02-14-2009, 05:15 PM
Amir,
In Pakistan tax liabilities are not determined on the basis of simple accounting profits. The impairment loss or fair value gain has no bearing with tax liabilities except in case of banks which under 7th schedule to ITO 2001 are expected to take such benefit. Seventh schedule was developed to reduce the differences between accounting and taxable profits of banks. However, FBR subsequently changed some rules regarding provisions for NPL under prudential regulations.
Currently it is construed that banks may be getting tax benefits for creating provisions against such impairment losses under 7th schedule. Banks are calculating provision for tax after taking into account such impirment losses. However, so many people including myself feel that it may not be going to happen when assessments will be finalized.
Let's see what happens.
The purpose of SECP's notification is to save the entities from reporting losses, and support the market sentiments by maintaining bottom line results etc. Normally, the civilized nations do not abondon/alter standardized requirements for such purposes at their own. This could however be achieved by some consensus at suitable public accountancy bodies. You would appreciate that this crises exists across the globe. However, you would rarely see such steps taken by other authorities in the world when there is already an adopted accounting standard for guidance.
In Pakistan stock market was ficticiously raised under the policies of Shaukat Azeez Govt. These companies kept on recognising millions of profits either realized or unrealized due to such rise. No body objected since it was in line with IAS 39. SECP did not interevene even knowing that market was ficticious. People kept on reporting higher EPS. Now, if it has gone down, why we are relucting to accept this ground reality. This is ridiculous.
SECP has committed three mistakes.
Firstly, it should have not abondoned or altered the requirements which have been adopted after worldover consensus more specially when SECP (and SBP) have earlier on indirectly declared that stock market rates of 31 December 2008 were active market rates.
Secondly, if it was a need of the hour by all means, SECP should have declared that the stock market rates as at 31 December 2008 (or other reporting dates) do not depict active market rates. When the quoted rates are not the rates of active market, one has to go for some valuation techniques under IAS 39. SECP should have asked people to follow valuation techniques which suit them in the circumstances as per guidance of IAS 39.
Thirdly, if it had to be done, the action taken is much much delayed. Such notification should have come within the first week of Janaury 2009. Some entities have issued their accounts and had been qualified by the auditors. One can see the news papers of previous days where a company was much discussed for this problem.
The way out adopted by SECP against the requirements of IAS 39 was not a professional solution. If these are said to have been abondoned merely because SECP has the powers to do so under scetion 234 of CO 84 then the whole purpose of adopting these IFRSs as financial reporting framework becomes worthless in its essense. I say this because fair valuation is the problem of the world. Pakistan cannot stand alone in this crises by making over the result of its entities. Our companies are into cross border offerings.
This international issue cannot be ignored merely by closing eyes like a pegion. We will lose reliability of our reported figures.
Regards,
KAMRAN.
Note Edited for some comments about taxability of banks.
In Pakistan tax liabilities are not determined on the basis of simple accounting profits. The impairment loss or fair value gain has no bearing with tax liabilities except in case of banks which under 7th schedule to ITO 2001 are expected to take such benefit. Seventh schedule was developed to reduce the differences between accounting and taxable profits of banks. However, FBR subsequently changed some rules regarding provisions for NPL under prudential regulations.
Currently it is construed that banks may be getting tax benefits for creating provisions against such impairment losses under 7th schedule. Banks are calculating provision for tax after taking into account such impirment losses. However, so many people including myself feel that it may not be going to happen when assessments will be finalized.
Let's see what happens.
The purpose of SECP's notification is to save the entities from reporting losses, and support the market sentiments by maintaining bottom line results etc. Normally, the civilized nations do not abondon/alter standardized requirements for such purposes at their own. This could however be achieved by some consensus at suitable public accountancy bodies. You would appreciate that this crises exists across the globe. However, you would rarely see such steps taken by other authorities in the world when there is already an adopted accounting standard for guidance.
In Pakistan stock market was ficticiously raised under the policies of Shaukat Azeez Govt. These companies kept on recognising millions of profits either realized or unrealized due to such rise. No body objected since it was in line with IAS 39. SECP did not interevene even knowing that market was ficticious. People kept on reporting higher EPS. Now, if it has gone down, why we are relucting to accept this ground reality. This is ridiculous.
SECP has committed three mistakes.
Firstly, it should have not abondoned or altered the requirements which have been adopted after worldover consensus more specially when SECP (and SBP) have earlier on indirectly declared that stock market rates of 31 December 2008 were active market rates.
Secondly, if it was a need of the hour by all means, SECP should have declared that the stock market rates as at 31 December 2008 (or other reporting dates) do not depict active market rates. When the quoted rates are not the rates of active market, one has to go for some valuation techniques under IAS 39. SECP should have asked people to follow valuation techniques which suit them in the circumstances as per guidance of IAS 39.
Thirdly, if it had to be done, the action taken is much much delayed. Such notification should have come within the first week of Janaury 2009. Some entities have issued their accounts and had been qualified by the auditors. One can see the news papers of previous days where a company was much discussed for this problem.
The way out adopted by SECP against the requirements of IAS 39 was not a professional solution. If these are said to have been abondoned merely because SECP has the powers to do so under scetion 234 of CO 84 then the whole purpose of adopting these IFRSs as financial reporting framework becomes worthless in its essense. I say this because fair valuation is the problem of the world. Pakistan cannot stand alone in this crises by making over the result of its entities. Our companies are into cross border offerings.
This international issue cannot be ignored merely by closing eyes like a pegion. We will lose reliability of our reported figures.
Regards,
KAMRAN.
Note Edited for some comments about taxability of banks.
