Frequently Asked Questions

1. What is the Nepal Financial Reporting Standard for Small- and Medium-Sized Entities
("NFRS for SMEs")?

NFRS for SMEs is a modification and simplification of full NFRS aimed at meeting the needs
of entities financial reporting users and easing the financial reporting burden on entities through
a cost-benefit approach. NFRS for SMEs is a financial reporting standard applicable to the
general-purpose financial statements of, and other financial reporting by entities that meet the
definition of small and medium-sized entities. Full NFRS and NFRS for SMEs are promulgated
by the Accounting Standards Board-Nepal(ASB-Nepal).

2. What is meant by Small- and Medium-Sized entities ("SMEs")?

There is no separate definition for Small and Medium Sized Entities. However, NFRS for SMEs
is intended to be used by SMEs, which are entities that publish general purpose financial
statements for external users and do not have public accountability.

Practically speaking, NFRS for SMEs is viewed as an accounting framework for entities that
are not of the size nor have the resources to use full NFRS.

3. What is public accountability?

Who have Public Accountability?

a. Whose debt or equity instruments are traded in public market or is in process of issuing such
instruments (except listed Micro Finance not having economic significance)
b. It holds assets in a fiduciary capacity for broad group of outsiders as one of its primary
businesses:

i. banks, credit unions, insurance companies, security dealers and mutual funds, investment
banks (except Micro Finance and Cooperatives not having economic significance)
ii. Pension and retirement funds

c. Government Business Enterprises (GBEs), Public entities established under special acts not
preparing financial statements under NPSAS

d. Entities having economic significance

i. Borrowings from banks or financial institutions or public funds or from entities holding
assets in fiduciary capacity of NRs 500 million or more;

ii. Statement of Financial Position (Balance Sheet) total (without off-setting current liabilities
with current assets) of NRS 1000 million or more;
iii. Employing more than 300 employees including workers in an average or
iv. Annual Turnover (Revenue of Entity) of NRS 1000 million or more;
v. Holding assets in fiduciary capacity in excess of NRs 500 million (includes security
brokers handling demat account, micro finance and cooperatives),

An entity which attains at least 1 of these limits in 2 consecutive years shall be deemed to be
an entity having economic significance to qualify as an entity with Public Accountability and
once qualified, must fall below all of these limits for 2 consecutive years to cease to qualify.

4. How should the financial statements be described?

An entity which have no public accountability and which elects to report in conformity with
NFRS for SMEs must make an "explicit and unreserved" declaration to that effect in the
financial statements.
The wordings that may be used are: "These financial statements have been prepared in
accordance with the Nepal Financial Reporting Standard (NFRS) for Small and Medium-sized
Entities issued by the Accounting Standards Board, Nepal ".
If this representation is made, the entity must comply fully with all relevant requirements in the
standard.

5. What if the financial statements of a publicly accountable entity assert that it is in

conformance with the NFRS for SMEs?

A publicly accountable entity's financial statements shall not be described as conforming to the
NFRS for SMEs.

6. Can entities change from full NFRS to NFRS for SMEs?

Yes, if the entity meets the specified conditions for two consecutive years to use NFRS for
SMEs. An entity can refer to Section 35 Transition to NFRS for SMEs.

7. What has the Accounting Standards Board Nepal accomplished by issuing NFRS for
SMEs?

The types and needs of users of SME financial statements are often different from the types and
needs of users of public company financial statements and other entities that would likely use
full NFRS. Full NFRS were designed to meet the needs of equity investors in companies in
public capital markets. Users of the financial statements of SMEs don't generally have those
same needs. Rather, users of the financial statements of SMEs are more focused on shorter-
term cash flows, liquidity, balance sheet strength, interest coverage and solvency issues. Also,
full NFRS impose a burden on SME preparers in that full NFRS contains topics and detailed
implementation guidance that generally are not relevant to SMEs. This burden has been
growing as NFRS have become more detailed. As such, a significant need existed for an
accounting and financial reporting standard for SMEs that would meet the needs of their
 financial statement users while balancing the costs and benefits from a preparer perspective.
NFRS for SMEs was designed to meet that need. With the issuance of NFRS for SMEs, many
SMEs will have the option of using a much simplified, NFRS-based accounting framework to
prepare their financial statements.

8. Are NFRS and NFRS for SMEs considered generally accepted accounting principles?

Yes. The ASB-Nepal is recognized as an accounting body for purposes of establishing Nepal
financial accounting and reporting principles. Full NFRS and NFRS for SMEs are not an other
comprehensive basis of accounting. Rather, they are generally accepted accounting principles.

9. Why would a SME choose to prepare its financial statements in accordance with NFRS
for SMEs?

The reasons why a SME would prepare NFRS for SMEs-based financial statements are varied,
depending upon the objectives of the company and the needs of its financial statement users.
SMEs may find the simplified NFRS for SMEs an attractive alternative to the more complicated
and voluminous full NFRS. Those SMEs may find NFRS for SMEs to be a more relevant and
less costly financial accounting and reporting standard than full NFRS.
Other examples of why a SME may decide to use NFRS for SMEs include the following:
• SME is owned by a foreign parent
• SME has a foreign investor
• SME is a supplier to foreign companies
• SME has a foreign venture partner
An ever increasing amount of SMEs are looking to conduct business outside the country and
obtain foreign financing. Using a common global financial accounting and reporting standard,
like NFRS for SMEs, increases comparability between companies and improves the efficiency
of conducting business across borders. Users of SME financial statements prepared in
accordance with NFRS for SMEs would benefit from a common global standard. In conducting
business with SMEs in different countries, lenders, venture capitalists and other users would
just need to understand and work with one financial accounting and reporting standard.
Many foreign countries maintain a simplified version of their national GAAP. With the issuance
of NFRS for SMEs, SMEs of Nepal now have a similar option to use accounting standards
tailored for smaller, private entities.

10. What are the key differences between NFRS and NFRS for SMEs?
Compared to the full NFRS, the aggregate length of the standards, in terms of number of words,
has been reduced. This was achieved by eliminating topics deemed to not be generally relevant to
SMEs, by eliminating certain choices of accounting treatments, and by simplifying methods for
recognition and measurement. These three sets of modifications to the content of the full NFRS
respond to both the perceived needs of users of SMEs' financial statements and to cost-benefit
concerns. Some topics in full NFRS are omitted because they are not considered relevant to SMEs
eg -segmental reporting, assets held for sale and earnings per share.
11. What does one do when an entity has a transaction not addressed in NFRS for SMEs?

If NFRS for SMEs does not specifically address a transaction, other event or condition, an
entity's management shall use its judgment in developing and applying an accounting policy
that results in information that is:
(a) relevant to the economic decision-making needs of users, and
(b) reliable, in that the financial statements:

(i) represent faithfully the financial position, financial performance and cash flows of the
entity;
(ii) reflect the economic substance of transactions, other events and conditions, and not
merely the legal form;
(iii) are neutral (in other words, free from bias);

(iv) are prudent; and

(v) are complete in all material respects.
In making the judgment described above, management should refer to, and consider the
applicability of, the following sources:
(a) the requirements and guidance in NFRS for SMEs dealing with similar and related issues,
and
(b) the definitions, recognition criteria and measurement concepts for assets, liabilities,
income and expenses and the pervasive principles in Section 2, Concepts and Pervasive
Principles, of NFRS for SMEs.
In making the judgment described above, management may also consider the requirements
and guidance in full NFRS dealing with similar and related issues.

12. What are some of the key challenges that a SME would face in using NFRS for SMEs?

Some key challenges that may be present in choosing to use NFRS for SMEs include
understanding the differences between NFRS for SMEs and taxation; the willingness of
financial statement users to accept financial statements prepared under NFRS for SMEs;
working with and accepting a more principles-based set of accounting standards compared
to the more rules-based taxation; the impact on taxes and tax planning strategies; and the
impact on financial reporting metrics.

13. From which date can an entity adopt NFRS for SMEs?
NFRS for SMEs can be applied for fiscal year beginning from 1st Shrawan 2080. However
earlier adoption is allowed.
 14. How was the NFRS for SME’s evolved?
IFRS for SMEs International Accounting Standard Board (IASB) has issued and
implemented on 9th July 2009.
NFRS for SMEs Accounting Standard Board, Nepal has issued on 2017-2018 and
implemented compulsorily from 2080.04.01.

15. Difference various applicable framework for NFRS for SME’s Nas for ME’s and NAS
for NPO’s?

NFRS for SMEs NAS for MEs NAS for NPOs

Entities must separate assets The Standard does not Assets and liabilities in
and liabilities into current prescribe the sequence or financial statements are
Statement of
and non-current unless format in which items are presented either by
Financial
presenting by liquidity is to be presented. liquidity ranking or by
Position
more reliable and relevant. current and non-current
classification.
Cash flow from operating Cash flows from operating Cash flow statement can
Statement of activities using either direct activities using indirect be prepared by applying
Cashflow or indirect method method. Direct Method or
Indirect Method
a) trading shares of listed
companies at market price
with gains or losses in profit
or loss,
An entity must measure b) available-for-sale listed Investments in financial
Financial investments in non- shares at the lower of cost assets like shares and
Instruments convertible and non- or market price with any bonds should be initially
puttable shares at fair value impairment in profit or loss, recorded at cost and
if publicly traded or reliably and remeasured at the lower
measurable; otherwise, they c) all other basic financial of cost or net realizable
are measured at cost less instruments at amortized value at the reporting
impairment. cost. date
An entity should not
include abnormal waste,
Costs excluded from storage costs,
Costs excluded from
inventory and recognized production-related
inventory and recognized as
as expenses include administrative
expenses include abnormal
abnormal waste, non- overheads, selling costs,
Inventories waste, non-essential
essential storage, foreign exchange
storage, unrelated
production and admin differences on foreign-
administrative overheads,
overheads, selling costs, currency inventories, or
and selling costs.
and interest costs. interest costs from
deferred settlement in
inventory costs.
 Investment property with
reliably measurable fair 15.2 For subsequent
Investment value should be recorded at measurement, an entity
No Separate Section
Property fair value each reporting must use the cost model
date, with changes for all investment
recognized in profit or loss. properties.
An entity shall measure An entity shall choose
PPE after initial either the cost model or
Property, Plant
An entity shall choose either recognition at cost less any the revaluation model as
and Equipment
the cost model or accumulated depreciation its accounting policy and
(PPE)
revaluation model after and any impairment losses shall apply that policy to
initial recognition. . an entire class of assets.
If feasible, an entity should
use the projected unit credit If an NPO has a defined
method to measure defined benefit plan, it must
benefit obligations and recognize the related
expenses, incorporating plan assets and accrued
Employee future salary increases and Retirement benefits, like severance benefits, and
Benefit various actuarial gratuity, should be make provisions based
assumptions like discount measured and recognized on actuarial valuation to
rates, return on plan assets, as a liability based on the cover the liability at the
salary growth, turnover, amount payable if end of the accounting
mortality, and medical cost employees left at the end of period.
trends. the reporting period.
An entity should recognize
An entity can offset current tax on profits as an expense
or deferred tax assets and based on statutory
Assets and liabilities are
liabilities only if it has a calculations, present the
Income Tax not presented net in the
legal right to do so and can corresponding liability as a
Financial Statement.
show it plans to settle them current liability, and show
net or simultaneously. advance tax payments as
current assets.