Paper 1: Advanced Financial Reporting

Attempt all questions. Working notes should form part of the answers.
1. Following are the draft statements of financial position of H Company, S Company and P
Company as at Ashadh end 2078:
Statement of Financial Position as at Ashadh end 2078

H Company S Company P Company

Rs. '000 Rs. '000 Rs. '000
Assets
Non-current Assets
Property, plant and equipment 22,520 14,180 12,140
Investment in:
S Company 5,880 - -
P Company 1,980 6,000 -
30,380 20,180 12,140
Current Assets 18,420 12,880 9,280
Total Assets 48,800 33,060 21,420
Equity and Liabilities
Equity
Equity shares of Rs. 0.50 each 9,280 7,660 7,260
Other components of equity 4,240 3,420 3,040
Retained Earnings 6,900 1,500 2,400
Total Equity 20,420 12,580 12,700
Liabilities
Non-current Liabilities 18,260 12,700 6,880
Current Liabilities 10,120 7,780 1,840
Total Liabilities 28,380 20,480 8,720
Total Equity and Liabilities 48,800 33,060 21,420
You are a group financial controller of H Company. The finance director of S Company has told
you that the company has been given a contract to construct a dry port at a price of Rs. 40,000,000.
The construction is expected to take 24 months starting on 1 st Bhadra 2078. He further said that
the company is, however, experiencing a decline in its profitability which might adversely affect
its chance to secure a loan required to fund the construction. He has thus, suggested to recognize
income expected from construction in the company’s financial statements for the year to Ashadh
end 2078 though he is not sure of issues this might raise.
The following information is relevant in the preparation of group accounts:
i. H acquired 90% equity shares of S and 20% equity shares of P on 1st Shrawan 2074 for a cash

Page 4 of 70
 consideration of Rs. 8,820,000 and Rs. 1,980,000 respectively. On the date of acquisition, the
fair value of S's identifiable net assets stood at Rs. 9,500,000 while its other components of
equity and retained earnings were Rs. 1,220,000 and Rs. 500,000 respectively. The excess in
fair value relates to non-depreciable land. The fair value of non-controlling interest on 1st
Shrawan 2074 was Rs. 980,000. H's 20% holding in P did not give rise to significant influence.
ii. S acquired 60% equity shares of P on 1st Shrawan 2075 for a cash consideration of Rs.
6,000,000. The fair value of identifiable net assets of P stood at Rs. 9,720,000. On the same
date, other components of equity and retained earnings were Rs. 1,640,000 and 1,000,000
respectively. Other components of equity and retained earnings had been Rs. 1,240,000 and
Rs. 600,000 respectively on 1st Shrawan 2074. Any difference between the fair value and
carrying amounts of the identifiable net assets relate to an item of plant which had a remaining
useful economic life of 4 years on 1st Shrawan 2074 and 3 years on 1st Shrawan 2075. The fair
values on non-controlling interests (26%) and 20% shareholding in P as at 1st Shrawan 2075
were Rs. 2,580,000 and Rs. 2,100,000 respectively.
iii. On Ashadh end 2078, H disposed off 30% equity holding in S for cash consideration of Rs.
3,800,000. This left H’s equity interests in S at 60%. This transaction was correctly recorded
in H’s individual books.
iv. S and P have not issued any additional shares since acquisition by H. Further, fair value
adjustments referred to in (a) and (b) above have not been incorporated in the above
statements of financial position.
v. Goodwill in S has been impaired by Rs. 100,000 as at Ashadh end 2078. However, goodwill
in P has not been impaired since its acquisition.
vi. It is the group policy to value non-controlling interests at fair value at the date of acquisition.
Required: (2+16+2=20 marks)
a) Calculate profit on disposal of 30% equity interests in S for inclusion in separate financial
statements of H group for the year to Ashadh end 2078.
b) Prepare the consolidated statement of financial position of H group as at Ashadh end 2078.
c) Comment on the treatment of contract revenue as suggested by finance director of S.
Answer
a) Calculation of profit on disposal of 30% equity interest in S:
Rs. '000
Consideration received 3,800
Share of cost of investment disposed off
(30/90)% X 8,820 (2,940)
Profit 860

b) H Company Group
Consolidated Statement of Financial Position as at Ashadh end 2078
Rs. '000
Assets

Page 5 of 70
 Non-Current assets
Property, plant and equipment (WN1) 48,960
Goodwill (WN2) 560
49,520
Current Asset (18,420 + 12,880 + 9,280) 40,580
Total Assets 90,100

Equity and Liabilities

Equity
Equity shares of Rs. 0.50 each 9,280
Other components of equity (WN3) 4,836
Retained Earnings (WN5) 8,140
22,256
Non - Controlling interests (WN6) 10,264
Total Equity 32,520
Liabilities
Non-current liabilities (18,260+12,700+6,880) 37,840
Current liabilities (10,120 + 7,780 + 1,840) 19,740
Total Liabilities 57,580
Total Equity and Liabilities 90,100
c) S is required to prepare its financial statements in accordance with applicable Nepal Financial
Reporting Standards and other generally accepted standards. Recognising income from the
construction contract in the financial statements for the year to Ashadh end 2078 would be against
the principles contained in NFRS 15, Revenue from Contracts with Customers which requires
revenue to be recognised as control is passed, either over time or at a point in time. This has not
happened as construction works have not even commenced and hence the income from construction
not recognized in the financial statements for the year to Ashadh end 2078.
Working Notes:
WN
1) PPE
Rs. '000
Given amounts:
H 22,520
S 14,180
P 12,140
Adjustments:
FV gain on acquisition of:
Page 6 of 70
 S [9,500 - (7,660 + 1,220 + 500)] 120
P [9,720 - (7,260 + 1,640 +1000)] (180)
Accumulated FV depreciation:
P [180/60 X 60] 180
PPE to report 48,960

WN
2) Goodwill on acquisition of:
S Company:
Rs. '000
Cost of acquisition 8,820
NCI at acquisition 980
FV of identifiable NA at acquisition (9,500)
Goodwill at acquisition 300
Impairment losses to date (100)
Goodwill to report 200
P Company:
Rs. '000
Cost of acquisition
Direct (FV of 20% shareholding as on 1/4/2075) 2,100
Share of direct subsidiary's cost (90% X 6,000) 5,400
NCI at acquisition [26% holding] 2,580
FV of identifiable NA at acquisition (9,720)
Goodwill at acquisition 360
Impairment losses to date -
Goodwill to report 360
Total Goodwill to report 560

WN
3) Other Components of Equity (OCE)
Rs. '000
H Company 4,240
Share of post-acquisition OCE of:
S 90% [3,420 - 1,220] 1,980
P 74% [3,040 - 1,640] 1,036

Page 7 of 70
 Net adjustment in Equity on reducing holding in S:
Disposal Proceeds 3,800
Net assets at transferred to NCI in:
S [WN4] (3,870)
P [WN4] ([2,350) [2,420] 596
OCE 4,836

WN
4) Net Assets transferred to NCI on reducing holding in :
Rs. '000
S Company:
Net assets at Ashadh end 2078 12,580
FV gains at acquisition 120
Goodwill at acquisition less impaired amount 200
Net assets at Ashadh end 2078 attributable to S 12,900
Net assets attributable to increase in NCI in S = 12,900 X 30% 3,870

P Company:
Net assets at Ashadh end 2078 12,700
FV losses at acquisition (180)
Accumulated FV depreciation 180
Goodwill at acquisition less impaired amount 360
Net assets at Ashadh end 2078 13,060
Net assets attributable to increase in NCI = 13,060 X 18% 2,350

WN
5) Retained Earnings:
Rs. '000
H Company 6,900
Share of post-acquisition OCE of:
S 90% [1,500 - 500) 900
P 74% [2,400 - 1,000) 1,036
Accumulated FV depreciation (P Company) (180 X 74%) 134
Reversal of gain on disposal of holding in S reported in separate
FS of H [see part (a) above] (860)
Goodwill impairment losses - S (90% X 100) (90)

Page 8 of 70
 Gain on re-measurement of earlier holding in P on gaining
control [2,100 - 1,980] 120
Retained Earnings 8,140

WN
6) Non-Controlling Interest [NCI]
Rs. '000
S Company:

At acquisition 980
Post-acquisition changes
Retained earnings 10% [1,500 - 500] 100
OCE 10% [3,420 - 1,220] 220
Goodwill losses 10% X 100 (10)
H's share of S Company's cost of investment in P 10% X 6,000 (600)
Increase in NCI on H reducing holding in S [see above] 3,870
NCI in S company 4,560

P Company:

At acquisition 2,580
Post-acquisition changes
Retained earnings 26% [2,400 - 1,000] 364
OCE 26% [3,040 - 1,640] 364
Accumulated FV depreciation 26% X 180 46
Increase in NCI in P on H reducing holding in S [see above] 2,350
NCI in P company 5,704
Total NCI 10,264
2.
a) H Ltd. has the following assets and liabilities as at 31st Ashadh, 2076 prepared in accordance
with previous GAAP:
Particulars Notes Amount (Rs.) Amount (Rs.)
Property, plant and equipment i 13,450,000
Investments in S Ltd. ii 4,800,000
Current assets 6,049000
Total assets 24,299,000
Page 9 of 70
 Deferral loan iii 6,000,000
Current liabilities and provisions 5,000,000
Total liabilities 11,000,000
Share capital 13,000,000
Reserves: 299,000
Cumulative translation difference iv 100,000
ESOP reserve v 20,000
Retained earnings 179,000
Total equity 13,299,000
Total equity and liabilities 24,299,000
The following GAAP differences were identified by the company on first-time adoption of NFRS
with effect from 1st Shrawan, 2076:
i. In relation to property, plant and equipment:
 Land held for capital appreciation purposes costing Rs. 450,000 was classified as
investment property as per NAS 40.
 Exchange differences of Rs. 100,000 were capitalized to depreciable property, plant
and equipment on which accumulated depreciation of Rs. 40,000 was recognized.
 There were no asset retirement obligations.
 The management intends to adopt deemed cost exemption for using the previous GAAP
carrying values as deemed cost as at the date of transition for PPE and investment
property.
ii. The company had made an investment in S Ltd. (subsidiary of H Ltd.) for Rs. 4,800,000
that carried a fair value of Rs. 6,800,000 as at the transition date. The company intends
to recognize the investment at its fair value as at the date of transition.
iii. The deferral loan of Rs. 6,000,000 was obtained on 31 st Ashadh, 2076, for setting up a
business in a backward region with a condition to create employment for local
population of that region. The loan does not carry any interest and is repayable in full
at the end of 5 years. While discounting at 10%, (the incremental borrowing rate), the
fair value of the loan as at 31 st Ashadh, 2076, is Rs. 3,725,528. The company chooses to
exercise the option given in NFRS 1, to apply the requirements of the Standard
retrospectively as necessary information had been obtained at the time of initially
accounting for deferral loan.
iv. The company had a non-integral foreign branch and had recognized a balance of Rs.
100,000 as cumulative translation difference. On first- time adoption of NFRS, the
company intends to avail NFRS 1 exemption of restating the cumulative translation
difference to zero.
v. The company had granted 1,000 options to employees out of which 800 have already
vested. It followed an intrinsic value method for recognition of ESOP charge and
recognized Rs. 12,000 towards the vested options and Rs. 8,000 over a period of time as
ESOP charge and a corresponding reserve. If fair value method had been followed in
accordance with NFRS 2, the corresponding charge would have been Rs. 15,000 and Rs.
9,000 for the vested and unvested shares respectively. The company intends to avail the
Page 10 of 70
 NFRS 1 exemption for share-based payments for not restating the ESOP charge as per
previous GAAP for vested options.
Required: 10 marks
Prepare the opening statement of financial position of H Ltd. after providing for necessary
adjustment. Give necessary explanation as appropriate.
b) An asset is sold in two different active markets (Biratnagar and Kathmandu) at different
prices. Hama Ltd. enters into transactions in both markets and can access the price in those
markets for the asset at the measurement date.
In Biratnagar market, the price that would be received is Rs. 290, transaction costs are Rs.
40 and the costs to transport the asset to that market are Rs. 30. Thus, the net amount that
would be received is Rs. 220.
In Kathmandu market, the price that would be received is Rs. 280, transaction costs are Rs.
20 and the costs to transport the asset to that market are Rs. 30. Thus the net amount that
would be received is Rs. 230.
Required: (8+2=10 marks)
i) What should be the fair value of the asset if Biratnagar market is the principal market?
What should be the fair value if none of the markets are principal market?
ii) If the net realization after expenses is more in export market, say Rs. 280 but Government
allows only 15% of the production to be exported out of Nepal. How would the fair value
be measured in such case? Discuss.
Answer
a)
Opening Statement of Financial Position of H Ltd. (NFRS based)
(Rs.)
Particular Notes Previous Adjustment NFRS
GAAP
Non-Current Assets:
Property, plant and equipment i 13,450,000 (450,000) 13,000,000

Investment property i 0 4,50,000 4,50,000

Investment in S Ltd. ii 4,800,000 2,000,000 6,800,000
Current Assets 6,049,000 6,049,000
Total assets 24,299,000 2,000,000 26,299,000
Non-current Liabilities
Deferral loan iii 6,000,000 (2,274,472) 3,725,528
Deferred government grant iii 0 2,274,472 2,274,472

Current Liabilities & Provisions 5,000,000 5,000,000

Total liabilities 11,000,000 11,000,000
Share capital 13,000,000 13,000,000
Page 11 of 70
 Reserves:
Cumulative translation difference iv 100,000 (100,000) 0

ESOP reserve v 20,000 1,000 21,000

Retained earnings vi 179,000 2,099,000 2,278,000
Total equity 13,299,000 2,000,000 15,299,000
Total equity and liabilities 24,299,000 2,000,000 26,299,000

Notes:
i. Property, plant and equipment: As the land was held for capital appreciation purpose, it
qualifies as investment property. Such property should be reclassified as to investment property
and presented separately. As the company has adopted the previous GAAP carrying values as
deemed cost, all items of PPE and investment property should be carried at its previous GAAP
carrying values. As such, the past capitalized exchange differences require no adjustment in
this case.
ii. Investment in subsidiary: On first time adoption of NFRS, a parent company has an option
to carry its investment in subsidiary at fair value as at the date of transition in its separate
financial statements. As such, the company can recognize such investment at a value of Rs.
6,800,000.
iii. Financial instruments: As the deferral loan is a financial liability under NAS: Financial
Instrument, that liability should be recognized at its present value discounted at an appropriate
discounting factor. Consequently, the deferral loan should be recognized at Rs. 3,725,528 and
the remaining Rs. 2,274,472 would be recognized as deferred government grant.
iv. Cumulative translation difference: As per NFRS 1, the first- time adopter can avail an
exemption regarding requirements of NAS 21 in context of cumulative translation differences.
If a first-time adopter uses this exemption the cumulative translation differences for all foreign
operation are deemed to be zero as at the transition date. In that case, the balance is transferred
to retained earnings. As such, the balance of Rs. 100,000 should be transferred to retained
earnings.
v. ESOPs: NFRS 1 provides an exemption of not restating the accounting as per the previous
GAAP in accordance with NFRS 2 for all options that have vested by the transition date.
Accordingly, out of 1000 ESOPs granted, the first-time adoption exemption is available on 800
options that have already been vested. As such, its accounting need not be restated. However,
the 200 options that are not vested as at the transition date, need to be restated in accordance
with NFRS 2. As such, the additional impact of Rs. 1,000 (i.e., 9,000 less 8,000) would be
recognized in the opening NFRS balance sheet.
vi. Retained earnings:
Rs.
As per previous GAAP 179,000
Increase in fair value of investment in subsidiary (note ii) 20,000,000
Transfer of cumulative translation difference balance to retained earnings 1,00,000
(note v)
Additional ESOP charge on unvested options (note iv) (1,000)
Page 12 of 70
 As per NFRS 2,278,000
b)
i) If Biratnagar market is the principal market:
If Biratnagar is the principal market for the asset (i.e. the market with the greatest volume and
level of activity for the asset), the fair value of the asset would be measured using the price that
would be received in that market, after taking into account transportation costs. So the fair
value will be:
Rs.
Price receivable 290
Less: Transportation cost (30)
Fair value of the asset 260
If neither of the market is the principal market:
If neither of the market is the principal market for the asset, the fair value of the asset would be
measured using the price in the most advantageous market. The most advantageous market is
the market that maximizes the amount that would be received to sell the asset, after taking into
account transaction costs and transportation costs (i.e. the net amount that would be received
in the respective markets)
Rs. Rs.
Biratnagar Market Kathmandu Market
Net amount to be received 220 230
Since the entity would maximize the net amount that would be received for the asset in
Kathmandu market i.e. Rs. 230 the fair value of the asset would be measured using the price in
Kathmandu market. Fair value in such a case would be:
Rs.
Price receivable 280
Less: Transportation cost (30)
Fair value of the asset 250
ii) Export prices are more than the prices in the principal market and it would give highest return
comparing to the domestic market. Therefore, the export market would be considered as most
advantageous market. But since the government has capped the export, maximum up to 15%
of total output, maximum sale activities are being done at domestic market only i.e. 85%. Since
the highest level of activities with highest volume is being done at domestic market, principal
market for asset would be domestic market. Therefore, the prices received in domestic market
would be used for fair valuation of assets.
3.
a) N Ltd. is an investment holding company whose main objective is to maximise shareholders'
wealth by investing in a portfolio of investees from different industries in order to diversify risk,
and at the same time, carefully selecting highly profitable businesses.
The directors of N Ltd. require advice on the accounting treatment of the following issue in
finalising the financial statements for the period:

Page 13 of 70
 On 1st Shrawan 2077, N Ltd. issued 2 million, Rs. 100, 10% loan coupons at par. Issue costs
amounted to 1% of the gross issue proceeds. The general market interest rate on 1 st Shrawan,
2077 was 10% (and was also equal to the interest rate specific to N Ltd. reflecting the company’s
credit rating). The loan coupons pay interest on Ashadh end each year over their term and are
redeemable at par on Ashadh end 2080. The issue was aimed at financing a portfolio of investment
assets whose returns are normally assessed with reference to changes in fair value. Consequently,
in order to avert an accounting mismatch or measurement basis for those assets and the loan
coupons liability, N Ltd. has designated the loan coupons as a fair value through profit or loss
(FVTPL) in accordance with NFRS 9. The fair value (after paying the interest due on that date)
of each loan coupons at Ashadh end 2078 was Rs. 101 whilst the general market interest rate at
that date was 10.5%.
Required: 10 marks
Advise the directors of N Ltd. on the above issue stating the appropriate accounting treatment in
accordance with NFRS and computing amounts to report in the financial statements for the year
to Ashadh end 2078.
b) X Ltd. prepares consolidated financial statements to 31st Ashadh each year. During the year ended
31st Ashadh 2077, the following events affected the tax position of the group: 10 marks
1. Y Ltd., a wholly owned subsidiary of X Ltd., made a loss, adjusted for tax purposes, of Rs.
3,000,000. Y Ltd. is unable to utilize this loss against previous tax liabilities. Income Tax Act
does not allow Y Ltd. to transfer the tax loss to other group companies as well. However, it
allows Y Ltd. to carry the loss forward and utilize it against company's future taxable profits.
The directors of X Ltd. do not consider that Y Ltd. will make taxable profits in the foreseeable
future.
2. Just before 31st Ashadh 2077, X Ltd. committed itself to closing a division after the year end,
making a number of employees redundant. Therefore, X Ltd. recognized a provision for closure
costs of Rs. 2,000,000 in its statement of financial position as at 31st Ashadh 2077. Income Tax
Act allows deductions for closure costs only when the closure actually takes place. In the year
ended 31st Ashadh 2078, X Ltd. expects to make taxable profits which are well in excess of Rs.
2,000,000. On 31st Ashadh 2078, X Ltd. had taxable temporary differences from other sources
which were greater than Rs. 2,000,000.
3. On the 30th Chaitra 2076, X Ltd. capitalized development costs which satisfied the criteria of
NAS 38 'Intangible Assets'. The total amount capitalized was Rs. 1,600,000. The development
project began to generate economic benefits for X Ltd. from 1st Shrawan 2077. The directors
of X Ltd. estimated that the project would generate economic benefits for five years from that
date. The development expenditure was fully deductible against taxable profits for the year
ended 31st Ashadh 2077.
4. On 1st Shrawan 2076, X Ltd. borrowed Rs. 10,000,000. The cost to X Ltd. of arranging the
borrowing was Rs. 200,000 and this cost qualified for a tax deduction on 1st Shrawan 2076.
The loan was for a three-year period. No interest was payable on the loan but the amount
repayable on 31st Ashadh 2079 will be Rs. 13,043,800. This equates to an effective annual
interest rate of 10%. As per the Income Tax Act, a further tax deduction of Rs. 3,043,800 will
be claimable when the loan is repaid on 31st Ashadh 2079.
Required:
Explain and show how each of these events would affect the deferred tax assets/liabilities in the
consolidated balance sheet of X Ltd. group at 31st Ashadh 2077 as per NAS. Assume the rate of
corporate income tax to be 20%.
Answer
Page 14 of 70
a) N Ltd. has classified the loan coupon as a FVTPL liability. They will, therefore, be initially,
measured at their fair value of Rs. 100 per coupon excluding transaction costs in accordance with
NFRS 9 (on Shrawan 01, 2077). Transaction costs of 1% X 2 million X Rs. 100 i.e. Rs. 2 million
will be expensed in P/L for the year the contract is entered that is year-end to Ashadh end 2078.
Subsequently, the Loan coupon liability will be remeasured to their fair value at each reporting
date. Therefore at Ashadh end 2078, their carrying amount in the SFP will be Rs. 202 million (i.e.
Rs. 101 per coupon X 2 million coupon). Re-measurement gains and losses are primarily reported
in P/L. However, any re-measurement gain or loss that arises from changes in the credit worthiness
of the entity are reported in OCI.
Amounts to report in the SPLOCI for the year end to Ashadh end 2078 will therefore be as
follows:
Statement of Profit or Loss & Other Comprehensive Income
Rs. '000
Transaction Costs on entering the contract (1% X Rs. 100 X 2
million coupon) (2,000)
Finance Cost on Carrying amount during the year Rs. 100 X 2
million X 10% (20,000)

Re-measurement Gain for the year (WN2) 1,720

Net loss on the FVTPL liability (20,280)

OCI

Re-measurement Loss for the year (WN3) (3,720)

Workings Notes:
1) Expected Fair Value of loan coupons at Ashadh end 2078 without changes in credit rating:
The expected fair value equals the present value of the future loan coupon cash flows, i.e. after
Ashadh end 2078, discounted at the specific interest rate at Ashadh end 2078 if the credit rating did
not change. At 1st Shrawan 2077, the specific interest rate was equal to the general market interest
rate. If N Ltd.'s credit rating at Ashadh end 2078 was the same as at 1st Shrawan 2077, the specific
interest rate would also be equal to the general interest rate at Ashadh end 2078 i.e. at 10.5%. The
expected fair value of each coupon would therefore be as follows:
Date (Ashadh PV factor @
end) Cash flow Rs. 10.5% PV

2079 (Rs. 100 X 10%) 10 0.905 9.05

2080 (100 + 10) 110 0.819 90.09
Expected FV at Ashadh end 2078 99.14
2) Re-measurement gain due to general changes in market interest rates (amount to report in P/L):

Page 15 of 70
 Rs. '000

Expected fair value at Ashadh end 2078 = 99.14 X 2 million 198,280

Carrying amount before re-measurement (200,000)

Gain due to general changes in market interest rates 1,720

3) Re-measurement loss due to changes (specific interest rate) in credit rating:

Rs. '000

Expected FV (Rs. 99.14 × 2 million) 198,280

FV at year ending Ashadh 2078 (Rs. 101 × 2 million) 202,000

Loss due to changes in credit rating (3,720)
b)
i. The tax loss creates a potential deferred tax asset for the year because since its carrying value
is nil and its tax base is Rs. 3,000,000.
However, no deferred tax asset can be recognized because there is no prospect of company
being able to reduce tax liabilities in the foreseeable future as no taxable profits are anticipated.
ii. The provision creates a potential deferred tax asset for the group since its carrying value is Rs.
2,000,000 and its tax base is nil.
The deferred tax asset can be recognized because X Ltd. is expected to generate taxable profits
in excess of Rs. 2,000,000 in the year to 31st Ashadh, 2078.
The amount of the deferred tax asset will be Rs. 400,000 (Rs. 2,000,000 x 20%).
This asset will be presented as a deduction from the deferred tax liabilities caused by the
(larger) taxable temporary differences.
iii. The development costs have a carrying value of Rs. 1,520,000 (Rs. 1,600,000 - (Rs. 1,600,000
x 1/5 x 3/12) as on 31st Ashadh 2077.
The tax base of the development costs is nil since the relevant tax deduction has already been
claimed.
The deferred tax liability will be Rs. 304,000 (Rs. 1,520,000 x 20%). All deferred tax liabilities
are shown as non-current.
iv. The carrying value of the loan at 31st Ashadh, 2077 is Rs. 10,780,000 (Rs. 10,000,000 - Rs.
200,000 + (Rs.9,800,000 x 10%).
The tax base of the loan is Rs.10,000,000.
This creates a deductible temporary difference of Rs. 780,000 (Rs. 10,780,000 -Rs. 10,000,000)
and a potential deferred tax asset of Rs. 156,000 (Rs. 780,000 x 20%).
Due to the availability of taxable profits next year (see part (ii) above), this asset can be
recognized as a deduction from deferred tax liabilities.
4. Write short notes on the following: (5×3=15 marks)
a) Minimum components of an interim financial report
Page 16 of 70
b) Difference between Market Value Added and Economic Value Added
c) Stress testing for banks
d) Classification of assets held for sale
e) A director of Rhivam Cement Ltd. has expressed concern about the accounting treatment of some
of the company’s items of property, plant and equipment which have increased in value. His main
concern is that the statement of financial position does not show the true value of assets which have
increased in value and that this ‘undervaluation’ is compounded by having to charge depreciation
on these assets, which also reduces reported profit. He argues that this does not make economic
sense. Respond to the director’s concern in line with relevant NAS.
Answer
a) An interim financial report may consist of a condensed version of the full financial statements and
should include an explanation of the events and transactions that are significant to an understanding
of the interim financial statements.
At a minimum, they should include:
i) Condensed balance sheet
ii) Condensed income statement
iii) Condensed statement showing changes in equity
iv) Condensed cash flow statement; and
v) Selected explanatory note
If the entity publishes a set of condensed financial statements in its interim financial report, those
condensed statements should include, at a minimum each of the headings and subtotals that were
included in its most recent annual financial statements, together with selected explanatory notes as
outlined by NAS 34.
The recognition and measurement principle should be the same as those used in the main financial
statements.
Additional line items or notes should be included if their omission would render the interim reports
misleading.
Basic and diluted earnings per share should be presented on the face of an income statement for an
interim period.
If, however, an entity chooses to publish a complete set of financial statements in its interim
financial report, the form and content of those statements must conform to NAS 1 for a complete
set of financial statements.
b) Market Value Added (MVA) is the difference between the current market value of a firm and the
capital contributed by investors.
If the MVA is positive, the firm has added value. If it is negative, the firm has diminished value.
The amount of value added needs to be greater than the firm's investors could have achieved
investing in the market portfolio, adjusted for the leverage (beta coefficient) of the firm relative to
the market. The formula for MVA is:

Where: MVA is market value added, V is the market value of the firm, including the value of the
firm's equity and debt, and K is the capital invested in the firm.

Page 17 of 70
 In corporate finance, Economic Value Added (EVA), is an estimate of a firm's economic profit –
being the value created in excess of the required return of the company's investors (being
shareholders and debt holders). Quite simply, EVA is the profit earned by the firm, less the cost
of financing the firm's capital. The idea is that value is created when the return on the firm's
economic capital employed is greater than the cost of that capital.
EVA is net operating profit after taxes (or NOPAT) less a capital charge, the latter being the product
of the cost of capital and the economic capital.
The basic formula is: EVA = (r - c) * K = NOPAT - c * K
where r is the return on investment capital (ROIC); c is the weighted average of cost of capital
(WACC); K is the economic capital employed; NOPAT is the net operating profit after tax.
The firm's market value added is the discounted sum (present value) of all future expected economic
value added: MVA = Present Value of a series of EVA values.
c) An analysis conducted under unfavourable economic scenarios which is designed to determine
whether a bank has enough capital to withstand the impact of adverse developments. Stress tests
can either be carried out internally by banks as part of their own risk management, or by supervisory
authorities as part of their regulatory oversight of the banking sector. These tests are meant to detect
weak spots in the banking system at an early stage, so that preventive action can be taken by the
banks and regulators.
Stress testing should be designed to provide information on the kinds of conditions under which
strategies or positions would be most vulnerable, and thus may be tailored to the risk characteristics
of the bank. Possible stress scenarios might include:
• abrupt changes in the general level of market rates;
• changes in the relationships among key market rates (i.e. basis risk);
• changes in the slope and the shape of the yield curve (i.e. yield curve risk);
• changes in the liquidity of key financial markets or changes in the volatility of market rates; or
• conditions under which key business assumptions and parameters break down.
d) A non-current asset (or disposal group) should be classified as held for sale if its carrying amount
will be recovered principally through a sale transaction rather than through continuing use. A
number of detailed criteria must be met:
a) The asset must be available for immediate sale in its present condition.
b) Its sale must be highly probable (i.e. significantly more likely than not).
For the sale to be highly probable for immediate sale in its present condition.
a) Management must be committed to plan to sell the asset.
b) There must be an active programme to locate a buyer.
c) The asset must be marketed for sale at a price that is reasonable in relation to its current fair
value.
d) The sale should be expected to take place within one year from the date of classification.
It is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
An asset can still be classified as held for sale, even if the sale has not actually taken place within
one year. However, the delay must have been caused by events or circumstances beyond the entity’s
control and there must be sufficient evidence that the entity is still committed to sell the asset or

Page 18 of 70
 disposal group. Otherwise the entity must cease to classify the asset as held for sale.
If an entity acquires an asset (a disposal group) (e.g. a subsidiary) exclusively with a view to its
subsequent disposal it can classify the asset as held for sale only if the sale is expected to take place
within one year and it is highly probable that all the other criteria will be met within a short time
(normally three months).
An asset that is to be abandoned should not be classified as held for sale. This is because its carrying
amount will be recovered principally through continuing use. However, a disposal group to be
abandoned may meet the definition of a discontinued operation and therefore separate disclosure
may be required.
e) The requirements of NAS 16, Property, Plant and Equipment may, in part, offer a solution to the
director’s concerns. NAS 16 allows (but does not require) entities to revalue their property, plant
and equipment to fair value; however, it imposes conditions where an entity chooses to do this.
First, where an item of property, plant and equipment is revalued under the revaluation model of
NAS 16, the whole class of assets to which it belongs must also be revalued. This is to prevent what
is known as ‘cherry picking’ where an entity might only wish to revalue items which have increased
in value and leave other items at their (depreciated) cost. Second, where an item of property, plant
and equipment has been revalued, its valuation (fair value) must be kept up-to-date. In practice,
this means that, where the carrying amount of the asset differs significantly from its fair value, a
(new) revaluation should be carried out. Even if there are no significant changes, assets should still
be subject to a revaluation every three to five years.
A revaluation surplus (gain) should be credited to a revaluation surplus (reserve), via other
comprehensive income, whereas a revaluation deficit (loss) should be expensed immediately
(assuming, in both cases, no previous revaluation of the asset has taken place). A surplus on one
asset cannot be used to offset a deficit on a different asset (even in the same class of asset).
Subsequent to a revaluation, the asset should be depreciated based on its revalued amount (less any
estimated residual value) over its estimated remaining useful life, which should be reviewed
annually irrespective of whether it has been revalued. An entity may choose to transfer annually an
amount of the revaluation surplus relating to a revalued asset to retained earnings corresponding to
the ‘excess’ depreciation caused by an upwards revaluation. Alternatively, it may transfer all of the
relevant surplus at the time of the asset’s disposal.
The effect of this, on company’s financial statements, is that its statement of financial position will
be strengthened by reflecting the fair value of its property, plant and equipment. However, the
downside (from the director’s perspective) is that the depreciation charge will actually increase (as
it will be based on the higher fair value) and profits will be lower than using the cost model.
Although the director may not be happy with the higher depreciation, it is conceptually correct.
The director has misunderstood the purpose of depreciation; it is not meant to reflect the change
(increase in this case) in the value of an asset, but rather the cost of using up part of the asset’s
remaining life.
5.
a) Explain Public Financial Management System. Nepal Public Sector Accounting Standard
states "All comparisons of budget and actual amount shall be presented on a comparable basis
to the budget". Explain the detail provisions of above standard for comparison of budget and
actual amount. 7 marks
b) On 1st Shrawan 2076, the fair value of the assets of XYZ Ltd.'s defined benefit plan were valued
at Rs. 2,040,000 and the present value of the defined obligation was Rs. 2,125,000. On 31st
Ashadh 2077, the plan received contributions from XYZ Ltd. amounting to Rs. 425,000 and
paid out benefits of Rs. 255,000. The current service cost for the financial year ending 31st
Ashadh 2077 is Rs. 510,000. An interest rate of 5% is to be applied to the plan assets and
Page 19 of 70
 obligations. The fair value of the plan’s assets at 31st Ashadh 2077 was Rs. 2,380,000 and the
present value of the defined benefit obligation was Rs. 2,720,000.
Required: 7 marks
Provide a reconciliation from the opening balance to the closing balance for Plan assets and
defined benefit obligation. Also show how much amount should be recognized in the statement
of profit or loss, other comprehensive income and statement of financial position.
Answer
a) Public Financial Management System refers to the set of laws, rules, systems and processes used
by sovereign nations (and sub-national governments), to mobilize 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, budget formulation, budget approval, budget execution, accounting
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.
Clause 1.9.25 to 1.9.30 of Nepal Public Sector Accounting Standard issued by Accounting Standard
Board of Nepal deals with the comparable basis for comparison of budget and the actual amount.
The content of above standard are given below:
1.9.25 All comparisons of budget and actual amounts shall be presented on a comparable basis to
the budget.
1.9.26 The comparison of budget and actual amounts will be presented on the same accounting
basis (accrual, cash or other basis), same classification basis and for the same entities and period
as for the approved budget. This will ensure that the disclosure of information about compliance
with the budget in the financial statements is on the same basis as the budget itself. In some cases,
this may mean presenting a budget and actual comparison on a different basis of accounting, for a
different group of activities, and with a different presentation or classification format than that
adopted for the financial statements.
1.9.27 Financial statements consolidate entities and activities controlled by the entity.
As noted in paragraph 1.9.10, separate budgets may be approved and made publicly available for
individual entities or particular activities that make up the consolidated financial statements. Where
this occurs, the separate budgets may be recompiled for presentation in the financial statements in
accordance with the requirements of this Standard. Where such recompilation occurs, it will not
involve changes or revisions to approved budgets. This is because this Standard requires a
comparison of actual amounts with the approved budget amounts.
1.9.28 Entities may adopt different bases of accounting for the preparation of their financial
statements and for their approved budgets. For example, in some, cases a government or
government agency may adopt the cash basis for its financial statements and the accrual basis for
its budget. In addition, budgets may focus on, or include information about, commitments to expend
funds in the future and changes in those commitments, while the financial statements will report
cash receipts and payments and balances thereof. However, the budget entity and financial
reporting entity will often be the same. Similarly, the period for which the budget is prepared and
the classification basis adopted for the budget will often be reflected in financial statements. This
will ensure that the accounting system records and reports financial information in a manner which
facilitates the comparison of budget and actual data for management and for accountability
purposes - for example, for monitoring progress of execution of the budget during the budget period
and for reporting to the government, the public and other users on a relevant and timely basis.

Page 20 of 70
 1.9.29 In some cases, budgets may be prepared on a cash or accrual basis consistent with a statistical
reporting system that encompasses entities and activities different from those included in the
financial statements. For example, budgets prepared to comply with a statistical reporting system
may focus on the general government sector and encompass only entities fulfilling the "primary"
or "nonmarket" functions of government as their major activity, while financial statements report
on all activities controlled by a government, including the business activities of the government.
1.9.30 In statistical reporting models, the general government sector may comprise national,
state/provincial and local government levels. Sometimes, the national government may control
state/provincial and local governments, consolidate those governments in its financial statements
and develop, and require to be made publicly available, an approved budget that encompasses all
three levels of government. In these cases, the requirements of this Standard will apply to the
financial statements of those national governmental entities. However, where a national
government does not control state or local governments, its financial statement will not consolidate
state/provincial or local governments. Rather, separate financial statements are prepared for each
level of government. The requirements of this Standard will only apply to the financial statements
of governmental entities when approved budgets for the entities and activities they control, or
subsections thereof, are made publicly available.
b) Reconciliation of Plan assets and Defined benefit obligation

Particulars Plan Assets (Rs.) Defined benefit

Obligation (Rs.)
.
Fair Value/present value as at 1st Shrawan 2076 2,040,000 2,125,000

Interest @ 5% 102,000 106,250

Current service cost - 5,10,000
Contribution received 425,000 -
Benefits paid (255,000) (255,000)
Return on gain (assets) (balancing figure 68,000 -
Actuarial loss (balancing figure) - 233,750
Closing balance as at 31st Ashadh 2077 2,380,000 2,720,000
In the statement of profit and loss, the following will be recognized:
Rs.
Current service cost 510,000
Net interest on net defined liability (Rs. 106,250 – Rs. 102,000) 4,250
Defined benefit re-measurements recognized in Other Comprehensive Income:
Rs.
Loss on defined benefit obligation (233,750)
Gain on Plan assets 68,000
(165,750)
In the balance sheet, the following will be recognized:
Page 21 of 70
 Rs.
Net defined liability (Rs. 2,720,000 – Rs. 2,380,000) 340,000
6.
a) Dodhara Ltd. is a large textile manufacturing company. Wherever possible, it structures its
operations to take advantage of any financial assistance available from national and regional
authorities.
A heavy duty equipment was purchased for its main manufacturing operation for Rs.12 million on
1st Kartik 2076. The equipment was expected to be used for 10 years, with a zero residual value.
Dodhara Ltd. pre-applied for a government grant on 1st Shrawan 2076, meeting all necessary criteria
for awarding of the grant. On 1st Bhadra 2076, the grant was awarded for 40% of the equipment's
cost and the cash was received on 1st Magh 2076. Conditions relating to maintaining employment
are attached to the grant, and if they are not satisfied, then the grant becomes repayable, or partly
repayable.
Dodhara Ltd. had expected to meet these conditions when the grant was applied for. However, due
to worsening economic conditions, redundancies for some staff on 31st Ashadh, 2078 resulted in a
repayment of 10% of the original grant becoming due. The repayment was made on 1st Bhadra,
2078. It accounted for the grant as a reduction in the carrying amount of the asset.
Required: 5 marks
Explain, with suitable calculations, the financial reporting treatment of the above in the financial
statements of Dodhara Ltd. for the year ended 31st Ashadh, 2078 in accordance with NAS 20:
Accounting for Government Grants and Disclosure of Government Assistance.
b) The RP Group, a limited company and a merchant banker, has a number of subsidiaries, associates
and joint ventures in its group structure. During the financial year to 31st Magh 2077 the following
events occurred:
(i) The company agreed to finance a management buyout of a group company, AB, a limited
company. In addition to providing loan finance, the company has retained a 25% equity
holding in the company and a board member on the board of AB. RP received management
fees, interest payments and dividends from AB.
(ii) On 1st Kartik 2077, RP sold a wholly owned subsidiary, X Ltd. to Z Ltd. During the year, RP
supplied X with second hand office equipment and X leased its factory from RP. The
transactions were all contracted for at market rates.
(iii) The retirement benefit scheme of the group is managed by another merchant bank. An
investment manager of the group retirement benefit scheme is also a non-executive director of
the RP Group and received an annual fee for his services of Rs. 25,000 which is not material
in the group context. The company pays Rs. 16 million per annum into the scheme and
occasionally transfers assets into the scheme. In 2077, property, plant and equipment of Rs. 10
million were transferred into the scheme and a charge of administrative costs of Rs. 3 million
was made.
Required: 5 marks
Discuss whether the above events would require disclosure in the financial statements of the RP
Group, under NAS 24 Related Party Disclosures.
Answer
a) The grant is credited to the asset's value on 1st Kartik 2076, the date of the asset’s initial
recognition.

Page 22 of 70
 The carrying amount of the asset is calculated as follows:
Particulars Amount (Rs.)
Asset value on initial recognition (1st Kartik 2076) 12,000,000
st
Grant (Rs. 12m x 40%) credited to asset on 1 Kartik, 2076 (4,800,000)
7,200,000
31st Ashadh, 2077 (Rs. 7.2m/10 years x 9/12) Depreciation (540,000)
Carrying Value on 31st Ashadh, 2077 6,660,000
31st Ashadh, 2078 (Rs. 7.2m/10 years) Depreciation (720,000)
5,940,000
Grant repayment (Rs. 4.8m x 10%) 480,000
Additional depreciation (480,000 x 1¾/10 years) (84,000)
Carrying Value on 31st Ashadh, 2078 6,336,000
The accounting entry is:
Date Particulars Debit Credit

31 Ashadh, 2078 Asset (480,000 – 84,000) 396,000

D
r
Profit or loss 84,000
D
r
To Grant repayable liability 480,000
b)
i) NAS 24 does not require disclosure of transactions between companies and providers of finance in
the ordinary course of business. As RP is a merchant bank, no disclosure is needed between RP and
AB. However, RP owns 25% of the equity of AB and it would seem significant influence exists
(NAS 28, greater than 20% existing holding means significant influence is presumed) and therefore
AB could be an associate of RP. NAS 24 regards associates as related parties. The decision as to
associate status depends upon the ability of RP to exercise significant influence especially as the
other 75% of votes are owned by the management of AB. Merchant banks tend to regard companies
which would qualify for associate status as trade investments since the relationship is designed to
provide finance. NAS 28 presumes that a party owning or able to exercise control over 20% of
voting rights is a related party. So an investor with a 25% holding and a director on the board would
be expected to have significant influence over operating and financial policies in such a way as to
inhibit the pursuit of separate interests. If it can be shown that this is not the case, there is no related
party relationship. If it is decided that there is a related party situation then all material transactions
should be disclosed including management fees, interest, dividends and the terms of the loan.
ii) NAS 24 does not require intragroup transactions and balances eliminated on consolidation to be
disclosed. NAS 24 does not deal with the situation where an undertaking becomes, or ceases to be,
a subsidiary during the year. Best practice indicates that related party transactions should be
disclosed for the period when X was not part of the group. Transactions between RP and X should
be disclosed between 1st Kartik 2077 and 31st Magh 2077 but transactions prior to 1st Kartik will
have been eliminated on consolidation. There is no related party relationship between RP and Z

Page 23 of 70
 since it is a normal business transaction unless either parties interests have been influenced or
controlled in some way by the other party.
iii) Employee retirement benefit schemes of the reporting entity are included in the NAS 24 definition
of related parties. The contributions paid, the non-current asset transfer (Rs.10m) and the charge of
administrative costs (Rs.3m) must be disclosed. The pension investment manager would not
normally be considered a related party. However, the manager is key management personnel by
virtue of his non-executive directorship. Directors are deemed to be related parties by NAS 24, and
the manager receives a fee of Rs. 25,000. NAS 24 requires the disclosure of compensation paid to
key management personnel and the fee falls within the definition of compensation. Therefore, it
must be disclosed.

Page 24 of 70