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ISLAMABAD: Following the footsteps of M/s Hub Power Company (Hubco), the Liberty Power Tech Ltd (LPTL) has also sought permanent exemption from the applicability of financial instrument of international financial reporting standard 9 (IFRS-9) for IPPs due to their financial woes.

The request for exemption IFRS-9 has been sent by M/s LPTL’s Company Secretary Muhammad Kashif to Chairman Securities and Exchange Commission of Pakistan (SECP).

According to the Company Secretary, the letter is in relation to the notification issued by Securities and Exchange Commission of Pakistan (SECP) of September 13, 2021 through which exemption from the application of Expected Credit Loss (ECL) method under IFRS-9 available to companies holding financial assets due from the Government of Pakistan in respect of circular debt was extended till June 30, 2022.

The Power Company has highlighted that circular debt situation has continued to worsen as huge receivables have accumulated on books of LPTL and other IPPs. This is after steps have been taken to settle circular debt through settlements under the PPA amendment agreements signed with many IPPs wherein outstanding balances have been partially settled through payments in instalments.

However, a lot more still needs to be done to address the issue of circular debt.

Hubco seeks exemption from application of IFRS-9 on behalf of all IPPs

The company believes that the complete resolution of circular debt will take some years depending upon the government’s course of actions. “IFRS-9 requires us to recognize a loss for the overdue receivables due mainly because of their aging.

LPTL overdue amounts from CPPA-G are not by its own choice but are the direct result of circular debt. The application of the impairment model provided in IFRS-9 will result in huge impairment losses on these late overdue amounts resulting in significant dilution of profitability and erosion of our retained earnings,” the letter notes adding that “therefore, the Company has requested Power Division to recommend to SECP for a permanent exemption from the application of IFRS-9 on trade debts on the same grounds as were applicable previously some of which are as follows: (i) application of IFRS- 9 will increase the variability of IPPs results from one period to another due to the abnormal payment pattern being followed by the Government of Pakistan (GoP).

This volatility in results from one period to another may give misleading results to the users of the financial statements.

Furthermore, as there is no firm timeline from CPPA-G for settlement of these receivables, it would be very difficult to estimate the loss.

Also, different assumptions by different companies and auditors will significantly affect the comparability of numbers between different companies; (ii) impairment on government-guaranteed receivable will deteriorate the credibility of the GoP.

This will end a negative image of the GOP to domestic and international investors and can hamper future foreign direct investments; (iii) the large impairment losses due to the application of IFRS-9 will deteriorate the already declining capital markets of the country as a result of panic amongst the shareholders of these IPPs; (iv) the impairment loss will also adversely impact the lenders’ covenants and may result in breach of loan covenants.

This will also negatively impact the ability of IPPs to borrow money in these times of financial crunch; (v) the application of IFRS-9 will restrict the ability of IPPs to declare dividends to their shareholders.

“The IPPs are already severely suffering from the circular debt issue and will face additional negative financial impacts of impairment losses on their receivables which will hamper their ability to pay dividends to their shareholders as the impairment losses recognized will lower their available profits for distribution,” LPTL’s Company Secretary said, adding that given the facts and the prevailing circumstances, Power Division should facilitate in obtaining a permanent exemption for all IPPs facing circular debt issue from the application of IFRS-9 by recommending to SECP for issuing a requisite notification under the powers provided to SECP under Section 225(3) of the Companies Act, 2017.

Copyright Business Recorder, 2022

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