AEL seeks exemption from IFRS-9 applicability

ISLAMABAD: M/s Altern Energy Limited (AEL) has approached Securities & Exchange Commission of Pakistan (SECP) for exemption from applicability of IFRS-9 financial instrument (trade debts) due to circular debt related financial woes of the company.

In this regard, Chief Executive of the company, Umer Shehzad has written a letter to Executive Director/ Head of Corporatization and Compliance Department, SECP, giving reference of SECP notification of September 13, 2021, and AEL letter dated March 31, 2021.

M/s AEL, in its letter of May 25, 2022, said that through the notification, companies holding financial assets due from the Government of Pakistan in respect of circular debt were exempted from the requirements contained in IFRS 9 (Financial Instruments) with respect to the application of Expected Credit Losses (ECL) Method till June 30, 2022 provided that such companies follow relevant requirements of “IAS 39 (Financial Instruments - Recognition and Measurement)” in respect of financial assets during the exemption period.

According to the company, the issues of circular debt has seriously affected the liquidity position of the Independent Power Producers (IPPs) and other companies operating in the energy and power sector in the past few years. In this regard, the Government has been trying to curb this grave issue by adopting different methods, but the situation is still deteriorating.

During the previous year, the Government had tried to curtail this issue via settlements with many IPPs formed under the 1994 power policy and under the 2002 power policy, wherein, the outstanding balances were partially settled in 2 instalments via cash, PIBs, and Sukuks; however, this was a temporary relief, and a lot more needs to be done to hinder the elevation of circular debt.

“We foresee that the complete resolution of circular debt will take some years depending upon sustained actions by the Government,” he said adding that late payments by the off-taker CPPA-G which includes amounts due for more than one year have resulted in the accumulation of huge receivables. If the company were to strictly apply IFRS 9, it will require recognizing an expected credit loss on receivables mainly because of their aging. The invoices are due for more than a year. The application of the impairment model provided in IFRS-9 will result in significant impairment losses on the outstanding invoices resulting in dilution of profit, as well as, erosion of retained earnings.

The CEO maintained that the application of the ECL method is in itself a complex calculation. It involves future economic data and forecasts, the time value of money, the probability analysis of the amount for a range of possible outcomes, and other significant assumptions to be made by the company’s management. The application gets further complicated if it is applied to IPPs facing a circular debt scenario where these assumptions become more subjective and may result in inconsistencies, between various companies and IPPS in particular, in applying the ECL method and the resultant impairment losses.

In view of prevalent scenario, AEL has requested SECP for an extension to the exemption from the application of IFRS-9 on trade debts.

The application of the impairment requirements as laid down in IFRS 9 will result in the following: (i) receivables from the off-taker, CPPA-G, are backed by the Government of Pakistan’s sovereign guarantee under the Implementation Agreement (IA) signed between the company and Private Power &Infrastructure Board (PPIB).

The impairment of Government guaranteed receivables will deteriorate the credibility of the Government, conveying a negative image to domestic and international investors;(ii) adverse impact on the ability of an IPP to pay dividends to its shareholders;(iii) ability of IPPS to borrow money in these times of serious liquidity crunch;(iv) significant impairment loss as a result of the application of IFRS 9 will deteriorate the perception of IPPs in relation to the capital market; and (v) application of IFRS 9 will also increase the variability of IPPs results from one period to another due to the GoP’s abnormal payment pattern.

In light of the submissions, AES has requested SECP to again extend its support to IPPs and extend the exemption to all IPPs facing circular debt issue from the application of IFRS 9 by issuing a requisite notification under the powers provided to SECP under Section 225(3) of the Companies Act, 2017.

An Affidavit duly certified by the CEO AEL along with the Challan for filing fee has been sent to the SECP.

It is unclear if the SECP has accepted the request of the company, as neither the CEO of the company nor SECP officials could be reached for comments.

Copyright Business Recorder, 2022