ISLAMABAD: The Port Qasim Electric Power Company (Private) Limited (PQEPC) has sought permanent exemption from the application of IFRS-9 on trade debts under the powers provided to the SECP under section 225(3) of the Companies Act, 2017.
The power company’s Chief Financial Officer (CFO) Mischa J Leonard, in a letter to Executive Director/Head of Department Corporation and Compliance Department, Securities and Exchange Commission of Pakistan (SECP), has explained that his request is in relation to the notification issued by the SECP on September 13, 2021, through which exemption from the application of Expected Credit Loss (ECL) method under IFRS-9 available to companies holding financial assets due from the Government of Pakistan in respect of circular debt was extended till June 30, 2022.
In this context, the PQEPC has highlighted that the circular debt situation has continued to worsen as huge receivables have accumulated on Port Qasim Electric Power Company (Private) Limited and other IPPs books. The PQEPC’s overdue amounts from Central Power Purchasing Agency (Guarantee) Limited (CPPA-G) are a direct result of the circular debt and the application of the impairment model provided in IFRS-9 (for overdue receivables) will result in huge impairment loss resulting in significant dilution of profitability erosion of the PQEPC’s retained earnings.
The PQEPC, in its letter has sought permanent exemption from the application of IFRS-9 on trade debts on the same grounds as were applicable previously, some of which are as follows: The application of IFRS-9 will increase the variability of IPPs results from one period to another due to the abnormal payment patterns followed by the Government of Pakistan through the CPPA-G.
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According to the power company, this volatility in results from one period to another may give misleading results to the users of the financial statements. Furthermore, as there is no firm timeline from CPPA-G for settlement of these receivables, it would be very difficult to estimate the expected credit loss. Also, different assumptions by different IPPs and auditors will significantly affect the comparability of numbers between IPPs.
The company maintains that impairment on government-guaranteed receivables will deteriorate the credibility of the Government of Pakistan. This will send a negative image of the GoP to domestic and international investors and can hamper future foreign direct investments.
“The impairment loss will also adversely impact the lenders’ covenants and may result in breach of loan covenants. This will also negatively impact the ability of the IPPs to borrow money for working capital requirements in these times of financial crunch,” said the CFO of the company.
The company is of the view that application of IFRS-9 will restrict the ability of the IPPs to declare dividends to their shareholders. The IPPs are already suffering from the circular debt issue and will face additional negative financial impact of impairment losses on their receivables as the impairment losses recognised will lower their available profits for distribution.
Given the facts and the prevailing circumstances, the company has requested for a permanent exemption from the application of IFRS-9 under the powers provided to the SECP under section 225(3) of the Companies Act, 2017.
Earlier, several other power generation companies have approached the SECP for exemption from applicability of IFRS-9 as it will hit them due to abnormal payments.
Copyright Business Recorder, 2022
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