Proceedings of the 2nd Engaging with Vietnam: An Interdisciplinary Dialogue” Conference

30th November – 1st December, 2010, Hanoi, Vietnam

The Relevance of International Financial Reporting Standards (IFRS) to a Developing

Country: Evidence from Vietnam

Duc Hong Thi Phan

Swinburne University of Technology
Level 6, 60 William Street, Hawthorn VIC 3122, Australia
Email: duchongthiphan@swin.edu.au

ABSTRACT

This paper adopts the concept of accounting ecology proposed by Gernon and Wallace (1995) in examining the
accounting environment of Vietnam to identify some of the factors that might explain the lack of support for
International Financial Reporting Standards (IFRS) in that country. Drawing on the literature of international
accounting convergence models, the author assesses the potential impact of IFRS adoption on the quality and
comparability of Vietnam reporting practices, the capital market effects and the potential costs of switching
from Vietnamese General Accepted Accounting Principles (VN GAAP) to full adoption of IFRS. The paper also
highlights some of the important factors that are likely to influence the progress of the implementation of IFRS
in Vietnam. The paper concludes with a discussion of scenarios for future evolution of accounting standards in
Vietnam in the light of the current global movement toward implementation of IFRS.

KEY WORDS: Vietnam, Accounting Ecology, VN GAAP, IFRS

INTRODUCTION

The rationale for the paper is derived from the fact that almost 120 countries have required or permitted or
harmonised with the use of International Financial Reporting Standards (IFRS)1 at this stage (from ‘Who we are,
what we do’ presentation of IFRS Foundation, last revised in July 2010). Apart from the US, all remaining
major economies have established time lines to converge with or adopt IFRS in the near future. (The US has
agreed to converge but there is no timeline as yet.) Among them are not only industrialized countries but also
developing countries (IASB 2010). At the present time, under the direction of the Ministry of Finance, Vietnam
is also moving towards adoption of these reporting standards.

This paper adopts the concept of accounting ecology proposed by Gernon and Wallace (1995) in examining the
accounting environment of Vietnam to identify some of the factors that might explain the lack of support for
IFRS in that country. The appropriateness of the accounting ecology framework for examining the accounting
environment of a country has been validated by Perera and Baydoun (2007) who provide insights into the
accounting environment of Indonesia.

According to Gernon and Wallace (1995), the concept of accounting ecology encompasses “five separate but
interacting slices” of the environment: i.e. social, organizational, professional, individual, and accounting. As
shown in Figure 1, the social environment refers to the structural (economic system, political system, and legal
system), cultural and non-cultural (geographic and demographic features) elements within a society. The
organizational environment refers to the organizational size, technology, complexity and culture, and human
and capital resources. The professional environment refers to such aspects of the profession as education,
training, registration, discipline, and ethics. The individual environment refers to the total setting in which
reporting enterprises, professionals, and other non-professional members of society lobby standard setters and
use accounting numbers to their respective advantage. The accounting environment refers to the disclosure and
measurement requirements and practices, types and frequency of accounting reports, and accounting
infrastructure. Accounting infrastructure includes producers and users of information, information
intermediaries, laws and regulations that govern the production, transmission, and the usage of information and
regulatory bodies (Lee 1987, p.79 cited in Gernon and Wallace 1995).

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Electronic copy available at: http://ssrn.com/abstract=2423170

 Proceedings of the 2nd Engaging with Vietnam: An Interdisciplinary Dialogue” Conference
30th November – 1st December, 2010, Hanoi, Vietnam

Figure 1: Gernon and Wallace’s (1995) accounting ecology

Source: Gernon and Wallace (1995, p.61)

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Electronic copy available at: http://ssrn.com/abstract=2423170

 Proceedings of the 2nd Engaging with Vietnam: An Interdisciplinary Dialogue” Conference
30th November – 1st December, 2010, Hanoi, Vietnam

This paper is structured as follows. Section 2 provides an understanding of the social ecology of Vietnam.
Section 3 highlights the perceived benefits of IFRS harmonization. Section 4 analyses the possible reasons for
the decision by Vietnamese accounting standard setters for non-adoption (but selective adaptation) of IFRS by
Vietnamese accounting standard setters, taking an ecological perspective. The paper concludes with a discussion
of possible pathways for future evolution of accounting standards in Vietnam in light of the current global
movement toward implementation of IFRS, and also makes recommendations for future research.

THE ACCOUNTING ECOLOGY OF VIETNAM

Social factors

In Gernon and Wallace’s (1995) national accounting ecology, the social environment refers to the structural
(economic system, political system, and legal system), cultural and non-cultural (geographic and demographic
features) elements within a society.

Economic system

Vietnam commenced to open its economy in 1986 with economic reforms under the Doi Moi (Renovation)
policy. This policy introduced market reforms, opened up the country for foreign investment, and dramatically
improved Vietnam's business climate. According to the World Bank website, Vietnam has come a long way
since 1986. The past two and a half decades have witnessed Vietnam being one of the best performancers in the
world in terms of both economic growth and poverty reduction. A country profile report prepared by the World
Bank Vietnam has achieved spectacular economic growth. (World Bank 2010)

“As one of the fastest growing economies in the world—with average annual GDP growth of
7.2% during the decade prior to the FY08-09 economic slowdown—Vietnam has lifted some 35
million people out of poverty. Vietnam’s poverty rate fell from 58% in 1993 to 14% in 2008.
The results from the Bank’s Vietnam development support program have been outstanding
(based on the Bank's Independent Evaluation Group (IEG) evaluations of 34 completed projects,
Vietnam has maintained its record of 100% of projects having been rated satisfactory). The
country has made substantive progress in adopting market-oriented reforms and its aim to
achieve middle-income status (defined by the Bank as countries with a per capita income of
US$1,000) is well within sight. In 2009, Vietnam transitioned from an IDA to an IBRD blend
country.” (World Bank, 2010)

In addition, according to a blog article written by James Davidson, published on the ‘East Asia & Pacific on the
rise’, World Bank blog pages, the World Bank and Vietnam signed a $500 million development policy loan in
December 2009. This loan supports a program of public investment reforms in the country. “Not only is it the
largest ever World Bank loan to Vietnam, but it is also the first loan from its International Bank for
Reconstruction and Development (IBRD).” Mr. Davidson wrote. The loan means Vietnam is a step closer to
reaching middle-income status (Davison 2010). In a short video interview by James Davidson, the Lead
Economist of the World Bank, Martin Rama explained why the largest ever loan to Vietnam by the World Bank
signals how far the country has come. "This is a country that has had 20 years of spectacular growth without a
substantial increase in inequality – with one of the fastest reductions in poverty that we have ever documented.
There is much for Vietnam to be proud of" Mr. Rama said.

Political system

Vietnam is a socialist republic, with the communist party of Vietnam playing a pivotal role in the operation of
the country. The government has been significantly influenced by Chinese Confucian values (these values will
be explored in greater detail in the social environment section) and is focused on maintaining political rule
through dominance.

 Executive branch
The government is structured in the following way:

o President
o Head of State
o Chair of National Defense
o Security Council

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 Legislative


o National Assembly
Judicial
o Supreme People's Court
o Supreme People's Procuracy

Dougal Crawford, the Senior Economist of the Australian Export Finance and Insurance Corporation (EFIC),
raised a concern that the pace of economic reform could slow if a more conservative leadership emerges from
the 2010 National Congress. “Reportedly, the recent economic difficulties have created divisions between the
reform-minded Prime Minister, Nguyen Tan Dung, and more conservative party members, led by the General
Secretary of the Communist Party of Vietnam, Nong Duc Manh” Mr. Crawford said. The World Bank places
Vietnam in the second bottom quartile of countries for government effectiveness and in the bottom quartile for
voice & accountability (World Bank governance matter database, cited in the EFIC website, June 2010).

Legal system

According to Vision & Associates (2010), the Vietnamese legal system consists of constitution, codes, laws,
ordinances, decrees, decisions, circulars, directives, and official letters. Although all have the force of law, only
a law passed by the National Assembly is referred to as such. Ordinances are issued by the Standing Committee
of the National Assembly, commonly to regulate on an area where a law is not yet promulgated and/or
regulated. On matters that the National Assembly entrusted to the Government, the Government issues decrees
or decisions or directives to implement the issued laws or ordinances. Circulars, decisions and regulations are
normally issued by individual ministries and other State agencies including people’s committees, with respect to
subjects within their sphere of responsibility and the force of subordinate legislation. Codes, laws and
ordinances are referred to by name, whereas decrees, decisions, circulars and directives are usually referred to
by the number, signing date, and name of the issuer.

In the 2006 PricewaterhouseCoopers Guidebook for Foreign Investors described Vietnam’s common law system
as “has been largely influenced by Chinese, French and Soviet rule” (PricewaterhouseCoopers, 2006).

According to the guides “Doing Business in Vietnam 2010” published by Grant Thornton Vietnam, the legal
system of Vietnam has, in the past, been criticized for its “incompleteness and inconsistencies”. The Vietnamese
government has made efforts to create a more “attractive investment environment” to encourage foreign
investors and to maintain a more “stable environment” for development. Many new laws have been promulgated
and existing law has been reviewed and amended to bring them closer to international standards (Grant
Thornton Vietnam, 2010).

According to Grant Thornton Vietnam (2010), the economic legal system includes the following legal

 Civil Code (2005);

documents relating to the business activities of foreign investor in Vietnam:

 Labour Code (1994, amended in 2002 and 2006);

 Law on Enterprises (2005);
 Law on Investment (2005);
 Law on Intellectual Property (2005)
 Land Law (2003, effective 1 July 2004)
 Law on Real Estate (2006)
 Law on Credit Institutions (1997, amended in 2004)
 Law on Bankruptcy (2004)
 Law on Accounting (2004)
 Law on Tax Administration (2006)
 Law on Value Added Tax - VAT (2005)
 Law on Personal Income Tax (2007, effective 1 January 2009)
 Law on Corporate Income Tax (2008, effective 1 January 2009)
 Law on Social Insurance (2006).

This represents a comprehensive system of laws regulating business.

Culture

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 Proceedings of the 2nd Engaging with Vietnam: An Interdisciplinary Dialogue” Conference
30th November – 1st December, 2010, Hanoi, Vietnam

Vietnamese is the official language of the country. It is a tonal language with influences from Thai, Khmer, and
Chinese. Since the early 20th century, the Vietnamese have used a Romanized script introduced by the French.
Previously, Chinese characters (known as “Chu Nom” in Vietnamese) and an indigenous phonetic script were
both used. English and Chinese (Mandarin) are the top two foreign languages used in business environment. In
the past, French and Russians were also very popular due to a historic relationship between Vietnam and France
(as a French colony) and Vietnam with the former Soviets (as a tight alliance with the Soviet Union).

The three traditional religions forming the "Tam Giao" (Buddhism, Taoism and Confucianism) strongly
influence Vietnamese religious beliefs. Vietnamese religion is also influenced by ancestor worship, Islam and
Catholicism. Over last two decades, Vietnam has continued to make progress on the expansion of religious
freedom. This is evidenced by the fact that in 2005, Vietnam passed comprehensive religious freedom
legislation, outlawing forced renunciations and permitting the official recognition of new denominations. The
religious freedom legislation means the government has granted official national recognition to a number of new
religions and religious groups, including seven more Protestant denominations, and has registered hundreds of
local congregations. This action of the Vietnam government has been applauded by the world. For example,
according to the web page of the Bureau of East Asian and Pacific Affairs of the US, in November 2006, the US
lifted the designation of Vietnam as a "Country of Particular Concern," based on a determination that the
country was no longer a serious violator of religious freedoms, as defined by the International Religious
Freedom Act. This decision was reaffirmed in 2007, 2008, and 2009.

Geography

According to the 2006 guidebook for foreign investors in Vietnam published by PricewaterhouseCoopers,
Vietnam is located in the centre of South East Asia with a land area over 330,000 km2. It lies in the eastern part
of the Indochina peninsula, bordered by China to the North, Laos and Cambodia to the West, the East Sea and
Pacific Ocean to the East and South, and has a beautiful 3,260 km long coastline. It is in an ideal position for the
development of the economy in general, and trade and tourism in particular. Three-quarters of the country
consists of mountains and tropical forests, but the plains are the most densely populated areas. The two rice-rich
areas are the Red River Delta in the north (15,000 km2) and the Mekong River Delta in the south (40, 000 km2).
Vietnam has 58 provinces along with 3 major cities i.e. Ha Noi, Ho Chi Minh City and Da Nang. Hanoi, in the
north, is the capital of the country. Ho Chi Minh City, in the south, is the largest commercial city. Da Nang, in
central Vietnam, is the third largest city and an important seaport. Vietnam is located in both tropical and
temperate zones. The climate is tropical in Southern and Central Viet Nam, with a wet and a dry season, and
warm and humid weather all year round. In the north, there are four seasons with a distinct winter. The average
annual rainfall is around 223cm. The whole country is affected by a strong monsoon influence, with a
considerable amount of sunshine and a high rate of rainfall and humidity.

Organizational environment

One of the most important aspects of economic reforms in Vietnam since Doi Moi (Renovation) in 1986 has
been the encouragement of domestic and foreign private investment. For domestic Vietnamese companies, the
Enterprise Law adopted in 2000 has had a significant impact on the development of the private sector in
Vietnam. The foreign investment sector has seen rapid growth, gradually asserting itself as a dynamic
component of the economy, and has made an important contribution to enhancing the economy’s
competitiveness and efficiency.

One unique characteristic of Vietnam’s organizational environment is that the government of Vietnam is very
keen to promote the state-owned enterprises reform program, i.e. the reorganization, restructuring, and
development of state-owned enterprises and state-owned banks to improve their productivity and efficiency.

Since Doi Moi, the government has pursued the reform of state-owned enterprises (SOEs) in three phases
(restructure, renovation, and development) through the implementation of four key measures:
(i) reform of SOE management
(ii) reorganization and reinforcement of state-owned general corporations
(iii) SOE equitisation
(iv) transferring, contracting, leasing and selling SOEs.

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The Report on the Observance of Standards and Codes (World Bank 2006) shows that Vietnam has recently
taken important steps to establish its corporate governance framework; however, there remain some significant
challenges moving forward.

Professional environment

According to Vision & Associates (2010), most Vietnamese are well-educated, with a literacy rate of over 90%.
There is about 140 universities and colleges throughout the country, attracting nearly one million students each
academic year. However, in general, the education system in Vietnam is outdated and of low quality. This leads
to professional capacity of Vietnamese including accounting much lower compared to the developed countries.

Prior to the establishment of the Vietnam Association of Certified Public Accountants (VACPA), the sole
responsibility for controlling the accounting and auditing profession lay with the Ministry of Finance, including
organizing exams, awarding membership certifications. According to the VACPA website (www.vacpa.org.vn),
the auditing profession has difficult examination procedures. The independent accounting consultants are
required to be members of the professional body with a membership certification. However, if the financial
statement preparers are the internal staff and employed by the company, they might not have completed such
examinations as they are not required to be members of any professional body. Over one thousand accountants
are qualified and have obtained the Vietnamese Certified Public Accountants (VNCPA) certificate. They work
in over 100 accounting firms in Vietnam. These people are able to certify the “true and fair” nature of the
financial statements of the enterprises operating in Vietnam as a requirement of Vietnamese Accounting
Standards.

Individual environment

In the article “Concepts of Individual and Self in Twentieth-Century Vietnam”, David Marr (2000) described
the term of individual (ca nhan) is ‘fragile” and “contested status” in comparison with other terms such as
“society” (xa hoi), “ethnic group/nation” (dan toc), “ideology” (chu nghia) in the Vietnamese language in the
first decades of the twentieth century. Vietnamese people have a strong sense belong to the group. Vietnam’s
oriental culture is to prefer prudence, to avoid risk and uncertainty. By nature, Vietnamese avoids risks and
uncertainty. Overall the mechanism of Vietnamese accounting system does not form the ground for the
flexibility and policy choices made by individuals. In the past, the Vietnamese accountants were instructed to be
extremely strictly compliant with rules and principles, and followed exactly step by step guidelines to avoid
uncertainty, risk and personal responsibilities. Thus, a typical Vietnamese accountant avoids calculating
accounting estimates or making personal judgments in the accounting jobs.

Accounting environment

The Ministry of Finance is the official standard setter in Vietnam. Under the Ministry of Finance, the
Department of Accounting and Auditing Policy and the General Department of Taxation are the two governance
bodies most involved in the management of accounting & auditing service providers and users. The Department
of Accounting and Auditing Policy currently plays the most significant role in the development of accounting &
auditing activities. As at October 2010, there are 26 Vietnamese Accounting Standards published by the
Department of Accounting and Auditing Policy of the Ministry of Finance. All entities operating in Vietnam
must comply with the Vietnamese Accounting Standards. It is possible for the foreign invested enterprise to
seek for exemption, but this is subject to specific approval from the Ministry of Finance for that entity.
According to Deloitte IAS Plus website, generally, Vietnamese Accounting Standards were based on
International Accounting Standards (IAS) with some modifications to reflect the local accounting regulations
and the business environment in Vietnam. However, neither IAS amendments after 2003 nor new IFRS have
been adopted.

We have considered the arguments how differences in ecology (i.e. social, organizational, professional,
individual and accounting through an example of Vietnam) lead to its different accounting regulations and
accounting practice. Does it really matter if different countries use different accounting method? It is useful to
consider the logic of recent global efforts to establish one set of accounting standards for worldwide use.

BENEFITS OF HARMONIZATION WITH IFRS

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According to Paul Pacter (2005)2, the idea of establishing a uniform set of accounting standards for global use
started when the professional accountancy bodies in nine countries3 agreed, at the 10th World Congress of
Accountants in Sydney in 1972, to create the International Accounting Standards Committee (IASC). In 1973,
IASC worked towards harmonizing global accounting standards by developing standards that could “serve as a
model on which national standard setters could base their own standards” (Pacter 2005). The former IASC
(1998, p50) stated that “many developing and newly industrialized countries are using IAS as their national
requirements, or as the basis for their national requirements. These countries have a growing need for relevant
and reliable financial information to meet the requirements both of domestic users and of international providers
of the capital they need”. The IASC was replaced by the International Accounting Standards Board (IASB)
effective in 2001.

Paul Pacter described how challenging it was for IASB achieving its mission. “The goal of replacing national
GAAPs with a single global set of standards was not just lofty, back in 1973. It was probably unrealistic. This
was particularly true in the relatively large economies of nearly all of the IASC’s founders, where national
standards and national standard setters were well entrenched both professionally and politically. In at least a
majority of the founding countries, relatively robust bodies of accounting standards were already in place, while
the IASC was in the position of having to play catch-up. There were differences among the nine IASC founding
countries on how to account for almost every major accounting question confronting business entities.” (Pacter
2005)

The European Commission made the following statement in a press release issued 2002 “The regulation
(requiring listed companies, including banks, insurance companies, to prepare their consolidated accounts in
accordance with the accounting standards issued by IASB from 2005 onwards) will help eliminate barriers to
cross-border trading in securities by ensuring that company accounts throughout the EU are more reliable and
transparent and that they can be more easily compared. This will in turn increase market efficiency and reduce
the cost of raising capital for companies, ultimately improving competitiveness and helping boost growth.”
(cited in Deegan (2010, p158)

The efforts of IASB “to develop a single set of high quality, understandable, enforceable and globally accepted
financial reporting standards based upon clearly articulated principles” (IFRS Foundation, “Who we are, What
we do”, July 2010) have been acknowledged and IFRS have gained increasing acceptance around the world.
Since 2005, many countries (including Australia and countries in the European Union) have elected to adopt the
accounting standards issued by the IASB. During the last few years there has been a significant increase in the
number of countries adopting IFRS as national standards (Whittington, 2008). A latest updates from IASB
website in July 2010 that over 120 countries have required or permitted or harmonised with the use of
International Financial Reporting Standards (IFRS). All remaining major economies apart from US have
established time lines to converge with or adopt IFRS in the near future. Among them are not only industrialized
countries such as Australia, UK, Germany but also developing countries like Indonesia, Malaysia, Philippines,
Thailand, Singapore, India, Bangladesh etc (IASB 2010). This has supported the argument that there is a global
trend of convergence towards IFRS (Delloitte IAS Plus website, Use of IFRS by jurisdiction, 2010).

The IASC (1998, p50) stated that “many developing and newly industrialized countries are using IAS as their
national requirements, or as the basis for their national requirements. These countries have a growing need for
relevant and reliable financial information to meet the requirements both of domestic users and of international
providers of the capital they need.” Ball (2006) affirmed “the evidence that many countries are implementing or
thinking to implement IFRS suggests that (1) the expected benefits will overweight the implementation cost. (2)
IFRS is “self-reforcing” i.e. adoption after adoption.”

In the same vein, according to Ding et al. (2005), there are three reasons explaining the wide acceptance of
IFRS, which are as follows:

(1) The rapid development of international capital markets is strengthening their dominant role as an
economic resource distributor. How information is disclosed to the market is a central issue in ensuring
market efficiency.
(2) The increasingly frequent cross-listing of multinationals generates an urgent need for a single universal
set of accounting standards for these firms in order to reduce information production costs and send out a
unified, reliable message to the market.
(3) The activities of institutional investors are becoming increasingly internationalized. Their presence in
foreign markets is forcing domestic listed firms to play the accounting game by global rules.

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An analytical and empirical examination, using survey techniques conducted by Barniv et al. (1997) found that
Australian Certified Practicing Accountants (CPA) and Chief Financial Executives (CFO) have “high
preferences” for harmonization of accounting standards “even with higher processing costs”. In consistency
with Barniv et al. (1997)’s results, McCombie (2005) provided evidence that harmonization offers substantial
benefits to large companies and their shareholders (McCombie, 2005).

Multinational companies are the first group to enjoy benefits of IFRS harmonization. These companies are often
dual reporting, generating two sets of financial reporting, one following the national standards to submit to the
government agencies and another one complying with IFRS to report to their holding companies. Convergence
to IFRS will save them a lot of costs of preparing two sets of reports, especially in the long run. It is argued that
IFRS would provide greater transparency in financial statement which should attract an increased foreign direct
investment; however, Ball (2006) stated that for small and private companies, “the costs are substantial and the
benefits are not great”.

Financial professionals and regulators are the second group to enjoy benefits of IFRS harmonization. The
harmonization of international accounting standards will create more “flexibility and efficiency” in the use of
financial professional staff (Nobes and Parker, 2004). Big Four accountant firms will enjoy substantial saving of
costs of recruitment, training and staff development, as well as a significant increase of revenue from providing
IFRS related consulting services.

Investors would also benefit from harmonization. Harmonization would enable companies to expand capital
market across borders. It will encourage strong, stable and liquid capital markets. It will increase investor
confidence and produce greater global acceptance of company financial statements (Ball 2006). Another
perceived benefit of harmonization is to improve the financial reporting quality, thus, allow small investors to
compete more fully with the institutional (large) investors.

FACTORS EXPLAINING THE LACK OF SUPPORT FOR IFRS IN VIETNAM

While acknowledging the importance of all five factors of Gernon and Wallace’s ecological framework, the
author confines herself here to analyzing only the social factors, delaying analysis of the remaining four factors
to a subsequent paper.

According to Scott Saxby in the web page “Public relations in Vietnam – the social environment”, since the
1990s, Vietnam’s social dynamics have undergone considerable changes including (i) changes in Vietnam’s
social structure; (ii) changes in the Vietnamese value system; (iii) changes in behavior; (iv) changes in lifestyle
for different social groups (Saxby, 2009).

As mentioned in the religion section, three traditional religions (i.e. Buddhism, Taoism, and Confucianism)
strongly influence Vietnamese religious beliefs. The introduction of Buddhism saw the Vietnamese people
adding more social norms to Confucianism. As defined in the Worldnet dictionary
(www.worldnet.princeton.edu), the teaching of Confucius emphasizes love for humanity, high value given to
learning and to devotion to family (including ancestors), peace, justice. Confucianism in Vietnam was originated
from the traditional culture of China. Confucianism is one of the major influences on Vietnamese society
besides the introduction of communism. Confucian norms introduced the belief of equality amongst the
Vietnamese public. These norms use the family model as a reference to on which to base all other social
relationship. An example of these relationships include (i) subject to ruler; (ii) son to father; (iii) wife to
husband; (iv) younger brother to elder brother; (v) mutual respect between friends. Simple values such as
respect for elders are still dominant in Vietnamese society. This behaviour can range from younger people using
hierarchical terms when interacting with those who are older, and always being the first person to say hello.
Thos who are younger should wait for their elders to begin eating first. They should ask permission to come and
go and avoid being disrespectful to others. Values such as these are transferred into business and basic social
interaction.

The accounting profession in Vietnam still has the aging accountants who were trained and practiced in the old
centrally planned economy model. It is very hard for these people to learn and accept new concepts and methods
of accounting in the new market such as concept of fair value, and applying professional judgment. This led to
their limited offering of judgments regarding personal responsibility or avoiding change new methods.
However, the younger generation of accountant, who is capable of professional judgment is hesitated to do
different ways with his or her senior person (elder or higher position), either to avoid uncertainty or personal

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responsibilities or just simply to show respect. Simple values such as respect for elders/more senior people are
still dominant in Vietnamese society.

In addition, due to the long term Chinese influence on its civilization, Vietnam is considered to be a part of the
East Asian Cultural Sphere with nature of uncertainty avoidance. By nature, Vietnamese also avoid risk and
uncertainty. Thus, a typical Vietnamese accountant avoids calculating accounting estimates or making personal
judgments in the accounting job. In addition, to avoid uncertainty, risk and personally responsibility,
Vietnamese accountants were instructed to be strictly compliant with rules and principles and follow exactly
step by step guidelines. The pre-defined account names and numbers in the chart of accounts is another evidence
of reducing flexibility in Vietnamese accounting system to avoid uncertainty.

In the socialist era, the cultural life of Vietnamese has been deeply influenced by the cultural of communist
nations such as the Soviet Union, China, Cuba and other. The collapse of the Soviet Union in the late 1980s
forced Vietnam to transform from “central planning and autarky” to ‘market orientation and international re-
integration”.

Nevertheless, Vietnam is not yet a free market economy but is an emerging and transitional country which has
carefully managed the transition from a planned economy to a socialist-oriented market economy. While the
party’s communist ideology has become “less important over time”, it still plays an active role in economic
development. “Currently, Vietnam socio-economy is bearing the features of both old centrally planned economy
and new market economy” Lan (2008) argued.

In the centrally planned economy, accounting plays a role of assist government to plan and control the
government’s budgets. Major assets and other natural resources owned, controlled by the government, then
allocated for use to the state-owned enterprises. The government assigned business targets and the state-owned
companies are expected to meet these certain targets, business results, profit or loss is not important. The
managers and employees get paid at fixed amount, not at all incentives to their results. Thus, a historical cost
and fixed depreciation rate upon the fixed useful life defined by the accounting regulations is the only
accounting option that the accountants need to follow. Historical cost concept suits the government’s planning
and controlling purpose. The fair value measurement context is outside the experience of most Vietnamese
accounting professionals. As a result, IFRS does not suit Vietnam’s culture. Vietnam’s market needs an
accounting system simpler and more understandable than IFRS.

During French colonial period, Vietnamese culture received merchant influences from the European, including
the spread of Catholicism and adoption of Latin alphabet. Much different with other Asian countries, Vietnam
uses the Latin alphabet to write the national languages, Vietnamese. Because of an impact of French
colonization, Vietnamese accounting system was originated from the Continental European accounting model.
Feature of this model is explained in Chapter 4 of the Financial Accounting Theory book written by Craig
Deegan, 3rd edition, 2010. “The continental European model of accounting typically is characterized by a
relatively small input from accounting profession, little reliance on qualitative requirements such as true and
fair, and stronger reliance on government. The accounting methods tend to be heavily associated with the tax
rules in place, and the information tends to be of a nature that protects the interest of creditors rather than
investors per se. (The entities within countries that use the continental European model have historically tended
to obtain most of their long-term funds from family sources, governments or lenders, often bank).” (Deegan,
2010, p133). On the other hand, the Anglo-American model is “characterized by a system of accounting that
strongly influenced by professional accounting bodies rather than the government; it emphasizes the importance
of capital markets (the entities within the countries that use this model of accounting are typically very reliant on
public sources of equity and debt finance), and relies on terms such as ‘true and fair’ or ‘presents fairly’, which
in turn base based on considerations of economic substance over and above legal forms (legal form being bound
by legislation)” (Deegan, 2010, p133).

Before Doi Moi (Renovation), accounting system was truly a tool for Vietnam’s communist government plan,
control the taxation and fiscal policies, through the state-owned. In line with the Continental European
accounting model, businesses in Vietnam mainly rely on financial institution or retained earning to growth
(naming credit-insider system by Nobes, 1998). Therefore, there is no much pressure for disclosure in the
financial statements because the financial institution either obtains the required financial information through
the covenant in the loan policy or representatives of the financial institution are actually involved in the
management boards. IFRS are designed to facilitate a particular financing system, ‘equity-outsider system’
(Nobes 1998). In the equity-outsider system, commercial pressures give the strongest power over financial
reporting to professionals i.e., rules made by professional accountants, independent bodies, stock exchanges and

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other equity market regulators. However, within the credit-insider system in a majority developing country such
as Vietnam, the forces that generate commercial pressures are not strong. Furthermore, the manner in which the
economic system operates tends to insulate businesses from market forces, thereby effectively removing a
condition that is essential for IFRS to work satisfactorily.

Vietnam is the single party socialist republic country. Vietnamese Communist Party is the highest representative
body of the people and the only organization having legislative powers in Vietnam. The key role of the
Vietnamese government is to develop and manage a socialist-oriented economy through tax law system,
financial policy system and state owned economic sector. Vietnamese government has greatly emphasized on
national social and political stabilization and has been prudent in managing macro economy that easily is seen in
many economic policies (Jean-Bernard Veron, cited in Lan 2009).

From the history of Vietnam, prior 1986, pre Doi Moi, when the country was under socialist economy model,
the economy was solely planned and controlled by the government. According to Lan (2008), in a centrally
planned economy, the main role of accounting was to facilitate centralized planning and controlling economy of
government while in market economy, accounting rules and practices are to support the free market. Accounting
system in Vietnam has not been completely transformed to market because the economy in Vietnam is not
completely the market economy. State ownership is still major in the economy and influences economic policies
of governments. Therefore, Vietnam has not been able to apply all principles of free market in which there is
fair value.

The government controlled prices of main items such as petrol/gas, rice, interest rate, and wages. The
government assigned certain targets to state-owned companies to implement. Profitability of the state-owned
enterprises was not as important as controlling their expenditures within budget and following the plan.
Historical cost has been used for all cases. The country’s assets, in all cases, were always presented in three
categories that are fixed historical costs, depreciation and remaining value. Under the order of the government,
assets could be transferred between state-owned entities. The concept of ‘fair value’ did not exist at all in
socialist economy. As the historical cost was so popular and so attached to Vietnamese professional
accountants, changes to new ‘fair value’ concept is not easy at all. Up to now, the historical cost principle is still
dominated in almost all accounting reports by Vietnamese companies.

The political system has influenced many aspects of society and economy in Vietnam. The characteristic of
political system in Vietnam has decided the pattern of economy of the country. This pattern importantly
determines economic policies adopted including accounting policies. Following IFRS is also a choice of
Vietnam government under pressures from the international institution funds (e.g. World Bank, Asian
Development Bank, Official Development Assistance (ODA) funds etc) to align Vietnamese accounting
regulations and practices with the international accounting practices.

According to Lan (2008) who directly interviewed the Vietnamese standard setters, the approach towards IFRS
of Vietnam is a “cautious and gradual adaptation” (not fully adoption) based on the needs and applicability to
the country. Vietnam will not immediately apply IFRS mainly due the impacts of its oriental culture; its socialist
political systems and its historic centrally planned economy model. The empirical study of Lan (2008) also
provided evidence that Vietnam’s approach is “over prudently”, which might “isolate the country from other
parts of the world” or lead to “adverse impacts”. Certainly, Vietnamese standard setters do not want to isolate
the country as a price of keeping the national standards instead of convergence to global standards. We will
discuss in the next section what options are available for future revolution of accounting standards in Vietnam in
light of the current global movement towards implementation of IFRS.

POSSIBLE SCENARIOS FOR THE FUTURE OF VIETNAM ACCOUNTING REVOLUTION

In prior literature, Belkaoui (2004, 150-3) expands the possibilities for choice of national accounting models
from the two pathways in Nobes’s model (1998) to a four standard-setting pathways, four standard setting
pathways are:
(1) the ‘quick-fix’ involving the ‘adoption’ of IFRS as national standards;
(2) the ‘slower transfer of technology’ path in which international accounting firms, multinational
enterprises (MNE) and academics operating in developing countries disseminate international
accounting techniques;

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(3) the ‘situationist’ path whereby the developing country adapts accounting techniques from a variety of
sources, including the developed countries and IFRS, to its specific situation; and
(4) the ‘evolutionary’ path whereby the developing country develops its own standards without reference
to outside influence.

A decision to select which is the most appropriate pathway will mainly depend on the ‘cost-benefit trade off’
between
a. recurring, albeit modest, comparability benefits for investors;
b. recurring future cost savings that will largely accrue to multinational companies; and
c. one-time transition costs borne by all firms and the economy as a whole (Hail et al. 2010).

In the context of Vietnam, the future evolution of Vietnamese accounting standards is likely to be the ‘slow
transfer of technology’ (pathway 2) towards IFRS, particularly in light of the current global movement toward
IFRS... Future research will be necessary to investigate the extent to which the adoption (pathway 1) and
evolutionary (pathway 4) strategies are possible, and the extent to which the situationist (pathway 3) are
differentiated from pathway.2, with a view to reworking Belkaoui’s categorization.

Given the context that Vietnam is not following pathway 1, full adoption of IFRS, at least in the near term, local
businesses liaising with international parties (e.g. foreign investors, banks, shareholders etc) are advised to
carefully plan with IFRS consultants in advance of deadlines to allow for a smooth conversion from the current
VAS-based financial statements to the IFRS-based financial statements, when the foreign party requests them.
According to Laverty (2009), the most important issues for Vietnamese firms in a conversion to IFRS are the
selection of accounting policies, and the measurement and recognition criteria of assets and liabilities and
importantly the remeasurement to fair value prescribed by some IFRS. The fair value measurement context is
outside the experience of most Vietnamese accounting professionals and businesses may well need to engage
relevant specialists as they apply fair value.

In addition, Vietnamese professional accountants can utilize the current training sources available to upgrade
their IFRS knowledge. Deloitte has an extensive free IFRS e-learning source at www.iasplus.com. The Deloitte
IAS plus website contains multiple resources, publications, newsletters, and links. They also provide “IFRS in
your pocket” guides as well as the detailed comparison between IFRS and VAS. Ernst & Young also offers a lot
of IFRS materials on their website www.ey.com/ifrs. KPMG has a seminar, an online publications library at
www.kpmgifrs.com/pubs/, and also provides a lot of teaching program, case studies, and materials on their IFRS
institute at www.kpmginstitutes.com/ifrs-institute. PricewaterhouseCoopers offers interactive learning
publications and various faculty materials on their website at www.pwc.com/faculty. Grant Thornton has faculty
materials on their website faculty.gtexperience.com, for a free account, write to facultyconnection@gt.com. The
International Association for Accounting Education and Research (IAAER) also provides a lot of electronic
educational materials www.iaaer.org/resources. Together with a lot of online materials, the IASB also appoint
Director of International Activities to assist the standard setters around the world that are implementing or
thinking of implementing IFRS. In addition, many global groups such as ACCA, CPA Australia, the World
Bank, and the Asian Development Bank etc are actively involved in IFRS training.

CONCLUSION

The paper provided an explanation of the possible reasons for the Vietnamese accounting standard setters’
policy decision of not-adopting (but selectively adapting) IFRS. The paper highlighted some of the important
factors that are likely to influence the accounting environment by reviewing the accounting ecology of Vietnam.
There seems to be a mismatch between the context that exists in Vietnam and that in which IFRS have been
developed. Nevertheless, with the continued growth of the Vietnamese economy and the constant need for
additional capital, Vietnamese businesses that are looking to foreign sources for expansion capital will still need
to consider how they intend to prepare IFRS financial statements as they seek this foreign capital... The paper
concludes with a discussion of scenarios for future evolution of accounting standards in Vietnam in light of the
current global movement toward implementation of IFRS, and the recommendation for future research.

NOTES

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1
The International Accounting Standards Committee (IASC) was replaced by the International Accounting
Standards Board (IASB) in 2001. The IASB inherited the standards issued by the IAS (the International
Accounting Standards – IAS), which were revised in most cases, and issued new standards of their own called
the International Financial Reporting Standards (IFRS). In this paper, IASB and IASC or IAS and IFRS are used
interchangeably depending on the chronological sequence of events.
2
In 2005, Paul Pacter was Director of Standards for Small and Medium-Sized Entities (SME) at IASB in
London. Concurrently, he was also Director in the Global IFRS Office of Deloitte in Hong Kong.
3
The nine countries were Australia, Canada, France, Germany, Japan, the Netherlands, Mexico, the UK/Ireland
and the USA.
4
Vietnam’s Power Distance Index (PDI) score is 70. China’s score is 80. Both Vietnam and China have higher
score than the average score of East Asian’s countries at 60. In contrast, Australia’s score is relatively low, with
an index of 36 compared to the world average of 55.

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