Fundamental Accounting Principles and Their Role in Accuracy, Consistency and Transparency

Fundamental accounting principles (also called concepts, conventions or assumptions) are the basic rules, doctrines and conventions that guide the recording, classification and presentation of financial transactions. They provide a uniform framework so that financial statements are comparable, reliable and meaningful to users. The main principles are explained below along with how each ensures accuracy, consistency and transparency.

1. Business Entity Principle (Separate Entity Concept)

The business is treated as a separate and distinct entity from its owners. Personal transactions of the proprietor are kept apart from business transactions.

• Accuracy: Only genuine business transactions enter the books, so profits and assets are not distorted by personal items.
• Consistency: The same boundary of "business" is applied every year.
• Transparency: Users can see the true financial position of the business independent of the owner's personal affairs.

2. Money Measurement Principle

Only those transactions which can be expressed in monetary terms are recorded. Non-monetary events (e.g., death of a manager, market reputation) are ignored.

• Accuracy: Provides a common unit of measurement so heterogeneous items can be added and compared.
• Consistency: The same measuring unit (Rs) is used in all periods.
• Transparency: Financial statements present objective, quantifiable facts rather than subjective opinions.

3. Going Concern Principle

The business is assumed to continue operating for the foreseeable future, not to be liquidated.

• Accuracy: Assets are valued at cost less depreciation rather than at forced-sale (break-up) value, giving a realistic picture.
• Consistency: The same valuation basis is followed year after year.
• Transparency: Users know statements are prepared on a continuing-entity basis, not a liquidation basis.

4. Cost Principle (Historical Cost)

Assets and liabilities are recorded at their original acquisition cost, not at current market value.

• Accuracy: Cost is objective and verifiable from documents (invoices, vouchers).
• Consistency: The same valuation base is used in all periods.
• Transparency: Figures are verifiable and free from personal bias or subjective revaluation.

5. Dual Aspect Principle (Double Entry)

Every transaction has two aspects — debit and credit — and the accounting equation Assets = Liabilities + Capital always holds.

• Accuracy: Arithmetic and logical accuracy is ensured because total debits must equal total credits.
• Consistency: The double-entry system is applied uniformly to all transactions.
• Transparency: The complete effect of each transaction is visible, reducing concealment or fraud.

6. Matching Principle

Expenses incurred to earn revenue are matched against the revenue of the same period (e.g., cost of goods sold against sales, depreciation against income).

• Accuracy: Correct period-wise profit is determined, avoiding over/under-statement.
• Consistency: The same matching logic is applied each period.
• Transparency: Users can see how income was generated and what costs were incurred.

7. Revenue Recognition (Realisation) Principle

Revenue is recognised when it is earned and realised — normally when goods are sold or services rendered — not when cash is received or an order is placed.

• Accuracy: Prevents premature or fictitious income from being recorded.
• Consistency: A uniform point of recognition is used across periods.
• Transparency: Users know exactly when and how revenue was earned.

8. Accrual Principle

Revenue and expenses are recorded in the period to which they relate, irrespective of actual cash receipt or payment (outstanding and prepaid items are adjusted).

• Accuracy: True profit/loss of the period is reflected, not merely cash movement.
• Consistency: Accrual basis is followed consistently, allowing period-to-period comparison.
• Transparency: All receivables and payables are disclosed, giving a complete picture.

9. Consistency Principle

The same accounting policies, methods and procedures (e.g., depreciation method, stock valuation) are followed from period to period unless a change is justified and disclosed.

• Accuracy: Comparison of figures becomes meaningful and reliable.
• Consistency: This principle is the direct guarantee of consistency itself.
• Transparency: Any change in policy must be disclosed with its effect, so users are not misled.

10. Materiality Principle

Only items significant enough to influence the decision of users need separate disclosure; immaterial items may be merged or ignored.

• Accuracy: Attention is focused on significant items, avoiding clutter and distortion.
• Consistency: The same materiality threshold is applied over time.
• Transparency: Important facts are highlighted while trivial details are not allowed to obscure them.

11. Conservatism (Prudence) Principle

Anticipate no profit but provide for all possible losses. Stock is valued at cost or market price, whichever is lower; provision is made for doubtful debts.

• Accuracy: Prevents overstatement of assets and income, giving a cautious and realistic view.
• Consistency: Applied uniformly to all uncertain items.
• Transparency: Losses and risks are disclosed promptly, protecting users from over-optimistic reporting.

12. Full Disclosure Principle

All material and relevant facts — accounting policies, contingent liabilities, methods used — must be disclosed in the financial statements or their notes.

• Accuracy: Users get complete information to judge the true position.
• Consistency: Disclosure format is maintained across periods.
• Transparency: This principle is the backbone of transparency, as nothing material is hidden.

13. Objectivity (Verifiability) Principle

Accounting records must be based on verifiable evidence and free from personal bias.

• Accuracy: Entries are supported by documentary proof.
• Consistency: Uniform, evidence-based treatment is followed.
• Transparency: Independent parties can verify the figures, strengthening trust.

14. Periodicity Principle

The life of the business is divided into equal accounting periods (usually one year) for measuring performance.

• Accuracy: Periodic profit is measured correctly through adjustments.
• Consistency: Equal periods allow fair comparison.
• Transparency: Timely and regular reporting keeps users informed.

15. Cost–Benefit and Stable Monetary Unit (supporting conventions)

The benefit of information must exceed its cost, and the monetary unit is assumed stable. These support practical, comparable and unbiased reporting.

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Conclusion

The fundamental accounting principles together form the GAAP framework on which financial statements are built. Accuracy is ensured through objectivity, dual aspect, cost, matching and revenue recognition; consistency through the consistency, going concern and periodicity principles; and transparency through full disclosure, materiality and conservatism. Applied together, they make financial statements reliable, comparable and useful for investors, creditors, regulators and the government, thereby protecting the interests of all stakeholders.

Financial Indicators

Financial indicators (also called financial ratios or performance indicators) are quantitative measures derived from a bank's financial statements — mainly the balance sheet and profit and loss account — that are used to assess its profitability, liquidity, asset quality, capital adequacy and overall financial health. They allow comparison of performance over time (trend analysis) and against other banks or regulatory benchmarks. For a commercial bank in Nepal, the key financial indicators prescribed under NRB directives include:

• Capital adequacy: Capital Adequacy Ratio (CAR), Core Capital Ratio, Tier-1 capital to RWA
• Asset quality: Non-Performing Loan (NPL) ratio, Provision coverage ratio, Net NPL ratio
• Liquidity: Liquidity ratio, Credit-to-Deposit (CD) ratio, Cash reserve and liquid assets
• Profitability: Return on Assets (ROA), Return on Equity (ROE), Net Interest Margin (NIM), Earnings per Share (EPS)
• Efficiency/Size: Operating expense ratio, Total assets, Deposits and loans growth

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Present Financial Position of Nepal Bank Limited (Based on Financial Indicators)

Nepal Bank Limited (NBL), established in 1937 as the first bank of Nepal, is a government-owned commercial bank (Class 'A') with the Government of Nepal holding about 51% and Rastriya Beema Sansthan holding about 49%. Its present financial position, judged through key indicators, is as follows:

Interpretation:

1. Capital position is sound. NBL's CAR and core capital are comfortably above NRB's minimum requirements, indicating adequate capacity to absorb shocks and support further lending.
2. Liquidity is comfortable. The CD ratio and liquid asset holdings are within regulatory limits, so the bank can meet depositor withdrawals and loan demand without stress.
3. Asset quality is satisfactory but improvable. The NPL ratio is within the 5% regulatory limit, yet it is higher than that of leading private commercial banks, reflecting legacy loans and weaker recovery in some sectors. NBL has been actively recovering bad loans and writing them back.
4. Profitability is positive and improving. ROA and ROE are positive, and net profit has shown an increasing trend in recent years due to higher interest income, treasury gains and recovery of written-off loans. However, profitability still lags behind top private banks because of a high operating expense ratio and large branch network costs.
5. Capital adequacy and deposit base give stability, while the bank's government ownership provides implicit sovereign support — a key strength in terms of public confidence.

Conclusion: On the basis of present financial indicators, Nepal Bank Limited is in a stable and satisfactory financial position — adequately capitalised, liquid, and profitable — though its NPL ratio and cost-efficiency need further improvement to match the performance of the best commercial banks in Nepal.

Definition of Accounting Concepts

Accounting concepts (also called accounting principles or conventions) are the basic rules, assumptions and guidelines that govern the recording, classifying and summarising of business transactions. They provide a uniform framework so that financial statements are prepared consistently, are comparable, and present a true and fair view. Examples: business entity concept, money measurement concept, going concern concept, periodicity concept, cost concept, matching concept, accrual concept, consistency concept, materiality concept, prudence concept.

Does the Periodicity Concept Contradict the Going Concern Concept?

In my opinion, the two concepts do not truly contradict each other; they appear contradictory only in emphasis. Rather, they are complementary and both are needed for meaningful financial reporting.

Going concern concept assumes that the business will continue to operate for the foreseeable future and has no intention of liquidation. Therefore assets are valued at cost less depreciation rather than at market (break-up) value, and prepaid expenses, goodwill, etc. are carried forward.

Periodicity concept (accounting period concept) assumes that the indefinite life of the business is divided into convenient, equal time intervals — normally one year — for measuring performance and financial position. Hence the preparation of the Trading Account, Profit and Loss Account and Balance Sheet at the year end.

Why they are not contradictory:

1. Periodicity is a practical necessity arising out of going concern. Because the life of the business is indefinite, owners cannot wait until liquidation to know the result. So the going concern is artificially cut into annual periods. The going concern assumption gives continuity; periodicity gives measurability.
2. Both support the same valuation base. Under going concern, assets are shown at historical cost; periodicity only allocates that cost (depreciation, amortisation) over the periods benefited. There is no clash of valuation.
3. Accrual and matching concepts bridge them. Outstanding expenses, prepaid expenses, accrued income and income received in advance are adjusted at the year end so that each period bears its own revenue and expense, while the unexpired portion is carried forward to future periods — which is possible only because the business is a going concern.

Example 1: A firm purchases a machine for Rs 10,00,000 with an estimated life of 10 years. Under going concern, the machine is not valued at its resale value; under periodicity, Rs 1,00,000 depreciation is charged each year for 10 years. Both assumptions work together.

Example 2: Rent of Rs 60,000 paid on 1 January for 12 months. At the year end (31 December), the whole amount is expensed. But if the year ends on 30 June, Rs 30,000 is charged as expense and Rs 30,000 shown as prepaid — the going concern assumption allows this unexpired cost to be carried forward, while periodicity decides how much belongs to the current period.

Conclusion: The apparent contradiction is only superficial. Going concern provides the reason for continuity of the entity, and periodicity provides the reason for measuring its results at regular intervals. Together they make financial statements both periodic and reliable.

NAS 16 – Property, Plant and Equipment: Treatment of Increase/Decrease in Carrying Amount under the Revaluation Model (with prior revaluations)

Under the revaluation model, when the carrying amount of an item of property, plant and equipment is revalued, the increase or decrease is treated as follows, keeping in view revaluations carried out in earlier years:

1. Increase in carrying amount (upward revaluation)

• The increase is recognised in Other Comprehensive Income (OCI) and accumulated in equity under the heading "Revaluation Surplus".
• Exception (earlier downward revaluation): To the extent the increase reverses a previous revaluation decrease of the same asset that was earlier recognised in profit or loss, the increase is recognised in profit or loss (income) to that extent. Only the excess above the amount previously charged to profit or loss is credited to OCI/Revaluation Surplus.

2. Decrease in carrying amount (downward revaluation)

• The decrease is recognised in profit or loss as an expense.
• Exception (earlier upward revaluation): To the extent the decrease does not exceed the balance in the Revaluation Surplus relating to that same asset, the decrease is recognised in Other Comprehensive Income and reduces the Revaluation Surplus. Only the excess beyond the existing revaluation surplus for that asset is charged to profit or loss.

Summary of the rule (net approach)

Additional points

• The revaluation surplus is not a distributable reserve; it may be transferred to Retained Earnings when the asset is derecognised (or gradually as the asset is used, i.e., as the difference between depreciation on revalued amount and depreciation on original cost).
• Each revaluation must be applied consistently to an entire class of assets, and the treatment must be applied asset by asset (the surplus/deficit of one asset cannot be offset against another).
• The adjusted carrying amount after revaluation becomes the new carrying amount, and depreciation is charged on this revalued amount over the remaining useful life.

Components of General Purpose Financial Statements — 4 marks

A complete set of general purpose financial statements comprises the following components:

1. Statement of Financial Position (Balance Sheet) — shows assets, liabilities and equity at a particular date.
2. Statement of Profit or Loss and Other Comprehensive Income — shows revenue, expenses, profit or loss and other comprehensive income for a period.
3. Statement of Changes in Equity — reconciles the opening and closing balances of each component of equity.
4. Statement of Cash Flows — shows cash inflows and outflows classified into operating, investing and financing activities.
5. Notes to the Financial Statements (including significant accounting policies) — provide narrative descriptions, disaggregation of line items and other explanatory information.
6. Comparative information for the preceding period, and (where applicable) opening statement of financial position at the beginning of the earliest comparative period when there is a retrospective restatement or reclassification.

Rationality of Preparing Financial Statements by Stewardship — 6 marks

Stewardship means the accountability of management for the resources entrusted to it by the owners (shareholders/depositors/members). The rationality of preparing financial statements on the stewardship basis can be discussed as follows:

1. Accountability of management — Owners provide capital but do not manage the entity themselves. Financial statements are the periodic account rendered by management showing how faithfully the entrusted resources have been used. This satisfies the owner's right to know.

2. Separation of ownership from management — In a company, shareholders are the owners while the board and managers run the business. This separation creates an agency relationship, and financial statements reduce the information gap (agency problem) between the two.

3. Basis for evaluating management performance — Profit, return on investment, earnings per share and cash flow figures enable owners to judge whether management has preserved and increased the value of their investment or has been inefficient.

4. Decision usefulness to users — Investors, lenders, depositors, employees, government and the public use financial statements to take economic decisions (buy/hold/sell shares, grant loans, fix wages, levy tax). Stewardship reporting supplies the reliable, comparable information these users need.

5. Protection of stakeholders' interest — In banks and financial institutions, depositors' money is at stake. Periodic financial statements, audited and published, protect depositors, creditors and the general public from misuse of funds.

6. Legal and regulatory requirement — Companies Act, 2063; Nepal Rastra Bank directives; NFRS/IFRS and the directives of the Office of the Auditor General require preparation and publication of financial statements. Stewardship reporting thus ensures compliance and transparency.

7. Promotion of good governance and capital market efficiency — Transparent stewardship reporting builds investor confidence, facilitates raising capital and discourages fraud, thereby supporting the growth of the economy.

Conclusion — Preparation of general purpose financial statements on the stewardship basis is rational because it makes management accountable, supplies decision-useful information to stakeholders, fulfils legal obligations and promotes good corporate governance.

Impairment Testing and Accounting Treatment under NFRS

1. Conditions Requiring Impairment Testing (5 marks)

As per NFRS 9: Financial Instruments (for financial assets) and NAS 36: Impairment of Assets (for non-financial assets), impairment testing should be conducted under the following conditions:

A. Under NAS 36 (Non-Financial Assets — PPE, Intangibles, Goodwill, Investment Property at cost):

1. Annual testing (mandatory): Impairment testing must be conducted at the end of each reporting period for:

   • Goodwill acquired in a business combination
   • Intangible assets with indefinite useful life
   • Intangible assets not yet available for use

2. Testing when indicators exist: For all other assets, testing is conducted only when there is an indication of impairment. Indicators include:

   External indicators:

   • Significant decline in market value of the asset
   • Significant adverse changes in technology, market, economy, or legal environment
   • Increase in market interest rates affecting the discount rate
   • Net assets of the reporting entity exceed market capitalisation

   Internal indicators:

   • Evidence of obsolescence or physical damage
   • Asset idle, restructuring, or plan to dispose before expected date
   • Asset's economic performance worse than expected
   • Significant adverse changes in the extent or manner of use

B. Under NFRS 9 (Financial Assets):

• Expected Credit Loss (ECL) model applies at each reporting date:
  • 12-month ECL — for Stage 1 (performing assets)
  • Lifetime ECL — for Stage 2 (significant increase in credit risk) and Stage 3 (credit-impaired)
• Impairment testing is conducted at each reporting date without waiting for a trigger event.

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2. Accounting Treatment for Impairment Loss and Reversal (5 marks)

A. Recognition of Impairment Loss:

An impairment loss is recognised when the carrying amount exceeds the recoverable amount (higher of fair value less costs of disposal and value in use).

Journal Entry:

(Alternatively, the asset account is directly credited.)

Allocation of impairment loss:

• First, reduce the carrying amount of goodwill allocated to the CGU
• Then, reduce other assets of the CGU pro-rata on the basis of carrying amount
• The carrying amount should not be reduced below the highest of fair value less costs of disposal, value in use, or zero

B. Reversal of Impairment Loss:

Reversal is recognised only if there has been a change in the estimates used to determine the recoverable amount since the last impairment loss was recognised.

Conditions:

• Reversal of goodwill impairment is NOT permitted (prohibited under NAS 36)
• For other assets, reversal is allowed up to the lower of recoverable amount or the carrying amount that would have been determined had no impairment loss been recognised (net of depreciation/amortisation)

Journal Entry:

Depreciation adjustment:

• After impairment, depreciation is charged on the revised carrying amount over the remaining useful life
• On reversal, depreciation is adjusted prospectively so that the revised carrying amount is allocated over the remaining useful life

Disclosure requirements:

• Impairment losses recognised/reversed during the period, by class of asset
• Events and circumstances leading to recognition/reversal
• Recoverable amount basis (fair value less costs of disposal or value in use)
• Discount rate used (if value in use)

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Summary: Impairment testing is mandatory annually for goodwill and indefinite-life intangibles, and trigger-based for other assets. Impairment losses are recognised in P&L (or revaluation surplus for revalued assets), while reversals are permitted except for goodwill.

Fair Value Accounting and Deferred Tax under NFRS in Nepal

1. Fair Value Accounting under NFRS (4 marks)

Fair Value is defined in NFRS 13 as 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 (an "exit price" at the principal or most advantageous market).

Key features:

• Market-based, not entity-based: It reflects assumptions of market participants, not the entity's own intention or cost.
• Three-level fair value hierarchy:
  • Level 1 – quoted prices in active markets for identical assets/liabilities.
  • Level 2 – observable inputs other than Level 1 (e.g., quoted prices for similar items, interest rates, yield curves).
  • Level 3 – unobservable inputs based on the entity's own assumptions (e.g., discounted cash flow models).
• Valuation techniques: market approach, income approach (present value techniques) and cost approach.
• Disclosure: NFRS 13 requires extensive disclosure of valuation techniques, inputs and sensitivity of Level 3 measurements.

Where NFRS uses fair value: NFRS 9 (financial instruments), NFRS 13 (measurement), NAS 16 (revaluation model for PPE), NAS 40 (investment property), NFRS 3 (business combinations), NFRS 2 (share-based payment) and impairment testing under NAS 36.

2. Deferred Tax under NFRS (part of the 4 marks)

Deferred tax arises from temporary differences between the carrying amount of an asset/liability in the financial statements (NFRS basis) and its tax base (Income Tax Act, 2058 basis). It is governed by NAS 12 – Income Taxes.

• Taxable temporary difference → Deferred Tax Liability (DTL) – amounts taxable in future periods.
• Deductible temporary difference → Deferred Tax Asset (DTA) – amounts deductible in future periods.
• Measurement: at the tax rates expected to apply when the asset is realised or liability settled, based on rates enacted or substantively enacted by the reporting date.
• Recognition of DTA: only to the extent that future taxable profit is probable.
• Presentation: offset within the same tax jurisdiction; classified as non-current.

Common sources in Nepal: difference between depreciation (Income Tax Act rates, e.g., 5%–25% block depreciation) and NFRS depreciation; provision for doubtful debts; unrealised fair value gains; carry-forward losses; revaluation surplus.

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3. Challenges in Transitioning to NFRS in Nepal (6 marks)

A. Challenges relating to Fair Value Accounting

1. Absence of active markets (Level 1 inputs): Nepal has a thin, illiquid capital market. For most assets — land, buildings, plant, investment property, unlisted shares — no quoted market price exists, forcing entities into Level 2/Level 3 valuation.
2. Lack of qualified valuers: Very few Nepali professionals hold internationally recognised valuation credentials (e.g., RICS, CFA, ASA). Valuations are often done by unqualified persons, raising audit and regulatory concerns.
3. Subjectivity and manipulation risk: Level 3 models depend on management assumptions (discount rates, cash flow projections). This creates scope for earnings management and "fair value cosmetics," especially in related-party transactions.
4. Cost and capacity constraints: Small and medium entities (SMEs) lack the systems, data and skilled manpower to run DCF or option-pricing models. The cost of external valuation often exceeds the benefit.
5. Volatility in earnings: Mark-to-market gains/losses under NFRS 9 flow through P&L, making profit figures volatile and reducing comparability across periods — a concern for tax authorities, lenders and investors.
6. Regulatory and tax mismatch: Fair value gains are recognised in accounting income but are not taxable until realised under the Income Tax Act. This creates a gap between accounting profit and taxable profit, which must be bridged through deferred tax.
7. Audit capacity: Audit firms in Nepal have limited experience in auditing complex fair value estimates, raising the risk of qualified opinions or restatements.

B. Challenges relating to Deferred Tax Recognition

1. Tax base determination difficulties: The Income Tax Act, 2058 allows block depreciation, pool-wise treatment and special deductions (e.g., for priority industries, export income). Determining the tax base of each asset/liability is complex and often disputed.
2. Non-recognition of DTA: Many Nepali entities have a history of tax losses or irregular profits. Since DTA recognition requires "probable" future taxable profit, entities either do not recognise DTA or recognise it only partially, reducing the usefulness of financial statements.
3. Rate uncertainty: Frequent changes in tax rates (budget announcements), plus the absence of "substantively enacted" rate guidance in the Nepali context, make measurement of deferred tax uncertain.
4. Permanent vs temporary difference confusion: Items such as disallowable expenses under Sections 15–22 of the Income Tax Act are permanent differences and should not create deferred tax. Practitioners often misclassify these, leading to errors.
5. Revaluation surplus interaction: Under NFRS, revaluation gains on PPE create a DTL. However, if the entity expects to recover the asset through use (not sale), the DTL is measured at the tax rate applicable to business income — a subtle distinction frequently missed.
6. Limited guidance and training: NAS 12 is principles-based; Nepali practitioners have limited exposure to complex scenarios such as business combinations (NFRS 3), consolidation adjustments and foreign operations.
7. Impact on distributable profit: Recognition of DTL reduces retained earnings available for dividend distribution. This creates tension between accounting compliance and the expectations of shareholders and the regulator (NRB, for banks).
8. Reconciliation and disclosure burden: NAS 12 requires a numerical reconciliation between tax expense and accounting profit × tax rate. Preparing this accurately requires robust tax computation records, which many entities lack.

Conclusion

Fair value accounting and deferred tax under NFRS are conceptually sound but operationally demanding in Nepal. The main challenges stem from thin markets, shortage of qualified valuers, capacity gaps, and the structural mismatch between NFRS accounting income and Income Tax Act taxable income. Addressing these requires investment in valuation infrastructure, capacity building of accountants and auditors, and clearer guidance from ICAN and the tax authority on the interaction between NFRS and the Income Tax Act, 2058.

Part 1: Types of Financial Instruments (4 marks)

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another (NAS 32 / NFRS 9).

Classification and measurement under NFRS 9: amortised cost (held to collect contractual cash flows, e.g. ordinary loans), fair value through other comprehensive income (held to collect and sell, or elected equity investments), and fair value through profit or loss (all others, including derivatives and held-for-trading shares).

Part 2: Investment in Associates (6 marks)

An associate is an entity over which the investor has significant influence, presumed where it holds 20% or more of the voting power (NAS 28).

Initial measurement: at cost, being the fair value of consideration paid plus directly attributable transaction costs.

Separate financial statements (NAS 27): the investment is carried either

• at cost, or
• at fair value in accordance with NFRS 9, or
• using the equity method.

The same policy applies to each category of investment. Dividends received are recognised in profit or loss.

Consolidated financial statements (equity method, NAS 28):

• The investment is initially recorded at cost, then its carrying amount is increased by the investor's share of the associate's profit and decreased by its share of losses after acquisition.
• The investor's share of the associate's other comprehensive income is recognised in the investor's OCI.
• Dividends received reduce the carrying amount, because they are a return of investment, not income.
• Goodwill (cost over the investor's share of fair value of net identifiable assets) is included in the carrying amount and not amortised. Any excess of the share of net assets over cost is taken to profit in the period of acquisition.
• Adjustments are made for fair value differences on the associate's assets at acquisition and for unrealised intragroup profits.
• The carrying amount is tested for impairment under NAS 36 when there is objective evidence.
• Use of the equity method stops when significant influence is lost.

Example: Company A buys 30% of B for Rs 30 lakh. B earns profit of Rs 10 lakh and pays dividends of Rs 4 lakh. Carrying amount = 30,00,000 + 30% × 10,00,000 − 30% × 4,00,000 = Rs 31,80,000.

Under the Cash Basis NPSAS (Nepal's version of the cash basis IPSAS), transactions are recognised only when cash is received or paid. Financial statements therefore focus on cash receipts, payments and balances, and notes are used to give users information that the cash statement cannot show.

1. Disclosure of Non-cash Transactions (5 marks)

Non-cash transactions do not pass through the cash receipts and payments statement, so they are not recognised in it. The standard encourages disclosure in the notes so that users get a complete picture of the entity's resources and activities.

• What is disclosed: the nature and amount of material non-cash transactions, such as goods and services received in kind, assets donated by development partners, assets acquired through grants in kind, debts waived or forgiven, and expenses paid directly by a donor on the entity's behalf.
• How: in the notes, separately from the cash statements, with enough detail to explain the transaction.
• Materiality: only transactions that influence users' decisions need disclosure.
• Consistency: the same approach is followed from period to period, with comparative figures where practicable.
• Purpose: better accountability for externally supported projects and resources not reflected in cash flows.

2. Disclosure of Balances Related to Assets and Liabilities (5 marks)

Assets and liabilities (other than cash itself) are not recognised in the statements under the cash basis. Their disclosure in the notes is encouraged, since the cash statements alone hide the entity's financial position.

• Assets: receivables, advances and deposits, inventories, and property, plant and equipment, with the basis of valuation where it is practicable to give one.
• Liabilities: payables, loans and borrowings, guarantees given, and other obligations such as unpaid bills.
• Controlled cash: cash balances that are restricted or not available for general use, and unused borrowing facilities.
• Presentation: a clear note or schedule showing the nature, amount and, where relevant, the measurement basis and any security or restriction attached.

Summary:

Meaning. Fair presentation means the Balance Sheet and Profit and Loss Account give a true and fair view of the bank's financial position as at the reporting date and of its performance for the period, in accordance with the applicable financial reporting framework (NFRS and NFRS for SMEs in Nepal, NRB Directives 4 and 5 for banks and financial institutions, the Companies Act 2063 and BAFIA 2073). Transparency means full, faithful and timely disclosure; accuracy means the figures are correctly measured, classified and presented. How the two statements achieve this is explained below.

1. Compliance with recognised standards and formats. Preparing the two statements as per NFRS and the NRB-prescribed formats leaves no scope for arbitrary classification of assets, liabilities, income and expenses. Uniform formats make figures comparable across periods and across banks, which is the first condition of transparency.

2. Faithful measurement and recognition. Accrual basis, going-concern assumption, consistency of accounting policies, prudence and substance over form ensure that income is recognised when earned and expenses when incurred. Loan loss provisions, impairment of assets, depreciation and provisions for doubtful debts as directed by NRB prevent overstatement of assets and profit — the essence of accuracy.

3. Full disclosure through notes and schedules. The statements are supported by notes on accounting policies, related-party transactions, contingent liabilities, off-balance-sheet items, maturity-wise classification of assets and liabilities, and non-performing loans. This lets depositors, shareholders, NRB and other stakeholders see not only the numbers but also the basis on which they were arrived at.

4. Prevention of window dressing and fraud. Because every transaction flows through the double-entry system and the statements must reconcile with the books, subsidiary ledgers and control accounts, manipulation such as hiding non-performing assets or inflating income becomes detectable. Statutory audit, NRB inspection and audit committee oversight further verify the fairness of presentation.

5. Informed decision-making and accountability. A fairly presented Balance Sheet shows the true capital position, liquidity and solvency, while the Profit and Loss Account shows the real earning capacity. This supports correct assessment of capital adequacy, dividend declaration, taxation and creditworthiness, and protects the interests of depositors and the general public.

6. Regulatory and legal consequences. BAFIA 2073 and the Companies Act 2063 provide penalties for false or misleading statements, so the legal compulsion to present fairly acts as a deterrent against concealment and misstatement.

Conclusion. Fair presentation is thus not merely a legal formality but the mechanism through which financial reporting becomes reliable: it converts book entries into a transparent, accurate and comparable picture of the bank, thereby sustaining depositor confidence, market discipline and effective regulatory supervision.