Enquiry:

Trust Deed and the Trust Rules made there-under are the constitutive documents of a Provident Fund Trust. These constitutive documents also spell out the accounting/ financial reporting and book keeping requirements of the Provident Fund Trust.

Financial statements of Provident Fund Trust are prepared in accordance with lAS 26 ‘Accounting and Reporting by Retirement Benefit Plans’. lAS 26 mandate valuation of investments of the Provident Fund Trust at fair value.

In case of some Provident Fund Trusts, the financial reporting provisions contained in the Trust Deed or the Trust Rules made there-under require that: a percentage of surplus arising on re-measurement of investments to fair value should not be appropriated among Provident Fund Trust Members; or a particular type of investment should be measured at cost; or a particular type of investment be measured at lower of fair value and cost etc.

Trustees of the Provident Fund Trust include such requirements in the Trust Deed the Trust Rules made there-under in view of prudence concept and to counter the demerits of fair value accounting of investments and in some cases to maximize the returns to Provident Fund Trust members

As the Trust Deed and the Trust Rules made there-under are the constitutive documents of a Provident Fund Trust, hence have an overriding effect on requirements of lAS 26. Please confirm this understanding.

Strength is also derived from the financial statements of open end mutual funds. In case of open end mutual funds, Trust Deed is the constitutive document and it is mentioned therein to amortize the preliminary expenses and flotation costs over a period of five years. Hence, requirements of constitutive document have an overriding effect on approved accounting standards. Accounting policy of “Preliminary expenses and flotation costs” and “Statement of compliance” of an open end mutual fund is reproduced below for ready reference:

“Preliminary expenses and floatation costs:

Preliminary expenses and floatation costs represent expenditure incurred prior to the commencement of operations of the Fund. These costs are being amortized over a period of five years commencing from _____, as per the requirement of the Trust Deed of the Fund.”

“Statement of compliance

These financial statements have been prepared in accordance with approved accounting standards as applicable in Pakistan. Approved accounting standards comprise of such International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board as are notified under the Companies Ordinance, 1984, the requirements of the Trust Deed, the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (the NBFC Rules), the requirements of the Non-Banking Finance Companies and Notified Entities Regulations, 2008 (the NBFC Regulations) and the directives issued by the Securities and Exchange Commission of Pakistan (SECP). Wherever the requirements of the Trust Deed, the NBFC Rules, the NBFC Regulations or the directives issued by SECP differ with the requirements of IFRSs, the requirements of the Trust Deed, the NBFC Rules, the NBFC Regulations or the directives issued by SECP prevail.”

Opinion:

The retirement benefit funds are established under the Trust Act, 1882 as separate entities in Pakistan and the trust deed is the incorporation document under which trust rules are formulated. The Trust Act, 1882 and the trust deed of the retirement benefit fund both require the preparation of financial statements for the funds but do not specify the applicable financial reporting framework under which the financial statements of the funds are required to be prepared. The generally accepted accounting framework in Pakistan is IAS/IFRS and for companies the requirement is emanating from section 234 of the Companies Ordinance 1984.

The accounts in Pakistan are required to be prepared in accordance with generally applicable framework so that they are comparable and understandable by the users. If the accounts are prepared in accordance with trust deed of each fund then they would not remain comparable. Trust deed can guide as to what is to be or not to be distributed but cannot override accounting policies which are required to be followed in accordance with IAS/IFRS. Hence, in view of the Committee IAS 26 will be the accounting framework of provident funds.

(November 12, 2015)