policyholder if an insured event occurs.
Insurance contract: A contract under which the insurer agrees to a certain amount (ie insurance fee) accepts significant insurance risk from a customer (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder.
Direct insurance contract: An insurance contract that is not a reinsurance contract.
Policyholder: A party that has a right to compensation under an insurance contract if an insured event occurs.
Reinsurance contract: An insurance contract issued by the reinsurer to compensate the cedant for losses on one or more contracts issued by the cedant.
The policyholder under a reinsurance contract: A direct insurance company which transfers risk under a reinsurance contract.
Insurance risk: Risk, other than financial risk, transferred from the holder of a contract to the insurer.
Insurance liability: An insurers net contractual obligations under an insurance contract.
Deposit component:A contractual component that is not accounted for as a derivative under standard on Financial Instruments and would be within the scope of standard on Financial Instruments if it were a separate instrument.
Guaranteed element: An obligation to pay guaranteed benefits, included in a contract.
Guaranteed benefits: Payments or other benefits to which a particular policyholder or investor has an unconditional right that is not subject to the contractual discretion of the insurer.
Insurance asset: An insurers net contractual rights under an insurance contract.
Reinsurance assets: A cedants net contractual rights under a reinsurance contract.
Discretionary participation feature: A contractual right to receive, as a supplement to guaranteed benefits, additional benefits:
(a) that is likely to be a significant portion of the total contractual benefits;
(b) Whose amount or timing is contractually at the discretion of the insurer; and
(c) that is contractually based on:
(i) The performance of a specified pool of contracts or a specified type of contract;
(ii) Realised and/or unrealised investment returns on a specified pool of assets held by the insurer; or
(iii) The profit or loss of the company, fund or other entity that issues the contract.
Unbundle: Account for the components of a contract as if they were separate contracts.
Fair value: The amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arms length transaction.
Financial risk: The risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract.
Financial instrument: Any contract in which one contracting party (an enterprise) creates a financial asset and the other party incurs a corresponding financial liability or an equity instrument.
A derivative: A financial instrument whose value changes in response to the change in an underlying unit that requires no initial net investment or little initial net investment relative to the other type of contracts and is settled at a future date.
Insured event: An uncertain future event that is covered by an insurance contract and creates insurance risk.
Liability adequacy test: An assessment of whether the carrying amount of an insurance liability needs to be increased (or the carrying amount of related deferred acquisition costs or related intangible assets decreased), based on a review of future cash flows.
CONTENT OF THE STANDARD
Embedded derivatives
06. The standard on Financial Instruments requires an entity to separate some embedded derivatives from their host contract, measure them at fair value and include changes in their fair value in profit or loss. Standard on Financial Instruments applies to derivatives embedded in an insurance contract unless the embedded derivative is itself an insurance contract.
07. As an exception to the requirement in standard on Financial Instruments, an insurer need not separate, and measure at fair value, a policyholders option to surrender an insurance contract for a fixed amount (or for an amount based on a fixed amount and an interest rate), even if the exercise price differs from the carrying amount of the host insurance liability. However, the requirement in standard on Financial Instruments does apply to a put option or cash surrender option embedded in an insurance contract if the surrender value varies in response to the change in a financial variable (such as an equity or commodity price or index), or a nonfinancial variable that is not specific to a party to the contract. Furthermore, that requirement also applies if the holders ability to exercise a put option or cash surrender option is triggered by a change in such a variable (for example, a put option that can be exercised if a stock market index reaches a specified level).
08. Paragraph 07 applies equally to options to surrender a financial instrument containing a discretionary participation feature.
Unbundling of deposit components
09. Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components:
(a) Unbundling is required if both the following conditions are met:
(i) The insurer can measure the deposit component (including any embedded surrender options) separately (ie without considering the insurance component).
(ii) The insurers accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component as shown in paragraph 10 as an example.
(b) Unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i) but its accounting policies require it to recognise all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations.
(c) Unbundling is prohibited if an insurer cannot measure the deposit component separately as in (a)(i).
10. The following is an example of a case when an insurers accounting policies do not require it to recognise all obligations arising from a deposit component. A cedant receives compensation for losses from a reinsurer, but the contract obliges the cedant to repay the compensation in future years. That obligation arises from a deposit component. If the cedants accounting policies would otherwise permit it to recognise the compensation as income without recognising the resulting obligation, unbundling is required.
11. To unbundled a contract, an insurer shall:
(a) Apply this Standard to the insurance component.
(b) Apply standard on Financial Instruments to the deposit component.
RECOGNITION AND MEASUREMENT
Accounting application
12. An insurer:
(a) Shall not recognize as a liability any provisions for possible future claims, if those claims arise under insurance contracts that are not in existence at the reporting date (such as catastrophe provisions and equalisation provisions).
(b) Shall carry out the liability adequacy test described in paragraphs 13-17.
(c) Shall remove an insurance liability (or a part of an insurance liability) from its balance sheet when, and only when, it is extinguished.
(d) Shall not offset:
(i) Reinsurance assets against the related insurance liabilities; or
(ii) Income or expense from reinsurance contracts against the expense or income from the related insurance contracts.
(e) Shall consider whether its reinsurance assets are impaired (see paragraph 18).
Liability adequacy test
13. An insurer shall assess at each reporting date whether its recognised insurance liabilities are adequate, using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of its insurance liabilities (less related deferred acquisition costs and related intangible assets, such as those discussed in paragraphs 27 and 28) is inadequate in the light of the estimated future cash flows, the entire deficiency shall be recognised in profit or loss.
14. An insurer shall apply a liability adequacy test that meets specified minimum requirements that follow:
(a) The test considers current estimates of all contractual cash flows, and of related cash flows such as claims handling costs, as well as cash flows resulting from embedded options and guarantees.
(b) If the test shows that the liability is inadequate, the entire deficiency is recognised in profit or loss.
In presenting profit and loss to the insurance administration (the Ministry of Finance), insurers shall follow all financial guidelines and regulations on exploitation costs.
15. If an insurers accounting policies do not require a liability adequacy test that meets the minimum requirements of paragraph 14, the insurer shall:
(a) Determine the carrying amount of the relevant insurance liabilities less the carrying amount of:
(i) Any related deferred acquisition costs; and
(ii) Any related intangible assets, such as those acquired in a business combination or portfolio transfer (see paragraphs 27 and 28). However, related reinsurance assets are not considered because an insurer accounts for them separately (see paragraph 18).
(b) Determine whether the amount described in (a) is less than the carrying amount that would be required if the relevant insurance liabilities were within the scope of VAS 18, Provisions, Contingent Liabilities and Contingent Assets. If it is less, the insurer shall recognise the entire difference in profit or loss and decrease the carrying amount of the related deferred acquisition costs or related intangible assets or increase the carrying amount of the relevant insurance liabilities.
16. If an insurers liability adequacy test meets the minimum requirements of paragraph 14, the test is applied at the level of aggregation specified in that test. If its liability adequacy test does not meet those minimum requirements, the comparison described in paragraph 15 shall be made at the level of a portfolio of contracts that are subject to broadly similar risks and managed together as a single portfolio.
17. The amount described in paragraph 15(b) (ie the result of applying VAS 18 Provisions, Contingent Liabilities and Contingent Assets) shall reflect future investment margins (see paragraphs 24-26) if, and only if, the amount described in paragraph 15(a) also reflects those margins.
Impairment of reinsurance assets
18. If a cedants reinsurance asset is impaired, the cedant shall reduce its carrying amount accordingly and recognise that impairment loss in profit or loss. A reinsurance asset is impaired if, and only if:
(a) There is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the cedant may not receive all amounts due to it under the terms of the contract; and
(b) That event has a reliably measurable impact on the amounts that the cedant will receive from the reinsurer.
Changes in accounting policies
19. An insurer may change its accounting policies for insurance contracts if, and only if, the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs. An insurer shall judge relevance and reliability by the criteria in VAS 29 Changes in Accounting Policies, Accounting Estimates and Errors.
20. To justify changing its accounting policies for insurance contracts, an insurer shall show that the change brings its financial statements closer to meeting the criteria in VAS 29, but the change need not achieve full compliance with those criteria. The following specific issues are discussed below:
(a) Current interest rates (paragraph 21);
(b) Continuation of existing practices (paragraph 22);
(c) Prudence (paragraph 23);
(d) Future investment margins (paragraphs 24-26);
Current market interest rates
21. An insurer is permitted, but not required, to change its accounting policies so that it remeasures designated insurance liabilities to reflect current market interest rates and recognises changes in those liabilities in profit or loss. At that time, it may also introduce accounting policies that require other current estimates and assumptions for the designated liabilities. The election in this paragraph permits an insurer to change its accounting policies for designated liabilities, without applying those policies consistently to all similar liabilities as VAS 29 would otherwise require. If an insurer designates liabilities for this election, it shall continue to apply current market interest rates (and, if applicable, the other current estimates and assumptions) consistently in all periods to all these liabilities until they are extinguished.
Continuation of existing practices
22. An insurer may continue the following practices, but the introduction of any of them does not satisfy paragraph 19:
(a) Measuring insurance liabilities on an undiscounted basis.
(b) Measuring contractual rights to future investment management fees at an amount that exceeds their fair value as implied by a comparison with current fees charged by other market participants for similar services. It is likely that the fair value at inception of those contractual rights equals the origination costs paid, unless future investment management fees and related costs are out of line with market comparables.
(c) Using non-uniform accounting policies for the insurance contracts (and related deferred acquisition costs and related intangible assets, if any) of subsidiaries, except as permitted by paragraph 21. If those accounting policies are not uniform, an insurer may change them if the change does not make the accounting policies more diverse and also satisfies the other requirements in this Standard.
Prudence
23. Applying prudence as a principle, an insurer need not change its accounting policies for insurance contracts to eliminate excessive prudence. However, if an insurer already measures its insurance contracts with sufficient prudence, it shall not introduce additional prudence.
Future investment margins
24. An insurer need not change its accounting policies for insurance contracts to eliminate future investment margins. However, there is a rebuttable presumption that an insurers financial statements will become less relevant and reliable if it introduces an accounting policy that reflects future investment margins in the measurement of insurance contracts, unless those margins affect the contractual payments.
Two examples of accounting policies that reflect those margins are:
(a) Using a discount rate that reflects the estimated return on the insurers assets; or
(b) Projecting the returns on those assets at an estimated rate of return, discounting those projected returns at a different rate and including the result in the measurement of the liability.
25. An insurer may overcome the rebuttable presumption described in paragraph 24 if, and only if, the other components of a change in accounting policies increase the relevance and reliability of its financial statements sufficiently to outweigh the decrease in relevance and reliability caused by the inclusion of future investment margins.
For example, suppose that an insurers existing accounting policies for insurance contracts involve excessively prudent assumptions set at inception and a discount rate prescribed by a regulator without direct reference to market conditions, and ignore some embedded options and guarantees. The insurer might make its financial statements more relevant and no less reliable by switching to a comprehensive investor-oriented basis of accounting that is widely used and involves:
(a) Current estimates and assumptions;
(b) A reasonable (but not excessively prudent) adjustment to reflect risk and uncertainty;
(c) Measurements that reflect both the intrinsic value and time value of embedded options and guarantees; and
(d) A current market discount rate, even if that discount rate reflects the estimated return on the insurers assets.
26. In some measurement approaches, the discount rate is used to determine the present value of a future profit margin. That profit margin is then attributed to different periods using a formula. In those approaches, the discount rate affects the measurement of the liability only indirectly. In particular, the use of a less appropriate discount rate has a limited or no effect on the measurement of the liability at inception. However, in other approaches, the discount rate determines the measurement of the liability directly. In the latter case, because the introduction of an asset-based discount rate has a more significant effect, it is highly unlikely that an insurer could overcome the rebuttable presumption described in paragraph 24.
Insurance contracts acquired in a business combination or portfolio transfer
27. To comply with VAS 11 Business Combinations, an insurer shall, at the acquisition date, measure at fair value the insurance liabilities assumed and insurance assets acquired in a business combination. However, an insurer is permitted, but not required, to use an expanded presentation that splits the fair value of acquired insurance contracts into two components:
(a) A liability measured in accordance with the insurers accounting policies for insurance contracts that it issues; and
(b) An intangible asset, representing the difference between
(i) The fair value of the contractual insurance rights acquired and insurance obligations assumed; and
(ii) The amount described in (a).
The subsequent measurement of this asset shall be consistent with the measurement of the related insurance liability.
28. An insurer acquiring a portfolio of insurance contracts may use the expanded presentation described in paragraph 27.
29. The intangible assets described in paragraphs 27 and 28 are excluded from the scope of VAS on Impairment of Assets and VAS on Intangible Fixed Assets. However, these VASs apply to customer lists and customer relationships reflecting the expectation of future contracts that are not part of the contractual insurance rights and contractual insurance obligations that existed at the date of a business combination or portfolio transfer.
DISCRETIONARY PARTICIPATION FEATURES
Discretionary participation features in insurance contracts
30. Some insurance contracts contain a discretionary participation feature as well as a guaranteed element. The insurer of such a contract:
(a) May, but need not, recognise the guaranteed element separately from the discretionary participation feature. If the insurer does not recognise them separately, it shall classify the whole contract as a liability. If the insurer classifies them separately, it shall classify the guaranteed element as a liability.
(b) Shall, if it recognises the discretionary participation feature separately from the guaranteed element, classify that feature as either a liability or a separate component of equity. This Standard does not specify how the insurer determines whether that feature is a liability or equity. The insurer may split that feature into liability and equity components and shall use a consistent accounting policy for that split. The insurer shall not classify that feature as an intermediate category that is neither liability nor equity.
(c) May recognise all premiums received as revenue without separating any portion that relates to the equity component. The resulting changes in the guaranteed element and in the portion of the discretionary participation feature classified as a liability shall be recognised in profit or loss. If part or the entire discretionary participation feature is classified in equity, a portion of profit or loss may be attributable to that feature (in the same way that a portion may be attributable to minority interests). The insurer shall recognise the portion of profit or loss attributable to any equity component of a discretionary participation feature as an allocation of profit or loss, not as expense or income (see VAS 21 Presentation of Financial Statements).
(d) Shall, if the contract contains an embedded derivative, apply VAS on Financial Instruments to that embedded derivative.
(e) Shall, in all respects not described in paragraphs 12-18 and 30(a)-(d), continue its existing accounting policies for such contracts, unless it changes those accounting policies in a way that complies with paragraphs 19-26.
Discretionary participation features in financial instruments
31. The requirements in paragraph 30 also apply to a financial instrument that contains a discretionary participation feature. In addition:
(a) If the insurer classifies the entire discretionary participation feature as a liability, it shall apply the liability adequacy test in paragraphs 14-17 to the whole contract (ie both the guaranteed element and the discretionary participation feature). The insurer need not determine the amount that would result from applying VAS on Financial Instruments to the guaranteed element.
(b) If the insurer classifies part or that entire feature as a separate component of equity, the liability recognised for the whole contract shall not be less than the amount that would result from applying VAS on Financial Instruments to the guaranteed element. That amount shall include the intrinsic value of an option to surrender the contract, but need not include its time value if paragraph 08 exempts that option from measurement at fair value. The insurer need not disclose the amount that would result from applying VAS on Financial Instruments to the guaranteed element, nor need it present that amount separately. Furthermore, the insurer need not determine that amount if the total liability recognised is clearly higher.
(c) Although these contracts are financial instruments, the insurer may continue to recognise the premiums for those contracts as revenue and recognise as an expense the resulting increase in the carrying amount of the liability.
DISCLOSURE
Explanation of recognised amounts
32. An insurer shall disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts.
33. To comply with paragraph 32, an insurer shall disclose:
(a) Its accounting policies for insurance contracts and related assets, liabilities, income and expense.
(b) The recognised assets, liabilities, income and expense (and, if it presents its cash flow statement using the direct method, cash flows) arising from insurance contracts. Furthermore, if the insurer is a cedant, it shall disclose:
(i) Gains and losses recognised in profit or loss on buying reinsurance; and
(ii) if the cedant defers and amortises gains and losses arising on buying reinsurance, the amortisation for the period and the amounts remaining unamortised at the beginning and end of the period.
(c) The process used to determine the assumptions that have the greatest effect on the measurement of the recognised amounts described in (b). When practicable, an insurer shall also give quantified disclosure of those assumptions.
(d) The effect of changes in assumptions used to measure insurance assets and insurance liabilities, showing separately the effect of each change that has a material effect on the financial statements.
(e) Reconciliations of changes in insurance liabilities, reinsurance assets and, if any, related deferred acquisition costs.
Amount, timing and uncertainty of cash flows
34. An insurer shall disclose information that helps users to understand the amount, timing and uncertainty of future cash flows from insurance contracts.
35. To comply with paragraph 34, an insurer shall disclose:
(a) Its objectives in managing risks arising from insurance contracts and its policies for mitigating those risks.
(b) Those terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of the insurers future cash flows.
(c) Information about insurance risk (both before and after risk mitigation by reinsurance), including information about:
(i) The sensitivity of profit or loss and equity to changes in variables that have a material effect on them.
(ii) Concentrations of insurance risk.
(iii) Actual claims compared with previous estimates (ie claims development). The disclosure about claims development shall go back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments, but need not go back more than ten years. An insurer need not disclose this information for claims for which uncertainty about the amount and timing of claims payments is typically resolved within one year.
(d) the information about interest rate risk and credit risk that VAS on Financial Instruments would require if the insurance contracts were within the scope of the VAS.
(e) Information about exposures to interest rate risk or market risk under embedded derivatives contained in a host insurance contract if the insurer is not required to, and does not, measure the embedded derivatives at fair value.
VIETNAMESE STANDARDS ON ACCOUNTING
STANDARD 30
EARNING PER SHARE
(Issued in pursuance of the Minister of Finance Decision No. 100/2005/QD-BTC dated 28 December 2005)
GENERAL
01. The objective of this Standard is to prescribe the accounting policies and procedures in relation to measurement and presentation of earnings per share for comparison of business results among joint-stock enterprises in one reporting period and the business results of one enterprise through reporting periods.
02. This Standard shall be applied by entities:
- whose ordinary shares or potential ordinary shares are publicly traded; and
- that are in the process of issuing ordinary shares or potential ordinary shares in public markets.
03. When an entity presents both consolidated financial statements and separate financial statements, the disclosures required by this Standard need be presented only on the basis of the consolidated information.
An entity that is not required to prepare consolidated financial statements shall present such earnings per share information only on the face of its separate income statement.
04. The following terms are used in this Standard with the meanings specified:
Dilution is a reduction in earnings per share or an increase in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.
Antidilution is an increase in earnings per share or a reduction in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.
A contingent share agreement is an agreement to issue shares that is dependent on the satisfaction of specified conditions.
An ordinary share is an equity instrument that provides for a dividend subordinate to all other classes of equity instruments.
A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares.
Contingently issuable ordinary shares are ordinary shares issuable for little or no cash or other consideration upon the satisfaction of specified conditions in a contingent share agreement.
Options, warrants and their equivalents are financial instruments that give the holder the right to purchase ordinary shares at a specified price and within a given period.
Put options on ordinary shares are contracts that give the holder the right to sell ordinary shares at a specified price within a given period.
05. Ordinary shares participate in profit for the period only after other types of shares such as preference shares have participated. Ordinary shares of the same class have the same rights to receive dividends.
06. Examples of potential ordinary shares are:
(a) Financial liabilities or equity instruments, including preference shares, that are convertible into ordinary shares;
(b) Options and warrants;
(c) Shares that would be issued upon the satisfaction of specified conditions resulting from contractual arrangements, such as the purchase of a business or other assets.
CONTENT OF THE STANDARD
MEASUREMENT
Basic Earnings per Share
07. An entity shall calculate basic earnings per share amounts for profit or loss attributable to ordinary equity holders of the parent entity.
08. Basic earnings per share shall be calculated by dividing profit or loss attributable to ordinary equity holders of the parent entity (the numerator) by the weighted average number of ordinary shares outstanding (the denominator) during the period .
09. Basic earnings per share information is to provide a measure of the interests of each ordinary share of a parent entity in the performance of the entity over the reporting period.
Profit or loss for the purpose of calculating basic earning per share
10. For the purpose of calculating basic earnings per share, the amounts attributable to ordinary equity holders of the parent entity shall be after-tax amounts of profit/loss attributable to parent entity adjusted by preference dividends, differences arising on the settlement of preference shares, and other similar effects of preference shares classified as equity.
11. All items of income and expense attributable to ordinary equity holders of the parent entity that are recognised in a period, including corporate income tax expense and dividends on preference shares classified as liabilities are included in the determination of profit or loss for the period attributable to ordinary equity holders of the parent entity.
12. Preference dividends that is deducted from profit or loss after tax for the purpose of calculating basic earning per share is:
(a) Preference dividends on non-cumulative preference shares declared in respect of the period; and
(b) Preference dividends for cumulative preference shares required for the period, whether or not the dividends have been declared. The amount of preference dividends for the period does not include the amount of any preference dividends for cumulative preference shares paid or declared during the current period in respect of previous periods.
13. Preference shares that provide for a low initial dividend to compensate an entity for selling the preference shares at a discount, or an above-market dividend in later periods to compensate investors for purchasing preference shares at a premium, are sometimes referred to as increasing rate preference shares. Any original issue discount or premium on increasing rate preference shares is amortised to retained earnings using the effective interest method and treated as a preference dividend for the purposes of calculating earnings per share.
14. Preference shares may be repurchased under an entitys tender offer to the holders. The excess of the fair value of the consideration paid to the preference shareholders over the carrying amount of the preference shares represents a return to the holders of the preference shares and a charge to retained earnings for the entity. This amount is deducted in calculating profit or loss attributable to ordinary equity holders of the parent entity.
15. Early conversion of convertible preference shares may be induced by an entity through favourable changes to the original conversion terms or the payment of additional consideration. The excess of the fair value of the ordinary shares or other consideration paid over the fair value of the ordinary shares issuable under the original conversion terms is a return to the preference shareholders. This excess is deducted from profit or loss attributable to ordinary equity holders of the parent entity.
16. Any excess of the carrying amount of preference shares over the fair value of the consideration paid to settle them is added in calculating profit or loss attributable to ordinary equity holders of the parent entity.
Number of shares for the purpose of calculating basic earning per share
17. For the purpose of calculating basic earnings per share, the number of ordinary shares shall be the weighted average number of ordinary shares outstanding during the period.
18. The weighted average number of ordinary shares outstanding during the period issued because the amount of shareholders capital varied during the period as a result of increased or decreased number of shares being outstanding at any time. The weighted average number of ordinary shares outstanding during the period is the number of ordinary shares outstanding at the beginning of the period, adjusted by the number of ordinary shares bought back or issued during the period multiplied by a time-weighting factor. The time-weighting factor is the number of days that the shares are outstanding as a proportion of the total number of days in the period.
19. Ordinary shares are usually included in the weighted average number of shares from the date consideration is receivable (which is generally the date of their issue), for example:
(a) Ordinary shares issued in exchange for cash are included when cash is receivable;
(b) Ordinary shares issued on the voluntary reinvestment of dividends on ordinary or preference shares are included when dividends are reinvested;
(c) Ordinary shares issued as a result of the conversion of a debt instrument to ordinary shares are included from the date that interest ceases to accrue;
(d) Ordinary shares issued in place of interest or principal on other financial instruments are included from the date that interest ceases to accrue;
(e) Ordinary shares issued in exchange for the settlement of a liability of the entity are included from the settlement date;
(f) Ordinary shares issued as consideration for the acquisition of an asset other than cash are included as of the date on which the asset is recognised; and
(g) Ordinary shares issued for the rendering of services to the entity are included as the services are rendered.
The timing of the inclusion of ordinary shares is determined by the terms and conditions attaching to their issue. Entity must consider carefully the substance of any contract associated with the issue.
20. Ordinary shares issued as part of the cost of a business combination are included in the weighted average number of shares from the acquisition date, because the acquirer incorporates into its income statement the acquirees profits and losses from that date.
21. Ordinary shares that will be issued upon the conversion of a mandatorily convertible instrument are included in the calculation of basic earnings per share from the date the contract is entered into.
22. Contingently issuable shares are treated as outstanding and are included in the calculation of basic earnings per share only from the date when all necessary conditions are satisfied (ie the events have occurred). Shares that are issuable solely after the passage of time are not contingently issuable shares, because the passage of time is a certainty.
23. Outstanding ordinary shares that are contingently returnable are not treated as oustanding and are excluded from the calculation of basic earnings per share until the date the shares are no longer subject to recall.
24.The weighted average number of ordinary shares outstanding during the period and for all periods presented 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.
25. The number of ordinary shares outstanding may be increased or reduced, without a corresponding change in resources. Examples include:
(a) A capitalization or bonus issue (sometimes referred to as a stock dividend);
(b) A bonus element in any other issue, for example a bonus element in a rights issue to existing shareholders;
(c) A share split; and
(d) Consolidation of shares.
26. In a capitalisation or bonus issue or a share split, ordinary shares are issued to existing shareholders for no additional consideration. Therefore, the number of ordinary shares outstanding is increased without an increase in resources. The number of ordinary shares outstanding before the event is adjusted for the proportionate change in the number of ordinary shares outstanding as if the event had occurred at the beginning of the earliest period presented. For example, on a two-for-one bonus issue, the number of ordinary shares outstanding before the issue is multiplied by three to obtain the new total number of ordinary shares, or by two to obtain the number of additional ordinary shares.
27. A consolidation of ordinary shares generally reduces the number of ordinary shares outstanding without a corresponding reduction in resources. However, when the overall effect is a share repurchase at fair value, the reduction in the number of ordinary shares outstanding is the result of a corresponding reduction in resources.
Diluted Earnings per Share
28. An entity shall calculate diluted earnings per share amounts for profit or loss attributable to ordinary equity holders of the parent entity.
29. For the purpose of calculating diluted earnings per share, an entity shall adjust profit or loss attributable to ordinary equity holders of the parent entity, and the weighted average number of shares outstanding, for the effects of all dilutive potential ordinary shares.
30. The objective of diluted earnings per share is consistent with that of basic earnings per share to provide a measure of the interest of each ordinary share in the performance of an entity while giving effect to all dilutive potential ordinary shares outstanding during the period. As a result:
(a) Profit or loss attributable to ordinary equity holders of the parent entity is increased by the amount of dividends and interest recognised in the period in respect of the dilutive potential ordinary shares and is adjusted for any other changes in income or expense that would result from the conversion of the dilutive potential ordinary shares; and
(b) The weighted average number of ordinary shares outstanding is increased by the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares.
Earnings
31. For the purpose of calculating diluted earnings per share, an entity shall adjust profit or loss after tax attributable to ordinary equity holders of the parent entity, as calculated in accordance with paragraph 10, by the after-tax effect of:
(a) Dividends or other items related to dilutive potential ordinary shares deducted in arriving at profit or loss attributable to ordinary equity holders of the parent entity as calculated in accordance with paragraph 10;
(b) Any interest recognised in the period related to dilutive potential ordinary shares; and
(c) Other changes in income or expense that would result from the conversion of the dilutive potential ordinary shares.
32. After the potential ordinary shares are converted into ordinary shares, the items identified in paragraph 31(a)-(c) no longer arise. Instead, the new ordinary shares are entitled to participate in profit or loss attributable to ordinary equity holders of the parent entity. Therefore, profit or loss attributable to ordinary equity holders of the parent entity calculated in accordance with paragraph 10 is adjusted for the items identified in paragraph 31(a)-(c). The expenses associated with potential ordinary shares include transaction costs and discounts accounted for in accordance with the effective interest method.
33. The conversion of potential ordinary shares may lead to consequential changes in income or expenses. For example, the reduction of interest expense related to potential ordinary shares and the resulting increase in profit or reduction in loss may lead to an increase in the share profit. For the purpose of calculating diluted earnings per share, profit or loss attributable to ordinary equity holders of the parent entity is adjusted for any such consequential changes in income or expense.
Number of shares for the purpose of calculating diluted earning per share
34. For the purpose of calculating diluted earnings per share, the number of ordinary shares shall be the weighted average number of ordinary shares calculated in accordance with paragraphs 17 and 24, plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. Dilutive potential ordinary shares shall be deemed to have been converted into ordinary shares at the beginning of the period or, if later, the date of the issue of the potential ordinary shares.
35. Dilutive potential ordinary shares shall be determined independently for each period presented. The number of dilutive potential ordinary shares included in the year-to-date period is not a weighted average of the dilutive potential ordinary shares included in each interim computation.
36. Potential ordinary shares are weighted for the period they are outstanding. Potential ordinary shares that are cancelled or allowed to lapse during the period are included in the calculation of diluted earnings per share only for the portion of the period during which they are outstanding. Potential ordinary shares that are converted into ordinary shares during the period are included in the calculation of diluted earnings per share from the beginning of the period to the date of conversion; from the date of conversion, the resulting ordinary shares are included in both basic and diluted earnings per share.
37. The number of ordinary shares that would be issued on conversion of dilutive potential ordinary shares is determined from the terms of the potential ordinary shares. When more than one basis of conversion exists, the calculation assumes the most advantageous conversion rate or exercise price from the standpoint of the holder of the potential ordinary shares.
38. A subsidiary, joint venture or associate may issue to parties other than the parent, venturer or investor potential ordinary shares that are convertible into either ordinary shares of the subsidiary, joint venture or associate, or ordinary shares of the parent, venturer or investor. If these potential ordinary shares of the subsidiary, joint venture or associate have a dilutive effect on the basic earnings per share of the reporting entity, they are included in the calculation of diluted earnings per share.
Dilutive Potential Ordinary Shares
39. Potential ordinary shares shall be treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share or increase loss per share.
40. An entity uses profit or loss attributable to the parent entity as the control number to establish whether potential ordinary shares are dilutive or antidilutive. Profit or loss attributable to the parent entity is adjusted in accordance with paragraph 10.
41. Potential ordinary shares are antidilutive when their conversion to ordinary shares would increase earnings per share or decrease loss per share. The calculation of diluted earnings per share does not assume conversion, exercise, or other issue of potential ordinary shares that would have an antidilutive effect on earnings per share.
42. In determining whether potential ordinary shares are dilutive or antidilutive, each issue or series of potential ordinary shares is considered separately rather than in aggregate. The sequence in which potential ordinary shares are considered may affect whether they are dilutive, therefore, to maximize the dilution of basic earnings per share, each issue or series of potential ordinary shares is considered in sequence from the most dilutive to the least dilutive, ie dilutive potential ordinary shares with the lowest earnings per incremental share are included in the diluted earnings per share calculation before those with a higher earnings per incremental share. Options and warrants are generally included first because they do not affect the profit or loss distributed to holders of common shares.
Options, Warrants and Their Equivalents
43. For the purpose of calculating diluted earnings per share, an entity shall assume the exercise of dilutive options and warrants of the entity. The assumed proceeds from these instruments shall be regarded as having been received from the issue of ordinary shares at the average market price of ordinary shares during the period. The difference between the number of ordinary shares issued and the number of ordinary shares that would have been issued at the average market price of ordinary shares during the period shall be treated as an issue of ordinary shares for no consideration.
44. Options and warrants are dilutive when they would result in the issue of ordinary shares for less than the average market price of ordinary shares during the period. The amount of the dilution is the average market price of ordinary shares during the period minus the issue price. Therefore, to calculate diluted earnings per share, potential ordinary shares are treated as consisting of both the following:
(a) A contract to issue a certain number of the ordinary shares at their average market price during the period. Enterprise should ignore these ordinary shares in the calculating of diluted earning per share because these shares are assumed to be fairly priced and to be neither dilutive nor antidilutive.
(b) A contract to issue the remaining ordinary shares for no consideration. Such ordinary shares generate no proceeds and have no effect on profit or loss attributable to ordinary shares outstanding. Therefore, such shares are dilutive and are added to the number of ordinary shares outstanding in the calculation of diluted earnings per share.
45. Options and warrants have a dilutive effect only when the average market price of ordinary shares during the period exceeds the exercise price of the options or warrants (ie they are in the money). Previously reported earnings per share are not retroactively adjusted to reflect changes in prices of ordinary shares.
46. Employee share options with fixed or determinable terms and non-vested ordinary shares are treated as options in the calculation of diluted earnings per share, even though they may be contingent on vesting. They are treated as outstanding on the grant date. Performance-based employee share options are treated as contingently issuable shares because their issue is contingent upon satisfying specified conditions in addition to the passage of time.
Convertible Instruments
47. The dilutive effect of convertible instruments shall be reflected in diluted earnings per share in accordance with paragraphs 31 and 34.
48. Convertible preference shares are antidilutive whenever the amount of the dividend on such shares declared in or accumulated for the current period per ordinary share obtainable on conversion exceeds basic earnings per share. Similarly, convertible debt is antidilutive whenever its interest (net of tax and other changes in income or expense) per ordinary share obtainable on conversion exceeds basic earnings per share.
49. The redemption or induced conversion of convertible preference shares may affect only a portion of the previously outstanding convertible preference shares. In such cases, any excess consideration referred to in paragraph 15 is attributed to those shares that are redeemed or converted for the purpose of determining whether the remaining outstanding preference shares are dilutive. The shares redeemed or converted are considered separately from those shares that are not redeemed or converted.
Contingently Issuable Shares
50. As in the calculation of basic earnings per share, contingently issuable ordinary shares are treated as outstanding and included in the calculation of diluted earnings per share if the conditions are satisfied (ie the events have occurred). Contingently issuable shares are included from the beginning of the period (or from the date of the contingent share agreement, if later). If the conditions are not satisfied, the number of contingently issuable shares included in the diluted earnings per share calculation is based on the number of shares that would be issuable if the end of the period were the end of the contingency period. Restatement is not permitted if the conditions are not met when the contingency period expires.
51. If attainment or maintenance of a specified amount of earnings for a period is the condition for contingent issue and if that amount has been attained at the end of the reporting period but must be maintained for an additional period, then the additional ordinary shares are treated as outstanding, if the effect is dilutive, when calculating diluted earnings per share. In that case, the calculation of diluted earnings per share is based on the number of ordinary shares that would be issued if the amount of earnings at the end of the reporting period were the amount of earnings at the end of the contingency period. Because earnings may change in a future period, the calculation of basic earnings per share does not include such contingently issuable ordinary shares until the end of the contingency period because not all necessary conditions have been satisfied.
52. The number of ordinary shares contingently issuable may depend on the future market price of the ordinary shares. In that case, if the effect is dilutive, the calculation of diluted earnings per share is based on the number of ordinary shares that would be issued if the market price at the end of the reporting period were the market price at the end of the contingency period. If the condition is based on an average of market prices over a period of time that extends beyond the end of the reporting period, the average for the period of time that has lapsed is used. Because the market price may change in a future period, the calculation of basic earnings per share does not include such contingently issuable ordinary shares until the end of the contingency period because not all necessary conditions have been satisfied.
53. The number of ordinary shares contingently issuable may depend on future earnings and future prices of the ordinary shares. In such cases, the number of ordinary shares included in the diluted earnings per share calculation is based on both conditions. Contingently issuable ordinary shares are not included in the diluted earnings per share calculation unless both conditions are met.
54. In other cases, the number of ordinary shares contingently issuable depends on a condition other than earnings or market price. In such cases, assuming that the present status of the condition remains unchanged until the end of the contingency period, the contingently issuable ordinary shares are included in the calculation of diluted earnings per share according to the status at the end of the reporting period.
55. Contingently issuable potential ordinary shares (other than those covered by a contingent share agreement, such as contingently issuable convertible instruments) are included in the diluted earnings per share calculation as follows:
(a) An entity determines whether the potential ordinary shares may be assumed to be issuable on the basis of the conditions specified for their issue in accordance with the contingent ordinary share provisions in paragraphs 50-54; and
(b) If those potential ordinary shares should be reflected in diluted earnings per share, an entity determines their impact on the calculation of diluted earnings per share by following the provisions for options and warrants in paragraphs 43-46, the provisions for convertible instruments in paragraphs 47-49, the provisions for contracts that may be settled in ordinary shares or cash in paragraphs 56-59, or other provisions, as appropriate.
However, exercise or conversion is not assumed for the purpose of calculating diluted earnings per share unless exercise or conversion of similar outstanding potential ordinary shares that are not contingently issuable is assumed.
Contracts that may be settled in ordinary shares or cash
56. When an entity has issued a contract that may be settled in ordinary shares or cash at the entitys option, the entity shall presume that the contract will be settled in ordinary shares, and the resulting potential ordinary shares shall be included in diluted earnings per share if the effect is dilutive.
57. When such a contract is presented for accounting purposes as an asset or a liability, or has an equity component and a liability component, the entity shall adjust the numerator for any changes in profit or loss that would have resulted during the period if the contract had been classified wholly as an equity instrument. That adjustment is similar to the adjustments required in paragraph 31.
58. For contracts that may be settled in ordinary shares or cash at the holder's option, the more dilutive of cash settlement and share settlement shall be used in calculating diluted earnings per share.
59. Examples of a contract that may be settled in ordinary shares or cash include:
(a) A debt instrument that, on maturity, gives the entity the unrestricted right to settle the principal amount in cash or in its own ordinary shares.
(b) A written put option that gives the holder a choice of settling in ordinary shares or cash.
Purchased options
60. Contracts such as purchased put options and purchased call options (ie options held by the entity on its own ordinary shares) are not included in the calculation of diluted earnings per share because including them would be antidilutive. The put option would be exercised only if the exercise price were higher than the market price and the call option would be exercised only if the exercise price were lower than the market price.
Written put options
61. Contracts that require the entity to repurchase its own shares, such as written put options and forward purchase contracts, are reflected in the calculation of diluted earnings per share if the effect is dilutive. If these contracts are in the money during the period (ie the exercise or settlement price is above the average market price for that period), the potential dilutive effect on earnings per share shall be calculated as follows:
(a) It shall be assumed that at the beginning of the period sufficient ordinary shares will be issued (at the average market price during the period) to raise proceeds to satisfy the contract;
(b) It shall be assumed that the proceeds from the issue are used to satisfy the contract (ie to buy back ordinary shares); and
(c) the incremental ordinary shares (the difference between the number of ordinary shares assumed issued and the number of ordinary shares received from satisfying the contract) shall be included in the calculation of diluted earnings per share.
Retrospective adjustments
62. If the number of ordinary or potential ordinary shares outstanding increases as a result of a capitalisation, bonus issue or share split, or decreases as a result of a reverse share split, the calculation of basic and diluted earnings per share for all periods presented shall be adjusted retrospectively. If these changes occur after the balance sheet date but before the financial statements are authorised for issue, the per share calculations for those and any prior period financial statements presented shall be based on the new number of shares. The fact that per share calculations reflect such changes in the number of shares shall be disclosed. In addition, basic and diluted earnings per share of all periods presented shall be adjusted for the effects of errors and adjustments resulting from changes in accounting policies accounted for retrospectively.
63. An entity does not restate diluted earnings per share of any prior period presented for changes in the assumptions used in earnings per share calculations or for the conversion of potential ordinary shares into ordinary shares.
Presentation of financial statements
64. An entity shall present on the face of the income statement basic and diluted earnings per share for profit or loss attributable to the ordinary equity holders of the parent entity for the period for each class of ordinary shares that has a different right to share in profit for the period. An entity shall present basic and diluted earnings per share with equal prominence for all periods presented.
65. Earnings per share is presented for every period for which an income statement is presented. If diluted earnings per share is reported for at least one period, it shall be reported for all periods presented, even if it equals basic earnings per share. If basic and diluted earnings per share are equal, dual presentation can be accomplished in one line on the income statement.
66. An entity shall present basic and diluted earnings per share, even if the amounts are negative (ie a loss per share).
Disclosure
67. An entity shall disclose the following:
(a) The amounts used as the numerators in calculating basic and diluted earnings per share, and a reconciliation of those amounts to profit or loss attributable to the parent entity for the period. The reconciliation shall include the individual effect of each class of instruments that affects earnings per share.
(b) The weighted average number of ordinary shares used as the denominator in calculating basic and diluted earnings per share, and a reconciliation of these denominators to each other. The reconciliation shall include the individual effect of each class of instruments that affects earnings per share.
(c) Instruments (including contingently issuable shares) that could potentially dilute basic earnings per share in the future, but were not included in the calculation of diluted earnings per share because they are antidilutive for the period(s) presented.
(d) A description of ordinary share or potential ordinary share transactions, other than those accounted for in accordance with paragraph 62, that occur after the balance sheet date. If those transactions had occurred before the end of the reporting period, that transactions would have changed significantly the number of ordinary shares or potential ordinary shares outstanding at the end of the period .
68. Examples of transactions in paragraph 67(d) include:
(a) An issue of shares for cash;
(b) An issue of shares when the proceeds are used to repay debt or preference shares outstanding at the balance sheet date;
(c) The redemption of ordinary shares outstanding;
(d) The conversion of potential ordinary shares outstanding at the balance sheet date into ordinary shares;
(e) An issue of options, warrants, or convertible instruments; and
(f) The achievement of conditions that would result in the issue of contingently issuable shares.
Earnings per share amounts are not adjusted for such transactions occurring after the balance sheet date because such transactions do not affect the amount of capital used to produce profit or loss for the period.
69. Financial instruments and other contracts generating potential ordinary shares may incorporate terms and conditions that affect the measurement of basic and diluted earnings per share. These terms and conditions may determine whether any potential ordinary shares are dilutive and, if so, the effect on the weighted average number of shares outstanding and any consequent adjustments to profit or loss attributable to ordinary equity holders.
70. If an entity discloses, in addition to basic and diluted earnings per share, amounts per share using a reported component of the income statement other than one required by this Standard, such amounts shall be calculated using the weighted average number of ordinary shares determined in accordance with this Standard. Basic and diluted amounts per share relating to such a component shall be disclosed with equal prominence and presented in the notes to the financial statements. An entity shall indicate the basis on which the numerator(s) is (are) determined, including whether amounts per share are before tax or after tax.
