Prepared by

Asha Sah

Advanced account theory

1. Write short notes on following: (4×2.5=10) - 2011

a) Going Concern

b) Classification of Reserves

c) Re-Insurance

d) Sinking Fund

a) Going Concern : The financial statements are normally prepared on the assumption that an enterprise
is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the
enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its
operations; if such an intention or need exists, the financial statements may have to be prepared on a
different basis and, if so, the basis used is disclosed.

b) Reserves are generally classified into:

(a) Capital Reserves and

(b) Revenue Reserves.

1. Capital Reserves are those which are not distributed (expected for certain circumstances) as profits as a
matter of law, prudence or business policy. They arise mainly out of capital profits, for example, profits
on sale of fixed asset or upward revaluation of fixed assets or from capital receipts, e.g. issue of shares or
debentures at a premium. They also arise from non–trading incomes during the period prior to
incorporation. These reserves may or may not involve any receipts of cash.

2. Revenue Reserves are any reserves which are not capital reserves and are available for distribution as
profits. These are created by retaining profits. Examples of revenue reserves are credit balance of the
Profit and Loss Account, general reserve, dividend equalization reserves, investment fluctuation reserves
etc. Revenue reserves can further be classified into:

(a) General Reserves and

(b) Specific Reserves.

(i) General Reserves: These reserves are not created for any particular purpose. These are created for
safeguarding the business against unforeseen losses in the future or with a view to planning for further
development of the business. General reserves are not earmarked against any particular asset.

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 (ii) Specific Reserves: These reserves are created for some specific purpose and are utilized for these
purposes only. These are generally earmarked against some particular asset and expressed as „reserve
fund‟. An amount of the reserve created is invested outside the business in securities for a specified
period. At the end of that specified period, all investments are sold away. The proceeds are utilized for
meeting that particular purpose for which the reserve was created.

c) Re – Insurance: If an insurer does not wish to bear the whole risk of policy written by him, he may
reinsure a part of the risk with some other insurer. In such a case the insurer is said to have ceded a part of
his business to other insurer. The reinsurance transaction may thus be defined as an agreement between a
„ceding company‟ and „reinsurer‟ whereby the former agreed to „cede‟ and the latter agrees to accept a
certain specified share of risk or liability upon terms as set out in the agreement. A „ceding company‟ is
the original insurance company which has accepted the risk and has agreed to „cede‟ or pass on that risk
to another insurance company or a reinsurance company. It may however be emphasized that the original
insured does not acquire any right under a reinsurance contract against the reinsurer. In the event of loss,
therefore, the insured‟s claim for full amount is against the original insurer. The original insurer has to
claim the proportionate amount from the reinsurer. There are two types of reinsurance contracts, namely,
facultative reinsurance and treaty reinsurance. Under facultative reinsurance each transaction has to be
negotiated individually and each party to the transaction has a free choice, i.e., for the ceding company to
offer and the reinsurer to accept. Under treaty reinsurance a treaty agreement is entered into between
ceding company and the reinsurer whereby the volume of the reinsurance transactions remain within the
limits of the treaty.

d) Sinking Fund: The most common method of supplementing capital available to a company is to issue
debentures, which are usually redeemable. Redeemable debentures may be redeemed after a fixed number
of years or any time after a certain number of years has elapsed since their issue, on giving a specified
notice or by annual drawing. Usually, according to the conditions of the issue, the company is required to
create a fund by appropriating annually a certain percentage of, or a fixed amount out of, its profit. The
fund so created is normally known as Sinking Fund or Debenture Redemption Reserve Fund. The
company invests the amount of the fund either in the purchase of securities which are readily saleable or
takes a policy that shall mature at the time the debentures will fall due for payment. Such an arrangement
would ensure that the company will have sufficient liquid funds for the redemption of debentures at the
time they shall fall due for payment. In the case of debentures that are redeemable at premium, the
appropriation to the Sinking Fund should be sufficient to pay both the amount of debenture and the
premium on redemption. On redemption of debentures, out of the balance lying in the Sinking Fund an
amount equal to the debentures so redeemed is transferred to General Reserve.

2. Write short notes on any four of the following: (4×2.5=10) - 2012

a) Mention any four areas in which different accounting policies may be adopted by different enterprises.
b) Contingency reserve
c) Non-performing assets
d) Conditions to be satisfied to capitalize the borrowing costs
e) Materiality and prudence

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a) Mention any four areas in which different accounting policies may be adopted by different
enterprises.
Major areas in which different accounting policies may be adopted by different enterprise includes:

• Methods of depreciation, depletion and amortization, e.g., WDV method, SLM method

• Treatment of expenditure during construction, e.g. capitalization, written off, deferment

• Conversion or translation of foreign currency items, e.g. average rate , TT buying rate

• Valuation of inventories, e.g., FIFO, Weighted average method

• Treatment of goodwill, e.g., capitalization method, super profit method

• Valuation of Investments, e.g. lower of cost and fair value.

b) Contingency reserve

The Contingency reserves are sum set aside to cover anticipated future liabilities or reduction in assets
value. This reserve is required when the company believes the value of its assets likely decrease or it has
incurred liabilities and it is able to reasonable estimate the amounts loss. Contingency reserves are net up
by deducting the appropriate sum from income.

Contingencies include:

• Potentially uncollectable money owed to company.

• Potential obligation under product warranties or related to products defects judgment for pending
threaten litigation.

• Likely loss due to fire and other hazards.

The Contingency reserve must be disclosed in financial statement when required and may be utilized for
the following purposes:

a. Expenses or loss of profits arising out of accidents, strikes or circumstances which the management
could not have prevented.

b. Expenses on replacement or removal of plant or works (other than normal maintenance or renewals). c.
Statutory obligation for payment of any compensation, if there is no special provision for such
compensation.

c) Non-performing assets

While preparing financial statements of a bank, it is necessary to identify non-performing assets mostly
based on statutory/regulatory norms. An asset becomes non-performing when installment of matured
principal and or income from it is not received by the bank for a certain period. Income from non-
performing assets can only be accounted for as and when it is actually received. Nepal Rastra Bank has
issued directives for the classification of loans and advances. Necessary provision should be made for
non-performing assets classifying as sub-standard, doubtful or loss assets as the case may be as per the
rate prescribed by Nepal Rastra Bank.

d) Conditions to be satisfied to capitalize the borrowing costs

The following conditions should be satisfied for capitalization of borrowing costs:

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a) Those borrowing costs, which are directly attributable to the acquisition, construction or production of
qualifying asset, are eligible for capitalization. Directly attributable costs are those costs that would have
been avoided if the expenditure on the qualifying asset had not been made.

b) Qualifying assets will give future economic benefit to the enterprise and the cost can be measured
reliably.

e) Materiality and prudence

Materiality: Information is material if its omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements. It depends on the size of the item or error
judged in the particular circumstances of its omission or misstatement. Often separate line item or sub-
item is decided bases on materiality. National level law may specify materiality limit for separate
disclosure of an item.

Prudence: Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in the
making the estimates required under conditions of uncertainty, such that assets or income are not
overstated and liabilities or expenses are not understated. The exercise of prudence does not allow, for
example, the creation of hidden reserves or excessive provisions.

3. Write short notes on: (4×2.5=10) – 2013

a) Money Measurement Concept

b) Accounting for Non Banking assets as per NRB Directives.

c) Deferred Tax Liability

d) Lease Answer

a) Money Measurement Concept:The concept of Money measurement is an important aspect of

accounting. It is an important convention in accounting which explains that any transaction or event that
can be measured in terms of money can only be recorded in accounting. Accounting is disclosure of all
the business activities in an organized way that includes the figures. Anything that cannot be measured in
terms of money cannot be shown in accounts. E.g. even though human resources are an important asset to
any entity, these cannot be recorded in the books of accounts as they cannot be reasonably measured in
monetary terms.

b) Accounting for Non Banking assets as per NRB Directives:

Banks and financial institutions are primarily engaged in lending activities. No bank or financial
institution lends without getting adequate level of collateral. All the debts of banks are securitized as there
is adequate level of collateral back up. In case where there are least possibilities of recovery of loans and
advances, recovery procedures are initiated and the assets taken as collaterals are taken over by banks as
Non Banking Assets.

The Non banking assets are to be taken over lower of the following values:

1. Fair Valuation of collateral at the time of taking over as non banking assets, or

2. Principal and interest outstanding on the day immediately proceeding the day of taking over as NBA.

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In case if Fair Valuation of collateral is less than outstanding loans and advances on the day immediately
preceding the day of taking over as NBA, the balance amount should be written off to profit and loss
account.

c) Deferred Tax Liability: According to NAS, A deferred tax liability shall be recognized for all taxable
temporary differences, unless the deferred tax liability arises from:

(a) the initial recognition of an asset or liability in a transaction which:

(i) is not a business combination; and

(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

It is inherent in the recognition of an asset that its carrying amount will be recovered in the form of
economic benefits that flow to the entity in future periods. When the carrying amount of the asset exceeds
its tax base, the amount of taxable economic benefits will exceed the amount that will be allowed as a
deduction for tax purposes. This difference is a taxable temporary difference and the obligation to pay the
resulting income taxes in future periods is a deferred tax liability. As the entity recovers the carrying
amount of the asset, the taxable temporary difference will reverse and the entity will have taxable profit.
This makes it probable that economic benefits will flow from the entity in the form of tax payments.

d) Lease: A lease is a contract calling for the lessee (user) to pay the lessor (owner) for use of an asset. A
rental agreement is a lease in which the asset is tangible property. Leases for intangible property could
include use of a computer program (similar to a license, but with different provisions), or use of a radio
frequency (such as a contract with a cell-phone provider). A written agreement under which a property
owner allows a tenant to use the property for a specified period of time and rent. The lease will either
provide specific provisions regarding the responsibilities and rights of the lessee and lessor, or there will
be automatic provisions as a result of local law. In general, by paying the negotiated fee to the lessor, the
lessee (also called a tenant) has possession and use (the rental) of the leased property to the exclusion of
the lessor and all others except with the invitation of the tenant.

4. Write short notes on: (4×2.5=10) – 2014

a) Sweat share

b) Firm underwriting

c) Related party transaction

d) Off balance sheet item

a) Sweat shares: Sweat shares means the equity shares issued by company to its employees or directors at
a discount or for a consideration other than cash for providing technical know-how or making available
rights in the nature of property rights or value additions. Such issue must be authorized by a special
resolution passed by the company in a general meeting. The resolution must specify the category of
employees etc, to whom shares are to be issued,number of shares, price, etc.

b) ‘Firm underwriting’ signifies a definite commitment to take up a specified number of shares

irrespective of the number of shares subscribed by the public. In such a case, unless it has been otherwise
agreed, the underwriter’s liability is determined without taking into account the number of shares taken up
‘firm’ by him, i.e. the underwriter is obliged to take up: 1. the number of shares he has applied for ‘firm’;
and 2. the number of shares he is obliged to take up on the basis of the underwriting agreement.

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c) Related party transaction

A business deal or arrangement between two parties who are joined by a special relationship prior to the
deal. For example, a business transaction between a major shareholder and the corporation would be
deemed a related-party transaction. As per the Provision of Nepal Accounting Standards, any such
transaction should be properly disclosed in the Financial Statement of the Organization.

d) Off balance sheet item

An asset or debt that does not appear on a company’s balance sheet. Items that are considered off balance
sheet are generally ones in which the company does not have legal claim or responsibility. For example,
loans issued by a bank are typically kept on the bank's books. If those loans are securitized and sold off as
investments, however, the securitized debt is not kept on the bank's books. One of the most common off-
balance sheet items is an operating lease.

5. Write short notes on (4*2.5=10) – 2015

a) Timing differences and permanent differences as per NAS -9

b) Capital adequacy ratio.

c) Realization concept

d) Exchange equalization fund

Question 6(A) Solution

Timing differences and Permanent differences as per NAS -9.

Temporary differences are differences between the carrying amount of an asset or liability in the balance
sheet and its tax base. Temporary differences may be either:

(a) Taxable temporary differences, which are temporary differences that will result in taxable amounts in
determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is
recovered or settled; or

(b) Deductible temporary differences, which are temporary differences that will result in amounts that are
deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset
or liability is recovered or settled. The tax base of an asset or liability is the amount attributed to that asset
or liability for tax purposes.

In current practices, companies, in general, prepare books of accounts as per Companies Act, generating
Accounting Profit/Loss. Accounting income and taxable income for a period are seldom the same.
Permanent differences are those which arise in one period and do not reverse subsequently. For e.g. an
income exempt from tax or an expense that is not allowable as a deduction for tax purposes. Timing
differences are those which arise in one period and are capable of reversal in one or more subsequent
periods. For e.g. Depreciation, Provision for expenses etc.

Question 6(B) Solution

Capital adequacy ratio is a measure of a bank‘s capital. It is expressed as a percentage of a bank‘s risk
weighted credit exposure. It is also known as ―Capital to Risk Weighted Assets Ratio (CAAR). This

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ratio is used to protect depositors and promote the stability and efficiency of financial system. It is
calculated as:

CAR = Tier I capital + Tier II /Capital Risk weighted assets

 Tier I capital is core capital which includes equity capital and disclosed reserves.

 Tier II capital is supplementary capital which includes items such as revaluation reserves, undisclosed
reserves, hybrid instruments and subordinated term debts.

 Risk weighted assets is banks assets or off balance sheet exposure weighted according to risk.

Question 6(C) Solution

Realization concept in accounting, also known as revenue recognition principle, refers to the application
of accruals concept towards the recognition of revenue (income). Under this principle, revenue is
recognized by the seller when it is earned irrespective of whether cash from the transaction has been
received or not. In case of sale of goods, revenue must be recognized when the seller transfers the risks
and rewards associated with the ownership of the goods to the buyer. This is generally deemed to occur
when the goods are actually transferred to the buyer. Where goods are sold on credit terms, revenue is
recognized along with a corresponding receivable which is subsequently settled upon the receipt of the
due amount from the customer. In case of the rendering of services, revenue is recognized on the basis of
stage of completion of the services specified in the contract. Any receipts from the customer in excess or
short of the revenue recognized in accordance with the stage of completion are accounted for as prepaid
income or accrued income as appropriate.

Question 6(D) Solution:

Section 45 the Bank and Financial Institution Act, 2063 requires that every Bank Financial Institution
which has obtained a license to deal in foreign exchange must maintain a Exchange Equalization Fund.
The bank and financial institution must transfer 25% of the revaluation profit earned as a result of
changes in the exchange rates of foreign currencies other than the Indian currency every year at the end of
the same fiscal year to the exchange equalization fund. The amount credited to the Exchange Equalization
Fund may not be spent or transferred for any purpose other than the adjustment of losses resulting from
the devaluation of foreign currencies without the approval of the Nepal Rastra Bank.

6. Write short notes on: (5×3=15) – 2016

a) Conditions to be satisfied to capitalize the borrowing costs

b) Deferred tax Liabilities

c) General reserve fund

d) Recognition of contingent assets and liabilities

e) Window dressing

a) Conditions to be satisfied to capitalize the borrowing costs

Capitalization of borrowing costs as part of the cost of a qualifying asset should commence only when all
the following conditions are satisfied:

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 The expenditure is being incurred for the Acquisition, construction or production of a qualifying asset; 
Borrowing costs are being incurred; and

 Activities that are necessary to prepare the asset for its intended use or sale, (including any technical or
administrative work prior to the commencement of physical construction but excluding such activities
during which no production or development take place) are in progress.

b) Deferred Tax Liabilities

A deferred tax liability is an account on a company's balance sheet that is a result of temporary
differences between the company's accounting and tax carrying values, the anticipated and enacted
income tax rate, and estimated taxes payable for the current year. According to NAS, A deferred tax
liability shall be recognized for all taxable temporary differences, unless the deferred tax liability arises
from the initial recognition of an asset or liability in a transaction which:

 is not a business combination; and

 at the time of the transaction, affects neither accounting profit nor taxable profit(tax loss).

c) General Reserve Fund

Section 44 of Bank and Financial Institution Act 2073, states that every Bank and Financial Institution
must maintain a general reserve fund and transfer at least 20 percent of the annual net profit to such fund
every year until the amount of such fund reaches an amount double the paid-up capital. The amount
credited to the general reserve fund of a licensed institution may not be invested or transferred to any
other head without the prior approval of the Nepal Rastra Bank.

d) Recognition of Contingent Liabilities: An entity shall not recognize a contingent liability.

1. A contingent liability is disclosed, as required by paragraph 86, unless the possibility of an outflow of
resources embodying economic benefits is remote.

2. Where an entity is jointly and severally liable for an obligation, the part of the obligation that is
expected to be met by other parties is treated as a contingent liability. The entity recognises a provision
for the part of the obligation for which an outflow of resources embodying economic benefits is probable,
except in the extremely rare circumstances where no reliable estimate can be made.

3. Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed
continually to determine whether an outflow of resources embodying economic benefits has become
probable. If it becomes probable that an outflow of future economic benefits will be required for an item
previously dealt with as a contingent liability, a provision is recognised in the financial statements of the
period in which the change in probability occurs (except in the extremely rare circumstances where no
reliable estimate can be made).

Recognition of Contingent Assets

An entity shall not recognize a contingent asset.

1. Contingent assets usually arise from unplanned or other unexpected events that give rise to the
possibility of an inflow of economic benefits to the entity. An example is a claim that an entity is
pursuing through legal processes, where the outcome is uncertain.

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2. Contingent assets are not recognised in financial statements since this may result in the recognition of
income that may never be realised. However, when the realisation of income is virtually certain, then the
related asset is not a contingent asset and its recognition is appropriate.

3. A contingent asset is disclosed, as required by paragraph 89, where an inflow of economic benefits is
probable.

4. Contingent assets are assessed continually to ensure that developments are appropriately reflected in
the financial statements. If it has become virtually certain that an inflow of economic benefits will arise,
the asset and the related income are recognised in the financial statements of the period in which the
change occurs. If an inflow of economic benefits has become probable, an entity discloses the contingent
asset (see paragraph 89).

e) Window Dressing

Window dressing is actions taken to improve the appearance of a company's financial statements.
Window dressing is particularly common when a business has a large number of shareholders, so that
management can give the appearance of a well-run company to investors who probably do not have much
day-to-day contact with the business. It may also be used when a company wants to impress a lender in
order to qualify for a loan. If a business is closely held, the owners are usually better informed about
company results, so there is no reason for anyone to apply window dressing to the financial statements.

Examples of window dressing are:

 Cash. Postpone paying suppliers, so that the period-end cash balance appears higher than it should be.

 Accounts receivable. Record an unusually low bad debt expense, so that the accounts receivable (and
therefore the current ratio) figure looks better than is really the case.

 Fixed assets. Sell off those fixed assets with large amounts of accumulated depreciation associated
with them, so the net book value of the remaining assets appears to indicate a relatively new cluster of
assets.

 Revenue. Offer customers an early shipment discount, thereby accelerating revenues from a future
period into the current period.

 Depreciation. Switch from accelerated to straight-line depreciation in order to reduce the amount of
depreciation charged to expense in the current period. The mid-month convention can also be used to
further delay expense recognition.

 Expenses. Withhold supplier expenses, so that they are recorded in a later period.

7. Write short notes on: (5×3=15) – 2017 - june

a) Fair Value Accounting

b) Exchange Equalization Fund

c) Underlying assumption on Preparation and presentation of Financial Statement

d) Sale and Lease Back Transactions as per NAS 17.

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e) Write any five peculiar features of Farm Accounting.

a) Fair Value Accounting

Fair Value is the amount for which an asset could be exchanged or a liability settled between
knowledgeable willing parties in an arm's length transaction. Fair value is measured using the price in the
principal market for the asset or liability (i.e. the market with the greatest volume and level of activity for
the asset or liability) or, in the absence of a principal market, the most advantageous market for the asset
or liability. Detailed guidance shall be required for measuring the fair value of liabilities, including a
description of the compensation that market participants would demand to take on an obligation.

b) Exchange Equalization Fund

Section 45 of the Bank and Financial Institution Act, 2073 requires that every Bank and Financial
Institution which has obtained a license to deal in foreign exchange must maintain a Exchange
Equalization Fund. The Bank and Financial Institution must transfer 25% of the revaluation profit earned
as a result of changes in the exchange rates of foreign currencies other than the Indian currency every year
at the end of the same fiscal year to the exchange equalization fund. The amount credited to the Exchange
Equalization Fund may not be spent or Transferred for any purpose other than the adjustment of losses
resulting from the devaluation of foreign currencies without the approval of the Nepal Rastra Bank.

c) Underlying assumption on Preparation and presentation of Financial Statement

Accrual Basis In order to make their objectives financial statements are prepared on the accrual basis of
accounting. Under this basis, the effects of transaction and other events are recognized when they occur
(and not as cash or equivalent is received or paid) and they are recorded in the accounting records and
reported in financial statements of the periods to which they relate. Going Concern The financial
statements are normally prepared on the assumption that an entity is a going concern and will continue in
operation for foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need
to liquidate or curtail materially the scale of operations; if such intention or need exists, the financial
statements may have to be prepared on a different basis.

d) Sale and Lease Back Transactions as per NAS 17

As per NAS 17 on ‘leases‘, a sale and leaseback transaction involves the sale of an asset by the vendor
and the leasing back of same asset to the vendor. The lease payments and the sale price are usually
interdependent, as they are negotiated as a package. The accounting treatment of a sale and lease back
transaction depends upon the type of lease involved. If a sale and leaseback transaction results in a
finance lease, any excess of sale proceeds over the carrying amount shall not be immediately recognized
as income by a seller-lessee. Instead it shall be deferred and amortized over the lease term. If sale and
leaseback transaction results in a operating lease, and it is clear that the transaction is established at fair
value, any profit or loss should be recognized immediately. If the sale price is below fair value any profit
or loss should be recognized immediately except that, if the loss is compensated by future lease payments
at below market price, it should be deferred and amortized in proportion to the lease payments over the
period for which the asset is expected to be used. If the sale price is above fair value, the excess over fair
value should be deferred and amortized over the period for which the asset is expected to be used.
Poultry, livestock and other agricultural produces.

e) Write any five peculiar features of Farm Accounting.

While preparing the farm account one should be conversant with the peculiar features of farm accounting
which are as below:

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1. The business is family type and there may be single bank account both for business and family
purpose.

2. A large chunk of the farm produce is appropriated towards consumption by the family members.

3. The family provides labor for the farm in addition to the time devoted for management.

4. There are several divisions in the farm such as crops, dairy, poultry etc.

5. The output of certain division becomes the input of other divisions.

6. Farming operations are fraught with uncertainties as to the weather, pests, market price of the input and
outputs and government policies.

7. In some cases, agriculture is a part time occupation.

8. Due to the intrinsic nature, there are difficulties in ascertaining the value of standing crops poultry,
livestock and other agricultural produces.

8. Write short notes on: (5×3=15) – 2018

a) Unexpired Risk Reserve

b) Financial Instrument

c) Receipt and Expenditure Account

d) Debt Service Coverage Ratio

e) Elements of Financial Statements

a) Unexpired Risk Reserve

As per rule 15 of the Insurance Regulation 2049, every Insurer operating Non Life Insurance Business
shall transfer an amount not less than fifty percent of the Net Insurance Premium show in Revenue
Account to the ―Unexpired Risk Reserve" account. Such amount shall be allocated for every category of
Insurance the Insurer operating. e.g. An insurer operating Non Life Insurance Business and accepting risk
for Fire Insurance, Marine Insurance, Motor Insurance and Aviation Insurance, then the insurer shall
maintain the Unexpired Risk Reserve For each of the fire, marine motor and aviation insurance. Such
Unexpired Risk Reserve shall be recognized as income in next year except the Unexpired Risk Reserve
maintained for Maine Insurance. In case of Marine Insurance, Unexpired Risk Reserve maintained for it
shall not be recognized as income for at least three years.

b) Financial Instrument

Financial instrument is any contract that gives rise to a financial asset to one entity and a financial liability
or equity instrument to another entity. Hence, financial instruments include financial assets, financial
liability and equity instrument. This means that financial assets of one entity shall be financial liabilities
or equity instruments of another entity and financial liabilities or equity instrument of one entity shall be
financial assets of another entity. For example, bond, debenture or bank loan is financial liabilities of
entity issuing such bond or debenture or raising loan and it is financial assets for holder of debenture or

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bond holder or provider of loan. Similarly, share capital is equity instrument for share issuing entity and it
is financial assets of holder of equity.

c) Receipt and Expenditure Account

Receipt and Expenditure Account also can be taken as part of Financial Statements. Some non-profit
making organization like professional firms, educational institutes etc. prefers to prepare Receipts and
Expenditure account instead of Income and Expenditure account as part of Financial Statements. Such an
account includes all expenses on accrual basis but incomes are recorded on cash basis. In other words, to
find out the result, all outstanding expenses are taken into account but the incomes that are outstanding
are not considered. The main reason behind this kind of practice is that professionals consider it
imprudent and risky to recognize the outstanding incomes.

d) Debt Service Coverage Ratio The ratio is a key financial ratio for the lenders.

 Debt servicing means timely payment of principal amount of instalments plus interest.

 Borrower should be able to service the debt out of the profits. Profit means the profit available for debt
servicing.

 This ratio is calculated as: Profit available for Debt Servicing Loan instalments +Interest

 This ratio normally should be 1.33 but a higher coverage is of advantage to the business as it improves
its strength to service the debts promptly

e) Elements of Financial Statements

The framework classifies items of financial statements can be classified in five broad groups depending
on their economic characteristics: Asset, Liability, Equity, Income/Gain and Expense/Loss.

Asset : Assets Resource controlled by the enterprise as a result of past events from which future
economic benefits are expected to flow to the enterprise

Liability : Liability Present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow of a resource embodying economic benefits

Equity : Equity Residual interest in the assets of an enterprise after deducting all its liabilities

Income/Gain : Income/Gain Increase in economic benefits during the accounting period in the form of
inflows or enhancement of assets or decreases in liabilities that result in increase in equity other than
those relating to contributions from equity participants

Expense/Loss : Expenses/Loss Decrease in economic benefits during the accounting period in the form
of outflows or depletions of assets or incurrence of liabilities that result in decrease in equity other than
those relating to distributions to equity participants.

9. Write short notes on: (5×3=15 marks) 2019

a) Reportable segment

b) Substance over form

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c) Sinking fund

d) Non-banking asset and its treatment

e) Prepackaged accounting software

a) Reportable segment

Reportable segment is a business segment or a geographical segment identified as reportable segment for
which segment information is required to be disclosed. A business or geographical segment shall be
identified as a reportable segment if a majority of its revenue is earned from sale to external customers
and:

• its revenue from sales to external customers and from transactions with other segments is 10 percent or
more of the total revenue, external or internal, of all segments; or

• its segment result, whether profit or loss, is 10 percent or more of the combined result of all segments in
profit or loss, whichever is the greater in absolute amount; or

• its assets are 10 percent or more of the total assets of all segments.

b) Substance over form

Substance over form is one of the qualitative characteristics of financial statements which has been
mentioned in the Framework for the preparation and presentation of financial statements. If information is
to represent faithfully the transactions and other events that it purports to represent, it is necessary that
they are accounted for and presented in accordance with their substance and economic reality and not
merely their legal form. The substance of transactions or other events is not always consistent with that
which is apparent from their legal or contrived form. For example, an entity may dispose of an asset to
another party in such a way that the documentation purports to pass legal ownership to that party;
nevertheless, agreements may exist that ensure that the entity continues to enjoy the future economic
benefits embodied in the asset. In such circumstances, the reporting of a sale would not represent
faithfully the transaction entered into.

c) Sinking fund

It refers to a fund created for redemption of a liability or replacement of an asset. The money of the fund
is invested in securities outside the business. Such securities are known as ‘sinking fund investments’.
The objective of creating such fund is to avoid any financial hardship to the company in the event of these
eventualities.

The sinking fund may be created for any of the following purposes:

i) For redemption of a liability

ii) For replacement of an asset

d) Non-banking asset and its treatment

Bank & financial institutions may, in the case of non-realization of loan, recover the outstanding
principal and interest by way of disposing the collateral property. Such property may be assumed by the
institution itself if the same could not be sold in auction, known as non-banking asset. Such asset shall be
accounted at the prevailing market value of the property or total receivable amount from borrower (i.e.
outstanding principal, interest, penal interest and any other receivable amount from borrower), whichever
is lower.

13
In case, if the market value of such property is lower than the total receivable amount, the difference
amount shall be immediately charged to Profit & Loss Account.

As per the directives issued by Nepal Rastra Bank, 100 percent provision shall be made for such asset in
the year in which such property has been transferred in the name of bank/financial institutions.

e) Prepackaged accounting software

There are several prepackaged accounting software which are available in the market and are used
extensively for small and medium sized organizations. These software are easy to use, relatively
inexpensive and readily available.

The installation of these software is very simple. An installation diskette or CD is provided with the
software which can be used to install the software on a personal computer. A network version of this
software is also generally available which needs to be installed on the server and work can to perform
from the various workstations or nodes connected to the server. Along with the software a user manual is
provided which guides the user on how to use the software.

After installation of the software, the user should check the version of the software to ensure that they
have been provided with the latest. The vendor normally provides regular updates to take care of the
changes of law as well as add features to existing software.

RTP:

1. 2018 june
(a) . Contingent Assets
(b). Watch List in Loan loss provisioning
(c). Leases
(d). Government Accounting System in Nepal
(e). Debt Service Coverage Ratio
(f). Advantages of Customized Accounting Packages
(g). Non Banking Assets
(h). Re-Insurance

(a). Contingent Assets :- An entity shall not recognize a contingent asset.

1. Contingent assets usually arise from unplanned or other unexpected events that give rise to the
possibility of an inflow of economic benefits to the entity. An example is a claim that an entity is
pursuing through legal processes, where the outcome is uncertain.
2. Contingent assets are not recognized in financial statements since this may result in the recognition of
income that may never be realized. However, when the realization of income is virtually certain, then the
related asset is not a contingent asset and its recognition is appropriate.
3. A contingent asset is disclosed, as required by paragraph 89, where an inflow of economic benefits is
probable.
4. Contingent assets are assessed continually to ensure that developments are appropriately reflected in
the financial statements. If it has become virtually certain that an inflow of economic benefits will arise,
the asset and the related income are recognized in the financial statements of the period in which the
change occurs. If an inflow of economic benefits has become probable, an entity discloses the contingent
asset.

(b). Watch list in Loan loss provisioning

14
Nepal Rastra Bank has formulated a new category of loan for provisioning purposes. As per the Central
Bank‘s Rule, all loans are required to be classified into 5 different categories including Watch List
whereby 5% of the total loan is required to be kept as provisioning though the provision can be reversed
when the loan becomes performing later. Provision made for watch list loans is a general loan loss
provision.
As per the circular issued by Central Bank, the loans having the following characteristics are to be
classified as Watch List loans:
1. If interest and principal repayments are outstanding for more than a month.
2. Short term/Working Capital Loans that are not renewed on time and are renewed on temporary basis. 3.
Loans and advances to customers/ group of customers who have been categorized as non performing by
other banks and financial institutions.
4. Firms/Companies/Organizations having negative net worth or net loss though interest and principal are
served on regular basis.
5. Specifically specified by NRB after due inspection.

(c). Leases:- A lease is a contract calling for the lessee (user) to pay the lessor (owner) for use of the
property. A rental agreement is a lease in which the asset is tangible property. Leases for intangible
property can include use of a computer program (similar to a license, but with different provisions), or use
of a radio frequency (such as a contract with a cell-phone provider). It is a written agreement under which
a property owner allows a tenant to use the property for a specified period of time and rent. The lease will
either provide specific provisions regarding the responsibilities and rights of the lessee and lessor, or there
will be automatic provisions as a result of local law. In general, by paying the negotiated fee to the lessor,
the lessee (also called a tenant) has possession and use (the rental) of the leased property to the exclusion
of the lessor and all others except with the invitation of the tenant

(d). Government Accounting System in Nepal

Government Accounting System in Nepal is generally on Cash Basis. It has set chart of accounts under
which revenue and expenditure are accounted for. It follows double entry system; however, do not follow
the mercantile system of accounting. Government accounting system broadly classifies expenditure into
administrative and development expenses. Accounting system followed by the government differentiates
Capital expenditures and revenue expenditure in its subsidiary records. Office of the Financial
Comptroller General specifies the chart of accounts under which all the government revenue and
expenditure are to be accounted for.

(e). Debt Service Coverage Ratio

The ratio is a key financial ratio for the lenders.
 Debt servicing means timely payment of principal amount of installments + interest.
 Borrower should be able to service the debt out of the profits. Profit means the profit available for debt
servicing.
 This ratio is calculated as:

Profit available for Debt Servicing

Loan instalments +Interest

 This ratio normally should be 1.33 but a higher coverage is of advantage to the business as it improves
its strength to service the debts promptly.

(f). Advantages of customized Accounting packages

Following are the advantages of the customized accounting packages:

15
 The input screens can be tailor made to match the input documents for ease of data entry.  The reports
can be prepared as per the specification of the organization. Many additional MIS reports can be included
in the list of reports.
 Bar-code scanners can be used as input devices suitable for the specific needs of and individual
organization.
 The system can suitably match with the organizational structure of the company.

(g). Non Banking Assets

Bank can sale the property which has taken as collateral security, against loan and advances given to the
borrower in case of default, to recover outstanding principal and interest amount. If such properties
couldn‘t be sold through auction then the bank can assume the properties in its own name. Such assumed
property is called Non Banking Asset (NBA)‘. Recognition of the NBA should be done at lower of total
outstanding amount (principal plus accrued interest thereon as on the date of assume) and prevailing
market value of the properties. The difference between the two should be recorded as an expense in the
year of assume. As per the requirement of the Unified Directives of Nepal Rastra Bank (NRB), 100%
provision should be provided to total value of NBA from the year of assume. It means institution
shouldn‘t hold NBA.

(h). Re-insurance
In general insurance there are risks which, because of their magnitude or nature, one insurance company
cannot afford to cover, e.g., aviation insurance. Generally, in such cases, an insurance company insures
the whole risk itself and lays off the amount it has accepted to other insurance of reinsurance companies,
retaining only that much risk which it can absorb.
A reinsurance transaction may thus be defined as an agreement between a 'ceding company' and a 're-
insurer' whereby the former agrees to 'cede' and the later agrees to accept a certain specified share of risk
or liability upon terms as set out in the agreement.

2. 2019 june
(a). Leases (b). Re-Insurance (c). Contingent Assets (d). Non Banking Assets
(e) Accounting Estimates
(f). Components of financial statements
(g). Watch List in Loan loss provisioning
(h). Government Accounting System in Nepal
(i). Outsourcing the Accounting function to third party
(j) Compilation of accounting information for agricultural farm.

(e) Accounting Estimates

As a result of the uncertainties in business activities, many financial statement items cannot be measured
with precision but can only be estimates. These are called accounting estimates. Therefore, the
management makes various estimates and assumptions of assets, liabilities, incomes and expenses as on
the date of preparation of financial statements. This process of estimation involves judgments based on
the latest information available.
Examples of estimation in some fields are:

i) Estimation of useful life of depreciable assets.

ii) ii) Estimation of provision to be made for bad and doubtful debts.

(f). Components of financial statements

Following are components of financial statements comprises:
(a) a statement of financial position as at the end of the period;

16
(b) a statement of profit or loss and other comprehensive income for the period;
(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising significant accounting policies and other explanatory information;

(g). Watch list in Loan loss provisioning

Nepal Rastra Bank (NRB) has formulated a new category of loan for provisioning purposes. As per the
NRB’s Rule, all loans are required to be classified into 5 different categories including Watch List
whereby 5% of the total loan is required to be kept as provisioning though the provision can be reversed
when the loan becomes performing later. Provision made for watch list loans is a general loan loss
provision. As per the circular issued by NRB, the loans having the following characteristics are to be
classified as Watch List loans:
1. If interest and principal repayments are overdue for more than a month.
2. Short term/Working Capital Loans that are not renewed on time and are renewed on temporary basis.
3. Loan and advances to customers/ group of customers who have been categorized as non performing by
other banks and financial institutions
4. Firms/Companies/Organizations having negative net worth or net loss though interest and principal are
served on regular basis.
5. Loan and advances having multiple banking exposure more than Rs. 1 billion and have not entered
into consortium agreement.
6. Specifically specified by NRB after due inspection.

(h). Government Accounting System in Nepal

Government Accounting System in Nepal is generally on Cash Basis. It has set chart of accounts under
which revenue and expenditure are accounted for. It follows double entry system; however, do not follow
the mercantile system of accounting. Government accounting system broadly classifies expenditure into
administrative and development expenses. Accounting system followed by the government differentiates
Capital expenditures and revenue expenditure in its subsidiary records. Office of the Financial
Comptroller General specifies the chart of accounts under which all the government revenue and
expenditure are to be accounted for.

(i). Outsourcing the Accounting function to third party

Recently a growing trend has developed for outsourcing the accounting function to a third party. The
consideration for doing this is to save cost and to utilize the expertise of the outsourced party. The third
party maintains the accounting software and the client data, does the processing and hands over the report
from time to time.

Benefits of outsourcing the accounting function to third party:

1. The organization that outsources its accounting function is able to save time to concentrate on the core
areas of business activity.
2. The organization is able to utilize the expertise of the third party in undertaking the accounting work. 3.
Storage and maintenance of the data is in the hand of professional people.
4. The organization is not bothered about people leaving the organization in key accounting positions.

The proposition is proving to be economically and more sensible as they do not have train the people
again. Hence the training cost is saved.

(j) Compilation of accounting information for agricultural farm

Agricultural activities are carried on mostly in an unorganized manner. Generally, the farmer does not
have office and also does not find time for day to day record keeping. The transactions and events of such

17
agricultural activities are also not supported by vouchers or other documents in most of the cases.
Therefore, it is essential to maintain a Diary to record happenings of the day. This Diary becomes the
source document for record keeping.
The following registers are required for compilation of the accounting information of agricultural
activities:

i. Cash Book: to record cash transactions.

ii. Fixed Assets Register: to record details of fixed assets such as description of assets, cost of
purchases/construction/generation, disposal, depreciation and balance.
iii. Loan Register: to record borrowings from bank, cooperatives and other agencies trade creditors
along with interest paid or payable.
iv. Stock Register: to record details of input, output and by-product – receipts, utilization, wastage
and balance.
v. Debtors and Creditors Register: to record credit transactions classified by parties involved.
vi. Register for National Transactions: to record transactions between farm and farm household.
vii. Cost Analysis Register: to record crop-wise input and output inclusive of apportionment of
common costs and finding out crop profit.

3. 2017-DEC.
(a). Contingent Assets
(b). Watch List in Loan loss provisioning
(c). Leases
(d). Government Accounting System in Nepal
(e). Debt Service Coverage Ratio
(f). Advantages of Customized Accounting Packages
(g). Non Banking Assets
(h). Re-Insurance

(a). Contingent Assets

An entity shall not recognize a contingent asset.
1. Contingent assets usually arise from unplanned or other unexpected events that give rise to the
possibility of an inflow of economic benefits to the entity. An example is a claim that an entity is
pursuing through legal processes, where the outcome is uncertain.
2. Contingent assets are not recognized in financial statements since this may result in the recognition of
income that may never be realized. However, when the realization of income is virtually certain, then the
related asset is not a contingent asset and its recognition is appropriate.
3. A contingent asset is disclosed, as required by paragraph 89, where an inflow of economic benefits is
probable.
4. Contingent assets are assessed continually to ensure that developments are appropriately reflected in
the financial statements. If it has become virtually certain that an inflow of economic benefits will arise,
the asset and the related income are recognized in the financial statements of the period in which the
change occurs. If an inflow of economic benefits has become probable, an entity discloses the contingent
asset.

(b). Watch list in Loan loss provisioning

Nepal Rastra Bank has formulated a new category of loan for provisioning purposes. As per the Central
Bank‘s Rule, all loans are required to be classified into 5 different categories including Watch List
whereby 5% of the total loan is required to be kept as provisioning though the provision can be reversed
when the loan becomes performing later. Provision made for watch list loans is a general loan loss
provision.

18
As per the circular issued by Central Bank, the loans having the following characteristics are to be
classified as Watch List loans:
1. If interest and principal repayments are outstanding for more than a month.
2. Short term/Working Capital Loans that are not renewed on time and are renewed on temporary basis.
3. Loans and advances to customers/ group of customers who have been categorized as non performing
by other banks and financial institutions.
4. Firms/Companies/Organizations having negative net worth or net loss though interest and principal are
served on regular basis.
5. Specifically specified by NRB after due inspection.

(c). Leases
A lease is a contract calling for the lessee (user) to pay the lessor (owner) for use of the property. A rental
agreement is a lease in which the asset is tangible property. Leases for intangible property can include use
of a computer program (similar to a license, but with different provisions), or use of a radio frequency
(such as a contract with a cell-phone provider). It is a written agreement under which a property owner
allows a tenant to use the property for a specified period of time and rent.

The lease will either provide specific provisions regarding the responsibilities and rights of the lessee and
lessor, or there will be automatic provisions as a result of local law. In general, by paying the negotiated
fee to the lessor, the lessee (also called a tenant) has possession and use (the rental) of the leased property
to the exclusion of the lessor and all others except with the invitation of the tenant

(d). Government Accounting System in Nepal

Government Accounting System in Nepal is generally on Cash Basis. It has set chart of accounts under
which revenue and expenditure are accounted for. It follows double entry system; however, do not follow
the mercantile system of accounting. Government accounting system broadly classifies expenditure into
administrative and development expenses.
Accounting system followed by the government differentiates Capital expenditures and revenue
expenditure in its subsidiary records. Office of the Financial Comptroller General specifies the chart of
accounts under which all the government revenue and expenditure are to be accounted for.

(e). Debt Service Coverage Ratio

The ratio is a key financial ratio for the lenders.
 Debt servicing means timely payment of principal amount of instalments plus interest.
 Borrower should be able to service the debt out of the profits. Profit means the profit available for debt
servicing.
 This ratio is calculated as: Profit available for Debt Servicing Loan instalments +Interest
 This ratio normally should be 1.33 but a higher coverage is of advantage to the business as it improves
its strength to service the debts promptly

(f). Advantages of customized Accounting packages

Following are the advantages of the customized accounting packages:
 The input screens can be tailor made to match the input documents for ease of data entry.
 The reports can be prepared as per the specification of the organization. Many additional MIS reports
can be included in the list of reports.
 Bar-code scanners can be used as input devices suitable for the specific needs of and individual
organization.

19
 The system can suitably match with the organizational structure of the company.

(g). Non Banking Assets

Bank can sale the property which has taken as collateral security, against loan and advances given to the
borrower in case of default, to recover outstanding principal and interest amount. If such properties
couldn‘t be sold through auction then the bank can assume the properties in its own name. Such assumed
property is called ‗Non Banking Asset (NBA)‘. Recognition of the NBA should be done at lower of total
outstanding amount (principal plus accrued interest thereon as on the date of assume) and prevailing
market value of the properties. The difference between the two should be recorded as an expense in the
year of assume. As per the requirement of the Unified Directives of Nepal Rastra Bank (NRB), 100%
provision should be provided to total value of NBA from the year of assume. It means institution
shouldn‘t hold NBA.

(h). Re-insurance
In general insurance there are risks which, because of their magnitude or nature, one insurance company
cannot afford to cover, e.g., aviation insurance. Generally, in such cases, an insurance company insures
the whole risk itself and lays off the amount it has accepted to other insurance of reinsurance companies,
retaining only that much risk which it can absorb. A reinsurance transaction may thus be defined as an
agreement between a 'ceding company' and a 'reinsurer' whereby the former agrees to 'cede' and the later
agrees to accept a certain specified share of risk or liability upon terms as set out in the agreement.

4. 2015 - DEC.
(a). Reinsurance
(b). Related Party Transactions
(c). Super profits in partnership firms
(d). Components of Financial Statement
(e). Government Accounting System in Nepal
(f). Prediction of insolvency on the basis of ratios
(g). Advantages of Customised Accounting Packages

(b). Related Party Transactions

NAS 24 requires disclosure of related party transactions and outstanding balances in the separate
financial statements of a parent, venture or investor company or entity. The following information shall
be disclosed in the financial statements as per this Accounting Standard.

a. Relationship between parents and subsidiaries shall be disclosed irrespective of whether there
have been transactions between those related parties
b. An entity shall disclose key management personnel compensation.
c. If there have been transactions between related parties, an entity shall disclose the nature of the
related party relationship as well as information about the transactions and outstanding balances
necessary for an understanding of the potential effect of the relationship on the financial
statements.
Items of the similar nature may be disclosed in aggregate except when separate disclosure is
necessary for an understanding of the effects of related party transactions on the financial
statements of the entity.

(c). Super profits in partnership firms

20
 Among various basis of determining the sharing and paying for joining or sacrificing the profits of a firm
one basis is super profit method. Under this method, it is assumed that any partner can get normal profits
by joining any average firm in the market.
However, focus should be given on super profits of the firm. Such super profit implies that the profit can
be earned by a firm over and above all ordinary firms in the industry/market.
This is the excess amount of profit earned by a firm over the past years and expected to continue the same
in the future. If and only if the average profit of the firm is more than the normal profit in the market there
comes into existence the super profit or goodwill.

(d). Components of Financial Statement

A complete set of financial statement includes the following components:

1. A Balance Sheet: Statement showing financial position of entity as on date.
2. An income statement: Statement showing performance of the entity during the period.
3. A Statement of changes in equity showing either:
i) All changes in equity, or
ii) Changes in equity other than those arising from transactions with equity holders acting in their
capacity as equity holder
4. A cash flow statement: Summary of cash inflow and outflow from operating, financing and investing
activities.
5. Notes to accounts: Comprising a summary of significant accounting policies and other explanatory
notes.

(e). Government Accounting System in Nepal

Government Accounting System in Nepal is generally on Cash Basis. It has set chart of accounts under
which revenue and expenditure are accounted for. It follows double entry system; however, do not follow
the mercantile system of accounting. Government accounting system broadly classifies expenditure into
administrative and development expenses. Accounting system followed by the government differentiates
Capital expenditures and revenue expenditure in its subsidiary records. Office of the Financial
Comptroller General specifies the chart of accounts under which all the government revenue and
expenditure are to be accounted for.

(f). Prediction of insolvency on the basis of ratios

The relevance of the ratios in predicting insolvency can be elaborated with the help of the following
illustrative ratios as below: Working capital to total assets indicates the liquidity position of the firm. If
the ratio is too low it indicates inability of the firm to carry on its day to day activities. If it is negative, the
firm will not have fund for its day to operations. If such situation continues, the firm may be forced to
suspend its operations and it may result insolvency in the long run.
Similarly, ratio of sales to total assets indicates the utilization of its assets to generate sales which
ultimately generates surplus for the firm. If it is too low, it indicates that the firm is keeping idle assets
which in long run may result to insolvency. Another example can be given of retained earnings to total
assets. Retained earnings are cushion for firm‘s health. So if it is too thin it may indicate that firm has
very low leverage and is posed to insolvency earlier.

(g). Advantages of customized Accounting packages

Following are the advantages of the customized accounting packages:

 The input screens can be tailor made to match the input documents for ease of data entry.
 The reports can be prepared as per the specification of the organization. Many additional MIS reports
can be included in the list of reports.

21
  Bar-code scanners can be used as input devices suitable for the specific needs of and individual
organization.
 The system can suitably match with the organizational structure of the company.

5. Dec 2014
(a). Sale and lease back transaction
(b). Escalation Clause in Contracts
(c). Re – Insurance
(d). Component of Financial Statement as per NAS
(e). Features of Farm Accounting

(a). Sale and Lease Back Transaction

A sale and leaseback transaction involves the sale of an asset by the vendor and the leasing of the same
asset back to the vendor. The lease payments and the sale price are usually interdependent as they are
negotiated as a package. The accounting treatment of a sale and leaseback transaction depends upon the
type of lease involved.

(b). Escalation Clause in Contracts

This is a clause provided in the contracts to cover up any changes in the price of the contract due to
changes in the price of raw materials and labour or change in utilization of factor of production. The
object of this clause is to safeguard the interest on both sides against unfavourable change in prices. The
basis, on which the factor prices are based, is laid down in the contract.
For e.g.: in a contract with transport undertaking, it may be provided that the price per ton km will
increase or decrease for each rise or fall in price of diesel by 10% of the prevailing prices.

(d). Component of Financial Statement as per NAS

A complete set of financial statement includes the following components:

1. A Balance Sheet: Statement showing financial position of entity as on date.
2. An income statement: Statement showing performance of the entity during the period.
3. A Statement of changes in equity showing either:
i) All changes in equity, or
ii) Changes in equity other than those arising from transactions with equity holders acting in their capacity
as equity holder
4. A cash flow statement: Summary of cash inflow and outflow from operating, financing and investing
activities.
5. Notes to accounts: Comprising a summary of significant accounting policies and other explanatory
notes.

(e). Features of Farm Accounting

(i) Agricultural sector is unorganized and dominated by small farmers. Most agricultural farms are family
oriented and part of the farms produce is consumed by the family members.
(ii) The family takes part in management. Besides it provides labor for the farm. Farmers cannot afford
the additional expenses involved in hiring a person to maintain accounts.
(iii) Agriculture is in some cases a seasonal occupation and many farmers have other occupations also.
Farming operations are uncertain due to natural calamities.

22
(iv) There are many divisions in farm accounting; finished product of one can become the raw material
for another.
(v) Tax authorities do not insist on maintenance of books of account. Collection of statistics by the
government is also not adequate.

6. Dec- 2020
a) Non Banking Assets
b) Unexpired Risk Reserve
c) Receipt and Expenditure Account
d) Debt Service Coverage Ratio
e) Watch List in Loan loss provisioning

b) Unexpired Risk Reserve

As per rule 15 of the Insurance Regulation 2049, every Insurer operating Non-Life Insurance Business
shall transfer an amount not less than fifty percent of the Net Insurance Premium show in Revenue
Account to the Unexpired Risk Reserve" account. Such amount shall be allocated for every category of
Insurance the Insurer operating. e.g. An insurer operating Non-Life Insurance Business and accepting risk
for Fire Insurance, Marine Insurance, Motor Insurance and Aviation Insurance, then the insurer shall
maintain the Unexpired Risk Reserve For each of the fire, marine motor and aviation insurance.

Such Unexpired Risk Reserve shall be recognized as income in next year except the Unexpired Risk
Reserve maintained for Maine Insurance. In case of Marine Insurance, Unexpired Risk Reserve
maintained for it shall not be recognized as income for at least three years.

c) Receipt and Expenditure Account

Receipt and Expenditure Account also can be taken as part of Financial Statements. Some non-profit
making organization like professional firms, educational institutes etc. prefers to prepare Receipts and
Expenditure account instead of Income and Expenditure account as part of Financial Statements. Such an
account includes all expenses on accrual basis but incomes are recorded on cash basis. In other words, to
find out the result, all outstanding expenses are taken into account but the incomes that are outstanding
are not considered. The main reason behind this kind of practice is that professionals consider it
imprudent and risky to recognize the outstanding incomes.

Q.No. What is NPSAS and What is the implementation status of NPSAS in Nepal?
The Accounting Standards Board has developed Nepal Public Sector Accounting Standards (NPSASs) for
public sector entities in Nepal. This standard provides for accounting and reporting of financial
information in general purpose financial statements to be issued by the government entities based on cash
basis of accounting.

The ASB has developed this standard for adoption by the Government of Nepal and recognizes that the
Government of Nepal has the right to adopt this standard and establish necessary policy and guidelines for
adoption. Adoption of this standard by the Government of Nepal (GON) improves both the quality and
comparability of financial information reported by public sector entities in Nepal.

There is general consensus among policy makers, accounting professionals, and international
organizations on the need for Nepal to adopt the cash basis IPSAS. Nepal has developed Nepal public
sector accounting standards by referring to the cash basis IPSAS in a close collaboration between the
professional accountants and government officials. Attempts are being made to change the accounting
regulations in order to incorporate the mandatory use of IPSAS. Nepal has successfully completed

23
piloting of two ministries for fiscal year 2067/68 & 2068/69 of Ministry of Physical Infrastructure and
Transport & Ministry of Women, Children and Social Welfare, followed by live implementation for fiscal
year 2069/70 of these two ministries. Certificate of conformance was also provided to these two
ministries by ICFGM for respective years. Implementation was further extended for 31 economic entities
(ministries & constitutional bodies) for fiscal year 2070/71 & 2071/72 which has also been completed by
the end of Ashadh 2072. Nepal has completely implemented NPSAS to all 43 economic entities (As-a-
whole-of-government) in 2073/74. OAG format (federal, province and local government) has been
approved by office of auditor general in Poush 2075. Implementation to provincial government is being
exercised in 2075/76.

Q.No.2 Complete set of financial statements

Complete set of financial statements includes:

 A Statement of financial position as at the end of the period A Statement of profit or loss and
other comprehensive income for the period
 A Statement of changes in equity for the period
 A Statement of cash flows for the period
 Notes, comprising a summary of significant accounting policies and other explanatory
information.

A balance sheet as at the beginning of the of the earliest comparative period when an entity applies
• An accounting policy retrospectively or
Change in Accounting Policy has retrospective effect except if exempted by new NFRS, effect is
immaterial, retrospective application is impracticable, new NFRS requires prospective application
etc.:NAS-8 Accounting policies, changes in accounting estimates and Errors
• Makes a retrospective restatements of items in its financial statements or
Material prior period errors should be corrected retrospectively as soon as discovered.:NAS8 Accounting
policies, changes in accounting estimates and Errors
• When it reclassifies items in its financial statements
Re-classification is moving an amount from one account to another. Example: reclassification of long
term loans due in less than one year is treated as current liabilities.

24