Circular No. 23/2018/TT-BTC dated March 12, 2018 of the Ministry of Finance on accounting for covered warrants of securities companies being issuers

THE MINISTRY OF FINANCE

Circular No. 23/2018/TT-BTC dated March 12, 2018 of the Ministry of Finance on accounting for covered warrants of securities companies being issuers

Pursuant to the Law on accounting No. 88/2015/QH13 dated November 20, 2015;

Pursuant to the Law on securities No. 70/2006/QH11 dated June 29, 2006;

Pursuant to the Law No. 62/2010/QH12 dated November 24, 2010 on amendments and supplements to the Law on securities;

Pursuant to the Government’s Decree No. 174/2016/ND-CP dated December 30, 2016 elaborating some articles of the Law on accounting;

Pursuant to the Government’s Decree No. 58/2012/ND-CP dated July 20, 2012 elaborating and guiding the implementation of the Law on securities and the Law on amendments to the Law on securities;

Pursuant to the Government’s Decree No. 60/2015/ND-CP dated June 26, 2015 on amendments to the Government’s Decree No. 58/2012/ND-CP dated July 20, 2012 elaborating and guiding the implementation of the Law on securities and the Law on amendments to the Law on securities;

Pursuant to the Government’s Decree No. 87/2017/ND-CP dated July 26, 2017 defining functions, tasks, powers and organizational structure of Ministry of Finance;

At the request of the Director of the Department of Accounting and Auditing Regulations;

The Minister of Finance promulgates a Circular providing guidance on accounting for covered warrants of securities companies being issuers.

Chapter I

GENERAL PROVISIONS

Article 1. Scopeof adjustment

This Circular provides guidance on bookkeeping and preparation of financial statements when economic/ financial transactions in covered warrants occur. This Circular does not apply to determination of securities companies’ tax liabilities.

Article 2.Subjects of application

This Circular provides guidance on accounting for covered warrants of securities companies that are permitted to issue covered warrants as prescribed by law.

Chapter II

GUIDANCE ON ACCOUNTING WORKS

Article 3. Accounts used to record transactions in covered warrants

1. Account 329 – Payable warrants: This account reflects the current payable warrants and changes in the payable warrants account due to the mark-to-market revaluation of warrants.

Structure of account 329 – Payable warrants:

Debit: - Payments for warrants;

- Decreased amounts of payable warrants.

Credit: - Amounts payable for warrants;

- Increased amounts of payable warrants.

Credit balance: Remaining amounts payable for warrants.

2. Sub-accounts of account 112 - Bank deposits are opened to monitor sums for securing payment obligations at a depository bank before the offering of warrants, sums deposited in escrow account (proceeds from offering of warrants on the primary market) and sums deposited in proprietary trading account (for hedging risks at the request of the Stock Exchange).

3. Account 018 - Warrants (sub-accounts are opened to record every type of warrants).

Structure of account 018 – Warrants:

Debit: Reflecting the quantity of warrants to be issued.

Credit: Reflecting the quantity of outstanding warrants.

Debit balance: Reflecting the quantity of untraded warrants.

Article 4. Accounting methods for major economic transactions

1. When a securities company provides margins at a depository bank for securing payment obligations for the offering of warrants, accountant must manage the margins on account 112 – Bank deposits and clearly explain the margin levels.

2. After receiving the certificate of warrant offering issued by the State Securities Commission of Vietnam (“SSC”), accountant must keep track of the quantity of warrants to be issued and record it to:

Dr 018 – Warrants.

3. When a securities company distributes warrants to investors on the primary market:

a. When offering warrants, record:

Dr 112 – Bank deposits (sub-account: escrow account opened at the bank)

Cr 329 – Payable warrants (sub-accounts are opened to record every type of warrants).

And record:

Cr 018 – Warrants.

b. When the SSC affirms the result of the warrant distribution in writing, accountant shall record a decrease in the escrow account and an increase in the ordinary deposit account.

c. In case where the SSC suspends or cancels the offering, accountant shall record:

Dr 329 – Payable warrants (sub-accounts are opened to record every type of warrants)

Cr 112 – Bank deposits.

The quantity of warrants of which the offering is suspended or cancelled must be clearly explained.

4. When initial costs involved in the offering of warrants including application for certificate of warrant offering, distribution of warrants on the primary market, listing and depository of warrants occur, record:

Dr 632 – Losses and costs of acquiring financial assets (offering costs)

Cr 111, 112.

5. When conducting transactions in warrants (buy/ sell) for the market-making purpose:

a. Buying warrants:

Dr 329 – Payable warrants (The book value of warrants)

Dr 632 – Losses and transaction costs that are directly attributable to the acquisition of financial assets and proprietary trading – sub-account: warrants (losses if the acquisition price is greater than the book value)

Cr 112 (acquisition price)

Cr 511 – Income from financial assets at fair value through profit or loss (gains if the acquisition price is lower than the book value).

Accountant also records to:

Dr 018 – Warrants.

b. Selling warrants:

Dr 112 – Bank deposits

Cr 329 – Payable warrants (sub-accounts are opened to record every type of warrants)

Accountant also records to:

Cr 018 – Warrants.

6. Accounting for hedging activities:

a. If a securities company has underlying securities recorded on account 121 - Financial assets at fair value through profit or loss or account 124 – Available-for-sale financial assets: Accountant shall open sub-accounts of accounts 121, 124 to reflect hedging securities; at the end of the hedge period, accountant shall reverse such entries.

b. If a securities company buys underlying securities to use as hedging instruments:

Dr 121 - Financial assets at fair value through profit or loss (Hedging against warrant risks)

Cr 321 – Clearing and settlement of securities transactions.

At the end of the accounting period, accountant shall reassess and record the reassessed value of underlying securities used as hedging instruments in the same manner as the reassessment of financial assets at fair value through profit or loss.

c. If a securities company is required to provide additional margins due to the difference between the theoretical and actual risk hedging positions, accountant shall manage such additional margins on account 112 and provide explanation thereof in financial statements.

7. At the end of the accounting period, warrants shall be marked to market.

a. If there is a reduction in the price of outstanding warrants:

Dr 329 – Payable warrants (Difference between the book value and the current market value)

Cr 5111 – Income from financial assets at fair value through profit or loss (decrease in the value of financial assets at fair value through profit or loss – warrants).

b. If there is an increase in the price of outstanding warrants:

Dr 63213 – Decrease in the value of financial assets at fair value through profit or loss after reassessment (increase in the value of financial assets at fair value through profit or loss – warrants = the difference between the current market value and the book value)

Cr 329 – Payable warrants (amounts payable for warrants).

8. When warrants mature:

a. If warrants are in the money, investors shall exercise warrants:

Dr 329 – Payable warrants

Dr 6321 – Loss from sale of financial assets at fair value through profit or loss (Loss from issuance of warrants = negative difference between the settlement price, the exercise price and the book value of warrants)

Cr 511 – Income (Profit from issuance of warrants = positive difference between the settlement price, the exercise price and the book value of warrants).

Cr 111, 112…..

b. If warrants are out of the money or at the money, investors shall not exercise warrants:

Dr 329 – Payable warrants (amounts payable for warrants = the book value of warrants)

Cr 511 – Income (profit from warrants).

c. If warrants that are not distributed on the primary market are recorded (debit balance of account 018), after the expiration date, there must be no amount payable for warrants (Cr 018).

If securities used for hedging are still outstanding after a warrant matured, such securities shall be used for proprietary trading or as hedging instruments for another warrant.

9. When warrants are delisted, the securities company must redeem outstanding warrants and give a refund to investors:

Dr 6321 - Loss from sale of financial assets at fair value through profit or loss (if the redemption price is greater than the selling price of warrants)

Dr 329 – Payable warrants

Cr 111, 112

Cr 5111 – Income from financial assets at fair value through profit or loss.

Accountant also records:

Dr 018 – Warrants (regarding warrants distributed on the primary market).

10. When the securities company makes restitution for damage caused to investors and/or late payment fine:

Dr 811 – Other costs

Cr 111, 112.

11. If a securities company purchases warrants, which are held for trading, from other issuers, the acquired warrants shall be recorded in the same manner as the acquisition of financial assets at fair value through profit or loss under regulations of the Circular No. 334/2016/TT-BTC dated December 27, 2016.

Chapter III

FINANCIAL STATEMENTS

Article 5. Balance sheet

1. To supplement some items to the balance sheet regulated in the Circular No. 210/2014/TT-BTC dated December 30, 2014 and the Circular No. 334/2016/TT-BTC dated December 30, 2016, including:

Credit balance of account 329 – “Payable warrants” is added to Item 6 - Payables for trading securities in the current liabilities part of Entry 318 of the balance sheet.

2. Off-balance sheet items:

Item “Warrants” (Debit balance of account 018) – Entry 014 is added to Part A. Assets of the securities company and those managed according to firm commitment.

Article 6. Income statement

Some entries are supplemented to the balance sheet regulated in the Circular No. 210/2014/TT-BTC dated December 30, 2014 and the Circular No. 334/2016/TT-BTC dated December 30, 2016, including:

- To present profit from sale of warrants in Item a. "Profit from sale of financial assets at fair value through profit or loss - Entry 01.1" of the income statement.

- Loss from sale of warrants is presented in Item a. “Loss from sale of financial assets at fair value through profit or loss – Entry 21.1” of the income statement.

- Item “Decrease in the value of outstanding warrants marked to market” is added to Item d. – Entry 01.4.

- Item “Increase in the value of outstanding warrants marked to market” is added to Item d. – Entry 21.4.

Article 7. Cash flow statement

1. Cash flow from operating activities (according to direct method):

+ Payments to investors who exercise in-the-money warrants when they mature are added to Item “Payments for acquisition of financial assets” – Entry 01.

+ Proceeds from offering of warrants are added to Item “Proceeds from sale of financial assets” – Entry 02.

+ “Receipts from returned margins” content is added to Item “Other proceeds from operating activities” – Entry 11

+ “Margins provided for securing payment obligations at depository bank”, “payments for covering costs involved in the offering of warrants upon maturity date or suspension or cancellation of warrant offering" are added to Item “Other payments for operating activities” – Entry 12.

2. Cash flow from operating activities (according to indirect method):

+ “Loss from reassessment of payable warrants” is added to Item “Loss from reassessment of financial assets at fair value through profit or loss” – Entry 11.

+ “Profit from reassessment of payable warrants” is added to Item “Profit from reassessment of financial assets at fair value through profit or loss” – Entry 19.

+ “Payable warrants” is added to Item “Increase (decrease) in accounts payable” – Entry 50.

Article 8. Notes to financial statements

Each securities company must provide the following additional notes:

- Profit (loss) from reassessment of warrants of the issuer (current period, previous period).

- Profit (loss) from reassessment of underlying assets for hedging warrant risks of the issuer (current period, previous period).

- Total amount of margins provided for securing payment obligations at depository banks of the issuer (beginning balance, ending balance).

- Total amount of margins additionally provided for hedging due to the difference between the theoretical and actual risk hedging positions.

- Total number of securities used for hedging.

- Total number of warrants to be issued.

- Total number of outstanding warrants.

Chapter IV

IMPLEMENTIONORGANIZATION

Article 9. Effect and implementationorganization

1. This Circular takes effect on April 27, 2018.

2. The Director of the Department of Accounting and Auditing Regulations, Chairman of the State Securities Commission of Vietnam and heads of relevant agencies shall implement this Circular.

3. Any difficulties arising in the course of implementation of this Circular should be reported to the Ministry of Finance for consideration./.

For the Minister

The Deputy Minister

Do Hoang Anh Tuan