The Securities and Exchange Commission of Pakistan (SECP) has approved amendments to the third, fourth and fifth schedules of the Companies Act, 2017.
Pursuant to promulgation of the 2017 Act on May 30, 2017, disclosure requirements of fourth and fifth schedules became applicable to various classes of companies for preparation of financial statements, in addition to the applicable financial reporting frameworks prescribed for each class under the third schedule. Stakeholders have since been highlighting concerns over practical difficulties in complying with some of the additional disclosure requirements of the respective schedules. One such requirement was to disclose information of related parties, irrespective of any transactions with such related parties.
The disclosures were required based on very broad definition of related parties, as provided in the new law by including directors, managers, key managerial personnel, their relatives, spouse, siblings, lineal ascendants and descendants etc. This posed practical difficulties for the companies to compile and present such non-financial information in the financial statements.
Moreover, the respective schedules contained requirements for disclosing beneficial ownership of foreign shareholders, other than natural persons, in the companies. It was highlighted that such disclosures should be part of the prescribed pattern of shareholding of the companies instead of the financial statements.
The accounting and audit fraternity and the corporate sector have been proposing changes to the schedules to address their concerns. Therefore, after consultation with stakeholders, the SECP has amended the third, fourth and fifth schedules to address the practical difficulties in its implementation and to ensure consistency in definitions, applicable financial reporting frameworks as well as the text.
For disclosures in the financial statements, the companies have to follow the requirements of the applicable financial reporting framework, therefore, it appears cogent to apply the definition of related party prescribed in the respective financial reporting frameworks for accounting and financial disclosures. In this context, an explanation has been added through the notification to this effect. In order to comply with legal requirements of section 208 of the Act, i.e. for entering into related party transactions or arrangements, approvals and record keeping, the definition given in the said section shall prevail. For financial disclosures, however, the criteria of related party in terms of the financial reporting framework (IFRS) shall be applied. This will address one of the major concerns of stakeholders. Furthermore, related party disclosures would now be required only if there are transactions or arrangements with related parties. Likewise, the requirements for disclosing beneficial ownership of the companies held by foreign shareholders, other than natural persons, shall now be made part of the pattern of shareholding instead of financial disclosures.