ISLAMABAD: K-Electric (KE) has brushed aside assumptions made in a letter written by one of its former board members with respect to write-offs of billions of rupees by the company.
KE’s Chief Risk Officer & Company Secretary, Rizwan Pesnani, in a letter to Farrukh H. Khan, CEO Pakistan Stock Exchange Limited stated that KE has been made aware of an attempt by a former board member to malign it. Citing market sources, he said, Asad Ali Shah, a former member of KE’s Board of Directors, allegedly circulated a letter with the subject “material misstatement in KE’s financial statements due to which published financial statements are rendered misreading” and addressed to CEO PSE on January 10, 2023.
“We find its contents a misrepresentation of facts, as well as, a misunderstanding of accounting principles. We further submit that KE is and has always been fully compliant with all the relevant rules and regulations including financial reporting and accounting standards,” Pesnani said adding that KE will be responding to in detail, clarifying its position and enabling the Stock Exchange to take an informed view.
Asad Ali Shah, in his letter claimed that he is writing to report major financial reporting irregularities by KE in the published financial statements. These irregularities are in violation of relevant legal framework and detrimental to the interests of its members and stakeholders.
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He further contended that as a member of the Board of Directors and the Board’s Audit Committee (BAC) he has been highlighting his views as to why KE’s claims for write offs from Government of Pakistan (GoP) as tariff differential claims have been incorrectly recorded and had dissented when the financial statements for the period ended September 30, 2021 and subsequent periods were endorsed by BAC and approved by the Board.
He accused KE of indulging in incorrect recognition of revenue and receivables from GoP for the last several years in respect of its write offs of trade receivables (which KE management asserts are recoverable as tariff differential) without specific approval from National Power Regulatory Authority (Nepra) or any acknowledgement from the GoP.
The recognition of such revenue is clearly in violation of IFRS-15 (which is essential part of legally applicable accounting framework) resulting in major overstatement of revenues, receivables and profits, and accordingly its financial statements for the quarter ended September 30, 2022, for the year ended June 30, 2022 and earlier periods (annual & quarterly) during the past few years of current Multi Year Tariff (MYT) from July 2016 to date have contained material misstatements.
Shah further stated that as per latest quarterly financial statements issued by KE for the period ended September 30, 2022, aggregate amount of revenue and receivables recognized in respect of write-offs (tariff differential claim receivable from GoP) amounted to Rs. 53.5 billion.
A prudent approach in accordance with applicable accounting standards should have been not to recognize such claims, unless and until Nepra had specifically approved such amounts after due process. Further, out of this claim, substantial portion of receivables are not valid claims and do not meet the legal requirements (Nepra consumer service manual) and the recognition criteria under International Financial Reporting Standard (IFRS) 15.
Consequently, KE’s receivables and cumulative profits are overstated by a huge amount of Rs. 53.5 billion, and there is insufficient disclosure to highlight material uncertainties with respect to recovery of such amounts in the financial statements.
He further said as per unconsolidated financial statements for the year ended June 30, 2022, an amount of Rs. 375 billion was reflected as other receivables. Note 14 reflects that biggest component of these receivables is tariff differential claim receivable from the GoP of Rs. 355 billion, the biggest asset included in the current assets of KE and was 260% of its trade debts. Bulk of this amount has arisen during current MYT, as total amount of other receivables (including Tariff Differential claim) as of June 30, 2016 amounted to only Rs. 5.2 billion.
“I am of firm view that recording of revenue and receivables from GoP as tariff differential claim was inappropriate until at least the amounts were specifically approved by Nepra,” he continued. Further, a significant portion of tariff differential claims, are not considered valid claims as they do not meet the requirements of consumer service manual issued by Nepra, and revenue recognition criteria provided in IFRS-15. Therefore, current accounting treatment has resulted in misstatements in financial statement for several years that are not just material, but pervasive.
He urged for consideration of Nepra and relevant functionaries of GoP, maintaining that delaying the resolution of important matters relating to tariff and settlement of dues has huge costs for consumers, investors, other stakeholders and citizens of Pakistan. “Therefore, I cannot overemphasize urgent resolution of matters of public importance, including those raised in this letter,” he concluded. Meanwhile, noted charter accountant Shabbar Zaidi has said that the statement by his colleague and friend is out of place and untimely.
“I had been the Senior Partner of largest and oldest accounting firm for six years and also the President of the Institute of Chartered Accountants. Other than tax I was leading special advisory segment of the firm and led the team with two of my Partners along with the support of our member firm Pricewaterhouse Coopers for MYT with Nepra,” he added.
According to Zaidi, there can always be disagreement on views however, it is totally uncalled for to make this kind of public statement without taking management into confidence.
“In summary, I can say very comfortably that the claim made by KE is totally justified and instead of helping the company in recovering a sum due to KE a friend in accounting community is entering into a technical debate which we can be answered in hundreds of pages. I will advice KE to engage with my friend and refrain from taking legal actions as it can be thought of one person not supported by proper understanding of the matter, background, accounting standards etc.,” he said.
Copyright Business Recorder, 2023
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