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)