Failure to clear power sector receivables: Fearing credit loss, CPPA-G seeks extension of IFRS-9 exemption

ISLAMABAD: The Central Power Purchasing Agency-Guaranteed (CPPA-G) has sought three years’ extension in exemption on applicability of International Financial Reporting Standards (IFRS) 9, ie, till June 30, 2027, fearing expected credit loss due to its failure to clear due receivables of power sector companies, sources close to Chief Executive CPPA-G told Business Recorder.

This request has been submitted in response to a letter of Securities and Exchange Commission of Pakistan (SECP) of September 27, 2024 whereby comments/recommendations have been sought from CPPA-G.

In this regard, the CPPA-G has submitted receivables of Government of Pakistan (GoP are backed by Sovereign Guarantee under the relevant Implementation Agreement).

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However, under IFRS-9, if applied, the power sector companies are required to recognize an expected credit loss on receivables from the Government of Pakistan mainly because of ageing.

“This impairment loss will also adversely impact the credit worthiness of the power sector companies as well as the security provided to their working capital lenders. In view of submissions, and complexities involved in implementation of expected credit loss model under IFRS-09, SECP should exempt the applicability of IFRS-09 for further three years (i.e. June 30, 2027) by issuing requisite notification,” said, CEO CPPA-G to Chairman SECP with attention to Oneeb Ahmad, Assistant Director.

SECP is already exempting applicability of International Financial Reporting Standards (IFRS) 9 in respect of debts due from Government of Pakistan to power supply chain companies since 2019.

The Commission makes the decision after detailed deliberation and consultation, taking into account the request of CPPA-G, and recommendations of the Institute of Chartered Accountants of Pakistan representations received from a number of affected companies.

Under Section 225 of the Companies Act, 2017, the Commission is empowered to notify financial reporting standards for companies classified in terms of Third Schedule to the Act. The Commission has power to grant exemption to any company or class of companies, if it is in the public interest to do so, from compliance with all or any of the requirements of the relevant Schedule.

The Commission while considering the exemption for IFRS 9 was of the considered view that compliance with IFRS for ensuring true and fair presentation of financial statements is of paramount importance for SECP. However, the said standard needs to be looked into from Pakistan perspective where phenomenon like circular debts need to be given due consideration.

The SECP noted that concerns expressed by companies regarding practical limitations in determining expected credit losses on debts due from government, due to uncertain cash recovery patterns of circular debt, carry weight. SECP placed its decision before the policy board of the SECP for its final approval for notification.

Last month, M/s Hub Power Company (HUBCO) had once again requested an exemption from the application of International Financial Reporting Standards-9 (IFRS-9) concerning trade debts due to the ongoing issue of circular debt.

In a letter addressed to the Securities and Exchange Commission of Pakistan (SECP), the Power Company referred to SECP’s notification dated January 20, 2023, under reference number S.R.O. 67 (1)/2023. This notification had previously exempted companies with financial assets receivable from the Government of Pakistan from the requirements of IFRS-9 related to the Expected Credit Loss (ECL) Method for the financial year ending on or before December 31, 2024.

During the exemption period, these companies were required to follow the provisions of IAS-39 Financial Instruments – Recognition and Measurement.

Copyright Business Recorder, 2024