Suggested December 2022 CAP III Group I

SUGGESTED ANSWERS TO
THE QUESTIONS SET AT

CHARTERED ACCOUNTANCY PROFESSIONAL (CAP)-III LEVEL
December 2022 EXAMINATIONS
Group-I
The Institute of Chartered Accountants of Nepal (ICAN)

ICAN Marg, Satdobato, Lalitpur
Suggested Answers December 2022 Examination (CAP III - Group I)
© The Institute of Chartered Accountants of Nepal

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Year and month of Publication: 2023 March
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Table of Contents
Paper 1: Advanced Financial Reporting................................................................................................ 4
Paper 2: Advanced Financial Management ........................................................................................ 25
Paper 3: Advanced Auditing ................................................................................................................. 39
Paper 4: Corporate Laws ...................................................................................................................... 53
Examiner’s Commentary on Students' Performance in December 2022 Examinations ................ 66
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Paper 1: Advanced Financial Reporting

Marks
Attempt all questions. Working notes should form part of the answers.
1. Alpha, a parent with a subsidiary Beta, is preparing the consolidated statement of
financial position at 32 Ashadh 2079. The draft statements of financial position for
both entities as at 32 Ashadh 2079 are given below:
(Rs. '000)
Alpha Beta
Assets
Non-current assets:
Property, plant and equipment (Note 1) 966,500 546,000
Development project (Note 1) - 20,000
Investment in Beta (Note 1) 450,000 -
1,416,500 566,000
Current assets:
Inventories (Note 2) 165,000 92,000
Trade receivables 99,000 76,000
Cash and cash equivalents 18,000 16,000
282,000 184,000
Total assets 1,698,500 750,000
Equity and liabilities
Equity
Share capital (Re. 1 shares) 360,000 160,000
Retained earnings 570,000 360,000
Other components of equity 102,000 -
Total equity 1,032,000 520,000
Non-current liabilities:
Long-term borrowings (Note 3) 300,000 85,000
Pension liability (Note 4) 187,500 -
Deferred tax (Note 1 and 2) 69,000 54,000
Total non-current liabilities 556,500 139,000
Current liabilities:
Trade and other payables 70,000 59,000
Short-term borrowings 40,000 32,000
Total current liabilities 110,000 91,000
Total equity and liabilities 1,698,500 750,000
Note 1 – Alpha’s investment in Beta
On 1 Magh 2078, Alpha acquired 120 million shares in Beta. Alpha made a payment
of Rs. 450 million in exchange for these shares. The individual interim financial
statements of Beta showed a balance of Rs. 340 million on its retained earnings on
1 Magh 2078.
The directors of Alpha carried out a fair value exercise to measure the identifiable
assets and liabilities of Beta at 1 Magh 2078. The following matters emerged:
• Plant and equipment having a carrying amount of Rs. 440 million had an estimated
fair value of Rs. 480 million. The estimated remaining useful life of this plant and
equipment at 1 Magh 2078 was four years.
• An in-process development project of Beta had a carrying amount of Rs. 8 million
and a fair value of Rs. 18 million. During the six-month period from 1 Magh 2078
to 32 Ashadh 2079, Beta incurred further development costs of Rs. 12 million
relating to this project. These costs were correctly capitalised in accordance with
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the requirements of IAS 38 "Intangible Assets". No amortisation of the capitalised

costs of this project was required prior to 32 Ashadh 2079.
• The fair value adjustments have not been reflected in the individual financial
statements of Beta. In the consolidated financial statements, the fair value
adjustments will be regarded as temporary differences for the purposes of
computing deferred tax. The rate of deferred tax to apply to temporary differences
is 20%.
On 1 Magh 2078, the directors of Alpha measured the non-controlling interest in Beta
at its fair value. On that date, the fair value of an equity share in Beta was Rs. 3.80.
Note 2 – Intra-group trading
Since 1 Magh 2078, Alpha has supplied a product to Beta. Alpha applies a mark-up
of 25% to its cost of supplying this product. Sales of the product by Alpha to Beta in
the period from 1 Magh 2078 to 32 Ashadh 2079 totaled Rs. 30 million. One-third of
the products which Alpha had supplied to Beta since 1 Magh 2078 were still unsold
by Beta at 32 Ashadh 2079. Any adjustment which is necessary in the consolidated
financial statements as a result of these sales will be regarded as a temporary
difference for the purposes of computing deferred tax. The rate of deferred tax to
apply to temporary differences is 20%. No amounts were owing to Alpha by Beta in
respect of these sales at 32 Ashadh 2079.
Note 3 – Long-term borrowings
Prior to 1 Shrawan 2078, Alpha had no long-term borrowings. On 1 Shrawan 2078,
Alpha borrowed Rs. 300 million to finance its future expansion plans. The term of the
borrowings is five years and the annual rate of interest payable on the borrowings is
6%, payable in arrears. Alpha charged the interest paid on 32 Ashadh 2079 as a
finance cost in its financial statements for the year ended 32 Ashadh 2079.
The borrowings are repayable in cash at the end of the five-year term or convertible
into equity shares on that date at the option of the lender. If the borrowings had not
contained a conversion option, the lender would have required an annual return of
8%, rather than 6%. Discount factors which may be relevant are as follows:
Discount Present value of Re. 1 Cumulative present value of Re. 1
factor payable at the end of year 5 payable at the end of years 1–5 inclusive
6% 74·7 Paisa Rs. 4·21
8% 68·1 Paisa Rs. 3·99
Note 4 – Pension liability
Alpha has established a defined benefit pension plan for its eligible employees. The
statement of financial position of Alpha at 32 Ashadh 2079 currently includes the
estimated net liability at 31 Ashadh 2078. The following matters relate to the plan for
the year ended 32 Ashadh 2079:
• The estimated current service cost was advised by the actuary to be Rs. 60
million.
• On 32 Ashadh 2079, Alpha paid contributions of Rs. 70 million into the plan and
charged this amount as an operating expense.
• The annual market yield on high quality corporate bonds on 1 Shrawan 2078 was
8%.
• The estimated net liability at 32 Ashadh 2079 was advised by the actuary to be
Rs. 205 million.
• No benefits have been paid to date.
Required: 20
On the basis of above information, prepare the consolidated statement of financial
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position of Alpha as at 32 Ashadh 2079. Unless specifically told otherwise, you can
ignore the deferred tax implications of any adjustments you make.
Answer
1) Consolidated statement of financial position of Alpha as at 32 Ashadh 2079
Particulars Rs.’000
Assets
Non-current assets:
Property, plant and equipment (966,500 + 546,000 + 35,000 (WN1)) 1,547,500
Goodwill (WN 2) 62,000
Development project (20,000 + 10,000 (WN 1)) 30,000
1,639,500
Current assets:
Inventories (165,000 + 92,000 – (30,000 x 1/3 x 25/125%)) 255,000
Trade receivables (99,000 + 76,000) 175,000
Cash and cash equivalents (18,000 + 16,000) 34,000
464,000
Total assets 2,103,500
Equity and liabilities
Equity
Share capital (Rs. 1 shares) 360,000
Retained earnings (WN 4) 571,310
Other components of equity (WN 8) 113,380
Total equity 1,044,690
Non-controlling interest (WN 3) 156,000
Total equity 1,200,690
Non-current liabilities:
Long-term borrowings (WN 10) 365,210
Pension liability 205,000
Deferred tax (WN 11) 131,600
Total non-current liabilities 701,810
Current liabilities:
Trade and other payables (70,000 + 59,000) 129,000
Short-term borrowings (40,000 + 32,000) 72,000
Total current liabilities 201,000
Total equity and liabilities 2,103,500
WN 1 – Net assets of Beta

(Rs. '000)
32 Ashadh
Particulars 1 Magh 2078 2079
Share capital 160,000 160,000
Retained earnings:
Per financial statements of Beta 340,000 360,000
Fair value adjustments:
Plant and equipment [(480-440) and 40-(40/4×6/12)] 40,000 35,000
Development project 10,000 10,000
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Deferred tax on fair value adjustments:

Date of acquisition (20% x (40,000 + 10,000)) (10,000)
Year end (20% x (35,000 + 10,000)) (9,000)
540,000 556,000
Increase in net assets post-acquisition (556,000 –
540,000) 16,000
WN 2 – Goodwill on acquisition of Beta

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

At date of acquisition (WN2) 152,000
25% of post-acquisition increase in net assets of 16,000 (WN1) 4,000
156,000
WN 4 – Retained earnings
Alpha – per draft SOFP 570,000
Adjustment for unrealised profit on unsold inventory (2,000 less 20%
(deferred tax)) (1,600)
Adjustment for finance cost of loan (WN6) (4,090)
Adjustment for: defined retirement benefit plan (WN7) (5,000)
Beta – 75% x 16,000 (WN1) 12,000
571,310
WN 5 – Equity component of long-term loan

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

Actual finance cost – 8% (300,000 – 23,880 (WN5)) 22,090
Incorrectly charged by Alpha (300,000 x 6%) (18,000)
So adjustment equals 4,090
WN 7 – Adjustment for: defined retirement benefit plan

Current service cost 60,000
7
Interest cost (8% x 187,500) 15,000

Contributions incorrectly charged to profit or loss (70,000)
So adjustment equals 5,000
WN 8 – Other components of equity

Alpha – per draft financial statements 102,000
Equity element of convertible loan (WN5) 23,880
Actuarial gain/(loss) on defined retirement benefits plan (WN9) (12,500)
113,380
WN 9 – Actuarial gain/(loss) on defined benefit pension plan

Opening liability 187,500
Current service cost 60,000
Interest cost 15,000
Contributions paid into plan (70,000)
192,500
Actuarial loss on re-measurement (balancing figure) 12,500
Closing liability 205,000
WN 10 – Long-term borrowings
Opening loan element (300,000 – 23,880 (WN5)) 276,120
Finance cost less interest paid (WN6) 4,090
So closing loan element for Alpha equals 280,210
Long-term borrowings of Beta 85,000
So consolidated long-term borrowings equals 365,210
WN 11 – Deferred tax
Alpha + Beta – per draft SOFP (69,000 + 54,000) 123,000
On closing fair value adjustments in Beta (WN1) 9,000
On unrealized profits in inventory (2,000 x 20%) (400)
131,600
2.
a)
i) On 1 Shrawan 2076, M Company granted 1000 share appreciation rights
(SARs) each to its 450 employees. All of the rights vested on 31 Ashadh 2078
can be exercised from 1 Shrawan 2078 up to Ashadh end 2080. At the grant
date, the value of each SAR was Rs. 100, and it was estimated that 5% of the
employees would leave during the vesting period. The fair value of the SARs
is as follows:
Date Fair value of SAR
Ashadh end 2077 Rs. 90
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All the employees who were expected to leave the employment did leave the
company as expected before 31 Ashadh 2078. On Ashadh end 2079, 90
employees exercised their options when the intrinsic value of the right was
Rs. 105 and was paid in cash. M Company is, however, confused as to
whether to account for the SARs under NFRS 2 "Share-based Payment" or
NFRS 13 "Fair Value Measurement" and would like to be advised as to how
the SARs should have been accounted for from the grant date to Ashadh end
2079.
Required: 8
Advise, with appropriate explanations, M Company on how the above
transactions should be accounted for in its financial statements of Ashadh end
2077, 2078 and 2079 with reference to relevant Nepal Financial Reporting
Standards (NFRS).
ii) An entity sometimes displays its financial statements or other financial
information in a currency that is different from either its functional currency
or its presentation currency simply by translating all amounts at end-of-period
exchange rates. This is sometimes called a convenience translation. A result of
making a convenience translation is that the resulting financial information
does not comply with all NFRS, particularly NAS 21 "The effects of Changes
in Foreign Exchange Rates".
Required: 2
Explain the disclosure requirements when convenience translation is used to
display financial information.
b) A Ltd. is engaged in the manufacturing of certain specialized chemicals.
During the manufacturing process, certain waste water is produced which is
released by A Ltd. in the nearby river. To reduce pollution of the rivers, the
state government has introduced a scheme with the following salient features:
i) If a manufacturer installs certain pre-approved waste water treatment plant,
the government will provide an interest free loan equal to 50% of the cost
of the plant;
ii) Such loan will be repayable to the government in 5 years from the date of
disbursal;
iii) The manufacturer availing the benefit of this scheme must treat the waste
water of its factory using the specified plant before releasing it to the river.
If this condition is violated, the entire loan shall become immediately
repayable to the government along with a penalty of Rs. 1 million.
Cost of the wastewater treatment plant to be installed to avail the benefit of
the scheme is Rs. 5 million. A Ltd. decided to utilise this scheme because, if
it were to obtain the similar loan from a bank, it would be available at a
market interest rate of 12% per annum. Accordingly, it applied for and
obtained the government loan of Rs. 2.5 million on 1 Shrawan 2077. The
company purchased and installed the plant such that it became ready for use
on the same date.
A Ltd. has an accounting policy of recognising government grant in relation
to depreciable assets in the proportion of depreciation expense. It has
determined that the plant will be depreciated over a period of 5 years using
straight-line method. In the month of Ashadh 2079, government officials
conducted a surprise audit, and it was found that the company was not using
the waste water treatment plant as prescribed. Accordingly, on 32 Ashadh
2079, the government ordered A Ltd. to repay the entire loan along with
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penalty. The company repaid the loan with interest and penalty as per the
order on 32 Ashadh 2079.
Required: (3+3+4=10)
i) Measure the amount of government grant as on 1 Shrawan 2077 with
explanation of relevant provisions of relevant NFRS.
ii) Determine the nature of the government grant and its accounting
treatment (principally) for the year ended 31 Ashadh 2078.
iii) Determine the impact on profit or loss if any, on account of revocation of
government grant as on 32 Ashadh 2079.
Give journal entries as well for the above three requirements.
Answer
2 a)
i) M Company will account for this transaction under the provisions of NFRS 2 "Share based
payment". NFRS 13 applies when another NFRS requires or permits fair value measurements or
disclosures about fair value measurements (and measurements, such as fair value less costs to sell,
based on fair value or disclosures about those measurements). NFRS 13 specifically excludes
transactions covered by certain other standards including share-based payment transactions within
the scope of NFRS 2 and leasing transactions within the scope of NFRS 16 "Leases".
For cash settled share-based payment transactions, the fair value of the liability is measured in
accordance with NFRS 2 initially, at each reporting date and at the date of settlement using an
option pricing model. Unlike equity settled transactions, the measurement reflects all conditions
and outcomes on a weighted average basis. Any changes in fair value are recognised in profit or
loss in the period.
Therefore, the SARs would be accounted for as follows:
Year Expense Liability Calculation
Ashadh end Rs. 19,260,000 Rs. 19,260,000 428 x 1,000 x Time apportioned over the
2077 Rs. 90 x ½ vesting period. Using the
estimated (450 x 95%) 428
employees
Ashadh end Rs. 27,820,000 Rs. 47,080,000 428 x 1,000 Expense is the difference between
2078 x Rs. 110 liabilities at Ashadh end 2078
and Ashadh end 2077
Ashadh end Rs. 2,930,000 Rs. 40,560,000 338 x 1,000 Cash paid is 90 x 1,000 x Rs.
2079 x Rs. 120 105, i.e. Rs.
9,450,000.
The liability has been reducedby
Rs. 6,520,000 (47,080,000-
40,560,000) and therefore the
expense is the difference of Rs.
2,930,000 (9,450,000-6,520,000)
The liability's fair value would be Rs. 40,560,000 at Ashadh end 2079 and the expense for
the year would be Rs. 2,930,000.
Statement of profit or loss for the year ended (Extracts)
2077 2078 2079
Rs. Rs. Rs.
Staff costs 19,260,000 27,820,000 2,930,000
Statement of financial position as at (Extracts)
2077 2078 2079
Rs. Rs. Rs.
SARs liabilities 19,260,000 47,080,000 40,560,000
ii) The disclosure requirement when convenience translation is used include:
• Identify the information as supplementary information to distinguish it from the
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information that complies with NFRS.

• Disclose the currency in which the supplementary information is displayed.
• Disclose the entity’s functional currency and the method of translation used to
determine the supplementary information.
2b) i) As per the principles of NAS 20 “Accounting for Government Grants and Disclosure of
Government Assistance”, the benefits of a government loan at a below market rate of
interest is treated as a government grant. The loan shall be recognized and measured in
accordance with NFRS 9 “Financial Instruments”. The benefit of the below market rate o f
interest shall be measured as the difference between the initial carrying value of the loan
determined in accordance with NFRS 9 and the proceeds received. The benefit is
accounted for in accordance with NAS 20. As per NFRS 9, the loan should be initially
measured at its fair value.
Initial recognition of grant as on 1st Shrawan, 2077
Fair value of loan = Rs. 2,500,000 x 0.567 (PVF @ 12%, 5th year) = Rs. 1,417,500
A Ltd. will recognize Rs. 1,082,500 (2,500,000 – 1,417,500) as the government grant and
will make the following entry on receipt of loan:
Date Particulars Dr. (Rs.) Cr. (Rs.)
1.4.20X1 Bank account Dr. 2,500,000
To Deferred Grant Income 1,082,500
To Loan account 1,417,500
(Being grant initially recorded at fair value)
ii) Accounting treatment for year ending 31st Ashadh, 2078
As per NAS 20, grants related to assets are government grants whose primary condition is
that an entity qualifying for them should purchase, construct or otherwise acquire long-
term assets.
As per NAS 20, Government grants related to assets, including non-monetary grants at
fair value, shall be presented in the balance sheet either by setting up the grant as deferred
income or by deducting the grant in arriving at the carrying amount of the asset.
One method recognises the grant as deferred income that is recognised in profit or loss on a
systematic basis over the useful life of the asset.
The other method deducts the grant in calculating the carrying amount of the asset. The
grant is recognised in profit or loss over the life of a depreciable asset as a reduced
depreciation expense.
A Ltd. has adopted first method of recognising the grant as deferred income that is
recognised in profit or loss on a systematic basis over the useful life of the asset. Here,
deferred income is recognised in profit or loss in the proportion in which depreciation
expense on the asset is recognised.
Depreciation for the year (2077-2078) = Rs. 5,000,000 / 5 years = Rs. 1,000,000
As the loan is to finance a depreciable asset, Rs. 1,082,500 will be recognized in Profit or
Loss on the same basis as depreciation.
Since the depreciation is provided on straight line basis by A Ltd., it will credit Rs. 216,500
(1,082,500 / 5) equally to its statement of profit and loss over the 5 years.
Journal Entries
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31.3.2078 Depreciation (Profit or Loss A/c) Dr. 1,000,000

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

Year Opening balance Adjustment Closing balance
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31.03.2078 1,082,500 216,500 866,000

32.03.2079 866,000 216,500 649,500
3.
a) Delta is an entity which prepares financial statements to 31 March each year.
The functional currency of Delta is the dollar ($). The following events have
occurred which are relevant to the year ended 31 March 2018:
Event 1:
On 1 January 2018, Delta entered into a contract with a foreign supplier. The
terms of the contract were that the supplier would construct a large machine for
Delta’s use and deliver the machine on 30 June 2018. The total construction
price of 20 million groats (the currency of the supplier) is due for payment on
31 July 2018.
On 1 January 2018, Delta entered into an agreement for the forward purchase
of 20 million groats. The settlement date for this forward purchase of foreign
currency was 31 July 2018. It intends to use this forward purchase as a hedge of
the expected cash outflow flows arising under the construction contract on 31
July 2018.
Delta wishes to use hedge accounting for this arrangement if this is possible
under International Financial Reporting Standards. It has prepared all relevant
documentation which is necessary to enable hedge accounting to be used if the
qualifying conditions are met.
Data relevant to the construction contract and to the forward purchase of
currency is as follows:
– Increase in expected cash flows arising under the construction contract
between 1 January 2018 and 31 March 2018 = $2,600,000.
– Positive fair value of forward currency purchase contract at 31 March 2018 =
$2,700,000.
Event 2:
On 1 February 2018, Delta purchased some inventory from a supplier whose
functional currency was the dinar. The total purchase price was 3·6 million
dinars. The terms of the purchase were that Delta would pay for the goods in
two instalments. The first instalment payment of 1,260,000 dinars was due on
15 March 2018 and the second payment of 2,340,000 dinars on 30 April 2018.
Both payments were made on the due dates. Delta did not undertake any
activities to hedge its currency exposure arising under this transaction. Delta
sold 60% of this inventory prior to 31 March 2018 for a total sales price of
$480,000. All sales proceeds were receivable in $. After 31 March 2018, Delta
sold the remaining inventory for sales proceeds which were in excess of their
cost.
Relevant exchange rates are as follows:
– 1 February 2018 – 6·0 dinars to $1.
– 15 March 2018 – 6·3 dinars to $1.
– 31 March 2018 – 6·4 dinars to $1.
Required: (5+5=10)
Explain and show how the events would be reported in the financial statements
of Delta for the year ended 31 March 2018.
b) Given below is the Profit and Loss Account of Nepal Cement Ltd. for the year
ending 32 Ashadh 2079:
Nepal Cement Ltd.
Profit and Loss Account for the fiscal year ending 32 Ashadh 2079
13
Notes Amount (Rs. ‘000’)

Income
Sales i 28,525
Other Income 756
29,281
Expenditure
Operating cost ii 25,658
Customs Duty 1,718
Interest on Bank Overdraft iii 93
Interest on 10% Debentures 1,157
28,626
Profit before depreciation 655
Less: Depreciation 255
Profit before tax 400
Less: Provision for tax iv 275
Profit after tax 125
Less: Transfer to Fixed Asset Replacement Reserve 25
100
Less: Dividend paid and payable 45
Retained Profit 55
Notes:
i) This represents the invoice value of goods supplied after deducting discounts,
returns and sales tax.
ii) Operating cost includes Rs. 10,247,000 as wages, salaries and other benefits
to employees.
iii) The bank overdraft is treated as a temporary source of finance.
iv) The charge for taxation includes a transfer of Rs. 45,000 to the credit of
deferred tax account.
Required: (5+5=10)
i) Prepare a value added statement for the year ending 32 Ashadh 2079.
ii) Reconcile total value added with profit before taxation.
Answer
3 a) Event 1:
Under the principles of NFRS 9 – Financial Instruments (revised 2014) – Delta is
permitted to use hedge accounting when reporting the hedging arrangement in its
financial statements. This is because:
• The relevant documentation has been prepared.
• There is a clear economic relationship between the hedged cash flows and the
hedging instrument.
• Delta is entering into a forward purchase of exactly the required amount of foreign
currency.
The hedging instrument is a derivative financial instrument. Derivatives are normally
measured at fair value in the financial statements with changes in fair value being
recognised in profit or loss.
On 31 March 2018, the derivative would be recognised in the financial statements as a
current asset at its fair value of $2·7 million.
The hedged item is designated to be the changes in the expected cash flows arising on the
contract. For the year ended 31 March 2018, changes in the expected cash flows arising
under the contract would not be recognised since the contract is an executory contract (a
contract made by two parties in which the terms are set to be fulfilled at a later date).
Since the hedging documentation indicates that the hedged item is the changes in the
expected cash flows, then cash flow hedge accounting is used. In this case, this involves
comparing the change in the value of the derivative (the recognised hedging instrument)
14
with the (unrecognised) changes in the value of the expected cash flows arising under the
contract.
To the extent that the change in the value of the derivative is less than or equal to the
change in the value of the expected cash flows (the effective portion of the hedge), the
change in value of the derivative is recognised in other comprehensive income rather than
profit or loss. However, any over-hedging would result in any gains or losses arising on
the hedging instrument which relate to the over-hedging (the ineffective portion of the
hedge) being immediately be recognised in profit or loss.
In this case, the overall gain in fair value of the derivative between 1 January 2018 and 31
March 2018 is $2·7 million.
In the same period, the change in the expected value of the cash flows arising under the
contract is $2·6 million. Therefore $2·6 million of the gain on the derivative would be
recognised in other comprehensive income with the balance of $100,000 being
recognised in profit or loss.
Event 2:
Under the principles of IAS 21 "The Effects of Changes in Foreign Exchange Rates" the
purchase of inventory on 1 February 2018 would be recorded using the spot rate of
exchange on that date. Therefore Delta would recognise a purchase and an associated
payable of $600,000 (3·6 million dinars/6).
Delta would recognise revenue of $480,000 in the statement of profit or loss because
goods to the value of $480,000 were sold prior to 31 March 2018.
Delta would recognise $360,000 ($600,000 x 60%) in cost of sales because the revenue
of $480,000 is recognised.
The closing inventory of goods purchased from the foreign supplier would be $240,000
($600,000 – $360,000) and would be recognised as a current asset. This would not be re-
translated since inventory is a non-monetary asset.
The payment of 1,260,000 dinars on 15 March 2018 would be recorded using the spot
rate of exchange on that date, therefore the payment would be recorded at $200,000
(1,260,000 dinars/$6·3).
The closing payable of 2,340,000 dinars (3,600,000 dinars – 1,260,000 dinars) is a
monetary item, therefore would be translated at the rate of exchange in force at the year
end (6·4 dinars to $1). Therefore the closing payable (recorded in current liabilities)
would be $365,625 (2,340,000 dinars/$6·4).
The difference between the initially recognised payable ($600,000) and the subsequently
recognised payment ($200,000) is $400,000. Since the closing payable is $365,625 (see
above), Delta has made an exchange gain of $34,375 ($400,000 – $365,625). This gain is
recognised in the statement of profit or loss, either under other income category or as a
reduction in cost of sales.
3 b)
i) Value added statement
Nepal Cement Ltd.
Value Added Statement
For the year ending on 32nd Ashadh 2079
Particulars Rs. in ‘000’ Rs. in ‘000’ %

Sales 28,525
Less: Cost of bought in material and services
Operating cost (25,658-10,247) 15,411
Customs Duty 1,718
Interest on bank overdraft 93 17,222
Value added by manufacturing and trading activities 11,303
15
Add: Other income 756

Total value added 12,059
Application of value added:
To pay employees:
Wages, salaries and other benefits 10,247 84.97
To pay government:
Corporation tax (275-45) 230 1.90
To pay providers of capital:
Interest on 10% Debentures 1,157
Dividends 45 1,202 9.98
To provide maintenance and expansion of company
Depreciation 255
Fixed Assets Replacement Reserve 25
Deferred Tax Account 45
Retained profit 55 380 3.15
Total 12,059 100
ii) Reconciliation between Total Value Added and Profit Before Taxation
Rs. in ‘000’ Rs. in ‘000’
Profit before tax 400
Add back:
Depreciation 255
Wages, salaries and other benefits 10,247
Debenture interest 1,157 11,659
Total Value Added 12,059
Notes:
• Customs Duty and deferred tax could alternatively be shown as a part of “To pay
government”.
• Bank overdraft, being a temporary source of finance, has been considered as the
provision of a banking service rather than of capital. Therefore, interest on bank overdraft
has been shown by way of deduction from sales and as a part of ‘cost of brought in
materials and services’
4. Write short note/ answer on the following: (5×3=15)
a) Defined Conglomerate Merger
b) Lev and Schwartzon model of Human Resource Value Accounting
c) What is insurance contract? List down the examples that are insurance contract.
d) Fair value as set out in NFRS 13
e) When does debt seem to be equity?
Answer
4 a) Defined Conglomerate merger
This is joining of two or more companies whose businesses are not related with each other
either vertically or horizontally. The companies involved in the merger may be
manufacturing totally different products. Of course, there may be some common features
between them such as same channel of distribution or technological area.
The basic objective behind such a merger is the diversification of activities. Such a merger
may also lead to concentration of economic power by virtue of controlling by the merged
corporation different fields of business activities. For example, a company engaged in
manufacturing activities may get itself merged with a company engaged in Insurance
business. The two companies are totally different and therefore such merger is defined
conglomerate merger.
16
4 b) Lev and Schwartzon Model on Human Resource Value Accounting:

Human resource accounting is the process of identifying and reporting investments made in
the human resources of an organization that are presently unaccounted for in the
conventional accounting practices. It is an extension of standard accounting principles.
Measuring the value of the human resources can assist organizations in accurately
documenting their assets.
One of the important approach to the evaluation of human resource assets is to calculate
their economic values. The economic value of the firm can be determined by obtaining the
present value of future earnings. A number of valuation models have been developed for
determining the present value of future earnings.
Lev and Schwartzon
Lev & Schwartz advocated the estimation of future earnings during the remaining service
life of the employee and then arriving at the present value by discounting the estimated
earnings at the cost of capital. The assumptions in this method are realistic and scientific.
The method has practical applicability when the availability of quantifiable and analyzable
data is concerned.
Still, this model cannot give any method to record the value of human resources in the
Books of Accounts. According to this model, the value of human resources is ascertained in
the following ways:
➢ All employees are classified into specific groups according to age, experience, and skill.
➢ Average annual earnings are determined for various ranges of age.
➢ The total earnings each group will get up to retirement age are calculated.
➢ The total earnings calculated as above are discounted at the rate of the cost of capital.
➢ The value thus arrived at will be the value of human resources/assets.
This method has some limitations, which are as follows:
• This method does not indicate the accounting treatment of human resources.
• This method only considers wages and salaries, but wages and salaries are not only the
costs associated with the employees. Other costs are associated with the employees.
• The model ignores the possibility and probability that an individual may leave an
organization for reasons other than death or retirement. The model’s expected value of
human capital measures a person’s human capital’s expected ‘conditional value.’ The
implicit condition is that the person will remain in an organization until death or
retirement. This assumption is not practical.
4 c) Insurance contract is a "contract under which one party (the insurer) accepts significant
insurance risk from another party (the policyholder) by agreeing to compensate the
policyholder if a specified uncertain future event (the insured event) adversely affects the
policyholder." The following are examples of insurance contracts:
• Insurance against theft or damage to property
• Insurance against product liability, professional liability, civil liability or legal expenses
• Life insurance and prepaid funeral expenses
• Life-contingent annuities and pensions
• Disability and medical cover
• Surety bonds, fidelity bonds, performance bonds and bid bonds
• Credit insurance that provides for specified payments to be made to reimburse the holder
for a loss it incurs because a specified debtor fails to make payment when due
• Product warranties (other than those issued directly by a manufacturer, dealer or retailer)
• Title insurance
• Travel assistance
• Catastrophe bonds that provide for reduced payments of principal, interest or both if a
specified event adversely affects the issuer of the bond
17
• Insurance swaps and other contracts that require a payment based on changes in climatic,
geological or other physical variables that are specific to a party to the contract
• Reinsurance contracts.
4 d) Fair value as set out in NFRS 13

Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. Basically it is
an exit price. Fair value is focused on the assumptions of the market place and is not entity
specific. It therefore takes into account any assumptions about risk. Fair value is measured
using the same assumptions and taking into account the same characteristics of the asset or
liability as market participants would. Such conditions would include the condition and
location of the asset and any restrictions on its sale or use. Further, it is not relevant if the
entity insists that prices are too low relative to its own valuation of the asset and that it
would be unwilling to sell at low prices. Prices to be used are those in ‘an orderly
transaction’.
An orderly transaction is one that assumes exposure to the market for a period before the
date of measurement to allow for normal marketing activities and to ensure that it is not a
forced transaction. If the transaction is not ‘orderly’, then there will not have been
enough time to create competition and potential buyers may reduce the price that they are
willing to pay. Similarly, if a seller is forced to accept a price in a short period of time, the
price may not be representative. It does not follow that a market in which there are few
transactions is not orderly. If there has been competitive tension, sufficient time and
information about the asset, then this may result in a fair value for the asset.
Fair value measurement assumes that the transaction to sell the asset or transfer the liability
takes place in the principal market for the asset or liability or, in the absence of a principal
market, in the most advantageous market for the asset or liability. The principal market is
the one with the greatest volume and level of activity for the asset or liability that can be
accessed by the entity.
The most advantageous market is the one which maximizes the amount that would be
received for the asset or minimizes the amount that would be paid to transfer the liability
after transport and transaction costs.
4 e) Many financial instruments have both features of debt and equity that this can lead to
inconsistency of reporting. It is not easy always to distinguish the debt and equity in an
entity‘s statement of financial position.
The key feature of debt is that the issuer is obliged to deliver either cash or another
financial asset to the holder. In contrast, equity is any contract that evidences a residual
interest in the entity‘s assets after deducting all of its liabilities. Thus, A financial
instrument is an equity instrument only if the instrument includes no contractual obligation
to deliver cash or another financial asset to another entity, and if the instrument will or may
be settled in the issuer's own equity instruments.
For example,
• a bond that requires the issuer to make interest payments and redeem the bond for cash is
classified as debt.
• ordinary shares, where all the payments are at the discretion of the issuer, are classified as
equity of the issuer.
• preference shares required to be redeemed on a fixed date, or on the occurrence of an
event that is certain to occur, should be classified as debt.
• preference shares required to be converted into a fixed number of ordinary shares on a
fixed date, or on the occurrence of an event that is certain to occur, should be classified as
equity.
5.
a) ‘Nepal Public Sector Accounting Standard’ states "All comparisons of budget and
actual amount shall be presented on a comparable basis to the budget". Explain
18
the detail provisions of above standard for comparison of budget and actual
amount. 8
b) Sundhara entered into a 20 years operating lease for a property on 1 Shrawan
2066 which has a remaining life of eight years at 1 Shrawan 2078. The rental
payments are Rs. 2.3 million per year.
Prior to 1 Shrawan 2078, Sundhara obtained permission from the owner of the
property to make some internal alterations to the property so that it can be used
for a new manufacturing processes which Sundhara is undertaking. The cost of
these alterations was Rs. 7 million and they were completed on 1 Shrawan 2078
(the time taken to complete the alterations can be taken as being negotiable). A
condition of being granted permission was that Sundhara would have to restore
the property to its original condition before handling back the property at the end
of the lease. The estimated restoration cost on 1 Shrawan 2078, discounted at 8%
per annum to its present value, is Rs. 5 million.
Required: (3+4=7)
i) Explain how the lease, the alterations to the leased property and the
restoration costs should be treated in the financial statements of Sundhara for
the year ended 32 Ashadh 2079.
ii) Prepare extracts from the financial statements of Sundhara for the year ended
32 Ashadh 2079 reflecting your answer to (i) above.
Answer
5 a) Clause 1.9.25 to 1.9.30 of Nepal Public Sector Accounting Standard issued by Accounting
Standard Board of Nepal deals with the comparable basis for comparison of budget and the
actual amount. The content of above standard are given below:
1.9.25 All comparisons of budget and actual amounts shall be presented on a comparable
basis to the budget.
1.9.26 The comparison of budget and actual amounts will be presented on the same
accounting basis (accrual, cash or other basis), same classification basis and for
the same entities and period as for the approved budget. This will ensure that the
disclosure of information about compliance with the budget in the financial
statements is on the same basis as the budget itself. In some cases, this may mean
presenting a budget and actual comparison on a different basis of accounting, for
a different group of activities, and with a different presentation or classification
format than that adopted for the financial statements.
1.9.27 Financial statements consolidate entities and activities controlled by the entity. As
noted in paragraph 1.9.10, separate budgets may be approved and made publicly
available for individual entities or particular activities that make up the
consolidated financial statements. Where this occurs, the separate budgets may be
recompiled for presentation in the financial statements in accordance with the
requirements of this Standard. Where such recompilation occurs, it will not
involve changes or revisions to approved budgets. This is because this Standard
requires a comparison of actual amounts with the approved budget amounts.
1.9.28 Entities may adopt different bases of accounting for the preparation of their
financial statements and for their approved budgets. For example, in some, cases a
government or government agency may adopt the cash basis for its financial
statements and the accrual basis for its budget. In addition, budgets may focus on,
or include information about, commitments to expend funds in the future and
changes in those commitments, while the financial statements will report cash
receipts and payments and balances thereof. However, the budget entity and
financial reporting entity will often be the same. Similarly, the period for which
the budget is prepared and the classification basis adopted for the budget will
often be reflected in financial statements. This will ensure that the accounting
19
system records and reports financial information in a manner which facilitates the
comparison of budget and actual data for management and for accountability
purposes - for example, for monitoring progress of execution of the budget during
the budget period and for reporting to the government, the public and other users
on a relevant and timely basis.
1.9.29 In some cases, budgets may be prepared on a cash or accrual basis consistent with
a statistical reporting system that encompasses entities and activities different
from those included in the financial statements. For example, budgets prepared to
comply with a statistical reporting system may focus on the general government
sector and encompass only entities fulfilling the "primary" or "non-market"
functions of government as their major activity, while financial statements report
on all activities controlled by a government, including the business activities of
the government.
1.9.30 In statistical reporting models, the general government sector may comprise
national, state/provincial and local government levels. Sometimes, the national
government may control state/provincial and local governments, consolidate those
governments in its financial statements and develop, and require to be made
publicly available, an approved budget that encompasses all three levels of
government. In these cases, the requirements of this Standard will apply to the
financial statements of those national governmental entities. However, where a
national government does not control state or local governments, its financial
statement will not consolidate state/provincial or local governments. Rather,
separate financial statements are prepared for each level of government. The
requirements of this Standard will only apply to the financial statements of
governmental entities when approved budgets for the entities and activities they
control, or subsections thereof, are made publicly available.
5 b)
(i) The alterations to the leased property do not affect the lease itself and this should
continue to be treated as an operating lease and charging profit or loss with the annual
rental of Rs. 2.3 million.
The initial cost of the alterations should be capitalized and depreciated over the
remaining life of the lease. In addition to this, NAS 37 "Provisions, contingent assets
and contingent liabilities" requires that the cost of restoring the property to its original
condition should be provided for on 1 Shrawan 2078 as this is when the obligation to
incur the restoration cost arises (as the time taken to do the alteration is negligible). The
present value of the restoration costs, given as Rs. 5 million, should be added to the
initial cost of the alterations and depreciated over the remaining life of the lease. A
corresponding provision should be created and a finance cost of 8% per annum should
be charged to profit or loss and accrued on this provision.
(ii) Extracts from the financial statements of Sundhara
Statement of profit or loss for the year ended 32 Ashadh 2079 Rs. 000’
Operating lease rental 2,300
Depreciation of alterations to leased property (12,000/8 years) 1,500
Finance cost (5,000 x 8%) 400
Statement of financial position as at 32 Ashadh 2079
Non current assets
Alterations to leased property (7,000 + 5,000) 12,000
Accumulated Depreciation (above) (1,500)
Carrying amount 10,500
Non-current liabilities
Provision for property restoration costs (5,000 + 400 above) 5,400
6.
a) Astha Ltd. made a decision to sell a business unit on 15 Aswin, 2079, and the
criteria to classify the unit as held for sale were met on 1 Kartik 2079. Astha
20
Ltd.’s accounting year end is 31 Chaitra. At 1 Kartik, 2079, the carrying amount of
the assets and liabilities of the business unit (before any depreciation for the year
2079 or revaluation adjustments) was as follows:
Rs. million
Land and buildings 120
Equipment 50
Trade receivables 30
Inventories 20
Trade payables (26)
Additional Information:
i) The land and buildings are held under the revaluation model of NAS 16
"Property, Plant and Equipment" and were last revalued on 31 Chaitra 2078 to
Rs. 120 million. Their market valuation on 1 Kartik 2079 was Rs. 124 million
and selling costs were estimated at Rs. 2.5 million at that date. Residual value
was, and continues to be, expected to be higher than cost.
ii) The equipment is held under the cost model of NAS 16. The equipment was
purchased on 1 Kartik 2077 for Rs. 80 million and is being depreciated
straight line over a four-year period to a zero residual value. Its sale value at
1 Kartik 2079 was Rs. 55 million. Selling costs are insignificant.
iii) The trade receivables are recorded at invoiced value, reduced by any
allowances for credit losses recognised at 31 Chaitra 2078. No adjustment to
these allowances was necessary at 1 Kartik 2079. The receivables, if factored,
would realise approximately Rs. 26 million, net of transaction costs at
1 Kartik 2079.
iv) The inventories are merchandise purchased for resale and are held at cost.
Their market value at 1 Kartik 2079 was Rs. 28 million. Associated selling
costs would amount to Rs. 1.4 million.
v) It was anticipated at 1 Kartik, 2079 that the business unit will be sold for
Rs. 200 million, net of selling costs, to a rival company in a single transaction.
Required: 5
In respect of Astha Ltd.’s year ended 31 Chaitra 2079, show and briefly explain,
the amount recognised as Non-Current Assets Held for Sale under NFRS 5 at
1 Kartik 2079 and the impairment charge (if any) for the business unit.
(6)
b) The following is the Balance Sheet of Sunrise Ltd. as on 32 Ashadh 2079:

Liabilities Rs. Assets Rs.
Share Capital Fixed Assets
10,000 Equity Shares Machinery 800,000
of Rs. 100 each 1,000,000 Factory Shed 300,000
Less: Calls in Arrear Vehicles 200,000
(Rs. 20 for Final Call) 50,000 950,000 Furniture 50,000
Reserve and Surplus Current Assets
General Reserve 400,000 Inventory 400,000
Profit & Loss Account 230,000 Sundry Debtors 750,000
Current Liabilities Bank Balance 60,000
Bank Overdraft 500,000
Creditors 500,000 Preliminary Expenses 20,000
Total 2,580,000 Total 2,580,000
The following additional information is furnished:
a) Machinery and Factory Shed are worth 30% above their book value.
Depreciation on appreciated value of Machinery and Factory Shed is not to be
considered for valuation of goodwill and shares.
21
b) For the purpose of valuation of shares, goodwill is to be considered on the

basis of 4 years’ purchase of super profits based on average profit (after tax)
of the last 3 years. Profit of the last 3 years (after tax) are as follows:
For the year ended 31.3.2077 Rs. 260,000
c) During the year ended on 31.3.2077, new addition to Factory Shed costing
Rs. 20,000 was charged to Profit & Loss Account. Depreciation charged on
Factory Shed is @ 10% on reducing balance method.
d) In a similar business, return on Capital Employed is 15% (after tax).
e) Income Tax rate is 25%
Required: 5
Find out the value of each fully paid and partly paid Equity Share on Net Assets
basis.
22
Answer
6 a) Non-Current Assets Held for Sale (NFRS 5)
Carrying amount at 1 Kartik, 2079, after applying NAS 16:
Rs. million
Equipment (50 – (80/4 years × 6/12)) 40
Trade receivables 30
Inventories 20
Trade payables (26)
188
Any test for impairment will be based on the disposal group as a whole. As a disposal group,
fair value less costs to sell (Rs. 200 million) is higher than carrying amount (Rs.188 million)
there is no impairment charge.
The amount recognised as non-current assets held for sale is therefore:
Rs. million
Equipment 40
164
Trade receivables and inventories are outside the scope of NFRS 5.
6 b) Sunrise Ltd.
Statement of Valuation of Shares
Particulars Amount (Rs.)
Net tangible assets (W N 1) 1,908,954
Add: Goodwill (W N 3) 69,208
Add: Calls in arrears 50,000
2,028,162
No. of Equity Shares 10,000
Value of fully paid Equity share (Rs. 2,028,162/10,000) Rs. 202.82
Value of partly paid Equity Share (Rs. 202.82-Rs. 20.00) Rs. 182.82
Working Notes:
1) Statement of Net Tangible Assets (as on 32nd Ashadh 2079)
Particulars Amount (Rs.) Amount (Rs.)
Machinery 800,000
Add: 30% increase 240,000 1,040,000
Factory Shed 300,000
Add: 30% increase 90,000 390,000
Addition to factory shed on 2076/77 20,000
Less: Depreciation
For 2076/77 Rs 2,000
For 2077/78 Rs 1,800
For 2078/79 Rs 1,620 5,420
14,580
Add: 30% appreciation 4,374 18,954
Vehicle 200,000
Furniture 50,000
Inventory 400,000
Debtors 750,000
Bank 60,000
2,908,954
23
Less: Bank Overdraft 500,000

Creditors 500,000 1,000,000
Net Tangible Assets 1,908,954
2) Average Annual Profits

Particulars 2076/77 2077/78 2078/79
Rs. Rs. Rs.
Reported Profit (after tax) 260,000 350,000 290,000
Add: Cost of Additional
Factory Shed (net of tax)
(Rs 20,000-Rs 5,000* ) 15,000
275,000
Less: Depreciation (net of tax)
on additional factory shed* 1,500 1,350 1,215
273,500 348,650 288,785
Average Profit of three years
(273,500+348,650+288,785)/3 = Rs 303,645
• 25% Tax saved in Expenses.
Fiscal Year Depreciation Tax Depreciation

@ 25% Net of Tax
Rs. Rs. Rs.
2076/77 2,000 500 1,500
2077/78 1,800 450 1,350
2078/79 1,620 405 1,215
3) Value of Goodwill
Capital Employed (net of tangible assets as per WN 1) 1,908,954
Average Profit (as per WN 2) 303,645
Less: Normal Profit @ 15% of Capital employed 286,343
Super Profit 17,302
Value of Goodwill (4 years’ purchase of super profits)
(Rs 17,302*4) 69,208
24
Paper 2: Advanced Financial Management

Marks
Attempt all questions.
Working notes should form part of the answers. Make assumptions wherever necessary.
1. Sagarmatha Ltd. is considering whether to set up a division in order to
manufacture a new product, SML. The projected profitability per unit of the new product is:
Particulars Rs. Rs.
Selling price 2,200
Material (3 Kgs @ Rs. 150 per Kg) 450
Direct Labour (2 Hours @ Rs. 250 per hour) 500
Overheads 1,150 2,100
Profit per unit 100
A feasibility study, recently undertaken at a cost of Rs. 5,00,000 suggests that a selling
price of Rs. 2,200 per unit should be set. At this price, it is expected that 10,000 units
would be sold each year. Demand for the product is expected to cease after 5 years.
Direct Labour and Material cost would be incurred only for the duration of the product
life.
Overheads per unit have been calculated as follows:
Particulars Rs.
Variable overheads 250
Rent Note (a) 80
Manager's Salary Note (b) 70
Depreciation Note (c) 500
Head office cost Note (d) 250
Total 1,150
Note:
(a) SML would be manufactured in a factory rented specially for the purpose. Annual
rental would be Rs. 8,00,000 payable only for as long as the factory is occupied.
(b) A Manager would be employed to supervise production of SML at a salary of Rs.
7,00,000 per annum. The Manager is at present employed by the company but is due
to retire in the near future on an annual pension of Rs. 200,000. If he continued to be
employed his pension would not be paid during the period of employment. His
subsequent pension rights would not be affected.
(c) Manufacture of the SML would require a specialized machine costing Rs. 2.5 crore.
The machine would be capable of producing SML for an indefinite period, although
25
due to its specialized nature it would not have any resale or scrap value when the
production of SML ceased. It is the policy of Sagarmatha Ltd., to provide
depreciation on all fixed assets using the straight line method. The annual charge of
Rs. 50,00,000 for the new machine is based on a life of 5 years, equal to the period
during which SML are expected to be produced.
(d) Sagarmatha Ltd. allocates its Head office fixed costs to all products at the rate of Rs.
125 per Direct Labour Hour. Total Head office fixed costs would not be affected by
the introduction of the SML to the Company's range of products.
The required return of Sagarmatha Ltd. for all new projects is estimated at 5% per
annum in real terms, and you may assume that all the costs and prices given above will
remain constant in real terms.
All the cash flows would arise at the end of each year with exception of the cost of
machine.
Required: 20
(a) Prepare NPV calculations, based on the estimates provided, to show whether
Sagarmatha Ltd. should proceed with manufacture of the SML.
(b) Determine how sensitive the NPV of manufacturing SML is to errors of estimation
in each of the three factors viz. Product Life, Annual Sales Volume and Material cost
per SML.
(c) Briefly explain risk analysis in capital budgeting.
Suggested answer to Q.1

a. NPV analysis
Computation of contribution and profit
Selling price (A) 2,200
Variable overheads:
Material 450
Labour 500
Variable overhead 250
Total variable overhead (B) 1,200
Contribution per unit (A-B) 1,000
No. of units 10,000
Total contribution (1,000×10,000) 10,000,000
Less: Fixed costs:
Rental 800,000
Manager's salary (700,000-200,000) 500,000
Profit per annum 8,700,000
Notes:
1. Incremental cost of Manager's salary is Rs. 500,000 only because Rs. 200,000 is
unavoidable.
2. Depreciation on machine has not been considered in calculation in the absence of
information about taxation of income.
3. Head office overhead charge has not been considered since that is not an incremental cost
on the project.
4. Feasibility study cost has not been considered because that is sunk cost.
26
Calculation of NPV of the project

Profit per annum (Net cash inflows) 8,700,000
Annuity factor @ 5% for 5 years 4.329
Present value of cash inflows 37,662,300
Less: Cost of machine 25,000,000
Net present value 12,662,300
b. Sensitivity analysis
Evaluation of sensitivity of the NPV to product's life
Year Cash flow PV Factor Discounted Cash Flow Cumulative DCF
1 8,700,000 0.952 8,282,400 8,282,400
2 8,700,000 0.907 7,890,900 16,173,300
3 8,700,000 0.864 7,516,800 23,690,100
4 8,700,000 0.823 7,160,100 30,850,200
As the cost of machine is Rs. 25,000,000, it seems to recover in between year 3 and 4 as per cumulative
discounted cash flows in above table.
So, Payback period = 3 + (Cost of machine - Cumulative DCF at the end of year 3) / DCF for the year 4
= 3 + (25,000,000 - 23,690,100) / 7,160,100
= 3 + 1,309,900 / 7,160,100 = 3 + 0.18 = 3.18 years
Hence, sensitivity of NPV to Product's Life is = (5-3.18) / 5 = 36.40%
Evaluation of sensitivity of the NPV to annual sales volume

Target discounted cash flow 25,000,000
So, annual cash flow needed (25,000,000 / 4.329) (rounded to zero) 5,775,000
Add: Fixed costs:
Rental 800,000
Manager's salary 500,000
So, Target annual contribution 7,075,000
Contribution per unit 1,000
Therefore, number of units at which NPV is zero (7,075,000 / 1,000) 7,075
Hence, sensitivity of NPV to Annual Sales Volume is = (10,000 - 7,075) / 10,000 = 29.25%
Evaluation of sensitivity of the NPV to material cost per SML

Target discounted cash flow 25,000,000
So, annual cash flow needed (25,000,000 / 4.329) (rounded to zero) 5,775,000
Add: Fixed costs:
Rental 800,000
Manager's salary 500,000
So, Target annual contribution 7,075,000
Target contribution per unit (7,075,000 / 10,000) 707.50
Selling price per unit 2,200
So, Target variable cost per unit 1,492.50
Less: Other variable costs:
Labour cost 500
Variable overheads 250
Target Material cost per unit 742.50
27
Hence, sensitivity of NPV to Material cost per SML is = (742.50 - 450) / 450 = 65%
c. Risk analysis
Identification and analysis of risk in capital budgeting is important because of the potential
effects of the investment decision in the company's current and future assets is usually
material and pervasive. The different types of risks that are faced by a company in capital
budgeting are economic risk, corporate risk, international risk, competitive risk, market risk,
industry and project specific risk etc. The better the executive understands the nature and
level of risks, the better the decision and ultimately, the better financial strength of the
company. In practice, executives can handle risks in two ways. The simple risk adjustment
method is based on the executive's estimations and intuitive adjustments to cash flows. The
probabilistic risk analysis is based on evaluation of the uncertainties associated with
particular variables before decisions are made. The methods of risk analysis are sensitivity
analysis, scenario analysis, break even analysis, Hillier model, simulation analysis, decision
tree analysis and corporate risk analysis etc.
2.
a. Bhatbhateni Florist Pvt. Ltd (BFPL) a retail florist, is for sale at an asking price of Rs
31,00,000. You have been contacted by a potential buyer who has asked you to give
him opinion as to whether the asking price is reasonable. The potential buyer has only
limited information about BFPL. He does not know that annual gross sales of BFPL
is about Rs 41,00,000 and that last year's Income Tax Return reported an annual
profit of Rs 4,20,000 before tax.
You have collected the following information from the financial details of several
retail florist that were up for sale in the past:
Table No. 1:
Particulars Price-to-Sale Price-to-

(P/S) Ratio Earning (P/E)
Ratio
Mean Ratio 0.55 3.29
Coefficient of 0.65 1.52
Variation
Maximum Ratio 2.35 6.29
Number of 38 33
firms
Table No. 2: Top 10 players (in descending P/S Order)
Particulars Price-to-Sale (P/E) Multiple

(P/S) Ratio
1 2.35 5.65
2 1.76 6.29
3 1.32 5.31
4 1.17 4.60
5 1.09 3.95
28
6 1.01 3.25
7 0.96 3.10
8 0.85 2.96
9 0.72 2.9
10 0.68 2.75
Offer you opinion on the reasonableness of the Asking price 10
Solution:
Analysis of Industry Performance:

Average P/S ratio is 0.55. Average P/E Ratio is 3.29.
The coefficient of variation of P/S Ratio is 0.65, which is much lower than that of P/E Ratio 1.52.
This indicates that there is substantially less dispersion of P/S Ratio about mean than in case of P/E
Ratio. Therefore, P/S Ratio is preferable over P/E Ratio for making comparision.
Details of BFPL
Ask Price : 3,100,000

Annual Gross Sales : 4,100,000
Annual Profit before Tax in tax return = 420,000
Price to Sale (P/S) Ratio = 3,100,000/4,100,000
= 0.756
The BFPL's P/S ratio (0.756) is much higher than the industry average (0.55). However, this is far
below when compared to the maximum P/S ratio (2.35) of top 10 players. The company's P/S ratio
stands in between 8th and 9th top players in the industry..
If sales of XY Pvt. Ltd. is likely to hold in the coming years the price of the company can be
calculated as below:
= 4,100,000× (0.85+0.72)/2
=4,100,000×0.785
=3.218 Million
The ask price received is Rs 3.1 Million and the fair value calculated based on the industry average
is Rs. 3.218 Million. Therefore, the ask price received is quite reasonable.
b. ABC Ltd. wishes to acquire BCD Ltd. The shares issued by the two companies are
10,00,000 and 5,00,000 respectively. Calculate the increase in the total value of BCD
Ltd. resulting from the acquisition on the basis of the following conditions:
Particulars Value
Current expected growth rate of BCD Ltd. 5%
Expected growth rate under control of ABC Ltd. (without any additional 7%
capital investment and without any change in risk of operations)
Current market price per share of ABC Ltd. Rs. 100
Current market price per share of BCD Ltd. Rs. 20
Current dividend per share of BCD Ltd. Rs. 0.60
On the basis of aforesaid conditions calculate:
29
(i) the gain or loss to shareholders of both the companies, if ABC Ltd. were to offer
one of its shares for every four shares of BCD Ltd.
(ii) the gain or loss to the shareholders of both the companies, if ABC Ltd. pays Rs. 25
for each share of BCD Ltd., assuming the P/E ratio of ABC Ltd. does not change
after the merger. EPS ABC Ltd. is Rs. 8 and that of BCD is Rs. 2.50.
It is assumed that ABC Ltd. invests its cash to earn 10%. 10
Suggested answer
Calculation of cost of capital of BCD Ltd.

Divdend per share ( ) = Rs. 0.60
Expected dividend next year ( ) = Rs. 0.63 (0.60 + 0.60 × 5%)
Current market price per share (P) = Rs. 20
Current growth rate (G) = 5%
Cost of capital ( = ( / P + G) ) = 8.15% (0.63/ 20 + 5%)
Calculation of market price after acquisition

Cost of capital ( ) = 8.15%
Expected growth rate (G) = 7%
Expected dividend next year ( ) = Rs. 0.642 (0.60 + 0.60 × 7%)
Market price (P = / ( ) = 0.642/ (8.15% - 7%)
= 0.642/0.0115
= Rs. 55.83
Calculation of increase in total value of BCD Ltd.
Expected market price per share = Rs. 55.83
Current market price per share = Rs. 20
Increase in market price per share = 35.83
No of shares outstanding = 500,000
So, increase in total value of BCD Ltd. = Rs. 17,915,000 (500,000 ×35.83)
Calculation of post merger value of shares of ABC Ltd. on exchange of share

Value of ABC Ltd. before merger = 1,000 Lakhs (10 Lakh shares @ Rs. 100 each)
Value of BCD Ltd. upon merger = Rs. 279.15 Lakhs (5 Lakh shares @ Rs. 55.83 per share)
Value of ABC Ltd. after merger = Rs. 1,279.15 Lakhs (1,000+279.15)
No of shares of ABC Ltd. os before merger = 10 Lakhs
No of shares issued to shareholders of BCD Ltd. = 1.25 Lakhs (5 × 1/4)
Total no of shares after merger = 11.25 Lakhs
Value per share after merger = Rs. 113.70 (1,279.15/11.25)
Calculation of gain or loss to shareholders on exchange of share

ABC Ltd. BCD Ltd.
Value per share after merger Rs. 113.70 Rs. 113.70
Equivalent value per share Rs. 113.70 Rs. 28.425 (107.30/ 4 shares)
Value per share before merger Rs. 100 Rs. 20
So, gain or loss per share Rs. 13.70 Rs. 8.425
i.e. gain or loss in % 13.70% 42.13%
Calculation of earnings per share after merger on cash purchase

Earnings of ABC Ltd. = Rs. 80 Lakhs (Rs. 8 each for 10 Lakhs shares)
Earnings of BCD Ltd. = Rs. 12.50 Lakhs (Rs. 2.5 each for 5 Lakhs shares)
Total earnings = Rs. 92.50 Lakhs (80+12.50)
Less: Loss of interest on cash purchase payment = Rs. 12.50 Lakhs (Rs.25 each for 5 Lakhs shares
@10%)
30
Net total earnings after merger = Rs. 80 Lakhs

No of shares os after merger = 10 Lakhs
Earnings per share after merger = Rs. 8 each (80/ 10)
Calculation of gain or loss to shareholders of ABC Ltd. on cash purchase

Market price of before merger Rs. 100
EPS before merger Rs. 8 each
PE ratio before merger (which is maintained even after) 12.50 (100/8)
EPS after merger Rs. 8
Market price per share after merger Rs. 100 (8 × 12.50)
Market price per share before merger Rs. 100
So, gain or loss per share Rs. 0 or 0%
Calculation of gain or loss to shareholders of BCD Ltd. on cash purchase

Cash received per share = Rs. 25
Market price per share before merger = Rs. 20
So, gain or loss per share = Rs. 5
i.e. gain or loss in % = 25%
3.
a) Mero Software Developer Pvt. Ltd., (MSDL) has acquired an export order of Rs. 10
million for software development to a European company. The MSDL has also
planned to import bulk of hardware worth Rs. 5 million from a company in UK.
The proceeds of exports will be realized in 3 months from now and the payments
for imports will be due after 6 months from now. The invoicing of these exports and
imports can be done in any currency i.e. Dollar, Euro or Pounds sterling at
company's choice. The following market quotes are available.
Annualised
Spot Rate
Premium
Rs./$ 128.10/128.20 $ - 7%
Rs. /Euro 120.15/120.20 Euro - 6%
Rs./Pound 147.65/147.75 Pound -5%
Advice MSDL about invoicing as to in which currency it would be beneficial. 10

(Calculation should be upto two decimal places).
Suggested answer:
(i) Proceeds of Exports in Rs = Rs. 10 Million
Position of Inflow under three currencies will be as follows:
Expected Rate after Conversion in Rs after
Currency Invoice at Spot Rate
3-months 3-months
Rs.100,00,000/128.10 128.10 (1 + 0.07/4) 130.34 x $ 78064.01

$
$ 78,064.01 130.34 10,174,863.06
31
Rs.100,00,000/ 120.15 120.15 (1 + 0.06/4) 121.95 x € 83229.30

€
€ 83,229.30 121.95 10,149,813.14
Rs.100,00,000/ 147.65 147.65 (1 + 0.05/4) 149.50 x £67727.73

£
£ 67,727.73 149.50 10125295.64
(ii) Payment of Import in Rs = Rs. 5 Million

Position of outflow under three currencies will be as follows:
Expected Rate after Conversion in Rs. after
Currency Invoice at Spot Rate
6-months 6-months
50,00,000/ 128.20 128.20 (1 + 0.07/2) 132.69 x $39001.56

$
39,001.56 132.69 5,175,117.00
50,00,000/ 120.20 120.20 (1 + 0.06/2) 123.81 x € 41597.34

€
41,597.34 123.81 5,150,166.67
50,00,000/ 147.75 147.75 (1 + 0.05/2) 151.44 x £ 33840.95

£
33,840.95 151.44 5,124,873.47
Advice: Since cash inflow is highest (10,174,863.06) in case of $ hence invoicing for Export should be in $.
However, cash outflow is least (5,124,873.47) in case of £ the invoicing for import should be in £.
b) Kathmandu Manufacturers has current earnings of Rs 6 per shares with 5,00,000

shares outstanding. It is planning to issue 40,000 shares of 9 percent, Rs 100 per
value convertible preference shares at par. The Preference share is convertible into 2
ordinary shares for each preference share held. The current market price of ordinary
shares is Rs 42 per share.
Required: 10
(a) Compute the conversion value of preference shares.
(b) Compute the conversion premium.
(c) Assuming total earnings remain the same, determine the effect of issue on basic
earnings per share (i) before conversion (ii) on a fully diluted basis.
(d) If profits after taxes increases by Rs 10 lakh, determine the basic earnings per
share
(i) before conversion and
(ii) on a fully diluted basis.
Suggested answer:
(a) Conversion value = Conversion ratio market price per share = 2 Rs * 42 = Rs 84.
(b) Conversion premium = (Rs 100 / Rs 84) – 1 = 19.05 per cent.
(c) Earnings per share effect
(i) Total after-tax earnings (Rs 6 X 5,00,000 shares) Rs 30,00,000
32
Preference share dividend (0.09 X 40,000 X Rs 100) 3,60,000

Earnings available to ordinary shareholders (NI) 26,40,000
Number of shares (N) 5,00,000
EPS (basic) (Rs 26,40,000 / 5,00,000) 5.28
(ii) Total earnings 30,00,000
Number of shares (5,00,000 + 80,000) 5,80,000
EPS (diluted) (Rs 30,00,000 / 5,80,000) 5.17
(d) Earnings per share effect with increase in profit
(i) Total after-tax earnings Rs 40,00,000
Preference dividend 3,60,000
NI 36,40,000
N 5,00,000
EPS (NI / N) 7.28
(ii) Total earnings (NI) 40,00,000
N (5,00,000 + 80,000) 5,80,000
EPS (NI / N) 6.90
4. Write short note on the following: (5×3=15)
a) Technology/ techniques of financial system

b) Global Depository Receipts and American Depository Receipts
c) Carry Trade Swap
d) Hostile Takeovers
e) Benefits of Offshore Banking
Suggested answer to Q 4.a

Financial system utilize various technologies/ techniques in various combinations in everything it
does. They are described below:
i. Delegation
Delegation reduces the cost of transaction in various ways. By the use of delegation depositor in a
bank delegate the work of making loan. Investors in debentures delegate to an underwriter, the task
of setting up a loan and to a trustee, the task of monitoring compliance with the contract. Similarly,
insured delegate to a insurance company, the task of setting up the pool and dealing with the moral
hazard and adverse selection.
ii. Credit substitution
In many cases is delegation combined with credit substitution but may not always go together. A
bank substitutes its own credit for the credit of the borrower i.e. depositors lend to the bank rather
than to the ultimate borrower. However, underwriters do not guarantee the issues they float i.e. there
is delegation but not credit substitution. When bank money is used in payment, the bank substitutes
its own credit for the credit of the buyer i.e. there is credit substitution but no delegation.
iii. Pooling
Pooling makes the liabilities of a financial intermediary safer and more liquid than its assets. For
example, pooling makes bank deposits safer and more liquid than bank assets.
iv. Netting
Executing every transaction is costly. Netting lowers the cost by offsetting one transaction with
another, so that fewer transactions need to be executed. For example, batch based net settlement of
cheque payments in clearing of cheques by banks. Netting also creates liquidity. For example,
netting of new deposits and withdrawals removes the need to liquidate the underlined assets by
banks.
Suggested answer to Q.4.b

Global depository receipts (GDRs) and American deposit receipts (ADRs) are the capital market
instruments developed to tap into foreign capital markets to secure finance for Companies of
33
international standard in terms of size, performance and corporate governance practices. GDRs are
the depository receipts denominated in US dollars issued by a depository bank in a foreign country
against the deposit with local custodian bank of local currency shares of a company in home
country. They are negotiable certificate without any voting rights that represents right to the
benefits of holding a share. These GDRs are freely tradable in the overseas market like any other
dollar denominated security through either a foreign stock exchange or through over the counter
(OTC) market or among restricted groups like qualified institutional buyers. ADRs are the
depository receipts issued by depository bank in the United States of America (USA) against
deposit of shares of a local company with local custodian bank in their home country like GDRs.
The companies issuing ADRs are subject to stringent norms of corporate governance as imposed by
Securities Exchange Commission (SEC) of USA which is a regulatory body of capital market in
USA like SEBON in Nepal. ADRs like GDRs provide access to the vast capital market of United
States as a source of finance when foreign direct investment is restricted in a country.
Suggested answer to Q.4.c

One of the most popular investments in the financial markets today is the carry trade. This
involves selling or borrowing an asset with a low-interest rate, with the aim of using the
proceeds to fund the purchase of another asset with a higher interest rate. By paying a low
interest rate on one asset and collecting the higher interest earned by the other asset, you profit
from the interest rate difference.
When it comes to currency trading, a carry trade is one where a trader borrows one currency
(for instance the USD), using it to buy another currency (such as the JPY). While the trader
pays a low interest rate on the borrowed/sold currency, they simultaneously collect higher
interest rates on the currency that they bought. The interest rate differential between the two
currencies is the profit. Carry trading gives currency traders an alternative to “buying low and
selling high” – a tough thing to do on a day to day basis. Most forex carry trading involves
currency pairs such as the NZD/JPY and AUD/JPY due to the high-interest rate spreads
involved.
Placing trades to take advantage of carry interest gives you an advantage since, in addition to
trading gains, you also receive interest earnings. Carry trading also lets you make use of
leverage to trade assets you would not otherwise be able to afford. The daily interest paid on the
carry trade is based on the leveraged amount, which can make for huge profits from a relatively
modest outlay. Still, carry trading carries significant risk, specifically due to the uncertainty in
exchange rates. The high levels of leverage utilized in carry trades mean that even small
movements in exchange rates could result in large losses if a trader fails to hedge their position
appropriately. Due to these reasons, carry trading is only a good option for traders with a high-
risk appetite. In any case, it should never be the main driver of your trades, but an additional
aspect that gives you an advantage over the financial markets.
Suggested answer to Q.4.d

The term hostile takeover refers to the acquisition of one company by another corporation
against the wishes of the former. The company being acquired in a hostile takeover is called the
target company while the one executing the takeover is called the acquirer. In a hostile takeover,
the acquirer goes directly to the company's shareholders or fights to replace management to get
the acquisition approved. Approval of a hostile takeover is generally completed through either a
tender offer or a proxy fight. Hostile takeover has mainly following features:
• A hostile takeover occurs when an acquiring company attempts to take over a target
company against the wishes of the target company's management.
34
• An acquiring company can achieve a hostile takeover by going directly to the target
company's shareholders or fighting to replace its management.
• Hostile takeovers may take place if a company believes a target is undervalued or when
activist shareholders want changes in a company.
• A tender offer and a proxy fight are two methods in achieving a hostile takeover.
• Target companies can use certain defenses, such as the poison pill or a golden parachute, to
ward off hostile takeovers.
• Factors playing into a hostile takeover from the acquisition side often coincide with those of
any other takeover, such as believing that a company may be significantly undervalued or
wanting access to a company's brand, operations, technology, or industry foothold. Hostile
takeovers may also be strategic moves by activist investors looking to effect change on a
company's operations.
• The target company's management does not approve of the deal in a hostile takeover. This
type of bid occurs when an entity attempts to take control of a firm without the consent or
cooperation of the target firm's board of directors.
Suggested answer to Q.4.e
a) Benefits of Offshore Banking: The benefits that the host country may derive from allowing the
establishment of an offshore banking unit of an overseas bank in its domain are:
a) Inflow of interest –free foreign capital
b) Supply of capital from foreign sources to capital-intensive local industries.
c) Earnings foreign exchange by way of payment for services rendered in converting raw
materials into finished goods etc
d) Exemption from minimum reserve requirement of CRR/SLr ( as in Nepal)
e) Low or non-existent taxes and levies.
f) Entry is relatively easy, especially for large international banks, in contrast to the situation
in neighbouring countries, which may be strictly limit or prohibit the entry of foreign banks
g) License fees are generally low.
h) Close proximity to the important loan outlets or deposit sources.
5.
a)
General Electric Inc. (GE), USA currently exports 500 special electric lights per
month to UAE @ $ 60 per piece. The variable cost per electric light is $ 40. In June
2022, the company was approached by the Government of UAE to establish a
manufacturing plant in UAE.
After careful analysis, the company decided to make an equity investment of $ 1
million, half of which would represent working capital and the other half the fixed
assets. The company would sell the plant to a local entrepreneur for a sum of $ 1
million at the end of 5 years and the Central Bank of UAE would repay the
company $ 500,000 for working capital.
In return for an increase in tariffs against other companies, GE will sell its electric
lights at $ 50 per piece in the UAE. In addition, the company undertakes to buy
certain raw materials from local suppliers and also to employ local managers. The
total cost of local managers and materials would be $ 15 per electric light. Other
materials would be purchased from the parent company at $ 10 and the parent
company would receive a direct contribution to overhead variable costs at $ 5 per
piece sold.
Under this arrangement, the company expects to sell 1,000 electric lights per month.
The fixed assets are to be depreciated on a straight line basis over a 5 year period.
35
The company will have to pay income tax at 50% on profits earned in UAE. The US
also has 50% tax rate with direct credit for UAE taxes.
The current exchange rate is 10 Dirham per dollar and is expected to stay the same
for the next 5 years. There is no restriction on cash flow repatriation.
You are required to determine the adjusted present value of the project at 10% cost
of capital. Further, GE has been informed that if it decides to reject the project, it
would lose its entire export sales to the UAE. How does this affect decision of GE? 8
Suggested answer to Q.5.a
Calculation of cash flow for the project lifespan of 5 years:

Sales revenue (1,000 × 50 × 12) 600,000
Less: Variable cost [(15+10-5) × 1,000 × 12] 240,000
Less: Depreciation (1,000,000 × 0.5/5) 100,000
Profit before tax 260,000
Less: Income tax (260,000 × 50%) 130,000
Profit after tax 130,000
Add: Depreciation 100,000
Cash flow after tax 230,000
Calculation of cash flow at the end of 5th year:
Sale proceeds from sale of plant 1000,000
Less: Book value of plant 0
Profit on sale of plant 1000,000
Less: Income tax (1000,000 × 50%) 500,000
Profit after tax/ net sale proceeds from sale of plant 500,000
Add: Repayment of working capital by Central Bank 500,000
Terminal cash flow after tax 1000,000
Calculation of Net/adjusted present value of project:
Year Cash Flows PV Factor at 10% PV of Cash Flow
1-4 230,000 3.169 728,870
5 1,230,000 0.621 763,830
Total cash inflows 1,492,700
Less: Initial investment 1,000,000
Net present value 492,700
Calculation of loss to GE on rejection of Project:
Export sales revenue (500 × 60 × 12) 360,000
Less: Variable cost (500 × 40 × 12) 240,000
Profit before tax 120,000
Less: Income tax (120,000× 50%) 60,000
Profit after tax 60,000
Present value of net profit for 5 years at 10% (60,000 × 3.790) 227,400
Therefore, if GE decides to reject the Project, it would lose $ 227,400 over 5 years period.
While on acceptance of the Project it will receive incremental benefit of (492,700 - 227,400)
= $ 265,300 over 5 years period. Hence, GE would be compelled to accept the project due
the additional information.
b)
Following data relates to share of Company X where European call option is also
available for risk management:
Current price of one share Rs. 200
Strike price of call option Rs. 180
Risk free rate of interest 10% p.a. (on continuous compounding basis)
36
= 0.9048 and = 1.1052

You are required to calculate theoretical current (fair) price of the European call option
expiring after 1 year and how can an arbitrageur make profit, if the price of the call
option is Rs. 30. 7
Suggested answers to Q.5.b

Current price of 1 share = Rs. 200
Strike/ Exercise price = Rs. 180
Rate of interest (r) = 10%
Time (t) = 1 year
Since, Theoretical current price of call option = Current price in the market - Current exercise price
So, Theoretical current price of call option = 200 - Exercise Price ×
= 200 - 180×
= 200 - 180×
= 200 - 180 × 0.9048 = 200 - 162.86 = Rs. 37.14
If the price of the call option is Rs. 30, it becomes lower than theoretical or fair value, hence
the arbitrageur will purchase the call option. The call option gives the right to the buyer to
purchase the asset at expiration date but no obligation, so s/he will take course of action as
per the then market price of share.
Suppose s/he has 1 share and he sells the share in the market.
Then, total amount available to the person as on today for investment = Rs. 200 - 30 = Rs. 170
The amount available after 1 year = 170 ×
= 170 ×
= 170 ×
= 170 × 1.1052 = Rs. 187.88
If after 1 year, market price of share is higher than Rs. 180 i.e. Rs. 200, s/he will exercise
the call option and the profit made will be = Rs. 187.88 - 180 = Rs. 7.88
If after 1 year, market price of share is lower than Rs. 180 i.e. Rs. 160, s/he will not exercise
the call option and buy the share in market, hence profit made will be = Rs. 187.88 -
160 = Rs. 27.88
6.
a)
The market received rumor about ABC corporation's tie-up with a multinational
company. This has induced the market price to move up. If the rumor is false, the
ABC corporation stock price will probably fall dramatically. To protect from this an
investor has bought the call and put options. He purchased one 3 months call with a
striking price of Rs.42 for Rs. 2 premium, and paid Re.1 per share premium for a 3
months put with a striking price of Rs.40. 5
(i) Determine the Investor's position if the tie up offer bids the price of ABC
Corporation's stock up to Rs. 43 in 3 months.
(ii) Determine the Investor's ending position, if the tie up program fails and the price
of the stocks falls to Rs. 36 in 3 months.
Suggested answers to Q.6.a
(Rs.)
100 shares call @ Rs. 2 premium 200
100 shares put @ Rs. 1 premium 100
Total cost of call and put options 300
37
(i) If the stock price increases to Rs. 43 in 3 months

The market price is higher than the strike price, and hence exercise the call option.
Then, the position is as follows:
(Rs.)
Initial premium on call and put options 300
Less: Gain on call option @ Rs. 1 per
share 100
Net Loss 200
ii) If the stock price falls to Rs. 36 in 3 months

The market price is lower than the strike price, and hence do not exercise the call option
(Rs.)
Initial premium paid on call and put
options 300
Less: Gain on put option @ Rs. 4 per share 400
Net gain 100
a)
i) If beta (β) is 1.50; Rf (risk-free returns) is 6.00%; and Rm (market return)
is12.00%, what should be the return on the share with the beta as given above?
ii) If the alpha value is 1.5, 1, 0 (zero), or -2.40, what would be the corresponding
actual returns from the stock in (i)?
iii) What investment action would you suggest for each of the four different
situation in (ii)
1+3+1=5
Question No. 6 (b) Solution:
The given can be detailed as under:

I. If beta (β) is 1.50; Rf = 6.00%; and Rm = 12.00%,
E (Rj) as per CAPM = Rf + β(Rm - Rf) = 6 + 1.5 × (12-6) =15%
II. Alpha = Actual return - Expected or Required return as per CAPM
Therefore, if Alpha = +1.5, since E (Rj) = 15%, Actual return = 16.5%

if Alpha = +1.0, since E (Rj) = 15%, Actual return = 16%
if Alpha = + 0 , since E (Rj) = 15%, Actual return = 15%
if Alpha = -2.4, since E (Rj) = 15%, Actual return = 12.6%
III. Whenever Alpha is positive, we retain the stock and when it turns negative we sell
the stock. And when it gives the desired return we are indifferent.
38
Paper 3: Advanced Auditing

Marks
1. Comment and give your views with reasons on each of the following cases, giving
consideration to respective Standards, Laws and Code of Ethics:
a) You are the manager responsible for the audit of Sigma Company Private
Limited. The Company’s financial year ended on Ashad 32, 2079 and you are
reviewing the audit work which has been completed on a payroll processing.
A summary of the work which has been performed is given below and the
description of audit work indicates the full extent of the audit procedures
carried out by the audit team.
The payroll function is outsourced to R & J Associates Private Limited, a
service organization which processes all of Sigma Company Private Limited’s
salary expenses. The payroll expenses recognized in the financial statements
have been tracked back to year-end report issued by R & J Associates Private
Limited. The audit team had no direct contact with R & J Associates Private
Limited as the year end reports were sent to Sigma Company Private
Limited’s finance director who then passed them to the audit team. Sigma
Company Private Limited employs a few casual workers who are paid in cash
at the end of each month and are not entered into payroll system. The audit
team has agreed the cash payments made back to the petty cash records and
the amounts involved are considered immaterial.
Required:
a) Comment on the sufficiency and appropriateness of the audit evidence

obtained (3)
b) Recommend further audit procedures to be performed by the audit team and

(5)
c) Explain the matters which should be included in a report in accordance to
NSA 265, Communicating Deficiencies in Internal Controls to Those Charged
with Governance and Management. (2)
Answer:
(a) The audit work in respect of payroll needs to be much more thorough. Simply
agreeing the amounts to the reports issued by R & J Associates Private Limited provides
no evidence on the completeness, accuracy or validity of the payroll figures recognized in
the financial statements. The audit team seems to have relied on R & J Associates Private
Limited’s year end reports as being accurate and the requirements of NSA 402 Audit
Consideration Relating to an Entity Using a Service Organization do not appear to have
been followed.
The audit team needs to obtain assurance on the control risk which R & J Associates
Private Limited has implemented in order to assess the risk of material misstatement in
the payroll figures and to respond to the risk with appropriate audit procedures. The
controls which Sigma Company Private Limited uses to verify the information received
from R & J Associates Private Limited also needs to be understood. With the permission
of Sigma Company Private Limited, the audit team should contact R & J Associates
Private Limited with the objective of obtaining more information which can be used to
assess how the payroll has been processed and the controls which are in place. The
controls in place at Sigma Company Private Limited should be documented and tested. It
39
is recommended that further substantive procedure should be carried out to provide a

wider range of evidence on the payroll processing expenses recognized in the financial
statements.
In relating to the casual employees, the fact that the amount involved is immaterial means
that the audit team doesn’t need to perform any further detailed audit procedure as there
is no risk of material misstatement. However, as there is a risk over the completeness of
these costs, the controls in place to ensure this process is effectively managed should be
discussed with management and documented.
(b) Further audit procedure:

• Review the service agreement between Sigma Company Private Limited and R & J
Associates Private Limited to understand the exact work which is conducted by R & J
Associates Private Limited as a service organization
• Read all report made by R & J Associates Private Limited during the year to identify
any risk of misstatement in the payroll figures.
• Discuss and document relevant controls in place at Sigma Company Private Limited
over the information received from R & J Associates Private Limited and the
management of casual employees, and perform test of controls on a sample basis.
• The amount of unpaid taxes in respect of the casual workers should be quantified by
recalculations of the amount due.
• Read any user manuals or system overviews to assess the efficacy of the controls in
place over the processing of payroll.
• If necessary, obtain a type1 or type 2 report from R & J Associates Private Limited to
obtain further assurance on the controls which the service organization has in place.
• Perform a substantive analytical review on payroll, preparing an auditors expectation
of the payroll figures and comparing it to that recognized in the financial statements
and discussing any variance with management
• Perform test of detail by selecting a sample from the payroll records and agreeing the
amounts to pay slips and HR record.
(c)Report to those charged with governance
The fact that casual employees are being paid from petty cash without being put onto the
company’s payroll indicates that Sigma Company Private Limited may not be complying
with NSA 265 Communicating Deficiencies in Internal Controls to Those Charged with
Governance and Management, for example the appropriate payroll taxes are not being
paid. Despite the amount involved being immaterial, the potential noncompliance should
be reported to those charged with governance, along with the recommendation that all
employees, whether casual or not, should be processed through the company’s payroll
system. There may be implication for the financial statements if fines or penalties are
imposed by the tax authority in respect of the noncompliance.
9889
b)
You are an audit manager at S&T Associates, a firm of Chartered
Accountants. The Senior Partner of S&T had summarized a number of matters
he had identified for different clients and wants you to help him to address
them. You have been provided with the following summary of such matters:
• S&T has been invited to be the statutory auditors of Regent Ltd., a
company listed in Nepal Stock Exchange and is engaged in hospitality
business. Mr. Suresh Pradhan who is an assurance partner of S&T is also a
Director of Awas (Pvt) Ltd, which is controlled by Regent Ltd.
40
• Enlight (Pvt) Ltd is an audit client of S&T and is in the tourism business.
They had offered a holiday package in a five-star hotel to the audit partner
and his family. This is for a period of one week with access to other
facilities such as gym, spa, and bar.
• S&T had been providing internal audit services to Nature Cosmetics (Pvt)
Ltd for over 5 years. The Board of Directors of Nature Cosmetics (Pvt) Ltd
has now invited S&T to be the statutory auditor.
• Continental (Pvt) Ltd is an audit client of S&T. During the course of the
current audit, the team had noted inappropriate capitalization of interest
costs on construction of a building even after the building was made
available for use for the said purpose. The interest cost capitalized was
material, but the client did not agree to adjust the financial statements or
agree to a qualification in the audit report. Further, the Managing Director
had stated that the Board of Directors will decide whether to reappoint
S&T as statutory auditors, based on this matter.
For each of the above scenarios, identify and assess the possible threats to
independence of S&T when complying with the fundamental and ethical
principles, giving your reasons for each threat identified. (2.5×4=10)
Answer:
Scenario Possible Threat/ Explanation

Risk
(i) New appointment and Threat to Since a partner is also a director of the subsidiary
a Objectivity and company of the potential audit client, there is a threat to
the objectivity of the auditor as it gives rise to a self-
partner is a director of Self-interest risk interest risk.
the
Further the Companies Act prohibits appointing an audit
potential audit client’s firm when a partner is a director of the potential audit
subsidiary company client or related entity of the potential audit client.
If this appointment is to be accepted, the assurance
partner (Suresh Pradhan) will have to agree to resign as
a director; otherwise, S&T cannot accept this client as
an audit client.
(ii) Audit client (Enlight Threat to The gift and hospitality treatment cannot be considered
(Pvt) Ltd) offered a Objectivity and as a token of love and it is a costly and exclusive offer
holiday package in Self-interest/ and to the audit partner and his family. If it is accepted, it
will be a threat to the objectivity of the auditor. As the
five-star hotel advocacy risk
audit partner gets significant benefits, the audit client
might be able to influence the decisions of the audit
partner and make him take decisions in the interest of
the company.
(iii) Internal audit Self-review threat If internal audit services are provided, the auditor needs
client (Nature (i.e. review of own to understand whether the work involved as the internal
Cosmetics (Pvt) Ltd) work) auditor would be subject to the review as part of the
audit. In this case it is important to be aware of the
offering for a statutory
scope of the internal audit (e.g., if the internal auditor
audit service has been involved in designing and implementing the
internal controls over financial reporting, then there is a
41
threat of reviewing own controls. If these controls were

operational and had no direct impact on the financial
statements, then the threat is reduced. The significance
of the threat and the safeguards that should be in place
should be assessed).
(iv) Inappropriate Intimidation threat In this instance, the audit partner is threatened and there
capitalization of is a fear of losing the audit client. If a good audit fee is
interests by the audit generated it will have an impact on the audit firm. If that
is the case, the firm will be under pressure to issue an
client and not agreeing
unmodified audit opinion.
to correct FS, rather
considering whether to
re-appoint
2.
(a) The audit report of Kosis Pvt. Ltd. for FY 2077-78 was issued by M/s
Bishwas & Co. on 20th Kartik 2078. However, a case was filed against Kosis
Pvt. Ltd. on 3rd Marg, 2078, with the Civil Court, with respect to an incident
caused in its factory on 15th Baisakh, 2078, the outcome of which may result
in paying heavy penalty by Kosis Pvt. Ltd.
Mr. Ramdev, the partner of M/s Bishwas & Co., discussed the said matter
with the management and it was determined to amend the financial statements
for FY 2077-78. Further, Mr. Ramdev inquired how the management intended
to address the said matter in the financial statements to which he was told that
the said matter was going to be disclosed as a “Contingent Liability for a
Court case” to the foot note in the balance sheet with no additional
disclosures.
The management told Mr. Ramdev that such disclosure was enough as he
would further give a description of the said court case and its outcome in the
‘Emphasis of Matter’ paragraph in his amended audit report.
In the context of aforesaid case scenario, please answer the following
questions: 10
1. Whether Mr. Ramdev on behalf of M/s Bishwas & Co., has properly
adhered to his responsibilities in accordance with NSA 560, on becoming
aware of the court case filed against Kosis Pvt. Ltd.?
2. Whether the contention of management of Kosis Pvt. Ltd. is valid with
respect to the disclosure of the court case in the financial statements?
Answer:
Auditor’s Responsibilities as per NSA 560:
• As per NSA 560, ‘Subsequent Events’, the auditor has no obligation to perform
any audit procedures regarding the financial statements after the date of the
auditor’s report. However, when, after the date of auditor’s report but before the
date the financial statements issued, a fact becomes known to the auditor that, had
it been known to the auditor at the date of auditor’s report, may have caused the
auditor to amend the auditor’s report, the auditor shall:
i. Discuss the matter with management and, where appropriate, TCWG.
ii. Determine whether the financial statements need amendment and, if so.
iii. Inquire how management intends to address the matter in the financial
statements.
• In the given case, on becoming aware of the court case filed against the company,
Mr. Ramdev discussed the said matter with the management and it was
42
determined to amend the financial statements. Also, he inquired how the

management intended to address the said matter in the financial statements.
• However, if management does not take necessary steps to ensure that everyone in
receipt of the previously issued financial statements is informed of the situation
and does not amend the financial statements in circumstances where Mr. Ramdev
believes they need to be amended, the auditor shall notify management and,
TCWG, that the auditor will seek to prevent future reliance on the auditor’s
report. If despite such notification the management of TCWG do not take these
necessary steps, the auditor shall take appropriate action to seek to prevent
reliance on the auditor’s report in accordance with NSA 560.
Disclosure of the court case in the financial statements:

As per NSA 706, ‘Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report’, and an Emphasis of Matter paragraph is not a
substitute for:
i. A modified opinion in accordance with NSA 705 (Revised) when required by the
circumstances of a specific audit engagement;
ii. Disclosures in the financial statements that the applicable financial reporting
framework requires management to make, or that are otherwise necessary to
achieve fair presentation; or
iii. Reporting in accordance with NSA 570 when a material uncertainty exists
relating to events or conditions that may cast significant doubt on an entity’s
ability to continue as a going concern.
In the given case, the management of company has presumed that as the auditor was
going to provide a description of the said court case and its outcome in the ‘Emphasis
of Matter’ paragraph in his amended audit report, there was no further need for it to
provide additional disclosures about the court case in the financial statements.
Conclusion
Contention of management is not valid as ‘Emphasis of Matter’ paragraph cannot be
used as a substitute for disclosures required to be made in the financial statements as
per the applicable financial reporting framework or that is otherwise necessary to
achieve fair presentation, which is the responsibility of the management.
(Marking Scheme: 4 marks for NSA Provision, 4 marks for Disclosures and 2 marks
conclusion)
(b) D
uring the audit of Samana Ltd., a listed company, Engagement Partner (EP)
completed his reviews and also ensured compliance with independence
requirements that apply to the engagements. The engagement files were also
reviewed by the Engagement Quality Control Reviewer (EQCR) except the
independence assessment documentation. Engagement Partner was of the
view that matters relating to independence assessment are responsibility of the
Engagement Partner and not of the Engagement Quality Control Reviewer.
So, the Engagement Partner did not provide documents relating to
independence assessment to the Engagement Quality Control Reviewer. The
Engagement Quality Control Reviewer objected to this and refused to sign off
the documentation. Discuss about the responsibility of the Engagement
Partner and the Engagement Quality Control Reviewer and advise as per
applicable NSA. (4+4+2=10)
Answer:
43
Responsibility of Engagement Partner

As per para 11 of NSA 220, the Engagement Partner shall form a conclusion on
compliance with independence requirement that apply to the audit engagement. In
doing so, the engagement partner shall:
i. Obtain relevant information from the firm and, where applicable, network firms,
to identify and evaluate circumstances and relationships that create threats to
independence;
ii. Evaluate information on identified breaches, if any, of the firm's independence
policies and procedures to determine whether they create a threat to
independence for the audit engagement; and
iii. Take appropriate action to eliminate such threats or reduce them to an
acceptable level by applying safeguards, or, if considered appropriate, to
withdraw from the audit engagement, where withdrawal is possible under
applicable law or regulation. The Engagement Partner shall promptly report to
the firm any inability to resolve the matter for appropriate action.
As per para 19 of NSA 220, for audits of financial statements of listed entities, for
which the firm has determined that the engagement quality control review is
required, the Engagement Partner shall determine that an EQCR has been appointed
and discuss the significant matters arising during the audit engagement, including
those identified during the engagement quality control review, with the EQCR and
not date the auditor's report until the completion of the engagement quality control
review.
Responsibility of the Engagement Quality Control Reviewer (EQCR)
As per para 20 of NSA 220, The Engagement Quality Control Reviewer (EQCR)
shall perform an objective evaluation of the significant judgements made by the
engagement team, and the conclusions reached in formulating the auditor's report.
This evaluation shall involve:
• Discussion of significant matters with the engagement partner;
• Review of the financial statements and the proposed auditor's report;
• Review of the selected audit documentation relating to the significant
judgements the engagement team made and the conclusions it reached; and
• Evaluation of conclusions reached in formulating the auditor's report and
consideration of whether the proposed auditor's report is appropriate.
As per para 21 of the NSA 220, for audits of financial statements of listed company,
the Engagement Quality Control Reviewer on performing an engagement quality
control review, shall also consider the following:
• The engagement team's evaluation of the firm's independence in relation to the
audit engagement;
• Whether appropriate consultation has taken place on matters involving differences
of opinion or other difficult or contentious matters, and the conclusions arising
from those consultations; and
• Whether audit documentation selected for review reflects the work performed in
relation to the significant judgements and supports the conclusions reached.
Conclusion
In the given case, considering the responsibility of the Engagement Partner and
Engagement Quality Control Reviewer required by the NSA 220, as discussed
above, the view of the Engagement Partner regarding the review of independence
assessment document is not right. The independence assessment documentation
should be made available to the ECQR for review purpose. The Engagement Quality
44
Control Reviewer is right since without reviewing the documents relating to

independence assessment s/he shall not be able to sign off the reviewed documents.
3.
a) Write down the objective, need and procedure of external confirmation? What
are the auditor’s responsibility in case management refusal external
confirmation or have doubt on external confirmation? (4+4=8)
Answer
Nepal Standards on Auditing 505 dealt with the external confirmation. The objective,
need and procedure of external confirmation are as follows:
Objective:
The objective of the auditor, when using external confirmation procedures, is to design
and perform such procedures to obtain relevant and reliable audit evidence or whether
performing further audit procedures is necessary.
Need for External Confirmation:

An auditor responsibility for the audit of the financial statement is to obtain reasonable
assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error. The auditor identifies and assess the risks of
material misstatement of the financial statements, whether due to fraud or error, designs
and performs audit procedures responsive to those risks, and obtain audit evidence that
is sufficient and appropriate to provide a basis for opinion.
External Confirmation is required to obtain such reasonable assurance on the financials
of a company. To obtain sufficient and appropriate audit evidence by performing
substantive procedures one of the method of collecting audit evidence is the External
Confirmation.
Procedure for External Confirmation:
1. Determining the information to be confirmed;
2. Selecting the appropriate parties from whom confirmation is required;
3. Designing the confirmation requests, being properly addressed with
information for responses to be sent directly to the auditor; and
4. Sending the requests, including follow-up request.
Auditor should ensure direct communications with the confirming parties to minimize
the possibility that the results of such confirmation process will be biased because of the
interception and alteration of confirmation request or responses.
External Confirmation shall be obtained by sending request to third party to confirm the
particular matter or amount.
The auditor may give a list of accounts selected for confirmation to the management for
preparing requests for confirmations, which should be properly addressed and stamped.
The auditor should ensure that it is the auditor who sends out the confirmation requests,
and it is requested that all replies and the undelivered confirmations are delivered
directly to the auditor. Email confirmation is also a valid confirmation.
Auditor’s responsibility in case management refusal external confirmation or have doubt
on external confirmation are as follows:
In case of Management refusal for external confirmation:

1. Inquire management’s reasons for the refusal, and seek audit evidence for
validity,
45
2. Evaluate the implications for such refusal

3. Perform alternative audit procedures
If management refusal is unreasonable, or the auditor is unable to obtain relevant and

reliable audit evidence from alternative audit procedures, the auditor shall communicate
with those charged with governance.
In case of doubt on external confirmation:
If the auditor has doubts about reliability of response, he shall obtain further evidences
to resolve the doubts.
If the auditor determines that response to confirmation request is not reliable, the auditor
shall evaluate the implications on the assessment of the relevant risks of material
misstatement, including the risk of fraud, and on the related nature, timing and extent of
other audit procedures.
If case auditor is even not satisfied with audit evidences obtained from alternative audit
procedures and he has assessed that risk of material misstatement on such circumstances
is still existed. If auditor ascertain it is the limitation of work, he has to modify his audit
report in line with NSA 705 (revised) accordingly or should withdraw from the
assignment. Before confirming withdrawal from the assignment auditor should inform
the matter to TCOG after legal consultation if required.
b) How would you evaluate the effects of misstatements identified on financial

statement during the audit? 7
Answer:
As per NSA 450, Evaluation of Misstatements identified during the Audit, misstatement
refers to a difference between the reported amount, classification, presentation, or
disclosure of a financial statement item and the amount, classification, presentation, or
disclosure that is required for the item to be in accordance with the applicable financial
reporting framework. Misstatements can arise from error or fraud. When the auditor
expresses an opinion on whether the financial statements are presented fairly, in all
material respects, or give a true and fair view, misstatements also include those
adjustments of amounts, classifications, presentation, or disclosures that, in the auditor’s
judgment, are necessary for the financial statements to be presented fairly, in all material
respects, or to give a true and fair view. Prior to evaluating the effect of uncorrected
misstatements, the auditor shall reassess materiality determined in accordance with NSA
320 to confirm whether it remains appropriate in the context of the entity’s actual
financial results. The auditor’s determination of materiality is often based on estimates
of the entity’s financial results, because the actual financial results may not yet be
known. Therefore, prior to the auditor’s evaluation of the effect of uncorrected
misstatements, it may be necessary to revise materiality determined in accordance with
NSA 320 based on the actual financial results. The auditor shall determine whether
uncorrected misstatements are material, individually or in aggregate. In making this
determination, the auditor shall consider:
(a) The size and nature of the misstatements, both in relation to particular classes of
transactions, account balances or disclosures and the financial statements as a whole, and the
particular circumstances of their occurrence; and
(b) The effect of uncorrected misstatements related to prior periods on the relevant classes of
transactions, account balances or disclosures, and the financial statements as a whole
Communication with Those Charged with Governance:
The auditor shall communicate with those charged with governance uncorrected
misstatements and the effect that they, individually or in aggregate, may have on the
opinion in the auditor’s report, unless prohibited by law or regulation. If uncorrected
misstatements have been communicated with person(s) with management responsibilities,
and those person(s) also have governance responsibilities, they need not be communicated
46
again with those same person(s) in their governance role. The auditor nonetheless has to
be satisfied that communication with person(s) with management responsibilities
adequately informs all of those with whom the auditor would otherwise communicate in
their governance capacity.
Documentation:
The auditor shall include in the audit documentation: (a) The amount below which
misstatements would be regarded as clearly trivial; (b) All misstatements accumulated
during the audit and whether they have been corrected; and (c) The auditor’s conclusion
as to whether uncorrected misstatements are material, individually or in aggregate and the
basis for that conclusion.
4.
(3×5=15)
(a) Mr. Keshav, a practicing Chartered Accountant is the proprietor of M/s
Keshav & Co. since 2065. He went abroad in the month of Chaitra 2078. He
delegated the authority to Mr. Yadav a Chartered Accountant, his employee
for taking care of the important matters of his office.
During his absence of Mr. Yadav has conducted the undermentioned jobs in
the name of M/s Keshav & Co.
i. He issued net worth certificate to a client for furnishing to a bank.
ii. He attended the income tax proceedings for a client as authorized
representative before income tax authorities.
Please comment on eligibility of Mr. Yadav for conducting such jobs in name
of M/s Keshav & Co. and liability of Mr. Keshav under the Chartered
Accountants Act, 1997.
Answer:
• As per the provisions of section 34 and section 41 of Nepal Chartered
Accountants Act, 1997, a Chartered Accountant in practice is deemed to be guilty
of professional misconduct “if he allows a person not being a member of the
institute in practice or a member not being his partner to sign on his behalf or on
behalf of his firm, any balance sheet, profit and loss account, report or financial
statements’’.
• In this case CA Keshav proprietor of M/s Keshav & Co., went abroad and
delegated the authority to another Chartered Accountant Mr. Yadav, his
employee, for taking care of routine matters of his office.
• The power to sign routine documents of which a professional opinion or
authentication is not required to be expressed, may be delegated and such
delegation will not attract the above provisions. Examples of such instances are
issue of audit queries, asking for information or issue of questionnaire, attending
to routine matters in tax practice etc.
Conclusion
i. Issuance of net worth certificate to a client for furnishing to bank by Mr.
Yadav is not a routine work and it is outside his authorities. Thus, CA Keshav
is guilty of professional misconduct under section 34 and penalties as per
section 41(3) of the Nepal Chartered Accountant Act, 1997 can be levied to
him.
ii. Attending Income Tax proceedings for a client as authorized representative
before Tax Authorities falls under routine work, hence Mr. Yadav, the
employee of M/s Keshav & Co. can attend to routine matter in tax practice.
Therefore, there is no misconduct in this case.
47
(b) Based on provisions laid down in Directive issued by the Institute on 'Criteria
for Accounting Professional Firms and Fee Determination, 2078', discuss
about the physical infrastructure requirements for accounting professional
firms.
Answer:
The Institute, as decided in 256th Council Meeting, has issued Directives on 'Criteria for
Accounting Professional Firms and Fee Determination, 2078. Preamble of this directive
intends to gain stakeholders' trust towards accounting profession through quality services
by the firms.
In para 4 of this Directives, physical infrastructure requirements in terms of office space,
meeting room, toilet, computer, data server etc. for professional accounting firms are
prescribe. These requirements include:
(i) For a professional accounting firm of Chartered Accountant and "B" class Registered
Auditors having staffs up to 5 (including proprietor and partners), office area should
be with work space of 250 square feet and for "C" and "D" class Registered
Accountants' firm office area should be with work space of 150 square feet.
(ii) For firms having staffs more than 5 (including proprietor and partners), additional 20
square feet per staff shall be available.
(iii) The firms shall arrange for at least one meeting room, toilet and sufficient space for
administrative works.
(iv) Where there is residence and office in same place, space used for personal and other
purposes shall not be included in calculation of office space as mentioned above.
(v) The firms shall make available in their offices in physical or in digital form the
prevailing laws, directives issued by the regulatory agencies, professional and
technical standards, professional publications, newspapers and other publications.
(vi) The firms shall make available the laptop, computer for staffs and ensure
security and confidentiality of data, server and internet and email.
(c)
i) When the Office of Auditor General Nepal has issued its annual
report for FY 2077/78 & what are the audited figures & “Beruju” for
the FY 2075/76, 2076/077 and 2077/078? (3)
ii) What is Good Governance Act in Nepal? Elaborate about the

maintenance of Citizen`s Charter. (2)
Answer :
i)
The Office of Auditors General of Nepal had issued its annual report for FY
2077/78 during 2079/03/29. The status of audited figures & “Beruju” for the FY
2075/76, 2076/077 and 2077/078 are as follows:
Financial Year Audited Figures (Rs. In Crore) Beruju (Rs. In Crore)
2075/076 200,884 10,634
2076/077 175,604 7,106
2077/078 155,581 4,439
48
ii)
Good Governance (Management & Operation) Act 2064 (2008) had enforced in
Nepal with effect from 2064/10/23 (06/02/2008). Section 25 of the Act has
prescribed Citizen`s charter shall have to be maintained by each public entities.
The charter should content the following matters:
a) Detail statement of service offered by the office and its nature,
b) Procedure to be followed by the service user (customer) to obtain the service,
c) Estimated time for delivering the service,
d) Description of the officer responsible for providing service and his/her
chamber,
e) Particulars of the fees to be charged or other amount to be paid, if any, to
receive the service,
f) Other matters as prescribed,
5) Answer the following: (3×5=15)
a) Write down the Audit procedures that may be applied to ATM operations
of the bank.
Answer:
While auditing ATM operations, Auditor should ensure or perform that:
• Whether periodic visits and check are made/done by ATM Channel Manager?
• Whether monitoring of uptime is done on real-time basis by bank?
• Whether online System for enabling immediate notification to vendor about
breakdown is available?
• Whether detailed servicing & replacement of system of ATM's is done when required?
• Whether system of periodic preventive maintenance is available?
• Whether corrective actions are taken on the basis of root cause analysis?
• Whether network penetration testing for ATM's is conducted to check that they are on
network or not?
• Whether the periodic reconciliation with ATM physical cash balance and accounting
system balance is done?
• Whether adequate safeguard has been made for physical security of the ATM
Machine?
• Auditor should carried out physical verification of ATM cash with adequate
procedures & documentation.
Further Auditor should carried assess the various risks as follows:
•Control environment- The board should periodically review policies and procedures to
ensure that proper controls have been implemented. There should also be a system in
place to monitor if bank employees are complying with the set policies and procedures
with instances of noncompliance being reported to the Board. Incidents of
noncompliance should have some follow-up and testing for compliance.
•Risk assessment- An evaluation of risks and control issues should accompany a bank's
ATM operations. Internal audit personnel should always be involved in the risk
assessment process for ATM operations. Technology is an integral part of ATM
operations and should also be assessed for risk factors and control issues
49
.•Control activities- Independent verification and reconciliations are integral to the

integrity of audit procedures for ATM operations. Segregation of duties and dual
controls are crucial to any operation that involves the handling of bank assets,
particularly cash. More important than segregation and dual controls is having a system
in place that ensures that personnel are complying with the policies and procedures
regarding segregation of duties and dual controls. A vacation policy in place for
employees that mandate at least one consecutive week's absence from duties is necessary
for critical employees involved in ATM operations.
If any, of these procedures might have resulted in the discovery of the embezzlement
scheme at bank/branch then it can be taken care of immediately.
b) Peace Limited has its entire operations including accounting computerized.

As the audit partner you are concerned about inherent and control risk for
material financial statement assertions. What could be the areas you look
forward for deficiencies and risk identification?
Answer:
The auditor in accordance with NSA 315 “Identifying and Assessing the Risk of
Material Misstatement through Understanding the Entity and its Environment”, should
make an assessment of inherent and control risk for material financial statement
assertions.
In CIS environment the risk of a material financial statement ascertain being erroneously
stated could arise from the deficiencies in the following case as:
(i) Program development and maintenance
(ii) System software support
(iii) Operations including processing of data
(iv) Physical CIS security
(v) Control over access to specialized utility program.
These deficiencies would tend to have a negative impact on all application systems that
are processed through the computer.
c) One size does not fit all. This is common proverb which also applies to the
audit practices. Realizing this fact, the International Auditing and Assurance
Standards Board (IAASB) is in process of developing a new standard for
audits of less complex entities. In this regard, discuss about such entities and
main features of standards being developed for audits of such entities.
Answer:
International Standards on Auditing (ISAs) require proper understanding by the
auditors of complex structures and transactions of their audit clients. At the same
time, this complexity in the ISAs can pose challenges for audits of less complex
entities.
Smaller, less complex entities (LCEs) make crucial contributions to the world
economy and account for the great majority of entities globally.
Based on the feedback from a discussion paper and outreach, the IAASB developed a
draft standard proportionate to the typical nature and circumstance of an audit of a
less complex entity and responsive to stakeholders’ challenges.
This new stand-alone standard (draft) for audits of less complex entities:
50
• Is designed specifically for audits of a less complex entities

• Is based on the underlying concepts from International Standards on Auditing
• Was developed to be understandable, clear and concise
• Reduces the risk of jurisdictional divergence by driving consistency and
comparability globally
• Will achieve a quality audit engagement
The IAASB has already put this draft standard on exposure process and evaluated the
feedback received on the exposure draft, feedback survey, and outreach and is, now,
revising the draft to address stakeholder feedback.
When final, the standard will meet the growing global need for a separate standard for
audits of less complex entities, while reducing the emerging risk of jurisdictional
divergence.
5. Write short notes on the following: (5×3=15)

a. Requirements of a Risk Management System in a Bank
b. Biological Assets.
c. Access controls in IT environment
d. Negative Confirmations
e. Cold file review
6a. Answer:
The requirements of a risk management system in a Bank are as follows:
1. Involvement of TCWG:
The risk management policies should be approved by TCWG. While approving
the policies, TCWG should ensure that the policies should be consistent with the
bank’s business objectives and strategies, capital strength, management expertise,
regulatory requirements and the types and amounts of risk it regards as
acceptable.
2. Identification, measurement and monitoring of risks:
Risks that may significantly affect the achievement of bank’s goals and objectives
should be identified, measured and monitored against pre-approved limits and
criteria.
3. Control activities:
Banks must have appropriate controls to manage its risks, including the following:
• effective segregation of duties,
• verification and approval of transactions,
• setting of limits,
• Reporting and approval of exception.
4. Monitoring activities:
Independent risk management unit should be set up which regularly assess the
risk management models, mythologies and assumptions used to measure and
manage risk.
5. Reliable information systems:
Banks must have a reliable information system that provide adequate financial,
operational and compliance information on a timely and consistent basis to
management and TCWG.
6b. Answer:
51
Biological assets are resources that are living. Usually, these include plants and
animals that companies own or control. Like other resources, biological assets are
crucial in generating revenues. In most cases, companies obtain products from these
assets. Then, they may process those products to make them available for sale in the
market. Therefore, these assets are essentially the same as other resources.
The auditors' role is to audit the fair value of biological assets determined by
management, including inter alia, the appropriateness of the fair value technique used,
the assumptions made by management and inputs injected into the fair value model
6c. Answer:
Access controls are procedures designed to restrict access to on-line terminal devices,
programs and data. Access controls consist of “user authentication” and “user
authorization.” “User authentication” typically attempts to identify a user through
unique logon identifications, passwords, access cards or biometric data. “User
authorization” consists of access rules to determine the computer resources each user
may access. Specifically, such procedures are designed to prevent or detect:
• Unauthorized access to on-line terminal devices, programs and data;
• Entry of unauthorized transactions;
• Unauthorized changes to data files;
• The use of computer programs by unauthorized personnel; and
• The use of computer programs that have not been authorized.
6d. Answer:
Negative confirmations provide less persuasive audit evidence than positive
confirmations. Accordingly, the auditor shall not use negative confirmation requests as
the sole substantive audit procedure to address an assessed risk of material misstatement
at the assertion level unless all of the following are present:
(a) Risk of material misstatement is low and internal controls are effective,
(b) Population of items subject to negative confirmation procedures comprises a
large number of small amounts,
(c) A very low exception rate is expected,
(d) No reason to believe that recipient may disregard the request.
6e. Answer:
Cold file review or cold review is an objective evaluation on the date of auditor’s
report and is performed by the auditor i.e. partner himself when all the audit work has
been concluded and the required sufficient appropriate audit evidence has been
obtained and conclusions drawn and reported. This review usually takes place when
the auditor’s report is signed off. The purpose of this review is to ensure compliance
with relevant auditing standards and to analyze weaknesses in the way whole audit
work is conducted and how it can be improved for next similar assignments by
updating firm’s quality control standards, training the staff etc.
52
Paper 4: Corporate Laws

Marks
1. Answer the following questions:
a) All companies either private or public or company of non-distributing profit including

foreign company are registered under the Company Act, 2063 in the Office of the Company
Registrar and the relation of all types of companies shall be as good as it should be with the
Office. Hence, the Office has retained certain power to control and monitor these companies
and the Act has vested the power to do so. Generally, these companies shall have to submit
information and reports to the Office as per the Act. What are the documents and
information that have to be submitted or informed to the Office as per the companies Act,
2063? List out them along with the concerned section of the Act and the time period to be
submitted to the office. 10
b) DBS, a swiss bank, awarded by the World Bank of the Year (2022), has willing to open branch
office to carry on banking and financial transactions within Nepal. As you are consultant of
the bank, advise them the process and provisions as to open branch office of the DBS in
Nepal on the basis of the legal measures provided in the Bank and Financial Institution Act,
2073. 10
Answer
1 a) All companies registered under Companies Act, 2063 have to submit the documents and reports to
Office as follows:
Time Period for providing
S.No. Details of Information
information
Amendment in Articles or Memorandum
1 Within 30 days
Section, 21 (2)
Within 30 days from the date of
2 Details of Share Distribution. Section, 31
distribution of shares
Prepared 30 days before the annual
Records or shareholders, debenture holders and
3 general meeting and within 30 days of
debt. Section 51(3)
the meeting
21 days before the annual general
4 Report of Public Limited Company Section,78
meeting
• Every company within 30 days.
• Every company should submit certified
5 Annual details, Section, 80
details within 6 months from the date of
completion of FY
within 7 days of receipt in the company
6 Director's declaration. Section, 92(3)
through the company in the office
Record book of director and company secretary.
7 Within 15 days
Section,107(2)
8 Appointment of auditor. Section, 111(1) Within 15 days
Within the specified time frame by the
9 Answer to Complaint. Section, (120)
office
Death of a single shareholder.
10 Within 1 month
Section, 153 (2)
11 Merge of company. Section, 177 Within 30 days
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Within 3 months after the incorporation

12 Details of Office Address, Section, 184
of company
Foreign Company
Details required to be submitted to the office by a foreign company as per Section 81 of the
Companies Act 2063
Time Period for providing

S.No. Details of Information
information
Accounts, Audit Report and Annual Financial Statement Within 6 months of completion
1
Section, 156(1) of the Fiscal Year
Annual financial statements are prepared in accordance
2 with the law of its home country, Audit Report and Within 3 months
Director’s Report. Section,156(2)
Certified statement from the LP of the liaison office. Within 3 months of completion
3
Section, 156(5) of the Fiscal Year
Amendment or alternation to any documents submitted.
4 Within 35 days
Section,155(2)
1 b) The Bank and financial institution Act, 2073 has provided the legal measures to open branch office of
internationally rated foreign bank or financial institution. Yes, it is provide in the section 6 of the Act. It is
required following process provided in the Act.
i) Prior Approval: Subsection 1
If any internationally rated foreign bank or financial institution desires to open branch office to
carry on banking and financial transaction or non-banking financial transaction within Nepal, prior
approval of the Rastra Bank should be obtained before opening such branch office.
ii) Application: Subsection 2
An application has to be submitted to Rastra Bank along with the capital and fees as prescribed by
the Rastra Bank.
iii) Details and documents to be submitted: Subsection 3
While submitting application pursuant to Sub-Section (2), such foreign bank or financial institution
shall have to submit the following details and documents in addition to the details and documents
as referred to in Sub-Section (1) of Section 5:-
• Written commitment of the Board of Directors that it will make available on demand of the
Rastra Bank the amount necessary for fulfilling its entire liabilities with regard to business
activities of its branch of representative or liaison office of concerned foreign bank or financial
institution in Nepal,
• Details as to the location of the proposed branch office of the foreign bank or financial
institution,
• Details as to the possible office bearers to be engaged in the proposed branch office of the
foreign bank or financial institution.
iv) Inquiry of details and documents and demand thereof: Subsection 4
The Rastra Bank may, If deems necessary to demand further documents or details while carrying
out inquiry to the documents or details submitted pursuant to Sub-Section (3), demand required
documents or details from concerned applicant. The Rastra Bank may inquire of the additional
documents submitted pursuant to Sub-Section (3) and of the documents asked for submission
pursuant to Sub-Section (4).
v) Grants of Approval: Subsection 5.
54
After carrying out such inquiry and deems appropriate Rastra Bank may grant approval to open a
branch office in Nepal within one hundred twenty days after filing of the application, with or
without prescribing any conditions.
vi) Registration of branch office: Subsection 6
The foreign bank or financial institution, after obtaining prior approval pursuant to Sub-Section (5),
shall have to get registered as the branch office according to the prevailing laws relating to
companies.
vii) Approval to carry on banking and financial transaction: Subsection 7
The branch office of the foreign bank or financial institution registered shall have to submit an
application before the Rastra Bank along with the following documents and details as well as the
charge or fee as prescribed by the Rastra Bank for approval to carry on baking and financial
transaction in Nepal:-
(a) Registration certificate of being registered according to the prevailing laws to carry on banking
and financial transaction in Nepal as a branch office,
(b) Letter of approval or consent granted by the Government or central bank or regulating
agency according to the law of concerned country of the foreign bank or financial institution to
open branch office of such bank or financial institution in Nepal,
(c) Details of the discrepancy, if any, in any matter to be completed by the concerned foreign
bank or financial institution under this Act after submission of application before the Rastra
Bank for establishment of a branch office of the foreign bank or financial institution or after
obtaining approval from the Rastra Bank,
(d) Other information and documents demanded by the Rastra Bank.
viii) Inquiry on application and approval for transaction: Subsection 8
The Rastra Bank may carry out inquiry over the application received if it deems necessary. After
inquiry Rastra Bank may grant approval to such branch office of foreign bank or financial institution
for carrying on banking and financial transaction in Nepal within 90 days from the date of filing the
application.
ix) Prior Approval may be denied: Section 7
The Rastra Bank may deny to grant prior approval for open branch office of the foreign bank or
financial institution in following circumstances:
(a) If the name or banking and financial transaction to be carried out by the proposed bank or
financial institution is not found to be appropriate from the point of view of public interests,
religion, ethnicity or traditional belief, etc.,
(b) If the objective of the proposed bank or financial institution is contrary to the prevailing laws,
(c) If incorporation of the proposed bank or financial institution does not seem to be technically
appropriate,
(d) If study of the feasibility study report, details and documents other infrastructures submitted
by the proposed bank or financial institution does not provide a ground to believe that it may
carry on financial transactions in a healthy and competitive manner,
(e) If not all promoters of the proposed bank or financial institution have signed the
Memorandum of Association and Articles of Association, also stating their names, address and
number of shares subscribed by them, in the presence witness and the name and address of
the witnesses have not been mentioned,
(f) If per person share investment limit and share ownership ratio has not been found to have
been maintained as specified by the Rastra Bank from time to time,
(g) If it is found to be inconsistent with the policy relating to incorporation of bank or financial
institution and licensing policy issued by the Rastra Bank,
(h) If any condition as prescribed by the Rastra Bank has not been found to be fulfilled.
If the Rastra Bank denies granting prior approval to the proposed bank or financial
institution for any of the reasons referred to above, information shall be given to the
applicant stating reasons thereof
55
a) Co-operative is a kind of institution where various sectors of local people are integrated by
mobilizing the scattered capital and skill of the members thereof to carryout out community
based economic social and cultural activities for the development of national economy. State
the exemptions and facilities which are provided to the cooperative societies under the Co-
operative Act, 2074? 7
b) Insurance Act, 2049 states that no individual will run or cause to operate an insurance firm
without first acquiring a certificate. As a result, anyone interested in conducting insurance
business must first obtain a license from the appropriate authority. Answer with concerned
provisions the conditions under which the insurance board may impose a restriction on the
insurance business under the Insurance Act, 2049. 7
c) Tina Seth, a professional lawyer, applied for liquidator license in Office. The Office has not
responded her application saying that her qualification is not sufficient for the liquidator
license. What are the qualifications and requirements to obtain the liquidator license and
how Tina can get the license? Answer by referring the provisions of Insolvency Act, 2063. 6
Answer:
2 a) Section 78 of the Cooperative Act, 2074 prescribes the provision regarding exemption and
facilities to cooperative societies. Notwithstanding anything in the Act, Cooperative Society
will be entitled to the following exemptions and facilities under the Section 78 of the Act:
i) As per S.78(1) Notwithstanding anything contained in the prevailing law, the Cooperative
Society/Association will be entitled to the following exemptions and facilities:
• The cooperative/Association or society shall not be required to have registration pass of any
instrument relating to its transaction, other than an instrument relating to immovable property.
• No revenue and stamp fee shall be charged on a document or any kind of instrument related with
the purchase of an immovable property in respect of construction of its building.
However the revenue fee shall be charged on a document or any kind of instrument purchased
while carried out its business.
Accordingly, where immovable properties purchased with exemptions of revenue are disposed
without being used shall have to return such exempted revenue charge use to be levied.
ii) No revenue and stamp fee shall be charged on a document or any kind of instrument related to the
registration of pledge of or going to pledge by it. Notwithstanding anything contained in the
prevailing law, no local tax shall be levied on the reserved fund created by the Cooperative Society
as per the Section 68, capital refund protection fund created by the cooperative society as per
Section 69 and cooperative promotional fund created by the society as per Section 70 of the Act.
iii) The government of Nepal may, by notification in the Nepal Gazette and pursuant to the prevailing law,
exempt fully or partly from chargeable customs tariff or sales tax such machineries, industrial and
agro-machines, equipment, spare parts, raw materials, office equipments and means of transport
as are imported by an association or society for its use.
iv) The government of Nepal may, by notification in the Nepal Gazette and pursuant to the prevailing law,
exempt fully or partly from chargeable excise duty or value added tax the goods produced by any
association or society.
v) The government of Nepal may, by notification in the Nepal Gazette and pursuant to the prevailing law,
exempt the chargeable export duty the goods produced by any association or society and grant the
cash as other industries are entitled to pursuant to the law.
vi) An association or society doing industrial business carrying basic industrial promotional business or
some special industry shall also be entitled to such other exemptions, facilities and protection as
the industries are entitled to pursuant to the law, in addition to the exemptions mentioned as
above.
56
vii) Government of Nepal, Provincial Government or Local level government organization may grant
exemption of any tax fully or partly along with the privileged loan and other financial assistance and
facilities, to the backward rural woman, differently able person, bonded labour, landless farmers,
unemployed persons, self employed promotional industries and for the development of the labour
and skill of self employed industries.
viii) Government of Nepal, may revenue exemption to the seek industries intended to be operated by
the workers themselves and provide financial provide financial assistance, or transfer of such
industries or grant guarantee to such industries.
ix) The government of Nepal may, by notification in the Nepal Gazette and pursuant to the prevailing law,
grant financial facilities or exemption of excise duty value added tax levied on the goods produced
by the special rural cooperative, market place, with a view to develop big cooperative scheme by
making participation in professional share, construction of basic infrastructure or acquiring land for
such infrastructure..
The process of acquiring exemption, facilities and privileges under the provision of the Act shall
be as prescribed.
2 b)
i) According to Section 12A of the Insurance Act, 2049, the Insurance Board may impose a ban
entirely or partially or may cancel any type of business being operated by the Insurer under the
Insurance Business in any of the following circumstances:
(a) If the directives provided by the Board 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/her
family is working as a Managing Agent or partner or provides guarantee or security of any
kind for any loan provided to him/her by others by violating Section 14,
(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 pursuant to Section
19,
(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 pursuant to
Section 27,
(I) If the Insurer does not re-insure pursuant to Section 28.
ii) 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.
iii) 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.
iv) 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.
v) 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 c) Section 64 of Insolvency Act, 2063 has made provisions for obtaining the license.
57
i) A person who is desirous of obtaining a license pursuant to Sub-section (1) of Section 63 shall make an
application, along with the prescribed fee, to the Office in the prescribed format.
ii) A person who makes an application pursuant to Sub-section (1)
shall meet the following conditions:
• Have completed the age of thirty five years;
• Being a member of the prescribed professional association;
• Having acquired at least bachelor's degree in commercial law, commerce, management, accounts
or any other prescribed subject from a recognized university;
• Having abode in the State of Nepal;
• Being competent to carry on insolvency practice under this Act.
iii) On receipt of an application under Sub-section (1), the Office shall, if it considers appropriate to issue a
license to carry on the insolvency practice, issue the license in the prescribed format.
iv) The license issued pursuant to Sub-section (3) shall be renewed prescribed.
a) After the seventh Constitution promulgation three tiers of government system has been
applied in Nepal. This system bears an impact on every sector of corporate life and among
them the industrial sector is one. Accordingly, the industrial administration has been
transferring in the federal to province level. Concerning the industry registration, how the
Industrial Enterprise Act, 2076 has managed the industry registration provision in the Federal
and Provincial level simultaneously? State the concerned legal provisions provided under the
Act. 7
b) Define the cooling off period for the engagement team members and what are the restrictions
on activities during the cooling off period to the engagement team member in an audit
according to the code of ethics of members of ICAN. 7
c) What do you mean by predicate offence? What offences are included as predicate offence
under the Asset (Money) Laundering Prevention Act, 2064? 6
Answer
3 a) Obviously, the industrial administration has been transferring through federal to provincial level after the
promulgation of the Constitution of Nepal. Such transferring has been carried out through Industrial
Enterprise Act, 2076. Section 4 has provided on the matter of the provision relating to registration of
industries. In accordance with the provision mentioned in the section 4, the registration provision has
been as follows in the federal vis-à-vis provincial level.
Application: Subsection 1
A person, firm or company that intends to establish any of the following industries under this Act shall
make an application to the Department (of Industry in Federal Level) for registration in such a form and
accompanied by such documents as prescribed:
• an industry mentioned in Schedule-1 that requires permission;

• an industry established with foreign investment;
• an industry related to any matter set forth in Schedule-5 of the Constitution of Nepal;
• an industry that falls under the jurisdiction of two or more Provinces;
• an industry related to academic consultancy services on diplomatic affairs.
Application through electronic means: Subsection 5
The details or documents to be attached with an application to be made under subsection (1) may also be
submitted through electronic means (online), and the relevant documents may be authenticated by a
digital signature.
58
Interim industry administration: Subsection 3
Notwithstanding anything contained in subsection (2), the Federation shall carry out acts relating to the
administration of industries including the registration, renewal and regulation of the industries subject to
registration, renewal and regulation by the Provincial Government until the concerned Provincial
Government makes law on such industries.
Limitation on particular industries establishment and operation: Subsection 4
Notwithstanding anything contained in subsections (1) and (2), industries generating atomic energy,
radio-active materials, and industries related to atomic energy and uranium-based energy.
Information to submit remain details or documents: Subsection 6.
When examining an application received under subsection (1), it appears that any required details and
documents are not submitted, the industry registration body shall immediately inform the applicant to
submit such details or documents within a maximum period of ninety days.
Rejection of registration: Subsection 7
If the applicant fails to submit the details or documents demanded under subsection (6) or it does not
appear that the procedures under this Act or the rules framed under this Act are met, the industry
registration body may, by setting out the reasons, reject the application for industry registration. If
decision is made to reject, it shall give written information thereof, setting out the reasons, to the
concerned applicant within five days after the decision.
Provincial industrial administration: Subsection 2
The concerned Provincial Government shall carry out acts relating to the administration of industries
including the registration, renewal and regulation of industries other than the industries under sub
section (1). Provided that, permission shall be obtained in the industry as prescribed in schedule-1 in the
case of an industry requiring permission.
Application to the industry registration body of concern province: Sub section 8
A person, firm or company that intends to establish an industry other than an industry mentioned
in subsection (1) shall make an application to the industry registration body of the concerned
Province for registration of the industry, accompanied by such details and documents as provided
in the Provincial law.
3 b) Code of Conduct of the Institute of Chartered Accountants of Nepal has defined the cooling off
period to the professional accountants as follows:
i If the individual acted as the engagement partner for seven cumulative years, the cooling-off
period shall be five consecutive years.
ii. Where the individual has been appointed as responsible for the engagement quality control
review and has acted in that capacity for seven cumulative years, the cooling-off period shall
be three consecutive years.
iii. If the individual has acted as a key audit partner other than in the capacities set out as above (i)
& (ii) for seven cumulative years, the cooling-off period shall be two consecutive years.
If the professional accountant has provided the services in a combination of key audit partner roles,
then the cooling off period will be as follows:
59
i If the individual acted in a combination of key audit partner roles and served as the
engagement partner for four or more cumulative years, the cooling-off period shall be five
consecutive years.
ii Subject to paragraph R540.16(a), if the individual acted in a combination of key audit partner
roles and served as the key audit partner responsible for the engagement quality control review
for four or more cumulative years, the cooling-off period shall be three consecutive years.
iii. If an individual has acted in a combination of engagement partner and engagement quality
control review roles for four or more cumulative years during the time-on period, the cooling-
off period shall:
a) As an exception to paragraph R 540.15 be five consecutive years where the individual has
been the engagement partner for three or more years; or
b) Be three consecutive years in the case of any other combination.
iv. If the individual acted in any combination of key audit partner roles other than those addressed
in paragraphs R540.14 to R540.16, the cooling-off period shall be two consecutive years.
Service at a Prior Firm
R540.18 In determining the number of years that an individual has been a key audit partner as
set out in paragraph R540.5, the length of the relationship shall, where relevant, include time
while the individual was a key audit partner on that engagement at a prior firm.
Shorter Cooling-off Period Established by Law or Regulation
R540.19 Where a legislative or regulatory body (or organization authorized or recognized by
such legislative or regulatory body) has established a cooling-off period for an engagement
partner of less than five consecutive years, the higher of that period or three years may be
substituted for the cooling-off period of five consecutive years specified in paragraphs
R540.11, R540.14 and R540.16(a) provided that the applicable time-on period does not exceed
seven years.
Restrictions on Activities During the Cooling-off Period
R540.20 For the duration of the relevant cooling-off period, the individual shall not:
(a) Be an engagement team member or provide quality control for the audit engagement;
(b) Consult with the engagement team or the client regarding technical or industry-specific
issues, transactions or events affecting the audit engagement (other than discussion with the
engagement team limited to work undertaken or conclusion reached in the last year of the
individual’s time on period where this remains relevant to the audit)
(c) Be responsible for leading or coordinating the professional services provided by the firm or
a network firm to audit client, or overseeing the relationship of the firm or a network firm
with the audit client; or;
(d) Undertake any other role or activity referred to above with respect to the audit client,
including the provision of non - assurance services that would result in the individual
(e) Having significant or frequent interaction with senior management or those charged with
governance,
3 c) A predicate offences is a crime that is a component of a more serious crime. For example,
producing unlawful funds is the primary offence and money laundering is the predicate offence.
The term “predicate offence” is usually used to describe money laundering or terrorist financing
activities.
A predicate offense – or predicate crime – refers to a crime which is a component of a larger crime. In a
financial context, the predicate offense would be any crime that generates monetary proceeds. The
larger crime would be money laundering or financing of terrorism.
Section 2ad has not defined but designated the predicate offence as provided in the annex of the Money
Laundering (Prevention) Act, 2064. Pursuant to the annex, the predicate offence as categorized in the
act is as follows:
i) Any offence under the prevailing laws
• Participation in an organized criminal group and illegal or racketeering,
• Disruptive (terrorist) act and terrorism,
60
• Trafficking in human being and migrant smuggling in any form,

• Any kinds of sexual exploitation including the child sexual exploitation,
• Illicit trafficking in narcotic drugs and psychotropic substances,
• Illicit trafficking in arms and ammunition,
• Illicit trafficking in stolen and other goods,
• Corruption and bribery,
• Fraud,
• Forgery,
• Counterfeiting of coin and currency,
• Counterfeiting and piracy of products or imitation, illegal copy or theft of products,
• Environmental crime,
• Murder, grievous bodily injury,
• Kidnapping, illegal restraint or hostage-taking,
• Theft or rubbery,
• Smuggling (including custom, excise and revenue),
• Tax (including direct and indirect),
• Extortion,
• Piracy,
• Insider Dealing and Market Manipulation in securities or commodities ,
• Ancient monument conservation,
• Forest, National park and wild animals conservation,
• Money, banking, finance, foreign exchange, negotiable instruments, insurance, cooperatives,
• Black marketing, consumer protection, competition, supply,
• Election,
• Communication, broadcasting, advertising,
• Transportation entrepreneurship, education, health, medicine or forgery in foreign employment,
• Firm, partnership, company, association,
• Real estate and property,
• Lottery, gambling, donation,
• Citizenship, immigration and passport.
ii) Offence of terrorist financing pursuant to section 4,
iii) Any other offence as designated by the Government of Nepal by publishing a notice in the Nepal
Gazette, or
iv) An offence under a law of a foreign State, in relation to act or omission under paragraph (1), (2) or (3),
which had they occurred in Nepal, would have constituted an offence.
a) The paid-up capital of JHI Private Limited is Rs. 10 Crores in the form of 7,00,000 Equity Shares
of Rs. 100 each and 3,00,000 Preference Shares of Rs 100 each. Morning Star Private Limited is
holding 3,00,000 Equity Shares and 3,00,000 Preferences Shares in JHI Private Limited. State with
reason, whether JHI Private Limited is subsidiary of Morning Private Limited? 8
b) Salme Hydropower Limited has issued IPO to the public on 22 September 2022 and listed in
NEPSE on 02 October 2022. As per Security Registration and Issues Regulation, 2073 all listed
companies have to published quarterly report in daily national newspaper and one copy of such
report with signature shall submit to SEBON and NEPSE. State the contents that have to be
mentioned in quarterly report as per the rules. 7
Answer
4 a) According to Section 2(e) of Companies Act, 2063 "Subsidiary Company" means any company
controlled by a holding company. Under section 142 (1) states that, a holding company may
control its subsidiary company as follows:
61
i) By holding direct or indirect control over the formation of the board of directors;
ii) By holding majority shares of the company.
Section 142 (2) says, if any company becomes a subsidiary company of any other subsidiary
company, the former company shall also be a subsidiary company of the holding company
controlling the later company.
Under section 142 (3) the shares of a company are subscribed by any agent on behalf of the
holding company or its subsidiary company or that the right to appoint directors of such company
is exercised by any person nominated on behalf of the holding company or its subsidiary
company, the conditions mentioned in Sub-section (1) shall be deemed to have been fulfilled.
However, that while determining a holding company and a subsidiary company, the shares
possessed in the following circumstances shall not be recognized for this purpose:
i) In cases where any company is entitled to exercise any power on the basis of holding
debentures or a trust deed on the issue of debentures or having subscribed shares;
ii) In cases where a company lending credit has accepted the shares by way of security.
It is to be noted that Preference share capital will also be considered if preference shareholders
have same voting rights as equity shareholders.
In the instant case, JHI Pvt. Ltd. is having paid-up capital of Rs. 10 Crores in the form of
7,00,000 Equity Shares of Rs. 100 each and 3,00,000 Preference Shares of Rs. 100 each.
Morning Star Pvt. Ltd. is holding 3,00,000 Equity Shares and 3,00,000 Preference Shares in JHI
Private Limited.
As in the given problem it is not clear that whether Preference Shares are having voting rights or
not, it can be taken that there is no voting right with these shares. On the basis of provisions of
Section 2(e) with section 65 (e) and facts of the given problem, Morning Star Pvt. Ltd. is holding
3,00,000 Equity Shares of total equity paid up share capital of JHI Pvt. Ltd. Therefore, as
Morning Star Pvt. Ltd. does not exercise or controls unless by holding direct or indirect control
over the formation of the board of directors' u/s 142 (1) (a) or by holding majority shares u/s 142
(1) (b) in JHI Pvt. Ltd., So, JHI Pvt. Ltd. is not subsidiary of Morning Star Pvt. Ltd.
4 b) Each listed company shall publish quarterly report in the national media and also should load the
data in the NEPSE & SEBON online system so that each stakeholder should have knowledge on
the company and its progress and current status. Following contents should be required to make
the quarterly report for the publication for a listed company as per the schedule 14 of the Security
Registration and Issue Regulation, 2073:
i) Financial statement:
• Quarterly financial statement including the balance sheet, profit or loss account and the quarterly
financial statement should be comparable with the previous year same quarter financial
statement. This financial statement should be based on the provisional financial statement and
should be prepared considering all possible facts and figures in every quarter and the figures
should be comparable in each quarter so that the investor can analyses the financial information
as per their requirement.
• Along with the financial report, a details of number of shares hold by the related parties of the
company is also shown in the report. Related parties including their name and share holding
along with their ratio of holding also be mentioned in this report.
• There should also include the financial ratio like earning per share, PE ratio, net worth per share,
return on assets and return on equity
ii) Management Analysis
• Management shall include the current status of the company saying whether the company has
started commercial operation or will start within the date or any further analysis of the company
should be mentioned in this section.
iii) Legal proceeding:
• The report should also disclose whether there is any legal case regarding. All legal cases and
litigation should be disclosed in this report.
62
5. Answer the following questions: (3×5=15)
a) According to the Labour Act, 2074,Hiring Foreign Nationals is not open to the employer.
However in certain cases, employer can employ foreign nationals by fulfilling the required
legal process. State those conditions where an employer is allowed to employ foreign
nationals.
b) Point out the matters shall be audited by the Auditor General in view of propriety in
accordance with Audit Act, 2075.
c) Certain customers of a commercial Bank have made an application that the commercial bank is
in a problematic condition. State the circumstances in which banks or financial institutions will
be deemed problematic as per the Nepal Rastra Bank Act 2058.
Answer
5 a) Section 22 of the Labour Act, 2074 prescribes the provision regarding the conditions where an employer
are permitted for hiring foreign nationals. According to it, the foreign national can only be hired if local
skill sets are not available for the job. The New Labor Act also provides provisions on work permit for
certain entities, the language of employment agreement, repatriation of salary and terms and condition
of service etc.
General Provisions: No foreign nationals can be engaged in work without having obtained the work
permit from the Department. Prior to engaging a foreign national in work, the entity must publish an
advertisement in national level Daily Newspaper to fill the vacant posts by Nepali citizens. If no
application is submitted or if no local skill set is available for any work after the vacancy publication
foreign national can be hired for the work with the approval of Labor Department.
Work Permit for technicians for short period (Section 24): Technicians engaged for less than three (3)
months to carry out repairing of any machinery or installing new technology or similar casual work may
be provided work permit simply by recording in the Labor Department.
Employment Agreement: As per the New Labor Act, 2074 no foreign national can be engaged in work
without the employment agreement which should be entered into either in language understandable by
such foreign national or in English language. Unless otherwise provided in the agreement, the
employment agreement continues for three years.
Repatriation of Income: The foreign nationals can repatriate their income in convertible foreign currency.
Work Permit Exemption Section (Section 24): The foreign nationals having diplomatic immunity or the
foreign nationals who are exempted from work permit under the treaty or agreement entered into with
Nepal government are exempted from work permit requirement.
5 b) In accordance with section 9 of the Audit Act, 2075 the matters to be audited by the Auditor
General in view of propriety:
i) The Auditor General shall, as required, audit the following matters in view of the propriety
thereof:
• If it is seen that any expenditure, though it confirms to the authorization, has been made
unreasonably or in a manner to cause loss and damage to the national property, with respect
to such expenditure and its authorization,
• With respect to any grant of national property whether movable or immovable or
underwriting of revenue or any lease, permit, license or rights relating to mining, forest,
hydropower etc. and all authorizations issued in a manner to abandon any revenue or
national property, whether movable or immovable,
• With respect to the subject-matters of various financial transactions including contracts and
agreements relating to public works, repair and maintenance, procurement and supply,
consultancy service, service delivery, public expenditure and revenue mobilization.
63
ii) The Auditor General may, if he or she deems it appropriate, examine, in accordance with the
recognized principles of accounting, as to whether or not any official within his or her scope
of competence has borne financial accountability.
iii) The Auditor General may not include in his or her report minor items of irregular amounts or
other items deemed not to be significant and important in view of their propriety.
5 c) Under Section 86B of Nepal Rastra Bank Act, 2058, Nepal Rastra Bank will declare any
commercial bank or financial institution problematic by providing written notice to it when Nepal
Rastra Bank is convinced that the following conditions are prevailing in any commercial bank or
financial institution:
a. In case any action against the interest of the depositors, shareholders, creditors or general public is
evident,
b. In case of not fulfillment of any financial liabilities or not having probalility to do that or not payment
of due amount,
c. In case of insolvency or going t be insolvent or facing material financial difficulties,
d. In case of non-compliance with or breach or the Nepal Rastra Bank Act, prevailing law related to bank
and financial institution, other prevailing law, terms of licenses or regulation, directives or order of
bank,
e. In case it is evident that the license has been obtained on the basis of submitting false, fraudulent,
wrong document or data,
f. In case of inability to maintain the capital fund as per Nepal Rastra Bank Act, prevailing law related to
bank and financial institution and directives issued by the bank at time to time.
g. In case of the initiation of legal proceedings for liquidation or resolution r insolvency of any
commercial bank or financial institution under the prevailing law,
h. In case of undue delay in the process of voluntary liquidation where such proceeding has been
initiated,
i. For the commercial bank or financial institution established with the joint venture of the foreign
commercial bank or financial institution, while such foreign commercial bank or financial institution is
insolvent or liquidator is appointed for the liquidation or the license of such commercial bank or
financial institution is terminated under the provision of the law or respective country or transaction is
banned either fully or partially or where it is evident that operation of banking transaction is done in
association with such commercial bank or financial institution, or
j. If the Nepal Rastra Bank is convinced that commercial bank or financial institution is unable t pay its
due or can make negative effect in its liability or duties, which it has to perform.
6. Write short notes on the followings:

a) Mention the grounds to cancel license of an institution violating directives issued under the
Act Relating to Institutions Acting as Financial Intermediary, 2055. 4
b) State punishment thresholds on commission of avail or provide credit, facility or discounts

beyond the authority obtained or limit sanctioned under of the Banking Offence and
Punishment Act, 2064. 3
c) Highlight the license procedures to carry on Foreign Exchange in accordance with the
Foreign Exchange (Regulation) Act, 2019. 3
Answer
6 a) Section 19 of the Act states the Power to Cancel License:
i) In case any Society violates the directives issued under Section 18, the Bank may issue a
warning to it to correct its mistakes, or impose a bank on any of its functions. In case any
society violates such directives for three times, or takes any of the following actions, the Bank
may suspend or cancel its license.
• In case the Society stops working as a financial intermediary.
• In case the Society misappropriates its funds, or does not use such funds for purposes for
which they have been received.
64
• In case the Society does not comply with the directives issued by the Bank to introduce
reforms or make any special arrangement in respect to any of its functions and activities by
prescribing a time limit for that purpose.
• In case the Society fails to renew itself under the 1977 Registration of Association Act and
Section 7 of this Act.
ii) The Bank may, if it so deems necessary before issuing an order of cancellation of license under
Sub-Section (1), have necessary nquiries or investigations conducted in that connection.
iii) Before cancelling a license under Sub-Section (1), the Bank shall provide the concerned
Society with an opportunity to submit its explanations.
6 b) Section 15(2) has been provided while avail or provide credit, facility or discounts beyond the
authority obtained or limit sanctioned. If anyone commits such offence specified under the section
7(d) he/she will be punished with the fine and imprisonment as stipulated on the basis of claimed
amount and depending upon the degree of offence committed.
Compensation
Claim Amount Imprisonment Fine (Recovering claim
Amount)
Up to 10 lakhs up to 1 year As per claim amount As per claim amount
10- 50 lakhs 2-3 years As per claim amount As per claim amount
50 - 100 lakhs 3-4 years As per claim amount As per claim amount
100 - 1000 lakhs 4-6 years As per claim amount As per claim amount
1000 - 5000 6-8 years As per claim amount As per claim amount
lakhs
5000 - 1 Arab 8-10 years As per claim amount As per claim amount
Above 1 Arab 10-12 years As per claim amount As per claim amount
6 c) The License procedures, pursuant to the section 3, to be obtained to carry on foreign exchange
transaction, are as follows:
i) A person, firm, company or body who intends to carry on the foreign exchange transaction shall obtain
the license from the Bank.
ii) A person, firm, company or body who intends to carry on the foreign exchange transaction shall
make an application, accompanied by the details specified by the Bank, to the Bank to obtain the
license.
iii) If an application is made pursuant to Sub-section (1), the Bank shall make necessary inquiry into the
matter on the basis of the specified criteria and may, if it considers appropriate, issue the license to
the concerned person, firm, company or body to carry on the foreign exchange transaction. In so
issuing the license, the Bank may also specify the type and limit of the foreign exchange to be
transacted, the period for carrying on the transaction and other necessary terms.
iv) The Bank may, from time to time, give necessary order or directive to the licensee in relation to the
regularization and management of the foreign exchange transaction. It shall be the duty of the
licensee to abide by such an order or directive.
v) The licensee bank shall pay to the Bank such annual fees and deposits as may be prescribed by the
Bank. The Bank may cancel or suspend the license of the licensee who fails to pay the annual fees
and deposits so prescribed.
vi) If any person, firm, company or body applies for an provisional (Patake) license to carry on the
foreign exchange transaction, the Bank may issue the provisional license to such a person, subject to
this Section.
65
Examiner’s Commentary on Students' Performance in

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

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

Question no. 1 a. NSA 402 is quoted and explained by only few students.
b. Though types and threats are properly given, explanation part seemed
weak in majorities of students.
Question no. 2 a. Objectives of EOM is not clear in majorities of the students.
b. Only few left to write the conclusion.
Question no. 3 a. Lack of conclusion in about 50% cases.
b. NSA 450/320 is quoted and explained by few students.
Question no. 4 a. Majorities of the students do not answer well.
Question no. 5 a. Fairly done.
b. NSA 315 is not explained by many students.
c. Too general answer.
Question no. 6 Satisfactory performance.
66
Paper 4: Corporate Laws

Question no. 1 a. Most of the students failed to maintain the legal provision and time
period to submit various documents under various sections.
b. Most of the students did not answer properly.
Question no. 2 a. Satisfactory performance
b. No adequate preparation of Insurance Act, 2049.
c. Most of the students failed to explain the question.
Question no. 3 a. Very few students answered this question correctly. Students are
unaware about the three tire of Government system for the registration
of industry.
b. The cooling off period is defined by very few students.
c. Most of the students defined predicate offence in general.
Question no. 4 a. Answered by majority of the students.
b. Overall performance of the students is satisfactory.
Question no. 5 a. Most of the students attempted this question with well preparation.
b. Majority students referred the correct legal provision.
c. No adequate preparation of Nepal Rasta Bank Act was found.
Question no. 6 a. Most of the students are not aware about the Act and could not answer
the question properly.
b. Not attempted by majority of the students.
c. Attempted by most of the students.
67

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SUGGESTED ANSWERS TO

THE QUESTIONS SET AT

The Institute of Chartered Accountants of Nepal (ICAN)

© The Institute of Chartered Accountants of Nepal

Year and month of Publication: 2023 March

Paper 1: Advanced Financial Reporting

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

WN 1 – Net assets of Beta

Deferred tax on fair value adjustments:

WN 2 – Goodwill on acquisition of Beta

WN 3 – Non-controlling interest in Beta

WN 5 – Equity component of long-term loan

WN 6 – Adjustment for finance cost of loan

WN 7 – Adjustment for: defined retirement benefit plan

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

WN 8 – Other components of equity

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

information that complies with NFRS.

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

2. Deferred Grant Income

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

Notes Amount (Rs. ‘000’)

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

Add: Other income 756

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

4 d) Fair value as set out in NFRS 13

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

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

Less: Bank Overdraft 500,000

2) Average Annual Profits

• 25% Tax saved in Expenses.

Fiscal Year Depreciation Tax Depreciation

Paper 2: Advanced Financial Management

Particulars Rs. Rs.

Selling price 2,200

Material (3 Kgs @ Rs. 150 per Kg) 450

Direct Labour (2 Hours @ Rs. 250 per hour) 500

Overheads 1,150 2,100

Profit per unit 100

Variable overheads 250

Rent Note (a) 80

Manager's Salary Note (b) 70

Depreciation Note (c) 500

Head office cost Note (d) 250

Suggested answer to Q.1

Calculation of NPV of the project

Evaluation of sensitivity of the NPV to annual sales volume

Evaluation of sensitivity of the NPV to material cost per SML

Particulars Price-to-Sale Price-to-

Table No. 2: Top 10 players (in descending P/S Order)

Particulars Price-to-Sale (P/E) Multiple

Offer you opinion on the reasonableness of the Asking price 10

Analysis of Industry Performance:

Ask Price : 3,100,000

On the basis of aforesaid conditions calculate:

Calculation of cost of capital of BCD Ltd.

Calculation of market price after acquisition

Calculation of post merger value of shares of ABC Ltd. on exchange of share

Calculation of gain or loss to shareholders on exchange of share

Calculation of earnings per share after merger on cash purchase

Net total earnings after merger = Rs. 80 Lakhs

Calculation of gain or loss to shareholders of ABC Ltd. on cash purchase

Calculation of gain or loss to shareholders of BCD Ltd. on cash purchase