Enquiry:
1. The Government of Pakistan and Privatization Commission (PC) , vide decisions of the Cabinet Committee on Privatization (CCoP) and Economic Coordination Committee of the Cabinet (ECC) (decisions attached at Annexure ‘a’), at different times, injected funds in an Public Limited Engineering Company (the Company) for relieving employees under Voluntary Separation Schemes/Compulsory Separation Schemes (VSS/CSS), shifting of machinery from B Works (BW) to K Works (KW) of the Company, bank loans of the Company taken over by the Government and amounts payable by the Company to different Government Departments like Customs, Railways and Karachi Port Trust.
2. Position of these loans / mark up as on 30.06.2015 is tabulated here under:-
Rs. In Million
PC Loans Govt. Loan Total
As per Company’s
Books Principal Loan 481 1,309 1,791
As Per Govt./ PC Stand
Principal Loan 613 1,309 1,922
Difference 131 – 131
Mark Up Claim of Govt. 1,295 2,801 4,097
Total Claim of Govt. 1,908 4,111 6,019
First time in the year 2005, the PC and Government of Pakistan had claimed mark up on the loans amounting to Rs. 2,664 million (up to 31.12.2010) and PC also confirm the loan in excess of Rs. 131 million being the amount of additional gratuities paid by the PC on behalf of the Company. Thus Government of Pakistan and PC as now claimed Rs. 6,019 million up to 30.06.2015 (Including principal loan of Rs. 1,791 million and additional gratuities of Rs. 131 million and mark up of Rs. 4,097 million up to 30.06.2015) instead of Rs. 1,791 million. A net difference of Rs. 4,228 million compared with the Company’ stance.
It is pertinent to mention that additional gratuities (valuing Rs. 131 million) were paid by Privatization Commission as per the agreement between the Company CBA and Privatization Commission without the consent of the Company management; hence this liability is not agreed by the Company.
According to the CCoP decision, dated May 30, 1994 these liabilities will be settled against the proceeds from disposal of BW Land (held for sale) and surplus land of KW, if needed. There is no fixed repayment schedule or tenure for repayment of these liabilities.
3. The management of the Company had handed over the title documents of the BW Land to the PC for disposal in the year 1994 and had PC disposed off the land at that time, no issue of interest would have arisen.
4. Several meetings for the reconciliation of these loans/mark-up have been conducted between Ministry of Finance, Privatization Commission, Ministry of Industries & Production and Committee of Directors of the Company constituted by the Board of Directors of the Company. All these meeting concluded with-out any decision with respect to the reconciliation of the loan liabilities and calculation of payment of interest on Government loans.
5. PC and Finance Division have claimed additional mark up on the above loans, however, the Board of Directors and the management of the Company do not agree with the additional liabilities claimed hence the payment of interest is disputed as there had never been any agreement in this regard. The loan liabilities were picked up by the Government so that the Company could be privatized. It may also be noted that many public sector entities which were provided such type of reliefs by the Government of Pakistan have never been asked to make any payment in respect of such reliefs.
6. The Board of Directors and management of the Company is willing to repay all the outstanding liabilities, which the Company is legally liable through disposal proceeds of BW Land and surplus land of KW, if needed. However, it is their considered opinion that the Company is not liable to pay any interest on these loans in the absence of any agreement. The management of the Company obtained legal opinion on the issue of interest on Government of Pakistan/ PC loans form the three firms of repute on 19.02.2016, 22.02.2011 and 10.10.2007.
The legal advisors are of the firm opinion that in cases where there is no mention of any mark-up or interest, and in the absence of any agreement, implied or explicit, for payment of markup, charging of the same is clearly not permitted under the law.
7. No SRO, notification or documentation was provided by the Ministry of Finance to substantiate their view point on the issue of levy of mark up on Government/ PC loans.
8. The management is confident that the ultimate outcome of the matter will result in favor of the Company and hence no provision has been made in the financial statements in respect of additional loan and markup claimed by the Government of Pakistan /PC.
9. The purpose of writing to ICAP is that certain documents reflect the provision of mark up on specific loans whereas other loans documents do not speak about the levy of mark up. As per lAS, SECP and Tax Laws the accounts of the Company should reflect the actual and real profit/ loss of the business. At present we are not making any provision of mark up on Government of Pakistan /PC loans.
10. ICAP is requested to kindly advise us on the following issues:
a. Whether the Company should start accruing mark up on these loans and at what rates on the loans which does not specify the rate of mark up.
b. Whether the Company should consider the additional gratuity of Rs. 131 million as liability?
c. Will the reclassification of financial statement would be required if the answer of ‘a’ and ‘b’ is “yes”.
Opinion:
The Committee would like to refer following definitions of IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’:
A provision is a liability of uncertain timing or amount.
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.
A contingent liability is:
(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or
(b) a present obligation that arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability.
In accordance with IAS 37, the mere existence of a present obligation as a result of a past event is not a sufficient basis on which to recognise a provision. In addition, the entity needs to consider whether it is probable that the obligating event will result in an outflow of resources. Where it is not probable that a present obligation exists, an entity discloses a contingent liability, unless the possibility is remote. Such an assessment involves judgment by management on a case-to-case basis, taking into account the documentary evidence, and past experience relating to the pattern of claims arising from any similar events and the circumstances surrounding the particular obligating event.
Accordingly, management needs to assess whether there is a present obligation and a probability that an outflow of resources embodying economic benefits is required to settle the obligations. Based on such assessment, if provision/ accrual is required to be made then it should be recorded.
In view of the above conditions and details provided in the enquiry, the Committee is of the view that the management of the company needs to determine whether a present obligation exists at the end of the reporting period taking into account all the available evidences, including, the opinion of legal experts. Where there is a probability that a present obligation exists at the end of the reporting period, the provision should be recognized. Contrary to this will require an entity to disclose a contingent liability.
Further, the Committee is also of the view that if in management judgment accrual of markup is required on loans, then, restatement will be required as per IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’.
(March 28, 2017)