NAS 1: Presentation of Financial Statements

1. Objective and scope of NAS 1

NAS 1 Presentation of Financial Statements prescribes the basic presentation of general purpose
financial statement to ensure comparability both with the entity’s financial statements of previous
periods and financial statement of other entities. Its sets our overall requirements for the
presentation of financial statements, guidelines for their structure and minimum content
requirements.

The term ‘general purpose financial statements’ means those financial statements which are
intended to meet the needs of user who are not position to require an entity to prepare customized
report to their particular information needs.

Nepal Financial Reporting Standards (NFRSs) are standards issued by the accounting standard
board of Nepal which are fully converged to international financial reporting standard, and
interpretation issued by the International Accounting Standard Board (IASB). They comprise
a. Nepal Financial Reporting Standard;
b. Nepal Accounting Standard;
c. IFRIC interpretation ; and
d. SIC Interpretation.

2. Various Component of NFRS based Financial Statements

A complete set of general purpose financial statement comprise of:
o A statement of Financial Position as at the end of the year (Balance Sheet).
o A statement of profit & loss and other comprehensive income for the period.
o A statement of changes in equity for the period.
o A statement of cash flows for the period.
o Notes comprising of a summary of significant accounting policies and other
explanatory information and
o A statements of financial position as at the beginning of the earliest comparative
period when an entity applies an accounting policy retrospectively or make a
retrospective restatement of item in its financial statements, or when it reclassifies
items in its financial statements.
3. General features of financial statements
1. Fair presentation& compliance with NFRS: Financial statements shall present fairly the
financial position (though statements of financial position), financial performance and cash
flows (through statement of cash flow).
Fair presentation is achieved-
i. By faithful presentation: It requires faithful presentation of the effect of transaction,
other event and condition criteria for assets, liabilities, equity, income and expenses set
out in the framework. Additional disclosures enhance faithful presentation.
ii. By making explicit and unreserved statement: An entity shall not describe financial
statements as complying with NRFSs unless they comply with the entire requirements
of NRFSs.
iii. By compliance with NFRSs
iv. By selection of appropriate accounting policies:
v. By presentation in compliance with qualitative characteristics: Financial statements
information and accounting policies are presented in a manner that satisfies qualitative
characteristics set out in the framework (i.e. understandable, relevant, reliable, and
comparable).
vi. Deviation from NFRSs: Normally this will affect ‘fair presentation’. When in an
exceptional circumstance, the management adopts a departure from NRFSs in selection
of accounting policies in order to achieve ‘fair presentation’ it should make adequate
disclosure-
- It has complied with the NRFSs except the departure made to achieve fair
presentation.
- Title of the standard or interpretation from which departure has been made; nature of
the departure, reason why the treatment stated in the NRFSs would have been
misleading in the context.
- Financial impact arising out of such departure
In such a case the entity can reduce the perceived misleading aspect by disclosing:
- Title of the standard or interpretation from which departure was necessary, nature of
the required departure, reason why the treatment stated in the NRFSs would have
been misleading in the context of the framework.
- Financial impact arising out of such departure as compared to the situation if the
NRFSs were adopted for each period presented.

Going concern:
While preparing financial statements, management shall make an assessment of an entity’s ability
to continue as a ‘going concern’ unless management either intend to liquidate the entity or to cease
 trading , or has no realistic alternative but to do so. Management is required to assess, at the time
of preparing the financial statements, the entity's ability to continue as a going concern, and this
assessment should cover the entity's prospects for at least 12 months from the end of the
reporting period. The 12-month period for considering the entity's future is a minimum
requirement; an entity cannot, for example, prepare its financial statements on a going concern
basis if it intends to cease operations 18 months from the end of the reporting period. The
assessment of the entity's status as a going concern will often be straightforward. A profitable
entity with no financing problems will almost certainly be a going concern. In other cases,
management might need to consider very carefully the entity's ability to meet its liabilities as they
fall due. Detailed cash flow and profit forecasts might be required to satisfy management that the
entity is a going concern.
If management has significant doubt of the entity’s ability to continue as a going concern, the
uncertainties should be disclosed.
In case the financial statements are not prepared on a going concern basis, the entity should
disclose the basis of preparation of financial statements and also the reason why the entity is not
regarded as a going concern.
Events that occur after the reporting period might indicate that the entity is no longer a going
concern. An entity does not prepare its financial statements on a going concern basis if
management’s post- year end assessment indicates that it is not a going concern. Any financial
statements that are prepared after that assessment (including the financial statements in respect of
which management are making the assessment) are not prepared on a going concern basis. This is
consistent with IAS 10, which requires a fundamental change to the basis of accounting when the
going concern assumption is no longer appropriate.
Example 1 [Going Concern Assessment]
X Ltd. Has the following statistics of losses the last five years (NPR in million):
2065 - (50) million
2066 - (250) million
2067 - (120) million
2068 - (300) million
2069 - (500) million

The management was confident that the company will earn profit in 2071. The management
viewed in 2069 that the company is the revival process and would earned profit but actually
suffered biggest loss ever. It is now uncertain about the market demand. Even it has already
planned for closure of production in Baisakh 2070 because of order booking position. Is the
going concern assessment is appropriate?
 1. Accrual basis of accounting
2. Materiality and aggregation:
Items are classified based on materiality. Each class of material items are presented separately.
Classified data are presented in the form of line items with headings and sub headings. Presentations of
line items are guided by materiality of individual financial information. Items of same nature are
aggregated if they are not material that warrants separate presentation.
3. Offsetting: Normally, item of assets, liabilities, income and expenses are presented
separately. Offsetting i.e. adjustment of assets against liabilities (and vice versa) and expense
against income (and vice versa) is carried out to achieve substance over form.

The following adjustments are not termed as offsetting:

a. Valuation allowance to assets,
b. Allowance for doubtful debts on receivable,
c. Obsolescence provision against inventories.
Revenue requires offsetting for presenting revenue net of the trade discount and rebates. Other
income generated from other than ordinary activities of the entity are presented net of
expenses:
 Gain or loss from disposal on the disposal of non-current assets, including investment
and operating assets, by deducting from the proceed on disposal the carrying amount of
the asset.
 Expenses are presented net of provision i.e. warranty expenses is presented net of
provision.
If materiality demands separate presentation of item, then offsetting is not carried out.

4. Frequency of reporting: A complete set of financial statement is presented at least annually.

Opting for longer or shorter period is permitted as per NAS 1. However, the entity has to
disclose the reason for such an option. The entity shall also disclose that comparative are not
‘entirely comparable’ (information become entirely comparable if lengths of accounting
periods are the same).
5. Comparative information: The comparative information is presented for all item of financial
statement in respect of previous financial period unless specifically exempted by an NFRS.
6. Consistency of presentation: Presentation and classification of items are maintained
consistently from one period to another. Change in presentation and classification is carried
out when there is significant change in the nature of entity’s operation for change is more
appropriate. The change is also carried out when required by a standard or an interpretation.
 NAS 8 Accounting policies, changes in accounting estimate and errors explains adjustment to
comparative information require when an entity changes an accounting policy or correct an
error.

1. Stetement of Financial Position:

Current and Non-current classifications
Current Assets:
a. It expect to realize the asset, or intend to sell or consume it, its normal operating cycle;
b. Its hold the assets primarily for the purpose of trading;
c. It expect to realize the asset within twelve month after the reporting period; or
d. The assets is cash or a cash equivalent (as define in NAS 7) unless the asset is restricted
from being exchanged or used to settle a liability for at least twelve months after the
reporting period.
While presenting assets and liabilities under current and non-current classification,
deferred tax asset is classified as an item of non-current assets and differed tax liability is
classified as an item of non-current liabilities.
In a manufacturing industry, operating cycle is determine by-
Raw materials holding period
+production time
+finished good holding period
+collection period
It is measured gross without deduction of payment period.
Operating cycle is not relevant for classification of finished goods inventories into current or
non-current assets.
Example 2:
X ltd. provides you the following information:
Raw material holding period: 3 months
Work in progress holding period: 1 month
Finished goods holding period: 5 months
Debtor collection period: 5 months
Compute the operating cycle of X Ltd.
Example 3:
Inventory or trade receivables of X Ltd. are normally raised in 15 months. How should X Ltd.
classify such inventory/trade receivables; current or noncurrent if these are expected to be
 realized within 15 months?
Example 4:
B ltd. produces aircrafts. The length of time between first purchasing raw materials to make
the aircrafts and the date the company completes the production and delivery is 9 months. The
company receives payment for the aircrafts 7 months after the delivary.
a) What is the length of operating cycle?
b) How should it treat inventory and debtors?
Current liabilities
An entity shall classify a liability as current when,
a. It expect to settle the liability in its normal operating cycle;
b. It holds the liability primarily for the purpose of trading:
c. The liability is due to be settle within twelve months after the reporting period; or
d. It does not have an unconditional right to defer settlement of the liability for at least twelve
month after the reporting period.
2. Statement of profit or loss and other Comprehensive Income
NAS 1 offer two alternatives for presenting comprehensive income-
1. Presenting component of profit or loss and other items of comprehensive income in a
single statement or
2. Two statement : presenting profit or loss (termed as statement of income) and presenting
other comprehensive income (statement of other comprehensive income)
Statement of profit or loss and other comprehensive income
The components of other comprehensive income include:
a. Change in revaluation surplus(NAS 16)
b. Remeasurement of defined benefit plans(NAS 19)
c. Gain and losses arising from translating the financial statement of a foreign operation(NAS
21)
d. Gain and losses on remeasuring available-for-sale financial asset(NAS 39)
e. The effective portion of gain and losses on hedging instruments in a cash flow hedge(NAS
39)
3. Statement of Changes in Equity
The following information is presented in the Statement of Changes in Equity:
1. Total comprehensive income for the period, showing separately the total amount
attributable to owners of the parents and to non-controlling interest;
2. For each component of equity, the effects of retrospective application or retrospective
restatement recognized in accordance with NAS 8
3. For each component of equity, reconciliation between the carrying amount at the beginning
and the end of the period , separately disclosing changes resulting from:
i. Profit & loss
ii. Other comprehensive income
iii. Transaction with owner in their capacity as owner, showing separately contribution
by an distribution to owner and changes in ownership interest in subsidiaries that do
not result in a loss of control.

4. Statement of cash flows

Information about the cash flows of an entity is useful in providing users of financial
statements with a basis to assess the ability of the entity to generate cash and cash
equivalents, when used in conjunction with the rest of the financial statement, provides
information that enables users to evaluate the changes in net assets of an entity, its
financial structure and its ability to affect the amounts and timing of cash flows in order to
adapt to changing circumstances and opportunities. Primarily statement of cash flow
captures the difference between accrual basis income and cash income. It also provides
structure information about cash flows resulting from operating activities, investment
activities and financing activities.
5. Notes to Accounts:

Information disclosed in notes such as significant accounting policies and break-up of a

line item presented in the statement of financial position, statement of profit or loss and
other comprehensive income, statement of cash flow and statement of changes in equity
would help the user to understand such line items.
Notes contain information either which are not presented on the face of the financial
statement or provide further details to an item presented on the face of the financial
statement for better understanding.
Notes are also used for providing compliance statement, basis for preparation of financial
statement, objective, policies and processes of managing capital by the entity, variation in
the reporting period, disclosures required by the relevant GAAP, other relevant disclosures.
NAS 02: Inventories
Definition:
Inventories are asset:
a. Held for sale in the ordinary course of business(FG)
b. In the process of production for such sale(WIP); or
c. In the form of materials or supplies to be consumed in the production process
or in the rendering of service(R/M).
Net realizable value:
It is the estimated selling price in the ordinary course of business less the estimated
cost of completion and the estimated costs necessary to make the sale. NRV is
entity specific value.
Fair Value:
It 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.
Measurement of inventories
Para 9. Inventories shall be measured at the lower of cost and net realizable
value.
Cost of inventories
Para 10. The cost of inventories shall comprise all costs of purchase, costs of
conversion and other cost incurred in bringing the inventories to their
present location and condition.
The cost of purchase of inventories comprise the purchase price, import duties
and other taxes (other than those subsequently recoverable by the entity from the
taxing authorities), and transport, handling and other cost directly attributable to
the acquisition of finished goods, materials and services.
 The costs of conversion of inventories include costs directly related to the
units of production, such as direct labor. They also include a systematic
allocation of fixed and variable production overhead that are incurred in
converting materials into finished goods. Fixed production overheads are
those indirect cost of production that remain relatively constant regardless of
volume of production, such as depreciation and maintenance of factory
building and equipment, and the cost of factory management and
administration. The allocation of fixed production overhead to the cost of
conversion is based on the normal capacity of the production facilities.
Normal capacity is the production expected to be achieved on average over a
number of periods or season under normal circumstance, taking in to account
the loss capacity resulting from planned maintenance.
Other costs include in the cost of inventories only to extent that they are
incurred in bringing the inventories to their present location and condition. For
example, it may be appropriate to include the cost of designing products for
specific customers in the cost of inventories. Example of cost excluded from
the cost of inventories and recognized as expenses in the period in which they
are incurred are:
a. Abnormal amount of wasted materials, labor or other production costs;
b. Storage costs, unless those costs are necessary in the production process
before a further production stage;
c. Administrative overheads that do not contribute to bringing inventories to
their present location and condition; and
d. Selling cost.
Allocation of costs to joint products and by products:
A production process may result in more than one product being produced
simultaneously. This is the case, for example, when joint products are
 produced or when there is a main product and a by-product. When the costs of
conversion of each product are not separately identifiable, they are allocated
between the products on a rational and consistent basis. The allocation may be
based, for example, on the relative sales value of each product either at the
stage in the production process when the products become separately
identifiable, or at the completion of production. Most by-products, by their
nature, are immaterial. When this is the case, they are often measured at net
realisable value and this value is deducted from the cost of the main product.
As a result, the carrying amount of the main product is not materially different
from its cost.
Example No 1:
In a manufacturing process of MN Ltd, one By-Product BP emerges besides two
main product MP1 and MP2. Details of cost of production process are as under:

Item Unit Amount Output Closing

stock as on
31.03.2071
Raw material 14,500 150,000 MP1 5,000 units 250
Wages - 90,000 MP 2 4,000 units 100
Fixed overhead - 65,000 BP 2,000 units
Variable overhead - 50,000
Average market price of MP1 and MP2 is Rs 60 per unit and Rs 50 per unit
respectively, by product is sold at Rs 20 per unit. There is a profit of Rs 5,000 on
sale of by product after incurring separate processing charges of Rs 8,000 and
packing charges of Rs 2,000 and Rs 5,000 is realized from sale of scrap.
Calculate the value of closing stock(Ans: 9600,3200)
Cost formulas
23. The cost of inventories of item that are not ordinarily
interchangeable and goods or service produced and segregated for
specific project shall be assigned by using specific identification of their
individual costs.
25. The cost of inventories, other than those dealt with in paragraph 23,
shall be assigned by using the first-in, first-out (FIFO) or weighted
average cost formula. An entity shall use the same cost formula for all
inventories having a similar nature and use to the entity. For inventories
with a different nature or use, different cost formulas may be justified.
Example no 2:
ABC Ltd. uses a periodic inventory system. The following information relates
to 2071-2072:
Date Particilars Unit Cost p.u. Total cost
Shrawan Inventory 200 10 2,000
Bhadra Purchases 50 11 550
Poush Purchases 400 12 4,800
Jestha Purchases 350 14 4,900
1,000 12,250
Physical inventory at 31.03.2072 is 400 units. Calculate the ending inventory
value and cost of sales using
a) FIFO
b) Weighted average method
(Ans: a)5500,6750 b) 4900,7350
Recognition as an expense
34. When inventories are sold, the carrying amount of those inventories
shall be recognized as an expense in the period in which the related revenue
is recognized. The amount of any write-down of inventories to net
realizable value and all losses of inventories shall be recognized as an
expense in the period the write-down or loss occurs. The amount of any
reversal of any write-down of inventories, arising from an increase in net
realizable value, shall be recognized as a reduction in the amount of
inventories recognized as an expense in the period in which the reversal
occurs.
Materials and other supplies held for use in the production of inventories are not
written down below cost if the finished products in which they will be
incorporated are expected to be sold at or above cost. However, when a decline
in the price of materials indicates that the cost of the finished products exceeds
net realisable value, the materials are written down to net realizable value. In
such circumstances, the replacement cost of the materials may be the best
available measure of their net realisable value.
Example No 3:
XYZ Ltd. purchased raw material @ Rs 400 per kg. Company does not sell
raw material but uses in production of finished goods. The finished goods in
which raw materi80al is used are expected to be sold at below cost. At the end
of the accounting year, company is having 10,000 kg of raw material in
inventory. As the company never sells the raw material, it does not know the
selling price of raw material and hence cannot calculate the realizable value of
the raw material for valuation of inventories at the end of the year. However,
replacement cost of raw material is Rs 300 per kg. How will you value the
inventory of raw material?
Example no 4:
Value the following items of inventory
a)Materials costing Rs12000 bought for processing and assembly for a profitable
special order. Since buying these items, the cost price has fallen to Rs10,000.
b)Equipment constructed for a customer for an agreed price of Rs18,000. This
has recently been completed at a cost of Rs16,800. It has now been discovered
that, in order to meet certain regulations, conversion with an extra cost of Rs
4,200 will be required. The customer has accepted partial responsibility and
agreed to meet half the extra cost.
 Disclosure
36. The financial statement shall disclose:
a. The accounting policies adopted in measuring inventories, including the cost
formula used;
b. The total carrying amount of inventories and the carrying amount in
classification appropriate to the entity;
c. The carrying amount of inventories carried at fair values less cost to sell;
d. The amount of inventories recognized as an expense during the period;
e. The amount of any write-down of inventories recognized as an expenses in the
period in accordance with paragraph 34;
f. The amount of any reversal of any write-down that is recognized as a reduction
in the amount of inventories recognized as expense in the period in accordance
with paragraph 34;
g. The circumstances or event that led to the reversal of a write-down of
inventories in accordance with paragraph 34; and
h. The carrying amount of inventories pledged as security for liabilities.

Example No 5:
Sun Ltd. has fabricated special equipment (solar power panel) during 2071-2072 as
per drawing and design supplied by the customer. However, due to a liquidity crunch,
the customer has requested the company for postponement in delivery schedule and
requested the company to withhold the delivery of finished goods products and
discontinue the production of balance items. As a result of the above, the details of
customer balance and the goods held by the company as work-in-progress and
finished goods as on 31-03-2073 are as follows:
Solar power panel (WIP) Rs 85 lakhs
Solar power panel (finished products) Rs 55 lakhs
Sundry Debtor (solar power panel) Rs 65 lakhs
The petition for winding up against the customer has been filed during 2072-2073 by
Sun Ltd. Comment with explanation on provision to be made of Rs 205 lakh included
in Sundry Debtors, Finished goods and work-in-progress in the financial statement of
2072-2073.

Past Exam Questions:

1) A Company deals in three products A, B and C, which are neither similar nor
interchangeable. At the time of closing of its account for the year 2005-06, the
historical cost and net realizable value of the item of closing stock are determined as
follows:

Items Historical cost (Rs) Net Realizable value (Rs)

A 40,00,000 28,00,000
B 32,00,000 32,00,000
C 16,00,000 24,00,000

What will be the value of closing stock?

(Dec-2006)
2) Z Ltd. manufactures a commodity product at two different locations A and B. It
values closing stock consistency as follows.
Location A
Raw materials: At cost, arrived at on FIFO basis.
Work in progress: At Raw Materials cost plus a proportionate share of variable
factory overhead.
Finish good: At Raw Materials cost plus variable factory overheads.
 Location B
Raw materials: At cost, arrived at on the LIFO basis.
Work in progress: At Raw Materials cost plus proportionate share of variable
factory overhead.
Finish good: At Raw Materials cost plus variable factory overheads.
The overhead considered above are direct wages and benefit of workers, fuel cost
and spares consumed.
Comment on the above accounting policy of Z Ltd. (Jun-2006)
3) Everest Ltd. Incurred Rs.20,00,000 as fixed production overhead per year. It
normally produces 1,00,000 units in a year. In 2010-11 however its production has been
only 40,000 units. At the yearend 16 July 2011, the closing stock was 10,000 units. The
cost of unit is below:
Material=Rs 500 per unit
Labour=Rs 250 per unit
Fixed production overhead=Rs 20,00,000 per annum
Fixed Administration= Rs 10,00,000 per annum
Calculate the value of closing stock?(June 2012)
4. The company does not include selling and distribution cost while valuing inventories.
The auditors have certified inventory at value without taking selling and distribution cost
as cost of inventory.
(Audit-Dec-2007)

5. M/S Quality Garment Pvt. Ltd. A garment manufacturing company calculated cost of
finished goods at USD 6300 per 1000 pcs. Due to crisis in the export market, the company
could not export the expected quantity and huge chunk of stock was lying in the
company’s inventory at last year end. Before the year end, to clear the inventory and to
manage the cash shortage, company collected price bids from the international parties. It
received the best offer of USD 5750 per 1000 pcs. The company decided to wait for some
time for better price offer.
The company valued its inventory at cost price of USD 6300 per 1000 pcs citing the
reason that company has not sold its stock as yet and the question of market selling price
does not arise. Give your comment.
(Audit-Dec-2008)
6) The management tells you that the work in process is not valued since it is difficult to
ascertain the same in view of the multiple processes involved and any case the value of
opening and closing work in process would be more or less the same.(Audit-June-2009)
7) Inventories of a car manufacturing company include the value of item required for the
manufacture of a model which was removed from the production line five year back, at
cost price. (Audit-Dec-2009)

8) The balance sheet of ABC Ltd. Include inventory amount to Rs 3 crores out of the total
assets of 20 crores. The inventories were valued at cost. The market price of the
inventories was Rs 2.5 crores. The company has disclosed this fact in the notes to
accounts. (Audit-Dec-2012)

9) Normal waste of materials in production process is 2% of input. 10,000 kg. of input

was made in process with resultant wastage of 500 kg. Cost per unit of input is Rs 100.
The entire quantity of waste is in stock at the year end. As an auditor how do you ensure
the proper valuation of inventory?(Audit-Dec-2013)

10) As an auditor, give your opinions with reason on the following cases:
The following information pertains to the trading stock of a company:
Product Historical cost (Rs) Net realizable value
(Rs)
Color T.V 2,00,000 2,70,000
Black & white T.V 1,15,000 1,50,000
Ordinary Bikes 2,00,000 1,85,000
Spot bikes 1,10,000 1,15,000
Computers 80,000 1,00,000
Total 7,05,000 8,20,000
 The company has policy to value stock at lower of cost or net realizable value and
accordingly trading stock has been valued at Rs 7,05,000 in the balance sheet of the
company. (Audit-july-2015)
11) PQR limited has computed the cost of the inventory using last in first out (LIFO)
method and the value comes to Rs 2 crore (if the cost of inventory is computed as per first
in first out formula, its cost will be Rs 2.5 crores). Net realizable value of the stock is Rs
2.25 crores. Since the policy of the company is to present inventory at lower of the cost or
NRV, the company has presented inventory in the financial statement at Rs 2 crores, being
the lowest. (Audit-Dec-2015)
12) On 31 Asadh 2073, a business firm finds that the cost of partly finished unit on that
date is Rs 530. The units can be finished in 2073/74 by additional expenditures of Rs 310.
The finished goods can be sold at Rs 750 subject to payment of 4% brokerage on selling
price. The firm seeks your advice regarding the amount at which the unfinished unit
should be valued as at 31 Asadh 2073 for preparation of final accounts. Assume that the
partly finished unit cannot be sold in semi finished form and its NRV is zero without
processing it further.
NAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
Accounting Policies
Accounting policies are anything from rules, guidelines, conventions,
principles and similar norms used by entities for the preparation of the
financial statements.

Selection & Application of accounting policies:

Para 7: When a NFRS specifically applies to transaction, other events or

condition, the accounting policy or policies applied to that item shall be
determined by applying the NFRS.

Para 10: In the absence of a NFRS that specifically applies to a

transaction, other events or condition, management shall use its judgment
in developing and applying an accounting policy that results in
information that is:
a) relevant to the economic decision-making needs of users; and
b) reliable, in that financial statements;
- represent faithfully the financial position, financial performance and
cash flows of the entity.
-reflect the economic substance of the transaction, other events and
conditions, and not merely the legal form;
- are neutral, i.e. free from bias
- are prudent; and
-are complete in material respect

Para 11: In making judgment described in para 10, management shall

refer to, and consider the applicability of, the following sources in
descending order:
a) the requirement in NFRS dealing with similar and related issues; and
b) the definition, recognition criteria and measurement concepts for
assets, liabilities, income and expenses in the framework

Para 12: In making the judgment described in para 10,management may

also consider the most recent pronouncement of other standard setting
bodies that use a similar conceptual framework to develop accounting
standard, other accounting literature and accepted industry practices, to
the extent that those do not conflict with the source in para 11.

Consistency of accounting policies:

para 13: An entity shall select and apply its accounting policies
consistently for similar transaction, other events and condition, unless a
NFRS specifically requires or permits categorization of items for which
different policies may be appropriate. If a NFRS requires or permits such
categorization, an appropriate accounting policy shall be selected and
applied consistently to each category.

Changes in accounting policies:

Para14: An entity shall change an accounting policy only if the change:
a) is required by the NFRS; or
b) results in the financial statements providing reliable and more relevant
information about the effects of transaction, other events or condition on
the entity’s financial position, financial performance or cash flows.

Applying changes in accounting policies:

Para 19: Subject to para 23
a) an entity shall account for a change in accounting policy resulting from
the initial application of a NFRS in accordance with the specific
transitional provisions, if any, in that NFRS; and
b) when an entity changes an accounting policy upon initial application of
NFRS that does not include specific transitional provisions applying to
that change, or changes an accounting policy voluntarily, it shall apply
the change retrospectively.

Retrospective application:
Para 22: the entity shall adjust the opening balance of each affected
component of equity for the earliest prior period presented and the other
comparative amounts disclosed for each prior period presented as if the
new accounting policy had always been applied. A change in accounting
policy shall be applied retrospectively except to the extent that is
impracticable to determine either period specific effects or cumulative
effect of a change.
Change in accounting estimates:
A change in accounting estimate is an adjustment of the carrying amount of an
asset or a liability, or the amount of the periodic consumption of an asset, that
results from the assessment of the present status of, and expected future
benefits and obligations associated with, assets and liabilities. Change in
accounting estimates results from new information or new developments and
accordingly, are not correction of errors.
As a result of the uncertainties inherent in business activities, many items in
financial statement cannot be measured with precision but can only be
estimated. The estimation involves judgments based on the latest available
reliable information. For example, estimates may be required of
a) bad debts
b) inventory obsolescence
c) the fair value of financial assets or financial liabilities
d) the useful lives of, or expected pattern of consumption of future economic
benefits embodied in depreciable assets; and
e) warranty obligation

Para 36: The effect of a change in accounting estimate, other than a

change to which para 37 applies, shall be recognized prospectively by
including it in profit or loss in:
a) the period of change, if the change affects that period only;or
b) the period of change and the future period, if the change affects both

Para 37: To the extent that a change in an accounting estimate gives rise
to changes in assets & liabilities, or related to an item of equity, it shall be
recognized by adjusting the carrying amount of the related asset, liability
or equity item in the period of the change.

Disclosure:
Para 39: An entity shall disclose the nature and amount of a change in an
accounting estimate that has an effect in the current period or is expected to
have an effect in future periods, except for the disclosure of the effect on the
future periods when it is impracticable to estimate that effect.
Para 40: if the amount of the effect in future period is not disclosed because
estimating it is impracticable, an entity shall disclose that fact.
Errors:
Prior period errors are omissions from, and misstatement in, the entity’s
financial statement for one or more periods arising from a failure to use, or
misuse of, reliable information that:
a) was available when financial statements for those period were authorized
for issues; and
b) could reasonably be expected to have been obtained and taken into account
in the preparation and presentation of those financial statements.
Such errors include the effect of mathematical mistakes, mistakes in applying
accounting policies, oversight or misinterpretations of facts, and fraud.

Para 42: Subject to Para 43, an entity shall correct material prior period
errors retrospectively in the first set of financial statements authorized
for issue after their discovery by:
a) restating the comparative amounts for the prior period(s) presented in
which the error occurred; or
b) if the error occurred before the earliest prior period presented,
restating the opening balances of assets, liabilities and equity for the
earliest prior period presented.

Para 43: A prior period error shall be corrected by retrospective restatement

except to the extent that is impracticable to determine either the period
specific effects or cumulative effect of the error.

Disclosure of prior period of errors:

Para 49: In applying para 42, an entity shall disclose the following;
a) the nature of prior period error;
b) for each prior period presented, to the extent practicable, the amount of the
correction;
1) for each financial statement line item affected;
2) if NAS 33 applies to the entity, for basic and diluted earnings per share;
c) the amount of the correction at the beginning of the earliest prior period
presented; and
d) if retrospective restatement is impracticable for a particular prior period, the
circumstances that led to the existence of that condition and a description of
how and from when the error has been corrected.
Financial statements of subsequent periods need not repeat these
disclosures.

Example:During 2071 a company discovered that certain items had been

included in inventory at 31 Asadh 2070 at a value of Rs 2.5 million but they
had in fact been sold before the year end.
The original figures reported for the year ending 31 Asadh 2070 and the
figures for the current year 2071 are given below:
2071 2070
Rs in Rs in
Particulars Thousands Thousands
Sales 52,100 48,300
Cost of Sales (33,500) (30,200)
Gross Profit 18,600 18,100
Tax (4,600) (4,300)
Net Profit 14,000 13,800
The cost of goods sold in 2071 includes the Rs 2.5 million error in opening
inventory. The retained earnings at 1 Shrawan 2069 were Rs
11.2million.(Assume that the adjustment will have no effect on the tax
charges)
Show the 2071 statement of profit or loss with comparative figures and the
retained earnings for each year. Disclosure of other comprehensive income is
not required.

1. Financial statements for the year 2069/70 were issued in Poush 2070.
While preparing the financial statements of 2070/71, it was known that
the financial statements of 2069/70 included error. The auditor advice the
management to correct and revise the financial statements of 2069/70 and
circulate the revised financial statements with all the authorities where
original financial statements were submitted.(July-2015)
2. A Company purchased a plant at the cost of Rs 10 crores on shrawan
2066 and the company is charging depreciation on straight line basis over
10 year useful life assuming there will be no scrap. In the year 2071/72
the company decides to charge depreciation as per written down value
method @ 10 %. The company management considers this as the change
in accounting estimate and accordingly considers the effect due to change
prospectively; i.e. depreciation charged in the year 2071/72 is Rs 50 lakh
and no adjustment in retained earnings and carrying amount of machine.
(Dec-2015)
3. M/s. Laghu Udyog Limited has been charging depreciation on an item
of plant and machinery on straight line basis. The machine as purchased
on 1-4-2070 at Rs.3,25,000. It is expected to have a total useful life of 5
years from the date of purchase and residual value of Rs. 25,000.
Calculate the book value of the machine as on 1-4-2072 and the total
depreciation charged till 31-3-2072 under SLM. The company wants to
change the method of depreciation and charge depreciation @ 20% on
WDV from 2072-73. Is it valid to change the method of depreciation?
Explain the treatment required to be done in the books of accounts in the
context of Accounting Standards. Ascertain the amount of depreciation to
be charged for 2072-73 and the net book value of the machine as on 31-
3-2073 after giving effect of the above change.( June 2017)
NAS-10 Events after the Reporting Period
1. Objective and scope
NAS 10 prescribes-
a. The timing when an entity shall adjust its financial statements for events
after the reporting period; and
b. The disclosure of the date when the financial statements were authorized
for issue and events after the reporting period.
NAS 10 prohibits an entity to prepare its financial statements on going
concern basis if events after the reporting period indicate that the going
concern assumption is not appropriate.
2. Meaning of the term “event after the reporting period”
“Event after the reporting period” are those events, both favorable and
unfavorable, which occur between the end of the reporting date and the
date when the financial statements are authorized for issue, and which are
having the characteristics of either adjusting or non-adjusting events.
2.1. Adjusting and Non-adjusting Events
An entity shall adjust its financial statements for those events after the
reporting date that provide further evidence of condition that existed at
the reporting date. These events are termed as adjusting events.
However, financial statements are not adjusted for events after the
reporting date that is indicative of condition that arose after the reporting
date. These events are term as non-adjusting events.
 Figure 1 classification of events occurring after the reporting date.
Events occurring after the reporting period

Non-adjusting events
Adjusting event

Events those are indicative of

Events that provided evidence
condition arising after the
of condition existed at the
reporting date
reporting date

3. Example of adjusting events

Paragraph 9, NAS 10 provides the following example of adjusting events:
a. Settlement of a court case after the reporting date
b. (i). Bankruptcy of a customer after the reporting date
(ii). Valuation of finished goods inventories
c. Determination of the cost of the asset purchased and proceeds of assets
sold
d. Determination after the reporting date the amount of profit sharing or
bonus payments
e. Fraud and error
Example 1 [Settlement in a court case]
A costumer sued X Ltd. for damage against its failure to fulfill warranty
amounting to NPR 2 million. The company created a provision of NPR 1
Million based on the legal advice. After the reporting date but before the
date of authorization of financial statements, the court decided against the
company and a compensation of NPR 1.5 million was awarded. Should the
court’s decision be considered as an evidence of present obligation? If yes,
what will be accounting impact?
The reporting date of the entity was 2070-03-31. The board of directors
approved the financial statements on 2070-05-31.
Example 2 [Bankruptcy of debtor after the reporting period]
A trade debtor amounting NPR 10 Million of X Ltd. defaulted in payment
on the due date of 2070-01-13. Apart from usual steps taken from recovery
of the debt, a valuation allowance of NPR 5 million has been created on the
reporting date. The debtor filed for bankruptcy as on 2069-12-14 and
declared bankruptcy by a court on 2070-05-28. It has been determined that
X Ltd. Will get 10% of the amount due from the estateof the bankruptcy
debtor.

XLtd. Follows financial year Shrawan- Ashad as its accounting period. The
board of director of X Ltd. Authorized financial statements on 2070-06-06.
Should X Ltd. Created additional valuation allowance on trade debtor for
the year 2070-071?
Example No 3: Shortly after the reporting date of 2072.03.31 a major credit
customer of a company went into a liquidation because of heavy trading losses
and it is expected that little or none of the Rs 1,25,00,000 debts will be
recoverable. Rs 100,00,000 of the debt relates to sales made to prior to the year
end and Rs 25,00,000 relates to sales made in the first two days of the new
financial year.

In the 2071-72 financial statements the whole debt has been written off, but one
of the director has pointed out that, as the liquidation is an event after the
reporting date, the debt should not in fact be written off but disclosure should be
made by note to this year’s financial statements, and the debt written off in
2072-73 financial statements.

Advise whether the director is correct?

Example No 4:X Ltd. purchased a plant on 2070.12.01. for NPR 12 million.
The agent of the company organized dispatch of the plant on 2070.12.10. The
transportation charge was Rs 100,000. And the agent’s commission is under
negotiation. The agent demanded 1% commission. Pending negotiation of the
commission, the company added agent’s commission at 0.6% on the asset at the
year end, and accordingly recognized the outstanding agent’s commission. The
company, however, settled agent’s commission at 0.8% on 2071.04.15. The
reporting date of the entity was 2071.03.31. The BOD approved the financial
statements on 2071.05.31. Calculate the cost of the assets on 2071.03.31.

Example 5 [Fraud and Error]

A fraud has been reported in the purchased of raw materials and suppliers of X
Ltd. Against the money advanced, false materials receipt documents are created,
and materials receipt notes are prepared. Actually no material has been received.
But the advanced to suppliers has been adjusted against such false Materials
Receipt Note. An enquiry committee has been formed before the reporting date.
The committee gave a report after the reporting date but before authorization of
financial statement that the advance has been given to a fictitious foreign party
who is no longer traceable. The company has initiated action against the
employees involved.
Should X Ltd. recognize the loss arising out of fraud in the financial statement
2070-071?

4. Example of non-adjusting events

The following are the example of non-adjusting events:
i) Major business combination after the reporting date;
ii) Disposing of assets, subsidiary, associate or joint
ventures;
iii) Announcing a plan to discontinue an operation, or classification of
assets as held for sales under NAS 5 non-current Assets held for sale
and discontinued operation;
iv) Major purchase of major assets;
v) Expropriation of major assets by Government;
vi) Destruction of major production plant or asset by a fire after the
reporting period;
vii) Announcing and commencing the implementation of major
restructuring;
viii) Major transaction in ordinary shares like offer or right, bonus, buy
back, share split or fresh issue;
ix) Abnormally large change in the asset price or exchange rate;
x) Change in tax rate that affect deferred tax asset and liability
significantly;
xi) Entering in to significant commitment or contingent liability (like
providing materials guarantee);
xii) Materials related party transaction entered into after the reporting
period;
xiii) Beginning of a litigation that arises out of the events occurring after
the reporting period;
xiv) Decline in fair value of investments between the end of the reporting
period and the date when the financial statements are authorized for
issue.
Example 5
X Ltd. invested in quality shares of Y Ltd. on 2070-04-01 for NPR
100,000. As on the reporting date 2071-03-31, the market value of the
investment in NPR 120,000. As per NAS 39/NFRS 9 this investment is
classified as available for sale or investment as at fair value through other
comprehensive income.
The Broad of director of the company finalized the financial statement
2070-71 as on Bhadra 31, 2071. As on the date of finalization of financial
statements, the fair value of investment (i.e. market price) is NPR 140,000.
 Can the company recognize additional NPR 20000 as fair value gain in its
statements of other comprehensive income, and recognize investments at
NPR 140,00?
5. Proposed dividend
If dividend to holder of equity instruments are proposed or declared after
the reporting date, an entity shall not recognize those dividends as a
liability. There was no obligation as on the reporting date. The entity
would disclose as per NAS 1 if any dividend is declared or proposed after
the reporting date but before the date of authorization of the financial
statements [paragraph 12 & 13, NAS 10]

6. Restriction on adoption of going concern basis

When preparing financial statements, management shall make an
assessment of an entity’s ability to continue as going concern. An entity
shall prepare financial statements on a going concern basis unless
management either intends to liquidate the entity or to cease trading, or has
no realistic alternative but to do so. When management is aware, in making
its assessment, of material uncertainties related to events or conditions that
may cast significant doubt upon the entity’s ability to continue as a going
concern, the entity shall disclose those uncertainties. Those uncertainties
may arise out of events after the reporting period.
An entity shall not prepare its financial statements on a going concern basis
if management determines after the reporting period but before
authorization of financial statements that it intends to liquidate the entity or
to cease the trading, or that it has no realistic alternative but to do so.
 When an entity does not prepare the financial statements on a going
concern basis, it shall disclose:
a) The fact that financial statements are not prepared in pursuant to “going
concern” basis; and
b) The basis on which the financial statements are prepared (say liquidation
basis incorporating fair value less cost to sale of all assets and liabilities)
and the reason why the entity is not regarded as a going concern.
In case simply there is uncertainty about the “going concern” basis for
reason arising after the reporting date the fact shall be disclosed.
7. Disclosures
i. Disclosure of date of authorization financial statements:
ii. Updating disclosures: An entity shall update disclosures that relate to
the condition that existed at end of the reporting period in the light of
any new information that receives after the reporting period. The
updating is required even when the information does not affect the
amounts that the entity have already recognized in its financial
statements.
iii. Disclosure of non-adjusting events: As regards materials non
adjusting events an entity discloses-
a. The nature of the event; and
b. Estimates of its financial effects, or statements that such an estimate
cannot be made.
iv. Disclosure of proposed dividend and dividend per share: An entity
may disclose amount of proposed dividend and dividend per share
below the statement of changes in Equity or in Notes to Accounts.
v. Disclosure of going concern uncertainty: In case there arises any
reason that causes going concern uncertainty but the management
 does not change the basis of accounting, the fact shall be disclosed.

PAST QUESTIONS OF NAS-10

1. A major fire has damaged assets in a factory of X Co. Ltd. On 8.4.2005, 8
days after the year end closing of accounts. The loss is estimated to be Rs.
16 crores (after estimating the recoverable amount of Rs 24 crores from the
insurance company)
If the company had no insurance cover, the loss due to fire would be Rs 40
crores.
Explain how the loss should be treated in the final Accounts of the year
ended 31.3.2005. (Acc-Jun-2006)

2. Bottom Ltd. entered into a sale deed for its immovable property before the
end of the year. But registration was done with registrar subsequent to
balance sheet data, but before finalization. Is it possible to recognize the
sale and the gain at the balance sheet date? Give your view with reason
(Acc-Dec-2006)

3. ABC Limited closed its accounting year as on 30.06.2011 and the accounts
for that period were considered and the approved by the board of director
on 20th August, 2011. The company was engaged in laying pipeline for the
oil company, deep beneath the earth. While doing the boring work on
01.09.2011 it had met a rocky surface for which it was estimated that there
would be extra cost to the tune of Rs 100 lakhs. Further, the court had
given its verdict against the company for the liability of Rs 50 lakhs on
02.08.2011 shown as contingent liabilities on accounts. You are required to
 state with reason, how it would be dealt with in the financial statements.
(Acc-Jun-2012)

4.
a. Distinguish between adjusting and non-adjusting events under relevant
Nepal Accounting Standard.
b. Following Balance Sheet pertains to Rising Nepal Ltd. As on 31 stAshad
2065:

Rising Nepal Ltd.

Balance Sheet as on 31stAshad 2065
Particular Amount
Liabilities Current Year(Rs)
Share capital 13,00,000
Reserve and surplus 450,000
Total 17,50,000

Assets Current year (Rs)

Fixed assets-gross 11,00,000
Less: Accumulated Depreciation 250,000
Net Block 850,000
Current Assets
Cash in Hand 40,000
Cash at Bank 325,000
Sundry Debtors 660,000
Advance to Supplier 250,000
Stock in Hand 50,000
Sub-total 13,25,000
Less: Current liabilities
Sundry creditor 300,000
Advanced from costumers 125,000
Sub-total 425,000
Net Current Assets 900,000
Total
17,50,000

Following matters were not considered while preparing above Balance Sheet:
Advance to suppliers includes Raw materials advance amounting to Rs 175,000
given to a Limited company in India. The company was liquidated on December
2007 (Poush2064). Liquidator made public notice for any claims against the
company during the course of liquidation. Rising Nepal Limited was aware of
the process only on Shrawan 2065. The court declared the company bankrupt on
Shrawan. There was no possibility of recovering the advance in any
circumstances. Similarly, Cheques issued by customers amounting to Rs 60,000
was received by the company on 2ndShrawan 2065. Further, there was a fire in
one of its plants on first week of Bhadra causing significant damage to the plant
and assets thereon. The book value of the plant along with all the fixed assets
there was Rs 350,000. However, no estimation of loss is finalized yet.
The financial statements of the company were approved on 15 thBhadra 2065.
Prepare the Balance Sheet after considering the provision of the applicable
Nepal Accounting Standard. (dec 2009- 15marks)
NAS 16 Property, Plant and Equipment
1. Definition of property, plant and equipment
Property, plant and equipment are tangible items that:
a. are held for use in the production or supply of goods or service, for rental
to others, or for administrative purpose; and
b. are expected to be used during more than one period.
2. Definition of cost
Cost is the amount of cash or cash equivalents paid or the fair value of the
other consideration given to acquire an asset at the time of its acquisition or
construction or where applicable, the amount attributed to that asset when
initially recognized.
When an item of PPE is received in an entity settled share based transaction,
it is measured at fair value of PPE. If the fair value of PPE cannot be reliably
estimated, then the transaction is measured at the fair value of equity.
3. Initial recognition
i. It is probable that future economic benefit associated with the asset will
flow to the entity; and
ii. The cost of the asset can be reliably measured.
Economic benefit to be derived from item of PPE can be direct or
indirect. An item of PPE may generate economic benefit individually or
in association with other assets and liabilities. For example assets
acquired for environmental measures.
4. Component-wise recognition of PPE
An entity may adopt the following policy for componentization of PPE:
i. A component is separately identifiable and measurable, and can be
separated from the complex asset;
 ii. The useful life of component is shorter than that of the main asset such
that it requires replacement during the life of the complex asset to which
it belongs;
iii. The cost of the component exceed the capitalization threshold of the
entity;
iv. The cost of the component is significant in relation to the total cost of
the complex asset; and
v. The useful life of the component is different from the complex asset
such that failure to depreciate the component will create materials
difference in depreciation charge.
5. Repair and maintenance
Normally spare parts and servicing equipment are accounted for as an item
of inventory and expensed when used. Day to day maintenance expenses are
expensed as repairs and maintenance. This type of costs includes labor,
consumables and small parts. NAS 02 Inventories applies to stock of
maintenance spares and consumables.
6. Inspection costs
Certain assets required regular inspection as preventive measure whether any
parts to be replaced or not. An example is aircraft inspection or dry-docking
of ship. NAS 16.14 sets out that when each major inspection is performed, its
cost is recognized in the carrying amount of the item of property, plant and
equipment if the recognition criteria are satisfied. Any remaining carrying
amount of the previous inspection (distinct from the physical asset) is
expensed.
7. Measurement principle
It is possible to apply cost model or revaluation model to different classes of
PPE.
 However, it is not possible to apply cost model to one item whereas
revaluation model to another item within the same class.
“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.”
8. Details of costs
a. Purchase price net of discounts and rebate, including import duties and
non-refundable purchase taxes,
b. Directly attributable costs of bringing the asset to working condition and
c. The cost of dismantling and removing the item and restoring the site.
Subsequent re-estimate of dismantling expenses may result in increase or
decrease of provision.
Directly attributable cost include- (i) Employee benefit, (ii) site preparation,
(iii) initial delivery and handling costs, (iv) installation and assembly cost,
(v) cost of testing net of sale proceeds of any goods produced in the testing
process, and (vi) professional fees.
Indirect expenses are not capitalized. Borrowing costs are capitalized in
accordance with NAS 23 Borrowing costs.
The following items of cost are not included in the cost of PPE
i. Costs of opening a new facility;
ii. Cost of introducing new product or service(including costs of
advertising and promotional activities)
iii. Costs of conducting business in a new location or with a new class of
customer
iv. Administrative and other general overheads; and
 v. Staff training costs.
The cost of any self- constructed asset is derived by eliminating any internal
profit. Also costs of any abnormal loss of materials, labour and other
resources incurred are not included in the cost of the asset.
Example 1 [purchase price of PPE]
Entity K purchased a plant for gross price NPR 200 Million. The seller
granted 0.5% rebate. The gross price includes excise duty NPR 18 million
for which the buyer entity will get tax refund and non-refundable VAT of Rs
10 million. It has also incurred NPR 15 Million for transporter cost, handling
charges and insurance, NPR 5 million for installation and NPR 3 million for
testing and professional fees. It has earned NPR 0.2 million from selling
goods produced out of testing. The company borrowed NPR 100 million for
financing the new purchase @ 10%. The entire process of purchase to make
the operational took nearly 15 months. The company earned NPR 0.1 million
from short – term parking of the money borrowed pending payment to
supplier and meeting all costs.
What should be the initial cost of the plant?
Example 2: An entity started construction on a building for its own use on 1st
April 2007 and incurred the following costs:
Rs’000
Purchase price of land 250,000
Stamp duty 5,000
Legal fees 10,000
Site preparation and clearance 18,000
Materials 100,000
Labour (period 1st April 2007 to 1 July 2008) 150,000
Architect’s fees 20,000
General overheads 30,000
The following information as also relevant:
a) Materials cost were greater than anticipated. On investigation, it was found
that materials costing Rs 10 million had been spoiled and therefore wasted
and a further Rs 15 million was incurred on materials as a result of design
work.
b) As a result of these problems, work on the building ceased for a fortnight
during October 2007 and it is estimated that approximately Rs 9 million of
the labour cost relate to this period.
c) The building was completed on 1st July 2008 and occupied on 1 Sept 2008.
You are required to calculate the cost of the building that will be included in
tangible non current assets additions.
Table 2 checklist of cost to be included and excluded
Initial costs
Items to be included Items to be Excluded
a. Purchase price net of discount i. Costs of opening a new
and rebates, including import facility;
duties and non-refundable ii. Cost of introducing new
purchase taxes, product or service, i.e.
b. Directly attributable costs of promotional cost of that
bringing the asset to working produce not of the asset;
condition and iii. Costs of conducting
c. The initial estimate of the costs of business in a new
dismantling and removing the location or with a new
 items and restoring the site. class of customer;
iv. Administrative and
Break-up of directly attributable other general overheads;
costs; and
v. Staff training costs.
(i) Employee benefit costs,
(ii) Site preparation costs, Also excluding interest
(iii) Initial delivery and handling expenses included in defer
costs, payment
(iv) Installation and assembly costs,
(v) Cost of testing net of sales No costs are added to the
proceeds of any goods carrying amount after the
produced in the testing assets becomes operational in
process, and its location as intended by the
(vi) Professional fees. management:
i. Initial operating losses
ii. Dislocation expenses
Special points for determining cost of self-constructed assets:
Include cost of materials, labour, and directly attributable overheads
Exclude : Abnormal wastage and internal profit
Include : Borrowing costs in accordance with NAS 23 if the self-
constructed is a qualifying asset under that standard
Include : Present value of estimated site restoration costs.

9. Capitalization of decommissioning expenses

NAS 16 property, plant and equipment requires capitalization of expenses
for decommissioning, site restoration and similar liabilities. Paragraph 16 (c)
 of NAS 16 is of critical significant. The cost of an item of PPE inter alia
comprises of
“The initial estimate of the cost of dismantling and removing the item and
restoring the site on which it is located, the obligation for which an entity
incurs either when the item is acquired or as a consequence of having used
the item during a particular period for purposes other than to produce
inventories during that period.”
Example 3: Hydroelectricity ltd. has estimated current site restoration
expenses at NPR 500,000. Estimated rate of inflation is 9% and risk free rate
is 11%. The estimated useful life of the project is 40 years. As on
2069.01.01, the date of initial recognition, the company estimates that NPR
500,000 as the current cost of site restoration.
a) How would the company apply the requirement of NAS 16?
b) Show unwinding of discount for initial 5 years.
(given: (1+9%)40 =31.10942, 1/(1+11%)40 =65)
10. Exchanging of assets
If an item of PPE is acquired in exchange of an item of non-monetary asset,
then the asset acquired is measured at fair values unless the transaction does
not have commercial substance. The transaction will have commercial
substance if the change in post-tax cash flows is substantially affected by the
exchange of the asset.
If the fair value of the PPE acquired by the exchange transaction cannot be
measured, the asset is recognized at the carrying amount of the asset given
up.

11. Measurement after initial recognition

After initial recognition, an entity may either choose cost model or
revaluation model. The election shall be applied to an entire class of PPE.
[Paragraph 29, NAS 16]
If cost model is adopted an asset is carried at cost less accumulated
depreciation and accumulated impairment losses.
Subsequent costs
Subsequent costs are those which are incurred after the initial costs. These
are cost incurred while the assets are already in operation.
The basic principle is that subsequent costs are added to the carrying amount
of PPE only when it is probable that future economic benefits, in excess of
originally assessed standard of performance of the existing assets, will flow
to the entity. All other subsequent expenses are expensed in the period in
which they are incurred.
Example of subsequent costs that can be added to the carrying amount are-
(i) Modification of an item to extend its useful life or increase in
capacity;
(ii) Upgrading machines parts to achieve a substantial improvement in
the quality of output;
(iii) Adoption of new production process enabling a substantial reduction
in previously assessed operating costs.
Expenditure on repairs and maintenance is made to restore or maintain
the future economic benefit that an entity can expect from the originally
assessed standard of performance of the assets. So such expenditure
item is expensed in the period in which it is incurred.
12. Application of revaluation model
The revaluation model can be applied to such items of PPE the fair value of
which can be reliably measured. 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.
When an item of property, plant and equipment is revalued, the entire class
of asset should be revalued. Example of separates classes of property, plant
and equipment are- (i) land, (ii) land and building, (iii) machinery, (iv) ships,
(v) air craft, (vi) motor vehicles, (vii) furniture and fixtures, and (vii) office
equipment.
Para 39: If an assets carrying amount is increased as a result of
revaluation,the increase shall be recognized in other comprehensive and
accumulated in equity under the heading of revaluation surplus. However,
the increase shall be recognized in profit or loss to the extent it reverses a
revaluation decrease of the same asset previously recognized in profit or loss.
Para 40: If an asset’s carrying amount is decreased as a result of a
revaluation, the decrease shall be recognized in profit or loss. However, the
decrease shall be recognized in other comprehensive income to the extent of
any credit balance existing in the revaluation surplus in respect of that asset.
The decrease recognized in other comprehensive income reduces the amount
accumulated in equity under the heading of revaluation surplus.

The revaluation surplus included in equity in respect of an item of property,

plant and equipment may be transferred directly to retained earnings when
the asset is derecognized. This may involve transferring the whole of the
surplus when the asset is retired or disposed of. However, some of the
surplus may be transferred as the asset is used by an entity. In such a case,
 the amount of the surplus transferred would be the difference between
depreciation based on the revalued carrying amount of the asset and
depreciation based on the asset’s original cost. Transfers from revaluation
surplus to retained earnings are not made through profit or loss.
Example no 4: A company revalues its building and decide to incorporate
the revaluation into its financial statements.
Extracts from the statement of financial position at 31st Dec 2007
Building: Rs’000
Cost 1200
Depreciation (144)
1056
The building is revalued at 1st January 2008 at Rs 14,00,000. Its useful life is
40 years at that date.
Show the relevant extracts from the final accounts at 31st Dec 2008.
Example no 5: On 1 Shrawan 2075 the fair value of XY Ltd.’s leasehold
property was Rs 100,000 with the remaining life of 20 years. The company’s
policy is to revalue its property at each year end. At 31st Asadh 2076 the
property was valued at Rs 86,000. The balance in revaluation surplus at 1
Shrawan 2075 was Rs 20,000 which relates entirely to the leasehold
property. XY ltd. does not make any transfer to realized profit in respect of
excess depreciation. Required:
a) Prepare the extracts of financial statements for the year ended 31st Asadh
2076 reflecting the above transactions.
b) State how the accounting would be different if the opening revaluation
surplus did not exist.
Example 6: A company revalued its land and building at the start of the year
to Rs 10 million(Rs 4 million represents land). The property cost Rs 5
 million(Rs 1 million for the land) ten years prior to revaluation. The total
expected life of 50 years is unchanged. The company’s policy is to make an
annual transfer of realized amounts to retained earnings.
Show the effects of the above on the financial statements for the year.
13. Depreciation
Depreciation is the systematic allocation of the depreciable amount of an
asset over its useful life. Depreciation method to be applied for an item of
PPE is adopted such that depreciable amount is allocated on a systematic
basis over the useful life of the asset. The underlying principle is that over-
recovery or under-recovery of the depreciable amount shall be avoided.
NAS 16 has therefore requires the following:
i. Charge depreciation component-wise
ii. Annual review of the useful life and residual value of the asset
iii. Annual review of the depreciation method.
Changes in depreciation method, useful life and residual value are
considered as change in accounting estimate. Depreciation method shall be
consistently pursued from period to period. Depreciation method is changed
when there is change in expected pattern of consumption of future economic
benefits embodied in an item of PPE.
Depreciation method specified in NAS 16 is straight line method, reducing
balance method and unit of production method. Usually unit of production
method is found suitable for mining and mineral extraction activities. Of
course, it is possible to apply this method to any plant and machinery for
which it is possible to determine the useful life based on the production
hours or production capacity in terms of number of units.
14. Residual value
 The residual value of an asset is the estimated amount that an entity would
currently obtain from disposal of the assets, after deducting the estimated
costs of disposal, if the asset were already of the age and in the condition
expected at the end of its useful life.
Normally residual value of an asset is not more than 5%. In case it exceeds
5%, the fact shall be disclosed given basis of such estimation.
In practice, the residual value of an asset is often insignificant and therefore
immaterial in the calculation of the depreciable amount.

15. Useful life

While determine the useful life of an asset the following factors should be
taken in to consideration-
i. Expected usage by the entity;
ii. Expected physical were and tear;
iii. Technical obsolescence;
iv. Legal or similar limits on the use of the asset.

16. Commencement and cessation of depreciation

Depreciation of an asset begins when it is available for use, i.e. when it is in
the location and condition necessary for it to be capable of operating in the
manner intended by the management. When significant parts (which are
recognized as PPE) are purchased, it is not presume that depreciation begins
immediately. Those parts are not ‘available for use’ until fitted in the plant,
machinery or equipment. That is the significant of the phrase ‘location and
condition necessary for it to be capable of operating in the manner intended
by the management’.
 Depreciation of an asset ceases at the earlier of the date that the asset is
classified as held for sale (or included in a disposal group that is classified as
held for sale) in accordance with NFRS 5 Non-current assets held for sale
and discontinue operation and the date that the asset is derecognized.
Depreciation does not cease when the asset becomes idle or is retired from
active use unless the asset is fully depreciated. However, under usage
method of depreciation the depreciation charge can be zero while there is no
production.
17. Derecognition of PPE:
An item of PPE is derecognized, i.e., eliminated from the statement of
financial position on disposal or when no further economic benefit is
expected to be derived from such assets. Disposal of PPE is done by sale, by
donation or by entering into a lease agreement which is classified as finance
lease under NAS 17.
Gains or losses arising derecognition of an asset is recognized in the profit
and loss when a particular asset is derecognized. Gains or losses on disposal
of an asset should be calculated with reference to the carrying amount.
However, this derecognition gain is not classified as revenue under NAS 18.
It is an item of non operating gain/loss.
18. Disclosure requirement:
1. Measurement bases used in determining gross carrying amount
2. Depreciation method used
3. Useful life of the asset or depreciation rate
4. The gross carrying amount, and the accumulated depreciation and
accumulated impairment losses at the beginning and end of the period;
 5. Reconciliation of the carrying amount at the beginning and end of the
period

Past Question of NAS-16

1. In fiscal year 2061/62, M/S PD Ltd. revalued its plant and machinery
upward by Rs. 57,000 by crediting as income in income statement. In the
fiscal year 2063/64, the assets under plant and machinery are revalued
downwards by Rs 25,000 by changing as expense to income statement.
Give your view on the accuracy of above accounting treatments with
reference to NAS-16.(June-2008)

2. During the current year 2069/70, M/S Harish power made the following
expenditure relating to its plant and machinery:
Particular Amount
(Rs)
General repairs 400,000
Repairing of electric motors 100,000
Partial replacement of part of machinery 50,000
Substantial improvement to the electrical wiring system
which will increase efficiency of the plant and machinery 10,00,000

Explain with reference to relevant NAS; how the above expenses should
be treated? (Dec-2013)
3. Discuss the treatment of upward and downward revaluation of assets as
per NAS 16. (June-2014)

4. The written down value of property, plant & equipment of Prudence

International Pvt. Ltd. as on Ashad end, 2072 was Rs 20, 00,000. The
company decided to revalue its property, plant and equipment on Ashad
end, 2072. This is the first instance when the company has gone for any
revaluation of asset.
With reference to NAS; explain the financial impact on account of
revaluation of property, plant and equipment on (i) reserve & surplus and
(ii) profit and loss Account if:
i) Property, plant & equipments is revalued at Rs 25, 00,000.
ii) Property, plant & equipments is revalued at Rs 16, 00,000.
(Dec-2015)

5. Fire Ltd. Purchase equipment for its power plant from Urja Ltd. during
the year 2006-07 at a cost of NRs 100 lacs. Out of this they paid only 90%
and balance 10% was to be paid after one year on satisfactory performance
of the equipment. During the financial year 2007-08, Urja Ltd. waived off
the balance 10% amount which was credit to profit and loss account by
fire Ltd. as discount received.(June-2009)
6. Kathmandu Boarding School was established in year 2010. It recently
constructed swimming pool of 20*20 meter size behind its main building.
Due to Vastusastra problem, the swimming pool was reconstructed
towards 5 meter west side of the building. Relocation of the pool incurred
additional cost of 20%. Suggest, how this cost be booked in account.(Dec-
2010)
7. The company’s plant & machinery was Rs 200 Million as on 1stshrawan
2067. It provided depreciation at 15% per annum under WDV method.
However it noticed that about Rs 20 million worth of imported asset,
which is component of above plant & machinery acquired on 1stshrawan
2067, would be obsolete in 2 year, company wants to write off this asset
over 2 years. Can company do so? Give comment.(Dec-2011)

8. On the basis of approval accounting policy, Bee Limited has revalued its
property and charged Rs 5 crores revaluation loss in profit and loss
account in 2067/68 whereas transferred Rs 10 crores the revaluation gain
to revaluation reserve in 2068/69.(June-2013)
9. Alpha Limited purchases a high value plant from Beta Limited in
exchange of 10,000 units of its finished product. The plant was in use in
Beta Limited for last 3 years and expert expects that its useful life could be
further 17 years (i.e. 20 years in total). Alpha limited sells its finished
products in the market at Rs 1000 per units whereas there is no specific
market for the used plant but the expert valuation of the used plant
indicated the value of the plant as Rs 1.2 crores. Hence, Alpha Limited has
recorded the cost price of the plant at Rs 1.2 crores.(Dec-2013)
10. A company purchased a plant for Rs 20 crores in 1 Shrawan 2070.The
company has the policy to charge depreciation at the rate of 10% on such
plants on straight line basis. Due to long dispute between the management
and the labour of the company, the factory was closed fron 1st kartik to
Chaitra end 2070. Management has charged depreciation of Rs 1 core on
the said plant to the income statement for the year because the newly
purchased plant was not used for 6 months in the year.
(June-2015)

11. ABC Hydropower Pvt. Ltd. has purchased equipment worth of Rs 4

million which is kept stand by for the urgent usage on need basis for
repairing the heavy equipment as and when default is reported in
functioning of heavy equipment. The accountant has treated it as recurring
inventory item and charged to profit and loss account at the end of each
financial year based on consumption patterns calculated on reasonable
basis. Is the accounting treatment made by accountant is correct?
Comment.
(June-2015)
12. A Company purchased machinery on 1stAsoj 2071 for Rs 10 crore on
credit for 6 month. The seller normally does not sell such machineries on
credit and cash price of the machinery at Rs 9.5 crores. The buying
company recognized machinery at Rs 10 crores in the book on 1stAsoj and
the liabilities is fully paid on FalgunMasant.(July-2015)
13. A Company has 10 vehicles with carrying amount of Rs 5 crores. The
company has purchased a new machinery worth Rs 8 crore by exchanging
with its 10 used vehicle and making further payment of Rs 2 crores in
 cash. The company management derecognizes vehicle from its financial
statement and recognizes machinery at Rs 7 crore (5 crores plus 2 crores).
(Dec-2015)
Questions for practice:

1. On 1 Shrawan 2075,SK Co. Ltd. began to construct a supermarket which had

an estimated useful life of 40 Years. It purchased a leasehold interest in the site
for Rs 25 million. The construction of the building cost Rs 9 million and the
fixtures and fittings cost Rs 6 million. The construction of the supermarket was
completed on 31 Asadh 2076 and it was brought into use on 1 Shrawan
2076.SK Co. Ltd. borrowed Rs 40 million on 1 Shrawan 2075 in order to
finance this project. The loan Carried interest @ 10% p.a. It was repaid on 30
Aswin 2076
Required: Calculate the total amount to be included at cost in property, plant
and equipment in respect of the development at 31 Asadh 2076..
2. X Ltd. started construction on a building for its own use on 1st April,2000. The
following cost are incurred
Purchase Price of Land 30,00,000
Stamp duty & Legal fee 200,000
Architect Fee 200,000
Site Preparation 50,000
Materials 10,00,000
Direct Labour 400,000
General Overhead 100,000
Other relevant information,
Materials costing Rs 1,00,000 had been spoiled and therefore wasted and further Rs
1,50,000 was spent on account of faulty design work. As a result of these problems,
work on the building was stopped for 2 weeks during November 2000 and it was
 estimated that Rs Rs 22,000 of the labour cost relate to that period. The building was
completed on Jan 01.2001 and brought in use April 1,2001. X Ltd. had taken a loan of
Rs 40,00,000 @ 8% p.a. on 01.04.2000. Find out the cost of the building.
3. On 1st April 2001, Sun Ltd purchased some land for 10 Million (including legal cost
of Rs 1 million) in order to construct a new factory. Construction work commenced
on 1st May 2001. Sun Ltd incurred the following cost in relation to its construction:
Preparation and leveling of land 300,000
Purchase of materials for preparation 60,08,000
Employment Cost 200,000 p.m.
Overhead Cost incurred directly on the construction of the factory 1,00,000 p.m.
Ongoing overhead cost allocated to the construction project using company’s normal
overhead allocation model = 50,000 p.m.
Income received during the temporary use of the factory premises as a car park during
construction period 50,000
Cost of relocating employees to work at the new factory 300,000
Cost of the opening ceremony on 31.01.2001 150,000
The factory was completed on 30.11.2001(consider this period as substantial as per
NAS 23) and production began on 1.02.2002. The overall useful life of the factory
building was estimated at 40 years from the date of completion. However, it is
estimated that the roof will need to be replaced 20 years after the date of completion
and that the cost of replacing the roof at current prices would be 30% of the total cost
of the building.
At the end of 40 year period, Sun Ltd. has a legally enforceable obligation to demolish
the factory and restore the site to its original condition.
The directors estimate that the cost of demolition in 40 years time(based on the
prevailing price at that time) will be Rs 20 million. An annual risk adjusted discount
rate which is appropriate to this project is 8%. The present value of Rs 1 payable in 40
years time at an annual discount rate of 8% is 4.6 cents.
The construction of the factory was partly financed by a loan of Rs 17.5 million taken
out on 1st April 2001 @ 6% p.a. During the period 1st April 2001 to 31.08.2001 Sun
Ltd received investment income of Rs 1,00,000 on the temporary investment of the
proceeds. Calculate the cost of the Assets.
NAS 20: Accounting for government grants and disclosure of government
assistance
Definition:
1. Government refers to government, government agencies and similar bodies whether
local, national or international.
2. Government assistance is action by government designed to provide an economic
benefit specific to an entity or range of entities qualifying under certain criteria.
Government assistance for the purpose of NAS 20 does not include benefits provided only
indirectly through action affecting general trading conditions, such as the provision of
infrastructure in development areas or the imposition of trading constraints on competitors.
Government assistance does not include the provision of infrastructure by improvement to
the general transport and communication network and the supply of improved facilities
such as irrigation or water reticulation which is available on an ongoing indeterminate basis
for the benefit of an entire local community. Government assistance takes many forms
varying both in the nature of the assistance given and in the conditions which are usually
attached to it. The purpose of the assistance may be to encourage an entity to embark on a
course of action which it would not normally have taken if the assistance was not provided.
3. Government grants are assistance by government in the form of transfers of resources
to an entity in return for past or future compliance with certain conditions relating to the
operating activities of the entity. They exclude those forms of government assistance which
cannot reasonably have a value placed upon them and transactions with government which
cannot be distinguished from the normal trading transactions of the entity. Government
grants are sometimes called by other names such as subsidies, subventions, or premiums.

4. 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.
Subsidiary conditions may also be attached restricting the type or location of the assets
or the periods during which they are to be acquired or held.

5. Grants related to income are government grants other than those related to assets.

6. Forgivable loans are loans which the lender undertakes to waive repayment of under
certain prescribed conditions.
Recognition of government grant:
Government grants, including non-monetary grants at fair value, should be recognized
only when there is reasonable assurance that:
a) the entity will comply with the conditions attaching to them; and
b) the grants will be received.

A government grant is not recognized until there is reasonable assurance that the entity will
comply with the conditions attaching to it, and that the grant will be received. Receipt of a
grant does not of itself provide conclusive evidence that the conditions attaching to the grant
have been or will be fulfilled.

Forgivable Loan: A forgivable loan from government is treated as a government grant

when there is reasonable assurance that the entity will meet the terms for forgiveness of the
loan.

Loans at below market interest rate by government: The benefit of a government loan at
a below -market rate of interest is treated as a government grant. The loan should be
recognized and measured in accordance with NFRS 9, Financial Instruments. The benefit of
the below-market rate of interest should 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. The entity should consider the
conditions and obligations that have been, or must be, met when identifying the costs for
which the benefit of the loan is intended to compensate.
Accounting for government grant:
There are two approaches to the accounting of government grant: ‘capital approach’ or
‘income approach’. Under capital approach, a grant is recognized outside profit or loss, i.e.,
grant is credited directly to equity whereas under the income approach grant is recognized
in profit or loss over one or more period.
Thus, government grants should be recognized in profit or loss on a systematic basis over
the periods in which the entity recognizes as expenses the related costs for which the grant
is intended to compensate. In most cases the periods over which an entity recognizes the
costs or expenses related to a government grant are readily ascertainable. Thus grants in
recognition of specific expenses are recognized in profit or loss in the same period as the
relevant expenses. Similarly, grants related to depreciable assets are usually recognized in
profit or loss over the periods and in the proportions in which depreciation expense on
those assets is recognized.
Example 1:

1. Grant of Rs 40 000 to acquire a water cleaning station. The cost of the station was Rs
100,000 and its useful life is 8 years. ABC acquired the station on 1 July 20X2 and
recognized depreciation on a straight-line monthly basis.
2. Grant of Rs 10 000 to cover the expenses for ecological measures during 20X2 –
20X6. ABC assumes to spend Rs 3 000 in 20X2-20X5 and Rs 2 000 in 20X6 (Rs 14
000 in total).
3. Grant of Rs 3 000 to cover the expenses for ecological measures made by ABC in
20X0-20X1.

Prepare the journal entries in the year ended 31 December 20X2

Example 2 A Limited received from the government a loan of Rs 50,00,000 @ 5% payable

after 5 years in a bulleted payment. The prevailing market rate of interest is 12%. Interest is
payable regularly at the end of each year. Calculate the amount of government grant(if any)
and pass necessary journal entry. Also examine how the Government grant be realized. How
the grant will be recognized in the statement of profit and loss assuming:
(a) the loan is an immediate relief measure to rescue the enterprise
(b) the loan is a subsidy for staff training expenses, incurred equally, for a period of 4 years
(c) The loan is to finance a depreciable asset.

Non monetary government grant:

A government grant may take the form of a transfer of a non -monetary asset, such as land
or other resources, for the use of the entity. In these circumstances the fair value of the non -
monetary asset is assessed and both grant and asset are accounted for at that fair value. An
entity is not permitted to measure these grants at nominal value.
Presentation of grant related to assets:
Government grants related to assets, including non-monetary grants at fair value, shall be
presented in the statement of financial position either by setting up the grant as deferred
income or by deducting the grant in arriving at the carrying amount of the asset.
Presentation of grant related to income:
Grant related to income are presented as part of profit or loss, either separately or under a
general heading such as “other income”; alternatively, they are deducted in related expense.
Repayment of government grants
A government grant that becomes repayable shall be accounted for as a change in accounting
estimate. Repayment of grant related to income shall be applied first against any unamortized
deferred credit recognized in respect of the grant. To the extent that the repayment exceeds
any such deferred credit, or where no such deferred exists, the repayment shall be recognized
immediately in profit or loss. Repayment of grant related to assets shall be recognized by
increasing the carrying amount of the asset or reducing the deferred income by the amount
repayable. The cumulative additional depreciation that would have been recognized in profit
or loss to date in the absence of grant shall be recognized immediately in profit or loss.

Disclosure:
The following matters shall be disclosed:
a) The accounting policy adopted for government grants, including the methods of
presentation adopted in the financial statements;
b) The nature and extent of government grants recognized in the financial statements
and an indication of other forms of government assistance from which the entity has
directly benefited; and
c) Unfulfilled condition and other contingencies attaching to government assistance
that has been recognized.
Past Exam Questions:
1. Leather development corporation (LDC) has installed advanced machinery, costing Rs
50 million, which was provided by the government through DANIDA’s grant in FY
2061/62 and is put to use from the date of installation. LDC is providing depreciation
at 15% p.a. as per Income Tax Act 2058 in a consistent basis. Whereas, such
depreciation during the first year amounting to Rs. 7.50 Million was charged to profit
and loss account. Comment.(Audit -June-2006)
 2. M/s reliable hospital Ltd. Received a cash grant of Rs 2.5 Million from the government
of Japan in FY 2063/64 under the agreement that the grant amount will be use to organize
3 free health camps in the eastern Nepal. In the FY 2063/64 it organized 2 free health camps
and spent Rs. 1.5 Million in total. The company treated Rs 2.5 Million as miscellaneous
income and Rs. 1.5 Million as charity expenses for the year. Comment in line with
applicable accounting standards.(Audit June 2008)

3. The Critical Pollution Extinction Company Limited procured a pollution controlling

machine for which the government has 50% rebate in costumes duty upon the precondition
that the machine should be used for at least 5 years. During the course of audit you found
that the company credit 50%rebate provided to income for the year by disclosing the same
in the Notes to accounts in the financial statement. What is your opinion as regard the
accounting treatment by the company? (Audit June 2011)

4. X ltd. received a grant of Rs 2 crores from the government for the purpose of installation
of special machinery during the fiscal year 2062/63. The cost of the machinery was Rs 20
crores and it has a useful life of 9 years. During f/y 2066/67, the grant has become
refundable due to non-fulfillment of certain conditions attached to it. Assuming the entire
grant was deducted from the cost of machinery in the year of acquisition, state with reasons,
the accounting treatment to be followed in the year 2066/67.(Account Dec 2010)

5. Kathmandu Petroleum Company Ltd. is a semi government undertaking. The

government has availed the following grant to the company during the fiscal year 2070/71.
Particulars Amount(Rs)
Financial aids to compensate the losses of previous fiscal years 20,000,000
Land for construction of own building 30,000,000
Petroleum Storage tank 10,000,000
Required: How should the above grants be accounted in the books of accounts of the
company for the fiscal year 2070/71?

6. On 1st Shrawan 2072, ABCL received a government grant of Rs.8 million towards
the purchase of new plant with a gross cost of Rs.64 million. The plant has an estimated life
of 10 years and is depreciated on a straight-line basis. One of the terms of the grant is that
the sale of the plant before 31st Ashadh 2077 would trigger a repayment on a sliding scale
as follows:
Sale in the year ended Amount of repayment
31 Ashadh 2073 100%
31 Ashadh 2074 75%
31 Ashadh 2075 50%
31 shadh 2076 25%
Accordingly, the directors propose to credit to the statement of profit or loss Rs.2 million
(Rs.8 million x 25%) being the amount of the grant they believe has been earned in the year
to 31st Ashadh 2073. ABCL accounts for government grants as a separate item of deferred
credit in its statement of financial position. ABCL has no intention of selling the plant
before the end of its economic life. Comment.

7. Agri Nepal Pvt. Ltd. has a business of agricultural farm. The Government of Nepal has
provided grant of Rs. 10 lakhs against the bank guarantee with a condition that the company
has to export its product worth of Rs. 50 lakhs per year in next two fiscal year. Guide the
accountant of the company for the accounting of the grant. (Audit Dec 2019)
NAS 21: The effects of Change in Foreign Exchange
Rates
The objective of the Standard is to address the accounting for foreign activities which
include:
1.
transactions in foreign currencies; or
2.
foreign operations.
Considering that an entity may present its financial statements in a foreign currency, the
Standard also seeks to prescribe how to translate financial statements into a presentation
currency. In this context, the Standard defines foreign currency as a currency other than
the functional currency of the entity.
1. Functional currency is the currency of the primary economic
environment in which the entity operates. In this regard, the primary economic
environment will normally be the one in which it primarily generates and expends cash i.e.
it operates.
2. Foreign operation has been defined as an entity that is a subsidiary, associate, joint
venture or branch of a reporting entity, the activities of which are based or conducted in a
country or currency other than those of the reporting entity.
3. Presentation currency is the currency in which the financial statements are presented;
the presentation currency may be different from the entity’s functional currency.
4. Monetary items Vs Nonmonetary items: Monetary items are units of the currency held
and assets and liabilities to be received or paid in a fixed or determinable number of units
of currency. Examples include pension and other employee benefits to be paid in cash;
provisions that are to be settled in cash; payables; receivables; and cash dividends that are
recognized as a liability. Conversely, the essential feature of non-monetary item is the
absence of a right to receive (or an obligation to deliver) a fixed or determinable number of
units of currency. Examples include: amounts prepaid for goods and services (eg prepaid
rent); goodwill; intangible assets; inventories; property plant and equipment; and provisions
that are to be settled by the delivery of non-monetary asset.
Functional Currency:
An entity measures its assets, liabilities, equity, income and expenses in its functional
currency. All transactions in currencies other than the functional currency are foreign
currency transactions. NAS 21 requires each entity to determine its functional currency. In
determining its functional currency, an entity emphasizes the currency that determines the
pricing of the transactions that it undertakes, rather than focusing on the currency in which
those transactions are denominated. The following are the factors that may be considered
in determining an appropriate functional currency.
a) the currency that mainly influences sales prices for goods and services; this often will
be the currency in which sales prices are denominated and settled;
b) the currency of the country whose competitive forces and regulations mainly
determine the sales prices of its goods and services; and
c) the currency that mainly influences labour, material and other costs of providing
goods and services; often this will be the currency in which these costs are de nominated
and settled. Other factors that may provide supporting evidence to determine an entity’s
functional currency are:
i) the currency in which funds from financing activities i.e., issuing debt and equity
instruments) are generated;
ii) the currency in which receipts from operating activities are usually retained.

If an entity is a foreign operation, additional factors are set out in the Standard which should
be considered to determine whether its functional currency is the same as that of the
reporting entity of which it is a subsidiary, branch, associate or joint venture:
(a) whether the activities of foreign operations are carried out as an extension of that
reporting entity, rather than being carried out with a significant degree of autonomy. If
the foreign operation only sells goods imported from the reporting entity and remits the
proceeds to it, this will be an example of the former. An example of the latter is when
the foreign operations accumulates cash and other monetary items, incurs expenses,
generates income and arranges borrowings, all substantially in its local currency;
(b) transactions with the reporting entity as a proportion of the foreign operation’s
activities;
(c) impact of cash flows from the activities of the foreign operations on the cash flows of
the reporting entity and whether such cash flows are readily available for remittance;
(d) Whether cash flows from the activities of the foreign operation are sufficient to service
existing and normally expected debt obligation without funds being made available by the
reporting entity.
In practice, the functional currency of a foreign operation that is integral to the group will
usually be the same as that of the parent. Management will be required to use its judgment
to determine the functional currency for which they have to give priority to the primary
indicators before considering the other indicators which are designed to provide additional
supporting evidence to determine an entity’s functional currency.
Accounting for foreign currency transaction:
Initial recognition at the reporting date:
A foreign currency transaction is a transaction that is denominated or requires settlement
in a foreign currency (i.e., a currency other than the functional currency of the entity),
including transactions arising when an entity:
(a) buys or sells goods or services whose price is denominated in a foreign currency;
(b) borrows or lends funds with amounts denominated in a foreign currency; or
(c) Otherwise acquires or disposes of assets, or incurs or settles liabilities,
denominated in a foreign currency.
A foreign currency transaction is initially recorded by translation in the entity’s
functional currency at the exchange rate on the transaction date (or at rate that a
approximates the actual exchange rate).
An average exchange rate for a specific period may be used as an approximate rate
if the exchange rate does not fluctuate significantly.
Reporting at the end of subsequent reporting periods:
At the reporting date, assets and liabilities denominated in a foreign currency are translated
as follows:
(a) monetary items are translated at the exchange rate at the reporting date i.e.,
closing rate;
(b) non-monetary items measured at historical cost are not retranslated and instead
remain at the exchange rate at the date of the transaction; and
(c) Non-monetary items measured at fair value in a foreign currency are translated
at the exchange rate on the date the fair value was determined.

A reporting entity may comprise branches, subsidiaries, associates or joint ventures.

 The functional currency of each entity should be determined separately. This may or
may not be the same as the reporting entity.
Recognition of Foreign Exchange Gains and Losses:
Para 28. Exchange difference arising on the settlement of monetary items or on translating
monetary items at rates different from those at which they were translated on initial
recognition during the period or in previous financial statements shall be recognized in
profit or loss in the period in which they arise, except as para 32(entity’s net investment in
foreign operations).
Use of a presentation currency other than the functional currency:
An entity may present its financial statements in any currency (or currencies). If the
presentation currency differs from the entity’s functional currency, it translates its results
and financial position into the presentation currency. For example, when a group contains
individual entities with different functional currencies, the results and financial position of
each entity are expressed in a common currency so that consolidated financial statements
may be presented.
The results and financial position of an entity whose functional currency is not the currency
of a hyperinflationary economy shall be translated into different presentation currency using
the following procedures:
a) Assets and liabilities for each statement of financial position presented (including
comparatives) shall be translated at the closing rate at the date of that statement of
financial position.
b) Income and expenses for each statement presenting profit or loss and other
comprehensive income (i.e. including comparatives) shall be translated at exchange
rates at the dates of the transactions; and
c) All resulting exchange difference shall be recognized in other comprehensive income.
How to translate foreign operation’s financial
statements to presentation currency?
1. Assets (including goodwill) and liabilities: use closing exchange rate of that balance
sheet.
2. Income and expenses: use historical exchange rates (at the dates of transaction).
You can use average rates for the period instead.
3. Post-acquisition reserves, capital increases and dividends paid:
use historical exchange rates (at the dates of transaction).
4. Share capital and share premium exchange rates: use acquisition exchange rates (at
the dates of acquisition).
5. Recognize all exchange rate differences in other comprehensive income as a
separate line. It is called “CTD” or currency translation difference.

Example:
DEF is a German Subsidiary Co. which has its parent co in USA called ABC Co.
ABC co acquired 100% share in DEF Co. on 31.12.20X1. Below is the Statement of
Financial Position of DEF Co. as on 31.12.20X1 and 31.12.20X2 and exchange rate
at different dates are as follows:

Particulars 31.12.20X1(Euro on’000) 31.12.20X2(Euro on’000)

Non Current Assets 800 800
Current Assets 450 550
TOTAL 1250 1350
Share Capital 400 400
Accumulated Profit - 100
Liabilities 850 850
TOTAL 1250 1350

Date USD/EUR
31.12.20X1 1.5
Average on 20X1 1.46
31.12.20X2 1.45
Average on 20X2 1.48
 Required: Translate the above Statement of Financial Position on presentation
currency.

Past Exam Questions:

1. A company purchased fixed assets costing Rs 50.88 lakhs on 1 Shrawan 2069 and the
same was fully financed by foreign currency loan in U.S. Dollars repayable in four
equal annual installments. Exchange rate at the time of purchase was 1 US Dollar =
Rs 84.80. The first installment was paid on 31 Ashad 2070 when 1 US Dollar 90.80.
The entire loss of exchange was included in cost of goods sold of normal business
operations. A company provides depreciation on their fixed assets at 20% on WDV
basis. Show the correct accounting treatment with reference to relevant accounting
standard.(Acc-June-2014)
2. Care Limited purchased machinery on 1.4.2065 from a foreign country at the price of
$ 200 thousands upon terms of credit that the price should be settled within six months
from the date of purchase. The company capitalized the asset and created liability for
the capital goods converting the foreign currency liability to Nepales Rupees at a rate
of exchange prevailing as on 1.4.2065. When the company settled the liability on 30
Poush 2065, it had to incur an additional amount of Rs. 500,000 due to change in
foreign exchange rate on the date of settlement. It added this additional amount of
exchange variation in the capital cost of asset and charged depreciation upon the
enhanced amount of asset value from 1 Magh 2065. Give your opinion. (Audit-June-
2010)
3. A Ltd. purchased fixed assets costing Rs 850 lakhs on 1.1.2069. This was financed
by the foreign currency loan(US$) payable in three equal installments. Exchange rates
were 1$= Rs 85 and Rs 88 as on 01.01.2069 and 31.03.2069. First installment was
paid on 31.03.2069. You are required to state how these financial transactions would
be accounted for? (Acc-June 2013)
4. M/s Raddison Hotel on 15.4.2073 imported two Mercedes Benz from Germany at a
price Euro 200 thousand each upon terms of credit that price should be settled within
three months from the date of purchase. The company capitalized the asset and created
a liability for the capital goods converting the foreign currency liability to Nepalese
Rupees at a rate of exchange prevailing as on 15.4.2073. When the company settled
the liability on 30.8.2073, it had to incur an additional amount of Rs.15,00,000 due to
foreign exchange rate on the date of settlement. It added this additional amount of
exchange variation in the capital cost of the asset and charged depreciation upon an
enhanced amount of asset value from 30.8.2073. Comment (Audit Dec 2017)

5. Gorkha Company Ltd. imported raw materials worth USD 9,000 on 24 th Jestha, 2074,
when the exchange rate was Rs.104 per USD. The transaction was recorded in the
books at the above mentioned rate. The payment of the transaction was made on 10 th
Shrawan, 2074, when the exchange rate was Rs.108 per USD. At the year end 31 st
Ashadh, 2074, the rate of exchange was Rs.109 per USD.The Account Officer of the
company passed an entry on 31st Ashadh, 2074 adjusting the cost of the raw material
consumed for the difference between Rs.108 and Rs.104 per USD. Discuss whether
this treatment is justified as per the provision of NAS-21. (Acc June 2018)
NAS 23: Borrowing Costs
Core Principle:
This standard requires borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset are included in
the cost of that asset. Other borrowing costs are recognized as an expense.
Defination:
1. Borrowing costs are interest and other costs that an entity incurs in
connection with the borrowing of funds. It includes:
a) interest expense calculated using the effective interest method as
described in NAS 39 Financial Instruments;
b) Finance charges in respect of finance leases recognized in respect of
NAS 17.
c) exchange differences arising from foreign currency borrowings to the
extent that they are regarded as an adjustment to interest costs
2. A qualifying asset is an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale.
Exchange Difference to be included in Borrowing Cost:
With regard to exchange difference required to be treated as borrowing costs, the
manner of arriving at the adjustments stated therein should be as follows:
i) the adjustment should be of an amount which is equivalent to the extent to
which the exchange loss does not exceed the difference between the cost of
borrowing in functional currency when compared to the cost of borrowing in a
foreign currency.
ii) where there is an unrealised exchange loss which is treated as an adjustment
to interest and subsequently there is a realised or unrealised gain in respect of the
settlement or translation of the same borrowing, the gain to the extent of the loss
previously recognised as an adjustment should also be recognised as an
adjustment to interest.

Example 1: An entity can borrow funds in its functional currency (Rs) @

12%. It borrows $ 1,000 @ 4% on 1st April, 20X1 when $ 1 = Rs 40. The
equivalent amount in functional currency is Rs 40,000. Interest is payable on
31st March, 20X2. On 31st March, 20X2, exchange rate is $ 1 = Rs 50.The loan
is not due for payment.
i) Calculate the borrowing cost eligible for capitalization on 31.03.20X2. What
will be your answer if exchange rate on 31.03.20X2 is 1$= Rs 41

Example 2:ABC Ltd. has taken a loan of USD 20,000 on 1st April, 20X1 for
constructing a plant at an interest rate of 5% per annum payable on annual
basis.
On 1st April, 20X1, the exchange rate between the currencies i.e USD vs
Rupees was Rs 45 per USD. The exchange rate on the reporting date i.e 31st
March, 20X2 is Rs 48 per USD.
The corresponding amount could have been borrowed by ABC Ltd from Nepal
Banijya Bank in local currency at an interest rate of 11% per annum as on 1st
April, 20X1.
Compute the borrowing cost to be capitalized for the construction of plant by
ABC Ltd on 31.03.2002.
Recognition:
Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset are capitalised as part of the cost of the
qualifying asset. Such borrowing cost are capitalised when below two
conditions will be satisfied:
-when it is probable it will result in future economic benefits to the entity; and
-the costs can be measured reliably.
Other borrowing costs are recognisied as an expense in the period in which they
are incurred.

Borrowing costs elegible for capitalization:

The borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset are those borrowing costs that would have been
avoided if the expenditure on the qualifying asset had not been made.

Specific borrowing costs

When an entity borrows funds specifically for the purpose of obtaining a qualifying
asset, the entity should determine the amount of borrowing costs eligible for
capitalisation as the actual borrowing costs incurred on that borrowing during the
period less any investment income on the temporary investment of those
borrowings.
The financing arrangements for a qualifying asset may result in an entity obtaining
borrowed funds and incurring associated borrowing costs before some or all of the
funds are used for expenditures on the qualifying asset. In such circumstances, the
funds are often temporarily invested pending their expenditure on the qualifying
asset. In determining the amount of borrowing costs eligible for capitalisation
during a period, any investment income earned on such funds is deducted from the
borrowing costs incurred.
Example No 3: Alpha Ltd. on 1st April, 20X1 borrowed 9% Rs 30,00,000 to finance
the construction of two qualifying assets. Construction started on 1st April, 20X1.
The loan facility was availed on 1 st April, 20X1 and was utilized as follows with
remaining funds invested temporarily at 7%.
 Factory Office
Building Building
1st April, 5,00,000 10,00,000
20X1
1st October, 5,00,000 10,00,000
20X1
Calculate the eligible borrowing cost that can be capitalized on 31.03.20X2.
General borrowing costs
When a qualifying asset is funded from a pool of general borrowings, the amount
of the borrowing costs eligible for capitalisation is not so obvious. It may be
difficult to identify a direct relationship between particular borrowings and a
qualifying asset and to determine the borrowings that could otherwise have been
avoided.
Such a difficulty occurs, for example, when the financing activity of an entity is
coordinated centrally. Difficulties also arise when a group uses a range of debt
instruments to borrow funds at varying rates of interest, and lends those funds on
various bases to other entities in the group.
Calculation of Capitalization rate:
To the extent that an entity borrows funds generally and uses them for the
purpose of obtaining a qualifying asset, the entity shall determine the amount
of borrowing costs eligible for capitalization by applying a capitalization rate
to the expenditures on that asset.
The capitalization rate shall be the weighted average of the borrowing
costs applicable to all borrowings of the entity that are outstanding
during the period.
The amount of borrowing costs that an entity capitalizes during a period shall
not exceed the amount of borrowing costs it incurred during that period

Commencement of Capitalization:
An entity is required to begin the capitalizing of borrowing costs as part of the
cost of a qualifying asset on the commencement date. The commencement date
for capitalization is the date when the entity first meets all of the following
conditions cumulatively on a particular date:
a) it incurs expenditures for the asset;
b) it incurs borrowing costs; and
c) it undertakes activities that are necessary to prepare the asset for its intended
use or sale.

Suspension of capitalization:
An entity is required to suspend the capitalization of borrowing costs during
extended periods in which it suspends active development of a qualifying asset.
Such costs are costs of holding partially completed assets and do not qualify for
capitalization. An entity does not require to suspend capitalizing borrowing costs
when a temporary delay is a necessary part of the process of getting an asset ready
for its intended use or sale.

Cessation of Capitalization:
An entity should cease capitalising borrowing costs when substantially all the
activities necessary to prepare the qualifying asset for its intended use or sale are
complete.
An asset is normally ready for its intended use or sale when the physical
construction of the asset is complete even though routine administrative work
might still continue. If minor modifications, such as the decoration of a property
to the purchaser’s or user’s specification, are all that are outstanding, this
indicates that substantially all the activities are complete.
When an entity completes the construction of a qualifying asset in parts and each
part is capable of being used while construction continues on other parts, the
entity shall cease capitalizing borrowing costs when it completes substantially all
the activities necessary to prepare that part for its intended use or sale.

Disclosure:
Entities are required to disclose:
a) the amount of borrowing costs capitalized during the period; and
 b) the capitalization rate used to determine the amount of borrowing costs
eligible for capitalization.

Questions for practice:

1. X Limited has a treasury department that arranges funds for all the
requirements of the Company including funds for working capital and
expansion programs. During the year ended 31st March, 20X2, the
Company commenced the construction of a qualifying asset and incurred
the following expenses:
Date Amount (Rs)
1st July, 20X1 2,50,000
1st December, 20X1 3,00,000
The details of borrowings and interest thereon are as under:

Particulars Average Balance Interest

(Rs) (Rs)
Long term loan @ 10% 10,00,000 1,00,000
Working capital loan 5,00,000 65,000
15,00,000 1,65,000
Compute the borrowing costs that need to be capitalized
2. The borrowings profile of Santra Pharmaceuticals Ltd. set up for the
manufacture of antibiotics at Kathmandu is as under:
Date Nature of Borrowing Amount Borrowed(Rs) Purpose of borrowings Incidental Expenses
01.01.2008 15% Demand Loan 60 Lakhs Acquisition of fixed assets 8.33%
01.07.2008 14.5% demand loan 40 Lakhs Acquisition of Plant & Machinery 5%
01.10.2008 14% Bonds 50 Lakhs Acquisition of fixed assets 8%
The incidental expenses consists of commission and service charges for arranging
the loans and are paid after rounding to the nearest lakh.
Fixed assets considered as qualifying assets are as under:
Sterile manufacturing shed Rs 10,00,000
Plant & Machinery(total) Rs 90,00,000
Other Fixed Assets Rs 10,00,000
The project is completed on 1st Jan 2009 and is ready for commercial production.
Show the capitalization of borrowing cost.
NAS 37: Provisions, Contingent Liabilities & Contingent Assets
1. Recognition of provision
A provision is a liability of uncertain timing or amount. A provision is recognized
when there is an obligating event that arises out of either legal or constructive
obligation.
A liability is a present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources embodying
economic benefits.
Three basic criteria to be satisfied for recognition of provision are:
i. There is a present obligation (legal or constructive) as a result of past
event;
ii. It is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation; and
iii. A reliable estimate can be made of the amount of obligation.
In case any of three criteria is not met, provision is not recognized. In such case the
relevant transaction or event may be disclosed in accordance with NAS 37.
The present obligation arises out of past event, which is termed as an obligating
event. The resultant obligation is either enforceable by law. Of course, there may
arise constructive obligation as well in which case the event (may be an action of the
entity) creates valid expectation in other parties that the entity will discharge the
obligation. An example of constructive obligation is the policy of refunding to
dissatisfied customer. For example, an entity follows a policy of refunding to
dissatisfied customers in case goods are returned within a specified time from the
date of purchase-then there exists a constructive obligation becomes the basis of
provisioning.
As per NAS 10 the settlement by a court after the reporting period provides an
evidence of the existence of a present obligation.
Obligating events – A past event that leads to a present obligation is called an
obligation event. There may arise legal or constructive obligation.
A legal obligation is an obligation that derives from:
a. A contract (through its explicit or implicit term);
b. Legislation; or
c. Other operation law.
A constructive obligation is an obligation that derives from an entity’s actions where:
a. By an established pattern of past practice, published polices or specific current
statement, has indicated together parties that it will accept certain responsibilities;
and
b. The entity has created a valid expectation on the part of those other parties that
will discharge those responsibilities.
It is only those obligations a rising from past event existing independently of an
entity’s future action (i.e. the future conduct of its business) that are recognized as
provision. Example of such obligations are-
i. Possible payment for product warranties;
ii. Possible payment of penalties or clean-up costs for unlawful environmental
damage;
iii. Provision for the decommissioning cost of an oil installation or a nuclear power
station, etc.
An obligation requires a counter- party to whom the obligation is owned. It is not
necessary, however, to know the identity of the party to whom the obligation is
owned. In fact, the obligation may be to the public at large.
Because an obligation always involves a commitment to another party, it follows that
the management or board decision does not give rise to a constructive obligation
automatically. It become a constructive obligation at the end of the reporting period
 if such decision has been communicated before the end of the reporting period to
those affected by it in a sufficiently specific manner to raise a valid expectation in
them that the entity will discharge its responsibilities.
Well known history of refunding dissatisfied customer, even though there is no
explicit law or regulation requiring him to do so.

2. Measurement of provision
The amount recognized as a provision shall be the best estimate of the expenditure
required to settle the present obligation at the end of the reporting period.
While determining the best estimate of the following issues are taken in to account:
i. Rational amount of payment: it is the amount that an entity would rationally
pay to settle the obligation at the end of the reporting period or to transfer it to a
third party at the time.
ii. Managerial judgment: Estimation of rational amount is a managerial judgement
based on experience is case of similar transaction or report of the independent
expert(s).
iii. Provision for large population of events: Example of large population of events
is warranty provision, customer refunds, etc. The provision is measured at
probability weighted expected value.
iv. Single estimate: when a single estimate is done for one-off events like
restructuring, environmental clean-up, settlement of law suit, etc., the provision
is measured at its most likely value.
v. Before tax estimation: provision is measured before tax.
vi. Risk and uncertainties: They are taken in to account for deriving the best
estimate.
vii. Present value: If the effect of time value of money is material, provision is
measured in terms of present value.
 viii. Discount rate: The discount rate (or rates) shall be pre tax rate (or rate) that
reflect(s) current market assessments of the time value of money and the risk
specific to the liability.
ix. Adjustment for the future event: While determining best estimate of the
provision, impact of any future event is adjusted in case there is objective
evidence about the likely occurrence of such event.
x. Gains on the disposal of assets are not considered in the measurement of
provision. For example, in estimating cost of a plant, gain on disposal of the
plant is not considered. This is followed irrespective of the fact the dismantling
cost relates to the asset.
xi. Use of provision: NAS 37 states that a provision shall be used only for
expenditure for which the provision was originally recognized. Use of
provision means the relevant expense is adjusted against the provision.
xii. Change of provision: NAS 37 require review of provision at the end of each
reporting period. The amount of provision is increased or reduced in
accordance with the current best estimate of the obligation.
Example 1[provision for site restoration]
A chemical company causes contamination of land but cleans up only when required to do
so under the laws of the country in which it operates. The country in which it operates did
not have any legislation requiring cleaning up, and the entity has been contaminating land
in that country for several years. At Ashad 31, 2070 it is virtually certain that a draft law
requiring a clean-up of land already contaminated will be enacted shortly after the year-
end with retrospective effect.
The company has estimated the following clean up costs:
probability
Most pessimistic NPR100 million 30%
Most likely NPR 85 million 60%
Most optimistic NPR 70 million 10%
 As per the proposed law the company shall be required to complete clean-up activities by
2 years.
A. Should the company require making provision?
B. If yes, find out the amount of provision that the company is required to make as per
NAS 37.
Take 10% as the time value of money.

Example 2
A chemical company causes contamination of land but clean up only when required to do
so under the laws of the country in which it operates. The country in which it operates did
not have any legislation requiring cleaning up, and the entity has been contaminating land
in that country for several years.
However, the entity has adopted an environmental policy in which it undertakes to clean
up all contamination that it causes. The company’s environmental cleaning policy is also
posted on its web site. Various environmental protection groups had demonstrated against
the company. But the company has not positively responded to such demonstration.
The company has not so far created any provision. Should the company creates a provision
as per NAS 37?
Example 3[provision for decommissioning liability]
An entity operates an offshore oilfield where its licensing agreement requires it to remove
the oil rig at the end of production and restores the seabed. It has been estimated that 85%
of the eventual cost relate to the removal of the oil rig and restoration of damage caused by
building it, and 15% arise through the extraction of oil. At the end of reporting period
(Ashad 31, 2070), the rig has been installed but no oil has been extracted.
Estimated current cost of decommissioning is NPR 50 million. Estimated production
period is 30 years. It is expected that annual oil production shall be equal over the year,
and the production is expected to commence from the next financial year.
Current rate of inflation is 8%. Time value of money is 10.5%. p.a.

A. When should the company recognize provision for decommissioning liability?

B. Measure the amount of provision for decommissioning liability.
C. Explain the accounting treatment of decommissioning liability triggered by
installation of the oil rig?
D. Explain accounting treatment of decommissioning liability triggered by oil
production on and from the reporting period ended Ashad 32, 2071.
Example 4 [obligation to fit smoke filters]
Under a new rule, an entity is required to fit smoke filters to its factories by Ashwin 30,
2070. The entity did not fit the smoke filters during the accounting period 2071-072. As
per law, the annual fine for not fitting smoke filter is NPR 100,000. The cost of the
smoke filter is NPR 20,00,000.
Should the entity provide for fine and the cost of the smoke filter?
Example 5 Requirement of retraining of staff because of change in accounting
regulation
Because of introduction of new accounting system, a company is required to retrained
its staff, and change in accounting software. The estimated retraining cost is NPR
500,000 and cost change in software is NPR 15, 00,000.
The company proposes to undertake the staff retraining and change in software over
next 2 years.
Should the company create any provision?
Example 6 Dry-docking expenses of ship
A ship requires dry-docking every 3 years for renewal of sailing license. Dry-docking
expense is NPR 40,00,000.
 Should the ship-owner provide for 1/3rd of the dry-docking expenses every year?
Example 7 court case
20 people died possibly as a result of food poisoning from products sold by the entity in
a conference. Legal proceeding is started seeking damages from the entity.
But it disputes liability. Up to the date of authorization of the financial statements for
the year to Asadh 31, 2070 for issue, the entity’s lawyers advice that it is probable that
the entity will not be found liable. However, when the entity prepares the financial
statements for the year to Asadh 32, 2071, its lawyers advice that, owing to
development in the case, it is probable that the entity will be found liable.
Should the entity create provision in 2069/70& 2070/71?

Discounting of provision
Where the effect of the time value of money is material, the amount of a provision shall
be the present value of the expenditure expected to be required to settle the obligation.
Provisions are therefore discounted, where the effect is material.
The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market
assessments of the time value of money and the risks specific to the liability. The
discount rates(s) shall not reflect risks for which future cash flow estimates have been
adjusted.
Onerous contract
An onerous contract is a contract in which the unavoidable costs of meeting the
obligation under the contract exceed the economic benefits expected to be received
under it. The unavoidable cost shall reflect the least net cost of exiting from the
contract, which is the lower of the cost of fulfilling it and any compensation or penalties
arising from failure to fulfill it.
If an entity has a contract that is onerous, it shall recognize the present obligation under
the contract and measured as a provision under paragraph 66, NAS 37.
Example 8 An entity operates profitably from a factory that is has taken under an
operating lease. On Chaitra 1, 2071, the entity relocates its operations to a new factory.
The lease on the old factory continues for the next four years, it cannot be sub-let to
another user. To cancel the lease it has to pay present value of annual lease rental of
NPR 500,000 discounted @ 10% p.a. Analyse the case and identify the obligation
event. Should the entity create provision under NAS 37?

Restructuring
A restructuring is a program that is planned and controlled by management, and
materially changes either:
a. The scope of the business undertaken by an entity;
b. The manner in which that business is conducted.
Examples of the events which may fall within the definition of restructuring (paragraph
70, NAS 37) are:
a. Sale or termination of a line of business;
b. The closure of business locations in a country or region or the relocation of business
activities from one country or region to another;
c. Changes in management structure, for example, eliminating a layer of management;
d. Fundamental reorganizations that have a material effect on the nature and focus of
the entity’s operations.
Table 8 provision of restructuring costs
1. General condition That:
of provision i. There is present obligation (legal or
recognition is constructive) as a result of a past event
satisfied ii. It is probable that an outflow of
resources embodying economic
benefits will be required to settle the
obligation; and
iii. A reliable estimate can be made of the
amount of the obligation.
2. Timing when When an entity has-
 constructive (a)Detailed restructuring plan that covers at
obligation for least (i) business or part of a business, (ii)
restructuring identification of business location to be
arises paragraph affected, (iii) location, function, and
72, NAS 37 approximate number of employees who
will be compensated for terminating their
service, (iv) expenditure, (v)
implementation schedule and
(b) Raised a valid expectation in those
affected that it will carry out the
restructuring by starting implementation
of that plan or announcing its main
features to those affected by it.
3. What could Public announcement of restructuring setting
constitute giving out the detailed plan is regarded as raising valid
rise to valid expectation of customers, suppliers and
expectation? employees that the entity would carry out
restructuring.
4. Implementation The public announcement described in point 3
schedule should also be supported by appropriate
implementation schedule. In case there is long
delay before the restructuring would begin, it is
unlikely to give rise to valid expectation.

Example 10
The Board of Director of X Ltd. has decided to close down its chemical division as on
Chaitra 12, 2070. But this decision was not communicated before the end of the
reporting period (Asadh 32, 2071), and no other steps were taken to implement the
decision. Should the entity consider any of its obligation relating to the closure of
chemical division?
 Contingent liabilities
A contingent liability is:
a. A possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity ; or
b. A present obligation that arises from past events but is not recognized because;
i. It is not probable that an outflow of resources embodying economic benefits
will be required to settle the obligation; or
ii. The amount of the obligation cannot be measured with sufficient reliability.
No provision is created for a contingent liability. An entity shall make disclosures in
accordance with paragraph 86, NAS 37. In case the possibility of outflow embodying
economic benefit is remote, the entity does not disclose a contingent liability.

Contingent Assets
A contingent asset is a possible asset that arises from the past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity.
Contingent assets usually arise from unplanned or other unexpected events that give rise to
the possibility of an inflow of economic benefit to the entity. An example is a claim that an
entity is pursuing through legal processes, where the outcome is uncertain. They are not
recognized. However, likewise contingent liabilities they are continually assessed to ensure
that developments are appropriately reflected in the financial statements.
When inflow of economic benefit is probable. When it become virtually certain that an
inflow of economic benefits will arise, the asset and the related income are recognized in
the financial statements of the period in which the change occurs.
Disclosure
Table 9 disclosure requirement
1. Break up of Carrying amount at the beginning of the period
provisions + additional provision made during the year
disclosure as + Increase because of unwinding of discount
paper paragraph -Amount used against liability/loss
84, NAS 37 -Amount reversed as provision is not required
= carrying amount at the end of the period
2. Descriptions a. Description of the obligation, amount and timing of
paragraph 85, outflows embodying economic benefit.
NAS 37 b. Associated uncertainties and how uncertainties are
reflected in the measurement of provision.
c. Reimbursements
3. Disclosure of The following are disclosed if the entity does not view that the
contingent possibility of an outflow in settlement is remote:
liabilities a. An estimate of the financial effect;
paragraph 86, b. Associated uncertainties;
NAS 37 c. Any reimbursement.

Past Exam Questions:

1. The company you are auditing which is a listed company manufacturing automotive
parts and air-conditioners for motor vehicle assemblers, is facing a potential legal
claim from Reliable Motors Limited (RML) is respect of defective air conditioners
supplied to them. Annual sale of the company is Rs 850 million and profit before tax
is Rs 60 million. A claim for Rs 25 million being the cost of replacement of air
conditioners and lost production time has been lodged with the company by RML.
The management is of the view that the claim is not justified, as the air conditioners
were properly functioning and had been tested for quality and that the defects have
arisen because of the negligence of RML and its technicians. However, a provision of
Rs 2 million has been made in financial statements in this respect. Comment.(Audit-
Dec-2008)
2. An airline is required by law to overhaul its aircraft once in every five years. The
Nepal Airlines which operate aircrafts does not provide any provision as required by
law in its final accounts. Discuss with reference with relevant Nepal Accounting
Standard 37 (Acc-June-2015)
3. Sagun Ltd. took a factory premises on lease on 01.04.2073 for Rs. 1, 00,000 per
month. The lease is operating lease. During Ashad, 2074, Sagun Ltd. relocates its
operation to a new factory building. The lease of the old factory premises continues
to live upto 31.12.2076. The lease cannot be cancelled and cannot be sub-let to
another user. The auditor insists that lease rent of balance 33 months upto 31.12.2076
should be provided in the accounts for the year ending31.03.2074. Sagun Ltd. seeks
your advice. (Acc June 2017)
4. Alpha Ltd. has entered into a sale contract of Rs. 7 crores with Gamma Ltd. during
2072-73 financial years. The profit on this transaction is Rs. 1 crore. The delivery of
goods to take place during the first month of 2073-74 financial years. In case of
failure of Alpha Ltd. to deliver within the schedule, a compensation of Rs. 2 crores is
to be paid to Gamma Ltd. Alpha Ltd. planned to manufacture the goods during the
last month of 2072-73 financial year. As on balance sheet date (31.3.2073), the goods
were not manufactured and it was unlikely that Alpha Ltd. will be in a position to
meet the contractual obligation. You are required to advise Alpha Ltd. on
requirement of provision for contingency in the financial statements for the year
ended 31st Ashad, 2073, in line with provisions of Accounting Standards?(Acc June
2017)
5. Surendra Clothing Pvt. Ltd. has been assessed to Income-tax, in which a demand of
Rs. 10 lakhs has been made. The company has gone in appeal. The company has
deposited Rs. 6 lakhs against the demand, on being pursued by the department. The
company has been advised by its counsel that there is 80% chance of losing in
respect of one of the grounds which may end up confirming the demand of rest Rs. 4
lakhs. How the company should treat the same while preparing the final accounts for
the year ending Asadh end, 2076?(Audit June 2019)
NFRS 03: Business Combinations
Business combinations occur when an entity obtains control of business by acquiring net assets or by
acquiring its significant equity interest. As such two significant elements are required for a transaction to
be a business combination. i.e.

A) The acquirer obtains the control of the acquiree

B) The acquiree is a business
A business consists of inputs and processes applied to those inputs that have the ability to create
outputs.
Elements of business:
a) Input: Any economic resource that creates, or has the ability to create, outputs when one or
more processes are applied to it.
b) Process: Any system, standard, protocol, convention or rule that when applied to an input or
inputs, creates or has ability to create outputs.
c) Output: The result of inputs and processes applied to those inputs that provide or have the
ability to provide a return in form of dividend, lower cost or other economic benefits directly
to investors or other owners, members or participants.
The acquisition method:
The following steps are involved in the acquisition for business combination:
Step 1: Identify the acquirer
Step 2: Determining the acquisition date
Step 3: Recognizing and measuring the identifiable assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree; and
Step 4: Recognizing and measuring goodwill or a gain from bargain purchase
1. Identification of acquirer:
The acquirer is the entity that has assumed control over another entity. In a business
combination, it is normally clear which entity has assumed control:
• If P pays $1m to obtain 60% of the ordinary shares of S then P is clearly
the acquiring company.

However, sometimes it is not clear as to which entity is the acquirer. For these cases,
NFRS 3 provides some guidance:
• The acquirer is normally the entity that has transferred cash or other
assets within the business combination
• If the business combination has not involved the transfer of cash or other
assets, the acquirer is usually the entity that issues its equity interests.
Other factors to consider are as follows:
• The acquirer is usually the entity whose (former) management
dominates the management of the combined entity
• The acquirer is usually the entity whose owners retain or receive the
largest portion of the voting rights in the combined entity
• The acquirer is normally the entity whose size is greater than the other
entities.
 Example 1: Abacus and Calculator are two public limited companies. The fair values
of the net assets of these two companies are $100 million and $60 million
respectively. On 31 October 20X1, Abacus incorporates a new company, Phone, in
order to effect the combination of Abacus and Calculator. Phone issues its shares to
the shareholders of Abacus and Calculator in return for their equity interests. After
this, Phone is 60% owned by the former shareholders of Abacus and 40% owned by
the former shareholders of Calculator. On the board of Phone are 4 of the former
directors of Abacus and 2 of the former directors of Calculator. With regards to the
above business combinations, identify the acquirer.

The acquiring enterprise is the enterprise which obtains the control as per NFRS 10. As per
NFRS 10 “Consolidated Financial Statements”, an investor controls an investee if and only if
investor has all the following:
a) Power over the investee;
b) Exposure, or rights, to variable returns from its involvement with the investee; and
c) The ability to use its power over the investee to affect the amount of investors return
The above definition is very wide and control assessment does not depend upon only on
voting rights instead it depends on the following as well;
- Potential voting rights
- Rights of non controlling shareholders
- Other contractual right of the investors if those is substantive in nature.
Indicators of control:
a) More than 50% voting rights
b) Power to appoint and remove board of directors
c) Investors have currently exercisable potential voting rights
In a business combinations effected primarily by transferring cash or other
assets or by incurring the liabilities, the acquirer is usually the entity that
transfers the cash or other assets or incurs the liabilities.
In a business combinations effected primarily by exchanging equity interest,
the acquirer is usually the entity that issues its equity interests. However, in
some business combinations, commonly called reverse acquisition, the
issuing entity is the acquiree. Other pertinent facts and circumstances shall
also be considered in identifying the acquirer in business combinations
affected by exchanging the equity interests, including:
a) The relative voting rights in the combined entity after the business
combination
b) The existence of the large majority voting interest in the combined entity
if no other owner or organized group of owners has a significant voting
interest;
c) The composition of the governing body of the combined entity
d) The composition of the senior management of the combined entity.
e) The terms of exchange of equity interest
f) The acquirer is usually the combining entity whose relative size is
significantly greater than that of other combining entity.
 2. Determination of acquisition date:
The acquirer shall identify the acquisition date, which is the date on
which it obtains control over the acquiree. Generally it is the date on
which the acquirer legally transfers the consideration, acquires the assets
and assumes the liabilities of the acquire i.e. the closing date. However,
the acquirer might obtain the control on a date that is either earlier or
later than the closing date. For example, the acquisitions date precedes
the closing date if a written agreement provides the acquirer obtains the
control of the acquiree on a date before the closing date. An acquirer
shall consider all pertinent facts and circumstances in identifying the
acquisition date.
The acquisition date is a very important step in business combinations
accounting because it determines when the acquirer recognizes and
measures the consideration, the assets acquired and the liabilities
assumed. The acquiree’s results are consolidated from this date. The
acquisition date materially impacts the overall acquisition accounting,
including post combination earnings.
In the case an entity acquires the entity step by step through the series of
purchase then the acquisition date will be the on which the acquirer
obtains control.
3. Recognizing and measuring the identifiable assets acquired, the liabilities assumed.
The acquirer must measure the identifiable assets acquired and the liabilities assumed
at their fair values at the acquisition date. Goodwill in the subsidiary's individual
financial statements is not an identifiable asset because it cannot be separately
disposed of. An asset is identifiable if:
a) It is capable of disposal separately from the business owning it, or
b) It arises from contractual or other legal rights, regardless of whether hose rights can be sold
separately.
Example 2: P purchased 60% of the shares of S on 1 January 20X1. At the acquisition date, S
had share capital of $10,000 and retained earnings of $190,000. The property, plant and
equipment of S include land with a carrying value of $10,000 but a fair value of $50,000.
Included within the intangible assets of S is goodwill of $20,000 which rose on the purchase
of the trade and assets of a sole trader business. S has an internally generated brand that is not
recognised (in accordance with NAS 38). The directors of P believe that this brand has a fair
value of $150,000. In accordance with NAS 37, the financial statements of S disclose the fact
that a customer has initiated legal proceedings against them. If the customer wins, which
lawyers have advised is unlikely, estimated damages would be $1m. The fair value of this
contingent liability has been assessed as $100,000 at the acquisition date. The directors of P
wish to close one of the divisions of S. They estimate that this will cost $200,000 in
redundancy payments.

Required:
What is the fair value of S’s identifiable net assets at the acquisition date?
 4. Recognizing and measuring goodwill or a gain from bargain purchase:
Goodwill should be recognised on a business combination. This is calculated as the difference
between:
(1) The aggregate of the fair value of the consideration transferred and the
Non-controlling interest in the acquiree at the acquisition date, and
(2) The fair value of the acquiree's identifiable net assets and liabilities.
If the share of net assets acquired exceeds the consideration given, then a gain on bargain purchase
('negative goodwill') arises on acquisition. The accounting treatment for this is as follows:
NFRS 3 says that negative goodwill is rare and therefore it may mean that an error has been made in
determining the fair values of the consideration and the net assets acquired. The figures must be
reviewed for errors. If no errors have been made, the negative goodwill is credited immediately to
profit or loss.
NFRS 15: Revenue from
Contract with Customers
Summary by CA Niwash Bhattarai
• Revenue Recognition: Five step process
• Identify the contract
• Identify the separate performance obligations within a contract.
• Determine the transaction price
• Allocate the transaction price to the performance obligations in the contract
• Recognize revenue when(or as) a performance obligation is satisfied
• Step 1: Identify the contract
• A contract is “an agreement between two or more parties that creates enforceable
rights and obligations”. A contract can be agreed in writing, orally, or through other
customary business practices.
• An entity can only account for revenue if the contract meets the following criteria:
• The parties to the contract have approved the contract and are committed to perform
their respective obligations
• The entity can identify each party’s rights regarding the goods or services to be
transferred
• The entity can identify the payment terms for the goods or services to be transferred
• The contract has the commercial substance, and
• It is probable that the entity will collect the consideration to which it will be entitled
in exchange for the goods or services that will be transferred to the customer.
• Step 2: Identify the separate performance obligations within a contract:
• Performance obligations are promises to transfer distinct goods or services to
a customer. Performance obligations may not be limited to the goods or
services that are explicitly stated in the contract. An entity’s customary
business practices, published policies or specific statements may create an
expectation that the entity will transfer a good or service to the customer.
• If an entity is an agent, then revenue is recognized based on the fee or
commission to which it is entitled.
• Step 3: Determining the transaction price:
• The transaction price is the amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods or services to a customer.
• Amount collected on behalf of third parties(such as sales tax) are excluded.
• While determining the transaction price, an entity shall consider the effects of all of the following:
• Variable consideration
• The existence of significant financing component in the contract
• Non cash consideration
• Consideration payable to customer
• Consideration payable to a customer:
• If consideration is paid to a customer in exchange for distinct goods and service, then it is
essentially a purchase transaction and should be accounted for in the same way as other purchases
from suppliers.
• Assuming that the consideration paid to a customer is not in exchange for a distinct goods or
service, an entity should account for it as a reduction of the transaction price.
• Step 4: Allocate the transaction price:
• The total transaction price should be allocated to each performance obligation in
proportion to stand alone selling prices. If a stand alone selling prices is not directly
observable, then the entity estimates the stand alone selling prices.
• Step 5: Recognize Revenue:
• Revenue is recognized when(or as) the entity satisfies a performance obligation by
transferring a promised good or services to a customer.
• For each performance obligation identified, an entity must determine at contract
inception whether it satisfies the performance obligation over time, or satisfies the
performance obligation at a point in time.
• For each performance obligation is satisfied at a point in time then the entity must
determine the point in time at which a customer obtains control of the promised
asset.
• Satisfying a performance obligation over time:
An entity transfers control of a goods or services over time and therefore, satisfies a performance
obligation and recognizes revenue over time, if one of the following criteria is met:
1. The customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs
2. The entity's performance creates or enhances an asset(eg WIP) that the customer controls as the
asset is created or enhanced, or
3. The entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date.
• For each performance obligation satisfied over time, an entity shall recognize revenue over time
by measuring the progress towards complete satisfaction of that performance obligation.
• Appropriate methods of measuring progress include:
• Output method: such as surveys of performance or time elapsed
• Input method: such as costs incurred to date as the proportion of total expected costs.
• Contract Costs:
• NFRS 15 says following costs must be capitalized:
• The incremental costs of obtaining a contract
• The cost of fulfilling a contract if they do not fall within the scope of another standard(NAS 02,
NAS 16, NAS 38) and the entity expects them to be recovered.
• The capitalized costs will be amortized as revenue is recognized. This means that they will be
expensed to cost of sales as the contract progresses.
• For a contract with customer where revenue is recognized over time, there are three important
rules:
• If the expected outcome is profit:
Revenue and cost should be recognized according to the progress of the contract.
• If the expected outcome is a loss:
The whole loss should be recognized immediately, recording a provision as an onerous contract.
• If the expected outcome or progress is unknown(at early stage of contract)
Revenue should be recognized to the level of recoverable costs
Contract cost should be recognized as an expense in the period in which it incurred.
• Contract Revenue:
Contract Revenue comprises:
• The initial amount of revenue agreed in the contract
• Variations in contract work and claims, to the extent that:
- it is probable that they will result in revenue
- they are capable of being reliably measured
• Contract Costs:
• Cost that relate directly to the specific contract
• Cost that are attributable to contract activity in general and can be allocated to the contract.
• Such other cost as are specifically chargeable to the customer under the terms of the contract.
• Presentation in Statement of Financial Position:
• Costs to date ****
Profit/Loss to date ****
Less: Amount billed to date (****)
Contract Assets(Liability) *****