Dec 2019

Paper 1: Advanced Financial Reporting

Attempt all questions. Working notes should form part of the answers.
1. AK Ltd., operates in Nepal and has investments in two other companies. The draft
statements of financial position of all three companies as at 31st Ashadh 2076 are as
follows:

Rs. In million
Assets: AK Ltd. BK Ltd. TK Ltd.
Non – current assets
Property plant and equipment 1,440 1,100 1,300
Investments in subsidiaries
BK Ltd. 1,250
TK Ltd. 310 1,270
Financial assets 320 21 141
Total non-current assets 3,320 2,391 1,441
Current assets 895 681 150
Total assets 4,215 3,072 1,591
Equity and liabilities:
Share capital 1,750 1,210 800
Retained earnings 1,240 930 350
Other components of equity 125 80 95
Total equity 3,115 2,220 1,245
Non-current liabilities 985 765 150
Current liabilities 115 87 196
Total liabilities 1,100 852 346
Total equity and liabilities 4,215 3,072 1,591
Additional Information:
a) On 1st Shrawan 2074, AK Ltd. acquired 14% of the equity interest of TK Ltd. for a cash
consideration of Rs. 260 million and BK Ltd. acquired 70% of the equity interest of TK
Ltd. for a cash consideration of Rs. 1,270 million. At 1st Shrawan 2074, the identifiable
net assets of TK Ltd. had a fair value of Rs. 990 million, retained earnings were Rs.
190 million and other components of equity were Rs. 52 million. At 1st Shrawan 2075,
the identifiable net assets of TK Ltd. had a fair value of Rs. 1,150 million, retained
earnings were Rs. 240 million and other components of equity were Rs. 70 million. The
excess in fair value is due to revaluation of non-depreciable land which has not been
accounted for and not changed till the reporting date. The fair value of the 14% holding
of AK Ltd. in TK Ltd., which was classified as fair value through profit or loss, was Rs.
280 million at 32nd Ashad 2075 and Rs. 310 million at 31st Ashadh 2076. However, the
fair value of BK Ltd’s interest in TK Ltd. had not changed since acquisition.
b) On 1st Shrawan 2075, AK Ltd. acquired 60% of the equity interests of BK Ltd. The cost
of investment comprised cash consideration of Rs. 1,250 million. On 1st Shrawan 2075,
the fair value of the identifiable net assets acquired was Rs. 1,950 million and retained
earnings of BK Ltd. were Rs. 650 million and other component of equity were Rs. 55
million. The excess in fair value is due to revaluation of non-depreciable land which
has not been accounted for and not changed till the reporting date. It is the group’s

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 policy to measure the non-controlling interest at acquisition at its proportionate share
of the fair value of the subsidiary’s net assets.
c) Goodwill of BK Ltd. and TK Ltd. were tested for impairment at 31st Ashadh 2076 and
found that there was no impairment relating to TK Ltd. However, the goodwill of BK
Ltd. was fully impaired by the reporting date.
d) On 1st Shrawan 2074, AK Ltd. acquired office accommodation at a cost of Rs. 90 million
with a 30 year estimated useful life. During the year, the property market in the area
slumped and the fair value of the accommodation fell to Rs. 75 million at 32nd Ashadh
2075 and this was reflected in the financial statements. However, the market
unexpectedly recovered quickly due to the announcement of major government
investment in the area’s transport infrastructure. On 31st Ashadh 2076, the professional
valuer advised AK Ltd. that the office accommodation should now be valued at Rs. 105
million. AK Ltd. has charged depreciation for the year but has not taken into account
of the upward valuation of the office accommodation. AK Ltd. uses the revaluation
model and records any valuation change when advised to do so.
e) AK Ltd. has announced two major restructuring plans during the year. The first plan
is to reduce its capacity by closure of some of its smaller factories, which have already
been identified. This will lead to the redundancy of 500 employees, who have all
individually been selected and communicated to. The costs of this plan are Rs. 9 million
in redundancy costs, Rs. 5 million in retraining costs and Rs. 5 million in lease
termination costs. The second plan is to re-organize the finance and information
technology department over a one-year period but it does not commence until two
years’ time. The plan will result in 20% of finance staff losing their jobs during the
restructuring. The costs of this plan are Rs. 10 million in redundancy costs, Rs. 6
million in retraining costs and Rs. 7 million in equipment lease termination costs. There
are no entries made in the financial statements for the above plans.
f) The following information relates to the group pension plan of AK Ltd.:
Rs. In million
1st Shrawan 31st Ashadh
2075 2076

Fair value of plan assets 28 29

Actuarial value of defined benefit obligation 30 35
The contributions for the period received by the fund were Rs. 2 million and the
employee benefits paid in the year amounted to Rs. 3 million. The discount rate to be
used in any calculation is 5%. The current service cost for the period based on
actuarial calculations is Rs. 1 million. The above figures have not been taken into
account for the year ended 31st Ashadh 2076 except for the contributions paid which
have been entered in cash and the defined benefit obligation.
Required: (20 marks)
Prepare the group consolidated statement of financial position of AK Ltd. as at 31st
Ashadh 2076 with the notes of any of the issues dealt in the question.
Answer:
AK Ltd.
Consolidated statement of financial position

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 Group I

as at 31 Ashadh 2076
Assets: Rs. Million
Non-current assets:
Property, plant and equipment [1,440 + 1,100 + 1,300 + 35 + 40 (W.N 2) +
32.6 (W.N 6)] 3,947.6
Goodwill (W3) 398
Financial assets (320 + 21 + 141) 482
4,827.6
Current assets (895 + 681 + 150) 1,726
Total assets 6,553.6
Equity and liabilities
Share Capital 1,750
Retained earnings (W5) 1,356.1
Other components of equity (W5) 170.1
3,276.2
Non-controlling interest (W4) 959.4
Total Equity 4,235.6
Total non-current liabilities [985 + 765 + 150 + 6 (W.N 8)] 1,906
Current liabilities [115 + 87 + 196 + 14 (W.N 7)] 412
Total liabilities 2,318
Total Equity and Liabilities 6,553.6
Workings:

W-1: Group structure

The group effective interest in TK Ltd is:
Direct interest 14%
Indirect interest or effective interest (60% X 70%) 42%
Group effective interest 56%
The NCI interest in TK Ltd. is therefore (100% - 56%) 44%
100%
Consolidation of BK Ltd.
Group 60%
NCI (100% - 60%) 40%
100%
The acquisition date of TK Ltd. is 1st Shrawan 2075 as this is when AK Ltd. gains control
over BK Ltd. and therefore indirect control over TK Ltd.

W-2: Net assets

Rs. In million
Post-
BK Ltd Acquisition date Reporting date
Acquisition
Share capital 1,210 1,210 -
Other components 55 80 25
Retained earnings 650 930 280

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 Fair value adjustment – Land
(balancing figure) 35 35 -
1,950 2,255 305
TK Ltd
Share capital 800 800 -
Other components 70 95 25
Retained earnings 240 350 110
Fair value adjustment – Land
(balancing figure) 40 40 -
1,150 1,285 135
Therefore, the post-acquisition profits of BK Ltd. is Rs. 305 million (Rs. 2,255 – Rs. 1,950)
and that of TK Ltd. is Rs. 135 million (Rs. 1,285 – 1,150).
W-3: Goodwill
The cost of TK Ltd. has three elements: the cost of the direct holding, the cost of the indirect
holding and the indirect holding adjustments.
BK Ltd.
Rs. Million
Fair value of consideration 1,250
NCI at acquisition (40% X Rs. 1,950) 780
Fair value of identifiable net assets acquired (W2) (1,950)
Goodwill at acquisition 80
Impairment 2075/76 (80)
Goodwill at reporting date (fully
impaired -

Alternative:
BK Ltd.
Rs. Million
Fair value of consideration 1,250
Group share of Fair value of identifiable net assets acquired (60% X 1,950) (1,170)
Goodwill at acquisition 80
Impairment (80)
Goodwill at reporting date -

TK Ltd.
Rs. Million

Fair value of consideration:

Direct holding (Fair value at date control obtained) 280
Indirect holding 1,270
indirect holding adjustment (40% X Rs. 1,270 million) (508)
NCI at acquisition (44% X Rs. 1,150 million) 506
Less fair value of identifiable net assets (W2) (1,150)

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 Goodwill at reporting date 398
AK investment in TK Ltd. was held at Rs. 310 million at the reporting date. Therefore, the
fair value increase of Rs. 30 million (Rs. 310 – Rs. 280) that has arisen since the date that
control was achieved must be removed from the consolidated statements. Retained
earnings must also be reduced by Rs. 30 million.

Alternative:
TK Ltd.
Rs. Million
Fair value of purchase consideration:
Direct holding 280
Indirect holding (60% X 1,270) 762
1,042
Less Group's share of fair value of identifiable net assets (56% X1,150) (644)
Goodwill at reporting date 398
Alternative:
TK Ltd.
Rs. Million
Fair value of purchase consideration:
Direct holding 280
Indirect holding (60% X 1,270) 762
NCI at acquisition (44% X Rs. 1,150) 506
Less fair value of identifiable net assets (W2) (1,150)
Goodwill at reporting date 398

W-4: Non-controlling interest

Rs. Million
NCI in BK Ltd. at acquisition (40% X Rs. 1,950) 780
Add: NCI % of post-acquisition net assets (40% X (Rs. 2,255 million -
Rs. 1,950 million)) 122
Indirect holding adjustment (40% X Rs. 1,270 million) (508)
NCI in TK Ltd. at acquisition 506
NCI in post-acquisition net assets (44% X (Rs. 1,285 - Rs.
1,150) 59.4
959.4
Alternative:
Rs. Million
NCI in BK Ltd's net assets at reporting date (40% X Rs. 2,255) 902
NCI in TK Ltd's net assets at reporting date (44% X Rs. 1,285) 565.4
NCI's share of investment in BK (40% X Rs.
1,270) (508)
959.4

W - 5: Retained earnings
Rs. Million

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 AK Ltd 1,240
BK Ltd.: 60% X (Rs. 930 million - Rs. 650 million
(W2)) 168
TK Ltd: 56% X (Rs. 350 million - Rs. 240 million
(W2)) 61.6
Gain on TK Ltd's investment (W3) (30)
Impairment of goodwill (W3) (80)
Reversal of impairment loss (W6) 11.6
Restructuring provision (W7) (14)
Pension plan (W8) (1.1)
1,356.10

Other components of equity

Rs. Million
AK Ltd. 125
BK Ltd.: 60% X (Rs. 80 million - Rs. 55 million (W2)) 15
TK Ltd: 56% X (Rs. 95 million - Rs. 70 million (W2)) 14
Revaluation gain (W6) 21
Pension plan re-measurement (W8) (4.9)
170.1
W - 6: The office
Rs. Million
Cost of office building (1.4.2074) 90
Depreciation (90/30 years) (2074/75) (3)
Carrying amount(32.03.2075) 87
Revaluation loss - Profit or loss (balancing figure) (12)
Fair value at 32nd Ashadh 2075 75
Depreciation (75/29 years) (2075/76) (2.6)
Carrying amount (31.03.2076) 72.4
Revaluation surplus – OCI (balancing figure) 32.6
Fair value at 31st Ashadh 2076 105
If no revaluation reserve exists for an item of PPE then a downwards revaluation is
recognized in the statement of profit or loss.
Some of this reversal can be recognized in profit or loss, but this is capped at the amount
needed to increase the asset to the value it would have been had no impairment occurred.
If no impairment had occurred, the asset would have been held at Rs. 84 million (Rs. 90
million – (2 X Rs. 3)). Therefore, the gain recorded in profit or loss is Rs 11.6 million (Rs.
84 million – 72.4 million). The remainder of the gain is recognized in other comprehensive
income.
The entries will be:

Dr property, plant and equipment Rs. 32.6 million

Cr profit or loss Rs. 11.6 million
Cr other comprehensive income Rs. 21 million

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 W – 7: provision for restructuring
Only those costs that result directly from and are necessarily entailed by a restructuring
may be included in a restructuring provision. This includes costs such as employee
redundancy costs or lease termination costs. Expenses that relate to ongoing activities, such
as relocation and retraining, are excluded.
With regard to the service reduction, a provision should be recognized for the redundancy
and lease termination costs of Rs. 14 million. The sites and details of the redundancy costs
have been identified.
In contrast, AK Ltd. should not recognize a provision for the finance and IT department’s
re-organisation. The re-organisation is not due to start for two years. Stakeholders outside
are unlikely to have a valid expectation that management is committed to the re-
organisation as the time frame allows significant opportunities for management to change
the details of the plan or even to decide not to proceed with it. In addition, the degree of
identification of the staff to lose their jobs is not sufficiently detailed to support the
recognizing of a redundancy provision.
W-8: pension plan
In order to calculate the re-measurement component, reconcile the opening and closing net
pension deficit. The re-measurement component is accounted for in other comprehensive
income.
The liability recognized in the financial statements will be Rs. 6 million (that is, Rs. 35
million – Rs. 29 million)

Rs. Million
Net obligation at 1st Shrawan 2075 (Rs. 30 million - Rs. 28
million) 2
Net interest component (Rs. 2 million X 5%) 0.1
Contributions (2)
Service cost component 1
Re-measurement loss (balancing figure) (4.9)
Net obligation at 31st Ashadh 2076 (35 - 29) 6
The service cost component and net interest component will be charged to profit or loss
(Rs. 1.1 million) and the re-measurement loss to Other Comprehensive Income (Rs. 4.9
million). There will be no adjustment for the contributions, which have already been taken
into account.
2.
a) DD Ltd. availed a lease. The terms of the lease are as under:
i) Lease period is 3 years, in the beginning of the year 2075/76, for equipment costing
Rs. 1,000,000 and has an expected useful life of 5 years.
ii) The fair market value is also Rs. 1,000,000.
iii) The property reverts back to the lessor on termination of the lease.

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Suggested Answer Paper Group I

iv) The unguaranteed residual value is estimated at Rs. 100,000 at the end of the year
2077/78.
v) Three equal annual payments are made at the end of each year.
Consider IRR of 10% and the present value of annuity of Re. 1 due at the end of 3rd
year at 10% is Rs. 2.4868 and PV of 3rd year is 0.7513.
Required: (4+2+2+2=10 marks)
i) Calculate annual lease payment and state whether the lease constitute finance
lease.
ii) Calculate total unearned finance income and show Journal entries for recording
the lease instalments.
b) The following information is supplied to you by Sagarmatha Ltd.:

Amount (Rs.)
Equity Shares (Face value Rs. 10) 580,000
12% Preference Shares (Face value Rs. 10) 150,000
10% Debentures (Face value Rs. 10) 500,000
Term Debt (taken at 15%) 200,000
Financial Leverage 1.2
Securities Premium A/c 50,000
General Reserve 20,000
Statutory Reserve 60,000
Income Tax Rate 30%
The industry to which Sagarmatha Ltd. belongs to has a practice of paying at least 15%
dividend to its shareholders. The ordinary shares are quoted at a premium of 400%,
preference shares at Rs. 25 and debentures at a discount of 20%.
Required: (4+4+2=10 marks)
Calculate Economic Value Added (EVA) and Market Value Added (MVA) statements
of the company and also explain the reasons for the difference, if any between the two.
Answer:
a)
i) Computation of annual lease payment to the lessor
Rs.
Cost of equipment 1,000,000
Unguaranteed residual value 100,000
PV of residual value after third year @10% (100,000 x 75,130
0.7513)
Fair value to be recovered from lease payments 924,870
(1,000,000 - 75,130)
PV of annuity for three years is 2.4868
Annual lease payments = 924,870/2.4868 371,912

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 The PV of lease payment i.e. Rs. 924,870 equivalent to 92.48% of the fair value.
As the present value of minimum lease payments substantially covers the initial fair
value of the leased asset and lease term covers the major part of the life of asset, it
constitutes a finance lease.
ii) Computation of Unearned finance income
Rs.
Total lease payments (Rs. 371,912 x 3) 1,115,736
Add: Unguaranteed residual value 100,000
Gross investment in the lease 1,215,736
Less: PV of investment (Rs. 75,130 +924,870) (1,000,000)
Total Unearned finance income 215,735
Journal Entry
Assets under Lease A/C Dr. Rs. 10 Lakh
To Lease Payable A/C Rs. 10 Lakh
b)
Economic Value Added (EVA) statement
Amount(Rs.)
Profit after tax (W.N 1) 280,000
Add: interest (net of tax) (80,000 x 0.70) 56,000
Return to providers of fund 336,000
Less: cost of capital (W.N 3) (171,450)
Economic value added (EVA) 164,550
Market Value Added (MVA) statement
Amount Amount
(Rs.) (Rs.)
Equity share capital (market value) (58,000 x 10 x 500%) 2,900,000
Preference share capital (15,000x25) 375,000
Debentures (50,000 x 10x80%) 400,000
Current market value of firm 3,675,000
Less: Equity share capital 580,000
Preference share capital 150,000
Debentures 500,000
Long term loan 200,000
Securities premium 50,000
General reserve 20,000
Statutory reserve 60,000 (1,560,000)
Market value added (MVA) 2,115,000
The MVA of Rs. 2,115,000 is the difference between the current market value of
Sagarmatha Ltd. and the capital contributed by the fund providers. While EVA
measures current earning efficiency of the company, MVA takes into consideration the

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 EVA from not only the assets in place but also from the future projects/activities of the
company. The difference between MVA and EVA thus represents the value attributed
to the future potential for the company and may change from time to time based on
market sentiments. In short the MVA is the net present value of all future EVAs.
Working Notes:
1. Calculation of net profit after interest and tax

Interest on debentures (500,000 x 10%) 50,000

Interest on long term debt (200,000 x 15%) 30,000
Total interest 80,000
Financial leverage = 1.2 = PBIT / (PBIT – Interest)
PBIT 480,000
Less: Interest (80,000)
Profit after interest before tax 400,000
Less : 30% tax (120,000)
Profit after interest and tax 280,000
2. Calculation of weighted average cost of capital (WACC)

Amount Amount Weight Cost % WACC %

Equity shareholders fund
Equity shares 580,000
Security premium 50,000
General reserve 20,000 650,000 0.43 15 6.45
Preference share 150,000 0.10 12 1.20
Debentures 500,000 0.33 7* 2.31
Long term debt 200,000 0.14 10.5* 1.47
1500,000 11.43
*Rate of interest has been calculated net of tax.
3. Cost of capital = capital employed X WACC%
= 1500,000 x 11.43%
= 171,450
3.
a) The capital structure of XYZ Ltd. on 31st Ashadh 2076 was as follows:
Equity share capital (Rs. 100 each) (Rs.) 1,800,000
12% preference capital (Rs. 100 each) (Rs.) 500,000
12% secured debentures (Rs.) 500,000
Reserves (Rs.) 500,000
Profit earned before interest and taxes during the year(Rs.) 720,000
Tax rate 25%
Normal rate of return on equity shares of the industry 15%

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 Subject to;
i) The profit after tax covers fixed interest and fixed dividend at least 4 times.
ii) The debt equity ratio is at least 2.
iii) Yield on shares is calculated at 60% of distributed profits and 10% of
undistributed profits.
The company has been paying regularly an equity dividend of 15%
The risk premium of dividend is generally assumed at 1%.
Required: (10 marks)
Find out the value of equity shares of the company as on 31st Ashadh 2076.
b) Bashu Kshitiz Ltd. acquired a block making machine on 1st Shrawan 2075. The cost of
the machine amounting to Rs. 1,340,000.00 was derived by Finance Office of the
company as follows:

Particulars Amount in '000 Rs.

Purchase Price 1,005.00
Installation Cost 234.50
Performance Deposit 67.00
Delivery Cost 33.50
Total cost 1,340.00
Following additional information are relevant in relation to cost of machine above:
i) The purchase price is before taking into account trade discount of 8%.
ii) Installation was done by employees of machine supplier and Bashu Kshitiz Ltd. Rs.
87,100.00 of the installation cost included above relates to what the machine
supplier paid to Bashu Kshitiz Ltd. for assisting in installation by workers of Bashu
Kshitiz Ltd. The company did not pay its employees any additional amount for being
involved in installing the new machine.
iii) Performance deposit relates to a two year maintenance service to be provided by
the supplier. It was paid on 1st Shrawan 2075. It is refundable if no works are
carried out on the machine. No maintenance works were provided by supplier in
the period to Ashadh end 2076.
iv) Delivery cost is simply an estimate of what it would have been charged by machine
supplier to deliver the machine. The machine was however delivered free of charge
as it was on promotion.
The machine qualified for an immediate government grant equal to 10% of its initial
cost calculated as per NAS 16 on a specific condition that it should remain in use over
its useful life. The grant was received by Bashu Kshitiz Ltd. on 1st Kartik 2075, the date
on which the machine was ready for its intended use. The company estimates that
depreciation on the machine at an annual rate of 20% on Straight Line Method (SLM)
basis with estimate of nil scrap value would be in compliant with the applicable
reporting standards. Also the company is considering a policy of using deferred income
to account for government grants.

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 Required: (10 marks)
Line items to be presented in the financial statements of Bashu Kshitiz Ltd. for the year
ended Ashadh 31, 2076. The calculation should be supported by adequate reasons.
Answer:
a)
Value of equity share = [Actual Yield / Expected Yield] X paid up value of share
= [9.92/15] X 100 = Rs. 66.13

Working Notes:
1) Calculation of profit after tax (PAT) and retained earnings: Rs.
A. Profit before interest & tax (PBIT) 720,000
B. Less: Debenture interest (Rs. 500,000 x 12%) (60,000)
C. Profit before tax 660,000
D. Less: Tax 25% (165,000)
E. Profit after tax (PAT) 495,000
F. Less: Preference Dividend (Rs. 500,000 x 12%) (60,000)
G. Less: Equity Dividend (Rs. 1,800,000 x 15%) (270,000)
Retained Earnings 165,000
2) Interest and fixed dividend coverage = (PAT + debenture interest)
Debenture interest + Pref. Dividend
= (495,000 + 60,000)
(60,000 + 60,000)
= 4.625 times
3) Debt Equity Ratio = Debentures
(Pref. Share capital + Equity share capital + Reserves)
= 500,000
(500,000 + 1,800,000 + 500,000)
= 0.179 (the ratio is less than the prescribed ratio)
4) Calculation of Yield of Equity shares
Yield on equity shares is calculated at 60% of distributed profit and 10% of
undistributed profit
60% of distributed profit (60% of Rs. 270,000) 162,000

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 10% of undistributed profit (10% of Rs. 165,000) 16,500
178,500
Yields on equity shares = [Yield on shares / Equity share capital] x 100
= [178,500 / 1800,000] x 100 = 9.92%
5) Calculation of expected yield on equity shares
Normal rate of return 15%
Add: Risk premium for low interest and
fixed dividend coverage (4.625 > 4) 0%
Add: Risk Premium for debt equity ratio (not required) 0%
Expected yield 15%
b)
The question deals with three items i.e. PPE, Government Grant and Prepayment. The
amount to be reported for these line items of FS are:
Line Item Amount in 000 Remarks
Non- current Assets
Property, Plant & Equipment 911.20 WN 1
Prepayment 67 N6
Current -Liability 21.44 WN2
Non- Current Liability 69.68 WN2
Income
Grant Income 16.08 WN2
Expenses
Depreciation 160.80 WN1

W. N. 1
Calculation of Carrying Amount of Machine
Purchase price 1,005.00
Trade discount @ 8% (N 1) (80.40)
Net purchase price 924.60
Installation cost (N2) 147.40
Total Initial Cost 1,072.00
Depreciation 9 Months @ 20% (N3) (160.80)
Carrying value 911.20
W. N. 2

Government grant

Government grant received (1072 x 10%) 107.20

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 Grant recognized as income (16.08)

Balance as on 31.3.2076 91.12

Current liability (N4) (91.12/5) 21.44 F

Non -Current Liability (N5) 69.68

N1: Trade discount not included in cost of machine as per NAS 16

N2: based on what was incurred by Basu Kshitiz Ltd. Rs. 87,100 paid to company by
the supplier for helping in installing the machine shall be set off with actual interest
cost.
N3: Proportionate depreciation for nine months.
N4: Current portion of grant i.e. income of next 12 months
N5: Non-current portion of grant, beyond 12 months.
N6: Amount paid for performance deposit of Rs. 67,000 should be treated as
prepayment in statement of financial position as at Ashadh end 2076 under non-current
assets. An amount equal to the value of repair works provided by the supplier should
be expensed to the statement of profit or loss and an equal amount transferred from the
amount. No amount is to be transferred to the statement of profit or loss nor expensed
for the year ended Ashadh end 2076 as no repair works were done by the supplier on
the machine.
4. Write short notes on the following: (5×3=15 marks)
a) Challenges faced by BFI undergoing NFRS implementation
b) Corporate Governance Reporting
c) The significance of the earnings per share (EPS) figure to the analysis of company
performance based on NAS 33.
d) Types of Hedging Relationship
e) Operating Segment
Answer:
a) Challenges faced by BFI undergoing NFRS implementation:
1. Technical Challenges:
a. Impairment of financial assets:
b. Fair value measurement criteria for assets and liabilities
c. Consolidation of financial statements
d. Disclosures requirement
e. Income recognition
2. Other Challenges:

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 a. Amendment to existing legal framework and policies
b. Shortage of trained and experienced resources
c. Complexity in financial reporting
d. Increased initial cost
e. Measurement of business performance
3. Change Management
b) Corporate governance involves balancing the interests of the stakeholders in a company
– these include its shareholders, management, customers, suppliers, financiers,
government and the community. Corporate governance provides the framework for
attaining a company‘s objectives and encompasses practically every sphere of
management, from action plans and internal controls to performance measurement and
corporate disclosure. Most companies strive to have a high level of corporate
governance. These days, it is not enough for a company to merely be profitable; it also
needs to demonstrate good corporate citizenship through environmental awareness,
ethical behavior and sound corporate governance practices. Good corporate governance
requires a joint effort of the promoters who need to be more transparent, responsible
and socially accountable; the shareholders who must actively participate in their
corporate affairs to help prevent any fraudulent and insider practices and; the regulatory
authority that should effectively enforce rules and regulations in order to protect the
rights of all stakeholders and create favorable environment to enhance good corporate
governance culture.
c) Significance of Earnings per Share (EPS)
• EPS gives a way to measure a company’s profits relative to the number of shares
in issue. It is argued that as owners hold equity shares, it is more relevant to them
to know how much profit each share has earned than to know the overall profit
figure.
• EPS feeds into the price / earnings ratio, one of the most important stock market
measures of value. This gives an estimate of the number of years it would take for
an investment in an equity share to return itself in earnings terms, assuming current
performance continues into the future.
• It is essential that such an important measure of performance have clear guidelines
regarding its calculation. NAS 33 Earnings per Share gives us a standardised
method of calculating both earnings, and the number of shares.
• Many investors feel that other measures are more appropriate, and that the NAS 33
definition of EPS is too conservative. NAS 33 allows alternative measures of EPS
to be published, as long as the NAS 33 figure gets equal or greater prominence.
• There is a danger in relying on a single measure of performance, as no single
measure can encapsulate all aspects of an entity’s performance.
• Also, there is a danger that EPS may be seen by unsophisticated investors as a
definite exact number, when in reality it is subject to all the accounting estimates
and judgments that are necessary in preparing a set of financial statements.
• Despite these fears, it is generally agreed that NAS 33 gives a very fair method of
calculating EPS, and that the consistency it offers is of value to the investor and
analyst.

18
 d) 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 cash
flows 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
e) NFRS defines an operating segment as a component of an entity;
(i) That engages in business activities from which it may earn revenues and incur
expenses (including revenues and expenses relating to transactions with other
components of the same entity)
(ii) Whose operating results are reviewed regularly by the entity’s chief operating
decision maker to make decisions about resources to be allocated to the segment and
assess its performance and
(iii) For which discrete financial information is available.
It also sets out various disclosure requirement for operating segments.
5.
a) What are the pillars of Public Expenditure and Financial Accountability (PEFA) and
how does its assessment help in strengthening Public Finance Management (PFM)
system of a country? (3.5+3.5=7 marks)

b) X Ltd. acquired a Safa Tempo business on 1st Shrawan 2075 for Rs. 4,600,000. The
values of the assets of the business at that date based on net selling prices were as
follows:

Rs. '000
Tempo 2,400
Intangible Assets (license of tempo) 600
Trade receivable 200
Cash 1,000
Trade payable (400)
3,800

19
 On 1st Bhadra 2075, the tempo company had four of its tempos stolen. The net selling
value of four tempos was Rs. 600,000 and because of non-disclosure of certain risks to
the insurance company, the tempos were uninsured. As a result of this event, X Ltd.
wishes to recognize an impairment loss of Rs. 900,000 (inclusive of the loss of the stolen
tempos) due to the decline in the value in use of the cash generating unit, that is the
tempo business. On 1st Ashwin 2075 a rival tempo company commenced business in the
same area. It is anticipated that the business revenue of X ltd. will be reduced by 25%
leading to a decline in the present value in use of the business which is calculated at
Rs 3,000,000. The net selling value of the tempo license has fallen to Rs. 500,000 as a
result of the rival tempo operator. The net selling value of the other assets have
remained the same as at 1st Shrawan 2075 throughout the period.
Required:

Describe how X Ltd. should treat the above impairment of assets in its financial
statements as at 1st Bhadra 2075 and 1st Ashwin 2075. (4+4=8 marks)
Answer:
a) PEFA Pillars
PEFA identifies seven pillars of performance in an open and orderly PFM system that
are essential to achieving desired fiscal and budgeting outcomes. The pillars are as
follows:
1. Budget reliability
2. Transparency of public finance
3. Management of assets and liabilities
4. Policy based fiscal strategy and budgeting
5. predictability and control in budget execution
6. Accounting and reporting
7. External scrutiny and audit
Within these 7 broad areas marked by these pillars, PEFA defines 31 specific indicators
that focus on key measurable aspects of the PFM system. PEFA uses the results of the
individual indicator calculations, which are based on available evidence, to provide an
integrated assessment of PFM system against the 7 pillars of PFM performance. It then
assesses the likely impact of PFM performance levels on the three desired budgetary
outcomes, viz, aggregate fiscal discipline, strategic allocation of resources and efficient
service delivery.
b)
At 1st Bhadra 2075
1/4/2075 Impairment 1/5/2075
loss
Rs '000 Rs '000 Rs '000
Goodwill (4,600 - 3,800) 800 (300) 500
(balancing
Intangible assets 600 figure) 600

20
 Tempos 2,400 (600) 1,800
Net assets (TR+ Cash-TP) 800 - 800
4,600 (900) 3,700
An impairment loss is recognized for the stolen vehicles. The balance of Rs 300,000 is
allocated to goodwill in the cash generating unit.

At 1st Ashwin 2075

1/5/2075 Impairment 1/6/2075
loss
Rs. '000 Rs. '000 Rs. '000
Goodwill 500 (500)
Intangible assets 600 (100) 500
Tempos 1,800 - 1,800
Net Assets 800 - 800
3,700 (600) 3,100
A further impairment loss of Rs. 600,000 (Goodwill 500 due to fall in net business
revenue + 100 decline in license) is recognized. The recoverable amount falls to the
higher of net selling price (3,700- 600) or value in use (3,000). There is no indication
that other tangible assets are impaired. The loss is applied initially to the intangible
assets and then to goodwill.
6.
a) Brat Ltd. incorporated in Nepal purchased 6,000 kg of materials on 1st Ashadh 2075
to use in their production process.
The supplier is located in China where the currency is Yuan. The goods cost 300,000
Yuan and have not been paid at the year end. The relevant exchange rates are:
1st Ashadh Re. 1 = 0.05 Yuan
32nd Ashadh Re. 1 = 0.056 Yuan
Required: (3+2=5 marks)
How this transaction will be included in the financial statements of 32nd Ashadh 2075.
Also, identify the functional currency and presentation currency of Brat Ltd.
b) Progressive Ltd. operates a defined benefit pension plan for its employees. At 1st
Shrawan 2075 the fair value of the pension plan assets was Rs. 8,200,000 and the
present value of the pension plan liabilities was Rs. 8,500,000. The Actuary estimated
that, the service cost for the year to 31st Ashadh 2076 was Rs. 2,100,000. The pension
plan paid Rs. 500,000 to retired members and Progressive Ltd. paid Rs. 1,900,000 in
contributions to the pension plan in the year to 31st Ashadh 2076. The Actuary
estimated that, the relevant discount rate for the year to 31st Ashadh 2076 was 6%.
On 31st Ashadh 2076, Progressive Ltd announced improvements to the benefits offered
by the pension plan to all of its members. The Actuary estimated that, the past service
cost associated with these improvements was Rs. 2 million. At 31st Ashadh 2076 the
fair value of the pension plan assets was Rs. 10,200,000 and the present value of the
pension plan liabilities (including the past service costs) was Rs. 12,500,000.

21
 Required: (3+2=5 marks)
In accordance with NAS 19 Employee Benefits:
i) Calculate the net actuarial gain or loss that will be included in Progressive Ltd.’s
other comprehensive income for the year ended 31st Ashadh 2076.
ii) Calculate the net pension asset or liability that will be included in Progressive
Ltd.’s statement of financial position as at 31st Ashadh 2076.
Answer:
a) Brat Ltd. should recognise the purchase of goods at the exchange rate in place at the
date of the transaction.
Therefore:
300,000 Yuan/0.05 = Rs. 6,000,000
Purchases A/c Dr. Rs. 6,000,000
Trade payables A/c Cr. Rs. 6,000,000
At the year end, the supplier has not been paid, so the liability is still outstanding. It
must be translated at the closing rate at the year end and any exchange gains or losses
recognised in the statement of profit or loss.
The liability at 32nd Ashadh 2075 is:
300,000 Yuan/0.056 = Rs. 5,357,143
It has decreased and Brat must recognise an exchange gain of Rs. 642,857 as:
Trade payables A/c Dr. Rs. 642,857
To OCI Cr. Rs. 642,857
Functional currency is the currency of the primary economic environment in which the
entity operates. In Brat Ltd.’s. case, it operates in Rs. which is the functional currency.
The presentation currency is the currency in which the financial statements are
presented. Brat Ltd. may well prepare financial statements in their functional currency
(Rs.).
b) Pension plan of Progressive Ltd.
i) Actuarial gains and losses:
FV of plan PV of plan
assets liabilities
Rs 000 Rs. 000
Opening balance (1.4.2075) 8,200 8,500
Service cost (2075/76) 2,100
Interest cost (6% x opening balances) 492 510
Benefits paid (500) (500)
Contributions 1,900

22
 Past service cost 2,000
Total 10,092 12,610
Actuarial gain on plan assets (balancing fig) 108
Actuarial gain on plan liabilities (balancing fig) (110)
Closing Balance 10,200 12,500

The net actuarial gain in OCI is NRs. 218,000 for the year.
ii)
Statement of financial position: NRs. 000
Present value of pension plan liabilities at 31st Ashadh 2076 (12,500)
Fair value of pension plan assets at 31st Ashadh 2076 10,200
Net pension liability (2,300)

23
 Dec 2020

Paper-1: Advanced Financial Reporting

Attempt all questions. Working notes should form part of the answers.
Use separate answer book for each question.

1. The statements of financial position of Jagat Co. and its investee companies, Phagat Co. and
Sangat Co. at 31 Ashadh, 2077 are as below:
Statements of Financial Position as at 31 Ashadh, 2077
Jagat Co. Phagat Co. Sangat Co.
Assets (Rs.’000) (Rs.’000) (Rs.’000)
Non- current assets
Freehold property 1,950 1,250 500
Plant and machinery 795 375 285
Investments 1,500 - -
4,245 1,625 785
Current assets
Inventory 575 300 265
Trade receivables 330 290 370
Cash 50 120 20
955 710 655
Total assets 5,200 2,335 1,440
Equity and liabilities
Equity
Share capital of Re.1/share 2,000 1,000 750
Retained earnings 1,460 885 390
3,460 1,885 1,140
Non-current liabilities
12% loan stock 500 100 -
Current liabilities
Trade payables 680 350 300
Bank overdraft 560 - -
1,240 350 300
Total equity and liabilities 5,200 2,335 1,440
Additional information:
i) Jagat Co., acquired 600,000 ordinary shares in Phagat Co., on 01 Shrawan, 2071 for Rs.
1,000,000 when the retained earnings of Phagat Co., were Rs. 200,000.
ii) At the date of acquisition of Phagat Co., the fair value of its freehold property was
considered to be Rs. 400,000 greater than its value in Phagat Co.’s statement of financial
position. Phagat Co., had acquired the property in Shrawan, 2071 and the buildings
element (comprising 50% of the total value) is depreciated on cost over 40 years.
iii) Jagat Co., acquired 225,000 ordinary shares in Sangat Co. on 01 Shrawan, 2075 for Rs.
500,000 when the retained earnings of Sangat Co. were Rs.150,000.
iv) Phagat Co., manufactures a component used by both Jagat Co., and Sangat Co.
Transfers are made by Phagat Co., at cost plus 25%. Jagat Co. held Rs. 100,000
inventory of these components at 31 Ashadh, 2077. In the same period Jagat Co., sold
 goods to Sangat Co., of which Sangat Co., had Rs. 80,000 in inventory at 31 Ashadh,
2077. Jagat Co., had marked these goods up by 25%.
v) The goodwill in Phagat Co. is impaired and should be fully written off. An impairment
loss of Rs. 92,000 is to be recognised on the investment in Sangat Co.
vi) Non-controlling interest is valued at full fair value. Phagat Co. shares were trading at
Rs. 1.60 just prior to the acquisition by Jagat Co.
Required: 20 marks
Prepare, in a format suitable for inclusion in the annual report of the Jagat Co. Group, the
consolidated statement of financial position at 31 Ashadh, 2077.
Answer:
Jagat Co. Group
Consolidated statement of financial position
As at 31 Ashadh, 2077
Assets (Rs.in ’000)
Non-current assets
Freehold property (W.N.2) 3,570.00
Plant and machinery (795+375) 1,170.00
Investment in associate (W.N.7) 475.20
5,215.20
Current assets
Inventory (W.N.3) 855.00
Receivables (330 + 290) 620.00
Cash (50 +120) 170.00
1,645.00
Total assets 6,860.20

Equity and liabilities

Equity
Share capital 2,000.00
Retained earnings (W.N.8) 1,792.20
3,792.20
Non-controlling interest (W.N.9) 878.00
4,670.20
Non-current liabilities
12% loan stock (500+100) 600.00
Current liabilities (680 +560+350) 1,590.00
Total equity and liabilities 6,860.20
Working Notes:
(1) Group structure
1.4.2071 (6 years ago)
Jagat Co. acquires 60% of Phagat Co.
1.4.2075 (2 years ago)
Jagat Co. acquires 30% of Sangat Co.
(2) Freehold Property

Rs. in’000
 Jagat Co. 1950
Phagat Co. 1250
Fair value adjustment 400
Additional depreciation [(400×50%)÷40]×6 years (2071 Shrawan - (30)
2077 Ashadh)
3570
(3) Inventory
Rs. in’000
Jagat Co. 575
Phagat Co. 300
Unrealized Profit (100× 25/125) (W.N.4) (20)
855
(4) Unrealized Profit
Rs. in ’000
On sales by Phagat Co. to Jagat Co. (Parent Co) 100×25/125 20.0
On sales by Jagat Co. to Sangat Co. (Associate) 80×25/125×30% 4.8
(5) Fair Value adjustment
Difference at Difference
acquisition now
Rs. in’000 Rs. in’000
Property 400 400
Additional depreciation: 200 × 6/40 - (30)
400 370
Therefore charge Rs. 30,000 to retained earnings
(6) Goodwill
Rs. in’000 Rs. in’000
Phagat Co.
Consideration transferred 1,000
Non-Controlling interest (400 × Rs. 1.60) 640
Net assets acquired
Share capital 1,000
Retained earnings 200
Fair value adjustment 400
(1,600)
Goodwill at acquisition 40
Impairment loss (40)
0
(7) Investment in Associates
Rs. in ’000
Cost of investment 500.00
Share of post-acquisition profit (390 – 150) × 30% 72.00
Less: Unrealized Profit (80×25/125)×30% (4.80)
Less: impairment loss (92.00)
475.20
(8) Retained earnings
Jagat Co. Phagat Co. Sangat Co.
Rs. in ’000 Rs. in ’000 Rs. in’000
Retained earnings given 1,460.0 885.0 390.0
 Adjustments
Unrealised profit (W.N.4) (4.8) (20.0)
Fair value adjustments (W.N.5) (30.0)
(Depn.)
Impairment loss (Phagat Co) (40.0)
795.0 390.0
Less pre –acquisition reserves (200.0) (150.0)
1,455.20 595.0 240.0
Phagat Co.: 60% ×595 357.00
Sangat Co.: 30% × 240 72.00
Impairment loss (Sangat Co) (92.00)
1,792.20
(9) Non – controlling interest at reporting date
Rs. in ’000
NCI at acquisition (W.N.6) 640.00
Share of post –acquisition retained earnings (595 × 40%) 238.00
878.00
2.
a) KK Ltd. runs a departmental store which awards 10 points for every purchase of Rs. 500
which can be discounted by the customers for further shopping with the same company.
Each point is redeemable on any future purchases of KK Ltd.’s products within 3 years.
Value of each point is Rs. 0.50. During the accounting year 2076/77, KK Ltd. awarded
10,000,000 points to various customers of which 1,800,000 points remained undiscounted
(to be redeemed till 31 Ashadh, 2079). The management expects only 80% of the
remaining will be discounted in future.
KK Ltd. has approached you with the following queries and has asked to state the
accounting treatment (Journal Entries) under the applicable NAS for these award points:
(i) How should the recognition be done for the sale of goods worth Rs. 1,000,000 on
a particular day?
(ii) How should the redemption transaction be recorded in the year 2076/77? The
company has requested you to present the sale of goods and redemption as
independent transaction. Total sales of the company is Rs. 500,000,000.
(iii) How much of the revenue for undiscounted points should be deferred at the year-
end (2076/77) because of the estimation that only 80% of the outstanding points
will be redeemed?
(iv) In the next year 2077/78, 60% of the outstanding points were discounted Balance
40% of the outstanding points of 2076/77 still remained outstanding. How much
of the deferred revenue should the company recognize in the year 2077/78 and
what will be the amount of balance deferred revenue?
(v) How much revenue will the company recognize in the year 2078/79, if 300,000
points are redeemed in the year 2078/79?
Required: Give answer to the queries of KK Ltd. with proper workings. 10 marks
b) R Co. is in the process of preparing its financial statements for the year ended 31 Ashadh
2077. The following matters are pending relating to deferred taxation. R’s current
income tax rate is 25%. However, this rate will be changed to 20%, with effect from 1
Shrawan 2077, as enacted by the new tax legislation.
i) Investment property acquired on 1 Shrawan 2075 for Rs. 26 million has been valued
for Rs. 32 million on 31 Ashadh 2077. The valuation does not affect the taxable profit.
R measures investment properties at fair value. R depreciates this property over 15
 years for tax purposes. If the investment property is sold, a tax rate of 10% would
apply on the sale proceeds in excess of the cost. However, reversal of tax
depreciation already claimed, will be taxed at the normal income tax rate. R expects
to sell this property in the 5th year of its useful life
ii) R has motor vehicles amounting to Rs. 50 million. R cannot deduct depreciation
allowance on these vehicles for tax purposes, and disposal gains are not taxable.
iii) R has recognised a provision for product warranty cost, amounting to Rs. 6 million.
These costs will not be taxable, until the claims are paid.
Required: 10 marks
Advise on the financial reporting treatment based on the requirements of NAS 12, Income
Taxes for the year ended 31 Ashadh 2077.
Answer:
a)
i) Points earned on Rs. 1,000,000 @ 10 points on every Rs. 500
= [(1,000,000/500) x 10]= 20,000 points.
Value of points = 20,000 points x Rs. 0.5 each point = Rs. 10,000
Revenue recognized for sale of goods Rs. 990,099 [1,000,000 x
(1,000,000/1,010,000)]
Revenue for points deferred Rs. 9,901 [1,000,000 x
(10,000/1,010,000)]
Journal Entry
Rs. Rs.

Bank A/c Dr. 1,000,000

To Sales A/c 990,099

To Liability under Customer Loyalty programme 9,901

ii) Points earned on Rs. 500,000,000 @ 10 points on every Rs. 500

= [(500,000,000/500 ) x 10] = 10,000,000 points.
Value of points = 10,000,000 points x Rs. 0.5 each point = Rs. 5,000,000
Revenue recognized for sale of goods
= Rs. 495,049,505 [500,000,000 x (500,000,000 / 505,000,000)]
Revenue for points = Rs. 4,950,495
[500,000,000 x (5,000,000 / 505,000,000)]
Journal Entries in the year 2076-77
Rs. Rs.

Bank A/c Dr. 500,000,000

To Sales A/c 495,049,505

To Liability under Customer 4,950,495
Loyalty programme
(On sale of Goods)
 Liability under Customer Loyalty 4,211,002
programme Dr.
To Sales A/c 4,211,002
(On redemption of (100 lakhs -18
lakhs) points)
Revenue for points to be recognized
Undiscounted points estimated to be recognized next year
= 1,800,000 x 80%= 1,440,000 points
Total expected points to be redeemed in 2076/2077 and 2077/78
= [(10,000,000 – 1,800,000) + 1,440,000] = 9,640,000
Revenue to be recognized with respect to discounted point in 2076/77
= Rs. 4,950,495 x (8,200,000/9,640,000) = Rs. 4,211,002
iii) Revenue to be deferred with respect to undiscounted point in 2076/77
= 4,950,495 – 4,211,002 = Rs. 739,493.
iv) In 2077/2078, KK Ltd. would recognize revenue for discounting of 60% of
outstanding points as follows:
Outstanding points = 1,800,000 x 60% = 1,080,000 points
Total points discounted till date = 8,200,000 + 1,080,000 = 9,280,000 points
Revenue to be recognized in the year 2077/78
= [{4,950,495 x (9,280,000 / 9,640,000)} – 4,211,002]
= Rs. 554,620.
Journal Entry in the year 2077/78

Rs. Rs.

Liability under Customer Loyalty programme Dr. 554,620

To Sales A/c Rs. 554,620

(On redemption of further 1,080,000 points)

The Liability under Customer Loyalty programme at the end of the year 2077/78
will be Rs. 739,493 – 554,620 = Rs. 184,873.
v) In the year 2078/79, the company will recognize the balance revenue of Rs. 184,873
irrespective of the points redeemed as this is the last year for redeeming the points.
Journal entry will be as follows:
Journal Entry in the year 2078/79
Liability under Customer Loyalty programme Dr. Rs. 184,873

To Sales A/c Rs. 184,873

(On redemption of remaining points)

b)
i) Because the investment property is measured at fair value, there is a rebuttable
 presumption that the company will recover the carrying amount of investment
property entirely through a sale. If that presumption is not rebutted, the deferred tax
reflects the tax consequences of recovering the carrying amount entirely through sale.
This presumption is rebutted if the investment property is depreciable and is held
within a business model whose objective is to consume substantially all the economic
benefits over time, rather than through sale.
Since R Co. does not expect to use the property for more than 5 years, it will not
consume substantially all the economic benefits derived from the asset and therefore
the presumption is not rebutted.
Therefore, if the property is sold, the carrying value as at the year-end (31 Ashadh
2077) is Rs. 32 million and the tax base is (Rs. 26m/15*13) Rs. 22.5 m. This results
in a taxable temporary difference of Rs. 9.5 m (i.e. Rs. 32 million – Rs. 22.50 million)
R needs to recognize deferred tax using the enacted rate applicable for a future period
of 20%.
The deferred tax impact would be as follows:
Rs. 6 m (Rs. 32 m – Rs. 26m) * 10% = Rs. 0.6m
Rs.3.5m (Rs. 26m – Rs. 22.5m) *20%= Rs. 0.7m
ii) A temporary difference may arise on initial recognition of an asset or liability, for
example, a part or all of the cost of an asset will not be deductible for tax purposes.
Since there is no tax impact at the initial recognition of these motor vehicles, deferred
tax is not recognized.
iii) The entire carrying amount will be deductible for tax purposes in the future periods.
The warranty provision has a tax base of nil (carrying amount less the amount
deductible for tax purposes in the future). The deference between the carrying amount
and its tax base is Rs. 6 millions. This is a deductible temporary difference. This will
result in a deferred tax asset of Rs. 1.2 millions.
Impact from change in the tax rate from 25% to 20% should be recorded in profit or
loss. In this case there are no amounts affecting OCI.
The change in the tax rate is an estimate change which requires prospective
adjustments in the financial statement.
3.
a) XYZ Ltd. has three cash generating units – X, Y and Z, the carrying amounts of which
as on 31 Ashadh, 2077 are as follows:
Cash Generating Units Carrying Amount Remaining useful life
(CGU) (Rs. in millions) (In years)
X 800 20
Y 1,000 10
Z 1,200 20
XYZ Ltd. also has corporate assets having a remaining useful life of 20 years as below:
Corporate Assets Carrying amount Remarks
(Rs. in millions)
AU 800 This amount can be allocated on a
reasonable basis to the individual cash
generating units.
BU 400 This amount cannot be allocated on a
reasonable basis to the individual cash
 generating units.
Recoverable amounts as on 31 Ashadh, 2077 are as follows:
Cash Generating Units Recoverable amount (Rs. in millions)
X 1,000
Y 1,200
Z 1,400
XYZ Ltd. 3,900
Required: (3+7=10 marks)
i) Allocate corporate assets to CGU and determine carrying amount.
ii) Calculate the impairment loss, if, any of XYZ Ltd.
b) Y Ltd. acquired a filling station from S Ltd. under a five - year lease agreement
commencing on 1 Shrawan 2076. The filling station was leased by S Ltd. immediately
after its completion. This was because the company decided to abandon its plans to
venture into oil marketing business. The agreement costs Y Ltd. Rs. 150,000 in legal
fees and other arrangement related costs. The lease agreement provides for annual
lease rentals of Rs. 3,000,000 for four years and Rs. 5,000,000 in year five. Further, the
agreement states that the asset will be transferred to Y Ltd. at the end of the lease
period. The lease agreement does not contain an implicit interest rate. However, Y Ltd.
has a weighted average cost of capital of 12%. In addition, review of the risk
associated with investing in Y Ltd. established that the company is now able to borrow
at an annual interest rate of 10% which was 8% previously.

The filling station has an economic useful life of ten years after which, Y Ltd. will be
required to dismantle it and restore the site to its original state. This will cost Y Ltd.
approximately Rs. 750,000. (Any provisions must be discounted at 12%).
Required: 10 marks
Advise Y Ltd. on how it should account for the lease agreement in their financial
statements for the year to 31 Ashadh 2077.
Answer:
a)
i) Allocation of corporate assets to Cash Generating Unit (CGU)
The carrying amount of AU is allocated to the carrying amount of each individual cash
generating unit. A weighted allocation basis is used because the estimated remaining
useful life of Y CGU is 10 years, whereas the estimated remaining useful lives of X and
Z CGUs are 20 years.
(Rs. in
millions)
Particular X Y Z Total
(a) Carrying amount 800 1,000 1,200 3,000
(b) Useful life 20 years 10 years 20 years
(c) Weight based on useful life 2 1 2
(d) Carrying amount (a x c) 1,600 1,000 2,400 5,000
(e) Pro-rata allocation of AU 32% 20% 48% 100%
(1,600/5,000) (1,000/5,000) (2,400/5,000)
(f) Allocation of carrying amount 256 160 384 800
of AU (32:20:48)
 (g) Carrying amount (after 1,056 1,160 1,584 3,800
allocation of AU) (a+f)

ii) Calculation of impairment loss

(a) Impairment loss of each CGU
(Rs. in millions)
Particulars X Y Z
Carrying amount (after 1,056 1,160 1,584
allocation of AU)
Recoverable amount 1,000 1,200 1,400
Impairment loss 56 Nil 184
(b) Allocation of the impairment loss
(Rs. in millions)
Allocation to X Z
AU 14 (56x256/1,056) 45 (184x384/1,584)
Other assets in CGU 42 (56x800/1,056) 139 (184x1,200/1,584)
Impairment Loss 56 184
(c) Impairment loss for the larger CGU, i.e. XYZ Ltd. as a whole
(Rs. in millions)
Particulars X Y Z AU BU XYZ Ltd.
Carrying amount 800 1,000 1,200 800 400 4,200
Impairment Loss (42) - (139) (14+45=59) - (240)
Carrying amount 758 1,000 1,061 741 400 3,960
Recoverable amount - - - - - 3,900
Impairment loss 60
b)
i) Under NAS 17, upon commencement of the lease, Y Ltd. should recognise a right-
of-use asset and a lease liability. The right-of-use asset is initially measured at the
amount of the lease liability plus any initial direct costs incurred and site restoration
obligations. This amounts to Rs. 13,003,500 (W.N. 3).
The lease liability is initially measured at the present value of the lease payments
payable over the lease term, discounted at the rate implicit in the lease if that can be
readily determined. The incremental borrowing rate of Y Ltd. of 10% will be used
as a discount rate in calculating lease liability as no implicit rate is provided in the
lease agreement.
The NAS requires recognised asset to be subject to depreciation and impairment
review and carried in the statement of financial position after taking into account
accumulated depreciation and accumulated impairment loss. The standard further
requires cost of asset to be spread over the useful life of asset as opposed to lease
period if the lessee will obtain ownership of asset at the end of lease period. This is
applicable to Y Ltd. as ownership of the filling station will be transferred to the
company after the expiry of a – five (5) year lease period. The filling station should
therefore be depreciated over the economic useful life of ten (10) years. This will
result in depreciation charge of Rs. 1,300,350 (W.N.3) which will be charged to the
statement of profit loss for the year ending 31 Ashadh 2077. The filling station will
be recognised under non-current assets in statement of financial position as at 31
Ashadh 2077 at a value of Rs. 11,703,150 (W.N.3).
ii) The lease liability will be re-measured at 31 Ashadh 2077 by taking into account
lease interest and lease payment for the year. This gives a total liability of Rs.
 10,873,200 (W.N.4) which has to be split between current and non-current
liabilities. Rs. 8,960,520 (W.N.4) should be shown under non-current liabilities
while Rs. 1,912,680 (W.N.4) under current liabilities in the statement of financial
position as at 31 Ashadh 2077. Lease interest of Rs. 1,261,200 (W.N.4) has to be
expensed to the statement of profit or loss for the year ending 31 Ashadh 2077.
iii) The cost of dismantling and site restoration of Rs. 750,000 should be recognised as
a liability in the financial statements of Y Ltd. This is because it has met the
recognition criteria of NAS 37 Provisions, contingent liabilities and contingent
assets’. The ownership of the filling station will be transferred to Y Ltd. and there is
a legal requirement to dismantle it and restore the site to its original state. Being a
future cost, the amount should be discounted using cost of capital of 12% to reflect
the time value of money. This gives Rs. 241,500 (W.N.2). This should be adjusted
for an amount representing unwinding of discount to arrive at an amount of Rs.
270,480 (W.N.5) to be shown under non-current liabilities in the statement of
financial position of Y Ltd. as at 31 Ashadh 2077. The unwound interest amount of
Rs. 28,980 (W.N.5) should be expensed to the statement of profit or loss for the
year ended 31 Ashadh 2077.
Working Notes:
1 Calculation PV of lease liability
Yr. CF (Rs.) DF @ 10% PV (Rs.)
1 to 4 3,000,000 3.169 9,507,000
5 5,000,000 0.621 3,105,000
12,612,000
2 Calculation of PV of Restoration cost
Yr. CF DF @ 12% PV
1 750,000 0.322 241,500
3 Carrying value of Filling station
Rs.
PV (W.N.1) 12,612,000
PV of restoration cost (W.N.2) 241,500
Legal cost 150,000
Total Cost (for initial
recognition) 13,003,500
Depreciation over 10yrs (yearly) 1,300,350
Value at 31 Ashadh 2077 11,703,150
Lease Liability as at 31 Ashadh
4 2077
Rs.
PV (W.N.1) (1 Shrawan 2076) 12,612,000
Interest @ 10% 1,261,200
Lease payment -3,000,000
31 Ashadh 2077 10,873,200
Interest @ 10% 1,087,320
Lease payment -3,000,000
Non - current 8,960,520
Current (3,000,000 - 1,087,320) 1,912,680
5 Restoration cost provision
 Rs.
PV
(W.N.2) 241,500
Unwinding of discount @ 12% 28,980
270,480
4. Write short notes on the following: (5×3=15 marks)
a) Treatment of the cost of internally generated software.
b) Matters to be included in annual reports in cases of material environmental impacts by
actions/operations of a company.
c) Embedded derivatives
d) Economic entity principle of accounting
e) During the year ended 31 Ashadh, 2077, Dorjee provided consultancy service to a
customer regarding the installation of a new production system. The system has caused
the customer considerable problems, so the customer has taken legal action against
Dorjee for the loss of profits that has arisen as a result of the problems with the system.
There is a 25% chance that the claim can be successfully defended, but a 75% chance
that Dorjee will be required to pay damage of Rs. 1.6 millions. Dorjee is covered by
insurance against this type of loss and a claim will be made as soon as the outcome of the
case is confirmed. No accounting has taken place because the claim is expected to
exactly offset against the damages payable. Advise Dorjee about accounting treatment.

Answer:
a) Internally generated software should be treated according to provisions of NAS 38,
Intangible Assets. As per NAS 38, Intangible Assets an Intangible asset shall be
recognized if, and only if,
 It is probable that the expected future economic benefit that are attributable to the
asset will flow to the entity; and
 The cost of the asset can be measured reliably
To assess whether as internally generated intangible asset meets the recognition criteria,
an entity classifies the generation of asset into a research phase and a development phase.
Intangible asset arising from research shall not be recognized and the expenditure on
research phase shall be recognized as an expenses when it is incurred.
An intangible asset arising from development shall be recognized if, and only if, an entity
can demonstrate all of the following:
 The technical feasibility of completing the intangible asset so that it will be available
for use or sale;
 Its intention to complete the intangible asset and use or sell it;
 Its ability to use of sale the intangible asset;
 How the intangible asset will generate probable future economic benefits. Among
other things, the entity can demonstrate the existence of a market for the output of the
intangible asset or, if it is to be sued internally, the usefulness of such asset;
 The availability of adequate technical, financial and other resources to complete the
development and to use or sale the software;
  Its ability to measure reliably the expenditure attributable to the software during its
development.
If the entity cannot distinguish the research phase from the development phase of an
internal project to create an intangible asset, or is not able to demonstrate the occurrence
of development phase, the entity charges the expenditure incurred on software to the
statement of income.
b) In cases where there are material environmental impacts, they will normally expect to see
a statement of corporate commitment, policies and strategy, showing the importance
attached to such issues. There could well be a competitive advantage to be gained from
being seen as a leader in responsible environmental practices. The statement would
usually deal with the overall control over such issues, whether through a committee of the
board or a senior manager with practical experience of environmental issues in a
corporate context.
Most users, particularly investors and lenders, will also be concerned to know whether
there are any material financial impacts, actual or potential, arising from environmental
issues. Where this is the case, discussion of environmental risks and uncertainties in the
annual report, together with the related action taken, may therefore be appropriate as well
as information about environmental performance. Depending on the nature of the entity,
there could be a call for information about matters such as site remediation, disposal of
waste, resource recycling or supply chain performance. In identifying the environmental
matters likely to be of particular concern to report users, some form of stakeholder
engagement is beneficial.
In reviewing a company’s annual report, the environmental matters attracting attention
will tend to vary according to its nature, size and geographical location but, where
environmental matters are significant, will generally fall within the following main areas:
 Commitments, policies and strategies.
 Environmental management
 Principal environmental impacts.
 Environmental performance – absolute and relative.
 Fines, penalties or awards.
In appropriate cases, it is often helpful to users if reference is made to compliance with
environment laws, or The Natural Step, or certification to a particular standard or Project
Acorn. This would normally help to demonstrate the adoption of desirable environmental
policies.
c) An embedded derivative is a component of a hybrid (combined) instrument that also
includes a non-derivative host contract with the effect that some of the cash flows of the
combined instrument vary in a way similar to a standalone derivative. An embedded
derivative causes some or all of the cash flows that otherwise would be required by the
contract to be modified according to a specified interest rate, financial instrument price,
commodity price, foreign exchange rate, index of prices or rates, credit rating or credit
index, or other variable, provided in the case of a nonfinancial variable that the variable is
not specific to a party to the contract. A derivative that is attached to a financial
instrument but is contractually transferable independently of that instrument, or has a
different counterparty form that instrument, is not an embedded derivative, but a separate
financial instrument.
 An embedded derivative should be separated from the host contract and accounted for as
derivative if, and only if;
(i) The economic characteristics and risks of the embedded derivative are not closely
related to the economic characteristics and risks of the host contract.
(ii) A separate instrument with the same terms as the embedded derivative would meet
the definition of a derivative; and
(iii) The hybrid instrument is not measured at fair value with changes in fair value
recognized in the statement of profit and loss (i.e. a derivative that is embedded in a
financial asset or financial liability at fair value though profit or loss is not
separated).
d) The economic entity principle states that the recorded activities of a business entity
should be kept separate from the recorded activities of its owner(s) and any other
business entities. This means that you must maintain separate accounting records and
bank accounts for each entity, and not intermix with them the assets and liabilities of its
owners or business partners. Also, you must associate every business transaction with an
entity.
A business entity can take a variety of forms, such as a sole proprietorship, partnership,
corporation, or government agency. The business entity that experiences the most trouble
with the economic entity principle is the sole proprietorship, since the owner routinely
mixes business transactions with his own personal transactions.
It is customary to consider a commonly-owned group of business entities to be a single
entity for the purposes of creating consolidated financial statements for the group, so the
principle could be considered to apply to the entire group as though it were a single unit.
The economic entity principle is a particular concern when businesses are just being
started, for that is when the owners are most likely to commingle their funds with those
of the business. A typical outcome is that a trained accountant must be brought in after a
business begins to grow, in order to sort through earlier transactions and remove those
that should be more appropriately linked to the owners.
e) It is necessary to consider the two parts of this issue separately
The claim made by the customer needs to be recognised as a liability in the financial
statements for the year ended 31 Ashad, 2077.
NAS 37, Provisions, Contingent liabilities and Contingent Assets states that a provision
should be made when, at the reporting date:
i) An entity has a present obligation arising out of past event
ii) There is a probable outflow of economic benefits.
iii) A reasonable estimate can be made of the outflow.
All three of those conditions are satisfied here, and so a provision is appropriate.
The provision should be measured as the amount the entity would rationally pay to settle
the obligation of the reporting date.
Where there is a range of possible outcomes, the individual most likely outcome is often
the most appropriate measure to use.
In this case a provision of Rs. 1.6 millions seems appropriate, with corresponding charge
to profit or loss
The insurance claim against Dorjee’s supplier is a contingent asset.
 NAS 37 states that contingent assets should not be recognised until their realization is
virtually certain, but should be disclosed where their realization is probable. This appears
to be the situation here.
Therefore the contingent asset would be disclosed in the financial statement. Any credit
to profit or loss arises when the claim is settled.
5.
a) Define Public Financial Management (PFM) system. Explain the problems of the PFM
and budgetary policies of Nineties in Nepal and state some initiatives taken by the
Government of Nepal to improve overall financial system of the government. 7 marks
b) Himgiri Ltd. grants 250 stock options to each of its 800 employees on 1 Shrawan, 2075,
conditional upon the employee remaining in the company for 2 years. The fair value of
the option is Rs. 22 on the grant date and the exercise price is Rs. 70 per share. The
number of employees expected to satisfy service condition are 720 in the first year and
670 in the second year. 30 employees left the company in the first year of service and 700
employees have actually completed second year vesting period. The profit of the company
before amortization of the compensation cost on account of employees stock option
(ESOP) is Rs. 5,865,000 for FY 2075/76 and Rs. 7,645,000 for FY 2076/77. The fair
value of shares for these years were Rs. 90 and Rs. 100 respectively. The company has
500,000 shares of Rs. 10 each outstanding at the end of both years.
Required: 8 marks
Calculate basic and diluted EPS for both the years. Ignore taxation impacts.
Answer:
a) Public Financial Management (PFM) in general incorporates the management of
government revenue, budget, expenditure, deposit, debt, reimbursement, procurement and
other important aspects of financial management such as accounting, recording and
reporting. It also includes internal control, final auditing and external scrutiny of the
financial transactions. Hence, strengthening Treasury System, Financial Monitoring and
Capacity Building are most critical elements of a sound public financial management
practices. The overarching goal of a PFM system is to improve efficiency of fiscal
operations and enhance government accountability and transparency as well as to
improve expenditure control and monitoring. The PFM system contributes to reduce
fiduciary risk of the government expenditure. A sound and predictable PFM system not
only attracts foreign resources from development partners but also ensures effective
utilization of such resources and establishes transparency and accountability of public
funds. Similarly, an effective PFM system also contributes to channelize all resources and
funds through the national system.
The PFM and budgetary policies of the Nepal Government during the Nineties were
directed towards economic liberalization, privatization, poverty reduction and
decentralization. Policies and programs of the budget were mainly concerned with
agriculture modernization, employment promotion, women’s empowerment, financial
sector reform, government expenditure management, tax reform, good governance, social
service and the development of basic and physical infrastructure. PFM system of Nepal,
like most developing countries, continued to be dominated by the traditional objectives of
control and accountability rather than a concern for allocating limited public sector
resources to well defined programs and projects that were intended to serve a set of
national objectives.
The extension of the budget coverage involved a combination of formal and informal
incorporation of expenditure activities. The other formal extension involved the
 incorporation of foreign assistance programs, which were previously outside the budget.
Planning the allocation of scarce resources was not given due priority. The pattern of
government expenditure followed more or less the uniform course till the 1990’s. Public
expenditure and revenue both increased; but the expenditure increase trend was greater
than the revenue. The inadequate mobilization of domestic resources through government
revenue resulted in a serious problem of widening resource gap in Nepal. Foreign aid was
the main source of development financing and deficit financing continued to increase.
Planning, budgeting, and implementation had inherent problems such as lack of capacity,
co-ordination and monitoring. In spite of a number of initiatives taken, one of the main
problems of Nepal has been the lack of proper domestic resource mobilization.
Several factors have contributed in varying degrees to the lack of effectiveness of public
spending in Nepal. The institutional factors played major role in the over-programming
(having too many programs in scarce resources) of the budget, its lack of focus and
prioritization and implementation problems. The lacks of ownership of projects/
programs at various levels and the absence of accountability, also undermined the quality
and effectiveness of public spending. Managing the national budget became increasingly
difficult for Nepal Government to further their objectives of poverty alleviation.
Public Expenditure Management is one of the key activities of any government in the
world. There is a growing concern to make PFM system predictable, transparent and
accountable anywhere in the world. PFM in general incorporates a credible planning
system, management of government revenues, budget execution, expenditure
management, debt management, reimbursement, procurement and other important
aspects of financial management such as accounting, recording, financial reporting and
auditing and external scrutiny of the financial transactions. Improving governance and
enhancing accountability are considered as the critical agenda of the Government of
Nepal (GoN) in the endeavor of institutionalizing good governance practices in the
country. Hence, strengthening Public Financial Management has been accepted as one of
the key elements of the GoN’s strategy for improving the overall governance, optimizing
outputs from public resources and ensuring inclusive and broad-based development. Poor
planning, ever increasing indiscipline in budget execution, ineffective expenditure control
and lack of transparency mainly in public procurement pose significant fiduciary risks to
almost all development projects both at center and local level. The GoN’s recent
initiatives such as Financial Administration Reform Program, Strengthening PFM
Project, Government Financial Statistics (GFS) based new codes and classification of
revenues and expenditures, implementation of Treasury Single Account (TSA) system,
strategy to implement International Accounting and Reporting Standards (NAPSAS),
Public Expenditure and Financial Accountability (PEFA) initiative and other capacity
building programs for PFM have resulted some positive impacts in strengthening PFM
system in general and financial good governance in particular in Nepal.
b) Calculation of Basic and Diluted EPS
Particulars 2075/76 (Rs.) 2076/77 (Rs.)
Profit before amortization of ESOP cost 5,865,000 7,645,000
Less: ESOP cost amortized (w.n.2) (1,980,000) (1,870,000)
Net profit for shareholders 3,885,000 5,775,000
No. of share outstanding (A) 500,000 500,000
Basic EPS 7.77 11.55
Potential equity (WN 1) (B) 19,250 52,500
Total Number of equity shares (A + B) 519,250 552,500
Diluted EPS 7.48 10.45
Working note – 1 – Calculation of potential Equity
 2075/76 2076/77
a Actual Number of employees 770 700
b Options granted per employee 250 250
c No. of options outstanding (a x b) 192,500 175,000
d Unamortized ESOP cost per option (Rs.) (22-22/2) =11 0
e Exercise price (Rs.) 70 70
f Expected exercise price to be received (c x e) (Rs.) 13,475,000 12,250,000
g Unamortized ESOP cost (cXd) (Rs.). 2,117,500 -
h Total Proceeds (f+g) 15,592,500 12,250,000
i Fair value per share 90 100
j No. of shares issued for consideration (h/i) 173,250 122,500
k Potential Equity (c-j) 19,250 52,500
Working note – 2 – Calculation of ESOP cost to be amortized
2075/76 2076/77
Fair value of options per share Rs. 22 22
No. of options expected to/ actually to vest (720x250) (700x250)
under the scheme 180,000 175,000
Fair value of options 3,960,000 3,850,000
Value of options recognized as expenses (3,960,000/2) (3,850,000 -
1,980,000 1,980,000)
1,870,000
6.
a) Saptari Ltd. holds 35% of total equity shares of Mustang Ltd., an associate company.
The value of investments in Mustang Ltd. on 31 Asadh, 2076 is Rs. 30 millions in the
consolidated financial statements of Saptari Ltd.
Saptari Ltd. sold goods worth Rs. 350,000 to Mustang Ltd. The cost of goods sold is Rs.
300,000. Out of these, goods costing Rs. 100,000 to Mustang Ltd. were in its closing
stock.
During the year ended 31 Asadh, 2077 the profit and loss statement of Mustang Ltd.
showed a loss of Rs. 10 millions.
Required: 5 marks
i) What is the value of investment in Mustang Ltd. as on 31 Asadh, 2077 in the
consolidated financial statements of Saptari Ltd., if equity method is adopted for
valuing the investments in associates?
ii) Will your answer be different if Mustang Ltd. had earned a profit of Rs. 15 millions
and declared a dividend of Rs. 7.5 millions to the equity shareholders of the
company?
b) On Shrawan 2076 the fair value of the assets of a defined benefit plan were valued at Rs.
1,100,000 and the present value of the defined benefit obligation was Rs. 1,250,000. On
31 Ashadh, 2077, the plan received contributions of Rs. 490,000 from the employer and
paid out benefits of Rs. 190,000.
The current service cost for the year was Rs. 360, 000 and a discount rate of 6% is to be
applied to the net liability/(asset).
After these transactions, the fair value of the plan asset as at 31 Ashadh, 2077 was Rs.
1,500,000. The present value of the defined benefit obligation was Rs. 1,553,600.
Required: 5 marks
 Calculate the gain or loss on re-measurement through OCI and the return on plan asset,
and illustrate how this plan will be treated in the statement of profit or loss and other
comprehensive income and statement of financial position for the year ended 31 Ashadh,
2077.
Answer:
a)
i) Value of investment in Mustang Limited as on 31 Asadh, 2077 as per equity method
in the consolidated financial statements of Saptari Ltd.
Rs. in millions
Cost of Investment 30.00
Less: Share in Post-acquisition Loss (10 m x 35%) (3.50)
Less: Unrealized gain on inventory left unsold with Mustang Limited
[{(50,000/3,00,000) x 1,00,000} x 35%] (0.006)
Carrying value as per equity method 26.494
\

ii) Value of investment in Mustang Limited as on 31 Asadh, 2077 as per equity

method in the consolidated financial statements of Saptari Ltd. (Profit Rs. 15 m and
dividend Rs. 7.5 m)
Cost of Investment 30.00
Add: Share in Post-Acquisition Profit (15 m x 35%) 5.25
Less: Unrealized gain on inventory left unsold with Mustang Limited
[{(50,000/3,00,000) x 1,00,000} x 35%] (0.006)
Less: Dividend (7.5 m x 35%) (2.625)
Carrying value as per equity method 32.619
b)
Particulars Asset Obligation
Fair value/present value at 1 Shrawan, 2076 1,100,000 1,250,000
Interest (1,100,000×6%)/ (1,250,000×6%) 66,000 75,000
Current service cost 360,000
Contributions received 490,000
Benefits paid (190,000) (190,000)
Return on plan assets excluding amounts in net 34,000 -
interest (balancing figure) (OCI) (re-measurement)
Loss of re-measurement (balancing figure) (OCI) - 58,600
Fair value/present value at 31 Ashadh, 2077 1,500,000 1,553,600
The following accounting treatment is required.
a. In the statement of profit or loss and other comprehensive income, the following
amounts will be recognized
In Profit or Loss
Current service cost 360,000
Net Interest on net defined benefit liability (75,000-66,000) 9,000
In other comprehensive income (34,000-58,600) 24,600

b. In the statement of financial position, the net defined benefit liability of Rs. 53,600
(1,553,600-1,500,000) will be recognized.
 June 2021

Paper 1: Advanced Financial Reporting

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

H Company S Company P Company

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

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

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

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

Equity and Liabilities

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

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

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

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

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

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

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

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

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

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

P Company:

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

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

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

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

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

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

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

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

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

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

Net loss on the FVTPL liability (20,280)

OCI

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

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

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

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

Page 15 of 70
 Rs. '000

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

Carrying amount before re-measurement (200,000)

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

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

Rs. '000

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

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

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

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

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

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

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

Particulars Plan Assets (Rs.) Defined benefit

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

Interest @ 5% 102,000 106,250

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

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

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

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

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

Page 24 of 70
 Dec 2021

Paper 1: Advanced Financial Reporting

Attempt all questions. Working notes should form part of the answers.
1. The following statements of financial position are as at 31st Ashadh, 2078:
Rs. in Million

Harisiddhi Siddartha Araniko

Ltd. Ltd. Ltd.

Assets

Tangible non-current assets 1,280 440 280

Investment in Siddartha Ltd. 400 - -
Investment in Araniko Ltd. 60 - -
Current assets 544 190 130
Total assets 2,284 630 410
Equity and liabilities
Share capital 950 260 230
Revaluation reserve 90 - -
Retained earnings 390 210 94
Total equity 1,430 470 324
Non-current liabilities 640 30 16
Current liabilities 214 130 70
Total equity and liabilities 2,284 630 410

Harisiddhi Ltd. acquired the following shareholdings in Siddartha Ltd. and Araniko Ltd.:
Rs. in Million
Date of Holding Fair value Purchase
acquisition acquired of net assets consideration
Siddartha Ltd. 1st Shrawan, 2075 10% 325 30
st
1 Shrawan, 2077 70% 460 370
Araniko Ltd. 1st Shrawan, 2077 25% 200 60

The following information are relevant:

i) At 1st Shrawan, 2075, the carrying value of the net assets of Siddartha Ltd. was the same as
their fair value, Rs. 325 million.
ii) The estimated fair value of the initial investment in 10% shares of Siddartha Ltd. was Rs. 40
million at 31st Ashadh, 2077.
iii) Harisiddhi Ltd. wishes to use the full fair value method of accounting for the acquisition of
Siddartha Ltd. At 1st Shrawan, 2077 the estimated value of the non-controlling interests was
Rs. 95 million.
iv) The difference between the carrying amount of Siddartha Ltd.’s net assets and their fair value
at the date of acquisition was due to land valued at cost which, on 1st Shrawan, 2077, had a
fair value of Rs. 25 million in excess of its carrying value. There has been no subsequent
significant change in that value.
v) At 1st Shrawan, 2076 the fair value of Araniko Ltd.’s land was Rs. 16 million in excess of its
carrying value. There has been no subsequent significant change in that value.
Page 4 of 79
 vi) Goodwill arising on acquisition is tested for impairment at each year end. The recoverable
amount of goodwill in Siddartha Ltd. at 31st Ashadh, 2078 was Rs. 30 million.
vii) There has been no impairment of the investment in Araniko Ltd.
viii) During the year, the Directors of Harisiddhi Ltd. decided to form a defined benefit pension
scheme for its employees. The company contributed cash to it of Rs. 250 million but the only
accounting entry for this has been made to include it in receivables at 31st Ashadh, 2078.
At 31st Ashadh, 2078 the following details relate to the pension scheme:
Rs. in million

Present value of obligation 317

Fair value of plan assets 302
Required:
Prepare the consolidated statement of financial position of the Harisiddhi Ltd. group as at 31st
Ashadh, 2078. 20 marks

Answer
Harisiddhi Ltd. group

Consolidated statement of financial position

as at 31st Ashadh, 2078
Particulars Rs.in million
Assets
Tangible non-current assets (WN 4) 1,745
Intangible non-current assets (WN 3) 30
Investment in associate (WN 5) 95
Current assets (544 + 190 - 250) 484
2,354
Equity and liabilities
Share capital 950
Revaluation reserve 90
Retained earnings (WN 7) 186
1,226
Non-controlling interest (WN 8) 99
1,325
Non-current liabilities (640 + 30) 670
Current liabilities (214 + 130) 344
Pension liability (WN 6) 15
2,354

Page 5 of 79
Workings:
WN 1) Net assets summaries
Siddartha Ltd.:
Rs. in million
At Reporting At Acquisition Post-Acquisition
st st
On 31 Ashad, 2078 On 1 Shrawan,2077
Share capital 260 260 -
Retained earnings 210 175 (460-260-25) 35 (210-175)
FV adjustment 25 25 -
FV (given) 495 460 35
(given)
Araniko Ltd.:

Rs.in Million
At Reporting At Acquisition Post-Acquisition
On 31 Ashad, 2078 On 1 Shrawan, 2077
Share capital 230 230 -
Retained earnings 94 (46) (200-230-16) 140 (94+46)
FV adjustment 16 16 -
FV 340 200 140
(given)

WN 2) Gain or loss on acquiring control of Siddartha Ltd. on 1st shrawan, 2077:

Rs. in million
Fair value of initial investment in Siddartha Ltd. at 1 Shrawan, 2077 40
Initial cost of investment (30)
Gain to be recognised on gaining control of Siddartha Ltd. 10
This gain has not yet been recognised in the individual financial statements of Harisiddhi Ltd;
it must therefore be included in the calculation of group reserves. (See WN 8).
WN 3) Goodwill in Siddartha Ltd. at acquisition
Particulars Rs. in million
Consideration transferred to achieve control 370
Fair value of initial investment at acquisition 40
Non-controlling interest at acquisition (at fair value) 95
505

Page 6 of 79
 Fair value of net assets acquired 460
Total goodwill at acquisition date (505-460) 45
Impairment (balancing figure) (15)
Goodwill at date of consolidation (given) 30
The goodwill impairment of Rs.15 million is apportioned between the interests of the equity
owners of Harisiddhi Ltd and NCI in the ratio 80:20.
Impairment of goodwill attributable to parent = Rs. 15m × 80% = Rs. 12m
Impairment of goodwill attributable to NCI = Rs. 15m × 20% = Rs. 3m.
WN 4) Tangible non-current assets

Particulars Rs. in million

Harisiddhi Ltd. 1,280
Siddartha Ltd. 440
Fair value adjustment 25
1,745

WN 5) Investment in associate – Araniko Ltd.

Particulars Rs. in million

Cost 60
Group share of post-acquisition profit (140 × 25%) 35
95

Alternatively,
Particulars Rs. in million
Group share of Fair value of Associate at reporting date (25% x 340) 85
Goodwill in associate (60 – 50) (Consideration share of FV of Net assets) 10
95

WN 6) Pension liability
The amount paid to set the pension must be removed from receivables, and the net pension
liability must be recognised in the statement of financial position.
The entry to achieve this is as follows:
Rs. in million
Particulars Dr Cr
Retained earnings (balancing figure) 265
Receivables 250
Pension scheme liability (317 – 302) 15
Page 7 of 79
WN 7) Consolidated retained earnings

Particulars Rs. in million

Harisiddhi Ltd (given) 390
Siddartha Ltd post-acquisition retained earnings (35×80%) 28
Gain on acquiring control (WN 2) 10
Goodwill impairment attributable to parent (WN 3) (15×80%) (12)
Share of post-acquisition profits of associate (WN 5) (140×25%) 35
Pension adjustment (WN 6) (265)
186

WN 8) Non-controlling interest in Siddartha Ltd.

Rs. in million
FV at date of acquisition 95
NCI share of post-acquisition retained earnings (35 × 20%) 7
Goodwill impairment (WN 3) (15 × 20%) (3)
99
Alternatively

Rs. in million
Book value (20% × 470) 94
Fair value adjustment (20% × 25) 5
Goodwill (3 – impairment 3) (W3) [95 – (20% x 460) – 3] 0
99
2.
a) P Ltd. issued 50,000 Compulsory Cumulative Convertible Preference Shares (CCCPS) as on
st
1 Shrawan, 2077 @ Rs. 180 each. The rate of dividend is 10% payable at the end of every
year. The preference shares are convertible into 12,500 equity shares (Face value Rs.10
each) of the company at the end of 5th year from the date of allotment. When the
CCCPS are issued, the prevailing market interest rate for similar debt without conversion
option is 15% per annum.
Transaction cost on the date of issuance is 2% of the value of the total proceeds. Effective
interest rate is 15.86%.
Required: (3+7=10 marks)
i. Compute liability and equity component of the CCCPS.
ii. Pass journal entries for entire term of arrangement i.e. from the issue of preference
shares till their conversion into equity shares, keeping in view the provisions of
relevant Accounting Standards.

Page 8 of 79
b) The Z Group operates in the farming industry and has operated a number of wholly owned
subsidiaries for many years. Its financial statements for the last two years are shown below:
Consolidated Statements of profit or loss for the year ended Ashadh end.
2078 2077
(Rs. ‘000’) (Rs. ‘000’)

Revenue 94,000 68,500

Cost of Sales (46,000) (28,000)
Gross profit 48,000 40,500
Distributions costs (21,200) (19,300)
Administrative expenses (25,600) (15,400)
Profits from operations 1,200 5,800
Investment income - 600
Finance costs (120) -

Profit before tax 1,080 6,400

Taxation (300) (1,920)

Profit for the year 780 4,480

Attributable to:
Shareholders of Z 1,580 4,480
Non-controlling interest (800) -
780 4,480
Consolidated Statement of Financial Position (extracts) as at Ashadh end.

2078 2077
(Rs. ‘000’) (Rs. ‘000’)
Current assets
Inventory 6,500 4,570
Trade receivables 17,000 15,600
Bank 610 6,000
Equity
Share capital 25,000 6,000
Retained earnings 73,500 72,500
Non – controlling interest 510 -
Non-current liabilities:
Loan 20,000 -

Additional information:

Page 9 of 79
 (i) Z Group has become increasingly worried about two major areas in its business
environment. First of all, there are concerns that reliance on large supermarkets (A and B)
are putting pressure on cash flow, as the supermarkets demand long payment terms.
Secondly, the consistent increases in fuel prices mean that delivering the produce nationally
is becoming extremely expensive.
(ii) In order to deal with the above worrying concerns, Z Group purchased 80% shares of Za
Ltd. on 1st Shrawan, 2077. This was the first time Z Group had purchased a subsidiary
without owning 100% of it. Za Ltd. operates two luxury hotels in Pokhara, and Z Group
purchased Za Ltd. with a view to diversify and to provide a long term solution to the cash
flow concerns raised above.
(iii) Z Group raised finance from multiple sources to finance its activities as it did not have ready
finance. Part of this finance came from the disposal of Rs. 11 million held in investments,
making a Rs. 4.50 million gain on disposal, which is included in administrative expenses.
(iv) Za Ltd. opened a third hotel which is located in Biratnagar Farming Block in Poush 2077.
After poor initial reviews, Za Ltd. appointed an experienced and qualified Marketing
Director Ms. H in Fagun 2077. Ms. H embarked on an extensive marketing campaign.
(v) Za Ltd. acquired six (6) generators in Jestha 2078 for use when there is power outage due
to load shading. Z Group issued additional equity shares during the 2077/078 financial year
and intends to issue bonus shares in 2078/079.
(vi) The following ratios have been calculated for the year ended Ashadh end 2077:
Gross profit margin 59.1%
Operating margin 8.5%
Return on capital employed 7.4%
Inventory turnover period 60 days
Receivables collection period 83 days

Required: (2.5+7.5=10 marks)

i. Prepare the equivalent ratios for the year ended Ashadh end 2078.
ii. Analyse the financial performance and cash flows of Z Group for the year ended Ashadh end
2078, making specific reference to any concerns or expectations regarding future periods.
Answer
a)
i) CCCPS is a compound financial instrument with two components – liability representing
present value of future cash outflows and balance represents equity component.
Total proceeds = 50,000 shares x Rs. 180 each = Rs. 9,000,000
Dividend @ 10% = Rs. 900,000

a. Computation of Liability & Equity Component (Rs.)

Date Particulars Cash Discount Net present

Factor@15%
Flow Value

Page 10 of 79
 01/04/2077 0 1 0.00
Dividend
31/03/2078 900,000 0.8696 782,640
Dividend
32/03/2079 900,000 0.7561 680,490
31/03/2080 Dividend 900,000 0.6575 591,750
31/03/2081 Dividend 900,000 0.5718 514,620
31/03/2082 Dividend 900,000 0.4971 447,390
Total Liability Component 3,016,890
Total Proceeds Total Equity
9,000,000
Component (Bal fig)
5,983,110

b. Allocation of transaction costs of Rs.180000 (i.e.2% of Rs.9,000,000)

Particulars Amount Allocation Net Amount
a b a-b
Liability Component Equity 3,016,890 60,338 2,956,552
Component
5,983,110 119,662 5,863,448
Total Proceeds
9,000,000 180,000 8,820,000
c. Accounting for liability component at amortised cost

- Initial accounting = Present value of cash outflows less transaction costs

- Subsequent accounting = At amortised cost, i.e. initial fair value adjusted for
interest and repayments of the liability.

Date Opening Interest @ Cash Flow Closing

Financial (Dividend Financial
15.86%
Liability payment) Liability
B (Rs.)
A (Rs.) C (Rs.) A+B-C (Rs.)
01/04/2077 2,956,552 2,956,552
468,909 900,000
31/03/2078 2,956,552 2,525,461
400,538 900,000
31/03/2079 2,525,461 2,025,999
321,323 900,000
31/03/2080 2,025,999 1,447,322
229,545 900,000
31/03/2081 1,447,322 776,867
123,133* 900,000
31/03/2082 776,867 -
st
*Difference of Rs. 78 (adjusted in the interest value of 31 Ashadh, 2082) is due to
approximation of figures in the earlier years.

Page 11 of 79
ii) Journal Entries to be recorded for entire term of arrangement are as follows:

Date Particulars Debit Credit

Rs. Rs.
01- Bank A/c Dr. 8,820,000
Srawan-
To Preference Shares A/c
2077 2,956,552
To Equity Component of Preference
shares A/c 5,863,448

(Being compulsorily convertible preference shares

issued. The same are divided into equity
component and liability component as per the
calculation)
31- Preference shares A/c Dr.
Asadh- 900,000
To Bank A/c
2078 900,000
(Being dividend at the coupon rate of 10%
paid to the shareholders)
31- Finance cost A/c Dr.
468,909
Asadh - To Preference Shares A/c 468,909
2078
(Being interest as per EIR method recorded)

32- Preference shares A/c Dr. 900,000

Asadh - 900,000
2079 To Bank A/c
(Being dividend at the coupon rate of 10% paid to
the shareholders)
32-
Finance cost A/c Dr. 400,538
Asadh-
400,538
2079 To Preference Shares A/c
(Being interest as per EIR method recorded)
31- Preference shares A/c Dr.
Asadh - 900,000
2080 To Bank A/c 900,000
(Being dividend at the coupon rate of 10% paid to
the shareholders)
31-
Finance cost A/c Dr. 321,323
Asadh- 321,323
2080 To Preference Shares A/c
(Being interest as per EIR method recorded)

Page 12 of 79
 31- Preference shares A/c Dr. 900,000
Asadh - 900,000
2081 To Bank A/c
(Being dividend at the coupon rate of 10% paid to
the shareholders)
31-
Finance cost A/c Dr. 229,545
Asadh -
2081 To Preference Shares A/c 229,545
(Being interest as per EIR method recorded)
31- Preference shares A/c Dr. 900,000
Asadh -
900,000
2082 To Bank A/c
(Being dividend at the coupon rate of 10% paid to
the shareholders)
Finance cost A/c Dr 123,133
31-
Asadh- To Preference Shares A/c 123,133
2082
(Being interest as per EIR method recorded)
31- Equity Component of Preference shares A/c Dr 5,863,448
Asadh-
To Equity Share Capital A/c 125,000
2082
To Securities Premium A/c 5,738,448
(Being preference shares converted in
equity shares and remaining equity
component is recognised as securities
premium)

b)
i. Ratios for the Z Group:

Ratios Formula Calculations 2077/078 2076/077

Gross profit Gross profit/sales x 100 (48,000/94,000) x 100 51.1% 59.1%

Operating Profits from (1,200/94,000) x 100 1.3% 8.5%

margin operations/sales x 100

Return on Profits from (1,200/(99,010 + 20,000) 1.0% 7.4%

capital operations/total x 100
employed shareholders fund +
long-term loan x 100

Page 13 of 79
 Inventory Inventory/cost of sales x (6,500/46,000) x 365 52 60
turnover 365 days days days
period

Receivables Receivables/sales x 365 (17,000/94,000) x 365 66 83

Collection days days days
period

ii) Analysis of the financial performance and cash flow of Z Group

Revenue and expenses have all increased during the year. It is also important to recognize that
the new Hotel was only opened in Poush 2077, so a full year’s revenue has not yet been
generated by this. Whereas revenue has increased significantly by 37.2%, it can be seen that
higher expenses have meant that the Z Group has made less profit than in the previous period.
For example, cost of sales increased exorbitantly by 64.3% from the previous year.

The gross profit margin has fallen in the year from 59.1% to 51.1%. This could be attributable
to the increased pressure on prices from supermarkets or difficult trading conditions, but could
also be as a result of the addition of Za Ltd. into the group.
It may be that the hotel industry generates much lower margins than the farming industry. The
improvement in feedback should lead to increased future bookings, so it may be that the new
hotel generates a significantly improved return in future years.
The operating margin has also deteriorated in the year. It is also important to note that there is
a significant one-off Rs. 4.5 million gain on disposal in relation to the sale of investments during
the year. Without this exceptional item, Z Group would have made a worrying loss from
operations of Rs. 3.3 million (4,500 – 1,200). The reason for this loss is due to a significant
increase in the administrative expenses, which would be Rs. 60.2 million excluding the Rs. 4.5
million profit on disposal. Therefore, the Z Group would have incurred costs relating to the
acquisition of Za Ltd, which will not be incurred in future periods.

The distribution costs have increased marginally by 9.8% during the year. This could suggest
that there has been a decline in the underlying farming business, as fuel costs have risen
significantly. It could also mean that the hotel business has extremely low distribution costs,
which is likely.

The return on capital employed has also deteriorated in the year from 7.4% to 1%, which is
expected due to the reduced operating profits. Removing the gain on disposal of the investments
would make The Z Group loss-making, meaning that it would make a negative return on capital
employed.

It thus appears that Za Ltd is a loss-making entity, as the non-controlling share of the group’s
profit is negative. As Za Ltd is the only partially (owned 80%) controlled subsidiary, the non-
controlling interest will relate solely to Za’s performance.
In addition to the reduced operating profits, the capital employed by the Z Group has increased
significantly. A total of Rs. 19 million of new shares have been issued during the year, probably
to fund the purchase of Za Ltd. There has also been a Rs. 20 million long-term loan contracted,
although it is possible that Za Ltd already had this loan and this has resulted from the
Page 14 of 79
 consolidation of Za’s assets and liabilities.
The sale of investments and share issue and potentially the contracted loan suggest that the Z
Group paid a very high price for Za Ltd. This may not have been wise if Za Ltd has low margins,
or is loss making. If Za Ltd owns the hotel premises, then this may have explained the high
price as the land is likely to hold its value, even if Za performs poorly as demonstrated.

Cash flow position

The cash balance has fallen to Rs. 0.6 million as at Ashadh end 2078. It is important to note
that the Z Group has raised significant funds during the year through a share issue, sale of
investments and the potential receipt of a long-term loan. This means that significant amount
of the cash raised is likely to have been spent on the purchase of Za Ltd and the new hotel.

However, the decrease in receivable collection period will have a positive effect on the cash
flow of the Z Group. As a hotel will largely be cash based rather than offering credit, this will
aid the cash flow of the Z Group. This means that the purchase of Za Ltd may help offset its
problems caused in the farming sector with the longer terms demanded by the supermarkets.

Another positive sign on cash flow is the reduction in the inventory turnover period. This will
be as a result of the fact that Za Ltd will not carry much inventory, as this is likely to relate to
food and drink served in the hotels.

Conclusion:
The success of the Z Group in the current year is difficult to judge; it has been a transitional
year. There are concerns over the performance of Za Ltd, although there are reasons to believe
this may improve in the instant future periods. For a more meaningful comparison, individual
financial statements of companies within the Z Group would need to be assessed.
3.
a) Mero Private Ltd. is an old company established in 2060. 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 provided a defined benefit plan to its employees. Following is the information
st st
relating to the balances of the fund’s assets and liabilities as at 1 Shrawan, 2077 and 31
Ashadh, 2078:
(Rs. in million)
st st
Particulars 1 Shrawan, 2077 31 Ashadh, 2078
Present value of benefit obligation 1,400 1,580
Fair value of plan assets 1,140 1,275
st
For the financial year ended 31 Ashadh, 2078, 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 marks)
i. As per relevant Accounting Standard, compute the balance(s) of the company to be
st
included in its balance sheet as on 31 Ashadh, 2078 and amounts to be recognized in

Page 15 of 79
 st
the statement of profit or loss and other comprehensive income for the year ended 31
Ashadh, 2078.
ii. Give the journal entries in respect of amount(s) to be recognized as above.

b) A Ltd. is engaged in the manufacturing business. On 1 st Shrawan, 2077 it obtained a motor

vehicle on lease from a bank. Details of the lease agreement are as follows:
i.Cost of motor vehicle is Rs. 4 million.
ii.Installments of Rs. 1.2 million are to be paid annually in advance.
iii.The lease term and useful life is 4 years and 5 years respectively.
iv.The interest rate implicit in the lease is 13.701%.
v.The ownership of the motor vehicle shall not be transferred to A Ltd. by the end of the
lease term.
A Ltd. follows a policy of depreciating the motor vehicles over their useful life, on the straight-
line method. However, the tax department allows only the lease payments as a deduction from
taxable profits. The tax rate applicable to the company is 30%. A Ltd.’s accounting profit before
tax for the year ended 31st Ashadh, 2078 is Rs. 12.25 million. There are no temporary differences
other than those evident from the information provided above.

Required: 10 marks
st
Prepare journal entries in the books of A Ltd. for the year ended 31 Ashadh, 2078 to record
the above transactions including tax and deferred tax.
Answer
a)
i. Item to be included in the Balance Sheet of Mero Pvt. Ltd. as at 31st Asadh, 2078 :
Rs. in million
Closing net defined liability (1,580 – 1,275) 305
Amount to be recognized in the Statement of Profit or Loss and Other Comprehensive
Income of Mero Pvt. Ltd. for the year ended 31st Asadh, 2078:

Particulars Rs. in million

Service cost 55.00
Net interest ( WN 1) 20.80
In the statement of profit or loss 75.80
In other comprehensive income:
Re-measurement loss (WN 2) 80.20

ii. Journal entries in the books of Mero Pvt. Ltd.

Particulars Rs. in million Rs.in million
Profit & Loss Dr. 75.80
Other comprehensive income Dr. 80.20
To Cash (Contribution) 111
To Net defined benefit liability (W.N. 3) 45

Page 16 of 79
 Workings:
WN 1) Computation of Net interest taken to the Statement of Profit or Loss
= Discount rate x Opening value of net defined benefit liability
= 8% x (1,400 – 1,140)
= 8% x 260
= Rs. 20.80 million

WN 2) Computation of Re-measurement gain or loss

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

Actual return on plan assets:

Particulars Rs. in million

Opening balance of asset 1,140
Cash contribution 111
Actual return (Bal. fig) 24
Closing balance of asset 1,275
Interest on opening balance of plan asset
= Rs. 91.20 million (i.e. 1,140 x 8%)
Hence, there is a decrease (Loss) in plan assets due to remeasurement for which
computation is as follows:
Actual Return – Interest on opening plan asset = Rs. 24 million – Rs. 91.20 million
= Rs.67.20 million
Net re-measurement loss would be:
Actuarial loss on liability + Loss on return = Rs. (13+67.20) million
= Rs.80.20 million
WN 3) Computation of increase/ decrease in net defined benefit liability:

Particulars Rs. in million

Opening net liability ( 1,400 lacs – 1,140 lacs) 260
Closing net liability ( 1,580 lacs – 1,275 lacs) 305

Page 17 of 79
 Increase in liability 45

b)
Journal Entries in the books of A Ltd. for the year ended 31st Ashadh, 2078

Amount in Rs.

Date Particulars Dr. Cr.

1/4/2077 Motor Vehicle - cost 4,000,000

Lease Liability 4,000,000

(Capitalize the leased asset with

corresponding Liability)

1/4/2077 Lease Liability 1,200,000

Bank 1,200,000

(Recording of first lease payment)

31/3/2078 Interest Expense (W.N.1) 383,628

Interest Payable 383,628

(Recording interest expenses and

interest payable)

31/3/2078 Depreciation 1,000,000

Accumulated Depreciation 1,000,000

(Rs. 4,000,000 / 4 years) (As per
NFRS 16: Lease para 32)

31/3/2078 Tax Expense (W.N.2) 3,730,088

Current tax payable 3,730,088

(Recording of tax expenses and

tax payable)
31/3/2078 Deferred tax asset (W.N.3) 55,088

Tax expense 55,088

(Booking of Deferred tax asset)

WN 1 Lease (Payments in advance) Schedule

In Rs.

Page 18 of 79
 Liability
Payment Liability at Principal Interest @
Rental after
time beginning Element 13.701%
payment

1/4/2077 4,000,000 1,200,000 1,200,000 2,800,000 383,628

WN 2 Current tax Rs.

Accounting profit 12,250,000

Add: Depreciation on leased

motor vehicle 1,000,000

Add: Interest expense on lease 383,628

Less: Lease payment (1,200,000)

Taxable profit 12,433,628

Current tax at 30% 3,730,088

WN 3 Deferred tax CA TB Temp. Diff

Rs. Rs. Rs.

Motor Vehicle 3,000,000 0 3,000,000 TTD

Lease Liability (Non-

current + Current) 2,800,000 0 2,800,000 DTD
Interest Payable 383,628 0 383,628 DTD

Net 183,628 DTD

Deferred tax asset at 30% 55,088

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

a) Objectives of financial reporting
b) Cash generating unit and reason of impairment based on it rather than individual assets
c) Recognition of impairment losses in the financial statements
d) Is hedging a diversification? Explain with examples.
e) When does debt seem to be equity?
Answer
a) The following are the objectives of financial reporting:

Page 19 of 79
 (i) To provide information that is useful to present and potential investors, creditors and other
users in making rational investment, credit and similar decisions.
(ii) To provide information to help investors, creditors and others to assess the amount, timing and
uncertainty of prospective net cash inflows to the related entity.
(iii) To provide information about the economic resources of an entity, the claims to those resources
(obligations of the entity to transfer resources to other entities and owners' equity), and the
effects of transactions, events and circumstances that change resources and claims to those
resources.
(iv) To provide information about an entity’s financial performance during a period.
(v) To give information about an entity’s performance provided by measures of earnings and its
components.
(vi) To provide information about how an entity obtains and spends cash, about its borrowing and
repayment of borrowing, about its capital transactions, including cash dividends and other
distributions of entity’s resources to owners, and about other factors that may affect an entity’s
liquidity or solvency.
(vii) To provide information about how management of an entity has discharged its stewardship
responsibility to owners for the use of entity resources entrusted to it.
b) A cash generating unit is defined as the smallest possible identifiable group of assets that
generates cash inflows that are largely independent of the reporting entity’s other cash
generating units. Identifying the smallest possible group of assets is important as this means
there will be fewer assets within each cash generating unit.
To determine whether impairment of a cash generating unit has incurred, it is necessary to
compare the carrying amount of the asset with its recoverable amount. The recoverable
amount is the higher of fair value less costs of disposal and value in use.
It is not always easy to estimate value in use. In particular, it is not always practicable to
identify cash flows arising from an individual noncurrent asset. For, example, the
individual assets in a supermarket are unlikely to generate cash flows in their own right,
but when combined (as a cash generating unit), it is possible to identify the cash flows. If
this is the case, value in use should be calculated at the level of cash generating unit.
c) An impairment loss is normally charged immediately in the Income Statement / Statement of
Comprehensive Income, to the same heading as the related depreciation (i.e. cost of sales,
administration or distribution).
That is: Debit Income Statement and Credit Asset Account with the amount of the impairment loss
But, if the asset has previously been revalued upwards, the impairment should be treated as a
revaluation decrease (and shown in “Other Comprehensive Income”). That is, the loss is first set
against any revaluation surplus for that asset until the surplus relating to that asset has been
exhausted. Then, any excess is recognised as an expense in the Income Statement.
After adjusting for the impairment loss, the new carrying amount is written off over the remaining
useful life of the asset.
Any related deferred tax assets or liabilities are determined under NAS 12 by comparing the revised
carrying value of the asset with its tax base.
d) It's important to note that hedging is not the same as portfolio diversification. Diversification is a
portfolio management strategy that investors use to smooth out specific risk in one investment,
while hedging helps to decrease one's losses by taking an offsetting position. If an investor wants
Page 20 of 79
 to reduce his overall risk, the investor should not put all of their money into one investment.
Investors can spread out their money into multiple investments to reduce risk.
For example, suppose an investor has Rs. 500,000 to invest. The investor can diversify and put
their money into multiple stocks in various sectors, real estate and bonds. This technique helps to
diversify unsystematic risk; in other words, it protects the investor from being affected by any
individual event in an investment.
When an investor is worried about an adverse price decline in their investment, the investor
can hedge their investment with an offsetting position to be protected. For example, suppose an
investor is invested in 100 shares of stock in oil company XYZ and feels that the recent drop in oil
prices will have an adverse effect on its earnings. The investor does not have enough capital to
diversify their position; instead, the investor decides to hedge their position by buying options for
protection. The investor can purchase one put option to protect against a drop in the stock price,
and pays a small premium for the option. If XYZ misses its earnings estimates and prices fall, the
investor will lose money on their long position, but will make money on the put option, which
limits losses.
e) Many financial instruments have both features of debt and equity that this can lead to inconsistency
of reporting. It is not always easy to distinguish the debt and equity in an entity's statement of
financial position.
The key feature of debt is that the issuer is obliged to deliver either cash or another financial asset
to the holder. In contrast, equity is any contract that evidences a residual interest in the entity's
assets after deducting all of its liabilities. Thus, A financial instrument is an equity instrument only
if the instrument includes no contractual obligation to deliver cash or another financial asset to
another entity, and if the instrument will or may be settled in the issuer's own equity instruments.
A contract is not an equity instrument solely because it may result in the receipt or delivery of the
entity's own equity instruments. The classification of this type of contract is dependent on whether
there is variability in either the number of equity shares delivered or variability in the amount of
cash or financial assets received. A contract that will be settled by the entity receiving or delivering
a fixed number of its own equity instruments in exchange for a fixed amount of cash, or another
financial asset, is an equity instrument.
However, if there is any variability in the amount of cash or own equity instruments that will be
delivered or received, then such a contract is a financial asset or liability as applicable.
Other factors that may result in an instrument being classified as debt are:
➢ Is redemption at the option of the instrument holder?
➢ Is there a limited life to the instrument?
➢ Is redemption triggered by a future uncertain event that is beyond the control of both the
holder and issuer of the instrument?
➢ Are dividends non-discretionary?
Similarly, other factors that may result in the instrument being classified as equity are whether the
shares are non-redeemable, whether there is no liquidation date or where the dividends are
discretionary.
Some instruments are structured to contain elements of both a liability and equity in a single
instrument. Such instruments – for example, bonds that are convertible into a fixed number of
equity shares and carry interest – are accounted for as separate liability and equity components.
'Split accounting' is used to measure the liability and the equity components upon initial recognition
of the instrument. This method allocates the fair value of the consideration for the compound
instrument into its liability and equity components.
Page 21 of 79
5.
a) Elaborate the main achievements of ‘Public Financial Management Reform Program’ in
Nepal. 8 marks
b) Adarsha Ltd. made a decision to sell a business unit on 15th Aswin, 2078, and the criteria to
classify the unit as held for sale were met on 1st Kartik, 2078. Adarsha Ltd.’s accounting year
end is 31st Chaitra. At 1st Kartik, 2078, the carrying amount of the assets and liabilities of the
business unit (before any depreciation or revaluation adjustments for the year) was as follows:
(Rs.in million)

Land and buildings 120

Equipment 50
Trade receivables 30
Inventories 20
Trade payables (26)
Additional Information:

i) The land and buildings are held under the revaluation model of NAS 16: Property, Plant
and Equipment and were last revalued on 31st Chaitra, 2077 to Rs. 120 million. Their
market valuation on 1st Kartik, 2078 was Rs. 124 million and selling costs were estimated
at Rs. 2.5 million at that date. Residual value was, and continues to be, expected to be higher
than cost.
ii) The equipment is held under the cost model of NAS 16. The equipment was purchased on
1st Kartik, 2076 for Rs. 80 million and is being depreciated straight line over a four-year
period to a zero residual value. Its sale value at 1st Kartik, 2078 was Rs. 55 million. Selling
costs are insignificant.
iii) The trade receivables are recorded at invoiced value, reduced by any allowances for credit
losses recognised at 31st Chaitra, 2077. No adjustment to these allowances was necessary
at 1st Kartik, 2078. The receivables, if factored, would realise approximately Rs. 26 million,
net of transaction costs at 1st Kartik, 2078.
iv) The inventories are merchandise purchased for resale and are held at cost. Their market
value at 1st Kartik, 2078 was Rs. 28 million. Associated selling costs would amount to Rs. 1.4
million.
v) It was anticipated at 1st Kartik, 2078 that the business unit will be sold for Rs. 200 million,
net of selling costs, to a rival company in a single transaction.
Required: (3+4 =7 marks)
i. What is meant by non-current assets held for sale? Briefly explain based on NFRS.
ii. In respect of Adarsha Ltd.’s year ended 31st Chaitra, 2078, show the amount to be
recognised as non-current assets held for sale at 1st Kartik, 2078 and the impairment charge
(if any) for the business unit.
Answer
a) There has been considerable progress in recent years. The second PEFA assessment shows
improvement across several indicators. Results of these upgrades on many PFM areas can be
attributed to the first generation of PFM reforms lead by the Government of Nepal (GoN) on budget
credibility, tax policy, Treasury Single Account (TSA), financial management information system
(FMIS) improvements, external audit and public procurement system. This is a result of
Page 22 of 79
collaborative efforts from various donors who are working in this field with a common objective
of improving country capacity, improving PFM performance as measured by PEFA indicators with
an aim to achieve results on the ground through effective use of resources.
GoN has been working closely with Development Partners (DPs) in the design and implementation
of Public Financial Management (PFM) reform initiatives at the country and sector level. The
components and the activities of SPFM I has been continued in the follow-on project with
additional component regarding enhancing and sustaining the TSA system and replacement of
treasury infrastructure at earthquake affected districts. So, some of the reform activities which are
included in the second phase of PFM reform action plans are already in place in the SPFM.
Under the SPFM-I project, TSA has been rolled out across all 75 districts of Nepal, meeting the
output target one year ahead of schedule. As a result, the Government has been able to close 14,000
bank accounts. Now, TSA covers 100 percent of the budget throughout the country. Monthly
budget execution reports are now available by its FMIS and posted real time data on the FCGO
website, thereby, improving access and promoting transparency. After the success of this project,
SPFM II project has been initiated. This project will provide support in upgrading the IT
infrastructure for sustainability of the TSA system and enhance the financial management
information system (FMIS) for revenue management. These activities are important to sustain the
results obtained under the ongoing SPFM.
Through the SPFM project, commitment-recording module has also been rolled out in all 75
districts. RMIS has now been implemented in 15 districts this FY after its successful pilots in three
large revenue receiving districts (Kathmandu, Lalitpur and Bhaktapur). Therefore, the government
has online, real-time access to 90% of the revenue collections in these districts as compared to the
45% coverage in 3 districts before this reform took place.
There are ongoing efforts to improve the content, quality, comprehensiveness and timeliness of
financial reporting. Two pilots of NPSAS-compliant financial statements have been completed at
the Ministry of Physical Infrastructure and Transport and the Ministry of Women, Children, and
Social Welfare. These NPSAS-based financial reports received certification by the International
Consortium of Government Financial Management (ICGFM). Additional 14 line ministries'
personnel have been trained to prepare NPSAS-based consolidated financial statements in this
fiscal year 2015/16. Fourteen central level entities have been able to prepare NPSAS-compliant
financial statements and submitted to OAG for audit purpose for fiscal year 2014/15. The FCGO
is planning on rolling out NPSAS in the rest of the ministries in the coming fiscal year
The Office of the Auditor General (OAG), under the Strengthening the Office of the Auditor
General (SOAG) Project, has completed six ISSAI-compliant performance audits within areas like
health, local government, and water and sanitation. The end-of-project target for the number of in-
depth performance audits to be reported to Parliament has already been achieved. OAG has also
enhanced public participation in the performance audit process. The Auditor General is keen to
increase the coverage and improve the quality of performance audits and initiatives of risk based
audit.
Line ministry budget information system (LMBIS) is one of the milestones of the online program
budget submission which has created direct link between line ministries' program budget
formulation and implementation with cooperation and coordination with MoF/NPC. This system
is interlinked and interfaced with the BMIS of the MoF. Achievements on reforms of tax and
customs through massive utilization of IT system wherein, application of PAN numbers to all the
taxpayers, self-assessment of tax, on-line submission of tax reports, automation in customs and
Page 23 of 79
 valuations are major landmarks of reforms in PFM. National Planning Commission (NPC) prepares
and implements MTEF for better policy based annual budgeting and resource allocation on priority
programs and projects. Enforcement of Public Procurement Act and Rules and application of e-
procurement system by Public Procurement Monitoring Office (PPMO) make better management
of government procurement. PPMO has created a single portal of e-Government Procurement (e-
GP) System with regular basis monitoring on all the government's procurements. There have been
critical upgrades in the audit function and enhanced collaboration between OAG and CSOs. In
addition social accountability has improved with better access to entitlement information, including
to the poor, women, and marginalized people. This is facilitated in part by participation in
subnational bodies by women, marginalized and deprived groups in the budget process. Beyond
MDTF, there has been different reform initiations made by ADB and other Development Partners
supporting bilaterally in the field of PFM areas. Under SPMP-I (Strengthening Public Management
Program), ADB has been supporting for LGCDP (including reform in accounting system of local
bodies on computer/IT based), MTBF for local bodies, MC-PM, MARS (Municipal Administration
Revenue System), SNGs' PEFA Assessment, Oversight and Accountability through National
Vigilance Centre (NVC), Procurement Reform (e-GP), internal audit manual for local bodies, etc.
Finally, there has been good progress in strengthening the institutional structure guiding the
reforms. Program results and reports are being uploaded and disseminated through a Program
website, which also became fully operational in the same month. The PEFA Secretariat’s website
has also been launched and is another channel for program results and reports.
b)
i. An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying
amount will be recovered principally through a sale transaction rather than continuing use.
For this to be the case, the asset (or disposal group) must be available for immediate sale in its
present condition subject only to terms that are usual and customary for sales of such assets (or
disposal groups) and its sale must be highly probable.
Sale transactions include exchange of non-current assets for other non-current assets when the
exchange has commercial substance in accordance with NAS 16 Property, plant and equipment.
An entity shall measure a non-current asset (or disposal group) classified as held for sale at the
lower of its carrying amount and fair value less costs to sell.
ii. Calculation of amount to be recognized as non-current assets held for sale and the amount of
impairment charge
Carrying amount at 1st Kartik, 2078, after applying NAS 16: Rs. in million

Land and buildings 124

Equipment (50 – (80/4 years × 6/12)) 40

Trade receivables 30

Inventories 20

Trade payables (26)

188

Page 24 of 79
 Any test for impairment will be based on the disposal group as a whole. As a disposal group, fair
value less costs to sell (Rs. 200 million) is higher than carrying amount (Rs. 188 million) there is
no impairment charge.
The amount recognised as non-current assets held for sale is therefore:
Lower of CA and FV Rs. in million
Land and buildings (Rs. 124 m –Rs.2.5 m) 121.50 FV
Equipment 40.00 CA
161.50
Trade receivables and inventories are outside the scope of NFRS 5.
6.
a) The following information is available in respect of High End Ltd. for the financial year 2076/77
and 2077/78:
Net profit Rs.

FY 2076/77 2,200,000
FY 2077/78 3,000,000
Number of shares outstanding prior to right issue was 1,000,000 shares.
Right issue: One new share for each five shares outstanding.
: Right issue price Rs. 25
: Last date to exercise right 30th Kartik, 2077
Fair value of one equity share immediately prior to exercise of rights is Rs. 32.
Required: Calculate 5 marks
i. Basic earnings per share (EPS) for the FY 2076/77.
ii. Restated EPS for the FY 2076/77 for right issue.
iii. Basic EPS for the FY 2077/78.
b) G is an investment company which holds a portfolio of securities linked to the real estate market
in Nepal. The following information is available at 31st Ashadh, 2078 regarding this portfolio:
(i) The portfolio cost was Rs. 26 million 2 years ago.
(ii) Real-estate prices in Nepal are generally accepted to have dropped by 20-30% in the past 2
years.
(iii) The portfolio of securities held by G is difficult to value, as there is no active market. However,
the company has received an offer of Rs. 5.2 million for this portfolio from an investor. It has
no intention of accepting this offer although similar companies have accepted offers from this
investor due to financial difficulties.
(iv) A normal sale in the present climate could be reasonably expected to yield Rs. 12 million,
based on an analysis of transactions in similar assets.
(v) G’s valuation models suggest that the real estate market in Nepal will recover, and it expects
that the portfolio will generate Rs. 24 million (at present value) over the next three years.
Required: 5 marks
In accordance with NFRS 13: Fair Value Measurement, advise with explanation to G on the
amount it should state its investment portfolio in its financial statements to 31st Ashadh, 2078
assuming it wishes to use fair value as measured.
Page 25 of 79
Answer
a) Computation of basic earnings per share
2076/77 2077/78
Rs. Rs.

EPS for the year 2076/77 as originally reported 2.20

(Rs. 2,200,000/1,000,000)

EPS for the year 2076/77 restated for the right issue 2.12
(Rs. 2,200,000/(1,000,000 x 1.04)) (WN 1)

EPS for the year 2077/78 (including effect of right issue) 2.62
(Rs. 3,000,000 / {(1,000,000 x 1.04 x 4/12) + (1,200,000 x
8/12)}

Working notes:
1. Number of right shares = one for every five shares = 1/5th = 1,000,000 x 1/5 = 200,000
2. Computation of theoretical ex-rights fair value per share = (fair value of all outstanding shares
immediately prior to exercise of rights + total value received from exercise of rights) / (number
of shares outstanding prior to exercise + number of shares issued on the exercise)
= (Rs. 32,000,000 + Rs. 25 x 200,000) / (1,000,000 + 200,000) = Rs. 30.83
3. Computation of adjustment factor
= Fair value per share prior to exercise of rights / theoretical ex-right value per share
= Rs. 32 / Rs. 30.83
= 1.04 (approx.)
b) There are a number of potential values that could be used here. However, not all are of equal quality.

o There is an offer for the asset of Rs. 5.2 million. However, G has no intention of accepting
this offer, so it is not an active market price.

o An orderly sale would be expected to yield Rs. 12 million. This figure is arrived at after
analyzing transactions in similar assets. Therefore, this would seem to qualify as a level 2
input, and would seem reasonable to use as the basis of valuation.

o The valuation models which suggest a portfolio value of Rs. 24 million are level 3, as they
are unobservable. Therefore they are inferior to level 2 inputs. However, the fact that the
models seem to be anticipating a recovery would suggest that the valuation determined by
them would not be attainable in the current market. Therefore this value would not meet the
NFRS 13 definition of fair value.

Hence, the best estimate of fair value in this situation would be Rs. 12 million at which the
investment should be valued to present in financial statements to 31st Ashadh 2078.

Page 26 of 79
 Paper 1: Advanced Financial Reporting
1. Statements of financial position as at 31st Asadh 2078 of L, N and M Limited companies are as
follows:
Assets: L N M
Rs. Million Rs. million Rs. million
Non-Current Assets
Property plant and equipment 1,800.00 1,375.00 1,625.00
Investment properties 750.00 500.00 250.00
Investments in subsidiaries:
N Ltd. 1,562.50
M Ltd. 387.50 1,587.50
Financial assets 400.00 26.25 176.25
4,900.00 3,488.75 2,051.25
Current Assets 1,118.75 851.25 187.50
Total Assets 6,018.75 4,340.00 2,238.75

Equity and Liabilities:

Equity
Share capital 2,187.50 1,512.50 1,000.00
Retained earnings 1,550.00 1,162.50 437.50
Other components of equity 156.25 100.00 118.75
Total equity 3,893.75 2,775.00 1,556.25
Liabilities
Non-current liabilities 1,231.25 956.25 187.50
Current liabilities 893.75 608.75 495.00
Total liabilities 2,125.00 1,565.00 682.50
Total Equity and Liabilities 6,018.75 4,340.00 2,238.75

Further information:
(i) On 1st Shrawan 2076, L acquired 14% of the equity interest of M for a cash
consideration of Rs. 325 million and N acquired 70% of the equity interest of M for a cash
consideration of Rs. 1,587.5 million. At 1st Shrawan 2076, the identifiable net assets of M had a
fair value of Rs. 1,237.5 million, retained earnings were Rs. 237.5 million and other components
of equity were Rs. 65 million.
(ii) On 1st Shrawan 2077, L acquired 60% of the equity interests of N. The cost of
investment comprised cash of Rs. 1,562.5 million. On 1st Shrawan 2077, the fair value of the
identifiable net assets acquired was Rs. 2,437.5 million and retained earnings of N were Rs.
812.5 million and other component of equity were Rs. 68.75 million. The excess in fair value is
due to non-depreciable land. It is the group‘s policy to measure the non-controlling interest on
acquisition at its proportionate share of the fair value of the subsidiary‘s net assets.
At 1st Shrawan 2077, the identifiable net assets of M had a fair value of Rs. 1,437.5
million, retained earnings were Rs. 300 million and other components of equity were Rs. 87.5
million. The excess in fair value is due to non-depreciable land. The fair value of the 14%
Page 4 of 83
holding of L in M, which was classified as fair value through profit or loss, was Rs. 350
million at 31st Asadh 2077 and Rs. 387.5 million at 31st Asadh 2078. However, the fair value of
N‘s interest in M had not changed since acquisition.
(iii) Goodwill of N and M were tested for impairment at 31st Asadh 2078 and found that
there was no impairment relating to M. However, the goodwill of N was fully impaired by the
reporting date.
(iv) On 1st Shrawan 2076, L acquired office accommodation at a cost of Rs. 112.5 million
with a 30- year estimated useful life. During the year, the property market in the area slumped
and the fair value of accommodation fell to Rs. 93.75 million at 31st Asadh 2077 and this was
reflected in the financial statements. However, the market unexpectedly recovered quickly due
to the announcement of major government investment in the area‘s infrastructure.
On 31st Asadh 2078, the valuer advised L that the offices should now be valued at Rs. 131.25
million. L has charged depreciation for the year but has not taken account of the upward
valuation of the offices. L uses the revaluation model and records any valuation change when
advised to do so.
(v) L announced two major restructuring plans during the year. The first plan was to reduce
its capacity by the closure of some of its smaller factories, which had already been identified.
This would lead to the redundancy of 500 employees, who had been individually selected and
communicated to. The costs of this plan were Rs. 11.25 million in redundancy costs, Rs. 6.25
million in retraining costs and 6.25 million in lease equipment termination costs. The second
plan is to re-organize the finance and information technology department over a one- year
period but it does not commence until two years‘ time. The plan will result in 20% of finance
staff losing their jobs during the restructuring. The costs of this plan are Rs. 12.5 million in
redundancy costs, Rs. 7.5 million in retraining costs and Rs. 8.75 million in equipment lease
termination costs. There are no entries made in the financial statements for the above plans.
(vi) The following information relates to the group pension plan of L:
1st Shrawan 2077 31st Asadh 2078
Rs. million Rs. million
Fair value of plan assets 35 36.25
Actuarial value of defined benefit obligation 37.5 43.75
(vii) Contributions for the period received by the fund were Rs. 2.5 million and the employee
benefits paid in the year amounted to Rs. 3.75 million. The discount rate to be used in any
calculation is 5%. The current service cost for the period based on actuarial calculations is Rs.
1.25 million. The above figures had not been taken into account for the year ended 31st Asadh
2078 except for the contributions paid which were entered in cash and the defined benefit
obligation.
Required: 20
Prepare L Ltd. Group consolidated statement of financial position as at 31st Asadh 2078.
Answer
1) L. Ltd. Group Consolidated statement of financial position as at 31st Asadh 2078
Assets: Rs. million
Non-current assets:
Property, plant and equipment (1,800 + 1,375 + 1,625 + 43.75 + 50 + 40.75) 4,934.50
Investment properties (750 +500 +250) 1,500.00
Goodwill (W3) 497.50
Page 5 of 83
 Financial assets (400 + 26.25 + 176.25) 602.50
7,534.50
Current assets(1,118.75 + 851.25 + 187.50) 2,157.50
Total assets 9,692.00
Equity and liabilities
Share capital 2,187.50
Retained earnings (W5) 1,695.13
Other components of equity (W5) 212.62
Total equity attributable to shareholders of parent 4,095.25
Non-controlling interest (W4) 1,199.25
Total equity 5,294.50
Total non-current liabilities (1,231.25 + 956.25 + 187.50 + 7.50 -defined 2,382.50
benefit liability
Current liabilities (893.75 + 608.75 + 495 + 17.50 – provision for 2,015.00
restructuring )
Total liabilities 4,397.50
Total equity and liabilities 9,692.00
Workings:
(W1) Group structure
The group effective interest in M Ltd is:

Direct interest 14%

Indirect interest or effective interest (60% x 70%) 42%
Group effective interest 56%
The NCI interest in M Ltd. is therefore (100% -56%) 44%
100%
Consolidation of N Ltd.
Group 60%
NCI (100% - 60%) 40%
100%
The acquisition date for M Ltd. by L Ltd. is 1st Shrawan 2077, hence the day when L Ltd.
gained control over N Ltd.; and therefore indirect control over M Ltd.
(W2) Net assets
N Ltd. Acquisition Reporting Post-
Date Date Acquisition
(Rs. million) (Rs. million) (Rs. million)

Share capital 1,512.50 1,512.50 -

Page 6 of 83
 Other components of equity 68.75 100.00 31.25
Retained earnings 812.50 1,162.50 350.00
Fair value adjustment – Land (remaining 43.75 43.75 -
figure)
2,437.50 2,818.75 381.25
M Ltd.
Share capital 1,000.00 1,000.00 -
Other components 87.50 118.75 31.25
Retained earnings 300.00 437.50 137.50
Fair value adjustment – Land (remaining 50.00 50.00 -
figure)
1,437.50 1,606.25 168.75
Therefore, the post-acquisition profits of N Ltd. is Rs. 381.25 million (Rs. 2,818.75
– Rs. 2,437.50) and that of M Ltd. is Rs. 168.75 million (Rs. 1,606.25 – Rs. 1,437.50).

(W3) Goodwill
The cost of M Ltd. has three elements: the cost of the direct holding, the cost of the
indirectholding and the indirect holding adjustments.
N Ltd.
Rs. million
Fair value of consideration 1,562.50
NCI at acquisition (40% x Rs. 2,437.50) 975.00
Fair value of identifiable net assets acquired (W2) (2,437.50)
Goodwill at acquisition 100
Impairment (100)
Goodwill at reporting date -
M Ltd.
Rs. million
Fair value of consideration:
Direct holding (Fair value at date control obtained) 350.00
Indirect holding 1,587.50
Indirect holding adjustment (40% x Rs. 1,587.50 million) (635.00)
NCI at acquisition (44% x Rs. 1,437.50 million) 632.50
Less fair value of identifiable net assets (W2) (1,437.50)
Goodwill at reporting date 497.50
M Ltd. (Alternatively)
Rs. million

Page 7 of 83
 Fair value of purchase consideration:
Direct holding 350.00
Indirect holding (60% x 1,587.50) 952.50
NCI at acquisition (44% x 1,437.50) 632.50
Less fair value of identifiable net assets (W2) (1,437.50)

Goodwill at reporting date 497.50

L‘s investment in M was held at Rs. 387.50 million at the reporting date. Therefore, the fair
value increase of Rs. 37.50 (Rs. 387.50 – Rs. 350 million) that has arisen since the date
control was achieved must be removed from the consolidated statements. Retained
earnings must also be reduced by Rs. 37.50 million.

(W4) Non-controlling interest

Rs. million
NCI in N Ltd. at acquisition (40% x Rs. 2,437.5) 975.00
Add: NCI % of post –acquisition net assets (40% x (Rs. 2,818.75 152.50
million – Rs. 2,437.5 million)
Indirect holding adjustment (40% x Rs. 1,587.5 million) (635.00)
NCI in M Ltd. at acquisition 632.50
NCI in post-acquisition net assets (44% x (Rs. 1,606.25 – Rs. 1,437.50) 74.25
1,199.25
Alternative:
Rs. million
NCI in N Ltd.‘s net assets at reporting date (40% x Rs. 2,818.75) 1,127.50
NCI in M Ltd.‘s net assets at reporting date (44% x Rs. 1,606.25) 706.75
NCI‘s share of investment in N (40% x Rs. 1,587.50) (635.00)
1,199.25

(W5) Retained earnings

Rs. million
L Ltd. 1,550.00
N Ltd: 60% x (Rs. 1,162.5 million – Rs. 812.5 million (W2)) 210.00
M Ltd: 56% x (Rs. 437.5 million – Rs. 300 million )(W2)) 77.00
Gain on M Ltd.‘s investment (W3) (37.50)
Impairment of goodwill (W3) (100)
Reversal of impairment loss (W6) 14.50
Restructuring provision (W7) (17.50)
Pension plan (W8) (1.37)
1,695.13

Page 8 of 83
 Other components of equity
Rs. million
L Ltd. 156.25
N Ltd.: 60% x (Rs. 100 million – Rs. 68.75 million) (W2) 18.75
M Ltd.: 56% x (Rs. 118.75 million – Rs. 87.50 million) (W2) 17.50
Revaluation gain (W6) 26.25
Pension plan re-measurement (W8) (6.13)
212.62

(W6) Office Building

Rs. million
Cost of office building 112.5
Depreciation (112.5/30years) (3.75)
Carrying amount 108.75
Revaluation loss – Profit or Loss (15)
Fair value at 31 Asadh 2077 93.75
Depreciation (93.75/29years) (3.25)
90.50
Revaluation surplus - OCI 40.75
Fair value at 31 Asadh 2078 131.25
If no revaluation reserve exists for an item of PPE then a downward revaluation is
recognized in the statement of profit or loss. Some of this reversal can be recognized in
profit or loss, but this is capped at the amount needed to increase the asset to the value it
would have been had no impairment occurred. If no impairment had occurred, the asset
would have been held at Rs. 105 million (Rs. 112.5 million – (2 x Rs. 3.75)). Therefore, the
gain recorded in profit or loss is Rs. 14.5 million (Rs. 105 million – Rs. 90.5 million). The
remainder of the gain is recognized in other comprehensive income.
The entries will be:
Dr property, plant and equipment Rs. 40.75 million
Cr profit or loss Rs. 14.50 million
Cr other comprehensive income Rs. 26.25 million
(W7) Provision for Restructuring
Only those costs that result directly from and are necessarily occasioned by a restructuring
may be included in a restructuring provision. This includes costs such as employee
redundancy costs or lease termination costs. Expenses that relate to ongoing activities, such
as relocation and retraining, are excluded.
With regard to the service reduction, a provision should be recognized for the redundancy
and lease termination costs of Rs. 17.5 million (Rs. 10 million + Rs. 7.5 million). The sites
and details of the redundancy costs have been identified.

Page 9 of 83
 In contrast, L Ltd. should not recognize a provision for the finance and IT department‘s re-
organization. The re-organization is not due to start for two years. Stakeholders outside are
unlikely to have a valid expectation that management is committed to the re-organization as
the time frame allows significant opportunities for management to change the details of the
plan or even to decide not to proceed with it. In addition, the degree of identification of the
staff to lose their jobs is not sufficiently detailed to support the recognizing of a redundancy
provision.
(W8) pension plan
In order to calculate the re-measurement component, reconcile the opening and closing net
pension deficit. The re-measurement component is accounted for in other comprehensive
income.
The liability recognized in the financial statements will be Rs. 7.5 million (that is, Rs. 43.75
million- Rs. 36.25 million)
Rs. million
Net obligation at 1st Shrawan 2077 (Rs. 37.5 million – Rs. 35 million) 2.50
Net interest component (Rs. 2.5 million x 5%) 0.125
Contributions (2.50)
Service cost component 1.25
Re-measurement loss (remaining figure) (6.125)
Net obligation at 31st Asadh 2078 (43.75 - 36.25) 7.50
The service cost component and net interest component will be charged to profit or loss
(Rs. 1.375 million) and the re-measurement loss to Other Comprehensive Income (Rs.
6.125 million). There will be no adjustment for the contributions, which have already been
taken into account.

2.
a) Ashish started a new company Nepsoft Pvt. Ltd. with Star Ltd. wherein investment of
55% is done by Star Ltd. and rest by Ashish. Voting powers are to be given as per the
proportionate share of capital contribution. The new company formed was the subsidiary
of Star Ltd. with two directors, and Ashish eventually becomes one of the directors of
company. A consultant was hired and he charged Rs. 30,000 for the incorporation of
company and to do other necessary statuary registration which is to be charged as an
expense in the books after incorporation. The company, Nepsoft Pvt. Ltd. was
st
incorporated on 1 Shrawan 2077.
The financials of Star Ltd. are prepared as per NFRS.

The draft financials of Nepsoft Pvt. Ltd. are as follows:

Statement of Profit and Loss for the year ending 31st Asadh 2078
Particulars Amount (Rs.)
Revenue from operations 1,000,000
Other Income 100,000
Total Revenue (a) 1,100,000
Expenses:
Page 10 of 83
Purchase of stock in trade 500,000
(Increase)/Decrease in stock in trade (50,000)
Employee benefits expense 175,000
Depreciation 30,000
Other expenses 90,000
Total Expenses (b) 745,000
Profit before tax (c) = (a)-(b) 355,000
Current tax @30% (106,500)
Deferred tax (6,000)
Profit for the year 242,500

Balance Sheet as at 31st Asadh 2078

Amount (Rs.)
Equity and Liabilities
Shareholders‘ Funds
(a) Share Capital 100,000
(b) Reserves & Surplus 227,500
Non-Current Liabilities
(a) Long Term Provisions 25,000
(b) Deferred tax liabilities 6,000
Current Liabilities
(a) Trade Payables 11,000
(b) Other Current Liabilities 45,000
(c) Short Term Provisions 106,500
Total 521,000
Assets
Non-Current Assets
(a) Property, plant and equipment (net) 100,000
Additional information
(b) Long-term of Nepsoft
Loans Pvt Ltd.:
and Advances 40,000
(c) Other Non-Current Assets 50,000
Current Assets
(a) Current Investment 30,000
(b) Inventories 80,000
(c) Trade Receivables 55,000
(d) Cash and Bank Balances 115,000
(e) Other Current Assets 51,000
Total 521,000
i) Deferred tax liability of Rs. 6,000 is created due to temporary difference in
depreciation amount as per Income tax and Accounting profit.

Page 11 of 83
 ii) There is only one property, plant and equipment in the company, whose
st
closing balance as at 31 Asadh, 2078 is Rs. 100,000 as per books and Rs.
80,000 as per Income tax record.
iii) Pre incorporation expenses are deductible on straight line basis over the
period of five years as per Income tax. However, the same are immediately
expensed off in the books.
iv) The current tax after doing necessary adjustments of allowances /
disallowances related to Income tax comes to Rs. 125,700.
v) After the reporting period, the directors have recommended dividend of Rs.
st
15,000 for the year ending 31 Asadh, 2078 which has been deducted from
reserves and surplus, and this has been grouped under ‗Other Current
Liabilities‘alongwith other financial liabilities.
vi) There are ‗Government statuary dues‘ amounting to Rs. 15,000 which are
grouped under ‗Other Current Liabilities‘.
vii) Other current assets of Rs. 51,000 comprise interest receivable from trade
receivables.
viii) Current investment of Rs. 30,000 is in shares of a company, with the purpose
of trading, has been carried at cost in the financial statements. The fair value
of current investment is Rs. 50,000 as at 31 st Asadh, 2078.
ix) Actuarial gain on employee benefit measurements of Rs. 1,000 has been
omitted in the financials for the year ending 31 st Asadh, 2078.
The financial statements for F/Y 2077/78 have not yet been approved.
Required: 10
State with reason whether the financial statements of Nepsoft Pvt. Ltd. are
correctly presented as per the applicable financial reporting framework. If not,
prepare the revised financial statements (SOPL and SFP) of Nepsoft Pvt. Ltd.
considering the above information and write a disclosure note on dividend.

b) Following information was extracted from the books of a life insurance business:
c) Particulars Amount (Rs.)
Employee Expenses 25,308
House Rent 5,362
Water and Electricity 969
Repair and Maintenance 667
Telephone 2,185
Printing and Stationeries 6,753
Transportation 1,041
Travelling 3,339
Agents‘ Expenses 54,617
Insurance Premium 530

Page 12 of 83
 Legal and Consultancy Fee 256
Advertising and Promotion 5,759
Sales Promotion 3,781
Entertainment 2,120
Actuary Valuation Expenses 400
Audit Fee 500
Bank Charges 254
Fees and Charges 803
Depreciation 4,731
Stamp Fee 1,653
Following additional information is available:
Types of Insurance Direct Insurance Agent Medical
Premium Commission Expenses
(Rs.) (Rs.)
(Rs.)
Endowment Insurance 990,253 115,452 4,072
Modified Endowment Insurance 156,217 44,439 1,095
Advance Payment Endowment 199,176 17,345 232
Insurance
Jeevan Sarathi Insurance 1,856 457 6
General Term Life Insurance 576 42 -

Required: 10
Calculate amount of management expenses to be distributed to Profit and Loss
Account and each category of Revenue Account.
Answer
2 a) If NFRS is applicable to any company, then NFRS shall automatically be made
applicable to all the subsidiaries, holding companies, associated companies, and joint
ventures of that company, irrespective of individual qualification of set of standards on
such companies.
In the given case, it has been mentioned that the financials of Star Ltd. are prepared as
per NFRS. Accordingly, the financials of its subsidiary Nepsoft Pvt. Ltd. should also
have been prepared as per NFRS.
Hence, it is necessary to revise the financial statements of Nepsoft Pvt. Ltd. as per
NFRS incorporating necessary adjustments.
The revised financial statements of Nepsoft Pvt. Ltd. as per NFRS are as follows:

Page 13 of 83
 st
Statement of Profit or Loss for the year ended 31 Asadh, 2078
Particulars Amount (Rs.)
Revenue from operations 1,000,000
Other Income (1,00,000 + 20,000) (WN1) 120,000
Total Revenue 1,120,000
Expenses:
Purchase of stock in trade 500,000
(Increase) / Decrease in stock in trade (50,000)
Employee benefits expense 175,000
Depreciation 30,000
Other expenses 90,000
Total Expenses 745,000
Profit before tax 375,000
Current tax (125,700)
Deferred tax (WN4) (4,800)
Profit for the year (A) 244,500
Other Comprehensive Income:
Remeasurements of net defined benefit plans 1,000

Tax liabilities on remeasurement (1000×30%) (300)

Other Comprehensive Income for the period (B) 700

Total Comprehensive Income for the period (A+B) 245,200

st
Balance Sheet as at 31 Asadh, 2078

(Rs.)
Assets
Non-current assets:
Property, plant and equipment 100,000
Financial assets:
Other financial assets (Long-term loans and advances) 40,000

Page 14 of 83
 Other non-current assets 50,000

Current assets:
Inventories 80,000
Financial assets:
Investments (30,000 + 20,000) (Note -1) 50,000
Other financial assets (Interest receivable from trade 51,000
receivables)
Trade receivables 55,000
Cash and cash equivalents 115,000
Total 541,000
Equity & Liabilities
Equity:
Share capital 100,000
Other equity (Retained Earnings) 245,200
Non-current liabilities
Provision (25,000 – 1,000) 24,000
Deferred tax liabilities (4800 + 300) 5,100
Current liabilities:
Financial liabilities
Trade payables 11,000
Other financial liabilities (WN3) 15,000
Other current liabilities (Govt. statuary dues) (WN3) 15,000
Current tax liabilities 125,700
Total 5,41,000

Disclosure forming part of financial statements:

Proposed dividend on equity shares is subject to the approval of the shareholders of the
company at the annual general meeting and not recognized as liability as at the Balance
Sheet date. (WN3)

Working Notes:
1. Current investments are held for the purpose of trading. Hence, it is a financial asset
classified as FVTPL. Any gain in its fair value will be recognized through profit or loss.
Hence, NRs 20,000 (50,000 – 30,000) increase in fair value of financial asset will be
Page 15 of 83
 recognised in profit and loss. However, it will attract deferred tax liability on increased
value.
2. Calculation of deferred tax on temporary differences as per NAS 12 for financial year
2077/78:
Item Carrying Tax base Difference DTA / DTL @
amount (Rs.) (Rs.) (Rs.) 30% (Rs.)
Property, Plant and Equipment 1,00,000 80,000 20,000 6,000-DTL
Pre-incorporation expenses Nil 24,000 24,000 7,200-DTA
Current Investment 50,000 30,000 20,000 6,000-DTL
Net DTL 4,800-DTL
3. As per NAS 10, ‗Events after the Reporting Period‘, If dividends are declared after the
reporting period but before the financial statements are approved for issue, the dividends
are not recognized as a liability at the end of the reporting period because no obligation
exists at that time. Such dividends are disclosed in the notes in accordance with NAS 1,
Presentation of Financial Statements.
4. Other current financial liabilities:

(Rs.)

Balance of other current liabilities as per financial statements 45,000

Less: Dividend declared for FY 2077 - 2078 (WN3) (15,000)
Reclassification of government statuary dues as ‗Other Current Liabilities‘ (15,000)

Closing balance 15,000

2 b) Calculation of Management Expenses:

Particulars Amount (Rs.)

Employee Expenses 25,308
House Rent 5,362
Water and Electricity 969
Repair and Maintenance 667
Telephone 2,185
Printing and Stationeries 6,753
Transportation 1,041
Travelling 3,339
Agents‘ Expenses 54,617

Page 16 of 83
 Insurance Premium 530
Legal and Consultancy Fee 256
Advertising and Promotion 5,759
Sales Promotion 3,781
Entertainment 2,120
Actuary Valuation Expenses 400
Audit Fee 500
Bank Charges 254
Fees and Charges 803
Depreciation 4,731
Stamp Fee 1,653
Total Management Expenses (A) 121,028
Management Expenses transferred to:
Profit and Loss = (A*10%) 12,103
Endowment Insurance Revenue Account = (A*90%*74.74%) 81,411
Modified Endowment Insurance Revenue Account = 10,348
(A*90%*9.50%)
Advance Payment Endowment Insurance Revenue Account = 16,980
(A*90%*15.59%)
Jeevan Sarathi Insurance Revenue Account = (A*90%*0.12%) 131
General Term Life Insurance Revenue Account = 54
(A*90%*0.05%)
Total 121,028

Working Notes:
Computation of weight for each category of Revenue Account:
Types of Insurance Direct Agent Medical Net Income Weight for
Insurance Commission Expenses for Weight Revenue
Premium (Rs.) (Rs.) Account
(Rs.)
Endowment Insurance 990,253 115,452 4,072 870,729 74.74%
Modified Endowment 156,217 44,439 1,095 110,683 9.50%

Page 17 of 83
 Insurance
Advance Payment 199,176 17,345 232 181,599 15.59%
Endowment Insurance
Jeevan Sarathi 1,856 457 6 1,393 0.12%
Insurance
General Term Life 576 42 - 534 0.05%
Insurance
Total 1,348,078 177,735 5,405 1,164,938 100.00%
3.
a) Eel Ltd. prepares consolidated financial statements to 31st Asadh each year. During
the year ended 31st Asadh 2078, the following events affected the tax position of the group:
i) Lil Ltd., a wholly owned subsidiary of Eel Ltd., made a loss adjusted for tax purposes of
Rs. 3 million. Lil Ltd. is unable to utilise this loss against previous tax liabilities and local
tax legislation does not allow Lil Ltd. to transfer the tax loss to other group companies.
Local legislation does allow Lil Ltd. to carry the loss forward and utilise it against its own
future taxable profits. The directors of Eel Ltd. do not consider that Lil Ltd. will make
taxable profits in the foreseeable future.
ii) Just before 31st Asadh 2078, Eel Ltd. committed itself to closing a division after the year
end, making a number of employees redundant. Therefore Eel Ltd recognised a provision
for closure costs of Rs. 2 million in its statement of financial position as at 31st Asadh
2078. Local tax legislation allows tax deductions for closure costs only when the closure
actually takes place. In the year ended 31 st Asadh 2079, Eel Ltd expects to make taxable
profits which are well in excess of Rs. 2 million. On 31 st Asadh 2078, Eel Ltd. had taxable
temporary differences from other sources which were greater than Rs. 2 million.
iii) During the year ended 31 st Asadh 2078, Eel Ltd. capitalised development costs which
satisfied the criteria in paragraph 57 of NAS 38 – Intangible Assets. The total amount
capitalised was Rs. 1.6 million. The development project began to generate economic
benefits for Eel Ltd. from 1 st Baishakh 2078. The directors of Eel Ltd estimated that the
project would generate economic benefits for five years from that date. The development
expenditure was fully deductible against taxable profits for the year ended 31 st Asadh
2078.
iv) On 1st Shrawan 2077, the total goodwill arising on consolidation in Eel Ltd.‘s consolidated
statement of financial position was Rs.4 million. On 31st Asadh 2078, the directors
reviewed the goodwill for impairment and concluded that the goodwill was impaired by
Rs. 600,000. There was no tax deduction available for any group company as a
consequence of this impairment charge as at 31 st Asadh 2078.
v) On 1st Shrawan 2077, Eel Ltd. borrowed Rs.10 million. The cost to Eel Ltd. of arranging
the borrowing was Rs. 200,000 and this cost qualified for a tax deduction on 1 st Shrawan
2077. The loan was for a three-year period. No interest was payable on the loan but the
amount repayable on 31 st Asadh 2080 will be Rs.13,043,800. This equates to an effective
annual interest rate of 10%. Under the tax jurisdiction in which Eel Ltd. operates, a further
tax deduction of Rs. 3,043,800 will be claimable when the loan is repaid on 31 st Asadh
2080.
Required: 10
Explain and show how each of these events would affect the deferred tax assets/liabilities
Page 18 of 83
 in the consolidated statement of financial position of the Eel Ltd. group at 31 st Asadh
2078. Where relevant, you should assume the rate of corporate income tax to be 25%.

b) R Ltd. owns Building A which is specifically used for the purpose of earning rentals. The
company has not been using the building or any of its facilities for its own use for a long time.
The company is also exploring the opportunities to sell the building if it gets the reasonable
amount in consideration.
Following information is relevant for Building A for the year ending 31st Asadh, 2078:
Building A was purchased 5 years ago at a cost of Rs. 100 million with estimated useful life of
20 years. The company follows straight line method for depreciation.
During the year, the company has invested in another Building B with the purpose to hold it for
capital appreciation. The property was purchased on 1st Shrawan, 2077 at the cost of Rs. 20
million. Expected life of the building is 40 years. As usual, the company follows straight line
method of depreciation.
Further, during the year 2077/78, the company earned / incurred following direct operating
expenditure relating to Building A and Building B:
Rental income from Building A = Rs. 7.5 million
Rental income from Building B = Rs. 2.5 million
Sales promotion expenses = Rs. 0.50 million
Fees & Taxes = Rs. 0.10 million
Ground rent = Rs. 0.25 million
Repairs & Maintenance = Rs. 0.15 million
Legal & Professional fees = Rs. 0.20 million
Commission and brokerage = Rs. 0.10 million
Required: (4+3+3=10)
i) Mention the measurement and recognition modality, in short, for investment property as per
relevant NAS and calculate the carrying value of investment properties of R Ltd. as on 31st
Asadh 2078.
ii) Calculate the amount to be recognized in Profit & Loss with respect to the investment
properties.
iii) Write in short, the disclosure note on investment properties of the entity.

Answer
3 a)
(i) The tax loss creates a potential deferred tax asset for the Eel Ltd. group since its carrying value
is nil and its tax base is Rs.3 million.
However, no deferred tax asset can be recognised because there is no prospect of being able to
reduce tax liabilities in the foreseeable future as no taxable profits are anticipated.
(ii) The provision creates a potential deferred tax asset for the Eel Ltd group since its carrying
value is Rs.2 million and its tax base is nil.
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 This deferred tax asset can be recognised because Eel Ltd. is expected to generate taxable
profits in excess of Rs. 2 million in the year to 31st Asadh 2079.
The amount of the deferred tax asset will be Rs. 500,000 (Rs. 2 million × 25%).
This asset will be presented as a deduction from the deferred tax liabilities caused by the
(larger) taxable temporary differences.

(iii) The development costs have a carrying value of Rs.1·52 million (Rs. 1·6 million – (Rs.1·6
million × 1/5 × 3/12)).
The tax base of the development costs is nil, since the relevant tax deduction has already been
claimed.
The deferred tax liability will be Rs.380, 000 (Rs. 1·52 million × 25%). All deferred tax
liabilities are shown as non-current.

(iv) No deferred tax liability arises in respect of goodwill on consolidation when it is created.
This is a specific exception referred to in NAS 12.
As a consequence of this, no adjustment is made for deferred tax purposes when goodwill is
impaired. Therefore, there are no deferred tax implications for the consolidated statement of
financial position.

(v) The carrying value of the loan at 31st Asadh 2078 is Rs.10·78 million (Rs.10 million –
Rs.200, 000 + (Rs. 9·8 million ×10%)).
The tax base of the loan is Rs. 10 million (Rs. 10·78 million – (Rs. 980,000 – Rs. 200,000)).
This creates a deductible temporary difference of Rs. 780,000 and a potential deferred tax
asset of Rs.195, 000 (Rs.780, 000 × 25%).
Due to the availability of taxable profits next year (see part (ii) above), this asset can be
recognised as a deduction from deferred tax liabilities.

3 b i) Investment property is held to earn rentals or for capital appreciation or both. NAS 40
shall be applied in the recognition, measurement and disclosure of investment property. An
investment property shall be measured initially at its cost. After initial recognition, an entity
shall measure all of its investment properties in accordance with the requirement of NAS 16
for cost model.
The carrying value of Investment property as per NAS 40 in the balance sheet would be:
st
Particulars Period ended 31 Asadh, 2078
(Rs. in million)
Gross Amount:
Opening balance (A) 100.00
Additions during the year (B) 20.00
Closing balance (C) = (A) + (B) 120.00
Depreciation:
Opening balance (D) 25
Depreciation during the year (E) (5 + 0.5) 5.5
Closing balance (F) = (D) + (E) 30.5
Carrying Value (C) - (F) 89.5

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ii) Amount recognised in Profit and Loss with respect to Investment
Properties
st
Particulars Period ending 31 Asadh, 2078
(Rs. in million)

Rental income from investment properties (7.5 + 2.5) 10.00

Less: Direct operating expenses generating rental
income (0.5+0.1+0.25+0.15+0.2+0.1) (1.30)

Profit from investment properties before depreciation

and indirect expenses 8.70
Less: Depreciation (5.50)
Profit from earnings from investment properties before
indirect expenses 3.20

iii) Disclosure Note on Investment Properties acquired by the entity:

a. Investment properties are measured in accordance with the cost model.
b. The fair value of the investment properties has not been obtained.
c. The amount recognized in profit or loss is given on (ii) above.
d. There is no restriction on the realisability of investment property or the remittance of
income and proceeds of disposal.
e. There is no contractual obligations to purchase, construct or develop investment property
or for repairs, maintenance or enhancements.
f. The depreciation has been changed on SLM based on useful life of 20 years for property
A and 40 years for property B. The gross carrying amount, depreciation amount and net
carrying amount are presented in (i) above.

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

a) Joint venture arrangement
b) Evaluate the treatment of development expenditure set out in NAS 38 'Intangible
Assets' against the characteristics of relevance and reliability.
c) Describe four circumstances in which a parent entity may not be required to present
consolidated financial statements under Nepal Financial Reporting Standards.
d) Briefly explain how lessee must account for leases within the scope of NFRS 16 Leases.
e) Explain 'Plain Vanilla Swap' with example.
Answer
4 a) A joint venture is an association of two or more businesses established for a special
purpose. Some joint ventures are in the form of partnerships or other unincorporated
forms of business. Others are in the form of corporations jointly owned by two or
more other firms.
The accounting principles for joint ventures are flexible because of their many forms .
The typical problem concerns whether a joint venture should be carried as an
investment or consolidated. Some joint ventures are very significant in relation to the
parent firm. There is typically a question as to whether the parent firm has control or

Page 21 of 83
 only significant influence. When the parent firm has control, it usually consolidates
joint ventures by using a pro rata share. Other joint ventures are usually carried in an
investment account by using the equity method. In either case, disclosure of
significant information often appears in a note.
When a firm enters into a joint venture, it frequently makes commitments such as
guaranteeing a bank loan for the joint venture or a long-term contract to purchase
materials with the joint venture. This type of action can give the company significant
potential liabilities or commitments that do not appear on the face of the balance sheet.
This potential problem exists with all joint ventures, including those that have been
consolidated. To be aware of these significant potential liabilities or commitments, read
the note that relates to the joint venture. Then consider this information in relation to the
additional liabilities or commitments to which the joint venture may commit the firm.
4 b) Under NAS 38 development expenditure should be recognized as an asset, but only where
it meets a number of stringent conditions. These relate to the technical feasibility of the
project, how the probable future economic benefits will be generated and the availability
of resources to complete the development. It must also be possible to measure the
development expenditure reliably.
The most reliable information would be provided if the costs are recognized in the income
statement as they are incurred (indeed this is the approach to be taken to research
expenditure and to development expenditure where the recognition criteria are not met).
However, this does not provide relevant information where benefits from the expenditure
will flow into the entity over several accounting periods. However, the reliability of this
more relevant information can be seriously compromised where there are uncertainties
surrounding the future outcome of the project. Hence, NAS 38 adopts the relevance
approach but only where the information backing up that approach is reliable, i.e. there is
sufficient certainty surrounding the viability/profitability of the project.
4 c) NFRS 10 Consolidated financial Statements outlines the following exemptions when the
parent entity need not present consolidated financial statements:
(i) The parent itself is a wholly owned subsidiary or a partially owned subsidiary and its
owners have been informed about it and do not object to the parent not preparing the
consolidated financial statements.
(ii) The parent‘s debt or equity instruments are not traded in a public market.
(iii) The financial statements of the parent are not filed with any regulatory organisation
for the purpose of issuing debt or equity instruments on any stock exchange.
(iv) The ultimate or immediate parent of the entity produces publicly available financial
statements that comply with NFRSs.
4 d) NFRS 16 requires that all leases with its scope must be capitalised by lessee by
recognising lease liabilities and Right Of Use Assets (ROUA). However, a lessee may not
capitalise a lease but merely account for lease rentals if any of the two exemptions has
been used:
 The lease is of a small value asset
 Short term Lease
Lease liabilities must initially be measured at the present value of the lessee‘s Minimum
Page 22 of 83
 Lease Payments (MLPs) payable in future discounted at the interest rate implicit in the
lease. The ROUA is initially measured at the aggregate of:
 Cash incurred at inception of the lease
 Initial carrying amount of lease liability
 Provision for decommissioning the lease.
Subsequently, lease liabilities must be measured at amortized cost using the interest rate
implicit in the lease, charging the finance costs in the SPL. ROUA must normally be
amortized on a straight line basis over the shorter of the asset under lease‘s useful
economic life and the lease term.
4 e) A plain vanilla swap is one of the simplest financial instruments contracted in the over-the-
counter market between two private parties, both of which are usually firms or financial
institutions. There are several types of plain vanilla swaps, including an interest rate swap,
commodity swap, and a foreign currency swap. The term plain vanilla swap is most
commonly used to describe an interest rate swap in which a floating interest rate is
exchanged for a fixed rate or vice versa.
A plain vanilla interest rate swap is often done to hedge a floating rate exposure, although
it can also be done to take advantage of a declining rate environment by moving from a
fixed to a floating rate. Both legs of the swap are denominated in the same currency, and
interest payments are netted. The notional principal does not change during the life of the
swap, and there are no embedded options.
In a plain vanilla interest rate swap, Company A and Company B choose a maturity,
principal amount, currency, fixed interest rate, floating interest rate index, and rate reset
and payment dates. On the specified payment dates for the life of the swap, Company A
pays Company B an amount of interest calculated by applying the fixed rate to the
principal amount, and Company B pays Company A the amount derived from applying the
floating interest rate to the principal amount. Only the netted difference between the
interest payments changes hands.
5.
a) Explain the objectives of public financial management. Discuss NPSAS in context of
government accounting. (4+4=8)
b) The following, information is supplied to you by Hanuman Co. Ltd.:
Amount (Rs.)
Equity shares (Face value Rs. 10) 580,000
12% preference shares (Face value Rs. 10) 150,000
10% Debentures (Face value Rs. 10) 500,000
Term Debt (taken at 15%) 200,000
Financial Leverage 1.2
Securities Premium 50,000
General Reserve 20,000
Statutory Reserve 60,000
Income Tax Rate 30%
The industry to which Hanuman Co. Ltd. belongs has a practice of paying at least 15%
dividend to its shareholders. The ordinary shares are quoted at a premium of 400%,
preference shares at Rs. 25 and debentures at a discount of 20%.
Required: 7
Page 23 of 83
 Calculate Economic Value Added (EVA) and Market Value added (MVA) of the company
and explain the reason for the difference, if any between the two.
Answer
5 a) It is generally accepted that a public financial management (PFM) system should achieve
three objectives, to which we here add a fourth, the promotion of accountability and
transparency. In order to assess a public financial management (PFM) system, we first need
to define its objectives, the final outcomes, by which performance can be measured. For the
due process of operation of all the reform activities, to adopt and to internalize the best
practices international standards as per our requirements and to mobilize the assistance and
supports of the Development Partners in this field, Public Financial Management has
following objectives:
 The maintenance of aggregate fiscal discipline is the first objective of a PFM system: it
should ensure that aggregate levels of tax collection and public spending are consistent with
targets for the fiscal deficit, and do not generate unsustainable levels of public borrowing.
 Secondly, a PFM system should ensure that public resources are allocated to agreed
strategic priorities ‒ in other words, that allocative efficiency is achieved.
 Thirdly, the PFM system should ensure that operational efficiency is achieved, in the sense
of achieving maximum value for money in the delivery of services.
 Finally, the PFM system should follow due process and should be seen to do so, by being
transparent, with information publicly accessible, and by applying democratic checks and
balances to ensure accountability.
Nepal Public Sector Accounting Standards (NPSAS) in context of government accounting.
The Accounting Standards Board, Public Sector Committee (the committee) develops
accounting standards for public sector entities referred to Nepal Public Sector Accounting
Standards (NPSAS) in Nepal. Nepal Public Sector Accounting Standards (NPSAS) have
been developed in line with International Public Sector Accounting Standards (IPSAS).
Such Standards establishes guidelines and standardize the financial reporting of Public
Sector Entities in Nepal, resulting into the improvement of both quality and Comparability
of the financial reporting. The Accounting Standards Board, Public Sector Committee has
developed and issued Nepal Public Sector Accounting Standard: Financial reporting under
the cash basis of accounting which becomes effective for annual financial statements
covering period beginning on or after 1 January 2009. Adoption of this standard by the
Government of Nepal (GoN) will improve both the quality and comparability of financial
information reported by public sector entities in Nepal The standard comprise two parts:
Part 1 is mandatory: It sets out the requirements which are applicable to all entities
preparing general purpose financial statements under the cash basis of accounting. It
defines the cash basis of accounting, establishes requirements for the disclosure of
information in the financial statements and supporting notes, and deals with a number of
specific reporting issues. The requirements in this part of the standard must be complied
with by entities which claim to be reporting in accordance with the Nepal Public Sector
Accounting Standard Financial Reporting under the Cash Basis of Accounting.
Part 2 is non-mandatory: It defines additional accounting policies and disclosures that an
entity is encouraged to adopt to enhance its financial accountability and the transparency of
its financial statements. It includes explanations of alternative method for presenting certain
information.

Page 24 of 83
5 b) Economic value added (EVA)
Amount (Rs.)
Profit after tax (WN1) 280,000
Add: interest (net of tax) (80,000 x 0.70) 56,000
Return to providers of fund 336,000
Less: cost of capital (WN2) (171,450)
Economic value added (EVA) 164,550

Computation of Market value added (MVA)

Amount Amount (Rs.)
(Rs.)
Equity share capital (market value) 2,900,000
(58,000x10x500%)
Preference share capital (15,000x25) 375,000
Debentures (50,000 x 10x80%) 400,000
Long term loan 200,000
Current market value of firm 3,875,000
Less: Equity share capital 580,000
Preference share capital 150,000
Debentures 500,000
Long term loan 200,000
Securities premium 50,000
General Reserve 20,000
Statutory reserve 60,000 (1,560,000)
Market value added (MVA) 2,315,000

The MVA of Rs. 2,315,000 is the difference between the current market value of Hanuman
Co. Ltd. and the capital contributed by the fund providers. While EVA measures current
earning efficiency of the company, MVA takes into consideration the EVA from not only
the assets in place but also from the future projects/activities of the company. The
difference between MVA and EVA thus represents the value attributed to the future
potential for the company and may change from time to time based on market sentiments.
In short the MVA is the net present value of all future EVAs.
Working Notes:
1. Calculation of net profit after interest and tax
Interest on debentures (500,000 x 10%) 50,000
Interest on long term debt (200,000 x 15%) 30,000
Total interest 80,000
Financial leverage = 1.2 = PBIT / (PBIT – Interest)
PBIT 480,000
Less: Interest (80,000)

Page 25 of 83
 Profit after interest before tax 400,000
Less : 30% tax (120,000)
Profit after interest and tax 280,000
2. Calculation of weighted average cost of capital (WACC)
Amount Amount Weight Cost % WACC %
Equity shareholders fund
Equity shares 580,000
Security premium 50,000
General Reserve 20,000 650,000 0.43 15 6.45
Preference share 150,000 0.10 12 1.20
Debentures 500,000 0.33 7* 2.31
Long term debt 200,000 0.14 10.5* 1.47
1500,000 11.43
*Rate of interest has been calculated net of tax.
Cost of capital = capital employed X WACC%
= 1500,000 x 11.43%
= 171,450
6.
a) Vajra Ltd. and Zoro Ltd. both are in the business of manufacturing and selling of Lubricant.
The shareholders of both companies agree to join forces to benefit from lower delivery and
distribution costs. The business combination is carried out by setting up a new entity called
Meera Ltd. that issues 100 shares to Vajra Ltd. shareholders and 50 shares to Zoro Limited‘s
shareholders in exchange for the transfer of the shares in those entities. The number of
shares reflects the relative fair values of the entities before the combination. Also respective
company‘s shareholders get the voting rights in Meera Ltd. based on their respective
shareholding.
Required:
Provide the provision and determine the acquirer by applying the principles of NFRS 3
‗Business Combinations‘. 5

b) The accountant of Goreto Ltd. is preparing financial statements for the year ended 31 st
Asadh 2078. Before these can be completed the following issues need to be resolved:
i. Goreto Ltd.‘s head office building was revalued on 1 st Magh 2077, giving rise to a surplus of
Rs. 100,000. The building had an original cost of Rs. 1 million on 1 st Shrawan 2070 and a
50-year life at that date. The useful life of the building remains unchanged.
ii. During the year one of Goreto Ltd.‘s machines broke down and could not be fixed. The
carrying amount of the machine at that date was Rs. 30,000.

Page 26 of 83
Because of the loss of production caused by the damaged machine, the company lost
customers and it was decided that the whole factory unit was impaired by Rs.120,000. The
accountant needs to decide how to allocate this impairment loss.
The carrying amounts of the assets of the factory unit at the date of the impairment review,
including the damaged machine, were:
Particulars Amount (Rs.)
Goodwill 20,000
Factory building 440,000
Plant and machinery 160,000
Net current assets 100,000
Total 720,000
Required: (2+3=5)
i) What amount should be charged as depreciation on the building in (i) above for the
year ended 31st Asadh 2078?
ii) Allocate the impairment loss and show the carrying amount of Non-current assets of
the factory unit.
Answer
6 a) As per NFRS 3, in a business combination effected primarily by exchanging equity
interests, the acquirer is usually the entity that issues its equity interests. However, in some
business combinations, commonly called ‗reverse acquisitions‘, the issuing entity is the
acquiree.
Other pertinent facts and circumstances shall also be considered in identifying the acquirer in
a business combination effected by exchanging equity interests, including:
The relative voting rights in the combined entity after the business combination - The
acquirer is usually the combining entity whose owners as a group retain or receive the
largest portion of the voting rights in the combined entity.
Based on above mentioned para, acquirer shall be either of the combining entities (i.e. Vajra
Ltd. or Zoro Ltd.), whose owners as a Group retain or receive the largest portion of the voting
rights in the combined entity.
Hence, in the above scenario Vajra Ltd.‘s shareholder gets 66.67% share (100 / 150 x 100) and
Zoro Ltd.‘s shareholder gets 33.33% share in Meera Limited. Hence, Vajra Ltd. is acquirer as
per the principles of NFRS 3.
6 b) i)
Particulars Rs. Rs.
Original cost 1/4/2070 1,000,000
Depreciation to 31/03/77 (1,000,000 X 7/50) (140,000)
860,000
Depreciation to 30/9/77 ((1,000,000/50) X 6/12) (10,000) 10,000
850,000
Revaluation surplus 100,000

Page 27 of 83
 950,000
Depreciation to 31/3/78 (950,000 X 0.5/42.5) (11,176) 11,176
Total depreciation year to 31/3/78 21,176

ii) Allocation as per NAS 36 para 104

Original Impairment(Rs.) Carrying
amount(Rs.) Amount(Rs.)
Goodwill 20,000 (20,000)
Building 440,000 (54,000) 386,000
Plant and machinery 160,000 (30,000+16,000) 114,000
720,000 120,000
Note:
i) Goodwill is reduced first.
ii) Allocate Rs. 30,000 to plant & machinery next.
iii)Allocate remaining amount on prorate to the carrying amount of remaining non-
current assets as below:
Building

=70,000×

Plant & Machinery

=70,000×

Page 28 of 83
Examiner’s Commentary on Students' Performance in June 2022
Examinations
Subject: Advanced Financial Reporting

List of Questions Specific Comments on the Performance of the Students

Question no. 1 Students were confused on Retained Earning calculation, mainly
misunderstanding and miscalculation of revaluation of office building,
and other component of equity, pension plan workout.
Question no. 2 a. Most students wrongly calculated deferred tax, interest receivable
from Trade Receivable, Tax liability on remuneration.
b. Few students attempted this question, lack of conceptual knowledge.
Question no. 3 a. Very well attempted the question.
b. Most of the students got confused to calculate depreciation on
building
Question no. 4 a. Students have shown little knowledge on joint venture.
b. Students attempted well on intangible assets.
c. Students have not prepared well on the question concept.
d. Students have not prepared well on the question concept.
Question no. 5 a. Satisfactory performance
b. Students were confused on calculation of effective rate.
Question no. 6 a. Students were confused on concept of acquirer.
b. Students well attempted this part of the question.

Subject: Advanced Financial Management

List of Questions Specific Comments on the Performance of the Students

Question no. 1 The concept of the IRPT is not clear with most students. There are lot of
calculation error, basic concept of delaying in Income Tax is also not
cleared by most of the students.
Question no. 2 The tax treatment of callable bond, one lapping interest is missing in
many cases, some of the students could not calculate the time value of
money for future cashflows.
Question no. 3 Satisfactory performance.
Question no. 4 Most of the students were confused in writing types of foreign currency
risk and value at risk.
Question no. 5 Calculation of number of contract and weather client should take out
/call option is not done by most of the students.
Question no. 6 Satisfactory performance

Page 82 of 83
 Suggested Answers December 2022 Examination (CAP III - Group I)

Paper 1: Advanced Financial Reporting

Marks
Attempt all questions. Working notes should form part of the answers.
1. Alpha, a parent with a subsidiary Beta, is preparing the consolidated statement of
financial position at 32 Ashadh 2079. The draft statements of financial position for
both entities as at 32 Ashadh 2079 are given below:
(Rs. '000)
Alpha Beta
Assets
Non-current assets:
Property, plant and equipment (Note 1) 966,500 546,000
Development project (Note 1) - 20,000
Investment in Beta (Note 1) 450,000 -
1,416,500 566,000
Current assets:
Inventories (Note 2) 165,000 92,000
Trade receivables 99,000 76,000
Cash and cash equivalents 18,000 16,000
282,000 184,000
Total assets 1,698,500 750,000
Equity and liabilities
Equity
Share capital (Re. 1 shares) 360,000 160,000
Retained earnings 570,000 360,000
Other components of equity 102,000 -
Total equity 1,032,000 520,000
Non-current liabilities:
Long-term borrowings (Note 3) 300,000 85,000
Pension liability (Note 4) 187,500 -
Deferred tax (Note 1 and 2) 69,000 54,000
Total non-current liabilities 556,500 139,000
Current liabilities:
Trade and other payables 70,000 59,000
Short-term borrowings 40,000 32,000
Total current liabilities 110,000 91,000
Total equity and liabilities 1,698,500 750,000
Note 1 – Alpha’s investment in Beta
On 1 Magh 2078, Alpha acquired 120 million shares in Beta. Alpha made a payment
of Rs. 450 million in exchange for these shares. The individual interim financial
statements of Beta showed a balance of Rs. 340 million on its retained earnings on
1 Magh 2078.
The directors of Alpha carried out a fair value exercise to measure the identifiable
assets and liabilities of Beta at 1 Magh 2078. The following matters emerged:
• Plant and equipment having a carrying amount of Rs. 440 million had an estimated
fair value of Rs. 480 million. The estimated remaining useful life of this plant and
equipment at 1 Magh 2078 was four years.
• An in-process development project of Beta had a carrying amount of Rs. 8 million
and a fair value of Rs. 18 million. During the six-month period from 1 Magh 2078
to 32 Ashadh 2079, Beta incurred further development costs of Rs. 12 million
relating to this project. These costs were correctly capitalised in accordance with

4
 Suggested Answers December 2022 Examination (CAP III - Group I)

the requirements of IAS 38 "Intangible Assets". No amortisation of the capitalised

costs of this project was required prior to 32 Ashadh 2079.
• The fair value adjustments have not been reflected in the individual financial
statements of Beta. In the consolidated financial statements, the fair value
adjustments will be regarded as temporary differences for the purposes of
computing deferred tax. The rate of deferred tax to apply to temporary differences
is 20%.
On 1 Magh 2078, the directors of Alpha measured the non-controlling interest in Beta
at its fair value. On that date, the fair value of an equity share in Beta was Rs. 3.80.
Note 2 – Intra-group trading
Since 1 Magh 2078, Alpha has supplied a product to Beta. Alpha applies a mark-up
of 25% to its cost of supplying this product. Sales of the product by Alpha to Beta in
the period from 1 Magh 2078 to 32 Ashadh 2079 totaled Rs. 30 million. One-third of
the products which Alpha had supplied to Beta since 1 Magh 2078 were still unsold
by Beta at 32 Ashadh 2079. Any adjustment which is necessary in the consolidated
financial statements as a result of these sales will be regarded as a temporary
difference for the purposes of computing deferred tax. The rate of deferred tax to
apply to temporary differences is 20%. No amounts were owing to Alpha by Beta in
respect of these sales at 32 Ashadh 2079.
Note 3 – Long-term borrowings
Prior to 1 Shrawan 2078, Alpha had no long-term borrowings. On 1 Shrawan 2078,
Alpha borrowed Rs. 300 million to finance its future expansion plans. The term of the
borrowings is five years and the annual rate of interest payable on the borrowings is
6%, payable in arrears. Alpha charged the interest paid on 32 Ashadh 2079 as a
finance cost in its financial statements for the year ended 32 Ashadh 2079.
The borrowings are repayable in cash at the end of the five-year term or convertible
into equity shares on that date at the option of the lender. If the borrowings had not
contained a conversion option, the lender would have required an annual return of
8%, rather than 6%. Discount factors which may be relevant are as follows:
Discount Present value of Re. 1 Cumulative present value of Re. 1
factor payable at the end of year 5 payable at the end of years 1–5 inclusive
6% 74·7 Paisa Rs. 4·21
8% 68·1 Paisa Rs. 3·99
Note 4 – Pension liability
Alpha has established a defined benefit pension plan for its eligible employees. The
statement of financial position of Alpha at 32 Ashadh 2079 currently includes the
estimated net liability at 31 Ashadh 2078. The following matters relate to the plan for
the year ended 32 Ashadh 2079:
• The estimated current service cost was advised by the actuary to be Rs. 60
million.
• On 32 Ashadh 2079, Alpha paid contributions of Rs. 70 million into the plan and
charged this amount as an operating expense.
• The annual market yield on high quality corporate bonds on 1 Shrawan 2078 was
8%.
• The estimated net liability at 32 Ashadh 2079 was advised by the actuary to be
Rs. 205 million.
• No benefits have been paid to date.
Required: 20
On the basis of above information, prepare the consolidated statement of financial
5
 Suggested Answers December 2022 Examination (CAP III - Group I)

position of Alpha as at 32 Ashadh 2079. Unless specifically told otherwise, you can
ignore the deferred tax implications of any adjustments you make.
Answer
1) Consolidated statement of financial position of Alpha as at 32 Ashadh 2079
Particulars Rs.’000
Assets
Non-current assets:
Property, plant and equipment (966,500 + 546,000 + 35,000 (WN1)) 1,547,500
Goodwill (WN 2) 62,000
Development project (20,000 + 10,000 (WN 1)) 30,000
1,639,500
Current assets:
Inventories (165,000 + 92,000 – (30,000 x 1/3 x 25/125%)) 255,000
Trade receivables (99,000 + 76,000) 175,000
Cash and cash equivalents (18,000 + 16,000) 34,000
464,000
Total assets 2,103,500
Equity and liabilities
Equity
Share capital (Rs. 1 shares) 360,000
Retained earnings (WN 4) 571,310
Other components of equity (WN 8) 113,380
Total equity 1,044,690
Non-controlling interest (WN 3) 156,000
Total equity 1,200,690
Non-current liabilities:
Long-term borrowings (WN 10) 365,210
Pension liability 205,000
Deferred tax (WN 11) 131,600
Total non-current liabilities 701,810
Current liabilities:
Trade and other payables (70,000 + 59,000) 129,000
Short-term borrowings (40,000 + 32,000) 72,000
Total current liabilities 201,000
Total equity and liabilities 2,103,500

WN 1 – Net assets of Beta

(Rs. '000)
32 Ashadh
Particulars 1 Magh 2078 2079
Share capital 160,000 160,000
Retained earnings:
Per financial statements of Beta 340,000 360,000
Fair value adjustments:
Plant and equipment [(480-440) and 40-(40/4×6/12)] 40,000 35,000
Development project 10,000 10,000
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 Suggested Answers December 2022 Examination (CAP III - Group I)

Deferred tax on fair value adjustments:

Date of acquisition (20% x (40,000 + 10,000)) (10,000)
Year end (20% x (35,000 + 10,000)) (9,000)
540,000 556,000
Increase in net assets post-acquisition (556,000 –
540,000) 16,000

WN 2 – Goodwill on acquisition of Beta

Particulars Rs.’000
Cost of investment:
Cash paid 450,000
Non-controlling interest at date of acquisition (40,000 x Rs.3·80) 152,000
Net assets at date of acquisition (WN1) (540,000)
Goodwill 62,000

WN 3 – Non-controlling interest in Beta

Particulars Rs.’000
At date of acquisition (WN2) 152,000
25% of post-acquisition increase in net assets of 16,000 (WN1) 4,000
156,000

WN 4 – Retained earnings
Particulars Rs.’000
Alpha – per draft SOFP 570,000
Adjustment for unrealised profit on unsold inventory (2,000 less 20%
(deferred tax)) (1,600)
Adjustment for finance cost of loan (WN6) (4,090)
Adjustment for: defined retirement benefit plan (WN7) (5,000)
Beta – 75% x 16,000 (WN1) 12,000
571,310

WN 5 – Equity component of long-term loan

Particulars Rs.’000
Total proceeds of compound instrument 300,000
Debt component:
Interest stream – 300,000 x 6% x Rs.3·99 (71,820)
Principal repayment – 300,000 x Rs.0·681 (204,300)
So equity component equals 23,880

WN 6 – Adjustment for finance cost of loan

Particulars Rs.’000
Actual finance cost – 8% (300,000 – 23,880 (WN5)) 22,090
Incorrectly charged by Alpha (300,000 x 6%) (18,000)
So adjustment equals 4,090

WN 7 – Adjustment for: defined retirement benefit plan

Particulars Rs.’000
Current service cost 60,000
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 Suggested Answers December 2022 Examination (CAP III - Group I)

Interest cost (8% x 187,500) 15,000

Contributions incorrectly charged to profit or loss (70,000)
So adjustment equals 5,000

WN 8 – Other components of equity

Particulars Rs.’000
Alpha – per draft financial statements 102,000
Equity element of convertible loan (WN5) 23,880
Actuarial gain/(loss) on defined retirement benefits plan (WN9) (12,500)
113,380

WN 9 – Actuarial gain/(loss) on defined benefit pension plan

Particulars Rs.’000
Opening liability 187,500
Current service cost 60,000
Interest cost 15,000
Contributions paid into plan (70,000)
192,500
Actuarial loss on re-measurement (balancing figure) 12,500
Closing liability 205,000

WN 10 – Long-term borrowings
Particulars Rs.’000
Opening loan element (300,000 – 23,880 (WN5)) 276,120
Finance cost less interest paid (WN6) 4,090
So closing loan element for Alpha equals 280,210
Long-term borrowings of Beta 85,000
So consolidated long-term borrowings equals 365,210

WN 11 – Deferred tax
Particulars Rs.’000
Alpha + Beta – per draft SOFP (69,000 + 54,000) 123,000
On closing fair value adjustments in Beta (WN1) 9,000
On unrealized profits in inventory (2,000 x 20%) (400)
131,600
2.
a)
i) On 1 Shrawan 2076, M Company granted 1000 share appreciation rights
(SARs) each to its 450 employees. All of the rights vested on 31 Ashadh 2078
can be exercised from 1 Shrawan 2078 up to Ashadh end 2080. At the grant
date, the value of each SAR was Rs. 100, and it was estimated that 5% of the
employees would leave during the vesting period. The fair value of the SARs
is as follows:
Date Fair value of SAR
Ashadh end 2077 Rs. 90
Ashadh end 2078 Rs. 110
Ashadh end 2079 Rs. 120

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 Suggested Answers December 2022 Examination (CAP III - Group I)

All the employees who were expected to leave the employment did leave the
company as expected before 31 Ashadh 2078. On Ashadh end 2079, 90
employees exercised their options when the intrinsic value of the right was
Rs. 105 and was paid in cash. M Company is, however, confused as to
whether to account for the SARs under NFRS 2 "Share-based Payment" or
NFRS 13 "Fair Value Measurement" and would like to be advised as to how
the SARs should have been accounted for from the grant date to Ashadh end
2079.
Required: 8
Advise, with appropriate explanations, M Company on how the above
transactions should be accounted for in its financial statements of Ashadh end
2077, 2078 and 2079 with reference to relevant Nepal Financial Reporting
Standards (NFRS).
ii) An entity sometimes displays its financial statements or other financial
information in a currency that is different from either its functional currency
or its presentation currency simply by translating all amounts at end-of-period
exchange rates. This is sometimes called a convenience translation. A result of
making a convenience translation is that the resulting financial information
does not comply with all NFRS, particularly NAS 21 "The effects of Changes
in Foreign Exchange Rates".
Required: 2
Explain the disclosure requirements when convenience translation is used to
display financial information.
b) A Ltd. is engaged in the manufacturing of certain specialized chemicals.
During the manufacturing process, certain waste water is produced which is
released by A Ltd. in the nearby river. To reduce pollution of the rivers, the
state government has introduced a scheme with the following salient features:
i) If a manufacturer installs certain pre-approved waste water treatment plant,
the government will provide an interest free loan equal to 50% of the cost
of the plant;
ii) Such loan will be repayable to the government in 5 years from the date of
disbursal;
iii) The manufacturer availing the benefit of this scheme must treat the waste
water of its factory using the specified plant before releasing it to the river.
If this condition is violated, the entire loan shall become immediately
repayable to the government along with a penalty of Rs. 1 million.
Cost of the wastewater treatment plant to be installed to avail the benefit of
the scheme is Rs. 5 million. A Ltd. decided to utilise this scheme because, if
it were to obtain the similar loan from a bank, it would be available at a
market interest rate of 12% per annum. Accordingly, it applied for and
obtained the government loan of Rs. 2.5 million on 1 Shrawan 2077. The
company purchased and installed the plant such that it became ready for use
on the same date.
A Ltd. has an accounting policy of recognising government grant in relation
to depreciable assets in the proportion of depreciation expense. It has
determined that the plant will be depreciated over a period of 5 years using
straight-line method. In the month of Ashadh 2079, government officials
conducted a surprise audit, and it was found that the company was not using
the waste water treatment plant as prescribed. Accordingly, on 32 Ashadh
2079, the government ordered A Ltd. to repay the entire loan along with

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 Suggested Answers December 2022 Examination (CAP III - Group I)

penalty. The company repaid the loan with interest and penalty as per the
order on 32 Ashadh 2079.
Required: (3+3+4=10)
i) Measure the amount of government grant as on 1 Shrawan 2077 with
explanation of relevant provisions of relevant NFRS.
ii) Determine the nature of the government grant and its accounting
treatment (principally) for the year ended 31 Ashadh 2078.
iii) Determine the impact on profit or loss if any, on account of revocation of
government grant as on 32 Ashadh 2079.
Give journal entries as well for the above three requirements.
Answer
2 a)
i) M Company will account for this transaction under the provisions of NFRS 2 "Share based
payment". NFRS 13 applies when another NFRS requires or permits fair value measurements or
disclosures about fair value measurements (and measurements, such as fair value less costs to sell,
based on fair value or disclosures about those measurements). NFRS 13 specifically excludes
transactions covered by certain other standards including share-based payment transactions within
the scope of NFRS 2 and leasing transactions within the scope of NFRS 16 "Leases".
For cash settled share-based payment transactions, the fair value of the liability is measured in
accordance with NFRS 2 initially, at each reporting date and at the date of settlement using an
option pricing model. Unlike equity settled transactions, the measurement reflects all conditions
and outcomes on a weighted average basis. Any changes in fair value are recognised in profit or
loss in the period.
Therefore, the SARs would be accounted for as follows:
Year Expense Liability Calculation
Ashadh end Rs. 19,260,000 Rs. 19,260,000 428 x 1,000 x Time apportioned over the
2077 Rs. 90 x ½ vesting period. Using the
estimated (450 x 95%) 428
employees
Ashadh end Rs. 27,820,000 Rs. 47,080,000 428 x 1,000 Expense is the difference between
2078 x Rs. 110 liabilities at Ashadh end 2078
and Ashadh end 2077
Ashadh end Rs. 2,930,000 Rs. 40,560,000 338 x 1,000 Cash paid is 90 x 1,000 x Rs.
2079 x Rs. 120 105, i.e. Rs.
9,450,000.
The liability has been reducedby
Rs. 6,520,000 (47,080,000-
40,560,000) and therefore the
expense is the difference of Rs.
2,930,000 (9,450,000-6,520,000)
The liability's fair value would be Rs. 40,560,000 at Ashadh end 2079 and the expense for
the year would be Rs. 2,930,000.
Statement of profit or loss for the year ended (Extracts)
2077 2078 2079
Rs. Rs. Rs.
Staff costs 19,260,000 27,820,000 2,930,000
Statement of financial position as at (Extracts)
2077 2078 2079
Rs. Rs. Rs.
SARs liabilities 19,260,000 47,080,000 40,560,000
ii) The disclosure requirement when convenience translation is used include:
• Identify the information as supplementary information to distinguish it from the
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 Suggested Answers December 2022 Examination (CAP III - Group I)

information that complies with NFRS.

• Disclose the currency in which the supplementary information is displayed.
• Disclose the entity’s functional currency and the method of translation used to
determine the supplementary information.
2b) i) As per the principles of NAS 20 “Accounting for Government Grants and Disclosure of
Government Assistance”, the benefits of a government loan at a below market rate of
interest is treated as a government grant. The loan shall be recognized and measured in
accordance with NFRS 9 “Financial Instruments”. The benefit of the below market rate o f
interest shall be measured as the difference between the initial carrying value of the loan
determined in accordance with NFRS 9 and the proceeds received. The benefit is
accounted for in accordance with NAS 20. As per NFRS 9, the loan should be initially
measured at its fair value.
Initial recognition of grant as on 1st Shrawan, 2077
Fair value of loan = Rs. 2,500,000 x 0.567 (PVF @ 12%, 5th year) = Rs. 1,417,500
A Ltd. will recognize Rs. 1,082,500 (2,500,000 – 1,417,500) as the government grant and
will make the following entry on receipt of loan:
Date Particulars Dr. (Rs.) Cr. (Rs.)
1.4.20X1 Bank account Dr. 2,500,000
To Deferred Grant Income 1,082,500
To Loan account 1,417,500
(Being grant initially recorded at fair value)
ii) Accounting treatment for year ending 31st Ashadh, 2078
As per NAS 20, grants related to assets are government grants whose primary condition is
that an entity qualifying for them should purchase, construct or otherwise acquire long-
term assets.
As per NAS 20, Government grants related to assets, including non-monetary grants at
fair value, shall be presented in the balance sheet either by setting up the grant as deferred
income or by deducting the grant in arriving at the carrying amount of the asset.
One method recognises the grant as deferred income that is recognised in profit or loss on a
systematic basis over the useful life of the asset.
The other method deducts the grant in calculating the carrying amount of the asset. The
grant is recognised in profit or loss over the life of a depreciable asset as a reduced
depreciation expense.
A Ltd. has adopted first method of recognising the grant as deferred income that is
recognised in profit or loss on a systematic basis over the useful life of the asset. Here,
deferred income is recognised in profit or loss in the proportion in which depreciation
expense on the asset is recognised.
Depreciation for the year (2077-2078) = Rs. 5,000,000 / 5 years = Rs. 1,000,000
As the loan is to finance a depreciable asset, Rs. 1,082,500 will be recognized in Profit or
Loss on the same basis as depreciation.
Since the depreciation is provided on straight line basis by A Ltd., it will credit Rs. 216,500
(1,082,500 / 5) equally to its statement of profit and loss over the 5 years.
Journal Entries
Date Particulars Dr. (Rs.) Cr. (Rs.)

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 Suggested Answers December 2022 Examination (CAP III - Group I)

31.3.2078 Depreciation (Profit or Loss A/c) Dr. 1,000,000

To Property, Plant & Equipment 1,000,000
(Being depreciation provided for the year)
Deferred grant income Dr. 216,500
To Profit or Loss 216,500
(Being deferred income adjusted)

iii) Impact on profit or loss due to revocation of government grant as on 32nd Ashadh 2079
As per para NAS 20, a government grant that becomes repayable shall be accounted for as
a change in accounting estimate. Repayment of a grant related to income shall be
applied first against any unamortised deferred credit recognised in respect of the grant.
To the extent that the repayment exceeds any such deferred credit, or when no deferred
credit exists, the repayment shall be recognised immediately in profit or loss.
Amount payable to Government on account of = Rs. 25,00,000
principal loan
Amount payable to Government on account of penalty = Rs. 10,00,000
Journal Entries
Date Particulars Dr. (Rs.) Cr. (Rs.)
31.3.2079 Deferred grant income Dr. 216,500
To Profit or Loss 216,500
(Being deferred income adjusted)
Loan account (WN1) Dr. 1,778,112
Deferred grant income (WN2) Dr. 649,500
Profit or Loss Dr. 72,388
To Government grant payable 2,500,000
(Being refund of government grant)
Profit or Loss Dr. 1,000,000
To Government grant payable 1,000,000
(Being penalty payable to government)
Therefore, total impact on profit or loss on account of revocation of government grant
as on 32nd Ashadh, 2079 will be Rs. 1,072,388 (1,000,000 + 72,388).
Circumstances giving rise to repayment of a grant related to an asset may require
consideration to be given to the possible impairment of the new carrying amount of the
asset.
Working Notes:
1. Amortisation Schedule of Loan
Year Opening balance of Loan Interest @ 12% Closing balance of Loan
31.03.2078 1,417,500 170,100 1,587,600
32.03.2079 1,587,600 190,512 1,778,112

2. Deferred Grant Income

Year Opening balance Adjustment Closing balance

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 Suggested Answers December 2022 Examination (CAP III - Group I)

31.03.2078 1,082,500 216,500 866,000

32.03.2079 866,000 216,500 649,500
3.
a) Delta is an entity which prepares financial statements to 31 March each year.
The functional currency of Delta is the dollar ($). The following events have
occurred which are relevant to the year ended 31 March 2018:
Event 1:
On 1 January 2018, Delta entered into a contract with a foreign supplier. The
terms of the contract were that the supplier would construct a large machine for
Delta’s use and deliver the machine on 30 June 2018. The total construction
price of 20 million groats (the currency of the supplier) is due for payment on
31 July 2018.
On 1 January 2018, Delta entered into an agreement for the forward purchase
of 20 million groats. The settlement date for this forward purchase of foreign
currency was 31 July 2018. It intends to use this forward purchase as a hedge of
the expected cash outflow flows arising under the construction contract on 31
July 2018.
Delta wishes to use hedge accounting for this arrangement if this is possible
under International Financial Reporting Standards. It has prepared all relevant
documentation which is necessary to enable hedge accounting to be used if the
qualifying conditions are met.
Data relevant to the construction contract and to the forward purchase of
currency is as follows:
– Increase in expected cash flows arising under the construction contract
between 1 January 2018 and 31 March 2018 = $2,600,000.
– Positive fair value of forward currency purchase contract at 31 March 2018 =
$2,700,000.
Event 2:
On 1 February 2018, Delta purchased some inventory from a supplier whose
functional currency was the dinar. The total purchase price was 3·6 million
dinars. The terms of the purchase were that Delta would pay for the goods in
two instalments. The first instalment payment of 1,260,000 dinars was due on
15 March 2018 and the second payment of 2,340,000 dinars on 30 April 2018.
Both payments were made on the due dates. Delta did not undertake any
activities to hedge its currency exposure arising under this transaction. Delta
sold 60% of this inventory prior to 31 March 2018 for a total sales price of
$480,000. All sales proceeds were receivable in $. After 31 March 2018, Delta
sold the remaining inventory for sales proceeds which were in excess of their
cost.
Relevant exchange rates are as follows:
– 1 February 2018 – 6·0 dinars to $1.
– 15 March 2018 – 6·3 dinars to $1.
– 31 March 2018 – 6·4 dinars to $1.
Required: (5+5=10)
Explain and show how the events would be reported in the financial statements
of Delta for the year ended 31 March 2018.
b) Given below is the Profit and Loss Account of Nepal Cement Ltd. for the year
ending 32 Ashadh 2079:
Nepal Cement Ltd.
Profit and Loss Account for the fiscal year ending 32 Ashadh 2079
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 Suggested Answers December 2022 Examination (CAP III - Group I)

Notes Amount (Rs. ‘000’)

Income
Sales i 28,525
Other Income 756
29,281
Expenditure
Operating cost ii 25,658
Customs Duty 1,718
Interest on Bank Overdraft iii 93
Interest on 10% Debentures 1,157
28,626
Profit before depreciation 655
Less: Depreciation 255
Profit before tax 400
Less: Provision for tax iv 275
Profit after tax 125
Less: Transfer to Fixed Asset Replacement Reserve 25
100
Less: Dividend paid and payable 45
Retained Profit 55
Notes:
i) This represents the invoice value of goods supplied after deducting discounts,
returns and sales tax.
ii) Operating cost includes Rs. 10,247,000 as wages, salaries and other benefits
to employees.
iii) The bank overdraft is treated as a temporary source of finance.
iv) The charge for taxation includes a transfer of Rs. 45,000 to the credit of
deferred tax account.
Required: (5+5=10)
i) Prepare a value added statement for the year ending 32 Ashadh 2079.
ii) Reconcile total value added with profit before taxation.
Answer
3 a) Event 1:
Under the principles of NFRS 9 – Financial Instruments (revised 2014) – Delta is
permitted to use hedge accounting when reporting the hedging arrangement in its
financial statements. This is because:
• The relevant documentation has been prepared.
• There is a clear economic relationship between the hedged cash flows and the
hedging instrument.
• Delta is entering into a forward purchase of exactly the required amount of foreign
currency.
The hedging instrument is a derivative financial instrument. Derivatives are normally
measured at fair value in the financial statements with changes in fair value being
recognised in profit or loss.
On 31 March 2018, the derivative would be recognised in the financial statements as a
current asset at its fair value of $2·7 million.
The hedged item is designated to be the changes in the expected cash flows arising on the
contract. For the year ended 31 March 2018, changes in the expected cash flows arising
under the contract would not be recognised since the contract is an executory contract (a
contract made by two parties in which the terms are set to be fulfilled at a later date).

Since the hedging documentation indicates that the hedged item is the changes in the
expected cash flows, then cash flow hedge accounting is used. In this case, this involves
comparing the change in the value of the derivative (the recognised hedging instrument)
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 Suggested Answers December 2022 Examination (CAP III - Group I)

with the (unrecognised) changes in the value of the expected cash flows arising under the
contract.
To the extent that the change in the value of the derivative is less than or equal to the
change in the value of the expected cash flows (the effective portion of the hedge), the
change in value of the derivative is recognised in other comprehensive income rather than
profit or loss. However, any over-hedging would result in any gains or losses arising on
the hedging instrument which relate to the over-hedging (the ineffective portion of the
hedge) being immediately be recognised in profit or loss.
In this case, the overall gain in fair value of the derivative between 1 January 2018 and 31
March 2018 is $2·7 million.
In the same period, the change in the expected value of the cash flows arising under the
contract is $2·6 million. Therefore $2·6 million of the gain on the derivative would be
recognised in other comprehensive income with the balance of $100,000 being
recognised in profit or loss.
Event 2:
Under the principles of IAS 21 "The Effects of Changes in Foreign Exchange Rates" the
purchase of inventory on 1 February 2018 would be recorded using the spot rate of
exchange on that date. Therefore Delta would recognise a purchase and an associated
payable of $600,000 (3·6 million dinars/6).
Delta would recognise revenue of $480,000 in the statement of profit or loss because
goods to the value of $480,000 were sold prior to 31 March 2018.
Delta would recognise $360,000 ($600,000 x 60%) in cost of sales because the revenue
of $480,000 is recognised.
The closing inventory of goods purchased from the foreign supplier would be $240,000
($600,000 – $360,000) and would be recognised as a current asset. This would not be re-
translated since inventory is a non-monetary asset.
The payment of 1,260,000 dinars on 15 March 2018 would be recorded using the spot
rate of exchange on that date, therefore the payment would be recorded at $200,000
(1,260,000 dinars/$6·3).
The closing payable of 2,340,000 dinars (3,600,000 dinars – 1,260,000 dinars) is a
monetary item, therefore would be translated at the rate of exchange in force at the year
end (6·4 dinars to $1). Therefore the closing payable (recorded in current liabilities)
would be $365,625 (2,340,000 dinars/$6·4).
The difference between the initially recognised payable ($600,000) and the subsequently
recognised payment ($200,000) is $400,000. Since the closing payable is $365,625 (see
above), Delta has made an exchange gain of $34,375 ($400,000 – $365,625). This gain is
recognised in the statement of profit or loss, either under other income category or as a
reduction in cost of sales.
3 b)
i) Value added statement
Nepal Cement Ltd.
Value Added Statement
For the year ending on 32nd Ashadh 2079

Particulars Rs. in ‘000’ Rs. in ‘000’ %

Sales 28,525
Less: Cost of bought in material and services
Operating cost (25,658-10,247) 15,411
Customs Duty 1,718
Interest on bank overdraft 93 17,222
Value added by manufacturing and trading activities 11,303
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 Suggested Answers December 2022 Examination (CAP III - Group I)

Add: Other income 756

Total value added 12,059
Application of value added:
To pay employees:
Wages, salaries and other benefits 10,247 84.97
To pay government:
Corporation tax (275-45) 230 1.90
To pay providers of capital:
Interest on 10% Debentures 1,157
Dividends 45 1,202 9.98
To provide maintenance and expansion of company
Depreciation 255
Fixed Assets Replacement Reserve 25
Deferred Tax Account 45
Retained profit 55 380 3.15
Total 12,059 100

ii) Reconciliation between Total Value Added and Profit Before Taxation
Rs. in ‘000’ Rs. in ‘000’
Profit before tax 400
Add back:
Depreciation 255
Wages, salaries and other benefits 10,247
Debenture interest 1,157 11,659
Total Value Added 12,059
Notes:
• Customs Duty and deferred tax could alternatively be shown as a part of “To pay
government”.
• Bank overdraft, being a temporary source of finance, has been considered as the
provision of a banking service rather than of capital. Therefore, interest on bank overdraft
has been shown by way of deduction from sales and as a part of ‘cost of brought in
materials and services’
4. Write short note/ answer on the following: (5×3=15)
a) Defined Conglomerate Merger
b) Lev and Schwartzon model of Human Resource Value Accounting
c) What is insurance contract? List down the examples that are insurance contract.
d) Fair value as set out in NFRS 13
e) When does debt seem to be equity?
Answer
4 a) Defined Conglomerate merger
This is joining of two or more companies whose businesses are not related with each other
either vertically or horizontally. The companies involved in the merger may be
manufacturing totally different products. Of course, there may be some common features
between them such as same channel of distribution or technological area.
The basic objective behind such a merger is the diversification of activities. Such a merger
may also lead to concentration of economic power by virtue of controlling by the merged
corporation different fields of business activities. For example, a company engaged in
manufacturing activities may get itself merged with a company engaged in Insurance
business. The two companies are totally different and therefore such merger is defined
conglomerate merger.

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 Suggested Answers December 2022 Examination (CAP III - Group I)

4 b) Lev and Schwartzon Model on Human Resource Value Accounting:

Human resource accounting is the process of identifying and reporting investments made in
the human resources of an organization that are presently unaccounted for in the
conventional accounting practices. It is an extension of standard accounting principles.
Measuring the value of the human resources can assist organizations in accurately
documenting their assets.
One of the important approach to the evaluation of human resource assets is to calculate
their economic values. The economic value of the firm can be determined by obtaining the
present value of future earnings. A number of valuation models have been developed for
determining the present value of future earnings.
Lev and Schwartzon
Lev & Schwartz advocated the estimation of future earnings during the remaining service
life of the employee and then arriving at the present value by discounting the estimated
earnings at the cost of capital. The assumptions in this method are realistic and scientific.
The method has practical applicability when the availability of quantifiable and analyzable
data is concerned.
Still, this model cannot give any method to record the value of human resources in the
Books of Accounts. According to this model, the value of human resources is ascertained in
the following ways:
➢ All employees are classified into specific groups according to age, experience, and skill.
➢ Average annual earnings are determined for various ranges of age.
➢ The total earnings each group will get up to retirement age are calculated.
➢ The total earnings calculated as above are discounted at the rate of the cost of capital.
➢ The value thus arrived at will be the value of human resources/assets.
This method has some limitations, which are as follows:
• This method does not indicate the accounting treatment of human resources.
• This method only considers wages and salaries, but wages and salaries are not only the
costs associated with the employees. Other costs are associated with the employees.
• The model ignores the possibility and probability that an individual may leave an
organization for reasons other than death or retirement. The model’s expected value of
human capital measures a person’s human capital’s expected ‘conditional value.’ The
implicit condition is that the person will remain in an organization until death or
retirement. This assumption is not practical.

4 c) Insurance contract is a "contract under which one party (the insurer) accepts significant
insurance risk from another party (the policyholder) by agreeing to compensate the
policyholder if a specified uncertain future event (the insured event) adversely affects the
policyholder." The following are examples of insurance contracts:
• Insurance against theft or damage to property
• Insurance against product liability, professional liability, civil liability or legal expenses
• Life insurance and prepaid funeral expenses
• Life-contingent annuities and pensions
• Disability and medical cover
• Surety bonds, fidelity bonds, performance bonds and bid bonds
• Credit insurance that provides for specified payments to be made to reimburse the holder
for a loss it incurs because a specified debtor fails to make payment when due
• Product warranties (other than those issued directly by a manufacturer, dealer or retailer)
• Title insurance
• Travel assistance
• Catastrophe bonds that provide for reduced payments of principal, interest or both if a
specified event adversely affects the issuer of the bond

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 Suggested Answers December 2022 Examination (CAP III - Group I)

• Insurance swaps and other contracts that require a payment based on changes in climatic,
geological or other physical variables that are specific to a party to the contract
• Reinsurance contracts.

4 d) Fair value as set out in NFRS 13

Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. Basically it is
an exit price. Fair value is focused on the assumptions of the market place and is not entity
specific. It therefore takes into account any assumptions about risk. Fair value is measured
using the same assumptions and taking into account the same characteristics of the asset or
liability as market participants would. Such conditions would include the condition and
location of the asset and any restrictions on its sale or use. Further, it is not relevant if the
entity insists that prices are too low relative to its own valuation of the asset and that it
would be unwilling to sell at low prices. Prices to be used are those in ‘an orderly
transaction’.
An orderly transaction is one that assumes exposure to the market for a period before the
date of measurement to allow for normal marketing activities and to ensure that it is not a
forced transaction. If the transaction is not ‘orderly’, then there will not have been
enough time to create competition and potential buyers may reduce the price that they are
willing to pay. Similarly, if a seller is forced to accept a price in a short period of time, the
price may not be representative. It does not follow that a market in which there are few
transactions is not orderly. If there has been competitive tension, sufficient time and
information about the asset, then this may result in a fair value for the asset.
Fair value measurement assumes that the transaction to sell the asset or transfer the liability
takes place in the principal market for the asset or liability or, in the absence of a principal
market, in the most advantageous market for the asset or liability. The principal market is
the one with the greatest volume and level of activity for the asset or liability that can be
accessed by the entity.
The most advantageous market is the one which maximizes the amount that would be
received for the asset or minimizes the amount that would be paid to transfer the liability
after transport and transaction costs.

4 e) Many financial instruments have both features of debt and equity that this can lead to
inconsistency of reporting. It is not easy always to distinguish the debt and equity in an
entity‘s statement of financial position.
The key feature of debt is that the issuer is obliged to deliver either cash or another
financial asset to the holder. In contrast, equity is any contract that evidences a residual
interest in the entity‘s assets after deducting all of its liabilities. Thus, A financial
instrument is an equity instrument only if the instrument includes no contractual obligation
to deliver cash or another financial asset to another entity, and if the instrument will or may
be settled in the issuer's own equity instruments.
For example,
• a bond that requires the issuer to make interest payments and redeem the bond for cash is
classified as debt.
• ordinary shares, where all the payments are at the discretion of the issuer, are classified as
equity of the issuer.
• preference shares required to be redeemed on a fixed date, or on the occurrence of an
event that is certain to occur, should be classified as debt.
• preference shares required to be converted into a fixed number of ordinary shares on a
fixed date, or on the occurrence of an event that is certain to occur, should be classified as
equity.
5.
a) ‘Nepal Public Sector Accounting Standard’ states "All comparisons of budget and
actual amount shall be presented on a comparable basis to the budget". Explain
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 Suggested Answers December 2022 Examination (CAP III - Group I)

the detail provisions of above standard for comparison of budget and actual
amount. 8
b) Sundhara entered into a 20 years operating lease for a property on 1 Shrawan
2066 which has a remaining life of eight years at 1 Shrawan 2078. The rental
payments are Rs. 2.3 million per year.
Prior to 1 Shrawan 2078, Sundhara obtained permission from the owner of the
property to make some internal alterations to the property so that it can be used
for a new manufacturing processes which Sundhara is undertaking. The cost of
these alterations was Rs. 7 million and they were completed on 1 Shrawan 2078
(the time taken to complete the alterations can be taken as being negotiable). A
condition of being granted permission was that Sundhara would have to restore
the property to its original condition before handling back the property at the end
of the lease. The estimated restoration cost on 1 Shrawan 2078, discounted at 8%
per annum to its present value, is Rs. 5 million.
Required: (3+4=7)
i) Explain how the lease, the alterations to the leased property and the
restoration costs should be treated in the financial statements of Sundhara for
the year ended 32 Ashadh 2079.
ii) Prepare extracts from the financial statements of Sundhara for the year ended
32 Ashadh 2079 reflecting your answer to (i) above.
Answer
5 a) Clause 1.9.25 to 1.9.30 of Nepal Public Sector Accounting Standard issued by Accounting
Standard Board of Nepal deals with the comparable basis for comparison of budget and the
actual amount. The content of above standard are given below:
1.9.25 All comparisons of budget and actual amounts shall be presented on a comparable
basis to the budget.
1.9.26 The comparison of budget and actual amounts will be presented on the same
accounting basis (accrual, cash or other basis), same classification basis and for
the same entities and period as for the approved budget. This will ensure that the
disclosure of information about compliance with the budget in the financial
statements is on the same basis as the budget itself. In some cases, this may mean
presenting a budget and actual comparison on a different basis of accounting, for
a different group of activities, and with a different presentation or classification
format than that adopted for the financial statements.
1.9.27 Financial statements consolidate entities and activities controlled by the entity. As
noted in paragraph 1.9.10, separate budgets may be approved and made publicly
available for individual entities or particular activities that make up the
consolidated financial statements. Where this occurs, the separate budgets may be
recompiled for presentation in the financial statements in accordance with the
requirements of this Standard. Where such recompilation occurs, it will not
involve changes or revisions to approved budgets. This is because this Standard
requires a comparison of actual amounts with the approved budget amounts.
1.9.28 Entities may adopt different bases of accounting for the preparation of their
financial statements and for their approved budgets. For example, in some, cases a
government or government agency may adopt the cash basis for its financial
statements and the accrual basis for its budget. In addition, budgets may focus on,
or include information about, commitments to expend funds in the future and
changes in those commitments, while the financial statements will report cash
receipts and payments and balances thereof. However, the budget entity and
financial reporting entity will often be the same. Similarly, the period for which
the budget is prepared and the classification basis adopted for the budget will
often be reflected in financial statements. This will ensure that the accounting
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 Suggested Answers December 2022 Examination (CAP III - Group I)

system records and reports financial information in a manner which facilitates the
comparison of budget and actual data for management and for accountability
purposes - for example, for monitoring progress of execution of the budget during
the budget period and for reporting to the government, the public and other users
on a relevant and timely basis.
1.9.29 In some cases, budgets may be prepared on a cash or accrual basis consistent with
a statistical reporting system that encompasses entities and activities different
from those included in the financial statements. For example, budgets prepared to
comply with a statistical reporting system may focus on the general government
sector and encompass only entities fulfilling the "primary" or "non-market"
functions of government as their major activity, while financial statements report
on all activities controlled by a government, including the business activities of
the government.
1.9.30 In statistical reporting models, the general government sector may comprise
national, state/provincial and local government levels. Sometimes, the national
government may control state/provincial and local governments, consolidate those
governments in its financial statements and develop, and require to be made
publicly available, an approved budget that encompasses all three levels of
government. In these cases, the requirements of this Standard will apply to the
financial statements of those national governmental entities. However, where a
national government does not control state or local governments, its financial
statement will not consolidate state/provincial or local governments. Rather,
separate financial statements are prepared for each level of government. The
requirements of this Standard will only apply to the financial statements of
governmental entities when approved budgets for the entities and activities they
control, or subsections thereof, are made publicly available.
5 b)
(i) The alterations to the leased property do not affect the lease itself and this should
continue to be treated as an operating lease and charging profit or loss with the annual
rental of Rs. 2.3 million.
The initial cost of the alterations should be capitalized and depreciated over the
remaining life of the lease. In addition to this, NAS 37 "Provisions, contingent assets
and contingent liabilities" requires that the cost of restoring the property to its original
condition should be provided for on 1 Shrawan 2078 as this is when the obligation to
incur the restoration cost arises (as the time taken to do the alteration is negligible). The
present value of the restoration costs, given as Rs. 5 million, should be added to the
initial cost of the alterations and depreciated over the remaining life of the lease. A
corresponding provision should be created and a finance cost of 8% per annum should
be charged to profit or loss and accrued on this provision.
(ii) Extracts from the financial statements of Sundhara
Statement of profit or loss for the year ended 32 Ashadh 2079 Rs. 000’
Operating lease rental 2,300
Depreciation of alterations to leased property (12,000/8 years) 1,500
Finance cost (5,000 x 8%) 400
Statement of financial position as at 32 Ashadh 2079
Non current assets
Alterations to leased property (7,000 + 5,000) 12,000
Accumulated Depreciation (above) (1,500)
Carrying amount 10,500
Non-current liabilities
Provision for property restoration costs (5,000 + 400 above) 5,400
6.
a) Astha Ltd. made a decision to sell a business unit on 15 Aswin, 2079, and the
criteria to classify the unit as held for sale were met on 1 Kartik 2079. Astha
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 Suggested Answers December 2022 Examination (CAP III - Group I)

Ltd.’s accounting year end is 31 Chaitra. At 1 Kartik, 2079, the carrying amount of
the assets and liabilities of the business unit (before any depreciation for the year
2079 or revaluation adjustments) was as follows:
Rs. million
Land and buildings 120
Equipment 50
Trade receivables 30
Inventories 20
Trade payables (26)
Additional Information:
i) The land and buildings are held under the revaluation model of NAS 16
"Property, Plant and Equipment" and were last revalued on 31 Chaitra 2078 to
Rs. 120 million. Their market valuation on 1 Kartik 2079 was Rs. 124 million
and selling costs were estimated at Rs. 2.5 million at that date. Residual value
was, and continues to be, expected to be higher than cost.
ii) The equipment is held under the cost model of NAS 16. The equipment was
purchased on 1 Kartik 2077 for Rs. 80 million and is being depreciated
straight line over a four-year period to a zero residual value. Its sale value at
1 Kartik 2079 was Rs. 55 million. Selling costs are insignificant.
iii) The trade receivables are recorded at invoiced value, reduced by any
allowances for credit losses recognised at 31 Chaitra 2078. No adjustment to
these allowances was necessary at 1 Kartik 2079. The receivables, if factored,
would realise approximately Rs. 26 million, net of transaction costs at
1 Kartik 2079.
iv) The inventories are merchandise purchased for resale and are held at cost.
Their market value at 1 Kartik 2079 was Rs. 28 million. Associated selling
costs would amount to Rs. 1.4 million.
v) It was anticipated at 1 Kartik, 2079 that the business unit will be sold for
Rs. 200 million, net of selling costs, to a rival company in a single transaction.
Required: 5
In respect of Astha Ltd.’s year ended 31 Chaitra 2079, show and briefly explain,
the amount recognised as Non-Current Assets Held for Sale under NFRS 5 at
1 Kartik 2079 and the impairment charge (if any) for the business unit.
(6)

b) The following is the Balance Sheet of Sunrise Ltd. as on 32 Ashadh 2079:

Liabilities Rs. Assets Rs.
Share Capital Fixed Assets
10,000 Equity Shares Machinery 800,000
of Rs. 100 each 1,000,000 Factory Shed 300,000
Less: Calls in Arrear Vehicles 200,000
(Rs. 20 for Final Call) 50,000 950,000 Furniture 50,000
Reserve and Surplus Current Assets
General Reserve 400,000 Inventory 400,000
Profit & Loss Account 230,000 Sundry Debtors 750,000
Current Liabilities Bank Balance 60,000
Bank Overdraft 500,000
Creditors 500,000 Preliminary Expenses 20,000
Total 2,580,000 Total 2,580,000
The following additional information is furnished:
a) Machinery and Factory Shed are worth 30% above their book value.
Depreciation on appreciated value of Machinery and Factory Shed is not to be
considered for valuation of goodwill and shares.
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 Suggested Answers December 2022 Examination (CAP III - Group I)

b) For the purpose of valuation of shares, goodwill is to be considered on the

basis of 4 years’ purchase of super profits based on average profit (after tax)
of the last 3 years. Profit of the last 3 years (after tax) are as follows:
For the year ended 31.3.2077 Rs. 260,000
For the year ended 31.3.2078 Rs. 350,000
For the year ended 32.3.2079 Rs. 290,000
c) During the year ended on 31.3.2077, new addition to Factory Shed costing
Rs. 20,000 was charged to Profit & Loss Account. Depreciation charged on
Factory Shed is @ 10% on reducing balance method.
d) In a similar business, return on Capital Employed is 15% (after tax).
e) Income Tax rate is 25%
Required: 5
Find out the value of each fully paid and partly paid Equity Share on Net Assets
basis.

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 Suggested Answers December 2022 Examination (CAP III - Group I)

Answer
6 a) Non-Current Assets Held for Sale (NFRS 5)
Carrying amount at 1 Kartik, 2079, after applying NAS 16:
Rs. million
Land and buildings 124
Equipment (50 – (80/4 years × 6/12)) 40
Trade receivables 30
Inventories 20
Trade payables (26)
188

Any test for impairment will be based on the disposal group as a whole. As a disposal group,
fair value less costs to sell (Rs. 200 million) is higher than carrying amount (Rs.188 million)
there is no impairment charge.
The amount recognised as non-current assets held for sale is therefore:
Rs. million
Land and buildings 124
Equipment 40
164
Trade receivables and inventories are outside the scope of NFRS 5.

6 b) Sunrise Ltd.
Statement of Valuation of Shares
Particulars Amount (Rs.)
Net tangible assets (W N 1) 1,908,954
Add: Goodwill (W N 3) 69,208
Add: Calls in arrears 50,000
2,028,162
No. of Equity Shares 10,000
Value of fully paid Equity share (Rs. 2,028,162/10,000) Rs. 202.82
Value of partly paid Equity Share (Rs. 202.82-Rs. 20.00) Rs. 182.82
Working Notes:
1) Statement of Net Tangible Assets (as on 32nd Ashadh 2079)
Particulars Amount (Rs.) Amount (Rs.)
Machinery 800,000
Add: 30% increase 240,000 1,040,000
Factory Shed 300,000
Add: 30% increase 90,000 390,000
Addition to factory shed on 2076/77 20,000
Less: Depreciation
For 2076/77 Rs 2,000
For 2077/78 Rs 1,800
For 2078/79 Rs 1,620 5,420
14,580
Add: 30% appreciation 4,374 18,954
Vehicle 200,000
Furniture 50,000
Inventory 400,000
Debtors 750,000
Bank 60,000
2,908,954
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 Suggested Answers December 2022 Examination (CAP III - Group I)

Less: Bank Overdraft 500,000

Creditors 500,000 1,000,000
Net Tangible Assets 1,908,954

2) Average Annual Profits

Particulars 2076/77 2077/78 2078/79
Rs. Rs. Rs.
Reported Profit (after tax) 260,000 350,000 290,000
Add: Cost of Additional
Factory Shed (net of tax)
(Rs 20,000-Rs 5,000* ) 15,000
275,000
Less: Depreciation (net of tax)
on additional factory shed* 1,500 1,350 1,215
273,500 348,650 288,785
Average Profit of three years
(273,500+348,650+288,785)/3 = Rs 303,645

• 25% Tax saved in Expenses.

Fiscal Year Depreciation Tax Depreciation

@ 25% Net of Tax
Rs. Rs. Rs.
2076/77 2,000 500 1,500
2077/78 1,800 450 1,350
2078/79 1,620 405 1,215

3) Value of Goodwill
Particulars Amount (Rs.)
Capital Employed (net of tangible assets as per WN 1) 1,908,954
Average Profit (as per WN 2) 303,645
Less: Normal Profit @ 15% of Capital employed 286,343
Super Profit 17,302
Value of Goodwill (4 years’ purchase of super profits)
(Rs 17,302*4) 69,208

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 Suggested Answers December 2022 Examination (CAP III - Group I)

Examiner’s Commentary on Students' Performance in

December 2022 Examinations
Paper 1: Advanced Financial Reporting
List of Questions Specific Comments on the Performance of the Students
Question no. 1 Most of the students attempted correctly, however confused on calculation
of Deferred Tax, Retained Earning, Long term Borrowing Parts.
Question no. 2 a. Most of the students were confused on Time Period for Calculation of
SAR Liability.
b. Most of the students were confused on Calculation of PV of loan.
Question no. 3 a. Confused on Hedge Accounting.
b. Bonus Question is well Attempted and scored good
Question no. 4 All questions are attempted well except question no e. Students were not
conceptually cleared on these questions.
Question no. 5 a) Very little preparation
b) Confused with finance ware.
Question no. 6 a) Confused on valuation of non-current asset as on 1st Kartik
b) Confused on treatment for factory Shed previously directs charged to
P/L.

Paper 2: Advanced Financial Management

List of Questions Specific Comments on the Performance of the Students
Question no. 1 In part (b) of the question students were not able to answer the question by
making NPV=0
In part (c) students did not explained properly the correct method of risk
analysis in capital budgeting.
Question no. 2 a. Most Students did not answer the question correctly.
b. Most of the students were not able to compute gain or loss to share
holder on exchange of share.
Question no. 3 Answered correctly, but some students wrongly used spot buying and
selling rate.
Question no. 4 All theories are not specifically answered.
Question no. 5 a. Most of the students wrongly treated the direct contribution to overhead
by parent company.
b. Most of the students answered correctly.
Question no. 6 a. Answered correctly.
b. Answered correctly, but some made mistakes in computing Actual
return.

Paper 3: Advanced Auditing

List of Questions Specific Comments on the Performance of the Students
Question no. 1 a. NSA 402 is quoted and explained by only few students.
b. Though types and threats are properly given, explanation part seemed
weak in majorities of students.
Question no. 2 a. Objectives of EOM is not clear in majorities of the students.
b. Only few left to write the conclusion.
Question no. 3 a. Lack of conclusion in about 50% cases.
b. NSA 450/320 is quoted and explained by few students.
Question no. 4 a. Majorities of the students do not answer well.
Question no. 5 a. Fairly done.
b. NSA 315 is not explained by many students.
c. Too general answer.
Question no. 6 Satisfactory performance.

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 Suggested Answers June 2023 Examination (CAP III - Group I)

Paper 1 – Advanced Financial Reporting

Attempt all questions. Working notes should form part of the answers.

1. L Ltd. has business relationship with two companies, P Ltd. and J Ltd. The draft statements of
financial position of these three companies as at Ashad end 2079 are provided below:

L Ltd. P Ltd. J Ltd.

Rs. million Rs. million Rs. million
Assets:
Non-current assets:
Property, plant and equipment 920 300 310
Investment in subsidiaries
P Ltd. 730
J Ltd. 320
Investment in PY Ltd. 48
Intangible assets 198 30 35
1,896 650 345
Current assets 895 480 250
Total assets 2,791 1,130 595
Equity and liabilities:
Share capital Rs. 100 920 400 200
Other components of equity 73 37 25
Retained earnings 895 442 139
Total equity 1,888 879 364
Non-current liabilities 495 123 93
Current liabilities 408 128 138
Total liabilities 903 251 231
Total equity and liabilities 2,791 1,130 595
Additional relevant information:
i) On 1 Shrawan 2078, L Ltd. acquired 60% of the equity interests of P Ltd. The cost of investment
comprised cash of Rs. 730 million. At acquisition, the fair value of the non- controlling interest in
P Ltd. was estimated at Rs. 292 million. On acquisition date, the fair value of the identifiable net
assets acquired totaled Rs. 835 million and the retained earnings of P Ltd. were estimated to be Rs.
319 million whilst other components of equity were Rs. 27 million. The excess in fair value is
resulting from a non-depreciable land.
ii) It is the group’s policy to measure the non-controlling interest at fair value at the date of
acquisition.
iii) On 1 Shrawan 2078, P Ltd. acquired 70% of the equity interests of J Ltd. for a cash consideration
of Rs. 320 million. The fair value of a 30% holding of the non-controlling interests was estimated at
Rs. 72 million, and a 58% holding was Rs. 161 million. At the date of acquisition, the identifiable
net assets of J Ltd. had a fair value of Rs. 362 million, retained earnings were Rs. 106 million and
other components of equity were Rs. 20 million. The excess in fair value is due to non-depreciable
land.
iv) On 1 Shrawan 2078, L Ltd. acquired a 14% interest in PY Ltd., for a cash considerationof Rs. 18
million. The investment was accounted for under NFRS 9: Financial Instruments and was
designated as at fair value through other comprehensive income. On 1 Magh 2078, L Ltd. acquired
an additional 16% interest in PY Ltd. for a cash consideration of Rs. 27 million and achieved
significant influence. The value of the original 14% investment on 1 Magh 2078 was Rs. 21 million.
PY Ltd. made profits after tax of Rs. 10 million and Rs. 30 million for the years to Ashad end 2078
and Ashad end 2079 respectively. On Ashad end 2079, L Ltd. received a dividend from PY Ltd.
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 Suggested Answers June 2023 Examination (CAP III - Group I)

amounting to Rs. 2 million, which has been credited to other components of equity.
v) L Ltd. purchased patents amounting to Rs. 10 million to use in a project to develop new products
on 1 Shrawan 2078. L Ltd. has completed the investigative phase of the project, incurring an
additional cost of Rs. 7 million and has now determined that the product can be developed
profitably. An effective and working prototype was created at a cost of Rs. 4 million and in order
to put the product into a condition for sale, a further Rs. 3 million was spent. Finally, marketing
costs of Rs. 2 million were incurred. All of the above costs are included in the intangible assets of
L Ltd.
vi) Impairment tests were conducted for both P Ltd. and J Ltd. on Ashad end 2079. The recoverable
amounts of both cash generating units as stated in the individual financial statements as at Ashad
end 2079 were P Ltd., Rs. 1,425 million, and J Ltd., Rs. 604 million, respectively. The Directors
of L Ltd. felt that any impairment of assets was due to the poor performance of the intangible assets
and it was deemed that other assets were already held at recoverable amount. The recoverable
amounts have been determined without consideration of liabilities which all relate to the financing
of operations.
Required: 20
Prepare the consolidated statement of financial position for the L Ltd. Group as at Ashad end 2079:

Answer
1)
L Ltd. Group
Consolidated statement of financial position as at Ashad End 2079
Assets: Rs. million
Non-current assets
Property, plant and equipment (920 + 300 + 310 +89 + 36) 1,655
Goodwill (W3) 187
Intangible assets (198 + 30 + 35 – 9 -27) 227
Investment in PY Ltd (W7) 50.5
Current assets (895 + 480 + 250) 1,625
Total assets 3,744.5
Equity and liabilities
Equity attributable to owners of parent
Share capital 920
Retained earnings (W5) 978.82
Other components of equity (W5) 76.1
1,974.92
Non-controlling interest (W4) 384.58
2,359.5
Total non-current liabilities (495 + 123 + 93) 711
Current liabilities (408 + 128 + 138) 674
Total liabilities 1,385
Total equity and liabilities 3,744.5

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 Suggested Answers June 2023 Examination (CAP III - Group I)

Working Notes:
W1) Group Structure
L Ltd. PY Ltd.
- 60% on P Ltd. - 14 % until 1 Magh, 2078
- 30% from 1 Magh, 2078
P Ltd.
- 70% on J Ltd.

The group effective interest in J Ltd is 42% (60% x 70%). The NCI holding is therefore 58%
(100% - 42%).

P Ltd. J Ltd.
L Ltd (Group) interests: Direct 60% 60% X 70% = 42%
Indirect -
Non-controlling interest: Direct 40% 100% - 70% = 30%
Indirect - 40% X 70% = 28%
100% 100%

W2) Net Assets – P Ltd

Acquisition date Reporting date Change
Rs. million Rs. million Rs. million
Share capital 400 400 -
Other components of equity 27 37 10.0
Retained earnings 319 442 123
Fair value adjustment – land 89 89 -
835 968 133

Net Assets - J Ltd

Acquisition date Reporting date Change
Rs. million Rs. million Rs. million
Share capital 200 200 -
Other components of equity 20 25 5
Retained earnings 106 139 33
Fair value adjustment- land 36 36 -
362 400 38

W3) Goodwill
P Ltd Rs. million
Fair value of consideration 730
Fair value of non-controlling interest 292
Fair value of identifiable net assets acquired (W2) (835)
Goodwill at acquisition 187
J Ltd Rs. million
Fair value of consideration 320

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 Suggested Answers June 2023 Examination (CAP III - Group I)

Indirect holding adjustment (40% x Rs. 320) (128)

FV of NCI at acquisition (58% holdings) 161
Less fair value of identifiable net assets (W2) (362)
Negative Goodwill at acquisition (9)
Goodwill charged to Profit or Loss account 9
Goodwill at reporting date -

W4) Non–controlling Interest

Rs. million
NCI in P Ltd at acquisition 292
NCI % of post-acquisition profit (40% x (Rs. 968 – Rs. 835) (W2)) 53.2
Indirect holding adjustment (40% x Rs. 320) (128)
NCI in J Ltd at acquisition 161
NCI% of post-acquisition profit (58% x (Rs. 400 – Rs.362) (W2)) 22.04
Impairment (58% x Rs. 27 (W6)) (15.66)
384.58

W5) Reserves
Retained earnings Rs. million
L Ltd 895
P Ltd: 60% x (Rs. 442 – Rs. 319 (W2)) 73.8
J Ltd: 42% (139 – Rs. 106) (W2)) 13.86
Impairment (42% x Rs. 27 (W6)) (11.34)
PY Ltd gain from OCE (W7) 3
PY Ltd dividend (W7) 2
Share of PY’s post-acquisition retained earnings (W7) 2.5
Capital surplus (Negative goodwill of J Ltd) 9
Intangible assets (W8) (9)
978.82
Other components of equity
Rs. million
L Ltd 73
P Ltd: 60% x (Rs. 37 – Rs. 27) (W2) 6
J Ltd: 42% (Rs. 25 – Rs. 20) (W7)) 2.1
PY Ltd gain to retained earnings (W7) (3)
PY Ltd dividend (W7) (2)
76.1

W6) Impairment
Note (vi) states that the recoverable amount of each subsidiary has been determined ‘without
consideration of liabilities’. Therefore carrying value of assets should be compared to calculate
impairment.
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 Suggested Answers June 2023 Examination (CAP III - Group I)

P Ltd (Rs. million) J Ltd (Rs. million)

Goodwill (W3) 187 -
Assets (per SFP) 1,130 595
Fair value adjustment (W2) 89 36
Total assets value 1,406 631
Recoverable amount (1,425) (604)
Impairment N/A 27
Group reserves will be debited with Rs. 11.34 (42% of 27 ) million and NCI with Rs. 15.66 (58%
of 27) million, being the loss in value of the assets split according to the effective interests.

W7) PY Ltd
L Ltd has significant influence over PY. PY is therefore an associate and must be accounted for
using the equity method. The gain of Rs. 3 million (Rs. 21 million – Rs. 18 million) recorded with
OCE up to Magh 1, 2078 would not be transferred to profit or loss for the year but can be
transferred within equity and hence to retained earnings under NFRS 9 Financial instruments.
Dr OCE Rs. 3 million
Cr Retained earnings Rs. 3 million
The dividend should have been credited to L’s profit or loss and not to OCE.
Dr OCE Rs. 2 million
Cr Retained earnings Rs. 2 million
The amount included in the consolidated statement of financial position would be:
Rs. million
Cost (Rs. 21 million + Rs. 27 million) 48
Share of post-acquisition profits (Rs. 30 million x 6/12 x 30%) 4.5
Less dividend received (2.0)
50.5
There is no impairment as the carrying amount of the investment in the separate financial
statements does not exceed the carrying amount in the consolidated financial statements nor does
the dividend exceed the total comprehensive income of the associate in the period in which the
dividend is declared.
The group’s share of the post-acquisition retained earnings movement is Rs. 2.5 m (Rs. 4.5 m –
Rs. 2.0 m). This will be held within group earnings (W5).

W8) Development
There are strict criteria in NAS 38 governing the items that can be included in the cost of an intangible
assets. L should recognize the Rs. 10 million as an intangible asset plus the cost of the prototype of
Rs. 4 million and the Rs. 3 million to get it into condition for sale. The remainder of the costs should
be expensed including the marketing costs. This totals Rs. 9 million, which should be taken out of
intangibles and expensed.
Dr Retained earnings Rs. 9 million
Cr Intangible assets Rs. 9 million

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 Suggested Answers June 2023 Examination (CAP III - Group I)

2.
a) The following trial balance and other information relate to Nyatapola Co. Ltd. at 32nd Ashad, 2079:

(Rs. in
Note (Rs. in million)
million)
Revenue i 213.50
Cost of Sales 136.80
Distribution Costs 12.50
Administrative Expenses ii 19.00
Interest on Debenture and dividend paid ii and iii 20.70
Investment Income 0.40
Equity Shares 60.00
6% Debenture ii 25.00
Retained earnings on 1.4.2078 18.50
Land and buildings at cost (land element iv 50.00
Rs. 10 million)
Plant and equipment at cost iv 83.70
Accumulated depreciation at 1.4.2078:
Building 8.00
Plant and Equipment 33.70
Equity Financial Asset Investments v 17.00
Inventory at 32.3.2079 24.80
Trade Receivable 28.50
Bank Balance 2.90
Current Tax vi 1.10
Deferred Tax vi 1.20
Trade Payables 36.70
Total 397.00 397.00
Notes:
i) On 1.4.2078, Nyatapola Co. Ltd. sold one of its products for Rs. 10 million (included in revenue
in the trial balance). As part of the sale agreement, Nyatapola is committed to the ongoing servicing
of this product until 31.3.2081 (i.e. three years from the date of sale). The value of this service has
been included in the selling price of Rs. 10 million. The estimated cost to Nyatapola of the
servicing is Rs. 600,000 p.a. and Nyatapola’s normal gross profit margin on this type of servicing
is 25%. Ignore discounting.
ii) Nyatapola issued a Rs. 25 million 6% Debenture on 1.4.2078. Issue costs were Rs. 1 million and
these have been charged to administrative expenses. The loan will be redeemed on 31.3.2081 at a
premium which gives an effective interest rate of 8%.
iii) Nyatapola paid and equity dividend of 32% per share during the year ended 32.3.2079.
iv) Non-current assets:
Nyatapola had been carrying land and buildings at depreciated cost, but due to a recent rise in
property prices, it decided to reveal its property on 1.4.2078 to market value. An independent
valuer confirmed the value of the property at Rs. 60 million (land element Rs. 12 million) as at
that date and the directors accepted this valuation. The property had a remaining life of 16 years
at the date of its revaluation. Nyatapola will make a transfer from the revaluation reserve to
retained earnings in respect of the realization of the revaluation reserve. Ignore deferred tax on the
revaluation.
Plant and equipment is depreciated at 15% p.a. using the reducing balance method.
No depreciation has yet been charged on any non-current asset for the year ended 32.3.2079. All
depreciation is charged to cost of sales.
v) The investments had a fair value of Rs. 15.7 million as at 32.3.2079. There were no acquisition or
disposals of these investments during the year ended 32.3.2079.

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 Suggested Answers June 2023 Examination (CAP III - Group I)

vi) The balance on current tax represents the under/over provision of the tax liability for the year
ended 31.3.2078. A provision for income tax for the year ended 32.3.2079 of Rs. 7.4 million is
required. At 32.3.2079, Nyatapola had taxable temporary differences of Rs. 5 million, requiring a
provision for deferred tax. Any deferred tax adjustment should be reported in the income
statement. The corporate tax rate of Nyatapola is 20%.
Required: (8+2=10)
i) Prepare the statement of comprehensive income for Nyatapola Co. Ltd. for the year ended 32nd
Ashadh 2079.
ii) Prepare the statement of changes in equity for Nyatapola Co. Ltd. for the year ended 32nd Ashadh
2079.

b) Given below is Lal’s accounts for deferred taxation in accordance with NAS 12 on Income Taxes.
A taxation rate of 20% was applicable to the year ended Ashad 2078 and as a result of recent
legislation, the taxation rate for the year ended Ashad 2079 has been increased to 30%.
Year ended 31 Year ended 32
Particulars
Ashad 2078 Ashad 2079
Accounting Profit 21,450 27,600
Add: Depreciation for accounting purpose 3,000 To be calculated
Donation 500 300
Amortization of software costs 1,200 To be calculated
26,150
Less: Depreciation for tax purpose (3,750) To be calculated
22,400
Tax expenses @20% 4,480 To be calculated

Summary of non-current assets Plant Software

Cost b/f on 1.4.2078 16,000 4,500
Additions year ended Ashad 2079 4,000 Nil
Accumulated Depreciation
b/f on 1.4.2078 9,600 2,700
Charge for year ended Ashad 2079 To be calculated To be calculated
Accumulated Depreciation –Tax purpose
b/f on 1.4.2078 9,250 See (ii)below
Tax depreciation year to Ashad end 2079 To be calculated To be calculated
Additional Information
i) Plant is depreciated at 20% p.a. on straight line for accounting purpose and 25% p.a. on a reducing
balance method for tax purpose.
ii) The software development started in FY 2073/74 and was completed on Ashad end 2076. During
the development period these costs were capitalized. Amortization commenced on 1.4.2076 and
was based on the sum of digits method over five year life. Software costs are allowed in full for
tax purpose as they are incurred.
iii) Donation are not an allowable expense for tax purpose.
iv) Lal’s forecast indicated that future profits will arise that will attract tax liabilities.
Required: (4+6=10)
i) Calculate the current tax expenses for the year to Ashad end 2079.
ii) Calculate the liability or asset for deferred tax in the statement of financial position at Ashad end
2078 and 2079 arising in relation to the plant and software of Lal.

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 Suggested Answers June 2023 Examination (CAP III - Group I)

Answers
2 a) (i) Statement of comprehensive income for the year ended 32nd Ashadh 2079
(Rs. in million)
Revenue (213.50 – 1.60) (W.N. 1) 211.90
Cost of Sales (W.N. 2) (147.30)
Gross profit 64.60
Distribution costs (12.50)
Administrative expenses (19.00-1.00) (W.N. 4) (18.00)
Loss on fair value of equity investments (17.00 – 15.70) (1.30)
Investment income 0.40
Finance costs (W.N. 4) (1.92)
Profit before tax 31.28
Income tax expense (7.40+1.10-0.20) (W.N. 5) (8.30)
Profit for the year 22.98
Other comprehensive income -
Gain on revaluation of Land and building (W.N. 3) 18.00
Total comprehensive Income 40.98

(ii) Statement of changes in equity for the year ended 32nd Ashadh 2079
(Rs. in million)
Share Revaluatio Retained Total
capital n Reserve earnings Equity
Balance as on 1.4.2078 60.00 - 18.50 78.50
Total comprehensive income - 18.00 22.98 40.98
Transfer to retained earnings - (1.00) 1.00 -
Dividend paid (60.00X32%) - (19.20) (19.20)
Balance as on 32.3.2079 60.00 17.00 23.28 100.28

Working Notes:
W.N. 1 –
Sales made which include revenue for ongoing serving work must have part of the revenue
deferred. The deferred revenue must include the normal profit margin (25%) for the deferred work.
At 32.3.2079, there are two more years of servicing work, thus Rs. 1.6 million
((600,000x2)x100/75) must be treated as deferred revenue, split equally between current and non-
current liabilities.

W.N. 2 Cost of sales

As per trial balance 136.80
Depreciation of building (W.N. 3) 3.00
Depreciation of plant (W.N. 3) 7.50
147.30
W.N. 3 Non current assets
Land and buildings:
The gain on revaluation and carrying amount of the land and building is:
Land Building
Carrying amount as at 1.4.2078 10.00 32.00
(40.00 – 8.00)
Revalued amount as at this date (12.00) (48.00)
(60.00-12.00)
Gain on revaluation 2.00 16.00
Building depreciation year to 32.3.2079 (48.00/16 years) 3.00
The transfer from the revaluation reserve to retained earnings in respect of ‘excess’ depreciation
(as the revaluation is realized) is Rs. 1 million i.e. (48.00-32.00)/16 years.
The Institute of Chartered Accountants of Nepal 10
 Suggested Answers June 2023 Examination (CAP III - Group I)

The carrying amount at 32.3.2079 is Rs. 57 million (60.00 – 3.00)

Plant and equipment:
Carrying amount as at 1.4.2078 (83.70 – 33.70) 50.00
Depreciation at 15% p.a. (7.50)
Carrying amount as at 32.3.2079 42.50

W.N. 4 Debenture
The finance cost of the debenture is charged at the effective rate of 8% applied to the carrying
amount of the debenture. The issue costs of the loan (Rs. 1 million) should be deducted from the
proceeds of the loan (Rs. 25 million) and not treated as an administrative expense. This gives an
initial carrying amount of Rs. 24 million and a finance cost of Rs. 1.92 million (24 x 8%). The
interest actually paid is Rs. 1.5 million (25 x 6%) and the difference between these amounts of Rs.
420,000 (1.92 – 1.50) is accrued and added to the carrying amount of the debenture.

W.N. 5 Deferred Tax

Provision required as at 32.3.2079 (5 x 20%) 1.00
Less: deferred tax b/d (1.20)
Credit to Income statement 0.20

2 b) (i) Current tax expenses

Particulars Rs.
Accounting profit 27,600
Add: Depreciation for accounting purpose (20% of 20,000) 4,000
Donation 300
Amortization of software costs( W.N-1) 900
32,800
Less: tax depreciation ( W.N-2) (2,688)
30,112
Tax expenses @ 30% 9,034

(ii) Deferred tax Asset/ Liability

As at 31.3.2078 Plant Software Total
Rs. Rs. Rs.
Cost 16,000 4,500 20,500
Depreciation (9,600) (2,700) (12,500)
Net Book Value as on 31.3.2078 (A) 6,400 1,800 8,200

Tax cost 16,000 4,500 20,500

Tax Depreciation (9,250) (4,500) (13,750)
Tax base 31.3.2078 (B) 6,750 Nil 6,750
Temporary difference (A)-(B) (350) 1,800 1,450

Therefore, deferred tax liability for the year ended 31.3.2078 is Rs.1, 450@ 20% =Rs.290
Plant Software Total
As at 32.3.2079
Rs. Rs. Rs.
Cost 20,000 4,500 24,500
Accumulated Depreciation – Accounting (13,600) (3,600) (17,200)
purpose (9,600+4,000) (2,700+900)
Net Book Value as on 32.3.2079 (A) 6,400 900 7,300

Tax cost 20,000 4,500 24,500

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 Suggested Answers June 2023 Examination (CAP III - Group I)

Accumulated Depreciation- Tax purpose (11,938) (4,500) (16,438)

(9,250+2,688)
Tax base 32.3.2079 (B) 8,062 Nil 8,062

Temporary difference (A)-(B) (1,662) 900 (762)

Therefore, deferred tax asset for the year ended 32.3.2079 = Rs.762 @ 30%= Rs.228.60. This
should be recognized because a future tax liability is expected to arise, against which it can be
offset.

Working Notes
a) Amortization of development cost of software

Sum of digits= (5+4+3+2+1)=15

Cost= 4,500
Amortization for year ended 32.3.2079 (3rd Year)=4,500*3/15= Rs.900

b) Tax depreciation on Plant for the year ended 32.3.2079

Particulars Rs.
On original asset 25%* (16,000-9,250) 1,688
On addition : 25% * 4,000 1,000
Total 2,688

3.
a) During FY 2078/79, Ratoma Limited discovered that some products that had been sold during FY
2077/78 were incorrectly included in the inventory at Rs. 6,500.
Ratoma Limited’s accounting records for FY 2078/79 show sales of Rs. 104,000, cost of goods
sold of Rs. 86,500 (including Rs. 6,500 for the error in opening inventory), and income taxes of
Rs. 5,250.

In FY 2077/78, Ratoma Limited reported:

Rs.
Sales 73,500
Cost of goods sold (53,500)
Profit before income taxes 20,000
Income taxes (6,000)
Profit 14,000
Basic and diluted EPS 2.8

In FY 2077/78 opening retained earnings was Rs. 20,000 and closing retained earnings was Rs.
34,000. Ratoma Limited’s income tax rate was 30% for FY 2078/79 and FY 2077/78. It had no
other income or expenses.
Ratoma Limited had Rs. 50,000 (5,000 shares of Rs. 10 each) share capital throughout, and no
other components of equity except for retained earnings.
Required: (3.5+3.5+3=10)
Show how the above will be treated /accounted in Ratoma Limited’s
(i) Statement of Profit and Loss,
(ii) Statement of Changes in Equity and
(iii) Notes to accounts, wherever required for current period and earlier period(s) as per relevant
Accounting Standard.

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 Suggested Answers June 2023 Examination (CAP III - Group I)

b) The Directors of M company seek advice on how they must account for the following transactions
in preparing financial statements for the year to Ashad end 2079:
i) On 1 Shrawan 2077, M had issued 2 million 10% Rs. 25 convertible loan note at a premium of
2%. Issue costs amounted to Rs. 250,000. Loan note holders are entitled to convert each note into
5 Rs. 2.5 equity shares at any time starting from Ashad end 2079. Any note remaining unconverted
will be redeemed at par on Ashad end 2081. The loan notes give periodic interest payments on
Ashad end each year over their term to maturity. The original effective interest rate on the liability
component of the loan notes has been correctlycomputed as 11.67%. M was in a position to issue
similar notes but without conversion rights at a market interest rate of 11.5%.
ii) On 1 Magh 2078, M made another investment by buying 3 million Rs. 2.5 equity sharesin S
company at a price (fair value) of Rs. 11.25 per share. Transaction costs paid by M on 1 Magh
2078 amounted to Rs. 200,000. Each equity share of S was trading at a priceof Rs. 11 on Ashad
end 2079. M received a dividend of Rs. 0.5 per share from these shares in Ashad 2079. M has not
made any election with regard to accounting for these shares.
Required: (6+4=10)
Explain, with necessary calculation, to the Directors of M company how the above transactions
must be accounted in the financial statements of M for the year to Ashad end 2079.

Answer
3 a) (i) Extract from the Statement of Profit and Loss of Ratoma Ltd.

(Restated)
Particulars FY 2078/79 FY 2077/78
Rs. Rs.
Sales 104,000 73,500
Cost of goods sold (80,000) (60,000)
Profit before income taxes 24,000 13,500
Income tax @ 30% (7,200) (4,050)
Profit after tax 16,800 9,450
Basic and diluted EPS 3.36 1.89

3 a) (ii) Statement of Changes in Equity of Ratoma Ltd.

Share capital Retained Earnings Total
Balance at 31st Asadh, 2077 50,000 20,000 70,000
Profit for the year ended 31st Asadh, 2078 as
9,450 9,450
restated
Balance at 31st Asadh, 2078 50,000 29,450 79,450
Profit for the year ended 32nd Asadh, 2079 16,800 16,800
Balance at 32nd Asadh, 2079 50,000 46,250 96,250

3 a) (iii) Extract from the Notes to accounts of Ratoma Ltd.

Some products that had been sold in FY 2077/78 were incorrectly included in inventory at 31st
Asadh, 2078 at Rs. 6,500. The financial statements of 2077/78 have been restated to correct this
error. The effect of the restatement on those financial statements is summarized below:
Effect on FY 2077/78
(Increase) in cost of goods sold (6,500)
Decrease in income tax expenses (6,000 – 4,050) 1,950
(Decrease) in profit (14,000 – 9,450) (4,550)

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 Suggested Answers June 2023 Examination (CAP III - Group I)

(Decrease) in basic and diluted EPS (2.8 – 1.89) (0.91)

(Decrease) in inventory (6,500)
Decrease in income tax payable 1,950
(Decrease) in equity (4,550)
There is no effect on the balance sheet at the beginning of the preceding period i.e. 1st Srawan,
2077.

3 b) i) M must split the loan notes into the liability component and the equity component at initial
recognition (1.04.2077) as follows (NAS 32):
Particulars Rs. Million
Gross issue proceeds ( 2 million X Rs. 25 X 1.02) 51
Less: Liability component (PV of loan note cash flows to Maturity at market
rate of non-convertible debt):
Principal (2X25X1.115^-4) 32.35
Interest (1.1^-1+1.115^-2+1.115^-3+1.115^-4) = 3.070X10%XRs. 25X2
15.35
million
(47.70)

Equity Component Share Options

Net Issue proceeds (51 - 0.25) 50.75
Net liability component (47.7/51 X 50.75) 47.47
Net Equity Component (3.3/51 X 50.75) 3.28

Subsequently, measure the liability component at amortised cost as follows (NFRS 9):
Particulars Rs. Million
Initial amount at 1.04.2077 47.47
Finance cost y/e Ashad 2078 (47.47X11.67%) 5.54
Interest paid at Ashad end 2078 (Rs. 25X10%X2 million) (5)

Carrying amount at Ashad end 2079 48.01

Finance cost to report in SPL for y/e Ashad 2079 (48.01X11.67%) 5.60
Interest paid at Ashad end 2079 Rs. (25X10%X2 million) (5)

Carrying amount to report in SFP at Ashad end 2079 (as non-current liability) 48.61

3 b) ii) The financial asset (investment) is an equity instrument asset for which there is irrevocable election
to designate as an FVTOCI item. The default classification of FVTPL will therefore apply. The asset
will initially be measured at FV without including transaction costs. Transaction costs will be
expensed in P/L for the period the contract is entered (in this case y/e Ashad 2079). Subsequently,
the asset must be remeasured to FV each reporting date with gains/losses reported in P/L. dividends
received will also be reported in P/L. The following amounts are applicable for the y/e Ashad 2079:
Particulars Rs. Million
Initial carrying amount at Magh 1, 2078 (FV) (11.25X3 million) 33.75
Remeasurement loss to report in P/L for the y/e Ashad 2079 bal. fig.) (0.75)
Carrying amount to report in SFP at Ashad end 2079 (FV) (11X3 million) 33.00
Net investment income to report in P/L for y/e Ashad 2079:
Transaction costs (0.2)
Dividend income (0.5X3 million) 1.5
Remeasurement loss (0.75)
0.55
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 Suggested Answers June 2023 Examination (CAP III - Group I)

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

a) ‘Close out’ in securities trading
b) Plain vanilla swap
c) Explain opportunity cost in the context of human resource accounting.
d) Capital expenditure may not be represented by assets. Explain.
e) Embedded derivative as per NFRS

Answer
4 a) ‘Close out’ in securities trading
In case of purchases on behalf of clients, member brokers shall be a at liberty to close out the
transactions by selling the securities, in case the client fails to make the full payment to the member
broker for the execution of the contract within two days of contract note having been delivered for
cash and seven days for specified shares or before pay in day (as fixed by stock exchange for the
concerned settlement period), whichever is earlier; unless the client already has an equivalent
credit with the member. The loss incurred in this regard, if any, will be met from the margin money
of that client. In case of sales on behalf of clients, member broker shall be at liberty to close out
the contract by effecting purchases if the client fails to deliver the securities sold with valid transfer
documents within two days of the contract note having been delivered or before delivery day (as
fixed by Nepal Stock Exchange for the concerned settlement period from time to time), whichever
is earlier. Loss on the transaction, if any, will be deductible from the margin money of that client.

4 b) Plain vanilla swap

A plain vanilla swap is one of the simplest financial instruments contracted in the over-the-counter
market between two private parties, both of which are usually firms or financial institutions. There
are several types of plain vanilla swaps, including an interest rate swap, commodity swap, and a
foreign currency swap. The term plain vanilla swap is most commonly used to describe an interest
rate swap in which a floating interest rate is exchanged for a fixed rate or vice versa.
A plain vanilla interest rate swap is often done to hedge a floating rate exposure, although it can
also be done to take advantage of a declining rate environment by moving from a fixed to a floating
rate. Both legs of the swap are denominated in the same currency, and interest payments are netted.
The notional principal does not change during the life of the swap, and there are no embedded
options.
In a plain vanilla interest rate swap, Company A and Company B choose a maturity, principal
amount, currency, fixed interest rate, floating interest rate index, and rate reset and payment dates.
On the specified payment dates for the life of the swap, Company A pays Company B an amount
of interest calculated by applying the fixed rate to the principal amount, and Company B pays
Company A the amount derived from applying the floating interest rate to the principal amount.
Only the netted difference between the interest payments changes hands.

4 c) It is one of the Economic value models used for measurement and valuation of Human assets. As
per this model, opportunity cost is the value of an employee in his alternative use. This opportunity
cost is used as a basis for estimating the value of Human resources. Opportunity cost value may
be established by competitive bidding within the firm so that in effect, Managers must bid for any
scarce employee. A Human asset will have a value only if it is a scarce resource, that is, when its
employment in one division denies it to another division. This method excludes employees of the
type of which can be readily hired from outside the firm. Also, it is in very rare cases that managers
would like to bid for an employee.

4 d) Capital expenditures (CapEx) are investments made by a company in long-term assets, such as
property, plant, and equipment, with the expectation of generating future benefits. While capital
expenditures are typically represented by assets on a company's balance sheet, it is possible for
some capital expenditures to not be represented by assets.

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 Suggested Answers June 2023 Examination (CAP III - Group I)

This can happen when a company makes an expenditure that does not meet the criteria for
capitalization as an asset under accounting standards. For example, if a company spends money
on research and development, the costs associated with this expenditure may not be capitalized as
an asset because the future benefits of the research and development are uncertain.
In addition, some capital expenditures may be expensed immediately rather than being capitalized
as an asset. For example, if a company spends money on repairs and maintenance to an existing
asset, the cost of these expenditures may be expensed immediately rather than being capitalized as
an improvement to the asset.
Furthermore, there may be situations where a company invests in a long-term asset that generates
future benefits, but these benefits are not expected to be sufficient to recover the full cost of the
asset. In such cases, the asset may be impaired and its carrying value reduced, resulting in a loss
on the company's income statement.
In summary, while capital expenditures are typically represented by assets on a company's balance
sheet, there are situations where capital expenditures may not be represented by assets, such as
when the expenditures do not meet the criteria for capitalization, are expensed immediately, or
result in an impairment loss.

4 e) Embedded Derivative as per NFRS

An embedded derivative is a component of a hybrid contract that also includes a non-derivative
host with the effect that some of the cash flows of the combined instrument vary in a way similar
to a stand alone derivative. An embedded derivative causes some or all of the cash flows that
otherwise would be required by the contact to be modified according to a specified interest rate,
financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit
rating or credit index, or other variable, provided in the case of a non financial variable that the
variable is not specified to a party to the contract. A derivative that is attached to a financial
instrument but is contractually transferable independently of that instrument, or has a different
counterparty, is not an embedded derivative, but a separate financial instrument.

5.
a) Paragraph 1.3.32 of Part 1 of Nepal Public Sector Accounting Standards requires that the financial
statements provide information that meets a number of qualitative characteristics. Appendix 4 of
the standard summarizes the qualitative characteristics of financial reporting. Explain the four
principal qualitative characteristics of financial reporting. 8

b) Following data relate to Galaxy Ltd.:

Particulars 32.3.2079 (Rs.) 31.3.2078 (Rs.)
Current Assets:
Inventory 120,000 165,000
Trade receivables 205,000 188,000
Cash & cash equivalents 35,000 20,500
Current Liabilities:
Trade payables 195,000 215,000
Provision for tax 48,000 65,000

Summary of Statement of Profit and Loss Rs. Rs.

Sales 8,550,000
Less: Cost of sales (5,600,000) 2,950,000
Other Income
Interest income 20,000
Fire insurance claim received 110,000 130,000
3,080,000
Depreciation (24,000)
The Institute of Chartered Accountants of Nepal 16
 Suggested Answers June 2023 Examination (CAP III - Group I)

Administrative and selling expenses (1,540,000)

Interest expenses (36,000)
Foreign exchange loss (18,000) (1,618,000)
Net Profit before tax and extraordinary income 1,462,000
Income Tax (95,000)
Net Profit 1,367,000
Additional information:
i) Trade receivables and Trade payables include amounts relating to credit sale and credit purchase
only.
ii) Foreign exchange loss represents increment in liability of a long-term borrowing due to exchange
rate fluctuation between acquisition date and balance sheet date.
Required: 7
Prepare statement of cash flows showing cash generated from Operating Activities using direct
method as per NFRS.

Answer:
5 a) The four principal qualitative characteristics are understandability, relevance, reliability and
comparability.
i) Understandability
Information is understandable when users might reasonably be expected to comprehend its
meaning. For this purpose, users are assumed to have a reasonable knowledge of the entity's
activities and the environment in which it operates, and to be willing to study the information.
Information about complex matters should not be excluded from the financial statements
merely on the grounds that it may be too difficult for certain users to understand.

ii) Relevance
Information is relevant to users if it can be used to assist in evaluating past, present or future
events or in confirming, or correcting, past evaluations. In order to be relevant, information
must also be timely.

Materiality
The relevance of information is affected by its nature and materiality. Information is material if its
omission or misstatement could influence the decisions of users or assessments made on the
basis of the financial statement. Materiality depends o n the nature or size of t he item or
error judged in t he part icular circumstances of its omission or misstatement. Thus, materiality
provides a threshold or cut-off po int rather than being a primary qualitative characteristic
which information must have if it is to be useful.

iii) Reliability
Reliable information is free from material error and bias, and can be depended on by users to
represent faithfully that which it purports to represent or could reasonably be expected to
represent.

Faithful Representation
For information to represent faithfully transactions and other events, it should be presented in
accordance with the substance of the transactions and other events, and not merely their legal
form.

Substance Over Form

If information is to represent faithfully the transactions and other events that it purports to
represent, it is necessary that they are accounted for and presented in accordance with their
substance and economic reality and not merely their legal form. The substance of
transactions or other events is not always consistent with their legal form.

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 Suggested Answers June 2023 Examination (CAP III - Group I)

Neutrality
Information is neutral if it is free from bias. Financial statements are not neutral if the
information they contain has been selected or presented in a manner designed to influence the
making of a decision or judgment in order to achieve a predetermined result or outcome.

Prudence
Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in making
the estimates required under conditions of uncertainty, such that assets or revenue are not
overstated and liabilities or expenses are not understated.

Completeness
The information in financial statements should be complete within the bounds of materiality
and cost.

iv) Comparability
Information in financial statements is comparable when users are able to identify similarities
and differences between that information and information in other reports.
Comparability applies to the:

• comparison of financial statements of different entities; and

• comparison of the financial statements of the same entity over periods of time.

An important implication of the characteristic of comparability is that users need to be

informed of the policies employed in the preparation of financial statements, changes to those
policies and the effects of those changes.
Because users wish to compare the performance of an entity over time, it is important
that the financial statements show corresponding informatio n for preceding periods.

5 b) Statement Cash Flows from operating activities of Galaxy Ltd. for the year ended 32
Ashad 2079 (Direct Method)
Particulars Rs. Rs.
Operating Activities:
Cash received from Trade receivables (W.N. 3) 8,533,000
Less: Cash paid to Suppliers (W.N.2) 5,575,000
Payment for Administration and Selling expenses 1,540,000
Payment for Income Tax (W.N.4) 112,000 (7,227,000)
1,306,000
Adjustment for exceptional items (fire insurance claim) 110,000
Net cash generated from operating activities 1,416,000

Working Notes:
1. Calculation of total purchases
Cost of Sales = Opening stock + Purchases – Closing Stock
Rs. 5,600,000 = Rs. 165,000 + Purchases – Rs.120,000
Purchases = Rs.5,555,000

2. Calculation of cash paid to Suppliers

Trade Payables
Particulars Rs. Particulars Rs.
To Bank A/c (balancing 5,575,000 By Balance b/d 215,000
figure)
To Balance c/d 195,000 By Purchases (W.N. 1) 5,555,000
5,770,000 5,770,000

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 Suggested Answers June 2023 Examination (CAP III - Group I)

3. Calculation of cash received from Customers

Trade Receivables
Particulars Rs. Particulars Rs.
To Balance b/d 188,000 By Bank A/c (balancing 8,533,000
figure)
To Sales 8,550,000 By Balance c/d 205,000
8,738,000 8,738,000

4. Calculation of tax paid during the year in cash

Provision for tax
Particulars Rs. Particulars Rs.
To Bank A/c (balancing 112,000 By Balance c/d 65,000
figure)
To Balance c/d 48,000 By Profit & Loss 95,000
Account
160,000 160,000

6.
a) An entity enters into a contract for the sale of Product A for Rs. 10,000. As part of the contract,
the entity gives the customer a 40% discount voucher for any future purchases up to Rs. 8,000 in
the next 30 days. The entity intends to offer a 10% discount on all sales during the next 30 days
as a part of seasonal promotion. The 10% discount cannot be used in addition to the 40% discount
voucher.
The entity believes that there is 75% likelihood that a customer will redeem the voucher and, on
an average, a customer will purchase Rs. 5,000 of additional products.
Required: 5
Determine, for each performance obligations of the entity, the stand-alone selling price and
allocated transaction price. State when the revenue is recognized.

b) Z Ltd. operates a defined benefit scheme which at Ashad end 2078 was in deficit by Rs. 240
million. Details for the year ended Ashad 2079 are as follows:
Rs. in million
Current service cost 110
Cash contribution to the scheme 200
Benefits paid in the year 160
Net loss on curtailment 22
Gain on remeasurement of liability at Ashad end 2079 18

The rate of interest applicable to corporate bonds was 5% and 8% at Ashad end 2078 and Ashad
end 2079 respectively. The cash contributions for the scheme have been correctly accounted for in
the financial statements for the year ended Ashad end 2079. This is the only adjustment that has
been made in respect of the scheme.
Required: 5
Recommend the correct accounting treatment of the above transactions in the financial statements
of Z Ltd. for the year ended Ashad end 2079, and show the financial statements extracts in
accordance with NAS 19: Employee Benefits.

Answer
6 a) Since all customers will receive a 10% discount on purchases during the next 30 days, the only
additional discount that provides the customer with a material right is the incremental discount of
30% on the products purchased. The entity accounts for the promise to provide the incremental
discount as a separate performance obligation in the contract for the sale of Product A.
The Institute of Chartered Accountants of Nepal 19
 Suggested Answers June 2023 Examination (CAP III - Group I)

The entity believes there is 75% likelihood that a customer will redeem the voucher and on an
average a customer will purchase Rs. 5,000 of additional products. Consequently, the entity’s
estimated stand-alone selling price of the discount voucher is Rs. 1,125 (Rs. 5,000 average
purchase price of additional products x 30% incremental discount x 75% likelihood of exercising
the option). The stand-alone selling prices of Product A and the discount voucher and the resulting
allocation of Rs. 10,000 transaction price are as follows:

Performance obligations Stand-alone selling price (Rs.)

Product A 10,000
Discount voucher 1,125
Total 11,125

Allocated transaction
Performance obligations
price (nearest Rs.)
Product A [(Rs. 10,000 ÷ Rs. 11,125) × 8,989
Rs. 10,000]
Discount voucher [(Rs. 1,125 ÷ Rs. 11,125) × 1,011
Rs. 10,000]
Total 10,000

The entity allocates Rs. 8,989 to Product A and recognizes revenue for Product A when control is
transferred. The entity allocates Rs. 1,011 to the discount voucher and recognizes revenue for the
voucher when the customer redeems it for goods or services or when it expires.

6 b) Pension scheme

The defined benefit scheme for the year should have been recorded as follows:
Particulars Rs. million
Net obligation at Ashad end 2078 240
Cash contribution into the scheme (200)
Net finance cost for the year (Rs. 240 million x 5%) 12
Current service cost 110
Loss on curtailment 22
Gain on remeasurement (18)
Net liability at Ashad end 2079 166

The benefits paid do not affect the net liability for the year. Since only the cash contributions have
been recorded for the year, the net obligation should be increased byRs. 126 million (Rs. 166
million – Rs. 40 million (240 -200). Rs. 144 million should be expensed to profit or loss being the
service cost component (current and curtailment) plus the interest charge. Rs. 18 million should
be credited to other components of equity being the gain on remeasurement.

Statement of profit or loss extract for the year ended (Extract)

Rs. Million
Defined benefit scheme (Rs. 110 + Rs. 12 + Rs. 22) (144)
Statement of financial position extract
Rs. Million
Equity and liability:
OCI – remeasurement component 18
Non-current liabilities:
Increased in defined benefit obligation 126

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 Suggested Answers June 2023 Examination (CAP III - Group I)

Examiner’s Commentary on Students' Performance in June

2023 Examinations
Paper 1 – Advanced Financial Reporting
List of Questions Specific Comments on the Performance of the Students
Question no. 1 Most of the students tried but could not answer properly. Students have
no clear understanding of holding company.
Question no. 2 a. Most of the students are not able to solve.
b. Well attempted.
Question no. 3 Change in equity Statement format is not clear for the student.
Question no. 4 Poor performance in conceptual knowledge of accounting terms.
Question no. 5 a. Lack of preparation.
b. Most students did not have knowledge of direct and indirect cash
flows.
Question no. 6 Revenue recognition and its calculation is not proper.

Paper 2 – Advanced Financial Management

List of Questions Specific Comments on the Performance of the Students
Question no. 1 Most of the students answer the question but notable to solve completely.
Question no. 2 a. Good performance from student.
b. Most of the students could not attempt.
Question no. 3 a. Good performance.
b. Most of the students calculated on the basis of market price rather on
return basis. Weak performance.
Question no. 4 Theory part is satisfactory. However Price risk and interest risk is not
covered by most of the students.
Question no. 5 a. Most of the students answer correctly.
b. Annual rate of premium is calculated on average basis.
Question no. 6 a. Answer correctly.
b. Most of the students failed to answer.

Paper 3 – Advanced Audit and Assurance

List of Questions Specific Comments on the Performance of the Students
Question no. 1 a. Students are giving specific answers for the issues.
b. General type answer.
Question no. 2 a. Most of the students give specific answer with relevant provisions of
NSA/NFRS..
b. Provisions of NSA 320, 705 & 706 not well written.
Question no. 3 a. Most of the students do not explain the Going Concern issue correctly.
b. Assessment of Company’s compliance with related party not
discussed.
Question no. 4 a. Conclusion whether it is justifiable or not has not been written in
majority of cases.
b. Factors evaluating the level of threats created has not been written in
majority of the cases.
Question no. 5 a. Fairly written answers.
b. Students give correct answer with NSA provisions and correct
conclusion.
Question no. 6 Students write short notes correctly.

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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

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 Suggested Answers - December 2023 - Advanced Financial Reporting

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

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Suggested Answers - December 2023 - Advanced Financial Reporting

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
Non-current liabilities
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

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 Suggested Answers - December 2023 - Advanced Financial Reporting

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

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Suggested Answers - December 2023 - Advanced Financial Reporting

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)

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 Suggested Answers - December 2023 - Advanced Financial Reporting

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

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Suggested Answers - December 2023 - Advanced Financial Reporting

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)
In 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
Non-current liabilities
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
Cu 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

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 Suggested Answers - December 2023 - Advanced Financial Reporting

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

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Suggested Answers - December 2023 - Advanced Financial Reporting

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:
Particulars Rs. in million
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:

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 Suggested Answers - December 2023 - Advanced Financial Reporting

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:
Particulars Rs. in million
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.:

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Suggested Answers - December 2023 - Advanced Financial Reporting

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”.

Further, paragraph 39 of NAS 16 states that:

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 Suggested Answers - December 2023 - Advanced Financial Reporting

“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”.
Further, paragraph 52 of NAS 16 states that:
“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”.
Further, paragraph 30 of NAS 40 states that:
“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:
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Suggested Answers - December 2023 - Advanced Financial Reporting

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)
Property ‘3’ 10,800

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 ‘1’ 16,000
Property ‘2’ 11,000 27,000
Investment Properties
Property ‘3’ 10,800

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

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 Suggested Answers - December 2023 - Advanced Financial Reporting

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

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Suggested Answers - December 2023 - Advanced Financial Reporting
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:
1. If interest and principal repayments are overdue for more than a month and less than 3 months.
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.

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 Suggested Answers - December 2023 - Advanced Financial Reporting

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

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Suggested Answers - December 2023 - Advanced Financial Reporting

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.
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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

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Suggested Answers - December 2023 - Advanced Financial Reporting

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

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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

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