Enquiry:

The object of the public unlisted company (“the Company”) is to establish, purchase construct and maintain hospitals, nursing homes and other allied health care facilities. The Company is categorized as medium-sized company and in pursuance of SRO 23(1)/ 2012 dated January 16, 2012 (previously SRO 860(I) I 2001 dated August 21, 2007) requires being compliant with the Accounting and Financial Reporting Standards (AFRS) for Medium-sized Entities (MSEs);

(i) The Accounts revealed that the Company disposed of its ‘Land’ during the years ended June 30, 2011, 2012 and 2013 and recorded / accounted for gains as ‘Profit on sale of
Patients’ Rooms’. Details of which are as under, figures are fictitious:

Years                                                 2011             2012              2013
Land (disposed of)                         120M          20M                100M
Profit on Sale of Patients’ Room 2M               0.5M                0.3M

(ii) The afore-referred disposal of land as ‘Sale of the Patients’ Rooms’ was recorded on the basis of a ‘Sale Agreement’ with various individuals at different prices. Salient terms and conditions of the sale agreement are as under:

a) The buyer agrees to purchase a patient admission room category (private) from the Company for a price of Rs.— paid within one years in —equal Installments of Rs. —-
each, out of which Rs. — has been received as down payment;

b) The buyer after making complete payment of the room will own one patient admission room category (private) in the said hospital without the right to own land, roof and bathroom. The sale deed shall be registered with the Registrar and documentation charges shall be borne by the buyer;

c) Both the parties agree that 40% of the total monthly admission revenue will be retained by hospital for maintenance and running expenses and 60%will be paid to the buyer by 15 days of every month according to the policy of Company;

d) The seller agrees that the buyer will get income of one room from the first phase of construction of 100 rooms, of all categories, of hospital subject to the condition that the buyer has already paid the total price of the subjected room;

e) The buyer is entitled to transfer / sell the rights of the room(s) only with the consent of the hospital administration and the hospital will have the priority to buy back the room;

f) Room will only be used at the discretion of the management of Company for admission of patients as and when required basis without any interruption;

g) Board of Directors will be the final authority regarding all matters related to room(s);

h) Maintenance of the room(s) will be the responsibility of the hospital’s administration;

i) Room rent will be collected and disbursed by the Company ; and

j) Both the parties agree that the management of Company shall be indemnified from any sort of litigation, legal proceedings and the buyer shall refrain from such action. The management of Company reserves the right to revoke this deed due to such unhealthy action and room shall be taken over by the Company’s management and cost shall be refunded back after deduction of relevant expenditures;

(iii) The Clauses of the ‘Sale Agreement’ of the patients’ admission rooms indicate that risks and rewards were not fully transferred to the allottees as the control of the patients’ admission rooms remain with the Company. Hence this arrangement may not be considered as a valid sale; and

(iv) No mutation of sale was recorded in respect of sale of patients’ room. Reference to para 2 of the ‘Sale Agreement’, SECP also confirmed that they have not been provided any documentary proof that the ‘Sale Agreement’ is registered with the Registrar of Properties. First, the mutation of the respective property be marked and then process of registration of the ‘Sale Agreement’ can be initiated.

(v) The Accounts for the years ended June 30, 2011, 2012 and 2013 revealed that there is a reduction in ‘Land’ owing to the sale of constructed private patients’ rooms ( which are not separable from the ‘Land’).

2. In this regard, ICAP is kindly requested to provide technical opinion/ input on the following queries of the Department:

(i) Whether the Company accounted for the afore-referred transaction in accordance with applicable accounting standards i.e. AFRS for MSEs; and

(ii) If not, please provide the correct accounting treatment in accordance with AFRS for MSEs / lAS / IFRS.

Opinion:

The Committee considered your enquiry and its views are as follows:

(i) The Company, being a medium-sized company, is required to comply with the requirements of Accounting and Financial Reporting Standards (AFRS) for Medium-sized Entities (MSEs).

(ii) The terms and condition of Sale Agreement mentioned in point (b) and (c) of the enquiry clearly states that right to own land, roof and bathroom of the patient admission room will not be given to the buyer. Point (f) indicates that the hospital may be retaining control over the rooms which indicate that risks and rewards were not fully transferred to the allottees. In addition, the economic benefit will continue to arise in future in the shape of reimbursement of maintenance.

Based on additional information received, mutation of the sale of patients’ room was not undertaken and there is no information whether sales deeds were registered with the Registrar of Properties. Hence, we concur with your views that it is not a sale of land.

With regard to accounting treatment of this transaction, the Committee feels that the transaction may either be a:

– sale of right to use the room depending on the provisions of the contract, for which recognition and measurement criteria of intangible assets as given in Section 5 ‘Intangible Assets’ may apply;
or
– the transaction may also be an operating lease on which provisions of Section 4 ‘Leases’ of AFRS may apply.

The Sales Agreement provided to us does not explicitly explain the terms of contract neither we have all other relevant facts and information to make the judgment of applicability of either of the two options.

Certain provisions of IAS 38 ‘intangible assets’ and IAS 17 ‘Leases’ are not covered in AFRS for MSE, therefore, recognition and measurement requirements as given in respective IFRSs should be used for guidance.

The Committee would also like to draw your attention to the requirements of paragraph 5 and 7 of IFRIC 12 ‘Service Concession Arrangements’ which applies to public-to-private service concession arrangements, and may be used as analogy in this case.

(December 02, 2014)