ISLAMABAD, Dec 4: The Securities and Exchange Commission of Pakistan (SECP) has directed the mutual funds to fully comply with the requirements of International Accounting Standards (IAS) 39 “Financial and Measurement” relating to tax on capital gains.

In this regard, SECP stated here on Wednesday, the relaxation earlier given to mutual funds has been withdrawn. The withdrawal had been effected in pursuant to appropriate amendments made in the Income Tax Ordinance, 2001, through SRO 728(I)/2002 dated October 23, 2002.

As a result of these amendments made by Central Board of Revenue on the recommendation of the SECP, there are no longer any tax implications for mutual funds in fully applying IAS 39 in preparation and presentation of their accounts, which was essentially the basis on which the relaxation was allowed by the Commission.

IAS 39, which establishes the principles for recognising, measuring and disclosing information about financial assets and liabilities, was adopted by the SECP in July 2001 on the recommendation of the Institute of Chartered Accountants of Pakistan (ICAP). The objective was to further improve the financial reporting framework of listed companies in Pakistan.

The principles contained in IAS have been adopted in other countries as well, including UK and Singapore, where comparable national standards have been issued, the statement remarked.

After the first year (2001-02) of implementation of IAS 39, listed companies started raising queries about the implementation of the IAS. The SECP, while ensuring that the corporate sector adheres strictly to the core requirements of the accounting standard, did not deter the implementation of IAS 39 for non- banking financial institutions under its purview.

Nevertheless, taking cognizance of tax anomalies that might arise as a result of application of IAS 39, SECP granted some relief. As a result, the mutual funds sector was allowed in June 2002 to recognize unrealised gain on investments held for trading directly in equity, although the same is required by IAS 39 to be included in the profit/loss for the year.

The relaxation was given to mutual funds in consideration of tax implications arising from inclusion of unrealised gain in income statement.

The SECP actively pursued the issue with the CBR so that the income of mutual funds is bifurcated as revenue and capital for the purpose of applicability of tax.

Following the CBR’s decision, the mutual funds are now allowed to claim tax exemption by distributing 90 per cent of their accounting income, as reduced by capital gains whether realised or unrealised for any year.

The mutual funds, the source further stated, are not required to fully comply with IAS 39 in preparing and presenting their financial statements.

Accordingly, quarterly accounts for the period ending December 31, 2002 will have to be prepared in accordance with IAS 39.

Full implementation of IAS 39, it is expected in the SECP, would enhance the quality of our corporate financials and bring them closer to international standards.