ASB-NEPAL 1

APPLICATION GUIDANCE TO

NFRS1 FIRST-TIME ADOPTION OF NEPAL FINANCIAL REPORTING STANDARDS

ACCOUNTING STANDARDS BOARD (ASB)

NEPAL

ASB-NEPAL 2

Contents

Page 1. Introduction 5 2. Meaning of first time adopter 6 3. Meaning of Nepal Financial Reporting Standards 7 4. Process of First Time Adoption of NFRSs 4.1 Guidelines for preparing NFRS based opening Balance Sheet

8 9

5. Estimates 14 6.Presentation and Disclosures 17 7. Optional exemptions 18 8. Mandatory exemptions 38 9. Assets and liabilities of subsidiaries, associated and jointly controlled entities

42

10. Decommissioning liabilities included in the cost of property, plant and equipment

43

11. Financial assets or intangible assets accounted for in accordance with IFRIC 12

45

12. Transfer of assets from customers 51 13. Extinguishing financial liabilities with equity instruments 52 14. Business Combinations that occurred before the date of transition 52 15. Interim financial reporting 54 17. Miscellaneous Issues 56 Annexure I NFRS Implementation Schedule 65 Annexure II List of IFRICs & SICs 66

Tables

Page Table 1 Cases in which an entity qualifies to be first time adopter 6 Table 2 Cases in which an entity does not qualify to be a first time adopter

7

Table 3 Activity Schedule of NFRSs adoption in 2014-15 8 Table 4 Estimation for First Time Adoption of NFRSs 14

ASB-NEPAL 3

Examples

Page Example 1 Estimation of NFRS based opening Balance Sheet 15 Example 2 Estimation for NFRS based Opening Balance Sheet when previous GAAP estimation was consistent with NFRS except discounting but further evidence becomes available

16

Example 3 Designation of Financial Assets and Financial Liabilities 25 Example 4Application of cost model of NAS 16 28 Example 5 Fair Value as deemed cost 30 Example 6 Determining whether an arrangement contains a lease 31 Example 7 Optionally convertible debentures 33 Example 8 Capitalisation of borrowing costs 34 Example 9 Government loans at below market rate 41 Example 10 Decommissioning liability 43 Example 11Service Concession Arrangement – Receivable Accounting method

45

Example 12 Service Concession Arrangement – Intangible Accounting method

48

Example 13Transfer of Assets from Customers 51 Example 14 Redemption of loan by equity shares 52 Case Study 1 Preparation of Opening NFRS Balance Sheet 60

ASB-NEPAL 4

APPLICATION GUIDANCE TO

NFRS 1 FIRST-TIME ADOPTION OF NEPAL FINANCIAL REPORTING STANDARDS

1. Introduction The objective of NFRS 1 is to ensure that an entity’s first NFRS based financial statements, and interim financial reports for part of the period covered by those financial statements, contain high quality information that (a) is transparent for users and comparable over all periods presented; (b) provides a suitable starting point for accounting in accordance with Nepal Financial Reporting Standards (NFRSs); and (c) can be generated at a cost that does not exceed the benefits.

First time adoption of NFRSs would require change in accounting policies. Paragraph 19 of NAS 8 Accounting Policies, Changes in Accounting Estimates and Errors require that any change in accounting policy arising out initial application of a NFRS is given effect (a) in accordance with transition provisions given in that NFRS, and (b) in case a particular NFRS does not include transitional provisions or an accounting policy is changed voluntarily the change is given effect retrospectively. Retrospective application means applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied. However, the change in accounting policy is applied retrospectively except to the extent it is impracticable to determine specific effect or cumulative effect of the change. Many NASs/NFRSs do not have transitional provisions or transitional provisions are applicable only to selected paragraphs of the standard. This would cause hardship in the adoption of NFRSs and the process of introducing accounting system that would generate high quality accounting information at par with IFRSs would have been very expensive.

The need for NFRS1 was felt as adoption of NFRS based financial statements would necessitate change of accounting policies, and retrospective application of such policies becomes difficult in many cases. For example, retrospective application of NFRS 3 to all combination transactions or retrospective application of cost model of NAS 16 to all items of property, plant and equipment is a highly costly proposition. This standard simplifies the accounting procedures for switching over from a set an accounting policies followed by an entity under the existing Nepal Accounting Standards which otherwise would have been covered by NAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

The purpose of NFRS 1 is to – (i) explain the process of transition to NFRS (ii) remove the difficulties of retrospective applications of certain NASs/NFRSs; (iii) Explain the accounting treatment of the resultant difference in the carrying amount

of various assets and liabilities.

ASB-NEPAL 5

Exemptions are granted from complying with certain transitional requirements of NFRSs and interpretations where the cost of complying with them would likely to exceed the benefits to users of financial statements. It prohibits retrospective application of NFRSs in some cases. It requires disclosures explaining how the transition from previous GAAP to NFRSs has affected the entity’s reported financial position, financial performance and cash flows. Therefore, transition provisions provided in other NFRSs do not apply to a first-time adopter’s transition to NFRSs. This Application Guidance explains and illustrates first time adoption of each of the NAS/NFRS and certain SICs/IFRICs. It includes two case studies to explain the preparation of first NFRS based financial statements with comparatives. 2. Meaning of First Time Adopter NFRS1 applies when an entity adopts NFRSs for the first time by an explicit and unreserved statement of compliance with NFRSs. Adoption of NFRSs means adoption of various NASs, NFRSs and interpretations as per announced schedule (refer to Annexure 1). In the cases presented in Table 1, an entity shall qualify as a first time adopter and accordingly shall apply NFRS 1.

Table 1Casesin which an entity qualifies to be a First Time Adopter

Cases when the financial statements of an entity are considered as the first NFRS based Financial Statements

Analysis

A(i).Previously prepared financial statements are in accordance with national requirements which are fully consistent with NFRSs

Transition from existing GAAP to NFRSs is a special accounting process. The entity shall provide explicit and unreserved statement of NFRSs adoption.

A (ii). Previously prepared financial statements prepared under NFRSs do not contain an explicit and unreserved statement of compliance with NFRSs

A (iii). Previous financial statements contained an explicit statement regarding compliance with some NFRSs, but not all

The explicit and unreserved statements regards application of all NFRSs, NASs, SICs / IFRICs is an essential condition for the first time adoption of NFRSs. Statement shall be complete.

A (iv). In previous financial statements , the entity applied some of the NFRSs for the issues not covered by national standards or requirements

Part compliance with NFRSs does not make an entity NFRS compliant. An entity shall apply all applicable NFRSs, NASs, SICs and IFRICs.

A(v).Previously prepared financial Reconciliation does not make an entity

ASB-NEPAL 6

statements as per national requirements along with reconciliation with NFRSs

NFRSs compliant.

B. Prepared financial statements under NFRSs for internal use only without making them available to the entity’s owners or any other external users

A document meant for internal use does not qualify as financial statements used for external reporting.

C. No financial statements were presented during the previous period

By exclusion an entity does not become NFRS compliant.

First time adopter means An entity that presents its first NFRS financial statements. In the cases presented Table 2, an entity does not qualify as a first time adopter.

Table 2Cases in which an entity does not qualify to be a First Time Adopter Cases when the financial statements of an entity are not considered as the first NFRS based Financial Statements

Analysis

1. If the entity prepared in an earlier period financial statements under the previous GAAP requirements as well as under NFRSs with an explicit and unreserved statement.

Preparing two set of accounts does not debar any entity to become NFRS compliant. Since it has already adopted NFRSs, it cannot apply NFRS 1 again.

2. The entity presented NFRSs based financial statements under national requirements with an explicit and unreserved statement of NFRSs compliance.

The entity has already adopted NFRSs. Thereafter it cannot apply NFRS1 for the presentation of financial statements at a future date.

3. The entity presented financial statements under NFRSs with an explicit and unreserved statement of NFRSs compliance but that contain audit qualification(s).

The entity has already adopted NFRSs. It cannot apply NFRS1 for the presentation of financial statements at a future date.

3. Meaning of Nepal Financial Reporting Standards (NFRSs) Nepal Financial Reporting Standards (NFRSs) mean Standards and Interpretations adopted by the Accounting Standards Board (ASB). They comprise: (a) Nepal Financial Reporting Standards; (b) Nepal Accounting Standards; (c) IFRIC Interpretations issued by the International Accounting Standards Board; and (d) SIC Interpretations issued by the International Accounting Standards Board. Refer to Annexure II for list of IFRICs and SICs issued by the International Accounting standards Board.

ASB-NEPAL 7

4. Process of First Time Adoption of NFRSs First time adoption of NFRSs requires selection of the accounting period in which NFRS based financial statements shall be prepared for the first time. Refer to Annexure 1 for NFRS adoption schedule. Based on the NFRS adoption period, the date of transition is determined. If NFRS is adopted in 2014-15, then the date of transition is 1.4.2013, the comparative period is 2013-14. First time adoption activities are presented in Table 3.

Table3Activity Schedule of NFRS adoption in 2014-15

1 2 3 Date of Transition Comparative Period NFRS adoption period 1st April 2013 1.4.2013-31.3.2014

( 2013-14) 1.4.2014-31.3.2015 (2014-15)

(a) Prepare Balance Sheet as on 1.4.2013 as per NFRS which is popularly termed as NFRS based opening Balance Sheet. [ Paragraph 6, NFRS 1] (b) Prepare explanatory statement reconciling equity as on 1.4.2013 as per NFRS and as per previous GAAP as on 31.3.2013. (c) Distinguish difference arising out of correction of errors made in the previous GAAP and difference arising out of NFRS adoption. ( d) Disclosures in accordance with NAS 36 when any previously recognised impairment loss is reversed while preparing opening Balance Sheet.

(a) Prepare NFRS based financial statements for 2013-14 which shall be used as the basis for comparatives of the first NFRS based financial statements. (b) Prepare explanatory statement reconciling equity as on 31.3.2014 as per NFRS and as per previous GAAP as 31.3.2014. (c) Prepare explanatory statement reconciling profit or loss for the period 2013-14 as per NFRS and as per previous GAAP. (d) Provide details of material adjustments to cash flows statement

(a) Prepare NFRS based financial statements for 2014-15 and use information of 2013-14 NFRS based financial statements as comparatives. (b) Present in the Note an explanatory statements showing reconciliation stated in 1(b), (c) & (d), and 2 (b), (c) & (d).

While preparing NFRS based financial statements, an entity shall comply with each of the NFRSs and interpretations effective at the reporting date for its first NFRS financial statements. Previous GAAP means the basis of accounting that a first-time adopter used before adopting NFRSs.

ASB-NEPAL 8

The presentation of the first NFRS based financial statements shall be supported by explanations stating how the transition from previous GAAP to NFRSs affected its reported financial position, financial performance and cash flows [Paragraph 23, NFRS 1]. Reconciliations stated in 1(b), (c) & (d), 2 (b), (c) & (d) of Table 3 would satisfy the purpose. An entity shall apply the following principles for the preparation and presentation of the opening NFRS balance sheet:

(a) recognise all assets and liabilities whose recognition is required by NFRSs; (b) do not recognise items as assets or liabilities if NFRSs do not permit such

recognition; (c) reclassify items that it recognised under previous GAAP as one type of asset,

liability or component of equity, which are different type of asset, liability or component of equity under NFRSs; and

(d) apply NFRSs in measuring all recognised assets and liabilities.

4.1Guidelines for preparing NFRS based opening Balance Sheet

The Guidelines stated in (a) - (g) below are followed for the purpose of preparation of NFRS based opening Balance Sheet as on the date of transition.

(a)Recognise all assets and liabilities whose recognition is required by NFRSs

Recognition of some new assets and liabilities may be required for the purpose of first time adoption of NFRS: • NAS 39 Financial Instruments: Recognition and Measurement requires recognition of all

derivative financial assets and liabilities, including embedded derivatives. Derivative assets or liabilities might not have been recognised as per the previous GAAP.

• NAS 19 Employee Benefits requires an employer to recognise its liabilities under defined benefit plans. These are not just pension liabilities but also obligations for medical and life insurance, vacations, termination benefits, and deferred compensation. In the case of "over-funded" plans, this would be a defined benefit asset.

• NAS 37 Provisions, Contingent Liabilities and Contingent Assets requires recognition of certain provisions like provisions for restructuring obligations, onerous contracts, decommissioning, remediation, site restoration, warranties, guarantees, and litigation. Many of these obligations might have been treated as contingent liabilities as per the previous GAAP requirements.

• NAS 38 Intangible Assets requires recognition of various intangible assets like brand, customer list, etc. acquired through business combinations which might have been subsumed in the goodwill as per the previous GAAP. In case an entity opts for retrospective application of NFRS 3, identifiable intangible assets arising out of past business combinations shall be recognised.

• NAS 12Income Taxes requires recognition of deferred tax liabilities on revaluation surplus which is not required as per previous GAAP.

ASB-NEPAL 9

An entity shall recognise new assets and liabilities which are required to be recognised by NFRSs but not recognised under previous GAAP.

(b) Do not recognise items as assets or liabilities which NFRSs do not permit

Examples of elimination of assets and liabilities are as follows

(i) Deferred expenditure which are not to be recognized as an asset under NAS 38 like-

• Research expenditure ; • Start-up, pre-operating, and pre-opening costs ; • Training expenses; • Advertising and promotion ; • Moving and relocation; and • Preliminary expenses.

(ii) Deferred income and expenditure which are integral part of amortised cost of financial assets and financial liabilities as :

• Premium / discount on issue debentures or bonds; • Premium/discount on redemption of debentures or bonds • Issue expenses for debentures, or bonds.

(iii) Expenses on issue of equity or preference shares

(iv) Deferral of exchange fluctuation loss

In case an entity has recognised any such deferred income or expenditure in the Balance Sheet, those items are eliminated while preparing the NFRS based opening Balance Sheet with a corresponding reduction in the retained earnings.

(v) if an entity has created any provision for restructurings, future operating losses, or major overhauls which do not meet the conditions for recognition as a provision under NAS 37, these items shall be eliminated in the NFRS based opening Balance Sheet with a corresponding increase in the retained earnings.

(vi)If an entity has recognised reimbursements and contingent assets that are not virtually certain, and do not fulfill recognition conditions of an asset ,these are eliminated in the NFRS based opening Balance Sheet.

(vii) NAS 10 Events after the reporting date does not recognise proposed dividend as an adjusting event ,and therefore it is not presented as a liability. Proposed dividend shall be disclosed in the note.

ASB-NEPAL 10

(c) Reclassify items which are recognised under previous GAAP as one type of asset, liability or component of equity, but under NFRSs are a different type of asset, liability or component of equity

An entity shall reclassify items presented in the previous GAAP Balance Sheet applying the appropriate NFRS classification. Examples under this head are -

(i) If an entity has presented treasury stock (an entity's own shares that it had bought back but not cancelled) as an asset, it would be reclassified as a component of equity under NFRS i.e. to be deducted from equity.

(ii) Goodwill recognised out of business combination transaction shall be reclassified into identifiable intangible asset in accordance with the requirements of NFRS 3 if an entity opts for retrospective application of this standard.

(ii) As per principles of NAS32 Financial Instruments : Classification for classifying items as financial liabilities or equity, redeemable preferred shares and put table shares (which do not meet conditions of Paragraphs 16A -16D , NAS 32 ) might have been classified as equity . These items shall be reclassified as financial liabilities in the NFRS based opening Balance Sheet.

Of course, if the liability component of a compound financial instrument is no longer outstanding on the date of transition , then splitting of compound financial instrument as per NAS 32 is not required.

All items of assets and liabilities shall be classified into current and non-current as per Paragraphs 60-77 of NAS 1Presentation of Financial Statements.

Various items of assets, liabilities and equity are presented with sub-classification in the notes. Paragraph 78 of NAS 1 requires the following sub-classification of assets , liabilities and equity :

• Items of property, plant and equipment are disaggregated into classes in accordance with NAS 16;

• Receivables are disaggregated into amounts receivable from trade customers, receivables from related parties, prepayments and other amounts;

• Inventories are disaggregated, in accordance with NAS 2 Inventories, into classifications such as merchandise, production supplies, materials, work in progress and finished goods;

• Provisions are disaggregated into provisions for employee benefits and other items; and • Equity capital and reserves are disaggregated into various classes, such as paid-in

capital, share premium and reserves. • Offsetting (netting of assets and liabilities ,or of income and expense ) principle as

stated in Paragraphs 32-35 of NAS 1, principles of materiality and aggregation as stated in Paragraphs 29-31 of NAS 1 shall be followed while presenting NFRS based financial statements.

ASB-NEPAL 11

• The scope of consolidation might change as per NFRS 10Consolidated Financial Statements.

(d) Carry out measurement of all assets and liabilities so recognized / re-classified in accordance with NFRSs

Measurement principles stated in various NFRSs shall be followed for the presentation of NFRS based financial statements. In case of retrospective application , NFRS measurement principles are applied retrospectively and cumulative effect shall be adjusted while preparing the NFRS based opening Balance Sheet.

Refer to Case Study 1.

(e) Change in accounting policies

For the purpose of NFRS adoption, an entity shall have to apply different accounting policies in respect of certain accounting items. The resulting adjustments arise from events and transactions prior to the date of transition to NFRSs. Therefore, such adjustments are recognised directly in retained earnings (or, if appropriate, another category of reserve like fair value reserve or revaluation reserve) as on the date of transition. However, adjustments arising out of change in accounting policies due to NFRS adoption are segregated from adjustments arising out of correction of errors detected in the process of NFRS adoption.

(f) Applying Exemptions

The first time adopter may elect for exemptions granted in Paragraphs 14-17, 29-33, and Appendices C & D of NFRS 1.

The first time adopter may elect for exemptions /options granted as regards –

(i) Designation of financial assets and financial liabilities [ Paragraphs 29& 29A, NFRS1];

(ii) Use of fair value as deemed cost [ Paragraph 30, NFRS 1];

(iii) Use of deemed cost for investments in subsidiaries, jointly controlled entities and associates[ Paragraph 31, NFRS 1];

(iv) Use of deemed cost for oil and gas assets [ Paragraph 31A, NFRS 1];

(v) Use of deemed cost for operations subject to rate regulation [ Paragraph 31A, NFRS 1];

Appendix D , NFRS 1 covers the following exemptions ( Paragraphs referred to the right of various points are of Appendix D to NFRS 1) :

• Share-based payment transactions [Paragraphs D2 and D3, Appendix D, NFRS 1]; • Insurance contracts [Paragraph D4];

ASB-NEPAL 12

• Deemed cost [ Paragraphs D5–D8B]; • Leases [ Paragraphs D9 and D9A]; • Cumulative translation differences [ Paragraphs D12 and D13]; • Investments in subsidiaries, jointly controlled entities and associates [ Paragraphs D14

and D15]; • Assets and liabilities of subsidiaries, associates and joint ventures [ Paragraphs D16 and

D17]; • Compound financial instruments [ Paragraph D18]; • Designation of previously recognised financial instruments [ Paragraphs D19–D19D]; • Fair value measurement of financial assets or financial liabilities at initial recognition [

Paragraph D20]; • Decommissioning liabilities included in the cost of property, plant and equipment [

Paragraphs D21 and D21A]; • Financial assets or intangible assets accounted for in accordance with IFRIC 12 Service

Concession Arrangements [ Paragraph D22]; • Borrowing costs [ Paragraph D23]; • Transfers of assets from customers [ Paragraph D24]; • Extinguishing financial liabilities with equity instruments [Paragraph D25]; and • Severe hyperinflation [ Paragraphs D26–D30]. An entity shall not apply these

exemptions by analogy to other items. • Joint arrangements [ paragraph D31] • Stripping cost in the production phase of a surface mine [ Paragraph D32 ].

An entity shall not apply these exemptions by analogy to other items.

These exemptions are discussed in Paragraph 7 of this Application Guidance. Also refer to Examples 3-8 and Case Study 1.

Appendix C covers the exemptions for business combinations .Refer to discussion in Paragraph 7 of this Application Guidance , Example ----- and Case Study 3.

G. Prohibition of retrospective application of some issues covered in other NFRSs

The first time adopter shall follow the prohibition of applying retrospective application in respect to–

• Derecognition of financial assets and financial liabilities ; • Hedge accounting ; • Consolidation ; and • Government loans.

These prohibitions are discussed in Paragraph 8 of this Application Guidance.

ASB-NEPAL 13

5. Estimates

Accounting estimates are critical in the preparation of NFRS based opening Balance Sheet. The general principle is that consistency of estimates shall be followed. Information relating to the non-adjusting events after the reporting period is not taken into account for estimation. An entity shall apply NAS 10 Events after the Reporting Period would provide useful guidance.

An entity applies NAS 10 in determining whether: (a) its opening NFRS Balance Sheet reflects an event that occurred after the date of transition to NFRSs; and (b) comparative amounts in its first NFRS financial statements reflect an event that occurred after the end of that comparative period.

Three different situations are explained in Table 4:

Table 4Estimation for First Time Adoption of NFRSs

Cases Case description Guidance 1 Previous GAAP required

estimates of similar items as on the date of transition using an accounting policy that is consistent with NFRSs

In this case estimates shall be consistent with previous GAAP estimates. Estimates shall not be adjusted for the events occurring after the reporting period. Of course, adjustments to estimates can be carried out if there is an objective evidence of error in estimate. Information received after the reporting period shall be used for revision of estimates as on the subsequent reporting date.

2 Previous GAAP required estimates of similar items for the date of transition to NFRSs, but the entity made those estimates using accounting policies that are not consistent to NFRSs

Adjustments are carried out to sort out the difference in accounting policies. For example, previous GAAP recognise undiscounted provisions whereas NAS 37 requires discounting of provisions. Therefore, to sort out this difference previous GAAP provisions shall be adjusted for the discounting effect.

3 Previous GAAP did not require estimates of similar items for the date of transition to NFRSs.

Estimates in accordance with IFRSs for that date reflect conditions existing at that date taking into account the effect of adjusting events in accordance with NAS 10.

Refer to Examples 1&2.

Paragraphs 14–17 of the NFRS1 do not override requirements in other NFRSs that base classifications or measurements on circumstances existing at a particular date. Examples include: (a) the distinction between finance leases and operating leases (refer to NAS 17Leases); (b) the restrictions in IAS 38 Intangible Assets that prohibit capitalisation of expenditure on

ASB-NEPAL 14

an internally generated intangible asset if the asset did not qualify for recognition when the expenditure was incurred; and (c) the distinction between financial liabilities and equity instruments (refer to NAS 32 Financial Instruments: Presentation). NAS 17 Leases is applied for classification of leases into operating lease and financial lease on the date of transition on the basis of circumstances existing at the inception of the lease. Any change in estimates like change in residual value or economic life of the leasehold property on the date of transition does not change the lease classification. If an internally generated intangible asset qualifies for recognition as per NAS 38 at the date of transition, an entity recognises the asset in its NFRS based opening Balance Sheet even if it had recognised the related expenditure as an expense in accordance with the previous GAAP. If the asset does not qualify for recognition in accordance with NAS 38 until a later date, its cost is the sum of the expenditure incurred from that later date. In its NFRS based opening Balance Sheet, an entity applies the criteria in NAS 32 to classify financial instruments issued (or components of compound instruments issued) as either financial liabilities or equity instruments in accordance with the substance of the contractual arrangement when the instrument first satisfied the recognition criteria in NAS 32 ( Paragraphs 15 and30), without considering events after that date (other than changes to the terms of the instruments).

Example 1 [ Estimation for NFRS based opening Balance Sheet]

[Refer to Paragraph 5 of this Application Guidance ]

Entity E’s first IFRS financial statements have a reporting date of 31 March 2015 and include comparative information for one year. In its previous GAAP financial statements for 2012-13 and 2013-14, entity E :

(i) estimated provision for warranty of NPR 10 lakhs which was considered as appropriate based on past experience. In preparing its first NFRS financial statements, entity E concluded that its estimates under previous GAAP as on 31 March 2013 and 2014 were made on a basis consistent with its accounting policies under NFRSs. E concluded that its estimates were reasonable and that, therefore, no error had occurred. However, the provision was not discounted.

(ii) pension benefit plan was accounted for under cash basis;

(ii) did not recognize a liability under indirect tax laws as it does not consider that an obligation had arisen. The fact of litigation was included as an item of contingent liability. The litigation was resolved by court’s decision on 5 May 2014by which E had to pay NPR 1.2 lakhs.

ASB-NEPAL 15

How should Entity E approach for the preparation of opening balance sheet under NFRSs on the transition date?

Solution

(1) Estimates shall not be changed in the NFRS based opening Balance Sheet as on 1.4.2013 and NFRS based financial statements for the year 2013-14 except discounting as per NAS 37.

(2) E shall apply NAS 19 Employee Benefits and make valuation of pension obligation applying actuarial valuation as on 1.4.2013 , 31.4.2014 and 31.3.2015. Valuation shall take into account market condition as on those dated for selecting discount rates.

(3) E shall apply NAS 37 and evaluate whether provision would have been created as on 1.4.2013 and 31.4.2014. Under NAS 37, an entity determines whether an obligation exists as on the reporting date taking into account of all available evidence, including any additional evidence provided by events after the balance sheet date. The analysis will not use hindsight to create provision. Of course, indirect tax claim becomes a confirmed liability as on 31.3.2015 and any other interim reporting date after 5 May 2014.

Example 2[ Estimation for NFRS based Opening Balance Sheet when previous GAAP estimation was consistent with NFRS except discounting but further evidence becomes available]

[Refer to Paragraph 5 of this Application Guidance ]

Heavy Engineering Ltd. made certain estimates as regards warranty provisioning for the preparation and presentation of financial statements as on 31 March , 2013 . Its date of transition to IFRS was 1 April , 2013. It received certain new information based on the products sold after the reporting period ( during April 2013-September 2013) that performance of such products has considerably improved .

Thereby it has re-estimated that the actual warranty claim rate of the product is 0.25% lower as compared to the average monthly failure rate during the previous year based on which warranty provision was created under the previous GAAP . The provision shall be lowered by 0.25% if this information is taken into account. The previous GAAP and NFRS 37 are consistent on the provisioning norms except for discounting. Previous GAAP do not require discounting of provisions whereas NFRS 37require discounting. Should the estimate be decreased and discounted for the purpose of the preparation of the NFRS based opening Balance Sheet as on 1.4.2013 ? If not, how and when should this information be incorporated?

ASB-NEPAL 16

Solution

Heavy Engineering Ltd. shall not consider the additional information which qualifies for classifying as events after the reporting period. It shall only adjust the estimates for discounting. The additional information shall be taken into account for measuring the warranty provision as on 31.3.2014 i.e. as on the next reporting date.

6. Presentation and Disclosures

Comparative Information–The first NFRS based financial statements are presented along with comparative information.

The first NFRS financial statements of an entity shall include at least : - three statements of financial position ( balance sheet), - two statements of comprehensive income, - two separate income statements (if presented), - two statements of cash flows, - two statements of changes in equity and - related notes, including comparative information.[ Paragraph 21 , NFRS 1]

An entity may present a Statement of Comprehensive Income as single statement comprising of statement income as well as other comprehensive income. Alternatively, it may follow two-statement approach for presenting separate Statement of Income and Statement of Other Comprehensive Income. For a detailed discussion refer to Application Guidance to NAS 1.

Historical summaries and comparative information - Any financial statements containing historical summaries or comparative information in accordance with previous GAAP, an entity shall:

(a) label the previous GAAP information prominently as not being prepared in accordance with NFRSs; and

(b) disclose the nature of the main adjustments that would make it comply with NFRSs. An entity need not quantify those adjustments.

Reconciliations -An entity shall explain how the transition from previous GAAP to NFRSs affected its reported financial position, financial performance and cash flows [ Paragraph 23,NFRS 1] . To comply with this requirement , an entity disclose reconciliation stated in Table 3 , 1(b),(c) &(d) , 2 (b),(c) &(d).

Fair value as deemed cost- When an entity opts for fair value as deemed cost ( refer to Paragraph 7(2) of the Application Guidance ] , it shall disclose :

(a) the aggregate of those fair values; and

ASB-NEPAL 17

(b) the aggregate adjustment to the carrying amounts reported under previous GAAP.

Releasing non-IFRS comparative information and historical summaries: These summaries and comparative information would be for periods under previous GAAP and partly under IFRSs. As per IFRS 1 such information needs not be IFRS compliant. The entity should –(a) label the previous GAAP information prominently as not being prepared under IFRSs; and (b) disclose the nature of the main adjustments ( without quantifying) that would make it comply with IFRSs.

7. Optional Exemptions

In this Paragraph we shall explain and illustrate various optional exemptions. An entity may opt for any or all of these exemptions while preparing NFRS based opening Balance Sheet.

(1) Designation of financial assets and financial liabilities[ Paragraphs 29,29A, D19, D19A, D19B, D19C & D19D, NFRS 1]

NFRS 9 Financial Instruments requires classification of financial assets into three types – (i) Financial assets at fair value through profit or loss, (ii) Financial assets at fair value through other comprehensive income and (iii) Financial assets at amortised cost. Certain financial liabilities may be classified as financial liabilities as at fair value through profit or loss. NAS 39 requires classification of financial assets into four types – (i) Financial assets at fair value through profit or loss, (ii) Available for sale , (iii) Held to Maturity, and (iv) Loans and Receivables.

These classifications may be carried out on the date of transition. Fair value of financial assets and financial liabilities as at fair value through profit or loss as on the date of transition are measured. Similarly, fair value of financial assets at fair value through other comprehensive income is measured on the date of transition. But amortised cost of financial assets and financial liabilities are measured retrospectively. Refer to Example 3.

An entity is permitted to designate a previously recognised financial asset or financial liability as at fair value through profit or loss. An entity may designate a financial asset as at fair value through profit or loss , or fair value through other comprehensive income (available for sale) on the basis of the facts and circumstances of the case on the date of transition.

If it becomes impracticable to find amortised cost of financial assets retrospectively applying effective interest method or impairment thereof , fair value of the financial asset on the date of transition is treated as its amortised cost.

Disclosures - (i) Fair value of financial assets or financial liabilities designated into each category at the date of designation ; and (ii) their classification and carrying amount in the previous financial statements.

ASB-NEPAL 18

(2) Fair Value as deemed cost[ Paragraphs 30 & D5 –D8, NFRS 1]

For the purpose of NFRS based opening Balance Sheet , carrying amounts of the following assets are determined applying respective NAS retrospectively if an entity opts for cost model:

Property , Plant and Equipment (PPE) NAS 16 Property, Plant and Equipment

Intangible Assets NAS 38 Intangible Assets

Investment Property NAS 40 Investment Property

This implies that cost and depreciation / amortization and carrying amount shall be re-computed. Re-computation would take into account issues like componentization of PPE, capitalization of replacement of major components and inspection cost and capitalization decommissioning provision. Refer to Example4.

The process of re-computation of cost of assets acquired in distant past is found to be a costly proposition and sometimes re-computation becomes difficult or impracticable because of non-availability of relevant details. An entity has the option to opt for fair value as deemed cost as on the date of transition.

The entity may accept any one of the value stated in (A)-(C) below as deemed cost as on the date of transition.

(A) Fair value at on the date of transition to IFRSs[Paragraphs30&D5,NFRS 1]. (B) Revalued amount determined on or before the date of transition [ Paragraph

D6,NFRS 1]. However, the revalued amount shall be broadly comparable to fair value , or cost or depreciated cost adjusted for general or specific price index.

(C) Fair value determined for specific event like privatisation or initial public offering before or after the date of transition. However, such fair value is adjusted to the date of transition. It should be broadly comparable to cost or depreciated cost adjusted for general or specific price index.

Subsequent depreciation when fair value is taken as deemed cost – The fair value shall first be allocated component-wise and then depreciation shall be charged component-wise.

For a discussion on the principles to be adopted for determining the fair value of PPE refer to Example 5.

If an entity adopts fair value as deemed cost for property, plant and equipment or intangible asset or investment property, it shall disclose, for each line item in the opening NFRS Balance Sheet: (a) the aggregate of those fair values; and

ASB-NEPAL 19

(b) the aggregate adjustment to the carrying amounts reported under previous GAAP.

(3) Deemed cost for investments in subsidiaries, jointly controlled entities and associates [ Paragraph 31& D15, NFRS 1]

The first time adopter may carry investments in subsidiaries, associates and joint ventures at cost or in accordance with NAS 39 ( or NFRS 9).

In case the first time adopter measures any of these investments at cost , then it shall measure that investment at one of the following amounts in its separate opening IFRS statement of financial position: (a) cost determined in accordance with NAS 27; or (b) deemed cost. The deemed cost of such an investment shall be its: (i) fair value at the entity’s date of transition to IFRSs in its separate financial statements ; or (ii) previous GAAP carrying amount at that date. A first-time adopter may choose either (i) or (ii) above to measure its investment in each subsidiary, joint venture or associate that it elects to measure using a deemed cost.

In other words, any entity may carry investments in subsidiaries, associates and joint ventures at previous GAAP cost which is deemed cost for the purpose of NFRS transition.

If an entity applies deemed cost as per Paragraph D15 of NFRS 1, it shall disclose in its first NFRS separate financial statements: (a) the aggregate deemed cost of those investments for which deemed cost is their previous GAAP carrying amount; (b) the aggregate deemed cost of those investments for which deemed cost is fair value; and (c) the aggregate adjustment to the carrying amounts reported under previous GAAP.

(4) Deemed cost for oil and gas assets[ Paragraph 31A & D8A(b), NFRS 1]

A first-time adopter may elect to measure oil and gas assets at the date of transition to IFRSs on the following basis: (a) exploration and evaluation assets at the amount determined under the entity's previous GAAP; and (b) assets in the development or production phases at the amount determined for the cost centre under the entity’s previous GAAP ( if it has followed cost centre based accounting as per the previous GAAP) . The entity shall allocate this amount to the cost centre’s underlying assets pro rata using reserve volumes or reserve values as of that date. The entity shall carry out impairment testing as on the date of transition of exploration and evaluation assets as per NFRS 6 Exploration for and Evaluation of Mineral Resources, and development and production assets as per NAS 36 Impairment of Assets. Impairment loss , if any, is deducted from the carrying amount of the previous GAAP.

ASB-NEPAL 20

This exemption is applicable only to oil and gas assets i.e. only those assets which are used in the exploration, evaluation, development or production of oil and gas. If an entity uses deemed cost as per Paragraph D8A(b) , NFRS 1 for oil and gas assets, it shall disclose that fact and the basis on which carrying amounts determined under previous GAAP were allocated. (5) Deemed cost for rate regulated activities[ Paragraph 31B & D8B, NFRS 1] An operation is treated as subject to rate regulation if it provides goods or services to customers at prices (i.e. rates) established by an authorised body empowered to establish rates that bind the customers and that are designed to recover the specific costs the entity incurs in providing the regulated goods or services and to earn a specified return. The specified return could be a minimum or range and need not be a fixed or guaranteed return. For example , power generation company may be treated as rate regulated activities if rate of energy is determined by a regulator established by Government and that is binding on customer. Also the formula used for rate fixation intends to cover cost of generation and return. In the case of rate regulated activities which is a first time adopter , there may exist some items which do not qualify to be an asset as per NFRS. For example , deferred expenses for issue of shares , preliminary expenses , etc. which are amortised over certain specified period. A first-time adopter may elect to use the previous GAAP carrying amount of such an item at the date of transition to NFRSs as deemed cost. If an entity applies this exemption to any such item, it is not necessary to apply the exemption to all those items. At the date of transition to NFRSs, an entity shall test for impairment in accordance with NAS 36 each item for which this exemption is used. If an entity uses deemed cost as per the exemption in paragraph D8B, NFRS 1 for rate regulated activities, it shall disclose that fact and the basis on which carrying amounts were determined under previous GAAP.

(6) Share based payment transactions

A first time adopter is encouraged but not required to apply NFRS 2Share Based Payment retrospectively to any equity instrument which was granted and vested before the date of transition.

Reference of IFRS 2 to 2 November , 2007 and 7 November , 2002for the purpose of exemption is not relevant in the context of Nepalese economy. Therefore , in this Application Guidance a different timeline has been revised as below:

• A first time adopter is encouraged but not required to apply NFRS 2 retrospectively to any equity instrument which was granted before 1.4.2005.

ASB-NEPAL 21

• A first time adopter is encouraged but not required to apply NFRS 2 retrospectively to any equity instrument which was granted before 1.4.2010 but vested before the date of transition.

• Liabilities arising out of share based payment transaction – A first time adopter is encouraged but not required to apply NFRS 2 to liabilities arising out of share based transactions which have been settled before the date of transition.

• If a first-time adopter modifies the terms or conditions of a grant of equity instruments to which NFRS 2 has not been applied, the entity is not required to apply Paragraphs 26–29 of NFRS 2 if the modification had occurred before the date of transition to NFRSs.

Disclosures - For all equity instruments granted under share based payment to which NFRS 2 is not applied , the entity shall disclose information required as per Paragraph 44 & 45 of NFRS 2.

(7) Insurance Contracts

A first-time adopter may apply the transitional provisions in NFRS 4 Insurance Contracts. NFRS 4 restricts changes in accounting policies for insurance contracts, including changes made by a first-time adopter.[ Paragraph D4 , NFRS 1] As per Paragraph 39(c ) (iii) of NFRS 4 an entity shall disclose actual claims compared with previous estimates (i.e. claims development). The disclosure about claims development shall go back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments, but need not go back more than ten years. An insurer need not disclose this information for claims for which uncertainty about the amount and timing of claims payments is typically resolved within one year. In applying Paragraph 39(c)(iii)of NFRS 4 as stated above , an entity is not required to disclose information about claims development that occurred earlier than five years before the end of the first financial year in which it applies NFRS 4. Furthermore, if it is impracticable, when an entity first applies NFRS 4, to prepare information about claims development that occurred before the beginning of the earliest period for which an entity presents full comparative information that complies with this IFRS, the entity shall disclose that fact.[ Paragraph 44 , NFRS 4 which a transition provision]

(8) Application of IFRIC 4 [ Paragraphs D9 & D9A, NFRS 1]

IFRIC 4 Determining whether an Arrangement contains a Lease requires to account for certain arrangements as lease. A first-time adopter has the option to determine whether an arrangement existing at the date of transition to NFRSs contains a lease on the basis of facts and circumstances existing at that date. Alternatively, it may apply IFRIC 4 to arrangements entered into on or after the date of transition.

ASB-NEPAL 22

In case an entity has already followed IFRIC 4 criteria in determining whether an arrangement contains a lease , it is not necessary to reassess the arrangement as on the date of transition. Refer to Example 6 for application of IFRIC 4 criteria.

It may be mentioned that IAS 17 Leases is under revision. Certain features of ‘ determining an arrangement as a lease’ has been incorporated in the revised definition.

(9) Cumulative translation differences [ Paragraphs D12 & D13, NFRS 1]

As per Paragraph 39(c) of NAS 21The Effects of Changes in Foreign Exchange Rates translation difference arising out translation of assets, liabilities, income and expenses shall be recognized in other comprehensive income. When the foreign operation is disposed of, the cumulative translation difference is recycled to profit or loss as a part of gain or loss arising out of disposal.

The first time adopter has the option of not finding out cumulative timing differences retrospectively. It may put cumulative timing difference at zero. If this option is exercised, the cumulative translation difference that arises after the date of transition shall only be the part of gain or loss on disposal.

(10) Assets and liabilities of subsidiaries, associates [Paragraphs D16&D17, NFRS1]

Refer to Paragraph 9 of this Application Guidance for a detailed discussion about the NFRS transition when a parent company and any of its subsidiaries do not adopt same transition date.

(11) Compound financial instruments [ Paragraphs D18, NFRS1]

NAS 32 Financial Instruments: Presentation requires an entity to split a compound financial instrument at inception into separate liability and equity components. As per NFRS 1, a first-time adopter needs not separate these two portions if the liability component is no longer outstanding at the date of transition to IFRSs. Refer to Example 7.

(12) Fair value measurement of financial assets or financial liabilities at initial recognition [ Paragraph D20, NFRS 1]

Paragraph AG 76(a), NAS 39 requires that a valuation technique shall incorporate all factors that market participants would consider in setting a price. As per Paragraph D20, NFRS 1 an entity may apply the requirement of Paragraph AG76(a),NAS 39 prospectively to transactions entered into on or after the date of transition to IFRSs.

ASB-NEPAL 23

(13) Decommissioning liabilities included in the cost of property, plant and equipment [ Paragraphs D21 & D21A, NFRS 1] Refer to Paragraph 10 for a detailed discussion. (14) Financial Assets or Intangible Assets accounted for in accordance with IFRIC 12 [ Paragraph D22, NFRS 1] A first-time adopter may apply the transitional provisions in IFRIC 12.Refer to Paragraph 11 for detailed discussion. (15) Borrowings costs [ Paragraph D23, NFRS 1] A first time adopter may apply NAS 23 Borrowing Costs from the date of transition. Alternatively , it may decide a date before the date of transition from when NAS 23 shall be applied. In case an entity opts for this exemption, the capitalization of interest shall be as follows:

- Borrowing costs that have been already capitalized as per previous GAAP and included in the carrying amount of the asset is not restated;

- Borrowing costs shall be accounted for in accordance with NAS 23 on and from the date from which the standard is applied.

Refer to Example 8. (16) Transfer of Assets from Customers [ Paragraph D24, NFRS 1] Refer to Paragraph 12 for a detailed discussion. (17) Extinguishing financial liabilities with equity instruments [ ParagraphD25, NFRS1] A first-time adopter may apply the transitional provisions in IFRIC 19Extinguishing Financial Liabilities with Equity Instruments. Refer to Paragraph 13 for a detailed discussion. (18) Joint Arrangements [ Paragraph D31, NFRS1 ] A first-time adopter may apply the transition provisions in NFRS 11 Joint Arrangements with the following exceptions: (a) When applying the transition provisions in NFRS 11, a first-time adopter shall apply these provisions at the date of transition to NFRS. (b) When changing from proportionate consolidation to the equity method, a first-time adopter shall test for impairment the investment in accordance with NAS 36 as at the date of transition to IFRS, regardless of whether there is any indication that the investment may be impaired.

ASB-NEPAL 24

Any resulting impairment shall be recognised as an adjustment to retained earnings at the date of transition to NFRS. (19) Stripping cost in the production phase of a surface mine [ Paragraph D32, NFRS1] A first-time adopter may apply the transitional provisions set out in paragraphs A1 to A4 of IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine. In that paragraph, reference to the effective date shall be interpreted as 1 January 2013or the beginning of the first NFRS reporting period, whichever is later.

Example 3 [ Designation of Financial Assets and Financial Liabilities]

[Refer to Paragraph 7(1) of the Application Guidance].

Entity E has the following financial assets and financial liabilities as per previous GAAP:

Financial Liabilities ( NPR in Lakhs)

Bonds NPR 500.00

Trade payables NPR 20.00

Financial Assets ( NPR in Lakhs)

Investments in shares NPR 60.00

Loan to Group Company NPR 50.00

Loans to Employees NPR 50.00

Date of transition 1.4.2013.

Bonds - 10% Bonds were issued on 1.4.2011. Bonds shall be redeemed at the end of 10th year i.e. 31.3.2021. Annual interest date : 31 March every year. Par Value NPR 100. Issue price NPR 99. Issue expense NPR 5 lakhs. Discount and issue expenses are amortised on straight line basis.

Investments in shares – As per previous GAAP measured at cost.

The entity intends to hold for more than 12 months : As on 1.4.2013, Cost NPR 30 lakhs, Market price NPR 35 lakhs

Shares intended to be held for 12 months or less : As on 1.4.2013 , Cost NPR 30 lakhs , Market Price NPR 28 lakhs.

ASB-NEPAL 25

Loan to Group Companies – Interest free loan to Group companies was granted on 1.4.2009 for 10 years. Benchmark interest cost for 10 years loan applicable to the borrower as on 1.4.2009 12% and as on 1.4.2013 11.5%.

Loans to employees – The entity granted concessional loans to employees on various dates. Each loan shall be evaluated individually for NFRS implementation. For simplicity, it is assumed that loans were granted on 1.4.2012 at 4% p.a. repayable equated monthly installments over 60 months. Benchmark interest cost for similar 60 months loans as on 1.4.2012 12.5% and as on 1.4.2013 12%.

How would these financial liabilities and financial assets be designated for the purpose NFRS adoption? What would be the measurement basis ? How should the measurement be carried out ?

Solution

Financial Liabilities

Designation on NFRS adoption

Date of designation

Measurement basis

Carrying amount as per NFRS

( NPR in Lakhs)

Carrying amount as per previous GAAP

( NPR in Lakhs)

Bonds

(Note -1)

Financial Liability at amortised cost

1.4.2013 Amortised cost

491.30 500.00

Unamortised discount and expenses

0.00 8.00

Financial Assets

Investments in shares

Note 2

Financial Assets as at fair value through profit or loss

1.4.2013 Fair value 28.00 30.00

Investments in shares

Note 3

Financial Assets as at fair value through other comprehensive income

1.4.2013 Fair value 35.00 30.00

Loan to Group Companies

Financial Assets at amortised cost

1.4.2013 Amortised cost

25.33 50.00

Loans to employees

Financial Assets at amortised cost

1.4.2013 Amortised cost

34.64 40.78

ASB-NEPAL 26

Note 1 Bonds – Bonds shall be measured at amortised cost retrospectively from that inception. Amortised cost is present value of future cash flows discounted at implicit interest rate of 10.33% i.e. NPR 491.30 lakhs.

Valuation of Bond ( Amount in NPR lakhs)

Year Date Issue proceeds

Issue expense

Interest Principal Repayment

Net Cash flow

0 1.4.2011 495 5 490 1 31.3.2012 -50 -50 2 31.3.2013 -50 -50 3 31.3.2014 -50 -50 4 31.3.2015 -50 -50 5 31.3.2016 -50 -50 6 31.3.2017 -50 -50 7 31.3.2018 -50 -50 8 31.3.2019 -50 -50 9 31.3.2020 -50 -50

10 31.3.2021 -50 -500 -550 10.33% PV of future cash flows as on 1.4.2013 491.30 Carrying amount as per previous GAAP 500.00 Adjustment to Retained Earnings 8.70

Another related issue is discount and issue expense of NPR10 lakhs. Assume that the entity amortises discount and issue expense on straight line basis i.e. unamortised balance as on 1.4.2013 was NPR 8 lakhs which shall be eliminated by adjusting to retained earnings. So net effect to retained earnings is NPR 0.70 lakh.

Note 2 FVTPL Investments :Investments having expected holding period of 12 months or less are classified as fair value through profit or loss ( FVTPL). The change in fair value is accounted for in the Statement of Comprehensive Income. Difference is adjusted against retained earnings.

Note 3 Available for sale investments :Investments having expected holding period of more than 12 months are classified as fair value through other comprehensive income. The change in fair value is accounted for in the Statement of Other Comprehensive Income. Difference is adjusted against Fair Value Reserve. Deferred tax liability shall created if there is long term capital gain tax.

Note 4 Loan to Group company : It is classified as financial assets at amortised cost. Amortised cost is determined as present value of future cash flows discounted at relevant benchmark interest rate at the inception of the loan i.e. 12% = 500 / (1+12%)6 = NPR 25.33 lakhs. The difference is adjusted against retained earnings.

Note 5 Loans to Employees : It is classified as financial assets at amortised cost. Amortised cost is determined as present value of future cash flows discounted at relevant benchmark interest rate at the inception of the loan i.e. 12.5%.The difference is adjusted against retained earnings.

ASB-NEPAL 27

Valuation of the EMI based loans ( Amount in NPR Lakhs):

As per previous GAAP

As per NFRS

Original balance as on 1.4.2012 50.00 EMI 0.9208 Remaining Principal Balance as on 1.4.2013 40.78 34.64

EMI = Original Balance / Annuity Factor = 50/ 54.2990689= 0.9208

1-(1+ 4%/12)-60

Annuity Factor = ----------------- =54.2990689

(4%/12)

Remaining Principal Balance as on 1.4.2013 =

(1+4%/12)12-1

50 × (1+4/12%)12 – 0.9208× [ ---------------- ] = 40.78

( 4%/12)

Annuity Factor at 12.5% for remaining 48 months = 37.6223

Remaining principal balance as per NFRS at 12.5% = PV of EMI for remaining 48 months at 12.5% i.e. 0.9208 × 37.6223 = 34.64

Adjustments to retained earnings / other components of equity

Amount in NPR lakhs

Amount in NPR lakhs

Retained Earnings

Fair Value Reserve

Bond and related unamortised expenses: Add to retained earnings for reduction in value of bond 8.70 Deduct from retained earnings for elimination unamortised discount

and expenses

-2.00

Net effect 6.70 Investment in shares classified as FVTPL -2.00 Investment in shares classified as at fair value through other comprehensive income

5.00

Loan to Group Company -24.67 Loans to Employees -6.14 -26.11 5.00

ASB-NEPAL 28

Example 4[ Application of cost model of NAS 16]

Entity E wishes to follow cost model after transition to NFRSs. It wishes to re-compute cost of recently purchased PPE . Date of Purchase 1.4.2011, Depreciable amount NPR 500 lakhs , Useful life 20 years , Scrap value 5%. The company follows straight line depreciation. The carrying amount of the PPE as per previous GAAP as on 31.3.2013 NPR 452.50 lakhs. For adoption of NAS 16, the PPE is componentized as follows:

Componentisation of PPE

Proportion to Original depreciable amount

Useful Life ( Years)

Residual Value (%)

Straight Line Depreciation (in NPR Lakhs)

Main 60% 20 5% 14.25 Component 1 20% 10 2.5% 9.75 Component 2 20% 5 2.5% 19.50

Component 2 was damaged on 15.6.2012 and therefore replaced at NPR 80 lakhs. The estimated useful life of replaced component is also 5 years and estimated scrap value is 2.5%. The company did not capitalize the replaced component as per the previous GAAP. The replacement was charged as repairs and maintenance. Also scrap realization of NPR 16 lakhs was accounted for as other income during 2012-13. Find out the carrying amount of the PPE as a 1.4.2013 as per NAS 16, the date of NFRS transition. Show the adjustment entry. Solution ( NPR in lakhs) Main Component1 Component 2 Total 1.4.2011 Cost 300.00 100.00 100.00 500.00 2011-12 Depreciation 14.25 9.75 19.50 43.50 31.3.2012 WDV 285.75 90.25 80.50 456.50 15.6.2012 Depreciation up to

15.6.2012 4.06

WDV 76.44 Scrapped -76.44 Replacement 80.00 Revised WDV 285.75 90.25 80.00 456.00 2012-13 Depreciation 14.25 9.75 12.35* 36.35 31.3.2013 WDV 271.5 80.5 67.65 419.65

ASB-NEPAL 29

* For 9.5 months Transition adjustment NPR 32.85 lakhs NPR in Lakhs Transition Entry : General Reserve Account Dr. 32.85 PPE Cr. 32.8.

Example 5 [ Fair value as deemed cost]

The fair value of items of plant and equipment is usually their market value determined by appraisal. If there is no market-based evidence of fair value because of the specialised natureof the item of property, plant and equipment and the item is rarely sold, except as part of a continuing business, an entity may need to estimate fair value using an income or a depreciated replacement cost approach.[ Paragraphs 32-33, NAS 16] A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The highest and best use of a non-financial asset takes into account the use of the asset that is physically possible, legally permissible and financially feasible, as follows: - A use that is physically possible takes into account the physical characteristics of the asset ( for example, location or size of the assets); - A use that is legally permissible takes into account any legal restrictions on the use of the asset ( for example, restriction on land use); - A use that is financially feasible takes into account whether a use of the asset that is physically possible and legally permissible generates adequate income or cash flows (taking into account the costs of converting the asset to that use) to produce an investment return. Highest and best use is determined from the perspective of market participants, even if the entity intends a different use. [ Paragraphs 27-29, NFRS 13] It is important to take into account Level 1, Level 2 or Level 3 inputs. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable (i.e. similar) assets, liabilities or a group of assets and liabilities, such as a business. The cost approach reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost). The income approach converts future amounts (e.g. cash flows or income and expenses) to a single current (i.e. discounted) amount. Based on the above principles, a first time adopter shall determine the fair value of an existing asset. Let us assume the following information regarding machinery : Market price based on latest transaction of similar asset – Not available. Current replacement cost NPR 20 million Present value of net cash flows NPR 25 million.

ASB-NEPAL 30

The entity may use current replacement cost as fair value as the market price of the asset should approximates the current replacement cost while income approach involves demand uncertainties which perhaps are factored into the current replacement cost.

Example 6[ Determining whether an arrangement contains a lease]

A situation could arise where a transaction does not take the legal form of a lease, but in substance conveys the right to use an asset. On the other hand, a transaction might take the legal form of a lease, while in substance it does not convey the right to use the asset. For these types of transactions IFRIC 4 Determining whether an arrangement contains a lease would apply. Determining whether an arrangement is, or contains, a lease shall be based on the substance of the arrangement and requires an assessment of whether: (a) fulfillment of the arrangement is dependent on the use of a specific asset or assets (the asset); and (b) the arrangement conveys a right to use the asset. Refer to Paragraphs 7-9, IFRIC 4. Specific asset test - Classification of these type of arrangements as lease will depend upon the evaluation whether the arrangement can be fulfilled by using only specific asset and it provides right to use the asset. Specific asset test is critical. In case the arrangement can be satisfied by using any asset , then it is not classified as lease. It is also possible that an asset is implicitly specified. This may happen when it does not economically feasible to satisfy the arrangement other than a particular asset.

Right to use the asset - Another characteristic is that the arrangement conveys right to use the asset. Important features that meet these characteristics are –

(i) Under this arrangement the purchaser has the ability or right to operate the asset or direct others to operate the asset and it obtains more than an insignificant amount of the output of the asset.

(ii) the purchaser has the ability or right to control physical access to the asset and it obtains more than an insignificant amount of the output of the asset.

(iii) there is only a remote possibility that parties other than the purchaser will take more than an insignificant amount of the output of the asset and the price that the purchaser will pay is neither fixed per unit of output nor equal to the current market price at the time of delivery.

The assessment process is carried out at the inception of the arrangement. Inception of the arrangement means earlier of the date of arrangement or the date on which the parties commit to the principal terms of the arrangement.

ASB-NEPAL 31

The first time adopter shall carry out the assessment as per IFRIC 4 as on the date of transition. Case analysis A production company (the purchaser) enters into an arrangement with a third party (the supplier) to supply a minimum quantity of gas needed in its production process for a specified period of time. The supplier designs and builds a facility adjacent to the purchaser’s plant to produce the needed gas and maintains ownership and control over all significant aspects of operating the facility. The agreement provides for the following: • The facility is explicitly identified in the arrangement, and the supplier has the contractual right to supply gas from other sources. However, supplying gas from other sources is not economically feasible or practicable. • The supplier has the right to provide gas to other customers and to remove and replace the facility’s equipment and modify or expand the facility to enable the supplier to do so. However, at inception of the arrangement, the supplier has no plans to modify or expand the facility. The facility is designed to meet only the purchaser’s needs. • The supplier is responsible for repairs, maintenance, and capital expenditures. • The supplier must stand ready to deliver a minimum quantity of gas each month. • Each month, the purchaser will pay a fixed capacity charge and a variable charge based on actual production taken. The purchaser must pay the fixed capacity charge irrespective of whether it takes any of the facility's production. The variable charge includes the facility’s actual energy costs, which amount to about 90 per cent of the facility’s total variable costs. The supplier is subject to increased costs resulting from the facility's inefficient operations. • If the facility does not produce the stated minimum quantity, the supplier must return all or a portion of the fixed capacity charge. Case solution The arrangement contains a lease within the scope of NAS 17 Leases. An asset(the facility) is explicitly identified in the arrangement and fulfillment of the arrangement is dependent on the facility. Although the supplier has the right to supply gas from other sources, its ability to do so is not substantive. The purchaser has obtained the right to use the facility because the facility is designed to meet only the purchaser's needs and the supplier has no plans to expand or modify the facility. It is remote that one or more parties other than the purchaser will take more than an insignificant amount of the facility’s output and the price the purchaser will pay is neither contractually fixed per unit of output nor equal to the current market price per unit of output as of the time of delivery of the output. Accordingly, both the purchaser and the supplier shall assess whether it is an operating lease

ASB-NEPAL 32

or finance lease , and account for the arrangement as an appropriate lease transaction.

Example 7 [Optionally Convertible debentures]

X Ltd. has issued convertible debentures amounting to NPR 65 million as on 1.4.2009 in form of zero coupon bond of par value NPR 100 at NPR 65 each. These debentures are optionally convertible into equity shares as on 31.3.2014. Maturity of debentures which are not converted 31.3.2014. As per the conversion clause each debenture shall be converted into 2 equity shares of the issuer. Benchmark yield on non-convertible debentures issued by comparable issuer on the date of issue was 10%. Tax rate 30%.

Date of transition 1.4.2013.

(a) Show the transitional entry. Assume that as per the previous GAAP , the following balances appear in the books of the issuer :

Debenture NPR 100 million and unamortised premium balance is NPR 28 million.

As per tax laws unamrotised premium shall be allowed as borrowing costs.

(b) What shall be transitional requirement , if the date conversion was 31.3.2013 and all debentures were converted by that date.

Solution

(a) Compound financial instruments shall be segregated into liability and equity components since inception. Therefore, retrospective effect shall be given to the transaction.

100

Valuation of debenture component = ---------------------- = NPR 62.09

(1+10%)5

Valuation of conversion option = 65-62.09 = 2.91

Debentures are accounted for applying amortised cost method. So value of debentures as on 31.3.2014/ 1.4.2014 = 62.09 × (1+10%)4 = 90.91.

ASB-NEPAL 33

Transitional entry ( NPR million) :

(1) For recording debentures at amortised cost , recognizing conversion option and eliminating unamortised premium

Debentures Dr. 9.09

Retained Earnings Dr. 0.82

Unamortised premium Cr. 7.00

Conversion Option Cr. 2.91

(2) For recognizing deferred tax liability since charge for borrowing cost in the next year shall be NPR 9.09 million whereas tax law shall allow only NPR 7 million.

Retained earnings Dr 0.63

Deferred Tax Liability Cr. 0.63

(b) No transitional action is required if the debentures are already converted on the date of transition.

Example 8

As on 1.10.2012, X Ltd. borrowed NPR 100 million @ 10% for the purpose of establishing a new factory. Tenure of the loan is 10 years. Arranger’s fee 0.5%. For first two years no interest shall be cumulated semi-annually on 30 September & 31 March and added to principal. Thereafter, interest is payable semi-annually on 30 September & 31 March.

The loan shall be repaid in20 equal semi-annual installments commencing from 31 March, 2015.

First installment of loan was drawn on 1.10.2012 Rs. 50 million and second installment of loan was drawn on 1.4.2013. Commitment fee 2% p.a. on undrawn amount is also capitalized.

Construction of the factory commenced on 1.10.2013 and expected to be completed on 31.5.2014.

Construction costs till 31.3.2013 : NPR 80 million.

Interest earned on temporary deposit of the borrowed money till utlisation : 1.10.2012-31.3.2013 NPR 10,000 ; 1.4.2012-31.3.2013 NPR 20,000.

Date of transition is 1.4.2013.

ASB-NEPAL 34

Solution

Details of Loan Account as per the previous GAAP is presented below:

Amount in NPR Year Date Outstanding

principal Accrued interest

Commitment fees

Installments Undrawn amount

0 1.10.2012 50000000 50000000 0.5 31.3.2013 103000000 2500000 500000 0

1 30.9.2013 108150000 5150000 0 1.5 31.3.2014 113557500 5407500 0

2 30.9.2014 119235375 5677875 0 2.5 31.3.2015 115629389 5961769 9567755

3 30.9.2015 111843103 5781469 9567755 3.5 31.3.2016 107867503 5592155 9567755

4 30.9.2016 103693124 5393375 9567755 4.5 31.3.2017 99310025 5184656 9567755

5 30.9.2017 94707771 4965501 9567755 5.5 31.3.2018 89875405 4735389 9567755

6 30.9.2018 84801420 4493770 9567755 6.5 31.3.2019 79473736 4240071 9567755

7 30.9.2019 73879668 3973687 9567755 7.5 31.3.2020 68005896 3693983 9567755

8 30.9.2020 61838436 3400295 9567755 8.5 31.3.2021 55362603 3091922 9567755

9 30.9.2021 48562978 2768130 9567755 9.5 31.3.2022 41423372 2428149 9567755 10 30.9.2022 33926786 2071169 9567755

10.5 31.3.2023 26055370 1696339 9567755 11 30.9.2023 17790383 1302768 9567755

11.5 31.3.2024 9112148 889519 9567755 12 30.9.2024 0 455607 9567755

The entity shall include arrangement fees as part of the borrowing costs as per NAS 39.

Year NAS 39 Cash flows

NAS 39 Interest Amortised cost

Amount in Million 0 49000000 49000000 1 53000000 1842447 103842447 2 5150000 3904575 112897022 3 5407500 4245036 122549557

ASB-NEPAL 35

4 5677875 4607980 132835412 5 -9567755 4994738 128262395 6 -9567755 4822788 123517429 7 -9567755 4644373 118594047 8 -9567755 4459249 113485541 9 -9567755 4267164 108184950

10 -9567755 4067857 102685053 11 -9567755 3861056 96978353 12 -9567755 3646478 91057077 13 -9567755 3423833 84913155 14 -9567755 3192816 78538215 15 -9567755 2953112 71923572 16 -9567755 2704395 65060212 17 -9567755 2446326 57938783 18 -9567755 2178553 50549581 19 -9567755 1900712 42882539 20 -9567755 1612424 34927208 21 -9567755 1313296 26672750 22 -9567755 1002921 18107915 23 -9567755 680875 9221035 24 -9567755 346720 0

Effective semi-annual interest rate

3.76%

Interest earned on temporary deposit of borrowed money is deducted from the Asset under Construction ( or Capital Work-in-progress).

Balance of Asset under Construction as on 31.3.2013 ( Amount in NPR million):

Construction Costs 80.00

Arrangement fees 1.00

Interest 1.10.2012-31.3.2013 2.50

Commitment fees 1.10.2012-31.3.2013 0.50

--------

84.50

-----------

ASB-NEPAL 36

(1) It is possible to apply NAS 23 retrospectively and rework borrowing cost as per effective interest rate method of IAS 39.

Asset under Construction Previous GAAP Retrospective Application of NAS 23

Construction costs 80000000 80000000 Arrangement fees 1000000 0 Interest 2500000 0 Commitment fees 500000 0 Effective interest as per NAS 39 0 1842447 84000000 81842447 Add to retained earnings 2157553 Loans 103000000

103842447

Deduct from retained earnings 842447

(2) NAS 23 may be adopted on the date of transition. Borrowing costs which have been already capitalized as per previous GAAP are not restated. Borrowing costs shall be accounted for as per NAS 23 on and from the date from which the standard is applied. Therefore, balances of the Asset under construction and Loan as per previous GAAP are taken as balances for the NFRS based opening Balance Sheet.

After implementation of NAS 23 & NAS 39, amortised cost shall be recomputed taking into account interest already capitalized as per previous GAAP , and ignoring arrangement fee which has already been capitalized to asset. Presented below is the amortised cost schedule computed taking into account optional exemptions granted in Paragraph D23, NFRS 1 read with NAS 39.

Amortised cost when NAS 23 is applied prospectively Year Cash flows NAS 39

Interest Amortised cost

0 1 103000000 103000000 2 5150000 3936143 112086143 3 5407500 4283370 121777013 4 5677875 4653706 132108594 5 -9567755 5048527 127589366 6 -9567755 4875825 122897436 7 -9567755 4696523 118026204 8 -9567755 4510369 112968818 9 -9567755 4317101 107718164

10 -9567755 4116447 102266856 11 -9567755 3908126 96607227 12 -9567755 3691843 90731315

ASB-NEPAL 37

13 -9567755 3467295 84630856 14 -9567755 3234166 78297267 15 -9567755 2992128 71721641 16 -9567755 2740841 64894727 17 -9567755 2479951 57806922 18 -9567755 2209090 50448258 19 -9567755 1927879 42808382 20 -9567755 1635921 34876548 21 -9567755 1332807 26641600 22 -9567755 1018108 18091953 23 -9567755 691384 9215582 24 -9567755 352173 0

Effective semi-annual interest rate

3.82%

8. Mandatory Exemptions

NFRS 1 prohibits retrospective application of some aspects of NAS 39 Financial Instruments: Recognition and Measurement ,NAS 27 Consolidated and Separate Financial Statements and NFRS 5 Non-current Assets Held for Sale and Discontinued Operations :

(i) Derecognition of financial assets or liabilities ;

(ii) Hedge accounting;

(iii) Consolidation ;and

(iv) Government loans

Detailed discussion of the above-mentioned items are as follows: (i) Derecognition of financial assets or liabilities -

The first time adopter shall not recognise any item of financial asset or financial liability which is already derecognized under local GAAP.

However, it may apply derecognition criteria of NAS 39/NFRS 9 retrospectively if information needed for application of those standards was obtained at the time of initially accounting for those transactions.

[ Paragraphs B2&B3, NFRS1]

(ii)Hedge accounting

ASB-NEPAL 38

All existing hedges shall be tested for compliance with hedge accounting principles of NAS 39 on the date of transition to IFRS. Hedges which do not satisfy hedge accounting criteria set out in IAS 39 are discontinued applying the principles set out in Paragraphs 99 and 101 of NAS 39.No new hedging relationship shall be created on the date of IFRS transition retrospectively.

An entity shall not reflect in its opening NFRS Balance Sheet a hedging relationship that does not qualify for hedge accounting in accordance with NAS 39. For example, hedging relationships where the hedging instrument is a cash instrument or written option; or where the hedged item is a net position are not qualified as hedge as per NAS 39. However, if an entity designated a net position as a hedged item in accordance with previous GAAP, it may designate an individual item within that net position as a hedged item in accordance with NFRSs as on the date of transition.

[ Paragraphs B4-B6, NFRS1]

(iii) Consolidation (a) Paragraph B94 , NFRS 10 requires that total comprehensive income of a subsidiary shall be distributed to the parent and non-controlling interest even if this results in negative balance of the non-controlling interest. (b) Paragraph B23, NFRS 10 sets out a principle that changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (i.e. transactions with owners in their capacity as owners). ( c) A parent may lose control over a subsidiary through two or more arrangements as specified in Paragraph B97, NFRS 10. In case of loss of control, a parent shall account for the transaction in pursuant to accounting policies stated in (a)-(d) below.

(a) derecognise: (i) the assets (including any goodwill) and liabilities of the subsidiary at their carrying amounts at the date when control is lost; and (ii) the carrying amount of any non-controlling interests in the former subsidiary at the date when control is lost (including any components of other comprehensive income attributable to them). (b) recognise: (i) the fair value of the consideration received, if any, from the transaction, event or circumstances that resulted in the loss of control; (ii) if the transaction, event or circumstances that resulted in the loss of control involves a distribution of shares of the subsidiary to owners in their capacity as owners, that distribution; and (iii) any investment retained in the former subsidiary at its fair value at the date when control is lost. (c) reclassify to profit or loss, or transfer directly to retained earnings if required by other IFRSs, the amounts recognised in other comprehensive income in relation to the

ASB-NEPAL 39

subsidiary on the basis described in paragraphB99. Any items of other comprehensive income other than revaluation surplus relating to the subsidiary is transferred to profit and loss. The revaluation surplus, if any, is transferred directly to retained earnings. (d) recognise any resulting difference as a gain or loss in profit or loss attributable to the parent.[ Paragraph B98, NFRS 10]

A first time adopter shall give effect to the above-stated transactions and events prospectively from the date of transition or the date of application of IFRS 3 Business Combinations whichever is earlier.[ Paragraph B7, NFRS 1] (iv) Government loans A first-time adopter shall classify all government loans received as a financial liability or an equity instrument in accordance with NAS 32 Financial Instruments: Presentation as on the date of transition. A first-time adopter shall apply the requirements in NFRS 9 Financial Instruments and NAS 20 Accounting for Government Grants and Disclosure of Government Assistance prospectively to government loans existing at the date of transition to IFRSs. Therefore, for the purpose of NFRS opening Balance Sheet the corresponding benefit of the government loan at a below-market rate of interest is not recognised as a government grant. Thus if a first-time adopter did not, under its previous GAAP, recognise and measure a government loan at a below-market rate of interest on a basis consistent with NFRS requirements, it shall use its previous GAAP carrying amount of the loan at the date of transition to NFRSs as the carrying amount of the loan in the opening NFRS Balance Sheet. An entity shall apply NFRS 9 to the measurement of such loans after the date of transition to NFRSs. However, an entity may apply the requirements in NFRS 9 and NAS 20 retrospectively to any government loan originated before the date of transition to IFRSs, provided that the information needed to do so had been obtained at the time of initially accounting for that loan. [ Paragraph B10-11, IFRS1; these Paragraphs are not covered in NFRS 1]

Example 9[ Government Loan at below market rate]

X Ltd. received Government Loan on 1.4.2012 amounting to NPR 5,00,000 @4% while the comparative market rate of interest was 12%.

The loan has been granted for a period of 5 years.

The entity wish to give retrospective effect to NFRS 9 & NAS 20 as per Paragraph B11, IFRS 1.

ASB-NEPAL 40

Solution

Valuation of Government Loan at below market rate of interest

( Amount in NPR)

Date Year Cash flows Discount factor

Discounted cash flows

1 31.3.2013 20000 0.8929 17857 2 31.3.2013 20000 0.7972 15944 3 31.3.2015 20000 0.7118 14236 4 31.3.2016 20000 0.6355 12710 5 31.3.2017 520000 0.5674 295062

355809 Accounting Government Loan at Below Market Rate ( Amount in NPR)

Year Date Balance of Loan

Interest Cash outflows

0 1.4.2012 355809 1 31.3.2013 378506 42697 20000 2 31.3.2013 403927 45421 20000 3 31.3.2015 432398 48471 20000 4 31.3.2016 464286 51888 20000 5 31.3.2017 0 55714 520000

The Government loan shall be presented at NPR 3,78,506. As per previous GAAP the loan is appearing at NPR 5,00,000. Accordingly, the difference of NPR 1,21,494 is charged to General Reserve.

9. Assets and liabilities of subsidiaries, associates and jointly controlled entities

[Paragraphs D16&D17, NFRS1]

(A) In case the parent and subsidiary do not adopt NFRS on the same date , and the subsidiary becomes a first-time adopter later than its parent, then the following exemptions are available to the subsidiary :

(i) It shall, in its financial statements, measure its assets and liabilities at either: (a) the carrying amounts that would be included in the parent's consolidated financial statements, based on the parent’s date of transition to IFRSs, if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary .

ASB-NEPAL 41

This exemption is not available to a subsidiary of an investment entity that is required to be measured at fair value through profit or loss. (ii) Alternatively, The subsidiary may measure the carrying amounts required by the rest of this NFRS, based on the subsidiary's date of transition to NFRSs. A similar exemption is available to an associate or joint venture that becomes a first-time adopter later than an entity that has significant influence or joint control over it. (B) However, if an entity becomes a first-time adopter later than its subsidiary (or associate or joint venture) the entity shall, in its consolidated financial statements, measure the assets and liabilities of the subsidiary (or associate or joint venture) at the same carrying amounts as in the financial statements of the subsidiary (or associate or joint venture), after adjusting for consolidation and equity accounting adjustments and for the effects of the business combination in which the entity acquired the subsidiary. This exemption is not available to a parent that is a non-investment entity and the subsidiary is an investment entity. An investment entity is defined as an entity that: (a) obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services; (b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and (c) measures and evaluates the performance of substantially all of its investments on a fair value basis. 10.Decommissioning liabilities included in the cost of property, plant and equipment [ Paragraphs D21 & D21A, NFRS 1] NAS 16 Property , Plant and Equipment requires capitalization of expenses for decommissioning , site restoration and similar liabilities. The cost of an item of PPE inter alia comprises of - “ The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.” IFRIC 1Changes in Existing Decommissioning , Restoration and Similar Liabilities deals with the accounting issue regarding changes in decommission , restoration or similar expenses. Changes would arise because of the following :

• Changes in the estimate of the expenses • Changes in the timing of the expenses and • Changes in the discount rate.

ASB-NEPAL 42

IFRIC 1 explains that impact of all such changes are adjusted to the cost of the asset if cost model is followed or to revaluation reserve if the asset is accounted for under revaluation model. A first time adopter shall –

(i) measure the decommissioning liability on the date of transition applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets ,

(ii) to the extent that the liability is within the scope of IFRIC 1, estimate the amount that would have been included in the cost of the related asset when the liability first arose; The liability shall accordingly be discounted back applying appropriate risk adjusted discount rate.

(iii) compute depreciation on that amount on the date of transition.

Example 10Entity E has decided to adopt NFRS with effect from 1.4.2014. As on that it has computed the fair value as deemed cost of a Plant at NPR 400 million excluding decommissioning obligation. The Plant is estimated to be decommissioned after 20 years. Future decommissioning liability was estimated as on 1.4.2014 to be NPR500 million. The asset was originally recognized before 1.4.2000. It was not possible to work out the estimated decommissioning expenses as on that date. But the entity had recognized decommissioning liability as on 31.3.2008 amounting to NPR35 million ( PV of future liability). However, the there is change in decommissioning obligation during in 2010 which was not accounted for and risk adjusted interest rate has undergone change The liability has been undiscounted @ 10% p.a. Therefore, the decommissioning liability was appearing in the Balance Sheet as on 31.3.2013at NPR 56.37 million. The entity follows straight line method of depreciation. How should the entity carry out transition to NFRS ? Solution The entity shall discount the estimated decommissioning expenses applying market based discount rate for 20 years matching with the remaining useful life of the entity on the date of transition. Assume that it is 11%. NPR 500 million PV of decommissioning Expenses as on the date of transition = --------------------- (1+11%)20

= NPR62.02 million. NPR 500 million PV of decommissioning expenses as on 31.3.2008 : ----------------------- (1+11%)25

= NPR 36.80 million.

ASB-NEPAL 43

The entity should have capitalized NPR 36.80 million as on 31.3.2008 in place of NPR 35 million.

Amount in NPR million As per previous GAAP

Valuation at NFRS adoption

Capitalized value of decommissioning liability included in PPE

35.0 36.80

Accumulated depreciation 7.0 7.36 Net 28.0 29.4 Addition to asset 1.44 Balance of decommissioning liability 56.37 62.02 Addition to liability 5.65

Convergence Entry : General Reserve Dr. NPR 3.21 million PPE Dr. NPR 1.44 million Provision for Decommissioning Obligation Cr. NPR5.65 million This means transition valuation of decommissioning liability and eligible capitalization to assets are separately measured.

• Estimate the discounted liability in accordance with IAS 37 on the date of transition. Compare with the existing provision, if any. Account for the difference.

• Find out the liability that arose out of application of IFRIC 1 because of change in decommissioning obligation. This represents the amount that would have been capitalized and depreciated prospectively. Charge depreciation for the expired period. Undepreciated portion as on the date of transition is to be capitalized.

• The resultant difference is adjusted in the General Reserve.

11. Financial Assets or Intangible Assets accounted for in accordance with IFRIC 12 [ Paragraph D22, NFRS 1] A first-time adopter may apply the transitional provisions in IFRIC 12. Paragraph 29 of IFRIC 12 states that changes in accounting policies are accounted for in accordance with IAS 8, i.e. retrospectively. Therefore, an operator shall apply IFRIC 12 retrospectively except when it is impracticable to give retrospective effect. Refer to Examples 11&12 for application of service concession arrangement. If, for any particular service arrangement, it is impracticable for an operator to apply this Interpretation retrospectively at the start of the earliest period presented, it shall: (a) recognise financial assets and intangible assets that existed at the start of the earliest period presented; (b) use the previous carrying amounts of those financial and intangible assets(however

ASB-NEPAL 44

previously classified) as their carrying amounts as at that date; and (c) test financial and intangible assets recognised at that date for impairment, unless this is not practicable, in which case the amounts shall be tested for impairment as at the start of the current period.[ Paragraph 30, IFRIC 12] Example 11 [ Service Concession Arrangement – Receivable Accounting method] An operator was engaged by the Public Works Department to construct a road under ‘Built , Operate and Transfer’ mechanism. As per terms , the operator has to complete construction within two years , and maintain and operate the road to a specified standard for eight years (i.e. years 3–10). The terms of the arrangement also require the operator to resurface the road at the end of year 8—theresurfacing activity is revenue-generating. At the end of year 10, the arrangement will end. The operator provides the following cost estimates :

Contract Costs( NPR in millions) Year 1 : Construction costs 400 Year 2 : Construction costs 200 Years 3-10 Operating service cost @ 10 million per year Year 8: Road resurfacing 150 In year 8 the operator will be reimbursed by the grantor for resurfacing the road. Assume that all cash flows take place at the end of the year. The terms of the arrangement require the grantor to pay the operator NPR 150 million per year in years 3–10 for making the road available to the public. Suppose that the following forecast is made for fair value measurement : Construction services + 10% Operating services + 25% Resurfacing + 10% How should this arrangement be accounted for under IFRIC12? Solution As per IFRIC 12 , the operator recognises contract revenue and costs in accordance with NAS 11Construction Contracts and NAS 18 Revenue. The costs of each activity—construction, operation and resurfacing—are recognised as expenses by reference to the stage of completion of that activity. Contract revenue as measured by the fair value of the amount due from the grantor for the activity undertaken, and is recognised simultaneously. The obligation to resurface the road is measured at zero in the statement of financial position and the revenue and expense are not recognised in profit or loss until the resurfacing work is performed. Year 1 : Construction costs NPR 400 million Construction revenue NPR 440 million

ASB-NEPAL 45

So construction profit of NPR 40 million is recognised. The amounts due from the grantor meet the definition of a receivable in NAS 39Financial Instruments: Recognition and Measurement. The receivable is measured initially at fair value. It is subsequently measured at amortised cost, i.e. the amount initially recognised plus the cumulative interest on that amount calculated using the effective interest method minus repayments. How to find out effective interest? It is IRR of cash flow as shown in the Table below:

Computation of Effective Interest Rate in Service Concession Arrangements ( NPR in Millions)

Year Contract Services

Operating Services

Resurfacing Services

Payment by Grantor Net Cash flow

0 0 1 -440 -440 2 -220 -220 3 -12.5 150 137.5 4 -12.5 150 137.5 5 -12.5 150 137.5 6 -12.5 150 137.5 7 -12.5 150 137.5 8 -12.5 -165 150 -27.5 9 -12.5 150 137.5

10 -12.5 150 137.5 IRR 7.69%

Receivables Accounting including computation of finance income as is explained in Table below:

Receivables Accounting in Service Concession Arrangements( NPR in Million)

Year

Opening Balance of

Receivables Interest

Due for Construction

Services

Due for Operating Services

Due for Resurfacing

Services Cash

Receipt Closing Balance

1 440.00 2 440.00 33.82 220 0 0 0 693.82 3 693.82 53.34 0 12.5 -150 609.66 4 609.66 46.87 0 12.5 -150 519.03 5 519.03 39.90 0 12.5 -150 421.43 6 421.43 32.40 0 12.5 -150 316.32 7 316.32 25.32 0 12.5 -150 203.14 8 203.14 15.62 0 12.5 165 -150 246.25

ASB-NEPAL 46

9 246.25 115.93 0 12.5 -150 127.68 10 127.68 9.82 0 12.5 -150 0.00

Reconciliation of Cash Flow – Profit , Cost and

Cash Payments Received ( NPR in Million)

Profit

Year Construction services

Operating Services

Resurfacing Facing

Interest Income Total

1 40 40.00 2 20 33.82 53.82 3 2.5 53.34 55.84 4 2.5 46.87 49.37 5 2.5 39.90 42.40 6 2.5 32.40 35.90 7 2.5 25.32 26.82 8 2.5 15 15.62 33.12 9 2.5 115.93 21.43

10 2.5 9.82 12.32 60 20 15 275 370.00 Cost of construction 600.00 Cost of operations 80.00 Cost of resurfacing 150.00 Total Cost (a) 830.00 Total receipt (b) 1200.00 Total Profit (b)-(a) 370.00

Accordingly, the company will recognise profit and interest income in different years and charge costs. Alternatively, the operator may recognize intangibles arising out of service concession arrangements as explained in Example 12. Example 12[ Service concession arrangement – intangible accounting method] An operator was engaged by the Public Works Department to construct a road under ‘Built , Operate and Transfer’ mechanism. As per the terms of the agreement, the operator has to complete construction within two years ,and maintain and operate the road to a specified standard for eight years (i.e. years 3–10). The terms of the arrangement also require the operator to resurface the road at the end of year 8—theresurfacing activity is revenue-generating. At the end of year 10, the arrangement will end. The operator provides the following cost estimates :

ASB-NEPAL 47

Contract Costs( NPR in millions)

Year 1 : Construction costs 400 Year 2 : Construction costs 200 Years 3-10 Other construction costs @ 10 million per year Year 8: Road resurfacing 150 In year 8 the operator will be reimbursed by the grantor for resurfacing the road. Assume that all cash flows take place at the end of the year. The terms of the arrangement allow the operator to collect tolls from drivers using the road. The operator forecasts that vehicle numbers will remain constant over the duration of the contract and that it will receive tolls NPR 170 million p.a. in each of years 3–10. Related expenses NPR10 million p.a. Other operating expenses NPR 10 million p.a. Suppose that the following forecast is made for fair value measurement : Construction services + 10% Borrowing :NPR 400 million @ 8% to be repaid at the end of 7th year. How should this arrangement be accounted for under IFRIC12? Solution The operator would recognise Intangible at fair value . During the construction phase of the arrangement the operator’s asset(representing its accumulating right to be paid for providing construction services) is classified as an intangible asset (licence to charge users of the infrastructure). The operator estimates the fair value of its consideration received to be equal to the forecast construction costs plus 10 per cent margin. The operator can also capitalise borrowing cost in accordance with NAS 23 Borrowing Costs. Assume that the operator capitalises the borrowing costs, estimated at 8 % on Rs. 400 million, during the construction phase of the arrangement. So fair value of intangibles works out be : Fair value of construction services NPR 660.00 million + Capitalised Borrowing cost @8% on NPR 400 million = NPR 32.00 million -------------------------- NPR 692.00 million --------------------------- Amortisation over 8 years = NPR 86.5 million Toll revenue : The operator recognises toll revenue as and when earned , i.e. NPR 170 million during Years 3-10. Related expenses should be charged. Resurfacing obligations : The operator’s resurfacing obligation arises as a consequence of use of the road during the operating phase. It is recognised and measured in accordance with

ASB-NEPAL 48

NAS 37 Provisions, Contingent Liabilities and Contingent Assets, i.e. at the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. For the purpose of this case example, it is assumed that the terms of the operator's contractual obligation are such that the best estimate of the expenditure required to settle the obligation at any date is proportional to the number of vehicles that have used the road by that date . In absence of that figure , straight line charge is possible. Calculation is presented in the Table below:

Provisioning of Resurfacing Charges (NPR in million)

Year 3 4 5 6 7 8 Total Discount Factor 0.6806 0.7350 0.7938 0.8573 0.9259 1.0000 Undiscounted Charge 25.00 25.00 25.00 25.00 25.00 25.00 150.00 Discounted Charge 17.01 115.38 19.85 21.43 23.15 25.00 125.82 Unwinding of discount 0 1.36 2.94 5.75 6.86 9.26 25.18 Balance of Provision for Resurfacing 17.01 36.75 59.54 85.72 115.74 150.00 Provisioning 17.01 19.74 22.79 26.20 30.01 35.26

Presented below in Table A – C are cash flow statement , income statement and balance sheet of the operator ( assumption : loan is repaid at the end of 7th year)

Table A Cash Flow Statement ( NPR in million)

Year Construction costs

Other operating costs

Borrowings

Toll Revenue

Operating Expenses

Borrowing costs Equity

Net Cash Flow

Cumulative Cash

1 -400 400 0 0 2 -200 32 -32 200 0 0 3 -10 170 -10 -32 118 118 4 -10 170 -10 -32 118 236 5 -10 170 -10 -32 118 354 6 -10 170 -10 -32 118 472 7 -10 -432 170 -10 -32 -314 158 8 -150 -10 170 -10 0 158 9 -10 170 -10 150 308

10 -10 170 -10 150 458

ASB-NEPAL 49

Table B :Income Statement ( NPR in Million )

Year Revenue

Amortisation of Intangibles

Operating expenses

Borrowing costs Provision Profit

Cumulative Profit

1 40 40.00 40.00 2 20 20.00 60.00 3 170 -86.5 -20 -32 -17.01 15.49 75.49 4 170 -86.5 -20 -32 -19.74 11.76 86.25 5 170 -86.5 -20 -32 -22.79 15.71 95.97 6 170 -86.5 -20 -32 -26.19 5.31 100.28 7 170 -86.5 -20 -32 -30.01 1.49 101.77 8 170 -86.5 -20 0 -35.27 29.23 131.00 9 170 -86.5 -20 0 0 63.5 195.50

10 170 -86.5 -20 0 0 63.5 2515.00

Table C Balance Sheet ( NPR in Million )

Year Equity Retained Profit Debt

Provision for Resurfacing Liability

Total Funds Intangibles Cash

Total Assets

1 0 40 400 440.00 440.00 0 440.00 2 200 60 432 0 692.00 692.00 0 692.00 3 200 75.49 432 17.01 723.50 605.50 118 723.50 4 200 86.25 432 36.75 755.00 519.00 236 755.00 5 200 95.97 432 59.54 786.51 432.50 354 786.50 6 200 100.28 432 85.72 8115.00 346.00 472 8115.00 7 200 101.77 0 115.73 417.50 259.50 158 417.50 8 200 131.00 0 0 331.00 173.00 158 331.00 9 200 195.50 0 0 395.50 86.50 308 395.50

10 200 2515.00 0 0 4515.00 0.00 458 4515.00 12. Transfer of Assets from Customers [ Paragraph D24, NFRS 1] A first-time adopter may apply IFRIC 18 Transfers of Assets from Customers from the date of transition. Therefore, in a case of transfer of assets from customer before the date of transition, wherein revenue would have been recognised but deferred as per previous GAAP shall continue. Alternatively, an entity may give retrospective effect to IFRIC 18. By this any deferred revenue shall be adjusted against retained earnings.

ASB-NEPAL 50

Example 13[ Transfer of Assets from Customers] During 2012-13, X Ltd. , electricity distribution company, received a payment of NPR 20,00,000 on account of last mile connection and sub-station to be constructed near the factory of the customer and to connection the customer’s plant. The distribution company recognised asset and deferred revenue and adopted a policy to amortise the deferred revenue over 10 years. Accordingly , during 2012-13 recognised NPR 2,00,000 to profit and loss. What should the transitional treatment? Solution (1) Applying exemption in Paragraph D24, NFRS 1, and the company may continue the deferred revenue account. However, it shall align the depreciation charge of the related asset as per NAS 16. (2) Alternatively, the entity may transfer deferred revenue of NPR 18 lakhs to General Reserve on the date of transition. It shall align the depreciation charge of the related asset as per NAS 16. 13. Extinguishing financial liabilities with equity instruments [ Paragraph D25, NFRS1] A first-time adopter may apply the transitional provisions in IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments . As per Paragraph 13 , IFRIC 19 an entity shall apply a change in accounting policy in accordance with IAS 8 from the beginning of the earliest comparative period presented. Example 14[ Redemption of loan by equity shares] As per Paragraph 6, IFRIC 19 when equity instruments issued to a creditor to extinguish all or part of a financial liability are recognised initially, an entity shall measure them at the fair value of the equity instruments issued, unless that fair value cannot be reliably measured. X Ltd. took a loan of NPR 100 million. It could not repay the loan and outstanding interest of NPR 36 million. As per agreement with the lender, it issued 1 million equity shares on 14 November, 2013. As per its previous GAAP, the company recognised equity shares capital and share premium at NPR 10 million and NPR 26 million respectively. Market price of equity shares of the company as on the date redemption was NPR 42. Discuss accounting policy to be followed by the company for NFRS transition on 1.4.2013.

ASB-NEPAL 51

Solution The company shall give effect to IFRS 19 retrospectively from the earliest comparative period presented. In other words, IFRIC 19 shall be given effect on the Balance Sheet as on 31.3.2013 which is the earliest comparative period for the first NFRS Balance Sheet to be released as on 31.3.2015 ( for 2014-15). NFRS 1 requires that three Balance Sheet shall be presented. So opening NFRS Balance Sheet is the earliest comparative Balance Sheet . Accordingly, fair value accounting of equity is necessary because the equity valuation as per Balance Sheet dated 31.3.2013 is the earliest comparative period. The transition entry: Retained Earnings Dr. NPR 6 million Share Premium Cr. NPR 6 million

14. Business combinations that occurred before the date of transition

A first time adopter may elect not apply NFRS 3Business Combination retrospectively, i.e. it may elect not apply NFRS 3 to the business combinations that occur before the date of transition to NFRS. However, if the first time adopter restates any of the past business combinations , it should then restate all later business combinations , and apply NFRS 10 Consolidated Financial Statements from the same date.

An entity is not required to apply NAS 21 The Effects of Changes in Foreign Exchange Rates retrospectively for the purpose of fair value adjustments and goodwill arising in business combination that occurred before the transition date. But it may elect apply NAS 21 retrospectively to fair value adjustments and goodwill arising either i. to all business combinations that occurred before transitional date; or ii. to all business combinations which the entity elects to restate to comply with NFRS 3. In case a first time adopter does not apply NFRS 3 retrospectively to past business combination , the following steps are followed:

(i) Retention of classification- Same classification of business combination ( i.e., acquisition or uniting of interest as per previous GAAP ) is retained.

(ii) Recognition of all assets and liabilities - Assets and liabilities acquired or assumed in any past business combination are recognised in the acquirer's NFRS based opening balance sheet. However, the following assets and liabilities are not recognised :

(a) Any financial asset or financial liability which is already derecognized in accordance with previous GAAP.

(b) Assets including goodwill and liabilities which are not recognised in the acquirer’s consolidated financial statements of the entity, and would not qualify for recognition as per NFRSs. The resultant change is recognised in the retained earnings or any other appropriate component of equity like fair value reserve or revaluation reserve.

ASB-NEPAL 52

(c) In case the first time adopter has recognised any intangible assets arising out of any previous business combination accounted for as per previous GAAP that does not qualify to be an intangible asset in accordance with NAS 38, shall eliminate such assets and adjust the change against goodwill, if any. All other changes are adjusted in the retained earnings or any other appropriate component of equity like fair value reserve or revaluation reserve.

(d) If an asset or liability was subsumed in goodwill in accordance with previous GAAP but would have been recognised separately under NFRS 3, that asset or liability remains in goodwill unless NFRSs would require its recognition in the financial statements of the acquiree. In other words, the first time adopter shall recognise intangible assets as per NAS 38 and adjust against goodwill. For example, in case there is license which is not separately recognised and subsumed in the goodwill, it should be separately recognised. Whereas the first time adopter shall not recognise brand since it was not segregated at the time of acquisition.

(e) If under the previous GAAP the goodwill was recognized as deduction from equity, the first time adopter cannot recognize that goodwill in its opening balance sheet. It is not allowed to transfer that goodwill when the investment in subsidiary is disposed or impaired, i.e. any transfer from equity to cover subsequent loss is prohibited. Even the entity is not permitted to recognise previously charged amount when the investment is sold , i.e. reversal is not allowed.

(e) The carrying amount of goodwill arising out of past business combination at its carrying amount as per the previous GAAP on the date of transition except for the cases stated in (c) and (d). No other adjustment to goodwill is permitted. NAS 38 does not allow amortization of goodwill. It is tested for impairment at each reporting date. But if the goodwill has been amortised in accordance with the previous GAAP, such amortisation is not reversed.

(f) NFRSs require subsequent measurement of some assets and liabilities as fair value. Accordingly, fair value measurement is carried out on the date of transition for those assets and liabilities include those which were acquired through business combinations. The resultant change is recognised in the retained earnings or any other appropriate component of equity like fair value reserve or revaluation reserve.

(g) NFRSs may require or allow cost based measurement of certain assets like property, plant and equipment , intangible assets, investment property, etc. The carrying amount of such assets is treated as deemed cost for the purpose of NFRSs. That deemed cost shall be basis for charging cost-based depreciation or amortization.

(h) In case any asset or liability was not recognised in a past business combination transaction, then carrying amount of such asset or liability is not taken zero. The entity shall recognise on the date of transition such an asset or a liability applying NFRSs. Suppose the acquiree subsidiary company did not recognise capitalized value of financial lease or a provision , then the acquirer shall recognise finance lease applying NAS 17 and provision applying NAS 37 for the purpose of its Consolidated Financial Statements. Accordingly, it shall adjust goodwill and non-controlling interest.

ASB-NEPAL 53

(i) In case an entity has not recognised a consolidated subsidiary as it was not regarded as a subsidiary as per previous GAAP but it is treated as a subsidiary, then the following adjustments are carried out the NFRS based opening consolidated balance sheet :

- The first-time adopter shall adjust the carrying amounts of the subsidiary’s assets and liabilities to the amounts that NFRSs would require in the subsidiary’s statement of financial position.

- The deemed cost of goodwill equals the difference between the parent’s interest in the adjusted carrying amount and cost of investment in the subsidiary as appearing in the parent’s separate financial statements at the date of transition to NFRSs.

As per NFRS 3 Business Combinations , the measurement of non-controlling interests and deferred tax follows from the measurement of other assets and liabilities. Therefore, the above adjustments to recognised assets and liabilities affect non-controlling interests and deferred tax.

The exemption to past business combination also applies to past acquisition of interest in joint ventures and associates. In case NFRS 3 is applied retrospectively from any date prior to the date of transition, then that date will also apply application NFRS 10 and NAS 28.

15. Interim Financial Reporting

NAS 34 applies if an entity is required, or elects, to present an interim financial report in accordance with IFRSs. Accordingly, neither NAS 34 nor the NFRS requires an entity: (a) to present interim financial reports that comply with NAS 34; or (b) to prepare new versions of interim financial reports presented in accordance with previous GAAP. However, if an entity does prepare an interim financial report in accordance with NAS 34 for part of the period covered by its first NFRS financial statements, the entity restates the comparative information presented in that report so that it complies with NFRSs. Listed companies are required to submit quarterly financial information to the stock exchange(s) as per listing agreement. Such quarterly information is prepared in accordance with NAS 34. Suppose that Entity E’s first NFRS financial statements have a reporting date of 31 March, 2015 , and its first interim financial report under NAS 34 is for the quarter ended 30June 2014. Entity E prepared previous GAAP annual financial statements for the year ended 31 March 2014, and prepared quarterly reports throughout 2013-14. E should carry out reconciliations as per the following details: In each quarterly interim financial reports for 2014-15, E should reconcile -

(i) its equity under previous GAAP at the end of the comparable quarter of 2013-14 to its equity under NFRSs at that date; and

(ii) its profit or loss under previous GAAP for the comparable quarter of 2013-14 (current and year-to-date) to its profit or loss under NFRSs.

ASB-NEPAL 54

Entity E’s interim financial report for the first quarter of 2014-15 includes reconciliations of (or a cross-reference to another published document that includes these reconciliations):

(i) equity under previous GAAP on 1 April 2013 and 31 March , 2014 to its equity under NFRSs at those dates; and

(ii) its profit or loss for 2013-14 under previous GAAP to its profit or loss for 2013-14 under NFRSs.

Explanation to cash flow adjustment

Entity E should explain the material adjustments to the cash flow statement.

Error under previous GAAP The reconciliations distinguish the correction of those errors from changes in accounting policies.

Omission of a material information in the interim report under previous GAAP

Disclose that information or include a cross-reference to another published document that includes it

16. Miscellaneous Issues

In this Paragraph transition of NAS 16, IFRS 2 , IAS 21 , IAS 18, IAS 17, IAS 12 , IAS 23 ,IAS 40 , IAS 36 , IAS 37 and IFRIC 4 are discussed.

(1) Property, Plant and Equipment

Transition procedures regarding property, plant and equipment are as follows:

(i) Depreciation Charge -If rates and method adopted in previous GAAP are not acceptable under NAS 16, then the entity shall re-compute depreciation and adjust balance of the accumulated depreciation under previous GAAP. Refer to Example4.

(ii) Deemed cost - The entity shall determine deemed cost, if that is opted for, in accordance with Paragraphs D30, D5-D8, NFRS 1. Refer to Paragraph 7(2) of the Application Guidance for a detailed discussion.

(iii) Subsequent depreciation when fair value is taken as deemed cost – It shall be first allocated component-wise based on engineering analysis of cost proportion or ratio of current market value of separate components.

(iv) Subsequent depreciation when revaluation amount is taken as deemed cost – Revalued amount is allocated component-wise and depreciation is charged from the date of revaluation.

(v) Revaluation surplus when cost model is adopted – It is carried forward till the asset is disposed off. Deferred tax liability is created on the existing balance of revaluation surplus.

ASB-NEPAL 55

(2) Leases :At the date of transition to IFRSs, a lessee or lessor classifies leases as operating leases or finance leases as per NAS 17 on the basis of circumstances existing at the inception of the lease.

(3) Revenue Recognition

In case the entity has recognized any amount as revenue under previous GAAP which does satisfy the revenue recognition criteria as per NAS18, it should recognize liability making adjustment to equity on the date of transition.

(4) Employee Benefits

To apply NFRSs an entity is required to carry out measurements of employee benefit obligations at three dates: the date of transition to NFRSs, the date of the comparative balance sheet and the reporting date. NAS 19 encourages an entity to involve a qualified actuary in the measurement of all material post-employment benefit obligations. It is possible that the qualified actuary would carry out a detailed actuarial valuation at one or two of these dates and roll the valuation(s) forward or back to the other date(s). Any such roll forward or roll back reflects any material transactions and other material events (including changes in market prices and interest rates) between those dates.

At the date of transition to NFRSs, NAS 19 is applied for the measurement of net employee benefit assets or liabilities under defined benefit plans. The entity may elect to recognise all cumulative actuarial gains or losses from the inception of the plan until the date of transition to NFRSs.

Actuarial assumptions made at the date of transition to IFRSs should be consistent with actuarial assumptions made for the same date under previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is objective evidence that those assumptions were in error. The impact of any later revisions to those assumptions is treated as actuarial gain or loss of the period in which the entity makes the revisions.

If the entity makes actuarial assumption on the transition date which were not necessary, it should ensure that such assumptions are consistent with the transition date and does not reflect conditions prevailing on a later date.

Transitional provision of NAS 19 does not apply to the first time adopter.

(5) The effect of changes in foreign exchange rates

Paragraph 41 , NAS 21 requires that “any goodwill arising on the acquisition of foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of such foreign operations shall be treated assets and liabilities of the foreign operation. Thus they shall be expressed in the functional currency of the foreign operation and shall be translated at the closing rate in accordance with paragraphs 39 and 42”.

ASB-NEPAL 56

Now if an entity treated such goodwill , component of assets and liabilities reflected fair value adjustment as stated in Paragraph 41, NAS 21 as assets and liabilities of the entity not that of foreign operations , it is permitted under NFRS 1 to apply the requirements of Paragraph 41 prospectively to all acquisitions of foreign operations occurring after the date of transition.

(6) Income Taxes

An entity applies NAS 12Income Taxes to temporary differences between the carrying amount of the assets and liabilities in its opening NFRS balance sheet and their tax bases. Measurement of current and deferred tax is carried out on the basis of tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.

NAS 12 requires recognition of deferred tax on revaluation reserve and other fair value accounted through other comprehensive income. For the purpose of opening NFRS financial statements create deferred tax on –

• Revaluation profit of property, plant and equipment; • Fair value gain /loss on financial assets through other comprehensive income; • Fair value gain or loss on investments in subsidiaries, associates and joint ventures

if carried at fair value as per NAS 27 Separate Financial Statements; • Translation difference arising out of foreign operations in opening consolidated

financial statements.

For a detailed discussion refer to Application Guidance on NAS 12 Income Taxes.

(7) Borrowing Costs

The entity should establish a policy on the transition date for capitalization of borrowing cost under NAS 23 or expensing of borrowing cost . The policy should be consistently applied opening NFRS balance sheet and in all periods presented in its first NFRS financial statements.

If the entity established a deemed cost for an asset, the entity should not capitalise borrowing costs incurred before the date of the measurement that established the deemed cost.

Also refer to Optional exemptions discussed in Paragraph 7(15) & Example 8.

(8) Investment Property

The entity has the choice under NAS 40 to opt for fair value model or cost model. If fair value model is opted for , transitional requirements of NAS 40 is not applied to the first time adopter. If cost model is opted for the entity shall apply NAS 40 retrospectively i.e. cost is determined as on the date acquisition of the investment property, componentization is

ASB-NEPAL 57

carried , if relevant and depreciation is charged as per NAS 16 The entity may opt for deemed cost in accordance with Paragraph 7(2) this Application Guidance.

(9) Impairment of Assets and Provisions, Contingent Liabilities and Contingent Assets

NAS 36 is applied by first time adopter to test whether there is an impairment or reversal of impairment.

The first time adopter shall use estimates to determine whether measurement of an impairment loss or provision at the date of transition to NFRSs are consistent with estimates made for the same date under previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is an objective evidence that those estimates were in error (Paragraphs 31 and 32 ,NFRS1). The entity would report the impact of revisions to those estimates at a later date as an event of the period in which it makes the revisions.

While making estimates for impairment , reversal of impairment or provisioning , the entity shall ensure that conditions prevailing on the date of estimates are adequately reflected.

Transitional provisions of NAS36 and NAS 37 do not apply to the first time adopter.

If reversal of previously recognized impairment loss is required , that shall be adjusted against retained earnings. If reversals take place after the first NFRS balance sheet that shall be accounted for in the Statement of Income even if the impairment was carried out under the previous GAAP.

ASB-NEPAL 58

Case Study Preparation of Opening NFRS financial statements

Given below are the Balance Sheet of X Ltd. prepared as per local GAAP as on 31.3.2013 , Notes and other information:

NPR Million Reference

31.3.2013

Shareholders' Funds Share Capital 100.00

General Reserve 948.00

1048.00

Liabilities Bonds 500.00 Example 3

Loans 103.00 Example 8 Convertible debentures 100.00 Example 7 Deferred Tax liabilities 23.25 Note 1 Trade Payables 30.00

Warranty Provision 20.00 Note 2 Tax Provision net of advance tax 1.00

Proposed dividend 10.00

787.25

Total Equity & Liabilities 1835.25

Assets Property, Plant & Equipment 452.50 Example 4

Capital work in progress 84.00 Example 8 Investments in shares 60.00 Example 3 Loans to Group Companies 50.00 Example 3 Loans to Employees 40.78 Example 3 Advances to suppliers 400.00

Inventories 300.00 Note 3 Trade Receivables net of allowance for bad debt 400.00 Note 4 Other Current Assets 17.00

Cash and Bank Balances 30.97 Note 5

1835.25

Figures of Bonds, Loans , Convertible debentures , Property, Plant and Equipment, Capital Work in Progress, Investment in shares , Loans to group companies and Loans to Employees are taken from Examples 3,4,7&8 wherein transition to NFRS for these items are explained.

ASB-NEPAL 59

Notes : Note -1 Deferred tax liabilities Amount in NPR in Million Assets Carrying

amount Tax Base

Difference Deferred tax liabilities

PPE 452.50 350.00 102.50 30.75

Liabilities Carrying amount

Tax Base

Difference Deferred tax assets

Allowance for Bad debt 5.00 0.00 5.00 1.50 Warranty provisions 20.00 0.00 20.00 6.00

7.50 Deferred Tax liabilities ( net) 0 23.25 Tax rate 30% Note 2 Warranty provisions NPR in Million For 2013-14 10 For 2014-15 5 For 2015-16 5

15

Note 3 Inventories Raw materials 100 Work in process 20 Finished goods 150 Spares 30

300 Spares include spares purchases before1.4.2012 20 Note 4 Trade Receivables Unsecured and Good 380.00 Unsecured and doubtful 20.00

400.00 Unsecured and doubtful trade receivables amounting to NPR 10 millions are overdue beyond operating cycle and allowance of NPR 5 million has been created on such trade receivables.

Note 5 Other Current Assets Unamortised premium on convertible debentures 7 Unamortised premium and issue expense on bonds 8 Other items 2

ASB-NEPAL 60

17

Note 6 Cash and Bank Balances Cash on hand 0.10 Current account balances 5.90 Deposits having original maturity of 90 days 8.75 Deposits having original maturity of 1 year and remaining maturity of 60 days

5.00

Deposits having original and remaining maturity of more than 1 year

11.22

30.97 Prepare opening NFRS Balance Sheet. Case Solution For transition analysis of the items stated below refer to the solution given elsewhere in the Application Guidance : Bonds, Investment in shares , Loans to group companies and Solution to Example 3 Loans & Capital Work in Progress Solution to Example 8 Convertible debentures Solution to Example 7 Property, Plant and Equipment Solution to Example 4

NFRS Based Opening Balance Sheet Previous

GAAP Adjustments

NFRS Reference

NPR in Million Assets Non-current Assets Property, Plant & Equipment 452.50 -32.85 419.65 Example 4 Capital work in progress 84.00 -2.16 81.84 Example 8 Investments in shares 30.00 5.00 35.00 Example 3 Loans to Group Companies 50.00 -24.67 25.33 Loans to Employees 40.78 -13.25 27.53 Non-current Inventories 0 20.00 20.00 Non-current Trade Receivables 0 5.00 5.00 Other non-current Assets 0 11.22 11.22 Note 6 Total non-current Assets 657.28 -31.71 625.57 Current Assets Investments in shares 30.00 -2.00 28.00 Example 3 Loans to Employees 0 7.12 7.12 Advances to suppliers 400.00 0.00 400.00 Inventories 300.00 -20.00 280.00 Note 3 Trade Receivables net of allowance 400.00 -10.00 390.00 Note 4

ASB-NEPAL 61

for bad debt Other Current Assets 17.00 -10.00 7.00 Note 5 Cash and cash equivalents 30.97 -16.22 14.75 Note 6 Total current Assets 1177.97 -51.10 1126.87 Total Assets 1835.25 -82.81 1752.44 Shareholders' Funds Equity Share capital 100.00 0 100.00 General reserve 948.00 -53.44 894.57 Fair value reserve 0.00 5.00 5.00 Conversion option 0 2.91 2.91 Example 7 1048.00 -45.53 1002.48 Liabilities Non-current Liabilities Bonds 500.00 -8.70 491.3 Example 3 Loans 103.00 0.84 103.84 Example 8 Deferred Tax liabilities 23.25 -9.02 14.24 Note 1 Non-current provisions 10.00 -1.32 8.68 Note 2 636.25 -18.20 618.055 Current Liabilities Convertible debentures ( Liability component)

100.00 -9.09 90.91 Example 7

Trade Payables 30.00 0.00 30.00 Warranty Provision 10.00 0.00 10.00 Note 2 Tax Provision net of advance tax 1.00 0.00 1.00 Proposed dividend 10.00 -10.00 0 151.00 -19.09 131.91 Total liabilities 787.25 -37.29 749.97 Total Equity and liabilities 1835.25 -82.81 1752.44 Note -1 Deferred tax liabilities Assets Carrying

amount Tax Base Difference Deferred

tax liabilities

Reference

PPE 419.65 350.00 69.65 20.90 Convertible debentures

0.63 Example 7

Bond 0.21 21.74 Liabilities Carrying

amount Tax Base Difference Deferred

tax assets

ASB-NEPAL 62

Allowance for Bad debt

5.00 0.00 5.00 1.50

Warranty provisions 20.00 0.00 20.00 6.00 7.50 Deferred Tax liabilities ( net)

0 14.24

Note : There may arise deferred tax impact on Loans to Group Companies , Loans to employees and Investments. Note 2 Warranty provisions Amount Discounted value Non-current For 2014-15 5.00 4.55 For 2015-16 5.00 4.13

10.00 8.68 Current For 2013-14 10.00 10.00 Total 20.00 18.68

Note 3 Inventories Non-current 20.00 Current 380.00 400.00 Note 4 Receivables Non-current net of allowance 5.00 Current 400.00 405.00 Note 5 Other Current Assets Unamortised premium on convertible debentures

7.00 0

Unamortised premium and issue expense on bonds

8.00 0

Other items 2.00 2.00 17.00 2.00

Bank deposits 5.00 7.00

Note 6 Cash and Bank Balances Cash and Cash Equivalents Cash on hand 0.10 Current account balances 5.90 Deposits having original maturity of 90 days 8.75 14.75

ASB-NEPAL 63

Other Current Assets Deposits having original maturity of 1 year and remaining maturity of 60 days

5.00

Other Non-current Assets Deposits having original and remaining maturity of more than 1 year

11.22

30.97

ASB-NEPAL 64

Annexure -1

NFRSs Implementation Schedule

The entities to which NFRSs shall be applicable and the financial year in which fully NFRSs complied Financial Statements to be prepared shall be as follows. However NFRS-9, Financial Instrument shall be applicable with effect from 16 July, 2015 onwards.

Type Entities Requiring adoption of NFRS NFRS Complied Financial

Statements

A 1. Listed Multinational Manufacturing Companies 2. Listed State O w ned Enterprises (SO Es) w ith minimum paid up capital of Rs. 5 billions (except Banks and Financial Institutions under BAFIA Act, 2006)

2014-15

B 1. Commercial Banks, including State Owned Commercial Banks; 2. All other Listed State Owned Enterprises (SOEs)

2015-16

C 1. All other Financial Institutions not covered under A & B above

2. All other SOEs 3. Insurance Companies 4. All other Listed Companies 5. All other Corporate Bodies/Entities not defined as

SMEs or entities having borrowing with minimum of Rs. 500 million.

2016-17

D NFRS for SMEs (SMEs as defined and classified by ASB)

2016-17

NOTE:

1. Early implementation of NFRSs is encouraged/ recommended.

2. Until the implementation of NFRS as per above schedule, existing NASs shall continue to be effective to such entities.

ASB-NEPAL 65

Annexure –II

List of IFRICs and SICs

IFRICS IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities

IFRIC 2 Members' Shares in Co-operative Entities and Similar Instruments

IFRIC 4 Determining whether an Arrangement contains a Lease

IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds

IFRIC 6 Liabilities arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment

IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies

IFRIC 10 Interim Financial Reporting and Impairment

IFRIC 12 Service Concession Arrangements

IFRIC 13 Customer Loyalty Programmes

IFRIC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

IFRIC 15 Agreements for the Construction of Real Estate

IFRIC 16 Hedges of a Net Investment in a Foreign Operation

IFRIC 17 Distributions of Non-cash Assets to Owners

IFRIC 18 Transfers of Assets from Customers

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

IFRIC 21 Levies

SICs SIC-7 Introduction of the Euro

SIC-10 Government Assistance—No Specific Relation to Operating Activities

SIC-15 Operating Leases—Incentives

SIC-25 Income Taxes—Changes in the Tax Status of an Entity or its Shareholders

SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease

SIC-29 Service Concession Arrangements: Disclosures

SIC-31 Revenue—Barter Transactions Involving Advertising Services

SIC-32 Intangible Assets—Web Site Costs