Suggested Answer Paper CAP III Dec 2019

CHARTERED ACCOUNTANCY PROFESSIONAL III
(CAP-III)
Suggested Answer Paper

December 2019
Education Department
The Institute of Chartered Accountants of Nepal
Suggested Answer Paper Group I
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Table of Contents
Group I
Paper 1: Advanced Financial Reporting ................................................................................................. 4

Paper 2: Advanced Financial Management .......................................................................................... 24
Paper 3: Advanced Audit and Assurance .............................................................................................. 42
Paper 4: Corporate Laws ....................................................................................................................... 56
Examiner’s Commentary on Students' Performance in December 2019 Examinations .............. 72

Paper 1: Advanced Financial Reporting

Attempt all questions. Working notes should form part of the answers.
1. AK Ltd., operates in Nepal and has investments in two other companies. The draft
statements of financial position of all three companies as at 31st Ashadh 2076 are as
follows:
Rs. In million
Assets: AK Ltd. BK Ltd. TK Ltd.
Non – current assets
Property plant and equipment 1,440 1,100 1,300
Investments in subsidiaries
BK Ltd. 1,250
TK Ltd. 310 1,270
Financial assets 320 21 141
Total non-current assets 3,320 2,391 1,441
Current assets 895 681 150
Total assets 4,215 3,072 1,591
Equity and liabilities:
Share capital 1,750 1,210 800
Retained earnings 1,240 930 350
Other components of equity 125 80 95
Total equity 3,115 2,220 1,245
Non-current liabilities 985 765 150
Current liabilities 115 87 196
Total liabilities 1,100 852 346
Total equity and liabilities 4,215 3,072 1,591
Additional Information:
a) On 1st Shrawan 2074, AK Ltd. acquired 14% of the equity interest of TK Ltd. for a cash
consideration of Rs. 260 million and BK Ltd. acquired 70% of the equity interest of TK
Ltd. for a cash consideration of Rs. 1,270 million. At 1st Shrawan 2074, the identifiable
net assets of TK Ltd. had a fair value of Rs. 990 million, retained earnings were Rs.
190 million and other components of equity were Rs. 52 million. At 1st Shrawan 2075,
the identifiable net assets of TK Ltd. had a fair value of Rs. 1,150 million, retained
earnings were Rs. 240 million and other components of equity were Rs. 70 million. The
excess in fair value is due to revaluation of non-depreciable land which has not been
accounted for and not changed till the reporting date. The fair value of the 14% holding
of AK Ltd. in TK Ltd., which was classified as fair value through profit or loss, was Rs.
280 million at 32nd Ashad 2075 and Rs. 310 million at 31st Ashadh 2076. However, the
fair value of BK Ltd’s interest in TK Ltd. had not changed since acquisition.
b) On 1st Shrawan 2075, AK Ltd. acquired 60% of the equity interests of BK Ltd. The cost
of investment comprised cash consideration of Rs. 1,250 million. On 1st Shrawan 2075,
the fair value of the identifiable net assets acquired was Rs. 1,950 million and retained
earnings of BK Ltd. were Rs. 650 million and other component of equity were Rs. 55
million. The excess in fair value is due to revaluation of non-depreciable land which
has not been accounted for and not changed till the reporting date. It is the group’s

policy to measure the non-controlling interest at acquisition at its proportionate share

of the fair value of the subsidiary’s net assets.
c) Goodwill of BK Ltd. and TK Ltd. were tested for impairment at 31st Ashadh 2076 and
found that there was no impairment relating to TK Ltd. However, the goodwill of BK
Ltd. was fully impaired by the reporting date.
d) On 1st Shrawan 2074, AK Ltd. acquired office accommodation at a cost of Rs. 90 million
with a 30 year estimated useful life. During the year, the property market in the area
slumped and the fair value of the accommodation fell to Rs. 75 million at 32nd Ashadh
2075 and this was reflected in the financial statements. However, the market
unexpectedly recovered quickly due to the announcement of major government
investment in the area’s transport infrastructure. On 31st Ashadh 2076, the professional
valuer advised AK Ltd. that the office accommodation should now be valued at Rs. 105
million. AK Ltd. has charged depreciation for the year but has not taken into account
of the upward valuation of the office accommodation. AK Ltd. uses the revaluation
model and records any valuation change when advised to do so.
e) AK Ltd. has announced two major restructuring plans during the year. The first plan
is to reduce its capacity by closure of some of its smaller factories, which have already
been identified. This will lead to the redundancy of 500 employees, who have all
individually been selected and communicated to. The costs of this plan are Rs. 9 million
in redundancy costs, Rs. 5 million in retraining costs and Rs. 5 million in lease
termination costs. The second plan is to re-organize the finance and information
technology department over a one-year period but it does not commence until two
years’ time. The plan will result in 20% of finance staff losing their jobs during the
restructuring. The costs of this plan are Rs. 10 million in redundancy costs, Rs. 6
million in retraining costs and Rs. 7 million in equipment lease termination costs. There
are no entries made in the financial statements for the above plans.
f) The following information relates to the group pension plan of AK Ltd.:
Rs. In million
1st Shrawan 31st Ashadh
2075 2076
Fair value of plan assets 28 29

Actuarial value of defined benefit obligation 30 35
The contributions for the period received by the fund were Rs. 2 million and the
employee benefits paid in the year amounted to Rs. 3 million. The discount rate to be
used in any calculation is 5%. The current service cost for the period based on
actuarial calculations is Rs. 1 million. The above figures have not been taken into
account for the year ended 31st Ashadh 2076 except for the contributions paid which
have been entered in cash and the defined benefit obligation.
Required: (20 marks)
Prepare the group consolidated statement of financial position of AK Ltd. as at 31st
Ashadh 2076 with the notes of any of the issues dealt in the question.
Answer:
AK Ltd.
Consolidated statement of financial position

as at 31 Ashadh 2076
Assets: Rs. Million
Non-current assets:
Property, plant and equipment [1,440 + 1,100 + 1,300 + 35 + 40 (W.N 2) +
32.6 (W.N 6)] 3,947.6
Goodwill (W3) 398
Financial assets (320 + 21 + 141) 482
4,827.6
Current assets (895 + 681 + 150) 1,726
Total assets 6,553.6
Equity and liabilities
Share Capital 1,750
Retained earnings (W5) 1,356.1
Other components of equity (W5) 170.1
3,276.2
Non-controlling interest (W4) 959.4
Total Equity 4,235.6
Total non-current liabilities [985 + 765 + 150 + 6 (W.N 8)] 1,906
Current liabilities [115 + 87 + 196 + 14 (W.N 7)] 412
Total liabilities 2,318
Total Equity and Liabilities 6,553.6
Workings:
W-1: Group structure

The group effective interest in TK Ltd is:
Direct interest 14%
Indirect interest or effective interest (60% X 70%) 42%
Group effective interest 56%
The NCI interest in TK Ltd. is therefore (100% - 56%) 44%
100%
Consolidation of BK Ltd.
Group 60%
NCI (100% - 60%) 40%
100%
The acquisition date of TK Ltd. is 1st Shrawan 2075 as this is when AK Ltd. gains control
over BK Ltd. and therefore indirect control over TK Ltd.
W-2: Net assets

Rs. In million
Post-
BK Ltd Acquisition date Reporting date
Acquisition
Share capital 1,210 1,210 -
Other components 55 80 25
Retained earnings 650 930 280

Fair value adjustment – Land

(balancing figure) 35 35 -
1,950 2,255 305
TK Ltd
Share capital 800 800 -
Other components 70 95 25
Retained earnings 240 350 110
Fair value adjustment – Land
(balancing figure) 40 40 -
1,150 1,285 135
Therefore, the post-acquisition profits of BK Ltd. is Rs. 305 million (Rs. 2,255 – Rs. 1,950)
and that of TK Ltd. is Rs. 135 million (Rs. 1,285 – 1,150).
W-3: Goodwill
The cost of TK Ltd. has three elements: the cost of the direct holding, the cost of the indirect
holding and the indirect holding adjustments.
BK Ltd.
Rs. Million
Fair value of consideration 1,250
NCI at acquisition (40% X Rs. 1,950) 780
Fair value of identifiable net assets acquired (W2) (1,950)
Goodwill at acquisition 80
Impairment 2075/76 (80)
Goodwill at reporting date (fully
impaired -
Alternative:
BK Ltd.
Rs. Million
Fair value of consideration 1,250
Group share of Fair value of identifiable net assets acquired (60% X 1,950) (1,170)
Goodwill at acquisition 80
Impairment (80)
Goodwill at reporting date -
TK Ltd.
Rs. Million
Fair value of consideration:

Direct holding (Fair value at date control obtained) 280
Indirect holding 1,270
indirect holding adjustment (40% X Rs. 1,270 million) (508)
NCI at acquisition (44% X Rs. 1,150 million) 506
Less fair value of identifiable net assets (W2) (1,150)

Goodwill at reporting date 398

AK investment in TK Ltd. was held at Rs. 310 million at the reporting date. Therefore, the
fair value increase of Rs. 30 million (Rs. 310 – Rs. 280) that has arisen since the date that
control was achieved must be removed from the consolidated statements. Retained
earnings must also be reduced by Rs. 30 million.
Alternative:
TK Ltd.
Rs. Million
Fair value of purchase consideration:
Direct holding 280
Indirect holding (60% X 1,270) 762
1,042
Less Group's share of fair value of identifiable net assets (56% X1,150) (644)
Alternative:
TK Ltd.
Rs. Million
Fair value of purchase consideration:
Direct holding 280
Indirect holding (60% X 1,270) 762
NCI at acquisition (44% X Rs. 1,150) 506
Less fair value of identifiable net assets (W2) (1,150)
W-4: Non-controlling interest

Rs. Million
NCI in BK Ltd. at acquisition (40% X Rs. 1,950) 780
Add: NCI % of post-acquisition net assets (40% X (Rs. 2,255 million -
Rs. 1,950 million)) 122
Indirect holding adjustment (40% X Rs. 1,270 million) (508)
NCI in TK Ltd. at acquisition 506
NCI in post-acquisition net assets (44% X (Rs. 1,285 - Rs.
1,150) 59.4
959.4
Alternative:
Rs. Million
NCI in BK Ltd's net assets at reporting date (40% X Rs. 2,255) 902
NCI in TK Ltd's net assets at reporting date (44% X Rs. 1,285) 565.4
NCI's share of investment in BK (40% X Rs.
1,270) (508)
959.4
W - 5: Retained earnings
Rs. Million

AK Ltd 1,240
BK Ltd.: 60% X (Rs. 930 million - Rs. 650 million
(W2)) 168
TK Ltd: 56% X (Rs. 350 million - Rs. 240 million
(W2)) 61.6
Gain on TK Ltd's investment (W3) (30)
Impairment of goodwill (W3) (80)
Reversal of impairment loss (W6) 11.6
Restructuring provision (W7) (14)
Pension plan (W8) (1.1)
1,356.10
Other components of equity

Rs. Million
AK Ltd. 125
BK Ltd.: 60% X (Rs. 80 million - Rs. 55 million (W2)) 15
TK Ltd: 56% X (Rs. 95 million - Rs. 70 million (W2)) 14
Revaluation gain (W6) 21
Pension plan re-measurement (W8) (4.9)
170.1
W - 6: The office
Rs. Million
Cost of office building (1.4.2074) 90
Depreciation (90/30 years) (2074/75) (3)
Carrying amount(32.03.2075) 87
Revaluation loss - Profit or loss (balancing figure) (12)
Fair value at 32nd Ashadh 2075 75
Depreciation (75/29 years) (2075/76) (2.6)
Carrying amount (31.03.2076) 72.4
Revaluation surplus – OCI (balancing figure) 32.6
Fair value at 31st Ashadh 2076 105
If no revaluation reserve exists for an item of PPE then a downwards revaluation is
recognized in the statement of profit or loss.
Some of this reversal can be recognized in profit or loss, but this is capped at the amount
needed to increase the asset to the value it would have been had no impairment occurred.
If no impairment had occurred, the asset would have been held at Rs. 84 million (Rs. 90
million – (2 X Rs. 3)). Therefore, the gain recorded in profit or loss is Rs 11.6 million (Rs.
84 million – 72.4 million). The remainder of the gain is recognized in other comprehensive
income.
The entries will be:
Dr property, plant and equipment Rs. 32.6 million

Cr profit or loss Rs. 11.6 million
Cr other comprehensive income Rs. 21 million

W – 7: provision for restructuring

Only those costs that result directly from and are necessarily entailed by a restructuring
may be included in a restructuring provision. This includes costs such as employee
redundancy costs or lease termination costs. Expenses that relate to ongoing activities, such
as relocation and retraining, are excluded.
With regard to the service reduction, a provision should be recognized for the redundancy
and lease termination costs of Rs. 14 million. The sites and details of the redundancy costs
have been identified.
In contrast, AK Ltd. should not recognize a provision for the finance and IT department’s
re-organisation. The re-organisation is not due to start for two years. Stakeholders outside
are unlikely to have a valid expectation that management is committed to the re-
organisation as the time frame allows significant opportunities for management to change
the details of the plan or even to decide not to proceed with it. In addition, the degree of
identification of the staff to lose their jobs is not sufficiently detailed to support the
recognizing of a redundancy provision.
W-8: pension plan
In order to calculate the re-measurement component, reconcile the opening and closing net
pension deficit. The re-measurement component is accounted for in other comprehensive
income.
The liability recognized in the financial statements will be Rs. 6 million (that is, Rs. 35
million – Rs. 29 million)
Rs. Million
Net obligation at 1st Shrawan 2075 (Rs. 30 million - Rs. 28
million) 2
Net interest component (Rs. 2 million X 5%) 0.1
Contributions (2)
Service cost component 1
Re-measurement loss (balancing figure) (4.9)
Net obligation at 31st Ashadh 2076 (35 - 29) 6
The service cost component and net interest component will be charged to profit or loss
(Rs. 1.1 million) and the re-measurement loss to Other Comprehensive Income (Rs. 4.9
million). There will be no adjustment for the contributions, which have already been taken
into account.
2.
a) DD Ltd. availed a lease. The terms of the lease are as under:
i) Lease period is 3 years, in the beginning of the year 2075/76, for equipment costing
Rs. 1,000,000 and has an expected useful life of 5 years.
ii) The fair market value is also Rs. 1,000,000.
iii) The property reverts back to the lessor on termination of the lease.

iv) The unguaranteed residual value is estimated at Rs. 100,000 at the end of the year
2077/78.
v) Three equal annual payments are made at the end of each year.
Consider IRR of 10% and the present value of annuity of Re. 1 due at the end of 3rd
year at 10% is Rs. 2.4868 and PV of 3rd year is 0.7513.
Required: (4+2+2+2=10 marks)
i) Calculate annual lease payment and state whether the lease constitute finance
lease.
ii) Calculate total unearned finance income and show Journal entries for recording
the lease instalments.
b) The following information is supplied to you by Sagarmatha Ltd.:
Amount (Rs.)
Equity Shares (Face value Rs. 10) 580,000
12% Preference Shares (Face value Rs. 10) 150,000
10% Debentures (Face value Rs. 10) 500,000
Term Debt (taken at 15%) 200,000
Financial Leverage 1.2
Securities Premium A/c 50,000
General Reserve 20,000
Statutory Reserve 60,000
Income Tax Rate 30%
The industry to which Sagarmatha Ltd. belongs to has a practice of paying at least 15%
dividend to its shareholders. The ordinary shares are quoted at a premium of 400%,
preference shares at Rs. 25 and debentures at a discount of 20%.
Required: (4+4+2=10 marks)
Calculate Economic Value Added (EVA) and Market Value Added (MVA) statements
of the company and also explain the reasons for the difference, if any between the two.
Answer:
a)
i) Computation of annual lease payment to the lessor
Rs.
Cost of equipment 1,000,000
Unguaranteed residual value 100,000
PV of residual value after third year @10% (100,000 x 75,130
0.7513)
Fair value to be recovered from lease payments 924,870
(1,000,000 - 75,130)
PV of annuity for three years is 2.4868
Annual lease payments = 924,870/2.4868 371,912

The PV of lease payment i.e. Rs. 924,870 equivalent to 92.48% of the fair value.
As the present value of minimum lease payments substantially covers the initial fair
value of the leased asset and lease term covers the major part of the life of asset, it
constitutes a finance lease.
ii) Computation of Unearned finance income
Rs.
Total lease payments (Rs. 371,912 x 3) 1,115,736
Add: Unguaranteed residual value 100,000
Gross investment in the lease 1,215,736
Less: PV of investment (Rs. 75,130 +924,870) (1,000,000)
Total Unearned finance income 215,735
Journal Entry
Assets under Lease A/C Dr. Rs. 10 Lakh
To Lease Payable A/C Rs. 10 Lakh
b)
Economic Value Added (EVA) statement
Amount(Rs.)
Profit after tax (W.N 1) 280,000
Add: interest (net of tax) (80,000 x 0.70) 56,000
Return to providers of fund 336,000
Less: cost of capital (W.N 3) (171,450)
Economic value added (EVA) 164,550
Market Value Added (MVA) statement
Amount Amount
(Rs.) (Rs.)
Equity share capital (market value) (58,000 x 10 x 500%) 2,900,000
Preference share capital (15,000x25) 375,000
Debentures (50,000 x 10x80%) 400,000
Current market value of firm 3,675,000
Less: Equity share capital 580,000
Preference share capital 150,000
Debentures 500,000
Long term loan 200,000
Securities premium 50,000
General reserve 20,000
Statutory reserve 60,000 (1,560,000)
Market value added (MVA) 2,115,000
The MVA of Rs. 2,115,000 is the difference between the current market value of
Sagarmatha Ltd. and the capital contributed by the fund providers. While EVA
measures current earning efficiency of the company, MVA takes into consideration the

EVA from not only the assets in place but also from the future projects/activities of the
company. The difference between MVA and EVA thus represents the value attributed
to the future potential for the company and may change from time to time based on
market sentiments. In short the MVA is the net present value of all future EVAs.
Working Notes:
1. Calculation of net profit after interest and tax
Interest on debentures (500,000 x 10%) 50,000

Interest on long term debt (200,000 x 15%) 30,000
Total interest 80,000
Financial leverage = 1.2 = PBIT / (PBIT – Interest)
PBIT 480,000
Less: Interest (80,000)
Profit after interest before tax 400,000
Less : 30% tax (120,000)
Profit after interest and tax 280,000
2. Calculation of weighted average cost of capital (WACC)
Amount Amount Weight Cost % WACC %

Equity shareholders fund
Equity shares 580,000
Security premium 50,000
General reserve 20,000 650,000 0.43 15 6.45
Preference share 150,000 0.10 12 1.20
Debentures 500,000 0.33 7* 2.31
Long term debt 200,000 0.14 10.5* 1.47
1500,000 11.43
*Rate of interest has been calculated net of tax.
3. Cost of capital = capital employed X WACC%
= 1500,000 x 11.43%
= 171,450
3.
a) The capital structure of XYZ Ltd. on 31st Ashadh 2076 was as follows:
Equity share capital (Rs. 100 each) (Rs.) 1,800,000
12% preference capital (Rs. 100 each) (Rs.) 500,000
12% secured debentures (Rs.) 500,000
Reserves (Rs.) 500,000
Profit earned before interest and taxes during the year(Rs.) 720,000
Tax rate 25%
Normal rate of return on equity shares of the industry 15%

Subject to;
i) The profit after tax covers fixed interest and fixed dividend at least 4 times.
ii) The debt equity ratio is at least 2.
iii) Yield on shares is calculated at 60% of distributed profits and 10% of
undistributed profits.
The company has been paying regularly an equity dividend of 15%
The risk premium of dividend is generally assumed at 1%.
Find out the value of equity shares of the company as on 31st Ashadh 2076.
b) Bashu Kshitiz Ltd. acquired a block making machine on 1st Shrawan 2075. The cost of
the machine amounting to Rs. 1,340,000.00 was derived by Finance Office of the
company as follows:
Particulars Amount in '000 Rs.

Purchase Price 1,005.00
Installation Cost 234.50
Performance Deposit 67.00
Delivery Cost 33.50
Total cost 1,340.00
Following additional information are relevant in relation to cost of machine above:
i) The purchase price is before taking into account trade discount of 8%.
ii) Installation was done by employees of machine supplier and Bashu Kshitiz Ltd. Rs.
87,100.00 of the installation cost included above relates to what the machine
supplier paid to Bashu Kshitiz Ltd. for assisting in installation by workers of Bashu
Kshitiz Ltd. The company did not pay its employees any additional amount for being
involved in installing the new machine.
iii) Performance deposit relates to a two year maintenance service to be provided by
the supplier. It was paid on 1st Shrawan 2075. It is refundable if no works are
carried out on the machine. No maintenance works were provided by supplier in
the period to Ashadh end 2076.
iv) Delivery cost is simply an estimate of what it would have been charged by machine
supplier to deliver the machine. The machine was however delivered free of charge
as it was on promotion.
The machine qualified for an immediate government grant equal to 10% of its initial
cost calculated as per NAS 16 on a specific condition that it should remain in use over
its useful life. The grant was received by Bashu Kshitiz Ltd. on 1st Kartik 2075, the date
on which the machine was ready for its intended use. The company estimates that
depreciation on the machine at an annual rate of 20% on Straight Line Method (SLM)
basis with estimate of nil scrap value would be in compliant with the applicable
reporting standards. Also the company is considering a policy of using deferred income
to account for government grants.


Line items to be presented in the financial statements of Bashu Kshitiz Ltd. for the year
ended Ashadh 31, 2076. The calculation should be supported by adequate reasons.
Answer:
a)
Value of equity share = [Actual Yield / Expected Yield] X paid up value of share
= [9.92/15] X 100 = Rs. 66.13
Working Notes:
1) Calculation of profit after tax (PAT) and retained earnings: Rs.
A. Profit before interest & tax (PBIT) 720,000
B. Less: Debenture interest (Rs. 500,000 x 12%) (60,000)
C. Profit before tax 660,000
D. Less: Tax 25% (165,000)
E. Profit after tax (PAT) 495,000
F. Less: Preference Dividend (Rs. 500,000 x 12%) (60,000)
G. Less: Equity Dividend (Rs. 1,800,000 x 15%) (270,000)
Retained Earnings 165,000
2) Interest and fixed dividend coverage = (PAT + debenture interest)
Debenture interest + Pref. Dividend
= (495,000 + 60,000)
(60,000 + 60,000)
= 4.625 times
3) Debt Equity Ratio = Debentures
(Pref. Share capital + Equity share capital + Reserves)
= 500,000
(500,000 + 1,800,000 + 500,000)
= 0.179 (the ratio is less than the prescribed ratio)
4) Calculation of Yield of Equity shares
Yield on equity shares is calculated at 60% of distributed profit and 10% of
undistributed profit
60% of distributed profit (60% of Rs. 270,000) 162,000

10% of undistributed profit (10% of Rs. 165,000) 16,500

178,500
Yields on equity shares = [Yield on shares / Equity share capital] x 100
= [178,500 / 1800,000] x 100 = 9.92%
5) Calculation of expected yield on equity shares
Normal rate of return 15%
Add: Risk premium for low interest and
fixed dividend coverage (4.625 > 4) 0%
Add: Risk Premium for debt equity ratio (not required) 0%
Expected yield 15%
b)
The question deals with three items i.e. PPE, Government Grant and Prepayment. The
amount to be reported for these line items of FS are:
Line Item Amount in 000 Remarks
Non- current Assets
Property, Plant & Equipment 911.20 WN 1
Prepayment 67 N6
Current -Liability 21.44 WN2
Non- Current Liability 69.68 WN2
Income
Grant Income 16.08 WN2
Expenses
Depreciation 160.80 WN1
W. N. 1
Calculation of Carrying Amount of Machine
Purchase price 1,005.00
Trade discount @ 8% (N 1) (80.40)
Net purchase price 924.60
Installation cost (N2) 147.40
Total Initial Cost 1,072.00
Depreciation 9 Months @ 20% (N3) (160.80)
Carrying value 911.20
W. N. 2
Government grant
Government grant received (1072 x 10%) 107.20

Grant recognized as income (16.08)
Balance as on 31.3.2076 91.12
Current liability (N4) (91.12/5) 21.44 F
Non -Current Liability (N5) 69.68
N1: Trade discount not included in cost of machine as per NAS 16

N2: based on what was incurred by Basu Kshitiz Ltd. Rs. 87,100 paid to company by
the supplier for helping in installing the machine shall be set off with actual interest
cost.
N3: Proportionate depreciation for nine months.
N4: Current portion of grant i.e. income of next 12 months
N5: Non-current portion of grant, beyond 12 months.
N6: Amount paid for performance deposit of Rs. 67,000 should be treated as
prepayment in statement of financial position as at Ashadh end 2076 under non-current
assets. An amount equal to the value of repair works provided by the supplier should
be expensed to the statement of profit or loss and an equal amount transferred from the
amount. No amount is to be transferred to the statement of profit or loss nor expensed
for the year ended Ashadh end 2076 as no repair works were done by the supplier on
the machine.
4. Write short notes on the following: (5×3=15 marks)
a) Challenges faced by BFI undergoing NFRS implementation
b) Corporate Governance Reporting
c) The significance of the earnings per share (EPS) figure to the analysis of company
performance based on NAS 33.
d) Types of Hedging Relationship
e) Operating Segment
Answer:
a) Challenges faced by BFI undergoing NFRS implementation:
1. Technical Challenges:
a. Impairment of financial assets:
b. Fair value measurement criteria for assets and liabilities
c. Consolidation of financial statements
d. Disclosures requirement
e. Income recognition
2. Other Challenges:

a. Amendment to existing legal framework and policies

b. Shortage of trained and experienced resources
c. Complexity in financial reporting
d. Increased initial cost
e. Measurement of business performance
3. Change Management
b) Corporate governance involves balancing the interests of the stakeholders in a company
– these include its shareholders, management, customers, suppliers, financiers,
government and the community. Corporate governance provides the framework for
attaining a company‘s objectives and encompasses practically every sphere of
management, from action plans and internal controls to performance measurement and
corporate disclosure. Most companies strive to have a high level of corporate
governance. These days, it is not enough for a company to merely be profitable; it also
needs to demonstrate good corporate citizenship through environmental awareness,
ethical behavior and sound corporate governance practices. Good corporate governance
requires a joint effort of the promoters who need to be more transparent, responsible
and socially accountable; the shareholders who must actively participate in their
corporate affairs to help prevent any fraudulent and insider practices and; the regulatory
authority that should effectively enforce rules and regulations in order to protect the
rights of all stakeholders and create favorable environment to enhance good corporate
governance culture.
c) Significance of Earnings per Share (EPS)
• EPS gives a way to measure a company’s profits relative to the number of shares
in issue. It is argued that as owners hold equity shares, it is more relevant to them
to know how much profit each share has earned than to know the overall profit
figure.
• EPS feeds into the price / earnings ratio, one of the most important stock market
measures of value. This gives an estimate of the number of years it would take for
an investment in an equity share to return itself in earnings terms, assuming current
performance continues into the future.
• It is essential that such an important measure of performance have clear guidelines
regarding its calculation. NAS 33 Earnings per Share gives us a standardised
method of calculating both earnings, and the number of shares.
• Many investors feel that other measures are more appropriate, and that the NAS 33
definition of EPS is too conservative. NAS 33 allows alternative measures of EPS
to be published, as long as the NAS 33 figure gets equal or greater prominence.
• There is a danger in relying on a single measure of performance, as no single
measure can encapsulate all aspects of an entity’s performance.
• Also, there is a danger that EPS may be seen by unsophisticated investors as a
definite exact number, when in reality it is subject to all the accounting estimates
and judgments that are necessary in preparing a set of financial statements.
• Despite these fears, it is generally agreed that NAS 33 gives a very fair method of
calculating EPS, and that the consistency it offers is of value to the investor and
analyst.

d) Types of Hedging Relationship:

There are three types of hedge accounting: fair value hedges, cash flow hedges
and hedges of the net investment in a foreign operation.
1. Fair Value Hedges:
The risk being hedged in a fair value hedge is a change in the fair value of an
asset or a liability. For examples, changes in fair value may arise through changes
in interest rates (for fixed-rate loans), foreign exchange rates, equity prices or
commodity prices.
2. Cash Flows Hedges
The risk being hedged in a cash flow hedge is the exposure to variability in cash
flows that is attributable to a particular risk and could affect the income statement.
Volatility in future cash flows will result from changes in interest rates, exchange
rates, equity prices or commodity prices.
3. Hedges of net investment in a foreign operation
An entity may have overseas subsidiaries, associates, joint ventures or branches
(‘foreign operations’). It may hedge the currency risk associated with the
translation of the net assets of these foreign operations into the group’s currency
e) NFRS defines an operating segment as a component of an entity;
(i) That engages in business activities from which it may earn revenues and incur
expenses (including revenues and expenses relating to transactions with other
components of the same entity)
(ii) Whose operating results are reviewed regularly by the entity’s chief operating
decision maker to make decisions about resources to be allocated to the segment and
assess its performance and
(iii) For which discrete financial information is available.
It also sets out various disclosure requirement for operating segments.
5.
a) What are the pillars of Public Expenditure and Financial Accountability (PEFA) and
how does its assessment help in strengthening Public Finance Management (PFM)
system of a country? (3.5+3.5=7 marks)
b) X Ltd. acquired a Safa Tempo business on 1st Shrawan 2075 for Rs. 4,600,000. The
values of the assets of the business at that date based on net selling prices were as
follows:
Rs. '000
Tempo 2,400
Intangible Assets (license of tempo) 600
Trade receivable 200
Cash 1,000
Trade payable (400)
3,800

On 1st Bhadra 2075, the tempo company had four of its tempos stolen. The net selling
value of four tempos was Rs. 600,000 and because of non-disclosure of certain risks to
the insurance company, the tempos were uninsured. As a result of this event, X Ltd.
wishes to recognize an impairment loss of Rs. 900,000 (inclusive of the loss of the stolen
tempos) due to the decline in the value in use of the cash generating unit, that is the
tempo business. On 1st Ashwin 2075 a rival tempo company commenced business in the
same area. It is anticipated that the business revenue of X ltd. will be reduced by 25%
leading to a decline in the present value in use of the business which is calculated at
Rs 3,000,000. The net selling value of the tempo license has fallen to Rs. 500,000 as a
result of the rival tempo operator. The net selling value of the other assets have
remained the same as at 1st Shrawan 2075 throughout the period.
Required:
Describe how X Ltd. should treat the above impairment of assets in its financial
statements as at 1st Bhadra 2075 and 1st Ashwin 2075. (4+4=8 marks)
Answer:
a) PEFA Pillars
PEFA identifies seven pillars of performance in an open and orderly PFM system that
are essential to achieving desired fiscal and budgeting outcomes. The pillars are as
follows:
1. Budget reliability
2. Transparency of public finance
3. Management of assets and liabilities
4. Policy based fiscal strategy and budgeting
5. predictability and control in budget execution
6. Accounting and reporting
7. External scrutiny and audit
Within these 7 broad areas marked by these pillars, PEFA defines 31 specific indicators
that focus on key measurable aspects of the PFM system. PEFA uses the results of the
individual indicator calculations, which are based on available evidence, to provide an
integrated assessment of PFM system against the 7 pillars of PFM performance. It then
assesses the likely impact of PFM performance levels on the three desired budgetary
outcomes, viz, aggregate fiscal discipline, strategic allocation of resources and efficient
service delivery.
b)
At 1st Bhadra 2075
1/4/2075 Impairment 1/5/2075
loss
Rs '000 Rs '000 Rs '000
Goodwill (4,600 - 3,800) 800 (300) 500
(balancing
Intangible assets 600 figure) 600

Tempos 2,400 (600) 1,800

Net assets (TR+ Cash-TP) 800 - 800
4,600 (900) 3,700
An impairment loss is recognized for the stolen vehicles. The balance of Rs 300,000 is
allocated to goodwill in the cash generating unit.
At 1st Ashwin 2075

1/5/2075 Impairment 1/6/2075
loss
Rs. '000 Rs. '000 Rs. '000
Goodwill 500 (500)
Intangible assets 600 (100) 500
Tempos 1,800 - 1,800
Net Assets 800 - 800
3,700 (600) 3,100
A further impairment loss of Rs. 600,000 (Goodwill 500 due to full in net business
revenue + 100 decline in license) is recognized. The recoverable amount falls to the
higher of net selling price (3,700- 600) or value in use (3,000). There is no indication
that other tangible assets are impaired. The loss is applied initially to the intangible
assets and then to goodwill.
6.
a) Brat Ltd. incorporated in Nepal purchased 6,000 kg of materials on 1st Ashadh 2075
to use in their production process.
The supplier is located in China where the currency is Yuan. The goods cost 300,000
Yuan and have not been paid at the year end. The relevant exchange rates are:
1st Ashadh Re. 1 = 0.05 Yuan
32nd Ashadh Re. 1 = 0.056 Yuan
Required: (3+2=5 marks)
How this transaction will be included in the financial statements of 32nd Ashadh 2075.
Also, identify the functional currency and presentation currency of Brat Ltd.
b) Progressive Ltd. operates a defined benefit pension plan for its employees. At 1st
Shrawan 2075 the fair value of the pension plan assets was Rs. 8,200,000 and the
present value of the pension plan liabilities was Rs. 8,500,000. The Actuary estimated
that, the service cost for the year to 31st Ashadh 2076 was Rs. 2,100,000. The pension
plan paid Rs. 500,000 to retired members and Progressive Ltd. paid Rs. 1,900,000 in
contributions to the pension plan in the year to 31st Ashadh 2076. The Actuary
estimated that, the relevant discount rate for the year to 31st Ashadh 2076 was 6%.
On 31st Ashadh 2076, Progressive Ltd announced improvements to the benefits offered
by the pension plan to all of its members. The Actuary estimated that, the past service
cost associated with these improvements was Rs. 2 million. At 31st Ashadh 2076 the
fair value of the pension plan assets was Rs. 10,200,000 and the present value of the
pension plan liabilities (including the past service costs) was Rs. 12,500,000.

Required: (3+2=5 marks)

In accordance with NAS 19 Employee Benefits:
i) Calculate the net actuarial gain or loss that will be included in Progressive Ltd.’s
other comprehensive income for the year ended 31st Ashadh 2076.
ii) Calculate the net pension asset or liability that will be included in Progressive
Ltd.’s statement of financial position as at 31st Ashadh 2076.
Answer:
a) Brat Ltd. should recognise the purchase of goods at the exchange rate in place at the
date of the transaction.
Therefore:
300,000 Yuan/0.05 = Rs. 6,000,000
Purchases A/c Dr. Rs. 6,000,000
Trade payables A/c Cr. Rs. 6,000,000
At the year end, the supplier has not been paid, so the liability is still outstanding. It
must be translated at the closing rate at the year end and any exchange gains or losses
recognised in the statement of profit or loss.
The liability at 32nd Ashadh 2075 is:
300,000 Yuan/0.056 = Rs. 5,357,143
It has decreased and Brat must recognise an exchange gain of Rs. 642,857 as:
Trade payables A/c Dr. Rs. 642,857
To OCI Cr. Rs. 642,857
Functional currency is the currency of the primary economic environment in which the
entity operates. In Brat Ltd.’s. case, it operates in Rs. which is the functional currency.
The presentation currency is the currency in which the financial statements are
presented. Brat Ltd. may well prepare financial statements in their functional currency
(Rs.).
b) Pension plan of Progressive Ltd.
i) Actuarial gains and losses:
FV of plan PV of plan
assets liabilities
Rs 000 Rs. 000
Opening balance (1.4.2075) 8,200 8,500
Service cost (2075/76) 2,100
Interest cost (6% x opening balances) 492 510
Benefits paid (500) (500)
Contributions 1,900

Past service cost 2,000

Total 10,092 12,610
Actuarial gain on plan assets (balancing fig) 108
Actuarial gain on plan liabilities (balancing fig) (110)
Closing Balance 10,200 12,500
The net actuarial gain in OCI is NRs. 218,000 for the year.
ii)
Statement of financial position: NRs. 000
Present value of pension plan liabilities at 31st Ashadh 2076 (12,500)
Fair value of pension plan assets at 31st Ashadh 2076 10,200
Net pension liability (2,300)

Paper 2: Advanced Financial Management

Attempt all questions.
Working notes should form part of the answers. Make assumptions wherever necessary.
1. The Board of Karki Investment Ltd. is considering the company’s capital investment
options for the coming year, and also evaluating the following potential investments:
Investment A:
This investment is similar to its current investments and requires an investment of Rs.
60,000 now, Rs. 40,000 for new capital equipment and Rs. 20,000 for increases in working
capital. This will be financed from Shareholders Funds. Sales next year would be 10,000
units, variable costs would be Rs. 6 and the product would be sold for Rs. 10. But due to
entry of new competitors and technological improvements, the sales price would decline
by 20% per annum thereafter, sales volume would fall by 10% and variable costs would
fall by 20% per annum. Overheads attributed to the project would be Rs. 15,000 per
annum.
In year three the project would be wound up, working capital investment would be
recovered and capital equipment sold off for 25% of its purchase costs the following year.
Overheads of project include an annual charge of Rs. 4,000 for depreciation.
Investment B:
This is a long–term project in a totally new area, involving an immediate outlay of Rs.
90,000, which they intend to borrow from their lenders at 6%. They expect net profits of
Rs. 12,000 next year, rising thereafter by 3% per annum in perpetuity.
Investment C:
This is another long-term investment in a totally new area, involving an immediate outlay
of Rs. 25,000 which they intend financing by retained profits.
Expected annual net cash profits are as follows:
Years 1 to 4: Rs. 3,000
Years 5 to 7: Rs. 5,000
Year 8 onwards forever: Rs. 7,000
The company discounts all projects lasting ten years duration or less at a cost of capital of
10% and all other projects at a cost of 13%. You may ignore taxation.
i) As a financial management analyst, you have been asked to advise the board of Karki
Investment Ltd. (in the form of a briefing report) which investment should be
undertaken. In your report you are to make use of the NPV method, as the members of
the board believe this is the best to use and have asked you to use it.
ii) Minority of board members feel that the Internal Rate of Return (IRR) should also be
used as either an alternative or a complementary method of investment appraisal.
Calculate the IRR of investments A and B (you may use 25% as the upper limit if you
wish) and comment accordingly.
Answer:

The answer should be in a report form, properly addressed, dated and structured.
Irrespective of how the projects are financed, they should be discounted as per the company
policy, i.e, all projects lasting ten years duration or less at a cost of 10% and all other
projects at a cost of 13%
The following NPV calculations should be included in the body or the main findings in the
body with the following in the appendices:
Sales Volume 10,000 9,000 8,100 7,290

Sales price 10 8 6.4 5.12
Variable cost 6 4.8 3.84 3.072
Investment A
Year 0 1 2 3 4
Sales 100,000 72,000 51,840
Variable cost -60,000 -43,200 -31,104
Overheads -11,000 -11,000 -11,000
Capital Investments -40,000 10,000
Working Capital -20,000 20,000
Net Cash Flow -60,000 29,000 17,800 29,736 10,000
DF (10%) 1 0.909 0.826 0.751 0.683
PVs -60000 26,361 14,703 22,332 6,830
NPV= 10,226
Investment B
r=13%
g=3%
Costs= 90,000
Net Profit 12000 in perpetuity
NPV = PV Benefits-PV costs
PV Benfits = CF1/(r-g)
= 12000/(.13-.03)
= 120000
NPV = 120000-90000
NPV = 30000
Investment C
NPV= PV of Benefits-PV of Costs
PV of Rs 7000 per annum in perpetuity=CFt/r=7,000/0.13=Rs. 53,846
Less: PV of Rs 7000 for years 1 to 7 x Discount Factor=Rs 7,000 x 4.423=Rs. 30,961
Thus PV of Rs 7000 a year from year 8 in perpetuity=Rs 53,846 – Rs. 30,961=Rs. 22,885

The discount factor for years 1 to 7 when r=13% is 4.423

Less the discount factor for years 1 to 4 when r=13% is 2.974
Thus, the discount factor for years 5 to 7 when r=13% is 4.423-2.974=1.448
Year Net Cash Flow (Rs) Discount Factor Present Value (Rs)
0 -25,000 1 -25,000
1 to 4 3,000 2.974 8,922
5 to 7 5,000 1.448 7,240
8+ 7,000 22,885
NPV= 14,047
Discounting
Year factor @13%
1 0.885
2 0.783
3 0.693
4 0.613 2.974
5 0.543
6 0.480
7 0.425 1.448 4.423
8 0.376
As all projects have positive NPVs they should all be undertaken. On the basis of the NPV
criteria project B has the greatest positive net present value, followed by A then C and all
should be undertaken.
Since the NPV values depend crucially on the discount rate used, the report should outline
to the board the appropriateness of their choice of discount rates.
The report should also outline limitations associated with using the NPV method and ways
to deal with these limitations. Limitations include how risky are the predicated cash flows
and hence what is the appropriate cost of capital. Appropriate methods to deal with these
include probability analysis and sensitivity analysis.
b) From the calculations below, the IRR of Investment A is approximately 19.4% while
the IRR of Investment B is approximately 18.5% . Thus both meet the required return of
projects as given by the board i.e 10% for all projects lasting ten years duration or less and
13% for all other projects.
Investment A
0 1 2 3 4
Net Cash Flow -60,000 29,000 17,800 29,736 10,000
DF (25%) 1 0.800 0.640 0.512 0.410
PV -60,000 23,200 11,392 15,225 4,100
NPV= -6,083
IRR=A+(a/(a-b)*(B-A)
i.e at r=10%, NPV=10,226

i.e at r=25% N PV=Rs -6,083
IRR= 10%+(10,226/(10,226-(-6,083))*(25%-10%)
= 10%+(10,226/(10,226-(-6,083))*(25%-10%)
= 10%+(10,226/(16,309)*(15%)
= 10%+(10,253/(16,335)*(15%)
= 10%+.628*(15%)
= 10%+9.41%
= 19.41%
Investment B
r= 13%
g=3%
Costs=Rs. 90,000
Yr 1=Rs. 12,000 in perpetuity
NPV= PV Benefits-PV of Costs
r=25%
g=3%
Costs=Rs. 90,000
Yr1= 12,000
NPV= PV Benefits-PV of Costs
PV Benefits= CF1/(r-g)= 12,000/(.25-.03)
= 54545
NPV = PV Benefits-PV of Costs=
NPV = 54,545-90,000
NPV = -35,455
at r=13%, NPV=Rs. 30,000
at r=25%, NPV=Rs. -35,455
IRR = 13%+(30,000/(30,000-(-35,455))*(25%-13%)
= 13%+(30,000/(65,455))*(12%)

= 13%+(30,000/(65,455))*(12%)
= 13%+(.458)*(12%)
= 13%+(.458)*(12%)
= 13%+5.50%
= 18.50%
Alternatively,
At IRR,
∑PVCI = ∑ PVCO
12,000
= 90,000
𝐼𝑅𝑅−0.03
Or, 14,700 = 90,000*IRR

14,700
IRR = 90,000
= 16.33%
2.
a) An investor has decided to invest Rs. 1 million in shares of two companies, namely, A
Limited and B Limited. The projections of return from the shares of the two companies
along with their probabilities are as follows:
Probability A Ltd. B Ltd.
0.20 12% 16%
0.25 14% 10%
0.25 (7%) 28%
0.30 28% (2%)
i) Expected return and risk of investments in individual shares.
ii) Compare the risk and return of these two shares with a portfolio of these shares
in equal proportion.
iii) Find out the proportion of each of the above shares to formulate a minimum risk
portfolio.
b) Alpha Limited acquired Beta Limited after a hotly contested takeover for
approximately Rs. 110 per share. The free cash flows of the two firms before and after
merger were projected as follows:
(Amount in Million Rs.)
Company Year 1 Year 2 Year 3 Year 4 Year 5

Alpha Limited 468.4 491.8 516.4 542.2 569.3

Beta Limited 47.1 50.9 55.0 59.4 64.1
Combined 519.5 555.8 594.8 636.4 680.9
Terminal values of Alpha Limited, Beta Limited and Merged entity as at the end of 5th
year were projected Rs. 8,275.6 million, Rs. 810.2 million and Rs. 9,767.2 million
respectively.
Cost of equity, cost of debt and debt ratio of the individual firms and combined firm
(after merger) were estimated as given below:
Company Cost of equity Cost of debt Debt ratio

Alpha Limited 14.23% 5.40% 21%
Beta Limited 15.33% 6.00% 9%
Combined 14.34% 5.42% 20%
At the time of merger deal, Beta Limited had 7.06 million outstanding shares and Rs.
53.7 million worth of outstanding debt.
i) What is the value of Alpha Limited and Beta Limited before merger? Also
calculate the value of synergy.
ii) What is the maximum and minimum price per share Alpha Limited could have
offered to Beta Limited?
iii) Do you think the price of Rs. 110 per share paid by Alpha Limited was justified?
Explain your answer.
Answer:
a)
i) Expected return and risk of investments in individual shares:
Return of A Limited = 0.20 × 0.12 + 0.25 × 0.14 + 0.25 × (0.07) + 0.30 × 0.28
= 0.024 + 0.035 – 0.0175 + 0.084
= 0.1255 or 12.55%
Return of B Limited = 0.20 × 0.16 + 0.25 × 0.10 + 0.25 × 0.28 + 0.30 × (0.02)
= 0.032 + 0.025 + 0.070 – 0.006
= 0.121 or 12.10%
Risk of shares of A Limited and B Limited:
Prob × Prob ×
Prob. dA dA2 dB dB2
dA2 dB2
0.20 (0.55) 0.3025 0.0605 3.90 15.21 3.0420
0.25 1.45 2.1025 0.5256 (2.10) 4.41 1.1025
0.25 (19.55) 382.2025 95.5506 15.90 252.81 63.2025
0.30 15.45 238.7025 71.6108 (14.10) 198.81 59.6430

167.7475 126.9900
Standard Deviation or Risk of shares of A Limited = (167.7475)1/2

= 12.95%
Standard Deviation or Risk of shares of B Limited = (126.9900)1/2
= 11.27%
ii) Risk and return of the portfolio comprising of these two shares in equal
proportion:
In order to find risk of portfolio of two shares, the covariance between the two is
necessary which can be calculated as follows:
Prob. dA dB dA × dB Prob × dA × dB
0.20 (0.55) 3.90 (2.145) (0.4290)
0.25 1.45 (2.10) (3.045) (0.7612)
0.25 (19.55) 15.90 (310.8450) (77.7112)
0.30 15.45 (14.10) (217.8450) (65.3535)
(144.2549)
Now, Standard Deviation of Portfolio is given by:
[(WA2 × SDA2) + (WB2 × SDB2) + 2 × WA × WB × Covariance A,B]1/2
= [(0.52 × 167.7475) + (0.52 × 126.9900) + 2 × 0.5 × 0.5 × (-144.2549)]1/2
= [41.9369 + 31.7475 – 72.1274]1/2 = 1.25%
Expected Return of Portfolio = (0.5 × 12.55) + (0.5 × 12.10) = 12.32%
Hence, the return is 12.32% with the risk of 1.25% for the portfolio. Thus the
portfolio results in the reduction of risk by the combination of two shares.
iii) Proportion of each of the above shares to formulate a minimum risk portfolio:
B 2 − Co var iance ( A, B)
WA =
A2 + B 2 − 2  Co var iance ( A, B)
126 .99 − (−144 .2549 )
WA =
167 .7475 +126 .9900 − 2  (−144 .2549 )
271.2449
WA = = 46.50%
583.2473
WB = 1 – WA = 53.50%
b)
i) Value of Alpha Limited and Beta Limited before merger and the value of synergy:
(Amount in Rs.'million.)
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Total
Alpha Limited:

Cash flows 468.4 491.8 516.4 542.2 8844.9 -

PV factor @ 12.37% 0.8899 0.7920 0.7048 0.6272 0.5581 -
Present Value 416.8 389.5 364.0 34.01 4936.3 6446.7
Beta Limited:
Cash flows 47.1 50.9 55.0 59.4 874.3 -
PV factor @ 14.49% 0.8734 0.7629 0.6663 0.5820 0.5083 -
Present Value 41.1 38.8 36.7 34.6 444.4 595.6
Synergy:
Cash flows 4.0 13.1 23.4 34.8 728.9
PV factor @ 12.55% 0.8885 0.7894 0.7014 0.6232 0.5537 -
Present Value 3.6 10.3 16.4 21.7 403.6 455.6
Note: Synergy = Cash flows from merged firm – Cash flows from individual firm.
ii) Maximum and minimum price per share which Alpha Limited could have offered
to Beta Limited:
(Amount in Rs. million.)
Particulars Maximum Price Minimum Price
Value of Beta Limited 595.6 595.6
Value of Synergy 455.6 Nil
Total Value of Beta Limited 1051.2 595.6
Less: Value of debt 53.7 53.7
Value of Equity of Beta Limited 997.5 541.9
Number of shares outstanding 7.06 million 7.06 million
Price per share Rs. 141.29 Rs. 76.76
iii) The price of Rs. 110 per share offered by Alpha Limited to Beta Limited is
justified as it is less than the maximum price which Alpha Limited could have
offered to Beta Limited.
Working note:
Weighted Average Cost of Capital (WACC) = Ke × We + Kd × Wd
Alpha Limited: 14.23% × 0.79 + 5.40% × 0.21 = 12.37%
Beta Limited: 15.33% × 0.91 + 6.00% × 0.09 = 14.49%
Combined: 14.34% × 0.80 + 5.42% × 0.20 = 12.55%
2.
a) C Limited and D Limited are contemplating a merger deal in which C Limited will
acquire D Limited. The relevant information about both the companies are given as
follows:
Particulars C Limited D Limited

Total earnings (in millions Rs.) 96 30
Number of outstanding shares (in millions) 20 14
Earnings per share (Rs.) 4.800 2.143

Price earnings ratio 8 7

Market price per share (Rs.) 38.40 15.00
i) What is the maximum exchange ratio acceptable to the shareholders of C Limited,
if the P/E ratio of the combined firm is 7?
ii) What is the minimum exchange ratio acceptable to the shareholders of D Limited,
if the P/E ratio of the combined firm is 9?
b) On 1st April 2019, Beta Limited of Egypt bought electronic equipment from foreign
supplier; that will require the payment of Egyptian pound (EGP) 1,800,000 on 30th
June, 2019. The spot rate on 1st April, 2019 is EGP 20 per dollar; the expected future
spot rate is EGP 16 per dollar; and the ninety days forward rate is EGP 18 per dollar.
The dollar (US) interest rate is 12 percent and the EGP interest rate is 8 percent. The
tax rate for both the countries is 30 percent. The Beta Limited is considering three
alternatives to deal with the risk of exchange rate fluctuations.
Calculate the net cost to the Beta Limited under each of the following three alternatives and
suggest the best alternative. (10 marks)
i) Forward market hedge.

ii) Money market hedge.
iii) Leave the exposure open (uncovered)
Answer:
a)
i) Maximum exchange ratio acceptable to the shareholders of C Limited
Earnings per share of C Limited Rs 4.80

Price earnings ratio of C Limited 8
Market price per share of C Limited Rs 38.40
Number of shares outstanding of C Limited 20 millions
Market capitalization of C Limited Rs 768.00 millions
Combined earnings (Rs 96 + Rs 30) millions Rs 126.00 millions
Combined P/E ratio 7
Combined market capitalization Rs 882.00 millions
Market capitalization of C Limited Rs 768.00 millions
Balance attributable to D Limited Rs 114.00 millions
Let N be the number of equity shares to be issued to shareholders of D Limited.
Then,
Rs114 millions
N=
Rs126 millions
7
( N + 20) millions

N = 2.96875 millions shares

Now, share exchange ratio = 2.96875 / 14 = 0.212: 1
Hence, maximum share exchange ratio acceptable to shareholders of C
Limited is 0.212 shares of C Limited for 1 share of D Limited.
ii) Minimum exchange ratio acceptable to the shareholders of D Limited
Market price per share of D Limited Rs 15.00

Number of shares outstanding of D Limited 14 millions
Market capitalization of D Limited Rs 210.00 millions
Combined earnings (Rs 96 + Rs 30) millions Rs 126.00 millions
Combined P/E ratio 9
Rs 1134.00
Combined market capitalization
millions
Market capitalization of D Limited Rs 210.00 millions
Balance attributable to C Limited Rs 924.00 millions
Let N be the number of equity shares to be issued to shareholders of D Limited.
Then,
Rs 210 millions
N=
Rs126 millions
9
( N + 20) millions
N = 4.54545 millions shares
Now, share exchange ratio = 4.54545 / 14 = 0.325: 1
Hence, minimum share exchange ratio acceptable to shareholders of D Limited is
0.325 shares of C Limited for 1 share of D Limited.
b) Invoice value to be paid = EGP 1,800,000
Current spot rate: 1 Dollar = EGP 20,
Three months forward rate: 1 Dollar = EGP 18 and
Three months expected spot rate: 1 Dollar = EGP 16
i) Total cost under forward market hedge:
Equivalent dollar cost if paid under forward cover (1,800,000/18) 100,000 dollars
Equivalent dollar cost if paid today (1,800,000 / 20) 90,000 dollars
Loss under forward cover 10,000 dollars
Tax saving on loss = 10,000 × 30% = 3,000 dollars
Net cost to Beta Limited = Payment under forward contract – Tax savings
= (100,000 – 3,000) dollars
= 97,000 dollars

ii) Total cost under money market hedge:

The amount of dollar borrowing should be such that when the dollar is converted
into EGP and which is then invested @ 8 percent for 3 months becomes EGP
1,800,000 . Hence, we have to first find the amount of EGP to be invested.
Now, 1,800,000 = Principal to be invested + Interest received – Tax on interest
 r n  r n 
1,800,000 = X +  X   −  X  100  12  tax rate
 100 12 
 8 3  8 3 
Or,1,800,000 = X +  X    − X    30%
 100 12   100 12 
Or, X =1,775,147.93
Now, EGP should be converted into dollars at spot rate. Amount of dollar required
to borrow EGP 1,775,147.93 = 1,775,147.93 / 20 = 88,757.40 dollars
Now, we can find the amount payable in dollar after three months which will be
equal to:
Principal + Interest – Tax on interest
 12 3   12 3 
= 88,757 .40 + 88,757 .40   − 88,757 .40  100  12  30%
 100 12 
= 88,757.40 + 2,662.72 − 798.82 = 90,621.30 dollars
Net cost to Beta Limited = 90,621.30 dollars.

iii) Total cost under open exposure:
Payment in dollars after 3 months (1,800,000 / 16) 112,500 dollars
Equivalent dollar cost if paid today (1,800,000 / 20) 90,000 dollars
Loss under open exposure 22,500 dollars
Tax saving on loss = 22,500 × 30% = 6,750 dollars
Net cost to Beta Limited = Payment under forward contract – Tax savings
= (112,500 – 6,750) dollars
= 105,750 dollars
As the total cost to Beta Limited under money market hedge is lowest (90,621.30
dollars), it should go for money market hedge to deal with exchange rate
fluctuation.
3. Answer the following: (5×3=15 marks)
a) Conflicting ranking.
b) Short selling of stock.
c) Describe the main features of and explain the main attractions to the investor and to
the issuer of convertible bonds.
d) Hiller’s Model for Risk Analysis and Certainly Equivalent Approach for Risk Analysis.
e) Define the term 'Long Straddle' and 'Long Strangle'.

Answer:
a) The net present value (NPV) and internal rate of return (IRR) methods yield the same
accept or reject rule in case of independent conventional investments. However, in
real business situations there are alternative ways of achieving an objective and, thus,
accepting one alternative will mean excluding the other. Investment projects are said
to be mutually exclusive when only one investment could be accepted and others
would have to be excluded. For example, in order to distribute its products a company
may decide either to establish its own sales organization or engage outside distributors.
The more profitable out of the two alternatives shall be selected. This type of
exclusiveness may be referred to as technical exclusiveness. On the other hand, two
independent projects may also be mutually exclusive if a financial constraint is
imposed. If limited funds are available to accept either project X or project Y, this
would be an example of financial exclusiveness or capital rationing. The NPV and
IRR methods can give conflicting ranking to mutually exclusive projects. In the case
of independent projects ranking is not important since all profitable projects will be
accepted. Ranking of projects, however, becomes crucial in the case of mutually
exclusive projects. Since the NPV and IRR rules can give conflicting ranking to
projects, one cannot remain indifferent as to the choice of the rule. The net present
value (NPV) and internal rate of return (IRR) rules will give conflicting ranking to the
projects under the following conditions:
• The cash flow pattern of the projects may differ. That is, the cash flows of one
project may increase over time, while those of others may decrease of vice versa.
• The cash outlays of the projects may differ.
• The projects may have different expected lives.
• Re investment assumption (NPV-Cost of capital IRR-project Rate of Return)
b) Short selling is an investment or trading strategy that speculates on the decline in a
stock or other securities price. It is an advanced strategy that should only be
undertaken by experienced traders and investors.
Traders may use short selling as speculation, and investors or portfolio managers may
use it as a hedge against the downside risk of a long position in the same security or a
related one. Speculation carries the possibility of substantial risk and is an advanced
trading method. Hedging is a more common transaction involving placing an
offsetting position to reduce risk exposure.
In short selling, a position is opened by borrowing shares of a stock or other asset that
the investor believes will decrease in value by a set future date—the expiration date.
The investor then sells these borrowed shares to buyers willing to pay the market price.
Before the borrowed shares must be returned, the trader is betting that the price will
continue to decline and they can purchase them at a lower cost. The risk of loss on a
short sale is theoretically unlimited since the price of any asset can climb to infinity.
• Short selling occurs when an investor borrows a security and sells it on the open
market, planning to buy it back later for less money.
• Short sellers bet on, and profit from, a drop in a security's price.

• Short selling has a high risk/reward ratio: It can offer big profits, but losses can
mount quickly and infinitely.
c) Features of Convertible bonds
• Convertible bonds are fixed return securities that may be converted into ordinary
shares of a company at pre-determined date(s) and at a pre-determined rate at the
option of the holder. Often the terms of the conversion may seem to be less
attractive at conversion dates further away. This reflects expected share price
growth.
• At the conversion date or dates, the holder has the option to convert the stock into
ordinary shares or continue to hold the stock and earn the fixed interest until the
bond matures. However, if the investor decides to convert the bond into ordinary
shares, they cannot convert the ordinary shares back into the original fixed
security.
• The conversion premium is the difference between the nominal issue value of the
bonds and the conversion value at the date of issue. From the issuers viewpoint the
larger the conversion premium the better as less shares need be issued for a given
amount of capital raised.
• However to be acceptable and valuable to investors the premium must reflect the
growth prospects of the issuers ordinary share price.
Attractions of convertible bonds to the investor and issuer:
• The price of the convertible bond in effect includes an option to buy the ordinary
shares.
• The potential value of the conversion rights.
• Interest income which would not be received if the investor simply bought a call
option on the shares.
• The interest cost to the company is lower than for conventional, non-convertible
stock.
• Most issuers expect the bonds to be converted and hence view them as delayed
equity.
• Thus EPS is not immediately affected as it would with the issue of ordinary shares.
• If bond is converted into equity then this removes the necessity to raise funds to
redeem the initial loan stock.
d) Hiller's Model for Risk Analysis and Certainly Equivalent Approach for Risk
Analysis:
In view of Hiller, uncertainty or risk associates with the capital investment decisions
is determined by the variation (standard deviation) of the expected cash flows. If the
cash flows of the project are less uncertain, there would be a lesser deviation from the
mean cash flows and vice versa. If there is a lesser deviation in cash flows from the
mean cash flow, the project’s capital investment and its cash flows are less vulnerable
to risk and uncertainty. The determination of standard deviation of various levels of
cash flow will be required to ascertain the uncertainty factor of cash flows of a project.
Based on the above argument he has developed a model to evaluate the various

alternative cash flows by taking into the mean of present value of the cash flows and
the standard deviation of such cash flows.
The certainty-equivalent approach takes into account the risk factor in making
estimations and appraisal of capital investment decisions. Under this technique, the
estimated cash flows are adjusted by using risk-free rate to ascertain risk free cash
flows. The expected cash flows of the project are converted to equivalent riskless
amounts. The smaller certainty equivalent will be used in case of an expected cash
inflow and the larger certainty equivalent is used for payments. The technique varies
with the risk adjusted discount rate, which adjusts the risk by varying the discount
rate. The certainty equivalent approach is theoretically a superior technique over the
risk adjusted discount approach, because it can measure risk more accurately. The
certainty equivalent factors will differ for different investment proposals. It is a
conservative approach in making estimation of project cash flows, recognizing the risk
factor in cash flows.
e) A long straddle options strategy is when an investor simultaneously purchases a call
and put option on the same underlying asset, with the same strike price and expiration
date. An investor will often use this strategy when he or she believes the price of the
underlying asset will move significantly out of a range, but is unsure of which
direction the move will take. This strategy allows the investor to have the opportunity
for theoretically unlimited gains, while the maximum loss is limited only to the cost
of both options contracts combined. This strategy becomes profitable when the stock
makes a large move in one direction or the other. The investor doesn’t care which
direction the stock moves, only that it is a greater move than the total premium the
investor paid for the structure.
In a long strangle options strategy, the investor purchases an out-of-the-money call
option and an out-of-the-money put option simultaneously on the same underlying
asset and expiration date. An investor who uses this strategy believes the underlying
asset's price will experience a very large movement, but is unsure of which direction
the move will take.
Losses are limited to the costs (or premium spent) for both options. Strangles will
almost always be less expensive than straddles because the options purchased are out
of the money.
4.
a) The following particulars relating to Vishnu Fund Scheme is supplied to you:
Particulars in Rs. million.

1. Investment in shares (at cost)
a. Pharmaceuticals Companies 790
b. Construction Companies 310
c. Service Sector Companies 560
d. IT Companies 340
e. Real Estate Companies 100
2. Investment in fixed income bonds

a. Listed bonds (8000, 14% Bonds of Rs. 15,000 each) 120

b. Unlisted bonds 70
3. Expenses payable 35
4. Cash and cash equivalents 15
Number of units outstanding are 42 million. Market expectations on listed bonds is 8.84%.
Particulars relating to different sectors are as follows:
Sector Index on acquisition date Index on valuation date

Pharmaceuticals Companies 260 465
Construction Companies 210 450
Service Sector Companies 275 480
IT Companies 240 495
Real Estate Companies 255 410
Required: (8 marks)
i) Net Asset Value of the fund.

ii) Net Asset Value per unit.
iii) If the period of consideration is 2 years, and the fund has distributed Rs. 3 per
unit per year as cash dividend, ascertain the Net Return (Annualized).
Make your calculations up to two decimal points.
b) Pack, Inc., a manufacturer of packaging products headquartered in the United States,

wants to apply the weighted average cost of capital (WACC) technique to value a
project in the United Kingdom. The expected free cash flows of the proposed project
are projected as:
Year 0 1 2 3 4
Free cash flow (£ in millions) (17.50) 11.25 11.25 11.25 11.25
The current spot exchange rate is $1.60/£. Suppose that the yield curve in both
countries is flat: The risk-free rate on dollars is 4%, and the risk-free interest rate on
pounds is 7%.
Pack has built up $20 million in cash for investment needs and has debt of $320. Its
net debt to equity ratio is 1. It intends to maintain a similar net debt-equity ratio for
the foreseeable future. Pack's current cost of debt is 6% and cost of equity is 10%
without UK project. It pays corporate tax at the rate of 40%.
Required: (7 marks)
Should Pack, Inc. undertake the UK project?
Answer:
a)
(i) Calculation of NAV of the Fund
Particulars in Rs. Million

1. Value of Shares:
a. Pharmaceuticals Companies [790 × 465/260] 1412.90
b. Construction Companies [310 × 450/210] 664.30
c. Service Sector Companies [560 × 480/275] 977.50
d. IT Companies [340 × 495/240] 701.20
e. Real Estate Companies [100× 410/255] 160.80
2. Value of Bonds:
c. Listed Bonds [120 × 14/8.84] 190.00
d. Unlisted Bonds 70.00
3. Cash and Cash Equivalents 15.00
Total Assets Value 4191.70
Less: Expenses Payable 35.00
NAV of the Fund 4156.70
(ii) Net Asset Value Per Unit

NAV of the Fund Rs. 4156.7 millon
Number of Units 42.0 million
NAV Per Unit Rs. 98.97
(iii) Annualized Net Return of the Fund
Initial Cost Per Unit:
Investment in Shares Rs. 2100.00 millon
Investment in Bonds Rs. 190.00 millon Rs. 2290.00 millon
Number of Units 42.00 millon
Total Cost Per Unit Rs. 54.52
Return Per Unit:
Capital Gain Rs. (98.97 – 54.52) Rs. 44.45
Dividend @ Rs. 3 Per Year Rs. 3 × 2 Rs. 6.00
Total Return Per Unit for 2 Years Rs. 50.45
Annualized Return Rs. (50.45/54.52)/2 46.27%
b)
Calculation of forward exchange rate:
F1 = S × (1 + r$)/ (1 + r£) = ($1.60/£) × (1.04)/ (1.07) = $1.5551/£
F2 = S × (1 + r$)2/ (1 + r£)2 = ($1.60/£) × (1.04)2/ (1.07)2 = $1.5115/£
F3 = S × (1 + r$)3/ (1 + r£)3 = ($1.60/£) × (1.04)3/ (1.07)3 = $1.4692/£
F4 = S × (1 + r$)4/ (1 + r£)4 = ($1.60/£) × (1.04)4/ (1.07)4 = $1.4280/£
Conversion of Pound FCF into Dollar:
Year 0 1 2 3 4
Free cash flow (£ in millions) (17.50) 11.25 11.25 11.25 11.25
Exchange rate to dollar 1.60 1.5551 1.5115 1.4692 1.4280

Free cash flow ($ in millions) (28.00) 17.50 17.00 16.53 16.07

Calculation of WACC:
Since net debt to equity ratio is 1, the weight of debt and equity in capital structure of
Pack is equal. Therefore,
rWACC = WE× rE + WD × rD (1 - tC)
= (0.5)(10.0%) + (0.5)(6.0%)(1 - 40%) = 6.8%
Calculation of net present value of free cash flows:
Year 0 1 2 3 4
Free cash flow ($ in millions) (28.00) 17.50 17.00 16.53 16.07
PVIF @ 6.8% 1 0.9363 0.8767 0.8209 0.7686
PV ($ in millions) (28.00) 16.39 14.90 13.57 12.35
NPV ($ in millions) 29.21
Since the NPV of the UK project is positive, Pack, Inc. should undertake the project.
5.
a) Assuming that that a US multinational has its subsidiary in a country where its income
is taxed at 20 per cent. Withholding tax rate is 5 per cent. Assume further that
corporate firms in US are subject to tax of 35 percent. However, corporate firms
having their subsidiaries abroad are allowed tax credit.
Determine the amount of tax credit available to a subsidiary having remitted US$ 4
million after tax earnings as dividends. (5 marks)
b) Innovative Limited, who is dealing in computer software, is having credit sales of Rs.
21,000,000 with average receivables of Rs. 3,500,000. Bad debts are 0.9% on sales.
With an eye to save time on collection of receivables Innovative Limited is considering
a proposal to appoint a factor. The following information is available:
Particulars Recourse Non-Recourse
Average reduction in collection period 30 Days 30 Days
Reduction in Bad Debts by 0.30% 0.30%
Saving in Administration cost Rs. 40,000 Rs. 40,000
Advance 80% 80%
Factoring fees 0.60% 1.25%
Interest on advance is 2% higher than current OD interest of 7% p.a. Assume 360 days
in a year.
You are required to evaluate the proposal (5 marks)
Answer:
a)
i) The subsidiary’s before tax earnings (EBT) are equivalent to US $ 5 million (i.e.
$ 4 million/1-tax rate 0.2)
ii) Taxes paid are ($ 5 million EBTX0.20) = $ 1 million (corporate taxes).
Withholding taxes paid are $4 million X 0.05 = $ 0.2 million. Thus, the total taxes
paid are $1 million+$0.2 million = $1.2 million.

iii) In US, the tazes on before tax income of a subsidiary would have been ($5 million
X 0.35) = $1.75 million, out of which the subsidiary has already paid $1.2 million.
iv) The tax liability of US firm, after tax credit adjustment of $ 1.2 million, will be
$0.55 million only ($1.75 million - $1.2 million)
v) The subsidiary has got tax credit for the entire amount of $1.2 million paid abroad.
In case the tax rate is 40 percent (applicable to subsidiary abroad), the tax credit
allowed in the US would have been limited to 35 percent ($1,75 million only)
b) Evaluation of factoring proposals
(i) Calculation of benefit with recourse factoring
Particulars Rs.
Financing cost saving (Rs. 1,750,000 × 0.07) 122,500
Bad debt saving (Rs. 21,000,000 × 0.003) 63,000
Administration cost saving 40,000
Total saving 225,500
Factoring fee (Rs. 21,000,000 × 0.006) 126,000
Additional interest in advance (Rs. 1,750,000 × 0.80 × 0.02) 28,000
Additional cost 154,000
Net saving 71,500
(ii) Calculation of benefit with non-recourse factoring
Particulars Rs.
Financing cost saving (Rs. 1,750,000 × 0.07) 122,500
Bad debt saving (Rs. 21,000,000 × 0.009) 189,000
Administration cost saving 40,000
Total saving 351,500
Factoring fee (Rs. 21,000,000 × 0.0125) 262,500
Additional interest in advance (Rs. 1,750,000 × 0.80 × 0.02) 28,000
Additional cost 290,500
Net saving 61,000
Decision: It is viable to accept the Recourse Factoring Proposal.

Paper 3: Advanced Audit and Assurance

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) You are the partner responsible for performing an engagement quality control review
on the audit of Adhar Company Limited, a listed company. You are currently reviewing
the engagement partner's proposed auditor's report on the financial statements of
Adhar Company Limited for the year ended 16th July 2019. During the year the
company has undergone significant reorganization, involving the discontinuance of
two major business segments. Extracts of the proposed auditor's report are shown
below.
Basis for adverse opinion arising from material misstatement in respect of NAS 37
The directors have not recognized a provision in relation to redundancy costs
associated with the reorganization during the year. The reason is that they do not feel
that a reliable estimate of the amount can be made, and so the recognition criteria of
NAS 37 have not been met. We disagree with the directors as we feel that an estimate
can be made. This matter is more fully explained in a note to the financial statements.
We feel that this is a material misstatement as the profit for the year is overstated.
In our opinion, the financial statements do not give a true and fair view of the financial
position of the company as of 16th July 2019, and of its financial performance and its
cash flows for the year then ended in accordance with Nepal Financial Reporting
Standards.
Emphasis of matter
The directors have decided not to disclose the Earnings per Share for FY 2018/19, as
they feel that the figure is materially distorted by significant discontinued operations
in the year. Our opinion is not qualified in respect of this matter.
Required
Critically appraise the proposed auditor's report of Adhar Company Limited for the
year ended 16th July 2019. (10 marks)
b)
i) TVS Ltd. commenced its manufacturing activities from Shrawan 1, 2075. In the
course of production the company generated certain by-products. As at Ashadh 31,
2076 the company did not value the by-products considering the value as
insignificant. The auditor of the company is of the opinion that the by-products are
inventory of the company and it should be valued and brought into books of
account. (5 marks)
ii) Mr. Bihari Binod, a Chartered Accountant was invited by the Nepal Bankers'
Association, to present a paper in a symposium on the issues facing Nepalese
Banking Industry. During the course of his presentation he shared some of the vital
information of his client’s business under the impression that it will help the
industry to cope with present problems faced by the industry. (5 marks)
Answer:
a) Adverse opinion paragraph

The auditor's report does not take the form recommended by NSA 705 (Revised),
Modifications to the Opinion in the Independent Auditor's Report. Adhar Company
Limited auditor's report contains one section that includes both the basis for the
auditor's opinion and the auditor's opinion itself. NSA 705 (Revised), however,
requires that there should be two paragraphs, the first entitled simply 'Adverse
opinion', and the second 'Basis for adverse opinion'. The opinion paragraph should
not state the reason for the opinion in its title. The presentation offered in the Adhar
Company Limited auditor's report could be confusing for readers.
In addition to above, the quality review revealed the following points:
• It is not appropriate for the auditors to give the argument offered by the directors
for not recognizing the provision. Details of the directors' view should be available
in the note to the accounts referred to. The auditor's report should provide auditor’s
view as to why this constitutes a material and pervasive misstatement.
• Sufficient details not provided regarding the misstatement. It is not enough simply
to refer to a note to the accounts, as this note would give details of the director's
judgment. The auditor's report should refer to a specific note in the accounts, and
state why this is a misstatement. In this context, the word 'feel' is inappropriate to
describe the auditor's judgment in an auditor's report, and may be indicative of a
lack of rigor on the part of the auditor. A related point is that the full name of NAS
37, Provisions, Contingent Liabilities and Contingent Assets should be given, as
omitting it could be confusing to readers.
• The paragraph states that the profit for the year is overstated, but it does not say
by how much, and does not explain the effect on the statement of financial
position, where liabilities are understated. An estimate should be given of the
financial effect of omitting the required provision. After all, it is as a result of their
view that such an estimate can indeed be made that the auditor disagrees with
Adhar Company Limited’s treatment. The auditor's report should then also give
further details, such as the timings of the probable cash outflow.
• The adverse opinion given may not be correct. An adverse opinion should be given
only when a misstatement is so pervasive that the financial statements are rendered
meaningless by it, but this misstatement would appear to relate to the specific
matter of the omission of a provision. It may be that a modified opinion of the type
'except for' would have been more appropriate.
Emphasis of matter paragraph
Non-disclosure of the earnings per share figure is a material misstatement. As per
NAS 33, Earnings Per Share, it is material by nature. As a listed company, Adhar
Company Limited must disclose both basic and diluted EPS irrespective of whether
or not it feels it to be distorted by discontinuing operations. If it feels this to be the
case, it should simply say so in its directors' report.
As this is a material misstatement, the auditor's report should be modified in respect
of it. An 'except for' qualification would appear to be the most appropriate, as the
matter is material but not pervasive. A paragraph discussing this misstatement should
be inserted, in which its financial effect would be quantified which in this case would
probably mean disclosing the EPS figures.

b)
i) As per NAS 2, Inventories, issued by the Institute of Chartered Accountants of Nepal,
a production process may result in more than one product being produced
simultaneously. This is the case when joint products are produced or when there is a
main product and by-products. If the costs of conversion of each product are not
separable, they are allocated on a rational and consistent basis.
Most of the by-products as well as scrap or waste materials, by their nature, are
immaterial. They are often measured at net realizable value and this value is deducted
from the cost of the main product. In the given case, as the value of the by-products
is insignificant, the realizable value of by-products should be ascertained and it
should be deducted from the cost of the main product.
An asset is a resource controlled by an entity as a result of past events from which
the future economic benefits are expected. As per NAS 2, inventories are assets:
a. Held for sale in the ordinary course of business,
b. In the process of production for such sale and
c. In the form of materials or supplies to be consumed in the production process or
in the rendering of services.
As the inventory of by-product is a resource controlled by TVS Ltd., it is an asset and
it is inventory because it is held for sale in the ordinary course of business.
Hence, TVS Ltd. should deduct the realizable value of its by-products from the cost
of production of main product.
ii) As per Section R114 of Part 1 of the Code of Ethics for Professional Accountants,
the principle of confidentiality imposes an obligation on all professional accountants
to respect the confidentiality of information acquired as a result of professional and
business relationships. As per the section, the following are circumstances where
professional accountants are or might be required to disclose confidential information
or when such disclosure might be appropriate:
a. Disclosure is required by law, for example:
(1) Production of documents or other provision of evidence in the course of
legal proceedings; or
(2) Disclosure to the appropriate public authorities of infringements of the
law that come to light;
b. Disclosure is permitted by law and is authorized by the client or the employing
organisation; and
c. There is a professional duty or right to disclose, when not prohibited by law:
(1) To comply with the quality review of a professional body,
(2) To respond to an enquiry or investigation by a professional or regulatory
body,
(3) To protect the professional interests of a professional accountant in legal
proceedings, or
(4) To comply with technical and professional standards, including ethics
requirements.
The Section further clarifies that a professional accountant shall continue to comply
with the principle of confidentiality even after the end of the relationship between
the accountant and a client or employing organisation. In the given case, Mr. Bihari

Binod has disclosed vital information of his client’s business without the consent
of the client under the impression that it will help the industry. Thus it is a
professional misconduct.
2. Answer the following:
a) You have been recently appointed as Head of Internal Audit Department of ABC
Company Limited, a leading bag manufacturing company in Nepal.
While conducting the analytical review, it was noted that the total factory wages has
significantly increased as compared to prior years without significant increase in
production and wage rate. The number of factory workers is huge and company has
installed automated payroll system with access cards for payroll processing.
i. Human Resource Department
Factory staffs are issued Employee Identity Card with their name and employee code
embossed on it. Employees swipe this access card at the beginning and end of the day
to mark their attendance and daily hours worked is automatically recorded in the
payroll software. This process is not supervised. Also, employees do not swipe their
employee identity card for going out of factory premises for lunch and/or other
purposes. The Payroll software automatically calculates monthly wages along with
other breakdown and the payroll supervisor just does bank transfers on the basis of
data generated from payroll software.
ii. Procurement Department
Procurement Manager who is also the brother in law of the Chairman of ABC
Company Limited is solely responsible for placing orders with suppliers. He is also
responsible for verifying the goods received in the factory premises and authorizes
the invoice of the supplier for making payments. The account department books the
inventory and issues the cheque on the basis of authorization received from
Procurement Manager. In addition to this he has also been assigned the duty of
reviewing exception reports and accounts payable printouts and same are not
independently reviewed by the accounts department.
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)
i) PSPD Private Limited is a leading toy trading company. It imports branded toys
from different countries and sells it in Nepal through its own retail stores and
online chains. Recently due to local manufacture of toys, requirement to import
toys in huge quantity at a time and delay in recovery of receivables, it has
experienced difficult trading conditions and lost significant market share. The
cash flow forecast has been reviewed during the audit fieldwork and it shows a
significant net cash outflow. Management is confident that further financing can
be obtained and so has prepared the financial statements in going concern basis
with no additional disclosure. The audit manager is highly doubtful to this. The

prior year financial statements showed a profit before tax of Rs. 1.2 million,
however the current year loss before the tax is Rs. 4.4 million and the forecast
cash outflow for the next 12 months is Rs. 3.2 million. Analyse the issue. Also
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. (5 marks)
ii) M/s Honey Limited has entered into a transaction on 25 Jestha, 2076, near year-
end, whereby it has agreed to pay Rs. 500,000 per month to Mr. Yunus as annual
retainer-ship fee for "engineering consultation". No amount was actually paid,
but Rs. 6 million is provided in books of account as on 31 Ashadh, 2076.
Your inquiry elicits a response that need-based consultation was obtained round
the year, but there is no documentary or other evidence of receipt of the service.
As the auditor of M/s Honey Limited, what would be your approach? (5 marks)
Answer:
a) The internal control weaknesses, consequences of each weakness and
recommendations of the auditor are tabulated below:
Weaknesses Consequences Recommendations
Human Resource
Department
Employees swipe Possibility of one CCTV monitoring of the
employee identity card individual swiping attendance process (swiping
at the beginning and end employee identity card of the card) or should be
of the day to mark their of absent and late monitored by the staff to
attendance and daily coming employee, prevent one individual to
hours worked is resulting in payment of swipe multiple cards.
automatically recorded wages to absentee, or Using thumb print for
in the payroll software. late arrival. recording attendance will be a
This process is not good move.
supervised.
Surprise check at Factory
premises to ensure that all the
employees whose identity
cards are swiped are
physically present in office
Employees could be Practice of swiping employee

Employees do not swipe identity card for going out of
enjoying excessive
their access card for factory premises and at the
breaks and going for
going out of factory time of again entry into
personal work during
premises for lunch and factory needs to be done.
working hours leading
other purposes. to decrease in
productivity and
increase in wage cost.
Sample of calculation made

Sample of calculations Automated controls by automated system needs to
made by automated within the system not be checked by payroll
payroll system is not

checked by payroll tested, may lead to supervisor to ensure that the

supervisor. financial loss. system is operating
effectively.
Procurement
Department
One individual has Greater segregation of duties
Lack of check and
authority for placing along with proper internal
balance system,
orders, verifying goods check and dual control is
leading to weak
received, approving required in the procurement
internal control.
accounts payable ledger department
Financial loss may
output and determining result due to payments
payments to suppliers. being made in error
All exception reports and
Exception reports and Systematic errors (for accounts payable printouts
accounts payable example) may not be should go to the accounts
printouts are not detected. Any over- department for review and
independently reviewed payments arising as a correction if any.
by the accounts result may not be
department. recovered
b)
i) The Company is facing going concern problem as it has experienced difficult trading
conditions and has negative cash flow. However, the financial statements have been
prepared on going concern basis.
Management is confident that further financing can be obtained, however the audit
manager is doubtful and so the following procedures should be applied
• Discuss with management whether any finance has now been secured
• Review the correspondence with the finance provider to confirm the level of
funding that is to be provided and this should be compared to net cash outflow of
Rs. 3.2 million.
• Review the most recent Board minutes to understand if the management view on
going concern has altered.
• Review the cash flow forecast for the year and assess the reasonableness of the
assumptions assessed.
If the management refuses to amend the going concern basis of financial statements
or at the very least make adequate disclosures for uncertainties involved in going
concern, the audit report will need to be modified.
ii) As per NSA 240, The Auditor's Responsibilities Relating to Fraud in an audit of
Financial Statements, fraud can be committed by management overriding controls
using such techniques as recording fictitious journal entries, particularly close to the
end of an accounting period, to manipulate operating results or achieve other
objectives.
Keeping in view the above, it is clear that company has passed fictitious journal
entries near year end to manipulate the operating results. Also auditor's enquiry

elicited a response that need-based consultation was obtained round the year, but
there is no documentary or other evidence of receipt of the service.
Accordingly, the auditor would adopt the following approach:
If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor
encounters exceptional circumstances that bring into question the auditor's ability to
continue performing the audit, the auditor shall:
a. Determine the professional and legal responsibilities applicable in the
circumstances, including whether there is a requirement for the auditor to report
to the person or persons who made the audit appointment or, in some cases, to
regulatory authorities;
b. Consider whether it is appropriate to withdraw from the engagement, where
withdrawal from the engagement is legally permitted; and
c. If the auditor withdraws;
1. Discuss with the appropriate level of management and those charged with
governance the auditor's withdrawal from the engagement and the reasons for
the withdrawal; and
2. Determine whether there is a professional or legal requirement to report to the
person or persons who made the audit appointment or, in some cases, to
regulatory authorities, the auditor's withdrawal from the engagement and the
reasons for the withdrawal.
Further, as per section 115 of the Companies Act 2063, the auditor shall report
whether the Board of Directors or any employees of the company have acted
contrary to the provisions of law relating to the accounts, or committed any
misappropriation or caused loss or damage to the company.
a) You are the audit partner of the firm and your manager has highlighted the following
matters:
The profit before tax of ABC Limited for the year ended 31 Ashadh 2076 is NPR 1580
million. ABC provides three year warranty to its customers and has made provision of
NPR 160 million in this regard. The management carries out the computation
internally. The process is complex and based on various assumptions. Therefore, your
firm has appointed an expert after following all the necessary procedures for assessing
the competence, capability and objectivity of the expert.
Describe the steps that will be performed in the above situation and discuss the possible
implications of the above on the audit report. (Drafting of audit opinion is not required)
(8 marks)
b) Discuss why the identification of related parties and material related party
transactions can be difficult for auditors. What can be the possible source of related
party information for the auditors? (4+3=7 marks)
Answer:
a) Provision of warranty is more than 10% of the profit before tax (PBT) and therefore
it is material to the financial statements. Since the expert has been appointed and

matters related to his appointment have already been considered, the auditor need to
perform the following procedures:
• Evaluate the adequacy of the expert's work for the auditor's purposes, including:
o the relevance and reasonableness of that expert’s findings and conclusions, and
their consistency with other audit evidence;
o if that expert's work involves use of significant assumptions and methods, the
relevance and reasonableness of those assumptions and methods in the
circumstances; and
o if that expert's work involves the use of source data that is significant to that
auditor's work, the relevance, completeness and accuracy of that source data.
• Carry out analytical procedures to assess the reasonableness of the provision as
compared to other relevant items.
• In case the auditor determines that the work of the expert is not adequate for his
purpose, he shall agree with the expert on the nature and extent of further work
to be performed by that expert or perform additional audit procedures appropriate
to the circumstances.
• Confirm that the accounting provisions of NAS 37, Provisions, Contingent
Liabilities and Contingent Assets have been complied with, in making the
provision.
• In case there is a difference between the valuation of the auditor’s expert and the
valuation of the management, discuss the difference with the management.
Reporting implication
In case the difference between the valuation of the auditor’s expert and the valuation
of the management is material and cannot be resolved, the auditor has to give a
modified opinion.
However, if the auditor has obtained sufficient appropriate evidence regarding the
valuation and presentation of the warranty provision, the auditor has to include
relevant details under the heading of key audit matters in the audit report, because it
is an area of higher assessed risk of material misstatement due to involvement of
high degree of uncertainty and significant auditor judgment.
The auditor is required to refer the work of expert in his report containing
unmodified opinion only if required by law and in such case he shall indicate in the
auditor’s report that the reference does not reduce the auditor’s responsibility for his
opinion.
If the auditor provides modified opinion, he may refer the expert’s work in the
auditor’s report to explain the nature of modification and shall indicate in the
auditor’s report that the reference does not reduce the auditor’s responsibility for his
opinion.
Before including the reference of the work of auditor’s expert in auditor’s report, the
auditor may need permission from him.
b) Related parties and associated transactions are often difficult to identify, as it can be
hard to establish, exactly who or what are the related parties of an entity. The criteria
for establishing related parties can be subjective and complex.

The directors may be reluctant to disclose to the auditors the existence of related
parties or transactions. This is an area of audit where knowledge is largely confined
to management, and the auditors often have little choice but to rely on full disclosure
by management to identify related parties. For example, identity of close family
members and their influence over an entity can only be revealed by management.
Similarly, related party transactions may not be easy to identify from the normal
transactions. For example, sales made to a related party may not be easily
distinguishable from the normal sales transactions.
Related party transactions may be concealed in whole, or in part, from auditors for
fraudulent purpose. Transactions may not be motivated by normal business
consideration, for example, transactions done for "window dressing." If the
management is deliberately concealing the true nature of these items, it will be
extremely difficult for the auditor to discover the rationale behind the transaction.
Materiality is a difficult concept to apply to related party transactions. A related
party transaction could occur at an abnormally small, or even nil, value. Determining
materiality based on monetary value is therefore irrelevant and the auditor should
instead be alert to the unusual nature of the transaction making it material. To
identify related party transactions following procedures can be used:
i. Review of documents that could possibly include persons related with the
entities. For example, income tax returns, information provided to regulatory
authorities, shareholder registers, director's declaration in case of Banks and
financial institutions, agreement with key management etc.
ii. Contracts executed by the company which are unusual in nature, guarantees
and guarantor relationships, communication with the advisors, lawyers etc.
iii. Existence of unusual transactions and complex transactions. For example,
complex equity transactions, mergers and acquisitions etc.
iv. The auditor should also obtain a written representation from the management
concerning the completeness of information provided regarding identification
of related parties.
a) Based on the following situations, provide your view whether the Chartered Accountant
involved is guilty of misconduct.
i) Mr. Mangal, a locally based Chartered Accountant in Biratnagar accepted an
audit assignment at a fee lower than that charged by the previous auditor, who
was stationed in Kathmandu and had to spend a lot of money on travel for which
he did not charge separately. (4 marks)
ii) Mr. S, a Chartered Accountant published a book and give his personal details as
the author. These details also mentioned his professional experience and his
present association as partner with STAR & Associates, Chartered Accountants,
an audit firm. (4 marks)
b) What does OECD stand for? Describe the Equitable Treatment of Shareholders as per
OECD principles on corporate governance. (1+6=7 marks)
Answer:

a)
i) ICAN's circular prohibits its members from tendering or quoting lower fee for any
profession/services than the fee/remuneration of their previous auditor/professional
accountant in public practice, without assigning and communicating reasonable
grounds for such reduction to those charged with governance.
In this case, Mr. Mangal a locally based Chartered Accountant, accepted an audit
assignment at a fee lower than that charged by the previous auditor, who was
outstation based Chartered Accountant and had to spend a lot of time and money on
travel which was included in his audit fee and was not charged by him separately.
The motive of Mr. Mangal was not to get the work from previous auditor by
accepting the audit assignment on lower fee i.e. undercutting of fee. Because, in
considering whether variation in fees would constitute undercutting, the quantum of
work, incidental and out of pocket expenses and other terms of appointment should
be considered.
Since the previous auditor was stationed in another town and therefore, had to incur
higher time and cost on account of conveyance, and previously fee was decided on
a composite basis, inclusive of travelling expenses of the auditor, it cannot be said
that Mr. Mangal has accepted an audit assignment based on undercutting of fees.
Hence, Mr. Mangal will not be held guilty for misconduct. He has to communicate
his grounds of quoting low fee to those charged with governance.
ii) Members should not adopt any indirect methods to advertise their professional
practice with a view to gain publicity and thereby solicit clients or professional
work. Such a restraint must be practiced so that members may maintain their
independence of judgment and may be able to command the respect of their
prospective clients.
As per the Guidelines on Ethical Marketing & Publicity Practices by Professional
Accountants issued by ICAN, a member writing a book is not permitted to indicate
in the book, the association with any firm of practicing member.
So, in the given case, Mr. S, being a chartered accountant in practice, has committed
the professional misconduct by mentioning that at present he is a partner in M/s
STAR & Associates, a chartered accountant firm.
b) OECD is the abbreviation of Organization for Economic Co-operation and
Development.
The corporate governance framework should ensure the equitable treatment of all
shareholders, including minority and foreign shareholders. All shareholders should
have the opportunity to obtain effective redress for violation of their rights. The
principle of equitable treatment of shareholders is explained in detail below:
a. All shareholders of the same series of a class should be treated equally. Within
any series of a class, all shares should carry the same rights. All investors should
be able to obtain information about the rights attached to all series and classes
of shares before they purchase. Any changes in voting rights should be subject
to approval by those classes of shares which are negatively affected. Minority
shareholders should be protected from abusive actions by, or in the interest of,
controlling shareholders acting either directly or indirectly, and should have

effective means of redress. Votes should be cast by custodians or nominees in a

manner agreed upon with the beneficial owner of the shares. Impediments to
cross border voting should be eliminated. Processes and procedures for general
shareholder meetings should allow for equitable treatment of all shareholders.
Company procedures should not make it unduly difficult or expensive to cast votes.
b. Insider trading and abusive self-dealing should be prohibited.
c. Members of the board and key executives should be required to disclose to the
board whether they, directly, indirectly or on behalf of third parties, have a
material interest in any transaction or matter directly affecting the corporation.
5.
a) Prime Chemical Industries manufactures chemical compounds using a continuous
production process. The profit before tax (Provisional) of the company as on 31 Ashadh
2076 is NPR 272 million. You are the auditor and the year-end audit is due to be
commenced shortly. The following matters have been brought to your attention.
At the beginning of the financial year 2075/76, management undertook an extensive
review of Prime Chemical's non-current asset valuation and as a result decided to
update the carrying value of all its Property Plant and Equipment. The finance director,
Mr. K K Pandey, contacted his brother, M K Pandey, who is a valuer and requested
that M K’s firm undertake the valuation, which took place in Shrawan 2075.
Required: (8 marks)
Describe substantive procedures you should perform to obtain sufficient, appropriate
audit evidence in relation to the above matters.
b) What is performance audit? Elaborate the objectives and scope of Performance Audit.
(7 marks)
Answer:
a) Substantive procedures for revaluation of property, plant and equipment (PPE)
• Obtain a schedule of all PPE revalued during the year and cast to confirm
completeness and accuracy of the revaluation adjustment and agree to trial
balance and financial statements.
• Consider the competence and capability of the valuer, M K Pandey, by assessing
through enquiry his qualification, membership of a professional body and
experience in valuing these types of assets.
• Consider whether the valuation undertaken provides sufficiently objective audit
evidence. Discuss with management whether M K Pandey has any financial
interest in Prime Chemical which along with the family relationship could have
had an impact on his independence.
• Agree the revalued amounts to the valuation statement provided by the valuer.
• Review the valuation report and consider if all assets in the same category have
been revalued in line with NAS 16, Property, Plant and Equipment.
• Agree the revalued amounts for these assets are included correctly in the non-
current assets register.

• Recalculate the total revaluation adjustment and agree correctly recorded in the
revaluation surplus.
• Recalculate the depreciation charge for the year to ensure that for the assets
revalued during the year, the depreciation was based on the correct valuation and
was for 12 months.
• Review the financial statements disclosures relating to the revaluation to ensure
they comply with NAS 16.
b) A performance audit is an objective and systematic examination of evidence for the
purpose of providing an independent assessment of the performance of a
government organization, program, activity, or function in order to provide
information to improve public accountability and facilitate decision-making by
parties with responsibility to oversee or initiate corrective action.
The objectives and scope of performance audits are to audit the economy, efficiency
and effectiveness (3Es) of auditees and to evaluate the discharge of accountability
and due care of probity in the use of resources.
Performance audits focus on one or more of following inter-related elements.
a. to provide objective assessment of the extent to which the auditee is currently
pursuing the 3Es.
b. to identify major deficiencies in management and control practices
c. to encourage improvement in the system of performance reporting
d. to provide information and propose recommendations that can lead to better
internal control and public accountability.
Performance auditing covers a wide variety of issues to arrive at the conclusion
relating to the 3Es. It examines and evaluates the systems, procedures, operation and
result related to:
a. planning , budgeting, accounting and reporting systems,
b. development , appraisal and utilization of resources,
c. acquisition and utilization of property , equipment, plant , inventory and other
assets, and
d. development, production and use of information.
a) Benefits of Electronic Data Interchange (EDI)
b) Purpose of Cost Audit
c) Agreed-upon Procedures
d) Scope Limitation
e) Tax Audit
Answer:
a) Benefits of Electronic Data Interchange (EDI)

EDI represents the transfer of electronic data from one organization's computer
system to another's. The data is structured in a commonly agreed format so that it is
directly usable by the receiving organization computer system. The following
benefits accrue under EDI systems:
a. The speed with which an inter-organizational transaction is processed is
minimized.
b. The paper work involved in transaction processing is eliminated.
c. The costs of transaction processing are reduced, as much of the need for human
interpretation and processing is removed.
d. Reduced human involvement reduces error.
b) Purpose of cost audit:
The undernoted circumstances may warrant the introduction of cost audit in an entity:
i. Price fixation: The need for fixation of retention prices in the case of materials
of national importance, like steel, cement, etc. may be useful in knowing the
true cost of production.
ii. Cost variation within the industry: Where the cost of production varies
significantly from unit to unit in the same industry, cost audit may be necessary
to find the reasons for such differences.
iii. Inefficient management: Where a factory is run inefficiently and
uneconomically, institution of cost audit may be necessary. It may be
particularly useful for the government before it takes over any unit.
iv. Tax-assessment: Where a duty or tax is levied on products based on cost of
production, the levying authorities may ask for cost audit to determine the
correct cost of production.
v. Trade disputes: Cost audit may be useful in settling trade disputes about claim
for higher wages, bonus, etc.
c) Agreed-upon Procedures
An agreed-upon procedures engagement is one in which a practitioner is engaged by
a client to issue a report of findings based on specific procedures performed on
subject matter. The client engages the practitioner to assist specified parties in
evaluating subject matter or an assertion as a result of a need or needs of the specified
parties.
Because the specified parties require that findings be independently derived, the
services of a practitioner are obtained to perform procedures and report his or her
findings. The specified parties and the practitioner agree upon the procedures to be
performed by the practitioner that the specified parties believe are appropriate.
Because the needs of the specified parties may vary widely, the nature, timing, and
extent of the agreed upon procedures may vary as well; consequently, the specified
parties assume responsibility for the sufficiency of the procedures since they best
understand their own needs.

In an engagement performed under this situation, the practitioner does not perform
an audit or a review and does not provide an opinion or negative assurance. Instead,
the practitioner's report on agreed-upon procedures should be in the form of
procedures and findings.
An engagement to perform agreed-upon procedures as per NSRS 4400 may involve
the auditor in performing certain procedures concerning individual items of financial
data (for example, accounts payable, accounts receivable, purchases from related
parties), a component of the financial statements (for example, a balance sheet) or
even a complete set of financial statements.
d) Scope Limitation
Scope limitation is the limitation imposed by either the client or circumstances that
prevent the auditor from applying procedures which are considered necessary in the
circumstances. An example of limitation imposed by the client may be when the
terms of engagement specify that the auditor will not carry out the audit procedure
that the auditor believes is necessary. Examples of limitation imposed by
circumstances may be (1) the timing of auditor’s appointment does not enable him to
observe the physical inventory counts. (2) Inadequacy in the client’s accounting
records does not enable him to carry out the audit procedure that he believes is
desirable.
e) Tax Audit
Tax audit is the process of review the entity's income tax returns and other
information supplied to regulatory agencies, i.e., Inland Revenue Department (IRD).
Tax Audit is the areas of the modern day auditing in which Auditor is appointed for
ascertaining the sales, purchase, profit and other figure submitted by the enterprises
to Tax Office.
Usually, management has an interest in pursuing inappropriate means to minimize
reported earnings for tax-motivated reasons. Thus, tax audit involves selective
verification of financial figure presented on entity's tax return reports. Basically tax
audit involves compliance of the Income Tax Act, 2058 which emphasizes on
providing the error free tax return to tax authorities by assessing the correct income
of assessees.

Paper 4: Corporate Laws

1. Answer the following questions:
a) ABC Limited is listed in stock exchange and preparing the abstract of Financial
Statements to be issued to its shareholders. The company has some confusion regarding
the provisions of the Companies Act relating to the abstract of financial statements and
its dissemination. Answer the following questions as per the Companies Act, 2063.
(2+5+3= 10 marks)
i) Is it necessary to send the annual financial statement and director’s report to the
shareholders?
ii) What is the basis and contents of the abstract of financial statement?
iii) What will be the compliance issue, if the Company chooses to publish the abstract
of financial statement instead of sending to shareholders?
b) The business of Solukhumbu Solar Power Company Ltd. is in decreasing trend. The
Board of Directors (BoD) of the company tried their best to maintain the business of
the company. The whole effort of BoD has gone in vain. As a result, the financial
position of the company is not in a position to bear its liabilities as per the financial
statement and also clearly stated it in the audit report of the company. Thus, its
shareholders are interested to liquidate it compulsorily as to the existing financial
position. However, the BoD are still in optimistic and not interested to liquidate the
company. Because of the pressure from the shareholders, the BoD are forced to initiate
the insolvency proceedings of the company. How would you explain the BoD if they
consulted you as an expert regarding the following questions: (4+2+4=10 marks)
i) When a company can be deemed as an insolvent under the Insolvency Act, 2063?
ii) How insolvency proceedings can be proceed?
iii) State where there is no application required for the insolvency proceedings of
certain companies.
Answer:
a)
i) As per Sec 84(1) of the Companies Act, 2063 a company listed in the stock exchange
shall not be required to send the annual financial statement and director’s report to its
shareholders or debenture-holders provided, however, that an abstract of financial
statement prepared pursuant to Sub-sections (2) and (3) shall be sent to every shareholder
along with the notice of annual general meeting.
ii) The abstract of financial statement required to be sent pursuant to the proviso to Sub-
section (1) shall be prepared on the basis of the annual financial statement of the company
and the director’s report. The format of such statement shall be as specified by the
Company Registrar's Office based on the suggestions of the body specified to set
accounting standards under the prevailing law. - Sec 84 (2)
Similarly, as per Subsection (3) of Section 84, abstract of financial statement contains,
inter alia, the following matters:

(a) Matter indicating that the abstract of annual financial statement is only an abstract
of the annual financial statement of the company and their director’s report,
(b) An opinion of the company’s auditor as to whether or not the abstract of annual
financial statement is in consonance with the annual financial statement of the
company and the director’s report and whether or not the abstract is consistent with
the format specified pursuant to this Section,
(c) Matter as to whether or not the auditor has made any remarks about the annual
financial statement of the company and, if such remarks have been made, full details
of such remarks and such materials as required to understand such remarks,
(d) In cases where the auditor has mentioned in his report anything about the inadequacy
of the accounts and accounting returns or about the company’s accounts not being
verifiable with the records and returns maintained by the company or about the non-
receipt of any such information and explanation as sought, full details thereof.
iii) Instead of sending the abstract of annual financial statement to the shareholders at their
personal addresses, the company many publish it at least twice in a national daily
newspaper at the time of publishing the notice of meeting. (Subsection (4) of Sec 84)
In the event of publication of the abstract of annual financial statement, there shall not be
required to send the abstract at the personal addresses of shareholders. (Subsection (5) of
Sec 84)
Hence, there is no compliance issue, if the company follows the above procedure to
publish the abstract of financial statement.
b)
i) According to Section 7 of the Insolvency Act, 2063, a company will be deemed to
have become insolvent in the following conditions:
(a) Where 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) Where 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) Where 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.
(2) Nothing contained in this Section shall prevent the establishing of the fact that a
company has become insolvent where it is proved from any other manner that the
liability of the company exceed the value of the assets of the company or the
company itself admits that it has become insolvent.
ii) According to Section 4 of the Insolvency Act, 2063, an application is to be made to
the Court for insolvency proceedings.
Where it is required to institute insolvency proceedings against any company, any of
the concerned person like shareholder, creditor or debenture-holder having the

qualification as prescribed may make an application to the Court in the prescribed

format for the institution of such proceedings.
iii) Section 8 of the Act prescribes that insolvency proceedings may be initiated in case of
certain companies although there is no application from the concerned persons. In
pursuant to Section 8 of the Act, no application may be made to the Court for
insolvency proceedings in relation to the following company without obtaining prior
approval of the following authority:
(a) In the case of a bank or financial institution carrying on banking and financial
business, the Nepal Rastra Bank, or
(b) In the case of an insurance company carrying on insurance business, the Insurance
Board formed pursuant to the Insurance Act, 2049, or
(c) In the case of a company which cannot undergo voluntary liquidation without
approval of the competent body or authority, except that mentioned in Clause (a)
or (b), such authority.
Every application to be made for insolvency proceedings in relation to a company as
mentioned above should be accompanied by a copy of the approval given by the
authority set forth in that Sub-section for that purpose.
a) The Institute of Chartered Accountants of Nepal (ICAN) received a complaint against
Mr. Nilam Sharma, a member of ICAN alleging that he conducts audit in partnership
with a person called Rabi Singh who has not obtained a certificate of practice of his
class, hence, a complaint filed against him. Answer the following questions pursuant
to the Nepal Chartered Accountant Act, 2053. (4+3=7 marks)
i) How the complaint shall be processed by ICAN?
ii) What action can ICAN take against him?
b) The clarification given by Mr. Pradhumnalal, the Governor of Nepal Rastra Bank is
ascertained as not valid as to the lack of knowledge of management. So, he was
removed from the post. While at the time of appointment, his name was recommended
to the Government of Nepal, Council of Ministers as a renowned export in the field of
economics. There is no any appointment till now. Answer the followings:
(1+3+2+1=7 marks)
iii) Who shall discharge the job of Governor before the appointment of new Governor?
iv) State the grounds of removal of Governor.
v) State the process of removal of Governor.
vi) Do you think his removal is valid on the said ground?
c) Town Development Department purchased Furniture for the Home Ministry from
Kamana Furnishing Solutions Pvt. Ltd. at sum of Rs. 10,00,000.00 (Rs. Ten Lakh). The
given Public Entity had purchased the furniture applying the force account method.
Shree furnishing Pvt. Ltd. questioned the method and requested to cancel the
procurement works regarding the overlapping the amount limitation and applying
procurement method otherwise. Supply the Procurement method on goods as provided

in the Public Procurement Act, 2063 and Ensure the validity of the force account
procurement method in above transaction. (6 marks)
Answer:
a) Pursuant to section 35 of Nepal Chartered Accountants Act, 2053, where a member having
obtained the professional certificate does not observe the code of conduct set forth in this
Act or the Rules framed under this Act or such member violates this Act or the Rules
framed under this Act, the concerned person may make a complaint to the ICAN against
such member. In pursuance to section 35 of the above Act a complaint has been filed to
ICAN against Mr. Nilam Sharma, a member of ICAN with the allegation that he conducts
audit in partnership with a person called Rabi Singh who has not obtained a certificate of
practice of his class, which is a prohibited act under section 34(2) of this Act. Pursuant to
this section 34(2), auditing, either in partnership or in collusion in any manner with a person
who has not obtained the certificate of practice of one's class, is prohibited.
Pursuant to section 35(2) of this Act, where there is found a fact to believe that a member
having obtained the professional certificate has not observed the conduct required to be
observed, the Executive Director shall submit a motion, accompanied by the available
facts, to the Council of ICAN for taking action against such member. Thereupon, the
Council of ICAN shall forward the complaint filed under Nepal Chartered Accountants
Rules, 2061 to the Disciplinary Committee for investigation.
Pursuant to section 14(1) of this Act, there is a Disciplinary Committee constituted under
Section 14 of this Act, to inquire into a complaint and recommend to the Council of ICAN
for necessary action.
The procedures of Disciplinary Committee are as prescribed in the Rules framed under the
Act. The Disciplinary Committee shall have the same powers as are vested in the court in
respect of issuing an order to the concerned person, receiving evidence and examining
witnesses. Pursuant to section 14(5) of this Act, the Disciplinary Committee shall make
recommendation, alongwith its opinion and finding, to the Council of ICAN for taking
necessary action against the member found guilty from its investigation; and the Council
of ICAN may, in view of such recommendation, impose any of the following penalties on
the concerned member, according to the gravity of the offence:
(a) Reprimanding;
(b) Removing from the membership for a period not exceeding five years;
(c) Prohibiting from carrying on the accountancy for any specific period;
(d) Cancelling the certificate of practice or membership.
Hence, the Council of ICAN shall take a decision to take appropriate action based on the
above recommendation against Mr. Nilam Sharma if the Disciplinary Committee finds him
guilty violating the code of conduct of ICAN.
Before imposing penalty as referred to in Sub-section (5) above, the Council of ICAN shall
provide a reasonable opportunity to him to defend himself. If he is not satisfied with the
decision made by the Council of ICAN to punish him, he can make an appeal to the
concerned High Court pursuant to section 14(8) of this Act.
b)

i) Section 27 of the Nepal Rastra Bank Act, 2058 has the provision of acting Governor:
So, Government of Nepal shall designate the Senior Deputy Governor of the Nepal
Rastra Bank as Acting Governor to discharge the functions of the Governor in cases
where the Governor is unable to discharge his duties due to any reason.
ii) The Governor shall be removed from the office on any of the following grounds:-
(a) If one is disqualified to become a Director pursuant to Section 21; or
(b) The lack of capability to implement or cause to implement the functions which
the Bank has to carry out in order to achieve the objectives of the Bank under this
Act; or
(c) If one has committed any act causing loss and damage to the banking and financial
system of the country; or
(d) If one is found to have acted dishonestly or with mala fide intention in any
transaction related to the business of the Bank; or
(e) If professional license is revoked or prohibited from carrying out any profession
rendering disqualified to be engaged in any trade or profession on the ground of
gross misconduct; or
(f) If one is absent for more than three consecutive meeting of Board without a
genuine reason;
Except on the grounds referred to in Sub-section (5), no Governor, Deputy Governor
and Director shall be removed from office.
iii) Section 23 has provided the constitution, functions and duties of Inquiry
Committee. The Governor is removed from office on the recommendation of such
committee. The Committee is constituted as follows:
(a) The person designated by Government of Nepal from amongst the retired Justices
of the Supreme Court - Chairperson;
(b) Two persons designated by Government of Nepal from amongst renowned
persons belonging to economic, monetary, banking, financial, commercial or
management sectors - Member
The Inquiry Committee may, prior to submission of its recommendation to
Government of Nepal along with its findings, record the statement and conduct
inquiry with, the concerned person. The Inquiry Committee may fix its procedure to
be followed in connection with the inquiry. The Inquiry Committee shall submit its
recommendation along with its findings to Government of Nepal within one month.
iv) Section 22 has mentioned the grounds for removal of the Governor also. He has to be
given reasonable opportunity to defend prior to removal from his office. Before
removal there should be grounds and recommendation of an inquiry committee
constituted under section 23. If he has not provided the opportunity to defend and
removed without any ground and recommendation of the inquiry committee the
removal may not be valid. While removing a Governor, the Government of Nepal shall
cause to conduct an inquiry by committee and remove him/her from the office on
the basis of the recommendation made by the committee. The Governor has removed
beyond the process as mentioned in the NRB Act, 2058. There is no any grounds of
removal as well as recommendation of inquiry committee. So, the removal is not valid.

c) The Public Procurement Act, 2063 (PPA) (with amendment 2073), Section 8(1)(a), has
mentioned the methods of procuring any goods by any Public Entity. They are as follows:
(1) By inviting open bids at international level,
(2) By inviting open bids at national level,
(3) By inviting sealed quotations,
(4) By procuring directly,
(5) Through participation of users' committee or beneficiary group,
(6) Through force account.
(7) Whole sale rate technique.
(8) Catalogue shopping technique.
(9) Limited Tendering that can be participate in bid by limited bidders.
(10) Buy Back Method in which new goods purchased and old one returned to the seller.
Regarding above force account method transaction the amount limitation is Rs 5,00,000
(five lakhs) only. More than the amount, other methods like sealed quotation and so on
methods shall be applied during the procurement of the goods and alike. However, the
transaction limit shall be over till the amount of 20 Lakhs for procuring medicine and till
the 15 Lakhs for procuring the goods of Nepalese origin. These extra transaction limitation
shall be not be applied for the furniture as said in above. Therefore, the procuring the
furniture applying the force account method of procuring is wrong and should be cancelled
by the concerned authority.
a) Industrial Enterprises Act, 2073 has provision of the constitution of Industry and
Investment Promotion Board. Discuss about the functions, duties and powers of the
Board as prescribed under the Act. (7 marks)
b) Money Laundering Prevention Act, 2064 has been enacted to prohibit the money
laundering and terrorist financing. This Act has punished any person committing the
offence of money laundering or terrorist financing irrespective of the person’s
residence. State the acts which are considered as offence under the Act. (7 marks)
c) Yeti business group has incorporated an International Merchant Bank in Nepal. In
Fiscal Year 2076/077, this bank is willing to do as international financial transactions.
Can this bank obtain the license to carry on the international financial transactions?
List out the financial entities which may authorize to obtain licenses to carry out the
international financial transactions under the International Financial Transactions
Act, 2054. (6 marks)
Answer:
a) The functions, duties and powers of the Industry and Investment Promotion Board as
prescribed in Section 19 of the Industrial Enterprise Act, 2073 are as follows:
(i) To decide policies related to industrial promotion, investment protection related to
enhancement of industrialization,
(ii) To resolve obstacles and confusions in respect of enforcement and implementation
of law of industry,

(iii) To observe and examine regularly country’s overall industrial policy, legal structure
and their system and to recommend the Government of Nepal (GON) for necessary
reform,
(iv) To decide policy matters on the basis of existing law regarding foreign investment
and technology transfer,
(v) To cause to follow the ways and means for the prevention of the environmental
pollution by putting more emphasis on the avoidance,
(vi) To recommend GON regarding examination and evaluation of position of industrial
development in the country,
(vii) To resolve any difficulties or obstacles regarding the services and facilities to be
provided to the industries under this Act.,
(viii) To give direction to the concern authorities resolving problem or cause to resolve by
going through the complaint of the entrepreneurs,
(ix) To recommend GON in respect of level and classification nature of the industries,
(x) To recommend GON relating to the promotion and encouragement of promotion of
investment through research and survey of them,
(xi) To decide policy for ensuring the quality of the goods product,
(xii) To advise GON relating to the enforcement of integrated industrial management
information,
(xiii) To do or cause to do for the development of effective competitive and coordinated
performance between the public, private and cooperative sectors,
(xiv) To do or cause to do act to gain speed of industrialization in the country,
(xv) To give directives to the concerned authorities to provide facilities and on receipt of
the complaints in this regard,
(xvi) To perform or cause to perform other acts as prescribed,
b) Chapter-2 of the Asset (Money) Laundering Prevention Act, 2064 prescribes the provisions
relating to the nature of the offences under the Act. It prescribes an act as an offence where
the money is laundered and the financing money in act of terrorism.
According to Section 3, money laundering is prohibited. The Act prescribes the committing
or cause to do following act as offences:
(a) Converting and transferring property by any means knowing or having reasonable
grounds to believe that it is proceeds of crime for the purpose of concealing or
disguising the illicit origin of property, or assisting any person involved in the offence
for evading legal consequences of offender.
(b) Concealing or disguising or changing the true nature, source, location, disposition,
movement or ownership of property or rights with respect to such property knowing
or having reasonable grounds to believe that it is proceeds of crimes.
(c) Acquiring, using, possessing property knowing or having reasonable grounds to
believe that it is the proceeds of crime.
(d) conspiring to commit, aid, abet, facilitate, counsel, attempt, associate with or
participate in the commission of the acts mentioned above.

In other words anyone who is engaged or involved in the act of concealing or hiding money
believed earned in an illicitly through offence or to hold money earned such money with a
view to protect anyone who is involved in an act of offence.
Accordingly Section 4 prohibits financial investment in act of terrorism by making such
act as an offence.
Under this provision it has been prohibited to attempt, support or provoke others to commit
offences stipulated above.
Section 4 of the Act also prescribes the condition when it is considered as investment in
the act of terrorism. According to the section, No person shall, by any means, directly or
indirectly, unlawfully and willfully, provide or collect funds with the intention that they should
be used or in the knowledge that they are to or intended to be used, in whole or in part, in order
to carry out a terrorist act, or by a terrorist or a terrorist organization. Moreover, no person
shall, by any means, directly or indirectly, provide or conspire to provide material support or
resources to any terrorist or terrorist organization or in order to carry out a terrorist act.
For this purpose, in case anyone has committed any act supposed to be an offence under
the various international conventions relating to terrorist activities or provided or collected
any money by any means for terrorizing knowingly or with grounds that such money is
being used for committing such offence, he/she shall be supposed to have invested in
terrorist activities.
c) Section 4(1) of the International Financial Transactions Act,2054 has provided the certain
financial entities which may be provided the license to carry out international financial
transactions. Therefore, the International Merchant Bank can obtain the license to do
international financial transactions.
Further, the following financial entities may be authorized to obtain licenses to carry out
international financial transactions under this Act:
(i) Foreign bank and trust companies,
(ii) International insurance and reinsurance companies,
(iii) Companies serving as the registered offices for foreign companies,
(iv) International holding and investment companies,
(v) Administrative or regional offices established by foreign companies,
(vi) International trading companies,
(vii) International finance companies,
(viii) Foreign real estate holding companies,
(ix) Foreign Patent and royalty companies,
(x) Foreign mutual funds,
(xi) International leasing companies,
(xii) International merchant banks,
(xiii) Entities such as foreign partnership and trusts established as body corporate,
(xiv) International sales transaction companies,
(xv) Foreign entities to allow nonresident pensions or deferred bonus plans,
(xvi) International financial companies providing services like stock broker, underwriter,
investment advisor, pension fund advisor.
a) Board of Directors of a Bank and Financial Institution plays an important role for
carrying the banking business. The success of the banking business totally depends
upon the composition of the Board of Directors and their ability to operate the

institution. State how the Board of Directors of the Bank and Financial Institution is
constituted along with their tenure. Also state who are not eligible to be appointed as
a Board of Director as per the Bank and Financial Institution Act, 2073. (8 marks)
b) Ganesh Regmi, an employee of Investment Company is convicted for an offence of
insider trading after investigation, and, he has to be imposed punishment against it
by the Securities Board. Answer the following pursuant to the Securities Act, 2063:
(2+3+2=7 marks)
i) What is insider trading?
ii) What persons are likely to be involved in insider trading?
iii) What is the range of punishment the Securities Board could impose against him?
Answer:
a) Section 14 of the Banks and Financial Institutions Act, 2073 prescribes the provision
regarding the constitution of Board of Directors of a bank or financial institution. As
per the Section, a bank or financial institution will consists of a Board of Directors
comprising at least five Directors and not exceeding seven Directors.
Appointment of Directors:
According to the provision of the Section 14 of the Act, the General Meeting of a bank
or financial institution will appoint the Directors Subject to Act and the Articles of
Association, However, before convening of the first Annual General Meeting of the
bank or financial institution, promoters themselves will appoint the Directors.
Furthermore in case where the position of any Director falls vacant before the holding
of the Annual General Meeting, the Board of Directors may appoint a Director until
the next General Meeting is held. In cases where any corporate body has subscribed
shares, it may appoint Directors in proportion to the number of shares it has subscribed
and while nominating in such a manner, the same person shall not be nominated to
more than one bank or financial institution. While appointing so, the concerned
company also appoints an Alternate Director to work in the absence of the Director.
The Board of Directors also appoints at least one independent director from among the
persons possessing qualifications and experience set forth in Section 17 of the Act. The
information thereof will be furnished to the First General Meeting to be held after such
an appointment. There is certain restriction of the appointment of the Independent
Director and Director from a single family. Thus a promoter, director or shareholder
possessing more than zero point one percent share of a bank and financial institution
and his/her member of family cannot become an independent Director.
In case of Directors, no more than one member of a family may become a Director of
any bank or financial institution at the same time. The chairperson of the Board of
Directors will be a Director chosen by the Directors from among themselves by
majority votes.
Term of Office of the Directors:
According to Section 15 of the Act, the term of office of a Director will be for a
maximum period of four years as provided for in the Articles of Association and he/she
may be eligible to be reappointed or re-nominated. However, an Independent Director
may be appointed for only one term of office.
Disqualification of Directors:

Section 18 of the Act prescribes the disqualification of Directors. According to it the

following persons will not be eligible to become a Director of a bank or financial
institution:-
(i) If he or she has not attained the age of 25 years,
(ii) If he or she is of unsound mind or insane,
(iii) If he or she has been declared bankrupt in Nepal or abroad for being unable to
pay debt,
(iv) If he or she has been blacklisted or declared a defaulter in connection with any
transaction with any bank or financial institution in Nepal or in abroad, and a
period of at least three years has not been lapsed after removal of his\her name
from the blacklist or list of defaulter
(v) An incumbent Director or an employee of any corporate body carrying out
transactions of a bank or financial institution or any institution collecting any
type of deposits or carrying out transactions relating to insurance,
(vi) A borrower or an incumbent auditor or an advisor of the concerned bank or
financial institution or a person, firm or company who/which is a partner in any
kind of contract with the concerned bank or financial institution or having
personal interests,
(vii) Who has acquired the membership of the Stock Exchange to act as a securities
broker or a merchant banker,
(viii) Incumbent Director of a licensed bank or financial institution,
(ix) A person, who has not subscribed to the minimum number of shares required
to subscribe to be eligible for appointment as a Director pursuant to the Articles
of Association of a bank or financial institution,
(x) Incumbent employee of the Government of Nepal, or a corporate body having
ownership of the Government of Nepal, or Rastra Bank or of a bank or financial
institution, Provided that nothing in this clause shall prevent from nominating
a Director in a micro-finance institution or infrastructure development bank, of
which share has been purchased by the Government of Nepal or an institution
having under the ownership of the Government of Nepal or Rastra Bank or bank
or financial institution.
(xi) Who, having a liability to pay taxes pursuant to the laws in force, has failed to
pay the same
(xii) If he or she has not completed a period of ten years after serving out the
sentence upon being convicted of an offence of theft, cheating, forgery, fraud,
corruption, any offence involving moral turpitude or a banking offence from a
court of Nepal or that of a foreign country,
(xiii) If action had been taken against him or her by a regulatory agency as per the
law for committing an act in contravention of the law and if he or she has not
completed a period of five years after being taken such action,
(xiv) In the case of an independent Director, If he or she is a promoter or a
shareholder holding ownership of more than 0.1 % share of the concerned bank
or financial institution,

(xv) If he or she has not served the full sentence or is yet to clear the dues of the fine
imposed by a court of law or if he or she is in arrears to pay a government due.
(2) Notwithstanding anything contained in Clause (e) of Sub-Section (1), an official or
employee of a bank or financial institution may work as a Director of a subsidiary
company of the same bank or financial institution.
According to Section 20 of the Act, any person, who holds a constitutional position
cannot remain in the Board of Directors so long as he/she is holding such a position.
b)
i) Insider trading has been defined by Section 91(1) of the Securities Act, 2063 as
under:
If any person deals in securities or causes any other person to deal in securities on
the basis of any insider information or notice that are unpublished or communicates
any information or notice known to such a person in the course of the discharge of
his duties in a manner likely to affect the price of securities such a person shall be
deemed to have been committed an insider trading in securities.
Pursuant to explanation to Section 91(1) of the Securities Act, 2063 "insider
information" means any such specific kind of information or notice not published
by a body corporate issuing any securities as may be capable of affecting the price
of such securities if such information or notice is disclosed.
ii) Section 92 of the Securities Act, 2063 identifies the persons likely to be involved in
insider trading as under:
For the purposes of this Act, the following persons shall be deemed to be those who
have access to the insider information or notice not published by anybody corporate:
(a) A director, employee or a person, who can obtain any information or a notice
in the capacity of a shareholder of that body corporate,
(b) A person who can obtain any information or a notice in the capacity of a
professional service provider to that body corporate.
(c) A person who can obtain any information or a notice having a direct or indirect
contact with the person of source as specified in Clauses (a) and (b) above.
iii) Ganesh Regmi, an employee of Investment Public Company who commits an
insider trading as referred to in Section 91 above, shall, upon being convicted of
the offense of insider trading, be liable to the punishment with a fine equal to the
amount in controversy or with imprisonment for a term not exceeding one year or
with both punishments pursuant to Section 101(1) of the Securities Act, 2063.
5. Answer the following questions: (3×5=15 marks)
a) Mr. R K Kayastha has been working in the RB Bank Ltd in Recovery unit. He has to
more credit to be recovered on behalf of bank. The Bank and financial Institution Act,
2073 (BAFIA) has mentioned its procedure that how credit is recovered. As you are
credit recovery experts, suggest the credit recovery provision to Mr. RK in accordance
with the BAFIA.
b) Securities Act, 2063 has been enacted 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 securities. State how a body corporate issues
securities as per the provisions of the Securities Act, 2063?
c) XYZ limited has been employing workers through labour provider. In line with the
requirements of the Labour Act, 2074, what are the liabilities of the main employer
when workers are hired from labour providers? Do you think there lies any
responsibilities of the main employer if remuneration are not provided to the workers?
Answer:
a) Section 57 of BAFIA has provided the process of credit recovery as follows:
(1) Recovery by selling the assets:
Any bank or financial institution may recover its principal and interests having sold
by auction the assets taken or put as mortgaged by the borrower in the name of the
bank or financial institution.
Bank may proceed the recovery process if the borrower fails to abide by the terms
of the credit as mentioned in the deed or agreement or any terms and covenants made
with a bank or financial institution or fails to repay credit to the bank or financial
institution within the time-limit stipulated in the deed, or if the bank or financial
institution is found, through the monitoring conducted pursuant to Section 56, that it
has misused the credit by using it for the purpose other than the purpose for which it
was disbursed.
(2) Placing more assets as collateral security:
In case the borrower gives off the title in any manner whatsoever over the assets
mortgaged collateral security or the value of assets mortgaged as collateral security
to the bank or financial institution is decreased, the bank or financial institution may
ask such borrower to place more assets as collateral security within the time limit
specified by it and the borrower shall have to place additional collateral security
within the time-limit prescribed by the bank or financial institution.
(3) Recovery from the movable or immovable assets of borrower:
In case the borrower fails to place more assets as collateral within the time limit
pursuant to Sub-Section (2) or the principal and interest could not be recovered from
the collateral security so mortgaged, the bank or financial institution may recover its
principal and interest from the movable or immovable assets under the ownership or
title of the borrower according to the prevailing laws.
(4) Refund the remaining amount to the borrower:
In case any amount remains after deducting the amount realized from auction sale or
other provisions under this Section from the amount of expenses and the amount of
principal and interests of the bank or financial institution, such remaining amount
shall have to be refunded to the concerned borrower.
(5) Register or transfer the assets auctioned in the name of person:
The bank or financial institution shall write to the concerned office to register or
transfer the ownership of the assets so auctioned as per this Section in the name of
the person accepting the auction in accordance with the prevailing law. The

concerned office shall have to register or transfer the ownership of the assets as
requested.
(6) Taking ownership of the assets which no one accepts:
In case no one accepts the movable or immovable assets while carrying out auction
by the bank or financial institution under this Section, the bank or financial institution
shall take into its ownership such assets as prescribed. The concerned office has to
register or transfer the ownership of the assets in the name of the concerned bank or
financial institution if it is requested with the decision as per the existing laws.
(7) Taking Government action for enjoying the assets:
In case the owner denies to, or obstructs in, possessing the property accepted by any
person or a bank or financial institution and the party accepting the auction who has
the right to enjoy the assets according to laws, the concerned body of Government of
Nepal shall take action to cause to possess of said property as per the prevailing law.
(8) Continuing the recovery process:
The licensed institution shall not be entitled to suspend the recovery process of the
credit written off subject to the prevailing Credit Write-off Byelaws.
(9) Blacklisting:
In case a borrower does not repay the credit from a bank or financial institution and
the interests accrued thereto and penal interests within the time limit stipulated in
the deed of the credit or the contract, the bank or financial institution shall have to
write to the Credit Information Bureau Limited to blacklist such borrower according
to the prevailing laws.
(10) Freezing any assets of borrower located in foreign country:
In case the credit could not be recovered even after taking actions against the
borrower under this Section, the bank or financial institution may, for the purpose
of recovering such credit amount, take actions for recovery of the credits according
to the prevailing laws including freezing of any assets of the borrower located in a
foreign country.
(11) Withhold or confiscate the passports and deprive the state services:
In case the credit could not be recovered even after taking all actions under this
Section, the concerned bank or financial institution may request the Rastra Bank for
making necessary provisions to withhold or confiscate the passport/s of the
concerned borrowers and to deprive the concerned borrower from availing the
services to be made available by the state. Upon receipt of such request, Rastra Bank
shall have to forward the request to Government of Nepal for necessary actions along
with its opinion.
b) The body corporate will issue its securities under the Securities Act, 2063 as follows:
Under section 27(1) 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).

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 along with
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.
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.
Each 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.
c) As per Section 64 of the Labour Act, 2074, following are the liabilities of the main
employer who employs workers through labour providers.
1. Any main employer, when employing workers through a licensed labour provider,
shall follow an agreement entered with such labour provider.
2. Main employer, before entering into an agreement, shall ensure that the provisions
for the payment of' remuneration and benefits to the workers shall not be less than
what is prescribed by the Act or the rules made under the Act.

3. Main employer shall acquire regular information on whether the labour provider is
regularly providing remuneration and benefits to the workers hired from such labour
provider or not.
4. On inquiry pursuant to sub-section (3), if it is found that the remuneration or benefits
are not provided to the workers by the labour provider, the main employer shall
immediately make a request to such labour provider for the payment of such
remuneration and benefits and the Department or Office shall also be informed
accordingly.
5. If the labour provider does not provide the remuneration and benefits as requested
under sub section (4), the main employer shall inform the Department or the Office
accordingly.
6. On receipt of the information pursuant to Subsection (5) or if the information about
the non-payment of the remuneration and benefits by the labour provider is received
through any other means, the Department or the Office may make the payment from
the deposit or bank guarantee kept by such labour provider at the time of acquiring
the license.
7. The main employer shall make necessary means and arrangement relating to the
Occupational Safety and Health required to be complied in the workplace.
8. If the remuneration and benefits to be provided pursuant to the prevailing law
increases after an agreement between a main employer and a labour provider is made,
such amount of remuneration and benefits, to the extent of increment, shall also be
paid by the main employer.
9. Hiring of workers is prohibited from any enterprise established with the involvement
of the main employer or with the involvement of any manager or director or family
member on his behalf'.
10. Other provisions relating to the liabilities of the main employer shall be as prescribed
According to Section 64(4) of the Labour Act, if it is found that the remuneration or
benefits are not provided to the workers by the labour provider, the main employer shall
immediately make a request to such labour provider for the payment of such remuneration
and benefits and the Department or Office shall also be informed accordingly. Hence,
there are responsibilities of the main employer if remuneration are not provided to the
workers by labour provider.
a) List out the offences of providing loan in an unauthorized manner under the Banking
Offence and Punishment Act, 2064. (4 marks)
b) State the essential elements of arbitration. (3 marks)
c) State the power of Nepal Rastra Bank if the directions given by the NRB are not abided
by the person who has obtained license to make the transaction of foreign exchange
under Foreign Exchange Regulation Act, 2019. (3 marks)
Answer:
a) Section 7 has provided such offence on loan that is provided in an unauthorized manner as
following:

(a) Avail or provide loans by submitting an incorrect, false, or non-existent financial

statement or by creating artificial business.
(b) Avail or provide over loans by way of unnatural overvaluation of collateral security.
(c) Avail or provide loans by way of unnaturally hiking the project cost based on false
details.
(d) Avail or provide credit, facility or discounts beyond the authority obtained or limit
sanctioned.
(e) Avail credit or advance by the chief executive officer or any employee of a bank or
financial institution in a manner except under the employee benefits scheme
prescribed in the prevailing employee administration bye-laws or employee loans or
advances bye-laws of the bank or financial institution.
(f) Avail credit by promoter, director, a shareholder deemed to have a financial interest
or the family members of such persons from the bank or financial institution provided
that there will no restriction on availing loan on the security of fixed deposit receipt,
gold or government securities.
(g) Re-avail or re-provide loans from or by other Bank of Financial Institution without
having due release of the collateral security once provided to a Bank or Financial
Institution or in excess than the amount covered by the collateral security against the
same collateral security. Provided that, this restriction shall not be applicable in case
of release of loans to be provided under pari passu consortium.
(h) Avail loans through an entity having established in the name of a person who, in fact,
does not have financial capability to run the business or, who is a person under undue
influence or bringing in a dummy borrower or extend loans knowing the said facts.
(i) Extend credit more than the requirement compared to the customer's business
transaction.
(j) Accept or provide any sort of undue benefit in return to granting credit facility.
(k) Give or receive payment of the full or partial amount of the loan by bringing in dummy
borrower by promoter, director, chief executive officer or a person authorized to
disburse the loan with the intention of also availing the loan facility himself.
(l) Disburse any loan by promoter, director, chief executive officer or a person authorized
to disburse the loan.to an individual or an organization with whom there is a financial
interest involved.
b) Following are the essential elements of a valid arbitration agreement:
a. Written form: It may be made before or after arising disputes.
b. No need to mention name of the arbitrator: It may be fixed by mutual agreement.
c. Disputes: Any disputes that arises thereof may be referred. The existence of dispute is
compulsory.
d. All the essential elements of a valid contract.
e. Binding force of award: An award given by the arbitrator carries binding force against
the disputed parties.
f. Simple procedure: The procedure of arbitration is simple which avoids the lengthy
procedures of the regular courts.

c) As per Section 3A of the Foreign Exchange Regulation Act, 2019, Nepal Rastra Bank may
take one or all out of the following actions:
i) To admonish,
ii) To impose restriction on any or all of the foreign exchange transaction,
iii) To forfeit the cash deposit in the Bank or make recovery from the guarantee,
iv) To suspend or cancel the license.
Examiner’s Commentary on Students' Performance in December

2019 Examinations
This commentary has been written to accompany the published questions and answers and is
written based on the observations of evaluators. The aim is to provide constructive guidance
for future candidates, giving insight into what the evaluating team is looking for, and flagging
difficulties encountered by candidates who attempted these questions.
Subject: Advanced Financial Reporting
Question No. 1
Most of the students tried to solve the question. However, the problem was not solved in detail
indicating poor understanding of the group accounting.
Question No. 2
(a) Most of the students attempted the question and this was easy part.
(b) Many students did not know the concepts of EVA and MVA.
Question No. 3
(a) Students' performance was average. Most students failed in computation of expected yield
% due to the ask premium and students had not considered preference share as debt for
computation of debt equity ratio and reserve was not considered a part of equity.
(b) Performance was average. Students had failed to compute cost since the grant of purchase
has been considered rather available for use. Most of the students failed to compute current
liability and non-current liability.
Question No. 4
(a) Overall performance of the students in theory question was satisfactory.
Question No. 5
(a) Most students had answered theory part properly.
(b) Most of the students did not have enough knowledge of impairment of assets.
Question No. 6
(a) Students were confused with exchange rate calculation and the concept of functional
currency.
(b) Most of the students answered early and this was the bonus question of the paper.
Subject: Advanced Financial Management
Question No. 1

Some students interpreted wrongly about outflow, variable cost and release of capital
investment in case of Investment A. In case of Investment B, many students were not able to
understand the concept of NPV computation for perpetual project. In Investment C, some
students were not able to select appropriate annuity factor. Even the requirement of question
was to write a brief report to the BOD but more of the students not answer in the report form.
Question No. 2
(a) Students' performance was overall satisfactory.
Question No. 3
(a) Being a comparatively easy question for the CAP III level, it was well attempted by most
of the candidates and performance of the candidates was also found satisfactory. The
answers given by few of the candidates were not properly structured in the way required
by the question even though individual components calculated in a scattered way were
correct. In general, following mistakes were observed:
• Few candidates had not calculated the share exchange ratios acceptable to
shareholders of the respective companies as required by the question. They simply
calculated the additional number of shares to be issued to maintain the given P/E ratio
of the combined firm. This ultimately led to incomplete solution causing deduction
of some marks.
• Instead of calculating market capitalization of the combined firm by multiplying
combined earnings of both the firms by given P/E ratios, few candidates calculated
market capitalization of the combined firm as being total of the individual market
capitalizations of the two companies. This ultimately resulted in the wrong
calculation of acceptable exchange ratios.
• To the examiners' surprise, few candidates developed quadratic equation to answer
the question and as solving the equation didn’t produce any result they simply made
observation as 'the merger deal is not feasible'.
• Few candidates, though properly developed the equation to calculate share exchange
ratio, couldn’t solve the equation properly thereby leading to inaccurate calculation
of share exchange ratio.
• Apart from the above mistakes, simple calculative mistakes were found in many
occasions.
(b) Performance of the candidates in this question was found to be very poor. Very few
candidates could solve the problem in proper way. Some of the candidates depicted their
poor knowledge on the fundamental concept of foreign exchange risk management. In
general, following mistakes were observed:
• Majority of the candidates had not understood the question properly (as per the
question liability of Beta Limited is fixed to Egyptian pound (EGP) of 1800,000 and
all one need to do was to try to keep cost in $ 90,000 as being payable in three months'
time. Based on this assumption candidates calculated varying amount of cost in EGP
under different alternatives.
• Majority of the candidates had not considered tax implications while calculating
interest as well as total cost to Beta Limited under different alternatives.
• Significant number of candidates had used wrong interest rates while calculating
amount to be borrowed in EGP and investing them in $ for three months' time.

• Apart from the above mistakes, simple calculative mistakes were found in many
occasions.
Question No. 4
Most of the students did not know Q.4(b) and (e). Rest of the questions were comparatively
satisfactory. Students should be knowledgeable about the emerging concepts in finance.
Question No. 5
Less than half of all candidates had solved the problem correctly. It shows that they were very
poor in conceptual knowledge.
Question No. 6
Most of students could not answer 6(a) properly though conceptual knowledge was
satisfactory. Students could not calculate remitted amount before tax.
Subject: Advanced Audit & Assurance
Question No. 1
a) Most of the students were not aware about the auditor's report format under NSA 705
(Revised). Comment on the auditor's report was given by around 25% of the students.
Design to report as non-disclosure of EPS was available in majority of the cases.
b)
i. Valuations of by products were not properly understood in about 50% of the cases.
ii. The question was fairly done well, only 10 % of the students had quoted the section.
Criteria for disclosure was not written properly; only few students had disclosed it
completely.
Question No. 2
a) Most of the answer were sketchy. Answers were not written in proper sequence of
weakness, consequence and remedy.
b) i) Most of the students tried to attempt this question however; they could not focus on
specific audit procedure to be applied in assessing management's assessment of going
concern.
ii) Most of the candidates did not understand this question. They could not relate this
questions answer with provision of NSA 240 and Section 115 of the Companies act.
Question No. 3
(a) Analysis of the work of auditor's expert was not properly disclosed. Few failed to explain the
implication on audit report.
(b) Students' performance was satisfactory.
Question No. 4
(a) Students performed poorly.
(b) Students' performance was average.
Question No. 5
Students performed poorly in the two parts of the question.
Question No. 6

(a) Most of the students did not understand the concept of EDI and could not write the benefits
of EDI.
(b) Students gave correct answer.
(c) Most of the students did not have clear understanding of NSRS 4400 and agreed upon
procedures.
(d) Most of the students provided incorrect answer about scope limitation.
(e) Regarding Tax Audit, most of the students gave answers in general terms. They could not
relate this with legal requirement.
Subject: Corporate Law
Question No. 1
Students had attempted the questions properly.
Question No. 2
Answers were not proper.
Question No. 3
Students should have focused on what is asked in the question rather than what they know
about the question.
Question No. 4
Most of the students could not answer properly the appointment part of Q.N 4(a).
Question No. 5
Students did not explain provision of the Act/Rule while answering to the question. Answers
to the question were too sketchy.
Question No. 6
Almost all students attempted the question. They could not provide its essence. Most of the
students provided the action however they referred NRB Act instead of FERA.

Table of Contents
Group II
Paper 5: Management Information and Control System ......................................................................... 2

Paper 6: Advanced Taxation ................................................................................................................. 15
Paper 7: Advanced Cost and Management Accounting ........................................................................ 34
Paper 8: Strategic Management and Decision Making Analysis .......................................................... 52
Examiner’s Commentary on Students' Performance in December 2019 Examinations .............. 65
Suggested Answer Paper Group II
Paper 5: Management Information and Control System

1. ABC Hotel, situated at the prime location of the capital city, is offering hospitality services
to its guests since last 8 years. It relies heavily on its existing information system to provide
up to date information. The company wishes to enhance its existing system by upgrading
or developing entirely new system.
a) You being an IT consultant, suggest how the audit of the present information system
should be conducted so that it can be further improved upon.
(10 marks)
b) As an IT consultant you have to explain to the management the prototyping approaches
to systems development. Now, write a short note on prototyping approaches to systems
development. Describe its advantages and disadvantages also. (5+5=10 marks)
Answer
(a) Detailed investigation of the present system involves collecting, organizing and evaluating
facts about the system and the environment in which it operates. Enough information
should be assembled so that a qualified person can understand the present system without
visiting any of the operating departments. Review of existing methods, procedures, data
flow, outputs, files, inputs and internal controls should be intensive in order to fully
understand the present system and its related problems.
The following areas may be studied in depth:
Review historical aspects: A brief history of the organization is a logical starting point for
the analysis of the present system. The historical facts should identify the major turning
points and milestones that have influenced its growth. A review of annual reports can
provide an excellent historical perspective. A historical review of the organization chart
can identify the growth of management levels as well as the development of various
functional areas and departments. The system analyst should identify what system changes
have occurred in the past. These should include operations that have been successful or
unsuccessful with computer equipment and techniques.
Analyse inputs: A detailed analysis of present inputs is important since they are basic to
the manipulation of data. Source documents are used to capture the originating data for any
type of system. The system analyst should be aware of the various sources from where data
can be initially captured, keeping in view the fact that outputs for one area may serve as an
input for another area. The system analyst must understand the nature of each form, what
is contained in it, who prepared it, from where the form is initiated, where it is completed,
the distribution of the form and other similar considerations. If the analyst investigates
these questions thoroughly, he will be able to determine how these inputs fit into the
framework of the present system.
Review data files maintained: The analyst should investigate the data files maintained by
each department, noting their number and size, where they are located, who uses them and
the number of times per given time interval these are used. Information on common data
files and their size will be an important factor, which will influence the new information
system. This information may be contained in the systems and procedures manuals. The

system analyst should also review all online and offline files which are maintained in the
organization as these will reveal information about data that are not contained in any
output. The related cost of retrieving and processing data is another important factor that
should be considered by the system analyst.
Review methods, procedures and data communications: Methods and procedures
transform input data into useful output. A method is defined as a way of doing something;
a procedure is a series of logical steps by which a job is accomplished. A procedure's review
is an intensive survey of the methods by which each job is accomplished, the equipment
utilized and the actual location of the operations. Its basic objective is to eliminate
unnecessary tasks or to perceive improvement opportunities in the present information
system. A system analyst also needs to review and understand the present data
communications used by the organization. He must review the types of data
communication equipment including data interface, data links, modems, dialup and leased
lines and multiplexers. The system analyst must understand how the data communications
network is used in the present system so as to identify the need to revamp the network
when the new system is installed.
Analyse outputs: The outputs or reports should be scrutinized carefully by the system
analysts in order to determine how well they will meet the organization’s needs. The
analysts must understand what information is needed and why, who needs it and when and
where it is needed. Additional questions concerning the sequence of the data, how often
the form reporting is used, how long it is kept on file, etc. must be investigated. Often many
reports are a carryover from earlier days and have little relevance to current operations.
Attempt should be made to eliminate all such reports in the new system.
Review internal controls: A detailed investigation of the present information system is
not complete until internal controls are reviewed. Locating the control points helps the
analyst to visualize the essential parts and framework of a system. An examination of the
present system of internal control may indicate weaknesses that should be removed in the
new system. The adoption of advanced methods, procedures and equipment might allow
much greater control over the data.
Model the existing physical system and logical system: As the logic of inputs, methods,
procedures, data files, data communications, reports, internal control and other important
items are reviewed and analysed in a top down manner, the process must be properly
documented. The logical flow of the present information system may be depicted with the
help of system flow charts. The physical flow of the existing system may be shown by
employing data flow diagrams. During the process of developing the data flow diagram,
work on data dictionary for the new information system should be begun. The data
elements needed in the new system will often be found in the present system. Hence, it is
wise to start the development of the data dictionary as early as possible.
The flow charting and diagramming of present information not only organizes the facts,
but also helps disclose gaps and duplication in the data gathered. It allows a thorough
comprehension of the numerous details and related problems in the present operation.

Undertake overall analysis of present system: Based upon the aforesaid investigation of
the present information system, the final phase of the detailed investigation includes the
analysis of:
• the present work volume
• the current personnel requirements
• the present benefits and costs
Each of these must be investigated thoroughly.
(b) Prototyping approaches:
Prototyping technique is used to develop smaller systems such as decision support systems,
management information systems and expert systems. The goal of prototyping approach is to
develop a small or pilot version called a prototype of part or all of a system. A prototype is a
usable system or system component that is built quickly and at a lower cost, and with the
intention of being modifying or replacing it by a full scale and fully operational system. Finally,
when a prototype is developed that satisfies all user requirements, either it is refined and turned
into the final system or it is scrapped. If it is scrapped, the knowledge gained from building the
prototype is used to develop the real system.
Prototyping can be viewed as a series of four steps:
Step 1: Identify Information System Requirements:
In traditional approach, the system requirements have to be identified before the development
process starts. However, under prototyping, the process of determining them can be less formal
and time-consuming than when performing traditional systems analysis.
Step 2: Develop the Initial Prototype:
In this step, the designers create an initial base model, for example, using fourth-generation
programming languages or CASE tools. The main goal of this stage is ‘rapid development’ and
‘low cost’.
Step 3: Test and Revise:
After finishing the initial prototype, the designers first demonstrate the model to users for
experiment. At the outset, users must be told that the prototype is incomplete and requires
subsequent modifications based on their feedback. Thus, the designers ask users to record their
likes and dislikes about the system and recommend changes. Using this feedback, the design
team modifies the prototype as necessary and then resubmits the revised model to system user
for re-evaluation. Thus interactive process of modification and re-evaluation continues until
the users are satisfied commonly, through four to six interactions.
Step 4: Obtain User Signoff of the Approved Prototype:
At the end of Step 3, users formally approve the final version of the prototype, which commits
them to the current design and establishes a contractual obligation about what the system will,
and will not do or provide.
Advantages of Prototyping

1. Prototyping requires intensive involvement by the system users. Therefore, it typically

results in a better definition of the users’ needs and requirements than does the traditional
system development approach.
2. A very short time period (e.g., a week) is normally required to develop and start
experimenting with a prototype. This short time period allows system users to immediately
evaluate proposed system changes.
3. Since system users experiment with each version of the prototype through an interactive
process, errors are hopefully detected and eliminated early in the development process. As
a result, the information system ultimately implemented should be more reliable and less
costly to develop than when the traditional systems development approach is employed.
Disadvantages of Prototyping
1. Prototyping can only be successful if the system users are willing to devote significant
time in experimenting with the prototype and provide the system developers with change
suggestions.
2. The interactive process of prototyping causes the prototype to be experimented with quite
extensively. Because of this, the system developers are frequently tempted to minimize
the testing and documentation process of the ultimately approved information system.
Inadequate testing can make the approved system error-prone, and inadequate
documentation make this system difficult to maintain.
3. Prototyping may cause behavioural problems with system users. These problems include
dissatisfaction by users if system developers are unable to meet all user demands for
improvements as well as dissatisfaction and impatience by user when they have to go
through too many interactions of the prototype.
2. Nepal Government is going to implement online e-Services to citizen. The Government
needs to develop and implement disaster recovery plan and business continuity plan (BCP)
for disaster recovery center. 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 these e-Services. (7 marks)
b) What steps of review & testing of existing system would you undertake before designing
the DR and BC plan? (7 marks)
c) Discuss the best approach for business continuity plan. (6 marks)
Answer
(a) A disaster recovery plan is a method of restoring information processing operations

which have been halted by disaster or accident. It includes a list of all business functions
and the hardware, software, data and people to support those functions. It includes
arrangement for alternate locations which may be either hot sites or cold sites. The plan
also includes ways for backing up and storing programs and data in another location,
ways of arranging necessary personnel and training for those personnel. 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 government organization should develop a Disaster Recovery Plan for all
applications. 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 and ensures the length of time that a disruption in a
business process does not go beyond what has been determined to be acceptable by
management in the organization.
An effective DR plan should include the following elements:
• Emergency plan
• Recovery plan
• Backup plan
• Test plan
(b) Development of the disaster recovery (DR) and business continuity (BC) plan of an
information system is essential to make sure that the services and functionalities are
available in the face of an unwanted occurrence of system outage due to man-made or
natural causes.
Since the requirement is to create a DR and BC plan for the existing system, detailed
study and testing of the system is useful in creating a good DR & BC plan. I would carry
out the following testing and detailed study to have an idea about the existing system in
the context of the DR & BC mechanism:
1. The architecture of the system deployment in terms of hardware and network.
2. Power provisioning of the system in existing location and requirement for
enhancing the power redundancy.
3. Location of the system to make sure that the DR mechanism caters for issues such
as seismic zones, disaster-prone areas and other risks such as fire, flooding, etc.
4. The features and functions of the system and their criticality to the functioning of
the organization and its services. More critical functions and services may need
better activities in data backup, restoration, security hardening, etc.
5. User management of the system and the awareness of the users regarding system
security. Internal users can knowingly and unknowingly cause system
disruptions. Proper knowledge of the system users and their activities helps in
preparing a good security and recovery plan.
6. The network layout of the system and its state of exposure to external
environment. This helps in hardening the existing deployment and creation of a
properly designed high-availability mechanism based in network redundancy and
security.
7. The detailed recovery plan of the current system and the areas in which it can be
improved and strengthened. A well-articulated and well-designed recovery plan
helps in quick restoration of system and services in case of an incidence of
disruption.
(c) A business continuity plan (BCP) is a plan to help ensure that business processes can
continue during a time of emergency or disaster. Such emergencies or disasters might
include a fire or any other case where business is not able to occur under normal
conditions. Businesses need to look at all such potential threats and devise BCPs to
ensure continued operations should the threat become a reality.

A business continuity plan involves the following:

• Analysis of organizational threats
• A list of the primary tasks required to keep the organization operations flowing
• Easily located management contact information
• Explanation of where personnel should go if there is a disastrous event
• Information on data backups and organization site backup
• Collaboration among all facets of the organization
• Buy from everyone in the organization
3.
(a) What is information system? Explain business perspective of information system in
detail. (2 + 6 = 8 marks)
(b) Explain decision support system with example. What are the goals and applications of
this system in business and industry? Compare decision support system with executive
support system. (3 + 2 + 2 = 7 marks)
Answer
(a) First Part: An information system can be defined as a set of interrelated components
that collect (or retrieve), process, store, and distribute information to support decision
making, coordination and control in an organization. In addition, information systems
may also help managers and workers analyse problems, visualize complex subjects, and
create new products. Information systems contain information about people, places, and
things within the organization or in the environment surrounding it to help organizations
in different activities.
Second Part: Firms invest in information technology and systems because they provide
real economic value to the business. The return on this investment will be superior to
other investments and will be expressed as increase in productivity, revenues, and long
term strategic position. Information system is an important instrument for creating value
for the firm. Information systems enable the firm to increase its revenue or decrease its
Supply Enterprise Customer Knowledge

Chain Management Management Management
Management
Firm
Profitability
and
Strategic
Position
Data Transformation Dissemination
Collection Into
and Business
Storage Systems
Planning Coordinating Controlling Modeling and

Decision Making
Information Processing Activities Management Activities

Business Value

costs by providing information that helps managers make better decisions or that
improves the execution of business processes. Information systems are also required to
cope with governmental regulations or other environmental demands, and in some cases,
they are required to stay in business. Every business has an information value chain,
in which raw information is systematically acquired and then transformed through
various stages that add value to that information. From a business perspective,
information systems are part of a series of value-adding activities for acquiring,
transforming, and distributing information that managers can use to improve decision
making, enhance organizational performance, and, ultimately, increase firm's
profitability.
(b) First Part:
Decision Support Systems (DSS) are the information systems that support non-routine
decision making for middle level management in organizations. They focus on problems
that are unique and rapidly changing, for which the procedure for arriving at a solution
may not be fully predefined in advance. These systems use internal information from
transaction processing system (TPS) and management information system (MIS), and
often information from external sources, such as current stock prices or product prices
of competitors. These systems use a variety of models to analyse data, or they condense
large amounts of data into a form in which decision makers can analyse them. DSS are
also called business intelligence systems because they focus on helping users make
better business decisions.
For example, a national level online book seller wants to begin selling its products
internationally but first needs to determine if that will be a wise business decision. The
vendor can use a DSS to gather information from its own resources (using a tool such
as online analytical processing (OLAP)) to determine if the company has the ability or
potential ability to expand its business and also from external resources, such as industry
data, to determine if there is indeed a demand to meet. The DSS will collect and analyse
the data and then present it in a way that can be interpreted by humans.
Second Part:
The primary goal of using a DSS is to present information to the customer in an easy-
to-understand way. A DSS system is beneficial because it can be programmed to
generate many types of reports, all based on user specifications. For example, the DSS
can generate information and output its information graphically, as in a bar chart that
represents projected revenue or as a written report. The flexibility of the DSS is
extremely beneficial for users who travel frequently. This gives them the opportunity to
be well-informed at all times, providing the ability to make the best decisions for their
company and customers on the go or even on the spot.
DSS has lots of applications in business and industry and is getting a lot of attention as
a way to promote better projections, management and analysis within a company. DSS
is extensively used in business and management. Executive dashboard and other
business performance software allow faster decision making, identification of negative
trends, and better allocation of business resources. Due to DSS all the information from
any organization is represented in the form of charts, graphs, i.e., in a summarized way,
which helps the management to take strategic decisions.
DSS can be used to manage inventory, where decision support system applications can
provide guidance on establishing supply chain movement that works for a business. It

can also be used for sales optimization, sales projection, and financial projections
necessary for determining expenditures and revenues.
Third Part:
Decision support system (DSS) allows senior managers to take non-routine decisions
while the executive support system (ESS) allows senior managers to take decisions to
meet the strategic goals of the organization. DSS is designed to help managers come up
with solutions to problems on the basis of a database or knowledge base whereas ESS is
executive support system that presents summarized information that is used by
executives to come up with best possible solution to problems with the help of their
education, experience and business environment that they face.
DSS uses mathematical models and statistical techniques to support decision making.
ESS is easier for upper-level executives to use and take decisions. It helps to monitor the
company performance and examine the critical success factors. It also allows analysing
trends and determines the competitiveness in the market. Moreover, it improves
flexibility, strategic control, improves communication and provides time management.
ESS also provides excellent reporting facilities.
4.
a) Explain the functions, duties and power of the controller mention in the Electronic
Transaction Act. (8 marks)
b) Discuss the opportunity and challenges of implementing Enterprise Resource Planning.
(7 marks)
Answer
a) The functions, duties and powers of the Controller shall be as follows:
• To monitor, cause to be monitored the functions performed by the Certifying
Authority;
• To carry out necessary supervision in relation to the matter as to whether or not the
Certifying Authority has performed the duties as referred to in the license , and, if
it is not found to have been performed, cause it to be done accordingly;
• To specify the quality standard of service to be rendered by the Certifying
Authority;
• To specify the terms required to be specified at the time of issuance of a license to
the Certifying Authority
• To appoint an auditor as per necessity;
• To monitor the functions and activities to be performed by the Auditor;
• To perform such other functions as may be specified by Government of Nepal
from time to time;
• To perform such other functions as may be required to implement the objectives of
the Act and these Rules.
b) An enterprise resource planning is a fully integrated business management system
covering functional areas of an enterprise like logistics, production, finance, accounting
and human resources, etc.
The benefits of using ERP are:

• It provides the control of invoicing and payments process to the account payable
personnel.
• It reduces the paper documents by providing online formats for quickly entering
and retrieving information.
• Improves timeliness of information by permitting posting daily instead of monthly
• Greater accuracy of information with detailed content, better presentation,
satisfactory for the auditors.
• Improved cost control.
• Faster response and follow-up on customers.
• More efficient cash collection.
• Better monitoring and quicker resolution of queries.
• Enables quick response to change in business operations and market conditions.
• Helps to achieve competitive advantage by improving its business processes.
• Provides a unified customer database usable by all applications.
The challenges of implementing ERP can be listed as:
• Not properly understanding the complexity of planning, development and training
that needed to properly implement ERP package.
• Human reluctance to use new system
• Cost factors associated with the system reengineering and data conversions.
• High dependency on the Information Technology by completely giving up the
existing system.
5.
a) What is Business-to-Consumer e-Commerce (B2C)? List and explain briefly the
advantages and disadvantages to customers (buyers) in using the e-Commerce.
(2+5=7 marks)
b) How do you align your business with information technology? What are the risks and
opportunities of using information technology in organizations? (4 + 4 = 8 marks)
Answer
(a) Business-to-Consumer (B2C) e-Commerce involves retailing products and services to

individual consumers. Using the Internet, the user orders products or services through
the website or mobile app. Payments made through valid Credit Cards or Debit Cards
or mobile banking or internet banking or other popular e-payment apps such as eSewa,
iPay, etc. Nowadays, payment on delivery option is also available.
Following are the advantages and disadvantages to customers (buyers) in using the
above e-Commerce.
(i) Advantages
a. No checkout queues
b. Reduced prices

c. You can shop anywhere in the World

d. Easy access 24 hours a day
e. Wide selection to cater for all consumers
f. No hassle of transport/ leave from work place to do shopping
g. You feel that you are in a one-stop shop for every thing
(ii) Disadvantages
a. Unable to examine products personally
b. Not every one is connected to the internet
c. There is a probability of credit card frauds
d. On average only 1/9th of stock is available on the stock
e. Return/Exchange of goods (not in correct size, etc.) will be very difficult and
costly.
f. Cannot negotiate the price.
(b) First Part:
Business-IT alignment is a process in which a business organization uses information
technology (IT) to achieve business objectives - typically improved financial
performance or marketplace competitiveness. Alignment is the capacity to demonstrate
a positive relationship between information technologies and the accepted
financial measures of performance.
This alignment is to what is often experienced in organizations: IT and business
professionals are unable to bridge the gap between themselves because of differences in
objectives, culture, and incentives and a mutual ignorance for the other group's body of
knowledge. This rift generally results in expensive IT systems that do not provide
adequate return on investment. For this reason, the search for business-IT alignment is
closely associated with attempts to improve the business value of IT investments.
Business-IT alignment integrates the information technology to the strategy, mission,
and goals of the organization. Key characteristics in order to achieve this alignment are:
• The organization must view information technology as an instrument to transform
the business. This includes exploring other revenue streams and integrating other
facets of their business into each other.
• An organization must hold customer service, both externally and internally, at the
utmost importance. Communication between the organization and their customers
must not be lost.
• An organization must rotate both IT and business professionals across different
departments and job functions. They must have the knowledge and experience of
both sides of the business so that understanding and communication is achieved.
• An organization must provide clear and specific goals to both the IT and business
employees. This will create the integration of both entities to achieve a common
goal.

• Ensure that IT and business employees understand how the company makes or loses
money. This is important so that money is not carelessly poured into the IT
department and there is no return on that investment.
• Organizations must create a vibrant and inclusive company culture. There must not
only be informational unity, but a company as whole.
Second Part:
Information technology (IT) plays a critical role in many businesses. If you own or
manage a business that makes use of IT, it is important to identify risks to your IT
systems and data, to reduce or manage those risks, and to develop a response plan in
the event of an IT crisis. Some of the common risks of using IT are:
• Unemployment and lack of job security
Implementing information technology can save a great deal of time during the
completion of tasks and some labour mechanic works. Most paperwork can be
processed immediately and financial transactions are automatically calculated. As
technology improves, tasks that were formerly performed by human employees are
now carried out by computer systems. Industry experts believe that the internet has
made job security a big issue as since technology keeps on changing with each day.
This means that one has to be in a constant learning mode, if he or she wishes for
their job to be secure.
• Dominant culture
While information technology may have made the world a global village, it has also
contributed to one culture dominating another weaker one.
• Security issues
Thieves and hackers get access to identities and corporate saboteurs target sensitive
company data. Such data can include vendor information, bank records, intellectual
property and personal data on company management. The hackers distribute the
information over the Internet, sell it to rival companies or use it to damage the
company’s image.
• Implementation expenses
To integrate the information system it require pretty good amount of money in
software, hardware and people. Software, hardware and some other services should
be rented, bought and supported. Employees need to be trained with unfamiliar
information technology and software.
Information technology contributes to the efficient running of organizations.
Information systems are showing the exponential growth in each decade. Some of the
common opportunities are:
• Communication
With help of information technologies the instant messaging, emails, voice and
video calls becomes quicker, cheaper and much efficient.
• Globalization and cultural gap
By implementing information systems we can bring down the linguistic,
geographical and some cultural boundaries. Sharing the information, knowledge,

communication and relationships between different countries, languages and

cultures becomes much easier.
• Availability
Information systems have made it possible for businesses to be open 24×7 all over
the globe. This means that a business can be open anytime anywhere, making
purchases from different countries easier and more convenient. It also means that
you can have your goods delivered right to your doorstep without having to move
a single muscle.
• Creation of new types of jobs
One of the best advantages of information systems is the creation of new and
interesting jobs. Computer programmers, Systems analysers, Hardware and
Software developers and Web designers are just some of the many new employment
opportunities created with the help of IT.
• Cost effectiveness and productivity
IT applications promote more efficient operation of the company and also improve
the supply of information to decision makers. These systems also help companies
to gain a competitive advantage. It has a positive impact on productivity
6. Write short notes on: (5 3=15 marks)
(a) Fuzzy logic
(b) COBIT
(c) Virtualization
(d) Information system vulnerabilities
(e) Sales force automation
Answer
(a) Fuzzy Logic resembles the human decision-making methodology. It deals with vague
and imprecise information, i.e., it describes the degree of truth or falsehood instead of
absolute truth or falsehood. This is over-simplification of the real-world problems and
based on degrees of truth rather than usual true/false or 1/0 like Boolean logic. In fuzzy
systems, the values are indicated by a number in the range from 0 to 1.
Some of the applications of Fuzzy logic in business can be listed as below:
• Complex decision making where the input parameters are not blurry
• Stock market analysis and prediction
• Process optimization in manufacturing industry
• Performance appraisal of staff members
• Insurance industry for the risk management.
• Customer segmentation in banks
(b) COBIT stands for Control Objectives for Information and Related Technology. It is a
framework created by the ISACA (Information Systems Audit and Control
Association) for IT governance and management. It was designed to be a supportive

tool for managers and allows bridging the crucial gap between technical issues,
business risks, and control requirements. COBIT is a thoroughly recognized guideline
that can be applied to any organization in any industry. Overall, COBIT ensures quality,
control, and reliability of information systems in an organization, which is also the most
important aspect of every modern business.
The COBIT business orientation includes linking business goals with its IT
infrastructure by providing various maturity models and metrics that measure the
achievement while identifying associated business responsibilities of IT processes.
Today, COBIT is used globally by all IT business process managers to equip them with
a model to deliver value to the organization, and practice better risk management
practices associated with the IT processes. The COBIT control model guarantees the
integrity of the information system.
(c) Virtualization refers to the creation of a virtual resource such as a server, desktop,
operating system, file, storage or network. The main goal of virtualization is to manage
workloads by radically transforming traditional computing to make it more scalable.
Virtualization has been a part of the IT landscape for decades now, and today it can be
applied to a wide range of system layers, including operating system-level
virtualization, hardware-level virtualization and server virtualization.
Virtualization can be categorized into different layers: desktop, server, file, storage and
network. Each layer of virtualization has its own set of advantages and complexities.
The technology offers many benefits, including low or no-cost deployment, full
resource utilization, operational cost savings and power savings. However, deploying
virtualization technology requires careful planning and skilled technical experts. Since
the virtual machines use the same resources to run, it may lead to slow performance.
(d) In the context of computerized information system, a vulnerability is a weakness that
can be exploited by an attacker, intruder or abuser of the system to gain an unauthorized
access and compromise the system security. To carry out such attack or compromise,
the attacker must have a prior knowledge of the vulnerability. Such knowledge can be
obtained by the published sources or by using different tools that can test the various
potential weak spots of the system and find out the exploitable one. Once the weakness
is known the system attacker should also have the tools or means to exploit the
vulnerability. It is analogous to a house intruder first finding out the weak spot or the
unguarded state of the house before using the suitable tool to break into it. Tools can
be different based on the nature of the vulnerability. System hardening is a regular
process of finding such vulnerabilities and patching them up.
(e) Sales force automation (abbreviated SFA) 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 customer relationship management (CRM); however,
CRM does not necessarily imply automation of sales tasks.
SFA also refers to software apps for sales management. SFA provides automated
workflows that create a streamlined sales process to manage business leads, sales
forecasts and team performance.

Paper 6: Advanced Taxation

Attempt all questions. Working notes should form part of the answer.
1. Mrs. Beena Shrestha, is a qualified medical doctor. She took retirement from a hospital
after working for 30 years on 1st Magh 2075. As a retirement plan, she has started process
of opening a clinic on sole proprietorship basis on 1st Shrawan 2075, and opened clinic
from 1st Magh 2075. Calculate the taxable income and tax liability of Mrs. Beena Shrestha
for the income year 2075-76 on the basis of below detail considering she opts for single
status. (20 marks)
Particulars Amount Remarks
(A) Salary Income from
Hospital for the income year
2075-76
Basic Salary 6,00,000
Dearness Allowance 4,00,000
Fuel Allowance 50,000
Incentive 5,00,000
Provident Fund 60,000
Other Benefits
Dashain Bonus 60,000
Statutory Bonus 1,00,000
Interest Free Loan provided 25,00,000 No Instalment Deducted.
for purchase of Land on 1st Management of hospital has allowed
Shrawan 2075 to repay loan after 2 years of
retirement with interest @ 8% p.a..
Market Rate of interest is 10% p.a.
Hospital has provided new
Maruti Swift Car worth
25,00,000 on 1st Shrawan
2075. Car is in the possession
of her till the end of income
year.
Total Retirement Benefits
payable to her as on
retirement date is as below: th
(a) PF from approved 30,00,000 Rs. 2,00,000 accrued till 18 Chaitra
2058.
retirement fund
Rs. 10,00,000 accrued till 18th Chaitra
(b) Gratuity 50,00,000 2058.
Rs. 1,00,000 accrued till 18th Chaitra
(c) Leave Encashment 10,00,000 2058.
Special Retirement Benefit 5,00,000
received from hospital
appreciating her contribution.
Voluntary PF Contribution to 3,00,000
Citizen Investment Trust
Life Insurance Premium of 50,000
Self

Medical Insurance Premium 30,000

of Self
(B) Financial Transactions of
Clinic for the Year
Income from Patients 1,00,00,000
Salary Payment to Doctors 50,00,000
Salary Payment to Other Staff 60,00,000
Interest Expenses 5,00,000 She has taken loan of Rs. 50,00,000
from Bank on 1st Shrawan 2075 for
Opening Clinic, out of which she has
deposited Rs. 20,00,000 in her
personal FD.
Rent paid to self for Clinic 12,00,000 She had purchased land and building
Building for Rs. 2,00,00,000 on 2075.06.01.
Cost of Building is 1,00,00,000.
Other Expenses 30,00,000
Other Information
Purchases of various assets
for Clinic are as below
Lab Equipment (on 1st Asoj 20,00,000
2075)
Furniture and Fixtures (on 1st 15,00,000
Poush 2075)
Computers (on 21st Magh 2,00,000
2075)
Ambulances (on 1st Baishakh 15,00,000
2076)
Vehicles (used by herself) (on 25,00,000
1st Ashadh 2076)
She has sold a plot of land
which she had bought on
2069.03.01 on 50,00,000 for
Rs. 2,00,00,000 on
2075.05.01.
Answer:
Determination of Taxable Income of Mrs. Beena Shrestha
Particulars Amount Remarks
(A) Remuneration Income
Basic Salary 6,00,000
Dearness Allowance 4,00,000
Fuel Allowance 50,000
Incentive 5,00,000
Provident Fund 60,000
Dashain Bonus 60,000
Statutory Bonus 1,00,000

Interest Subsidy – While on Employment* 1,25,000 25,00,000*10%/12*6

Interest Subsidy – Post Retirement 25,000 25,00,000*(10%-8%)/12*6
Car Facility – While on Employment 3,000 6,00,000*0.5%/12*6
Car Facility – Post Retirement 1,25,000 1% of 25,00,000/12*6
Special Retirement Benefit 5,00,000
Total Income from Employment 2,548,000
(B) Income from Business
Income from Patients 1,00,00,000
Less : Salary Payment to Doctors 50,00,000
Less : Salary Payment to Other Staff 60,00,000
Less : Interest Expenses 3,00,000 Interest on FD in self name is
disallowed since FD income
is final withholding tax.
Less : Rent paid to self for Clinic Building 0 Rent paid to self by sole
proprietorship firm is Not
Allowed.
Less : Other Expenses 30,00,000
Less : Depreciation 14,75,000
Total Income From Business (57,75,000) Loss
Income From Non Business Chargeable
Assets
Sale Price of Plot of Land 2,00,00,000
Less : Purchase price of Plot of Land 50,00,000
Profit from Disposal of Land 1,50,00,000
*Assumed no interest paid by Dr. Shrestha till poush end 2075
Calculation of Tax Liability
Option A:
Business Loss is not set off from income from disposal of land and business loss of Rs
57,75,000 carried forwarded.
(A) On Remuneration Income
Amount
&
Income from Remuneration 20,48,000
Less : PF Contribution 3,00,000
Total PF Contribution
PF by Employer – Rs 60,000
PF by Employee – Rs 60,000
Voluntary PF – 3,00,000
Total PF Contribution – 4,20,000
Eligible PF Deduction –

1/3rd of Remuneration Income – 8,48,833

Actual Contribution – 4,20,000
Maximum : 3,00,000
Life Insurance Premium 25,000
Medical Insurance 20,000
Net Taxable Income 1,703,000
Income Tax
On first 3,50,000 @ 1% 3,500
Next 100,000 @ 10% 10,000
Next 200,000 @ 20% 20,000
Next 1,053,000 @ 30% 315,900
Income Tax on Remuneration Income 349,400
&: Rs. 500,000 transferred to retirement benefit

(B) On Retirement Payment
On Special Retirement Fund
Total amount receive 500,000
Tax @ 15% 75,000
On PF
Total Payment received 30,00,000
Less : Accrued till 18 Chaitra 2058 2,00,000
Balance 28,00,000
Exempt 50% or 5,00,000 or PF amount whichever is higher 14,00,000
Tax @ 5% 70,000
On Gratuity and Leave Encashment
Gratuity Payment received 50,00,000
Balance 40,00,000
Leave Payment received 10,00,000
Balance 9,00,000
Total Gratuity + Leave 49,00,000
Income Tax @ 15% 735,000
(C) On Disposal of Land
Income from Land Sale 1,50,00,000
Income Tax @ 2.5% being land held for more than 5 years 3,75,000

Total Income Tax Liability

Amount
Remuneration Income 5,11,040
On PF 70,000
On Gratuity and Leave 7,35,000
On Sale of Land 3,75,000
Total Income Tax 16,91,040
(D) On Business income
Loss: Business income (57,75,000)

Option B
Business Loss of Rs 57,75,000 settled from income from disposal of Land. There will be
no carried forward business loss.
Revised Income Tax on Disposal of Land
Income from Land Sale 1,50,00,000
Less : Business Loss Set Off 57,75,000
Balance Income from Sale of Land 92,25,000
Income Tax @ 2.5% being land held for more than 5 years 2,30,625
Tax paid at Malpot Office during transfer of land amount Rs. 375,000 after deducting
actual tax liability of Rs. 2,30,625, (i.e., Rs. 1,44,375) will remain as advance tax and is
available for set off in next year
Total Income Tax Liability under Option B
Amount
Remuneration Income 3,49,400
On Retirement payment 75,000
On PF 70,000
On Gratuity and Leave 7,35,000
On Sale of Land 2,30,625
Total Income Tax 14,60,025
Advance Tax 1,44,375
Calculation of Depreciation:
Amount Purchase Deprec Depreciation Eligible Eligible

Date iation Depreciation Depreciation
Rate Ratio
Block A : Building
Building Cost 1,00,00,000 2075.06.01 5% 5,00,000 100% 5,00,000
Block B : Computer/Office Equipment/Furniture Fixture

Furniture and 15,00,000 2075.09.01 25% 3,75,000 100% 3,75,000

Fixtures
Computers 2,00,000 2075.10.21 25% 50,000 2/3rd 33,333
Block C: Automobiles
Ambulance 15,00,000 2076.01.01 20% 3,00,000 1/3rd 1,00,000
rd
Vehicle 25,00,000 2076.03.01 20% 5,00,000 1/3 1,66,667
Block D: Other Assets
Lab 20,00,000 2075.06.01 15% 3,00,000 100% 3,00,000
Equipment
Total 14,75,000
2.
a)
i) What are the conditions to be fulfilled to be called as Finance lease under the
Income Tax Act?
ii) How the Income Tax Act has envisaged the characterization of payments under
annuities, installment sales and finance leases?
iii) M/s ABC Construction company Pvt. Ltd., a construction company, has purchased
a Heavy Duty Earth Moving Machine from M/s XYZ company Pvt. Ltd. with the
amount payable in five installments which are payable at the beginning of the year.
The amount of each installment is Rs. 10 Lakhs. Calculate the amount of interest to
be claimed under Section 14 of the Act by showing the year wise interest and
repayment of debt claim. (7 marks)
b) A group of foreign investors from Bangladesh is planning to set up a cement factory
and start producing cement within income year 2076-77 in Biratnagar, Nepal, and they
want to know the income tax benefits and effective tax rate for such cement factory.
They have provided their plan as below:
Particulars Plan A Plan B Plan C
Total Investment 51 Crores 101 Crores 201 Crores
No. of Employees (Nepali) 900-1100 600-700 400-450
Export 60% 70% 90%
Describe the relevant provisions of the Income Tax Act 2058 and Rules 2059 in detail.
Advise management of the company various tax benefits and effective tax rate
applicable to them in all the above scenarios. (7 marks)
c)
i) M/s Ram, a resident natural person, is having a business with annual turnover not
exceeding Rs. 20 Lakhs and net income not exceeding Rs. 2 Lakhs enquires you
about his tax liability if he opts for tax as per Section 4(4) of the Income Tax Act.
As a tax professional, you have to advise him the tax payable as per the locations
categorized in income tax law with the conditions, if any, to be fulfilled.
ii) If his business is related to Gas and Cigarette and has turnover exceeding Rs. 20
Lakhs but not exceeding Rs. 50 Lakhs, with commission rate of 2.75% and he opts
to pay tax as per Section 4(4Ka) of the Income Tax Act, will your answer differ?
Advise with the relevant provisions of the Act. (6 marks)

Answer:
a)
i) Section 32(5) of the Act states that the following conditions are required to be fulfilled
for a finance lease:
(i) The term of the lease agreement provides for transfer of ownership to the lessee
at the end of the lease term or the lessee has an option to purchase the asset after
expiry of the lease term for a fixed or estimated price,
(ii) The lease term exceeds seventy five percentage of the useful life of the asset,
(iii) The estimated market value of the asset after expiry of the lease term becomes
less than twenty percentage of its market value of the asset at the
commencement of the lease,
(iv) In the case of a lease that commences before the last twenty five percentage of
the useful life of the asset, the present value of the minimum lease payments
equals or exceeds ninety percent of the market value of the asset at the
commencement of the lease term, or
(v) The asset is especially made for the lessee and after expiry of the lease term the
asset will not be of practical use to anyone other than the lessee.
“Lease Term” means the term including an additional period for which the lessee has
an option to renew the lease.
ii) Section 32 of the Act deals with characterization of payments under annuities, instalment
sales and finance leases.
Payments made by a person for acquiring an asset under annuity or instalment sales or
for the use of an asset under finance lease shall be treated as interest and repayment of
capital under a debt claim. All the payments shall be aggregated and the total be divided
into two sections:
A) Capital portion being equal to all payments made under annuity or the market value
of any asset at the time it is sold or leased and
B) Interest portion being the total of all payments minus the capital portion.
Interest portion shall be treated as interest paid or to be paid and the capital portion shall
be treated as repayment of capital under a debt claim.
At the time of concluding an agreement of the annuity, instalment sale or finance lease,
it is required to segregate the portions of interest and capital while determining
instalments and provide with the amortisation schedule. If the schedule is not provided,
it is required to treat the interest and capital portion of annuity, instalment sale or finance
lease as a blended loan with the interest compounded on six monthly basis. A borrower
under a blended loan is required to make in part a payment of interest and in part a
repayment of capital where the interest part is calculated on capital outstanding at the
time of each payment so as to be the uniform rate of interest over the term of the loan.
The lessee shall be treated as the owner of the property leased to the lessee under a
finance lease and the lessor shall be treated as the holder of a debt claim against the

lessee. Present value of lease payments shall be calculated using a discount rate equal
to the standard interest rate.
iii) In the case given,
Per Instalment amount Rs. 10 Lakhs payable at the beginning of the year.
Standard Interest Rate for discounting as per Section 32(8): 15 percent per annum.
Year Instalment amount Discount Discounted Value

(Rs.) Factor (Rs.)
1 10,00,000 1.0000 10,00,000
2 10,00,000 0.8695 869,500
3 10,00,000 0.7561 756,100
4 10,00,000 0.6575 657,500
5 10,00,000 0.5717 571,700
Present value of payments (Rs.) 38,54,800
Total payments (Rs.) 50,00,000
Interest (Rs.) 11,45,200
Year-wise Break Up (Rs.)

Year Opening Total Interest Principal Outstanding
Balance Portion Portion Principal
Principal
1 38,54,800 10,00,000 - 10,00,000 28,54,800
2 28,54,800 10,00,000 428,220 571,780 22,83,020
3 22,83,020 10,00,000 342,453 657,547 16,25,473
4 16,25,473 10,00,000 243,821 756,179 869,294
5 869,294 10,00,000 130,706 869,294 -
Total 50,00,000 11,45,200 38,54,800
The amount of total interest to be claimed as interest under Section 14 is Rs. 11,45,200
on year wise basis.
b) Tax Benefits available to Cement Factories are as below –
Particulars Plan A Plan B Plan C
Given Data :
Total Investment 51 Crores 101 Crores 201 Crores
No. of Employees (Nepali) 1000-1100 600-700 400-450
Export 60% 70% 90%
Tax Benefits :
(1) Normal Income Tax Rate for 25% 25% 25%
entity is

(2) Benefit of Special Industry : 20% 20% 20%

Cement Factory is special industry.
Hence, as per section 11(2kha)(kha)
20% tax rebate will be provided on
applicable tax rate. Hence effective
tax rate will be 20% (25%-20% of
25%)
(3) Benefits u/s 11(3)
(a) Applicable Tax on the basis of 70% of 75% of 80% of
No. of Nepali Employee employed applicable tax applicable tax applicable
for whole year rate rate tax rate
(b) Applicable Tax on the basis of Tax Exempt
capital employed and No. of Nepali for 5 years
Employee employed for whole year and 50% of
applicable tax
for next 3
years
(4) Effective Tax Rate 14% (70% of - Exempt for 16% (80% of
20%) first 5 years 20%)
- 7.5% for
next 3 years
(50% of 75%
of 20%)
- thereafter
15%
c) If a person selects to apply section 4(4) for his tax calculation, following conditions
shall have to be met:
• The natural person has during the income year, income from business having source
of income Nepal only,
• He has not claimed deductions from tax amount for medical tax credit under Section
51 and advance tax paid under section 93,
• The turnover during the year does not exceed Rs. 20 Lakhs and the taxable income
does not exceed Rs. 2 Lakhs, and
• Not registered with VAT.
If above conditions are met, his tax liability shall be as per Section 1(7) of Schedule 1
of the Act, which is as per follows:
• If his business is in metropolitan or sub-metropolitan city, then Rs. 7,500.
• If his business is in municipality, then Rs. 4,000
• If his business in in other than above two places, then Rs. 2,500.
As per section 4(4Ka) of the Act, if the following conditions are met, the tax liability
of a resident natural person shall be as per the rate specified in Section 1(17) of
Schedule 1 of the Act:
• The natural person has during the income year, income from business having source
of income Nepal only,

• Annual turnover of the business should exceed Rs. 20 Lakhs but shall not exceed
Rs. 50 Lakhs,
• Not registered with VAT, and
• He shall not have income from consulting and expert advisory services provided by
natural persons including services of medical professionals, engineers, auditors,
legal practitioners, sportspersons, artistes, and consultants.
If above conditions are met, tax liability shall be levied as per Section 4(4Ka) of the
Act and tax shall be imposed on the rate as follows on the turnover if it exceeds Rupees
20 Lakhs (as per schedule 1 section 1(17));
• If the business is dealing in goods including gas, cigarette having commission or
value addition up to 3 percent, then 0.25% of the turnover.
• If the business is other than above, then 0.75% of the turnover.
• In case of services business, 2 percent of turnover.
The above rates are applicable on the excess of turnover over Rs. 20 lakhs. Up to Rs.
20 lakhs, the tax will levied at the flat rates as per Section 1(7) of Schedule 1.
3.
a) Define the concept of “Resident Person” as per Income Tax Act, 2058. (5 marks)
b) Sagarmatha Infotech Private Limited has income tax outstanding of Rs. 50,00,000 for
various income years which it had failed to pay within prescribed time limit. Income
Tax Department has requested in writing to the concerned authorities of Government
of Nepal to stop the CEO and CFO of the Company from leaving Nepal for 6 months.
The contention of the CEO is since payment of Income Tax is financial matter, he
should not be held responsible, and contention of the CFO is since it is duty of the CEO
to arrange for fund for payment of tax, he should not be held responsible for payment
of the tax. Further, there contention is it is shareholders of the Company who is ultimate
owner of the Company and should be held responsible. And hence, the order of income
tax department to stop them from leaving Nepal is ultra-virus to the provisions of law.
Describe the relevant provisions of the Income Tax Act, Advise: (5 marks)
i) Whether the action of Income Tax Department is ultra-virus to the provisions of the
law or not.
ii) What are the remedies available to the CEO and CFO of the company?
Answer:
a) Section 2(KaNga) of Income Tax Act, 2058 defines the concept of resident person. As
per the section, ‘Resident Person’ for any income year denotes following persons:
(a) In case of Natural Person:
a. Who has his normal habitual place of adobe is in Nepal,
b. Who stayed in Nepal for a period of 183 days or more during a consecutive
period of 365 days, or
c. Who has been deployed by the Government of Nepal in a foreign country
during any period of time of income year

(b) Partnership firm

(c) In the case of a trust:
a. Which is established in Nepal,
b. Trustee of the trust is a resident person of Nepal during the income year, or
c. The trust is controlled by a resident person or group of such persons directly
or through one or more interposed entities during the income year.
(d) In the case of a company:
a. Which is incorporated under the laws of Nepal, or
b. Which has an effective management in Nepal during the income year
(e) Government of Nepal or Provincial Government of Nepal,
(f) Rural Municipalities, Municipalities or District Coordination Committees,
(g) In the case of an entity of Foreign Government or a provincial or local government
thereof:
a. which is established under the laws of Nepal, or
b. Which has an effective management in Nepal during the income year
(h) Organisation or entity established under any treaty or convention, or
(i) Foreign permanent establishment of a non-resident person situated in Nepal.
b)
i) Whether the action of Inland Revenue Department is ultra-virus to the provisions
of the law or not -
a. Section 106 of the Income Tax Act, 2058 provides that if any person fails to
deposit income tax within the time period provided by the department, then
department can stop such persons from leaving Nepal for 72 hours from the
expiry of due date of payment by issuing request in writing to the concerned
authority of Government of Nepal.
b. Further, Section 107 of the Act provides that all the officers of the entity will
be jointly and severely responsible for any noncompliance of the provisions of
the Act.
c. Hence, the contention of the CEO and CFO of the Company is not correct u/s
107 of the Act.
d. Action of the Inland Revenue Department to stop CEO and CFO of the
Company from leaving the Nepal is as per law u/s 106 and 107.
ii) Remedies available to the CEO and CFO of the Company –
a. Section 106(3) provides that department can withdraw order of stopping from
leaving Nepal to any person if:
i. Such person deposits the due tax amount, or
ii. The department is satisfied with the plan furnished by such person to
pay due tax amount.

4.
a) Discussing the relevant provisions of Value Added Tax Act and Rules, determine the
VAT payable for the month of Bhadra 2076 of Swarnim Foods Limited on the basis of
below detail: (10 marks)
Particulars Amount
Sales for the month (excluding VAT where applicable)
Export sales 35,00,000

Local sales 1,00,00,000
VAT exempt sales 15,00,000
Total sales 1,50,00,000
Other Transactions
Opening VAT Receivable 5,00,000
Vatable Purchase (including VAT) 56,50,000
Non Vatable Purchase 15,00,000
Payment to food consultant in India 10,00,000
Ticketing expenses for food consultant born by company 1,00,000
Total construction cost of Office Building by Company itself through 1,00,00,000
various parties as below:
(a) Direct purchase of construction materials from VAT registered
party (with VAT) – Rs. 80,00,000
(b) Payment of labour wages to labour contractor – Rs. 20,00,000
Total construction cost of Factory Godown by company through 40,00,000
VAT registered Contractor in turnkey project basis (including VAT)
Company Received below bills of expenses related to previous
financial years:
(a) Transportation bill of import of goods dated 2075.04.15 – Rs.
5,00,000 of non VAT registered party
(b) Consultancy fee of Rs. 11,30,000 for risk assessment of
Company dated 2075.05.15 including VAT
(c) Advertisement bill of VAT registered party dated 2075.04.10 Rs.
15,00,000 including VAT
Liquor purchase for anniversary celebration of Company (including 2,00,000
VAT)
Purchase of Motor Cycle for Sales Team including VAT 10,00,000
Purchase of Car for Sales Manager including VAT 30,00,000
Purchase Diesel for Car 50,000
Purchase of Petrol for Machine 1,00,000

b) Your group of clients, foreign mission/ diplomatic body, enquires you on VAT
implications on transfer of vehicles, cancellation of registration and few other related
matters. By referring the specific provision of VAT Act, you have to give your
professional decision in the following matters: (10 marks)
i) A foreign mission or donor agency wants to transfer the motor vehicles (imported
with the enjoyment of tariff facility) to governmental body. Is VAT attracted in this
case?
ii) A diplomatic body wants to scrap and cancel the registration of motor vehicle
which was imported with the enjoyment of tariff facility. Is VAT attracted in this
case?
iii) Is there any VAT facility for goods or services imported by a mission and a person
serving in a diplomatic mission?
iv) Is there any VAT facility for any project as per previous treaty or agreement for
sales tax exemption?
v) Is there refund of VAT facility for foreign diplomat, regional or international
commission, diplomatic commission, international institution?
Answer:
a) Determination of VAT Payable by Swarnim Foods Limited for the month of Bhadra
2076
Particulars Amount VAT
(A) VAT on Sales
Export Sales (VAT @ 0%) 35,00,000 0
Local Sales (VAT @ 13%) 1,00,00,000 13,00,000
VAT Exempt Sales (VAT Exempt) 15,00,000 0
Total VAT on Sales 1,50,00,000 13,00,000
(B) Ratio of Vatable sales to Non-Vatable Sales 90%
[1,35,00,000/1,50,00,000]
(C) VAT on Purchases

Vatable Purchase (including VAT) 56,50,000 6,50,000
Non Vatable Purchase 15,00,000 0
Payment to Food Consultant in India (Reverse charge u/s 8(2) 10,00,000 1,30,000
Ticketing Expenses for Food Consultant born by Company 1,00,000 0
(Non-Vatable)
VAT on Self Construction
Direct purchase of Construction materials from VAT 80,00,000 9,20,354
registered party
Payment of labour wages to labour contractor (u/s 8(3) since 20,00,000 0
cost of construction is more than 50 lacs) Note
Construction cost of Factory Godown 40,00,000 4,60,177

Transportation bill of import of Goods dated 2075.04.15 5,00,000 0

Consultancy fee of Rs 11,30,000 for risk assessment of 11,30,000 3,00,000
Company dated 2075.05.15 [ Allowed since invoice date is
within 1 year]
Advertisement Bill of VAT registered party dated 2075.04.10 15,00,000 0
[Not allowed since invoice date is more than a year old]
Liquor purchase for anniversary celebration of Company 2,00,000 0
[Not allowed under rule 41(1)
Purchase of Motor Cycle for Sales Team including VAT 10,00,000 2,65,487
Purchase of Car for Sales Manager [only 40% VAT credit 30,00,000 3,18,584
allowed under Rule 41(1)]
Purchase Diesel for Car [Credit not allowed Rule 41(1)(c)] 50,000 0
Purchase of Petrol for Machine [Credit not allowed Rule 1,00,000 0
41(1)(c)]
Total VAT Credit 30,44,602
(D) Total VAT Credit for Vatable Sales [90% of 27,40,141.80
30,44,602]
(E) Opening VAT Credit 5,00,000
(F) VAT Receivable for the month of Bhadra 2076 19,40,141.80
Note: VAT u/s 8(3) is not available for credit.

b)
i) As per clause 13 of Part B (Other Goods and Services) of Group 11of Schedule 1
of VAT Act, value added tax shall not be levied on transfer of motor vehicle (not
crossed ten years from the first year of manufacturing) that were imported by any
diplomatic mission or donor agency with the enjoyment of diplomatic facility or
tariff facility to the project itself in consonance with the annual approved program
of the project and converting their number plates into government ones or on
transfer, with the approval of Ministry of finance of the Government of Nepal, any
motor vehicles (not crossed ten years from the first year of manufacture) that were
imported in the name of any project with the enjoyment of full or partial tariff
facility (except those imported on record or bank guarantee) to any governmental
body after the completion of the project and converting their number plates into
governmental ones.
ii) As per Clause 14 of Part B (Other Goods and Services) of Group 11of Schedule 1
of VAT Act, if any diplomatic mission, project, individual or other body
(governmental or nongovernmental organization) intends to scrap and cancel the
registration of any motor vehicle that it has imported with enjoyment of tariff
facility and that is more than 15 years old from the first year of production, with
the approval of Ministry of Finance, value added tax shall not be levied on such
motor vehicle.
iii) As per Clause 3 of Schedule 2 of VAT Act, zero VAT shall be levied on goods or
services imported by a person or mission enjoying diplomatic facility and a person

serving in a diplomatic mission enjoying tariff facility, on the recommendation of

Ministry of Foreign Affairs of the Government of Nepal.
iv) As per Clause 4 of Schedule 2 of VAT Act, zero VAT shall be levied if any previous
treaty or agreement provides for sales tax exemption on imports and local purchase
is made from the registered taxpayers, on the recommendation of concerned project,
the facility of zero rate shall be provided on such supplies so long as such treaty or
agreement is in effect.
v) As per section 25(1) (Ka) of VAT act, the amount of tax paid, to the extent of own
consumption, inside the territory of Nepal by a diplomat, situated in Nepal, of a
foreign country, regional, international commission or institution if the foreign
country or regional, international commission or institution grants on reciprocal
basis tax exemption privileges to Nepalese diplomats recognized by the Ministry
of Foreign Affairs of the Government of Nepal to that foreign country.
As per Section 25(1)(ka1) of VAT Act, on the basis of recommendation made by
Government of Nepal, Ministry of foreign affairs, VAT paid by diplomatic mission
on goods or services purchased within Nepal shall be refunded.
As per section 25(1)(kha) of VAT Act, the amount of tax paid by an international
institution for which Government of Nepal, Ministry of Finance, has granted the
privileges of tax exemption.
Application for such VAT refund shall have to be made within three years from the
date of the concerned transaction and tax paid by a diplomatic mission or diplomat
on purchase of goods or services should not be less than ten thousand at one time
of purchase.
5.
a) Provide your answer by referring relevant provisions of law. (7 marks)
i) Mr. Ram Prasad brought an item A from abroad (accompanied baggage with him)
whose value amounts to NPR 10,00,000. Prevailing Excise duty is @30%, Customs
Duty @ 30%, VAT 13%. Calculate the excise duty, customs duty and VAT payable
by Mr. Ram Prasad as per the provision of the customs act (amended by Finance
Act, 2076). Will there be change in calculated figures if the baggage is
unaccompanied with him?
ii) If such item A is Arms and Ammunitions, does the customs act (amended by Finance
Act, 2076) tax separately from above case?
iii) If Mr. Ram, as a Nepali traveller, brings home LCD plasma or LED TV amounting
to Rs. 500,000, then what will be the customs duty payable?
iv) If Mrs. Sweety, a foreign traveller, brings gold ornament of 160 grams and silver
ornament 220 grams for personal usage amounting to Rs. 500,000, then what
amount Mrs. Sweety needs to pay as per the Customs Act (amended by Finance Act,
2076)? Also give your answer with relevant provision while returning back to her
country.
b) Liquor World (Pvt.) Ltd. has the following stocks. Analyze and suggest the company
about the shortages as per Excise Rules, 2064. (7 marks)
Stock as per Physical
Stock as per Record Verification
Liquor 10,000 litres 9,890 litres

Stock as per flow-

meter Stock as per bottle counter
Beer bottles while bottling 10,000 bottles 9,800 bottles
Stock as per physical
Beer bottles after Stock as per record verification
pasteurization, packaging and
storing 10,000 bottles 9,600 bottles
c) Everest Manufacturing Co. imported a Machinery worth Rs. 50,00,000 by paying the
necessary duties. In that, one part costing Rs. 5,00,000 was defective and the supplier
was willing to replace the same free of cost if the defective part was sent to him. If the
company wants to export the same and receive the replacement part, consider the
custom duty, procedure and VAT implications for the same. (6 marks)
Answer:
a)
i) As per Finance Act 2076, goods imported, accompanied or unaccompanied by a
passenger, as per the baggage rules shall be charged a lump sum customs duty at a
flat rate of 40% instead of levying chargeable customs duty, excise duty and value
added tax. Accordingly, in this case, he has to pay 40% of Rs. 10,00,000, i.e., Rs.
400,000 as lump sum customs duty. If the baggage is unaccompanied, there will
not be a change in calculated figures. Same amount is payable as per finance act.
ii) As per Finance Act 2076, customs duty shall be charged as per the tariff rates on
goods such as silver ornaments, cigarettes, pipe tobacco, liquor, means of transport,
arms and ammunitions and other goods requiring import license even if it is part of
baggage. In this case, it will be taxed separately unlike item A.
iii) As per Finance Act 2076, as per the notice published in Nepal Gazette regarding
baggage rules, Nepali travellers bringing LCD Television, Plasma or LED TV shall
be charged at the rate of 55% as lump sum customs duty instead of levying
chargeable customs duty, excise duty and value added tax. Hence, in this case, he
has to pay Rs. 275,000.
iv) As per Finance Act 2076, if a foreign traveller, brings with him/ her gold and silver
ornament, for personal purpose and later to be taken back while returning, in excess
of 50 grams (for gold) and 100 grams (for silver) and declares at customs point,
then after testing and verification, such ornament is allowed to make entry by
depositing 20 percent of ornament value. Hence, in this case, she has to deposit Rs.
100,000. While returning back, such amount of deposit shall be refunded. But
during testing and verification, quality and quantity of ornament is found to be
different from what has been declared at customs point, then this shall be a
punishable offence as per section 57(1) of Customs Act, 2064.
b) Calculation of Shortages of the quantity:
Stock as per
Physical
Stock as per Record Verification Difference % Difference
Liquor 10,000 9,890 110 1.10%

Stock as per Flow- Stock as per Bottle

meter Counter Difference % Difference
Beer bottles while
bottling 10,000 9,800 200 2.00%
Stock as per
Beer bottles after Physical
pasteurization, Stock as per Record Verification Difference % Difference
packaging and
storing 10,000 9,600 400 4.00%
Rule Nos. 23 and 24 stipulate about the shortages in liquor and beer. According to Rule
No. 23 liquor reduced due to vaporization, pilferage, in course of bottling etc. can be
exempted up to 1%. Likewise, Rule No. 24 stipulates that the beer manufacturer can get
exemption for reduction of beer up to 1.5% while bottling and 2% after bottled. Any
excess loss beyond the ceilings shall be taxed.
Accordingly, the losses shall be taxed for excess of the ceilings which are found in all
the given cases.
c) First there must be a letter of commitment from the supplier that he will replace the
item. If the custom officer is satisfied, he can allow the export of the part on receiving
a security for the same equivalent to the custom duty as if it were a new import. On
receipt of the replacement, he will assess the duty and if the security earlier taken is
less he will collect the difference before releasing the part or if the duty becomes less,
the excess will be refunded.
If the supplier sends the replacement before sending the defective material, the custom
officer will decide the custom value and collect the custom duty on the replacement
item received along with VAT thereon. If the replaced item originally imported is sent
back within 6 months to the supplier, then the custom officer will refund the custom
duty paid on the item while earlier imported. Then the industry will have to reverse the
claim of refund of VAT on its monthly return with proof of custom duty refund as that
material is not used by the industry. But there is no provision made for this type of case
in the VAT Act. If the goods are not sent back within the permitted time, then the
custom duty earlier paid will not be refunded.
6.
a) Based upon the Double Taxation Avoidance Agreement (DTAA) with India, find out
the taxability of the following transactions citing the relevant DTAA provision:
(5 marks)
S. No. Transaction Taxable In Relevant
Nepal - Yes DTAA
or No? Provision
1. Ministry of Foreign Affairs Nepal paid to a Training
Institute in India.
2. Everest Bank Ltd., Nepal; a subsidiary of Punjab
National Bank, India paid director’s fees to its
director from India, who visits Nepal only for
occasional meetings.
3. Mr. Jaswant Singh, an Indian Resident, has a house
in Kathmandu and gets rent on a monthly basis.

4. Mr. Gaurishankar a Nepali Resident has conducted a

restaurant in Pahadganj, New Delhi.
5. The income of Indian Airlines from the DEL-KTM-
DEL route.
b) Describe the various provisions contained in Income Tax Act, 2058 regarding foreign
tax credit. (5 marks)
Answer:
a)
S. No. Transaction Taxable Relevant DTAA Provision
In Nepal
- Yes or
No?
1. Ministry of Foreign Affairs Nepal No Article 7 Business profits
paid to a Training Institute in
The profits of an enterprise of a Contracting
India.
State shall be taxable only in that State
unless the enterprise carries on business in
the other Contracting State through a
permanent establishment situated therein.
If the enterprise carries on business as
aforesaid, the profits of the enterprise may
be taxed in the other State but only so much
of them as is attributable to that permanent
establishment.
2. Everest Bank Ltd, Nepal; a Yes Article 16 Directors’ fees
subsidiary of Punjab National
Directors’ fees and other similar payments
Bank, India paid director’s fees to
derived by a resident of a Contracting State
its director from India, who visits
in his capacity as a member of the Board of
Nepal only for occasional
Directors of a company which is a resident
meetings.
of the other Contracting State may be taxed
in that other State.
3. Mr. Jaswant Singh, an Indian Yes Article 6 Income from immovable property
Resident, has a house in
Income derived by a resident of a
Kathmandu and gets rent on a
Contracting State from immovable
monthly basis.
property (including income from
agriculture or forestry) situated in the other
Contracting State may be taxed in that other
State.
4. Mr. Gaurishankar a Nepali No Article 7 Business profits
Resident has conducted a
The profits of an enterprise of a Contracting
restaurant in Pahadganj, New
State shall be taxable only in that State
Delhi.
unless the enterprise carries on business in
the other Contracting State through a
permanent establishment situated therein.
If the enterprise carries on business as
aforesaid, the profits of the enterprise may
be taxed in the other State but only so much
of them as is attributable to that permanent
establishment.
5. The income of Indian Airlines No Article 8 Shipping and air transport
from the DEL-KTM-DEL route.
Profits derived by an enterprise of a
Contracting State from the operation of

ships or aircraft in international traffic shall

be taxable only in that Contracting State.
b) Section 71 of the Income Tax Act, 2058 provides for various provisions related with
foreign tax credit. Section 71 provides that:
(a) Foreign tax paid can be adjusted with tax liability in Nepal with respect to
respective foreign income as prescribed , or
(b) Foreign tax paid can be claimed as expense.
Adjustment of Foreign Tax Paid
Section 71(1) provides that any resident person may claim for adjustment of foreign
tax paid during the income year with respect to such foreign income included in
assessable income of the tax payer. While claiming such foreign tax adjustment:
(a) Separate calculation shall be done with respect to assessable income of each
foreign country,
(b) Foreign tax paid with respect to income of one country cannot be adjusted with
income of any other country, and
(c) If average tax on income in foreign country is less than average tax in Nepal on
such income, then differential income tax shall be paid in Nepal.
(d) Excess average foreign tax over average tax of Nepal cannot be claimed for adjustment.
However, such excess foreign tax may be carried forward for adjustment in succeeding
income years for adjustment of tax in income from such foreign country.
Adjustment of Foreign Tax as Expenses
If a person foregoes its right of adjustment of foreign tax credit as specified above, then
the taxpayer may claim such foreign tax paid as expenses.

Paper 7: Advanced Cost and Management Accounting

Attempt all questions. Working notes should form part of the answer. Make assumptions
wherever necessary.
1.
a) The TCL Ltd., located in Province 5, manufactures a variety of industrial valves and
pipe fittings. Currently, the company is operating at about 70% capacity and is earning
a satisfactory return on investment.
TCL’s management has been approached by JAL Industries Ltd. with an offer to buy
120,000 units of pressure valve. JAL Industries Ltd. manufactures a valve identical to
TCL’s pressure valve; however a fire in JAL Industrial valve plant has temporarily
shut down its manufacturing operations. JAL needs the 120,000 valves over the next
four months to meet commitments to its regular customers. The company is prepared
to pay Rs. 19 each for the valves. JAL will arrange to pick up the valves from the TCL’s
plant.
TCL’s manufacturing costs, based on currently attainable standards, for the pressure
valve are:
In Rs. per unit
Direct materials 5.00
Direct manufacturing labour costs 6.00
Manufacturing overhead costs 9.00
Total manufacturing costs 20.00
Manufacturing overhead is allocated to production at the rate of Rs. 18 per standard
direct labour-hour. This overhead rate is made up of the following components.
Rs.
Variable manufacturing overheads 6.00

Fixed manufacturing overheads 12.00
Budgeted manufacturing overhead 18.00
Additional costs incurred in connection with sales of the pressures valve include sales
commissions of 5% and freight costs Rs. 1 per unit. However, the company does not
pay commission on special orders that come directly to management.
In determining selling prices, TCL adds a 40% mark-up to manufacturing costs. This
approach provides Rs. 28 suggested selling price for the pressure valve. The marketing
department, however, has set the current selling price for at Rs. 27 in order to maintain
market share.
Production management believes that it can handle the JAL Industries order without
disrupting its scheduled production. The order would, however, require additional
fixed manufacturing overhead of Rs. 12,000 per month in increased supervision and
clerical costs.

If management accepts the order, 30,000 pressure valves will be manufactured and
picked up by JAL Industries each month for the next four. Shipments will be made
weekly.
i) Determine how many additional directly manufacturing labour-hours would be
required each month to fulfill the JAL Industries order.
ii) Prepare an incremental analysis showing the impact on revenue and costs of
accepting the JAL Industries order.
iii) Calculate the minimum unit price that TCL management could accept for the JAL
Industries order without changing operating income.
iv) Identify the factors, others than price that the TCL Ltd. should consider before
accepting the JAL Industries order.
b) A single product company furnishes the following data:
Year 1 Year 2
Sales (Rs.) 4,500,000 ?
1
P/V Ratio 33 % 30%
3
Margin of Safety 25% 40%
While there was no change in the volume of sales and rate of variable cost in year 2
the selling price was however reduced.
Calculate the Sales, Fixed cost and Profit for year 2. (8 marks)
Answer:
a)
i) Additional Labour Hours required each month
Manufacturing overhead cost per unit = Rs. 9
Manufacturing overhead rate per hour = Rs. 18
Time required per unit = 9/18, i.e., ½ Hours
Demand per month 120,000/4 = 30,000 units
Additional Labour hours required per month = 30,000 × ½ hours = 15,000 hours
ii) Statement of analysis of impact on revenue and cost
Amount (Rs)
Incremental Gain:
Sales 120,000 × 19 2,280,000
Incremental Cost:
Direct Material 120,000 × 5 600,000

Direct Labour 120,000 × 6 720,000

Variable Manufacturing Overhead 120,000 × 3 360,000
Fixed Manufacturing Overhead 48,000 1,728,000
Net Incremental Gain 552,000
There would be incremental gain of Rs. 552,000 for TCL if it accepts JAL’s offer.
iii) Minimum Price Acceptable
Relevant Cost 1,728,000
= = Rs. 14.40 per unit
No of Units 120,000
iv) TCL management should consider the fact that JAL is its competitor. It will never
be a wise decision to help the competitor under any circumstances. Rather TCL
management should explore the possibility of attracting the existing customers of
JAL by offering attractive terms.
b)
Year 1
Contribution = Sales × P/V Ratio
1
=Rs. 4,500,000 × 333 %
=Rs. 1,500,000
Sales – Variable Cost = Contribution
Or, Variable Cost = Sales – Contribution
=4,500,000 – 1,500,000
= Rs. 3,000,000
Margin of safety = 25%
Or, Break Even Sales = 75% of Sales
= 75% of 4,500,000
= Rs. 3,375,000
At, Break even sales, contribution is just sufficient to meet fixed cost
Or, BES × P/V Ratio = Fixed Cost
1
Or, Fixed Cost = 3,375,000 × 333% = Rs 1,125,000
Year 2
Let the sales for year 2 be X.
We have,
Sales – Variable Cost = Contribution = Sales × PV Ratio [PV Ratio is given]

Or, X – 3,000,000 = X × 30% = 0.3 X

Or, 0.7 X = 3,000,000
Or, X [Sales for year 2] = Rs. 4,285,714.28
Margin of Safety = 40%
Or, Break even sales = 60% of 4,285,714.28 = Rs. 2,571,428.57
Fixed Cost = BE Sales × PV Ratio = 2,571,428.57 × 30%
= Rs. 771,428.57
Profit = 4,285,714.28 – 3,000,000 – 771,428.57
= Rs. 514,285.71
2.
a) Game Station runs a retail store which sells video games and provides gaming facility
along with repairing of game system. Sales are uniform for most of the year, but pick
up in Ashwin and Chaitra, both because new releases come out and games are
purchased in anticipation of festival season and holidays. The forecast of sales and
service revenue for the third quarter of 2076/77 is as follows:
Month Expected Expected Total revenue
sales revenue (Rs.) service revenue (Rs.) (Rs.)
Magh 550,000 100,000 650,000
Falgun 620,000 140,000 760,000
Chaitra 970,000 260,000 1,230,000
Total 2,140,000 500,000 2,640,000
Almost all the service revenue is paid for by bank credit card, so Game Station budgets
this as 100% bank card revenue. The bank cards charge an average fee of 3% of the
total. Half of the sales revenue is also paid for by bank credit card, for which the fee is
also 3% on average. About 10% of the sales are paid in cash, and the rest (the
remaining 40%) are carried on a store account. Although the store tries to give store
credit only to the best customers, it still averages about 2% for uncollectible accounts;
90% of store accounts are paid in the month following the purchase, and 8% are paid
two months after purchase.
i) Calculate the cash that Game Station expects to collect in Falgun and in Chaitra
of 2076. Show calculations for each month.
ii) Game Station has budgeted expenditures for Falgun of Rs. 435,000 for the
purchase of games and game systems, Rs. 140,000 for rent and utilities and other
costs, and Rs. 100,000 in wages for the two part time employees. Assume
(independently for each situation) that Falgun revenues might also be 5% less and
10% less, and that costs might be 8% higher. Under each of those three scenarios
show the total net cash for Falgun and the amount Game Station would have to
borrow if cash receipts are less than cash payments. Assume the beginning cash
balance for Falgun is Rs. 10,000.

iii) Suppose the costs for Falgun are as described in requirement (ii), but the expected
cash receipts for the month are Rs. 620,000 and beginning cash balance is Rs.
10,000. Game Station has the opportunity to purchase the games and game systems
on account in Falgun, but the supplier offers the company credit terms of 2/10 net
30. Game Station can borrow money at a rate of 24%. Should Game Station take
the purchase discount?
b) Western Timber has a raw timber division and a finished timber division. The variable
costs are as follows:
• Raw timber division: Rs. 1,000 per 100 board-feet of raw timber.
• Finished timber division: Rs. 1,250 per 100 board-feet of finished timber.
Assume that there is no board-feet loss in processing raw timber into finished timber.
Raw timber can be sold at Rs. 2,000 per 100 board-feet. Finished timber can be sold
at Rs. 2,750 per 100 board-feet.
i) Should Western Timber process raw timber into its finished form? Show your
calculations.
ii) Assume that internal transfers are made at 110% of variable cost. Will each
division maximize its division operating-income contribution by adopting the
action that is in the best interest of Western Timber as a whole? Explain.
iii) Assume that internal transfers are made at market prices. Will each division
maximize its division operating-income contribution by adopting the action that is
in the best interest of Western Timber as a whole? Explain.
Answer:
a)
i) Calculation of cash collection in Falgun and Chaitra of 2076.
Cash collections Falgun (Rs.) Chaitra (Rs.)
From sales revenue:
Sales through credit card:
Falgun (50% × Rs. 620,000 × 97%) 300,700
Chaitra (50% × Rs. 970,000 × 97%) 470,450
Cash sales:
Falgun (10% × Rs. 620,000) 62,000
Chaitra (10% × Rs. 970,000) 97,000
Credit sales collection:
From Magh (40% × Rs. 550,000 × 90%) 198,000
(40% × Rs. 550,000 × 8%) 17,600
From Falgun (40% × Rs. 620,000 × 90%) 223,200
From service revenue:
Falgun (Rs. 140,000 × 97%) 135,800
Chaitra (Rs. 260,000 × 97%) 252,200
Total cash collections 696,500 1,060,450
ii) Cash budget of changing scenario of Falgun 2076
Particulars Original Revenue Revenue Cost increases
Budget decreases by decreases by by 8% (Rs.)
(Rs.) 10% (Rs.) 5% (Rs.)

Beginning cash 10,000 10,000 10,000 10,000

Cash collection 696,500 646,650 671,575 696,500
(WN 1)
Cash costs:
Purchases (435,000) (435,000) (435,000) (469,800)
Rent & Utilities (140,000) (140,000) (140,000) (151,200)
Wages (100,000) (100,000) (100,000) (108,000)
Total cash 31,500 (18,350) 6,575 (22,500)
WN 1)
Cash collection when 10% revenue decrease
= 90% (300,700+62,000+135,800) + 198,000 = Rs. 646,650
Cash collection when 5% revenue decrease
= 95% (300,700+62,000+135,800)+198,000 = Rs. 671,575
iii) The cost of purchases without the discount is Rs. 435,000, which Game Station
would not have to pay until Chaitra if they buy the games and games systems on
account in Falgun. However, if they take the discount and pay in Falgun, the cost
will be Rs. 435,000 × (100% - 2%) = Rs. 426,300. This means they will save Rs.
8,700.
This makes total expenditures for Falgun:
Costs (Rs.)
Purchases 426,300
Rent & Utilities 140,000
Wages 100,000
TOTAL 666,300
Game Station's total cash available is Rs. 10,000 (cash balance) + Rs. 620,000 (cash
receipts) so they will have to borrow Rs. 36,300 at a rate of 24% (or 2% per month.)
Based on the information from (i), they will be able to pay this back in Chaitra
(assuming cash expenditures don’t increase dramatically), so they will incur
interest costs of Rs. 36,300 × 2% = Rs. 726. Since it will cost them less to save Rs.
8,700, it makes sense to go ahead and take the short-term loan to pay the account
payable early.
b)
i) Incremental revenues and incremental costs in the Finished Timber Division:
Incremental revenues = Rs. 2,750 – Rs. 2,000 = Rs. 750
Incremental costs = Rs. (1,250)
Incremental loss = Rs. (500) per 100 board-feet
Decision:

Since processing of raw timber into finished form generates a loss of Rs. 500
per 100 board-feet in contribution margin, Western Timber should not process
raw timber into finished form.
ii) Transfer price at 110% of variable costs:
= Rs. 1,000 × 110% = Rs. 1,100 per 100 board-feet
Particulars Sell as raw timber (Rs.) Sell as finished timber

(Rs.)
Raw timber division:
Division revenue 2,000 1,100
Division variable cost (1,000) (1,000)
Division operating income 1,000 100
Finished timber division:
Division revenue 0 2,750
Transfer-in cost 0 (1,100)
Division variable cost 0 (1,250)
Division operating income 0 400
Explanation:
The raw timber division will maximize reported division operating income by
selling raw timber, which is the action preferred by the company as a whole. The
finished timber division will maximize division operating income by selling
finished timber, which is contrary to the action preferred by the company as a
whole.
iii) Transfer price at market price: Rs. 2,000 per 100 board feet
Particulars Sell as raw timber (Rs.) Sell as finished timber
(Rs.)
Raw timber division:
Division revenue 2,000 2,000
Division variable cost (1,000) (1,000)
Division operating income 1,000 1,000
Finished timber division:
Division revenue 0 2,750
Transfer-in cost 0 (2,000)
Division variable cost 0 (1,250)
Division operating income 0 (500)
Explanation:
Since the raw timber division will be indifferent between selling the timber in raw
or finished form, it would be willing to maximize division operating income by
selling raw timber, which is the action preferred by the company as a whole. The
finished timber division will maximize division operating income by not further
processing raw timber and this is preferred by the company as a whole. Thus,
transfer at market price will result in division actions that are also in the best interest
of the company as a whole.

3.
a) The number of days of Total Float (TF) and Earliest Start Time (EST) and duration in
days are given for some of the following activities:
Activities Total Float Earliest Start Time Duration
1-2 0 0 ???
1-3 2 ??? ???
1-4 5 ??? ???
2-4 0 4 ???
2-5 1 ??? 5
3-6 2 12 ???
4-6 0 12 ???
5-7 1 ??? ???
6-7 ??? 23 ???
6-8 2 ??? ???
7-8 0 23 ???
8-9 ??? 30 6
i) Draw the network.
ii) Find the missing (???) figures.
iii) Determine the critical path and the length of the project.
b) A small retail has studied the weekly receipts and payments over the 200 weeks and
has developed the following set of information.
Daily Receipt (Rs.) Probability Daily Payments (Rs.) Probability
14,000 0.20 12,000 0.30
18,000 0.30 20,000 0.40
11,000 0.40 9,000 0.20
21,000 0.10 16,000 0.10
Using the following set of random numbers, simulate the weekly pattern of receipts and
payments for 12 days of the next quarter, assuming that the beginning bank balance is
Rs. 8,000. What is the estimated balance at the end of the 12 weeks period? What is the
highest daily balance during the quarter? What is the average weekly balance for the
quarter? (10 marks)
Random Numbers:
For Receipts : 03, 91, 38, 55, 17, 46, 32, 43, 69, 72, 24, 22
For Payments : 61, 96, 30, 32, 03, 88, 48, 28, 88, 18, 71, 99
Answer:
a)
i. The network for the given problem is as follows

E=4
L=4 E=9
2 5 L=10
5
4 8 E=23 E=30 E=36
E=0 13 L=23 L=30 L=36
L=0 1 7 4 7 7 8 6 9
E=12 11 0
12 L=12
6
5
3
9 E=23
L=23
E=12
L=14
ii. The missing figures
iii. The Critical Path of the project is

Critical Path of the project is 1- 2- 4-6-7-8-9 [Duration of the project is 36 days]
b) Random number table is as follows:
Daily Receipt (Rs) Probability Daily Payments (Rs) Probability

14,000 0.20 12,000 0.30
18,000 0.30 20,000 0.40
11,000 0.40 9,000 0.20
21,000 0.10 16,000 0.10
According to the given information, the random number interval is assigned to both the
receipts and payments as follows:
Receipts Prob. RN Interval Payments Prob. RN Interval
14,000 0.20 00-19 12,000 0.30 00-29
18,000 0.30 20-49 20,000 0.40 30-69
11,000 0.40 50-89 9,000 0.20 70-89

21,000 0.10 90-99 16,000 0.10 90-99

Based on the random numbers given, the receipts and payments and also the balance
for various weeks can be stimulated as follows
Week Receipts Payments Balance

0 R No Rs R No Rs 8,000
1 3 14,000 61 20,000 2,000
2 91 21,000 96 16,000 7,000
3 38 18,000 30 20,000 5,000
4 55 11,000 32 20,000 -4,000
5 17 14,000 3 12,000 -2,000
6 46 18,000 88 9,000 7,000
7 32 18,000 48 20,000 5,000
8 43 18,000 28 12,000 11,000
9 69 11,000 88 9,000 13,000
10 72 11,000 18 12,000 12,000
11 24 18,000 71 9,000 21,000
12 22 18,000 99 16,000 23,000
i) Estimated balance at the end of the 12 weekly period is Rs. 23,000

ii) Highest weekly balance during the quarter is Rs, 23,000
iii) Average weekly balance is Rs. 8,333 [Opening balance not considered]
4.
a) Hanover Manufacturing has four categories of overhead. The four categories and
expected overhead costs for each category for next year are listed below:
Maintenance Rs. 200,000
Materials handling 32,000
Setups 100,000
Inspection 120,000
Currently, overhead is applied using a predetermined overhead rate based upon
budgeted direct labour hours. For next year, 50,000 direct labour hours are budgeted.
The company has been asked to submit a bid for a proposed job. The plant manager
thinks getting this job would result in new business in future years. Usually bids are
based upon full manufacturing cost plus 20 percent.
Estimates for the proposed job (Job No. P902) are as follows:
Direct materials Rs. 6,000
Direct labour (1,000 hours) Rs. 10,000
Machine hours 500
Number of material moves 12
Number of setups 2
Number of inspections 10

In the past, full manufacturing cost has been calculated by allocating overhead using
a volume-based cost driver (direct labour hours). The plant manager has heard of a
new way of applying overhead that uses cost pools and cost drivers.
Expected activity for the four activity-based cost drivers that would be used are:
Machine hours 20,000
Material moves 1,600
Setups 2,500
Quality inspections 4,000
Required: (8 marks)
i) Determine the amount of overhead that would be allocated to the proposed job if a
plant wide rate with direct labour hours used the unit-level driver.
ii) Determine the total cost of the proposed job and determine the company’s bid if the
bid is based upon full manufacturing cost plus 20 percent.
iii) Determine the amount of overhead that would be applied to the proposed project if
activity-based drivers are used.
iv) Determine the total cost of the proposed job if activity-based costing is used and
determine the company’s bid if activity-based costing is used and the bid is based
upon full manufacturing cost plus 20 percent.
b) Himalayan health centre runs a Medical Care Unit. For this purpose, it has hired a
building at a rent of Rs. 50,000 per month with the understanding that it would bear
the repairs and maintenance charges also.
The Unit consists of 25 beds and 5 more beds can be comfortably accommodated when
the occasion demands. The permanent staff attached to the unit are as follows:
One Supervisor, each at a salary of Rs. 2,000 p.m.
Two Nurses, each at a salary of Rs. 1,200 p.m.
Two Ward boys, each at a salary of Rs. 300 p.m.
Though, the unit is open for patients all the 365 days in a year scrutiny of accounts in
2017-18 reveals that only for 120 days in the year, the unit bed the full capacity of 25
patients per day and for another 80 days, it had on an average 20 beds occupied per
day. But there were occasion when the beds were full, extra beds were hired at a charge
of Rs. 50 per day and this did not come to more than 5 beds extra above the normal
capacity on any one day. The total hire charges for extra beds incurred for the whole
year accounted to Rs. 20,000.
The unit engaged expert doctors from outside to attend the patients and the fees were
paid on the basis of the number of patients attended and time spent by them which on
an average worked out to Rs. 50,000 per month in 2017-18.
The other expenses for the year as under: Rs.
Repairs and maintenance 25,000
Food supplied to patients 88,000
Janitor and other service for patients 25,000
Laundry charges for bed linen 56,000

Medicines supplied 70,000

Cost of Oxygen, X-ray etc. other than directly borne for
treatment of patients 2,08,000
General administrative charges allocated to the unit 98,000
Calculate: (7 marks)
i) If the unit recovered an overall amount of Rs. 500 per day on an average from each
patient, what is the profit per patient day made by the unit in 2017-18?
ii) The unit wants to work on a budget for 2018-19 but the number of patients requiring
intensive medical care is a very uncertain factor. Assuming that the same revenue
and expenses prevail in 2018-19, work out the number of patient days required by
the unit to break-even.
Answer:
a)
i) Total overhead = Rs. 200,000 + Rs. 32,000 + Rs. 100,000 + Rs. 120,000
= Rs. 452,000
Overhead rate = Rs. 452,000/50,000 direct labour hours
= Rs. 9.04 per direct labour hour
Overhead assigned to proposed job = Rs. 9.04 × 1,000 direct labour hours
= Rs. 9,040
ii) Total cost of proposed job:
Direct materials .............................. Rs. 6,000
Direct labor .................................... 10,000
Overhead applied ........................... 9,040
Total cost ........................................ Rs.25,040
Company’s bid = Full manufacturing cost × 120%
= Rs.25,040 × 120%
= Rs.30,048
iii) Maintenance: Rs.200,000/20,000 machine hours = Rs. 10 per machine hour
Materials handling: Rs. 32,000/1,600 material moves = Rs. 20 per move
Setups : Rs. 100,000/2,500 setups = Rs. 40 per setup
Inspection : Rs. 120,000/4,000 inspections = Rs. 30 per inspection
Overhead assigned to proposed job:
Maintenance (Rs. 10 × 500) .......... Rs. 5,000
Materials handling (Rs. 20 × 12) ... 240
Setups (Rs. 40 × 2) ........................ 80

Inspections (Rs.30 × 10) ............... 300

Total overhead assigned to job ...... Rs. 5,620
iv) Total cost of proposed project:
a. Direct materials ........................ Rs. 6,000
b. Direct labour ............................ 10,000
c. Overhead applied ..................... 5,620
d. Total cost .................................. Rs. 21,620
Company’s bid = Full manufacturing cost × 120%
= Rs. 21,620 × 120%
= Rs. 25,944
Mark-up .......................................... × 120%
Bid price ......................................... Rs.25,944
b)
i) Number of Patient days in 2017-18:
25 beds x 120 days =3,000
20 beds x 80 days = 1,600
Extra bed days = 400
Total Patient days = 5,000
(Total hire charges of extra beds/charges per bed per day = Rs. 20,000/Rs. 50).
We have presumed in the solution that the cost of janitor and other services are
variable as they are related to number of patient days. Cost of oxygen, X-ray has
been taken as a fixed cost since it has been stated that this cost is other than costs
directly borne for treatment of patients.
Statement of Cost and Profit
Rs. Rs.
Income received (Rs. 500 x 5,000 patient days) 25,00,000
Variable costs:
Food 88,000
Janitor services 25,000
Laundry 56,000
Medicines 70,000
Doctors’ fee (50,000 x 12) 6,00,000
Hire charges for extra beds 20,000 8,59,000
Contribution 16,41,000

Fixed Costs:
Salaries (1 x 2,000 + 2 x 1,200 + 2 x 300) x 12 60,000
Rent (50,000 x 12) 6,00,000
Repairs and maintenance 25,000
General administration 98,000
Cost of Oxygen, X-ray etc. 2,08,000 9,91,000
Profit 6,50,000
Profit per patient day = Rs. 6,50,000/5,000

= Rs. 130
ii) Break-even Point = Total Fixed Cost × Gross Income/ Total Contribution
= Rs. 9,91,000 × 25,00,000/16,41,000
= Rs. 15,09,750
= Rs.15,09,750/500
= 3,020 Patient days
5. Write short notes on the following: (5 × 3=15 marks)
a) Budgetary slack
b) Material requirements planning Vs. JIT production
c) Linear cost function Vs. Non-linear cost function
d) Value-chain analysis
e) Quality costs
Answer:
a) Budgeting is most effective when lower-level managers actively participate and
meaningfully engage in the budgeting process. Participation adds credibility to the
budgeting process and creates greater commitment and accountability toward the
budget. But participation requires "honest" communication about the business from
subordinates and lower-level managers to their bosses. At times, subordinates may try
to "play games" and build in budgetary slack.
Budgetary slack describes the practice of underestimating budgeted revenues, or
overestimating budgeted costs, to make budgeted targets more easily achievable. It
frequently occurs when budget variances (the differences between actual results and
budgeted amounts) are used to evaluate performance. Line managers are also unlikely
to be fully honest in their budget communications if top management mechanically
institutes across-the-board cost reductions in the face of projected revenue reductions.
Budgetary slack provides managers with a hedge against unexpected adverse
circumstances. But budgetary slack also misleads top management about the true profit
potential of the company, which leads to inefficient resource planning and allocation

and poor coordination of activities across different parts of the company. To avoid
problems of budgetary slack, some companies use budgets primarily for planning
purposes. They evaluate managerial performance using multiple indicators that take
into account various factors such as the prevailing business environment and
performance relative to competitors. Evaluating performance in this way takes time and
requires careful exercise of judgment. Other companies use budgets for both planning
and performance evaluation and use different approaches to obtain accurate
information.
b) Materials requirements planning (MRP) is a "push-through" system that manufactures
finished goods for inventory on the basis of demand forecasts. To determine outputs at
each stage of production, MRP uses (1) demand forecasts for final products; (2) a bill
of materials detailing the materials, components, and subassemblies for each final
product; and (3) available inventories of materials, components, and products. Taking
into account the lead time required to purchase materials and to manufacture products,
a master production schedule specifies the quantity and timing of each item to be
produced. Once production starts as scheduled, the output of each department is pushed
through the production line. This "push through" can sometimes result in an
accumulation of inventory when workstations receive work they are not yet ready to
process.
Just-in-time (JIT) production is a "demand-pull" manufacturing system that
manufactures each component in a production line as and when needed by the next step
in the production line. In a JIT production line, manufacturing activity at any particular
workstation is prompted by the need for that workstation's output. Demand triggers
each step of the production process, starting with customer demand for a finished
product at the end of the process and working all the way back to the demand for direct
materials at the beginning of the process. In this way, demand pulls an order through
the production line. The demand-pull feature of JIT production system achieves close
coordination among workstations. JIT production systems aim to simultaneously (1)
meet customer demand in a timely manner, (2) with high-quality products and (3) at
the lowest possible total cost.
c) A linear cost function is a cost function in which, within the relevant range, the graph
of total costs based on the level of a single activity is a straight line. Linear cost
functions can be described by a constant, a, which represents the estimate of the total
cost component that, within the relevant range, does not vary with changes in the level
of the activity; and a slope coefficient, b, which represents the estimate of the amount
by which total costs change for each unit change in the level of the activity within the
relevant range. Three types of linear cost functions are variable, fixed, and mixed (or
semi-variable).
A nonlinear cost function is one in which the graph of total costs based on the level of
a single activity is not a straight line within the relevant range. Nonlinear costs can arise
because of quantity discounts, step cost functions, and learning-curve effects. With
learning curves, labour-hours per unit decline as units of production increase. In the
cumulative average-time learning model, cumulative average-time per unit declines by
a constant percentage each time the cumulative quantity of units produced doubles. In
the incremental unit-time learning model, the time needed to produce the last unit

declines by a constant percentage each time the cumulative quantity of units produced
doubles.
d) Value-chain analysis is identifying and exploiting internal and external linkages with
the objective of strengthening a firm’s strategic position. The exploitation of linkages
relies on analysing how costs and other nonfinancial factors vary as different bundles
of activities are considered. For example, organizations change their structure and
processes as needed to meet new challenges and take advantage of new opportunities.
This may include new approaches to differentiation. Additionally, managing
organizational and operational cost drivers to create long-term cost reduction outcomes
is an important input in value-chain analysis when cost leadership is emphasized. The
objective, of course, is to control cost drivers better than competitors can (thus creating
a competitive advantage).
e) Quality costs are those costs that are incurred because products may fail or actually fail
to meet design specifications (and are, therefore, associated with quality of
conformance). There are four categories of quality costs: prevention, appraisal, internal
failure, and external failure. Prevention costs are those incurred to prevent poor quality.
Appraisal costs are those incurred to detect poor quality. Internal failure costs are those
incurred because products fail to conform to requirements, and this lack of conformity
is discovered before an external sale. External failure costs are those incurred because
products fail to conform to requirements after an external sale is made.
6.
a) Cooler company manufactures and sells a model of air cooler, AC500. In 2075/76, it
reported the following:
Units produced and sold 8,000
Investment Rs. 45,000,000
Mark-up percentage on full cost 15%
Rate of return on investment 30%
Variable cost per unit Rs. 8,450
Required: (5 marks)
i) What was Cooler company's operating income on AC500 in 2075/76? What was
the full cost per unit? What was the selling price? What was the percentage mark-
up on variable cost? What was the total fixed cost?
ii) Cooler company is considering increasing the annual spending on advertising for
the AC500 by Rs. 1,500,000. The company believes that the investment will
translate into a 10% increase in unit sales. Should the investment be made?
b) ABC Manufacturing has developed value-added standards for its activities including
material usage, purchasing, and inspecting. The value-added output levels for each of
the activities, their actual levels achieved, and the standard prices are as follows:
Activity Activity Driver Std. Qty. Actual Qty. Std. Price
(Rs.)
Using Raw material Kg. 24,000 30,000 100
Purchasing Purchase order 800 1,000 500
Inspecting Inspection hours 0 4,000 120

Assume that material usage and purchasing costs correspond to flexible resources
(acquired as needed) and that inspection uses resources that are acquired in blocks or
steps of 2,000 hours. The actual prices paid for the inputs equal the standard prices.
Required: (5 marks)
i) Prepare a cost report that details value-and non-value-added costs.
ii) Suppose that the firm wants to reduce all non-value-added costs by 30% in the
coming year. Prepare kaizen standards that can be used to evaluate the firm's
progress toward this goal. How much will these measures save in resource
spending?
Answer:
a)
i) Operating Income on AC500 in 2075/76:
Investment Rs. 45,000,000
Return on investment 30%
Operating income (30% × Rs. 45,000,000) Rs. 13,500,000
Full cost per unit:
Operating income per unit (Rs. 13,500,000 ÷ 8,000) Rs. 1,687.50
Full cost per unit (1,687.50 ÷ 0.15) Rs. 11,250
Selling price per unit:
Selling price per unit = Full cost per unit + Operating income per unit
= Rs. 11,250 + Rs. 1,687.50 = Rs. 12,937.50
Mark-up percentage on variable cost:
= Operating income per unit ÷ Variable cost per unit)
= Rs. 1,687.50 ÷ Rs. 8,450 = 19.97%
Total fixed costs:
Total fixed costs = (Full cost per unit – Variable cost per unit)×Units sold
= (Rs. 11,250 – Rs. 8,450) × 8,000 units = Rs. 22,400,000
ii) Contribution margin per unit = Rs. 12,937.50 – Rs. 8,450 = Rs. 4,487.50
Increase in sales = 10% × 8,000 units = 800 units
Increase in contribution margin = Rs. 4,487.50 × 800 units = Rs. 3,590,000
Less: Additional advertising costs = (Rs. 1,500,000)
Increase in operating income = Rs. 2,090,000

Cooler company should spend Rs. 1,500,000 in advertising because it increases

operating income by Rs. 2,090,000.
b)
i) Cost report showing value added and non-value added costs
Activity Value Added Costs Non-value Added Costs Total (Rs.)
(Rs.) (SQ × SP) (Rs.) (AQ – SQ) × SP
Using Raw material 2,400,000 600,000 3,000,000
Purchasing 400,000 100,000 500,000
Inspecting 0 480,000 480,000
Total 2,800,000 1,180,000 3,980,000
ii) Non-value added costs reduced by 30%
Kaizen Standards
Activity Quantity SP (Rs.) Total (Rs.)
Using Raw material 24,000 + 6,000 × 70% = 28,200 100 2,820,000
Purchasing 800 + 200 × 70% = 940 500 470,000
Inspecting 0 + 4,000 × 70% = 2,800 120 336,000
Total 3,626,000
If these standards are met savings are:
Activity Quantity SP (Rs.) Total (Rs.)
Using Raw material 30,000 - 28,200 = 1,800 100 180,000
Purchasing 1,000 – 940 = 60 500 30,000
Total 210,000
There is no reduction in resource spending for inspecting because it must be purchased
in increments of 2,000 and only 1,200 hours were saved- another 800 hours must be
reduced before any reduction in resource spending is possible.

Paper 8: Strategic Management and Decision Making Analysis

1. Read the following and answer the questions accordingly:
All Seasons Hatchery Pvt. Ltd. was established in 1994 AD in Chitwan with generous
objective of producing chicks. It was good time to invest in hatchery business as Nepal had
set objective of making the country self-dependent in poultry products. Many people started
poultry farming in different parts of the country at the same time. All Seasons Pvt. Ltd.
traced the increasing business opportunity in poultry farming, and started its early
investment in almost central part of the country. It picked up business with good position
from the very beginning of its operation. Hari Singh, Chief Business Officer of All Seasons
Hatchery Pvt. Ltd., started dreaming to lead it. He was smart in scanning business
environment, formulating strategies and influencing people. He was theory-based manager
often prefer deciding as the different theories suggest. He dreamed to lead All Seasons
Hatchery as the successor of Mr. Paudel, Chief Executive Officer (CEO). He then, started
finding ways to acquire the position and decided to join Sajilo Feed Solution Pvt. Ltd. as
there was no immediate opportunity to be in the position of CEO in All Seasons Hatchery
Pvt. Ltd.
Sajilo Feed Solution Pvt. Ltd., one of the first three poultry feed producer in Nepal,
established in 1992 AD in Chitwan. Within a short span of time, it established a good
supply chain of its product within 34 districts of Nepal. It was based on the philosophy that
‘If you buy from me, I will buy from you’. This attracted small and medium size poultry
farmers as it gave commitment of purchasing eggs and chickens produced by them. Small
and medium size poultry farmers got the opportunity to sell their products whenever they
wish to sell at the committed price. They started increasing their business investment. They
never realized they need to start feed production as there was reciprocal business
opportunity. They only focused to increase their production of eggs and chickens. With
time, new large investors started food production within the country and few national
distributors started selling Indian products which increased the level of competition. Sales
revenue of the company started decreasing gradually and hence the existing management
decided to hire new, dynamic and good business track holder person in the position of
Chief Executive Officer. Eventually, Mr. Singh joined Sajilo Feed Solution Pvt. Ltd. with
commitment to bounce back the organization’s reputation and business position. But, Mr.
Singh had set his own milestone to be CEO of All Season Hatchery Ltd. rather than
uplifting the business of Sajilo. So, without delay, he proposed merger of Sajilo and All
Season Hatchery at minimum valuation of Sajilo acting just as the internal agent of All
Season Hatchery. Management of Sajilo could not understand the policy of Mr. Singh’s
strategy and decided to merge at 3:5.
After merger process, All Season Hatchery started to develop third business ecosystem
ignoring the supply chain and business philosophy of Sajilo. All Season Hatchery could
capture the supply chain of Sajilo but could not do so because of its own traditional
business philosophy i.e. philosophy of ‘customers purchase the product because of price
and quality but not because of sellers’. Channel participants were totally ignored because
of this, the chain members started working with other producers of Hatchery and Feed
Producers which resulted in business loss to both hatchery and feed production. After one

year, it is noted that the company after merger lost 10 percent. It created dissatisfaction of
employees as well as shareholders. Though the All Season was last mover, it could be fast
mover but it made the blunder.
Questions:
a) Trace the landscape of the case and describe the users, scope, methods and parameters
of the case. (10 marks)
b) If you were member of management committee of Sajilo, what could you prefer to
enhance the business? What was the mistake All Season Hatchery did after Merger?
How could it be overcome? (10 marks)
Answer:
a) Landscape of the case is the analysis of organization or the issues and problems discussed
on the case. It is the analysis of concept focused on finding a cohesive and consistent view
of the main organizations, issues, problems and initiatives taken to solve the problems. The
key elements of a landscape analysis are defining users (stakeholders), the scope (what
kinds of organizations are analysed, i.e., the targets of the analysis), methods used,
and parameters to study.
In the above case, these are the main elements:
• Users/stakeholders:
The organizations are working within same business industry, i.e., poultry industry. As
stakeholders, both business organizations All Seasons Hatchery Pvt. Ltd. and Sajilo
Feed Solution Pvt. Ltd. are major users. Besides, Mr. Paudel, Mr. Singh, and the
channel participants are the other stakeholders.
• Scope:
The case has focused on strategy of the organization, i.e., merger for increasing and
strengthening business opportunity. It focuses on the leadership will and personalized
interest. This case proves that the personal attitude, behaviour and vested interest can
overlook the organizational interest. Finally, this case has proved that organization
should choose fast mover strategy though it can be established late.
• Methods of analysis :
Case is based on the analysis of one of employees with interest how personal interest
can result into organizational failure.
• Parameters of the study:
Parameters of the study are still open but vague. This case gives crystal clear idea
regarding leadership interest and organizational success. This is based on leadership
vision regarding how business opportunities need to be shared with stakeholders for
the success of organization. Parameters clearly state that right strategy regarding the
commitment on appropriate moves helps to growth opportunity. This case proves that
the organization need to have fast move, strategic integration and strategic alliances for
growth and success.
b) As a member of management committee of Sajilo Feed Solution Pvt. Ltd., I would prefer
to understand and analyse the causes of business slump. As per the case, Sajilo Feed

Solution was doing the business with mutual gain sharing with strategic alliances, i.e.,
poultry farmers, retailers, other channel participants. A business philosophy was
established to create market with mutual effort as a strategy. Increased competition was
responsible for decreasing sales. Thus, in such situation, organization need to go with
merger rather it should try to strengthen the distribution channel as the business philosophy
was success. For me, merger was the first mistake that Sajilo Feed Solution made. Second
reason to justify the merger strategy was wrong is that the merging organizations were
doing their business with different business philosophies. Culturally they were different
and the business of Sajilo Feed Solution could not be directly linked with business of All
Seasons Hatchery Pvt. Ltd. So, I would prefer not to go with merger. Regarding how the
business of Sajilo Feed could be increased, I would like to discuss with all the existing
stakeholders and determine new ways to increase mutual benefits.
After merger, All Season Hatchery did two major mistakes as follows:
a. All Season Hatchery could follow the business model of Sajilo Feed as it had already
established its network in 34 districts but it could not do so and followed its own
traditional business philosophy. Its own traditional philosophy cannot work in
competitive market. In the situation, level of competition was increasing, without
sensing the situation, it followed the same traditional business model. If it needed to
continue the same business model, i.e., not get benefits of established network, merger
was not necessary.
b. All Season Hatchery needed to take strategy of fast mover, i.e., aggressive growth
strategy after merger but it could not do so. After merger, through Sajilo Feed and its
networking partners could increase the demand of Hatchery but it did not so.
In order to overcome the above mentioned problem, All Season Hatchery need to take action
immediately otherwise no benefits of merger can be attained. Following action can be
suggested to bounce back the business of organization.
a. The business model of All Season Hatchery is not appropriate in competitive market
thus, it should change its business philosophy. It should activate the strategic channel
developed by Sajilo Feed. It should try to establish the significance of merger with such
channel participants and need to develop different benefit packages to the poultry
farmers. It should ensure poultry farmers for supply of chicks and feed with priority to
the members of the alliance and develop the market of chicken and eggs to support to
the farmers.
b. The organization should diversify its business. It can develop its new product line in
medicine distribution for chickens, and even chicken dry products. It helps to fulfil the
market development commitment to the channel members and poultry farmers and can
increase trade volume.
c. All Season Hatchery should follow aggressive market growth strategy, i.e., fast mover
as other competitors might watch the merger of Hatchery and Feed producer with large
distribution network and hence may formulate new strategies to beat the All Season
Hatchery’s strategy.

2.
a) Describe SWOT analysis with its components. You are also required to illustrate the
strategic alternatives that can be generated through SWOT analysis. (10 marks)
b) Introduce BCG matrix. How does it differ with GE matrix? Do you agree the GE matrix
is superior to BCG matrix? If so give your opinion. (3+4+3=10 marks)
Answer:
a) SWOT is the acronym for strength, weakness, opportunities and threats that are the strategic
factors for a company. A SWOT analysis summarizes the key issues from the business
environment and the strategic capability of an organization that are most likely to impact
the strategy development. Hence, it is also called the situation analysis. SWOT analysis is
one of the fundamental parts in formulating strategy. Under this, the information about
external and internal environment is presented in a structured way. The environmental
opportunities and threats are identified and evaluated. Similarly, strengths and weaknesses
are located through the internal or resource analysis. Finally, a matrix is prepared to match
the external components with the internal capabilities and develop possible strategic
alternatives.
The following components are analysed under SWOT analysis.
Strength:
Strength is the positive internal characteristics that the organization can exploit to achieve
its goals. It is the capability of an organization to perform better than the competitors. An
organization is said to be strong if it has strong strategy, sound financial condition, strong
brand image, market leadership, and sophisticated technology.
Weakness:
Weakness is internal characteristics that might inhibit or restrict the organization’s
performance. Weakness is also determined by the internal environment of an organization.
It results due to poor resources and competencies. It reduces the competitiveness of an
organization. An organization becomes weak if it has unclear goal, lacks strong strategy,
has weak financial condition, and lack skilled manpower.
Opportunity:
An opportunity is the condition in the general environment that if exploited effectively,
helps a company achieve strategic competitiveness. The favourable conditions in the
environment result in business opportunities. An organization can take advantage of
opportunities through product development, market expansion, entry into new business,
new technology, and strong economy.
Threat:
A threat is a condition in the general environment that may hinder a company’s efforts to
achieve strategic competitiveness. Threats hinder the business in goal achievement. Entry
of new firm, insufficient resources, low worker commitment, change in need and preference
of customers, and unfavourable law and politics may cause business threats
SWOT analysis is a tool for developing strategic options. The following are some of the
likely strategic options developed through SWOT analysis.

Strength and Opportunity Strength and Threat

Possible Strategies Possible Strategies
• Expansion • Diversification
• Product development • Consolidation
• Market development • Market penetration
Weakness and Opportunity Weakness and Threat
Possible Strategies Possible Strategies
• Strategic alliance • Downsize
• Collaboration • Divestiture
b) In BCG matrix, each of the company's product lines or business units is plotted according
to the growth rate of the industry in which it competes and its relative market share.
1. Stars are those business units which have rapidly growing markets with large market
share. They represent the best long run opportunities, i.e., growth and profitability in
the firm's portfolio.
2. Cash cows are those business units which have high market share but low market
growth rate. They generate enough cash needed to maintain their market share.
3. Dogs are the business units with low market share and low growth rate. They pose very
low competitive position because of high costs, low quality, and low profit.
4. Question marks are the business units or products with the potential for success, but
they need a lot of cash for development. They are the business units with high market
growth but low market share.
The differences between BCG and GE matrix are mentioned below.
Bases of Difference BCG Matrix GE Matrix
1. Components of The bases of portfolio The bases of portfolio
portfolio analysis under BCG analysis under GE matrix
analysis matrix are market are competitive position
growth and market and market attractiveness.
share.
2. Scope of analysis The components under The components under GE
BCG matrix are analysed matrix are analysed in terms
in terms of high and low of high, medium and low.
only.
3. Determinants of BCG matrix assumes GE matrix incorporates
industry only market share as the many elements as market
attractiveness determinants of industry share, market size, market
attractiveness. growth rate, financial
resources, and technology
that determine industry
attractiveness.
4. Simplicity It is simple to understand It is complex to understand
due to incorporation of due to incorporation of a
small number of factors. large number of
components.
The following are some of the reasons that make the GE matrix superior to BCG matrix:

• Unlike BCG matrix, GE matrix offers an intermediate classification of medium and

average ratings.
• The GE Business Screen considers more variables and does not lead to such simplistic
conclusions as by the BCG matrix.
• GE matrix is a powerful analytical tool to channel corporate resources to business that
combine medium to high industry attractiveness with an average to strong business strength
competitive position.
3.
a) What do you mean by project? What are the essential skills required to be a successful
project manager? Discuss. (3+7=10 marks)
b) State and explain different reasons for the failure of strategic implementation.
(10 marks)
Answer:
a) A project is any series of activities and tasks that has specific objective to be completed
within certain specifications, have defined start and end dates, have funding limits and
consume resources. It is a unique, one-time job that has specified starting and ending dates,
a clearly specified objective and goals, a scope of work to be performed, predefined budget
and usually a temporary organization in dynamic environment.
The major characteristics of the project are:
 Specific objectives
 Life span
 Single entity
 Custom made
 Time, cost/budget and quality constraints
The essential skills required to be a successful project manager are discussed below.
1. Technical skills:
They are the knowledge, abilities and proficiencies in performing a specialized task
using technology. For this he/she should:
 Have a clear understanding of technology involved in the project
 Have a technical concept and solution
 Communicate technically with project team
 Assess technical risk, trend and innovations.
2. Managerial skills:
It is the ability to practice management concepts, tools and techniques. In regard to
management skill the project manager must possess:
 Planning and control skills
 Organizational skills
 Decision making skills
 Human resource management skills

 Leadership skills
3. Human skills:
It is the ability to understand, communicate, motivate, coordinate, lead and control the
behaviour of project team members including project stakeholders. They basically are
related to human side of project management. The major human skills required are:
 Communication skill
 Motivation skill
 Negotiation and bargaining skill
 Conflict management skill
 Stress management skill
4. Conceptual skill:
It involves the ability of the project manager to visualize holistically the project in its
environment. These skills include the project manager's ability to identity problems and
resolve problems for the realization of project deliverables within the various
constraints.
5. Team building skills:
One of the major responsibilities of project manager is to build a team. Hence, he must
be capable of identifying, committing and integrating the various cross-functional task
groups into a single project team.
a) The reasons for failure of strategic implementation are termed as pitfalls. Following are
some of the important reasons, i.e., pitfalls of strategic implementation:
• Lack of ownership:
If the people involved in strategic implementation process fail to accept and realize the
ownership of strategy, implementation process will be affected and hence its
effectiveness gets decreased. Lack of commitment of top level management also
frustrates the middle and lower level employees to bear the ownership of strategy
implementation.
• Poor communication:
If the strategy or the plan is not properly and timely communicated to concerned
stakeholders, they may resist or the problem may be created during the implementation.
They do not understand how they contribute in strategy implementation process.
• Over involvement in daily activities:
Strategic implementation demands continuous monitoring, evaluation and control. If
the owners and top level managers are involved in day to day activities, then they lose
their vision and concern for long term goals. This negatively affects effectiveness of
the strategy implementation.
• Poor integration of plan:
The strategy or plan should be integrated with organizational goals and objectives.
Sometimes, strategies and plans are treated as something separate and removed from
the management process which could be the cause for poor implementation of strategy.

• Lack of prioritization:
If the strategies or plans are prepared with too numerous options or lack to prioritize,
fail to make tough choices to eliminate non-critical actions then the employees do not
know from where to begin. This also leads to poor implementation of the strategy.
• Lack of regular monitoring:
For effective implementation of strategy, implementation process should be monitored,
traced and reported regularly for feedback. The plan should measure what’s easy, what
is important and so on. If there is no regular tracking of progress, no one feels any
forward momentum. Implementation becomes less effective in such situation.
• Poor accountability:
Accountability and high visibility help drive change. This means that each measure,
objective, data source, and initiative must have an owner. If no one and none of the
managers in the organizational structure is accountable for implementation process,
implementation becomes less effective.
• Lack of empowerment:
Although the accountability provides strong motivation for improving performance,
employees must also have the authority and responsibility to the relevant
measures. Otherwise, they may resist involvement and ownership because of which
the implementation becomes less effective.
4.
a) What do you mean strategy evaluation and how does it differ with operation
evaluation? Write. (3+5= 8 marks)
b) Describe the process of strategy formulation. (7 marks)
Answer:
a) Strategy evaluation takes into account the changing assumptions that determine a strategy,
continually evaluate the strategy as being implemented and take the necessary steps to
adjust the strategy to the new requirements. It serves as early warning system which is
different from the post-action control.
Strategy evaluation attempts to answer the question as are we moving in the right direction?
They aim at proactive and continuous questioning of the basic direction of the strategy.
Hence, the main concern is steering the organization’s future direction. They mainly focus
on external environment and consider a long period of time and exercised by the top
management in support of the middle and lower level.
Operation evaluation compares the performance standard of different functional units and
their actual performance. If the performance does not match with the standards, corrective
actions are taken. It is a post-performance evaluation. Hence, it is also called performance
evaluation. It focuses on the internal environment of the organization over a short period
of time.
The following are some of the notable differences between strategic and operational
evaluation.

Bases of
Strategic Evaluation Operating Evaluation
Difference
Sources ofStrategic evaluation uses larger Operating evaluation uses fewer
data sources of data. sources of data.
Nature ofStrategic evaluation basically Operating evaluation basically
information relies on external sources of relies on internal sources of
used information. information.
Orientation Strategic evaluation is oriented Operating evaluation is oriented
to the future. to the present.
Value of Strategic evaluation is concerned Operating evaluation tends to be
outcome with the quantitative as well as concerned with the quantitative
qualitative value of certain value of certain outcomes.
outcomes.
Reporting The reporting interval of The reporting interval of
interval strategic control is long. operating control is short.
Focus Strategic control focuses on long Operational control focuses on
term operations. day-to-day operations.
Exercise of It is exclusively exercised by the It is mainly exercised by the
control top level It is mainly exercised middle level management on
by the middle level management direction of the top level.
in support of the lower level.
Techniques Its main techniques are Its main techniques are budgets,
environmental scanning, schedules and management by
information gathering, objective (MBO).
questioning and review.
b) Strategy is a means to achieve long-term objectives. It is a potential plan of action that
includes top management decisions and significant amount of resources. Strategy is likely
to be concerned with the long term direction of an organization Strategy formulation
includes the following steps:
1. Review of strategic elements:
In the first step of strategy formulation, the strategic elements should be reviewed. They
are vision, mission, objectives, strategies and policies.
i. Vision is the picture of expected future. In other words, it shows what a firm ultimately
wants to achieve. Thus, a vision statement gives shape to its intended future. In other
words, a vision statement points the direction where an organization would eventually
like to be in future.
ii. Mission is the basic reason for the organization's existence. It provides the basic
philosophy of what the organization is all about. A mission statement may also include
the firm’s values and philosophy about how it does business and treats its employees.
It defines what the company is now and what it wants to become in future.
iii. Objectives are the end results of planned activities. They state what an organization
intends to accomplish. The achievement of objectives should result in the fulfilment
of a company’s mission. The areas of objectives may be profitability, efficiency, and
growth.

iv. Strategies are the comprehensive master plan stating how the organization will
achieve its mission and objectives. It maximizes competitive advantage and minimizes
competitive disadvantage. Strategies are formulated at corporate, business and
functional levels.
v. Policies are the broad guidelines for actions and decision. They link formulation of
strategies with their implementation. Policies ensure that employees throughout the
firm make decisions and take actions that support the company’s mission, objectives,
and strategies.
Before formulating strategies, above stated strategic elements should be reviewed. They
should be restated or redefined, if necessary.
2. SWOT analysis:
It is also called situation analysis. SWOT analysis is the process of finding a strategic fit
between external opportunities and internal strengths while working around external
threats and internal weaknesses. It is conducted to understand the external and internal
environment of the organization. External environment consists of political-legal,
economic, socio-cultural, and technological forces. These forces provide opportunities or
pose threats to the organization. Internal environment consists of resource and
competencies within the organization. It provides strengths and weaknesses to the
organization. SWOT analysis provides a useful framework for making the best strategic
choice.
3. Identification of strategic options:
After SWOT analysis, different strategic alternatives are developed. At the corporate level,
the strategic options would be stability, growth, retrenchment and combination. According
to Porter, there are basically three strategies at business level. They are low leadership,
differentiation and focused. There are four alternative directions for strategy development.
They are protect/build on current position, product development, market development, and
diversification. Likewise, the methods of strategy development also provide various
strategic options such as, internal development, mergers and acquisitions, joint
development and strategic alliances.
4. Evaluation of strategic options:
In the fourth stage of strategy formulation, the strategic options are evaluated. They are
evaluated on the basis of three elements: suitability, acceptability and feasibility.
Suitability is concerned with environmental fit of the strategic option. Acceptability is
related to the stakeholders’ expectations and deals with the expected performance outcome
of a strategic option. Feasibility is concerned with availability of resource and
competencies to deliver a strategic option. It examines whether the strategic option can be
implemented successfully or not.
5. Selection of strategy:
At the final stage of strategy formulation, the best option of strategy is selected. Strategic
choice is the decision to select the best strategy from the various alternatives to meet the
organization's objectives.


a) Scenario planning
b) Cost effectiveness analysis
c) Blue ocean strategy
d) Horizontal integration
e) Strategic control
Answer:
a) Scenario planning
Scenario planning is detailed and plausible view of how the business environment of an
organization might develop in the future. It is developed by analysing the probable impacts of
environmental factors to a particular industry. It is based on groupings of key environmental
influences and drivers of change about which there is a high level of uncertainty.
Scenario planning can be used to explore and learn the future and form corporate strategy. It
helps to link the likely future uncertainties to the decisions that are made today. It is a planning
method that works by understanding the nature and impact of the most uncertain and important
driving forces affecting the future.
b) Cost effectiveness analysis
Cost efficiency is a means of strategic capability. It involves both appropriate resources and
competences to manage costs. It benefits the customers in terms of lower prices or more
product features for the same price. It is becoming a threshold strategic capability for two
reasons.
Customers do not value product features at any price. Hence, costs have to be kept as low as
possible commensurate with the value to be provided. Otherwise, the customers may switch
the product.
Since competitors constantly try to lower down their costs, cost efficiency becomes a
requirement for survival in a market becoming a threshold resource.
There are different ways of analysing cost.
1. Economies of scale
2. Supply cost
3. Product process and design
4. Experience
c) Blue ocean strategy
Blue ocean strategy is based on a decade-long study of more than 150 strategic moves in more
than 30 industries over 100 years. It is based on the simultaneous pursuit of differentiation and
low cost. Hence, it is an "and-and" strategy, not an "either-or" strategy. It does not aim to
outperform the competition, rather aims to make the competition irrelevant. It does so by
reconstructing industry boundaries.
Blue ocean creating businesses follow a different strategic logic. They are:
▪ Challenge industry conditions and paradigms

▪ Focus on customers, not competitors

▪ Do not segment customers, aggregate them
▪ Assets capabilities are not fixed, they are fluid
▪ Solve problems across the entire supply chain
d) Horizontal integration
Horizontal integration involves introduction of new products and markets which tie within the
company’s know-how and experience, the technology, finance and marketing. It involves
obtaining other businesses whose products are unrelated but whose customers are related to
the firm’s current offerings. The products are sold through the existing distribution channels,
therefore, there is developing a synergy. It capitalizes the firm’s strengths in the area of
technology and skills also. For example, Kantipur Publications has diversified its business into
Kantipur Media Group (KMG).
e) Strategic control
Strategic control is the process of measurement and feedback systems that allow strategic
managers to evaluate whether a company is achieving superior efficiency, quality, innovation,
and customer responsiveness or not while implementing its strategy. The strategic control
monitors the progress of various activities undertaken while implementing the strategy and if
deviation exists, starts the corrective actions. There are four areas in which strategic control is
implemented: premise control, implementation control, strategic surveillance and special alert
control.
6.
a) Describe the decision making practices widely prevalent in Nepalese organizations.
(5 marks)
b) Why environmental analysis is regarded as the foundation of strategic management? Give
reasons. (5 marks)
Answer:
a) The widely prevalent decision making practices in Nepalese organizations are as follows:
• Nepalese organizations are found to give less priority for developing organizational
vision and mission as well as strategy for long-term survival.
• Nepalese organizations mostly focus on short term financial benefits at the expense of
strategic goal. They tend to focus less on strategic outcomes.
• Decisions are based on intuitive approach of the owner or manager. Environmental
analysis is less emphasized. Very few organizations adopt the rational approach of
decision making.
• A decision may affect many parts or units of an organization. This is considered less
by Nepalese organizations. As such, decisions may be conflicting.
• In Nepalese organizations, decisions are taken by the top level management without
participation of the lower level. Hence, delegation of decision making authority is poor.
• Even group decisions are made under the influence of powerful positions or the head
of the organizations.

b) Strategic management emphasizes the monitoring and evaluating 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. The following are
the steps of strategic management.
1. Strategic planning:
This is the first step of strategic management process. Strategic planning is concerned
with the formulation of strategy. It includes development of vision, mission, objectives
and 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. SWOT analysis serves as the basis of strategic
planning. Hence, environmental analysis is always at the heart of strategic planning
process.
2. Strategy implementation:
This is the most crucial stage of strategic management. The overall essence of strategic
management lies in the implementation of strategy. In this stage, the strategies are
translated into action, i.e., they are implemented.
Strategy implementation also requires environmental analysis. The environment is
analysed 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. Hence, environment
analysis is essential during strategy implementation.
3. Strategic control:
Under this stage of strategic management, organizational performances or activities are
monitored to ensure that the direction of strategy implementation is in the right way.
The assumptions about the internal and external environment in which the current
strategy is based are reviewed and the actual performance is measured. Eventually,
corrective actions are taken if necessary. It is an on-going process. Necessary
adjustments or changes are made in the strategy if required. Strategic control ensures
the adjustments between strategic plan and strategy implementation.
4. Feedback:
This is the last stage of strategic management process. Under this, information is
constantly gathered from the environment to improve the process of strategic
management.
Each and every step of strategic management as mentioned above demand
environmental analysis. Hence, it may be concluded that strategic management can no
longer be effective if it is not supported by proper environmental analysis.

Examiner’s Commentary on Students' Performance in December

2019 Examinations
This commentary has been written to accompany the published questions and answers and is
written based on the observations of evaluators. The aim is to provide constructive guidance
for future candidates, giving insight into what the evaluating team is looking for, and flagging
difficulties encountered by candidates who attempted these questions.
Subject: Management Information and Control System
Question No. 1
a) Most Students did not have conceptual knowledge in this question.
b) Most students had properly answered but did not have adequate knowledge of 2nd and 3rd
part.
Question No. 2
a) Students' performance was satisfactory
b) Answers given by most of the students were satisfactory but some student were confused
about DR and BC Plan.
c) Most of the student were in confusion about business continuity plan.
Question No. 3
a) Students tried to write unnecessarily long answers.
b) The meaning of DSS was missing. Analytical power could have been included. Students
are advised to provide examples of what if analysis.
Question No. 4
Answers were not be specific and point wise.
Question No. 5
Students' overall performance was average.
Question No. 6
The performance of the students regarding the short notes was just satisfactory. Answer to the
short note questions are expected to be precise.
Subject: Advanced Taxation

Question No. 1
Answers were inadequate. Students need to have conceptual clarity.
Question No. 2
a) Overall average performance.
b) Most of the students had written provisions of the Act/Rules, but not the conclusion part
correctly.
c) Overall satisfactory performance.

Question No. 3
Students exhibited lack of conceptual knowledge and practice. Students did not explain the
provision of the Act/Rules while answering to the question. Answers to the question were too
sketchy.
Question No. 4
Overall satisfactory performance.
Question No. 5
Students provided good answer to VAT related provisions of the question. Students did not
prepare for the updated provisions of the relevant act as amended by the Finance Act. They are
strongly advised to stay updated with amendments made by annual finance act. In excise
question, they had provided good answer. It would be better if they study more about practical
cases related to Excise laws.
Question No. 6
a) Many students attempted this part of question on DTAA, but failed to explain the reason
of taxability /non-taxability.
b) Most students attempted but answers were below average.
Subject: Advanced Cost and Management Accounting

Question No. 1
a) Students' performance indicated the lack of conceptual clarity.
b) Most of students did not have basic concept.
Question No. 2
a) Very few students answered completely. Most of the students showed lack of concept &
practice on cash budget.
b) Most of the students attempted the question but almost all did not answer the explanation
part properly.
Question No. 3
a) Most of the students did not attempt the question.
b) Almost all attempted the question.
Question No. 4
a) Majority of students had not given correct treatment to fixed and variable cost. Except for
that performance (overall) was okay.
Question No. 5
(a) Most of the students had no knowledge. Some answered on the basis of linear programming
as well.
(b) Maximum of the students had answered it satisfactorily.
(c) Students answered it on the basis of general knowledge only.
Question No. 6

(a) Most of the students attempted and answered well.

(b) Most of the students did not answer the question. Those who attempted did not have
conceptual knowledge of value added and no value added activities.
Subject: Strategic management and decision making analysis

Question No. 1
Too general answers were provided. Students lacked the patience to read the case properly and
to link problem with specific strategic issues/alternatives/methods.
Question No. 2
(a) 1st part was not answered exactly and 2nd part was not explained adequately but only points.
(b) 1st part adequately answered 2nd part not in right format. It was not exhaustive.
Question No. 3
Overall performance of candidates was satisfactory. Skills required for effective project
manager could have been identified and explained properly.
Question No. 4
In general, answers were satisfactory. However, students lacked conceptual knowledge related
to 4a.
Question No. 5
Performance of most of the students was moderately satisfactory. However, students'
preparation was not adequate.
Question No. 6
Some of the students understood the question very well and some of them were not well
prepared and rest were okay.

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CHARTERED ACCOUNTANCY PROFESSIONAL III

Suggested Answer Paper

© The Institute of Chartered Accountants of Nepal

Published On: February 2020

© The Institute of Chartered Accountants of Nepal 2

Paper 1: Advanced Financial Reporting ................................................................................................. 4

© The Institute of Chartered Accountants of Nepal 3

Paper 1: Advanced Financial Reporting

© The Institute of Chartered Accountants of Nepal 4

policy to measure the non-controlling interest at acquisition at its proportionate share

Fair value of plan assets 28 29

© The Institute of Chartered Accountants of Nepal 5

W-1: Group structure

W-2: Net assets

© The Institute of Chartered Accountants of Nepal 6

Fair value adjustment – Land

Fair value of consideration:

© The Institute of Chartered Accountants of Nepal 7

Goodwill at reporting date 398

W-4: Non-controlling interest

© The Institute of Chartered Accountants of Nepal 8

Other components of equity

Dr property, plant and equipment Rs. 32.6 million

© The Institute of Chartered Accountants of Nepal 9

W – 7: provision for restructuring

© The Institute of Chartered Accountants of Nepal 10

© The Institute of Chartered Accountants of Nepal 11

© The Institute of Chartered Accountants of Nepal 12

Interest on debentures (500,000 x 10%) 50,000

Amount Amount Weight Cost % WACC %

© The Institute of Chartered Accountants of Nepal 13

Particulars Amount in '000 Rs.

© The Institute of Chartered Accountants of Nepal 14

Required: (10 marks)

© The Institute of Chartered Accountants of Nepal 15

10% of undistributed profit (10% of Rs. 165,000) 16,500

Government grant received (1072 x 10%) 107.20

© The Institute of Chartered Accountants of Nepal 16

Grant recognized as income (16.08)

Balance as on 31.3.2076 91.12

Current liability (N4) (91.12/5) 21.44 F

Non -Current Liability (N5) 69.68

N1: Trade discount not included in cost of machine as per NAS 16

© The Institute of Chartered Accountants of Nepal 17

a. Amendment to existing legal framework and policies

© The Institute of Chartered Accountants of Nepal 18

d) Types of Hedging Relationship:

© The Institute of Chartered Accountants of Nepal 19

© The Institute of Chartered Accountants of Nepal 20

Tempos 2,400 (600) 1,800

At 1st Ashwin 2075

© The Institute of Chartered Accountants of Nepal 21

Required: (3+2=5 marks)

© The Institute of Chartered Accountants of Nepal 22

Past service cost 2,000

© The Institute of Chartered Accountants of Nepal 23

Paper 2: Advanced Financial Management

© The Institute of Chartered Accountants of Nepal 24

Sales Volume 10,000 9,000 8,100 7,290

© The Institute of Chartered Accountants of Nepal 25

The discount factor for years 1 to 7 when r=13% is 4.423

© The Institute of Chartered Accountants of Nepal 26

i.e at r=25% N PV=Rs -6,083