INTRODUCTION OF THE STUDY ON FINANCIAL
INSTRUMENTS ACCOUNTING FOR NON-FINANCIAL
FIRMS IN VIETNAM
Vietnam is integrating more intensively and extensively into the global
economy, demonstrated by the vigorous flows of capital, technology and products in
and out of the country. Numerous foreign companies are investing in Vietnamese
market; they formulate financial reports in accordance to international standards. On
the other hand, Vietnamese companies are promoting export and establishing their
business overseas; thus, they are put under a tighter supervision and must comply with
international standards in formulating financial reports.
According to the international accounting standards, financial instruments accounting
(FIA) must comply with requirements of IAS32 on the “presentation of financial
instrument”; IAS39 on the “recognition and measurement of financial instruments”
and IFRS7 on the “disclosure of financial instrument information”.
Vietnam has not yet succeeded in formulating a systematic standard for FIA. Instead,
the regulations on the practice of FIA are scattered in several set of standards such as
VAS01, VAS10, VAS16, etc. This situation are causing several difficulties in managing
and standardizing the information, as well as in implementing accounting practices in
a financial market with the operation of derivatives such as forwards, futures, swaps,
options. Meanwhile, the corporate accounting for non-financial firms does not address
FIA, resulting in the confusion and inconsistence in the reporting of firms’ financial
situation, affecting the trustworthiness and comparativeness of the indexes in the
Based on the actual demand of businesses, investors’ requirement for information
disclosure and the needs of the accounting profession in the context of integration, the
author choose to work on the topic “Completing the Financial instruments
accounting for non-financial firms in Vietnam” for the PhD. thesis.
1.2 Overview of research context
1.2.1 International research on FIA
188.8.131.52 Identification of financial instruments
Most of the studies agree on the main features of a financial instrument, which
is a contract binding parties; the instrument implies both right (assets) and obligation
(liabilities) in accordance with the contract; depending on the contract, the payment
instrument can be exchanged directly or indirectly.
184.108.40.206 Measurement of financial instruments
The scientific circle highlights the advantage of the fair value accounting,
which still remains a new concept to Vietnamese accounting, particularly FIA. This
motivates the author to study the fair value accounting to find a solution in order to
complete the FIA for non-financial firms in Vietnam.
220.127.116.11 Recognition of financial instruments
The recognition of financial instruments depends on the classification of the
instruments. L.EC.Wilson & Bryan (1997) asserts that it is necessary to formulate
accounting principles on financial instruments based on their purposes rather than
imposing each instrument with specific principles, so that new instruments can be
employed to ensure the usefulness of information and, at the same time, minimize the
cost of establishing new principles.
18.104.22.168 Presentation of financial instrument
Financial instruments are becoming more and more complicated since
instruments are hybridized, for example: convertible bond, preferred dividend
(possessing the characteristics of both liabilities and equity); new types of derivatives
(hybridizing the derivatives), hybrid instrument with embedded derivatives, etc.
Hence, the recognition of financial instruments becomes more difficult accordingly.
22.214.171.124 Information disclosure of financial instruments
Financial instruments are becoming more and more diversifying and
complicated; thus, the requirement for disclosure of information is also getting harsh.
Caedo and Tirado (2004) stated that the information on the risks that the firm confronts
may affect business’ future profit, and thus, it is necessary to disclose this information
to users of the financial reports.
1.2.2 Status-quo of research on accounting financial instruments in nonfinancial firms in Vietnam
There are quite a few scientific researches in Viet Nam focusing on the
application of international accounting standards on FIA for Vietnamese firms,
especially banks. Nevertheless, none of them comprehensively address the general
principles of FIA from identification, measurement, recognition, presentation to
disclosure of information of financial instruments. Particularly, none of these research
evaluate the degree to which financial instruments are presented and disclosed on
firm’s financial reports, and figure out the link between this degree and specific
characteristics of the firm.
1.3 Research objectives
The overall objective of this thesis is to complete the practice of FIA for nonfinancial firms in Vietnam. In order to attain that objective, this thesis outlines the
specific objectives as follows:
Complete the identification, classification of basic financial instruments and
Complete the practice of recognizing basic financial instruments and
Complete the presentation and disclosure of information on basic financial instruments
Identify the degree of presentation and disclosure of information of financial
instruments of non-financial firms in Vietnam (based on the survey data from
companies listed on Ho Chi Minh City Stock Exchange in 2010 -2012)
Testify the link between the degree of presentation and disclosing information
of financial instruments and the characteristics of the firms by formulating a model
using data in 2010, 2011, and 2012.
1.4 Research subject and scope
The subject of this research is FIA, including basic financial instruments and
Studying basic financial instruments and derivatives, the focuses of the research
is the identification, measurement, recognition, presentation and disclosure of
information of financial instruments.
The research scope covers non-financial firms. From the perspective of supply
and demand in the economy, businesses are categorized into two main types: financial
institutions trading capital, such as commercial banks, finance companies, insurance
companies, etc., which are not the target of this research; and non-financial firms
manufacturing commodities and providing service. The latter is the focused target of
The time frame of this research is from 2010 o 2012.
The survey is on 82 non-financial firms listed on Ho Chi Minh City Stock
1.5 Research questions
On the foundation of the research objectives, the thesis aims to answer the
Question 1: What are the solutions for the completion of identification and
classification of basic financial instruments and derivatives used in non-financial
Question 2: How to complete the measurement of basic financial instruments
and derivatives used in non-financial firms in Vietnam?
Question 3: What are the solution to complete the recognition of basic financial
instruments and derivatives used in non-financial firms in Vietnam?
Question 4: How to complete the presentation and disclosure of information on
basic financial instruments and derivatives used in non-financial firms in Vietnam?
Question 5: How to identify the degree to which financial instruments in nonfinancial firms in Vietnam are presented and disclosed on financial reports in 2010
-2012 period? Which factors affect the degree of presentation and information
disclosure of financial instruments on the financial reports of non-financial firms in
1.6 Research methods
In order to attain objectives mentioned above, based on the methodologies of
dialectical materialism and historical materialism, this thesis employs several research
approaches including investigation, survey, grouping, expert consultation, etc. The
thesis synthesizes, analyzes and evaluates the achievements as well as limitations of
the current practice of FIA for non-financial firms in Vietnam and recommends the
solutions, accompanied by conditions, to complete the FIA for non-financial firms in
The research methods are specified into research steps as follows:
Step 1: Disseminate questionnaires to firms;
Step 2: Disseminate questionnaire and conduct in-depth interview with individuals;
Step 3: Collect financial reports;
Step 4: Process survey data;
Step 5: Recommend the solutions to complete FIA for non-financial firms in Vietnam.
1.7 Significances of the thesis
Academic and theoretical significances
Complete the theory framework on FIA for non-financial firms in Vietnam,
Completing the recognition and measurement of basic financial instruments and
Completing the measurement of basic financial instruments and derivatives;
Completing the presentation and information disclosure on basic financial
instruments and derivatives.
Applying the theory framework on FIA for non-financial firms in Vietnam to
complete the practice of FIA in surveyed firms;
Identifying the degree of presentation and information disclosure of nonfinancial firms in Vietnam in 2010 - 2012 (DQ index). The DDQ index helps policy
makers evaluate the impact of Circular 210/2009/TT-BTC (guiding the application of
international accounting standards on the presentation and information disclosure of
financial instruments) on the quality of financial reports.
Figuring out the link among the degree of presentation and information
disclosure of financial instruments to firm’s scale, business result and scale of the
auditing firm so that the users of accounting information are more active in using the
financial reports and making investment decision.
1.8 Structure of the thesis
The thesis comprises of four Chapters:
Chapter 1: Introduction of FIA for non-financial firms in Vietnam
Chapter 2: Theoretical basis of FIA in non-financial firms
Chapter 3: Analysis on the status – quo of FIA in non-financial firms in Vietnam
Chapter 4: Solutions to complete FIA for non-financial firms in Vietnam.
THEORETICAL BASIS OF FINANCIAL INSTRUMENTS
ACCOUNTING IN NON-FINANCIAL FIRMS
2.1 Identification and classification of financial instruments
2.1.1 Identification of financial instruments
126.96.36.199 Basic financial instrument identification
In financial terms, financial instruments refer to a specific financial category
employed in order to achieve certain purposes. Hence, financial instruments those
applied to explore mobilize and allocate financial sources. This, in fact, is a broad
concept related to financial instruments, which is closely attached with the State’s
utilization of financial instrument system to explore, motivate as well as apply
financial resources in the most effective basis.
Following is the definition of financial instruments from the micro-economics
perspective: It is stated in the Business dictionary that financial instrument is a
document (such as a check, draft, bond, share, bill of exchange, futures or options
contract) that has a monetary value or represents a legally enforceable (binding)
agreement between two or more parties regarding a right to payment of money.
Characteristics to identify financial instruments is that it is an agreement
binding two parties, which brings about asset to one party, but a financial liability or
equity capital instrument to the other at the same time.
Therefore, financial instruments are comprised of asset, financial liability and
equity capital instrument. Derivatives are a special category of financial instruments
which might be receivables (asset) or payables (financial liability).
188.8.131.52 Identification of derivatives
According to IAS 39, derivatives are those:
- of which, the prices change in accordance with price changes of another basic
asset (securities, foreign exchange rate, commodities, limit or credit rate, etc)
- of which, there is no or low initial investment costs
- which are paid at a designated date in the future
Then, derivatives are closely linked with future receivables (assets) or
liabilities. Therefore, it is essential to record them in the balance sheet.
2.1.2 Financial instrument classification
The thesis presents financial instrument classification by different criteria, including
by types of items in the balance sheet; by requirement on measurement and disclosure;
by the origin of the basic financial instruments and derivatives.
Basic financial instrument classification: Basic financial instruments are
divided into asset, liability and equity capital instruments.
Derivatives classification: Derivatives are divided into 4 basic types: forwards,
futures, options and swaps contract.
2.2 Measurement of financial instrument
2.2.1 Measurement of basic financial instrument
This thesis presents how to measure basic financial instruments including asset,
liability, equity capital instruments;
Measurement of assets;
Measurement of liabilities;
Measurement of equity capital instruments.
2.2.2 Derivatives measurement
The basis for measurement of derivatives is fair value.
In case that derivatives are regarded as assets: Fair value of the derivative is
identified as the quoted market price. If quoted market price is not available, the
enterprise itself has to identify the fair value through valuation techniques in order to
specify the value of underlying assets on the valuing date of exchange of equal values.
In the case that derivatives are regarded as liabilities: Fair value the derivatives
regarded as a liability is no less than the value stated in the contract, calculated from the
first day of payment.
2.3. Recognition of financial instruments
2.3.1. Recognition of basic financial instruments
184.108.40.206. Initial recognition of basic financial instruments
Assets and liabilities are recognized at the time the enterprise becomes a party
of the contract. Hague (2004) explained this as the moment financial instruments bring
about rights as well as obligations which are compatible with the definition of assets
and liabilities .
220.127.116.11. Subsequent recognition of basic financial instruments
During the holding period, the value of basic financial instruments would be
recognized in the balance sheet, either at fair value or amortized cost, and the
recognition of the instrument shall be made accordingly.
18.104.22.168. Derecognition of basic financial instruments
This means that the recognized assets and liabilities are derecognized in the
balance sheet. The derecognition happens when: the right to collect money or assets as
in the contract expires; or the asset has already been transferred under appropriate
terms and conditions.
An enterprise ceases the recognition of a liability in the balance sheet partially
or completely when it not longer has the obligation to pay. In other words, the
recognition ceases when all duties in the contract have been carried out, exempted,
cancelled or expired.
2.3.2 The recognition of derivatives
22.214.171.124. Initial recognition of derivatives
Recognition of derivatives requires specific categories of business instruments or
risk hedging ones. The classification of these instruments used for business purpose or
risk hedging purpose should be clarified when the contract takes effect. The enterprise
should perform accounting practices for derivative consistently and must not reclassify
these derivatives during their validity period, except when the derivative for the
purpose of risk hedging no longer meet the requirements of risk hedging accounting.
126.96.36.199. Subsequent record of derivatives
Derivatives are subsequently recognized according to fair value. Concerning
those for business purpose, the value change is recognized in financial collection.
Concerning those for risk hedging purpose, the value change is recognized in equity
capital in the balance sheet.
188.8.131.52. Derecognition of derivatives.
Derivatives are derecognized when the contract expires or it is transferred to another
party under the following conditions:
- Most risks and benefits attached with ownership have been transferred
- The right to control derivatives expires
The difference in fair value of derivative already recognized into equity capital
would be transferred into income/expense in income statement if there is a
derecognition of derivatives for risk hedging purpose.
2.4 Financial instrument presentation and disclosure
2.4.1 Financial instrument presentation
Following are rules to present financial instruments in the balance sheet:
- General rule: A financial instruments issued or invested by an enterprise as a
liability, asset or equity capital instrument has to respect the financial nature of the
transaction rather than the formality.
- Derivatives with underlying assets are treated as assets. The embedded
derivatives are not separated from this contract.
- Although most assets and liabilities are only deducted under certain
circumstances, they are normally not deducted in the balance sheet presentation.
2.4.2 Financial instrument information disclosure
184.108.40.206 Main issues of information disclosure of financial instruments
Financial instruments are more and more diversifying and complicated. This
results in strict requirement for information disclosure, which should include the
- Disclosing additional information to clarify items of financial instruments
presented on the balance sheet
- Disclosing information on income, interest/interest income of current financial
instrument; gain/loss of disposal financial instrument
- Disclosing information (qualitative and quantitative) in terms of potential risks
of financial instruments including credit risk, pay risk and market risk
- For each individual risk hedging instrument, it is necessary to disclosure
information describing the hedging measure, financial instrument employed to hedge
risk and the nature of risk to be hedge.
220.127.116.11. Degree of presentation and information disclosure of financial
Financial reports are a channel for enterprises to announce their business
results as well as financial status. The regulatory bodies, accounting associations
always make best efforts to issue the most qualified accounting standards as well as
more specific and widespread regulations on the practice of information disclosure
related to financial instruments.
Hypothesis 1: Degree of presentation and information disclosure of financial
instruments in the financial statement closely connects to and parallels with the
Hypothesis 2: Degree of presentation and information disclosure of financial
instruments in the financial statement is closely linked with the enterprise business
Hypothesis 3: Degree of presentation and information disclosure of financial
instruments in the financial statement has a close connection with the enterprise’s
Figure 2.5 Elements of presentation and information disclosure degree of financial instruments
Those three hypotheses are testified by using the following function (1):
DQ= α0 + α1 Size + α2 PTA + α3 PE + α4 DTA + α5 Audit + α6 Yafter + ε (1)