ISLAMABAD: The China Power Hub Generation Company (Pvt) Ltd (CPHGC) has sought the Power Division’s support for an exemption from the Expected Credit Loss (ECL) method under IFRS-9, citing the power sector’s circular debt as the primary reason for the request.
In a letter to the Power Division, the company’s Head of Finance referred to a notification issued by the Securities and Exchange Commission of Pakistan (SECP) on September 13, 2021 (SRO 1177(I)/2021), under which the exemption from the application of the ECL method under IFRS-9 for companies holding financial assets due from the Government of Pakistan in respect of circular debt was extended until December 31, 2024.
Highlighting the persistent issue of circular debt, the company stated that substantial receivables have accumulated in the accounts of the CPHGC and other Independent Power Producers (IPPs). While the government has taken various measures to address the challenge, the company noted that much more needs to be done to effectively curb the problem.
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According to the CPHGC, IFRS-9 requires overdue receivables to be recognised as losses primarily based on their aging.
However, the overdue amounts owed to the company by the Central Power Purchasing Agency (CPPA-G) are not the result of any action by the CPHGC, but rather stem directly from the circular debt crisis. Applying the impairment model prescribed under IFRS-9 would therefore lead to substantial impairment losses, significantly diluting profitability and eroding retained earnings.
In light of these factors, the company requested the Power Division to recommend to SECP the grant of a permanent exemption from the application of IFRS-9 on trade receivables, on grounds similar to those previously applied. These include: (I) Recognising impairment on government-guaranteed receivables would undermine the credibility of the Government of Pakistan and project a negative image to domestic and international investors, potentially discouraging foreign direct investment; (ii) the application of IFRS-9 would significantly increase volatility in IPPs’ financial results due to irregular payment patterns by the government. In the absence of a firm timeline from CPPA-G for settlement, loss estimation would remain highly uncertain, while differing assumptions by companies and auditors would impair comparability across the sector; (iii) recognition of large impairment losses would further weaken the already fragile capital markets and could trigger panic among IPP shareholders; (iv) Impairment losses may adversely affect lenders’ covenants and lead to breaches of loan agreements, further restricting IPPs’ access to financing amid acute financial stress; and (v) the application of IFRS-9 would limit IPPs’ ability to declare dividends, as impairment losses would reduce distributable profits and shareholder returns.
Given the prevailing circumstances, the company has urged the Power Division to facilitate a permanent exemption for all IPPs affected by circular debt from the application of IFRS-9. It has requested the ministry to recommend that SECP issue the requisite notification under Section 225(3) of the Companies Act, 2017.
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