With effect from August 22, 2005, the Karachi Stock Exchange (Guarantee) Limited has introduced “The Continuous Funding Systems (CFS) Regulations, 2005. The said Regulations have replaced the previously applicable “Carry Over Transactions (COT) Regulations, 1993”. The transaction mechanism under the new Regulations is the same as was under the previous COT Regulations.
In this regard we would like to have the ICAP’s opinion whether its ruling under TR-29 will continue to be applicable in case of CFS transactions i.e. whether CFS transactions should be treated as “Rev Repo Transactions” in our books of account. If yes, then whether it should be disclosed under the head “Lending to Financial and Other Institutions” or under the head “Advances”?
Preamble of Continuous Funding System provides that the system is introduced to improve market liquidity and would replace the existing Carry Over Regulations.
Review of the Rules reveals that though CFS Rules are different in form from the Carry Over Regulations, the essence of both the Regulations is to provide liquidity to the buyer of the shares by providing finance against shares following the mechanism given under the respective Regulations.
Paragraph 35 of the ‘Framework for the Preparation and Presentation of Financial Statements’ issued by IASB provides that transaction should be recorded on the basis of substance and not on form. As substance of both the Regulations is provision of liquidity through financing, therefore, the Committee is of the opinion that TR 29 should be followed in accounting transactions executed under CFS.
With regard to the disclosure, as the financing is done through Karachi Automated System, which can only be operated by the authorized members of the Stock Exchange who execute the transaction normally on behalf of their clients following the pooling of funds concept with subsequent allocation on required basis. As such, categorization of clients according to their operational status is not possible. In view of the above, it may be appropriate to generalize the disclosure and disclose the transaction as financing against shares.
(January 7, 2006)