ISLAMABAD: M/s Jhimpir Power (Private) Limited (JPL) has sought exemption from the application of International Financial Reporting Standard-9 (IFRS-9) till the resolution of “worsening” power sector circular debt.
In a letter to Chairman Securities and Exchange Commission of Pakistan (SECP), the company’s CFO, Abdul Basit Tola, noted that his letter is in relation to the notification issued by the SECP on September 13, 2021, through which exemption from the application of Expected Credit Loss (ECL) method under IFRS-9 available to the companies holding financial assets due from the Government of Pakistan (GoP) in respect of circular debt was extended till June 30, 2022.
In this regard, the company has highlighted that circular debt situation has continued to worsen as huge receivables have accumulated on Jhimpir Power (Private) Limited and other IPPs’ books. This is even after steps taken by the GoP to settle circular debt. However, a lot more still needs to be done to arrest the issue of circular debt.
According to the JPL, it is believed that the complete resolution of circular debt will take years depending upon the GoP’s course of actions. However, IFRS-9 requires the company to recognize an expected loss for the overdue receivables due mainly because of their aging; JPL’s overdue amounts from CPPA-G are not by its own choice but are the direct result of the circular debt.
The application of the impairment model provided in IFRS-9 will result in huge impairment losses on these long overdue amounts resulting in significant dilution of profitability and erosion of our retained earnings.
The State Bank of Pakistan (SBP) on July 5, 2022 has also granted similar exemption from the application of ECL requirements to financial institutions as follows: “The credit exposure (in local currency) that has been guaranteed by the Government and Government Securities are exempted from the application of ECL Framework.”
Therefore, the Company has requested the SECP for a permanent exemption from the application of IFRS-9 on trade receivables due from the GoP till the resolution of the circular debt issue on the same grounds as were applicable previously based on which exemption was granted earlier; some of which are as follows: (i) the 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 GoP with no future visibility.
This volatility in results, from one period to another, may give misleading information 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 due to subjective assessments, it leads to different assumptions by different companies and auditors which will significantly affect the comparability of numbers between different companies of the same sector; (ii) impairment on sovereign-guaranteed receivables will deteriorate the credibility of the GoP.
This will send a negative image of the GoP to domestic and international investors and lenders, which can hamper future foreign direct investments and lending; (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; and (v) the application of IFRS-9 will restrict the IPPs ability to declare dividends to their shareholders.
The IPPs are already suffering severely from circular debt issue and impairment losses on receivables from the GoP will result in additional negative financial impacts by hampering their ability to pay dividends to their shareholders as it will lower their available profits for distribution.
In the light facts and the prevailing circumstances, the JPL has requested the Ministry to facilitate, and the SECP to grant a permanent exemption for all IPPs from the application of IFRS-9 till the resolution of the circular debt issue by issuing a requisite notification per the powers provided to SECP under Section 510 read with Section 225(3) of the Companies Act, 2017.
Copyright Business Recorder, 2022