Financial Reporting: Experience in Financial Control & Risk Prevention

Experience in Preparing Financial Statements – Is Your Business Doing It "Right"?

Financial statements offer a comprehensive overview of a company's financial health and operational performance. Accurate and transparent reports not only ensure tax compliance but also build credibility with partners, investors, and banks.

1. What Should a Business Do Upon Discovering Errors in Financial Statements?

Financial statements are akin to a comprehensive picture of a company's financial health. But what if you notice a "blemish" on that picture?

First, assess the severity of the error:

Minor Errors: If the error doesn't significantly impact key indicators, adjustments are relatively straightforward.

Significant Errors: If the error affects tax liabilities, revenue, or profits, proceed with caution, as it may lead to tax reassessments or administrative penalties.

If the tax authority hasn't announced a tax audit decision, businesses can still file supplementary declarations in accordance with the Tax Administration Law 2019.

2. How to Determine if a Business is at Risk of Tax Inspection?

To assess these factors, tax authorities apply specific indicators to analyze, review, and decide which businesses require inspection during the year, including:

Value-Added Tax (VAT) is a significant tax and a common area for tax discrepancies. Tax authorities pay close attention to:

(1) Discrepancy Between VAT Taxable Revenue and Corporate Income Tax (CIT) Revenue:

• Significant discrepancies may indicate incorrect declarations, leading to erroneous tax liabilities.

  
  

• For detailed tax explanation methods in such cases, refer to: Experience in Tax Explanation for Businesses.

(2) Difference Between Output and Input VAT:

Corporate Income Tax (CIT) is a major revenue source for the government, so tax authorities closely monitor indicators affecting profits and taxable income, including:

• Unusual Expenses: Multiple abnormal deductions may raise suspicions of attempts to reduce CIT liabilities.

• Adjustments Reducing Pre-Tax Profits:

  
  

  - Significant reductions in pre-tax profits without reasonable justification may prompt thorough reviews by tax authorities.

  
  

  - Consider: Can Both Pre-Tax and Post-Tax Profits Be Optimized Simultaneously?

While businesses can carry forward losses to reduce CIT liabilities, excessive or unreasonable carryforwards may trigger tax inspections.

3. What Principles Should Financial Statements Adhere To?

Financial statements must be prepared and presented in accordance with accounting standards, ensuring the provision of truthful and reasonable information about the company's financial situation. The principles to follow include:

• Going Concern: When preparing financial statements, businesses must assess their ability to continue operations for at least 12 months after the end of the reporting period. If there are indications of ceasing operations or downsizing, the report must reflect this.

  
  

• Accrual Basis: Transactions should be recorded when they occur, regardless of cash receipt or payment, to accurately reflect revenue and expenses in the relevant accounting period.

  
  

• Consistency: The presentation and classification of items in financial statements should remain consistent across periods for comparability unless changes are justified.

4. Seven Fundamental Principles for Preparing Financial Statements

Financial statements are crucial tools reflecting a company's financial status and business operations. To ensure accuracy, transparency, and compliance with standards, businesses should adhere to the following seven fundamental principles:

• Compliance with Accounting Standards:

Financial statements must adhere to prescribed accounting standards, such as Vietnamese Accounting Standards (VAS) or International Financial Reporting Standards (IFRS), ensuring consistency with legal regulations and international practices.

• Substance Over Form:

Emphasizes that financial statements should reflect the economic substance of transactions rather than merely their legal form.

• Reasonable Valuation of Assets and Liabilities:

Assets and liabilities should be valued based on their actual or fair value at the reporting date, rather than fixed or outdated values.

• Classification of Assets and Liabilities:

Clear categorization of assets (e.g., cash, inventory) and liabilities (e.g., bank loans, payables) according to their nature and maturity for ease of understanding and analysis.

• Clear Presentation:

Financial statements should be presented clearly and understandably, with logically arranged items and comprehensive notes to prevent misinterpretation.

• Alignment with International Practices:

Especially for multinational operations or foreign stakeholders, financial statements should align with international accounting practices for global consistency and comparability.

• Matching Investment Benefits:

Profits or benefits from investments should be recognized and allocated appropriately to reflect the effective use of capital.

5. Common Errors in Preparing Financial Statements

When preparing corporate financial statements, the following errors often occur, affecting accuracy and credibility:

• Incorrect Timing Recognition: Recording revenue or expenses in the wrong period, e.g., recording November 2024 revenue in December 2024, leading to data discrepancies.

  
  

• Missing Documents: Lack of invoices or receipts results in unsupported financial statements, increasing the risk of tax reassessment.

  
  

• Misclassification of Items: Erroneously recording operating expenses as fixed assets, distorting the financial position.

  
  

• Failure to Establish Provisions: Omitting provisions for inventory devaluation or doubtful debts, leading to inflated assets.

  
  

• Manual Data Entry Errors: Mistakes from manually transferring data from records to financial statements, especially without accounting software.

6. Important Considerations Before Preparing Financial Statements

Before starting to prepare financial statements, businesses need to understand the following important content to ensure effectiveness:

• Applicable Accounting Standards: Determine whether to use VAS or IFRS, depending on the company's scale and market (domestic or international).

  
  

• Submission Deadlines: According to Decree 132/2020/NĐ-CP, businesses must submit financial statements within 90 days from the end of the fiscal year (by March 31 annually).

  
  

• Input Data: Ensure all invoices, contracts, and accounting records are complete to avoid omissions.

  
  

• Tax Authority Requirements: Understand VAT and CIT indicators to prevent unexpected audits.

  
  

• Internal Analysis: Evaluate the financial situation before preparing reports to anticipate risks.

7. Key Considerations During Financial Statement Preparation

During the financial control and statement preparation process, businesses should note the following points to avoid risks:

• Cross-Check Data: Compare data across reports (balance sheet, income statement) to detect errors.

  
  

• Stay Updated with Legal Regulations: Monitor changes from Decree 52/2021/NĐ-CP to comply with new standards.

  
  

• Utilize Software: Implement technologies like MISA or Fast to minimize manual errors.

  
  

• Internal Review: Have accounting staff or experts review reports before submission.

  
  

• Document Retention: Maintain all records for at least 10 years as per tax laws.

Accurate financial statement preparation is key for businesses to prevent risks, comply with laws, and build credibility. With practical experience from W&A, businesses can avoid errors, grasp essential content, and apply effective considerations to optimize financial control and professional financial statement preparation.

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