Enquiry:

Pursuant to demutualization of the Lahore Stock Exchange (LSE) and Karachi Stock Exchange (KSE), the ownership rights in a Stock Exchange were segregated from the right to trade on an exchange. As a result of such demutualization, Trading Right Entitlement Certificates and Shares were issued by Stock Exchanges.

According to ICAP Directive, the apportionment of book value of Cards will be on the basis of fair value of Trading Right Entitlement Certificates and Shares issued by Stock Exchanges. After apportionment of book value of cards to TREC and Shares, we will determine recoverable amount of Cash Generating Units (CGU) according to IAS-36 for impairment test. Recoverable amount will be equal to higher of FV less cost of disposal and Value in Use (Para 19).

The Karachi Stock exchange has, vide its notice dated May 2013, determined the fair value of Trading Right Entitlement Certificates and Shares for the purpose of Base Minimum Capital (BMC) requirement as under:
– TREC – Rs.15,000,000
– Shares @ Rs. 9.954 per share

Currently a number of companies are showing the formal Stock Exchange card carrying value either as it is or apportioned the same between TREC and long Term Investment even if it exceeds the fair value of the TREC and Shares. For example:
The carrying value of card of KSE is around Rs. 105 M. Now either the card is being shown at Rs, 105M or this 105M is apportioned into TREC and Shares at Rs. 29M and Rs. 76M respectively. This apportionment is made on the following assumptions.

The KSE has declared the value of TREC at Rs. 15M and shares at Rs. 40M. The ratio of this value comes to 27:73. This Rs. 105M has been apportioned on the basis of this ratio.

Likewise, the carrying value of card of LSE is around Rs. 38M. Now either the card is being shown at Rs. 38M or this 38M is apportioned into TREC and Shares at Rs. 12M and Rs. 26M respectively. This apportionment is made on the following assumptions.

The LSE has declared the value of TREC at Rs. 4M and shares at Rs. 8.4M. The ratio of this value comes to 32:68. This Rs. 38M has been apportioned on the basis of this ratio.
In view of the above the clarification is required what will be the treatment of the value of cards over and above the value of TREC & Shares (Rs.15,000,000 & Rs.40,073,830) in respect of Karachi Stock Exchange and (Rs. 4,000,000 and Rs. 8,439,750) in respect of Lahore Stock Exchange.

Currently the TREC & Shares for KSE have been trading in the market at Rs.45 million approximately and TREC & Shares for LSE around Rs. 8 to Rs10M. Hence, active market is available. These transactions are being done in the form of open auction and private deals in the stock exchanges.

Opinion:

The Committee considered your query and would like to reproduce ICAP Selected Opinion No. 1.5 ‘Clarification required on ICAP Opinion on Accounting for De-Mutualization of Stock Exchanges’ of Volume XIX issued on August 29, 2013:

“15. Any subsequent measurement of the shares and/ or TREC would only be possible where their reliable fair values can be measured. This would most likely happen when the blocked shares are sold to the strategic investor or to the general public through an IPO and an active market develops for the TREC.

The Committee in its opinion had no intention to time bound the subsequent measurement of fair value. An entity can determine the reliable fair value through an appropriate price finding mechanism any time after initial recognition”.

With regard to your query, the Committee would suggest that fair values on split off date need to be assessed and allocation of the value of card should then be done on the basis of determined fair values.

The Committee is also of the view that the apportioned carrying value would be required to be tested for impairment as per IAS 36, if any. When the management and the auditor conclude that there is no impairment, they may continue to use the apportioned carrying value. However, the Committee would like to caution you about transactions which are being done privately; care must be taken when data is not available publicly.

(February 11, 2015)