CAP-III RTPs June2023 Group-I

CHARTERED ACCOUNTANCY PROFESSIONAL III
(CAP-III)
Revision Test Paper

Group I
June 2023
The Institute of Chartered Accountants of Nepal
The Revision Test Papers are prepared by the institute with a view to assist the students in their study.
The suggested answers given here are indicative and not exhaustive. Students are expected to apply their
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Contents
Paper 1 - Advanced Financial Reporting ................................................................................ 3
Paper 2 - Advanced Financial Management ......................................................................... 39
Paper 3 - Advanced Audit & Assurance ............................................................................... 71
Paper 4 - Corporate Laws ...................................................................................................... 92
2
Paper-1
Advanced Financial Reporting
3
Q. No. 1 Consolidated Financial Statements
Kanchenjunga Ltd. has investment in Koshi Ltd., Mechi Ltd. and Api Ltd. The Statements of
financial position of Kanchenjunga, Koshi and Mechi as at 32 Ashadh 2079 are as under:
Rs.
000"
Assets Kanchenjunga Koshi Mechi
Non-Current Assets
Property, Plant and Equipment 53,100 60,500 63,250
Investment in Subsidiaries
Koshi 57,000
Mechi 46,400
Investment in Api 3,400
Financial assets 9,500 - -
169,400 60,500 63,250
Current Assets 44,250 39,100 11,200
Total 213,650 99,600 74,450
Equity and Liabilities

Equity Share Capital (Rs. 100 per share) 82,500 36,000 35,000
Retained Earnings 59,000 44,000 18,200
Other Components of Equity 6,400 3,900 2,950
147,900 83,900 56,150
Non-Current Liabilities
Term Loan 53,900 9,450 8,600
Defined Benefit Obligation 3,250 - -
Current Liabilities 8,600 6,250 9,700
Total 213,650 99,600 74,450
Consider following information for preparation of the group financial statements:
a. On 1 Shrawan 2078, Kanchenjunga acquired 70% of equity shares of Koshi Ltd. On that date,
the retained earnings and other components of equity of Koshi Ltd. were Rs. 39,000,000 and
Rs. 3,200,000 respectively. At 1 Shrawan, 2078, the fair value of identifiable net assets of
Koshi Ltd. was Rs. 80,000,000.
It is group policy to value the non-controlling interest at fair value and, at the date of
acquisition, this was Rs. 24,250,000. The excess in fair value of identifiable net assets is due
to land.
b. On 1 Shrawan 2077, Kanchenjunga acquired 40% of the equity shares of Mechi Ltd. for cash
consideration of Rs. 21,000,000. At this date, carrying amount and fair value of the
identifiable net assets of Mechi Ltd. was Rs. 51,600,000. Kanchenjunga treated Mechi Ltd.
as an associate and equity method was followed to account for interest in Mechi Ltd. up to
Ashadh end, 2078.
4
On 1 Shrawan 2078, Kanchenjunga took control of Mechi Ltd., by further acquiring 45%
interest for cash consideration of Rs. 25,000,000 and included this amount in carrying amount
of investment in Mechi Ltd.
On 1 Shrawan 2078, the retained earnings and other components of equity of Mechi Ltd. were
Rs. 14,650,000 and 2,950,000 respectively and the fair value of identifiable net assets was Rs.
53,100,000. The difference between the carrying amounts and the fair values was in relation
to plant with a remaining useful life of 5 years.
The share prices of Kanchenjunga and Mechi were Rs. 500 and Rs. 160 per share respectively
on 1 Shrawan 2078. The fair value of original 40% holding and the fair value of non-
controlling interest should both be estimated using the market value of shares.
c. Kanchenjunga has been holding 25% equity shares in Api Ltd. since couple of years. Api Ltd.
made profits during the FY 2078/79 of Rs. 1,000,000, which can be assumed to have accrued
evenly. Api does not have any other comprehensive income. On Poush end 2078,
Kanchenjunga sold 10% equity interest for cash of Rs. 2,100,000. Kanchenjunga was unsure
about accounting of this disposal and so has deducted the proceeds from the carrying amount
of the investment at 1 Shrawan 2078 which was Rs. 5,500,000.
The fair value of the remaining 15% shareholding was estimated to be Rs. 3,250,000 at Poush
end, 2078 and Rs. 3,350,000 at 32 Ashadh, 2079. Kanchenjunga no longer exercises
significant influences and has designated the remaining shareholding as fair value through
other comprehensive income.
d. There has been no impairment of goodwill.
e. Kanchenjunga operates a defined benefit pension scheme. On 32 Ashadh, 2079, the company
announced that it was to close down a business division and agreed to pay each of its 150
staffs a cash payment of Rs. 2,500 to compensate them for loss of pension arising from wage
inflation. It is estimated that the closure will reduce the present value of the pension obligation
by Rs. 290,000. Kanchenjunga is unsure of how to deal with such settlement and curtailment
and has not yet recorded anything in its financial statements.
Required:
Prepare the consolidated statement of financial position of Kanchenjunga Group as at 32 Ashadh,
2079 in accordance with Nepal Financial Reporting Standards.
Q. No. 2 NFRS 2 Share-based Payment

Info Developers Ltd. grants 130 stock options to each of its 800 employees on 1 January 2018.
The grant condition is that employees have to remain in the service over the next three years. The
exercise date is 31st December, 2021and the vesting date is 31st December, 2020. The company
estimates that fair value of each option on the grant date is Rs. 30. The nominal value and exercise
price per share is Rs. 100 and Rs. 135 respectively.
On 31st December 2018, the exercise price of the company has dropped to Rs. 130 and the company
has repriced its stock option which will vest at the end of 3rd year i.e. 31st December, 2020. The
company estimates that at the date of repricing, fair value of each of the original options granted
(i.e. before taking into account the repricing) is Rs. 24 and that the fair value of each repriced stock
option is Rs. 28.
5
Following information are also relevant:
31 Dec, 2018 31 Dec, 2019 31 Dec, 2020
Number of employees Left 50 45 30
Estimated No. of employees
expected to leave in next year(s) 80 35 0
On 31st December 2021, 650 employees exercised the option.
Required:
Compute the amount of expenses to be recognized by the company for the year 2018, 2019 and
2020 and also give extract of ESOP outstanding Account as appeared in in the books of account
of Info Developers ltd. in the year 2021.
Q. No. 3 NFRS 5 Non-Current Assets Held for Sale and Discontinued Operations
Rohit Ltd and Kohli Ltd are engaged in similar nature of business. Due to this, on 01.01.2022,
both of them mutually agreed that it would be in the best interest of both of them that Kohli Ltd
be acquired by Rohit Ltd. 1 Jan 2022. The acquired entity, Kohli Ltd, however is itself
a holding entity with two wholly owned subsidiaries, Rahul and Dhawan.
Dhawan is however, acquired exclusively with a view to resale and meets the criteria for
classification as held for sale. Rohit Ltd.’s year end is 32 Dec 2022.
On 1 Jan 2022 the following information is relevant:
❖ The identifiable liabilities of Dhawan have a fair value of Rs.10 Lakhs
❖ The acquired assets of Dhawan have a fair value of Rs.20 Lakhs
❖ The expected costs of selling Dhawan are 1 Lakh
❖ On 32 Dec 2022, the assets of Dhawan have a fair value of Rs. 15 Lakhs.
❖ The liabilities have a fair value of Rs. 6 Lakhs and the selling costs still remain at 1 Lakh.
Discuss how Dhawan Ltd will be treated in the Rohit Group financial statements on acquisition
and at 32 Dec 2022.
Q. No. 4 NFRS 8 Operating Segments

The management of Ichiban Ltd has identified operating segments based on following categories.
Information for these segments is provided below:
In ‘000
Segment External Revenue Internal Revenue Total Revenue Profit/ (Loss) Assets
Pradesh 1 250 250 500 100 3,500
Pradesh 2 46 44 90 (30) 400
Pradesh 3 200 - 200 50 1,000
Pradesh 4 270 280 550 130 4,000
Pradesh 5 45 35 80 (20) 600
Pradesh 6 45 50 95 15 900
Pradesh 7 10 10 20 10 200
Total 866 669 1,535 255 10,600
6
The management wants to know according to NFRS 8, which segments need to be reported?
Q. No. 5 NFRS 9 Financial Instruments

Dillibazar Ltd is a key supplier for Satdobato Ltd. On 1 Nov 2022, Dillibazar Ltd sold goods on
credit to Satdobato Ltd for Rs. 500,000. Satdobato Ltd has a credit limit with Dillibazar Ltd of 60
days and this limit is quite normal in any transactions between them. Dillibazar Ltd applies NFRS
9 Financial instruments, and uses a pre-determined matrix for the calculation of allowances for
receivables as follows.
Days overdue Expected loss provision
Nil 1%
1 to 30 5%
31 to 60 15%
61 to 90 20%
90 + 25%
Satdobato Ltd has, however, not paid the sum by 31 Dec 2022, and so failed to comply with its
credit term, and Dillibazar Ltd learned that Satdobato Ltd was having serious cash flow difficulties
due to downfall of its products. Despite this fact, the finance controller of Satdobato Ltd has
informed Dillibazar Ltd that they will receive payment soon and they need not to worry about it.
Ignore sales tax.
Required:
Show the accounting entries on 1 Nov 2022 and 31 Dec 2022 to record the above, in accordance
with the expected credit loss model in NFRS 9.
Q. No. 6 NFRS 9/NFRS 13/ NAS 32

The directors of Pawan, a public limited company, are worried about the challenging market
conditions of Nepal which the company is facing. The markets are very much volatile and illiquid
and the central government is also injecting liquidity into the economy. Thus, the directors are
concerned about the significant shift towards the use of fair values in financial statements. NFRS
9 Financial instruments in conjunction with NFRS 13 Fair value measurement defines fair value
and requires the initial measurement of financial instruments to be at fair value. The directors are
uncertain of the relevance of fair value measurements in these current market conditions.
Required
(a) Briefly discuss how the fair value of financial instruments is measured, commenting on the
relevance of fair value measurements for financial instruments where markets are volatile and
illiquid.
(b) Further they would like advice on accounting for the following transaction within the financial
statements for the year ended 31 Dec 20X8.
Pawan issued one lakh convertible bonds on 1 Jan 20X6. The bonds had a term of three years
and were issued with a total fair value of Rs.10m which is also the par value. Interest is paid
annually in arrears at a rate of 6% per annum and bonds, without the conversion option,
attracted an interest rate of 9% per annum on 1 Jan 20X6. The company incurred issue costs
7
of Rs. 100,000. If the investor did not convert to shares they would have been redeemed at par.
At maturity all of the bonds were converted into 2.5 million ordinary shares of $1 of Pawan.
No bonds could be converted before that date. The directors are uncertain how the bonds should
have been accounted for up to the date of the conversion on 31 Dec 20X8 and have been told
that the impact of the issue costs is to increase the effective interest rate to 9.38%.
Q. No. 7 NFRS 13 Fair Value Measurement

a. What is an “observable” input for NFRS 13 purposes, and where it can be found?
b. What is the relationship between the input data hierarchy and the choice of measurement
technique? Must this be a standard technique?
Q. No. 8 NFRS 15 Revenue from Contracts with Customers

Kabindra Ltd is a renowned trader and supplier of Gym equipment having all kinds of fitness
equipment available in the market. On 01 Jan 2022, Kabindra Ltd sold a Gym Equipment to a
Rabindra for a total price of Rs. 200,000. Kabindra Ltd invoiced the Rabindra for Rs. 200,000 on
01 Jan 2022.
However, Rabindra made a payment of Rs. 200,000 to Kabindra Ltd only on 20 Jan 2022. The
terms of sale also included an arrangement where Kabindra Ltd would service and maintain the
machine for a two-year period from starting from 01 Jan 2022. Kabindra Ltd would normally
charge an annual fee of Rs. 5,000 for a service and maintenance arrangement of this nature. The
normal selling price of the machine without a service and maintenance arrangement was Rs.
190,000.
Explain and show how the event would be accounted for in the financial statements of Kabindra
Ltd for the year ended 32 December 2022.
Q. No. 9 NFRS 16 Leases

Lumbini Ltd has entered into a 10-year lease contract for a building as a lessee with Bagmati Ltd.
The contract also provides for an option to extend the lease for a further five years. Lease payments
are Rs. 200,000 per year during the initial term and Rs. 250,000 per year during the optional period.
Lumbini ltd also incurred initial direct costs associated with the lease at the commencement date
2079.04.01 at Rs.30, 000.
Lumbini Ltd concluded that it is not reasonably certain to exercise the option to extend the lease
at the commencement date and, therefore, determined that the lease term is for 10 years only. The
interest rate implicit in the lease could not be readily determined at the commencement of the lease.
However, Lumbini Ltd.'s incremental borrowing rate is 8.5% per annum.
Determine the Right of use Assets (ROU) and lease liability at the commencement of the lease and
after 1 year from the date of commencement if:
a. The lease payments are made at the end of the year.
b. The lease payments are made in advance
Also, segregate the above lease liability at the end of year 1 into current and non-current lease
liability.
8
Q. No. 10 NAS 2 Inventories
Bhandari Retail Shop Pvt. Ltd. is engaged in retail business of consumable goods. The company
has obtained VAT registration to carry out its retail business. As on Ashadh end 2079, the company
holds 1,000 kg goods as inventories. The following expenditure was incurred by the company in
relation to the inventories of goods:
Particulars Rs. Per kg
Cost of per kg of Goods 500
Less: Trade discount received 10
Add: VAT paid 63.7
Billing price by the vendor 553.7
Transportation cost per kg 20
You are asked to calculate the cost of per kg of goods to the company and its valuation when the
net realizable value is Rs. 580.
Q. No. 11 NAS 12 Income Taxes

ABC Ltd has purchased Machinery in the past for Rs 50 lakhs which now has carrying amount of
Rs 25 Lakhs. However, during the current fiscal year the machinery is revalued to 60 Lakhs. No
adjustment of revaluation is made for tax purpose. The cumulative depreciation of the machine for
tax purpose is Rs 35 lakhs and the tax rate is 30%. If the asset is sold for more than the cost, the
profit to the extent of accumulated depreciation will be included in taxable profit and the proceeds
in excess of the original cost will not be taxable.
In Lakhs
Particulars Accounts Tax Books
Cost 50 50
Accumulated Depreciation (25) (35)
Carrying value/ Tax Base 25 15
Revalued To 60 -
Revaluation By 35 -
Calculate the amount of Deferred Tax Assets or Deferred Tax Liability of the assets if:
i) The asset is used in the business to recover the revalued amount,
ii) The asset is sold immediately at revalued amount.
Q. No. 12 NAS 19 Employee Benefits

At 1 Shrawan, 2078, the fair value of the Plan Assets was Rs. 1,000,000. The Plan paid benefits
of Rs. 1,90,000 and received contributions of Rs. 490,000 on Poush end, 2078. The company
computes the fair value of Plan Assets to be Rs. 1,500,000 as on Ashadh end, 2079 and the present
value of the Defined Benefit Obligation amounts to Rs. 1,479,200 on the same date. Actuarial
losses on defined benefit obligation were Rs. 6,000.
9
Compounding happens half-yearly. The normal interest rate for 6 months period is 10% per
annum, while the effective interest rate for 12 months period is based on the following data:
At 1 Shrawan, 2078, the company made the following estimates based on market prices at that
date:
Particulars %
Interest and Dividend Income after tax payable by the fund 9.25
Add: Realized and Unrealized Gains on Plan Assets (after tax) 2.00
Less: Administration Cost (1.00)
Expected Rate of Return 10.25
Determine actual return and expected return on plan asset. Also compute amount to be recognized
in ‘Other Comprehensive Income’ in this case.
Q. No. 13 NAS 23 Borrowing Costs

MS Ltd began to construct a new building in Imadol and Kamalbinayak on 1st January 2022.It had
incurred various expenditures during the construction at various dates as given below. For such
the company had used the general borrowings availed from the banks at the given interest rates.
The company had also obtained Rs.1.75 lakh special loan to finance the construction of the
building on 1st January 2022 at an interest rate of 8%.
The company’s general borrowing outstanding during the year are:
Amount (Rs.) Rate of Interest
500,000.00 11%
900,000.00 13%
The expenditure that were made on the building projects were as follows:
Date Amount (Rs.)
1-Jan-12 20,000.00
1-Feb-12 157,000.00
1-Oct-12 275,000.00
1-Dec-12 76,000.00
Both buildings were completed by 31st December 2022. Following the principles prescribed in
NAS 23 Borrowing Costs, calculate the amount of interest to be capitalized in the cost of building,
also calculate the total cost of building considering all the above facts and figures.
Q. No. 14 NAS 24 Related Party Disclosure

a. Argentina Ltd has owned 60% of the equity shares of France Ltd and 70% of the equity shares
of Brazil Ltd for many years. On 1 January 2022, France Ltd entered into a lease agreement
with Brazil Ltd. Under the terms of the lease, France Ltd would lease one of its unused
warehouses, with a remaining useful life of 20 years, to Brazil Ltd for five years. Consideration
payable by Brazil Ltd would be Rs. 25,000 a year in arrears. Market rentals for similar sized
warehouses tend to be around Rs. 250,000 per year
10
Discuss the correct treatment of the above transaction in France Ltd.'s financial statements for
the year ended 30 June 2022.
b. At the end of FY 2078/79, there are three shareholders in FinTax Ltd. The finance director has
60%, and the operation director has 30% stake in the company. The third owner is a passive
investor who does not participate in the management and operation of the company. All
ordinary shares carry equal voting rights. Further, the spouse of the finance director is serving
as the sales director of the company and their son also works there as an intern and receives a
salary of Rs. 700,000 p.a. which is normal compensation package prevailing in the industry.
The finance director and his wife have set up an investment company, InvoMax Ltd. They
jointly own InvoMax and their shares in InvoMax will eventually be transferred to their son
when he has finished the internship with FinTax.
Further, on 1 Chaitra 2078, FinTax obtained a loan of Rs. 20 Lakhs from a local bank, by
keeping the private property of finance director as a collateral.
Required:
Advise FinTax Ltd. for the identification and disclosure of the company’s related parties in
preparing its separate financial statements for the FY 2078/79.
Q. No. 15 NAS 33 Earnings per Share

Hamro Bank Ltd. really wants to know its actual basic earnings per share and has given you with
the following information to compute the basic earnings per share
• Net Profit: Rs. 43 Crores for Year 2077/78 and Rs. 63 Crores for Year 2078/79
• No. of shares outstanding prior to Right issue: 30,000,000 shares
• Right issue: One new share for each four outstanding, i.e. 7,500,000 shares
• Right issue price: Rs. 250
• Last date to exercise right: 30/6/2078
• Fair rate of equity share immediately prior to exercise of right on 30/6/2078: Rs. 300
Required
Compute the basic earnings per share for the years 2077/78 and 2078/79 of Hamro Bank Ltd
Q. No. 16 NAS 36 Impairment of Assets

a. Grow Ltd., several years ago, acquired a Strategic Business Unit (SBU), which can generate
cash inflows independently but, at 32 Ashadh 2079, the CFO of the company was concerned that
the value of the SBU had declined because of reduction in sales owing to entry of new competitors
in the market. On that date, the carrying values of the assets under SBU before any impairment
review were as under:
Rs. in Lakhs
Goodwill 6
Property, Plant and Equipment 20
Other Assets 38
Total 64
11
The fair values of the property, plant and equipment and the other assets at 32 Ashadh 2079 were
Rs. 20 Lakhs and Rs. 34 Lakhs respectively and their costs to sell were Rs. 2 lakhs and 6 lakhs
respectively.
It is expected that the SBU will generate following cash flows in next five years:
Rs. in Lakhs
Pre-tax Cash Post-tax Cash
Financial Year flows flows
FY 2079/80 16 10
FY 2080/81 14 10
FY 2081/82 10 6
FY 2082/83 6 3
FY 2083/84 26 20
The pre-tax discount rate for the SBU is 12% and the post-tax discount rate is 9%. Grow Ltd. has
no plans to expand the capacity of the SBU and believes that a reorganization would bring cost
savings but, as yet, no plan has been approved.
Give advice to the CFO whether the SBU’s value is impaired and suggest how it should be
reflected in the financial statements for the year ended on 32 Ashadh, 2079 in accordance with
relevant Nepal Financial Reporting Standards.
b. NB Ltd has two machineries in its books. The carrying value of first machinery after 2 years of
use is Rs. 30 lakhs with remaining life of 3 years. The machinery if sold now would generate Rs.
25 lakhs cash flows net of all the selling costs. However, due to accidents that occur in the factory
in the same day, the company now expects the machinery to generate less cash flow than
anticipated for the rest of its useful life. The estimated cash flow for the next year would be Rs. 5
lakhs with an estimated growth rate of 3% pa thereafter for the remaining term.
The expected growth rate for the following years is estimated to be 3% pa with the discount rate
of 10%.
The second machinery was acquired as on 01.04.2075 for 18 lakhs which had estimated useful life
of 5 years. On 01.04.2078, the carrying value of the machinery was reassessed to Rs. 12.4 lakhs
and the gain arising out of revaluation was credited to revaluation reserve. However, during the
year 2078.79, due to the change in the market conditions, the recoverable amount was ascertained
to be only Rs. 2.6 lakhs as on Ashadh end 2079. NB Ltd had followed the policy of writing down
the revaluation gain by the increased charges of depreciation resulting from revaluation.
Both the fixed assets are subjected to Straight line depreciation (SLM) with nil residual value each.
Q. No. 17 NAS 38 Intangible Assets

On 1 Shrawan 2074, Jaftra Pvt. Ltd. acquired a trademark, Lilivin, for a line of sport wear for Rs.
50 Lakhs. Initially, Jaftra expected to continue marketing and receiving cash flows from the Lilivin
product-line indefinitely. However, it decided to amortise the trademark over 10 years, using the
straight-line method because of the complexity in ascertaining its useful life.
In Shrawan 2078, one of the rival companies unexpectedly revealed a technological breakthrough
which is expected to result in a product which, when launched, will significantly reduce the
demand for the Lilivin product-line. The demand for the Lilivin product-line is expected to remain
high until Ashadh 2081, when the rival company is expected to launch its new product.
12
At 32 Ashadh 2079, Jaftra assessed the recoverable amount of the trademark at Rs. 10 Lakhs and
has intention to continue the production of Lilivin product till Ashadh end, 2081.
Advise Jaftra on how to reflect its trademark in the financial statements for the year ended on 32
Ashadh 2079.
Q. No. 18 Value Added Statement

A1Soft Ltd. has been preparing value added statements from past few years. The company has
decided to introduce an incentive system based on value added in order to enhance the employee
performance. The incentive system proposes that the best index performance (from company’s
view) i.e. employee costs to value added for the last five years will be used as the target index for
future calculations of the bonus to be earned.
After the target index is determined, any actual improvement in the index will be rewarded, to
employer and employees in the ratio of 1:2. The bonus is given at the end of the period, after the
profit for the year is ascertained.
From the following details, find out the bonus to be paid to the employees, if any, for 2022:
Value Added Statements for 5 Years
Rs. '000
Year 2017 2018 2019 2020 2021
Sales 4,200 5,700 6,900 7,800 9,000
Less: Cost of bought in
goods and services 1,920 3,000 3,750 4,200 4,800
Value Added 2,280 2,700 3,150 3,600 4,200
Employee Costs 975 1,140 1,260 1,476 1,680
Depreciation 390 465 540 660 840
Taxes 480 570 630 750 840
Interest on Debentures 60 60 60 60 60
Dividend 150 225 300 360 450
Retained Earnings 225 240 360 294 330
Value Added 2,280 2,700 3,150 3,600 4,200
Summarized Statement of Profit or Loss for 2022

Particulars Rs. "000 Rs. "000
Sales 10,950
Expenses
Cost of materials 3,750
Wages 1,050
Production staff salaries 300
Production expenses 1,050
Depreciation of Machinery 750
Administrative salaries 450
Administrative expenses 450
Administrative depreciation 300
13
Debenture interest 60
Sales Department's Salaries 90
Sales expenses 300
Depreciation Sales Department 90
Total Expenses 8,640
Profit 2,310
Q. No. 19 Public Financial Management

What is public financial management system? Explain the initiative taken by the government of
Nepal to strengthen PFM system.
Q. No. 20 Short note:

a. Opportunity Cost in the context of Human Resource Accounting
b. Sustainability Reporting
14
Answers:
Q. No. 1 Consolidated Financial Statements
Kanchenjunga Group
Statement of Financial Position
As at 32 Ashadh 2079
Rs. '000
Assets Amount
Non-Current Assets
Goodwill 3,950
Property, Plant and Equipment 179,050
[53,100+60,500+63,250+1,800+500-100]
Financial assets 12,850
[9,500+3,350]
195,850
Current Assets 94,550
Total 290,400
Equity and Liabilities
Equity Fund
Equity Share Capital (Rs. 100 per share) 82,500
Retained Earnings 66,072.50
Other Components of Equity 7,115
155,687.50
Non-Controlling Interest 34,877.50
Non-Current Liabilities
Term Loan 71,950
Defined Benefit Obligation 2,960
Current Liabilities 24,925
Total 290,400
15
\Working Notes:
Working Note 1: Group Structure
Subsidiary (70%) Kanchenjunga Ltd.

2078.04.01
Associates (25%)
Associates (40%)
Koshi Ltd. Poush end, 2078
1 Shrawan, 2078
Subsidiary (85%) Financial Asset (15%)
Mechi Ltd. Api Ltd.
Working Note 2: Net Assets Calculation

Koshi Ltd.
000"
Particulars At Acquisition Date At Reporting Date
Equity Share capital 36,000 36,000
Retained Earnings 39,000 44,000
Other Components of Equity 3,200 3,900
Fair Value adjustment-Land (Bal. Fig.) 1,800 1,800
Total 80,000 85,700
Increase in Net assets 5,700
Mechi Ltd.
000"
Particulars At Acquisition Date At Reporting Date
Equity Share capital 35,000 35,000
Retained Earnings 14,650 18,200
Other Components of Equity 2,950 2,950
Fair Value adjustment-Plant (Bal. Fig.) 500 500
Additional Depreciation on Plant (500/5) (100)
Total 53,100 56,550
Increase in Net assets 3,450
16
Working Note 3: Goodwill Calculation
000"
Koshi Ltd. Mechi Ltd.
Cash consideration 57,000 25,000
Fair value of Existing Holding* 22,400
Fair Value of Non-controlling Interest** 24,250 8,400
Less: Fair Value of Identifiable Net Assets at

acquisition date (80,000) (53,100)
Goodwill 1,250 2,700
3,950
For Mechi
*(350,000*0.4*160)
**(350,000*0.15*160)
Working Note 4: Gain (loss) on existing holding (40%) at Mechi while acquiring control
000"
Amount
Cost of investment 21,000
Share in increase in Net Assets 400
(14650+2950+35000-51600)*0.4
Carrying amount as on 2078.04.01 21,400
Fair Value of Existing Holding 22,400
Gain 1,000
This amount of gain should be debited to investment in Mechi Ltd and credited to Profit or loss
account at the time of acquiring control over Mechi Ltd.
Working Note 5: Disposal of Shares of Api Ltd.

000"
Amount
Carrying amount as at 2078.04.01 5,500
Share of profit till the date of disposal 125
(1,000*0.5*0.25)
Carrying amount at the date of disposal (A) 5,625
Fair value of remaining interest on Poush end, 2078 3,250

Proceeds from disposal 2,100
(B) 5,350
Loss on disposal (A-B) 275

The remaining 15% holding shall be restated at its fair value of Rs. 3,350,000 at 32 Ashadh 2079
and gain of Rs. 100,000 shall be recognized as other components of equity.
17
Working Note 6: Non-controlling Interest
000"
Koshi Ltd. Mechi Ltd.
Fair Value of NCI at Acquisition date 24,250 8,400
Share in Post-acquisition increment in net assets 1,710 517.50
[5700*30%]
[3450*15%]
25,960 8,917.50
Total NCI 34,877.50
Working Note 7: Pension adjustment

000"
Amount
Estimated settlement on pension liability 375
[150@ Rs. 2,500)
Estimated curtailment gain 290
Loss to be charged against retained earnings 85

Pension liability w.r.t. settlement should be included within current liabilities whereas Defined
Benefit obligation should be reduced by curtailment gain.
Working Note 8: Group Retained Earnings

000"
Amount
Kanchenjunga 59,000
Share in post-acquisition retained earnings
Koshi Ltd. [5700-(3900-3200)]*0.7 3,500
Mechi Ltd. [3450*0.85] 2,932.50
Loss due pension adjustment (85)

Loss on disposal of interest in Api Ltd. (275)
Gain on existing holding at Mechi at the date of
acquisition 1,000
Total 66,072.50
Working Note 9: Other Components of Equity

000"
Amount
Kanchenjunga 6,400
Share in post-acquisition increase in OCI:
Koshi Ltd. 490
Mechi Ltd. -
Share in profit of Api till the date of disposal 125
18
Gain on Fair value of Investment in Api 100
Total 7,115.00
Q. No. 2 NFRS 2 Share-based Payment

NFRS 2 Share-based Payment states that equity settled share-based payment transactions related
to employees should be measured at the fair value of the equity instruments granted at the grant
date. So, fair value of stock option at the grant date i.e. Rs. 30 each has to be used to measure the
transaction in the given case of Info Developers Ltd.
Further, when any modification occurs to the terms of equity settled share-based payment, an entity
must continue to recognize the grant date fair value of equity instruments in profit or loss account,
and make adjustments for change in fair values prospectively by spreading the difference between
fair value of the original arrangement (current fair value) and fair value of new arrangement over
the period from the date of modification to the vesting date.
We know that:
Equity = (No. of expected employees at vesting date)*(stock option per employee)*fair value of
option)*Year elapsed/Vesting period
Staff Expense for the year = Closing Equity – Opening Equity
Computation of Expenses to be recognized by the company:
Particulars Calculation Equity Staff Expenses
Year 2018 [(800-50-80)*130*30*1/3] 871,000 871,000
Year 2019
Under Original Arrangement [(750-45-35)*130*30*2/3] 1,742,000 871,000
Modification [(750-45-35)*130*(28-24)*1/2] 174,200 174,200
Total 1,916,200 1,045,200
Year 2020
Under Original Arrangement [(705-30)*130*30*3/3] 2,632,500 890,500
Modification [(705-30)*130*4*2/2] 351,000 176,800
Total 2,983,500 1,067,300
ESOP Outstanding Account

Date Particulars Amount Date Particulars Amount
31.12.2021 To Share capital 8,450,000 01.01.2021 By Balance b/d 2,983,500
[650*130*100] 31.12.2021 By Bank 10,985,000
31.12.2021 To Securities Premium 5,408,000 [650*130*130]
[650*130*(30+30+4)]
31.12.2021 To Retained Earnings 110,500
Total 13,968,500 Total 13,968,500
19
Q. No. 3 NFRS 5 Non-Current Assets Held for Sale and Discontinued Operations
On acquisition, the assets and liabilities of Dhawan are measured at fair value less costs to sell in
accordance with IFRS 5:
Particulars Rs. In Lakhs
Assets 20
less: Selling Cost (1)
19
Liabilities (10)
Net Fair Value less cost to sell 9
At the reporting date, the assets and liabilities of Dhawan are remeasured to update the fair value
less cost to sell.
Particulars Rs. In Lakhs
Assets 15
less: Selling Cost (1)
14
Liabilities (6)
Net Fair Value less cost to sell 8
The fair value less cost to sell has decreased from Rs. 9 Lakhs on 1 Jan to 8 Lakhs on 32 Dec. This
1 lakh reduction in the fair value must be presented in the consolidated statement of profit or loss
as a part of the single line item entitled “Discontinued operations”. Also included in this line is the
post-tax profit or loss earned/incurred by Dhawan in the Jan-Dec 2022 period.
The assets and liabilities of Dhawan must be disclosed separately on the face of the statement of
financial position. Dhawan’s assets will appear below the subtotal for the Rohit group’s current
assets:
Non-current assets classified as held for sale Rs. 14 Lakhs.
Dhawan’s liabilities will appear below the subtotal for the Rohit group’s current liabilities:
Liabilities directly associated with non-current assets classified as held for sale Rs. 6 Lakhs.
No Other disclosure is required.
Q. No. 4 NFRS 8 Operating Segments

Step 1: The 10% Test**
Segment 10% total Revenue test 10% result test 10% Assets Test Reportable?
Pradesh 1 Yes Yes Yes Yes
Pradesh 2 No No No No
Pradesh 3 No Yes No Yes
Pradesh 4 Yes Yes Yes Yes
20
** From Working Notes below
Based on the 10% tests, Pradesh 1, 3 and 4 are reportable. However, we must check whether they
comprise at least 75% of the company's external revenue.
Step 2: The 75% Test: ‘000
External
Segments revenue
Pradesh 1 250
Pradesh 3 200
Pradesh 4 270
Total 720
The external revenue of reportable segments is 83.14% (720/866) of total external revenue. The
75% test is met and no other segments need to be reported.
Hence, the reportable segments are Pradesh 1, 3 and 4.
Working Notes (All figures in ‘000)
W. No. 1 10% of total Sales
10% of 15,35,000 153.5
Hence, all the segments having total sales above 153.50 thousand are reportable
W. No. 2 10% of result
10% of profit-making segments
10% of (100+50+130+15+10) 30.5
10% of profit-making segments
10% of (30+20) 5
Therefore, all the segments making profit or loss greater than 30.5 thousand are
reportable.
W. No. 3 10% of Total Assets
10% of 10.6 million 1,060
All the segments exceeding 1060 thousands assets are to be reported.
Q. No. 5 NFRS 9 Financial Instruments

In the case of trade receivables such as this, that is trade receivables that do not have an NFRS 15
financing element, NFRS 9 allows a simplified approach to the expected credit loss method. The
loss allowance is measured at the lifetime expected credit losses, from initial recognition. On 1
Nov 2022 the entries in the books of Dillibazar Ltd will be:
Dr. Trade receivables Rs. 500,000
Cr. Revenue Rs. 500,000
21
Being initial recognition of sales an expected credit loss allowance, based on the matrix given,
would be calculated as follows:
Dr. Expected credit losses Rs. 5,000 *
Cr. Allowance for receivables Rs. 5,000
*(Being expected credit loss: Rs. 500,000*1%)
On 31 Dec 2022, applying Dillibazar Ltd.'s matrix, Satdobato Ltd has moved into the 5% bracket,
because it has exhausted its 60-day credit limit. Despite assurances that Dillibazar Ltd will receive
payment, the company should still increase its credit loss allowance to reflect the increased credit
risk. Dillibazar Ltd will therefore record the following entries on 31 Dec 2022:
Dr. Expected credit losses Rs. 20,000 **
Cr. Allowance for receivables Rs. 20,000
**Being expected credit loss: (Rs. 500,000*5% – Rs. 5,000)
Q. No. 6 NFRS 9/NFRS 13/ NAS 32

The fair value of an asset is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date (NFRS 13
Fair value measurement). NFRS 13 states that valuation techniques must be those which are
appropriate and for which sufficient data are available. Entities should maximize the use of
relevant observable inputs and minimize the use of unobservable inputs. The standard establishes
a three-level hierarchy for the inputs that valuation techniques use to measure fair value.
Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the
reporting entity can access at the measurement date
Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset
or liability, either directly or indirectly, e.g. quoted prices for similar assets in active markets or
for identical or similar assets in non-active markets or use of quoted interest rates for valuation
purposes
Level 3 Unobservable inputs for the asset or liability, i.e. using the entity's own assumptions about
market exit value
The standard believes that fair value is the most appropriate measure for most financial
instruments because it is the most relevant. However, it may be less reliable. There is more scope
for manipulation. Particular difficulties arise where quoted prices are unavailable. If this is the case
– and it frequently is – there is more reliance on estimates.
Not all markets are liquid and transparent. Where a market is illiquid, it is particularly difficult to
apply fair value measurement, because the information will not be available. In addition, not all
markets are stable; some are volatile. Fair valuing gives a measurement at a particular point in
time, but in a volatile market this measure may not apply long term. It needs to be considered
whether an asset is to be actively traded or held for the long term. Disclosure is important in helping
to deal with some of the problems of fair value, particularly as it provides an indicator of a
company's risk profile.
Convertible bond
Some financial instruments contain both a liability and an equity element. In such cases, NAS 32
requires the component parts of the instrument to be classified separately, according to the
22
substance of the contractual arrangement and the definitions of a financial liability and an equity
instrument.
One of the most common types of compound instrument, as here, is convertible debt. This creates
a primary financial liability of the issuer and grants an option to the holder of the instrument to
convert it into an equity instrument (usually ordinary shares) of the issuer. This is the economic
equivalent of the issue of conventional debt plus a warrant to acquire shares in the future.
Although in theory there are several possible ways of calculating the split, the following method
is recommended:
(1) Calculate the value for the liability component.
(2) Deduct this from the instrument as a whole to leave a residual value for the equity component.
The reasoning behind this approach is that an entity's equity is its residual interest in its assets
amount after deducting all its liabilities.
The sum of the carrying amounts assigned to liability and equity will always be equal to the
carrying amount that would be ascribed to the instrument as a whole.
The equity component is not re-measured. However, the liability component is measured at
amortized cost using an effective interest rate (here 9.38%).
It is important to note that the issue costs (here $m) are allocated in proportion to the value of the
liability and equity components when the initial split is calculated.
Step 1: Calculate Liability Element
* A 9% discount rate is used, which is the market rate for similar bonds without the conversion
rights:
Present value of interest at end of: Rs'000
Year 1 (31 Dec 20X6) (Rs.10m × 6%) × 0.9174 550
Year 2 (31 Dec 20X7) (Rs.10m × 6%) × 0.8417 505
Year 3 (31 Dec 20X8) (Rs.10m × (Rs.10m × 6%)) × 0.7722 8,185
Total liability component 9,241
Total equity element 759
Proceeds of issue 10,000
Step 2: Allocate Issue Costs

Liability Equity Total
Details Rs'000 Rs'000 Rs'000
Proceeds 9,241 759 10,000
Issue cost (92) (8) (100)
Total 9,148 752 9,900
The Double entry is:
Rs'000 Rs'000
Dr. Cash 10,000 -
23
Cr. Liability - 9,241
Cr. Equity - 759
Rs'000 Rs'000
Dr. Liability 92 -
Dr. Equity 8 -
Cr. Cash - 100
Step 3: Re-measure liability using effective interest rate

Details Rs'000
Cash – 1.1.20X6 (net of issue costs per Step 2) 9,148
Effective interest to 31.12.20X6 (9.38% * 9,148) 858
Coupon paid (6% * Rs.10m) (600)
At 1.1.20X7 9,406
At 1.1.20X8 9,689
At 31.12.20X8 10,000
Step 4: Conversion of bond
On conversion of the bond on 31 Dec 20X8, Pawan will issue 2.5 million ordinary shares. The
consideration for these shares will be the original equity component (net of its share of issue costs)
together with the balance on the liability.
Details Rs'000
Share capital – 2.5 million at $1 2,500
Share premium 8,251
Equity and liability components (10,000 + 759 – 8) 10,751
Q. No. 7 NFRS 13 Fair Value Measurement

a. For the purpose of measuring the fair value of an asset or liability, NFRS 13 requires the use
of a measurement technique, which maximizes the use of relevant observable inputs, while
considering the complete set of characteristics of the asset or liability.
NFRS 13 defines “observable” inputs as “inputs that are developed using market data, such as
publicly available information about the actual events or transactions, and that reflect the
assumptions that market participants would use when pricing the asset or liability.”
The standard gives some examples of markets in which observable inputs can be identified:
24
Exchange markets: The prices observed directly derive from the transactions and are generally
representative of fair value.
Dealer Markets: Dealers are agents prepared to engage directly in buying and selling.
Therefore, they provide a price at which they are willing to buy and a price at which they are
willing to sell.
Brokered Markets: Brokers are intermediaries who do not trade on their own account. Brokers
match buyers and sellers to make the transaction possible. It is sometimes possible to obtain
prices from completed transactions.
Principal-to-Principal Markets: Transactions are negotiated independently with no
intermediaries and may therefore be used as observable inputs. However, limited information
about these transactions is available publicly.
b. NFRS 13 attributes more importance to the quality of the inputs than the measurement model,
which is chosen with a view to maximizing the use of observable inputs.
NFRS 13 does not expressively require a “Standard” Model to be used in order for the
measurement to be considered as level 1 or 2.
However, it should be noted that the standard does require the use of technique which is:
• Appropriate; and
• Likely to be used by a market participant in estimating the price.
Hence, these two requirements mean that in practice an entity will use standard approaches
whenever they are available.
Q. No. 8 NFRS 15 Revenue from Contracts with Customers

NFRS 15 Revenue from contracts with Customers regards a transaction such as this as being made
up of two separately identifiable performance obligations
– The supply of the equipment and the supply of the servicing agreement.
The total revenue of Rs. 200,000 would need to be allocated between the two separate
performance obligations in proportion to their stand-alone selling prices. The selling price of the
machine is Rs. 190,000 and the normal selling price of the supply of services is Rs.10, 000 (2 ×
Rs. 5,000). The total stand-alone selling prices therefore total Rs.200, 000.
Revenue of Rs. 190,000 (Rs. 200,000 × 190,000/200,000) is allocated to the supply of the
equipment. The balance of revenue of Rs.10, 000 is allocated to the supply of services. On 01 Jan
2022, Kabindra Ltd would recognize revenue from the supply of the machine of Rs.190, 000. On
the same date Kabindra Ltd would recognize a receivable of Rs. 200,000. The balance of Rs 10,000
would initially be recognized as deferred income.
On 20 Jan 2022, the receivable of Rs. 200,000 would be de-recognized when the payment was
received from the Rabindra. In the year ended 32 December 2022, service revenue of Rs.5, 000
(Rs. 10,000 X 1/2) can be recognized. The closing balance of deferred income on 32 December
2022 will be Rs. 5,000 (Rs. 10,000- Rs.5, 000) which will be shown as a current liability as this
refers to service revenue to be recognized in the year ended 32 December 2023.
25
Q. No. 9 NFRS 16 Leases
When the payments are made at the end of the year:
At the commencement date, a lessee shall measure the lease liability at the present value of the
lease payments that are not paid at that date. The lease payments shall be discounted using the
interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily
determined, the lessee shall use the lessee’s incremental borrowing rate. (Para 26 of NFRS 16:
Leases) Hence, Lumbini Ltd should discount the cash flows associated with the lease with the
incremental borrowing rate i.e. 8.5%.
The carrying amount of the right-of-use-asset at the commencement date would be Rs.
13,42,269.61 (Working note 1) (Rs. 13,12,269.61 + Rs.30,000 initial direct costs) and
consequently the annual depreciation charge will be Rs. 13,42,26.96 (Rs. 13,42,269.61 x 1/10).
The lease liability will be measured using amortized cost principles.
Working Note 1.
Year Cash flows PVIF @8.5% PV
1 200,000.00 0.9217 184,331.80
2 200,000.00 0.8495 169,891.06
3 200,000.00 0.7829 156,581.62
4 200,000.00 0.7216 144,314.86
5 200,000.00 0.6650 133,009.08
6 200,000.00 0.6129 122,589.02
7 200,000.00 0.5649 112,985.27
8 200,000.00 0.5207 104,133.89
9 200,000.00 0.4799 95,975.94
10 200,000.00 0.4423 88,457.08
Present value 1,312,269.61
Working Note 2:
Year Balance b/fwd Finance cost (8.5%) Payment Balance c/fwd
1 13,42,269.61 114,092.92 (200,000) 12,56,362.53
2 12,56,362.53 106,790.81 (200,000) 11,63,153.34
At the end of year one, the carrying amount of the right-of-use-asset will be 12,08,042.65 (Rs.
13,42,269.61 less Rs. 13,42,26.96 depreciation).
The interest cost of Rs. 114,092.92 will be taken to the statement of profit or loss as a finance cost.
The total lease liability at the end of year one will be Rs. 12,56,362.53. As the lease is being paid
off over 10 years, some of this liability will be paid off within a year and should therefore be
classed as a current liability.
Hence Non-Current liability will be Rs. 11,63,153.34 and Current Liability will be Rs. 93,209.19
(Rs. 12,56,362.53 – Rs. 11,63,153.34)
26
Where payment are made in advance:
Where payment are made in advance, the carrying amount of the right-of-use-asset at the
commencement date would be Rs. 1,453,812.53 (Working note 3) (Rs. 1,423,812.53 + Rs.30,000
initial direct costs) and consequently the annual depreciation charge will be Rs. 1,453,81.25 (Rs.
1,453,812.53 x 1/10). At the end of year one, the carrying amount of the right-of-use-asset will be
Rs.13,08,431.28 (Rs. 1,453,812.53 less Rs. 1,453,81.25 depreciation).
The initial lease payment of Rs. 200,000 would actually be included as part of the cost of the right-
of-use asset rather than the lease liability. This is because the cost of the right-of-use asset should
include the initial measurement of the lease liability plus any lease payments made at or before the
commencement date.
The total lease liability at the end of year one will be Rs. 13,27,836.59.(Working note 4) Where
payments are made in advance, the non-current liability would be Rs. 12,23,702.70 and current
liability would be Rs. 104,133.89 (Rs. 13,27,836.59 - 12,23,702.70)
Working Note 3.
Year Cash flows PVIF @8.5% PV
1 200,000.00 1.0000 200,000.00
2 200,000.00 0.9217 184,331.80
3 200,000.00 0.8495 169,891.06
4 200,000.00 0.7829 156,581.62
5 200,000.00 0.7216 144,314.86
6 200,000.00 0.6650 133,009.08
7 200,000.00 0.6129 122,589.02
8 200,000.00 0.5649 112,985.27
9 200,000.00 0.5207 104,133.89
10 200,000.00 0.4799 95,975.94
Present value 1,423,812.53
Working Note 4.
Year Balance b/fwd Payment Subtotal Finance cost (8.5%) Balance c/fwd
1 1,423,812.53 (200,000) 12,23,812.53 104,024.06 13,27,836.59
2 13,27,836.59 (200,000) 11,27,836.59 95,866.11 12,23,702.70
Q. No. 10 NAS 2 Inventories

As per NAS 2, inventories shall be measured at the lower of cost and net realizable value. The cost
of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in
bringing the inventories to their present location and condition. The cost of purchase of inventories
comprise the purchase price, import duties and other taxes (other than those subsequently
recoverable by the entity from the taxing authorities,), and transport, handling and other costs
directly attributable to the acquisition of finished goods, materials and services. Trade discounts,
rebates and other similar items are deducted in determining the costs of purchase.
27
Computation table for cost per kg of goods purchased:
Particulars Rs. Per kg
Normal price per kg of goods 500
Less: Trade discount (10)
Cost to the Company 490
Add: Transportation cost to the Company 20
Cost of purchase per kg** 510
** As the company is registered with VAT, the amount of VAT paid at the time of purchase will
be netted off against the VAT amount that will be collected from the buyer and hence the VAT
paid will not form part of cost of goods.
Hence, the inventory of goods should be valued at cost i.e. Rs. 510 per kg.
Q. No. 11 NAS 12 Income Taxes

The tax base of the assets is the difference between the cost and the accumulated depreciation for
tax purpose i.e. Rs 50 Lakhs – 35 Lakhs = Rs 15 Lakhs. Hence, there is a taxable temporary
difference of Rs 45 Lakhs i.e. the difference between the revalued amount and the tax base (Rs 60
Lakhs – 15 Lakhs). The tax base of the assets is less than the carrying amount and hence will result
in Deferred Tax Liability. The Deferred Tax Liability in the two given case will be calculated as
below:
i) If the entity expects to recover the carrying amount by using the assets in the business, it must
generate taxable income of Rs 45 Lakhs. The taxable temporary difference of Rs 45 Lakhs
will be subject to tax. On this basis there will be Deferred Tax Liability of Rs 13.5 Lakhs i.e.
30% of Rs 45 Lakhs.
ii) If the entity expects to recover the carrying amount by selling the assets immediately the
proceeds from the sale of the assets will be equivalent to the revalued amount i.e. Rs 60 Lakhs.
In the given case, the profit on tax base will be Rs 45 Lakhs i.e. Rs 60 Lakhs – Rs 15 Lakhs.
The profit to the extent of accumulated depreciation for tax purpose i.e. Rs 35 Lakhs will be
taxed at 30% and the balance will not be taxable.
Hence, Deferred Tax Liability in the given case will be Rs 10.5 Lakhs i.e. 30% of Rs 35 Lakhs.
Q. No. 12 NAS 19 Employee Benefits

Computation of Expected Return on Plan Assets
Particulars Amount Rs.
Return on Rs. 10 Lakhs for FY 2078/79 @ 10.25% 102,500
Add: Return on Rs. 3 Lakhs for 6 months @ 10% p.a. 15,000
[(490,000-190,000)*10%*6/12]
Expected Return on Plan Assets 117,500
Computation of Actual Return on Plan Assets

Fair Value of Plan Assets as at Ashadh end, 2079 1,500,000
Less: Fair Value of Plan Assets as at Shrawan 1, 2078 (1,000,000)
28
Less: Contribution received during the year (490,000)
Add: Benefits paid during the year 190,000
Actual Return on Plan Assets 200,000
Computation of Net Actuarial Gain

Actual Return on Plan Assets 200,000
Less: Expected Return on Plan Assets (117,500)
Actuarial gain on Plan Assets 82,500
Less: Actuarial loss on Defined Benefit Obligations (6,000)
Net Actuarial gain to be recognized in 'Other Comprehensive
Income' 76,500
Q. No. 13 NAS 23 Borrowing Costs

1. Calculation of amount eligible for capitalization of borrowing cost
Cost (Rs.) Date Months Eligible cost
20,000.00 1-Jan-12 12 20,000.00
157,000.00 1-Feb-12 11 143,916.67
275,000.00 1-Oct-12 3 68,750.00
76,000.00 1-Dec-12 1 6,333.33
Total Cost Rs. 239,000.00
2. Calculation of weighted average rate of interest on general borrowings

General Borrowings Rate of Interest (p.a.) Total interest (Rs.)
250,000.00 8% 20,000.00
300,000.00 10% 30,000.00
550,000.00 9.09% 50,000.00
Weighted average interest rate = 9.09%
3. Calculation of interest eligible for capitalization
Specific borrowing (175000*8%) Rs. 14,000.00
General borrowings (239000*9.09%) Rs. 21,727.27
Total Rs. 35,727.27
4. Total amount to be capitalized for building and total cost of the buildings:
Cost of building (20000+157000+275000+76000) = Rs. 528,000.00
Amount of interest = Rs. 35,727.27
Total cost of both buildings = Rs. 563,727.27
29
Q. No. 14 NAS 24 Related Party Disclosure
a. A finance lease is a lease where the risks and rewards of ownership are transferred from lessor
to lessee. This lease between France Ltd and Brazil Ltd is only for a fraction of the asset’s
remaining useful life and the lease payments are insignificant. The lease is therefore an operating
lease. France Ltd should recognize lease income on a straight line basis over the lease term.
Therefore, Rs. 12,500 (Rs. 25,000 × 6/12) should be recognized in the current year’s statement of
profit or loss, as well as a corresponding entry to accrued income on the statement of financial
position.
A related party transaction is defined by NAS 24 as a transfer of resources, services or obligations
between a reporting entity and a related party. An entity is related to the reporting entity if they
are under joint control. An entity must disclose if it has entered into any transactions with a related
party.
France Ltd and Brazil Ltd are under joint control of Argentina Ltd, so this means that they are
related parties. Disclosure is required of all transactions between France Ltd and Brazil Ltd during
the financial period.
France Ltd must disclose details of the leasing transaction and the income of Rs. 12,500 from
Brazil Ltd during the year. Disclosures that related party transactions were made on terms
equivalent to an arm’s length transaction can only be made if they can be substantiated. The lease
rentals are only 10% of normal market rate meaning that this disclosure cannot be made.
b. NAS 24 Related Party Disclosures requires an entity to identify and disclose facts related to
existence of related parties and transactions and outstanding balances with them in its financial
statements in order to draw the attention of users of financial statements on the possible impact
that may have on the financial performance and position of the entity due to such relationship.
The standard further states that a person or a close family member of such person is related to a
reporting entity if that person:
➢ has control or joint control over the reporting entity;
➢ has significant influence over the reporting entity; or
➢ is a member of the key management personnel of the reporting entity or of a parent of
the reporting entity.
In case of FinTax, the finance director is a related party, as he owns more than half of the voting
power (60%). In the absence of evidence to the contrary, he controls FinTax and is a member of
the key management personnel.
The sales director is also a related party of FinTax as she is a member of the key management
personnel and a close family member (spouse) of a finance director. Their son being a close family
member also meets the criteria for being a related party of the company.
The operation director is also a related party as he owns more than 20% of the voting right in the
company. In the absence of evidence to the contrary, the operation director has significant
influence over FinTax and is a member of key management personnel.
Further, an entity is related to a reporting entity if the entity is controlled or jointly controlled by a
person identified as a related party. Considering this criterion, it can be concluded that InvoMax
Ltd. is a related party of FinTax.
30
In the absence of evidence to the contrary, the third owner of the company is not a related party.
The person is a passive investor who does not appear to exert significant influence over the FinTax.
The loan from the bank, which has been secured through the private property of finance director,
shall be disclosed in the Financial Statements of FinTax, by detailing the facts in Notes that the
loan has been obtained by keeping the personal property of finance director as a collateral.
Q. No. 15 NAS 33 Earnings per Share

Computation table for Basic Earnings per share
Particulars Year ended as on
31/3/2078 32/3/2079
EPS for the year 2077/78 as originally reported:
[Net Profit of the year attributable to equity shareholders / Weighted Rs. 14.33
average number of equity shares outstanding during the year]
(Rs. 430,000,000/30,000,000)
EPS for the year 2077/78 restated for right issue:

[Rs. 430,000,000/{30,000,000 X 1.03(as per working note No. 2)}] Rs. 13.91
EPS for the year 2078/79 including effects of right issue:
Rs. 630,000,000
(30,000,000 X 1.03X 3/12) + (37,500,000 X 9/12)
Rs. 630,000,000 Rs. 17.57
35,850,000 (approx..)
Working Notes
1. Computation of theoretical ex-rights fair value per share
= (Rs. 300 X 30,000,000 shares) + (Rs. 250 X 7,500,000 shares)

30,000,000 shares + 7,500,000 shares
= Rs. 10,875,000,000 / 37,500,000
= Rs. 290
2. Computation of adjustment factors
= Fair value per share prior to exercise of right / Theoretical ex-right value per share (as per
Working Note No. 1)
= Rs. 300/ Rs.290
= 1.03 (approx.)
31
Q. No. 16 NAS 36 Impairment of Assets
a. NAS 36 Impairment of Assets requires that assets be carried at no more than their recoverable
amount. Therefore, entities should test all assets within the scope of the standard if there is
potential impairment when indicators of impairment exist. If fair value less cost to sell or value
in use is more than carrying amount, the asset is not impaired. It further says that in measuring
value in use, the discount rate used should be the pre-tax rate which reflects current market
assessments of the time value of money and the risks specific to the asset. The discount rate
should not reflect risks which future cash flows have been adjusted and should equal the rate of
return which investors would require if they were to choose an investment which would
generate cash flows equivalent to those expected from the asset. Therefore, pre-tax cash flows
and pre-tax discount rates should be used to calculate value in use. Discounting post-tax cash
flows with a post-tax discount rate could give the same result in any entity were it not for any
temporary difference and/or tax losses which might exist.
Rs. in Lakhs
Financial Year Pre-tax Cash flows DF@12% Discounted cash flows
FY 2079/80 16 0.8929 14.29
FY 2080/81 14 0.7972 11.16
FY 2081/82 10 0.7118 7.12
FY 2082/83 6 0.6355 3.81
FY 2083/84 26 0.5674 14.75
Value in Use 51.13
The SBU is impaired by the amount by which its carrying amount exceeds its recoverable
amount which is the higher of an asset’s fair value less cost to sell and its value in use. The fair
value less cost to sell of the SBU is:
Rs. in Lakhs
Assets Fair Value Cost to sell FV less Cost to sell
Property, Plant and Equipment 20 2 18
Other Assets 34 6 28
SBU's Fair value less cost to sell 46
Therefore, recoverable amount of the SBU is Rs. 51.13 Lakhs.
Impairment loss of SBU = Carrying amount – Recoverable amount
= 64 – 51.13
= Rs. 12.87 lakhs
Now, Grow Ltd. has to allocate this amount, first to the goodwill and then to other remaining
assets on pro rata basis based on their carrying amount provided that their individual value
should not be less than fair value less cost to sell.
Allocation of Impairment loss:
Rs. in Lakhs
Allocation of Value after
Assets Carrying Amount Impairment Loss Impairment
Goodwill 6 6 0.00
Property, Plant and Equipment 20 2.37 17.63
Other Assets 38 4.50 33.50
32
Total 64 12.87 51.13
Since carrying amount of an asset cannot be reduced below its fair value less cost to sell,
allocation of impairment loss as shown in above table shall be adjusted for property, plant and
equipment and other assets by Rs. 0.37 lakhs (Rs. 18 lakhs – Rs. 17.63 Lakhs). So, impairment
loss on property, plant and equipment should be reduced by Rs. 0.37 lakhs and that of other
assets should be increased by such amount. Hence, final allocation of impairment loss and
carrying amount of assets shall be as under:
Rs. in Lakhs
Allocation of Value after
Assets Carrying Amount Impairment Loss Impairment
Goodwill 6 6 0.00
Property, Plant and Equipment 20 2.00 18.00
Other Assets 38 4.87 33.13
Total 64 12.87 51.13
The amount of impairment loss Rs. 12.87 lakhs shall be shown under Statement of Profit or loss
of the Grow Ltd.
b. NAS 36 prescribes the procedures that an entity should apply to ensure that its assets are carried
at no more than their recoverable amount. An asset is carried at more than its recoverable amount
if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this
is the case, the asset is described as impaired and the Standard requires the entity to recognize an
impairment loss. The Standard also specifies when an entity should reverse an impairment loss
and prescribes disclosures.
To ascertain whether the asset is impaired, the company should firstly calculate the value in use of
the asset in order to determine the higher amount among the value in use and fair value less cost
to sell.
Calculation of value in use of the first machinery:
Amount in Lakhs
Year Future cash flows PV @ 10% Discounted Cash flows
1 9.00 0.9091 8.18
2 9.27 0.8264 7.66
3 9.54 0.7513 7.17
Total 23.02
The impairment loss would be calculated by comparing the carrying value (Rs. 30 lakhs) with the
higher of value in use (Rs. 23.02 lakhs) and net selling price (Rs. 25 Lakhs)
Thus the impairment loss would be (Rs. 30 Lakhs - Rs. 25 Lakhs = Rs. 5 lakhs) and the new
carrying value would be Rs. 25 Lakhs.
For the second machinery:
Amount in Lakhs
Amount
Particulars (Rs.)
Cost of the machine as on 01.04.2075 18
33
Depreciation for 3 years i.e. up to 01.04.2078 (18/5)*3 Years 10.8
Carrying amount as on 01.04.2078 7.2
Add: Upward revaluation (Credited to revaluation reserve) (12.5-7.2) 5.3
Revaluated amount as on 01.04.2078 12.5
Less: Depreciation for 1 year (12.5/2)*1 6.25
Carrying amount as on Ashadh End 2079 6.25
Less: Recoverable amount 2.6
Impairment loss 3.65
Less: Balance in revaluation reserve as on Ashadh End 2079
Balance in revaluation reserve as on 01.04.2078 less amount equal to
additional depreciation transferred from revaluation reserve for 2078.79 i.e. -2.65
[5.3 - (5.3/2)*1] 2.65
Impairment loss to be debited to profit and loss account 1
Q. No. 17 NAS 38 Intangible Assets

NAS 38 Intangible Assets states that the cost less residual value of an intangible asset with a finite
useful life should be amortized on a systematic basis over that useful life, that the amortization
method should reflect the pattern of benefits and that it should be reviewed at least annually.
The amortization method should be reviewed at least annually and, if the pattern of consumption
of benefits has changed, the amortization method should be changed prospectively as a change in
estimate under NAS 8 Accounting Policies, changes in Accounting Estimates and Errors.
Expected future reductions in sales could be indicative of a higher rate of consumption of future
economic benefits embodied in an asset. Hence, the trademark would be amortized over 3 year
period till Ashadh 2081.
Further, NAS 36 Impairment of Assets states that an entity should assess at the end of each
reporting period whether there is any indication that an asset may be impaired. If any such
indication exists, the entity should estimate the recoverable amount of the asset. Irrespective of
whether there is any indication of impairment, an entity shall also test an intangible asset with an
indefinite useful life or an intangible asset not yet available for use for impairment annually by
comparing its carrying amount with its recoverable amount. This impairment test may be
performed at any time during the reporting period, provided that it should be performed same
time every year. Hence, Jaftra should test the trademark for impairment.
Following adjustments need to be made in the books of account Jaftra Pvt. Ltd. for the period
ended on 32 Ashadh, 2079:
A. Amortization expenses
Amortization Expenses Dr. ……………………….. 1,000,000
To Intangible asset (Trademark) …………………………. 1,000,000
(Being recognizing amortization of trademark during the period)
B. Impairment Loss
Impairment Loss on Trademark Dr. …………………………… 1,000,000
To Intangible asset (Trademark) …………………………………. 1,000,000
(Being impairment loss recognized with respect to trademark)
34
Working Notes:
Cost of trademark (Rs.) 5,000,000
Expected useful life (Years) 10
Amortization Expenses per year (Rs.) 500,000
Accumulated amortization till 1 Shrawan 2078

(For 4 years) (Rs.) 2,000,000
Carrying amount of trademark as at 1 Shrawan 2078 3,000,000

[50 Lakhs-20Lakhs]
The useful life of the trademark is reduced to 3 years and therefor it has to be amortized over that
period.
Amortization Expenses for the period (Rs.) 1,000,000
[Rs. 3,000,000/3yrs]
Carrying Amount as at 32 Ashadh, 2079 2,000,000

[Rs. 30 Lakhs- Rs. 10 Lakhs]
Recoverable Amount (Rs.) 1,000,000

Impairment Loss (Rs.) 1,000,000
[Carrying Amount-Recoverable Amount]
Q. No. 18 Value Added Statement

Statement showing Value Added and amount of Bonus paid to Employees
Rs. '000
Year 2017 2018 2019 2020 2021
Employee Cost 975 1,140 1,260 1,476 1,680
Value Added 2,280 2,700 3,150 3,600 4,200
Percentage 42.76% 42.22% 40.00% 41.00% 40.00%
Target Index = 40%
Value Added Statement for 2022
Rs. "000
Particulars Amount Amount
Sales 10,950
Less: Cost of bought in goods and
services
Cost of Materials 3,750
Production Expenses 1,050
Administrative Expenses 450
Sales Expenses 300 (5,550)
Value Added 5,400
35
Employee Cost
Wages 1,050
Production staff salaries 300
Administrative salaries 450
Sales Department's Salaries 90
Total Employee Cost 1,890
Bonus Calculation:
Employee cost as per target index 2,160
[5400*40%]
Actual Cost 1,890
Saving in employee cost 270
Employee Share 180
[270*2/3]
i.e. Rs. 180,000.00
Q. No. 19 Public Financial Management

PFM refers to the set of laws, rules, systems and processes used by sovereign nations (and sub-
national governments), to mobilise revenue, allocate public funds, undertake public spending,
account for funds and audit results. It encompasses a broader set of functions than financial
management and is commonly conceived as a cycle of six phases, beginning with policy design
and ending with external audit and evaluation. A large number of actors engage in this “PFM
cycle” to ensure it operates effectively and transparently, whilst preserving accountability.
The PFM and budgetary policies of the Government of Nepal during the Nineties were directed
towards economic liberalization, privatization, poverty reduction and decentralization. Policies
and programs of the budget were mainly concerned with agriculture, modernization, employment
promotion, women's empowerment, financial sector reform, government expenditure
management, tax reform, good governance, social service and the development of basic and
physical infrastructure. PFM system of Nepal, like most developing countries, continued to be
dominated by the traditional objectives of control and accountability rather than a concern for
allocating limited public sector resources to well defined programs and projects that were intended
to serve a set of national objectives.
The extension of the budget coverage involved a combination of formal and informal incorporation
of expenditure activities. The other formal extension involved the incorporation of foreign
assistance programs, which were previously outside the budget. Planning the allocation of scarce
resources was not given due priority. The pattern of government expenditure followed more or
less the uniform course till the 1990s. Public expenditure and revenue both increased; but the
expenditure increase trend was greater than the revenue. The inadequate mobilization of domestic
resources through government revenue resulted in a serious problem of widening resource gap in
Nepal. Foreign aid was the main source of development financing and deficit financing continued
to increase. Planning, budgeting, and implementation had inherent problems such as lack of
capacity, co-ordination and monitoring. In spite of a number of initiatives taken, one of the main
problems of Nepal has been the lack of proper domestic resource mobilization.
36
Several factors have contributed in varying degrees to the lack of effectiveness of public spending
in Nepal. The institutional factors played major role in the over-programming (having too many
programs in scarce resources) of the budget, its lack of focus and prioritization and implementation
problems. The lacks of ownership of projects/ programs at various levels and the absence of
accountability, also undermined the quality and effectiveness of public spending. Managing the
national budget became increasingly difficult for Government of Nepal to further their objectives
of poverty alleviation.
Public Expenditure Management is one of the key activities of any government in the world. There
is a growing concern to make PFM system predictable, transparent and accountable anywhere in
the world. PFM in general incorporates a credible planning system, management of government
revenues, budget execution, expenditure management, debt management, reimbursement,
procurement and other important aspects of financial management such as accounting, recording,
financial reporting and auditing and external scrutiny of the financial transactions. Improving
governance and enhancing accountability are considered as the critical agenda of the Government
of Nepal in the endeavour of institutionalizing good governance practices in the country. Hence,
strengthening Public Financial Management has been accepted as one of the key elements of the
GoN’s strategy for improving the overall governance, optimizing outputs from public resources
and ensuring inclusive and broad-based development.
Poor planning, ever increasing indiscipline in budget execution, ineffective expenditure control
and lack of transparency mainly in public procurement pose significant fiduciary risks to almost
all development projects both at centre and local level. The GoN’s recent initiatives such as
Financial Administration Reform Program, Strengthening PFM Project, Government Financial
Statistics (GFS) based new codes and classification of revenues and expenditures, implementation
of Treasury Single Account (TSA) system, strategy to implement International Accounting and
Reporting Standards (NAPSAS), Public Expenditure and Financial Accountability (PEFA)
initiative and other capacity building programs for PFM have resulted some positive impacts in
strengthening PFM system in general and financial good governance in particular in Nepal.
Q. No. 20 Short notes:

a. Opportunity cost method is one of the economic value models used for measurement and
valuation of human assets. As per this model, opportunity cost is the value of an employee in
his/her alternative use. This opportunity cost is used as a basis for estimating the value of
Human Resources.
Opportunity cost value may be established by competitive bidding within the firm so that in
effect, managers must bid for any scarce employee. A human asset will have a value only if it
is a scarce resource, that is, when its employment in one division denies it to another division.
This method excludes employees of the type of which can be readily hired from outside the
firm. Also, it is in very rare cases that managers would like to bid for an employee.
b. Sustainability reporting is a form of non-financial reporting through which companies convey
their progress toward goals on a variety of sustainability parameters, including environmental,
social and governance metrics, as well as risks and impacts they may face, at the moment or in
the future.
In fact, sustainability reporting gives an overview of a company’s economic, environmental
and social impacts. By considering this, an organization is able to measure, understand and
assess its performances in the larger context. As a result, it becomes able to set new
goals and manage changes needed, in order to be integrated in a new sustainable global
37
economy. All in all, sustainability report helps to enhance the trustworthiness of a company
among its customers, employees and other stakeholders, including investors.
38
Paper-2
Advanced Financial Management
39
The Financial System
Question No. 1
Describe basic functions of financial system.
Financial Intermediaries
Question No. 2
Explain economic functions of secondary markets.
Question No. 3
What are rigidities in Nepalese Money Market?
Question No. 4
Sagarmatha International Limited (SIL) currently has Rs. 2,000 million of corporate bonds. The
average maturity of SIL's corporate bonds is 18 years. SIL currently has 'AA' credit rating.
Following information regarding quoted credit spread for corporates in the concerned sector are
as follows:
Rating 1 year 2 years 3 years 5 years 7 years 10 years 30 years
AAA 18 24 28 33 43 57 79
AA 28 37 43 55 63 75 103
A 53 71 77 91 96 103 137
BBB 67 113 133 153 161 169 207
BB 243 278 290 313 320 337 384
Note: The table above is quoted in basis points where 1% = 100 basis points
The current yield on government bonds is 3.75% for all bond maturities. The current market return
on the equity market portfolio is 6.85% and the corporate tax rate is expected to be 29% for the
foreseeable future.
Required:
Estimate the cost of cost of debt using credit rating tables.
Capital Markets
Question No. 5
Neptune Chemicals is a paint manufacturing company listed on the Stock Exchange, whose
earnings and capital structures are given below:
No. of shares issued 10 million
Current share price (Rs.) 75
Corporate debentures (Rs. million ) 3,000
Debenture interest rate 12%
Corporate tax rate 15%
40
The CEO of Neptune Chemicals has sold the company's controlling stake (51%) to a high net
worth businessman at Rs. 75 per share. He continues to hold 15% of the equity and enters into a
contract to be its CEO for the next 3 years. In an attempt to improve financial performance, recently
the company made a successful rights issue of 4:5 at Rs. 50 per share to infuse funds, and the entire
proceeds had been used to retire the debt. The company offered a redundancy package to some of
its workforce and 1,000 workers accepted the compensation package of 6 months’ salary (average
worker salary is Rs. 35,000 per month). The company reduces its working capital by going for a
sub-contractor model; thereby the company would increase its operating profit to Rs. 1.5 billion
(before the compensation costs). Post rights shares are trading at Rs. 65 per share and Neptune
Chemicals declares a 60% dividend.
Required:
(i) Determine the new capital structure of Neptune Chemicals immediately after the rights issue.
(ii) What would be the dividend yield of the high net worth investor?
(iii) Assuming the dividend growth is 5%, and the cost of equity is 20%, calculate the share price
of Neptune Chemicals using Gordon's dividend growth model.
Question No. 6
The following data relate to Beta Ltd.'s share price:
Current price per share Rs. 1,900
6 months’ future's price per share Rs. 2,050
Assuming it is possible to borrow money in the market for transactions in securities at 10% per
annum, you are required followings:
(a) Advise the justified theoretical price of a 6-months forward purchase; and
(b) Evaluate any arbitrage opportunity, if available.
Question No. 7
Swap Bank entered into a plain vanilla swap through on Overnight Index Swap on a principal of
Rs.100 million and agreed to receive LIBOR overnight floating rate for a fixed payment on the
principal. The swap was entered into on Sunday, 5th January, 2023 and was to commence on 6th
January, 2023 and run for a period of 7 days.
Respective LIBOR rates for Monday to Sunday were:
8.15%, 8.12%, 7.95%, 7.75%, 8.15%, 7.98%
Calculate fixed rate and interest under both legs if Swap Bank received Rs. 423 net on settlement.
Notes:
Saturday is Holiday. Consider 365 days a year and ignore other holidays if any.
41
Question No. 8
On 1 September 2022, Kanchenjunga Securities Limited (KSL) bought three-month share options
which can be exercised at any time up to its maturity date i.e. 30 November 2022. While approving
the investment in options, KSL's Board advised the management as follows:
• Exercise 60% of the options when any options yield 10% at any time.
• Exercise further 40% of the options if any options yield 20% at any time.
• For all remaining options at 30 November 2022, exercise options if they are 'in the money'.
Following information in respect of options are available:
Stock Symbol
LPA SPB BDC NMD
Type of share options purchased Call Call Put Put
No. of share options purchased 250,000 1,000,000 500,000 300,000
Rs. per Share
Exercise price 240.00 16.00 158.60 285.50
Options premium 7.00 1.00 4.50 8.00
3 months High 304.60 19.00 165.20 295.00
3 months Low 235.30 15.50 150.00 255.00
Spot price as on 30 November 2022 292.00 17.80 155.00 290.00
Now you shall assume today is 30 November 2022 and ascertain the net profit/(loss) for KSL, if
advice of the Board has been adopted.
Question No. 9
Mr. Ram is holding 10,000 shares of face value of 100 each of Apex Ltd. He wants to hold these
shares for long term and have no intention to sell. On 1 January 2020, Xerox Ltd. has made short
sales of Apex Ltd.'s shares and approached Mr. Ram to lend his shares under certain arrangement
with following terms:
a) Shares to be borrowed for 3 months from 01-01-2020 to 31-03-2020,
b) Lending Charges/Fees of 1% to be paid every month on the closing price of the stock
quoted in Stock Exchange and
c) Bank Guarantee will be provided as collateral for the value as on 01-01-2020.
Other Information:
a) Cost of Bank Guarantee is 8% per annum,
b) On 29-02-2020 Apex Ltd., declared dividend of 25%,
c) Closing price of Apex Ltd.'s share quoted in Stock Exchange on various dates are as
follows.
Scenario -1 Scenario-2
Date
Closing Price (Rs.) Closing Price (Rs.)
01-01-2020 1000 1000
31-01-2020 1020 980
29-02-2020 1040 960
31-03-2020 1050 940
42
Required:
a) Earning of Mr. Ram through the arrangement in both the scenarios.
b) Total Earnings of Mr. Ram during 01-01-2020 to 31-03-2020 in both the scenarios.
c) What is the Profit or loss to Xerox Ltd. by shorting the shares using through the
arrangement in both the scenarios?
Valuation of Assets, Shares and Companies

Question No. 10
White Mountain Falls is a boutique plantation hotel with 33 rooms. There are 5.6 million shares
in issue and the current market price is Rs. 70 per share. The company's equity is Rs. 250 million.
The property was recently revalued at Rs. 490 million, while its written down value was Rs. 180
million. The revaluation entries have not yet been passed in the accounts. The historical profit after
tax of the hotel was in the range of Rs. 20 - 25 million per annum, and the management forecasts
that this year it could end up with a profit of Rs. 30 million. The hotel sector Price/Book value is
1.5 times and Price/Earnings multiple is 11.5 times. The cost to replace a similar hotel is around
Rs. 12 million per room. The Managing Director and his wife jointly own 50% of the shares. They
are willing to divest the investment at Rs. 90 per share. However, with the present stock exchange
regulation, they can only do a share crossing at a maximum of market price + 20%. Assume you
are the Financial Controller, and the Managing Director wishes to obtain a valuation for the hotel's
shares. What is your advice? Should they hold or dispose of the shares at the maximum selling
price permissible? Justify your answer using different valuation methods.
Question No. 11
XYZ Bank enters into a Repo for 21 days with ABC Bank in 8% Government Bonds 2023 @
6.10% for Rs. 50 million. Assuming that clean price is Rs. 97.30 and initial margin is 1.50% and
days of accrued interest are 240 days (assuming 360 days in a year).
You are required to compute: (i) the dirty price and (ii) the repayment at maturity.
Investment Decisions and Strategies

Question No. 12
Celica Limited (Celica) is currently a manufacturer of industrial freezer units for the chemical,
medical and hospitality industries. In the face of growing competition, consumer demand and a
strategic drive to utilize spare production capacity, Celica's directors are considering entering the
household refrigeration market.
The initial phase was to design a smaller version of its most popular industrial unit in response to
demand from households in country, which is now ready for production. Celica has spent Rs. 50
million to design the new product, FeelFresh for the domestic market.
Celica 's directors would like to understand the potential value of launching the FeelFresh over a
five-year term.
Production of the FeelFresh can commence on 1 January 2022 with the first year of sales in the
year ending 31 December 2022. The marketing director has suggested a unit selling price of Rs.
550,000 and is optimistic that there will be high demand for the FeelFresh in local households,
43
although there is some uncertainty. Therefore, the marketing director has estimated the following
sales volumes for the FeelFresh over a five-year period as follows:
First year of sales (2022)
• In 2022, sales will be 2,000 units (60% probability) or 2,500 units (40% probability).
Second year of sales (2023)
If 2022 sales are 2,000 units, then in 2023 sales are estimated to be 2,250 units (70% probability)
or 2,500 units (30% probability). If 2022 sales are 2,500 units, then in 2023 sales are estimated to
be 2,750 units (65% probability) or 3,000 units (35% probability).
Subsequent year sales (2024-2026)
Unit sales will grow by 10% in 2024 based on expected 2023 sales, and by a further 5% in both
2025 and 2026, based on the previous year sales.
Production of the FeelFresh
Celica has many production sites. Production Facility 4 currently manufactures the smallest of its
industrial freezer units, the FRZ100, and is the most up-to-date manufacturing facility with
computerized robotic machinery which can be quickly programmed to manufacture different
products.
Celica's operations manager estimates that Production Facility 4 currently has spare production
capacity to manufacture an additional 1,000 FRZ100 units per annum beyond current FRZ100
production levels. The directors have decided that in case of shortfall in capacity, production of
FeelFresh should give priority over FRZ100.
The current selling price and costs required to manufacture one FRZ100 unit are as follows:
Rs. in '000
Selling price 900
Materials (375)
Skilled labour (eight hours per FRZ100 unit) (160)
Variable costs (including machine time and product packing) (120)
The expected production costs required to manufacture one FeelFresh unit are as follows:
Rs. in '000
Materials (180)
Skilled labour (five hours per FeelFresh unit) (100)
Variable costs (including machine time and product packing) (100)
In addition to above, production of the FeelFresh will require some new specialized machinery to
manufacture new refrigeration technology. Production of the FeelFresh will require Celica to
invest Rs. 250 million in new machinery and equipment on 31 December 2021. Based on past
experience, the directors are assuming that this machinery and equipment will have a disposal
value of Rs. 24 million on 31 December 2026. This machinery and equipment will not increase
overall capacity at Production Facility 4.
The directors of Celica are assuming that new machinery and equipment will attract initial capital
allowance of 25% in the first year and a further 10% per annum on a reducing balance basis,
commencing in the year of acquisition. The company can be assumed to be in a position to claim
all tax allowances in full as soon as they become available and to pay corporate tax at a rate of
29% per annum over the life of the project. The tax is payable at the end of the year to which it
relates.
44
The production manager has forecasted that Rs. 25 million of additional fixed costs of maintenance
and product quality control will be incurred in the first year of production of the Celica and will
continue to be incurred for each year of production. An additional production manager would need
to be recruited to manage the manufacture of the new product. The new FeelFresh production
manager will be paid a salary of Rs. 2.5 million per annum in the first year of production,
increasing by annual inflation each year thereafter.
Working capital to support production of the FeelFresh will be required at a rate of 15% on net
revenue of FeelFresh (i.e. revenue from FeelFresh less revenue forgone of FRZ100) for each year.
Working capital is assumed to be in place at the beginning of each respective year. The directors
have assumed all working capital will be released after five years of production and sales.
Additionally, all cash flows are assumed to occur on the last day of each year, unless stated
otherwise.
The company's current weighted average cost of capital is 8%, which the directors have determined
should be used to evaluate the launch of the FeelFresh. All revenues and costs are subject to annual
inflation which is expected to remain stable at 3% per annum over the next five years. All revenues
and costs are stated at current values, unless stated otherwise.
Required:
Recommend if the directors should proceed to launch the FeelFresh production based on the
assumptions provided by the directors of Celica Limited.
Question No. 13
Saurya Energy is a large producer of energy in Nepal which has a strategy of increasing its
proportion of energy generation and supply from sustainable sources. Saurya's marketing
department has recently completed extensive research in the energy market at a cost of Rs. 2
million. Based on the findings of this research, Chief Marketing Officer (CMO) has recommended
to the board of directors that the retail division could significantly increase its consumer market
share by adopting wireless energy monitoring technology and installing this in consumers' homes.
The technology allows consumers to monitor their energy usage through an energy monitor that
links to an app via the consumer's home Wi-Fi. The CMO believes introducing this technology
will attract significant new consumers by providing information that can help to reduce energy
consumption. The CMO has asked the Chief Finance Officer to determine if contribution from
forecast new retail energy consumers is sufficient to outweigh the cost of implementation of new
energy monitor in consumers' homes. The project timeframe is expected to be five years and the
CMO has requested that the finance and planning department apply the following assumptions in
their analysis:
(i) Initial energy monitoring infrastructure costs of Rs. 125 million will be paid at the beginning
of the project, of which Rs. 100 million is expected to be eligible to claim capital allowances. Due
to their nature, the entire infrastructure costs are not expected to have any residual value at the end
of the project.
(ii) Existing electricity revenue is Rs. 500 million. Revenue from new consumers is expected to
grow over the life of the project as follows:
Years 1 2 3 4 5
Percentage to be applied on existing 20% 40% 60% 80% 100%
Additionally, price inflation of 4% per annum is expected to apply to revenue in the first year and
each year of the project thereafter.
45
(iii) New consumers are expected to generate a contribution of 35% each year over the life of the
project.
(iv) For the new consumers, incremental fixed costs of Rs. 20 million are expected to be incurred
in the first year of the project and each year thereafter. Cost inflation of 5% per annum is expected
to apply each year.
(v) The project is expected to require additional working capital of 10% of the incremental project
sales revenue for a given year, to be in place at the beginning of each year. Working capital is
expected to be released at the end of the project.
(vi) Saurya pays tax on profits at the rate of 28%. Eligible capital expenditure is subject to initial
and normal depreciation of 25% and 10% respectively under reducing balance method. Saurya
earns sufficient profits to adjust the claim arising from depreciation. Assume tax is payable in the
same year in which it arises.
(vii) Saurya is currently ungeared and has a cost of equity of 13%. The directors plan to finance
the project through the sale of other subsidiary assets.
(viii) All project revenue and cost cash flows occur annually at the end of the year in which they
arise except otherwise specified.
Required:
Evaluate the proposed energy monitor implementation project by calculating the net present value
of the new project and its modified internal rate of rate return.
International Financial Management

Question No. 14
Xen-Yen Limited (XYL) operates a chain of large retail stores in country X where the functional
currency is CX. The company is considering to expand its business by establishing similar retail
stores in country Y where functional currency is CY. As a policy, XYL evaluates all investments
using nominal cash flows and a nominal discount rate.
The required investments and the estimated cash flows are as follows:
(i) Investment in country X
CX 7 million would be required to establish warehouse facilities which would stock inventories
for supply to the retail stores in country Y at cost. At current prices, the annual expenditure on
these facilities would amount to CX 0.5 million in Year 1 and would grow @ 5% per annum in
perpetuity.
Investment in country Y
Investment of CY 800 million would be made for establishing retail stores in country Y. At current
prices, the net cash inflows for the first three years would be CY 170 million, 250 million and 290
million respectively. After Year 3, the net cash inflows would grow at the rate of 5% per annum,
in perpetuity.
(ii) Inflation in country X and Y is 7% and 20% per annum respectively and are likely to remain
the same, in the foreseeable future. Presently, country Y is experiencing economic difficulties and
consequently XYL may face problems like increase in local taxes and imposition of exchange
controls.
(iii) The current exchange rate is CX 1 = CY 45.
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(iv) XYL’s shareholders expect a return of 22% on their investments. XYL uses this rate to
evaluate all its investment decisions.
Required: Prepare a report to the Board of Directors evaluating the feasibility of the proposed
investment. Your report should include the following:
(a) Computation of net present value of the project and a recommendation about the viability of
the project.
(b) Identification of the risk and uncertainties involved.
(c) Brief discussion on management strategies which may be adopted to counter the risks of
increase in local taxes and imposition of exchange controls.
Question No. 15
Escape Suppliers is consumer electronics wholesaler. The business of the firm is highly seasonal
in nature. In 6 months of a year, firm has a huge cash deposits and especially near Festival time
and other 6 months firm cash crunch, leading to borrowing of money to cover up its exposures for
running the business.
It is expected that firm shall borrow a sum of £25 million for the entire period of slack season in
about 3 months.
The banker of the firm has given the following quotations for Forward Rate Agreement (FRA):
Spot 5.50% - 5.75%
3x6 FRA 5.59% - 5.82%
3x9 FRA 5.64% - 5.94%
3-month £50,000 future contract maturing in a period of 3 months is quoted at 94.15.
You shall ignore the time value of money in settlement amount for future contract.
Required:
(a) Advise the position to be taken in Future Market by the firm to hedge its interest rate risk and
demonstrate how 3 months Future contract shall be useful for the firm, if later interest rate turns
out to be (i) 4.5% and (ii) 6.5%
(b) Evaluate whether the interest cost to the firm shall be less had it adopted the route of FRA
instead of Future Contract.
Portfolio Theory & Asset Pricing

Question No. 16
Century Nepal Limited (CL) is a manufacturer of ready-to-cook and ready-to-eat frozen foods
based close to Rupandehi, Nepal. Although the company is listed on the Nepal Stock Exchange,
the founders still own a large proportion of the equity share capital and until recently, the company
was all equity financed.
The manufacturing process involves a blast freezing technique that freezes products quickly in
order to retain the freshness and quality of the foods produced. Consumer demand for such
convenience food has increased significantly in recent years. CL has found it difficult to grow the
business due to constraints in the distribution network, both in terms of cold transport and also in
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terms of suitable retail outlets for consumers to purchase goods. Therefore, in 2021, the board
embarked on an ambitious growth strategy that would remove the constraints on growth.
Phase one of the strategy has been completed which comprised of the acquisition of a cold transport
logistics company. This acquisition was funded through an injection of new equity finance,
bringing CL's equity value to Rs. 48 billion and new debt finance with the issue of new 3%
corporate bonds of Rs. 15 billion. These bonds are redeemable in June 2032 at a 10% premium.
The corporate bonds are currently AAA credit rated.
CL is now ready to commence phase two of its expansion plan, which involves raising Rs. 20
billion of debt through a bank loan for acquiring the equity of a small chain of retail outlets. The
retail outlets will stock CL's inventory on an exclusive basis once acquired. A suitable, all equity,
company has been identified. However, the acquisition is considered to be quite risky as the target
company's ungeared beta is 2.23 which is greater than CL's most recently quoted equity beta of 1
.25. You should assume that the cost new debt finance is the same as the cost of its existing
corporate bonds obtained in phase one.
The relevant Arbitrage Pricing Theory factors are shown below together with their appropriate β
weighting:
Factor Indicator Market risk
Beta
premium
β1 Industry risk Purchasing managers index (PMI)
7% 1.16
manufacturing Nepal
β2 Gold prices Return on investment in gold 2% 0.15
β3 Economy risk Gross Domestic Product (GDP) for Nepal 4% 0.22
β4 Inflation Inflation rate 3% 0.06
Corporate tax rate is 29%, the average market return on the stock exchange is 10% and risk free
rate is 4%. CL’s corporate bond βd at different credit grading is as follows:
CL’s Corporate Bond Credit rating βd
AAA 0.00
A 0.25
Required:
(a) Calculate the current market value of the redeemable bonds and CL's overall gearing ratio
(using market values) after phase one of its expansion strategy.
(b) Calculate CL's cost of equity using the Arbitrage Pricing Theory and Capital Asset Pricing
Model (CAPM), and briefly explain the difference in your answers.
(c) Calculate the current weighted average cost of capital (WACC) for CL before embarking on
phase two of the expansion strategy using the cost of equity from part (b) calculated using the
CAPM.
(d) Calculate the expected equity beta for CL after commencement of phase two of the project and
calculate the revised cost of equity for CL using CAPM.
(e) Explain, with relevant calculations, how a change in CL's credit rating from AAA to A may
impact the market value of CL's corporate bonds.
(f) Recalculate the WACC for CL after embarking on phase two of the project and explain why
the WACC has changed.
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Foreign Exchange Management
Question No. 17
Country Metals Limited (CML) is a company located in the province of Bagmati, Nepal. CML is
in the iron mining industry and currently has two mines in operation. Iron metal ore is the primary
deposit, though the company has also been successful in retrieving gold, silver and sulphur
deposits from these mines.
The price of iron fluctuates depending on market demand and supply for the metal, along with the
availability of iron substitute metals.
CML is in the final stages of negotiations with Alzer Bukri (AB) Limited, a company based in
Dubai. AB requires 300,000 pounds of iron in six months' time on 31 December 2022. AB wants
that the contract price is set at the prevailing market rate when delivery takes place at the end of
December.
CML's CFO is proposing that CML should hedge against a likely fall in the value of iron. He has
obtained relevant financial information included below and would like your help in evaluating if
a futures contract hedge on the price of iron is worthwhile.
Iron prices are quoted in the global commodity market as US dollars (USD) per pound.
Relevant financial information for iron hedge
Financial information Estimated December
June 2022
2022
USD/pound USD/pound
Spot price 4.3525 4.2835
Futures contracts (December dated) 4.3675 4.2845
Contract size 25,000 pounds
Tick size 0.0005 USD/pound
Required:
Recommend, with supporting calculations and explanations, if CML should proceed and hedge
the sale of iron in six months' time. In doing so, compare a hedging strategy with the expected no
hedge position and state your answers in USD.
Question No. 18
Jack sparrow Ltd. (JL) is located in South Korea. You have recently been appointed Finance
Manager of the company and you have collected the following information: It is now, 1 January
and the prevailing money market rates are as follows:
Borrowing Deposit
3 Months SKW 9.60 7.20
3 Months JPY 12.30 9.00
3 Months PHP 7.00 6.50
Other relevant information
Spot rate (CNY to SKW) 2.1610 +/- 0.0050
Spot rate (PHP to SKW) 2.2504 +/- 0.0060
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Spot rate (JPY to SKW) 7.5585 +/- 0.00195
Three-month forward rate (CNY to SKW) 2.2145 +/- 0.0075
Where:
SKW = South Korean Won
PHP = Philippine Peso
JPY = Japanese Yen
CNY = Chinese Yuan
JL imports parts, assembles and re-brands them and then sells the assembled items. One of its most
popular products is disposable Camping Huts which are manufactured by a third party in China.
These are sold by JL in its domestic market as well as exported overseas. JL has recently taken
delivery of a container full of disposable Camping Huts. The contracted price for the Camping
Huts is 4,000,000 Chinese Yuan. Half of this has already been settled; the balance is payable on 1
April.
Required:
(a) Compare the cost to JL if it buys Yuan at the spot rate as against entering into a forward
agreement. Briefly comment on your answer and discuss the advantages/disadvantages of using
forward rate agreements.
(b) JL also imports DVDs from Japan. JL owes a Japanese supplier JPY 1,400,000 payable in
three months' time. What will be the cost in South Korean Won (SKW) with a money market hedge
and what effective forward rate would this represent?
(c) A major export market for JL for both Camping Huts and other products is Philippines. JL is
owed PHP 2.5 million in three months' time by a Philippine company. What will be the receipt in
South Korean Won (SKW) with a money market hedge and what effective forward rate would this
represent?
Emerging Concept of Financing

Question No. 19
In order to reduce the cost of electricity consumption, Eastern Textiles Limited has decided to
install a gas generator and discontinue the power supply being obtained from electricity authority.
The gas generator which would meet their requirements would cost Rs. 80 million. The following
two proposals are being considered by Textiles:
Option 1: Offer from MAN Leasing Company Limited
MAN has offered a three-year lease at a quarterly rent of Rs. 7.46 million payables in arrears. In
addition, MAN would be required to pay a security deposit of Rs. 10 million at the time of signing
the lease agreement. Generator will be transferred to MAN at the end of the lease term, against the
security deposit. The fair value of the generator, at the end of lease period is estimated at Rs. 20
million. Operating and maintenance costs of the generator are estimated as follows:
Cost Frequency Rs. In million
Staff salary Monthly 0.50
Lubricants and filters Quarterly 1.00
Parts replacement Half yearly 3.00
Overhaul At the end of 2nd year 15.00
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Option 2: Offer from Imark Rental Services
Imark has also offered to sign a three-year contract according to which textiles would pay quarterly
rent of Rs. 11 million in arrears, with a 10% increase in each subsequent year. The lease rental
would include the cost of maintenance and overhauling of the generator, which will be borne by
Imark. It may be assumed that textile’s cost of capital is equal to the IRR offered by MAN.
You are required to evaluate which of the above proposals should be accepted by Eastern Textiles
Limited. You may ignore taxes.
Foreign Direct Investment

Question No. 20
The finance department of Beena Internationals has been criticized by the company’s board of
directors for not undertaking an assessment of the political risk of the company’s potential direct
investments in Southeast Asian countries. The board has received an interim report from a
consultant that provides an assessment of the factors affecting political risk in three Southeast
Asian countries. The report assesses key variables on a scale of –10 to +10, with –10 the worst
possible score and +10 the best.
Country 1 Country 2 Country 3
Economic growth 5 8 4
Political stability 3 -4 5
Risk of nationalization 3 0 4
Cultural compatibility 6 2 4
Inflation 7 -6 6
Currency convertibility -2 5 -4
Investment incentives -3 7 3
Labour supply 2 8 -3
The consultant suggests that economic growth and political stability are twice as important as the
other factors. The consultant states in the report that previous clients have not invested in countries
with a total weighted score of less than 30 out of a maximum possible 100 (with economic growth
and political stability double weighted). The consultant therefore recommends that no investment
in Southeast Asian Countries should be undertaken.
Required:
(a) Discuss whether or not Beena Internationals should use the technique suggested by the
consultant in order to decide whether or not to invest in Southeast Asian Countries.
(b) Discuss briefly how Beena might manage political risk if it decides to invest in Southeast
Asian Countries.
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Answers
The Financial System
Answer No. 1
Basic functions of financial system are as follows:
1. The Savings Function:
Public savings find their way into the hands of those in production through the financial
system. Financial claims are issued in the money and capital markets, which promise future
income flows. The funds are in the hands of the producers, resulting in better goods and
services and an increase in society's living standards. When savings flow declines, however,
the growth of investment and living standards begins to fall.
2. Liquidity Function:
Money in the form of deposits offers the least risk of all financial instruments. But its value is
mainly eroded by inflation. That is why one always prefers to store funds in financial
instruments like stocks, bonds, debentures, etc. However, in such investments, (i) a greater
level of risk is involved, (ii) and the degree of liquidity (i.e., conversion of the claims into
money) is; moreover, the financial markets provide the investor with the opportunity to
liquidate their investments.
3. Payment Function:
The financial systems offer a very convenient mode of payment for goods and services. The
check system, credit card systems, etc. are the easiest methods of charge in the economy; they
also drastically reduce the cost and time of transactions.
4. Risk Function:
The financial markets provide protection against life, health, and income risks. These are
accomplished through the sale of life, health, and property insurance policies. Overall, they
provide immense opportunities for the investor to hedge himself/herself against or reduce the
possible risk involved in various instruments.
5. Policy Function:
Most governments intervene in the financial system to influence macroeconomic variables like
interest rates or inflation. So, for example, the central bank indulges in several cuts in CRR
and tries to decrease the interest rates and increase the availability of credit at cheaper rates to
the corporates.
Financial Intermediaries
Answer No. 2
The economic functions of secondary markets are as follows:
Price discovery
Price discovery is one of the central functions of secondary markets. It is the route through which
securities markets arrive at prices for the securities traded. Price discovery is important because it
provides information that influences economic decisions, for example whether a company will
expand production and finance this with long-term borrowing or the issue of new shares (rights
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offer). Price discovery also provides clues as to the prices that need to be offered on new issues of
securities.
Liquidity
Liquidity refers to the ability to trade a security with ease, i.e. without impacting significantly on
its price. It will be apparent that in liquid markets, prices will not be adversely affected by large
orders, whereas in thin markets prices may be shifted markedly by small orders. It may be said
that a liquid market is more likely to create a state of equilibrium in the market. By this is meant
that if the buyers and sellers are equally matched in terms of orders, the price will not be affected
adversely (up or down), i.e. the price is a market-clearing price. As indicated, in a thin market, the
market may clear at a vastly different price, depending on whether buyer orders outweigh sell
orders (higher price), or vice versa (lower price). Equilibrium is disturbed in thin markets.
Liquidity enables investors to rapidly adjust their portfolios in terms of size, risk, return, liquidity
and maturity. This in turn has a major influence of the liquidity premium investors place on liquid
securities. This of course means that the issuer is able to borrow at a lower cost than in the absence
of liquidity. It is for this reason that many issuers of bonds attempt to create their own markets by
acting as market makers (quoting buying and selling prices simultaneously) in their own securities,
or by outsourcing this function to an investment / merchant bank/s. An important question is how
to enhance liquidity. The answer is, firstly, the active participation of the role-players in the
financial markets, secondly, the existence of market makers, and thirdly the existence of
arbitrageurs and speculators
Support of primary market
The secondary market plays an important role in terms of supporting the primary market. We noted
above that price discovery in the secondary market assists the primary markets in terms of
providing clues as to the pricing of new issues. In addition to this important function, the secondary
market provides clues as to the receptiveness of market for new issues. Clearly, a liquid market
improves the ability of issuers to place securities, and lowers the price.
Implementation of monetary policy
An active secondary market enables the central bank to buy and sell securities in order to influence
the liquidity of the banking system, with a view the ultimately influencing interest rates. This is
termed open market operations, which means that the central bank buys and sells securities in the
open market.
Answer No. 3
The most important rigidities in the Nepalese money market are:
(i) Markets are not integrated: Money market in Nepal is not well integrated. There is a more
developed secondary capital market in Nepal, which does not exist in money market.
(ii) Players restricted: Only Government, banks and financial institutions are involved in the
money market. Retail investors are rarely interested in the money market.
(iii) Supply based-sources influence uses: Banks and financial institutions are generally the main
sources of fund in the money market. Commercial Banks are main supplier of funds in money
market instruments especially NRB which issues Treasury Bills on behalf of the Government of
Nepal.
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(iv) Not many instruments: Unlike European Market, only few money market instruments are
available in Nepal i.e. Treasury bill, Citizen Saving Bonds, Government Bonds, deposit collection
in Nepal.
(v) Reserve requirements: There are fixed reserve requirements in case of Cash Reserve Ratio
(CRR) and Statutory Liquidity Ratio (SLR) which banks and financial institutions have to maintain
at all times. CRR is the reserve which banks have to keep with NRB whereas SLR is the reserve
which banks have to keep with themselves, thus, restricting the flow of money market instruments.
(vi) Lack of transparency: There is lack of transparency in money market because the secondary
market is not very well developed. Since, the transactions are mostly done Over the Counter, there
may be lack of transparency and public information.
Answer No. 4
Calculation of the after-tax cost of debt using credit rate tables:
SIL has Rs. 2,000 million of 'AA' rated corporate bonds with an average 18 years to maturity
Rating 10 years 30 years
AA 75 103
The expected yield of the bond = risk free bond rate + credit risk premium.
Expected yield on government bond, which equates to risk free rate, is 3.75%.
Calculation of credit risk premium:
Using interpolation to determine 18-year maturity premium between 10 years and 30 years.
Credit risk premium on a 10-year AA rated bond is 75 basis points.
Credit risk premium on a 30-year AA rated bond is 103 basis points.
Credit risk premium for 18 years = 10 years + additional 8 years bond maturity.
Additional risk premium per year = (103-75) / (20 years) = 1.4 basis point per year.
Additional eight years of risk premium = 8years x 1.4 = 11.2 basis points.
Credit risk premium for 18 years = 10-year credit risk premium + additional 8 years bond maturity.
Credit premium for 18 years = 75 + 11.2= 86.2 basis points
The expected yield on AA 18-year bond = 3.75% + (86.2/100) = 4.61%
The estimated cost of debt = 4.61% x (1-0.29) = 3.27%
Capital Markets
Answer No. 5
(i) Number of rights issue= 10,000,000 x 4/5 = 8,000,000 shares
Rights issue = 8,000,000 x 50 = Rs. 400 million
Capital Structure after right issue
Capital Structure Rs. Million
Equity 18 million shares @ Rs. 65 1,170
Debt (3,000 - 400) 2,600
3,770
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(ii)
Rs in million
Operating profit 1,500
Less: Redundancy costs (35,000 x 6 x 1,000) (210)
Finance cost (Rs. 2,600 @ 12%) (312)
Profit before tax 978
Tax @ 15% (146.7)
Profit after tax 831.3
Dividend (60%) = 831.3 x 60% 498.78
High net worth individual dividend = 498.78 x 51% 254.37
High net worth individual investment
= (51% x 10 million shares x Rs. 75 per shares) + (Rs. 400 million x 51%)
= 382.5 million + 204 million = Rs. 586.5 million
Dividend yield = Rs. 254.37 million /586.5 million = 43.37%
(iii) Dividend per share = Rs. 498.78 million/18 million shares = Rs. 27.71
Here,
P = Do (1+ g) / (Ke – g) = 27.71 x 1.05 /(0.20 - 0.05)
Per share price = Rs. 193.97
Answer No. 6
(a) The justified theoretical price of a 6 months’ forward contract as per Cost to Carry Model is as
follows:
Theoretical minimum price = Rs. 1,900 + (Rs. 1,900 x 10/100 x 6/12) = Rs.1,995
(b) Arbitrage Opportunity:
Since current future price is Rs. 2050, yes there is an opportunity for carrying arbitrage profit. The
arbitrageur can borrow money @ 10% for 6 months and buy the shares at Rs. 1,900. At the same
time, he can sell the shares in the futures market at Rs. 2,050. On the expiry date 6 months later,
he could deliver the share and collect Rs. 2,050 pay off Rs. 1,995 and record a risk-less profit of
Rs. 55 (Rs. 2,050 – Rs. 1,995).
Answer No. 7
Day Principal Rs. LIBOR % Interest Rs.
Monday 100,000,000 8.15% 22,329
Tuesday 100,022,329 8.12% 22,252
Wednesday 100,044,580 7.95% 21,791
Thursday 100,066,371 7.75% 21,247
Friday 100,087,618 8.15% 22,348
Saturday and Sunday* 100,109,966 7.89% 43,280
Total interest @ Floating 153,247
Less : Net received 423
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Day Principal Rs. LIBOR % Interest Rs.
Expected interest @ fixed 152,824
Fixed interest rate 7.97%
* Interest for two days
Answer No. 8
Stock Symbol LPA SPB BDC NMD Total
Type of options Call Call Put Put
Exercise price A. 240 16 158.6 285.5
Profit 10% [A x 110% & 90%] B. 264.00 17.60 142.74 256.95
Profit @ 20% [A x 120% & 80%] C. 288.00 19.20 126.88 228.40
90 days high for Call D. 304.6 19
90 days low for Put E. 150 255
Spot price F. 292 17.8 155 290
No. of options G. 250,000 1,000,000 500,000 300,000
Options premium H. 7 1 4.5 8
Rs. In thousand
Exercise of 60% call option if D>B
3,600.00 960.00 4,560.00
Gx60%x(B-A)
Exercise of 60% put option if E<B
5,139.00 5,139.00
Gx60%x(A-B)
Exercise of 40% call option if D>C
4,800.00 4,800.00
GX40%x(C-A)
Exercise of 40% put option if E<C -
Gain realized at spot price if on 30
Nov:
720.00 1,800.00 2,520.00
the spot price> A in case of call
and the spot price < A in case of put
Total cost of option (G x H) (1,750.00) (1,000.00) (2,250.00) (2,400.00) (7,400.00)
Option wise profit or loss 6,650.00 680.00 (450.00) 2,739.00 9,619.00
Answer No. 9
a) Earning of Mr. Ram through the arrangement in both the scenarios
Date Particulars Scenario 1 Scenario 2
31/01/2020 1020*1 % and 980 *1% 10.2 9.8
29/02/2020 1040*1 % and 960 *1% 10.4 9.6
31/03/2020 1050*1 % and 940 *1% 10.5 9.4
Earnings from Lending per share(a) 31.1 28.8
No. of shares 10,000 10,000
Total earning from lending 311,000 288,000
b) Total Earnings of Mr. Ram during 01-01-2020 to 31-03-2020 in both the scenarios.
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Particulars Scenario 1 Scenario 2
Dividend income per share (b) 25 25
Total earnings per share (a + b) 56.1 53.8
No. of shares 10,000 10,000
Total earnings 561,000 538,000
c) Profit or loss to Xerox Ltd. by shorting the shares using through the arrangement in both
the scenarios
Particulars Scenario 1 Scenario 2
Gain on shorting of shares
(50) 60
(1000-1050) and (1000-940)
Lending fees paid (31) (29)
Bank Guarantee Charges @8% for 3 months (20) (20)
Gain per share (101.1) 11.2
No. of shares 10,000 10,000
Total Gain on shorting of shares (1,011,000) 112,000
Valuation of Assets, Shares and Companies

Answer No. 10
Revaluation of property
Rs.
Property value 180 million
Revaluation adjustment 310 million
Property Revaluation 490 million
Value attributable to ordinary shareholders = 250 + 310 =Rs. 560 million
= 560 million /5.6 million shares
= Rs. 100 per share
Price to Book value = 560 x 1.5 = Rs. 840 million
= Rs. 150 per share
Price to Earnings = 30 x 11.5 P/E = Rs. 345 million
= Rs. 61 per share
Replacement = Rs. 33 x 12 million = Rs. 396 million
= Rs. 70 per share
The intrinsic value of the shares Rs. 61 - Rs. 150. Therefore, it is not prudent to sell at the maximum
price of Rs. 84 (70 x 1.2).
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Answer No. 11
(i)Dirty Price
= Clean price + Interest Accrued
=97.30+ 100 *8%* 240/360
=97.30+ 5.33
=Rs. 102.63
(ii) First leg (Start Proceed)
= Nominal value * Dirty Price/ 100 * (100-Initial Margin)/ 100
=Rs. 50,000,000 * 102.63/100 * (100-1.5)/100
= Rs. 50,545,275
Second leg (Repayment at Maturity)
= Start proceed * [1+ (Repo rate * No. of days/360)]
= Rs. 50,545,275 * [1+ (6.10%* 21/360)]
= Rs. 50,725,132
Investment Decisions and Strategies

Answer No. 12
Calculation of Project NPV
Rs in million
Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Sales revenue
(Sales volume (WN-1) x 1,246.30 1,476.24 1,672.58 1,808.81 1,956.16
0.55x1.03^year)
Variable manufacturing costs
(Sales volume X
(861.08) (1,019.95) (1,155.60) (1,249.72) (1,351.53)
0.38(0.18+0.1+0.1) X
1.03^year)
Additional production
(2.50) (2.58) (2.65) (2.73) (2.81)
manager salary
Additional fixed costs (25.00) (25.75) (26.52) (27.32) (28.14)
Lost contribution from sales
(94.63) (151.01) (197.84) (227.77) (260.73)
of FHZ100 (WN-2)
Profit before tax 263.09 276.95 289.96 301.27 312.95
Tax at 29% (76.30) (80.32) (84.09) (87.37) (90.75)
Investment in new machinery (250.00) 24.00
Tax saving on capital
23.56 4.89 4.40 3.96 28.72
allowances (WN-3)
Working capital (WN-4) (134.80) (3.42) (3.65) (3.94) (3.94) 149.76
Net cash flows (384.80) 206.93 197.88 206.33 213.92 424.66
Discount factor @ 8% 1.00 0.93 0.86 0.79 0.74 0.68
Present value (384.80) 191.60 169.65 163.79 157.24 289.02
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Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Net present value (NPV) 586.51
Based on the positive NPV of Rs. 586.51 million, the launch of the FeelFresh refrigerator should
proceed subject to risk assessment and analysis of non-financial factors, such as resource
constraints, production planning and logistics.
Working Notes:
WN-1: Expected sales volume
Year 1 Year 1Year 2 Year 2 Year 2 Year 2
If 2,000 If 2,000 If 2,500 in If 2,500
in Yr.1 in Yr.1 Yr. 1 in Yr. 1
Year 1 probability 60% 40% 60% 60% 40% 40%
Year 2 probability, given
70% 30% 65% 35%
Year 1
Probability (year 1 x year
42% 18% 26% 14%
2)
Predicted sales volume 2000 2500 2250 2500 2750 3000
Probability x Predicted
1200 1000 945 450 715 420
sales volume
Expected sales volume 2200 2530
WN-2: Lost contribution
Year 1 Year 2 Year 3 Year 4 Year 5
In units
FeelFresh volumes A. 2,200 2,530 2,783 2,922 3,068
FeelFresh units in replacement of FRZ100 ( A-
600 930 1,183 1,322 1,468
1600#) B.
Decrease in production of FRZ100 (B*5/8) 375 581 739 826 918
Rs. In million
Lost contribution 245@ * decrease in productions
94.63 151.01 197.84 227.77 260.73
*1.03^year
@
900-375-160-120
In hours
Spare Capacity (1000* 8 hours per unit) 8000
FeelFresh production units using spare capacity (8000/ 5 hours per unit) 1600#
WN-3: Tax saved on capital allowances
Year 1 Year 2 Year 3
Year 4 Year 5
Rs. In million
Capital expenditure / Tax written down value b/f 250.00 168.75 151.88 136.69 123.02
Initial capital allowance (250*25%) 62.50
Normal Tax depreciation at 10% 18.75 16.88 15.19 13.67 12.30
Tax-allowable depreciation 81.25 16.88 15.19 13.67 12.30
Loss on disposal of machine (123.02×0.9)-24 86.72
Total tax allowances 81.25 16.88 15.19 13.67 99.02
59
Tax written down value c/f 168.75 151.88 136.69 123.02 24.00
Tax saving at 29% 23.56 4.89 4.40 3.96 28.72
WN-4: Working capital

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Rs. In million
Expected FeelFresh revenue 1,246.30 1,476.24 1,672.58 1,808.81 1,956.16
Lost revenue from sale of
FRZ100 (Decrease in FRZ100 (347.63) (554.74) (726.77) (836.70) (957.79)
(W-2)x0.9x1.03^year)
Net increase 898.68 921.50 945.81 972.10 998.37
Increase in working capital 15% 134.80 138.22 141.87 145.82 149.76 -
Working capital cash flows (134.80) (3.42) (3.65) (3.94) (3.94) 149.76
Answer No. 13
Rs. In million
Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Incremental sales revenue (WN1) 104.00 216.32 337.46 467.94 608.33
Contribution 35% 36.40 75.71 118.11 163.78 212.91
Incremental fixed costs (20.00) (21.00) (22.05) (23.15) (24.31)
Profit before tax 16.40 54.71 96.06 140.63 188.60
Tax @ 28% (4.59) (15.32) (26.90) (39.38) (52.81)
Tax saving at capital allowance
9.10 1.89 1.70 1.53 13.78
(WN2)
Working capital (WN3) (10.40) (11.23) (12.11) (13.05) (14.04) 60.83
Infrastructure costs (125.00)
Net cash flows (135.40) 9.68 29.17 57.82 88.74 210.41
13% discount factor 1 0.88 0.78 0.69 0.61 0.54
Present value (135.40) 8.56 22.84 40.07 54.43 114.20
Present value (135.40) 240.10
NPV 104.70
Working Notes:
WN1:
Incremental revenue
Rs. In million
Existing retail revenue 500
Incremental increase in revenue
20% 40% 60% 80% 100%
each year
60
Total incremental revenue 100 200 300 400 500
Price Inflation at 4% p.a. 1.04 1.08 1.12 1.17 1.22
Incremental revenue 104.00 216.32 337.46 467.94 608.33
WN2:
Tax saving on capital allowance
Rs. In million
Assets value eligible for allowance 100.00 67.50 60.75 54.68 49.21
Sales proceeds
Balancing allowance 49.21
Initial Capital Allowance at 25% 25.00
Normal Capital Allowance at 10% 7.50 6.75 6.08 5.47 -
Tax-allowable allowance 32.50 6.75 6.08 5.47 49.21
Balance 67.50 60.75 54.68 49.21 -
Tax saving at 28% 9.10 1.89 1.70 1.53 13.78
WN3:
Working Capital
Rs. In million
Working capital (10% of 10.40 21.63 33.75 46.79 60.83
incremental sales revenue)
Working capital (required)/
(10.40) (11.23) (12.11) (13.05) (14.04) 60.83
released
Modified Internal Rate of Return (MIRR)

MIRR using the following formulae:
MIRR = {(PVr/ PVi)1/n } (1+discount rate %) – 1
Present value of the return phase : years 1 to 5 240.10
Present value of the investment phase : years 1 to 5 135.40
MIRR = {(240.10/135.40)1/5} *1.13-1 = 1.1214 *1.13 -1 = 1.2672-1 = 26.72%
International Financial Management

Answer No. 14
Answer:
To: Board of Directors
Date: 7 February 2023
61
Subject: Evaluation of proposed investment in Country Y
(a) Net present value of the investment
The financial evaluation of the Country Y Project is based on estimates of the future nominal cash
flows of the investment, in both Country X and Y. All foreign cash-flows are converted to CX and
total is discounted at a shareholders' required rate i.e. 22% per annum. The theory of purchasing
power parity has been used to estimate future currency exchange rates. This predicts that if
currencies are allowed to float freely on the market, they will adjust in the long run to compensate
for differences in countries' inflation rates. The results show that the investment has an expected
net present value of approximately CX 81.19 million, which indicates that it is worthwhile and
should add to shareholder value.
Calculations:
Growth Inflation Years
0 1 2 3
Exchange rate (PY *1.2/1.07) 45 50.47 56.60 63.48
Amount in million
Cash flows in Country X 5% 7% (7.00) (0.54) (0.60) (0.68)
Cash flows in Country Y (in CY) 20% 800.00 204.00 360.00 501.12
Cash flows in Country Y (in CX) (17.78) 4.04 6.36 7.89
Total nominal cash flows (in CX) (24.78) 3.51 5.76 7.22
Discount Factor @ 30.54% 1.00 0.77 0.59 0.45

{(1.22*1.07)-1}
Present Value (24.78) 2.69 3.38 3.25

NPV of above (15.46)
Country X:NPV from Perpetuity WN1 (1.89)
Country Y:NPV from Perpetuity WN2 98.54
81.19
Working Notes:
1. Growth rate for Country X from year 4 to perpetuity [(1.07x1.05)-1] =12.35%
Perpetuity value = - {(0.68* 1.1235) / (0.3054-0.1235} * 0.45 = (1.89)
2. Growth rate for Country Y from year 4 to perpetuity [(1.20x1.05)-1] = 26%
Perpetuity value = {(7.89* 1.26) / (0.3054-0.26)}*0.45 = 98.54
(b) Risks and uncertainties
(i) Large margins of potential error in the exchange rate prediction
(ii) A slow payback: in present value terms the project will probably not break even until
Year 8 or 4.
(iii) The economic uncertainties in Country Y which may affect adversely on rate of inflation.
(iv) Inappropriate projection of future cash flows specially the cash flows to be generated in
Country Y and cash flows expectation to perpetuity.
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(c) Management Strategies
To counter the increase in local taxes
(i) Negotiate tax concessions in advance
(ii) Use transfer price strategies including royalties and management, to minimize the impact
of variation in Country Y taxable profits and dividends
To counter the imposition of exchange controls

(i) Make extensive use of local currency loans for financing
(ii) Arranging currency swaps
(iii) Back to back loans with other multinational companies and banks with complimentary
cash needs
Answer No. 15
(a) Since firm is a borrower it will like to off-set interest cost by profit on Future Contract.
Accordingly, if interest rate rises it will gain hence it should sell interest rate futures.
No. of Contracts = (Amount of Borrowing/ Contract Size) X (Duration of Loan/3 months)
= (£25,000,000/£50,000) x (6/3)
=1000 Contracts
The final outcome in the given two scenarios shall be as follows:
If the interest rate turns out to If the interest rate turns out to
be 4.5% be 6.5%
Future Course Action:
Sell to open 94.15 94.15
Buy to close 95.50 (100-4.5) 93.50 (100-6.5)
Loss/ (Gain) 1.35% (0.65)%
Cash Payment (Receipt) for £50,000x1000x1.35% x 3/12 £50,000x1000x0.65% x 3/12
Future Settlement = £168,750 =(£81,250)
Interest for 6 months at actual £25 million x 4.5% x 1/2 £ 25 million x 6.5% x 1/2
rates =£562,500 =£812,500
£ 731,250 £ 731,250
Thus, the firm locked itself in interest rate:
£731,250/£25,000,000 x 100 x 12/6 = 5.85%
(b) No, the interest cost shall not be less for Escape Suppliers had it taken the route of FRA, as the
3x9 FRA contract are available at 5.64% -5.94% i.e. borrowing rate of 5.94%. Hence, the
interest cost under this option shall be nearby by 5.94% which is more than interest rate under
Future contract rate of 5.85%.
Portfolio Theory & Assets Pricing

Answer No. 16
(a) Kd = Rf + βd (Rm-Rf)
63
Kd gross yield=4% +0 x (10% -4%) = 4%
Current market value of debt:
Time Cash flow Rs. DF @ 4% PV MV%
1-10 Interest 3% x 1,000 = 30 8.1109 243.3
10 Redeem 1,000 × 110% = 1100 0.6756 743.2
986.5 98.7%
Market value of bonds = Rs. 15 billion x 98.7% = Rs. 14.8 billion
Rs. in billion
Market value debt 14.8
Market value equity 48.0
Total market capitalization 62.8
Gearing ratio = Debt / (Debt + Equity) =23.6%
(b) Current cost of equity using APT and CAPM
APT: Required return (Ke)
= Rf+( β1 x premium1)+( β 2 x premium2)+( β 3 x premium3)+( β 4 x premium4)
= 4%+ (1.16 x 7%) + (0.15 x 2%) + (0.22 x 4%) + (0.06 x 3%)
Ke= 13.48%
CAPM: Required return (Ke)
= Rf+ βe (Rm-Rf)
=4%+1.25 x (10%-4%)
Ke= 11.5%
The difference in the answers is based on the level of complexity between the two models, as
follows:
• CAPM is a one-dimensional model which predicts a required return based on a single
variable, the Nepal Stock market.
• APT includes multiple variables when determining the overall return. There are no
universally accepted variables for APT however there are several variables which are
frequently used such as the Nepal Stock market as above, expected inflation, GDP and gold
prices.
(c) Current WACC = [(Ve*Ke) + (Vd * Kdt)] / (Ve+Vd)
= (48x11.5%)+(14.8x3.3% (W-1)) / (48+14.8)
= 9.6%
W-1: Cost of debt (bond)
Time Cash flow Working DF @ 2% PV DF @ 5% PV
0 Investment Market Value =(986.5) 1 (986.5) 1 (986.5)
1-10 Interest 3%*1000*(1-.29)=21.3 8.983 191.3 7.722 164.5
10 Redeem 1,000 x 110% = 1,100 0.820 902 0.614 675.4
106.8 (146.6)
IRR=2% + [106.8/(106.8+146.6)] x (5% -2%) = 3.3%
Kdt = 3.3%
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(d) βA= (Ve x βe) / [((1-T)*Vd)+E]
=(48×1.25)/((1-0.29)×14.8+48
=1.0255
Overall ẞA for company going forward is weighted average
Market Value βA Weight
Manufacturing and cold logistics 48 1.0255 49.22
Retail outlets 20 2.2300 44.60
68 93.82
Overall βA= 93.82/68 = 1.380
New overall βe for company going forward
Assume that no change in the market values of equity and original debt
1.380 = (48 x βe )/[ (1-0.29) 34.8+48]
βe = 2.09
Ke = Rf + βe (Rm-Rf) = 4% +2.090 × 6% =16.54%
(e) The market value of CL's corporate bonds will fall if the credit rating reduces.
A fall in the credit rating suggests that the debt will no longer be considered risk free for the
investor.
This will increase the required return by the debt investor.
Revised gross yield on CL's corporate bond using CAPM at A credit rating:
Kd gross yield = Rf+ Bd (Rm-Rf)
= 4%+0.25 x 6% = 5.5%
Revised market value of original debt
Time Cash flows (Rs. in million) DF @5.5% PV MV %

1-10 Interest 3% x 1,000 = 30 7.5376 226.1
10 Redeem 1,000 x 110% 1,100 0.5854 643.9
Total 870.0 87%
Revised Market value of corporate bonds Rs. 15 billion x 87% = Rs. 13.05 billion
(f) Revised WACC = [(Ke x Ve) + (Kdt x Vd bond) + (Kdt x Vd loan)]/ [Ve+Vd bond +Vd loan]
= [(16.54% x 48) +(3.3% x14.8)+(3.3% x 20)]/[48+14.8+20]
= 11.0%
The overall weighted average cost of capital for CL has increased from 9.6% to 11.0%.
There are two changes that have influenced this change:
(i) The introduction of additional debt finance is likely to lead to a fall in the overall weighted
average cost of capital due to more of the cheaper debt finance being used in the business.
(ii) The additional debt will increase the risk to shareholders and this is one of the reasons for the
increase the cost of equity.
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Foreign Exchange Management
Answer No. 17
Outcome if no hedge:
If CML does not hedge and use the spot rates in six months' time, the net receipt will be:
Sell Iron at December 2022 spot (4.2835x300,000) = USD 1,285,050
Outcome if hedge using Futures contract:
If CML takes out a future contract to hedge against the fall in the value of iron, then the expected
receipt in USD will be:
Iron futures
Sell Iron for Dec 22 spot price (4.2835×300,000) = USD 1,285,050
Gain on Iron futures hedge (WN-1) = USD 24,900
Total receipts = USD 1,309,950
Conclusion:
Iron future is beneficial for Country Metals Limited as compared to no hedge.
WN-1:
Movement per pound (4.3675-4.2845) USD 0.0830
Number of ticks (0.0830/0.0005) 166
Tick size per contract (25,000 x 0.0005) USD 12.5
Gain on one contract (166 x USD 12.50) USD 2,075
Number of contracts (300,000/25,000) 12
Gain on futures contracts hedge (12x USD 2,075) USD 24,900
Answer No. 18
a. Note: Rates expressed are “annualized rates”. Therefore, before solving the problems it is
important to express the given rates as rates for a period of three months.
3 months annualized rates converted for a period of three month rates
Borrowing Deposit
3 Months SKW 2.4% 1.8%
3 Months JPY 3.075% 2.25%
3 Months PHP 1.75% 1.625%
The balance to be settled = CNY 4,000,000/2 = CNY 2,000,000
Spot rate (CNY to SKW) = 2.1610 +/- 0.0050
As JL buying CNY, they have to buy at the bank’s selling rate which is = 2.1610 + 0.0050
= 2.166
Cost at the spot rate = CNY 2,000,000 x 2.166 = SKW 4,332,000
Three month’s forward rate (CNY to SKW) = 2.2145 + 0.0075
Under forward rate JL has to buy at the rate of = 2.2145 + 0.0075 = 2.2220
66
(bank forward selling rate)
Cost at the forward rate = CNY 2,000,000 x 2.222 = SKW = 4,444,000
At a glance it seems the cost is more if the company goes for a forward contract in terms
of SKW by 4,444,000 – 4,332,000 = 112,000
Advantages of using forward agreement:
A firm can fix the exchange rate today (at the current rate) for a transaction which will take place
at a future date. Then the firm is sure of exactly how much it is going to receive or pay in terms of
local currency. Therefore, it does not face a risk in terms of future exchange rate changes. Finally,
a large fluctuation of firm's cost/revenue and profits due to exchange rate changes can be
controlled.
Disadvantages of using forward contracts:
The exchange rate could change favourably. There is a possibility that the value of the paying
foreign currency to go down against the local currency and to pay less in terms of the local
currency. Such favourable changes cannot be expected when the rate is fixed in advance under a
forward agreement. There may be occasions where you may have to cancel the transaction due to
various reasons.
(b) JL has to borrow SKW and buy JPY in advance and invest in JPY for three months till the payment
date.
The amount of JPY needed at the end of three months = JPY 1,400,000
The amount, JL has to invest now to get JPY 1,400,000 in 3 months
= JPY1,400,000/1.0225 = JPY 1,369,193
*Note that the JPY deposit Rate is 2.25% or 0. 0225 for a period of three months
Amount of SKW needed to buy JPY 1,369,193 = JPY 1,369,193 x 7.56045 =SKW 10,351,715
* Recognize that JL has to buy at Bankers selling rate (7.5585 +0.00195 = 7.56045)
As JL is going to borrow SKW 10,351,715, it has to pay in 3 months with interest
= SKW 10,351,715* (1.024)
= SKW 10,600,156
SKW 10,600,156 is the real cost South Korean Won.
*Recognize that they have to borrow at the rate of 2.4% = .024
The effective forward rate of the firm:
At the end of three months, JL settles JPY 1,400,000 to the Japanese party with the money available
in JPY deposit. For the borrowed money they will have to pay to the bank SKW 10,600,156.
So effective forward rate is = SKW10,600,156/ JPY1,400,000 = 7.571
(c) JL borrows Philippine Peso (PHP) in 3 months’ advance and invest in SKW.
Amount JL has to collect from Philippine in three months’ time = PHP 2,500,000. JL has to
borrow PHP against the amount receivable in 3 months
= PHP 2,500,000 / 1.0175 = PHP 2,457,002 (That is the present value of future receivables)
*Note that PHP borrowing rate is 1.75% = 0.0175
67
Convert PHP 2,457,002 to SKW = PHP 2,457,002 x 2.2444 = SKW 5,514,495
(Note that they have to sell at the bank buying rate = 2.2504 - 0.0060 = 2.2444)
The company then will invest SKW 5,514,495 for three months at the rate of 1.8%
= SKW 5,514,495 * (1.0180)
Amount with the interest = SKW 5,613,755
Therefore, the receipt in South Korean Won (SKW) with a money market hedge is = SKW
5,613,755
The company will settle the PHP borrowing with PHP 2.5 million receipt. The effective forward
exchange rate in this case is = 2.245 approximately (SKW 5,613,755/ PHP2,500,000)
Note: Exchange rates given in the question do not necessarily reflect the real parity rates.
Emerging Concept of Financing

Answer No. 19
Proposal of MAN Leasing Company Limited
Total Interest Discount
Amount PV
number rate factor
Cash flow (Rs. In Frequency (Rs in
of /period (annuity
million) million)
payments (WN1) factor)
Security deposit 10.00 1 10.00
Lease rentals 7.46 Quarterly 12 4.00% 9.3834 70.00
Lubricants and filters 1.00 Quarterly 12 4.00% 9.3834 9.38
Parts replacement 3.00 Half yearly 6 8.00% 4.6229 13.87
Staff cost 0.50 Monthly 36 1.33% 28.46 14.23
Overhaul 15.00 End of 2nd year 0.731 10.97
Residual value (20.00) End of 3rd year 0.625 (12.50)
Total present value 115.95
Proposal of Imark Rental Services

Quarterly Rental Discount factor Present value
Quarter
(Rs. In million) (WN1 ) 4% (Rs. In million)
1 11 0.962 10.58
2 11 0.925 10.17
3 11 0.889 9.78
4 11 0.855 9.40
5 12.1 0.822 9.95
6 12.1 0.790 9.56
7 12.1 0.760 9.20
8 12.1 0.731 8.84
9 13.31 0.703 9.35
10 13.31 0.676 8.99
68
11 13.31 0.650 8.65
12 13.31 0.625 8.31
Total 112.78
Conclusion: Imark’s option is better as it gives lower overall cost in present value terms.
Working Notes:
WN-1: Finding the rate offered by MAN
PV of inflow = Present value of outflows (annuity) = R × Annuity Factor (AF)
Hence, 80 − 10 = 7.46 × AF
AF = 70 ÷ 7.46 = 9.3834
IRR is approx. 4% per quarter i.e. the figure corresponding to annuity factor of 9.385 (of 9.3834)
and 12 periods, on the annuity table.
Foreign Direct Investment

Answer No. 20
The consultant’s report should not be used as the only basis for the Southeast Asian investment
decision, because:
The decision should be taken after evaluating the risk/return trade-off; financial factors (e.g. the
expected NPV from the investments); strategic factors; and other issues including political risk.
Political risk is only one part of the decision process (although in extremely risky countries it might
be the most important one).
The scores for the three countries are: Country 1:29, Country 2: 24, and Country 3:28.
Just because previous clients have not invested in countries with scores of less than 30 does not
mean that Beena should not. The previous countries may not have been comparable with these in
Southeast Asian countries. This decision rule also ignores return. If return is expected to be very
high, a relatively low score might be acceptable to Beena. The factors considered by the consultant
might not be the only relevant factors when assessing political risk. Others could include the extent
of capital flight from the country, the legal infrastructure, availability of local finance and the
existence of special taxes and regulations for multinational companies. The weightings of the
factors might not be relevant to Beena. Scores such as these only focus on the macro risk of the
country. The micro risk, the risk for the actual company investing in a country, is the vial factor.
This differs between companies and between industries. A relatively hi-tech electronics company
might be less susceptible to political actions than, for example, companies in extractive industries
where the diminishing bargain concept may apply. There is no evidence of how the scores have
been devised and how valid they are.
(b) Prior to investing Beena might negotiate an agreement with the local government covering
areas of possible contention such as dividend remittance, transfer pricing, taxation, the use of local
labour and capital, and exchange control. The problem with such negotiations is that governments
might change, and a new government might not honour the agreement.
The logistics of the investment may also influence political risk:
If a key element of the process is left outside the country, it may be viable for the government to
take actions against company as it could not produce a complete product. This particularly applies
when intellectual property or know-how is kept back.
69
Financing locally might deter political action, as effectively the action will hurt the local providers
of finance.
Local sourcing of components and raw materials might reduce risk. It is sometimes argued that
participating in joint ventures with a local partner reduces political risk, although evidence of this
is not conclusive.
Control of patents and processes by the multinational might reduce risk, although patents are not
recognized in all countries.
Governments or commercial agencies in multination’s home countries often offer insurance
against political risk.
70
Paper-3
Advanced Audit & Assurance
71
Nepal Standards on Auditing
1. Explain analytical procedure. Further explain the points to be considered while designing and
performing substantive analytical procedure.
2. You are the auditor of Car Spare Parts Pvt. Ltd. for the year 2079-80. The inventory as at the
end of the year was Rs.8.5 cr. Due to some circumstances, you were not able to be present at
the time of annual physical verification.
Under the above circumstances how would you ensure that the physical verification conducted
by the management was in order?
3. During the course of audit of Federal Limited the auditor received confirmation of the balances
of trade payables outstanding in the balance sheet by negative confirmation request.
In the list of trade payables, there are number of trade payables of small balances except one,
old outstanding of Rs.3.8 cr, of whom, no confirmation on the credit balance has been received.
Comment with respect to Nepal Standard of Auditing.
4. Gelal Associates, Chartered Accountants, conducting the audit of Plant Ltd., a listed Company
for the fiscal year 2078/79 is concerned with the auditor's responsibilities relating to other
information, both financial and non-financial, included in the Company’s annual report. While
reading other information, Gelal Associates considers whether there is a material inconsistency
between other information and the financial statements. As a basis for the consideration the
auditor shall evaluate their consistency, compare selected amounts or other items in the other
information with such amounts or other items in the financial statements. Guide Gelal
Associates with examples of "Amounts" or "other items" that may be included in the "other
information" with reference to NSA 720.
Audit Planning, Strategy & Execution

5. QXF is a movie theatre complex located in prime locations of Kathmandu. The major portion
of income comes from sale of ticket both OTC and online and also includes the income from
café, kid zone etc. Its other income includes advertisements in hoardings, banners, slides, short
films etc. It also consists of a parking are in its basement. QXF appointed your firm as the
auditor of the entity. Being a team leader, you are, therefore, required to draw an audit
Programme initially in respect of its revenue and expenditure considering the above mentioned
facts along with other relevant points relating to a complex.
6. You have been appointed as auditor of Nimplex Ltd. for the first time. List out the factors to
be considered while establishing an overall audit strategy along with its benefits.
Risk Assessment and Internal Control

7. Star Fish Hospital is a newly established international hospital which has been facing a lot of
pilferage and troubles regarding their inventory maintenance and control.
On taking a deep dive into the matter it was found that the person in charge of inventory is also
given the responsibility for purchases and maintaining inventory records. According to you,
which basic system of control has been overlooked? Also list down the other general conditions
pertaining to such system which needs to be maintained and checked by the management.
8. You are the auditor of Gwachey Ltd., for the FY 2078/79. During the course of audit, you
noticed material weaknesses in the internal control system and wish to communicate the same
72
to the management. You are required to elucidate important points an auditor should keep in
the mind while drafting such letter/report highlighting material weakness in internal control
system.
Other Services & EDP Audit

9. Kanchapanya Ltd is planning to absorb a manufacturing concern. Luckily your firm Lucky
Associates has been appointed for a DDA. The TOR suggests to look specifically for any
hidden liabilities and overvalued assets. Explain the major areas where you may find hidden
liabilities or overvalued assets.
10. CA Pandey has been appointed as Forensic Auditor by Kanxi Bank Limited for one of its
creditors Strange Ltd. CA Pandey started the audit by first reviewing the transactions of the
borrower in Bank statement as per Bank records to identify any hidden patterns in that
information. He had to review huge volume of data, as the number of transactions per day were
in hundreds and the data was to be reviewed for the last three years. So, he was stuck up as to
how to proceed further to identify any hidden patterns in information, if any. Guide CA Pandey,
suggesting which technique to be used for identifying any hidden patterns in the information.
Audit of specialized enterprises
11. Suppose your audit firm named Mero & Hamro Associates has been appointed for an
assignment in a Life insurance company in Nepal. You are required evaluate various processes,
employed by an Insurance Company in accounting process like collection of premium from
the policy holders, booking of premium, banking, accounting and reconciliation of the same.
In view of above, you are required to briefly mention some illustrative points, which auditors
must follow during the Audit of Accounting of Premiums in case of Life Insurance Companies.
12. Explain the difference between the Proportional Treaties and Non Proportional Treaties.
13. Teti Airlines Ltd was incorporated in Nepal on 1 March 20X8. In April, the company exercised
an exclusive right granted by the government of India to provide twice weekly direct flights
between Mumbai and Kathmandu.
The introduction of this service has been well advertised as 'efficient and timely' in national
newspapers. The journey time between Nepal and India is expected to be significantly reduced,
so encouraging tourism and business development opportunities in Nepal.
Teti Airlines operates a refurbished 35-year old aircraft which is leased from an international
airline and registered with the CAAN. The CAAN requires that engines be overhauled every
two years. Engine overhauls are expected to put the aircraft out of commission for several
weeks.
The aircraft is configured to carry 15 First Class, 50 Business Class and 76 Economy Class
passengers. The aircraft has a generous hold capacity for Nepal's numerous horticultural
growers (e.g., of tea and fruit) and general cargo
The 3 hour journey offers an in-flight movie, a meal, hot and cold drinks and tax-free shopping.
All meals are prepared in TIA under a contract with an airport catering company. Passengers
are invited to complete a 'satisfaction' questionnaire which is included with the in-flight
entertainment and shopping guide. Responses received show that passengers are generally least
satisfied with the quality of the food – especially on the KTM-MUM flight.
73
Teti Airlines employs ten full-time cabin crew attendants who are trained in air-stewardship
including passenger safety in the event of accident and illness. Flight personnel (the captain
and co-pilots) are provided under a contract with the international airline from which the
aircraft is leased. At the end of each flight the captain completes a timesheet detailing the crew
and actual flight time.
Ticket sales are made by Teti Airlines and travel agents in Nepal and India. On a number of
occasions Economy seating has been over-booked. Customers who have been affected by this
have been accommodated in Business Class as there is much less demand for this, and even
less for First Class. Ticket prices for each class depend on many factors, for example, whether
the tickets are refundable/non-refundable, exchangeable/non-exchangeable, single or return,
mid-week or weekend, and the time of booking.
Teti Airlines' insurance cover includes passenger liability, freight/baggage and compensation
insurance. Premiums for passenger liability insurance are determined on the basis of passenger
miles flown.
Required
Identify and explain the business risks facing Teti Airlines Ltd.
Audit Reports
14. CA Shaquile O’Niel is the statutory auditor of PQR Ltd. for the FY 2078-79. During the course
of audit CA Shaquile O’Niel noticed the following:
1. With respect to the debtors amounting to Rs. 150 crores, balance confirmation was not
obtained. Further, there has been defaults on the payment deadline by debtors on the due
dates during the year under audit. The Company has created a provision for bad debts to
the tune of Rs.25 Cr. during the year under audit. The Company has stated that the
provision is based on receivables which are older than 36 months, which according to the
audit team is inadequate and team is unable to ascertain the carrying value of trade
receivables.
2. Further, in respect of Inventories (40% of the total assets of the company), during the
reporting period, the management has not done physical verification at periodic intervals.
Also, the Company has not maintained adequate inventory records at the factory. The audit
team was unable to undertake the physical inventory count as such the value of inventory
could not be ascertained.
Under the above circumstances what kind of opinion should CA Shaquile O’Niel give?
General terms in Auditing

15. Distinguish Self-interest threat from self-review threat in an Assurance Engagement.
16. Auditors should accept some of the blame when a company on which they have expressed an
unmodified audit opinion subsequently fails, and they should also do more to highlight going
concern problems being faced by a company.
Discuss this statement.
17. You are the manager responsible for the audit of Galley Cold Store Co. The company's
principal activity is wholesaling frozen fish. The draft consolidated financial statements for the
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year ended 31/03/2079 show revenue of Rs.67.0 million (2078 – Rs.62.3 million), profit before
taxation of Rs. 11.9 million (2078 – Rs. 14.2 million) and total assets of Rs.48.0 million (2078
– Rs.36.4 million).
The following issues arising during the final audit have been noted on a schedule of points for
your attention.
(a) In early 2079 a chemical leakage from refrigeration units owned by Galley Cold Store
caused contamination of some of its property. Galley Cold Store has incurred Rs.0.3 million
in clean-up costs, Rs.0.6 million in modernization of the units to prevent future leakage and
Rs.30, 000 fine to a regulatory agency. Apart from the fine, which has been expensed, these
costs have been capitalized as improvements.
(b) While the refrigeration units were undergoing modernization Galley Cold Store outsourced
all its cold storage requirements to Masu Warehousing Services. At 31/03/2079 it was not
possible to physically inspect Galley Cold Store's inventory held by Masu due to health and
safety requirements preventing unauthorized access to cold storage areas. Galley Cold Store's
management has provided written representation that inventory held at 31/03/2079 was Rs.10.1
million (2078 – Rs.6.7 million). This amount has been agreed to a costing of Masu's monthly
return of quantities held at 32/03/2079.
(c) Galley Cold Store owns a residential apartment above its head office. Until 31 Chaitra 2078
it was let for Rs.3,000 a month. Since 1 Baishakh 2079 it has been occupied rent-free by the
senior sales executive.
Required
In undertaking your review of the audit working papers and financial statements of Galley Cold
Store Co for the year ended 32/03/2079, for each of the above issues:
(i) Comment on the matters that you should consider; and
(ii) State the audit evidence that you should expect to find
Short Notes
18. Define parallel simulation and illustrate the overall process with the help of a diagram
19. Write a short note on general objectives of an operational audit.
20. Write a short note on the contents of an audit plan.
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Answers
1. Evaluation of financial information through analysis of plausible relationships among both
financial and non-financial data. Analytical procedures also encompass such investigation as
is necessary of identified fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount.
While designing and performing substantive analytical procedure, either alone or in
combination with tests of details, as substantive procedures in accordance with NSA 330, the
auditor shall:
a) Determine the suitability of particular substantive analytical procedure for given assertions,
taking account of the assessed risks of material misstatement and tests of details, if any, for
these assertions.
b) Evaluate the reliability of data from which the auditor’s expectations of recorded amounts
or ratios is developed, taking account of source comparability, and nature and relevance of
information available, and controls over preparation.
c) Develop an expectation of recorded amounts or ratios and evaluate the expectation is
sufficiently precise to identify a misstatements that, individually or when aggregated with
other misstatements, may cause the financial statements to be materially misstated and,
d) Determine the amount of any difference of recorded amounts from expected values that is
acceptable without further investigation.
2. As per NSA 501 Audit Evidence – Specific Considerations for Selected Items, the auditor
should perform audit procedures, designed to obtain sufficient appropriate audit evidence
during his attendance at physical inventory counting. NSA 501 is additional guidance to that
contained in NSA 500, Audit Evidence, with respect to certain specific financial statement
amounts and other disclosures. If the auditor is unable to be present at the physical inventory
count on the date planned due to unforeseen circumstances, the auditor should take or observe
some physical counts on an alternative date and where necessary, perform alternative audit
procedures to assess whether the changes in inventory between the date of physical count and
the period end date are correctly recorded. The auditor would also verify the procedure
adopted, treatment given for the discrepancies noticed during the physical count. The auditor
would also ensure that appropriate cut off procedures were followed by the management. He
should also get management’s written representation on
a) The completeness of information provided regarding the inventory, and
b) Assurance with regard to adherence to laid down procedures for physical inventory count.
By following the above procedure it will be ensured that the physical verification conducted
by the management was in order.
3. As per NSA 505, External Confirmation, negative confirmation is a request that the confirming
party respond directly to the auditor only if the confirming party disagrees with the information
provided in the request. Negative confirmations provide less persuasive audit evidence than
positive confirmations. The failure to receive a response to a negative confirmation request
does not explicitly indicate receipt by the intended confirming party of the confirmation request
or verification of the accuracy of the information contained in the request. Accordingly, a
failure of a confirming party to respond to a negative confirmation request provides
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significantly less persuasive audit evidence than does a response to a positive confirmation
request.
Confirming parties also may be more likely to respond indicating their disagreement with a
confirmation request when the information in the request is not in their favour, and less likely
to respond otherwise. In the instant case, the auditor sent the negative confirmation requesting
the trade payables having outstanding balances in the balance sheet while doing audit of
Federal Limited. One of the old outstanding of Rs.3.8 cr has not sent the confirmation on the
credit balance. In case of nonresponse, the auditor may examine subsequent cash
disbursements or correspondence from third parties, and other records, such as goods received
notes.
Further non response for negative confirmation request does not means that there is some
misstatement as negative confirmation request itself is to respond to the auditor only if the
confirming party disagrees with the information provided in the request.
But, if the auditor identifies factors that give rise to doubts about the reliability of the response
to the confirmation request, he shall obtain further audit evidence to resolve those doubts.
4. As per NSA 720 the Auditor’s Responsibility in Relation to Other Information in Documents
Containing Audited Financial Statements, the following are examples of amounts and other
items that may be included in other information. This list is not intended to be exhaustive.
Amounts
i. Items in a summary of key financial results, such as net income, earnings per share,
dividends, sales and other operating revenues, and purchases and operating expenses.
ii. Selected operating data, such as income from continuing operations by major operating
area, or sales by geographical segment or product line.
iii. Special items, such as asset dispositions, litigation provisions, asset impairments, tax
adjustments, environmental remediation provisions, and restructuring and
reorganization expenses.
iv. Liquidity and capital resource information, such as cash, cash equivalents and
marketable securities; dividends; and debt, lease and minority interest obligations.
v. Capital expenditures by segment or division.
vi. Amounts involved in, and related financial effects of, off-balance sheet arrangements.
vii. Amounts involved in guarantees, contractual obligations, legal or environmental
claims, and other contingencies.
viii. Financial measures or ratios, such as gross margin, return on average capital employed,
return on average shareholders’ equity, current ratio, interest coverage ratio and debt
ratio. Some of these may be directly reconcilable to the financial statements.
Other Items
i. Explanations of critical accounting estimates and related assumptions.
ii. Identification of related parties and descriptions of transactions with them.
iii. Articulation of the entity’s policies or approach to manage commodity, foreign
exchange or interest rate risks, such as through the use of forward contracts, interest
rate swaps, or other financial instruments.
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iv. Descriptions of the nature of off-balance sheet arrangements.
v. Descriptions of guarantees, indemnifications, contractual obligations, litigation or
environmental liability cases, and other contingencies, including management’s
qualitative assessments of the entity’s related exposures.
vi. Descriptions of changes in legal or regulatory requirements, such as new tax or
environmental regulations, that have materially impacted the entity’s operations or
fiscal position, or will have a material impact on the entity’s future financial prospects.
vii. Management’s qualitative assessments of the impacts of new financial reporting
standards that have come into effect during the period, or will come into effect in the
following period, on the entity’s financial results, financial position and cash flows.
viii. General descriptions of the business environment and outlook.
ix. Overview of strategy.
x. Descriptions of trends in market prices of key commodities or raw materials.
xi. Contrasts of supply, demand and regulatory circumstances between geographic
regions.
xii. Explanations of specific factors influencing the entity’s profitability in specific
segments.
5. Audit Programme of Movie Theatre Complex:

i. Peruse the Memorandum of Association and Articles of Association of the entity.
ii. Ensure the object clause permits the entity to engage in this type of business.
iii. In the case of income from sale of tickets:
a) Verify the control system as to how it is ensured that the collections on sale of
tickets of various shows are properly accounted.
b) Verify the system of relating to online booking of various shows and the system
of realization of money.
c) Check that there is overall system of reconciliation of collections with the
number of seats available for different shows on a day.
iv. Verify the internal control system and its effectiveness relating to the income from café,
shops, pubs, game zone etc., located within the multiplex.
v. Verify the system of control exercised relating to the income receivable from
advertisements exhibited within the premises and inside the hall such as hoarding,
banners, slides, short films etc.
vi. Verify the system of collection from the parking areas in respect of the vehicles parked
by the customers.
vii. In the case of payment to the distributors verify the system of payment which may be
either through out right payment or percentage of collection or a combination of both.
Ensure at the time of settlement any payment of advance made to the distributor is also
adjusted against the amount due.
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viii. Verify the system of payment of salaries and other benefits to the employees and ensure
that statutory requirements are complied with.
ix. Verify the payments effected in respect of the maintenance of the building and ensure
the same is in order.
x. Verify the insurance premium paid and ensure it covers the entire assets.
6. Factors while establishing Overall Audit Strategy:

Overall audit strategy would involve:
i. Determination of Characteristics of Audit: Identify the characteristics of the
engagement that define its scope.
ii. Reporting Objectives: Ascertain the reporting objectives of the engagement to plan the
timing of the audit and the nature of the communications required.
iii. Team’s Efforts: Consider the factors that, in the auditor’s professional judgment, are
significant in directing the engagement team’s efforts.
iv. Preliminary Work: Consider the results of preliminary engagement activities and,
where applicable, whether knowledge gained on other engagements performed by the
engagement partner for the entity is relevant.
v. Nature, timing and Resources: Ascertain the nature, timing and extent of resources
necessary to perform the engagement.
Benefits of Overall Audit Strategy:
The process of establishing the overall audit strategy assists the auditor to determine such
matter as
i. Employment of Qualitative Resources: The resources to deploy for specific audit areas,
such as the use of appropriately experienced team members for high risk areas or the
involvement of experts on complex matters.
ii. Allocation of Quantity of Resources: The amount of resources to allocate to specific
audit areas, such as the number of team members assigned to observe the inventory
count at material locations, the extent of review of other auditors’ work in the case of
group audits, or the audit budget in hours to allocate to high risk areas.
iii. Timing of Deployment of Resources: When these resources are to be deployed, such
as whether at an interim audit stage or at key cut-off dates.
iv. Management of Resources: How such resources are managed, directed and supervised,
such as when team briefing and debriefing meetings are expected to be held, how
engagement partner and manager reviews are expected to take place (for example, on-
site or off-site), and whether to complete engagement quality control reviews.
7. Basic system of Control:

Internal Checks and Internal Audit are important constituents of Accounting Controls. Internal
check system implies organization of the overall system of book-keeping and arrangement of
Staff duties in such a way that no one person can carry through a transaction and record every
aspect thereof.
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In the given case of Star Fish Hospital, the person-in-charge of inventory inflow and outflow
from the store house is also responsible for purchases and maintaining inventory records. Thus,
one of the basic system of control i.e. internal check which includes segregation of duties or
maker and checker has been violated where transaction processing are allocated to different
persons in such a manner that no one person can carry through completion of a transaction
from start to finish or the work of one person is made complimentary to the work of another
person.
The general condition pertaining to the internal check system may be summarized as under:
• No single person should have complete control over any important aspect of the
business operation. Every employee’s action should come under the review of another
person.
• Staff duties should be rotated from time to time so that members do not perform the
same function for a considerable length of time.
• Every member of the staff should be encouraged to go on leave at least once a year.
• Persons having physical custody of assets must not be permitted to have access to the
books of accounts.
• There should exist an accounting control in respect of each class of assets, in addition,
there should be periodical inspection so as to establish their physical condition.
• Mechanical devices should be used, where ever practicable to prevent loss or
misappropriation of cash.
• Budgetary control should be exercised and wide deviations observed should be
reconciled.
• For inventory taking, at the close of the year, trading activities should, if possible be
suspended, and it should be done by staff belonging to several sections of the
organization.
• The financial and administrative powers should be distributed very judiciously among
different officers and the manner in which those are actually exercised should be
reviewed periodically.
• Procedures should be laid down for periodical verification and testing of different
sections of accounting records to ensure that they are accurate.
8. As per NSA 265, Communicating Deficiencies in Internal Control to Those who charged with
Governance and Management, the auditor shall include in the written communication of
significant deficiencies in internal control -
I. A description of the deficiencies and an explanation of their potential effects; and
II. Sufficient information to enable those charged with governance and management to
understand the context of the communication. In other words, the auditor should
communicate material weaknesses to the management or the audit committee, if any, on a
timely basis.
This communication should be, preferably, in writing through a letter of weakness or
management letter.
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Important points with regard to such a letter are as follows-
a) The letter lists down the area of weaknesses in the system and offers suggestions for
improvement.
b) It should clearly indicate that it discusses only weaknesses which have come to the
attention of the auditor as a result of his audit and that his examination has not been
designed to determine the adequacy of internal control for management.
c) This letter serves as a valuable reference document for management for the purpose of
revising the system and insisting on its strict implementation.
d) The letter may also serve to minimize legal liability in the event of a major defalcation
or other loss resulting from a weakness in internal control.
9. 'Due Diligence' is a term that is often heard in the corporate world these days in relation to
corporate restructuring. The purpose of due diligence is to assist the purchaser or the investor
in finding out all he can, reasonably about the business he is acquiring or investing in prior to
completion of the transaction including its critical success factors as well as its strength and
weaknesses.
Due diligence is an all pervasive exercise to review all important aspects like financial, legal,
commercial, etc. before taking any final decision in the matter. As far as any hidden liabilities
or overvalued assets are concerned, this shall form part of such a review of Financial
Statements.
Normally, cases of hidden liabilities and overvalued assets are not apparent from books of
accounts and financial statements. Review of financial statements does not involve
examination from the view point of extraordinary items, analysis of significant deviations, etc.
However, in order to investigate hidden liabilities, the auditor should pay his attention to the
following areas:
• The company may not show any show cause notices which have not matured into demands,
as contingent liabilities. These may be material and important.
• The Company may have sold some subsidiaries/businesses and may have agreed to take
over and indemnify all liabilities and contingent liabilities of the same prior to the date of
transfer. These may not be reflected in the books of accounts of the company.
• Product and other liability claims; warranty liabilities; product returns/discounts;
liquidated damages for late deliveries etc. and all litigation.
• Tax liabilities under direct and indirect taxes.
• Long pending sales tax assessments.
• Pending final assessments of customs duty where provisional assessment only has been
completed.
• Agreement to buy back shares sold at a stated price.
• Future lease liabilities.
• Environmental problems/claims/third party claims.
• Unfunded gratuity/superannuation/leave salary liabilities; incorrect gratuity valuations.
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• Huge labour claims under negotiation when labour wage agreement has already expired.
• Contingent liabilities not shown in books.
Regularly Overvalued Assets:
The auditor shall have to specifically examine the following areas:
• Uncollected/uncollectable receivables.
• Obsolete, slow non-moving inventories or inventories valued above NRV; huge
inventories of packing materials etc. with name of company.
• Underused or obsolete Plant and Machinery and their spares; asset values which have been
impaired due to sudden fall in market value etc.
• Assets carried at much more than current market value due to capitalization of
expenditure/foreign exchange fluctuation, or capitalization of expenditure mainly in the
nature of revenue.
• Litigated assets and property.
• Investments carried at cost though realizable value is much lower.
• Investments carrying a very low rate of income / return.
• Infructuous project expenditure/deferred revenue expenditure etc.
• Group Company balances under reconciliation etc.
• Intangibles of no value.
10. Data Mining Techniques: It is a set of assisted techniques designed to automatically mine large
volumes of data for new, hidden or unexpected information or patterns.
Data mining techniques are categorized in three ways:
• Discovery,
• Predictive modelling and
• Deviation and Link analysis
It discovers the usual knowledge or patterns in data, without a predefined idea or hypothesis
about what the pattern may be, i.e. without any prior knowledge of fraud. It explains various
affinities, association, trends and variations in the form of conditional logic.
11. Following are the certain illustrative points, Auditors are required to follow during The Audit
of Accounting of Premiums:
Collection of Premium:
• Check whether there is daily reconciliation process to reconcile the amounts collected,
entered into the system and deposited into the bank.
• Check that there is appropriate mechanism to ensure all the collections are deposited
into the Bank on timely basis.
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Calculation of Premium:
• Check that Accounting system, employed by the Company, calculates premium
amounts and its respective due dates correctly.
• Check that system employed as such is equipped to calculate all types of premium
modes correctly.
Recognition of Income:
• Check that premium is recognized only on the basis of ‘Issued Policies’ and not on
underwriting dates.
• Check that there is inbuilt mechanism the system all the premium collected are
correctly allocated all various components of the Policies.
• Check that there is appropriate mechanism in place to conduct reconciliation on daily
basis and reconciling items, if any, are rectified/ followed up.
Accounting of Advance Premium:
• Check, whether system has capability to identify regular and advance premium.
• Check whether there is a process of applying advance premium to a contract when
premium is due.
Reporting of Premium figures to Nepal Insurance Authority:
• Check the methodology for generation of MIS from the system and there is no manual
intervention.
• Check the procedure for Maker/ Checker before finalizing the MIS.
• Check whether there is a reconciliation process between premiums Income as per
financials and as reported.
Other Areas:
• Check whether there are appropriate SOPs developed by the Companies and are strictly
followed by all the departments/ branches of the Company.
• Ensure duly approved Delegation of Authority parameters matrix already in place for
authorization limits.
• Premium recognition and refund of premium are independent processes with adequate
segregation of duties amongst the personnel.
• Check that the Company conducts premium reconciliation on daily basis.
• Check the robustness of interface between administration and accounting system.
12. Difference between Proportional Treaties and Non Proportional Treaties:

Proportional Treaties –
• Proportional treaties are based on pro-rata apportionment of the sum insured, premium and
losses, according to a pre-determined percentage/ratio.
• These treaties can be further classified as Quota Share Treaty, Surplus Treaty, Auto-
Facultative Treaty and pools.
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Non-Proportional Treaties –
• Non-Proportional treaties are characterized by a distribution of liability between the ceding
company and the reinsurer on the basis of losses rather than the sum insured, as is the case
in proportional reinsurance.
• Non-Proportional Treaties can be further classified into Excess of Loss Treaties, Excess of
Loss Cover on Prevent basis, Excess of Loss cover on Non-Prevent basis, Stop Loss
Treaties.
13. Business risks

(i) Leasing of equipment and specialist staff. As Teti Airlines leases its equipment and the
most specialized of its staff from another airline, there is a risk that its equipment and/or pilots
could be withdrawn leaving it unable to operate.
(ii) Conditions of exclusive right. The PAA requires Teti Airlines' aircraft engines be
overhauled biannually. There is a risk that Teti Airlines will be unable to meet this condition,
if the lessor company does not agree to regular overhaul or that it will be too expensive for
Teti Airlines to meet this requirement and it could lose the right to operate, or its exclusivity,
opening it up to competition. There may be other conditions which Teti Airlines has to meet,
such as the two weekly flights being a minimum.
(iii) Necessary service suspension. As Teti Airlines is required to overhaul its engines every
two years, there will be a significant period every two years where Teti Airlines will either
have to incur the cost of leasing other planes (assuming this is possible) or will have to suspend
services. The cost of leasing other planes might be prohibitively expensive or the disruption
to service might mean that conditions relating to the right to operate might not be met. As Teti
Airlines only has one plane, service would also be interrupted if there was an emergency
relating to the plane, such as fire or a crash.
(iv) Age of aircraft. The aircraft being leased is old. This raises operational risks (it may not
always be able to fly due to necessary maintenance), finance risks (it may require regular
repair) and compliance risks (it may not meet environmental or safety standards, now or in
the future).
(v) High proportion of expensive seats. The plane leased by Teti Airlines has a high
proportion of unrequired expensive seats and therefore insufficient (overbooked) cheaper
seats. Although Teti Airlines can appease customers by upgrading them, this means the airline
is operating well below capacity.
(vi) Cargo. The flight route results in the airline carrying a large amount of horticultural
produce. This raises various risks – that Teti Airlines might be liable to passengers if their
cargo degrades in transit, that the airline might be liable for any breaches of law by its
passengers (for example, if prohibited items are transferred into India or Nepal, many
countries prohibit the importation of animals or meat products or plants).
(vii) On-board services. Customers are currently dissatisfied with the food provision on the
flight and there is a risk that food prepared in TIA may become less appealing and even
dangerous when served on a KTM-MUM flight (when it has been prepared a substantial time
earlier, given a 3 hour flight, at least an hour's turnaround time, and time for getting to the
airline in the first place). If the food makes customers ill, Teti Airlines might be faced with
compensation claims.
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(viii) Pricing. There is a complex system of pricing and a large number of sales agents, and
Teti Airlines is at risk of operating at a sales value less than required to cover costs (for
example, if too many of the cheapest tickets are sold).
(ix) Safety. The airline industry has stringent safety conditions and Teti Airlines may face
customer boycott or difficulty in recruiting staff if safety requirements are not met.
(x) Fuel. The aircraft cannot fly without fuel, which can be a scarce or high-cost resource. If
fuel prices escalate due to world conditions, the company might not be able to meet the costs
of operating.
14. In the present case, CA Shaquile O’Niel is unable to obtain sufficient and appropriate audit
evidence with respect to the following:
• The balance confirmation with respect to debtors amounting to Rs. 150 crores is not
available. Further there has been default in payment by the debtors and the provision so
made is not adequate. The audit team is also unable ascertain the carrying value of trade
receivables.
• With respect to 40% of the company’s inventory, neither the physical verification has been
done by the management nor are adequate inventory records maintained. The audit team is
also unable to undertake the physical inventory count as such the value of inventory could
not be verified.
In the above two circumstances the auditor is unable to obtain sufficient appropriate audit
evidence on which to base the opinion, and the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive. Thus, CA Shaquile
O’Niel should give a Disclaimer of Opinion.
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of
Opinion paragraph is as under:
Disclaimer of Opinion
We do not express an opinion on the accompanying financial statements of PQR Ltd. Because
of the significance of the matters described in the Basis for Disclaimer of Opinion section of
our report, we have not been able to obtain sufficient appropriate audit evidence to provide a
basis for an audit opinion on these financial statements.
Basis for Disclaimer of Opinion
We are unable to obtain balance confirmation with respect to the debtors amounting to Rs.
150 crores. Further, there have been defaults on the payment obligations by debtors on the
due dates during the year under audit. The Company has created a provision for doubtful debts
to the tune of Rs. 25 Cr. during the year under audit which is inadequate in the circumstances
of the company. The carrying value of trade receivables could not be ascertained.
Further, in respect of Inventories (which constitutes 40% of the total assets of the company),
during the reporting period, the management has not undertaken physical verification of
inventories at periodic intervals. Also, the Company has not maintained adequate inventory
records at the factory. We were unable to undertake the physical inventory count and as such
the value of inventory could not be verified.
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15. Self Interest Threat: Self-interest threats, which may occur as a result of the financial or other
interests of a professional accountant or of a relative.
Circumstances that may create self-interest threats
• A financial interest in a client or jointly holding a financial interest with a client.
• Undue dependence on total fees from a client.
• Having a close business relationship with a client.
• Concern about the possibility of losing a client.
• Potential employment with a client.
• Contingent fees relating to an assurance engagement.
Self-Review Threat: Self-review threats, which may occur when a previous judgment needs
to be re- evaluated by the professional accountant responsible for that judgment;
Circumstances that may create self-review threats
• The discovery of a significant error during a re-evaluation of the work of the
professional accountant in public practice.
• Reporting on the operation of financial systems after being involved in their design or
implementation.
• Having prepared the original data used to generate records that are the subject matter
of the engagement.
• A member of the assurance team being, or having recently been, a director or officer
of that client.
• A member of the assurance team being, or having recently been, employed by the
client in a position to exert direct and significant influence over the subject matter of
the engagement.
• Performing a service for a client that directly affects the subject matter of the assurance
engagement.
16. The concept of an expectations gap between auditors and the public is a key lens through which
assertions such as this one can be viewed. The first part of the statement would appear to assert
that the auditor is in some way responsible for the failure of a company. This is not the case:
those charged with governance are responsible for risk assessment and risk management. It is
not the role of the auditor to become involved with the entity's risk management processes –
indeed, this could be deemed to constitute a management role, which would compromise the
auditor's independence.
However, it is true that the auditor should gain an understanding of the client's business; this
is a crucial requirement of NSAs. Amongst other things, it is necessary for an auditor to audit
management's assessment of the appropriateness of the going concern assumption, for which
a good understanding of the business risks faced by the client is necessary. The auditor must
judge whether the going concern assumption used is appropriate. However, this is never a
matter of cut-and-dried logic: it is a judgment, based on an assessment of risk. It is in the nature
of risk for there to be uncertainties, and it is in the nature of judgment to contain elements of
doubt.
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It is therefore to be expected that there will be cases where the auditor has judged the going
concern assumption to be appropriate, and yet the company fails within the year. The question
is not whether the assumption was proved correct by subsequent events, but whether the
auditor's assessment was reasonable and in line with auditing standards.
There is more scope for discussion on the question of whether auditors should do more to
highlight problems. This may be the responsibility of management; it would be possible for
regulators and setters of accounting standards to require increased disclosure on going concern.
For example, financial statements could be required to provide more narrative detail regarding
the risks faced by an entity.
At present, auditors should disclose the presence of material uncertainties over going concern
by way of an emphasis of matter paragraph in the auditor's report, and if they deem the
assumption to be inappropriate then the opinion would be modified. It may be possible for
these disclosures to be made clearer than they are, or for auditors to use their report to draw
users' attention to any parts of the financial statements that are significant to the assessment of
going concern.
In conclusion, it is unfair to require auditors to accept the blame for company failures which
are the proper responsibility of management, although it may be argued that more could be
done by auditors to highlight going concern problems where they exist.
17. Chemical leakage

Matters to consider
• The clean-up costs of Rs.0.3m should not have been capitalized as an asset but should
have been written-off to the statement of profit or loss. This amount represents 0.6%
of total assets and 2.5% of profit before tax so is not material but should be adjusted
for in the financial statements.
• The modernization costs of Rs.0.6m represent 1.2% of total assets and 5% of profit
before tax and are therefore material to the accounts. Their capitalization would be
correct in accordance with NAS 16 Property, Plant and Equipment if the expenditure
restores the economic benefits of the refrigeration units.
• The fine of Rs.30,000 incurred by Galley Cold Store is immaterial but has been
correctly written-off to the statement of profit or loss.
Audit evidence
• Invoices to support the clean-up costs and modernization costs
• Correspondence from the regulatory agency to confirm the amount of the fine
• Bank statement and cash book extracts to show payment of the amounts involved
• Board minutes referring to the chemical leakage
• Physical inspection of the refrigeration units to confirm the modernization costs
incurred
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Inventory held by Masu Warehousing
Matters to consider
• Inventory is material to the statement of financial position, comprising 21% of total
assets, therefore the auditors need to obtain sufficient, appropriate audit evidence of its
valuation as at the year end.
• Inventory has increased from the year before by 51% which is very high – the reason
for this increase needs to be investigated further.
• A written representation from management on the value of inventory held at the year-
end is not sufficient audit evidence as there should be other more reliable audit evidence
available to confirm the Rs.10.1 million figure.
• If the inventory figure cannot be adequately verified, this may result in a limitation on
the scope of the audit, and a modification of the auditor's opinion on the grounds of an
inability to obtain sufficient appropriate audit evidence.
• Although the quantity of inventory held by Masu Warehousing can be provided, this
does not provide evidence of its valuation as at the year-end date. Given that inventory
comprises fish, it may be that some of the inventory might be damaged and therefore
its value would be less. Inventory may therefore be overstated in the financial
statements.
Audit evidence
• Written representation from management referring to the value of year-end inventory
• Correspondence between Galley Cold Store and Masu Warehousing regarding the
inventory held by Masu Warehousing on behalf of Galley Cold Store
• Masu's monthly returns of quantities held
• Correspondence relating to the health and safety issues preventing access to cold
storage areas
• Analytical procedures on inventory, such as month by month comparisons to the
previous year, to try to ascertain why the value of inventory has increased so much this
year
Residential apartment
Matters to consider
• The senior sales executive is a related party in accordance with related party disclosures
as he would be a member of key management.
• A related party transaction has therefore occurred by virtue of the senior sales executive
using the residential apartment of the company even though no money has exchanged
hands –a related party transaction is 'a transfer of resources, services or obligations
between a reporting entity and a related party, regardless of whether a price is charged'.
• NAS 24 requires related party transactions to be disclosed in the financial statements
as they are material by their nature. The standard details what is required for disclosure,
but it includes the names of the related parties, the relationships, the amounts involved
and a description of the transactions.
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Audit evidence
• Rental agreement to confirm charge of Rs.3,000 per month and identification of the
other party
• Deeds to confirm ownership of the apartment by Galley Cold Store
• Physical inspection of the apartment to confirm its existence and that it is being
occupied
• A written representation from the directors of Galley Cold Store to confirm all related
party transactions and that there are no others that need to be disclosed
• A written representation from the senior sales executive stating that he is occupying the
apartment rent-free
18. With parallel simulation, the auditor processes real client data on an audit program similar to
some aspect of the client’s program. The auditor compares the results of this processing with
the results of the processing done by the client’s program.
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19. General objectives of operational audit: It includes-
i) Appraisal of Controls.
ii) Evaluation of performance.
iii) Appraisal of objectives and plans and
iv) Appraisal of organizational structure.
i) Appraisal of controls: Operations and the results in which management is interested are
largely a matter of control. If controls are effective in design and are faithfully adhered to
the result that can be attained then they will be subject to the other limiting constraints in
the organization.
ii) Evaluation of performance: In the task of performance evaluation, an operational auditor
is heavily dependent upon availability of acceptable standards. The operational auditor
cannot be expected to possess technical background in so many diverse technical fields
obtaining even in one enterprise. Even when examining or appraising performance or
reports of performance the operational auditor’s mind is invariably fixed on control aspects.
iii) Appraisal of objectives and plans: In performance appraisal, the operational auditor is
basically concerned not so much with how well technically the operations are going on,
but with accumulating information and evidence to measure the effectiveness, efficiency
and economy with which the operations are being carried on.
iv) Appraisal of organizational structure: Organizational structure provides the line of
relationships and delegation of authority and tasks. This is an important element of the
internal control design. In evaluating organizational structure, the operational auditor
should consider whether the structure is in conformity with the management objectives and
it is drawn up on the basis of matching of responsibility and authority. He should also
analyse whether line of responsibility has been fixed, whether delegation of responsibility
or authority is clear and there is no overlapping area.
20. Contents of an Audit Plan: The auditor shall develop an audit plan that shall include a
description of-
• The nature, timing and extent of planned risk assessment procedures, as determined under
NSA 315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment.
• The nature, timing and extent of planned further audit procedures at the assertion level, as
determined under NSA 330, The Auditor’s Responses to Assessed Risks.
• Other planned audit procedures that are required to be carried out so that the engagement
complies with NSAs.
The audit plan is more detailed than the overall audit strategy that includes the nature, timing
and extent of audit procedures to be performed by engagement team members. Planning for
these audit procedures takes place over the course of the audit as the audit plan for the
engagement develops. For example, planning of the auditor's risk assessment procedures
occurs early in the audit process. However, planning the nature, timing and extent of specific
further audit procedures depends on the outcome of those risk assessment procedures. In
addition, the auditor may begin the execution of further audit procedures for some classes of
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transactions, account balances and disclosures before planning all remaining further audit
procedures.
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Paper-4
Corporate Laws
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Nepal Chartered Accountants Act, 2053 & Regulation, 2061
Question No. 1
CA. Innovative is a new member of the Institute of Chartered Accountants of Nepal (ICAN). He
argues that alike registered auditors, the council shall categorize CA members as well into 3 classes
and limit in audit as per their categorization.
Give your opinion upon the validity of his argument pursuant to Nepal Chartered Accountants Act,
2053 & Rules, 2061.
Companies Act, 2063

Question No. 2
Mai Pokhari Travels Pvt. Ltd. is a private company which shareholders are distributed throughout
Nepal. Hence, for convenience of all shareholders, the company is planning to convene its 5th
Annual General Meeting via zoom. However, the chairperson of the company is confused if it can
conduct virtually instead of in-person.
Give your opinion on the validity of the plan of the company for conducting the AGM virtually.
Question No. 3
Birtamode Construction Company Pvt Ltd is a single shareholder private company. Unfortunately,
its shareholder Mr. X died in a plane crash with his wife at Pokhara. The shareholder had a son
Mr. Y and 2 daughters Ms A & Ms. B who were living jointly with their parents. Now, their
relatives are suggesting Mr. Y to get transfer the entire shares of his father Mr. X into his name on
the ground that being the single shareholder company, no any additional person can become its
shareholder and further he is the only son of their parents.
Give your opinion on the validity of the suggestion of the relatives in accordance with the
Companies Act, 2063.
Question No. 4
Kanyam Learning Ground is a company not distributing profit. Due to inconvenience in operation,
members of the company are planning to liquidate the company and donate the remaining assets
to a social organization operating the senior citizen shelter.
Give your opinion regarding the validity of the members’ plan for donating remaining assets to a
social organization in accordance with the Companies Act, 2063.
Securities Act, 2063

Question No. 5
Mr. Expert is an active Facebook user. He wants to buy shares of a listed company XYZ Ltd.
However, its market price is very high in the stock exchange. So, he wrote a misleading statement
in his Facebook page stating that “Market price of XYZ Ltd is going to be decreased drastically
due to internal conflict of management. Hence, in order to preclude loss, it would be better if its
shareholders sell shares as soon as possible”. On the ground of such statement, the Securities Board
of Nepal is planning to conduct an investigation and file case to punish him.
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Give your opinion regarding the validity of SEBON’s plan for imposing such punishment in
accordance with the Securities Act, 2063.
Banks & Financial Institutions Act, 2073

Question No. 6
Tinjure Micro Finance Financial Institution Ltd, a newly licensed financial institution, has earned
a huge amount of surplus in F/Y 2078/79. So, its Board of Directors proposed the Nepal Rastra
Bank for granting approval to declare 20% dividend to its promoter shareholders. However, NRB
refused to grant the approval on the ground that it has not allotted shares to general public yet.
Give your opinion, if the action of NRB to deny approval on such ground is valid in accordance
with Banks & Financial Institutions Act, 2073.
Nepal Rastra Bank Act, 2058

Question No. 7
On the ground Nepal Rastra Bank has monopoly over the issue of banknotes, an agenda for printing
bank notes with denomination of NPR 2,000 was proposed at its recent Board meeting. Favouring
the necessity of such high denominated bank notes, the agenda was passed unanimously. Now, the
Bank is in process of inviting global tender for printing the note.
Give your opinion regarding the validity of the decision made by the Board of Directors of Nepal
Rastra Bank in accordance with Nepal Rastra Bank Act, 2058.
Industrial Enterprises Act, 2076

Question No. 8
Mukumlung Shoes Industry Pvt. Ltd. has been bearing loss for last 7 consecutive years. The
chairperson of the industry heard that an industry with such financial status may be declared as a
sick industry and the sick industry may demand advanced technology to the Government of Nepal
at free of cost. So, in order to revive his industry by claiming those free benefits, he is planning to
declare it as a sick industry by making decision from its Special General Meeting.
Give your opinion regarding the validity of the chairperson’s plan in accordance with Industrial
Enterprises Act, 2076.
Foreign Investment & Technology Transfer Act, 2075

Question No. 9
Mr. Ziang, a Chinese citizen, desires to make foreign investment in Nepal by bringing the share
amount to be invested in gold. However, he is not clear if he can make such investment in gold.
So, suggest him, if he can bring his foreign investment amount in gold. Will your suggestion be
different if he wants to bring the foreign investment amount in Nepalese currency?
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Labour Act, 2074
Question No. 10
Ms. Active had been working properly at an enterprise for last 3 years. Suddenly, the general
manager of the enterprise handed over her an employment termination letter with a notice that she
need not continue her employment with effect from the next day. She argues that how her
employment can be terminated so easily providing just 1 day prior notice.
Now, give your opinion, if the argument of Ms. Active is valid in accordance with the Labour Act,
2074. Will your answer be different if Ms. Active had stolen a diamond statue of the enterprise?
Insurance Act, 2079

Question No. 11
Mr. Surprise got information from a newspaper that Insurance Board established under Insurance
Act, 2049 has been converted into Nepal Insurance Authority with the enactment of Insurance Act,
2079. So, he is so curious to know about the power, functions and duties of this new regulatory
body Nepal Insurance Authority.
Enumerate him the power, functions and duties of Nepal Insurance Authority pursuant to Insurance
Act, 2079.
International Financial Transactions Act, 2054

Question No. 12
Naria Trading Company Ltd, a trading company based in Dubai, desires to obtain a license to carry
out international financial transactions under International Financial Transactions Act, 2054.
However, its Board of Directors is not clear about the legal provision regarding the expatriation
and repatriation of foreign currencies.
So, clarify the expatriation and repatriation related legal provision to the Board of Directors of the
company pursuant to International Financial Transactions Act, 2054.
Cooperatives Act, 2074 & Rules, 2075

Question No. 13
Ms. C is a member of XYZ Saving & Credit Cooperative Society Ltd. She had deposited her
savings in the cooperative society. However, the cooperative society has been unable to refund her
savings. So, she is planning to initiate for declaring the cooperative society a problematic one by
making a coalition with other suffered members. However, she is not clear where and how to file
an application for declaring it problematic.
Suggest her circumstances and procedure for declaring a cooperative society problematic in
accordance with Cooperatives Act, 2074.
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Insolvency Act, 2063
Question No. 14
The Court has appointed Ms. Positive as a liquidator of ABC Industry Ltd for conducting its
liquidation proceedings. After 3 months of her appointment, she is planning to make an application
to the Court to implement the restructuring program instead of liquidation. However, a shareholder
of the company objects her plan on the ground the decision of the court to liquidate the company
cannot be challenged.
Now, give your opinion upon the legal validity of the objection made by the shareholder in
accordance with the Insolvency Act, 2063.
Money Laundering Prevention Act, 2064

Question No. 15
Ms. Prana, an investigation officer, arrested Ms. Shun accusing she has been earning money by
committing human trafficking offences. However, the investigation officer had not informed the
Chief of the Department of Money Laundering Department prior to such arrest. So, the chief of
the Department is complaining against the investigation officer that she cannot arrest anyone
without furnishing its prior information to him. The chief is accusing that the investigation officer
is doing what she likes disobeying the law.
Give your opinion regarding the validity of the complaint of the chief of the department in
accordance with the Money Laundering Prevention Act, 2064
Public Procurement Act, 2063 & Rules, 2064

Question No. 16
Mr. Suleman has been working as a procurement manager under Procurement Department of a
public entity. The entity is going to conclude a contract with a commodity vendor. However, he
has no clear idea regarding the terms & conditions to be incorporated in the procurement contract.
So, suggest him the terms & conditions to be included in the procurement contract as prescribed
by the Public Procurement Act, 2063.
Audit Act, 2075

Question No. 17
Sarwangin Agriculture Cooperative Society Ltd has received a grant amount of Rs. 1 crore for
conducting agriculture activities from the Government of Nepal. Meanwhile, the Office of Auditor
General wrote a letter to the cooperative society regarding the initiation of financial audit of the
grant received. However, the Board members of the cooperative society object the audit of the
government grant on the ground that OAG is authorized to audit the government offices and
entities owned by the government only, not their cooperative society.
Give your opinion if the objection of the Board members of the cooperative society is valid in
accordance with Audit Act, 2075.
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Arbitration Act, 2055
Question No. 18
At request of a disputing party Ms. A, their arbitrator made an interim order against Ms. B
prohibiting in meantime for selling her goats which are connected with the dispute. Ms. B being
dissatisfied with such decision claims the arbitrator is not entitled to make any such interim
decision.
Now, give your opinion regarding the validity of the arbitrator’s interim order pursuant to
Arbitration Act, 2055.
Banking Offence & Punishment Act, 2064

Question No. 19
Ms. B has been blacklisted by a commercial bank ABC Bank Ltd due to non-payment of the loan
borrowed by her. The blacklist has not been lifted yet. Later on, she went to XYZ Bank Ltd and
applied for opening a new bank account in order to deposit her savings earned from business.
However, XYZ Bank Ltd refused to open the bank account on the ground her blacklist has not
been lifted yet.
Now, give your opinion whether the action of XYZ Bank Ltd is valid pursuant to the Banking
Offence & Punishment Act, 2064.
Act relating to Institutions acting as Financial Intermediary, 2055

Question No. 20
Makalu Rural Financial Society, a social organization registered under Associations Registration
Act, 2034 at District Administration Office, Sankhuwasabha had been working as a financial
intermediary after obtaining a license from Nepal Rastra Bank. However, it failed to renew its
registration certificate at the concerned District Administration Office on time. So, suddenly it got
a notice from the Nepal Rastra Bank that its license has been cancelled.
Now, give your opinion, if the Nepal Rastra Bank has power to cancel the financial intermediary
license under such circumstance pursuant to Act relating to Institutions acting as Financial
Intermediary, 2055.
Foreign Exchange Regulation Act, 2019

Question No. 21
Mr. New is a business person desiring to involve in the export of Nepali textile to foreign country.
However, he is unknown about the legal provision regarding the payment to be received from the
export of goods.
So, suggest him pursuant to Foreign Exchange Regulation Act, 2019.
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Answers:
Nepal Chartered Accountants Act, 2053 & Regulation, 2061
Answer to Question No. 1
Legal provision:
As per section 30 of the Nepal Chartered Accountants Act 2053, notwithstanding anything
mentioned elsewhere in this Act, the Council, subject to this Act, Regulations and bye-regulations
framed under this Act, shall categorize the Registered Auditors existed at the commencement of
this section and shall issue Certificate of Practice to carry out audit service as per the provisions
of this Act. Provided that such Registered Auditors shall not be deprived of the privileges provided
under the Auditors' Act, 1974.
Further, as per section 30A of the NCA Act, the limit of audit, entitled to a Registered Auditor
member holding a Certificate of Practice categorized pursuant to Section 30, shall be as prescribed
by the council taking approval of the Government of Nepal.
Case:
In the given case, CA. Innovative is a new member of the Institute of Chartered Accountants of
Nepal (ICAN). He argues that alike registered auditors, the council shall categorize CA members
as well into 3 classes and limit in audit as per their categorization.
Analysis:
Section 30 of the NCA Act has mandated the council to categorize only the Registered Auditors
existed at the commencement of this section and issue Certificate of Practice (COP) to carry out
audit service as per the provisions of this Act, not chartered accountant members. In addition,
section 30A of idem Act has entitled the council, taking approval of the Government of Nepal, to
limit audit for Registered Auditor members holding COP categorized pursuant to Section 30, not
chartered accountant members.
Conclusion:
Hence, the argument of CA. Innovative for categorizing CA members as well into 3 classes and
limiting their audit as per their categorization alike registered auditors is not valid in accordance
with section 30 & 30A of the Nepal Chartered Accountants Act, 2053.
Companies Act, 2063

A private company may convene its Annual General Meeting by following the provisions
prescribed under section 150 of the Companies Act 2063 as follows:
(1) Notwithstanding anything contained elsewhere in this Act, if except, as otherwise provided in
the articles of association of a private company, any shareholder of the company makes
communication contact with all shareholders through any communication means and takes part
in communication contact with other shareholders in such a manner that the other shareholders
can hear or read whatever is spoken by every shareholder, every shareholder who so takes part
in such communication contact shall be deemed to have taken part in the general meeting along
with other shareholders.
(2) Notwithstanding anything contained elsewhere in this Section, where any shareholder makes
a complaint/petition accompanied by the prescribed fees, to the Office no later than 3 months
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after the holding of a general meeting, mentioning that he/she has not taken part in the general
meeting, the Office shall inquire into the concerned company; and, in holding such inquiry,
where the company fails to prove that the complainant shareholder has taken part in such
meeting, the decision made by that meeting shall not be valid.
(3) A meeting of shareholders conducted pursuant to Sub-section (1) shall be deemed to have been
conducted in the place where the chairperson of the meeting is present.
(4) The provisions of Sub-section (1), (2) or (3) applicable to the general meeting of a company
shall also apply, mutatis mutandis, to the meeting of directors or a sub-committee of directors
of the company.
(5) After the completion of the general meeting pursuant to Sub-section (1), the chairperson of the
meeting shall prepare minutes of the proceedings and decisions conducted and taken in the
meeting annually and authenticate the same.
In the given case, Mai Pokhari Travels Pvt Ltd is a private company which shareholders are
distributed throughout Nepal. Hence, for convenience of entire shareholders, the company is
planning to convene its 5th Annual General Meeting via zoom. However, the chairperson of the
company is confused if it can conduct virtually instead of in-person.
As per section 150 of the Act, Mai Pokhari Travels Pvt Ltd, unless prohibited by its articles of
association (AOA), may convene its AGM via zoom as well. However, it has to make the zoom
meeting open for oral &/or verbal communication among its entire shareholders so that any
shareholder attended at the meeting may communicate with all other shareholders in such a manner
that the other shareholders can hear or read whatever is spoken by every shareholder.
Hence, the plan of Mai Pokhari Travels Pvt Ltd to convene its 5th Annual General Meeting via
zoom is valid in accordance with section 150 of the Companies Act 2063.

Section 153 of the Companies Act, 2063 prescribes about the following provisions regarding the
transmission of shares of a single shareholder company in the event of death of its shareholder:
(1) In the event of death of the shareholder of a single shareholder company, his/her heir or the
person acquiring the title to his shares shall acquire the right of shareholder, and such heir
or person shall do all such acts inclusive of the transfer and transmissions of shares as the
single shareholder can do under this Act. While making a decision to transfer and transmit
shares, the person so acquiring the title shall make such decision in writing.
Provided, however, that if no heir to such shareholder is found, the Office shall appoint a
liquidator and liquidate the company in accordance with the prevailing law.
(2) A person acquiring the title to shares pursuant to Sub-section (1) shall give information
thereof, accompanied by the evidence of such title, to the Office no later than one month
after the acquisition of such title.
(3) On receipt of the information as referred to in Sub-section (2), the Office shall record the
information by collecting the prescribed fees and give information thereof to the person who
acquires the title to shares.
(4) Where the number of person acquiring the title to shares pursuant to Sub-section (1) is more
than one, they shall be considered to be the directors of company for the time being, except
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where the other heirs transfer the title to only one heir, and the memorandum of association
and articles of association of the company shall be amended on that basis.
Provided, however, that where there arises a question of entitlement, such matter shall be
governed by a judgment of the competent court.
In the given case, Birtamode Construction Company Pvt Ltd is a single shareholder private
company. Its shareholder Mr. X died in a plane crash with his wife. He had a son Mr. Y and 2
daughters Ms. A & Ms. B who were living jointly with their parents. Now, their relatives are
suggesting Mr. Y to get transfer the entire shares of his father Mr. X into his name on the ground
that being the single shareholder company, no any additional person can become its shareholder
and further he is the only son of their parents.
While analysing the given case pursuant to section 153 of the Act:
(1) As per section 153(1) of idem Act, in the event of death of the shareholder Mr. X, his son and
2 daughters Ms. A & Ms. B living jointly being heirs of equal position pursuant to National
Civil Code, 2074 are equally entitled to acquire the right of shareholder. Hence, in addition to
his son Mr. Y, his 2 daughters are also entitled to acquire the share of Birtamode Construction
Company Pvt Ltd equally.
(2) As per section 153(4) of idem Act, though Birtamode Construction Company Pvt Ltd is a
single shareholder company, except where the other 2 heirs viz. Ms A & Ms. B transfer the
title on shares to their brother Mr. Y only, all 3 heirs of Mr. X shall be considered to be the
directors of company for the time being. Then, they have to amend the memorandum of
association and articles of association of the company for converting the single shareholder
company into multiple shareholder company.
Hence, the suggestion of the relatives that only the son of the deceased shareholder is entitled to
acquire his share and the company with single shareholder cannot have more than 1 shareholder
at all is not in accordance with section 153 of the Companies Act, 2063.

Section 167(1) of the Companies Act, 2063 prescribes notwithstanding anything contained in this
Act or the prevailing law, the following matters of a company incorporated pursuant to Section
166 shall be as follows:
(a) There shall not be required share capital to incorporate a company not distributing profits.
Provided, however, that the company may receive membership fees from its members and
receive any donation, gift pursuant to law for the accomplishment of its objectives.
(b) No member of the company shall be liable for the debts and liabilities of the company except
in the case where any member accepts such liability in writing the liability of the company,
with specification of the limit of such liability; his/her liability shall be limited to the extent of
that limit.
(c) All the provisions of this Act as applicable to the listed company, other than those provisions
which may be applicable only to the company with share capital, shall also apply to the
company, its director, officer, auditor and employee.
(d) The company shall not distribute dividend, bonus or any other amount, from the profits earned
by it, to its members or employees; and the profits earned by the company shall be used to
increase the capital of the company or for the attainment of its objectives.
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(e) The company shall obtain prior approval of the Office to change objectives.
(f) Any company not distributing profits shall not be merged with any company distributing
profits.
(g) The members of a company incorporated under this Chapter shall elect the directors from
amongst themselves in such number as fixed in the articles of association, on the basis of one
member one vote.
(h) The meeting allowance, salary, facility receivable by the officers of a company incorporated
under this Chapter and the incorporation and operational expenses of the company shall not
exceed the amount as specified by the Office; and in so specifying expenses, the Office shall
have regard to the capital situation and profits of such company.
Provided, however, that administrative expenses shall not be more than twenty five percent of
total expenses.
(i) In the event of liquidation or cancellation of registration of a company incorporated under this
Chapter, the assets of the company, if any, remaining after the settlement of the debts and
liabilities of the company shall be dealt with as per the provision, if any, contained in its articles
of association, and failing such provision, such assets shall devolve on the Government of
Nepal.
Provided that such assets shall, in no way, devolve on any institution or company where a
promoter or member of such company or his/her close relative or close relative of such relative
is a promoter or member.
In the given case, Kanyam Learning Ground is a company not distributing profit. Due to
inconvenience in operation, members of the company are planning to liquidate the company and
donate the remaining assets to a social organization which is operating the senior citizen shelter.
As per clause (i) of section 167(1) of the idem Act, in the event of liquidation of Kanyam Learning
Ground, the assets of the company, if any, remaining after the settlement of the debts and liabilities
of the company shall be dealt with as per the provision, if any, contained in its articles of
association, and failing such provision, such assets shall devolve on the Government of Nepal.
Provided, however, that the social organization should not have a member or promoter who is a
promoter or member of Kanyam Learning Ground or his/her close relative or close relative of such
close relative.
Hence, as per section 167(1) of idem Act, the plan of members of Kanyam Learning Ground to
donate the remaining assets after its liquidation is valid on the condition:
(1) Its AOA has clearly mentioned about such provision and
(2) The recipient social organization should not have a member or promoter who is already a
promoter or member of liquidating Kanyam Learning Ground or his/her close relative or close
relative of such close relative.
Securities Act, 2063

Section 97 of the Securities Act, 2063 states if a person intentionally commits any of the following
acts to incite others to purchase or sell securities, such a person shall be deemed to have committed
an act of misleading:-
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(a) To make or publish any statements or projection related statements with knowledge that such
a statement is false, misleading or fake,
(b) To hide any fact or information with mala fide intention,
(c) To make or publish a false or misleading statement, promise or projection with mala fide
intention.
Further, section 102 of idem Act prescribes about the following provision regarding the
investigation and filing of a case:
(1) If a complaint is made by any one that any one has committed the offense referred to in Sections
91, 94, 95, 96, 97, 98, 99 and 100 or the Board receives in any manner an information relating
to such an offense or the Board believes that any one has committed such an offense, the Board
may designate any officer as an investigating authority to conduct investigations of the case
relating to such an offense.
(2) The investigating authority designated pursuant to Sub-section (1) shall conduct investigations
as prescribed in relation to such an offense and file a case in the concerned District Court within
35 days after the date of completion of investigations.
(3) The investigating authority designated pursuant to Sub-section (1) may, in the course of
conducting investigation, make necessary inquiry with, take depositions of, any person or body
related with the offense or demand necessary documents, statements and records from such
person or body.
(4) The designated investigating authority shall, in conducting investigation of and filing a case
pursuant to this Section, shall obtain advice of the government attorney.
In the given case, Mr. Expert is an active Facebook user. He wants to buy shares of a listed
company XYZ Ltd. However, its market price is very high in the stock exchange. So, he wrote a
misleading statement in his Facebook page stating that “Market price of XYZ Ltd is going to be
decreased drastically due to internal conflict of management. Hence, in order to preclude loss, it
would be better if its shareholders sell shares as soon as possible”. On the ground of such statement,
the Securities Board of Nepal is planning to conduct an investigation and file case to punish him.
As per section 97 of idem Act, publishing a misleading statement about XYZ Ltd by Mr. Expert
with an intention to incite others to sell its securities shall be deemed to have committed an offense
of misleading. In such case, the Board may designate any officer as an investigating authority to
conduct investigations of the case relating to such an offense and file case to the District Court
under section 102 of the Act.
Hence, in my opinion, the plan of SEBON to conduct an investigation against the misleading
information of Mr. Expert and file case to punish him is valid in accordance with section 97 and
102 of the Securities Act, 2063.
Banks & Financial Institutions Act 2073

As per section 47 of Banks & Financial Institution Act 2073, a bank or financial institution shall
obtain approval of the Nepal Rastra Bank before declaring and distributing dividends. In addition,
no bank or financial institution shall be allowed to declare or distribute dividends to its
shareholders until it recovers all of its preliminary expenses and the losses sustained by it until the
previous year, capital, capital fund, possible loss provision as prescribed by the Rastra Bank and
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for general reserve fund pursuant to Section 44 and until complete sale of shares to be allotted to
the general public.
In the given case, Tinjure Micro Finance Financial Institution Ltd, a newly licensed financial
institution, has earned a huge amount of surplus in F/Y 2078/79. So, its Board of Directors
proposed the Nepal Rastra Bank for granting approval to declare 20% dividend to its promoter
shareholders. However, NRB refused to grant the approval on the ground it has not allotted shares
to general public yet.
As per section 47 of idem Act, the Nepal Rastra Bank is entitled to disallow Tinjure Micro Finance
Financial Institution to declare or distribute dividends to its shareholders until it completes the sale
of shares to be allotted to the general public.
Hence, the action of Nepal Rastra Bank disallowing Tinjure Micro Finance Financial Institution
to declare and distribute dividend until it allots its shares to the general public completely is valid
pursuant to section 47 of the Banks & Financial Institution Act 2073.
Nepal Rastra Bank Act, 2058

Section 52 of the Nepal Rastra Bank Act, 2058 prescribes following provisions regarding the
power of Nepal Rastra Bank to print bank notes in Nepal:
(1) Nepal Rastra Bank shall have monopoly over the issue of banknotes and coins in Nepal. Such
notes and coins shall be legal tenders in Nepal.
(2) The NRB shall issue notes pursuant to Sub-section (1), only against the security, and the
liability of such issued notes shall be equal to the value of property kept as security. At least
50% of the property to be kept as security shall be 1 or more of gold, silver, foreign currency,
foreign securities, and foreign negotiable instruments and the remaining percentage shall be
one or more of the coins (Mohar Double or coins of higher denomination, the Debt Bond issued
by the Government of Nepal (GoN), the promissory note or bills of exchange payable in Nepal
within a maximum of 18 months from the date of repayment by bank. Provided that with the
permission of the GoN the ratio of property kept as security may be at least 40% one or more
of gold, silver, foreign currency, foreign securities, and foreign bills of exchange and the
remaining percentage shall be 1 or more of the coins (Mohar Double or coins of higher
denomination, the Debt Bond issued by GoN, the promissory note or bills of exchange payable
in Nepal within a maximum of 18 months from the date of repayment by bank.
(3) For the purpose of Sub-section (2), the valuation of property shall be made as follows:-
(a) The price of gold at the rate fixed by GoN on the recommendation of the Board;
(b) The price of silver at the rate deemed appropriate by the Board;
(c) The foreign currencies at the exchange rate fixed by the NRB;
(d) The Debt Bond issued by GoN, the foreign securities and negotiable instruments at the rate
deemed appropriate by the Board on the basis of market rates;
(e) Coins at the rate of face value.
(4) The NRB shall issue the bank notes of various denominations as may be necessary. While
issuing banknotes in this way, the pictures appearing in the notes, size and denominations shall
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be as approved by GoN and the pictures invisible at note, internal security arrangements, the
materials for printing banknotes and other materials shall be as decided by the Board of NRB.
In the given case, an agenda for printing bank notes with denomination of NPR 2,000 was proposed
at recent Board meeting of NRB. Favouring the necessity of such high denominated bank notes,
the agenda was passed unanimously.
As per section 52 of idem Act, NRB has power to issue bank notes and coins in Nepal. However,
while issuing banknotes, the denomination shall be as approved by the Government of Nepal.
Decision of the Board of Directors of Nepal Rastra Bank is not enough to print bank notes with
new denomination.
Hence, the decision made by the Board of Directors of NRB for printing bank note of new
denomination NPR 2,000 is invalid in accordance with section 52 of Nepal Rastra Bank Act, 2058
and hence void ab initio.
Industrial Enterprises Act, 2076

As per section 39 of the Industrial Enterprises Act 2079, an industry may be declared as a sick
industry under following circumstances:
(1) If an industry which has been in operation for a minimum of 5 years after the date of
commencement of its commercial production or transaction, and in a capacity that is 3 0 %
or less of its installed capacity for thelast 3 consecutive years because of a circumstance
beyond control but not because of its intentional default or managerial weakness is being
operated in loss for the 3 consecutive years, the Governmentof Nepal may declare such an
industry as a sick industry on the basis of such criteria and on the pursuance of such procedures
as prescribed.
(2) If it appears from the scheme or project proposal submitted by an industry in a state of closure
upon being sick under subsection (1) and study carried out by the Ministry relating to industry
that the industry may revive its operation if certain exemption, facility or concession is
provided to it, the Government of Nepal may provide such exemption, facility or concession
as prescribed for a certain period for the rehabilitation, reconstruction and management of such
an industry.
(3) If a cooperative makes a proposal, with the consent of the investor, for the operation of any
industry declared sick by the Government of Nepal under subsection (1), the industry may be
caused to be operated through such a cooperative subject to the prescribed terms, having regard
to, inter alia, the capacity of thecooperative, appropriateness and feasibility.
Further, as per section 41 of the Act, notwithstanding anything contained in the prevailing laws,
the Government of Nepal may grant exemption in full or in part on duty, fee or tax on any
machinery, tools, or equipment to be imported by an industry identified as a sick industry under
Section 39 or classified under Section 40 for its expansion, re-structuring or diversification.
In the given case, Mukumlung Shoes Industry Pvt Ltd has been bearing loss for last 7 consecutive
years. The Chairperson of the industry heard that an industry with such financial status may be
declared as a sick industry and the sick industry may demand advanced technology to the
Government of Nepal at free of cost. So, in order to revive his industry by claiming those free
benefits, he is planning to declare it as a sick industry by making decision from its Special General
Meeting.
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As per section 39 of idem Act, just bearing loss for last 7 consecutive years is not an enough
condition to declare it as a sick industry. Instead, the industry has to be in operation for a minimum
of 5 years after the date of commencement of its commercial production or transaction and such
loss has to be incurred due to usage of 30% or less of its installed capacity for the last 3
consecutive years because of a circumstance beyond control but not because of its intentional
default or managerial weakness.
Further, it is the Governmentof Nepal, not the special general meeting, who is authorized to declare
such an industry as a sick industry on the basis of such criteria and on the pursuance of such
procedures as prescribed.
In addition, as per section 41 of idem Act, the Government of Nepal may grant exemption in full
or part on duty, fee or tax on any machinery, tools, or equipment to be imported by the sick industry
for its expansion, re-structuring or diversification instead of advanced technology at free of cost.
Hence, the plan of the Chairperson of Mukumlung Shoes Industry Pvt Ltd to declare it as a sick
industry by making decision from its Special General Meeting and demanding advanced
technology at free of cost is not consistent with section 39 & 41 of Industrial Enterprises Act 2076.
Foreign Investment & Technology Transfer Act, 2075

Section 16 of the Foreign Investment & Technology Transfer Act, 2075 prescribes about the legal
provision regarding the way of bringing the foreign investment in Nepal as follows:
(1) Upon obtaining the approval for foreign investment in accordance with Section 15, the
foreign investor shall give information in writing, along with the self-declaration to the effect
that the amount of such investment has been earned from any legitimate source, to the Nepal
Rastra Bank. After giving such information, the foreign investor may bring the amount of
such investment into Nepal.
(2) A foreign investor shall bring the amount to be invested inconvertible foreign currency
through the banking system upon completion of such procedures as determined by the Nepal
Rastra Bank.
Provided that an Indian investor may also make investment of such amount in Indian
currency through the banking channel.
(3) Notwithstanding anything contained in sub-section (3), lease investment referred to in Section
6 and loan investment made by issuing securities referred to in Section 11 shall be as
prescribed.
In the given case, Mr. Ziang, a Chinese citizen, desires to make foreign investment in Nepal by
bringing the share amount to be invested in gold. However, he is not clear if he can make such
investment in gold.
As per section 16(2) of idem Act, Mr. Ziang, a Chinese citizen, needs to bring the foreign
investment in convertible foreign currency through the banking channel.
Hence, Mr. Ziang cannot bring his foreign investment in gold pursuant to section 20 of the Foreign
Investment & Technology Transfer Act 2076. He shall bring the foreign investment amount
exclusively in convertible foreign currency. So, my answer would not be different even if he wants
to bring the foreign investment amount in Nepalese currency.
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Labour Act, 2074
Section 144 of the Labour Act, 2074 prescribes following provisions regarding the period of notice
to be given prior to the termination of the contract:
(1) Prior to terminating the employment relation in any circumstance except when employment
is terminated upon action taken for misconduct, the employer or labour shall give a notice
as follows to each other:
(a)Prior to at least 1 day, in the case of employment for a maximumof 4 weeks,
(b) Prior to at least 7 days, in the case of employment for a periodof 4 weeks to one year,
and
(c)Prior to at least 30 days, in the case of employment for a period of more than 1 year.
(2) Where the employer terminates employment without giving the notice referred to in sub-
section (1), the employer shall pay the amount equal tothe remuneration for the period
requiring the notice to be given to the concerned labour.
(3) Where the labour terminates employment without giving a notice to the employer pursuant
to sub-section (1), the employer may deduct the amount equal to the remuneration for the
period requiring the notice to be so given from the remuneration payable to the concerned
labour.
Further, as per section 131(4) of idem Act, a labour may be dismissed from the service on the
ground of misconduct if he or she steals anyone’s property in the workplace. However, as per
section 135 of idem Act, prior to imposing such punishment on any labour for misconduct, the
authority imposing punishment shall provide such a labour with a notice giving opportunity to
submit clarification within a period of seven days, and such a notice shall clearly state also the
facts of commission of the misconduct and possible punishment imposable if it is proved.
In the given case, Ms. Active had been working properly at an enterprise for last 3 years. Suddenly,
the general manager of the enterprise handed over her an employment termination letter with a
notice that she need not continue her employment with effect from the next day. She argues that
how her employment can be terminated so easily providing just 1 day prior notice.
As per section 144(1) of the Labour Act 2074, in the case of employment for a period of more
than 1 year, prior to terminating the employment relation in any circumstance except when
employment is terminated upon action taken for misconduct, the employer or labour shall give
a 30 days prior notice to counter party. However, if the employer terminates employment without
giving the notice referred to in sub-section (1), the employer shall pay the amount equal to
the remuneration for the period requiring the notice to be given (i.e. 30 days remuneration in the
given case) to the concerned labour.
In addition, as per section 131(4) of idem Act, stealing a diamond statue of the enterprise is a
misconduct attracting dismissal punishment. However, as per section 135 of idem Act, prior to
imposing such dismissal punishment on Ms. Active, the general manger shall provide a notice
giving opportunity to submit clarification within a period of 7 days, clearly stating the facts of
commission of the misconduct and possible punishment imposable if it is proved.
Further, as per section 135 of the idem Act, prior to imposing punishment on any labour for
misconduct, the authority imposing punishment shall provide such a labour with a notice giving
opportunity to submit clarification within a period of seven days, and such a notice shall clearly
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state also the facts of commission of the misconduct and possible punishment imposable if it
is proved.
Hence, being the employment period of Ms. Active more than 1 year, prior notice of at least 30
days would have been provided by the general manager to her. Hence, her argument is valid as
providing 1 day prior notice for the termination of contract even while working properly is not
consistent with section 144 of idem Act. In such event, Ms. Active is entitled to claim
compensation equivalent to salary of 30 days.
In addition, if Ms. Active had stolen a diamond statue of the enterprise, the general manager could
have authority to dismiss her from the employment by allowing at least 7 days period for presenting
clarification. Hence, even if she had done the misconduct, giving one day prior notice of
employment termination without providing opportunity to defend would be invalid pursuant to
section 135 of idem Act.
Insurance Act, 2079

In the given case, Mr. Surprise got information from a newspaper that Insurance Board established
under Insurance Act, 2049 has been converted into Nepal Insurance Authority with the enactment
of Insurance Act, 2079. He is so curious to know about the power, functions and duties of this new
regulatory body Nepal Insurance Authority. So, I will enumerate him the following provisions
prescribed pursuant to section 5 of Insurance Act 2079.
(a) To act as an advisor of the Government of Nepal regarding Insurance,
(b) To draft the National Policy on Insurance and make recommendation to Government of Nepal,
(c) To grant prior approval for the establishment of Insurance company, issue license or revoke
such license,
(d) To formulate necessary bylaws, directives, guidelines or orders for the Insurance Business,
(e) To issues licenses to Insurance Intermediaries, renew and revoke such licenses,
(f) To determine the capital and capital fund,
(g) To prepare and implement the necessary programs to make the insurance business systematic,
regular, competitive and credible,
(h) To conduct or cause to conduct the study, research, trainings, orientation or outreach programs
for the development and expansion of Insurance Business,
(i) To provide the decision on the complaints filed by insured against insurer regarding the
determination of insurance liability,
(j) To settle the disputes concerning various parties of insurance,
(k) To take necessary actions for minimization of risk in insurance business,
(l) To prepare and implement the programs for the development of human resources and for the
promotion of insurance education for the development of insurance business,
(m) To prepare and implement the insurance promotion programs to increase the access to
insurance by all the people,
(n) To promote micro insurance business to ensure the access to insurance of the people with low
income,
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(o) To cooperate, coordinate and exchange information with other governmental, or non-
governmental organizations for the regulation, inspection, supervision and development of
insurance business,
(p) To cooperate with the foreign Insurance Regulatory Agency, international organization and
other organizations that conduct study, research and trainings in insurance,
(q) To represent the Government of Nepal or Authority in international organizations relating
Insurance Regulation and to obtain membership of such organizations,
(r) To operate Fund for protection of policy holder’s interest and carry out or cause to carry out
other necessary activities,
(s) To coordinate with provinces regarding insurance,
(t) To carry out other necessary activities relating insurance as a regulatory agency.
International Financial Transactions Act, 2054

My clarification on legal provision regarding the expatriation and repatriation of foreign currencies
would be as follows:
As per section 6 of the International Financial Transactions Act 2054, no restriction of any kind
shall be imposed on a license holder entity to bring in foreign currencies as may be required for
international financial transactions. In addition, no restriction of any kind imposed by the existing
laws relating to foreign exchange shall apply in relation to a license holder entity.
Further, as per section 7 of idem Act, a license holder entity may repatriate outside Nepal the
foreign currencies earned by it by carrying out international financial transactions and the foreign
currencies brought in by such entity for the purpose of carrying out international financial
transactions. Provided that no property or capital accrued from any illicit or illegal activity shall
be allowed to be repatriated.
Cooperatives Act, 2074 & Rules, 2075

Section 104 of the Cooperatives Act, 2074 prescribes about the following provision regarding the
declaration of a cooperative society as problematic:
(1) In case any society or union is found to have the following circumstance from the inspection
or checking of accounts conducted under this Act, the Registrar may recommend the Ministry
looking after cooperative affairs to declare such society or union as a problematic society
or union:-
(a) Commission of any act against interests of the members;
(b) Failure to fulfil the financial liabilities to be fulfilled by the Society or Union or inability
to bear the liabilities to be borne or occurrence of a situation of inability to make
payment;
(c) Failure to refund the savings of members according to the agreed terms and conditions;
(d) Operation of the Society or Union against this Act or the Rules and Byelaws framed
under this Act;
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(e) Emergence of a situation of probable insolvency of the Society or Union or facing
significantly serious financial crisis;
(f) In case at least 25 members of a Society or Union submitted an application to the
Registrar stating that the Society or Union did not refund the savings amount of
members within the time set to refund and it has been found from investigation that
any of the circumstance situations referred to in clauses (a) to (e) has seem occurred.
(2) In case the recommendation referred to in sub-section (1) is received, the Ministry may
declare such a Society or Union as problematic Society or Union;
(3) Notwithstanding anything contained elsewhere in this Section, in case a Commission formed
by Government of Nepal according to the prevailing laws recommends to declare any
Society or Union as problematic Society or Union or if such a Commission has declared
any Society or Union as a problematic or based on the number of complaints filed in such
a Commissionand on rationality, the Ministry may declare such a Society or Union as
a problematic Society or Union.
In the given case, Ms. C is a member of XYZ Saving & Credit Cooperative Society Ltd. She had
deposited her savings in the cooperative society. However, the cooperative society has been unable
to refund her savings. So, she is planning to initiate for declaring the cooperative society a
problematic one by making a coalition with other suffered members. However, she is not clear
where and how to file an application for declaring it problematic.
Hence, I would suggest that pursuant to section 104 of the Act, at least 25 members including Ms.
C of XYZ Saving & Credit Cooperative Society may submit an application to the Registrar
stating that the Society did not refund the savings amount of members within the time set
to refund and if it has been found from investigation that such circumstance has occurred, the
Registrar may recommend the Ministry looking after cooperative affairs to declare such society
as a problematic society or union.
Insolvency Act, 2063

Section 30 of the Insolvency Act, 2063 prescribes about the following provision regarding the
conversion of liquidation of a company into the restructuring program:
(1) Where, based on the study and examination of the business and assets of the company, nature
of the goods or services to be produced by the company and market potentiality thereof, the
liquidator thinks that the restructuring program of the company can be adopted by a meeting
of creditors and approved, the liquidator may make an application, accompanied by the
reasons, to the Court for an order to keep pending the order on liquidation of company issued
by the Court pursuant to this Act for a certain period of time and to implement the restructuring
program pursuant to this Act.
(2) Where the Court is satisfied with the contents of the application received pursuant to Sub-
section (1), it may issue an order to suspend the order on liquidation of a company issued
previously for any certain period of time and implement the restructuring program.
(3) Where an order is issued pursuant to Sub-section (2), the order shall be implemented pursuant
to this Act.
In the given case, court has appointed Ms. Positive as a liquidator of ABC Industry Ltd for
conducting its liquidation proceedings. After 3 months of her appointment, she is planning to
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make an application to the Court to implement the restructuring program instead of liquidation.
However, a shareholder of the company objects her plan on the ground the decision of the court to
liquidate the company cannot be challenged.
As per section 30 of idem Act, where based on the study and examination of the business and
assets of ABC Industry Ltd, nature of the goods or services to be produced by it and market
potentiality thereof, Ms. Positive thinks that the restructuring program can be adopted by a meeting
of creditors and approved, she may make an application, accompanied by the reasons, to the Court
for an order to keep pending the order on liquidation of company issued by the Court pursuant to
this Act for a certain period of time and to implement the restructuring program pursuant to this
Act.
Hence, in my opinion, the objection of the shareholder that the liquidator cannot file application
for restructuring program even after the decision of court made for conducting liquidation is not
valid pursuant to section 39 of the Act.
Money Laundering Prevention Act, 2063

Section 17 of the Money Laundering Prevention Act, 2063 prescribes about the following
provision regarding detaining suspect under custody for investigation and inquiry:
(1) The investigation officer may, by issuing detention letter, detain the person against whom
proceedings have been initiated as per this Act if there exist sufficient grounds to believe that
such person may demolish or destroy any evidence or create obstruction or adverse influence
in investigation and inquiry proceedings.
(2) Where the investigation and inquiry against the arrestee requires more than 24 hours' time, the
investigation officer shall produce the suspect before adjudicating officer and detain the
suspect as remanded.
(3) The Department shall, while producing the suspect for remand as stipulated under Sub-Section
(2), clearly mention the charges against the detainee, reasons and grounds thereon, description
of suspect's statement, if any, and the reason & basis to detain the suspect for investigation.
(4) If remand is requested for investigation and inquiry pursuant to Sub-Section (3), the
adjudicating officer may, after reviewing the concerned documents and whether or not the
investigation and inquiry has been satisfactory, remand the suspect for 90 days, not exceeding
30 days at a time.
(5) In case remand is requested as per Sub-Section (2), the detainee may petition before the
adjudicating officer thereby stating reasons and grounds for him not to be remanded.
(6) The investigation officer, if requires to arrest, detain in custody or produce the suspect before
adjudicating officer for the extension of detention time pursuant to this section, shall provide
its prior information to the chief of the department.
Provided that, if requires to arrest any person right away, the investigation officer, immediately
after arresting such a person, shall provide its information to the chief of the department as
soon as possible.
In the given case, Ms. Prana, an investigation officer, arrested Ms. Shun accusing she has been
earning money by committing human trafficking offences. However, the investigation officer had
not informed the Chief of the Department of Money Laundering Department prior to such arrest.
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So, the chief of the Department is complaining against the investigation officer that she cannot
arrest anyone without furnishing its prior information to him. The chief is accusing that the
investigation officer is doing what she likes disobeying the law.
As per proviso clause under section 17(6) of idem Act, Ms. Prana is entitled to arrest Ms Shun if
requires even without furnishing prior information to the chief of the department. However,
immediately after arresting her, she shall provide its information to the chief of the department as
soon as possible.
Hence, complain of the chief of the department is not valid at all times in accordance with section
17(6) of the Money Laundering Prevention Act, 2064.
Public Procurement Act, 2063 & Rules, 2064

Section 52 of the Procurement Act, 2063 prescribes about the terms & conditions to be
incorporated in a procurement contract. So, I would suggest Mr. Suleman to include following
terms & conditions in the employment contract of his entity:
(1) In making procurement other than that of low-value one in accordance with this Act, the
public entity shall enter into procurement contract pursuant this Section.
(2) The procurement contract referred to in sub-section (1) shall include the terms and
conditions set forth in the bidding documents, documents relating to proposal and documents
relating to sealed quotation and such terms and conditions may, according to the nature of the
contract, be as follows:
(a) Names and addresses, telephone, fax numbers of the parties to the procurement contract
and their contactpersons for the implementation of the contract,
(b) Scope of the procurement contract,
(c) Description of the documents contained in the procurement contract and the order of
their priority,
(d) Work performance schedule,
(e) Time for supply, time for performance or whether the termcan be extended or not,
(f) The amount of procurement contract or method fordetermining it,
(g) Terms and conditions for the acceptance of goods,construction work or service,
(h) Terms and conditions and mode of payment includingpayment of foreign currency,
(i) Circumstance of force majeure,
(j) If price adjustment can be made, provision thereof,
(k) If the procurement contract can be amended and variationorder can be issued, provision
thereof,
(l) If insurance is necessary, provision relating thereto,
(m) Security as required,
(n) Liquidated damages for the failure of performance withinthe stipulated time,
(o) Provision concerning bonus to be given if work iscompleted before the stipulated period,
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(p) Circumstances in which the procurement contract may beterminated,
(q) Provision whether sub-contracting can be made or not,
(r) Mechanism for the settlement of disputes,
(s) The governing law, and
(t) Other matters as prescribed.
Audit Act, 2075

As per section 3 of the Audit Act 2075, audit of the following bodies shall be performed by the
Auditor general
(a) Government Offices,
(b) Corporate bodies wholly owned by the Government of Nepal, Provincial Government or
Local Level,
(c) Bodies or institutions the audit of which is so specified by the Federal lawas to be performed
by the Auditor General.
The responsible officials of the afore stated bodies shall furnish accounts of incomes and
expenditures and financial statements in accordance with the prevailing law and have the final
audit thereof performed by the Auditor General.
Further, as per section 7 of the Act, the Auditor General may audit any aid and grant amount
receivable by the Government of Nepal, Provincial Government or Local Level under the Federal
law and any aid or grant amount to be provided by the Government of Nepal, Provincial
Government or Local Level. The mode, method, scope, period, matters of examination and reports
thereofshall be as specified by the Auditor General.
In the given case, Sarwangin Agriculture Cooperative Society Ltd has received a grant amount of
NPR 1 crore for conducting agriculture activities from the Government of Nepal. Meanwhile, the
Office of Auditor General wrote a letter to the cooperative society regarding the initiation of
financial audit of the grant received. However, the Board members of the cooperative society
object the audit of the government grant on the ground that OAG is authorized to audit the
government offices and entities owned by the government only. They claim the cooperative society
is neither a government office not owned by the government.
As per section 3 of the Act, the claim of the Board members of Sarwangin Agriculture Cooperative
Society Ltd that the Office of Auditor General is entitled to audit the government offices and
entities owned by the government is right. However, the authority of Auditor General to audit is
not limited to that extent only. As per section 7 of the Act, it may also audit the grant amount of
Rs. 1 crore provided by the Government of Nepal
Hence, in my opinion, the objection of Board members of Sarwangin Agriculture Cooperative
Society Ltd that the Auditor General is not entitled to audit the grant amount received by the
cooperative society is not valid in accordance with section 7 of the Audit Act 2075.
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Arbitration Act, 2055
Section 21 of the Arbitration Act, 2055 prescribes about the powers of arbitrator which are as
follows:
(1) The powers of the arbitrator shall be as follows, except when otherwise provided for in the
agreement:
(a) To direct the concerned parties to appear before him/her to submit documents, and record
their statements as required.
(b) To record statements of the witness.
(c) To appoint expert and seek their opinion or cause examination on any specific issue.
(d) In case party is a foreign national so that the decision pronounced by the arbitrator is not
likely to be implemented for that reason, to obtain a bank guarantee or any other
appropriate guarantee as determined by the arbitrator.
(e) To inspect the concerned place, object, product, structure, production process or any other
related matter which are connected with the dispute on the request of the parties or on
his/her own initiative if he/she so deems appropriate, and in case there is any material or
object which is likely to be destroyed or damaged, to sell them in consultation with the
parties, and keep the sale proceeds as a deposit.
(f) To exercise any specific power conferred by the parties.
(g) To issue preliminary orders or interim or inter locating orders in respect to any matter
connected with the dispute on the request of any party, or take a conditional decision.
(h) To issue certified copy of document.
(i) To exercise the other power conferred by this Act.
(2) Any party which is not satisfied with the order issued by the arbitrator pursuant to Clause (g)
of Sub-section (1) may submit an application to the high court within 15 days, and the decision
made by the High Court shall be final.
In the given case, at request of a disputing party Ms. A, the arbitrator made an interim order against
Ms. B prohibiting in meantime for selling her goats which are connected with the dispute. Ms. B
being dissatisfied with such decision claims the arbitrator is not entitled to make any such interim
order.
As per section 21 of the Act, the arbitrator has power to issue an interim order prohibiting Ms. B,
in meantime, to sell her goats which are connected with the dispute on the request of disputing
party Ms. A.
Hence, in my opinion, the interim order of Arbitrator against Ms. B is valid pursuant to section
21(1) of the Arbitration Act, 2055. If she is dissatisfied with such decision, she may submit
an application to the high court within 15 days pursuant to section 21(2) of the Act.
Banking Offence & Punishment Act, 2064

Section 10 of the Banking Offence & Punishment Act, 2064 prescribes no borrower who has been
blacklisted due to expiry of loan term payable to bank or financial institution shall retain money
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by opening an account with a native or foreign bank or financial institution or continue such
account or operate the account or purchase any movable or immovable assets in any manner or
acquire title or possession over such assets in any manner without settling the dues payable to a
bank or financial institution.
Provided that,
(a) An account may be opened or retain amount in the account up to 30 days for the purpose of
repaying loan and loan may be repaid by cheque.
(b) For the purpose of basic necessary expenses needed for daily living, the borrower may
withdraw from bank accounts maintained in native or foreign up to the limit as prescribed.
In the given case, Ms. B has been blacklisted by a commercial bank ABC Bank Ltd due to non-
payment of the loan borrowed by her. The blacklist has not been lifted yet. Later on, she went to
XYZ Bank Ltd and applied for opening a new bank account in order to deposit her savings earned
from business. However, XYZ Bank Ltd refused to open the bank account on the ground her
blacklist has not been lifted yet.
As per section 10 of idem Act, Ms. B cannot open a new bank account either within or outside the
country without settling the dues payable to ABC Bank Ltd.
Hence, the action of XYZ Bank Ltd for prohibiting Ms. B to open a new bank account is valid in
accordance with section 10 of the Banking Offence & Punishment Act, 2064.
Act relating to Institutions acting as Financial Intermediary, 2055

Section 19 of the Act relating to Institutions acting as Financial Intermediary, 2055 prescribes
about the following provision regarding the cancellation of license:
(1) If any institution violates any direction given pursuant to Section 18, the Bank may warn it or
restrict any act of the institution for reforms. If institution violates such direction for three times
or does any of the following acts, the Bank may suspend or cancel the license of such an
institution.
(a) If the institution abandons the act of financial intermediation,
(b) If the institution misappropriates the funds of the institution or does not use the amount in
the purpose for which it has been obtained,
(c) If the institution has failed to make reforms or make any specific provision in relation to
any activity with specification of the period,
(d) If the institution fails to obtain renewal pursuant to the Association Registration Act, 2034
(1977) and Section 7 of this Act.
(2) Prior to issuing order to cancel the license pursuant to Sub-section (1), the Bank may, if it
considers necessary, make necessary inquiry or examination in relation thereto.
(3) Prior to cancelling the license pursuant to Sub-section (1), the Bank shall give an opportunity
to the concerned institution to submit explanation.
In the given case, Makalu Rural Financial Society, a social organization registered under
Associations Registration Act, 2034 at District Administration Office, Sankhuwasabha had been
working as a financial intermediary after obtaining a license from Nepal Rastra Bank. However, it
114
failed to renew its registration certificate at the concerned District Administration Office on time.
So, suddenly it got a notice from the Nepal Rastra Bank that its license has been cancelled.
As per section 19(1) of the Act, Nepal Rastra Bank is entitled to cancel the license of financial
intermediary on the ground Makalu Rural Financial Society did not renew its registration
certificate at District Administration Office on time. However, as per section 19(3) of the Act, the
NRB should have given an opportunity to Makalu Rural Financial Society for submitting its
explanation.
Hence, in my opinion, Nepal Rastra Bank has power to cancel the financial intermediary license
after providing opportunity to defend pursuant to section 19 of the Act relating to Institutions
acting as Financial Intermediary, 2055.
Foreign Exchange Regulation Act, 2019

In the given case, Mr. New is a business person desiring to involve at export of Nepali textile to
foreign country. However, he is unknown about the legal provision regarding the payment to be
received from the export of goods. Section 9B of the Foreign Exchange Regulation Act, 2019
prescribes about the restricted activities not to be done by the exporter. So, pursuant to the section
9B, I would suggest him to do following activities:
(a) To receive payment for the exported goods through other mode except as prescribed.
(b) To arrange the payment for the exported goods delayed than the period as prescribed.
(c) To do any work in order not to receive payment for total value of the exported goods.
(d) To do any act defying real invoice or any other act pertaining to such an act.
Further, pursuant to section 17(6) of the Act, I will warn him stating that if you commit an offence
in contrary to Section 9B, you shall be charged additionally a fine from the claimed amount of the
exported goods up to two times of the claimed money.
115

CAP-III RTPs June2023 Group-I

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CHARTERED ACCOUNTANCY PROFESSIONAL III

Revision Test Paper

The Institute of Chartered Accountants of Nepal

Total 213,650 99,600 74,450

Equity and Liabilities

Q. No. 2 NFRS 2 Share-based Payment

Q. No. 4 NFRS 8 Operating Segments

Q. No. 5 NFRS 9 Financial Instruments

Q. No. 6 NFRS 9/NFRS 13/ NAS 32

Q. No. 7 NFRS 13 Fair Value Measurement

Q. No. 8 NFRS 15 Revenue from Contracts with Customers

Q. No. 9 NFRS 16 Leases

Q. No. 11 NAS 12 Income Taxes

Q. No. 12 NAS 19 Employee Benefits

Q. No. 13 NAS 23 Borrowing Costs

Q. No. 14 NAS 24 Related Party Disclosure

Q. No. 15 NAS 33 Earnings per Share

Q. No. 16 NAS 36 Impairment of Assets

Q. No. 17 NAS 38 Intangible Assets

Q. No. 18 Value Added Statement

Summarized Statement of Profit or Loss for 2022

Q. No. 19 Public Financial Management

Q. No. 20 Short note:

Working Note 1: Group Structure

Subsidiary (70%) Kanchenjunga Ltd.

Subsidiary (85%) Financial Asset (15%)

Mechi Ltd. Api Ltd.

Working Note 2: Net Assets Calculation

Less: Fair Value of Identifiable Net Assets at

Working Note 5: Disposal of Shares of Api Ltd.

Fair value of remaining interest on Poush end, 2078 3,250

Loss on disposal (A-B) 275

Working Note 7: Pension adjustment

Loss to be charged against retained earnings 85

Working Note 8: Group Retained Earnings

Loss due pension adjustment (85)

Working Note 9: Other Components of Equity

Q. No. 2 NFRS 2 Share-based Payment

ESOP Outstanding Account

Q. No. 4 NFRS 8 Operating Segments

All the segments exceeding 1060 thousands assets are to be reported.

Q. No. 5 NFRS 9 Financial Instruments

Q. No. 6 NFRS 9/NFRS 13/ NAS 32

Step 2: Allocate Issue Costs

Step 3: Re-measure liability using effective interest rate

Q. No. 7 NFRS 13 Fair Value Measurement

Q. No. 8 NFRS 15 Revenue from Contracts with Customers

Q. No. 10 NAS 2 Inventories

Q. No. 11 NAS 12 Income Taxes

Q. No. 12 NAS 19 Employee Benefits

Computation of Actual Return on Plan Assets

Computation of Net Actuarial Gain

Q. No. 13 NAS 23 Borrowing Costs

2. Calculation of weighted average rate of interest on general borrowings

Q. No. 15 NAS 33 Earnings per Share

EPS for the year 2077/78 restated for right issue:

= (Rs. 300 X 30,000,000 shares) + (Rs. 250 X 7,500,000 shares)

Q. No. 17 NAS 38 Intangible Assets

Accumulated amortization till 1 Shrawan 2078

Carrying amount of trademark as at 1 Shrawan 2078 3,000,000

Carrying Amount as at 32 Ashadh, 2079 2,000,000

Recoverable Amount (Rs.) 1,000,000

Q. No. 18 Value Added Statement