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ISLAMABAD: K-Electric (KE) has sought exemption from Expected Credit Losses (ECLs) on financial assets for two years effective from July 1, 2022, as the balance payable to Government of Pakistan and provincial governments and their departments/ entities under circular debt has accumulated to Rs. 341 billion.

The power utility has sought this exemption from SECP in a letter titled “exemption from the applicability of International Financial Reporting Standards (IFRS- 9)” under section 225 of the Companies Act, 2017.

The letter jointly signed by CEO KE, Syed Moonis Abdulah Alvi and Chief Risk Officer & Company Secretary, Rizwan Pisnani, says that the power utility’s application is in relation to SRO. 1177(l)/2021 of September 13, 2021, wherein SECP notified that the requirements contained in IFRS 9 with respect to application of ECL method shall not be applicable in respect of Companies holding financial assets due from the Government of Pakistan (GoP) till June 30, 2022, 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 the KE, circular debt situation faced by KE is deteriorating with each passing year with the major contributors being delays in determination/ notification of Quarterly Tariff Adjustments and release of Tariff Differential Claims (TDC) despite rigorous efforts undertaken by KE for recovery of these long outstanding balances including regular engagement with the relevant government departments.

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The issue has been further aggravated by the fact that expensive RLNG has replaced the major portion of cheaper indigenous gas as source of fuel coupled with significant increase in fuel prices in the last quarter of financial year ended June 30, 2022.

As of June 30, 2022, KE’s receivable from GoP, Provincial Governments and GoP/ Provincial Government entities was Rs.413 billion on principal basis (including unbilled revenue, un-recovered cost and additional write-off included in last quarterly variation that is yet to be determined by NEPRA) with net receivables standing at Rs 72 billion. Though certain steps have been taken by the government to curb the circular debt menace, resolution of this chronic issue to a reasonable level is expected to take further time.

KE maintains that though Commission is already cognizant of the subject consequences which led them to issue exemption, the power utility re-emphasizes 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.

KE maintains that 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, overdue payables to various suppliers are appearing in the balance sheets of power companies mainly due to the overdue tariff adjustment claims and energy dues held by the government and certain public sector companies.

In case of KE, the balance payable to GoP and Provincial Governments and their departments/ entities under circular debt has accumulated to Rs. 341 billion. 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.

KE further notes that in the light of prevalent scenario, 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.

Copyright Business Recorder, 2022

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