Enquiry:

A listed modaraba has 100% wholly owned subsidiary which is a private brokerage company.

The subsidiary (incorporated in Dec 2015) has not yet commenced its operations as Trading Right Entitlement Certificate (which is in the name of Modaraba) is pending transfer by PSX to brokerage subsidiary.

The question is that whether:

1. The subsidiary needs to be consolidated on each reporting period? i.e. Quarterly, Half yearly and annually.
2. Either whole set of financial statements will be made? i.e. Balance sheet, P&L, Cash flows, Statement of changes in Equity, Notes for each reporting period or any of these can be omitted?

Please note that the subsidiary is a private brokerage company duly incorporated in Dec 2015 and has not yet commenced its operations due to pending transfer of TREC by PSX.

Opinion:

The Committee understands that the Modaraba is registered under Modaraba Companies and Modaraba (Floatation and Control) Ordinance 1980 (Modaraba Ordinance).

The financial statements of the Modaraba are prepared in accordance with the approved accounting standards as applicable in Pakistan and the requirements of the Modaraba Ordinance, Modaraba Rules 1981 and Prudential Regulations for Modaraba. Further, the Modaraba Ordinance does not contain a provision for the preparation of consolidated financial statements.

However, section 503 of the Companies Ordinance 1984 (the Companies Ordinance) explains that the provisions and requirements of the Companies Ordinance are applicable to companies governed by special enactments including modarabas. The relevant clause of section 503 of the Companies Ordinance is reproduced as under:

“503. Application of Ordinance to companies governed by special enactments.- (1) The provisions of this Ordinance shall apply-

(c) to modaraba companies and modarabas, except in so far as the said provisions are inconsistent with the provisions of the Modaraba Companies and Modaraba (Floatation and Control ) Ordinance, 1980 (XXXI of 1980);……”

The Committee would also like to refer following requirements of section 237 of the Companies Ordinance and paragraph 4 of IFRS 10 ‘Consolidated Financial Statements’, which are self-explanatory: (underline is ours)

237. Consolidated financial statements.

(1) There shall be attached to the financial statements of a holding company having a subsidiary or subsidiaries, at the end of the financial year at which the holding company’s financial statements are made out, consolidated financial statements of the group presented as those of a single enterprise and such consolidated financial statements shall comply with the disclosure requirements of the Fourth schedule and International Accounting Standards notified under sub-section (3) of section 234.

(3) Every auditor of a holding company appointed under section 252 shall also report on consolidated financial statements and exercise all such powers and duties as are vested in him under section 255.

(4) All interim financial statements of a subsidiary as required under sub-section (3) shall be reviewed by the auditors of that subsidiary appointed under section 252 who shall report on such financial statements in the prescribed form.

IFRS 10

4. An entity that is a parent shall present consolidated financial statements. This IFRS applies to all entities, except as follows (we understand that these exceptions are not applicable in your case):

(a) a parent need not present consolidated financial statements if it meets all the following conditions:
(i) it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and all its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements;
(ii) its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);
(iii) it did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and (iv) its ultimate or any intermediate parent produces financial statements that are available for public use and comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with this IFRS.

Based on the information provided to the Committee, it understands that your Modaraba is not an investment entity, and the exemption given for the requirements of section 237 of the Companies Ordinance through SECP’s SRO 56(1)/2016 and IFRS 10 are not applicable.

Your attention is also drawn to the requirements of IAS 34 ‘Interim Financial Reporting’: (underline is ours)

IAS 34

Interim period is a financial reporting period shorter than a full financial year.

Interim financial report means a financial report containing either a complete set of financial statements (as described in IAS 1 Presentation of Financial Statements (as revised in 2007)) or a set of condensed financial statements (as described in this Standard) for an interim period.

Conclusion:

Based on above, the Committee’s view to your queries is as follows:

1. A subsidiary of listed Modaraba should be consolidated at each reporting period despite the fact that it has not yet commenced the operations. Accordingly, the consolidated financial statements shall be prepared at the interim period/s in accordance with the requirements of the Companies Ordinance.

2. Complete set of financial statements as defined under paragraph 10 of IAS 1, should be made annually, whereas, for interim financial reporting, either a complete set of financial statements (as described in IAS 1) or a condensed set of financial statements can be made (as described in IAS 34).

IAS 34 defines the minimum content of an interim financial report which includes condensed financial statements and selected explanatory notes. IAS 34 does not prohibit or discourage an entity from publishing a complete set of financial statements in its interim financial report, nor does it prohibit or discourage an entity from including in condensed interim financial statements more than the minimum line items or selected explanatory notes as set out in this Standard.

(May 25, 2017)