BANKING ACADEMY ADVANCED PROGRAM FACULTY OF ACCOUNTING AND AUDITING ---------------- GRADUATION THESIS Title: Financial reporting quality and lease propensity in Vietnamese listed companies and implication for adoption of IFRS 16 – Leases Student: Pham Mai Anh Class: K19-CLC-KTA Cohort: 2016-2020 Student code: 19a4030040 Supervisor: Ph. Dao Nam Giang Hanoi, June 2020 ACKNOWLEDGEMENTS I am grateful to Ph. Dao Nam Giang, lecturer in the Faculty of Accounting and Auditing, who instructs me throughout this Thesis. I am extremely thankful and indebted to her for spending valuable time to share expertise, precious guidance and encouragement extended to me.
I take this opportunity to express gratitude to all of the lecturers in Banking Academy in general and Accounting and Auditing Faculty lecturers in particular for their conscientious and support. I also thank my parents for the unceasing encouragement, support and attention. I also place on record, my sense of gratitude to one and all, who directly or indirectly, have lent their hand in this thesis. STATEMENT OF AUTHORSHIP Name: Pham Mai Anh Class: K19-CLC-KTA Students’ Numbers: 19A4030040 Supervisor: Ph.
Dao Nam Giang Name of research paper: Financial reporting quality and lease versus buy decision in Vietnamese listed companies and implication for adoption of IFRS 16 – Leases Declaration I declare that this thesis has been composed solely by myself and that it has not been submitted, in whole or in part, in any previous application for a degree. Except where states otherwise by reference or acknowledgment, the work presented is entirely my own. Signed _______________________________________________________ Date : 7th June, 2020 Graduation Thesis Supervisor: Ph. Dao Nam Giang TABLE OF CONTENTS LIST OF ACRONYMS.
i TABLE OF FIGURES .1 CHAPTER 1: OVERVIEW OF LEASE ACCOUNTING. The evolution of lease activities and lease accounting. The evolution of lease activities. The evolution of lease accounting .3 Introduction of IAS 17 and its drawbacks.
The reform of lease accounting and IFRS 16. Overview of the reform of lease accounting. The content of IFRS 16. The effects of IFRS 16 .14 CHAPTER 2: LITERATURE REVIEW ON LEASE ACCOUNTING AND FINANCIAL REPORTING QUALITY.
The empirical researches on lease accounting. Loophole of lease accounting under IAS 17. Off-balance sheet financing. The capitalization of operating lease and impact on financial ratios.
Financial reporting quality and lease propensity. Research hypothesis development .24 CHAPTER 3: RESEARCH BACKGROUND AND METHODOLOGY. Lease activities and lease accounting in Vietnam.33 Pham Mai Anh – 19a4030040 K19-CLC-KTA Graduation Thesis Supervisor: Ph. Dao Nam Giang 3.37 CHAPTER 4: EMPIRICAL RESULTS, DISCUSSION AND IMPLICATION.
Descriptive statistic and correlation. Discussion on the results. Limitation of the research. Implication and recommendation for adoption of IFRS 16 – Leases .57 Pham Mai Anh – 19a4030040 K19-CLC-KTA Graduation Thesis Supervisor: Ph.
Dao Nam Giang LIST OF ACRONYMS FASB Financial Accounting Standards Board IAS International Accounting Standards IASB International Accounting Standards Board IFRS International Financial Reporting Standards PPE Property, plant and equipment PV Present value VAS Vietnamese Accounting Standards Pham Mai Anh – 19a4030040 i K19-CLC-KTA Graduation Thesis Supervisor: Ph. Dao Nam Giang TABLE OF FIGURES List of Table Name Page Table 1: The difference between IAS 17 and IFRS 16 12 Table 2: The use of off balance sheet leases by listed companies 14 throughout the world Table 3: The use of off-balance sheet leases within industry sector 15 Table 4: Summary of the lease capitalization impact for industries 16 Table 5: Comparison between IAS 17 and VAS 06 30 Table 6: Differences between the Law on Credit Institutions and VAS 06 33 Table 7: Variable calculation 37 Table 8: Sample distribution 38 Table 9: Summarize of lease model variables 39 Table 10: Pearson correlation coefficients for lease model variables 42 Table 11: Coefficients from OLS estimations 43 Table 12: Test for Multicollinearity 44 Table 13: Breusch-Pagan / Cook-Weisberg test for Heteroskedasticity 44 Table 14: Breusch-Godfrey LM test for Autocorrelation 45 Table 15: Coefficients from regression using Robust Standard errors 45 Table 16: The results of Hypothesis 46 List of Figure Name Page Figure 1: Lease by Sector 40 Figure 2: The trend of Lease and AccQual for the 5 years period 41 Figure 3: Financial situation of companies for the 5 years period 42 Pham Mai Anh – 19a4030040 ii K19-CLC-KTA Graduation Thesis Supervisor: Ph. Dao Nam Giang INTRODUCTION 1. Novelty of the topic Lease activities is becoming more popular in Vietnam these days as it bring about conveniences and benefits over buying.
However, the treatments for this transactions maintain loopholes that firm lean on to manage their financial results. Beside that, leasing activities in Vietnam tend be simple and not be regarded importantly in many enterprises. Therefore, while in the world, lease and off-balance sheet financing is a hot topic, the impact of that in Vietnam has not been properly considered with just few mentions. The flaws in the current standard is theoretically discussed recently but there has been very few evidence given.
Dig into the directions in researches about lease, previous researches and discussion agreed that IAS 17 contains loopholes that result in off-balance sheet financing. There are two outstanding approaches for this issue. While the number of research approach on lease capitalization and its impact on financial ratio is numerous, research on the lease propensity is much fewer. More particular, whether leasing propensity is increased as the quality of accounting is low is an interesting topic.
This is even more urgent since (1) accounting quality is becoming an important matter, the reason why standard setter put much effort to improve the quality of information reported and (2) very few researches were carried out on this subject, and all of which are executed in developed country while none is in developing/ under- developed country. That is why this thesis want to focus on this direction to contribute to the inadequate of the approach on lease and accounting quality in Vietnam. The purpose of the topic This research present the overview of lease accounting, including the evolution of lease activities, the accounting for lease with IAS 17 and its drawbacks, the reform to IFRS 16 and its approach. Then, researches on such matter of leasing and accounting quality is reviewed to an overview of how these issue was discussed and analyzed in order to extract the relevant basis for this thesis.
All come to the major purpose of the topic – to provide evidence of whether lower accounting quality Pham Mai Anh – 19a4030040 1 K19-CLC-KTA Graduation Thesis Supervisor: Ph. Dao Nam Giang firms will prefer leasing over buying. Additionally, this aimed to find out the association of tax rate, gearing ratio, ROE, and size with the propensity of leasing instead of buying. By doing so, I want to provide the quantitative proves of how firms in Vietnam did take advantage of the lack in the current lease standard – VAS 16 to serve for their intended purposes.
Vietnam is also under the circumstance that on March 16, 2020, the Minister of Finance issued “Decision No.345/QD-BTC” to approve the "Scheme for Application of Financial Reporting Standards in Vietnam". With the new set of standard to be applied in just a few years, what should the regulators, businesses, users and preparers do in order to face with this massive change, particularly with lease accounting, shall be discussed. Research questions Leasing activities few year lately have been growing dramatically, but it is still a new field. Despite that the popularity and scale of lease transactions is quite limited in terms of market participants and guiding regulations, leasing activity is starting to spread across all sectors and sizes of business.
However, it has not been received the appropriate attention by both regulators and entities that take part in leasing activities when the regulations for this matter are very simple and sometimes, even conflict with each other. Within that circumstance, the current standard used to account for lease is VAS 06, which is based almost completely on IAS 17, carry the same loopholes and all the opportunities for firm to manipulate financial statement as its origin. And as mention above, the direction to focus on the relation of accounting quality and other factors on leasing propensity are still very few, and all of that are in developed country. Therefore, this thesis is trying to answer the question that whether that evidence can be found in Vietnam? Under a developing market, where leasing is still relatively new, whether companies in Vietnam make use of the loophole in the current standard, making the association of lease propensity and accounting quality existed? And whether improving the debt ratios contribute to the tendency of leasing assets?.
Pham Mai Anh – 19a4030040 2 K19-CLC-KTA Graduation Thesis Supervisor: Ph. Dao Nam Giang All of that questions lead to the main question, also the hypothesis of this research, that is: (1) Whether a firm’s tendency to lease instead of buying declines in its accounting quality? Besides, I try to figure out (2) Whether other factors like tax rate, gearing, ROA, size, growth have correlations with leasing propensity? To be detailed: (2.1) Whether lease propensity decrease when tax rate increase? (2.2) Whether lease propensity increase when gearing/ leverage increase? (2.3) Whether lease propensity increase when ROA increase? (2.4) Whether lease propensity increase when size increase? (2.5) Whether lease propensity increase when growth increase? These questions shall be solve within a single model. Research object and scope The object of this thesis is the financial information collected from the statements of firms public on Cafef database, which audited by Big4 and Baker and Tilly as only companies that audited by these 5 audit firms disclose extensively the lease commitment in their notes. Data from companies represent for seven sectors: retail, manufacturing, service, medical, information technology, energy and airline.
After randomly observing about 40 companies in Retailers sectors, 25-30 companies in the remaining 5 sectors for the 5 years period 2014 - 2018 (because many companies have not release the reports for the year 2019 due to Covid-19), those that do not disclose operating lease in their financial statement for the full 5 year period will be excluded. Therefore, the data shrink to 45 firms for the period 2014-2018, resulting to the final total observation is 225. Research methodology The methodology being used in this research is multivariate regression analysis, which is performed with Stata software. Variables are chosen after the review of former researches.
Lease tendency play the role of dependent variable, while Accounting quality, Tax rate, Gearing ratio, ROE, Size and Growth are Pham Mai Anh – 19a4030040 3 K19-CLC-KTA Graduation Thesis Supervisor: Ph. Dao Nam Giang independent variables. The model of this research was based on the work of Beatty, Liao and Weber (2010). Some modification has been made to fit with the available data and propensity in Vietnam.
While the other five variables can be calculated directly, Lease and Accounting quality were more complicated. The measurement of Accounting quality is based on Teoh, Welch and Wong (1998), and the calculation of Lease follow construction capitalization method of Imhoff, Eugene A, Lipe and Wright (1991). Structure of the thesis Chapter 1: Overview of lease accounting In Chapter 1, three main points will be focused on are the evolution of lease activities and lease accounting; introduction of IAS 17 and its drawbacks; and the reform of lease accounting and IFRS 16. Chapter 2: Literature review on lease accounting and financial reporting quality Chapter 2 focus on reviewing the empirical researches on lease accounting, especially on accounting quality and lease propensity and the development of research hypothesis base on the gap of previous researches and the current background of lease activities and accounting in Vietnam.
Chapter 3: Research background and methodology In this chapter, the current situation of lease activities and lease accounting in Vietnam will be detailed. Then, research methodology will be presented with the two main part are the empirical model and data collection.