LEPCL seeks extension in exemption from IFRS-9

ISLAMABAD: The Lucky Electric Power Company Limited (LEPCL) has sought extension in exemption from the applicability of International Financial Reporting Standards-9 (IFRS- 9) on the financial assets up to June 30, 2026 due to current position of circular debt, dividend paying capacity, financing and borrowing constraints and volatility and lack of comparability, Newzshewz has learnt reliably.
M/s LEPCL, in its communication with the SECP has cited reference of the latter’s S.R.O of November 08, 2024, whereby companies holding financial assets receivable from the Government of Pakistan (GoP) were granted an exemption from the application of the Expected Credit Loss (ECL) model under IFRS 9 – Financial Instruments until December 31, 2025, subject to the requirement to apply the relevant impairment provisions of IAS 39 – Financial Instruments: Recognition and Measurement for the duration of the exemption period.
According to the power company, Independent Power Producers (PPs), including Lucky Electric Power Company Limited, continue to be materially exposed to the chronic circular debt situation. As a result, strict application of the forward-looking ECL model under IFRS 9 to GoP backed receivables would generate significant impairment losses on outstanding invoices, leading to dilution of profitability, erosion of retained earnings, and volatility in reported results, outcomes that are not reflective of the underlying credit risk given the presence of sovereign guarantees.
In addition, the ECL methodology is inherently complex and highly assumption driven, requiring incorporation of forward-looking macroeconomic variables, probability weighted scenarios, and discounting based on the time value of money. Within the circular debt environment, these assumptions become increasingly subjective, resulting in inconsistent application across the IPP sector and impairing the comparability of financial statements, contrary to the objective of financial Reporting under the IFRS Conceptual Framework.
In view of the above circumstances, LEPCL has submitted that the exemption from the application of IFRS 9 on trade receivables be extended up to June 30, 2026, on the following grounds: (i) Sovereign Guarantee and credit enhancement: Receivables from the off-taker, Central Power Purchasing Agency Guarantee Limited (CPPAG), are backed by the GoP’s Sovereign Guarantee issued pursuant to the Implementation Agreement executed with the Private Power & Infrastructure Board (PPIB). Recording impairment losses on sovereign guaranteed receivables would imply deterioration in the GOP’s credit standing and may adversely influence domestic and international investor sentiment ;(ii) Dividend paying capacity: ECL provisioning under IFRS 9 would restrict the ability of IPPS to declare dividends, directly impacting shareholders and long-term investor confidence;(iii) financing and borrowing constraints: Recognition of large non-cash impairment charges may negatively affect leverage ratios, potentially constraining access to financing markets and increasing the cost of capital for IPPs ;(iv) volatility and lack of comparability: GoP’s irregular payment patterns and sector wide liquidity constraints would cause material period to period volatility under IFRS 9, undermining comparability across reporting periods as well as among entities within the power sector.
“LEPCL undertakes to continue providing transparent disclosures in its financial statements regarding the exemption granted by SECP and the resulting application of IAS 39 impairment requirements for receivables from CPPAG,” said the Company Secretary, in his communication.
In light of the foregoing, and in the interest of consistent and reliable financial reporting across the power sector, LEPCL requested SECP to extend the exemption from the applicability of IFRS 9 on the
above referred financial assets up to June 30, 2026, by issuing the requisite notification under the authority conferred upon SECP by Section 225(3) of the Companies Act, 2017. Ends