Brief facts of the enquiry:

The Accounting Standards Board (the Board) received a request to share its comments on an application filed by a company for exemption from IFRS 9 Financial Instruments.

In the enquired fact pattern, the enquirer is required to prepare statutory financial statements in accordance with the accounting and reporting standards as applicable under the Companies Act, 2017 (the Companies Act). Further, the enquirer is an associated company of a licensed Non-Banking Finance Company (herein after referred to as “the associated NBFC”).

The enquirer also submitted that:

•Under the Companies Act, IFRS 9 is applicable from July 01, 2019. However, Securities & Exchange Commission of Pakistan (SECP), through S.R.O. 273(I)/2020 (dated March 30, 2020) has deferred the effective date of IFRS 9 for NBFCs. IFRS 9 is applicable to NBFCs from June 30, 2021 (while earlier application is permitted).

•The associated NBFC is not applying IFRS 9 as it has availed the above noted deferment granted by SECP.

•The enquirer is required to account for the associated NBFC (being an associated entity) under the equity method of accounting of IAS 28 Investment in Associates and Joint Ventures. IAS 28 requires that the associate’s financial statements shall be prepared using uniform accounting policies for like transactions and events in similar circumstances.

•As associated NBFC has availed a statutory relaxation (from IFRS 9), application of IFRS 9 by enquirer would make its accounting policy different from its associated NBFC.

The enquirer based on above scenario submitted that exemption from the application of IFRS 9 be allowed to the enquirer.

Opinion:

The Board noted that the enquirer, in its separate financial statements, has elected to account for its associated NBFC by using the equity method as described in IAS 28.

The Board noted that paragraph 35 of IAS 28 requires that an associate’s financial statements shall be prepared using uniform accounting policies for like transactions and events in similar circumstances.

Paragraph 36 of IAS 28 explains that if an associate uses accounting policies other than those of the entity for like transactions and events in similar circumstances, adjustments shall be made to make the associate’s accounting policies conform to those of the entity when the associate’s financial statements are used by the entity in applying the equity method.

The Board observed that the enquirer while preparing its statutory financial statements is required to apply IFRS 9. The Board also noted that the enquirer requested for exemption from IFRS 9 on the basis that IFRS 9 exemption is available to the enquirer’s associated company (which is a NBFC).

The Board noted that, in Pakistan, State Bank of Pakistan (SBP) and SECP being the banking sector and corporate regulators, respectively, have granted various general and sector specific exemptions/deferments from IFRS requirements. The Board observed that, there could be a situation where a particular company could be availing a regulatory exemption/relaxation from IFRS requirement, however, other group companies or investor of such company are not exempted and thereby required to follow the relevant IFRS requirement.

For the preparation of consolidated financial statements or separate financial statements (where equity method of accounting is applied), the above-noted situation raises the issue of uniformity of accounting policies. For example, in a group that includes a power sector company and a banking company, the power sector company would be required to follow IFRS 9 while the bank is presently not required to apply IFRS 9.

In context of the uniformity of accounting policies under the above scenario, based on a limited research of audited statutory financial statements of companies, the Board noted that adjustments for uniformity of accounting policies for like transactions and events are not made with regards to the statutory exemptions/deferments from IFRS requirements.

The Board observed that the benefit of relaxations/exemptions from IFRS requirements granted to a certain company should be considered while preparing consolidated financial statements or separate financial statements (where equity method of accounting is applied). Accordingly, when a specific accounting policy of a company is based on the SECP/SBP granted exemption then the investor or parent of such a company should not be required to apply uniform accounting policy for like transactions or events.

In all other cases, the parent or an investor (applying equity method of accounting) should make adjustments to the financial information of their subsidiaries or associates for uniformity of accounting policies.

The Board also recommended that SECP for the purpose of clarity and common understanding of all stakeholders, may consider issuing a directive to disseminate above views.

The Board concluded that in the submitted fact pattern:

(a)The enquirer while preparing separate financial statements should apply IFRS 9 to the transactions and events pertaining to it.

(b)Since, the associated NBFC has availed relaxation from the requirements of IFRS 9 under the Companies Act, and its accounting policy is based on such statutory relaxation, the enquirer while applying the equity method in its separate financial statements is not required to apply uniform accounting policy by making adjustments to the associated NBFC’s accounting policy (that is based on a statutory relaxation).

(Issued in September, 2020)