CCP asks SECP not to issue directive on IAS-39 which would violate Competition Ordinance

ISLAMABAD (February 11 2009): The Competition Commission of Pakistan (CCP) has asked the Securities and Exchange Commission of Pakistan (SECP) to ensure that any directive on International Accounting Standards (IAS-39) should not violate the Competition Ordinance, 2007.

It has been learnt here on Tuesday that the CCP has dispatched a policy-note to the SECP about the IAS-39. The SECP should ensure that section 10 of the Competition Ordinance, 2007 should not be violated while issuance of directive pertaining to impairment in valuation of investment (accounting year 2008).

According to sources, Pakistani consumers and businesses are protected from deceptive marketing practices as per Section 10 of the Competition Ordinance. Under this section, no undertaking shall enter into deceptive marketing practices. The deceptive marketing practices shall be considered if an undertaking resorts to the distribution of false or misleading information that is capable of harming the business interests of another undertaking.

The distribution of false or misleading information to consumers, including the distribution of information lacking a reasonable basis, related to the price, character, method or place of production, properties, suitability for use, or quality of goods.

The CCP has noticed that the SECP is about to issue a directive on the IAS-39. The whole issue mainly related to the relaxation from application of International Financial Regulatory Standards (IFRS) or IAS.

The CCP sources are of the view that an attempt has been made to hide the losses occurred as a result of significant impairment in the value of equity investment by treating the loss as a capital loss and not as operational loss. The regulators are seriously considering to issue a directive in this regard.

This seemed to be misleading the investors and mis-information which could be a violation of section 10 of the Competition Ordinance, 2007. The overstatement of profits could mislead the investors and other stakeholders. The SECP directive should be in conformity with all relevant laws including Competition Ordinance. Before issuance of the directive, the SECP should consider the policy-note of the CCP.

Sources said that the SECP is examining the viewpoint of the CCP as per policy note on the IAS-29. According to the CCP policy-note, the CCP said that there appears to be a vociferous body of opinion urging that any impairment in investments available for sale based on equity values prevailing on December 31, 2008 should be recognised directly in the Balance Sheet as a diminution in equity rather than this being first recognised as a loss in the Profit & Loss Account. It is being strenuously argued that since the equity market was dysfunctional for about 100 days due to the imposition of a floor and that it only resumed ordinary functioning as late as on December 15 (upon removal of the floor) the period of half-a-month till the end of December is insufficient for the market to recover its normal equilibrium.

The CCP appreciate that this is debatable; so is, perhaps, the fact that IAS 39 (which was adopted as a global standard after considerable deliberation and soul-searching) is a comprehensive and sensible directive covering all aspects of financial asset recognition and measurement.

We also appreciate the fact that whether or not the impairment is recognised in the Profit & Loss Account, the financial position of the entity as reflected in the Balance Sheet remains the same.

The question really is whether the management's performance as displayed by the Profit & Loss Account should be impacted by the impairment suffered by financial assets which were in the nature of investments held for disposal, as and when necessary.

The further obvious question is whether the investor should be exposed to inconsistent treatment of the accounts and an effective cover-up of losses suffered (even if such losses may have occurred due to extraordinary circumstances, Acts of God, or other wholly unforeseen matters).

In this connection, the CCP has pointed out that an overstatement of profits by means inconsistent with established norms and practice would potentially misinform and mislead investors. It would not only be abhorrent to public interest but also may tantamount to a violation of Section 10 of the Competition Ordinance, 2007 on “Deceptive Marketing Practices”.

The CCP is sanguine that any directive by you will not require action in conflict with the letter or spirit of any law. You are requested to take into consideration the contents of this note in formulating an appropriate directive, if any, in the matter of IAS 39 reporting requirements, policy-note added.

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