Suggested Answers - Dec 2023 - CAP III - Group 1

SUGGESTED ANSWERS TO
THE QUESTIONS SET AT

CHARTERED ACCOUNTANCY PROFESSIONAL
CAP III LEVEL - GROUP 1
DECEMBER 2023 EXAMINATION
The Institute of Chartered Accountants of Nepal

ICAN Marg, Satdobato, Lalitpur
The Institute of Chartered Accountants of Nepal
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Year and month of Publication: 2024 April
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CONTENTS
Paper 1 - Advanced Financial Reporting 4-23
Paper 2 - Advanced Financial Management 24-41
Paper 3 - Advanced Auditing 42-56
Paper 4 - Corporate Laws 57-71
Suggested Answers - December 2023 - Advanced Financial Reporting
ADVANCED FINANCIAL REPORTING

Suggested Answer
Roll No……………. Maximum Marks - 100

Total No. of Questions - 6 Total No. of Printed Pages - 19
Time Allowed - 3 Hours

Marks
Attempt all questions. Working notes should form part of the answers.
1. Ram Limited’s investment includes one subsidiary Rahim Limited. The draft statements of financial
position of the two companies as at 31.03.2080 were as follows:
Ram Limited Rahim Limited
(Rs. ’000) (Rs. ’000)
Assets
Non-current assets:
Property, plant and equipment (Note 1) 380,000 355,000
Intangible assets (Note 1) 80,000 40,000
Investments (Note 1 and 3) 497,000 -
Total non-current assets 957,000 395,000
Current assets
Inventories (Note 4) 100,000 70,000
Trade receivables (Note 5) 80,000 66,000
Cash and cash equivalent (Note 5) 10,000 15,000
Total current assets 190,000 151,000
Total assets 1,147,000 546,000
Equity and liabilities
Equity
Share capital of Rs. 0.50 150,000 200,000
Retained earnings (Note 1) 498,000 186,000
Other component of equity (Note 1 and 3) 295,000 10,000
Total equity 943,000 396,000
Non-current liabilities
Provisions (Note 6) 34,000 -
Long term borrowings (Note 7) 60,000 50,000
Deferred tax 35,000 30,000
Total non-current liabilities 129,000 80,000
Current liabilities
Trade and other payables (Note 5) 50,000 55,000
Short term borrowings 25,000 15,000
Total current liabilities 75,000 70,000
Total equity and liabilities 1,147,000 546,000
Note 1: Ram Limited’s investments in Rahim Limited
On 01.04.2077, Ram Limited acquired 300 million shares in Rahim Limited by means of a share
exchange of one share in Ram Limited for every two shares acquired in Rahim Limited. On that
date, the market price of a share of Ram Limited was Rs. 2.40. Ram Limited incurred directly
4| The Institute of Chartered Accountants of Nepal

attributable costs of Rs. 2 million on acquisition of Rahim Limited. These costs comprised:
• Rs. 0.80 million –cost of issuing own shares, debited to Ram Limited’s share premium account
within other component of equity.
• Rs. 1.20 million due diligence costs-included in the carrying amount of investment in Rahim
Limited in Ram Limited’s own statement of financial position.
There has been no change to the carrying amount of this investment in Ram Limited’s own statement
of financial position since 01.04.2077.
• On 01.04.2077, the individual financial statements of Rahim Limited showed the following
reserve balances:
• Retained earnings Rs. 125 million
• Other component of equity Rs. 10 million
The directors of Ram Limited carried out a fair value exercise to measure the identifiable assets and
liabilities of Rahim Limited at 01.04.2077. The following matters emerged:
• Plant and equipment having a carrying amount of Rs. 295 million had an estimated market val-
ue of Rs. 340 million. The estimated remaining useful economic life of this plant was five years.
None of this plant and equipment had been disposed between 01.04.2077 and 31.03.2080.
• An in-process research and development project existed at 01.04.2077 but did not meet the rec-
ognition criteria of NAS 38 – Intangible Assets. The fair value of the research and development
project at 01.04.2077 was Rs. 20 million. The Project started to generate economic benefits on
01.04.2078 over an estimated period of four years.
The above two fair value adjustments have not been reflected in the individual financial statements
of Rahim Limited. In the consolidated financial statements, these fair value adjustments will be
regarded as temporary differences for the purpose of computing deferred tax. The rate of deferred
tax to apply to temporary differences is 20%.
Ram Limited uses the proportion of net assets method to calculate non-controlling interest in Rahim
Limited.
Note 2: Impairment review on goodwill on acquisition of Rahim Limited
No impairment of the goodwill on acquisition of Rahim Limited was evident when reviews were
carried out on Ashadh end 2078 and 2079. On 31.03.2080, the directors of Ram Limited concluded
that the recoverable amount of the net assets (including goodwill) of Rahim Limited at the date
was Rs. 450 million. Rahim Limited is regarded as a single cash generating unit for the purpose of
measuring goodwill impairment.
Note 3: Other Investments
Apart from its investment in Rahim Limited, the investments of Ram Limited included in the
statement of financial position at 31.03.2080 are all financial assets which Ram Limited measures at
fair value through other comprehensive income. These other investments are correctly measured in
accordance with NFRS – 9 Financial Instruments.
Note 4: Intra-group sales of inventories
The inventories of Ram Limited at 31.03.2080 included components purchased from Rahim Limited
in the last three months of the financial year at a cost of Rs. 20 million. Rahim Limited supplied these
goods at a mark-up of 25% on the cost to Rahim Limited.
Note 5: Trade receivables and payables
Group policy is to clear intra-group balances on a given date prior to each year end. All group
The Institute of Chartered Accountants of Nepal |5

companies had complied with this policy at 31.03.2080, so at that date there were no outstanding
intra-group balances.
Note 6: Provisions
On 31.03.2080, Ram Limited finalized the construction of an energy generating facility. The facility
has an expected useful economic life of 25 years and Ram Limited has a legal requirement to
decommission the facility at the end of its estimated useful life. The directors of Ram Limited
estimated the cost of this decommissioning to be Rs. 34 million based on prices prevailing at Ashadh
end 2105. At an appropriate discount rate the present value of the cost of decommissioning the
facility is Rs. 10 million. The directors of Ram Limited made a provision of Rs. 34 million and
charged this amount as an operating cost in the financial statements of Ram Limited for the year
ended 31.03.2080.
Note 7: Long term borrowings
On 01.04.2079, Ram Limited issued 40 million Re. 1 bonds at par. The cost of issuing the bonds was
Rs. 1 million and the cost was charged as a finance cost for the year ended 31.03.2080. No interest
is payable on the bonds but they are redeemable at a large premium which makes their effective
finance cost of 8% per annum. The bonds are included at a carrying amount of Rs. 40 million in the
statement of financial position of Ram Limited at 31.03.2080.
Required: 20
Prepare the consolidated statement of financial position of Ram Limited at 31.03.2080.
Answer
1) Consolidated statement of financial position of Ram Limited as on 31.03.2080
Assets Rs.’000
Non-current assets
PPE (380,000 + 355,000 + 45,000 - 27000) [WN 1] 753,000
Bargain Purchase/Goodwill [WN 3] 26,100
Intangible assets (80,000 + 40,000 + 20,000 – 10,000) [WN 1] 130,000
Investments (497,000 – 360,000 -1,200) [WN 3] 135,800
1,044,900
Current assets
Inventories (100,000 + 70,000 – 4,000) 166,000
Trade receivables 146,000
cash and cash equivalents 25,000
337,000
Total assets 1,381,900
Equity and liabilities
Equity
Share Capital 150,000
Consolidated retained earnings [WN 4] 496,180
Other component of equity 295,000
941,180
Provisions [WN 4] 10,000
Long term borrowings (60,000 + 50,000 + 3,120 – 1000) [WN 4] 112,120
Deferred tax (35,000 + 30,000 + 4,800) [WN 1] 69,800
Non-controlling interest[WN 2] 103,800
295,720

Current liabilities
Trade and other payables 105,000
Short term borrowings 40,000
145,000
Total equity and liabilities 1,381,900
Working Note:
1. Net assets of Rahim Limited
(Rs.’000)
01.04.2077 31.03.2080
Equity 200,000 200,000
Retained earnings 125,000 186,000
Other component of equity 10,000 10,000
Fair value adjustments
Plant and Machinery 45,000 45,000
Depreciation on Plant and Machinery
- (27,000)
(45,000/5 years × 3 years)
Research and Development 20,000 20,000
Research and Development written off
- (10,000)
(20,000/4 years × 2 years)
Unrealized profit (20,000/125 × 25) - (4,000)
Deferred tax [(45,000 + 20,000) × 20%
(13,000) (4,800)
(18000 + 10000 – 4000) × 20%]
Net assets 387,000 415,200
Increase in net assets 28,200
2. Non-controlling interest (Rs.’000)
a) Initial recognition (25 % of 387,000) 96,750
b) On date of consolidation
• Initial recognition 96,750
• Add: increase in net assets (25% of 28,200) 7,050
103,800
3. Bargain Purchase (Rs.’000)
a) Initial recognition
Cost of investment (300 million x ½ x 2.4) 360,000
NCI (25% of net assets on the date of acquisition) 96,750
456,750
Less: Net assets 387,000
Bargain Purchase/Goodwill 69,750
b) On date of consolidation
Bargain Purchase Gross (69,750/75%) 93,000
Net assets 415,200
508,200
Recoverable amount 450,000
Impairment of goodwill 58,200

Share of Ram Limited (58,200 x 75%) 43,650

Balance of Bargain purchase (69,750 – 43,650) 26,100
4. Consolidated retained earnings
Ram Limited’s own 498,000
Increase in net assets (75% of Rs. 28,200) 21,150
Due diligence cost (1,200)
Impairment of goodwill (43,650)
Provision (34,000 – 10,000) (to be deducted from provision) 24,000
Bond issue expenses (to be deducted from bond value) 1,000
Discount cost on bond (39,000 x 8%) (to be added to bond value (3120)
496,180
2.
a) Following is the trial balance of X Ltd. as at 31.03.2080:
(Rs. in ’000)
Particulars Dr Cr
Sales revenue 200,000
Manufacturing costs 100,000
Selling and distribution costs 35,000
Administrative costs 30,000
Opening inventories 23,000
Interest on borrowings 5,000
Provision for income tax 2,000
Advance income tax paid 6,000
Property, plant and equipment 86,000
Accumulated depreciation on property,
plant and equipment 12,000
Export licence 6,000
Trade receivables 37,800
Cash and bank balances 4,725
Other receivable and prepayments 14,000
Trade payables 12,000
Provisions for litigation 5,000
Long term borrowings 31,525
Deferred tax 5,000
Share capital (Rs. 10 each and fully paid) 60,000
Retained earnings 20,000
Total 347,525 347,525
Additional information:
i) Previous year’s sales included goods invoiced at Rs. 10 million which were sent to a customer
on 25.03.2079 under a sale or return agreement, at cost plus 20%. The goods were returned
on 25.05.2079. No correction has been made for the return.
ii) The export licence has been obtained for exporting a new product and is effective for five
years up to 30.09.2079. However, the exports commenced from 01.04.2080.
iii) Closing inventories are valued at Rs. 30 million.
iv) Details of property, plant and equipment are as follows:
(Rs. in ’000)

Land Buildings Plant &

equipments
Cost as at 32.03.2079 20,000 36,000 30,000
Fully depreciated amounts
included in cost 3,000
Estimated useful life
at the date of purchase 20 years 10 years
The company uses straight line method for charging depreciation. Depreciation is allocated
to manufacturing, distribution and administrative costs at 75%, 15% and 10% respectively.
v) Rs. 6 million of the long term borrowings is of current maturity (i.e. will be repaid within 12
months).
vi) During the year Rs. 5 million was paid in full and final settlement of income tax liability
against which a provision of Rs. 7 million had been made in the previous year. Current
year’s taxable income exceeds accounting income by Rs. 5 million of which Rs. 0.8 million
are permanent differences. Applicable tax rate for the company is 35%.
vii) On 32.04.2080 the Board of Directors proposed a final dividend at 15% for the year ended
31.03.2080 (previous year: at 20%)
Required: (6+4=10)
In accordance with the requirements of the relevant Financial Reporting Standards, prepare:
i) The statement of financial position as of 31.03.2080.
ii) The statement of profit or loss for the year ended 31.03.2080.
b) DDN Private Ltd. is an old company established in 2030 BS. The company started with a very
small capital base and today it is one of the leading companies in Nepal in its industry. The
company has an annual turnover of Rs. 11 billion and is planning to get listed in the next year.
The company has a large employee base. It provided a defined benefit plan to its employees.
Following is the information relating to the balances of the fund’s assets and liabilities as at 1st
Shrawan, 2079 and 31st Ashadh, 2080.
Rs. in million
Particulars 1st Shrawan, 2079 31st Ashadh, 2080
Present value of benefit obligation 1,400 1,580
Fair value of plan assets 1,140 1,275
For the financial year ended 31st Ashadh, 2080, service cost was Rs. 55 million. The company
made a contribution of an amount of Rs. 111 million to the plan. No benefits were paid during
the year.
Consider a discount rate of 8%.
Required: (7+3=10)
i) Compute the amounts to be recognized in the statement of profit and loss and other
comprehensive income for the year ended 31st Ashadh, 2080 and also compute change in
net liability company as on 31st Ashadh, 2080.
ii) Give the journal entries in respect of amount(s) to be recognized.
Answer

2 a) X Ltd.
i) Statement of Financial Position as at 31.03.2080
Rs. ’000
ASSETS
Fixed assets
Property, plant and equipment (86,000 – 12,000 – 4,500) 69,500
Intangible assets (Export licence) (6,000 – 600) 5,400
74,900
Current assets
Stock-in-trade (WN 1) 30,000
Trade receivable (37,800 - 10,000) 27,800
Other receivables and prepayments (6,000 + 14,000) 20,000
Cash and bank balances 4,725
82,525
Total assets 157,425
EQUITY AND LIABILITIES

Equity
Issued, subscribed and paid up capital 60,000
Retained earnings (WN 6) 35,956
95,956
Long term borrowings (31,525 – 6,000) 25,525
Deferred tax liability (5,000 – 1,470) (WN 5) 3,530
29,055
Current liabilities
Trade and other payables

12,000
Provision for litigation 5,000
Current portion of long-term borrowings 6,000
Provision for taxation (WN 5) 9,414
32,414
Total equity and liabilities 157,425
ii) X Ltd.
Statement of Profit or Loss for the year ended 31.03.2080
Rs. ‘000
10 | The Institute of Chartered Accountants of Nepal

Revenue 200,000
Cost of sales (WN 1) (104,708)
Gross profit 95,292
Selling and distribution costs (WN 3) (36,275)
Administrative costs (WN 4) (30,450)
Operating profit 28,567
Finance costs (5,000)
Profit before tax 23,567
Income tax expense (WN 5) (6,528)
Profit for the year/ Total comprehensive income 17,039
(WN 1) Cost of Sales Rs. ‘000

Manufacturing costs 100,000
Opening inventories 23,000
Inventory on returned sales (10,000/120 × 100) 8,333
Closing inventory (30,000)
Allocated Depreciation (75% × 4,500) 3,375
104,708
(WN 2) Depreciation Rs. ‘000
Building = (36,000/20) 1,800
Plant = (30,000 – 3000)/10 2,700
4,500
Allocated to:
Cost of sales – 75% 3,375
Selling & Distribution – 15% 675
Administrative cost – 10% 450
4,500
(WN 3) Selling and Distribution costs Rs. ‘000
Given 35,000
Amortization of export license (6,000/5 years × ½ years) 600
Allocated Depreciation 675
36,275
(WN 4) Administrative costs Rs. ‘000
Given 30,000
Allocated Depreciation 450
30,450
(WN 5) Income Tax Rs. ‘000
PBT (As per FS) 23,567
Add: Provision for litigation 5,000
The Institute of Chartered Accountants of Nepal | 11

PBT (for taxation) 28,567

a) Tax (@ 35%) - current expense 9,998
Less: Previous Tear tax on returned goods profit (10,000-8,333)×35%) (584)
b) Provision required 9,414
c) Deferred tax (5,000 – 800) × 35% 1,470
d) Provision write back (7,000 – 5,000) 2,000
Income tax expenses (a – c – d) 6,528
(WN 6) Retained Earnings) Rs. ‘000
Given 20,000
Profit on returned sales (1,667)
Tax on returned sales 584
Profit for the year 17,039
35,956
2 b)
i)
1. Computation of Net interest taken to the Statement of Profit or Loss
= Discount rate x Opening net defined benefit liability
= 8% x (1,400 – 1,140) million
= 8% x 260 million = 21 million (Rounded off to nearest lacs)
2. Computation of Remeasurements
Statement to calculate Actuarial gain or loss on defined benefit liability:
Particulars Rs. in million
Opening balance of liability 1,400
Current service cost 55
Interest on opening liability (1,400 x 8%) 112
Actuarial loss (Bal. fig) 13
Closing balance of liability 1,580
Statement to calculate Actual return on plan assets:
Opening balance of asset 1,140
Cash contribution 111
Actual return (Bal. fig) 24
Closing balance of asset 1,275
Net interest on opening balance of plan asset = Rs. 91 million (i.e. Rs. 1,140 million x 8%)
(Rounded off)
Hence there is a decrease in plan assets due to remeasurement for which computation is as
follows:
Actual Return – Net interest on opening plan asset
= Rs. 24 million – Rs. 91 million = Rs. 67 million.
Amount to be recognized in the statement of profit or loss:

Current service cost Rs. 55 million

Interest on Opening liability Rs. 112 million
Interest on Opening assets (Rs. 91) million
Rs. 76 million
Net remeasurement loss (to be reflected in other comprehensive income) would be computed as
follows:
Actuarial loss on liability + Loss on return
= Rs. 13 million + Rs. 67 million = Rs. 80 million.
3. Computation of increase/ decrease in net defined benefit liability balance of fund:
Opening net liability ( Rs. 1,400 million – Rs. 1,140 million) 260
Closing net liability ( Rs. 1,580 million – Rs .1,275 million) 305
Increase in liability 45
ii) Journal entries in the books of DDN Private Ltd.
Particulars Rs. in million Rs. in million
Profit & Loss Dr. 76
Other comprehensive income Dr. 8
To Cash (Contribution) 111
To Net defined benefit liability (Refer WN 3) 45
3.
a) Aryan Ltd. owns three properties, which were purchased on 1st Shrawan, 2079. The details of
purchase price and market values of the properties are given as below:
Particulars Property 1 Property 2 Property 3
Factory Factory Let-Out
Purchase price (Rs. ’000) 15,000 10,000 12,000
Market value on 31.03.2080 (Rs.
16,000 11,000 13,500
’000)
Life 10 Years 10 Years 10 Years
Subsequent Measurement Cost Model Revaluation Model Revaluation Model
Property 1 and 2 are used by Aryan Ltd. as factory building whilst property 3 is let-out to a non-
related party at a market rent. The management presents all three properties in balance sheet as
‘Property, Plant and Equipment’.
The company does not depreciate any of the properties on the basis that the fair values are
exceeding their carrying amount and recognize the difference between purchase price and fair
value in Statement of Profit and Loss.
Required: 10
Analyze whether the accounting policies adopted by the Aryan Ltd. in relation to those properties
are in accordance with relevant accounting standard. If not, advise the correct treatment
alongwith working for the same.
b) Following details relate to B Ltd.:

Particulars (Rs. in ’000)

Forging shop division:
Sales to bright bar division 4,575
Other domestic sales 90
Export sales 6,135
10,800
Bright bar division:
Sales to fitting division 45
Export sales to Rwanda 300
345
Fitting division:
Export sales to India 270
(Rs. in ’000)
Head office Forging shop Bright bar Fitting
Particulars
division division division division
Pre-tax operating result 240 30 (12)
Head office cost reallocated 72 36 36
Interest costs 6 8 2
Fixed assets 75 300 60 180
Net current assets 72 180 60 135
Long-term liabilities 57 30 15 180
Required: 10
Prepare a segmental report for publication in the annual report of B Ltd.
3 a) The given issue needs to be examined in the umbrella of the provisions given in NAS 1
‘Presentation of Financial Statements’, NAS 16 ‘Property, Plant and Equipment’ in relation to
property ‘1’ and ‘2’ and NAS 40 ‘Investment Property’ in relation to property ‘3’.
Property ‘1’ and ‘2’:
Para 6 of NAS 16 ‘Property, Plant and Equipment’ defines:
“Property, plant and equipment are tangible items that:

a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
b) are expected to be used during more than one period.”
Paragraph 29 of NAS 16 states that:
“An entity shall choose either the cost model or the revaluation model as its accounting policy
and shall apply that policy to an entire class of property, plant and equipment”.
Further, paragraph 36 of NAS 16 states that:
“If an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs shall be revalued”.

“If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be
recognized in other comprehensive income and accumulated in equity under the heading of
revaluation surplus. However, the increase shall be recognized in profit or loss to the extent
that it reverses a revaluation decrease of the same asset previously recognized in profit or loss”.
“Depreciation is recognized even if the fair value of the asset exceeds its carrying amount, as long
as the asset’s residual value does not exceed its carrying amount”.
Property ‘3’
NAS 40 defines ‘Investment property’ as:

“Investment property is property (land or a building—or part of a building—or both) held (by the
owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both,
rather than for:
e) use in the production or supply of goods or services or for administrative purposes; or
f) sale in the ordinary course of business”.
“An entity shall adopt as its accounting policy the cost model to all of its investment property”.
Further, paragraph 79 (e) of NAS 40 requires that:
“An entity shall disclose the fair value of investment property”.
Further, paragraph 54 (2) of NAS 1 ‘Presentation of Financial Statements’ requires that:
“As a minimum, the balance sheet shall include line items that present the following amounts:
c) property, plant and equipment;
d) investment property;
As per the facts given in the question, Aryan Ltd. has
a) presented all three properties in balance sheet as ‘property, plant and equipment’;
b) applied different accounting policies to Property ‘1’ and ‘2’;
c) revaluation is charged in statement of profit and loss as profit; and
d) applied revaluation model to Property ‘3’ being classified as Investment Property.
This accounting treatment is neither correct nor in accordance with provision of NAS 1, NAS 16
and NAS 40.
Accordingly, Aryan Ltd. shall apply the same accounting policy (i.e. either revaluation or cost
model) to entire class of property being property ‘1’ and ‘2”. It also required to depreciate these properties
irrespective of that, their fair value exceeds the carrying amount. The revaluation gain shall be
recognized in other comprehensive income and accumulated in equity under the heading of
revaluation surplus.
There is no alternative of revaluation model in respect to property ‘3’ being classified as Investment
Property and only cost model is permitted for subsequent measurement. However, Aryan Ltd. is
required to disclose the fair value of the property in the Notes to Accounts. Also the property ‘3’
shall be presented as separate line item as Investment Property.
Therefore, as per the provisions of NAS 1, NAS 16 and NAS 40, the presentation of these three
properties in the balance sheet is as follows:
Case 1: Aryan Ltd. has applied the Cost Model to an entire class of property, plant and
equipment.
Balance Sheet (extracts) as at 31st Ashadh, 2080 Rs. ’000
Assets
Non-Current Assets
Property, Plant and Equipment ( Less: depreciation)
Property ‘1’ 13,500
Property ‘2’ 9,000 22,500
Investment Properties ( Less: depreciation)
Case 2: Aryan Ltd. has applied the Revaluation Model to an entire class of property, plant and
equipment of Property 1 & 2 and Cost model to Property 3.
Balance Sheet (extracts) as at 31st Ashadh, 2079 Rs. ’000
Assets
Non-Current Assets
Property, Plant and Equipment
Property ‘2’ 11,000 27,000
Investment Properties
Equity and Liabilities

Other Equity
Revaluation Reserve
Property ‘1’ [16,000 – (15,000 – 1,500)] 2,500
Property ‘2’ [11,000 – (10,000 – 1,000)] 2,000 4,500
The revaluation reserve should be routed through Other Comprehensive Income (subsequently not
reclassified to Profit and Loss) in Statement of Profit and Loss and shown in a separate column
under Statement of Changes in Equity.
3 b) B Ltd.
Segmental Report
Information relating to revenue
(Rs. ‘000)
Forging Shop Bright Bar Fitting Inter Segment
Particulars Total
Division Division Division Elimination
Segment Revenue
Sales

Domestic 90 - - - 90
Export 6,135 300 270 - 6705
External Sales 6,225 300 270 - 6795
Inter Segment Sales 4575 45 - 4620 -
Total Revenue 10,800 345 270 4620 6,795
B Ltd.
Segmental Report
Sales Revenue by geographical market
(Rs. ‘000)
Domestic Export Sales (by Export to Export
Particulars Total
Sales forging shop division) Rwanda to India
External Sales 90 6,135 300 270 6,795
B Ltd.
Segmental Report
Information in relation to assets and liabilities:
(Rs. ‘000)
Forging Shop Bright Bar Fitting Inter Segment
Particulars Total
Division Division Division Elimination
Fixed Asset 300 60 180 540
Net Current Assets 180 60 135 375
Segment Assets 480 120 315 915
Unallocated corporate
147
Assets (75+72)
Total Assets 1,062
Segment Liabilities 30 15 180 225
Unallocated corporate
57
Liabilities
Total Liabilities 282
4. Write short note/ answer on the following: (5×3=15)
a) Watch list loans

b) Types of hedging relationship
c) Sustainability reporting and its advantages
d) Explain the concept of actuarial valuation in retirement scheme.
e) Option contract and its features
Answer
4 a) Watch List Loans
Nepal Rastra Bank (NRB) has formulated a new category of loan for provisioning purposes. As per
the NRB’s Directive, all loans are required to be classified into 5 different categories including Watch
=
List whereby 5% of the total loan is required to be kept as provisioning though the provision can be

reversed when the loan becomes performing later. Provision made for watch list loans is a general
loan loss provision. As per the circular issued by NRB, the loans having the following characteristics
are to be classified as Watch List loans:
= overdue for more than a month and less than 3 months.
1. If interest and principal repayments are
2. Short term/Working Capital Loans that are not renewed on time and are renewed on temporary
basis.
3. Loan and advances to customers/ group of customers who have been categorized as non per-
forming by other banks and financial institutions.
4. Firms/Companies/Organizations having negative net worth or net loss though interest and prin-
cipal are served on regular basis.
5. Loan and advances having multiple banking exposure more than Rs. 2 billion and have not
entered into consortium agreement.
6. Specifically specified by NRB after due inspection.
7. Loans having debt-equity ratio greater than 80:20.
8. Loans having inadequate debt to income ratio as prescribed by Nepal Rastra Bank.
4 b) Types of Hedging Relationship

There are three types of hedge accounting: fair value hedges, cash flow hedges and hedges of the
net investment in a foreign operation.
1. Fair Value Hedges:
The risk being hedged in a fair value hedge is a change in the fair value of an asset or a liability.
For examples, changes in fair value may arise through changes in interest rates (for fixed-rate
loans), foreign exchange rates, equity prices or commodity prices.
2. Cash Flows Hedges
The risk being hedged in a cash flow hedge is the exposure to variability in cashflows that is
attributable to a particular risk and could affect the income statement. Volatility in future cash
flows will result from changes in interest rates, exchange rates, equity prices or commodity
prices.
3. Hedges of net investment in a foreign operation
An entity may have overseas subsidiaries, associates, joint ventures or branches (‘foreign
operations’). It may hedge the currency risk associated with the translation of the net assets of
these foreign operations into the group’s currency.
4 c) A sustainability report is a report published by a company or organization about the economic,
environmental and social impacts caused by its everyday activities. A sustainability report also
presents the organization’s values and governance model, and demonstrates the link between its
strategy and its commitment to a sustainable global economy. It details actions and policies towards
helping future generations meet their needs.
Sustainability reporting can help organizations to measure, understand and communicate their
economic, environmental, and social and governance performance, and then set goals, and manage
change more effectively. A sustainability report is the key platform communicating sustainability
performance and impacts, whether positive or negative.
Sustainability means meeting our own needs without compromising the ability of future generations
to meet their own needs. In addition to natural resources, we also need social and economic
resources.
Some of the advantages of corporate sustainability reports:
1. Enhances company image and reputation.

2. Attracts and retains employees. Employees tend to be happier working with companies that
take care of them, and give them the opportunities to give back to, and volunteer in their local
communities. Such happy employees stay longer, and attract other people that are likeminded
and want to work for such organisation.
3. Increases understanding of risks and opportunities for sustainability projects. Similar to SWOT
analysis in marketing, a report, because it is so detailed and tied in with overall company goals.
4. Engages stakeholders.
4 d) A concept of actuarial valuation in retirement scheme
Actuarial valuation is the process used by an actuary* to estimate the present value of benefits to
be paid under a retirement scheme and the present values of the scheme assets and, sometimes,
of future contributions. In the case of defined benefit scheme the cost of retirement benefits, to
be charged to Profit and Loss Account on year to year basis, is determined on actuarial basis.
According to NAS 19, an enterprise should use the Projected Unit Credit method to determine the
present value of its defined benefit obligations and the related current service cost and, wherever
applicable, past service cost.
4 e) Option Contract and its features
Option contract is a derivative instrument under which a buyer gets the right to buy or sell and a
seller undertakes an obligation to sell or buy a given quantity of the underlying asset at a given
price at a given future date for a payment of option premium by the buyer to the seller. For example;
equity share option (eg. Big Bank option), commodity options (eg. Gold/silver option).
Features of option contracts
1. Only the seller of an option is under an obligation to sell/buy the underlying asset as and when
the buyer exercises his/her right
2.Buyer of an option pays the option premium in full to the seller of an option at the time of buying
an option.
3. For buyer of an option, profits are potentially unlimited and losses are limited to the option
premium paid to the seller. For seller of an option, profits are limited to the option premium
received from the buyer and losses are potentially unlimited.
4. Only seller/writer is required to pay the margin.
5.
a) State the provisions related to foreign currency as per Nepal Public Sector Accounting
Standards. 8
b) Micra Developers Ltd. grants 130 stock options to each of its 800 employees on 1 Shrawan 2076.
The grant condition is that employees have to remain in the service over the next three years. The
exercise date is 31 Ashadh 2080 and the vesting date is 32 Ashadh 2079. The company estimates
that the fair value of each option on the grant date is Rs. 30. The nominal value and exercise price
per share is Rs. 100 and Rs. 135 respectively.
On 1 Shrawan 2077, the exercise price of the company has dropped to Rs. 130 and the company
has repriced its stock option which will vest at the end of 3rd year i.e. 32 Ashadh 2079. The
company estimates that at the date of repricing, fair value of each of the original options granted
(i.e. before taking into account the repricing) is Rs. 24 and that the fair value of each repriced stock
option is Rs. 28. Following information are also relevant:
31 Ashadh 2077 31 Ashadh 2078 32 Ashadh 2079
Number of employees Left 50 45 30

Estimated No. of employees

80 35 0
expected to leave in next year(s)
On 31 Ashadh 2080, 650 employees exercised the option.
Required: 7
Compute the amount of expenses to be recognized by the company for the financial year 2076/77,
2077/78 and 2078/79 and also give extract of ESOP Outstanding Account as appeared in the
books of account of Micra Developers Ltd. in the financial year 2079/80.
Answer
5 a) Provision relating to foreign currency as per NPSAS:
i) Cash receipts and payments arising from transactions in a foreign currency should be record-
ed in an entity's reporting currency by applying to the foreign currency amount the exchange
rate between the reporting currency and the foreign currency at the date of the receipts and
payments.
ii) Cash balances held in a foreign currency should be reported using the closing rate.
iii) The cash receipts and cash payments of a foreign controlled entity should be translated at the
exchange rates between the reporting currency and the foreign currency at the dates of the
receipts and payments.
iv) An entity should disclose the amount of exchange differences included as reconciling items
between opening and closing cash balances for the period.
v) When the reporting currency is different from the currency of the country in which the entity
is domiciled, the reason for using a different currency should be disclosed. The reason for any
change in the reporting currency should also be disclosed.
vi) Governments and government entities may have transactions in foreign currencies such as
borrowing an amount of foreign currency or purchasing goods and services where the pur-
chase price is designated as a foreign currency amount. They may also have foreign opera-
tions and transfer cash to and receive cash from those foreign operations. In order to include
foreign currency transactions and foreign operations in financial statements the entity must
express cash receipts, payments and balances in reporting currency terms.
vii) Unrealized gains and losses arising from changes in foreign currency exchange rates are not
cash receipts and payments. However, the effect of exchange rate changes on cash held in a
foreign currency is reported in the statement of cash receipts and payments in order to rec-
oncile cash at the beginning and the end of the period. This amount is presented separately
from cash receipts and payments and includes the differences, if any, had those cash receipts
payments and balances been reported at end-of-period exchange rates.
5 b) NFRS 2 Share-based Payment states that equity settled share-based payment transactions related
to employees should be measured at the fair value of the equity instruments granted at the grant
date. So, fair value of stock option at the grant date i.e. Rs. 30 each has to be used to measure the
transaction in the given case of Micra Developers Ltd.
Further, when any modification occurs to the terms of equity settled share-based payment, an entity
must continue to recognize the grant date fair value of equity instruments in profit or loss account,
and make adjustments for change in fair values prospectively by spreading the difference between
fair value of the original arrangement (current fair value) and fair value of new arrangement over
the period from the date of modification to the vesting date.
We know that:
Equity = No. of expected employees at vesting date × stock option per employee × fair value of
option × Year elapsed/Vesting period
Staff
Particulars Calculation Equity
Expenses
FY 2076/77 [(800-50-80)×130×30×1/3] 871,000 871,000
FY 2077/78
Under Original Arrangement [(750-45-35)×130×30×2/3] 1,742,000 871,000
Modification [(750-45-35)×130×(28-24)×1/2] 174,200 174,200
Total 1,916,200 1,045,200
FY 2078/79
Under Original Arrangement [(705-30)×130×30×3/3] 2,632,500 890,500
Modification [(705-30)×130×4×2/2] 351,000 176,800
Total 2,983,500 1,067,300
Staff Expense for the year = Closing Equity – Opening Equity
ESOP Outstanding Account
Amount
Date Particulars Date Particulars Amount (Rs.)
(Rs.)
01.04.2079
31.03.2080 To Share capital 8,450,000 By Balance b/d 2,983,500
[650×130×100] 31.03.2080 By Bank 10,985,000
31.03.2080 To Securities Premium 5,408,000 [650×130×130]
[650×130×(30+30+4)]
31.03.2080 To Retained Earnings 110,500
Total 13,968,500 Total 13,968,500
6.
a) Kasthamandap Ltd. is a subsidiary of a media company. Kasthamandap's principal asset is the
rights it owns to a classic film. Kasthamandap had the following intangible assets as at the year
end 32 Ashadh 2079:
Rs.in ’000
Classic film Website Total
Cost 10,000 150 10,150
Accumulated amortisation (6,000) (90) (6,090)
Carrying amount 4,000 60 4,060
The following information includes all relevant events that occurred during the year ended 31
Ashadh 2080:
i) The film was originally published on 1 Shrawan 2031 and the rights were acquired by
Kasthamandap on 1 Shrawan 2076 for Rs. 10 million. Copyright was set at 50 years from
the date the film was originally published. The film was amortised by Kasthamandap using
straightline method over the remaining copyright period. However, recent legislative changes
passed on 1 Shrawan 2079 have extended the copyright period from 50 years to 70 years,
subject to payment of a registration fee prior to the original expiry date. This, together with
associated legal costs, amounted to Rs. 70,000 and was paid on 1 Shrawan 2079. According
to Kasthamandap's professional valuers, who determined the valuation on 1 Shrawan 2079,
the value of the classic film was Rs. 12.1 million.
ii) During the year Kasthamandap developed a new interactive website to market the film

and associated merchandise given its extended copyright period. The website includes its
own e-commerce system for online DVD sales, direct streaming of the film and associated
material and merchandise sales.
Costs incurred were as follows: Rs.in’000
Planning the new website 8
Registration of various domain names 18
Internal design costs 85
External contractor design costs 112
New content development 38
Advertising of the new website 22
The new website went live on 1 Magh 2079 and the old website, which was being amortised using
straight line method over five years, was taken offline on that date and will not be used for any other
purpose.
Required: 5
Prepare a note reconciling the carrying amount of Kasthamandap’s intangible assets from the
beginning to the year ended 31 Ashadh 2080 as required by NAS 38: Intangible Assets. Comparative
information is not required.
b) Tenzing Ltd. sold one of its warehouses on 1 Magh 2079 to a finance house for Rs. 23.5 million and
leased it back under an operating lease on the same date. The carrying amount of the warehouse
on 1 Magh 2079 was Rs. 16 million. The half-yearly lease rental payments of Rs. 1 million shall
be paid in arrears on Poush end and Ashadh end over a period of 4 years.
The open market value of the property would have been Rs. 20 million if not leased back on
these terms. The lease rental payments were approximately double market rates for such a lease.
The finance house can terminate the lease at any time with a month's notice to Tenzing, at which
point any excess of the sales proceeds over market value of the property not yet repaid becomes
repayable immediately.
Tenzing depreciated the property up to 1 Magh 2079 and then derecognized it, recognizing a
profit of Rs. 7.5 million (netted against expenses in the statement of profit or loss). The first Rs.
1 million, 6 monthly lease rental payment, made on 31 Ashad 2080 has been charged to cost of
sales. No other accounting entries have been made.
Tenzing now wishes to amortize the excess of the sales proceeds over market value on a straight
line basis over the period the warehouse will be used (i.e. 4 years).
Required:
5
Suggest (as the information permits) the correct accounting treatment of the
above transaction under NFRS 16: Leases, for the year ended 31 Ashadh
2080.
Answer
6 a)
Classic film Website Total
Rs.’000 Rs.’000 Rs.’000
Carrying amount at 1 Shrawan 2079 4,000 60 4,060
Additions (WN 1) 70 215 285
Amortisation (WN 2) (185) (20) (205)
Disposals (60 – 15) (45) (45)
Carrying amount at 31 Ashadh 2080 3,885 210 4,095

At 31 Ashadh 2080:
Cost/valuation (10,000 + 70)/(WN-1) 10,070 215 10,285
Accumulated amortisation
((10,000/5 x 3) + (WN-2) 185)/(WN-2) (6,185) (5) (6,190)
Carrying amount 3,885 210 4,095
Working Note- 1
Website development costs
Rs. in’000
Planning – expensed as akin to research per –
Registration of various domain names 18
Internal design costs 85
External contractor design costs 112
New content development - expensed because developed to market
the entity's own products –
Advertising of new website - expensed as no intangible asset
is created –
215
Working Note-2
Amortisation Rs. in’ 000
Classic film (4,000 + 70)/22 years 185
Website:
Old website (150/5 years x 6/12) 15
New website ((W1) 215/21½ years x 6/12) 5
20
205
6 b)
Double entries performed by Tenzing: Rs.in’000 Rs.in’000
DR Bank
23,500
CR Property 16,000
CR P/L 7,500
DR Cost of sales (P/L)
1,000
CR Bank 1,000
Correct double entries required for excess of sale proceeds over fair value:
Rs.in’000
Dr. P/L (23,500 – 16,000) 7,500
Cr. Other income (P/L) (20,000 – 16,000) 4,000 genuine profit – moved
Cr. Deferred income (SOFP) (23,500 – 20,000) 3,500 excess profit – deferred
The deferred income should be amortised to profit or loss (other income) over the
period the asset is expected to be used:
Rs. in’000
Dr. Deferred income (3,500/4 years x 6/12) 438
Cr. Other income (P/L) 438

Suggested Answers - December 2023 - Advanced Financial Management
ADVANCED FINANCIAL MANAGEMENT

Suggested Answer
Roll No……………. Maximum Marks – 100

Marks
Attempt all questions.
Working notes should form part of the answers. Make assumptions wherever necessary.
1. Mr. R, an agricultural expert just returned back from foreign employment in Israel, is planning to set up a
company for commercial production of premium apples with most advance technologies. During
the initial days of the proposed company, it will focus on cultivating and harvesting a variety of
premium apples and sell them in the ever increasing domestic market.
In order to set up his project, he has already reached agreements with the local government author-
ity and the local communities through a cooperative society of one of the hilly districts suitable for
farming. As such, the agreement has guaranteed minimum 25 years of lease of land property having a
total area of 625 ropanis with a rent of Rs. 2.88 crore per annum. The rent will be paid on an annual
basis with increment of 30% at the interval of every 5 years and the plantation properties (agricultur-
al estate and the project office) will be transferred to the cooperative society at the end of 25th year.
The rent accrual is agreed from the commercial operation date (COD), which tentatively is proposed
from 1st of Shrawan, 2081. No incentive or residual value will be received by the proposed company
at the end of project i.e. on Ashadh end 2106.
In order to operate the project successfully, you have been hired as his finance consultant and want
you to assess the information properly. From the available research data adjusted with current infla-
tion figures, you have been able to gather the following information in respect of annual operating
cost and capital cost:
Operating costs (Amount in Rs.)
Particulars of operating expenses Estimated annual cost Annual
(Rs) Growth (in every 5 years)
Orchard Activities (Pruning and Training, Thinning,

Fertilizers, General Farm Labor, Irrigation and Electricity)
Cost of activities starting from Year 1 18,810,000 15%
Harvesting Activities (Picking Labor, Other Labor and Hauling of Apples)
Administration Expenses (except rent)

Capital cost
Particulars of Capital Expenses Cost (Rs.)
Land Development and Ancillary Cost 50,000,000
Plantation Cost 120,000,000
Other capital investments (viz., quarters and project office set up in leased land) 20,000,000
Further, you have been informed that only 80% of the land taken on rent is used for the harvest and
he expects to produce 3 metric tons of apples per ropani from the 3rd year after COD, then 200 metric
tons in total increase every year until 8th year after COD and steady production from 9th year on-
wards with no further growth or decline during the entire project period. In addition, he expects
to fetch at least Rs.60 per kg during the first harvesting season, i.e. on 3rd year after COD and then
15% growth after every three years adjusted with inflation till 10th year (consider price rounding in
nearest rupee).
Consider:
• Tax rate as 20%;
• No tax outflows during the accumulated loss period;
• Useful life of all initial investments as equivalent to the project period (lease term) and
depreciation method as SLM basis;
• All assets accounted as leasehold asset and categorised under Class "E", hence no deferred
tax and temporary differences; and
• In regard to financing this project, the company is contemplating to maintain its capital struc-
ture, which consist of 45% debt-equity ratio. For this it can issue Rs. 1,000 par, 8% 15 year
bond. In capital market, these bonds of similar risk are currently yielding 8.5% and are com-
manded by stocks at least with 3% for additional risk compensation.
Required: (16+4 =20)

a) Based on the NPV & IRR from the aforementioned information, would you suggest him to
take up this project based on the 10 years cash flow, at least from financial perspective? Con-
sider carrying amount of initial capital investment at the end of 10th year as its terminal value
for your computation. (Calculate in nearest thousand).
b) What three factors other than the financial should an investor look into before taking up the
project? Your answer should present factors in connection to the above apple farming case
study.
Q.1 Answer:
(a)
Answer:
Computation of cost of capital
Debt- equity (D/E) Ratio =45%
Or, D/E =45%
Or, D/(1-D) =45%
Or, D=0.45-0.45D
Or,1.45D=0.45

Or, D= 0.45/1.45 = 31%

Therefore, E=100% - 31% =69%
So, Weight of Debt (Wd) =31%
Weight of Equity (We) = 69%
Kd = AI (1-t) = 8.5% (1-0.2) =6.80%
Ke = AI +additional risk compensation =8.5%+3% =11.5%
Now, Ko = Ke* We + Kd * Wd
= 11.5% *0.69 + 6.80% * 0.31
= 7.93% + 2.10%
= 10.03%
Ko= 10% (Round-off)
Computation of Apple Harvest:

Total land rented = 625 Ropanis
Land used for Harvesting =625 Ropanies * 80% = 500 Ropanies
Total Production of Applies = 500 Ropanies * 3 metric tons of apples per ropani =1500 Metric
tons (from 3rd year onwards) and is increased by 200 metric tons per year until 8th year from
COD.
Computation of Initial Investments, Annual Depreciation and Terminal Value

Particulars Rs. In 000
Initial Investment
Land Development and Ancillary Cost 5,00,00
Plantation Costs 12,00,00
Other Capital Investments 2,00,00
Total Initial Investments 19,00,00
Useful Life of Initial Investments 25 years
Annual Depreciation 76,00
Total Depreciation on 10 years 760,00
Terminal Value after 10 years 1140,00
Computation of Net Present Value:
Year 0 1 2 3 4 5 6 7 8 9 10
Production in Tons 0 0 1500 1700 1900 2100 2300 2500 2500 2500
Price per Kg 60 60 60 69 69 69 79 79
Rs. In 000
Sales 0 0 9,00,00 10,20,00 11,40,00 14,49,00 15,87,00 17,25,00 19,75,00 19,75,00
1,88,10 1,88,10 1,88,10 1,88,10 1,88,10 2,16,32 2,16,32 2,16,32 2,16,32 2,16,32
Orchard Activities
14,85 14,85 14,85 14,85 14,85 17,08 17,08 17,08 17,08
Harvesting Activities 40,19 40,19 40,19 40,19 40,19 46,22 46,22 46,22

Administration
Expenses (except rent) 54,00 54,00 54,00 54,00 54,00 62,10 62,10 62,10
Total Costs Except
Rent and Depreciation 1,88,10 2,02,95 2,97,14 2,97,14 2,97,14 3,25,36 3,27,59 3,41,72 3,41,72 3,41,72
Rent 2,88,00 2,88,00 2,88,00 2,88,00 2,88,00 3,74,40 3,74,40 3,74,40 3,74,40 3,74,40
Depreciation 76,00 76,00 76,00 76,00 76,00 76,00 76,00 76,00 76,00 76,00
Total Costs 5,52,10 5,66,95 6,61,14 6,61,14 6,61,14 7,75,76 7,77,99 7,92,12 7,92,12 7,92,12
Profit Before Tax -5,52,10 -5,66,95 2,38,86 3,58,86 4,78,86 6,73,24 8,09,01 9,32,88 11,82,88 11,82,88
- 14397
-111905 8
Accumulated Profit -5,52,10 -88019 52133 -4247 63077 237266 355554 473842
Tax 0 0 0 0 0 12615 16180 18658 23658 23658
Profit After Tax -55210 -56695 23886 35886 47886 54709 64721 74630 94630 94630
Add: Depreciation 7600 7600 7600 7600 7600 7600 7600 7600 7600 7600
Cash Profit -47610 -49095 31486 43486 55486 62309 72321 82230 102230 102230
Initial Investments -190000
Terminal Value 114000
Net Cash Flow -190000 -47610 -49095 31486 43486 55486 62309 72321 82230 102230 216230
PV Factor @ 10% 1.000 0.909 0.826 0.751 0.683 0.621 0.565 0.514 0.467 0.425 0.386
Discounted Cash Flow -190000 -43277 -40552 23646 29701 34457 35205 37173 38401 43448 83465
Net Present Value 51667
At discount rate of 10%, the project has a positive NPV of Rs.51,667K hence a much higherdiscount
rate (15%) is considered to compute IRR.
Net Cash Flow -190000 -47610 -49095 31486 43486 55486 62309 72321 82230 102230 216230
PV Factor @ 15% 1.000 0.870 0.757 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247
Discounted Cash Flow -190000 -41421 -37165 20718 24874 27577 26917 27193 26889 29033 53409
Net Present Value -31976
Thus
IRR shall be
𝑁𝑃𝑉 𝑎𝑡 𝐿𝑜w 𝑅𝑎𝑡𝑒
= Low Rate x
𝑁𝑃𝑉 𝑎𝑡 𝐿𝑜w 𝑅𝑎𝑡𝑒−𝑁𝑃𝑉 𝑎𝑡 𝐻igℎ 𝑅𝑎𝑡𝑒
= 10%+ (51,667 / (51,667 - (-31,976 ))) × 5%
= 13.09%𝑥
(𝐻i𝑔ℎ 𝑅𝑎𝑡𝑒 − 𝐿𝑜𝑤 𝑅𝑎𝑡e
From the above calculation of NPV & IRR, the project can be undertaken.
b) The financial assessment of the project is indeed very important to ascertain its
viability. Nevertheless, the investors should also look into other factors such as political,
social and technological in order to determine whether these factors complement to its
progression.
In addition, there is also a growing trend of examining the factors like environmental and legal / reg-
ulatory that could influence the feasibility of the project. As far as assessment is concerned, all these
components are indispensable and interrelated.
The political factors have significant bearing in the investment of the project. These include law

and order situation, stability of the government and its policies, availability and development of
adequate infrastructures, tax regime and subsidies to the investors, transportation facilities, adequate
law for free flow of goods and services within the region etc. Any disorder in the factors mentioned
above would discourage the investors to put in their hard earned money as there will be severe un-
certainty on economic rewards they expect from the project.
2.
a) Everest Brewery Ltd. is expected to grow at a higher rate of 4 years; thereafter the growth rate
will fall and stabilize at a lower level. The following information has been assembled:
Base year (year 0) information

Revenue Rs. 3,000 million
EBIT Rs. 500 million
Capital Expenditure Rs. 350 million
Depreciation Rs. 250 million
Working Capital as a percentage of revenue 25%
Corporate tax rate (for all time) 30%
Paidup Equity Capital (Rs. 10 Par) Rs. 400 million
Market Value of Debt Rs. 1200 million
Inputs for the high growth period
Length of high growth period 4 years
Growth rate in revenue, depreciation, EBIT and capital expenditure 20%
Working Capital as a percentage of revenues 25%
Cost of Debt (pre-tax) 13%
Debt-Equity Ratio 1:1
Risk-free rate 11%
Market risk premium 7%
Equity beta 1.129
Inputs for the stable growth period
Expected growth rate in revenues and EBIT 10%
Capital Expenditure are offset by depreciation -
Working Capital as a percentage of revenues 25%
Cost of Debt (pre-tax) 12.14%
Risk-free rate 10%
Market risk premium 6%
Equity beta 1.00
Requirements: 10
i) What is the weighted average cost of capital (WACC) for the high growth period and the sta-
ble growth period?
ii) What is the value of Everest Brewery Ltd?

Note: Extracted from the table of present value of Re. 1:

PVIF/Year 0 1 2 3 4
at 13% 1.0000 0.885 0.783 0.693 0.613
at 14% 1.0000 0.877 0.769 0.675 0.592
at 15% 1.0000 0.870 0.756 0.658 0.572
Q.2a. Answer:
(a) During High Growth Period
Cost of Equity under CAPM
= 11+(1.129×7) = 18.9%
Cost of Debt
= 13(1-0.30) = 9.10%
Weighted average cost of capital
= (18.9×0.5) + (9.10×0.5)
= 9.45 + 4.55 = 14%
(b) During Stable Growth Period
Cost of Equity under CAPM
= 10+(1×6) = 16%
Cost of Debt
= 12.14 (1-0.30) = 8.5%
Weighted average cost of capital
= (16×0.6) + (8.5×0.4)
= 9.6 + 3.4 = 13%
Alternatively, for calculation of WACC by taking 1:1 as D.E Ratio

= 16×0.5+8.5×0.5
= 8+4.25
= 12.25%
Calculation of Forecasted Free Cashflow for High Growth Period Rs. Million
Year 1 2 3 4 Terminal Year
Revenues 3,600.00 4,320.00 5,184.00 6,220.80 6,842.90
EBIT 600.00 720.00 864.00 1,036.80 1,140.50
Less: Tax @ 30% 180.00 216.00 259.20 311.04 342.15
420.00 504.00 604.80 725.76 798.35
Capital expenditure less
120.00 144.00 172.80 207.40 -
depreciation
Increase in working capital 150.00 180.00 216.00 259.20 155.50
Free cashflow 150.00 180.00 216.00 259.20 642.80
Present value of Free Cashflow during forecast period.

= (150 × 0.877) + (180 × 0.769) + (216 × 0.675) + (259.2 × 0.592)
= 131.55 + 138.42 + 145.80 + 153.45 = Rs. 569.22 million
Present value of Terminal Value

= 642.8 × 0.592 = Rs. 12,684.59 million

0.13 – 0.10
Value of Everest Brewery Limited:
= 569.22 + 12,684.59 = Rs. 13,253.81 million.
OR
Present value of Terminal Value
= 642.8 × 0.592 = Rs. 16,912.78 million
0.1225 – 0.10
Value of Everest Brewery Limited
= 569.22+16912.78
= 17482
b) On 1st April, 2022 Innovative Investments Limited (IIL) invested in certain shares as follows:
Company No. of shares Face value (Rs) Cost (Rs)

Sun Limited 1,000 100 200,000
Moon Limited 500 10 150,000
In September 2022, 10% dividend was paid out by Sun Limited and in October 2022, 30% divi-
dend was paid out by Moon Limited. On 31st March, 2023 market quotations showed a value of
Rs. 220 and Rs. 290 per share for Sun Limited and Moon Limited respectively.
On 1st April 2023, investment advisors indicate (a) that the dividends from Sun Limited and
Moon Limited for the year ending 31st March 2024 are likely to be 20% and 35% respectively
and (b) that the probability of market quotations on 31st March, 2024 are as below:
Probability Sun Limited (Rs) Moon Limited (Rs)

0.2 220 290
0.5 250 310
0.3 280 330
Required: (2+2+6=10)
(i) Calculate the average return from the portfolio for the year 2022/23
(ii) Calculate the expected average return from the portfolio for the year 2023/24
(iii) Advise IIL, the comparative risk in the two investments by calculating the standard de-
viation in each case.
Q.2b. Answer:
(i) Calculation of the average return from the portfolio for the year 2022.23
Particulars Sun Limited Moon Limited

Dividend received (Rs) 10.00 3.00
Capital gain (Rs):
(Rs. 220 – Rs. 200) & (Rs. 290 – Rs. 300) 20.00 (10.00)

Total gain/loss (Rs) 30.00 (7.00)

Cost (Rs) 200.00 300.00
Return % 15% (2.33)
Portfolio weight: (200,000 : 150,000) 0.57 0.43
Weighted average return:
(0.15 × 0.57 + (0.0233) × 0.43) = 7.55%
Calculation of the expected average return from the portfolio for the year 2023.24
Particulars Sun Limited Moon Limited

Dividend expected (Rs) 20.00 3.50
Capital gain (Rs):
(Rs. 253 – Rs. 220) & (Rs. 312 – Rs. 290) 33.00 22.00
Total gain/loss (Rs) 53.00 25.50
Market value as on 01.04.2023 (Rs) 220.00 290.00
Return % 24.09% 8.79
Portfolio weight:
(1,000 × 220) : (500 × 290) 0.60 0.40
Weighted average return:
(0.2409 × 0.60 + 0.0879 × 0.40) = 17.97%
Calculation of standard deviation
Sun Limited
Exp. price Exp. Exp. Exp. Prob. Yield × Deviation (PS - S)2 Prob.× (PS
gain div. yield Prob. (PS - S) - S )2
220 - 20 20 0.2 4 (33) 1,089 217.80

250 30 20 50 0.5 25 (3) 9 4.50
280 60 20 80 0.3 24 27 729 218.70
441.00
σ = 21
Moon Limited
Exp. Exp. Exp. Exp. Prob. Yield × Deviation (PM - M)2 Prob.× (PM
price gain div. yield Prob. (PM - M) - M )2
290 - 3.50 3.50 0.2 0.70 (22) 484 96.80

310 20 3.50 23.50 0.5 11.75 (2) 4 2.00
330 40 3.50 43.50 0.3 13.05 18 324 97.20
196.00
σ = 14
Advice to IIL: Sun Limited's share is more risky than that of Moon Limited as the standard deviation
is more than Moon Limited.

Working note:
Expected share price of Sun Ltd = Rs. 220 × 0.2 + Rs. 250 × 0.5 + Rs. 280 × 0.3 = Rs. 253
Expected share price of Moon Ltd = Rs. 290 × 0.2 + Rs. 310 × 0.5 + Rs. 330 × 0.3 = Rs. 312
Alternative Solution
Alternatively based on return in percentage terms standard Deviation can also be computed as follows:
M Ltd.
Exp. Exp. Exp. Exp. Prob. (1) Dev. Square (2) x (3)
Market Gain Div. Return Factor () of dev.
X (2)
value (1) (2) (3)
220 0 20 9.09 0.2 1.82 -15.01 225.30 45.06
250 30 20 22.73 0.5 11.37 -1.37 1.88 0.94
280 60 20 36.36 0.3 10.91 12.26 150.31 45.09
24.10 σ 2m=91.09
Standard deviation (σm) 9.54%
N Ltd.
Exp. Exp. Prob. (1) Square
Exp. Exp.
Market Return Factor Dev. () of dev. (2) x (3)
Gain Div. X (2)
value (1) (2) (3)
290 0 3.5 1.21 0.2 0.24 -7.58 57.46 11.49
310 20 3.5 8.10 0.5 4.05 -0.69 0.48 0.24
330 40 3.5 15.00 0.3 4.50 6.21 38.56 11.57
8.79 σ 2n=23.30
Standard deviation (σn) 4.83%
Share of company M Ltd. Is more risky as the S.D. is more than company N Ltd.
3.
a) Electro Product is consumer electronics wholesaler based on Europe. The business of the firm
is highly seasonal in nature. In 6 months of a year, firm has a huge cash deposit, especially near
Christmas time and other 6 months firm has cash crunch, leading to borrowing of money to cover
up its exposures for running the business.
It is expected that firm shall borrow a sum of € 50 million for the entire period of slack season in
about 3 months. A bank has given the following quotations:
Spot 5.50% - 5.75%
3 × 6 FRA 5.59% - 5.82%
3 × 9 FRA 5.64% - 5.94%
3 month € 50,000 future contract maturing in a period of 3 months is quoted at 94.15 (5.85%).

You are required to determine: (5+5=10)

(i) How a Forward Rate Agreements (FRA), shall be useful if the actual interest rate after 3
months turnout to be:(i) 4.5% (ii) 6.5%
(ii) How 3 months Future contract shall be useful for company if interest rate turns out as men-
tioned in part (i) above.
Q.3a. Answer:
(a) (i) By entering into an FRA, firm shall effectively lock in interest rate for a specified future in
the given it is 6 months. Since, the period of 6 months is starting in 3 months, the firm shall opt
for 3 × 9 FRA locking borrowing rate at 5.94%. In the given scenarios, the net outcome shall be
as follows:
If the rate turns out to be 4.50% If the rate turns out to be 6.50%
FRA Rate 5.94% 5.94%
Actual Interest Rate 4.50% 6.50%
Loss/ (Gain) 1.44% (0.56%)
FRA Payment / € 50 m × 1.44% × ½ = € € 50m × 0.56% × ½ = (€
(Receipts) 360,000 140,000)
Interest after 6 months = € 50m × 4.5% × ½ = € 50m × 6.5% × ½
on = €1,125,000 = € 1,625,000
€50 Million at actual
rates
Net Out Flow € 1,485,000 € 1,485,000
Thus, by entering into FRA, the firm has committed itself to a rate of 5.94% as follows:
€ 1,485,000 12
× 100 × = 5.94%
€ 50,000,000 6
(ii) Since firm is a borrower it will like to off – set interest cost by profit on Future Contract. Accord-
ingly, if interest rate rises it will gain hence it should sell interest rate futures.
Amount of Borrowing Duration of Loan

X
No. of Contracts = Contract Size 3 Months
€ 50,000,000 6
€ 50,000 X 3 = 2000 Contracts

The final outcome in the given two scenarios shall be as follows:
If the interest rate turns out to be 4.5% If the interest rate turns out to be 6.5%
Future Course Action:
Sell to open 94.15 94.15
Buy to close 95.50 (100 - 4.5) 93.50 (100 - 6.5)
Loss / (Gain) 1.35% (0.65%)
Cash Payment (Receipt) € 50,000 × 2000 × 1.35% × 3/12 € 50,000 × 2000 × 0.65% × 3/12
for Future Settlement = €337,500 = (€ 162,500)
Interest for 6 months on € € 50 million × 4.5% × ½ € 50 million × 6.5% × ½
50 million at actual rates = € 11,25,000 = € 16,25,000
€ 1,462,500 € 1,462,500
Thus, the firm locked itself in interest rate:
€ 1,462,500 12
× 100 × = 5.85%
€ 50,000,000 6
b) The current EPS of Annapurna Limited is Rs. 4. The company has shown extraordinary growth
of 40% in its earnings in the last few years. This high growth rate is likely to continue for the
next 5 years after which growth rate in earnings will decline from 40% to 10% during the next
5 years and remain stable at 10% thereafter. The decline in the growth rate during the 5 year
transition period will be equal and linear. Currently, the company's pay-out ratio is 10%. It is
likely to remain the same for the next 5 years and from the beginning of the 6th year till the end
of 10th year, the pay-out will lineally increase and stabilize at 50% at the end of the 10th year.
The post tax cost of capital of the company is 17%.
You are required to calculate the intrinsic value of the company's stock based on expected
dividend. If the current market price of the stock is Rs. 125, suggest if it is advisable for the
investor to invest in the company's stock or not. 10
For your calculations use the following PV factors:

Rate/Year 1 2 3 4 5 6 7 8 9 10
17% 0.855 0.731 0.625 0.534 0.456 0.390 0.333 0.285 0.244 0.209
Q.3b. Answer:
Calculation of intrinsic value of shares of Annapurna Limited based on expected dividend
Year Dividend (Rs) PV Factor PV of Dividends (Rs)

1 0.56 0.855 0.48
2 0.78 0.731 0.57
3 1.10 0.625 0.69
4 1.54 0.534 0.82
5 2.15 0.456 0.98
6 5.19 0.390 2.02
7 9.59 0.333 3.19

8 15.30 0.285 4.36

9 21.93 0.244 5.35
10 28.71 0.209 6.00
24.46
= Rs. 94.29
Intrinsic Value = Rs Rs. 24.46 + Rs. 94.29 = Rs. 118.75
Since the intrinsic value of equity shares of Annapurna Limited (Rs. 118.75) is less than its cur-
rent market price (Rs. 125), it is not advisable to invest in the same.
Working notes:
(i) Calculation of EPS as per given growth rate
Year 1 2 3 4 5 6 7 8 9 10
Growth rate 40% 40% 40% 40% 40% 34% 28% 22% 16% 10%
EPS (Rs) 5.60 7.84 10.98 15.37 21.51 28.82 36.89 45.01 52.21 57.43
Calculation of dividend pay-out
Year 1 2 3 4 5 6 7 8 9 10
Pay-out ratio 10% 10% 10% 10% 10% 18% 26% 34% 42% 50%
Div. (Rs) 0.56 0.78 1.10 1.54 2.15 5.19 9.59 15.30 21.93 28.71

4. Write short note on the following: (5×3=15)
a) Book building and Reverse book building.

b) Foreign Direct Investment.
c) Repo and Reverse Repo.
d) Securitization and its Benefits.
e) Exposure netting.
Q.4a. Answer:
Book building is a method of initial public offer (IPO) to raise capital, whereby a Company
offers its shares for subscription at indicative price range. Investors are to subscribe at a price
within the range offered by the Company. The price at which shares will finally be allotted
will be based on criterion under law. Whereas reverse book building is a method of buy back
of securities. It is an efficient price discovery process adopted when the Company aims to buy
the shares from the public and other shareholders. This is generally done when the Company
wishes to delist itself from the stock exchanges. Securities Board of Nepal (SEBON) has issued
regulations relating to book building and even listed the qualified institutional investors who can
participate in the building process. However, there has not been any issue of shares under book
building process until now. Further, there is no such provision for reverse book building as of
yet in Nepal. The both methods works in a way that investors value the Company based on their
perspectives of Company’s financial position, performance and prospects. They then participate
in the process by quoting a certain price at which they may be allotted or their shares may be
purchased depending upon bids made on the overall.

Q.4b. Answer:
Foreign direct investment (FDI) is the category of international investment that reflects the ob-
jective of a resident entity in one economy obtaining a ‘lasting interest’ and control in an en-
terprise resident in another economy. FDI is an integral part of an open and effective interna-
tional economic system and a major catalyst to development. Developing countries, emerging
economies and countries in transition have come increasingly to see FDI as a source of filling
investment gaps, economic development and modernization, income growth and employment.
Countries have liberalized their FDI regimes and pursued other policies to attract investment.
FDI triggers technology spillovers, assists human capital formation, contributes to international
trade integration, helps create a more competitive business environment and enhances enterprise
development. All of these contribute to higher economic growth, which is the most potent tool
for alleviating poverty in developing countries. Nepal needs more of FDIs so as to meet its sus-
tainable development goals by 2030s as source of fulfilling the gap between investment require-
ments and availability of funds. Accordingly, Government of Nepal is making improvements in
policies, laws, institutional arrangement, and procedural requirements in addition to working out
to facilitate FDIs through one window services along with provision of automatic routes regard-
ing approval of FDIs under certain threshold.
Q.4c. Answer:
The repo is known as repurchase agreement and the reverse repo is known as reverse repurchase
agreement, which are two key tools used by many large financial institutions, banks and some
businesses. These short-term agreements provide temporary lending opportunities that help to
fund ongoing operations. The Federal Reserve also uses the repo and RRP as a method to control
the money supply. A repo is an agreement between parties where the buyer agrees to temporarily
purchase a basket or group of securities for a specified period. The buyer agrees to sell those
same assets back to the original owner at a slightly higher price using a RRP. Both the repurchase
and reverse repurchase portions of the contract are determined and agreed upon at the outset of
the deal
The central bank can boost the overall money supply by buying Treasury bonds or other
government debt instruments from commercial banks. This action infuses the bank with cash
and increases its reserves of cash in the short term. It will later resell the securities back to the
banks. When the central bank wants to tighten the money supply — removing money from the
cash flow — it sells the bonds to the commercial banks using a repo. Later, they will buy back
the securities through a reverse repo, returning money to the system.
Q.4d. Answer:
Securitization is the process of pooling and repackaging of homogeneous illiquid financial as-
sets into marketable securities that can be sold to investors. The process leads to the creation of
financial instruments that represent ownership interest in or are secured by a segregated income
producing asset or pool of assets. The pool of assets collateralizes securities. These assets are
generally secured by personal or real property such as automobiles, real estate or equivalent
loans but in some cases are unsecured, for example, credit card debt and customer loans.
The main reason for securitization is to reduce a company’s funding costs. Through securitiza-
tion, a company that is rated BB but maintains assets that are very high in quality (AAA or AA)
can borrow at significantly lower rates, using the high quality assets as collateral, as opposed to
issuing unsecured debt. For example, Moody’s downgraded Ford Motor Credit’s rating in Janu-
ary 2002, but senior automobile-backed securities, issued by Ford Motor Credit in January 2002
and April 2002, continued to be rated AAA because of the strength of the underlying collateral

and other credit enhancements.

Q.4e. Answer:
Meaning :
(i) Offsetting exposures : Exposure netting is the act of offsetting exposures in one currency with
exposures in the same or another currency.
(ii) Example : If an entity has Dollar Receivables, which is exposed to currency risk, it may enter
into an offsetting position by entering into a Dollar Payable arrangement.
Objective : The objective of netting, is to offset the likely loss in one exposure, with the likely
gain
in another.
Hedging tool : It is a form of hedging foreign exchange risks. When a Firm opts for exposure
netting, it hedges its risk without taking any forward cover or options cover.
Fundamentals for Banking Transactions :
(i) Application : Banking transactions are based on the principle of netting. A Bank generally
offsets its position in a currency, by taking opposite positions in the same currency.
(ii) Settlement Risk : Settlement Netting / Settlement Risk is the difference of the summed
transactions between the parties which is actually transferred. Example, A Bank is required to
pay USD 1,00,000 and USD 2,75,000 to Mr. A, and collect from him USD 1,75,000, Euro
50,000, then the net payable is called the settlement netting or settlement risk.
Situation for exposure netting : Exposure netting occurs where outstanding positions are net-
ted against one another in the event of counter party default.
5.
a) A portfolio manager purchased 1000 equity shares of Soaltee Hotel Ltd @ Rs. 510 per share.
He wants to hedge the position by writing an April call with a strike price of Rs. 530 and call
premium Rs. 10. Alternatively, he wants to hedge by buying a put option of strike price of Rs.
510 and premium of Rs. 10.
i) Find out his profit/loss if the share price goes up to Rs. 540
ii) Find out his profit/loss if the share price goes up to Rs. 525 till the date of expiration of the
options.
iii) Find out his profit/loss if the share price comes down to Rs. 490.
iv) Does the strategy of buying a stock and writing a call manage his risk effectively ?
v) Under which circumstances should the portolio manager buy a put option ?
vi) Assume that the share price goes down to Rs. 490, what will be the profit/loss of his portfolio
if he buys put option? 8
Q.5a. Answer:
i) His profit is restricted to Rs. 10, which is the option premium, as the call buyer will strike
when the stock price is Rs. 540.
ii) His profit will be Rs. 25, premium plus profit on sale of stock Rs. 15. The call expires worth-
less.
iii) His loss will be Rs. 10, loss in stock Rs. 20 minus premium earned Rs. 10.
iv) No. As writing a call does not protect the value of investment in the downside but it restricts
upside profit.
v) When he thinks that the share price will go down.
vi) If the shares goes down to Rs. 490, then he will strike and get price of Rs. 510. So his stock
value will be neutralized at Rs. 51,000 but his loss will be the amount of put premium paid,
i.e. Rs. 10 per share.
b) Sky Systems Ltd., an Indian company, is interested in expanding its operations in US for which
it requires funds of $ 20 million, net of issue expenses and floatation costs etc., which accounts
to 3 % of the issue size. To finance this project the company proposes to issue GDR.
Following factors are considered in pricing the issue:
(i) Expected market price of share at the time of issue of GDR is IRs. 300 (FV Rs. 10).
(ii) Three shares shall underlay each GDR and shall be priced at 10% discount to market price.
(iii) Expected exchange rate is IRs. 75 per $.
(iv) 20 % dividend is expected to be paid for next year with growth rate of 15%.
You are required to compute the number of GDRs to be issued and cost of GDR to Skylark
Systems Ltd. 7
If the company is able to raise the funds in US at the rate of 4% p.a. and the company is able
to repay the loan along with interest from revenue generated from the operations of the US,
what is your advice to the company?
Q.5b. Answer:
Basic calculations:
Net issue size = $ 20 million
Issue expenses & floatation cost = 3% of the issue size.
Therefore, gross issue size = $ 20 million/(1 – 0.03)
= $ 20.619 million
Number of shares underlay = 3 shares
Market price per share = Rs. 300 less 10% discount = Rs. 270
Issue price per GDR in Rs. = Rs. 270 × 3 = Rs. 810
Issue price per GDR in $ = Rs. 810/Rs 75 = $ 10.80
Dividend per GDR = Rs. 10 × 20% × 3 = Rs. 6
Net proceeds per GDR in Rs. = Rs. 810 × 0.97 = Rs. 785.70
Now,
Number of GDR's to be issued = $ 20.619/$10.80 = 1.9092 million
Cost of GDR (Ke) = (Rs. 6/Rs. 785.70) + 0.15
= 15.76%
If the company receives an offer from US bank willing to provide an equivalent amount of loan
with interest rate of 4%, the company should accept the offer.
6.
a) An investment manager has chanced upon a couple of securities with identical variance of

25%, but zero covariance between their returns. 5

i. Calculate portfolio risk when any two securities are combined in equal proportions.
ii. Calculate portfolio risk when any three securities are combined in equal proportions.
iii. Generalise your result for n-security case and examine its implications for an insur-
ance company.
Q.6a. Answer:
(i) σ2p = w2aσ2a + w2b σ2b+2pabwaσawbσb

since covariance (σ12= p12w1σ1w2σ2) between securities is zero
σ2p = w2aσ2a + w2b σ2b
= 0.52×25+0.52×25
= 6.25 + 6.25
= 12.50 per cent
(ii) σ2p = w2aσ2a + w2b σ2b+ w2c σ2c +2pabwaσawbσb +2pacwaσawcσc+2pbcwbσbwcσc

since covariance (σ12= p12w1σ1w2σ2) between securities is zero
For zero covariance term
σ2p = w2aσ2a + w2b σ2b+ w2c σ2c
=
(1/3)2×25+(1/3)2×25+(1/3)2×25
=2.78+2.78+2.78
=8.34 per cent
(iii)The generalisation involves there conditions: i) identical variance (σ2), ii)zero cova-
riance and iii) weight is equal to 1/n.
portfolio variance σ2p = (wσ)2 + (wσ)2 + n -times
= n(1/n)2σ2 = σ2/n =25/n
It is obvious that as the number of assets increases, the portfolio risk approaches zero.
Based on this result, once is tempted to conclude that the insurance companies can reduce
risk to zero level by increasing the number policies sold. However, it is not so. As more
assets with uncorrelated returns are entered into the portfolio, portfolio risk approaches
zero, provided the size of wealth (portfolio) remains fixed. As insurance companies sell
more policies, the size of portfolio increases. In this case, it is more appropriate to de-
termine mean and standard deviation in value (rupee) terms rather than rates. Insurance
companies pool risk (accumulate independent risky projects) by selling policies, which
does not eliminate the risk of the insurance company.
b) Jupiter Ltd. wishes to takeover Tally Ltd. The Financial data of both the companies are as
under:
Amounts in NPR ‘000
Liabilities Jupiter Ltd. Tally Ltd.
Equity Shares of Rs 10 per share 100,000 50,000
Shares premium Account - 2,000
Profit and Loss Account 38,000 4,000
Preference Shares 20,000 -
10% Debentures 15,000 5,000

Total 173,000 61,000

Assets:
Fixed Assets 122,000 35,000
Net Current Assets 51,000 26,000
Total 173,000 61,000
Additional Information:
Maintainable annual profit (after tax) for equity shareholders 24,000 15,000
(Rs. ‘000)
Market price per equity Share (Rs.) 24 27
Price Earning Ratio 10 9
You are required to answer the following questions: 5
i) What offer do you think Jupiter Ltd. could make to Tally Ltd. in terms of exchange
ratio based on: (a) Net Assets Value (b) Earning per Share (c) Market price per share ?
ii) Which method would you prefer from the acquirer company’s point of view?
Q.6b. Answer:
Calculation of Net Assets Value
in 000
Tally
Particulars Jupiter Ltd.
Ltd.
Fixed Assets 122,000 35,000
Net Current Assets 51,000 26,000
Total Assets 173,000 61,000
Less: Preference Shares 20000 0
Less: 10% Debentures 15,000 5,000
Net Assets 138,000 56,000
No. of Shares outstanding 10,000 5,000
Net Assets value per share 13.8 11.2
Share Exchange Ratio = Rs 11.2/13.80 = 0.8116
For Every 1 share of Tally Ltd 0.8116 shares of Jupiter Limited will be issued.
No. of New shares issued = 5,000,000 × 0.8116 shares

= 40,58,000 Shares
Pre Merger EPS:
Jupiter Ltd. Rs. 24,000,000/10,000,000 = Rs 2.4
Tally Ltd. Rs. 15,000,000/5,000,000 = Rs 3
Share Exchange Ratio = Rs 3/2.4 = 1.25
For Every share in Tally Limited 1.25 Shares of Jupiter Limited will be issued.

No. of Shares to be issued = 5,000,000×1.25 = 6,250,000 Shares

Again,
Exchange ratio based on Market price per Sahre = Rs 27/Rs 24 = 1.125
The shareholders of Tally Ltd. will get 1.125 shares of Jupiter Limited for every shares held by
them.
No. of New shares to be issued = 5,000,000 × 1.125 = 56,25,000
Conclusion: The exchange ratio based on the net asset value is the best from the point of view of
Jupiter Ltd. In this basis it wil be required to issue minimum number of shares.

Suggested Answers - December 2023 - Advanced Auditing
Advanced Auditing
Suggested Answers


Marks
Attempt all questions.
1. Comment and give your views with reasons on each of the following cases, giving consideration
to respective Standards, Laws and Code of Ethics:
(a) Nepal Capital Ltd. (NCL) is an investment holding company that controls a number of
subsidiaries. It is listed on the Nepal Stock Exchange and is 75% owned by Mr. Khushiram
Anand. M/s Saurav & Associates conducted the audit of the financial statements of NCL and
its subsidiaries (NCL Group) for the year ended 31 Ashadh 2080, and the engagement team has
drafted an unmodified audit opinion.
The engagement team has identified going concern, fair value of land and buildings, and im-
pairment of the investment in subsidiaries as significant risks. The draft audit report, however,
only contains going concern as a key audit matter (KAM).
The engagement quality review partner (EQRP) believes that there is a material uncertainty
over going concern based on the financial position and performance. The engagement partner
provided the following explanations during the meeting with the EQRP.
• A letter of support from Mr. Khushiram Anand was obtained stating that he will provide the
required support to NCL Group. M/s ABC Ltd has also confirmed that no repayment of the
foreign currency loan will be demanded until NCL is able to repay the loan.
• Including going concern as a KAM negates the requirement to modify the audit opinion.
The KAM included in the audit report is adequate audit documentation on its own.
• As the members of the board were overseas, it was not possible to discuss any matters with
those charged with governance.
• The significant risks were identified during planning and adequate work was done when
performing audit work. Hence, no further documentation was done to consider those as
KAM or not.
After performing and documenting audit work, the audit team has now concluded that the
going concern assumption is appropriate but there is a material uncertainty, and the finance
director has agreed to provide the updated draft financial statements considering going
concern matter.
Based on information available above,
(i) Evaluate the application of the requirements of NSA 701 in deciding the KAMs in the draft
audit report on NCL Group’s financial statements for the year ended 31 Ashadh 2080.
(ii) Select the type of audit opinion you would provide, if the updated draft financial statements
provided by the finance director;
• includes a note adequately disclosing the material uncertainty
• do not include a note adequately disclosing the material uncertainty
6+4=10

Answer
(i) In the given case, there were three significant risks identified at the point of drafting the audit report.
However, only going concern was included as a KAM. Accordingly, KAMs have not been deter-
mined considering matters in NSA 701, which are given below.
• Areas of higher risk of material misstatement or significant risks identified in accordance with
NSA 315.
• Significant auditor judgments relating to areas in the financial statements that involved signifi-
cant management judgment.
• The effect on the audit of significant events and transactions during the period.
NSA 701 emphasizes that the auditor should not communicate a matter in the Key Audit Matters
section of the auditor’s report when the auditor would be required to modify the opinion in accor-
dance with NSA 705 (Revised) as a result of the matter. NSA 701 also makes special mention of
going concern problems. Where there is a material uncertainty in relation to going concern, this
is described in the ‘Material uncertainty related to going concern’ section. Going concern issues
should not be included as a KAM (although the KAM section will include a reference to the ‘Ma-
terial uncertainty related to going concern’ section).
Although significant risks are likely to be KAMs (probable KAMs), how the team dismissed those
from graduating as KAMs, is not evidenced as relevant. Not having the required documentation is
a departure from NSA 701.
KAMs are selected from matters communicated to those charged with governance. They have not
been communicated to those charged with governance.
(ii) the type of audit opinion would be influenced by the scenario as discussed below:
Scenario Impact on Audit Report
If the financial statements include a note adequately Unmodified opinion with a section headed
disclosing the material uncertainty ‘Material Uncertainty Related to Going
Concern’
If the financial statements do not include a note Qualified or adverse opinion (i.e. modified
adequately disclosing the material uncertainty opinion)
(b) Mr. Chabilal, a Chartered Accountant in practice, delivered a speech in the IT Forum organised
by Tech Nepal Society (TNS). The chief guest of the program, Minister for Information and
Communications of Nepal, congratulated on the contribution of Mr. Chabilal as a Cyber security
Expert in Nepal and further praised on delivering world class services of cloud accounting, IT
governance, risk compliance and information security. Later, Mr. Chabilal also requested the
audience to approach his firm of Chartered Accountants for these services and at the request of the
audience he also distributed his business cards and website links of his firm to those in the audience.
Comment in the light of professional Code of Ethics.
10
Answer
Marketing, publicity or advertisement may create threat to compliance with the fundamental princi-
ples of the Code of Ethics and as per guidelines on marketing professional services by professional
accountants in public practice- 2023.
Such communication must not be in form to influence, persuade, or coerce the clients through any
means of advertisement, publicity, communication, lobbying etc. The professional accountant in
practice shall not bring the profession into disrepute when marketing professional services.

The professional accountants in public practice shall be honest and truthful and not:
• Make exaggerated claims for services offered, qualification possessed or experience gained, or
• Make disparaging references or unsubstantiated comparisons to the work of another.
Further, if a professional accountant is in doubt about whether a form of advertising or marketing is
appropriate, the accountant is encouraged to consult with the relevant professional body.
As per guidelines on marketing professional services by professional accountants in public prac-
tice- 2023, a Professional Accountant in Public Practice shall not seek to obtain clients by any
means of manner of communication, or publicity or advertising (written, oral, or electronic), or
other forms of solicitation: (i) in a manner that is false, fraudulent, misleading, deceptive, unfair,
tends to promote unsupported claims, or (ii) which is accomplished or accompanied by the use of
coercion, duress, compulsion, intimidation or vexatious or harassing conduct.
Further, Professional Accountant in Public Practice shall not on behalf of himself/herself, his/
her partner or associate, or any other individual affiliated with him/her or his/her firm, use
or participate in the use of any form of public communication containing a false, fraudulent,
misleading, deceptive or unfair statement or claim, or advertising which the ICAN/Council
considers to be self-serving rather than in the public interest. Publicity not in the public interest
shall include, but not be limited to, advertising or marketing that:
• is false, fraudulent, deceptive, or misleading;
• guarantees any service that is inconsistent with decisions of regulatory authorities;
• makes any claim relating to professional services or products or the cost or price thereof which
cannot be substantiated by the firm, who shall have the burden of proof;
• makes claims of professional superiority which cannot be substantiated by the firm, who shall
have the burden of proof; or
• offer inducements in any form for a professional service or product.
Since, Mr. Chabilal requested the audience to approach his firm of Chartered Accountants for the
services and distributed his business cards and website links of his firm. The activities shown by Mr.
Chabilal in the IT forum is the clear indication of the violation of the ICAN Guidelines. Thus, use
of designation of Mr. Chabilal as a Cybersecurity Expert and explaining the achievement through
speaker leads to violation of Guidelines.
2. Comment and give views with reasons on each of the following cases:
(a) You are a manager in Timothy George & Co., a firm of Chartered Accountants. You have just
attended a monthly meeting of audit partners and managers at which client-related matters were
discussed. Information in relation to client S & Co, which were discussed at the meeting, is given
below:
The audit report on the financial statements of S & Co, a long-standing audit client, for the year
ended 31 Ashadh, 2080 was issued in 15 Ashwin 2080, and was unmodified. In Kartik 2080 S & Co’s
audit committee contacted the audit engagement partner to discuss a fraud that had been discovered.
The company’s internal auditors estimate that Rs. 4.50 million has been stolen in a payroll fraud,
which has been operating since Kartik 2079. The audit engagement partner commented that neither
tests of controls nor substantive audit procedures were conducted on payroll in the audit of the latest
financial statements as in previous years’ audits there were no deficiencies found in controls over
payroll. The total assets recognized in S & Co’s financial statements at 31 Ashadh 2080 were Rs.
80 million. S & Co is considering suing Timothy George & Co. for the total amount of cash stolen

from the company, claiming that the audit firm was negligent in conducting the audit.
Explain the matters that should be considered in determining whether Timothy George & Co. is
liable to S & Co in respect of the fraud.
10
Answer
Napal Standards on Auditing 240 “The auditor’s responsibilities relating to fraud in an audit of fi-
nancial statements” deals with the auditor’s responsibilities relating to fraud in an audit of financial
statements. The primary responsibility for the prevention and detection of fraud rests with both
those charged with governance of the entity and management. Therefore, the management along
with TGWG are responsible for designing and implementing suitable internal controls that can
prevent, detect and correct the misstatement on timely basis.
An auditor conducting an audit in accordance with NSAs is responsible for obtaining reasonable as-
surance that the financial statements taken as a whole are free from material misstatement, whether
caused by fraud or error. But due to the inherent limitations of an audit, there is an unavoidable risk
that some material misstatements may not be detected, even though the audit is properly planned
and performed in accordance with the NSAs.
The objectives of the auditor are:
- To identify and assess the risks of material misstatement of the financial statements due
to fraud;
- To obtain sufficient appropriate audit evidence regarding the assessed risks of material
misstatement due to fraud, through designing and implementing appropriate responses;
and
- To respond appropriately of fraud or suspected fraud identified during the audit.
Aa per NSA 200, the auditor shall maintain professional skepticism throughout the audit, recog-
nizing the possibility that a material misstatement due to fraud could exist, notwithstanding the
auditor’s past experience of the honesty and integrity of the entity’s management and those charged
with governance.
The auditor shall identify and assess the risks of material misstatement due to fraud at the financial
statement level, and at the assertion level for classes of transactions account balances and disclo-
sures. The auditor shall treat those assessed risks of material misstatements due to fraud as signifi-
cant risks and accordingly, to the extent not already done so, the auditor shall obtain an understand-
ing of the entity’s related controls, including control activities, relevant to such risks.
The auditor shall determine overall responses to address the assessed risks of material misstatement
due to fraud at the financial statement level.
As per the provisions of NSAs, it is the responsibility of management and not the auditors to detect
fraud. However, as per NSA 240 auditor has to assess the risk and respond appropriately. In this
case, the auditor has failed to test the controls and relied blindly on the past assessment and rep-
resentation from the management. So, it seems that auditors didn’t apply professional skepticism.
Since the quantum of fraud is material (5.63% of total assets) and the audit team has not applied
professional skepticism and due care. The fraud is material and client has sustained loss. So, Tim-
othy George & Co. will be held liable in this case.
(Marking Scheme: 5 marks for NSA Provision, 5 marks for case analysis and conclusion {including
1 mark for Management Representation})

(b) You are the Statutory Auditor of Sudas Ltd. for the FY 2079/080. During the audit process you
noticed following issues:
i) Company`s provisional financial statement of the FY 2079/080 shows total Net balance of
Property, Plant and Equipment amounts to Rs. 200 million being 40% of the total assets of the
Company. Company has not carried out physical verification since inception of its establish-
ment (5 Years). Further fixed assets register has not been prepared.
ii) Company`s Procurement Policy defines purchase of any services or goods exceeding worth
of Rs. 1 million through competitive bidding process. During the FY 2079/080 company pur-
chased computers worth of Rs. 2 million only obtaining three competitive quotations.
iii) Company has incurred non-budgeted expenses of Rs. 0.5 million without revision of original
budget and getting approval from competent authority.
iv) Company has carried out only three board meeting during the financial year 2079/080.
v) Company, owned three Cars/Vans for business operation such as collection of sales proceeds,
pick up and drop of executives, delivery of products, and other administrating work with
various authorities. Total fuel and repair & maintenance cost for the FY 2079/080 is Rs. 2.5
million. Company has no logging system for vehicles operated.
Required: As Statutory Auditor draft your preliminary audit report under 5C's criteria
.
10
Answer
SN Observations Criteria Condition Cause Consequence Corrective Action
1 Company`s provision- Company should Physical Verifi- Due to Actual status of We suggest for car-
al financial statement carry out physical cation of fixed non-con- fixed assets at rying out physical
of the FY 2079/080 verification of the assets has not duction of the end of the FY verification of fixed
shows total Net fixed assets on been carried out physical 2079/080 could assets at least once
balance of Property periodic basis, at since the estab- verification not be verified at the end of each
Plant and equipment least once during lishment of the of fixed including absence FY. Fixed Assets
amounts to Rs. 200 the particular company. Fixed assets & of fixed assets Register should
million being 40% of financial year. Assets register non-main- register & recon- be maintained and
the total assets of the Fixed Assets has not been tenance of ciliation which reconciled with the
Company. Company Register should maintained and fixed assets shows weak accounting record
has not carried out be maintained & reconciled with register. control over fixed before formal
physical verification reconciled with the accounting assets owned by closure of annual
since inception of the accounting records. the company. accounts of the FY
its establishment (5 records. True & fairness 2079/080.
Years). Further fixed of FS of FY
assets register has not 2079/080 could
been prepared. not be ensured.

2 Company`s Procure- Company should During the Due to pro- Non-compli- We suggest for
ment Policy defines purchase goods FY 2079/080 curement ance with the compliance of
purchase of any or services on company pur- of comput- procurement procurement
services or goods competitive basis chased com- ers through policy of the policy of the com-
exceeding worth of in line with the puters worth of quotation company result- pany and taking
Rs. 1 million through company`s pro- Rs. 2 million procedures ing occurrence corrective action
competitive bidding curement policy. through quo- instead of of unauthorized to regularize such
process. During tation proce- bidding transactions. deficiency.
the FY 2079/080 dures. This procedures.
company purchased purchase was
computers worth of non-complaint
Rs. 2 million only to the compa-
obtaining three com- ny’s procure-
petitive quotations. ment policy.
3 Company has Expenses should Company Due to Weak budgetary We suggest taking
incurred non-budget- be made within has incurred incurring control system corrective action
ed expenses of Rs. the budget- non-budgeted non-bud- and authenticity for regularizing
0.5 million without ary limits. expenses of geted ex- of such expens- such deficiency
revision of original If budgetary Rs. 0.5 mil- penditure es could not be as per company`s
budget and getting limits exceeds lion. without ensured. formal policy.
approval from com- or non-budgeted approval.
petent authority. expenses to be
made, approval
from competent
authority should
be taken.
4 Company has carried As per Section 97 Only three Due Non-compliance We suggest for
out only three board of the Company`s board meet- non-con- with the provi- strict compliance
meeting during Act 2063, meeting has been ducting sion of company of company`s Act
the financial year ings of the board conducted by minimum act 2063 would 2063 to conduct
2079/080. of directors of a the company number result penalty minimum board
public company during FY of board etc. meeting in the par-
shall be held at 2079/080. meeting as ticular FY to avoid
least six times in per com- penalty etc.
a year. pany`s Act
2063.
5 Company owned Company should Company Due to lack Economy in fuel We suggest for
three Cars/Vans for maintain the log has not used of logging and R & M cost introducing the
business operation book of vehicles any logging system in could not be en- logging system for
such as collection operated to en- systems for the compa- sured. Chances vehicles operated
of sales proceeds, sure the economy vehicles oper- ny. of unauthorized in the company
Pick up and drop of in fuel & R&M ated. usage of vehi- to regularize such
executives, delivery cost. cles could not be deficiencies.
of products, and ruled out.
other administrating
work with various
authorities. Total fuel
and repair & main-
tenance cost for the
FY 2079/080 is Rs.
2.5 million. Com-
pany has no logging
system for vehicles
operated.
3. Comment and give your views with reasons on each of the following cases, giving consideration
to Nepal Standards on Auditing:
(a) Himalayan Beverage Ltd. a listed company has been engaged in soft drink production and dis-

tribution business over decades. As usually the company is compelled to prepare their financial
statement (FS) in accordance to conceptual framework as guided by the Nepal Financial Reporting
Standard (NFRS). In the respective AGM of the company, Hitesh and Co., Chartered Accountants
has been appointed auditor for the year ending 31 Ashadh 2080. Notable that although the company
is a listed one, a family being major investor has been passively engaged to influence the major de-
cisions of the company. The one who represents the family is a highly influential personality being
closely connected to national level politics.
Hitesh and Co. having been influenced by the brand image of the company accepted the engage-
ment without doing much of pre acceptance review. Having been engaged, the firm deputed the en-
gagement manager to have a quick review of the draft FS as part of the risk assessment process. The
engagement team revealed that the company has been reporting their annual maintenance costs (not
overhauling) as part of the Property Plant and Equipment which naturally does qualify to be capital
expenditure. Given the nature of the company this expenditure is substantially a large amount. The
engagement team primarily doubted that the management had been overstating profit every year by
capitalizing such big amount of annual maintenance cost.
The engagement team argued that this was wrong reporting leading to a gross misstatement and
would require rectification in the financial statement under audit. This could never be accepted as
capital expenditure which results in understatement of the operating expense and correspondingly
overstatement of the capital expenditure. The management, without much deliberation, outrightly
refused to put required rectification and they referred to their logic applied to their previous audi-
tors. The company seemed to be worried about the implication, should they accept such rectification
proposition. Such rectification proposition might require restatement and necessary adjustments in
the previously published FS as well as in the draft handed over to the auditor. On the contrary, if not
necessary adjustment accepted, carrying such substantial misstatement, the respective audit report
would be a modified one. But the management too indicated that their board geared by the influen-
tial corner might not accept any modified opinion.
Under the given circumstance and having felt the influential stature of the board, the audit firm
wished to discontinue the engagement and withdraw their team without further progress in the audit
work.
Requirements:
i) As engagement manager what are the steps would you suggest that your firm should take to =
discontinue the engagement? 4
ii) Being a new engagement, what actions as guided by the ethical codes should your firm have =
taken prior to formally accept such engagement? 4
Answer
a. In an ideal situation, once an engagement is accepted, the audit firm should carry on doing
whatever is necessary towards successful completion of the engagement. However, if it is
sensed that successful completion is unlikely and if at all done forming a credible opinion
might not be possible due to potential intimidating environment, the auditor may prefer with-
drawing from the engagement. In that case following steps may be necessary:
• Holding clear discussion amongst partners of the firm bringing on table all necessary points
underlying such hard decision.
• If suitable, putting a note with The Institute of Chartered Accountants of Nepal.
• Communicating the logic behind the decision of withdrawal with those charged with the
governance. While communicating, necessary reference of technical standards, ethical
codes and other regulatory directives may be offered for their clear understanding.
• If felt appropriate, taking a legal advice on the matter.

• Returning all evidence collected so far to the client, if left in original copy with the firm.
b. IESBA Codes of Ethics offer appropriate ethical guidance to its members across the globe.
ICAN has also issued The Handbook of the Code of Ethics for Professional Accountants as
an ethical guidance to its members. The audit firm shall follow The Institute of Chartered
Accountants of Nepal Act and Regulation, Nepal Standards on Auditing and other relevant
acts in this context. Similarly, there has been list of guidance applicable to a firm/professional
accountant contemplating to accept a new engagement. The guidance items are:
• Determine whether acceptance would create any threat to compliance with the fundamental
principles.
• Determine potential threats to integrity and professional behavior due to the predominant
influential attitude of the owners, management etc.
• Review if the client has/had involvement in illegal activities.
• Evaluate the magnitude of the threats and apply suitable safeguard. If the threats are un-
likely to be eliminated or reduced to an acceptable level, it is better declining to enter the
relationship.
• Periodically review acceptance decisions of recurring client engagements.
• Accept only those engagements which professional accountant in practice is competent to
perform.
• Evaluate the significance of the threats and apply suitable safeguard to eliminate them or
reduce to an acceptable level. Safeguards may include:
- Acquiring sufficient knowledge of the industries and related activities.
- Deploying adequate staff with due competencies
- Using expert services wherever necessary
• In case of replacing or tendering for an engagement currently held by a professional ac-
countant in public practice:
- Determine if there is any reason for not accepting this offer.
- Communicate directly to the existing accountant.
- While communicating existing accountant the professional accountant in practice needs
client’s permission to do so.
(b) External auditors may use the work of internal audit function. In determining whether to use
the work of internal auditor, external auditor should evaluate whether the internal audit func-
tion applies a systematic and disciplined approach, including the objectivity and competence
of internal auditors. What are the factors that may affect the external auditor’s determination of
objectivity and competence of internal audit function and whether the internal audit function
applies systematic and disciplined approach? 7
Answer
As per NSA 610 Using the work of Internal Auditors, when the external auditor expects to use the
work of the internal audit function to modify the nature or timing, or reduce the extent, of audit
procedures to be performed directly by the external auditor, or to use internal auditors to provide
direct assistance, then he has to determine in which areas, and to what extent the work of the inter-
nal audit function can be used.
To determine whether the work of the internal audit function or direct assistance from internal
auditors, the external auditor should evaluate the internal audit function to the extent he considers
that it will be relevant in determining the nature, timing and extent of his compliance and substan-
tive procedures. Depending upon such evaluation, the external auditor may be able to adopt less
extensive procedures than would otherwise be required. The report of the external auditor is his

sole responsibility, and that responsibility is not by any means reduced because of the reliance he
places on the internal auditor’s work.
The external auditor shall determine whether the work of the internal audit function can be used
for purposes of the audit by evaluating the following:
i) The extent to which the internal audit function’s organizational status and relevant policies
and procedures support the objectivity of the internal auditors;
ii) The level of competence of the internal audit function; and
iii) Whether the internal audit function applies a systematic and disciplined approach, including
quality control.
Matters affecting objectivity of internal auditor:
• organizational status of the internal audit function, including the function’s authority and ac-
countability, that supports the ability of the function to be free from bias, conflict of interest
or undue influence of others to override professional judgments.
• Whether the internal audit function is free of any conflicting responsibilities
• Whether those charged with governance oversee employment decisions related to the inter-
nal audit function
• Whether there are any constraints or restrictions placed on the internal audit function by
management or those charged with governance, for example, in communicating the internal
audit function’s findings to the external auditor
• Whether the internal auditors are members of relevant professional bodies and their member-
ships obligate their compliance with relevant professional standards relating to objectivity,
or whether their internal policies achieve the same objectives.
Matters affecting competence of the internal audit function:
• attainment and maintenance of knowledge and skills of the function and membership of
professional bodies
• Whether the internal audit function is adequately and appropriately resourced
• established policies for hiring, training and assigning internal auditors to internal audit en-
gagements
Matters affecting application of systematic and disciplined approach:
The application of a systematic and disciplined approach to planning, performing, supervising,
reviewing and documenting its activities distinguishes the activities of the internal audit function
from other monitoring control activities that may be performed within the entity. Factors that may
affect the external auditor’s determination of whether the internal audit function applies a system-
atic and disciplined approach include the following:
• The existence, adequacy and use of documented internal audit procedures or guidance cov-
ering such areas as risk assessments, work programs, documentation and reporting, the
nature and extent of which is commensurate with the size and circumstances of an entity.
• Whether the internal audit function has appropriate quality control policies and procedures,
for example, such as those policies and procedures in NSQC 1 that would be applicable
to an internal audit function (such as those relating to leadership, human resources and
engagement performance) or quality control requirements in standards set by the relevant
professional bodies for internal auditors. Such bodies may also establish other appropriate
requirements such as conducting periodic external quality assessments.
4.
(a) Comment and give your views on the following with reference to the Nepal Chartered Accoun-
tants Act, Regulations and Code of Ethics:

i. CA. Biraj Mehata has been appointed as tax auditor for the year 2079/80 by Netflix Private
Limited. He finds that the company has wrongly claimed excess carry-forward loss of Rs.15
million in the previous year’s (2078/79) tax return in which he was not associated at all.
This has no effect in the tax return for the year 2079/80.
ii. The Joint Merger Committee of Hatta Bank and Khmer Bank has appointed CA. Raghur-
am as Due Diligence Auditor of both banks for the merger process. The appointment letter
has following clause regarding fees: “Fees amounting to Rs.500,000 for each bank shall be
paid on submission of DDA report. Additional payment of Rs.500,000 shall be made, if the
merger is successful.”
4+4=8
Answer
i) Section 604 of Code of Ethics deals with tax practice by professional accountants. It states
that when a professional accountant learns of a material error or omission in a tax return for
previous year (with which the professional accountant may or may not have been associated),
the client should be advised promptly to disclose the fact to tax authority. However, CA. Biraj
Mehata is not obliged to inform the tax authorities. CA. Biraj should inform the client that it is
not possible to act for them in connection with that return or other related information submit-
ted to the authorities. Since, the prior error does not have any effect in tax return for the year
in which he is associated, he may continue professional relation with client but all reasonable
steps should be taken to ensure that the error is not repeated in subsequent returns.
ii) Section 330 “Fees and other types of remuneration” of Code of Ethics of ICAN, states that
Professional services should not be offered or rendered to a client under an arrangement
whereby no fee will be charged unless a specified finding or result is obtained or when the
fee is otherwise contingent upon the findings or results of such services. Fees charged on a
percentage or similar basis should be regarded as contingent. In the given instance; though
the first part of the clause of fee is straight forward and will be received on submission of the
DDA report, the second part of the fee is contingent upon the successful merger. The second
part of the fee will not be there if the merger is unsuccessful. It is understood that the success
of merger shall be significantly influenced by the DDA Report. This may also cause self-in-
terest threat on the objectivity of the assignment. Given the facts, CA. Raghuram should not
accept the assignment based on the given terms of fee.
(b) What is the Sarbanes-Oxley (SOX) Act of 2002? What is the purpose of the Sarbanes-Oxley
Act?
3 +4 =7
Answer
Definition:
The Sarbanes-Oxley Act of 2002 is a law the U.S. Congress passed on July 30 of that year to
help protect investors from fraudulent financial reporting by corporations. Also known as the
SOX Act of 2002, it mandated strict reforms to existing securities regulations and imposed
tough new penalties on lawbreakers.
The Sarbanes-Oxley Act of 2002 came in response to financial scandals in the early 2000s =
involving publicly traded companies such as Enron Corporation, Tyco International plc, and
WorldCom. The high-profile frauds shook investor confidence in the trustworthiness of cor-
porate financial statements and led many to demand an overhaul of decades-old regulatory
standards.
The purpose of the Act:

The Sarbanes-Oxley Act is a product of a series of scandals that took place around the turn of
the millennium. Several publicly traded companies—Enron and WorldCom were two of the
most prominent—used accounting trickery, shell corporations, and other fraudulent techniques
to hide business losses from the public and keep stock prices artificially high. Executives and
board members used this deception to enrich themselves, cashing out and leaving investors
(and, in Enron’s case, employees who had been urged put their retirement into company stock)
holding the bag when the deception could no longer be maintained and the stock price collapsed.
These scandals unwound around the same time dot-com stock prices collapsed, and while none
of those early-stage internet companies perpetrated fraud on quite such a scale as Enron, many
people believed that they had inflated reports of their earning potential in advance of initially
lucrative IPOs, essentially enriching company founders at the expense of investors.
The Sarbanes-Oxley Act imposed a heavy regulatory burden in an attempt to prevent these
kinds of abuses from happening again. The law aims to improve corporate behavior by making
sure companies produce and retain accurate data about their own finances, and that they be able
to make that data available to investors and regulators in near-real time. For IT, that means huge
amounts of corporate data has to be kept meticulously accurate and absolutely safe—from both
internal and external threats—and has to be available to auditors and investors on short notice.
5.
(a) X Cooperatives Ltd has 200 members with operations in the municipality in Chautara, Sindh-
upalchowk. 75% of its members raised a voice for the need of assessment of loans disbursed
and documentation. The Chairman of the board placed the agenda to appoint Forensic Auditor.
In this background, explain key characteristics and outcome of Forensic Audit.
7
Answer
A forensic audit is a specialized type of financial audit that focuses on investigating
potential financial misconduct, fraud, or other irregularities within an organization. It is a
comprehensive examination of an entity's financial records, transactions, and activities,
conducted with the goal of uncovering evidence that can be used in legal proceedings or to
address specific concerns.
‘Forensic auditing’ suggests to follow the specific procedures carried out in order to produce
evidence. Audit techniques are used to identify and to gather evidence to prove, for example,
how long the fraud has been carried out, and how it was conducted and concealed by the perpe-
trators. Evidence may also be gathered to support other issues which would be relevant in the
event of a court case. Such issues could include:
• the suspect’s motive and opportunity to commit fraud
• whether the fraud involved collusion between several suspects
any physical evidence at the scene of the crime or contained in documents
• comments made by the suspect during interviews and/or at the time of arrest
• attempts to destroy evidence.
Key characteristics of a forensic audit include:
1. Investigative Nature: Unlike regular financial audits that aim to ensure compliance with
accounting standards and assess the accuracy of financial statements, forensic audits are
driven by suspicions or concerns related to financial impropriety.
2. Legal Purpose: Forensic audits are often carried out in anticipation of legal actions, such as
in cases of suspected fraud, embezzlement, misappropriation of funds, or other financial
crimes. The findings can be used as evidence in legal proceedings.
3. Detailed Examination: Forensic auditors perform a detailed and thorough examination of

financial records, documents, and transactions. They may also interview individuals, review
emails, and gather evidence to reconstruct financial activities.
4. Expertise: Forensic auditors typically have specialized skills and training in forensic accounting
and investigative techniques. They may work closely with legal experts, law enforcement, or
regulatory authorities.
5. Fraud Detection: Detecting and preventing fraud is a primary objective of forensic audits.
Auditors look for red flags, irregularities, and anomalies in financial data to identify potential
fraudulent activities.
6. Preservation of Evidence: Proper documentation and chain of custody are essential in

forensic audits to ensure that evidence is admissible in court if necessary.
7. Reporting: The findings of a forensic audit are documented in a report that outlines the audit
procedures, evidence collected, and conclusions. This report can be used in legal proceedings
or for internal action.
8. Remediation: Depending on the findings, recommendations for corrective actions or

improvements may be provided to prevent future financial misconduct.
Forensic audits are often undertaken in various situations, such as during corporate
investigations, insurance claims assessments, embezzlement cases, and other instances where
financial integrity is in question. The goal is to provide a clear, objective, and legally sound
assessment of the financial issues at hand.
(b) You are the Financial Advisor of one the Nationalized Commercial Bank. Prepare a presenta-
tion to orient the Finance Department personnel for comparative GAP (NAS & NFRS) Analysis
on accounting treatment for following items:
i) Inter-bank lending, ii) Investment in equity shares of listed companies, iii) Investment in As-
sociates, iv) Investment in Subsidiaries v) Investment in equity shares of un-listed companies,
vi) Borrowings and vii) Government Development Bond. 8
Answer
Presentation for comparative GAP (NAS & NFRS) Analysis on accounting treatment would be as
follows:
S. Particulars Accounting treatment as Accounting treatment as per
No. per NAS NFRS
1 Inter-bank lending a. Investments booked at a. Investment shall be booked
amortized cost (cost less at amortized cost using effec-
impairment) & tive interest rate method &
b. Interest income booked on b. Interest income booked un-
accrual basis on daily basis. der accrual basis using effec-
tive interest rate method.

2 Investment in equity Investment booked at cost or Should be accounted at fair

shares of listed com- market value whichever is value.
panies lower.
3 Investment in Associ- Investment booked at cost or Initial measurement at cost
ates market value whichever is and the carrying amount is
lower. increased or decreased to rec-
ognize share of profit or loss of
the entity.
4 Investment in Subsid- Investment booked at cost or Consolidated Financial State-
iaries market value whichever is ment Should be prepared.
lower.
5 Investment in equity Investment booked at cost or At fair Value. Since, Fair value
shares of un-listed market value whichever is cannot be reliably estimated
companies lower. hence valued at Cost. Further,
impairment testing shall be
done.
6 Borrowings Accounted at principal value Borrowing shall be considered
and the interest expenses is as financial liability and shall
accounted under the accrual be valued at amortized cost
basis of accounting.
7 Government Develop- a. Investments are booked at a. Investment shall be booked
ment Bond face value at amortized cost using effec-
b. Premium paid on bond tive interest rate method.
amortized on proportionate b. Premium paid shall be in-
basis over the maturity peri- cluded while computing amor-
od, and tized cost, and
c. Interest income booked c. Interest income booked un-
under accrual basis using der accrual basis using effec-
coupon interest rate. tive interest rate method.
6. Write short notes on the following: 5×3=15
(a) Audit Through the Computer

Answer
Computerization of accounts does not affect the basic objectives of auditing. However, the auditor
would need to modify his audit procedures, approach and technical capabilities so as to be able
to form an opinion on the accounts processed in a computerized environment. Audit through the
Computer is the audit, with the help of computer technology in the audit of accounts processed in a
computerized environment. Audit through the computer requires that the auditor submits data to the
computer for processing. The results are then analyzed for the processing reliability and accuracy
of the computer program. Technical and other developments that necessitated this approach include
the following;
i) On line data entry
ii) Elimination or reduction of print outs
iii) Real time files up dating

The auditor can use the computer to test the logic and controls existing within the system and the
records produced by the system. Depending upon the complexity of the application system being
audited, the approach may be fairly simple or require extensive technical competence on the part
of the auditor. There are several circumstances where auditing through the computer must be used:
a) The application system processes large volumes of input and produces large volumes of output
that make extensive direct examination of the validity of input and output difficult.
b) Significant parts of the internal control system are embodied in the computer system. For exam-
ple, in on line banking system a computer programmed may batch transactions for individual
tellers to provide control totals for reconciliation at the end of the day’s processing.
c) The logic of the system is complex and there are large portions that facilitate use of the system
for efficient processing.
d) There are substantial gaps in the visible audit trail.
The primary advantage of this approach is that the auditor has increased power to effectively test
the computer system. The range and capability of tests that can be performed increases and the
auditor acquires greater confidence that data processing is correct. By examining the system’s pro-
cessing, the auditor also can assess the system’s ability to cope with environment change. The pri-
mary disadvantages of the approach are generally high costs and the need for extensive technical
expertise when systems are complex. However, these disadvantages are really not that important if
auditing through the computer is the only viable method of carrying out the audit. Auditing through
computer may be conducted through test data, computer programmed, etc.
(b) Fair presentation framework and compliance framework

Answer
The applicable financial reporting framework is a framework adopted by management and,
where appropriate, those charged with governance in the preparation of the financial statements
that is acceptable in view of the nature of the entity and the objective of the financial statements,
or that is required by law or regulation. Such financial reporting framework could be:
 Fair presentation framework – this framework is used to refer to a financial reporting
framework that requires compliance with the requirements of the framework and:
 Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial
statements, it may be necessary for management to provide disclosures beyond those
specifically required by the framework; or
 Acknowledges explicitly that it may be necessary for management to depart from a
requirement of the framework to achieve fair presentation of the financial statements.
Such departures are expected to be necessary only in extremely rare circumstances.
 Compliance framework – this framework is used to refer to a financial reporting frame-
work that requires compliance with the requirements of the framework, but does not contain
the acknowledgements that is made in case of fair presentation framework; i.e., providing
disclosures beyond requirements or departing from requirements.
(c) Traditional Audit Vs Risk Based Audit

Answer
Traditional Audit Risk Based Audit

Post Mortem. Forward looking.

Testing of transactions (focus on finding Risk identification & management (focuses on ma-
errors irrespective of materiality level). terial risk areas and ensures that major controls are
operating).
Financial Focus. Focus on all areas of operation (e.g. system).
Confirm that internal controls are operat- Provides opinion whether risks are being properly
ing. managed
(d) Considerations in the Use of CAATs
Answer
When planning an audit, the auditor may consider an appropriate combination of manual
and computer assisted audit techniques. In determining whether to use CAATS, the factors to
consider include:
• the IT knowledge, expertise and experience of the audit team;
• the availability of CAATs and suitable computer facilities and data; the impracticability of
manual tests;
• effectiveness and efficiency; and
• time constraints.
Before using CAATS the auditor considers the controls incorporated in the design of the
entity’s computer systems to which CAAT would be applied in order to determine whether, and
if so, how, CAATs should be used.
IT Knowledge, Expertise and Experience of the Audit Team: Auditing in computer informa-
tion systems environment deals with the level of skill and competence the audit team needs to
conduct an audit in a CIS environment. It provides guidance when an auditor delegates work to
assistants with CIS skills or when the auditor uses work performed by other auditors or experts
with such skills. Specifically, the audit team should have sufficient knowledge to plan, execute
and use the results of the particular CAAT adopted. The level of knowledge required depends
on “availability of CAATS” and “suitable computer facilities”.
(e) Role of Audit Committee in oversight of financial reporting and accounting

Answer
Audit committees typically review financial statements quarterly and annually in public com-
panies. In addition, members will often discuss complex accounting estimates and judgments
made by management and the implementation of new accounting principles or regulations. Au-
dit committees interact regularly with senior financial management such as the CFO and CEO
and are in a position to comment on the capabilities of these personnel. Should significant prob-
lems with accounting practices or personnel be identified or alleged, a special investigation may
be directed by the audit committee, using outside consulting resources as deemed necessary.
External auditors are also required to report to the committee on a variety of matters, such as
their views on management's selection of accounting principles, accounting adjustments arising
from their audits, any disagreement or difficulties encountered in working with management,
and any identified fraud or illegal acts.

Suggested Answers - December 2023 - Corporate Laws
Corporate Laws
Suggested Answer
Time Allowed - 3 Hours Marks
Attempt all questions
1. Answer the following questions:
a. Mrs. Ratna, holds shares of Pay-sewa Limited. The company and its management has taken
some decisions which affected the shareholders rights and interests. However, she is not satisfied =
with the decision and action of the company and its directors and officers. She has listened about
the protection of shareholders in the Companies Act, 2063. And, she is interested to know and
carry an action on followings issues. Provide the opinion on following issues as being a consul-
tant of her referring to the Companies Act, 2063.
i) Could she take an action for the remedies provided in the Act for an act done against rights
and interests of shareholders?
ii) What do you mean by Derivative Action? Is it possible to her to take such action against the
actions of directors and officers? 10
Answer:
i. Section 139 of Companies Act, 2063 provides remedy for an act done against rights and interests
of shareholders: It has following provisions:
1) Making a petition to the Court:
Based on the ground that the business of a company is carried on or is likely to be carried on in
such a manner as to be prejudicial (harmful) to the rights and interests of any shareholder of the
company or that any act done or intended to be done on behalf of the company or the failure of
the company to do any act required to be done has resulted in or would result in a prejudice to
the rights and interests of any shareholder, such shareholder may make a complaint/ petition to
the Court for an appropriate order.
2) To prove the action is done with ulterior motive or undue discrimination:
A shareholder who makes a petition pursuant to Sub-section (1) shall prove that the director,
managing director, manager or any officer who manages and controls the company has done or
intends to do any act with ulterior motive or made or intends to make undue discrimination, in
contravention of the memorandum of association or articles of association or consensus agree-
ment.
3) Court issue order, as it thinks appropriate:
On receipt of a petition as referred to in Sub-section (1), the court may if, upon inquiring into
the concerned company, director or officer, the claim set forth in the petition appears to have
reasonable, issue such order in the name of the company as it thinks appropriate for providing
remedy thereto.
4) Nature of order by Court:
In issuing an order pursuant to Sub-section (3), notwithstanding anything contained in the
memorandum of association, articles of association or consensus agreement, the Court may,
without prejudice to the generality of the said Sub-section, also issue the following order,
namely:

a) Preventing the act and action done and taken against the rights and interests of any or all
shareholders and carrying of the business of the company in the future in a due manner,
b) Preventing any act and action being done and taken or requiring to do any act not done or
intended not to be done by the company,
c) Requiring to institute, on behalf of the company a civil case against any one, in pursuance of
a direction given by the court,
d) Requiring to buy back the shares of any shareholder in accordance with the procedures set
forth in this Act, by reducing the capital of the company, and to return the amount of such
shares,
e) In the event of any loss and damage being suffered any shareholder from a discrimination
made against him/her, requiring the company or the person making such discrimination to
pay compensation to the shareholder for the same,
f) Liquidating the company;
g) Requiring the company itself or any other shareholder of the company to purchase the shares
held in the name of any shareholder;
h) Recovering the loss and damage caused to the company or its shareholders from the director
or officer who has caused such loss and damage;
i) If company is to buy back its own shares, issuing an order to reduce the share capital of such
company as if the share capital of such company were reduced by it by adopting a special
resolution on reduction of share capital; where the memorandum and articles of association
of the company is to be amended by virtue of such order, issuing other appropriate order also
to make necessary amendment thereto.
5) Notwithstanding anything contained in Sub-section (1) or (2), the remedy available to a person
who suffers any loss or damage because of the fact that a company or its director or any person
responsible for the management or control of the company or its employee has failed to do any
act required to be done or done any act required not to be done or otherwise done a discrimi-
natory treatment shall not be deemed to be limited to this Section only; and such person may
institute an action, whether individually or jointly, on behalf of him/herself or other sharehold-
er, as well, to have any remedy available under other prevailing law.
Conclusion: For the instant issues, she can institute a petition following the above legal provision
and court may issue appropriate order for the protection of rights and interests of the shareholders.
ii. Derivative Action: Shareholders are normally precluded from taking action on behalf of the com-
pany and the courts generally refuse to intervene in the internal management of a company that is
acting within its powers. However, shareholders may be able to intervene where certain specified
types of wrong are committed by the directors. In such situations, the court has discretion to permit
shareholders to bring a claim in their own name on behalf of the company. This type of claim is
called derivative action. So, the derivative action is brought by a shareholder on behalf of the com-
pany. Successful derivative action awarded to the company and not the shareholders who brought it.
It may only be brought where the company suffers loss as a result of directors negligence, default,
breach of duty, and breach of trust.
In given case, being a shareholder, it is possible to take action by her if the management take deci-
sion that affect the company. This action is provided in section 140 of the companies Act, 2063 that

provides right to shareholder/s to institute case on behalf of company. It has following provisions:
1) A company may file in the Court a case against any director, office or shareholders or any per-
son having control over the company pursuant to the consensus agreement to have any rights
and interests of the company enforced.
2) If the company concerned fails to institute a case under Sub-section (1), any shareholder hold-
ing two and half percent or more of the shares in the paid-up capital of the company separately
or jointly with two or more shareholders holding five percent shares may, on behalf of the com-
pany, file in the Court a case against any such director or officer or the person having control
over the company or any other person.
3) While filing a case by a shareholder pursuant to Sub-section (2), he/she shall state about what
sort of effort he/she has made to persuade the company to institute the case by itself.
4) If a case is filed pursuant to Sub-section (2), the Court may decide whether it would be appro-
priate to keep on the case being run by the shareholder or to get the company to take over the
case, and if it is found appropriate to get the company to take over the case, it may order the
company to take over the case.
5) Any case once filed pursuant to Sub-section (1) or (2) shall not be capable of being dismissed
or being compromised except in cases where such compromise contains such terms and condi-
tions as specified by the Court.
6) If a case file pursuant to Sub-section (2) is adjudged sustaining the claim made by the claimant
shareholder, the expenses incurred by him/her in the institution of such case and reasonable ex-
penses made for the services of legal practitioner shall be reimbursed by the company. If such
claim is not sustained, such amount out of the expenses incurred by the defendant in defending
such case as the Court thinks appropriate shall be reimbursed from the complainant sharehold-
er.
Conclusion: Mrs. Ratna, holds shares of Pay-sewa Limited. The question has not specified the number
of shares she holds in the company. Any shareholder holding 2.5 % or more of the shares of the paid up
capital of the company individually or jointly with 2 or more shareholders holding 5 % shares may, on
behalf of the company, file in the Court a case against any director or officer to have any rights and in-
terests of the company enforced. Thus, Mrs. Ratna can take derivative action if she holds 2.5 % or more
of the shares of the paid up capital of the company individually or by filing a case jointly with 2 or more
shareholders holding 5 % shares of the company
b. The Securities Act, 2063 has been enacted to regulate and manage the activities of securities markets
and persons involved in the business of dealing with securities by regulating the issuance, purchase,
sale, and exchange of securities to protect the interests of investors. Describe how a corporate body
can issue securities under this Act. 10
Answer: The body corporate will issue its securities under the Securities Act 2063 as follows:
Section 27 (1) states, a body corporate shall have to register securities to be issued by it with the Board
prior to their issuance. For this, a corporate body shall have to apply to the Securities Board to register
securities in the prescribed format, accompanied by its Memorandum of Association, Articles of Asso-
ciation, documents related to such securities, and the prescribed fees.
If an application is received, the Securities Board shall make necessary inquiry into the matter and, if
it considers appropriate to register such securities, register such securities in the register as prescribed,
indicating the details of such securities and issue the securities registration certificate in the prescribed
format to the concerned body corporate.

 Under section 28, if a body corporate allots or sells securities after registering such securities, the
body corporate shall have to give notice along with the details of securities allotted or sold to the
Securities Board within seven days.
 Upon receipt of a notice as referred as above, if it appears necessary to make the allotment and
sale of such securities fair and informative for the interests of investors and the body corporate,
the Securities Board may give necessary directive to the concerned body corporate. It shall be the
duty of the concerned body corporate to abide by such directive.
 Under section 29, if a body corporate is to sell and distribute securities to more than 50 persons
at a time, it shall make a public issue for the sale and distribution of such securities. The period to
be open for making application of the securities to be issued as above shall be as prescribed. The
provisions relating to the value and allotment of securities for which public issue has to be made
shall be as prescribed.
If securities for which public issue has been made once could not be sold and have to be re-issued again
within one year, the body corporate which so issues the securities may, with the approval of the Securi-
ties Board, issue such securities by mentioning the matters which are different than the matters set forth
in the previously published prospectus and the prospectus previously published.

a) A member holding certificate of practice in his profession is a dignified professional person
carrying a reliable and trustworthiness work. The Nepal Chartered Accountants Act, 2053
has prescribed certain code of conducts to make the profession reliable and trustworthiness.
If the members failed to observe or follow the code of conduct, they will be liable for the
punishment. Examine concept and nature of the code of conducts that is to be observed by
the members with reference to the Nepal Chartered Accountants Act, 2053. If any member
violate any code of conduct, who can make a complaint against him/her for the punishment
pertaining to the non-observation of the code of conduct? (7)
Answer:
Code of Conducts are the set of norms, ethics and standards to be observed or followed by a
professional in his/her profession. The code of conduct is to be followed by members or mem-
bers holding certificate of practice in his profession. These are the rules designed to make the
profession reliable and trustworthiness. Further, the professional respect, integrity and dignity
which are top most important for the profession can be maintained through due observance of
these code. On the other hand, the code of conducts are not only the guidelines but binding rules.
Hence, if a member of the Institute fails to abide the code of conducts, he/she can be charged and
punished as prescribed in the Act.
Section 34 of the Act has provided following code of conducts to be observed by the member or
members holding certificate of practice: The member and member holding certificate of practice
shall fully observe this Act or the Rules framed under this Act.
a) Member shall not carry out auditing in collaboration by way of partnership or otherwise with
any person who has not obtained the certificate of practice of his or her class.
b) Member shall not make any kind of partnership in the audit fees or remuneration received or
earned by, or sharing in the profits made by, that member with any person other than person
who has obtained membership of the Institute. No member shall give commission, brokerage
etc. from the professional fees which he or she has received or earned to any person including
a person who has obtained membership.

c) Member shall not show fear, terror, swank or influence, whether directly or indirectly to any
person in order to get the business of accountancy practice.
d) Member shall not supply or disclose any information and explanation which he or she has got
in the course of his or her business to any person other than the person who employs him or
her and the person to whom he or she is compelled by the laws in force to supply or disclose
such information and explanation.
e) Member having obtained the certificate of practice shall not certify any financial returns or
make any kind of report without making examination and verification by himself or herself
or his or her partner or employee.
f) While making any kind of report or certifying any financial returns of an organization in
which he or she or his or her partner has interest, a member having obtained the professional
certificate shall also clearly set down that he or she or his or her partner has such interest.
g) A member having obtained the professional certificate shall clearly show any material details
known to him or her in order to actually reflect any financial statements certified by him/her.
h) A member having obtained the professional certificate shall carefully perform the duties
required to be performed in the course of practicing his or her profession. He shall draw at-
tention of all the concerned towards any material things which are not or have not been done
in consonance with the laws in force and the recognized principles on auditing.
i) A member having obtained the professional certificate shall not base the remuneration to
which he or she is entitled for his or her work on a percentage of profits or on any other un-
certain result.
j) Member shall not knowingly or recklessly mention any false matter in any notice, explana-
tion or statement required to be given to any office or department of Government of Nepal
or any organization.
k) Member shall not carry out auditing of an organization for which he or she has served, prior
to the expiry of at least 3 years of his or her retirement from the service of that organization.
l) Member having obtained the professional certificate shall not accept his or her appointment
as an auditor of any organization without ascertaining that the procedures required by the
laws in force for appointment as an auditor have been fulfilled.
m) A member shall obtain ample (sufficient) related information prior to expressing his or her
opinion about auditing.
Complaint against a Member: Section 35 of the Act provides, if a member having obtained the certif-
icate of practice does not observe the conduct set forth in this Act or the Rules framed under this Act
or such member violates this Act or the Rules framed under this Act, the concerned person may make
a complaint to the Institute against such member. If there is found a fact to believe that a member or
member holding the certificate of practice has not observed the conduct required to be observed, the
Executive Director shall submit a proposal to the Council accompanied by the available fact for taking
action against such member or member holding certificate of practice.
b) The Audit is an examination or inspection of various books of accounts by an auditor, followed

by physical checking of inventory to ensure that all departments follow the documented system of
recording transactions. It is done to ascertain the accuracy of financial statements provided by the
organization. Point out the matters to be audited by Auditor General in view of propriety as per the
Audit Act, 2075. 7
Answer:
Under section 9 of the Audit Act, 2075 the matters to be audited by the Auditor General considering
propriety:
(1) The Auditor General shall, as required, audit the following matters in view of the propriety thereof:
(a) If it is seen that any expenditure, though it confirms to the authorization, has been made un-
reasonably or in a manner to cause loss and damage to the national property concerning such
expenditure and its authorization,
(b) To any grant of national property whether movable or immovable, or underwriting of reve-
nue or any lease, permit, license, or rights relating to mining, forest, hydropower, etc., and
all authorizations issued in a manner to abandon any revenue or national property, whether
movable or immovable,
(c) With respect to the subject matters of various financial transactions, including contracts and
agreements relating to public works, repair and maintenance, procurement and supply, con-
sultancy service, service delivery, public expenditure and revenue mobilization.
(2) The Auditor General may, if he or she deems it appropriate, examine, under the recognized account-
ing principles, whether or not any official within his or her scope of competence has borne financial
accountability.
(3) The Auditor General may not include in his or her report minor items of irregular amounts or other
items deemed not to be significant and important in view of their propriety.
c) A Cooperative is a financial entity owned and operated by its members. Cooperatives are expected to
provide high-quality service at reasonable prices. They may be more concerned with their members'
financial well-being rather than increasing profits. In that view, what are the Account Supervision
Committee's functions, duties, and powers under the Cooperative Act, 2074? 6
Answer:
Pursuant to Cooperative Act, 2074, the General Meeting shall form through election an Accounts Su-
pervision Committee comprising of one convener and two members having met the prescribed qual-
ifications. Section 49 of this Act prescribes the following functions, duties and powers of Accounts
Supervision Committee:
a) To conduct or cause to be conducted internal auditing of the Cooperative Organization in every
quarter;
b) To comply with or cause to be complied with the basic principles of auditing while conducting
internal auditing;
c) To inspect and evaluate and cause to be inspected or evaluated financial transactions;
d) To have regular supervision of the actions and activities of the Board and to provide necessary
suggestions to the Board;
e) To monitor whether or not directives issued or decisions made by the General Meeting and deci-
sion of the Board have been implemented;
f) To submit to the General Meeting accounts, report and annual report on supervision of the func-
tions of the Board;
g) To recommend the Board to call meeting of the extraordinary General Meeting showing the rea-

sons thereof that adverse impact is caused in the interests of any Cooperative Organization due
to non-compliance of the recommendations made by it frequently; that there have been embez-
zlement or massive misuse of cash or kind assets of such organization or in case the organization
is likely to undergo serious financial crises.
h) To make recommendation of names of three persons to be appointed as internal auditor, if re-
quired.
The convener and members of the Accounts Supervision Committee shall not be involved in daily and
administrative functions of the Cooperative Organization.

a) Certain authorities of the FNCCI are interested to know about the insolvency proceedings to be
adopted under the Insolvency Act, 2063 while instituting insolvency proceedings against any
company. They approached you as an expert of the insolvency law, how would you advise in
respect to the following issues:
i) Who can make an application for insolvency proceedings against any company? 3
ii) When an application for the insolvency proceedings against the company can be initiated and
when a company deemed to have become insolvent? 4
Answer:
i) Pursuant to Section 4 of the Act, if it is required to institute insolvency proceedings against
any company, any of the following persons may make an application to the Court in the pre-
scribed form for the institution of such proceedings:
a) A company itself which has become insolvent,
b) Creditor or creditors that has or have lent at least 10 % of total credit of the company,
c) Shareholder or shareholders that has or have subscribed at least 5 % of total shares of the
company,
d) Debenture-holder or debenture-holders that has or have subscribed at least 5 % of total de-
bentures of the company,
e) A liquidator who has been appointed to liquidate a company, or
f) In the case of a company that carries on any specific type of business set forth in Section 8, a
body authorized to administer and regulate such business i.e., regulatory authority.
ii) According to Section 5 of the Act, prior to making an application to the Court pursuant to Sec-
tion 4 for insolvency proceedings, a notice shall be sent to the registered office of the company
in the prescribed form for the payment of debt. Such notice shall be signed by the creditor
himself or herself or by a person authorized by the creditor, on his or her behalf.
In order for an application to be made for insolvency proceedings against any company, a period
of 35 days shall have been expired after a notice issued to pay the debt referred to in Section 5
has been duly served on the concerned company.
According to Section 7 a company will be deemed to have become insolvent in the following
condition:
a) The general meeting of shareholders adopts a resolution that the company has become insol-
vent or a meeting of the board of directors of the company makes such decision; or

b) The Court issues an order requiring the company to pay the debt and the debt is not paid
up within 35 days from the date of receipt by the company of such order; or
c) The company fails to pay the debt within 35 days after the service by the creditor on the
company a notice for the payment of the debt or fails to make an application to the Court
within the said period to void such notice.
Nothing contained in this Section shall prevent the establishing of the fact that a company
has become insolvent where it is proved from any other matter that the liability of the com-
pany exceeds the value of the assets of the company or the company itself admits that it has
become insolvent.
b) Bank and Financial Institution Act, 2073 has prescribed the provisions regarding the trans-
actions that can be carried in the course of its operation of banking and financial transaction.
State the acts not to be carried out by the bank or financial institution as per the Act.
[7]
Answer:
Section 50 of the Banks and Financial Institutions Act, 2073 prescribes the provision regarding
the acts not to be carried out by Bank or Financial Institution.
(1) According to it is prohibited to carry out the following acts:
a) Purchasing or selling goods for commercial purpose, constructing building or purchasing
any immovable property except when it is required for its own use
b) Advancing credit against the security of its own shares,
c) Supplying any kind of credit or facilities to any directors, person subscribing 1 % or more
of its shares, chief executive or any family member of such persons or managing agent or
person, firm, company having authority to appoint director, or firm, company or institu-
tion having significant ownership of the bank or financial institution or having financial
interest,
d) Supplying credit or facility in an amount exceeding per customer limit of its capital fund
as prescribed by the Rastra Bank to a single customer, company and companies or part-
nership firm of a single group, associate person,
e) Supplying any type of credit to any person, firm, company or institution against the guar-
antee given by the promoters, directors or chief executive,
f) Making investment in securities of a bank or financial institutions which is classified as
class "A", "B" and "C" by the Rastra Bank,
g) Making investment of an amount exceeding the limit prescribed by the Rastra Bank in the
share capital of any other institution,
h) Indulging with other bank or financial institutions to mutually create any type of monopo-
ly (cartel) or any other type of controlled practice in the financial transactions,
i) Doing any kind of act which is capable of creating an artificial obstruction in the compet-
itive environment of the financial sector, with the intention of deriving undue (unjustified)
advantage,
j) Doing such other acts prohibited from being done by a bank or financial institution as may
be prescribed by the Rastra Bank.
(2) Notwithstanding anything contained elsewhere in this Act, there shall be no restriction to

carry on own banking and financial transaction or to provide housing or other facilities for its
own employees according to prevailing personnel byelaws of bank or financial institution, to
disburse any credit against the collateral security of the bond issued by Government of Nepal
or Rastra Bank, amount deposited in any account or fixed deposits receipts or to make available
credit and credit card facilities up to the prescribed limit to promoters, Directors, Chief Exec-
utive or shareholders having subscribed more than one percent of shares against the collateral
security of their own fixed deposit receipts, and the bonds issued by Government of Nepal or
the Rastra Bank.
c) Prevention of money laundering becomes totally successful when investigation and inquiry pro-
cess is carried out properly by an appropriate investigation officer. Discuss the Provisions relat-
ing to Investigation and Inquiry under the Asset (Money) Laundering Prevention Act, 2063. [6]
Answer:
Chapter – 6 of the Asset (Money) Laundering Prevention Act, 2063 prescribes provision relating to in-
vestigation and inquiry.
1. Pursuant to Section 13 of the Act, it is required to make Complaint regarding information of
the offence. Accordingly, any one of the person, who has information regarding an offence
under this Act, may submit a complaint, application, to the Department in written or oral
form. The Department on obtaining the information will register the complaint so received.
2. As per Section 14, the chief shall make or cause to make preliminary inquiry if he receives
complaint pursuant to Section 13 or suspicious transaction reports disseminated from Fi-
nancial Intelligence Unit pursuant to Section 10. The officer designated for the preliminary
investigation may exercise the powers of the investigation officer pursuant to this Act.
3. Pursuant to Section 15, the chief, if he finds it reasonable to make an investigation of a case
from the preliminary inquiry or investigation pursuant to section 14, may conduct investi-
gation himself or appoint or designate an officer of the Department or of other Government
agency or of public institution for the investigation of the case.
4. Pursuant to Section 16, the functions, duties and powers of the investigation officer, subject
to general direction and control of the Chief, shall be as follows:
(a) To order any government agency, regulator, reporting entity and related person to pro-
vide documents, records, statements, notices and/or information related to the offence
of money laundering and terrorist financing,
(b) To conduct a search of any government entity, regulator, reporting entity, a person
and any other place at which any document, write-up, material, facts, information,
or instruments that may constitute evidence of an offence of money laundering and
terrorist financing is reasonably believed to be located, and to seize such document,
write-up, material, facts, information, or instruments or property or instrumentality
related with the offence, provided that a written receipt in a prescribed form is given
to the concerned person or official for all items seized in the course of the search,
(c) To arrest a person and detain a person, as per prevailing laws, if the investigation
officer has reasonable grounds to believe that such person accused of or suspected of
involving in money laundering or terrorist financing may abscond or destroy or hide
evidences or likely to obstruct or create adverse influence in the investigation process,
(d) To require any person with information or reasonably believed to have information re-
lated to the offence of money laundering or terrorist financing to provide information,
statement or supplementary statement,
(e) If the person while giving statement or supplementary statement under clause (d) is
found necessary to provide additional information, he can be released by taking a

written commitment to present as required, or ask for bail and in case of inability to
provide bail, detain with the consent of the court,
(f) To trace, identify and evaluate the properties and instrumentality fully and effectively
in order to freeze or seize such property or instrumentality pursuant to section 18,
(g) To write to Financial Intelligence Unit if there is reasonable ground to believe that
foreign Financial Intelligence Unit may have any information,
(h) To carry out the other functions as prescribed.
5. Pursuant to Section 17, a detention (arrest) warrant shall be provided to a person accused of
or having reasonable grounds to suspect that he is involved in the offence of money laun-
dering or terrorist financing before detaining him. The investigation officer shall present a
person detained in money laundering or terrorist financing offence within 24 hour of arrest,
except the time for arrival, and may be detained further upon the permission of the adjudi-
cating (judging) authority.

a) No person will operate or cause to operate an insurance business without obtaining a certifi-
cate according to section 25 of the Insurance Act, 2079. As a result, obtaining a license from
the concerned authority is mandatory for those wanting to do insurance business. Answer
with concerned provisions relating under the Act to refuse prior approval for establishing the
insurance company. [8]
Answer:
Section 26 of the Insurance Act, 2079 states prior approval for the establishment of Insurance
business. Pursuant to section 27, notwithstanding anything written in Section 26, the authority
may refuse to give prior approval to establish an insurance company or to open a branch office
of a foreign insurance company in any of the following cases.
a) If the name of the proposed insurance company is identical with the name of insurance com-
pany which has already been registered,
b) If the name of the proposed insurance company or the insurance business to be carried on by
it appears to be undesirable in view of public interest, decency, etiquette, religion, nationali-
ties or communities or social system,
c) If a study of the feasibility study report, details and documents and other infrastructures sub-
mitted by the proposed insurance company does not provide a ground to believe that it may
carry out insurance transactions in a healthy and competitive manner,
d) If the objectives of the proposed insurance company are contrary to the prevailing laws,
e) If the documents and details as prescribed by the Authority pursuant to Section 26 are not
submitted,
f) If each promoter does not undertake to subscribe at least 10,000 shares of the proposed insur-
ance company or if he/she does not state clearly the number of shares undertaken to subscribe
by him/her,
g) If it is found that the proposed insurance company does not propose to maintain the paid up
capital as prescribed in Section 36,
h) If any of the promoters of the proposed insurance company is convicted in an insurance

offence, banking offense, cheating, fraud, forgery, money laundering, corruption, human
trafficking, kidnapping, hostage taking or other similar offense involving moral turpitude,
and sentenced in respect thereof, a period of 5 years has not elapsed from the expiry of the
sentence,
i) If it appears that the proposed insurance company has objective to carry other business along
with the insurance business,
j) If prior approval is prohibited pursuant to section 31,
k) If any promoter of the proposed insurance company or any member of his family has been
blacklisted pursuant to prevailing laws and a period of 3 years has not elapsed from the date
of release from black list.
l) If the shares which the promoters have undertaken to subscribe for the time being seems to
be 15% or more in the ownership of single person, family, organization or group. Provided
that, this provision shall not be applicable in relation to the shares subscribed by Government
of Nepal, Provincial Government or foreign investor.
m) In case insurers with same type of insurance business have substantial shareholders of same
person or his/her family.
According to this section, if the authority refuses to give pre-approval for establishing an insurance
company, the applicant shall be given written information, including the reason, within sixty days
of the application.
b. The audit report shall be prepared in accordance with the prevailing law or in consonance with the
audit standards prescribed by the competent body. What are the Functions and duties of auditor as
prescribed by the Companies Act, 2063? [7]
Answer:
Section 115 of the Companies Act, 2063 prescribes the provision regarding the functions and duties of
auditor. Sub-section 115(1) provides the auditor shall, addressing the shareholders or the appointing
authority, submit to the company his/her report, certifying the balance sheet, profit and loss account and
cash flow statement based on the books of account, records and accounts audited by him/her.
The audit report shall be prepared in accordance with the prevailing law or in consonance with the audit
standards prescribed by the competent body; and such report shall state the matters to be set out under
this Act, as per necessity.
The audit report shall also indicate the following matters:
a) Whether such information and explanations have been made available as were required for the
completion of audit,
b) Whether the books of account as required by this Act have been properly maintained by the com-
pany in a manner to reflect the real affairs of its business,
c) Whether the balance sheet, profit and loss account and cash flow statements received have been
prepared in compliance with the accounting standards prescribed under the prevailing law and
whether such statements are in agreement with the books of account maintained by the company,
d) Whether in the opinion of the auditor based on the explanations and information made available
in the course of auditing, the present balance sheet properly reflects the financial situation of the
company and the profit and loss account and cash flow statement for the year ended on the same
date properly reflect the profit and loss and cash flow of the company respectively,
Thee)Institute
Whether of the board ofAccountants
Chartered directors or any representative or any employee has acted contrary to |law
of Nepal 67
or misappropriated any property of the company or caused any loss or damage to the company
or not,
f) Whether any accounting fraud has been committed in the company,
g) Suggestion if any.
According to Section 116 (1) an audit report prepared by the auditor appointed by any company under
this Act shall be signed and dated by the auditor him/herself. If any company has appointed any account-
ing institution licensed under the prevailing law to carry out audit, the member who has been authorized
by a decision of the partners of such institution shall sign and date the audit report. (2 marks)
5. Answer the following questions: (3×5=15)

a) The President shall, on the recommendation of the Constitutional Council appoints the Audi-
tor General of Nepal. He is responsible for final audit and report to the Government of Nepal.
How he/she is entrusted to carry on final audit? Discuss the Auditor General's functions,
duties and powers provided by the Constitution of Nepal. [5 mark]
Answer:
Pursuant to Section 4 of Audit Act, 2075, the Auditor General may conduct final audit of the
financial activities and other activities relating thereto of the Entities mentioned in section 3(1)
or units under such entities either in detail or sporadically or a random basis and present the facts
obtained therefrom, make critical comments thereon and submit its reports.
Article 241 of the Constitution of Nepal, 2072 has provided the functions, duties and powers of
Auditor General as follows:
(1) The accounts of all Federal and State Government Offices including the Office of the Pres-
ident, Office of the Vice-President, Supreme Court, Federal Parliament, State Assembly, State
Government, Local level, Constitutional Bodies and Offices thereof, Courts, Office of the Attor-
ney General, Nepal Army, Nepal Police and Armed Police Force, Nepal shall be audited by the
Auditor General in accordance with law, having regard to the regularity, economy, efficiency,
effectiveness and the propriety thereof.
(2) The Auditor General shall be consulted in the matter of appointment of an auditor to carry
out the audit of a corporate body of which the Government of Nepal or State Government owns
more than 50 % of the shares or assets. The Auditor General may also issue necessary directives
setting forth the principles for carrying out the audit of such corporate body.
(3) The Auditor General shall, at all times, have power to examine any books of accounts for the
purpose of carrying out the functions under clause (1). It shall be the duty of the concerned chief
of office to provide all such documents and information as may be demanded by the Auditor
General or any of his or her employees.
(4) The accounts to be audited pursuant to clause (1) shall be maintained in the form prescribed
by the Auditor General, as provided for in the Federal law.
(5) In addition to the accounts of the offices mentioned in clause (1), the Federal law may also
require the accounts of any other offices or bodies to be audited by the Auditor General.
b) How dispute is settled, if it arises between a foreign investor and a national investor under
the Foreign Investment and Technology Transfer Act, 2075? Also discuss the other particular
laws if applicable in this case. [5]

Answer:
According to Section 40 of the Foreign Investment and Technology Transfer Act, 2075, if any
dispute arises between a foreign investor, national investor or the concerned industry the dispute
shall be settled as follows:
 Firstly, the dispute shall be settled through mutual discussions or negotiations. The De-
partment may provide necessary facilitation.
 If the dispute cannot be settled through mutual discussion or negotiations within a pe-
riod of 45 days after the dispute has arisen, and a joint investment or dispute settlement
agreement exists between the parties to the dispute for the resolution of such a dispute,
the dispute shall be settled in accordance with such an agreement. The parties shall give
information about the settlement of the dispute to the Foreign Investment Approving body
not later than 15 days of its settlement.
 If no agreement was made between the parties on the settlement of dispute prior to the
arising of the dispute or if they realize that the agreement is inadequate, the concerned par-
ties may make an agreement for the settlement of a dispute even after the dispute has aris-
en. Information of the agreement so made shall be given to body registering the industry.
 If the agreement concluded between the parties has no provision about the settlement of
disputes, such a dispute shall be settled by arbitration in accordance with the arbitration
law of Nepal.
 Any dispute arising in connection with any foreign investment shall be settled by arbitra-
tion in accordance with the prevailing Rules or Procedures of the United Nations Com-
mission on International Trade Law (UNCITRAL), unless otherwise agreed upon by the
parties to the dispute.
 Arbitration to be conducted in accordance with this Section shall be held in Nepal, and
substantive law of Nepal relating to arbitration shall apply. However, with respect to the
case in which a joint investment or dispute settlement agreement exists between the par-
ties, the provision contained in that agreement shall apply.
Nevertheless, the Industrial Enterprises Act, the taxation laws, labour law, Contract laws, Arbi-
tration Act, Trade law and other laws to the extent of relevancy also will be applied in this case.
c) What are the special powers of Securities Board of Nepal in regards to the development of
capital market and protection of interests of investors? Discuss based on the provisions of
Securities Act, 2063.
Answer:
Section 90 of Securities Act, 2063, has provided the special powers of Board. Basically, such
powers have been provided to the Board to exercise for the purpose of regulating and managing
the securities transactions, having regard to the development of capital market and interests of
investors. Such special powers are provided as follows:
a) In the event of the failure of anybody corporate having made public issue of securities to call
its general meeting, as required to be called under the laws in force, within the specified time,
to order such a body corporate to call the general meeting,
b) In the event of the failure of anybody corporate having made public issue of securities to allot
its securities within the specified time, to order such a body corporate to refund the money
paid for such securities,
c) To direct the concerned body corporate to enlist any securities or to stop transactions of any
securities,
d) In consultation with a stock exchange, to issue an order to close the stock exchange for a
maximum period of five days,

e) To issue a direction, also indicating the contents to be amended in the Bye-laws of the stock
exchange and specifying a certain period, to amend the Bye-laws within such period or order
to issue a new Bye-laws, as required,
f) To get the financial statements and financial reports submitted by any corporate body having
issued securities and any securities business person to be reviewed or examined by accounts
experts, as required,
g) To direct any corporate body having registered their securities to make correction in the man-
agement, financial arrangements and other related provisions of such a body,
h) To direct the concerned stock exchange to restructure its board of directors,
i) In the event of receipt of information on any action taken by the stock exchange against its
member pursuant to Section 52, to take appropriate action against such a member or revoke
the license of such member,
j) In the event of violation, in the course of carrying activities relating to securities, of this Act
or the Rules and Bye-laws framed under this Act or orders or directions issued by the Board
thereunder by any stock exchange, securities business person and any director or employee
of anybody corporate which has listed its securities, to order the concerned stock exchange,
securities business person or body corporate which has listed its securities to institute neces-
sary action against such a director or an employee,
k) In the event of failure of any stock exchange, securities business person or body corporate
which has listed its securities to have audit within the specified time or otherwise to appoint
an auditor, to appoint an auditor to examine and audit the accounts, books, cash and in-kind
properties, as well, of such stock exchange, securities business person or body corporate
which has listed its securities.
6. Write short notes on the followings:
a) Describe the matters to be mentioned in arbitration award. [4]
Answer:
The arbitral award is the decision or judgment rendered by the arbitrators resolving the mat-
ter submitted for their consideration in the arbitration proceedings. Pursuant to Section 27
of Arbitration Act, 2055, the arbitrator must explicitly mention the following matters in the
decision, except when otherwise provided for in the agreement:
(a) Brief particulars of the matter referred to for arbitration.
(b) In case any party had questioned the jurisdiction of arbitration, grounds for deciding
that the matter falls under the jurisdiction of arbitration.
(c) The arbitrator’s decision, and reasons and grounds for reaching that decision.
(d) Claims which must be realized or amounts which must be compensated.
(e) Interest on amount to be realized, and the additional rate of interest to be charged after
the expiry of the time limit for implementing the decision of the arbitrator in the event
of the limit mentioned in section 31.
(f) Place and date of decision.
b) How much time and limitation have been provided for the submission of first information
report as per Banking Offence and Punishment Act, 2064? [3]

Answer:
1) In regard to an offense under this Act, First Information Report may be lodged within one year
from the date the offense comes to the knowledge and the suit shall have to be lodged within
six months from the date the First Information Report is so lodged with the Court as fixed by
the Government of Nepal by publishing a notice in Nepal Gazette.
2) Notwithstanding anything contained hereinabove in Sub-section (1), a lawsuit may, at any time,
be initiated against an employee or office bearer of a bank or financial institution, who caused
misappropriation or loss of asset of Bank or Financial Institution during his/her assumption of
service in any post thereof and there shall be no obstruction in initiating a lawsuit even after
such office bearer or employee retires from his/her service.
c) Meaning of technology transfer as per Foreign Exchange (Regulation) Act, 2019.
[3]
Answer:
"Technology transfer" means any transfer of technology to be made under an agreement between an
industry and a foreign investor on the following matters:
1) Patent, design, trademark, goodwill, technological specificity, formula, process,
2) User’s license, technological know-how sharing or use of technological knowledge (franchise),
3) Provision of foreign technical adviser, management and marketing service or other technologi-
cal skill or knowledge
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g]kfn rf6{8{ PsfpG6]G6\; ;++:yf
Established under the Nepal Chartered Accountants Act, 1997
ICAN Marg, Satdobato, Lalitpur
P O Box 5289, Ph.: 5430832, 5430730
Web: http://www.ican.org.np
E-mail: ican@ntc.net.np

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SUGGESTED ANSWERS TO

THE QUESTIONS SET AT

DECEMBER 2023 EXAMINATION

The Institute of Chartered Accountants of Nepal

Year and month of Publication: 2024 April

ADVANCED FINANCIAL REPORTING

Roll No……………. Maximum Marks - 100

4| The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal |5

6| The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal |7

Share of Ram Limited (58,200 x 75%) 43,650

8| The Institute of Chartered Accountants of Nepal

Land Buildings Plant &

The Institute of Chartered Accountants of Nepal |9

EQUITY AND LIABILITIES

10 | The Institute of Chartered Accountants of Nepal

(WN 1) Cost of Sales Rs. ‘000

The Institute of Chartered Accountants of Nepal | 11

PBT (for taxation) 28,567

12 | The Institute of Chartered Accountants of Nepal

Current service cost Rs. 55 million

b) Following details relate to B Ltd.:

The Institute of Chartered Accountants of Nepal | 13

Particulars (Rs. in ’000)

Para 6 of NAS 16 ‘Property, Plant and Equipment’ defines:

“Property, plant and equipment are tangible items that:

Paragraph 29 of NAS 16 states that:

Further, paragraph 39 of NAS 16 states that:

14 | The Institute of Chartered Accountants of Nepal

NAS 40 defines ‘Investment property’ as:

Equity and Liabilities

16 | The Institute of Chartered Accountants of Nepal

4. Write short note/ answer on the following: (5×3=15)

a) Watch list loans

The Institute of Chartered Accountants of Nepal | 17

4 b) Types of Hedging Relationship

18 | The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal | 19

Estimated No. of employees

The Institute of Chartered Accountants of Nepal | 21

22 | The Institute of Chartered Accountants of Nepal

ADVANCED FINANCIAL MANAGEMENT

Roll No……………. Maximum Marks – 100

Orchard Activities (Pruning and Training, Thinning,

24 | The Institute of Chartered Accountants of Nepal

Required: (16+4 =20)

The Institute of Chartered Accountants of Nepal | 25

Or, D= 0.45/1.45 = 31%

Computation of Apple Harvest:

Computation of Initial Investments, Annual Depreciation and Terminal Value

26 | The Institute of Chartered Accountants of Nepal

Net Present Value -31976

The Institute of Chartered Accountants of Nepal | 27

Base year (year 0) information

28 | The Institute of Chartered Accountants of Nepal

Note: Extracted from the table of present value of Re. 1:

Alternatively, for calculation of WACC by taking 1:1 as D.E Ratio

Present value of Free Cashflow during forecast period.

The Institute of Chartered Accountants of Nepal | 29

= 642.8 × 0.592 = Rs. 12,684.59 million

Company No. of shares Face value (Rs) Cost (Rs)

Probability Sun Limited (Rs) Moon Limited (Rs)

Particulars Sun Limited Moon Limited

Roll No……………. Maximum Marks - 100

Roll No……………. Maximum Marks – 100

Roll No……………. Maximum Marks - 100