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SECP needs to suspend impairment in valuation of investment for Accounting Year 2008

KARACHI (February 08 2009): The Securities and Exchange Commission of Pakistan (SECP) needs to suspend the impairment in valuation of investment for accounting year 2008. Views to the above were generally given at a meeting held on Saturday at the Institute of Chartered Accountants of Pakistan in Karachi.

The participants included representatives from banks, DFIs, leasing companies, investment banks, mutual funds and major broker-investors such as Arif Habib and Jahangir Siddiqui. Three representatives of SECP had come from Islamabad to listen to the stakeholders.

They expressed their views before the evaluators ie leading auditing firms on the accounting treatment of impairment in investment in listed securities and fixed investment bonds. They sharply disagreed with taking the impairment in profit and loss and called for taking it into account only into equity.

The argument was based on the premise that extraordinary situation had arisen in 2008 due to the imposition of floor for 110 days on the Karachi Stock Exchange and that December 31 values did not reflect the fair value of the available-for-sale or AFS investments. They called upon SECP to suspend the impairment clause in IAS-39 or else they would take legal recourse for establishing the fair value.

Surprisingly, the leading auditors at the meeting did not give any views. The meeting had been called at the behest of SECP and the views expressed would be forwarded to the regulators. The banking regulator – State Bank of Pakistan – was not present at the meeting.

ICAP is expected to forward the minutes of the Saturday meeting to SECP. And, then it is up to SECP to either agree or amend the earlier view taken by SBP and ICAP on the subject. Meanwhile, listed companies are keeping their accounts open until a firm decision is taken. So far, the regulators have taken a stance that the issue is not a regulatory but of valuation and it best be left to auditing firms and companies to value the investment.

Normally, cross-company investments are regarded as strategic in nature and therefore are treated as long term and not under the umbrella of AFS. However, IAS-39 explicitly provides for taking impairment of significant nature or for prolonged period into account for profit and loss. A midway proposal to amortise the impairment in valuation for two years has been rejected by MUFAP and SECP is now reconsidering the whole issue.

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