CIRCULAR ISSUED TO MEMBERS 2006

Circular No. Date of Issue Subject 01/2006 02/2006 03/2006 04/2006 05/2006 06/2006 07/2006 08/2006 09/2006 10/2006

Jan-13, 2006 Jan 20, 2006 Jan 26, 2006 March 22, 2006 May 10, 2006 June 19, 2006 August 23 October 31, 2006 Dec 16, 2006 Dec 28, 2006

ICAP invites comments on Draft Financial Reporting Framework and Standards for Small and Medium- Sized Entities ICAP Invite Comments ……………………. (This Circular issued by PSC&E Department) Code of Corporate Governance – Review Report to the Members ICAP INVITES COMMENTS ON:

1. IFRS 2 ‘Share-based Payment’

2. ISA 720 ‘Other Information in Documents Containing Audited Financial Statements’

RE-EXPOSURE OF DRAFT FINANCIAL REPORTING FRAMEWORK AND STANDARDS FOR SMALL AND MEDIUM-SIZED ENTITIES TREATMENT OF PROPOSED DIVIDEND AND BONUS ISSUES ADOPTION OF IFAE, ISA 720, ISAE 3000, and WITHDRAWAL OF TR-20) REVIEW OF STATEMENT OF STANDARD AUDITING PRACTICE (SAPs) TR-5 - IASB STANDARDS – COUNCIL’S STATEMENT ON APPLICABILITY (REVISED 2006) TR-5 - IASB STANDARDS – COUNCIL’S STATEMENT ON APPLICABILITY (REVISED 2006)

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Circular No. 01/2006 January 13, 2006 ALL MEMBERS OF THE INSTITUTE Dear Member ICAP INVITES COMMENTS ON DRAFT FINANCIAL REPORTING FRAMEWORK AND STANDARDS FOR SMALL AND MEDIUM- SIZED ENTITIES The Council in its 177th meeting held on December 24, 2005 considered the draft financial reporting framework and standards for small and medium-sized entities (SMEs) and related recommendations as proposed by the Professional Standards and Technical Advisory Committee and decided to expose the same to the members of the Institute before considering the implementation of such reporting framework. Background Currently, under the provisions of the Companies Ordinance, 1984, only listed companies are required to comply with the accounting standards notified by the Securities & Exchange Commission of Pakistan (SECP). Although, the Institute through its TR-5 has made most of the accounting standards applicable to even non-listed companies and the audit report format prescribed for non-listed companies also refers to Approved Accounting Standards, the preparers as well as users of the financial statements of small and medium-sized entities have faced significant problems in complying with such standards. It is generally felt that in the case of small and medium-sized entities, the cost of compliance with complete set of approved accounting standards as notified by the SECP is considerably more than the benefits accruing from the use of such standards. The Draft Report on Standards and Codes prepared by the World Bank also highlighted non-compliance with Approved Accounting Standards by non-listed large entities and financial institutions. In order to address the above issues, the Institute’s Accounting and Auditing Standards Committee (South) had set up a Sub-committee to develop the accounting framework that could be used for the preparation of the general purpose financial statements by the Small and Medium-Sized entities. The proposed standards and related recommendations have been prepared by this Sub-committee, and subsequently reviewed and endorsed by the two AASCs and PS&TAC of the Institute.

THREE TIERED APPLICABILITY THRESHOLD In order to provide a comprehensive framework of accounting and financial reporting that covers all entities of

varying sizes as well as that addresses the degrees of public interest involved in such entities, a three tiered approach is proposed as follows:

Contd. P/2

-2-

Tier Description Criteria Standards to follow Tier 1 Publicly

Accountable Entities

All entities that meet any one of the following criteria:

1. listed companies ; 2. it has filed, or is in the process of filing, its fin

with the Securities and Exchange Commissother regulatory organisation for the purposeof instruments in a public market;

3. it holds assets in a fiduciary capacity for a b

outsiders, such as a bank, insurance compabroker/dealer, pension fund, mutual fund or entity;

4. it is a public utility or similar entity that provid

public service; or 5. it is economically significant on the basis of

assets, total income, number of employees, dominance, and nature and extent of extern

The criteria for economically significant entities wo i. Turnover in excess of Rs. 1 billion, excludingii. Number of employees in excess of 750 iii. Total borrowings (excluding normal trade cre

liabilities) in excess of Rs. 500 million (Five In order to be called economically significant amentioned in (i), (ii) and (iii) above have to followed will be based on the previous yestatements. Entities can be de-listed from thisdo not fall under the criteria as aforementioneyears.

Complete set of International FinaStandards that are approved by thInstitute and notified by the SECPthese entities

Contd. P/3

-3-

Tier 2 Medium- Sized Entities

All entities that neither fall in Tier 1 nor in Tier 3. The proposed Standards on AccountingReporting by the Medium-sized entities iof Chartered Accountants of Pakistan wthese entities

Tier 3 Small Sized Entities

Small-Sized entities are those entities that:

i) have paid up capital plus undistributed reservtaking into account any dividend proposed foexceeding twenty five million rupees; and

ii) have annual turnover not exceeding two hunexcluding other income.

In order to qualify as a small-sized entity, both of conditions must be satisfied.

The proposed Standard on Accounting Reporting by Small-Sized Entities issuedChartered Accountants of Pakistan will bentities.

Basis for developing Standards on Accounting and Financial Reporting for Small and Medium-Sized Entities

Although, the International Accounting Standards Board (IASB) is currently working on a project to develop the Accounting Standards for Small and Medium-sized Entities, it is expected that it may take a period of two years for finalizing this standard. To fill this gap during this transitory, period the Institute has taken this initiative to formulate the Standards for Accounting and Financial Reporting for Small and Medium-sized Entities.

In developing the attached standards, the committees considered the accounting standards for SMEs in other jurisdictions, the guidelines issued by Intergovernmental Working Group of Experts on International Standards on Accounting and Reporting (ISAR) of the United Nations Conference on Trade and Development (UNCTAD) as well as the principles contained in the International Financial Reporting Standards issued by the IASB. Further, in developing the three tier structure, definition for publicly accountable entities has been formulated after considering the criteria set out in the discussion paper prepared by IASB and for small entities, the definition of Small Company given in the Income Tax Ordinance, 2001 has been considered.

Full text of both the above standards can be downloaded from the Institute’s website i.e. www.icap.org.pk.

All members are requested to send their valued comments and recommendations to the Directorate of Technical Services by January 25, 2006. The comments would be helpful if they indicate the specific paragraph or group of paragraphs to which they relate, clearly explaining the issue (s), and providing a suggestion for alternate text giving rationale for the suggested change. Yours truly Shahid Hussain Deputy Director Technical Services

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Circular No. 02/2006 January 20, 2006

This Circular was issued by PSC&E Department

Circular No. 03/2006 January 26, 2006 ALL MEMBERS OF THE INSTITUTE Dear Member CODE OF CORPORATE GOVERNANCE – REVIEW REPORT TO THE MEMBERS Kindly refer to our Circular No. 05/2002 dated July 3, 2002 in which reference has been made to ISA-910 on Engagement to Review Financial Statements. Consequent upon IFAC’s decision to change the title of the standard relating to review engagement, ISA 910 is now to be known as International Standard on Review Engagements (ISRE-2400). As such, the first sentence of second paragraph of the “Review Report to the Members” relating to half-yearly financial statements enclosed with the Circular under reference would now read as “We conducted our review in accordance with the International Standard on Review Engagements 2400”. Members are requested to note the aforesaid change which is applicable with immediate effect. Revised format of the review report is enclosed. Thanking you Yours truly Shahid Hussain Deputy Director Technical Services Encl.: as above G:\ICAP\Circular Issued in 2006.DOC

REVIEW REPORT TO THE MEMBERS We have reviewed the annexed balance sheet of ……………….as at ……….., and the related profit and loss account, cash flow statement and statement of changes in equity together with the notes forming part thereof (here-in-after referred to as the “financial statements”) for the half-year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these financial statements based on our review. We conducted our review in accordance with the International Standard on Review Engagements 2400.This Standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial statements are free of material misstatement. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the annexed financial statements are not presented fairly, in all material respects, in accordance with approved accounting standards as applicable in Pakistan. Date AUDITOR Address G:\ICAP\Circular Issued in 2006.DOC

Circular No. 04/2006 March 22, 2006 ALL MEMBERS OF THE INSTITUTE Dear Member ICAP INVITES COMMENTS ON:

1. IFRS 2 ‘Share-based Payment’

2. ISA 720 ‘Other Information in Documents Containing Audited Financial Statements’ The Professional Standards and Technical Advisory Committee (PS&TAC) in its 51st meeting held on March 6, 2006 has decided that before recommending the above two Standards to the Council for their adoption, they should be exposed to the general membership for their comments.

The main features of IFRS-2 and note on adoption of ISA 720 are enclosed as Annexures ‘A’ and ‘B’ respectively to this circular.

Both IFRS 2 and ISA 720 are available in IFRS Bound Volume 2005 and ISA Handbook respectively. As the IASB has exclusive copyright on IFRS, only the soft copy of ISA has been placed on the Institute's website.

Members are invited to offer their comments, if any, on the above two Standards. Comments would be more helpful if they indicate the specific paragraph or group of paragraphs to which they relate, clearly explaining the issue(s). Members are requested to send their comments to the undersigned by April 10, 2006. Thanking you Yours truly Shahid Hussain Deputy Director Technical Services Encl.: as above H:\ICAP\Circular Issued in 2006.DOC

Annexure “A”

MAIN FEATURES OF IFRS-2 IFRS 2 – Share-based Payment was issued by the IASB in February 2004 which is effective for annual periods beginning on or after 1 January 2005. The standard sets out measurement principles and specific requirements for recognition of share-based payment transactions in an entity’s financial statements. A share-based payment is a transaction in which the entity receives or acquires goods or services either as consideration for its equity instruments or by incurring liabilities for amounts based on the price of the entity's shares or other equity instruments of the entity. Rationale of Issuance

The use of share-based payments has increased in recent years and continues to spread while there has been no IFRS covering the recognition and measurement of these transactions. Concerns have been raised about this gap in standards. Also the users of the financial statements and other commentators called for improvements in the accounting treatment of share based payments. Scope The concept of share-based payments is broader than employee share options. IFRS 2 encompasses the issuance of shares, or rights to shares, in return for services and goods. IFRS 2 applies to all entities. There is no exemption for private or smaller entities. Furthermore, subsidiaries using their parent's or fellow subsidiary's equity as consideration for goods or services are within the scope of the Standard. Exemptions to the general scope principle. The issuance of shares in a business combination should be accounted for under IFRS 3 Business Combinations. However, care should be taken to distinguish share-based payments related to the acquisition from those related to employee services. IFRS 2 does not address share-based payments within the scope of paragraphs 8-10 of IAS 32 Financial Instruments: Disclosure and Presentation, or paragraphs 5-7 of IAS 39 Financial Instruments: Recognition and Measurement. Therefore, IAS 32 and 39 should be applied for commodity-based derivative contracts that may be settled in shares or rights to shares. IFRS 2 does not apply to share-based payment transactions other than for the acquisition of goods and services. Share dividends, the purchase of treasury shares, and the issuance of additional shares are therefore outside its scope. Recognition and Measurement The issuance of shares or rights to shares requires an increase in a component of equity. IFRS 2 requires the offsetting debit entry to be expensed when the payment for goods or services does not represent an asset. The expense should be recognised as the goods or services are consumed. The issuance of fully vested shares, or rights to shares, is presumed to relate to past service, requiring the full amount of the grant-date fair value to be expensed immediately. The issuance of shares to employees with, say, a three-year vesting period is considered to relate to services over the vesting period. Therefore,

the fair value of the share-based payment, determined at the grant date, should be expensed over the vesting period. Disclosures An entity is required to disclose information that enables users of the financial statements to understand:

the nature and extent of share-based payment arrangements that existed during the period.

how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined.

the effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position.

Reasons for Adoption of IFRS-2 by the Institute

Guidelines: The Companies Ordinance, 1984, Companies (Issue of Capital) Rules, 1996 and Public Companies (Employees Stock Option Scheme) Rules, 2001 do not contain comprehensive and extensive guidelines to encompass all sorts of share based payments as have been enunciated in the IFRS.

Guidelines pertaining to vesting conditions: Rules do not prescribe the specific guidelines pertaining to market based and non-market based vesting conditions.

Accounting treatment of modifications to terms and conditions of grant of equity instruments: IFRS - 2 also provides guidelines pertaining to accounting treatment of modifications to terms and conditions on which equity instruments were granted while rules do not provide any such guidelines.

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Annexure “B”

ADOPTION OF ISA 720 ‘OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED

FINANCIAL STATEMENTS’ International Standard on Auditing 720 was issued by IFAC in February 1984. The purpose of this ISA is to establish standards and provide guidance on the auditor’s consideration of other information, on which the auditor has no obligation to report, in documents containing audited financial statements. It requires auditors to read the other information to identify material inconsistencies with the audited financial statements. The reason for not adopting the ISA by the Council of the Institute was that in most of the cases the information published along with the annual reports was not made available to the auditors before printing of the annual reports and as a result of this, auditors were unable to review and identify material inconsistencies, if any, with the audited financial statements. Also there was no legal requirement on the management of the companies to share such information with their auditors within a timeframe that will enable the external auditors to review it prior to its publication as is the case in certain other jurisdictions. Owing to the above reasons, the Council was of the view that this ISA should not be adopted until appropriate amendments were introduced in the relevant section of the Companies Ordinance, 1984. The concern / matter was also discussed in the SECP/ICAP Coordination Committee meeting and it was recommended to SECP that appropriate amendments need to be incorporated in the Companies Ordinance, 1984 before the Council can consider the adoption of this ISA.

CURRENT STATUS However the SECP felt that issuance of a circular would achieve the desired result and recently issued a Circular No. 23/2005 dated December 14, 2005 making it obligatory for all listed companies and their subsidiaries to provide “Other Information" contained in their annual reports, to their external auditors. The text of the Circular is reproduced below:

“In exercise of the powers conferred by sub-section (1) of Section 246 of the Companies Ordinance, 1984 (XLVII of1984), the Securities and Exchange Commission of Pakistan is pleased to direct all listed companies and their subsidiaries to provide: (a) "Other Information" contained in their annual report, as such term is defined in International Standard on Auditing 720, to their external auditor(s); and (b) sufficient time to their external auditor(s) to review and comment upon any "material inconsistencies" found in such Other Information where the Other Information may contradict the information contained in the audited financial statements. Listed companies and their subsidiaries are required to comply with this directive from the period commencing 1st January, 2006.”

DECISION OF PS&TAC In view of the above development the PS&TAC considered the adoption of this Standard in its 51st meeting held on March 6, 2006, and decided to recommend its adoption to the Council after receiving the input from members. Accordingly, the ISA is being exposed to members for their comments with regard to its proposed adoption. G:\ICAP\Circular Issued in 2006.DOC

Circular No. 05/2006 May 10, 2006 ALL MEMBERS OF THE INSTITUTE Dear Member RE-EXPOSURE OF DRAFT FINANCIAL REPORTING FRAMEWORK AND STANDARDS FOR SMALL AND MEDIUM-SIZED ENTITIES It may be recalled that the Institute vide its Circular No. 01/2006 sought comments from members on the above mentioned draft standards. Subsequent to the receipt of members’ comments the Institute organized a roundtable discussion on May 5, 2006 with the objective to have an interactive session and open discussion which helped the stakeholders in understanding the said standards. Representatives from the Securities and Exchange Commission of Pakistan and the State Bank of Pakistan also participated in the roundtable. Apart from other recommendations, some participants felt that it would be useful to obtain more feedback from the members while the Institute is engaged in the process of organizing roundtables. Members are requested to review the draft standards which are available on Institute's website www.icap.org.pk and send their valued comments and recommendations to the Directorate of Technical Services by May 27, 2006. The comments would be helpful if they indicate the specific paragraph or group of paragraphs to which they relate, clearly explaining the issue (s), and providing a suggestion for alternate text giving rationale for the suggested change. Thanking you Yours truly Shahid Hussain Deputy Director Technical Services G:\ICAP\Circular Issued in 2006.DOC

Circular No. 06/2006 June 19, 2006 ALL MEMBERS OF THE INSTITUTE TREATMENT OF PROPOSED DIVIDEND AND BONUS ISSUES Dear Member As members are aware that Securities and Exchange Commission of Pakistan (SECP) in July 2004 revised the Fourth Schedule to the Companies Ordinance, 1984 and one of the changes was removal of the words ‘proposed dividend’ under the heading of ‘Current Liabilities’ in order to bring the treatment of proposed dividend in line with the requirements of paragraph 12 of International Accounting Standard (IAS-10) ‘Events After the Balance Sheet Date‘. Subsequently, the State Bank of Pakistan through its BSD Circular No. 04 dated February 17, 2006 issued ‘Revised Forms of Annual Financial Statements’ in which reference to proposed dividend have also been removed. However, Fifth schedule to the Companies Ordinance, 1984 and other schedules containing formats of various specialized entities (e.g. Modarabas, mutual funds, general insurance companies etc.) still contain disclosure requirement of proposed dividend either in appropriations or other liabilities. In order to remove the inconsistencies and to bring the accounting for aforesaid appropriations in line with the requirements of IAS – 10, the Professional Standards and Technical Advisory Committee in its 51st meeting held on March 6, 2006 discussed the issue and clarified that all entities should follow the requirements of IAS – 10 notified by the SECP under the provisions of Section 234(3) of the Companies Ordinance, 1984 and hence part of the legal framework. Accordingly all declarations of dividends to holders of equity instruments including declaration of bonus issues and other appropriations except appropriations which are required by law (e.g. statutory reserves) after the balance sheet date, should not be recognized as liabilities or changes in reserves at the balance sheet date. Such declarations/appropriations should be disclosed in the notes in accordance with IAS -1 as well as the requirements in relevant statutes. Members are requested to note the above and ensure appropriate treatment of proposed dividend and bonus issues while preparing / auditing the financial statements. Thanking you Yours truly Shahid Hussain Deputy Director Technical Services

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Circular No. 07/2006 August 24, 2006

ALL MEMBERS OF THE INSTITUTE ADOPTION OF IFAE, ISA 720, ISAE 3000 AND WITHDRAWAL OF TR-20 Dear Member The Council of the Institute in its 180th meeting held on April 28, 2006 has decided to adopt the following framework and standards:

International Framework for Assurance Engagements (IFAE); International Standard on Auditing (ISA) 720 ‘Other Information

in Documents Containing Audited Financial Statements’ and International Standard on Assurance Engagements (ISAE) 3000

‘Assurance Engagements Other than Audits or Reviews of Historical Financial Information’.

IFAE and ISAE 3000 will be effective for assurance reports issued on or after December 31, 2006 whereas ISA 720 will be effective for audits of financial statements for periods beginning on or after July 1, 2006. The framework and standards are available in the Handbook of International Auditing and Assurance Pronouncements and Code of Ethics for Chartered Accountants published by the Institute. The above documents can also be downloaded from ICAP website using the following links:

http://www.icap.org.pk/Circulars/circulars2006/Framework.pdf http://www.icap.org.pk/Circulars/circulars2006/ISA720.rtf http://www.icap.org.pk/Circulars/circulars2006/ISAE3000.pdf

Further, the Council in the aforesaid meeting has also decided to withdraw TR-20 ‘Accounting for Expenditure During Construction Period (Reformatted – 2000)’ for the reasons mentioned below:

a) TR-20 refers to paragraph 5(C) of Part II of the superseded Fourth Schedule to the Companies Ordinance, 1984, which does not exist any more in the revised Fourth Schedule.

b) Examples of direct project costs given in TR-20 are appropriately covered in paragraph 17 of revised IAS-16 therefore, there is no need to replicate them in TR again.

c) Subsequent to the introduction of paragraph 19 in IAS 16 there appears to be no need to define or explain indirect costs further.

d) Accounting treatment of Borrowing Cost is adequately taken care of in IAS-23 “Borrowing Cost”

The revised Sectional Index is enclosed which is to be filed in Section C of Part I of Members’ Handbook Volume II. Yours truly Shahid Hussain Director Technical Services Encl.: as above

SECTIONAL INDEX PART I SECTION C TECHNICAL RELEASES TR-1 Withdrawn -( Capitalization of Interest on Loan ) TR-2 Withdrawn-( Financial Statement Presentation – Credit Cards ) TR-3 Withdrawn-( Depreciation Treatment in Tax Holiday Companies) TR-4 Withdrawn -( Gratuity – Provision in the Accounts of Company ) TR-5 IASB Standards-Council's Statement on Applicability (Revised-2005) TR-6 Fixed Assets Register (Reformatted - 2004) TR-7 Withdrawn– ( Revaluation of Fixed Assets ) TR-8 Clarification Regarding Basis of Calculation of Workers Profit Participation Fund (Reformatted 2004) TR-9 Withdrawn – ( Treatment of Post-dated Cheques or Promissory

Notes ) TR-10 Withdrawn – ( Deferred Taxation ) TR-11 Depreciation on Idle Property, Plant and Equipment (Reformatted - 2004) TR-12 Withdrawn – ( Debt Extinguishment ) TR-13 Withdrawn – ( Accounting for Compensated Absences ) TR-14 Withdrawn – ( Revaluation of Fixed Assets – Accounting Treatment ) TR-15 Bonus Shares-Accounting Treatment (Reformatted 2004) TR-16 Withdrawn – ( Pending Litigation Settled in Favour of Client After the

Balance Sheet date). TR-17 Withdrawn – (Finished Pieces of Equipment held by Manufacturer for

Customers) TR-18 Withdrawn - (Good Accounting Software )

TR-19 Excise Duty-Accounting Treatment (Reformatted - 2000) TR-20 Withdrawn – (Accounting for Expenditure During Construction Period) TR-21 Date of Commencement of Commercial Production (Reformatted - 2000) TR-22 Book Value per Share (Revised - 2002) TR-23 Withdrawn – (Investments Valuation –Application of Lower of Cost and

Market Value) TR-24 Exchange Risk Fee-Accounting Treatment (Reformatted - 2000) TR-25 Withdrawn – ( Prudential Regulations for Banks ) TR-26 Withdrawn – ( Export Quota – Accounting Treatment ) TR-27 IAS 12, Income Taxes (Revised 2003) TR-28 Withdrawn – ( Golden Handshake – Accounting For ) TR-29 Carry-Over-Transactions (COT)

Circular No. 08/2006 October 31, 2006 ALL MEMBERS OF THE INSTITUTE REVIEW OF STATEMENTS OF STANDARD AUDITING PRACTICE (SAPs) Dear Member The Council of the Institute in its 179th meeting held on March 7, 2006 has approved the Professional Standards and Technical Advisory Committee’s (PS&TAC) recommendation to convert Statement of Standard Auditing Practice (SAP) 1 into ATR-18 and withdraw SAP 3 and 5 for the following reasons:

SAP Ref Subject Reason for withdrawal

SAP – 1

Bank Reports for Audit Purposes

In order to simplify the pronouncements of the Institute the Council approved the conversion of SAP-1 into enclosed ATR 18.

SAP-1 now stands withdrawn.

SAP – 3

Verification of Inventories

The Council approved withdrawal of SAP-3 as appropriate guidance on the subject is already available in paragraphs 15-35 of ISA 500 – Audit Evidence and Part A of ISA 501– Attendance at physical Inventory Count.

SAP – 5

Verification of Debtors’ Balances by Direct Communication

Withdrawn whereas the suggested format of a standard letter for sending positive confirmation to debtors is enclosed.

The revised Sectional Index is enclosed which is to be filed in Section C of Part II of Members’ Handbook Volume II. Yours truly

Shahid Hussain Director Technical Services Encl.: As above

SECTIONAL INDEX PART II SECTION C TECHNICAL RELEASES ATR-1 Only Members to sign audit documents ATR-2 Withdrawn–(Communication–Statement on the

explanation and its clarification of the word)

ATR-3 Withdrawn – (Incoming auditors to help in clearing the professional dues of retiring member)

ATR-4 Withdrawn – ( Audit of government corporations ) ATR-5 Withdrawn – (Replying to enquiries for audit jobs ) ATR-6 Withdrawn – (Audit by ex-employees ) ATR-7 Withdrawn – (Some glaring omissions by the auditors

pointed out by Corporate Law Authority)

ATR-8 Preparation of accounts from incomplete records and report thereon as auditors (Reformatted 2002)

ATR-9 Signing of correspondence and financial statements by members

ATR-10 Withdrawn – (Communication of consent by incoming auditors)

ATR-11 Appointment of auditors-I (Reformatted 2002)

ATR-12 Withdrawn – (Appointment of auditors-II)

ATR-13 Lien on books of accounts due to non-payment of professional dues

ATR-14 Minimum hourly charge out rates and minimum fee for audit work by practicing members (Revised 2003)

ATR-15 Withdrawn – ( Qualification in auditor’s report - going concern assumption for organization formed with a limited life)

ATR-16 Acceptance of audit assignments by new auditor(s) when audit fee of existing auditor(s) is outstanding

ATR-17 Auditors’ Report to the Trustees/Board of Governors/Management Committee (Revised 2004)

ATR-18 Bank Reports for audit purposes

BANK REPORTS FOR AUDIT PURPOSES

1.0 THE ISSUE 1.1 To seek standardization of auditing practice when approaching

banks for audit information.

2.0 EXPLANATION

2.1 This release deals with request by auditors to client's bankers for confirmation of balances and other information and prescribing a standard letter of request.

2.2 The practice of obtaining independent confirmations or reports

from banks is essential to the proper discharge of auditors’ responsibilities. Bank reports assist auditors to verify existence of liabilities and the existence, ownership and proper custody of assets; they also provide other information relevant to the audit of accounts.

3.0 TECHNICAL COMMITTEE RECOMMENDATION

3.1 The Committee suggests the following standard format for the letter of request for bank confirmation and also the appropriate guidance in this regard to be used by the auditors while verifying the bank balances.

STANDARD LETTER OF REQUEST

3.2 The information which is usually required from banks and financial institutions for audit purposes is substantially the same for most audits and can be obtained in a standard letter of request which would facilitate prompt response from banks and financial institutions. The use of such letter, designed to cover all normal banking activities and to facilitate extraction of information from banking records should enable prompt response to these requests. It should also enable auditors to make further enquiries from banks if the replies received call for further clarification.

3.3 This technical release, therefore, requires auditors to adopt the

practice of requesting information from banks and financial institutions in the form of standard letter set out in Appendix-I. It also requires that the standard letter of request should be used in accordance with the procedures laid down in paragraph 5 below. Appendix-II to this release sets out explanations of items that are incorporated in, or specifically excluded from, the standard letter. It is stressed that this standard letter is for audit purposes only.

4.0 AUTHORITY TO DISCLOSE

Banks and financial institutions will require explicit written authority of their customers to disclose information requested by auditors. For convenience sake, it has been decided that the authority shall be evidenced by the customer's counter signature on the standard letter of request. In the case of joint accounts, the authority must be given in the standard letter of request by all parties to the account. In the case of security lodged by third party, its authority for disclosure will also have to be obtained and produced to the bank.

5.0 PROCEDURES 5.1 The following procedures should be adopted by the auditors in

connection with the standard letter of request for bank report:

a) The standard letter set out in Appendix-I to this release should be sent on each occasion by the auditor on his own letterhead to the Manager of each bank branch with which it is known that the client holds an account or has dealt since the end of the previous accounting period.

b) The client's authority to permit disclosure should be

obtained on the standard letter of request itself before the letter is sent out.

c) The standard letter of request should preferably reach the

branch manager on or before the date of the client's financial year-end.

d) The dates to be entered on the standard letter are

normally the closing dates of:

i) The client's accounting reference period for which the report is requested; and

ii) the client's previous accounting reference period for which full bank report was compiled. If, exceptionally, audited financial statements are produced other than for an accounting reference period, alternative dates should be substituted.

e) In reviewing the bank's reply, it is important for auditors to

check that bank has answered all questions in full. f) It will be necessary to obtain confirmation as to the

authenticity of any letter not received directly from the bank branch concerned and of any letter received from a bank without a request having previously been made. It is essential that in both cases, the auditors obtain confirmation from the branch concerned that the report has been prepared in compliance with the terms of the standard letter.

g) If no reply is received from the banks within two weeks

after the original request was made or two weeks after the closing of the year which ever is earlier, the auditor should send a "First Reminder" so marked on the standard letter of request.

h) After the expiry of a further period of one week from the date

of sending out the "First Reminder", if no reply is received, the auditor may consider sending a "Second Reminder" so marked on the standard letter of request if deemed appropriate by him.

5.2 The Standard letter should be used in its complete form for all

audit requests and in accordance with the above procedures in respect of financial statements for the relevant period and should not be altered to reduce the minimum contents prescribed. In certain circumstances, supplementary requests for additional information may be required for audit purposes. The letter containing such supplementary requests should be submitted to the bank, as far as possible, at the same time as the standard letter.

(179th meeting of the Council held on March 7, 2006)

APPENDIX-I

The Manager

(Bank) (Branch)

Dear Sir, (Clients's Name)

STANDARD REQUEST FOR BANK REPORT FOR AUDIT PURPOSES

In accordance with your above-named customer's instructions given hereon, please send DIRECT to us at the above address, as auditors of your customer, the following information relating to their affairs at your branch as at the close of business on and, in the case of items 2,4 and 12 during the period since the end of the previous accounting period. Please state against each item any factors which may limit the completeness of your reply; if there is nothing to report, state 'None'. It is understood that any replies given are in strict confidence, for the purposes of audit.

Information Requested Response BANK ACCOUNTS (1) Full titles of all accounts together with

the account numbers and balances therein, including NIL balances:

(a) where your customer's name is

the sole name in the title; (b) where your customer's name is

joined with that of other parties; (c) where the account is in a trade

name. NOTES

(i) Where the amount is subject to

any restriction (e.g. a garnishee order or arrestment) or exchange control considerations (e.g. 'blocked account') information regarding nature and extent of the restriction should be stated.

(ii) where the authority upon which

you are providing this information does not cover any amounts held jointly with other parties, please refer to your customer in order to obtain the requisite authority of the other parties with a copy to us.

(2) Full titles and dates of closure of all

accounts closed during the period. (3) The separate amounts accrued but not

charged or credited as at the above date, of

(a) markup/interest; and

Information Requested Response (b) provisional charges (including

commitment fees)

(4) The amount of markup/interest charged during the period if not specified separately in the customer's statement of account.

(5) Particulars (i.e. date, type of document

and accounts covered) of any written acknowledgement of set-off, either by specific letter of set-off, or incorporated in some other document or security.

FACILITIES (6) Details of leasing facilities, loans,

overdrafts, cash credit facilities (including standby facilities), and associated guarantees / indemnities specifying agreed limits, unused facilities, markup/interest terms, over due rentals / installments and in the case of term loans, date for repayment or review.

SECURITIES (7) (a) In respect of facilities,

contingent liabilities and derivatives and commodity trading, please give:

(i) details of any security

formally charged in favour of the bank, including the date and type of charge, (e.g. pledge, hypothecation etc.)

(ii) particulars of any

undertaking to assign any assets to the bank.

Information Requested Response If a security is limited to any borrowing, or if there is a prior, pari passu or subordinate charge, please indicate.

(iii) Whether the security

supports facilities granted by the bank to the customer or to another party.

(iv) For any arrangements for

set off of balances or compensating balances e.g. back to back loans, give particulars of any acknowledgement of set off (i.e. date, type of document and accounts covered).

CUSTODIES

(b) Investments, bills of exchange,

documents of title or other assets held but not charged. Please give details.

CONTINGENT LIABILITIES (8) Nature, currency, amount and extent of

any facilities limits and details of period of availability of agreed facility of all contingent liabilities, viz:-

(a) Total of bills discounted with

recourse to the customer or any subsidiary or related party of the customer;

(b) Details of any guarantees,

comfort letters, letter of undertakings, bonds, endorsements or indemnities given to you by the customer in

Information Requested Response favour of third parties (separately specifying any such items in favour of any subsidiary or related party of the customer);

(c) Details of any guarantees,

bonds or indemnities given by you, on your customer's behalf, stating where there is recourse to your customer and/or to its holding, parent or any other company within the group;

(d) Total of acceptances; (e) Total of outstanding liabilities

under documentary credits;

(f) Others (please give details).

ASSETS

(9) Details specifying the nature, amount and maturity date of the assets covered under Islamic mode of finance (e.g. morabaha, musharika, modaraba etc.) or any other mode of finance including leasing:-

(a) Asset repurchase

agreement; (b) Asset resale agreement; (c) Options outstanding at the

relevant date.

DERIVATIVES AND COMMODITY TRADING

(10) Details of all outstanding contracts specifying the number, deal date, maturity or value date, price at which the deal was transacted and currency of the contract bought and sold for:-

Information Requested Response (a) Total of foreign

exchange contracts; (b) Bullions; (c) Securities; (d) Others

(11) Information in respect of any letter of comfort obtained by the bank from the parent or any other associated concern of the company.

ADDITIONAL BANKING RELATIONSHIPS (12) A list of other banks, or branches of your

bank, where you are aware that a relationship has been established during the period.

(13) OTHER INFORMATION

Yours faithfully,

DISCLOSURE AUTHORISED For and on behalf of (CUSTOMER'S NAME) Signed in accordance with the terms and conditions for the conduct of the customer's bank account.

APPENDIX-II NOTES ON THE STANDARD LETTER

(This Appendix contains explanations of item numbers referred to in the Standard letter)

(1) BANK ACCOUNTS:

The phrase 'all accounts' includes details of all current, deposit loan and foreign currency accounts and other advances or facilities, money held on deposit receipt and account numbers.

(4) ANALYSIS OF CHARGES:

The details of the rate of markup/interest applicable to any markup/interest-bearing account shall be required.

(5) Auditors will need to have an understanding of the principles governing set-off, but it should not normally be necessary to make enquiries beyond the question as put in the standard letter. Details should be available from the relevant documents. A right to set-off may exist even when there are no written arrangements.

(7) CUSTOMER'S ASSETS:

a) Security includes details of charge, mortgage or other claims or security or security registered (e.g. debenture, memorandum of deposit); assets charged and where appropriate cross reference to facility specifically secured.

b) Assets include bonds, stock and share certificates, investments, bearer or other securities; title deeds relating to freehold, leasehold or other property; bills of exchange or other negotiable instruments receivable (other than cheques); deposit receipts (as distinct from any account represented by the deposit receipt); the names of persons who are able to obtain release of the assets should be ascertained from the customer and are usually covered by the bank mandate.

c) Lien: Auditors should be aware that any assets held by the bank other than those specifically charged, may be subject to some form of banker's lien, although this may only operate under particular conditions. It should be necessary to enquire only in exceptional circumstances.

d) Bearer securities: detailed enquiries on bearer securities

should be made of the bank only when evidence cannot be obtained from the customer or his banking records.

APPENDIX-II (8) CONTINGENT LIABILITIES: The liabilities under indemnities/ guarantees given in respect of

shipping documents relating to imports do not have an expiry date. From time to time the banks take a view on old liabilities and remove some of them from their records. Certain of these old liabilities may not therefore be shown in the figure quoted by the bank, but it cannot be guaranteed that no claim will be incurred subsequently.

(13) OTHER INFORMATION: Banks are often asked for introductions to other branches or

banks for the purpose of establishing new sources of finance. The provision of any available information relating to introductions or new accounts will assist auditors to satisfy themselves that they have information about all of their client's banking relationship.

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SUGGESTED FORMAT OF LETTER FOR DEBTOR’S CONFIRMATION BY DIRECT COMMUNICATION

(TO BE TYPED ON CLIENT’S LETTERHEAD)

DEBTOR’S NAME AND ADDRESS

Dear Sir, As part of their normal audit procedures, we have been requested by our auditors ______________ of _________________ to ask you to confirm direct to them your indebtedness to us of Rs. ___________ as at ________________. If the amount is in agreement with your records, please sign in the space provided below and return this letter directly to our auditors. If the amount is not in agreement with your records please notify our auditors directly of the amount shown by your records and, if possible, send them full particulars of the difference. For your reply to be of assistance to our auditors please give this request your early attention. *We enclose a prepaid envelope for your convenience. Please do not send remittances to the auditors along with the confirmation. Yours faithfully, CLIENT’S AUTHORISED SIGNATORY

PLEASE DO NOT DETACH

(CLIENT’S NAME)

DEBTOR’S NAME:

NO: The amount shown above of Rs. ___________ due from us *is/ [is not] in agreement with our records at ___________________. *The details of discrepancies are annexed.

Authorized Signature & Stamp Title of Position * Delete as appropriate (stamped self-addressed return envelope by the auditor’s should be enclosed)

SUGGESTIONS FOR IMPROVING RATE OF FEEDBACK FOR DEBTORS’ CONFIRMATIONS

The efficiency of the audit procedure of debtor’s confirmation through direct communication is influenced by both the willingness and ability of debtor to respond accurately to the information presented on the letter of confirmation. Improving confirmation feedback rate may reduce the extent of other audit procedures that the auditor may have planned to undertake. The following are some suggestions for improving feedback rates:-

(a) Use of preliminary notification

The use of a brief letter, post card, or telephone call by the client immediately before posting the letter generally tends to increase responses as the debtor is less likely to ignore the letter having been previously notified.

(b) Request information the debtor is able to confirm

The confirmation request should include all the relevant detailed information required for response by the debtor.

(c) Use clear wording The confirmation request should avoid technical jargon and should be written in simple language to facilitate an early and effective reply. (including Urdu or vernacular).

(d) Set deadlines The confirmation should state deadlines e.g. URGENT or REPLY REQUESTED WITHIN 5 DAYS.

(e) Provide return envelopes Return envelopes that have the firm’s name and address printed in bold are likely to draw attention to confirmations and are likely to encourage debtors to respond.

(f) Provide prepaid postage To facilitate responses, auditors normally include a stamped self-addressed return envelope along with each confirmation.

(g) Send follow-up reminders/second requests Sending reminders/second request soon after sending the initial letter are likely to increase feedback rates.

Circular No. 09/2006 December 16, 2006 ALL MEMBERS OF THE INSTITUTE Dear Member TR-5 - IASB STANDARDS – COUNCIL’S STATEMENT ON APPLICABILITY (REVISED 2006) The Council of the Institute in its 186th meeting held on November 08, 2006 has decided to revise TR-5 - IASB Standards – Council’s Statement on Applicability. The revised paragraph 2.4, requires the members to ensure compliance with the ‘Accounting and Financial Reporting Standards for Medium-Sized Entities (MSEs) and Small-Sized Entities (SSEs)’ while expressing an opinion on financial statements of MSEs or / SSEs. It may please be noted that the Council in its 184th meeting held on July 28, 2006 had already approved the aforesaid standards for release to members. A copy of the revised TR-5 along with the revised Sectional Index is enclosed to be filed in Section C of Part I of Members’ Handbook Volume II. Full text of the standards can be downloaded from the Institute’s website i.e. www.icap.org.pk. The printed bound volume is also available at the Karachi, Lahore and Islamabad offices of the Institute. Thanking you Yours truly Shahid Hussain Director Technical Services Encl.: As above G:\ICAP\Circular Issued in 2006.DOC

SECTIONAL INDEX PART I SECTION C TECHNICAL RELEASES TR-1 Withdrawn -(Capitalization of Interest on Loan) TR-2 Withdrawn-(Financial Statement Presentation – Credit Cards) TR-3 Withdrawn-(Depreciation Treatment in Tax Holiday Companies) TR-4 Withdrawn -(Gratuity – Provision in the Accounts of Company) TR-5 IASB Standards-Council's Statement on Applicability (Revised- 2006) TR-6 Fixed Assets Inventory and Records (Reformatted - 2004) TR-7 Withdrawn– (Revaluation of Fixed Assets) TR-8 Clarification Regarding Basis of Calculation of Workers’ Profit Participation Fund (Reformatted 2004) TR-9 Withdrawn – (Treatment of Post-dated Cheques or Promissory

Notes) TR-10 Withdrawn – (Deferred Taxation) TR-11 Depreciation on Idle Property, Plant and Equipment (Reformatted

- 2004) TR-12 Withdrawn – (Debt Extinguishment) TR-13 Withdrawn – (Accounting for Compensated Absences) TR-14 Withdrawn – (Revaluation of Fixed Assets – Accounting

Treatment) TR-15 Bonus Shares-Accounting Treatment (Reformatted 2004) TR-16 Withdrawn – (Pending Litigation Settled in Favour of Client After

the Balance Sheet date)

TR-17 Withdrawn – (Finished Pieces of Equipment held by

Manufacturer for Customers) TR-18 Withdrawn - (Good Accounting Software) TR-19 Excise Duty-Accounting Treatment (Reformatted - 2000) TR-20 Withdrawn – (Accounting for Expenditure during Construction

Period) TR-21 Date of Commencement of Commercial Production (Reformatted

- 2000) TR-22 Book Value per Share (Revised - 2002) TR-23 Withdrawn – (Investments Valuation –Application of Lower of

Cost and Market Value) TR-24 Exchange Risk Fee-Accounting Treatment (Reformatted - 2000) TR-25 Withdrawn – (Prudential Regulations for Banks) TR-26 Withdrawn – (Export Quota – Accounting Treatment) TR-27 IAS 12, Income Taxes (Revised 2003) TR-28 Withdrawn – (Golden Handshake – Accounting For) TR-29 Carry-Over-Transactions (COT)

ACCOUNTING TR-5 (Revised 2006) IASB STANDARDS-COUNCIL’S STATEMENT ON APPLICABILITY 1. THE ISSUE

The Institute has been a member body of the International Federation of Accountants (IFAC) ever since its establishment in 1973. In 2004 IFAC issued seven Statements of Membership Obligations (SMOs) and subject matter of one of them i.e. SMO 7 is ‘International Financial Reporting Standards’ (IFRSs) issued by the International Accounting Standards Board (IASB). Being a member body of IFAC it is the Institute’s obligation to comply with this statement which requires that all member bodies should use their best endeavors: (a) To incorporate the requirements of IFRSs in their

national accounting requirements, or where the responsibility for the development of national accounting standards lies with third parties, to persuade those responsible for developing those requirements that general purpose financial statements should comply with IFRSs, or with local accounting standards that are converged with IFRSs, and disclose the fact of such compliance; and

(b) To assist with the implementation of IFRSs, or national

accounting standards that incorporate IFRSs. To date, the IASB (formerly IASC) has issued eight IFRSs (IFRS 1 to 8) and it has made changes to various International Accounting Standards (IASs) that were issued by its predecessor body International Accounting Standards Committee. In Pakistan, almost all of the IASs (except for IAS-29 and IAS-41) have been adopted and notified by the SECP on the recommendation of the Institute, while the remaining standards are in the process of adoption. The Council has also decided to gradually adopt all IFRSs for the use of public interest entities.

While the Institute has been pursuing the objective of adoption and use of international standards for the preparation of general purpose financial statements over the years, it is also cognizant of the difficulties faced by small and medium entities (SMEs) for complying with full set of IFRSs that have been made applicable for listed companies. In order to address the needs of the SMEs,

the Council of the Institute had initiated a project to develop a separate set of standards for such entities in line with similar efforts in various other countries. Based on the work conducted and recommendations made by various committees working on this project for last two years, the Council is pleased to lay down this framework of accounting standards, including the two SME standards that should be complied with by the members of the Institute while expressing an opinion on the financial statements of SMEs.

2. COUNCIL’S DIRECTIVE

2.1 The Council wishes to draw the attention of all members to paragraphs 5, 8 and 9 of the revised Preface to International Financial Reporting Standards which read as under: -

5. All Standards and Interpretations issued under

previous Constitutions continue to be applicable unless and until they are amended or withdrawn. The International Accounting Standards Board may amend or withdraw International Accounting Standards and SIC Interpretations issued under previous Constitutions of IASC as well as issue new Standards and Interpretations.

When the term IFRSs is used in this Preface, it includes standards and interpretations approved by the IASB, and International Accounting Standards (IASs) and SIC Interpretations issued under previous Constitutions.

8. IFRSs set out recognition, measurement, presentation

and disclosure requirements dealing with transactions and events that are important in general purpose financial statements. They may also set out such requirements for transactions and events that arise mainly in specific industries. IFRSs are based on the Framework, which addresses the concepts underlying the information presented in general purpose financial statements. The objective of the Framework is to facilitate the consistent and logical formulation of IFRSs. The Framework also provides a basis for the use of judgement in resolving accounting issues.

9. IFRSs are designed to apply to the general purpose financial statements and other financial reporting of all profit-oriented entities. Profit-oriented entities include those engaged in commercial, industrial, financial and similar activities, whether organized in corporate or in other forms. They include organizations such as mutual insurance companies and other mutual cooperative entities that provide dividends or other economic benefits directly and proportionately to their owners, members or participants. Although IFRSs are not designed to apply to not-for-profit activities in the private sector, public sector or government, entities with such activities may find them appropriate.

2.2 The Council desires to direct all members to ensure that in accordance with the obligations undertaken by the Institute the auditor, while expressing an opinion on financial statements, should satisfy himself that they do comply with IASs/IFRSs in all material respects and that in the event of any departure from or inconsistency with such standards, the auditors’ report should contain suitable qualification. It should however be emphasized that IASs/ IFRSs do not override the local statutory provisions under Companies Ordinance, 1984 and the disclosure requirements under the Fourth and Fifth Schedules. Compliance with IASs/IFRSs shall be mandatory in so far as such standards are not inconsistent with local regulations or standards, directives or pronouncements issued by this Institute.

2.3 The Council is conscious of the present set of

circumstances prevailing in Pakistan, in relation to compliance with some of the IASs / IFRSs and in view thereof has decided that for auditors of all companies while expressing an opinion on financial statements the compliance with the following standards shall, until notified otherwise, not be deemed to be mandatory:

IAS 29 IAS 39 IAS 41 IFRS 1 to 8

2.4 Applicability of Accounting and Financial Reporting Standards for Medium-Sized Entities and Small-Sized Entities

2.4.1 The Institute has developed and the Council in its

meeting held on July 28, 2006 has approved two separate sets of accounting and financial reporting standards for Medium-Sized Entities (MSEs) and Small-Sized Entities (SSEs). These standards will be called as ‘Accounting and Financial Reporting Standards for Medium-Sized Entities and Small Sized Entities’.

2.4.2 The Institute directs its members that while

expressing an opinion on financial statements of MSEs or / SSEs (whichever is applicable) they shall ensure compliance with the Accounting and Financial Reporting Standards for MSEs or / SSEs.

2.4.3 Entities qualifying as MSE or SSE are defined

below:

QUALIFYING ENTITIES

Medium-Sized Entity (MSE)

A Medium-Sized Entity (MSE) is an entity that:

a) is not a listed company or a subsidiary of a listed company;

b) has not filed, or is not in the process of filing, its

financial statements with the Securities and Exchange Commission of Pakistan or other regulatory organisation for the purpose of issuing any class of instruments in a public market;

c) does not hold assets in a fiduciary capacity for a

broad group of outsiders, such as a bank, insurance company, securities broker/dealer, pension fund, mutual fund or investment banking entity;

d) is not a public utility or similar entity that

provides an essential public service;

e) is not a economically significant entity on the

basis of criteria as defined below; and

f) is not a Small-Sized Entity (SSE) as defined below.

Economically Significant Entity

An entity is considered to be economically significant if it has: (i) turnover in excess of Rs. 1 billion, excluding

other income;

(ii) number of employees in excess of 750; (iii) total borrowings (excluding trade creditors

and accrued liabilities) in excess of Rs. 500 million.

In order to be treated as economically significant any two of the criteria mentioned in (i), (ii) and (iii) above have to be met. The criteria followed will be based on the previous year’s audited financial statements. Entities can be delisted from this category where they do not fall under the aforementioned criteria for two consecutive years.

Small-Sized Entity (SSE)

A Small-Sized Entity (SSE) is an entity that:

(i) has paid up capital plus undistributed

reserves (total equity after taking into account any dividend proposed for the year) not exceeding Rs.25 million; and

(ii) has annual turnover not exceeding Rs.200

million, excluding other income.

In order to qualify as a Small-Sized Entity, both of the above mentioned-conditions must be satisfied.

Effective Date

2.4.4 Medium-Sized and Small-Sized Entities in respect of their annual financial statements shall apply the Accounting and Financial Reporting Standards for accounting periods beginning on or after July 1, 2006.

2.5 The Institute further directs its members that while

expressing an opinion on financial statements of entities that do not qualify to be treated as MSE or SSE as per the definition given in paragraphs 2.4.3 above (except for public utility entities or similar entities that provide an essential public service or regulatory agencies that do not fall under the jurisdiction of Securities and Exchange Commission of Pakistan (SECP)), they shall ensure compliance with the International Accounting Standards (IASs)/ International Financial Reporting Standards (IFRSs) as adopted by the Council and notified by the SECP under section 234(3) of the Companies Ordinance, 1984.

2.6 Furthermore, while expressing an opinion on financial

statements of public utility entities or similar entities that provide an essential public service or regulatory agencies that do not fall under the regulatory jurisdiction of SECP, such entities shall ensure that accounting frameworks as prescribed in their relevant statutes are complied with. However, where the relevant statute is silent or does not prescribe any accounting and financial reporting framework or treatment, the Institute recommends that such entity shall comply with IASs/IFRSs as applicable.

2.7 This statement is and shall be deemed to be a directive

of the Council and shall be applicable to any International Accounting Standard /International Financial Reporting Standard which may be issued in future unless otherwise specified by the Council. Non-compliance with this directive shall be deemed to be a professional misconduct in terms of clause (3) of Part 4 of Schedule I to the Chartered Accountants Ordinance, 1961.

(186th meeting of the Council – November 8, 2006)

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Circular No. 10/2006 December 27, 2006 ALL MEMBERS OF THE INSTITUTE Dear Member TR-5 - IASB STANDARDS – COUNCIL’S STATEMENT ON APPLICABILITY (REVISED 2006) Please refer to ICAP Circular No. 09/2006 dated December 16, 2006 on the above subject. It may be noted that in paragraph 2.3 of the TR-5 sent along with the aforesaid Circular the reference of ‘IAS 39’ has inadvertently been included in the list of IASs/IFRSs not yet adopted/notified. In addition subsequent to the notification of IFRS 2, 3, 5 and 6 on December 6, 2006 by SECP, the reference of IFRSs to paragraph 2.3 has also been amended. You are requested to kindly replace the enclosed page. Any inconvenience caused is very much regretted. Thanking you Yours truly Shahid Hussain Director Technical Services Encl.: As above H:\ICAP\Circular Issued in 2006.DOC

9. IFRSs are designed to apply to the general purpose financial statements and other financial reporting of all profit-oriented entities. Profit-oriented entities include those engaged in commercial, industrial, financial and similar activities, whether organized in corporate or in other forms. They include organizations such as mutual insurance companies and other mutual cooperative entities that provide dividends or other economic benefits directly and proportionately to their owners, members or participants. Although IFRSs are not designed to apply to not-for-profit activities in the private sector, public sector or government, entities with such activities may find them appropriate.

2.2 The Council desires to direct all members to ensure that in accordance with the obligations undertaken by the Institute the auditor, while expressing an opinion on financial statements, should satisfy himself that they do comply with IASs/IFRSs in all material respects and that in the event of any departure from or inconsistency with such standards, the auditors’ report should contain suitable qualification. It should however be emphasized that IASs/ IFRSs do not override the local statutory provisions under Companies Ordinance, 1984 and the disclosure requirements under the Fourth and Fifth Schedules. Compliance with IASs/IFRSs shall be mandatory in so far as such standards are not inconsistent with local regulations or standards, directives or pronouncements issued by this Institute.

2.3 The Council is conscious of the present set of

circumstances prevailing in Pakistan, in relation to compliance with some of the IASs / IFRSs and in view thereof has decided that for auditors of all companies while expressing an opinion on financial statements the compliance with the following standards shall, until notified otherwise, not be deemed to be mandatory:

IAS 29 IAS 41 IFRS 1, 4, 7 and 8

2.4 Applicability of Accounting and Financial Reporting Standards for Medium-Sized Entities and Small-Sized Entities

2.4.1 The Institute has developed and the Council in its

meeting held on July 28, 2006 has approved two separate sets of accounting and financial reporting standards for Medium-Sized Entities (MSEs) and Small-Sized Entities (SSEs). These standards will be called as ‘Accounting and Financial Reporting Standards for Medium-Sized Entities and Small Sized Entities’.

2.4.2 The Institute directs its members that while

expressing an opinion on financial statements of MSEs or / SSEs (whichever is applicable) they shall ensure compliance with the Accounting and Financial Reporting Standards for MSEs or / SSEs.

2.4.3 Entities qualifying as MSE or SSE are defined

below:

QUALIFYING ENTITIES

Medium-Sized Entity (MSE)

A Medium-Sized Entity (MSE) is an entity that:

a) is not a listed company or a subsidiary of a listed company;

b) has not filed, or is not in the process of filing, its

financial statements with the Securities and Exchange Commission of Pakistan or other regulatory organisation for the purpose of issuing any class of instruments in a public market;

c) does not hold assets in a fiduciary capacity for

a broad group of outsiders, such as a bank, insurance company, securities broker/dealer, pension fund, mutual fund or investment banking entity;

d) is not a public utility or similar entity that

provides an essential public service;