Table of Contents

Table of Contents ___________________________________________________________________ 0

CHAPTER 1: FINANCIAL REPORTING STANDARDS __________________________________ 2
1.1. Conceptual Framework for the Preparation & Presentation of Financial Statements ............. 2
1.2. NFRS 3 Business Combination ............................................................................................... 6
1.3. NAS 1 Presentation Of Financial Statements .......................................................................... 6
1.4. NAS 2 Inventories ................................................................................................................... 7
1.5. NAS 3 Statement of Cash Flows ........................................................................................... 12
1.6. NAS 8 Accounting Policy, Change in Accounting Estimates & Errors ................................ 13
1.7. NAS 10 Events After The Reporting Period ......................................................................... 16
1.8. NAS 16 Property, Plant & Equipment (PPE) ........................................................................ 20
1.9. NAS 17 Leases ...................................................................................................................... 28
1.10. NAS 18 Revenue ................................................................................................................... 33
1.11. NAS 20 Accounting for Government Grant & Disclosure of Government Assistance ........ 40
1.12. NAS 21 The Effects of Changes in Foreign Exchange Rates................................................ 43
1.13. NAS 37 Provisions, Contingent Liabilities & Contingent Assets ......................................... 52
1.14. NAS 11: Construction Contracts ........................................................................................... 55
1.15. NAS 12: Income Taxes .......................................................................................................... 55
1.16. NAS 23 Borrowing Costs ...................................................................................................... 59
1.17. NAS 24: Related Party Disclosure......................................................................................... 63
1.18. NAS 33 Earnings Per Share ................................................................................................... 65
1.19. NAS 36: Impairment of Assets .............................................................................................. 65
1.20. NAS 38 Intangible Assets ...................................................................................................... 68
1.21. NFRS 2 Share Based Payments ............................................................................................. 70
1.22. Miscellaneous ........................................................................................................................ 70
CHAPTER 2: ACCOUNTING FOR SPECIAL TRANSACTIONS __________________________ 79
2.1 Hire Purchase transaction .......................................................................................................... 79
A. Theoretical Questions ....................................................................................................... 79
B. Practical Questions ........................................................................................................... 80
2.2 Contract Accounting ............................................................................................................... 110
A. Theoretical Question ...................................................................................................... 110
B. Practical Questions ......................................................................................................... 112
2.3 Investment Accounting ........................................................................................................... 120
A. Theory Questions ............................................................................................................ 120
B. Practical Questions ......................................................................................................... 120
2.4 Branch & Departmental Accounts .......................................................................................... 131
A. Theoretical Questions (Departmental Accounts) ......................................................... 131
B. Theoretical Questions (Branch Accounts) .................................................................... 132
C. Practical Questions (Departmental Accounts) ............................................................. 133
D. Practical Questions (Branch Accounts) ........................................................................ 145
2.5 Insurance Claim – Loss of Stock & Profit .............................................................................. 158
A. Theoretical Questions ..................................................................................................... 158
B. Practical Questions ......................................................................................................... 159
CHAPTER 3: COMPANY ACCOUNTING ____________________________________________ 199
 CAP II Paper 1: Advanced Accounting

3.1 Accounting for Shares & Debentures .................................................................................. 199

A. Theoretical Questions ..................................................................................................... 199
B. Practical Questions ......................................................................................................... 202
3.2 Preparation & Presentation of Financial Statements ........................................................... 227
A. Theoretical Questions ....................................................................................................... 227
B. Practical Questions ........................................................................................................... 227
3.3 Winding up of Companies ................................................................................................... 278
C. Theoretical Questions ..................................................................................................... 278
D. Practical Questions ......................................................................................................... 279
3.4.1 Accounting for Acquisition, Absorptions, Amalgamation and Merger ............................... 291
A. Practical Questions ......................................................................................................... 291
3.4.2 Reconstruction ..................................................................................................................... 344
A. Theoretical Questions ..................................................................................................... 344
B. Practical Questions ......................................................................................................... 344
CHAPTER 4 PARTNERSHIP ACCOUNTS ___________________________________________ 361
A. Theoretical Questions ..................................................................................................... 361
B. Practical Questions ......................................................................................................... 364
CHAPTER 5 PREPARATION & PRESENTATION of FINANCIAL STATEMENTS of SPECIAL
ORGANIZATIONS _______________________________________________________________ 449
5.1 Banking & Financial Institutions ......................................................................................... 449
A. Theoretical Questions ..................................................................................................... 449
B. Practical Questions ......................................................................................................... 453
5.2 Cooperatives ........................................................................................................................ 481
A. Theoretical Questions ..................................................................................................... 481
5.3 Insurance Companies ........................................................................................................... 482
A. Theory Questions ............................................................................................................ 482
B. Practical Questions ......................................................................................................... 487
5.4 Agriculture Accounting ....................................................................................................... 497
A. Theory Questions ............................................................................................................ 497
CHAPTER 6 INCOMPLETE RECORDS ______________________________________________ 500
A. Theory Questions ............................................................................................................ 500
B. Practical Questions ......................................................................................................... 501
CHAPTER 8 ANALYSIS & INTERPRETATION OF FINANCIAL STATEMENTS ___________ 520
A. Theory Questions ............................................................................................................ 520
B. Practical Questions ......................................................................................................... 522
CHAPTER 7 GOVERNMENT ACCOUNTING ________________________________________ 554
A. Theory Questions ............................................................................................................ 554
CHAPTER 8 ACCOUNTING IN COMPUTERIZED SYSTEM ____________________________ 556
A. Theoretical Questions ..................................................................................................... 556
Chapter 9 Miscellaneous ___________________________________________________________ 558
A. Theoretical Question ...................................................................................................... 558
B. Practical Questions ......................................................................................................... 563

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CHAPTER 1: FINANCIAL REPORTING STANDARDS

1.1. Conceptual Framework for the Preparation & Presentation of Financial

Statements

1. Materiality and prudence (CAP Dec. 2012 Q6e-2.5 Marks)

Answer
Materiality:
Information is material if its omission or misstatement could influence the economic decisions
of users taken on the basis of the financial statements. It depends on the size of the item or error
judged in the particular circumstances of its omission or misstatement. Often separate line item
or sub-item is decided bases on materiality. National level law may specify materiality limit
for separate disclosure of an item.

Prudence:
Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in the
making the estimates required under conditions of uncertainty, such that assets or income are
not overstated and liabilities or expenses are not understated. The exercise of prudence does
not allow, for example, the creation of hidden reserves or excessive provisions.

2. Going Concern
(CAP Dec. 2011 Q6a-2.5 marks; Inter Jun. 2003 Q9d -3 Marks, Inter Dec. 2003 Q 6- 4
Marks)

Answer
The financial statements are normally prepared on the assumption that an enterprise is a going
concern and will continue in operation for the foreseeable future. Hence, it is assumed that the
enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its
operations; if such an intention or need exists, the financial statements may have to be prepared
on a different basis and, if so, the basis used is disclosed.

3. Underlying assumption on Preparation and presentation of Financial Statement

Answer (CAP Dec. 2017 Q6a-3 Marks)
Accrual Basis
In order to make their objectives financial statements are prepared on the accrual basis of
accounting. Under this basis, the effects of transaction and other events are recognized when
they occur (and not as cash or equivalent is received or paid) and they are recorded in the
accounting records and reported in financial statements of the periods to which they relate.
Going Concern
The financial statements are normally prepared on the assumption that an entity is a going
concern and will continue in operation for foreseeable future. Hence, it is assumed that the
entity has neither the intention nor the need to liquidate or curtail materially the scale of

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operations; if such intention or need exists, the financial statements may have to be prepared
on a different basis.

4. Elements of Financial Statements (CAP Dec. 2018 Q6e-3 Marks)

Answer
The framework classifies items of financial statements can be classified in five broad
groups depending on their economic characteristics: Asset, Liability, Equity, Income and
Expense.
Assets Resource controlled by the entity as a result of past events from which
future economic benefits are expected to flow to the entity
Liability Present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow of a resource
embodying economic benefits.
Equity Residual interest in the assets of an entity after deducting all its
liabilities.
Income Increase in resources embodying economic benefits during the
accounting period in the form of inflows or enhancement of assets or
decreases in liabilities that result in increase in equity other than those
relating to contributions from equity participants
Expenses Decrease in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrence of liabilities
that result in decrease in equity other than those relating to
distributions to equity participants.

5. Measurement of the Elements of Financial Statements

(Inter Dec. 2011 Q6d-5 Marks; Inter Dec 04, Q5b)
Answer
Measurement is the process of determining the monetary amount at which the elements of the
Financial Statements are to be recognized and carried in the balance sheet and income
statement.
The elements of financial statements measure the financial position and performance of an
entity. The elements directly related to the measurement of financial position are assets,
liabilities and equity. And, the elements directly related to the measurement of performance in
the Statement or profit or loss are income and expenses.
An item that meets the definition of an element should be recognized if:
• it is probable that any future economic benefit associated with the item will flow to or
from the entity, and
• the item has a cost or value that can be measured with reliability.

After deciding that an item is to be recognized in the financial statements, the following
measurement bases are used in reporting:

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• Assets: Initial recognition of assets is done at cost with subsequent measurement made at
fair value
• Liabilities: Measured at the fair value of consideration required to settle the obligation
• Income: Measured at the fair value of consideration received or receivable
• Expense: Measured at the fair value of economic benefit out-flown or expected to outflow
• Equity: Residual interest. No specific recognition requirements

6. Qualitative characteristics of financial statements

(Inter Jun. 2010 Q6c – 5 Marks; CAP Jun. 2014 Q6a- 2.5 Marks)
Answer
These are the attributes of financial statements that make the information provided in them
useful to their users. Followings are the four major qualitative characteristics of financial
statements:
• Understandability:
For this, information is provided in the financial statements in such a way that a user of
reasonable knowledge of business, economic activities and accounting can study them with
reasonable diligence.
• Relevance:
Information has the quality of relevance when it influences the economic decisions of users by
helping them evaluate past, present or future events or confirming, or correcting, their past
evaluations.
• Reliability:
Information has the attribute of reliability when it is free from material error and bias. It can be
depended upon by users to represent faithfully that which it either purports to represent or could
reasonably be expected to represent.
• Comparability:
Users must be able to compare the financial statements of an entity through time in order to
identify trends in its financial position and performance. It needs disclosure of accounting
policies, presentation of past information and compliance of relevant accounting standards.

7. Explain the concept of Capital Maintenance

(CAP Jun. 2010 Q3b (ii) -3 Marks; Inter Jun. 2004 Q2a -4 Marks; Inter Dec. 2005 Q 6a-5
Marks)
Answer
Broadly, there are two major concept of capital maintenance:
First one is the concept of physical capital maintenance where profit means increase in
operating or production capacity of an enterprise at the end of a period compared to that at the
beginning of the period.
In second concept, profit is only earned if the monetary value of the net assets at the end of a
period exceeds the monetary value at the beginning of the period.
Both the concepts exclude any contributions from and distributions to the owners during the
period.

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Underlying principle of capital maintenance is that profit should be only recognized, after
ensuring that capital is intact as compared to the beginning of the period and it’s not eroded as
compared to the starting point of the period under consideration.

8. Fundamental Accounting Assumptions (CAP Jun. 2016 Q6e-3 Marks)

Answer
Accounting has its own assumption to make it relevant and for the purpose of facility. The
basic assumptions underlying accounts are as follows:
1. Going concern: The enterprise is normally viewed as a going concern, i.e. as continuing
operations for the foreseeable future. It is assumed that the enterprise has neither the
intention nor the necessity of liquidation.
2. Consistency: It is assumed that accounting policies are consistent from one period to
another. This adds the virtue of comparability to accounting data. If comparability is
lost, the relevance of accounting data for users’ judgment and decision making is gone.
3. Accrual: Revenues and costs are accrued, that is, recognized as they are earned or
incurred (and not as money is received or paid) and recorded in the financial statements
of the periods to which they relate. This assumption is the core of accrual accounting
system.
4. Disclosure requirements If the fundamental accounting assumption, viz. going
Concern, Consistency, and Accrual are followed in financial statements, specific
disclosure is not required. If a fundamental accounting assumption is not followed, the
fact should be disclosed.

9. Recognition of expenses (CAP Jun. 2014 Q6b- 2.5 Marks)

Answer
Expenses, as per the conceptual framework is referred to as a decrease in outflow of resources
embodying economic benefits or increase in liability other than those relating to distributions
to the equity participants. As per the recognition criteria, expenses in the financial statements
are recognized when:
• it is probable that any future economic benefit associated with the item will flow
from the entity, and
• the cost or value that can be measured with reliability

10. Matching Concept

(CAP Jun. 2019 Q6b-3 Marks)
Answer
The matching concept is an essential part of accrual accounting, these two are often
used interchangeably. Like accrual concept, the matching concepts also result from
periodicity concept. The matching concept requires that the expenses for an
accounting period should be matched against related incomes. The matching concept
states that the revenue and the expenses incurred to earned the revenues must belong
to the same accounting period. So, once the revenue is realized, the next step is to
allocate it to the relevant accounting period.

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Significance
• It guides how the expenses should be matched with revenue for determining
exact profit or loss for a particular period.
• It is very helpful for the investors/ shareholders to know the exact amount of
profit or loss of the business.
• It requires proper allocation of costs into appropriate period so that relevant
income and expenses are matched.

11. What is entity concept? (CAP Jun. 2011 Q3b (i) – 2 Marks)

Answer
Business consists of person and resources. Person representing the business is separate and
distinct from the business enterprises. Accounting system deals with the economic activities
of the business not of owner. In Entity Concept, preparation of Balance Sheet of the business
does not consider the personal assets and liability of the owner of the business.

1.2. NFRS 3 Business Combination

Mostly covered under Merger & Acquisition.

1.3. NAS 1 Presentation Of Financial Statements

1. Indicate any three areas in respect of which different accounting policies may be adopted by
different enterprises. Also indicate the requirements with regard to disclosure of accounting
policies as per the relevant NAS.
(CAP Dec. 2010 Q5c-5 Marks; Inter Jun. 2002 Q 6a-7 Marks)

Answer
Areas in which different accounting policies may be adopted: The following are three areas in
which different accounting policies may be adopted by different enterprises:
(i) Methods of depreciation
(ii) Cost formula for inventories
(iii) Subsequent measurement of Property, plant & equipment.
Disclosure requirements of accounting policies: The disclosure requirements as prescribed in
Accounting Standard 1 (NAS 1) ‘Presentation of Financial Statements’ are as follows:
An entity shall disclose its significant accounting policies comprising:
(a) the measurement basis (or bases) used in preparing the financial statements; and
(b) the other accounting policies used that are relevant to an understanding of the financial
statements.

2. Components of Financial Statements

(Inter Jun. 2010 Q6a- 5 Marks; CAP Jun. 2012 Q6c– 2.5 Marks)

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Answer
As per NAS 1, Presentation of Financial Statements, a complete set of financial statements
comprise:
(a) a statement of financial position as at the end of the period;
(b) a statement of profit or loss and other comprehensive income for the period;
(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising significant accounting policies and other explanatory information; and
(f) a statement of financial position as at the beginning of the preceding period when an entity
applies an accounting policy retrospectively or makes a retrospective restatement of items in its
financial statements, or when it reclassifies items in its financial statements

3. Other Comprehensive Incomes’ as per NFRS. (CAP Jun. 2018 Q6c-3 Marks)

Answer
Other comprehensive income comprises items of income and expenses (including
reclassification adjustments) that are not recognized in profit and loss as required or permitted
by other NFRSs.
The components of other comprehensive income include;
1. Changes in revaluation surplus
2. Re-measurements of defined benefit plans
3. Gains and losses arising from translating the financial statements of a foreign operation
4. Gains and losses from investments in equity instruments measured at fair value through
other comprehensive income
5. The effective portion of gains and losses on hedging instruments in a cash flow hedge
For particular liabilities designed as at fair value through profit or loss, the amount of the
change in the fair value that is attributable to changes in the liability’s credit risk.

1.4. NAS 2 Inventories

1. In a production process, normal waste is 5% of input. 5,000 MT of input were put in process
resulting in wastage of 300 MT. Cost per MT of input is Rs. 1,000. The entire quantity of waste
is on stock at the year end. State with reference to Accounting Standard, how will you value
the inventories in this case? (CAP Dec. 2016 5b-5 Marks)

Answer
As per of NAS- 2,” Inventories”, abnormal amount of wasted materials, labor and other
production costs are excluded from cost of inventories and such costs are recognized as
expenses in the period in which they are incurred.
In this case, normal waste is 250 MT and abnormal waste is 50 MT. The cost of 250 MT will
be included in determining the cost of inventories (finished goods) at the year end. The cost of
abnormal waste (50MT x 1,052.63 = Rs 52,632) will be charged to the profit and loss statement.
Cost per MT (Normal Quantity of 4,750 MT) = 50,00,000 / 4,750 = Rs 1,052.63

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Total value of inventory = 4,700 x Rs 1,052.63 = Rs 49,47,368.

2. Rahul Trading gives the following information relating to items forming part of inventory as
on 32-3-2075. His factory produces Product X using Raw material A.
i) 600 units of Raw material A (Produce @ Rs. 120). Replacement cost of raw material A as
on 32-3-2075 is Rs. 90 per unit.
ii) 500 units of partly finished goods in the process of producing X and cost incurred till date
Rs. 260 per unit. These units can be finished next year by incurring additional cost of Rs.
60 per unit.
iii) 1500 units of finished product X and total cost incurred Rs. 320 per unit. Expected selling
price of Product X is Rs. 300 per unit.
Determine how each item of inventory will be valued as on 32-3-2075. Also calculate the value
of total inventory as on 32-3-2075.
(CAP Dec. 2018 Q5c-5 Marks)
Answer
As per NAS 2 ‘Inventories’ are valued at lower of cost and net realizable value. Materials and
other supplies held for use in the production of inventories are not written down below cost if
the finished products in which they will be incorporated are expected to be sold at cost or above
cost. However, when there has been a decline in the price of materials and it is estimated that
the cost of the finished products will exceed net realizable value, the materials are written down
to net realizable value. In such circumstances, the replacement cost of the materials may be the
best available measure of their net realizable value. In the given case, selling price of product
X is Rs. 300 and total cost per unit for production is Rs.320.
Hence the valuation will be done as under:
i) 600 units of raw material will be written down to replacement cost as market value of
finished product is less than its cost, hence value at Rs. 90 per unit.
ii) 500 units of partly finished goods will be valued at 240 per unit i.e. lower of cost Rs.
320 (Rs. 260+ additional cost Rs. 60) or Net estimated selling price Rs.
240(Estimated selling price Rs. 300 per unit less additional cost of Rs. 60)
iii) 1500 units of finished product X will be valued at NRV of Rs. 300 per unit since it is
lower than cost Rs. 320 of product X.

Valuation of Total Inventory as on 32-03-2075

Units Cost NRV/ Value=units x cost
(Rs.) Replacement or NRV whichever
cost is less (Rs.)
Raw material A 600 120 90 54,000
Partly finished goods 500 260 240 1,20,000
Finished goof X 1,500 320 300 4,50,000
Value of inventory 6,24,000

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3. In Fiscal Year 2064/065, M/s SD Ltd. changed its inventory valuation policy from FIFO
method to Simple Average method and financial statements were prepared accordingly. Give
your view on the above changes with reference to NAS - 02.
(Inter Dec. 2008 Q2b-5 Marks)
Answer
As per the Nepal Accounting Standard (NAS) - 2 'Inventories' - cost of inventories should be
ascertained by using specific identification method. It also allows first in first out (FIFO) or
weighted average method for interchangeable items. Hence, entity should adopt any formula
from the above. There is no option of adopting simple average as a cost determining formula.
So, M/s SD Ltd. can't adopt simple average method by replacing FIFO method.

4. Following are data of Robinson

➢ Market Value of Stock as on Shrawan 01, 2066: Rs. 300,000 (Market Price
being cost plus 20% thereof).
➢ Purchases for the year: Rs. 1,450,000 (Out of which goods worth Rs.150,000 was delivered on
Shrawan 08, 2067)
➢ Sales for the year: Rs. 1,480,000.
➢ Goods costing Rs. 20,000 was taken by the proprietor for personal use.
➢ Goods costing Rs. 10,000 was used for firm’s office stationery.
➢ Normally, the firm sells goods on cost plus 40%
Determine the value of stock to be taken as on Ashadh end, 2067
(CAP Jun. 2011 Q3b ii- 8 Marks)
Answer
Robinson
Statement showing Value of Stock
as on Ashadh end, 2067
Opening Stock (as on Shrawan 01, 2066) 250,000
Add:
Purchases during the Year 1,450,000
Less: Goods in Transit (150,000)
Less: Goods taken by proprietor for personal use (20,000)
Less: Goods used for office's stationery (10,000) 1,270,000
Less:
Cost of Goods Sold:
Sales for the Year 1,480,000
Less: Profit on Sales (422,857)
1,057,143
Stock in Hand (as on Ashadh end, 2067) 462,857
Items delivered after the year end do not form part of the inventory as there is no
control over the asset currently.
Working Notes:
1. Calculation of Opening Stock:
Market Value of Stock: 300,000

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Profit Margin (on Cost) 20%

Cost Price of Opening Stock: =300,000 = 250,000
(100+20)
2. Calculation of Profit on
Sales:
Sales 1,480,000
Profit Margin (on Cost) 40%
Profit Amount =1,480,000 X 40 = 422,857 1,057,143
(100+40)

5. The company deals in three products, A, B & C, which are neither similar nor interchangeable.
At the time of closing of its account for the year 2066/067, the Historical and Net Realizable
Value of the items of closing stock are determined as follows:

Items Historical Cost Net Realizable Value

(Rs. in Lakhs) ( Rs. in Lakhs)
A 40 28
B 32 32
C 16 24
Compute the value of closing stock?
(CAP Jun. 2011 Q5a- 5 Marks; Inter Dec. 2006 Q1a-4 Marks)
Answer
As per NAS 2, Inventories, inventory should be valued at the lower of cost and net realizable
value. Inventories should be written down to net realizable value on an item-by-item basis in
the given case:
Historical Net Realizable Valuation of Closing
Items Cost Value Stock
(Rs. in Lakhs) (Rs. in Lakhs) (Rs. in Lakhs)
A 40.00 28.00 28.00
B 32.00 32.00 32.00
C 16.00 24.00 16.00
76.00

Hence, closing stock will be valued at Rs. 76 lakhs

6. Everest Ltd. incurred Rs. 20,00,000 as fixed production overhead per year. It normally
produces 1,00,000 units in a year. In 2010-11 however its production has been only 40,000
units. At the year-ended 16th July 2011, the closing stock was 10,000 units. The cost of unit is
below:

Material = Rs. 500 per unit

Labor = Rs. 250 per unit

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Fixed Production overhead = Rs. 20,00,000 per annum

Fixed Administration = Rs. 10,00,000 per annum
Calculate the value of closing stock. (CAP Jun. 2012 Q5b– 5 Marks)

Answer
In accordance with NAS 2, “Inventories”, the costs of conversion include a systematic
allocation of fixed and variable production overheads that are incurred in converting materials
into finished goods. The allocation of fixed production overheads for the purpose of their
inclusion in the cost of conversion is based on the normal capacity of the production facilities.
Thus, cost per unit of finished goods can be computed as follows:

Particulars Rs. /unit

Material cost 500
Labor cost 250
Fixed Production Overhead [Rs. 2,000,000 / 100,000 units] 20
Total Cost of conversion 770
Thus, the value of 10,000 units of finished goods on stock at the year-end will be Rs. 7,700,000
(10,000 units X Rs. 770 per unit).

7. During the year 2063/64 a medium size manufacturing company wrote down its inventories to
net realizable value by Rs. 500,000. Is separate disclosure necessary?
(Inter Jun. 2007 Q6i -5 Marks)
Answer:
NAS 2 specifically requires the disclosures of the amount of any write down of inventory
recognized as an expense in the period in accordance with the measurement principle of
“lower of cost or NRV”. Therefore, the entity is required to make disclosure with regards
to write down.

8. A limited company has been including interest in the valuation of closing stock. In 2063/64 the
management of the company decided to follow NAS 02 and accordingly interest has been
excluded from the valuation of closing stock. This has resulted in a decrease in profits by Rs.
300,000. Is disclosure necessary? If so, draft the same. (Inter Jun. 2007 Q 6ii -5 Marks)

Answer:
Under the provisions of NAS 23 Borrowing costs, borrowing costs (interest) that are
directly attributable to the acquisition, construction or production of a qualifying asset
(asset that necessarily take a substantial period of time to get ready for its intended use or
sale) shall be capitalized as part of the cost of that asset.

In the given case, if the asset to which the interest costs were allocated met the definition
of qualifying asset, the accounting treatment done by the company is justified. However, if
the asset did not meet the definition of qualifying asset, the accounting treatment done by
the company should be considered as prior period error; in which case the company should
opt for retrospective restatement of figures in line with the provisions of NAS 08,

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Accounting policies, changes in accounting estimates & errors. Disclosure in which case
would be:
“the company had been including interest cost in valuing its closing inventories which is
not allowed under the provisions of NAS 23. The prior period error has been corrected by
restating the figure of retained earnings of earliest prior period presented by NRs. XXXX.”

9. Definition of inventories as per Nepal Accounting Standard 2.

(Inter Jun. 2005 Q 6b -4 Marks)

Answer
Inventories are assets
• Held for sale in the ordinary course of business
• In process of production for such sale
• In form of materials or supplies to be consumed in production process or in
rendering services.

1.5. NAS 3 Statement of Cash Flows

1. How will you disclose following items while preparing Cash Flow Statement of Thapathali
Ltd. as per Nepal accounting standard for the year ended 32nd Ashadh 2075?
(i) 10% Debentures issued as on 1.4.2074 Rs. 110,000
As on 32.3.2075 Rs. 77,000
(ii) Debentures were redeemed at 5% premium at the end of the year. Premium was charged
to profit/loss for the year.
(iii) Unpaid interest on debentures as on 1.4.2074 Rs. 275
As on 32.3.2075 Rs. 1,175
(iv) Debtors of Rs. 36,000 were written off against the provision for doubtful debts account
during the year.
(v) Investment in 10% Bonds As on 1.4.2074 Rs. 350,000
As on 32.3.2075 Rs. 350,000
(vi) Accrued interest on investments as on 32.3.2075 Rs. 10,500
(CAP Dec. 2018 Q3b-5 Marks)
Answer
Cash flow statement of Thapathali Ltd. for the year ended 32nd Ashadh 2075

A Cash flow from operating activities

Net profit as per Statement of Profit or Loss --------
Add: Premium on redemption of debentures 1,650
Add: interest on 10% debentures 11,000
Less: interest on 10% investments (35,000)
B Cash flow from investing activities
Interest on investments (35,000 – 10,500) 24,500
C Cash flow from financing activities

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Interest on debentures paid [11,000 – (1,175-275)] (10,100)

Redemption of debentures [(110,000-77000) at 5% premium] (34,650)
Writing of debtors against provision for bad debt will not be included in cash flow statement

2. Cash and cash equivalents (Inter Jun. 2012 Q6b – 5 Marks)

Answer
Cash equivalents are short-term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value.
Cash equivalents are held for the purpose of meeting short-term cash commitments rather than
for investment or other purposes. For an investment to qualify as a cash equivalent it must be
readily convertible to a known amount of cash and be subject to an insignificant risk of
changes in value. Therefore, an investment normally qualifies as a cash equivalent only when
it has a short maturity of, say, three months or less from the date of acquisition. Equity
investments are excluded from cash equivalents unless they are, in substance, cash
equivalents, for example in the case of preferred shares acquired within a short period of their
maturity and with a specified redemption date

3. Write short notes on Cash Flow Statement (Inter Jun. 2003 Q 9c- 3 Marks)

Answer
A Cash Flow Statement, as the name signifies, is a statement showing inflows and outflows of
cash and cash equivalents during a certain period of time. It summarizes the inflows and
outflows relating to the following three activities:
1. Operating activities: These include activities relating to the purchase and sale of goods
and service by the company in the normal course of business operations.
2. Investing activities: These deal with the acquisition and disposal of long-term assets
including long-term investments.
3. Financing activities: They reflect the cash effect of all transactions relating to long-term
liabilities and capital of the enterprise.

Where the amount of significant cash and cash equivalent balances held by an enterprise are
kept not available for use by the enterprise, the same should be disclosed separately together
with a commentary by management. A cash flow statement starts with the opening balance of
cash and cash equivalents at the start of the accounting period and is reconciled with the closing
balance of cash and cash equivalents at the end of the period.

1.6. NAS 8 Accounting Policy, Change in Accounting Estimates & Errors

1. While preparing its final accounts for the year ended 31st March 2012, Sky Limited created a
provision for bad and doubtful debts at 2% on trade debtors. A few weeks later the company
found that payments from some of the major debtors were not forthcoming. Consequently, the
company decided to increase the provision by 10% on the debtors as on 31st March, 2012 as

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the accounts were still open awaiting approval of the Board of Directors. Is this to be considered
as an extraordinary item or prior period item? The company wants to treat the expenditure as
deferred revenue expenditure. Give your comments for the financial year ending on 31-03-
2012 in the context of relevant NAS.
(CAP Dec. 2012 Q5a -5 Marks; Jun. 2006 Q 1b – 4 Marks; Dec. 2006, Q 1d)
Answer
As per NAS 01, Presentation of Financial Statements, an entity shall not present any items of
income or expenses as extra-ordinary therefore classification of the change in provision amount
as extraordinary is not allowable.

In the given case, Sky Limited created a provision for bad and doubtful debts at 2 % on trade
debtors while preparing its final accounts for the year ended 31st March, 2012. As the company
had initially provided provision @ 2%, it can be deduced that the increase in provision is due
to some events that took place after the reporting period and subsequently, the company
decided to increase the provision by 10%. Therefore, the company should assess whether this
is an estimation error or this is a result of events that took place after the reporting period. If it
is concluded that the increase is due to an estimation error, adjustments shall be made to the
financial statements. If it is concluded that the increase is due to some events that took after the
reporting period, the company is advised not to adjust the amount of provision but rather
disclose the fact in the notes if the amount involved is significant. Moreover, the company is
also advised to assess recoverability of individual debtor rather than increasing the amount of
provision by certain percentage.

No items of expenses or income are allowed to be deferred unless allowed by a standard.

Moreover, estimated loss on debtors does not meet the definition of “Assets” under the
conceptual framework itself therefore the company cannot carry this amount as deferred
expenditure but rather should expense it off.

2. Mention any four areas in which different accounting policies may be adopted by different
enterprises.

Answer
• Methods of depreciation e.g., WDV method, SLM method
• Conversion or translation of foreign currency items, e.g. average rate, TT buying rate
• Valuation of inventories, e.g., FIFO, Weighted average method
• Subsequent measurement of Property, plant & equipment

3. When Can a Company change its accounting policy?

(Inter Jun. 2010 Q5a- 3Marks, CAP Jun. 2018 Q6d-3 Marks)

Answer
A change in accounting policy is allowed, under NAS 08, only if the change:

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i) is required by a NFRS or
ii) results in the financial statements providing reliable and more relevant information
about the effects of transaction, other events or condition on the entity’s financial position,
financial performance or cash flows.

An entity is further required by NAS 08 to disclose the nature of change, reason of change, the
financial impact for current & prior periods presented and financial impact on the opening
balance of retained earnings as a result of such change.

4. Accounting estimate. (CAP Jun. 2011 6c- 3 Marks; Inter Dec. 2011 Q6a-5 Marks)

Answer
Accounting estimate is an approximation of a monetary amount in the absence of a precise
means of measurement. This term is used for an amount measured at fair value where there is
estimation uncertainty, as well as for other amounts that require estimation.
Because of the uncertainties inherent in business activities, some financial statement items can
only be estimated. Further, the specific characteristics of an asset, liability or component of
equity, or the basis of or method of measurement prescribed by the financial reporting
framework, may give rise to the need to estimate a financial statement item. These are called
accounting estimates. Accounting estimates are required to enhance the timeliness & relevancy
of the financial statements without trading off on reliability. The current financial
Examples of estimation in some fields are:
(i) Estimation of useful life of depreciable assets.
(ii) Fair value estimation
(iii) Determining the stage of completion of construction contracts

5. Z Ltd. manufactures a commodity product at two different locations A and B. It values closing
stock consistently as follows:
Location A
Raw materials: At cost, arrived at on FIFO basis.
Work in progress: At Raw Materials cost plus a proportionate share of variable factory
overheads.
Finished goods: At Raw Materials cost plus variable factory overheads.
Location B
Raw materials: At cost, arrived at on LIFO basis.
Work in progress: At Raw Materials cost plus a proportionate share of variable factory
overheads.
Finished goods: At Raw Materials cost plus variable factory overheads.
The overheads considered above are direct wages and benefits of workers, fuel costs and spares
consumed.
Comment on the above accounting policy of Z Ltd. (Inter. Jun. 2006, Q1c – 4 Marks)

Answer:

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As per the provisions of NAS 02, cost of items of inventory shall be identified using specific
identification. However, cost formula such as FIFO or weighted average may be used for
interchangeable items. LIFO is not an allowed alternative under NAS 2 therefore method of
valuation of inventory at Location A is not in accordance with the requirements of NAS 2.
Under NAS 08, same accounting policies shall be used for similar transactions therefore the
consistency in valuation of work in progress and finished goods at both the location is a
requirement. Moreover, the entity should also consider measuring inventories at lower of cost
or NRV.

1.7. NAS 10 Events After The Reporting Period

1. Distinguish between adjusting and non-adjusting events under relevant Nepal Accounting
Standard.
(CAP Dec. 2009 5a-5 Marks, CAP Jun. 2010 6d- 2.5 Marks, Inter Dec. 2009 Q6b-5 Marks)
Answer:
NAS 10 , Events after the reporting period defines “Events after the reporting period” as
follows:

Events after the reporting period are those events, favorable and unfavorable, that occur
between the end of the reporting period and the date when the financial statements are
authorised for issue. Two types of events can be identified:
(a) those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period).

Examples of adjusting events include:

• The settlement after the reporting period of a court case that confirms that the entity
had a present obligation at the balance sheet date.
• Receipt of information after the reporting date, about impairment of asset (e.g.
bankruptcy of a customer or sale of inventories below cost) at the end of the reporting
period.
• The determination after the reporting period of the cost of assets purchased or the
proceeds from assets sold, before the end of the reporting period.
• The determination of the amount of profit sharing or bonus payments.
• The discovery of fraud or errors that show that the financial statements are incorrect.

The difference between adjusting & non adjusting events being that:
a. An entity shall adjust the amounts recognised in its financial statements to reflect adjusting
events after the reporting period.
b. An entity shall not adjust the amounts recognised in its financial statements to reflect non-
adjusting events after the reporting period

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However, if non-adjusting events after the reporting period are material, non-disclosure could
influence the economic decisions that users make on the basis of the financial statements.
Accordingly, an entity shall disclose the following for each material category of non-
adjusting event
after the reporting period:
(a) the nature of the event; and
(b) an estimate of its financial effect, or a statement that such an estimate cannot be made.

2. ABC Limited closed its accounting year on 30.06.2011 and the accounts for that period were
considered and approved by the board of directors on 20th August, 2011. The company was
engaged in laying pipeline for an oil company, deep beneath the earth. While doing the boring
work on 01.09.2011 it had met a rocky surface for which it was estimated that there would be
extra cost to the tune of Rs. 100 lakhs. Further, the court had given its verdict against the
company for the liability of Rs. 50 lakhs on 02.09.2011 shown as contingent liabilities on
accounts. You are required to state with reasons, how it would be dealt with in the financial
statements. (CAP Jun. 2012 Q5a– 5 Marks)

Answer:
NAS 10 , Events after the reporting period defines “Events after the reporting period” as
follows:
Events after the reporting period are those events, favourable and unfavourable, that occur
between the end of the reporting period and the date when the financial statements are
authorised for issue. Two types of events can be identified:
(a) those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period).

In the first case the incidence, which was expected to push cost by a significant amount, became
evident after the date of authorization of issue of the financial statements (i.e. after approval by
the BOD) & therefore no adjustments should be made with regards to the item in the financial
statements.

In the second case also, the settlement of the court case happened after the financial statements
had been authorized for issue and therefore are not covered by NAS 10. It is assumed that the
disclosure as contingent liability by considering all the circumstances available at that time.
Therefore, the settlement of the case will be account for as an expense and liability in the
financial statements for the next reporting period.

3. State with reasons, how the following events would be dealt with in the financial statements of
National Trading Ltd. for the year ended 31stAshadh, 2072:
(i) An agreement to sell a land for Rs. 30 lakh to another company was entered into on
1stAshadh, 2072. The value of land is shown at Rs. 20 lakhs in the Balance sheet as on
31stAshadh, 2071. However, the sale Deed was registered on 15thShrawan, 2072.

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(ii) The negotiation with another company for acquisition of its business was started on
2ndMagh, 2071. National Trading Ltd. invested Rs. 40 lakhs on 12thAshoj, 2072. (CAP Jun.
2016 5c -5 Marks; CAP Jun. 2013 Q5c– 5 Marks; Inter Dec. 2006 Q 1e-4 Marks)

Answer
(i) According to NAS 10 ''Event after the reporting period'', assets and liabilities should be
adjusted for events occurring after the reporting period that provide additional evidence of
conditions existing at the end of the reporting period. In the given case, sale of immovable
property was carried out before the closure of the books of accounts. The agreement to sell was
affected on 1stAshadh, 2072 and registration of the sale deed happened on 15thShrawan, 2072,
provides evidence of sale transaction that took place prior to 31st Ashadh. Therefore,
adjustment to assets for sale of land is necessary in the financial statements of National Trading
Ltd. for the year ended 31stAshadh, 2072.
(ii) Events after the reporting period are those events, favorable and unfavorable, that occur
between the end of the reporting period and the date when the financial statements are
authorized for issue. Two types of events can be identified:
(a) those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period).
In the given case, though the negotiations took place during the Financial Year, the actual
transaction took place during the next financial year. Therefore, no adjustments need to be
made in the financial statements for the year ended 31st Ashadh 2072. However, as per the
provisions of NAS 10, significant events after the reporting period which can influence
economic decision of users should be disclosed in the notes to the financial statements. In this
case, National Trading Ltd. should make disclosure in its financial statements in accordance
with the disclosure requirements of NFRS 3 Business Combination

4. A major fire has damaged assets in a factory of X Co. Ltd. On 8.4.2005, 8 days after the year
end closing of accounts. The loss is estimated to be Rs. 16 crores (after estimating the
recoverable amount of Rs. 24 crores from the Insurance Company).
If the company had no Insurance cover, the loss due to fire would be Rs. 40 crores.
Explain how the loss should be treated in the Final Accounts of the year ended 31.3.2005.
(Inter. Jun. 2006 Q1a-4 Marks)
Answer:
The present event does not relate to conditions existing at the end of the reporting period
therefore the loss of assets by fire of X Ltd. is a non-adjusting event. Hence, no specific
adjustment is required in the financial statements for the year ending on 31.3.2005.
However, as per the disclosure requirements to NAS 10, if non-adjusting events after the
reporting period are material, non-disclosure could influence the economic decisions that users
make on the basis of the financial statements. Accordingly, an entity shall disclose the
following for each material category of non-adjusting event after the reporting period:
(a) the nature of the event; and
(b) an estimate of its financial effect, or a statement that such an estimate cannot be made.

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Therefore, X Ltd. should make disclosure about the event and the expected loss from the event
in the notes.

5. Kathmandu Ltd. is a company that prepares accounts in accordance with Nepal Financial
Reporting Standards (NFRS). A meeting of the Directors of Kathmandu Ltd. is scheduled to
discuss the following matters with a view to finalizing the accounts for the year ending 32nd
Ashadh 2075:
i) A fire occurred in one of the warehouses of Kathmandu Ltd. on 3rd Shrawan 2075,
destroying inventory which had a cost price of Rs. 100,000 and a net realizable value of
Rs. 150,000.
ii) On 9th Shrawan 2075, Kathmandu Ltd. received information that one of their largest
customers had gone bankrupt. At 32nd Ashadh 2075, this customer owed Kathmandu Ltd.
Rs. 235,000. It is anticipated that Kathmandu Ltd. can only receive 10 paisa for every Rs.
1 they were owed.
iii) In Shrawan 2075, Kathmandu Ltd. sold inventory which had been in one of their
warehouses for the past two years, for Rs. 75,000. This had been included in the financial
statements, for the year ended 32nd Ashadh 2075, at its cost price of Rs. 105,000.
iv) On 30th Ashadh 2075, an employee of Kathmandu Ltd. fell and injured her arm at work.
This employee has commenced legal action. The solicitors for Kathmandu Ltd. informed
the company on 10th Ashwin 2075, that it is probable they will be found liable and have
to pay this employee Rs. 33,000.
Required: Advise the board on the accounting treatment of these issues.
(CAP Jun. 2019 Q5a-5 Marks)
Answer:

i) This is a non-adjusting event as it occurred after the reporting date. If it is material it

should be disclosed in the financial statements, but it should not be recognized in the
financial statements.
ii) This is an adjusting event as it provides evidence of conditions that existed at the
reporting date. The company should recognize this in the accounts by debiting bad
debts Rs. 211,500 (90/100*235,000) and crediting trade receivables Rs. 211,500.
iii) This is also an adjusting event as it confirms the net realizable value of the goods that
were in stock at 32nd Ashadh 2075. The company will have to recognize this by
reducing the value of closing inventory in the financial statements.
iv) This is an adjusting event. As the injury took place prior to the year end it has now
been confirmed that the company will probably have to pay out Rs. 33,000 in
compensation. The company will have to recognize a provision of Rs. 33,000 in the
financial statements by debiting expense of Rs. 33,000 and crediting provision in the
statement of financial position for Rs. 33,000.

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1.8. NAS 16 Property, Plant & Equipment (PPE)

1. During the current year 2069/70, M/S Harish Power made the following expenditure relating
to its Plant & Machinery:
Particulars Amount (Rs.)
General Repairs 400,000
Repairing of Electric Motors 100,000
Partial Replacement of Parts of Machinery 50,000
Substantial improvements to the electrical wiring system
which will increase efficiency of the plant & machinery 1,000,000
Explain with reference to relevant NAS; how the above expenses should be treated?
(CAP Dec. 2013 Q5c-5 Marks; Inter Dec. 2006, Q 1c-4 Marks)
Answer
As per NAS 16 Property, Plant and Equipment, both initial & subsequent expenditure incurred
on an item of PPE (add to, replace part of or servicing cost) are recognized as included in the
cost of an item of PPE if, and only if:
a. It is probable that economic benefit associated with the item will flow to the entity &
b. The cost of the item can be measured reliably.

Also, the standard states that cost of day-to-day servicing of an item of PPE are recognized
in the profit or loss when incurred.
Based on these principles the treatment of expenditure incurred by Harish Power shall be
as follows:
Particulars Capitalized Charged to P/L
General Repairs 400,000
Repairing of Electric Motors 100,000
Partial Replacement of Parts of Machinery * 50,000
Substantial improvements to the electrical wiring system 1,000,000
which will increase efficiency of the plant & machinery
* With respect to partial replacement of parts of the machinery, the company shall
derecognize the carrying amount of replaced parts and include current replacement cost .

2. An electricity company decided to replace some parts of its plant by an improved plant. The
plant to be replaced was built in 2043 for Rs. 4,200,000. It is estimated that it would cost Rs.
7,800,000 to build a new plant of the same size and capacity. The cost of the new plant as per
the improved design was Rs. 12,600,000 and in addition, material belonging to the old plant
valued at Rs. 456,000 was used in the construction of the new plant. The balance of the plant
was sold for Rs. 360,000.
Compute the amount to be written off to and the amount to be capitalized. Also prepare Plant
Account and Replacement Account.
(CAP Dec. 2014 3a-7 Marks; CAP Jun. 2015 Q3a- 7 Marks)

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Answer
The question is missing information with regards to accumulated depreciation till date. For
solving, it has been assumed that the accumulated depreciation on the old plant till date is
Rs. 30,00,000. Since we are given the cost of the plant to be replaced, the information
provided with regards to the cost breakdown and increment is of no significance in solving
the question.

Old Plant A/C

Dr. Cr.
Particulars Amount Particulars Amount
To Balance b/d 4,200,000 By Accumulated depreciation 30,00,000
By New Plant A/C 4,56,000
By Bank A/C 3,60,000
By Loss on replacement 384,000
(charged to P/L for the period)
44,00,000 44,00,000

New Plant A/c

Dr. Cr.
Particulars Amount Particulars Amount
To Material/Labor/OH 12,600,000 By Balance c/d 13,056,000
To Old Plant A/c 456,000
13,056,000 13,056,000

3. Revaluation of PPE (Inter Jun. 2003 Q 9e - 3 Marks)

Answer
As NAS 16 Property, Plant & Equipment:
On upward Revaluation:
If an asset's carrying amount is increased as a result of a revaluation:
• the increase shall be credited directly to equity under the heading of Revaluation
Surplus.
• However, the increase shall be recognized in profit or loss to the extent that it
reverses a revaluation decrease of the same asset previously recognized in profit or
loss.
Hence, in case of revaluation of property, plant & equipment to Rs. 2,500,000; Rs.
500,000 shall be credited directly to equity under Revaluation Surplus.

On downward Revaluation:
If an asset's carrying amount is decreased as a result of a revaluation:
• the decrease shall be recognized in profit or loss.

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• However, the decrease shall be debited directly to equity under heading of

revaluation surplus to the extent of any credit balance existing in the revaluation
surplus in respect of that asset.

When an asset is revalued, the entire class of concerned asset should be revalued. Revaluation
should be reviewed on a periodic basis so that the revalued amount stays attune to the market
value.

4. The Written Down Value of Property, Plant & Equipment of Prudence International Pvt. Ltd.
as on Ashadh end, 2072 was Rs. 2,000,000. The company decided to revalue its Property, Plant
& Equipment on Ashadh end, 2072. This is the first instance when the company has gone for
any revaluation of assets.
With reference to NAS; explain the financial impact on account of revaluation of Property,
Plant & Equipment on (i) Reserves & Surplus and (ii) Profit & Loss if:
i) Property, Plant & Equipment is revalued at Rs. 2,500,000.
ii) Property, Plant & Equipment is revalued at Rs. 1,600,000.
(CAP Dec. 2015 Q-5B)
Answer
As NAS 16 Property, Plant & Equipment:
On upward Revaluation:
If an asset's carrying amount is increased as a result of a revaluation:
• the increase shall be credited directly to equity under the heading of Revaluation
Surplus.
• However, the increase shall be recognized in profit or loss to the extent that it
reverses a revaluation decrease of the same asset previously recognized in profit or
loss.
Hence, in case of revaluation of property, plant & equipment to Rs. 2,500,000; Rs.
500,000 shall be credited directly to equity under Revaluation Surplus.

On downward Revaluation:
If an asset's carrying amount is decreased as a result of a revaluation:
• the decrease shall be recognized in profit or loss.
• However, the decrease shall be debited directly to equity under heading of
revaluation surplus to the extent of any credit balance existing in the revaluation
surplus in respect of that asset.
Hence, in case of revaluation of property, plant & equipment to Rs. 1,600,000; Rs.
400,000 shall be recognized as expense in Profit or Loss for the period.

5. Tinkune Ltd.’s head office building is the only building it owns. Using professional valuers, it
revalued the building on 1st Shrawan 2074, at Rs. 21,00,000. Tinkune Ltd. has adopted a
revaluation policy for buildings from this valuation date and has decided that the original useful
life of buildings has not changed as a result of the revaluation. The building was acquired on
1st Shrawan 2064. The cost of the building on acquisition was Rs. 25,00,000 and the

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accumulated depreciation to the Ashadh end, 2074 amounted to Rs. 5,00,000. The depreciation
up to 1st Shrawan 2074 was depreciated evenly since acquisition. The professional valuer
believes that the residual value on the building would be Rs. 6,00,000 at the end of its useful
life.
Required:
Calculate the depreciation amount of the building for the year ended 32nd Ashadh 2075 based
on the information provided in the above scenario. (CAP Dec. 2018 Q5a-5 Marks)

Answer
The depreciation amount is as follow:
To calculate the new depreciation amount, we use the following depreciation formula.
Revalued cost of asset-residual value 21,00,000-6,00,000
Expected useful life of asset 40 Years

Depreciation per year 37,500

Working Note 1
Building-original cost 25,00,000
Building- Accumulated Depreciation 5,00,000
Accumulated Depreciation/Cost= 20%
Building has been depreciated by 20 % over 10 years, so annual rate of depreciation has been
2 % i.e. 20%/10 years, as asset has been depreciated evenly since acquisition. Therefore, the
original useful life is 50 years and the remaining useful life is 40 years.

6. Nepal Electricity Authority decides to replace one of its old plants with a modern one with a
larger capacity. The plant when installed in 2040 B.S., cost was Rs. 44,00,000, the components
of materials, labor and overheads being in the ratio 5:3:2. It is ascertained that the costs of
materials and labor have gone up by 40% and 80% respectively. The proportion of overheads
to total costs is expected to remain the same as before.
The cost of the new plant as per improved design is Rs. 60,00,000 and in addition, material
recovered from the old plant of a value of Rs. 2,40,000 has been used in the construction of
the new plant. The old plant was scrapped and sold for Rs. 7,50,000.
The accounts of the company are maintained under the double accounts system. Indicate how
much would be capitalized and the amount that would be charged to revenue. Show the ledger
accounts. (Inter Dec. 2009 Q4-10 Marks; CAP Jun. 2010 3a (i) – 7 Marks)

Answer
The question is missing information with regards to accumulated depreciation till date. For
solving, it has been assumed that the accumulated depreciation on the old plant till date is
Rs. 30,00,000. Since we are given the cost of the plant to be replaced, the information
provided with regards to the cost breakdown and increment is of no significance in solving
the question.

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Old Plant A/C

Dr. Cr.
Particulars Amount Particulars Amount
To Balance b/d 44,00,000 By Accumulated depreciation 30,00,000
By New Plant A/C 2,40,000
By Bank A/C 7,50,000
By Loss on replacement 4,10,000
(charged to P/L for the period)
44,00,000 44,00,000

New Plant A/c

Dr. Cr.
Particulars Amount Particulars Amount
To Material/Labor/OH 60,00,000 By Balance c/d 62,40,000
To Old Plant A/c 2,40,000
62,40,000 62,40,000

7. In Fiscal Year 2061/062, M/S PD Ltd. re-valued its Plant and Machinery upward by Rs. 57,000
by crediting as income in Income Statement. In the fiscal year 2063/64, the assets under Plant
and Machinery are re-valued downwards by Rs. 25,000 by changing as expense to income
statement. Give your view on the accuracy of above accounting treatments with reference to
NAS-16.
(Inter June. 2008 Q4b)
Answer
According to NAS – 16 'Property, Plant and Equipment and Depreciation" – when an asset's
carrying amount is increased as a result of a revaluation, the increase should be recognized in
other comprehensive income and accumulated in equity under the heading of revaluation
surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses
a revaluation decrease of the same asset previously recognized in profit or loss.

When an asset's carrying amount is decreased as a result of revaluation, the decrease should be
recognized as an expense. However, the decrease shall be recognized in other comprehensive
income to the extent of any credit balance existing in the revaluation surplus in respect of that
asset. The decrease recognized in other comprehensive income reduces the amount
accumulated in equity under the heading of revaluation surplus.

In the given case the plant and machinery were revalued upward by Rs. 57,000 in fiscal year
2061/62 and the surplus on revaluation is credited to income statement. The credit of
revaluation surplus to income statement is against NAS-16, which should be credited to
revaluation surplus. Similarly, the downward revaluation of plant and machinery in fiscal year
2063/64 should be deducted from 'revaluation surplus', created in fiscal year 2061/62.
Impact on depreciation has been ignored due to lack of information

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8. Nepal Electricity Company laid down a Main at a cost of Rs. 8,000,000. Some years later the
company laid down an auxiliary Main for one-fourth of the old Main at a cost of Rs.3,000,000.
It also replaced the rest of the length of the old Main at a cost of Rs.9,000,000 the cost of
material and labor having gone up by 15%. Sale of old materials realized Rs. 200,000. Old
materials valued at Rs. 200,000 were used in renewal and those valued at Rs. 300,000 were
used in auxiliary Main.
Pass Journal Entries for recording the above transactions in the books of Nepal Electricity
Company. Show your workings (Inter Jun. 2011 Q5a- 10 Marks)

Answer
The question is missing information with regards to accumulated depreciation till date. For
solving, it has been assumed that the accumulated depreciation on the old plant till date is Rs.
6,000,000. Since we are given the cost of the plant to be replaced, the information with regards
to current cost of replacement and cost increment is of no significance in solving the question.

Journal Entries in the books of Nepal Electricity Company

Dr Cr
Particulars
Rs. Rs.
Auxiliary Main Account 3,000,000
To Bank Account 3,000,000
(Being cost incurred on laying auxiliary)
Accumulated Depreciation Account 6,000,000
Bank A/C 200,000
Auxiliary Main A/C 300,000
New Main A/c 200,000
Loss on replacement (P/L) 1,300,000
To Old Main A/C 8,000,000
(Being accumulated depreciation on scrapped asset
netted, scrap sold and part used on new and auxiliary
main recorded)
New Main Account 9,000,000
To Bank Account 9,000,000
(Being additional cost of New Main capitalized)
Note: It has been assumed that the total cost of 3,000,000 & 9,000,000 is excluding cost
of material used from the old main. Students may make an assumption that the cost
is inclusive, in which case the solution will slightly vary.

9. Palpa Power company decided to replace some parts of its plant by an improved plant. The
plant to be replaced was built in 2065 for Rs.70,00,000. It is estimated that it would cost
Rs.130,00,000 to build a new plant of the same size and capacity. The cost of the new plant as
per the improved design was Rs.2,10,00,000 and in addition, material belonging to the old plant
valued at Rs.7,60,000 was used in the construction of the new plant. The balance of the plant

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was sold for Rs.6,00,000. Compute the amount to be written off to revenue and the amount to
be capitalized. Also prepare Plant account and Replacement account.
(CAP Jun. 2011 Q4c- 5 Marks)

Answer
The question is missing information with regards to accumulated depreciation till date. For
solving, it has been assumed that the accumulated depreciation on the old plant till date is Rs.
6,000,000. Since we are given the cost of the plant to be replaced, the information with regards
to current cost of replacement is of no significance in solving the question.

Old Plant A/C

Dr. Cr.
Particulars Amount Particulars Amount
To Balance b/d 70,00,000 By Accumulated depreciation 60,00,000
By gain on replacement 3,60,000 By New Plant A/C 7,60,000
(charged to P/L for the period)
By Bank A/C 6,00,000

73,60,000 73,60,000

New Plant A/c

Dr. Cr.
Particulars Amount Particulars Amount
To Bank 2,10,00,000 By Balance c/d 2,77,60,000
To Old Plant A/c 7,60,000
2,77,60,000 62,40,000

10. Discuss the treatment of upward and downward revaluation of assets as per NAS 16.
(CAP Jun. 2014 Q5b- 5 Marks)
Answer
As per NAS 16 if an asset’s carrying amount is increased as a result of a revaluation, the
increase shall be recognized in other comprehensive income and accumulated in equity under
the heading of revaluation surplus. However, the increase shall be recognized in profit or loss
to the extent that it reverses a revaluation decrease of the same asset previously recognized in
profit or loss.

If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be

recognized in profit or loss. However, the decrease shall be recognized in other comprehensive
income to the extent of any credit balance existing in the revaluation surplus in respect of that
asset. The decrease recognized in other comprehensive income reduces the amount
accumulated in equity under the heading of revaluation surplus.

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11. M/s. Laghu Udyog Limited has been charging depreciation on an item of plant and machinery
on straight line basis. The machine was purchased on 1-4-2070 at Rs. 3,25,000. It is expected
to have a total useful life of 5 years from the date of purchase and residual value of Rs. 25,000.
Calculate the book value of the machine as on 1-4-2072 and the total depreciation charged till
31-3-2072 under SLM. The company wants to change the method of depreciation and charge
depreciation @ 20% on WDV from 2072-73. Is it valid to change the method of depreciation?
Explain the treatment required to be done in the books of accounts in the context of Accounting
Standards.
Ascertain the amount of depreciation to be charged for 2072-73 and the net book value of the
machine as on 31-3-2073 after giving effect of the above change.
(CAP Jun. 2017 Q5b-5 Marks)
Answer
As per NAS 16 ‘ Property, Plant & Equipment’, the depreciation method applied to an asset
shall be reviewed at least at each financial year end and, if there has been a significant change
in the expected pattern of consumption of the future economic benefits embodied in the asset,
the method shall be changed to reflect the changed pattern. Such a change shall be accounted
for as a change in an accounting estimate in accordance with NAS 08.

As per NAS 08 ‘Accounting Policies, Changes in Accounting Estimates & Errors’, changes in
accounting estimates shall be adjusted prospectively that means the effect of a change in an
accounting estimate shall be included in the determination of net profit or loss in:
(a) The period of the change, if the change affects the period only; or
(b) The period of the change and future periods, if the change affects both.

In the given case, the company can change the method of depreciation from year 2072-73 if
the conditions set aside in above paragraph have been fulfilled.
Depreciation for year 2072-73 and net book value of Machine as on Rs.
31.3.73 after effect of the change
Book value of Machinery as on 01.04.2072 2,05,000
Current year depreciation as per new method (WDV) (2,05,000 X 20%) 41,000
Net Book value as on 31.03.2073 (2,05,000–41,000) 1,64,000
Working Note:
Book Value of Machinery and Depreciation under SLM as on 01-04-2072
Rs.
Cost of Machine purchased on 01.04.2070 3,25,000
Less: Residual Value 25,000
Depreciable amount 3,00,000
Useful life of Machine 5 Years
Depreciation for 2 Years (Rs.3,00,000x2/5) 1,20,000
Book value as on 01.04.2072 2,05,000

12. The depreciation of machinery under two different methods is as given below:
Year SLM (lacs) WDV (lacs)

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1 7.8 21.38
2 7.8 15.80
3 7.8 11.68
4 7.8 8.64
Total 31.2 57.50

What would be the amount of resultant surplus/ deficiency if the company decides to switch
over from WDV method to SLM method after first four years? Also state how you will treat
the same in the Accounts. (Inter Jun. 2009 Q2b- 4 Marks)

Answer
Method of depreciation as per the provisions of NAS 16 and NAS 8 are merely accounting
estimates and therefore changes to depreciation method is accounted for prospectively, i.e. the
carrying number of NRs. 57.50 lakhs are taken as depreciable amount for the rest of the useful
life of the asset.

13. Alex Ltd. intends to set up a solar plant. Alex Ltd. has acquired a dilapidated factory, having
an area of 7,500 acres at a cost of Rs. 70,000 per acre. Alex Ltd. has incurred Rs. 5,000,000 on
demolishing the old factory building thereon. A sum of Rs. 4,357,500 (including 13% VAT)
was realized from sale of material salvaged from the site. Alex Ltd. also incurred Registration
Charges of 5% of Land Value, paid legal and consultancy charges Rs. 500,000 for land
acquisition and incurred Rs. 200,000 on Title Guarantee Insurance. Compute the value of land
acquired to be booked in books of the company.
(CAP Jun. 2019 Q5b-5 Marks)

Answer
Particular Rs in lakhs
Purchase price @ Rs 70,000 per acre for 7,500 acres 5,250.00
Stamp duty & registration charges @5% 262.50
Legal fees 5.00
Title guarantee insurance 2.00
Demolition expenses
Less: Sale of salvaged materials (net of VAT)
(43,57,500× 100/113) = (38.56) 11.44
Value of land 5,530.94

1.9. NAS 17 Leases

1. Write short notes on Minimum Rent and Short workings

(Inter Jun. 2001, Q 6a 4 Marks)
Answer:
Minimum Rent also known as Dead Rent is the minimum amount which the lessee has to pay
for each period even if the mine has not been worked at all or when the output for such period
is below a certain quantity provided for in the agreement.

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Short workings arise when the minimum rent paid is in excess of that amount which would
have been payable on the basis of actual output.

Such short working may be recouped in the future years that means the actual royalty due
will be reduced to the extent of the unrecouped year/years which had shortcomings in the
past.

2. Basic criteria for classification of leases into Operating Lease and Finance Lease.
(June 2007, Q 5c)
Answer:
Leases are classified based on the extent to which risks and rewards incident to ownership of
a leased asset lie with the Lessor or the Lessee.
Risks include the possibilities of losses from idle capacity or technological obsolescence and
of variations in return due to changing economic conditions.
Rewards may be represented by the expectation of profitable operation over the economic life
of the asset and of gain from appreciation in value or realization of residual value.

A lease is called a Finance Lease if it transfers substantially all the risks and rewards incident
to ownership. Title may or may not eventually be transferred. A lease is called an Operating
Lease if it does not transfer substantially all the risks and rewards incident to ownership.

3. Sale and lease back transaction

(CAP Dec. 2010 6a-2 Marks; CAP Dec. 2017 Q6c-3 Marks; CAP Jun. 2009 6e- 4 Marks)
Answer
As per NAS 17 on ‘Leases’, a sale and leaseback transaction involve the sale of an asset by the
vendor and the leasing back of same asset. The lease payments and the sale price are usually
interdependent, as they are negotiated as a package. The accounting treatment of a sale and
lease back transaction depends upon the type of lease involved.
If a sale and leaseback transaction results in a finance lease, any excess of sale proceeds over
the carrying amount shall not be immediately recognized as income by a seller-lessee. Instead
it shall be deferred and amortized over the lease term.
If sale and leaseback transaction results in an operating lease, and it is clear that the transaction
is established at fair value, any profit or loss should be recognized immediately. If the sale price
is below fair value any profit or loss should be recognized immediately except that, if the loss
is compensated by future lease payments at below market price, it should be deferred and
amortized in proportion to the lease payments over the period for which the asset is expected
to be used. If the sale price is above fair value, the excess over fair value should be deferred
and amortized over the period for which the asset is expected to be used.

4. Lease (CAP Dec. 2013 6d-2.5 Marks)

Answer

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A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or
series of payments the right to use an asset for an agreed period of time. A lease, based on the
features of the agreement can be classified as follows:
Finance Lease: A finance lease is a lease that transfers substantially all the risks and rewards
incidental to ownership of an asset. Title may or may not eventually be transferred. There are
certain conditions that are to be satisfied under NAS 17 for a lease to be classified as finance
lease.
Operating Lease: An operating lease is a lease other than a finance lease

5. A machine having expected useful life of 6 years is leased for 4 years. Both the cost and fair
value of the machinery are Rs. 17,00,000. The amount will be paid in 4 equal installments and
at the termination of lease, lessor will get back the machinery. The unguaranteed residual value
at the end of the 4th year is Rs. 1,70,000. The IRR of investment is 10%. The present value of
annuity factor of Rs. 1 due at the end of 4th year at 10% IRR is 3.169. The present value of Rs.
1 due at the end of 4th year at 10% rate of interest is 0.683.
State with reason on the basis of your calculation, whether the lease constitutes finance lease
or not. (CAP Dec. 2018 Q5c-5 Marks)

Answer
As per NAS 17 on "Leases", one of the situations that individually or in combination would
normally lead to a lease being classified as a finance lease is that if at the inception of the
lease the present value of the minimum lease payment amounts to at least substantially all of
the fair value of the leased asset.
Determination of nature of lease Rs.
Fair value of asset is Rs. 17,00,000 and unguaranteed residual value is Rs.1,70,000
Present value of residual value at the end of 4th =1,70,000*0.683 =1,16,110
year
Present value of lease payment recoverable = 17,00,000–1,16,110 =15,83,890
The percentage of present value of lease
payment to fair value of the asset is = (15,83,890/17,00,000) *100% =93.17%

Since the present value of minimum lease payment substantially cover the major portion of
fair value of leased assets and life of the asset, the lease transaction meets the definition of
finance lease as per NAS -17. Hence, it constitutes a finance lease.

6. Finance lease (Inter Jun. 2012 Q6d-5 Marks; CAP Jun. 2017 6e-3 Marks)
Answer:
A finance lease is lease that transfers substantially all the risks and rewards incidents to
ownership of an asset. Title may or may not eventually transferred.
Whether a lease is a finance lease or an operating lease depends on the substance of the
transaction rather than the form of the contract.1 Examples of situations that individually or
in combination would normally lead to a lease being classified as a finance lease are:

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a) the lease transfers ownership of the asset to the lessee by the end of the lease term;
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently
lower than the fair value at the date the option becomes exercisable for it to be reasonably
certain, at the inception of the lease, that the option will be exercised;
c) the lease term is for the major part of the economic life of the asset even if title is not
transferred;
d) at the inception of the lease the present value of the minimum lease payments amounts to
at least substantially all of the fair value of the leased asset; and
e) the leased assets are of such a specialized nature that only the lessee can use them without
major modifications.
Indicators of situations that individually or in combination could also lead to a lease being
classified as a finance lease are:
a) if the lessee can cancel the lease, the lessor’s losses associated with the cancellation are
borne by the lessee;
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee
(for example, in the form of a rent rebate equaling most of the sales proceeds at the end of
the lease); and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is
substantially lower than market rent.

7. Following figures represent expected production of a machinery taken on 5 years’ operating

lease:
Years Lease Amount (Rs) Production (MT)
1 15,000 13,000
2 35,000 21,000
3 50,000 34,000
4 47,000 32,500
5 44,500 30,000
191,500 130,500
Required:
Pass necessary journal entries in the books of lessee for initial two years.
(CAP Jun. 2010 Q4b- 5 Marks)
Answer
a) Lease rental to be recognized as expense in proportionate to units of production.
Here, Total lease rental for 5 years= Rs.191,500
Total Production for 5 years=130,500

Hence, Lease rental to be charged in 1st year=Rs. 13,000/130,500 X 191,500= Rs.19,077

Lease rental to be charged in 2nd year=Rs. 21,000/130,500 X 191,500=Rs.30,816

Journal Entries in the books of lessee for first and second year:
First Year
a) Lease Rent Dr 15,000
To Bank Cr. 15,000

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(Being Lease rent for the first year of lease paid)

b) Lease Rent Dr 4,077

To Lease Rent Adjustment Ac Cr 4,077
(Being adjustment of lease rent for the year)

Second Year
a) Lease Rent Dr. 35,000
To Bank Cr. 35,000
(Being Payment of Lease rent for the year)

b) Lease Rent Adjustment Dr. 4,184

Lease Rent Expenses Dr. 30,816
To Lease Rent Cr. 35,000
(Being recognition of lease rent as expense for the year)

8. Initial recognition of finance lease in the financial statement of Lessee.

(CAP Jun. 2014 Q6d- 2.5 Marks)
Answer
At the commencement of the lease term, lessees shall recognize finance lease as assets and
liabilities at amount equal to the fair value of the lease property or, if lower, the present value
of the minimum lease payments, each determined at the inception of the lease. The discount
rate to be used in calculating the present value of the minimum lease payments is the interest
rate implicit in the lease, if practicable to determine; if not, the lessee’s incremental borrowing
rate shall be used. Any initial direct cost of the lessee is added to the amount as the asset.

9. M/s. Zipee Traders sold a car to a customer on installment sales basis.

The sales price of the car is Rs. 6,000,000.
The customer was required to pay following:
Shrawan Down Payment (At the
01, 2072 time of delivery) 3,000,000
Shrawan (includes Interest of
01, 2073 At the end of Year 1 1,860,000 Rs. 360,000)
Shrawan (includes Interest of
01, 2074 At the end of Year 2 1,680,000 Rs. 180,000)
Total Amount 6,540,000
M/s. Zipee Traders booked the entire Rs. 6,540,000 as sales on Shrawan 01, 2072. With
reference to the applicable NAS, explain whether the accounting treatment of M/s. Zipee
Traders is justifiable or not. (CAP Jun. 2016 Q5a- 5 Marks)

Answer

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Under the provisions of NAS 17 Leases, Manufacturer or dealer lessors shall recognize selling
profit or loss in the period, in accordance with the policy followed by the entity for outright
sales. The lessor, under finance lease is required to recognize receivable at an amount equal to
Net investment in the lease and finance income should be recognized shall be based on a pattern
reflecting constant periodic return on the net investment in the lease.

The recognition of entire amount of Rs. 6,540,000 as sales is not in line with the
aforementioned provisions. Zipee Traders should recognize sales to the extent of Rs. 6,000,000
at the time of the sales whereas the balance of 540,000 should be recognized as finance income
over the period of the lease.

10. Sagun Ltd. took a factory premises on lease on 01.04.2073 for Rs. 1, 00,000 per month. The
lease is operating lease. During Ashadh, 2074, Sagun Ltd. relocates its operation to a new
factory building. The lease of the old factory premises continues to live up to 31.12.2076. The
lease cannot be cancelled and cannot be sub-let to another user. The auditor insists that lease
rent of balance 33 months up to 31.12.2076 should be provided in the accounts for the year
ending 31.03.2074. Sagun Ltd. seeks your advice. (CAP Jun. 2017 Q5a-5 Marks)

Answer
In accordance with the provisions of NAS 37 ‘Provisions, Contingent Liabilities and
Contingent Assets’, if an enterprise has a contract that is onerous, the present obligation
under the contract should be recognized and measured as a provision. An onerous contract is a
contract in which the unavoidable cost of meeting the obligations under the contract exceed the
economic benefit expected to be received under it.
In the given case, the operating lease contract has become onerous as the economic benefit of
lease contract for next 33 months up to 31.12.2076 will be nil. However, the lessee, Sagun Ltd.,
has to pay lease rent of Rs.3, 300,000 (i.e. Rs.100, 000 p.m. for next 33 months). Therefore,
provision on account of Rs.3, 300,000 is to be provided in the accounts for the year ending
31.03.2074.

Hence auditor’s contention to provide for the lease rent of balance 33 months up to 31.12.2076
in the accounts for the year ending 31.03.2074 is correct.

1.10. NAS 18 Revenue

1. X Limited has recognized Rs. 10 lakhs, on accrual basis, income from dividend on units of
mutual funds of the face value of Rs. 50 lakhs held by it as at the end of the financial year 31st
March, 2006. The dividends on mutual funds were declared at the rate of 20% on 15th June,
2006. The dividend was proposed on 10th April, 2006 by the declaring company. Whether the
treatment is as per the relevant Accounting Standard? (Inter Dec 2006, Q1b-4 Marks)

Answer

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NAS-18 Revenue, states that dividends should be recognized when the shareholders' right to
receive payment is establishment. In the given case, the dividend is proposed on 10th April
2006, while it is declared on 15th June 2006. Hence, the right to receive payment is established
on 15th June 2006. As per the above-mentioned paragraph, income from dividend on units of
mutual funds should be recognized by X Ltd. in the financial year ended on 31st March 2007.

2. A National Finance Company Ltd. recognized Rs. 5 lakhs, on accrual basis, income from
dividend during the year 2071/72, on shares of the face value of Rs. 25 lakhs held by it in
Everest Bank Ltd. as at 31st Ashadh, 2072. Everest Bank Ltd. proposed dividend @ 20% on
25th Shrawan, 2072. However, dividend was declared on 30th Ashoj 2072. Financial Statement
of the National Finance Company was approved on 15th Kartik, 2072 by the Board of Directors
of the company. Please state with reference to relevant Nepal Accounting Standard whether
the treatment accorded by National Finance Company Ltd. is in order.
(CAP Dec. 2015 Q-5c)

Answer
Para 30 of NAS 18 "Revenue" states that dividends shall be recognized when the shareholder's
right to receive payment is established. Thus, an investment in shares dividend income is not
recognized in the statement of Profit or Loss (or other comprehensive income as per the
categorization adopted for the investment) until the right to receive dividend is established.
In the given case, the dividend is proposed on 25th Shrawan, 2072, while it was declared on
30th Ashoj 2072. Hence, the right to receive dividend is established on 30th Ashoj 2072 only.
Therefore, on applying the provisions stated in the standard, income from dividend on shares
should be recognized by National Finance Company Ltd. in the financial year 2072/73 only.

3. Rajesh Suppliers purchased goods on credit from Prakash Hardwares for Rs. 1.5 crores for
export. The export order was cancelled. Rajesh Suppliers decided to sell the same goods in the
local market with a price discount. Prakash Hardwares was requested to offer a price discount
of 15 %. The Chief Accountant of Prakash Hardwares wants to adjust the sales figures to the
extent of the discount requested by Rajesh Suppliers. Discuss whether the treatment is justified.
(CAP Dec. 2013 Q5a-5 Marks)
Answer
Prakash Hardwares has sold goods to Rajesh Suppliers on credit worth Rs. 1.5 Crores and the
sale was completed in all respects. Rajesh Supplier’s decision to sell the same in the domestic
market at a discount does not affect the amount recorded as sales by the Prakash Hardwares.
The discount of 15% offered by Prakash Hardwares after request of Rajesh Suppliers is in the
nature of cash discount and not trade discount. Therefore, Prakash Hardware should record this
as discount provided rather than altering the amount of sales.

4. Vikas Electronics is a manufacturer of LED television sets since past 2 years. It deals in both
wholesale trade via its dealers and retail trade via its showroom located at 15 different places
across the country. Vikas electronics has just received an order from a newly established hotel
for supply of 50 pieces of 32 inches LED sets and 100 pieces of 42 inches LED sets. Vikas
electronics entered into the agreement 3 months ago and all LED sets had already been supplied

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to the hotel. However, the hotel management has found serious flaws on 25 pieces of 32 inches
LED sets and 30 pieces of 42 inches LED sets. Since the warranty period of the television sets
had not expired, the hotel management has decided to return the damaged sets to Vikas
electronics. Vikas electronics seeks your advice as to how to recognize the revenue for this
transaction. Advice the management.
(CAP Dec. 2015 5a)
Answer
Revenue from the sale of goods shall be recognized when all the following conditions
have been satisfied:
(a) the entity has transferred to the buyer the significant risks and rewards of ownership
of the goods;
(b) the entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the transaction will flow to
the entity; and
(e) the costs incurred or to be incurred in respect of the transaction can be measured
reliably.

The customer has returned goods on account of damages during the warranty period. It appears
that the goods were sold under warranty ad not sale on approval basis. Therefore, liability under
warranty does not provide enough ground to implicate that the risk and reward of ownership
had not been transferred to the customer. Therefore, Vikas Electronics should recognize
revenue on the entire transaction. However, it should provide for adequate provision for
liability under warranty and the recent return of goods returned by the customer should be taken
into consideration in estimation of the warranty provision.

5. Shree Ganesh Ltd., a manufacturing company produces durable consumer goods with an
annual turnover of Rs. 100 crores. The company receives orders from its commission agents
all over the country, but goods are dispatched directly to the customers. The documents
including transport bills are sent through the bank for collection. At the end of the 6th year, it
is found that documents covering the dispatch of goods worth Rs. 10 crores were still lying
with the banks not cleared by the customers even though the normal collection period of 15
days from the date of dispatch has expired. Should revenue be recognized in the above case?
(CAP Dec. 2016 5a-5 Marks)
Answer
According to NAS - 18, revenue from the sale of goods shall be recognized when
• the seller of goods has transferred to the buyer the significant risks and rewards
of ownership of the goods;
• the seller retains neither continuing managerial involvement to the degree
usually associated with ownership nor effective control over the goods sold;
• the amount of revenue can be measured reliably.

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• It is probable that the economic benefits associated with the transaction will
flow to the entity; and
• The costs incurred or to be incurred in respect of the transaction can be
measured reliably.
Though the transport bills were sent through bank for collection, the seller neither retains risk
and reward of ownership not has any managerial involvement. The fact that the amount is lying
unpaid after the expiry of normal credit period, does not necessarily implicate that amounts
will not be collected from the debtors. Hence the company is advised to recognize revenue
pertaining to these transactions. However, the fact that collection period has expired indicates
impairment of trade receivables and adequate impairment (provisions) shall be made in this
regard with respect to the debtors.

6. Nepa Roadways has taken a transit insurance policy. Suddenly in the year 2073-2074 the
percentage of accident has gone up to 12% and the company wants to recognize insurance
claim as revenue in 2073-2074 in accordance with relevant Accounting Standard. Do you
agree? (CAP Dec. 2017 Q5b-5 Marks)

Answer
NAS 18 on “Revenue” defines revenue as “gross inflow of economic benefits during the period
arising in the course of the ordinary activities of an entity when those inflows result in increases
in equity, other than increases relating to contributions from equity participants”
To recognize revenue NAS 18 requires that revenue arises from ordinary activities and that it
can be measured reliably and it is probable that the economic benefits associated with the
transaction will flow to the entity.
In the given case, Nepa Roadways wants to recognize insurance claim because it has increased
over the previous year. However, the claim is not to be in the course of ordinary activity of the
company and therefore Nepa Roadways is not advised to recognize the Insurance claim as
revenue. It may however be required to separately disclose the amount of income generated
from transit insurance claim based on materiality.

7. How do you recognize income arising from following events:

i) Instalment sales, under which the consideration is receivable in instalments.
ii) Admission fees.
iii) Installation fees.
(Inter. Dec. 2009 Q2b-3 Marks)
Answer
Instalment sales, under which the consideration is receivable in instalments
The amount of revenue that would be recognized on outright sales transaction is recorded as
revenue as per NAS 17 Leases. The balance of amount received against recognized sales is
recognized as finance income on a systematic basis over the lease term.

Admission fees

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Revenue from artistic performances, banquets and other special events is recognized when the
event takes place. When a subscription to a number of events is sold, the fee is allocated to
each event on a basis which reflects the extent to which services are performed at each event.

Installation fees
Installation fees are recognized as revenue by reference to the stage of completion of the
installation, unless they are incidental to the sale of a product in which case, they are recognized
when revenue from the sale of goods is recognized.

8. On 25th September, 2010, Planet Advertising Limited obtained advertisement rights for World
Cup Hockey Tournament to be held in December, 2010 and January 2011 for Rs. 520 Lakhs.
They furnish the following information:
i) The company obtained the advertisements for 70% of available time for Rs. 700 Lakhs by
30th September, 2010.
ii) For the balance time they got bookings in October, 2010 Rs. 240 Lakhs.
iii) All the advertisers paid the full amount at the time of booking the advertisements.
iv) 40% of the advertisements appeared before the public in December 2010 and balance 60%
appeared in the month of January 2011.
v) Planet Advertising Limited follows Accounting year January-December.
You are required to calculate the amount of profit / loss to be recognized for the year 2010 and
2011 as per Nepal Accounting Standard- Revenue. (Inter Dec. 2011 Q5a-5 Marks)

Answer
As per paragraph NAS – 18 'Revenue' when the outcome of a transaction involving the
rendering of services can be estimated reliably, revenue associated with the transaction should
be recognized by reference to the stage of completion.

In the given problem, 40% of the advertisement appeared before the public in December, 2010
and balance 60% appeared in January, 2011.
Total profit will be computed as follows:
Rs. in Lakhs
th
Advertisement for 70% of available time obtained by 30 Sep. 2010 700
Advertisement for 30% of available time obtained by Oct. 2010 240
Total 940
Less: Cost of advertising rights 520
Profit 420
The profit amounting to Rs. 420 lakhs should be apportioned in the ratio of 40 : 60 for
the year 2010 and 2011. Thus, the company should recognize Rs. 168 lakhs (40%) in
the year 2010 and rest Rs. 252 lakhs (60%) in the year 2011.

9. What are the conditions that have to be satisfied for recognition of revenue from sale of
goods? (CAP Jun. 2011 Q5b- 5 Marks; Inter Jun. 2003 Q9f- 3 Marks)
Answer

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As per NAS 18, Revenue from Sale of goods shall be recognized when all the following
conditions have been satisfied:
i. The entity has transferred to the buyer the significant risks and rewards of ownership of
goods;
ii. The entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;
iii. The amount of revenue can be measured reliably;
iv. It is probable that the economic benefits associated with the transaction will flow to the
entity; and
v. The cost incurred or to be incurred in respect of the transaction can be measured reliably.

10. Rajesh Brothers sells their goods to their approved customers on “Sale or Return” basis treating
all such transactions as actual sales at the time of dispatch. They sent on 15th December goods
costing Rs. 10,000 to Rama Stores at 20% profit on sale and passed the goods through Sales
Day Book. How would you adjust the transaction on 31st December, if Rama Store’s consent
is pending? (CAP Jun. 2012 Q4a– 5 Marks)

Answer
Rs.
Cost of goods sent to customers 10,000
Add: 20% Profit on sales i.e. 25% on cost. 2,500
Selling price of goods sent to customer 12,500

As stated in the question, Rajesh Brothers sells their goods to approved customers on "Sale or
Return" basis treating all such transactions as actual sales at the time of dispatch. So following
journal entry must have been passed at the time the goods were sent to Rama Stores:
Dr Cr
Date Particulars
Rs. Rs.
th
15 December Rama Stores Dr 12,500
To Sales A/c 12,500
st
Since Rama Store's consent has not been received till 31 December, following adjustment
entry needs to be passed on 31st December:
Dr Cr
Date Particulars
Rs. Rs.
st
31 December (a) For cancellation of sale:
Sales A/c Dr 12,500
To Rama Stores 12,500
(Being reversal of sales for goods lying with
Rama Stores earlier treated as sales)
(b) For recording stock with customer at
cost:
Stock with customers Dr 10,000
To Inventory A/c 10,000

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(Being goods with Rama Stores recorded as

stock with customer)

11. The following information are related with Purple Nepal Ltd.
i) Goods of Rs. 60,000 were sold on 20-3-2074 but at the request of the buyer these were
delivered on 10-4-2074.
ii) On 15-3-2074 goods of Rs. 1,50,000 were sent on consignment basis of which 20% of the
goods unsold are lying with the consignee as on 31-3-2074.
iii) Rs. 1,20,000 worth of goods were sold on approval basis on 1-12-2073. The period of
approval was 3 months after which they were considered sold. Buyer sent approval for
75% goods up to 31-1-2074 and no approval or disapproval received for the remaining
goods till 31-3-2074.
iv) Apart from the above, the company has made cash sales of Rs. 7,80,000 (gross). Trade
discount of 5% was allowed on the cash sales.
You are required to advise the accountant of Purple Nepal Ltd. with valid reasons, the amount
to be recognized as revenue in above cases in the context of NAS -18 and also determine the
total revenue to be recognized for the year ending 31-3-2074.
(CAP Jun. 2018 Q5a-5 Marks)
Answer
As per NAS 18, Revenue from Sale of goods shall be recognized when all the following
conditions have been satisfied:
i. The entity has transferred to the buyer the significant risks and rewards of ownership of
goods;
ii. The entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;
iii. The amount of revenue can be measured reliably;
iv. It is probable that the economic benefits associated with the transaction will flow to the
entity; and
v. The cost incurred or to be incurred in respect of the transaction can be measured reliably.

In case (i):
The sale is complete but delivery has been postponed at buyer's request. Purple Nepal Ltd.
should recognize the entire sale of Rs. 60,000 for the year ended 31st Ashadh, 2074.

In case (ii):
20% goods lying unsold with consignee should be treated as closing inventory and sales should
be recognized for Rs. 1,20,000 (80% of Rs. 1.50,000). In case of consignment sale revenue
should not be recognized until the goods are sold to a third party.

In case (iii):
In case of goods sold on approval basis, revenue should not be recognized until the goods have
been formally accepted by the buyer or the buyer has done an act adopting the transaction or
the time period for rejection has elapsed or where no time has been fixed, a reasonable time

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has elapsed. Therefore in case (iii) revenue should be recognized for the total sales amounting
Rs.1,20,000 as the time period for rejecting the goods had expired.

In case (iv):
Trade discounts given should be deducted in determining revenue. Thus Rs. 39,000 should be
deducted from the amount of turnover of Rs.7,80,000 for the purpose of recognition of revenue.
Thus, revenue should be Rs. 7,41,000.

Thus total revenue amounting Rs. 10,41,000 (60,000+1,20,000+1,20,000+7,41,000) will be

recognized for the year ended 31st Ashadh, 2074 in the books of Purple Nepal Ltd.

12. On 1st Shrawan 2071, Dillibazar Furniture sold some furniture to his regular customer M/S
Zebra for Rs. 400,000 with three years interest-free credit. Dillibazar Furniture’s cost of capital
is 8%. You are required to advise how much revenue should be recognized in fiscal year ending
on Ashadh 2072, 2073 and 2074 in accordance with NAS 18?
(CAP Jun. 2019 Q5c-5 Marks)
Answer
On Shrawan 2071, sales revenue will be Rs. 317,532.90 i.e. (400,000×1/(1.08)3 . Also,
Dillibazar Furniture will recognize interest income of Rs. 25,402.63 i.e. 317,532.90 ×8% on
Ashadh 2072.

In 2073 Ashadh, interest income will be Rs. 27,434.84 i.e. (317,532.90+25,402.63)×8%.

In 2074 Ashadh, remaining amount out of Rs. 400,000 i.e. Rs. 29,629.63 will be
recognized as interest income.

1.11. NAS 20 Accounting for Government Grant & Disclosure of Government

Assistance

1. X Ltd. received a grant of Rs. 2 crores from the Government for the purpose of installation of
special machinery during F/Y 2062/063. The cost of Machinery was Rs. 20 crores and it had a
useful life of 9 years. During F/Y 2066/067, the grant has become refundable due to non-
fulfillment of certain conditions attached to it. Assuming the entire grant was deducted from
the cost of machinery in the year of acquisition, state with reasons, the accounting treatment to
be followed in the year 2066/067. (CAP Dec. 2010 Q5b-5 Marks)

Answer
As per NAS 20, the amount refundable in respect of a government grant related to assets is
recorded by increasing the book value of the asset by the refund amount. Also, the cumulative
additional depreciation that would have been recognized in profit or loss to date in the absence
of the grant shall be recognized immediately in profit or loss. The accounting treatment is given
as Journal Entry as follows:

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Machinery Dr. 2
Depreciation Dr. 0.89
Accumulated Depreciation 0.89
Grant Repayable 2

Working:
Grant Grant Not
Particulars
Received Received
Cost of Machinery 20 20
Less: Grant 2 -
Depreciable Amount 18 20
Annual Depreciation 18/9 = 2 20/9 = 2.22
Depreciation charged till 2065/66 8 8.89
Book Value 10 11.11

Note: The annual depreciation from FY 2065/66 onwards will be 2.22 crores.

2. GP Ltd. received a grant of Rs. 40 lakhs from the Government for the purpose of special
machinery during fiscal year 2064-065. The cost of machinery was Rs. 400 lakhs and had a
useful life of 10 years. During fiscal year 2068-069, the grant has become refundable due to
non-fulfillment of certain conditions attached to it. Assuming the entire grant was deducted
from the cost of machinery in the year of acquisition; state with reason, the accounting
treatment to be followed in the fiscal year 2068-069. (CAP Dec. 2012 4c-5 Marks)

Answer:
As per NAS 20, the amount refundable in respect of a government grant related to assets is
recorded by increasing the book value of the asset by the refund amount. Also, the cumulative
additional depreciation that would have been recognized in profit or loss to date in the absence
of the grant shall be recognized immediately in profit or loss. The accounting treatment is given
as Journal Entry as follows:

The computation of depreciation and expense can be given as:

Cost of Machinery Rs. 400 lacs
Less: Grant Received Rs. 40 lacs
Cost of Machinery Rs. 360 lacs
Useful life of Machinery 10 years
Depreciation per year as per straight line method (Assuming residual value to be zero Rs. 360
lacs/10 = Rs. 36 lacs
Total depreciation for 4 years (2064/65 to 2067/68) = 36×4 =Rs. 144 lacs

Cost of machinery without government grants Rs. 400 lacs

Useful life of Machinery 10 years
Depreciation that would have been recognized in absence of grant Rs. 400/10 = 40 Lacs

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Cumulative total depreciation that would have been recognized in absence of grant=40×4 =160
lacs
Expenses to be recognized in FY 2068/069 = 160 lacs – 144 lacs=16 lacs

Depreciation to be charge for another 6 years = (400 – 160)/6

Amount of depreciation as an expense for 2068/069 = 40 + 16 = 56 lacs
Depreciation for remaining 5 years = 40 lacs per year

3. A Ltd. received a grant of Rs 2 crores from the Government for purchase of a special purpose
machinery during 2062-063. The cost of machinery was Rs 38 crores and had a useful life of
9 years. During the current year 2065-066 the grant has become refundable due to non-
fulfillment of certain conditions attached to it. Assuming that the entire amount of grant was
deducted from the cost of machinery in the year of acquisition, state with reasons, the
accounting treatment to be followed in the rear 2065-066
(CAP Jun. 2011 Q5c- 5 Marks)
Answer
Value of asset (Without grant) = Rs.38 crore
Depreciation (Without Grant) = Rs.38 crore/9years
= 4.22 crore per year
As per NAS, the additional depreciation needs to be charge of expenses. Hence,
Already charge Depreciation
Book value (before refund of grant) = Rs 20 crore
(assuming SLM method and no residual value, annual depreciation will be Rs.(38-2)/9 = Rs. 4
crore, depreciation for 4 years will be Rs.16 crore
Additional Depreciation for 4 years = (4.22×4)-(4×4)
(change as expenses for current year = 16.88-16=0.88 crore
Revises book Value = 38-16.88 =21.12 crore, Depreciation for next 5 year =4.22

4. Discuss accounting treatment of repayment of Government Grants as per NAS 20.

(CAP Jun. 2013 Q5b–5 Marks)
Answer
A government grant that becomes repayable shall be accounted for as a change in accounting
estimate. Repayment of a grant related:
(a) to income shall be applied first against any unamortized deferred credit recognized in
respect of the grant. To the extent that the repayment exceeds any such deferred credit, or
when no deferred credit exists, the repayment shall be recognized immediately in profit or
loss.
(b) (b)to an asset shall be recognized by increasing the carrying amount of the asset or
reducing the deferred income balance by the amount repayable. The cumulative
additional depreciation that would have been recognized in profit or loss to date in the
absence of the grant shall be recognized immediately in profit or loss.

5. Presentation of ‘Government Grant related to Assets’ in Financial Statement.

(CAP Jun. 2016 Q6a - 3 Marks)

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Answer
Government grants related to assets, including non-monetary grants at fair value, shall be
presented in the statement of financial position either by setting up the grant as deferred income
or by deducting the grant in arriving at the carrying amount of the asset.
One method sets up the grant as deferred income which is recognized as income on
a systematic and rational basis over the useful life of the asset.
The other method deducts the grant in arriving at the carrying amount of the asset.
The grant is recognized as income over the life of a depreciable asset by way of a
reduced depreciation charge.

1.12. NAS 21 The Effects of Changes in Foreign Exchange Rates

1. Carlin Co. has head office at New York (USA) and branch at Kathmandu, Nepal. Nepal
branch is an integral foreign operation of Carlin & Co. Nepal branch furnishes you with its
trial balance as on 31st March, 2006 and the additional information given there after:
Debit Credit
Particulars NRs NRs
Stock on 1st April,2005 300,000.00 -
Purchases and Sales 800,000.00 1,200,000.00
Sundry Debtors and Creditors 400,000.00 300,000.00
Bills of exchange 120,000.00 240,000.00
Wages and Salaries 560,000.00 -
Rent, rates and taxes 360,000.00 -
Sundry charges 160,000.00 -
Computers 240,000.00 -
Bank balance 420,000.00 -
New York office a/c - 1,620,000.00
Total 3,360,000.00 3,360,000.00

Additional Information
a) Computers were acquired from a remittance of US $6,000 received from New York
head office and paid to the supplier. Depreciate computers at 60% for the year.
b) Unsold stock of Nepal branch was worth NRs. 420,000 on 31st March ,2006.
c) The rates of exchange may be taken as follows:
# on 1.4.2005 @ Rs 40 per US$
# on 31.3.2006 @ Rs42 per US $
# Average exchange rate for the year @ Rs 41 per US $
#conversion in $ shall be made up to two decimal accuracy

You are asked to prepare in US dollars the revenue statement for the year ended 31st March,
2006 and the Statement of Financial Position as on that date of Nepal branch as would appear
in the books of New York head office of Carlin & Co

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You are informed that Nepal branch account showed a debit balance of US $ 39,609.18 on
31.3.2006 in New York books and there were no items pending reconciliation.
(CAP Jun. 2009 Q2- 16 Marks)
Answer
CARLIN & CO. Ltd.
Statement of Profit or Loss
Of Kathmandu, Nepal Branch
For the year ended 31st March, 2006

Particulars Amount (NRs.) Amount (USD)

Sales 1,200,000.00 29268.29
COGS
OS 300,000.00 7500
Purchases 800,000.00 19512.2
Closing Stock -420,000 680,000.00 -10000 17,012.20
Wages and Salaries 560,000.00 13658.54
Rent, rates and taxes 360,000.00 8780.49
Sundry charges 160,000.00 3902.44
Depreciation 144000 3512.2
Net Profit/Loss -704,000.00 -17,597.58

Statement of Other Comprehensive Income

Particulars Amount
Net Profit as per SOPL (17,597.58)
Translation Gain 835.66
Total Comprehensive Income (16,761.92)

CARLIN & CO. Ltd.

Kathmandu, Nepal Branch
Statement of Financial Position as on 31st March 2006
Assets Amount (NRs.) Amount (USD)
Bank 420,000.00 10,000
Sundry Debtors 400,000.00 9,523.81
Bills Receivable 120,000.00 2,857.14
Inventory 420,000.00 10,000
Computers 240,000.00
Acc. Dep -144000 96,000.00
Total 1,456,000.00 34,666.66

Equity & Liabilities

Head Office 1,620,000.00 38,571.43
Accumulated Loss -704,000.00 -17,597.58

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Translation Reserve 0.00 835.66 -16,761.92

Sundry Creditors 300,000.00 7,142.86
Bills Payable 240,000.00 5,714.29
Total 1,456,000.00 34,666.66

Notes: As per the requirements of NAS 21, foreign operation has been translated as follows:
- Items of P/L translated on average rate (except closing stock which is translated on
closing rate)
- Items of SFP translated on closing rate
- Equity has been translated using closing rate. As NAS 21 does not clearly state
requirement of translation of equity, translation at closing rate is the best alternative as
all assets/liabilities represented by equity are translated at closing rate.
- Translation gain has been recognized directly in equity under Translation Reserve. The
transfer should be made through Statement of Other Comprehensive Income.

2. Following Figure relates to a Company:

Exchange Rate per $
Goods purchased on 1.1.2065 of $ 10,000 Rs. 75
Exchange rate as on 31.03.2065 Rs. 74
Date of actual payment 07.07.2065 Rs. 73
Ascertain the loss/gain for financial year 2064-65 and 2065-66. Also give the treatment as per
NAS-21.
(Inter Jun. 2010 Q5b- 5 Marks)
Answers:
As per NAS 11 on 'The Effects of Changes in Foreign Exchange Rates' all foreign currency
transactions should be recorded applying the exchange rate on the date of transactions. Thus,
goods purchased on 1.1.2065 and corresponding creditor would be recorded at Rs.750000
(i.e.$10,000* Rs. 75)

According to the standard, at the reporting date, all monetary items should be reported using
the closing rate. Thus, creditor US $ 10000 on 31.03.2065 will be reported at Rs.740,000 (i.e.$
10,000*Rs.74) and exchange profit of Rs.10000(i.e.750,000 – 740,000) should be recognized
in Profit or Loss for the year 2064-65.

On 07.07.2065, creditor of $10,000 is paid at the rate of Rs. 73. Exchange difference on
settlement of the account should also be recognized in Profit or Loss Account .Therefore,
Rs.10000 (i.e.740000- 730000) is recognized in Profit or Loss for the year 2065/66

3. Megha Ltd., Kathmandu, have a branch in Sydney, Australia. At the end of 31st March, 2011,
the following ledger balances have been extracted from the books of the Kathmandu Office
and the Sydney Office:

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 CAP II Paper 1: Advanced Accounting

Kathmandu Sydney
(Rs. in thousands) ( Australian dollars in
thousands)
Debit Credit Debit Credit
Share Capital 2000
Reserves and Surplus 1000
Land 500
Buildings (Cost) 1000
Buildings Acc. Depreciation 200
Plant & Machinery ( Cost) 2500 200
Plant & Machinery Acc. Depreciation 600 130
Debtors and Creditors 280 200 60 30
Stock (1.4.2010) 100 20
Branch Stock Reserve 4
Cash & Bank Balances 10 10
Purchase and Sales 240 520 20 123
Goods Sent to Branch 100 5
Managing Director's Salary 30
Wages & Salaries 75 45
Rent 12
Office Expenses 25 18
Commission Receipts 256 100
Branch / H.O. Current Account 120 7
4880 4880 390 390

The following information is also available:

a) Stock as at 31.03.2011 ;
Kathmandu Rs. 150000
Sydney A $ 3,125
b) Head office always sent goods to the branch at cost plus 25%.
c) Provision is to be made for doubtful debts at 5%.
d) Depreciation is to be provided on building at 10% and on plant and machinery at 20% on
written down values.
e) The managing director is entitled to 2% commission on net profits before provision for
doubtful debts.
f) Income- tax is to provide at 47.5%.

You are required:

To convert the branch trial balance into rupees, use the following rates of exchange:
Opening rate A $ = Rs. 20
Closing rate A $ = Rs. 24
Average rate A $ = Rs. 22
For fixed assets A $ = Rs. 18

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To prepare the Statement of Profit or Loss for the year ended 31st March, 2011 showing to the
extent possible head office result and branch results separately. (Balance Sheet not required.)
(Inter Jun. 2011 Q2- 15 Marks)
Answer
Megha Ltd
Trial Balance of Sydney Branch
Sydney Sydney
(Australian dollars Nepalese Rupees
Particulars Rate
in thousands) in Thousand
Debit Credit Debit Credit
Plant & Machinery ( Cost) 200 24 4800 0
Cost
Acc. Depreciation 144 24 0 3456
Debtors and Creditors 57 30 24 1368 720
Cash & Bank Balances 10 24 240 0
Sales 123 22 0 2706
COGS 0 0
Stock (1.4.2010) 20 20 400 0
Purchases 20 22 440 0
Goods Sent to Branch 5 100 0
CS -3.125 24 -75 0
Wages & Salaries 45 22 990 0
Rent 12 22 264 0
Office Expenses 18 22 396 0
Commission Receipts 100 22 0 2200
Branch / H.O. Current Account 7 24 0 168
Depreciation (for the year) 14 22 308 0
Provision for doubtful debts 3 22 66 0
Translation Gain 122
Closing Inventory 3.125 24 75 0
Total 404 404 9372 9372

Statement of Profit or Loss

For the Year ended 31.03.2011
Branch
Particulars HO Total
$ Rate Rs
Sales (plus branch stock res) 524 123 22 2,706 3,230
Goods Sent to Branch 100 - 100
COGS
OS 100 20 20 400 500
Purchases 240 20 22 440 680
Goods from HO - 5 - 100 100
CS (150) (3) 24 (75) (225)

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Gross Profit 434 81 - 1,841 2,275

Commission 256 100 22 2,200 2,456
Managing Director's Salary (30) - 22 - (30)
Wages & Salaries (75) (45) 22 (990) (1,065)
Rent (12) 22 (264) (264)
Office Expenses (25) (18) 22 (396) (421)
Provision for debtors (14) (3) 22 (66) (80)
Depreciation (460) (14) 22 (308) (768)
86 89 2,017 2,103
MD’s Commission 43
Profit Before Tax 2,060
Current Tax Expense 978.5
Net Profit 1,081.5
Translation Gain 122
Total Comprehensive Income 1,203.5
* Note: Gain is not recognized in P/L but shown under separate component of equity through
transfer from statement of other comprehensive Income. Separate SOCI has not been prepared
as question does not have the requirement

Rate given for "Fixed Assets" is not relevant.

Working Notes:-

Computation of tax liability and MD’s bonus

Profit as per above 2,103
Less: Unrealized profit on stock (15)
Add: Provision for doubtful debts 80
Bonus Eligible Figure 2168
Bonus @2% 43
Profit Before tax 2,060

Calculation of Depreciation : H.O Branch

A. Building – cost 1000
Less: Depreciation Provision 200
800
Depreciation @ 10% 80
B. Plant & Machinery , cost 2500 3600
Less: Depreciation Provision 600 2340
1900 1260
Depreciation @ 20% 380 252
Total depreciation (A.+B) 460 252

Calculation of Branch Stock Reserve :

Closing Stock 75

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Reserve on closing stock (75×1/5) 15

4. A Ltd. Purchased non-current assets costing Rs. 850 Lakhs on 1.1.2069. This was financed by
foreign currency loan (U.S. Dollars) payable in three equal instalments. Exchange rates were
$1=Rs. 85 and Rs. 88 as on 1.1.2069 and 31.3.2069. First instalment was paid on 31.3.2069.
You are required to state, how these financial transactions would be accounted for?
(CAP Jun. 2013 Q4c –5 Marks)
Answer:
As per NAS-21: The Effects to Changes in Foreign Exchange Rates, exchange
differences arising on the settlement of monetary items or on reporting an enterprise
monetary items at rates different from those at which they were initially recorded during
the period, or reported in previous financial Statements, should be recognized as income
or expense in the period they arise. Thus, exchange differences arising on repayment of
liabilities incurred for the purpose of acquiring fixed assets are recognized as income or
expense.

Calculation of Exchange Difference:

Foreign Currency Loan = Rs 850 Lacs / Rs 85 = $10 Lacs
Exchange Difference = $ 10 Lacs X (88-85) = Rs 30 Lacs
Loss due to exchange difference amounting to Rs 30 Lacs should be charged to Profit &
Loss for the year ended 31.03.2069.

5. A Company purchased non-current costing Rs. 50,88 lakhs on 1st Shrawan 2069 and the same
was fully financed by foreign currency loan in U.S. Dollars, repayable in four equal annual
installments. Exchange rate at the time of purchase was 1 US Dollar Rs. 84.80. The first
installment was paid on 31 Ashadh 2070 when 1 US Dollar 90.80. The entire loss on exchange
was included in cost of goods sold of normal business operations. The Company provides
depreciation on their assets at 20% on WDV basis. Show the correct accounting treatment with
reference to relevant accounting standards. (CAP Jun. 2014 Q4c- 5 Marks)

Answer
As per NAS 21 ‘The Effects of changes in Foreign Exchange Rates’, foreign currency non-
monetary items which are carried in terms of historical cost denominated in a foreign currency
should be reported using the exchange rate at the date of the transaction and exchange
differences arising on the settlement of monetary items or on reporting an enterprise’s monetary
items at rates different from those at which they were initially recorded during the period, or
reported in previous financial statements, should be recognized as income or as expense in the
period in which they arise. Foreign currency loss will be computed as Rs. 360 lakhs {$60 lakhs
[5088 Lakhs/84.80] x (Rs. 90.80-Rs. 84.80)}. The entire loss on exchange difference of Rs.
360 lakhs should be recognized as an expense for the year ended 31st Ashadh 2070 and should
not be included in the cost of goods sold. Depreciation on assets amounting Rs. 1,017.60 lakhs
(20% of 5088 lakhs) should be provided for in the financial statements for the year ended 31st
Ashadh 2070.

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6. Gorkha Company Ltd. imported raw materials worth USD 9,000 on 24th Jestha, 2074, when
the exchange rate was Rs.104 per USD. The transaction was recorded in the books at the above
mentioned rate. The payment of the transaction was made on 10th Shrawan, 2074, when the
exchange rate was Rs.108 per USD. At the year-end 31st Ashadh, 2074, the rate of exchange
was Rs.109 per USD.

The Account Officer of the company passed an entry on 31st Ashadh, 2074 adjusting the cost
of the raw material consumed for the difference between Rs.108 and Rs.104 per USD. Discuss
whether this treatment is justified as per the provision of NAS-21.
(CAP Jun. 2018 Q5c-5 Marks)
Answer
As per NAS-21, “The effects of changes in foreign exchange rates”,
(i) Initial recognition of a foreign currency transaction is done in the functional currency, by
applying the spot exchange rate between the functional currency and foreign currency at
the date of the transaction.
(ii) At the end of each reporting period, foreign currency monetary items shall be translated
using the closing rate.
(iii)Exchange difference arising on settlement of monetary items or on translating monetary
items at rates different from those at which they were translated on initial recognition
during the period or in previous financial statement shall be recognized in profit and loss
in the period in which they arise.
In the given case, at the date of transaction the raw material purchased and its creditors will be
recorded at USD 9,000×Rs.104= Rs. 936, 000.
At the end of the reporting period, such transaction is reported at closing rate of exchange,
hence it will be valued at the closing rate i.e. Rs.109 per USD (USD 9,000×Rs.109=Rs.981,
000)
The difference of exchange rate between the closing date and transaction date is Rs.5 per USD
(i.e. Rs. 109-Rs.104). The difference of Rs.45,000 (USD 9,000×5) will be shown as an
exchange loss in the profit and loss for the year ended 31st Ashadh, 2074 and will not be
adjusted against the cost of raw materials.

At the settlement date, the company would recognize or provide in the profit and loss an
exchange gain of Rs. 9,000 (i.e. at the rate Rs. 1 per USD, the difference of exchange rate
between the reporting date and the date of settlement, i.e. Rs.109 and Rs.108 per USD).
Hence the accounting treatment adopted by the Account officer is not as per NAS 21.

7. Briefly explain the objective and scope of Accounting for The effects of changes in Foreign
Exchange rates – NAS 21. (Inter Dec. 2001, Q 6b-4 Marks)
Answer:
The objective & Scope of NAS 21 has been provided in the standard as follows:
a. Objective
An entity may carry on foreign activities in two ways. It may have transactions in foreign
currencies or it may have foreign operations. In addition, an entity may present its financial

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statements in a foreign currency. The objective of this Standard is to prescribe how to

include foreign currency transactions and foreign operations in the financial statements of
an entity and how to translate financial statements into a presentation currency. The
principal issues are which exchange rate(s) to use and how to report the effects of changes
in exchange rates in the financial statements
b. Scope
NAS 21 shall be applied:
i. in accounting for transactions and balances in foreign currencies, except for those
derivative transactions and balances that are within the scope of IFRS 9 Financial
Instruments;
ii. in translating the results and financial position of foreign
iii. operations that are included in the financial statements of the entity by consolidation or
the equity method; and
iv. in translating an entity’s results and financial position into a presentation currency.

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1.13. NAS 37 Provisions, Contingent Liabilities & Contingent Assets

1. Accounting treatment of contingency gains. (CAP Dec. 2009, 6a-2.5 Marks)

Answer
Contingency gains are not recognized in financial statement since their recognition may result
in the recognition of revenue which may never be realized. However, when the realization of
a gain is virtually certain, then such a gain is not a contingency and accounting for the same
is appropriate.

2. Recognition of contingent assets and liabilities

(CAP Dec. 2015 Q6d; CAP Jun. 2013 Q6d– [Link])
An entity shall not recognize a contingent liability.
1. A contingent liability is disclosed, unless the possibility of an outflow of resources
embodying economic benefits is remote.
2. Where an entity is jointly and severally liable for an obligation, the part of the
obligation that is expected to be met by other parties is treated as a contingent
liability. The entity recognizes a provision for the part of the obligation for which an
outflow of resources embodying economic benefits is probable, except in the
extremely rare circumstances where no reliable estimate can be made.
3. Contingent liabilities may develop in a way not initially expected. Therefore, they
are assessed continually to determine whether an outflow of resources embodying
economic benefits has become probable. If it becomes probable that an outflow of
future economic benefits will be required for an item previously dealt with as a
contingent liability, a provision is recognized in the financial statements of the period
in which the change in probability occurs (except in the extremely rare circumstances
where no reliable estimate can be made).
An entity shall not recognize a contingent asset.
1. Contingent assets usually arise from unplanned or other unexpected events that give
rise to the possibility of an inflow of economic benefits to the entity. An example is
a claim that an entity is pursuing through legal processes, where the outcome is
uncertain.
2. Contingent assets are not recognized in financial statements since this may result in
the recognition of income that may never be realized. However, when the realization
of income is virtually certain, then the related asset is not a contingent asset and its
recognition is appropriate.
3. A contingent asset is disclosed, where an inflow of economic benefits is probable.
4. Contingent assets are assessed continually to ensure that developments are
appropriately reflected in the financial statements. If it has become virtually certain
that an inflow of economic benefits will arise, the asset and the related income are
recognized in the financial statements of the period in which the change occurs. If
an inflow of economic benefits has become probable, an entity discloses the
contingent asset (see paragraph 89).

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3. Difference between provisions and contingent liabilities. (Jun. 2006, Q 7d- 3 Marks)
Answer:
Provision is a liability of uncertain timing and amount. A provision shall be recognized when:
(i) An entity has a present obligation (legal or constructive) as a result of a past event
(ii) It is probable that any outflow of resources embodying economic benefits will be
required to settle the obligation, and
(iii) A reliable estimate can be made of the amount of obligation

A contingent liability is:

(i) A possible obligation that arises from the past events and whose existence will be
conformed only by the occurrence of or non-occurrence of one or more uncertain future
events not wholly within the control of the entity, or
(ii) A present obligation that arises from past events but is not recognized because:
a. It is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
b. The amount of the obligation cannot be measured with sufficient reliability.

4. Difference between Provisions and other liabilities. (CAP Jun. 2014 Q6c- 2.5 Marks)
Answer
Provision can be distinguished from other liabilities such as trade payable and accruals because
there is uncertainty about the timing or amount of future expenditure required in settlement.
By contrast:
Trade payables are liabilities to pay for goods or services that have been received or supplied
and have been invoiced or formally agreed with the supplier; and
Accruals are liabilities to pay for goods or services that have been received or supplied but not
have been paid, invoiced or formally agreed with the supplier, including amounts due to
employees. Although it is sometimes necessary to estimate the amount or timing of accruals,
the uncertainty is generally much less than for provision.
Accruals are often reported as part of trade and other payables, whereas provisions are reported
separately.

5. Alpha Ltd. has entered into a sale contract of Rs. 7 crores with Gamma Ltd. during 2072-73
financial years. The profit on this transaction is Rs. 1 crore. The delivery of goods to take place
during the first month of 2073-74 financial years. In case of failure of Alpha Ltd. to deliver
within the schedule, a compensation of Rs. 2 crores is to be paid to Gamma Ltd. Alpha Ltd.
planned to manufacture the goods during the last month of 2072-73 financial year. As on the
reporting date (31.3.2073), the goods were not manufactured and it was unlikely that Alpha
Ltd. will be in a position to meet the contractual obligation. You are required to advise Alpha
Ltd. on requirement of provision for contingency in the financial statements for the year ended
31st Ashadh, 2073, in line with provisions of Accounting Standards?
(CAP Jun. 2017 Q5c-5 Marks)
Answer
NAS 37 “Provisions, Contingent Liabilities and Contingent Assets” provides that a
provision shall be recognized when:

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(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision shall be recognized. when an enterprise has a
present obligation, as a result of past events, that probably requires an outflow of resources
and a reliable estimate can be made of the amount of obligation, a provision should be
recognized.

In the given case, Alpha Ltd. has present obligation to deliver the goods as a result of
contract entered with the customer and it is more likely than not that Alpha Ltd. will be
required to settle the obligation on account of penalties. Therefore, Alpha Ltd. should
provide for the provision amounting Rs. 2 crores as per NAS 37.

6. M/s Dalima Ltd. is in a dispute with the competitor company. The dispute is regarding the
alleged infringement of copyrights. The competitor has filed a suit in the court seeking damages
of Rs. 325 lakhs.
Directors are of the view that the claim can be successfully resisted by the company.
How the matter be dealt in the financial statements of the company in the light of NAS 37.
Explain in brief giving reasons for your answer. (CAP Jun. 2018 Q5b-5 Marks)

Answer
As per NAS 37 "Provisions, Contingent liabilities and Contingent assets" a provision should
be recognized when
a) an entity has a present obligation as a result of a past event.
b) it is probable that the outflow of resources embodying economic benefits will be required
to settle the obligation and
c) a reliable estimate can be made of the amount of obligation.
If these conditions are not met, no provision should be recognized.

In the given situation, since the directors of the company are of the opinion that the claim can
be successfully resisted by the company, therefore there will be no outflow of resources. Hence
no provision is required. The company can disclose the same as contingent liability by way of
following note.

Litigation is in the process against the company relating to dispute with the competitor who
alleged that the company has infringed copyrights and seeking damages of Rs. 325 lakhs.
However the director are of the opinion that the claim can be successfully resisted by the
company.

7. Contingent Liability (Jun 07 Q 5e)

Answer
A possible obligation that arises from past events and the existence of which will be

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confirmed only by the occurrence or non-occurrence of one or more uncertain future events
not wholly within the control of the enterprise, or.
A present obligation that arises from past events but it is not recognized because
(a) It is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation, or
(b) A reliable estimate of the amount of the obligation cannot be made.
A contingent liability should not be recognized, but only disclosed. Also contingent liability
should be periodically reviewed by the enterprise.

8. Difference between Provisions and Reserves (Dec 07 Q 6c)

Answer:

A provision is a liability of uncertain timing or amount whereas he portion of earnings, receipts

or other surplus of an enterprise whether capital or revenues, apportioned by the management
for a general or specific purpose is called reserve. Reserves are primarily of two types: capital
reserves and revenue reserves. Provision is the charge against the profit whereas reserve is the
appropriation out of profits.

1.14. NAS 11: Construction Contracts

All questions have been included under Accounting for special transaction : Contract
Accounting

1.15. NAS 12: Income Taxes

1. Briefly describe the disclosure requirements for "Deferred Tax Assets" and "Deferred Tax
Liabilities" as per relevant Nepal Accounting Standard. (CAP Dec. 2009 2b ii-5 Marks)

Answer
An enterprise should offset deferred tax assets and deferred tax liabilities if:
➢ the enterprise has a legally enforceable right to set off assets against liabilities representing
current tax, and
➢ the deferred tax assets and the deferred tax liabilities relate to taxes on income levied by
the same governing taxation laws.
Deferred tax assets and liabilities should be distinguished from assets and liabilities
representing current tax for the period. Deferred tax assets and liabilities should be disclosed
under a separate heading in the balance sheet of the enterprise, separately from current assets
and current liabilities.
The break-up of deferred tax assets and deferred tax liabilities into major components of the
respective balances should be disclosed in the notes to accounts.
The nature of the evidence supporting the recognition of deferred tax assets should be
disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax
laws.

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2. Deferred Tax Liability (CAP Dec. 2013 6c-2.5 Marks; CAP Dec. 2015 Q6b)
Answer
According to NAS 12, A deferred tax liability shall be recognized for all taxable temporary
differences, unless the deferred tax liability arises from:
(a) the initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax
loss).
It is inherent in the recognition of an asset that its carrying amount will be recovered in the
form of economic benefits that flow to the entity in future periods. When the carrying amount
of the asset exceeds its tax base, the amount of taxable economic benefits will exceed the
amount that will be allowed as a deduction for tax purposes. This difference is a taxable
temporary difference and the obligation to pay the resulting income taxes in future periods is a
deferred tax liability. As the entity recovers the carrying amount of the asset, the taxable
temporary difference will reverse and the entity will have taxable profit. This makes it probable
that economic benefits will flow from the entity in the form of tax payments.

3. Prudent prepares financial statement to 31st December each Year, on 1st January 20x0 the entity
purchased a non-current asset for Rs 1.6 million that had an anticipated useful life of four Years.
This asset qualified for immediate tax relief of 100% of the cost of that asset.

For the year ended 31st December 20x0; the draft account showed a profit before tax of Rs. 2
million. The directors anticipate that this level of profit will be maintained for the foreseeable
future.

Prudent pays tax at a rate of 30%. Apart from the difference caused by the purchase of no current
asset in 20x0, there are no other difference between accounting profit and taxable profit or the
tax base and carrying amount of net asset. Current year tax for the year is Rs 240,000 and for
the years 20x1 to 20x3 are Rs. 720,000 for each year.
You are required to compute the pre, and post-tax profits for the Prudent for each of the four
Years ending 31st December 20x0 to 20x3 assuming deferred tax is recognized.
(CAP Dec. 2014 5a-5 Marks; CAP Jun. 2015 Q5a- 5 Marks)
Answer
Particulars 20x0 (Rs.) 20x1 (Rs.) 20x2 (Rs.) 20x3 (Rs.)
Carrying Amount 1,200.00 800.00 400.00 -
Tax Base - - - -
Temporary difference 1,200.00 800.00 400.00 -
Closing deferred tax
Liability@30% 360.00 240.00 120.00 -
Opening deferred tax
Liability - (360.00) (240.00) (120.00)
Charge/(credit) to
income 360.00 (120.00) (120.00) (120.00)

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Income statement 20x0 (Rs.) 20x1 (Rs.) 20x2 (Rs.) 20x3 (Rs.)
Profit Before tax 2,000.00 2,000.00 2,000.00 2,000.00
Current Tax (240.00) (720.00) (720.00) (720.00)
Deferred Tax (360.00) 120.00 120.00 120.00
Profit after Tax 1,400.00 1,400.00 1,400.00 1,400.00

4. Timing differences and permanent differences as per NAS -12 (CAP Dec. 2015 6a)

Answer
Timing differences and Permanent differences as per NAS -12.
Temporary differences are differences between the carrying amount of an asset or liability in
the balance sheet and its tax base. Temporary differences may be either:
(a) Taxable temporary differences, which are temporary differences that will result in taxable
amounts in determining taxable profit (tax loss) of future periods when the carrying amount
of the asset or liability is recovered or settled; or
(b) Deductible temporary differences, which are temporary differences that will result in
amounts that are deductible in determining taxable profit (tax loss) of future periods
when the carrying amount of the asset or liability is recovered or settled.

The tax base of an asset or liability is the amount attributed to that asset or liability for
tax purposes.

Permanent differences are those which arise in one period and do not reverse
subsequently. For e.g. an income exempt from tax or an expense that is not allowable
as a deduction for tax purposes.
Timing differences are those which arise in one period and are capable of reversal in
one or more subsequent periods. For e.g. Depreciation, Provision for expenses etc.

5. Tax base of an asset (Inter Jun. 2010 Q6b- 5 Marks)

Answer
The tax base of an asset is the amount that will be deductible for tax purposes against any taxable
economic benefits that will flow to an entity when it recovers the carrying amount of the asset.
If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying
amount. For example, a plant purchased for Rs.10,000 has depreciation of Rs.4,000 deducted in
past. It is intended to use in future for generating more revenue. Its tax base is Rs.6,000 which
is its carrying amount.

6. NAS 12 “Income Taxes” uses the concept of temporary differences. Temporary differences are
the difference between the carrying value of an asset and its tax base. The standard distinguishes
between “taxable temporary differences” and “deductible temporary differences”.
Required:

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Explain the distinction between taxable and deductible temporary differences.

(CAP Jun. 2010 5c- 5 Marks)
Answer
Temporary differences are differences between the carrying amount of an asset or liability in
the balance sheet and its tax base. The tax base of an asset or liability is the amount attributed
to that asset or liability for tax purposes.

Temporary differences may be either taxable temporary differences or deductible temporary

differences. Taxable temporary differences are temporary differences that will result in taxable
amounts in determining taxable profit (tax loss) of future periods when the carrying amount of
the asset or liability is recovered or settled. For instance if a tax authority taxes interest income
on a cash basis then any income accrued at the balance sheet date will not be included in the
current tax charge but will be taxed in the future when the cash is received.
Deductible temporary differences are the temporary differences that will result in amounts that
are deductible in determining taxable profit (tax loss) of future periods when the carrying
amount of the asset or liability is recovered or settled. For instance, if a tax authority taxes
interest expense on a cash basis then any expense accrued at the balance sheet date will not be
included in the current tax charge but will be deductible in the future when it is paid.

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1.16. NAS 23 Borrowing Costs

1. A company obtained term loan during the year ended 31st March, 2012 to an extent of Rs. 650
lakhs for modernization and development of its factory. Building worth Rs. 120 lakhs were
completed and plant and machinery worth Rs. 350 lakhs were installed by 31st March, 2012. A
sum of Rs. 70 lakhs has been advanced for assets the installation of which is expected in the
following year. Rs. 110 lakhs has been utilized for working capital requirements. Interest paid
on the loan of Rs. 650 lakhs during the fiscal year 2011-012 amounted to Rs. 58.50 lakhs. How
should the interest amount be treated in the account of the company? Give your comments for
the financial year ending on 31-03-2012 in the context of relevant NAS.

Answer
According to NAS 23 (“Borrowing Cost”), interest on borrowed funds, which is directly
related to the acquisition, construction or production of qualifying asset should be capitalized.
As factory building, Plant and Machinery are qualifying asses as per NAS 23 interest paid on
the loan being borrowing cost should be capitalized and included in the gross book value of
these assets. The interest pertaining to the money spent on the working capital should be
charged off as expense. In the given case, the interest amount of Rs. 58.50 lakhs shall be
treated as follows:

Proportion Rs. In
lakhs
To be added to the cost of building 120  58.50
10.80
650
To be added to the cost of Plant and Machinery 350  58.50
31.5
650
To be charged off as expense (Advance) 70  58.50
6.3
650
To be charged off as expenses 110  58.50
9.9
650
Total
58.50

2. Conditions to be satisfied to capitalize the borrowing costs

(CAP Dec. 2010 6d-2 Marks; CAP Dec. 2012 6d -2.5 Marks; CAP Dec. 2015 Q6 A)
Answer
Capitalization of borrowing costs as part of the cost of a qualifying asset should commence
only when all the following conditions are satisfied:

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1. The expenditure is being incurred for the Acquisition, construction or production of a

qualifying asset;
2. Borrowing costs are being incurred; and
3. Activities that are necessary to prepare the asset for its intended use or sale, (including
any technical or administrative work prior to the commencement of physical
construction but excluding such activities during which no production or development
take place) are in progress.

3. Discuss the treatment of capitalization of borrowing cost as per NAS 23

(CAP Dec. 2014 5b-5 Marks; CAP Jun. 2015 Q5b- 5 Marks)
Answer
Borrowing costs that are directly attributable to the acquisition, construction or production of
a qualifying asset shall be capitalized as part of the cost of asset. Borrowing cost are interest
and other cost incurred by an entity in connection with the borrowing of funds.
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for
its intended use or sale.
Commencement of capitalization
The capitalization of borrowing cost as part of qualifying asset shall commence when:
Expenditures for the asset are being incurred;
Borrowing costs are being incurred; and
Activities that are necessary to prepare the asset for its intended use or sale are in progress.
Suspension of capitalization
Capitalization of borrowing cost shall be suspended during extended periods in which active
development is interrupted.
Cessation of capitalization
Capitalization of borrowing cost shall cease when substantially all the activities necessary to
prepare qualifying asset for its intended use or sale are complete.

4. Define Borrowing cost & qualifying assets as per NAS 8? When borrowing cost is capitalized?
(CAP Jun. 2012 Q5c– 5 Marks)
Answer
Borrowing costs are interest and other cost incurred by an entity in connections with
borrowing of funds.
Qualifying asset is an asset that necessarily takes a substantial period of time to get ready
for its intended use or sale.
Borrowing cost is capitalized if
I. Expenditure for the asset are being incurred
II. Borrowing costs are being incurred ;and
III. Activities that are necessary to prepare the assets for its intended use or sale
are in progress.

5. M/s Biotic Company Limited obtained a loan for Rs. 14 crores on Shrawan 15, 2069 from
Nepal Bank Limited, to be utilized as under:
Construction of Factory building Rs. 2.5 crores

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Purchase of Plant and Equipment Rs. 2.0 crores

Working Capital Rs'. 1.5 crores
Advance for purchase of trucks Rs. 1.0 crore
In Ashadh 2070, construction of the factory building was completed and Plant and Equipments,
which was ready for its intended use, was installed. Delivery of trucks was received in the next
FY. Total interest of Rs. 9,100,000 was charged by the bank for the financial year ending
31.3.2070.
Show the treatment of interest under NAS 23 “Borrowing Cost” and also explain the nature of
assets. (CAP Jun. 2014 Q4b- 5 Marks)

Answer:
(a) Treatment of Interest (Borrowing cost) as per NAS 23 ‘Borrowing Cost’
Interest to be Interest to be
[Link]. Particulars Nature
capitalized expensed
Rs. Rs.
(i) Construction of Factory Qualifying 91,00,000 x 25/70
Building (Refer Note 1) Assets =Rs.32,50,000
(ii) Purchase of Plant and 91,00,000 x 20/70
Equipment =Rs.26,00,000
Non
(iii) Working Capital 91,00,000 x 15/70
Qualifying -
=Rs.19,50,000
Assets
(iv) Advance for purchase of 91,00,000 x 10/70
Trucks =Rs.13,00,000
Total Rs. 32,50,000 Rs. 58,50,000

Notes:
1. It is assumed that construction of a factory building was completed on 31st Ashadh, 2070
2. It is assumed that the Plant and Equipment was ready for its intended use at the time of
its acquisition.
As per NAS 23, assets have been defined as ‘qualifying asset’ and non-qualifying assets.
(i) Qualifying assets is an asset that necessarily takes a substantial period of time to get
ready for its intended used or sale; whereas
(ii) Non-qualifying asset is an asset other than qualifying asset.
The Loan at one place is 14 crore but in detail is 7 crore. Hence, there are 2 options for
calculation of borrowing rate:
i) As given in Answer
91 𝑙𝑎𝑐𝑠
ii) = 6.5%
14 𝑐𝑟𝑜𝑟𝑒

6. The notes to accounts of X Ltd. for the year 2063/64 include the following:
Interest on bridge loan from banks and financial institutions and on debentures specifically
obtained for the company’s Fertilizer Project amounting to Rs. 18,080,000 has been
capitalized during the year, which includes approximately Rs. 17,033,465 capitalized in

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respect of the utilization of loan and debenture money for the said purpose.” Is the treatment
correct? Briefly comment.
(June 2007, Q 6iii)
Answer:

NAS 23 on “Borrowing Costs” states that borrowing cost incurred with respect to
acquisition, of qualifying asset should be included as part of the cost of the asset.

In the given case, X ltd capitalized the finance cost of Rs. 1,80,80,000 with the cost of the
Fertilizer Project out of which Approximately Rs. 17,033,465 has been capitalized. The
disclosure requirements of NAS 23 requires an entity to disclose:
a. the amount of borrowing costs capitalized during the period; and
b. the capitalization rate used to determine the amount of borrowing costs eligible for
capitalization.

Therefore, X ltd. is suggested to make disclosure in line with the requirements of NAS 23.
Also, the entity shall consider commencement, suspension & cessation requirements of the
standard in capitalizing the borrowing costs.
(due to lack of clarity in the question, we are not able to assess whether the capitalized
portion is eligible for capitalization or not)

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1.17. NAS 24: Related Party Disclosure

1. Related party (CAP Dec. 2009 5d-5 Marks)

Answer
Parties are considered to be related if at any time during reporting period one party has ability
to control over other party or exercise significant influence over the other party in making
financial and or operating decision.

2. Briefly describe the disclosure requirements of related party transactions as per Nepal
Accounting Standard 24 (CAP Jun. 2009 6b – 4 Marks; CAP Dec. 2014 6c-2.5 Marks)

Answer
NAS 24 requires disclosure of related party transactions and outstanding balances in the
separate financial statements of a parent, venture or investor company or entity. The
following information shall be disclosed in the financial statements as per this Accoun ting
Standard.
i) Relationship between parents and subsidiaries shall be disclosed irrespective of
whether there have been transactions between those related parties.
ii) An entity shall disclose key management personnel compensation.
iii) If there have been transactions between related parties, an entity shall disclose the
nature of the related party relationship as well as information about the transactions
and outstanding balances necessary for an understanding of the potential effect of
the relationship on the financial statements.
Items of the similar nature may be disclosed in aggregate except when separate disclosure
is necessary for an understanding of the effects of related party transactions on the financial
statements of the entity.

3. Krishna Infrastructures Limited (KIL) is engaged in carrying out the construction activities of
hydropower projects and sanitation projects in Joint venture with other private construction
companies. Recently, KIL entered into an agreement under its leadership and management to
lay the pipelines in Hetauda Industrial Area with Premier constructions Pvt. Ltd., Raktakali
Nirman Sewa and Pukar Nirman and Constructions Limited. KIL wants to close the books of
accounts as on 31st Ashadh 2070. The management of the company seeks your suggestion as
to whether Premier constructions Pvt. Ltd., Raktakali Nirman Sewa and Pukar Nirman and
Constructions Limited are to be disclosed as Related Party in the financial statements or not.
Advice the management taking into account relevant pronouncements of Nepal Accounting
Standard.
(CAP Jun. 2014 Q5c- 5 Marks)
Answer:
According to Nepal Accounting Standard relating to Related Party, Related party, a party is
related to an entity if:
(a) directly, or indirectly through one or more intermediaries, the party:

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(i) controls, is controlled by, or is under common control with, the entity (this includes
parents, subsidiaries and fellow subsidiaries);
(ii) has an interest in the entity that gives it significant influence over the entity; or
(iii) has joint control over the entity;
In this case, KIL entered into an agreement to lay the pipelines in Hetauda Industrial Area with
Premier constructions Pvt. Ltd., Raktakali Nirman Sewa and Pukar Nirman and Constructions
Limited. KIL has the leadership as well as management to control the project and the other 3
entities are just the intermediaries of KIL. In case of any other projects there may be different
types of intermediaries.
However, it should be noted that the intermediaries are not such that these three entities are the
subsidiaries of KIL. In considering each possible related party relationship, attention is directed
to the substance of the relationship and not merely the legal form.
In the context of this Standard, the parties need not necessarily be related only because they
share joint control over a joint venture. Thus, there may not necessarily be related party
relationship between KIL and other three entities.

4. Related party transaction (CAP Jun. 2015 Q6c- 2.5 Marks)

A business deal or arrangement between two parties who are joined by a special relationship
prior to the deal. For example, a business transaction between a major shareholder and the
corporation would be deemed a related-party transaction. As per the Provision of Nepal
Accounting Standards 23, any such transaction should be properly disclosed in the Financial
Statement of the Organization.

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1.18. NAS 33 Earnings Per Share

1. Goverdhan Ltd. has equity capital of Rs. 2,000,000 consisting of fully paid equity shares of Rs.
10 each. The net profit for the year ended 31.03.2069 was Rs. 3,000,000. It has also issued
18,000, 10% convertible debentures of Rs. 50 each. Each debenture is convertible into 5 equity
shares. The tax rate applicable is 30%.
Compute the diluted earnings.(CAP Jun. 2013 Q4b– 3 Marks)

Answer
Particulars Amount
Interest on Debentures @10% for the year 90,000
(18,000 debentures x Rs50x10%)
Less Tax on Interest @ 30% -27,000
63,000
Add: Net Profit for the year ended 31.3.2069 30,00,000
Diluted Earning 30,63,000

1.19. NAS 36: Impairment of Assets

1. Explain about corporate assets (CAP Dec. 2009-3 Marks)

Answer
Corporate assets are the assets other than goodwill that contribute to the future cash flow
of both cash generating unit under review and other cash generating units.

2. NAS 18 "Impairment of Assets" requires an entity to write down the value of its assets, or
group of assets, whenever the recoverable amount of an asset is less than its carrying value.

Required:
Define “recoverable amount” and state why an asset should be written down to this value if it
is below its carrying value. (CAP Jun. 2010 5a- 5 Marks)

Answer
NAS 36 “Impairment of Assets” defines recoverable amount as the higher of an asset’s fair
value less costs to sell and its value in use.
It further defines the fair value less costs to sell as the amount obtainable from the sale of an
asset (in an arm’s length transaction between knowledgeable, willing parties) less costs of
disposal.
Also, it defines the value in use as the present value of the future cash flows expected to be
derived from an asset (or cash-generating unit).
The recoverable amount of an asset represents the amount of economic benefits that the asset
will generate for an entity. If the carrying value of an asset exceeds its recoverable amount this
means that the asset will not generate sufficient economic benefits to meet its carrying value,

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the asset should therefore be written down to the value that is recoverable by either continuing
to use the asset or by selling it.

3. Brindawan Ltd. has an item of plant that is carried in the balance sheet at a revalued amount of
Rs. 16,200,000. The plant manufactures a product which, until recently, was the only product
of its type in the market place. A competitor is now manufacturing a similar product, and
Brindawan Ltd.’s market share has consequently fallen. Brindawan Ltd. has re-assessed the
expected cash flows, to be generated from using the plant over the remaining four years of its
life, to be as follows:
Rs.
2067/68 7,000,000
2068/69 4,000,000
2069/70 3,500,000
2070/71 2,000,000
Brindawan Ltd. has been offered Rs. 15,000,000 for the plant by an overseas company.
Brindawan Ltd. would be responsible for any shipping and conversion costs that are estimated
to be Rs. 1,000,000.

The depreciated historic cost of the asset is Rs 15,200,000.

Brindawan Ltd.’s cost of capital is 8%. The present value of Re 1 receivable at the end of each
year, based on discount rates of 8% can be taken as:

End of year 1 0·93

2 0·86
3 0·80
4 0·74
Required:
Calculate the impairment loss in respect of the plant and state how the loss should be accounted
for in Brindawan Ltd.’s financial statements for the year ended 31st Ashadh, 2067.
(CAP Jun. 2010 5b- 6 Marks)
Answer

Computation of fair value less cost to sell:

Selling price 15,000,000
Shipping and conversion costs (1,000,000)
Net proceeds 1,4000,000

Computation of Value in use

Year Cashflow DF Rs
2067/68 7,000,000 0.93 6,510,000
2068/69 4,000,000 0.86 3,440,000
2069/70 3,500,000 0.8 2,800,000
2070/71 2,000,000 0.74 1,480,000

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14,230,000

Impairment Loss ( Rs) = Carrying Amount – Value in Use

= 16,200,000 – 14,230,000 = Rs. 1,970,000

The recoverable amount of the asset is the greater amount, i.e. its value in use of Rs 1,4230,000.
The asset is carried at a revalued amount of Rs 16,200,000, this means that an impairment loss
of Rs 1,970,000 has occurred.

As the asset is carried at a revalued amount and the depreciated historic cost of the asset is Rs
15,200,000 there will be a revaluation surplus of Rs 970,000 (Rs.15,2500,000 –
Rs.14,230,000)in respect of the asset, this surplus would initially be utilized for the write down.
The remaining impairment loss of Rs. 1,000,000 will be charged to the profit and loss for the
period.

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1.20. NAS 38 Intangible Assets

4. A pharma company spent Rs. 135 lakhs during the accounting year ended 31st March, 2012 on
a research project to develop a drug to treat “AIDS”. Experts are of the view that it may take
four years to establish whether the drug will be effective or not and even if found effective it
may take two to three more years to produce the medicine, which can be marketed. The
company wants to treat the expenditure as deferred revenue expenditure. Give your comments
for the fiscal year ending on 31-03-2012 in the context of relevant NAS.

Answer
As per NAS 27 on intangible assets, the research cost is to be expenses as and when incurred.

The development expenses, cost of internal project also to be expenses as incurred unless they
meet asset recognition criteria, before recognizing these costs as assets the following points
should be demonstrated:
• Technical feasibility of the product
• Availability of product for use or sale
• Identification of cost incurred
• Probability of external market or
• The realistic expectation that there will be sufficient revenues to cover cost.

In the given case, the above conditions not having been fulfilled (Nothing is stated about future
revenue or benefits), the sum of Rs. 135 lakhs should be charged as an expense in the
accounting year ended 31st March, 2012.

5. A company with a turnover of Rs. 250 crores and an annual advertising budget of Rs. 2 crore
has taken up the marketing of a new product. It was estimated that the company would have a
turnover of Rs. 25 crores from the new product. The company has charged the total expenditure
of Rs. 2 crore incurred on extensive special initial advertisement campaign for the new product
as expense. Is the procedure adopted by the company correct?
(CAP Dec. 2013 Q5b-5 Marks)
Answer
For recognition of intangible items as intangible asset, it should meet the definition of an asset
as per NFRS. As the advertisement are already incurred with no control over it and no future
economic benefit associated to it that can be measured reliably, the amount shall be recognized
as an expense. Therefore, the accounting treatment followed by the company is correct.

6. R has developed a software program during the year to 30th November 2014. The cost of
developing the software was Rs. 50 million. The software is used by the rest of the group and
sold to third parties. Net revenue of Rs. 40 million is expected from sale of the software .Which
has quickly become market leader in this field. The software is expected to generate revenue
for four years, after which an upgraded version will be developed

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Should R recognize the internally developed software as an Intangible asset?

(CAP Dec. 2014 Q5c-5 Marks, CAP Jun. 2015 Q5c- 5 Marks)
Answer
Internally generated intangibles, other than goodwill, is required to be recognized as an
intangible asset under the provisions of NAS 38.
The software developed by R is capable of generating economic benefit through both use
within the group and through sale to external parties which establish that the asset is identifiable
and within the control of the entity. Therefore, R Ltd. should recognize the internally generated
software as an asset. The cost of the asset (50 million) is assumed to be recovered through sale
and use. R ltd. would, however, be required to assess impairment on the intangible on a periodic
basis. Further, being an asset having definite useful life, the intangible shall be amortized over
its useful life of 4 years.

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1.21. NFRS 2 Share Based Payments

1. Employee stock option plan and its importance (CAP Jun. 2017 Q6a-3 Marks)

Answer
It is a plan under which the enterprise grants employee stock options. Employee stock option
is a contract that gives the employees of the enterprise the right, but not the obligation, for a
specified period of time to purchase or subscribe the shares of the company at a fixed or
determinable price.
The importance of these plans is as follows:
1) Employee stock option plans encourage employees to have higher participation in the
company.
2) Stock options provide an opportunity to employees to contribute in the growth of the
company.
3) Stock option creates long term wealth in the hands of the employees.
4) They are important means to attract, retain and motivate the best available talent for the
company.
5) It creates a sense of ownership between the company and its employees.

1.22. Miscellaneous

1. What are the issues, with which accounting standards deal? (CAP Dec. 2015 Q3b)

Answer
Accounting Standards deal with the issues of
i) Recognition of events and transactions in the financial statements,
ii) Measurement of these transactions and events,
iii) Presentation of these transactions and events in the financial statements in
a manner that is meaningful and understandable to the reader, and
iv) Disclosure requirements which should be there to enable the public at large
and the stakeholders and the potential investors in particular, to get an insight
into what these financial statements are trying to reflect and thereby
facilitating them to take prudent and informed business decisions.

2. Money Measurement Concept (CAP Dec. 2013 6a-2.5 Marks)

Answer
The concept of Money measurement is an important aspect of accounting. It is an important
convention in accounting which explains that any transaction or event that can be measured in
terms of money can only be recorded in accounting. Accounting is disclosure of all the business
activities in an organized way that includes the figures. Anything that cannot be measured in
terms of money cannot be shown in accounts. E.g. even though human resources are an

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important asset to any entity, these cannot be recorded in the books of accounts as they cannot
be reasonably measured in monetary terms.

3. Contingency reserve (CAP Dec. 2012 6b-2.5 Marks)

Answer
The Contingency reserves are sum set aside to cover anticipated future liabilities or reduction
in assets value. This reserve is required when the company believes the value of its assets likely
decrease or it has incurred liabilities and it is able to reasonable estimate the amounts loss.
Contingency reserves are net up by deducting the appropriate sum from income. Contingencies
include:
• Potentially uncollectable money owed to company.
• Potential obligation under product warranties or related to products defects judgment
for pending threaten litigation.
• Likely loss due to fire and other hazards.
The Contingency reserve must be disclosed in financial statement when required and may be
utilized for the following purposes:
a. Expenses or loss of profits arising out of accidents, strikes or circumstances which the
management could not have prevented.
b. Expenses on replacement or removal of plant or works (other than normal maintenance
or renewals).
c. Statutory obligation for payment of any compensation, if there is no special provision
for such compensation.

4. Realization concept (CAP Dec. 2015 6C

Answer
Realization concept in accounting, also known as revenue recognition principle, refers to the
application of accruals concept towards the recognition of revenue (income). Under this
principle, revenue is recognized by the seller when it is earned irrespective of whether cash
from the transaction has been received or not. In case of sale of goods, revenue must be
recognized when the seller transfers the risks and rewards associated with the ownership of the
goods to the buyer. This is generally deemed to occur when the goods are actually transferred
to the buyer. Where goods are sold on credit terms, revenue is recognized along with a
corresponding receivable which is subsequently settled upon the receipt of the due amount
from the customer. In case of the rendering of services, revenue is recognized on the basis of
stage of completion of the services specified in the contract. Any receipts from the customer
in excess or short of the revenue recognized in accordance with the stage of completion are
accounted for as prepaid income or accrued income as appropriate.

5. Window dressing (CAP Dec. 2015 Q6 E

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Answer
Window dressing is actions taken to improve the appearance of a company's financial
statements. Window dressing is particularly common when a business has a large number
of shareholders, so that management can give the appearance of a well-run company to
investors who probably do not have much day-to-day contact with the business. It may also
be used when a company wants to impress a lender in order to qualify for a loan. If a business
is closely held, the owners are usually better informed about company results, so there is no
reason for anyone to apply window dressing to the financial statements.

Examples of window dressing are:

▪ Cash. Postpone paying suppliers, so that the period-end cash balance appears higher than
it should be.
▪ Accounts receivable. Record an unusually low bad debt expense, so that the accounts
receivable (and therefore the current ratio) figure looks better than is really the case.
▪ Fixed assets. Sell off those fixed assets with large amounts of accumulated depreciation
associated with them, so the net book value of the remaining assets appears to indicate a
relatively new cluster of assets.
▪ Revenue. Offer customers an early shipment discount, thereby accelerating revenues
from a future period into the current period.
▪ Depreciation. Switch from accelerated to straight-line depreciation in order to reduce the
amount of depreciation charged to expense in the current period. The mid-month
convention can also be used to further delay expense recognition.
▪ Expenses. Withhold supplier expenses, so that they are recorded in a later period.

6. Fair Value Accounting (CAP Dec. 2017 Q6e -3 Marks)

Answer
Fair Value is the amount for which an asset could be exchanged or a liability settled between
knowledgeable willing parties in an arm's length transaction. Fair value is measured using the
price in the principal market for the asset or liability (i.e. the market with the greatest volume
and level of activity for the asset or liability) or, in the absence of a principal market, the most
advantageous market for the asset or liability. Detailed guidance shall be required for
measuring the fair value of liabilities, including a description of the compensation that market
participants would demand to take on an obligation.

7. Financial Instrument (CAP Dec. 2018 Q6b -3 Marks)

Answer
Financial instrument is any contract that gives rise to a financial asset to one entity and a
financial liability or equity instrument to another entity. Hence, financial instruments include
financial assets, financial liability and equity instrument. This means that financial assets of
one entity shall be financial liabilities or equity instruments of another entity and financial
liabilities or equity instrument of one entity shall be financial assets of another entity. For
example, bond, debenture or bank loan is financial liabilities of entity issuing such bond or

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debenture or raising loan and it is financial assets for holder of debenture or bond holder or
provider of loan. Similarly, share capital is equity instrument for share issuing entity and it
is financial assets of holder of equity.

8. Receipt and Expenditure Account (CAP Dec. 2018 Q6c -3 Marks)

Answer
Receipt and Expenditure Account also can be taken as part of Financial Statements. Some
non-profit making organization like professional firms, educational institutes etc. prefers to
prepare Receipts and Expenditure account instead of Income and Expenditure account as part
of Financial Statements. Such an account includes all expenses on accrual basis but incomes
are recorded on cash basis. In other words, to find out the result, all outstanding expenses are
taken into account but the incomes that are outstanding are not considered. The main reason
behind this kind of practice is that professionals consider it imprudent and risky to recognize
the outstanding incomes.

9. Write the difference between Cash Flow and Funds Flow Statement
(Inter Dec. 2008 Q5b -5 Marks)
Answer
(i) Cash flow statement deals with the change in cash position between two points of time.
Fund flow statement deals with the changes in working capital position.
(ii) Cash flow statement contains opening as well as closing balances of cash and cash
equivalents. The fund flow statement does not contain any such opening and closing
balance.
(iii) Cash flow statement records only inflow and outflow of cash. Fund flow statement
records sources and application of funds.
(iv) Fund flow statement can be prepared from the cash flow statement under indirect
method. However, a cash flow statement cannot be prepared from fund flow statement.
(v) A statement of changes in working capital is usually prepared along with fund flow
statement. No such statement is prepared along with the cash flow statement.

10. Off Balance Sheet Items:

(Inter Dec. 2008 Q6b-4 Marks; CAP Jun. 2015 Q6d- 2.5 Marks; CAP Dec. 2014 6d-2.5
Marks)
Answer
Off Balance Sheet Items are obligations that are contingent liabilities and thus do not appear
on the balance sheet.
Off Balance Sheet item could involve a lease or a separate subsidiary or a contingent liability
such as a letter of credit. It also involves loan commitments, futures, forwards and other
derivatives except such derivatives pertaining to equity securities, ESOP, or phantom stock,
which usually must be held as reserves in the Long-Term Debt section of a Balance Sheet.
In general, off-balance sheet items includes direct credit substitutes in which a financial
institution substitutes its own credit for a third party, including standby letters of credit,
irrevocable letters of credit that guarantee repayment of commercial paper or tax-exempt

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securities, sale and re-purchase agreements, interest rate swaps, interest rate options and
currency options and so on.

11. True and fair view of financial statements (Inter Dec. 2009 Q6a-5 Marks)

Answer
A financial statement can be said as presenting true and fair view of the business when it is
prepared with proper application of relevant and appropriate accounting standards. Further, it
should also contain the principal qualitative characteristics; viz. understandability, relevance,
reliability and comparability. Such true and fair presentation of financial statements are
expected to meet the objective of providing information about the financial position,
performance and changes in financial position of an entity that is useful to a wide range of users
in making economic decision.

12. Capital and Revenue Receipt (Inter Dec. 2009 Q6c-5 Marks)

Answer
Subscription by shareholders towards share capital of a Company or for Purchasing its
debentures are considered by the Company as capital receipts. By the same criterion,
contributions by partners or proprietors to capital of their business are capital receipts. Profits
to a business on sale of fixed Assets (not those on the sale of goods in which it trades) also are
capital receipts since these are distinguishable from revenue receipts, e.g., those from sale of
merchandise , rent on property , interest on investment , professional fee for services rendered,
etc. It will be evident that capital receipts emanate out of a fund already held or arise on
conversion of an asset , whereas revenue receipts flow from personal exertion, use of a capital
asset or from sale or transfer of floating assets .

13. Accounting Convention of Conservatism. (Inter Dec. 2010 Q6 c-5 Marks)

Answer
Accounting convention of conservatism states that the accountants should not anticipate income
and should provide for all possible losses. The underlying principle is that revenues should only
be recognized when there is reasonable certainty about their realization. At the same time
provision must be made for all possible liabilities, whether the amount is known with certainty
or is based on estimates. Faced with the choice between two methods of valuing an asset, the
method which leads to lesser value must be selected. To illustrate, inventories are recorded at
the cost or market value, whichever is less or if there is a possibility that a debt may not be
realized, a specific amount is set aside from profits as a provision for doubtful debts.

14. Deferred Revenue Expenditure.

(Inter Dec. 2010 Q6 d-5 Marks; Inter Jun. 2009 Q6a- 5 Marks)
Answer

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The term deferred revenue expenditure was traditionally used in the case of pre-operating
expenses or in the case of expenditures which were unusually huge to affect the financial
performance or in the case of expenditure whose benefit was assumed to be available for more
than a single accounting period. Such expenditures were treated as asset and were written off
over a period of several years based upon management’s discretion. For example, advertisement
cost, cost of staff training etc. However, with an introduction of NAS 27 Intangible Assets,
only those assets which meet the identifiability criterion as prescribed in the standard is allowed
to be recognized as intangible assets. Accordingly all other expenditures that do not meet the
criteria are charged as expenditure irrespective of their volume and nature.

15. Prior Period Items (Inter Jun. 2010 Q6d- 5 Marks)

Answer
The term "Prior Period Item" refers only to income or expenses which arise in the current period
as a result of errors or omissions in the preparation of the financial statements of one or more
prior periods. The term does not include other adjustments necessitated by circumstances,
which though related to prior periods, are determined in the current period, e.g. arrears payable
to workers as a result of revision of wages with retrospective effect during the current period.
Errors in the preparation of the financial statements of one or more prior periods may be
discovered in the period. Errors may occur as a result of mathematical mistakes, mistakes in
applying accounting policies, misinterpretation of facts or oversight. Such items are generally
infrequent in nature and can be distinguished from changes in accounting estimates.
Prior Period Items are normally included in the determination of net profit or loss for the current
period. An alternative approach is to show such items in the statement of profit and loss after
determination of current period net profit or loss.

16. Substance over form (Inter Jun. 2009 Q6 c- 5 Marks)

Answer
If information is to express faithfully the transactions and other events that it purports
to represent, it is necessary that they are accounted for and presented in accordance
with their substance and economic reality and not merely their legal form. The
substance of transactions or other events is not always consistent with that which is
apparent from their legal of contrived form. For example, an entity may dispose of an
asset to another party in such a way that the documentation purports to pass legal
ownership to that party; nevertheless, agreements may exist that ensure that the entity
continue to enjoy the future economic benefits embodied in the asset. In such
circumstances, the reporting of a sale would not represent faithfully the transaction
entered into.

17. Following is the information of two business organizations belonging to same industry for
2065/066;
Particulars Birat Industry Kirat industry

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Rs Rs

Opening balance 25,000 15,000

Cash flow from operating activities 8,500 24,000
Cash from investing activities;
Sale of fixed assets 35,000 6,000
Cash from financing activities:
Amount borrowed 40,000 5,000
Closing Balance 1,08,500 50,000
Birat claims that it’s cash generating activity is better than that of Kirat. Do you
agree ? Comment on the basis of cash generating ability of both organization .
(CAP Jun. 2011 4b- 5 Marks)

Answer
Kirat organization has a better capacity to generate cash. Claim of Birat organization is not
appropriate. The evaluation is based on the quantum of cash flow from operating activities
rather than on investing or financing activities. Birat organization is generating funds from
either sale of goods or out of borrowing and quantum of funds so generated is not an
appropriate indicator for evaluation.

18. Matching Concept (CAP Jun. 2012 Q6a – 4 Marks)

Answer
Matching concept requires periodic revenue should be matched with that period’s expense.
While reporting financial performance of the entity only that portion of expense should be
recognized as expense which is attributable for earning revenue and remaining portion of the
expenses should be carried forward for the next accounting period so as to derive actual
performance of the entity during that period. That is the reason why prepaid expenses are not
recognized in periodic performance though outflow is incurred during that particular period.
Provisioning of the expense follow same rule. Depreciation is charged on the ground of same
underlying principle.

19. Adjusting entries and correcting entries (CAP Jun. 2017 6b-3 Marks)
Generally, adjusting entries are required every accounting period so that a company's
financial statements reflect the accrual method of accounting.
It is typical for the adjusting entries to be dated as of the last day of the accounting
period and to include an income statement account and a balance sheet account.

Adjusting entries are necessary to:

I. accrue expenses and losses and the related liabilities.
II. accrue revenues and gains and the related assets.
III. defer expenses and the related assets.
IV. defer revenues and the related liabilities.

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V. record depreciation expense or bad debts expense and the change in the related contra
asset account.

A correcting entry is needed only if an error is discovered in an account. Correcting

entries can involve any combination of income statement and balance sheet accounts.
Correcting entries are recorded if:
I. an erroneous amount was used in a previously posted entry.
II. an entry was recorded in the wrong account.

20. Financial Reporting Standard (Inter Dec 03, Q 6(iii))

Answer:
International Accounting Standard Board publishes its standard in a series of pronouncements
called International Financial Reporting Standards (IFRS). Upon its inception the IASB
adopted the International Accounting Standards issued by International Accounting Standard
Committee. The term International Financial Reporting Standards (IFRS) includes IFRS's,
IFRIC Interpretation, IASs and SIC Interpretations.

21. Entity Concept (Dec 03, Q6(iv))

Answer:
Business consists of person and resources. Person representing the business is separate and
distinct from the business enterprises. Accounting system deals with the economic activities of
the business not of owner. In this concept, Preparation of Balance Sheet of the business does
not consider the personal assets and liability of the owner of the business.

22. Advantages and disadvantages of setting of Accounting Standards.

(Inter Jun. 2006 Q 7a--3 Marks)

Answer:
The Accounting Standards seek to describe the accounting principles, the valuation
techniques and the methods of applying the accounting principles in the preparation and
presentation of financial statements so that they may give a true and fair view. The ostensible
purpose of the standard setting bodies is to promote the dissemination of timely and useful
financial information to investors and certain other parties having an interest in companies’
economic performance. The setting of accounting standards has the following advantages:
i. Standards reduce to a reasonable extent or eliminate altogether confusing variations in the
accounting treatments used to prepare financial statements.
ii. There are certain areas where important information are not statutorily required to be
disclosed. Standards may call for disclosure beyond that required by law.
iii. The application of accounting standards would, to a limited extent, facilitate comparison of
financial statements of companies situated in different parts of the world and also of
different companies situated in the same country. However, it should be noted in this
respect that differences in the institutions, traditions and legal systems from one country
give rise to differences in accounting standards practiced in different countries.

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However, there are some disadvantages of setting of accounting standards:

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 a trend towards rigidity and away from flexibility in applying the
accounting standards.
iii. Accounting standards cannot override the statute. The standards are required to be framed
within the ambit of prevailing statutes.

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CHAPTER 2: ACCOUNTING FOR SPECIAL TRANSACTIONS

2.1 Hire Purchase transaction

Hire purchase debtors and stock method, hire purchase trading account method are not
acceptable accounting models under NFRS. NAS 17 relates Hire Purchase Transactions
as Finance lease which should be accounted for accordingly. Questions, where
information allows, have been solved as per the requirements of NAS 17.

A. Theoretical Questions

1. List out the differences between Hire-purchase system and Installment Purchase
system.
(Inter Dec. 2001, Q 6c-4 Marks)
Answer:
Hire Purchases System Installment Purchase System
(a) Ownership in goods will pass to the Ownership in the goods will pass to the
buyer only on payment of last buyer immediately at the time of sale
installment.
(b) In case if the buyer fails to pay any The seller cannot recover the goods. He can
installment the seller can recover the only sue for recovery of price and damages.
goods back from buyer.
(c) Default in payment by the buyer the The money paid by the buyer, will be taken
seller can forfeit all moneys paid by as a payment towards part of the selling
the buyers so far. price and the seller can sue only for the
balance.

2. What is the basic principle involved in accounting for hire purchase transactions in
the books of seller?
(Inter Jun. 2007 Q 2a)
Answer
The basic principle involved in accounting for hire purchase transactions in the books of the
seller is the spreading of recognition of revenue over the period of the transaction i.e. as per
the terms of hire purchase agreement.

3. Features of Installment Sale Transaction (Inter Dec. 2011 Q6c-5 Marks)

Answer
The essential features of Instalment Sale Transaction are as follows:
1. The ownership in the goods passes to the buyer as soon as the transaction is completed.
2. The seller has right only to sue for the unpaid balance. He has no right to repossess the
goods for default in payment of instalments.

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