- THE ISSUE
The Institute has been a member body of the International Federation of Accountants (IFAC) ever since its establishment in 1973. In 2004 IFAC issued seven Statements of Membership Obligations (SMOs) and subject matter of one of them i.e. SMO 7 is ‘International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB). Being a member body of IFAC it is the Institute’s obligation to comply with this statement which requires that all member bodies should use their best endeavors:
(a) To incorporate the requirements of IFRSs in their national accounting requirements, or where the responsibility for the development of national accounting standards lies with third parties, to persuade those responsible for developing those requirements that general purpose financial statements should comply with IFRSs, or with local accounting standards that are converged with IFRSs, and disclose the fact of such compliance; and
(b) To assist with the implementation of IFRSs, or national accounting standards that incorporate IFRSs. To date, the IASB has issued fifteen IFRSs (i.e. IFRS 1 to 15) and it has made changes to various International Accounting Standards (IASs). In Pakistan, all of the IFRSs, except for IFRS 1, 9, 14 and 15, have been adopted and notified by the SECP on the recommendation of the Institute.
While the Institute has been pursuing the objective of adoption and use of international standards for the preparation of general purpose financial statements over the years, it has also been cognizant of the difficulties faced by small and medium sized entities for complying with full set of IFRSs that have been made applicable for listed companies.
Even the IASB has recognized the need for a simpler set of standards for small and medium sized entities. In 2009 IASB issued International Financial Reporting Standard for Small and Medium Entities (IFRS for SMEs) a self-contained standard of about 230 pages tailored for the needs and capabilities of smaller businesses. The standard was a result of a five-year development process with extensive consultation of SMEs worldwide.
On the recommendation of the Institute the SECP vide SRO No. 929/2015 dated September 10, 2015 has notified the ‘International Financial Reporting Standard for Small and Medium Sized Entities (IFRS for SMEs)’ and ‘Revised Accounting and Financial Reporting Standards (AFRS) for SSEs’ issued by ICAP. These standards are applicable on annual financial period beginning on or after January 1, 2015.
Consequently ICAP has withdrawn, for corporate entities, the AFRS for Medium Sized Entities and AFRS for Small Sized Entities issued in the year 2006. However, for non-corporate entities the old AFRS for Small Sized Entities will still be applicable.
- COUNCIL’S DIRECTIVE
2.1 The Council wishes to draw the attention of all members to paragraphs 5, 8 and 9 of the revised Preface to International Financial Reporting Standards which read as under:
- All Standards and Interpretations issued under previous Constitutions continue to be applicable unless and until they are amended or withdrawn. The International Accounting Standards Board may amend or withdraw International Accounting Standards and SIC Interpretations issued under previous Constitutions of IASC as well as issue new Standards and Interpretations.
When the term IFRSs is used in this Preface, it includes standards and interpretations approved by the IASB, and International Accounting Standards (IASs) and SIC Interpretations issued under previous Constitutions.
- IFRSs set out recognition, measurement, presentation and disclosure requirements dealing with transactions and events that are important in general purpose financial statements. They may also set out such requirements for transactions and events that arise mainly in specific industries. IFRSs are based on the Conceptual Framework, which addresses the concepts underlying the information presented in general purpose financial statements. Although the Conceptual Framework was not issued until September 2010, it was developed from the previous Framework for the Preparation and Presentation of Financial Statements, which the IASB adopted in 2001. The objective of the Conceptual Framework is to facilitate the consistent and logical formulation of IFRSs. The Conceptual Framework also provides a basis for the use of judgement in resolving accounting issues.
- IFRSs are designed to apply to the general purpose financial statements and other financial reporting of all profit-oriented entities. Profit-oriented entities include those engaged in commercial, industrial, financial and similar activities, whether organized in corporate or in other forms. They include organizations such as mutual insurance companies and other mutual cooperative entities that provide dividends or other economic benefits directly and proportionately to their owners, members or participants. Although IFRSs are not designed to apply to not-for-profit activities in the private sector, public sector or government, entities with such activities may find them appropriate
2.2 The Council desires to direct all members to ensure that in accordance with the obligations undertaken by the Institute the auditor, while expressing an opinion on financial statements, should satisfy himself that they do comply with the accounting standards as applicable in Pakistan which includes the IFRS /IFRS for SMEs and /AFRS, in all material respects and that in the event of any departure from or inconsistency with such standards, the auditors’ report should contain suitable qualification. It should however be emphasized that such standards do not override the local statutory provisions under Companies Ordinance, 1984 and the disclosure requirements under the Fourth and Fifth Schedules. Compliance with above mentioned accounting standards shall be mandatory in so far as such standards are not inconsistent with local regulations or standards and directives or pronouncements issued by the Institute.
2.3 Applicability of IFRS for SMEs and Revised AFRS for SSEs
2.3.1 Under the SECP directives, IFRS for SMEs is to be applied by:
- Medium Sized Companies; and
- Small and Medium Sized Company formed/licensed under Section 42 and Section 43 which has an annual gross revenue including other income / revenue of less than Rs.200 million.
Whereas the ‘Revised Accounting and Financial Reporting Standards for SSEs’ is applicable on Small Sized Companies.
2.3.2 The Institute directs its members that while expressing an opinion on financial statements of MSEs and SSEs they shall ensure compliance with the IFRS for SMEs Revised AFRS for SSEs and existing AFRS for SSEs (for non-corporate entities) respectively.
2.3.3 Following classes of companies have been defined in the Fifth Schedule to the Companies Ordinance 1984:
Medium Sized Company (MSC)
A non-listed company which is not a:
- a) Public Interest Company; or
- b) Large Sized Company; or
- c) Small Sized Company other than a non-listed public company
Public Interest Company (PIC)
A non-listed company which is:
a) a public sector company as defined in the Public Sector Companies (Corporate Governance) Rules, 2013;
b) a public utility or similar company carrying on the business of essential public service;
c) holding assets In a fiduciary capacity for a broad group of outsiders, such as a bank, Insurance company, securities broker/dealer, pension fund, mutual fund or investment banking entity;
d) in the process of filing its financial statements with the Securities and Exchange Commission of Pakistan (SECP) or other regulatory organization for the purpose of issuing any class of instruments in a capital
Large Sized Company (LSC)
A non-listed company
a) which has a paid-up capital of Rs.200 million or more; or
b) turnover 1 billion or more.
Small Sized Company (SSC)
Other than a non- listed public company having:
a) Paid up capital not exceeding Rs.25 million; and
b) Turnover not exceeding Rs.100 million
2.4 Effective Date
Effective date as per the SECP SRO 929 dated September 10 2015 is annual financial periods beginning on or after January 1, 2015.
2.5 The Institute further directs its members that while expressing an opinion on financial statements of entities that do not qualify to be treated as MSC or SSC as per the definition given in paragraphs 2.3.3 above (except for public utility entities or similar entities that provide an essential public service or regulatory agencies that do not fall under the jurisdiction of SECP, they shall ensure compliance with the IFRSs as adopted by the Council and notified by the SECP under section 234(3) of the Companies Ordinance, 1984.
2.6 Furthermore, while expressing an opinion on financial statements of public utility entities or similar entities that provide an essential public service or regulatory agencies that do not fall under the regulatory jurisdiction of SECP, such entities shall ensure that accounting frameworks as prescribed in their relevant statutes are complied with. However, where the relevant statute is silent or does not prescribe any accounting and financial reporting framework or treatment, the Institute recommends that such entity shall comply with IFRSs as applicable.
2.7 This statement is and shall be deemed to be a directive of the Council and shall be applicable to any International Financial Reporting Standard which may be issued in future unless otherwise specified by the Council. Non-compliance with this directive shall be deemed to be a professional misconduct in terms of clause (3) of Part 4 of Schedule I to the Chartered Accountants Ordinance, 1961.
(271st meeting of the Council January 9, 2016)