Govt mulls IFRS exemption for energy SOEs

CMU opposes five-year relief, warns of hidden fiscal risks and Rs500b losses

ISLAMABAD:

The government is set to exempt state-owned energy companies from adopting international financial reporting standards (IFRS) whose implementation without settling circular debt will result in potential Rs500 billion credit losses and erosion of equity and market capitalisation of these firms.

A special committee has proposed to the Cabinet Committee on State-Owned Enterprises (SOEs) to grant a five-year exemption to energy sector firms by relaxing the SOEs Act of 2023 and SOE policy. The law, introduced three years ago to bring reforms, provided a three-year transition period that lapsed in February this year.

However, the Central Monitoring Unit (CMU) of the finance ministry has opposed the exemption, arguing it would compromise transparency and hide fiscal risks on the balance sheets of these enterprises.

Exemptions from International Financial Reporting Standards (IFRS) 9 and 14 are neither appropriate nor consistent with reform direction under the SOEs Act 2023, according to the CMU's report. The CMU said proper application of IFRS 14 and related regulatory accounting principles is critical for Sui Northern Pipelines Limited (SNGPL) and Sui Southern Company Limited (SSGCL), as deferral account balances, tariff differentials and recoverable amounts must be transparently identified.

Government sources told The Express Tribune that a decision has been made in principle to exempt energy sector companies from IFRS, which require booking expected credit losses estimated at Rs500 billion due to delayed settlement of payables. The duration of the exemption will be decided by the cabinet body.

The total gas sector circular debt has jumped to over Rs3.4 trillion, including Rs1.8 trillion in principal amounts. The government plans to settle about Rs1.5 trillion, but the International Monetary Fund (IMF) has not yet cleared the plan. The IMF has asked the government to float bonds instead of generating Rs850 billion through dividends from Oil and Gas Development Company Limited (OGDCL), Pakistan Petroleum Limited (PPL) and Government Holding Private Limited (GHPL). "These receivables are due from the Sui companies and the government has assured that these dues will be settled in due time. That is why the exemption from IFRS applicability has been sought," said Minister for Petroleum Ali Pervaiz Malik.

Due to the government's failure to address the gas sector circular debt, it has decided to exempt SNGPL, SSGCL, Pakistan State Oil Company Limited (PSO), OGDCL, PPL and GHPL from IFRS 9 and 14. All these firms have significant receivables from circular debt, and the government's debt management plan remains stalled at the IMF's table. Officials said enforcing the standards would force companies to make provisions for losses estimated at Rs400 billion to Rs500 billion, eroding equity and market capitalisation.

IFRS 9 requires financial institutions and companies to anticipate and make provisions for potential future losses across 12-month and lifetime horizons.

The Petroleum Division had submitted a summary to the Cabinet Committee on State-Owned Enterprises (CCoSOE) for exemption from IFRS-14 and IFRS-9 for SSGCL and SNGPL for five years until reforms under the Gas Sector Circular Debt Management Plan (CDMP) take effect. The CCoSOE established a committee comprising secretaries of Petroleum, Finance, Law and the SECP chairman to give recommendations.

The special committee has now recommended exemption, arguing that the chronic issue of circular debt faced by public sector companies will take time to settle. It also said the federal government can issue directives to the SECP to grant exemptions on a case-to-case basis.

The committee said that given significant circular debt-related receivables, the existing deferral from the Expected Credit Loss Model of IFRS 9 should remain available for companies holding financial assets due from the government.

CMU differs

Director General CMU has stated in published reports that complete or partial exemption shall ordinarily not be granted except on grounds of national security, defence or SOEs being included in the privatisation programme. The DG CMU said SOEs must comply with IFRS within three years from the SOE Act coming into effect in January 2023.

The CMU said adoption of IFRS would lead to financial impairment and provisioning of Rs400 to Rs500 billion, but this was not a valid reason for delaying implementation for five years. DG CMU Majid Soofi, a financial reporting expert, has repeatedly highlighted risks associated with granting IFRS exemptions.

IFRS 9 impairment requirements must be applied to long-outstanding circular-debt receivables in the oil and gas sector so expected credit losses are properly recognised. Similarly, IFRS 14 regulatory deferral account balances should be appropriately recognised and disclosed in the Sui companies' financial statements.

The CMU said instead of granting exemptions, affected SOEs should assess and disclose IFRS effects in notes to financial statements. Even if an exemption is given, it should not exceed two years, with statements prepared in line with IFRS requirements during this period.