Revision Test Paper CAP III June 2017

REVISION TEST PAPER
CAP III
(June 2017)
The Institute of Chartered Accountants of Nepal

Satdobato, Lalitpur, Nepal
PO Box : 5289
Tel :
Fax :
Email : ican@ntc.org.np
Website : www.ican.org.np
Advanced Financial Reporting
Questions
1. On 1 January 20X6, Gardenbugs Co received a NRs. 30,000,000 government grant
relating to equipment which cost NRs. 90,000,000 and had a useful life of six years. The grant
was netted off against the cost of the equipment. On 1 January 20X7, when the equipment had a
carrying amount of NRs. 50,000,000 , its use was changed so that it was no longer being used in
accordance with the grant. This meant that the grant needed to be repaid in full but by 31
December 20X7, this had not yet been done.
Pass the required journal entries relating to refund of the grant in the books of Gardenbugs Ltd.
For the year ended 31 December 20X7
2.
a. Shiba Co entered into a non-cancellable four-year operating lease to hire a photocopier on 1
January 20X7. The terms of the lease agreement were as follows:
Operating lease rental 5,000 per annum
Cash back incentive received at the start of the lease 1,000
Useful life of the asset Eight years
What is the charge in the statement of profit or loss of Shiba Co for the year ended 31 December
20X7 in respect of this operating lease?
b. On 1 October 20X1, Bash Co borrowed NRs.6m for a term of one year, exclusively to finance
the construction of a new piece of production equipment. The interest rate on the loan is
6% and is payable on maturity of the loan. The construction commenced on 1 November
20X1 but no construction took place between 1 December 20X1 to 31 January 20X2 due
to employees taking industrial action. The asset was available for use on 30 September 20X2
having a construction cost of NRs.6m.
What is the carrying amount of the production equipment in Bash Co‘s statement of
financial position as at 30 September 20X2?
c. Petre owns 100% of the share capital of the following companies. The directors are unsure of
whether the investments should be consolidated.
Which of the following circumstances would the investment NOT be consolidated?
 Petre has decided to sell its investment in Alpha as it is loss-making; the directors
believe its exclusion from consolidation would assist users in predicting the group‘s future
profits
 Beta is a bank and its activity is so different from the engineering activities of the rest of the
group that it would be meaningless to consolidate it
 Delta is located in a country where local accounting standards are compulsory and these are
not compatible with NFRS used by the rest of the group
 Gamma is located in a country where a military coup has taken place and Petre has lost
control of the investment for the foreseeable future
3. Aphrodite Co has a year end of 31 December and operates a factory which makes computer
chips for mobile phones. It purchased a machine on 1 July 20X3 for NRs.80,000 which had
a useful life of ten years and is depreciated on the straight-line basis, time apportioned in
the years of acquisition and disposal. The machine was revalued to NRs.81,000 on 1 July 20X4.
There was no change to its useful life at that date.
A fire at the factory on 1 October 20X6 damaged the machine leaving it with a lower operating
capacity. The accountant considers that Aphrodite Co will need to recognise an impairment
loss in relation to this damage. The accountant has ascertained the following information at 1
October 20X6:
(1) The carrying amount of the machine is NRs.60,750.
(2) An equivalent new machine would cost NRs.90,000.
(3) The machine could be sold in its current condition for a gross amount of NRs.45,000.
Dismantling costs would amount to NRs.2,000.
(4) In its current condition, the machine could operate for three more years which gives it
a value in use figure of NRs.38,685.
Required:
a. In accordance with NAS 16 Property, Plant and Equipment, what is the depreciation charged
to Aphrodite Co‘s profit or loss in respect of the machine for the year ended 31 December
20X4?
b. What is the total impairment loss associated with Aphrodite Co‘s machine at 1 October
20X6?
c. On 1 July 20X7, it is discovered that the damage to the machine is worse than originally
thought. The machine is now considered to be worthless and the recoverable amount of the
factory as a cash-generating unit is estimated to be NRs.950,000.
At 1 July 20X7, the cash-generating unit comprises the following assets:
NRs.‘000
Building 500
Plant and equipment (including the damaged machine at a carrying amount of 335
NRs.35,000)
Goodwill 85
Net current assets (at recoverable amount) 250
1,170
In accordance with NAS 36, what will be the carrying amount of Aphrodite Co‘s plant and
equipment when the impairment loss has been allocated to the cash-generating unit?
4. After preparing a draft statement of profit or loss (before interest and tax) for the year ended 31
March 20X6 (before any adjustments which may be required by notes (i) to (iv) below), the
summarised trial balance of Triage Co as at 31 March 20X6 is:
NRs.‟000 NRs.‟000
Equity shares of NRs.1 each 50,000
Retained earnings as at 1 April 20X5 3,500
Draft profit before interest and tax for year ended 31 March 30,000
20X6
6% convertible loan notes (note (i)) 40,000
Leased property (original life 25 years) – at cost (note (ii)) 75,000
Plant and equipment – at cost (note (ii)) 72,100
Accumulated amortisation/depreciation at 1 April 20X5: leased 15,000
property
plant and equipment 28,100
Trade receivables (note (iii)) 28,000
Other current assets 9,300
Current liabilities 17,700
Deferred tax (note (iv)) 3,200
Interest payment (note (i)) 2,400
Current tax (note (iv) 700
187,500 187,500
The following notes are relevant:
(i) Triage Co issued 400,000 NRs.100 6% convertible loan notes on 1 April 20X5. Interest is
payable annually in arrears on 31 March each year. The loans can be converted to equity shares
on the basis of 20 shares for each NRs.100 loan note on 31 March 20X8 or redeemed at par for
cash on the same date. An equivalent loan without the conversion rights would have required an
interest rate of 8%.
The present value of NRs.1 receivable at the end of each year, based on discount rates of 6% and
8%, are:
End of year 6% 8%
1 0·94 0·93
2 0·89 0·86
3 0·84 0·79
(ii) Non-current assets:
The directors decided to revalue the leased property at NRs.66·3m on 1 October 20X5. Triage
Co does not make an annual transfer from the revaluation surplus to retained earnings to reflect
the realisation of the revaluation gain; however, the revaluation will give rise to a deferred tax
liability at the company‘s tax rate of 20%.
The leased property is depreciated on a straight-line basis and plant and equipment at 15% per
annum using the reducing balance method. No depreciation has yet been charged on any non-
current assets for the year ended 31 March 20X6.
(iii) In September 20X5, the directors of Triage Co discovered a fraud. In total, NRs.700,000
which had been included as receivables in the above trial balance had been stolen by an
employee. NRs.450,000 of this related to the year ended 31 March 20X5, the rest to the
current year. The directors are hopeful that 50% of the losses can be recovered from the
company‘s insurers.
(iv) A provision of NRs.2·7m is required for current income tax on the profit of the year to 31
March 20X6. The balance on current tax in the trial balance is the under/over provision of
tax for the previous year. In addition to the temporary differences relating to the information
in note (ii), at 31 March 20X6, the carrying amounts of Triage Co‘s net assets are NRs.12m more
than their tax base.
Required:
(a) Prepare a schedule of adjustments required to the draft profit before interest and tax (in
the above trial balance) to give the profit or loss of Triage Co for the year ended 31 March
20X6 as a result of the information in notes (i) to (iv) above.
(b) Prepare the statement of financial position of Triage Co as at 31 March 20X6.
(c) Calculate the diluted earnings per share for Triage Co for the year ended 31 March 20X6
5. The finance director of Downing Co has correctly calculated the company‘s basic and diluted
earnings per share (EPS) to be disclosed in the financial statements for the year ended 31
March 2016 at 14.82 and 11.94 cents respectively. The dilution of EPS is due to issue of
convertible loan notes due for redemption on 31 March 2018.
On seeing these figures, the chief executive officer (CEO) is concerned that the market will react
badly knowing that the company‘s EPS in the near future will be only 11.94, a fall of over 19%
on the current year‘s basic EPS.
Required:
Explain why and what aspect of Downing Co‘s capital structure is causing the basic EPS to be
diluted and comment on the validity of the CEO‘s concerns.
6. The following details relate to two items of property, plant and equipment (A and B) owned by
Purnabiram Ltd. which are depreciated on a straight-line basis with no estimated residual value:
Item A Item B
Estimated useful life at acquisition 8 years 6 years
NRs.‘000 NRs.‘000
Cost on 1 April 2010 240,000 120,000
Accumulated depreciation (two years) (60,000) (40,000)
Carrying amount at 31 March 2012 180,000 80,000
Revaluation on 1 April 2012:
Revalued amount 160,000 112,000
Revised estimated remaining useful life 5 years 5 years
Subsequent expenditure capitalised on 1 April nil 14,400
2013
At 31 March 2014 item A was still in use, but item B was sold (on that date) for NRs.70 million.
Note: Purnabiram Ltd. makes an annual transfer from its revaluation surplus to retained
earnings in respect of excess depreciation.
Required:
Prepare extracts from:
(i) Purnabiram Ltd.‘s statements of profit or loss for the years ended 31 March 2013 and 2014 in
respect of charges (expenses) related to property, plant and equipment;
(ii) Purnabiram Ltd.‘s statements of financial position as at 31 March 2013 and 2014 for the
carrying amount of property, plant and equipment and the revaluation surplus.
7. The following issues have arisen during the preparation of Skeptic‘s draft financial
statements for the year ended 31 March 2014:
(i) From 1 April 2013, the directors have decided to reclassify research and amortised
development costs as administrative expenses rather than its previous classification as cost of
sales. They believe that the previous treatment unfairly distorted the company‘s gross profit
margin.
(ii) Skeptic has two potential liabilities to assess. The first is an outstanding court case
concerning a customer claiming damages for losses due to faulty components supplied by
Skeptic. The second is the provision required for product warranty claims against 200,000 units
of retail goods supplied with a one-year warranty. The estimated outcomes of the two liabilities
are:
Court case Product warranty claims
10% chance of no damages awarded 70% of sales will have no claim
65% chance of damages of NRs.4 20% of sales will require a NRs.25
million repair
25% chance of damages of NRs.6 10% of sales will require a NRs.120
million repair
(iii) On 1 April 2013, Skeptic received a government grant of NRs.8 million towards the
purchase of new plant with a gross cost of NRs.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 31 March 2017 would trigger a
repayment on a sliding scale as follows:
Sale in the year Amount of
ended repayment
31 March 2014 100%
31 March 2015 75%
31 March 2016 50%
31 March 2017 25%
Accordingly, the directors propose to credit to the statement of profit or loss NRs.2 million
(NRs.8 million x 25%) being the amount of the grant they believe has been earned in the
year to 31 March 2014. Skeptic accounts for government grants as a separate item of
deferred credit in its statement of financial position. Skeptic has no intention of selling the
plant before the end of its economic life.
Required:
Advise, and quantify where possible, how the above items (i) to (iii) should be treated in
Skeptic‘s financial statements for the year ended 31 March 2014.
8. On 1 January 2014, Chandra Ltd. acquired 80% of the equity share capital of Bindu Ltd.. The
consideration was satisfied by a share exchange of two shares in Chandra Ltd. for every three
acquired shares in Bindu Ltd.. At the date of acquisition, shares in Chandra Ltd. and Bindu Ltd.
had a market value of NRs.3 and NRs.2·50 each respectively. Chandra Ltd. will also pay cash
consideration of 27·5 Chandra Ltd. on 1 January 2015 for each acquired share in Bindu Ltd..
Chandra Ltd. has a cost of capital of 10% per annum.
None of the consideration has been recorded by Chandra Ltd.
Below are the summarised draft financial statements of both companies.

Statements of profit or loss and other comprehensive income for the year ended 30 September
2014
Chandra Ltd. Bindu Ltd.
NRs.‘000 NRs.‘000
Revenue 62,600 30,000
Cost of sales (45,800) (24,000)
Gross profit 16,800 6,000
Distribution costs (2,000) (1,200)
Administrative expenses (3,500) (1,800)
Finance costs (200) (nil)
Profit before tax 11,100 3,000
Income tax expense (3,100) (1,000)
Profit for the year 8,000 2,000
Other comprehensive income:
Gain on revaluation of property (note 1,500 nil
(i))
Total comprehensive income 9,500 2,000
Statements of financial position as at 30 September 2014

Chandra Ltd. Bindu Ltd.
NRs.‘000 NRs.‘000
Assets
Non-current assets
Property, plant and equipment 18,700 13,900
Investments: 10% loan note from Bindu Ltd. 1,000 nil
(note (ii))
19,700 13,900
Current assets
Inventory (note (iii)) 4,300 1,200
Trade receivables (note (iv)) 4,700 2,500
Bank nil 300
9,000 4,000
Total assets 28,700 17,900
Equity and liabilities
Equity
Equity shares of NRs.1 each 10,000 9,000
Revaluation surplus (note (i)) 2,000 nil
Retained earnings 6,300 3,500
18,300 12,500
Non-current liabilities
10% loan notes (note (ii)) 2,500 1,000
Current liabilities
Trade payables (note (iv)) 3,400 3,600
Bank 1,700 nil
Current tax payable 2,800 800
7,900 4,400
Total equity and liabilities 28,700 17,900
The following information is relevant:

(i) At the date of acquisition, the fair values of Bindu Ltd.‘s assets and liabilities were equal to
their carrying amounts with the exception of Bindu Ltd.‘s property which had a fair value of
NRs.4 million above its carrying amount. For consolidation purposes, this led to an increase
in depreciation charges (in cost of sales) of NRs.100,000 in the post-acquisition period to 30
September 2014. Bindu Ltd. has not incorporated the fair value property increase into its entity
financial statements.
The policy of the Chandra Ltd. group is to revalue all properties to fair value at each year end.
On 30 September 2014, the increase in Chandra Ltd.‘s property has already been recorded,
however, a further increase of NRs.600,000 in the value of Bindu Ltd.‘s property since its
value at acquisition and 30 September 2014 has not been recorded.
(ii) On 30 September 2014, Chandra Ltd. accepted a NRs.1 million 10% loan note from Bindu
Ltd..
(iii) Sales from Chandra Ltd. to Bindu Ltd. throughout the year ended 30 September 2014 had
consistently been NRs.300,000 per month. Chandra Ltd. made a mark-up on cost of 25% on all
these sales. NRs.600,000 (at cost to Bindu Ltd.) of Bindu Ltd.‘s inventory at 30 September 2014
had been supplied by Chandra Ltd. in the post-acquisition period.
(iv) Chandra Ltd. had a trade receivable balance owing from Bindu Ltd. of NRs.1·2 million
as at 30 September 2014. This differed to the equivalent trade payable of Bindu Ltd. due to a
payment by Bindu Ltd. of NRs.400,000 made in September 2014 which did not clear Chandra
Ltd.‘s bank account until 4 October 2014. Chandra Ltd.‘s policy for cash timing differences is to
adjust the parent‘s financial statements.
(v) Chandra Ltd.‘s policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose Bindu Ltd.‘s share price at that date can be deemed to be
representative of the fair value of the shares held by the non-controlling interest.
(vi) Due to rePaisa adverse publicity concerning one of Bindu Ltd.‘s major product lines, the
goodwill which arose on the acquisition of Bindu Ltd. has been impaired by NRs.500,000 as at
30 September 2014. Goodwill impairment should be treated as an administrative expense.
(vii) Assume, except where indicated otherwise, that all items of income and expenditure accrue
evenly throughout the year.
Required:
(a) Prepare the consolidated statement of profit or loss and other comprehensive income for
Chandra Ltd. for the year ended 30 September 2014.
(b) Prepare the consolidated statement of financial position for Chandra Ltd. as at 30 September
2014.
9. P Ltd. owns 80% of S and 40% of J and 40% of A. J is jointly controlled entity and
A is an
associate. Summarised Balance Sheets of four companies as on 31.03.1 5 are:
NRs. Lakhs
Particulars P Ltd. S Ltd. J Ltd. A Ltd.
Investment in S 800 - - -
Investment in J 600 - - -
Investment in A 600 - - -
Fixed assets 1000 800 1400 1000
Current assets 2200 3300 3250 3650
Total 5200 4100 4650 4650
Liabilities:
Share capital
Equity share 1000 400 800 800
Retained earnings 4000 3400 3600 3600
Trade payables 200 300 250 250
Total 5200 4100 4650 4650
P td. acquired shares in S‗ many years ago when S‗ retained earnings were 520 lakhs.
P td. acquired its shares in J‗ at the beginning of the year when J‗ retained earnings were 400
lakhs. P td. acquired its shares in A‗ on 01.04.14 when A‗ retained earnings were 400
lakhs.
The balance of goodwill relating to S had been written off three years ago. The value
of goodwill in J‗ remains unchanged.
Prepare the Consolidated Balance Sheet of P Ltd. as on 31.03.15.
10. Prepare the Consolidated Balance Sheet as on December 31, 2011 of group of companies A Ltd.,
B Ltd. and C Ltd. Their summarized balance sheets on that date are given below:
Particulars A Ltd. B Ltd. C Ltd.

Share Capital (share of ` 100 1,25,000 1,00,000 60,000
each)
Reserves 18,000 10,000 7,200
Profit & Loss A/c 16,000 4,000 5,000
Trade Payables 7,000 3,000 —
A Ltd. — 7,000 —
C Ltd. 3,300 — —
Total 1,69,300 1,24,000 72,200
Assets
Fixed Assets 28,000 55,000 37,400
Investments in shares-
B Ltd. 85,000 — —
C Ltd. — 53,000 —
Inventory 22,000 6,000 —
B Ltd. 8,000 — —
Trade Receivables 26,300 10,000 31,500
A Ltd. — — 3,300
Total 1,69,300 1,24,000 72,200
Other information:
(i) A Ltd. holds 750 shares in B Ltd. and B Ltd. holds 400 shares in C Ltd. These holdings were
acquired on 30th June, 2011
(ii) On 1st January, 2011 the following balances stood in the books of B Ltd. and C Ltd.
B Ltd. C Ltd.
Reserves 8,000 6,000
P & L Account 1,000 1,000
iii) C Ltd., sold goods costing ` 2,500 to B Ltd. for ` 3,100. These goods still remain unsold.
11. An entity purchases equipment from a foreign supplier for €6 million on March 31, 20X6, when
the ex-
change rate was €2 = $1. The entity also sells goods to a foreign customer for €3.5 million on
April 30,
20X6, when the exchange rate was €1.75 = $1. At the entity‘s year-end of May 31, 20X6, the
amounts
have not been paid. The closing exchange rate was €1.5 = $1. The entity‘s functional currency is
the
dollar.
Required
Calculate the exchange differences that would be recorded in profit or loss for the period ending
May 31,
20X6.
12. An entity commenced business on January 1, 20X6, with an opening share capital of $2 million.
The income statement and closing balance sheet follow:
Income Statement for the year ended December 31,

20X6
$m
Revenue 32
Cost of sales -10
Gross profit 22
Distribution costs -8
Administrative expenses -2
.Profit before tax
Profit before tax 12
Tax expense -4
Profit for period 8
Balance Sheet at December 31, 20X6

$m
Share capital 2
Retained earnings 8
Trade payables 4
Total equity and liabilities 14
Land (nondepreciable) acquired December
31, 20X6 8
Inventories 4
Trade receivables 2
Total assets 14
The functional currency is the dollar, but the entity wishes to present its financial statements
using the euro as its presentational currency. The entity translates the opening share capital at the
closing rate. The exchange rates in the period were
$1 =
January 1, 20X6 €1
December 31, 20X6 €2
Average rate €1.5
Required
Translate the financial statements from the functional currency to the presentational currency.
13. Hawa Pvt. Ltd. is a newly established enterprise. It was set up by an entrepreneur who is
generally interested in the business of providing engineering and operational support services to
aircraft manufacturers. Hawa Pvt. Ltd., through the contacts of its owner, received a confirmed
order from a well-known aircraft manufacturer to develop new designs for ducting the air
conditioning of their aircraft. For this project, Hawa Pvt. Ltd. needed funds aggregating to
NRs.1 million. It was able to convince venture capitalists and was able to obtain funding of
NRs.1 million from two Silicon Valley venture capitalists. The expenditures Hawa Pvt. Ltd.
incurred in pursuance of its research and development project follow, in chronological order:
• January 15, 20X5: Paid NRs.175,000 toward salaries of the technicians (engineers and
consultants)
• March 31, 20X5: Incurred NRs.250,000 toward cost of developing the duct and producing the
test model
• June 15, 20X5: Paid an additional NRs.300,000 for revising the ducting process to ensure that
product could be introduced in the market
• August 15, 20X5: Developed, at a cost of NRs.80,000, the first model (prototype) and tested it
with the air conditioners to ensure its compatibility
• October 30, 20X5: A focus group of other engineering providers was invited to a conference
for the introduction of this new product. Cost of the conference aggregated to NRs.50,000.
• December 15, 20X5: The development phase was completed and a cash flow budget was
prepared. Net profit for the year 20X5 was estimated to equal NRs.900,000.
Required
What is the proper accounting treatment for the various costs incurred during 20X5?
14. Commodity Traders Ltd. is a company engaged in commodities trading. The company recently
obtained NRs.5 million short-term borrowing which is secured by the company‘s inventory of
1,000 tons of copper which it purchased at a cost of NRs.5.2 million. The bank has obligated
Commodity Traders Ltd. to provide additional collateral in event the value of copper inventories
fall below NRs.5 million. On 1 January 2015, Commodity Traders Ltd. sold the inventories
forward by entering into a 12-month futures contract at price of NRs.5,200 per ton.
On 30 June 2015, i.e. the financial year end of Commodity Traders Ltd., price of copper fell to
NRs.4,900 per ton.
Identify the hedged instrument and the hedging instrument and journalize the transactions.
15. Entity C prepares financial statements to 30 September each year. On 1 October 2011 entity C
granted 200 options to 20 senior executives. The options only vest if entity C‘s share price
reaches NRs.20 on set dates and the relevant executives remain employed by the entity on those
dates. The options can vest:
 On 30 September 2013 if the share price reaches NRs.20 during the year ended 30
September 2013 and remains that at least that level until 30 September 2013.
 If the above conditions are not satisfied the options do not vest.
On 1 October 2011 the directors of entity C estimated that the fair value of a share option under
this scheme was NRs.18. This estimate was arrived at based upon the assumption that the options
would vest on 30 September 2015. In fact the share price reached NRs.20 on 1 June 2014 and
remained at or above that level until 30 September 2014. Therefore the options vested on 30
September 2014. The directors consistently estimated that all 20 executives would remain
employed by entity C over the relevant vesting period and all executives were in employment
when the options vested.
Show the impact of the share-based payment arrangement on the financial statements for the
years ended 30 September 2013 and 2014.
16. The Balance Sheet of Suyash Ltd .as on 31-3-2003 is as follows:

Liabilities Rs Assets Rs
Equity Shares of Rs 10 each 5,00,000 Building 5,00,000
10% Preference Shares of Rs 1,000,00 Machinery 3,00,000
100 each Stock 60,000
General Reserve 1,00,000 Debtors 50,000
Profit & Loss Account 50,000 Bank 50,000
Creditors 1,10,000
Provision for Income tax 40,000
Proposed Dividend 60,000
Total 9,60,000 Total 9,60,000
The profits of the company after charging depreciation but before income - tax @ 40% were as
follows for last five years;
1991 - Rs 1,00,000
2000 - Rs 1,40,000
2001 - Rs 1,60,000
2002 - Rs 1,70,000
2003 - Rs 1,80,000
Reasonable Return on Equity funds in this line of business is considered to be 10%.
 Find out the value of equity share under the Net Asset or Intrinsic Method after valuing
goodwill on the basis of five year‘s purchase of annual super profits.
 Also , ascertain the share value on the basis of profit earning capacity in relation to
 Average maintainable profits.
 Average dividend rate which was 8%, 9% ,7% for the last three years.
 Further calculate the number of shares to be purchased by an individual investor with an
amount of Rs 20,000 available for investment on the basis of appropriate fair value of the
relevant equity shares.
17. Famous Corporation has been preparing Value Added Statement for the past five years. The
Human Resource Manager of the Company has suggested introducing a Value Added Incentive
Scheme to motivate the Employees for their better performance.
To introduce the Scheme, it is proposed that the Best Index Performance (favourable to
Employer), i.e. Employee Costs to Added Value for the last five years, will be used as the Target
Index for future calculations of the bonus to be paid After the Target Index is determined, any
actual improvement in the Index will be rewarded. The Employer & the Employee will be
sharing any such improvement in the ratio 1:2. The bonus is given at the end of the year, after the
profit for the year is determined.
The following information is available: Value Added Statement for 5 years ( in Thousands)
Particulars 2010 2011 2012 2013 2014
Sales 5,600 7,600 9,200 10,400 12,000
Less: Cost of Bought in
Goods/Services 2,560 4,000 5,000 5,600 6,400
Added Value 3,040 3,600 4,200 4,800 5,600
Employee Costs 1,300 1,520 1,680 1,968 2,240
Dividend 200 300 400 480 600
Taxes 640 760 840 1 1,120
Depreciation 520 620 720 880 1,120
Debenture Interest 80 80 80 80 80
Retained Earning 300 320 480 392 440
Added Value 3,040 3,600 4,200 4,800 5,600
Summarized Profit and Loss Account for the year ended on 31st March 2015 (in Thousands)
Particulars Amount Amount
Income
Sales less Returns 13,600
Dividends and Interes 500
Miscellaneous Income 500 14,600
Expenditure:
Production
Cost of Materials 5,000
Wages & Salaries 1,800
Other Manufacturing Expenses 1,400 8,200
Administrative
Administration Salaries 600
Administration Expenses 600 1,200
Selling and Distribution Expenses
Selling and Distribution Salaries 120
Selling Expenses 400 520
Finance Cost
Debenture Interest 80
Depreciation 1,520
Total Expenditure 11,520
Profit before Taxation 3,080
Less: Provision for Taxation 770
Profit after Taxation 2,310
From the above information, prepare Value Added Statement for the year 2014–2015 and
determine the amount of Bonus Payable to Employees, if any.
18. Suppose that Tract Ore Co finishes its first year of operations in which all contract costs were
paid in cash and all progress billings and advances were received in cash. For contracts W, X and
Z only:
(a) contract costs include costs of materials purchased for use in the contract which have not
been used at the period end; and
(b) customers have advanced sums to the contractor for work not yet performed.
The relevant figures for all contracts at the end of Tract Ore's first year of trading are as follows.
W X Y Z Total
NRs. NRs.
Particulars m NRs. m NRs. m NRs. m m NRs. m
Contract revenue recognised 113.10 405.60 296.40 156.00 42.90 1,014.00
Contract expenses recognised (85.80) (351.00) (273.00) (195.00) (42.90) (947.70)
Expected losses recognised – – – (31.20) (23.40) (54.60)
Recognised profits less recognised losses 27.30 54.60 23.40 (70.20) (23.40) 11.70
Contract costs incurred in the period 85.80 437.60 386.10 195.00 85.80 1,190.30
Contract expenses recognised (85.80) (351.00) (73.00) (195.00) (42.90) (747.70)
Contract expenses that relate to future
activity recognised as an asset – 86.60 13.10 – 42.90 142.60
Contract revenue 113.10 405.60 296.40 156.00 42.90 1,014.00
Progress billings (78.00) (405.60) (296.40) (140.40) (42.90) (963.30)
Unbilled contract revenue 35.10 – – 15.60 – 50.70
Advances – 41.60 10.40 – 13.00 65.00
Required
Show the figures that should be disclosed under NAS 11.
19. These consolidated financial statements relate to the JYCE group for the year ended September
30,
20X4:
JYCE Group balance sheet at September 30, 20X4
NRs.m
Assets :
Noncurrent assets
Property, plant, and equipment 500
Goodwill 100
Investment in associate 70
670
Current assets 130
800
Equity and Liabilities:
Equity attributable to equity holders of
parent
Share capital 200
Retained earnings 400
600
Minority interest 50
Total equity 650
Noncurrent liabilities 60
Current liabilities 90
JYCE Group income statement for the year ended September 30, 20X4
Revenue 1800
Cost of sales -1200
Gross profit 600
Other income 60
Other expenses -50
Finance costs -60
Share of profit of associates 10
Income tax expense -70
Profit for the period 190
Attributable to:
Equity holders of the parent 176
Minority interest 14
190
This information is relevant to the production of the segmental information:

(a) The entity is organized for management purposes into three major operating divisions: office
furniture, office stationery, and computer products. There are other smaller operating divisions.
(b) The sales revenue for the major operating divisions is set out next.
Intersegment sales
Revenue eliminated on consolidation
NRs.m NRs.m
Office furniture 800 200
Office stationery 500 150
Computer products 400 80
There are no intersegment sales to the smaller operating divisions.

(c) The profit after taking into account the other income, distribution costs, and administrative
ex-
penses can be allocated in this way:
Percentage of
profit
Office furniture 50%
Office stationery 25%
Computer products 20%
Other divisions 5%
100%
(d) The ―other‖ expenses, finance costs, and income tax expense cannot be allocated to the seg-
ments on any reasonable basis.
(e) During the year, the office furniture division had purchased an investment in an associate.
The
profit shown in the income statement is after the elimination of intersegment profit of NRs.2
million.
(f) The next table shows the breakdown of segment assets and liabilities that are allocated to
segments.
Office Office
furniture stationery Computer products
NRs.m NRs.m NRs.m
Property, plant, and
equipment 300 100 80
Goodwill 60 30 10
Current assets 80 40 6
Noncurrent liabilities 30 21 4
Current liabilities 45 33 8
The remainder of the assets and liabilities relate to the other divisions except for an asset of
NRs.4 million and a liability of NRs.6 million that cannot be allocated.
Required
Produce a schedule that shows the information required for segment disclosures under NFRS 08,
Operating Segment.
20. A subsidiary sold goods costing NRs. 10 million to its parent for NRs. 11 million, and all of
these goods are still held in inventory at the year-end. Assume a tax rate of 30%. Explain the
deferred tax implications.
21. Write short notes on

a. What is economic value added and how is it calculated?
b. Corporate Social Reporting
c. Qualitative characteristics of Financial Statements
Suggested Answer
Solution to Q No. 1
The repayment of the grant must be treated as a change in accounting estimate. The
carrying amount of the asset must be increased as the netting off method has been used. The
resulting extra depreciation must be charged immediately to profit or loss.
Particulars Original As if no grant Adjustment
Cost 90,000,000 90,000,000
Grant (30,000,000) -
60,000,000 90,000,000
Depreciation (10,000,000) [1 yr] (30,000,000) [2 yr] 20,000,000
Carrying amount 50,000,000 [1/1/X7] 60,000,000 10,000,000
[31/12/X7]
Required Journal Entry

Dr. Depreciation Expense 20,000,000
Dr. PPE 10,000,000
Cr. Liability 30,000,000
Solution to Q No. 2 (a)

Answer:
Net total being paid over four years ((5,000 x 4 years) – 1,000) = 19,000
Annual charge spread evenly over the lease term (19,000/4 years) = 4,750
Solution to Q No. 2(b)

Answer
Production cost of PPE 6,000
Capitalisation of borrowing costs:
NRs. 6m x 6% x 9/12 = 270
Total cost capitalised (and carrying amount) at 30 September 20X2 = 6,270
Solution to Q No. 2(c)

Answer:
Gamma Ltd. The investment no longer meets the definition of a subsidiary (ability to control)
and therefore would not be consolidated
Solution to Q No. 3
Answers
a. Depreciation 1 January to 30 June 20X4 (80,000/10 x 6/12) = 4,000
Depreciation 1 July to 31 December 20X4 (81,000/9 x 6/12) = 4,500
Total depreciation = 8,500
b. Value in Use = 38,685

Fair Value less cost to sell = 45000-2000 = 43,000
Carrying Amount = 60,750
As VIU is lower than FV (less costs to sell), so impairment is 60,750 – 43,000 = NRs.17,750
c. The impairment loss of NRs.220 (1,170 – 950) is allocated as follows

NRs.‘000
Plant & Machinery (carrying amount of damaged 35
asset)
Goodwill 85
Total Impairment Loss recognized 120
Balance 100
Balance Amount of IL has to be charged proportionately to the remaining assets of the CGU
NRs.‘000
Component Carrying Amount Proportionate IL CA after
Impairment
Building 500 62.5 437.5
(500/800*100)
Plant & Machinery 300 37.5 262.5
Net Current Assets 250
Total 950
Solution to Q No. 4
Answer
(a) Triage Co – Schedule of adjustments to profit for the year ended 31 March 20X6
Draft profit before interest and tax per trial balance 30,000
Adjustments re:
Note (i)
Convertible loan note finance costs (w (i)) -3,023
Note (ii)
Amortisation of leased property (1,500 + 1,700 (w
(ii))) -3,200
Depreciation of plant and equipment (w (ii)) -6,600
Note (iii)
Current year loss on fraud (700 – 450 see below) -250
Note (iv)
Income tax expense (2,700 + 700 – 800 (w (iii))) -2,600
Profit for the year 14,327
The NRs.450,000 fraud loss in the previous year is a prior period adjustment (reported in the
statement of changes in equity).
The possible insurance claim is a contingent asset and should be ignored.
(b) Triage Co – Statement of financial position as at 31 March 20X6

Assets NRs.‘000 NRs.‘000
Non-current assets
Property, plant and equipment (64,600 + 37,400 (w 102,000
(ii)))
Current assets
Trade receivables (28,000 – 700 fraud) 27,300
Other current assets per trial balance 9,300 36,600
Total assets 138,600
Equity
Equity shares of NRs.1 each 50,000
Other component of equity (w (i)) 2,208
Revaluation surplus (7,800 – 1,560 (w (ii))) 6,240
Retained earnings (w (iv)) 17,377 25,825
75,825
Deferred tax (w (iii)) 3,960
6% convertible loan notes (w (i)) 38,415 42,375
Current liabilities
Per trial balance 17,700
Current tax payable 2,700 20,400
Total equity and liabilities 138,600
Diluted earnings per share (w (v)) 29 Paisa
Workings (monetary figures in brackets in NRs.‘000)

(i) 6% convertible loan notes
The convertible loan notes are a compound financial instrument having a debt and an equity
component which must both be quantified and accounted for separately:
Year ended 31 March outflow 8% present value
NRs.‘000 NRs.‘000
20X6 2,400 0·93 2,232
20X7 2,400 0·86 2,064
20X8 42,400 0·79 33,496
Debt component 37,792
Equity component (= 2,208
balance)
Proceeds of issue 40,000
–––––––
The finance cost will be NRs.3,023,000 (37,792 x 8%) and the carrying amount of the loan notes
at 31 March 20X6 will be NRs.38,415,000 (37,792 + (3,023 – 2,400)).
(ii) Non-current assets

Leased property
The gain on revaluation and carrying amount of the leased property is:
NRs.‘000
Carrying amount at 1 April 20X5 (75,000 – 15,000) 60,000
Amortisation to date of revaluation (1 October 20X5) (75,000/25 x (1,500)
6/12)
Carrying amount at revaluation 58,500
Gain on revaluation = balance 7,800
Revaluation at 1 October 20X5 66,300
Amortisation to year ended 31 March 20X6 (66,300/19·5 years x (1,700)
6/12)
Carrying amount at 31 March 20X6 64,600
Annual amortisation is NRs.3m (75,000/25 years); therefore the accumulated amortisation

at 1 April 20X5 of NRs.15m represents five years‘ amortisation. At the date of
revaluation (1 October 20X5), there will be a remaining life of 19·5 years.
Of the revaluation gain, NRs.6·24m (80%) is credited to the revaluation surplus and NRs.1·56m
(20%) is credited to deferred tax.
Plant and equipment

NRs.‘000
Carrying amount at 1 April 20X5 (72,100 – 28,100) 44,000
Depreciation for year ended 31 March 20X6 (15% reducing balance) (6,600)
Carrying amount at 31 March 20X6 37,400
(iii) Deferred tax

Provision required at 31 March 20X6:
Revalued property and other assets (7,800 + 12,000) x 3,960
20%)
Provision at 1 April 20X5 (3,200)
Increase in provision 760
Revaluation of land and buildings (7,800 x 20%) (1,560)
Balance credited to profit or loss (800)
(iv) Retained earnings

Balance at 1 April 20X5 3,500
Prior period adjustment (fraud) (450)
Adjusted profit for year (from (a)) 14,327
Balance at 31 March 20X6 17,377
(v) The maximum additional shares on conversion is 8 million (40,000 x 20/100), giving total
shares of 58 million. The loan interest ‗saved‘ is NRs.2·418m (3,023 (from (w (i)) above x
80% (i.e. after tax)), giving adjusted earnings of NRs.16·745m (14,327 + 2,418).
Therefore diluted EPS is
NRs.16,745,000 x 100/58 million shares = 29 Paisa
Solution to Q No. 5
Answer
The issue of convertible financial instruments is the reason why Downing Co has to disclose a
figure for diluted EPS in addition to its basic EPS. When the convertible loan notes are due for
redemption on 31 March 2018, there is the potential that they will be converted into equity
shares which would increase the number of equity shares in issue. At the same time there will
also be a saving in the after tax interest which will no longer be paid to the loan note
holders, however, this will be proportionately less per share than is currently generated from
earnings per share (otherwise there would not be a dilution) and thus the EPS will be diluted or
‗watered down‘. In reality, it is possible that the convertible loan notes, or a proportion of them,
will be redeemed for cash which would not cause a dilution, however, NAS 33 Earnings
per Share requires that maximum possible dilution has to be assumed when calculating the
diluted EPS.
Despite this, the CEO seems mistaken as to what the diluted EPS figure actually means; it does
not mean that this will be the EPS in the near future (or at the time of redemption). The future
EPS will be based on future earnings and the (weighted average) number of shares actually in
issue in that future year. Rather, the diluted EPS figure should be seen as a sort of warning. It
is saying that, based on existing circumstances, if the dilution had already taken place, i.e. that
the convertible shares had already been redeemed for equity (at the maximum possible number
of new shares), the diluted EPS as disclosed would have been the figure reported as the actual
(basic) EPS.
So, although the CEO does not fully understand what the diluted EPS figure means, it does
indicate to investors the possibility of a future dilution of EPS; and with the dilution being a
sizable 19% lower than the basic EPS, it may well cause an adverse reaction in the market price
of the Downing Co‘s shares.
Solution to Q No. 6
(i) Purnabiram Ltd. – Extracts from statement of profit or loss (see workings):
NRs.‘000
Year ended 31 March 2013
Plant impairment loss 20,000
Plant depreciation (32,000 + 54,400
22,400)
Year ended 31 March 2014
Loss on sale 8,000
Plant depreciation (32,000 + 58,000
26,000)
(ii) Purnabiram Ltd. – Extracts from statement of financial position (see workings):
NRs.‘000
As at 31 March 2013
Property, plant and equipment (128,000 + 217,600
89,600)
Revaluation surplus
Revaluation of item B (1 April 2012) 32,000
Transfer to retained earnings (32,000/5 years) (6,400)
Balance at 31 March 2013 25,600
As at 31 March 2014
Property, plant and equipment (item A only) 96,000
Revaluation surplus
Balance at 1 April 2013 25,600
Transfer to retained earnings (asset now sold)
(25,600)
Balance at 31 March 2014 nil
Workings:
Item A Item B
NRs.‟000 NRs.‟000
Carrying amounts at 31 March 2012 180,000 80,000
Balance = loss to statement of profit or loss (20,000)
Balance = gain to revaluation surplus 32,000
Revaluation on 1 April 2012 160,000 112,000
Depreciation year ended 31 March 2013 (160,000/5 years) (22,400) (112,000/5
(32,000) years)
Carrying amount at 31 March 2013 128,000 89,600
Subsequent expenditure capitalised on 1 April nil 14,400
2013
104,000
Depreciation year ended 31 March 2014 (unchanged) (32,000) (26,000) (104,000/4
years)
78,000
Sale proceeds on 31 March 2014 (70,000)
Loss on sale (8,000)
Carrying amount at 31 March 2014 96,000 nil
Solution to Q No. 7
Answer:
(i) Changing the classification of an item of expense is an example of a change in accounting
policy, in accordance with NAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors. Such a change should only be made where it is required by an NFRS or where it would
lead to the information in the financial statements being more reliable and relevant. It may be
that this change does represent an example of the latter, although it is arguable that
amortised development costs should continue to be included in cost of sales as amortisation
only occurs when the benefits from the related project(s) come on-stream. If it is accepted
that this change does constitute a change of accounting policy, then the proposed treatment by
the directors is acceptable; however, the comparative results for the year ended 31 March 2013
must be restated as if the new policy had always been applied (known as retrospective
application).
(ii) The two provisions must be calculated on different bases because NAS 37 Provisions,
Contingent Liabilities and Contingent Assets distinguishes between a single obligation (the
court case) and a large population of items (the product warranty claims).
For the court case the most probable single likely outcome is normally considered to be the best
estimate of the liability, i.e. NRs.4 million. This is particularly the case as the possible outcomes
are either side of this amount. The NRs.4 million will be an expense for the year ended 31 March
2014 and recognised as a provision.
The provision for the product warranty claims should be calculated on an expected value basis at
NRs.3·4 million (((75% x nil) + (20% x NRs.25) + (10% x NRs.120)) x 200,000 units). This will
also be an expense for the year ended 31 March 2014 and recognised as a current liability (it is a
one-year warranty scheme) in the statement of financial position as at 31 March 2014.
(iii) Government grants related to non-current assets should be credited to the statement of profit
or loss over the life of the asset to which they relate, not in accordance with the schedule of any
potential repayment. The directors‘ proposed treatment is implying that the government grant is a
liability which decreases over four years. This is not correct as there would only be a liability if
the directors intended to sell the related plant, which they do not. Thus in the year ended
31 March 2014, NRs.800,000 (8 million/10 years) should be credited to the statement of profit
or loss and NRs.7·2 million should be shown as deferred income (NRs.800,000 current and
NRs.6·4 million non-current) in the statement of financial position
Solution to Q No. 8
Chandra Ltd.
Consolidated statement of profit or loss and other comprehensive income for the year ended 30
September 2014
NRs.‘000
Revenue (62,600 + (30,000 x 9/12) – (300 x 9 months intra-group 82,400

sales))
Cost of sales (w (i)) (61,320)
Gross profit 21,080
Distribution costs (2,000 + (1,200 x 9/12)) (2,900)
Administrative expenses (3,500 + (1,800 x 9/12) + 500 goodwill (5,350)
impairment)
Finance costs (200 + 135 (w (v))) (335)
Profit before tax 12,495
Income tax expense (3,100 + (1,000 x 9/12)) (3,850)
Profit for the year 8,645
Other comprehensive income
Gain on revaluation of property (1,500 + 600) 2,100
Total comprehensive income 10,745
Profit for year attributable to:

Equity holders of the parent (balance) 8,465
Non-controlling interest (w (ii)) 180
8,645
Other comprehensive income attributable to:
Equity holders of the parent (balance) 10,445
Non-controlling interest (180 above + (600 x 20%)) 300
10,745
Chandra Ltd. – Consolidated statement of financial position as at 30 September 2014

NRs.‘000
Assets
Non-current assets
Property, plant and equipment (w (iii)) 37,100
Intangible asset: goodwill (w (iv)) 5,200
42,300
Current assets
Inventory (4,300 + 1,200 – 120 URP (w (i))) 5,380
Trade receivables (4,700 + 2,500 – 1,200 intra-group) 6,000
Bank 300
11,680
Total assets 53,980

Equity attributable to owners of the parent
Equity shares of NRs.1 each ((10, 000 + 4,800) w (iv)) 14,800
Other component of equity (share premium) (w (iv)) 9,600
Revaluation surplus (2,000 + (600 x 80%)) 2,480
Retained earnings (w (v)) 6,765
33,645
Non-controlling interest (w (vi)) 4,800
Total equity 38,445
10% loan notes (2,500 + 1,000 – 1,000 intra-group) 2,500
Current liabilities
Trade payables (3,400 + 3,600 – 800 intra-group) 6,200
Current tax payable (2,800 + 800) 3,600
Deferred consideration (1,800 + 135 w (v)) 1,935
Bank (1,700 – 400 cash in transit) 1,300
13,035
Total equity and liabilities 53,980
Working Notes:
(i) Cost of sales 45,800
Plastik 18,000
Bindu Ltd. (24,000 x 9/12) -2,700
Intra-group purchases (300 x 9 months) 120
URP in inventory (600 x 25/125) 100
Additional depreciation on property 61,320
(ii) Non-controlling interests in Bindu td.‘s profit or loss

Bindu td.‘s profit as reported 2,000
9/12 post-acquisition = 1,500
Deduct: Additional depreciation on property -100
Goodwill impairment -500
Adjusted post-acquisition profit 900
x 20% non-controlling interest 180
(iii) Non-current assets

Plastik 18,700
Bindu Ltd. 13,900
Fair value increase at acquisition 4,000
Additional depreciation on property -100
Fair value increase since acquisition 600
37,100
(iv) Goodwill in Bindu Ltd.

Investment at cost
Shares (9,000 x 80% x 2/3 x NRs.3) 14,400
Deferred consideration (9,000 x 80% x 27·5 Chandra Ltd. x 1/1·1) 1,800
Non-controlling interest (9,000 x 20% x NRs.2·50) 4,500
20,700
Net assets (equity) of Bindu Ltd. at 30 September 2014 -12,500

Less post-acquisition profits (2,000 x 9/12) 1,500
Fair value adjustment: property -4,000
Net assets at date of acquisition -15,000

Goodwill on consolidation 5,700
Impairment as at 30 September 2014 -500
5,200
Note: The 4·8 million (9,000 x 80% x 2/3) shares issued by Plastik at NRs.3 each would be recorded as
share capital of NRs.4·8 million (4,800 x NRs.1) and share premium of NRs.9·6 million (4,800 x
NRs.2)
(v) Retained earnings

Plastik 6,300
Bindu td.‘s post-acquisition adjusted profit (900 (w (ii)) x 80%) 720
Finance costs on deferred consideration (1,800 x 10% x 9/12) -135
Unrealised profit in inventory (w (i)) -120
6,765
Alternative calculation 6,300

Plastik‘s retained earnings at 30 September 2014 -8,000
ess Plastik‘s profit for the year 8,465
Consolidated profit for the year from part (a) 6,765
(vi) Non-controlling interest in statement of financial position

At date of acquisition (w (iv)) 4,500
Post-acquisition from statement of profit or loss and other comprehensive
income 300
4,800
Solution to Q No. 9
Consolidated Balance Sheet of P Ltd. as on 31.3.15
Particulars Amount in
lacs
I. Equity and Liabilities
Shareholder's Funds
(a)Share Capital 1,000
(b)Reserves and Surplus 8,800
Minority Interest (in S Ltd.) 760
Current Liabilities
Trade Payables(200+ 300 + 40% of 250)
Total 11,160
II.Assets
Non-current assets
Fixed assets
Tangible assets [1,000 + 800 + 560 (1400 x 40%)] 2,360
Intangible assets (Goodwill) 120
Non-current investment (investment in A) 1,880
Current assets [2,200+3,300+1,300 (3,250x 40%)] 6,800
Total 11,160
Working Notes:
Computation of Goodwill
S (subsidiary)
in lacs
Cost of investment 800
Less: Paid up value of shares 320
acquired
Share in pre-acquisition 416 (736)
profits of S Ltd. (520 × 80%)
Goodwill 64
Minority Interest
Share Capital 400* 20% 80
Retained Earning 680
3400*20%
Total 760
J (Jointly Controlled Entity)
in lacs
Cost of Investment 600
Less:
Paid up value of shares 320
acquired (40% of 800)
Share in pre-acquisition 160 (480)
profits (40% of 400)
Goodwill 120
Note: Jointly controlled entity J‗ to be consolidated on proportionate basis
Associate A`
in lacs
Cost of investment 600
Less:Paid up value of shares acquired (800 x 320
40%)
Share in pre-acquisition profits (400 x 40%) 160 (480)
Goodwill 120
Goodwill shown in the Consolidated Balance Sheet

in lacs
Goodwill of J 120
Goodwill of S 64
ess:Goodwill written off of S (64)
Goodwill 120
Investment in Associate (Revaluation)

Share Capital 800
Reserves (pre acquisition + post 3600
acquisition)
Total 4400
P Ltd. Share 40 %
1760
Goodwill (on investment in associate) 120
Total 1880
Solution to Q No. 10
Solution
Workings Notes:
Shareholding Pattern
B Ltd. C Ltd.
Total Number of 1,000 600
Shares
A td‘s Holding 750 NA
B td‘s Holding NA 400
Minority Holding 250 200
Minority % 25 % 33.33%
(1) Analysis of Profit

Capital Revenue Revenue
C Ltd. Profit Reserve Profit
Reserve on 1.1.2011 6,000 0 0
Additional Reserve created in 2011 600 600 0
[1,200 X
[7,200 – 6,000] = 1,200 ½] 1,200 X ½]
P & L A/c, Balance on 1.1.2011 1,000 0 0
Profit for 2011 [5,000 – 1,000] = 4,000 2,000 0 2,000
[4,000 X [4,000 X
½] 0 ½]
9,600 600 2,000
3,200 200 667
Due to outsiders, 1/3 6,400 400 1,333
Share of B Ltd. (2/3)
B Ltd.
From C Ltd. 6,400 400 1,333
Reserve on 1.1.2011 8,000 — —
Additional Reserve created in 2011 1,000 1,000 —
[2,000 X 2,000 X
[10,000-8,000] = 2,000 ½] ½] —
Profit and Loss A/c:
Balance on 1.1.2011 1000 —
Profit during 2011 [4,000-1,000]=3,000 1,500 — 1,500
[3,000 X
[3,000 X ½] ½]
17,900 1,400 2,833
Due to outsiders (1/4) 4,475 350 708
Share of A Ltd. 13,425 1,050 2,125
A Ltd. 18,000 16,000
18125
Less: Inventory Reserve -600
Total 13,425 19,050 17,525
Notes:
(i) During 2011, 1,200 has been added to the Reserves of C Ltd., and 2,000 to the Reserves of B
Ltd. The profit must have been earned during the whole of the year; hence, half of these figures
(i.e., up to 30.6.2011) must be considered as capital pre-acquisition and the remaining revenue.
(ii) Total unrealised profit is ` 600, i.e., ` 3,100 less ` 2,500.
(2) Minority Interest

B Ltd. C Ltd.
Share Capital 25,000 20,000
Share of Capital Profits 4,475 3,200
Share of Revenue Reserves 350 200
Share of Revenue Profits 708 667
Total 30,533 24,067
Grand Total 54,600
(3) Cost of Control/Goodwill

Amount paid:
A Ltd. 85,000
B Ltd. 53,000 1,38,000
Less: Par value of shares in:
B Ltd. 75,000
C Ltd. 40,000
Capital Profits* 13,425 (1,28,425)
Cost of Control/Goodwill 9,575
Note ∗ The whole of this amount may preferably be adjusted against cost of control, instead of
being added
to the profits of B Ltd. Consequently capital profits will increase by ` 1,600 with a
corresponding
reduction in Minority interest.
(4) Since X Ltd. shows ` 8,000 against B Ltd. whereas B Ltd., shows only ` 7,000 in favour of A
Ltd., it
must be assumed that B Ltd., has remitted ` 1,000 to A Ltd.; not yet received by A Ltd. The
amount is in transit.
(5) If capital profit is increased by ` 1,600 cost of control will be ` 7,975.
Consolidated Balance Sheet of A Ltd.

and its subsidiaries B Ltd. and C Ltd.,
as on 31st December, 2011
Particulars Note Amount

I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 125,000
(b) Reserves and Surplus 1 36,575
(2) Minority Interest (W.N
2) 54,600
(3) Current Liabilities
Trade Payables 2 10,000
Total 226,175.00
II. Assets
(1) Non-current assets
(i) PPE 3 120,400

(ii) Intangible assets 4 9,575
(2) Current assets
(a) Inventories 5 27,400
(b) Trade receivables 6 67,800
(c) Cash & Cash
equivalents 7 1,000
Total 226,175
Explanatory Notes/Schedules:
Note Particulars Amount Amount
1 Reserves and Surplus
Reserves (W.N.1) 19,050
Profit and Loss Account
(W.N.1) 17,525 36,575
2 Trade Payables
A Ltd. 7,000
B Ltd. 3,000 10,000
3 Tangible Assets
A Ltd. 28,000
B Ltd. 55,000
C Ltd. 37,400 120,400
4 Intangible assets
Goodwill (W.N 3)
5 Inventories
A Ltd. 22,000
B Ltd. 6,000
28,000
Less : Inventory reserve (600) 27,400
6 Trade Receivables
A Ltd. 26,300
B Ltd. 10,000
C Ltd. 31,500 67,800
7 Cash & Cash equivalents
Cash in transit 1000
The entity records the asset at a cost of $3 million at March 31, 20X6, and a liability of the same
amount. At year-end, the amount has not been paid. Thus using the closing rate of exchange, the
amount payable would be retranslated at $4 million, which would give an exchange loss of $1
million to be reported in profit or loss. The cost of the asset remains at $3 million before
depreciation. Similarly, the entity will record a sale of $2 million and an amount receivable of
the same amount. At year-end, the receivable would be stated at $2.33 million, which would give
an exchange gain of $0.33 million, which would be reported in profit or loss.
Income Statement for the year ended December 31, 20X6, at average rate
Amount (€1.5 =
Particulars $1)
Revenue 48
Cost of sales -15
.
Gross profit 33
Administrative
expenses -3
.Profit before tax
Tax expense -6
Profit for period 12
The exchange difference is calculated in this way:

The retained earnings if translated into euros would be €16 million. As the income statement has
been
translated using the average rate, the profit per that statement is €12 million, creating an
exchange differ-
ence of €4 million.
The total exchange difference of €4 million, is shown as a component of equity.
Balance Sheet at December 31, 20X6

Amount (€2 =
$1)
Share capital (closing rate) 4
Retained earnings (above) 12
Exchange difference (see below) 4
20
Trade payables 8
Land (nondepreciable) acquired December 16
31, 20X6
Inventories 8
Trade receivables 4
Total assets 28
Treatment of various costs incurred during 20X5 depends on whether these costs can be
capitalized or expensed as per NAS 38. Although NAS 38 is clear that expenses incurred during
the research phase should be expensed, it is important to note that not all development costs can
be capitalized. In order to be able to capitalize costs, strict criteria established by NAS 38 should
be met. Based on the criteria prescribed by NAS 38, these conclusions can be drawn:
(1) It could be argued that the technical feasibility criterion was established at the end of August
20X5, when the first prototype was produced.
(2) The intention to sell or use criterion was met at the end of August 20X5, when the sample
was tested with the air-conditioning component to ensure it functions. But it was not until
October 20X5 that the product‘s marketability was established. The reason is attributable to the
fact that the entity had doubts about the new models being compatible with the air conditioners
and that the sample would need further testing, had it not functioned.
(3) In October 20X5, the existence of a market was clearly established.
(4) The financial feasibility and funding criterion was also clearly met because Hawa Pvt. Ltd.
has obtained a loan from venture capitalists and it had the necessary raw materials.
(5) Hawa Pvt. Ltd. was able to measure its cost reliably, although this point was not addressed
thoroughly in the question. Hawa Pvt. Ltd. can easily allocate labor, material, and overhead costs
reliably.
Therefore, the costs that were incurred before October 20X5 should be expensed.
The total costs that should be expensed = NRs.175,000 + NRs.250,000 + NRs.300,000 +

NRs.80,000 = NRs.805,000.
The costs eligible for capitalization are those incurred after October 20X5. However, conference
costs of NRs.50,000 would need to be expensed because they are independent from the
development process.
Thus there are no total costs to be capitalized in terms of NAS 38.
Hedged instrument is the instrument whose fair value is shielded using the hedging strategy. In
this case, it is the copper inventory held by Commodity Traders Ltd. Hedging instrument on the
other hand is the derivative instrument which mitigates the fair value changes of hedged
instrument by reversely mimicking its fair value movement.
On 30 June 2015, the fair value of copper inventories held for trading shall be adjusted as
follows:
Profit and loss on Financial Instrument NRs.300,000

Inventories (NRs.5,200,000 - NRs.4,900 * 1,000) NRs.300,000
The loss on inventories shall be offset by corresponding gain on the forward transaction. Since
the forward transaction entitles Commodity Traders Ltd. to sell copper at NRs.5,200 per ton even
though the market price is NRs.4,900 per ton, it represents a NRs.300 gain per ton, which
translates into NRs.300,000 gain on 1,000 tons. The fair value change of the hedging instrument
is recognized as follows:
Derivative (asset) NRs.300,000

Profit and loss on Financial Instrument (1,000 * (NRs.5,200 -
NRs.300,000
NRs.4,900)
There shall be zero effect on the net value of inventories on Commodity Traders Ltd. balance
sheet even though copper price fell over the period by NRs.300 per ton. The hedging strategy
saves Commodity Traders Ltd. from furnishing additional security to the bank in wake of the fall
in fair value.
Year ended 30 September 2013

The options do not vest in this period so the charge to profit or loss and the credit to equity is
based on the assumptions made when estimating the fair value of the options at the grant date –
ie a three-year period with a vesting date of 30 September 2015. Therefore the charge to profit or
loss and the credit to equity is NRs.24,000 (200 x 20 x NRs.18 x 1/3).
Year ended 30 September 2014

The options actually vest in this period so the total cumulative cost needs to be recognised in
equity by that date. The total amount to be recognised is NRs.72,000 (200 x 20 x NRs.18). This
means the charge to profit or loss in this accounting period is NRs.48,000 (NRs.72,000 –
NRs.24,000).
Alternative assumption
Assuming, as an alternative, that the share price remained below NRs.20 for the whole of the
three-year period ending 30 September 2015 so the options never vested, there would be a charge
to profit or loss, and a corresponding credit to equity, of NRs.24,000 for each of the three years
ending 30 September 2013, 2014 and 2015. Therefore there would be a charge to profit or loss
even though the options never vested. This would never happen for non-market vesting
conditions.
 Computation of Goodwill
Capital Employed Rs Rs
Buildings 6,00,000
Machinery 2,50,000
Stock 60,000
Debtors 50,000
Bank 50,000
10,10,000
Less: Liabilities
Creditors 1,10,000
Provision for Income Tax 40,000
Proposed Dividend 60,000 2,10,000
Capital Employed 8,00,000
Average Maintainable Profits (before income tax)
(1,00,000 + 1,40,000 +1,60,000 + 1,70,000+1,80,000) 1,50,000

÷5
Less :Income tax @40% 60,000
Normal profit (10% of 8,00,000) 80,000
Super profit 10,000
Goodwill = Super Profit x 5 years

= Rs 10,000 x 5
= Rs 50,000
 Valuation of shares on Net Asset Basis

Capital employed 8,00,000
Add : Goodwill (as above ) 50,000
Assets available to Shareholders 8,50,000
Less : Preference share capital 1,00,000
Assets available to Equity Shareholder 7, 50,000
Value of Equity Share = Assets available to Equity Shareholder / Number of Equity

Shares
= 7,50,000 / 50,000
= Rs 15 per share
 Valuation of share on Yield Basis

Average Equity Dividend = 8 + 9 +7 / 3
= 8%
Value of Equity Share = (Average Dividend Rate ÷ Normal Dividend) x Paid up
value
= 8 x 10 / 10
= Rs 8 per share
 Fair Value of Equity Share = 15 + 8 / 2
= Rs 11.50 per share
 Number of shares which can be purchased = 20000 / 11.50

= 1,739 Equity Shares
Calculation of Target Index

Year Ending 31st March 2010 2011 2012 2013 2014
Employee Cost 1,300 1,520 1,680 1,968 2,240
Value Added 3,040 3,600 4,200 4,800 5,600
Ratio (Employee Cost ÷ Value
Added) 42.76% 42.22% 40.00% 41.00% 40.00%
Target Index is taken as least of the above on conservative basis = 40% (Favorable to Employer)
Computation of Bonus for the Year ending 31st March 2015
Particulars Amount („000)
Sales 13,600
Less: Bought in Goods & Services:
Cost of Materials 5,000
Production Expenses 1,400
Administration Office Expenses 600
Sales Office Expenses 400 7,400
Value Added from Manufacturing and Trading Activities 6,200
Add: Other Income (500 + 500) 1,000
1. Net Value Added 7,200
2. Employees Cost, i.e. Wages & Salaries – [Wages & Salaries ` 1,800 +
Administration Salaries ` 600 + Selling & Distribution Salaries ` 120] 2,520
3. Employee cost to Net Value added for the year 35%
4. Improvement for the Year eligible for Bonus = Target 40% –
Ratio as above 35% 5%
5. Bonus Payable for the Year = Value Added ` 7,200 × 5% ×
Employee Share 2/3rd 240
Statement of Application of Value Added

Particulars Amount ‗000 %
1. To Employees: As above 2,520 + Bonus 240 2,760 38.33%
2. To Government: Taxes 770 10.69%
3. To Providers of Capital: Interest on 80 1.11%
Debentures
4. To Shareholders
(a) Depreciation 1,520
(b) Retained Profits (given 2,310 – Incentive 2,070 3,590 48.87%
240)
Total 7,200 100.00%
NRs. m
Contract revenue recognised in the period 1,014.0
Contract costs incurred and recognised profits (less recognised losses) to 1,202.0
date (W)
Advances received 65.0
Gross amount due from customers for contract work: asset (W) 254.3
Gross amount due to customers for contract work: liability (W) (15.6)
Workings
V W X Y Z Total
Particulars NRs. m NRs. m NRs. m NRs. m NRs. m NRs. m
Contract costs incurred 85.8 437.6 386.1 195 85.8 1,190.30
Recognised profits less recognised
losses 27.3 54.6 23.4 -70.2 -23.4 11.7
113.1 492.2 409.5 124.8 62.4 1,202.00
Less: progress billings to date -78 -405.6 -296.4 -140.4 -42.9 -963.3
Due from customers 35.1 86.6 113.1 19.5 254.3
Due to customers -15.6 -15.6
Information about business segments: JYCE Group
Office Office Computer

furniture stationery products Other Consolidated
Revenue: NRs.m NRs.m NRs.m Division Elimination NRs. m
External sales 800 500 400 100 1800
Intersegment sales 200 150 80 0 -430 1800
Total revenue 1000 650 480 100 -430
Result:
Segment result 180 90 72 18 360
Unallocated expenses -50
Finance costs -60
Share of profit of associates 10 10
Income tax expense -70
Profit for the period 190
Other information:
Segment assets 440 170 96 20 726
Investment in associate 70 70
Unallocated asset 4
Consolidated total assets 800
Segment liabilities 75 54 12 3 144
Unallocated liabilities 6
Consolidated total liabilities 150
Workings
Segment result NRs.m

Gross profit 600
Other income 60
Net profit 360
Allocated 180
Office furniture 90
Office stationery 72
Computer products 18
Other divisions 360
Office Office
furniture stationery NRs. Computer products
Segment assets NRs. m m NRs. m
Property, plant, and equipment 300 100 80
Goodwill 60 30 10
Current assets 80 40 6
440 170 96
Segment liabilities
Noncurrent 30 21 4
Current 45 33 8
75 54 12
The unrealized profit of NRs. 1 million will have to be eliminated from the consolidated income
statement and from the consolidated balance sheet in group inventory. The sale of the inventory
is a taxable event, and it causes a change in the tax base of the inventory. The carrying amount in
the consolidated financial statements of the inventory will be NRs. 10 million, but the tax base is
NRs. 11 million. This gives rise to a deferred tax asset of NRs. 1 million at the tax rate of 30%,
which is NRs. 300,000 (assuming that both the parent and subsidiary are resident in the same tax
jurisdiction)
a. Economic Value Added (EVA) is primarily a benchmark to measure earnings efficiency. EVA
as a residual income measure of financial performance is simply the operating profit after tax
less a charge for the capital employed, equity as well as debt, used in the business.
Mathematically EVA= OPBT  Tax  (TCE × COC)
Where:
OPBT = Opening Profit Before Tax
TCE = Total Capital Employed
COC = Cost of Control
Because EVA includes both profit and loss as well as balance sheet efficiency as well as the
opportunity cost of investor capital - it is better linked to changes in shareholders wealth and is
superior to traditional financial measures such as PAT or percentage of return measures such as
ROCE or ROE.
EVA, additionally, is a tool for management to focus on the impact of their decisions in
increasing shareholders wealth. These include both strategic decisions such as what investments
to make, which business to exit, what financing structure is optimal; as well as operational
decisions involving trade-offs between profit and asset efficiency such as whether to make
inhouse or outsource, repair or replace an equipment, whether to make short or long production
runs etc.
Most importantly the real key to increasing shareholders wealth is to integrate EVA framework
in four key areas, viz., to measure business performance, to guide managerial decision making,
to align managerial incentives with the shareholders' interests and to improve the financial and
business literacy throughout the organisation.
To better align managers interests with shareholders' - the EVA framework needs to be
holistically applied in an integrated approach - simply measuring EVA is not enough; it must
also become the basis of key management decisions as well as be linked to senior management's
variable compensation.
However, EVA as a strategic tool has the following limitations:
1. Not easy to use; too complicated for small businesses.
2. Recommends inexpensive debts in order to reduce the cost of capital.
3. A passive tool, measures past performance
b. Corporate Social Reporting is the information communique with respect to discharge of social
responsibilities of corporate entity. The transition in accounting function from historical cost
based profitability accounting to social responsibility accounting is a good fit to the present-day
data requirement of the ―Users of accounts‖.
The content of Corporate Social Report is essentially based on the social objectives,
namely Net Income Contribution, Human Resource Contribution, Public Contribution,
Environmental Contribution and Product or Service Contribution.
Considering the major socio-economic problems of the country, eight major heads can be
identified for social reporting purpose:
(i) Employment Opportunities;
(ii) Foreign Exchange Transactions;
(iii) Energy Conservation;
(iv) Research and Development;
(v) Contribution to Government Exchequer;
(vi) Social Projects;
(vii) Environmental Control;
(viii) Consumerism.
Initially, it is difficult to express social costs incurred by a corporate enterprise and social
benefits generated in money terms. Until suitable methologies are available for conversion
of social cost-benefit in money terms, it is desirable to begin with descriptive social report.
Further research is necessary in this area either to improve heads of corporate social reporting
in the context of dynamic socio-economic environment.
c. Qualitative characteristics are the attributes that make the information provided in the financial
statements useful to the users. The four principal qualitative characteristics are: (i)
Understandability, (ii) Relevance, (iii) Reliability and (iv) Comparability.
(i) Understandability: An essential, quality of the information provided in the financial
statement is that it is readily understandable by the users. For this purpose, users are deemed
to have reasonable knowledge of business and economic activities. However, information
about complex matters should be included in the financial statements which is relevant to the
users of accounts for their economic decision making although this may be too difficult for
certain users to understand.
(ii) Relevance: To be useful, information must be relevant to the decision making needs of all
the users. Information has the quality of relevance when it influences the economic decisions
of users by helping them to evaluate past, present or future events or confirming, or
correcting their past evaluations.
Relevance of an information is affected by its nature and materiality. In some cases, the
nature of information alone is sufficient to determine its relevance. In other cases, both the
nature and materiality are important:
(iii) Reliability: To be useful, information must also be reliable. Information has the
quality of reliability when it is free from material error and bias and can be depended upon
by users to represent faithfully that which, it either purports to represent or could reasonably
be expected to represent.
Reliability of the financial statement information is dependent on faithful representation,
substance over form, neutrality, prudence, and completeness. If information is to represent
faithfully the transactions and other events, it is necessary that they are accounted for and
presented in accordance with their substance and economic reality and not merely by their
legal form. To be reliable, the information contained in financial statement must be neutral
i.e. free from bias. Financial statements are not neutral if, by the selection or presentation of
information, they influence the making of a decision or judgement in order to achieve a pre-
determined result or outcome. Prudence is the inclusion of a degree of caution in the exercise
of the judgements needed in making the estimates required under conditions of uncertainty.
To be reliable, information in financial statements must also be complete within the bounds
of materiality and cost. An omission can cause information to be false or misleading and thus
unreliable and deficient in terms of its relevance.
(iv) Comparability: Users must be able to compare the financial statements of an
enterprise through time in order to identify trends in its financial position and performance.
An important implication of this qualitative characteristic is that users should be informed of
the accounting policies employed in the preparation of the financial statements, any changes
in those policies and the effects of such changes.
Advanced Auditing
Code of ethics
Question No. 1
―Ethical safeguard protects professionalism‖. Do you agree?
Answer
Yes, I fully agree that ethical safeguard is a key to uphold professionalism. During professional
practice several ethical threats are encountered by the professionals. Such threats are prone to
reduce the effectiveness of a professional person and his/her ability to act as per intended
objective. As such an ethical safeguard is a constraint or control placed upon a professional
person to prevent the occurrence of any of the ethical threats namely self-interest, self-review,
advocacy, familiarity and intimidation threats. The primary benefit of any ethical safeguard is to
protect professionals from the effects of an ethical threat. Ethical threats, unchecked by effective
ethical safeguards, undermine the professional reputation and introduce unhelpful factors which
make it difficult for accountants to operate normally.
Question No. 2
Quantum ltd. would like to use your expertise on one of the proposals that it is going to submit to
ABC Ltd. However, you are caught in a dilemma as you are a statutory auditor of ABC Ltd.
Under such circumstances what matters should you consider in deciding whether to provide
advice to Quantum Ltd.?
Answer
A potential conflict between the interests arises from offering any advice in such case. A conflict
of interest may create potential threats to objectivity, confidentiality or other threats to
compliance with the fundamental principles of the ICAN Code of Ethics for Professional
Accountants.
In such scenario, there may also be problems to do with confidentiality of information, as the
confidential information of audit client may be exposed to the other client.
In dealing with conflicts of interest, the code requires the significance of any threats to be
evaluated, and safeguards to be applied when necessary to eliminate the threats or reduce them to
an acceptable level. The most important safeguard is disclosure to both parties of the potential
conflict of interest and obtain their consent to act.
Other possible safeguards could include:

– The use of separate engagement teams;
– Procedures to prevent access to information (for example, strict physical separation of such
teams, confidential and secure data filing);
– Clear guidelines for members of the engagement team on issues of security and confidentiality;
– The use of confidentiality agreements signed by employees and partners of the firm; and
– Regular review of the application of safeguards by a senior individual not involved with
relevant client engagements.
Accordingly I may decide, having evaluated the threats and available safeguards, that the threats
cannot be reduced to an acceptable level, in which case I shall decline from giving advice to
Quantum Ltd.
Question No. 3
Many professional accountants are conservative enough to avoid assignments where there is a
possibility of ethical conflict without weighing the courses available to resolve the same. Under
such circumstances, what measures would you like to suggest the professional accountants for
the resolution of ethical conflict that is envisaged in the ICAN code of ethics 2015, so that they
don‘t bluntly move away from taking the assignments..
Answer
A professional accountant may be required to resolve a conflict in complying with the
fundamental principles. When initiating either a formal or informal conflict resolution process,
the following factors, either individually or together with other factors, may be relevant to the
resolution process:
(a) Relevant facts;
(b) Ethical issues involved;
(c) Fundamental principles related to the matter in question;
(d) Established internal procedures; and
(e) Alternative courses of action.
Having considered the relevant factors, a professional accountant shall determine the appropriate
course of action, weighing the consequences of each possible course of action. If the matter
remains unresolved, the professional accountant may wish to consult with other appropriate
persons within the firm or employing organization for help in obtaining resolution.
Where a matter involves a conflict with, or within, an organization, a professional accountant

shall determine whether to consult with those charged with governance of the organization, such
as the board of directors or the audit committee.
It may be in the best interests of the professional accountant to document the substance of the
issue, the details of any discussions held, and the decisions made concerning that issue.
If a significant conflict cannot be resolved, a professional accountant may consider obtaining

professional advice from the relevant professional body or from legal advisors. The professional
accountant generally can obtain guidance on ethical issues without breaching the fundamental
principle of confidentiality if the matter is discussed with the relevant professional body on an
anonymous basis or with a legal advisor under the protection of legal privilege. Instances in
which the professional accountant may consider obtaining legal advice vary. For example, a
professional accountant may have encountered a fraud, the reporting of which could breach the
professional accountant‘s responsibility to respect confidentiality. The professional accountant
may consider obtaining legal advice in that instance to determine whether there is a requirement
to report.
If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a
professional accountant shall, where possible, refuse to remain associated with the matter
creating the conflict. The professional accountant shall determine whether, in the circumstances,
it is appropriate to withdraw from the engagement team or specific assignment, or to resign
altogether from the engagement, the firm or the employing organization.
Corporate Governance and Best Practices
Question No. 4
How can an audit function within an entity improve the corporate governance structure of a
company?
Answer
Corporate Governance is the process and structure used to direct and manage the business and
affairs of the corporations with the objective of enhancing shareholder value, which includes
ensuring the financial viability of the business. The process and structure define the division of
power and establish mechanisms for achieving accountability among shareholders, the board and
management. These requirements are well complimented by the audit functions within a
company.
There are two types of audit functions within a company. One is audit committee overlooking the
internal audit and other control functions and the other one being statutory audit. The audit
committee composed of independent nonexecutives with clear terms of reference act as a watch
dog in monitoring the compliance with the applicable laws and regulations. It acts as a
mechanism to promote transparency, accountability and control within an organization. On the
other hand the statutory auditor plays a central role in good corporate governance by virtue of:
o audit financial statements and other (financial) reporting;
o attest internal control statements, where applicable; and
o review or attest corporate governance statements where applicable.
Accordingly, the audit functions support the best practice of good corporate governance by
ensuring:
o Ensuring best management practices;
o Appropriate delegation of authority and responsibility;
o Compliance with the applicable laws and regulations;
o Adherence to the management policies and procedures;
o Review of internal control structures including financial, operational and compliance
controls;
o Safeguard of assets; and
o Overall transparency and accountability within an organization; and
o Timely and accurate financial reporting to the stakeholders.
Nepal Standards on Auditing
Question No. 5
In the developing countries like Nepal, the general public as well as the regulators often expects
the auditors to attest the financial statement as absolutely free from any kinds of frauds,
irregularities or non-compliances. With this very notion, whenever there is some fraud within the
organization, the first person to be convicted is always the auditor. The recent tax law of the
country also introduced similar provisions of charging the auditors for any sort of misstatements
in the financial statements.
Under such circumstances, don‘t you think that the time has come that the auditors should be
more descriptive in expressing their opinion quoting all the inherent limitations and scope of the
audit in a more simplistic manner rather than just stating ―True and Fair View‖ which in many
case is vague and highly technical for the general stakeholders and the regulators?
Answer
It is a point that the use of the term ―True and Fair View‖ as well as the format of the audit report
is somewhat technical. However, just because some group of stakeholders or the regulators have
difficulty in understanding the audit report does not make sense in making the language of the
audit report simpler. Even though, the language made simpler does not necessarily help
everybody to understand the wholesome spirit of the audit and its scope and limitations because
for somebody to understand all the technical details have to have a fair knowledge of Nepal
Standards on Auditing, which in itself is highly technical for their liking.
Therefore the best way to convey the message about the objective, scope and the limitations of
the audit to the stakeholders is to educate them on a broader scale about the basics of the
profession. Seminars, training, tutorials and ad campaigning has to be done to educate the society
about the whole phenomenon of audit. That way only the mindset of the people could be
changed and the profession could flourish rather than changing the audit report to make it
simpler and expressive.
Question No. 6
How would you explain the term ―True and Fair View‖ in a simple manner to an investor
without sound knowledge of auditing?
Answer
True and fair view is an opinion expressed by an auditor on the state of the financial statements
of an organization. It implies that the financial statements are presented fairly in all materials
respect the position, performance, cash flows and changes in equity of the organization. The
auditor expresses such opinion upon assessment of the internal control system of the
organization and test checking the financial transactions carried out during the fiscal year. The
auditors act is guided by the provisions set forth in the Nepal Standards on Auditing together
with the Code of Ethics applicable to the professional accountants.
As per NSA 200 ―Objectives and General Principles Governing an Audit of Financial
Statements‖, the auditor‘s expression of true and fair view is supposed to be received as only the
―Reasonable Assurance and not the Absolute Assurance‖ of the state of the financial statements.
This implies that the users are not supposed to absolutely rely on auditor‘s judgment for making
their financial decisions relating to the organization. This is because the auditor is not expected
to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the
financial statements are free from material misstatement due to fraud or error. This is because
there are inherent limitations of an audit, which result in most of the audit evidence on which the
auditor draws conclusions and bases the auditor‘s opinion being persuasive rather than
conclusive.
Broadly speaking, the financial statements are considered as presenting to true and fair if:
 The information contained in them are not materially misstated;
 There is an appropriate application of Nepal Accounting Standards, with additional
disclosure in the case of companies registered under Companies Act 2063. In the case of
other entities there is an appropriate application of generally accepted accounting
principles as is applicable; and
 They comply with the provisions of applicable laws and regulations of the country.
Question No. 7
You are an audit senior of Hessonite & Co and are in the process of reviewing the inventory
system documentation for your audit client, Lemon Quartz Co (Quartz) which manufactures
computer equipment. The company‘s factory and warehouse are based on one large site, and
their year end is 30 June 2016. Quartz is planning to undertake a full inventory count at the year
end of its raw materials, work in progress and finished goods and you will be attending this
count. In preparation you have been reviewing the inventory count instructions for finished
goods provided by Quartz.
The count will be undertaken by 15 teams of two counters from the warehouse department with
Quartz‘s financial controller providing overall supervision. Each team of two is allocated a
number of bays within the warehouse to count and they are provided with sequentially numbered
inventory sheets which contain product codes and quantities extracted from the inventory
records. The counters move through each allocated bay counting the inventory and confirming
that it agrees with the inventory sheets. Where a discrepancy is found, they note this on the sheet.
The warehouse is large and approximately 10% of the bays have been rented out to third parties
with similar operations; these are scattered throughout the warehouse. For completeness, the
counters have been asked to count the inventory for all bays noting the third party inventories on
separate blank inventory sheets, and the finance department will make any necessary
adjustments.
Some of Quartz‘s finished goods are high in value and are stored in a locked area of the
warehouse and all the counting teams will be given the code to access this area. There will be no
despatches of inventory during the count and it is not anticipated that there will be any deliveries
from suppliers.
Each area is counted once by the allocated team; the sheets are completed in ink, signed by the
team and returned after each bay is counted. As no two teams are allocated the same bays, there
will be no need to flag that an area has been counted. On completion of the count, the financial
controller will confirm with each team that they have returned their inventory sheets.
Required:
In respect of the inventory count procedures for Lemon Quartz Co:
(i) Identify and explain FIVE deficiencies;
(ii) Recommend a control to address each of these deficiencies; and
(iii) Describe a TEST OF CONTROL the external auditors would perform to assess if each of
these controls, if implemented, is operating effectively.
(Source: Question adopted from March/June 2016 – Sample Questions of ACCA Exams)
Answer
Deficiencies Controls Test of controls
The count will be undertaken The counting teams should be Attend the year-end count and
by teams of warehouse staff. independent of the warehouse; enquire of the counting teams
hence members of alternative which department they
There should be a segregation departments should undertake normally work in. Inspect the
of roles between those who the counting rather than the updated inventory count
have day-to-day responsibility warehouse staff. instructions to verify that they
for inventory and those who have been communicated to
are checking it. If the same members of staff outside the
team are responsible for warehouse department.
maintaining and checking
inventory, then errors and
fraud could be hidden.
The inventory sheets contain The count sheets should be Inspect a sample of the
quantities as per the inventory sequentially numbered and counting sheets being used by
records. There is a risk that the contain product codes and the counting teams to verify
counting teams may simply descriptions but no quantities. that only the inventory product
agree with the pre-printed codes and description are pre-
quantities rather than counting printed on them.
the balances correctly,
resulting in significant errors
in inventory.
There are 15 teams of Each team should be informed Observe the counting teams to
counters, each team having that both members are assess if they are counting
two members of staff. required to count their together or if one counts and
However, there is no clear assigned inventory separately. the other then double checks
division of responsibilities Therefore, one member counts the quantities counted. Review
within the team. Therefore, and the second member also the records of the sample
both members of staff could undertakes a count and then checks undertaken by the
count together rather than records the inventory on the supervisor of the inventory
checking each other‘s count; count sheets correctly. In count.
and errors in their count may addition, the financial
not be identified. controller supervising the
count should undertake some
sample checks of inventory
counted by each team
Inventory owned by third All inventories belonging to Enquire of the count
parties is also being counted third parties should be moved supervisor where the third
by the teams with adjustments to one location. This area party inventory is to be stored,
being made by the finance should be clearly marked and confirm through inspection of
team to split these goods out excluded from the counting the counting sheets that these
later. There does not appear to process. bays are not included on any
be a method for counters to pre-printed forms.
identify which items are third
party inventory.
There is a risk that these goods
may not be correctly removed
from the inventory count
sheets, resulting in inventory
being overstated.
High value inventory which is The high value inventory Attempt to access the area
normally stored in a secure should be kept in the locked where the high value
location will be accessible by area of the warehouse. Senior inventory is stored; this should
all team members as they will members of the team should not be possible without the
be given the access code. This be allocated to count these access code. At the year-end
significantly increases the risk goods, and they should be visit attempt to access with the
of theft as any member of the given the access code to enter code which was supplied
counting team could the area. Upon completion of during the inventory count.
subsequently access these the count the access code
goods. should be changed.
Each bay of the warehouse is Once all inventories have been Observe the counting team
counted once only. If counted once, each area undertake second counts of all
inventory is only checked should be recounted by a areas; confirm that different
once, then counting errors different team. Any teams undertake this process.
may arise resulting in under or differences on the first count
overstated inventory should be promptly notified to
the count supervisor and a
third count undertaken if
necessary.
If a full second count would
be too time-consuming for the
company, then sample checks
on the inventory counted
should be undertaken by a
different counting team.
Once areas are counted, the All bays should be flagged as Physically confirm that the
teams are not marking the completed, once the inventory completed bays of the
bays as completed. Therefore has been counted. In addition, warehouse have been flagged
there is the risk that some the count supervisor should to indicate that the goods have
areas of the warehouse could check at the end of the count been counted. At the end of
be double counted or missed that all of the bays with the count, review any bays
out. Quartz‘s inventory have been containing Quartz‘s goods
flagged as completed. which have not been flagged.
The inventory sheets are After the counting has Review the sequence of the
sequentially numbered and at finished, each team should inventory sheets for any gaps
the end of the count they are return all of their sequentially in the sequence and obtain an
given to the count supervisor numbered sheets and the explanation from the count
who confirms with each team supervisor should check the supervisor.
that they have returned all sequence of all sheets at the
sheets. However, no sequence end of the count.
check of the sheets is
performed. If sheets are
missing, then the inventory
records could be understated.
Question No. 8
You are an audit supervisor of Amethyst & Co and are currently planning the audit of your
client, Aquamarine Co (Aquamarine) which manufactures elevators. Its year end is 31 July 2016
and the forecast profit before tax is $15·2 million.
The company undertakes continuous production in its factory, therefore at the year end it is
anticipated that work in progress will be approximately $950,000. In order to improve the
manufacturing process, Aquamarine placed an order in April for $720,000 of new plant and
machinery; one third of this order was received in May with the remainder expected to be
delivered by the supplier in late July or early August.
At the beginning of the year, Aquamarine purchased a patent for $1·3 million which gives them
the exclusive right to manufacture specialised elevator equipment for five years. In order to
finance this purchase, Aquamarine borrowed $1·2 million from the bank which is repayable over
five years.
In January 2016 Aquamarine outsourced its payroll processing to an external service
organisation, Coral Payrolls Co (Coral). Coral handles all elements of the payroll cycle and sends
monthly reports to Aquamarine detailing the payroll costs. Aquamarine ran its own payroll until
31 December 2015, at which point the records were transferred over to Coral.
The company has a policy of revaluing land and buildings and the finance director has
announced that all land and buildings will be revalued at the year end. During a review of the
management accounts for the month of May 2016, you have noticed that receivables have
increased significantly on the previous year end and against May 2015.
The finance director has informed you that the company is planning to make approximately 65
employees redundant after the year end. No decision has been made as to when this will be
announced, but it is likely to be prior to the year end.
Required:
(a) Describe SIX audit risks, and explain the auditor‘s response to each risk, in planning the audit
of Aquamarine Co.
(b) Explain the additional factors Amethyst & Co should consider during the audit in relation to
Aquamarine Co‘s use of the payroll service organisation.
(Source: Question adopted from March/June 2016 – Sample Questions of ACCA Exams)
Answer
a.
Audit risks Auditors‘ responses
Aquamarine Co (Aquamarine) undertakes The auditor should discuss with management
continuous production and the work in the process they will undertake to assess the
progress balance at the year end is likely to be cut-off point for work in progress at the year
material. As production will not cease, the end. This process should be reviewed by the
exact cut-off of the work in progress will need auditor while attending the year-end inventory
to be assessed. If the cut-off is not correctly count. In addition, consideration should be
calculated, the inventory valuation may be given as to whether an independent expert is
under or over stated. required to value the work in progress. If so,
this will need to be arranged with consent from
management and in time for the year-end
count.
Aquamarine has ordered $720,000 of plant and Discuss with management as to whether the
machinery, two-thirds of which may not have remaining plant and machinery ordered have
been received by the year end. arrived; if so, physically verify a sample of
Only assets which physically exist at the year these assets to ensure existence and ensure
end should be included in property, plant and only appropriate assets are recorded in the non-
equipment. If items not yet delivered have been current asset register at the year end.
capitalised, PPE will be overstated. Determine if the asset received is in use at the
Consideration will also need to be given to year end by physical observation and if so, if
depreciation and when this should commence. depreciation has commenced at an appropriate
If depreciation is not appropriately charged point.
when the asset is available for use, this may
result in assets and profit being over or
understated.
A patent has been purchased for $1·3 million, The audit team will need to agree the purchase
and this enables Aquamarine to manufacture price to supporting documentation and to
specialised elevator equipment for the next five confirm the useful life is five years.
years. In accordance with IAS 38 Intangible The amortisation charge should be recalculated
Assets, this should be included as an intangible in order to ensure the accuracy of the charge
asset and amortised over its five-year life. and that the intangible is correctly valued at the
If management has not correctly accounted for year end.
the patent, intangible assets and profits could
be overstated.
The company has borrowed $1·2 million from During the audit, the team would need to
the bank via a five-year loan. This loan needs confirm that the $1·2 million loan finance was
to be correctly split between current and non- received. In addition, the split between current
current liabilities in order to ensure correct and non-current liabilities and the disclosures
disclosure. for this loan should be reviewed in detail to
ensure compliance with relevant accounting
standards. Details of security should be agreed
to the bank confirmation letter.
Also, as the level of debt has increased, there The finance costs should be recalculated and
should be additional finance costs. There is a any increase agreed to the loan documentation
risk that this has been omitted from the for confirmation of interest rates. Interest
statement of profit or loss leading to payments should be agreed to the cash book
understated finance costs and overstated profit. and bank statements to confirm the amount
was paid and is not therefore a year-end
payable.
During the year Aquamarine outsourced its Discuss with management the extent of records
payroll processing to an external service maintained at Aquamarine and any monitoring
organisation. A detection risk arises as to of controls undertaken by management over
whether sufficient and appropriate evidence is the payroll charge. Consideration should be
available at Aquamarine to confirm the given to contacting the service organisation‘s
completeness and accuracy of controls over auditor to confirm the level of controls in
payroll. If not, another auditor may be required place.
to undertake testing at the service organisation.
The payroll processing transferred to Coral Discuss with management the transfer process
Payrolls Co from 1 January. If any errors undertaken and any controls put in place to
occurred during the transfer process, these ensure the completeness and accuracy of the
could result in the payroll charge and related data.
employment tax liabilities beingWhere possible, undertake tests of controls to
under/overstated. confirm the effectiveness of the transfer
controls. In addition, perform substantive
testing on the transfer of information from the
old to the new system.
The land and buildings are to be revalued at the Discuss with management the process adopted
year end; it is likely that the revaluation for undertaking the valuation, including
surplus/deficit will be material. whether the whole class of assets was revalued
The revaluation needs to be carried out and and if the valuation was undertaken by an
recorded in accordance with IAS 16 Property, expert. This process should be reviewed for
Plant and Equipment, otherwise non-current compliance with IAS 16.
assets may be incorrectly valued.
Receivables for the year to date are Discuss with management the reasons for the
considerably higher than the prior year. If this increase in receivables and management‘s
continues to the year end, there is a risk that process for identifying potential irrecoverable
some receivables may be overvalued as they debt. Test controls surrounding management‘s
are not recoverable. credit control processes.
Extended post year-end cash receipts testing
and a review of the aged receivables ledger to
be performed to assess valuation. Also
consider the adequacy of any allowance for
receivables.
Aquamarine is planning to make Discuss with management the status of the
approximately 65 employees redundant after redundancy announcement; if before the year
the year end. The timing of this announcement end, review supporting documentation to
has not been confirmed; if it is announced to confirm the timing. In addition, review the
the staff before the year end, then under IAS 37 basis of and recalculate the redundancy
Provisions, Contingent Liabilities and provision.
Contingent Assets a redundancy provision will
be required at the year end. Failure to provide
will result in an understatement of provisions
and expenses.
b) Payroll service organisations Additional factors Amethyst & Co should consider in relation to
Aquamarine‘s use of the service organisation, Coral Payrolls Co (Coral) include:
– The audit team should gain an understanding of the services being provided by Coral,
including the materiality of payroll and the basis of the outsourcing contract.
– They will need to assess the design and implementation of internal controls over
Aquamarine‘s payroll at Coral.
– The team may wish to visit Coral and undertake tests of controls to confirm the operating
effectiveness of the controls.
– If this is not possible, Amethyst & Co should contact Coral‘s auditors to request either a type 1
(report on description and design of controls) or type 2 report (on description, design and
operating effectiveness of controls).
– Amethyst & Co is responsible for obtaining sufficient and appropriate evidence, therefore no
reference may be made in the audit report regarding the use of information from Coral‘s auditors.
Question No. 9
Discuss the detailed procedures that may be performed by you under an engagement to review
financial statements of a company.
Answer
NSRE 2400 ―Engagements to Review Financial Statements‖, procedures for the review of
financial statements will ordinarily include:
(i) Discuss terms and scope of the engagement with the client and the engagement team.
(ii) Prepare an engagement letter setting forth the terms and scope of the engagement.
(iii) Obtain an understanding of the entity‘s business activities and the system for recording
financial information and preparing financial statements.
(iv) Inquire whether all financial information is recorded:
(a) Completely;
(b) Promptly; and
(c) After receiving necessary authorization.
(v) Obtain the trial balance and determine whether it agrees with the general ledger and the
financial statements.
(vi) Consider the results of previous audits and review engagements, including accounting
adjustments required.
(vii) Inquire whether there have been any significant changes in the entity from the previous year
(e.g., changes in ownership or changes in capital structure).
(viii) Inquire about the accounting policies and consider whether:
(a) They comply with the applicable accounting standards;
(b) They have been applied appropriately; and
(c) They have been applied consistently and, if not, consider whether disclosure has
been made of any changes in the accounting policies.
(ix) Read the minutes of meetings of shareholders, the board of directors and other appropriate
committees in order to identify matters that could be important to the review.
(x) Inquire if actions taken at shareholder, board of directors or comparable meetings that affect
the financial statements have been appropriately reflected therein.
(xi) Inquire about the existence of transactions with related parties, how such transactions have
been accounted for and whether related parties have been properly disclosed.
(xii) Inquire about contingencies and commitments.
(xiii) Inquire about plans to dispose of major assets or business segments.
(xiv) Obtain the financial statements and discuss them with management.
(xv) Consider the adequacy of disclosure in the financial statements and their suitability as to
classification and presentation.
(xvi) Compare the results shown in the current period financial statements with those shown in
financial statements for comparable prior periods and, if available, with budgets and
forecasts.
(xvii) Obtain explanations from management for any unusual fluctuations or inconsistencies in
the financial statements.
(xviii) Consider the effect of any unadjusted errors – individually and in aggregate. Bring the
errors to the attention of management and determine how the unadjusted errors will
influence the report on the review.
(xix) Consider obtaining a representation letter from management.
Question No. 10
How would you verify the existence of related party transactions during an audit? Explain with
reference to NSA 550 ―Related Parties‖.
Answer
NSA 550 ―Related Parties‖, During the audit, the auditor shall remain alert, when inspecting
records or documents, for arrangements or other information that may indicate the existence of
related party relationships or transactions that management has not previously identified or
disclosed to the auditor.
• Entity income tax returns.
• Information supplied by the entity to regulatory authorities.
• Shareholder registers to identify the entity‘s principal shareholders.
• Statements of conflicts of interest from management and those charged with
governance.
• Records of the entity‘s investments and those of its pension plans.
• Contracts and agreements with key management or those charged with governance.
• Significant contracts and agreements not in the entity‘s ordinary course of business.
• Specific invoices and correspondence from the entity‘s professional advisors.
• Life insurance policies acquired by the entity.
• Significant contracts re-negotiated by the entity during the period.
• Internal auditors‘ reports.
• Documents associated with the entity‘s filings with a securities regulator (e.g,
prospectuses).
Arrangements that may indicate the existence of previously unidentified or undisclosed
related party relationships or transactions
In particular, the auditor shall inspect the following for indications of the existence of
related party relationships or transactions that management has not previously identified or
disclosed to the auditor:
(a) Bank, legal and third party confirmations obtained as part of the auditor‘s procedures;
(b) Minutes of meetings of shareholders and of those charged with governance; and
(c) Such other records or documents as the auditor considers necessary in the circumstances
of the entity.
Cases on corporate laws

Question No. 11
Syabun Ltd. is a listed hydro power company. 15% of its equity shares are owned by the
Government of Nepal. The company declared and distributed interim dividend of 15% on its
paid up capital of Rs. 1 billion. The interim dividend was distributed as from 10% of the profit of
the previous year and 5% from the profit of the current year.
As an auditor of the said company, what would be your comment on the action of the company
with reference to the legal provision prescribed by the Companies Act, 2063.
Answer:
To comment on the above case we have to look into following provisions contained in the
Companies Act 2006:
 Under sec 182 (7), the board of directors of the company can distribute interim dividend
from the profits of the previous year provided such provisions are mentioned in its AOA
and that its previous year‘s financial statements are certified by the auditors and approved
by the board of directors; and
 Under sec 182 (2), companies owned by Government of Nepal fully or partly can distribute
dividend only after prior approval of Government of Nepal. In this regard Government of
Nepal may issue necessary directive for the distribution of dividend by such company.
In the above case, out of the total interim dividend of 15%, the interim dividend distributed from
10% of the profit of the previous year seems complying with the act assuming that:
 Government of Nepal fully or partly has granted prior approval for the distribution; and
 Provision for interim dividend is mentioned in the AOA of the company and that its
previous year‘s financial statements are certified by the auditors and approved by the board
of directors.
However, the interim dividend of 5% from the profit of the current year is a violation of Section
182 of the Companies Act 2006 that states that the Board of directors of the Bhote Koshi Hydro
power company can only propose the dividend, which will become final only after approval by
shareholders at the AGM as well as prior approval of the Government of Nepal.
Question No. 12
The General Manager of the Food Corporation Ltd. (Corporation wholly owned by the
Government of Nepal) is of the opinion that its financial statements can be audited by the
practicing chartered accountants. Comment upon the opinion of the GM.
Answer:
No, the financial statements of the Food Corporation Ltd. cannot be audited by the practicing
chartered accountants.
As per Section 6 (1) of the Audit Act, 2048, notwithstanding anything contained in the existing
laws, the audit of the corporate bodies wholly owned by the government of Nepal shall be
audited by the Auditor General pursuant to the said Act. However, under section 6 (2) of the act
the Auditor General may appoint may appoint professional auditors as assistants owing to
constraint of time and resource to audit the corporate bodies wholly owned by the government of
Nepal.
Question No. 13
The promoters of the regional level development banks from four different districts of Nepal
would like to merge as one owing to the increment in capital base required by the Nepal Rastra
Bank. As such, they have come to you for a professional advice on legal provisions and
procedures of the merger.
Required:
As a professional, you are required to give them advice considering all the applicable laws,
regulations and directives issued by the regulators.
Answer:
Section 69 of BAFIA, 2063 has laid down provisions regarding the mergers. As per this section
following action should be taken by these banks:
1. If any licensed institution wishes to be merged with or merging another licensed institution,
both the merged licensed institutions shall adopt a special resolution to that effect in their
respective general meetings and make a joint application, setting out the following matters,
Nepal Rastra Bank for approval:
(a) Audit report of the last fiscal year of the merging licensed institution, along with its
balance sheet, profit and loss account, cash flow statement and other financial
statements;
(b)A copy of the written consent of the creditors of both the merging and merged licensed
institutions to merge or to be merged;
(c) Valuation of the movable and immovable properties of, and actual details of assets and
liabilities of, the merging licensed institution;
(d) A copy of the decision as to the employees of the merging licensed institution;
(e) Such other necessary matters as prescribed by Nepal Rastra Bank in relation to the
merger of the licensed institutions.
2. If an application is made for approval pursuant to sub-section (1), Nepal Rastra Bank shall
examine the documents and returns attached with the application and decide whether or not to
grant approval for the merger of the licensed institutions with each other and give information
thereof to the concerned licensed institutions within forty five days, and within a period of
additional days if Nepal Rastra Bank has demanded any returns or document in the course of
making decision.
3. Notwithstanding anything contained elsewhere in this Act, Nepal Rastra Bank shall not grant
approval for the merger of any two more than two licensed institutions if it sees that the
merger of such licensed institutions is likely to create an environment of unhealthy
competition or to give rise to the monopoly or controlled practices of any licensed institution
in the financial sector.
4. On receipt of an approval from Nepal Rastra Bank for merger pursuant to Sub-section (2), all
the assets and liabilities of the merging licensed institution shall be transferred to the merged
licensed institution.
5. Nepal Rastra Bank shall maintain records of the merged licensed institutions.
6. Nepal Rastra Bank may issue necessary directives in relation to other procedures relating to
the merger of licensed institutions.
7. Nepal Rastra Bank shall publish in a newspaper of national circulation at least once within
thirty days after the date of decision a notice containing the particulars of the decision made
by it in relation to the merger of any licensed institution for the information of the general
public.
Nepal financial reporting standards/Nepal accounting standards

Question No. 14
ABC Garments Ltd. is facing difficulty in getting demand for one of its Toddler products.
Accordinlgy it would like to assess impairment of one of its manufacturing units producing
Toddlers Nappies that is considered as a seperate Cash Generating Unit. The detail regarding the
unit is as under:
Carrying amount
Assets (Rs.) Fair value(Rs.) Value in use (Rs.)
Factory shed 40 50 -
Patent 20 - -
Equipment 80 60 70
Machineries 50 30
35
Furniture 25 20 0
Inventories 30 - -
Cash 10 - -
Receivables 60 -
Required:
a) Work out impairment loss if any in the above case, if the recoverable amount of the CGU
is calculated as Rs. 180.
b) Calculate the carrying amount of the asset after adjusting impairment loss.
Answer
a. First we have to calculate the calculate the carrying amount of CGU
Carrying amount
Assets (Rs.)
Factory shed 40
Patent 20
Equipment 80
Machineries 50
Furniture 25
Total 215
The we have to calculate the impairment loss of the CGU considering the recoverable amount of
CGU that is given as Rs. 180. Accordingly the impairment loss comes to Rs. 35 calculated as
under:
Particulars (Rs.)
Carrying amount of CGU 215
Recoverable amount of CGU 180
Impairment loss 35
b. For the calculation of carrying amount after adjusting impairment loss, we have to
allocate the impairment loss on a prorate basis as under:
Carrying Remarks
amount
Carrying amount of Impairment loss after loss
Assets CGU (Rs.) allocation allocation
Asset not impaired as its
fair value is higher than
Factory shed 40 40 carrying amount
Equipment 80 10 70 Loss allocation to the
Machineries 50 15 35 extent recoverable
Furniture 25 5 20 amount*.
Patent 20 5 15 Balance allocation
Carrying amount of CGU after impairment adjustment 180
* Recoverable amount is the higher of the fair value or the value in use.
Question No. 15
You were newly appointed as an accounting consultant for one of the leading departmental store
of the city. Upon discussion with the management you came to know that the store has a program
called ―customer loyalty program‖ under which it awards points for every purchases to the
customer. Such points could then be redeemed by the customers on their subsequent purchase at
the stores. However, you were surprised to know that the management has never accounted for
such award of points and rather they were dealing the matter on a cash basis, i.e. whenever
customer comes to the store and claim for the redemption, such redemption would be treated as
discount to the customer.
Upon further analysis you came up with the following information:

 The departmental store has a policy of awarding 10 points for every purchase of Rs.500
which can be discounted by the customer during further shopping;
 Unutilized points would lapse on expiry of two years from the date of award;
 Value of each point is Rs.0.50.
 During accounting period 2016, the entity awarded 10 million points to various
customers of which 1.8 million points remained outstanding; and
 The management expected that only 80% will be discounted in future of which normally
60-70% are redeemed during the following year.
Now, as a consultant the management is seeking your advice on raising journal entries for the
following transactions:
a. How should the merchant recognize sale of goods worth Rs.1,000,000 on a particular day?
b. How should the redemption transaction be recorded? First show total sale of goods account,
then present the redemption transaction. The total sales of the entity Rs.5,00 million.
c. How much of the deferred revenue should be recognized as the year end 31st December 2016
because of the estimation that only 80% of the outstanding points will be redeemed?
d. In the next year (2017) another 60% of the outstanding points were discounted and the
balance remained outstanding. How much of the deferred revenue should the merchant
recognize?
e. In 2018, 20% of the outstanding points of 2017 are discounted by the customers and
remaining points are lapsed. How much of the deferred revenue should the merchant
recognize?
Answer
a. Accounting for sale of goods
Bank A/c Dr. 1,000,000
To Sales A/c 990,000
To Liability under customer loyalty program 10,000
(Segregation of fair value of revenue into sale of goods and customer loyalty program.
Rs.1,000,000 sales = 20,000 point and fair value of 20,000 points = Rs.10,000)
b. Recording redemption transactions

(10,000,000 – 1,800,000 = 8,200,000 points)
Entry for aggregated sale of goods
Bank/ Debtors A/c Dr. 500,000,000

To Sales A/c 495,000,000
To Liability under customer loyalty program 5,000,000
(Liability for 10,000,000 points)
Entry for sale of goods exclusively for rewards on redemption of points

Liability under customer loyalty program Dr. 4,100,000
To Sales A/c 4,100,000
(8,200,000 points equivalent to Rs. 4,100,000)
c. During 2016, balance of liability under customer loyalty programme stands at Rs.900,000.
During the current year deferral of revenue is to the extent of fair value of outstanding
awards, Rs.720,000 (900,000 × 80% ).
Balance amount of Rs. 180,000 (i.e. 900,000 – 720,000) should be recognized as revenue.
Liability under customer loyalty program Dr. 180,000
(Writing back deferred revenue under customer loyalty program which has been revalued at
the year end, based on the past experience).
d. At the year end of 2017, the entity should reassess the obligation under customer loyalty
program against outstanding points of 2016 for which liability of Rs.720,000 was created
deferring revenue.
60% of the deferred revenue were redeemed during 2017 and the balance points remained
outstanding. So no further revenue recognition other than that linked to redemption of
outstanding points should be recognized.
31st December 2017
Entries for sale of goods exclusively for reward on redemption of points
(60% of Rs. 720,000)
Redemption balance out of 2016 award points valued at Rs.288,000 will appear in the
balance sheet of 2017 under the head liability under customer loyalty program.
e. At the year end of 2018, the entity should reassess the obligation under customer loyalty
program against outstanding points of 2017.
20% of outstanding points of 2017 were redeemed for which:

To Sales A/c 57,600
(20% of 288,000)
Balance points were lapsed for which:

To Income Statement 230,400
Question No. 16
Explain auditors Auditor‘s liability in case of unlawful acts or defaults by clients.
(Question source : ICAN Final Exam : June 2009)
Answer
The auditor's basic responsibility is to report whether in his opinion the accounts show a true and
fair view and in discharging his responsibility he has to see as to how the particular situations
affected his position. The general thinking with regard to unlawful acts or defaults by clients
appears to be that the auditor should not 'aid or abet' but he is apparently not under any legal
obligation to disclose the offence. A professional accountant would himself be guilty of a
criminal offence if he advises his client to commit any criminal offence or helps or encourages in
planning or execution of the same or conceals or destroys evidence to obstruct the course of
public justice or positively assists his client in evading prosecution. A professional accountant in
his capacity as auditor, accountant, or tax representative has access to a variety of information
concerning his clients. On some occasions, he may acquire knowledge that his client has been
guilty of some unlawful act, default, fraud, or other criminal offence. The duty of the
professional accountant in such a case would depend upon the actual circumstances of the
situation. Due consideration should be given to the exact nature of services that a professional
accountant is rendering to his client, i.e. is he representing the client in income-tax proceedings
or is he acting in the capacity of an auditor or an accountant or a consultant.
The Institute of Chartered Accountants has considered the role of chartered accountants in
relation to taxation frauds by an assessee and has made the following major recommendations:
i) If the fraud relates to past years when the accountant did not represent the client, the client
should be advised to make a disclosure. The accountant should also be careful that the past
fraud does not in any way affect the current tax matters.
ii) In case of fraud relating to accounts examined and reported upon by the professional
accountant himself, he should advise the client to make a complete disclosure. In case the
client refuses to do so, the accountant should inform him that he is entitled to dissociate
himself from the case and that he would make a report to the authorities that the accounts
prepared or examined by him are unreliable on account of certain information obtained later.
In making such a report, the contents of the information as such should not be communicated
unless the client consents in writing.
iii) In case of suppression in current accounts, the client should be asked to make a full
disclosure. If he refuses to do so, the accountant should make a complete reservation in his
report and should not associate himself with the return. However, it can be argued that the
auditor has a professional obligation to ensure that the client is fully aware of the seriousness
of the offence and to seriously consider full disclosure of the matter. It has been clearly
established in various case laws that the auditor is expected to know the contents of
documents and records and ascertain whether the affairs of the client are being conducted in
an unlawful manner. It is in the course of the work, he comes across any unlawful acts, it is
his duty to bring it to the notice of the client as also to make a disclosure in his report in
appropriate cases. In this regard, one has to bear in mind the consequence of the act in
relation to the professional code to which an auditor is subjected. Under the code, an auditor
cannot disclose confidential information unless permitted by the client or unless required by
law. Each case has to be judged on its circumstances. However, in every case he has to assess
the implications of the unlawful act or default on the true and fair character of the accounting
statements. The question of liability of an auditor for unlawful acts or defaults by clients
should be considered in the light of the broad parameters given above. However, it appears
that if an auditor was aware of any unlawful act having been committed by client in respect
of accounts audited by him and the unlawfulness was not rectified by proper disclosure or
any other appropriate means, the auditor owes a duty to make a suitable report. If he does
not, he may be held liable, if the true and fair character of the accounts has been vitiated.
Audit under computerized environment

Question No. 17
Push Ltd. transformed its accounting processes from manual to customised accounting software.
Therein, all the transactions are recorded, processed and the final accounts generated from the
system. The management tells you that in view of the voluminous nature of transactions, there is
no need to take printouts and that audit can be conducted on the computer itself. The
management further assures you that any 'query based reports' as required can be generated and
printed.
As a statutory auditor of the company, enumerate the procedures you would adopt to conduct the
audit in such environment.
Answer
A key feature of the accounting software package used by the company definitely involves the
absence of a clear audit trail. In other words, transactions cannot be easily traced or co-related
from the individual supporting documents of those transactions. Moreover, the management does
not wish to print the transactions in view of the voluminous nature since it may involve extensive
costs. This has naturally led to extensive dependence by management upon the "exception
reporting" principle.
From the auditor's point of view, it must also be conceded that the exception reports in the form
of 'query-based reports' which isolate the above data will provide the very material information
that the auditor requires for most of the verification work. The only problem which it raises, and
it is a serious one, is that the auditor cannot simply assume that the programmes which produce
the exception reports are reliable in respect of the following factors:
(i) operating accurately;
(ii) printing out all the exceptions which exist; and
(iii) bound by programmed control parameters which meet the company's genuine
internal control requirements.
In view of the above, the auditor is required to test the invisible processes which purport to
embody the controls, and produce the output such as it is. These tests, which invariably involve
the use by the auditor of the computer itself, are known as tests through the computer. In that
approach, the auditor starts by proving the accuracy of the input data, and then thoroughly
examines (by applying tests) the processing procedures with a view to establishing the following
that:
(i) all input is actually entered into the computer.
(ii) neither the computer nor the operators can cause undetected irregularities in the
final reports.
(iii) the programmes appear, on the evidence of rejection and exception routines, to
be functioning correctly.
(iv) all operator intervention during processing is logged and scrutinised by the DP
manager.
The auditor in such circumstances will have to first evaluate the existing controls. For the
same, he has to do the following:
(i) Evaluate the internal control system especially the controls and checks existing for
recording the transactions, i.e., he has to verify at what level transactions can be entered into
the system and what checks are available to prevent any unauthorised data entry and for
rectifying errors/omissions in the transactions entered.
(ii) Evaluate at what level there is authority given for modification of transactions already
entered. Is there any authority given only to a senior employee to carry out modifications?
Or is it that once transactions are entered and validated no further modifications are possible
thereto.
(iii) Whether there is a provision in the software for carrying out an online audit of transactions,
i.e. whether there a separate module in the package, where a separate password given to the
auditor and once he has seen and approved a particular transaction/set of transactions, the
same would be locked and no modifications would be possible by anyone (including the
senior most employee) in the company.
(iv) Whether there are proper procedures for backup of data on a regular basis and whether the
said procedures are being strictly followed.
(v) In case of any loss of data whether there is a clear defined recovery procedure to minimize
the loss of data due to power failures or any human errors.
(vi) The auditor may introduce some dummy data into the system and see the results obtained.
After the auditor has evaluated the above procedures, he has to prepare an audit plan depending
on the results obtained from his earlier evaluation. Since the transactions are not being printed,
the plan can contain procedures wherein data is verified directly on the computer from the
vouchers/invoices, etc. The audit plan will also require a lot of analytical procedures to be
performed. Depending on the importance of various expense heads and other important account
heads, the auditor will also obtain various reports from the system depending on various queries
that he would have to identify. Some illustrative reports can be:
(i) To check whether proper classification is done for revenue/capital - a report can be obtained
of all purchases (not being raw materials or other routine purchases) exceeding ` one lakh.
(ii) To check whether all freight outward bills are accounted for a report containing a month-
wise co-relation between goods dispatched and freight amount paid. The same can be
further co-related with the freight rates obtained from the bills.
Once the auditor has performed the above procedures, he would be able to form an opinion
whether reliance can be placed on the accounting systems and the data recorded. If the auditor
finds that reliance cannot be placed on the systems he can inform the management about the fact
and also that the transactions will need to printed to allow him to conduct the audit. The
finalization procedures to be followed even under this system would remain more or less similar
to other accounting systems.
Contemporary issues
Question No. 18
"Corporate accountability and civil and criminal penalties for white collar crimes." Comment on
the major provisions of Sarbanes Oxley Act.
Answer
The Sarbanes Oxley Act of 2002 established corporate accountability and civil and criminal
penalties for white – collar crimes. This Act also known as the Public Company Accounting
Reform and Investor Protection Act of 2002 and commonly called SOX or Sarbox; is a United
States federal law passed in response to a number of major corporate and accounting scandals
including those affecting Enron, Tyco International, and WorldCom. These scandals resulted in a
decline of public trust in accounting and reporting practices.
This Act provides regulatory bodies and courts to take various actions – civil and criminal
proceedings in connection of misstatements amounting to accounting scandals and fraudulent
financial reports, other frauds on securities matters, obstruction of justice and retaliating against
corporate whistleblowers. The Act also enforce tougher civil and criminal penalties for fraud and
accounting scandals, securities fraud and certain other forms of obstruction of justice. The Act
further protect employer against corporate whistle blowers (person who provide evidence of
fraud in the company).
Some of the major provisions of Sarbanes-Oxley Act of 2002 are:
(i) Creation of the Public Company Accounting Oversight Board (PCAOB);

(ii) A requirement that public companies evaluate and disclose the effectiveness of their internal
controls as they relate to financial reporting, and that independent auditors for such
companies "attest" (i.e., agree, or qualify) to such disclosure;
(iii) Certification of financial reports by chief executive officers and chief financial officers;
(iv) Auditor independence, including outright bans on certain types of work for audit clients and
pre-certification by the company's Audit Committee of all other non-audit work;
(v) Ban on most personal loans to any executive officer or director;
(vi) Accelerated reporting of insider trading;
(vii) Prohibition on insider trades during pension fund blackout periods;
(viii) Enhanced criminal and civil penalties for violations of securities law;
(ix) A requirement that companies listed on stock exchanges have fully independent audit
committees that oversee the relationship between the company and its auditor;
(x) Additional disclosure;
(xi) Significantly longer maximum jail sentences and larger fines for corporate executives who
knowingly and willfully misstate financial statements, although maximum sentences are
largely irrelevant because judges generally follow the Federal Sentencing Guidelines in
setting actual sentences;
(xii) Employee protections allowing those corporate fraud whistleblowers who file complaints
with OSHA within 90 days to win reinstatement, back pay and benefits, compensatory
damages, and congressional page abatement orders, and reasonable attorney fees and costs.
Question No. 19
(Source: environmentalauditors.com.au)
a. What is an environmental audit and what are its types and benefits?
Answer
Environmental audits are tools which can quantify an organizational environmental performance
and position. There are three main types of audits which are environmental compliance audits,
environmental management audits to verify whether an organisation meets its stated objectives,
and, functional environmental audits such as for water and electricity.
Benefits of an environmental audit vary depending on the objectives and scope of the
audit. However, common benefits of environmental auditing include:
 Organizations understand how to meet their legal requirements;

 Meeting specific statutory reporting requirements;
 Organizations can demonstrate they are environmentally responsible;
 Organizations can demonstrate their environmental policy is implemented;
 Understanding environmental interactions of products, services & activities
 Knowing their environmental risks are managed appropriately;
 Understanding how to develop and implement an ISO 14001 EMS; and
 Improving environmental performance and saving money.
b. Who should complete an environmental audit?

Answer
ISO 19011:2012 Guidelines for auditing management systems provides information regarding
the choice of Environmental Auditor. Environmental Auditors should have personal attributes,
such as ethics, open-mindedness, perceptiveness and tact. They should understand audit
principles, procedures and techniques, as well as having gained experience through conducting
audits. They should know the subject matter they are auditing against and how this applies to
different organisations.
Audit Team Leaders should be able to plan and resource effectively, have good communication
and leadership skills. Preferably Environmental Auditors should complete training and have
attained an appropriate level of education. A good Auditor should have adequate skills and
experience.
When seeking an external Auditor consideration could be given to the skills outlined above.
Exemplar Global Environmental Auditors have completed training (5 days) and have met a
minimum certification standard. Depending on the auditing requirements consideration could be
given to determining whether the Auditor needs to be certified by additional organizations (e.g.
EPA appointed Environmental Auditors).
Question No. 20
Carry out discussion on the audit of public sector enterprises published by the Office of the
Auditor General of Nepal.
Answer
Thefollowing is a direct extract of the ―Guideline for the Audit of Public Sector Enterprises‖
published by the Office of the Auditor General of Nepal.
1. Fundamental Principles
1.1. The purpose for this guide is to establish Auditing Standards and provide guidance on the
objective and general principles governing the audit of financial statements of public sector
undertakings including statutory organizations in Nepal. The audit will be carried out in
accordance with International Organization of Supreme Audit Institutions (INTOSAI) Auditing
Standard read in conjunction with this guide as well as applicable Nepal Standards on Auditing
(NSA) in all matters that are defined material.
1.2. The auditor should comply with ethical principles governing professional responsibilities as
outlined in NSA 01 in the following areas:
Professional Competence and Due Care
Confidentiality
Professional Behaviors:
Integrity, Objectivity and Independence
Technical Standards
2. Objectives of the Audit
The objectives of the regularity audit are:

a) Express an opinion on whether the financial statements of the audited organization as a whole
present fairly, in all material respects the financial position of the organization at year end, the
results of its operations for the year then ended, etc., in conformity with applicable accounting
principles;
b) Audit of financial systems and transactions including an evaluation of compliance with
applicable statutes and regulations;
c) Generally, management is responsible for establishing an effective system of internal controls
to ensure compliance with laws and regulations. Auditor should examine the appropriateness, the
relevance through the control and evaluation of the:
1. Internal organization (structures, functions, tasks, authority, responsibilities, methods,
procedures, etc.)
2. Existence, respect and application of laws, regulations and instructions
3. Protection of resources and assets
4. Prevention of errors and fraud
5. Quality and viability of the information system and the reporting.
d) Competent, relevant and reasonable evidence should be obtained to support the auditor‘s
judgments and conclusions regarding the organization, program, activity or function under audit.
e) Analyze the financial statements to establish whether acceptable accounting standards for
financial reporting and disclosures are complied with.
f) Reporting of any other matters arising from or relating to the audit that Office of the Auditor
General (OAG) considers should be disclosed.
g) Examination of the consideration of remarks stemming from previous audit reports.
3. Scope of Audit
3.1 The audit should be organized to cover adequately all aspects of the enterprise as far as these
are relevant to the financial statements being audited and should be reasonably satisfied that:
a) The information contained in the underlying accounting records and other source data
is reliable and sufficient; and
b) Whether the relevant information is properly disclosed in the financial statements
subject to statutory requirements, where applicable.
3.2 Assess the reliability and sufficiency of the information by:
a) Studying and evaluating accounting systems and internal controls to determine the
nature, extent and timing of other auditing procedures; and
b) Carrying out such other tests, enquiries and other verification procedures of accounting
transactions and account balances as considered appropriate in the circumstances.
3.3 Determine whether the relevant information is properly disclosed in the financial statements
by:
a) Comparing the financial statements with the underlying accounting records and other
source data; and
b) Considering the judgment that management has made in preparing the financial
statements, accordingly, assess the selection and consistent application of accounting
policies, the manner in which the information has been classified, and the adequacy of
disclosure.
3.4 Because of the test nature and other inherent limitations of an audit, together with the
inherent limitations of any system of internal control, there is an unavoidable risk that some
material misstatement may remain undiscovered. The auditor should design audit steps and
procedures to provide reasonable assurance of detecting errors, irregularities and illegal acts that
could have a direct and material effect on the financial statement amounts or the results of
regularity audits. The audit cannot, therefore, be relied upon to ensure discovery of all frauds or
errors but where the auditor has any indication that some fraud or error may have occurred,
which could result into material misstatement it should extend its procedures to confirm or dispel
its suspicions.
3.5 the auditor should consider items which either individually or as a group are material:
a) In general terms, a matter may be judged material if knowledge of it would be likely to
influence the user of the financial statements or the audit report.
b) Materiality is often considered in terms of value but the inherent nature or
characteristics of an item or group of item may also render a matter material for example,
where law or regulation requires if to be disclosed separately regardless of the amount
involved.
3.6 Verification that expenditures correspond to the budgets as approved by the authorities.
Briefly analyse the deviations between budgeted and effective expenses.
3.7 Verification of the respect of purchasing procedures and also that goods purchased are
utilized within the foreseen objectives and are still available or have been ceded/sold in
conformity with the methods defined in audited entity‘s rules and regulations.
3.8 Verification of the transactions under the following aspects:
a) Conformity of expenditure authorizations and validity of the supporting documents;
b) Arithmetic accuracy of accounts, supporting documents and financial statements;
c) Accuracy of the bookkeeping entries;
d) Allocation of expenditures in conformity with budgets;
e) Verification that contracts are in conformity with prevailing laws and regulation;
f) Verification that receipts are exhaustively and regularly accounted for;
g) Control of advances, accrued or in abeyance, justification for amounts overdue or
outstanding for long.
3.9 Verification that the accounting systems in use responds to the needs of managements,
particularly as concerns cost analysis.
3.10 Verification that all corrections required from previous audit have been carried out.
3. Responsibility for Financial Statements
The financial statements are management‘s responsibility. The auditor‘s responsibility is to

express an opinion on the financial statements. Management is responsible for sound accounting
policies and for establishing and maintaining an internal control structure that will among other
things, record, process, summarize and report financial data that is consistent with managements
assertions embodied in the financial statements.
Corporate Law
RTP FINAL CAP III 2017
The Companies Act, 2063:
1. Ashok Party Palace Ltd. has not sent any reports to the Registrar of Companies for
long time including the change of the registered office address. The Registrar issued a
public notice in a newspaper with wide circulation intending to cancel the name from
the roster but the company could not reply it because the notice was published on just
before the Dasain Festival and it could not gone through the newspaper as it was
thrown away during long holiday of the Dasain festival . After 3 years of cancellation,
the company management came to know that the company was already cancelled.
What will be the impact of the transaction done during the period? Can it be revived?
Discuss.
Answer:
Under Section 137 of the Companies Act 2063, deregistration of the company by the
Registrar of Companies can be challenged within 5 years from the date of decision of
deregistration. If the Registrar issued a notice having a reply period of 2 months
intending to deregister the company but not replied by it or the Registrar is not satisfied
with replies, Registrar can deregister the company. In the given case ROC has sent the
notice but the registered office has shifted from there where it was registered. The public
notices were issued but the management was unaware of it and the ROC decided
deregistration. The transactions were done without notice of deregistration for 3 years.
In those cases any member/creditor of the company may apply to the court to revive the
company within 5 years. The company can be revived upon the decision of the court in
this favour. If the court decides so, all the transactions were deemed as done by a normal
company and valid for law. The legal status of the company shall be deemed as
perpetual within the period of deregistration as a normal company.
2. Promoters of a prospective company 'De Lux Services' applied to the Company
Registrar's Office (CRO) for its registration. Few days after filing the application
the CRO refused its registration. In this context, answer the following questions in
the light of the Companies Act, 2063:-
i. State the circumstances under which the CRO may refuse registration of
the prospective company 'De Lux Services'.
ii. Whether the promoters of the prospective company 'De Lux Services' have
any legal remedy against such a refusal of registration?
Answer:
(i) Pursuant to Section 6 of the Companies Act, 2063, the Company Registrar's
Office (CRO) may refuse to register the prospective company 'Alico' in any
of the following circumstances:
(a) If the name of the proposed company is identical with the name by which a
company in existence has been previously registered or so resembles the
name of that company as it might cause misleading,
(b) If the name or objective of the proposed company is contrary to the
prevailing law or appears to be improper or undesirable in view of public
interest, morality, decency, etiquette etc. or reflects criminal motive,
(c) If the name of the proposed company is identical with the name of a
company of which registration has been cancelled pursuant to this Act or
that of a company which has been insolvent under the prevailing law or so
resembles such name as it might cause misleading and a period of five years
has not expired after such cancellation of registration or insolvency,
(d) If the requirements for the incorporation of a company under this Act are
not fulfilled.
If the CRO refuses to register the prospective company 'A' in any of the
circumstances as referred to in section 6(1) of this Act, it shall give a notice
there of, accompanied by the reasons therefore, to the applicant no later than
15 days after the date of application made for the incorporation of company
pursuant to section 4 of this Act.
(ii) If the CRO refuses to register any company pursuant to section 6(1) of the
Companies Act, or fails to give a notice pursuant to section 6(2) of the Act, a
person who is not satisfied with this action may file a complaint in the court
(Commercial Bench of the concerned Court of Appeal) within fifteen days
of this cause of action.
3. In a prospectus issued by a company the Managing Director stated that the

company had paid dividend every year during 2014-2016, which was a fact.
However, the company had sustained losses during the relevant period and had
paid dividends out of secret reserves accumulated in the past.
Examine the consequences of the observation made by the Managing director.
Answer:
Prospectus is an information book for all concerned, published by a body corporate at
the time of issuing shares. Accordingly to S. 30 of Securities Act 2007 a body corporate
publish a prospectus approved by the Securities Board for making public issue of
securities. At the time of publishing prospectus it is required to mention the place where
the general public can obtain or inspect prospectus. According to S. 31 The Board will
grant permission to publish it if it contains all the required information.
S.31 of the Securities Act 2007 prescribes the matters required to be contained in a
prospectus. According to it, a prospectus must contain such information as may be
adequate for investors to make evaluation as to the assets and liabilities, financial status,
profit and loss of the issuer and matters expected in future. According to S. 32 it also
requires to provide information regarding main functions to be done by the issuer,
information pertaining to legal action, economic condition, general administration,
management of the issuer, information relating to the expert preparing the prospectus
and the economic statements and other information as supportive to evaluate financial
conditions to make it capable of affecting the transaction the value of securities.
As per the given question where the managing director mislead the public by
misrepresenting the fact of the issue of dividend of the company, the security purchaser
can treat it as breach of implied condition and can rescind the contract and claim return
of price and damages. It is because an active concealment of a fact is fraudulent. It is
because under Section 23(2) of the Companies Act 2006 prior to the publication of
prospectus it is to be signed by all directors of the company and has to be submitted
along with written application made to the Securities Board for approval. In this regard
Under Section 23(9) of the Act the concern company has to make a declaration before
the Securities Board that the provisions of the Act have been complied with. Disclosure
made in the prospectus should give true and fair view of Company‘s position. Public is
invited to take shares on the faith of the representations contained in the prospectus. The
public is at the mercy of company promoters. Everything must, therefore, stated in it
must be strict and scrupulous accuracy. Nothing should be stated as fact which is not so,
and no fact should be omitted the existence of which might in any degree affect the
nature or quality of the privileges and advantages which the prospectus holds out as
inducement to take share. In other words, the true nature of the company‘s venture
should be disclosed. Therefore if the declaration made is fraudulent or false represented
the concern Board of the Directors of the company will liable for that.
4. Under the Articles of Association of a Company, the directors of a company had

power to borrow up to Rs. 10, 00,000. without the consent of the general meeting.
The directors themselves lent Rs. 15, 00,000. to the company without such consent
and took debentures.
Is the company liable for Rs. 15, 00,000? if not for what amount, if any, is the
company liable?
Answer:
This issue is related to the question whether insiders are protected as third party for their
transactions made with company exceeding their limitation on the powers of the board
of directors under the company‘s constitution. The protection conferred on third parties
does not apply fully to directors who enter into transaction with their company. In such
case the transaction is voidable at the instance of the company under S. 103(2) of the
Companies Act 2006. In other words directors are not third party. Under S. 103(2) it is
the duty of director or officer to do such transaction within the ambit of jurisdiction
specified in the memorandum of association of the company.
Accordingly the facts of this problem are based on the case of Howard vs. Patent Ivory
Manufacturing Co (1888). In this case it was held that the directors had knowledge of
the irregularity and hence company could not be held liable for anything more than the
amount allowed to be borrowed under the Articles. Thus, in this case company can be
held liable only for Rs. 10,00,000. The protection of the rule of indoor management
cannot be claimed by one who has the knowledge of the Indoor happenings. So
directors could not defend the issue which they were lending money to the company
required the assent of the general meeting which they had not obtained.
5. Hotel Ashoka Ltd, a public company listed at Nepal Stock Exchange Ltd. failed to
appoint its auditor in the Annual General Meeting (AGM). However, the AGM
delegated the power to appoint auditor to the Board of Directors (BoD) based on
which the BoD appointed the auditor. Is this appoint valid?
Answer:
According to Section 111(a) of the Companies Act, 2063, appointment of an auditor for a
public company limited company is the power and obligation of a general meeting of
shareholders. There is no authority of the general meeting that it could delegate its power
to the board of directors.
Hotel Ashoka Ltd, is a public Ltd. company. The general meeting of a private limited can
delegate its power to the board of director to appoint the auditor if the memorandum of
association, articles of association or a consensus agreement had allowed it to do so.
Section 113 prescribes a solution to a case where the auditor could not be appointed in the
general meeting for any reason or an annual general meeting could not take place or an
auditor appointed in accordance with the provision of the Companies Act could not
continue for any reason, the Company Registrar Office may appoint the auditor on
request from the board of directors.
In the given case, the board of directors could request the Company Registrar Office for
the appointment of auditor but in no case is allowed to appoint by itself regardless of the
delegation of power. Hence, the appointment of auditor by the board of directors is not
valid.
6. Mr. Ratna Kumar Kunwar is one of the shareholder of Nepal Mining Ltd. He
holds 50,000 numbers of shares in the company, each of NRs. 100 face value, for
which NRs. 50 each is called, but not yet paid. Despite extension of time limit for
payment and also issue of public notice he still has not paid the called money. The
company decided to forfeit all his shares though only 50% money is unpaid. He
claims that the company‟s move to forfeit 100% shares is unlawful. Give your legal
opinion on the same.
Answer:
As per Section 53(1) an amount for a share should be paid up within the period of a call
made in thereof. Under Sub section (2) of the same, the company should send every
shareholder a written notice, specifying a time –limit of at least thirty days and the
installment payable by him. A public company should also publish such notice, for at
least three times, in a daily national news paper circulation.
Under Section 53(3) of the Companies Act, 2063, if a shareholder fails to pay the sum
called and payable in respect of the share within the period as specified in the first call
notice, the second notice should be sent to the concerned shareholder, giving an
additional period of three months specifying clearly that if the payment is made within
that period, it should be accepted, along with interest at the prescribed rate, and if the
shareholder fails to make payment even within that period, his share will be liable to be
forfeited. In the case of public company, such notice should also be published in a daily
newspaper with national circulation for at least three times. If the installment called is not
paid even within the time-limit as mentioned in the second notice, the company may
forfeit shares after retaining the number of shares as fully paid up to the extent of the
amount paid on the shares in respect of which the company has give such notice or also
to the extent of the amount of dividends, if any attached in respect of such shares.
In the given issue, Mr. Ratan Kumar Kunwar has already paid 50% of the share amount.
As mentioned above, the Companies Act, does not allow Nepal Mining Ltd to forfeit all
his shares, but only the half of shares issued and allotted to him. The company should
retain 25,000 number of shares fully paid and the remaining shares may be forfeited. His
claim is legally tenable that all his shares should not be forfeited, but only the shares for
which he failed to pay.
7. Chitwan Rebuild Ltd. holds 30% shares in Middle Devlopment Construction Ltd.
and has appointed two directors Mr. Suman Agrawal and Mrs. Sumana Agrawal to
sit on the board of Middle Devlopment Construction Ltd. It has also appointed two
more alternate directors, one of which Mr. Sahan Shah. Mr Suman Agrawal was
out of the country for three months, Mr. Sahan Shah attended the board meeting in
place of Suman Agrawal. After his returned back the office, Mr. Sahan is still
attending the meeting. Is this lawful? Give your opinion.
Answer:
Section 87(2) of the Companies Act, 2063 prescribes that in case a corporate entity holds
shares in a company, the corporate body may appoint directors in proportion to the total
number of directors of the company and the number of shares subscribed by such body
corporate and also an alternate director for each director to attend and vote in a meeting
of the board of directors instead of the director in cases where such director will not be in
a position to attend the meeting of the board for any reason.
Subsection (3) of the same prescribes that where any director is not able to attend a
meeting of the board of directors such director will give information thereof to his
alternate director and the board of directors. In such case, the alternate director will be
entitled to attend, and vote in the meeting of the board of directors. As provided in sub
Section (4), an alternate director will not be entitled to attend, and vote in a meeting of
the board of directors unless so informed by the director.
In the given case, Mr. Suman Agrawal is already back to office to be able to attend the
board meeting. Further, there is no information by Mr. Suman Agrawal to the board of
directors and Mr. Sahan Shah about the inability to attend the meeting after he has
resumed the office. Hence, the attendance of Mr. Sahan Shah in the board meeting as an
alternate director cannot be lawful.
8. Nepal Insurance Ltd. is registered at the Office of the Company Registrar (OCR). It
has also applied with the Insurance Board for the license to operate a non-life
insurance business. Pending the issuance of the license from the Board, it held its
first annual general meeting which is objected by some of the shareholders on the
ground that a public company having special objective cannot start its business
activities unless license permission is received from the concerned authority and a
certificate of commencement of business is issued by OCR. Give your opinion on the
issue.
Answer:
Under Section 63(1) of the Companies Act, 2063, no public company should commence
its business without obtaining an approval from the office of Company Registrar to carry
on its business.
Sub-Section(4) states that without obtaining the approval to commence business no
public company should carry out any act of creating liability or publishing the prospectus.
It allows the company to hold extraordinary general meeting and meeting of the board of
directors and operate management of the company. The Companies Act does not
categorically denies the convening of an annual general meeting. Annual general meeting
has not been put as a exception.
In the given case, it is clear that Nepal Insurance Ltd. has not obtained an approval from
the office of Company Registrar to commence the business. Further, it is also evident that
no license has been issued for the insurance business by the Insurance Board. Provision
of Sub-Section(6) puts a condition that in case of a company having a business that
required approval from the regulating authority, the business may be commenced only
after such approval has been issued. Nepal Insurance Ltd. being an insurance company
having license yet to be issued and the approval for the commencement of business yet to
be issued, cannot hold the annual general meeting.
9. Kathmandu Football club is currently registered under the Association Registration
Act, 2034. The executive committee of the club has made decision to register this
club under the Companies Act, 2063, as a not profit distributing company. You as a
consultant advise the committee on this matter.
Answer:
A provision relating to the registration of a company not distributing profits is prescribed
in Chapter IX of the Companies Act. Under Section 166 any company may be
incorporated to develop and promote any profession or occupation or to protect the
collective rights and interests of the persons engaged in any specific profession or
occupational objective on the condition of not distributing dividends.
For the registration:
(2) Any person or trust registered pursuant to the prevailing law or who wishes to register
a company for the attainment or the objective mentioned as said above may make an
application to the Office pursuant to Section 4 of the Companies Act.
(3) The number of promoters promoting such company should be at least five; and after
the incorporation such company, it may have any number of its members, with a
minimum of five members.
(4) The membership of such company incorporated as said above will not be transferable
in any manner. The membership of any person or body will ipso facto be terminated in
the event of death, cancellation of registration or dissolution of such member.
It is to be considered following special provisions relating to the company not distributing
profits under Section167 of the Act.
(a) There will not be required share capital to incorporate a company not distributing
profits. However, the company may receive membership fees from its members and
receive any donation, gift pursuant to law for the accomplishment of its objectives.
(b) No member of the company will be liable for the debts and liabilities of the company
except in the case where any member accepts such liability in writing the liability of the
company, with specification of the limit of such liability; his/her liability will be limited
to the extent of that limit.
(c) All the provisions of the Companies Act is applicable to the listed company, other
than those provisions which may be applicable only to the company with share capital,
will also apply to the company, its director, officer, auditor and employee.
(d) The company shall not distribute dividend, bonus or any other amount, from the
profits earned by it, to its members or employees; and the profits earned by the company
shall be used to increase the capital of the company or for the attainment of its objectives.
(e) The company shall obtain prior approval of the Office to change objectives.
(f) Any company not distributing profits will not be merged with any company
distributing profits.
(g) The members of a company incorporated under this Chapter will elect the directors
from amongst themselves in such number as fixed in the articles of association, on the
basis of one member one vote.
(h) The meeting allowance, salary, facility receivable by the officers or a company
incorporated under this Chapter and the incorporation and operational expenses of the
company will not exceed the amount as specified by the Office.
(i) In the event of liquidation of or cancellation of registration of such company, the
assets of the company, if any , remaining after the settlement of the debts and liabilities of
the company will be dealt with as per the provision, if any, contained in its articles of
association, and failing such provision, such assets will devolve on the Government of
Nepal .
Under Sub-Section (2) In the event of violation of any provision contained in as said
above, the Office may cancel the registration of the company committing such violation.
However, the company will be provided with an opportunity to defend itself, prior to
such cancellation of registration.
(3) A person who is not satisfied with a decision on cancellation of registration made by
the Office may file a complaint in the Court within thirty five days after the receipt of
information of such decision.
(4) While canceling the registration the Office shall appoint a liquidator and an auditor to
complete the liquidation proceedings of such company, specifying the period for
completion of such liquidation proceedings.
(5) The liquidator and auditor appointed pursuant so will discharge their functions in
accordance with the provisions contained in this Act and the prevailing law.
Hence, if Nepal football club is interested register as a not profit distributing company
under the Companies Act, it is required to fulfill the matters as prescribed by S. 166 and
167 of the Act.
10. Hotel Cozy (P) Ltd. has conducted its extra-ordinary general meeting (EGM) to
approve resolutions for amendment to memorandum of association and articles of
association on request from shareholders. However, a group of shareholders, who
were absent in the meeting, have challenged the legality of the EGM on the ground
that the due process for calling the EGM was not followed. As a corporate
consultant advice the company on the eligibility of shareholders to make a written
reques for convening the EGM and the process to be followed in this regard until
the EGM is called by the Office of Company Registrar(OCR).
Answer:
Pursuant to Section 82 of the Companies Act, 2063 the board of directors of a
company may convene an extra-ordinary general meeting if it deems
necessary. Accordingly If ,in the course of examining the account of a company, it is
deemed necessary to call an extra ordinary general meeting for any
reason, the auditor may request the board of directors to call such meeting; and if the board
of directors fails to call the meeting accordingly, the auditor may make an application,
setting out the matter , too the Office; and if an application is so made, the Office may call
the extra-ordinary general meeting of the company.
Moreover, If the shareholders holding at least ten percent shares of the paid–up capital of a
company or at least twenty five per cent shareholders of the total number of shareholders
make an application, setting out the reasons therefore, to the registered office of the
company for calling an extra-ordinary general meeting of the company.
If the board of directors does not call the extra-ordinary general meeting within thirty days
from the date on which an application is made the concerned
shareholders may make a petition to the Office setting out the matter; and if a such
petition‘s made, the Office may cause to call such meeting.
If the Office deems necessary to call an extra-ordinary general meeting in view of the
findings of any inspection or investigation or for any others reason, it may itself call or
cause there board of directors to call such meeting.
Hotel Cozy being a (P) ltd. company all the formalities required to follow in case of public
company is not need not be followed here. Thus, where the meeting is convened at the
request of the shareholders holding at least ten percent shares of the paid-up capital of the
company or at least twenty five percent shareholders of the total number of shareholder,
and if the notice regarding the meeting is given at least fifteen days in advance to all
shareholders and also passed the resolution by such meeting by fulfilling quorum as
required with a special resolution, the challenge made by the dissatisfied shareholders will
not be valid.
Nepal Chartered Accountants Act 2053:
1. ICAN received a registered letter containing a complaint against Mr. Ram
Krishna , a member of ICAN that he conducts audit in partnership with a person
who has not obtained a certificate of practice, which is a prohibited under the Act.
How and what action the Council of ICAN can take against Mr. Ram Krishna for
not upholding the code of conduct under Nepal Chartered Accountants Act, 2053?
Answer:
Pursuant to section 35 of Nepal Chartered Accountants Act, 1997 where a member
having obtained the professional certificate does not observe the conduct set forth in
this Act or the Rules framed under this Act or such member violates this Act or the
Rules framed under this Act, the concerned person may make a complaint to ICAN
Council against such member Ram Krishna under this provision.
Where there is a reason to believe that the member Ram Krishna having obtained the
professional certificate has not observed the conduct required to be observed, the
Secretary of ICAN, shall submit a motion, accompanied by the available fact, to the
Council of ICAN for taking action against him.
The Council of ICAN thereupon refers this case to the Disciplinary Committee of
ICAN for investigation under sections 11(k) and 14 of this Act. The Disciplinary
Committee shall exercise its authority similar to a judicial court while investigating
evidences and witnesses under section 14(4) of this Act.
The Disciplinary committee shall make recommendation, along with its opinion and
finding, to the Council for taking necessary action against him if found guilty from
its investigation, and the Council may, in view of such recommendation, impose any
of the following penalties on Ram Krishna, according to the gravity of the offence
committed under section 34(2) of this Act:
(a) Reprimanding;
(b) Removing from the membership for a period not exceeding Five years;
(c) Prohibiting from carrying on the accounting profession for any specific period;
(d) Canceling the professional certificate or membership.
Before imposing a punishment as said above the Council should provide a reasonable
opportunity to the concerned member to submit their clarification as an opportunity
of being heard principle.
2. What are the conducts a member and COP holder of ICAN must observe as to
doing partnership with another member, sharing audit fees, disclosing clients‟
information, attention to the material facts and procedure of appointment?
Answer:
Every member and member holding COP of ICAN should observe certain
conducts as provided under section 34 of Nepal Chartered Accountants Act,
2053. It is a mandatory provision against every member and member holding
COP of ICAN. Following are the conducts required to be observed as per the
question:
As per section 34 (2) one should do partnership or work in collusion only with a
member of his own class.
As per section 34 (3) one should share audit fee only with a member of the institute.
As per section 34 (5) one should disclose any information of the clients acquired
during professional services only to his employer or the person who is legally
allowed to get such information.
As per section 34 (8) and (9) in order to truly present the financial statement certified
by him, one should clearly state all the material facts known to him or to the best of
his knowledge. And also, he should draw attention of all concerned to such material
facts which are or have taken place contrary to the prevailing law and do not comply
with generally accepted principles of auditing.
As per section 34 (13) one will accept his appointment as an auditor of an
organization only after ascertaining that all required procedures for appointment as
the auditor under the prevailing law has been duly fulfilled.
3. What action the Council of ICAN can take against the member of under
the Institute of Chartered Accountants Act, 2053?
Answer:
a) The Council of ICAN can take disciplinary action against a member under sections 35
and 14 of Nepal Chartered Accountants Act, 2053.
Pursuant to section 35 of this Act:
(1) The concern one may lodge a complaint to the ICAN against the member (holding
certificate of practice) for not upholding the conduct mentioned in or for violation of
the Act or Regulation framed under the Nepal Chartered Accountants Act, 2053.
(2) The Executive Directors shall, if he finds convincing information that proves any
member or member holding certificate of practice is not observing the conduct,
submit the proposal along with the related facts to the Council of the ICAN for
further action against such member.
Where the council receives such information, the Disciplinary Committee constituted
by the ICAN Council under section 14 of the Act, to inquire into a complaint and
recommend the Council for necessary action.
The Disciplinary Committee shall exercise its authority similar to a judicial court
while investigating evidences and witnesses under this Act.
The Disciplinary Committee shall make recommendation, along with its opinion and
finding, to the Council for taking necessary action against a member found guilty from
its investigation; and the Council may, in view of such recommendation, impose any
of the following penalties on the concerned member, according to the gravity of the
offence:
(a) Reprimanding;
(c) Prohibiting from carrying on the accountancy profession for any specific period;
(d) Cancellation of the certificate of practice or membership.
Before imposing an action as a punishment as said above the Council should provide
a reasonable opportunity to the concerned member to submit their clarification as an
opportunity of being heard principle.
4. CA. Madan Koirala, a statutory auditor of Kathmandu Adventure
Company Ltd. of fiscal year 2072/2073 has committed certain offences as
forbidden by Companies Act, 2063 during the course of audit of the
company. Now advise the company by answering the following questions:
a. i. What are the functions and duties of an auditor pursuant to the
Companies Act 2063?
ii. What are the punishments imposed against an auditor for his offences under
the Companies Act 2063?
b. Can the Council of the Institute of Chartered Accountants of Nepal (ICAN) also
take any action in this case against CA Madan Koirala, who is also a member of
ICAN? If yes, what action can be taken?
Answer:
a. i. The functions and duties of an auditor have been provided under Section 115 of
the Companies Act, 2063 are in brief as follows:
1. The auditor should submit his report to the company certifying balance sheet,
profit and loss account and cash flow based on the bookds of account, records
and accounts audited by him.
2. The audit report should be prepared as per the standards prescribed by the
prevailing law stating the matters as per necessary.
3. The audit report should also indicate all relevant information relating to the
maintenance of books of account, preparation of the books of account as
prescribed along with economic situation of the company respectively
showing all financial statement of the company.
ii. Section 160 of the Companies Act, 2063 has imposed the various punishments
against the auditor as per the degree of offenses with a fine from twenty thousand
rupees to fifty thousand rupees or with imprisonment for a term not exceeding two
years or with both punishments.
Under Section 161 the auditor who commits an offense by not presenting a report
as specified will be liable to be punished with a fine from ten thousand rupees to
fifty thousand rupees.
b. The Council of ICAN can take disciplinary action against a member under sections
35 and 14 of Nepal Chartered Accountants Act, 2053.
Pursuant to section 35 of this Act:
(1) The concern one may lodge a complaint to the ICAN against the member
(holding certificate of practice) for not upholding the conduct mentioned in or
for violation of the Act or Regulation framed under the Nepal Chartered
Accountants Act, 2053.
(2) The Executive Directors shall, if he finds convincing information that proves
any member or member holding certificate of practice is not observing the
conduct, submit the proposal along with the related facts to the Council of the
ICAN for further action against such member.
Where the council receives such information, the Disciplinary Committee
constituted by the ICAN Council under section 14 of the Act, to inquire into a
complaint and recommend the Council for necessary action.
The Disciplinary Committee shall exercise its authority similar to a judicial court
while investigating evidences and witnesses under this Act.
The Disciplinary Committee shall make recommendation, along with its opinion
and finding, to the Council for taking necessary action against a member found
guilty from its investigation; and the Council may, in view of such
recommendation, impose any of the following penalties on the concerned
member, according to the gravity of the offence:
(a) Reprimanding;
(c) Prohibiting from carrying on the accountancy profession for any specific
period;
(d) Cancellation of the certificate of practice or membership.
Before imposing an action as a punishment as said above the Council should

provide a reasonable opportunity to the concerned member to submit their
clarification as an opportunity of being heard principle.
5. An auditor appointed by a company if commits any offence against it, may
take legal action under the Companies Act, 2063. Besides the action taken by
the company, can Council of ICAN also take any action in such case against
the auditor who is also a member of ICAN? Discuss the issue with reference
to the Companies Act 2063, and Nepal Chartered Accountant Act 1997.
Answer:
If any auditor appointed by a company commits any offence against the company, it
can take an action against the defaulting auditor under the Companies Act 2006 as
per the provisions prescribed as follows:
Section 119 prescribes the provision relating to removal of appointed auditor.
According to Section 119(1) An auditor should not be removed pending the
completion of audit of accounts of any financial year for which he was appointed as
the auditor.
Section 119(2) prescribes the proviso clause relating to Section 119(1), that if any
auditor breaches the code of conduct of auditors or does any act against the interest
of the company which has appointed him as the auditor or commits any act contrary
to the prevailing law, such auditor may be removed through the same process
whereby he/she was appointed as auditor, by giving by prior information to the
Nepal Chartered Accountants Institute, and with the approval of the regulatory
authority, if any authorized by the prevailing law for the regulation of business of
the company concerned, and failing such authority, with the approval of the
company Registrar‘s office.
Section 1119(3) prescribes the provision regarding the process of removal of an
auditor. According to it, while removing an auditor as per Section 119(2), the
auditor should be provided an opportunity to defend him.
6. Mr Vijaya Kumar, a practicing auditor and a member of ICAN, published a
compilation of all the existing audit principles of various sectors. While publishing
the compilation he gave his personal resumes and detail as one of the leading
auditor in respect of his professional experience of an auditor and his present
association as a partner with M/s XYZ, a firm.
i) Examine whether the details given by Mr Vijaya Kumar is a violation of the code
of conduct as prescribed by the Nepal Chartered Accountant Act 1997?
ii) If there is violation of code of conduct to what extent Mr Vijaya Kumar can be
penalized?
Answer:
i) Mr Vijaya Kumar as a member of ICAN one has to be fully abided by the NCA
Act and the Regulations of it. As profession of auditor it has been prescribed as a
mandatory duties of an auditor. In the given context publishing a compilation regarding
the existing audit principles of various sectors is an act for promoting professional job
and is not a violation of the code as prescribed by the Act. However, publishing the
personal detail regarding the professional experience of an auditor is a kind of violation
of code of conduct of the Act. Chapter VIII of the Nepal Chartered Accountants Act
1997 prescribes provision regarding conducts that are to be fully observed by Members
of it. One of the conduct prescribed by the Act is that members should not disclose or
divulge any information and explanations acquired in the course of professional service
to any person other than the employer employing him and the person whom he is
complied by the law to do so. The Act further prescribes that members should not
directly or indirectly influence any person by way of enticement in order to secure any
professional business. Finally it is the duty of a member to be abided by all other matter
concerning the conduct in the course of his profession. In the given issue it is clear that
the publishing the personal details as one of the leading auditor and his professional
experience of an auditor is a violation of code prescribed by the Act and liable for it.
ii) One of the prime functions of NCA Council is to monitor as to whether or not the
members and members holding certificate or practice have acted in conformity with the
prescribed professional code of conduct. In the given issue it is clear that Mr Vijaya
Kumar has violated code of conduct prescribed by the NCA Act 1997 by giving his
personal detail regarding professional experience of an auditor and his present
association as a partner with an audit firm. In such case if a member lodge a complain to
the Institute against such member in respect of not upholding the conduct mentioned in
the Act, an action can be taken against such member by NCA and the member so
violated will liable to be punished for committing an act contrary to the provision of
NCA Act or Regulation framed there on with a suspension for a maximum period of
five years and will be liable of punishment with a maximum penalty of two thousand
rupees or imprisonment for a maximum period of three months or both.
7. Briefly explain the rights and duties of the Accounting Standards Board and
Auditing Standards Board as per Nepal Chartered Accountants Act, 2053.
Answer:
As per section 15B of the Nepal chartered Accountants Act, 2053 the functions,
duties and powers of the Accounting Standards Board have been prescribed as
follows:
(a) To provide for accounting standards, also based on international accounting
standards, in order to systematize and regulate the accountancy and financial reports;
(b) To prepare appropriate modalities in order to develop accounting standards and
publish materials relating to accounting standards;
(c) To amend, improve and revise accounting standards;
(d) To interpret accounting standards;
(e) To perform other acts relating to accounting standards.
As per section 15E the functions, duties and powers of the Standards on Auditing
Board will be as follows:
(a) To provide for standards on auditing, also based on international standards on
auditing, in order to systematize and regulate the accountancy and financial reports;
(b) To prepare appropriate modalities in order to develop standards on auditing and
publish materials relating to standards on auditing;
(c) To amend, improve and revise standards on auditing;
(d) To interpret standards on auditing;
(e) To perform other acts relating to standards on auditing.
Securities Act 2063
1. Capital finance securities company Ltd. is a corporate body dealing securities

business. Being a securities business person, it requires submitting accounts
and statements including the affairs of the securities business carried on in the
preceding financial year to the Nepal Securities Board and concerned stock
exchange. Capital finance securities Company Ltd. failed to submit the
statements by reason of not having them audited within the time limit. In this
regard, what action can be taken by the stock exchange upon corporate body,
which has listed its securities, fails to submit its financial statements and other
related documents under Securities Act, 2063?
Answer:
Securities business person, in carrying on the securities business has to adopt certain
business principles like maintaining securities business fair and of high standards, to
carry on the business with proper skills, care and hard working by keeping on the
higher standard of stock exchanges etc. Under Sec 78 of The Securities Act 2063 a
securities business person has to maintain accounts and records with a view to
reflect the actual affairs of the business. To make such statement transparent the Sec
82 of the Act also prescribes the provision regarding the mandatory submission of
accounts and statements including the affairs of the securities business carried on in
the preceding financial year within three months from the date of expiry of the fiscal
year to the Nepal Securities Board. If a securities business person fails to submit the
accounts and statements within three months from the date of expiry of the fiscal
year, it can submit an application by mentioning the reasonable grounds for such
failure requesting for the extension of the time limit. On receipt of the application
the Board may extend the time limit for a period not exceeding three months. In the
event of failure to submit such accounts and statements even within the period of
time limit so extended, the Board may fine such securities business person with a
sum of five thousand to twenty five thousand rupees. This provision is prescribed by
the Sec 82 (2) of the Securities Act 2063. As per the question where a securities
business person failed to submit the statements by reason of not having them
audited within the time limit, they are allowed to submit unaudited accounts and
statements on the condition of submission of actual accounts and statements audited
subsequently under Sec 82 (3) of the Act.
2. To regulate and manage the activities of the securities markets and persons
involved in the business of dealing in securities by regulating the issuance,
purchase, sale and exchange of securities for the purpose of protecting the
interests of investors in securities, Securities Act, 2063 is enacted.
Explain how a body corporate issues securities under the Act.
Answer:
The body corporate will issue its securities under the Act as follows:
Under section 27(1) a body corporate shall have to register securities to be
issued by it with the Board prior to their issuance. For this a body corporate
shall have to make an application in the prescribed format, accompanied by its
memorandum of association, articles of association, documents related with
such securities, and the prescribed fees, to the Board for registering securities
pursuant to Sub-section (1).
Where an application is received the board shall make necessary inquiry into
the matter and, if it considers appropriate to register such securities, register
such securities in the register as prescribed, indicating the details of such
securities and issue the securities registration certificate in the prescribed
format to the concerned body corporate.
Under section 28 where a body corporate allots or sells securities after
registering such securities, the body corporate shall have to give a notice
along with the details of securities so allotted or sold to the Board within
seven days.
Upon receipt of a notice as referred as above, where it appears necessary to
make the allotment and sale of such securities fair and informative for the
interests of investors and the body corporate, the Board may give necessary
directive to the concerned body corporate. It shall be the duty of the
concerned body corporate to abide by such directive.
Under section 29 where a body corporate is to sell and distribute securities to
more than fifty persons at a time, it shall make public issue for the sale and
distribution of such securities. The period to be open for making application
of the securities to be issued as above shall be as prescribed. The provisions
relating to the value and allotment of securities for which public issue has to
be made shall be as prescribed.
Where securities for which public issue has been made once could not be sold
and have to be re-issued again within one year, the body corporate which so
issues the securities may, with the approval of the Board, issue such securities
by mentioning the matters which are different than the matters set forth in the
previously published prospectus and the prospectus previously published.
Under section 30 a body corporate shall have to get a prospectus approved by
the Board for making public issue of securities in accordance with this Act
and publish the prospectus for information to all the concerned. While
publishing the prospectus in such a way, the prospectus shall also mention the
place where the general public can obtain or inspect the prospectus.
However, it is not required to issue a prospectus in the following securities:
(a) Securities issued by Nepal Rastra Bank,
(b) Securities issued against the full guarantee of the Government of Nepal,
(c) Securities proposed to be sold to up to fifty persons at a time,
(d) Securities issued to own workers or employees,
(e) Securities permitted by the Board as to issue and sell without issuing a
prospectus.
Under section 31 The Board shall approve only a prospectus which contains
such information as may be adequate for investors to make evaluation as to
the assets and liabilities, financial status, profit and loss of the issuer and
matters expected in future.
Under section 34 Everybody corporate issuing securities shall provide
information on the following matters to the Board and its shareholders as soon
as possible:
(a) Such matters as may be necessary and supportive to evaluate its financial
condition,
(b) Such information as may be capable of affecting the transaction of stock
exchanges or the value of securities.
(2) Every body corporate issuing securities shall also provide the Board and
its shareholders with the notice and information as prescribed, in addition to
the above matters
3. Securities Act 2063 provides for establishment of a compensation fund to
protect interest of the investors from a possible loss or damage. Mention
about such fund and it‟s operation.
Answer:
Section 53, 54 and 55 of the Securities Act, 2063 provide for stock exchange to establish
a compensation fund a operation of such fund:
Section 53 prescribes as follows:
(1) Stock exchange will establish and operate a compensation fund as may be prescribe
by the Board in order to protect investors against possible loss or damage.
(2) The funds deposited to the fund referred to above will be used to bear compensation
as prescribed.
Section 54 prescribes provision regarding the operation of the fund. According to it the
following provisions will be made in the Rules in relation to the operation of the
compensation fund to be established as per Section 53 or 55:
a. Provisions relating to the deposit of money to the fund;
b. Maximum amount to be paid as a compensation from the fund;
c. Provisions relating to the accounts and audit of the fund;
d. Conditions for making claim to obtain amount from the compensation fund and
procedures from making such a claim;
e. Conditions where any claim cannot be made on the compensation fund;
f. Procedures for taking action and making decision on payment of money as claimed
from the compensation fund;
g. Maximum limit of amount payable as a compensation to one person;
h. Other necessary matters in relation to the examination of compensation claims;
i. Provisions to be made in the event of the revocation of the license of stock exchange
; and
j. Other necessary provisions in relation to compensation.
Section 55 provides the provision regarding the failure to establish and operate the
compensation fund as per section 53. According to it if a stock exchange is not able
to establish and operate the compensation fund pursuant to Section 53 in order to
protect investors against possible loss and damage or does not pay or fails to pay the
amount of compensation to be payable as prescribe, the Board may establish and
operate the compensation fund as prescribed or make necessary provisions in relation
to the payment of the amount of compensation required to be paid as prescribed.
4. Mechi Securities Ltd. has received license to operate securities business from the
Security Board of Nepal. The securities business company (Mechi Securities Ltd)
has to follow certain prescribed standard as defined in Securities Act. What are
these standards? Explain.
Answer:
Section 76 of the Securities Act, 2063 has explained the provisions relation to business
standards for securities business persons. According to it all securities business person
should in carrying the securities business, observe the following business principles:
a. To maintain the operation of securities business fair and of high standards,
b. To carry on the securities business with proper skills, care and hardworking,
c. To keep on the higher standard of stock exchanges,
d. To obtain information from customer as to their objective to make investment and
provide services accordingly,
e. To provide such information and advice as may be required for the customers to make
decision on investment in securities,
f. To avoide conflicts of own interests with the interest of customers and, in the event of
existence of such situation, to disclose that matter to customers and carryon the
securities business having regard to the interest of customers,
g. To make such provision as may be necessary to fulfill commitments made in relation
to the securities business,
h. To properly maintain records relating to the securities business,
i. To provide for necessary training to employees in order to prepare skilled human
resources for the operation of the securities business,
j. To observe such other principle as prescribed in relation to the operation of the
securities business.
5. Suppose, after the change of government, the staff of Nepal Securities Board office
demanded the Government to remove the Chairperson of this Board, and the
government said it would be according to law. State the circumstances on which
the Chairperson of Nepal Securities Board may be removed from office by the
Government of Nepal pursuant to the Securities Act, 2063.
Answer:
Section 12 of the Securities Act, 2053 provides the following circumstances on
which a Chairperson of Nepal Securities Board may be removed from office:
(1) Where there occurs a circumstance for removal of the Chairperson of this
Board referred to in section 12(2) of this Act, the Government of Nepal shall
remove the Chairperson, as the case may be.
Provided that prior to making such a removal, the Government of Nepal shall not
deprive the concerned person of a reasonable opportunity to defend him/herself.
(2) The Chairperson, as the case may be, shall be removed from the office in any
of the following circumstances:-
(a) If one is disqualified to be a Chairperson, as the case may be, pursuant to
Section 11 of this Act (which sets disqualifications for this post),
(b) If one commits any act contrary to the interest of investors in securities or
any act that may cause loss or damage to the development of capital market,
(c) If one suffers from lack of competence to implement, or cause to implement,
such functions required to be performed by this Securities Board to attain its
objectives pursuant to this Act or the Rules framed under this Act,
(d) If one has been held disqualified to carry on any occupation or business by
the reason of misconduct and his or her certificate has been revoked or he or she
has thus been restricted to carry on a business,
(e) If one remains absent from three consecutive meetings of this Board without
giving a notice to it.
6. How does the Secured Transaction Act, 2063 protect the interest of creditors
in the security?
Answer:
The Secured Transaction Act, 2006 is a new experience in our system having the
objective to protect the interest of creditors in the security. Basically this law is
applicable in the business of banks and financial institutions. Some important
provisions incorporated in the Act for the protection of the creditors' interest are
as follows:
 Recognition of security interest of the creditors in transaction like pledge,
hypothecation, hire purchase and lease, etc.
 Sufficient provision for the contingent rights of the creditors for enforcement of their
interest in case of not fulfilling the liabilities mentioned in the agreement by the
debtor.
 Applicable to all the transactions where the effect is to secure an obligation with
collateral, including pledge, hypothecation, and hire purchase; the sale of accounts
and secured sales contract; and the lease of goods.
 Establishment of the Office of Registrar for the registration of the secured
transactions. The records of this office are public records. Any person has right to
inspect and obtain copies of records held by the registration office.
 A security agreement must be in the form of a record that is effective according to its
terms between the parties, against purchasers of the collateral, and against the
creditors and the lien holders, except as otherwise provided in this Act. A security
agreement may be related to one or more than one security interest.
In case of default, the security holder may take possession or control of collateral
without legal proceedings if the security giver has agreed in writing for this. In case it
is not stated in writing, the security holder shall be entitled to take possession or
control over the collateral with the order from the Court.
Remedy is also available in case of interference made by the defaulter while
enforcing the security. A fine may be imposed against a person who commits an
offence under this Act with an amount not less than NRs 50,000 and not exceeding
NRs 5,00,000 or an imprisonment not exceeding six months or both depending on
the gravity of the offence.
Nepal Rastra Bank Act 2058 and Banks and Financial Institution Act, 2063:
1. Auditing plays an important role in the management of the banking and financial
institution as a part of the good corporate governance. Discuss how Provisions
Relating to Auditing in case of Banks and Financial Institutions is to support this
objective.
Answer:
Section 60 of the Banks and Financial Institutions Act (BAFIA) 2063 prescribes the
provision regarding the appointment of an auditor as follows
1. The general meeting of a bank or financial institution should appoint an auditor.
2. The general meeting should appoint an auditor from amongst the auditors
included in the list of auditors approved by the Rastra Bank. However the general
meeting should not appoint the same auditor for more than three consecutive
times.
3. While appointing an auditor from amongst the auditors included in the list o
auditors approved by the Rastra Bank, the general meeting should appoint a
chartered accountant in the case of licensed institution of Class ―A‖ or ―B‖ or
―C‖, and a chartered accountant or a registered auditor in the case of a licensed
institution of class ―D‖.
4. The Rastra Bank may, at any time, remove any auditor who fails to fulfill his or
her duty from the list of auditors entitled to audit the accounts of licensed
institutions.
Accordingly Sec. 61 of the Act an auditor will not be eligible to be appointed as an

auditor of a licensed institution and cease to hold the office of auditor in the
following cases:
1. A director of the licensed institution or his or her family member;
2. An employee of the licensed institution;
3. A person working as a partner of any director or employee of the licensed
institution;
4. A debtor of the licensed institution;
5. A person who has been punished in an offence relating to audit, and a period of
five years has not been lapsed after he or she has served the punishment;
6. A person who is insolvent;
7. A person, firm, company or institution having subscribed one percent or more or
the shares in the licensed institution;
8. A person who has been punished by the court for a criminal offense involving
moral turpitude, and period of five years has not lapsed after he or she has served
the punishment;
9. A person who has been punished by a court for an offense relating to corruption or
cheating;
10. A person who is not included in the list of auditors approved by the Rastra Bank.
Section 165 of the Companies Act 2063 prescribes the functions, duties and powers
of audit committed as follows:
a. To review the accounts and financial statements of the company and ascertain the
truth of the facts mentioned in such statements;
b. To review the internal financial control system and the risk management system
of the company;
c. To supervise and review the internal auditing activity of the company;
d. To recommend the names of potential auditors for the appointment of the auditor
of the company, fix the remuneration and terms and conditions of appoint of the
auditor and present the same in the general meeting for the ratification thereof;
e. To review and supervise as to whether the auditor of the company has observed
such conduct, standards and directives determined by the competent body
pursuant to the prevailing law as required to be observe in the course of doing
auditing work;
f. Based on the conduct, standard and directives determined by the competent body
pursuant to the prevailing law, to formulate the policies required to be observed
by the company in respect of appointment and selection of the auditor;
g. To prepare the accounts related policy of the company and enforce, or cause to be
enforced the same;
h. Where any regulatory body has provided for the long term audit report to be set
out in the audit report of the company, to comply with the terms required to
prepare such report;
i. To perform such other terms as prescribed by the board of directors in respect of
the accounts, financial management and audit of the company.
The provision regarding the appointment of an auditor clearly shows that this
provision has been made to control and regulate the banks and financial institutions
management. The provision of the appointment of an auditor only for three terms
clearly indicates that the particular auditor should not be there for long time to avoid
the probabilities of being influenced by the board. Accordingly it can assure that the
account of that particular institution has been kept perfect way. In this respect, the
functions and duties of the auditor plays an important role for the promotion of the
concept of good corporate governance.
2. Nepal Rastra Bank, in the process of going through the examination and
investigation, is in the opinion that the particular banking institution is not
conducting its business in a proper way and not in a position to carry out its
business properly. Nepal Rastra Bank formed the opinion to cancel the registration
of that particular licensed institution. You as an expert, explain the circumstance
how the Rastra Bank can proceed to deregister the ban under the Banks and
Financial Institutions Act 2063.
Answer:
Sec. 35 of the Banks and Financial Institutions Act (BAFIA) 2063 prescribes the
provision regarding deregistration of the Banking and Financial Institutions.
According to it, if any institutions having license under the Act to carry out
financial transactions does anything in violation of the provisions of Nepal Rastra
Bank Act 2058 or BAFIA or the rules and regulation made there under or fails to
comply with the order and direction given by NRB or fails to carry out the
transactions in the interest of the depositors, NRB can cancel the license give for
doing financial transaction by prescribing certain time or can suspend the
transaction of such bank and financial institution fully or partially.
Under Sub-Section 2 of the Section 35 of the Act, Nepal Rastra Bank may cancel
the license obtained by a licensed institution to carry on the financial transactions
pursuant to this Act for doing financial transactions by license holder bank and
financial institution under following conditions:
a. If the concerned bank and financial institution request for cancellation of license;
b. If financial transaction is not commenced within six months after receiving

license;
c. If no banking transaction is carried out continuously for more than a month

continuously;
d. If banking transaction is carried out in such a manner as to the contrary to the

right and interest of the depositors;
e. If any provisions of NRB Act 2058 or rules and regulation and bye-laws framed
there under the Act is violated;
f. If condition prescribed by NRB is violated;
g. If it fails to comply with the order and directives issued by NRB;
h. If it becomes insolvent;
i. If the banks and financial institution is found to have obtained the license by
submitting false details;
j. If the banks and financial institution licensed is amalgamated with another bank
or financial institution.
If a banks and financial institutions duly makes an application for the cancellation
of its license voluntarily to Nepal Rastra Bank, NRB have to give its decision
within 45 days after the receipt of such notice. NRB will give its decision in
writing with the reason for its order. If a decision is made to cancel a license
pursuant to this provision, the Rastra Bank should publish a public notice thereof.
A notice in writing of the decision will be provided to the concern institution.
Where a decision is made to cancel a license as said above, the Rastra Bank
should publish a public notice thereof.
3. How does Nepal Rastra Bank mobilize Foreign Exchange Reserve? Explain it in the
light of Nepal Rastra Bank Act, 2058.
Answer:
In pursuance to section 66 of the Nepal Rastra Bank (NRB) Act, 2058, NRB will
mobilize Foreign Exchange Reserve in the following manner:
(1) NRB will mobilize the foreign exchanges reserve. Such reserve will be denominated
in the respective foreign exchange and such reserve will consist of the following
assets:-
(a) Gold and other precious metals held by or for the account of NRB;
(b) Foreign currencies held by or for the account of NRB;
(c) Foreign currencies held in the accounts of NRB on the books of a foreign central bank
or other foreign banks;
(d) Special drawing rights (SDR) held by NRB at the International Monetary Fund;
(e) Bill of exchange, promissory note, certificate of deposit, bonds, and other debt
instrument payable in convertible foreign currencies issued by any debtor or liability
holder and held by NRB;
(f) Any forward purchase or repurchase agreements of NRB concluded with or
guaranteed by foreign central banks or public international financial institutions, and
any futures and option contracts of NRB providing for payment in freely convertible
foreign currency.
(2) While selecting the assets referred to in Sub-section (1), due consideration should be
given to NRB's capital and liquidity to maximize earnings.
(3) NRB will maintain international reserve at a level, which will be adequate for the
execution of monitory and exchange rate policies and for the prompt settlement of
the international transaction.
(4) If international reserves have declined or, in the opinion of Bank, are in danger of
declining to such an extent as to jeopardize the execution of the monetary or
exchange rate policies in the prompt settlement of the country's international
transactions, NRB shall submit to Government of Nepal a report on the international
reserves position and the causes which have led or may lead to such a decline,
together with such recommendations as it considers necessary to remedy the
situation.
(5) Until such time as, the situation referred in Sub-section (4) has been rectified, NRB
will make further such report and recommendations to Government of Nepal.
(6) NRB will hold the foreign exchange reserve referred to in sub-section (1) in its
balance sheet.
4. Jyoti Bank Ltd. has nine directors inclusive of one independent
professional director. Advise whether the Bank complies BAFIA and
Companies Act, 2063 clearly stating the provision regarding formation of
the Board and number of directors?
Answer :
Section 12 of the BAFIA, prescribes the provision regarding the Formation of
Board of directors as follows:
(1) Every bank or financial institution shall have a Board of Directors. The Board shall
consist of not less than five and not more than nine directors.
(2) Subject to sub-section (1), there shall be appointed to the Board a professional
director from the list of professional experts maintained by Nepal Rastra Bank
pursuant to Section 13. The director to be so appointed shall not be required to have
subscribed any share of the concerned bank or financial institution.
(3) A director chosen by the directors from among themselves by a majority decision
shall be the chairman of the Board of Directors.
Section 86 of the Companies Act, 2063 - Board of directors and number of directors:
(1) The appointment and number of directors of a private company shall be as provided
in its articles of association.
(2) Every public company shall have a board of directors consisting of a minimum of
three and a maximum of eleven directors.
(3) In forming the board of directors pursuant to sub-section (2), at least one independent
director, in the case of the number of directors not exceeding seven, and at least two
independent directors, in the case of the number of directors exceeding seven, shall be
appointed from amongst the persons who have the knowledge as prescribed in the
articles of association of the company and gained knowledge and experience in the
subject related with the business of the company concerned.
(4) Any one director selected by the directors from amongst themselves shall be the
chairman of the board of directors.
Considering the above mentioned provisions we can conclude that the Bank has complied
BAFIA. However, as the number of directors is nine it is suggested to reduce one non
professional director and introduce an independent director to comply with requirements
of the Companies Act, 2063.
5. Appointment and Disqualification of directors under BAFIA, 2006

The term director includes any person occupying the position of director by whatever
the name called like Chairperson and an alternate director. Similarly the mere
description of someone as a director (e.g. an employee as an associate director) will not
necessarily make them one for present purposes. Therefore the articles may provide for
the appointment of senior employees as special directors etc. but without the right to
attend board meetings and they are not directors for the purpose of company law.
Sec.17 of Banks and Financial Institution Act (BAFIA) 2006 prescribes the provision
regarding appointment of directors. The directors of a bank or financial institution will
be appointed by the general meeting of the bank or financial institution who are eligible
to be appointed as a director.
Sec.18 of Banks and Financial Institution Act (BAFIA) 2006 prescribes the provision
regarding disqualification of directors. According to it any of the following persons will
not be eligible to be elected or nomination to the office of, or continue to hold the office
of, a director.
i) Who is below 21 years of age,
ii) Who is of unsound mind or insane,
iii) Who is a declared insolvent,
iv) Who has been blacklisted in connection with any transaction with any bank
v) Who is director of any bank or financial institution carrying on the similar business
vi) Who is a partner in any kind of contract agreement with concern bank.
vii. Who has acquired membership of Stock Exchange to act as a securities
dealer.
viii. Who has not subscribed the minimum number of share to be eligible for appointment a
director.
ix. Who is employee of Government of Nepal, or Rastra Bank or bank or
financial institution.
x. Who, having a liability to pay tax pursuant to the laws in force, has failed
to pay the same.
xi. Who is convicted by a court of law on an offence of corruption or cheating.
A director will continue to hold the office of a director until he suffers from
disqualification as mentioned. Similarly a directorship may not be retained where
the general meeting passes a resolution to remove him from the office of director, or
if he is held by a court to have done any act involving dishonesty in the activities of
the bank and financial institution or if he did any act prohibited by the Act from
being done as a director.
The tenure of office of a director of a bank or financial institution will be as
prescribed in its articles of association, but not exceeding four years.
Industrial Enterprises Act, 2049 ad Foreign Investment and Technology transfer

Act, 2049:
1. How is dispute settled, if it arises between a foreign investor and a national
investor under the Foreign Investment and Technology Transfer Act,
2049? Also discuss the other particular laws if applicable in this case.
Answer:
According to Section 7 of the Foreign Investment and Technology Transfer Act
(FITTA), 2049, the dispute shall be settled as follows:
(1) If any dispute arises between a foreigner investor, national investor or the
concerned industry, the concerned parties shall be required to settle the
dispute by mutual consultations in the presence of the Department of
Industries.
(2) If the dispute could not be settled in the manner as referred to in Sub-section
(1) above, it shall be settled by arbitration in accordance with the prevailing
arbitration Rules of the United Nations Commission on International Trade
Law (UNCITRAL).
(3) The arbitration shall be held in Kathmandu. The laws of Nepal shall be
applicable in the arbitration.
(4) Notwithstanding anything contained in Sub-sections (1), (2) and (3) above,
disputes arising in regard to foreign investment made in the industries with
investment as prescribed may be settled as mentioned in the foreign
investment agreement.
2. Who is foreign investor? What facilities and concessions are granted to the foreign
investors under the Foreign Investment and Technology Transfer Act 2049?
Answer:
According to The Foreign Investment and Technology Transfer Act 1992 foreign investor is a
person who makes an investment in share, reinvestment of the earning derived from the
investment share, and investment made in the form of loan or loan facilities.
Section 5 of the The Foreign Investment and Technology Transfer Act 1992 prescribes the
facilities and concession provided to the foreign investor. According to it a foreign investor
making investment in foreign currency will be entitled to repatriate the following amount
outside the Kingdom of Nepal:
a) The amount received by the sale of the share of foreign investment as a wholor any part
thereof.
b) The amount received as profit or dividend in lieu of the foreign investment.
c) The amount received as the payment of the principal of and interest on any foreign loan.
Similarly a foreign investor will be entitled to repatriate outside the Kingdom of Nepal the
amount received the under an agreement for the transfer of technology in such currency as set
forth in the concerned agreement.
S. 6 of the Act prescribes the visa facilities. A foreign national visiting the Kingdom of Nepal
in connection with undertaking any study or carrying out any research with the objective of
making investment in the Kingdom on Nepal will be provided a non tourist visa for up to six
month. A foreign investor or dependent family will for the purpose of stay in Kingdom of
Nepal be provided a business visa until the foreign investment is returned. There is a
provision of residential visa where a foreign investor or his dependent family who, at a time
makes investment in an amount no less than one hundred thousand US dollar or in convertible
foreign currency equivalent thereto.
4. Discuss how Industrial Promotion Board is constituted under the Industrial
Enterprises Act 2049. Write its functions, duties and power of the Board.
Answer:
Industrial Promotion Board has been defined by The Industrial Enterprises Act, 2049 under
section 2(g). According to it ―Board‖ means the industrial Promotion Board constituted
under Section 12.
Section 12 of the Act has empowered Government of Nepal to constitute an Industrial
Promotion Board consisting of the following members:
a. The Minister or State Minister for Industries- Member
b. The Assistant Minister of Industries – Member
c. Member (looking after industries), National Planning Commission- Member
d. The Governor, Nepal Rastra Bank – Member
e. The Secretary, Ministry of Industry- Member
f. The Secretary, Ministry of Finance – Member
g. The Secretary, Ministry of Tourism – Member
h. The Secretary, Ministry of Commerce – Member
i. The Director General, Department of Cottage and Small Industries – Member
j. Representative, Federation of Nepal Chamber of Commerce and Industry – Member
k. Two persons nominated by Government of Nepal, either from among the industry,
Commerce and tourism sector organizations or from among the person of high
distinction in the same field.
l. The Director General, Department of Industries- Member Secretary.
However Government of Nepal may, by notification published in the Nepal Gazette,
make necessary alteration or change in the membership of the Board.
The Act further prescribes that the Board, if it deems necessary, is entitle to invite any
national or foreign expert or consultant at any meeting of the Board to participate
there in as an observer. The Board can fix the procedures relating to the meetings of
the Board.
Section 13 of the Act prescribes Functions, Duties and powers of the Board.
According to it Industrial Promotion Board is to provide co-operation in formulation
and implementation of policies, laws and regulations pertaining to the
industrialization of the country so as to make it competitive along with coordination
between the policy and implementation level of industrial policy. It attempts to avoid
and prevent effects of environmental pollution and its effect in public health. IPB can
recommend to Government of Nepal for the inclusion of any industry in the
classification of industries. IPB is also entitle to give directives to the concerned body
on receipt of complain regarding facilities and concessions to be made available by
the committee.
Under Section 26 IPB may delegate its power to concerned Department, Office,
official Committee of any member of the Board as necessary.
5. Ramesh Maskey wants to establish a pashmina industry at Bargaun. It is the
industry which is mentioned in annex 1 and not required permission to
establish as per the Industrial Enterprise Act. Though Ramesh Maskey is
still interested whether this pashima industry should be registered in the
Department of Cottage and Small Industries under this Act?
Answer:
Section 10 of the Act has made certain provisions regarding the registration of
industries. As per this section:
(1) In establishing any industry which requires permission to that effect pursuant
to this Act, registration in the Department as prescribed shall be required to be
made.
(1a) In establishing any industry not requiring permission under the Act, an
application shall be required to be made to the Department for its registration
setting out the nature, the classification of the industry, the place where the
industry is to be situated, the machinery to be employed by the industry, raw
materials, auxiliary raw materials, chemicals, packaging goods and the name of
the industrialist.
(2) Notwithstanding anything contained in Sub-section (1a) above, a Cottage
Industry shall be required to get registered within 6 months from the date of
operation.
(3) The Department shall, within twenty one days from the date of application for
registration pursuant to Sub-section (1), (1a) or (2) above register such industry
and issue an industry registration certificate to the applicant as prescribed.
(4) The registration of a Cottage and Small Industry shall be made in the
Department of Cottage and Small Industries or any district level office under the
Department or any office designated by the Department on its behalf and the
registration of a medium and Large Industry shall be made in the Department of
Industries or at such office as may be designated by the Department.
Ramesh Maskey has to get the industry be registered in the Department of Cottage
and Small Scale Industries.
Labour Act, 2048
1. Nepal Solar Power Industry is in operation with 225 Nepalese workers. Sagun
Kshetri, the manager thinks the business of the Industry would be more
successful and prosperous, if he recruited certain foreign national in the post of
metal crafting and designing workers. Do you think Mr. Sagun Kshetri can
appoint foreign nationals in the Industry?
Answer:
Section 22 of the Industrial Enterprises Act 1992 prescribes that industrial manpower
required for any industry should have to be recruited from among Nepali citizens. The
Act permits only national human resources required for any industry and not foreign
nationals. Similarly Section 4A of Labour Act 1992 also prescribes the provision
regarding prohibition of engaging Non-Nepalese Citizens at work. According to it non-
Nepalese citizens should not be permitted to be engaged at work in any of the posts exist
in the establishment. Labour Act also prescribes the procedure of selection and
appointment an employee in the industrial establishment.. Under Section 4 of the Labour
Act 1992 where it is required to appoint a worker or employee in any post classified in
the establishment, the manager should advertise in order to select such a worker or
employee and worker or employee so selected shall have to be provided with
appointment letter and be engaged at work.
In the given issue, first the Industrial management should try to employ among Nepalese
only by advertising the recruitment notice in the national level public newspaper and
journals. If a Nepalese citizen could not be available for any skilled technical post even
after publishing an advertisement in national level public newspaper and journals, the
manager may appoint foreign national by obtaining prior approval of the concern
authority. So proviso clause to Section 4A of Labour Act 1992 permits to recruit foreign
national in certain cases. According to it if any industry cannot be operated without
person living outside his own country expatriate manpower, foreign national may be
appointed in such industry with the prior approval of the Department of Labour for
maximum period of up to five years not exceeding two years at a time. If a person so
appointed happens to be a specialized kind of skilled technical post such person may be
appointed for up to seven years.
However, the Manager, who engages non-Nepalese citizens at work should have to make
arrangements for making the Nepalese citizens skilled and for replacing the non-citizens
gradually by them.
Therefore the proviso clause of the Act prescribes provision allowing appointment of
non-Nepalese in certain circumstances. Metal crafting and designing work being a
specialized skilled and technical post, may be permissible to appoint by the Industry by
obtaining approval from Department of Labour and simply framing the metallic work is
simple and ordinary job which does not required special skill so may not be valid
appointment. However the validity is backed by the evidence of non-availability of the
required skilled technical manpower among Nepalese Citizen.
2. Does a proprietor of an industrial establishment have any right to curtail
production or service of his enterprise or closedown his enterprise or a part
thereof? If so, explain the process in reference of the Labour Act, 2048.
Answer:
Pursuant to Section 11 of the Labour Act, 2048 a proprietor has the right to curtail
production or service of his enterprise or close down his enterprise partially or full on
certain ground as follows:
i. In case where the curtailment of production or service in any enterprise for some
period is necessary or where operation of the enterprise cannot be continued for
some special circumstance, the proprietor may curtail its production or service or
may close the enterprise or a part thereof.
ii. Permission from the Labour Office in case of period up to fifteen days and from the
Department of Labour in case of a period for more than that should have to be taken
while curtailing the production or service or closing the enterprise or any part
thereof. The Labour Office should inform the Department of Labour about such
permission.
iii. While doing curtailment in the production or service, permanent workers or
employees other than workers or employees working on shifts or on wages will be
kept in reserve by giving them half of the remuneration. Such workers or
employees will continue to receive all appropriate facilities which they are
receiving.
iv. If any worker or employee kept in reserve refuses to work on another assignment or
similar nature on equal remuneration offered by the proprietor in the same
enterprise or another enterprise under his control or if he does not come in the
enterprise once a day during office hours or on other situations as prescribed, the
proprietor may withhold the remuneration and facility of such worker and
employee.
3. Mr. Ram Bahadur Tamang, a permanent security guard at ABC Bank Ltd. is
shot by a gang of robbers during working hours while being on duty at the
premises of the Bank. The death of Mr.Tamang has left his family in deep
financial problem as he was the only bread earner for the family. State the
provisions regarding notice and compensation as per the Labour Act, 1992 and
Labour Rules, 1993? Also mention the circumstances when compensation is not
payable according to the rules?
Answer:
According to Labour Act 1992 S. 35 management has to furnish notice regarding the
death of Mr. Karki as follows:.
1) In case any worker or employee dies or becomes unable to work for more than 48
hours after sustaining injury due to any accident in the establishment, or for any
other reason, the concerned establishment shall notify the labor office within three
days. In case the establishment finds any worker or employee to have contracted
any occupation-related disease, it shall notify the labour office within seven days
from the date when it becomes aware of it.
2) The authority empowered to conduct investigations into the disease or accident
mentioned in the notice received under Sub-Section (1), and its functions, duties and
powers, as well as the working procedures, shall be as prescribed.
Accordingly Rule 17 of Labour Rules 1993 prescribes Compensation in the event
of death
In case any worker or employee dies instantly or in the course of treatment as a
result of an accident while discharging the duties assigned to him by the
establishment, an amount equal to his three year remuneration calculated at the rate
of remuneration being drawn by him shall be paid in lump sum to his nearest heir as
compensation
However Rule 19 prescribes the circumstances when compensation is not payable
in the following circumstances:
a. In case any worker or employee dies or becomes physically disabled as a result of
a natural calamity while discharging the duties assigned to him by the
establishment, he or his heir shall not be entitled to compensation under these
rules.
b. Considering the above mentioned provisions the Bank has a duty to notify the
labour office within three days regarding the death. The nearest heir of Mr.
Tamang will be eligible for compensation equal to three year remuneration as
drawn by him and compensation would not be payable only if such death is due to
a natural calamity.
Insurance Act 2049:
1. What are the circumstances in which the Insurance Board may impose a ban
or suspend entirely or partially any type of business being operated by the
insurer under the Insurance Act, 2049?
Answer:
(1) Section 12A of the Insurance Act, 2049 provides that the Insurance Board may
impose a ban or suspend any portfolio of the insurance business of an insurer the
total of its business on any of the following grounds:
(a) If the directives provided by the Board from time to time regarding the procedures
to be followed by the insurer during the operation of the insurance business has
been violated.
(b) If the insurer provides loan to any corporate body in which any of its directors or
his family member is working as a managing agent or partner, or provides
guarantee or security of any kind for any loan provided to him by other by
violating Section 4 of the Act.
(c) If the Insurer does not provide information to the Board to be provided
pursuant to Section 15,
(d) If the Insurer does not maintain the accounts and record, to be maintained
(e) If the Insurer does not maintain separate accounts and records to be
maintained separately pursuant to Section 20,
(f) If the Insurer does not maintain the fund to be maintained by it pursuant to
Section 21 or bears liability of one Insurance Business from the fund maintained for
another business,
(g) If the Insurer does not maintain the compulsory reserve fund to be
maintained by it pursuant to Section 22,
(h) If the Insurer accepts the insurance risk without receiving the insurance premium
(I) If the Insurer does not re-insure pursuant to Section 28.
(2) Before imposing a ban on the Insurance Business of an Insurer pursuant to Sub-
section (1), the Board shall provide a reasonable time-limit to submit clarification to the
concerned Insurer clearly stating the reasons for imposing the ban on its Insurance
Business.
(3) If the concerned Insurer does not submit its clarification within the time-limit
mentioned in Sub-section (2) or the clarification submitted by it is not found to be
satisfactory, the Board may impose a ban on the Insurance Business of the concerned
Insurer pursuant to Sub-section (1) and shall publish a notice in two major newspapers to
be published in Nepal for the information of public in general.
(4) During the time period of a ban on the Insurance Business of any Insurer pursuant to
Sub-section (3) such Insurer shall make payment of claims of compensation filed against
it as prescribed.
(5) If the ban is imposed in the Insurance Business of any Insurer under this section, the
Board may, if it finds the evidence submitted by the Insurer within the time-limit by
stating that the circumstances for imposing the ban on its business existed no longer to be
satisfactory, impose a fine as prescribed and lift the ban.
2. State the grounds under which the Insurance Board may cancel the registration of
an insurance company (Insurer) under the Insurance Act, 2049
Answer:
Under the following grounds as stipulated by section 13 of the Insurance Act,
2049 the registration of an insurer may be cancelled by the Insurance Board:-
(1) The Insurance Board may cancel the registration of an insurer by providing a
written notice with effect from the date prescribed in the same notice in the
following circumstances:
(a) If the insurance business is not started within six months from the date of
obtaining the certificate,
(b) If it is felt that the liability of the insurer exceeds its assets within Nepal,
(c) If the insurer could not fulfill the liability pursuant to the decision within three
months from the date of final decision of the court in the case filed under the
insurance policy issued within Nepal,
(d) If the head office of the insurance business of any foreign insurer is situated
outside Nepal and in case it is felt that Nepalese Insurer has not obtained equal
facilities there which are enjoyed by the foreign insurer pursuant to the prevailing
law of such country,
(e) If the insurer does not open its office inside Nepal,
(f) If the insurer does not perform the functions to be performed or has performed
any functions which is not to be performed pursuant to this Act or the Rules made
under this Act.
(2) Before canceling the registration of an insurer pursuant to sub-section (1) above,
the Insurance Board shall provide a reasonable time-limit to submit clarification to
the concerned insurer, stating the reasons for canceling its registration.
(3) If the concerned insurer does not submit its clarification within the time period
mentioned in sub-section (2) above or in case the clarification submitted by it is
found not to be satisfactory, the Insurance Board shall cancel the registration of
such insurer pursuant to sub-section (1) above, and shall publish a notice in two
major newspapers to be published in Nepal for the public information in general.
(4) Mere cancellation of the registration of an insurer pursuant to this section shall
not make any effect to the rights and liabilities of the concerned insurer regarding
to any action taken or functions performed before the cancellation.
3. How a person can get involved in the insurance business that is desirous to
engage in the insurance business as an agent or surveyor or as a broker?
Answer:
Insurance agent, surveyor and broker is a kind of technical job. So merely desiring to
be involved in the business is not enough. For this he/she should possess
qualification as prescribed. It is required to register the name of the concerned
insurance business person in the Insurance Board.
Chapter five of the Insurance Act 1992 prescribes the provision regarding
registration of the Insurance agent, surveyor and broker under the Section 30, 30A
and 30 B respectively. According to Section 30, any person desirous to work as an
insurance agent has to submit an application to the Board along with the fees and
recommendation of the concerned insurance business person. The Board after
making necessary inquiry upon the application may provide a license of an Insurance
Agent to the applicant. Similar process is adopted in case of registration of Surveyor
and Broker. The Insurance Agent, Surveyor or Broker has to submit an application to
the Board by the end of Chaitra of each for the renewal of their license. The Board
may extend the time limit of renewal period for a maximum period of six month on
receipt of the application for the extension of the time with reasonable ground. The
Board may cancel the license of the Agent, Surveyor or Broker who fails to renew
their license or for any act committed contrary to the Act and Rules thereof.
The Act under Sec. 32 prescribes the disqualification of the Insurance Agent,
Surveyor or Broker. According to it, any person who is incompetent to enter into a
contract or has done anything regards insurance business causing loss or damage to
the insurance business person or Insurance Policy Holder cannot become Insurance
Agent, Surveyor or Broker.
International Financial transaction Act, 2054:
The governor of Nepal Rastra Bank is confused about formation of
International Financial Transactions Accreditation Committee. Please
advise the governor.
Answer:
Section 11 of International Financial Transaction Act, 2054 has consisted of the
provisions concerning formation of International Financial Transactions
Accreditation Committee. An International Financial Transactions Accreditation
Committee consisting of the following members shall be formed for the purpose
of granting licenses to international financial entities to carry out international
financial transactions, and for the purpose of regulating financial transactions to
be carried out by such entities:
a. Governor, Nepal Rastra Bank - Chairperson
b. Secretary, Ministry of Finance - Member
c. Secretary, Ministry of Law and Justice - Member
d. One person nominated by Government of Nepal
from among Chartered Accountants - Member
e. One person nominated by Government of Nepal
from among economists - Member
The Accreditation committee may invite national or foreign experts or advisors
involved in international financial transactions to participate at its meetings as
observers. The tenure of office of the members nominated under point (d) and (e)
above shall be two years. An officer-level employee of Nepal Rastra Bank as
designated by the Accreditation Committee with the consent of Nepal Rastra
Bank shall act as secretary of the Accreditation Committee. The office of the
Accreditation Committee shall be located at Nepal Rastra Bank. The working
procedures of the meetings of the Accreditation Committee shall be as
prescribed.
International Financial Mediators Act, 2058:

1. Discuss the procedure of licensing to Financial Mediators under the
Financial Mediator Act, 2058:
Answer:
Chapter 2 of the Financial Mediator Act, 2058 prescribe for the procedure of licensing to
financial mediators‘. Section 3 of the Act lays down prohibition on carrying out act of
financial intermediation without license.
If an institution, which has been registered with an objective to carry out the act of
financial intermediation, intends to carry out the act of financial intermediation pursuant to
this Act, the institution has to make an application to Nepal Rastra Bank (NRB) in the
prescribed format.
The procedure of licensing to Financial Mediators under Section 4 of the Act are as
follows:
Under section 4 of the Financial Mediators Act, 2058 any societies registered under
Societies Registration Act, 1977 can apply to Nepal Rastra Bank for conducting the
functions of the financial mediators in the prescribed format explicitly setting the following
details:
a. Certificate of registration and constitution of the society
b. Names, address and occupations of the office bearers of the society
c. Total number of the members of the society
d. Movable and immovable properties of the society
e. Geographical locations where the society intends to work as financial mediator
f. Other matters as prescribed
Section 5 of this Act, sets parameters how license should be issued by NRB. If an
application is made pursuant to Section 4, NRB will make necessary examination of the
application. After such examination if NRB considers appropriate to issue the license, it
will issue the license to the applicant, in the prescribed format, to carry out the act of
financial intermediation, by collecting the prescribed fees.
In issuing the license or in giving information of rejection, such license information has
to be issued or given within a maximum period of seventy five days after the date of
receipt of application or the date of receipt of additional information sought as per the
Act.
Under Section 6 NRB may specify terms required to be abided by the institution in
carrying in carrying out the act of financial intermediation.
It will be the duty of the institution to abide by such terms so specified.
2. XYZ is an organization registered under the 2034 Registration of Associations Act

with the objective of working as a financial intermediary. Now it desires to work as
a financial intermediary under the Financial Intermediary Act 2058. If the
company asked you to suggest for obtaining the license in this respect, how would
you suggest the company regarding the procedure of obtaining the licensing to
Financial Mediators?
Answer:
Section 3 of the Financial Intermediary Societies Act 1999 prohibits to work as
Financial Intermediary without obtaining license. Section 4 of the Financial
Intermediary Societies Act 1999 prescribes the provision regarding procedure of
licensing to Financial Mediators as follows:
Under section 4 of the Financial Intermediary Societies Act, 2055 any societies which
has been registered under the Societies Registration Act, 1977 can apply to Nepal Rastra
Bank for conducting the functions of the financial intermediary in the prescribed format
explicitly mentioning the following particulars:
i) Certificate of registration and constitution of the society.
ii) Names, addresses and occupations of the office bearers of the society.
iii)Total number of the members of the society
iv) Movable and immovable assets of the society
v) Geographical locations where the society intends to work as financial intermediary.
vi) Other matters as prescribed from time to time.
According to Rule 4, while applying for license the society should provide the
following:
1. Institution desiring to do financial intermediaries work has to file an application as
per the format prescribed.
2. While filing application as per said above following details and documents as per
mention should be provided.
a. Certified photocopy of citizenship certificate of officers of the institution and
recent passport size photo including personal details.
b. Last three fiscal year audit report of the institution.
c. Certified photocopy of certificate of association of institution with Council for
Social welfare.
d. Certified photocopy of agreement relating to taking donation or loan by
institution from domestic and international institution or from person.
e. Business plan as per mention format by bank.
On receipt of an application as said above, the Bank will conduct necessary

inquiries into it, and, if it so deems necessary it may demand additional information
from the applicant-society and issue the license to work as a financial intermediary
to the applicant.
Cooperative Act 2048:

1. What are the functions and duties of Registrar under Cooperative Act, 2048/Rules
2049 of Nepal?
Answer:
Under Section of the Cooperative Act, 2048 prescribes the power to the Government of
Nepal to appoint a registrar to register cooperative societies and perform the functions as
mentioned in Rule 16 of the Cooperative Rules 2049. According to the legal provision as
mentioned in Rule 16 of the Cooperative Rules 2049 functions of the registrar are as
follows:
b. To register societies after conduction necessary investigations into applications
for the purpose, and issue certificates of registration.
c. To approve the bye-rules framed by societies or union for operating their
business subject to the Act and Rules thereof.
d. To have the board of directors of societies elected.
e. To amalgamate or demerge societies.
f. To inspect and monitor societies from time to time.
g. To coordinate the operation of administrative functions of societies in order to
promote their activities and inspect or make arrangements for inspecting their
accounts and records.
2. Explain cooperative societies' right to conduct banking business under the

Cooperative Act, 2048
Answer:
According to the provisions prescribed by S.26 of the Cooperative Act, 2048, provides
that a cooperative association or society may accept saving deposits from its members
and lend loans to its members. As per the legislative provisions the powers to carry on
banking transactions by cooperative societies can be discussed as follows:
(1) A Cooperative association or society may accept saving deposits from its member and
lend loans to its members.
(2) A Cooperative association or society has to obtain prior approval of NRB in order to
carry on other banking transactions including acceptance of deposits and
disbursement of loans limited only to its members, other than the transactions
mentioned in sub-section (1) above. Such association or society has to observe the
terms and conditions prescribed and directions given by the NRB.
(3) A Cooperative association or society carrying on business after being registered prior
to the commencement of this Act has to make arrangements for carrying on
transactions pursuant to sub-section (1) above or sub-section (2) above within one
year after the date of commencement of this Act.
(4) Notwithstanding anything contained elsewhere in this Act, cooperative associations or
societies may jointly form a cooperative bank.
(5) If an application, accompanied by a recommendation of NRB, is made for the
establishment of a bank pursuant to sub-section (4) above, the Registrar may hold
necessary inquiry and register such bank.
(6) A bank registered and established pursuant to sub-section (5) above may carry on the
banking transactions under the Commercial Bank Act, 2031 approved by NRB; and
the bank has to observe the terms and conditions prescribed by and the directions
given from time to time by NRB.
3. Bhrikuti Cooperative Society Ltd., decided to write off a loan of Rs. 2

Lakhs due for long and the loanee was not traceable for over 10 years with
a simple majority of the total number of shareholders. Decide if the
decision is valid.
Answer:
Under section 31 of the Co-operatives Regulation 2031, any loan as a bad debt can
be written off based on the facts with a 2/3 rd majority of the shareholders physically
present in the annual general meeting which should have been validly conducted. In
this sense the present decision by a simple majority is not correct.
Insolvency Act, 2063 :
1. When a company is deemed to have become insolvent under the Insolvency Act
2063? Who can make an application for insolvency proceedings:
According to the Section 7 of the Insolvency Act, 2063 as otherwise proved a
company shall be deemed to have become insolvent on the following condition:
(a) Where the general meeting of shareholders adopts a resolution that the company
has become insolvent or a meeting of the board of directors of the company
makes such decision; or
(b) Where the Court issues an order requiring the company to pay the debt and the
debt is not paid up within thirty five days from the date of receipt by the
company of such order; or
(c) Where the company fails to pay the debt within thirty five days after the service
by the creditor on the company a notice for the payment of the debt or fails to
make an application to the Court within the said period to void such notice.
(d) Where it is proved from any other matter establishing of the fact that the liability
of the company exceed the value of the assets of the company or the company
itself admits that it has become insolvent.
Under Section 4 of the Insolvency Act, 2063 where it is required to institute

insolvency proceedings against any company, any of the following persons may
make an application to the Court in the prescribed form for the institution of
such proceedings:
(a) A company itself which has become insolvent;
(b) Out of the total creditors of a company which has become insolvent, at least ten
percent creditor or creditors who has or have lent money;
(c) Shareholder or shareholders that have or have subscribed at least five percent of
shares, out of the total shareholders of a company;
(d) Debenture-holder or debenture-holders that has or have subscribed at least five
percent of debentures, out of the total debenture-holders of a company;
(e) A liquidator who has been appointed to liquidate a company; or
(f) In the case of a company that carries on any specific type of business set forth in
Section 8, a body authorized to administer and regulate such business like in the
case of a bank or financial institution carrying on banking and financial business,
the Nepal Rastra Bank, or in the case of an insurance company carrying on
insurance business, the Insurance Board formed pursuant to the Insurance Act,
2049.
2. Kathmandu GKL Ltd. is facing insolvency proceedings from its creditors and
the court has appointed an inquiry official under Section 10(3) on the basis of
an application made under Section 4(1). Elaborate the area of inquiry for the
official and the provision regarding management of the company during
inquiry period as per the Insolvency Act, 2063?
Answer:
The provision regarding duty of the inquiry official and management of the
company during the inquiry period as laid out in the Insolvency Act are as
follows:
Section 13 of the Insolvency Act 2063 prescribes the proceedings and cases of
inquiry as follows:
(1) Where the Court issues order to inquire into insolvency proceedings pursuant
to Sub-section (3) of Section 10, the inquiry official shall independently inquire
into the financial situation of the concerned company in order to determine the
following:
(a) Whether or not there should be issued an order for immediate liquidation of the
company by the reason that its financial situation cannot be improved;
(b) Whether or not the period of inquiry as referred to in Section 14 should be
extended;
(c) Whether or not there should be issued an order for the restructuring of the
company through the restructuring program;
(d) Whether or not the company has become or is likely to become insolvent.
(2) The inquiry official shall make inquiry pursuant to Sub-section (1) and submit
an inquiry report to the Court within the period specified by the Court, and
such report shall contain, inter alia, the resolution, if any, adopted by the
meeting of creditors, the company‘s report and evaluation and recommendation
made by the official.
Section 15 of the Act prescribes the management of company during inquiry
period as follows:
(1) Notwithstanding anything contained in the laws in force, the board of director of
the company shall carry out the management and ordinary transactions of the
company during the period of inquiry of insolvency proceedings, under the
regular supervision of the inquiry official.
(2) Notwithstanding anything contained in Sub-section (1), where the inquiry officer
submits to the Court a report indicating that the board of directors of the company
has not operated the company properly, the Court may issue an order to remove
the board of directors and order the inquiry officer to carry out the management
and ordinary transactions of the company.
(3) Where the Court orders the inquiry officer to carry out the management and
ordinary transactions of the company pursuant to Subsection (2), the inquiry
officer shall carry out the transactions accordingly.
(4) Where any special transaction such as the sale of the assets or business of the
company shall be carried out in the course of operating the ordinary business of
the company pursuant to Sub-section (3), an application setting out the reason
thereof shall be made to the Court for permission, and where the Court issues an
order granting such permission, the inquiry officer may carry out such transaction.
3. What do you mean by Reorganization of a company. What are the process of
reorganization prescribed by the Insolvency Act 2063 when a company
becomes insolvent due to financial difficulty? Procedures of reorganization of
the company:
Reorganization or restructuring means the act of organizing a company in a different
way, where a company may become insolvent due to financial difficulty.
Restructuring means a process to be adopted under the insolvency Act 2063 in order
to a company which may become insolvent because of financial difficulty (s.2 (e))
Where the court issues an order to restructure the company in pursuant to section
22(2), on the basis of report submitted by the investigation office, certain procedures
is adopted as accordance to the chapter 4 of the insolvency Act 2063.
After the appointment of reorganization manager he prepares the program for this
purpose. Then the manager starts to execute the procedures of reorganization.
a. The reorganization manage has to call a meeting of the creditors as accordance to the
provision of Sec 21 and to fulfill all the legal formalities within 15 days from the date
of commencement of business and such notice shall be published in a daily
newspaper of national circulation for at least two times; and such notice may also be
put on the website. . (Sec. 24).
b. The meetings of the creditors called pursuant to Sec. 21(3), discuss the details of the
Reorganization program proposal presented by the manager and adopts a resolution:
i. With or without amendment on the program proposal, acceptance or
ii. Recommendation for the immediate liquidation of the company.
If the court issues order approving the resolution of reorganization program, that will
be implemented.
c. The reorganization officer within the period of reorganization has to submit a report
to the court accompanied by the transactions, assets, financial situation of the
company and the reorganization program, if any amendment made.(Sec.25):
Where reorganization program is proposed in the report submitted by the manager,
the following matters must be stated:
i. Summary and analysis of the proposed program
ii. Details of the effect likely to be caused by the implementation of the program to the
creditors.
iii. Details of the consideration and effect available to the creditors from the
implementation of reorganization program in comparison to the immediate
liquidation of the company.
iv. Opinion and description accompanied by the finding in the report of the manager that
the company would not be insolvent if the reorganization program was implemented.
Thus, reorganization program proposal must contain following matters in

the written form:
i. All details and relevant in written form about the future program,
ii. All details of the benefit to creditors by implementation of the program,
iii. Details about the matter that proposal is not illegal and prohibited by law
Details to the consequences of implementation that company will be rescued from
insolvency, and details about the costs between investigation and reorganization
period as well as remuneration of manager and officer
4. What do you mean by Restructuring of a company. What are the process
prescribed by the Insolvency Act 2063 when a company becomes insolvent due to
financial difficulty?
Answer:
Reorganization or restructuring means the act of organizing a company in a different
way, where a company may become insolvent due to financial difficulty.
Restructuring means a process to be adopted under the insolvency Act 2063 in order
to a company which may become insolvent because of financial difficulty (s.2 (e))
Where the court issues an order to restructure the company in pursuant to section
22(2), on the basis of report submitted by the investigation office, certain procedures
is adopted as accordance to the chapter 4 of the insolvency Act 2063.
Procedures:
1. Court order to the appointment of reorganization manager.
According to the court order the reorganization office is appointed and, the office has
to prepare a reorganization program as accordance to the law.
2. Preparation of reorganization program (Sec. 23(2)
Where the Court makes an order to restructure a company pursuant to Sub-section
(2) of Section 22, the restructuring manager has to prepare a restructuring scheme
containing the
Following matters of the company in writing.
a) To capitalize the debt of the company and alter the capital structure ;
(b) To pay the claims of creditors by selling any portion of the assets of the company;
(c) To change the nature of claims of creditors of the company and issue securities
for the same;
(d) To get the creditors of the company to participate in capital investment by issuing
shares in consideration for their claims;
(e) To amalgamate the company with any other company;
(f) To change the management of the company; or
(g) To do any such other act which the Court considers appropriate to restructure the
company.
Money Laundering Prevention Act, 2063
Answer the following question

1. What activities are considered as money laundering offence under the Money
Laundering Prevention Act, 2063? What provision has been made for the
prevention of money laundering activities under the Act?
Answer:
Principally an offence refers to an act done against the state. In other words it refers
to do an act which has been forbidden by law or prohibited by the prevailing law of
the nation. In this context Government of Nepal has enacted an Act to prevention
laundering of criminally earned money (assets).
Chapter-2 of the Act prescribes the provisions relating to offences under it.
According to Sec 3.It has been prohibited to launder the assets personally or cause to
launder assets. It clearly prescribes that any one committing acts in respect of
laundering assets will be deemed to have committed offence as per this Act.
Sec 4 of the Act prescribes the condition when it is considered as laundering of
assets. According to it, assets will be supposed to have laundered in case anyone,
directly or indirectly, earns from tax evasion or terrorist activities or invests in such
activities or acquires, holds, possesses or utilizes assets by committing any or all
offences committed under arms and ammunitions laws, foreign exchange regulation
laws, Offences of murder, theft, cheating, forgery documents, counterfeiting, kidnap
or abduction, drug control laws national park and wild animals conservation laws,
human trafficking and transportation control laws, cooperatives laws, forest laws,
corruption control laws, bank and financial institution laws, ancient monuments
conversation laws, along with any other offence that the Government of Nepal has
prescribed in Nepal Gazette. If assets are acquired, held or accumulated from the
above said offence is possessed, held or used, utilized or consumed or committed any
other act so as to present such assets as legally acquired or earned assets will be
deemed as laundering of assets. It also includes an act as laundering of assets where
it conceals sources of origin of such assets or assists any one to transform, conceal or
transfer such assets with an objective of avoiding legal actions to the person having
such assets. Sec. 4 of the Act further clarifies the concept of an offence under this
Act.
2. State the act, which is considered as an offence according to the Money

Laundering Act 2063? How the Act has prescribed the legal provision to
coordinate inter-related to the prevention of assets laundering with the provision
of Coordination Committee?
Answer:
Chapter-2 of the Act prescribes the provisions relating to offences under it.
According to Sec 3.It has been prohibited to launder the assets personally or cause to
launder assets. It clearly prescribes that any one committing acts in respect of
laundering assets will be deemed to have committed offence as per this Act.
Sec 4 of the Act prescribes the condition when it is considered as laundering of assets.
According to it, assets will be supposed to have laundered in case anyone, directly or
indirectly, earns from tax evasion or terrorist activities or invests in such activities or
acquires, holds, possesses or utilizes assets by committing any or all offences committed
under arms and ammunitions laws, foreign exchange regulation laws, Offences of
murder, theft, cheating, forgery documents, counterfeiting, kidnap or abduction, drug
control laws national park and wild animals conservation laws, human trafficking and
transportation control laws, cooperatives laws, forest laws, corruption control laws,
bank and financial institution laws, ancient monuments conversation laws, along with
any other offence that the Government of Nepal has prescribed in Nepal Gazette. I
Provisions for Coordination Committee and Financial Information Unit
Chapter – 4 (Sec. 8-10) of the Money Laundering Prevention Act, 2063 prescribes
Provision Relating to
Formation of Coordination Committee. To coordinate inter-related to the prevention of
assets laundering Sec. 8 of the Act prescribes the provision of Coordination
Committee, consisting of the members as follows:
(a) Secretary, Ministry of Finance - Coordinator
(b) Secretary, Ministry of Law, Justice and
Parliamentary System -Member
(c) Secretary, Ministry of Home -Member
(d) Secretary, Ministry of Foreign Affairs -Member
(e) Deputy Governor, Nepal Rastra Bank - Member
To fulfill the objective of the Act, Sec.9 prescribes the provision of Financial
Information Unit in Rastra Bank for collection and analysis of information relating to
assets laundering.
3. Discuss the functions, powers and duties of financial information unit of the
Money Laundering Prevention Act 2063.
Answer:
The Functions, Powers and Duties of Financial Information Unit has been set in Sec. 10
of the Act as follows:
(a) To obtain details of transactions under Section 7 from government entities, bank,
financial institution and non-financial institution regularly and maintain records of
those details by scrutinizing them,
(b) To conduct preliminary inquiry, in case the notice, details and documents available
to it requires inquiry and investigation on assets laundering and send its details to the
concerned Department,
government entity, bank, financial institution and non-financial institution,
(c) To communicate the Department the details received pursuant to Clause (a) or
including the extensive details if it appears doubtful or arises any doubt or prevails
reasonable ground not to believe the transaction upon conducting the inquiry
pursuant to Clause (b), write to the Department with extensive details, should there
appear doubtful transactions or looks dubious or there are reasonable
grounds to doubt in the details received pursuant to clause (a) or from the inquiry made
pursuant to clause (b),
(d) To send notice, details and documents regarding assets laundering to the Financial
Information Units of other country and international organization, institutions
reciprocally and receive such notice from
concerned country and international organization and institution,
(e) To inspect transactions and records of bank, financial institution and
non financial institution, to obtain any information or clarification about such
transactions and records and their copies if necessary,
(f) To manage required training programs for the staffs of government entities,
Departments and Financial Information Unit for prevention of assets laundering,
(g) To carry out other functions as prescribed.
The Act also specify the that an entity authorized to regulate bank, financial
institution and nonfinancial institution under prevailing laws may receive
information from the Financial Information Unit and may provide information
available with it to the Unit. The Financial Information Unit may give necessary
directives to the concerned institutions about the method, form, time and other
procedures regarding the submission of details, statistics, notices and information and
it will be the duty of such institution to be abide by such directives.
4. How the Money Laundering Prevention Act, 2063 prescribes Provision Relating to
Formation of the Laundering Prevention Department and its Functions, Duties
and Powers to carryout investigation and enquiry of offences under the Act?
Answer:
Government of Nepal has to establish an Asset Laundering Prevention Department to
carryout investigation and inquiry of offences under this Act. Chapter – 5 (Sec.11-12)
of the Money Laundering Prevention Act, 2063 prescribes Provision Relating to
Formation of the Laundering Prevention Department and its Functions, Duties and
Powers.
Under Sec. 11 of the Act, Government of Nepal has to establish an Asset Laundering
Prevention Department to carryout investigation and inquiry of offences under this
Act. As per Sec 12 of the Act the Department may exercise the following powers in
course of investigation and inquiry of the offences under this Act:-
(a) To issue order to any concern government entity, bank, financial institution to submit the
concerned document, evidence or other required detail remained with such entity, bank,
financial institution to the Department within a particular time limit,
(b) To conduct search operation of any concerned government entity, bank, financial
institution or non-financial institution or of any other places, to seize, take control of
concerned document, deed, material evidence and other evidence and hand its receipts
to the concerned official,
(c) To get present and inquire, call explanation or clarification from the concern official of
the concerned government entity, bank, financial institution or other staff or a concerned
person supposed to have obtained information of related facts as deemed by the
Department,
(d) To release a person with a written condition to present at requirement or on dated
attendance, or release with guarantee or bail in case there are reasonable grounds that
he/she may disappear or to
keep under custody at the failure of providing guarantee or bail with the permission of the
court after the inquiry, explanation or clarification as per Clause (c),
Provided that the concerned person shall not be placed under custody for more than the
period punishable for offences under this Act when decision is given against him/her.
(e) To order the concerned entity to freeze assets, located in Nepal, of a concerned person at
the request of another nation where the offence under this Act has occurred or any other
international organization or in accordance with bilateral or multilateral treaty or
agreement or on the other grounds like that,
(f) To require to freeze assets related to the offence under this Act in the course of inquiry
and investigation of the offence.
Where any government entity, bank, financial institution is communicated by the

Department to submit any documents or any other matters, freeze assets or provide
information about any matter in the course of investigation and inquiry of the offences
under this Act, the entity, bank, financial institution, concerned official, staff or agent of
the institution not submitting such document or other matters, not freezing assets or not
providing information and any official or staff of such entity, bank, financial institution
absenting even at the order of the Department to be present, the Department may require
him/her to submit documents or matter or to freeze assets or to provide required
information by arresting him/her and may fine him/her up to one thousand rupees.
5. How the Money Laundering Prevention Act, 2063 prescribes Provision Relating to
Punishment for the offences under the Act?
Answer:
Chapter – 7 (Sec.30-33) of the Money Laundering Prevention Act, 2063 prescribes
Provision Relating to punishment under the Act.
In pursuance to Sec 30 of the Act, any one committing offence under the Act
will be punished as follows, in accordance with the degree of offence committed:-
a. Fine equal to the amount involved in the offence or imprisonment from one year to
four years or both punishments to any person or staff of a bank, financial institution
or nonfinancial institution who has committed offence or in case such staff is not
identified for the person working as a chief at the time of committal,
(b) In case an office bearer, chief or staff of a bank, financial institution or non-financial
institution or public servant has committed offence, ten percent more than the
punishment mentioned in Clause (a).
The person assisting or provoking to commit or causing to commit an offence under this
Act shall be punished half of the punishment to be done to the offender.
Sec 31. Of the Act also prescribes provision of imposing fines:
a. There will be a fine of five hundred thousands rupees to a bank or financial institution
and from twenty five thousands to one hundred thousands Rupees to a non-financial
institution as per the degree of offence for the act of not submitting documents to the
Financial Information Unit pursuant to Section 7 and Clause (a) of Section 10.
b. The Financial Information Unit shall punish as said above and person not satisfied
with the punishment may appeal to the Appellate Court within thirty five days of such
punishment.
Sec 32. Prescribes Punishment for Concealing or Destroying Evidences: According to it,
any person who commits the offence of concealing or destroying evidence related to acts
deemed to be an offence under this Act shall be liable for the imprisonment from one
month to three months or fine from fifty thousand rupees to one hundred thousand rupees
fine or both in accordance with the degree of offence committed and person assisting for
committing such act shall be punished half of such punishment.
Section 33 of the Act prescribed Punishment for Creating Obstacles. According to it if

any person creates obstacles in the proceedings of investigation and inquiry undertaken
under this Act, the adjudicating officer may punish him/her with an imprisonment up to
six months or a fine up to five thousand rupees or both based on the report of
investigation Officer.
Any assets obtained from an offence under this Act and assets accumulated thereof and
assets utilized for committing such offence shall be confiscated under Sec 34 of the Act.
Where the entitlement to assets has been transferred to someone else and an amount has
been quoted in such act of transfer, the amount shall be dealt as per the deed with security
(Kapali).
Under Sec. 35, the Department may issue an order to the concerned office for not issuing
new passport or to seize already issued passport if so required as per the circumstance,
and degree of the offence.
Public Procurement Act 2063

1. The Public Procurement Act 2063 has been enacted to make the procedures,
processes and decisions relating to public procurement much more open,
transparent, and reliable. Discuss the provisions relating to monitoring of
procurement activities by which the public procurement of an entity?
Answer:
Merely making the legal provisions regarding the public procurement to make the
procedures, processes and decisions relating to public procurement much more open,
transparent, and reliable will not be effective unless and until the monitoring activities of
the concern authority are active and effective.
Chapter-9 of the Act prescribes the Provision Relating to Monitoring of Procurement
Activities. Under Sec 64 of the Act a Public Procurement
Monitoring Office under the Office of the Prime Minister and Council of
Ministers will have to be established in order to monitor procurement activities, the
chief of the office will be an employee of the gazetted special class of the civil service
of Government of Nepal.
Under Sec. 65 of the Act, the functions, duties and powers of Public Procurement
Monitoring Office will be as follows:-
(a) To make recommendation to the government of Nepal for reform in the procurement
policy or laws in force,
(b) To issue technical guidelines and manuals required for implementing this Act,
(c) To prepare standard model of the standard bidding documents, prequalification
documents, procurement contract document and documents relating to proposal to be
used by a Public Entity to conduct procurement proceedings,
(d) To collect statistics of procurement proceedings to be operated or operated by a
Public Entity and to monitor or to make or cause to be made technical auditing of
whether or not such proceedings are conducted in compliance with this Act or
Regulations or manual, made there under.
(e) If the Public Entity seeks opinion, advice about a matter as referred to in this Act or
Regulations, Manuals made there under, to provide opinion, advice,
(f) To establish and operate procurement website,
(g) To publish a bulletin in order to have made public this Act and the Regulations,
Manuals, Technical Notes made there under and public procurement related writings,
article, material and similar other matters,
(h) To prepare procedures required for coordination in the procurement proceedings and
submit to the Government of Nepal for approval,
(i) To make arrangements for regular training program for the bidder or the employee
involved or to be involved in procurement proceedings,
(j) To make necessary criteria of exclusion from the blacklist under Section 63 and
exclude from such blacklist as per such criteria,
(k) To review, appraise construction works, supply, consultancy service, and other
services system in order to make the procurement system effective, and to solicit
regularly suggestion from customers or international organization and other foreign
bodies as per necessity,
(l) To prepare plan of domestic or foreign assistance required to systematize and reform
procurement system and to act as the central body for coordinating such assistance,
(m) To submit the annual report of the procurement proceedings to the Government of
Nepal, and
(n) To do other prescribed functions.
However the Public Procurement Monitoring Office shall not involve in any manner in
the procurement proceedings, except the procurement proceedings of its office, of other
public entities nor shall resolve any dispute arisen in respect thereof.
2. The Public Procurement Act 2063 has been enacted to make the procedures,
transparent, and reliable. Discuss the provisions relating to Rejection of Proposal
and Cancellation of Procurement Proceedings
Answer:
Merely making the legal provisions regarding the public procurement to make the
procedures, processes and decisions relating to public procurement much more open,
transparent, and reliable will not be effective unless and until the monitoring activities of
the concern authority are active and effective.
Section 36 of the Act prescribes the Provision Relating to Rejection of Proposal and
Cancellation of Procurement Proceedings Under Section 36 of the Act Rejection of
Proposal and Cancellation of Procurement Proceedings
Will be prescribed as follows:
The Public Entity may reject all proposals or cancel the procurement
proceedings in the following conditions:-
(a) If all the received proposals are not substantially responsive to
the terms of reference,
(b) If the cost offered by the selected proponent is substantially
more than the cost estimate and available budget,
(c) If the consultancy service is no longer required or,
(d) If it is proved that the proponents have submitted the proposal
by mutual collusions.
Provided that the proposal of those proponents who have not
colluded may be processed.
Section 37 of the Act prescribes the Negotiations with the Proponent.
(1) Negotiations with the proponent selected pursuant to Section 35 may be held in the
matter of terms of reference and scope of the proposed services, progress report, and
facility to be made available by the Public Entity.
(2) Except in the conditions under clause (b) of Sub-section (1) of
Section 35, negotiations in relation to the financial proposal cannot be held with
respect to the remuneration of professional experts.
Provided that negotiations may be held with respect to the reimbursable
expenditure.
(3) If an agreement acceptable to both the Public Entity and the
proponent could not be resulted from the negotiations held pursuant to this Section,
the Public Entity shall have to negotiate in the case of the proposal under clause (a)
(b) and (c) of Sub-section (1) of Section 35, with the proponent having obtained the
next highest marks and in the case of the proposal under clause (d), with the
proponent having the next lowest cost, respectively.
3. Public Procurement Act 2063 has been enacted to make the procedures,
transparent, and reliable. How far this Act objective has been tried to achieve
under the Act. Explain with reference to the legal provisions as prescribed by the
Act.
Answer:
It is rightly said that the Public Procurement Act 2063 has been enacted to make
the procedures, processes and decisions relating to public procurement much more
open, transparent, and reliable. Preamble of the Act clearly states the objective of
the Act. According to it, the Act is expedient to make legal provisions in order to
make the procedures, processes and decisions relating to public procurement
much more open, transparent, objective and reliable, obtain the maximum returns
of public expenditures in an economical and rational manner by promoting
competition, fairness, honesty, accountability and reliability in public procurement
processes, and; ensure good governance by enhancing the managerial capacity of
procurement of public entities in procuring, or causing to be procured,
construction work and procuring goods, consultancy services and other services
by such entities and by ensuring the equal opportunity for producers, sellers,
suppliers, construction entrepreneurs or service providers to participate in public
procurement processes without any discrimination.
As it is stated in the Preamble of the Act the objective of the Act can be listed as
follows:
 to make the procedures, processes and decisions relating to public
procurement much more open, transparent, and reliable
 to obtain the maximum returns of public expenditures in an economical
and rational manner
 to promote competition, fairness, honesty, accountability and reliability in
public procurement processes
 to ensure good governance
 to enhance the managerial capacity of procurement of public entities in
procuring, or causing to be procured,
 procurement of construction work and procuring goods, consultancy
services and other services and other services by such entities
 and to ensure the equal opportunity for producers, sellers, suppliers,
construction entrepreneurs or service providers to participate in public
procurement processes without any discrimination.
In this respect Sec 2(a) of the Act defines ―Procurement‖ means as the acquisition
of any goods, consultancy services or other services or carrying out or causing to
be carried out any construction works, by a public entity pursuant to this Act;
Accordingly section 2 (b) of the Act ―Public Entity‖ has been defined and means
the following entity:-
(1) Constitutional organ or body, Court, Ministry, Secretariat, Commission,
Department of the Government of Nepal or any other Governmental Entity or
Office there under,
(2) Corporation, Company, Bank or Board owned or controlled fully or in
majority by the Government of Nepal or Commission, Institute, Authority,
Corporation, Academy, Board, Center, Council established at the public level or
formed by the Government of
Nepal under the laws in force and other corporate body of a similar nature,
(3) University, College, Research Center, which is operated by the Government of
Nepal or receives grants fully or in majority from the Government of Nepal, and
other Academic or Educational Institution of a similar nature,
(4) Local body,
(5) Development Board formed under the Development Board Act,1956,
(6) Body operated with loan or grant of the Government of Nepal, and
(7) Other Bodies as specified by the Government of Nepal by publishing a
notification in the Nepal Gazette, as a Public Entity;
Accordingly section 2 (c) of the Act ―Goods‖ has been defined as any kind of
object, whether movable or immovable, and this term includes services incidental
to the supply of such goods.
Audit Act 2048:
1. What do you understand by “Corporate body wholly owned by government of

Nepal”? Who is entitle to audit of such corporate bodies which is wholly owned
by Government of Nepal?
Answer:
S 2(d) of Audit Act 2048 prescribes the meaning of ―Corporate body wholly owned
by government of Nepal‖. According to it Corporate body wholly owned by
government of Nepal means a corporate body whose all shares of assets are owned
by Government of Nepal, or a corporate body whose all shares or assets are owned
by Government of Nepal corporate body or by such corporate body and
Government of Nepal. It also further prescribes that it includes such corporate body
for whom Government of Nepal is required to bear full responsibility. However it is
difference from ―corporate body substantially owned by government of Nepal‖ S
2(e) of the Act prescribes meaning of corporate body substantially owned by
government of Nepal which
means a corporate body whose more than fifty percent shares or assets are
owned by Government of Nepal. Audit Act 2048 S.6 prescribes provision
regarding audit of the corporate bodies wholly owned by Government of Nepal.
According to the legal provision the Auditor General is responsible and entitle
to do the audit of the corporate bodies wholly owned by Government of Nepal.
If the Auditor General is not in a position to audit such corporate body due to
constraint by time and resources, he may appoint a licensed auditor, with a
preference to Nepali citizen, as an assistant. The auditor so appointed will act
under the direction, supervision and control of the Auditor General. The powers,
functions, duties and responsibilities including remuneration to be paid by
the concerned organization of such appointed auditor will be as prescribed by
the Auditor General. The remuneration, however, will be fixed by the Auditor
General on the basis of volume of financial transactions, status of accounts,
number of branches and sub-branches, work load and work progress of the
concerned organization.
2. Nepal Terpentine Corporation Ltd., a corporation wholly owned by the Government of

Nepal has not audited its books of accounts for the last two financial years. The
shareholders of the company feels that the Auditor General could not perform the
audit due to his time constraint and hence decided to appoint Mahendra Yadavl, a
practicing Fellow Chartered Accountant, as its auditor in its AGM.
i) Is his appointment valid?

ii) Will your answer be the same if Mahendra Yadav is appointed by the Auditor
General as his assistant to complete the audit of the corporation?
Answer:
a) As per Section 6 (1) of the Audit Act, 2048, notwithstanding anything contained in the
existing laws, the audit of the corporate bodies wholly owned by the government of Nepal
shall be audited by the Auditor General pursuant to this Act. Hence, the appointment of
Mahendra Yadav as an auditor of Sleep well Corporation Ltd, by AGM will be void and
illegal.
Section 6 (2) of Act further provides that if the Auditor General in constraint of time and
resource to audit the corporate bodies wholly owned by the government of Nepal, he may
appoint professional auditors as his assistants. Hence, the appointment of Mahendra Yadav
will be valid if it is appointed by Auditor General as his assistant due to his constraint of time
and resources to audit.
3. Kiran Niraula Associates has been appointed auditor of ABC Bank Ltd. for the FY
2072/73 in the month of poush 2072. Recently in the month of Shrawan 2073 he has
come to know that his brother in law, living separately and independently, has been
holding 1.5 percent shares of Dena Bank Ltd. State the relevant provisions of the
Companies Act, 2063 attracted by the development and the responsibility of auditors
regarding information and disqualification?
Answer:
Section 112 of the Companies Act 2006 prescribes Disqualifications of auditor.
According to Section 112(1) following persons will not be qualified for appointment as auditor
and will not continue to hold office, despite appointment as auditor,:
a) A director, advisor appointed with entitlement to regular remuneration or cash benefit, a
person or employee or worker involved in the management of the company or close
relative of a director or and employee of such relative.
b) A debtor who has borrowed moneys from the company in any manner or a person who
has failed to pay any dues payable to the company within the time limit or close relative
of such person.
c) A person who has been sentenced to punishment for an offense pertaining to audit and a
period of three years has not elapsed thereafter.
d) A person who has been declared insolvent.
e) A substantial shareholder of the company or a shareholder holding one percent or more of
the paid up capital of the company or his close relative;
f) A person who has been sentenced to punishment for an offense of corruption, fraud or a
criminal offense involving moral turpitude and a period of five years has not elapsed
thereafter.
g) An auditor, who has been appointed as an auditor for more than three consecutive terms
to perform the audit of a public company.
h) A company or corporate body with limited liability.
i) A person having interest in any transaction with the company.
According to Section 112(2) the auditor, prior to his appointment, should give information in
writing to the company that he is not disqualified pursuant to sub-section (1).
Similarly under Section 112(3) if any auditor becomes disqualified to audit the accounts of a
company or there arises a situation where he becomes disqualified for appointment or can no
longer continue to act as an auditor of the company, he should immediately stop performing
audit which is required to be performed or is being performed by him and give information
thereof to the company in writing.
Under Section 112(4) the audit performed by an auditor who has been appointed in contravention
of this Section will be invalid.
Under Section - 2(z9) of the Companies Act, 2063 "Close relative" means a partition member of
an undivided family or husband, wife, father, mother, mother-in-law, father-in-law, elder brother,
younger brother, elder sister, younger sister, sister-in-law (elder or younger brother's wife),
brother-in-law, sister-in-law, brother-in-law (husband of elder sister), uncle, aunt, maternal
uncle, maternal aunt, son, daughter, daughter-in-law, grand-son, grand-daughter, grand-daughter-
in-law or son-in-law.
Considering the provisions of Section 112(1)(e) read with Section 2(z9) the appointment of the
Auditor is invalid and has to be given up immediately notifying the company.
Management Information and Control System
1. An organization has already developed and tested computerized system to manage its
operations and now it is in the implementation/ change-over stage. List out and explain
different approach/methods of new system implementation/conversion from manual to
computerized system.
Change over requires careful planning to select an appropriate approach to change over from one
system to another. Following are the different approach:
i. Direct Implementation: This is also called abrupt change-over. With this approach
the old system is replaced with the new system in one-go. Direct implementation
date is usually decided by the management. After changeover, the old system is
discontinued and new system will be used. This approach is most risk. In case the
new system did not work as planned there will be no alternative.
ii. Phased implementation: Under this approach, system is changed gradually. This
may be a change of a particular module and then next module and so on. The
change also may be from branch to branch. This is a safer way of implementation.
Next module is changed/started only after the first module is successfully
implemented and starts normal operation. Similarly, next branch is start once the
system is successfully implemented in the first branch and so on.
iii. Pilot Implementation: With this approach, the new system replaces the old one in
one operation but only on a small scale. Any error can be rectified or further
beneficial change can be introduced and replicated throughout the whole system
successfully with least interruption of regular operation. Generally, pilot
implementation is done in one or very few branches. Other branches system are
changed if the system is successfully implemented in one. This also is a safer
approach, although costly.
iv. Parallel Running implementation: This method is considered the most secured
method with both system running in parallel over a short period. The old system
and the new system both are used and are able to operate independently. If all goes
well in the new system, the old system is stopped and new system carries on as the
only system. This approach is safe but is expensive as two system (old and the new)
system has to be operated for a period. .
2. Distinguish between:
a. Hot site and cold site
Hot site or cold site are maintained to continue the business operation, in case the main computer
site is not operational due to disaster, or other reasons. A hot site includes all necessary
hardware, software, and all necessary facilities. It is generally fully configured and ready to
operate within a few hours. A cold site contains all the facilities including power,
communication lines, air conditioning, and basic setup. But, it generally does not include
computer system, software, supplies, etc. Hot site can be used immediately, however, cold site
will take some time to be operational. Maintaining a hot site is expensive.
b. Local Area Network (LAN) and Wide Area Network (WAN)
LAN interconnects a variety of devices and provides means of information exchange among
them. LAN interconnects devices within a limited geographic area. It is permanently connected,
and the security is high. WAN covers large geographic areas. WAN generally connects several
building and other facilities like ATM networks. LAN uses its own network, whereas WAN
may use outside network or public network too. Scope of LAN is smaller. In WAN, some of the
network assets may not be owned by the organization.
c. Physical access control and Logical access control
Physical access control are designed to protect the organization from unauthorized access
to prevent illegal entry to a designated place/area. The system is designed in such a way to
allow access or entry only to authorized persons. Security guard, lock on door, door
alarms, visitor logged access, gate pass, are some of the physical controls.
Logical Access control are the computer system based mechanizms used to designate a
person to be authorized to access only those specific system resource and type of
transactions or functions that are needed for the person to do his/her duties. One cannot
access other system not permitted to he/her. Accessing logical access controls involves
evaluating the critical procedures to restrict user only to authorized transaction and
functions. Log-in ID, password, pin number, are some of the logical access controls.
d. Structured decision and unstructured decision

Structured decisions are those that are easily made from a given set of inputs. Most of the
structured decisions can be made with information available inside the organization. These
decision are generally made by lower level management like, production planning, raw material
requirements, etc. Unstructured decisions and semi-structured decisions are decisions for which
information obtained from internal computer system is only a portion of the total knowledge
needed to make decisions. The Decision Support System is particularly well adapted to help with
semi-structured / unstructured decisions. Semi-structured / unstructured decisions often do not
conform to a predefined set of decisions-making rules. These decisions are generally done by top
level management like, market demand, sales projection, etc.
e. Internal threat and external threat
Threat is anything that has the potential to cause serious harm to a computer system. A threat is
something that may or may not happen, but has the potential to cause serious damage. Threats
can lead to attacks on computer systems, networks and more. A threat originating inside an
organization is called internal threat. An internal security threat occurs when someone from
inside the network creates a security threat to the network. Studies has found that, 60 percent of
the breaches come from internal sources. Some of these security breaches were malicious with
bad intention; others were accidental. Generally, the threat is exploited by a dissatisfied
employee, or employee with bad motive.
An external security threat occurs when someone from outside the network creates a security
threat to the organization‘s network.
3. Write short notes on:

a. Business continuing plan
Business Continuing Planning (BCP) is the process of developing prior arrangements and
procedures in such a manner that critical business functions can continue during a disruption at
the main site. The end result of the planning is called BCP which is a documented collection of
procedures and information that is developed compiled and kept ready for use during disruptions
at the main site. This will enable an organization to continue to deliver its critical products and
services during a disruption at the main site.
b. Disaster recovery plan
Disaster Recovery Plan (DRP) is a documented process or set of procedures to recover and
protect a business IT infrastructure and data in a disaster. This plan is targeted to initiate/recover
the resources that have been adversely affected by a disaster.
c. Intrusion detection system
Intrusion detection refers to the process of monitoring computer and network activities and
analyzing those events to look for signs of intrusion in the computer system. The reason of
looking for unauthorized intrusions is to alert IT professionals and system administrators within
the organization to potential system or network security threats and weaknesses to take
preventative measures.
d. Virus.
Virus is a generic term applied to variety of malicious computer programs that send out request
to the operating system of host system under attack to insert the virus to other program. Virus
are also self-propagating to other programs. They can be less damaging such as web defacing or
seriously damaging act such as deleting files, corrupting programs, or causing denial of service.
Generally virus attacks program files, file directory system, data files, boot program.
e. Computer hacking
Hacking is an attempt to exploit a computer system or a private network inside a computer. It is
the unauthorised access to or control over computer network security systems for some illicit
purpose. Hackers also hack to take control over the system for personal gains. They can destroy,
steal or even prevent authorized users from accessing the system. They do this by finding
loopholes and weaknesses in the system. Hacking are considered illegal other than the work done
to identify weakness and strengthen the system
f. Mobile computing
Mobile Computing is a technology that allows transmission of data, voice and video through a
computer or any other wireless enabled device without having to be connected to a fixed
physical link. It involves mobile communication, mobile hardware, and mobile software.
Communication issues include ad hoc networks and infrastructure networks as well as
communication properties, protocols, data formats and concrete technologies. Hardware includes
mobile devices or device components. Mobile software deals with the characteristics and
requirements of mobile applications.
g. Firewall
A firewall is a collection of computers, routers, and software that controls access between
different security domains. All traffics through and from public internet and between different
domains must pass through the firewall. The firewall serves as an access control point for traffic
between security domains. They are located between the two or more systems to inspect and
allow or block data passing through it.
h. Business Process
A business process is a logically related set of activities that define how specific business tasks
are performed. Business processes are the ways in which organizations coordinate and organize
work activities, information, and knowledge to produce their valuable products or services.
How well a business performs depends on how well its business processes are designed and
coordinated. Well-designed business processes can be a source of competitive strength for a
company if it can use the processes to innovate or perform better than its rivals. Conversely,
poorly designed or executed business processes can be a liability if they are based on outdated
ways of working and impede responsiveness or efficiency.
Computer based information systems automate manual business processes and make an
organization more efficient. Data and information are available to a wider range of decision-
makers more quickly when information systems are used to change the flow of information.
Tasks can be performed simultaneously rather than sequentially, speeding up the completion of
business processes. Information systems can also drive new business models that perhaps
wouldn‘t be possible without the use technology.
4. What is ERP ? Explain advantages and disadvantages of ERP.
Enterprise Resource Planning (ERP) system is a fully integrated business management system
that integrates the core business and management processes to provide an organization a
structured environment in which decision concerning demand, supply, operational, personnel,
finance, logistic, etc. are fully supported by accurate, reliable, and real-time information. ERP
programs help organizations manage company-wide business processes, using a common
database and shared management reporting tools.
ERP solutions are designed to help organizations improve the operational efficiency of
business resources. Businesses use ERP systems to integrate all its business processes into a
single system to efficiently and effectively manage business goals.
Advantages of ERP:
a. Better use of organizational resources.
b. Lower operating costs
c. Proactive Decision Making
d. Decentralized decision making
e. Enhanced customer services
f. Flexibility in business operation
g. Reduces paper works
h. Improves timeliness of information
i. Increases efficiency by avoiding multiple entry of transactions
Disadvantages:
a. It is expensive to develop and set up an ERP system initially
b. Staff resistance to change specially during initial phase
c. The ERP designed and implemented may not be appropriate for the organization.
d. Involves significant user training time and costs
5. What are the risks of using internet? List out and explain risk in using internet
Because the Internet is public and is easily accessible by anyone, it can also be a dangerous
place. All type of people use it for their purpose. Predators, cyber criminals, bullies, and corrupt
businesses try to take advantage of the ignorant visitors.
Examples of internet risks
i. Identity thieves use the information they find online to steal ones bank account or other
files to damage credit ratings.
ii. Phishing is a common trick used on websites that have been hacked or are pretending to
be legitimate. PayPal and eBay are two of the most common targets for phishing scams.
iii. Popular social networking sites such as Facebook are targets for scams.
iv. Illegal or immoral business, terrorism, etc. are also promoted and conducted through
internet.
v. Data passing through the internet can be intercepted, diverted, recorded, or manipulated
for personal gain.
6. Discuss advantages and disadvantages buying Pre-written (off-the-self) software versus

developing a software to manage operations.
When a business is looking for a software package, there are two main options available – buy an
off-the-shelf software package, or develop own software. Following are the advantages and
disadvantages.
(i) Off-the-shelf software
Off-the-shelf software is software that is ready-made and available to buy or at no cost. Some of
the software use require to pay a license fee to use it, e.g. cloud services, Microsoft Office, etc.
The advantages are:
Cheaper. The development costs are spread across a large number of users, so one has to pay
much less than it would cost to build the same software from scratch.
Available immediately. The development work has already been done, so all one need to set up
the software and start using it.
Lower training costs. If it is a commonly used package, users and IT staff may already be
familiar with it which saves on learning time and training costs. Or, there may be pre-existing
training materials and courses that can be used.
Community support. If the software is popular, there may be books, articles, forums and online
communities offering support and advice to help to learn or resolve any issues.
More functionality. Off-the-shelf software often has more functionality, because the developers
try to meet the requirements of as many users as possible. There may even be functionality one
may not need.
Upgrades. Generally the vendor will continue to develop the software, so it is likely get
upgrades for free or at a reduced cost, whereas in self developed software one don‘t get anything
new unless pay for it to be built.
The disadvantages are:
Compromise. One may have to compromise on the requirements – it is may not be possible to
get a ready-made software that meets ones exact need.
Overly complicated. The software may include functionality that one does not need. Generally
such software are developed to meet different requirements of a number of users. This can make
it more difficult to learn and use.
Not in control. The vendor‘s plans for the future may not always fit with ones own. As a single
customer amongst many, one may not be able to get required features they need.
(ii) However, developed software is written especially for the organization, to meet its specific
business requirements.
The advantages are:
Tailored. The software is developed and built to meet its specific requirements, ensuring that you
get software that works exactly how you need it to and delivers the results you want.
More flexible. A developed system can evolve over time to match your changing requirements.
No per-user fees. If organization owns the software, there will no extra per-user fees as the
business grows.
Not tied in. The organization owns the intellectual property, so it is not tied to a specific vendor
that could potentially disappear at any time.
Competitive advantage. Competitors won‘t have the same software; it could give a competitive
edge. An effective software package can make a company work more efficiently, improve their
performance and have a positive impact on customer satisfaction levels.
The disadvantages are:
Higher initial costs. It will cost more at the beginning since the organization has to bear the
development costs.
Takes longer to develop. Depending on the size and complexity of the software, it may take
months or even years to develop.
7. Why an IT strategy should be aligned with the business strategy ?

Aligning an organization's business strategy with its IT strategy generally improves the
company's overall performance. It can lead to more efficient processes, development of better
products and services, cost reductions, faster response times, and more efficient supply chain
management. To achieve strategic alignment, the IT strategy should be developed at the same
time (in ideal case)as the business strategy, and integrated into it.
Because aligning IT strategy with business strategy tends to have a positive impact on
organizations, strategic alignment should be a top priority for senior managers. They should
regard IT as a way of meeting business goals and providing value.
To align IT strategy with business strategy, every aspect of the IT strategy should support the
business goals of the organization. In other words, all IT systems, applications, processes, and
budgets should agree with the overall corporate strategy and objectives. When a company's
business strategy is properly aligned with its IT strategy – that is, when it's IT-enabled – it can
prove valuable in different ways.
An IT-enabled business strategy is more than just the combination of an IT strategy and a
business strategy in a single document. It's the alignment of the two strategies in order to meet
key business objectives and goals. As such, it lays out several key aspects:
An IT-enabled business strategy contains the company's long-term IT plans. IT plans are
concerned with how IT should be deployed, managed, and implemented in the future to support
the business strategy.
8. How an Information System Audit differs from Financial Audit ? What are the
benefits of Information System Audit ?
An information technology audit, or information systems audit, is an examination of the
management controls within an Information technology (IT) infrastructure. The evaluation of
obtained evidence determines if the information systems are safeguarding assets, maintaining
data integrity, and operating effectively to achieve the organization's goals or objectives. These
reviews may be performed in conjunction with a financial statement audit, internal audit, or other
form of attestation engagement.
An IT audit is different from a financial statement audit. While a financial audit's purpose is to
evaluate whether an organization is adhering to standard accounting practices, the purposes of an
IT audit are to evaluate the system's internal control design and effectiveness. This includes, but
is not limited to, efficiency and security protocols, development processes, and IT governance or
oversight. Installing controls are necessary but not sufficient to provide adequate security. People
responsible for security must consider if the controls are installed as intended, if they are
effective, if any breach in security has occurred, and if so, what actions can be done to prevent
future breaches. These inquiries must be answered by independent and unbiased observers.
These observers are performing the task of information systems auditing. In an Information
Systems (IS) environment, an audit is an examination of information systems, their inputs,
outputs, and processing.
The primary functions of an IT audit are to evaluate the systems that are in place to guard an
organization's information. Specifically, information technology audits are used to evaluate the
organization's ability to protect its information assets and to properly dispense information to
authorized parties. The IT audit aims to evaluate the following:
Will the organization's computer systems be available for the business at all times when
required? (known as availability). Will the information in the systems be disclosed only to
authorized users? (known as security and confidentiality). Will the information provided by the
system always be accurate, reliable, and timely? (measures the integrity). In this way, the audit
hopes to assess the risk to the company's valuable asset (its information) and establish methods
of minimizing those risks. Auditing in Information system is increasing day by day and
becoming the focal point of the independent audit, compliance audit, and operational audits.
Through auditing the organization get benefits in many ways, which are as under:
i. Reduces risk
ii. Strengthens controls
iii. Complies with regulations
iv. Standardization.
v. Improve business efficiency.
vi. Improve system and process controls.
vii. Plan for contingencies and disaster recovery.
viii. Manage information & developing systems.
ix. Prepare for the independent audit.
x. Evaluating the effectiveness and efficiency related to the use of resources.
xi. Reduce risk and enhance system security
xii. Prevent and detect errors as well as fraud.
9. Define and briefly explain Risk, Vulnerability, Threat, and Exposure

Risk is the potential that a threat will exploit vulnerabilities of an asset to cause loss/ or damage
to the assets. In other words, threat is anything that can exploit vulnerability, intentionally or
accidentally, and obtain, damage, or destroy an asset. Risk is the intersection of assets, threats,
and vulnerabilities. It is a function of threats exploiting vulnerabilities to obtain, damage, or
destroy assets. Thus, threats may exist, but if there are no vulnerabilities then there is little or no
risk. Similarly, it can have vulnerability, but if there is no threat, then there is little or no risk.
Accurately assessing threats and identifying vulnerabilities is critical to understanding the risk to
assets. Understanding the difference between threats, vulnerabilities, and risk is the first step.
A threat is what we‘re trying to protect against. It is a potential cause of an unwanted negative
impact to a system or organization. It falls into two categories: vulnerabilities and exposures.
Vulnerability is a mistake in software that can be used by a hacker to gain access to a system. It
is weaknesses or gaps in a security program that can be exploited by threats to gain unauthorized
access to an asset. It creates a situation to weaken or create gap in protection efforts.
i. It allows an attacker to execute commands as another user.
ii. It allows an attacker to access data that is contrary to the specified access restrictions for
that data.
iii. It allows an attacker to pose as another entity.
iv. It allows an attacker to conduct a denial of service
Exposure is a state or condition of being unprotected and open to damage, danger, risk of
suffering a loss in a transaction, or uncertainty. Generally, it happens due to incorrect system
configuration or a mistake in software that allows access to information or capabilities that can
be used by a hacker as a way into a system or network.
i. It allows an attacker to conduct information gathering activities.
ii. It allows an attacker to hide activities.
iii. It includes a capability that behaves as expected, but can be easily compromised.
10. What is CASE tools ? Why this is used ? Briefly explain types of CASE tools.
Computer-aided software engineering (CASE) is a tool used to design and implement
applications. CASE tools are used for developing high-quality, defect-free, and maintainable
software. CASE software can be used in the software development process.
It provides automated assistance for software development. CASE tools reduces the time and
cost of software development and the enhancement of the quality of the systems developed. It is
used for productivity, improving product quality, facilitating maintenance.
Most common CASE tools provides software development support tools like interactive
debuggers, compilers, etc.
Generally CASE tools can be separated into three different categories, depending on where in the
development process they are most involved in:
Upper - support analysis and design phases
Lower - support coding phase
Integrated - also known as I-CASE support analysis, design and coding phases
Upper and lower CASE tools are named as such because of where the phases they support are in
the Waterfall Model
Upper CASE tools support business and analysis, Entity Relationship (ER) diagrams, Data flow
diagram, Structure charts, Decision Trees, Decision tables, etc. Lower CASE tools support
development activities, such as physical design, debugging, construction, testing, component
integration, maintenance, and reverse engineering. All other activities span the entire life-cycle
and apply equally to upper and lower CASE.
CASE tools are of different types to perform specific function, such as:
i. Requirement Analysis Tool
ii. Structure Analysis Tool
iii. Software Design Tool
iv. Code Generation Tool
v. Test Case Generation Tool
vi. Document Production Tool
vii. Reverse Engineering Tool
11. Define by distinguishing between the role of Information System Analyst, Information
System Manager, Database Manager, Information System Auditor
A systems analyst is an information technology (IT) professional who specializes in analyzing,
designing and implementing information systems. Systems analysts assess the suitability of
information systems in terms of their intended outcomes and liaise with end users, software
vendors and programmers in order to achieve these outcomes. A systems analyst is a person who
uses analysis and design techniques to solve business problems using information technology.
Systems analysts may serve as change agents who identify the organizational improvements
needed, design systems to implement those changes, and train and motivate others to use the
systems.
Information systems managers are business executives who manage and implement computer
and information technology systems. They act as the liaison between an organization's top
management and IT specialists. Information systems managers (IS Manager) implement
information technology in an organization, overseeing a team of IT professionals. The role
includes information systems planning, installation, and maintenance, hardware and software
upgrades. IS manager may focus on a specific issue such as network security or Internet services,
or they may coordinate all technology operations.
Database managers manage databases. They manage Data Base Management System (DBMS)
that handles the organisation, storage and retrieval of the data. . DB managers have a set of
command-line parameters, which allow them to initiate features and functions beyond the
graphical user interface.
Information System Auditors are the qualified person who has skill in assessing vulnerabilities
and instituting technology controls in an enterprise environment. An information technology
audit, or information systems audit, is an examination of the management controls within an
Information technology infrastructure. The evaluation of obtained evidence determines if the
information systems are safeguarding assets, maintaining data integrity, and operating effectively
to achieve the organization's goals or objectives. These reviews may be performed in conjunction
with a financial statement audit, internal audit, or other form of attestation engagement.
12. Write full form and define:

a. COSO
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a joint
initiative to combat corporate fraud. It was established in the United States by five private sector
organizations to guide executive management and governance entities on relevant aspects of
organizational governance, business ethics, internal control, enterprise risk management, fraud,
and financial reporting. COSO has established a common internal control which organizations
use to assess their control systems. The COSO framework defines internal control as a process,
effected by an entity's board of directors, management and other personnel, designed to provide
"reasonable assurance" regarding the achievement of objectives in the following categories: (1)
Effectiveness and efficiency of operations, (2) Reliability of financial reporting, (3) Compliance
with applicable laws and regulations, and (4) Safeguarding of Assets.
COSO is supported by five supporting organizations, including the Institute of Management
Accountants (IMA), the American Accounting Association (AAA), the American Institute of
Certified Public Accountants (AICPA), the Institute of Internal Auditors (IIA), and Financial
Executives International (FEI).
b. COBIT
Control Objectives for Information related Technology (COBIT) is a framework of generally
applicable information system security and control practices for IT control. The framework
allows management to benchmark the security and control practices of IT environment, IT
services to get assured that adequate security and control exists, and auditor to substantiate their
opinions on internal control and to advise on IT security and control matters.
c. ITIL
Information Technology Infrastructure Library (ITIL) is the best practice in the IT service
management. This is a set of best practices for IT service management that focuses on aligning
IT services with the needs of business. ITIL has published as a series of five core volumes, each
of which covers a different IT service management lifecycle stage.
ITIL describes processes, procedures, tasks, and checklists which are not organization-specific,
but can be applied by an organization for establishing integration with the organization's
strategy, delivering value, and maintaining a minimum level of competency. It allows the
organization to establish a baseline from which it can plan, implement, and measure. It is used to
demonstrate compliance and to measure improvement.
d. ISO/IEC 270001
ISO/IEC 27001:2013 is an information security standard that was published in September 2013
It supersedes ISO/IEC 27001:2005, and was published by the International Organization for
Standardization (ISO) and the International Electrotechnical Commission (IEC) under the joint
ISO and IEC subcommittee, ISO/IEC JTC 1/SC 27.[2] It is a specification for an information
security management system. Organizations which meet the standard may be certified compliant
by an independent and accredited certification body on successful completion of a formal
compliance audit.
13. What is High Availability computer system ? What is done to make system high-
available?
In information technology, high availability refers to a system or component that is continuously
operational for a desirably long length of time. Availability can be measured relative to "100%
operational" or "never failing." A widely-held but difficult-to-achieve standard of availability for
a system or product is known as "five 9s" (99.999 percent) availability.
Since a computer system or a network consists of many parts in which all parts usually need to
be present in order for the whole system to be operational. High availability centers requires
additional backup, failover processing, data storage, and access, etc. For storage, a redundant
array of independent disks (RAID) is one approach. A more recent approach is the storage area
network (SAN).
For any system to be highly available, the parts of a system should be well-designed and
thoroughly tested before they are used. For example, a new application program that has not
been thoroughly tested is likely to become a frequent point-of-breakdown in a production
system.
14. List out controls in the computer system in respective of its objectives and briefly
explain them.
a. Preventative Controls.
These controls are designed to prevent error, omission, or malicious act occurring. An
example of preventative control is the use of password to gain access to a computer
system.
b. Detective control
These controls are designed to detect errors, omission, commission, or malicious acts
occurring during data entry or in processing. When it occurs, it will report to the
appropriate person. Examples: video monitoring, sensor to detect any movements, hash
totals, echo sound on incorrect entry, error message, audits, cash counts, etc.
c. Corrective Controls
This is designed to reduce the impact or correct an act of error once it has been detected.
A business continuity plan is a significant corrective action. Other examples are, data
backup, contingency plan, etc.
e. Compensatory controls.
This is basically designed to reduce the probability of threat which can exploit the
vulnerability of a system. Insurance for loss is an example of the control.
15. What is MIS and its role in an organization ?

Management information system refers to a manual or computer-based system that provides
managers with the tools to organize, evaluate and efficiently manage departments within an
organization. In order to provide past, present and prediction information, a computer based
management information system can include software that helps in decision making, data
resources such as databases, the hardware resources of a system, decision support systems,
people management and project management applications.
The following are some of the important roles of the MIS:
i. The MIS satisfies the diverse needs through variety of systems such as query system,
analysis system, modeling system and decision support system.
ii. The MIS helps in strategic planning, management control, operational control and
transaction processing.
iii. The MIS helps the junior management personnel by providing the operational data for
planning, scheduling and control and helps them further in decision-making at the
operation level.
iv. The MIS helps the middle management in short term planning, target setting and
controlling the business functions. It is supported by the use of the management tools
of planning and control.
v. The MIS helps the top level management in goal setting, strategic planning and
evolving the business plans and their implementation.
vi. The MIS plays the role of information generation, communication, problem
identification and helps in the process of decision-making. Therefore, it plays a vital
role in the management, administration and operation of an organization.
16. What is encryption and why and where it is used ?

Encryption is the process of converting a plaintext message into secure coded form of
text, called cipher text. Encrypted test cannot be understood without converting back
using decryption (the reverse process) to human readable plain text. This is done through
a mathematical function and special encryption/decryption password called the
encryption key.
Encryption is generally used to protect data in transit over network from unauthorized
interception and manipulation. It also protects information store on computers from
unauthorized viewing and manipulation. It also protect accidental or intentional
manipulation of data.
However, encryption cannot prevent loss or damage of data.
17. What is information? Explain the type of information and the user.
Information is data that have been put into a meaningful and useful context. To make it
meaningful data are processed to make it valuable or meaningful to a particular user for
making decisions. For example, sales data of various salesman can be merged to provide
information of total sales by person and area. This information is of value to the manager
to plan future sales and to develop a sales strategy. In a way, data is similar to raw
material but information is a finished product. A data processing system processes data
and generates information which is used for a decision. Therefore a quality of the
decision depends of the information and information depends on the data.
Information can be broadly divided into two types:
i. Internal Information is information generated from the operations of the

organization at various functional areas. The internal information are processed and
summarized at Lower level for the Middle or top level management. Examples are,
production information, sales information, information about personnel, material, stock,
accounts, etc.
ii. External Information is collected from the external environment of the

organization. External information is considered to affect the organizational performance
from outside situation/happenings. Examples: Changes in government policies,
competition, customer demand trend, etc.
Generally, top level management uses both internal and external information to develop a
strategy for sales production, etc. However, middle or lower level management uses
internal information to manage the operation, sales, procurement, etc.
18. What is Business Process Reengineering ? Why this is used?

Business Process Re-engineering (BPR) is the practice of rethinking and redesigning the
way work is done to better support an organization's mission and reduce costs. It
involves analysis, of a company‘s current systems and workflow. This becomes
necessary because a company becomes a collection of even unnecessary processes that
evolves over time. BPR involves the radical redesign of core business processes to
achieve dramatic improvements in productivity, processing cycle times and quality. It
starts with a blank sheet of paper and rethink existing processes to deliver more value to
the customer. It aims to help organizations to fundamentally rethink how they do their
work in order to dramatically improve customer service, cut operational costs.
Reasons for re-engineering a company‘s business processes are:
i.To make clarity of purpose
ii. To make simple and streamlined operation
iii. To remove redundant/unnecessary actions/steps
iv. To increase efficiency
v. To achieve better results and products
vi.To increase profit or reduce costs
19. What is Output Design? What are the general principles for output design?
Outputs present information to system users. Output is the most visible component of a
working information system. Designing output should proceed in an organized, well
thought manner. The right output should be designed by ensuring that it will be easy and
understandable for the user to use it effectively. The output coveys information about the
past activities, current status, projections of the future, confirmation of action, or signal
opportunities or problem, and trigger an action.
The following general principles should be followed for designing a good output.
i. All output should have a title.
ii. It should include section headings
iii. Columns should have column headings
iv. Abbreviation should be interpreted
v. All fields should be defined.
20. What is the purpose of the Electronic Transaction Act 2063? What are the
offences related to the Electronic Transaction Act 2063 ?
The purpose of the Electronic Transaction Act (ETA) is to make, legal provisions for
authentication and regularization of the recognition, validity, integrity and reliability of
generation production, processing, storage, communication and transmission system of electronic
records by making the transactions to be carried out by means of electronic data exchange or by
any other means of electronic communications, reliable and secured. This is also for controlling
the acts of unauthorized use of electronic records or of making alteration in such records through
the illegal manner
Offences Relating to Computer
i. Pirate, Destroy or Alter computer source code
ii. Unauthorized Access in Computer Materials
iii. Damage to any Computer and Information System
iv. Publication of illegal materials in electronic form
v. Confidentiality to Divulge
vi. To inform False statement to the Certifying Authority
vii. Submission or Display of False License or Certificates suspended or revoked
viii. Non-submission of Prescribed Statements or Documents
ix. Commit computer fraud
x. Abetment to commit computer related offence
Advanced Taxation
1. Question No. 1.
Cement Sigma Pvt. Ltd. has following statement of Income and transaction during
the year 2072/073.
Statement of Income
For the Period End 31st Ashad 2073
Particular Note
NPR
Sales 13 53,220,000
Less: Cost of Goods Sold 14 30,540,000
Gross Profit 22,680,000
Miscellaneous Income 15 3,555,000
Repair and maintenance 16 -
Selling and Distribution Expenses 17 -
Administrative expenses 18 17,580,000
Operating Profit 8,655,000
Interest Expenses 19 2,100,000
Depreciation Expenses 4 1,725,000
Profit Before Staffs Bonus 4,830,000
Provision for Staffs Bonus -
Profit Before Tax 12 4,830,000
Provision for Income Tax -
Net Profit for the period 12 4,830,000
Note to Financial statements
Note-13 Note-14
Sales Proceeds Cost of Goods Sold
60,000,00
Sales Opening Stocks 3,240,000
0
Less: Raw Materials Purchased 36,300,000
Sales Returns 6,780,000 Production Expenses 6,000,000
53,220,00
Total Sales Raw Materials Returns (4,500,000)
0
Note-18 Closing Stock (10,500,000)
Administrative
Total 30,540,000
expenses
Salary Allowances 4,500,000
Legal Fees & Expenses 150,000
Business Promotions 8,100,000 Note- 15
Donations 600,000 Miscellaneous Incomes
Cash Discount 1,605,000 VAT Refund 1,950,000
Freight 750,000 Gain on Sale of Generator 30,000
Dividend income( Net of
Office Expenses 1,500,000 1,500,000
Tax)
Vehicle Expenses 375,000 Gift 75,000
17,580,00
Total Total 3,555,000
0
Additional Information to financial Transactions:
A) Sales Return includes the Cement Return of NPR. 3,390,000 including vat.
B) Closing Stocks includes the sales Returned goods of NPR. 6,780,000 & 50% of Opening
Stock.
C) Opening Stock includes Repair & Maintenance Expenses of NPR. 240,000.
D) Purchase Return is return of Raw Materials purchased Baikash 2073 & Return in
months of Jestha 2073. However Adjustment is done in VAT Return of Bhadra 2073.
E) Production Expenses includes the following;
i. The Cost of Petrol to run Generator of NPR. 1,017,000 including VAT.
ii. Repair and Maintenance of Assets (Block D) NPR. 900,000
F) Payment of Salary is NPR. 1500,000 without deduction withholding tax (TDS).
G) Refund of VAT NPR. 1,950,000 is received during the year which was claimed under
section 17 of Value Added Tax Act, 2052.
H) Divided income received from RBS Bank Ltd. after deducting Tax.
I) Gift Received from the supplier of Raw Material 3D Suppliers Pvt. Ltd and market
value of gift is NPR 150,000.
J) Legal Fee & Expenses included NPR. 30,000 tax penalty and remaining expenses is
related to previous year law cases faced by company.
K) Business Promotion expense includes the payment of NPR. 6,450,00 to International
Metal works China for consultancy service provided by Metal works china in relation to
modification & improvement of the production process so, that the cost per Bag is
reduce by NPR 100.
L) Donation includes the following payments:
Bagarkot VDC 225,000
XYZ PVT. 150,000
Villagers of Bagarkot VDC 225,000
600,000
M) Cash discount given to distributors of the company which meet the sales target without
deduction of withholding tax (TDS).
N) Office expenses includes the following:
i.60% VAT paid on purchase of delivery VAN for NPR. 1,000,000(
78,000
cost including tax) 10/11/2072
II. 40% Vat Paid on Purchase of car for office purpose for NPR.
2,000,000( cost including tax) on 03/04/2072 and rest Vat is 104,000
Capitalized
III. Vat Paid on mineral water for Office Purpose. 13,000
195,000
O) Vehicle expenses include Petrol Cost of NPR. 169,500 including Vat for Running Office
Car.
P) Interest is related to Bank Loan taken for the Establishment of New Cement Factory
which is 100% subsidiary of this company(50% loan is used) and 50% is used by
Directors of company.
Q) Depreciation is charged as per schedule 2 of Income Tax Act 2058.
R) Advance tax return is not submitted by the company as required by Income Tax Act,
2058.
S) Company has paid NPR. 500,000 advance tax in the months of Chaitra 2072.
Required:
a) Compute Taxable Income of the company.
b) What is the applicable tax rate to the company? State the relevant provision of
Income Tax Act, 2058.
c) Management of Company has decided not to claim additional depreciation benefit as
pre Income Tax Act 2058. State your view and describe who can take this benefit as
per Income Tax Act 2058.
d) Calculate tax liability by considering fine and Interest under section 117,118 and 119
of Income Tax Act, 2058.
e) Company has not provided Bonus Provision as per requirement of Bonus Act, 2030 in
the financial statements, state the possible impact.
Answer to Question no.1

a) Computation of Taxable income of Cement Sigma Pvt. Ltd.
For financial year 2072/073
Calculation of Taxable Income
Sales(WN#1) 53,610,000
VAT Refund(WN#7) -
Gain on Sale of Generator(WN#8) -
Dividend income( Net of Tax)(WN#9) -
Gift (WN#10) 150,000
Total inclusion 53,760,000
Deduction:
General deduction u/s 13(WN#20) 10,318,000
Interest Expenses u/s 14(WN#17) -
Cost of Goods Sold u/s 15(WN#2) 29,793,000
Repair and Maintenance u/s 16(WN#21) 900,000
Depreciation expenses u/s 19 1,725,000
Total Deduction 42,736,000
Adjusted Taxable income 11,024,000

Less
Research and Development expenses u/s 18(WN#14) 5,512,000
Donation u/s 12(WN#15) 100,000
Taxable Income 5,412,000
Working Notes# WN
WN#1
Sales
Sales 60,000,000
Less: Sales Returns 6,780,000
Add: VAT including in Sales return 390,000
(1130000*3/113*13)
Total Sales 53,610,000
WN#2
Cost of Goods Sold
Opening Stocks (WN#3) 3,000,000
Add:
Raw Materials Purchased 36,300,000
Production Expenses (WN#6) 4,983,000
Less:
Raw materials Returns (4,500,000)
Closing Stock (WN# 4) (9,990,000)
Total 29,793,000
WN#3
Opening Stocks 3,240,000
Less: Repair and Maintenance u/s 15(8) (240,000)
Total 3,000,000
WN#4
Closing Stock 10,500,000
Less: Vat included in sales Return (390,000)
Less: Repair and Maintenance u/s 15(8) (120,000)
Total 9,990,000
WN#5
Purchase return is related to FY 2072/073, Vat adjustment on purchase can be done
within 12 months from the transaction date. Hence it does not have any implication in
calculation of taxable profit.
WN#6
Production Expenses 6,000,000
Less: Vat on Petrol to run generator (117,000)
Less: Repair and Maintenance separately claimed u/s 16 (900,000)
Total 4,983,000
(1,017,000*13/113) VAT can be offset on petrol used in other than vehicles VAT
Rules 41(1) U.
WN#7
Vat Refund shall not be included in income, it shall be adjusted with VAT
receivables, again VAT claimed u/s 17 means offset of Vat, not refund hence it is
error in accounting. It should not be included in calculating of taxable income.
WN#8
Gain on Sale of Generator shall not be taxable since block D is existence but the sales
should be reduced from the block value as per schedule 2 of Income Tax Act 2058.
WN#9
As per Section 92 of Income Tax Act, 2058 dividend is final withholding payment.
WN#10
Gift related to business should be included in business income u/s 7(2)(f) & market
value shall be taxable u/s 27(1) of Income Tax Act 2058. Hence, NPR. 150,000 is
included in calculation of taxable income.
WN#11
Salary & allowance is deductable u/s 13 salary paid without deducting withholding
tax is deductible expenses but withholding tax should be deducted & deposited into
Inland Revenue office. As per section 90(3) of Income Tax Act 2058 though
withholding tax is not deducted, it shall be deemed as deducted.
WN#12
Legal fees & Expenses 150,000
Less Tax penalty (30,000)
Total 120,000
Legal fees incurred during the year, though it relates to previous year legal cases, it is
allowed for deduction during the year on ground that it relates to the activities of the
company to reduce any type of burden of the company and the amount is ascertained
payable during the year. (Honorable Revenue Tribunal in case of Goodwill finance
and Investment Company Nepal Limited. In case no.223/927 and decision no.91of
2059)
WN#13
Business Promotions 8,100,000
Less: Research and Development Expenses to be claimed
under Section 18 (6,450,000)
1,650,000
WN#14
Research and Development expenses -Section 18
Calculation of deductable Research & Development Expense u/s 18
Research and development expenses included in Business promotion 6,450,000
50% of Adjusted taxable income (As per 18(2)) 5,512,000
Lower of above 5,512,000
As per section 18(2) of Income Tax Act 2058 expenses up to 50% adjusted Taxable
income of all business shall be deductible and remaining undetectable expenses is
capitalized in Block D as per section 18(3).
Research and development costs mean costs incurred by a person for the purposes
of developing the person's business and improving business products or process. In
this case company has made payment to Metal works China to reduce its cost per bag
by NPR. 100 is treated as research and development costs.
WN#15
Donation
Lower of the following is deductible u/s section 12
I) As per 12(2) 100,000
II) 5% of adjusted Taxable Income 551,200
III) Actual (Bagarkot VDC only) 225,000
Lower of above 100,000
Allowable donation expenses is NPR.100,000 related to tax exempted entity and
XYZ Pvt. Ltd and Villagers donation is not allowed as per Income Tax Act 2058.
WN#16
Cash Discount
Withholding tax should be deducted as per section 88 Income Tax Act 2058 but such
expenses NPR. 1,605,000 is deductible.
WN#17
Interest to establishment of capital investment and interest portion of loan used by
directors of company is not allowed deduction u/s 14 of Income Tax Act 2058.
WN#18
Deductable office expenses
Office Expenses 1,500,000
Less: Vat on Purchase of Van claimed u/s 17 of Vat (78,000)
Less: VAT on Purchase of Car (104,000)
(Vat can be claimed 40% & rest should be capitalized as per rule 41(2) V (Vat rules
2053)
Less: Vat paid on mineral water cannot offset as per rule 41(1-3) -
Total 1,318,000
WN#19
Calculation of deductable Vehicle expenses
Vat paid on Petrol to ruin vehicle cannot offset hence, it should be part of expenses.\
Thus NPR, 169,500 is deductable
WN#20
General Deduction
Salary Allowances 4,500,000
Legal Fees & Expenses 120,000
Business Promotions ` 1,650,000
Donations -
Cash Discount 1,605,000
Freight 750,000
Office Expenses 1,318,000
Vehicle Expenses 375,000
Total 10,318,000
WN#21
Repair and maintenance expense is not part of cost of goods sold as per section
15(8), so repair and maintenance is claimed u/s16.
b) Cement Sigma is cement manufacturing company the applicable tax rate to

company is 20% as per annexure 1 section 2(1) of Income Tax Act 2058,
provision related to entities.
c) As per Income Tax Act 2058, entities referred to in section 19 (2) and paragraph
2(3) and (4) of Schedule-1 shall be entitled to an additional depreciation rate
added by 1/3 in the depreciation rates referred to in subparagraph (1) applicable to
pools of depreciable assets in Class A, B, C, and D. The entity may be any of
these:-
 An entity wholly engaged in operating a special industry for the income
year
 An entity that operates any road, bridge, tunnel, ropeway, or flying bridge
constructed by itself.
 An entity that operates trolley buses or trams.
 An entity has acquired the whole of its income during the year from
export
 An entity that has a projection to construct and operate a public
infrastructure to transfer it to government of Nepal.
 An entity has engaged in power generation, transmission or distribution.
As per this provision company can take benefits of additional depreciation
but management has not taking benefits of additional depreciation,
management can do so because it is not compulsory.
d) Calculation of Tax Liability:

Tax Rate 20% 20%
Tax Liability 1,082,400.0
Fine under section 117 2,000
Interest under section 118 47,739
Interest under section 119 -
Total Tax Liability 1,132,139
WN#22
Penalty under 117 (1 ka), fails to submit advance tax return as required by section
95(1).
WN#23 Interest calculation under section 118
Fine
Installment Required Required Deposited Fine
period
First -40% 432,960.0 - 16,236.0 3 months
Second -70% 757,680.0 500,000 9,663.0 3 months
Final installment-100% 1,082,400 500,000 21,840.0 3 months
Total Interest u/s 118 1,082,400 500,000 47,739
WN # 24 Interests 119
A person who fails to pay tax on or before the date on which the tax is payable is
liable to pay interest for each month and part of a month for which any of the tax is
outstanding calculated as the standard interest rate applied to the amount
outstanding. In this case the company has submitted its return within ashwin end
2073 and deposited the tax liability accordingly. So interest is not calculated under
section119.
e) Ever entities making profit shall be required to allocate 10% Bonus out of Net
profit to its employee as per section 5 of Bonus Act 2030. In the given cases
company has not provided Bonus provision in the financial statements and Bonus
expenses is not claimed in tax, which is inconsistence with Bonus Act, 2030.
2. Question No. 2
Last SAARCE Submit held in Kathmandu organized by Nepal, during this meeting
professionals from China are invited as guest. Professional groups from China and Nepal
are agreed to establishment of joint companies in South and East Asia as result Nepal
China Pvt. Ltd. Company registered with Capital city Kathmandu Nepal holding 50%
stake by Nepalese professional Groups and 50% Chinese Professional group is
established, with an objective to hold market share in South and East Asia. The company
has invested its equity investment in Singapore a Subsidiary company Singapore Nepal
China Pvt. Ltd. holding its 77% stake.
Singapore Nepal China Pvt. Ltd. has a subsidiary in China, named China Singapore
Nepal Pvt. Ltd in which the Singapore Nepal China Pvt. Ltd. holds 85% share.
Following are financial transactions in the financial year 2073/074.

100,000,00
Income from Disposal of Trading Stocks
0
Dividend from Singapore Nepal China Pvt. Ltd. (subject to 15% TDS) 10,000,000
Dividend from China Singapore Nepal Pvt. Ltd (subject to 5% TDS) 7,500,000
Admissible expenses related to operations 55,000,000
Donations to political party registered with Election Commission of
1,500,000
Nepal
Income(Net) of Singapore Nepal China Pvt. Ltd. 67,500,000
Income(Net) of China Singapore Nepal Pvt. Ltd 32,500,000
With the permission from the IRD the company has spent NPR.10 Lakh for the
preservation of Kathmandu Darbar squire.
Required:
a) What is Controlled foreign entity for an income-year and Attributable income as

per Income Tax Act, 2058?
b) You are required to compute the tax payable amount for Nepal China Pvt. Ltd. for
the financial year 2073/074.
c) State the relevant provision regarding Foreign Tax Credits.
d) Define Assessable Income with considering relevant provision of Income Tax
Act, 2058.
e) Is there any, provisions for Ancient Preservation and Development games and
sport expenses in Income Tax Act, 2058?
Answer to Question: 2
a) As per section 69 Clarification (b) of Income Tax Act, 2058, Controlled foreign
entity for an income-year means a non-resident entity in which a resident person
holds an interest, directly or indirectly through one or more interposed non-
resident entities, and the person is associated with the entity or would be if the
person and not more than four other resident persons were associated. Similarly
section 69 clarifications (a) defines, Attributable income of a controlled foreign
entity for an income year is its taxable income for the year calculated as if the
entity were a resident entity.
b) In the given case entities, Nepal China Pvt. Ltd. is having more than 50% share
holding in a Subsidiary Singapore Nepal China Pvt. Ltd. and through Singapore
Nepal China Pvt. Ltd., it is having controlling interest in another subsidiary China
Singapore. As per Income Tax Act, 2058 section 69 explanation part, Controlled
foreign entity for an income-year means a non-resident entity in which a resident
person holds an interest, directly or indirectly through one or more interposed
non-resident entities, and the person is associated with the entity or would be if
the person and not more than four other resident persons were associated. In this
regard, Singapore Nepal China Pvt. Ltd. and China Singapore Nepal Pvt. Ltd.,
non-resident entities are considered as controlled foreign entities.
Computation of Tax payable of Nepal China Pvt. Ltd. for the financial year
2073/074
Share holding of Nepal China Pvt. Ltd. in controlled foreign entities:
Singapore Nepal China Pvt. Ltd. 77%
China Singapore Nepal Pvt. Ltd (85*77%) 65.45%
Income booked from disposal of trading stocks 100,000,000
Dividend from Singapore Nepal China Pvt. Ltd. (subject to
-
15% TDS)(#WN1 )
Dividend from China Singapore Nepal Pvt. Ltd (subject to 5%
-
TDS) (#WN1)
Income (Net) of Singapore Nepal China Pvt. Ltd. (77%) 51,975,000
Income (Net) of China Singapore Nepal Pvt. Ltd.
21,271,250
(85*77%=65.45%)
Total Inclusion 173,246,250
Deduction:
Admissible expenses related to operations 55,000,000

Adjusted taxable income 118,246,250
Less;
Donation to the tax exempted entities NPR. 1,00,000 5% of
adjustable taxable income Actual donation of NPR. 15 lakh, or 100,000
the up to 1 lakh (whichever is less of above)
Assessable Income 118,146,250
Less:
Donation u/s 12 KA
NPR. 10 Lakh or 10% of the assessable income during the year
1,000,000
whichever is lower.(WN#2)
Taxable income 117,146,250
Tax on above @25% 29,286,563
Adjustment of foreign tax credit(WN#3) 1,875,000

Net tax payable 27,411,563
Working Notes# WN
WN#1:
The dividend from controlled foreign entities is not taxable as it is taxed in the
period when the income is recognized in proportionate basis. So, dividend
from Singapore Nepal China Pvt. Ltd. (subject to 15% TDS) and Dividend
from China Singapore Nepal Pvt. Ltd (subject to 5% TDS) are not included in
tax computation because it‘s already included in proportionate basis in
previous financial years tax calculations.
WN#2
As per section12a of Income Tax Act 2058, stated that with the approval of
IRD amount spent for Ancient Preservation and Development games and sport
are allowed for deduction. The maximum limit of the deduction shall be NPR.
10 lakh or 10% of the assessable income during the year whichever is lower.
In this regard, expenses for NPR. 10Lakhas for the preservation of
Kathmandu Darbar squire is allowed for deduction.
WN#3
Calculation of foreign tax credit
Adjustment of foreign tax credit
Average rate of tax
=Tax payable before adj. of foreign tax Average rate of tax/Taxable
income*100%
=29,286,563 /117,146,250 *100%
=25%
Tax paid in Singapore 1,500,000

Related income from Singapore 51,975,000
Average Tax rate @25% 25%
Tax liability 12,993,750
Claimable tax credit amount 1,500,000
Tax paid in China 375,000
Related income from China 21,271,250
Average Tax rate @25% 25%
Tax liability 5,317,813
Claimable tax credit amount 375,000
Adjustment of foreign tax credit 1,875,000
Alternatively to
claiming tax credit, the foreign tax can be claimed as expenses (sec 71(4)).
c) Relevant provision for Foreign Tax Credits is section 71 of Income Tax Act,
2058. As per section 71 of Income Tax Act, 2058 following are the provision
related to foreign tax credits;
A resident person may claim a foreign tax credit for an income-year for any
foreign income tax paid by the person to the extent to which it is paid with respect
to the person‘s assessable foreign income for the year.
Foreign tax credits claimed shall be calculated as follows:-
 Calculated separately for assessable foreign income sourced in each country;
and
 with respect to each calculation, shall not exceed the average rate of Nepal
income tax of the person for the year applied to the person‘s assessable
foreign income.
Any foreign income tax paid with respect to a person's assessable foreign income
for which a foreign tax credit is not granted this section as a result of the
limitation provided for in this section shall be as follows:-
 may be carried forward; and
 Shall be treated as paid with respect to assessable foreign income of the
person for a future income-year that is sourced in the same country.
Notwithstanding mention in this section, with respect to any income-year, a
person may elect to relinquish a foreign tax credit for the year and claim a
deduction for foreign income tax for which the credit is available.(Foreign Tax-
Expense Method)
For the purpose of this section:
 Clarification (a) Assessable foreign income of a resident person for an income-
year means the following income that is included in the person's assessable
income from any employment, business, or investment for the year. (1) Foreign
source income; and (2) income of a non-resident person, from whatever source,
treated as distributed to the resident person under section 69.
 b)Average rate of Nepal's income tax, means the rate that appears after dividing
the tax amount by taxable income that is applicable to the income tax payable by
a person for an income year under Section 3(a) before any foreign tax credit
adjustment is made and multiplying the resulting amount by hundred.
d) As per section 6 of Income Tax Act, 2058, Assessable Income subject to income
tax act, the following income of a person for an income-year from any
employment, business, or investment shall be as the assessable income:-
(a) Income of a resident person from the employment, business, or investment of
the year irrespective of the location of the source of the income; and
(b) Income of a non-resident person from the employment, business, or
investment of the year but only to the extent the income has a source in Nepal.
Provided that, the assessable income does not include any income exempt under
sections 11 or 64 or both.
e) Yes, section 12 ka of Income Tax Act 2058, mention provision for Ancient
Preservation and Development games and sport expenses. As per provision of this
section with prior permission from IRD for incurring the expenses related Ancient
Preservation and Development games and sport, person can spend maximum limit
of the deduction shall be NPR. 10 lakhs or 10% of the assessable income during
the year whichever is lower.
3. Question No. 3 International taxation and Transfer pricing
a) What are the discloser requirements for multinational enterprises for transfer pricing as
per OCED guidelines for transfer pricing?
b) Delta is multinational enterprises start its commercial transaction to Nepal in last year.
Tax office wants to investigate the transfer pricing arrangement of the enterprises, as tax
advisory, what are the documents that the enterprises need to provide to the tax officer for
investigation the transfer pricing arrangements in addition to the financial statements.
Answer to question no.3

a) As per OECD Guidelines for Multinational Enterprises 2011, following are the disclosure
requirements for multinational enterprises for transfer pricing;
Disclosure
1. Enterprises should ensure that timely and accurate information is disclosed on all
material matters regarding their activities, structure, financial situation, performance,
ownership and governance. This information should be disclosed for the enterprise as a
whole, and, where appropriate, along business lines or geographic areas. Disclosure
policies of enterprises should be tailored to the nature, size and location of the enterprise,
with due regard taken of costs, business confidentiality and other competitive concerns.
2. Disclosure policies of enterprises should include, but not be limited to, material
information on:
a) the financial and operating results of the enterprise;
b) enterprise objectives;
c) major share ownership and voting rights, including the structure of a group of
enterprises and intra-group relations, as well as control enhancing mechanisms;
d) remuneration policy for members of the board and key executives, and information
about board members, including qualifications, the selection process, other enterprise
directorships and whether each board member is regarded as independent by the board;
e) related party transactions;
f) foreseeable risk factors;
g) issues regarding workers and other stakeholders;
h) governance structures and policies, in particular, the content of any corporate
governance code or policy and its implementation process.
3. Enterprises are encouraged to communicate additional information that could include:

a) value statements or statements of business conduct intended for public disclosure
including, depending on its relevance for the enterprise‘s activities, information on the
enterprise‘s policies relating to matters covered by the Guidelines; b) policies and other
codes of conduct to which the enterprise subscribes, their date of adoption and the
countries and entities to which such statements apply; c) its performance in relation to
these statements and codes; d) information on internal audit, risk management and legal
compliance systems; e) information on relationships with workers and other stakeholders.
4. Enterprises should apply high quality standards for accounting, and financial as well
as non-financial disclosure, including environmental and social reporting where they
exist. The standards or policies under which information is compiled and published
should be reported. An annual audit should be conducted by an independent, competent
and qualified auditor in order to provide an external and objective assurance to the board
and shareholders that the financial statements fairly represent the financial position and
performance of the enterprise in all material respects.
b) The enterprises need to submit a brief description of the implementation and application
of the group‘s internal transfer pricing policy that explains arm‘s length nature of prices
used by the taxpayer. In additional to this, following documents a tax officer may seek to
establish the transfer pricing.
i. A description of the business and business strategy of the tax payer including
changes in the business strategy compared to the previous income year.
ii. A general description of the group‘s organizational legal and operational
structure.
iii. Identification of the controlled transaction involving business in Nepal, including
description of;
 flow of transactions ( tangible and intangible assets, services, financial,)
 Invoice flows.
 Amounts of transaction flows.
iv. The ownership of intangible (patents, trademarks, brand names. Know- how etc)
and royalties paid or received.
v. An analysis. Including by comparisons with the previous year, of,
 Characteristics of property service dealt in,
 Functions performed, assets used and risk assumed.
 Contractual terms
 Economic circumstances
 Specific business strategy.
vi. An explanation of the selection and application of the transfer pricing methods i.e.
why a specific transfer pricing method was selected and how it is applied
financial transactions.
vii. Relevant information on internal and external comparables if available.
4. Question No. 4
Government of Nepal (GoN) has adopted the concept of Special Economic Zone (SEZ)
to attract foreign and national investors to invest and establish industrial and business
units, which will contribute in increased promotion of export. With this concept of, SEZ
development, Sum Pharmaceuticals India Inc. Pvt. has invested 60% equity in Sun
Pharmaceuticals Nepal Pvt. Ltd. in SEZ Bhairawa with the objective investment in
Medicine Company and company requires substantial cash outlays. During the months of
Poush end 2073 Nepalese Banking systems suffer liquidity crisis due to which Sum
Pharmaceuticals Nepal Pvt. has unable to borrow loan from Banks. The board of
Directors has decided to manage fund for development of its projects by borrowing fund
from local shareholder as well as non-resident parent company Sum Pharmaceuticals
India Inc. Pvt. The borrowing rate has decided by Board of Director of company is 18%
but the market rate is 12% as prescribed by Nepal Rastra Bank.
Required
a) As a tax advisor, what would be your opinion on applicability of provision of transfer
pricing with respect to borrowing fund for project financing?
b) What is the applicability of withholding tax (TDS) by Sun Pharmaceuticals Nepal
Pvt. Ltd and other procedural aspect as per Income Tax Act, 2058?
c) What are the relevant provisions that are applicable in case loan borrowed from
Indian companies?
d) Is there any provision of the Income Tax Act, 2058 is applicable while entering in to
above arrangements of availing loan from shareholders? What happens if the Sun
Pharmaceuticals Nepal‘s has high or low adjustable taxable income over the interest
income?

a) With reference with Income Tax Act 2058, associates persons is defined under
section 2(bd) of act, Associated Persons means two or more persons or group of such
persons where one may reasonably be expected to act in accordance with the
intentions of the other. According director is considering as associated person and in
other hand shareholder having no control in the decision making process are
considered as associated person. Similarly under section 33 of income tax act 2058,
Transfer Pricing and Other Arrangements Between Associates, any arrangement
between associated persons that does not reflect arm‗s length principal may under the
purview of Transfer Pricing. In general, but not limited to; the concept of transfer
pricing is applicable in cross boarder transaction.
As per this section, in any arrangement between persons who are associates, the
Department may, by notice in writing, distribute, apportion, or allocate amounts to be
included or deducted in calculating income between the persons as is necessary to
reflect the taxable income or tax payable that would have arisen for them if the
arrangement had been conducted at arm‘s length. It means the IRD may recharcterise
its cost/ income to reflect the market value (arm‘s length). In the given case, Sum
Pharmaceuticals India Inc. Pvt. and its directors (excluding shareholder having no
control on decision making process) is associated person of Sum Pharmaceuticals
Nepal Pvt.Ltd. and the cost of borrowing is greater than market value IRD has power
to recharcterise income / cost of Sum Pharmaceuticals Nepal and company can
borrow the fund that cost of borrowing fund is not exceed market rate.
b) As per Section 88(1) of Income Tax Act, 2058, Sum Pharmaceuticals Nepal is
required to deduct tax at the rate of 15% on such interest payment. Such withholding
will be final tax at the hand of nonresident. That is, in the case of Sum
Pharmaceuticals India Inc. Pvt. Ltd., that is non-resident company, 15% tax withheld
by Sum Pharmaceuticals Nepal is final tax u/s 92(1)(f) and credit is available in India
as there is no double tax as per DTTA between Nepal and India. The resident getting
this interest income should include the interest income under income from investment
and submit tax return and pay applicable tax (up to 35%).
c) As per clause 1 Article 11 of DTAT between Nepal and India stated that ―Interest
arising in a Contracting State and paid to a resident of the other Contracting State
may be taxed in that other State.‖ Similarly clause 2 Article 11 of DTAT between
Nepal and India stated that, ―however, such interest may also be taxed in the
Contracting State in which it arises and according to the laws of that State, but if the
beneficial owner of the interest is a resident of the other Contracting State, the tax so
charged shall not exceed 15 per cent of the gross amount of the interest.‖ By
considering above clause Interest paid to Sum Pharmaceuticals India Inc. Pvt. is taxed
in India. However, such interest may also be taxed in Nepal according to Income Tax
Act of Nepal. In such case the tax on such interest (in Nepal) shall not exceed 15% on
gross amount of Interest. As per international taxation concept (Section 71 as per
Income Tax Act, 2058 in the case of Nepal); tax paid on foreign income in the foreign
country is available for set-off in the country of domicile. Accordingly it is advised
that tax paid (withholding tax) by Sum Pharmaceuticals India Inc. Pvt. in Nepal is
available for set-off in India.
d) If interest payment is done with arm‗s length principal Income Tax Act, 2058 does
not put any restriction on payment of interest on the loans borrowed from the
shareholders. As per section 14 of Income Tax Act 2058 clarifies Sum
Pharmaceuticals Nepal as exempt entity for the purpose of computing deductible
interest u/s 14(2). Accordingly where Sum Pharmaceuticals Nepal pays interest to
Sum Pharmaceuticals India the deductibility of interest shall not exceed the total of
followings:
(a) Interest income of Sun Pharmaceuticals Nepal‘s.
(b) 50% of adjusted taxable income calculated without considering interest income
and interest expenses.
As per this section this limitation will not be relevant the company Sum
Pharmaceuticals Nepal in case of the adjusted taxable income is substantially high as
compared to interest payment and if the adjusted taxable income is substantially low
as compared to interest payment in this case it is relevant. The company should not
forget to get approved the agreement of borrowing from the Department of Industry
in Nepal and central bank‗s permission is also required for remittance of Indian rupee
to Sum Pharmaceuticals India in India.
5. Question No. 5
Mrs. Asmita a government employee is suspended by Commission for Investigation of

Abuse of Authority (CIAA) in financial year 2070/071 but in the financial year 2072/073
Supreme Court has cancelled the Suspension by CIAA. She received three financial year
salary and benefits after cancellation of CIAA suspension in 2070/071 NPR. 750,000,
financial year 2071/072 NPR. 890,000 and financial year 2072/073 is NPR. 1000,000.
The account of the office has calculate the tax liability by considering total sum of three
financial year is one financial year in the year 2072/073 and deposit tax liability
according in the financial year 2072/073.
Required:
a) State your view in this regard, imposition of tax in the income of Mrs. Asmita?
b) Define imposition of Tax as per Income Tax Act, 2058?
c) What are the provisions for Social Security tax in financial Act 2073? Whether social
security tax is applicable to Mrs. Asmita? What happen if she has only pension income?

a) Calculation of tax liability by considering three year income in one year i. e. financial
year 2072/073 is not in line with income tax provisions. Imposition of tax is applicable
for each income year as per Income Tax Act 2058, section 3. Accordingly tax liability of
Mrs. Asmita shall be calculated separately of each financial year it means tax liability of
financial year 2070/071, 2071/072 and 2072/073 is calculated and tax liability is
deposited to IRO.
It is further supported by: ―Income tax is imposed on yearly basis of income. Supreme
court on the issue of past employees of Nepal Rastra Bank vide case no.2677, decided on
2064/04/23.
b) As per section 3 of Income Tax Act 2058, imposition of tax means: Income tax is hereby
imposed on and realised from every person as follows for each income-year:
i. a person, who has taxable income for the year;
ii. a foreign permanent establishment of a non-resident person situated in
Nepal and has repatriated income for the year as mentioned in subsection
(3) and (4) of section 68; and
iii. a person, who receives a final withholding payment during the year.
c) As per section 24 of financial act 2073, annexure 1 section 1 of income tax act 2058 if
income of individual up to NPR. 350000 or couple NPR. 400,000 than social security tax
shall be applicable 1%. Social security tax shall be deducted at time of payment and
deposited is separate social security tax revenue account. Social Security tax is
applicable to Mrs. Asmita income. Social security tax shall not applicable to retirement
income.
6. Question No. 6
Ghatal Bank Ltd. registered office is in Dadeldhura Far Western Nepal and its Corporate
Office at Kathamndu Nepal. During the financial audit your audit Team Leader( Article
Trainee) mail you the following issue with respect to tax implication:
Dear Respected Sir,

Wish you a Very happy New Year.
Respected sir, during our audit we have observed following tax issues with respect to
Ghatal Bank. Please provide you opinion in these issues:
Issue:
a) As per the Section 88(1) of the Income Tax Act, 2058 stated that withholding tax
at the rate of 15% shall apply in the case of the purchase of the service. During
the financial year Bank has entered the Consulting Service Agreement with
SWIFT- SCRL (Belgium) and makes the payment NPR. 1,500,000 without
deducting the tax. In VAT Act, Section 8(2) of VAT Act, 2052 the recipient of the
services in Nepal from a person outside Nepal shall access at the taxable value in
accordance with this act and rules there under.
b) Bank has entered in to an agreement with the Thompson-Reuters Service

Agreements for Reuter’s communication services and agreement will be governed
by the Law of the India. Bank need to made payments Monthly USD 613. The
bank has paid NPR. 300,000 during this financial year (without deducting Tax
and VAT).
c) Bank has entered in to agreement with Infosys Ltd., India for Procurements and
implementation of the Core Banking Solution. Banking Software name (Product)
is Infosys Flexcube. Total cost of ownership of the product (licenses) for 5 years
including Infosys technology components and maintenance is USD
750,000(applicable tax in Nepal borne by the Bank). But bank has not been
deducted tax on the entire payments. Infosys Ltd., India had rendered this service
without maintaining PE in Nepal.
d) During the financial year Bank has provided interest NPR. 1000,000 to M/s Guthi
Sansthan on saving and fixed deposit account. Guthi Sansthan is registered as
Tax exempted entity with Inland Revenue department. Bank has provided interest
without deducting tax. While discussion this issue with responsible official of
Bank they are arguing that it’s a tax exempt entity, so tax deduction is not
required.
Thank you!
Denisya
Required:
As a tax expert, you need to advice above issues possible implication of income
tax and planning. Advice shall be based on specific provision of the Income Tax
Act 2058 and Double Tax Avoidance Treaty (DTAT).
Answer to question no. 6:

Dear Denisya, Thank you very much for you mail and please find implication of income
tax and DTAT on issues raised by you.
a) In this issue, SWIFT service, source of service in not Nepal (SWIFT processing
takes place out of Nepal) and hence the question of TDS does not arise with
consideration of section 67 of Income Tax Act, 2058.Though IRD may demand for
the same. However, the service is consumed in Nepal and hence they are required to
pay VAT on such import of service as per Section 8(2) of VAT Act, 2052.
b) As per DTAA with India article 13 Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income (DTAT); if person
resident in India provides service, the tax on such income is payable only in India
and hence no TDS is required. However, the service is consumed in Nepal and hence
they are required to pay VAT on such import of service as per Section 8(2) of VAT
Act, 2052.
c) According to Section 88(1) of Income Tax Act, 2058, withholding tax at the rate of
15% shall apply in the case of purchase of service. Further to subsection 4 of Section
88(1) stated that withholding tax of 1.5% shall apply in the case of service from the
person registered for the purpose of Value Added Tax. As per Section 89(3ka) of the
Income Tax Act 2058; where the service is acquired from a non-resident person
along with supply withholding tax 5% shall apply.
As per Article 13 of Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income (DTAT) between India and Nepal Article
13 Independent Personal Services, Income derived by a resident of a Contracting
State in respect of professional services or other independent activities of a similar
character shall be taxable only in that State except in the following circumstances
when such income may also be taxed in the other contracting State:
a) if he has a fixed base regularly available to him in the other Contracting State for
the purpose of performing his activities; in that case, only so much of the income as
is attributable to that fixed base may be taxed in that other Contracting State; or
b) if his stay in the other Contracting State is for a period or periods amounting to or
exceeding in the aggregate 183 days in the relevant "previous year" or "year of
income" as the case may be; in that case, only so much of the income as is derived
from his active kjbes performed in that other State may be taxed in that other State.
It means only so much of the income as is derived from his activities performed in
Nepal may be taxed in Nepal.
The term ―professional services" includes independent scientific, literary, artistic,
educational or teaching activities, as well as the independent activities of physicians,
surgeons, lawyers, engineers, architects, dentists and accountants.
In the mail licenses fee you referred for the product is bundled with installation and
service and is treated as supply and installation including service required thereon
with reference to Section 89(3) of the Act. However, the case referred appears to be
the services rendered by the person either from India or by the person non-resident in
Nepal; that is the service provider does not have permanent establishment in Nepal.
In addition to above, as per Income Tax, 2058 (Sec.73.4) the International
Agreement shall prevail upon the standard provisions of the Income Tax Act 2058.
Accordingly the provisions in the DTAT shall prevail upon the provisions of Income
Tax Act 2058. Where the Indian Resident not come under the conditions mentioned
above are not required to pay tax in Nepal for the independent professional services
and withholding obligation does not arise to Bank. Bank need to pay 13% VAT, with
reference to section 8(2) of VAT Act, 2052. According to the said section the
recipient of services in Nepal from a person outside Nepal (i.e., import of service)
shall have to assess at the taxable value in accordance with this Act and Rules there
under.
d) Ghatal Bank need to deduct tax on interest payment as the rate of 15% as per section
88(1) of Income Tax Act 2058. Bank required complying with the provision of this
section and tax shall be deduct 15% TDS and deposited in IRD. Tax exempted
certificated done not provide tax exemption in interest payment so interest is subject
to tax even in the case of exempt entity.
7. Question No. 7
Define and explain the relevant provisions with reference the DTAT agreement with
Respective countries:
a) Independent Personal Services (DTAT Between China and Nepal)

b) Dependent Personal Services (DTAT Between China and Nepal)
c) Resident (DTAT Between Nepal and Norway)
d) Income from Immovable Property (DTAT Between Nepal and Norway)
e) Air Transport (DTAT Between Nepal and India)
f) Associated Enterprises (DTAT Between Nepal and India)
g) Permanent Establishment (DTAT Between Nepal and India)
Answer to questions no.7:
a) As per Article 14 of ―The Avoidance of Double Taxation and The Prevention of Fiscal
Evasion with Respect to Taxes on Income Between Nepal and China‖ Independent
Personal Services related provision are;
1. Income derived by a resident of a Contracting State in respect of professional services

or other activities of an independent character shall be taxable only in that State except in
one of the following circumstances, when such income may also be taxed in the other
Contracting State:
a) if he has a fixed base regularly available to him in the other Contracting State for the
purpose of performing his activities; in that case, only so much of the income as is
attributable to that fixed base may be taxed in that other State;
b) if his stay in the other Contracting State is for a period or periods amounting to or
exceeding in the aggregate 183 days in any twelve-month period, in that case, only so
much of the income as is derived from his activities performed in that other State may be
taxed in that other State.
2. The term "professional services" includes especially independent scientific, literary,

artistic, educational or teaching activities as well as the independent activities of
physicians, lawyers, engineers, architects, dentists and accountants.
b) As per Article 15 of ―The Avoidance of Double Taxation and The Prevention of Fiscal
Evasion with Respect to Taxes on Income Between Nepal and China‖, Dependent
Personal Services applicable provisions are;
1. Subject to the provisions of Articles 16, 18, 19, 20 and 21, salaries, wages and other
Similar remuneration derived by a resident of a Contracting State in respect of an
employment shall be taxable only in that State unless the employment is exercised in the
other Contracting State. If the employment is so exercised, such remuneration as is
derived there from may be taxed in that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a

Contracting State in respect of an employment exercised in the other Contracting State
shall be taxable only in the first-mentioned State if:
a) the recipient is present in the other State for a period or periods not exceeding in the
aggregate 183 days within any twelve-month period; and
b) The remuneration is paid by, or on behalf of, an employer who is not a resident of the
other State; and
c) The remuneration is not borne by a permanent establishment or a fixed base which the
employer has in the other State.
3. Notwithstanding the preceding provisions of this Article, remuneration derived in

respect of an employment exercised aboard a ship or aircraft operated in international
traffic, shall be taxable only in the Contracting State in which the place of head office or
of effective management of the enterprise is situated.
c) As per Article 4 of ―The Avoidance of Double Taxation and The Prevention of Fiscal
Evasion with Respect to Taxes on Income and on Capital Between Nepal and Norway‖
resident means;
1. as per this Agreement, the term " resident of a Contracting State " means any person
who, under the laws of that State , is liable to tax therein by reason of his domicile,
residence, place of management or any other criterion of a similar nature. But this term
does not include any person who is liable to tax in that State in respect only of income
from sources in that State or capital situated therein.
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both

Contracting States, then his status shall be determined as follows:
a) he shall be deemed to be a resident of the State in which he has a permanent home
available to him; if he has a permanent home available to him in both States, he shall be
deemed to be a resident of the State with which his personal and economic relations are
closer ( centre of vital interest );
b) if the State in which he has his centre of vital interests cannot be determined , or if he
has not a permanent home available to him in either State, he shall be deemed to be a
resident of the State in which he has an habitual abode;
c) if he has an habitual abode in both States or in neither of them, he shall be deemed to
be a resident of the State of which he is a national;
d) if he is a national of both States or of neither of them, the competent authorities of the
Contracting States shall settle the question by mutual agreement.
3. Where by reason of the provision of paragraph 1, a person other than an individual is a

resident of both Contracting States, then it shall be deemed to be a resident of the State in
which its place of effective management is situated.
d) Article 6 of The Avoidance of Double Taxation and The Prevention of Fiscal Evasion
with Respect to Taxes on Income and on Capital Between Nepal and Norway‖ Income
from Immovable Property applicable provisions are;
1. Income derived by a resident of a Contracting State from immovable property

(including Income from agriculture or forestry) situated in the other Contracting State
may be taxed in that other State.
2. The term ―immovable property ―shall have the meaning which it has under the law of
the Contracting State in which the property in question is situated. The term shall in any
case include property accessory to immovable property, livestock and equipment used in
agriculture and forestry, rights to which the provisions of general law respecting landed
property apply, usufruct of immovable property and rights to variable or fixed payments
as consideration for the working of, or the right to work, mineral deposits, sources and
other natural resources; ships and aircraft shall not be regarded as immovable property.
3. The provisions of paragraph 1 shall apply to income derived from the direct use,
letting, or use in any other form of immovable property.
4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable
Property of an enterprise and to income from immovable property used for the
performance of independent personal services.
e) Article 8 of ―The Avoidance of Double Taxation and The Prevention of Fiscal Evasion
with respect To Taxes on Income between India and Nepal‖ Air Transport applicable
provisions are:
1. Profits derived by an enterprise of a Contracting State from the operation of aircraft in

international traffic shall be taxable only in that State.
2. The provisions of paragraphs 1 shall also apply to profits from the participation in a
pool, a joint business or an international operating agency. For the purposes of this
article, interest on funds connected with the operation of aircraft in international traffic
shall be regarded as income /profits derived from the operation of such aircraft, and the
provision of article 11 shall not apply in relation to such interest.
3. The term "operation of aircraft" shall mean business of transportation by air of

passengers, mail, livestock of goods carried on by the owners or lessees or charterers of
aircraft, including the sale of tickets for such transportation on behalf of other enterprises,
the incidental lease of aircraft and any other activity directly connected with such
transportation.
f) Article 9 of ―The Avoidance of Double Taxation and The Prevention of Fiscal Evasion
with respect To Taxes on Income between India and Nepal‖ Associated Enterprises
related provisions are:
Where an enterprise of a Contracting State participates directly or indirectly in the

management, control or capital of an enterprise of the other Contracting State, or the
same persons participate directly or indirectly in the management, control or capital of an
enterprise of a Contracting State and an enterprise of the other Contracting State, and in
either case conditions are made or imposed between the two enterprises in their
commercial or financial relations which differ from those which would be made between
independent enterprises, then any profits which would, but for those conditions, have
accrued to one of the enterprises, but, by reason of those conditions, have not so accrued,
may be included in the profits of that enterprise and taxed accordingly.
g) Article 5 of ―The Avoidance of Double Taxation and The Prevention of Fiscal Evasion
with respect To Taxes on Income between India and Nepal‖ Permanent Establishment
related provisions are :
1. For the purposes of this Agreement, the term "permanent establishment" means a fixed
place of business through which the business of an enterprise is wholly or partly carried
on.
2. The term ―permanent establishment" includes especially;
a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; and
f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;
g) a building site or construction or assembly project, but only where such site, project or
activity continues for a period or periods aggregating more than 183 days in any twelve-
month period;
h) the furnishing of services by an enterprise through employees or other personnel,
where activities continue within the country for a period or periods aggregating more
than 183 days in any twelve-month period.
3. notwithstanding the preceding provisions of the Article, the term "permanent
establishment‖ shall be deemed not to include;
a) The use of facilities solely for the purpose of storage or display of goods or
merchandise belonging to the enterprise;
b) The maintenance of a stock of goods or merchandise belonging to the enterprise solely
for the purpose of storage or display;
c) The maintenances of a stock of goods or merchandise belonging to the enterprise
solely for the purpose of processing by another enterprise;
d) The maintenance of a fixed place of business solely for the purpose of purchasing
goods or merchandise, or of collecting information, for the enterprise;
e) The maintenance of a fixed place of business solely for the purpose of carrying on, for
the enterprise, any other activity of a preparatory or auxiliary character.
4. Notwithstanding the preceding provisions of paragraph 1 and 2, where paragraph 5

applies is acting on behalf of an enterprise and has, and habitually exercises, in a
Contracting State an authority to conclude contracts on behalf of the enterprise, that
enterprise shall be deemed to have a permanent establishment in that State in respect of
any activities which that person undertakes for the enterprise, unless the activities of such
person are limited to the purchase of goods or merchandise for the enterprise.
5. An enterprise of a Contracting State shall not be deemed to have a permanent

establishment in the other Contracting State merely because it carries on business in that
other State through a broker, general commission agent or any other agent of an
independent status provided that such persons are acting in the ordinary course of their
business. However, when the activities of such an agent are devoted wholly or almost
wholly on behalf of that enterprise, he will not be considered an agent of an independent
status within the meaning of this paragraph.
6. The fact that a company which is a resident of a Contracting State controls or is

controlled by a company which is a resident of the other Contracting State, or which
carries on business in that other Contracting State ( whether through a permanent
establishment or otherwise), shall not of itself constitute either company a permanent
establishment of the other.
8. Question no.8:
Professional Productions Pvt. Ltd is manufacturer of Chocolates products has two
division manufacturing division and for trading of Chocolates trading division. Its
factory site is located at Sindhupalchowk District an earthquake affected area. Statement
of income during financial year 2072/73 is as under:
Statement of Income
For the Period End 31st Ashad 2073
Particular Note Manufacturing Trading
NPR
Sales 13 350,000,000 40,000,000
Less: Cost of Goods Sold 14 184,000,000 18,000,000

Gross Profit 166,000,000 22,000,000
Miscellaneous Income 15 2,500,000
Repair and maintenance 16 -
Selling Expenses 17 -
Administrative expenses 18 15,500,000 3,000,000

Operating Profit 153,000,000 19,000,000
Interest Expenses 19 3,000,000
Depreciation Expenses 4 4,000,000 7,500,000

Profit Before Staffs
Bonus 146,000,000 11,500,000
Provision for Staffs Bonus 13,272,727 1,045,455
Profti Before Tax 12 132,727,273 10,454,545
Provision for Income Tax 33,181,818 2,613,636
Net Profit for the period 12 99,545,455 7,840,909
Notes to annual financial statements:
Note-13 Manufacturing Trading

Sales
Sales Local 300,000,000 30,000,000
Export sales 50,000,000 10,000,000
Total Sales 350,000,000 40,000,000
Note 14 Manufacturing Trading
Cost of Goods Sold
Opening Stocks 9,000,000 3,000,000
Raw Materials Purchased 40,000,000 30,000,000
Production Expenses 150,000,000 -
Raw materials Returns -
Closing Stock (15,000,000) (15,000,000)
Total 184,000,000 18,000,000
Note 15 Manufacturing Trading
Miscellaneous Incomes
VAT Refund 2,500,000 -
Total 2,500,000 -
Note-18
Administrative expenses Manufacturing Trading
Salary Allowances 12,000,000 3,000,000
Legal Fees & Expenses 500,000 -
Cash Discount 2,500,000 -
Bank commission 500,000 -
Total 15,500,000 3,000,000
Additional Information:
a) The company has provided provision for tax @ 25% of profit in both divisions.
b) Provision for staff bonus is provided in the financial statements @ 10% as required
by Bonus Act, 2030.
c) Company borrowed loan from Ghatal Bank Ltd. but the company has well managed
cash flows. CEO Mrs. Ekira has used this loan for his personal purpose.
d) Expert sales are related to Sales in Germany and USA.
e) Vat refund is related to sales of Jestha 2073.
f) The company has accepted the sale in under invoicing as assessed by IRO i.e. under
invoiced Trading sales NPR. 500,000 and manufacturing sales NPR. 5,000,000, as on
15.03.073. However the assessment order is given in 04.04.2073 by IRO.
g) Closing Stocks of Manufacturing division includes:
Particular
Raw Materials 4,000,000
Finished goods
Raw Materials 2,500,000
Production expenses 1,000,000
Repair Factory building 6,000,000
Depreciation 1,000,000
Interest 500,000 11,000,000
Total 15,000,000
Repair of Plant and Machinery expenses is included in Production expenses of NPR.
1,000,000.
h) Repair and maintenance Factory building is related to Factory building repair which
is destroyed by earthquake time in Nepal. Depreciation base for Block A is NPR
50,000,000.
i) All Salary Allowance and NPR. 67,000,000 out of Production Expenses is payment to
workers and staff of the company as wages & salary. The status of the worker and
staff in manufacturing division for the year is as follows:
Particular Nepali
Men 220
Women 160
Total 380
j) The Company consumed 55% of Local raw materials for its production.
k) The paid of capital of the company as on 2071/072 is NPR. 15,000,000 and this year
additional capital is NPR. 30,000,000.
l) Depreciation for manufacturing unit is as per Income Tax Act, 2058 where as
depreciation in trading unit includes NPR. 125,000 cost of fiscal printer acquired on
31.03.2073 for issuing bills. Depreciation base for Block D is NPR. 50,000,000
before deducting depreciation.
m) Land has been revalued from NPR. 500 lakhs (cost) to NPR. 750 lakhs in 2073.03.14
and sold for NPR. 850 lakhs on 2073.3.27. Market Price was NPR. 650 lakhs as per
records of Land Revenue Office at the time of implementation of Income Tax Act
2058. The sales transaction is not recorded in the books of accounts of the company.
n) Bank Commission includes NPR. 75,000 levied on disposal of liability of the
company.
o) Company has not paid any installment tax.
p) IRO did assessment as per section 101 and included NPR. 200 lakhs in taxable
income i.e. (Selling Price of Land is deducted from the market price of land).
q) As per assessment of IRO again include NPR. 300 lakhs as increased in capital during
the year in taxable income of the company as source of income of companies
shareholder could not produced.
Required:
Calculate the Income Tax liability including interest under section 118 and 119. State the
provision of Finance Act 2073 for answering the questions.
Answer to question no.8:
Calculation of Taxable Income Manufacturing Trading

Sales(WN#1) 355,000,000 40,500,000
VAT Refund(WN#6) - -
Gain on Sale of Land(WN#4) - 20,000,000
Total inclusion 355,000,000 60,500,000
Deduction:
General deduction u/s 13(WN#11) 28,772,727 4,045,455
Interest Expenses u/s 14(WN#10) - -
Cost of Goods Sold u/s 15(WN#2) 192,500,000 18,000,000
Repair and Maintenance u/s 16(WN#7) 7,000,000 -
Depreciation expenses u/s 19(WN#8) 5,000,000 7,500,000
Total Deduction 233,272,727 29,545,455
Adjusted Taxable income 121,727,273 30,954,545

Less
Donation u/s 12 -
Taxable Income 121,727,273 30,954,545
Calculation of tax liability Manufacturing Trading

Manufacturing applicable rate is
14%(WN#12) 17,041,818
Taxable income of trading division
except land 10,954,545
Trading division -export income portion
of taxable income 2,738,636
Trading unit -local income portion of
taxable income 8,215,909
Total local sales including land 28,215,909
Total taxable profit 30,954,545
Trading income export is 20% (WN#12) 547,727
Other income is 25%(WN#12) 7,053,977
Total tax liability 17,041,818 7,601,705
Total liability both division 24,643,523

interest u/s 118(WN#14) 1,940,677
interest u/s 119(WN#15) -
Total tax liability including Interest 26,584,200
Working notes: WN#
WN#1
Sales Manufacturing Trading

Sales local 300,000,000 30,000,000
Add: additional sales 5,000,000 500000
Export sales 50,000,000 10,000,000
Total Sales 355,000,000 40,500,000
Though the assessment order of IRO is received in F.Y. 2073/74, i.e. 04.04.073 related to
F.Y. 2072/73 and accepted by the company, it is to be included in income of F.Y.
2072/73. It is assumed that Vat Adjustment is done correctly in Vat return.
WN#2
Cost of Goods Sold Manufacturing Trading
Opening Stocks 9,000,000 3,000,000
Add: -
Raw Materials Purchased 40,000,000 30,000,000
Production Expenses(WN#5) 150,000,000 -
Less:
Closing Stock (WN# 3) (6,500,000) (15,000,000)
Total 192,500,000 18,000,000
WN#3
Manufacturing Trading
Closing Stock 15,000,000 15,000,000
Less: Repair and Maintenance u/s 15(8) included in
(1,000,000)
production exp.
Less: Repair and Maintenance u/s 15(8) related to
(6,000,000) -
building
Less Depreciation expenses u/s 19 separately claimed (1,000,000) -
Less interest expenses u/s 14 separately claimed (500,000) -
Total 6,500,000 15,000,000
Note: As per section 15(8), Repair and Maintenance, depreciation shall not be included in
Valuation of Closing stock and again as per the circular of department dated 2066.02.27,
interest shall not be included in calculation of closings stock.
WN#4
Gain on Sale of Land
As per section 40(5)(ka) of Income Tax Act 2058, the market price as on date of
transaction shall be taken as cost of the property. Hence, though actual cost is NPR. 850
lakh it is taken as NPR 650 lakh, and gain on sale NPR. 200(850-650) lakh assessed by
IRO is correct.
WN#5
Calculation of Production expenses NPR. 150,000,000 is allowed no adjustment required.
Production expenses include in closing stock repair and maintenance is separately
claimed u/s 16 and this is not part of closing stock.
WN#6
Vat Refund shall not be included in income, it shall be adjusted with VAT receivables,
again VAT claimed u/s 17 means offset of Vat, not refund hence it is error in accounting.
It should not be included in calculation of taxable income.
WN#7
Calculation of Repair and Maintenance u/s 16
Depreciable Base of Block D 50,000,000

Allowable repair @ 7% 3,500,000
Actual Repair of Plant and machinery included in production expense 1,000,000
Minimum of above 1,000,000
Depreciable Base of Block A 50,000,000

Allowable repair @ 7% 3,500,000
Actual expenses 6,000,000
As per section 16(2) kha inserted by financial act 2073, limit of 7% for repair and
maintenance is not applicable for assets destroyed by earth quick and entities has
incurred expenses for the repair and maintenance of assets till year 2073/074, so whole
amount NPR. 6,000,000 is allowed for deduction as repair and maintenance. Company
need to collect sufficient proof of earthquake affect in Building and certification from
competent authority to.
Allowed repair and maintenance for Building 6,000,000
Total Repair and maintenance u/s 16 7,000,000
WN#8
Calculation of Depreciation
As per Finance Act 2073, as per section 3(4) of schedule 2 of Income Tax Act, 2058, any
person may deduct the expenditure incurred on fiscal printer and cash machine as
depreciation expenses, if the person issues bill through it. Expenses incurred for fiscal
printer is allowed as whole depreciation.
Total Depreciation Manufacturing Trading

As per statement of income 4,000,000 7,500,000
Depreciation included in closing stock 1,000,000 -
Total allowed depreciation 5,000,000 7,500,000
WN#9
The question states that bank commission is paid for discharging liability. Bank charges
paid for discharging liability is an allowable expense.
WN#10
Interest Expenses u/s 14
Interest expenses NPR, 3000,000 and addition to closing stock NPR. 500,000 is not
allowed u/s section 14 as deduction, it is used by CEO for personal purpose not for
business.
WN#11
Manufacturing Trading
General Deduction
Salary Allowances 12,000,000 3,000,000
Legal Fees & Expenses 500,000 -
Cash Discount 2,500,000 -
Bank commission 500,000 -
Bonus expenses 13,272,727 1,045,455
Total 28,772,727 4,045,455
Bonus expense is allowed for deduction under section13.
WN# 12 Applicable tax rate

 Schedule 1 section (2)1 of Income Tax Act 2058, rate of tax on trading business
of entity is 25%.
 Schedule 1 section (2) 3ka of Income Tax Act 2058, applicable rate for entities
for export income is 20%.
 Schedule 1 section (3) of Income Tax Act 2058, rate of tax in income from special
industry is 20%.
 As per section11 (3) (ka) of Income Tax Act 2058 (Amended as per Finance Act,
2073); if direct employment in the industry throughout the year is for 100 or more
Nepali citizens the effective tax rate shall be 70% of prevailing rate, note the
special industry shall be hire Nepalese employee thought the year.
 As per Section 11(3na) if a manufacturing industry exports goods that it has
manufactured, tax rebate shall be granted by Twenty Five percent on the rate of
tax rebate on income earned there from.
 As per Section (4) of section 11 of Income Tax Act 2058, a person who is
entitled to a concession under subsections (1), (2), (3) (a),(b), 3Ka, 3Kha, 3Ga,
3Gha schedule-1 section 1 sub-section13, 14,15 and schedule-1 section 2 sub-
section, 2 ,(3), 3ka and 4 shall calculate the income referred to in those
subsections as though the income was the only income derived by a separate
person.
 11(5) where a person qualifies for more than one concession under subsections
with respect to the same income, the person shall only be entitled to one
concession with respect to that income but shall be entitled to select which
concession applies.
Applicable Tax Rate Manufacturing Trading

Export Local Export
Local sales
sales sales sales
Incomes 20% 15% 25% 20%
Applicable tax rate as
considering above 14% 14% 25% 20%
points
The rate of manufacturing division is 14% with considering more than 100 employee
employed through the year, so for export sales this is rate considered in manufacturing
because entities has option to choose rate under section 11(5) and 11(3)(ka).
WN# 13
As per section 11kha of Income Tax Act 2058, ―Concession on National Importance
Infrastructure Development Project‖ Arrangement has been made not to look into the
income source of manufacturing industries using more than 50 percent indigenous raw
materials, employing more than 300 national workers or those of national importance
such as hydro electricity projects, international airports, tunnel ways, road ways or
railways (excepts Cigarette, Liquor and Beer industries) till Chaitra 2075. So the entities
consumed 55% of local raw materials and hire more than 300 local people thus IRO
cannot include additional capital investment amount in taxable income.
WN# 14 Total Interest u/s 118

The interest is calculated up to the time that the return is to be filed as per Sec.118 (2),i.e.
up to Aswin end.
Installment
Required Deposited Interest Interest period
Required
First installment 40% 9,857,409.1 - 369,652.8 3 months
Second installment
17,250,465.9 - 646,892.5 3 months
70%
Final installment
24,643,523 - 924,132.1 3 months
100%
Total Interest u/s 118 24,643,523 - 1,940,677
Interest under 119 - - - 3 months
WN# 15Calculation of Interest u/s 119 (Interest for failure to pay tax)
Interest for failure to pay tax shall be charged @ 15% p.a. for the period from kartik,
2073 to date of return filing on monthly basis. we assumed that retrun is submitted in the
months of Ashwin end 2073 so no more interest as per section 119 shall be chargeable.
However, under provision of Sec. 119 'Ka' changes for noncompliance will be levied as
set form in Sec. 128. If the return is not filed before Aswin, the company will be liable
for fees under sec.117 (1)kha.
9. Question no.9:
Explain the followings with relevant provision of Income Tax Act, 2058.
a) What do you mean by Trustee under Income Tax Act, 2058?
b) What is Public Circular? Why such Circular is issued? Give your answer citing the
provisions of Income Tax Act, 2058.
c) What do you mean by exempted entities? What are the applicable provisions to exempted
entities? Please explain with the relevant provision of Income Tax Act, 2058 and Income
Tax Rule 2059.
d) What do you understand by Transfers between Associates and Other Non-Market

Transfers under Income Tax Act 2058?
Answer to question no. 9
a) As per Section 2 (Pa) of Income Tax Act 2058, trustee means an individual or Goothi or
corporate body holding assets in a fiduciary capacity, whether held alone or jointly with
other individuals or corporate bodies, and includes the following persons:
 any executor or administrator of a deceased individual's estate,
 any liquidator, receiver, or trustee,
 any person having, either in a private or official capacity, the possession,
 direction, control, or management of the assets of an incapacitated person,
 any person who manages assets under a private foundation or other similar arrangement,
and
 any person in a similar position to a person mentioned in above subparagraphs.
b) As per section 75 of Income Tax Act 2058, ―Public Circulars‖ is the circular that is
issued to achieve consistency in the implementation of Income Tax Act and to make the
tax administration simple and provide guidance to persons affected by Income Act,
including officers of the Department, the Department may issue in writing public
circulars setting out the Department‘s interpretation of Income Tax Act. The Department
shall make public circulars issued under subsection (1) of section 75, available to the
public at offices of the Department and at such other locations or by such other medium
as the Department may determine. A public circular issued under this section shall be
binding on the Department.
c) As per Section 2(dha) of the Income Tax Act 2058 ―Exempt entities means the following
entities:-
(1) Following entities registered with the Department as an exempt organization:
(a) a social, religious, educational, or a charitable organization of a public character
established without having a profit motive,
(b) an amateur sporting association formed for the purpose of promoting social or
sporting facilities not involving the acquisition of gain,
(2) a political party registered with the Election Commission,
(3) a village development committee, municipality or district development committee,
Provided that, any entity, giving benefit to any person from the assets of, and amounts
derived by the entity except in pursuit of the entity‘s function as per its objectives or as
payment for assets or services rendered to the entity by the person, is not exempt from
tax.
In additional to above Income Tax Provisions, Income Tax rules 2059 has provided some
provision applicable to exempt entities are.
In addition to above Rule 33 of Income Tax Rule 2059 provides provision for
Application for Exemption: according to this rule;
(1) An entity deserving the status as an exempt entities under section 2(dha) of the
Income Tax Act 2058 shall require to furnish an application with the Department
attaching the following details therewith-
(a) In case of the organizations required to be registered by the prevailing laws, a copy of
the certificate of registration,
(b) A copy of its charter of establishment, and
(c) A copy of the certificate of permanent account number (PAN) if acquired.
d) A copy of audit report if any (2) the department shall record exempt entity and give the
exempt entity certificate after necessary investigation.
In Rule 4 of Income Tax Rules 2059, the Department may prescribe any entity, other than
the entities formed without a profit motive as referred to in Section 2 (s) (1) of the Act, as
entitled to enjoy tax exemption by advance ruling under Section 76 of the Act. Under
rules 5 of Income Tax Rules 2059, The entity registered under Rule - 3 (2) and the entity
entitled to enjoy tax exemption under Rule - 4 shall compulsorily file with the
Department a copy of its audited financial statements for an income-year not later than
three months after the end of the year. In case where an exempt entity fails to file such
the statement, the entity shall not be entitled to enjoy tax exemption until the statement is
filed with the Department
d) According to section 45 of Income Tax Act 2058, Transfers between Associates and
Other Non-Market Transfers related provision are:
(1) Where a person disposes of an asset by way of transfer as per sections 43 and 44 to an
associate of the person or by way of transfer to any other person for no consideration, the
following provisions shall apply:-
(a) the person shall be treated as deriving in respect of the disposal an amount equal to
the greater of the market value of the asset or the net outgoings for the asset immediately
before the disposal; and
(b) the person who acquires ownership of the asset shall be treated as incurring in the
acquisition costs of an amount equal to as mentioned in paragraph (a).
(2) Notwithstanding subsection (1), where a person disposes of an asset, being a business
asset, a non-business Taxable asset, or trading stock, by way of transfer of ownership of
the asset to an associate of the person and the requirements of subsection (6) are met, the
following provisions shall apply:-
the net outgoings for the asset immediately before the disposal; and
(b) the associate shall be treated as incurring in acquiring the asset costs of an amount
equal to as mentioned in paragraph (a).
(3) Notwithstanding subsection (1), where a person disposes of a depreciable asset by
way of transfer of ownership of the asset to an associate of the person, the asset constitute
all of the assets of a pool of the person's depreciable assets, and the requirements of
subsection (6) are met, the following provisions shall apply:-
the written down value of the pool pursuant to paragraph 4(3) of Schedule-2 at the time
of disposal; and
(b) the associate shall be treated as incurring in acquiring the asset or assets costs of an
amount equal to as mentioned in paragraph (a).
(4) where a person disposes of a liability as per sections 43 and 44 by way of transfer of
the liability to an associate of the person or by way of transfer to any other person for no
cost, the following provisions shall apply:-
(a) the person shall be treated as incurring costs for the disposal in an amount equal to the
lesser of market value or the net incomings for the liability immediately before the
disposal; and
(b) the person to whom the liability is transferred shall be treated as deriving in respect of
incurring the liability an amount equal to the liability.
(5) Where a person disposes of a liability that was incurred in the production of income
from a business of the person by way of transfer of the liability to an associate of the
person and the requirements of subsection (6) are met, the following provisions shall
apply:-
(a) the person shall be treated as incurring costs for the disposal in an amount equal to the
net incomings for the liability immediately before the disposal; and
(b) the associate shall be treated as deriving in respect of incurring the liability an equal
amount.
(6) For the purpose of subsections (2), (3) and (5), the following requirements shall be
required to be met:-
(a) in the case of business assets, trading stock, or depreciable assets of a business, the
asset or assets are business assets, trading stock, or depreciable assets of a business of the
associate immediately after transfer by the person;
(b) in the case of non-business chargeable assets or depreciable assets of an investment,
the asset or assets are business assets, non-business chargeable assets, depreciable assets,
or trading stock of the associate immediately after transfer by the person;
(c) in the case of a liability, the liability is transferred to the associate in the production of
income from a business of the associate;
(d) at the time of the transfer-transfer, the person and the associate are not residents and
are not exempt from tax;
(e) there is continuity of underlying ownership in the asset or underlying obligation of the
liability, as the case requires, of at least 50 percent; and
(f) an election for subsection (2), (3) or (5), as the case requires, to apply is made by both
the person and the associate in writing.
10. Question no.10
a) Mr. Chand, Professional Chartered Accountants is appointed as Chief Executive Officer

(CEO) of Daupal Bank Ltd. by 365th Meeting of Board of Director of Bank held on 31st
Ashad 2072 for four years. The compensation arrangements for Chief Executive Officer
of Bank during the tenure are;
(i) Mr. Chand will be entitled to the purchase of shares as allowed under regulatory
provision of Nepal Rastra Bank at the time of Initial Public Offer of the Bank.
(ii) A monthly remuneration of NPR 1,525,000/-pm (Nepali Fifteen lakhs twenty five
thousand a month) Tax will be deducted at source (TDS) as per Income Tax Act 2058.
Revision of remuneration will be done initially after two years from the date of
commencement of the contract and thereafter, based on Mr. Chand‘s performance and
reviewed under mutual agreement.
(iii) Reimbursement of the cost of Mobile Phone bill and can be use dual SIM.
(iv) For security reasons 1 guard 24 hours a day at his residence and keeping the security
situation in mind one personal security guard with him.
(v) Bank will cover the Medical and Accidental Insurance under the policy purchased by the
Bank as per approval schemes.
(vi) A Mercedes-Benz (or equivalent) with driver with mileage within Nepal. The same will
be the property of the bank and assigned to the CEO for his use for the tenure of the
contract.
(vii) Annual, casual, and other leave will be the same as applicable to other staff of the Bank
as per the HR Policy.
(viii) Annual Dashain Bonus totaling one month of the monthly remuneration at the time of
payment of the Dashain Bonus to staffs of the Bank.
(ix) Entitle to the Statutory Bonus as applicable to other staffs of the Bank after the closure
of the Fiscal year, at the time statutory Bonus is paid to all staffs.
In addition to above the following information‘s are available for financial year,
 Mr. Chand received NPR. 900,000 as Bonus of financial year.

 Mr. Chand has life insurance plan with Delta Life Insurance Company for which
annual insurance premium is paid by him is NRR. 75.000.
 PL Security service (P.) Ltd., provides security service as per this agreement with
the Bank and for that PL Security service (P.) Ltd. charge NPR. 15,000 including
VAT for per security personnel.
 XYZ Securities Pvt. Ltd. provide Security of Body Guards service to CEO as per
the agreement of CEO with Bank and for that XYZ Securities Pvt. Ltd. charge
NPR.14, 500 including Vat for per security personnel.
 MR. Chand made contribution to approved provident fund is NPR. 1,500,000.
 CEO has submitted the Bill of Medical treatment of NPR. 25,000.
Required:
Calculate the tax liability of the CEO for financial year 2073/074 and state the relevant
provision of Financial Act 2073.
b) State the relevant provision of Income Tax Act 2058 regarding the Return of Income tax
not required.
c) Chian University Professor QXII has been teaching there since last 11 years and came to
Nepal on Mansir 2072 under an assignment for carrying out specific research work in Far
Western University. For his excellent feedback and research work Far Western University
has paid Rewards of NPR. 1 Million for the financial year 2072/073. Discuss the tax
liability of Professor QXII giving consideration to the agreement between Nepal and China
for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on
income. What happen if Professor QXII do research in private purpose and received same
payment?
Answer to Question no.10:

a) Calculation of Tax Liability of CEO for Financial year 2073/074
Particular Basic NPR
Gross Salary Paid For the year 15,25000*12 18,300,000
Vehicle Facility 0.5% of Gross Salary 91,500
Dashain Bonus 1,525,000
Statutory Bonus 900,000
Incentives & Facilities (WN#1) 888,000
Total Taxable 21,704,500
Less insurance Premium 20,000
Assessable Income 21,684,500
Less:
Contribution to Provident fund 300,000
First 400000*1% 4,000
Next 100000*15% 15,000
net up to 2500,000 2000000*25% 500,000
above 2500000 35% 18,884,500*35% 6,609,575
Total Tax Liability 7,128,575
Less : Medical Tax Credit 750
Net Tax Liability 7,127,825
Mr. Chand, need to be submit income tax return as per the requirement of income tax act
2058 (as amendment made by Financial Act 2073). As per section 97(2) of Income Tax
Act 2058 if income of individual person is more than NPR. 40 Lakh than return of
income is required to submit as per section 96 of Income Tax Act 2058.(Amended by
financial Act 2073). So, with considering above provision Mr. Chand required to submit
income tax return with the format prescribed by Inland Revenue Department.
Working Notes#
WN#1
As per the agreement with the CEO of the Bank, for security reasons 1 guard 24 hours a
day at his residence and keeping the security situation in mind one personal security
guard with him. To considering this points three security guard is need to serve 8 hrs per
day in his resident and 2 security Body Guards 8 hrs per day is need to keep in security in
mind. The payment of expenses for security is related to benefits of CEO, so calculation
of tax liability this expense is included in income.
PL Security service (P.) Ltd.
Particulars Qty Rate Amount
Security Guards 3.00 15,000.00 45,000.00
XYZ Securities Pvt. Ltd.
Particulars Qty Rate Amount
Security Body Guards 2.00 14,500.00 29,000.00
Monthly 74,000.00
Yearly 888,000.00
WN#2
Contribution to Provident fund NPR. 300,000 is allowed as deduction as per Rule 21 of
Income Tax Rules 2059. As per provision of this section,1/3 of assessable income or
NPR. 300,000 whichever is less is allowed as deduction.
WN#3
As per section 1(12) of Schedule 1 of Income Tax Act 2058 life insurance premium is
deductible up to NPR.20,000 or premium amount whichever is less.
WN#4
Vehicle Facility 0.5% of Gross Salary (NPR. 91,500) is included in income as per rule
13(1ka) of Income Tax Rules 2059.
b) As per section 97 of Income Tax Act 2058, ―return of income not required stated that,
1)Unless requested by the Department by notice in writing served on the person or by

public notification, no return of income for an income-year shall be required under
section 96 from following persons:-
(a) a person who has no tax payable for the year under section 3(a);
(b) a person referred to in section 3(c) for the year;
(c) a resident individual to whom section 4(3) applies for the year or
(d) an individual who is an owner of vehicle and is liable to pay tax under Section 1 (13)
of schedule 1.
2) Notwithstanding subsection 1 above, if income of individual is more than NPR. 40
lakh in the financial year, return of income tax is required to submit under section 96.
3) Individual who submit income tax return as mention in subsection 2 required to
inclusive in income addition to required income are, income of subsection Gha of section
5, subsection 3 of section 7, subsection 3(ka) of section 8, subsection 3(ka) of section 9
and income derived by considering business concession under section 11 of Income Tax
Act 2058. However, income from meeting allowance and interest income shall not be
required in inclusion.
4) Individual person can deduct from income final with holding payments and tax
exempted income of section 11 but income from meeting allowance and interest income
shall not be required to be deduction.
5) The format of Income tax return shall be as prescribed by Inland Revenue department.
c) As per article 20 of ―The Avoidance of Double Taxation and The Prevention of Fiscal
Evasion with Respect to Taxes on Income between Government of Nepal and The
Government of The People's Republic of China‖ with respect to Teachers and
Researchers tax on income is:
Remuneration which an individual who is or was immediately before visiting a
Contracting State, a resident of the other Contracting State and who is present in the first-
mentioned State for the primary purpose of teaching, giving lectures or conducting
research at a university, college, school or educational institution or scientific research
institution recognized by the Government of the first-mentioned State derives for the
purpose of such teaching, lectures or research shall not be taxed in the first-mentioned
State, for a period of two years from the date of his first arrival in the first-mentioned
State. Considering this article provision payment made by Far Western to Professor QXII
is exempted from tax.
In the second case Professor QXII do research for private benefits purpose than it is
taxable in Nepal as considering section 2 of article 20 of ―The Avoidance of Double
Taxation and The Prevention of Fiscal Evasion with Respect to Taxes on Income
between Government of Nepal and The Government of The People's Republic of China‖
11. Question no.11
a) INFO is an INGO registered in Inland Revenue department as Tax exempted entities

and affiliated to Social Welfare Council Nepal. The financial year adopted by INGO
is June end and same financial statement is audited & submitted to Inland Revenue
departments. State you view in this regard.
b) Five Star Bank Nepal Limited is a limited liability company domiciled in Nepal with
its registered office at Kathmandu. The Bank was registered with Company
Registrar‘s Office on Baisakh 5, 2073 B.S. The Company has applied for obtaining
operating license from Nepal Rastra Bank and awaits approval as on 15th July 2016.
The Bank has obtained its operating license from Nepal Rastra Bank of Nepal, (Nepal
Rastra Bank) on Shrawan 4, 2073 B.S. The Bank commenced its operation from
Shrawan 7, 2073 B.S. What is the tax rate applicable for the Bank in the financial
year 2072/073 for income tax return? State your view with considering the relevant
provision of Income Tax Act 2058.
c) Delta is a Life Insurance company registered with office of company register and
insurance Board of Nepal as a limited liability company. Statement of income in the
financial year 2072/073 is already ready and management of company provides you
the following data for calculation of tax liability.
Data extract from the statement of Income of Financial year 2072/073

Particular NPR.
Net Premium Received 300,000,000
Total Policy values 28,000,000,000
Commission paid on Re-insurance accepted 15,000,000
Commission received on Re-insurance done 3,750,000
Agent commission 22,500,000
Income from investment and loans to policy holders 84,000,000
Other miscellaneous income 450,000
Surrender value paid (premium collected 3,000,000) 2,700,000
Payment to the policy holder due to death (premium paid
250,000) 2,500,000
Payment to policy holders in maturity (premium payment
1,200,000) 2,250,000
Management Expenses 13,500,000
Medical expenses 100,000
Claimable depreciation expenses 6,300,000
Amount transferred to insurance fund this year 27,000,000
Donation to Prime Minister Relief fund 1,200,000
Required:
You are required to calculate tax liability of the company for the financial year with
considering the relevant provision of Income Tax Act 2058 and Financial Act 2073.
d) Define Resident person as per Income Tax Act 2058? Considering the relevant
provision of income tax Act 2058 identified the residential status of CA. Prachanda
for the income year 2071/72, 2072/73 and 2073/74.
―CA. Prachanda Man Sing is partner of Man Sing & Co., Chartered Accountants
Kathmandu went on foreign employment in USA. As per Passport details issued by
department of Passport Nepal he went to USA on Bhadra 6, 2071 and returned on
Bhadra 5, 2073 and thereafter have been residing in Nepal and joined Man Singh &
Co as Senior Partner.‖

a) As per Rule 5 of Income Tax Rules 2059, ―Financial Statement to be submitted‖ The
entity registered under the provision of Income Tax Rules 2059, shall compulsorily file
with the Department a copy of its audited financial statements for an income-year not
later than three months after the end of the year. In case where an exempt entity fails to
file such the statement, the entity shall not be entitled to enjoy tax exemption until the
statement is filed with the Department.
As per section 2(jha) of Income Tax Act 2058, Income-year means the period from the
start of Shrawan of a year to the end of Ashad of the following year. The period of
financial year is adopted by INFO INGO is not in line with the Income Tax Act 2058,
definition section and Income Tax Rules 2059 provisions.
b) As per section 59 of Income Tax Act 2058, Clarification part, banking business means a
business of a bank or financial institution to the extent it involves banking activities with
an approval as per the prevailing laws for the bank or financial institution. As per
Schedule 1 section 2(2) of Income Tax Act 2058, applicable rate for entities for Bank and
financial institution is 30%. As per considering above clarification part till date of
financial year 2072/073, bank has not obtained the approval as Bank and financial
institutions so applicable tax rate is 25% as entities (as per section Schedule 1 section
2(1) of Income Tax Act 2058).
c) Calculation of taxable income and tax liability of Delta Life Insurance Company Ltd. for
the financial year 2072/073
Income NPR.
Interest Income 84,000,000
other Miscellaneous Income 450,000
Commission Received on reinsurance 3,750,000
Total Inclusion of income 88,200,000
Deduction:
Commission paid on Reinsurance 15,000,000
Agent commission 22,500,000
Depreciation Expenses 6,300,000
Medical Expenses 100,000
Loss on Settlement of Liability(WN#1) 3,000,000
Management Expenses 13,500,000
Total Deductible expenses 60,400,000
Adjusted taxable income 27,800,000
Less Donation expenses u/s 12 ka(WN#2) 1,200,000
Tax Liability @ 25% 6,650,000
Working Notes#1
Calculation of Loss on Settlement of Liability
Payment to Policy holder on surrender 2,700,000
Premium Received 3000000
Gain on surrender 300,000
Payment to Policy holder on death 2,500,000
Loss (2,250,000)
Payment to Policy holder on Maturity 2,250,000
Loss (1,050,000)
Total Loss on Settlement of Liability (3,000,000)
Working Notes#2
As per section 12 kha of Income Tax Act 2058(as amended by financial Act
2073) amount contributed to Prime Minister Relief fund is allowed as deduction.
In this case, whole amount of contribution NPR. 1,200,000, is allowed as
deduction
d) As per Section 2 (kana) of the Income Tax Act, 2058, Resident person with respect to an
income-year means-
(1) in the case of an individual, an individual-
(a) whose normal place of abode is in Nepal;
(b) who is present in Nepal for 183 days or more in the 365 consecutive days, or
(c) who is an employee or an official of Government posted abroad at any time during
the income year;
(2) any partnership;
(3) in the case of a trust, a trust that-
(a) is established in Nepal;
(b) has a trustee that is a resident person for the income-year; or
(c) is controlled directly or through one or more interposed entities by a person or
persons one of whom is a resident person for the income-year;
(4) in the case of a company, a company that-
(a) is incorporated or formed under the laws of Nepal; or
(b) has its effective management in Nepal during the income year;
(41)Government of Nepal
(5) a village development committee, municipality or district development committee;
(6) in case of a foreign government or a political subdivision of the foreign government,
such an entity-
(a) if it is established under the laws of Nepal; or
(b) has its effective management in Nepal during the income year ; and
(7) any institution or entity established under treaty; and
(8) a foreign permanent establishment of a non-resident person situated in Nepal.
Form the above definition considering applicable to individual, if we check the

residence status of CA. Prachanda, we see that though his permanent address is in
Nepal, his continuity of residency and the economic activity is not mainly in Nepal for
the financial year 2071/072 and 2072/073, therefore his normal place of residence
cannot be considered as Nepal, therefore we will have to apply to the second provision
of the Sub-section also to test his resident status.
For the financial year 2071/072 he left the Nepal on 6th Bhadra 2071 he was not there in
the Nepal for 183 days period between 5th bhadra 2072 to 6th Bhadra 2071. So,
residential status for financial year 2071/072 is non-resident.
Similarly in the he is not in Nepal for the financial year 2072/073, so residential status is
non-resident.
Finally for the financial year 2073/074 he is in Nepal from 5th Bhadra, 2073 and his
normal place of residence is Nepal and, he will be considered resident from the day he
comes back to Nepal for the income year 2073/074.
12. Question no.12
a) On 1st Shrawan 2071, Golden Handshake has obtained the approval for maintenance of
Retirement Fund in the name of Golden Handshake Retirement Fund from Inland
Revenue Department and managing the retirement fund for its 1200 staff since the date of
establishment.
On the Falgun 11th 2073, Golden Handshake is notified by Inland Revenue department
for cancellation of the approved status of the retirement fund effective from that date.
Following are the financial transaction form the date of approval of retirement funds to
till date of cancellation:
S. No Particular NPR.
2071/072
1 Contribution received from members in 2071/072 212,500,000
2 Interest received from Investment in 2071/072 21,250,000
3 Fund management expenses in 2071/072 3,000,000
4 Retirement payment in 2071/072 38,750,000
2072/073
Retirement payment in 2073/074 68,750,000
8 2073/074
12 Retirement payment in 2073/074 72,500,000
Required:
Calculate the taxable liabilities of the Retirement Fund for the financial year 2073/074.
b) Eptisa is a multinational company specialised in engineering, consultancy, information
technologies and institutional, economic and social development, clearly oriented
towards service to the client, carrying out the most complex projects in the fields of
Transport, Water and the Environment, Building, Energy and Industry; applying
technological knowledge, creativity, innovation and the latest technologies to progress
towards sustainable development of society, to the benefit of people's welfare. This
company is registered in Spain. It got the contract to construct a water project in the year
2072 Mahakali Revier Kanchanpur. In the year 2073 it completed its project and is
closing down its operation in Nepal.
Following are the transactions for the financial year 2073/74.

Sale of Land in Kanchanpur (purchase price 56 crores) 75 crores
Compensation received for the loss of equipment
(insurer is from England) 7 crores
Sale of equipments related to project (opening WDV 7
crores) 10 crores
Settlement of loans taken for the project in Nepal from
Royal Bank of Scotland RBS(loan was taken at US $ 1 = 25 Million US $(1 US$
Rs. 99) =105)
Royalty received by the company for the trade mark used
by(1US$= 109) England company 5 Million US $
Royalty received by the company for the trade mark used
by(1US$= 109) Scotland company 1 Million US $
You are required to calculate the assessable Income in Nepal.
c) Home Bricks is Bricks manufacturing company located at Sirad Bagarkot-5 Dadeldhura.

The research department carried out a study and found that a integrated plant costing
NPR. 10 Million, would be very effective to control environmental pollution inside as
well as outside the factory. The boards of director are convinced with the proposal of
research department and suggested proceeds that option. The company purchased this
integrated plant on 2073/10/15 and total installation costing of plant is NPR. 500,000.
The adjusted taxable income of the company for income year 073/74 is NPR 15 Million.
What would be the allowable deduction on this transaction as per the Provisions of
Income Tax Act, 2058?
d) Mr. Martin held the position of Personal Representative of the Secretary-General in

Nepal for support to the peace process, 2006-2007, and Special Representative of the
Secretary-General and Head of United Nations Mission in Nepal, 2015-2017. Mr. Martin
is working in Nepal since last 2 years and getting his salary of US $ 15,000 per month in
Nepal. The salary is paid by the United Nations, in Nepal. State whether his remuneration
is taxable in Nepal or not?

a) As per section 64 of Income Tax Act 2058 stated the provisions for retirement funds. As
per sub-section 2 of section 64 stated that, the income of approved retirement fund is
exempt from tax.
Subsection 3 of Section 64 stated that where an approved retirement fund ceases to be an

approved retirement fund, it shall pay income tax in an amount equal to schedule-1 Sub-
section 1 of section 2 tax rate applied to the amount remained after subtracting the
amount of all retirement contributions and income that would be taxable income but for
subsection (2) derived by the fund during the period from its most recent approval as an
approved retirement fund to when it ceases to be so approved from the amount of all
retirement payments made by the fund from its most recent approval as an approved
retirement fund to when it ceases to be so approved.
In this case, Golden Handshake ceases to approved retirement fund so subsection 3 is
applied according to which the balance lying on the date of cancellation of approval shall
be taxed at 25%.
Calculation of income Taxable income:
Contribution from the date of Receipt of Approval 687,500,000

Income from investment since approval 108,750,000
Total Inclusion 796,250,000
Retirement payment
2071/072 38,750,000
2072/073 68,750,000
2073/074 72,500,000
Total Retirement payment 180,000,000
Taxable income of the retirement fund 616,250,000
Tax rate as per section 2(1) of annexure 1 25%
Tax Liability 154,062,500
WN#1
Tax rate as per section 2(1) of annexure 1 of Income Tax Act 2058 is 25%.
b) Calculation of assessable income of Eptisa for the Financial year 2073/074
Calculation of Assessable Income of Corer

Gain in sale of land (75-56) 19
Compensation from insurer 7
Gain in sale of equipment 3
Loss on settlement of loan 15
Total assessable income 14
Working notes
1. Gain on sale of land
Gain on sale of land
Purchase price of land 56 corer
sale of land 75 corer
Total gain 19 corer
2. Compensation received from foreign insurer for the assets used in Nepal is taxable in
Nepal as per Section 67 (3)(ga).
3. Profit on dissolution of pool of assets is taxable in Nepal as per section 67(3) of
Income tax act 2068.
4. Loss on settlement of loan due to change in exchange rate is allowable for deduction
as per Section 67 (3) (ka).
5. Royalty received by the company for trade mark used in England and Scotland is not
taxed in Nepal as per section 67(7).
c) According to section 17 of Income tax Act 2058, expenses incurred in the course of
business during any income year for controlling pollution shall be allowed for deduction
to certain extent. Such expenses shall be allowed for deduction to the extent of actual
expense incurred or 50% of adjusted taxable (for all business) whichever is less.
However, any excess amount that could not be allowed for deduction due to above
ceiling shall be capitalized at the beginning of next year in pool D and depreciation shall
be charged as per schedule 2 of Income Tax Act 2058.
According to above section:

Home Bricks has purchased the plant for NPR. 10 Millon and the installation cost is
NPR. 500,000. Thus, the total expenditure incurred for pollution control plant is NPR.
10,500,000 and the adjusted taxable income of the company for income year 73/074 is
NPR. 15,000,000. Therefore, the allowable deduction would be least of the following:
1. Actual expenses incurred 10,500,000
2. 50% of adjusted taxable income 7,500,000
min of above 7,500,000
Hence, the allowable deduction would be NPR. 7500,000 and the excess amount spent
i.e. 3000,000 shall be capitalized at the beginning of next year in pool D and depreciation
shall be charged as per schedule 2 of Income Tax Act 2058.
d) As per section 10 of Income Tax Act 2058, any amounts received by a natural person in
consideration of his employment in the government service of a foreign country, is
exempt from tax in Nepal, Provided that,
The person must have become a resident or non-resident person simply because of his
employment, and such amounts must have been paid from the state funds of that country.
From the above stated provision Mr. Martin is a residing in Nepal last 2 years. His
residency is just for the reason of employment and supposes that he was not engaged in
other business except the employment and the United Nations pays his salary. Therefore
all the condition stated in section 10 of Income Tax Act 2058 as indicated above are met
thereby his salary will not be taxed in Nepal.
Question no.13
13. Ethical requirements as per Income Tax Act and Anti Money Laundering
provisions
a) Singh a professional accountant, worked as a financial controller in business. He

was asked by a newly appointed director to transfer a substantial sum of money into
an off-shore bank account. Singh asked for an explanation and was told by the
director that it was a payment for work done. However the director was not able to
provide any supporting documentation. Singh later received an email instructing that
a payment be made and confirming that it related to legitimate expenses. As a result
the payment was made but Singh informed the managing director of his concerns.
Shortly afterwards Singh was made redundant. Three months later an insolvency
practitioner was appointed as administrator and contacted Singh to seek details
relating to this transaction.
Required:
Identify the fundamental principles that Singh needs to consider prior to any
discussion with the administrator and outline any questions needed to establish
whether these are threatened.
b) Donal is an employer with a growing business. She is a new tax client of your firm,
which has already completed its client acceptance procedures. Donal handled the
payroll herself for the last two tax years and has recently attended a meeting to
discuss handing this over to you. It is 1st Shrawan, and your firm has agreed to
advise Donal from the current tax year onwards.
You now become aware that Donal regularly hands out cash bonuses to employees
as a reward for hard work. These have been ignored in the past for payroll purposes,
although they appear as a deduction in the business accounts as ‗miscellaneous staff
expenses‘. Donal says she thought it was acceptable to do this as long as the
payments were in cash. You have pointed out that this is incorrect. Donal is willing
to have these amounts declared going forward, but is not willing to contact IRD
regarding prior years‘ undeclared payments. She cannot understand why you are
concerned about these given that you are not responsible for previous years.
Requirement
Comment on the ethical considerations raised by the handover of Donal‘s payroll to

your firm.
c) You have received the following query from your HR manager.

EMAIL
From: HR manager
To: Financial controller
We are putting together a fact sheet for employees who are going to be asked to
work in Sanima.
I have heard from a friend who works in Sanima that some non-Sanima workers
minimise their Sanima tax liability by arranging for their salary to be paid into an
overseas bank account. This apparently avoids the attention of the Sanima tax
authorities. Although I am told this is not strictly illegal, it does not sound very
ethical to me. However, I have a duty to provide our employees with appropriate
advice when they are sent to work in Sanima. Should the fact sheet include advice
on this method of minimising Sanima tax? Please give me explanations for your
answer since we do not seem to have a policy for this particular issue and I want to
update the firm's Human Resources manual.
Requirement: Prepare a response to this email.
d) You have acted for two sole trader clients for many years. They have just set up a
company together as a separate enterprise each owning 50% of the shares. The
clients have asked that you continue to act for them individually as well as acting for
the company.
Explain the nature of the conflict of interest and how the conflict can be
managed.
Answer to question no. 13:
a) Singh must adhere to all five fundamental principles. In this situation he needs to
consider the following fundamental principles in particular:
 Integrity – Were the actions that he took and any conversation with the
administrator, unfair, untruthful or dishonest in any way?
 Objectivity – Where is the boundary between his duty to his former employer and
the administrator?
 Confidentiality – Are there proper grounds for disclosing the information?
b) By omitting to declare taxable employee income for PAYE, Donal is paying too
little income tax which incompliance with the Income Tax Act 2058. She should be
informed of the need to amend previous payroll information and payments, in
writing. She should also be informed of the possible interest payment on underpaid
tax and also penalties, which are influenced by her behaviour. This may possibly
have been careless omission at the time, but now that she has been informed a
correction is needed, continuing delay becomes deliberate.
The fact that this related to years for which your firm is not responsible does not
make it acceptable to ignore the omissions. If Donal continues to refuse to deal with
the omissions, the engagement letter should be checked for any agreed conditions
under which the firm may disclose information to IRD. Consideration should also be
given as to whether the firm should give notice that it is ceasing to act for Donal.
c)
Email to: HR manager
From: Financial controller
Ethical issue regarding tax avoidance scheme
There is a potential conflict in this situation between your company duty as an employer
to provide appropriate advice to employees sent to work in Sanima, company duty to
comply with the law whether that is Nepal or overseas, and personal ethics on whether it
is appropriate to avoid tax by circumventing the substance of tax law.
In addition, it is a concern that the firm does not have written procedures which consider
this ethical problem.
Before advising on this issue certain steps should be considered to ascertain the facts:
hould obtain professional tax advice from a reputable firm in sanima which
can advise on legal means of minimising the employees' tax liabilities in sanima.
consider the opinion given to ensure that the advice matches with the company's
corporate policy on working in other tax jurisdictions and to ensure that there are no
potential conflicts.
Resolving the problem of personal ethics conflicting with the workplace is a very
difficult issue. The ICAN code of ethics sets out five fundamental principles which act as
a framework. Relevant to this scenario are the principles of integrity, requiring a
professional accountant to be straightforward and honest in business and professional
relationships; and professional behaviour, requiring that a professional accountant should
comply with relevant laws and regulations and should avoid any action that discredits the
profession.
I would advise you to consult your professional body's code of ethics to ascertain your
position and responsibilities in this matter.
As a priority, a project to review all companies‘ procedures manuals in respect of HR and

other functions should be implemented and also review of training to ensure that ethics is
incorporated at all levels within the organisation.
d) At this point in time there is no reason to suggest that you should not act for all three
clients. However, if your firm acts for all three separate clients the principle of
confidentiality must be maintained for each client. The clients must also be informed that
you may need to cease to act if future conflict arises.
14. Question no: 14

a) Is there any provision for Final Withholding Payments, define Final Withholding
Payments? What are the payments treated as final withholdings as per Income Tax
Act, 2058?
b) Define "non-business chargeable assets" under Income Tax Act, 2058?
c) Is there any provision for payment of income tax by installments under Income Tax
Act, 2058?
Answer to question No.14
a) As per Section 2(Ga) of Income Tax Act, 2058, final withholding payment is defined as
the payments specified under Section 92 such as dividend, rent, gains, interest and
payment to a non-resident person, which is to be made after withholding final tax.
Final withholding payments are the payments made after deducting tax at source at
specified rate prescribed under Income Tax Act, 2058. The tax, thus, deducted shall be
the final tax. The person receiving the final withholding payments does not have to
include this amount in his other taxable income.
According to Section 92 of Income Tax Act, 2058, following payments are treated as
final withholding payments:
 Dividend paid by a resident company.
 Rent for lease of land or building and associated fittings and fixtures, having a source in\
Nepal, and that is received by an individual other than the individual carrying on
business.
 Payment made by resident person for gains from investment insurance.
 Payments made as gain from unapproved Retirement Fund.
 Interest payment, as specified under Section 88(3), made by bank, financial institution or
any entity issuing bond or company listed as per the prevailing law.
 Payments made to non-resident persons that are subject to withholding tax under section
87, 88, or 89.
 Retirement payments made by Nepal Government or from the Approved or Unapproved
Retirement Fund including all types of retirement payments (except regular pension
payment).
 Meeting fee, payments made for occasional teaching.
 Payment against windfall gain.
 Return distributed by mutual fund to natural person.
b) As per Section (2) (da) of Income Tax Act 2058, non-business chargeable assets means
securities or an interest in an entity as well as land and buildings held by a natural person
but excludes the following assets.
(i) business assets, depreciable assets, of trading stock;
(ii) a private residence of an individual that has been:
 owned continuously for ten years or more; and
 lived in by the individual continuously or intermittently for a total of ten years or
more;
private resident means building or area covered by building or one rupani land
whichever is less.
(iii) interest belonging to a beneficiary in a retirement fund;
(iv) land and private building of an individual that is disposed off for less than rupees
three million; or non-business assets of an individual that is disposed off by way of any
type of transfer, other than sales and purchase, made within three generations.
c) The provisions regarding payment of income tax by installments are given in Section 94
of Income Tax Act 2058. According to this Section, a person who derives or expects to
derive any assessable income during an income year from a business or investment shall
be required to pay tax for the year in three installments as follows:
Payable Date Payable Amount
By the end of Poush 40% of the estimated tax less tax already paid.
By the end of Chaitra 70% of the estimated tax less tax already paid.
By the end of Ashadh 100% of the estimated tax less tax already paid.
However, if the amount of installment calculated is less than NPR. 5,000, the amount of
installment shall not be deposited.
15. Question no. 15.
a) What are the conditions that need to be satisfied while treating a financial transaction as a
finance lease under the Income Tax Act, 2058?
b) Write short note on Taxpayers Rights under the Income Tax Act 2058.
c) Define the meaning of Investment Insurance under the Income Tax Act 2058
d) What are the procedures to appeal to Revenue Tribunal?
a) The following conditions shall be required to be satisfied while conducting finance lease
under this section:
o arrangement is made in the lease agreement provides for transfer of ownership
following the end of the lease term, or the lessee has an option to purchase the asset
after expiry of the lease term for a fixed or presupposed price;
o The lease term exceeds 75 percent of the useful life of the asset;
o The estimated market value of the asset after expiry of the lease term is less than 20
percent of its market value at the commencement of the lease.
o In the case, of a lease that commences before the last 25 percent of the useful life of
the asset, the present value of the minimum lease payments equals or exceeds 90
percent of the market value of the asset at the commencement of the lease term; or
o The asset is custom - made for the lessee and after expiry of the lease term the asset
will not be of practical use to anyone other than the lessee.
b) A taxpayer with respect of paying tax under section 74 of Income Tax Act 2058 shall
have the following rights:
o right to get respectful behaviour;
o right to receive tax related information as per the prevailing laws;
o right to get opportunity of submitting proof in own favour in respect of tax matters;
o right to appoint lawyers or auditors for defence; and
o right to secrecy in respect of tax matters and keep it inviolable
c) Investment Insurance as per Section 2(kaga) of Income Tax Act 2058, means insurance
of any of the following classes:
1) Insurance where the event covered is death of an individual who is the insured or an
associate of the insured;
2) Insurance where the event covered is personal injury suffered or personal
incapacitation in a particular manner of an individual who is the insured or an associate
of the insured.
3) Insurance where the agreement is expressed to be in effect for at last five years or
without limit of time and is not terminable by the insurer before the expiry of five years
except in special circumstances specif8ed in the agreement
4) Insurance under which an amount or series of amounts is to become payable to the
insured in future
5) Reinsurance of insurance referred to under (1), (2) and (3) above and reinsurance of
the reinsurance of the above.
d) A person who is not satisfied with the order of the Director General under under section
115 of the Income Tax Act 2058 may appeal to the Revenue Tribunal under section 116
of Income tax Act in accordance with the Revenue Tribunal Act 1974. The appeal should
be filed within 35 days of the receipt of the order of DG or on the expiry of 60 days from
the date of application to DG. A person who appeals to the Tribunal under sub section
116(1) shall within 15 days of doing so file a copy of the notice of appeal with -in the
department. Notwithstanding anything contained in section 114(1) of the Income Tax Act
2058 if any decision is made by the director general on any mater subject to
administrative review by the director general, appeal to the Revenue Tribunal may be
filed under this sub section.
16. Question No. 16

P Palastic Pvt .Ltd. (PPP) is a 100% Foreign Direct Investment company established
after taking necessary approval for Foreign direct Investment (FDI) in Nepal. The
company has obtained license, approval from the excise department for manufacturing
plastic packing materials and registered in VAT in Inland Tax office. The company is
one of the largest manufacturers of Injection Stretch Blow Molded (ISBM) bottles and
containers. Innovation, segment-wise market expansion, penetration and high degree of
customer orientation have been the key factors behind its astounding growth. The
company commenced its commercial operation from 1st Ashad 2073.
In the production process ISBM method used even though, input output ration of
Polypropylene and finished product is 1:0.9., i.e there is a production loss. Custom duty
paid @ 25% of landed cost is not included in above data. The rate of excise duty on the
product is 5 % of the value.
PPP has appointed its 100% subsidiary company 4P for marketing and distribution of its
product as sole distributor of the company products. PPP sales its product to the
distribution @ NPR.38.15 per Kg. 4P sells the product @ NPR. 75 per Kg and normal
commission to distributors for such product paid by other considering best standard
practice is NPR. 18 per kg and carriage out wards expenditure incurred by considering
best industry practice is NPR. 9 per Kg.
The company had following transactions during the month of Ashad 2073:
Import of plastic 100 tonne Polypropylene(CIF Raxaul) 1,000,000
Clearing and forwarding expenses at Raxaul 150,000
Carriage Inward incurred 86,000
Factory Wages 245,000
Other production cost 345,000

Stock of plastic Polypropylene at the end of Ashad 2073 35 tonne
Stock of finished products at the end of Ashad 2073 35 tonne
The company purchased Scoter Price is inclusive of VAT. 169,500
Purchase of Mini Truck including VAT 2,260,000
Required:
a) In mid night of 25th Ashad 2073 in factory of PPP raw materials store is destroyed
by Fire and fire is controlled with the help of Nepal Army 4 am in the morning.
What are the obligation consequences and time limit to company as per VAT,
custom and Excises act?
b) Tax officer is in believed that the company is under invoicing its product. IRD
think to buy the stock of finished product at price invoiced by the company. Can
IRD buy the product without consent of the company?
c) IRD have assessed additional VAT finished goods sold on the ground that the
product was heavily under invoiced than the prevailing market price. State the
relevant provision of Vat act.
d) Calculate amount of VAT payable for the month of Ashad 2073.
e) Excise authorities are considering imposing additional excise on the company on

the ground that factory price is not derived properly. State the relevant provision
and advise the company on powers of the excise authorities to impose additional
excise duty.
a) Rule 39ka Vat Regulations 2053 requires such event to be informed within 30 days
of such incidents along with the evidence of writing off the goods from stock due to
fire. Similarly rule 17 of Excise Regulations 2058 requires such event to be
informed as soon as possible. There is no obligation under Customs Act 2064.
Therefore, the company should inform the authorities within stipulated time to
enable it to write off the loss. If these authorities are not informed the company will
have following consequences: The Company will not be able to write off the loss
under VAT. Further under rule 40 of VAT regulations, tax officer may assume the
stock as sold on physical verification and may order to pay VAT. Similarly the
company may be required to pay loss of excise suffered by Nepal Government under
rule 17 of the Excise Regulations.
b) Under section 23GA(1) of VAT Act 2052, VAT authorities have power to buy stock
of goods considered to be under invoiced. Under section 23GA(2), VAT authorities
may choose to buy stock at the value sold by the company without the consent of the
company and pay amount calculated at the rate invoiced by the company. As per this
provision IRD can buy under invoiced goods.
c) As per section 20 1(e) of Vat Act 2052 Tax Officer is empowered to assess tax if he
has reasonable ground to believe that the product is sold by under invoicing. Since
in this case it seems to be under invoiced compared to similar products, VAT
Officer may rightly assess additional tax.
d) Calculation of VAT payable for the month of Ashad 2073
Particulars NPR NPR
Cost of Plastic Polypropylene 1,000,000
Clearing and forwarding expenses 150,000
Carriage inward 86,000
Landed cost 1,236,000
Custom Duty @ 25% 25% 309,000
Sub Total 1,545,000
VAT paid @ 13% 200,850
Cost of raw material consumed (1545000/100)*65 1,004,250
Factory wages 245,000
Other production cost 345,000
Factory Cost 1,594,250
Factory cost per kg finished product 1594,250/58,500 27.25
Margin @ 40% of factory cost 40% 10.90
Factory price to whole seller 38.15
Excise duty @ 5% 5% 1.91
Sub Total 40.06
VAT per kg @ 13% 13% 5.21
Total VAT collected 23500*5.21 122,385.26
Less VAT paid
Paid at customs 200,850.00
Paid in purchase of Scoter 19,500.00
Paid in purchase of Mini Truck 260,000.00
Total credit to be claimed 480,350.00 480,350.00

Net credit to be claimed 357,964.74
Working Notes:
1. Rule 41(2)(kha) restricts VAT credit for automobiles to 40% only but two
wheelers and Mini truck does not fall under automobiles.
2. Stock of raw material is 35 tonne, so used is 65 tonne.
3. Input to out to ratio is 10: 9, 65 tonne materials used so output is 58.5 tonne and
stock is 35 tonne.
e) Section 3kha (3) of Excise Act 2058, confers power to Excise Officer to collect
excise if difference between consumer price and factory price is not reasonable. In
this case excise officer may assess and collect excise duty after considering
consumer price, commission to wholesaler or retailer, transport expenses and taxes
in nearest market. It seems excise officer is not satisfied due to difference in
consumer price and factory price. Therefore, such difference should be calculated
before opposing excise officer's view.
Consumer price 75.00
Normal commission to wholesalers 18.00
Transport expenses 9.00
Estimated selling cost 27.00
Modified consumer price 48.00
Factory price to wholesaler 38.15
Difference 9.85
Since the difference is unreasonable, excise officer's view is not contrary to the legal
provisions. Therefore, Excise Officer may order rightly to pay additional excise
duty.
17. Question no.17
a) Define Group of company or entity as per Value Added Tax 2053?
b) What is market Value as per Value Added Tax 2053? Mention the relevant provision
applicable to market Value as per Value Added Tax 2053?
c) Can tax officer assess the tax under Value Added Tax 2058? List out the situations
under which the tax officer may assess the tax.
d) With the VAT Return Poush end 2073, XYZ Securities service Pvt.Ltd., VAT due is
NPR 12 corer . IRD has information several times( previous months return) to pay the
Vat due in time but the management of the company didn‘t pay any amount until the
months of Falgun end, which is increased by NPR. 4 Corer with return of Magh end
2073. On the 1st Chaitra 2073 IRD request to Nepal Rastra Bank to hold the Bank
account of XYZ Securities service Pvt.Ltd. for three months and NRB issued letter to
Delta Bank to hold Bank account for three months with request of IRD. Can IRD hold
the bank account of XYZ Securities service Pvt.Ltd., due to nonpayment of Vat in
timely?
a) As per section 2(Cha1) of Value Added Tax Act, 2053, ―Group of company or
Entity‖ means the group of company or entity having existed the following situation:
i. Conducting a business by an associated person or by a representing member in

the group of the entity,
ii. Supplying any goods or service by a group of entity to an associated entity or
group of other entity,
iii. Supplying goods or services to a group of entity or member of group,
iv. Permanent adders of conducting business of two or more entity having the
same place, or
v. Having direct or indirect control of a person or of some persons on the group
of entity.
b) As per section 2(k) of Value Added Tax Act 2058, "Market Value" means the price
as determined pursuant to Section 13;
As per section 13 of Value Added Tax Act 2058, market value related provisions are:
(1) The market value of goods or services shall be determined as the consideration in
money which the supply of these goods or services would generally be agreed on if
the transaction were made under similar circumstances at that date in Nepal taking
into consideration the characteristics, quality, quantity, materials, and any other
relevant factor, being a supply freely offered and made between persons who are
unrelated.
(2) For the purpose of this section the method for the determination of market value
hall be as prescribed.
(3) Where the market value of goods or services could not be determined under
subsection 1) and (2), it shall be determined in accordance with a process determined
by the Director General.
In addition to this section, Rule 22 of Value Added Rules 2053 mention that, for
determining the market value under Section 13 of the Act, the tax officer shall
determine the market value by studying the transactions and value of other vendors
registered in regard to the transaction of the same nature. In cases where the market
value of any goods or services cannot be determined as set forth in sub-section (3) of
Section 13 of the Act, the Director General shall determine the value on the basis also
of the information received in that regard by him from the registered persons of the
same nature.
c) As per section 20 of the Value Added Tax, Act 2052, in the following circumstances
the tax officer have right to assess the tax.
 In case the tax return are not submitted within the prescribed time limit.
 In case incomplete or defective tax return are submitted.
 In case false return are submitted.
 In case the tax officer has reasons to believe that the amount of tax has been shown at
a lower figure.
 In case the tax officer has reasons to believe that the sale has been made by under
invoicing.
 In case there is under invoicing with the associate companies.
 In case the person is carrying transaction without being registered, thought required to
mandatory registration.
 In case sale made without invoicing.
 In case tax collected by the unregistered persons.
d) As per section 23D of Value Added Tax Act, 2052 stated that with the approval of
director general the tax office may do or make to do the following acts if there is
possibility of loosing the evidence of offence or fleeing the accused in case no action
is taken immediately on transaction carried out avoiding tax by a person, firm,
company or organization.
 to shield transaction spot,
 to take into possession the electronic equipment and its record,
 to require cash deposit or pledge against assets in the equivalent to the tax
amount avoided upon raising a note therefore from the person believed to
have committed offence.
 Tax payer bank account can be hold for three months but if investigation is
not complete with approval of DG bank account can be hold for addition three
months
In additional to above the tax officer will have the right for the investigation
on offence under this act equivalent to the right to police as per prevailing
law.
As per this provision IRD can hold the Bank account of XYZ Securities
service Pvt.Ltd., due to nonpayment of Vat in timely.
18. Question no.18
a) Dolma Distilleries, manufacturer of Beer and wiskey both brand name is ―Change &
Dance‖, which is facing top competition threat from similar product manufacturer. The
management of the company has decided to provide 10 beer & wiskey free for 5 cartons
of Change & Dance and 2 cartons free for every 10 cartons of Change & Dance sales.
The consumer will get threes free sales promotion from retailer. The retailer will be
reimbursed the same from dealers the company will pay to the dealers and will book
under sales promotion expenses. The company will do the luck draw schemes with TV,
Motorbike, and Car and house facility in yearend period. The management of the
company seeks your advice whether it can go for the schemes proposed by them?
b) Define London Proof Liter (LPL), Under Proof (UP), OP, with considering this definition
what is the percentage of Alcohol in 15 UP, 25 UP, 30 UP, 40 UP, 50 UP and 70 UP
strength of liquor produced and sold in Nepal? Give you answer based on excise
provisions in Nepal.
c) What are the terms to be abided by the liquor license holder under Excise Act, 2058?
d) Define Factory Price as per Excise Act, 2058?
a) As per section 4E of Excise Act, 2058 if any liquor, beer or cigarette manufacturing
industries offering any schemes shall be deemed to violate the condition of license. In the
present context, Dolma Distilleries, who intends to offer the promotional scheme, is not
in line with the provision of the Excise Act, 2058. Therefore, it is advised to the
Company not to implement any free scheme and luck draw scheme.
The company will liable to pay excise duty as per Excise Act, 2058 and Vat as per Value
Added Tax Act, 2052.
b) LP (London proof) means the strength of clean ethanol in London proof. Quantity of pure
ethanol per liter is called London Proof Liter (LPL). LP liter means 57.06% strength of
clean ethanol. UP means the liquor containing less strength than London proof. OP
means the liquor containing more than strength than London proof.
Strength of liquor produced and sold in Nepal has been tabulated below:
Strength Proof(100-Strength) Percentage of Alcohol ( Proof *.5706)

15 UP 85 48.50%
25UP 75 42.80%
30UP 70 39.94%
40UP 60 34.24%
50UP 50 28.53%
70UP 30 17.12%
c) Terms to be abided by the license holder under Excise Act 2058:
Terms to be abided by the license holder under Annexure 3 of Excise Rules, 2059 are as
follows:
All licensees:
i) Renew license within Shrawan end of every year.
ii) To display the license at the place of business all the time.
Liquor licensees:
i) Sell & distribute the liquor from 10 AM to 10 PM only.
ii) To retain the liquor purchase and sale invoices.
iii) Liquor license holder should deal only in liquor & tobacco.
iv) Departmental Stores must sell the liquor & tobacco in a separate room.
v) Excise ticket must be attached covering the bottle & cap.
vi) Not to sell the liquors to the person below the age of 18 years.
Duty free shops:
i) To be sold from bonded warehouse only to diplomatic person, organization and
mission.
ii) To submit the details of goods imported on bank guarantee facility along with
the monthly returns.
iii) Entry into and exit from warehouse to be done in presence of excise office staff
only.
iv) Separate invoices are to be prepared for arrival and departure sales mentioning
nationality, passport number and flight number.
d) As per Section 2(j) of Excise Duty Act, 2058 "Factory price" means the price fixed by
adding only the expenditure incurred in manufacturing a product subject to excise duty
and the profit of the enterprise, excluding the excise duty or any other tax chargeable on
such product. Factory price is very much relevant in excise duty calculation as this is the
base amount on which excise duty is calculated for goods chargeable under excise duty.
In Section 2(k) of Excise Duty Act, 2058 defines ‗value‘ which is the base for calculation
of excise duty. As per the section, in case of manufactured goods, factory price becomes
the value for determination of excise duty.
19. Question no.19
a) What is bonded warehouse? What is the procedure for maintaining a nongovernment

warehouse and what are the responsibilities of the owner of nongovernment warehouse?
b) The ABC Bricks Industries is registered under the Excise Act and incurred heavy loss
since F/Y 2070/071 due to political disturbance in Nepal. The owner of ABC Bricks
Industries wanted to suspend the license for two years from F/Y 2071/072 to 2072/073.
As you are a tax expert, the firm wants your expert opinion whether the suspension for
two years is possible or not? Your views are to be based on the legal provision of Excise
Act, 2058.
c) What are the provisions of Customs Act, 2064, if a person intends to export any goods in
violation of intellectual property rights?
d) Ms. Sharmila, Proprietor of Sharmila Trading, purchased goods from Japan for trading
purpose. Ms. Sharmila is unable to pay Customs duty for release of goods imported for
the Trading purpose. Comment with considering the relevant of provision of Customs
Act, 2064.
Answer to question no.19:
a) As per section 2(n) of Custom Act 2064, ―Bonded warehouse" means a warehouse
licensed by the Department to import and hold, against the bank guarantee facility, such
raw materials or subsidiary manufacture goods to be exported to foreign countries or to
be sold domestically at convertible foreign currencies or such goods as to be sold at a
duty free shop.
No person shall maintain a non-government warehouse without the prior permission of
Government of Nepal. Any person desirous or opening a non-government warehouse
may submit an application to the local custom office indicating the cost estimates of the
proposed warehouse as well the site thereof. The local custom office, on its part, shall
submit a report along with its opinion to Government of Nepal.
Responsibilities of operator of custom warehouse operated by private sector as per Rule
64 of Custom Rule 2064 are as follow:
a. To make provision of security of goods stored at the warehouse.
b. To keep updated records of goods stored in the warehouse.
c. Not to stored goods that are disallowed by the custom office.
d. Not to withdraw of goods form the warehouse without prior approval of custom office.
e. Not to bring back goods which have already been taken for examination, without
approval of custom officer.
f. Not to open goods and to make provision for such, without order of custom office.
g. To provide information of goods lost or damaged or gets damaged by any means, kept
in warehouse.
h. To notify the custom office exceeding the period of 90 days for the goods stored in
warehouse
i. To allow the custom officer to inspect the warehouse any time and provide information
and details as demanded by the officer immediately
j. To make available of the daily details of goods stored in the warehouse to the custom
office.
k. To keep clear records of the name, address telephone if any and E-mail address of the
owner of the goods stored in the warehouse.
b) As per the decision of Inland revenue Department dated 2068.04.17, in case where an
application is made to the excise officer for the suspension of license for limited period in
valid reason, the excise officer may grant the permission for suspension of license if the
following conditions are satisfied:
 The firm has paid full amount of Tax & fee till the date of suspension.
 Separate record has to be maintained of suspension industries
 The declaration of closing stock of all brands and quantity is to be provide to the
Excise officer.
 The time limit of suspension is to be fixed.
 At least two times inspection has to be done in those industries.
 The notice of suspension is to be circulated to local authority and firm registered
office.
 In case the firm desired to reoperation the business, an application is to be made to
excise officer and necessary examination is to be done by excise officer before
granting the operating license.
c) As per Section 68 of Custom Act, 2064, if any person is going to export or import any
goods in violation of intellectual property rights such as patent, design, trademark, and
copy right acquired by any one pursuant to the prevailing laws, the concerned person may
submit an application, accompanied by evidence, to the concerned Customs Officer for
withholding such export or import.
If an application is made, the concerned Customs Officer shall withhold such goods in
the Customs Office and make a request to the concerned body or authority for necessary
action in that respect. (Section 68(2))
Such body or authority shall take action in that respect and settle the matter in accordance
with the prevailing laws and give information thereof to the Customs Office. (Section
68(3))If, upon taking action in accordance with the prevailing laws, the body or authority
referred to in Sub-section (3), holds that such goods are liable to be forfeited, the
Customs Officer shall hand over such goods to such body or authority.
d) As per section 7 of Customs Act, 2064, duty not to be charged on goods left in customs
office following provision are applicable:
(1) If any importer makes an application for not releasing any goods imported by that
importer and for so leaving such goods with the Customs Office that they belong to the
Government of Nepal, no duty shall be charged on such goods.
(2) The Government of Nepal may itself use the goods so left pursuant to Sub-section (1)
or auction them in accordance with this Act.
Provided that where such goods are in such a condition that they can neither be brought
into use nor be auctioned, the Customs Officer may remove such goods from the
Customs Office or destroy them as prescribed; and the expenses incurred in such removal
or destroy shall be recovered from the concerned importer himself / herself.
According to provision of this section these are applied to Ms. Sharmial.
20. Question no.20
a) Sankshi Pvt.Ltd trading company has its Branch office in Thailand, Bangkok, Singapore
and China. It has adopted the Internation Financial Reporting Standards (IFRS/IAS) for
preparation and presentation of Financial Statements. In the months of Falgun end 2073
sales in the Head office is NPR. 50 Million and sales from Thailand, Bangkok, Singapore
and China is NPR. 60Million, NPR. 70 Million, NPR. 80 Million and NPR.100 Million
respectively. With considering the VAT Act 2052, how much Vat Need to pay, if input
tax credit is NPR. 5 Million.
b) What are the circumstances where an unregistered person needs to pay VAT on his
transactions similar to as registered person?
c) What are the functions and duties of license holders carrying the transactions of excisable
goods as per Excise Act and Rules?
a) As per Value Added Tax Act 2052 section 5 ―Imposition of Value Added Tax‖ (1)
Except otherwise provided for in this Act, a Value Added Tax shall be imposed on the
following transactions:
(a) Goods or services supplied into the Kingdom of Nepal;
(b) Goods or services imported into the Kingdom of Nepal;
(c) Goods or services exported outside the Kingdom of Nepal;
This section further describes that tax shall be levied on the taxable value of every
transaction. Notwithstanding anything contained in sub-section (1) no tax shall be levied
on the transactions of goods or services set forth in Schedule 1, provided that any tax
applicable on such goods or services at the time of purchase shall not be offset pursuant
to section 17 and shall not be refunded pursuant to Section 24.
With analysis of this section any sales or purchase beyond territory of Nepal is not
subject to VAT, even the person is registered person.
Here, Head office sales is NPR. 50 million is output and output tax is NPR. 6.5 millions.
Calculation of Vat payable=Output tax- Input tax
= 6.5 Million- 5 million = NPR. 1.5 Million
b) As per Section 20(1) of Vat Act 2052, empowers Tax Officer to assess tax in the person
having transaction in Nepal if he believes and can prove with details that registration was
not done while the transaction was such that he should have registered or he has collected
VAT without getting registered.
There are some more cases, where the person purchasing goods or services need to pay
VAT.
As per section 8(2) of Value Added Tax 2052, any person (registered or not) in Nepal
receiving service from person outside Nepal need to pay VAT on the amount paid for
service. If the person is registered person, it can set off such payment as other purchases.
Similarly as per section 8(3) of Value Added Tax 2053 any person (registered or not) in
Nepal engaged in constructing commercial buildings, apartments, shopping malls or
similar having value more than NPR.5 million need to pay VAT on the construction cost,
if not paid to a registered person.
c) As per Rule 13 of Excise Rules, 2059 the function and duties of license holder are as
follows:
If the license holder is a Manufacturer:
1. To submit returns or statements as prescribed by this Rule in a format prescribed by
IRD within 25 days of the next month.
2. To record in a daily register the particulars of the goods manufactured and sold and
supplied, and produce the register to the excise officer, or the employee deputed him in
the course of inspection.
3. To send to the office samples of the goods manufactured after having them certified
the excise officer or the employee deputed by him.
4. To have the particulars of the goods kept in godown certified by the excise officer or
the employee deputed by him, and kept evidence thereof.
If the license holder is a Service provider:
1. To maintain on a daily basis records and accounts of invoices issued for service
provided.
2. To Kept a record of the invoices for excisable goods purchased during the course of
providing excisable services.
3. To make available all the documents when demanded by the excise officer or the
employee deputed by him.
If the license holder is a Importer of excisable goods:
1. In vase of import of goods, the registered importer has to furnish the purchase invoices
to excise officer or employee deputed by him.
2. In case a person imports goods though LC it has to furnish the following documents to
the excise officer:
i) The specification of the goods imported.
ii) The classification for the custom purpose.
iii) The unit price and quantity.
Duties of all licensees:
1. To display the license at the business place in a conspicuous manner.
2. The statements or returns which are required to be submitted as per the rules should be
submitted to the excise officer within 25 days of the expiry of the month
21. Question no. 21

Apollo Hospitals Delhi (Health Care Company) is one of the best hospitals in India
providing a complete range of latest diagnostic, medical & surgical facilities. It has open
Branch in Nepal and registered in Vat with Inland Revenue Department. Sales and
purchase in the months of Falgun end 2073 are:
Sales Purchases
Particulars NPR. Particulars Basic NPR.
Admission Charge 3,500,000.00 Medicine 31,500,000.00
Doctor's Fee 7,000,000.00 Pacemaker 52,500,000.00
Bed Charge 17,500,000.00 Lab Materials 3,500,000.00
USG Charge 3,500,000.00 Oxygen Gases 2,100,000.00
Medicine 35,000,000.00 Furniture & Fixtures 10,500,000.00
Surgical Fee 10,500,000.00 Telephone 1,400,000.00
Pacemaker for Heart 70,000,000.00 Vehicle for MD 17,500,000.00
Lab Fee 5,600,000.00 Ambulance(10) 21,000,000.00
TOTAL 152,600,000.00 TOTAL 140,000,000.00
The management of the company has appointed you as tax consultant; provide the
applicable provision for Vat computation of the company in the months of Falguan 2073
and Health Service Tax .Consider the relevant provision of Value Added Tax Act 2052
and Finance Act 2073 applicable to the company for calculation of VAT payable and
Health Service Tax payable.
As per section 7 of Finance Act, 2073 Health service provided by any hospital, other than the
Government & Community hospital required to collect Health Service Tax at the rate of 5%
of invoice price and deposit to Inland Revenue Department. The company need to submit
health service tax return with IRD quarterly and required to deposit collated tax within 25
days of quarter end. Tax officer may assess the tax liability if any company institution avoids
tax under this section. The tax office may fine 25% of avoided tax as assessed by tax officer.
In addition to above tax office may fine 15% interest if tax collected is not deposited in
timely with IRD and if return is not submitted than NPR. 1000 fine is also applicable for per
return. Tax office may give order for closing down the company if health service tax is not
deposited in timely.
As per above provisions the Apollo Hospitals Delhi need to collect and deposit 5% Health
Service Tax for invoice issued.
Computation of Vat
Particular Taxable Tax Exempt

Admission Charge 3,500,000.00 -
Doctor's Fee 7,000,000.00 -
Bed Charge 17,500,000.00 -
USG Charge 3,500,000.00 -
Medicine - 35,000,000.00
Surgical Fee 10,500,000.00 -
Pacemaker for Heart - 70,000,000.00
Lab Fee 5,600,000.00 -
Total 47,600,000.00 105,000,000.00
VAT @13% 6,188,000.00 -
Taxable and non taxable sales portion is 68.80734%.

Computation taxable Purchase, Tax exempt Purchase, Proportionate taxable purchase &
VAT Receivable
Particular Proportionate Taxable Tax Exempt
Medicine - - 31,500,000.00
Pacemaker - - 52,500,000.00
Lab Materials - 3,500,000.00 -
Oxygen Gases - - 2,100,000.00
Furniture & Fixtures 10,500,000.00 - -
Telephone 1,400,000.00 - -
Vehicle for MD 17,500,000.00 - -
Ambulance(10) - - 21,000,000.00
Total 29,400,000.00 3,500,000.00 107,100,000.00
VAT @13% 3,822,000.00 455,000.00
Less:
60% VAT on Vehicle for 195,000.00
MD (25,00,000 x13%x60%)
Remaining 3,627,000.00 455,000.00
Less: 2,495,642.22
Un-claimable VAT on
Proportionate of Tax exempt
Sales (68.81%)
Net Vat Receivable 1,131,357.78 455,000.00
Computation of Net VAT Payable
VAT on Taxable Sales 6,188,000.00

VAT on Tax Exempt Sales -
(A) Total VAT Payable 6,188,000.00
VAT on Taxable Purchase 455,000.00
VAT on Tax Exempt Purchase 1,131,357.78
VAT on Proportionate Taxable Purchase -
(B) Total VAT Receivable 1,586,357.78
Net VAT Payable for the month (A-B) 4,601,642.22
Note:
The hospital is providing taxable & tax exempt services to its patients therefore, before
computing VAT payable, taxable sales, purchase & Tax exempt sales, purchase is required to
compute.
22. Question no. 22

Sumy Distillery is sole proprietor firms registered in the name of Saud Chandra Prakash
produce liquor products. It has purchased 50 OP rectified sprite of 1000 liters from
Annapurna sugar industry Pvt. Ltd. Factory is monitored by Excise Officer it was found
that the Factory produce 1200 liter of 25UP wine name ―FEE CHANGE‖. Excise duty
is NPR.680 per liter.
Required:
a) Volume of Feel Change wine produced (25UP) from the 50 OP rectified sprite of
1000 liters.
b) Find out amount of Excise duty if 75% of production is discharged from the
Factory for sales.
c) Find out amount of Excise duty if 90% of production is discharged from the
Factory for sales.
d) What is the rate of tax applicable to Sumy distillery as per provision of Income
Tax Act 2058?

a) As per Excise Directive 2068, LP (London proof) means the strength of clean ethanol in
London proof, Quantity of pure ethanol per liter is called London Proof Liter (LPL). LP
liter means 57.06% strength of clean ethanol. UP means the liquor containing less
strength than London proof. OP means the liquor containing more than strength than
London proof.
We have,
LPL=(100+OP)/100* Q
LPL=(100+50)/100*1000
LPL=1500
Volume in 25 UP=(100*1500)/(100-25)
=2000 Liters
The actual output can be produce from 50 OP rectified sprite of 1000 liters of 25 UP is
2000 liters.
b) Calculation of Volume:
Volume is 1200 liters of 25UP
Volume of output V=100*LPL/(100-25)
Or 1200=100*LPL/(75)
Therefore, LPL= 900 liters
Rate per LPL is 680

Excise duty 75% of production is discharged from the Factory for sales:
Excise duty is= 900*75%*680=459,000
c) Excise duty 90% of production is discharged from the Factory for sales.
Excise duty is= 900*90%*680=550,800
d) As per section 2(2) of schedule 1 of Income Tax Act 2058 the applicable tax rate for
liquor producer is 30%. But schedule 1 section 1 of Income Tax Act 2058 describes the
applicable rate for individuals. As per section 2(o) Individual means a natural person and
the term denotes, for the purpose of this act, any proprietorship firm whether registered or
unregistered owned by the person, if any, and a couple making an election as single
natural person under section 50. So applicable tax rate is as per provision of section 1 of
schedule 1 of Income Tax Act 2058.
23. Question no 23.
Email correspondent between Excellent Warehouse operator and XYZ Pvt. Ltd.
From: Finance Manager of XYZ Pvt.Ltd
To: Excellent Warehouse operator
GaddaChauki Customs Office Mahendranager
Subject: Claim of Damage Goods of NPR.1,500,000

Respect Sir,
―We have kept in your warehouse 10,000 liter of Sprite custom code (2207.20.00) in 1st
November 2016. In Febuary 20 2017 our representative visited in your warehouse we
have shortage of 1000 liter of sprite due to mishandling by warehouse representative. The
cost per liter of sprite is NPR. 1,100 but the present market price per liter is NPR 1,500.
With considering the market price please make arrangement for payment of NPR.
1,500,000 our claim due to you lost of 1000 liter of sprite in your warehouse.‖
Thank you.
Finance Manager XYZ Pvt. Ltd.
Email:
Reply over Claim by XYZ Pvt. Ltd.
From:Excellent Warehouse operator
GaddaChauki Customs Office Mahendranager
To Finance Manager of XYZ Pvt.Ltd.
Sir, ―goods kept in warehouse should have been cleared within 60 days from the date of
goods entered into warehouse and therefore no claims can be entertained by your
compnay.‖
Thank you.
The applicable customs duty is per liter NPR 30 as per Finance act 2073.
As consultant of the warehouse operator, provide advice in the following issues with
stating the relevant provision of Customs Duty Act.
a) The argument of the warehouse operator is correct?

b) The amount claimed of Sprite by the XYZ is correct?
c) How much amount has to be paid by the warehouse operator to loss of Sprite to XYZ?
d) Explain the provision of customs duty in these issues.
a) As per the Rule 32 of Customs Rules 2064, the goods can be kept in the warehouse for a
maximum of 90 days. However, in case of hazardous goods or goods of perishable nature
or not fit for keeping in warehouse or due to lack of space the goods cannot be kept until
the maximum time allowed for keeping into warehouse, the customs officer will notify
the owner to clear the goods within specified time. In the above case, the goods are not of
perishable nature, the maximum of 90 days is available with the XYZ to clear the goods.
As such, the argument of the warehouse operator is not correct.
b) As per Rule 56 of Customs Rules 2064, the amount that can be claimed in case of
damage is the value of the goods as mentioned in the Invoice plus 5% additional amount.
So claimed by XYZ is not in line with customs rules. ( i.e 1000 liters and per liter is 1100
plus % addition of this invoice price)
c) The Excellent Warehouse operator has to pay to XYZ the following amounts:
Lost Per liter cost Total cost

1,000 1,100 1,100,000
add 5% of invoice price 55,000
Total claimed payable 1,155,000
d) As per Rule 56(3) of the Customs Rules 2064, the private warehouse operator has to pay
applicable customs duty to the customs office with 7 days from the date of payment of
claims to the owner of the goods. In this case The Excellent Warehouse operator shall be
paid customs duty NPR. 30 per liter of 1000 liters i. e NPR. 30,000.
24. Question no. 24
a) What are the relevant provisions applicable to Tax Invoice under VAT Act 2052? What
are the mandatory provisions to be complied with while issuing a VAT Invoice by the
registered person?
b) What are the provisions applicable to suspension of an excise license under section 9ka of
Excise Act, 2058?
a) As per Rule 17 of Value Added Rule 2053, Tax Invoices related provision are in
supplying any goods or service by a registered person, he shall give tax invoices to the
recipient, in the format as set forth in Schedule5 and 5a. The type, size, model and branch
of goods should be mention on issuing such invoice. Tax invoice pursuant to the
description mention in schedule 5a should be issued on sales of goods or service under
subsection 7 of section 14 of Vat act 2052. Tax invoice shall be written clearly and
conspicuously on the front page of the invoice to be given to the recipient. Such tax
invoices shall be prepared in three copies, and the original copy shall be given to the
recipient, the second copy to be separately recorded so that it can be produced as and
when asked for by the Vat office and the third copy be recorded by the registered person
for the purpose of his transaction.
In additional to above rule 18 of Value added Tax rules 2053 stated the provision
applicable to Abbreviated Tax Invoices and rule 18a provides provision for invoice issue
from cash machine or computer software.
Section 14 of Value Added Act 2053 stated the provision for invoices to be issued except
otherwise prescribed. Rule 19 of Value Added Rule 2053 stated that a person who carries
out transactions of used goods of a value exceeding ten thousand rupees, for the purpose
of sub-section (1) of Section 14 of the Act, need not issue a tax invoice in such cases
where the selling price is less than the buying price of the goods supplied by him.
b) As per Section 9ka of Excise Act, 2058, under the following conditions an excise license
could be suspended:
 In case the licensee has stopped dealing in excisable items, within 15 days of such
decision, it should apply for suspension of the license to an excise officer stating
the reason for it.
 On enquiry, if the excise officer thinks proper, he may allow the suspension of the
 license for the required period. In either case, he should inform the decision to the
 licensee within 30 days of the application received.
 In case the suspension is allowed, the licensee is not required to submit the excise
return to be submitted under section 10ka of the Act from the month coming after
the month of suspension.
In case of suspension, the licensee is not required to get its excise license
renewed, as required under Section 9, during the entire period of suspension.
25. Question no. 25.
Define Demurrage as per Customs Act, 2064? State the relevant applicable provisions to
demurrage of Custom Rule 2064 and Customs Act 2064.
Calculate demurrage payable on delivery of laptop in the following case;
Ekira is a PhD student in top university of United States of America. Ekira brother Mr.
Yeklabya demand laptop which she sends through International Courier service provider
consignment and it arrived in Bhairawa Custom office on 25 November 2016 but the
brother is unable to take consignment on timely. On 2nd March 2017 brother took delivery
laptop from the custom office.
Product details
MacBook Pro 13-inch and Invoice Price $1799
 Touch Bar and Touch ID

 13.3-inch (diagonal) LED-backlit Retina display
 2.9GHz or 3.1GHz dual-core Intel Core i5 or 3.3GHz dual-core Intel Core i7 processor
Turbo Boost up to 3.6GHz
 Up to 10 hours battery life
 Up to 1TB SSD
 Force Touch trackpad
 3.02 pounds
 Weight 3.5 Kg
Applicable Customs duty is 30% and exchange rate on customs clearance is NPR. 107.02
per US$.
As per section 2(ee) of Customs Act 2064 "demurrage" means the charge payable to the
Government of Nepal by the exporter or importer of goods if such exporter or importer
fails to take delivery of such goods stored at the customs godown run by the Customs
Office within the prescribed time limit.
As per section 72 of Customs Act 2064 state the following provision related to
demurrage;
(1) If the owner of goods stored in a customs godown operated by the Customs Office
does not get clearance and get delivery of such goods within the prescribed time limit,
demurrage shall be charged as prescribed. Provided that no demurrage shall be
charged in the case of those goods which could not be cleared by the Customs Officer
because of confusion about the valuation, classification of goods or for other reason.
(2) Notwithstanding anything contained in sub-section (1), if there is a reasonable ground
for remitting demurrage chargeable on any goods because of the occurrence of any
special circumstance or condition, the prescribed authority may make full or partial
remission, as prescribed.
In additional to above rule chapter 11 of Custom Rule 2064 provide provision related to
arrangement for demurrage. This chapter describes in rule 50 arrangement for demurrage
which are:
(1) No demurrage shall be charged for seven days from the date on which goods are
stored in the customs office operated warehouse.
(2) In case goods are not cleared w ithin the time limit as referred to in Sub-rule (1)
the demurrage shall be charged from the eighth day at a rate as referred to in
Schedule-9. The demurrage shall not be more than the customs value of goods.
In addition to this rule 52 provide the provision relate to remission for the demurrage
provisions are;
(1) If the owner of the goods has reasonable ground for the remission of the
demurrage, the owner may apply for the remission with the e evidence and documents
to proof the claim to the chief of the customs office.
(2) The Chief of the customs office may decide in writing along with the reasons
thereof subject to the provisions as provided in Sub-rule (3) and (6) to grant remission
from demurrage either partially or in full in respect of goods to be exported or
imported, in case he/she is satisfied that there exist specific reasons for granting such
remission.
(3) In case of remission of the demurrage the follow ing officers may grant remission up
to the following amount:
a)Up to Twenty Five Thousand Rupees if non-gazetted staff is the chief of the customs
office; b)Up to One Hundred Thousand Rupees if third class gazetted officer is the
chief of the customs office;
c)Up to Three Hundred Thousand Rupees if First or Second class gazetted officer
is the chief of the customs office.
(4) If the chief of the customs office is satisfied that the remission shall be granted over
and above the amount within his/her authority, the chief shall write to the Director
General with his/her recommendation along with the concerned documents including
application made there for pursuant to Sub-section (1).
(5) Upon conducting an enquiry into the documents pursuant to Sub- rule (4), if the
Director General is satisfied that either partially or in full remission shall be granted,
he/she may approve or may instruct the chief of the customs office accordingly.
(6) After the approval from the Director General pursuant to Sub- rule (4), the chief of
the customs office may grant the amount of remission.
As per above provisions when goods are not cleared within 7 days from date of goods
entered into warehouse; demurrage shall be levied from 8th day to date of good clearance
from custom office. Such changes should not exceed the custom value of the goods and
shall be levied as per Annexure 9.
Statement of demurrage payable to custom office
Date of good entered into godown: 25.11.2016

Good to be cleared date: 02.12.2016
Good clearance date: 02.03.2017
Clearance delayed days 3 months or 90 days
Period Demurrage rate Calculation NPR.

Up to 30 days 0.40 per kg per day 3.5 kg * 30 days * 0.40 42.00
30 – 60 days 0.80 per kg per day 3.5 kg * 30 days * 0.80 84.00
Above 60 days 1.20 per kg per day 3.5 kg * 30 days * 1.20 126.00
Total Demurrage payable to custom office 252.00
Mr. Yeklabya shall have to pay demurrage of NPR. 252 to custom office for clearance of
laptop and custom duty is higher the demurrage charge so demurrage charge is
applicable.
26. Question no. 26

a) State the relevant provision for place and time of supply under Valued added Tax Act
2052 and valued added rules 2053.
b) What are the orders that a tax payer can ask the Director General of Inland Revenue
Department for administrative review?
Answer to question 26
a) As per section 6 of Value Added Tax Act 2052, place and time of supply means, for the
purpose of assessment and collection of tax under this Act, the determination of the fact
whether the supply of any goods or services has taken place within or outside of the
Kingdom of Nepal shall be as prescribed.
The supply of any goods or services shall be considered to have taken place at the
earliest time of the following times:
(a) The time supplier issued an invoice
(b) In the case of the supply of goods, when the recipient removes or takes possession
of the goods from the supplier's transaction place;
(c) In the case of the supply of services when the services are provided; and
d) When the supplier receives a consideration for goods or services
Clarification: for the purpose of this clause, receipt (of service) will be deemed on the
following situation; a) Copy right, patent, licenses, trademark, and similar rights;
b) Advertisement service
c) technical service , engineering service , service of technical service provider , legal
service, accounting service , data and data processing service, information service and
similar service;
d) Providing service under subsection (1) or accepting an obligation or contract or
exercising partly or wholly of the contract or conducting a business activity using such
right;
e) Insurance or reinsurance service except the service of safe deposit facility.
The following time shall be considered as the time of supply in the following cases:
(a) In the case of services which are continuously provided, namely,
telecommunication services or similar other public services, when the invoice is issued;
(b) Where there is a contractual provision for paying partially the value of goods or
services in more than one day on an installment basis, the supply time shall be the
earliest day on which the payment is made or the day on which the payment is to be
made according to the contract;
(c) In the case of goods or service which are so used as not to be allowed an offset
under this Act, the time when such Goods or Services are used;
This section additional stated that in the case of a transaction for which more than one
provisions of above is applicable at once, the supply time shall be as prescribed by the
Director General on an objective basis.
In addition to above section provision Rule chapter 3 stated that provision for place and
time of supply. According to rules 15 of Value Added Tax Rule 2053, determination of
the Place of Supply of Goods: The following places shall be deemed to be the place of
supply of goods:-
(a) In the case of movable goods transferred by sale, the place where such goods were
sold or transferred,
(b) In the case of any immovable goods whose location can't be transferred even if their
ownership is changed, the place where such goods are located,
c) In the case of imported goods, the customs point in the Kingdom of Nepal through
which such goods are imported into the Kingdom of Nepal,
(d) In case any producer or vendor supplies the goods to himself, the place where the
producer or vendor of such goods resides.
In rule 16 of value added Tax Rule 2053, the place of supply of a service shall be the
place where the benefit of that service is received.
b) The orders that the Director General can review according to Section 114(1) are as
follows:
i. Advance ruling by the department under Section 76.
ii. Order or decision as per Section 90(8).
iii. Estimate by the department of the tax to be paid by a person under Section 95(7).
iv. Decision to require any person to submit return of income under Section 96(5) or 97.
v. Decision of the department on the application under Section 98 for time for Submission
of return of tax.
vi. Any assessment of tax payable under Section 100 or 101 for any income year or
assessment of any fee or interest under Section 122.
vii. Any order of the department to a receiver of payments to appropriate a certain amount
as receivable by any person.
viii. Any order under Section 109(1) to direct any person owing money to the tax payer in
default to pay the amount to the department.
ix. Any order under Section 110(1) to deposit any tax payable by a resident person.
x. Decision of the department on the application for refund of tax under Section 113(5).
xi. Any decision on application for extension of time under Section 115(3) for filing of
petition against the order quoted above.
Advanced Cost and Management Accounting
Activity Based Costing Vs. Target Costing
1. AML Ltd. is engaged in production of three types of ice-cream products: Coco, Strawberry and
Vanilla. The company presently sells 50,000 units of Coco @ Rs25 per unit, Strawberry 20,000
@ Rs20 per unit and Vanilla 60,000 units @ Rs15 per unit. The demand is sensitive to selling
price and it has been observed that every reduction of Re.1 per unit in selling price increases the
demand for each product by 10% to the previous level. The company has the production
capacity of 60,500 units of Coco, 24,200 units of strawberry and 72,600 units of Vanilla. The
company marks up 25% on cost of the product.
The company management decides to apply ABC analysis. For this purpose it identifies four
activities and the rates as follows:
Activity Cost Rate

Ordering Rs. 800 per purchase order
Delivery Rs. 700 per delivery
Shell stocking Rs. 199 per hour
Customer support and assistance Rs. 1.10 per unit sold.
The other relevant information for the products is as follows:
Coco Strawberry Vanilla

Direct Material per unit (Rs.) 8 6 5
Direct Labour per unit (Rs.) 5 4 3
No. of purchase orders 35 30 15
No. of deliveries 112 66 48
Shelf stocking hours 130 150 160
Under the traditional costing system, store support costs are charged @ 30% of prime cost. In
ABC these costs are coming under customer support and assistance.
Required:
(i) Calculate target cost for each product after a reduction of selling price required to achieve
the sales equal to the production capacity.
(ii) Calculate the total cost and unit cost of each product at the minimum level using traditional
costing.
(iii) Calculate the total cost and unit cost of each product at the maximum level using activity
based costing.
(iv) Compare the cost of each product calculated in (i) and (ii) with (iii) and comment on it.
Solution:
(i) Calculation of Target cost of Each product

A. Production Capacity 60,500 24,200 72,600
B. Selling price after reduction of Rs2 Rs 23.00 Rs 18.00 Rs 13.00
C. Less: Mark up @ 20% sales Rs 4.60 Rs 3.60 Rs 2.60
D. Target Cost Rs 18.40 Rs 14.40 Rs 10.40
(ii) Calculation of Total cost and Unit Cost of Each Product [Using Traditional
Costing]

A. Maximum production capacity 60,500 24,200 72,600
B. Direct Material Cost/Unit 8 6 5
C. Direct labour Cost/Unit 5 4 3
D. Total Direct Material Cost [A×B] 4,84,000 1,45,200 3,63,000
E. Total Direct Labour Cost [A×C] 3,02,500 96,800 2,17,800
F. Prime cost [D+E] 7,86,500 2,42,000 5,80,800

G. Add: stores support cost
[prime cost × 30%] 2,35,950 72,600 1,74,240
H. Total cost [F+G] 10,22,450 3,14,600 7,55,040
I. Cost per unit [H/A] Rs 16.90 Rs 13.00 Rs 10.40
(iii) Calculation of Total Cost and Unit Cost of Each Product [Using Activity Based
Costing]
A. Maximum production capacity 60,500 24,200 72,600
B. Direct material cost/unit 8 6 5
C. Direct Labour Cost/Unit 5 4 3
D. Total Direct Material Cost [A×B] 4,84,000 1,45,200 3,63,000
E. Total Direct Labour Cost [A×C] 3,02,500 96,800 2,17,800
F. Prime cost [D+E] 7,86,500 2,42,000 5,80,800
G. Total Overheads
Cost of overheads @ Rs 800
Per purchase order 28,000 24,000 12,000
Cost of delivery @ Rs 700 78,400 46,200 33,600
Per delivery
Shelf stocking @ Rs 199 per hour 25,870 29,850 31,840
Customer support and Assistance
@ Rs 1.10 per unit sold 66,550 26,620 79,860
1,98,820 1,26,670 1,57,300
H. Total Cost [F+G] 9,85,320 3,68,670 7,38,100
I. Cost per unit [H/A] Rs 16.29 Rs 15.23 Rs 10.17
(iv) Comparison

Target cost/unit Rs 18.40 Rs 14.40 Rs 10.40
Traditional cost/unit Rs 16.90 Rs 13.00 Rs 10.40
ABC cost/unit Rs 16.29 Rs 15.23 Rs 10.17
Comment: Both the costs Traditional Both the costs
are with the cost is within are within the
range of the the range of range of
Target Cost Target Cost but Target Cost
ABC Cost
exceeds the
Target Cost
Marginal Costing-Price Mix
2. ICRA Ltd. Manufactures and markets two products A and B, the demand in the market of which
fluctuates with the price quoted. As a result of the deliberations of its recent sales conference the
following data were agreed upon as a working basis:
Product A Product B
Selling price per unit 32 30 28 22 20 19
(Rs)
Expected demand per 900 1,000 1,500 1,600 2,000 3,000
Month (Nos.)
8 labour hours are required to produce product A and 4 labour hours to produce product B and
the maximum capacity of the factory is restricted to 20,000 labour hours per month. The
variable cost per unit for product A and product B are 20 and Rs 14 respectively.
Fixed Overheads are Rs 32,400 per quarter.
You are required to compute the possible combinations and arrive at a proper price mix for
maximum profitability.
Solution:
Calculation of Total Contribution and Total Labour Hours of Each Product at Different
Prices
Product Product A Product B
A. Expected Demand 900 1,000 1,500 1,600 2,000 3,000
B. Selling Price per unit (Rs) 32 30 28 22 20 19
C. Variable Cost per unit (Rs) 20 20 20 14 14 14
D. Contribution per unit (Rs) [B- 12 10 8 8 6 5
C] 8 8 8 4 4 4
E. Labour Hours per unit 10,800 10,000 12,000 12,800 12,000 15,000
F. Total Contribution (Rs) [A×D] 7,200 8,000 12,000 6,400 8,000 12,000
G. Total Labour Hours required
[A×E]
Total Contribution and Total Labour Hours of both the products at all possible price
Combinations
Products A Products B Total Contribution Labour Hrs.

Selling Price (Rs) Selling Price (Rs) (Rs) Required
32 22 23,600* 13,600**
32 20 22,800 15,200
32 19 25,800 19,200
30 22 22,800 14,400
30 20 22,000 16,000
30 19 25,000 20,000
28 22 24,800 18,400
28 20 24,000 20,000
28 19 27,000 24,000
*(Rs 10,800 + Rs 12,800),**(7,200 + 6,400)

Recommendation: The above computations show that the maximum contribution of Rs 25,800
is possible at 19,200 labour hours. Therefore, profitable price mix is A Rs 32 and Rs 19.
Transfer Pricing
3. The two manufacturing divisions of a company is organized on profit Centre basis. Division X
is the only source of a component required by Division Y for their product ‗P‘. Each unit of P
requires one unit of the said component. As the demand of the product is not steady, orders for
increased quantities can be obtained by manipulating prices.
The manager of Division Y has given the following forecast:
Sales per day (units) Average price per unit of P (Rs)

5,000 393.75
10,000 298.50
15,000 247.50
20,000 208.50
25,000 180.00
30,000 150.75
The manufacturing cost (excluding the cost of the component from Division X) of P in Division
Y is Rs. 14,06,250 on first 5,000 units and Rs. 5‘625 per unit in excess of 5,000 units.
Division x incurs a total cost of Rs. 5,62,500 per day for an output upto 5,000 components and
the total cost will increase by Rs. 3,37,500 per day for every additional 5,000 components
manufactured. The manager of Division X has set the transfer price for the component at Rs. 90
per unit to optimize the performance of his Division.
Required:
(i) Prepare a divisional profitability statement at each level of output, for division X and Y
separately;
(ii) Find out the profitability of the company as a whole at the output level where;
(a) Division X‘s net profit is maximum:
(b) Division Y‘s net profit is maximum:
(iii) Find out at what level of output, the company will earn maximum profit, if the company is
not organized on profit Centre basis.
Solution
(i) Statement of Profitability of Division X
No. of Components Transfer price for the Total Cost of Profit/(Loss)

component to Components
Department Y @ Rs. Rs. Rs.
(a) 90 per unit (b) (c) (d) = (b) –(c)
5,000 4,50,000 5,62,500 (1,12,500)
10,000 9,00,000 9,00,000 -
15,000 13,50,000 12,37,500 1,12,500
20,000 18,00,000 15,75,000 1,25,000
25,000 22,50,000 19,12,500 3,37,500
30,000 27,00,000 22,50,000 4,50,000
Statement of Profitability of Division Y
No. of Sales Components Manufacturing Total Cost Profit/Loss

Components Revenue Cost Cost in
Average (Transfer Division Y
Price basis Price) to
Deptt. Y
(a) Rs. Rs. Rs. Rs. Rs.
(b) (c) (d) (e) = {(c) +(d)} (f)={(b)-(e)}
5,000 19,68,750 4,50,000 14,06,250 18,56,250 1,12,500
10,000 29,85,000 9,00,000 16,87,500 25,87,500 3,97,500
15,000 37,12,500 13,50,000 19,68,750 33,18,750 3,93,750
20,000 41,70,000 18,00,000 22,50,000 40,50,000 1,20,000
25,000 45,00,000 22,50,000 25,31,250 47,81,250 (2,81,250)
30,000 45,22,500 27,00,000 28,12,500 55,12,500 (9,90,000)
(ii) Profitability of the company as a whole
(a) At 30,000 units level, at which Division X‘s net profit is maximum
Rs.
Profit of division X
4,50,000
Profit of division Y
(9,90,000)
Operating profitability / (Loss) of the company
(5,40,000)
(b) At 10,000 units level, at which Division Y‘s net profit is maximum
Rs.
Profit of division X
NIL
Profit of division Y
3,97,500
Operating profitability of the company
3,97,500
(iii) Profitability of the company, if it is not organized on profit Centre basis
No. of Sales Cost Manufacturing Total Cost Profit/Loss

Components Revenue on Component Cost in
average basis division X division Y
Rs. Rs. Rs. Rs. Rs.
(a) (b) (c) (d) (e)={(c)+(d)} (f)={(b)-(e)}
5,000 19,68,750 5,62,500 14,06,250 19,68,750
10,000 29,85,000 9,00,000 16,87,500 25,87,500 3,97,500
15,000 37,12,500 12,37,500 19,68,750 32,06,250 5,06,250
20,000 41,70,000 15,75,000 22,50,000 38,25,000 3,45,000
25,000 45,00,000 19,12,500 25,31,250 44,43,750 56,250
30,000 45,22,500 22,50,000 28,12,500 50,62,500 (5,40,000)
The level of output, the company will earn maximum profit, if the company is not recognized on
profit Centre basis is 15,000 components.
Just in Time Purchasing
4. X td. is considering JIT implementation in 2018. The company‘s annual demand for product
XJ-200, a surgical scalpel, is 20,000 units. If company implements JIT, the purchase price of the
scalpel is expected to increase from Rs 10 to Rs 10.05 because of frequent deliveries by
Morrison Manufacturing, Inc. Morrison enjoys a sterling reputation for quality and reliability.
Ordering costs will remain at Rs 5 per order. However, the annual number of orders placed will
be 200 instead of the current 20. As a result of frequent ordering, Company‘s order size will
decrease proportionally. Company‘s required rate of return on investment is 20%. Other
carrying costs (insurance, materials handling and so on) will remain at Rs 4.50 per unit.
Currently hardest has no stock out costs. Lower inventory levels from implementing JIT will
lead to Rs 3 per unit stock out costs on 100 units during the year.
Required: Calculate the estimated dollar savings (Loss) for X Ltd. from the adoption of JIT
purchasing.
Solution:
Statement of Comparative Cost (Relevant Cost)
Particulars Present System JIT System

Rs. Rs.
Purchase Cost 2,00,000 (10 × 20,000) 2,01,000 ( 10.05 × 20,000 )
Ordering Cost 100 ( 5 × 20 ) 1,000 ( 5 × 200 )
Storage Cost 2,250 ( 4.50 × 500 ) 220 ( 4.5 × 50 )
Stock out Cost - 300 ( 3 × 100 )
Opportunity Cost 1,000 100.50
2,03,350 2,02,625.50
Decision: It is better to implement Just In Time due to cost saving Rs 724.50 (2,03,350–
2,02,625.50)
Working Note:
Particulars Present JIT Analysis

Purchase cost 10 10.05
Order 20 200
Required (Unit) 20,000 20,000
Order size 1,000 100
Average stock ½ × 1,000 = 500 ½ × 100 = 50
Carrying cost 4.5 4.5
Working capital blocked 5,000 (500 × 10) 502.5 (50×10.05)
Opp. Cost on WC blocked 1,000 (5,000 x 20%) 100.50 (502.5×20%)
Target Costing
5. X limited undertakes market research for clients. A typical study takes three months and uses
two types of staff as follows:
Types of staff Proportion of variables costs incurred in

used Month Month Month Total
1 2 3
Research 40% - 60% 100%
Tabulating - - 100% 100%
Research staff and tabulating staff account for 80 per cent and 20 per cent respectively of the
variable cost of a study.
When quoting a price for a study X Ltd. adds the following contribution on the estimated
variable cost: Research Staff 112.50 percent of Variable Cost. Tabulating Staff 50 percent of VC.
In April X Ltd. Started work on order of Rs 30,000 and In May Rs 40,000 and In June Rs
23,000. For calculating of monthly income the value of an order is divided on the basis of first
month 34 percent, second month 6 percent and third month 60 percent, X Ltd. Target
contribution is 10 percent above fixed cost which is Rs 16,000 per month.
Required: Calculate the value of additional orders which should be received, by X Ltd. for work
to start in June to achieve the target contribution in June.
Solution:
Statement of contribution to be achieved in June
Particulars Rs.
For April order (Rs 30,000×26%) 7,800
For May order (Rs 40,000× 6%) 2,400
For June order (Rs 23,000×18%) 4,140
Present Contribution 14,340
Target Cost (Rs 16,000 + Rs 1600) 17,600
Deficit 3,260
Working Notes:
(i) Let the variables cost of study be Rs 100, then VC of Research staff = Rs 80 and VC of
Tabulating staff = Rs 20
Research Staff = (Rs 80 + 1.125%×Rs80) = 170
Tabulating Staff = (Rs 20 + 50% × Rs 20) = 30
Total Selling Price 200
It indicates overall margin in 50% on sales over 3 months.
(ii) Statement of Allocation of Income
Month I II III Total

A. Sales Value 68 12 120 200
B. Variable Cost: 32 - 48 80
Research Staff - - 20 20
Tabulating Staff 32 Nil 68 100
C. Profit [A-B] 36 12 52 100

D. % of Selling Price of Rs 200 18% 6% 26% 50%
Learning Curve
6. Your company has been approached by a customer to supply four units of a new product made
to the customer‘s individual specification. The company experiences a 90% learning rate. The
estimated labour time for the first unit of this product is 150 hours and the company‘s direct
labour cost Rs5 per hour. Estimate the labour cost for this order. (b) After receiving the first
order, if the customer places repeat order, what will be the labour cost for the second order? (c)
If the customer had ordered all eight units at the same time, calculate the labour cost per unit for
the combined order.
Solution: (a)
Units produced Cumulative Average time per unit Total labour time
(1) Production (2) (hrs.) (4) = (2) x (3)
(3)
1 1 150.0 150.0
1 2 135.0 (90% of 150) 270.0
2 4 121.5 (90% of 135) 486.0
Estimated labour cost for the order = 486 x Rs5 = Rs2,430
Labour cost per unit = Rs607.50
(b) The first order relates to four units.

The repeat order will be for another four units
Thus, average labour hours for 8 units will be: hrs.
Average time per unit = 90% of 121.5 = 109.35
Average time for 8 units = 109.35 x 8 = 874.80
Less: time spent on this order 486.00
388.80
Total labour cost for second order = 388.8 x Rs5 = 1,944 or Rs486 per unit, i.e., Rs1,944÷4.
(c) Labour cost of combined order
Units produced Cumulative Average time per Total labour time

(1) Production unit (hrs.) (4) = (2) x (3)
(2) (3)
1 1 150.0 150.0
1 2 135.0 270.0
2 4 121.5 486.0
4 8 109.35 874.8
Estimated labour cost for the order = 874.8 x Rs5 = Rs4,374
Estimated labour cost per unit = (4,374÷8) =Rs546.75
Assignment
7. A city corporation has decided to carry out road repairs on 4 main roads in the city. The
government has agreed to make a special grant of Rs50 lacs towards the cost with the condition
that repairs should be carried out a lowest cost. Five contractors have sent their bids. Only road
will be awarded to one contractor. The bids are given below:
Cost of Repair (Rs in lacs)
Road R1 R2 R3 R4
C1 9 14 19 15
Contractors C2 7 17 20 19
C3 9 18 21 18
C4 10 12 18 19
C5 10 15 21 16
Ans:
(i) There are 5 rows and 4 columns hence insert a dummy column R5.
1. C2 has been allocated to R1.
2. C4 has been allocated to R2. Hence the assignment is restricted to
R3 R4 R5
C1 19 15 0
C3 21 18 0
C5 21 16 0
Column Minimum
R3 R4 R5
C1 0 0 0
C3 2 3 0
C5 2 1 0
R3 R4 R5
C1 0 0 1
C3 1 2 0
C5 1 0 0
Hence C1 has been allotted to R3, C3 to R5 and C5 to R4.
Hence the Minimum cost is = 7+12+19+16+0 =54lacs
(ii) C3 should reduce 2 lacs for R1, 6 lacs for R2, 2 lacs for R3 and 2 lacs for R4
Minimum Discount = 2 lacs for any of R1, R3, R4
(iii) Minimum rate of Discount (54 - 50) = 4/54 = 7.41%
Simulation
8. In a travel agency, servicing clients was observed to follow:
Time to deal with clients minutes 2 4 6 10 14 20 30
Probability .05 .10 .15 .30 .25 .10 .05 = 1.0
Time between arrival minute 1 8 15 25
Probability 0.2 0.4 0.3 0.1 = 1.0
(a) Simulate the arrival of 10 clients and their servicing with the following random numbers.
Arrival pattern: 03, 47, 43, 73, 86, 36, 96, 47, 36, 61.
Service pattern: 63, 71, 62, 33, 26, 16, 80, 45, 60, 11
(b) Calculate the number of the clients served in a week of 6 days, each day is about 8 hours.
Solution:
Table 1: Time to deal with clients
Time (min) Probability Cum Probability Assigned numbers

2 0.05 0.05 00-04
4 0.10 0.15 05-14
6 0.15 0.30 15-29
10 0.30 0.60 30-59
14 0.25 0.85 60-84
20 0.10 0.95 85-94
30 0.05 1.00 95-99
Table 2: Time between arrival
Time (min) Probability Cum probability Assigned numbers

1 0.2 0.2 00-19
8 0.4 0.6 20-59
15 0.3 0.9 60-89
25 0.1 1.0 90-99
Table 3: Work sheet (time in maturity) Time
Client Time between Arrival In Time Service Time Out Waiting Time
arrival (Table2) Time (Table 1) Time
1 1 1 1 14 15 -
2 8 9 15 14 29 6
3 8 17 29 14 43 12
4 15 32 43 10 53 11
5 15 47 53 6 59 6
6 8 55 59 6 65 4
7 25 80 80 14 94 -
8 8 88 94 10 104 6
9 8 96 104 14 118 8
10 15 111 118 4 122 7
For 10 clients, service time = 122 minutes = 2 hours 2 minutes

40 clients can be served in a day of extended day of 8 hrs. and 8 minutes.
According to simulation in 6 days a week, No. of clients may be served = 6x40 = 240.
Marginal Costing
9. A Chinese soft drink company is planning to establish a subsidiary company in Nepal to
produce mineral water. Based on the estimated annual sales of 40,000 bottles of the mineral
water, cost studies produced the following estimates for the Nepal subsidiary:
Total Annual costs Percent of total
Annual Cost which is variable
Material 2,10,000 100%
Labour 1,50,000 80%
Factory Overheads 92,000 60%
Administration Expenses 40,000 35%
The Nepal Production will be sold by manufacturer‘s representatives who will receive a
commission of 8% of the selling price. No portion of the Chinese office expenses is to be
allocated to the Nepal subsidiary.
You are required to: (i) Compute the selling price per bottle to enable the management to realize
an estimated 10% profit on sale proceeds in Nepal. (ii) Calculate the break-even point in Rupee
sales as also in number of bottles for the Nepal subsidiary on the assumption that the selling
price is Rs. 14 per bottle.
Solution:-
(i) Computation of Selling Price per bottle
Let the selling price per bottle be x

A. Selling price per bottle X
B. No. of bottles 40,000
C. Total Sales (AxB) 40,000 X
D. Less: Total Costs
Material 2,10,000
Labour 1,50,000
Factory Overheads 92,000
Adm. Expenses 40,000
Commission @ 8% of Sales 32,00 X 4,92,000 + 3,200 X
E. Profit (C-D) 40,000 X – (4,92,000 + 3200 X)
40,000 X – (4,92,000 + 3,200 X) = 10 % of 40,000 X (given)
32,800 X = 4,92,000 or, X= 4,92,000/32,800 = Rs.15 per bottle
(ii) Computation of Break Even Point

Total Per unit
A. No. of bottles 40,000
1
B. Selling price per unit (Rs.) 14
14
C. Total Sales Revenue (Rs.) (AxB) 5,60,000
14
D. Less: variable costs (Rs.)
Materials 2,10,000
5.25
Labour (80% of Rs. 1,50,000) 1,20,000
3.00
Factory Overhead (60% of Rs. 92,000) 55,200 1.38
Administration expenses (35% of Rs. 40,000) 14,000 0.35
Commission (Rs. 40 x 14,000 x 8%) 44,800
1.12
4,44,000
11.10
E. Contribution (Rs.) [C-D] 1,16,000
2.90
F. Fixed Costs (Rs.) 92,800
(Rs. 1,50,000 x 20%) + (Rs. 92,000 x 40%) + (Rs. 40,000 x 65%) = Rs.92,800
P/V Ratio = Sales – variable cost/sales x 100 = 5,60,000 – 4,44,000/5,60,000 x 100
= Rs.20.714%
Break Even point (in Rupees sales) = Fixed cost/P/V ratio = Rs.92,800/20.7142%
= Rs. 4,48,000
Break Even point (in Number of bottles) = Fixed Cost/Contribution per bottle
= Rs.92,800/Rs.2.90 = 32,000 bottles
Standard Costing
10. A company operate a standard cost system to control the variable works cost of its only product.
The following are the details of actual production, costs and variance for November, 2016.
Production and cost (actual)
Production………………………………………………….. 10,000 units
Direct Materials (1,05,000kg.)……………………… Rs 5,20,000
Direct labour (19,500 hrs.)…………………………… Rs 3,08,000
Variable Overheads………………………………………Rs 4,10,000
Cost Variances
Direct materials – Price………………………………Rs 5,000 (F)
Direct materials – usages……………………………..Rs 25,000(A)
Direct labour – Rate…………………………………..Rs 15,500(A)
Direct labour – Efficiency…………………………… Rs 7,500 (F)
Variable overheads……………………………………Rs 10,000 (A)
The cost Accountant finds that the original standard cost data for the product is missing from the
cost department files. The variance analysis for December, 2015 is held up for want of this data.
You are required to calculate:
I. Standard price per kg. of direct material.
II. Standard quality for each unit of output.
III. Standard rate of direct labour hour.
IV. Standard time for actual production.
V. Standard variable overhead rate.
Solution:
(i) Standard price per kg. of Direct Material

Material price variance = Standard Cost of Actual Quantity – Actual Cost
5,000 (F) = Standard Cost of actual Quantity – Rs 5,20,000
Standard cost of Actual Quantity = Rs5,20,000 + Rs5,000
= Rs 5,25,000
Standard Cost of Actual Quantity = Standard Price per kg. * Actual Quantity
5,25,000 = Standard Price per kg. * 1,05,000 kg.
Standard price per kg. = {Rs5,25,000/1,05,000kg}
= Rs 5
(ii) Standard Quantity for each unit output

Material Usage Variance = Standard Cost of Standard Quantity for
Actual Output – Standard Cost of Actual Quantity
25,000 (A) = Standard Cost of Standard Quantity for
Actual Output – Rs 5,25,000
Standard Cost of Standard Quantity for Actual Output
=Rs 5,25,000 – Rs25,000
= Rs 5,00,000
Standard Cost of Standard Quantity for Actual output

= Standard Price per kg.* Standard quantity for
Actual Output
Rs 5,00,000 = Rs 5 * Standard Quantity for Actual output
Standard Cost of Actual Output = [Rs5,00,000/Rs 5]
= Rs 1,00,000 kg.
Standard Quantity for each unit of output = [Rs100,000 kg./10,000 units]
= 10 kg.
(iii) Standard Rate of Direct Labour Hour
Direct Labour Rate Variance = Standard cost of Actual Time – Actual Cost
15,500 (A) = Standard cost of Actual Time – Rs3,08,000
Standard cost of Actual Time = Rs3,08,000 – Rs15,500

= Rs2,92,500
Standard cost of Actual Time= Standard Rate per hr. * actual hrs.
Rs2,92,500 =Standard Rate per hr. * 19,500 hrs.
Standard Rate per hr. = [Rs2,92,500/19,500 hrs.] = Rs15
(iv) Standard time for Actual Production

Labour Efficiency Variance = Standard Cost of Standard Time for Actual Production
-Standard Cost of Actual Time
7,500 (F) = Standard Cost of Standard Time for Actual Production
- Rs 2,92,500
Standard Cost of Standard time for Actual Production = Rs2,92,500 + Rs7,500
= Rs 3,00,000
Standard Cost of Standard time for Actual Production = Standard Rate per hr. * Standard
Time for Actual Production
Rs3,00,000 = Rs15*Standard Time for Actual
production Standard Time for Actual Production =
[Rs3,00,000/Rs15]
= 20,000 hrs.
(iv) Standard Variable Overheads Rate
Variable Overhead Variance = Standard Variable Overheads for Production – Actual

Variable Overheads
10,000 (A) = Standard Variable Overheads for Production – Rs 4,10,000
Standard Variable Overheads for Production = Rs 4,10,000 – Rs 10,000
= Rs 4,00,000
Standard Variable Overheads for Production = Standard Variable Overheads Rate per Unit *
Actual Production (Units)
Rs 4,00,000 = Standard Variable Overheads Rate per Unit * 10,000 units
Standard Variable Overhead Rate per unit = [Rs 4,00,000/10,000units]
= Rs 40
Or
Standard Variable Overheads for Production = Standard Variable Overheads Rate per hr *
Standard hrs for Actual Production
Rs 4,00,000 = Standard Variable Overheads Rate per hr * 20,000 hrs
Standard Variable Overhead Rate per hr = [Rs4,00,000/20,000hrs]
= Rs 20
CPM/PERT
11. After 15 days of working the following progress is noted for the network of an erection job:
I. Activity 1-2, 1-3, and 1-4 completed as per original schedule.
II. Activity 2-4 is in progress and will be completed in 3 more days.
III. Activity 3-6 is in progress and will be needed 18 days more for completion.
IV. Activity 6-7 appears to present some problem and its new estimated time of
completion is 12 days.
V. Activity 6-8 can be completed in 5 days instead of originally planned for 7 days.
2 18 5
9 7 8
7
1 4
6 20
6 8
10 5
6
7
3 12 7
You are required to:
I. Updated the above diagram after 15 days of the start of work based on the
assumption given above.
II. Write down the critical path with total project duration
Solution:
(a) The new Formulation of the problem is as follows:
 Activities 1-2, 1-3 and 1-4 completed in 9 days, 10 Days and 6 days respectively
as per Original schedule.
 Activity 2-4 needs 9 days (15+3-9) instead of Original Schedule of 7 days.
 Activity 3-6 needs 23 days (15+18-10) instead of Original schedule of 12 days.
 Activity 6-7 needs higher duration of 12 days instead of Original planned 7 days.
 Activity 6-8 needs lesser duration of 5 days instead of Original planned 7 days.
 Activities 2-5, 3-4, 4-7, 5-7, 7-8 need 18 days, 5 days, 20 days, 8 days, 6 days
respectively as per Original schedule.
The updated network based on the above listed activities will be as follows:
18
2 5
9
9 8
7
1 4
6 20
3 6 8
10 5 12
6
23 5
Critical path: 1-3-6-7-8
(ii) Various Paths with Duration of updated network are as follows:
Path Duration
1-2-5-7-8 41
(9+18+8+6)
1-2-4-7-8 44
(9+9+20+6)
1-4-7-8 32
(6+20+6)
1-3-4-7-8 41
(10+5+20+6)
1-3-6-7-8 51
(10+23+12+6)
1-3-6-8 38
(10+23+5)
Critical Path is 1-3-6-7-8 with duration of 51 Days.

Linear Programming
12. In a chemical industry two products P and Q are made involving two operations. The production
of Q also results in by- product R. The product P can be sold at a profit of Rs3 per unit and Q at
a profit of Rs8 per unit. The by-product R has a profit of Rs2 per unit. Forecast show that upto 5
units of R can be sold. The company gets 3 units of R for each unit of Q produced. The
manufacturing times are 3 hrs per unit for P on each of the operation one and two and 4 hrs and
5 hrs per unit for Q on operation one and two respectively. Because the product R results from
producing Q, no time is used in producing R. The available times are 18 hrs and 21 hrs of
operation one and two respectively. The company desires to know that how much P and Q
should be produced keeping R in mind to make the highest profit.
Required:
Formulate LP model for this problem.

Solution:-
Let y1, y2 , y3 be the number of units produced of products P, Q and R respectively.
Objective function:
Then the profit gained by the industry is given by

Z = 3y1 + 8y2 + 2y3
Here is assumed that all the units of products P and Q are sold.
Condition-1
In first operation, P takes 3 hrs of manufacture‘s time and Q takes 4 hrs of manufacture‘s
time. Therefore, total number of hours required in first operation becomes-
3y1 + 4y2
In second operation, per unit of P takes 3 hrs of manufacture‘s time and per unit Q takes
5 hrs of manufacture‘s time. Therefore, the total number of hours based in second
operation becomes
3y1 + 5y2
Since there are 18 hrs available in first operation and 21 hrs in second operation, the
restrictions become
3y1 + 4y2 ≤ 18
3y1 + 5y2 ≤ 21
Condition-2:
Since the maximum number of units of R that can be sold is 5, therefore,
Y3 ≤ 5
Condition-3:
Further the company gets three units of by product R for every unit of product Q
produced, therefore
Y3 = 3y2
Now, the allocation problem of the industry can be finally put in the following linear
programming problem:
Maximize
Z = 3y1 + 8y2 + 2y3
Subject to the constraints:
3y1 + yx2 ≤ 18
3y1 + 5y2 ≤ 21
y3 ≤ 5
y3 = 3y2
y1, y2 , y3 ≥ 0
Marginal Costing-Decision making
13. Division X and Y are two divisions of XY Ltd., which operate as profit centres. Division X
makes and sells product X. The budgeted income statement of Division X, based on a sales
volume of 30,000 units, is given below:
Budgeted Income Statement of Division X
Particulars Rs In „000
Sales Revenue 6,000
Component purchase costs 1,050
Other variable costs 1,680
Fixed costs 480
Variable marketing costs 270
Fixed marketing overheads 855
Operating profit 1,665
The manager of Division X suggests that sales can be increased by 9,600 units, if the selling
price is reduced by Rs 20 per unit from the present price of Rs 200 per unit and that for this
additional volume, no additional fixed costs will be incurred.
Division Y makes a component Y which is sold outside at a price of Rs 50 per unit.
Division X presently uses a component which is purchased from outside at Rs 35 per unit. This
component is similar to component made by Division Y. Division Y can make this component
for Division X with a minor modification in specification which would cause reduction in direct
material cost for the Division Y by Rs 1.5 per unit and would require extra labour hour of 1 per
unit at the rate of Rs 1.5 per hour.
Further the Division Y will not incur variable selling marketing cost on units transferred to the
Division X. Division X‘s manager has offered to buy the component from Division Y at Rs
25.000 per unit. Division Y has the capacity to produce 85,000 units.
The current budgeted information of Division Y are as follows:
Number of units sold outside 60,000 units @ Rs 50 per unit, variable cost including material
and labour Rs 15 per unit, variable marketing cost Rs 3 per unit, operating profit Rs 12,00,000
and fixed overheads Rs 7,20,000.
Advise:
(i) Should the Division X reduce the selling price by Rs 20 per unit even if it is not
able to procure the component from Division Y at Rs 25 per unit?
(ii) Should the Division Y be willing to supply 39,600 units to Division X at Rs 25
per unit?
Support each of your conclusions with appropriate calculations.

Solution:
(i) Should Division x reduce the selling price by Rs 20 per unit?
Statement Showing „Impact of Selling Price Reduction
Particulars Rs.
Incremental Revenue
Additional Sales Revenue (9,600 units x Rs 180) 17,28,000
Loss of Revenue (30,000 units x Rs 20) (6,00,000)
Total (A) 11,28,000
Incremental Cost
Component Purchase Costs (9,600 units x Rs 35) 3,36,000
Other Variable Costs (9,600 units x Rs 16,80,000 / 30,000 units ) 5,37,600
Variable Marketing Costs (9,600 units x Rs 2,70,000 / 30,000 units) 86,400

Total (B) 9,60,000
Savings / (Loss) A) – (B) 1,68,000
Advice:
Above incremental analysis clearly indicates that the reduction of selling price by Rs 20 per unit
shall be accepted as it increases the profit of the concern by Rs 1,68,000.
(ii) Should the division Y will be willing to supply 39,600 units to Division X…?
Statement Showing „Minimum Average Transfer Price‟ per component

(39,600)
Particulars Rs
Variable Cost 15.00
Loss of Contribution* [14,600 units x (Rs 50 – Rs 15 – Rs 3)/39,600 units] 11.80
Transfer Price 26.80
(*) Division Y has surplus capacity to the extend of 25,000 units, for additional 14,600 units the
Transfer Price must consider the Division Y‘s Variable Costs of Manufacturing the Component
plus the Lost contribution Margin ( that will result losing outside sales).
Company‘s Perspective
Particulars Rs
Market Price per component 35.00
Relevant Cost per Transfer per component (from above) 26.80
Saving per component 8.20
Units 39,600
Total Savings 3,24,720
Advice:
It is not in the interest of the Division Y to transfer 39,600 units to Division X at price below the
Minimum Average Transfer Price based on Opportunity Cost. However, from the Concern‘s
Perspective, internal transfer between Division is beneficial as each unit to be transferred is
offering a saving of Rs 8.20.
Marginal Costing-Decision making –Key factor
14. XYZ Ltd. manufactures four products P, Q, R and S. The direct Cost of production are
estimated at:
P Q R S
Materials Rs. 36 Rs.38 Rs. 42
Rs. 24
Labour:
Assembly (at Rs. 4 per hr.) 8 12 16
16
Machinists (at Rs. 6 per hr.) 12 24 18
36
Total fixed costs are dependent on output levels, as follows:

Production (units) Total Fixed Costs
Upto 50,000 Rs. 4,00,000
50,001 to 75,000 5,00,000
75,001 to 1,00,000 6,00,000
The sales Director estimates that demand for their products in the next year will be as follows:
P Q R
S
Units 18,000 30,000 27,000 15,000
Selling price per units (Rs.) 68 90 91 94
The production Manager states that the capacity of existing machines is 2,10,000 hours per
annum, through this will be increased to 3,00,000 hours in two years time when new plant which
is currently on order will be delivered. Meanwhile, a local firm has offered to manufacture any
product on a sub-contract basis at the following prices:
P Rs. 63; Q Rs.80; R Rs.72; S Rs.82
Required:
(a) Advise the management to what extent the services of the sub-contractor should be utilized in
order to meet the expected demand of P, Q, R, S.
(b) Prepare a statement showing the profit you would expect if your advice is followed.
(c) What will be your advise if existing fixed cost are fully avoidable on sub-contracting?
Solution:-
Statement showing the contribution per unit and ranking of product if products are
manufactured
Particulars P Q R S
A. Sub-contract price (Rs.) 63 80 72 82
B. Less: Variable cost of in house manufacturing
Material 36 38 42 24
Labour - - - -
Assembly (at Rs. 4 per hr.) 8 12 16 16
Machines (at Rs. 6 per hr.) 12 24 18 36
Total variable cost 56 74 76 76
C. Contribution [A-B] 7 6 (4) 6
D. Hours per unit (Machinist) 2 hrs 4 hrs 3 hrs 6 hrs
E. Contribution per hour [C/D] 3.50 1.5 1
F. Ranking , if only, contribution per hour is considered I II III
Statement showing the Allocation of 2,10,0000 hours

A. Total hours available 2,10,000
B. Less: Hours utilized to produce 18,000 units of P [18000 x 2] (36,000)
C. Balance hours [A-B] 1,74,000
D. Less: Hours utilized to produce 30,000 units of Q [30,000 x 4] (1,20,000)
E. Balance hours utilized to produce 9,000 units of S [9000 x 6] 54,000
Thus, the following strategy could be adopted:

P Q R S
Own manufacturing 18,000 30,000 - 9,000
Sub-Contracting - - 27,000 6,000
(b) Statement showing the profit by Manufacturing 50,000 units and 57,000 units
Products Units Total contribution Units Total contribution
18,000 2,16,000 18,000 2,16,000

30,000 4,80,000 30,000 4,80,000
2,000 36,000 9,000 1,62,000
50,000 7,32,000 57,000 8,58,000
4,00,000 5,00,000
3,32,000 3,58,000
5,13,000 5,13,000
(27,000 x Rs 19) (27,000 x Rs 19)
1,56,000 72,000
(13,000 x Rs 12) (6,000 x Rs 12)
6,69,000 5,85,000
10,01,000 9,43,000
(c) Statement showing the profit by sub-contracting All units

Product Selling price Sub-contract contribu Units Total
price tion Contributi
on
P 60 63 5 18,000 90,000
Q 90 80 10 30,000 3,00,000
R 91 72 9 27,000 5,13,000
S 94 82 12 15,000 1,80,000
total contribution 10,83,000
Less: Fixed costs ( since -
there is no production)
Total Profit 10,83,000
Advise: As the profit is more than Rs. 10,01,000 all the units should be sub-contracted and there
should be no in house manufacturing.
Marginal Costing-Break Even Point
15. A Bank conducts competitive examination every year for selection of candidates for the post of
probationary offices each candidates is charged an entrance fees of Rs 75 for admission to the
examination. Data gathered from the last two years are as under:
Particulars 2015 (Rs.) 2016 (Rs.)

(A) Fees collected 3,00,000 3,75,000
(B) Costs:
- Valuation of answers books 1,20,000 1,50,000
- Question papers 80,000 1,00,000
- Hire of hall 12,000 12,000
- Honorarium to Examination Superintendent 10,000 10,000
- Invigilators at the rate of one invigilator for every 50 students 16,000 20,000
at Rs 100 per day for two days
General Expenses 12,000 12,000
Total (B) 2,50,000 3,04,000
Net income (A-B) 50,000 71,000
In 2017 it is expected that 6000 candidates will appear for the entrance examination. The hall
rent and general expenses are expected to increase by Rs 3,000 and Rs 8,000 respectively.
Required:
(i) Budgeted income
(ii) Break even number of candidates
(iii) Number of students required to sit for the examination to earn a net revenue of Rs 1,00,000.
Solution:
Allocation of cost (according to nature)
Particulars 2015 2016 Nature Cost Variable cost

per candidates
No of candidates (3,00,000/75) (3,75,000/75)
=4,000 =5,000
Rs Rs
Valuation of answer books 1,20,000 1,50,000 Variable 30
Question papers 80,000 1,00,000 Variable 20
Hire of hall 12,000 12,000 Fixed -
Hon. To Exam supt. 10,000 10,000 Fixed -
Invigilator 16,000 20,000 Step cost -
General Expenses 12,000 12,000 Fixed -
(i) Budget showing budgeted income for 2005 (No. of candidates = 6000)
Revenue for fees (6000 x Rs 75) (i) 4,50,000

Variable Cost:
Valuation of answers books 1,80,000
Question papers 1,20,000
Invigilators 24,000
Total variable cost (ii) 3,24,000
Contribution (i) – (ii) 1,26,000
Less: Fixed costs
Hire of hall
15,000
Hon to Exam Superintendent 10,000 45,000
General Expenses
20,000
Profit 81,000
Contribution per candidate = Rs 1,26,000/6,000 candidates = Rs21

Contribution per candidate without invigilators cost = Rs 1,50,000/6,000 candidates = Rs25
(ii) BEP = (F÷C) = (45,000÷21) = 2,142.86 candidates

In multiple of 50 = 2,100.00 candidates
Balance = 42.86
Invigilation cost minimum = Rs200
Balance = 28.56
Additional students required (28.56÷25) = 1.14
BEP candidates = 2,142.86 + 1.14 = 2,144
(iii) Net income required = 1,00,000

Fixed costs = 45,000
Contribution required = 1,45,000
No of candidates required (145000÷21) = 6,904.76
In multiples of 50 = 6,900.00
Balance = 4.76
Invigilation cost minimum = Rs200.00
Invigilation cost recovered (4.76 x 200)÷50 = 19.04
Balance = 180.96
Additional candidates required (180.96÷25) = 7.24
Total candidates required = 6,904.76 + 7.24 = 6,912
Budget & Budgetary Control
16. AK Ltd. manufactures a single product. The selling price of the product is Rs 95 per unit. The
following are the results obtained by the company during the last two quarters:
Particulars Quarter 1 Quarter 2

Sales unit 5,100 4,800
Production unit 5,500 4,500
Rs. Rs.
Direct materials A 66,000 54,000
B 55,000 45,000
Manufacturing wages 1,56,750 1,38,000
Factory overhead 86,000 83,000
Selling overhead 1,79,000 1,73,000
The company estimates its sales for the next quarter to range between 5,500 units and 6,500
units, most likely volume being 6,000 units. The manufacturing programme will match with the
sales quantity such that no increase in inventory of finished goods is contemplated in the next
quarter. The following price and cost changes will, however, apply to the next quarter:
(i) The price of direct material B will increase by 10%. There will be no change in the price of
direct material A.
(ii) The wages rates will go up by 8%, if the production volume increases beyond 5,500 units,
overtime premium of 50% is payable on the increased volume due to overtime working to be
done by the variable labour complement.
(iii) The fixed factory and selling expenses will increase by 20% and 25%, respectively.
(iv) A discount in the selling price of 2% is allowed on all sales made at 6,500 units level of
output. The selling price, however, will remain unaltered, if the volume of output is below 6,500
units.
While operating at a volume output of 6,500 units in the next quarter, the company intends to
quote for an additional volume of 2,000 units of output to be supplied to a government
department for its captive consumption. The working capital requirement of this order is
estimated at 80% of the sales value of the government order. The company desires a return of
20% on the capital employed in respect of this order.
Required:
(i) Prepare a flexible budget for the next quarter at 5,500, 6,000 and 6,500 unit levels and
determine the profit at the respective volumes.
(ii) Calculate the lowest price per unit to be quoted in respect of the Government order for 2,000
units.
Solution:
Working Notes:
Capital employed
Return = 20% of Capital employed
= 20% (Fixed Assets + Working capital)
= 20% (nil + 80% of sales)
= 20% (1,81,845 x 80% = 29,095
(i) Statement of Flexible Budget
Level 5500 units (Rs) 6000 units (Rs) 6500 units (Rs)
Direct Material
A 66,000 (5,500 x 12) 72,000 (6,000 x12) 78,000 (6,500 x 12)
B 60,500 (5,500 x 11) 66,000 (6,000 x11) 71,500 (6,500 x11)
Wages:
Variable 1,11,375 (20.25 x 5,500) 1,21,500 (20.25 x 6,000) 1,31,625 (20.25 x 6,500)
Fixed 57,915 57,915 57,915
Premium - 5062.5 (10.125 x 500) 10,125 (10.125 x 1,000)
Factory Overhead:
Variable 16,500 (3x5,500) 1,800 (3x6,000) 19,500 (3x6,500)
Fixed 83,400 (69,500x1.2) 83,400 (69,500 x 1.2) 69,500 x 1.2
Selling and distribution
Variable 1,10,000 (20x5500) 1,20,000 (20 x 6,000) 1,30,000(20x6,500)
Fixed 96,250 96,250 96,250
Total cost 6,01,940 6,40,127.5 6,68,190
Sales 5,22,500 5,70,000 6,17,500
Profit (79,400) (70,127.5) (50,690)
(ii) Statement of Lowest price (2000 Additional Units)
Particulars Amount (Rs)

Cost to be incurred
Materials
A (12x2,000) 24,000
B (11x2,000) 22,000
Wages with overtime (2,000 x 30.375) 60,750
Factory overhead
Variable overhead (2,000 x3) 6,000
Selling distribution
Variable (2,000 x20) 40,000
Desired Return (W/N) 29,095
Selling Price 1,81,845
Selling Price p.u. (1,81,845 ÷ 2,000) 90.0 P.U.
Computation of wage rate

Qtr 1 = 156750/550 = 28.5
: Variable cost per unit = Change in Lab.cost/Change in unit
= 156750-138000/5500-4500
= 18.75
Qty 4,500 5,500
Variable cost @ 18.75 84,375 1,03,125
Fixed Cost 53,625 (B.f.) 53,625 (B.f.)
Total 1,38,000 1,56,750
(iii) Raw material price

A = 66000/55000 = 12
B = 45000/4500 = 10
New rate for Qtr 3
A=12
B=10+1 =11
Note: Rate of labour mean variable as well as fixed hence we should increase variable and fixed
both.
Total Quality Management
17. (A) Kantipur Publication Ltd. is in the business of publishing a leading newspaper which has a
wide customer base. It measures quality of service in terms of
(i) Print quality
(ii) On time delivery
(iii) Number of damaged and unsold paper
To improve its business prospects and performance, the company is considering installing a
scheduling and tracking system which involve an annual additional cost of Rs 3,00,000 beside
equipment‘s costing Rs 4,00,000 needed for the installation of system.
To purchase the equipment‘s company is planning to utilise the proceeds of an investment

fetching an annual income @ of 9%.
Details regarding the present and future performance are given as under-
Present
Expected
On-time delivery 85% 97%
Variable cost per lost of newspaper damaged and unsold Rs 40 Rs 40
Fixed Cost 50,000 50,000
No. of lots of newspaper damaged and unsold 6,000 1,000
It is expected that each percentage increases in on time performance will result in revenue
increases of Rs 36,000 per annum. Required contribution margin is 40%.
Should Kantipur publication Ltd. install the new system?
Solution:
Rs.
Additional Costs of the New scheduling & tracking system p.a 3,00,000
Equipments –Opportunity Cost (Rs 4,00,000 x 9%) 36,000
(A) 3,36,000
Contribution from additional annual revenue (40% x Rs 4,32,000) 1,72,800
Cost saving in respect of lots of Newspaper [(6,000 – 1,000) x Rs 40] 2,00,000
… (B) 3,72,800
Net Benefits … (B)-(A) 36,800
(*) [Rs 36,000 x 12% / 1%]
By installing the scheduling and tracking system, the company will be able to save Rs 36,800 per
annum. Hence, the company should install the new system.
Pricing strategy of New Product

17 (B) X Ltd. wants to enter in the market with the new product ‗Gamma‘. You are required to
help management of X Ltd. in deciding pricing strategy if
-Demand of the Gamma is elastic
-Good possibility of substantial savings on large scale production and
-There is threat of competition
Solution: While preparing to enter the market with a new product, X Ltd has to adopt a
skimming or penetrating pricing strategy.
Skimming Pricing: It is a policy of high prices during the early period of products existence.
This can be synchronized with high promotional expenditure and in the later years the prices can
be gradually reduced.
Penetrating Pricing: Penetrating pricing means a pricing suitable for penetrating mass market
as quickly as possible through lower price offers. The company may not earn profit by resorting
to this policy during the initial stage. Later on the price may be increased as and when the
demand picks up.
X td. should follow ‗penetrating pricing‘ as-

-demand of product ‗Gamma‘ can be increased by lowering the price as it has elastic demand.
-There is also scope of substantial savings on large scale production and increase in demand is
sustained by the adoption of low pricing policy
-The prices fixed at a low level act as an entry barrier to the prospective competitors.
Operating Costing (Service Costing)
18. A Multinational Company runs a Public Medical Health Centre. For this purpose, it has hired a
building at a rent of Rs 10,000 per month with 5% of total taking. Health Centre has three types
of wards for its patient‘s namely General ward, Cottage ward and deluxe ward. State the rent to
be charged to each bed day for different types of ward on the basis of the following
informations:
(i) The number of beds of each type are General Ward 100, Cottage ward 50, deluxe ward 30.
(ii) The rent of cottage ward bed is to be fixed at 2.5 times of the general ward bed and that of
deluxe ward bed as twice of the cottage ward bed.
(i) The occupancy of each type of bed is as follows:

General wards 100%, Cottage ward 80% and deluxe ward 60%. But in general ward
there were occasions when beds are full, extra beds were hired at a charges of Rs 20 per
bed. The total hire charges for the extra beds incurred for the whole year amount to Rs
12,000.
(ii) The Health Care engaged a heart specialist from outside and on an average fees paid to
him was Rs 15,000 per trip. He makes three trips in the whole year.
(iii) The other expenses for the year were as under: Rs

Salary of Supervisors, Nurses, ward boys 425,000
Repairs and maintenance 90,000
Salary of doctors 1,350,000
Food Supplied to patients 40,000
Laundry charges for their bed linens 80,500
Medicines supplied 74,000
Cost of oxygen, X-ray etc. other than directly borne 49,500
General administration charges 63,000
(iv) Provide profit@ 20% on total taking
(v) The Health Centre imposes 8% service Tax on rent received.
(vi) 360 days may be taken in a year.
Solution:
Statement of Total Cost
Particulars Rs
Salary of Supervisor, Nurses, ward boys 425,000
Repair and maintenance 90,000
Salary of doctors 1,350,000
Food supplied to Patients 40,000
Laundry charges for their bed linens 80,500
Medicines supplied 74,000
Cost of oxygen, X-ray etc. other than directly borne 49,500
General administration charges 63,000
Building Rent (10,000X12) 120,000
Additional building rent on takings 5% on total takings
Hire charges extra beds 12,000
Fees to Heart Specialists(15,000X3) 45,000
Total Cost 2,349,000+5% on total takings
Profit 20% on total takings
Total Takings 2,349,000+25% of total takings
Total Takings (Assume X to be the rent per day) 105,000X
Rent to be charged
105000 X = 2,349,000+25% (105,000 X)
78,750 X = 2349,000
X= 2,349,000/78,750
= 29.83 (Rounded off)
No of beds with Equivalent Rent
Nature of wards Occupancy Weight of Rent Ward Days
General ward 100X 360X100% 36,000X1 36,000
Additional general 12000/20=600 600X1 600
ward
Cottage Ward 50X360X80% 14,400X2.5 36,000
Deluxe ward 30X360X60% 6,480X5 32,400
105,000
Rent to be charged
Particulars Basic Service tax Total
General ward 29.83 2.39 32.22
Cottage Ward 74.58 5.97 80.55
Deluxe ward 149.15 11.93 161.08
19. Write short notes on

i. Types of cost audit
ii. Advantages of Life cycle costing
iii. Limitations of Value Chain Analysis
iv. Limitations of Simulation
v. Relevant costs and benefits for decision making
Solution:
i. Types of cost audit
The main types of Cost audit are the following:
(i) Cost Audit as an Aid to Management:

The aim is to see that all information placed before management is relevant, reliable and prompt
so that management can discharge its duties well. It must also be seen that no relevant or
pertinent information is suppressed.
(ii) Cost Audit on Behalf of a Customer:

Often contracts are placed on ―Cost Plus‖ basis. In other words, the customer will determine the
final price to be paid on the basis of exact cost plus an agreed margin of profit. The customer, in
such a case, usually gets cost accounts of the product concerned audited to establish correct cost
and, therefore, price.
(iii) Cost Audit on Behalf of Government:

Sometimes the Government is approached with request for financial help or protection. Before
taking a decision on the request, the Government may choose to get cost accounts of the
applicant audited to establish whether the need for help is genuine or is a result of mere
inefficiency.
(iv) Cost Audit under Statute:

The aim of cost audit under statute seems to be that the Government wishes to know, as an
instrument of control, the costs of various goods. Government has the power to prescribe the
forms in which cost audit reports are to be made out. These are designed not only to verify
information, but also to convey good deal of information to Government.
(v) Cost Audit on Behalf of the Trade Association:

Sometimes trade associations seek to maintain prices at a certain level. For this purpose, the
accuracy of costing information submitted by various concerns has to be checked. The trade
associations may seek to have full information about production capacity and the relative
efficiency of productive processes.
ii. Advantages of life cycle costing
The advantages of life cycle costing are summarized as follows:
i) The product life cycle costing results in earlier actions to generate revenue or to lower
costs than otherwise might be considered. There are a number of factors that need to be
managed in order to maximize return on a product.
ii) Better decisions should follow from a more accurate and realistic assessment of revenues
and costs, at least within a particular life cycle stage.
iii) Product life cycle thinking can promote long term rewarding in contrast to short term
profitability rewarding.
iv) It provides an overall framework for considering total incremental costs over the entire life
span of a product, which in turn facilitates analysis of parts of the whole where cost
effectiveness might be improved.
iii. Limitations of Value Chain Analysis

Value Chain Analysis is not free from criticism and may have several limitations as:
1. Non-availability of data: Internal data on costs, revenues and assets used for value chain
analysis are derived from financial information of a single period. For long term strategic
decision making, changes in cost structures, market prices and capital investments etc. may not
be readily available.
2. Identification of stages: Identifying stages in an industry‘s value chain is limited by the
ability to locate at least one firm that participates in a specific stage. Breaking a value stage into
two or more stages when an outside firm does not complete in these stages is strictly judgment.
3. Ascertainment of cost, revenues and assets: Finding the costs revenues and assets for each
value chain activity poses/gives rise to serious difficulties. There is no scientific approach and
much depends upon trial and error and experimentation methods.
4. Identification of cost drivers: Isolating cost drivers for each value-creating activity,
identifying value chain linkages across activities and computing supplier and customer profit
margins present serious challenges.
5. Resistance from employees: Value chain analysis is not easily understandable to all
employees and hence may face resistance from employees as well as managers.
6. Science vs. Art: Value chain analysis is not exact science. It is more ―art‖ than preparing
precise accounting reports. Certain judgments and factors of analysis are purely subjective and
differ from person to person.
iv. Limitations of Simulation
It is not an optimization problem. It provides only a set of response to the system under different
operating conditions.
ii. Simulation is a time consuming process.
iii. Simulation does not create or generate solution techniques.
iv. All simulation cannot be evaluated by using simulation approach.
V. Relevant costs and benefits for decision making
Relevant cost and benefits are those expected future costs and benefits which are essential but
differ for alternative courses of action.
Costs and benefits that are independent of the decision are not relevant. Every decision deals
with future. Therefore, past costs are not relevant. Variable costs are relevant. Avoidable fixed
costs and incremental fixed costs are relevant.
The costs and benefits that are common to alternatives under consideration are not relevant for
example, while considering a proposal for replacement of plant, by discarding the existing plant;
the original cost and the present depreciated book value of old plant are irrelevant as they have
no impact on the decision for replacement.
The expected sales value of the discarded plant is relevant, as it just goes to reduce the amount of
investment to be in the new plant.
Some of the assumptions are made in relevant costing:
Cost behavior patterns are known.
Amount of fixed costs, unit variable costs, sales price and sales demand are known with
certainty.
Information is complete and reliable.
20. (A) Distinguish between Programmed & non programmed decisions.

(B) What are the criticisms of ABC (Activity based costing) system?
Solution:
(A)Programmed and non-programmed decisions
The act of decision making from a business perspective is choosing an option from a list of
alternatives that benefits the business the most. A decision made in business sometimes comes
easily to a manager because it relates to a situation encountered before; this is a programmed
decision. When a manager faces uncertainty and there is a higher level of risk involved regarding
a decision, he must make an unprogrammed decision using logic.
Programmed decisions
Programmed decisions are those that a manager has encountered and made in the past. The
decision the manager made was correct because he/she used the assistance of company policies,
computations or a set of decision-making guidelines. In addition to being well structured with
predetermined rules regarding the decision-making process, programmed decisions may also be
repetitive or routine as their outcome was successful in the past. It generally does not take a
manager as long to come to a conclusion when faced with a business-related programmed
decision because the challenge faced is not new. As a result, programmed decisions allow a
manager to make streamlined and consistently effective choices.
Examples of Programmed Decisions
Individuals naturally make programmed decisions on a daily basis.From a business perspective, a
company may create a standard routine for handling technical issues, customer service problems
or disciplinary matters. An employee‘s duties may become routine with repetition, like the
process a mechanic uses to troubleshoot problems with a customer‘s car
Non-programmed decisions
Nonprogrammed decisions involve scenarios that are new or novel and for which there are no
proven answers to use as a guide. In such a case, a manager must make a decision that is unique
to the situation and results in a tailored solution. Nonprogrammed decisions generally take longer
to make because of all the variables an individual must weigh; and the fact that the information
available is incomplete, so a manager cannot easily anticipate the outcome of his decision.
Examples of Nonprogrammed decisions
An individual may make anonprogrammed decision when he/she visits a new restaurant, is
unfamiliar with the menu and the menu is in a language she does not understand. In the business
world, the makers of the earliest personal computers had to make nonprogrammed decisions
regarding the type of marketing to use to attract customers who possibly had never used a
computer in the past. Fast-food companies also had to make a nonprogrammed decision
regarding consumer concerns about high fat contents and lack of healthy menu options.
(B) Criticism of ABC System
The disadvantages and critism of ABC system are as under:
a) Some arbitrary cost apportionment may still be required for cost like rent, rates and
building depreciation.
b) Single cost driver may not explain the cost behavior of all items in its associated pool.
c) Every cost may not have an identifiable cost driver like what drivers the cost of annual
external audit?
d) ABC is sometimes introduced because it is fashionable, not because it will be used by

management to provide meaningful product costs or extra information. If management is
not going to use ABC information, an absorption costing system may be simpler to
operate.
e) The cost of implementing and maintaining an ABC system can exceed the benefits of
improved accuracy.
f) Implementing ABC may be problematic. Recent journal articles have highlighted issues
like incorrect belief that ABC can solve all an organization's problems and difficulty in
determining appropriate cost drivers.
g) ABC is relatively new technique and as such management is not familiar with its principles
and methods and as such may be reluctant to introduce the system.

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REVISION TEST PAPER

The Institute of Chartered Accountants of Nepal

None of the consideration has been recorded by Chandra Ltd.

Below are the summarised draft financial statements of both companies.

Statements of financial position as at 30 September 2014

The following information is relevant:

Particulars A Ltd. B Ltd. C Ltd.

Income Statement for the year ended December 31,

Balance Sheet at December 31, 20X6

16. The Balance Sheet of Suyash Ltd .as on 31-3-2003 is as follows:

This information is relevant to the production of the segmental information:

There are no intersegment sales to the smaller operating divisions.

21. Write short notes on

Required Journal Entry

Solution to Q No. 2 (a)

Solution to Q No. 2(b)

Solution to Q No. 2(c)

b. Value in Use = 38,685

c. The impairment loss of NRs.220 (1,170 – 950) is allocated as follows

(b) Triage Co – Statement of financial position as at 31 March 20X6

Diluted earnings per share (w (v)) 29 Paisa

Workings (monetary figures in brackets in NRs.‘000)

(ii) Non-current assets

Annual amortisation is NRs.3m (75,000/25 years); therefore the accumulated amortisation

Plant and equipment

(iii) Deferred tax

(iv) Retained earnings

Revenue (62,600 + (30,000 x 9/12) – (300 x 9 months intra-group 82,400

Profit for year attributable to:

Chandra Ltd. – Consolidated statement of financial position as at 30 September 2014

Equity and liabilities

(ii) Non-controlling interests in Bindu td.‘s profit or loss

(iii) Non-current assets

(iv) Goodwill in Bindu Ltd.

Net assets (equity) of Bindu Ltd. at 30 September 2014 -12,500

Net assets at date of acquisition -15,000

(v) Retained earnings

Alternative calculation 6,300

(vi) Non-controlling interest in statement of financial position

Consolidated Balance Sheet of P Ltd. as on 31.3.15

Goodwill shown in the Consolidated Balance Sheet

Investment in Associate (Revaluation)

(1) Analysis of Profit

(2) Minority Interest

(3) Cost of Control/Goodwill

Consolidated Balance Sheet of A Ltd.

Particulars Note Amount

(i) PPE 3 120,400

The exchange difference is calculated in this way:

Balance Sheet at December 31, 20X6

The total costs that should be expensed = NRs.175,000 + NRs.250,000 + NRs.300,000 +

Thus there are no total costs to be capitalized in terms of NAS 38.

Profit and loss on Financial Instrument NRs.300,000

Derivative (asset) NRs.300,000

Year ended 30 September 2013

Year ended 30 September 2014

Average Maintainable Profits (before income tax)

(1,00,000 + 1,40,000 +1,60,000 + 1,70,000+1,80,000) 1,50,000

Goodwill = Super Profit x 5 years