Uncover Key Differences: Consolidated Financial Statements vs Separate Financial Statements in Vietnam

Understanding the differences between consolidated financial statements vs separate financial statements in Vietnam is crucial, especially in the context of Vietnam’s unique economic landscape. This article aims to shed light on these key differences, providing you with a clearer picture of how each type of statement functions and their respective implications for businesses in Vietnam.

 What does a corporate financial statement entail?

A financial statement, which includes a balance sheet, income statement, cash flow statement, and an explanation of these statements, provides a comprehensive overview of a company’s assets, equity, liabilities, financial health, business results, and cash flow dynamics.

Essentially, financial statements serve as a tool to communicate the financial performance and status of a business to various stakeholders, such as administrators, business owners, investors, creditors, tax authorities, and regulatory bodies.

The type of financial statement a company has depends on its structure:

• A company without any subsidiaries will only have one type of financial statement, which reflects the company’s own financial and business situation.
• A company that owns one or more subsidiaries will have both separate and consolidated financial statements. The separate financial statements represent the financial and business situation of the parent company alone. On the other hand, consolidated financial statements provide a comprehensive summary of the financial and business situation of the entire group, including the parent company and its subsidiaries.

What does a holding or subsidiary company imply?

In Vietnam, businesses can be either holding or subsidiary companies. A holding company is a parent corporation that owns more than 50% of the shares of its subsidiaries, aiming to control them. A subsidiary company is primarily owned by another business, known as a holding company. Companies with subsidiaries in Vietnam have both separate financial statements for the parent company and consolidated ones for the entire group.

Looking into consolidated financial statements

When comparing consolidated financial statements vs separate financial statements in Vietnam, the Vietnamese Accounting Standards (VAS) govern consolidated financial statements. It applies to all economic entities, including foreign-owned enterprises and non-business organizations. The VAS provides a standard chart of accounts, a financial statement template, and detailed guidance on accounting entries. Companies are required to comply with VAS for their financial transactions. Some entities also apply IFRS for consolidated financial statements. The VAS 25 deals with consolidated financial statements and accounting for investments in subsidiaries. Businesses conducting transactions in foreign currencies can choose a monetary unit in accounting and must notify tax authorities of this choice.

Looking into separate financial statements

On the other hand, in regard to the consolidated financial statements vs separate financial statements in Vietnam, separate financial statements are part of the International Accounting Standard (IAS) 27. They account for investments in subsidiaries, joint ventures, and associates at cost or using the equity method. These statements are presented alongside consolidated financial statements or the financial statements of an investor with investments in associates or joint ventures. Dividends from a subsidiary, joint venture, or associate are recognized when the entity’s right to receive the dividend is established and are recognized in profit or loss unless the equity method is used.

Differentiating factors: Consolidated financial statements vs separate financial statements in Vietnam

Consolidated vs separate profits 

Profit is a key element in financial statements. While separate profit reflects the financial performance of an individual entity, consolidated profit provides a holistic view of the entire group of companies. This is achieved by aggregating the revenues and expenses of the parent company and its subsidiaries. This comprehensive perspective allows investors to evaluate the financial health of the entire group, encompassing both the parent company and its subsidiaries.

Consolidated vs separate balance sheets

A balance sheet, another crucial component of financial statements, details a company’s assets, liabilities, and equity. The consolidated balance sheet integrates the financial data of all entities under a parent company’s purview, offering a comprehensive view of the group’s financial position, including any equity discrepancies between the parent company and its subsidiaries. In contrast, a separate balance sheet solely reflects the financial status of a single entity.

 Determining which financial statement works best 

Deciding between separate and consolidated financial statements depends on your needs. Separate is ideal for assessing a specific subsidiary, while consolidated gives an overview of a group’s finances. However, preparing consolidated statements can be complex and might require specialized software. They provide a more accurate picture of a company’s financial health, aiding in strategic planning. Understanding these differences is key to decision-making.

Requirements for consolidated financial statements

As per Article 3 of Circular 202/2014/TT-BTC, the requirements for consolidated financial statements include:

• A comprehensive summary and presentation of the group’s assets, liabilities, owner’s equity at the end of the accounting period, business results, and cash flows during the accounting period. This should be done as if the group is an independent enterprise, irrespective of the legal boundaries of the parent company or its subsidiaries. 
• Provision of economic and financial information for evaluating the group’s financial position, business results, and cash-generating ability in the past accounting period and future forecasts. This serves as a basis for decision-making about the management, operation, or investment of a business by a group of current and future owners, investors, creditors, and other users of the financial statements. 

The basics of preparing and presenting consolidated financial statements

In Vietnam, according to Article 10 of Circular 202/2014/TT-BTC, the parent company must consolidate its own financial statements and those of all subsidiaries, both domestic and foreign, unless control is temporary or the subsidiary’s activities are restricted. Temporary control is determined at the time of acquisition and is not considered temporary if the subsidiary is expected to cease operations within 12 months.

Subsidiaries with different business activities or those that are trust funds, mutual funds, venture capital funds, or similar businesses are not excluded from the consolidated financial statements.

Accounting principles for consolidated financial statements

The consolidated financial statements must be prepared using the same accounting principles as independent enterprises and apply a uniform accounting policy for similar transactions and events. If a subsidiary uses different accounting policies, adjustments must be made to align with the group’s general policies.

For example, if an overseas subsidiary applies the revaluation model for fixed assets and the parent company applies the historical cost model, the subsidiary’s financial statements must be converted to the historical cost model before consolidation.

If a subsidiary cannot use the same accounting policy as the group, this must be disclosed in the notes to the consolidated financial statements.

Points to consider for Consolidated Financial statements

The financial statements used for consolidation from the subsidiary and the parent firm must be prepared for the same accounting period. If the balance sheet date is different, the subsidiary must prepare an additional set of financial statements for consolidation.

If feasible, use financial statements prepared at the same time. If that is not possible, statements prepared within three months of each other can be used, but adjustments must be made for significant transactions and events between the subsidiary’s and the group’s balance sheet dates.

Business results of subsidiaries

The business results of subsidiaries should be included in the consolidated financial statements from the date the parent company gains control until it effectively ceases control.

Investments in an enterprise that is no longer a subsidiary should be accounted for under the financial instrument’s standard, rather than as a joint venture or associate.

Ownership of the subsidiary’s identifiable net assets at the acquisition date should be stated at fair value. Any difference between the carrying amount and fair value should be distributed to both the parent and non-controlling shareholders.

If the subsidiary’s assets, with a fair value different from the carrying amount, are depreciated, liquidated, or sold, the difference should be adjusted for the undistributed after-tax profit of the parent shareholder and non-controlling shareholder interests.

If there is a difference between the fair value and carrying amount at the acquisition date, the parent company should recognize deferred income tax arising from the business combination.

Accounting for Goodwill

Goodwill or gain from a purchase is measured as the difference between the cost of investment and the fair value of the subsidiary’s net identifiable assets at the acquisition date when the parent company gains control.

The allocation of goodwill should not exceed 10 years, starting from the date the parent company controls the subsidiary, and should be made gradually over the years.

Periodically, the parent company should assess potential goodwill losses at the subsidiary. Evidence of loss may include a decrease in the subsidiary’s market value, a credit rating reduction, or significant financial deterioration.

It is important to refer to the relevant accounting standards for detailed guidelines on consolidation.

Preparing consolidated financial statements

Several key considerations must be followed. First, use financial statements prepared at the same time or adjust for significant transactions and events if the statements are prepared within three months of each other. Include the subsidiary’s business results from the date of gaining control until it effectively ceases control.

Account for investments in former subsidiaries under the financial instrument’s standard. State ownership of identifiable net assets at fair value at the acquisition date, with any difference distributed to the parent and non-controlling shareholders. Adjust for differences between fair value and carrying amount when depreciating, liquidating, or selling assets.

Measure goodwill or gain from a purchase as the difference between the cost of investment and the fair value of net identifiable assets at the acquisition date. Allocate goodwill over a period not exceeding 10 years, starting from the date of control. Periodically assess the potential goodwill loss at the subsidiary, considering market value, credit rating, and financial deterioration.

In multi-stage business combinations, determine goodwill or profit from a cheap purchase by calculating the investment cost as the sum of the subsidiary’s acquisition date cost and previous exchanges, revalued at fair value at the control date. Additional investments should be recognized as equity transactions.

Preparing consolidated balance sheets and Income statements

Consolidated balance sheets and income statements involve eliminating the parent company’s investment and share of equity, allocating goodwill or profit from a cheap purchase, presenting non-controlling shareholder interests separately, eliminating intra-group transactions, and eliminating unrealized profits and losses.

Differences between divestment proceeds and net asset value plus unallocated goodwill are recorded in undistributed profit after tax, depending on whether control is maintained or lost. After adjustments, transfer the difference from the income statement to undistributed profit after tax.

Prepare the consolidated statement of cash flows by eliminating intra-group transactions and presenting cash flows with entities outside the group under three activities: business activities, investment activities, and financial activities. If subsidiaries have different reporting currencies, convert their financial statements to the parent company’s reporting currency.

How can Premia TNC help?

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