Enquiry:

I would like to highlight issues pertaining to the treatment of Membership card surrendered by members in favour of stock exchanges and issuance of TREC and Shares against such membership card.

• ICAP had graciously advised me vide letter No. ICAP/DTS/1/7038/2532 dated February 25, 2013 through “Opinion on accounting for exchange of membership card with shares and trading right entitlement certificate on demutualization of stock exchanges.
• On the advice of ICAP cost of Membership Card is allocated on the shares of stock Exchange and TREC on the basis of fair value of respective assets (TREC and Shares).
• The Lahore stock exchange has determined value of TREC at Rs.4,000,000/- for the purpose of BMC and value of share is Rs.10 per share. Thus value of TREC and Shares is calculated as under:-

TREC= Rs.4,000,000 (32.15%)
Shares= Rs.8,439,750 (67.85%) – 843,975 shares @10 each
Total= Rs.12,439,750

The cost of membership card is allocated between two assets on the basis of 32.15% for TREC and 67.85% for Shares at the time of acquisition of TREC and Shares.

You are requested to guide me as to whether or not the above treatment be continued without charging any impairment for the financial year 2013 where following circumstances exists:-

1. 60% of the shares are kept by stock exchanges in the blocked account and divestment of the same will be made in accordance with the requirements of the Act within two years from the date of demutualization. Similarly, rest of 40% shares are credited to the brokers CDC account and cannot be sold out because of non – existence of market.
2. The fair value of such shares is not available because of the reason that there is no market available for sale or purchase of such shares.
3. It is not expected that the value per share will remain at Rs.10 per share at the time when “permission to sale” will be granted to member.
4. Similarly, the fair value of TREC cannot be determined because of the fact that there is no parallel transaction to be followed and if some transaction is made, it is purely on private basis and not on fair market basis.

Opinion:

The accounting treatment stated in ICAP Selected Opinion No. 1.2 of Volume XVIII on ‘Accounting for Exchange of Membership Card with shares and trading right entitlement certificate on demutualization of the Stock Exchanges’ issued in February 2013, is applicable at the initial stage. Subsequently, fair value adjustment or revaluation as the case may be, is to be carried out when fair values are determined. However, the impairment test should be performed in accordance with relevant IFRSs.

(November 08, 2013)