Suggested Answer CAP III June 2017 GI

CHARTERED ACCOUNTANCY PROFESSIONAL CAP-III
SUGGESTED ANSWER
June 2017
The Institute of Chartered Accountants of Nepal
QGL P.T.O.
(2)
Advanced Financial Reporting
P.T.O.
(3)
Suggested
Roll No……………. Maximum Marks - 100
Total No. of Questions - 6 Total No. of Printed Pages - 14
Time Allowed - 3 Hours Marks

Attempt all questions. Working notes should form part of the answers.
1. Following information is made available to you in respect of two mutually exclusive
business combination transactions in respect of TOYOTA CAB Ltd., the acquirer and
MARUTI CAB Ltd.
a) The financial position of TOYOTA CAB Ltd. just before the acquisition was as follows:
Assets Book Value (Rs.)
Non-Current Assets:
- Property, Plant and Equipment – Taxis 35,000,000
- Intangible Assets- taxi licenses 10,000,000
Sub-total Non-Current Assets (a) 45,000,000
Current Assets:
- Cash & cash equivalents 60,000,000
Sub-total Current Assets (b) 60,000,000
Total Assets (a+b) 105,000,000
Equity
Share Capital 5,000,000
Retained earnings 100,000,000
Total Equity 105,000,000
b) Information about assets, liabilities and contingent liabilities of MARUTI CAB

Ltd. on the acquisition date were as follows:
Particulars Book Value (Rs.) Fair Value (Rs.)
Taxis 15,000,000 20,000,000
Taxi licenses 5,000,000 15,000,000
Brand (Registered trade name) - 6,000,000
Possible obligation for a court case - (1,000,000)
Share Capital 1,000,000
Retained earnings 19,000,000
Business combination was effected through the mutually exclusive transactions:
i) By transferring assets, obligations and operation of the taxi business to
TOYOTA CAB Ltd. for Rs. 42,000,000 paid in cash on the date of
acquisition, or
ii) By purchasing all the shares of MARUTI CAB Ltd.,
You are required to:
(a) State the relevant provisions of applicable Nepal Financial Reporting
Standards (NFRSs)/Nepal Accounting Standards (NASs) to which you
will base your measurement and presentation of elements of consolidated
financial statements of TOYOTA CAB Ltd. for both the situations given
above. (3+3=6)
(b) Give journal entries in the books of TOYOTA CAB Ltd. to give effect of
the business combinations for both the situations (2+2=4)
P.T.O.
(4)
(c) Prepare statement of financial position of TOYOTA CAB Ltd.
immediately after the acquisition reflecting the effect of the business
combination for both the situations. (5+5=10)
Answer
(a) (i) Para 18 of NFRS 3 on „Business Combination‟ states that the acquirer shall measure
the identifiable assets acquired and the liabilities assumed at their acquisition date fair
values. Similarly, Para 32 of above NFRS states that any difference between the cost
of the business combination and the acquirer‟s interest in the net fair value of the
identifiable assets, liabilities and a provision for contingent liabilities shall be
accounted as goodwill or negative goodwill.
(ii) If TOYOTA CAB Ltd. purchases the entire share capital of MARUTI CAB Ltd.
the later company will become hundred percent subsidiary company of first company.
TOYOTA CAB Ltd. prepares its consolidated financial statements by combining the
financial statements of its subsidiary.
In the consolidated financial statement, the assets and liabilities of MARUTI CAB
Limited are measured as follows:
Property, plant and equipment – taxis 20,000,000
Intangible assets- taxi license 15,000,000
Intangible assets – brand 6,000,000
Intangible assets – goodwill 2,000,000
Contingent liabilities – court cases (1,000,000)
(b) (i) TOYOTA CAB Ltd. accounts for the business combination by recognizing the cost
of Rs. 42,000,000 to the identifiable assets acquired (the taxis, taxi license and brand)
and the liabilities and contingent liabilities assumed (the possible obligation for the
court case i.e. a contingent liability for which a fair value can be determined), at their
respective fair value at the date of acquisition with the following journal entry:
Rs. Rs.
Dr. Property, plant and equipment – taxis 20,000,000
Dr. Intangible Assets - taxi licenses 15,000,000
Dr. Intangible Assets – brand 6,000,000
Dr. Intangible Assets – goodwill 2,000,000
Cr. Contingent Liabilities – Court Case 1,000,000
Cr. Cash 42,000,000
(ii) While preparing consolidated statement of financial position at the acquisition date
(after combining the financial statements of TOYOTA CAB Ltd. and MARUTI CAB
Ltd. line by line by adding together like item of assets, liabilities and equity)
management would use the following consolidated adjustments:
Rs. Rs.
Dr. Property, plant and equipment – taxis 5,000,000
Dr. Intangible Assets - taxi licenses 10,000,000
Dr. Intangible Assets – brand 6,000,000
Dr. Intangible Assets – goodwill 2,000,000
Dr. Equity (MARUTI CAB pre-acquisition equity) 20,000,000
Cr. Contingent Liabilities – Court Case 1,000,000
Cr. Investment in MARUTI CAB Ltd. 42,000,000
P.T.O.
(5)
(c ) (i) The statement of financial position of TOYOTA CAB Ltd. immediately after
acquisition will be as follows:
Particulars Before Effect of After
Acquisition Acquisition Acquisition
(Rs.) (Rs.) (Rs.)
Assets
Non-current Assets
Property, Plant & Equipment – taxis 35,000,000 20,000,000 55,000,000
Intangible Assets – goodwill - 2,000,000 2,000,000
Intangible Assets – taxi licenses 10,000,000 15,000,000 25,000,000
Intangible Assets – brand - 6,000,000 6,000,000
45,000,000 43,000,000 88,000,000
Current Assets
Cash 60,000,000 (42,000,000) 18,000,000
60,000,000 (42,000,000) 18,000,000
Current Liabilities
Liabilities – court case - (1,000,000) (1,000,000)
- (1,000,000) (1,000,000)
Total net assets 105,000,000 - 105,000,000
Equity
Share Capital 5,000,000 - 5,000,000
Reserves 100,000,000 - 100,000,000
Total Equity 105,000,000 - 105,000,000
(ii) The consolidated financial statement of TOYOTA CAB Ltd. immediately after
business combination would be calculated as follows:
Amount in Rs. „000‟
Particulars TOYOTA MARUTI Consolidation Consolidated
CAB Ltd. CAB Ltd. Adjustment Financial
Carrying Carrying Position
Amount Amount
Assets
Non-current Assets
Property, plant and 35,000 15,000 5,000 55,000
equipment – taxies
Intangible Assets – - - 2,000 2,000
Goodwill
Intangible Assets – Taxis 10,000 5,000 10,000 25,000
licenses
Intangible Assets – brand - - 6,000 6,000
45,000 20,000 23,000 88,000
Current Assets
Cash 60,000 - (42,000) 18,000
60,000 - (42,000) 18,000
Current Liabilities
Liabilities-court case - - (1,000) (1,000)
- - (1,000) (1,000)
Total net-assets 105,000 20,000 (20,000) 105,000
Equity
Share Capital 5,000 1,000 (1,000) 5,000
Reserves 100,000 19,000 (19,000) 100,000
Total Equity 105,000 20,000 (20,000) 105,000
P.T.O.
(6)
2.
a) Better Future Ltd. (BFL) operates a defined benefit pension plan for its
employees. You are preparing the financial statements of BFL complying fully
with applicable NFRSs/NASs in respect of the plan.
Following information was available to you in respect of the plan:
i) Financial and other data for two years:
(Rs. in million)
Particulars 2072/73 2071/72
Present value of obligation at year-end 2,040 2,300
Fair value of plan assets at year-end 1,784 2,150
Current service cost 125 143
Benefits paid during the year 99 110
Contribution made during the year 105 118
Discount rate for plan obligation 9% 8%
Expected return on plan assets 10% 9%
ii) Present value of pension obligation and fair value of plan assets as on 1st
Shrawan 2071 were Rs. 2,050 million and Rs. 1,995 million respectively.
iii) During the year 2071/72, BFL amended the scheme whereby the benefits
available under the plan had been increased. It resulted in an increase in the
present value of the defined benefit pension obligation by Rs. 5 million and
Rs. 8 million on account of vested and non-vested benefits respectively. The
period to vest was 4 years.
iv) On 31st Ashad 2073, BFL sold a business segment to Secure Future Ltd.
(SFL). Accordingly, BFL transferred the relevant component of its pension
fund to SFL. The present value of the defined benefit pension obligation
transferred was Rs. 280 million and the fair value of plan assets transferred
was Rs. 240 million. BFL also made a cash payment of Rs. 20 million to SFL
in respect of the plan.
v) Average remaining working lives of employees is 10 years.
Standards/Nepal Accounting Standards to which you will look in to ensure
full compliances. 2
(b) Prepare relevant extracts to be reflected in the statement of financial
position, statement of comprehensive income and notes to the financial
statements of BFL for the year ended on 31st Shrawan 2073 in accordance
with NFRSs/NASs with comparative figures. (1+3+4=8)
b) Everest Leasing Co. (ELC), which uses the straight line method for depreciating
assets, entered into a three year leasing contract for a new machine on 1st Shrawan
2070 with Machhapuchchhre Finance Company (MFC).
The lease contract includes the following information:
Fair value of leased machine Rs.25,390

Present value of minimum lease payments Rs.25,380
Lease rentals payable six monthly in arrears Rs.5,000
Six monthly implicit rate of interest 5%
The machine has an expected useful life of four years and a residual value of nil.
ELC is responsible for the insurance and maintenance of the machine.

P.T.O.
(7)
In addition to the above lease contract, ELC also entered into a contract on 1st
Shrawan 2070, to lease a piece of equipment from Ganesh Himal Ltd. at a cost of
Rs.250 per month payable in advance and terminable by either party. The cash
price of this type of office equipment is Rs.8,000 and its estimated useful life is
four years.
You are required to show the effect of both leases in ELC books for each of the 3
years ended on 31st Ashad 2071 to 31st Ashad 2073 on:
i) Statement of Comprehensive Income, and 4

ii) Statement of Financial Position 6
Answer
2
a) As per NAS 19 Para 55 accounting for defined benefit plans is complex because
actuarial assumptions are required to measure the obligation and expense and
there is a possibility of actuarial gain and losses. Moreover, the obligations are
measured on a discounted basis because they may be settled many years after the
employees render the related service.
Further, as per NAS 19 Para 56 defined benefit plans may be unfunded, or they
may be wholly or partly funded by contributions by an entity, and sometimes its
employees, into an entity, or fund, that is legally separate from the reporting entity
and from which the employee benefits are paid. The payment of funded benefits
when they fall due depends not only one the financial position and the investment
performance of the fund but also on an entity's ability, and willingness, to make
good any shortfall in the fund's assets. Therefore, the entity is, in substance,
underwriting the actuarial and investment risks associated with the plan.
Consequently, the expenses recognized for a defined benefit plan is not
necessarily the amount of the contribution due for the period.
2 a) (b) (i) Extracts of Statement of Financial Position
(Rs. in million)
2072/73 2071/72
Deferred liabilities:
Net defined benefit liability (PV of obligation - FV of Plan
Assets) 256 150
2 a) (b) (ii) Extracts of Statement of Comprehensive Income
Profit and loss account: 97 140

- Operating expenses( Note 3)
Other comprehensive income:
- Re-measurement loss on defined pension plan (347-213) &
(33+40) (134) (73)
2 a) (b) (iii) Extracts of Notes to Financial Statements
Under Staff Retirement Benefits

1. Changes in the present value of the pension obligations
Rs. in million
2072/73 2071/72
Present value obligations at the beginning of the year 2,300 2,050
Interest at 9%, 8% 207 164
Past service cost (5+8) - 13
Benefits paid (99) (110)
P.T.O.
(8)
Settlement (Explanation) (280) -
Re-measurement (gain)/losses charged to other
Comprehensive income (balancing figure) (213) 40
Present value of obligation at year end (given) 2,040 2,300
2. Changes in fair value of plan assets

Fair value of plan asset at beginning of the year 2,150 1,995
Interest at 10%, 9% 215 180
Benefits paid (99) (110)
Contribution paid 105 118
Settlement (Note 1) (240) -
Re-measurement losses charged to other comprehensive
income (balancing) (347) (33)
Fair value of plan asset at year end (given) 1,784 2,150
Explanation: During 2072/73, the company sells one of its business segments and
transfers the relevant part of the pension plan to the purchaser. This is a settlement.
The overall gain on settlement is calculated as follows:
Rs. in million
2072/73
Present value of obligation settled 280
Fair value of plan assets transferred on settlement (240)
Cash transferred on settlement (20)
Gain on settlement 20
3. Amounts recognized in the profit and loss account

Rs. in million
2072/73 2071/72

Past service cost - 13
Interest cost 207 164
Less: Interest income on plan assets (215) (180)
Gain on settlement (20) -
97 140
2. b) (i) Statements of Comprehensive Income (Extracts)
31/03/71 31/03/72 31/03/73
Lease interest 2,351 1,567 703
Depreciation 8,460 8,460 8,460
Operating lease rental 3,000 3,000 3,000
2. b) (ii) Statement of Financial Position (Extracts)
Non-current assets
Cost 25,380 25,380 25,380
Accumulated Depreciation 8,460 16,920 25,380
Net Book Value 16,920 8,460 -
Lease obligation 17,731 9,298 4,763
Current liability 8,433 9,298 -
Non-current liability 9,298 - -
Working Note 1: Determination of finance charge and capital sum
Period Capital Sum at Finance Charge Capital sum Rental Paid Capital sum end
Start (5%) during period of the period
30/09/70 25,380 1,269 26,649 5,000 21,649
31/03/71 21,649 1,082 22,731 5,000 17,731
2,351
30/09/71 17,731 886 18,617 5,000 13,617
P.T.O.
(9)
31/03/72 13,617 681 14,298 5,000 9,298
1,567
30/09/72 9,298 465 9,763 5,000 4,763
31/03/73 4,763 238 5,001 5,000 -
703
4,621
Working Note 2: Depreciation 25,380 ÷ 3 : 8,460 (approx) per annum

3.
a) On 1st Shrawan 2073, an entity invested Rs. 200 million in a 5 percent coupon
fixed income security portfolio. After 6 months the entity received the first
coupon payment of Rs. 5 million. The market value of the securities has increased
by Rs. 4 million at the end of 6th month.
i) If you are asked to classify and reflect the above investment as per relevant
NFRSs/NASs, what additional information you want or assumptions you will
make? 1
ii) Considering the above transactions only, how will you reflect assets and
equity in the balance sheet and income in the statement of comprehensive
income, when the investment is classified as follows: (3×3=9)
 Assets held for trading purposes,
 Assets available for sale, and
 Held-to-maturity assets
b) The following issues have arisen during the preparation of ABCL‟s draft financial
statements for the year ended 31st Ashad 2073:
i) On 1st Shrawan 2072, ABCL received a government grant of Rs.8 million
towards the purchase of new plant with a gross cost of Rs.64 million. The
plant has an estimated life of 10 years and is depreciated on a straight-line
basis. One of the terms of the grant is that the sale of the plant before 31st
Ashadh 2077 would trigger a repayment on a sliding scale as follows:
Sale in the year ended: Amount of repayment

31 Ashadh 2073 100%
31 Ashadh 2074 75%
31 Ashadh 2075 50%
31 Ashadh 2076 25%
Accordingly, the directors propose to credit to the statement of profit or loss
Rs.2 million (Rs.8 million x 25%) being the amount of the grant they believe
has been earned in the year to 31st Ashadh 2073. ABCL accounts for
government grants as a separate item of deferred credit in its statement of
financial position. ABCL has no intention of selling the plant before the end
of its economic life.
ii) From 1st Shrawan 2072, the directors have decided to reclassify research and
amortized development costs as administrative expenses rather than its
previous classification as cost of sales. They believe that the previous
treatment unfairly distorted the company‟s gross profit margin.
iii) ABCL has two potential liabilities to assess. The first is an outstanding court
case concerning a customer claiming damages for losses due to faulty
components supplied by ABCL. The second is the provision required for
product warranty claims against 200,000 units of retail goods supplied with
one-year warranty.
The estimated outcomes of the two liabilities are:
Court case Product warranty claims
P.T.O.
(10)
10% chance of no damages awarded 70% of sales will have no claim
65% chance of damages of Rs.4 million 20% of sales will require Rs.25/unit
repair costs
25% chance of damages of Rs.6 million 10% of sales will require
Rs.120/unit repair costs
Standards/Nepal Accounting Standards to which you will base your views
under each of the situations described above. (2+2+2=6)
(b) A
dvise, whether the treatments made by ABCL are correct for situation i) &
ii) and quantify the amount of provision to be made in ABCL‟s financial
statements for the year ended 31st Ashadh 2073 in respect of situation iii).(1+1+2=4)
Answer
3. a) (i) Following assumptions were made:
- With respect to the held to maturity securities, amortization effect caused by the
difference between the effective interest rate and the nominal interest rate is
ignored.
- The securities have not been impaired and no principal has been repaid.
3. a) (ii) Presentation of each category of the securities in the balance sheet and income
statement will be as follows:
Balance sheet as Trading portfolio Available for sale Held-to maturity

of poush end portfolio
2073
Assets
Cash/Bank (Deposit) 5,000,000 5,000,000 5,000,000
Cost of security 200,000,000 200,000,000 200,000,000
(Investment)
Unrealised gains 4,000,000 4,000,000
on securities
209,000,000 209,000,000 205,000,000
Liabilities
Equity
Paid up Capital( 200,000,000 200,000,000 200,000,000
Capital available
for investment)
Reserve( Earnings) 9,000,000 5,000,000 5,000,000
Valuation Gains 4,000,000
209,000,000 209,000,000 205,000,000
Income Statement for
the period Shrawan 01,
2073 to Poush 2073
Interest Income 5,000,000 5,000,000 5,000,000
Unrealized Gains 4,000,000
3. b)
i) Government grants related to non-current assets should be credited to the statement of profit
or loss over the life of the asset to which they relate, not in accordance with the schedule of
any potential repayment. The directors‟ proposed treatment is implying that the government
grant is a liability which decreases over four years. This is not correct as there would only be a
P.T.O.
(11)
liability if the directors intended to sell the related plant, which they do not. Thus in the year
ended 31 Ashadh 2073, Rs.800,000 (8 million/10 years) should be credited to the statement of
profit or loss and Rs.7·2 million should be shown as deferred income (Rs.800,000 current and
Rs.6·4 million non-current) in the statement of financial position
ii) Changing the classification of an item of expense is an example of a change in accounting

policy, in accordance with NAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors. Such a change should only be made where it is required by an NFRSs/NASs, or where
it would lead to the information in the financial statements being more reliable and relevant. It
may be that this change does represent an example of the latter, although it is arguable that
amortized development costs should continue to be included in cost of sales as amortization
only occurs when the benefits from the related project(s) come on-stream. If it is accepted that
this change does constitute a change of accounting policy, then the proposed treatment by the
directors is acceptable; however, the comparative results for the year ended 31 Ashadh 2073
must be restated as if the new policy had always been applied (known as retrospective
application).
iii) The two provisions must be calculated on different bases because NAS 37 Provisions,
Contingent Liabilities and Contingent Assets distinguishes between a single obligation (the
court case) and a large population of items (the product warranty claims). For the court case
the most probable single likely outcome is normally considered to be the best estimate of the
liability, i.e. Rs.4 million. This is particularly the case as the possible outcomes are either side
of this amount. The Rs.4 million will be an expense for the year ended 31 Ashadh 2073 and
recognized as a provision. The provision for the product warranty claims should be calculated
on an expected value basis at Rs.3·4 million (((70% x nil) + (20% x Rs.25) + (10% x Rs.120))
x 200,000 units). This will also be an expense for the year ended 31 Ashadh 2073 and
recognized as a current liability (it is a one-year warranty scheme) in the statement of financial
position as at 31 Ashadh 2073.
4.
a) Peoples Financiers Ltd. is providing hire purchase solutions for acquiring
consumer durables. The following information is extracted from its books for the
year ended 31st March 2014.
Assets Funded Interest Overdue but recognized in Net Book Value of
Profit & Loss Assets Outstanding
Period Overdue Interest Amount
Rs. million Rs. million
LCD Televisions Upto 12 months 480.00 20,123.00
Washing Machines For 24 months 102.00 2,410.00
Refrigerators For 30 months 50.50 1,280.00
Air Conditioners For 45 months 26.75 647.00
You are required to calculate the amount of provision to be made. 3
b) Key Ltd. entered into a sale deed for its immovable property before the end of the
year. However, formal transfer registration process at the appropriate authority
could only be completed a week after the balance sheet date. Is it possible to
recognise the sale and the gain at the balance sheet date? Give your view with
provisions in relevant NFRSs/NASs. 3
c) Crystal Sugar Industries Ltd. has estimated the economic life of a plant purchased
7 years ago as 10 years. As a routine exercise, assessment of the status of the plant
was carried out by qualified mechanical engineers. They estimated the remaining
life of the plant as 5 years more instead of 3 years based on original estimation.
Board of directors of the company decided to provide the depreciation on
remaining book value of the plant for the period of 5 years. Give your view with
provisions in relevant NFRSs/NASs. 3
P.T.O.
(12)
d) Explain the concepts of „Fixed budget‟, „rolling budget‟ and „zero-based budget‟. 3
e) Write notes on forward contract and its accounting treatment. 3
Answer
4. a) As per prudential concept followed in various countries the NBFC‟s are required to
make additional provision in respect of hire purchase and leased assets as under:
Rs. Million
(a) Where hire charges are Nil -
overdue upto 12 months
(b) Where hire charges are 10% of the net book value =
overdue for more than 12 months but 10% X 2,410 241
upto 24 months
(c) Where hire charges are 40% of the net book value =
overdue for more than 24 months but 40% X 1,280 512
upto 36 months
(d) Where hire charges or lease 70% of the net book value=
rentals are overdue for more than 36 70% X 647 453
months but upto 48 months
Total 1,206
b) Yes, it is possible for the Key Ltd. to recognize the sale and the gain at the balance sheet
date according to NAS 18: „Revenue‟. It is evident that the significant risks and rewards of
ownership had passed before the balance sheet date and the delay in transfer of property
was merely because of formality in getting the transfer deed registered. Further the
registration post the balance sheet date confirms the condition of sale at the balance sheet
date as per NAS 10 „Events after the Reporting Period‟.
c) The decision of the Board of Directors of Crystal Sugar Industries Limited is correct being in
line with the provisions of Nepal Accounting Standard – 6, “Property, Plant & Equipment”.
The accounting standard states that the residual value and the useful life of an asset shall be
reviewed at least at each financial year end and, if expectations differ from previous estimates,
the change(s) shall be accounted for as a change in an accounting estimate in accordance with
NAS 02 Accounting Policies, Changes in Accounting Estimates & Errors and treated
prospectively.
d) A fixed budget is one prepared in advance of the relevant budget period which is not changed
or amended as the budget period progresses. This budget represents a periodic approach to
budgeting, since a new budget is prepared towards the end of the budget period for the
subsequent budget period. In this way, an organisation may set a new budget on an annual
basis. A fixed budget is likely to be useful in circumstances where the organisational
environment is relatively stable and can be predicted with a reasonable degree of certainty.
A rolling budget, sometimes called a continuous budget, represents an alternative approach to

periodic budgeting. Here, a portion of the budget period is replaced on a regular basis so that
the overall budget period remains unchanged. For example, with a budget period of one year,
at the end of each quarter a new quarter could be added to the end of the budget period and the
elapsed quarter could be deleted, so that the budget was always looking one year ahead.
Continuous budgeting continues to increase in popularity. A rolling budget is likely to be
useful in circumstances where the future is less certain and more flexibility is needed in the
organisational response to its changing environment. For this reason, rolling budgets are
popular with new organisations. A cash budget is often a rolling budget because of the need
to keep tight control of this area of financial management. A rolling budget is also supported
by the availability of cheap and powerful information processing via personal computers and
computer networks.
A zero-based budget is a periodic budget which seeks to dispose of the incremental approach
to budgeting. In the incremental approach, an increment is added to the relevant figure from
P.T.O.
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last year‟s budget, for example to take account of inflation. In this way, inefficiency can
become embedded in the annual budget and profitability may suffer as a result. With the zero-
based approach, each element of planned activity is required to be justified in terms of its
contribution towards achieving organisational objectives. This involves the formulation of
decision packages, which describe particular activities in such a way that managers can
compare them in terms of their competing claims on organisational resources, and then rank
them from a cost-benefit point of view. In this way, zero-based budgeting looks at each
budget period with a new perspective. A zero-based budgeting approach tends to be most
beneficial when used with services and with discretionary activities, and so is most widely
used in the public sector.
e) A forward contract is basically a contractual agreement in which one party buys and other
party sells designated currency at a forward rate mutually agreed upon on the date of contract
for delivery at designated future date. Accordingly, „An enterprise may enter into a forward
contract or other financial instrument that is in substance a forward exchange contract to
establish the amount of reporting currency required or available at settlement date of a
transaction. The difference between the forward rate and the exchange rate at the date of
transaction should be recognised as income or expense over the life of the contract, except in
respect of liabilities incurred for acquiring fixed assets, in which case, such difference should
be adjusted in carrying amount of the respective fixed assets.
5.
a) Explain the highlights of Nepal Public Financial Management Reform
Strategies/Program Phase II. 8
b) From the following information taken from the books of Nepal Portfolio Ltd.
relating to staff and community benefits, prepare a statement classifying the
various items under the appropriate heads, required under corporate social
reporting. 7
Particulars Rs.
Environmental improvements 201,000
Medical facilities 450,000
Training programmes 102,500
Generation of Job opportunities 607,500
Municipal taxes 107,000
Increase in the cost of living in the vicinity
due to thermal power station 165,500
Concessional transport, water supply 112,500
Extra work put in by staff and officers for draught relief 185,000
Leave encashment and leave travel benefits 520,000
Educational facilities for children of staff members 216,000
Subsidized canteen facilities 144,000
Generation of business 250,000
Answer
5. a) The development of Public Financial Management Reform Program, Phase II (PFMRP
II) is built on the progress of the first phase of PFM reform (PFMRP- I), findings of the
second Public Expenditure and Financial Accountability (PEFA) assessment and the priority
Public Financial Management (PFM) areas identified by the Government of Nepal (GoN). The
second PEFA assessment was a self-assessment conducted under the leadership of the
Government of Nepal (with nine teams led by Joint Secretaries) and received endorsement
from the PFM Steering Committee chaired by the Finance Secretary. The working committee
was led jointly by the PEFA Secretariat and the Chief of the Budget and Program Division,
Ministry of Finance.
Based on the findings of the second PEFA assessment, there were upgrades in 19 indicators
(61%), downgrades in 2 indicators (7%) while 10 (32%) indicators remained constant. The
second PEFA assessment notes improvements in the areas of budget credibility,
P.T.O.
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comprehensiveness, budget formulation process, accounting, reporting, and audits. The areas
of improvement identified by this assessment are budget execution and control, enhancing
parliamentary scrutiny on PFM system for better accountability and enhanced control of extra
budgetary funds. The use of Information Technology has been a core area that has assisted in
the improvement of PEFA indicators. The maintenance, up-gradation and sustainability of the
previous and on-going PFM reforms are considered as prime important areas of improvements
too.
The recent constitutional mandate for a new federal structure raises a number of issues in
terms of delegation of functional responsibilities, design of intergovernmental fiscal system,
provision of administrative authority to lower levels for service delivery and control over
relevant staff and assets associated with the service. These would need to be resolved by GoN
and could also be used as an opportunity to address shortcomings in PFM and governance
system to enable better transition through designing for conversion, encompassing and
replicating the present PFM system, process and institution which works well with current
skills and capacities. Taking the example of District Treasury Comptroller Offices (DTCOs)
where they function out of every district, the structure can be aggregated at the level of
provinces and local level governance.
Drawing mainly from identified strengths and weaknesses identified by the second PEFA
assessment, the Government has prepared the PFMRP II. It has equally taken into account the
ongoing reform program of the government in areas such as further enhancement of the
Treasury Single Account (TSA) systems, strengthening accounting and reporting practices and
strengthening PEFA Secretariat. There are all together 119 reform action plans identified and
developed on the basis of the recognized PFM performance gaps observed from the second
PEFA assessment. PFMRP II focuses on the various areas that still need to be further
developed and also reflects the immediate priorities (24 numbers of actions). Government,
through PFMPRP Phase II Strategy, intends to refine the detailed plan of action as derived
from second PEFA assessment into short-term/medium/long-term strategy with multiple
reform actions sequenced and aggregated at sub-project level. The National PFM Steering
Committee will continue to spearhead the next phase of PFM reforms with support from
implementing agencies and line ministries in Government of Nepal.
This strategy is based on three key principles. First, it is a Government report developed after
an extensive stakeholders' consultative process. Second, it takes into consideration lessons
learnt from first phase particularly the limits to absorptive capacity of the agencies. Third, the
preference would be to implement this second phase on the basis of clustering into sub-
projects that are government executed to enhance ownership and commitment. When
Development Partners (DPs) are involved, one DP or multi-donor trust fund (MDTF) should
take the lead in providing support for each sub-project to help assure coherent design and
implementation. If all the actions of a sub-project is not possible to support by one DP then
other DPs also could involve in supporting any part of the sub-project implementation.
Sustaining the management of public finances continue to be a priority for GoN today, ever
more as the nation is going through a crisis as a result of the 2015 earthquake and blockade.
The Government remains committed to improve and mainstream sound PFM systems,
processes and institution throughout the country.
5. b)
Nepal Portfolio Ltd.
Statement relating to staff and community benefits
I. Social Benefits and Cost to Staff Rs.
A. Social Benefits to Staff
1. Medical facilities 450,000
2. Training Programme 102,500
3. Concessional transport, water supply 112,500
4. Leave encashment and leave travel benefits 520,000
5. Educational facilities for children of staff members 216,000
6. Subsidized canteen facilities 144,000
P.T.O.
(15)
Total 1,545,000
B. Social Cost to Staff
Extra work put in by staff and officers for drought relief 185,000
Net social benefits to Staff (A-B) 1,360,000
II. Social Benefits and Costs to Community Rs.
A. Social Benefits to Community
1. Environmental Improvement 201,000
2. Generation of job opportunities 607,500
3. Municipal Taxes 107,000
4. Generation of business 250,000
Total 1,165,500
B. Social Cost to Community
Increase in the cost of living in the vicinity due to a thermal
power station 165,500
Net social benefits to Community (A-B) 1,000,000
6.
a) You are provided with following information with respect to capital structure of a
company:
Particulars Amount Rs.
Equity (expected dividend 12%) 1,000,000
10% Preference Shares 500,000
8% Secured Loan 1,500,000
Calculate the weighted average cost of capital, assuming 50% as the rate of
income-tax, before and after tax. 5
b) Cute Ltd. has an asset, which is carried in the balance sheet of 31.3.2073 at Rs.
1,500 lakhs. As at that date the value in use is Rs. 1,200 lakhs and the net selling
price is Rs. 1,125 lakhs.
i) Calculate impairment loss 2
ii) Prepare journal entries for adjustment of impairment loss 1
iii) Show, how impairment loss will be shown in the balance sheet. 2
Answer
a)
(i) Calculation of weighted average cost of capital before tax:
Particulars Rs. After Weights Cost

Equity 10,00,000 12% 33.33% 3.99
Preference 5,00,000 10% 16.67% 1.67
8% Loan 15,00,000 8% 50.00% 4.00
30,00,000 9.66%
Weight average cost of capital = 9.66%.
(ii) Calculation of weighted average cost of capital after tax:
Particulars Rs. After Weights Cost

Equity 10,00,000 12% 33.33% 3.99
Preference 5,00,000 10% 16.67 1.67
8% Loan 15,00,000 4% 50.00 2.00
30,00,000 7.66%
Weight average cost of capital = 7.66%
P.T.O.
(16)
b) i) Impairment loss is the amount by which the carrying amount of an asset exceeds its
recoverable amount.
Thus, Impairment loss = Carried amount – Recoverable amount*

= Rs. 1,500 lakhs – Rs. 1,200 lakhs = Rs. 300 lakhs
*Recoverable amount is higher of asset‟s net selling price Rs. 1,125 lakhs and its value
in use Rs. 1,200 lakhs.
Therefore, Recoverable amount = Rs. 1,200 lakhs
ii)
Journal Entries
Rs. in lakhs
Particulars Dr. Cr.
Rs. Rs.
Impairment loss account Dr. 300
To Asset account 300
(Being the entry for accounting
impairment loss)
Profit and loss account Dr. 300

To Impairment loss account 300
(Being the entry to transfer impairment
loss to profit and loss account)
iii)
Balance Sheet of Cute Ltd. as on 31.3.2073
Rs. in
lakhs
Asset less depreciation 1,500
Less: Impairment loss 300
1,200
P.T.O.
(17)
Advanced Financial Management
P.T.O.
(18)
Suggested
Roll No……………. Maximum Marks – 100
Total No. of Questions - 6 Total No. of Printed Pages – 20
Time Allowed - 3 Hours
Marks
Attempt all questions.
Working notes should form part of the answers. Make assumptions wherever necessary.
1.
a) A
akash Distributions Ltd. is a company which purchases distribution
rights of songs from producers and sells them to various types of users.
The company has identified potential expansion of its business by
investing in production of songs with its own rights. The establishment
of production house initially requires Rs. 5.5 million of investment
in production equipments. The production house equipments have 10%
disposable value at the end of 5th year of establishment.
The company estimated the following additional annual revenue and its
probability over the 5 year life of the production house equipments:
Level of production Revenue (Rs. in millions) Probability
High 8.00 0.25
Medium 5.60 0.50
Low 4.48 0.25
The company further estimates contribution margin ratio of 55% and
fixed overhead of Rs. 0.90 million per annum.
Income tax rate applicable for the company is 25% and is payable in
advance during the income year.
Aakash Distributions Ltd.'s annual after-tax nominal discount rate is
15.5%. It has expected a uniform inflation rate of 5% per annum which
will apply to all costs and revenue during the life of the production
house project.
All of the values above have been expressed in terms of current prices.
It can be assumed that all cash flows occur at the end of each year and
investments in production house equipments do not qualify for capital
allowances.
Required: (6+4=10)
i) Evaluate the proposed investment in production house equipments
from a financial perspective. Consider real cash flows and real
discount rate for your calculation.
ii) Calculate and discuss the sensitivity of the production house
establishment project to changes in the expected annual
contribution.
b) H
i-tech Software Ltd. (HSL) has a complete "Software Developing Unit"
costing Rs. 70 lakhs. It is this type of block of assets that have no book
value as at 31st March, 2017 as it entitled to 100 percent rate of
depreciation under the prevailing law. The company is facing acute
fund crunch as it lacks order from Middle East and was toying with the
idea of taking term loan. Eastern Financier (EF), a reputed finance
company, gave the idea of "buy and lease back" to tide over the fund
crunch. EF agreed to buy the software-developing unit at Rs. 50 lakhs
and lease back to HSL for lease rental of Rs. 9 lakhs per annum for a
period of 5 years. HSL decides to put the entire net proceeds in a fixed
P.T.O.
(19)
deposit at a commercial bank at yearly interest of 8.75 percent for 5
years to generate cash flow much needed for day-to-day operation.
Central Financier (CF), another financier, gave a proposal of selling a
similar software-developing unit at Rs. 30 lakhs to HSL and they will
buy back after 5 years at a price of Rs. 5 lakhs provided the Annual
Maintenance Contract (AMC) @ Rs. 1.50 lakhs per annum is entrusted
to them. The new machine is also entitled to 100 percent rate of
depreciation under the law. CF also agreed to buy the existing software-
developing unit at Rs. 50 lakhs. HSL would utilize the net sales proceed
to finance this machine.
The marginal rate of tax of HSL is 34 percent and its weighted average
cost of capital is 12 percent. Which offer HSL should accept? 10
Discounting factor at 12 percent is as follows:
Year 1 2 3 4 5
Discounting
0.893 0.797 0.712 0.636 0.567
factor
Solution to Question 1 (a)
The case indicates that a uniform inflation rate applies to all costs and revenues.
Therefore, current prices will be equivalent to real cash flows.
Calculation of real discount rate will be done as follows:
(1+Real discount rate) = (1+Nominal discount rate)/ (1+Inflation rate)
Or, (1+Real discount rate) = (1+0.155)/ (1+0.05)
Or, (1+Real discount rate) = 1.155/ 1.05
Or, Real discount rate = 1.10 – 1 = 0.10, or 10%
Calculation of expected value of revenue from the project
Expected value of revenue = Probable value of revenue
= Rs. [(8.00 x 0.25) + (5.60 x 0.50) + (4.48 x 0.25)] million
= Rs. [2.00+2.80+1.12] million = Rs. 5.92 million
(i) Calculation of NPV (Rs. in millions)
Description Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Expected Revenue 5.920 5.920 5.920 5.920 5.920
Contribution (@55%) 3.256 3.256 3.256 3.256 3.256
Less: Fixed costs 0.900 0.900 0.900 0.900 0.900
Taxable profits 2.356 2.356 2.356 2.356 2.356
Less: Tax @ 25% 0.589 0.589 0.589 0.589 0.589
Net cash flows (5.500) 1.767 1.767 1.767 1.767 1.767
Disposal value 10% Of 0.550
investment
DF @ 10% 1 0.909 0.826 0.751 0.683 0.621
PV of Cash flows (5.500) 1.606 1.460 1.327 1.207 1.439
NPV 1.539
Decision: The expansion project by investment in production house equipments

should be undertaken because the NPV of the project is positive.
ii) Calculation of the sensitivity of the production house establishment project to
changes in the expected annual contribution
P.T.O.
(20)
The sensitivity of project can be shown by calculating the amount of
contribution that gives zero NPV. It will show how much the contribution can
fall to justify the viability of the project.
Let 'c' be the contribution amount after deduction of fixed costs.
In the given case, NPV will be zero at the following point:
(0.75×c×0.909)+(0.75×c×0.826)+(0.75×c×0.751)+(0.75×c×0.683)+(0.75×c×0.621)+
(0.55×0.621) = 5.5
Or, 0.75C (3.79) +0.34155 = 5.5
Or, 2.8425 c = 5.5 – 0.34155 = 5.15845
Or, c = 5.15845/ 2.8425
Or, c = 1.814758
Therefore, contribution before fixed cost = 1.814758 + 0.90 = Rs. 2.714758 million.
Decrease in contribution = 3.256 – 2.714758 = Rs. 0.541242 million
Decrease % = 0.541242/ 3.256 = 0.1662 = 16.62%
Therefore, sensitivity of the project to changes in contribution is 16.62%. Till
this point of fall, the project can be undertaken.
Solution to Question 1 (b)
Evaluation of Eastern Financier (EF) Proposal
Present value of cash flows
Year Particulars Amount (Rs.) PV factor Present Value (Rs.)
0 Sale of software 5,000,000 1.000 5,000,000
0 Tax on gain (1,700,000) 1.000 (1,700,000)
0 Investment in FD (3,300,000) 1.000 (3,300,000)
1–5 Annual net outflow (403,425) 3.605 (1,454,347)
5 Release of FD 3,300,000 0.567 1,871,100
416,753
Working notes:
(i) Interest on fixed deposit
Rs.
Sales proceeds of Software-Developing Unit 5,000,000
Less: Tax @ 0.34 1,700,000
Net proceeds invested in FD 3,300,000
Interest (3,300,600 @ 0.0875) 288,750
(ii) Yearly net cash outflows
Rs.
Payment of lease rent 900,000
Less: Interest on FD 288,750
611,250
Less: Tax saving @ 0.34 207,825
Annual net outflows 403,425
Evaluation of Central Financier (CF) Proposal

Present value of cash flows
Year Particulars Amount (Rs.) PV factor Present Value (Rs.)
0 Sale of software 5,000,000 1.000 5,000,000
P.T.O.
(21)
0 Tax on gain (1,700,000) 1.000 (1,700,000)
0 Purchase of software (3,000,000) 1.000 (3,000,000)
1 Tax save on depreciation 1,020,000 0.893 910,860
1–5 Annual net outflow (99,000) 3.605 (356,895)
5 Terminal cash flow 330,000 0.567 187,110
1,041,075
Working notes:
(i) Annual net cash outflow
Rs.
Maintenance cost 150,000
Less: Tax saving @ 0.34 51,000
Net outflow 99,000
(ii) Terminal cash flow
Rs.
Buyback price of software 500,000
Less: Tax @ 0.34 170,000
Net inflow 330,000
Decision: Since NPV is higher in case of proposal from CF, the same should be accepted.
2.
a) T
he following information is available relating to 3 companies that are
identical except for their capital structure:
Orange Grape Apple
Total invested capital 1,00,000 1,00,000 1,00,000
Debt/assets ratio 0.8 0.5 0.2
Shares outstanding 6,100 8,300 10,000
Pretax cost of debt 16% 13% 15%
Cost of equity 26% 22% 20%
Operating Income (EBIT) 25,000 25,000 25,000
Net Income 8,970 12,350 14,950
The tax rate is uniform 35% in all cases.

Required: (2.5+2.5+ 3.5+ 1.5=10)
i) Compute the weighted average cost of capital for each company.
ii) Compute the economic valued added (EVA) for each company and
based on the EVA calculated suggest which company would be
considered for best investment. Give reasons.
iii) If the industry price earnings (PE) ratio is 11 times, estimate the
price for the share of each company; and comment on the results
obtained vis-à-vis the PE ratio you have used.
iv) Calculate the estimated market capitalization for each of the
companies.
b) A
s an investor, you hold two stocks, stock A and stock B. You are
required to consider ex-ante probability distribution of possible
economic scenario and conditional returns for the two stocks and
market index prepared by a financial analyst as given below:
Conditional return
Economic scenario Probability
Stock A Stock B Market
P.T.O.
(22)
Growth 0.40 25 20 18
Stagnation 0.30 10 15 13
Recession 0.30 −5 −8 −3
The risk free-rate during the next year is expected to be around 11%.
Required: 10
Assuming that the assumptions of capital assets pricing model (CAPM)
hold true in the present case, determine whether you should liquidate
your holdings in stocks A and B or you should make fresh investments
in them.

(i) Working for calculation of WACC
Orange Grape Apple
Total debt 80,000 50,000 20,000
Post tax Cost of debt 10.4% 8.45% 9.75%
Equity fund 20,000 50,000 80,000
WACC
Orange: (10.4 × 0.8) + (26 × 0.2) = 13.52%
Grape: (8.45 × 0.5) + (22 × 0.5) = 15.225%
Apple: (9.75 × 0.2) + (20 × 0.8) = 17.95%
(ii)
Orange Grape Apple
WACC 13.52 15.225 17.95
EVA [EBIT (1-T)-(WACC × Invested Capital)] 2,730 1,025 -1,700
Orange would be considered as the best investment since the EVA of the company is highest
and its weighted average cost of capital is the lowest
(iii) Estimated of price of the company shares

Orange Grape Apple
EBIT (Rs.) 25,000 25,000 25,000
Interest (Rs.) 12,800 6,500 3,000
Taxable Income (Rs.) 12,200 18,500 22,000
Tax 35% (Rs.) 4,270 6,475 7,700
Net Income (Rs.) 7,930 12,025 14,300
Shares 6,100 8,300 10,000
EPS (Rs.) 1.3 1.448795 1.43
Stock Price (EPS × PE Ratio) (Rs.) 14.30 15.94 15.73
Since the three entities have different capital structures they would be exposed to different
degrees of financial risk. The PE ratio should therefore be adjusted for the risk factor.
P.T.O.
(23)
(iv) Market Capitalization
Estimated Stock Price (Rs.) 14.30 15.94 15.73
No. of shares 6,100 8,300 10,000
Estimated Market Cap (Rs.) 87,230 1,32,302 1,57,300

Expected Return on stock A = E (A) = ∑ Pi Ai
i = G, S R
where G, S and R denotes growth, stagnation and recession)
Expected return on stock A = 0.40 x (25) + 0.30 (10) + 0.30 (−5) = 10 + 3 – 1.5 = 11.5%
Expected return on stock B = 0.40 x (20) + 0.30 (15) + 0.30 (−8) = 8 + 4.5 – 2.4 = 10.1%
Expected return on Market Index = 0.40 x (18) + 0.30 (13) + 0.30 (−3) = 7.20 + 3.90 – 0.9 =
10.2%
Variance of Market Index = (18 – 10.2)2 (0.40) + (13 – 10.2)2 (0.30) + (-3 – 10.2)2 (0.30) =
24.336 +
2.352 + 52.272 = 78.96%
Co-variance of stock A and Market Index M
Cov. (A & M) = ∑ [Pi Ai – E (A)] [Mi – E (M)] Pi
i = G, S R
= (25 – 11.5) (18 – 10.2) (0.40) + (10 – 11.5) (13 – 10.2) (0.30) + (- 5 – 11.5) (-3 – 10.2)
(0.30) = 42.12 + (–1.26) + 65.34 = 106.2
Cov. (B & M) = ∑ [Pi Ai – E (A)] [Mi – E (M)] Pi

i = G, S R
= (20 – 10.1) (18 – 10.2) (0.40) + (15 – 10.1) (13 – 10.2) (0.30) + (- 8 – 10.1) (-3 – 10.2)
(0.30) = 30.89 + 4.12 + 71.67 = 106.68
Beta of stock A = Cov (A & M) = 106.20 = 1.345

Variance (Market) 78.96
Beta of stock B = Cov (B & M) = 106.68 = 1.351
Variance (Market) 78.96
Required Return for A
R (A) = Rf + β (M – Rf) = 11% + 1.345 (10.2 – 11)% = 11% - 1.076% = 9.924%
Required Return for B
R (B) = Rf + β (M – Rf) = 11% + 1.351 (10.2 – 11)% = 11% - 1.081% = 9.919%
Alpha for Stock A = E (A) – R (A) = (11.5 – 9.924)% = 1.576%
Alpha for Stock B = E (B) – R (B) = (10.1 – 9.919)% = 0.181%
Since stock A and stock B both have positive Alpha, both the stocks are underpriced. Fresh
investment should therefore be made in these stocks.
3.
a) T
he following information is provided relating to the acquiring company
Everest Ltd., and the target company Hills Ltd:
Particulars Everest Ltd. Hills Ltd.
Number of shares (Face value Rs. 10 each) 20 lakhs 15 lakhs
P.T.O.
(24)
Market capitalization Rs. 1,000 lakhs Rs. 1,500 lakhs
P/E Ratio (times) 10.00 5.00
Reserves and surplus Rs. 600 lakhs Rs. 330 lakhs
Promoter's holding (No. of shares) 9.50 lakhs 10 lakhs
The board of directors of both the companies has decided to give a fair
deal to the shareholders. Accordingly, the weights are decided as 40%,
25% and 35% respectively for earnings, book value and market price of
share of each company for swap ratio.
Calculate the following: (3+2+1+1+2+1=10)
i) Market price per share, earnings per share and book value per share;
ii) Swap ratio;
iii) Promoter's holding percentage after acquisition;
iv) EPS of Everest Ltd. after acquisition of Hills Ltd;
v) Expected market price per share and market capitalization of Everest
Ltd; and
vi) Free float market capitalization of the merged firm.
b) Z
ed Ltd. is involved in the manufacture of parts of electronic device
which are exported to USA, Japan and Europe on 90 days credit terms.
The relevant information relating to cost and sales applicable to exports
made to different destinations are as shown below:
Cost and sales information:
Particulars Japan USA Europe
Variable cost per unit Rs. 360 Rs. 632 Rs. 816
Export sale price per unit Yen 650 US $ 10.23 Euro 11.99
Receipt from sale due in 90 days Yen 7,800,000 US $ 102,300 Euro 95,920
The following information relating to foreign exchange rates are also available.
Particulars Yen / Rs. US $ / Rs. Euro/ Rs.
Spot market 1.511 – 1.523 0.01338 – 0.01356 0.01106 – 0.01125
3 months forward 1.498 – 1.517 0.01331 – 0.01350 0.01100 – 0.01113
3 months spot 1.514 – 1.537 0.0134 – 0.01348 0.01106 – 0.01119
Required: On the basis of contribution of sales ratio, advise Zed Ltd.

whether it should hedge its foreign currency. 10

(i) Market price per share, earnings per share and book value per share
Particulars Everest Ltd. Hills Ltd.
Market capitalization (Rs.) 1,000 lakhs 1,500 lakhs
No. of shares 20 lakhs 15 lakhs
Market price per share (Rs.) 50.00 100.00
P/E Ratio (Times) 10 5
Earnings per share (Rs.) 5.00 20.00
Profit (Rs.) 100 lakhs 300 lakhs
Share capital (Rs.) 200 lakhs 150 lakhs
Reserve and surplus (Rs.) 600 lakhs 330 lakhs
P.T.O.
(25)
Total book value (Rs.) 800 lakhs 480 lakhs
Book value per share (Rs.) 40.00 32.00
(ii) Swap ratio

Earnings per share 1: 4 4.0 × 40% 1.6
Book value per share 1: 0.8 0.8 × 25% 0.2
Market price per share 1 : 2 2 × 35% 0.7
Total 2.5
Therefore, swap ratio for every one share of Hills Ltd. is 2.5 shares of Everest Ltd.
(iii) Promoters holding percentage after acquisition

Total promoters share = 9.5 lakh shares + (10 lakh shares × 2.5)
= 34.50 lakh shares
Percentage of promoters share = 34.50 lakh shares / 57.50) lakh shares
= 60%
(iv) EPS of Everest Ltd. after acquisition of Hills Ltd.
Total no. of shares to be issued is 37.50 lakh shares (15 lakhs × 2.5)
Total profit = Rs. 100 lakhs + Rs. 300 lakhs
= Rs. 400 lakhs
Total no. of shares (20+37.5) lakh= 57.50 lakh
Earning per share (400 /57.50) = Rs. 6.96
(v) Market price per share and market capitalization of Everest Ltd.
Expected market price = EPS × P/E Ratio
= Rs. 6.96 × 10
= Rs. 69.60
Market capitalization = Rs. 69.60 × 57.50 lakh shares
= Rs. 4002 lakhs
(vi) Free float capitalization of the merged firm
Public shareholdings = 40% of 57.50 lakh shares
= 23 lakh shares
Capitalization = Rs. 69.60 × 23 lakh
= Rs. 1600.8 lakhs
Computation of Contribution to Sales Ratio
Particulars Japan USA Europe Total Rs.
P.T.O.
(26)
If Foreign Currency Risk is
Hedged:
Sum due ¥ 7,800,000 US$ 102,300 Euro 95,920
Unit input price ¥ 650 US $ 10.23 Euro 11.99
Unit sold 12,000 10,000 8,000
Variable cost per unit Rs. 360 Rs. 632 Rs. 816
Variable cost (A) Rs. 4,320,000 Rs. 6,320,000 Rs.6,528,000 Rs.17,168,000
3 months forward rate
for selling ¥ / Rs. 1.517 $ /Rs. 0.01350 Euro /Rs. 0.01113
Rupee value of receipts (B) Rs. 5,141,727 Rs. 7,577,778 Rs. 8,618,149 Rs. 21,337,654
Contribution (B) – (A) Rs. 821,727 Rs. 1,257,778 Rs. 2,090,149 Rs. 4,169,654
Average contribution
to sale ratio
19.54%
If Risk is not Hedged:
3 months spot rate for selling ¥ / Rs. 1.537 $ /Rs. 0.01348 Euro /Rs. 0.01119
Rupee value of receipt Rs. 5,074,821 Rs. 7,589,021 Rs. 8,571,939 Rs. 21,235,781
Total Contribution (C)–(A) Rs. 754,821 Rs. 1,269,021 Rs. 2,043,939 Rs. 4,067,781
Average contribution
to sale ratio 19.16%
Recommendation: The computation done above clearly shows that contribution to

sales ratio is higher when foreign currency exchange risk is hedged, it is therefore
advised that Zed Ltd. should hedge its foreign currency exchange risk.
4. A
nswer any five of the followings: (5×3=15)
a) D
istinguish between „defined benefit‟ and „defined contribution‟ pension
plans.
b) E
xplain how netting and diversification have contributed toward the
facilitation of modern day banking transactions.
c) W
hat do you mean by „bailouts‟? Why are these used?
d) B
riefly explain what an exchange traded fund is and mention its key
features.
e) W
rite a short note on „breadth index‟.
Answer to Question 4:
a) A defined benefit pension plan is the one in which the employer firm
promises to make periodic payments to employees after retirement. The
benefit is usually based on the employee's years of service and the
employee's salary at, or near, retirement. For instance, an employee might
earn a retirement benefit of 2% of his/her final salary for each year of
service. Assuming a service period of 20 years and a final salary of Rs.
P.T.O.
(27)
2,400,000, the employee would be entitled to a retirement benefit of Rs.
960,000 (Rs. 2,400,000 x 2% x 20) each year upon retirement until death.
In a defined benefit pension plan, since the employee's future benefit is
defined, it is the employer who assumes the investment risk. The
contribution of the employer is managed by a fund established for the
purpose of providing the promised future benefits. As a result, poor
investment performance of the fund will have the effect of increased
contribution from the employer to the fund and vice versa.
A defined contribution pension plan is a retirement benefit plan in which
the employer firm contributes a defined sum each period to the employee's
retirement account. The contribution of the firm can be based on a number
of factors such as years of service, employee's age, salary, profitability or
even a percentage of employee's contribution.
In such a pension plan, the employer does not make any promise to the
employee regarding the future value of the plan assets. The decisions of the
investment are left to the employee who assumes all of the investment risk.
b) E
xecuting a transaction and its subsequent settlement which always requires
moving securities and money involves cost and is always expensive. A firm
or an individual trader may engage in a numerous transactions every day,
the costs of transactions add up. One way to reduce these costs is through
netting. In netting, the costs is lowered by offsetting one transaction against
another without the need to execute all the transactions. We can take the
example of clearing of cheques. The physical transfer of currency is costly;
the netting of banks' obligation to one another reduces the need for physical
transfer and thereby reduces costs. Netting also helps to create liquidity.
The financial institutions such as commercial bank can hold relatively
illiquid assets since it can meet withdrawals out of new deposits without the
need to liquidate the underlying assets.
Diversification is the splitting of total investment sum over many
independent assets. For instance, a commercial bank pools the deposits of
thousands or even hundreds of thousands of general public giving it a very
huge fund to lend. This will enable the bank to provide many loans, each of
which will be small relative to the size of total portfolio.
With a diversified portfolio, if a few borrowers default, only a small part of
the total amount will be lost. It should, however, be noted that, the
diversification can work properly only when the chances of default on
various loans are unrelated. This is because, when the loans are
concentrated in a particular sector and there is a slump in the activities of
that sector, all the borrowers will tend to default together.
c) A bailout is a situation in which a business, an individual or a government

offers money to a failing business to prevent the consequences that arise
from the business's downfall. Bailouts can take the form of loans, bonds,
stocks or cash. They may require reimbursement. Bailouts have
traditionally occurred in industries or businesses that are perceived as no
longer being viable or are sustaining huge losses. Bailout packages are
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brought in the form of actions or programs designed to help a business that
is in danger of failing.
Typically, companies in need of bailout employ a large number of people,
leading some people to believe that the economy would be unable to sustain
such a huge jump in unemployment if the business folded. Bailouts are
normally only considered for companies or industries whose bankruptcies
could cause a severely adverse impact to the economy as a whole, and not
just to the industry.
A bailout might be performed for the benefit of the one providing the
monetary aid (someone who bails out a struggling company in order to gain
control of that company), or simply for the benefit of the company and
anyone who consumes the goods or services offered by that company.
d) Exchange Traded Funds (ETFs) were introduced in US in 1993 and came to

India around 2002. ETF is a hybrid product that combines the features of an
index mutual fund and stock and hence, is also called index shares. These
funds are listed on the stock exchanges and their prices are linked to the
underlying index. The authorized participants act as market makers for
ETFs.
ETF can be bought and sold like any other stock on stock exchange. In
other words, they can be bought or sold any time during the market hours at
prices that are expected to be closer to thenet assets value (NAV) at the end
of the day. NAV of an ETF is the value of the underlying component of the
benchmark index held by the ETF plus all accrued dividends less accrued
management fees.
There is no paper work involved for investing in an ETF. These can be
bought like any other stock by just placing an order with a broker.
Some other important features of ETF are as follows:
1. It gives an investor the benefit of investing in a commodity without
physically purchasing the commodity like gold, silver, sugar etc.
2. It is launched by an asset management company or other entity.
3. The investor does not need to physically store the commodity or bear
the costs of upkeep which is part of the administrative costs of the fund.
4. An ETF combines the valuation feature of a mutual fund or unit
investment trust. It has the tradability feature of a closed-end fund,
which trades throughout the trading day at prices that may be more or
less than its net asset value.
e) Breadth index is an index that covers all securities traded. It is

computed by dividing the net advances or declines in the market by the
number of issues traded.
The breadth index either supports or contradicts the movement of a
stock exchange averages. If it supports the movement of the stock
exchange averages, this is considered sign of technical strength and if it
doesn‟t support the averages, it is a sign of technical weakness i.e. a
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sign that the market will move in a direction opposite to the stock
exchange average.
5.
a) S
Ltd. has 1 million shares outstanding and a target capital structure
consisting of 30% debt. Its debt interest rate is 8% and it has Rs. 108.20
million in debt. The free cash flow of S Ltd. is Rs. 20 million per year
and is expected to grow at a constant rate of 5% a year. Its beta is 1.4.
H Ltd. is considering acquisition of S Ltd. and it estimates that if it
acquires S Ltd., interest payments will be Rs. 15 million per year for 3
years, after which the current target capital structure of 30% debt will
be maintained. Interest in the fourth year will be Rs. 14.72 million, after
which interest and the tax shield will grow at 5%. Synergies will cause
the free cash flows to be Rs. 25 million, Rs. 29 million, Rs. 34 million
and Rs. 35.7 million in years 1 through 4, respectively, after which the
free cash flows will grow at a 5% rate.
Assume that the risk free rate is 5% and the market risk premium is 6%.
Both the companies have tax rate of 25%.
Required: (3+3+2=8)
Considering the acquisition,
i) What is the unlevered value of S Ltd.?
ii) What is the value of S Ltd.'s tax shield?
iii) What is the per share value of S Ltd. to H Ltd.?
b) A
firm has a bond outstanding of Rs. 50,000,000, Rs. 1,000 bond. The
bond has 12 years remaining until maturity, has a 12 percent coupon
rate and is callable at Rs. 1,060 per bond; it had floatation cost of Rs.
700,000, which are being amortized at Rs. 50,000 annually.
The firm intends to sell Rs. 50,000,000 new bond of 10 per cent coupon
rate, 20 years bond to raise funds for retiring the old bonds. It proposes
to sell the new bonds at their par value of Rs. 1,000. The estimated
floatation costs for the new issue will be Rs. 1,800,000 and the interest
rate of new bonds will be 10 percent. The unamortized portion of issue
cost of old bonds can be written off no sooner the old bonds are called
off. The firm is paying 40% tax and its after tax cost of debt is 6
percent.
Required: Analyze the feasibility of refunding bonds by showing

computations of net present value of bond refunding decision including
detailed workings related therewith. 7

Growth rate (g) = 5%
Return on equity of S Ltd. before acquisition (reL) = 5% + 6% × 1.4 = 13.4%
Unlevered cost of equity (reU) = we × reL + wd × rd
= 0.70 × 0.134 + 0.30 × 0.08 = 0.0938 + 0.024 = 11.78%
(i) Calculation of unlevered value of S Ltd.
Rs. in million
Particulars Year 1 Year 2 Year 3 Year 4
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and
beyond
Free cash flow 25 29 34 35.7
Horizon value of cash flow 552.88
(FCF4th yr (1+g) / (reU - g)
Total FCF 25 29 34 588.88
PVIF @11.78% 0.8946 0.8003 0.7159 0.6404
PV of FCF 22.37 23.21 24.34 377.12
Unlevered value of S Ltd. (VU) = (ƩPV of 447.04
FCF)
(ii) Value of S Ltd.'s Tax shield

Rs. in
million
Particulars Year 1 Year 2 Year 3 Year 4
and
beyond
Interest cost 15 15 15 14.72
Tax shield @ 25% 3.75 3.75 3.75 3.68
Horizon value of tax shield 56.99
(TS4th yr (1+g) / (reU - g)
Total Tax shield 3.75 3.75 3.75 60.67
PVIF @11.78% 0.8946 0.8003 0.7159 0.6404
PV of Tax shield 3.35 3.00 2.68 38.85
Value of S Ltd.'s tax shield=(ƩPV of TS) 47.88
iii) Per share value of S Ltd. to H Ltd.

Per share value = Value of equity/ No. of shares outstanding
= (VU + VTS – outstanding debt)/ No. of shares outstanding
= Rs. (447.04 + 47.88 – 108.2) million/ 1 million = Rs. 386.72
Net Present Value of Bond Refunding Proposal
Rs.
Present Value of Annual Cash Flow Savings (Working Note 2) 6,047,888
(616,000 x PVIFA 8%, 20) i.e. 9.818
Less: Initial Investment (Working Note 1) 3,360,000
Net Present Value (NPV) 2,687,888
Since the NPV of the proposal is positive, it is recommended that the bonds should
be refunded.
Working Notes:
1. Initial Investment:
(i) Call Premium
(1,060 – 1,000) x 50,000 = 3,000,000
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Less: Tax @ 40% = 1,200,000
After tax cost of Call Premium: Rs. 1,800,000
(ii) Floatation Cost: Rs. 1,800,000
(iii) Tax Savings on Unamortized Floatation Cost
of Old Bonds [12 /14 x 700,000 x 0.40] (Rs. 240,000)
Net Initial Investment: Rs. 3,360,000
2. Annual Net Cash Flow Savings:
(I) Old Bond:
(i) Interest Cost Net of Tax
[50,000,000 x 0.12 x (1 - 0.40)] = 3,600,000
(ii) Tax Saving from Amortization of
Floatation Cost (50,000 x 0.40) (20,000)
Annual after Tax Payment of Debt (I) Rs. 3,580,000
(II) New Bond:
(i) Interest Cost Net of Tax
[50,000,000 x 0.10 x (1 - 0.40)] Rs. 3,000,000
(ii) Tax Saving from Amortization of
Floatation Cost (1,800,000/ 20 x 0.40) Rs. (36,000)
Rs. 2,964,000
Annual Cash Flow Savings: (I – II) Rs. 616,000
6.
a) E
xplain the term „exposure netting‟, with an example. 5
b) F
ollowing data are available in respect of a convertible bond:
Face value: Rs. 1,000
Coupon rate: 12%
Number of shares per bond: 20
Market price of share: Rs. 48
Straight value of bond: Rs. 940
Market price of convertible bond: Rs. 1,060
Required: (3.5+1.5=5)
(i) Calculate (a) Percentage of downside risk, (b) Conversion
premium, and
(c) Conversion parity price of the stock
(ii) Explain what the percentage of downside risk and conversion
parity price calculated by you in (i) above indicates.
Answer to Question 6 (a)
Exposure netting refers to offsetting exposures in one currency with exposures
in the same or another currency, where exchange rates are expected to move in
such a way that losses or gains on the first exposed position should be offset by
gains or losses on the second currency exposure.
The objective of the exercise is to offset the likely loss in one exposure by
likely gain in another. This is a manner of hedging foreign exchange exposures
though different from forward and option contracts. This method is similar to
portfolio approach in handling systematic risk.
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For example, let us assume that a company has an export receivables of US$
10,000 due 3 months hence, if not covered by forward contract, here is a
currency exposure to US$.
Further, the same company imports US$ 10,000 worth of goods/commodities
and therefore also builds up a reverse exposure. The company may strategically
decide to leave both exposures open and not covered by forward, it would be
doing an exercise in exposure netting.
Despite the difficulties in managing currency risk, corporates can now take
some concrete steps towards implementing risk mitigating measures, which
will reduce both actual and future exposures. For years now, banking
transactions have been based on the principle of netting, where only the
difference of the summed transactions between the parties is actually
transferred. This is called settlement netting. Strictly speaking in banking terms
this is known as settlement risk. Exposure netting occurs where outstanding
positions are netted against one another in the event of counter party default.

(i) Percentage of the downside risk = Rs. 1,060 – Rs. 940 = Rs. 120
Rs. 940 Rs. 940
= 0.1277, or 12.77%
Conversion premium: Market price – Conversion value x 100
Conversion value
Here, conversion value of the bond = 48 x 20 = Rs. 960

Therefore, Conversion premium = Rs. 1,060 – Rs. 960 x 100= Rs. 100 x 100
Rs. 960 Rs. 960
= 10.42%
Conversion parity price: Bond price = Rs. 1,060

No. of shares on conversion 20
Rs. 53
(ii) Indication of percentage of downside risk and conversion parity price:
The percentage of downside risk ratio gives the percentage price decline which
the bond will experience if the stock becomes worthless.
The conversion parity price indicates that, if the price of shares rises to Rs. 53
from Rs. 48, the investor will neither gain nor lose on buying the bond and
exercising it. It can be observed that Rs. 5 (Rs. 53 - |Rs. 48) is 10.42% of Rs.
48, which is equal to conversion premium.
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Advanced Audit & Assurance
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Suggested
Total No. of Questions - 6 Total No. of Printed Pages -8

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: (4×5=20)
a) During the course of the last three years, a company owning and
operating helicopters lost four helicopters. The company
management felt that after the crash, the maintenance provision
created in respect of the respective helicopters was no longer
required, and decided to write back to the profit and loss account as
a prior period item.
b) M Ltd. manufactures machinery used in steel plants. It quotes
prices in various tenders issued by steel plants. As per terms of
contract, full price of machinery is not released by the steel plants,
but 10% thereof is retained and paid after one year if there is
satisfactory performance of the machinery supplied. The company
accounts for only 90% of the invoice value as sales income and the
balance amount in the year of receipt to the extent of actual receipts
only.
c) X Ltd., a listed company, was incurring heavy losses since the
last several years and the industry in which it was functioning was
not expected to perform better in the next few years. While
finalizing the accounts for the year ended 31/03/072, the CFO of
the company decided to create a deferred tax asset for the tax
benefits that would arise in future years from the earlier year losses
that had remained unabsorbed in income tax. As the statutory
auditor, how would you deal with the situation?
d) Mr. Madhav as a contractor has just entered into a contract with a
local body for building a flyover. As per the contract terms, Mr.
Madhav will receive an additional Rs. 50 million if the
construction of the flyover were to be finished within a period of
two years of the commencement of the contract. Madhav wants to
recognize this revenue since in the past he has been able to meet
similar targets very easily.
Answer
a) The balance amount of maintenance provision written back to Profit and Loss
Account, no longer required due to crash of the helicopters, is not a prior period
item because there was no error in the preparation of previous periods' financial
statements. The term prior period items as defined in NAS 8, "Accounting
Policies, Changes in Accounting Estimates & Error", refer only to income or
expenses which arise in the current period as a result of errors and omissions in
the preparation of the financial statements of one or more prior periods. The
nature and the amount of such item should be separately disclosed in the statement
of profit and loss in a manner that its impact on current profit or loss can be
perceived.
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b) NAS 18 on „Revenue ‟, states that revenue from sale of goods should be

recognized as and when sale is made if following conditions are satisfied:
 Property in the goods has been transferred for a price
 all significant risks and rewards of ownership have been transferred, and
 seller retains no effective control of the goods associated with ownership
and
 no significant uncertainty exists regarding the amount of consideration.
In the present case, the goods, as well as the risks and rewards of ownership
have been transferred to the steel plants. The invoice raised by M Ltd. is for the
full price, but 10% less is received as the same is kept as „Retention Money‟.
Conclusion: Under the circumstances, revenue is required to be recognized at

the full invoice price. Depending on the past experience of recovering the
balance 10% from the steel plants, M Ltd. can, make a provision for sales
income which is not likely to realize.
c) NAS 12 on “Income Taxes”, requires that deferred tax should be recognised for
all timing differences, subject to the considerations of prudence in respect of
deferred tax assets. The standard further states that where an enterprise has
unabsorbed depreciation or carry forward of losses under the tax laws, deferred
tax assets should be recognised only to the extent that there is virtual certainty
supported by convincing evidence that sufficient future taxable income will be
available against which such deferred tax assets can be realised. This implies that
there is a reasonable certainty that the carry forward losses would be recouped in
the future years.
In the instant case, looking to the fact that the industry in which the company was
functioning was not expected to perform well in the next few years, getting virtual
certainty and convincing evidence for the same would be almost impossible.
Hence, in the absence of virtual certainty for offset of the losses in future years,
creating a deferred tax asset would not be possible for the company. Conclusion:
The statutory auditor would therefore have to qualify his report by stating that
deferred tax assets have been created though there is no virtual certainty for
getting the said benefit in income tax. He would also have to mention the amount
by which the loss for the year has been understated and the amount by which the
reserves are overstated.
d) According to NAS 11 'Construction Contracts', incentive payments are additional
amounts payable to the contractor if specified performance standards are met or
exceeded. for example, a contract may allow for an incentive payment to the
contractor for early completion of the contract. Incentive payments are included in
contract revenue when: (i) the contract is successfully advanced that it is probable
that the specified performance standards will be met or exceeded; and (ii) the
amount of the incentive payment can be measured reliably. In the given problem,
the contract has not even begun and hence the contractor should not recognize any
revenue of this contract.
2. Answer the following:
a) D
o you think it is important for an accountant to have good
understanding of corporate governance? Why? Briefly explain the
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major forces behind the push for the global convergence of
corporate governance practices? 10
b)
i) W
hat are the factors affecting form, contents and extent of audit
documentation? 5
ii) W
hat do you mean by “Management Representations”? Indicate
to what extent an auditor can place reliance on such
representations. 5
Answer
a) Corporate governance deals with the mechanism by which the shareholders (i.e. the
principals) of a company exercise control over the managers (i.e. the agents) and
provide overall direction to the company, so that shareholders‟ interests are protected.
Ideally, in this situation:
 the company operates more responsibly and profitably;

 relations are enhanced between the company and all stakeholders – shareholders,
employees, suppliers and society at large;
 the quality of directors and managers is improved;
 the board and management think long-term – they are not just focused on short-term
results;
 the information needs of all stakeholders including the shareholders, board and
regulators are satisfied; and
 executive management is monitored properly in the interest of shareholders.
The role of the accountant in this setting is to maintain proper balance between
the components of the system by ensuring that the audit and accounting tools are
playing proper governance roles, and that risk management and internal controls
– the pillars of good governance – are well established. For example, nearly
every major decision a board makes depends on the quality and accuracy of its
accounting data. Similarly, a well-conducted internal audit can uncover issues
such as fraud or lax processes before they become serious problems for the
organisation.
The importance of accounting in corporate governance is also highlighted in laws
and guidelines on corporate governance, such as the Companies Act, Nepal
Rastra Bank Act, and OECD Principles (2004).
The drive for good governance has been under way in many countries for a
decade or more. Perhaps most importantly, countries are beginning to adopt more
universally recognised good governance practices in order to make themselves
more attractive to investors. In addition, shareholder activists, especially large
institutional shareholders like superannuation funds, have pushed for more
influence with boards.
In some locales, the drive for good governance has gained momentum from
corporate scandals, problems of product liability, and controversial commercial
practices. Increasingly, board members in some jurisdictions find themselves the
objects of lawsuits or the subject of stricter rules of director liability.
Most recently, the convergence of governance practices has been given a global push by
the global financial crisis. The result of all of these forces has been a steady stream of
legislation and regulation in countries around the world – new rules that are bringing
governance practices into line everywhere.
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Another force which involves the convergence of financial reporting and accounting
standards around the world is improving the ability of investors to compare
investments on a global basis. Using a common financial reporting language (the
International Financial Reporting Standards [IFRS]) has the potential to create a new
standard of accountability and greater transparency.
b) i) The form and content of working papers are effected by matters such as:
i. The Nature of the engagement
ii. Form of the auditor's report,
iii. Nature and complexity of the client's business,
iv. Nature and conditions of the client's records and degree of reliance on internal
control,
v. Needs in the particular circumstances for direction, supervision and review of
work performed by assistants, and
vi. Specific audit methodology and technology used in the course of the audit.
ii) AS per NSA 580 “Written Representations” -it is a written statement by
management provided to the auditor to confirm certain matters or to support other
audit evidence. Management representations in this context do not include financial
statements, the assertions therein, or supporting books and records. The
management representations shall be in the form of a representation letter addressed
to the auditor.
Management representations are necessary information that the auditor requires in
connection with the audit, hence they are recognized as audit evidence as a
response to inquiries. Although management representations provide necessary
audit evidence, they do not provide sufficient appropriate audit evidence on their
own about any of the matters with which they deal.
Extent of Reliance:
i. If the auditor has concerns about the competence, integrity, ethical values or
diligence of management, the auditor shall determine their effect on the
reliability of representations (oral or written) and audit evidence in general.
ii. In particular, if management representations are inconsistent with other audit
evidence, the auditor shall perform additional audit procedures to attempt to
resolve the matter.
iii. If the auditor concludes that the management representations are not reliable,
the auditor shall take appropriate actions, including determining the possible
effect on the opinion.
iv. If he claims that there is sufficient doubt about integrity of management, he
shall issue a disclaimer of opinion.
3. Comment and give your views with reasons on each of the following
cases.
a) ABC and Associates is the Auditor of Omega Limited who has
prepared its financial statements for 2072/73 in accordance with
NFRS. During the course of audit the audit team noted that the
inventory of Omega as on 31st Ashad 2073 is stated as Rs. 13 crore
at cost although net realizable value of the inventory is Rs. 7 crore
only. The misstatement of value of inventory is considered as
material but not pervasive by the audit team. Audit manager is not
quite clear about audit opinion and wording of the opinion in such
circumstance. As an engagement partner for this audit what will be
your guidance to audit manager. 8
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b) You are a senior audit in-charge working for the firm Ram &
Associates. You are currently carrying out the audit of Bajra Ltd., a
manufacturer of plastic bags. You are unhappy with Bajra Ltd.‟s
inventory valuation policy and have raised the issue several times
with the audit manager. He has dealt with the client for a number
of years and does not see what you are making an objection about.
He has refused to meet you on site to discuss those issues.
As the audit manager has dealt with Bajra Ltd. for so many years,
the other partners have decided to leave the audit of Bajra Ltd. in
his capable hands. 7
Answer
a) Modification to the opinion in independent auditor’s report: NSA 705:
“Modification to the opinion in independent auditor‟s report” provides guidance to
the auditor for dealing with similar cases.
Since the audit team concludes that inventory is misstated and the misstatement is
material although not pervasive, qualified opinion will be appropriate in such case.
When the auditor modifies the opinion on the financial statements, the auditor shall,
in addition to the specific elements required by NSA 700, include a paragraph in the
auditor‟s report that provides a description of the matter giving rise to the
modification. The auditor shall place this paragraph immediately before the opinion
paragraph in the auditor‟s report and use the heading “Basis for Qualified Opinion,”
“Basis for Adverse Opinion,” or “Basis for Disclaimer of Opinion,” as appropriate.
the auditor shall include in the basis for modification paragraph a description and
quantification of the financial effects of the misstatement, unless impracticable. If it
is not practicable to quantify the financial effects, the auditor shall so state in the
basis for modification paragraph. When the auditor modifies the audit opinion, the
auditor shall use the heading “Qualified Opinion,” “Adverse Opinion,” or
“Disclaimer of Opinion,” as appropriate, for the opinion paragraph. When the
auditor expresses a qualified opinion due to a material misstatement in the financial
statements, the auditor shall state in the opinion paragraph that, in the auditor‟s
opinion, except for the effects of the matter(s) described in the Basis for Qualified
Opinion paragraph:
 The financial statements present fairly, in all material respects (or give a true and
fair view) in accordance with the applicable financial reporting framework when
reporting in accordance with a fair presentation framework; or
 The financial statements have been prepared, in all material respects, in accordance
with the applicable financial reporting framework when reporting in accordance
with a compliance framework.
Hence based on above guidance Extract from Independent Auditor’s Report can be
provided as below for the given case
Basis for Qualified Opinion
The company‟s inventories are carried in the statement of financial position at Rs 13
crore. Management has not stated the inventories at the lower of cost and net
realizable value but has stated them solely at cost, which constitutes a departure
from Nepal Financial Reporting Standards. The company‟s records indicate that had
management stated the inventories at the lower of cost and net realizable value, an
amount of Rs 6 crore would have been required to write the inventories down to
their net realizable value. Accordingly, cost of sales would have been increased by
Rs. 6 crores and provision for current income tax, net income and shareholders‟
equity would have been reduced by Rs. 1.5 core, 4.5 crores and 4.5 crores
respectively.
Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis for Qualified
Opinion paragraph, the financial statements present fairly, in all material respects,
(or give a true and fair view of) the financial position of Omega as at 31 Ashad
P.T.O.
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2073, and (of) its financial performance and its cash flows for the year then ended in
accordance with Nepal Financial Reporting Standards.
b) Quality control Issues on an engagement: Several quality control issues are raised in
the scenario:
Engagement partner: An engagement partner is usually appointed to each audit
engagement undertaken by the firm, to take responsibility for the engagement on
behalf of the firm. Assigning the audit to an experienced audit manager is not
sufficient.
The lack of an audit engagement partner also means that several of the requirements
of NSA 220 on „Quality control for audits of financial statements, about ensuring
that engagements in relation to independence and directing, supervising and
reviewing the audit not in place.
Conflicting views: In this scenario the audit manager and senior have conflicting
views about the valuation of inventory. This does not appear to have been handled
well, with the manager refusing to discuss the issue with the senior.
NSA 220 on “Quality control for audits of financial statements”, requires that the
audit engagement partner takes responsibility for settling disputes in accordance
with the firm‟s policy in respect of resolution of difference of opinion required by
NSQC 1 “Nepal Standards on Quality Control”. In this case, the lack of engagement
partner may have contributed to this failure to resolve the disputes. In any event, at
best, the failure to resolve the difference of opinion is a breach of the firm‟s policy
under NSQC 1. At worst, it indicates that the firm does not have a suitable policy
concerning such disputes required by NSQC 1.
a) Mr. Kishor Nahata, a professional chartered accountant and
member of ICAN performs his auditing services in a country other
than Nepal also. He published his advertisement in the country
other than Nepal explaining about his competency and skills to
perform auditing, management and consulting services at very
reasonable fee. He argues that it was permitted by the local ethical
requirement of the country. How would you analyze the issue if
you were a member of Disciplinary Committee of ICAN and the
issue had been lodged before the committee? 8
b) Fortune Cosmetic (P) Ltd. is a retailer of fast moving cosmetic
goods. There are seven sales executives who work for this
company. The sales executives‟ remuneration is based on the
achievement of set sales targets. You are the accountant of the
company. The financial results of the company up to the end of the
third quarter were not satisfactory and this will have an impact on
your annual bonus as well.
One sales executive approached you and suggested to record those
orders of customers which are confirmed (but not yet sold) by
invoicing them in advance. As orders have already been confirmed,
and it is unlikely that they will be returned, you foresee this as a
good opportunity.
Required: 7
i) L
ist four threats to the professional ethical behavior of an
accountant.
ii) E
xplain two fundamental principles of professional ethics that
will be violated if you are to accept the suggestion made by the
sales executive.
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iii) I
dentify the threat to your professional ethical behavior as the
accountant of the company and the safeguard available for the
threat identified.
Answer
a) The issue mentioned in the question should be analyzed as per section 6 of the Code
of Ethics issued by the ICAN to its members which states that a professional
accountant qualifying in Nepal may reside in another country or may be temporarily
visiting that country to perform professional services, in all circumstances, the
professional accountant should carry out professional services in accordance with the
relevant technical standard and ethical requirements. When a professional accountant
performs services in a country other than Nepal and differences on specific matters
exist between ethical requirements of the two countries, the following provision
should be applied:
1. When the ethical requirements of the country in which the services are being
performed are less strict than the ICAN Code of Ethics, then ICAN Code of Ethics
should be applied.
2. When the ethical requirements of the country in which the services are being
performed are stricter than ICAN Code of Ethics, their ethical requirement in the
country where services are being performed should be applied.
3. When the ethical requirements of Nepal are mandatory for services performed outside
that country and stricter than set out in (1) and (2) above, then the ethical
requirements of Nepal should be applied.
Hence, in the given context Mr. Kishor Nahata will be liable for disciplinary action
under the Codes of Ethics of ICAN.
b)
i. The four threats to the professional ethical behavior of an accountant are:

a. Self-interest threat
b. Self-review threat
c. Advocacy threat
d. Familiarity threat
e. Intimidation threat
ii. The two fundamental principles of professional ethics that will be violated if the
suggestion made by the sales executive are;
Integrity- Dealing should be straightforward and honest. If I am to agree with the
suggestion of sales executive, I am violating „integrity‟.
Objectivity- members shall not allow bias or conflict of interest or undue influence of
other people to override their professional or business judgment.
Professional behaviour- members shall comply with relevant laws and regulations
(accounting standards) and avoid any action that discredits the profession.
iii. The threat to the professional ethical behavior as the accountant of the company is Self-
interest threat- I am getting financial reward (bonus) if I agree with the sales executive.
Safeguard- commitment as the accountant to ethical behavior is the only safeguard
available and should refuse to accept the suggestion.
a) W
hat is the objective of review engagement of financial statements?
How does review engagement differ from audit engagement? 8
P.T.O.
(41)
b) While compiling the financial statements of a concern, you
observed that the input information supplied by the concern is
incomplete, incorrect and few of the Accounting Standards have
not been followed. Describe, in brief, the procedures you will
follow in the above case. 7
Answer
a) Objective of Review Engagements: The objective of a review of financial
statements is to enable a practitioner to state whether, on the basis of procedures which
do not provide all the evidence that would be required in an audit, anything has come
to the practitioner‟s attention that causes the practitioner to believe that the financial
statements are not prepared, in all material respects, in accordance with the applicable
financial reporting framework (negative assurance).
Difference between review and audit engagements: The level of assurance provided by review engagem
engagements. In the review engagement the practitioner obtains sufficient and
appropriate evidence primarily through inquiry and analytical procedures whereas in
audit other procedures like inspection, observations, confirmation, self-computation
etc. are also often used.
b) According to NSRS 4410: Engagement to compile Financial Information, the
practitioner would normally have to rely upon the management for information to
complete the financial statements in a compilation engagement. If in the course of
compilation of financial statements, it is observed that the information supplied by the
entity is incorrect, incomplete or otherwise unsatisfactory, the practitioner should
perform following procedures:
i) Make any enquiries of management to access the reliability and
completeness of the information provided;
ii) Assess internal controls prevailing in the entity; and
iii) Verify any matters or explanations.
The practitioner may also request the management to provide additional information.
This may be asked in the form of management representation letter. If the
management refuses to provide additional information, the practitioner should
withdraw from the engagement, informing the entity of the reasons for such
withdrawal.
If one or more Accounting Standards are not complied with, the same should be brought
to the notice of the management and if the same is not rectified by the management, the
practitioner should include the same in notes to the accounts and the compilation report.
6. Write short notes on the following: (5×3=15)
a) D
ue diligence
b) C
oncurrent audit
c) A
udit note-book
d) L
imitation of setting of Accounting Standards
e) P
erformance materiality
Answer
a) Due diligence is the effort made by an ordinarily prudent or reasonable party to
avoid harm to another party or himself. Due diligence goes far beyond the
P.T.O.
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financial analysis. The scope of due diligence review is wider and it includes a
review of historical figures as one of its elements and also involves analyzing the
sustainability of business, competition, business plan, future prospects, corporate
and management structure, technology, synergy of target business to company‟s
business apart from researching regulatory compliances, legal issues and other
financial data. In finance due diligence is the process of research and analysis that
takes place in advance of an acquisition, investment, business partnership or bank
loan in order to determine the value of the subject of the due diligence or whether
there are any “skeletons in the closet”.
b) Continuous or concurrent audit is one in which the auditor‟s staff is engaged
continuously in checking the accounts of the clients the whole year round; i.e. the
audit that remains continued throughout the financial year. It is a systematic and
timely examination of financial transactions on a regular basis to ensure accuracy
and compliance with procedures and guidelines.
c) An audit note book is usually a bound book in which a large variety of matters
observed during the course of audit are recorded. Audit note books form part of
audit working papers and for each year a fresh audit note book is maintained. In
case an auditor classifies his working paper into permanent and current, then audit
note book shall form part of the current file. It is in any case a part of the
permanent record of the auditor available for reference later on, if required.
The audit note book also provides a valuable help to the auditor in picking up the
links of work when the concerned assistant is away or the work is stopped
temporarily. It is also used for recording the various queries raised in the course of
the work and their state of disposal. In respect of disposed queries, explanation
obtained and evidence seen would is used be recorded in the said book, while
queries remaining undisposed of would be noted for follow up.
d)
i. Alternative solutions to certain accounting problems may each have arguments
to recommend them. Therefore, the choice between different alternative
accounting treatments may become difficult.
ii. There may be trend towards rigidity and away from flexibility in applying the
accounting standards.
iii.Accounting standards cannot overwrite the statute. The standards are required
to be framed within the ambit of prevailing statutes.
e) The amount or amounts set by the auditor at less than materiality for the financial
statements as a whole to reduce to an appropriately low level the probability that
the aggregate of uncorrected and undetected misstatements exceeds materiality for
the financial statements as a whole. If applicable, performance materiality also
refers to the amount or amounts set by the auditor at less than the materiality level
or levels for particular classes of transactions, account balances or disclosures.
P.T.O.
(43)
Corporate Laws
P.T.O.
(44)
Suggested
Total No. of Questions - 6 Total No. of Printed Pages - 2
Marks
1. Answer the following questions:
a) P
romise Commercial Bank was established to make the banking business in
the country. It has more than 50 branches all over the country. The Bank was
in profit and distributing the dividend to its shareholders annually. There
were also preference shareholders in the Bank. Some of the preference
shareholders wanted to come out from the Bank. But the Bank was reluctant
to leave them. The Bank was in loss only in 2 years during its 10 years
tenure. The preference shareholders were demanding the dividend as paid to
them in the previous year. (5×2=10)
i) O
n what situation preference shareholders are protected?
ii) W
hether the preference shareholders have the right to come out taking their
investment?
iii) W
hether the preference shareholders have the right to get the dividend
where there was no profit?
iv) W
hich is the appropriate body to take the decision in aforementioned issue?
v) W
hich law is applicable in this issue?
b) T
hakurlal Shrestha, a computer operator received an article from Samjhana
Insurance Co. Ltd. to be published by next day while editing news for
Economic Times. It was related to the financial forecast future strength of the
company as it is about to acquire Dunhill Insurance, U.K. At the same day, he
purchased 10000 No. of shares of Samjhana Insurance Co. @ NRs. 300 per
share believing that the news might affect the price of share and he could earn
profit. When the news published by next day, the share of the company
increased, hence, he succeeds to sell these shares @ NRs. 600 per share with
earnings of NRs. 300 per share. A case is filed against him for the
commission of an offence of insider trading. Decide with the relevant
provisions of the Securities Act, 2063.
i) W
hether Thakurlal Shrestha committed an offence of insider trading. 5
ii) S
tate the punishment to be imposed in an offence of insider trading 5
Answer 1(a)
i) During the continuance of the company it must be assured of a preferential dividend.
The preferential dividend may consist of a fixed amount payable to preferential
shareholders before anything paid to the ordinary shareholders. On the winding up of
P.T.O.
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a company it must carry a preferential right to be paid, that is, the amount paid up on
preference shares must be paid back before anything is paid to the ordinary
shareholders. This preference, unless there is an agreement to the contrary, exist only
up to the amount paid up or deemed to have been paid up on the shares.
ii) A company has the power to issue what are known as redeemable preference shares.
There must, however be an authority to issue such shares in the Articles of
Association and the Memorandum of Association of the company. Sections 30 and 65
of the Companies Act, 2063 have the provisions in this respect.
iii) Preference shares may be either cumulative or non-cumulative. If there is no profit in

one year and the arrears of dividends are to be carried forward and paid out of the
profits of subsequent years, the preference shares are said to be cumulative. But if
unpaid dividend lapses, the shares are said to be non-cumulative preference shares.
There must, however be an authority to issue such shares in the Articles of Association
and the Memorandum of Association of the company. Section 65 of the Companies
Act, 2063 has the provisions in this respect. If the AOA and MOA clearly stipulates
the provision to provide the dividend in the situation as mentioned above, they may get
the same.
iv) The company being a legal person can act only through its directors. The
general principles of agency, therefore govern the relations of directors with the
company and of persons dealing with the company through its directors. Where the
directors make the activities on behalf of the company, it is the company which is
liable on it and not the directors. The board of directors is the body to make all such
activities, pursuant to section 95(1) of this Act.
v) Provisions as prescribed by the Sections 30 and 95 of the Companies Act, 2063 are to
be adopted while making the decision in these issues. According to Section 30, the
company has power to issue various classes of shares with different rights by making
provisions to that effect in its MOA and AOA. Accordingly under Section 95(1) the
directors are entitle to manage the arrangements as prescribed in the MOA/AOA and
perform their duties thereof. They are the key persons of the company, and are
authorized to carry out the activities for the protection of all the shareholders.
Answer 1(b) i
Pursuant to Section 91 of the Securities Act, 2063, it is illegal share trading by
employees of a company where they have used confidential price-sensitive information
for their own gain or the gain of their associates. It is a trading in securities whilst in
possession of price-sensitive information which is not available to the person with
whom one is contracting or to other participants in the securities in the market at the
relevant time.
The following dealings are generally called as insider trading and are prohibited:
a. Dealing of price-affected securities as an agent or principal
b. Procuring directly or indirectly the acquisition or disposal of securities by any other
person.
c. Encouraging another person to deal in the price-affected securities.
d. Disclosing the information otherwise than in the proper performance of the functions of
his employment, office or profession to another person.
In this case, Thakurlal Shrestha therefore, has committed an offence of insider trading
who has obtained insider information in the proper performance of the functions of his
employment pursuant to sections 91 and 92 of the Securities Act, 2063. Similarly, the
computer operator as an employee of Economic Times has obtained the price affecting
P.T.O.
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information and had misappropriated information belonging to his employer the
insurance Co. which he should not use for his own benefits.
Answer 1(b)ii
Sections 91 and 94 to 100 of the Securities Act, 2063 have explained various types of
offences for insider trading and Section 101 of the said act has mentioned various
punishments as follows:
a. A person who commits an insider trading as referred to in Section 91 shall, upon
being convicted of the offense of insider trading, be liable to the punishment with a
fine equal to the amount in controversy or with imprisonment for a term not
exceeding one year or with both punishments.
b. A person who commits any act referred to in Section 94, 95, and 96 will be liable to
the punishment with a fine of fifty thousand rupees to one hundred thousand or
with imprisonment for a term not exceeding one year or with both punishments, and
the loss or damage caused if any to be recovered.
c. A person who commits any act referred to in Section 97, 98, 99 and 100 will be liable
to the punishment with a fine of one hundred thousand to three hundred thousand
rupees or with imprisonment for a term not exceeding two year or with both
punishments, and the loss or damage caused if any to be recovered.
d. If a person knowingly or with mala fide submits or prepare statement of accounts or
books will be liable to the punishment with a fine of fifty thousand rupees to two
hundred thousand rupees.
e. A person may be fined rupees fifty thousand rupees to two hundred thousand
rupees and the compensation thereof for loss, for the act done in contravention to
the Act or Rules or Bye-laws.
f. A person may be fined rupees fifty thousand rupees to one hundred thousand rupees
for issuing securities, carrying stock exchange without fulfilling such requirements as
required as per the Act or Rules or Bye-laws.
g. A person who violates the Act or Rules or Bye-laws. Framed thereof may be fined
rupees twenty five thousand rupees to seventy five thousand rupees.
a) N
epal Rastra Bank (NRB) is the economic advisor of the government. As a
central bank of the country it intervenes the banks and financial institution in
case severe irregularities are found in these institutions. It also dissolves the
management of such institutions and take over the management when it
deems fit. Based on these aspects answer the following: 10
i) U
nder what law NRB is authorized to do such activities?
ii) H
ow far the intervention of NRB is appropriate?
iii) W
ho are the beneficiaries in such cases?
b) T
he Chief Financial Executive of a Company prepared the financial accounts by
overstating the assets and the profit for the purpose of declaring dividend to the
shareholders and the same was presented to the Annual General Meeting. Discuss
the consequence of his action under the Companies Act, 2063 and the Code of
Ethics considering CEO being a Chartered Accountant and not being a Chartered
Accountant. 10
Answer 2(a)
P.T.O.
(47)
i) Under sections 5 and 79 of NRB Act, 2058, bank has the authority to do so. Section
5(i)(h) & (j) of the act has given authority to central bank for regulation, inspection,
supervision and monitoring function on commercial banks. Section 79 of the Act is
more specific in this issue to regulate and for the necessary action. The bank has full
powers to regulate various functions and activities of commercial banks and financial
institutions.
The Bank using the power of Section 79(5) can enforce authority and responsibility
granted under this act and any other act enacted for licensing, supervising and
regulating commercial banks and financial institutions and to revoke the license of
commercial banks and financial institutions and to take over or to provide in
trusteeship the commercial banks or financial institutions which have been declared
insolvent or are on the verge of insolvency.
The bank also has power to investigate or inspect, or supervise or to cause to
investigate, inspect or supervise by any official or the bank or the persona designated
by the bank to books of accounts and other records.
The bank further has authority to issue order to the member of the Board or directors,
officials or employee of any commercial bank of financial institution to provide
necessary information about the bank or institution in cases it is necessary to inspect
and supervise the transaction of such bank or financial institution.
ii) It is the duty of the central bank to protect the public money. The central bank while
doing so should be convinced that there were severe irregularities in the bank, and it
was justifiable to intervene the management of the company. Before intervening these
institutions, NRB complies various supervisory, monitoring and inspecting roles
entrusted by NRB Act, 2058 for the best interest of these institutions and other
stakeholders. Being the economic advisor of the government, and also a banker of the
commercial banks and financial institutions the role of the NRB as a Central Bank is
very much important and appropriate.
iii) General public are the main beneficiaries, most of them are small investors that are
outside the management, and heavily suppressed by the insiders of the company.
Among the general public are the customers, depositors, investors, creditors and other
stakeholders as well are the beneficiaries.
Answer 2(b)
Under section 102 of the Companies Act, 2063 explained that if any officer, knowingly
giving false statements in the general meeting of a company instead of giving the
actual situation of the company and encourage to distribute higher dividend to the
shareholders of the company than that can be distributed from the real profits, thereby
affecting the capital of the company, the officer giving such false statements shall be
personally liable for such act.
Section 160 of the Company Act, 2063 has explained punishment with fine not
exceeding 50,000 rupees or with imprisonment for a term not exceeding two years or
with both if the officer who commits above mentioned offense. In a given case the
chief financial executive of the company has caused loss to the company by
mentioning higher profit in the financial statement of the company with mala fide
intention or malicious recklessness.
Further, he may be asked along with the directors to compensate the company for the
dividend or excess dividend paid out by the company as per Section 102 of the
Companies Act, 2063.
The false statement was signed by the auditor without qualifying the report and the
same report was then presented to the general meeting by the Board of Director. Hence
the auditor of the company is also liable under Section 160(c) of the Company Act,
2063 for punishment of fine and imprisonment as stated above.
P.T.O.
(48)
If the Chief Executive is a member of Institute of Chartered Accountants of Nepal, on

receiving the complaint, disciplinary proceedings can be taken against him and award
further punishment of suspending him for certain number of years/months from
membership or cancel the membership permanently depending on the seriousness of
crimes under section 14(5) of Nepal Chartered Accountants Act, 2053. The
Disciplinary committee of ICAN shall make recommendation, along with its opinion
and finding, to the Council for taking necessary action against a member found guilty
from its investigation; and the council may, in view of such recommendation, impose
any of the following penalties to him:
- Reprimanding;
- Removing from the membership for a period not exceeding five
years;
- Canceling the professional certificate or membership
If chief finance executive as mentioned above is not a member of ICAN, his penalties
will be limited to the provisions of the company act, 2063 only.
In the above case, the auditor has signed the false financial statement and the auditor of
the said company is also liable. The Council of ICAN take action against statutory
auditor of the company for negligence in his duties and may suspend his/her COP for
certain period or cancel his/her COP permanently as per the Section14(5) of Nepal
Chartered Accountants Act, 2053.
3. A
nswer the following questions:
a) U
nder the Foreign Investment and Technology Transfer Act (FITTA), 2049
what types of business are restricted to be established under foreign
investment? How far the foreign investors are allowed to repatriate their
earnings to their home country (ies)? Explain. 10
b) C
ompanies Act, 2063 is in practice to regulate the companies, including
incorporation and operation of the companies. What are the relevancies and
objectives of the Industrial Enterprises Act, 2049 in connection to the
governance of the Companies Act, 2063? Explain in brief. 10
Answer 3(a)
Under the Annex, Part (A) and Part (B) of the Foreign Investment and Technology
Transfer Act (FITTA), 2049 following are the restricted areas for foreign investment and
business:
(Part A)
1. Cottage industries
2. Personal service Business, such as Tailoring, driving, salon and cosmetics
business, etc.
3. Arms and ammunitions industries
4. Explosives and gunpowder
5. Industries related to radioactive materials.
6. Real estate business ( Excluding construction industries)
7. Motion Picture Business made in national language.
8. Securities printing.
9. Currencies including coinage Business.
Part (B):
P.T.O.
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1. Other retail business except the Retail Business instantly conducted in more than
two countries as international transaction.
2. Bidi (Tobacco), (Excluding those exporting more than 90 %)
3. Internal courier service.
4. Atomic energy.
5. Poultry business.
6. Fishery business
7. Beekeeping
8. Other consultancy services, including Management, Accounting, Engineering and

Legal Services besides consultancy services having the foreign investment having
up to 51 percent.
9. Beauty parlor
10. Domestic food processing methods in rent
11. Local catering service,
12. Rural Tourism.
Further pursuant to section 9 A of this Act, the Government of Nepal may, by
notification in Nepal Gazette, make necessary alterations or amendments in Part (B) of
the Annex.
Section 5(2) of the FITTA has made the provisions regarding the repatriation out of the
earnings including from the sale of the shares, out of profit or dividend, and for the
payment of the principal and the interest of the foreign loan made in foreign currency.
Under section 5(3) of FITTA, 2049 a foreign investor shall be entitled to repatriate
outside Nepal the amount received under an agreement for the transfer of technology
in such currency as set forth in the concerned agreement.
Answer 3(b)
The main purpose of the Companies Act, 2063 is to facilitate the registration,
incorporation, operation, including the provision of the meeting of the company, board of
the directors etc. The purpose of other Acts relating to the business and industry is to
create suitable environment for the promotion and the development of the business and
industry in the country.
The main purpose of the Industrial Enterprises Act, 2049 is to make more facilitative, easy
and encouraging industrial investment environment which will encourage competitiveness
and enhances the productivity by flourishing the industries for the development of the
country's economy. Section 15 and 16 of the Act are the special provisions made for
facilitating the industries. There is a close connectivity between the Companies Act, 2063
and the Industrial Enterprises Act, 2049. Industries established under this later Act need to
be registered and operated under the Companies Act, 2063 as corporate entities and vice
versa.
The recent amendment of the Act has made statutory provision regarding the corporate
social responsibility. For this purpose, one percent out of the profit of an enterprise has to
be made for the social purpose.

a) I
dentify the circumstances under which the Insurance Board may cancel the
insurance business being operated by an Insurer pursuant to the Insurance
Act, 2049. 8
b) P
rudent Commercial Bank wants to get insolvent, but it has no idea how to
proceed with. It needs to get appropriate information as to the relevant laws
and procedures. Whether it has to get prior approval, and/or approach to the
P.T.O.
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Court to institute insolvency proceedings? And what other legal requirements
it has to fulfill for this purpose? Give your legal opinion in the light of the
Insolvency Act, 2063. 7
Answer 4(a)
Under any of the following circumstances, the Insurance Board may cancel the insurance
business of any type being operated by an Insurer pursuant to Section 12A of the
Insurance Act, 2049:
(a) If the directives provided by the Insurance Board from time to time regarding the
procedures to be followed by the insurer during the operation of the insurance
business has been violated.
(b) If the insurer provides loan to any corporate body in which any of its directors or
his/her family member 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 of the Act.
(c) If the insurer does not provide information to the Insurance Board to be provided
pursuant to Section 15 of the Act.
(d) If the insurer does not maintain the accounts and record, to be maintained
(e) If the Insurer does not maintain separate accounts and records to be maintained
separately pursuant to Section 20 of the Act.
(f) If the insurer does not maintain the fund to be maintained by it pursuant to
Section 21 of the Act 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 of this Act.
(h) If the insurer accepts the insurance risk without receiving the insurance premium
(I) if the insurer does not re-insure pursuant to Section 28 of the Act.
Answer 4(b)
Prudent Commercial Bank in order to get insolvent has to fulfill certain legal requirements
under the Insolvency Act, 2063. In pursuance to section 3 of the Insolvency Act, 2063, save
as ordered by the Commercial Bench of the concerned High Court (Court) pursuant to this
Act, no person shall commence insolvency proceedings against any company.
As a rule, where it is required to institute insolvency proceedings against any company, any
of the concerned persons as per Section 4(1) may make an application to the Court in the
prescribed form for the institution of such proceedings
In pursuance to section 4(1)(a) of this Act, in order to get insolvent Prudent Commercial
Bank itself should apply to the Court in the prescribed form for insolvency proceedings.
Notwithstanding, anything contained in section 4 above, Prudent Commercial Bank carrying
on banking and financial business shall obtain prior approval of Nepal Rastra Bank (NRB)
for applying to the Court in order to institute insolvency proceedings pursuant to section
8(1)(a) of this Act. Pursuant to section 8(2) of this Act, a copy of such NRB approval must
be accompanied to the application filed before the court under section 4(1) of this Act.
Further, pursuant to section 4(3) of this Act, every application to be made pursuant to
section 4(1) above shall be accompanied by the reason for making the application, short
description of the financial condition of the company and the evidence supporting the fact
P.T.O.
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that the company has become insolvent and the following details as well: Where Prudent
Commercial Bank, itself which has become insolvent makes such application shall under
section 4(3)(a) of the Insolvency Act, 2063 supply the following details along with the
application: (1) a document certified by the Board of Directors of the company, mentioning
that the company has become insolvent; (2) a special resolution adopted by the Board of
Directors of the Company to institute the insolvency proceedings pursuant to this Act; (3)
Certified copies of the balance sheet and audit report of the company available at the time of
making application for the institution of insolvency proceedings.
Prudent Commercial Bank which claims it to be insolvent shall be deemed to have become
insolvent once the general meeting of the shareholders of the company adopts a resolution
that the company has become insolvent or a meeting of the Board of Directors of the
Company makes such decision under section 7(1) (a) of the Act save as otherwise proved.
5. Answer the following questions: (3×5=15)

a) I
dentify the steps to be undertaken by public entity before placing order for
procurement of goods pursuant to the Public Procurement Act, 2063 and
Public Procurement Rules 2064.
b) E
xplain the Function, Responsibilities and Powers of the Financial Information
Unit under the Assets (Money) Laundering Prevention Act, 2063.
c) C
ooperatives established under the Cooperatives Act, 2048 are authorized to
make financial activities. How do you see this provision of this Act? Is there
any scope for reform in this Act? Give your argument.
Answer 5(a)
Section 3 of the Public Procurement Act, 2063 requires public entity to comply the
procedures set out in this Act before placing order for procurement of goods. Under
Section 4, the public entity prior to procuring goods shall have to prepare
specifications, plan, drawing, design, special requirements or other descriptions
pertaining thereto. The description shall be prepared on the basis of relevant objective
technical and quality characteristics and functions of such goods. In preparing the
description of goods, a particular brand, trademark, name, patent, design, type, origin
or producer's name cannot be mentioned.
Under Section 5, while procuring the goods, it is compulsory to make the cost estimate
of the goods if the value of such procurement is more than rupees 25 thousand. While
preparing cost estimate, the procurement unit will consider actual cost incurred in the
procurement of the same nature by the concerned public entity or another public entity
in the district where such public entity is situated in the current year or in previous
years. Also the procurement unit consider the rate prevailing at the local market, rate
prevailing at other market and estimated transportation costs to the place of delivery of
goods, also compare the rate issued by the chamber of commerce and industry of the
country.
The cost estimate prepared pursuant to Rules 11 has to be approved by the concerned
authority as prescribed in the rules.
A public entity shall in making procurement valued at an amount in excess of the
prescribed limit, have to prepare a master procurement plan and annual
procurement plan, as prescribed undertake such activities. Public entity shall
P.T.O.
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establish a procurement unit and the unit will do the following works before
placing the order of goods.
- Prepare public procurement plan
- Prepare prequalification documents, bidding documents and procurement
contract related documents by making necessary amendments in the
standard bidding documents, standard prequalification documents and
standard procurement contract documents prepared by the public
procurement monitoring office.
- To coordinate activities relating to procurement proceedings
- To collect procurement requisitions and submit the same to the competent
authority for approval.
A public entity should select procurement methods before issue the public notice.
There are various methods of procurement like international bidding, national level
bidding, sealed quotation and direct procurement.
Answer 5(b)
In pursuance to section 9 of the Assets( Money) Laundering Prevention Act, 2063
inclusive of its Second Amendment, the Financial Information Unit ( FIU) shall be
established as a Department in Rastra Bank with functional independence and autonomy
to receive suspicious transaction reports and other information related to money
laundering , terrorist financing and predicate offences and analyze suspicious
transactions and other information and to disseminate the results of such analysis to the
Department.
Pursuant to Section 10 (1) of this Act, the various functions, responsibilities and powers
in addition of others of the Financial Information Unit can be listed as under:
(a) To obtain details of transactions under Section 7 from government entities,
bank, financial institution and non-financial institution regularly and
maintain records of those details by scrutinizing them,
(b) To conduct preliminary inquiry, in case the notice, details and documents
available to it requires inquiry and investigation on assets laundering and
send its details to the concerned Department, government entity, bank,
financial institution and non-financial institution,
(c) To communicate the Department the details received pursuant to Clause (a)
or including the extensive details if it appears doubtful or arises any doubt
or prevails reasonable ground not to believe the transaction upon conducting
the inquiry pursuant to Clause (b) . Write to the Department with extensive
details, should there appear doubtful transactions or looks dubious or there
are reasonable grounds to doubt in the details received pursuant to clause (a)
or from the inquiry made pursuant to clause (b),
(d) To send notice, details and documents regarding assets laundering to the
Financial Information Units of other country and international organization,
institutions reciprocally and receive such notice from concerned country and
international organization and institution,
(e) To inspect transactions and records of bank, financial institution and non-
financial institution, to obtain any information or clarification about such
transactions and records and their copies if necessary,
(f) To manage required training programs for the staffs of government entities,
Departments and Financial Information Unit for prevention of assets
laundering,
(g) To carry out other functions as prescribed.
P.T.O.
(53)
Answer 5(c)
Under chapter 6, sections 23 to 30 are related to the financial activities of the
cooperative Societies. Section 26 of the Act makes the provision that the cooperative
societies are allowed to make the banking business. As per this section, an association
or society may accept saving deposits from its member and lend loans to its members.
An association or society has to obtain prior approval of Nepal Rastra Bank in order to
carry on other banking transactions including acceptance of deposits and disbursement
of loans limited only to its members, other than the transactions. Such association or
society has to observe the terms and conditions prescribed and directions given by
Nepal Rastra Bank.
An association or society carrying on business after being registered prior to the

commencement of this act has to make arrangements for carrying on transactions
within one year after the date of commencement of this act. Associations or societies
may jointly form a cooperative bank. If an application accompanied by a
recommendation of Nepal Rastra Bank is made for the establishment of a bank the
Registrar may hold necessary inquiry and registered such bank. The bank registered
and established may carry on the banking transactions under Banking and Financial
Institutions Act, 2063 approved by Nepal Rastra Bank and the bank has to observe the
terms and conditions prescribed by the directive given from time to time by Nepal
Rastra Bank.
There is the scope for reform in the governance of the cooperative societies and
Associations for the best interest of their members and the national economy. Let the
cooperative societies/association be run transparently, effectively, prudently and
efficiently for which the government must create favorable business environment for
these cooperative entities.
a) State the main banking offences under the Banking Offence and Punishment Act,
2064? 4
b) Explain whether Financial Mediator should be a company registered under the
Companies Act, 2063 or not. 3
c) M
ention the process of appointment of arbitrator under the Arbitration Act, 2055 3
Answer 6(a)
Under chapter 2 through sections 3 to 14 of the Banking Offence and Punishment Act,
2064 deals with following banking offences:
i) It is prohibited to open the accounts and demand for payments by unauthorized
manners (section3)
ii) It is prohibited to receive cheques, cheque books, or bank statements in
unauthorized manner (section 4)
iii) It is prohibited to withdraw the cash or make the payment in an unauthorized manner
( section 5)
iv) It is prohibited to withdraw cash or make the payment through the electronic means
in unauthorized manner. ( Section 6)
v) It is prohibited to take or to provide loan by unauthorized manner.( Section 7)
vi) Should not misuse the credit( section 8)
P.T.O.
(54)
vii) Should not misuse the banking resources, means and assets (Section 9)
viii) Not to acquire assets or open account by borrower who has over dues(section 10)
ix) Not to stop credit facility in the way to loss working project of borrower.(Section 11)
x) Not to make loss by making alteration in the accounts or ledger or by committing
forgery or fraud.(section 12)
xi) Not to derive excess, low or false valuation.(Section 13), and
xii) Not to carry out and cause to carry out irregular economic or financial
transactions.(section 14)
Answer 6(b)
Financial Mediator could only be an association registered under the Societies Registration
Act, 2034, which is a non-profit motive organization and not allowed to distribute the
profits to its members. It may act as Financial Mediator only after obtaining license from
the Rastra Bank and its constitution must include such purpose to carry on the business of
financial mediator. According to the classification of banking and financial institutions,
Financial Mediators fall under class IV pursuant to section 47(1)(4) of Banks and
Financial Institutions Act, 2063, therefore they need to comply with the provisions of the
Companies Act, 2063.
Answer 6(c)
Pursuant to section 5 of the Arbitration Act, 2055, there shall be ordinarily (one or not mentioned
in this Act) three Arbitrators in one arbitatoral tribunal.
Basically, arbitrators are appointed on the basis of agreement done by the parties. Section 6 of
the Arbitration Act, 2055 has explained if the names of arbitrators are inserted in the agreement
then they themselves shall be recognized as having been appointed as arbitrators. In case the
agreement has made provision to appoint them, then they are appointed as per the provision of
the act. Each party shall appoint one arbitrator and these two appointed arbitrators shall appoint
the third arbitrator who shall work as the chief arbitrator.
Section 7 of the Act mentions that if the arbitrator could not be appointed on the basis of
above provision or there is no provision of appointment of arbitration in the agreement,
then parties have to request to the High Court for the appointment of arbitrators and the
Court will appoint arbitrator within 60 days either from the proposed names by the party in
case of consensus or if consensus is not reached then the Court shall appoint appropriate
person(s). Pursuant to section 8 of this Act, appointment of Arbitrators in vacant posts in
special circumstances may be made in the manner in which the arbitrator had originally
been appointed or in its failure by the High Court on the party (ies) request.
P.T.O.

Suggested Answer CAP III June 2017 GI

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CHARTERED ACCOUNTANCY PROFESSIONAL CAP-III

The Institute of Chartered Accountants of Nepal

Advanced Financial Reporting

Time Allowed - 3 Hours Marks

b) Information about assets, liabilities and contingent liabilities of MARUTI CAB

The lease contract includes the following information:

Fair value of leased machine Rs.25,390

ELC is responsible for the insurance and maintenance of the machine.

i) Statement of Comprehensive Income, and 4

Profit and loss account: 97 140

Under Staff Retirement Benefits

2. Changes in fair value of plan assets

3. Amounts recognized in the profit and loss account

Current service cost 125 143

Working Note 2: Depreciation 25,380 ÷ 3 : 8,460 (approx) per annum

Sale in the year ended: Amount of repayment

Balance sheet as Trading portfolio Available for sale Held-to maturity

ii) Changing the classification of an item of expense is an example of a change in accounting

A rolling budget, sometimes called a continuous budget, represents an alternative approach to

Particulars Rs. After Weights Cost

(ii) Calculation of weighted average cost of capital after tax:

Particulars Rs. After Weights Cost

Thus, Impairment loss = Carried amount – Recoverable amount*

Profit and loss account Dr. 300

Asset less depreciation 1,500

Less: Impairment loss 300

Advanced Financial Management

Decision: The expansion project by investment in production house equipments

Evaluation of Central Financier (CF) Proposal

The tax rate is uniform 35% in all cases.

Solution to Question 2 (a)

(iii) Estimated of price of the company shares

Solution to Question 2 (b)

Cov. (B & M) = ∑ [Pi Ai – E (A)] [Mi – E (M)] Pi

Beta of stock A = Cov (A & M) = 106.20 = 1.345

Required: On the basis of contribution of sales ratio, advise Zed Ltd.

Solution to Question 3 (a)

(ii) Swap ratio

(iii) Promoters holding percentage after acquisition

Particulars Japan USA Europe Total Rs.

Recommendation: The computation done above clearly shows that contribution to

c) A bailout is a situation in which a business, an individual or a government

d) Exchange Traded Funds (ETFs) were introduced in US in 1993 and came to

e) Breadth index is an index that covers all securities traded. It is

Required: Analyze the feasibility of refunding bonds by showing

Solution to Question 5 (a)

(ii) Value of S Ltd.'s Tax shield

iii) Per share value of S Ltd. to H Ltd.

Solution to Question 6 (b)

Here, conversion value of the bond = 48 x 20 = Rs. 960

Conversion parity price: Bond price = Rs. 1,060

Advanced Audit & Assurance

Total No. of Questions - 6 Total No. of Printed Pages -8

b) NAS 18 on „Revenue ‟, states that revenue from sale of goods should be

Conclusion: Under the circumstances, revenue is required to be recognized at

 the company operates more responsibly and profitably;

i. The four threats to the professional ethical behavior of an accountant are:

1. Answer the following questions:

iii) Preference shares may be either cumulative or non-cumulative. If there is no profit in

If the Chief Executive is a member of Institute of Chartered Accountants of Nepal, on

8. Other consultancy services, including Management, Accounting, Engineering and

4. Answer the following questions:

5. Answer the following questions: (3×5=15)