IFRS adoption roadmap raises challenges to property businesses

19:03 | 28/05/2020
A recent Ministry of Finance ruling to adopt the International Financial Reporting Standards (IFRS) is set to send ripples across real estate businesses, especially those with extensive asset portfolios. The adoption roadmap commits to improved transparency and brings financial reporting in Vietnam closer to global standards.

Decision No.345/QD-BTC establishes revised compliance requirements for specific groups of enterprises but allows flexibility on adoption timelines and how IFRS is approached. The new reporting standards will become mandatory for almost all businesses after 2025.

The broad thrust of IFRS is that financially reported asset values and liabilities should align with their actual or estimated fair market prices. The most accurate approach is using fair value (FV) accounting, or "mark-to-market", a generally accepted accounting principle. Generally, when any asset or liability value increases or is expected to, the value or liability is adjusted to its current market.

Troy Griffiths, deputy managing director of Savills Vietnam said that this requires the close attention of business leaders and CFOs as assets and liabilities will require accurate and up-to-date valuations and extensive changes to financial statement applications.

“Hard value is great for investors and shareholders wanting an accurate gauge of corporate financial health but involves experience and expertise that CFOs generally lack,” said Griffiths.

ifrs adoption roadmap raises challenges to property firms
Troy Griffiths, deputy managing director at Savills Vietnam, said that IFRS requires close attention of business leaders and CFOs as assets and liabilities will require accurate and up-to-date valuations and extensive changes to financial statement applications

For example, IFRS 16 will no longer differentiate between finance and operating leases. For any contracts that meet the definition of a lease, a lessee balance sheet will show an asset right-of-use with a lease liability.

For lessees owning property rights or benefiting from large "right-of-use" asset portfolios, the change in value will significantly affect their financial position. For occupiers with portfolios of leased properties such as retailers, hoteliers or cinema operators, the additional assets and liabilities on balance sheets will be significant.

At commencement, a lessee shall measure the lease liability present value by unpaid lease payments on that date. Lease payments are discounted referencing the interest rate implicit in the lease if that rate can be readily determined. If not, the lessee uses the lessee’s incremental borrowing rate. The interest rate implicit in the lease affects the lease payments' present value. The unguaranteed residual value comprises the underlying asset fair value and any initial direct costs of the lessor.

Meanwhile, Nguyen Hong Son, head of Savills advisory services, commented that companies required to prepare financial statements for external reporting face potentially serious issues.

“Failure to file or comply with FV standards could lead to fines or more serious consequences. Due to more complex reporting standards and the downside potential in getting it wrong, most are turning to reputable valuation firms,” Son said.

He added that registered valuers are a key part of the process to assess the "right of use". Experienced, objective, and reputable valuation companies are required.

Early IFRS adopting enterprises have grasped how FV affects operations and are already reducing implementation costs and compliance risks. At Savills, our advice is to get ahead of this now, rather than put it off until it becomes urgent,” Son added.

ifrs adoption roadmap raises challenges to property firms
Companies require to prepare financial statements for external reporting, face potentially serious issues, according to Nguyen Hong Son, head of Savills Advisory Services

Businesses engaging reputable and experienced consultancies will see a smooth, effective transition and all stakeholders fully comprehending the new IFRS normal. However, early action is required to avoid the inevitable last-minute rush to compliance in 2025.

From 2018-2020 the IFRS adoption roadmap describes 10 to 20 simple standards for implementation which have been required for listed companies since early 2020. An entity shall apply IFRS 16 for annual reporting beginning on or after January 1, 2019. Earlier application is permitted for entities applying IFRS 15 covering Customer Contract Revenues.

Within the context of COVID-19, business leaders need to be closely involved in IFRS conversion as it affects every part of their business. Successful implementation involves the time needed for appropriate assessment and decision-making to avoid cheaper, less thorough, and ultimately more expensive solutions.

By Bich Ngoc

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