KARACAHI (January 28 2009): In order to avoid subjectivity in mark to market of investments held by banks, the State Bank of Pakistan has allowed banks to use the market price prevailing on December 31st, 2008 for listed securities while preparing their financial statements.
Banks currently hold three types of investments: fixed income securities, equity market securities and investment in Associates and subsidiaries. The KSE-100 index has suffered 65 percent decline in 2008, while the off-market transaction was even lower. This had led to a disagreement between auditors and bank management on establishing a fair market price for quoted securities.
Steep rise in interest rates last year has also adversely impacted the value of fixed income securities. Banks had been pleading with SBP to exempt the mark to market adjustment through profit and loss and allow, however, the hit to be taken in their equity and reserves.
Banks had conceded to take the deficit into account for payment of dividends and calculating Capital Adequacy Ratio. This plea of some banks for relaxation to avoid unnecessary volatility in profit and loss due to volatile market conditions has been turned down. And, SBP has issued the following circular for revaluation of investments:
REVALUATION SURPLUS/DEFICIT: Please refer to BSD Circular No 10 dated July 13, 2004 and subsequent instructions on the captioned subject. State Bank of Pakistan has been approached by Pakistan Banks' Association as well as individual banks on the matters relating to determination and treatment of Revaluation Surplus/Deficit on listed equity investments, TFCs and Sukuks.
It is clarified that Banks/DFIs may use market prices as prevailing on 31st December 2008, for the purchase of preparing Annual Financial Statements for the year ended 31st December, 2008. Furthermore, the Surplus/Deficit so determined will be reflected in the Profit and Loss Account/Balance Sheet of the bank/DFI in accordance with the existing instructions issued from time to time on the subject.