Enquiry:

IPPs are regulated under NEPRA ACT and the Regulator has determined the Tariffs of the IPPs after careful scrutiny under the 2002 GOP Power Generation Policy.

However, the IPPs are under criticism for showing much higher profits, the major reason why IPPs are showing much higher profits is due to the accounting treatment of the long term loan Principal payment received by the IPPs which is shown under the head of revenue. Practically, this not an income for the IPPs since this whole amount is repaid to the Lenders by decreasing the liability in the books. On the other hand, the revenue item remains intact in the books without any corresponding expense entry. This treatment is as per the standards.

However, the general public the politicians, the bureaucrats do not fully understand this technical aspect and, IPPs are victimized unnecessarily in the media. As all IPPs have an annuity structure with the lenders where the principal repayments amount increases with time, the profits continue to increase in the books. The scale of this difference can be judged from the fact that the actual profit amount is more than doubled when the loan repayment amount is booked revenue head.

We would request ICAP to:

(a) Find some practical accounting solution for this item (past and future Treatments) without going into the leasing structure which has its own drawbacks for the moment.
(b) Notify such Change/ solution to us and to the audit companies in Pakistan for their annual review purposes.

Opinion:

Power sector in Pakistan is regulated by National Electric Power Regulatory Authority (NEPRA). The Committee understands that the roles and responsibilities of the NEPRA include determination of tariff for generation, transmission and distribution of electric power, under the power policies issued by the Government of Pakistan from time to time. The tariff determined by the NEPRA during the initial years of operation of a power generation company also includes the recovery of principle amount of the loans obtained by that power generation company to finance its project, as per the applicable power policy. Such tariff should be used to record revenue of the power generation companies in accordance with IAS 18 ‘Revenue’.

The Committee would like to mention that the financial statements of the power sector companies are prepared in accordance with the approved accounting standards as applicable in Pakistan which generally, comprise of International Financial Reporting Standards (lFRSs) as notified under the Companies Ordinance, 1984, (the Ordinance), the provisions and directives issued under the Ordinance. In case the requirements differ, the provisions or directives of the Ordinance prevail.

SECP vide S.R.O. 24(1)/2012 dated January 16, 2012 has granted waiver to the companies, including the power sector companies from the requirements of IFRIC 4 ‘Determining whether an arrangement contains a lease’ and IFRIC 12 ‘Service Concession Arrangements’. However, the SECP made it mandatory for such companies to disclose the impact on the financial results of the application of the IFRIC 4 and IFRIC 12. It is relevant to note that the SECP provided above mentioned exemptions to the power sector companies on the request of IPPs.

Based on the above discussion and consideration of the enquired scenario, the Committee is of the view that the accounting treatments are prescribed in IFRIC 4 and IFRIC 12 and the solution lies in the application of these IFRICs, in accordance with company’s arrangement. If a power sector company chooses to apply any of these IFRICs, it can do so.

(May 29, 2017)