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ISLAMABAD: M/s Sapphire Electric Power Company Limited (SECL) has sought permanent exemption from the application of International Financial Reporting Standard-9 (IFRS-9) for all Independent Power Producers (IPPs) on the justification that there is no firm commitment from the GOP to settle receivables.

The power company sought this exemption through a letter to the Securities and Exchange Commission of Pakistan (SECP), which is available with Business Recorder.

According to the CFO of SECL, Umar Rahi, the letter is in relation to the notification issued by the Securities and Exchange Commission of Pakistan (SECP) on 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 company has highlighted that the circular debt situation has continued to worsen as huge receivables have accumulated on Sapphire Electric Company Limited (SECL) and other IPPs books. This is even after steps have been taken to settle the circular debt through settlements under the Master Agreement signed with SECL and many other IPPs wherein outstanding balances have been partially settled through payments in installments. However, a lot more still needs to be done to address this issue of circular debt. The complete resolution of circular debt will take some years depending upon the government’s course of action.

IFRS-9 requires the power company to recognize a loss for the overdue receivables due mainly because of its aging. SECL’s overdue amount from CPPA-G is not by its own choice but is 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 its retained earnings.

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

Therefore, SECL has requested 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 the following: (i) the application of IFRS- 9 will increase the variability of IPPs results from one period to another to the abnormal payment pattern being followed by the Government of Pakistan.

This volatility results from one period to another and may give misleading results to the users of the financial statements. Furthermore, as there is no firm timeline from CPPA -G for the 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 or government-guaranteed receivable will deteriorate the credibility of the GoP.

This will send a negative image of 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 enders’ 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 and; (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 impact 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.

Given the facts and the prevailing circumstances, M/s Sapphire has requested SECP to provide a permanent exemption for all IPPs from the application of IFRS-9 by issuing a requisite notification under the powers provided to SECP under section 510 read with section 225(3) of the Companies Act, 2017.

Copyright Business Recorder, 2022

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Muhammad Khurram Oct 31, 2022 01:55pm
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