Perception of investors about fair value accounting in Vietnam

ting- auditing Banking & finance Others Historical cost 8 9.3 15.8 4.7 11.4 9.1 Fair value 36 35.2 17.4 57.9 37.2 42.9 22.7 Both 56 55.6 82.6 26.3 58.1 45.7 68.2 (Source: The author synthesizer) Table 8: Investors’ perspective of impacts of using information of fair value financial statement in place of historical cost (%) The use of fair value in place of historical cost for financial statement would: General answer Based on experience Based on specialization Under 5 years Accounting- auditing Under 5 years Accounting- auditing Banking and finance Others create negative difference 10.8 16.4 4.3 5 9.1 8.3 18.2 create positive difference 86.3 80 91.3 95 90.9 88.9 72.7 make no difference 2.9 3.6 4.3 2.8 9.1 (Source: The author synthesizer) It is obvious that the survey participants supposed that both information of financial statement and that of other sources were important for investment decision. However, they paid more attention to the former type. This is a reasonable fact because in listed firms of Vietnam’s stock market, the information of financial statement is a relatively precise source, which is easy to be collected. Other sources of information are mainly based on different relationships and very difficult to be verified. Most investors want to use both of historical cost and fair value for information of financial statement. This is an appropriate fact with Vietnam’s context, of which basically firms are still utilizing historical cost to reflect value of items in financial statement. Concerning limited quality of accounting information provided by historical cost, survey participants supposed that the application of fair value would supply them with more helpful information for decision making. In fact, there are numerous cases of investors wishing to use fair value. Nonetheless, due to poor information for fair value determination, these investors still have to apply historical cost. Therefore, the combination of both these two types is suitable with the context of Vietnam. Investors with 5-10 experience years are those approving this perspective at most. 3.4. Investors’ opinion of difficulties and challenges if applying fair value 88 Participants indicated that all matters of fair value knowledge, financial market and financial transactions in Vietnam, legislative framework, fair value applying cost, human resource, pricing technique utilization and accuracy of accounting information were difficulties in the application of fair value (µ>4). Among these problems, these participants considered accuracy of accounting information as well as financial market and asset transaction in Vietnam as the two biggest hindrances (µ=4.42;4.34). 47,5% and 46.5% of these participants greatly agreed and agreed with the idea that applying fair value in Vietnam would be difficult because of accuracy character of supplied information and only 5.9% did not have any opinion. 38.6% agreed upon the idea that underdeveloped financial market and asset transaction in Vietnam has resulted in troubles for the application of fair value, 56.4% shared the same agreement and 5% did not have any opinion, only 7.9% did not have any idea and 3% did not agree. These difficulties are quite similar to those in China’s market, which is proved in the research by Liu & Wang (2009) (Diagrams 1 and 2). Diagram 1: Agreeing level of difficulties in identifying accuracy of accounting information based on fair value (Source: The author synthesizer) Diagram 2: Agreeing level of difficulties of financial market and asset transaction in the application of fair value accounting (Level: 1- Totally disagree -> 5-Totally agree) (Source: The author synthesizer) It can be seen that the accuracy of information is not high. This results from the fact that in an underdeveloped market with insufficient information like Vietnam, the determination of fair value is based on different hypothesizes and estimations of firms’ Finance Accuracy 89 management board, which leads to poorly accurate accounting information. Additionally, the management board might take advantage of determining assets’ value based on fair value to distort information of business operation for their own purposes, which invades benefits of investors. Vietnam’s financial market and asset transaction is not greatly developed because the best information of fair value is the transaction price in the market with high liquidity. For example, the purpose of determining fair value of a financial instrument is identifying the transaction price of this instrument on the financial reporting date of an active market, of which the accessing potential is not limited. However, in reality, Vietnam’s financial market, especially its stock market has really small scale. According to statistics in 2006 by the State Security Commission of Vietnam, the capital size of the stock market constituted 14% of capital supply proportion for the economy, the capitalization rate accounted for 36% of GDP. The average transaction scale was low. Particularly, a lot of stocks did not have transaction price and/or liquidity. This would make it infeasible to determine transaction price of assets or impossible to reflect precise fair value of financial instrument. 4. Conclusions and Policy Implications In order to ensure the usefulness of information in financial statement, possibly apply fair value accounting at optimal basis and manage to solve the above arising difficulties, the author suggests the following recommendations: Firstly, due to investors’ relatively good understanding of general concept of fair value, especially the under 10 experience years ones’, Ministry of Finance should quickly issue regulations, establish fair value standards and speed up the roadmap of fair value accounting application so that it is compatible with IFRS. It is essential for the Ministry to invite international experts, which is attached with cooperation with different training units and enterprises to organize training course as well as conferences to equip investors with in-depth knowledge of fair value’s contents. Vietnam’s authorities should build up public and transparent roadmaps of applying fair value accounting standards so that enterprises can prepare their plans for investment into material base (software, different means) suitable human resource training. This preparation helps to avoid passiveness in implementation of those plans. Secondly, relying on investors’ high appreciation of applying information of financial statement for decision making demand and their recognition of evaluating items of financial statement based on fair value, Ministry of Finance should quickly build up regulations recording information in fair value financial statement, which has been carried out by certain countries. This helps to provide historical cost and fair value information in financial statement system. The fair value record will be presented in detail in financial statement to supply appropriate information with users. Thirdly, in order to tackle with difficulties in applying fair value, Ministry of Finance and State Security Committee should prioritize solutions ensuring accuracy of accounting data so that it is appropriate with investors’ demand, announce punishment policies on public firms with big differences between data before and after auditing and require these firms to give detailed explanation about these differences, as well as 90 regularly implement activities of inspectation and supervisory on firms’derogations. The Government should continue speeding up its process of innovating, enhancing international economic integration, issuing policies on attracting and creating advantages for huge investors to participate in Vietnam’s market. This aims at transactions of organized investors as well as domestic and national investment funds. At the same time, it should maintain macro-economic stability, minimize risks of inflation changes, exchange rate, interest rate and the state’s policies as well as improve information transparency in order to build up great trust of investors for their decision. Regarding joint stock firms, it is essential to train skillful accountants and ensure that accounting information and data is recorded and reported with complete and objective evidences, which are the same as reality in terms of their contents and value of accounting event. Concerning investors, it is suggested to improve their importance of supervising enterprises, making decisions on significant issues of the invested enterprises according to their authority regulated by enterprise law and companies’ charter in order to ensure the effectiveness of their investment. 5. References Edwards, E (1975), 'The State of Current Value Accounting', The Accounting Review, 50(2), 235-245. 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