ISLAMABAD: China Power Hub Generation Company (Pvt) Ltd (CPHGC) has requested the Power Division’s support to secure a permanent exemption from the application of the Expected Credit Loss (ECL) method under IFRS-9, citing the power sector’s chronic circular debt as the primary justification.
In a letter addressed to the Power Division, CPHGC’s Head of Finance referred to the Securities and Exchange Commission of Pakistan (SECP) notification issued on September 13, 2021 (SRO 1177(I)/2021), which granted an exemption from the ECL method for companies holding financial assets due from the Government of Pakistan in respect of circular debt. This exemption was valid until December 31, 2024.
The company highlighted that persistent circular debt has led to the accumulation of substantial receivables in the accounts of CPHGC and other Independent Power Producers (IPPs). Although the government has taken steps to address the issue, CPHGC maintained that these measures remain insufficient to effectively resolve the problem.
Under IFRS-9, overdue receivables are required to be recognised as losses largely on the basis of aging. CPHGC argued that overdue amounts owed by the Central Power Purchasing Agency–Guarantee (CPPA-G) are not due to any default or inefficiency on the part of IPPs, but are a direct consequence of systemic circular debt. Applying the IFRS-9 impairment model in such circumstances would result in substantial impairment losses, significantly eroding profitability and retained earnings.
The company urged the Power Division to recommend that SECP grant a permanent exemption from IFRS-9 for trade receivables on grounds similar to those previously recognised. These include concerns that recognising impairment on government-guaranteed receivables could undermine the credibility of the Government of Pakistan and send negative signals to domestic and international investors, potentially discouraging foreign direct investment.
CPHGC further noted that IFRS-9 would introduce excessive volatility in IPPs’ financial results due to irregular payment patterns by the government. In the absence of a clear settlement timeline from CPPA-G, estimating losses would remain highly uncertain, while differing assumptions by companies and auditors would impair comparability across the sector.
The company also warned that large impairment losses could further weaken already fragile capital markets, trigger concern among IPP shareholders, adversely affect lenders’ covenants, and potentially lead to breaches of loan agreements, thereby restricting access to financing. Moreover, impairment charges would reduce distributable profits, limiting IPPs’ ability to declare dividends and impacting shareholder returns.
Given these challenges, CPHGC has called on the Power Division to facilitate a permanent exemption for all IPPs affected by circular debt from the application of IFRS-9, and to recommend that SECP issue the necessary notification under Section 225(3) of the Companies Act, 2017.
Story by Mushtaq Ghumman
