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THE
MINISTRY OF FINANCE
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SOCIALIST
REPUBLIC OF VIET NAM
Independence - Freedom - Happiness
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No.
100/2005/QD-BTC
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Hanoi,
December 28, 2005
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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;
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- 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
DEPUTY MINISTER
Tran Van Ta
VIETNAMESE STANDARDS ON
ACCOUNTING
STANDARD 11
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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
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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.
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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.
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(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.
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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.
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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
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(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.
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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.
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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;
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(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.
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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.
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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.
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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
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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:
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(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.
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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:
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(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:
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(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.
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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;
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(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.
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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.
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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
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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;
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(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.
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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.
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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.
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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.
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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.
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(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
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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.
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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.
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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
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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.
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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.
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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.
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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
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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:
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(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;
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(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.
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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.
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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.
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(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.
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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;
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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.
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(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.
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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:
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(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.
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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.
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(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).
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(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.
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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
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(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);
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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
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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.
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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.
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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:
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(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
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(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:
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(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.
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- 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.
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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
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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
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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;
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(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.
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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
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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.
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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.
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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.
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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.
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(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.
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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.
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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.
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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.
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