The Securities and Exchange Commission of Pakistan has directed that the requirements of consolidation under section 237 of the 1984 Companies Ordinance and International Financial Reporting Standard-10 (IFRS-10) will not apply to investment by companies in mutual funds established under trust structure. It is to facilitate the mutual fund industry and in accordance with the intent and purpose of the legislature.
IFRS-10 deals with the preparation of consolidated financial statements of holding companies and subsidiaries. The scope of the definition of subsidiary and control given in the IFRS-10 was broader in nature. Due to this broader definition of subsidiary and control, financial sector was facing issues in consolidation of financial statements. In particularly asset management companies were of the view that applicability of broader definition of IFRS-10 to mutual funds will lead to risk of distortion and volatility in the financial statement of the asset management companies and their parent companies.
Further, preparing consolidated financial statements for asset management companies by consolidating the mutual funds under their management could hinder user's ability to assess their fair and true position. Therefore, they requested the SECP to review the applicability of IFRS-10 to consolidation of mutual funds with asset management companies. The State Bank also argued that the SECP should further analyse the applicability of IFRS-10 as it has an impact on banks and their subsidiaries.
In view of the above, the SECP considered that application of section 237 to holding company vis-à-vis its asset management company, which is its subsidiary within the meaning of section 237 is fully enforceable, but its application to the 'trust' or 'fund' it manages cannot be appreciated as it does not fall within the meaning of subsidiary as mandate under section 237. Moreover, if application of IFRS-10 is extended it will give distorted picture of accounts, which is against the intent and purpose of the ordinance.-PR