VAS 16 - Borrowing Costs

Standard No. 16

BORROWING COSTS

(Promulgated and publicized together with the Finance Minister's Decision No. 165/2002/QD-BTC of December 31, 2002)

GENERAL PROVISIONS

01. This standard aims to prescribe and guide the principles and methods for accounting borrowing costs, including: recognition of borrowing costs into production and/or business costs in the period; capitalization of borrowing costs when these costs directly relate to the construction investment or production of uncompleted assets which serve as basis for recording accounting books and compiling financial statements

02. This standard applies to the accounting of borrowing costs.

03. The terms in this standard shall be construed as follows:

Borrowing costs are loan interest and other costs incurred in direct relation to borrowings of an enterprise.

Uncompleted assets are assets in the construction investment process and assets in the production process, which need a duration long enough (over 12 months) to be put to use according to the set purposes or to sale.

04. Borrowing costs include:

(a) Interests on short-term and long-term borrowings, including borrowing interest on overdraft amounts;

(b) Amortization of discounts or premiums related to borrowings through bond issuance;

(c) Amortization of ancillary costs incurred in relation to the arrangement of borrowing procedures;

(d) Financial costs of financial leasing assets.

05. For example: Uncompleted assets are those being in the construction investment process, which are either unfinished or finished but not yet put into production or use; unfinished products being in the production process of production lines with a production cycle of over 12 months.

CONTENTS OF THE STANDARD

Recognition of borrowing costs

06. Borrowing costs should be recognized into production or business costs in the period in which they are incurred, unless they are capitalized according to provisions in paragraph 07.

07. Borrowing costs directly related to the construction investment or production of uncompleted assets shall be accounted into the value of such assets (capitalized) when the conditions prescribed in this standard are fully met.

08. Borrowing costs directly related to the construction investment or production of uncompleted assets shall be accounted into the value of such assets. Borrowing costs shall be capitalized when it is highly probable that enterprises can get future economic benefits from the use of such assets and the costs can be reliably determined.

Determination of borrowing costs to be capitalized

09. In cases where a particular borrowing is used only for the purpose of construction investment or production of an uncompleted asset, the borrowing cost fully eligible for capitalization for such uncompleted asset shall be determined as borrowing cost actually arising from borrowings minus (-) incomes earned from temporary investments of such borrowings.

10. Incomes from temporary investments of particular borrowings shall, pending the use thereof for the purpose of obtaining uncompleted assets, be offset against borrowing costs incurred upon the capitalization.

11. In case of joint capital borrowings, which are used for the purpose of investment in construction or production of an uncompleted asset, the borrowing costs eligible for capitalization in each accounting period shall be determined according to the capitalization rate for weighted average accumulated costs incurred to the investment in construction or production of such asset. The capitalization rate shall be calculated according to the weighted average interest rate applicable to the enterprise's borrowings unrepaid in the period, except for particular borrowings for purpose of obtaining an uncompleted asset. The amount of borrowing costs capitalized during a period must not exceed the amount of borrowing costs arising during that period.

12. If any discount or premium arises upon the issuance of bonds, the borrowing interest shall be readjusted by amortizing the value of such discount or premium and readjusting capitalization rate in an appropriate manner. The amortization of the discount or premium may be effected by the actual interest rate method or straight line method. Borrowing interests and amortized discounts or premiums capitalized in each period must not exceed the actual borrowing interest amount and amortized discount or premium amount in that period.

Time of commencing capitalization

13. The capitalization of borrowing costs into the value of an uncompleted asset shall commence when the following conditions are simultaneously satisfied:

(a) Expenses for investment in construction or production of the uncompleted asset start to arise;

(b) Borrowing costs are arising;

(c) Activities that are necessary to prepare the uncompleted asset for its intended use or sale are being conducted.

14. Costs of the investment in construction or production of an uncompleted asset include costs which must be paid in cash, transfer of other assets or the acceptance of interest-bearing liabilities, excluding subsidies or supports related to the asset.

15. Activities necessary to prepare the asset for its intended use or sale include the activities of construction, production, technical and general management prior to the commencement of construction or production, such as the activities related to the application for permits prior to the commencement of construction or production. However, such activities do not cover the holding of an asset when no construction or production that changes the asset's state is taking place. For example, borrowing costs related to the purchase of a land plot requiring site preparation activities shall be capitalized in the period during which activities of preparing such site are conducted. However, borrowing costs incurred while such land plot is purchased for the purpose of holding without construction activities related to such land plot, shall not be capitalized.

Temporary cessation of capitalization

16. The capitalization of borrowing costs shall be temporarily ceased in periods during which the investment in construction or production of uncompleted assets is interrupted, except for cases where such interruption is necessary.

17. The capitalization of borrowing costs shall be temporarily suspended when the investment in construction or production of uncompleted assets is abnormally interrupted. At that time, incurred borrowing costs shall be recognized as in-period production or business costs until the investment in construction or production of uncompleted assets resume.

Termination of capitalization

18. The capitalization of borrowing costs shall terminate when the major activities necessary to prepare the uncompleted asset for its intended use or sale are completed. Borrowing costs arising afterward shall be recognized as in-period production or business costs.

19. An asset is ready for its intended use or sale when its construction or production is complete even though general management works might still continue. In cases where due to minor changes (such as the asset decoration at the purchaser's or user's request) these activities are not yet completed, the major activities are still considered complete.

20. When the investment in construction of an uncompleted asset is completed in parts and each completed part is capable of being used while the construction investment continues for the other parts, the capitalization of borrowing costs shall terminate when all major activities necessary to prepare that part for its intended use or sale are completed.

21. For a trade quarter comprising many buildings, each of which can be used separately, the capitalization shall terminate for borrowed capital used for each particular completed work. However, for the construction of an industrial plant involving many production items which are carried out in sequence, the capitalization shall terminate only when all production items are completed.

Presentation of financial statements

23. Enterprises must present in their financial statements:

(a) Accounting policy applicable to borrowing costs;

(b) Total amount of borrowing costs capitalized in the period; and

(c) Capitalization rate used for determining borrowing costs capitalized in the period.

Standard No. 24

CASH FLOW STATEMENTS

(Promulgated and publicized together with the Finance Minister' s Decision No. 165/2002/QD-BTC
of December 31, 2002)

GENERAL PROVISIONS

01. This standard aims to prescribe and guide the principles and methods for compiling and presenting cash flow statements.

02. This standard applies to the compilation and presentation of cash flow statements.

03. The cash flow statement is a constituent of a financial statement, it provides information to help users assess changes in net assets, financial structure, cash liquidity of assets, solvency and capability of enterprises for creating cash flows in their operations. Cash flow statements enhance the ability to objectively assess the business operation situation of enterprises and the comparability among enterprises because it can eliminate effects of the use of different accounting methods for the same transactions and events

The cash flow statement is used in assessing and forecasting the possibilities in terms of amount, timing and certainty of future cash flows; it is also used in re-checking the previous assessments and forecasts of cash flows, and examining the relationship between profitability and net cash flow as well as impacts of price fluctuation.

04. The terms in this standard are construed as follows:

Cash comprises cash in funds, cash on transfer and demand deposits.

Cash equivalents are short-term (not exceeding 3 months) investments, which can be easily converted into known amounts of cash and are subject to an insignificant risk of conversion into cash.

Cash flows are inflows and outflows of cash and cash equivalents, excluding internal transfers between cash and cash equivalent amounts within enterprises.

Business activities are principal revenue-earning activities of enterprises and activities other than investment or financial ones.

Investment activities are activities of procuring, constructing, liquidating, assigning or selling long-term assets and other investments other than cash equivalents.

Financial activities are activities that result in changes in size and structure of the owners' equity and borrowed capital of enterprises.

CONTENTS OF THE STANDARD

Presentation of cash flow statements

05. Enterprises shall have to present in-period cash flows in their cash flow statements upon three types of activities: business, investment and financial activities.

06. Enterprises may present their cash flows from business, investment and financial activities in a manner which is most appropriate to their business characteristics. The classification of and reporting on cash flows by activities shall provide information which help users assess impacts of those activities on the enterprises' financial positions and on cash and cash equivalent amounts generated by the enterprises in the period. This information may also be used to evaluate the relationships among the above-said activities.

07. A single transaction may involve cash flows in different types of activities. For example, the repayment of a borrowing including both the principal and interest, in which the interest belongs to business activities and the principal belongs to financial activities.

Cash flows from business activities

08. Cash flows arising from business activities are those relating to principal revenue-earning activities of an enterprise, and providing basic information to evaluate the enterprise's capability to generate cash from their business activities to repay debts, maintain operation, pay dividends and make new investments without external financing sources. Information on cash flows from business activities, when being used in conjunction with other information, shall help users forecast cash flows from future business activities. Principal cash flows from business activities include:

(a) Cash receipts from the sale of goods and the provision of services;

(b) Cash receipts from other revenue-earning activities (royalties, fees, commissions and other revenues other than received cash amounts determined being cash flows from investment and financial activities);

(c) Cash payments to goods suppliers and service providers;

(d) Cash payments to employees as wages and bonuses, and those on behalf of employees such as insurance premiums, allowances, etc.;

(e) Cash payments of loan interests;

(f) Cash payment of enterprise income tax;

(g) Cash receipts from tax reimbursements;

(h) Cash receipts from compensations or fines paid by customers violating economic contracts;

(i) Cash payments to insurance companies as insurance premiums, indemnities and other cash amounts under insurance policies;

(j) Cash payments of fines or compensations imposed on enterprises for their breaches of economic contracts.

09. Cash flows relating to the purchase and sale of securities for commercial purposes shall be classified as cash flows from business activities.

Cash flows from investment activities

10. Cash flows arising from investment activities are those relating to the procurement, construction, assignment, sale or liquidation of long-term assets and investments other than cash equivalents. The principal cash flows from investment activities include:

(a) Cash payments to procure and/or construct fixed assets and other long-term assets, including those relating to development costs already capitalized as intangible fixed assets;

(b) Cash receipts from the liquidation, assignment or sale of fixed assets and other long-term assets;

(c) Cash payments to provide loans to third parties, other than loans of banks, credit institutions and financial institutions; cash paid to acquire debt instruments of other units, other than payments for those debt instruments considered to be cash equivalents and those for commercial purposes;

(d) Cash receipts from the recovery of loans provided to third parties, other than recovered loans of banks, credit institutions and financial institutions; cash receipts from the re-sale of debt instruments of other units, other than receipts from the sale of those instruments considered to be cash equivalents and those for commercial purposes;

(e) Cash payments of investments in capital contributions to other units, other than payments for the purchase of shares for commercial purposes;

(f) Cash recovered from investments in capital contributions to other units, other than cash receipts from the re-sale of already purchased shares for commercial purposes;

(g) Cash receipts from loan interests, dividends and earned profits.

Cash flows from financial activities

11. Cash flows arising from financial activities are those relating to the change in size and structure of owners' equity and borrowed capital of enterprises. The principal cash flows from financial activities include:

(a) Cash proceeds from the issuance of shares or reception of capital contributed by owners;

(b) Cash repayments of contributed capital to owners or for redemption of shares by the issuing enterprises;

(c) Cash receipts from short- or long-term borrowings;

(d) Cash repayments of principals of borrowings;

(e) Cash repayments of financial leasing debts;

(f) Cash payments of dividends or profits to owners or shareholders.

Cash flows from business activities of banks, credit institutions, financial institutions and insurance enterprises

12. For banks, credit institutions, financial institutions and insurance enterprises, their arising cash flows bear distinct characteristics. When making their cash flow statements, these organizations shall have to base themselves on their operation natures and characteristics to classify cash flows in an appropriate manner.

13. For banks, credit institutions and financial institutions, the following cash flows shall be classified as cash flows from business activities:

(a) Provided loan cash;

(b) Received loan cash;

(c) Cash receipts from capital mobilization (including deposits or savings received from other organizations and/or individuals);

(d) Cash refunds of mobilized capital (including repayments of deposits or savings of other organizations and/or individuals);

(e) Receipt of deposits from and repayment of deposits to other financial and credit institutions;

(f) Deposits and receipt of deposits at other financial and credit institutions;

(g) Receipts and payments of assorted service charges and commissions;

(h) Receipts from interests on loans and/or interests on deposits;

(i) Payment of interests on borrowings and/or deposits;

(j) Profits or losses from the purchase and sale of foreign currencies;

(k) Receipts or payments in the purchase and sale of securities at securities-trading enterprises;

(l) Payments for the purchase of securities for commercial purposes;

(m) Proceeds from the sale of securities for commercial purposes;

(n) Recovery of bad debts already written off;

(o) Other receipts from business activities;

(p) Other payments for business activities.

14. For insurance enterprises, received insurance premiums and paid insurance indemnities as well as receipts and payments related to clauses of insurance policies shall all be classified as cash flows from business activities.

15. For banks, credit institutions, financial institutions and insurance enterprises, cash flows from investment activities and financial activities shall be similar to those of other enterprises, except for loans provided by banks, credit institutions and financial institutions, which are already classified as cash flows from business activities for the reason that they relate to principal revenue-generating activities of enterprises.

METHODS OF MAKING CASH FLOW STATEMENTS

Cash flows from business activities

16. Enterprises shall have to report their cash flows from business activities by one of the following two methods:

(a) The direct method: Under this method, the norms indicating cash inflows and cash outflows are presented on statements and determined by one of the following two ways:

- Direct analysis and synthesis of cash receipts and payments upon each receipt or payment item according to the accounting records of enterprises.

- Readjustment of revenues, cost of goods sold and other items in the business result report, for:

+ Changes in the period in inventories, and receivables and payables from business activities;

+ Other non-cash items;

+ Cash flows relating to investment and financial activities.

(b) The indirect method: Norms indicating cash flows are determined on the basis of total before-tax profit and readjusted from the following:

- Non-cash revenues and costs, such as depreciation of fixed assets, reserves, etc.;

- Gains and losses of unrealized exchange rate difference;

- Paid enterprise income tax amounts;

- Changes in the period in inventories, and receivables and payables from business activities (other than income tax and other payables after enterprise income tax);

- Profits or losses from investment activities.

Cash flows from investment and financial activities

17. Enterprises shall have to report separately cash inflows and cash outflows from investment and financial activities, except for those cash flows which are reported on a net basis and mentioned in paragraphs 18 and 19 of this standard.

Reporting on cash flows on a net basis

18. Cash flows arising from the following business, investment or financial activities shall be reported on a net basis:

(a) Cash receipts and payments on behalf of customers:

- Rentals received or paid on behalf of asset owners and those returned to them;

- Investment funds held for customers;

- Acceptance and repayment of demand deposits by banks, amounts transferred or paid via banks.

(b) Cash receipts and payments for items of which the turnover is quick and the maturities are short:

- Purchase and sale of foreign currencies;

- Purchase and sale of investments;

- Other borrowings and loans of a short-term of 3 months or less.

19. Cash flows arising from the following activities of banks, credit institutions and financial institutions shall be reported on a net basis:

(a) Acceptance and repayment of time deposits with fixed maturity dates;

(b) Placement of deposits at and withdrawal of deposits from other financial institutions;

(c) Provision of loans to customers and repayment of those loans by customers.

Foreign currency-related cash flows

20. Cash flows arising from foreign-currency transactions must be converted into the accounting currency at the foreign exchange rates at the time such transactions arise. Currencies in cash flow statements of institutions operating overseas must be converted into the accounting currency of the parent companies at the actual exchange rate of the cash flow statement date.

21. Unrealized exchange rate difference arising from the changes in exchange rates for converting foreign currencies into the accounting currency are not cash flows. However, the exchange rate difference due to the conversion of cash and cash equivalents currently deposited in foreign currencies must be separately presented on cash flow statements in order to compare cash and cash equivalents at the beginning and the end of the reporting period.

Cash flows relating to received interests, dividends and profits

22. For enterprises (other than banks, credit institutions and financial institutions), cash flows relating to already paid loan interests shall be classified as cash flows from business activities. Cash flows relating to received loan interests, dividends and profits shall be classified as cash flows from investment activities. Cash flows relating to already paid dividends and profits shall be classified as cash flows from financial activities. These cash flows must be presented as separate norms suitable to each type of activities on cash flow statements.

23. For banks, credit institutions and financial institutions, the already paid or received interests shall be classified as cash flows from business activities, other than received interests definitely identified to be cash flows from investment activities. The received dividends and profits shall be classified as cash flows from investment activities. The paid dividends and profits shall be classified as cash flows from financial activities.

24. The total amount of loan interest paid in the period must be presented in the cash flow statement whether it has been recognized as a cost in the period or capitalized in accordance with accounting standard No. 16 "Borrowing costs."

Cash flows relating to enterprise income tax

25. Cash flows relating to enterprise income tax shall be classified as cash flows from business activities (except for cases where they are determined as cash flows from investment activities) and presented as separate norms on cash flow statements.

Cash flows relating to the acquisition and liquidation of subsidiary companies or other business units

26. Cash flows arising from the acquisition and liquidation of subsidiary companies or other business units shall be classified as cash flows from investment activities and presented as separate norms on cash flow statements.

27. The total amount of payments for and/or receipts from the acquisition and liquidation of subsidiary companies or other business units shall be presented in cash flow statements in net cash and cash equivalents paid for or received from the acquisition and liquidation.

28. Enterprises shall have to synthetically present in their financial statement explanations the following information on both the acquisition and liquidation of subsidiary companies or other business units in the period:

(a) Total purchase or liquidation value;

(b) Value portion of the purchase or liquidation paid in cash and cash equivalents;

(c) Cash and cash equivalent amounts actually available at subsidiary companies or other business units acquitisioned or liquidated;

(d) Value portion of assets and liabilities other than cash and cash equivalents at subsidiary companies or other business units acquitisioned or liquidated in the period. Value of such assets must be synthesized upon each type of asset.

Non-cash transactions

29. Investment and financial transactions that do not require the direct use of cash or cash equivalents shall not be presented in cash flow statements.

30. Many investment and financial activities do not have a direct impact on current cash flows although they do affect the asset and capital source structure of enterprises. Therefore, they shall not be presented in cash flow statements but in financial statement explanations. For example:

(a) The purchase of assets by accepting related liabilities directly or through financial leasing operation;

(b) The acquisition of an enterprise by means of share issuance;

(c) The conversion of debts into owners' equity.

Components of cash and cash equivalents

31. Enterprises shall have to present in their cash flow statements the norms of cash and cash equivalents at the beginning and the end of the period, effects of changes in foreign exchange rates for converting the currently held cash and cash equivalents in foreign currencies for comparison of the data in cash flow statements with the corresponding items on the balance sheets.

Other explanations

32. Enterprises shall have to present the value of and reasons for large cash and cash equivalent amounts that they have held and not been used due to limitations prescribed by law or other commitments which must be fulfilled by enterprises.

33. There are many circumstances in which cash and cash equivalent balances held by enterprises are not available for use for business activities. For example: Cash amounts accepted as deposits or into escrow accounts; special-use funds; project funding, etc.