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FAIR VALUE IN THE CASE OF VIETNAM BY

LE MAI TRANG Graduation Project Submitted to the Department of Business Studies,
HELP University College, in Partial Fulfilment of the Requirements for
the Degree of Bachelor of Business (Accounting) Hons
OCTOBER 2011
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DECLARATION OF ORIGINALITY AND

I also would like to extend my special thanks to managers, accountants, my friends,
and other people who have help me to carry out the survey. I want to thank them for
all their support, interest and valuable hints.

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FAIR VALUE IN THE CASE OF VIETNAM
By
LE MAI TRANG
October 2011
Supervisor: Dr. Pham Duc Hieu
ABSTRACT

The recent financial crisis has led to various arguments for and against fair-value
accounting. These arguments focus on the possibility of applying this accounting
method, at the same time challenge the accounting setters to extend the application of
FVA in other areas. The financial crisis is the first, and also the biggest, challenge for
fair-value accounting ; it also lays the foundation for experimental research on fair-
accounting in the coming years, helping researchers and accountants better their
understanding on the pros and cons of this method. This paper studies fair-value
accounting and investigates the application of fair value in Vietnam companies, from
which brings the appropriateness of accounting valuation between Vietnam and

2.3.3 Valuation Techniques 6
2.4 Practical application of FV in the world 6

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2.4.1 FVA in the USA 6
2.4.2 Application of fair value as required in the international accounting
standards. 6
2.5 The formation and development of FVA in Vietnam 6
2.5.1 History form 6
2.5.2 In common standard - model theory 6
2.5.3 Comparison between IAS and VAS on FVA 6
2.1. Definition and conceptualization of Fair value 7
2.2.1. Argument for and against HC 9
2.2.1.1. Argument for HC 9
2.2.1.2. Argument against HC 10
2.2.2. The argument for and against FVA 11
2.2.2.1. Argument for FVA 11
2.2.2.2. Arguments against FVA 13
2.3. Method to determine the FV 15
2.3.1. Valuation premise 15
2.3.2. Fair Value Hierarchy 15
2.3.3. Valuation Techniques 17
2.4. Practical application of FV in the world 18
2.4.1. FVA in the USA 18
2.4.2. Application of fair value as required in the international accounting
standards 20
2.5. The formation and development of FVA in Vietnam 22
2.5.1. History form 22
2.5.2.1. In common standard - model theory 24



Chart 4.1 Description of Result – Question 1 35
Chart 4.2 Description of Result – Question 2 36
Chart 4.3 Description of Result – Question 3 36
Chart 4.4 Description of Result – Question 4 37
Chart 4.5 Description of Result – Question 5 38
Chart 4.6 Description of Result – Question 6 38

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LIST OF ABBREVIATIONS

GAAP Generally Accepted Accounting Principles
FASB Financial Accounting Standards Board
IASB International Accounting Standards Board
IAS International Accounting Standard
VAS Vietnam Accounting Standard
IFRS International Financial Reporting Standards
SFAS Statement of Financial Accounting Standards
SEC Securities and Exchange Commission
NASDAQ National Association of Securities Dealers Automated
Quotations


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1.1. Background

Historical cost accounting (HCA) is a system where liabilities and assets are
presented and recorded at the monetary amount paid or the consideration given at the
time of their acquisition. According to Generally Accepted Accounting Principles
(GAAP), assets and liabilities have been recording through this system. People are
common working with HCA because this is so conventional method. However, it
bears some strong flaws in context of the current business environment, which have
made accounting bodies, especially IASB & FASB, to search for a number of other
accounting methods. One of these alternatives is fair (market) value accounting that
has been thinking as the best alternative to the HCA. The FV of an asset (liability) is
the amount at which that asset (liability) could be sold or bought (settled or incurred)
in a current transaction between willing parties. The strongest argument for a move
to FVA is that investors need to know what an asset is currently worth is rather than
is worth when it was acquired. But the patrons of HC have strongly disagreed with
this movement to FVA. Therefore, there is an ongoing argument between HCA and
FVA.
FV is a required measure for many financial instruments. Determining whether a
financial instrument should be recorded at FV in a company‟s financial statements
depends in part on what type of institution owns the instrument and the intended use
of that instrument. For example, in the case of a broker-dealer, a high percentage of
its assets typically are traded and must therefore be accounted for at FV. Other
institutions record financial instruments at FV depending on what their intent is for
holding the instrument or the nature of the business activity.

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In addition to using FV measures to comply with public reporting requirements,
business determine their financial instruments at FV for a number of internal

recoverable, although there are many factors leading to the decline of property
values, especially in economic crisis.
So the direction on determining the fair value accounting in Vietnam‟ enterprises is
an essential issue in the current period to clarify the nature of fair value and confirm
a new valuation tool for accounting in Vietnam. Beside, bring the appropriateness of
accounting valuation between Vietnam and international to narrow the gap in the
integration process.
The study focuses on research and addresses the following key issues. Firstly, Study
on the history, nature and contents of fair value, as well as its application in the
world. Next, study on the characteristics of FV in theory and practical application of
survey FVA in Vietnamese enterprises enhances the role of fair value. Lastly,
orientation on the use of FV in Vietnam and international practices in the short term
as well as long term.
1.3. Structure of Study

This paper describes a framework of the FV in the case of Vietnam and the effects of
using the FVA alter for the historical one. Therefore, the research questions will be
as the following:

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- Defined the fair value accounting.
- What is the status of application of FV in Vietnam?
- What are the advantages and disadvantages of FVA especially in Vietnam?
- How does fair value use the most suitably for the characteristics of Vietnam?
These above questions will be answered in the following chapters. In chapter two,
literature review gives an overview about FVA, its application in the world through
the concepts and examples of FVA. Beside this, the challenges that Vietnam‟s
companies facing when using FVA also discussed. To assess this situation, the paper
uses quantitative tool such as analysis, synthesis, comparison and matching in the
next chapter. From the method in chapter three, chapter four will give detail about

standards
2.5 The formation and development of FVA in Vietnam
2.5.1 History form
2.5.2 In common standard - model theory
2.5.3 Comparison between IAS and VAS on FVA 7

2.1. Definition and conceptualization of FV

The FASB has recently issued Statement of Financial Accounting Standards No. 157
Fair Value Measurements (SFAS 157), on which work was well advanced before the
Memorandum of Understanding was published. SFAS 157 establishes a single
definition of FV together with a framework for measuring FV for US GAAP. The
IASB recognized the need for guidance on measuring fair value in IFRSs and for
increased convergence with US GAAP. Consequently, the IASB decided to use the
FASB‟s standard as the starting point for its deliberations. As the first stage of its
project, the IASB is publishing in this discussion paper its preliminary views on the
principal issues contained in SFAS 157.
Paragraph 5 of SFAS 157 defines fair value as „the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.‟ By comparison, fair value is generally defined
in IFRSs as „the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm‟s length transaction‟ (with some
slight variations in wording in different standards). The definition in SFAS 157
differs from the definition in IFRSs in three important ways:
(a) The definition in SFAS 157 is explicitly an exit (selling) price. The definition in
IFRSs is neither explicitly an exit price nor an entry (buying) price.
(b) The definition in SFAS 157 explicitly refers to market participants. The definition

that makes prices of transactions uncharacteristic of market conditions. The
transaction is presumed to be between unrelated parties, each acting independently.

2.2. Fair value vs. historical cost
2.2.1. Argument for and against HC
2.2.1.1. Argument for HC

Although historical cost accounting still exist several limitations as well as flaws, we
cannot deny that some patrons believe that it is considered as standard form of
accounting by unique features and conventions. Moreover, they still think that fair
value statement cannot more reliable than historical financial. There are some unique
advantages that make many people support history cost accounting, including:
Managers can depend on the historical cost to know past data. From there, they will
forecast future operational cost. Future projections are maybe wrong, even hampered
if without information about the historical cost. - The recorded amount from HCA
often is verifiable and reliable as well as avoiding management bias. This is because
they are based on actual transactions. - HCA bring absolute certainly results and it
also fits with the cash flow statement in perfectly. According to Williamson (2003),
HCA always help to balance sheet amount because of it tells exactly what has been
received or received
Historical cost accounting uses invoice, receipts as ample evidences to support for
avoid scope for manipulation.

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For fixed interest debt, HCA measures financial instruments at its issuance yield to
maturity over its life, regardless of market yield movements. This constant yield to
maturity approach produces a smooth and predictable interest cost or return outcome
and valuation. (Australian Office of Financial Management: 2004-05)
2.2.1.2. Argument against HC


Reliable forecast of the future income effects of a financial instrument is unlikely to
be possible from the simple extrapolation of past gain and losses based on historical
cost.
2.2.2. The argument for and against FVA
2.2.2.1. Argument for FVA

Supporters of FVA argues that this measurement is more appropriate than HC as it
provides up-to-date information consistent with market and as it takes into account
the inflationary adjustment to the acquired cost. Opponents have argued that this
method increases volatility and thus reduces stock price. Its patrons contend that
HCA hides economic realities while FV reveals.

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These are following advantages supported by the proponents of FVA:
FV measurement is more relevant to investors and creditors as it reflects the current
market price of an asset or liability.
Jackson (2000) argues that it provides more transparency to users. If all financial
instruments can be measured at FV; regulators, depositors & investors may have
achieved greater regulatory and market discipline.
Measurement of financial assets and liabilities at FV in the balance sheet should
better capture an entity‟s exposure to risk and increase its visibility in the balance
sheet.(IASC discussion paper :1997)
Generally, an investor appraises the risk that he is ready to accept in exchange for a
particular return. The appraisal is based on the information available to him. The
information about the FV at the reporting date, the changes in that value and the
components of that change- all provide the investors with valuable information for
his decision making. (Hague: 1999)
FV measurement is useful to determine and record asset impairments.
The FV of any financial asset or liability embodies the market exception of future
income return from that instrument taking into account the current market rate of

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Some critics are worried that the precipitous adoption of FVA will have negative
effect on both the financial system and banks as a whole. These critics suppose that
earnings based on HC for investment securities are likely to be less unstable than
those based on market value. (Yuko & Tatsuya: 1998)
These following flaws of FVA have been pointed out by critics:
In view of Ramanna & Watts (2007), FV are basically based on unverifiable
subjective estimates of managers. Agency theory recommends that managers will
make use of this unverifiability to control financial reports in order to extract rents.
Budding reliable methods for measuring FV in order to increase the credibility and
reliability of investors in the information reported in financial statements are too
critical, especially in the light of recent scandals in financial reporting. (Shortridge et
al: 2006)
When quoted market price for an asset or liability is not available, FV is measured
based on an estimate by using the most excellent information and techniques
available in the circumstances. However most often difficulties occur when making
estimates of FV by using inappropriate models like: cash-in method or using
appropriate models inappropriately, for example, using assumption that doesn‟t
reflect the risk in the underlying asset. (Jackson: 2000)
Although FV is able to provide relevant and reliable measures of impairments of an
asset or a liability, it can‟t provide the same relevant & reliability in case of
measuring the appreciation.

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Valuing tangible and intangible assets at FV is extremely difficult and time
consuming. Someone who accepts the FV for balance sheet measurement of financial
instruments has faced greater difficulty in accepting the performance reporting
effects. (Hague: 1999)
2.3. Method to determine the FV
The following issues should be considered when determining fair value.

could be based on the price expected to be received in selling the inventory at retail,
or the value at wholesale, adjusted for differences between the condition and location
of the items. Theoretically, FV should be the same whether adjustments are made to
a retail price or a wholesale price, but the FV estimate that maximizes inputs in the
higher level of the hierarchy is the one that should be used to estimate the price to be
received in selling the inventory (para. A24f).
Level 3 inputs are defined as unobservable inputs for the asset or liability.
Unobservable inputs shall be used to measure fair value to the extent that relevant
observable inputs are not available, thereby allowing for situations in which there is
little, if any, market activity for the asset or liability at the measurement date. On the
other hand, the FV measurement objective remains the same, that is, an exit price
from the perspective of a market participant who holds the asset or owes the liability.