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SECP grants relaxation on accounting treatment for equity securities as required under IAS-39

ISLAMABAD (February 14 2009): The Securities and Exchange Commission of Pakistan (SECP) has granted relaxation in the accounting treatment for equity securities held by the companies under the head 'Available for Sale' as required under International Accounting Standard “Financial Instrument: Recognition and Measurement” (IAS 39).

The SECP issued SRO 150(I)2009 here on Friday to relax accounting treatment for equity securities of companies under the IAS. According to details issued by the SECP, the relaxation is valid till December 31, 2009 and has been granted in the light of representations from various stakeholders including Mutual Funds Association of Pakistan (MUFAP), Insurance Association of Pakistan (IAP), Pakistan Banking Association (PBA), Leasing Association of Pakistan (LAP), Modaraba Association of Pakistan (MAP), Karachi Stock Exchange (KSE) and the corporate sectors.

The SECP had convened detailed meetings with all relevant institutions and bodies including ICAP and the leading chartered accountancy firms. Throughout this period, very close co-ordination and consultation were maintained with SBP to ensure that there is a consistent accounting treatment throughout the country.

The final decision on this issue was taken by both regulators unanimously and simultaneously so that the uncertainty that had recently been generated on this issue should come to an end as many companies were in the process of finalising their annual accounts and half yearly accounting statements, the SECP said.

Stakeholders had requested relaxation in the said accounting treatment citing prevalent market conditions, closure of stock markets for four months and very low trading volumes on the stock markets which had made the application of impairment tests (ie, arriving at fair valuation) difficult.

Before taking this step extensive consultation with major stakeholders was held by SECP. In this connection, a meeting was convened by ICAP at their head office on February 7, 2009. In this meeting the stakeholders were of the view that the current economic conditions in the country are “rare circumstances” and the plunge in the equity markets cannot be considered to be a fair reflection of equity values.

Under the existing accounting treatment related to recognition of impairment/decline in value of 'Available for Sale' equity securities through Profit and Loss account will not reflect the correct financial performance of the corporate entities. The SECP in its notification has also clearly stated that those companies who are willing to follow the full requirements of IAS 39 are encouraged to do so.

Through SRO 150(I)2009, the SECP has directed all companies that the impairment, if any, resulting from valuation of listed equity securities held as 'Available for Sale' in terms of International Accounting Standard 'Financial Instrument: Recognition and Measurement', (IAS 39), to market price as quoted on the stock exchange on December 31, 2008 be treated as follows:

Firstly, the impairment loss, if recognised as on December 31, 2008 due to valuation of listed equity investments held as 'Available for Sale' to quoted market prices of December 31, 2008 may be shown under the 'Equity'. Secondly, the amount taken to equity, including any adjustment/effect for price movements during the quarter calendar year 2009 shall be taken to Profit and Loss Account on quarterly basis during the calendar year ending on December 31, 2009.

Thirdly, the amount taken to 'equity', shall be treated as a charge to account for the purposes of dividend. The above dispensation shall be available to all companies and mutual funds. The notification has further elaborated that the companies to which section 16 of the Accounting and Financial Reporting Standards for Medium and Small Sized Entities applies may also opt for the above treatment. The SECP has stated that the companies and mutual funds willing to follow the full to do so requirements of IAS-39 are encouraged to do so.

All companies and mutual funds opting for this treatment shall disclose prominently on the face of their Balance Sheet, Profit and Loss Account and Directors' Report the parameters used by them in determination of the value of their investments and the figures arrived at under both the regular and especially opted accounting treatment, that is to say, the requirements of international Accounting and Reporting Standards regarding disclosure of such departure have been complied with, the SECP added. The SECP has used powers conferred under the Companies Ordinance, 1984 and Securities and Exchange Commission of Pakistan Act, 1997 to implement the decision.

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