Section 208 of Companies ordinance, 1984

[wsafca]

Dear all! and specially Kamran bhai

Section 208 implies certain restrictions on investments in associated undertakings.

My questions is

Two companies that are associated are sharing common office.
Office expenditure are paid by one company and a percentage of cost is billed to the second. The said billed amount is outstanding for years, for more than 10 years..

Whether this "financing" by the company is considered under section 208.

[kamranACA]

Dear

This is very critical and quality question, I must say at the outset.

The word "Investment" has been defined in Section 208 of CO84 and it includes the financial support provided in a number of ways (eg, equity financing, debt financing and other arrangement that is not normal trade credit etc).

Sharing of offices, utilities, employee services and other common facilities is typically not treated as "investment" and is indirectly assumed within the definition of "normal trade credit".

However, even if normal trade credit is not paid for such a longer time, it should have been provided for impairment/written off or should have been clearly rescheduled to reflect the substance of the transaction and related balance.

A payable balance if not cleared within the limits of norms prevelant in the market, this is nothing but an indirect financial support that is being paid in CASH by the other associate in one way or other.

If provision for doubtful receivable is made it leaves no logic and legal basis to continue such arrangement further. If it is still continued even after providing or writing off the previous balance, it will render the expenditure incurred by other associate on common facilities to be QUALIFIEd by the auditors as "not for the purpose of the business" of that other associate.

If no impairment is charged (and no reschduling is agreed) even then auditors should qualify their report for doubtful unprovided balance and continued unjustified support to the associate.

The only way outs remain are either to recover the balance forthwith or enter into some rescheduling agreement, in which case, the current receivable balance may be needed to be recognised as long term receivable balance as per rescheduling terms. If this has to be done the approval of section 208 will be required by all means. Markup will be charged on rescheduled balance in consonance of section 208 and the recovery will have to be ensured strictly as per reschuling agreement. Markup rate should not be less than average borrowing rate of investing company. However, even after ensuring this condition if the mark up rate will be less than the market interest rate, fair value adjustments may also be rqeuired under IAS 39.

Recoveries against services provided after rescheduling of previous balance should be made as normal trade credit.

To summarize the things,

-provide or write off outstanding balance with BOD's approval and discontinue such arrangement forthwith; or

-forthwith recover entire balance and then continue to recover further amounts as normal trade credit; or

-enter into rescheduling agreement, obtain approval under section 208, charge markup not lesser than average borrowing rate of investing entity (if it is lesser than open market rate, adjustment under IAS 39 may also be required), recover installments as per repayment schedule agreed and treat next accruing amounts as normal trade credit and recover accordingly.

So this carries bunch of situations and give rise to many options and entails a complex accounting considerations.

Just to remind, section 208 of CO84 is now also applicable to private (as well unlisted or listed public) companies. Further, now probably such arrangement (under section 208)is also required to be endorsed/approved by Competition Commission of Pakistan (CCP) which charges substantial fees for such approvals. Mr. Khalid Mirza Zindabaad!!!

Further complexties you know!!!

Regards,



Kamran.

[Star]

Dear all,

Is any approval or endorsment required from CCP before entering transactions falling under section 208?


Please give the reference.



Regards,

*

[kamranACA]

Dear

So far the webpage of CCP and its fee schedule does not explicitly depict any provision or fee addressing such approvals under section 208 of CO84.

However, since this arrangement in fact calls for competition aspects to be reviewed, it's a general perception that CCP has or is planning to work on it as well.

There is a rumour that CCP has decided that such resolutions will be endorsed by CCP after reviewing competition aspects.

Let's see what the situation will unfold in the coming days.

Regards,



KAMRAN.

[wsafca]

Thanks Kamran bhai for your comprehensive solution to the situation

From point of view of the "Financee" (The company who has 'received' the finance, is there any implication of the fact on Auditors' report, specially if the company explains the situation clearly in notes.

I guess emphasis of matter para would be sufficient in this regard.

What do you think?

[kamranACA]

Dear

I don't even feel a need of emphasis of matter paragraph. However, its addition in the report is discretionary, and does not raise any issue if disclosures have already been made.

Regards,


KAMRAN.

[wsafca]

Thanks once again