1. THE ISSUE
The Institute has been a member body of the International Federation of Accountants (IFAC) ever since its establishment in 1973. In 2004 IFAC issued seven Statements of Membership Obligations (SMOs) and subject matter of one of them i.e. SMO 7 is ‘International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB). Being a member body of IFAC it is the Institute’s obligation to comply with this statement which requires that all member bodies should use their best endeavors:
(a) To incorporate the requirements of IFRSs in their national accounting requirements, or where the responsibility for the development of national accounting standards lies with third parties, to persuade those responsible for developing those requirements that general purpose financial statements should comply with IFRSs, or with local accounting standards that are converged with IFRSs, and disclose the fact of such compliance; and
(b) To assist with the implementation of IFRSs, or national accounting standards that incorporate IFRSs.
To date, the IASB (formerly IASC) has issued eight IFRSs (IFRS 1 to 8) and it has made changes to various International Accounting Standards (IASs) that were issued by its predecessor body International Accounting Standards Committee. In Pakistan, almost all of the IASs (except for IAS-29 and IAS-41) have been adopted and notified by the SECP on the recommendation of the Institute, while the remaining standards are in the process of adoption. The Council has also decided to gradually adopt all IFRSs for the use of public interest entities.
While the Institute has been pursuing the objective of adoption and use of international standards for the preparation of general purpose financial statements over the years, it is also cognizant of the difficulties faced by small and medium entities (SMEs) for complying with full set of IFRSs that have been made applicable for listed companies. In order to address the needs of the SMEs,
the Council of the Institute had initiated a project to develop a separate set of standards for such entities in line with similar efforts in various other countries. Based on the work conducted and recommendations made by various committees working on this project for last two years, the Council is pleased to lay down this framework of accounting standards, including the two SME standards that should be complied with by the members of the Institute while expressing an opinion on the financial statements of SMEs.
2. COUNCIL’S DIRECTIVE
2.1 The Council wishes to draw the attention of all members to paragraphs 5, 8 and 9 of the revised Preface to International Financial Reporting Standards which read as under: –
5. All Standards and Interpretations issued under previous Constitutions continue to be applicable unless and until they are amended or withdrawn. The International Accounting Standards Board may amend or withdraw International Accounting Standards and SIC Interpretations issued under previous Constitutions of IASC as well as issue new Standards and Interpretations.
When the term IFRSs is used in this Preface, it includes standards and interpretations approved by the IASB, and International Accounting Standards (IASs) and SIC Interpretations issued under previous Constitutions.
8. IFRSs set out recognition, measurement, presentation and disclosure requirements dealing with transactions and events that are important in general purpose financial statements. They may also set out such requirements for transactions and events that arise mainly in specific industries. IFRSs are based on the Framework, which addresses the concepts underlying the information presented in general purpose financial statements. The objective of the Framework is to facilitate the consistent and logical formulation of IFRSs. The Framework also provides a basis for the use of judgement in resolving accounting issues.
9. IFRSs are designed to apply to the general purpose financial statements and other financial reporting of all profit-oriented entities. Profit-oriented entities include those engaged in commercial, industrial, financial and similar activities, whether organized in corporate or in other forms. They include organizations such as mutual insurance companies and other mutual cooperative entities that provide dividends or other economic benefits directly and proportionately to their owners, members or participants. Although IFRSs are not designed to apply to not-for-profit activities in the private sector, public sector or government, entities with such activities may find them appropriate.
2.2 The Council desires to direct all members to ensure that in accordance with the obligations undertaken by the Institute the auditor, while expressing an opinion on financial statements, should satisfy himself that they do comply with IASs/IFRSs in all material respects and that in the event of any departure from or inconsistency with such standards, the auditors’ report should contain suitable qualification. It should however be emphasized that IASs/ IFRSs do not override the local statutory provisions under Companies Ordinance, 1984 and the disclosure requirements under the Fourth and Fifth Schedules. Compliance with IASs/IFRSs shall be mandatory in so far as such standards are not inconsistent with local regulations or standards, directives or pronouncements issued by this Institute.
2.3 The Council is conscious of the present set of circumstances prevailing in Pakistan, in relation to compliance with some of the IASs / IFRSs and in view thereof has decided that for auditors of all companies while expressing an opinion on financial statements the compliance with the following standards shall, until notified otherwise, not be deemed to be mandatory:
IAS 29
IAS 41
IFRS 1, 4, 7 and 8
2.4 Applicability of Accounting and Financial Reporting Standards for Medium-Sized Entities and Small-Sized Entities
2.4.1 The Institute has developed and the Council in its meeting held on July 28, 2006 has approved two separate sets of accounting and financial reporting standards for Medium-Sized Entities (MSEs) and Small-Sized Entities (SSEs). These standards will be called as ‘Accounting and Financial Reporting Standards for Medium-Sized Entities and Small Sized Entities’.
2.4.2 The Institute directs its members that while expressing an opinion on financial statements of MSEs or / SSEs (whichever is applicable) they shall ensure compliance with the Accounting and Financial Reporting Standards for MSEs or / SSEs.
2.4.3 Entities qualifying as MSE or SSE are defined below:
QUALIFYING ENTITIES
Medium-Sized Entity (MSE)
A Medium-Sized Entity (MSE) is an entity that:
a) is not a listed company or a subsidiary of a listed company;
b) has not filed, or is not in the process of filing, its financial statements with the Securities and Exchange Commission of Pakistan or other regulatory organisation for the purpose of issuing any class of instruments in a public market;
c) does not hold assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance company, securities broker/dealer, pension fund, mutual fund or investment banking entity;
d) is not a public utility or similar entity that provides an essential public service;
e) is not a economically significant entity on the basis of criteria as defined below; and
f) is not a Small-Sized Entity (SSE) as defined below.
Economically Significant Entity
An entity is considered to be economically significant if it has:
(i) turnover in excess of Rs. 1 billion, excluding other income;
(ii) number of employees in excess of 750;
(iii) total borrowings (excluding trade creditors and accrued liabilities) in excess of Rs. 500 million.
In order to be treated as economically significant any two of the criteria mentioned in (i), (ii) and (iii) above have to be met. The criteria followed will be based on the previous year’s audited financial statements. Entities can be delisted from this category where they do not fall under the aforementioned criteria for two consecutive years.
Small-Sized Entity (SSE)
A Small-Sized Entity (SSE) is an entity that:
(i) has paid up capital plus undistributed reserves (total equity after taking into account any dividend proposed for the year) not exceeding Rs.25 million; and
(ii) has annual turnover not exceeding Rs.200 million, excluding other income.
In order to qualify as a Small-Sized Entity, both of the above mentioned-conditions must be satisfied.
Effective Date
2.4.4 Medium-Sized and Small-Sized Entities in respect of their annual financial statements shall apply the Accounting and Financial Reporting Standards for accounting periods beginning on or after July 1, 2006.
2.5 The Institute further directs its members that while expressing an opinion on financial statements of entities that do not qualify to be treated as MSE or SSE as per the definition given in paragraphs 2.4.3 above (except for public utility entities or similar entities that provide an essential public service or regulatory agencies that do not fall under the jurisdiction of Securities and Exchange Commission of Pakistan (SECP), they shall ensure compliance with the International Accounting Standards (IASs)/ International Financial Reporting Standards (IFRSs) as adopted by the Council and notified by the SECP under section 234(3) of the Companies Ordinance, 1984.
2.6 Furthermore, while expressing an opinion on financial statements of public utility entities or similar entities that provide an essential public service or regulatory agencies that do not fall under the regulatory jurisdiction of SECP, such entities shall ensure that accounting frameworks as prescribed in their relevant statutes are complied with. However, where the relevant statute is silent or does not prescribe any accounting and financial reporting framework or treatment, the Institute recommends that such entity shall comply with IASs/IFRSs as applicable.
2.7 This statement is and shall be deemed to be a directive of the Council and shall be applicable to any International Accounting Standard /International Financial Reporting Standard which may be issued in future unless otherwise specified by the Council. Non-compliance with this directive shall be deemed to be a professional misconduct in terms of clause (3) of Part 4 of Schedule I to the Chartered Accountants Ordinance, 1961.
(186th meeting of the Council – November 8, 2006)