Abdul Ghani

Pakistan’s federal state-owned enterprises (SOEs) are required to transition to full International Financial Reporting Standards (IFRS) recognition and measurement by February 2026 under the provisions of the SOE Act 2023, according to the Federal State-Owned Enterprises Annual Aggregate Report FY2025.

The report states that SOEs are moving from hybrid and regulator-driven accounting frameworks toward comprehensive application of IFRS across financial reporting areas. This includes recognition and measurement standards relating to impairments, fair value accounting, leases, insurance contracts and foreign exchange treatment.

Under the transition framework, SOEs are required to apply IFRS 9 expected credit loss (ECL) models to financial assets, including circular-debt receivables and government-linked balances. The report notes that balances historically carried at nominal or recoverable amounts must be measured using probability-weighted lifetime expected credit loss methodologies, incorporating probability of default, loss given default and exposure at default parameters.

 Tariff differentials and under-recoveries are required to be assessed in accordance with asset recognition criteria under the IFRS Conceptual Framework and IFRS 14. Amounts not meeting recognition standards are to be reflected directly in profit or loss rather than deferred or capitalized.

The report further states that legacy power purchase agreements must be evaluated under IFRS 16 and IAS 21. This requires recognition of embedded leases on balance sheets as right-of-use assets and lease liabilities, along with recognition of foreign exchange movements in financial statements.

For SOEs in the financial sector, the transition includes full application of IFRS 9 without residual exemptions. These requirements include expected credit loss modeling, hedge accounting where applicable, fair value classification based on the business model and contractual cash flow characteristics, and enhanced disclosures under IFRS 7.

Insurance-sector SOEs are required to transition to IFRS 17. The new standard replaces earlier premium-based accounting models with a contractual service margin and fulfillment cash flow approach. Investment accounting under IFRS 9 is also required to align asset valuation with insurance liability measurement.

The report also mentions recognition of fair-value expense for share-based payments, consolidation of managed funds where control exists under IFRS 10, and transition of investment properties to fair-value measurement under IAS 40, with valuation changes recognized through profit or loss.

According to the report, these requirements are part of broader compliance measures under the SOE Act 2023 aimed at aligning financial reporting of SOEs with international standards.

The IFRS transition details are included in the annual aggregate assessment of financial and operational performance of SOEs across sectors including power, oil and gas, financial services, infrastructure and manufacturing for the fiscal year ended June 2025.

Credit: INP-WealthPk