SECP - Fair Value of 'AFS' Equity Investments

[kamranACA]

Dears,

SECP today issued a Notification SRO 150(1)/2009 whereby directing the companies to use market rates of 31 December 2008 for calculating the fair values of available for sale (AFS) listed equity securities. It directs that the resulting IMPAIRMENT loss (which is off course significant and prolonged) will be taken directly to equity (through statement of changes in equity instead of charging to profit and loss account).

This means such impairment will be debited to the fair value reserve instead of charging as expense.

However, the notification imposes the condition that while declaring dividend, any such impairment carried to Equity will be considered as have been charged to Profit and Loss account. This means that no dividend could be paid to that extent.

On one side SBP and SECP had substantiated through earlier circulars that market rates of 31 December 2008 have to be considered the active market rates. Now, the regulator has waived off / changed the requirement of IAS 39. I don't see any sanity in the manner this whole matter has been lingered on and finally decided.

Specially the entities which have finalized their accounts and got qualifications in auditors reports are most affected of this delayed notification. Regulators, some how, are not playing their part of game efficiently and effectively. The rule of law does not exist and no body can ever dare to push such non-sense regulators to the court of justice. I wonder if some other Iftikhar Ch. would arise to oversee these criminal delays, over-looking and "stakeholders affected" decisions by a regulator.

We saw another instance of SECP where its two departments (NBFC and Enforcement) at the same date issued two conflicting clarifications regarding the time limitation for holding AGMs after change in CO84. No one pulled the dummy regulators into the court of justice.

I wonder when professionalism would be seen in such institutions. Off course our institutions and justice procedures have been materially destroyed.

These are my personal views and do not depict a professional opinion.

Regards,


KAMRAN.

[Pracs]

If nothing else its spirited the stock market even if a couple of hundred points

[Muhammad Amir]

I think this has done mainly due to Tax implications. Government does not want to lose Tax revenue just because of these artificial crises.

[tariqab]

Dears

In case of financil assets at fair value thru profit & loss a/c, can we treat them as AFS as per IAS-39. I think IAS-39 will not permitt such change. I need your suggestion, if we made disclosure "change in accounting policy" for above mentioned change, is it feasible.

Regards
Tariq

[kamranACA]

Tariq,

If you have recognised a financial asset as through profit or loss, you cannot re-clasify it out of this category merely by changing the accounting policy. This is as per draft of IAS 39 (revised 2003) applicable in Pakistan so far.

However, IAS 39 has again been recently changed, which changes have not so far been adopted in Pakistan being a latest development. These amendments provide some conditions and stipulations where such category could be changed.

If you need a copy of those amendments you can visit IFAC / IASB webpages or tell me your e-mailing ID. I will e-mail you those amendments. However, such amendments are yet to be adopted in Pakistan.

Regards,


KAMRAN.

[kamranACA]

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.

[tariqab]

Dear Kamran

can you send IAS-39 ammendments as you mentioned in your post my email.

[email protected]

Thanx in advance

Regards
Tariq

[kamranACA]

Tariq,

The amendments in IAS 39 (October 2008) have been e-mailed to you along with two press releases.


Regards,


KAMRAN.

[tariqab]

Dear Kamran

First thanks for your email. Despite of this amendments, we can not reclssify financial assets thru profit and loss, because from intial it is designated as it is. Ref para 5(b)(c)

Regards
Tariq

[kamranACA]

Yes, I told there are certain conditions and stipulations.