CAP III - Suggested Answer Papers - All Subjects - June 2019

CHARTERED ACCOUNTANCY PROFESSIONAL III
(CAP-III)
Suggested Answer
June 2019
The Institute of Chartered Accountants of Nepal
Disclaimer: The Suggested answers are prepared by the institute with a view to assist the students in their
study. The suggested answers are indicative and not exhaustive. Students are expected to apply their
knowledge and write the answer in the examinations taking the suggested answers as guidance.
Paper 1: Advanced Financial Reporting
CAP III Paper 1: Advanced Financial Reporting
Marks
Attempt all questions. Working notes should form part of the answers.
1.
a) AF Ltd., involved in retailing hired you to prepare its account. During the year
2074/75, AF acquired interests in AY Ltd. and AM Ltd. The statement of profit or
loss for AF, AY and AM for the year ended 32nd Ashadh 2075, are as follows:
(Rs. in million)
Particulars AF AY AM
Revenue 1,125.00 375.00 187.50
Cost of sales -750.00 -225.00 -112.50
Gross profit 375.00 150.00 75.00
Operating expenses -62.50 -37.50 -12.50
Operating profit 312.50 112.50 62.50
Interest and similar charges -37.50 -12.50 -2.50
Profit before tax 275.00 100.00 60.00
Income tax -68.75 -25.00 -15.00
Profit after tax 206.25 75.00 45.00
Retained earnings at start of the year 293.75 112.50 17.50
Retained earnings at end of the year 500.00 187.50 62.50
i) On 1st Kartik 2074, AF purchased 30 million of the 37.50 million Re 1
ordinary shares in AY at a cost of Rs. 8 per share. At the date of acquisition,
the fair value of AY’s net assets were equal to their book value with the
exception of property, the details of which are as follows:
(Rs. in million)
Cost 187.50
Accumulated depreciation at Shrawan 1, 2074 (15.00)
Net book value at Shrawan 1, 2074 172.50
The property, which had a useful economic life of 25 years on Shrawan 1,
2072, is in a prime commercial location and has increased dramatically in
value since it was purchased by AY on Shrawan 1, 2072. The replacement
cost of a similar building, with similar remaining useful economic life at
Kartik 1, 2074 is Rs. 250 million. The fair value at acquisition has not been
reflected in the records of AY.
ii) On Magh 01, 2074, AF purchases 10 million of the 25 million Re. 1 ordinary
shares in AM at a cost of Rs. 6 per share. At the date of acquisition the fair
value of AM’s net assets were equal to their book value with the exception of
property that had a fair value of Rs. 22.50 million in excess of its book value
and a remaining useful life of four years.
iii) In Falgun 2074, AF sold goods to AY for Rs. 18.75 million and 20% of these
goods remained unsold at 32nd Ashadh 2075; AF prices its sales at cost plus
50%.
iv) On 25th Shrawan 2075, AF sold its former head office administrative building
for Rs. 3.12 million. At Ashadh 32, 2075, the building was for sale and
unoccupied, with staff having moved to a new premises. The book value of
the building in the statement of financial position of AF as at 32nd Ashadh
2075 was Rs. 5 million.
v) Each company charges depreciation on a time apportionment basis to
operating expenses.
vi) The directors of AF believe that any goodwill arising on the acquisition of AY
and AM has been impaired by 25% as at 32nd Ashadh 2075. The directors
© The Institute of Chartered Accountants of Nepal 2

have a policy of measuring non-controlling interest at the proportionate share

of identifiable net assets.
Required: 18
Prepare the consolidated statement of profit and loss account of AF Group for the
year ended Ashadh 32, 2075 in accordance with NFRS.
b) Despite substantial evidence, drawn from different countries and different time
periods, that suggests the wealth of shareholders in a bidding company is unlikely
to be increased as a result of taking over another company, takeovers remain an
important part of the business landscape. Explain briefly when takeover will make
economic and financial sense. 2
Answer:
a)
AF Group
Consolidated statement of profit or loss account for the year ended 32nd Ashadh, 2075
Particulars (Rs. in million)
Revenue [1,125 + (375 × 9/12) - 18.75 (W4)] 1,387.50
Cost of sales [750 + (225 × 9/12) - 18.75 (W4) + 1.25 (W4)] -901.25
Gross profit 486.25
Operating expenses [62.5 + (37.5 X 9/12) + 10.38 (W1) + 2.62 (W3) +
1.88 (W7)] -105.50
Operating profit 380.75
Interest payable and similar charges [37.5 + 12.5 × 9/12] -46.88
Share of profit of associate (AM) (W6) 7.88
Profit before tax 341.75
Tax [68.75 + 25 × 9/12] -87.50
Profit after tax 254.25
Non-controlling interest (W5) -10.73
Net profit for the year 243.52
Rr Retained earnings at start of year 293.75
Retained earnings at end of the year 531.02
Working Notes:
1. Goodwill:
Rs. in million
Investment at cost (30 m × Rs. 8) 240.00
Non-controlling interest (20% × 248.13) 49.63
289.63
Net assets acquired:
Re. 1 ordinary shares 37.50
Pre-acquisition profits (Shrawan 01, 2074) 112.50
Pre-acquisition profits (Rs. 75 million × 3/12) 18.75
Fair value adjustment (W2) 79.38
(248.13)
Total goodwill on acquisition 41.50
Impairment @ (25% ×41.50) ( 10.38)
Net goodwill 31.12
Alternative approach:
Investment at cost 240.00
Net assets acquired:
Re. 1 ordinary shares 37.50
Pre-acquisition profits (Shrawan 01, 2074) 112.50

Pre-acquisition profits (Rs. 75 million × 3/12) 18.75
Fair value adjustment (W2) 79.38
248.13
Group Share on net assets (80% × 248.13) (198.50)
Total goodwill on acquisition 41.50
Impairment @ (25% × 41.50) ( 10.38)
Net goodwill on acquisition 31.12
2. Fair value adjustment of property:
Replacement cost @ Kartik 01, 2074 250.00
Net book value @ Shrawan 01, 2074 172.50
Depreciation Shrawan 01, 2074 to Kartik 01, 2074 (Rs. 187.50
million / 25)*3/12 -1.88 (170.62)
79.38
3. Additional depreciation on fair value adjustment of property:
(Rs. 79.38 million /22.75 Yrs.) × 9/12 2.62
4. Intercompany transactions:
Eliminate intercompany sales and cost of sales 18.75
Eliminate inventory profit (Rs. 18.75 million / 5) × 50/150 1.25
5. Non-controlling interest charge:
Net profit for the year (9/12 × 75 million) 56.25
Less depreciation on fair value adjustment ( 2.62)
53.63
X 20% 10.73
6. Share of profit of associate
Profit after tax (Rs. 45 million X 6/12 × 0.4) 9.00
Depreciation adjustment (Rs. 22.5 million /4 X 0.4 × 6/12) -1.12
7.88
7. Sale of former head office administrative building:
NAS 10 Events after the reporting period states that of non-current assets are non-
adjusting events and accounts would not normally be amended to reflect this (although it
would be disclosed in the notes). However, in this case, it could be argued that the sale
price is evidence of impairment arose after the year-end then the accounts should be
adjusted. Given that the sale took place on 25th Shrawan 2075, it is likely that the
conditions existed at the date of statement of financial position.
Therefore the impairment Rs. (5-3.12) million should be charged in the 2074/75 financial
statements in accordance with NAS 36 Impairment of Assets as:
Income statement – operating expenses A/c Dr. Rs. 1.88 million
To property A/c Rs. 1.88 million
The property would be classified as a ‘non-current asset held for sale’ in accordance with
NFRS 5 Non-Current Assets Held for Sale and Discontinued Operations.
Note: If it is assumed that the sales transactions was occurred after the date when the
financial statements are authorized for issue then no adjustment will be required.
b) A merger will only be worthwhile for a company that is committed to maximizing

shareholder wealth, if gains arise that would not otherwise arise if the bidding and target
businesses had not been combined. The value of a business may be defined as the present
value of its future cash flows. This means that a takeover will make economic sense if the
present value of the combined business exceeds the aggregate of the present values of
each business when taken separately.

2.
a) Following trial balance was extracted from the books of KG Holdings Ltd. on
Ashadh end 2075:
(Rs. in million )
Particulars Dr. Cr.
Cost of sales 76.80
Distribution cost 24.40
Administration expenses 12.00
Provision for warranty claim 12.00
Land & building revalued amount (Land Rs. 24 m) 160.00
Accumulated depreciation on building 8.00
st
Revaluation surplus 1 Shrawan 2074 24.00
Plant at cost 260.00
Accumulated depreciation on plant 124.00
Revenue 240.80
Investment property 128.00
Equity investment 33.60
Trade receivables 27.60
Closing inventory 24.80
Cash & bank 35.20
Trade payables 18.40
Income tax 1.60
Equity shares 80.00
Share premium 140.00
Equity investment reserve 5.60
st
6% Debenture issued on 1 Falgun 2074 80.00
Dividend paid 9.40
st
Retained earnings of 1 Shrawan 2074 60.60
Total 793.40 793.40
The following notes are relevant to the trail balance:
i) The company maintains a provision for warranty claims expected to arise in
the future on goods sold. At the reporting date, this provision was carried at
Rs. 12 million. It has been agreed that this provision should be increased to
Rs. 17.5 million.
ii) Land and buildings are carried under the revaluation model, as permitted by
NAS 16. The most recent valuation took place on Ashadh end 2073, resulting
in the values included in the trial balance above. The revaluation surplus of
Rs. 24 million resulted solely from these land and buildings. The buildings
were estimated to have a useful economic life of 17 years as at that date and
zero residual value. On Ashadh end 2075, the land was revalued to Rs. 20
million and the buildings to Rs. 90 million. There was no change to the useful
life estimates of the buildings. Depreciation is recognized on a straight line
basis through cost of sales, and no depreciation has yet been charged for the
year ending on Ashadh end 2075.
iii) Plant is being depreciated through cost of sales at 20% per annum reducing
balance. On Ashadh end 2075, a piece of plant with cost of Rs. 40 million on
Shrawan 1 2073 was sold for Rs. 22 million. The only entry made to record
this transaction was to debit cash and credit sales revenue with Rs. 22 million.
iv) Investment properties are accounted for under the fair value model of NAS
40. The figure included in the trial balance above represents the fair value of

these properties at 1st Shrawan 2074. The fair value of these properties at
Ashadh end 2075 was Rs. 140 million.
v) The figure for equity investments represents the fair value of equities held at
1st Shrawan 2074 plus the cost of equities purchased during the year. As
permitted by NFRS 9, an election was made at the date of purchase to account
for any fair value gains and losses on all these equity investments through
‘other comprehensive income’. The company takes such gains and losses to a
separate component of equity. The fair value of the equity investments at
Ashadh end 2075 was Rs. 25 million.
vi) Income tax for the year was estimated at Rs. 22 million. The balance in the
trial balance is a residual amount after offsetting of payment of income tax for
the year ended Ashadh end 2074 against the provision made in that year.
vii) Debentures were issued during the year. Interest is payable annually in
arrears. No interest has been provided for or paid as at Ashadh end 2075.
Required: 10
Prepare Income Statement as per NFRS.
b) Following details are available in relation to a contract work undertaken by DD
Developers Ltd.:
Particulars Current Year Previous Year
Rs. in million
Accumulated actual cost of contract 2,560 1,500
Revised estimated cost to complete the
contract 2,900 2,600
Unpaid gross bills 100 75
Work certified and billed 80% 45%
Following additional information are available:
i) Price of the contract is agreed at Rs. 3,000 million and cost to complete the
contract is estimated at Rs. 2,400 million. The contract work is started during
previous year and is in progress which is expected to be completed within six
months after end of current year.
ii) DD Developers Ltd. recognizes contract revenue and cost under percentage of
completion method.
iii) Actual accumulated cost of contract includes expenses of Rs. 7 million for
preparing bidding document for the contract.
iv) DD Developers Ltd. is required to rectify defects, if any, during the warranty
period. Cost of rectification is estimated at 5% of the contract price.
Required: 10
Show contract revenue and contract cost to be recognized in income statement of
both year considering the requirement of NFRS. Also calculate gross amount due
from customer.
Answer:
a) Statement of profit or loss and other comprehensive income for the year ended
Ashadh end 2075
Particulars WN Rs. in million
Revenue 1 218.80
Cost of Sales 3 (112.00)
Gross profit 106.80
Distribution Cost (24.40)
Administration Expenses 4 (17.50)
Finance Cost 5 (2.00)
Loss on disposal of Plant 2.3 (3.60)
Loss on revaluation of land and building 6 (10.00)

Gain on revaluation of investment property 7 12.00
Profit before tax 61.30
Tax Expenses 8 (23.60)
Profit for the year 37.70
Other Comprehensive Income:
Loss on revaluation of land and building 6 (24.00)
Loss on revaluation of equity investment 9 (8.60)
Other Comprehensive Income for the year (32.60)
Total Comprehensive income for the year 5.10
Working Notes: (Rs. in million)
1 Accounting for sales of plant as sales revenue reduced
2.1 Building Depreciation
Cost of Building 136.00
Depreciation for the year (Rs. 136 m / 17
Yrs.) 8.00
2.2 Depreciation on Plant
Opening Carrying Amount (260-124) 136.00
Opening Carrying amount of plant sold (80%
×Rs. 40 m) (32.00)
Depreciable amount 104.00
Depreciation ( @ 20% of Rs. 104 m) 20.80
Depreciation of sold item (@ 20 of Rs. 32 m) 6.40
Total Depreciation 27.20
2.3 Sales of Plant
Cost of sold item 40.00
Depreciation Y1 (8.00)
Depreciation Y2 (6.40)
Carrying Amount 25.60
Sales value 22.00
Loss on sale of plant 3.60
3 Cost of Sales
As per trial 76.80
Add: Depreciation on plant ( W.N 2.2) 27.20
Add: Depreciation on building ( W.N 2.1) 8.00
4 Administration Expenses 12.00
Add: Increase in provision amount of
warranty 5.50
5 Finance cost
Par value of debentures 80.00
Interest for the year 4.80
Interest for 5 months 2.00
6 Land & Building Revaluation Land Building Total

Opening Balance (Carrying amount) 24 128.00 152
Less: Depreciation for the year (W.N 2.1) (8.00) -8
Closing Revalued amount (Given) 20 90.00 110
Revaluation Loss 4 30.00 34
Loss to the extent of previous gain

recognized in OCI & remaining amount

charged to P & L A/c.
7 Investment Property
As per trial 128.00
Closing Fair Value 140.00
Fair value gain 12.00
8 Income Tax
Of previous year 1.60
Of current year 22.00
Total 23.60
9 Investment in equity
As per trial 33.60
Closing fair value 25.00
Loss on equity investment 8.60
b)
Expected profit loss on completion of contract (Rs. in million)
Current Previous
Year Year
Contract Price a 3,000 3,000
Work completion b 80% 45%
Accumulated actual cost c 2,560.00 1,500.00
Cost before award of the contract d -7 -7
Actual accumulated cost e=c+d 2,553.00 1,493.00
Estimated cost to complete f 2,900 2,600
Further cost (Balancing) g= f-e 347.00 1,107.00
Estimated warranty cost ( 5% of CP) h 150 150
Estimated total cost of contract i 3,050 2,750
Estimated profit loss of contract j=a-i -50 250
Contract cost recognition
Cost recognized up to end of the year k=i*b 2,440 1,237.5
Cost recognized up to end of previous year -1,237.5
cost for the year 1,202.5 1,237.5
Loss to be recognized j*20% 10
Contract cost recognition 1,212.5 1,237.5
Contract revenue to recognized:
Contract revenue to recognized cumulative a*b 2,400 1,350
Recognized up to previous period -1350
Contract revenue to be recognized for the
year 1,050 1,350
Gross Amount due from customers
Contract cost incurred e 2,553.00 1,493.00
Profit ( 45% × Rs. 250 m) 112.5
Loss -50
2,503.00 1,605.50
Progress Billing a*b -2400 -1350
Gross amount due from customer 103.00 255.50

3.
a) On 1st Shrawan 2074, an 8% convertible loan with a nominal value of Rs.
600,000 was issued by a company at par. It is redeemable on 31st Ashadh
2078 at par. Alternatively, it may be converted into equity shares on the
basis of 100 new shares for each Rs. 200 worth of loan.
An equivalent loan without the conversion option would have carried interest
at 10%. Interest of Rs. 48,000 has already been paid and included as a finance
cost. Present value rates are as follows:
Year end @ 8% @ 10%
1 0.93 0.91
2 0.86 0.83
3 0.79 0.75
4 0.73 0.68
Required: (6+4=10)
i) How will the Company present the above loan notes in the financial
statements for the year ended 32nd Ashadh 2075?
ii) Also calculate additional finance cost and pass journal entry to record it.
b) The following consolidated financial statements relate to the CG group for the
year ended Ashadh 32, 2075:
CG Group balance sheet at Ashadh 32, 2075
Rs. in Assets: Rs. in
Equity and Liabilities:
million million
Equity attributable to equity
Non-current assets:
holders of parent:
Property, plant, and
Share capital 200 500
equipment
Retained earnings 400 Goodwill 100
Investment in associate 70
Minority interest 50
Current assets 130
Non-current liabilities 60
Current liabilities 90
Total 800 Total 800
CG Group income statement for the year ended Ashadh 32, 2075
Particulars Rs. in million
Revenue 1,800
Cost of sales (1,200)
Gross profit 600
Other income 60
Distribution costs (200)
Administrative expenses (100)
Other expenses (50)
Finance costs (60)
Share of profit of associates 10
Profit before tax 260
Income tax expense (70)
Profit for the period 190
Attributable to:
Equity holders of the parent 176
Minority interest 14

Following information is relevant to the production of the segment information:

(a) The entity is organized for management purposes into three major operating
divisions: furniture, stationery and computer. There are other smaller
operating divisions also.
(b) The sales revenue for the major operating divisions is set as:
Inter-segment sales
Revenue
Particulars eliminated on consolidation
(Rs. in million)
(Rs. in million)
Furniture 800 200
Stationery 500 150
Computer 400 80
There are no inter-segment sales to the smaller operating divisions.
(c) The profit after taking into account the other income, distribution costs, and
administrative expenses can be allocated in this way:
Percentage of profit
Furniture 50%
Stationery 25%
Computer 20%
Other divisions 5%
100%
(d) The other expenses, finance costs, and income tax expense cannot be allocated
to the segments on any reasonable basis.
(e) During the year, the furniture division had purchased an investment in an
associate. The profit shown in the income statement is after the elimination of
inter-segment profit of Rs. 2 million.
(f) The breakdown of segment assets and liabilities are :
(Rs. in million)
Particulars Furniture Stationery Computer
Property, plant, and equipment 300 100 80
Goodwill 60 30 10
Current assets 80 40 6
Non-current liabilities 30 21 4
Current liabilities 45 33 8
The remainder of the assets and liabilities relate to the other divisions except
for an asset of Rs. 4 million and a liability of Rs. 6 million that cannot be
allocated.
Required: 10
Produce a schedule that shows the information required for segment
disclosures under NFRS 08, Operating Segments.
Answer:
a)
i) There is an ‘option’ to convert the loans into equity i.e. the loan note holders do not
have to accept equity shares; they could demand repayment in the form of cash.
NAS 32 states that where there is an obligation to transfer economic benefits there
should be a liability recognized. On the other hand, where there is not an obligation to
transfer economic benefits, a financial instrument should be recognized as equity.
In the above question we have both - ‘equity’ and ‘debt’ features in the instrument.
There is an obligation to pay cash - i.e. interest at 8% per annum and a redemption
amount - this is ‘financial liability’ or ‘debt component’. The ‘equity’ part of the
transaction is the option to convert. So it is a compound financial instrument.

Debt element of the financial instrument so as to recognize the liability is the present
value of interest and principal.
The rate at which the same is to be discounted, is the rate of equivalent loan note
without the conversion option i.e. at 10%.
Year Interest & Principle amount @ 8% PVIF @ 10% Amount (Rs.)
2075 48,000 0.91 43,680
2076 48,000 0.83 39,840
2077 48,000 0.75 36,000
2078 648,000 0.68 440,640

560,160
Amount to be recognized as a Liability 560,160
Initial Proceeds (600,000)
Amount to be recognized as Equity 39,840
ii) The next step is to recognize the interest component equivalent to the loan that
would carry if there was no option to cover. Therefore, the interest should be
recognized at 10%. As on date Rs. 48,000 has been recognized in the statement
of profit and loss i.e. 600,000 x 8% but we have discounted the present value of
future interest payments and redemption amount using discount factors of 10%,
so the finance charge in the statement of profit and loss must also be recognized
at the same rate i.e. for the purpose of consistency.
The additional charge to be recognized in the income statement is calculated on
[Debt component of the financial instrument Rs. 560,160] as:
Interest charge (560,160x 10%) Rs. 56,016
Already charged to the income statement (Rs. 48,000)
Additional charge required Rs. 8,016
Journal Entries for recording additional finance cost for year ended 32nd Ashadh 2075:
Particulars Dr. Amount Cr.
(Rs.) Amount
Finance cost A/c Dr. 8,016 (Rs
To Debt component A/c .)
8,0
(Being interest recorded for difference between 16
amount recorded earlier and that to be recorded as
per NAS 32)
b) Information about business segments: CG Group (Rs. in million)

Elimin
Particulars Furniture Stationary Computer Other Consolidated
ation
Revenue:
External sales 800 500 400 100 1,800
Intersegment sales 200 150 80 0 (430)
Total revenue 1,000 650 480 100 (430) 1,800
Segment
180 90 72 18
result:(W.N. 1) 360
Other expenses (50)
Finance costs (60)
Share of profit of
10
associate 10
Income tax expense (70)
Profit for the period 190

Other information:
Segment assets:
440 170 96 20 726
(W.N. 2)
Investment in
70 70
associate
Unallocated asset 4
Consolidated total
800
assets
Segment liabilities:
75 54 12 3 144
(W.N. 2)
Unallocated
6
liabilities
Consolidated total
liabilities 150
W.N. 1:
Segment result Rs. in million
Gross profit 600
Other income 60
Distribution costs (200)
Administrative expenses (100)
Net profit 360
Allocated as:
Furniture 180
Stationery 90
Computer 72
Other divisions 18
Total 360
W.N. 2:
(Rs. in million)
Particulars Furniture Stationary Computer
Segment assets:
Property, plant, and equipment 300 100 80
Goodwill 60 30 10
Current assets 80 40 6
440 170 96
Segment liabilities:
Noncurrent 30 21 4
Current 45 33 8
75 54 12
4. Write short notes on the following: (5×3=15)

a) Human resource accounting and its need
b) Option contract and its features
c) Limitations of value added statement
d) Arguments for accounting of share-based payment
e) Techniques of inflation accounting

Answer:
a) Human resource accounting is the process of identifying and reporting investments made
in the human resources of an organization that are presently unaccounted for in the
conventional accounting practices. It is an extension of standard accounting principles.
Measuring the value of the human resources can assist organizations in accurately
documenting their assets.
Need for human resource accounting:
i) Under conventional accounting, no information is made available about the human
resources employed in an organization, and without people the financial and physical
resources cannot be operationally effective.
ii) The expenses related to the human organization are charged to current revenue
instead of being treated as investments, to be amortized over a period of time, with
the result that magnitude of net income is significantly distorted. This makes the
assessment of firm and inter-firm comparison difficult.
iii) The productivity and profitability of a firm largely depends on the contribution of
human assets. Two firms having identical physical assets and operating in the same
market may have different returns due to differences in human assets. If the value of
human assets is ignored, the total valuation of the firm becomes difficult.
iv) If the value of human resources is not duly reported in profit and loss account and
balance sheet, the important act of management on human assets cannot be perceived.
v) Expenses on recruitment, training, etc. are treated as expenses and written off against
revenue under conventional accounting. All expenses on human resources are to be
treated as investments, since the benefits are accrued over a period of time.
b) Option contract is a derivative instrument under which a buyer gets the right to buy or
sell and a seller undertakes an obligation to sell or buy a given quantity of the underlying
asset at a given price at a given future date for a payment of option premium by the buyer
to the seller. For example; equity share option (eg. Nabil Bank option), commodity
options (eg. Gold/silver option).
Features of option contract:
i) Only the seller of an option is under an obligation to sell/buy the underlying asset as
and when the buyer exercise his right.
ii) Buyer of an option pays the option premium in full to the seller of an option at the
time of buying an option.
iii) For buyer of an option, profits are potentially unlimited and losses are limited to the
option premium paid to the seller. For seller of an option, profits are limited to the
option premium received from the buyer and losses are potentially unlimited.
iv) Only seller/writer is required to pay the margin.
c) Following are the limitations of value added statement:

i) Preparation and presentation of value added statement (VAS) may lead to information
overload and confusion, as an ordinary employee reading his company's corporate
annual report may not be able to reconcile the value added statement with the
earnings statement.
ii) It raises a danger that management may take the maximization of value added as their
goal i.e. the inclusion of the value added may wrongly lead management to pursue
maximization of firms value.
iii) Its inclusion in the corporate annual report would involve extra work, therefore, extra
costs and delay and also a slight loss of confidentiality in view of the additional
disclosure involved.
iv) The most severe limitation of value added data emerges from lack of any uniformity
and consistency amongst different companies in the preparation and presentation of
VAS.

v) Since there are various methods of calculating VA, it is difficult to make inter-firm
comparisons. Even intra-firm comparison is not possible if the treatment of these
items is changed in the subsequent years.
vi) VAS may lead to confusion especially in the cases where wealth or value added is
increasing while earnings are decreasing.
d) Where shares are issued for no cash consideration, it can be argued that there is a cost to
the owners of the business by dilution of their holding.
Accounting for share-based payment allows comparison between companies that
remunerate their staff in different ways, some in cash consideration, while others use a
mixture of cash consideration and share-based payment.
The share options have been issued in return for valuable resources (e.g. employee
services). These resources are not received in cash, as they are for other capital because
the resources are consumed by the entity as they are provided, but nevertheless they have
been received and should be accounted for.
This consumption of resources provided meets the Conceptual Framework definition of
an expense so a share-based payment expense is justified.
e) Inflation accounting refers to the process of adjusting the financial statements of a

company to show the real financial position of the company during inflationary period.
i) Current Purchasing Power (CPP) Method – It involves adjustment of financial
accounts to price changes. A general price index is used to convert the values of
various items. It takes into account the purchasing power of money and ignores the
rise and fall in the price of an item. It involves adjustment of historical figures at
current purchasing power which is done through multiplication of the historical
figures by a conversion factor.
ii) Current Cost Accounting (CCA) Method – Under this method assets are shown at
current costs and profits are determined on the basis of costs at the date of sale rather
than the actual cost. CCA is an alternative to the CPP method. The CCA method
matches current revenues with the current cost of the resources which are consumed
in earning them.
5.
a) What is public financial management system? Explain the initiative taken by the
government of Nepal to strengthen PFM system. 8
b) Consider the following case:
(i) Current cost of capital employed (equity approach) Rs. 1,040,000
(ii) Profit earned after current cost adjustment (equity Rs. 172,000
approach)
(iii) 10% long term loan Rs. 450,000
(iv) Normal rate of return:
On equity capital employed 15.6%
On long-term capital employed 13.5%
Required: 7
Find out Leverage effect on Goodwill.
Answer:
a) The PFM and budgetary policies of the Government of Nepal during the Nineties were
directed towards economic liberalization, privatization, poverty reduction and
decentralization. Policies and programs of the budget were mainly concerned with
agriculture, modernization, employment promotion, women’s empowerment, financial
sector reform, government expenditure management, tax reform, good governance, social
service and the development of basic and physical infrastructure. PFM system of Nepal,
like most developing countries, continued to be dominated by the traditional objectives of
control and accountability rather than a concern for allocating limited public sector
resources to well defined programs and projects that were intended to serve a set of
national objectives.
The extension of the budget coverage involved a combination of formal and informal
incorporation of expenditure activities. The other formal extension involved the
incorporation of foreign assistance programs, which were previously outside the budget.
Planning the allocation of scarce resources was not given due priority. The pattern of
government expenditure followed more or less the uniform course till the 1990’s. Public
expenditure and revenue both increased; but the expenditure increase trend was greater
than the revenue. The inadequate mobilization of domestic resources through government
revenue resulted in a serious problem of widening resource gap in Nepal. Foreign aid was
the main source of development financing and deficit financing continued to increase.
Planning, budgeting, and implementation had inherent problems such as lack of capacity,
co-ordination and monitoring. In spite of a number of initiatives taken, one of the main
problems of Nepal has been the lack of proper domestic resource mobilization.
Several factors have contributed in varying degrees to the lack of effectiveness of public
spending in Nepal. The institutional factors played major role in the over-programming
(having too many programs in scarce resources) of the budget, its lack of focus and
prioritization and implementation problems. The lacks of ownership of projects/
programs at various levels and the absence of accountability, also undermined the quality
and effectiveness of public spending. Managing the national budget became increasingly
difficult for Government of Nepal to further their objectives of poverty alleviation.
Public Expenditure Management is one of the key activities of any government in the
world. There is a growing concern to make PFM system predictable, transparent and
accountable anywhere in the world. PFM in general incorporates a credible planning
system, management of government revenues, budget execution, expenditure
management, debt management, reimbursement, procurement and other important
aspects of financial management such as accounting, recording, financial reporting and
auditing and external scrutiny of the financial transactions. Improving governance and
enhancing accountability are considered as the critical agenda of the Government of
Nepal in the endeavor of institutionalizing good governance practices in the country.
Hence, strengthening Public Financial Management has been accepted as one of the key
elements of the GoN’s strategy for improving the overall governance, optimizing outputs
from public resources and ensuring inclusive and broad-based development. Poor
planning, ever increasing indiscipline in budget execution, ineffective expenditure control
and lack of transparency mainly in public procurement pose significant fiduciary risks to
almost all development projects both at center and local level. The GoN’s recent
initiatives such as Financial Administration Reform Program, Strengthening PFM
Project, Government Financial Statistics (GFS) based new codes and classification of
revenues and expenditures, implementation of Treasury Single Account (TSA) system,
strategy to implement International Accounting and Reporting Standards (NAPSAS),
Public Expenditure and Financial Accountability (PEFA) initiative and other capacity
building programs for PFM have resulted some positive impacts in strengthening PFM
system in general and financial good governance in particular in Nepal.
b) Amount in Rs.
a. Profit for equity fund after current cost 172,000
adjustment
b. Profit as per Long-term fund approach:
Profit for equity fund 172,000
Add: Interest on Long-term loan (Rs. 450,000
x 10%) 45,000 217,000
1,040,000
c. Capital employed as per Long-term fund
approach:
Current cost of capital employed (by Equity 1,040,000
approach)
Add: 10% Long term loan 450,000
1,490,000
d. Value of Goodwill:
(A) By equity approach:
Capitalized value of Profit as per
equity approach = 172,000/15.60 ×100 1,102,564
Less: Capital employed as per equity (1,040,000)
approach
Value of Goodwill 62,564
(B) By long-term fund approach:
Capitalized value of Profit as per
long-term fund approach = 217,000/13.5 1,607,407
×100
Less: Capital employed as per Long-
term fund approach (1,490,000)
Value of goodwill 117,407
Leverage effect on Goodwill:
Adverse Leverage effect on goodwill is Rs. 54,843 (i.e. Rs. 117,407 – Rs. 62,564).
6.
a) Chandragiri Ltd. acquired a machine on 1st Shrawan, 2068 for Rs. 180 million
which had an estimated useful life of 9 years. The company follows straight line
method (SLM) for depreciating its fixed assets. It was estimated that this machine
would have nil residual value. On 1st Shrawan, 2073, the carrying value of the
machine was reassessed at Rs. 124 million and the gain arising out of the
revaluation is credited to revaluation reserve. During the year 2074/75, due to the
change in the market conditions, the recoverable amount ascertained to be only
Rs. 26 million as on 32nd Ashadh 2075. Chandragiri Ltd. had followed the policy
of writing down the revaluation gain by the increased charges of depreciation
resulting from revaluation.
Required: 5
Calculate the loss on impairment of the machine and show the amount to be
debited to statement of profit and loss for the year ended on 32nd Ashadh, 2075 as
per NAS.
b) M Ltd. is a manufacturing company which prepares its financial statements in
compliance with Nepal Financial Reporting Standards (NFRS). The following
transactions took place for the year ended 32nd Ashadh, 2075:
i) M Ltd. has traditionally repainted its premises every five years. The next
painting is due in a year’s time. The entity proposes to accrue as a provision
the expected cost of repainting the premises.
ii) M Ltd. has guaranteed the debts of its associate company up to a maximum
amount of Rs. 75 million. The associate is in excellent financial health and the
directors are of the opinion that it is unlikely the guarantee will ever be called
in.
Required: 5
Explain in brief how each of the above transactions and events should be recorded
by M Ltd. in compliance with the requirements of NAS 37 Provisions, Contingent
Liabilities and Contingent Assets.

Answer:
a)
Statement of showing impairment Loss
Rs. in million
Cost of the machine as on 1st Shrawan, 2068 180
Depreciation for 5 years i.e. 2068/69 to 2072/73 (100)
[(180 /9 years) x 5 years]
Carrying amount as on 31/03/2073 80
Add: Upward Revaluation (credited to revaluation reserve 44
account) (124-80)
Carrying amount of the machine as on 1st Shrawan, 124
2073(revalued)
Less: Depreciation for 2 years i.e. 2073/74 to 2074/75 (62)
[(124 /4 years) x 2 years]
Carrying amount as on 32/03/2075 62
Less: Recoverable amount (26)
Impairment loss 36
Less: Balance in revaluation reserve as on 32/03/2075:
Balance in revaluation reserve as on 1/4/2073 44
Less: Amount equal to additional depreciation transferred
from revaluation reserve for 2073/74 to 2074/75 [(44/4 (22) (22)
years) x 2 years]
Impairment loss to be debited to profit and loss account 14
b)
i) No present obligation exists to paint the premises; hence the accrual of a provision is
not permitted by NAS 37. No contingent liability exists either, unless a commitment
has been made to a supplier to carry out the work.
ii) There is a present obligation, as the entity has undertaken to guarantee the debts of
another party. However, it seems unlikely that this guarantee will be called in. Hence,
it is not probable at the reporting date that an outflow of resources will be required to
settle the obligation. Therefore the second condition has not been met, and no
provision should be recognised in the financial statements. If an outflow of resources
is judged possible but not remote, disclosure of a contingent liability of Rs. 75 million
should be made in the notes.

Specific Comments on the performance of the students

Batch: -June 2019
Level: - CAP-III
Paper I: Advanced Financial Reporting
Question No. 1
(a) Most of the students correctly calculated value of goodwill. However, they were lacking
clear knowledge about associate which should not be considered while calculating goodwill.
(b) Most of the students have not answered precisely about business combination. They have
only mentioned synergetic effect, monopoly, benefit etc.
Question No. 2
Only few students have given complete answer to the question. Students are required to focus on
concepts of contract account.
Question No. 3
(a) Most of the students have answered question and their performance in this part was
satisfactory. .
(b) Most of the students could not prepare the segment report, instead of that they wrote the
answer theoretically. Overall performance of the student was unsatisfactory and the
presentation made by them was poor too.
Question No. 4
In part (e) most of the students were lacking the concept and techniques. Other parts found to be
satisfactory.
Question No.5
(a) Most of the students attempted the question but they found to be lacking the deep
understanding about the chapter.
(b) Most of the students attempted this question and they have written satisfactory answer except
some of the students who found to be lacking the deep understanding of the chapter.
Question No. 6
(a) Most of the students have properly solved the question however some students were unable
to give revaluation reserve effect in a correct manner.
(b) Students found to be lacking the conceptual clarity on NAS-37.

Paper 2: Advanced Financial Management
CAP III Paper 2: Advanced Financial Management
Marks
Attempt all questions.
Working notes should form part of the answers. Make assumptions wherever necessary.
Use separate answer book for each question.
1. HP Limited anticipates an increase in demand for one of its major product lines, and
is thus interested in expanding its production capacity. It presently operates one
model, M - 100, and is considering two alternatives.
Alternative I: Acquire an additional M – 100 and operate with two sets of M – 100
machine.
Alternative II: Acquire the newly introduced model, M – 500 which have double
output capacity than that of M – 100. In this case HP Limited requires keeping the old
M – 100 models for emergencies, since tests have shown that the M – 500 is a very
sensitive machine; so will operate with existing M – 500 machine and new M – 500
machine.
The following information has been developed for the two alternatives:
Particulars M – 100 M – 500
Current Acquisition cost (Rs.) 5,000,000 8,000,000
Operating cost per unit of output (Rs.):
Material 40 80
Labour 80 30
Overheads 20 10
Annual operating fixed cash cost per machine (Rs.) 500,000 500,000
Resale value after 10 year Nil Nil
The existing model, M – 100, was purchased 4 years ago for Rs. 4,000,000. If
operated, it will have to be replaced in 6 year from now at an estimated cost of
Rs. 6,000,000. The machine which will replace the existing model, will have a market
value of Rs. 3,000,000 after 4 years.
If the M – 500 model is acquired, it will cost Rs. 200,000 per year to maintain the
existing M – 100 on standby status.
However, if M – 100 is kept as standby, it will not need to be replaced at the end of
6th year and can run for next 10 years. The company believes that a 15 percent cost of
capital rate is appropriate for this decision. The company follows straight line method
of depreciation and the same is accepted for taxation purposes.
Forecast sales at Rs. 200 per unit over the next 10 years are as follows:
Year 1-2 3-6 7 - 10
Sales unit 45,000 50,000 70,000
The corporate tax rate applicable to the company is 35 percent.
Advise HP Limited as regards the alternative it should go for. 20

Answer:
Calculation of cash outflows:
(Amount in Rs)
Particulars M – 100 M – 500
Acquisition cost (Rs) 5,000,000 8,000,000
Replacement cost of old M – 100 in year 6:
(Rs 6,000,000× 0.432) 2,592,000 -
Net cash outflows (Rs) 7,592,000 8,000,000
Calculation of cash inflows when M – 100 is purchased
(Amount in Rs)
Particulars Year 1 – 2 Year 3 – 6 Year 7 – 10
Sales unit 45,000 50,000 70,000
Sales revenue @ Rs 200 per unit 9,000,000 10,000,000 14,000,000
Costs
Variable costs @ Rs 140 per unit 6,300,000 7,000,000 9,800,000
Fixed cash cost 500,000 500,000 500,000
Depreciation on M – 100 (old) 400,000 400,000 -
Depreciation on M – 100 (replaced) - - 750,000
Depreciation on M – 100 (new) 500,000 500,000 500,000
Total costs 7,700,000 8,400,000 11,550,000
Earnings before taxes 1,300,000 1,600,000 2,450,000
Less: Taxes @ 35 percent 455,000 560,000 857,500
Earnings after taxes 845,000 1,040,000 1,592,500
Add: Depreciation 900,000 900,000 1,250,000
Cash flow after taxes 1,745,000 1,940,000 2,842,500
Calculation of cash inflows when M – 500 is purchased

(Amount in Rs)
Particulars Year 1 – 2 Year 3 – 6 Year 7 – 10
Sales unit 45,000 50,000 70,000
Sales revenue @ Rs 200 per unit 9,000,000 10,000,000 14,000,000
Costs:
Variable costs @ Rs 120 per unit 5,400,000 6,000,000 8,400,000
Fixed cash cost 500,000 500,000 500,000
Depreciation on M – 100 240,000 240,000 240,000
Depreciation on M – 500 800,000 800,000 800,000
Maintenance cost M – 100 200,000 200,000 200,000
Total costs 7,140,000 7,740,000 10,140,000
Earnings before taxes 1,860,000 2,260,000 3,860,000
Less: Taxes @ 35 percent 651,000 791,000 1,351,000

Earnings after taxes 1,209,000 1,469,000 2,509,000
Add: Depreciation 1,040,000 1,040,000 1,040,000
Cash flow after taxes 2,249,000 2,509,000 3,549,000
Calculation of NPV of proposed alternatives:

(Amount in Rs)
Year CFAT PV Factor Total PV
M – 100 M – 500 at 15% M – 100 M – 500
0 7,592,000 8,000,000 1.000 (7,592,000) (8,000,000)
1–2 1,745,000 2,249,000 1.626 2,837,370 3,656,874
3–6 1,940,000 2,509,000 2.159 4,188,460 5,416,391
7 – 10 2,842,500 3,549,000 1.234 3,507,645 4,379,466
10 3,000,000 - 0.247 741,000 -
Net Present Value 3,682,475 5,452,731
Recommendation:
As NPV is much higher from M – 500 model machines, HP Limited should purchase M –
500 model machines for its business expansion.
Working notes:
1. Depreciation on new M – 100 purchased in year 6:
(Rs 6,000,000 – Rs 3,000,000)/4 = Rs 750,000
2. As in case of new M – 100 model machine, it is assumed that the existing M – 100 model
machine also originally have useful life of 10 years and had been depreciated for past
four years accordingly. On that note book value of existing M – 100 on decision point is
Rs 2,400,000 (Rs 4,000,000 – Rs. 1,600,000). But under alternative II (purchase of M –
500 and keeping old M – 100 for emergencies throughout 10 year from decision point),
the book value of existing M – 100 (Rs 2,400,000) has been depreciated on straight line
basis for 10 years. Different assumptions are equally valid.
3. Based on above assumption, depreciation on old M – 100 machine:
(Rs 4,000,000 – Rs 1,600,000)/10 = Rs 240,000 p.a.
2.
a) Richmond Corporation is one of the largest automobile manufacturers. The
company reported an EBIT of Rs. 500 lakh in 2017. The capital expenditures for
year 2017 amounted to Rs. 300 lakh and the working capital was 20 percent of
revenues (which were Rs. 7,000 lakh). Depreciation in year 2017 was Rs. 200
lakh. The company is expected to operate with high growth for 5 years. Other
information for this high growth phase is as follows:
Length of the high growth phase 5 years
Expected growth rate 9 percent
Beta 1.2
Cost of debt 10 percent
Debt equity ratio 50 percent
The company expects revenues, earnings, capital expenditure and depreciation to
grow at 9 percent a year from year 2018–2022, after which the growth rate is
expected to drop to 4 percent. Capital spending will offset depreciation in the
steady state period. The tax rate for the company is 35 percent. The Treasury bill
rate is 7 percent and the market premium is 5.5 percent. Other information for the
steady state is as follows:
Beta 1
Cost of debt 9 percent
Debt equity ratio 0.25
Required: 10
Find out the value of the Richmond Corporation.
b) Kailash has following shares in his investment portfolios as on January 1, 2018
Shares Numbers Current Expected Standard Correlation with share
Price Year-end deviation A B C
(Rs.) Price (Rs.) of return
A 250 420 550 12% 1 -1 0.20
B 500 350 425 8% -1 1 -0.20
C 250 280 380 7% 0.20 -0.20 1
Required: (4+2+1+3=10)
i) Determine the expected return from Kailash's portfolio.
ii) What is the standard deviation of Kailash's portfolio?
iii) Suppose Kailash is a risk-averse investor. Give preference ranking of Kailash
to the shares with reason.
iv) Design a portfolio mix for Kailash using first two shares of his preference
which would produce zero standard deviation.
Answer:
a) Cost of equity (Ke) = Rf + β(Rm – Rf)
Cost of capital (Ko) = Ke × We + Kd × Wd
Cost of equity during the high growth phase = 7 + 1.2 × 5.5 = 13.6%
Cost of capital during the high growth phase = 13.6 × 0.5 + 10(1 – 0.35) × 0.5 = 10.05%
Cost of equity during the stable growth phase = 7 + 1 × 5.5 = 12.5%
Cost of capital during the stable growth phase = 12.5 × 0.75 + 9(1 – 0.35) × 0.25 = 10.84%
Determination of forecasted Free Cash Flow to the Firm (FCFF)

(Amount in lakh Rs)
Particulars Year
2018 2019 2020 2021 2022 Terminal
EBIT 545.00 594.05 647.51 705.79 769.31 800.08
Less: Taxes @ 35% 190.75 207.92 226.63 247.03 269.26 280.03
Less: Capital exp less dep. 109.00 118.81 129.50 141.16 153.86 -*
Less: Increase in WC 126.00 137.34 149.70 163.17 177.86 86.16
FCFF 119.25 129.98 141.68 154.43 168.33 433.89
* Offset by depreciation
FCFF
Ter min al value of the firm 
Ke  g
Rs. 433.89 lakh

0.1084  0.04
 Rs. 6,343.42 lakh
Value of the firm = PV of expected free cash flow + PV of the terminal value

(Amount in lakh Rs)
Particulars 2018 2019 2020 2021 2022 Terminal
FCFF/Terminal Value 119.25 129.98 141.68 154.43 168.33 6343.42
PV Factor at 10.05% 0.909 0.826 0.750 0.682 0.620 0.620
Present Value 108.40 107.36 106.26 105.32 104.36 3932.92
Value of the firm = Rs. 4,464.62 lakh approximately.
Working notes:
(i) Capital expenditure (increase by 9%)
(in lakh Rs)
Particulars 2018 2019 2020 2021 2022
Expenditure 327.00 356.43 388.51 423.48 461.59
Less: Dep. 218.00 237.62 259.01 282.32 307.73
109.00 118.81 129.50 141.16 153.86
(ii) Changes in working capital
(in lakh Rs)
Particulars 2018 2019 2020 2021 2022 Terminal
Revenues 7,630.00 8,316.70 9065.20 9881.07 10,770.37 11,201.18
Increase 630.00 686.70 748.50 815.87 889.30 430.81
Change in WC 126.00 137.34 149.70 163.17 177.86 86.16
b)
Shares Numbers Current Expected Total Weight Expected return [E(ri)]=
Price Year-end current [(EYP – CP)/ CP]
(Rs.) Price (Rs.) price
(Rs.)
A 250 420 550 105,000 30.00% (550 – 420)/420 = 31%
B 500 350 425 175,000 50.00% (425 – 350)/350 = 21%
C 250 280 380 70,000 20.00% (380 – 280)/280 = 36%
Total 350,000 100%
i) Expected return from Kailash's portfolio
E(rp) = WA×E(rA) + WB×E(rB) + WC×E(rC)
= 0.30 × 0.31 + 0.50 × 0.21 + 0.20 × 0.36
= 0.093 + 0.105 + 0.072 = 0.27 = 27%
ii) Standard deviation of Kailash's portfolio
σp = √ WA2σA2 +WB2 σB2+WC2 σC2+2PABσAσBWAWB+2PBCσBσCWBWC+2PACσAσCWAWC
= √ (0.30)2×(0.12)2 + (0.50)2×(0.08)2 + (0.20)2×(0.07)2 + 2(-1)×0.12×0.08×0.30×0.50 + 2(-0.20)
×0.08×0.07×0.50×0.20 + 2(0.20) ×0.12×0.07×0.30×0.20
= √ 0.001296 + 0.0016 + 0.000196 + (-0.00288) + (-0.000224) + 0.0002016
= √0.0001896 = 0.0137 = 1.37%
iii) A risk averse investor always prefers securities having high return at minimum level of
risk.Therefore, among three shares of Kailash's portfolio, Kailash will give 1st preference to
share C, 2nd to share A and 3rd preference to share B.
iv) Portfolio mix of zero standard deviation portfolio
WC = (σA2 - PACσAσC)/ (σC2+σA2-2PACσAσC)
= ((0.12)2 - (0.20) ×0.12×0.07)/ ((0.07)2 +(0.12)2 - 2(0.20) ×0.12×0.07)
= (0.0144 – 0.00168)/ (0.0049 + 0.0144 – 0.00336)
= 0.01272/ 0.01594 = 0.798 = 79.80%
And,
WA = 1-0.798 = 0.202 = 20.20%
Therefore, to produce zero standard deviation on portfolio, a mix of 79.80% shares of C and
20.20% shares of C should be made.
3.
a) Richard Ltd., a UK company is in the process of negotiating an order amounting
to Euro 40 lakh with a large German retailer on 6 months credit. If successful, this
will be the first time that Richard Ltd. has exported goods into the highly
competitive European market. The following three alternatives are being
considered for managing the transaction risk before the order is finalized.
(a) Invoice the German firm in Sterling using the current exchange rate to
calculate the invoice amount.
(b) Alternative of invoicing the European firm in Euro and using a forward
foreign exchange contract to hedge the transaction risk.
(c) Invoice the European Firm first in Euro and use sufficient 6 months sterling
future contracts (to the nearly whole number) to hedge the transaction risk.
Following data is available:
Spot Rate Euro 1.1750-Euro 1.1770/£
6 months forward premium 0.60-0.55 Euro Cents
6 months further contract is currently trading at Euro 1.1760/£
6 months future contract size is £62,500
Spot rate and 6 months future rate Euro 1.1785/£
Required: 10
i) Calculate to the nearest £ the receipt for Richard Ltd., under each of the three
proposals.
ii) In your opinion, which alternative would you consider to be the most
appropriate and the reason thereof?
b) Oxygen Ltd. has a surplus cash of Rs. 80 lakh and wants to distribute 28% of it to
the shareholders. The company decides to buy back shares. The finance manager
of the company estimates that its share price after repurchase is likely to be 10%
above the buyback price, if the buyback route is taken. The number of shares
outstanding at present is 10 lakh and the current EPS is Rs. 3.
You are required to determine: 10
i) The price at which the shares can be repurchased if the market capitalization
of the company should be Rs. 180 lakh after buyback.
ii) The number of shares that can be repurchased.
iii) The impact of share repurchase on the EPS, assuming the net income is same.
Answer:
a)
b (i) Receipt under three proposals
(a) Invoicing in Sterling
€ 40
Invoicing in £ will produce = lakh/1.1770 = £ 3,398,470.7
b) Use of Forward Contract
Forward Rate= € 1.1770+0.0055= 1.1825
Using Forward Market hedge Sterling receipt would be € 40 lakh/1.1825
= £ 3,382,663.8
c) Use of Future Contract
The equivalent sterling of the order placed based on future price (€1.1760)
= € 40 lakh
1.176
= £ 3,401,360.5
Number of Contracts = £ 3,401,360.5
62,500
Contracts (to the
nearest while
= 54 number)
The € amount hedged by future contract will be = 54* £ 62,500
= £ 3,375,000
Total profit on Future Contracts = 54* £ 62,500 *€ 0.0025
= 8,438
After 6 months
Amount Received € 4,000,000
Add: Profit on Future Contracts € 8,438
€ 4,008,437.5
Sterling Receipts
On sale of € at spot= = € 4,008,437.5
1.1785
= € 3,401,304.6
ii) Proposal of option c is preferable because the option (a) & (b) produces least receipts.
Alternative solution:
Assuming that 6 month forward premium is considered as discount, because generally premium
is mentioned in ascending order and discount is mentioned in descending order.
i) Receipt under three proposals
a) Invoicing in Sterling
Invoicing in £ will produce = € 4,000,000
1.1770
= £ 3,398,470.7
b) Use of Forward Contract
Forward Rate=€ 1.1770-0.0055= = € 1.1715
Using Forward Market hedge Sterling receipt would be € 4,000,000
1.1715
= £ 3,414,425.9
c) Use of Future Contract

The equivalent sterling of the order placed based on future price (€1.1760)=
= € 4,000,000
1.176
= £ 3,401,360.5
Number of Contracts= = £ 3,401,360.5
62,500
Contracts (to the
nearest whole
= 54 number)
Thus, € amount hedged by future contract will be = 54*£ 62,500
= £ 3,375,000
Buy Future at € 1.176
Sell Future at € 1.1785
€ 0.0025
Total profit on Future Contracts= 54*£62,500* €0.0025
= € 54*62,500* 0.0025
= € 8438
After 6 months
Amount Received € 4,000,000
Add: Profit on Future Contracts € 8,438
€ 4,008,438
Sterling Receipts
On sale of € at spot= = € 4,008,438
1.1785
= € 3,401,305
ii) Proposal of option (b) is preferable because the option (a) & ( c ) produces least receipts.
b)
a. Let P be the buyback price decided by Oxygen Ltd
Market capitalization after buyback:
1.1P(Original Shares-Shares bought back)
=22.40
= 1.1P(10 lakh-28% of 80 lakh) lakh
P
= 1.1P(10 lakh-22.40 lakh)
P
=26.4
= 11 lakh *P- 24.64 lakh lakh
Given: Market capitalization after buyback =Rs 180 lakh
Thus we have
11 lakh *P- 27.104 lakh = 180 lakh
27.104
or 11 lakh *P= 180 lakh + lakh
or 11 lakh *P= 207.104 lakh
or P= Rs.18.83
b Number of shares to be bought back= 24/18.83 lakh
Number of shares to be bought back= 1.27 lakh approximatley.
10 lakh-1.27
c New O/s shares= lakh
New O/s shares= 8.73 lakh
EPS= 3*/10 lakh
8.73 lakh
EPS= 3.44
EPS= Rs. 3.44
Thus EPS of Oxygen Ltd increses to Rs 3.44

4. Answer the following: (5×3=15)
a) Leverage buyouts
b) Spin-off and sell-off and identify three reasons for spin-off
c) Black-Scholes option pricing model
d) Money market securities and capital market securities
e) Country risk in overseas investment
Answer:
a) A Leveraged buy-out (LBO) is an acquisition of a company in which the acquisition is
substantially financed through debt. Debt typically forms 70-90 percent of the purchase
price and it may have a low credit rating. Stock market and the equity is concentrated in
the hands of a few investors. Debt is obtained on the basis of the company’s future
earnings potential. LBOs generally involve payment by cash to the seller.
When the managers buy their company from its owners employing debt the leveraged
buy-out is called management buy-out (MBO). LBOs are very popular in the USA. It has
been found there that in LBOs, the sellers require very high premium, ranging from 50 to
100 percent. The main motivation in LBOs is to increase wealth rapidly in a short span of
time. A buyer would typically go public after four or five years, and make substantial
capital gains.
In LBOs, a buyer generally looks for a company which is operating in a high growth
market with a high market share. It should have a high potential to grow fast and be
capable to earning superior profits. The demand for the company’s product should be
known so that its earnings can easily forecast. A typical company for a leveraged buyout
would be one which has high profit potential, high liquidity and low or no debt. Low
operating risk of such companies allows the acquiring firm or the management team to
assume a high degree of financial leverage and risk.
A lender provides high leverage in a leveraged buy-out because he may have full
confidence in the abilities of the managers-buyers to fully utilize the potential of the
business and convert it into enormous value. His perceived risk is low because of the
soundness of the company and its assumed predictable performance. He would also guard
himself against loss by taking ownership position in the future and detaining the right to
change the ownership of the buyers, if they fail to manage the company. The lender also
expects a high return on his investment in a leveraged buy-out since the risk is high. He
may therefore stipulate that the acquired company will go public after four or five years.
A major portion of his return comes from capital gains.
MBOs /LBOs can create a conflict between the (acquiring) managers and shareholders of
the firm. The shareholders benefits will reduce if the deal is very attractive for the
managers. This gives rise to agency costs. It is the responsibility of the board to protect
the interests of the shareholders, and ensure that the deal offers a fair value of their
shares. Another problem of LBOs could be the fall in the price of the LBO target
company’s debt instrument (bonds/debentures). This implies a transfer of wealth from
debenture holders to shareholders since their claim gets diluted. Debenture holders may,
thus demand a protection in the event of a LBO. They may insist for the redemption of
their claims at par if the firm changes.
b) A spinoff is the creation of an independent company through the sale or distribution of

new shares of an existing business or division of a parent company. A spinoff is a type of
divestiture. The spun-off companies are expected to be worth more as independent
entities than as parts of a larger business. A spinoff is also known as a spinout or starbust.

When a corporation spins off a business unit that has its own management structure, it
sets it up as an independent company under a renamed business entity. The company that
initiates the spinoff is referred to as the parent company. A spinoff retains its assets,
employees, and intellectual property from the parent company which gives it support in a
number of ways, such as investing equity in the newly formed firm and providing legal,
technology, or financial services.
A sell-off is the rapid selling of securities such as stocks, bonds, ETFs, commodities or
currencies. A sell-off may occur for many reasons, such as the sell-off of a company's
stock after a disappointing earnings report, the departure of a important executive or the
failure of an important product. Markets and stock indexes can also sell-off when interest
rates rise or oil prices surge, causing increased fear about the energy costs that companies
will face. Sell-offs can also be caused by political events, or terrorist acts.
All financial trading instruments have sell-offs. They are a natural occurrence from
profit-taking, short-selling or portfolio turnover. Healthy price up trends require periodic
sell-offs to replenish supply and trigger demand. Minor sell-offs are considered
pullbacks. Pullbacks tend to hold support at the 50-period moving average. However,
when a sell-off continues on an extensive basis, it can be signs of a potentially dangerous
market reversal leading to a correction or a crash.
Reasons for Spin-Offs
Here are reasons why some companies are better off as separate units than they are as one
bigger business:
 Better management: While executives of a company may be well-suited to overseeing
most of its lines of business, perhaps there's a unit that doesn't quite match their
expertise. In another example, a specific unit may require more attention than it's
getting from top management and its performance suffers as a result. In either case,
spinning off the unit and putting it under new management may result in better
performance in the unit-turned-independent company, while the parent company’s
managers can now redouble their focus on their remaining units.
 Separating growth trajectories and strategies: A business unit that's slow to make
money might prove a drag on a sister unit that's experiencing robust growth,
particularly if the parent company uses profits from the latter to subsidize the former.
But when two such units are no longer under the same parent company, they can
grow at their own pace and might even see more success in attracting investors who
specifically seek out fast-growing or mature companies.
 Better coverage from securities analysts: Research has shown that divestitures —
including spinoffs and sales to other companies — by parent companies result in
higher quality research by the analysts covering those parent companies. One study of
103 spinoffs, for instance, found that analyst forecast accuracy increased between 30
to 50 percent following spinoff transactions. One of the reasons why is that when a
business is less complex, it's easier to analyze. In addition, after a corporation
narrows its array of businesses, it may attract coverage from analysts with
specializations matching those businesses that may provide more accurate forecasts
about the corporation.
 Unlocking shareholder value: Perhaps the biggest factor driving spinoffs is the idea
that the parent company is undervalued — perhaps because of management or
strategy issues described above — and that its remaining business valuation would be
higher if it spun off one or more business units.
c) Fischer Black & Myron Scholes developed a precise model for determining the value of
an option. The model was published in 1973. The model is an extension of Theoretical

Minimum Price Model & considers riskiness of a stock also. The model is based on the
following assumptions:
i) There are no transaction costs & taxes.
ii) The short term interest rate is known and constant throughout the duration of
the option contract. Market participants can both borrow and lend at this rate.
iii) Only European options are considered; that is options that can be exercised
only at expiration.
iv) No imperfections exist in writing an option or selling a stock short (i.e short
selling is allowed without any penalty).
v) The stock pays no dividend.
vi) The deviation of return is constant over life of the option contract & is known
to market participants.
Valuation of Call option:
Vo=Vs x N(d1)-E N(d2)
ert
d1=Ln. Vs +(r+1/22) t
E
__________________
 t
Dd=Ln. Vs + (r+1/22) t or d2=d1- t
E
____________________
Sdt
Vo= Valute of option Vs= Spot value E=Exercise price r=rate of interst t=time to maturity
Assuming, for example, that it is a call option then its maximum value must be the share price.
Even if the exercise price is zero, no one is going to pay more than the share price simply to
acquire the right to buy the shares. The minimum value meanwhile will be the difference
between the share’s price and the option’s exercise price adjusted to its present value. The model
puts these fairly easy assumptions into a formula and then adjusts to account for other relevant
factors.
 The cost of money, buying an option instead of the underlying stock saves money and
therefore, makes the option increasingly valuable the higher interest rates go.
 The time until, the option expires, because the longer the period, the more valuable the option
becomes since the option holder has more time to make a profit.
 The volatility of the underlying share price, because the more it is likely to bounce around,
the greater chance the option holder has to make a profit.
Of these, volatility, as measured by the standard deviation of share returns, is the most significant
factor. Yet it was the factor over which Black and Scholes struggled because it is not intuitively
obvious that greater volatility should equal greater-value. That it is so is because of the peculiar
nature of options: they peg losses to the amount paid for the option, yet they offer unlimited
potential for profit. Note that the basic Black-Scholes model is for pricing call option, but it can
be adapted for pricing a put option.
d) Money market securities are short-term indebtedness. By ―short term‖ we usually imply an
original maturity of one year or less. The most common money market securities are treasury
bills, commercial paper, negotiable certificates of deposit, and bankers' acceptances. Money
market securities are backed solely by the issuer’s ability to pay. With money market securities,
there is no collateral; that is, no item of value (such as real estate) is designated by the issuer to
ensure repayment. The investor relies primarily on the reputation and repayment history of the
issuer in expecting that he or she will be repaid.

Capital market securities are long-term securities issued by corporations and governments. Here
―long-term securities‖ refers to securities with original maturities greater than 1 year and
perpetual securities (those with no maturity). There are two types of capital market securities:
those that represent shares of ownership interest, also called equity, issued by a company, and
those that represent indebtedness, issued by company and by the governments.
e) Among others, investors should consider country risk factors before investing overseas. Country
risk refers to the risk that arises from investing or doing business in a particular country. This
risk depends on the country's economic, political, and social environment. Countries with stable
economic, social, political, and regulatory systems provide a safer climate for investment, and
therefore have less country risk, than less stable nations. Examples of country risk include the
risk associated with changes in tax rates, regulations, currency conversion, and exchange rates.
Country risk also includes the risk that property will be expropriated without adequate
compensation, as well as new host country stipulations about local production, sourcing or hiring
practices, and damage or destruction of facilities due to internal strife.
5.
a) The following data are furnished by the Smart Choice Leasing Limited (SCLL):
Investment cost Rs. 500 lakh
Primary lease term 5 years
Estimated residual value after the primary period Nil
Pre-tax required rate of return 24 percent
The SCLL seeks your assistance in determining the annual lease rentals under the
following rental structures: 8
i) Equated;
ii) Stepped with an annual increase of 15 percent;
iii) Ballooned (annual rental of Rs. 80 lakh for years 1– 4); and
iv) Deferred (2 years deferment period).
b) The United States Dollar is selling in Nepal at 111.00. If the Interest rate for a
6-months borrowing in Nepal is 8% per annum and the corresponding rate in
USA is 2%. 7
i) Do you expect US$ to be at a premium or at discount in the Nepalese forward
market?
ii) What is the expected 6-months forward rate for US$ in Nepal, and
iii) What is the rate of forward premium or discount?
Answer:
a) Calculation of lease rentals under different rental structures
i) Equated annual lease rentals
Let Y be the annual rental, then
Y = Investment cost / PV Factor (24 percent, 5 years)
= Rs 500 lakh / 2.744
= Rs 182.22 lakh
ii) Stepped lease rentals with an annual increase of 15 percent
Let Y be the rental for first year, then
Rs 500 lakh = Y × PVIF (24, 1) + Y (1.15) × PVIF(24, 2) + Y(1.15)2 × PVIF(24, 3) +
Y(1.5) × PVIF(24, 4) + Y(1.15)4 × PVIF(24, 5)
3
Or, Rs 500 lakh = 0.806Y + 0.748Y + 0.693Y + 0.643Y + 0.596Y

Or, Rs 500 lakh = 3.486Y
Or, Y = Rs 500 lakh / 3.486
= Rs 143.43 lakh
Lease rental (year-wise) in Rs.lakh
Year 1 2 3 4 5
Lease rent 143.43 164.95 189.69 218.14 250.86
iii) Ballooned (annual rental of Rs 80 lakh for yers 1 – 4)
Let Y be the rental for last year, then
Rs 500 lakh = Rs 80 lakh × PVIF (24, 4) + Y × PVIF (24, 5)
Or, Rs 500 lakh = Rs 80 lakh × 2.403 + 0.341Y
Or, Y = Rs 307.76 / 0.341
= Rs 902.52 lakh
iv) Deferred (2 years deferment period)
Let Y be the rental for last three year, then
Rs 500 lakh = Y × PVIF (24, 3) + Y × PVIF (24, 4) + Y × PVIF (24, 5)
Or, Rs 500 lakh = 0.524Y + 0.423Y + 0.341Y
Or, Y = Rs 500 lakh / 1.288
= Rs 388.20 lakh
i) Under the given circumstances, the US$ is expected to quote at a premium in
Nepal as the interest rate is higher in Nepal.
ii) Calculation of the forward rate (F):
[1+ (0.08/2)] / [1+ (0.02/2)] = F/111
Or, (1+0.04) / (1+0.01) = F /111
Or, 1.04/1.01 × 111.00 = F
Or, F = 114.30
iii) Rate of Premium:
(114.30 – 111.00)/111.00 × 12/6 × 100 = 5.95%
6.
a) Eager Limited issued 9 percent bond of Rs. 1,000 each having maturity of three
years. The present rate of interest is 12 percent for one year tenure. It is expected
that forward rate of interest for one year tenure is going to fall by 75 basis points
and further by 50 basis points for next year. This bond has a beta value of 1.02
and is more popular in the market due to lesser credit risk.
Calculate: 5
i) Intrinsic value of bond;
ii) Expected price of bond in the market
b) Target Limited, engaged in manufacturing business, furnishes you the following
information:
Income Statement for current year ended 31st March, 2019
Rs. in lakh
Sales 935
Earnings before interest and taxes (EBIT) 180
Interest on loan 18
Earnings before taxes (EBT) 162
Corporate tax @ 35 percent 56.7
Earnings after taxes (EAT) 105.3

Balance Sheet as at 31st March, 2019
Rs. in lakh
Capital and Liabilities Amount Assets Amount
Share Capital of Rs. 100
100 Fixed Assets (Net) 495
each
Reserve and Surplus 325 Current Assets 290
10% Loan 180
Other Liabilities 180
785 785
Target Limited's weighted average cost of capital is 12 percent.
Required: 5
i) Determine Economic Value Added (EVA).
ii) If the company's shares are currently quoted at Rs. 500 per share, determine
the amount of Market Value Added (MVA).
Answer:
a)
i) Calculation of intrinsic value of bond
Market interest rate: 1st year – 12%, 2nd year – 11.25% and 3rd year – 10.75%
Intrinsic value = PV of interest + PV of maturity value of bond
Now,
Rs 90 Rs 90 Rs 90
PV of int erest   
(1  0.12) (1  0.12)(1  0.1125 ) (1  0.12)(1  0.1125 )(1  0.1075 )
 Rs 80.36  Rs 72.23  Rs 65.22
 Rs 217 .81
Rs1,000
PV of maturity value 
(1  0.12)(1  0.1125 )(1  0.1075 )
 Rs 724 .64
Hence,
Intrinsic value of bond = Rs 217.81 + Rs 724.64
= Rs 942.45
ii) Expected price of the bond= Intrinsic value × β
= Rs 942.45 × 1.02
= Rs 961.30
b)
i) Determination of Economic Value Added (EVA) Rs. Lakh
Earnings before interest and taxes (EBIT) 18.00
Corporate tax @ 35 percent 6.30
Net Operating Profit after Tax 11.70
Cost of Capital Employed [0.12 × (10.00 + 32.50 + 18.00)] 7.26
Economic Value Added (EVA) 4.44

ii) Determination of Market Value Added (MVA)
Market value per share Rs 500
Number of equity shares outstanding 100,000
Total market value Rs 500 lakh
Equity fund (Rs 10.00 + Rs 32.50) million Rs 425 lakh
Market Value Added (MVA) Rs 75 lakh

Batch: -June 2019
Level: - CAP-III
Paper II: Advanced Financial Management
Question No. 1
Overall performance of the students found to be satisfactory. Some of the students need to practice
more with conceptual clarity.
Question No. 2
Students have tried their best to attempt both (a) & (b) part of the questions. However, there was
lack of conceptual knowledge and performance, hence only 35% of the students could secure
good marks. Overall performance was not found satisfactory.
Question No. 3
(a) This question was well attempted by most of the students and performance of students was found
to be satisfactory. The answer given by few of the students were not properly structured as
required by the question even through individual components calculated in a scattered way were
correct. In general , following errors were observed :
- Few students were not able to understand the fundamental concept of spot and forward
exchange rate and picked up wrong exchange rates to calculate total £ receivables associated
with different invoicing options.
- While calculating the required number of future contracts to cover the exposures, few students
assumed 55 future contracts as appropriate even though the question clearly says to round off it
to the nearly whole number. This led to wrong calculation of £ receivables from the future
contract option.
- Few students didn’t calculate profit from future contract while calculating £ receivables under
option (iii).
- Few student didn’t prepare comparative statement of £ receivables associated with different
invoicing options while giving their recommendation.
a. Performance of the students in this question was found satisfactory. Some of the students
depicted their poor knowledge of the fundamental concepts of share buyback. In general,
following errors were observed :
- Few students were not able to properly understand the question and assumed 28 percent of Rs.
80 lakh was to be paid as dividend and remaining amount was to be used for buy back.

- Few students were not aware of the fact that after buyback the existing number of shares
outstanding would decrease by the number of shares bought back to arrive at the numbers of
shares outstanding after the buy-back and there by leading to wrong calculation of EPS.
- Few students, although properly developed the equation to show market capitalization of
Rs.180 lakh after buyback, couldn’t solve the equation properly to arrive at the correct buy-
back price of shares thereby leading to calculation of incorrect number of shares to be bought
back and incorrect EPS after buy-back.
Question No. 4
a) Few students were lacking conceptual clarity of financial leverage.
b) Good preparation, except for the second part of the question, where clear understanding
was lacking among the students.
c) Most of the students have not mentioned the assumptions of Black-Scholes option pricing
model.
d) Good preparation by the students.
e) Some of the students found to be lacking clear concept about country risk.
Question No. 5
Overall performance was satisfactory. Although, students need to practice more to answer
perfectly to such type of questions.
Question No. 6
(a) Some students were lacking clear knowledge on discounting rate to be applied for each
year in order to compute intrinsic value.
(b) Performance was average. While computing net operating profit after tax, some students
took deduction tax amount directly from income statement (i.e. 56.7) instead of EBIT (1-
t), some students ignored the loan portion for computing cost of capital employed. For
computing NVA and some students added reserve and surplus on total market value.

Paper 3: Advanced Auditing
CAP III Paper 3: Advanced Auditing
Marks
1. Comment and give your views with reasons on each of the following cases, giving
consideration to respective Standards, Laws and Code of Ethics:
a)
i) The CFO of Alpha Limited has created provision for the first two instances
out of 4 instances mentioned below after lot of deliberations with his team. (4×1.25=5)
 On 1st July 2018, the board of Alpha decided to close the Delta division.
Before 16th July 2018, the decision was not communicated to any of those
affected and no any other step was taken to implement the decision.
 The board agreed on detailed closure plan of Gama division on 10th July
2018 and details were given to customers and employees on 12th July 2018.
 The company is obliged to incur a cleanup costs of 50 lakh for
environmental damage (that has already been caused).
 The company intends to carry future expenditures for a new division to
operate in a particular way in future.
ii) A company produces three products (Product A, Product B and Product C)
from three different divisions. The normal production level of A, B and C are
200,000 units each. In the year under consideration, the company has
produced 240,000 units of A, 200,000 units of B and 160,000 units of C
respectively, the fixed production overhead incurred for the divisions involved
in production of A, B and C are 2 crore in each division. The company has
inventory of 5,000 units of each product. The company follows FIFO method
of valuation and finance manager is unsure about the fixed production
overhead to be allocated to each product for inventory valuation. 5
b)
i) A case was pending in Supreme Court against XYZ limited as on 15th July
2017 for which provision of NPR 50 lakh were made. Based on judgment
issued on 1st July 2018, the company had to pay 1 crore to the customer who
sued the company. The auditor of the company asserts that there was material
misstatement in accounting estimate of the company for the financial year
2073/74. 5
ii) Luthara and Associates, a Chartered Accountant firm with three partners, is
the auditor of a real estate company for last two years. The management
requested the firm to assist in first time implementation of NFRS and agreed
to pay NPR 5 lakh in addition to the audit fee for this assistance. 5
Answer:
a)
i)
 Decision to close a division not yet communicated to those affected: Creating
Provision by CFO in this case is not in line with NAS 37 because the decision to
close Delta division has not raised a valid expectation in those affected that it will
carry out the restructuring by starting to implement that plan or announcing its
main features to those affected by it.
 Detail closure plan of a division communicated to those affected: Creating
Provision in this case is in line with NAS 37 because the decision to close Gama

division has raised a valid expectation in those affected that it will carry out the
restructuring by starting to implement that plan or announcing its main features to
those affected by it.
 Obligation to incur cleanup costs: Not creating provision in this case is a non-
compliance with NFRS because the three basic conditions for recognition of
provision (present obligation as a result of past event, possibility of outflow of
resources to settle the obligation and reliable estimate of the obligation can be
made) are met. So, the provision should be recognized in this case.
 Future expenditure for operating in particular way: CFO has complied with NFRS
by not creating provision in this case because there is no present obligation
resulting from past event. The company can avoid the future expenditure by its
future actions, for example by changing its method of operation
ii) Allocation of fixed production overhead for inventory valuation: NAS 2 requires that
the allocation of fixed production overheads to the costs of conversion is based on the
normal capacity of the production facilities. Further, the amount of fixed overhead
allocated to each unit of production is not increased as a consequence of low
production or idle plant and in periods of abnormally high production, the amount of
fixed overhead allocated to each unit of production is decreased so that inventories
are not measured above cost. The cost of fixed production overhead to be allocated to
inventory of three products is calculated in the table below:
Particulars Product A Product B Product C
Fixed production overhead in NPR 20,000,000 20,000,000 20,000,000
for the period (a)
Normal production capacity in units 200,000 200,000 200,000
(b)
Actual production units © 240,000 200,000 160,000
Denominator to be considered for 240,000 200,000 200,000
fixed cost allocation as per NAS (d)
Production overhead to be allocated 83 100 100
per unit (e=a/d)
Units of inventory (f) 5,000 5,000 5,000
Total fixed production overhead in 416,667 500,000 500,000
NPR to be allocated to inventory
(e*f)
b)
i) Audit of accounting estimate: Generally, there is high uncertainty relating to
accounting estimate for outcome of litigation. As per NSA 540, a difference between
the outcome of an accounting estimate and the amount originally recognized or
disclosed in the financial statements does not necessarily represent a misstatement of
the financial statements. However, it may do so if, for example, the difference arises
from information that was available to management when the prior period’s financial
statements were finalized, or that could reasonably be expected to have been obtained
and taken into account in the preparation of those financial statements. Many
financial reporting frameworks contain guidance on distinguishing between changes
in accounting estimates that constitute misstatements and changes that do not, and the
accounting treatment required to be followed.

In the given situation, if management of XYZ had estimated the amount in the
financial statements of 2073/74 based on the available information before audit
reports of that year was issued, the financial statements of 2073/74 cannot be
considered as materially misstated.
ii) Providing NFRS related service to an audit client: Management is responsible for the
preparation and fair presentation of the financial statements in accordance with the
applicable financial reporting framework. These responsibilities include:
 Determining accounting policies and the accounting treatment within those
policies.
 Originating or changing journal entries, or determining the account classifications
of transactions;
 Preparing or changing source documents or originating data, in electronic or other
form, evidencing the occurrence of a transaction (for example, purchase orders,
payroll time records, and customer orders).
Providing an audit client with accounting and book keeping services, such as
preparing accounting records or financial statements, creates a self-review threat
when the firm subsequently audits the financial statements. However, as per section
290 sub subsection 290.167 of "Handbook of the Code of Ethics for Professional
Accountants" 2018 version issued by ICAN says providing technical advice on
accounting issues such as the conversion of existing financial statements from one
financial reporting framework to another (for example, to comply with group
accounting policies or to transition to a different financial reporting framework such
as Nepal Financial Reporting Standards) generally, does not create threats to
independence provided the firm does not assume a management responsibility for the
client.
So, based on above provisions of Code of Ethics 2018, it can be said that Luthara &
Associate can accept the engagement to assist technically the audit client in
preparation of NFRS compliant financial statements.
2. Answer the following:

a) You are the audit manager of Poor & Rich Bank Limited, class “A” commercial
bank with more than 100 branches spread across Nepal. Branch Manager Mr.
Champak and his second in charge Mr. Gurju are very old and loyal staffs of the
bank located at Sandhikhara. During the course of the branch audit, you noted the
following:
 Vault Key Management: There is no practice of maintaining key movement
register. While reviewing the CCTV footage it was noted that both the vault
keys (combination keys) were handled by single staff during holiday counter.
 Customer Service Department: The new staffs who are deputed for managing
cheques requisition and cheques handover to customer has full access to the
core banking system. Owing to urgency, the system access was provided by
head IT under verbal request of Mr. Champak.
 Mr. Champak and Mr. Gurju are of the view that the surprise physical
verification of cash and cash equivalent apart from daily reconciliations by
departmental staff are mere waste of time and are to be done by the auditors
on need basis.
 Trade Operations: The letter of guarantee is handled by Mr. Champak himself,
this being a sensitive issue. Mr. Champak receives the application for opening
letter of guarantee from customer having permanent guarantee limit and

verifies the request of the customer and after ensuring that it is within the
guarantee limit issues the letter guarantee on his sole signature.
 Human Resource Management: The job roles of Mr. Champak and Mr. Gurju
have not been changed for the last five years and the block leave was not
availed by Mr. Champak during the fiscal year 2074/75.
Required: (3+3+4=10)
i) Briefly describe the internal control weaknesses.
ii) Consider the possible consequences of each weakness.
iii) Describe the controls you would recommend to remedy each weakness.
b) Tik and Tok Private Limited is the leading manufacturing company of Toy in
Nepal. The new accountant is confused about the valuation of stock. The details
of cost and expenses are tabulated below. (5+5=10)
i) Normal waste of material in production process is 3%. 1,000 kg of input was
processed resulting into finished product of 950 kg. The entire quantity of
finished product is at stock at the year end. Cost of input is Rs. 100/kg. The
cost of storing the final product was Rs. 6,000. The net realizable value of
stock is Rs. 120/kg. The company recognized the finished good at a value of
Rs. 101,000. As an auditor suggest the management regarding the correct
valuation of stores.
ii) Subsequent to year end 2074/75 company’s sales ledger has been corrupted by
computer virus. A new accountant was able to produce the financial
statements prior to the occurring; however, the audit team has been unable to
access the sales ledger to undertake the detail testing to revenue or year-end
receivables. All other accounting records are unaffected and there are no
backups available for sales ledger. Revenue for the financial year is Rs. 15.60
million, profit before tax is Rs. 2 million and its receivables are Rs. 3.40
million. Describe the procedures to be followed by the audit team to resolve
this issue and its impact on the audit report if it remains unresolved.
Answer:
a) The internal control weakness, consequences of each weakness and recommendation of
the auditor is tabulated below:
Weakness Consequences Recommendation
Key movement register Possibility of financial Ensure that all movements of

documenting the fraud. Even trusted key are recorded in a key
possession of the key is employees can become movement register, signed by
not maintained. untrustworthy. new & old custodians with
date and time entry in the
register.
The cash vault is under Opportunity and motive The vault key handling
the control of single staff can combine to cause arrangement shall be made in
during holiday counter. out-of-character actions such a way that dual control
over vault is ensured at all
times.
System access to new System access not Provide access to core

staff was provided without commensurate with job banking system on need basis

accessing which module role and responsibilities. only after proper verification
of the system access are and written approval from the
required in line with authorized personal only.
his/her job responsibility.
System access provided Possibility of fraud as

on verbal request of the staff has access to
Branch manager. customer specimen
signature, account
details and account
history.
Surprise checking element Possibility of fraud/error Surprise physical verification
from branch staff by departmental staff of cash and cash equivalent at
independent of cash and collusion. vault/tellers should be done.
cash equivalent related This surprise/spot check
work is missing. maintains check and balance
on departmental work.
One individual has Possibility of Financial Greater segregation of duties

authority for receiving loss/fraud. (E.g.: While is required in the Trade
applications, verification verifying the expiry date operation department (e.g.
of limits and other of guarantee, he may There should be maker and
documents and issues the erroneously/intentionally checker concept and
letter of guarantee under provide the guarantee guarantee should be issued
his sole signature. for longer period than under dual signature.
requested for)
Job rotation of the staff No job rotation of Human Resources

after certain time interval sensitive personal and Department should ensure the
and block leave once in a non-availing of block job rotation of the staff and
year not made leave by key personal block leave policy is
mandatory/availed by the exposes bank to mandatorily followed.
branch staff operational risk.
Someone else should assume
Over reliance on certain the duties of staff during the
staffs might impact on block leave as a
work life balance. fraud/prevention and
detection toll.
b)
i) As per Para 16 of NAS 2, following cost are excluded from the cost of inventories
and recognized as expenses in the period in which they incur
 Abnormal amount of waste materials, labor or other production cost,
 Storage cost, unless these costs are necessary in the production process before
further production stage
 Administrative overheads that do not contribute to bringing the inventories to
their present location and condition and
 Selling cost
In this case, normal loss is 30 kg and abnormal loss is 20 kg. The cost of 30 kg will be
included in determining the cost of finished product, whereas the cost of 20 kg Rs.

2,000 and storage cost of Rs. 6,000 will be excluded from the cost and recognized as
expenses. Thus, the cost of inventories at year end will be Rs. 98,000. Whereas, the
net realizable value of the inventory is Rs. 114,000 (120*95)
As per Para 9 of NAS 2 Inventories shall be measured at the lower of cost and net
realizable value Hence the value of finished goods is Rs. 98,000.
ii) Tik and Tok Private Limited sales ledger has been corrupted by a computer virus;
hence no detail testing has been performed on revenue and receivables. The audit
team will have to see if they can confirm the revenue and receivable in an alternative
manner. If they are unable to do this then two significant balance in the financial
statements will not have been confirmed. Revenue and receivables are both higher
than the total profit before tax (PBT) of Rs. 2 million, receivables are 170% of PBT
and revenue is nearly eight times of PBT. Hence this is a very material issue.
A procedure to adopt includes:
 Discuss with management whether they have any alternative records which detail
revenue and receivable for the year.
 Attempt to perform analytical procedures, such as proof in total or monthly
comparison to last year, to gain comfort for in total for revenue and receivable.
The auditor will need to modify the audit report if they are unable to obtain sufficient
and appropriate evidence in relation to two material and pervasive areas, being
receivable and revenue. The opinion paragraph will be disclaimer of opinion and will
state that we are unable to form an opinion on the financial statements. A basis for
disclaimer of opinion paragraph will explain the limitations in relating to the lack of
evidence over revenue and receivable.
3. Comment and give your views with reasons on each of the following cases:
a) Everest Pharmaceuticals Products (EPP) Pvt. Ltd. is a pharmaceutical company.
The management of EPP has decided to introduce a new vitamin capsule to its
product range.
EPP operates the production facility in its own building. Adequate safety
measures have been taken to ensure that the products are manufactured to the
expected quality standards. Sophisticated large machinery as well as various types
of easily moveable equipment is used in the manufacturing process. In addition,
various electrical equipment, computers, laptops and motor vehicles for
distribution are used by EPP. All of these are considered as non-current assets of
EPP.
Required: (3+3+2=8)
i) Identify three (03) risks related to the non-current assets of EPP.
ii) Identify controls that EPP can implement to mitigate the risks identified in (i)
above.
iii) List two (02) ways EPP can facilitate physical identification of non-current
assets.
b) Universal (Pvt.) Ltd. is a trading company that imports fast moving consumer
goods and distributes them in Nepal. The company has an IT system where
inventories and sales modules are integrated. The users are provided access to the
modules and can log into them using the individual desktops provided. The
company has an IT division and the following information is provided.

 All goods received and issued are recorded in the inventory module.
 Sales invoices are generated through the system.
 The standard price database is linked to the invoicing function in the sales
module.
 Sales prices are picked from the standard price database and these prices
cannot be amended /changed.
 If the quantity invoiced does not match with the sale order quantity, the
system provides an error message.
 The system does not allow raising an invoice if the required quantity of goods
is not available.
Discuss the importance of having information technology (IT) general controls and
application controls for an entity and Identify three (03) IT general controls that the
company should implement in order to ensure continuity of operations. 7
Answer:
a)
i)
 Building/Other assets: Damage to the building and thereby pose risk of illegal
entry to the building and factory premises.
 Other assets such as machinery, other electrical systems and motor vehicles are all
liable to break down and accidents.
 The entity has small moveable items that are non-current assets. These could be
stolen if not properly protected.
ii)
Risk Physical control
Building- damage to the building and Strong locks on doors, protection of
risk of illegal entry to the building and windows against breakage, burglar alarms,
factory premises fire alarms, CCTV cameras, security
guards, insurance policies.
Other assets such as machinery, other Protection against the risk of breakdown
electrical systems and motor vehicles should be provided by regular
are all liable to break down. maintenance.
The entity has small moveable items These should be kept is a secure place,
that are non-current assets. These could such as a lockable place, when not being
be stolen if not properly protected. used. When employees take non-current
assets such as laptops away from the
office, they should be required to sign a
document as evidence that they are in
possession of the asset, or monitor the
physical access through CCTV cameras.
iii) Physically identification of non-current assets:

 A manual sticker may be pasted to each fixed asset, containing the asset's unique
identification number.
 A barcode label may be attached to each fixed asset, containing data that
identifies the individual asset, including its unique identification number.
 Assets may also be identified using radio-frequency identification (RFID) tags.

 Motor vehicles - vehicle registration or chassis number.

 Other equipment (laptops, desktops etc.) - serial number
b) Importance of IT general controls and application controls for an entity:-

Internal controls in IT systems are essential to provide reasonable assurance that IT
systems will function as intended and fulfill their purpose effectively.
General IT controls help to create risk awareness in all IT applications. They are also
necessary to ensure that IT applications are implemented with limited risks (i.e. there will
not be any discontinuation of operations, no unauthorized access etc.)
Application controls are required to check for errors, and report (or automatically correct)
errors that are detected. Since the management wants to ensure data input, processing and
output is accurate and complete, it is essential to have IT application controls.
IT general controls to ensure continuity of operations
 Store extra copies of programs and data files off-site
 Protect equipment against fire and other hazards
 Back-up power sources
 Establish disaster recovery procedures. E.g. availability of back-up computer facilities
 Have maintenance agreements and insurance

a) (4+4=8)
i) Mahatara and Associates, a chartered accountant firm was appointed as an
auditor of a company on Ashwin 15, 2074 for the financial year 2073/74
where Kishan Kumar, one of the partners of the audit firm, was holding 3
percent paid up shares of the company since 2068. But, Kishan Kumar sold all
his shares of the company on Ashwin 30, 2074. It was further noted that the
audit report was signed by another partner of the firm Falgun 15, 2074 only.
Will you answer be different in case Kishan Kumar holds 0.8 percent of
shares of the company?
ii) "The auditors should communicate audit matters of governance interest
arising from the audit of financial statements with those charged with the
governance of an entity". Briefly state the five major matters to be included in
such communication.
b) Describe the main intent to introduce The Sarbanes-Oxley Act of 2002. What
were the major events contributing the adaptation of this Act in United States? 7
Answer:
a) i) A person or a firm, in which such person has substantial shareholding, 5% of paid up
capital of Public Company as per section 50 of Company Act 2063, which is also called
basic shareholders of the company or a shareholder holding one percent or more of the
paid up capital of the company or his/her close relative is not qualified for appointment as
an auditor as per section 112(1) of the Companies Act. So, in the present case since
Kishan Kumar, a partner of Mahatara & Associates, holds 3 percent shares of the
company, Mahatara & Associates is disqualified from appointment as an auditor as of
Ashwin 15, 2074. But Kishan Kumar disposes all his shares after the appointment as an
auditor and audit report is signed after disposal of the shares. Despite this fact as per

section 112(4) of the Companies Act since the appointment of audit is in contravention of
the provision of the Companies Act, the audit cannot be considered as valid.
Similarly as per section 112 subsection 2 of Company Act 2063 (as amended), before
accepting the appointment every auditor to be appointed should declare in writing that he
is not ineligible for appointing as external auditor of the any particular company. In this
case audit firm which is going to be appointed should have been declared his
qualification before appointment which was not happened.
In case, Kishan Kumar holds only 0.8 percent of the shares of the company, the
appointment of Mahatara & Associates will be valid as per section 112(1) of the
Companies Act.
ii) Communications of audit matters with those charged with governance:

As per NSA 260 “Communication with Those Charged with Governance”, the auditor
shall communicate with those charged with governance, the responsibilities of the auditor
in relation to the financial statement audit, including that:
1. The auditor is responsible for forming and expressing an opinion on the financial
statements that have been prepared by management with the oversight of those
charged with governance; and
2. The audit of the financial statements does not relieve management or those charged
with governance of their responsibilities.
The auditor shall communicate with those charged with governance the following:
1. The auditor’s views about significant qualitative aspects of the entity’s accounting
practices, including accounting policies, accounting estimates and financial statement
disclosures. When applicable, the auditor shall explain to those charged with
governance why the auditor considers a significant accounting practice, that is
acceptable under the applicable financial reporting framework, not to be most
appropriate to the particular circumstances of the entity;
2. Significant difficulties, if any, encountered during the audit;
3. Unless all of those charged with governance are involved in managing the entity:
 Significant matters, if any, arising from the audit that were discussed, or subject to
correspondence with management; and
 Written representations the auditor is requesting; and
4. Other matters, if any, arising from the audits that, in the auditor’s professional
judgment, are significant to the oversight of the financial reporting process.
b) The Sarbanes-Oxley Act of 2002, also known as the "Public Company Accounting
Reform and Investor Protection Act" or "Corporate and Auditing Accountability and
Responsibility Act" and more commonly called as Sarbanes-Oxley, Sarbox or SOX, is a
United States federal law that set new or expanded requirements for all US public
company boards, management and public accounting firms. The intent of the SOX Act
was to protect investors, and really all stakeholders in a business firm, by improving the
accuracy and reliability of corporate disclosures, such as earnings reports, pursuant to
securities laws and regulations.
A variety of complex factors created the conditions and culture in which a series of large
corporate frauds occurred between the years 2000 to 2002. The spectacular, highly
publicized frauds at Enron, WorldCom and Tyco exposed significant problems with
conflicts of interest and incentive compensation practices for senior management and
accounting firm. It ultimately reveals problems like: inadequate oversight of accountants,
lack of auditor independence, weak corporate governance procedures, and stock analysts,

conflict of interests, inadequate disclosure provisions, and grossly inadequate funding of

the Securities Exchange Commission.
Reasons for adaptation of SOX:
The following are the main reasons for the adaptation of SOX:
a. Auditor conflict of interest
b. Boardroom failures
c. Securities analysts' conflicts of interest
d. Banking practices
The SOX Act holds company CEO's and CFO's responsible for the information presented
by their company in the financial statements. It created new standards of accountability
for corporations as well as penalties of those standards of accountability are not met.
SOX established new financial reporting standards. All companies, according to SOX,
must provide a year-end report about the internal controls they have in place and the
effectiveness of those internal controls.

a) (4+4=8)
i) Milan Metal Industries Ltd. had purchased during the year machinery on
deferred payment basis, payable over next ten years. The company has
computed the interest payable over these 10 years and debited Interest
Suspense Account. Every year, 1/10th of the same is written off to profit and
loss account treating the same as deferred revenue expenditure. As an auditor,
give your opinions with reasons.
ii) You notice a misstatement resulting from fraud or suspected fraud during the
audit and conclude that it is not possible to continue the performance of audit.
b) State what may be the evaluative or review procedures that the statutory auditor
may do before concluding as to relevance and reasonableness of auditor's expert
work for using it for his audit purposes? 7
Answer:
a) i) As per NAS -08 on “Borrowing Costs” enumerates the treatment of interest that
interests directly attributable to the acquisition, construction or production of a qualifying
assets shall be capitalized as part of the cost of that assets. However, interest payable on
fixed assets purchased on a deferred credit basis or on borrowed for acquisition of assets
should not be capitalized after such assets are put to use. Since the company has been
following an inappropriate accounting policy, the auditor should qualify his report as the
amount involved in interest on purchased of machinery would be material.
ii) If an auditor concludes that it is not possible to continue the performance of auditing
because of misstatement resulting from fraud or suspected fraud, he should take action in
accordance with the requirement of NSA 240 in relation to the Auditor’s Responsibility to
consider Fraud and Error:
i. He should consider the professional and legal responsibilities applicable in the
circumstances including whether there is a requirement for the auditor to report to the
person(s) who made the audit appointment.
ii. He should consider whether he has to report to the regulatory authorities.
iii. If the auditor withdraws, he should discuss with the appropriate level of management
and those who charged with the governance about the reasons for the withdrawal.

In view of the exceptional nature of circumstances and the need to consider the legal
requirement, he may also seek legal advice for determining the appropriate course of
action.
b) Evaluating the Adequacy of the Auditor’s Expert’s Work: As per NSA 620 Using the
work of an Expert, the auditor shall evaluate the adequacy of the expert’s work for the
auditor’s purposes, including the relevance and reasonableness of that expert’s findings
or conclusions, and their consistency with other audit evidence, etc.
Specific procedure to evaluate the adequacy of the expert’s work is –
 Enquiries of the expert.
 Reviewing the expert’s working papers and reports
 Corroborative procedure such as-
a) Observing the expert’s work
b) Examining the published data, such as statistical reports from reputed source
c) Confirming the relevant matters with third parties
d) Performing detailed analytical procedure to see whether principles of materiality
aspects considered
e) Re performing calculations
 Discussions with another expert with relevant expertise when, for example,
the findings or the conclusion of the auditor’s expert are not consistent with
other audit evidence.
 Discussing the expert’s report with the management.

a) Audit expectation gap
b) Audit threshold for different class of auditors.
c) Tolerable misstatement and tolerable rate of deviation
d) Energy audit
e) Reporting of review engagement
Answer:
a) Auditing expectation gap or simply expectation gap is the term used to signify the
difference in expectations of users of financial statements and auditor’s expectation
concerning audited financial statements. Although it's about expectations but still its
scope and meanings have been defined in number of ways. Difference in expectation can
arise on the performance i.e. the level of performance what users expect from auditor and
how auditor actually performed.
Expectation gap can also be explained as the difference between the effectiveness of
audit engagement what users believe and what auditor believes. Expectation gap in
related to audit can also be explained as the difference between expectation of user and
auditor himself on the responsibilities of the auditor. It can also refer to difference in
understanding regarding nature of audit engagement i.e. what users believe audit is and
what audit actually is.
b) As per the Rule 53 of the Nepal Chartered Accountants Regulations 2061 (as amended);
the limit(threshold) for audit of entities based on volume of total assets or total liabilities
has been prescribed unlimited amount for CA member and up to Rs. 1 billion, Rs.250
million and Rs. 50 million for B,C & D class members respectively.

c) Tolerable misstatement is the monetary amount set by the auditor in respect of which the
auditor seeks to obtain an appropriate level of assurance that the monetary amount set by
the auditor is not exceeded by the actual misstatement in the population.
While determining the sample, the auditor determines tolerable misstatement in order to
address the risk that the aggregate of individual material misstatements may cause the
financial statements to be materially misstated and provide the margin for possible
undetected misstatements.
Tolerable rate of deviation is the rate of deviation from the prescribed internal control
procedures set by the auditor in respect of which the auditor seeks to obtain an
appropriate level of assurance that the rate of deviation set by the auditor is not exceeded
by the actual rate of deviation in the population.
d) Energy Auditing is defined as an activity that serves the purposes of assessing energy use
pattern of a factory or energy consuming equipment and identifying energy saving
opportunities. In that context, energy management involves the basic approaches
reducing avoidable losses, improving the effectiveness of energy use, and increasing
energy use efficiency. The energy auditor is normally expected to give recommendations
on efficiency improvements leading to monetary benefits and also advise on energy
management issues.
e) The review report should contain a clear written expression of negative assurance. The
auditor should review and assess the conclusions drawn from the evidence obtained as
the basis for the expression of negative assurance. Based on the work performed, the
auditor should assess whether any information obtained during the review indicates that
the financial statements do not give a true and fair view (or are not presented fairly, in all
material respects) in accordance with the identified financial reporting framework. The
report on a review of financial statements describes the scope of engagement to enable
the reader to understand the nature of the work performed and make it clear that an audit
was not performed and, therefore, that an audit opinion not expressed.


Batch: -June 2019
Level: - CAP-III
Paper III: Advanced Auditing
Question No. 1
Students found to be lacking practical and conceptual knowledge of the chapter.
Question No. 2
2 (a): Answers were fairly written in most of the cases. However, in some cases answer was too short
or too lengthy. Some students have written answer without any sequence of weakness, consequence and
recommendation resulting tedious to evaluate the answer paper.
2 b (i) : Answers have been written below average in most of the cases. Only few students could work
out the correct cost of inventories at the year end. Some students were even unable to write correct
reference of NAS.
2 b (ii) : Answers have been written average in most of the cases. Most of the students have written
disclaimer of opinion should be given, however only few students have been able to write that what
should be mentioned in disclaimer of opinion paragraph.
Question No. 3
Lack of clear understanding of question was observed and specific answer of the question was not
written by the students. Students were found not have clear understanding about general controls and
specific controls.
Question No. 4
Answers of part (b) were little bit sketchy. Students should be specific to the demand of question and
should not write sketchy and contradicting type of answers.
Question No. 5
Performance of the students in this part was average. . Students should emphasize in particular standard
and its specific paragraphs while answering the question.
Question No. 6
Performance of students were not satisfactory. Only few students answered this question. Students are
required to understand the requirement of the question.

Paper 4: Corporate Laws
CAP III Paper 4: Corporate Laws
Marks
1. Answer the following questions:
a) Peoples' Technology Ltd. is willing to merge in Citizen Information Technology
Ltd. Both companies have to do the merger process by passing the special
resolution through their general meetings. You are appointed as a consultant on
behalf of Citizen Information Technology Ltd. for such special purpose. The
company has required your opinion. As a consultant to the special purpose,
furnish your opinion in the following matters in accordance with the Companies
Act, 2063. (2+2+6=10)
i) What is the special resolution?
ii) Do you think that the merger of company with other is the subject matter of
the special resolution?
iii) What are the matters to be submitted in the general meeting as a special
resolution?
b) Deepa Senjon from USA intends to carry on insurance business in Nepal. She has
no knowledge about the legal provisions of Nepal in this respect. So, she
approached you as an expert for the operation of an insurance company as an
insurer. How would you advise her regarding following issues: (5+5=10)
i) Registration process of an insurance business.
ii) Renewal and refusal of registration of an insurer.
Answer:
a)
i) A resolution which requires special support of the shareholders is called a special
resolution. So, a resolution requiring the special majority to get passed in the general
meeting is a special resolution. As mentioned in the proviso of the section of Companies
Act, 2063 74(3), it is deemed to have been passed a special resolution by the general
meeting of shareholders representing 75% of shares present and cast vote in favour of the
resolution.
ii) The subject matter of merger of a company with other company is submitted as a special
resolution. As per the Section 83 and Section 177 of Companies Act, 2063, a public
company may, by adopting a special resolution in its general meeting to that effect, be
merged with another company. The merger of People's Technology Limited with the
given company is the subject matter of a special resolution as mentioned in the legal
provisions of the Companies Act, 2063.
iii) The subject matter, as provided in the section 83, including the merger of the company, to
be presented in the general meeting of a company for decision on the following matters
are as follows:
(a) Increasing the authorized capital of the company,
(b) Decreasing or altering the share capital of the company,
(c) Altering the name or main objectives of the company,
(d) Amalgamating one company into another company,

(e) Issuing bonus share,

(f) Buying back of own shares by the company,
(g) Selling shares at a discount,
(h) Converting a private company into a public company or vice versa,
(i) Such other matter in respect of which the company is required by this Act or the
articles of association to adopt a special resolution.
Apart from those, the following subject matters also are presented as a special resolution for
the decision in general meeting.
a. Amendment to the Memorandum and Article of company. (Section 21).
b. The alteration in the rights of the shareholders of any particular class. (Section 30(6).
c. Any special proposal to determine a call may not be made in respect of certain portion of
its share capital not called on except in the case of liquidation or insolvency of the
company. (Section 53(7)).
d. Grant a reward in a sum not exceeding three per cent of the net profits after payment of
income tax to the directors who work full time for the company so as to encourage them.
(Section 91(2).
e. A Proposal to be rectified by the general meeting in forms of special resolution regarding
any act or transaction done by a director beyond the authority conferred to him/her.
f. A special proposal is required regarding transferring of property, borrowings more than
the paid up capital and free reserve and making a contribution, donation or gift in a sum
exceeding fifty thousand rupees in one financial year or a sum exceeding one percent of
the average net profits of the company. (Section 105(1).
g. Liquidation of company (Section 126).
b)
i) Section 10 of the Insurance Act, 2049 prescribes the provision regarding the
Registration of The Insurer as follows :
(1) No Person shall operate or cause to operate the Insurance Business without obtaining a
certificate pursuant to this Act.
(2) Any national or foreign corporate body desirous to operate an Insurance Business shall submit
an application to the office of the Insurance Board in the prescribed form along with the
following documents and prescribed fees for the registration of its name as an Insurer:
(a) Memorandum and articles of association of the corporate body,
(b) Insurance Business to be operated and its policies and terms and conditions,
(c) If life Insurance Business to be operated, documents displaying calculations of the
premiums to be received in operating such business and liability,
(d) The documents regarding the methods of utilizing the amounts to be received from the
Insurance, and
(e) Other necessary documents as prescribed by the Board.
(3) The Board shall make necessary investigation upon the application received pursuant to Sub-
section (2) of Section 10 of the Act and shall make an inquiry with the applicant, if necessary,
and shall register the name of such applicant in the prescribed register-book by mentioning
the types of the Insurance Business to be operated by the applicant and shall provide the
registration certificate of Insurer to the applicant in the form as prescribed. In case there is any
reasonable ground for not registering the name, the Board shall inform the concerned
applicant accordingly.
(4) Notwithstanding anything contained elsewhere in this Section, in the case of the Life
Insurance, the Board shall, with the approval of the Nepal Government, issue a certificate to

operate the Business, based on the fulfillment of the criteria which it has fixed, from time to
time, in respect of the operation of the Insurance Business.
ii) Section 11. prescribes the provision regarding Renewal of Registration of the
Insurer as follows :
(1) The Insurer shall have to submit an application to the office of the Board in the prescribed
form along with the prescribed fees up to the last day of Chaitra of each year for the
renewal of the certificate of registration.
(2) Upon the receipt of the application pursuant to Sub-section (1), the Board shall have to
renew the certificate of registration.
(3) In case any Insurer submits an application to the Board within thirty days from the date of
expiry of the time-limit pursuant to Sub-section (1), mentioning the reason for its failure to
submit an application for the renewal of the certificate of registration within the aforesaid
time-limit, the Board may, if it considers the reasons to be appropriate, renew the
certificate of registration of such Insurer.
Pursuant Section12 of this Act, the board may refuse to register the insurers in the following
conditions: According to it no national or foreign corporate body shall be registered as an
Insurer in the following circumstances:
(a) If the name of an Insurer to be registered is identical to the name of another Insurer which
has been already registered in the office of the Board, and
(a1) If any Insurer wants to be registered for operating Life Insurance and Non-Life
Insurance Business,
(b) If the paid-up capital does not amount to at least two hundred fifty million rupees for the
Life Insurance Business and to at least one hundred million rupees for the Non-life Insurance
Business.
(c) In the event that the Board has made a decision to ban to register to additional corporate
body as an Insurer to operate Insurance Business on the basis of the report, regarding to the
study, research and evaluation of the Insurance Business market.

a) Cooperative Association has right to collect deposit and carryout credit
transaction with accompanying more than one hundred Nepalese citizen
altogether as provided in the section 3 of Cooperatives Act, 2074. Cooperative
Bank can also incorporate with motive of carrying credit transaction as set forth in
the same Act. So, this Act also defined some act as an offence and provided
punishment. State the acts deemed to be an offence under the Cooperatives Act,
2074. 6
b) State the process of examination of bid by the public entity as per the Public
Procurement Act, 2063, where the goods are purchased through the bidding
process. 7
c) Sulaxmi Commercial Bank wants to get acquisition of Kuber Finance Company,
which the later agrees. As a corporate consultant advise them in the following
issues as per the Banks and Financial Institutions Act, 2073: (2+1+4=7)
i) What legal procedure these two financial entities have to follow for getting
consent on principles of Nepal Rastra Bank (NRB) to such acquisition?
ii) Under what circumstance(s) NRB may give consent on principles to continue
the proceedings of acquisition of the finance company?

iii) Under what grounds NRB may grant its final approval for such acquisition?
Answer:
a) Section 122 of Cooperative Act, 2074 has mentioned prohibited and finally declared as to be
an offence acts. These are as follows:
a. To provide credit without taking a guarantee or collateral while providing loan amount
more than prescribed limit,
b. To embezzle amount of credit that is provided to any member of committee, relatives
thereof or other person or an employee that is resembles that the credit amount may not
to be recovered.
c. To take amount of credit with providing fraud or fake descriptions, collateral is proved
immature or embezzle the credit amount.
d. The cooperative association has been carrying out the investment of amount or
collecting any amount with an objective of investment in any manner contrary to this
Act and rules or by rules framed under this Act.
e. To provide or cause to provide any credit with placing the artificial enterprise or cause
to placed thereof.
f. To provide or cause to provide the credit amount carrying out the higher valuation of
collateral in the unrealistic manner.
g. To provide or cause to provide the credit amount on the basis of fraudulent statement
and adding more cost of project in the unrealistic manner.
h. To provide or cause to provide the credit amount in the manner that the collateral that is
provided to any person or cooperative association once is not released with due process
or such collateral has been provided in other institution in the manner of higher
valuation than that of the value which the collateral has.
i. To use or cause to use the credit amount in the manner that the credit is provided for any
certain purpose by a cooperative association but the credit amount is used in the area of
vice versa.
j. To misuse the properties of cooperative or to embezzle the saving or the share money by
the cooperative member, executive or the employee.
k. To provide or cause to be provided the cooperative in loss by evaluating the collateral
with high value, or low value or doing wrong valuation by the valuator at the time of
auction of the collateral security of the loan provided by the cooperative.
l. To conduct audit with careless and provide false report which resulted the loss to the
cooperative, its members and stakeholders.
b) On receipt of the bid documents, the Public Entity shall have to open bids as prescribed at the
time and place specified in the bidding documents on the same day immediately after expiry
of the deadline for the submission of bids as per Section 22 of the Public Procurement Act,
2063.
According to Section 23 the bid opened pursuant to Section 22 should be submitted to the
Evaluation Committee by the Public Entity.
Under Section 23(2) the Committee should, prior to evaluating the bids submitted pursuant to
Sub-section (1) above, examine the bids in order to ascertain the following matters:-
(a) Whether documents establish that the bidder is qualified under law to submit the bid are
submitted or not,
(b) Whether the bid is complete in accordance with the instructions to bidders set forth in the
bidding documents or not, and whether it is signed by the bidder or by the bidder’s
authorized agent or not,

(c) Where a bid security is required to be submitted along with the bid, whether a bid security
of such type, period and amount as set forth in the bidding documents is accompanied
with the bid or not,
(d) Whether the bid is substantially responsive to the technical specifications set forth in the
bidding documents and the terms and conditions of procurement contract attached with
the bidding documents or not.
Under subsection (3) in examining the completeness of bids pursuant to clause (b) of
Subsection (2), the following matters shall be examined:-
(a) Whether a power of attorney for the authorized agent or local agent of the bidder is
submitted or not,
(b) Where a joint venture agreement is necessary, whether such agreement is submitted or
not,
(c) Whether documents establishing the eligibility of the bidder and of goods mentioned by
the bidder are submitted or not,
(d) Whether necessary document relating to the qualifications of the bidder is submitted or
not,
(e) Where the bidding documents require the submission of a rate analysis, whether such rate
analysis is submitted or not,
(f) Other matters as prescribed.
(4) The Public Entity may ask bidders for necessary information.
(5) The concerned bidder should have to provide the information sought by the Public Entity
without allowing any change or alteration in the bid price or other substance of the bid.
(6) In examining bids bidder shall be made to ascertain whether or not it confirms to the
prequalification or not.
(7) While examining the qualification pursuant to Sub-section (6) above, if the qualification of a
bidder is found to be substantially lower than what was at the prequalification stage, the bid of
such a bidder shall be rejected.
(8) If any arithmetical error is found in a bid in examining bids the Public Entity may correct
such an error, and where, in making such correction, there exists a discrepancy between unit rate
and total amount, the unit rate shall prevail, and the total amount shall be corrected as per the
same rate.
(9) Where there is a discrepancy between figures and words in a bid submitted by a bidder, the
amount in words shall prevail.
(10) Where any error is corrected pursuant to Sub-section (8) or (9) above, information of such
correction shall be communicated to the concerned bidder.
c)
i) If Sulaxmi Commercial Bank want to get acquisition of Kuber Finance Company and the
later agrees to that, in that case both the Financial Entities shall adopt a special resolution to
that effect in their respective general meetings and get a decision thereof from their
respective Board of Directors, and make a joint application setting out the following

matters for getting consent on principles of Nepal Rastra Bank (NRB) pursuant to section
70(2) of the Banks and Financial Institutions Act (BAFIA), 2073:
(a) Necessity and justification of acquisition of the finance company, and the general
impact therefrom on the banking and financial sector and the financial system,
(b) Audit report including balance sheet, statement of income and expenditure, cash flow,
net worth and the like of the last fiscal year of the Sulaxmi Commercial Bank and the
Kuber Finance Company,
(c) Details of the personnel management of Sulaxmi Commercial Bank and Kuber Finance
Company,
(d) Approval proceeding under the prevailing Companies and Securities laws,
(e) Preliminary agreement of acquisition of the finance company.
(f) Other matters as are prescribed by NRB.
ii) Upon receiving such joint application for acquisition of the Kuber Finance Company, NRB
shall examine the documents so filed, and then may give its Consent on Principles for such
acquisition pursuant to section 70(4) of this Act, if it feels satisfied that the acquisition of
the finance company is not likely create an adverse impact on the country's banking and
finance development, on the environment of healthy competition, and in the compliance of
the prevailing laws of the country.
iii) After obtaining NRB's Consent on Principles for acquisition, the applicants are required to
cause up to date valuation of their assets, liabilities and turnover on the set parameters of
NRB pursuant to section 71(2) through (7) of this Act. Thereafter, the Parties of acquisition
are required to conclude an agreement between them containing suitable arrangement of
the following matters pursuant to section 72 of this Act:
(a) arrangement of protection of interests of depositors, creditors and shareholders,
(b) valuation method and adjustment arrangement of the assets and liabilities of the
Applicant Bank and Financial Company,
(c) matters like management of investment and transaction, inter-corporate ownership and
transaction, details of guarantee and undertaking, management of non-banking
transactions, adequate arrangement of assets and liabilities,
(d) process, time frame and cost to be involved for such acquisition,
(e) structure of operation and management and name list of directors,
(f) arrangement and adjustment of job levels, service conditions of the concerned entities
of acquisition,
(g) details of substantial shareholders and other shareholders,
(h) stakeholders' grievance management method
(i) prevailing law and the process for its compliance
(j) Such other necessary matters as are prescribed by NRB.

The Bank and Finance company obtaining NRB's Consent on Principle for acquisition are
further required to get a special resolution passed by their respective general meetings and
submit a copy of it along with a copy of agreement concluded under section 72 as above
and file a joint application to NRB seeking its final approval for such acquisition.
NRB thereafter cause a thorough examination of that joint application for acquisition and
may grant final approval for such acquisition setting certain terms and conditions if and/in
case such acquisition shall not likely create an environment of unhealthy competition or
give rise to the monopoly or controlled practice of any financial entity in the financial
sector, and if there is no possibility of causing any serious impact on the whole structure of
banking and finance, and the financial market and the depositors pursuant to section 73 of
this Act.

a) Prevention of money laundering becomes totally successful when investigation
and inquiry process is carried out properly by an appropriate investigation officer.
State the provisions relating to investigation and inquiry under the Money
Laundering Prevention Act, 2063. 6
b) Mr. Heyman, US Nationals, willing to invest funds in World Link Ltd. Basically,
he is interested to invest in share of the company. Do you think that it is a foreign
investment and why? What kinds of facilities and concession he may enjoy? Have
there any visa facilities to foreign investors? Justify your answer referring the
Foreign Investment and Technology Transfer Act, 2049. 7
c) What connotes 'International Financial Institutions' under the International
Financial Transaction Act, 2054? What acts the International Financial
Institutions are forbidden from doing in Nepal? State the facilities and
concessions granted to such institutions in Nepal under the Act. 7
Answer:
a) Chapter – 6 of the Money Laundering Prevention Act, 2063 prescribes Provision Relating to
Investigation and Inquiry under the Act. Investigation and inquiry is a most important part
in respect of fulfilling the objectives of the Money Laundering Prevention Act, 2063. It is
the investigation process, by which it is possible to bring action against the culprits of assets
laundering.
1. Pursuant to Sec 13 it is required to make Complaint regarding information of the

offence. According to it any one of the person, who has information regarding an
offence under this Act, may submit a complaint, application, to the Money Laundering
Investigating Department in written or oral form. The Department on obtaining the
information will register the complaint, application so received. As per Sec. 14 the
Department will conduct necessary investigation and inquiry after receiving the
application or information regarding the offence. In the course of investigation and
inquiry, where there is risk of absconding or destroying the evidence or document,
taking control of any document or asset by the person committing an offence, the
Department may arrest the person involved in it, and may take control of such relevant
evidences and assets at place where offence was committed or being committed. The
Department may obtain opinion of government attorney in this respect.
2. In pursuant to Section 15 of this Act, on receipt of the complaint the Department may
appoint or designate any officer of the Department or other officer as an Investigation

Officer, in order to conduct investigation and inquiry of the offences under this Act and
designate other staff as required.
3. Pursuant to Section 16 the functions, powers and duties of the Investigation Officer,
appointed or designated will be as follows:-
a) To take necessary action by arresting the suspect immediately,
b) To conduct search or cause to conduct search operation of any office, residence,
building, storage, vehicles or of any place in the course of investigation and inquiry,
c) To exercise other powers vested to the above Department.
The investigation officer, while proceeding necessary action may keep the suspect on
date, release him by obtaining bail or guarantee or keep under custody with the
permission of the court if he/she fails to provide bail or guarantee.
As per Sec. 17, the investigation officer may detain the person against whom
proceedings have been initiated as per this Act, if there is risk of extinction or
destruction of any evidence or create obstacles or perverse effects in the proceedings of
investigation and inquiry according to the prevailing law of the country. While detaining
the person committing an offence it must be obtained prior approval by fulfilling
required legal formalities before the adjudicating officer. However, the detainee will not
be exempted from making a petition for his release with reasons thereof.
b) In accordance with Section 2(b) of Foreign Investment and Technology Transfer Act, 2049,
investment in share or equity of a company is deemed to be foreign investment. Apart from
the investment in shares, reinvestment of the earnings derived from the investment in share
and investment made in the form of loan or loan facilities shall be also deemed to be foreign
investment. Therefore, in the instant case, the said investment is foreign investment.
This Act has provided some motivational factors to foreign nationals. While observing the
legal provision mentioned in the Act, Section 5 is provided the facilities and concessions to
such person. A foreign investor shall be entitled to repatriate outside Nepal the amount
received under an agreement for the transfer of technology in such currency as set forth in
the concerned agreement. He/ she has to make an investment in foreign currency and shall
be entitled to repatriate the following amount outside Nepal:-
a) The amount received by the sale of the share of foreign investment as a whole or any part
thereof.
b) The amount received as profit or divided in lieu of the foreign investment.
c) The amount received as the payment of the principal of and interest on any foreign loan.
He/she, as a foreign investor, may enjoy visa exemption provision. Visa exemption has been
provided in section 6 of the same Act. It provides as:
(1) A foreign national visiting Nepal in connection with undertaking any study or carrying
out any research with the objective of making investment in Nepal shall be provided a
non-tourist visa for up to six months.
(2) A foreign investor or dependent family or authorized representative of such a foreign
investor and dependent family of such authorized representative shall for the purpose of
stay in Nepal be provided a business visa until the foreign investment is retained.

(3) A foreign investor who, at a time, makes investment in an amount no less than one
hundred thousand United States dollar or in convertible foreign currency equivalent
thereto, and his/her dependent family shall be granted a residential visa until such
investment is retained.
c) Pursuant to section 2(a) of International Financial Transactions Act, 2054 "International

Financial Transactions" means any financial transaction carried out by any license holder
entity under this Act.
International financial entities are not allowed to do the following acts pursuant to section 5 of
this Act, as under:
(a) To purchase any kind of immovable property within the Nepal or to keep in their name
otherwise,
(b) To carry out any type of international financial transaction with any person resident of
Nepal,
(c) To purchase shares or debentures of any company incorporated in Nepal under the
existing laws,
(d) To open an account in any commercial bank of Nepal:
Provided that an account may be opened in any commercial bank with the permission of
the Accreditation Committee for the purpose of running the day-to-day administrative
business of the office up to such amount as may be fixed by the Accreditation Committee.
Following facilities and concessions are granted to International Financial Institutions:
(1) No restriction of any kind shall be imposed on a license holder entity to bring in foreign
currencies as may be required for international financial transactions pursuant to Section 6 of
this Act.
(2) No restriction of any kind imposed by the existing laws relating to foreign exchange shall
apply in relation to a license holder entity of this kind.
(3) Section 7 of the act provided the facilities to repatriate the fund to the license holder entity
outside Nepal the foreign currencies earned by it by carrying out international financial
transactions and the foreign currencies brought in by such entity for the purpose of carrying out
international financial transactions.
Provided that no property or capital accrued from any illicit or illegal act shall be allowed
to be repatriated.
(3) Pursuant to Section 8 of the Act, the capital or the property of any entity shall not be
subjected to nationalization.

a) Audit report of the Himalayan Water Ltd. shows that the amount of liabilities
exceeds the value of assets of the company. So, the company couldn't fulfill its

financial liability to its creditor. Possibly, there shall be the queue of creditor who
demands their investment. Company is in dilemma that how the liability is settled.
Other side, the creditors, shareholders, debenture holders of the company have
their own claimant that how the investment being made to the company is
restituted? In this situation, you are employed for as a liquidator of the company.
Provide a report on following requirements referring Insolvency Act, 2063. (2+2+4=8)
i) What is the conditions company deemed to be an insolvent?
ii) Who can submit an application for the institution of insolvency proceedings
and where?
iii) What are the functions, duties and powers of a liquidator?
b) Securities Act, 2063 has been enacted with a view to regulate and manage the
activities of the securities markets and persons involved in the business of dealing
in securities by regulating the issuance, purchase, sale and exchange of securities
for the purpose of protecting the interests of investors in the securities. State how
a body corporate issues securities under the Act. 7
Answer:
a)
i) There is the insolvency situation in the said company. Section 2(b) of the
Insolvency Act, 2063 has defined the world “being insolvent” as a state of being
unable, or appearing to be unable, to pay any or all of the debts due and payable
to or payable in the future to creditors or a situation where the amount of
liabilities of a company exceeds the value of the assets. In regard to the company,
it shall be deemed to have become insolvent on the following condition (Section
7).
(a) The general meeting of shareholders adopts a resolution that the company has become
insolvent or a meeting of the Board of Directors of the Company makes such decision; or
(b) The Court issues an order requiring the company to pay the debt and the debt is not paid
up within thirty five days from the date of receipt by the company of such order; or
(c) The Company fails to pay the debt within thirty five days after the service by the creditor
on the company a notice for the payment of the debt or fails to make an application to the
Court within the said period to void such notice
ii) Any of the following persons may make an application before a court to initiate of
the insolvency proceedings pursuant to Section 4 of this Act.
(a) A company itself which has become insolvent;

(b) Out of the total creditors of a company which has become insolvent, at least ten percent
creditor or creditors who has or have lent money;
(c) Shareholder or shareholders that has or have subscribed at least five percent of shares, out
of the total shareholders of a company;
(d) Debenture-holder or debenture-holders that has or have subscribed at least five percent of
debentures, out of the total debenture-holders of a company;
(e) A liquidator who has been appointed to liquidate a company; or
(f) In the case of a company that carries on any specific type of business set forth in Section
8, a body authorized to administer and regulate such business.

iii) A liquidator shall be appointed by a court amongst the persons entitled to carry on
insolvency business. He/she has following functions, duties and powers pursuant to
Section 40 of Insolvency Act, 2063 as under:
(a) To institute or defend any case or legal action on behalf of the company;
(b) To appoint employees to assist in the discharge of his or her functions;
(c) Where any installment on any share of the company is due, to make a call on the
shareholder for payment of such installment;
(d) To do and execute, or cause to be done and executed, all such acts and deeds or
documents as required to be done and executed on behalf of the company and in the name
of the company and use the seal of the company for that purpose;
(e) To borrow loans against security of the assets of the company;
(f) Where the liquidator considers that the sale and disposal of any property or termination of
any contract or liability will render benefits to the company, to sell and dispose of such
property or terminate such contract or liability;
(g) To enter into compromise with any creditor of the company or any person who claims to
be a creditor of the company in relation to the claim made by such creditor or person;
(h) To enter into compromise with any person against whom the company may make a claim
in relation to any loan, liability or any other claim;
(i) To sell the assets of the company and distribute the proceeds of such sale pursuant to this
Act; and
(j) To perform, or cause to be performed all such other acts as may be necessary to liquidate
the company.
b) The body corporate will issue its securities under the Act as follows:
Under section 27(1) of the Securities Act, 2063, a body corporate shall have to register
securities to be issued by it with the Securities Board prior to their issuance. For this a body
corporate shall have to make an application in the prescribed format, accompanied by its
memorandum of association, articles of association, documents related with such securities,
and the prescribed fees, to the Board for registering securities pursuant to Sub-section (1)
above.
Where an application is received the board shall make necessary inquiry into the matter and,
if it considers appropriate to register such securities, register such securities in the register as
prescribed, indicating the details of such securities and issue the securities registration
certificate in the prescribed format to the concerned body corporate.
Under section 28 where a body corporate allots or sells securities after registering such
securities, the body corporate shall have to give a notice along with the details of securities
so allotted or sold to the Board within seven days.
Upon receipt of a notice as referred as above, where it appears necessary to make the
allotment and sale of such securities fair and informative for the interests of investors and
the body corporate, the Board may give necessary directive to the concerned body corporate.
It shall be the duty of the concerned body corporate to abide by such directive.
Under section 29 where a body corporate is to sell and distribute securities to more than fifty
persons at a time, it shall make public issue for the sale and distribution of such securities.
The period to be open for making application of the securities to be issued as above shall be

as prescribed. The provisions relating to the value and allotment of securities for which
public issue has to be made shall be as prescribed.
Where securities for which public issue has been made once could not be sold and have to
be re-issued again within one year, the body corporate which so issues the securities may,
with the approval of the Board, issue such securities by mentioning the matters which are
different than the matters set forth in the previously published prospectus and the prospectus
previously published.
Under section 30 a body corporate shall have to get a prospectus approved by the Board for
making public issue of securities in accordance with this Act and publish the prospectus for
information to all the concerned. While publishing the prospectus in such a way, the
prospectus shall also mention the place where the general public can obtain or inspect the
prospectus.
However, it is not required to issue a prospectus in the following securities:

(a) Securities issued by Nepal Rastra Bank.
(b) Securities issued against the full guarantee of the Government of Nepal,
(c) Securities proposed to be sold to up to fifty persons at a time,
(d) Securities issued to own workers or employees,
(e) Securities permitted by the Board as to issue and sell without issuing a prospectus.
Under section 31, the Board shall approve only a prospectus which contains such information
as may be adequate for investors to make evaluation as to the assets and liabilities, financial
status, profit and loss of the issuer and matters expected in future.
Under section 34, every body corporate issuing securities shall provide information on the
following matters to the Board and its shareholders as soon as possible:
(a) Such matters as may be necessary and supportive to evaluate its financial condition,
(b) Such information as may be capable of affecting the transaction of stock exchanges or the
value of securities.
(2) Every body corporate issuing securities shall also provide the Board and its shareholders
with the notice and information as prescribed, in addition to the above matters
5. Answer the following questions: (3×5=15)

a) How is the fund of the Institute of Chartered Accountants of Nepal created and
operated and how the audit of accounts of the Institute of Chartered Accountants
of Nepal is conducted? Answer in the light of Nepal Chartered Accountants Act,
2053.
b) What types of funds the Government of Nepal may create pursuant to the existing
Industrial Enterprises Act, 2073 for the industrial development of the country?
c) State the types of employments that can be employed as per the Labor Act?
Answer:
a) The Fund of ICAN is created under section 36 of Nepal Chartered Accountants Act, 2053 as
under:
(1) The ICAN shall have a separate fund of its own; and the fund shall consist of the following
amounts:
(a) Grants received from Government of Nepal;

(b) Amounts received from international or foreign organizations or institutions;

ICAN should obtain prior approval from the Government of Nepal in this case.
(c) Amounts received while registering the names of members of ICAN or issuing the
professional certificates;
(d) Amounts earned from the movable and immovable properties of ICAN;
(e) Amounts received by ICAN from other sources.
(2) All amounts to be received by ICAN shall be credited to an account to be opened with any
commercial bank within Nepal.
(3) All expenditures to be incurred by ICAN shall be chargeable on the fund as referred to in
sub-section (1) above of this section.
Specific Fund should be spent on the same purpose only.
(4) The Executive Director shall make expenses chargeable on the fund subject to the control
and supervision of the Council of ICAN.
(5) The account of ICAN shall be operated as prescribed by its Council.
Pursuant to section 37 of this Act:

(1) The accounts of the incomes and expenditures of ICAN shall be maintained in the format as
prescribed by its Council.
(2) The accounts of ICAN shall be audited by a designated member having obtained the
professional certificate.
(3) Government of Nepal may, if it so wishes, inspect, or cause to be inspected, any documents
relating to the accounts of ICAN at any time.
b) In pursuance to section 47(1) of the Industrial Enterprises Act, 2073, the Government of
Nepal may by itself or in participation of the cooperatives sector constitute a necessary or all
of the following funds for the country's industrial development, promotion and protection:
(a) Found for the entrepreneurial development of micro, cottage and small industries,
(b) Venture capital fund,
(c) Technology Development Fund,
(d) Industrial Investment Protection and Promotion Fund,
(e) Sick industries rehabilitation, reconstruction and Management Fund,
(f) Women Entrepreneurial Development Fund.
The procedure and other arrangement relating to deposition of money in those Funds, their
management and operation shall be as prescribed, pursuant to section 47(2) of this Act. (1)
c) As per section 10 of Labor Act, 2074, there are following types of employments that can be
employed. Accordingly employer may engage a worker in any of the following employment:
a) Regular employment: means any employment other than those specified in sub-sections
(b), (c) and (d).
b) Task based employment means an employment in which a particular task or service
specified by the employer is required to be accomplished.
c) Time based employment means an employment in which a worker is required to provide
a service or accomplish a task within a period fixed by the employer.

d) Casual employment means an employment in which a worker is engaged for seven or less
than seven days within a period of one month to provide any service or accomplish a task
given by the employer.
e) Part time employment means an employment in which a worker is engaged by the
employer for thirty five hours or lesser than thirty five hours in a week to accomplish any
work.
Notwithstanding anything mentioned in the employment contract, where a question arises as

to whether the employment relationship is regular or not, it shall be determined on the basis of
the nature of the work as prescribed.

a) How does Nepal Rastra Bank act as the Fiscal Agent and Depository of the
Government of Nepal? Answer in the light of Nepal Rastra Bank Act, 2058. 4
b) What are the punishments to a valuator providing false report to the bank under
Banking Offence and Punishment Act, 2064? 3
c) Write short notes on Foreign exchange and foreign exchange transaction under the
Foreign Exchange Regulation Act, 2019. 3
Answer:
a) Pursuant to section 69(1) of Nepal Rastra Bank Act, 2058, Nepal Rastra Bank (NRB) shall be
the banker and financial advisor of Government of Nepal and a financial agent of Nepal as
under:
(2) The Government of Nepal shall consult NRB on any matters that are within the
jurisdiction of its competence. It shall be the duty of the Bank to advice on matter
consulted by the Government of Nepal.
(3) Government of Nepal shall, while preparing annual budget, consult NRB on the domestic
debt including overdrafts.
(4) NRB shall submit a pre-budget review report to Government of Nepal each year on the
economic and financial matters.
Pursuant to section 71 of this Act:

(1) NRB shall accept the deposits of Government of Nepal or other bodies prescribed by
Government of Nepal.
(2) While accepting deposits pursuant to Sub-section (1) above, NRB shall receive and
disburse monies, keep accounts therein, and provide banking services related thereto.
(3) NRB may authorize commercial banks and other financial institutions to conduct the
transaction as referred to in Sub-section (2) above subject to the terms and conditions
prescribed by NRB.
Functions of NRB as a Fiscal Agent of Nepal are as provided under section 72 of this Act
below:
NRB shall, subject to the terms and conditions stipulated in the agreement entered into with
Government of Nepal, act as fiscal agent of Government of Nepal on the following
matters:-
(a) Marketing, purchase and sell of debt bonds issued by the Government of Nepal and to
act as registrar and transfer agent there for;

(b) Payment of the principal, interest and other fees of the debt bonds referred to in Sub-
section (a) above;
(c) Other necessary functions to be carried out as the agent.
b) Pursuant to Section 13(1) of the Banking Offence and Punishment Act, 2064, a valuator
while carrying out the valuation of movable or immovable assets held by a bank or financial
institutions as a collateral security of a loan or non-banking movable or immovable asset of a
bank or financial institution, the valuator shall not cause any loss or harm to the bank or
financial institution by deriving excess, low or false valuation of such assets while valuating
for the purpose of auctioning sell or for other purpose relating to bank.
Section 15 of the Banking Offence and Punishment Act, 2064 has defined various
punishments if anyone has committed banking offence as mentioned in the Act.
Sub Section (3) of the Section 15 has further defined the punishment as follow which applies
in this case of the offending valuator:
If the valuator commits any offense specified under Clause (a), (b), (c) of Section 7 or Section
13, he/she shall be punished with a fine equivalent to the value of such collateral security and
an imprisonment up to a period of four years.
In case the suit amount cannot be established in accordance with this section, he/she shall be
punished with a fine up to rupees one million and an imprisonment up to two years.
In case any organization commits any offence specified under this act and if the concerned
office bearer or the employee committing such offense be identified, he/she shall be held
liable, if the office bearer or the employee could not be identified, the person working in the
capacity of the organization head at the time of the occurrence of the offense shall be held
liable.
c) Foreign exchange and foreign exchange transaction has been defined by the Foreign
Exchange Regulation Act – 2019 as follows:
Section 2(d) “foreign exchange” means a foreign currency, deposits, credits and balances of
all types which are paid or received in a foreign currency, foreign securities and cheques,
drafts, travellers cheques, electronic fund transfers, credit cards, letters of credit, bills of
exchange and promissory notes which are in international circulation and are or can be paid
in a foreign currency, and this term also includes any other such monetary instruments as
may be prescribed by the Bank by publishing and broadcasting a public notice;
Section 2(d1)"foreign exchange transaction" means the purchase, sale, lending and
borrowing the foreign exchange or receiving or giving of the foreign exchange in any other
manner, and this term also includes the act of giving permission by the Bank to convert the
foreign exchange.


Batch: -June 2019
Level: - CAP-III
Paper IV: Corporate Laws
Question No. 1
Q.no.1 (a) was related to the Companies Act, 2063. The issues given was related to the provision of
special resolution pertaining to the merger of the company. Actually it is quite simple issue but the
students don’t have sufficient knowledge regarding the provision of the special resolution and hardly
written the Section of the concerned provision. So it is required to go through the text of the legal
provision with knowledge of the concerned section like Section 83 where the subject matter of the
special resolution have been specially prescribed and under section 74 that how the special resolution
can be adopted.
Q.no.1 (b) was related apparently to the Insurance Act, 2049 indirectly related to IEA and FITTA.
Thus the issues given was related to the two aspect i) At first, process of registration and renewal of
the insurance company, ii) secondly it was related to the Foreign Direct Investment where it requires
specially to answer with reference to the IEA and FITTA. Although students were aware of the
registration and renewal provision of the insurance company, they have hardly mentioned provision
regarding the IEA and FITTA in the answer. So the students were not much aware of the hidden
question. Substantial number of students has written answers as per the direct question only. Thus it is
required to answer with reference to the indirect and hidden requirement of the question as well.
Question No. 2
(a) Adequate preparation of Cooperative Act, 2074 was lacking among the students.
(b) Systematic knowledge was lacking in most of the students and tried to justify assuming the
procedure.
(c) Well preparation by the students but they were unable to proportionate the answer as per the
question.
Question No. 3
Overall performance of student was satisfactory. Especially students should require deep
understanding on question no. 3 (c).
Question No. 4
Most of the students did not answer properly question 4(b) and they were not able to mention relevant
provision of law in the answer.
Question No. 5
(a) Most of the students have correctly understood the question and answered properly.
(b) Most of the students could not answer properly.
(c) Only few students have correctly understood the question and answered accordingly.
Question No. 6
(a) In this question two different roles of the NRB was asked. However students have provided
their answer partly and incomplete deliberations of the provision was found.
(b) It requires the definitions of false valuation of collaterals as well as punishment however
students have answered very surfacely without being specific to the question.
(c) Foreign exchange and foreign exchange transaction were required to be defined and it should
be concluded with foreign currency. However, students provided answer partly and not relating
it to foreign currency. So, it is recommended that question’s requirement, understanding of
subject matter and knowledge of concerned legal provision should be clearly understood while
answering the question.

Paper 5: Management Information and Control System
CAP III Paper 5: Management Information and Control System
Marks
1. Assume that you are working as a software project manager in a software

development company. Your company assigned you a project to develop an
information system for a bank and you chose object-oriented methodology
to develop the system. Based on this scenario, answer the following
questions.
a) What are the reasons for choosing object-oriented development approach
for this project? How is object-oriented development different from
structured development approach? (4+6=10)
b) Why do you incorporate controls into the design and implementation of
information systems? Explain general controls and application controls
that are used to control information system. What is the role of auditing
in the control process? (3+4+3=10)
Answer:
a) First part: Object-oriented development uses the object as the basic unit of
systems analysis and design. An object combines data and the specific processes
that operate on those data. Data encapsulated in an object can be accessed and
modified only by the operations, or methods, associated with that object. Instead
of passing data to procedures, programs send a message for an object to perform
an operation that is already embedded in it. The system is modeled as a
collection of objects and the relationships among them. Because processing
logic resides within objects rather than in separate software programs, objects
must collaborate with each other to make the system work.
Object-oriented developments make the promise of reduced maintenance, code
reusability, real world modelling, and improved reliability and flexibility. Since
my company is a software development company, the software objects
developed for one project can be easily ported to another project. Moreover, in
object oriented approach, each distinct function or feature can be developed by a
separate developer or team and integrated into the main project later. These are
the principal motivators for me to choose this approach. Here are some of the
major benefits of the object-oriented approach:
 Reduced Maintenance: The primary goal of object-oriented development is
the assurance that the system will enjoy a longer life while having far
smaller maintenance costs. Because most of the processes within the system
are encapsulated, the behaviour may be reused and incorporated into new
behaviour.
 Real-World Modelling: Object-oriented systems tend to model the real
world in a more complete fashion than do traditional methods. Objects are
organized into classes of objects, and objects are associated with
behaviour. The model is based on objects, rather than on data and
processing.
 Improved Reliability and Flexibility: Object-oriented system promise to
be far more reliable than traditional systems, primarily because new
behaviors can be "built" from existing objects. Because objects can be
dynamically called and accessed, new objects may be created at any time.
The new objects may inherit data attributes from one, or many other

objects. Behaviors may be inherited from super-classes, and novel

behaviors may be added without effecting existing systems functions.
 High Code Reusability: When a new object is created, it will automatically
inherit the data attributes and characteristics of the class from which it was
spawned. The new object will also inherit the data and behaviour from all
super classes in which it participates. When a user creates a new type of a
widget, the new object behaves "wigitty", while having new behaviour
which are defined to the system.
Second part: Structured methodologies have been used to document, analyze,

and design information systems since the 1970s. Structured refers to the fact
that the techniques are step by step, with each step building on the previous one.
These methodologies are top-down, progressing from the highest, most abstract
level to the lowest level of detail from the general to the specific. These methods
are process-oriented, focusing primarily on modeling the processes, or actions
that capture, store, manipulate, and distribute data as the data flow through a
system. These methods separate data from processes whereas object oriented
development combine both data and process in a single object. Object oriented
development uses modeling tools (class diagram, object diagram, sequence
diagram etc.) that are different from structured development.
The primary modeling tool in structured development for representing a
system’s component processes and the flow of data between them is the data
flow diagram (DFD). DFD offers a logical graphic model of information flow,
partitioning a system into modules that show manageable levels of detail. DFD
rigorously specifies the processes or transformations that occur within each
module and the interfaces that exist between them. DFDs can be used to depict
higher-level processes as well as lower- level details. Through leveled data flow
diagrams, a complex process can be broken down into successive levels of
detail. Using DFD, an entire system can be divided into subsystems with a high
level data flow diagram. Each subsystem, in turn, can be divided into additional
subsystems with second-level data flow diagrams, and the lower-level
subsystems can be broken down again until the lowest level of detail has been
reached.
Another tool for structured analysis is a data dictionary, which contains
information about individual pieces of data and data groupings within a system.
The data dictionary defines the contents of data flows and data stores so that
systems builders understand exactly what pieces of data they contain. Another
tool is process specification that describes the transformation occurring within
the lowest level of the data flow diagrams. Process specifications express the
logic for each process. Another tool is structure chart where software design is
modeled using hierarchical structure charts. It is a top-down chart, showing each
level of design, its relationship to other levels, and its place in the overall design
structure; The design first considers the main function of a program or system,
then breaks this function into sub-functions, and decomposes each sub-function
until the lowest level of detail has been reached; The chart may document one
program, one system (a set of programs), or part of one program
b) First Part: To minimize errors, disasters, interruptions of service, computer
crimes, and breaches of security, controls must be incorporated into the design
and implementation of information systems. The combination of manual and
automated measures that safeguard information systems and ensure that they
perform according to management standards is termed controls. Controls consist
of all the methods, policies, and procedures that ensure protection of the

organization’s assets, the accuracy and reliability of its records, and operational
adherence to management standards.
In the past, the control of information system was addressed only toward the
end of implementation, just before the system was installed. Today,
Organizations must identify vulnerability and control issues as early as possible.
The control of an information system must be an integral part of its design.
Users and builders must pay close attention to controls throughout the system’s
life span.
Second Part: Computer systems are controlled by a combination of general

controls and application controls. General controls establish the framework for
controlling design, security, and use of computer programs and the security of
data files in general throughout an organization. Application controls, on the
other hand, are specific controls unique to each computerized application.
 General Controls and Data Security: General controls include software
controls, physical hardware controls, computer operations controls, data
security controls, controls over the systems implementation process, and
administrative controls. Although most of these controls are designed and
maintained by information systems specialists, data security controls and
administrative controls require input and oversight from end users and
business managers.
Software controls monitor the use of software and prevent unauthorized
access of software programs, system software, and computer programs.
Hardware controls ensure that computer hardware is physically secure, and
check for equipment malfunction. Computer operations controls oversee the
work of the computer department to ensure that programmed procedures are
consistently and correctly applied to the storage and processing of data. Data
security controls ensure that valuable business data file on either disk or tape
are not subject to unauthorized access, change, or destruction while they are
in use or in storage. Implementation controls audit the systems development
process at various points to ensure that the process is properly controlled and
managed. Administrative controls formalize standards, rules, procedures,
and control disciplines to ensure that the organization’s general and
application controls are properly executed and enforced.
 Application Controls: Application controls include both automated and
manual procedures that ensure that only authorized data are completely and
accurately processed by an application. These are unique to each
computerized application. Application controls include input controls,
processing controls, and output controls.
Input controls check data for accuracy and completeness when they enter the
system. These are specific input controls for input authorization, data
conversion, data editing, and error handling. Processing controls establish
that data are complete and accurate during processing. Output controls
ensure that the results of computer processing are accurate, complete, and
properly distributed.
Third Part: To know that information systems controls are effective,

organizations must conduct comprehensive and systematic audits. An MIS audit
identifies all the controls that govern individual information systems and assess
their effectiveness. To accomplish this, the auditor must acquire a thorough
understanding of operations, physical facilities, telecommunications, control
systems, data security objectives, organizational structure, personnel, manual
procedures, and individual applications.

For this audit, the auditor usually interviews key individuals who use and
operate a specific information system concerning their activities and procedures.
Application controls, overall integrity controls, and control disciplines are
examined. The auditor should trace the flow of sample transactions through the
system and perform tests, using, if appropriate, automated audit software.
2. Commercial Bank is going to implement e-Banking system with 24×7

service. The bank needs to develop and implement information technology
infrastructure mainly focusing on data center and disaster recovery center. It
is also planning to implement ERP system. You are hired as the ICT expert
for this project. Based on the above scenario, answer the following
questions.
a) Discuss the recovery plan for new information system of this Bank. 7
b) How to implement an ERP in this Bank? What are the characteristics of
ERP? (4+3=7)
c) What are the key points to be taken into account while conducting a
disaster recovery testing policy for disaster recovery center of this Bank? 6
Answers:
a) Disaster Recovery Plan (DRP) is to restore the operability of systems that
support mission-critical and critical business processes. The objective is for the
organization to return to normal operations as soon as possible. Since many
mission-critical and critical business processes depend on a technology
infrastructure consisting of applications, data, and IT hardware, the DRP should
be an IT focused plan. Every organization should develop a Disaster Recovery
Plan for all applications. Restoration of systems does not necessarily imply
technology redundancy. The DRP may call for some procedures to be
completed manually. The decision to revert to manual procedures, rather than to
build and maintain an IT infrastructure is a cost-driven decision made by the
organization. Having a DRP in place reduces the risk that the duration of
disruption in a business process does not go beyond what has been determined
to be acceptable by management in the organization. During the recovery phase,
the focus is on establishing controls over occurring events to limit the risk of
any additional losses.
This DRP is common to all systems and utilizes the following six steps:
 Develop the Business Contingency Planning Policy and Business Process
 Conduct a Risk Assessment
 Conduct the Business Impact Analysis (BIA)
 Develop Business Continuity and Recovery Strategies
 Conduct awareness, testing, and training of the DRP
 Conduct Disaster Recovery Plan maintenance and exercise
b) An ERP solution provides the core information system functions for the entire
business. But usually an organization must redesign its business processes to
fully exploit and use an ERP solution. Most organizations must still supplement
the ERP solution with custom software applications to fulfill business
requirements that are unique to the industry or business. For most organizations,
an ERP implementation and integration represents the single largest information
system project ever undertaken by the organization. It can cost tens of millions
of dollars and require a small army of managers, users, analysts, technical
specialists, programmers, and consultants.
ERP applications are significant to systems analysts for several reasons. First,
systems analysts may be involved in the decision to select and purchase an ERP

solution. Second, and more common, systems analysts are frequently involved
in the customization of the ERP solution, as well as the redesign of business
processes to use the ERP solution. Third, if custom-built applications are to be
developed within an organization that uses an ERP core solution, the ERP
system’s architecture significantly impacts the analysis and design of the
custom application that must coexist and interoperate with the ERP system
ERP systems have following characteristics:
 ERP systems integrate the various processes in the organization.
 ERP systems use an enterprise-wide database which stores each data only
once
 ERP systems allow access to the data in real time
 ERP systems support multiple currencies and languages.
 ERP system are flexible to accommodate the changing needs of an
enterprise
 ERP has many features like security, authorization, referencing,
responsibility and implementation of the business rules.
 ERP usage can be controlled at all levels such as the data, transaction,
information and analysis level.
 In ERP systems, information is often recorded in a form that cannot be read
without the use of computer.
 It is difficult to make changes after an ERP system has been implemented.
c) The key points of disaster recovery testing policy are as follows:
 Secure management approval and funding for the test.
 Provide detailed information about the test.
 Make sure the entire test team is available on the planned test date.
 Ensure the test does not conflict with other scheduled tests or activities.
 Confirm test scripts are correct.
 Verify that the test environment is ready.
 Schedule a dry run of the test.
 Be ready to halt the test if needed.
 Have a scribe take notes.
 Complete an after-action report about what worked and what failed.
 Use the results from the test to update the DR plan.
3.
a) Describe the main pre-requisites of a Management Information System,
which make it an effective tool. Explain the major constraints in
operating it. (5+3=8)
b) Explain Executive Information System (EIS). What purpose does it
serve and what are the characteristics of Executive Information System? (3+2+2=7)
Answer:
a) Pre-requisites of an MIS: The following are pre-requisites of an
effective MIS:
(i) Database: It is a super file which consolidates data records formerly stored
in many data files. The data in database is organized in such a way that
access to the data is improved and redundancy is reduced. Normally, the
database is subdivided into major information sub-sets needed to run. The
database should be user-oriented, capable of being used as a common data
source, available to authorized persons only and should be controlled by a
separate authority such as DBMS. Such a database is capable of meeting
information requirements of its executives, which is necessary for planning,

organizing and controlling the operations of the business.

(ii) Qualified System and Management Staff: MIS should be manned by
qualified officers. These officers who are experts in the field should
understand clearly the views of their fellow officers. The organizational
management base should comprise of two categories of officers (i) System
and Computer experts and (ii) Management experts. Management experts
should clearly understand the concepts and operations of a computer. Their
whole hearted support and cooperation will help in making MIS an effective
one.
(iii)Support of Top Management: An MIS becomes effective only if it receives
the full support of top management. To gain the support of top management,
the officer should place before them all the supporting facts and state clearly
the benefits which will accrue from it to the concerned. This step will
certainly enlighten the management and will change their attitude towards
MIS.
(iv) Control and Maintenance of MIS: Control of the MIS means the operation
of the system as it was designed to operate. Sometimes users develop their
own procedures or shortcut methods to use the system, which reduces its
effectiveness. To check such habits of users, the management at each level
in the organization should devise checks for the information system control.
Maintenance is closely related to control. There are times when the need for
improvements to the system will be discovered. Formal methods for
changing and documenting changes must be provided.
(v) Evaluation of MIS: An effective MIS should be capable of meeting the
information requirements of its executives in future as well. The capability
can be maintained by evaluating the MIS and taking appropriate timely
action. The evaluation of MIS should take into account the following points:
 Examining the flexibility to cope with future requirements;
 Ascertaining the view of the users and designers about the capabilities
and deficiencies of the system ; and
 Guiding the appropriate authority about the steps to be taken to maintain
effectiveness of MIS.
Constraints in operating MIS:
Major constraints which come in the way of operating an information system are:
 Non-availability of experts, who can diagnose the objectives of the
organization and provide a desired direction for installing a system.
 Experts usually face the problem of selecting the sub-system of MIS to be
installed and operated upon.
 Due to varied objectives of business concerns, the approach adopted by
experts for designing and implementing MIS is a non-standardized one.
 Non-availability of cooperation from staff in fact is a crucial problem. It
should be handled tactfully. Educating the staff by organizing lectures,
showing films, training on system and utility of the system may solve this
problem.
 There is high turnover of experts in MIS. Turnover in fact arises due to
several factors like pay, promotion chances, future prospects, behavior of
top ranking managers etc.
 Difficulty in quantifying the benefits of MIS, so that it is easily comparable

with cost.

b) An Executive Information System (EIS) – sometimes referred to as an

Executive Support System (ESS) is a DSS that is designed to meet the special
needs of top-level managers. Some people use the terms “EIS” and “ESS” inter
changeably, but others do not. Any distinction between the two usually is
because Executive Support Systems are likely to incorporate additional
capabilities such as electronic mail. An Executive Information System (EIS) is a
tool that provides direct on-line access to relevant information in a useful and
navigable format. The relevant information is timely, accurate, and actionable
information about aspects of a business that are of particular interest to the
senior manager. An EIS is easy to navigate so that managers can identify broad
strategic issues, and then explore the information to find the root causes of those
issues.
EIS serves the following major purposes:
 The primary purpose of an Executive Information System is to support
managerial learning about an organization, its work processes, and its
interaction with the external environment.
 A secondary purpose is to allow timely access to information so that based
on the answers to questions, strategic decisions could be taken by a manger
in time.
 It directs the attention of the management to specific areas of the
organization or specific business problems. It makes managers and
subordinates to work together to determine the root causes of issues
highlighted by EIS.
Major characteristics of an Executive Information System (EIS) are given as

follows:
 EIS is a computer-based-information system that serves the information
need of top executives.
 EIS enables users to extract summary data and model complex problems
without the need to learn query languages, statistical formulae or high
computing skills.
 EIS provides rapid access for timely information and direct access to the
management reports.
 EIS is capable of accessing both internal and external data.
 EIS provides extensive online analysis tools like trend analysis, market
conditions etc.
 EIS can easily be given a DSS support for decision making.
4.
a) Explain Customer Relationship Management system in detail along with
benefits. What is sales force automation? (6+2=8)
b)
Assume an IT consultant company is working on a MIS for a commercial bank.
Explain why it is important for the two organizations to enter into a non-
disclosure agreement. Explain the importance of copyright protection in the
software industry. (3.5+3.5=7)
Answer:
a) First part: Customer Relationship Management (CRM) is a strategy for
managing an organization’s relationships and interactions with customers and

potential customers. A CRM system helps companies stay connected to

customers, streamline processes, and improve profitability.
Customer relationship management focuses on managing all of the ways that a
firm deals with its existing and potential customers. It uses information systems
that integrate all of the business processes that interact with customers in sales,
marketing, and service. The ideal CRM system provides end-to-end customer
care from receipt of an order through product delivery.
CRM software records customer contact information such as email, telephone,
website social media profile, and more. It can also automatically pull in other
information, such as recent news about the company's activity, and it can store
details such as a client's personal preferences on communications. The CRM
system organizes this information to give a complete record of individuals and
companies. CRM software improves customer relationship management by
creating a 360° view of the customer, capturing their interactions with the
business, and by surfacing the information needed to have better conversations
with customers. The benefits of customer relationship management system
include:
 Better client relationships – Good and accurate information about client
enables the service provider to better serve the clients. This makes the
clients feel that the organization cares for them, thereby enhancing loyalty.
 Improved ability to cross-sell – Better knowledge about customer needs
enables the organization to provide a better solution to their next problem.
 Increased team collaboration – A good CRM gives better information to
better align teams and their activities to enhance customer experience.
 Improved efficiency in serving clients – If related team is using the CRM to
record their customer interactions, EVERY client interaction, then they are
able to serve the client with the knowledge of what has been previously
discussed with the client.
 Greater staff satisfaction – The more knowledge the employees have the
more empowered and engaged they are. Having an accurate and up-to-date
CRM that everyone uses and accesses helps employees solve client
problems. Doing so makes employees and clients happy.
 Increased revenue and profitability – Once everyone learns, and uses, the
CRM productivity increases, sales cycles decrease, the organization has the
ability to provide additional products and services to clients and client
satisfaction increases.
 Cost savings – While the implementation of CRM software is expensive and
time-consuming, over time the benefits far outweigh the costs. Members of
the sales team are able to better schedule meetings with prospects in the
same geographic area. Client-service reps are better able to resolve a client's
concern. There is a central client and prospect database that everyone can
access rather than everyone keeping a separate spread sheet or contact
database on their computer.
 Less client attrition – When a client is engaged with only one member of a
professional services firm, the risk of attrition is 40%. When five or more
partners are involved in a client relationship, the risk of attrition falls to less
than 5%.
Second Part: Abbreviated SFA, sales force automation is a technique of

using software to automate the business tasks of sales, including order
processing, contact management, information sharing, inventory monitoring and
control, order tracking, customer management, sales forecast analysis and
employee performance evaluation. SFA is often used interchangeably

with CRM; however, CRM does not necessarily imply automation of sales
tasks.
b) A commercial bank is a business entity in a highly competitive sector. Similarly

IT consultancy and software development are also very competitive sectors.
Because of the tough competition and need to do well to survive, the companies
do their utmost to make sure their business secrets, strategies, software source
codes, system access privileges etc are protected and do not get leaked to the
people who should not have them. In the modern digital age, the data and
information are the biggest asset. A single page of information can divulge
critical business strategy or an important system design. Such breach of
confidentiality can be extremely harmful to the organization and its business
prospects. Though there are many ways such information can be released, it is
normally assumed that the internal staff members do not release them. At least
they may have sworn to protect that. However, the scenario is tricky when two
separate entities work on a common project such as MIS deployment. This
involves close collaboration and sharing of the important assets such as system
access, design topologies, personnel and privilege information etc. To make
sure that these critical information of one entity are not compromised by the
other, it is customary to sign a non-disclosure agreement (NDA) between the
two. This creates a legal obligation for each entity to safeguard the information
and data of the other. In case of any breach, the NDA also gives a strong legal
case for the entity whose data is breached.
Copyright protection scheme is designed to promote innovation and reward &
acknowledge the innovators. The new products, services, tools etc developed or
created by an innovator finds good use among a lot of people but at the same time,
the innovation can be copied by some rogue person and promoted by his or her own.
In such a case, the original creator of the product does not get due credit, both
material and immaterial. This makes true innovators discouraged to further work on
such creative projects. As a result, the pace of innovation, creation and ideation
slows down leading to the disadvantage for all. To make sure this does not happen,
the innovators, creators, artists, designers etc need to get both financial and non-
financial credit for their creation. This is ensured by the copyright regime which
protects the original creator against unlawful copying, distribution and monetization
of the products or services without the consent of the original creator. Such
copyright protects the innovators, ensures benefits (if applicable) for them in terms
of direct sales or shares, and above all, makes sure that the name of the creator is
associated with the creation. This protects the intellectual property, discourages
illegal copying and encourages innovation. Hence, copyright protection regime is of
great importance in all modern industry including IT industry. It is even more
relevant in computer and IT industry because in this field there are many means and
mechanisms by which the intellectual property can be stolen and breached.
5.
a) Explain the three types of cloud computing service models . What
are key features of PaaS (Platform as a Service)? (6+2=8)
b) Describe the role of IS auditor with respect to: (23.5=7)
i) Physical access controls
ii) Environmental controls.

Answer:
a) The three Types of Cloud Computing Service Models are:
Software as a Service (SaaS)
The capability provided to the consumer is to use the provider’s applications
running on a cloud infrastructure. The applications are accessible from various
client devices through either a thin client interface, such as a web browser
(e.g., web-based email), or a program interface. The consumer does not
manage or control the underlying cloud infrastructure including network,
servers, operating systems, storage, or even individual application capabilities,
with the possible exception of limited user-specific application configuration
settings.
Platform as a Service (PaaS)
The capability provided to the consumer is to deploy onto the cloud
infrastructure consumer-created or acquired applications created using
programming languages, libraries, services, and tools supported by the
provider. The consumer does not manage or control the underlying cloud
infrastructure including network, servers, operating systems, or storage, but
has control over the deployed applications and possibly configuration settings
for the application-hosting environment.
Infrastructure as a Service (IaaS)
The capability provided to the consumer is to provision processing, storage,
networks, and other fundamental computing resources where the consumer is
able to deploy and run arbitrary software, which can include operating systems
and applications. The consumer does not manage or control the underlying
cloud infrastructure but has control over operating systems, storage, and
deployed applications; and possibly limited control of select networking
components (e.g., host firewalls).
The key features of PaaS are as follows:
 Multi-tenant architecture
 Customizable /Programmable User Interface
 Unlimited Database Customization
 Robust Workflow engine/capabilities
 Granular control over security/sharing (permissions model)
 Flexible “services-enabled” integration model
b) 1)Role of IS Auditor in Physical Access Controls: Auditing Physical Access

requires the auditor to review the physical access risk and controls to form an
opinion on the effectiveness of the physical access controls. This involves the
following:
Risk Assessment: The auditor must satisfy himself that the risk assessment
procedure adequately covers periodic and timely assessment of all assets,
physical access threats, vulnerabilities of safeguards and exposures therefrom.
Controls Assessment: The auditor based on the risk profile evaluates whether
the physical access controls are in place and adequate to protect the IS assets
against the risks.
Planning for review of physical access controls: It requires examination of
relevant documentation such as the security policy and procedures, premises
plans, building plans, inventory list and cabling diagrams.
Testing of Controls: The auditor should review physical access controls to
satisfy for their effectiveness. This involves:
 Tour of organizational facilities including outsourced and offsite facilities.

 Physical inventory of computing equipment and supporting infrastructure.

 Interviewing personnel can also provide information on the awareness and
knowledge of procedures.
 Observation of safeguards and physical access procedures. This would also
include inspection of:
i) Core computing facilities.
ii) Computer storage rooms.
iii) Communication closets.
iv) Backup and off site facilities.
v) Printer rooms.
vi) Disposal yards and bins.
vii) Inventory of supplies and consumables.
Review of physical access procedures including user registration and
authorization, authorization for special access, logging, review, supervision etc.
Employee termination procedures should provide withdrawal of rights such as
retrieval of physical devices like smart cards, access tokens, deactivation of
access rights and its appropriate communication to relevant constituents in the
organization.
Examination of physical access logs and reports. This includes examination of
incident reporting logs and problem resolution reports.
2) Role of Auditor in Environment Controls:
The attack on the World Trade Centre in 2001 has created a worldwide alert
bringing focus on business continuity planning and environmental controls.
Audit of environment controls should form a critical part of every IS audit plan.
The IS auditor should satisfy not only the effectiveness of various technical
controls but that the overall controls help in safeguarding the business against
environmental risks. Some of the critical audit considerations that an IS auditor
should take into account while conducting his audit are given below:
Audit Planning and Assessment: As part of risk assessment:
 The risk profile should include the different kinds of environmental risks
that the organization is exposed to. These should comprise both natural and
man-made threats. The profile should be periodically reviewed to ensure
updating with newer risk that may arise.
 The controls assessment must ascertain that controls safeguard the
organization against all acceptable risks including probable ones and are in
place.
 The security policy of the organization should be reviewed to access policies
and procedures that safeguard the organization against environmental risks.
 Building plans and wiring plans need to be reviewed to determine the
appropriateness of location of IPF, review of surroundings, power and cable
wiring etc.
 The IS Auditor should interview relevant personnel to satisfy himself about
employees’ awareness of environmental threats and controls, role of the
interviewee in environmental control procedures such as prohibited
activities in IPF, incident handling, and evacuation procedures to determine
if adequate incident reporting procedures exist.
 Administrative procedures such as preventive maintenance plans and their
implementation, incident reporting and handling procedures, inspection and
testing plan and procedures need to be reviewed.

6. Write short notes on: (53=15)

a) Business and IT alignment
b) Secure electronic payments
c) Artificial intelligence
d) Information system audit strategy
e) Importance of business continuity planning
Answer:
a) Business and IT alignment
MEDIATING FACTORS:
Environment
Culture
Structure
ORGANIZATIONS Standard Procedures INFORMATION
Politics TECHNOLOGY
Management Decisions
Chance
There exists two-way relationship between information systems and

organizations. Information systems must be aligned with the organization to
provide useful information to important groups within the organization.
Similarly, organizations must be aware of and be open to the influences of
information systems in order to take benefit from new information technologies.
This two-way relationship is very complex and is influenced by many mediating
factors, including the organization’s structure, standard operating procedures,
politics, culture, surrounding environment, and management decisions.
b) When an online purchase is made, the credit card information is vulnerable to
interception by network sniffers, software that easily recognize credit card
number formats. Several basic security measures are being used to solve this
security problem: (1) encrypt (code and scramble) the data passing between the
customer and merchant, (2) encrypt the data passing between the customer and
the company authorizing the credit card transaction. For example, many
companies use the Secure Socket Layer (SSL) that automatically encrypts data
passing between your web browser and a merchant's server. However, sensitive
information is still vulnerable to misuse once it's decrypted (decoded and
unscrambled) and stored on a merchant's server, so a digital wallet payment
system was developed. In this method, security software add-on modules are
added to web browser. That enables the browser to encrypt credit card data in
such a way that only the bank that authorizes credit card transactions for the
merchant gets to see it. All the merchant is told is whether the credit card
transaction is approved or not. The Secure Electronic Transaction (SET)
standard for electronic payment security extends this digital wallet approach. In
this method, software encrypts a digital envelope of digital certificates
specifying the payment details for each transaction.
c) Artificial intelligence (AI) based technologies are being used in a variety of
ways to improve the decision support provided to managers and business
professionals in many companies. Al-enabled applications are at work in
information distribution and retrieval, database mining, product design,

manufacturing, inspection, training, user support, surgical planning, resource

scheduling, and resource management. Indeed, for anyone who schedules,
plans, allocates resources, designs new products, uses the Internet, develops
software as well as for anyone responsible for product quality, an investment
professional, heads IT team or uses of IT, or operates in any of a score of other
capacities and arenas, Al technologies already may be in place and providing
competitive advantage.
d) The audit strategy is a key driver determining the type, scope, and frequency of
IT audits an organization conducts and defining the criteria organizations use to
prioritize the items in the audit universe. Organizations follow procedures in
the audit strategy to assign audit priorities and use those determinations to
allocate internal auditing resources.
An audit strategy sets the direction, timing, and scope of an audit. The
strategy is then used as a guideline when developing an audit plan. The
strategy document usually includes a statement of the key decisions needed
to properly plan the audit. The audit strategy is based on the following
considerations:
 The characteristics of the engagement
 Reporting objectives
 Timing of the audit
 Nature of communications
 Significant factors in directing engagement team efforts
 The results of preliminary engagement activities
 The knowledge gained on other engagements
 The nature, timing, and extent of resources available for the engagement
The audit strategy could be relatively short for the audit of a smaller entity,
perhaps in the form of a brief memo. If there are unexpected chan ges in
conditions or the outcome of audit procedures, it may be necessary to alter
the audit strategy. If there is an alteration, the reasons for the alteration
should be stated in the accompanying documentation.
The audit plan is much more detailed than the strategy document, since the
plan states the nature, timing, and extent of the specific audit procedures to
be conducted by the audit team.
e) Business Continuity Planning (BCP) relates to the detailed plan prepared to
make sure the business processes and systems continue operating in the event of
a disaster. This creates a detailed plan along with recovery procedures, roles,
responsibilities and stepwise plan of action to restore the systems and services
in the event of a natural or man-made disaster affecting normal system
operation.
A well-crafted BCP is important because it can act as a guiding document for
the management and IT team of the organization to restore the services, recover
data and in the event of that taking longer time, to follow an alternate course of
action so that business processes continue to function. This tells how to recover
services, restore data and whom to involve or resort to in case of an emergency.
Not having this plan can lead to chaos, data loss, mismanagement and loss of
credibility in the face of a major outage caused by a disaster or any other
circumstance.


Batch: -June 2019
Level: - CAP-III
Paper V: Management Information and Control System
Question No. 1
(a) Answer should have focused on: OOD support code reusability, ease to
maintain low coupling, high cohesion can be achieved with considering good
design patterns.
(b) Answer should focus on: Controls are required to conduct processes, tasks
correctly. Different types of control exist with different objectives. There must
be someone has taken the responsibility of checks process, tasks performed by
subordinates, that someone must have knowledge about controls and
consequences of not abiding processes tasks with specified controls, rules &
regulations.
Question No. 2
Students have not answered in specific way. Some students have written answers
in general and purely in management point of view.
Question No. 3
Most of the students have not answered question no.3 (a) properly. Answer to
question no. (3b) have written well.
Question No. 4
(a) Students are required to focus on specific area on the CRM features and
modules. Further, use of cases and examples in the answer would have been
better.
(b) NDA and its implication on both sides of bank and consultants can be covered.
Copy right, IDR and software are to be included in the answer.
Question No. 5
Q 5(a) The answer of this question was not given in proper way. Most of the students have
written introduction of cloud computing only. They were lacking knowledge on cloud
service model.
Q 5(b). Answers given by the students were satisfactory.
Question No. 6
(a) Most of the students were lacking clear concept of the subject.
(b) Students have explained electronic payment but they have not explained
about secure electronic payments technique.
(c) , (d), (e) –Most of the students have answered well.

Paper 6: Advanced Taxation
CAP III Paper 6: Advanced Taxation
Marks
Attempt all questions. Working notes should form part of the answer.
1. Mr. Bipin Koirala is working as a manager in Nabil Bank Ltd. and he received the
following amount during the income year 2074/2075.
Salary Rs. 75,000 per month
Grade Rs. 5,000
Dashain Allowance Rs. 50,000
Gratuity Rs. 75,000
Bonus Rs. 150,000
Conveyance Allowance Rs. 20,000 per month
Employer’s contribution to approved P.F. 10% of salary
Following additional information is provided to you:
a) He contributed similar amount to Provident Fund and contributed Rs. 75,000
gratuity amount received from the bank plus Rs. 100,000 to Citizen Investment
Fund.
b) He retired from service on 30th Poush 2074. He received a pension of Rs. 50,000
per month after the date of his retirement.
c) He was allowed free accommodation by the employer, who allowed him to stay
there till Ashadh 2075.
d) He received his Provident Fund amount of Rs. 1,550,000 from the approved
Provident Fund on Magh 2074. The balance of the Provident Fund amount in his
account as on 18th Chaitra 2058 was Rs. 700,000.
e) He was also paid the sum of Rs. 100,000 by the Managing Director as his
personal token in appreciation of his sincere service to the employer.
f) He received a sum of Rs. 150,000 as unutilized leave salary as per the rule on 1 st
Magh 2074.
g) He has received Rs. 30,000 as fee for question setting for BBS students.
h) He has taken loan from the company amounting to Rs. 2,000,000 @ 8% p.a.
interest. The market interest rate of such loan is 12% p.a.
i) He was provided car facility for both official and personal purposes. Employer
allowed him to retain the car with him till end of Ashadh 2075 and also paid
Rs. 5,000 per month for fuel and car maintenance expenses.
j) During Aswin 2074, he was admitted to a private hospital for one week and the
employer spent Rs. 150,000 on his medical treatment at the hospital and also
reimbursed Rs. 175,000 his personal expenses.
k) Other employees presented him with a sliver casket engraving costing Rs.
250,000.
l) He received dividend of Rs. 500,000 from various listed companies and received
Rs. 150,000 bank interest.
m) He had paid Rs. 50,000 life insurance premium and Rs. 30,000 medical insurance
premium of his families to Shikhar Insurance Company Ltd.
n) The company has provided 100 shares of Uniliver Co. as a gift to him at the time
of his retirement. The market price is Rs. 22,500 per share.

Required:
i) Calculate his taxable income and total tax liability explaining with reasons for
including or for not including any particular item in the taxable income. 12
ii) Explain what type of payments are not included in remuneration income. 3
iii) Describe whether Bipin has to file an income tax return to Inland Revenue Office
for the income year 2074/75. 3
iv) If same situation remains in income year 2075/76, what would be his tax liability? 2
Answer:
Calculation of Taxable Income
of Mr. Bipin Koirala
for Income Year 2074/75
(Assumed Single Status) (See also WN 2)
Section/Rule of Amount
S. Particulars Income Tax Act, Basis and Workings
(Rs.)
No. 2058
Assessable Income from
8 1,351,875
1 Employment
Salary @ Rs. 45,000 for 6
Salary 8(2) (Ka) 455,000 months plus grade (See also
1.1 WN 1)
Festival Allowance 8(2) (Ka) 50,000 WN 2
1.2
1.3 Bonus 8(2) (Ka) 150,000
1.4 Conveyance Allowance 8(2) (Kha) 120,000 Rs. 20,000 for 6 months
1.5 Additional Provident Fund 8(2) (Cha) 45,500
1.6 Pension 8(2) (Cha) 300,000
27(1) (Kha) (2)
Free Accomodation 9,100 WN 3
and Rule 13(2)
1.7
27(1)(Kha)(2) and
Vehicle Facility 2,275 WN 4
1.8 Rule 13(1)
Fuel and Maintenance
8(2) (Kha) 30,000 WN 5
Expenses
1.9
Medical Treatment
8(2) (Ga) 150,000
1.10 Reimbursements
Reimbursement of
8(2) (Ga) 175,000
1.11 Personal Expenses
WN 6
Concession of Interest on
40,000
Loan
1.12
Inclusion/Assessable Question setting fee is a
30,000
2 Income from Business professional income.
2.1 Question Setting Fee 30,000

Total Assessable Income 1,381,875

3
Being less than 1/3rd of the
assessable income or NRs
300,000 or actual
Less: Deduction for PF contribution (20% PF
Sec 63 Rule 21 266,000
contribution contribution and CIT
contribution) = 45,500 +
45,500 + 75,000 +100,000);
4 whichever is lower.
25% of Exemption Limit
Schedule 1
Rs. 350,000.00 or Actual
Pension Allowance Section 1 (9) and 87,500
Pension Rs. 300000.00;
Rule 39
5 whichever is less.
Net Taxable income 1,115,875
Segregation of Net Taxable Income into Various Sources
The Net Taxable Income includes income from employment including pension, and also business. The
exemption slab is taxed @ 0% for pension and business and @ 1% for income from employment except
pension. So, the net taxable income should be segregated in all three sources, which can be done in the
proportionate basis:
Net Taxable Income 1,115,875
Segregated into:
Income from employment except

pension 1051875/1381875*988375 849,397.39
Pension 300000/1381875*988375 242,252.37
Business 30000/1381875*988375 24,225.24
Total 785,875.00 1,115,875.00
Calculation of Tax Liability (Single Status) for Income Year 2074-75
Particulars Taxable Amount Tax Rate Tax
Exemption Limit from Pension 214,572.59 0% -
Exemption Limit from Business 21,457.26 0% -

Exemption Limit from
Employment except Pension 83,522.39 1% 835.22
First Slab 100,000.00 15% 15,000.00
Rest 665,875.00 25% 166,468.75
Tax Liability 182,303.97

If the same situation remains in income year 2075/76, his taxable income
shall have changed by excluding the question setting fees as it is taken as a
final withholding income. Accordingly, the taxable income shall be less by
Rs. 30000, and shall remain Rs. 1085875. The tax liability shall be changed
as follows:
Calculation of Tax Liability (Single Status) for Income Year 2075-76
Tax
Particulars Taxable Amount Rate Tax
Exemption Limit from Pension 214,572.59 0% -
Exemption Limit from Business 21,457.26 0% -

Exemption Limit from
Employment except Pension 113,970.15 1% 1,139.70
First Slab 100,000.00 10% 10,000.00
Next 200,000.00 20% 40,000.00
Rest 435,875.00 30% 130,762.50
Tax Liability 181,902.20
Tax Calculation on Retirement Payments

Tax Exempt Taxable
Amount Amount
Related to Related to Tax
Period before Period after Calculatio Tax
S Total Income Tax Income Tax n Amount
N Particulars Amount Act, 2058 Act, 2058 Workings Rs. Remarks
(850000-
Provident 500000)*5
1 Fund 1,550,000.00 700,000.00 850,000.00 % 17,500.00
Since he is already
drawing pension; this
gratuity should be
something extra
benefit at the
retirement rather than
41130*15 the gratuity as per the
2 Gratuity 75,000.00 33,870.00 41,130.00 % 6,169.50 Labout Act.
Unutilized Leave 42260*15
3 Pay 150,000.00 67,740.00 82,260.00 % 12,339.00
Gift Shares at the 1233900*
4 Retirement 2,250,000.00 1,016,100.00 1,233,900.00 15% 185,085.00
Total 4,025,000.00 1,817,710.00 2,207,290.00 221,093.50

Working Notes:
1. The amount of grade is given Rs. 5,000.00 without mentioning per month or per year. In lack of
information, the grade amount Rs. 5,000.00 is assumed as on annual basis. (If a student assumes
the grade per month, mark should be awarded as correct.)
2. Normally, the festival allowance shall be of one month’s salary including grade. However, the
amount is included as provided in the question.
3. Free accommodation to employee, worker and person drawing monthly salary is characterized
and quantified @ 2% of salary. Free accommodation for about 6 months even after retirement is
normally not provided. But, the question has mentioned so. Thus, free accommodation given to
Mr. Bipin after retirement is attracted Rule 13 (2) (Kha), which mentions that the free
accommodation should be characterized and quantified @ 25% of applicable rent. In lack of
rent amount, the free accommodation for after retirement could not be quantified.
4. Vehicle facility to employee, worker, and person drawing monthly salary is characterized and
quantified @ 0.5% of salary. Vehicle facility for about 6 months even after retirement is
normally not provided. But, the question has mentioned so. Thus, vehicle facility given to Mr.
Bipin after retirement is attracted Rule 13 (1) (Kha), which mentions that the vehicle facility
should be characterized and quantified @ 1% of market value of the vehicle. In lack of the
market value, the vehicle facility for after retirement could not be quantified.
5. The expenses given for 6 months during his service period can be taken within the vehicle
facility and the monthly fixed amount given for after his retirement should be included in
income at the market value of the facility.
6. The loan should be supposed to have recovered at the time of retirement as is normally
practiced. So, the concession in interest = 2,000,000.00*(12-8%)*6/12
7. Normally, every natural person shall have single status unless they have elected for couple
status.
8. The gifts from the Managing Director and other employees are not included as they fall under
personal nature.
9. Dividend and interest from bank received by a natural person are final withholding incomes
under Section 92. Such incomes are excluded for income tax purpose as per Sections 8 (3), 7 (3)
and 9 (3).
10. The insurance premiums paid for family is not reducible to the taxpayer. So, no reductions
available for Rs. 50,000 life insurance premium and Rs. 30,000 medical insurance premium of
his families to Shikhar Insurance Company Ltd.
11. The question setting fee is an income from occupation/profession, and is not related to
employment, so it should be income from business.
i) The following payments are not included in course computing the income from
employment:
a) Any amount received by an employee for which exemption is given under Section 10
of the Act.
b) Any amount received which is subject to final withholding tax
c) Daytime meals or refreshment provided by the employer in equal terms for all the
employees.
d) Any reimbursement of expenses incurred by the employee:
 That serves the purpose of the business of the employer: or
 That would otherwise be deductible in calculating the individual’s income from
the business or investment.
e) Any prescribed small amounts, which are too small and thus unreasonable or
administratively not practical to make accounting for them. The amount prescribed by
the Rule is Rs 500 at a time. The expenses prescribed by the Rule include tea

expenses, stationary expenses, prizes, gift, emergency medical facility or other such
payments as specified by IRD.
ii) According to Section 97, unless a written order is issued or a public notice is published
by IRD, the following person are not obliged to file an annual return:
a. The person who has no liability to pay tax during the year
b. The person who has only incomes, subject to final withholding tax
c. A natural person having income from vehicles subject to payment tax at a fixed
amount annually.
d. A resident individual under the following condition:
e. The income for an income year consists exclusively of income from an employment
having a source in Nepal
f. Who has only one employer at a time and all of the employers are residents of Nepal
during the year;
g. Who claims for medical allowance and a retirement contribution allowed by the
employer only, but does not claim the donation given during the year.
Hence, Mr. Bipin Koirala should file income tax return for the income year 2074/75
separately to IRO within Aswin end 2075.
2.
a) Employees’ Provident Fund, Nepal (EPF), established under the Employees’
Provident Fund Act, has the following incomes for Income Year 2074/75. Find
out its tax liability. 7
Interest Income from Bank Deposit Rs. 150,000,000
Dividend Income from Hydro-power projects from consortium financing with a
bank Rs. 150,000,000
Rent Income Rs. 150,000,000
b) Ms. Aksheta Sharma has received Rs. 23,000,000 on 2075.01.23 from

Budhigandaki Hydro Power project as a compensation of land acquisition by the
government. She had owned that land on 2072 Magh 1 after getting property
transferred from her mother. The value of land at the time of ownership transfer
was Rs. 3,000,000. She acquired another land at Rs. 20,000,000 on 2075/06/19.
Find out her tax liability, if any, giving consideration to legal provisions. Will the
tax liability be different if she acquired the land on 2076/02/14? 7
c) Him Electronics Pvt. Ltd. has the following assets on Shrawan 1, 2074:
S.N. Assets Written down value on 2074/4/1
1 Building 45,050,000
2 Office Equipment 250,000
3 Motor Car 4,550,000
4 Plant & Machinery 1,275,000
Following additions have been made and following repair & maintenance
expenses have been incurred during income year 2074/75:

S.N. Assets Date of Cost Rs. Put to use Repair

Acquisition and
Maintena
nce
Expenses
1 Building Shrawan 4, 2074 2,575,000 Magh 25, 2074 1,500,000
2 Office Equipment Magh 20, 2074 150,000 Baisakh 10, 2075 0
3 Motor Car Poush 15, 2074 4,500,000 Baisakh 20, 2075 450,000
4 Plant & Magh 30, 2074 500,000 Phalgun 30, 2074 520,000
Machinery
5 Accounting Chaitra 10, 2074 550,000 - -
software 5 years
4 months life
The company sold the following assets during income year 2074/075:
S.N Assets Date of Sale Sale Consideration (Rs.)
1 Office Equipment Ashadh 20, 2075 298,000
2 Plant & Machinery Ashadh 25, 2075 520,000
Determine the amount of depreciation, repair and maintenance expenses
allowable under Income Tax Act, 2058 for the income year 2074/2075. Also
explain pooling date and mention whether the company can claim accelerated
depreciation? 6
Answer:
a) EPF is an Approved Retirement Fund (ARF) under Income Tax Act and Rules (Section
63 and Rule 20). Section 64 (2) of the Act has exempted for all incomes of an ARF from
income tax. However, Rule 20 has prescribed that the investment of an ARF can be only
in ‘approved investment’. Approved investments are – the investments in Citizen
Investment Trust, investment in banks established under the prevailing banking laws,
investment in government bonds, investment in consortium financing with bank, and
investment to the own beneficiaries of the ARF except to the own shareholders.
If the investment is not an approved investment, any income from the investment are not
exempted. Accordingly, the rent income is taxable and the other two incomes are not
taxable. Thus, the taxable income and tax liability shall be as follows:
S. No. Particulars Amount Rs. Workings
1 Inclusion 150,000,000
An ARF is tax exempted for the
Interest Income income from approved investment.
from Bank The bank deposit is an approved
1.1 Deposit - investment, so, it is not taxable.
Dividend Income
from Hydro- An ARF is tax exempted for the
power projects income from approved investment.
from consortium The investment in a consortium
financing with a financing with a bank is an approved
1.2 bank - investment, so, it is not taxable.

An ARF is tax exempted only for the

income from approved investment.
Renting a house is not an approved
1.3 Rent Income 150,000,000 investment, so, it is taxable.
2 Taxable Income 150,000,000
3 Tax Rate 25%
4 Tax Liability 37,500,000
b) This is an involuntary disposal under Section 46. According to the Section, income tax is
levied on the net gain from the disposal. The net gain is calculated as the surplus over the
outgoings for acquiring the similar assets by the taxpayer within a year from date of
involuntary disposal.
The tax amount if she acquired the land on 2075.06.19 will be as follows:
Particulars Amount Rs. Workings
According to Section 46, if another similar asset is
acquired within a year, the incomings shall be:
Outgoings + Surplus. Where, surplus = compensation
received – cost for newly acquired property =
Incomings 6,000,000 3,000,000 + (23,000,000 – 20,000,000)
Outgoings 3,000,000
Gain 3,000,000
Reduction 0
Net Gain 3,000,000
Tax Rate 5%
Tax 150,000
The tax amount if she acquired the land on 2076.02.14:
Particulars Amount Rs. Workings
If similar another asset is not acquired within
one year, the incomings shall be the whole
amount received as compensation. Since, she
acquired the land on 2076.02.14, one year is
Incomings 23,000,000 elapsed from the date of compensation received.
Outgoings 3,000,000
Gain 20,000,000
Reduction 0
Net Gain 20,000,000
Tax Rate 5%
Tax 1,000,000
c) Depreciation is computed on the date latest of date of payment for the assets or date of
put to use. This latest date is called polling date. In case of machinery, it is purchased in
earlier period than its put to use in business. Here pooling date is later date i.e. date of put
to use. If any assets have used in business under sale or purchase on approval basis, date
of put to use will come first and then date of purchase (approval date). In this case,
pooling date is date of approval.
The company cannot have claimed accelerated depreciation. According to Section 3(2) of
Schedule 2, depreciation rate shall be increased by 1/3rd in the following entity for Pool
A, B, C and D:

 Special Industry as defined in Section 11

 Construction of Road Bridge, Tunnel, Rope-way, Sky Bridge
 Operation of Trolley Bus and Tram
 Cooperative Union or Society (non-taxable business
 Power house construction, generation and power transmission
 Built Own, Operate and Transfer (BOOT) business
Calculation of depreciation and repair and maintenance expenses:
Him Electronics Pvt. Ltd.
Computation of Allowable Depreciation
(Income Year: 2074/75)
I. Building: Amount Rs.
Written down value on 2074/4/1 (Depreciation basis amount) 45,050,000.00
Addition during the year:
Date of put to use Cost Depreciation basis amount
2074/10/25 2,575,000 2,575,000 x 2/3 1,716,666.67
Total depreciation basis amount: 46,766,666.67
Allowable depreciation: (A) 46,766,666.67 X 5% 2,338,333.33
1
II. Office Equipment:
Written down value on 2074/4/1 (Depreciation basis amount) 250,000.00
Date Cost Depreciation basis amount
2075/1/10 150,000 150,000.00 x 1/3 50,000.00
300,000.00
Sold during the year: Sold on 2075/3/20 (298,000.00)
Total depreciation basis amount: 2,000.00
Allowable Depreciation: 2,000 X 25% 500.00
Balance: 1,500.00
However, as per Sec. 2 (6) of Schedule-2 of Income Tax Act, 2058, if the balance of
depreciation basis amount becomes less than NRs. 2,000, additional depreciation
equivalent to that balance amount should be charged. Therefore, in this case the
allowable depreciation would be Rs. 2,000 (Rs. 500 + Rs. 1,500).
Allowable depreciation (B) = 2,000
III. Motor Car: Amount NRs.

2075/1/20 4,500,000.00 4,500,000.00 X 1/3 1,500,000.00
Allowable depreciation: (C) 6,050,000.00 X 20% 1,210,000.00
IV. Plant & Machinery
2074/11/30 500,000.00 500,000.00 X 2/3 333,333.33
Less: 1,608,333.33
Sold during the year: Sold on 2075.3.25 (520,000.00)
Allowable depreciation: (D) 1,088,333.33 X 15% 163,250.00
V. Accounting software
Addition during the year 2074.12.10 550,000.00
Depreciation base 550,000*2/3 366,666.67

Life: 5 years 4 months

Allowable depreciation= 366,666.67 * 20% 68,750.00
Calculation of allowable repair and maintenance expenses as per Income Tax Act 2058.
S.N Particulars Depreciation Actual R & M 7% of Allowed
base for expenses NRs Depreciation repair
2074/75 NRs base NRs. expenses
NRs
1 Building 46,766,666.67 1,500,000 3,273,666.67 1,500,000.00

2 Office Equipment 2,000 - - -
3 Motor Car 6,050,000 450,000 423,500 423,500.00
4 Plant and Machinery 1,008,333.33 520,000 112,583.33 112,583.33
5 Accounting software 366,666.67 - - -
Total 2,470,000 3,809,750 2,036,083.33
Actual repair and maintenance expenses = Rs. 2,470,000.00
Allowed repair and maintenance expenses = Rs. 2,036,083.33
Disallowed repair and maintenance expenses = Rs. 433,916.67
Note:
Depreciation has been calculated as per Schedule 2 of the Income Tax Act, 2058.
3.
a) As per the prevailing code of ethics, what are the taxation services that can be
provided by a professional accountant to its client? 5
b) Every officer of IRD or IRO shall keep the documents and information coming to
his possession or knowledge secret while performing his duties under Income Tax
Act. In which circumstances he can convey the information to other persons? 5
Answer:
a) Taxation services comprise a broad range of services, including:
a. Tax return preparation;
b. Tax calculations for preparing the accounting entries;
c. Tax planning and other tax advisory services; and
d. Assistance in the resolution of tax disputes.
However, the professional accountant should maintain his integrity and independence.
b) As per Income Tax Act Section 84, the tax officer can convey the information to the
following person under the given circumstances:
a. To the extent required in order to perform the officer's duties under Income Tax Act;
b. To a court or tribunal as required to perform by them in proceedings with respect to a
matter under this Act;
c. To the Finance Minister;
d. To any person when the disclosure is necessary for the purpose of any other fiscal
law;
e. To any person in the service of GON, who requires the information for revenue or
statistics related works;
f. To the Auditor-General or any person authorized by the Auditor-General when such a
disclosure is necessary for the performance of his official duties; or

g. To the competent authority of the foreign government with which Nepal has entered
into an international agreement, to the extent permitted under the agreement.
4.
a)
i) ABC Co. is a transportation company which carry goods from one place to
another. Mr. Hari Bhadur Thapa called the ABC Co. and entered into an
agreement to hire a vehicle for carrying goods from Bhairahawa to
Kathmandu. The price for the service was Rs. 100,000. Hari Bhadur Thapa
loaded some barrels containing liquor and headed towards Kathmandu along
with the driver. At Mugling, the vehicle was intercepted by Excise Police and
on enquiry it was found that the liquor was illicit liquor. The person who hired
the vehicle had run away in the meanwhile. The value of the liquor was
estimated at Rs. 10 lakh. What is the punishment under the Excise Act in such
circumstances? What enquiry is to be made before any punishment? 5
ii) Mr. Ram Krishna Neupane wanted to import the goods from USA. The goods
which are to be imported did not arrive to Customs boarder but he wanted to
make the payment of duty in advance so that goods after arrival could be
cleared from Customs faster. He paid the customs duty on March 26, 2018 for
the goods to be imported at the exchange rate of 1 USD = Rs. 112. The goods
arrived on April 26, 2018 and Mr. Neupane wanted to clear the goods on that
day and the exchange rate on that day was 1 USD = Rs. 116. Mr. Neupane
claims that there will not be any impact of the difference in exchange rate as
he has already paid the duty in advance. State your views on the claim of Mr.
Neupane referring the provisions of Customs Act/Rules. Will there be any
difference if the exchange rate on April 26, 2018 was 1 USD=Rs. 110? 5
b) Ram Private Limited deals in manufacturing and sales of VATable goods. It has
started its operation from 15 Bhadra 2075 without registering under VAT. Below
is it’s transactions for the month of Bhadra 2075, Asoj 2075 and Kartik 2075
including VAT wherever applicable.
Particulars Bhadra 2075 Asoj 2075 Kartik 2075

Purchase of Raw Materials 5,000,000 3,000,000 4,000,000
(VATable)
Purchase of Car for CEO 0 5,000,000 0
(VATable)
Liquor Expenses 200,000 100,000 0
Petrol Expenses 0 15,000 10,000
Machineries (VATable) 50,000,000 0 0
Sales 1,000,000 7,000,000 20,000,000
You are a Tax Official and came to know that Ram Private Limited is doing
business without registering under VAT, and you intend to carry out VAT
assessment of Ram Private Limited. Discussing the relevant provisions of VAT
Act, 2052 and Rules 2053, assess the total VAT liability of Ram Private Limited
including fine, interest and penalty, if any, as on 30 Poush 2075. 10

Answer:
a)
i)
1. The liquor will be confiscated and penalty equivalent to the value of the liquor
will be imposed on the manufacturer of the liquor after making proper
investigation to find out the manufacturer of the liquor, under Sec. 12 (1) of
Liquor Act and Sec 16 (1) of the Excise Duty Act.
2. The value of the confiscated liquor for the purpose will be its factory value plus
Excise Duty on the same for the purpose of calculating the value of penalty
payable.
3. Mr. Hari Bahadur Thapa may be punished with imprisonment for one year
without the penalty or both imprisonment and penalty depending on the nature of
the crime after due investigation.
4. If the vehicle used for the transportation of the illicit liquor is a vehicle registered
as a hired vehicle, without the permission of the owner, the owner will be levied a
penalty of Rs. 25,000.
5. The driver will be punished with imprisonment up to three months or a penalty of
Rs. 15,000 or both on the basis of the nature of involvement of the driver in the
crime. In this case, he has not knowingly allowed the transportation, he may be
levied minimum penalty.
6. If the vehicle has been used with the involvement of the owner, then the vehicle
can be confiscated. But since here the involvement of the owner is not
established, the vehicle may not be confiscated.
7. Proper investigation has to be made with regard to the degree of involvement of
each person before deciding the quantum of punishment.
8. They have to find out the person who ran away to ascertain the manufacturer and
his involvement in the transaction.
ii) Section 24 of Customs Act, 2064 prescribes the following provisions.

As per Section 24(1) if any importer wishes to pay the duty chargeable on any goods
to be imported by the importer prior to the arrival of such goods at the concerned
Customs Office, the importer may, for that purpose, make an application,
accompanied by the declaration form filled up and such documents relating such
goods as referred to in Section 18, to the Customs Officer.
If on examination of the application received pursuant to sub-section (1), it appears
reasonable to collect the duty, the Customs Officer may determine the duty pursuant
to Section 22. The importer shall pay the duty so determined to the Customs Office.
If the rate of the duty determined pursuant to sub-section (2) or the exchange rate of
convertible foreign currency prevailing on the day of payment of payment of duty
differs from that prevailing on the day of clearance of goods, the rate prevailing on
the day of clearance of goods shall be applied. Hence, the payment of duty prior to
arrival of goods is possible. As per Section 24(3), if there is difference in exchange
rate, the exchange rate prevailing on the day of clearance of goods shall be applicable.
Mr. Ram Krishna has to pay the difference in duty due to increase in exchange rate
(Rs. 116-Rs. 112=Rs. 4).
If the exchange rate is lesser than the amount paid prior to the arrival of goods (Rs.
112 - Rs. 110 = Rs. 2), Mr. Neupane has to apply for refund of excess duty paid and
the Customs Officer has to refund the amount which arose due to exchange rate
difference on the date of payment and the date of clearance of goods.

b)
i) Section 5(1) of the Value Added Tax Act, 2052 provides that until unless provided
otherwise, VAT is to be levied on all goods and services supplied within Nepal. In the
given case, Ram Private Limited deals in VATable goods. Hence, it should have
registered itself under VAT. However, mere fact that it has not registered under VAT,
that does not mean it has no liability for payment of VAT since section 5(1) has
specifically cast VAT liability on sales of goods and services within Nepal. So, if any
person who is required to be registered under VAT has not registered under VAT, and
carries out transaction in Nepal, in the said case it will be assumed that the transaction
done by the said Company is inclusive of VAT, i.e. even though Company has not
collected VAT, it will be assumed that VAT is collected and included in sales.
ii) Further, section 20(g) of Value Added Tax Act, 2052 provides that VAT Officer can
carry out VAT assessment of the person who is required to be registered but not
registered.
iii) Section 17(1) of the Value Added Tax Act, 2052 provides that VAT credit will be
allowed to a registered person. Here, since Ram Private Limited is not registered
under VAT, VAT credit on input shall not be allowed.
iv) So, total VAT liability of Ram Private Limited will be as below
Particulars Bhadra 2075 Asoj 2075 Kartik 2075
VAT Credit Not Available Not Available Not Available
since not since not since not
Registered Registered Registered
VAT Payable
Total Sales 1,000,000 7,000,000 20,000,000
VAT on Sales A 115,044.25 805,309.73 2,300,884.96
(Sales/113*100)
Penalty u/s B 10,000 10,000 10,000
29(1)(a) – Rs
10,000 for each
VAT period
Penalty u/s 29(2) – C 115,044.25 805,309.73 2,300,884.96
100% of VAT
Liability
Additional Fee u/s D 3,035.89 14,540.31 22,369.71
19 – 10% per
annum calculated
on a daily basis
Interest u/s 26 – E 5,752.22 30,199.11 57,522.12
15% per annum
Fee and Interest 4 Month 3 Months 2 Months
Month till 30
Poush 2075
Total VAT 248,876.61 1,665,358.88 4,691,661.75
Liability
Grand Total 6,605,897.24
5.
a) Nepali Pahichan, a typical handicraft exporting firm imported some VAT
attractive auxiliary materials from India for INR 1,000,000. Kolkata-Jogbani
freight and insurance are INR 50,000 and INR 5,000 respectively. Customs
clearing charges is Rs. 10,000. Excise and Customs Duty Rates are 25% and 40%

respectively. The sales value is 25% more than the cost by adding 25% cost from
Jogbani to sales level. 60% of the production has been sold. Calculate the amount
of VAT payable and find out the VAT carry forward or payable amount, if any,
on the transactions assuming there are no other purchases affecting in VAT
calculation. 7
b) Adrian EXIM Co. Ltd. has imported motorcycles by declaring INR 6,000,000
CFR Raxaul. Customs Officer assessed at the customs point and found that there
is under-invoicing by 50%. How can the Customs Officer assess the import? If
the under-invoicing was found out during post clearance audit, how would the
assessment be done?
Customs and Excise Duty Rates are respectively 60% and 40%. 7
c) Prabhu Helicopter Pvt. Ltd. had sent its engine for repair purpose to Singapore on
Bhadra 5, 2075. The value of engine is US$ 2,000,000 and incurred US$ 200,000
repair cost (including spare parts replacement). The engine was back in Nepal
after repair on Falgun 5, 2075. What is the time limit for goods to be brought back
which were sent to a foreign country from Nepal for the purpose of repair?
Calculate the amount of Custom deposit at the time of sending the engine to
Singapore and Custom duty to be charged on returning of engine. Assume rate of
custom duty is 14%. Exchange rate on Bhadra 5, 2075 is 1 US$ = Rs. 115.50 and
on Falgun 5, 2075 is 1 US$ = Rs. 112.50. 6
Answer:
a) Calculation of VAT Paid at the Customs Point:
Particulars Amount Rs. Working
Invoice Value 1,601,500.00 1000000*1.6015
Freight and Insurance 88,082.50 55000*1.6015
Customs Value 1,689,582.50
Duty Rate 40.00%
5% discount for duty rate
Duty Rate after discount for Import upto 30% and 3% discount
from India 38.80% for above 30%.
Customs Duty 655,558.01
Excise Value 2,345,140.51
Excise Duty 586,285.13 25%
Customs Clearing Charges 10,000.00
Taxable Value 2,941,425.64
VAT 382,385.33
Handicrafts are VAT-exempted items under Group 8 of Schedule 1 of the VAT Act. So,
there shall not be VAT return filing and accordingly no matter arises about VAT carry
forward or VAT payable.
b)
As assessed by the Customs Officer:
CFR Raxaul Value 19,218,000.00 12000000*1.6015
Any reasonable assumption of the
Insurance Charges insurance charges shall be awarded the
Assumed 500,000.00 mark.
Duty Rate 60.00%

Duty Rate after discount 5% discount for duty rate upto 30% and
for Import from India 58.20% 3% discount for above 30%.
Customs Duty 11,475,876.00
Excise Duty 12,477,550.40 40%
As declared by the Importer:
CFR Raxaul Value 9,609,000.00 6000000*1.6015
Any reasonable assumption of the
Insurance Charges insurance charges shall be awarded the
Assumed 500,000.00 mark.
Duty Rate 60.00%
Duty Rate after discount 5% discount for duty rate upto 30% and
for Import from India 58.20% 3% discount for above 30%.
Customs Duty 5,883,438.00
Excise Duty 6,396,975.20 40%
Additional Duty and Penalty to be levied by the Customs Officer at the Customs
Point:
Additional Customs Duty 50% additional duty or buying the
as per Section 13 (15) of goods giving 5% more on the declared
Customs Act 2,796,219.00 value.
Penalty as per Section 16
(4) (Ka) of Excise Act 6,080,575.20 100% additional duty
Penalty to be levied by the
Customs Officer if
assessed under Post
Clearance Audit:
Penalty for Customs Duty 5,592,438.00 100% (Section 34 (2)
Penalty for Excise Duty 6,080,575.20 100%
c)
i) As per Rule 7, in case it becomes necessary to send any goods or machinery or spare
parts thereof to a foreign country from Nepal for purpose of repair, deposit as defined
below shall be taken.
0.5% of the value of the goods in case the goods are aircraft, helicopter and parts
thereof, otherwise it shall be 5% of value.
Here, the value of machinery sent is for helicopter engine (US$ 2,000,000 * Rs.
115.50) = Rs. 231,000,000.
The custom duty deposit shall be 0.5% of it i.e., 0.5% of 231,000,000 = Rs.
1,155,000.
ii) As per Rule 7 of Custom Rule, such goods, machinery or spare shall have to be
brought back within 3 months from the date of export.
iii) In case the time limit prescribed above for bringing back such items after repair is
inadequate, an application accompanied with documentary evidence of such
inadequate shall be submitted to the Custom officer. The custom officer may, if he so
deems appropriate, extend the time limit by a period not exceeding three months.

iv) The time given in Rule 7 for reimports of machine sent for repair is three months if
granted by custom officer. Here, Time limit shall be extended and re-import shall be
done within time.
Thus custom officer shall charge custom duty at prevailing rate on the expenses involved
in such repair or on the price of spare parts which are replaced.
From it, custom deposit furnished earlier shall be deducted and custom officer shall
return the balance of the amount of the person.
Here,
Particulars Amount Rs
Expenses of repair = US$ 200,000 = 200,000 * 112.50 22,500,000
Rate of custom duty 14%
Custom duty on repair 3,150,000
Custom deposit given when machine sent for repair 1,155,000
Amount to be deposited 1,995,000
6.
a) Discuss the main objectives of entering into double taxation avoidance agreement
with various countries as mentioned in Income Tax Directives, 2068. 5
b) What are the various methods used for determination of arm's length price under
OECD model? 5
Answer:
a) Every country levies income tax. Income tax is levied on two principles –
(i) Source of Income Rule, and
(ii) Residence Rule
As per source of income rule, the income may be subject to tax in the country where the
source of such income exists whether income earner is resident in that country or not. On
the other hand, resident rule stipulates that the power to tax should rest with the country
in which tax payer resides.
Nepal and many other countries follow mixture of these two systems. Accordingly, this
leads to taxation of same income of a person in more than one country. Thus problem of
double taxation arises if a person is taxed in respect of any income on the basis of source
of income rule in one country and on the basis of residence in another country or on the
basis of mixture of above two rules. Accordingly, same income is taxed multiple times.
To address this problem, many countries enter into double taxation relief agreements with
each other with below main objectives as mentioned in Income Tax Directives, 2068 –
(i) To Eliminate Incidence of Double Taxation: As discussed above, the main principle
of income tax is same income cannot be taxed twice. So, to provide relief of taxation
of same income in different countries, double taxation avoidance agreement is entered
into.
(ii) To reduce the burden of Tax : It may happen that the rate of income tax on a
particular income in the source of country may be higher than the rate of tax provided
in the double taxation avoidance agreement. This helps to reduce the burden of tax in
source country on the income earned by non-resident person.
(iii)To reduce the uncertainty of tax liability: Income Tax Act is a flexible law. It can be
modified by respective country anytime as per its own benefit. However, in the
context of the global economy where big foreign investments are made by a resident
of one country in another country, they want certainty of tax laws. To provide these
certainties also, double taxation avoidance agreement are entered into between
countries.
(iv) To control tax leakage: In the context of current globalization, there is always a
possibility of transfer of income from high tax rate country to low tax rate country or

altogether no taxation of income. This leads to leakage of income tax which is

harmful to both of the countries. To stop this leakage also, double taxation avoidance
agreement is being entered into.
b) Various Methods used for determination of arm’s length price under OECD
model :
(a) Comparable uncontrolled price method (CUPM) : Under this method price is
determined on the basis of price charged or paid for property transferred or services
provided in comparable uncontrolled transaction or number of such transactions by
adjusting for differences which could materially affect the price in open market.
(b) Resale Price Method : Under this method, the price is calculated by identifying the
price at which goods or services are sold to unrelated party and normal gross profit
and normal expenses for transactiong such transactions are deducted.
(c) Cost Plus Method: Under this method, the cost of the product or service is identified
and the same is increased by normal gross profit margin.
(d) Profit Split Method: Under this method, combined net profit of all associated
enterprises engaged in international transaction is determined, and the profit is
apportioned on the basis of functions performed, assets employed, risk assumed by
different enterprises.


Batch: -June 2019
Level: - CAP-III
Paper VI: Advanced Taxation
Question No. 1
Students were found to be lacking of conceptual knowledge in a question and they were unable to
give clear answer. Lack of complete study of contents was observed in the students.
Question No. 2
Students have not adequately practiced the chapter. Lack of conceptual knowledge and lack of
analysis was observed in the students.
Question No. 3
(a) Students have good knowledge about this question.
(b) Students have shown good conceptual knowledge in this question.
Question No. 4
(a) i. Students have tried to answer in a general way without properly referring the sectors /
provisions of act.
ii. Students have written well.
(b) Students need to read the question’s requirement very well first and then write the answer.
Question No. 5
(a) Most of the students have not answered correctly. Students were unable to differentiate
between VAT exempt and zero rated VAT.
(b) Most of the students have not answered correctly. Answers written were lengthy but not
relevant and the provision of the act was not understood by students.
(c) Answers were well attempted.
Question No. 6
Students’ performance was not adequate as required.
.
.

Paper 7: Advanced Cost and Management Accounting
CAP III Paper 7: Advanced Cost and Management Accounting
Marks
Attempt all questions. Working notes should form part of the answer. Make
assumptions wherever necessary.
1. Bikers Point Pvt. Ltd. manufactures mountain bikes which are being popular in Nepal
recently in comparison to other imported mountain bikes. You are given the
following information about its different products and opportunities available to the
company:
i) The company is producing the heavy-duty gear shifters used in its most popular
line of mountain bikes. The company’s Accounting Department reports the
following costs of producing 8,000 units of the shifter internally each year:
Particulars Rate per unit (Rs.) Total (Rs.)
Direct materials 60 480,000
Direct labor 40 320,000
Variable overhead 10 80,000
Supervisor's salary (avoidable) 30 240,000
Depreciation of equipment 20 160,000
Allocated general overhead 50 400,000
Total cost 210 1,680,000
ii) The company has just received a request from Police Department to produce 100
specially modified mountain bikes at a price of Rs. 5,580 each. The bikes would
be used to patrol the more densely populated residential sections of the city. The
company can easily modify its City Cruiser model to fit the specifications of
Police Department. The normal selling price of the City Cruiser bike is Rs. 6,980
and its unit product cost is Rs. 5,640 as shown below:
Particulars Rs.
Direct materials 3,720
Direct labor 900
Manufacturing overhead (Variable Rs. 120) 1,020
Total 5,640
The order would have no effect on the company’s total fixed manufacturing
overhead costs. The modifications requested by Police Department consist of
welded brackets to hold radios, nightsticks, and other gear. These modifications
would require Rs. 340 in incremental variable costs. In addition, the company
would have to pay a graphics design studio Rs. 24,000 to design and cut stencils
that would be used for spray painting Police Department’s logo and other
identifying marks on the bikes.
This order should have no effect on the company’s other sales. The production
manager says that he can handle the special order without disrupting any of the
company’s regular scheduled production.
iii) In addition to its other products, Bikers Point makes saddlebags for bicycles
called panniers in two models- a touring model and a mountain model. Cost and
revenue data for the two models of panniers are as follows:
Particulars Touring (Rs.) Mountain (Rs.)
Selling price per unit 300 250
Variable cost per unit 180 100
Contribution margin per unit 120 150
Contribution margin ratio 40% 60%

The plant that makes the panniers is operating at capacity. The bottleneck is a
stitching machine. The touring pannier requires one minute of stitching time per
unit, and the mountain pannier requires two minutes of stitching time per unit.
The stitching machine is available for 12,000 minutes per month, and the
company can sell up to 7,000 touring panniers and 4,000 mountain panniers per
month.
The operator of the stitching machine works for 8 hours a day and 25 days in a
month with a payment of Rs. 80 per hour. The overtime premium is 50% of the
hourly rate.
Required: 20
(a) An outside supplier has offered to sell 8,000 shifters a year to the company at
a price of only Rs. 190 each. Should the company stop producing the shifters
internally and buy them from the outside supplier?
(b) Would your answer be different than that of (a) above, if the space now being
used to produce shifters could be used to produce a new cross-country bike
that would generate a segment margin of Rs. 600,000 per year?
(c) What effect would accepting the order from Police Department have on the
company’s net operating income?
(d) Which model of pannier should be emphasized for producing? Why?
Determine the profit maximizing quantity of both the model.
(e) How much will be the loss, if the stitching machine breaks down for an hour?
How much would it be worth to the company to run the stitching machine
overtime to cater the unfulfilled order?
Answer:
(a) Statement showing Make or Buy Analysis (Annual)
Particulars Make (Rs.) Buy (Rs.) Remarks
Direct materials 480,000
Direct labor 320,000
Variable overhead 80,000
Supervisor’s salary 240,000 It is avoidable and relevant.
Depreciation of equipment 0 It is sunk cost and not relevant.
Allocated general overhead 0 It is not changed and irrelevant.
Outside purchase price 1,520,000 (Rs. 190 x 8,000)
Total relevant costs 1,120,000 1,520,000
Difference in favour of 400,000
Making
Decision:
Since the relevant cost of making is lower than the cost of buying, the company
should not stop producing the shifters internally.
(b) Statement showing Make or Buy Analysis (Annual) with opportunity cost
Particulars Make (Rs.) Buy (Rs.) Remarks
Relevant costs (as in (a)) 1,120,000 1,520,000
Opportunity cost (segment margin forgone 600,000 Economic
on a potential new product line) benefit
forgone
Total relevant cost 1,720,000 1,520,000
Difference in favour of buying 200,000
Decision:
If the space now being used to produce shifters could be used to produce a new
cross-country bike that would generate a segment margin of Rs. 600,000 per year,

then the decision in (a) above will change and the company should opt for buying
the shifters from outside because the opportunity cost is sufficiently large.
(c) Effect on the company’s net operating income by accepting the order of 100
bicycles from Police Department:
Particulars Per unit (Rs.) Total (Rs.)
Incremental Revenue 5,580 558,000
Incremental Costs:
Direct materials 3,720 (372,000)
Direct labor 900 (90,000)
Manufacturing overhead (Variable portion) 120 (12,000)
Special modification cost 340 (34,000)
Additional cost of design and stencil (24,000)
Total incremental costs (532,000)
Incremental operating income 26,000
Explanation on relevant and irrelevant items:
Only the incremental costs and benefits are relevant. Because the existing fixed
manufacturing overhead costs would not be affected by the order, they are not
relevant.
Analysis and decision:
Accepting special 100 units order from Police Department will result in incremental
operating income of Rs. 26,000. Even though the Rs. 5,580 price on the special order
is below the normal Rs. 5,640 unit product cost and the order would require
additional costs, the order would increase net operating income.
(d) Model of pannier to be emphasized for producing
Calculation of shortfall time of stitching machine to cater full demand
Particulars Touring (Rs.) Mountain (Rs.) Total
Monthly demand (unit) 7,000 4,000
Time per unit (minute) 1 2
Monthly time required (minute) 7,000 8,000 15,000
Monthly time available (minute) 12,000
Shortfall time (minute) 3,000
Contribution Margin of constrained stitching time
Particulars Touring (Rs.) Mountain
(Rs.)
Contribution margin per unit 120 150
Time per unit (minute) 1 2
Contribution margin per minute 120 75
Priority for production 1st 2nd
Total stitching minute available 12,000
Time allocation:
(7,000 units x 1 min) (12,000-7,000) 7,000 5,000
Maximum units to produced (To maximize profit) 7,000 2,500
Each minute on the stitching machine that is devoted to the touring pannier results in
an increase of Rs. 120 in contribution margin and profits. The comparable figure for
the mountain pannier is only Rs. 75 per minute. Therefore, the touring model should
be emphasized. Even though the mountain model has the larger contribution margin
per unit and the larger CM ratio, the touring model provides the larger contribution

margin in relation to the constrained resource. Profit maximizing unit is 7,000 for
Touring model and 2,500 for Mountain model.
(e) Loss, if the stitching machine breaks down for an hour
Statement showing the loss, if the stitching machine breaks down for an hour
Particulars Touring (Rs.) Mountain (Rs.)
Contribution margin per minute 120 75
Time per hour (minute) 60 60
Contribution margin per hour 7,200 4,500
Decision:
The amount of loss, if the stitching machine breaks down for an hour, will range
from Rs. 4,500 to Rs. 7,200.
The worth to the company to run the stitching machine overtime to cater the
unfulfilled order.
Particulars Total
No. of unfulfilled unit (for mountain pannier) (4,000-2,500) (Units) 1,500
Additional time required (hours) (1,500 x 2/60) 50
Operator's payment per hour with overtime premium (Rs. 80 x 150%) (Rs.) 120
Additional cost (Rs. 120 x 50) (Rs.) 6,000
Additional contribution margin generated (Rs. 150 x 1,500 units) (Rs.) 225,000
Since the additional contribution is much higher than the additional cost, the net
worth of operating the stitching machine overtime is Rs. 219,000 (Rs. 225,000 – Rs.
6,000).
2.
a) M/S Handicraft Nepal Ltd. is planning to produce and sell flower vase, wooden
vase and clay vase in the Thamel tourist area. The company will commence
trading on 1 July 2017 by Mr. Siddarth and his wife. Mr. Siddarth plans to invest
all of his bank balance of Rs. 75,000, into the company. Mr. Siddarth has
prepared the following budgeted information for the first six months of trading:
i) Sales of wooden vase will be made on a cash basis only. Sales of the clay vase
will be on a credit basis with 50% of sales received in following month of
sales and these qualify for a 5% early settlement discount. Of the remaining
credit sales, 10% will become bad debts and the balance will be received
equally in the third and fourth month of sales. Wooden vase will have a
selling price of Rs. 50 per unit and clay vase will have a selling price of
Rs. 200 per unit. The projected sales, in units, of each are as follows:
Month of Sales Wooden Vase Clay Vase
July 50 0
August 55 30
September 50 35
October 60 40
November 65 50
December 65 70
ii) Wooden vase will be produced in the month they are sold. The variable
production cost of one wooden vase will be Rs. 25 and this will be paid in the
month incurred.
iii) Production of clay vase will be in the month prior to sale. The production cost
of one clay vase will be Rs. 130 and 60% of this will be paid the month after it
is incurred with the balance been paid one month later.

iv) In July, Mr. Siddarth will purchase equipment, costing Rs. 60,000 and this
will be paid for in October. This equipment will have a useful life of five
years. Depreciation will be assumed to be on a straight line basis.
v) Fixed production overheads are projected at Rs. 3,000 per month and will
include the monthly depreciation charge for the equipment.
vi) Mr. Siddarth has organised for a bank loan, of Rs. 25,000, to be received on
1st August. Mr. Siddarth will only make monthly interest repayment at a rate
of 12% per annum for 1st year of loan. Thereafter, Mr. Siddarth will have to
start making capital repayments on the loan in equal monthly instalment.
vii) Mr. Siddarth will employ one sales person, commencing on 1st July, who will
receive a monthly salary of Rs. 2,500 plus sales commission of 4% of the total
sales value made during the period. The salary will be paid in the month
incurred while the sales commission will be paid one month in arrears.
Required: 10
Prepare a cash budget for M/S Handicraft Nepal Ltd., on a monthly basis, for the
six month period commencing 1st July 2017, showing clearly the closing cash
balance at the end of each month.
b) ABC Ltd. make and sell three types of electronic game for which the following
budget, standard information and actual information is available for a four-week
period:
Model Budget sales Standard unit data Actual sales
(units) Selling price Variable cost (units)
(Rs.) (Rs.)
Ordinary 20,000 10,000 3,300 18,000
Special 50,000 12,000 3,800 42,000
Sophisticated 30,000 15,000 6,000 36,000
Budgeted fixed costs are Rs. 350 million for the four-week period. Budgeted fixed
costs should be charged to product units at an overall budgeted average cost unit
where it is relevant to do so.
Required: (5+5=10)
i) Calculate the sales volume variance for each model and in total for the four-
week period where (a) turnover (b) contribution and (c) net profit is used as
the variance valuation base.
ii) Calculate the total sales mix and sales quantity variance for ABC Ltd. for the
four-week period, using contribution as the valuation base. (Individual model
variances are not required.)
Answer:
a)
( Amount in Rs.)
Cash inflows: July Aug Sept Oct Nov Dec
Initial investment 75,000 - - - - -
Loan - 25,000 - - - -
Sales - Wooden
Vase 2,500 2,750 2,500 3,000 3,250 3,250
Sales - Clay Vase - - 2,850 4,675 6,725 8,125
Total inflow 77,500 27,750 5,350 7,675 9,975 11,375
Cash Outflows:
Variable Prod.
Overhead-wooden
vase 1,250 1,375 1,250 1,500 1,625 1,625

Variable Prod.
Overhead – Clay
vase - 2,340 4,290 4,940 5,980 8,060
Equipment - - - 60,000 - -
Fixed Production
Overhead 2,000 2,000 2,000 2,000 2,000 2,000
Interest charge - 250 250 250 250 250
Sales person wages 2,500 2,500 2,500 2,500 2,500 2,500
Sales commission - 100 350 380 440 530
Total Outflow 5,750 8,565 10,640 71,570 12,795 14,965
Opening Balance - 71,750 90,935 85,645 21,750 18,930
Inflow/(Outflow) 71,750 19,185 (5,290) (63,895) (2,820) (3,590)
Closing Balance 71,750 90,935 85,645 21,750 18,930 15,340
Working Notes:
Working 1: Sales of Wooden vase
Month of sales Unit sold Sales Value (Rs.)
July 50 2,500
August 55 2,750
September 50 2,500
October 60 3,000
November 65 3,250
December 65 3,250
All sales of small wooden objects are on a cash basis and are therefore received in the
month of sale.
W.N. 2: Sales of clay vase and cash receipt is Rs.
Month of sales Unit sold Sales Value July Aug Sept Oct Nov Dec
July - - - - - - - -
August 30 6,000 2,850 1,350 1,350
September 35 7,000 3,325 1,575 1,575
October 40 8,000 3,800 1,800
November 50 10,000 4,750
December 70 14,000
Total 225 45,000 - - 2,850 4,675 6,725 8,125
W.N. 3 Variable production cost for wooden vase
Month of sales Unit Produced Cost per unit (Rs.) Cost Value (Rs.)
July 50 25 1,250
August 55 25 1,375
September 50 25 1,250
October 60 25 1,500
November 65 25 1,625
December 65 25 1,625

W.N. 4: Variable production cost for clay vase

(Amount in Rs.)
Month of Unit Cost per Cost
sales Produced unit Value July Aug Sept Oct Nov Dec
July 30 130 3,900 2,340 1,560
August 35 130 4,550 2,730 1,820
September 40 130 5,200 3,120 2,080
October 50 130 6,500 3,900 2,600
November 70 130 9,100 5,460
Total 225 650 29,250 2,340 4,290 4,940 5,980 8,060
W.N.5: Fixed Production overhead
Monthly Depreciation Charge [60,000/5/12] Rs.1,000
Cash Fixed Production overhead [3000-1000] Rs.2,000
Depreciation is not cash expenses item so not included in cash budget
W.N.- 6 Interest Charge
Annual interest charge [25,000*12%] Rs.3,000
monthly interest charge [3,000/12] Rs.250
W.N.7: Sales commission
Month of sales Total sales (Rs.) commission @4% (Rs.) Month paid
July 2,500 100 August
August 8,750 350 September
September 9,500 380 October
October 11,000 440 November
November 13,250 530 December
Total 45,000 1,800
b)
i) Sales volume variance for each model:
S. No. Particulars Ordinary Special Sophisticated Total
1. Budgeted sales(units) 20,000 50,000 30,000 100,000
2. Actual sales (units) in 19,200 48,000 28,800 96,000
standard proportions
3. Actual sales (units) 18,000 42,000 36,000 96,000
Standard unit valuations:
4. Selling price (Rs.) 10,000 12,000 15,000
5. Contribution (Rs.) 6,700 8,200 9,000
6. Profit (Rs.) 3,200 4,700 5,500
Sales volume variance:
On turnover basis (3-1) x (4) 20,000,000 96,000,000 90,000,000 26,000,000
(Rs.) (A) (A) (F) (A)
On contribution basis (3-1) 13,400,000 65,600,000 54,000,000 25,000,000
x (5) (Rs.) (A) (A) (F) (A)
On profit basis (3-1) x (6) (Rs.) 6,400,000 37,600,000 33,000,000 11,000,000
(A) (A) (F) (A)
Note: Fixed cost per unit = Rs. 350,000,000/100,000 = Rs. 3,500.

ii) Sales mix and sales quantity variance:

Sales mix variance
Model Actual Actual sales Difference Standard Sales mix
Sales volume in contribution variance (Rs.)
Volume budgeted margin
proportions (Rs.)
Ordinary 18,000 19,200 (20%) -1,200 6,700 - 8,040,000
Special 42,000 48,000 (50%) -6,000 8,200 - 49,200,000
Sophisticated 36,000 28,800 (30%) +7,200 9,000 +64,800,000
Total: 96,000 + 7,560,000 F
Sales quantity variance
Model Actual sales Budgeted Difference Standard Sales quantity
volume in sales contribution variance (Rs.)
budgeted quantity margin
proportions (Rs.)
Ordinary 19,200 (20%) 20,000 -800 6,700 -5,360,000
Special 48,000 (50%) 50,000 -2,000 8,200 -16,400,000
Sophisticated 28,800 (30%) 30,000 -1,200 9,000 -10,800,000
Total: -32,560,000 A
3.
a) The following table shows normal and speeded up activity duration and cost
values for a number of activities involved in one of the work packages involved in
a project:
Activity Normal Normal cost Speeded up Speeded up cost
duration (week) (Rs.) duration (week) (Rs.)
A-B 4 20,000 3 50,000
A-K 19 250,000 14 375,000
B-C 3 35,000 2 70,000
B-D 2 30,000 2 30,000
B-E 3 40,000 2 75,000
C-H 2 10,000 1 50,000
C-I 1 15,000 1 15,000
D-I 1 25,000 1 25,000
E-F 4 40,000 3 60,000
E-G 2 60,000 2 60,000
F-K 5 50,000 3 85,000
G-K 1 80,000 1 80,000
H-J 1 70,000 1 70,000
I-J 3 30,000 2 100,000
J-L 2 15,000 1 45,000
K-L 3 20,000 2 40,000
L-M 4 30,000 3 35,000
M-N 5 100,000 4 110,000
Required: (4+6=10)
i) Draw a work package schedule showing the critical path and the estimated
work package duration.
ii) Fully crash the critical path. Find the revised critical path, revised work
package duration and the total incremental cost of crashing.
b) A fertilizer company manufactures a special type of fertilizer using the
combination of two raw materials (Chemicals) P and N. The total weight of the
combination must be 50 kg in a sack. The combination has to be so made that at

least 20 kg of P and not more than 40 kg of N can be used. The cost of P is

Rs. 30 per kg and that of N is Rs. 70 per kg.
Required: 10
Find out the optimal combination of raw materials P and N in one sack which
makes the product cost minimum. Use revised simplex method.
Answer:
a)
i) Work package schedule
Critical path and estimated work package duration:

Since Path (A-K-L-M-N) has the longest duration of 31 weeks (19+3+4+5= 31), it is
the critical path and duration along this path; i.e. 31 weeks is the estimated package
duration.
ii) The activities that can be crashed and the first part of the crash sequence are shown in
the table below. It should be noted that activity A–K is originally on the critical path
but the overall duration running through A–K is only 3 weeks longer than the parallel
route A–B, B–E, E–F, F–K. In other words, A–K may be crashed but only by a
maximum of 3 weeks. At 3 weeks, a second critical path is formed and, if any further
crashing of A–K is required, it must be done in parallel with A–B, B–E, E–F or F–K.
Activity A–K is actually the fourth cheapest crash option as shown in the table below.
Initially, there are only 4 critical activities A–K, K–L, L–M and M–N.
Activity Normal Normal Crashed Crashed Crash Crash
duration cost (Rs.) duration cost (Rs.) cost/ week sequence
(week) (week) (Rs.)
A-B 4 20,000 3 50,000 30,000
A-K 19 250,000 14 375,000 25,000 4
B-C 3 35,000 2 70,000 35,000
B-E 3 40,000 2 75,000 35,000
C-H 2 10,000 1 50,000 40,000
E-F 4 40,000 3 60,000 20,000
F-K 5 50,000 3 85,000 17,500
I-J 3 30,000 2 100,000 70,000
J-L 2 15,000 1 45,000 30,000
K-L 3 20,000 2 40,000 20,000 3
L-M 4 30,000 3 35,000 5,000 1
M-N 5 100,000 4 110,000 10,000 2
This crash sequence can only save a maximum of 8 weeks.

a. Crash L–M.
Work package duration falls from 31 to 30 weeks. Work package cost increases
by Rs. 5,000.
b. Crash M–N.
Work package duration falls from 30 to 29 weeks.
Work package cost increases by Rs. 10,000.
Cumulative work package cost increases by Rs. 15,000.
c. Crash K–L.
d. Crash A–K by 3 weeks.
There are now 2 critical paths.
Critical path 1: A–K, K–L, L–M, M–N.
On this path, activities K–L, L–M and M–N have already been fully crashed and
activity A–K has been crashed 3 weeks out of a maximum available of 5 weeks.
The only further crash available on this path is, therefore, A–K with a maximum
of 2 weeks.
Critical path 2: A–B, B–E, E–F, F–K, K–L, L–M, M–N.
On this path, activities K–L, L–M and M–N have already been fully crashed. The
cost of crashing the remaining activities is as follows.
A–B: 1 week available @ Rs. 30,000/week.
B–E: 1 week available @ Rs. 35,000/week.
E–F: 1 week available @ Rs. 20,000/week.
F–K: 2 weeks available @ Rs. 17,500/week.
The cheapest option, therefore, is to crash A–K by the final 2 weeks available plus
F–K by 2 weeks.
Crash A–K by 2 weeks and crash F–K by 2 weeks.
Work package cost increases by Rs. 50,000 (A–K) plus Rs. 35,000 (F–K) =
85 000.
Cumulative work package cost increases by Rs. 195,000. (Total incremental cost
of crashing)
The revised critical paths are:
Critical path 1: A–K, K–L, L–M, M–N
Critical path 2: A–B, B–E, E–F, F–K, K–L, L–M, M–N
with work package duration of 23 weeks.
b) Let a and b be the quantity of raw materials P and N respectively that has to be combined.
Now,
Objective function,
Min C = 30a + 70b
Subject to,
a + b = 50……..(i)
a ≥ 20 …………(ii)
b ≤ 40 …………(iii)
a, b ≥ 0
Changing inequality constraint (ii) as:
a = (20 + c) …………(iv) and c = 0 (by replacing value of a in (ii))
Substituting the value of a we get:
Min C = 30 (20+c) + 70b

Or, Min C = 600 + 30c +70b

Or, Min C' = 70b + 30c where, C' = C – 600
Subject to,
20 + c + b = 50
or, b + c = 30
b ≤ 40
b, c ≥ 0
Introducing slack variable S and artificial variable A,
Min C' = 70b + 30c + 0S – 100A
Subject to,
b + c + A = 30
b + S = 40
b, c, S, A ≥ 0
Now, re-writing the equation,
C' – 70b – 30c – 0S + 100A = 0
0C' + b + c + 0S + A = 30
0C' + b + 0c + S + 0A = 40
Fitting in simplex table,
Simplex Table 1
Table 1 C' b c S A Constant Ratio
Row 0 1 -70 -30 0 100 0 -
Row 1 0 1 1 0 1 30 30/1 = 30
Row 2 0 1 0 1 0 40 40/1 = 40
Key column is b with highest negative value -70 in R0.
Key row is R1 with minimum ratio of 30.
Key element is 1; i.e. the value at the intersection of key column and key row.
Replacing value for key row (R1) is to be calculated by dividing the value of key row for
Table 1 by key element:
New R1: 0/1, 1/1, 1/1, 0/1, 1/1, 30/1
: 0, 1, 1, 0, 1, 30
Replacing value for other remaining row is calculated using the following formula:
Replacing value = Element of old row – (intersecting element of old row with key
column x corresponding element of replacing row)
Replacing value for R0
Old R0 1 -70 -30 0 100 0
Intersecting element -70 -70 -70 -70 -70 -70
Element of replacing row 0 1 1 0 1 30
New R0 1 0 40 0 170 2100
Replacing value for R2
Old R2 0 1 0 1 0 40
Intersecting element 1 1 1 1 1 1
Element of replacing row 0 1 1 0 1 30
New R2 0 0 -1 1 -1 10
Simplex Table 2
Table 1 C' b c S A Constant
Row 0 1 0 40 0 170 2100
Row 1 0 1 1 0 1 30
Row 2 0 0 -1 1 -1 10
Since all the element in index row R0≥0, the above simplex table 2 gives optimum
solution as:

Basic solution:
1 0 0 C' 2100
0 1 0 b = 30
0 0 1 S 10
As calculated above, when c = 0, a = 20
Min C' = 2100 and
C = 2100 + 600 = 2700 (i.e. total cost Rs. 2,700)
a = 20 (i.e. total input of P is 20 kgs)
b = 30 (i.e. total input of N is 30 kgs)
4.
a) A transport company has a fleet of three trucks of 10 tons capacity each plying in
different directions for transport of customer’s goods. The trucks run loaded with
goods and return empty. The distance travelled, number of trips made and the
load carried per day by day each truck are as under:
Truck One way distance No. of trips per day Load carried per trip/
no. km. day tons
1 16 4 6
2 40 2 9
3 30 3 8
The analysis of maintenance cost and the total distance travelled during the last
two years is as under:
Year Total distance travelled Maintenance cost (Rs.)
1 160,200 460,500
2 156,700 451,750
The following are the details of expenses for the year under review:
Diesel: Rs. 100 per liter. Each liter gives 4 km. per liter of diesel on an average
Driver’s salary: Rs. 20,000 per month
License and taxes: Rs. 50,000 per annum per truck
Insurance: Rs. 50,000 per annum for all the three vehicles
Purchase price per truck: Rs. 3,000,000 life 10 years. Scrap value at the end of life
is Rs. 100,000.
Oil and sundries: Rs. 250 per 100 km. run
General Overhead: Rs. 110,840 per annum
The vehicle is operated 24 days per month on an average.
Required: 8
i) Prepare an annual cost statement covering the fleet of three vehicles.
ii) Calculate the cost per km. run.
iii) Determine the freight rate per ton km. to yield a profit of 10% on freight.
b) An engine manufacturing company has two production departments:
1. Snowmobile engine
2. Boat engine
And, two service departments:
1. Maintenance
2. Factory office

Budgeted cost data and relevant cost are as follows:

Department costs: Rs.
Snowmobile engine 1,200,000
Boat engine 3,400,000
Factory office 600,000
Maintenance 480,000
Cost drivers:
Factory office department: No. of employees
Snowmobile engine department 2,160
Boat engine department 540
Maintenance department 300
Total Employees 3,000
Maintenance department: No. of work orders
Snowmobile engine department 1,140
Boat engine department 380
Factory office department 80
Total orders 1,600
Required: 7
Compute the cost driver allocation percentage and then use those percentages to
allocate the service department costs by using i) direct method ii) non-reciprocal
method/step method.
Answer:
a)
i)
Annual Cost Statement of three Vehicles
Particulars Rs.
A. Diesel [(134,784 kms/4km) x Rs. 100] 33,69,600
B. Oil and sundries [(134,784 kms/100 kms)x Rs. 250] 3,36,960
C. Maintenance [(134784 kms x Rs 2.50) + Rs 60,000] 3,96,960
D. Driver’s salary [Rs. 20000 x 12 months) x 3 trucks] 7,20,000
E. License and taxes 1,50,000
F. Insurance 50,000
G. Depreciation [(Rs. 29,00,000/10 years)x 3 trucks] 8,70,000
H. General overhead 1,10,840
I. Total annual cost 60,04,360
ii) Cost per kilometer run
= Total annual cost of vehicles / Total kilometer travelled annually
= 60,04,360 / 134,784 = Rs 44.54
iii) Freight rate per ton km (to yield a profit of 10% on freight)
Cost per ton km.
= Total annual cost of three vehicles / Total effective ton kms. per annum
= 60,04,360 / 525,312 = Rs 11.43
Freight rate per ton km [Rs. 11.43 x 10/9] = Rs. 12.70
Working notes:
i) Total km travelled & tons km (load carried) by three trucks in one year.
Truck One way No. of Total Load carried Total
number distance in trips distance per day/trip effective
kms covered in in tons tons km.
km. per day
1 16 4 128 6 384

2 40 2 160 9 720
3 30 3 180 8 720
Total 468 1824
Total kilometers travelled by three trucks in one year =134,784
(468 kms x 24 days x 12 months)
Total effective tons kilometer of load carried by three trucks during one year = 525,312
(1824 tons km x 24 days x 12 months)
ii) Fixed and variable component of maintenance cost:
Variable maintenance cost per KM
Difference in maintenance cost / Difference in distance travelled
= (460,500 - 451,750) / (160,200 – 156,700) = Rs 2.50
Fixed maintenance cost = Total maintenance cost – Variable maintenance cost
= Rs 460,500 – 160,200 km x 2.5 = Rs 60,000.
b)
i) Calculation of cost driver allocation percentage using direct method:
Factory office dept. Number of employees Percent used
Snowmobile engine 2,160 80%
Boat engine 540 20%
Total 2,700 100%
Maintenance dept. Number of work orders
Boat engine 380 25%
Total 1,520 100%
Charging of service Department cost
Particulars Factory Maintenance Snowmobile Boat Engine
office Dept. Dept. Dept. (Rs) (Rs)
(Rs) (Rs)
Departmental Cost 6,00,000 480,000 12,00,000 34,00,000

Allocated costs (Rs):
Factory Office Dept.
Maintenance Dept.
(6,00,000) - 480,000 120,000
(480,000) 360,000 120,000
Total 0 0 20,40,000 36,40,000
ii) Calculation of cost allocation percentage using non-reciprocal method/step method:
Factory office dept. Number of employees Percent used
Boat engine 540 18%
Maintenance dept. 300 10%
3000 100%
Maintenance dept Work order Percent used
Boat engine 380 25%
1,520 100%
Step 4: Charging service department costs
Particulars Factory office Maintenance Snowmobile Boat engine
Dept. (Rs.) Dept. (Rs.) engine (Rs.) (Rs.)
Departmental costs 600,000 480,000 12,00,000 34,00,000
a) Factory office (600,000) 60,000 4,32,000 1,08,000

b) Maintenance Dept. - (540,000) 4,05,000 1,35,000

Total cost 0 0 20,37,000 36,43,000
5. Write short notes/Distinguish between: (5×3=15)

a) Facility sustaining cost
b) The Taguchi Quality Loss Function
c) Customer costing in service sector
d) Total productive efficiency
e) Components of quality management system
Answer:
a) Facility-sustaining costs are the costs of activities that cannot be traced to individual
products or services but that support the organization as a whole. For example, the
general administration costs (including top management compensation, rent, and building
security) are facility-sustaining costs. It is usually difficult to find a good cause-and-
effect relationship between these costs and the cost-allocation base. This lack of a cause-
and-effect relationship causes some companies not to allocate these costs to products and
instead to deduct them as a separate lump-sum amount from operating income. Some
companies allocate facility-sustaining costs to products on some basis—for example,
direct manufacturing labor-hours. Allocating all costs to products or services becomes
important when management wants to set selling prices on the basis of an amount of cost
that includes all costs.
b) The traditional zero defects definition assumes that hidden quality costs exist only for
units that fall outside the upper and lower specification limits of products. The Taguchi
loss function assumes that any variation from the target value of a quality characteristic
causes hidden quality costs. Furthermore, the hidden quality costs increase quadratically
as the actual value deviates from the target value. The Taguchi quality loss function can
be described by the following equation:
L(y) = k(y - T)2
where
k = A proportionality constant dependent upon the organization’s external failure cost
structure
y = Actual value of quality characteristic
T = Target value of quality characteristic
L = Quality loss
To apply the Taguchi loss function, k must be estimated. The value for k is computed by
dividing the estimated cost at one of the specification limits by the squared deviation of
the limit from the target value:
k = c/d2
where
c = Loss at the lower or upper specification limit
d = Distance of limit from target value
c) The customer costing is new approach in management accounting. It aims to satisfy

customers by categorizing and profiling them. In service sector, the specific output may
be difficult to identify and quantify. Also, there are various types of customers and
identifying their specific service requirement and segregation of common cost over them
may become problematic. In these cases, the customer costing is very helpful. Customer
costing, through the help of ABC analysis, attempts to profile the customer and
segregates the common cost required to deliver the service. The activities to serve
customers are identified and common costs are charged to each category of customers

according to cost required to serve them. Then it determines the specific customer
profitability. Thus it provides valuable information in pricing the customer.
d) Productivity is concerned with producing output efficiently, and it specifically addresses

the relationship of output and the inputs used to produce the output. Usually, different
combinations or mixes of inputs can be used to produce a given level of output. Total
productive efficiency is the point at which two conditions are satisfied: (1) for any mix of
inputs that will produce a given output, no more of any one input is used than necessary
to produce the output and (2) given the mixes that satisfy the first condition, the least
costly mix is chosen. The first condition is driven by technical relationships and,
therefore, is referred to as technical efficiency. Viewing activities as inputs, the first
condition requires the elimination of all non-value-added activities and requires that
value-added activities be performed with the minimal quantities needed to produce the
given output. The second condition is driven by relative input price relationships and,
therefore, is referred to as allocative efficiency. Input prices determine the relative
proportions of each input that should be used. Deviation from these fixed proportions
creates allocative inefficiency.
e) The components of quality management system are:

 Quality policy – where the main aims of the quality management system are defined.
The policy is usually defined in terms of the strategic aims and objectives of the
organization.
 Quality objectives – where the policy is broken down into separate achievable
objectives which act as work packages in terms of the policy. The objectives are
usually set in specific terms that relate to specific sections of the company.
 Quality assurance – where the system establishes some kind of target performance
values that can subsequently be assessed.
 Quality control – where the quality targets are compared to the actual performance
figures and any quality variances are isolated. Where this quality variance exceeds a
pre-set performance standard, an alarm bell rings and appropriate corrective action is
initiated.
 Quality audit –where there is some kind of internal and external review of the quality
management system to ensure that it is measuring what it is intended to measure and
that the standard it is achieving is compatible with the requirements of the company.
 Quality plan and review – where project management tools and techniques are used to
plan and implement the quality management system and then monitor and control its
performance in the long term.
6.
a) Lotus Manufacturing Industry uses a back flush costing system with three trigger
points:
 Purchase of direct materials
 Completion of good finished units of product
 Sale of finished goods
There are no beginning inventories. Information for Shrawan 2075 is as follows:
Direct materials purchased Rs. 880,000 Conversion costs allocated Rs. 400,000
Direct materials used Rs. 850,000 Costs transferred to finished goods
Rs.1,250,000
Conversion costs incurred Rs. 422,000 Cost of goods sold Rs. 1,190,000

Required: (4+1=5)
i) Prepare journal entries for Shrawan 2075 (without disposing of under-
allocated or over-allocated conversion costs). Assume there are no direct
materials variances.
ii) Under an ideal JIT production system, how would the amounts in your journal
entries differ from the journal entries in requirement (i) above?
b) Machine Tools Ltd. (MTL) manufactures and sells 18,000 high-technology tools
each year. The variable and fixed costs of rework and repair are as follows:
Variable cost (Rs.) Fixed cost (Rs.) Total cost (Rs.)

Rework cost
per hour 790 1,150 1,940
Repair costs:
Customer support
cost per hour 350 550 900
Transportation cost
per load 3,500 1,150 4,650
Warranty repair cost
per hour 890 1,500 2,390
MTL’s current tools have a quality problem that causes variations in the
performance. Its engineers suggest changing a key component in each tool. The
new component will cost Rs. 700 more than the old one. In the next year,
however, MTL expects that with the new component it will (1) save 14,000 hours
of rework, (2) save 850 hours of customer support, (3) move 225 fewer loads, (4)
save 8,000 hours of warranty repairs, and (5) sell an additional 140 tools for a
total contribution margin of Rs. 16,800,000. MTL believes that even as it
improves quality, it will not be able to save any of the fixed costs of rework or
repair. It uses a one-year time horizon for this decision because it plans to
introduce a new tool at the end of the year.
Required: (3+2=5)
i) Should MTL change to the new component?
ii) Suppose the estimate of 140 additional tools sold is uncertain. What is the
minimum number of additional tools that MTL needs to sell to justify
adopting the new component?
Answer:
a)
i) Journal entries for Shrawan 2075:
1. Materials and In-Process Inventory Control A/c Dr. 880,000
To Accounts Payable Control A/c 880,000
(Being direct materials purchased)
2. Conversion Costs Control A/c Dr. 422,000
To Various Accounts (such as Wages Payable Control) A/c 422,000
(Being conversion cost incurred)
3. Finished Goods Control A/c Dr. 1,250,000
To Materials and In-Process Inventory Control A/c 850,000
To Conversion Costs Allocated A/c 400,000
(Being standard cost of finished goods completed)

4. Cost of Goods Sold A/c Dr. 1,190,000

To Finished Goods Control A/c 1,190,000
(Being standard cost of finished goods sold)
ii) Under an ideal JIT production system, if the manufacturing lead time per unit is very
short, there would be zero inventories at the end of each day. Entry (3) would be Rs.
1,190,000 finished goods production [to match finished goods sold in entry (4)], not
Rs. 1,250,000. If the marketing department could only sell goods costing Rs.
1,190,000, the JIT production system would call for direct materials purchases and
conversion costs of lower than Rs. 880,000 and Rs. 422,000, respectively, in entries
(1) and (2).
b)
i) Relevant costs over the next year of changing to the new component = Rs. 700 × 18,000
=Rs.12,600,000
Relevant Benefits over the next year of choosing the new component:
Costs of quality items Rs.
Savings in rework costs (Rs. 790×14,000 hours) = 11,060,000
Savings in customer-support costs (Rs. 350×850 hours) = 297,500
Savings in transportation costs (Rs. 3,500×225 loads) = 787,500
Savings in warranty repair costs (Rs. 890×8,000 hours) = 7,120,000
Incremental savings in rework and repair = 19,265,000
Opportunity costs
Contribution margin from increased sales = 16,800,000
Total cost savings and additional contribution margin = 36,065,000
Because the expected relevant benefits of Rs. 36,065,000 exceed the expected
relevant costs of the new component of Rs. 12,600,000, MTL should introduce the
new component.
ii) The incremental cost of the new component of Rs. 12,600,000 is less than the
incremental savings in rework and repair costs of Rs. 19,265,000. Thus, it is
beneficial for MTL to invest in the new component even without making any
additional sales.


Batch: -June 2019
Level: - CAP-III
Paper VII: Advanced Cost and Management Accounting
Question No. 1
Almost all the students attempted this question. Some of the students showed the lack of
understanding in relevant costs vs variable costs.
Question No. 2
(a) Most of the students have attempted it. Even minor mistakes in the answer have caused
for less number.
(b) Most of the students have left this question. Some of them have taken short cut approach
to solve the question.
Question No. 3
(a) Well Attempted by students.
(b) Lack of practice and lack of conceptual understanding was observed however the
question was also quite tough.
Question No. 4
Students were lacking clear understanding on calculating variable and fixed cost.
Question No. 5
Majority of the students have tried to answer the question in general terms. Very few have
attempted part (b). Also, the selection of topic for question is from the chapter that is not studied
by students in general. However, students are required to prepare whole syllabus for exam.
Question No. 6
(a) Most of the students were lacking conceptual knowledge of back flush costing and failed to
prepare journal entries with reference to three trigger point.
(b) Well attempted and solved by most of the students.

Paper 8: Strategic Management and Decision Making Analysis
CAP III Paper 8: Strategic Management and Decision Making Analysis
Marks

1. Read the following and answer the questions accordingly:

Dristi Publication was established in 2010 with an initial capital of NPR 1 billion with
the vision of 'Connecting People with Knowledge'. Currently, its capital is around
NPR 50 billion with over 150 full time employees working throughout the country.
Now, it publishes over 550 books which range from school to college level covering
almost all the universities.
Initially, it was solely involved in publishing books on accounts and finance. Later, it
was involved in publishing other books on management for Plus Two and Bachelor
levels. By 2012, it also started publishing question bank and exam solution manuals
and some books on science. By 2013, it started publishing books of school levels. It
has also published few books on literature and politics. However, it has not published
any book on education and humanities. The market of Distri Publication has spread
throughout the country.
The publication has been managed with simple structure since its inception. The
managing director is the owner who directs and controls all the activities. The
delegation of authority and responsibility is very poor. Some of the family members
are also involved in the operations of the publication with no defined position. The
publication has outsourced both distribution and production facilities. Marketing is
done by its full time staff in different regions of the country.
The books of the publication have premium price. However, it has been able to attract
the readers due to consistency in quality. The publication believes that the readers are
ready to pay certain extra amount for quality.
The writers are found satisfied with the royalty they get. However, some of them
comment transparency is poor. The publication emphasizes standardized way of
writing books. Some writers view this has hindered their creativity. Employee
turnover is lower compared to other publications. Salary and other benefits for the
employees are good. Like other publications, career development opportunities to the
employees seem poor. It is seen that books are mostly prescribed both in schools and
colleges based on faculty recommendation and personal relationship rather than
quality of text.
There is no official data about the number of publication house in Nepal for school
and college levels. Approximately, it exceeds fifty. There are no much legal
formalities and administrative works for the establishment of publication in Nepal.
Over the years, competition among the publishing houses is getting severe. The
publishing houses are more regulated for the school level by the Curriculum
Development Centre. Copyright infringement is a major problem of publication
industry in Nepal. There is news that corporate sectors are also interested in
publication business.
Currently, it is constructing a high tech building for its central office. The massive
growth of the publication inspires the owner to open school and college in near
future.

Questions:
a) What business strategy is adopted by Dristi Publication? Justify your answer. You
are also required to analyze the industry environment using Porter’s Five Force
Model. (3+7=10)
b) What type of organizational structure is followed by the organization? Describe.
Is it suitable for the publication? Justify. If not which structure do you suggest? (4+6=10)
Answer
1 a) Dristi Publication has adopted differentiation strategy for its business growth. It is an
integrated set of actions taken to produce goods that customers perceive as being different in
ways that are important to them.
According to Porter, an industry environment is composed of the threat of new entrants,
power of suppliers, power of buyers, threat of product substitutes, and rivalry among
competitors. The interactions among these five factors determine an industry’s profit
potential that eventually determines the strategic options of the firms. The industry
environment of Dristi Publication is presented below.
Components Degree Reasons
Threats of new High Low legal and administrative formalities
entrants Less regulated sector
Comparatively lower cost of
establishment
Buyers’ power High Large number of publishing house allows
the customer more choices making them
more powerful
Suppliers’ Moderate Distributors, printing press and book
power writers can be managed reasonably.
Threats of High Paper books may be replaced by e-books.
substitute Online blogs and notes may also replace
paper books.
Competitive High Presence of large number of publications.
rivalry
The industry environment of Dristi Publication is competitive based on the above analysis.
1 b) The publication has followed simple structure. Initially, this structure was suitable for the
publication. Under this structure, the owner makes all major decisions. He/she monitors all
activities. The employees serve as the assistants of the manager. It is characterized by
informal relationships, few rules, limited task specialization, and informal information
systems. Coordination is relatively high due to frequent and informal communications
between the manager and employees.
With the increase in size and products, the simple structure is not suitable for the publication
as it may not be able to cope up with the environmental and organizational complexity. With
the growth and success, the publication may have to change its actions and strategy which

demands new structure. Hence, divisional structure may be suitable for the publication. It
consists of a corporate office and operating divisions which represents a separate business or
profit centre. The responsibilities for day-to-day operations are delegated to divisional
managers. The publication can divide the organization in different divisions based on
disciplines such as science division, management division or School division, Plus Two
division and University division. Each functional division can address the environmental
dynamism. It encourages the management to concentrate on the business and functional
strategy.
2.
a) Briefly explain strategic planning as component of strategic management. 10
b) What is BCG Matrix? How does BCG Matrix help in strategic choice decision? (3+7=10)
Answer
2 a) Strategic management consists of several components as planning, implementation, and
control. Strategic planning is explained below:
Strategic planning is the process of determining the basic objectives of an organization and
deciding the strategies and policies to achieve these objectives. It is the formulation of
future direction aimed to achieve strategic advantages of a company coping up with its
environment. It is concerned with appraising the environment in relation to the company,
identifying the strategies to obtain sanction for one of the best alternatives. Therefore, it is
the framework within which future activities of the organization are expected to be carried
out.
Strategic planning comprises the following features:
1. Strategic planning concerns with appraisal of environments to identify opportunities
and threats of a company.
2. Strategic planning also concerns with appraisal of company strength and weakness. So,
it is the appraisal of strength and weakness, opportunity and threats (SWOT).
3. Strategic planning guides the choice among the broad directions in which the company
seeks to move.
4. Strategic planning helps to identify strategic alternatives and selection of the best
alternatives with the best interest of company and personal value of top management.
5. Strategic planning precedes the operational planning.
6. Strategic planning is prepared by top management and other expertise staff related to
planning in the organization.
Strategic planning consists of following steps :
a. Environmental analysis : Under environmental analysis, environmental factors are
observed and analyzed. From internal environmental analysis, strengths and weaknesses
are examined while from analysis of external environment, threats and opportunities are
estimated. This means, SWOT (strengths, weaknesses, opportunities and threats) analysis
is conducted through environmental analysis.
b. Strategy formulation and choice: Different strategic alternatives are formulated after
the environmental analysis. After formulating different alternative strategies, they need to

be analyzed and right strategy should be selected. While evaluating the strategies,
strategy managers must consider suitability, acceptability and feasibility.
From all these explanation, it is clear that strategic planning is the beginning stage of
strategic management. In order to practice the strategic management in an organization,
strategic planning is first and foremost component.
2 b) Portfolio analysis is the approach of analyzing product lines and business units as a series of
investments from which it expects a profitable return. From a portfolio analysis, the top
management constantly judges to ensure the best return on the corporations invested money.
For effectiveness of the strategy, portfolio analysis can be done. BCG is one of the most
popular portfolio analysis in strategy.
Boston Consulting Group (BCG) is one of the most popular matrix method of analyzing the
strategic options for choosing the best one. Under BCG, options are evaluated under two
situational variables i.e. market share and the market growth potential. The market growth
rate (percentage growth in overall sales) is the projected rate of sales growth for the market
to be served by a particular business. Market share (relative competitive position) is usually
expressed as the ratio of a business's market share divided by the market share of the largest
competitor in that market. Thus, relative competitive position provides a basis for
comparing the relative strengths of different businesses.
Y
(High) 100%
Stars Question Marks

Market Growth Rate
? ? ?
50%
Cash Cows Dogs
  
(Low)
0% X
High Market Share Low
Stars : Star is the condition of any business organizations having high market share with a
high market growth potentiality. In such condition, organizations grow rapidly and can
do their best for long-run opportunities in terms of growth and profitability in the
organization’s portfolio. Organizations in such situation become leaders in their
industry and generate large amount of cash. They require substantial investment to
maintain and expand their dominant position in a growing market. The investment
requirement often exceeds the internal cash generation.
Cash Cows : Cash cows are the situation in which organizations face low-growth but high
market-share of the products or divisions. Because of their high market share, they
have low costs operations and easily generate more cash. Since market growth
potentiality is slow, therefore, organizations need to reinvestment less or not. Cash

cows provide funds for overhead, dividends and investment for the rest of the firm and
are in excess of their needs. Therefore, these businesses serve as a source of corporate
resources for deployment elsewhere (to stars and question marks) and are managed to
maintain their strong market share while efficiently generating excess. They are the
foundation of the firm, and stability is the appropriate strategy for them. Business
organization can chose the diversification, retrenchment and even divestiture
depending upon the condition and number of competitors in the industry.
Dogs: Businesses are defined as dogs, in which the growth rate is slow and the relative
market share is low compared to the leading competitors. Because of their low market
share, these businesses are often expected to have a higher cost structure than industry
leaders. It is difficult and extremely expensive for them to gain share in a mature
market. Divestment and rapid harvesting are the recommended strategies for such
weak businesses.
Question Marks: Question marks are the situations of business organizations with high
market growth potentiality but low market share of products or divisions. Such
businesses can improve their strength as there is growth potentiality, otherwise
become dogs. They need to increase market share by generating lower cost operation.
Primary objective of such businesses should be to gain market share rather than
maximize short-term profitability. So, questions marks should be converted into stars
then later into cash cows.
3.
a) What is project life cycle? Explain its different stages. (3+7=10)
b) Explain different attributes of project managers. 10
Answer
3 a)
The project life cycle refers to a logical sequence of activities to accomplish the projects
goals or objectives. Every project has a fixed life span and it is divided into phases. The
phases are collectively known as project life cycle.
The following are the different stages of project life cycle.
1. Initiation/Formation or conception phase: It is the first phase of project. The conception
takes place with the creative ideas through the situation survey, external sources and internal
sources. A series of managerial activities and actions are carried out in the initiation phase. It
consists of;
 Determination of the need of project
 Goal establishment
 Estimation of resources the organization can commit
 Sell the organization on the need for a project organization
 Make key personnel appointments
2. Project planning and design: This phase includes the planning of all the elements of the
project to be ready for implementation. This phase of project life cycle involves;
 Plans resource utilization

 Prepares detailed plans and estimates for time, cost and quality
In this phase appraisal and detailed designing are performed.
3. Project execution and control: This phase is about implementing the project. It is more
concerned in getting things done through and with people. It basically, focuses on design,
construction, production etc related to the project. Here performance standard are set, actual
performance are measured and compared with standard so that deviation can be identified
and corrected.
4. Project closure: It is considered as the last phase of project life cycle. Also called
termination phase here the project is completed and handover to the customer is carried out.
The basic managerial tasks in this phase are to train functional personnel, transfer materials,
transfer responsibility, relines resources, reassign project team members etc.
3 b) Effective project manager is one who effectively leads the project team so that project
objectives can be attained at the right time. Project managers, in general, possess the
following attributes:
1. Effective communication skills : Project manager is to set project goals, set work plan,
member’s task, responsibilities, expectation and feedback and communicate these things
to project team members as well as other stakeholders. Thus, managers must be a
good communicator so that they can connect with people at all levels.
2. Strong leadership skills : Effective project management should have strong leadership
qualities such as motivating the team member, supervising, leading and controlling the
team activities and drive them to maximum performance.
3. Sound decision maker : An effective project manager needs to make decision-making in
several issues. S/he should have special skills of making decisions for effectiveness and
efficiency.
4. Technical expertise : An effective project manager needs to have sound technical
knowledge to understand the issues that are related to the technical aspect. Knowledge of
theory as well as the technical side can greatly help manager in taking strategic initiatives
when needed.
5. Inspires a shared vision : An effective project manager should to articulate the team
vision to members effectively. A visionary person can lead his people to the right
direction as well as easily adapt to the changes that come in the way.
6. Good negotiation skills : One of the qualities needed for effective project management is
the ability to negotiate. In times that conflict arise due to differences in opinion, project
managers need sheer negotiating skills to settle the issue and maintain harmony in the
team.
7. Empathetic : Understanding and caring for people as well as being grateful for their help
are a few of the things that an empathetic leader shows to his members. It includes
understanding the needs of the project and its stakeholders.
4.
a) Explain the role of CEO in strategy management. 8
b) Explain functional organizational structure essential for effective strategic
implementation. 7

Answer
4 a) Chief Executive Officer (CEO) is the person responsible for strategic formulation and
implementation. The CEO has to perform the roles of strategist, organizational builder,
and a leader. Though, the board of director and members of top management play an
important role, the strategic responsibility still lies with the CEO. As strategy
formulation, CEO plays following vital roles.
i. CEO as a designer of strategy: CEO is a designer of organizational strategy. S/he
analyzes the business environment minutely and sets the long term action plan. To
accomplish this role, CEO requires analytical ability, creativity, self-awareness and
sensitivity to society’s expectations.
ii. CEO as mediator and negotiator: CEO is senior authority of the organization who
deals with the conflict emerged among organizational employees, and between the
business organizations. S/he should be responsible to make climate for trust, cooperation,
individual development, member’s commitment to the organizational purpose, and
efficiency turn the strategy into end result.
iii. CEO as a personal leader: CEO must examine own characteristic behavior to try to
see whether it meets or complicates the needs of his own organization or it directs or
distracts the attention given by followers to organizational goals. They control people by
their behavior and lead the strategy formulation process.
iv. CEO as a resource allocator: CEO plans and allocates resources for effective
implementation of strategies formulated in order to accomplish the goal. One of the
strong parts of strategic management is the best fit between organizational resources to
the environmental opportunities.
v. CEO as strategic control: CEO should regularly evaluate and take initiation to
attain the organizational goals. S/he monitors, analyzes and selects course of action to
lead the organizational success. Timely and systematic approach of the strategic control
helps to achieve the goals. During this course of action, CEO may require to restructure
the organization and they do.
4 b) For effective implementation of the strategy, organizational structure is the prerequisite.

Different organizational structures need to formulate based on size and the nature of the
business. Functional structure consists of the chief executive officer and a limited corporate
staff, with functional line managers for main functional areas i.e. production, accounting,
marketing, R&D, Finance and Human Resources as shown below :
CEO
Production Marketing Accounting and R&D and Engineering

Department Department Finance Department Department
Following table summarizes advantages and disadvantages of functional organizational

structure.
Advantages Disadvantages
 Fixed authority and  Coordination between the

responsibility department is difficult

 Group of specialist in top level  Overburden to chief executives,
and middle level management limits internal development of
 Simplified control/direct general managers
supervision  Encourage interdepartmental
 Simple communication and rivalry and conflict
decision net work  Difficult to cope with diversity
 Status to major functional areas  Functional rivalry or staff-line
 Efficiency through conflict
specialization.
 Improved development of
functional expertise.
 Differentiates and delegates day-
to-day operating decisions.
 Retains centralized control of
strategic decisions.

a) Elements of environment
b) Focus strategy
c) Unique resources
d) Strategic change
e) PERT and CPM
Answer
5 a) categories of environment: General environment and industry environment. General
environment consists of (a) Demographic environment (b) Economic environment (c)
Socio-cultural environment (d) Political/legal environment (e) Technological
environment (f) Natural environment. (Explain briefly)
Industry environment consists of i) Suppliers ii) Marketing intermediaries iii) Customers
iv) Competitors, v) Creditors vi) Financial institutions vii) Strategic allies & associations
viii) Special interest groups/pressure groups ix) Publics (media public, local community)
(Explain briefly)
5 b) The focus strategy is an attempt to produce goods or services that serve the needs of a
particular competitive segment. Thus, firms adopt this strategy when they utilize their core
competencies to serve the needs of a particular industry segment or a different segment of a
product line, and a different geographic market.
Through a focus strategy, firms can gain competitive advantage in specific market niches or
segments, even though they do not possess an industry-wide competitive advantage.
Focus strategy intends to serve a particular segment of an industry more effectively than the
competitors do. The companies with focus strategy get success when they understand the

unique needs of the segment and the competitors choose not to serve that segment. There are
two types of focus strategy.
 Focus low cost: It focuses on a particular segment with lower cost than the competitors.
Cost advantage is sought in a particular market.
 Focus differentiation: Focus differentiation attempts to serve a particular market with
unique products and services.
5 c) The resources that are critical for building core competency are called unique resources.
They are related to critical success factors. They are developed over a long period of time.
They enable an organization get opportunity and mitigate threats. Unique resources are
valuable, non-substitutable, costly to imitate and rare. They increase value on the product.
The following are some of the notable characteristics of unique resources.
a. Valuable: They are very important in the strategic positioning of an organization. They
add value on product and enhance customer satisfaction.
b. Non-substitutable: Unique resources cannot be replaced by other resources.
c. Costly to imitate: It is very difficult and costly to imitate unique resources. Hence, all
organizations may not be able to develop the unique resources.
d. Rare: Acquisition and development of unique resources are not easy since they are rare.
5 d) Business environment is dynamic in nature. Strategies are formulated and implemented to
cope with the environmental dynamism. They should be reviewed constantly to address the
dynamism. Strategic change involves changes in the content of a firm's strategy as defined
by its scope, resource deployments and, competitive advantages. Strategic drift demands
change in strategy. It occurs when the current strategy loses relevancy in terms of
addressing the environmental issues.
5 e) PERT denotes Program Evaluation and Review Technique. CPM denotes Critical Path
Method. Both of them are scheduling techniques that have been found useful in project
management.
PERT was developed by the U.S. Navy in cooperation with Booz Allen Hamilton and the
Lockheed Corporation. DuPont developed CPM. PERT has primarily been used for R&D
projects though its use is more common on the development side of R&D than it is on the
research side. CPM was designed for construction projects and has been generally embraced
by construction industry.
Originally, PERT was strictly oriented to the time element of projects and used probabilistic
activity time estimates to aid in determining the probability that a project could be
completed by some given date. CPM, on the other hand, used deterministic activity time
estimates and was designed to control both the time and cost aspects of a project.
6.
a) What is environment analysis? How does it relate to strategic management? 5
b) Describe the trend of strategic decision making practices widely prevalent in
Nepalese organizations. 5
Answer
6 a) Environmental analysis is a process by which strategists monitor the environment to
determine opportunities for and threats to their firm. The main objective of environment
analysis is to assess the likely opportunities and threats arising. An opportunity is a

condition in the general environment that if exploited effectively, helps a company achieve
its strategic competitiveness. On contrary, a threat may hinder a company’s efforts to
achieve its strategic competitiveness.
Strategic management emphasizes monitoring and evaluating of external opportunities and
threats in light of a firm's strengths and weaknesses. Hence, it is based on environmental
analysis. Each step requires analysis of the environment.
1. Strategic planning: Strategic planning is concerned with the formulation of strategy. It
begins with situation analysis: the process of finding a strategic fit between external
opportunities and internal strengths while working around external threats and internal
weaknesses.
2. Strategy implementation: Strategy implementation is related to translating the strategy
into action. It requires environmental analysis. The environment is analyzed to ensure
that existing resources and capabilities are able to deal with opportunities and threats.
During implementation phase, in some cases, the strategic plans are required to be
adjusted with the environmental changes.
3. Strategic control: Under this stage, the assumptions about the internal and external
environment in which the current strategy is based are reviewed and the actual
performance is measured. Necessary adjustments or changes are made in the strategy if
required.
4. Feedback: Under this, information is constantly gathered from the environment to
improve the process of strategic management.
Each and every steps of strategic management as mentioned above demand environmental
analysis. Hence, strategic management and environmental analysis are closely associated to
each other.
6 b) Strategic decision is guided by policies, available resources and the insights of the
strategists. It is normally about trying to achieve some advantage for the organization over
competitors and concerned with the scope of an organization's activities. It deals with
knowing organizational objective, resources availability, customers to be served and the
competitors to be faced; and preparing alternative strategies to select one of the most
appropriate.
The widespread trends of making strategic decisions in Nepal are;
1. Less focus on strategic issues: Nepalese organizations are found to give less priority for
developing organizational vision and mission as well as strategy for long-term survival.
2. Focus on short term benefits: Nepalese organizations mostly focus on short term
financial benefits at the expense of strategic goal. They tend to focus less on strategic
outcomes.
3. Lack of environmental analysis: Strategic decisions are based on intuitive approach of
the owner or manager. Environmental analysis is less emphasized.
4. Less attention on multi effects: A decision may affect may parts or units of an
organization. This is considered less by Nepalese organizations. As such, decisions may
be conflicting.


Batch: -June 2019
Level: - CAP-III
Paper VIII: Strategic Management & Decision Making Analysis
Question No. 1
Students found to be lacking clear knowledge about posters five forces model.
Question No. 2
Overall performance of the students found to be satisfactory. However, students should focus on
more study to write elaborative answer to the question.
Question No. 3
Overall performance of the students found to be satisfactory. Students should emphasize on
maintaining flow of answer
Question No. 4
Students have written very short description which was not sufficient to justify the answer to the
question.
Question No. 5
Most of the students found to have good understanding about given question.
Question No. 6
It was noticed that students were not consistent with the coverage of answers and even not
considered the marks allocated for the particular question.

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CHARTERED ACCOUNTANCY PROFESSIONAL III

The Institute of Chartered Accountants of Nepal

© The Institute of Chartered Accountants of Nepal 2

have a policy of measuring non-controlling interest at the proportionate share

Pre-acquisition profits (Shrawan 01, 2074) 112.50

b) A merger will only be worthwhile for a company that is committed to maximizing

© The Institute of Chartered Accountants of Nepal 4

© The Institute of Chartered Accountants of Nepal 5

Loss on revaluation of land and building 6 (10.00)

6 Land & Building Revaluation Land Building Total

© The Institute of Chartered Accountants of Nepal 7

recognized in OCI & remaining amount

© The Institute of Chartered Accountants of Nepal 8

© The Institute of Chartered Accountants of Nepal 9

Following information is relevant to the production of the segment information:

© The Institute of Chartered Accountants of Nepal 10

2078 648,000 0.68 440,640

b) Information about business segments: CG Group (Rs. in million)

Profit for the period 190

4. Write short notes on the following: (5×3=15)

© The Institute of Chartered Accountants of Nepal 12

c) Following are the limitations of value added statement:

© The Institute of Chartered Accountants of Nepal 13

e) Inflation accounting refers to the process of adjusting the financial statements of a

© The Institute of Chartered Accountants of Nepal 16

© The Institute of Chartered Accountants of Nepal 17

Specific Comments on the performance of the students

© The Institute of Chartered Accountants of Nepal 18

© The Institute of Chartered Accountants of Nepal 2

Calculation of cash inflows when M – 500 is purchased

© The Institute of Chartered Accountants of Nepal 3

Calculation of NPV of proposed alternatives:

Determination of forecasted Free Cash Flow to the Firm (FCFF)

© The Institute of Chartered Accountants of Nepal 5

c) Use of Future Contract

Thus EPS of Oxygen Ltd increses to Rs 3.44

© The Institute of Chartered Accountants of Nepal 9

b) A spinoff is the creation of an independent company through the sale or distribution of

© The Institute of Chartered Accountants of Nepal 10

© The Institute of Chartered Accountants of Nepal 11

© The Institute of Chartered Accountants of Nepal 12

Or, Rs 500 lakh = 0.806Y + 0.748Y + 0.693Y + 0.643Y + 0.596Y

© The Institute of Chartered Accountants of Nepal 14

 Rs 80.36  Rs 72.23  Rs 65.22

© The Institute of Chartered Accountants of Nepal 15

Specific Comments on the performance of the students

© The Institute of Chartered Accountants of Nepal 16

© The Institute of Chartered Accountants of Nepal 17

© The Institute of Chartered Accountants of Nepal 2

© The Institute of Chartered Accountants of Nepal 3

2. Answer the following:

© The Institute of Chartered Accountants of Nepal 4

Key movement register Possibility of financial Ensure that all movements of

System access to new System access not Provide access to core

© The Institute of Chartered Accountants of Nepal 5

System access provided Possibility of fraud as

One individual has Possibility of Financial Greater segregation of duties

Job rotation of the staff No job rotation of Human Resources

© The Institute of Chartered Accountants of Nepal 6

© The Institute of Chartered Accountants of Nepal 7

iii) Physically identification of non-current assets:

© The Institute of Chartered Accountants of Nepal 8

 Motor vehicles - vehicle registration or chassis number.