ISLAMABAD: K-Electric has sought exemption from requirement of application of Expected Credit Loss (ECL) under International Financial Reporting Standards-9 (IFRS 9) for further two years contending that the main reason for the accumulation of circular debt is receivables from federal and provincial government/public sector entities, sources in the SECP told Business Recorder.
The power utility, which has become a rolling stone between the GoP, its likeminded Board members and their opposition, has forwarded this request to the SECP, through a joint letter signed by Chief Executive Officer (CEO), Syed Moonis Abdullah Alvi and Company Secretary Rizwan Pesnani.
According to sources, KE stated that its letter is in relation to SRO. 1784(1)/2024 dated November 04, 2024, wherein SECP notified that the requirements contained in IFRS 9 with respect to application of Expected Credit Loss (ECL) method shall not be applicable in respect of Companies holding financial assets due or ultimately due from the Government of Pakistan (GoP) in respect of circular debt for the financial years ending on or before December 31, 2025 owing to prevailing circular debt situation in the country; provided such companies shall follow relevant requirements of IAS 39 in respect of above referred financial assets during the exemption period.
However, the circular debt situation based on which SECP had relaxed requirements of IFRS 9, largely remained unchanged.
According to KE, though Commission is already cognizant of the subject consequences which led them to issue the above referred exemption, it has re-emphasized this point being the major industry concern.
IFRS 9 requires building a model based on expected recoveries of the due amounts. In case of receivables stuck under circular debt, there is no past pattern as well as future visibility through which such recoveries can be forecast. Subjective assessments in this respect would result in unusual distortion in the ECL provisioning and its movement over the future periods.
Further, had the amounts due from GoP and provincial governments and their departments/entities been received timely, payments would have been correspondingly made to other suppliers; which is actually the reason for circular debt accumulation.
Therefore, consideration of impairment loss under IFRS-9 on receivables from government in isolation does not depict the true substance of the overall situation as there is significant amount of linked payables as well.
After explaining the background, KE stated that application of the requirements contained in IFRS-9 with respect to application of ECL will result in the following: (i) adverse impact on the capital markets of the country as a result of likely deterioration in results of the effected companies; (ii) adverse impacts on loan covenants with likely breach of certain loan conditions. This will also adversely impact the ability of the effected companies to borrow money in these times of serious liquidity crunch which can have a material impact on their ability to continue smooth business operations; (iii) application of IFRS 9 will also result in unusual distortion of the results of the effected companies from one period to another.
The recovery pattern of receivables under circular debt cannot be ascertained with reasonable certainty; while payments against outstanding receivables are received on a lump sum basis from GoP and Provincial Governments and their departments/entities.
The resultant would therefore be corresponding variability in the ECL provisioning ultimately distorting the companies’ results; and (iv) circular debt represents both receivables and payables in the entire value chain. Application of ECL and recording of corresponding provision only on receivables side of it, ignoring the linked payables, will distort the overall position of effected companies’ financial statements.
The joint letter further stated that KE has always been a proponent of compliance with the applicable accounting and reporting standards.
However, considering the ground realities of circular debt situation in Pakistan perspective, the SECP should consider the prevalent accumulated receivables from GoP and provincial governments and their departments/entities/bodies, and extend the granted exemption from the application of ECL method on financial assets due from GoP and provincial governments and their departments/entities/bodies for a further period of two years.
Copyright Business Recorder, 2025
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