Brief facts of the enquiry

The Accounting Standards Board (the Board) has received an enquiry regarding the impact of subsequent recovery of a loan on the provision for impairment at the reporting date.

In the fact pattern described in the enquiry:

▪An entity, after its reporting date of December 31, 2020, receives cash from a customer. This cash represents recovery of an outstanding loan balance. The loan settlement agreement with the customer was executed on the reporting date. However, the proceeds from customer were credited to the entity’s bank account after the reporting date as the cheque through which the proceeds were transferred was also dated after the reporting date.

▪With this basic information, guidance has been sought on the impact of subsequent recovery of loan on the provision for impairment at the reporting date, under the three (03) scenarios relating to listed company, listed modaraba and a non-going concern modaraba.

Scenario A – Measurement of provision for impairment by a listed company under IFRS 9

Under this scenario, the reporting entity is a listed public company.

Company has calculated and recognized a provision (based on provision matrix) for impairment against the receivable balance from a customer, in accordance with IFRS 9, Financial Instruments. However, as noted in the basic information, subsequent to the reporting date and before the issuance of financial statements, company recovers the amount from the customer. In such a scenario, following questions have been asked in the submission:

–whether the recovery from the customer after the reporting date be considered as an adjusting event for the financial statements for year ended December 2020; and

–whether the provision (in context of the subsequent recovery) should be reversed in December 31, 2020 financial statements.

Scenario B – Measurement of provision for impairment by a modaraba, under the accounting and reporting standards as applicable in Pakistan

Under this scenario, the reporting entity is a financial services modaraba listed on Pakistan Stock Exchange.

Modaraba has calculated and recognised a provision for impairment against the receivable balance from a customer, based on provision matrix prescribed in the Modaraba Regulations. However, subsequent to the reporting date and before the issuance of financial statements, modaraba recovers the amount from the customer. In such a scenario, following questions have been asked in the submission:

–whether the recovery from the customer after the reporting date be considered as an adjusting event for the financial statements for year ended December 2020; and

–whether the provision (in context of the subsequent recovery) should be reversed in December 31, 2020 financial statements.

Scenario C – Measurement of provision for impairment by a non-going concern modaraba, under the accounting and reporting standards as applicable In Pakistan

Under this scenario, the reporting entity is a modaraba listed on Pakistan Stock Exchange and the financial statements for December 31, 2020 have been prepared on a basis other than going concern. In those financial statements, assets and liabilities are reported on the basis of their respective net realizable values.

Based on provision matrix prescribed in Prudential Regulations, modaraba has calculated and recognised a provision for impairment against the receivable balance from a customer.

In such a scenario it has been asked in the submission, whether the subsequent recovery will be reflected in calculating the net realizable value of receivables at the reporting date, despite the fact that recovery was made in subsequent period?

The Accounting Standards Board comments and conclusion

Scenario A

1.In the context of the submitted fact pattern, the Board noted that a public listed company is required to recognize an impairment allowance for receivable balance(s) in accordance with the expected credit loss (ECL) model of IFRS 9, Financial Instruments.

IFRS 9 requires measurement of expected credit losses in a way that reflects reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

2.The Board noted that IAS 10, Events after the Reporting Period, requires an entity to adjust the amounts recognized in its financial statements to reflect adjusting events after the reporting period.

3.The Board noted that IFRS 9 does not specifically require that new information that becomes available after the reporting date has to be reflected in the measurement of ECL at the reporting date. However, the Transition Resource Group for Impairment of Financial Assets (formed by International Accounting Standards Board with the aim of providing support for the implementation of the new expected credit loss requirements in IFRS 9) has discussed this matter in 2015.

4.The Board, based on the principles set out in IAS 10 regarding adjusting and non-adjusting events and discussions of Transition Resource Group for Impairment of Financial Assets, concluded that a listed company should apply judgement as per the specific facts and circumstances to determine whether a subsequent recovery of a receivable (I.e. cash recovery between the reporting date and the date the financial statements are authorized for issue) is an ‘adjusting’ or ‘non-adjusting’ event in accordance with IAS 10.

In case, a loan-specific information and related facts that existed at the reporting date is an ‘adjusting event’ in accordance with IAS 10, a listed company while applying IFRS 9 should update its estimation of credit losses as of the reporting date with the information about such adjusting event. In this regard, materiality considerations outlined with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, would also be relevant.

Scenario B

5.With regards to the fact pattern submitted by enquirer under scenario B, the Board noted that a modaraba is required to prepare its financial statements in accordance with the accounting and reporting standards as applicable in Pakistan. This financial reporting framework applicable to modaraba includes International Financial Reporting Standards (IFRS Standards) issued by the International Accounting Standards Boards (IASB) as notified under the Companies Act, 2017 and the requirements of the Companies Act, Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980, Modaraba Companies and Modaraba Rules, 1981 and Modaraba Regulations, 2021 (Modaraba Regulations). Further, wherever provisions of and directives issued under the above-mentioned statute differ from IFRS Standards, the provision of and directives issued under the statutory instrument should prevail.

6.The Board further noted that a modaraba is required to comply with the requirements of Modaraba Regulations, for the classification and provisioning for non-performing assets. In this regard, regulation 14 of the Modaraba Regulations, together with Schedule III thereof, specify a time-based classification and provisioning criteria. While, regulation 15 discusses the reversal of provisioning where there is cash recovery.

7.The Board also noted that IAS 10, Events after the Reporting Period, being part of IFRS Standards is also applicable to a modaraba. IAS 10 requires adjustment of the amounts recognized in its financial statements to reflect adjusting events after the reporting period.

8.The Board concluded that a modaraba should consider the requirements of IAS 10 while calculating and recognizing the provision for non-performing assets at the reporting date. A subsequent recovery against a loan could be an adjusting event based on the loan-specific facts and circumstances. A modaraba should update its provisioning as of the reporting date, consequent to the subsequent recovery, if such recovery is an adjusting event in accordance with IAS 10. In this regard, materiality considerations outlined with IAS 8 would also be relevant.

Scenario C

9.In context of the fact pattern submitted in scenario C, the Board noted that the statutory financial reporting framework (as noted in paragraph 5, above) does not change for a modaraba that is a non-going concern entity. In context of the submitted scenario, while preparing statutory financial statements, the requirements of Modaraba Regulations and IAS 10 would be part of the financial reporting framework applicable to a non-going concern modaraba.

10.The Board concluded that based on the conclusions outlined in scenario B, above, a modaraba should consider the requirements of IAS 10 in relation to treatment of subsequent recovery against a loan and determination of carrying value of such loan at the reporting date.

(Issued in September 2021)