NFRS-ACCOUNT

PAST QUESTION CHAPTER WISE

[Up-to June 2022]

NAS-01 Presentation of Financial Statements.…………………………………………….. 2

NAS-02 Inventories.…………………………………………………………………………… 4
NAS-07 Statement of Cash Flows…………………………………………………………… 8
NAS-08 Accounting Policies, Changes in Accounting Estimates & ERRORS………….. 8
NAS-09 Deferred Tax Assets and Liabilities…………………………………………………11
NAS-10 Events after the Reporting Period....……………………………………………….12
NAS-11 Construction Contracts. [No Question have been asked from this chapter]
NAS-16 Property, Plant & Equipment ......…………………………………………………..17
NAS-17 Leases.……… [NOTE : No Question have been asked from this chapter]
NAS-18 Revenue.…………………………………………………………………………….. 21
NAS-20 Accounting for Government Grants & Disclosure of Government Assistance.. 25
NAS-21 The Effects of Changes in Foreign Exchange Rates……………………………. 27
NAS-23 Borrowing Cost.…………………………………………………………………….. 28
NAS-24 Related Party Disclosure…………………………………………………………….29
NAS-36 Impairment Of Assets………………………………………………………………..30
NAS-37 PROVISIONS, Contingent Liabilities & Contingent Assets………………………31

Extra Question….……………………………………………………………………………….32

This Note Is Prepared only for the study purpose.

We are very Thankful to Mr. Yuvraj Pandey who is helping to prepare the study notes.

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NAS-01 ‘Presentation Of Financial Statement’’
1.Subhakamana Sugar Mills Limited has been closed from the last 11 months due to
outdated technology and has no sales as old technology produces inferior products.
The company will take a minimum of 2 years' time with substantial modification of
technology to restart production and make sales. Cost is very substantial for
upgrading technology. Due to factory closure, the company defaults in loan
repayment and the bank has issued notice for auction if loan is not repaid within 3
months' time. Management is doubtful that funding can be arranged.
CFO is of view that financial statements shall be prepared in going concern basis as
there is little hope that funding will be received. [D22-5M]

2.GOT Resort Pvt. Ltd. has taken a loan to construct its building. However, before the
assets could be completely constructed and put to use, the construction got delayed
due to lockdown as a result of COVID-19 pandemic. Now, as the statutory auditor, you
need to give your opinion on the treatment of the interest on the loan during the
lockdown period.[J22-5M]

ANS::
Going concern is an underlying assumption that is used by an entity while preparing financial
statements. Under the going concern assumption, the entity is viewed as continuing
business for the foreseeable future. As per NAS 1 “Presentation of Financial Statements” the
entity shall make assessment of the entity‟s ability to continue as a going concern while
preparing financial statements. An entity shall prepare its financial statements on a going
concern basis unless management either intends to liquidate the entity or to cease trading or
has no realistic alternative but to do so. While doing assessment management shall consider
all available information about the future, which is at least, but not limited to, twelve months
from the end of the reporting date. Hence, contention of the accountant of Small Limited is
not correct as per NAS-1, the company shall make assessment of going concern assumption
while preparing the financial statements.

3.Chitle International Ltd.’s total turnover for FY 2075/76 is Rs.1 crore and it includes
Rs. 2.7 lakhs from sale of by-products. Whereas, the by-product sales are included
under the miscellaneous income in the financial statements and is not separately
disclosed in the income head. [D21-5M] [D11-5M]

ANS::
As per NAS 1, Presentation of Financial Statements information is material if its omission or
misstatement could influence the economic decisions of users taken on the basis of the
financial statements. Materiality depends on size of the item or error judged in the particular
circumstances of its omission or misstatement. Thus, materiality provides a threshold or
cut-off point rather than being a primary qualitative characteristic which information must
have if it is to be useful. As per NAS 1, each material item shall be presented separately in
the financial statements. Immaterial amounts shall be aggregated with amounts of a similar
nature or function and need not be presented separately. In this case, income from sale of

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by-product shall be disclosed separately in the revenue item as the income from by-product
is considered material items since it is more than two percent of total turnover of the
company. Similarly, the auditor has to ensure that a material item is disclosed separately and
distinctly or at least clear information about the item is available in the financial statements.
In this case, he is required to request the company to disclose information about revenue
from sale of by-product, as the income from byproduct is material in giving or distorting a
true and fair view of financial statements.

4.AJ Limited has an investment worth NPR 1,000,000 in its financial statements at 31st
Ashadh 2074. Due to the continuing recession, the investment reduced in value to
NPR 900,000 by 15th Shrawan 2074.[J18-5M]
ANS::
NAS 10 Events after the Reporting Period provides guidance whether an entity should adjust
its financial statements or shall disclose for the events after the reporting period. Since
reduction in investment value occurred only after the reporting period, it is indicative of
conditions that arose after the reporting period which is a non-adjusting event as per para 3
of NAS 10. An entity shall not adjust the amounts recognised in a financial statement to
reflect non-adjusting events after the reporting period. The decline in fair value does not
normally relate to the condition of the investments at the end of the reporting period, but
reflects circumstances that have arisen subsequently. Therefore, the entity does not update
the amounts disclosed for the investments as at the end of the reporting period, however it
may need to give additional disclosure about the Suggested Answer - June 2018 The
Institute of Chartered Accountants of Nepal 22 nature of event and an estimate of its
financial effect , or a statement that such an estimate cannot be made.

5.Give your comments on the following:

Chitale Limited has declared a dividend of 12% for FY 2069/70 in the month of Ashoj
2070. The company has booked this as Interim Dividend in Financial Statement of
2069/70.[D13-5M]
ANS::
Dividend has been declared at year end so this should be the final dividend. Further, Nepal
Accounting Standards 10 on Events after the Reporting Period provides that if an entity
declares dividends to holders of equity instruments after the balance sheet date, the entity
shall not recognize those dividends as a liability at the balance sheet date. If dividends are
declared after the balance sheet date but before the financial statements are authorised for
issue, the dividends are not recognized as a liability at the balance sheet date because they
do not meet the criteria of a present obligation. Such dividends are disclosed in the notes in
accordance with NAS 01 Presentation of Financial Statements. Thus, the treatment followed
by Chitale limited is not in line with NAS.

6.Howard Ltd., as part of overall cost cutting measures, announced a voluntary

retirement scheme (VRS) to its employees, to reduce the employee strength. During
the year ended 32.03.2068 the company paid a compensation of Rs.10 million to those
who availed the scheme. The chief accountant has reflected this payment as part of
regular salaries and wages paid by the company. [J12-5M]
ANS::
NAS 1, “Presentation of Financial Statements” clearly states that when the items of income
and expenses are material, their nature and amount shall be disclosed separately. Such a

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disclosure shall assist in understanding the financial performance achieved and in assessing
future results. In the instant case the payment made to the employees on account of VRS as
an overall cost cutting measure would fall under the domain of material item. Accordingly it is
eligible to be shown separately in the income statement of Howard Ltd., so that the effect of
it on the operating results of the Company during the previous year can be perceived.
Therefore, clubbing of Rs. 10 million with the regular salaries and wages of the company by
the Chief Accountant is not appropriate.

7.Briefly discuss the basis of disclosure of accounting policies according to NAS-1 on

―Presentation of Financial Statements".[J09-5M]
ANS::
According to NAS-1, an entity shall disclose in the summary of significant policies:
measurement basis used for preparing the financial statements; the other accounting
policies used that are relevant to an understanding of the financial statements. In addition to
the specific accounting policies used in the financial statements, it is important for the users
to be aware of the measurement basis used (historical cost, current cost, realisable value,
fair value or present value) because they form the basis on which the financial statements
are prepared. When more than one measurement basis is used in the financial statements,
for example, when certain non-current assets are revalued, it is sufficient to provide an
indication of the categories of assets and liabilities to which each measurement basis is
applied. In deciding whether a particular policy shall be disclosed, management considers
whether disclosure would assist users in understanding the way in which transactions and
events are reflected in the reported financial performance and financial position. The
accounting policies that an entity might consider presenting include revenue recognition,
recognition and depreciation/ amortisation of tangible and intangible assets, capitalization of
borrowing costs and other expenditure, financial instruments and investments, leases,
research and development costs, inventories, taxes, provisions, employee benefit costs,
foreign currency transaction, definition of cash and cash equivalent and government grants.

NAS-02 ‘’INVENTORY’’
1.The management tells you that the work-in-process is not valued since it is difficult
to ascertain the same in view of the multiple processes involved and in any case the
value of opening and closing work-in-process would be more or less the
same.[D21-5M] [J09-5M]
Answer:
According to NAS 2, Inventories, the inventories also include (para 6) those assets which are
in the process of production for sale in the ordinary course of business apart from finished
goods. The materials or supplies are consumed in such production process. It is, thus,
necessary for a company to ensure that each and every component of inventory is
measured and valued properly. The argument advanced by the company that it is difficult to
ascertain the same in view of the multiple processes involved is not acceptable. In general,
the audit procedures regarding work-in-process are similar to those used for raw materials
and finished goods. The auditor has to carefully assess the stage of completion of the
work-in-process for assessing the appropriateness of its valuation.
The argument that the opening and closing work-in-process would be more or less the same
is also not justified because the omission of those would lead to distortion of true and fair

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view. Further, costs incurred for raw materials and the overheads would normally be different
and would give rise to different values of opening and closing inventory. In view of the above,
the auditor shall consider its overall impact on financial statements and conclude as to how it
should be reported in his audit report.

2.The ABC Ltd., while valuing its finished goods inventory at the year-end wants to
include interest on Bank Overdraft as an element of cost, for the reason that overdraft
has been taken specifically for the purpose of financing current assets like inventory
and for meeting day to day working expenses. [J21-5M] [J19-5M]
Answer:
As per NAS 2, Inventories, cost of inventories comprises all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their present location and
condition. NAS 23, Borrowing Costs includes inventories as qualifying assets and borrowing
cost that are directly attributable to the acquisition, construction or production of qualifying
assets are included in the cost of that asset. In the given case, Bank overdraft was taken for
the purpose of financing current assets not especially for the inventories. Therefore, the
proposal of ABC Ltd. to include interest on bank overdraft as an element of cost of
inventories is not acceptable because it does not form part of cost of production.

3.The total assets of Rs. 250 million of Y & Z Limited includes inventory amounting to
Rs. 50 million. The inventories were valued at cost. The market price of the
inventories was Rs. 42 million. The company has disclosed this fact in the notes to
accounts.[D18-5M]
Answer:
As per Nepal Accounting Standards (NAS) 2, Inventories should be measured at lower of
cost and net realizable value. In the present case the cost price of the inventories is Rs. 50
million and net realizable value is Rs. 42 million and hence the inventories should be
presented at Rs. 42 million in the balance sheet. However, the company has presented the
inventories at Rs. 50 million and disclosed in the notes to accounts that the inventories have
been presented at cost although its net realizable value is lower than the cost. Mere
disclosure of this fact in the notes however does not result into compliance with the
accounting standard. Hence as an auditor, I will qualify my audit report because inventory in
the present case represents material item of the assets of the company and it has been
materially misstated in the balance sheet.

4.PQR limited has computed the cost of the inventory using last in fast out (LIFO)
method and the value comes to Rs 2 crores (if the cost of the inventory is computed
as per first in first out formula, its cost will be Rs 2.5 crores). Net realizable Value of
the stock is Rs 2.25 crores. Since the policy of the company is to present inventory at
lower of cost or NRV, the company has presented inventory in the financial statement
at Rs 2 crores, being the lowest.[D15-5M]
Answer:
As per NAS 2, cost of inventories should be assigned as per first in first out or weighted
average formula. Determining the cost as per last in first out is not allowed. So, despite the
fact the cost of inventories of PQR will be more if FIFO is used than if LIFO is used, the cost
should be determined as per FIFO. Hence the cost of inventory shall be taken as 2.5 crore in
the given case instead of 2 crore as per LIFO. Since NRV of the inventory is 2.25 crores,

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lower than the cost, inventory shall be presented at Rs 2.25 crores in the financial
statements.

5.Organo Pvt. Ltd., manufacturing noodles, has valued at the year end its closing
stock of packed finished goods for which firm sales contracts have been received, at
realizable value inclusive of profit and cash incentive. As at the year end, the
ownership of the goods has not been transferred to the buyers.[D15-5M]
Answer:
Valuation of Inventories: NAS 2 requires that inventories should be valued as lower of cost
and Net realizable value(NRV). A departure from the general principle can be made if the
NAS is not applicable or having regard to the nature of industry. NAS 2 also states that (a)
work in progress arising under construction contracts, including directly related service
contracts (b) work in progress arising in the ordinary course of business of service
providers;(c) shares, debentures and other financial instruments held as stock-in-trade; and
(d) producers‘ inventories of livestock, agricultural and forest products are measured as NRV
based on established practices. In the given case the sale is assumed under a forward
contract but the goods are not of a nature covered by the above exceptions taking into
account the facts the closing stock of finished goods should have been valued at cost, as it
is lower than the realizable value (as it includes profit). Further, sale cash incentives should
not be included for valuation purposes. The policy adopted by the Organo Pvt. Ltd. for
valuing its closing stock of inventory of finished goods on selling price plus sale incentives is
not correct. The statutory auditor should give a qualified report.

6.The following information pertains to the trading stock of a company:

Product Historical cost (Rs.) Net Realisable value (Rs.)
Colour Tvs 200,000 270,000
Black & White TVs 115,000 150,000
Ordinary Bikes 200,000 185,000
Sport bikes 110,000 115,000
Computers 80,000 100,000
Total 705,000 820,000
The company has a policy to value stock at lower of cost or net realizable value and
accordingly trading stock has been valued at Rs. 705,000 in the balance sheet of the
company. [J15-5M]
Answer:
Inventories are usually written down to net realizable value (NRV) item by item. In the given
case, cost of all the items on total basis is lower than their NRV. However, if we compare
NRV with cost product-wise, we can note that NRV of ordinary bikes (i.e. Rs 185,000) is
lower than its cost (i.e. Rs. 200,000).
The following comparative table may be useful for valuation of inventories
Product Historical cost Rs NRV (Rs.) Presentable value (Rs.)
ClourTvs 200,000 270,000 200,000
Black & White TVs 115,000 150,000 115,000
Ordinary Bikes 200,000 185,000 185,000
Sport bikes 110,000 115,000 110,000
Computers 80,000 100,000 80,000
Total 705,000 820,000 690,000

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So, inventory should be presented at Rs. 690,000 in the balance sheet rather than at Rs.
705,000.

7.Normal waste of material in production process is 2 % of input. 10,000 kg. of input

was made in process with resultant wastage of 500 kg. Cost per kg of input is Rs. 100.
The entire quantity of waste is in stock at the year end. As an auditor how do you
ensure the proper valuation of inventory?[D13-5M]
Answer:
As per Para 16 of NAS-2, abnormal amounts of waste materials, labour or other production
costs, storage costs, unless those costs are necessary in the productin process before a
further production stage; administrative overheads that do not contribute to bringing
inventories to their present location and condition; and selling costs are excluded from cost
of inventories and such costs are recognized as expenses in the period in which they are
incurred. In this case, normal waste is 200 kg and abnormal waste is 300 kg. The cost of 200
kg will be included in determining the cost of inventories (Finished Products) at the year end.
The cost of abnormal waste amounting to Rs. 30,000 (300 kg *Rs. 100) will be charged in
the profit and loss statement.

8.The Balance sheet of ABC Ltd. includes inventory amounting to Rs. 3 crores out of
total assets of 20 crores. The inventories were valued at cost. The market price of the
inventories was Rs. 2.5 crores. The company has disclosed this fact in the notes to
accounts.[D12-5M]
Answer:
As per Nepal Accounting Standard 4, Inventories should be measured at lower of cost or net
realizable value. In the present case the cost price of the inventories is 3 crores and net
realizable value is 2.5 crores and hence the inventories should be presented at 2.5 crores in
the balance sheet. However, the company has presented the inventories at 3 crores and
disclosed in the notes to accounts that the inventories have been presented at cost although
its net realizable value is lower than the cost. Mere disclosure of this fact in the notes
however does not result into compliance with the accounting standard. Hence as an auditor I
will qualify my audit report because inventory in the present case represents material item of
the assets of the company and it has been materially misstated in the balance sheet.

9.Inventories of a car manufacturing company include the value of items required for
the manufacture of a model which was removed from the production line five years
back, at cost price. [D09-5M]
Answer:
Inventory valuation: NAS 4 on “Inventories” provides that the cost of inventories may not be
recoverable if those inventories are damaged, have become wholly or partially obsolete, or if
their selling prices have declined. Accordingly, the auditor should examine whether
appropriate allowance has been made for the defective, damaged, obsolete and
slow-moving inventories in determining the net realizable value. In this case, items required
for the manufacture of a model which has been withdrawn from the production line five years
ago are included in the stock at cost price resulting in overstatement of inventory and profit.
As it appears from the facts given that the net realizable value of these items is likely to
much lower than the cost at which these are being shown in the books of account.
Accordingly, it becomes necessary to write down the inventory to ‘net realizable value’ if the

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items of inventories become wholly or partially obsolete. Under the circumstance, the auditor
should qualify the report appropriately.

NAS-07 ‘’STATEMENT OF CASH FLOW’’

1.Z Ltd. paid Rs. 100,000 income tax for disposal of capital assets during fiscal year
2069/070 and showed as deduction from cash flow from operating activities. Is this
treatment in compliance with NAS 03? Suggest correct treatment in cash flow
statement.[D13-5M]
Answer:
As per Para 33 of NAS-3, cash flows arising from taxes on income shall be separately
disclosed and shall be classified as cash flows from operating activities unless they can be
specifically identified with financing and investing activities. Further Para 34 added that taxes
paid are usually classified as cash flows from operating activities. However, when it is
practicable to identify the tax cash flow with an individual transaction that gives rise to cash
flows that are classified as investing or financing activities, the tax cash flow is classified as
an investing or financing activity as appropriate. In view of the above provision in NAS -03,
the treatment for income tax (capital gain tax) on disposal of capital asset is not in
compliance with NAS 03, accordingly it should be shown under cash flow from investing
activities.

NAS-08 ‘’ACC POLICIES & CHANGE’’

1.Accounting policies and Accounting estimates.[D22-5M]
Answer: Prefer NFRS Notes
2..XYZ Limited has provided Rs. 50 lakhs for Inventory obsolescence in 2076/77. In the
subsequent year, it was determined that 45% of such inventory was usable. The Board
of Directors is in the view of adjusting same through prior period adjustment.
[J21-5M]
Answer:
As per NAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, prior
period errors are omissions from and misstatement in an entity’s financial statements for one
or more prior periods arising from a failure to use or misuse of reliable information that was
available when financial statements for those period where authorized for issue and could
reasonably be expected to have been obtained and taken into account in the preparation
and presentation of those financial statements. Such errors include the effects of
mathematical mistakes, mistakes in applying accounting polices oversights or
misrepresentations of facts, and fraud. In light of these facts, the write-back of provision
made in respect of inventories in the earlier year does not constitute prior period errors
(adjustment) since it neither constitutes error nor omission but it merely involves making
estimates based on prevailing circumstances when financial statements were being
prepared. It is a mere estimate process involving judgment based on the latest information
available at that particular time.
An estimate may have to be revised if changes occur regarding the circumstances on which
the estimate was based, or as a result of new information, more experience or subsequent
developments. The revision of the estimate, by its nature, does not bring the adjustment
within the definitions of prior period errors discussed above.

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In this case, XYZ Ltd. provided Rs 50 lakhs for inventory obsolescence in 2076/77. In the
subsequent year, due to change in circumstances, it was determined that 45% of such
inventory was usable. Revision of such an estimate does not bring the resulting amount of
Rs.22.5 lakhs within the definition of a prior period errors requiring adjustment in prior period.
The amount, however, involved is material and requires separate disclosure to understand
the financial position and performance of an enterprise. Accordingly, adjustment in the value
of the inventory through prior period item would not be appropriate.

3.During the previous year ABC Limited has followed the straight line method of
depreciation. During the current year it has been changed to written down value
method.[D20-5M][J19-5M]
Answer:
As per NAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” defines
accounting policy and a change in accounting estimates.
An entity shall change the accounting policy only if the change:
a) is required by Standards; or
b) results in the financial statements providing reliable and more relevant information about
the effects of transactions, other events or conditions on the entity‟s financial position,
financial performance or cash flows.
A change in accounting estimate is an adjustment of carrying amount of an asset or liability,
or an amount of the periodic consumption of assets, which results from the assessment of
present status of, and expected future benefits and obligations associated with, assets and
liabilities.
As per NAS 16 Property, Plant and Equipment para 5, the residual value and the useful life
of an assets shall be reviewed at least at each financial year-end, if expectation differs from
previous estimates, the changes shall be accounted for as a change in an accounting
estimate in accordance with NAS 8. Para 60 and 61 further describe that depreciation
method used shall reflect the pattern in which the asset‟s future economic benefits are
expected to be consumed by the entity and shall be reviewed at least at each financial
yearend, if there has been a significant change in the expected pattern of consumption of the
future economic benefits embodied in the assets, the method shall be changed to reflect the
changed pattern. Such a change shall be accounted for as a change in accounting estimate
in accordance with NAS 8.
In light of provisions laid down in NASs as discussed above, the change in depreciation
method by the entity is a change in accounting estimate, not the changes in accounting
policy. Therefore, as per NAS 8, effect of such changes in accounting estimate shall be
recognised prospectively by including it in profit or loss in the period of the change or in the
period of change and future periods, if such change affects both. The entity shall disclose
the nature and amount of such change in an accounting estimate that has an effect in
current period or is expected to have an effect in future periods.

4.A Ltd. company has been valuing its closing inventories under the
weighted-average cost method. In 2072/73, management decided to change its
accounting policy relating to the valuation of inventories to first-in, first-out (FIFO)
method since it was considered to more accurately reflect the usage and flow of
inventories in the economic cycle. Is the change in accounting policy
justified?[D16-5M]
Answer:

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As per NAS 8, an entity shall change an accounting policy only if the change
• Is required by a NFRS; or
• Results in the financial statements providing reliable and more relevant information about
the effects of transactions, other events, or conditions on the entity‟s financial position,
financial performance, or cash flows.
• Reflect the economic substance of transactions, other events and conditions, and not
merely the legal form;
• are neutral, i.e. free from bias;
• are prudent and are complete in all material respect.
In this case, the company has changed its accounting policy in order to accurately reflect the
usage and flow of inventories in the economic cycle. The change in accounting policy is
justified.

5.M/s DC Limited signed an agreement with workers for increase in wages with
retrospective effect. The outflow on account of arrears was for 2011-12 Rs. 10.00
lakhs, for 2012-13 Rs. 12.00 lakhs and for 2013-14 Rs. 12.00 lakhs. This amount is
payable in September, 2014. The accountant wants to charge Rs. 22.00 lakhs as prior
period charges in financial statement for 2014-2015.[J16-5M]
Answer:
The term prior period item refers only to income or expenses which arise in the current
period as a result of errors or omission in the preparation of the financial statements of one
or more prior periods. The term does not include other adjustments necessitated by
circumstances, which though related to prior periods are determined in the current period.
The full amount of wage arrears paid to workers will be treated as an expense of current
year and it will be charged to profit and loss account as current expenses and not as prior
period expenses. It may be mentioned that additional wages is an expense arising from the
ordinary activities of the company.
Although abnormal in amount, such an expense does not qualify as an extraordinary item.
However, as per NAS, when items of income and expense within profit or loss from ordinary
activities are of such size, nature or incidence that their disclosure is relevant to explain the
performance of the enterprise for the period, the nature and amount of such items should be
disclosed separately.

6.A company purchased a plant at the cost of Rs 10 crores on 1 Srawan 2066 and the
company is charging depreciation on straight line basis over 10 years useful life
assuming there will be no scrap. In the year 2071/72 the company decides to charge
depreciation as per written down value method @ 10%. The company management
considers this as the change in accounting estimate and accordingly considers the
effect due to the change prospectively; i.e. depreciation charged in the year 2071/72 is
Rs 50 lakh and no adjustment in retained earnings and carrying amount of
machinery.[D15-5M]
Answer:
As per NAS 8, Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.
A change in accounting estimate is an adjustment of the carrying amount of an asset or a
liability, or the amount of the periodic consumption of an asset, that results from the
assessment of the present status of, and expected future benefits and obligations associated
with, assets and liabilities. Examples of estimate provided in the standard includes the useful

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lives of, or expected pattern of consumption of future economic benefits embodied in
depreciable assets.
Straight line method or written down value method of depreciation reflects the estimate of
useful life and expected pattern of consumption of future economic benefits from depreciable
assets. Hence change of depreciation method from straight line to WDV is the change in
accounting estimate and not the change in accounting policy. So, the effect of the change
considered by the management in the preparation of the financial statements seems to be
appropriate.

7.Financial Statements for the year 2069/70 was issued in Paush 2070. While
preparing the financial statements of 2070/71, it was known that the financial
statements of 2069/70 included error. The auditor advises the management to correct
and revise the financial statements of 2069/70 and circulate the revised financial
statements with all the authorities where original financial statements were
submitted.[J15-5M]
Answer:
As per NAS 8, prior period errors are corrected in the comparative information presented in
the financial statements. Unless it is impracticable, an entity shall correct material prior
period errors retrospectively in the first set of financial statements authorized for issue after
their discovery by: (a) restating the comparative amounts for the prior period(s) presented in
which the error occurred; or (b) if the error occurred before the earliest prior period
presented, restating the opening balances of assets, liabilities and equity for the earliest prior
period presented. So, in the given case, the error in the financial statements of 2069/70 can
be rectified in the comparative information of the financial statements of 2070/71. The
financial statements of 2069/70 which was already issued need not be revised.

8.A sum of Rs.10,00,000 is received from an Insurance company in respect of a claim

for loss of goods in transit costing Rs.8,00,000. The amount is credited to the
Purchases Account.[D09-5M]
Answer:
All items of income and expense which are recognized in a period should be included in the
determination of net profit or loss for the period. The claim for loss of goods in transit is
arising out of ordinary activities of the enterprise as a part of its normal course of business.
However, the cost of goods lost in transit is only Rs.8,00,000 while the insurance money
received is Rs.10,00,000. Purchases Account need not be credited since it would distort the
purchases done during the year and as also the gross profit. Therefore, entire amount of
Rs.10 lacs needs to be taken to profit and loss account under an appropriate head. This is
an income arising from an ordinary activity of the enterprise but having regard to amount
involved and exceptional nature, a separate disclosure is to be made in the profit and loss
account. Such disclosure would enable the users to understand the performance of an
enterprise for the period.

NAS-9 ‘’Deferred Tax Assets and Liabilities’’

1.Your client has computed the deferred tax assets or liabilities on: i. Fixed assets as per
financial base Rs. 500,000, as per tax base Rs. 600,000; ii. Other assets as per financial
base 300,000 as per tax base Rs. 200,000 and other liabilities as per financial base Rs.
100,000 as per tax base Rs. 50,000. Consider applicable tax rate 5% and opening balance

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of deferred tax asset is Rs.5,000As an Auditor how would be check the accounting treatment
made on deferred tax by your client (show your computation as well)?[D12-5M]
Answer:
[PREFER SUGGESTED]

NAS-10 ‘’EVENTS AFTER REPORTING PERIOD’’

1.XYZ is a manufacturing company. There was huge fire in the factory of XYZ on 1 Ashoj
2077 and fixed assets having written down value of Rs. 10 crores out of total fixed assets of
Rs. 20 crores of the company were destroyed. The financial statements of the company for
the year 2076/77 was approved by the Board on 30 Ashoj 2077 in which fixed assets have
been presented at WDV of Rs. 20 crores despite the severe loss due to fire and the
information about the loss due to fire is properly explained in the Notes to the financial
statements. [J21-5M] [D14-5M]
Answer:
As per NAS 10, Events After the Reporting Period, events after the reporting period are
those events, favorable and unfavorable, that occur between the end of the reporting period
and the date when the financial statements are authorized for issue.
Two types of events can be identified:
-those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
-those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period)
So, the event in the given case (fire after reporting period) is a non-adjusting event. An entity
shall not adjust the amounts recognized in its financial statements to reflect non-adjusting
events after the reporting period.
If events after the reporting date impacts going concern status of the entity, the entity is
required to prepare its financial statements on break-up value basis. This does not seem to
be the case here.
If non-adjusting events after the reporting period are material, non-disclosure could influence
the economic decisions that users make on the basis of the financial statements.
Accordingly, an entity shall disclose the following for each material category of non-adjusting
event after the reporting period:
-the nature of the event; and
-an estimate of its financial effect, or a statement that such an estimate cannot be made.
So, presenting fixed assets at Rs 20 crores in the balance sheet with appropriate disclosure
in the Notes to Accounts seems to be appropriate.

2.A Co. Ltd. has not included in the Balance Sheet as on 32-03-2075 a sum of Rs.
1,500,000 being amount in the arrears of salaries and wages payable to the staff for the last
2 years because the negotiations were going since last 18 months which concluded on
30-04-2075. The auditor wants to sign the said financial statement and give the audit report
on 31-05-2075. The auditor came to know the result of the negotiations on
15-05-2075.[D18-5M]
Answer:
As per NAS 10 ―Events after the reporting period‖, adjustments to assets and liabilities are
required for events after the reporting date that provide additional information materially
affecting the determination of the amounts relating to conditions existing at the reporting

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date. Similarly as per NAS 37 "Provisions, Contingent liabilities and Contingent Assets",
future events that may affect the amount required to settle an obligation should be reflected
in the amount of a provision where there is sufficient objective evidence that will occur.
The amount of Rs 1,500,000 is a material amount and it is the result of an event,
which has occurred after the reporting date. The facts have become known to the auditor
before the date of issue of the Audit Report and Financial Statements. The auditor has to
perform the procedure to obtain sufficient, appropriate evidence about the events occuring
from the date of the financial statements i.e. 32-3-2075 to the date of Auditors Report i.e.
31-05-2075. It is observed that as a result of long pending negotiations a sum of Rs.
1,500,000 representing arrears of salaries of last two years have not been included in the
financial statements. It is quite clear that the obligation requires provision for outstanding
expenses. So the auditor should request the management to adjust the sum of Rs.
1,500,000 by making provision for expenses. If the management does not accept the
request the auditor should qualify the audit report.

3.AJ Limited has an investment worth NPR 1,000,000 in its financial statements at 31st
Ashadh 2074. Due to the continuing recession, the investment reduced in value to NPR
900,000 by 15th Shrawan 2074. [J18-5M]
Answer:
NAS 10 Events after the Reporting Period provides guidance whether an entity should adjust
its financial statements or shall disclose for the events after reporting period. Since reduction
in investment value occurred only after the reporting period, it is indicative of condition that
arose after the reporting period which is a non-adjusting event as per para 3 of NAS 10. An
entity shall not adjust the amounts recognised in financial statement to reflect non-adjusting
events after the reporting period. The decline in fair value does not normally relate to the
condition of the investments at the end of the reporting period, but reflects circumstances
that have arisen subsequently. Therefore, the entity does not update the amounts disclosed
for the investments as at the end of the reporting period, however it may need to give
additional disclosure about the nature of event and an estimate of its financial effect , or a
statement that such an estimate cannot be made.

4.AA Ltd. provided Rs 64 lakhs for Inventory obsolescence in 2072/73. In the subsequent
year, it was determined that 50% of such inventory was usable. The Board of Directors
wants to adjust the same through prior period adjustment. [J17-5M]
Answer:
As per NAS 10 on "Events after the Reporting Date ", prior period items are income or
expenses which arise in the current period as a result of errors or omissions in the
preparation of the financial statements of one or more prior periods. The write-back of
provision made in respect of inventories in the earlier year does not constitute prior period
adjustment since it neither constitutes error nor omission but it merely involves making
estimates based on prevailing circumstances when financial statements were being
prepared. It is a mere estimate process involving judgment based on the latest information
available.
An estimate may have to be revised if changes occur regarding the circumstances on which
the estimate was based, or as a result of new information, more experience or subsequent
developments. The revision of the estimate, by its nature, does not bring the adjustment
within the definitions of an extraordinary item or a prior period item.

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In this case, AA Ltd. provided Rs 64 lakhs for inventory obsolescence in 2072-73. In the
subsequent year due to change in circumstances, it was determined that 50% of such
inventory was usable. Revision of such an estimate does not bring the resulting amount of
Rs.32 lakhs within the definition either of a prior period item or of an extraordinary item. The
amount, however, involved is material and requires separate disclosure to understand the
financial position and performance of an enterprise. Accordingly, adjustment in the value of
the inventory through prior period item would not be appropriate.

5.Sagar International Ltd. has acquired a solar power system on 01.04.2072 for Rs. 100
lakhs. On 02.04.2072, it applied to Alternative Energy Promotion Board of Nepal for a 50%
subsidy. The subsidy application was finally approved on 01.06.2073. While finalizing the
accounts, the company has accounted the subsidy as adjusting event after reporting period.
The board of directors has not yet authorized the financials for issue. [J17-5M]
Answer:
NAS 10 on “events after reporting period” requires the value of assets and liabilities to be
adjusted for events occurring after the balance sheet date which occur upto the date of
approval of accounts by the Board of Directors ( authorized for issue) if they provide
evidence of the conditions existing at the end of the reporting period. Since, in this case
books of account have not been approved, grant of subsidy will be considered as an
adjusting event.
Hence, the accounts should be adjusted for the subsidy in 2072-73. Hence, the subsidy
should be either credited to the cost of the system or alternatively may be treated as
deferred income to be written off over the useful life in proportion in which depreciation is
written off.

6.A company‘s financial year ends on 31 March 2015 for group accounting purpose. Due to
devastating earthquake in the month of April 2015, the company‘s factory building with
carrying amount of Rs 5 crores was totally destroyed. The board of director authorized the
financial statements for issue on 30June 2015. The financial statements include the
destroyed building at Rs 5 crore although the Notesto account makes appropriate disclosure
about the earthquake and the destruction of the factory building.[D15-5M]
Answer:
Earthquake occurred in the month of April 2015 which is after the end of the accounting year
(31 March 2015) and before the date when the financial statements are authorized for issue
(30 June 2015). Hence it is an event after reporting period. Since this event does not provide
further evidence of the condition existed at the end of reporting period (31 March 2015) and
it indicates the conditionthat arose after the reporting period, it is a non-adjusting event. So,
the carrying value of the destroyed factory building need not be adjusted in the financial
statements and appropriate disclosure in the Notes to account seems to be in line with NAS
10

7.Total trade receivable of a company is Rs. 20 crores. It includes receivables from

Maheswary Limited amounting to Rs 2 Crores. Maheswary Limited was declared
bankrupt on 15th Asoj 2071; i.e. after the reporting period of Ashad end 2071 and
before the date when financial statements were authorized for issue; i.e. Asoj
Masant 2071. The company management claims that the carrying amount of trade
receivable does not need to be adjusted because the information about bankruptcy
was known after the reporting period.[J15-5M]

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Answer:
Events after the reporting period are those events, favorable and unfavorable, that occur
between the end of the reporting period and the date when the financial statements are
authorized for issue. Two types of events can be identified:
i) those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
ii) those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period)
So, the event in the given case (knowing information about bankruptcy of the debtor after
balance sheet date) seems to be an adjusting event because the debtor was bankrupt on the
balance sheet date which was declared by the court later on. Hence the carrying amount of
the trade receivable should be presented at Rs. 18 crores instead of Rs. 20 crores in the
balance sheet.

8.Chitale Limited has declared dividend of 12% for FY 2069/70 in the month of Ashoj 2070.
The company has booked this as Interim Dividend in Financial Statement of
2069/70.[D14-5M]

Answer:
Dividend has been declared at year end so this should be final dividend.
Further, Nepal Accounting Standards 05 on Events after the Balance Sheet Date provides
that if an entity declares dividends to holders of equity instruments after the balance sheet
date, the entity shall not recognise those dividends as a liability at the balance sheet date.
If dividends are declared after the balance sheet date but before the financial statements are
authorised for issue, the dividends are not recognised as a liability at the balance sheet date
because they do not meet the criteria of a present obligation. Such dividends are disclosed
in the notes in accordance with NAS 01 Presentation of Financial Statements.
Thus, the treatment followed by Chitale limited is not in line with NAS.

9.Satya Limited is company listed in Recognized Stock Exchange of Nepal. During normal
course of operation, a fire broke out on 15th Ashoj, 2070, in which material worth 50 lakhs
which was lying in stock since 1st Ashadh, 2070 was totally destroyed. The financial
statements of the company have not been adopted till the date of fire. The management of
the company argues that since the loss occurred in the year, 2070- 71, no provision for the
loss needs to be made in the financial statements for 2069-70. State whether argument of
management is in accordance with applicable provision. [J14-5M]
Answer:
Event occurring after the balance sheet date: This case requires attention to NSA 560
―Subsequent Events‖ and NAS 5 ―Events After Balance Sheet Date‖. As per NAS 5
―Events After Balance Sheet Date‖, adjustments to assets and liabilities are required for
events occurring after the balance sheet date that provide additional information materially
affecting the determination of the amounts relating to conditions existing at the balance
sheet date or that indicate that the fundamental accounting assumption of going concern
(i.e., the continuance of existence or substratum of the enterprise) is not appropriate. NAS –
5 also requires disclosure of the non adjusting event, in the report of the approving authority.
Further, as per NSA 560 ―Subsequent Events‖, the auditor should assure that all events
occurring subsequent to the date of the financial statements and for which the applicable
financial reporting framework requires adjustment or disclosure have been adjusted or

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disclosed. The event took place after the close of the accounting year and does not relate to
conditions existing at the balance sheet date. Thus, it will have no effect on items appearing
at the balance sheet date because as per NAS – 5 ―Contingencies and Events Occurring
after Balance Sheet Date‖ have to be adjusted that provide evidence of conditions existing
as at the balance sheet date. However, the auditor has to ensure that this loss will not
materially affect the substratum of the enterprises as per its size, nature and complexity of
operations.
Thus, subject to satisfaction in respect of non-violation of going concern concept, the
company has correctly accounted by not providing provision. However, the auditor is
required to ensure the proper disclosure of above mentioned event.

10.A company wants to adjust the bank balance on the balance sheet date by reversing the
entry for a cheque issued in the normal course of business and cancelled after the year end
but before the finalization of accounts. The cheque was returned on the ground that the
signature differs. [J13-5M]
Answer:
According to the NAS-05 “Events After the Balance Sheet Date”, assets and liabilities should
be adjusted for significant events occurring after the balance sheet date that provide
additional evidence to assess estimation of amounts relating to conditions existing at the
balance sheet date. Since the phenomenon of difference in signature existed on the balance
sheet due (though known afterwards); the reversal of the entry can be made as on the
balance sheet date if the amount is material.

11.Though the audit for the year 2068/69 was completed, but not signed the financial
statements of X Limited by the board of directors. In the mean time, the board has decided
to stop the operation of Z Limited, one of the major subsidiary companies of X Limited with
effect from Marg 1, 2069. [D12-5M]
Answer:
NAS 05 section 21 has defined the non – adjusting events after the balance sheet date, but
it should be disclosed in the balance sheet. The sections this events as follows:
If non-adjusting events after the balance sheet date are material, nondisclosure could
influence the economic decisions of users taken on the basis of the financial statements.
Accordingly, an entity shall disclose the for each material category of non-adjusting event
after the balance sheet date:
(a) the nature of the event; and
(b) an estimate of its financial effect, or a statement that such an estimate cannot be made.

Section 22 has defined the examples of non adjusting events after the balance sheet date
are as follows:
(a) a major business combination after the balance sheet date (NAS 21 Business
Combinations requires specific disclosures in such cases) or disposing of a major subsidiary;
(b) announcing a plan to discontinue an operation;
(c) major purchases of assets, classification of assets as held for sale, other disposal of
assets, or expropriation of major assets by government;
(d) the destruction of a major production plant by a fire after the balance sheet date;
(e) announcing, or commencing the implementation of, a major restructuring;
(f) major ordinary share transactions and potential ordinary share transactions after the
balance sheet date (NAS 26 Earnings Per Share requires an entity to disclose a description

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of such transactions, other than when such transactions involve capitalization or bonus
issues, share splits or reverse share splits all of which are required to be adjusted under
NAS 26);
(g) abnormally large changes after the balance sheet date in asset prices or foreign
exchange rates;
(h) changes in tax rates or tax laws enacted or announced after the balance sheet date that
have a significant effect on current and deferred tax assets and liabilities (see NAS 09
Income Taxes);
(i) entering into significant commitments or contingent liabilities, for example, by issuing
significant guarantees; and
(j) commencing major litigation arising solely out of events that occurred after the balance
sheet date. In the financial statements of X Limited, a proper disclosure is required regarding
the closure of the subsidiary company Z Limited and its effects though the financial figures
will not be changed in the balance sheet.

NAS-16 ‘’PROPERTY,PLANT & EQUIPMENT'’

1.In the financial statements of PQR limited, carrying amount of Land and building is Rs. 10
lakh as on year end 2078. In FY 2078-79 land and building has been revalued and the
revalued amount of land and building is Rs. 14 Lakh. The company wants to recognize
revaluation gain in profit or loss.[J22-5M]
Answer:
As per Nepal Accounting Standards -16 “Property, Plant and Equipment” if an asset‟s
carrying amount is increased as a result of a revaluation, the increase shall be recognised in
other comprehensive income and accumulated in equity under the heading of revaluation
surplus. However, the increase shall be recognised in profit or loss to the extent that it
reverses a revaluation decrease of the same asset previously recognised in profit or loss. In
the given case carrying amount of land and building of PQR limited has been increased after
revaluation and the company wants to recognise such revaluation gain in profit or loss which
is not correct as per NAS 16. Revaluation gain should be recognised in other comprehensive
income and such amount should be accumulated in revaluation reserve. Recognition of
revaluation gain in profit or loss is permitted only to the extent revaluation loss previously
recognised in profit or loss. Hence the contention of the company to recognise the
revaluation gain in profit or loss is not correct as per NAS 16.

2.During the financial year 2077/78, SR Private Limited, a service providing company
purchased a generator of Rs.20 lakhs for smooth functioning of its office. The accountant
claims that there is no necessity to provide for depreciation in respect of generator as it was
kept standby but not used at all during the financial year.[D21-5M] [J18-5M]
Answer:
As per NAS 16, Property, Plant and Equipment, depreciation of assets begins when it is
available for use, i.e. when it is in the location and condition necessary for it to be capable of
operating in the manner intended by the management. Depreciation is the systematic
allocation of the cost of an item of property, plant & equipment (less its residual value) over
its useful life. Thus, depreciation has to be charged even in case of these assets which are
not used at all during the year but by mere efflux of time provided such assets qualify as
depreciable assets.

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When the generator was kept ready for use as stand-by, it means it was intended to be used
for the purpose of business. Depreciation in respect of this generator would have been
provided in the accounts for the year ended 31st Ashadh 2078. If there is an intention to use
an asset, though it may not have actually been used, it is a 'constructive' or 'passive' use and
eligible for charging depreciation.

3.MNS Ltd. (The Company) is engaged in manufacturing business. The book value of plant
& machinery of the company was Rs. 900 million as on Ashadh end 2073 (purchased at Rs.
1,000 million on 1st Shrawan 2072). It provided depreciation on straight line basis at 10%
per annum based on useful life of the plant & machinery. Imported asset of Rs. 100 million,
the component of above plant & machinery was acquired on 1st Shrawan 2073 that would
be obsolete in 2 years. The company wants to write off this asset over 2 years. Can the
company do so?
Answer:
As per Nepal Accounting Standard 16 (Property, Plant and Equipment), each part of an item
of property, plant and equipment with a cost that is significant in relation to the total cost of
the item shall be depreciated separately. An entity shall allocate the amount initially
recognised in respect of an item of property, plant and equipment to its significant parts and
depreciate separately each such part. To the extent that an entity depreciates separately
some parts of an item of PPE it also can depreciate separately the remainder of the item. As
it appears that imported assets of Rs. 100 million, which is component of plant and
machinery, is having independent useful life. Therefore, the company can choose to
depreciate the significant parts at 10% p.a. and remainder imported assets over two years.

4.X Ltd. owns five motors that it uses in its business as property, plant, and equipment. The
entity intends to carry three motors under the cost model and the remaining two under the
revaluation model.[D16-5M]
Answer:
NAS 16 permits an entity to choose between either the cost model or the revaluation model.
It does not allow an entity to apply two different models for the same class of property, plant,
and equipment. Therefore, the company is not allowed to carry three motors under the cost
model while carrying two under the revaluation model, since the standard categorically
prohibits such an accounting treatment.

5.A company has 10 vehicles with carrying amount of 5 crores. The company has purchased
a new machinery worth Rs 8 croreby exchanging with its 10 used vehicles and making
further payment of Rs 2 crores in cash. The company management derecognizes vehicles
from its financial statements and recognizes machinery at Rs 7 crores (5 crores plus 2
crores).[D15-5M]
Answer:
The company has acquired new machinery by exchanging with used vehicles and making
further payment of Rs 2 croresin cash. As per NAS 16, the assets acquired in such case
shall be recognized at the fair which is Rs 8 crore in this case. So, Machinery should be
recognized at Rs 8 crores. Since 2 Crores has been paid in cash, disposal of vehicle should
be recognized at Rs 6 crore thereby resulting into gain of Rs 1 crore on disposal of vehicle
because the carrying amount of vehicle in the books of the company is Rs 5 crore. Hence
the treatment of recognizing new machinery at Rs 7 crore and not recognizing gain of Rs 1

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croreon disposal of vehicle by the management does not seem to be appropriate in
accordance with NAS 16.

6.A company purchased machinery on 1st Asoj 2071 for Rs. 10 crores on credit for 6
months. The seller normally does not sell such machineries on credit and cash price of the
machinery is Rs 9.5 crores. The buying company recognizes machinery at Rs. 10 crores in
the books on 1 st Asoj and the liability is fully paid on Falgun Masant.[J15-5M]
Answer:
As per NAS 6, the cost of an item of property, plant and equipment is the cash price
equivalent at the recognition date. If payment is deferred beyond normal credit terms, the
difference between the cash price equivalent and the total payment is recognized as interest
over the period of credit unless such interest is capitalized in accordance with NAS 8.
So, in the given case, the machinery should be recognized at Rs. 9.5 crores in the books
and 0.5 crores should be recognized as interest over the 6 months period (Asoj-Falgun)

7.A company purchased a plant for Rs. 20 crores on 1 Shrawan 2070. The company has the
policy to charge depreciation at the rate of 10% on such plants on straight line basis. Due to
long dispute between the management and the labour of the company, the factory was
closed from Kartik 1, 2070 to Chaitra end 2070. Management has charged depreciation of
Rs. 1 crore on the said plant to the income statement for the year because the newly
purchased plant was not used for 6 months in the year. [D14-5M]
Answer:
Depreciation of an asset begins when it is available for use, i.e. when it is in the location and
condition necessary for it to be capable of operating in the manner intended by
management. Depreciation of an asset ceases at the earlier of the date that the asset is
classified as held for sale (or included in a disposal group that is classified as held for sale)
in accordance with NAS 06 and the date that the asset is derecognized. Therefore,
depreciation does not cease when the asset becomes idle or is retired from active use
unless the asset is fully depreciated. So, in the given case, depreciation expenses to be
charged to the income statement for the year 2070/71 should be Rs 2 crores (i.e. for full
year) instead of Rs 1 crore.

8.ABC Hydropower Pvt. Ltd. has purchased equipment worth of Rs. 4 million which is kept
stand by for urgent usage on need basis for repairing the heavy equipment as and when
default is reported in functioning of heavy equipment. The accountant has treated it as
recurring inventory item and charged to profit and loss account at the end of each financial
year based on consumption pattern calculated on reasonable basis. Is the accounting
treatment made by accountant is correct? Comment.[D14-5M]
Answer:
As per NAS 6- Property, Plant and Equipment, spare parts and servicing equipment are
usually carried as inventory and recognized in profit or loss as consumed. However, major
spare parts and stand-by equipment qualify as property, plant and equipment when an entity
expects to use them during more than one period. Similarly, if the spare parts and servicing
equipment can be used only in connection with an item of property, plant and equipment,
they are accounted for as property, plant and equipment.
In view of the above provision made in NAS 6, the equipment purchased by ABC
Hydropower Pvt. Ltd. should be treated as property, plant and equipment. Though it is
servicing equipment used on repairing heavy equipment; it has to be kept stand-by and can

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be used only in connection with heavy equipment and usable for more than one accounting
period, it should be treated as property, plant and equipment instead of treating it as
inventory.

9.Alpha Limited purchased a high value plant from Beta Limited in exchange of 10,000 units
of its finished products. The plant was in use in Beta Limited for last 3 years and expert
expects that its useful life could be further 17 years (i.e. 20 years in total). Alpha limited sells
its finished products in the market at Rs 1,000 per unit whereas there is no specific market
for the used plant but the expert valuation of the used plant indicates the value of the plant
as Rs. 1.2 crores. Hence, Alpha Limited has recorded the cost price of the plant at Rs. 1.2
crores.[D13-5M]
Answer:
The fair value of the asset given up by Alpha Limited is Rs 10,000,000 (i.e. 10,000 units * Rs
1,000). As per NAS 6 on property plant and equipment, if an entity is able to determine
reliably the fair value of either the asset received or the asset given up, then the fair value of
the asset given up is used to measure the cost of the asset received unless the fair value of
the asset received is more clearly evident. In the present case, the fair value of the used
plan is not clearly evident because there is no specific market for the used plant. Hence the
plant should be recorded at the fair value of finished stock of Alpha Limited given up to
purchase the used plant; i.e. Rs 1 crore. So, the accounting treatment on measurement of
cost of used plant purchased from Beta Limited by Alpha Limited is not in accordance with
the requirement of NAS.

10.On the basis of approval accounting policy, Bee Limited has revalued its property and
charged Rs. 5 crores revaluation loss in profit and loss account in 2067/68 whereas
transferred Rs. 10 crores the revaluation gain to revaluation reserve in 2068/69?[J13-5M]
Answer:
NAS 6 paras 39, 40 and 41 are related with the treatment of revaluation of fixed assets. As
per this para, if an asset‟s carrying amount is increased as a result of a revaluation, the
increase shall be credited directly to equity under the heading of revaluation surplus.
However, it reverses a revaluation decrease of the same asset previously recognized in
profit or loss.
If an asset‟s carrying amount is decreased as a result of a revaluation, the decrease shall be
recognized in profit or loss. However, the decrease shall be debited directly to equity under
heading of revaluation surplus to the extent of any credit balance existing in the revaluation
surplus in respect of that asset.
The revaluation surplus included in equity in respect of an item of property, plant and
equipment may be transferred directly to retained earnings when the asset is derecognized.
This may involve transferring the whole of the surplus when the asset is retired or disposed
of. However, some of the surplus may be transferred as the asset is used by an entity. In
such a case, the amount of the surplus transferred would be the difference between
depreciation based on the revalued carrying amount of the asset and depreciation based on
the asset‟s original cost. Transfers from revaluation surplus to retained earnings are not
made through profit or loss.
Hence in a given case, the revaluation profit of Rs 5 crores is to be credited to profit or loss
account of the year 2068/69, the amount equivalent to revaluation loss which was charged to
profit or loss account in earlier years and Rs 5 crores is to be credited to equity directly (i.e.
revaluation reserve). So, the accounting treatment on revaluation of property, plant and

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equipment provided by the company for the year 2068/69 is not in accordance with the
requirement of NAS.

11.The Company`s plant & machinery was Rs. 200 million as on 1st Shrawan 2067. It
provided depreciation at 15% per annum under WDV method. However it noticed that about
Rs. 20 million worth of imported asset, which is component of above plant & machinery
acquired on 1st Shrawan 2067, would be obsolete in 2 years. Company wants to write off
this asset over 2 years. Can Company do so? Give Comments.[D11-5M]
Answer:
As per Nepal Accounting Standard 6 (Property, Plant and Equipment), where the addition or
extension retains a separate identity and is capable being used after the existing asset is
disposed off, depreciation should be provided independently on the basis of an estimate of
its own useful life. As it appears that imported assets of Rs. 20 million, which is component
of plant and machinery, is having independent useful life. Therefore, the company`s policy to
write off over two years is correct.

12.Kathmandu Boarding School was established in year 2010. It recently constructed

swimming pool of 2020 meter size behind its main building. Due to Vastusastra problem, the
swimming pool was reconstructed toward 5 meter west side of the building. Relocation of the
pool incurred additional cost of 20%. Suggest, how this cost be booked in account.[D10-5M]
Answer:
According to NAS 6 Property, Plant and Equipment, the expenditure for relocation of
swimming pool should be capitalized. However, the carrying amount of those parts that
are replaced should be derecognized in accordance with the de-recognition provisions.

13.Fire Ltd. purchased equipment for its power plant from Urja Ltd. during the year 2006-07
at a cost of NRs.100 lacs. Out of this they paid only 90% and balance 10% was to be paid
after one year on satisfactory performance of the equipment. During the Financial year
2007-08, Urja Ltd. waived off the balance 10% amount which was credited to Profit and Loss
account by Fire Ltd. as discount received.[J09-5M]
Answer:
According to NAS-6 on Property, Plant and Equipment, the cost of an asset may undergo
changes subsequent to its acquisition on account of exchange fluctuation, price adjustment,
change in duty or similar factors. Such change in price /cost needs to be adjusted with the
cost of the asset.
In the give case, Fire Ltd., initially accounted for 100% amount i.e., NRs.100 lacs as cost of
property plant and equipment although they paid only NRs.90 lacs and kept NRs.10 lacs as
payable to the credit of Urja Ltd. Now since the supplier has waived off the balance amount
of NRs.10 lacs, this should be treated as change in price and needs to be adjusted with the
cost of asset.
Therefore, the treatment given by Fire Ltd., in crediting NRs.10. Lacs as discount to Profit &
Loss Account is completely wrong and needs to be corrected. It will have effect on
depreciation also and needs adjustment. The auditor should report the matter if suitable
changes are not made in the accounts

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NAS-18 “REVENUE’’
1. You are the financial consultant of Corona Distillery Ltd. The accountant is in dilemma for
booking the revenue from interest, royalty and dividend. Suggest him in this regard.[D20-5M]
Answer:
NAS 18, Revenue states that Revenue arising from the use by others of entity assets
yielding interest, royalties and dividends shall be recognized on the following bases:
(a) interest shall be recognized using the effective interest method;
(b) royalties shall be recognized on an accrual basis in accordance with the substance of the
relevant agreement; and
(c) dividends shall be recognized when the shareholder’s right to receive payment is
established.
Aforesaid revenue shall be booked when
(a) it is probable that the economic benefits associated with the transaction will flow to the
entity; and
(b) the amount of the revenue can be measured reliably.
Based on the aforesaid provision of NAS 18, I as a financial consultant, will guide the
accountant of Corona Distillery Ltd

2.X Ltd. entered into an agreement with Y Ltd. to dispatch goods valuing Rs. one lakh every
month for six months upon receipt of entire payments. Y Ltd. accordingly made the payment.
In third month due to a natural calamity Y Ltd. requested X Ltd. not to dispatch until further
notice. [J18-5M]
Answer:
NAS 18 ―Revenue‖ specifies that revenue from sale of goods should be recognized when
following conditions have been fulfilled:
i) The seller of the goods has transferred all significant risks and rewards of ownership to the
buyer.
ii) the seller retain no effective control of the goods sold usually associated with ownership;
iii) The amount of revenue can be measured reliably.
iv) It is probable that the economic benefits associated with the transaction will flow to the
entity and
v) The cost in respect of the transaction can be measured reliably.
In this case X Ltd had transferred the significant risk and rewards of the property at an
agreed price. As such sale has been fully completed because upon receipt of the entire
payment. X Ltd was required to dispatch goods valuing Rs 100,000 for six month out of its
inventory. However, in the third month, Y Ltd requested to stop dispatch until further
intimation due to a natural calamity. X Ltd had transferred the goods at an agreed price and
all significant risks and rewards. The delivery was to be effected as per the schedules
indicated by Y Ltd. As per NAS 18, Revenue, mere postponement of delivery at buyers
request does not alter the period in which revenue should be recognized. Accordingly X Ltd
should recognize the entire 600,000 as Sales.

3.Nice Guy Ltd. sells goods with a cost of Rs. 100,000 to Start-up Co. for Rs. 140,000 and a
credit period of six months. Nice Guy’s normal cash price would have been Rs. 125,000 with
a credit period of one month or with a Rs. 5,000 discount for cash on delivery. The company
wishes to book the revenue as Rs. 140,000. [J17-5M]
Answer:

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Effectively, Nice Guy Ltd is financing Start-up Co. for a period of six months. The normal
price would have been Rs. 125,000 as the goods sold with a credit period of six months.
Therefore, cash discount should not be applicable for the goods sold on credit settlement.
Sales revenue should be accounted for Rs. 125000 being the fair value of consideration
receivable. The difference between the nominal amount of Rs. 140,000 and the normal price
of goods Rs. 125000 i.e. Rs. 15,000 would be recognized as interest income over the period
of finance of six months.
As per NAS 18, Revenue is the gross inflow of economic benefits during the period arising in
the course of the ordinary activities of an entity when those inflows result in increases in
equity, other than increases relating to contributions from equity participants. In a given case
it has been shown after deducting in the purchase which is not as per this standard and it
should be disclosed in gross as per this NAS.

4.Smart Pvt. Limited sold a Television worth of Rs. 500,000 (exclusive of all taxes) on 32
Ashadh 2071 which includes Rs. 100,000 for servicing fees of the Television for 5 years from
the date of sales. The servicing fee is estimated equal amount for each guaranteed service
years. Smart Pvt. Limited booked entire Rs. 500,000 as revenue for financial year 2070/71.
[D14-5M]
Answer:
As per NAS 7 "Revenue" when the selling price of a product includes an identifiable amount
for subsequent servicing (for example, after sales support and product enhancement on the
sale of software), that amount is deferred and recognized as revenue over the period during
which the service is performed. The amount deferred is that which will cover the expected
costs of the services under the agreement, together with a reasonable profit on those
services.Accordingly in the light of aforesaid provision of NAS 7; the accounting treatment
made by Smart Pvt. Limited is not correct. Smart should book Rs. 400,000 as revenue for
FY 2070/71 and Rs. 100,000 should be deferred. For each coming year Rs. 20,000 should
be recognized as revenue to match its services cost.

5.M/s Merita Impex is engaged in the business of manufacturing and trading of musical
instruments. A sum of Rs. 5 lakhs, received from an insurance company as an insurance
claim for loss of goods in transit costing Rs. 4 lakhs, is credited to the purchase
account.[D13-5M]
Answer:
All items of income and expense which are recognised in a period should be included in the
determination of net profit or loss for the period. The claim for loss of goods in transit is
arising out of ordinary activities of the impex as a part of its normal course of business.
However, the cost of goods lost in transit is only Rs.4,00,000 while the insurance money
received is Rs.5,00,000. Purchases Account need not be credited since it would distort the
purchases done during the year and as also the gross profit. Therefore, entire amount of 5
lakhs needs to be taken to profit and loss account under an appropriate head. This is an
income arising from an ordinary activity of the enterprise but having regard to amount
involved and exceptional nature, a separate disclosure be made in the profit and loss
account. Such disclosure would enable the users to understand the performance of an
enterprise for the period. As per NAS 18 Revenue is the gross inflow of economic benefits
during the period arising in the course of the ordinary activities of an entity when those
inflows result in increases in equity, other than increases relating to contributions from equity

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participants. In a given case it has been shown after deducting in the purchase which is not
as per this standard and it should be disclosed in gross as per this NAS.

6.COMMENT :
Sahara Garment Private Limited is one of the leading garments industries in Nepal. The
company has exported 50,000 readymade shirts to Turkey for equivalent NPR 10 millions
and booked NPR 10 millions as income in their account, however, the government of Turkey
for the time being has suspended the equivalent NPR 5 millions amount to be remitted to
Sahara Garment P Ltd on the ground that the quota system as determined by the
government of Turkey is below than the goods as supplied by Sahara Garment from
Nepal.[D12-5M]
Answer:
NAS 07 Nepal accounting standards on revenue Para 18 has clearly defined the case of
remit suspense. As per this Para revenue is recognized only when it is probable that the
economic benefits associated with the transaction will flow to the entity. In some cases, this
may not be probable until the consideration is received or until an uncertainty is removed.
For example, it may be uncertain that a foreign governmental authority will grant permission
to remit the consideration from a sale in a foreign country. When the permission is granted,
the uncertainty is removed and revenue is recognized. However, when an uncertainty arises
about collectability of an amount already included in revenue, the uncollectable amount or
the amount in respect of which recovery has ceased to be probable is recognized as an
expense, rather than as an adjustment of the amount of revenue originally recognized.
Sahara Garment P Ltd has to adjust the balance suspended amount from the revenue which
was recognized previously. Otherwise the auditor should make qualification on the revenue
reorganization.

7.Shree Ltd. has 2 divisions X and Y. The finished products of division X are transferred to
division Y where further processing is carried out before sale to customers. To achieve
transparency and accountability between the divisions, division X raises an invoice on
division Y at cost plus normal margins. At the year end the unrealized profits on inter-division
stocks are eliminated. However, the transfers are recorded at the invoice value as sales and
purchases in the respective divisions for the purpose of preparing the Profit & Loss Account.
Suitable disclosures, for this are given in the ‘Notes to Accounts’.[J12-5M]
Answer:
As per the definition of the term “Revenue” in NAS 07, revenue is the gross inflow of cash,
receivables or other consideration arising in the course of the ordinary activities of an
enterprise from the sale of goods, from the rendering of services, and from the use by others
of enterprise resources yielding interest, royalties and dividends. Revenue is measured by
the charges made to customers or clients for goods supplied and services rendered to them
and by the charges and rewards arising from the use of resources by them. The definition
clearly implies that the transfers within the enterprise cannot be considered as fulfilling the
definition of the term “revenue”.
Thus, the recognition of inter-divisional transfers as sales is an inappropriate accounting
treatment and is inconsistent with NAS 07. Further, in case of inter-divisional transfers, risks
and rewards remain within the enterprise and also there is no consideration from the point of
view of the enterprise as a whole. Thus, the recognition criteria for revenue recognition are
also not fulfilled in respect of interdivisional transfers. In the instant case, therefore, Shree
Ltd cannot recognize inter-division transfers from X to Y as sales and the same will have to

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be eliminated during finalization. If management do not agree to do so, the auditor shall
qualify his report.

8.Grand Industries Ltd. is engaged in manufacturing and supply of gear boxes to Suzaki
Vehicles Ltd. As per terms of supply, full price of the goods are not released by Suzaki
Vehicles Ltd. but 15% thereof is retained and paid after one year, if there is satisfactory
performance of the parts supplied. Grand Industries Ltd. accounts for only 85% of the
invoice value as sale at the time of supply and balance 15% is accounted as sale in the year
of receipt of payment. [D11-5M]
Answer:
According to NAS-7 on Revenue, revenue recognition from sale of goods should be
recognized when the seller has transferred to the buyer, the property or the goods for a price
or when the seller has transferred all significant risk and rewards and the seller has no
effective control over goods and no significant uncertainty exists regarding the amount of
consideration and its collectability. In the given case the goods as well as the risk and
ownership has been transferred by Grand Industries Ltd., to Suzaki Vehicles Ltd., on the
basis of invoice and delivery of material. In the instant case, therefore, Grand Industries Ltd.
should recognize sale at full 100% of the invoice value in spite of the fact that 15% payment
will be released after one year. However, depending upon the past experience regarding
collectability of 15% amount, they can make a provision for the amount that is not likely to be
realized. Hence, the treatment given by the company is not correct and if they do not correct
it, the auditor should qualify his report.

9.BMG Ltd. is a manufacturing company produces durable consumer goods with an annual
turnover of Rs. 100 crores. The company receives orders from its commission agents all
over the country, but goods are dispatched directly to the customers. The documents
including transport bills are sent through the bank for collection. At the end of the 6th year, it
is found that documents covering the dispatch of goods worth Rs. 10 crores were still lying
with the banks not cleared by the customers even though the normal collection period of 15
days from the date of dispatch has expired. Should revenue be recognised in the above
case?[D09-5M]
Answer:
According to NAS - 07 on Revenue, revenue from the sale of goods shall be recognized
when
-the seller of goods has transferred to the buyer the significant risks and rewards of
ownership of the goods;
-the seller retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;
-the amount of revenue can be measured reliably.
-It is probable that the economic benefits associated with the transaction will flow to the
entity; and
-The costs incurred or to be incurred in respect of the transaction can be measured reliably.
Since the transport bills were sent through the bank for collection, it may be said that the
seller entity has retained effective control over the ownership of goods. Further since the
documents were not cleared by the customer even after the expiry of the normal period of
collection, there is an uncertainty in the realization of sale proceeds. Apparently, the amount
also appears to be quite material being 10% of total turnover. Hence, revenue should not be
recognised in this case.

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NAS-20 'GOVERNMENT GRANTS’
1.Agri Nepal Pvt. Ltd. has a business of agricultural farm. The Government of Nepal has
provided grant of Rs. 10 lakhs against the bank guarantee with a condition that the company
has to export its product worth of Rs. 50 lakhs per year in next two fiscal year. Guide the
accountant of the company for the accounting of the grant.[D19-5M]
Answer:
As per NAS 20, Accounting for Government Grants and Disclosure of Government
Assistance, government grants shall not be recognized until there is reasonable assurance
that:
• The entity will comply with the condition attaching to them and
• The grants shall be received.
Receipt of grant does not itself provide conclusive evidence that the conditions attaching to
the grant have been or will be fulfilled.
In the given case, the Government of Nepal has provided grant of Rs. 10 lakhs with the
condition that the company need to export its produce worth of Rs. 50 lakhs in next two
years. The grant received shall only be recognized as income if the company can export Rs.
50 lakh in next two years. In this case, the government grant shall be recognised in profit
and loss on systematic basis over the periods in which the entity recognises as expenses
the related costs for which the grants are intended. So the company shall book Rs. 5 lakhs
as income in first year if it has exported Rs. 50 lakhs. If it has reasonable assurance that it
will be able to export Rs. 50 lakhs in second year it can book income of next Rs. 5 lakhs in
second year.

2.Reena Ltd. received Rs. 50 lakhs as grant from the Nepal Government towards the part
cost of a specific machinery. The company credited the above sum of Rs. 50 lakhs as
income in its profit & loss account for the year. [J12-5M]
Answer:
NAS 10: Accounting for government grants recognized two methods of presentation of
grants related to specific fixed assets in financial statements as acceptable alternatives:
(i) Under first alternative, the grant is shown in the Balance Sheet as a deduction from the
gross value of a machinery. The grant is recognized in P& L A/c over the useful life of a
depreciable asset by way of a reduced depreciation charges.
(ii) Under second alternative, it can be treated as deferred income which should be
recognized in P & L A/c over useful life of asset in proportion in which depreciation on
machinery will be charged. The deferred income pending its apportionment to P & L A/c
should be disclosed in Balance Sheet with a suitable description e.g. Deferred Government
Grants.
In the given case, Reena Ltd. received Rs.50 lakhs as grant towards part cost of specific
machinery. The company has credited the said sum as income in its Profit and Loss account
which is incorrect as per the above provisions.

3.The Critical Pollution Extinction Company Limited procured a pollution controlling machine
for which the government has 50% rebate in customs duty upon the precondition that the
machine should be used for at least 5 years. During the course of audit you found that the
company has credited 50% rebate provided to income for the year by disclosing the same in
the Notes to Accounts in the Financial Statement. What is your opinion as regards the
accounting treatment by the company?[J11-5M]

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Answer:
As mentioned in Para 8 of NAS 10 Accounting for Government Grants and Disclosure of
Government Assistance, a government grant is not recognized until there is reasonable
assurance that the entity will comply with the conditions attaching to it, and that the grant will
be received. Receipt of a grant does not of itself provide conclusive evidence that the
conditions attaching to the grant have been or will be fulfilled. Government grants shall be
recognized as income over the periods necessary to match them with the related costs
which they are intended to compensate, on a systematic basis. They shall not be credited
directly to shareholders‟ interests. It is fundamental to the income approach that government
grants be recognized as income on a systematic and rational basis over the periods
necessary to match them with the related costs. Income recognition of government grants on
a receipts basis is not in accordance with the accrual accounting assumption. Government
grants related to assets, including non- monetary grants at fair value, shall be presented in
the balance sheet either by setting up the grant as deferred income or by deducting the grant
in arriving at the carrying amount of the asset. Hence the NAS has provided two acceptable
alternative methods of presentation in financial statements of grants related to assets.
According to the first method, the grant amount is accounted for as deferred income which is
recognized as income on a systematic and rational basis over the useful life of the asset.
Under the other alternative method, government grant is deducted in arriving at the carrying
cost of the asset and the grant is recognized as income over the depreciable asset by way of
a reduced depreciation charge.
Hence, as mentioned here above, the treatment to credit whole of the credit rebate amount
in the year of purchase of the machine by Critical Pollution Extinction Company is not
appropriate since it is bound by the precondition that the machine should be used for at least
5 years. The 50% rebate received on customs duty should be credited to income for at least
over a period of 5 years.

NAS-21 ‘’FOREX’’
1.M/s Raddison Hotel on 15.4.2073 imported two Mercedes Benz from Germany at a price
Euro 200 thousand each upon terms of credit that price should be settled within three
months from the date of purchase. The company capitalized the asset and created a liability
for the capital goods converting the foreign currency liability to Nepalese Rupees at a rate of
exchange prevailing as on 15.4.2073. When the company settled the liability on 30.8.2073, it
had to incur an additional amount of Rs.15,00,000 due to foreign exchange rate on the date
of settlement. It added this additional amount of exchange variation in the capital cost of the
asset and charged depreciation upon an enhanced amount of asset value from 30.8.2073.
[D17-5M]
Answer:
Nepal Accounting Standards (NAS) 21 states that the exchange differences on the
settlement of monetary items at a rate different from those at which they were translated on
initial recognition during the period or in previous financial statements shall be recognized in
profit or loss in the period in which they arise. Therefore, in view of the above, the M/s
Raddison Hotel should charge the additional amount of Rs.15,00,000 to profit and loss
account in accordance with the said standard and not to capitalize.

2.Treatment of foreign currency monetary items on balance sheet date.[J12-5M]

Answer:

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Foreign Currency Monetary Items and its Treatment on Balance Sheet date: As per NAS- 11
on “Accounting for the Effects of Changes in Foreign Exchange Rates” monetary items are
money held and assets and liabilities to be received or paid in fixed or determinable amounts
of money, e.g., cash, receivable, payables, etc. Regarding foreign currency transactions,
NAS 11 requires that while reporting effects of changes in exchange rates subsequent to
initial recognition, at each balance sheet date, monetary items denominated in a foreign
currency, (e.g., foreign currency notes, balances in bank accounts denominated in a foreign
currency, and receivables, payables and loans denominated in a foreign currency) should be
reported using the closing rate prevailing on balance sheet date. However in certain
circumstances the closing rate may not WBX (7) reflect, with reasonable accuracy, the
amount in reporting currency that is likely to be realized from or required to be disbursed to
because the rate is unrealistic. In such circumstances, the relevant monetary item should be
reported in the reporting currency at the amount which is likely to be realized from or
required to be disbursed to at the balance sheet date.

NAS-23 ‘BORROWING COST’’

1.GOT Resort Pvt. Ltd. has taken loan to construct its building. However, before the assets
could be completely constructed and put to use, the construction got delayed due to
lockdown as a result of COVID-19 pandemic. Now, as the statutory auditor, you need to give
your opinion on the treatment of the interest on the loan during the lockdown period.
[J22-5M]
Answer:
Interest on loan taken to acquire qualifying assets can be termed as borrowing cost. Nepal
Accounting Standard – 23 deals with the accounting of borrowing cost. It states that
borrowing costs should be recognized as an expense in the period in which they are
incurred. However, as per alternative treatment, borrowing costs that are directly attributable
to the acquisition or construction of any asset should be capitalized as part of the cost of that
asset. In the above case the loan has been solely taken for the purpose of constructing the
asset and hence needs to be capitalized up to the put-touse phase. However, the standard
also specifies that an entity shall suspend capitalization of borrowing costs during extended
periods in which it suspends active development of a qualifying asset. An entity may incur
borrowing costs during an extended period in which it suspends the activities necessary to
prepare an asset for its intended use or sale. Such costs are costs of holding partially
completed assets and do not qualify for capitalization. Hence in the above case, the interest
on loan during the lockdown period should not be capitalized and should be charged to the
profit & loss account.

2.XYZ Hotels Ltd. has incurred loss and one of its illiterate director wants your assistance to
find out exactly what happened in the company. He suspects that the company has paid
excessive interest on its borrowing. He has found average of 12 month end borrowing
balance was Rs. 120 million and prevailing interest rate was 10% for the year. Interest paid
for 12 month was Rs. 12 million. Suggest to the director on this matter how he can verify this
matter.[D10-5M]
Answer:
Average interest cost on the average borrowing by XYZ Hotels Ltd. is matching with
prevailing interest rate. However, detailed verification of borrowing and interest expenses
booked need to be carried out as following:

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1) Examine the date, rate and amount of borrowing with reference to borrowing documents.
2) Verify booking date of the balances in individual accounts and total of borrowing balance.
3) Examine whether there is a procedure for obtaining confirmation of balance periodically.
4) Check calculations of interest and examine whether interest expenses has been
accurately provided for with reference to the duration of borrowing.
5) Trace the amount of borrowing in to bank account and interest and loan repayment from
bank account.
6) Examine whether borrowing is properly authorized and whether internal control
procedures have been followed.
7) Examine that other items of liability is not booked as borrowing.

3.The entire liability for interest on deferred payment terms is treated as part of capital cost
of the asset as such liability was incurred at the time of acquisition of the asset
itself.[J09-5M]
Answer:
According to NAS - 8 on "Borrowing Costs", under allowed alternative treatment, borrowing
costs that are directly attributable to the acquisition, construction or production of a qualifying
asset shall be capitalised as part of the costs of that asset. The interest on deferred payment
terms are borrowing costs directly attributable to the acquisition of the asset and can be
treated as part of the capital cost. However, under NAS - 8, the capitalisation of borrowing
cost shall cease when substantially all the activities necessary to prepare the qualifying
asset for its intended use are complete. Hence, the interest on deferred payment related to
the period after the assets are ready to put to use shall not be capitalised.

NAS-24 ‘RELATED PARTY DISCLOSURE’’

1.Mr. Rajaram is a director in M/s P Ltd. and also in M/s Q Ltd. M/s Q Ltd. purchases goods
from M/s P Ltd. The two companies reported the transaction as transaction with related party
as on Ashadh 31, 2074 under NAS-24.[D17-5M]
Answer:
According to the Provisions of NAS-24, the given transaction between P Ltd. and Q Ltd. is
not a related party transaction. According to the standard, related party relationship includes
enterprises owned by directors or major shareholders of the reporting enterprise and
enterprises that have a member of key management in common with the reporting
enterprise. In the given case, none of the enterprises is owned by Rajaram. He is only a
director in both the enterprises not a Key Management Personnel (Such as Managing
Director, Whole time Director, etc). Therefore, P Ltd should not report the transaction as
related party transaction.

2. A firm of a father and a son is receiving Rs. 2 lakhs towards job work done for XYZ Ltd.
during the year ended on 32.03.2072. The total job work charges paid by XYZ Ltd. during
the year are over Rs. 50 lakhs. The father is a Managing Director of XYZ Ltd. having
substantial holding. The Managing Director told the auditor that since he is not involved in
the activities of the firm and since the amount paid to it is insignificant; there is no need to
disclose the transaction. He further contended that such a payment made in the last year
was not disclosed. Is Managing Director right in his approach? [J17-5M][J12-5M]
Answer:

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Nepal Accounting Standard 24,“Related Party Disclosures” applies to the facts of the case.
NAS 24 requires disclosure of party relationship and transactions between a reporting
enterprise and its related parties. The parties are considered to be related if at any time
during the reporting period, one party has the ability to control the other party or exercise
significant influence over the other party in making decisions.
In the given case, the managing director of XYZ Ltd. is a partner in the firm with his son,
which has been paid Rs. 2 lakhs as job work charges. The managing director is having a
substantial holding in the firm. The case is covered by NAS 24. The approach of the
managing director is not tenable under the standard and accordingly all disclosure
requirements have to be complied. Since there is related party transaction the contention of
managing Director is not correct and the auditor should advise him to make proper
disclosure as required by NAS and if the management refuses, the auditor shall express a
qualified report.

NAS 36 ‘Impairment of Assets’

1.As an auditor, give your opinion with explanations on the following cases: (45=20) HDL
Ceramics Ltd, Bhaktapur purchased and assembled plant at Madhyapur which has been
declared by municipality as not meeting the requirements of environment laws of
municipality which have been recently enacted. The asset has to be destroyed as per the
law. The asset is carried in the Balance Sheet at the year end at Rs. 55,00,000. The
estimated cost of destroying the asset is Rs. 7,00,000. The accountant wishes to charge off
assets in next 7 years.[J22-5M]
Answer:
As per NAS 36 on Impairment of Assets, impairment loss is the amount by which the
carrying amount of an asset exceeds its recoverable amount, where recoverable amount is
the higher of an asset‟s net selling price and its value in use·. In the given case, recoverable
amount will be nil [higher of value in use (nil) and net selling price (Nil)].
Thus, impairment loss will be calculated as Rs. 55,00,000 [carrying amount (Rs. 5500,000) –
recoverable amount (nil)]. Therefore, asset is to be fully impaired and impairment loss of Rs.
55,00,000 has to be recognized as an expense immediately in the statement of Income as
per NAS. Further, cost of destroying the assets shall also be recognized as expense.

2.Manu Manufacturing Limited acquired an asset which has been declared by municipality
as not meeting the requirements of environment laws which have been recently enacted.
The asset has to be destroyed as per the law. The asset is carried in the Balance Sheet at
the year end at Rs. 6,00,000. The estimated cost of destroying the asset is Rs. 70,000. The
accountant wishes to charge off net balance of Rs.5,30,000 in next 5 years. [J16-5M]
Answer:
As per NAS on Impairment of Assets, impairment loss is the amount by which the carrying
amount of an asset exceeds its recoverable amount, where, recoverable amount is the
higher of an asset‟s net selling price and its value in use·. In the given case, recoverable
amount will be nil [higher of value in use (nil) and net selling price is also nil. Thus
impairment loss will be the sum of Rs. 670,000 including the cost of disposable of the fixed
assets. Therefore, asset is to be fully impaired and impairment loss of Rs. 6,70,000 has to
be recognized as an expense immediately in the statement of income as per NAS.

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NAS-37 ‘’PROVISION,CONTINGENT ASSET & LIABILITIES’’
1.TCIN Pvt. Ltd. has been fighting a legal case since last three years. The legal team of the
company has assured that company will win the case. During the year some new facts have
developed and these facts are not in favor of the company. If the company loses the case it
has to pay Rs. 25 lakhs to other party. The company has approached to you for dealing with
the situation. [D19-5M]
Answer:
As per NAS 37, Provisions, Contingent Liabilities and Contingent Assets, a provision shall be
recognized when:
• An entity has a present obligation as a result of past obligation;
• It is probable that outflow of resources embodying economic benefits will be required to
settle the obligation and
• A reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision shall be recognized. In the given case, the
company was fighting a legal case since last three years. During the year, new facts were
developed against the company. Since the new facts are not in favour of the company, it has
to make provision of Rs. 25 lakh in profit and loss account because it has met all the
condition of recognition of provision.

2.Surendra Clothing Pvt. Ltd. has been assessed to Income-tax, in which a demand of Rs.
10 lakhs has been made. The company has gone in appeal. The company has deposited
Rs. 6 lakhs against the demand, on being pursued by the department. The company has
been advised by its counsel that there is 80% chance of losing in respect of one of the
grounds which may end up confirming the demand of rest Rs. 4 lakhs. How the company
should treat the same while preparing the final accounts for the year ending Asadh end,
2076?[J19-5M]
Answer:
As per paragraph 14 of NAS 37, an entity shall recognise a provision if and only if:
-a present obligation (legal or constructive) has arisen as a result of past event (the
obligating event),
-payment is probable („more likely than not‟)
-the amount can be estimated reliably
Here, the obligating event is an event that creates a legal or constructive obligation and
therefore results in an entity having no realistic alternative but to settle the obligation.
Contingent liability is a possible obligation depending on whether some uncertain future
event occurs or a present obligation but payment is not probable or the amount cannot be
measured reliably. Contingent liability is not recognised; rather it is disclosed in the notes to
accounts in financial statements.
In the given case, there is an assessment by income tax authority of Rs. 10 lakhs. This
situation has arisen as a result of past event resulting in present obligation of the entity and
there is an 80% chance of losing the case. This extent of probability is substantial. The
amount of obligation can also be estimated reliably. Therefore the company shall make
provision for Rs. 10 lakhs. If the provision of Rs. 6 lakhs already deposited has been
accounted for as provision, additional provision of Rs. 4 lakhs should be made and
presented in financial statements accordingly.

Prepared by -----------------31—-------------- HARI YADAV

EXTRA QUESTIONS.
1.M/s Merita Impex is engaged in the business of manufacturing and trading of musical
instruments. A sum of Rs. 5 lakhs, received from an insurance company as an insurance
claim for loss of goods in transit costing Rs. 4 lakhs, is credited to the purchase
account.[D16-5M]
Answer:
All items of income and expense which are recognized in a period should be included in the
determination of net profit or loss for the period. The claim for loss of goods in transit is
arising out of ordinary activities of the Impex as a part of its normal course of business. (24)
P.T.O. Since the company received Rs. 5 lakhs against goods lost in transit costing Rs. 4
lakhs, there is profit of Rs. 1 lakh from insurance claim which should be separately
recognized in P/L. Further cost of goods sold should be reduced by Rs. 4 lakhs (i.e. goods
lost in transit) so that gross profit figure is not affected as sales revenue did not arise for
these goods.

Prepared by -----------------32—-------------- HARI YADAV