This section includes queries on:

1. Corporate laws i.e. Companies Ordinance, 1984 and Code of Corporate Governance (2012)
2. Worker’s Welfare Fund (WWF) & Worker Profit Participation Fund (WPPF)
3. Others

1. CORPORATE LAWS

1.  Definition of ‘executives’

Enquiry:

Paragraph IV B of Part 1 to the fourth schedule to the Companies Act, 2017 defines “executive” as an employee, other than the chief executive and directors, whose basic salary exceeds twelve hundred thousand rupees in a financial year, for the purposes of disclosure required under paragraph VI 35 of the fourth schedule. Similarly, disclosures also have to be given for executives under paragraph V 29 of the fifth schedule to the Act, but the term ‘executive’ has not been defined in that Schedule.

Opinion:

Your attention to the following wordings of the fifth schedule of the Companies Act, 2017, which clearly states if an expression is defined in the fourth schedule it shall have the same meaning thereby the meaning of ‘executive’ will be same for both the schedules:

“Any word or expression used herein but not defined in the Act and/or fourth schedule shall have the same meaning as under the applicable Accounting Framework”.

Accordingly, the definition of executive contained in the fourth schedule of the Companies Act, 2017 will be relevant for the fifth schedule disclosure requirements.

(October 02, 2017)

2. Classification of companies under the third schedule of the Companies Act, 2017

Enquiry:

In paragraph 2 (a) of the third Schedule of the Companies Act, 2017, three conditions for a company to be classified as large sized company are given and after first two conditions word ‘or’ has been used, which clearly indicates that if anyone of the three conditions applies, the company will be large sized company. In paragraphs No. 3(a), 3(b) and 4 the words ‘or’ or ‘and’ have not been used, which creates a confusion that all or anyone of the given conditions are to be applied for a company to be a medium-sized company or small-sized company. SRO 929(1)2015 appropriately used these words for the classification of companies, but third schedule creates confusion. Please clarify.

Opinion:

The Board would like to highlight that under the Companies Act, 2017 the classification criterion has been re-defined/ revised, compared to the repealed Companies Ordinance, 1984 (through SECP SRO 929 of 2015).

We note that the wording “or” is inadvertently missing from the classification criteria for the medium-sized, private company under clause 3 (b). Further, the applicable accounting framework has erroneously been stated as Revised AFRS for SSEs whereas it should be International Financial Reporting Standards for SMEs.

The absence of wording “and” in the classification criteria for the small-sized company in clause 4 of Third Schedule is not relevant as all conditions are to be fulfilled for classification as a small-sized company. If anyone of the condition is not fulfilled the company will be classified as a medium-sized company.

(October 02, 2017)

3. Filing of financial statements with the registrar of companies

Enquiry:

Section 233(3) of the Companies Act, 2017 exempts private companies having paid up share capital not exceeding ten million rupees from filing of financial statement with the Registrar of Companies. On the other hand section 234 requires private companies having paid up share capital not exceeding one million rupees to file their financial statements with the Registrar.

It transpires that all companies have to file their financial statements with the Registrar of Companies, except private companies having paid up share capital more than one million rupees but not more than ten million rupees. We do not understand the logic to require micro companies to file their financial statements whether audited or unaudited and to exempt the sufficient larger companies having capital up capital up to ten million rupees, from filing of the financial statements.

Opinion:

The provisions relating to the audit and filing of financial statements by the companies have been prescribed in section 233 and 234 of the Companies Act, 2017. The filing related requirements are that:

• A private company with share capital less than 1 million is required to file authenticated financial statements (whether audited or not) with the registrar within thirty days from holding of meeting. (section 234)

• On the other hand, a private company having share capital not exceeding 10 million rupees is not required to file the financial statements with the registrar. (section 233)

We have noted that the above provisions need to be rationalised, as micro/ very small companies (share capital less than one million) have been directed to file their financial statements. Whereas, comparatively large sized companies (having share capital up to ten million rupees) are not mandatorily required to file their financial statements. Further, the Institute has highlighted this anomaly to SECP also.

(October 02, 2017)

4. Definition of associated company

Enquiry:

IAS 28 ‘Investments in Associates and Joint Ventures’ defines an associate as an entity over which the investor has significant influence. Significant influence has also been described as holding, directly or indirectly 20 per cent or more voting power in the investee.

Section 2 (4) of the Companies Act, 2017 gives four situations for a company to be an associated company:

(I) if a person holds not less 20% of the voting power in two companies, these two companies shall be associates for each other;
(2) if the companies are under common management or control or one is the subsidiary of another;
(3) managed modaraba; and
(4) if a person holds not less than 10% of the voting power in a company, he shall be an associated person of another person who also holds not less than 10% voting power in that company.

Our question is that, why has the situation of directly holding not less than 20% voting power not been mentioned in the law? Does it mean an investor holding 20% voting power in the investee is not an associate? More over the term ‘common management’ has also not been described. Please elaborate.

Opinion:

In relation to the accounting of associated companies, a new provision has been incorporated in section 225 of the Companies Act, 2017 through which the associated companies will be accounted for in the financial statements in accordance with the IFRS definition.

It is to be noted that the definition of the ‘Associated Company’ contained in section 2(4)
of the Companies Act, 2017 is relevant and applicable to all other regulatory matters under the Companies Act, 2017.

(October 02, 2017)

5. Query on Statutory Positions

Enquiry:

Mr. ZAMS is a qualified CA and holds following positions in a same group:

• Head of Internal Audit, Risk and Compliance in a Listed Modaraba, (on its payroll, dedicated function);
• Head of Internal Audit (acting as coordinator to a outsourced auditor’s firm) of an Investment Bank;
• Head of Internal Audit (acting as coordinator to a outsourced auditor’s firm) and Compliance Officer of a brokerage house; and
• Head of Internal Audit (acting as coordinator to a outsourced auditor’s firm) of an asset management fund and its three associated funds.
Does COCG allow one person to hold multiple statutory positions? Considering the above case as actual.

Opinion:

The Committee considered the requirements given in the Code of Corporate Governance 2012 (the Code) and the requirements given in the Companies Act 2017 (the Act).

THE CODE

The Committee would like to refer the revised ICAP Code of Ethics for Chartered Accountants 2015 (the Code of Ethics), which institutes the fundamental principles of professional ethics and provides a conceptual framework for applying those principles. One of the basic elements of the framework is ‘Independence’. It is important to note that independence of mind and in appearance is necessary to enable the chartered accountants to enable them to perform their functions without bias, conflict of interest or undue influence.

Your attention is drawn to the following sections of Part C of the Code of Ethics relating to Chartered Accountants in Business: (underline is ours)

300.6 A chartered accountant in business shall not knowingly engage in any business, occupation, or activity that impairs or might impair integrity, objectivity or the good reputation of the profession and as a result would be incompatible with the fundamental principles.

310.1 A chartered accountant in business may be faced with a conflict of interest when undertaking a professional activity. A conflict of interest creates a threat to objectivity and may create threats to the other fundamental principles. Such threats may be created when:

• The chartered accountant undertakes a professional activity related to a particular matter for two or more parties whose interests with respect to that matter are in conflict; or
• The interests of the chartered accountant with respect to a particular matter and the interests of a party for whom the chartered accountant undertakes a professional activity related to that matter are in conflict.

A party may include an employing organization, a vendor, a customer, a lender, a shareholder, or another party.

A chartered accountant shall not allow a conflict of interest to compromise professional or business judgment.

310.3 When identifying and evaluating the interests and relationships that might create a conflict of interest and implementing safeguards, when necessary, to eliminate or reduce any threat to compliance with the fundamental principles to an acceptable level, a chartered accountant in business shall exercise professional judgment and be alert to all interests and relationships that a reasonable and informed third party, weighing all the specific facts and circumstances available to the chartered accountant at the time, would be likely to conclude might compromise compliance with the fundamental principles.

In the light of above, the Committee is of the view that the Head of Internal Audit of one group company of a listed company can hold similar position in any other listed company of the same group, only where independence is not impaired and conflict of interest is not created while performing his/her statutory responsibilities with the other role.

Further, appropriate safeguards should be applied, when necessary, to eliminate the threats to compliance with the fundamental principles created by the conflict of interest or reduce them to an acceptable level.

THE COMPANIES ACT 2017

You are advised to ensure compliance, to the extent applicable in your case, with the related provisions of the Act which have been reproduced below for reference: (underline is ours)

2(45) “officer” includes any director, chief executive, chief financial officer, company secretary or other authorised officer of a company;

206. Interest of officers. (1) Save as provided in section 205 in respect of directors, no other officer of a company who is in any way, directly or indirectly, concerned or interested in any proposed contract or arrangement with the company shall, unless he discloses the nature and extent of his interest in the transaction and obtains the prior approval of the board, enter into any such contract or arrangement.

(2) ………………………

208. Related party transactions. (1) A company may enter into any contract or arrangement with a related party only in accordance with the policy approved by the board, subject to such conditions as may be specified, with respect to-

a) to e) ……………………………
f) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associated company:

Provided that where majority of the directors are interested in any of the above transactions, the matter shall be placed before the general meeting for approval as special resolution:

Explanation.- In this sub-section:

(a) the expression “office of profit” means any office:

(i) …………….
(ii) where such office is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(c) the expression “related party” includes-

(i) a director or his relative;
(ii) a key managerial personnel or his relative;……………….

(July 06, 2017)

6. Opinion required on treatment of Rebate

Enquiry:

We are an IT export oriented Public Unlisted Company (registered in Pakistan). The query is related to discount/ rebate given by our Company to one of its USA customer.

One of our USA customers has entered into an agreement with us for delivery of some specific software development related services.

There is only one legal agreement by the name of Master Corporate Service Agreement (MCSA) dated 01st February 2015 and there are two amendments in this MCSA effective from 1st February 2016 (10% quarterly rebate) and effective from 1st May 2016 (20% quarterly rebate) respectively. On 30th June 2016, 100% work has been delivered and 100% amount has been received against work done.

1. From agreement and amendment it is not clear that why we are paying this rebate, however, BOD is of the opinion that we are paying this amount as commission because we are getting business from them. NCR, our customer is procuring our services for one of its customer. It is emphasized that we have no direct link with that customer. We are delivering our work to NCR and receiving our all payments from NCR.

2. Payment on quarterly basis is the payment methodology/ timing whereas we are following accrual basis of accounting and we are booking rebate amount whenever we generate invoice (definition of liability is fulfilling) which means in any case we need to pay the rebate amount as agreed in amendment.

We have not yet paid any discount/ rebate amount to customer. As per agreement, this is rebate and there is no mention of ‘commission amount’. However, we are required to pay this rebate in cash to our customer.
The Institute is requested to give its opinion about the treatment of this amount as rebate (whether should it be deducted from gross sales) or as Commission expense (should become part of selling and marketing expense).

Opinion:

The Committee would like to refer clause 2 (a) of Part III “Requirements as to Profit & Loss Account” of the 4th schedule of the Companies Ordinance 1984 which states that Profit & Loss Account shall disclose the turnover after deduction of discount and sales tax.

Academically any reduction given to the customer on sales invoice (trade discount) is shown as a deduction from gross sales whereas cash discount (not mentioned on the invoice and arisen due to subsequent events like early payment by customer etc.) is shown separately as expense. In the given case although the rebate is not shown on the sales invoice but it is not dependent on a future event either.

In case of Commission, tripartite agreement shall be there where one is agent, one principal and one is customer/consumer. Since in this case, amount is payable to the same customer under a bilateral agreement, therefore, the Committee is of the view that it may be shown as a deduction from the gross sales and will not be treated as commission expense. Further, as the amount has not been paid so far to the customer, therefore, it would be accounted for on accrual basis as ‘payable’.

(October 20, 2016)

7. Section 208 of the Companies Ordinance, 1984

Enquiry:

We have encountered a technical issue at one of our client. There are two group companies of which one is public-unlisted, hereinafter referred as ‘First Company’, and the other is a private limited, hereinafter referred as ‘Second Company’. First Company has given loan to the Second Company and is charging interest on it under compliance of Section 208 of Companies Ordinance, 1984. The Second Company has no business operations at present and it also doesn’t have smooth financial cash flows which due to which it is sure that it will not be able pay back even the principal amount. Note also that the Second Company’s audit report is being issued with emphasis matter paragraph due to going concern issue. Therefore, we need ICAP’s assistance, whether we can reverse the interest accrued which seems to be dummy accrual in both of the companies and whether we can stop further accruals.

Furthermore, we also need to inquire that if we can classify the above mentioned loan as non-interest bearing payable at convenience of the First Company, then whether TR-32 is applicable on this financial instrument.

Opinion:

We would like to refer relevant clauses of section 208 of the Companies Ordinance, 1984 (the Ordinance):

“208. Investments in Associated companies and undertaking-

(1) Subject to sub-section (2A) a company shall not make any investment in any of its associated companies or associated undertakings except under the authority of a special resolution which shall indicate the nature period and amount of investment and terms and conditions attached thereto.

Provided that the return on investment in the form of loan shall not be less than the borrowing cost of investing company.

(2) No change in the nature of an investment or the terms and conditions attached thereto shall be made except under the authority of a special resolution.

(2A) The Commission may-

(a) by notification in the official Gazette, specify the class of companies or undertakings to which the restriction provided in sub-section (1) shall not apply; and

(b) through regulations made thereunder, specify such conditions and restrictions on the nature, period, amount of investment and terms and conditions attached thereto, and other ancillary matters, as it deems fit.”

Under section 208 of the Ordinance, the rate of return on loan should not be less than prevailing market rate of return on similar deposits or borrowing cost of the investing company. Further, section 208 of the Ordinance and clause 8 of the “Companies (Investment in Associated Companies or Associated Undertakings) Regulations, 2012” (the Regulations) explain that the terms and nature of the loan, and any subsequent change thereto shall be made with the authority of a special resolution of the investing company. However, section 208 and the Regulations do not permit provision of a non-interest bearing loan to the associated company, which is ultra-virus to law.

The impairment due to un-collectible status of financial assets is based on the entity’s assessment of receivables from the counterparties, and shall be dealt in accordance with the paragraph 58 of IAS 39 ‘Financial In¬stru¬ments: Recog¬ni¬tion and Mea¬sure¬ment’ (Volume 2009) and provisions of section 196 of the Ordinance.

In view of the above, the investing company shall consider the requirements of section 208 of the Ordinance to account for the interest on loan provided to the associated company.

(March 20, 2017)

8. Clarification regarding Section 230 & Auditors Report to the Members

Enquiry:

Section 230 of the Companies Ordinance 1984 deals with “Books of Account” and has several subsections. The sub-section 6 states:

Quote “The books of account of every company relating to a period of not less than ten years immediately preceding the current year shall be preserved in good order” unquote.

And whereas

– the Auditor’s Report to the members states:

Quote “We report that:

a) In our opinion, proper books of account have been kept by the Company as required by the Companies Ordinance 1984″ Unquote

Similarly under para 3, line 3 states:

Quote “An Audit includes examining on a test basis” Unquote

I request clarification whether the Auditor’s Report to the members confirms compliance of Section 230 including subsection 6 having been verified on test check basis by the external auditors or not?

Opinion:

The Committee would like to emphasis that both the above addressed matters are different. Section 230 of the Companies Ordinance 1984 deals with retention of records whereas auditor’s report addresses maintenance of proper books of account which means proper accounting, properly reconciled, etc.

The Committee would like to reproduce section 255(3) of the Companies Ordinance 1984:

(3) The auditor shall make a report to the members of the company on the accounts and books of accounts of the company and on every balance-sheet and profit and loss account or income and expenditure account and on every other document forming part of the balance-sheet and profit and loss account or income and expenditure account, including notes, statements or schedules appended thereto, which are laid before the company in general meeting during his tenure of office, and the report shall state-

(a)……

(b) whether or not in their opinion proper books of accounts as required by this Ordinance have been kept by the company;

An auditor is required to give an opinion that proper books of accounts have been maintained by the company for the relevant accounting period. An auditor is not required to perform extra procedures to verify whether or not books of account of last ten years have been preserved by the company.

(February 11, 2015)

9. Clarification on the definition of ‘Subsidiary’ in terms of Section 237 of the Companies Ordinance, 1984

Enquiry:

The Companies Ordinance, 1984 (the “Ordinance”) in its Section 3 lays down the definition of ‘subsidiary’ and ‘holding company’ as follows:

“Meaning of “subsidiary” and “holding company”.-(1) For purposes of this Ordinance, a company or body corporate shall be deemed to be a subsidiary of another if –

(a) that other company or body corporate directly or indirectly controls, beneficially owns or holds more than fifty per cent of its voting securities or otherwise has power to elect and appoint more than fifty per cent of its directors; or

(b) the first mentioned company or body corporate is a subsidiary of any company or body corporate which is that other’s subsidiary;

Provided that where a central depository holds more than fifty percent of the voting securities of a company, such company shall not be deemed to be a subsidiary of the central depository save where such voting securities are held beneficially by the central depository in its own behalf.

(2) For the purpose of this Ordinance, a company shall be deemed to be another’s holding company if, but only if, that other is its subsidiary.”

2. In view of this, if a Company ‘A’ holds, owns or directly controls more than 50 percent of the shares of another company ‘B’, any such company ‘B’ would become the subsidiary of company ‘A’ without any doubt.

3. However, since the financial and operating policies of an organization are governed by the board of directors of a company. Decisions are made through majority rule in a board of directors meeting. Accordingly, there can be certain instances where a company ‘A’ holds, owns or directly controls quite less than 50 percent of the shares of another company ‘B’ (assuming that company ‘B’ does not hold any shares of company ‘A’), but both the companies have common board/ directorship or they have majority of the board members in common. In this scenario, the Commission would like to seek the views of the Institute of Chartered Accountants of Pakistan (ICAP) as to whether the company ‘B’ would be the subsidiary company of company ‘A’. What impact would this scenario have if the chief executive of company ‘B’ is one of the common directors, as chief executive is a position that brings with it, the control of the company in which the person is the chief executive officer?

4. Moreover, there can be such other instances where a company ‘A’ holds, owns or directly controls quite less than 50 percent of the shares of another company ‘B’ (assuming that company ‘B’ does not hold any shares of company ‘A’), but both the companies have common board / directorship or they have majority of the board members in common, and the total number of shares of company ‘B’ are held by all the common directors and the company ‘A’, which, in aggregate, constitute a collective holding of more than 50 percent shares of company ‘B’. So, the Commission would also like to seek the views of the ICAP in this scenario as to whether the company ‘B’ would be the subsidiary company of company ‘A’, as company ‘A’ directly and indirectly holds or controls more than 50 percent shares of company ‘B’. What impact would this scenario have if the chief executive of company ‘B’ is one of the common directors? Will it further strengthen the indirect control of company ‘A’ over company ‘B’?

5. It would be pertinent to state that the definition of subsidiary in Ordinance clearly refers to both direct as well as indirect control and at the same time the Ordinance does not further define the term “control” (be it direct or indirect).

6. For ease of reference, the 9th Edition of the Black’s Law Dictionary was also referred, which defines the term ‘control’ as:

“control, n (16c) The direct or indirect power to govern the management and policies of a person or entity, whether through ownership of voting securities by contract, or otherwise; the power or authority to manage, direct, or oversee <the principal exercised control over the agent>

control, vb. (15c) 1. To exercise power or influence over <the judge controlled the proceedings>.
2. To regulate or govern <by law, the budget office controls expenditures>. 3. To have a controlling interest in <the five shareholders controlled the company>.

7. From the above-quoted definition of the term ‘control’, it is quite evident that control is fairly attributable to the direct or indirect power or influence to govern the management and policies of a company, regardless of the fact that such control or power has been acquired or is exercised by means of ownership or otherwise.

8. Your timely valuable opinion in the matter discussed hereinabove would enlighten us and would help the Commission in implementing and enforcing the relevant provisions of the law, accordingly.

Opinion:

The Committee considers that the issues highlighted by you are very relevant for corporate structure in Pakistan and would take more significance as IFRS 10 is applied. The Committee also considers that in addition to analysis for the purposes of Companies Ordinance, 1984 (the Ordinance), this analysis should also be carried out for accounting purposes i.e. whether or not these may be regarded as subsidiaries under IAS 27 or IFRS 10. Before this analysis, for ease of reference we have briefly quoted some of the paragraphs of IAS 27 and IFRS 10. However, we emphasize that for each situation all facts and circumstances need to be examined and there may be other paragraphs of the standard which may be relevant.

IAS 27 ‘Consolidated and Separate Financial Statements’ (2008)

Definitions

Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

13. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists when the parent owns half or less of the voting power of an entity when there is:
(a) power over more than half of the voting rights by virtue of an agreement with other investors
(b) power to govern the financial and operating policies of the entity under a statute or an agreement;
(c) power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or
(d) power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.

IFRS 10 ‘Consolidated Financial Statements’

6. An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

7. Thus, an investor controls an investee if and only if the investor has all the following:
(a) power over the investee (see paragraphs 10–14);
(b) exposure, or rights, to variable returns from its involvement with the investee (see paragraphs 15 and 16); and
(c) the ability to use its power over the investee to affect the amount of the investor’s returns (see paragraphs 17 and 18).

17. An investor controls an investee if the investor not only has power over the investee and exposure or rights to variable returns from its involvement with the investee, but also has the ability to use its power to affect the investor’s returns from its involvement with the investee.

18. Thus, an investor with decision-making rights shall determine whether it is a principal or an agent. An investor that is an agent in accordance with paragraphs B58–B72 does not control an investee when it exercises decision-making rights delegated to it.

B38 An investor can have power even if it holds less than a majority of the voting rights of an investee. An investor can have power with less than a majority of the voting rights of an investee, for example, through:
(a) a contractual arrangement between the investor and other vote holders (see paragraph B39);
(b) rights arising from other contractual arrangements (see paragraph B40);
(c) the investor’s voting rights (see paragraphs B41–B45);
(d) potential voting rights (see paragraphs B47–B50); or
(e) a combination of (a)–(d).

B42 When assessing whether an investor’s voting rights are sufficient to give it power, an investor considers all facts and circumstances including:

(a) the size of the investor’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders noting that:
(i) the more voting rights an investor holds, the more likely the investor is to have existing rights that give it the current ability to direct relevant activities;
(ii) the more voting rights an investor holds relative to other vote holders, the more likely the investor is to have existing rights that give it the current ability to direct the relevant activities;
(iii) the more parties that would need to act together to outvote the investor, the more likely the investor is to have existing rights that give it the current ability to direct the relevant activities;
(b) potential voting rights held by the investor, other vote holders or other parties (see paragraph B47-B50)
(c) rights arising from contractual arrangements (see paragraph B40)
(d) any additional facts and circumstances that indicate the investor has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.

B58 When an investor with decision-making rights (a decision maker) assesses whether it controls an investee, it shall determine whether it is a principal or an agent. An investor shall also determine whether another entity with decision-making rights is acting as an agent for the investor. An agent is a party primarily engaged to act on behalf and for the benefit of another party or parties (the principal(s)) and therefore does not control the investee when it exercises its decision-making authority (see paragraphs 17 and 18). Thus, sometimes a principal’s power may be held and exercisable by an agent, but on behalf of the principal. A decision maker is not an agent simply because other parties can benefit from the decisions that it makes.

B73 When assessing control, an investor shall consider the nature of its relationship with other parties and whether those other parties are acting on the investor’s behalf (i.e. they are ‘de facto agents’). The determination of whether other parties are acting as de facto agents requires judgment, considering not only the nature of relationship but also how those parties interact with each other and the investor.

B75 The following are examples of such other parties that, by the nature of their relationship, might act as de facto agents for the investor:
(a) the investor’s related parties
(b) —- (d)
(e) An investee for which the majority of the members of its governing body or for which its key management personnel are the same as those of the investor.

An analysis of the three situations for the purposes of the Ordinance and for accounting purposes under IAS 27 and IFRS 10 could be as follows:

1. Company ‘A’ holds, owns or directly controls more than 50 percent of the shares of another company ‘B’

Companies Ordinance, 1984:

In the absence of any other agreement, the Company B would appear to be subsidiary of Company A.

IAS 27:

In the absence of any other agreement, the Company B would appear to be subsidiary of Company A. In the absence of any other agreement, the Company B would appear to be subsidiary of Company A.

IFRS 10:

An analysis of the factors other than voting rights e.g. identification of the relevant activities, understanding the purpose and design of an investee, other contractual arrangements, pattern of voting rights held by others, and specific voting rights for specific relevant activities etc. is also necessary to determine control over an investee.

2. Company ‘A’ holds, owns or directly controls quite less than 50 percent of the shares of another company ‘B’ but both the companies have majority of the board members in common

Companies Ordinance, 1984:

In the absence of any other agreement giving power to Company A to elect and appoint more than fifty per cent of directors of Company B, Company B would not appear to be subsidiary of Company A. The Company A does not seem to have power to elect and appoint more than fifty percent of directors of Company B.

The term ‘indirectly controls’ has not been defined in the Companies Ordinance. In the absence of any other instructions, the committee considers that the term used in paragraph 13 of IAS 27 ‘indirectly through subsidiaries’ should be applied.

IAS 27:

Under IAS 27, an investor may have control over an investee while holding less than 50% of the voting rights. Conditions given in para 13 of IAS 27 (reproduced above) need to be carefully reviewed for analyzing control.

In Committee’s view, by having common members on the respective board of directors, or by having Chief Executive Officer of Company B on the board of Company A, may not itself provide corroborative evidence that Company A has a control over Company B. All facts and circumstances would need to be analysed.

IFRS 10:

Under IFRS 10 as well, an investor can control an investee with less than the majority of voting rights. Refer paragraph B38 above.

For this to be the case all facts and circumstances reproduced in B42 above would need to be considered.

B75(e) gives example that an investee for which the majority of the members of its governing body or for which its key management personnel are the same as those of the investor, may act as de facto agents for the investor.

The Committee considers that common directorship is not a conclusive factor for determining control. Other factors like contractual arrangements and circumstances discussed above may also require judgment and need to be considered.

IFRS 10 includes number of application examples to illustrate the analysis that is required and the Committee would recommend referring them for guidance purposes.

3. Company ‘A’ holds, owns or directly controls quite less than 50 percent of the shares of another company ‘B’ but both the companies have majority of the board members in common, and the total number of shares of company ‘B’ are held by all the common directors and company ‘A’, in aggregate, constitute a collective holding of more than 50 percent shares of company ‘B’.

Refer case no. 2 above.

Note of Caution:

The Committee would like to highlight here that the above views are based purely on theoretical scenarios presented. Therefore, application of views presented above based on these theoretical scenarios to actual conditions without considering all relevant underlying factors in accordance with provisions of relevant applicable standards may not be appropriate.

(December 24, 2014)

10. Capitalization of Deferred Revenue Expenditure

Enquiry:

We would like to draw your kind attention towards a general issue related to Capitalization of Deferred Revenue Expenditure (Preliminary Expenses). According to para 69 (a) of International Accounting Standards-38 (IAS-38) Intangible Assets:-

QUOTED

“68     Expenditure on an intangible item shall be recognized as an expense when it is incurred unless:

a) it forms part of the cost of an intangible asset that meets the recognition criteria( see paragraphs 18-67); or

b) The item is acquired in a business combination and cannot be recgonised as an intangible asset. If this is the case, it forms part of the amount recognized as goodwill at the acquisition date (see IFRS 3).

69 In some cases expenditure is incurred to provide future economic benefits to an entity, but no intangible asset or other asset is acquired or created that can be recognised. In the case of the supply of goods, the entity recognizes such expenditure as an expense when it has a right to access those goods. In the case of the supply of services, the entity recognizes the expenditure as an expense when it is receives the services. For example, expenditure on research is recognized as an expense when it is incurred (see paragraph 54), except when it is acquired as part of a business combination. Other examples of expenditure that is recognized as an expense when it is include:

(a) Expenditure on start-up activities (i.e. start-up costs), unless this expenditure is included in the cost of an item of property, plant and equipment in accordance with IAS 16, Start-up costs may consist of establishment costs such as legal and secretarial costs incurred in establishing a legal entity, expenditure to open a new facility or business (i.e. pre-opening costs) or expenditure for starting new operations or launching new products or processes (Ice, preconditioning costs).”

UNQUOTED

Under the light of the above paragraph, it is not allowed to capitalize the preliminary expenditure in the period it is incurred.

According to the Section 25 of the Income Tax Ordinance, 2001, pre-commencement expenditures are allowable a tax expense for the purpose of calculating Taxable Income.

QUOTED

“25. Pre-commencement expenditure.- (1) a person shall be allowed a deduction for any pre-commencement expenditure in accordance with this section.

2) Pre-commencement expenditure shall be amortized on a straight line basis at the rate specified in Part III of the Third Schedule.

3) The total deduction allowed under this section in the current tax year and all previous tax years in respect of an amount of pre-commencement expenditure shall not exceed the amount of the expenditure.

4) no deduction shall be allowed under this section where a deduction has been allowed under another section of this Ordinance for the entire amount of the pre-commencement expenditure in the tax year in which it is incurred.

5) In this section- pre-commencement expenditure means any expenditure incurred before the commencement of a business wholly and exclusively to derive income chargeable to tax, including the cost of feasibility studies, construction of prototypes and trial production activities , but shall not include any expenditure which is incurred in acquiring land or which is depreciated amortized under section 22 or 24.”

UNQUOTED

Based on the above paragraph, we are of the opinion that in the financial statements the Deferred Revenue Cost should be capitalized, for the reason that incase the incremental laws conflicts with the local laws, the local laws will prevail.

Opinion:

The financial reporting framework as applicable in Pakistan comprises of IASs/ IFRSs, Companies Ordinance 1984 and notifications issued by SECP as explained in ICAP Circular No. 7 of 2007. The relevant extracts of the circular is as follows:

The Professional Standards and Technical Advisory Committee in its 56th meeting held on September 10, 2007 also reviewed the following draft of the Statement of Compliance to be included in the financial statements of companies other than MSEs and SSEs:

“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 (IFRS) issued by the International Accounting Standards Board as are notified under the Companies Ordinance, 1984, provisions of and directives issued under the Companies Ordinance, 1984. In case requirements differ, the provisions or directives of the Companies Ordinance, 1984 shall prevail.”

It is clear from reading the above that financial reporting framework as applicable in Pakistan does not include Income Tax laws. Further, under Section 25 of the Income Tax Ordinance, 2001, pre-commencement expenditures are allowable only as tax expense for the purpose of calculating Taxable Income.

The Committee is of the opinion that there is no ambiguity in the accounting treatment of preliminary expenses in IASs/ IFRSs and Companies Ordinance 1984 and these should not be capitalized.

(March 19, 2014)

11. Auditor’s QCR Status in case of Co-Audit

Enquiry:

Kindly refer to the requirement that auditor of ESE should have satisfactory QCR rating.

The question is that in case of co-audit whether both the auditors should be QCR certified or not.

Opinion:

The Committee would like to refer the following wordings of SECP SRO 268(1)/2012 dated March 16, 2012 which relates to the issue:

“………….the SECP is pleased to direct all non-listed companies, falling under the definition of ‘economically significant companies’ in terms of clause (iii) of para 2 of Part-1 of the Fifth Schedule to the said Ordinance, to appoint as its statutory external auditors of the firms of Chartered Accountants which hold satisfactory rating under the ‘Quality Control Review Program’ of the Institute of Chartered Accountants of Pakistan. The requirement of this directive shall be effective from the financial year beginning on or after July 1, 2012”.

The Committee is of the view that in case of co-audit both the auditors should hold satisfactory rating under the QCR program of the Institute.

(August 29, 2013)

12. Implication over change of name in the audited Financial Statement

Enquiry:

Your advice is sought on the implication over change of name as per Companies’ Ordinance 1984 on issuance of audited financial statements. The following is the scenario:

A company is a manufacturing concern having its financial year end on June 30 and is in operation since years. The management of the company wants to change its name and in this respect all the formalities regarding change of name as per companies’ ordinance 1984 have been compiled with before the year end. However, the Certificate of Incorporation of change of name from Securities and Exchange Commission of Pakistan (SECP) will be received subsequent to the year end in the month of August.

In September, company wants to issue its audited financial Statements and wants to know whether it can issue financial statements with its new name or with its old name as Certificate of Incorporation of Change of Name was received subsequent to the year end in month August.

According to Section 40 and 143 of the Companies ordinance 1984:

Where a company changes its name it shall, for a period of one year from the date of issue of a certificate by the registrar, continue to mention its former name along with its new name on the outside of every office or place in which its business is carried on and also in every official document like bills of exchange, hundis, promissory notes, endorsements, cheques and orders for money or goods purporting to be signed by or on behalf of the company, and in all bills of parcels, invoices, receipts and letters of credit of the company.

On the basis of above Sections, company is eligible to use its new name along with its former name from August. Financial statements are going to be issued in the month of September.

Our query is that the company in the audited financial statements should use its old name or new name based on the above scenario and sections quoted above?

Opinion:

The Committee considered your enquiry and is of the view that once the certificate by the registrar confirming change of name is issued, all documents, reports and statements of the company should be titled according to the new name. The company shall also mention its former name for a period of one year along with the new name. Therefore the financial statements and audit report signed after the issuance of certificate should refer the company by its new name.

(August 29, 2013)

13. Interpretation of Sec 208 of the Companies Ordinance, 1984

Enquiry:

As per the requirements of Sec 208 of the Companies Ordinance 1984 (Investment in Associated Companies), Loans and Advances (not in the nature of normal trade credit) given by an associated undertaking to other, form part of the definition of Investments that should be authorized by a special resolution. The question in this regard is whether the interest amount cumulated on these loans and advances should be added up to the original principal balance of loans and advances for the purpose of complying with the limit on investment as mentioned in the relevant forms (Form 26 and 30) of the special resolution pertaining to Sec. 208.

Apparently, the wording of Sec 208 leads us to believe that the investment mentioned in this section, that should be authorized by special resolution mainly refers to the amount of investment at the time of initiation of original transaction i.e. at the time of the giving of loans and advances and not the subsequent impact of the interest impact added up to the original principal balance. Please clarify?

Opinion:

The Committee examined your query and is of the view that investment under section 208 of the Companies Ordinance 1984 refers to the amount of investment at the time of initiation of original transaction i.e. at the time of the giving of loans and advances.

(March 1, 2012)

14. Appropriate Financial Reporting Framework Of NGO/NPO

Enquiry:

1. If an entity is registered under section 42 of Companies Ordinance as a not for profit organization, which framework would be referred in the statement of compliance of the financial statements of that entity? Would we use the MSE/SSE Standards issued by ICAP in which the applicability comes from 5th schedule OR NGO/NPO guidelines issued by ICAP. The matter is due to the constitution of the entity under the Companies Ordinance, 1984.

2. MSE standards issued by ICAP uses the word “entity” like Medium Sized Entity, but the 5th schedule uses the word Medium Sized Company. So, if they are applied on entities then can we use these standards for NGOs/NPOs? Further, would you also clarify whether the SSE and MSE standards are applicable to Companies only or can they be used as a framework for other entities as well?

3. If the NGO/NPO is registered under section 42 of Companies Ordinance and is managing different projects having a material funding from one or more than one donors, and donors have not mentioned any framework for the preparation of financial statements but mentioned that the accounts should be prepared and be audited by a reputed firm, then which framework to use MSE/SSE or NPO/NGO guidelines issued by ICAP?

4. If an entity is formed through its own statute through notification by the Prime Minister of Pakistan or President of Pakistan and nothing is mentioned about the applicable framework to use for the preparation of the financial statements, then what to do in that case with respect to the applicable financial reporting framework. Please remember that the entity is not registered as NGO/NPO or a Company under the Companies Ordinance 1984.

5. If an entity/NGO has a further Project whose accounts are prepared separately for example a factory, housing scheme, or manufacturing concern not registered as a separate COMPANY!! Which framework would we use in this case?? Can we use the MSE and SSE standards as it is an entity although not a Company!!

For 1, 3 and 4 above, which audit report should be used in all the cases above?? i.e. Report as per Companies Ordinance Form 35A or ATR 17?

Opinion:

The Committee views on the above enquiries are as follows:

1. All NGOs/NPOs registered under section 42 of the Companies Ordinance, 1984 are required to comply with the requirements of section 234 of the Companies Ordinance, 1984 while preparing their financial statements.

Auditor’s report format – Form 35A should be used.

2. MSE and SSE standards can be used as a framework for other entities as well.

3. Please refer response to enquiry (1) above.

4. Other than NGO/NPO registered under section 42 of the Companies Ordinance, 1984, NGOs registered under Societies Act are required to comply with ATR 17.

The applicable framework of the entities other than above mentioned entities, the guidance may be obtained from NGOs/NPOs Guidelines issued by ICAP while preparing financial statements.

Auditor’s report format –Reference may be taken from ISAs/ ATR-17.

5. MSE/SSE standard can be used.

(May 20, 2011)

15. Requirement of Related Party Transactions in Code of Corporate Governance

Enquiry:

We are multinational listed automobile company, we purchase raw materials from our associated company in Japan.

With reference to the clause (xiii a) of Code of Corporate Governance, it requires that:

“The Board of Directors of a company shall approve the pricing methods for related party transactions that were made on the terms equivalent to those that prevail in arm’s length transaction only if such terms can be substantiated.”

We have certain following queries on the above clause:

1) Code has not prescribed any pricing methods for related party transactions. What are the pricing methods? Does it require the same methods prescribed under the Income Tax rules or OECD guidelines? Existing provisions of the code are silent on pricing methods. Therefore, the listed company can approve any pricing method to comply with the requirement of the code.

2) Code has also not mentioned the responsibility, is it the responsibility of buyer or seller in the case of sale/purchase of goods or services?

In our case, we are the buyer and purchase raw materials from Japan. We have been making the transactions since many years. Any change in prices is negotiated between the parties which are based on the factors changed, it is just the simple negotiation process, as between the unrelated parties.

It is the basic fact that no seller would disclose its pricing structure to its buyer that he is using either Cost plus or Resale price method. How the buyer can know the pricing method.

We recommend that it should be the responsibility of seller to disclose and approve the pricing method.

3) What are the benefits of this approval of the method by the board of directors? Because it is not related to income tax or other transfer pricing laws.

Opinion:

The Committee’s opinion on the three queries raised by you is as follows:

1. Currently there is no pricing method prescribed in the Fourth Schedule and the Code of Corporate Governance, however following pricing methods are internationally used and accepted which may be adopted for related party transactions:

I Traditional transaction methods
i. Comparable uncontrolled price method
ii. Resale price method
iii. Cost plus method

II Transactional profit methods
iv. Transactional net margin method
v. Transactional profit split method

2. It the responsibility of the reporting entity to approve the pricing method.

3. With regard to your third point regarding benefits of the approval of the method by the board of directors the Committee would not like to give any opinion on this as it does not come under the purview of this Committee.

(February 17, 2011)

16. Separate Audited Financial Statement before Court Order of Merger

Enquiry:

A Company has applied to the Court for merger with another Company and the order from the Court was made after expiry of submission due date of its annual audited financial statement to the members as well as to the Commission. The Company has not submitted its separate annual audited financial statement on its due date pertains to the year end only due to reason that the case of merger was pending in the Court.

Chronological Order of Events:

Date of Application to the Court November 14, 2009
Effecting Date of Merger (in application) November 30, 2009
Financial Year End (closing date) December 31, 2009
Audited Annual Account Submission Due Date April 30, 2010
Court Order Date (for approval) July 14, 2010

As per our understanding, at the time where the Company was supposed to submit its audited accounts should submit its under discussion accounts separately (non merged accounts) on the due date even if the matter of merger was sub-judice in the court, whereas subsequent to the order of Court and approval the merger was passed and should disclose the facts in the note to the financial statement.

We think that the merger has nothing to do with the filing of accounts and the accounts should be presented to the members at the time allowed by the Ordinance or the extended time allowed by the Commission.

We believe that the company has violated the law by not submitting the said accounts in its time as required under section 233 of the Companies Ordinance, 1984.

We shall be grateful for your valuable comments on the aforesaid matter as to whether the Company should submit the separate audited accounts on or before April 30, 2010 or not.

Opinion:

For ready reference the Committee likes to draw your attention to the following clauses of section 233 of the Companies Ordinance 1984:

(1) The directors of every company shall at some date not later than eighteen months after the incorporation of the company and subsequently once at least in every calendar year lay before the company in annual general meeting a balance sheet and profit and loss account or in the case of a company not trading for profit an income and expenditure account for the period, in the case of the first account for the period since the incorporation of the company and in any other case since the preceding account, made up to a date not earlier than the date of the meeting by more than four months:

Provided that, in the case of a listed company the Commission, and in any other case the registrar, may for any special reason, extend the period for a term not exceeding one month.

(2) The period to which the accounts aforesaid relate shall not exceed twelve months except where special permission has been granted in that behalf by the registrar.

(5) A listed company shall, simultaneously with the dispatch of the balance sheet and profit and loss account together with the reports referred to in sub-section (4), send five copies each of such balance sheet and profit and loss account and other documents to the Commission, the stock exchange and the registrar.

Based on above, the Committee is of the opinion that the Company should have complied with the above sections of the Companies Ordinance, 1984.

(November 8, 2010)

17. Guidance for the correct treatment in filing of Form – 3 (Return Of Allotments U/S 73(1) of the Companies Ordinance, 1984)

Enquiry:

One of my clients who is a Public Limited Company and is quoted on all the three stock exchanges of Pakistan has just completed the process of issuance of Right Shares which have been offered to all the shareholders.

Necessary requirements of notice under section 86 and 87 (as the case may be) of the Companies Ordinance, 1984 have been complied with and all the other approvals from the concerned authorities were obtained.

The main purpose of the issue as fully described in circular under section 86(3) is to repay the loans obtained for expansion purposes so as to divert the savings in the financial Costs towards payment of dividend to the shareholders.

The sponsors had opted for the conversion of their loans towards subscription of Right Issue. These loans were advanced to the Company from their own private resources, were through normal banking channels and received prior to the announcement of Right Issue.

ISSUE:

In the “Form 3” under section 73 (1) of the Companies Ordinance, 1984 “RETURN OF ALLOTMENTS” There are two columns in the return showing the allotment of shares as follows:

I. Serial number 10 Part A – “SHARES ALLOTTED PAYABLE IN CASH”

2. Serial number 11 Part B – “SHARES ALLOTTED FOR A CONSIDERATION OTHERWISE THAN IN CASH”

Nowhere in the return is a column for the conversion of loans received prior to the issue into equity toward contribution against Right Issue already received through normal banking channels.

I seek your opinion as to where the conversion of loans would appear in the “Form 3” as

1. Shares allotted payable in cash at serial number 10 for the reason that the funds were received by the company through banking channels earlier to the right issue.

2. Shares allotted in consideration otherwise than in cash at serial number II for the reason that it’s a conversion of loan into share capital. There is another point that issue of shares otherwise than in cash also need additional requirements such as valuation of assets against which shares are to be issued, contract between the company and the allottee, affidavit by the chief executive and the certificate from the auditor that all requirements have been complied with. In the above case, how can we obtain valuation certificate that the asset against which shares are to be issued is cash/funds received earlier to the decision of allotment of shares.

Opinion:

The Committee examined your enquiry and is of the opinion that the conversion of sponsors’ loans into equity should be considered as issuance of shares against cash and should appear in the “Form 3” as shares allotted payable in cash.

(July 8, 2010)

18. Opinion on appointing an External Auditor providing Non- Assurance Services

Enquiry:

A Public Sector Bank (Listed company) is in the process of undertaking a few assignments in which we will require services of external consultants, and our external auditor firms, in their capacity as professional consultants, may also participate in the same. We understand that there are independence and ethics related guidelines in vogue that are applicable to external auditors’ services including guidelines as contained in the listing regulations, which are also applicable on us as a listed company.

We would like to seek your opinion as to whether our external auditors can provide services in the following areas:

Computerized Consumer Record Keeping & Maintenance

This system will be required to maintain customer database on computerized system and would include database management and MIS capabilities. This system would contain all particulars of borrower, details of loans including tenor, markup, payment history, repayment schedule and aging of loan for the purpose of classification.

The firm will provide maintenance services and support to the Bank with respect to housing mortgage and SME products for small borrowers.

Under the agreement the firm will manage the technical maintenance of the System implemented to ensure complete troubleshooting and maintenance support on-site and for this purpose a technical team has to be posted on-site at the Bank. The firm will provide continuous support for system for back office functions. System technical maintenance also includes continuous technical functioning of the application system software together with troubleshooting in case of system errors, removal of bugs, effecting recovery in case of disaster recovery, database corruption in whole or part caused by any event, misuse or corruption due to any computer virus or any other cause.

Loans to be maintained on the new system would approximately represent 1.8% of the gross advances of the bank in the case of housing mortgage and 1% in the case of SME product respectively.

Income Tax Related Advisory:

Can an external audit firm be engaged in services concerning income tax advisory?

Core Banking Application Advisory:

The Bank also intends to acquire consultancy / advisory services with regard to implementation of Core Banking Application software. This software includes bank wide automation of all banking applications. The Bank has set-up a Project Monitoring Officer (PMO) comprising executives of various departments to ensure effective implementation of the system. The main purpose of consultancy is to act as a liaison between the Bank (PMO) and primary vendor for the software. Their function will be to advise on process level integration of the various existing systems with core banking, to highlight issues with the vendor to safeguard the interest of the bank at every stage of design & implementation of the application, assess and advise the bank on the status of preparedness necessary for the implementation of the system and to validate the outcome of the various stages of implementation. The consultants will also be responsible to point out and assist in removing any shortcomings of the system from the Bank’s point of view. The actual work of removing the shortcomings will be done by the software vendor.

We would like your opinion as to whether external auditors can participate in the bidding process of such an assignment and can provide such consultancy services to the bank or not.

Opinion:

At the outset the Committee would like to draw your attention to clause xl of Code of Corporate Governance to be read with clause 29-C of KSE Listing Regulations (underline is ours):

“(xl) No listed company shall appoint its auditors to provide services in addition to audit except in accordance with the regulations and shall require the auditors to observe applicable IFAC guidelines in this regard and shall ensure that the auditors do not perform management functions or make management decisions, responsibility for which remains with the Board of Directors and management of the listed company.” (underlining is ours)

“29-C (i) No Listed company shall, appoint or continue to retain any person as an auditor who is engaged by the company to provide services that are prohibited.

(ii) A listed company shall also not appoint or continue to retain any person as an auditor, if a person associated with the auditor is, or has been, at any time during the preceding three months engaged as a consultant or advisor or to provide any services that are prohibited.

Explanation:

For the purposes of this regulation, the expression “associated with” shall mean any person associated with the auditor, if the person:-

(a) is a partner in a firm, or is a director in a company, or holds or controls shares carrying more than twenty percent of the voting power in a company, and the auditor is also partner of that firm, or is a director in that company or so holds or controls shares in such company; or

(b) is a company or body corporate in which the auditor is a director or holds or controls shares carrying more than twenty percent of the voting power in that company or has other interest to that extent.

Explanation:

For the purposes of this regulation the services that are prohibited shall mean the following:

1. Preparing financial statements, accounting records and accounting services;
2. Financial information technology system design and implementation, significant to overall financial statements;
3. Appraisal or valuation services for material items of financial statements;
4. Acting as an Appointed Actuary within the meaning of the term defined by the Insurance Ordinance, 2000;
5. Actuarial advice and reviews in respect of provisioning and loss assessments for an insurance entity;
6. Internal audit services related to internal accounting controls, financial systems or financial statements;
7. Human resource services relating to:-
i. Executive recruitment;
ii. Work performed (including secondments) where management decision will be made on behalf of a listed audit client;

8. Legal Services;
9. Management functions or decisions;
10. Corporate finance services, advice or assistance which may involve independence threats such as promoting, dealing in or underwriting of shares of audit clients.
11. Any exercise or assignment for estimation of financial effect of a transaction or event where an auditor provides litigation support services as identified in paragraph 9.187 of Code of Ethics for Chartered Accountants.
12. Share Registration Services (Transfer Agents)” (underlining is ours)

Further we would also like to refer the Code of Ethics for Chartered Accountants which institutes the fundamental principles of professional ethics and provides a conceptual framework for applying those principles. One of the basic elements of the framework is ‘Independence’. It is important to note that independence of mind and in appearance is necessary to enable the practicing chartered accountants to enable them to express a conclusion, without bias, conflict of interest or undue influence.

As a value addition, practicing chartered accountants are expected to provide a variety of non-assurance services that are consistent with their skills and expertise, subject to the requirement of applicable regulations including those which are stated above. While rendering other services to an audit client, practicing chartered accountants are required to apply the conceptual framework to identify threats to compliance with the fundamental principles and assess their significance and implication.

The onus of evaluation of such threats to compliance with the fundamental principles rests on the practicing chartered accountants and they should consider qualitative as well as quantitative factors while performing such evaluation. Such obligation on the part of a practicing chartered accountant becomes more critical in a situation where the applicable guidelines or regulations do not clearly prohibit any specific service.

In case where practicing chartered accountants render such services which may coincide with management functions and management decision making, the threat of “Self Review” could exist. One instance of such activity is the preparation of original data used to generate records that could be the subject matter of the audit engagement.

In this connection we would like to refer the following paras of section 290 of Part B of Code of Ethics for Chartered Accountants which states:

“290.166 It is the responsibility of financial statement audit client management to ensure that accounting records are kept and financial statements are prepared, although they may request the firm to provide assistance. If firm, or network firm, personnel providing such assistance make management decisions, the self review threat created could not be reduced to an acceptable level by any safeguards. Consequently, personnel should not make such decisions. Examples of such managerial decisions include:

• Determining or changing journal entries, or the classifications for accounts or transaction or other accounting records without obtaining the approval of the financial statement audit client;
• Authorizing or approving transactions; and
• Preparing source documents or originating data (including decisions on valuation assumptions), or making changes to such documents or data.”

With regard to Computerized Consumer Record Keeping & Maintenance services, the Committee would like to state that from your explanation of service it appears that the auditors would only be required to provide system maintenance and support and they would not be involved in feeding data into the system and generating accounting records. The Bank in such a scenario would need to consider whether the accounting firm would retain any responsibility of data generated from the system, if the Bank determines that the firm retains responsibility for the data then the firm may attract provisions of clause 1 of prohibited services stated above as the same may comprise accounting record keeping services.

Further, with regard to Core Banking Application Advisory the Bank would need to assess the appointment of external auditor for this service as it would attract prohibitions placed under clause 2 of prohibited services which prohibits the auditor of a listed company from providing financial information technology system design and implementation services to the listed audit clients which may be significant to overall financial statements.

With regard to Income Tax Related Advisory services, the Committee would like to state that the prohibited services listed above do not provide any restrictions on provisions of taxation services by the listed company’s auditors. Further, the committee would also like to draw your attention to the para 290.176 of Code of Ethics for Chartered Accountants:

“290.176 The firm may be asked to provide taxation services to a financial statement audit client. Taxation services comprise a broad range of services, including compliance, planning, provision of formal taxation opinions and assistance in the resolution of tax disputes. Such assignments are generally not seen to create threats to independence.”

Based on above and because tax advisory services are not prohibited as per clause 29-C reproduced above, the Committee is of the opinion that the external auditors may engage in tax advisory services. However, tax service may also pose a threat in the form of conflict of interest, self-review etc. for which the auditor need to take care of.

Finally, the Committee is of the opinion that the first two assignments mentioned in your enquiry should not be rendered by the external auditors.

(January 2010)

19. Maintenance of Register of Mortgages U/S 135 of the Companies Ordinance, 1984 & maintenance of Fixed Assets Register as per ICAP – TR-6

Enquiry:

We seek your guidance relating to the Auditors responsibilities for non-maintenance of the above registers by the client.

Background

We qualified the Auditors report relating to Deferred Tax Liability. We mentioned in the Management Letter for the non-maintenance of Mortgages register and Fixed Assets register.

The SECP issued a Show cause notice to us for not qualifying the Auditors report for non-maintenance of those two registers and imposed a fine on us.

We provided a detailed reply stating that our responsibility is limited to ML unless Materiality is affected. We mentioned in this letter to SECP that all the documents and evidences relating to Mortgage and charges and fixed assets were verified by us. We also provided a copy ATR – 20 of ICAP which provides ICAP guidance on Auditors responsibilities.

Our Request for ICAP Guidance

We request you to kindly provide ICAP guidance on the above case, as SECP appears to have different interpretations than ICAP on the above subject.

Opinion:

We would like to draw your attention to the following paragraphs of ISA 500, Audit Evidence:-

1. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. In order to form an opinion on the financial statements, the auditor performs the audit procedures in accordance with the International Standards on Auditing (ISA). We would like to draw your attention towards the following paragraphs of ISA 500 “Audit Evidence”:

2. The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.

3. “Audit evidence” is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based, and includes the information contained in the accounting records underlying the financial statements and other information. Auditors are not expected to address all information that may exist. Audit evidence, which is cumulative in nature, includes audit evidence obtained from audit procedures performed during the course of the audit and may include audit evidence obtained from other sources such as previous audits and a firm’s quality control procedures for client acceptance and continuance.

4. Accounting records generally include the records of initial entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers, journal entries and other adjustments to the financial statements that are not reflected in formal journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations and disclosures. The entries in the accounting records are often initiated, recorded, processed and reported in electronic form. In addition, the accounting records may be part of integrated systems that share data and support all aspects of the entity’s financial reporting, operations and compliance objectives.

5. Management is responsible for the preparation of the financial statements based upon the accounting records of the entity. The auditor obtains some audit evidence by testing the accounting records, for example, through analysis and review, reperforming procedures followed in the financial reporting process, and reconciling related types and applications of the same information. Through the performance of such audit procedures, the auditor may determine that the accounting records are internally consistent and agree to the financial statements. However, because accounting records alone do not provide sufficient audit evidence on which to base an audit opinion on the financial statements, the auditor obtains other audit evidence.

By applying the audit procedures, the auditor comes to a conclusion whether or not:

a) All assets, liabilities and equity reported in the financial statements exist;
b) The entity holds or controls the rights to all assets and liabilities are the obligations of the entity.
c) All assets, liabilities and equity that should have been recorded have been recorded.
d) All assets, liabilities, and equity are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

A Fixed Assets Register (FAR) is kept by a company for internal control purposes, as it allows a company to keep track of details of each fixed asset, ensuring control and preventing misappropriation of assets. It also keeps track of the correct value of assets, which allows for computation of depreciation and for tax and insurance purposes. The FAR generates accurate, complete, and customized reports that suit the needs of management.

As per Section 2 (5) of the Companies Ordinance 1984 “books of account” include accounts, deeds, vouchers, writings and documents, maintained on paper or computer network, floppy, diskette, magnetic cartridge tape, CD-Rom or any other computer readable media.

A company normally maintains various documents as “books of account” like general ledger, voucher, cash book, good received note, party ledger, purchase book, FAR etc. FAR is one of the secondary accounting records which may be maintained by a company as its books of account. Thus, FAR may be considered to be one of the sources to verify fixed assets but not the only source.

Section 255 requires an auditor to give an opinion whether or not proper books of account as required by this Ordinance have been kept by the company. Section 230 requires a company to maintain proper books of account with regard to its assets, liabilities, sales, purchases, receipts, payments and production.

If a company does not maintain its “books of account” in a manner that the auditor is not able to obtain sufficient appropriate audit evidence for material account balances, the auditor would be required to modify the audit report appropriately.

In the absence of FAR, if the auditor is able to satisfactorily verify fixed assets from other accounting records, modification of audit report does not seem to be necessary. Conversely, the audit report would be modified if the auditor is not able to obtain sufficient appropriate audit evidence for material fixed asset balance(s).

Further, the responsibility of maintaining records under section 135 of the Companies Ordinance, 1984 (Company’s register of mortgages) is that of the Company. The auditor cannot be held responsible for the noncompliance.

ATR-20 Auditor’s Reporting Responsibilities in respect of Non- Compliances with Laws or Regulations, clarifies as follows:

5. It should also be noted that it is not the purpose of the audit nor the responsibility of the auditor to highlight the contraventions of corporate and other laws.

7. Additionally, in case of non compliance with laws and regulations, the ISA 250 also requires the auditor to report the same to members of management charged with governance.

8. Hence it is concluded that an infraction of laws or regulations, the financial implication of which is not material to the financial statement do not require the modification of the auditors opinion. The auditor should follow the guidance given in paragraphs 6 and 7 above

The auditor is not necessarily required to modify the audit report if he is able obtain sufficient appropriate audit evidence through alternative sources such as Form 10 and 17, bank letters etc., in the absence of Register of Mortgages under section 135 of the Companies Ordinance, 1984.

(June 5, 2009)

20. Disclosure & Reporting Requirements For Delisted Companies

Enquiry:

One of our audit clients was a listed company as at 30-6-2007 and was de-listed subsequently from Karachi and Lahore Stock Exchanges.

Financial statements’ disclosures for the financial year ended 30-6-2007 have been made in accordance with the requirements of Listing Regulations and the Fourth Schedule to the Companies Ordinance, 1984 and accordingly Audit Report has been issued by our predecessor.

Now we have to report for the financial year ended 30-6-2008 which includes 4 months of listed period and 8 months of unlisted period as the company stands as an unlisted company as at 30-6-2008. Therefore, in order to issue audit report for the financial year ended 30-6-2008, we need to have your valuable opinion on the following issues:

1. Which of the Fourth & Fifth Schedule (the Companies Ordinance, 1984) would be applicable?

2. Whether the financial statements should comply with listing regulations of Stock Exchanges? If so, whether to whole year or to 4 months only.

3. Whether the Code of Corporate Governance incorporated in Listed Regulations would apply to the company? If so, whether to whole year or 4 months only.

4. Whether the Directors’ report should include discussion & statements with reference to Listing Regulations? If so, whether for whole year or covering 4 months only.

5. Whether the Auditors’ Review Report to the Members on Statement of Compliance needs to be issued? If so, whether for whole year or covering 4 months only.

6. Whether the following statements as applicable to listed companies should be issued with the financial statements? If so, whether for whole year or covering 4 months only:

(a) Vision & mission statements
(b) Statement to ethics & business practices
(c) Statement of Compliance with the Code of Corporate Governance

7. Whether the company should continue to follow complete set of IASs or it should follow Accounting Standard for SSEs or MSEs, whichever applicable.

Opinion:

The Committee is of the view that as of June 30, 2008 the company you referred to in your above enquiry was not listed therefore you would be required to comply with the requirements of Fifth Schedule and MSE or SSE standards whichever is applicable, provided such company is not a subsidiary of a listed company.

Further in the above case compliance with the Code of Corporate Governance which is a part of Listing Regulation of the three Stock Exchanges of the country is also not mandatory.

(October 18, 2008)

21. Applicability Of SSE Standard

Enquiry:

Accounting and financial reporting Standard for SSEs requires the lease payments, either operating or finance, should be recognized as an expense and should not be shown either as an asset or liability in the balance sheet. Please suggest for the following; If in the previous years the finance lease is shown as an asset and liability. In the current year, as the SMEs standard applies, should the previous year’s figure be restated; or else.

Opinion:

Your attention is drawn to the following paragraph of Accounting and financial reporting standards for SSEs:

41   Lease payments, deriving from an operating or finance lease, shall be recognized as an expense (on an accrual basis). If the payments are material, the expense should be shown under a specific lease payment heading in the income statement.

As there is no transitional provision available in SSE Standard with regard to the above requirement therefore the Committee is of the opinion that the above requirement should be applied retrospectively. For further guidance you may refer to IAS 8 ’Accounting Policies, Changes in Accounting Estimates and Errors’

(January 11, 2008)

22. Treatment of Preference Shares / Redeemable / Convertible in the Financial Statements

Enquiry:

Due to the amendment in the 4th Schedule to the Companies Ordinance, 1984 which, has made the application of International Accounting Standards mandatory. This includes IAS-32 prescribing the treatment of Preference Shares, which is in contradiction to treatment and classification implied by the Companies Ordinance, 1984.

Whereas Preference Shares / Redeemable / Convertible or otherwise are classified as part of equity if they meet certain criteria in accordance with IAS-32, if the criteria is not met the same are required to be classified as liabilities. The provisions of the Companies Ordinance, 1984 are indicative of the fact that the same are part of the equity.

Some of the facts have been examined below:

1. Although the 4th Schedule requires adherence to all IASs including IAS-32 there are contradictory provisions in the 4th Schedule itself in this context. Part II-6 pertains to disclosure of requirements of Share Capital and also requires Paid-up Capital to be grouped under Share Capital and Reserves.

2. In accordance with section 90 of the Companies Ordinance, 1984 different classes of shares as provided by the memorandum and articles of association of the company are categorized as share capital i.e. equity. Return of allotment of shares filed under section 73(1) group both ordinary / preference shares of each class in Paid-up Capital.

3. Various other provisions of the Companies Ordinance, 1984 and ‘Companies’ Share Capital, (Variation in Rights and Privileges) Rules, 2000’ are indicative of the fact that Preference Shares redeemable, convertible or otherwise are part of Share Capital.

4. The normal terms of issue of the Redeemable Preference Shares provides options for redemption and conversion into Ordinary Shares. On redemption it will fall within purview of Section 85 of the Companies Ordinance, which requires creation of Capital Redemption Reserves and the latter is part of equity. On conversion it will be converted into class of Ordinary Shares, which is again equity.

5. Further Schedules are sub-ordinate to the Ordinance; accordingly provisions of the Ordinance take precedence.

6. It is further observed that IAS-32 does not cater for the situation where redemption reserve is created.

7. It is also observed that dividend on preference shares are appropriations of profits both from the perspective of the Companies Ordinance and under the tax laws.

Irrespective of the requirements of IAS 32, the Companies Ordinance, 1984 will take precedence. This is similar to the treatment of revaluation surplus under S235 of the Companies Ordinance, 1984 which differs from the requirements of IAS 16.

A number of our clients have already issued Preference Shares / Redeemable / Convertible or otherwise or are in the process of issuing the same. We shall be grateful if you could confirm in this context, taking into consideration the above stated facts that it is appropriate to classify such shares as part of equity.

Alternatively till the resolution of the matter, the companies be allowed to treat and classify them equity for the interim period involving the current audited financial statements in process.

Opinion:

The appropriate Committee of the Institute has examined the above enquiry, regarding the treatment of preference shares and its comments are as under: –

1. It is important to note that while Section 234 of the Companies Ordinance, 1984 (the Companies Ordinance) makes it obligatory for listed companies to observe IASs as are notified from time to time, the repealed Fourth Schedule to the Ordinance did not bear any direct reference to the mandatory observance of such IASs.

It is significant to note that paragraph 1 of Part-I of the revised fourth schedule carries an overriding stipulation as under:

“The listed companies and their subsidiaries shall follow all the International Accounting standards in regard to accounts and preparation of balance sheet and profit and loss account as are notified for the purpose in the official Gazette by the Commission, under sub-section (3) of section 234 of the companies Ordinance, 1984 (XLVII of 1984)”.

From the aforesaid, it is the Committee’s view that IASs would override anything to the contrary contained in the Fourth Schedule of the Ordinance vis-à-vis accounting treatment and disclosure. Indeed the very revision of the Fourth Schedule, in the Committee’s view, would seem to be premised on the fact that the accounts shall be prepared and disclosed pursuant to IASs read with the said schedule.

2. Section 90 of the Companies Ordinance read with the Companies’ Share Capital, (Variation in Rights and Privileges) Rules, 2000 and the 4th Schedule to the Companies Ordinance provides for issuance and disclosure of different kinds of share capital and classes therein. If the memorandum and articles of a company so provide, it may issue any class of its share on terms that they shall be redeemed at a fixed date, or over a fixed period of time, or on the occurrence of one or more specified contingencies, or that the shares may be redeemed at the option of the company or the holders of the shares on a fixed date or at any time.

3. In this regard, Clause 6 of Part II of the 4th Schedule to the Companies Ordinance provides that:

“Share capital and reserves shall be classified under the following sub-heads, namely:-

a. Issued, subscribed and paid up capital, distinguishing in respect of each class between, –

i. shares allotted for consideration paid in cash;
ii. shares allotted for consideration other than cash, showing separately shares issued against property and others (to be specified); and
iii. shares allotted as bonus shares.

b. Reserves, distinguishing between capital reserves and revenue reserves.”

4. On the other hand, Section 85 of the Companies Ordinance deals with redemption of preference share. The gist of the provisions of this section is that the amount required to redeem the redeemable shares may be found out of the profits of the company available for distribution or out of the proceeds of a fresh issue of shares. If shares are redeemed out of the proceeds of a fresh issue of shares, the capital issued or paid up on those shares will replace the redeemed capital. If alternatively, redeemable shares are redeemed out of assets representing a company’s distributable profits, the amount by which its issued share capital is thereby reduced must be transferred from profits or revenue reserves to a special capital reserve known as “the capital redemption reserve fund”, which can itself be reduced only in the same way as paid up share capital. In effect, the amount credited to the capital redemption reserve fund replaces the aggregate nominal values of the redeemed shares, and the transfer from profits or revenue reserves make the amount transferred unavailable for distribution as dividend.

5. In this regard, the following paragraph of IAS 32 state that:

18 The substance of a financial instrument, rather than its legal form, governs its classification on the entity’s balance sheet. Substance and legal form are commonly consistent, but not always. Some financial instruments take the legal form of equity but are liabilities in substance and others may combine features associated with equity instruments and features associated with financial liabilities. For example:

(a) a preference share that provides for mandatory redemption by the issuer for a fixed or determinable amount at a fixed or determinable future date, or gives the holder the right to require the issuer to redeem the instrument at or after a particular date for a fixed or determinable amount, is a financial liability.

20 A financial instrument that does not explicitly establish a contractual obligation to deliver cash or another financial asset may establish an obligation indirectly through its terms and conditions. For example:

(a) a financial instrument may contain a non-financial obligation that must be settled if, and only if, the entity fails to make distributions or to redeem the instrument. If the entity can avoid a transfer of cash or another financial asset only by settling the non-financial obligation, the financial instrument is a financial liability.

(b) a financial instrument is a financial liability if it provides that on settlement the entity will deliver either:

     (i) cash or another financial asset; or
(ii) its own shares whose value is determined to exceed substantially the value of the cash or other financial asset.

Although the entity does not have an explicit contractual obligation to deliver cash or another financial asset, the value of the share settlement alternative is such that the entity will settle in cash. In any event, the holder has in substance been guaranteed receipt of an amount that is at least equal to the cash settlement option.

6. Hence, in view of above, the Committee is of the opinion that the Securities and Exchange Commission of Pakistan (the SECP), in order to remove the above inconsistencies between the Companies Ordinance and IAS 32, should amend section 85 of the Companies Ordinance by adding a proviso to the effect that for companies which are required to adopt 4th Schedule to the Companies Ordinance in the preparation of their financial statements, the provisions contained in the said schedule relating to redemption shall not apply. This will result in clarifying the circumstances when preference shares should be classified as equity or otherwise to conform to the requirements of the said IAS.

Once this amendment is made to the Companies Ordinance, then the ambiguity regarding the treatment and/or disclosure of preference shares as either equity or debt will be resolved. Accordingly, dividend paid on such preference shares will also be classified as either an appropriation or a charge to the profit and loss account, as the case may be, depending upon the forms governing the issue of preference shares.

7. However, recognizing that the amendment to the Companies Ordinance could take some time, the SECP, in the meantime, is requested to issue a notification with regard to the treatment and disclosure of preference shares in the financial statements of listed companies.

(January 7, 2006)

23. Section 226 of the Companies Ordinance, 1984 ‘Securities and Deposits’

Enquiry:

We write with reference to the caption subject pertaining to the area of Security Deposits received by a corporate under section 226 of the Companies Ordinance, 1984.

Section 226 Securities and deposits, etc.

No company, and no officer or agent of a company, shall receive or utilize any money received as security or deposit, except in accordance with a contract in writing; and all moneys so received shall be kept or deposited by the company or the officer or agent concerned, as the case may be, in a special account with a scheduled bank;

Provided that this section shall not apply where the money received is in the nature of an advance payment for goods to be delivered or sold to an agent, dealer or sub-agent in accordance with a contract in writing.

We request for your attention and clarification to certain queries on the subject matter which are as follows:

(i) What kinds of Security Deposits come under this section and should they be treated as short-term or long-term?

(ii) Is it necessary to deposit the amount in a current account or a savings account? Is there any mandatory requirement?

(iii) If the amount is deposited in a current account then can a company make a lien on that security deposit against its loan? And if it is allowed can the company return the charge amount?

Opinion:
The securities or deposits other than those in the nature of advance payment for goods received in accordance with a contract in writing may fall under the purview of this section. These securities and deposits may be treated as either short-term or long-term depending upon the terms of the contract. The statute has not explicitly stipulated the type of account in which these securities or deposits are required to be kept. The only mandatory statutory requirement pertaining to these securities or deposits stipulated in the Companies Ordinance, 1984 is that they are required to be kept in a special account with a scheduled bank.

However it has been observed that usually prior to receipt of securities or deposits, parties to the contract unequivocally provide for in the contracts that the security or deposit is not required to be kept in a special account according to the provisions of Section 226 of the Companies Ordinance, 1984. These contracts also usually grant permission to the recipient of such kind of securities or deposits for utilization thereof either with or without compliance of conditions precedent.

With regard to your third query relating to lien on securities deposits, the Committee is of the view that the question of lien does not arise if the amount is to be kept in a separate bank account unless there is a specific approval in writing.

(October 8, 2005)

24. Shares Issued at Discount – Treatment of Deferred Cost

Enquiry:

While reviewing the financial statements of one of our clients, we have come across a situation where the client has issued shares at discount. The discount amount is being treated as deferred cost and amortized over a period of 5 years. We require clarifications in the light of the revised 4th Schedule to the Companies Ordinance, 1984 and applicable International Accounting Standards.

Revised 4th Schedule to the Companies Ordinance, 1984

The original 4th Schedule to the Companies Ordinance, 1984 allowed discount on shares to be deferred for a period of five years.

Revised 4th Schedule to the Companies Ordinance, 1984

The concept of deferred cost has been deleted in the revised 4th Schedule to the Companies Ordinance, 1984 giving rise to the presumption that any cost incurred during the year not qualifying the criteria of capitalization should be charged to profit and loss account.

Companies Ordinance, 1984

Section 234(1)

The said section allows that where any item of expenditure, which may in fairness be distributed over several years, has been incurred in any one financial year, the whole amount of such expenditure shall be stated with the addition of the reasons why only a portion of such expenditure is charged against the income of the financial year.

Section 84 (1)

Subject to the provisions of this section, it shall be lawful for a company to issue shares at discount.

Section 83 (3)
Issue of shares at discount shall not be deemed to be reduction of capital.

Section 84 (4)
Every prospectus relating to the issue of shares, and every balance sheet issued by the company subsequent to the issue of shares, shall contain particulars of the discount allowed on the issue of shares or of so much of that discount as has not been written off at the date of issue of the prospectus or balance sheet.

Issue

The relevant provisions of the Companies Ordinance, 1984 and the revised 4th Schedule to the Companies Ordinance have become contradictory as there is no concept of deferred cost in the revised 4th Schedule while the highlighted section 84(4) allows deferment of discount offered on issue of shares.

In light of the above, we seek guidance on the following issues:

1. If a company issues shares at discount, what would be the appropriate treatment of discount offered on such issue? Charging the entire discount amount to the profit and loss account in the year of issue of shares would have a substantial impact on the profitability and would limit the ability of the company to pay dividends to its members.

2. Whether discount on shares can be set off directly against the equity without charging it though the profit and loss account?

3. What would be the treatment of the amount of deferred cost being carried by the company before the applicability of the revised 4th Schedule? Can the company continue deferring the discount amount at the same rate (over five years) or the remaining cost can be deferred at any other rate considered appropriate by the management in the best interests of the shareholders?

Opinion:

The issue raised by you was deliberated in detail and the Committee is of the view that sub-section (1) of section 234 only refers to distribution of an item of expenditure over several years subject to fairness of the reasons why only a portion of expenditure should be charged against income of the financial year. Fairness of said distribution has to be judged against an accounting framework which in case of Pakistan are International Accounting Standards and such Accounting Standards no longer carry the concept of deferred cost. Therefore any deferment of expenditure by an entity will not be according to International Accounting Standards adopted by us. IAS – 9, which used to allow deferment of certain expenses has already been superseded by IAS 38 way back in 1999.

We would also like to mention that previously the Fourth Schedule was only allowing deferment of expenditure up to five years including the year in which it was incurred. Whereas the interpretation as mentioned in your letter under reference would provide a carte blanche to the listed companies to defer expenditure for an unlimited period of time thus leading to distortion of published financial statements.
The appropriate Committee of the Institute would also like to draw your attention to Opinion No. 1.1 of Volume VII of the Selected Opinions where this issue has been discussed in detail in the context of law which existed at that time wherein it was recommended that the best possible treatment would be to show the amount of discount on issue of shares as a deduction from equity.

With regard to your concern that there is a contradiction between Section 84(4) and revised 4th Schedule the Committee is of the view that the said section neither allows nor prohibits companies to defer discount allowed on issue of shares. Instead it requires the companies who issue shares at discount to show the amount not written off, if any, in the balance sheet at the time of issuing balance sheet or a prospectus.

In the light of the above discussion the response to your enquiries are as follows:

1. & 2 As stated above, the best possible way would be to show the amount of discount on issue of shares as a deduction from equity.

3. With regard to your 3rd enquiry the Institute had, before the receipt of your enquiry, already recommended to SECP to issue the following clarification:

The companies who are carrying deferred cost in their financial statements as on July 5, 2004 may be allowed to continue to treat such cost according to the requirement of the superceded Fourth Schedule. However after July 5, 2004 the companies should not be allowed to include any further deferred cost in their financial statements.

This recommendation has been accepted by SECP. Please see SECP Circular No. 01 of 2005 dated January 19, 2005 which is also available on ICAP website.
(December 4, 2004)

25. Partnership Arrangements with Previous Auditors

Enquiry:

I have been appointed as the external auditor of XYZ Ltd., in its AGM held on January 30, 2004 and previous auditors M/s. ABC & Co. were not re-appointed due to Statutory Regulation No. xli of Code of Corporate Governance i.e. rotation of audit. Now I have bright chances to have partnership arrangements in future with M/s. ABC & Co.,

With reference to above paragraph, kindly advise us about any clause/interpretation of Code of Corporate Governance which restrains newly appointed auditors to form partnership with previous auditor who was not re-appointed due to Statutory Regulation No. xli of Code of Corporate Governance.

Opinion:

We would like to draw your attention towards the following clause (xli) of Listing Regulations 38 relating to Code of Corporate Governance:-

(xli) All listed companies are required to change their external auditors every five years. If for any reason this is impractical, a listed company may at a minimum, rotate the partner in charge of its audit engagement after obtaining the consent of the Securities and Exchange Commission of Pakistan.

As the above regulation does not address your specific enquiry, the Committee, therefore, is of the view that it is the responsibility of the merging firm to ensure that the object of the regulation should not appear to be defeated.

(August 7, 2004)

26. Appointment of External Auditors

Enquiry:

The appointment of external auditors is governed by the following: –

1. Regulation (xxxiii) of Code of Corporate Governance (CCG) states that Audit Committee (AC) shall be responsible for recommending to the Board of Directors (BOD) the appointment of external auditors by the listed company’s shareholders.

2. Recommendation of the AC for appointment of retiring auditors or otherwise shall be included in the Directors Report as per Regulation (xxxix) of CCG.

3. And Regulation (xli) of CCG says that listed companies are required to change their external auditors every five years.

4. Section 253 of the Companies Ordinance 1984 states that a notice shall be required for a resolution at a company’s AGM appointing as auditor a person other than a retiring auditor. The notice shall be given by a member to the company not less than 14 days before the AGM.

In respect of above we seek clarification as under:

Where AC recommends name/names to change auditors after five years, is it necessary that a member should also give notice for the same name/names to the company at least 14 days before the AGM to comply with the requirements of Section 253.

If a member proposes another name other than proposed by AC can that be considered for appointment as auditors without being recommended by AC. In such a situation should voting be held between name recommended by AC (not proposed by member) and name proposed by member (not recommended by AC).

We take up a practical example. In SNGPL notice of AGM for December 29, 2003 item 4 of agenda was quote “to appoint auditors for the year ending June 30, 2004. The retiring auditors being eligible also offer themselves for re-appointment” unquote.

In the directors report to the shareholders it was mentioned quote “present joint auditors A.F. Ferguson & Co. and Ford Rhodes Sidat Hyder & Co. are retiring and eligible for reappointment, however on the recommendation of A.C. the BOD have proposed change in the retiring auditors A.F. Ferguson & Co.” unquote.

Ten days before the meeting, notice was sent to all the shareholders that certain shareholders have proposed name of M. Yousuf Adil Saleem & Co., Riaz Ahmed & Co. and Hameed Choudhry & Co. Chartered Accountants for appointment of auditors.
Voting was held among all the above-referred five firms and M/s. Ford Rhodes Sidat Hyder & Co. and Riaz Ahmed and Co. were appointed as auditors after securing highest votes.

The points need consideration:

– The AC did not recommend any other name except Ford Rhodes Sidat Hyder & Co. If joint auditors were to be appointed was it not required to recommend name of any other firm as required under Regulation (xxxix) of CCG?

– Although name of A.F. Ferguson & Co. was not recommended by AC but their name was also included for shareholders to vote. Were they eligible for voting although AC did not recommend.

– Riaz Ahmed & Co. were appointed as auditors but A.C. did not recommend their name, without recommendation of A.C. can they be appointed as auditors?

The above is quoted only to learn and educate. Our main point is about compliance of Section 253 vis-à-vis Regulation (xxxix) of CCG.

Opinion:

Before examining the issue raised by you it would be pertinent to keep the following provisions of the Companies Ordinance, 1984, clause (xxxix) of the Code of Corporate Governance and question No. 3 of Frequently Asked Questions on the Code of Corporate Governance as placed by SECP on its Website.

Companies Ordinance, 1984

Section 253 Provision as to resolutions relating to appointment and removal of auditors.- (1) A notice shall be required for a resolution at a company’s annual general meeting appointing as auditor a person other than a retiring auditor.

Code of Corporate Governance

Clause (xxxix) The Board of Directors of a listed company shall recommend appointment of external auditors for a year, as suggested by the Audit Committee. The recommendations of the Audit Committee for appointment of retiring auditors or otherwise shall be included in the Directors’ Report.

Frequently Asked Questions

Q3. Does the Code conflict with the Companies Ordinance, 1984?

The SEC considers the Code to be an extension of the requirements of the Companies Ordinance, 1984 rather than in conflict with it. A number of amendments have recently been made in the Companies Ordinance, 1984 for greater harmonization between the provisions of the Code and the Companies Ordinance. Furthermore, the SEC draws support from the decision of the Karachi High Court in the matter of Messrs. Data Textiles Limited vs. Karachi Stock Exchange and another, 1999MLD 108. The Honourable High Court held, inter alia, that provisions contained in (Section 249 of) the Companies Ordinance, 1984 do not override and cannot be interpreted to be in derogation with the Listing Regulations framed under the Securities and Exchange Ordinance, 1969, as both the enactments cover separate and distinct spheres.

With regards to your first query, the appropriate Committee of the Institute is of the opinion that it is necessary that, where AC recommends name/names to change auditors after five years, a member should also give notice for the same name/names to the company at least 14 days before the AGM to comply with the requirements of Section 253.

Notwithstanding the SECP viewpoint regarding Companies Ordinance, 1984 and Code of Corporate Governance, the Committee is of the opinion that the requirements of section 253 of the Companies Ordinance, 1984 override all provisions and as the law stands today a member of a company has an inviolable right to propose any chartered accountant in practice to be the auditor of a company and the members have a right to elect an auditor by a majority vote, which may not necessarily be the same as proposed by the Board of Directors on the recommendation of the Audit Committee.

(July 28, 2004)

27. Payment of Dividends from Incremental Depreciation

Enquiry:

opinion/ clarification of the Institute is required on whether incremental depreciation on revalued assets, as transferred to unappropriated profit and loss account through statement of changes in equity can be considered for distribution of profits in the form of dividends by any company

Following scenario fully explains the issue and the importance of decision arrived at in this respect.

A company declared interim cash dividend to its shareholders (Rs.10 million) on the basis of profitability in its quarterly accounts. Subsequently annual accounts of the company disclosed that the company has earned net profit after tax of only Rs. 2 million for the year. Accounts do not show any reserve whereas losses had accumulated to Rs. 50 million. Statement of changes in equity shows that the company has transferred incremental depreciation on revalued assets relating to prior years Rs. 15 million and for current year Rs. 10 million as per notification No SRO 45(I)/2003 of the Commission.

Resultantly, profits of the company do not cover the amount of dividend and in the absence of any reserve, this tantamount to violation of Section 249 of the Companies Ordinance, 1984 which prohibits distribution of dividends, otherwise than out of profits of the Company.

Following table shows position of statement of changes in equity keeping in view the above information

STATEMENT OF CHANGES IN EQUITY
Rs. in millions
Share Capital    20.000

Accumulated losses at the beginning 50.000
Loss for the year 2.000
Dividend 10.000
Incremental depreciation
Prior years (15.000)
Current year (10.000)
Balance of accumulated loss at the end 37.000

Following should be kept forth before forming opinion in this respect:

• Para (2) & (3) of SRO 45(I)/ 2003 of Commission states that:

(2) An amount equal to incremental depreciation for the period shall be transferred from “Surplus on Revaluation of Fixed Assets Account” to un-appropriated profit / accumulated loss through Statement of Changes in Equity to record realization of surplus to the extent of the incremental depreciation charge for the period;”

(3) an amount equal to incremental depreciation charged in previous years may be transferred from “Surplus on Revaluation of Fixed Assets Account” to un-appropriated profit / accumulated loss through Statement of Changes in Equity; and

• Sub-Section (2) of Section 235 of the Ordinance strictly disallows utilization of surplus on revaluation for distribution of profits by way of dividends. It states

(2) Except and to the extent actually realized on disposal of the assets which are revalued, the surplus on revaluation of fixed assets shall not be applied to set-off or reduce any deficit or loss, whether past, current or future, or in any manner applied, adjusted or treated so as to add to the income, profit or surplus of the company, or utilized directly or indirectly by way of dividend or bonus:

Provided that the surplus on revaluation of fixed assets may be applied by the company in setting-off or in diminution of any deficit arising from the revaluation of any other fixed assets of the company:
[Provided further that incremental depreciation arising out of revaluation of fixed assets may be charged to Surplus on Revaluation of Fixed Assets Account.]

In view of the above information following points require clarification:

(1) Can dividend be paid out of incremental depreciation (both relating to current and prior periods) transferred to accumulated profit/ accumulated losses through statement of changes in equity in the light of Section 235, Section 249 and aforementioned notification; and

(2) Would the decision be same, where any company does not have any reserves and accounts show huge accumulated losses, as in above-mentioned example.

Any decision taken in this respect will be detrimental for the companies. I would appreciate early response in this respect.

Opinion:

To deal with the queries raised by you, the appropriate Committees of the Institute would like to draw your attention towards clauses (2) and (3) of SRO No. 45(I)/2003 dated January 13, 2003.

(2) an amount equal to incremental depreciation for the period shall be transferred from “Surplus on Revaluation of Fixed Assets Account” to un-appropriated profit / accumulated loss through Statement of Changes in Equity to record realization of surplus to the extent of the incremental depreciation charge for the period;

(3) an amount equal to incremental depreciation charged in previous years may be transferred from “Surplus on Revaluation of Fixed Assets Account” to un-appropriated profit / accumulated loss through Statement of Changes in Equity.

In the light of above clauses, the Committee is of the opinion that any dividend paid out of incremental depreciation whether relating to current year or previous years which does not fully offset the accumulated loss would appear to be paid out of capital.

(April 3, 2004)

28. Preservation of Books of Account

Enquiry:

We will be grateful for your help if you kindly inform us about the existence of any law in Pakistan relating to the retention of corporate documents in electronic form by use of imaging systems.

Whether the laws of Pakistan which require the storage of accounting records (such as vouchers, invoices, statements) allow for such accounting record in imaging system.

If your answer is positive please briefly provide details as to the conditions imposed for the keeping of such accounting records in imaging systems.

Opinion:
As regards to your question whether the laws of Pakistan allow for accounting records to be preserved in an imaging system, we would like to draw your attention towards the enclosed ICAP Circular 06/2002 dated July 13, 2002 that summarizes requirements of different statutes on preservation of accounting and auditing records.

Please note that though the statutes prescribe the time period for preservation of books of account, the medium of preservation i.e. whether it should be in hard form or soft form is not laid down in any of the statutes.

In the absence of any clarification by the statutory authorities and the law being silent on the issue, reference is made to the definition of “Document” as stated in the Black’s Law Dictionary:

“Document. An instrument on which is recorded, by means of letters, figures or marks, the original, official, or legal form of something, which may be evidentially used. In this sense the term “document” applies to writings; to words printed, lithographed, or photographed; to maps or plans; to seals, plates, or even stones on which inscriptions are cut or engraved. In the plural, the deeds, agreements, title-papers, letters, receipts, and other written instruments used to prove a fact. As used as verb, to support with documentary evidence or authorities.

Within meaning of the best evidence rule, document is any physical embodiment of information or ideas; e.g. a letter, a contract, a receipt, a book of account, a blue print, or an X-ray plate.”

The Committee is of the view that the terms lithographed/ photographed/ X-ray plate as used in the above definition may be stretched to include electronic imaging as a form of document.

The above view appears to stand valid in light of the provisions of Section 722 and 723 of the UK Companies Act 1985, that are reproduced below:-

722. Form of company registers, etc.

(1) Any register, index, minute book or accounting records required by the Companies Acts to be kept by a company may be kept either by making entries in bound books or by recording the matters in question in any other manner.

(2) Where any such register, index, minute book or accounting record is not kept by making entries in a bound book, but by some other means, adequate precautions shall be taken for guarding against falsification and facilitating its discovery.

723. Use of computers for company records

(1) The power conferred on a company by section 722(1) to keep a register or other record by recording the matters in question otherwise than by making entries in bound books includes power to keep the register or other record by recording those matters otherwise than in a legible form, so long as the recording is capable of being reproduced in a legible form.

Therefore, in our opinion, books of account of a company may be preserved/ retained in an electronic form by use of imaging systems. Further, as there are no separate conditions stipulated for the preservation of accounting records in an imaging system, period and place of preservation of such records would have to be derived as per the relevant statutes.”

(January 3, 2004)

29. Rotation of Auditors

Enquiry:

In accordance with the Code of Corporate Governance, every listed company is required to change their auditor (or at least the audit partner) who have been auditing for last five years. In this regard we request clarification regarding the following.

Our firm was a sole proprietorship up to January 2003 and was converted into partnership. Previously Mr. A. was signing the accounts, but since the partnership I am the audit partner of all listed companies.

Q. 1 Will our firm fall within the requirement of rotation of auditor by December 2003.

Q. 2 What is the status of two firms, which are merged?

Q. 3 Is it the name of the audit firm that matters or the structure of firm i.e. sole proprietorship / partnership.

At the time of entering into partnership we were considering the change of name of the firm, but the same was deferred and we are now considering the change in the near future.

Q. 4 If we plan to change the name of our firm, what will be the status of our firm in respect of following: –
a) Will the QCR (satisfactory status) already issued to our firm remain valid.
b) Will this change of name cause casual vacancy in the office of the auditor of listed and unlisted companies or will we be required to carry the old name up to the AGM of the Companies and in the AGM the new name will be proposed.
c) Will the requirement of rotation of auditor (as per the listing rules) apply retrospectively to the new named firm.

Opinion:

The appropriate Committee of the Institute would like to state that the purpose of introduction of rotation clause in the Code of Corporate Governance was to bring more transparency and independence in audit and this objective would not be achieved if firms change their names or merge with any other firm or do few cosmetic changes just to avoid rotation.

Therefore the Committee is of the opinion that mere change of firm’s name or conversion of sole proprietorship into partnership or merger may not be treated as a new firm with regards to the applicability of rotation of auditors.

Following are the responses to the queries you have raised: –

1. Yes, for the reason we have mentioned above;

2. Though the merger of two firms will constitute a new firm, for rotation purposes it would not change the status as it was before merger. If two firms A & B merge into AB & Co. and if A or B were due for rotation then AB will also be due for rotation.

3. Neither the name nor the conversion from sole proprietorship to partnership will make any difference for rotation purpose;

4 a. Your firm will not be subject to a fresh Quality Control Review (QCR);

b. You will carry your old name up to the AGM of companies when the new name may be proposed. Please refer section 47 of the Partnership Act, 1932 as quoted below:

47. Continuing authority of partners for purposes of winding-up. – After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise:

Please see reply at 1 above.

(December 5, 2003)

 

2. WORKER’S WELFARE FUND (WWF) & WORKER PROFIT PARTICIPATION FUND (WPPF)

1. Accounting Treatment Of “Workers Profit Participation Fund”

Enquiry:

According to clause 5.2 of the license granted by OGRA to one of the biggest gas companies in Pakistan (the Company) read with clause 5.02 of World Bank loan agreement with the said gas company, and guaranteed by the Government of Pakistan, the OGRA shall determine an annual return of 17.5% of the average net current value of the licensee/ borrower’s fixed assets in operation for a financial year. The GDS if not paid or short paid shall be recovered under section 3 of the Natural Gas (Development surcharge) Ordinance, 1967 read with rule 3 of the Natural Gas (Development Surcharge) Rules 1967.

The Director General Audit, Customs & Petroleum during audit of the Company’ accounts for FY 2009-10 (Para 2.7) pointed out that “inclusion of Rs. xxx million on account Of Worker Profit Participation Fund (WPPF) in “other operating expenses” for calculation of Final Revenue Requirement by the Company was not an expense and required to be appropriated from the profit earned by the Company/ Licensee”. The OGRA, however, admitted treatment of WPPF as an expense which caused short payment of GDS of Rs.xx million which is in line with the World Bank loan covenant 5.02 d (iv) and is reproduced below for reference purposes:

Quote:
“The term “total operating expenses” means all expenses related to operations. including administration, adequate maintenance, compulsory contributions to employee funds, taxes and payments in lieu of taxes such as development surcharges or other levies on gas revenues, and provision for depreciation on a straight-line basis at a rate of not less than 6% per annum of the average current gross value of the Borrower’s fixed assets in operation, or other basis acceptable to the Bank, but excluding corporate income tax, interest and other charges on debt”.

As per DAC directives of 05.08.2015, the matter was referred to Finance Division for seeking their opinion regarding the treatment of WPPF in the Revenue Requirement/ Accounts of the Company. In response, Finance Division stated that since the matter involves interpretation of accounting treatment, therefore, Ministry of Petroleum sought advice from ICAP on the accounting treatment of WPPF.

Opinion:

The Institute’s relevant Committee has deliberated the matter and the views/comments based on the review of the related documents provided by you are as follows:

1. Section 3(1)(b) of the Companies Profits (Workers Participation) Act, 1968 (the Act) requires every company to which the Scheme set out in Schedule to the Act applies pay subject to adjustments, if any, every year to the Workers’ Participation Fund constituted under the Act five percent (5%) of its profits during such year. The expression ‘Profits’ is defined in section 2 (d) of the Act.

The payment of such amount to the Fund is then distributed to workers’ of the company as per their respective entitlement provided under the Act and the left over amount from the allocation, if any, is paid into the treasury of the Government on account of Worker’s Welfare Fund established under the Workers Welfare Fund Ordinance, 1971.

The Act accordingly requires that where there are workers’ in a company the payment of 5% of profit is mandatory. The amount so calculated is deducted from the profit for the year of the company and after providing for taxation on profits and any other applicable item, net profit available to the owners of the company is arrived at. Distribution of such net profit after taxation for the year to the owners is taken as appropriation of profit.

2. Further, the Conceptual Framework of International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board defines an expense as “Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants”. As workers’ are not the equity participants of the company, the amount towards Workers’ Participation Fund is an expense in accordance with the requirements of IFRS.

3. With regard to the provisions of the World Bank Loan Agreement “the term ‘total operating expenses’ means all expenses related to operations, including……….but excluding corporate income tax, interest and other charges on debt”.

As explained above the payment towards Workers’ Participation Fund is mandatorily required for the workers’ of the company by the Act. We consider that the involvement and job of workers’ in the company is towards operating activities of the company. Therefore amount payable to the benefit of workers’ is an operating expenditure and all expenses related to operations are part of total operating expenses as provided in the meaning above. You would also note that the definition of total operating expenses in the agreement only excludes corporate income tax, interest and other charges on debt therefrom. Accordingly we agree with the determination of OGRA that payment to Workers’ Participation Fund is an operating expense of the company.

Our above opinion is limited to the accounting treatment under the IFRS accounting framework and does not take into account other matters / documents concerning the issue under consideration of the Public Accounts Committee.

(April 05, 2016)

2.  Clarification regarding WWF and WPPF

Enquiry:

ABC Limited is an Independent Power Producer (IPP) engaged in business of generation and selling of electricity to National Transmission & Dispatch Company (NTDC). As per its tariff determined by NEPRA (the Regulator), WWF and WPPF is recovered from NTDC after payment.

Before the Commercial Operations, ABC Limited capitalized its exchange gain/(loss) for the year ended June 30, 2009 and there was loss in the Financial Statements to the extent of Administration cost. In the next year to comply with IAS 21, the Company changed its accounting policy and charged exchange gain/(loss) to profit and loss account and restated its accounts for the year ended June 30, 2009 as per IAS 8, as a result, loss for the year 2009 converted into profit.

Company paid WWF and WPPF on the restated profit and invoiced the same amount to NTDC for recovery as per Power Purchase agreement and Tariff determined by NEPRA. NTDC wrote a letter to ABC Limited to seek clarification from ICAP that in case Company again changes its accounting policy, it may get some benefit from the concerned authority too after getting its reimbursement from NTDC also.

Please provide us the clarification on the following queries:

1. Whether a Company is liable to pay WWF and WPPF pertaining to previous year in case of restatement of financial statements due to change in accounting policy?

2. After getting reimbursement of WPPF and WWF from NTDC, can Company get benefit from Ministry of Human Resource and FBR in future by again adopting the previous accounting policy?

Opinion:

The Committee would like to give its opinion only on the accounting aspects of the issue. The Committee would like to draw your attention towards section 2(d) of the Companies Profits (Workers’ Participation) Act which defines profits as:

“Profits in relation to a company means such of the net profits as defined in Section 87C of the Companies Act, 1913 as are attributable in its business, trade undertakings or other operations in Pakistan.”
Section 87C(3) of the Companies Act 1913 (the Repealed Act) defines Net Profits’ as under:

“For the purposes of this section ‘net profits’ means the profits of the company calculated after allowing for all the usual working charges, interest on loans and advances, repairs and outgoing, depreciation, bounties or subsides received from any Government or from a public body, profits by way of premium on shares sold, profits on sale proceeds of forfeited shares, or profits from the sale of the whole or part of the undertaking of the company but without any deduction in respect of income-tax or super-tax, or any other tax or duty on income or revenue or for expenditure by way of interest on debentures or otherwise on capital account or on account of any sum which may be set aside in each year out of the profits for reserve or any other special fund.”

In the opinion of the Committee, considering the definition of profit stated above, especially the underlined portion, it appears that only profits from the ordinary activities of the company should be considered in computing the share of the workers. The Committee is of the view that the Company would be liable to pay WWF and WPPF for previous year in case of restatement of financial statements due to change in accounting policy as it is relevant to the business operations of the company and the same should be construed as part of the profits of the company for all intents and purposes.

With regard to your second query, the Committee would like to your attention to the following paragraph of IAS-8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’:

14    An entity shall change an accounting policy only if the change:

       (a) is required by an IFRS; or
(b) results in the financial statements providing reliable and more relevant information about the effects of                    transactions, other events or conditions on the entity’s financial position, financial performance or cash flows.

From the above, it is clear that change in accounting policy may only make to obtain reliable and relevant information. A Company must not change its accounting policy merely to get monetary benefit from any other entities.

(May 28, 2013)

3. Query Related To WPPF

Enquiry:

The ABC limited has incurred losses for last five years and in the current year the company earned profit. During the current year, the bank – which has given long term loan to the ABC limited, has re-scheduled the overdue long term and also reduce the rate of mark-up , due to which the ABC limited has reversal of accrual of mark-up expenses of last four years. The effect of reversal of accrued mark-up taken in the current year profit as prior year’s adjustment.

In this respect, I want to know your expert opinion whether the WPPF & WWF will be calculated on the profit taking into effect of reversal of mark-up of previous years or not.

Opinion:

It shall be appreciated that the Committee does not have the legal expertise and it does not, therefore, deal with contentious legal aspects; the Committee assists the members only in the interpretation of accounting/ auditing standards and statutory provisions dealing with these matters.

The Committee is of the view that though the issue under reference appears to be a legal matter, however, it would like to give its opinion on the query raised by you as follows:-

The Committee would like to draw your attention towards section 2(d) of the Companies Profits (Workers’ Participation) Act which defines profits as:

“Profits in relation to a company means such of the net profits as defined in Section 87C of the Companies Act, 1913 as are attributable in its business, trade undertakings or other operations in Pakistan.”

Section 87C (3) of the Companies Act 1913 (the Repealed Act) defines Net Profits’ as under:

“For the purposes of this section ‘net profits’ means the profits of the company calculated after allowing for all the usual working charges, interest on loans and advances, repairs and outgoing, depreciation, bounties or subsides received from any Government or from a public body, profits by way of premium on shares sold, profits on sale proceeds of forfeited shares, or profits from the sale of the whole or part of the undertaking of the company but without any deduction in respect of income-tax or super-tax, or any other tax or duty on income or revenue or for expenditure by way of interest on debentures or otherwise on capital account or on account of any sum which may be set aside in each year out of the profits for reserve or any other special fund.”

In the opinion of the Committee, considering the definition of profit stated above, especially the underlined portion, it appears that only profits from the ordinary activities of the company should be considered in computing the share of the workers. The Committee feels inclined to hold the view that effect of reversal of mark-up of previous years due to re-scheduling of the overdue of long term loans and reduction of the rate of mark-up is relevant to the business operations of the company and the same should be construed as part of the profits of the company for all intents and purposes.

Accordingly, in the opinion of the Committee, provision for WPPF and WWF should have been made.

(February 2010)

4. Applicability of Companies Profits (Workers’ Participaiton) Act, 1968 (The Act) on Capital Gains earned from Sale of Shares

Enquiry:

An issue has arisen regarding the treatment of gains recognized in the Profit and Loss Account on investments in equity shares for the purposes of computation of profits distributable under the above Act, where material. Based on a legal opinion, there is a view that net profits, for the purpose of computation of the contributions to the Workers’ Profits Participation Fund (WPPF), are to exclude, inter-alia, profits by way of premium on shares sold, profits on sale proceeds of forfeited shares, or profits from the sale of the whole or part of the undertaking of the company. The relevant extracts of the opinion are set out below:

“….. while calculating “net profits”, inter alia profits by way of premium on shares sold, profits on sale proceeds of forfeited shares, or profits from the sale of the whole or part of the undertaking of the company are not to be included in the “net profits”. The rational is that the profits in which no effort of workers is involved, are not to be included in “net profits” for the purpose of 5% contribution to the Fund; Conversely where the effort of the workers in the earning of the profit is involved but expenditure is made in the form of payment of taxes or duties etc, it is to be included (not excluded) in the ‘net profit’….” (emphasis is ours)

There appears to be a concern amongst certain members of the Institute regarding the treatment of gains/(losses) booked in the accounts upon de-recognition of above investments, if material, for the purpose of determination of profits distributable under the Act in view of the following facts, where relevant:

(b) Any permanent diminution in the value of the above investments recognized in accounts was also deducted in arriving at the profit available for distribution under the Act.

(c) Interest paid on borrowings that were, directly or indirectly, utilized to acquire such investments was also deducted in arriving at the profit available for distribution under the Act.

You are requested to provide your views on the treatment of such gains for the purposes of computing the ‘net profits’ of the company under the Act.

Opinion:

The Committee discussed the concerns raised by you and is of the opinion that the permanent diminution in the value of investments should be deducted in arriving at the “net profits” available for determination of contribution to WPPF. In reaching the opinion the Committee viewed that “profit by way of premium on shares sold” referred to in the definition of “net profits” under Section 87C(3) of repealed Companies Act, 1913 will not include within its ambit gain/loss on investments. The Committee is also of the view that the legislature views interest on loans and advances as revenue expenditure and as such deductible and has specifically mentioned it in the definition to differentiate it with interest on debentures and otherwise on capital account which are not deductible.

We would like to point out here that the advice given above is a matter of interpretation of the law and is based on the collective experience and wisdom of the Committee members who as you know are not lawyers by profession. In view of this it may be prudent if you also seek a legal opinion in the matter from a lawyer.

(January 7, 2006)

3. OTHERS

1. Opinion on the Accounting of Shares of a Limited Company received by the BESOS Trust

Enquiry:

We are writing to seek your views on the accounting treatment of the shares of a listed XYZ Oil Company Limited (“the Company”) received under their respective Employees Empowerment Trust (“the Trust”) established under the Benazir Employees Stock Option Scheme (BESOS). The salient features of the scheme and the Specific matter regarding which the accounting opinion is being sought is explained in more detail in following paragraphs. For clarification purpose, the opinion is being sought in respect of the books and records of the Trust and not regarding the Company.

1. Salient feature of the Trust and its legal status

1.1 The Trust has been established under a trust deed with a view to achieve the goals set out in the Benazir Employees Stock Option Scheme. The trust deed was executed on 7 October 2009 by the Ministry of Petroleum and Natural Resources (MoP&NR) Government of Pakistan (GoP) and vests on a Board of Trustees set up under the Trust Deed.

1.2 In pursuance of the above mentioned trust deed, MoP had transferred 12% of the shares held by them in the Company to the Trust constituting 5.25 M ordinary shares of Rs. 10 each. 8.25 M shares are held by the Trust (increase is due to bonus shares issued by the Company) as of 30 June 2016. Title to these shares is held in the name of the Trust.

However, under the trust deed, the shares of the Company so transferred and/ or vested in the Trustees, from time to time, shall transferred and / or vested back to the MoP by the Trustees at the return value as and when the unit certificate(s) (refer paragraph 1.5 below) is surrendered, redeemed and/ or retuned by the employee to the trust. The shares transferred and/ or vested back to the GoP shall correspond to the number of the units/ certificates as determined under the trust deed (refer paragraph 1.5). Furthermore, under the trust deed fifty percent (50%) dividend received on the Company’ shares shall be distributed by the Trustees to the employee prorated on the basis of units held by them and the remaining fifty percent (50%) of dividend received by the Trust on the shares will be transferred to the Privatization Commission, Governments of Pakistan which will maintain a special fund for this purpose. (emphasis is ours)

1.3 The Trust has been created for the benefit of the eligible employees, who shall comprise the following:

– Regular or permanent employees (both workmen and non-workman)
– Contract employees (both workmen and non-workman) with five (5) years or more service in the company, excluding employees working with the Company on deputation or on daily wages.
– Those employees who were on the payroll of the Company as on 14 August, 2009.

1.4 The Trust Properties

1.4.1 Under the trust deed, the Trust properties shall consist of:
a) rupees ten thousands (Rs. 10,000/-) as initial grant by MoP;
b) properties/ assets purchased by or transferred and/or vested in Trust, including twelve percent (12%) shares of the Company (the “Shares”) to be transferred by the MoP to the Trust;
c) dividends received from time to time on the Shares;
d) donations/contributions from sources approved by the GoP; and
e) earnings of the TRUST on account of its working or investments.

1.4.2 The Shares transferred and/or vested in the Trustees, from time to time, shall be transferred and/or vested back to the MoP by the Trustees, subject to clause 5 of the Deed. (emphasis is ours)

1.4.3 The Trustees shall create a find (the FUND) and the money received from sources stipulated under clause (1.4.1) (a.to e.) shall be transferred to the FUND.

1.4.4 The Trust shall issue and offer unit certificates (the “Unit Certificate”) to the employees pursuant to a plan (the “Plan”) attached herewith as Annexure B and fifty percent (50%) dividend received on shares shall be passed on to the Employees as per the Plan.

1.5 The units for allotment to the employees (as mentioned above) have been calculated on the basis of each completed year of service with a maximum of 20 units for each employee and Unit Certificates shall be issued on the basis of units so allotted. The Unit Certificate issued to the employees is not transferable/ saleable. Provided, however, the employees can create a lien or hypothecation on these Units Certificates for securing loan.

1.6 The Fund is being maintained and administered by the Board of Trustees, comprising a minimum of six (6) Trustees, as may from time to time be determined and nominated by MoP. Fifty percent of the Trustees shall be the representatives of the employees and the Trustees shall then among themselves elect President of the Board.

The Trust is irrevocable save with the consent of MoP, except that it may be wound up if so directed by MoP. In the event of the winding up of the Trust and the Fund, its assets left after meeting its liabilities, if any, shall be transferred to/ or vested in the MoP within three months of the winding up under intimation as per the applicable law. However, the Trust shall be wound up after all the shares have been transferred to the Mop.

1.7 Furthermore, as per the plan given in the Trust deed, an employee, on ceasing to be an employee of the Company shall surrender the Unit Certificate(s) to the Trust and will receive compensation for the surrendered units on the basis of value of these units (to be done on the basis of the average quoted value of shares of the immediately preceding month on the stock exchange).

1.8 In case of ceasing to be an employee due to an earlier exist, the employee shall surrender the Unit Certificate(s) to the Trustees but he/she shall not be entitled to get compensation of surrendered units unless he/she has served five more years in the Company from the date of enforcement of Benazir Employees Stock Option Scheme, i.e. 14 August 2009; however, this condition will not apply in case of superannuation, retrenchment, retirement on medical grounds and death/ disability.

1.9 A letter dated February 2010, issued by the Privatization Commission, Ministry of Privatization, Government of Pakistan addressed to the Trustee / Secretary of the Trust mentions that if the Company announces/ declares the dividend in kind (bonus shares), appropriate percentage in proportion to the shares held by the Trust will be transferred to Trust. Fifty percent (50%) of the bonus shares received by the Trust will be directly transferred to the GoP without any consideration and remaining fifty percent (50%) of the shares will remain with the Trust for distribution to the eligible employees who are on the payroll of the Company for the said period.

1.10 Transfer back of shares and investiture of the Trustees

The shares transferred and/ or vested in the Trustees by the MoP shall notwithstanding anything contrary contained in this deed, be transferred and/or vested back by the Trustees to the Government of Pakistan at the Return Value (as defined in the Plan) as and when the Unit Certificate is surrendered redeemed and/ or returned by the employee to the TRUST. The shares transferred and/or vested back to the Government or Pakistan shall correspond to the number or the Unit Certificates as determined under the plan. The Company shall ensure that outgoing employee surrenders Unit Certificates to TRUST before ceasing to be Employee of the company. (emphasis is ours)

2. Statements of compliance and accounting convention as mentioned in the audited financial statements of the TRUST for the year ended 30 June 2015

2.1 Statement of compliance

These Financial statements have been prepared in accordance with the requirements of the trust deed and the International Accounting Standard – 26 (IAS 26) ‘Accounting and Reporting by Retirement Benefit Plans’. Where the requirements of the trust deed differ with those of IAS 26, the requirements of the trust deed have been followed.

2.2 Accounting convention

These financial statements have been prepared under the historical cost convention except for investments held for cash – settled share –based payments which have been stated at fair value.

3. Accounting opinion

Up to the year-end 30, June 2015, the Trust’s practice was to record the shares of the Company received (both the initial receipt of shares from the Government of Pakistan and subsequent bonus receipts) as investment/assets with simultaneous credit to ‘net assets available for benefits’. Primary reason, we consider, could be because of the fact that the Trust properties, as defined in the Trust deed (see also para 1.4 of letter), includes the Company shares transferred to the Trust and that the title to the Company’s shares are held in the Trust’s name.

This has been our practice since financial year 2010, the first period for which the financial statements were prepared by the Trust. We also understand that this practice (of the accounting entry /treatment is explained above) is also being followed by similar other BESOS related Trusts.

For the financial year-ended 30 June 2016, a different view, regarding the accounting treatment of the shares of the Company as received from the Government of Pakistan (including the subsequent bonus shares) have been suggested and the view is that the Company’ shares should not be recorded in the books and records of the Trust as an asset/ investment due to the following basic reasons:

i) These are not the assets held by a long-term employee benefit fund as defined in IAS 19 (Employees benefits) as follows:
Assets held by a long-term employee benefit fund are assets (other than non-transferrable financial instruments issued by the reporting entity) that:

a. are held by an entity (a fund) that is legally separate from the reporting entity and exists solely to pay or fund employee benefits; and

b. are available to be used only to pay or fund employee–benefits, are not available to the reporting entity’s own creditors (even in bankruptcy), and cannot be returned to the reporting entity, unless either:

i. The remaining assets of the fund are sufficient to meet all the related employees benefit obligations of the plan or the reporting entity; or
ii. The assets are returned to the reporting entity to reimburse it for employee benefits already paid. (emphasis is ours)

ii) The shares of the Company are held by the Trust ‘in trust’ on behalf of the Government of Pakistan.

Apparently it appears that the shares of the Company are not the assets of the Trust and instead have to be returned to the Government of Pakistan (when the related units are surrendered, redeemed and/or returned by the employee to the Trust).

The fact that the shares of the Company are held by the Trust “in trust” can also be viewed from the following covenant of the Trust deed which states as follows:

“The MoP hereby creates the Trust for the benefits of the eligible Employees as per the criteria attached herewith the Annexure A (“the Employees”) and conveys, transfers, settles, vests, assign and grants Rupees ten thousand (Rs 10,000/-) to the Trustees to be held in trust and administered for the purposes and objects of the TRUST in accordance with the provisions and directions contained hereunder.”(emphasis is ours)

iii) Apart from the above clarification regarding the holding of the Company’s shares in trust, paragraph 1.2, 1.4.2 and 1.10 also mentions that these shares have to be returned to the Government of Pakistan.

iv) These shares do not appear to fully satisfy the following definition/ conditions for classification of an asset as given in the Glossary to the IFRS hand book:

Assets A resource:

i. Controlled by an entity as a result of past events; and
ii. From which future economic benefits are expected to flow to the entity.

v) However, a disclosure may need to be made in the financial statements of the Trust regarding the Company’s shares held by the Trust ‘as a trustee’ and that the trust deed does not prescribe the basis of accounting.

You are requested to kindly review the above mentioned point of view and kindly give us your advice for an appropriate accounting treatment of the shares of the Company received by the Trust in its books/records.

Opinion:

The Committee understands that the XYZ Limited Employees Trust (“the Trust’) was established under a trust deed. The Trust properties as defined in clause 1.4 of the Trust deed include 12 percent shareholding of Government of Pakistan’s (GoP) in the Company. The said shareholding was transferred by the Ministry of Petroleum and Natural Resources (MoP&NR), GoP to the Trust.

Further, based on the information provided by the enquirer, the titles to these shares are held in the Trust’s name for the benefit of the Company’s employees and these shares are not transferable/ salable.

The International Financial Reporting Standards (IFRS) define “Asset” as under:

“a resource controlled by an entity as a result of past events; and from which future economic benefits are expected to flow to entity.” (Underline is ours)

The evaluation of control should take into account the extent to which the reporting entity is able to determine the use of the assets; and the ‘benefits’ test should take into account which party obtains the risks and rewards associated with ownership.

The definition of asset includes the basic requirement of control, however, control is not defined in the Conceptual Framework for Financial Reporting of the IFRS. In these circumstances, the relevant legal and contractual requirements should therefore be carefully reviewed and judgement applied if necessary to determine whether the ‘control’ and ‘benefits’ tests have been met. The legal capacity in which the Trust holds shares is important and the substance of the contractual arrangement should be considered in addition to its legal form.

The clause 1 of the Trust Deed, explaining the creation of trust and transfer of property is reproduced hereunder:

“The MoP hereby creates the Trust for the benefits of the eligible Employees as per the criteria attached herewith the Annexure A (“the Employees”) and conveys, transfers, settles, vests, assign and grants Rupees ten thousand (Rs 10,000/-) to the Trustees to be held in trust and administered for the purposes and objects of the TRUST in accordance with the provisions and directions contained hereunder.”

Further, in accordance with sub-clause 1 of clause 5, 12 percent of the GoP’s shareholding transferred by the MoP to the Trust shall be transferred and/or vested back by the Trustees to the GoP at a return value.

The Committee understands that the Trust holds shares of the Company vested by the MoP for the benefit of employees and the shares held by trust are not transferable/ salable by the Trustees. The Trust therefore, has a fiduciary responsibilities under the clause 3 of the Trust Deed and it is obliged to discharge these with due care.

An important indicator of control is the voting rights attached to the shares held by the Trust and based on the information provided by the enquirer, the voting rights are with the Trustees of the Trust.

The sub-clause 2 of the clause 5 explains that:

“The trust property shall absolutely vest in the Trustees and shall be applied to the objectives of the Trust as the Trustees in their discretion may deem fit and proper.”

The Committee also understands that pursuant to the Trust deed, the GoP has no real discretion over the use of shares as they would not be able to sell shares unilaterally for a purpose other than to satisfy the share-based payment arrangement under BESOS.

Conclusion

Based on the above discussion, the Committee is of the view that the Company’s shares transferred by MoP&NR to the Trust are held by the Trust to meet the objectives of the establishment of Trust i.e. the welfare/ empowerment of the employees of the Company and settlement of their benefits under the BESOS. The significant risk and rewards i.e. the voting rights, increase/ decrease in share price and dividends related to these shares are also with the Trustees and affect the employees directly. In view of the above, the Committee is of the view that the shares of the Company held by the Trust under the Trust deed are assets of the Trust.

(August 22, 2017)

2. Treatment of Unrealized Mark-Up on Advances

Enquiry:

ICAP is requested to please provide clarification on the treatment of unrealized mark-up on advance on the following matter as per applicable accounting standards.

Some of the banks/ DFIs have given advances to XYZ Company, which defaulted on the payments, so the mark-up was suspended in the books of the banks. However, XYZ Company was later acquired by ABC Company and in turn; these advances (liabilities of XYZ Company) were transferred to ABC Company.

It may be noted that the banks had a total exposure of Rs. xx billion (Outstanding Rs. xxx million as of 30-09-2016) on XYZ Company. The suspended mark-up as of 30-09-2016 stood at Rs. xxx million.

After the acquisition, one of the leading banks approached the SBP to allow it to take the unrealized mark-up to the income account due to improved risk profile of the borrower (new ABC Company). SBP advise the banks to recognize the suspended mark-up only when realized in cash.

Nonetheless, the bank claims that both amount (principal and mark-up) are today expected to be fully recoverable based on the credit standing and performance of the ABC Company. Previously, there was a concern that the amount due would not be recoverable from the XYZ company, however after the acquisition, the market standing of the ABC company has further strengthened and the amount are expected to be fully recovered. The bank has requested to take the suspended mark-up to the income by saying that the previously suspended markup now satisfies the conditions of recognizing the revenue as per IAS 18; stated below.

International Accounting Standard 18 ‘Revenue’ requires that revenue shall be recognized when following criteria are met:

• Reliable measurement of consideration
• Probability that the economic benefits associated with the transaction will flow to the entity.

The revenue is measurable and the probability of it flowing to the bank is no different from the probability of the principal flowing to the Bank, which is recognized at full amount. In order to recognize these claims, the recognition of the principal will simply require a change in obligor in the books of the bank (i.e. from XYZ to ABC Co). However, there is no receivable outstanding in the books against the suspended markup as the receivable was reversed from the books when the markup was suspended. Therefore, as a first step, the claim in respect of the suspended markup will have to be recognized as a receivable, with a corresponding credit to income.

Further, the bank sated that in order to not recognize the previously suspended markup as income (until received in cash), while still maintaining the claim against this amount, it would have to debit the income and take a provision against this claim. Since this is now a claim against ABC Co, it would be tantamount to questioning the recoverability of a claim against ABC. It could also cause negative repercussions for ABC as any reversal of markup would imply that there are questions about either the ability or the willingness of ABC to settle this claim. Since there is no doubt of the recoverability of all other claims on ABC which are significantly larger than this amount, it could be maintained that there is also no need to doubt the recoverability of the claim against the previously suspended markup.

During this issue, SBP highlighted the fact that mark-up payment is due to be received at a future date i.e. in 2024. In this regard the bank states that the criteria for recognition of an asset should be dependent on the probability of the recoverability of the asset rather than the timing of the recoverability of the asset. While the first installment of the previously suspended markup will now be due for payment in Jan 2024, the last principal installment of the loan is due in December 2023. Hence, if the much larger principal that is due in future is considered good and fully recoverable, then it would not be unreasonable to also consider the markup, which is due only one month later, good, and fully recoverable.

Opinion:

The Banks/DFIs prepare their financial statements in accordance with the approved accounting standards as applicable in Pakistan, which comprise of:

• International Financial Reporting Standards (IFRSs) and Islamic Financial Accounting Standards (IFASs) as notified under the Companies Ordinance, 1984;
• provisions and directives issued under the Companies Ordinance, 1984;
• provisions and directives issued under the Banking Companies Ordinance, 1962; and
• the directives issued by the Securities Exchange Commission of Pakistan (SECP) and the State Bank of Pakistan (SBP).

However, in case requirements of provisions and directives issued under the Banking Companies Ordinance, 1962, Companies Ordinance, 1984 and the directives issued by SBP and SECP differ from requirements of IFRSs and IFASs, the provisions of and directives issued under the Banking Companies Ordinance, 1962, the Companies Ordinance, 1984 and the directives issued by SBP and SECP shall prevail.

In the enquired scenario, i.e. the recognition of un-realized mark-up on classified loans/advances by banks/DFIs, the requirements of IAS 18 ‘Revenue’ are not relevant, and the financial instrument recognition criteria, outlined in IAS 39 ‘Financial Instruments: Recognition and Measurement’ has to be considered and fulfilled. However, the SBP has deferred the applicability of IAS 39 for the banks/DFIs, and has issued directives, prescribing the recognition and measurement criteria of the financial instruments. Accordingly, the banks/DFIs recognize and measure financial instruments related transactions in accordance with the SBP issued directives. The SBP has issued Prudential Regulations for Corporate/Commercial Banking (the Regulation), advising the Banks/DFIs to ensure compliance of the Regulation in the letter and spirit.

The Regulation-8, “Classification and Provisioning for Assets”, explains the criteria and provides detailed guidance for the classification and provisioning of assets, including the treatment of suspended/un-realized mark-up of classified advances. The Regulation-8 is reproduced below for reference purposes:

“1. Loans/Advances:

a) Banks/DFIs shall observe the prudential guidelines given in Annexure-V in the matter of classification of their asset portfolio and provisioning there against on the time based criteria.”

The Annexure-V of the Regulation provides guidelines to the Regulation-8, including the treatment of income related to the classified loans/advances. In accordance with the guidelines of Annexure-V, the suspended/un-realized mark-up on a classified loans/advance is recognized on the receipt basis. The relevant part of the Annexure-V of the Regulation is reproduced below for reference purposes:

“Unrealized mark-up/ interest to be kept in memorandum account and not to be credited to income account except when realized in cash. Unrealized mark-up/interest already taken to income account to be reversed and kept in the memorandum account.”

The Committee during its deliberations and conclusion has assumed that the loan was transferred from XYZ company to ABC company on the original agreed terms (as agreed between XYZ company and the bank), and the loan was not restructured/ re-scheduled, subsequent to its transfer to ABC company. However, for reference purposes the Committee would like to refer paragraph 3 of Regulation-8, which explains the basis for the recognition of suspended mark-up of the rescheduled/restructured loans/advances.

In the light of above, the Committee is of the view that suspended/un-realized mark-up of classified loans/advances should be recognized in accordance with the provisions of the Regulation, as issued by the SBP.

(February 01, 2017)

3. Query on Gratuity

Enquiry:

An industrial undertaking pays gratuity to the employee who completes one year of service equal to last month drawn salary and is not following strictly the provisions of law that employee is entitled to gratuity equal to last drawn salary x no. of years of service at the time he leaves the service.

Further information

1. Accounting policy describes that gratuity is paid every year to the eligible person.
2. Gratuity paid every year is disclosed in the final accounts.
3. Employment agreement mentions that gratuity will be paid every year.
4. Employee has acknowledged the receipt of amount of gratuity.

Please advise:

1. Under the circumstances, are the accounts misstated?
2. Is company liable to pay some amount to employee on account of gratuity who leaves the service say after 5 years while he has been receiving his gratuity every year in accordance with terms of employment?
3. How auditor should give his audit report in respect of gratuity? Or there is no need of mentioning anything?

Kindly give definite/specific answers, please do not reproduce the Standard.

Opinion:

The Industrial & Commercial Employment (Standing Orders) Ordinance 1968 is applicable to all industrial and commercial establishments employing more than twenty workmen at any time during the preceding twelve months. For certain Standing Orders (S.O.) including the S.O. No. 12 (6) relating to termination of employment and payment of terminal benefits etc. the minimum number of persons employed is required to be 49 for Industrial undertakings and 20 for other undertakings. The relevant provisions of the S.O. No. 12 are reproduced below for reference:

12. Termination of employment.–

(1) For terminating employment of a permanent workman, for any reason other than misconduct, one month’s notice shall be given either by the employer or the workman. One month’s wages calculated on the basis of average earned by the workman during the last three months shall be paid in lieu of notice.

(6) Where a workman resigns from service or his services are terminated by the employer, for any reason other than misconduct, he shall, in addition to any other benefit to which he may be entitled under this Ordinance or in accordance with the terms of his employment or any custom, usage or any settlement or an award of a Labour Court under the [Punjab Industrial Relations Act 2010 (XIX of 2010)], be paid gratuity equivalent to [thirty days] wages, calculated on the basis of the [wages admissible to him in the last month of service if he is a fixed-rated workman or the highest pay drawn by him during the last twelve months if he is a piece-rated workman], for every completed year of service or any part thereof in excess of six months.

Provided that, where the employer has established a provident fund to which the workman is a contributor and the contribution of the employer to which is not less than the contribution made by the workman, no such gratuity shall be payable for the period during which such provident fund has been in existence.

Provided further that if through collective bargaining the employer offers and contributes to an “Approved Pension Fund” as defined in the Income Tax Ordinance, 2001 (XLIX of 2001), and where the contribution of the employer is not less than fifty per cent of the limit prescribed in the aforesaid Ordinance, and to which the workman is also a contributor for the remaining fifty per cent or less, no gratuity shall be payable for the period during which such contributions has been made.

From the plain reading of the above two paragraphs it appears that gratuity under S.O. No.12 (6) (normally called Statutory Gratuity) is in addition to all other terminal benefits {except as mentioned in two provisos to S.O. No.12(6)} and can only be paid after termination of employment for any reason or resignation from service. The payment along with current pay does not, prima facie, seem to be aligned to the requirements of S.O. No.12 which deals with matters arising on and after the termination of the employment. You may interpret the inquired questions based on the above guidance provided by the Committee.

Further, considering that your query involves interpretation of the law, you are advised to seek legal opinion for more clarity and understanding.

(April 25, 2016)

4. Query on Trading Right Entitlement Certificates (TREC)

Enquiry:

Pursuant to demutualization of the Lahore Stock Exchange (LSE) and Karachi Stock Exchange (KSE), the ownership rights in a Stock Exchange were segregated from the right to trade on an exchange. As a result of such demutualization, Trading Right Entitlement Certificates and Shares were issued by Stock Exchanges.

According to ICAP Directive, the apportionment of book value of Cards will be on the basis of fair value of Trading Right Entitlement Certificates and Shares issued by Stock Exchanges. After apportionment of book value of cards to TREC and Shares, we will determine recoverable amount of Cash Generating Units (CGU) according to IAS-36 for impairment test. Recoverable amount will be equal to higher of FV less cost of disposal and Value in Use (Para 19).
The Karachi Stock exchange has, vide its notice dated May 2013, determined the fair value of Trading Right Entitlement Certificates and Shares for the purpose of Base Minimum Capital (BMC) requirement as under:

– TREC – Rs.15,000,000
– Shares @ Rs. 9.954 per share

Currently a number of companies are showing the formal Stock Exchange card carrying value either as it is or apportioned the same between TREC and long Term Investment even if it exceeds the fair value of the TREC and Shares. For example:

The carrying value of card of KSE is around Rs. 105 M. Now either the card is being shown at Rs. 105M or this 105M is apportioned into TREC and Shares at Rs. 29M and Rs. 76M respectively. This apportionment is made on the following assumptions.

The KSE has declared the value of TREC at Rs. 15M and shares at Rs. 40M. The ratio of this value comes to 27:73. This Rs. 105M has been apportioned on the basis of this ratio.

Likewise, the carrying value of card of LSE is around Rs. 38M. Now either the card is being shown at Rs. 38M or this 38M is apportioned into TREC and Shares at Rs. 12M and Rs. 26M respectively. This apportionment is made on the following assumptions.

The LSE has declared the value of TREC at Rs. 4M and shares at Rs. 8.4M. The ratio of this value comes to 32:68. This Rs. 38M has been apportioned on the basis of this ratio.

In view of the above the clarification is required what will be the treatment of the value of cards over and above the value of TREC & Shares (Rs.15,000,000 & Rs.40,073,830) in respect of Karachi Stock Exchange and (Rs. 4,000,000 and Rs. 8,439,750) in respect of Lahore Stock Exchange.

Currently the TREC & Shares for KSE have been trading in the market at Rs.45 million approximately and TREC & Shares for LSE around Rs. 8 to Rs10M. Hence, active market is available. These transactions are being done in the form of open auction and private deals in the stock exchanges.

Opinion:

The Committee considered your query and would like to reproduce ICAP Selected Opinion No. 1.5 ‘Clarification required on ICAP Opinion on Accounting for De-Mutualization of Stock Exchanges’ of Volume XIX issued on August 29, 2013:

“15. Any subsequent measurement of the shares and/ or TREC would only be possible where their reliable fair values can be measured. This would most likely happen when the blocked shares are sold to the strategic investor or to the general public through an IPO and an active market develops for the TREC.

The Committee in its opinion had no intention to time bound the subsequent measurement of fair value. An entity can determine the reliable fair value through an appropriate price finding mechanism any time after initial recognition”.

With regard to your query, the Committee would suggest that fair values on split off date need to be assessed and allocation of the value of card should then be done on the basis of determined fair values.

The Committee is also of the view that the apportioned carrying value would be required to be tested for impairment as per IAS 36, if any. When the management and the auditor conclude that there is no impairment, they may continue to use the apportioned carrying value. However, the Committee would like to caution you about transactions which are being done privately; care must be taken when data is not available publicly.

(February 11, 2015)

5. Guidance for treatment of Membership Card of Stock Exchange Brokers

Enquiry:

I would like to highlight issues pertaining to the treatment of Membership card surrendered by members in favour of stock exchanges and issuance of TREC and Shares against such membership card.

• ICAP had graciously advised me vide letter No. ICAP/DTS/1/7038/2532 dated February 25, 2013 through “Opinion on accounting for exchange of membership card with shares and trading right entitlement certificate on demutualization of stock exchanges.
• On the advice of ICAP cost of Membership Card is allocated on the shares of stock Exchange and TREC on the basis of fair value of respective assets (TREC and Shares).
• The Lahore stock exchange has determined value of TREC at Rs.4,000,000/- for the purpose of BMC and value of share is Rs.10 per share. Thus value of TREC and Shares is calculated as under:-
Value                              %
TREC        Rs.4,000,000/-             32.15%

Shares       Rs.8,439,750/-              67.85%

(843,975 shares @10 each)

Total         Rs.12,439,750/-                100%

The cost of membership card is allocated between two assets on the basis of 32% for TREC and 67.85% for Shares at the time of acquisition of TREC and Shares.

You are requested to guide me as to whether or not the above treatment be continued without charging any impairment for the financial year 2013 where following circumstances exists:-
1. 60% of the shares are kept by stock exchanges in the blocked account and divestment of the same will be made in accordance with the requirements of the Act within two years from the date of demutualization. Similarly, rest of 40% shares are credited to the brokers CDC account and cannot be sold out because of non – existence of market.
2. The fair value of such shares is not available because of the reason that there is no market available for sale or purchase of such shares.
3. It is not expected that the value per share will remain at Rs.10 per share at the time when “permission to sale” will be granted to member.
4. Similarly, the fair value of TREC cannot be determined because of the fact that there is no parallel transaction to be followed and if some transaction is made, it is purely on private basis and not on fair market basis.

Opinion:

The accounting treatment stated in ICAP Selected Opinion No. 1.2 of Volume XVIII on ‘Accounting for Exchange of Membership Card with shares and trading right entitlement certificate on demutualization of the Stock Exchanges’ issued in February 2013, is applicable at the initial stage. Subsequently, fair value adjustment or revaluation as the case may be, is to be carried out when fair values are determined. However, the impairment test should be performed in accordance with relevant IFRSs.

(November 08, 2013)

6. Clarification required on ICAP opinion ‘accounting for de-mutualization of stock exchanges’

Enquiry:

The Committee interpretation is requested on the following lines:

Quote: At any subsequent date, if an entity is able to estimate a reliable fair value for shares by any method, the gain will be recognized according to IAS 39. Un Quote :

By word subsequent, our client has an interpretation as if today market conditions.

Whereas keeping in view paragraph 15 of ICAP opinion on subject, we differently interpret that the subsequent date is the date by which the blocked shares will be sold out to strategic investor or general public not before and active market is developed for these shares not earlier.

Paragraph 15 of the ICAP opinion says that:

Quote: Any subsequent measurement of the shares and / or TREC would only be possible where their reliable fair values can be measured. This would most likely happen when the blocked shares are sold to the strategic investor or to the general public through an IPO and an active market develops for the TREC. Un Quote

Opinion:

The Committee considered your query and would again like to reproduce para 15 of the opinion:

“Any subsequent measurement of the shares and / or TREC would only be possible where their reliable fair values can be measured. This would most likely happen when the blocked shares are sold to the strategic investor or to the general public through an IPO and an active market develops for the TREC”.

The Committee in its opinion had no intention to time bound the subsequent measurement of fair value. An entity can determine the reliable fair value through an appropriate price finding mechanism any time after initial recognition.

(August 29, 2013)

7. Opinion on accounting for exchange of Membership Card with shares and Trading Right Entitlement Certificate on Demutualization of the Stock Exchanges

1. The following guidance paper has been prepared in response to various queries received by the Technical Advisory Committee (TAC) from the members of stock exchanges in relation to accounting for exchange of membership cards with shares and Trading Right Entitlement Certificate on Demutualization of Stock Exchanges.
Background:

2. Before demutualization, the three stock exchanges of Pakistan were functioning as Guarantee Limited Companies, wherein ownership and trading rights were conferred to members through a membership card. Pursuant to the promulgation of the Stock Exchanges (Corporatisation, Demutualisation and Integration) Act, 2012 [the 2012 Act] on 9 May 2012, the ownership in a stock exchange has been segregated from the right to trade on the exchange. Therefore, the membership card has now been replaced by:

a) Shares in the exchange; and
b) Trading Right Entitlement Certificates (TREC)

3. Each membership card holder is entitled to 4,007,383 shares, along with a TREC. 60% of the entitlement of each member’s shares would be blocked in a separate account held with CDC. The blocked shares would be sold to strategic investors and general public at a future date, at a price which remains to be finalised. The remaining shares (40% of the total entitlement) are now available to each member, with no condition on their future sale.

4. Each member has also received a TREC. This initial TREC may be sold or transferred once, by the member. However, once sold or transferred, it would take the form of a ‘licence’ and would not be saleable / transferrable again. Under the 2012 Act, a stock exchange may issue new TRECs. Till the year 2019, new issues of TRECs would be restricted at a specified number, however, the restriction on the number of issues would end after the year 2019. These new issues would be in the form of a ‘licence’, without any possibility of a sale or transfer.

Enquiry:

5. The issue arising out of this transaction is how to account for the shares and TREC in exchange of the value at which the membership card is carried on the balance sheet of a member of the stock exchange.

Opinion:

The transaction is in the nature of exchange of an intangible asset (membership card) with a financial asset (shares) together with an intangible asset (TREC). Shares and TRECs are separate assets and mutually exclusive to each other.

The Committee referred to Paragraph 12 of IAS 18, which states that when goods are exchanged or swapped with goods of a similar nature and value, the exchange is not regarded as a transaction which generates revenue.

The Committee concluded that nature and value of the asset given up (membership card) is similar to the nature and value of the asset acquired (Shares and TREC). Therefore, exchange of assets will not result in any gain or loss. Further, it can be argued that derecognition of the membership card has not occurred because the rights of the cardholder were not lost at any point during the exchange.

The Committee also referred to paragraph 45 of IAS 38, which interalia states that when the fair value of neither the asset received nor the asset given up can be reliably measured, the cost of the asset received should be measured at the carrying amount of the asset given up, and no gain or loss shall arise on the exchange. This further corroborates the discussion referred to in paragraph 7 and 8 above.

To reach the conclusion referred in paragraph 8 and 9 above, the Committee noted that the documented selling prices available for the membership card, in the pre-demutualization days, are those whereby the exchange had auctioned off the membership card of defaulting members. All other transactions were private, for which verifiable data is not available. The Committee observed that the prices at which cards were auctioned by the exchange may represent “Forced Sale Prices” in a “Sale in Distress” and may not reflect the fair values of these cards.

The Committee also noted that the active market is not available for shares received by the membership card holder. An attempt to arrive at the fair value by using an appropriate valuation technique may be possible, if data from observable markets is available. However, it would be difficult to arrive at the fair value of TRECs received by the membership card holders, as active market is not available for these rights and similar rights may be issued by the exchange in future (in the form of ‘license’) which would introduce significant subjectivity and variability in the range of fair value estimates.

In the absence of reliable fair values of shares and TRECs, the allocation of the carrying value of a membership card between the assets (Shares and TREC) may be made using a basis which is considered reasonable by the management and is also acceptable to the auditors.

However, if the management believes it can allocate the cost on the basis of the fair values of the respective assets, and the determination of which is acceptable to the auditors then it would be a preferable basis of allocation of cost.

The shares should be classified as ‘Available for Sale’ and the effect of any subsequent measurement of their fair value should be recognized in accordance with the requirements of the IAS 39. Further, the TREC issued to the original membership cardholder should be separately identified as an intangible asset under the requirements of IAS 38.

Any subsequent measurement of the shares and / or TREC would only be possible when their reliable fair values can be measured. This would most likely happen when the blocked shares are sold to a strategic investor or to the general public through an IPO and an active market develops for the TREC.

As the rooms occupied by a member in the stock exchange are separate assets therefore these should be accounted for separately.

(February 25, 2013)

8. Guidance on accounting for Specie Dividend issue by a Subsidiary Company

Enquiry:

Our client a private limited company has a substantial stake in a subsidiary company listed on Stock Exchange. The company listed on Stock exchange has a 100% owned subsidiary company which was a private limited company.

The listed subsidiary company in its last AGM approved a specie dividend, being shares of its subsidiary company (private limited company) as permitted under the stock exchange listing regulation VIII.

As per the procedures prescribed in this regulation, the private limited company changed status to a listed company to enable it to distribute specie dividend to the shareholder of the first subsidiary listed company.

ACCOUNTING ISSUE INVOLVED

While technical guidance on accounting for bonus shares has been given in TR- 15, the accounting for this kind of dividend i.e., specie dividend has not yet been considered. Our clients all the 3 companies i.e., investor company (private limited) and 2 subsidiaries i.e., fist subsidiary – listed company and the sub-subsidiary (now converted into a listed company) are of an opinion that fair value measurement basis given in IAS – 39 (Paragraph 43, 44) may be followed at the date of issue of the aforesaid specie dividend. Therefore, the holding company, and first subsidiary company on receipt of specie dividend recorded the same by investment in the sub-subsidiary company with a corresponding credit to dividend income at fair value considering the same to be not a bonus issue by the subsidiary company.

We feel that the accounting treatment made by the holding company and the subsidiary appear in compliance to IAS – 39 (Para 43, 44). Further, we also feel that the same treatment may appear reasonable if the first mention company would not be holding company but any other investor company. However, we need to confirm the appropriateness of the treatment and wish to obtain a clear guidance from relevant committee of ICAP on the matter.
In our case following three companies are involved:

P – Parent having substantial stake in subsidiary S1
S1 – Subsidiary company of parent
SS1 – Sub-Subsidiary of S1 (which holds 100% share capital)

S1 distributes its holding in SS1 to the extent of 50% as specie dividend.
P by virtue of its holding in S1 received specie dividend from S1 being shares in SS1.

Common control before and after distribution have been retained as under:

 Control by subsidiary (S1) in sub-subsidiary in SS1 before distribution – 100%

 Control by the group after distribution:

Parent company (P) – 20%
Subsidiary (S1) – 50%
Common directors of the group – 7%

Total control after distribution – 77%

The accounting policy of P provides initial recognition of investment in associates is recorded at cost and equity accounting applied as appropriate.

When considering the above provisions as well as the accounting policies of the company receipt of specie dividend is accounted for as under:

 Debit to investments at cost of shares in the sub-subsidiary (SS1).

 Credit to investments account of first subsidiary (S1).

At the year-end date the cost of investments in SS1 as well as investments in S1 have been amended by recording the current period share of profit and loss as given in the equity accounting procedures.

Opinion: At the outset, the Committee would like to highlight that there is some information missing from your enquiry re: whether the holding company (P) and first subsidiary (S1) both prepare consolidated and separate financial statements? However, we have assumed that both the P and S1 prepare separate and consolidated financial statements. We further have assumed that both P and S1 recognize investment in subsidiaries and associates at cost.

The effect of transaction on both separate and consolidated financial statements of P and S1 are summarized below:

Separate Financial Statements

In P’s separate financial statements the specie dividend would be recorded as Dividend Income at the value distributed with corresponding debit to the investment in subsidiary/associate SS1.

In S1’s separate financial statements, S1 would first recognize liability for dividend payable in relation to profit available for distribution and then the liability for dividend payable would be offset against the value of investments in SS1. S1 cannot recognize any gain on such distribution as the liability for dividend is fixed. If the value of investment is determined higher than the carrying value, then the number of shares to be distributed would reduce and vice-a-versa rather than pre-fixing the numbers of shares and then recognizing gain or loss on distribution.

Consolidated Financial Statements

In P’s consolidated financial statements there would not be any change other then normal consolidation adjustments and eliminations including elimination of investments and intra group dividend, except where the value of investments is treated as different for distribution purposes from the holding cost of S1, in which case the difference would also need to be eliminated.

In S1’s consolidated financial statements dividend distribution would be accounted for normally and there would not be any elimination.

We have not dealt with the issue of appropriateness of determining control over S1 or whether the accounting policies specified in your enquiry are appropriate or not.

(January 2010)

9. Scope of Accounting Term

Enquiry:

Our Company exports ‘Naphtha’ but is in principle a bye-product in this line of business. The company wants clarification regarding the ‘accounting’ aspects as used in the Income Tax Rules 2002. We reproduce two rules as follow:

1. Income Tax Rules 2002

1.1 Rule 32 provides as follows

32 General form of books of accounts, documents and records:-

(a) The books of accounts, records and other documents required to be maintained by a taxpayer in accordance with this Chapter may be kept on electronic media, provided sufficient steps have been taken to ensure the sanctity and safe keeping of such accounts, documents and records.

(b) The books of accounts, documents and records required to be maintained by a company in accordance with this Chapter shall be maintained in accordance with International Accounting Standards and as required under the Companies Ordinance 1984

1.2. Rule 231 provides as follows:

231 Computation of export profits and tax attributable to export sales:-

(1) Where a taxpayer exports any goods manufactured in Pakistan, the taxpayer’s profits attributable to export sales of such goods shall be computed in the manner specified hereunder:-

(a) where a taxpayer maintains separate accounts of the business of export of goods manufactured in Pakistan, the profits of the export business shall be taken to be such amount as may be determined by the Commissioner in accordance with the provisions of Ordinance on the basis of such accounts; or

(b) in other cases, the profits of such business shall be taken to be an amount which bears to the total profits of the business of the assessee from the sale of goods, the same proportion as the export sales of goods manufactured in Pakistan bear to the total sales of goods.

(2) Where the total income of a taxpayer includes any profit from the export of goods manufactured in Pakistan, the tax attributable to such profits shall be an amount which bears to the tax payable on the income the same proportion as such profits bear to the total income.

(3) In this rule, unless there is anything repugnant in the subject or context:-

(a) “export sales” means the fob price of the goods exported;

(b) “total profits” means:-

(i) the aggregate of export sales as determined under clause (a); and
(ii) the ex-factory price of goods sold in Pakistan, where the goods exported out of Pakistan were manufactured by the exporter; or
(iii) the ex-godown price of goods sold in Pakistan, in other cases.

2. We need your opinion as to the scope of the terms used in Rule 231 (1)(a)” where a tax payer maintains separate accounts of the business of export of goods manufactured in Pakistan”

3. We seek Institute’s assistance in identifying the professional and practical meaning of ‘separate accounts of the business of export’ in the light of various accounting pronouncements and the Institute’s expertise.

Opinion:

The Committee is of the opinion that the term “separate accounts of the business of export of goods manufactured in Pakistan” used in the rule 231 of Income Tax Rules 2002 refers to maintenance of separate books of accounts, records and documents relating to the export business in such a manner that the Commissioner may determine / verify the following:

a) all exports and purchase of goods relating to export business
b) directly allocated manufacturing expenses relating to exports
c) indirectly allocated manufacturing expenses relating to exports
d) all sums of money received and expended by the taxpayer and the matters in respect of which the receipt and expenditure takes place in export business
e) all assets relating to export business
f) all liabilities relating to export business

Beside this, the Company is required to maintain books of accounts, documents and records in accordance with International Accounting Standards and as required under the Companies Ordinance, 1984.

(February 8, 2008)

10. Inconsistent Treatment of Head Office Expenses by branches of Foreign Banks

Enquiry:

Few years ago Institute’s attention was drawn to inconsistent treatment of head office expenses by branches of foreign banks. It was noted that some of the branches have been recording the head office expenses in their books and some branches have not been recording and their audit reports have been qualified in this respect. There have also been some branches who have not been recording these head office expenses and their audit reports have not been qualified.

I understand that the Institute clarified this matter by issuing a selected opinion wherein it was stated that head office expenses should be recognized as a liability in the balance sheet as “the outflow of resources is certain”. In Committee’s considered view, the non-recognition of the expenses in the financial statements impaired the “true and fair view” of the financial statements and, therefore, called for qualified audit report.

However, it has been noted that even in December 2003 financial statements this inconsistent treatment has continued and auditors have neither quantified the amount of liability nor recorded or qualified their reports.

It would be appreciated if the Committee looks into the matter and issue necessary clarification so that some comparability can be achieved. Also, perhaps it would be in order to also clarify the status of selected opinions i.e. whether they are binding on the members of the Institute or not.

Opinion:

In order to respond to the question raised by you the Committee considered it appropriate to ponder on the issue in the light of certain fundamental principles. Accordingly, paragraph 49(b) and paragraph 70(b) of the “Framework for the Preparation and Presentation of Financial Statements’ wherein the expressions “liability” and “expenses” have been defined were discussed. These definitions are reproduced below for reference.

“49(b) A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.”

“70(b) Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.”

In the light of the definitions reproduced above, the Committee agreed that if the head office makes a claim in respect of certain expenses that it had incurred for the Pakistan Branch, such claim being usually evidenced by a debit note, the claim in such event will require recognition as an expense and a corresponding liability otherwise the “true and fair view” of the financial statement is likely to be impaired,. However, in the absence of a claim from the head office and \ or in case where the head office confirms, either explicitly or implicitly, that expenses, if any, incurred by the head office and attributable to the branch will not be claimed, there is neither any liability capable of being booked nor an expense is incurred which would need to be recorded in the books of account of the Pakistan Branch. The fact that a branch is entitled to resort to the provision of tax permitting deductibility of a claim representing “Head Office expenses” on the basis of “attribution” supported by a certificate from the head office’s auditors and a confirmation from the Head Office to the effect that such attribution to the Pakistan operation is proper and reasonable for the limited purpose of determining Pakistan Branch’s taxable profits does not in itself mean that a claim has been made by the head office on the branch or the branch has incurred such expense or by the same token, a liability. You would appreciate that in view of the decision of the Supreme Court of Pakistan, the allowance of “head office expenses” is not negated by the fact that such expenses have not been recognized in the financial statements of the branch. The deliberation of the Committee is thus summed up as under:

1. If there is a claim on the branch by the head office, of certain expenses paid on behalf of the Pakistan Branch, evidenced by a debit note, such claim will require recognition as expenses and liability in the financial statements of the Pakistan Branch.

2. If there is no claim from the head office or the head office confirms either explicitly or implicitly that expenses, if any, incurred by the head office and attributable to the branch will not be claimed, there can obviously be no basis or cause for recognition of expenses or liability as any determination purported to be “head office expenses” is merely an internal attribution to enable Pakistan Branch to determine its taxable profit for the purposes of Pakistan taxation.

3. The deductibility of “head office expenses” therefore, for the purposes of computation of income of the branch for purposes of Pakistan taxation does not amount to a claim by the head office on the branch and has to be seen and equated with other permissible statutory allowances or deductions permitted by the tax law which are not and do not require to be accounted for in the financial statements of the Pakistan Branch.

With regard to your second enquiry we would like to state that the opinions issued by the Committees to the members’ / other stake-holders’ queries are dated. Since an opinion is arrived at on the basis of the facts and circumstances of each individual query, it may change if the facts and the circumstances change. An opinion may also change due to subsequent developments in law, pronouncements made by the Institute and other relevant changes. The Institute and the Committees will have no liability in connection with such opinion.

In every case the members / other stake-holders have to take their own decisions in the light of facts and circumstances in accordance with related laws and rules etc., applicable to the issue under decision at that point in time.

(August 13, 2005)