Ican Journal June 2014

June 2014
Vol. 16 No. 4
P A
ACCOUNTANT
Contents
(Quarterly Journal of The Institute of Chartered Accountants of Nepal)
Editorial Committee
CA. Mahesh Kumar Guragain
CA. Narendra Bhattarai
CA. Kiran Subedi
CA. Pankaj Thapa
CA. Santosh Ghimire
RA. Dev Bahadur Bohara
RA. Dharanidhar Adhikari
RA. Murari Bhattarai
RA. Shankar Gyawali
Mr. Binod Neupane
Chairman
Vice -Chairman
Member
Member
Member
Member
Member
Member
Member
Secretary
Mr. Binaya Paudel
Editorial Support
The Institute of Chartered Accountants of Nepal

Babar Mahal, P O Box 5289, Kathmandu, Nepal
Tel. No. 4269130, 4258569, 2030021, Fax: 977-1-4258568
E-mail: ican@ntc.net.np, Website: www.ican.org.np
Branch Office Biratnagar
Tel: 021-471395, Fax: 021-470077, E-mail: icanbrt@ican.org.np
Branch Office Butwal
Tel: 071-543629, E-mail: icanbtl@ican.org.np
Editorial
President's Message
ACCOUNTING
Fully Depreciated Assets - IAS 16
- CA. Pooja Gupta
AUDITING
Reconciling Stakeholder Expectations of an Audit Through
Better Audit Management
- CA. Nanda Kishore Sharma
Need to Harmonize the Regulation of Audit

- CA. Paramananda Adhikari
14
Risk Based Internal Auditing: Nepalese Banking Perspective

- CA. Ramesh Dhital
17
ECONOMY
Fiscal Risks and Related Teransparency Issues
20
- CA. Chandra Kanta Bhandari
Branch Office Birgunj

Tel: 051-522660, E-mail: icanbrj@ican.org.np
Public Debt: An Emerging Global Concern
Branch Office Pokhara

Tel: 061-537679, E-mail: icanpkr@ican.org.np
24
- Mr. Iswar Raj Shrestha
Economic Vision for the Long Term Growth and

Development of Nepal
Designed & Printed By

Print and Art Service, Putalisadak,Ktm.
Tel: 4244419, 4239154
30
- Dr. Basudev Sharma
Taxation
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Rs. 300 (if received by self)
Opinions expressed by the contributors in this journal are their own and do not
necessarily represent the views of the Institute. Member Bodies of SAFA may
quote or reprint any part of this journal with due acknowledgements. For others,
solicitation is expected.
Improvements Required in the Functioning of Tax Hierarchy

to Encourage Foreign Investments
34
- CA. N.Krishnaswami
Other
Accepting Globalization The Profession Needs to be Torch
Bearer of Change
41
- CA. Sujeev Shakya
The Financial Reporting Supply Chain in Asia

- Mr. Brian Blood
Contributors
CNC Pvt. Ltd.
First Cover Back
Standard Chartered Bank (Nepal) Ltd.
Page No: 6
Global IME Bank Ltd.
Page No: 53
NB Bank Ltd.
Page No: 56
Shikhar Shoe
Inside Back
SKODA M.A.W.
Back Cover
News
43
46
Students News
Member News
International Participation
Important Notice
13, 23, 29 & 42
Editorial
Editorial
The Institute of Chartered Accountants of Nepal (ICAN) established in 1997
as a national professional accounting body under the Nepal Chartered Accountants
Act, 1997 in the country. In the initial stage of its inception, it started operations
with a limited space on rented building situated in Babarmahal, Kathmandu.
With the increased operations the institute severally felt the need of adequate
infrastructure for better functioning and planned to construct the building of its
own but getting adequate land at the appropriate location was difficult and
challenging task. Due to the honest efforts of the office bearer and members,
the Government of Nepal generously allotted a plot of land on lease some five
years ago at Satdobato, Lalitpur for construction of building. ICAN initiated
campaign to gather the resources for better infrastructure and the entire members
voluntarily contributed in support of this move.
ICAN is finally shifting to own newly constructed modern building with various
required facilities after seventeen years of its establishment at the new location
at Satdobato, Lalitpur. This shifting will be historical moment and a milestone
achievement in the annals of accounting precession in the country.
With the new infrastructure, we believe ICAN will be able to enhance further
its social image and its professional strength through motivated students,
employees, and members at large by delivering more quality and professional
duties.
ICAN building is the outcome of collaborative effort of all the stakeholders
mainly Government, different regulatory bodies, Councils, members, students
and staffs and others who generously contributed monetary as well as their
whole hearted support for construction of the building. We all have the duty
and let us commit to create the building as an Icon of the accounting profession.
for the generation to generations.
Congratulation to whole ICAN Family !
The Editorial Board
ACCOUNTING
President's
Message
Since I took the charge of President last

year on 4 Shrawan 2070 (19 July 2013),
this is my fourth and last message to you
in the ICAN Journal as the President of
the Institute. At this point of time, I would
like to mention some of the major
activities undertaken during my
Presidency and also like to share with
you the activities where we need to put
more efforts to achieve them in order to
make the institute more credible and
professional as a whole.
It is a matter of great pleasure to the
entire membership that our long cherished
dream turned into reality with the
inauguration of newly constructed office
building of the Institute at Satdobato,
Lalitpur by the Rt. Honorable Dr. Ram Baran Yadav, the President
of Nepal on Sunday 13 July 2014 (2071/03/29). We take it as
one of the milestone achievement of the Institute. Without a
doubt the new office building shall provide us adequate
infrastructure facilities and reinforce the sustainability of the
Institute to some extent. This achievement has been accomplished
due to whole hearted support and cooperation of Government
of Nepal and entire membership.
International Financial Reporting Standards (IFRSs) has become
the global standards for the preparation of financial statements
by corporate entities. By virtue of Law ICAN has the
responsibility to make pronouncement and regulate the
implementation of Financial Reporting Standards based on
international developments. As per the roadmap of ICAN for
the IFRS implementation in Nepal, convergence will begin on
phase-wise-basis starting from financial year 2014-15 with
Multinational Manufacturing Companies and State-Owned
Enterprises (SOEs) listed in Security Exchange. The convergence
process shall be completed in fiscal year 2016-17 with the
application of IFRS for SMEs for those corporate entities not
covered by full set of IFRSs. The convergence with IFRS in the
Public Sector Enterprises (PSEs), the Government of Nepal has
fully supported to ICAN pronouncements with a close
coordination of Ministry of Finance. The Institute assumes this
initiative as a significant achievement since it is the outcome
of continuous effort of the Institute to convince the Government.
So far country of G20s, European Union and 40 other countries
The Nepal Chartered Accountant
June 2013
35
around the world have implemented IFRSs. In this context,

Nepal's decision for the way forward is to make more
conducive environment for the more investment
opportunities. In this course, we all regulators and
professionals need to be prepared to support the changing
demands.
ICAN has conducted different exams during a year. ICAN
has reached to have a one time examination systems from
CAP I to CAP III (Professional) levels and membership
examination with same syllabus, questions maintaining
same standard and uniformity. ICAN has setup four exam
centers at branch offices outside Kathmandu. ICAN has
made arrangement for online access to examination result.
Arrangement has been made for the CAs who qualified
from foreign institutions and interested to seek the
membership of ICAN will have to go through one year
internship from 2015.
The existing audit limit specified for RA members has
been increased substantially as per the current market
scenario and hoped that it will extend the scope of audit
and make them responsible.
The existing annual renewal fees of Membership, Certificate
of Practices (COP) and Auditing Firm for all ICAN's
member has been revised to make uniformity in scientific
way so as to maintain global practices.
Editorial policy has been formulated to provide a clear
guidance to Editorial Board (EB), authors, readers,
reviewers to improve the quality of journal.
ICAN has continuously organizing international level
program with the technical support of the Institute of
Chartered Accountants of India (ICAI). This year ICAN
organized ISA & IFRS course and recently organized
certification course on International Taxation.
ICAN is going to host two days International SAFA
Conference on the theme "Governance for Creating
Enabling Environment for Economic Development" on
18th&19th July, 2014 in Kathmandu. The Conference shall
confine on the contemporary issues on national economic
environment, corporate governance including transparency,
accountability, disclosure requirements and compliance
within the legal and regulatory framework. Organizing
such international events also helps enhancing capacity
and credibility of the Institute in the SAFA fraternity.
To establish ICAN as a competent professional and

regulating body it has started to accept the global level
accounting professionals within a certain level of CA
studies. In this course, ICAN has initiated to provide
exemption to ACCA qualified professionals' upto CAP II
level along with some exemption fee. Training to foreign
bodies qualified professionals approaching to ICAN
membership exam also is the another steps of this
approaches.
For maintaining the credibility of the Institute, regulating
the members is of prime importance and undertaking the
activities with this respect is challenging also. With this
view internal and external exercise is underway to form
a Quality Assurance Board (QAB) with adequate power
and duties and making it well-equipped. No doubt, QAB
will take over the existing arrangement of Peer Review
system. I hope this arrangement will reinforce the selfregulation system of the Institute that is highly needed too.
ICAN has been able to get success in maintaining the IFAC
requirement in education, examination and member capacity
building. To comply with IFAC requirement on CPE, ICAN
plans to implement to provide 120 credit hours with in the
three years cycle for accounting professionals.
The recent councils meeting has approved the ICAN
Strategic Plan 2014-16. This is also an achievement for us
to run our Institute with a long-term policy and program.
It is my duty to inform that GON is convinced and taken
initiation to work jointly with the Institute/professionals
for the implementation of International Public Sector
Accounting Standards (IPSAS) in the public sector. I think
this is an area where the government can collaborate with
us and ICAN can contribute significantly in improving the
financial management system in the public sector.
The scope of general-purpose financial statement and
specific purpose financial statements are truly different
fact. For this, at global level auditors report on both types
of financial statements are placed separately. Nepal also
needs to follow the global practices. ICAN is in course to
make pronouncement for separate disclosure requirement
on the preparation of financial statements and Auditor's
Reports thereon.
Council has modified the Criteria for Continued Professional
Education (CPE) to accommodate more professional
activities for the members participations at broader level.

The CPE program of ICAN is found one of the more
effective and successful activity of professional development
for the members in South Asia Region. Considering the
access of technology and its effectiveness ICAN is in
process to apply online CPE system.
ICAN has started to use of online ERP system for
maintaining total data-base of the Institute in a single
basket.
ICAN has contributed to the Government of Nepal by
providing suggestions on making amendments in the
prevailing Anti Money Laundering Act, Banking and
Financial Institutions Act and Banking Offence and
Punishment Act, 2008 as the amendment is in process.
The ethical violation and professional misconduct lodged
against some members, the process of studying and
reviewing the cases by the Disciplinary Committee (DC)
in some cases are finalized and some cases are in final
stage. ICAN is always responding all requests from judicial,
investigating and regulating bodies regarding the
disciplinary actions to our members. To establish ICAN
scope and responsibility on disciplinary actions against its
member, we had a detailed discussion with the secretary
of Ministry of Finance.
Last year the ethical issue of auditors was highly debated
and discussed among regulators, government authorities,
Institute and members. In this connection, many round of
formal and informal meeting were held with the concerned
authorities including written correspondence was made
for finding out the amicable solution of the problem and
have been solved with a minimum understanding with the
authorities. However, we have to be cautious while
rendering our professional services in the days to come.
Repetition of such kind of dispute is really matter of
concern for every stakeholder.
Political stability is very vital for over all development of
country. Once the present government write the constitution
and promulgate the constitution in federal structure that
will create conducive environment to attract for internal
and external investment. Such environment will be useful
for economic growth of the country. In that situation the
role of the accounting profession will also be increased in
contributing in the areas of good governance, transparency,
corporate governance, capital market etc. within the country.

We are being the witness on some of the good economic
indicators after the elected government is in place.
The Institute is regularly attending the meeting, seminar
and capacity development activities organized by SAFA,
CAPA and IFAC. I would like to inform that the decisions
taken, lessons learned and exposure gained from these
events are being applied in our context for the development
of the Institute.
There is no doubt that we have gained respect from society
but in the meantime we also need to compare with the way
the public perceive the other profession so as to justice
towards our self. This is directly related to the professional
conduct which is the basis by which the profession is
judged. We have to keep in mind that our conduct will
help enhancing our professional as well as institutional
image.
On behalf of the professions and ICAN, I extend my
gratitude to Rt. Honorable Dr. Ram Baran Yadav, the
President of Nepal for inauguration of new office building
of the Institute and we are highly encouraged from his
gracious presence.
I will not hesitate to admit that I have not been able to
accomplish the achievement as expected and remained
unfinished. I wish my successor for more initiatives to take
the Institute to a greater height and express my commitment
for regular supports.
In closing, I wish to express my sincere appreciation to
my fellow Council members, Committees members, all
members, regulating bodies, GoN's officials, and ICAN
staff who have worked for the cause of the Institute over
the year.
I Remain,
16th July 2014
CA. Mahesh Kumar Guragain

President
ACCOUNTING
Fully Depreciated Assets - IAS 16
IAS 16 permits 2 models for

subsequent measurement of
your property, plant and
equipment: cost model and
revaluation model.
Revaluing assets with zero
carrying amount will
effectively mean that there is
a Change in the Accounting
Policy and hence the company
will need to apply IAS 8.
Have you come across a situation

when you find that the block of assets
are fully depreciated in the books but
the company is still using them in its
operation to generate revenue?
In this case, the original estimate of
assets useful life proved to be
incorrect.
A survey proves that more than 95%

of the companies do not revise the
useful lives of their assets and book
the depreciation charge based on the
original rates determined for the block
of assets. As a result, the companies
are using fully depreciated assets for
their production processes.
These assets are used beyond their

useful life, they are fully depreciated
and their carrying amount in the books
is zero. What depreciation expense
can you recognize in the profit or loss?
What is the solution then?
None, of course - because the carrying

amount of the assets cannot be sub
zero. As a result, the matching
principle does not work here. The
expenses simply do not match the
benefits gained from these assets.
The standard IAS 16 Property, Plant
and Equipment defines the useful life
as either:
The period over which an asset
is expected to be available for
use by an entity, or
The number of production or
similar units expected to be
obtained from the asset by an
entity.
CA. Pooja Gupta

CA. Gupta is Fellow Member of ICAI &IFRS
author by choice with more than 16 yrs of
professional experience.
Now this is extremely important: IAS

16 requires entities to review assets'
useful lives at least at each financial
year-end.
When faced with such a kind of

situation the company can either:
1. Review the useful life of its assets
at the end of each financial year;
(IAS 8 - Change in Accounting
Estimate) or
2. Use Revaluation Model
(IAS 8 - Change in Accounting
Policy)
Review the useful life of its

assets at the end of each
financial year:
If you change useful life of the assets
then it is treated as a Change in
Accounting Estimate as per IAS 8
Accounting Policies, Changes in
Accounting Estimates and Errors. If
the revised useful life is different from
the original life then, set the new
remaining useful life, take the carrying
amount and recognize the depreciation
charge based on the carrying amount
June 2014
ACCOUNTING
and new remaining useful life.

No restatement of previous periods' financial statements
is required. IAS 8 requires recognizing change in accounting
estimates prospectively.
Revaluation Model:
IAS 16 permits 2 models for subsequent measurement of
your property, plant and equipment: cost model and
revaluation model.
Revaluing assets with zero carrying amount will effectively
mean that there is a Change in the Accounting Policy and
hence the company will need to apply IAS 8.
IAS 8 mentions that an Accounting Policy can be changed
in the following scenario:
standards how you will report certain transactions in the

financial statements - not only now, but also in the future.
So, do you think that changing your accounting policy
from cost model to revaluation model would make you
provide better information about your assets, not only now
but also in the future?
Revaluation model is used for buildings and land in
most of the cases, because it's easy to get the fair value
of these assets regularly. In case of movable assets like
plant or machine getting fair value from the market
gets a bit difficult.
Revaluation of the assets have to be done with sufficient
regularity, i.e. atleast annually.
1. The change is required by an IFRS. With our situation,

this definitely is not the case.
Entire class of assets and not an individual assets needs

to be revalued.
2. The change results in the financial statements providing

reliable and more relevant information about the effects
of transactions, other events or conditions on the
entity's financial position, financial performance or
cash flows.
To determine the fair value of the class of assets, IFRS

13 Fair Value Measurement standard needs to be
applied. This standard is complex and difficult for
movable assets.
In our case, the second situation will match to an extent.

But are we really considering the after effects of moving
from a cost model to revaluation model for our block of
assets?
Accounting policy means using the prescribed rules and
June 2014
If after considering the above concerns if it is still beneficial

for your company to switch from cost model to revaluation
model, the new depreciation accounting policy need not
be applied retrospectively, just prospectively - no
restatement of previous periods.
AUDITING
Reconciling Stakeholder Expectations of an Audit

Through Better Audit Management
It is for sure that if audit is carried

out with due professional care, it
will definitely lead to reasonable
assurance about the truth and
fairness of the financial statement,
the subject matter of audit. Thus,
it is important for auditors to
realize that the public continues
to expect a low rate of audit
failures and that they must plan
and perform their audit
procedures in a manner that will
minimize the risk of an undetected
material misstatement
To start with, let me quote a proverb

that says "The most difficult phase of
life is not when no one understands
you; it is when you don't understand
yourself". By quoting this proverb, I
am not trying to label all the blames
on the auditors for not delivering as
per the expectation of the stakeholders
but trying to emphasize that the
auditors are required to play a vital
role in reconciling the stakeholders'
expectation by understanding their
roles first and educating the others,
including the regulators and public at
large, what they actually do.
Context
CA. Nanda Kishore Sharma
CA. Sharma is Fellow Member of ICAN
We all appreciate that the auditing

profession worldwide commands
respect and demand for its services
primarily on account of the faith of
the public on its work. Auditing
standards are best practices that an
auditor uses in performance of its
attest function as these are framed to
ensure probity, integrity and quality
in the professional's work, essential
for ensuring the confidence of society
in the financial information being
reported by the business enterprises.
Although the profession has
steadfastly contended that its audit
reports are worthy of reliance,

however, did we have really heard
them and ensured that we have met
their expectation?
The Auditor's Position

The accounting profession has long
contended that an audit conducted in
accordance with generally accepted
auditing standards (GAAS) provides
"reasonable assurance" (as opposed
to "absolute" assurance) that the
subject financial statements are free
of material misstatements if read in
line with relevant accounting
framework. What is and why
reasonable assurance? I think the
problem lies here. We have never tried
to address the "expectation gap"- the
gap between the level of assurance
that financial statement readers expect
of an audit report and the level of
assurance that an audit report actually
provides.
The accounting profession rewrote
its auditing standards to provide moreexplicit guidance on the level of
assurance it provides and has, together
with accounting regulators, stepped
up its oversight and disciplinary
measures. These efforts did not,
however, eradicate financial frauds,
June 2014
AUDITING
and the public outrage in response to such massive frauds

as Enron, WorldCom, Satyam, Himalayan Bank, Nepal
Telecom, etc. In an effort to restore public confidence in
the audit process, commercial laws require the management
of public companies to establish and implement effective
internal controls and require their Board to certify as to
the effectiveness of those controls. In addition, the auditing
standards require that each public company's auditors also
evaluate the effectiveness of those controls in deciding
audit procedures and framing their opinion on the financial
statements. It is for sure that if audit is carried out with
due professional care, it will definitely lead to reasonable
assurance about the truth and fairness of the financial
statement, the subject matter of audit. Thus, it is important
for auditors to realize that the public continues to expect
a low rate of audit failures and that they must plan and
perform their audit procedures in a manner that will
minimize the risk of an undetected material misstatement
Stakeholders' Expectation
Audit affects a wide variety of people/parties (we refer to
them as 'stakeholders' of organisations) who have different
expectations. For example, we know that shareholders
want the audit to serve and protect their interests in the
organisations they own but:
directors may want auditors to support them in
discharging their responsibilities;
managers may want auditors to understand their
organisations and add value by providing business
advice and helping them to access finance at reduced
cost;
audit regulators may want auditors to be accountable
for meeting clear standards of performance and
maintaining audit quality;
regulators of organisations may see the audit as
providing comfort that organisations are complying
with their rules and regulations;
creditors and lenders may see the audit as providing
comfort that organisations will continue to be able to
pay for goods and services or finance;
audit firms may want auditing to provide challenging
and rewarding work for auditors so that they can
attract the brightest and best; and
employees may want the audit to provide some comfort
10
June 2014
about job security and the future direction of the

organisation.
The audit might be seen as one way of seeking some
comfort over these expectations. While people commonly
refer to stakeholder expectations of audit in a broad sense,
in practice, this can lead to confusion. Agency theory
provides an explanation of the purpose and role of the
statutory audit: relationships between principals
(investors/shareholders) and their agents (management)
are of particular importance in understanding how the
statutory audit has evolved over the centuries and continues
to develop. As agents, directors are delegated responsibility
for managing the affairs of the company by the owners
(the principal) and the financial statements have therefore
become a primary mechanism for shareholders to hold the
directors accountable . The independent opinion provided
enhances the confidence of shareholders in using financial
statements to assess the stewardship of directors and their
running of the company. The statutory audit, like other
assurance services, also requires auditors (or other
professional accountants) to assess and address any potential
threats to their independence.
Expectation Gap
Stakeholders have expectations both about what types of
audited information organisations should provide and about
the assurance aspects of audited information (for example,
what auditors do when they perform statutory audits). The
specific expectations of shareholders in relation to the
financial statements are constantly changing and auditing
and financial reporting standards have evolved in response.
Hence stakeholder dissatisfaction might arise where
expectations from either or both sets of expectations are
not met. If the audit was to attempt to meet all the different
expectations of stakeholders, whether these are additional
or congruent, there would be potential consequences that
could impact on the value of the audit. For example, the
information set to which the audit opinion is attached
would be likely to grow significantly, leading to problems
around assessing completeness and providing relevant and
easily accessible information. Even within the category of
shareholders of organisations there are conflicting interests
to address (long terms v/s short-term).
The expectations of other stakeholders create additional
audit expectation gaps. An expectation gap already exists
AUDITING
in the traditional agency model of audit in that shareholders'

expectations may be different to directors' expectations and
the expectations of auditors. Expectation gaps can be
identified in three specific areas: fraud, internal control
and going concern. This is not an exhaustive list and
expectations about the precision and accuracy of financial
statement balances could also be included.
If the audit was reshaped to meet these expectations then
it is very likely that its purpose would change. As a result,
it may become less meaningful to shareholders and the use
of the audit as a means of addressing the specific principalagent conflict may no longer be relevant. This has
implications for the role of the statutory audit as set out in
law and would affect auditors' responsibilities. This could
lead to a need for auditors to develop different skills and
would have consequences for auditors' risk management
processes and liability.
Also, expectations change over the years, as does the
importance of different stakeholders, particularly as a result
of the increasing level of information provided in the
financial statements and external scrutiny. Expectations
will also vary even within a particular category of
stakeholder.
Responding to Expectation Gap

There is a tendency growing over the years to shift all the
responsibilities towards the auditor without really
understanding their limitations in providing assurances in
all areas, besides assessing the compliance with the reporting
framework and giving opinion thereon.
There are clearly three ways to respond to the expectation
gap:
1.
Making the directors accountable to meet number of

expectation and responding to them,
2.
Adopting quality assurance mechanism by the auditors

in discharging their attest duties, and
3.
Last but not the least, educating all stakeholders,

starting from Ministry of Finance to the management
to public at large what audit really mean and what can
be expected from this exercise.
A) Director's Roles:
It is to be considered that:
directors have regard to all the relationships on which
the company depends with a view to achieving company
success for the benefit of shareholders as a whole; and
improvements be made to company reporting, which
for public and very large private companies would
require the publication of a broad operating and financial
review which explains the company's performance,
strategy and relationships (e.g., with employees,
customers and suppliers as well as the wider
community).
To run any organisation effectively, directors have to think
about its stakeholders. They are responsible for considering
the expectations of stakeholders, for deciding what
expectations they want to respond to (other than those
already enshrined in law), and for meeting them in whatever
way they consider to be the most appropriate. Directors
then identify the most appropriate way to meet expectations
that can and should be addressed. This may or may not
involve the auditors. The audit is not, therefore, the only
answer.
In responding to stakeholder expectations, directors of
organisations need to consider how they might deal with
concerns from stakeholders and how they can build relations
with stakeholders and address and balance their
expectations. There may be a number of ways to address
expectations. For example, organisations might engage
directly with their stakeholders, through website tools,
stakeholder forums and open days or they may use other
risk management techniques. Where stakeholders'
expectations include information in reports, directors of
organisations might consider that there is a need for
mechanisms, other than audit, to provide some comfort
over the information provided. The internal controls and
internal audit functions of the organisation may help to
support the credibility of information provided. Likewise
some organisations might choose to outsource specific
parts of their operations to other organisations with the
relevant experience and expertise that is required.
Alternatively, directors might consider that there is a need
June 2014
11
AUDITING
for other services that could be provided by professional

accountants. Such services could be specifically tailored
to meeting the needs of stakeholders, the intended users
of the information. There may therefore be a role for new
assurance services that would be worth exploring further.
B) Auditor's Roles
It is not the role of the audit or auditors to ensure that
organisations are meeting the expectations of their
stakeholders. They have to concentrate on improving their
way of doing work i.e. instituting quality assurance
mechanism within its auditing processes and building trust
by making scrutiny of its works from others. The challenges
the auditing profession are facing can be summarized as:
How can audit quality be further enhanced?
How can profession stay relevant from user
perspectives?
How to ensure profession's long-term sustainability?
Significant increase in complexity of financial reporting
and financial information disclosure?
The steps that auditors shall follow can be presented as 5
sequential steps as depicted in the chart below:
The auditor shall then carry out audit following relevant

auditing standards and tools and evaluate the controls in
place and collect evidences. The Auditor shall then look
at the impact of the finding at both account level and
financial statement as a whole and evaluate the conclusions
drawn from the audit evidences obtained as the basis for
forming an opinion on the Financial Statements, whether:
accounting policies applied are appropriate
estimates made by management are reasonable
information presented is relevant, reliable, comparable
and understandable, and
sufficient disclosures to enable users to understand the
effect of material transactions or events.
It is then the responsibility of the auditor to form an opinion
which is technically correct in the given circumstances
duly evaluating the impact of the audit evidences. It is
worth mentioning here that to ensure that the auditors have
carried out the audit in accordance with technical standards
and audit opinion issued was appropriate in the given
circumstances, it is necessary that the firm has established
quality control mechanism, in line with the requirement
of Nepal Standards on Quality Control.
C) Defining Audit
The auditors shall ensure that they are competent to take

up the assignment and have no threat to their independence
and integrity based on their assessment of risks. Before
they start the actual auditing, they must allocate resources
effectively and draw up client specific audit steps covering
additional audit procedures to address audit risks identified.
12
June 2014
The statutory requirement of reporting by auditor of all

accounting frauds and no mis-management by organisation's
staff, management and board (Section 115 (3) of Companies
Act and 65 of BAFIA) has raised a very pertinent question
of whether the auditor is expected to give an "Opinion" or
"Certification". Also there is a common belief of auditor's
signature equivalent to spraying "Ganga Jal" to make
everything "holy". There has been recent incidents of
putting the auditors behind the bars invoking "cheating"
clause of Muluki Ain (Civil Code) based on the above
reporting requirement by auditors. Thus, it's a high time
for every accounting professional to stand together in
educating the larger public, including the legislature about
the true meaning of audit and what they shall expect from
an audit opinion.
Conclusion
It can be argued that the case for regulated, mandatory
corporate social reporting can be made stronger by looking
AUDITING
at stakeholder theory, which is believed to provide an

appropriate framework from which to develop a corporate
single audit that is responsive to the information needs of
multiple corporate stakeholders. However, whether the
current accounting standard structure could develop
corporate social responsibility standards that meet the
needs of all stakeholders is a big question to answer. Even
if those within the current standard setting structure
mandated corporate social reporting, the mandatory aspects
are likely to reflect the interests of the most powerful
stakeholders. It can be concluded that the ultimate success
of a stakeholder- based corporate single audit would depend
on:
the development of reporting and attestation
requirements that lead to the dissemination of reliable
corporate social responsibility information; and
a change in the relative power of the corporate

stakeholder groups that influence the adoption of
regulated, mandatory corporate social reporting.
In seeking to try to reconcile all the expectations there is
a danger that the audit could end up making no one happy.
Thus, there is a need to reconcile the all stakeholders,
including auditors.
I conclude by quoting IFAC Policy Position: Regulation
of the Accountancy Profession, Dec 2007: "The
sustainability of the accountancy profession depends upon
the quality of the services provided by its members and
on the profession's capacity to respond effectively and
efficiently to the demands of the economy and society."
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June 2014
13
AUDITING
Need to Harmonize the Regulation of Audit
Introduction
The first major contributing factor
to audit quality is existence of
high quality audit standards
developed by IAASB and issued
to audit practice, called the ISAs,
which are being considered for
adoption worldwide. However,
audit practice supported by two
other bodies of standards namely
professional ethics and
professional education of
International Federation of
Accountants (IFAC).
CA. Paramananda Adhikari
Regulation of audit in 21st century is

in limelight due to the number of
debates that have developed since the
financial reporting scandals of big
corporate giants like Enron,
WorldCom, Xerox, Parmalat, Satyam
and many others after circa 2001.
Question on "regulation of audit" arose
largely as a response to these crises
that they were perceived as the big
audit failures in the corporate history
and the credibility of audit profession
is now in the forefront of the minds
of investors, corporate entities,
regulators, government and public as
well. Moreover, the issues are closely
related to the areas of harmonization
of audit practices, ethical compliance
and education to the members of
auditing professional across the globe.
The debate on audit regulation is
related to serious audit crisis and the
avenues for minimizing not only the
consequences but also in terms of
harmonization of practices across the
globe. Perhaps, harmonization of audit
regulation and practices should be a
goal of high priority among the
national and international regulators
since the world markets have
continued to become a global village.
CA. Adhikari is Technical Director of ICAN
14
June 2014
Auditing Profession: How it

is Regulated?
Before the enactment of SOX Act in
2002 in the US, it was perceived that
the auditing profession was selfregulated across the globe and the
Professional Accounting
Organizations (PAOs) authorized to
regulate auditing profession through
the power delegated by the
government. However, after the failure
of big corporate conglomerates, the
auditing profession has lost public
perception and led the credibility
question that create ground for need
to external regulation worldwide. As
a result, auditing profession is no
more self-regulated and in many
countries government carried out the
regulation through an oversight
agency/body. The major concern of
the stakeholders and public is the issue
of independence of the professionals.
Overcoming the independence issue
means having a strong and robust
process that may invite the formation
of public interest oversight agency to
regulate the profession.
Substance of Audit
Regulation
Despite the global initiatives to
improve the audit regulation, concern
arose how to address the credibility
AUDITING
issues of auditing profession in local jurisdiction, since

the national scenario may not be exact with the global
situation. The only possible way to narrow the gap would
be following the audit standards and practices thereon to
the extent possible and harmonize the national regulation
with international regulation that needs to achieve
convergence in regulation, ethical compliances and reporting
practices. The system of harmonization is neither easy nor
automatic but it requires compliance of standards, ethical
pronouncements and strict commitment by the members
of PAOs. Normally, local regulation is built on common
precepts, principles and implements common standards,
then differences may occur in the form but not in substance.
The development of common precepts, principles and
standards can serve as new globalized instruments and
these standards will have global legitimacy and applicability
over the substance in audit regulation.
How to Harmonize the Audit Regulation?

Regulation is the combination of organization rules, policies
and practices that result the accountability and transparency
in policies, practices and reporting to the public. Regulation
is the result that the number of stakeholders, society, general
public perceives and responds to risk. Good regulation
serves the public interest through supporting the building
and maintenance of confidence in processes, in which the
public participates, such as auditing, on which the public
relies heavily upon the financial reporting and function of
auditors. To harmonize the regulation of auditing profession,
it requires the technical knowledge/expertise, skills,
adequate experience, attitude and ethics of those who are
in profession and response to the need for standards to be
adhered by them. Audit regulation can thus be seen as the
system providing confidence in the reliability of financial
markets and services generally, and financial reporting in
particular. The need for and nature of regulation is
dependent on the profession specific and the market
expectations in which it operates. Therefore,
convergence/harmonization in auditing profession would
assist in making the national financial system and reporting
practices similar to the international financial system and
reporting practices which will be more efficient as well as
robust.
Why for Audit Regulation?

The main objective of audit regulation is to safeguard the
public interest from financial and other risks and protection

of market participants from compliance risks. This applies
especially to investors who invest in capital market, others
who trust financial institutions to safeguard their deposits
and ensure reliable rate of return/income on their investment.
Additionally, it is to be said that good regulation should
be viewed as a driving force for reliable and high quality
financial services/reporting practices towards the public.
Regulatory reform for harmonization is need of the hour
due to the perceptions of the public for the inadequacy of
existing systems and lacuna worldwide. It requires action
to avoid a loss of trust and confidence, whether we like it
or not, that would undermine the entire audit profession
that will fill up the perceived vacuum of governance,
transparency, accountability and confidence.
Auditing Standards: Are they Principles or

Rules?
Audit and assurance standards pronounced by the PAOs
in their local jurisdiction and their strict compliances is
the key factor for successful regulation of the audit
profession. If the profession is to perform high quality
work in the public interest, it needs to have high quality
standards that are set in the public interest. Standards are
backbone of the auditing profession and not divergence
jurisdictions to jurisdictions and perceive the uniform
application worldwide. Therefore these are the principles
and not rules. Nevertheless, principles often include rules
to assist in their implementation. Therefore, some people
will ignore legal requirements despite of their form of
expression; others will look to circumvent the law by acting
within its form but ignoring its spirit or substance. If we
trust someone, simply because legal practices apply for
breaking rules or avoiding rules, we do not, in fact, trust
them at all. To make regulation respectful, it should be
designed to serve clear objective, transparent, accountable
with respect to implementation results and it should allow
room for honest judgment, even honest mistakes so as not
to crack down initiative and innovation.
How to Harmonize the Audit Quality?

Question may arise on how harmonization of regulation
can enhance the Audit Quality? And how will progress
towards convergence in audit quality? The first major
contributing factor to audit quality is existence of high
June 2014
15
AUDITING
quality audit standards developed by IAASB and issued

to audit practice, called the ISAs, which are being considered
for adoption worldwide. However, audit practice supported
by two other bodies of standards namely professional ethics
and professional education of International Federation of
Accountants (IFAC). The International Ethics Board for
Accountants (IESBA) and International Accounting
Education Standards Board (IAESB) are operate under
the auspices of IFAC and subject to direct oversight by
the Public Interest Oversight Board (PIOB) which works
to ensure that standards set are consistent with due regard
for public interest. Thus the regulation of standard setting
is also subject to international supervision. The other
contributing factor to audit quality is the way in which
standards are implemented and applied in their respective
jurisdictions. The policies and actions that determine the
quality of implementation are depending on local audit
regulators, which must coordinate with international bodies
to harmonize the quality of audit and reporting practices.
Safeguards are actions or other measures that may eliminate
risks or reduce such risks to an acceptable level. Further
auditor's independence play the important role to maintain
the risk associated with the business entities. Auditor's
independences should be both in fact i.e. real independence
and appearance i.e. perceived independence. The SOX
Act, 2002 was a legal reaction of the auditor's independence.
Reputation is a significant driver in any profession including
auditing. Loosing reputation means no confidence/trust by
the public. Therefore, integrity is a prerequisite for all
those who act in the public interest. The auditing standards
are for compliance by the professional auditors to discharge
their responsibilities in favor of public interest. These
standards are subject to broad consultation with the
stakeholders and are monitored on a continuous basis by
the PAOs. Compliance of the standards, also called as the
safeguards, by the professional accountants in practice are
the minimum benchmarks to minimize the risk associated
with audit. These safeguards seek to obtain a quality of
audit which incorporates technical expertise and remains
responsive to the needs of a broad range of stakeholders
as well as the public interest. Moreover, audit quality is
not solely dependent only on Auditing Standards, but also
premised on ethical behavior and professional education
of the members.
How to execute/implement the audit quality may be the

emerging issue to the professional auditors. However, the
answer would be successful implementation of standards.
Convergence of audit practice and audit quality will depend
on multiple actors and multiple factors. Audit firms which
develop methodologies for audit practice will shape the
way their members approach their audit assignments.
Smaller firms will shape their practice based on
implementation guidance provided by the standard setting
bodies which in many cases will be, or will be assisted by,
national or international accounting bodies. Regulator of
audit will also play an important role by ensuring
compliance of standards and by developing common
principles and implementation guidance for their practices.
The formation of an international forum of audit regulators
is a promising platform for this work on convergence of
audit quality across the world.
Sum Up
What are the Safeguards?
16
How to Execute the Audit Quality?
June 2014
How the auditing profession should be regulated has been

the subject of much debate in recent years. As a result,
there have been much consequential changes in different
play makers in financial reporting including professional
accountants, their clients, PAOs and government.
Government also seeks to ensure that the profession should
deliver high quality services to the corporate and other
entities and contributes to economic growth and
development of the country. In international arena, the
PIOB is involved for implementation of standards through
its oversight, i.e. IFAC member body compliance program
popularly called SMOs. These SMO obligations are used
as a framework for the development of strong accountancy
profession and they provide clear benchmark for PAOs
and their best endeavors to implement international
standards of audit, ethics and education to harmonize the
audit regulation worldwide. This program can prove to be
a very important support for implementation of international
standards, convergence of audit practice and audit quality.
Therefore, the use of principle based standards for audit,
the formation of an appropriate mix of external and selfregulation and the establishment of transparent, accountable,
effective regulation are guarantees for the achievement of
high quality audit services and reporting practices thereon.
AUDITING
Risk Based Internal Auditing:

Nepalese Banking Perspective
In banking industry, having

realized this fact, Nepal Rastra
Bank has also recommendedvia
Inspection Reports, to implement
Risk Based Internal Audit
(RBIA).Some of the MultiNational entities in Nepal
havealready implemented Internal
Auditing which is linked with
overall risk management
framework of the organization.
Internal Auditing helps an organization

accomplish its objectives by bringing
a systematic, disciplined approach to
evaluate and improve the effectiveness
of risk management, control, and
governance processes.Internal audit
needs to communicate in the language
of the business and of the board of
directors.Basis this, most of the
organizations in Nepal have made the
Internal Audit Department functional.
Even if organizations seem to have
realized the importance of internal
auditing, most of the organization
have set the structure of Internal
Auditing as Compliance Based Audit
and designed to serve the organization
as fault finding exercise.
Under compliance based internal
auditing, auditor assesses almost all
functions of the bank, reviews the
policies, procedures and results of the
bank functions, lists the exceptions
and communicate.
CA. Ramesh Dhital
CA. Dhital is Member of ICAN
However, there are various reasons to

think beyond Compliance Based
Internal Audit considering the
increased audit risk. In banking
industry, having realized this fact,
Nepal Rastra Bank has also
recommendedvia Inspection Reports,
to implement Risk Based Internal
Audit (RBIA).Some of the MultiNational entities in Nepal havealready
implemented Internal Auditing which

is linked with overall risk management
framework of the organization.
Risk Based Internal Auditing

Risk Based Internal Auditing (RBIA)
is defined as a methodology that links
internal auditing to an organization's
overall risk management framework.
RBIA allows internal audit to provide
assurance to the board that risk
management processes are managing
risks effectively, in relation to the risk
appetite.
Every organization is considered as
different, with a different attitude to
risk, different in its structure, different
processes and different environment.
Internal auditors are expected to adapt
these ideas to the structures, processes
and environment of their organization
in order to implement RBIA. RBIA
seeks at every stage to reinforce the
responsibilities of management and
the board for managing risk.
RBIA will assess the effectivenessof
board oversight i.e. initiations,
approvals, oversight proactive,
prudent and reasonablenessof senior
management; soundness of corporate
governance;independence of audit
functions; robustnessof internal
control system; independence of
reporting lines;role of middle offices
June 2014
17
AUDITING
to assess all types of risks; strategic orientation; efficiency

of MIS and soundnessof risk management practices.
The risk based audit plan:

Summarize the current assessment of risk management,
controls and governance process.
Includes a list of organizational activity and core
management controls that could be considered forthe
audit.
functional line managers

Review of Credit Files Assessment of risks
Review of past report of NRB Inspections
Analysis of Budget variance/target variance
Analysis of Growth of unit/department and branches
Structure of function
Sample review/transaction
Demonstrate the areas with higher risk.
Review Management commitments
Provide, over a certain period, assurance on important

aspects of the risk management, controls and
governance process.
Quality of prudential reports submitted to NRB
Advantages of RBIA
By following RBIA, internal audit should be able to
conclude that:
Management has identified, assessed and responded
to risks above and below the risk appetite
The responses to risks are effective but not excessive
in managing inherent risks within the risk appetite
Where residual risks are not in line with the risk appetite,
action is being taken to remedy thatRisk management
processes, including the effectiveness of responses and
the completion of actions, are being monitored by
management to ensure they continue to operate
effectively
Risks, responses and actions are being properly
classified and reported.
Risk Assessment
Risk assessment in a bank can be initiated in following
way
Meeting with senior management of Bank
Meetings and interview with compliance officers,
department heads, AML and other Risk
Managers/Officers (related to middle office/control)
Meetings with Risk Management Committee, ALCO
and other risk governance bodies
Meeting with Board members
This enables internal audit to provide the board with

assurance that it needs on three areas:
Risk management processes, both their design and how
well they are working
Management of those risks classified as 'key', including
the effectiveness of the controls and other responses
to them
Complete, accurate and appropriate reporting and
classification of risks
Meeting with External Auditors

Review of documents and Interviews with other
18
June 2014
Risk Mitigation and RBIA Execution
AUDITING
Risk can be managed with the help of risk register to

identify the risks associated with all auditable activities.
Firstly, auditor can establish the process map after obtaining
all information from the established policies and procedures
of the bank and conduct interviews with the process owners
followed by a walk through test and draw a process flow
chart to understand the working and steps to complete one
activity under one process. With this auditor can identify
the control weaknesses at each individual step of the process
for determining the extent of checking.
RBIA will require board of directors to take active

responsibility for running the bank. It will force the banks
to have comprehensive risk management programs to cover
major risks leading to formal risk management structure
and function (Risk Management Committee or Risk
Manager).
The implementation and ongoing operation of RBIA has
three stages:
Implementation of RBIA
Implementing RBIA will require greater interaction with
top management of banks,clear understanding of risks and
risk management systems of banks,capacity to assess
quantity, quality and direction of risks,ability to
communicate in clear and concise manner both CAMELS
and Risk Ratings. Accordingly, more time is spent on
planning. All these will lead to timely corrective actions
upon identifying excessive risk taking.
The major changes from compliance based audit to risk
based audit can be analyzed on grounds:
Past Vs Future orientation
Ticking exercise Vs Analysis and Assessments
Scheduled / Routine Vs Risk Based
Symptoms Vs Root Cause
Besides reviewing documents and transactions, emphasis
is given to interviews, interactions and discussions with
Board, Senior Management, Head of the Departments and
Internal Control Questionnaires. Banks credit reviews are
performed in more forward looking approaches (including
borrowers' strength of financials, ability to repay via cash
flow, international best practices and standards)
Stages of implementation and ongoing operation of RBIA
Conclusion
The effectiveness of the Bank's internal control system
should be reviewed regularly by the Board, its committees,
Management and Internal Audit. The Audit Committee
should review the effectiveness of the internal control.
Apart from compliance with policies and standards and
the effectiveness of internal control structures across the
Bank through its program of business/unit audits, the
Internal Audit function should focus on the areas of greatest
risk as determined by a risk-based assessment methodology.
Even though the RBIA has not been mandated, the intention
of the NRB seems to be in this direction. The format of
LFAR also contains Audit Areas' Risk Assessment, Audit
procedures adapted to mitigate identified audit risks and
audit Quality Control Mechanism.RBIA implementation
can take a paceupon clear provision and guidance and
slight alignment in NRB Directive 6,7 and other relevant
NRB circulars on RBIA.
June 2014
19
ECONOMY
Fiscal Risks and Related Transparency Issues
Introduction
Fiscal transparency refers to the

clarity, reliability, frequency,
timeliness, and relevance of
public fiscal reporting and the
openness to the public of the
government's fiscal policymaking process.
CA. Chandra Kanta Bhandari

CA. Bhandari is Fellow Member of ICAN
20 The Nepal Chartered Accountant
Government must be open and

responsive to the citizen. To be
claimed as an open and responsive
government, it should always keep on
watch about its fiscal position and get
all stakeholders informed about fiscal
risks, strategies to response those risks.
Fiscal risk generally refers to the
factors that lead to differences between
a government's forecast and actual
fiscal position.
It is imperative that public fiscal
reporting should be comprehensive,
of high quality and timely. It would
help policy makers and government
for effective fiscal policy making and
the management of fiscal risks. So,
Fiscal transparency is now, especially
recent financial crisis in US and
Europe has been regarded as a critical
element in public governance. Fiscal
transparency typically requires
government to develop and adopt a
set of accepted standards for
comprehensive, qualitative and timely
disclosers of fiscal information and
monitor regularly and respond the
risks therein. This also requires
openness to the public of the
government's fiscal policy making
process.
Therefore, Fiscal transparency refers
June 2014
to the clarity, reliability, frequency,

timeliness, and relevance of public
fiscal reporting and the openness to
the public of the government's fiscal
policy-making process. Fiscal
transparency can be maintained
through public fiscal reporting which
refers to the publication and
dissemination of information about
the state of the public finances to
citizens in the form of fiscal forecasts
(in fiscal strategy or budget
documents), government finance
statistics (fiscal reports produced in
accordance with statistical standards),
or government financial statements
or accounts (fiscal reports produced
in accordance with accounting
standards).
Nature and Sources of Fiscal

Risks
Fiscal risks may be relating to or come
from transaction or institution or both.
So, nature and sources of fiscal risk
could be as follows:
Relating to Transaction:
Macroeconomic shocks to budgeted
revenue and spending,
Extra budgetary spending,
Unfunded civil service pensions,
Government guarantees,
ECONOMY
Commodity prices,
Financial transactions,
Public-Private Partnership
Relating to Institution:
Central Government,
Sub-national Government,
Public corporations,
Social security institutions,
Extra-budgetary Funds,
Financial sector
Benefits of Fiscal Transparency

Fiscal transparency helps ensure that government's
economic decisions are informed by a shared and accurate
assessment of the current fiscal position, the costs and
benefits of any policy changes, and the potential risks to
the fiscal outlook. Fiscal transparency also provides
legislatures, markets, and citizens with the information
they need to make efficient financial decisions and to hold
governments to account for their fiscal performance and
their utilization of public resources. It also facilitates
international surveillance of fiscal developments and helps
mitigate the transmission of fiscal spillovers between
countries. Following are the some of the examples on how
fiscal transparency can help in managing fiscal risks:
More frequent and timely public reporting of fiscal
developments can help ensure that fiscal forecasts
are based on the most up-to-date understanding of
the current fiscal position and facilitate rapid policy
responses to shocks;
Comparisons with independent forecasts, and
alternative macro-fiscal forecast scenarios can help
ensure that fiscal forecasts are credible and fiscal
policy settings are robust to a range of macroeconomic
outcomes;
Fiscal risk statements can raise awareness of the
magnitude of potential shocks to the public finances
and encourage government to mitigate or provide
for those risks;
Expanding the institutional coverage of public fiscal
reporting can reduce the scope for off-budget fiscal

activity whose costs can later rebound on the
government;
Implementation of international accounting and
statistical standards can highlight otherwise hidden
costs or obligations and encourage governments to
budget for them;
Aligning the methodologies and standards for fiscal
forecasting, budgeting, and reporting can help
eliminate unexplained inconsistencies between
forecasts and outturns; and
Publication of audit reports in accordance with
internationally accepted standards can highlight
weaknesses in government financial control or
accounting practices and prompt initiation from
governments to address them.
Where we are now?

As to fiscal risk identification, assessment and responding
to risks and making stakeholders informed in this regards,
Nepal lacks in all respects; identification, assessment,
responding and fiscal transparency discloser. Ministry of
Finance, central bank; the Nepal Rasta Bank (as a financial
sector regulator and financial adviser to the government)
and Financial Comptroller General Office (FCGO) are
primarily responsible regarding identification, assessment,
and addressing such identified fiscal risks and disclosing
fiscal transparency. There lacks integrated reporting system.
Though Ministry of Finance has set one of its strategic
goals "Adapt transparent as well as accountable fiscal and
financial information system", it rarely conducts rigorous
studies on fiscal risks except forming high level committees
time to time. It further lacks such manpower having
knowledge, skills and expertise in fiscal management.
Nepal Rasta Bank occasionally forms task force/ or a
committee to study on fiscal issues, however, it is not as
system but as a single event. It publishes Economic Reviews,
Economic Bulletins and Indicators, Working Papers, Study
reports as a routine publication; however, they are
specifically focused on fiscal risks and fiscal transparency
disclosures. The FCGO, as a government's central
accountant and financial management wing, is unable to
include financial and quasi-financial transactions of all
June 2014
21
ECONOMY
public sectors and prepare a consolidated financial report

of whole public sectors.
and do have fiscal implications. These comprise

non-financial corporations and financial public
corporations (including the central bank). Broadening
the institutional coverage of fiscal analysis would
improve understanding of fiscal risks Public
corporations need to be part of any comprehensive
analysis of public finances since their debts are often
implicitly or explicitly government-guaranteed.
Challenges in Reporting the Fiscal Position

of the whole Public Sector
Lack of human, physical and other resources as to
robust information system, particularly with central
agency of the government responsible to report
overall financial position of the government.
(b)
More comprehensive reporting of assets and

liabilities - government usually holds significant
number of financial and non-financial assets and
liabilities. So, the government financial statement
is to include comprehensive balance sheets reporting
the value of government financial and nonfinancial
assets and liabilities. Providing a more
comprehensive picture of overall sovereign net worth
requires reporting standards to capture a broader
range of direct and contingent assets and liabilities.
This further requires recognition of provisions in
respect of a broader range of contingent liabilities
in accounts and supplementary summary statistics
provided that the amounts can be reliably valued.
These contingent liabilities should be valued at their
market, fair, or expected present value, taking into
account the probability of the liability being called
and the amount and timing of any resulting payments,
unless there is a clear moral hazard case for nonrecognition.
(c)
Recognition of a broader range of transactions and

other economic flows - to identify fiscal position
and identify risks, government should recognize all
transactions that have financial bearings in broader
range. There are transactions including derivatives
which pose government into significant fiscal risks
where there is lack of standards to provide guidance
on incorporating them in overall fiscal analysis.
(d)
More frequent and timely fiscal reporting - Lack of

timely information about the current fiscal position
can also be an important source of risks.
Governments should publish detailed financial
reports on a quarterly and monthly basis.
(e)
More rigorous approach to fiscal forecasting and

risk analysis - the methodology, construction, and
time horizon of fiscal forecasts and budgets are the
some of important aspects to be considered. The
Recognition and measurement complexities involved

regarding financial and non-financial assets and
liabilities that government hold is another big
challenge.
In some cases, conceptual and practical differences
between the accounting used by national governments
and public corporations.
public corporations that use commercial accounting
do not typically regard investment in fixed assets as
a cost (as it creates a corresponding asset on their
balance sheet), while most governments treat capital
expenditure as a cost as it increases their primary
measure of the deficit (net borrowing);
revenues from the voluntary commercial activities
of public corporations are conceptually different
from those that governments derive from compulsory
taxation, therefore simply adding the two together
would overstate the tax burden;
consolidation of public corporations' gross liabilities
with those of the general government could overstate
the financial vulnerability of the public sector as the
liabilities of public corporations are typically matched
by commercial assets; and
consolidating the central bank with the rest of the
public sector requires a different treatment of the
former's monetary liabilities, as the issuance of base
money generally does not give rise to a fiscal
imbalance.
Strengthening Fiscal Transparency: How?

(a)
More complete coverage of public sector institutions

- in most countries there is a range of public entities
outside the general government whose activities can
22 The Nepal Chartered Accountant
June 2014
ECONOMY
approach should be prospective fiscal reporting

incorporating assumptions of alternative scenarios
and their financial implication rather than using a
single scenario.
(f)
Alignment of standards for budgets, statistics, and

accounts - divergence in the reporting concepts used
in ex ante budgets and ex post statistics and accounts
results in inappropriate fiscal analysis leading to
wrong conclusion. So, alignment of standards for
budget, any type of financial statistics and accounting
is a MUST to get better idea about fiscal risk.
References:
1)
Fiscal Transparency, Accountability and Risk,

International Monetary Fund
2)
Modeling and Forecasting Fiscal Policy and

Economic Growth in Nepal, Nepal Rastra Bank,
Research Department, NRB Working Paper,
February, 2012
3)
Various publications of Financial Comptroller

G e n e r a l O ff i c e , G o v e r n m e n t o f N e p a l
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PsfpG6]G6 ;b:on] k/fdz{bftfsf] sfo{If]q cGtu{t k"0f{sflng ?kdf lg/Gt/ /xL a9Ldf # dlxgf dfq k/fdz{ ;]jf
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PsfpG6]G6 ;b:ox?n] cfkm\gf] k]zfut k|df0fkq :yug u/]sf] gkfOPdf g]kfn rf6{8{ PsfpG6]G6\; P]glgodcfrf/
;+lxtflgb]{zg cg';f/ sf/jfxL ul/g] Joxf]/f ;DalGwt ;a}sf] hfgsf/Lsf] nflu of] ;"rgf k|sflzt ul/Psf] 5 .
g]kfn rf6{8{ PsfpG6]G6\; ;+:yf
The Institute of Chartered Accountants of Nepal

(Established Under the Nepal Chartered Accountants Act, 1997)
Babarmahal, Kathmandu, Nepal

P.O. Box: 5289, Tel: 4258569, 4269130, 4255668, Fax: 4258568
E-mail: ican@ntc.net.np, Website: www.ican.org.np
June 2014
23
ECONOMY
Public Debt: An Emerging Global Concern
Background
The Government of Nepal is
receiving domestic and external
borrowings without clear policy
& strategy and proper analysis of
terms and conditions of lenders.
In addition, the government has
no prudent system for the debt
management. So, it is high time
for the Government to work for
revamping the existing practices,
so that internationally accepted
sovereign borrowing and lending
policies and strategies could be
adopted.
Mr. Iswar Raj Shrestha
Mr. Shrestha is AAG in OAG/N
24
The evolution of public debt can be

linked with the basic principle of
economics that human needs are
unlimited whereas the means to
accomplish these needs are limited.
The same principle applies in case of
a state. The role of a state has been
changing in terms of the nature and
types of involvement. At the
beginning, security was the major
concern of all states and they used to
borrow monies from their citizens to
finance war and security. With the
convergence of role of states from
security to development and welfare,
the financing requirements of states
increased to a greater extent and the
requirements were fulfilled through
the domestic borrowings and bilateral
assistance. After the emergence of
international financial institutions like,
the World Bank, International
Monetary Fund and other regional
banks, governments began to mobilize
foreign aid in grants and loans as a
major source of financing for
restructuring and transforming the
countries' development process.
At present, both external and domestic
borrowing has become a major source
of the governments' deficit financing.
It has been regarded as an important
instrument of monetary and financial
June 2014
management. The inflows of foreign

aid including the share of loan of the
countries have increased significantly
with the unrestricted borrowings. The
repayment of debt or sustainability of
debt has appeared as a new challenge
for many countries due to excessive
borrowings from the banks and
international financial institutions.
This article focuses on the growing
concern of public debt and the
initiative taken by the UNCTAD and
INTOSAI to streamline public debts
of the countries for the mutual benefits
of both borrowers and lenders.
Sovereign Debt Risks

Sovereign debt refers to government
debt that is issued as bonds. The bonds
are either addressed to investors in
the local market in local currency or
they are addressed to foreign investors
in foreign currencies. Borrowing
allows a country, in short term, to
invest beyond the level of revenue
mobilization and saving capacity.
However, no country can borrow
indefinitely and unsustainable
borrowing may result a huge burden
to a country's economy and future
generation. International debt crisis
of early 1980s signified the need of
an effective public debt management.
Excessive short-term volatile capital
ECONOMY
inflow coupled with some financial speculations was the

main cause responsible for appearance of the Asian financial
crisis in 1990. Debt repudiation of some highly indebted
countries and Asian financial crisis brought the complexities
of debt management risks and also put the international
community in a discomfort situation.
The global financial crisis of 2008 affected most of the
capitalist economies. The crisis is considered to be one of
the main reasons for the emergence of sovereign debt into
a crisis. Countries did not prepare financing plans and debt
redemption plan to save their economy. The governments'
of some countries default to pay back sovereign debt in
foreign currency due to insufficiency the foreign currencies
reserves.
The public debt covers the broad area of national economy
and the obligations of debt repayment rest on national
governments. Economists have different views regarding
the sustainability of public debts. The IMF has given
special attention in highlighting the vulnerability of debt
indicators. Some of important indicators are mentioned
below:
Debt indicators: These include maturity profiles,
reimbursement schedules, sensitivity to interest rates
and debt composition. The most common indicators
are: ratios of external debt to GDP, ratios of export to
GDP, ratios of external debt to tax revenue, ratios of
debt servicing to recurrent expenditure, ratios of
external debt to foreign exchange reserve etc.
Indicators on reserves sufficiency: They imply the
relationship between reserves and short term debt.
Financial soundness indicators: These indicators relate
to capitalization of financial institutions, assets quality,
profitability and liquidity.
Contingent liabilities: It is the obligation of national
government to those contingent liabilities that may
lead to increase in public debt liabilities.
Indicators based on the GDP are popular and useful
indicators to measure the sustainability of public debt.
Some economists believe that sovereign debt becomes a
real issue when it exceeds the Gross Domestic Production
(GDP) by half, as it increases budget deficit without any
probability of improving the state revenues. However, the
accumulated sovereign debt of some countries has reached

more than 100 percent of GDP. According to IMF report,
Gross Government Debt (GND) as percentage of GDP in
2012 reached 158 in Greece, 146 percent in Jamaica, 238
percent in Japan, 117 percent in Italy. Norway, Switzerland,
Sweden, Brunei, Algeria are some of countries having low
percentage of GND /GDP ratios.
UNCTAD Principles:
Lack of globally agreed rules and regulations guiding
sovereign financing have contributed to many instances
of irresponsible sovereign borrowing and lending to
sovereign countries. In view of global financial and
economic crisis, UNCTAD, as a specialized agency of
United Nations, took initiative in 2009 to promote
responsible sovereign lending and borrowing practice. The
UNCTAD took initiative to provide a forum for debate on
responsible practices and to develop a set of commonly
accepted principles and practices relating to public debt.
The UNCTAD developed "Principles on Responsible
Sovereign Lending and Borrowing" frameworks to reduce
the frequency and severity of debt crises by developing a
set of voluntary guidelines that promote and reinforce
responsible sovereign lending and borrowing practices.
These principles aim to provide economic benefits to be
applied both sovereign borrowers and their lenders. The
major responsibilities of lenders and borrowers covered
in the Principles are given below:
Responsibilities of Lenders
Agency- Lenders should recognize that government officials
involved in sovereign lending and borrowing transactions
are responsible for protecting public interest.
Informed Decisions- Lenders have a responsibility to
provide information to their sovereign customers to assist
borrowers in making informed credit decisions.
Due Authorization- Lenders have a responsibility to
determine whether the financing has been appropriately
authorized and whether the resulting credit agreements are
valid and enforceable under relevant jurisdiction/s.
Credit Decisions- A lender is responsible to make a realistic
assessment of the sovereign borrower's capacity to service
a loan based on the best available information.
June 2014
25
ECONOMY
Project Financing- Lenders financing a project in the

debtor country have a responsibility to perform their own
ex ante investigation into and, when applicable, postdisbursement monitoring of the likely effects of the project,
including its financial, operational, civil, social, cultural
and environmental implications.
International Cooperation- All lenders have a duty to
comply with United Nations sanctions imposed against a
governmental regime.
Debt Restructurings- In circumstances where a sovereign
is manifestly unable to service its debt, all lenders have
duty to behave in good faith and with cooperative spirit to
reach a consensual rearrangement of those obligations.
Responsibilities of Borrowers
Agency- Governments are agents to the state and, as such,
when they contract debt obligations, they have a
responsibility to protect the interests of their citizens.
Binding Agreements- A sovereign debt contract is a
binding obligation and should be honored.
Transparency- The process for obtaining financing and
assuming sovereign debt obligations and liabilities should
be transparent.
Disclosure and publication- Relevant terms and conditions
of a financing agreement should be disclosed by the
sovereign borrower, be universally available, and be freely
accessible.
Project Financing- In the context of project financing,
sovereign borrowers have a responsibility to conduct a
thorough ex ante investigation into financial, operational,
civil, social, cultural and environmental implications of
the project and its funding.
Management and Monitoring- Debtors should design
and implement a debt sustainability and management
strategy and to ensure that their debt management is
adequate. They have a responsibility to put in place effective
monitoring systems, including at the sub-national level,
that also capture contingent liabilities.
Avoiding Incidences of Over-borrowing- Governments
have a responsibility to weigh cost and benefits when
seeking sovereign loans.
Restructuring- If a restructuring of sovereign debt
26
June 2014
obligations becomes unavoidable, it should be undertaken

promptly, efficiently and fairly.
The UNCTAD XIII conference held at Doha in April 2012
was the first step to endorse the UNCTAD Principles on
Promoting Responsible Sovereign Lending and Borrowing.
The government officials participating from Brazil,
Germany, Italy, Nepal, Norway, and Morocco expressed
support for the Principles on behalf of their countries. The
UNCTAD Principles are still open for discussion and
debate. These principles are designed to voluntary
implementation from all UN member states.
INTOSAI's Initiative.
International Organization of Supreme Audit Institutions
(INTOSAI) has also taken initiative to enhance the roles
of SAIs in auditing public debt. The Governing Board of
INTOSAI formed a Public Debt Committee to conduct
studies on the SAIs to publish guidelines and other
information for use by SAI to encourage the sound
management and reporting of public debt. In 1998, several
issues on the role of SAIs in public debt audit were discussed
in INCOSAI meeting. It approved the unified guidance
for planning and conducting and audit of internal controls
of public debt. In June 2013, the INTOSAI organized a
seminar on "Strengthening Public Oversight and Audit of
Sovereign Lending and Borrowing Frameworks" in Geneva,
Switzerland. The meeting discussed the technical aspects
of incorporating the UNCTAD Principles into the
international standards used by Auditors General to audit
their countries' public debt. Based on the UNCTAD
Principles, the work of updating existing auditing standards
of public debt and capacity building program for public
auditors in several countries is going on though the working
group on public debt.
INTOSAI has also taken initiative to develop public debt
audit as a specialized audit discipline. The INTOSAI has
prepared and launched a separate programme to strengthen
the audit of lending and borrowing frameworks and capacity
development of SAIs for 2013-2016. The Cooperation
meeting of Heads of SAIs held in Malaysia recently in
May 2014 in association with UNCTAD, has entered
agreements between INTOSAI Development Initiative
(IDI) and SAIs various countries in strengthening the
professional and organizational capacity development in
conducting in-depth and effective audit of lending and
ECONOMY
borrowing in SAIs.
INTOSAI has been implementing International Standards
of Supreme Audit Institutions (ISSAIs) as a benchmarks
for public sector auditing in member SAIS. It has issued
separate specialized guidelines for the audit of public debt,
which include the followings:
ISSAI - Guidelines on Audit of Public Debts:

ISSAI 5410 - Guidance for Planning and Conducting an
Audit of Internal Controls of Public Debt
ISSAI 5411 - Debt Indicators
ISSAI 5420 - Public Debt Management and Fiscal
Vulnerability: Potential Roles for SAIs
ISSAI 5421 - Guidance on Definition and Disclosure of
Public Debt
ISSAI 5422 - Carry out Performance Audit of Public
Debt
ISSAI 5430 - Fiscal Exposures: Implications of Debt
Management and the Role of SAIs
ISSAI 5440 - Guidance for Conducting a Public Debt:
The Use of Substantive Tests in Financial
Audits.
Public Debt in Nepal

Looking from the historical perspective, Nepal remained
debt free till 1950. The first domestic borrowing was taken
with the issuance of 90 days Treasury bills amounting to
Rs. 7 million in 1962 and Nepal received first foreign loan
in FY 1963/64. Thereafter, the foreign and domestic
borrowings have become alternative means of government's
deficit financing. As of now, Nepalese economy has been
heavily relying both on short-term domestic debt and
concessional foreign loans of long maturity, particularly
from multi-lateral agencies like the World Bank, ADB,
IFAD, etc.
Legal Provisions - The legal frameworks for public
debt in Nepal is governed by various statutes. The
Article 89 (2) of Interim Constitution of Nepal 2063
(2007) stipulates that no loan shall be raised or
guarantee be given by the Government of Nepal
except in accordance with law. The Article 92 (d) of
the constitution provides that all charges relating to
debts for which the Government of Nepal is liable
come under the Expenditure Chargeable on the

Consolidated Fund.
Public Debt Act, 2059 (2002) provides the legal
mandate for raising of domestic borrowings by issuing
bonds, whereas the Loan and Guarantee Act 2025
(1968) provides the authority to government for
borrowing external loans and give guarantee. As per
Section 3 of the Public Debt Act, 2059 (2002), the
Government of Nepal may raise public debt by issuing
any one type of or more types of bonds at the same
time or at several times in such a quantity as it may
consider necessary for the proper mobilization of
government finance. The Section 5 of the same Act
mentions that the central bank is held responsible for
carry out all acts relating to management of public
debt on behalf of the Government including
maintenance of necessary accounts, submitting to
reports on the status of public debt to the Government.
The Public Debt Rules, 2059 (2003) covers the details
procedures about the issue the bonds.
The Section 3 of Loan and Guarantee Act 2025 (1968)
has empowered the Government of Nepal to borrow
loan in foreign currency as per necessity from any
foreign government or agency for any approved
development plan. Regarding the power to give
guarantee, the Section 4 of the same Act mentions
that the Government of Nepal may cause a loan to be
lent by and foreign government or agency or other
institution and give guarantee for the loan of a project
included in any approved development plan or for
the purchase of a new aircraft for the Nepal Airlines
Corporation considering the reasons why the institution
is borrowing loan, national interest to be served by
the borrowing and the borrower's ability to make the
repayment of principal and interest of the loan to
lending foreign government or agency or institution.
The agreement on the borrowing of a loan or giving
a guarantee by the Government of Nepal requires to
be laid before the Legislative- Parliament as promptly
as possible.
Institutional Arrangement- Ministry of Finance (MOF)
is legally responsible for policy level decisions for
the country's overall government borrowing and
lending. The Financial Comptroller General Office
June 2014
27
ECONOMY
(FCGO) under the Ministry of Finance (MOF) is

undertaking the public debt management functions.
The FCGO maintains accounts of government
borrowings, debt outstanding and makes repayment
of interest and principal of public debt. The
consolidated financial statements of outstanding
internal and external debts and debt servicing are
prepared by the office every year. The FCGO also
maintains the records of government lending to public
enterprises provided as loan investments. Regarding
the domestic borrowings, Nepal Rastra Bank carries
out the most of management works of as per the
government's requests.
Present Status- Nepal is now in a moderate risk of
public debt distress due to decline in capital
expenditure. The Government Debt /GDP ratio of
Nepal was 60 percent in 2000/01 which was
considered as riskiest. However, the Debt/GDP ratio
started declining gradually after the year. The ratio
decreased to 44 percent in 2006/07 and 33 percent in
2010/11. According to Auditor General' Annual Report
2013, the total outstanding public debt of the country
as of FY 2012/ 2013 is Rs. 545 billion 314 million,
of which Rs. 211 billion 873 (39 percent) is internal
and Rs. 333 billion 441 million (61 percent) is external.
The Outstanding Government Debt/GDP ratio has
stood 32 percent in 2012/13, of which internal debt
and external debt stood 12.46 percent and 19.60
percent respectively. In comparison to total government
budget expenditure and recurrent expenditure of the
FY 2012/13, the payment of principal and interest
repayment of internal and external loan stood 13.63
percent and 19.75 percent respectively. The
outstanding government debt burden of the year
figures around 20 thousand Rupees per person.
Challenges- Although Nepal has been taking internal
and external borrowing, no clear policy has not been
framed to use the borrowed monies. The Government
of Nepal is receiving loans as a measure to bridge the
deficit budget financing, but the terms and conditions
of lenders and country's debt sustainability are less
considered. Debt management issues including the
risks of foreign exchange are not taken into
consideration before receiving the external borrowings.
28
June 2014
Though the Government has outlined general policy

for mobilizing loans in its foreign aid policy, it has
not covered a clear strategic policy to receive internal
and external borrowings.
At present, Nepal has separate law for receiving
internal and external borrowings without having
relationship. The existing Public Debt Act and Loan
and Guarantee Act are confined to fixing of debt
ceilings and describing the procedures for raising
loans. Moreover, these Acts have not been reviewed
and updated as per country's requirements.
Domestic and external borrowings are administered
in isolation without analyzing the relative benefits
each other. The government is raising internal loans
as usual although it has surplus or savings in
government treasury in some year due to inability to
spend the capital budget. The above mentioned
instances clearly indicate the weakness in government's
debt mobilization policy and management strategic
decisions.
Concluding Remarks
Public debt is an emerging issue of global economy as the
financial and economic crisis of the several countries
adversely affected their economies. The crisis appeared
due to lack of prudent debt management system in countries.
In recent years, the sustainability of countries' debt is a
major concern of United Nations specialized agencies like
UNCTAD and INTOSAI. The UNCTAD has developed
Principles on Promoting Responsible Sovereign Lending
and Borrowing. An attempt has been made to set
responsibilities on the part of both borrowers and lenders
that are mutually acceptable. Likewise, the INTOSAI has
developed and issued separate audit guidelines for
conducting the audit of public debt. However, these reform
initiatives may not be successful, if the countries do not
cooperate to implement reform initiatives in their existing
practices.
The Government of Nepal is receiving domestic and external
borrowings without clear policy & strategy and proper
analysis of terms and conditions of lenders. In addition,
the government has no prudent system for the debt
management. So, it is high time for the Government to
work for revamping the existing practices, so that
ECONOMY
internationally accepted sovereign borrowing and lending

policies and strategies could be adopted. The Government
should give attention in establishing prudent debt
management system to raise funds from the developing
partners with minimum cost and to analyze risk of
borrowings. An attempt should also be made to keep the
debt liabilities at sustainable level without affecting the
country's credibility and the prospect of borrowings of the
future generation. In addition, the auditing tools and
methodology based on ISSAIs should also be used to carry
out audit of public debt in effective manner.
Public Statement on Income and Expenditure for the

Fiscal Year 2013/14, Government of Nepal, Ministry
of Finance 2013
References:
INTOSAI - International Standards of Supreme Audit

Institutions (ISSAI).
United Nations, UNCTAD Principles on Promoting

Responsible Sovereign Lending and Borrowing.
Auditor General's Annual Report 2014, Office of the
Auditor General, Kathmandu Nepal.
Economic Survey, Fiscal Year 2012/13, Government

of Nepal, Ministry of Finance 2013
Development Cooperation Report Fiscal Year 2012/13,
Government of Nepal, Ministry of Finance.
Public Debt Act 2059 (2002), Nepal Law Commission,
Loan and Guarantee Act 2025 (1968), Nepal Law
Commission
Report on the Study of Overall Situation of Public

Debt in Nepal, Center For Empowerment Innovation
and Development (CEMID- Nepal) July 2012.
June 2014
29
ECONOMY
Economic Vision for the Long Term Growth

and Development of Nepal
Many countries face a long period

of adjustment to absorb the
legacies of the crisis, particularly
in terms of high unemployment,
excess capacity and large fiscal
imbalances. Further ahead,
demographic changes, including
ageing, and economic
convergence will bring about
large shifts in the composition of
global GDP.
Abstract
Introduction
Economic policy is the actions taken

by a government to influence its
economy. Types of economic policy
actions can include setting interest
rates through a countries reserve,
regulating the level of government
expenditures, creating private property
rights, and setting tax rates. It is
usually comprised of various
measures, through which the
government seeks to influence the
overall economy. There are three
methods through which a government
typically seeks to control the economy
with its budget, known as the
allocative, stabilization, and
distributive functions. While all three
functions are always used
collaboratively, their emphasis may
change with each new government,
era, and global economy. Whatever
the path and direction of the economy
it should be reform oriented,
structurally departure from static
culture to growth and performance
oriented culture, and should be able
to address the hope and expectation
of general peoplel.
Economic vision articulates the shape

and structure of the economy. It guides
and directs the overall economic
image of the nations. It states the
overall economic position of the state
in future. In the economic stance what
will be the Nepal's position after 10
or 20 years will be described in
economic vision. Economic Vision
provides the necessary skills and
structure to provide a strong and
secure future without compromising
todays lifestyle. For most of recorded
history, whether Eastern or Western
out of this new probing of economic
patterns, two economic theories
emerged. The first theory described
what we today call capitalism. The
second theory is what its proponents
called socialism. Theories, we are
often told, are merely abstractions
with no real practical impact, but
hardly anything has impacted modern
history more profoundly than
capitalism and socialism.
Understanding these theories and the
times out of which they came is key
to recognizing the dominator
assumptions embedded in them, and
to building a new economic theory
called partnerism one that really
works for the greater good of all.
Dr. Basudev Sharma
Dr. Sharma is Under Secretory, Ministry of

Finance
30
June 2014
ECONOMY
Stimulating transitional economy after a long political

conflict really creates pressure. The rising expectation of
people for decent job, secured life and rapid socio economic
progress insist speed economic revolution what we call
leap frog growth. In the political and administrative
process it is not easy and fast to gearup the economy in
full speed. Unless and until a strong commitment dedication,
and disciplined is not develop in the socio political
atmosphere it is difficult to fulfill the expectation and
dream of the peoples in reality.
The creation of a long-term roadmap for economic progress
for Nepal through the establishment of a common
framework aligning all policies and plans and fully engaging
the private sector in their implementation is really tough
due to multi-stakeholders and their vested interest in socio
economic agenda. However, it is a time to think how we
can build a vibrant Nepal economically as well as
socioculturaly. Seeking to ensure the continued failures to
be succeed our national development plan and agenda of
the Nation's development, the Government of Nepal has
to be set guidelines and priorities for the Nepal's socioeconomic progress in its Policy Agenda. Taking these
guidelines as its parameters, the Nepalese Economic Vision
2030 should be developed by the Government, in
consultation with the private sector, for next 16-years
strategy to achieve these aims, and to ensure that all
stakeholders in the economy are moving in a concerted
way, with a clear view of the long-term goals.
Having established these pillars, the Government should

be committed itself to direct public policy to strengthen
and develop them. This involves focusing on four key
priority areas which are economic development, social and
human resources development, infrastructure development
and environmental sustainability, optimisation of
Government operations.
Economic Development
Economic diversification is common and fundamental to
the Government's other stated priority areas and the policy
agenda as a whole. The Government wishes to see the
creation of higher-value employment opportunities,
especially for Nationals, and maximising participation of
women in the workforce. To encourage investment and
entrepreneurial activity, the Government plans to contribute
to enhancing the business environment through further
legislative reform and by ensuring that all economic policy
is formulated with reference to rigorous data sources and
statistical information. Enhancing the economy and
business climate will also help to integrate Nepal further
into the global economy by attracting foreign as well as
local investment, and by facilitating export of capital
through targeted investments with international partners.
Pillars of the Nepal Policy Agenda Vision
The Nepal's Policy Agenda for 2012/2013 defines the

priorities for public policy in the country. These priorities
have been set to achieve what the Government of Nepal
sees as its primary goals: a safe and secure society and a
dynamic, open economy etc. But for the long term vision,
the Government has identified following light pillars which
will form the architecture of the Nepal's social, political
and economic future. These pillars are a large empowered
private sector, a sustainable knowledge-based economy,
an optimal, transparent regulatory environment, a
continuation of strong and diverse international
relationships, the optimisation of the Nepal's resources,
premium education, healthcare and infrastructure assets,
complete international and domestic security, maintaining
Nepal's values, culture and heritage
June 2014
31
ECONOMY
Social and Human Resources Development

According to the Policy Agenda, social and human
development represents the pre-eminent objective and
driving motivation behind all policies and initiatives.
Ensuring that high quality education and health services
are available to residents is therefore of the highest priority.
When it comes to developing the workforce, the
Government aims to ensure the availability of a stable
supply of high quality labour to staff the economy, and
especially to encourage full employment among Nationals.
At the same time, Nepal wishes to maintain ethical and
safe management of its labour resources, through the
thorough implementation of Federal labour laws and the
meeting of commitments made through the Nepal's signature
of international labour arrangements.
Infrastructure Development and

Environmental Sustainability
Developing appropriate infrastructure, while preserving
the environment, forms the third priority area. The
Government will ensure the development of a professionally
designed and well-managed urban environment in the
Nepalese towns and cities complete with world-class traffic
and transport systems. The simultaneous development of
the Regions to keep pace with that of the Capital is also
an important policy priority in order to achieve a Nepal'swide distribution of economic activity and associated
benefits. For its part, the Government need to ensure that
capital city security is maintained and that its towns and
cities remain a safe place in which to live and work in
order to ensure that the urban infrastructure is able to cope
with the envisioned growth without stresses.
Optimisation of Government Operations

The Policy Agenda sets out guidelines for optimising the
Government's own role in the future of the federal Nepal.
This can be achieved by improving the efficiency and
accountability of government departments. The Government
has already embarked on an extensive review of its
processes and structures. Many services are being delivered
electronically through e-government initiatives, and
departments are being streamlined and non-core services
outsourced to the private sector also. These initiatives need
to be continued and enhanced. At the same time, the
32
June 2014
Government also need to review and enhance the legislative

framework and the law-making processes themselves to
ensure maximum efficiency.
Economic Vision Imperatives

The state Policy Agenda has placed a heavy emphasis on
the economy and on ensuring the economic wellbeing of
all of Nepalese citizens. This Agenda came in response to
a number of opportunities and challenges facing Nepal.
The state drive for a more sustainable and diversified
economy is intended to reduce the relatively high
dependence on oil and the cyclical swings which accompany
it. Moreover, the young National population presents the
opportunity, as well as the challenge, to create attractive,
high value-added employment opportunities for the
emerging generation. The drive for diversification as well
as the challenge of a burgeoning population delivers a
greater need for Nepal to upgrade the quality of its education
system and to increase the educational attainment rates of
Nationals and the overall workforce to move the economy
up the value chain. Moreover, a better educated workforce
will be a key enabler to address the relatively low
productivity rates found in much of the Nepal's enterprise
base.
Nepal's Vision for Long Term Growth

The global economy currently faces serious challenges
and policy action is needed to restore confidence and put
the economic recovery into a sustainable growth path.
Many countries face a long period of adjustment to absorb
the legacies of the crisis, particularly in terms of high
unemployment, excess capacity and large fiscal imbalances.
Further ahead, demographic changes, including ageing,
and economic convergence will bring about large shifts in
the composition of global GDP. In the scenario presented
here, countries confront these challenges and the appropriate
policy responses and structural reforms are taken in order
to ensure that growth returns to a sustainable path. Thus,
the scenario embeds sustained, albeit not dramatic, policy
improvements in both advanced and emerging economies
in a number of areas including labour and product markets,
fiscal consolidation and reforms of welfare and financial
policies. Over the next half century, the global economy
is projected to grow at around 3% per annum on average.
According to the study of Economics Department
ECONOMY
Organisation for Economic Co-operation and Development

OECD (2012) the world economy will get following long
term growth fundamentals.
Global GDP is expected to grow at around 3% per
year over the next 50 years, but wide variations are
forecast between countries and regions.
In parallel, the relative size of economies will change
radically over the next 50 years.
The global saving rate will remain fairly stable until
2030.
Notwithstanding fast growth in low -income and
emerging countries, large cross-country differences
in living standards will persist in 2060.
Bolder structural reforms and more ambitious fiscal
policy could raise long -run living standards by an
average of 16% relative to the baseline scenario of
moderate policy improvements.
Global imbalances could widen up until 2030 perhaps
reaching pre -crisis levels, but deeper and faster
structural and fiscal reforms could reduce imbalances
by as much as one - quarter by then.
The global economy faces a number of challenges in
the short and the long -term Global growth will be
sustained by emerging countries, though at a declining
rate.
Ageing will be a drag on growth in many countries,
while improvements in education will sustain it.
Improvements in productivity will be the most powerful
driver of growth
Interest rates may rise over time
Global savings will be sustained by fiscal consolidation

and the rise of China and India
Current account imbalances will rise over the next
two decades
The relative size of economies will change dramatically
over the next half century
GDP per capita gaps will shrink but significant cross
country differences will persist
Conclusion
If we see the OECD study it can be pursued that the way
of long term growth is not easy as we expect. But the
underdeveloped situation of Nepal with vibrant potentiality
of different sector indicates as an emerging economy. It
is expected that besides China, India will be highest growth
rate country by 2020. These two giant economies will
influence Nepalese economic growth. As Nepal has planned
to upgrade its economy from existing underdeveloped
economy to developing economy up to 2022, it seems to
be achievable target.
Nepal's desire should be double digit growth in the long
run to up lift its economy. The probable sector for this may
be infrastructure, agriculture, tourism, herbs and herbals
with technology and human resource development. One
thing should be remembered that Nepal's development is
possible only through focused strategy. Grants, Loan,
Foreign aid may not be sustainable means for Nepal's
development. Nepalese own resources and foreign direct
investment will be the best resources for Nepal's long term
growth and development.
June 2014
33
TAXATION
Improvements Required in the Functioning of

Tax Hierarchy to Encourage Foreign Investments
1. INTRODUCTION
When the taxpayer finds that he
has to pay additional amount
towards interest and late fee and
pays the amount, it is observed in
the cases examined by the author,
that the amount levied and
amount collected is mentioned in
the VAT statement but they do not
set off the amount between each
other and show the correct dues
but they show total dues and the
total amount collected separately
at the top as if the interest and
late fees are still outstanding and
liable to be paid.
CA. N.Krishnaswami
CA. Krishnaswami is Fellow Member of ICAN
34
1.1 While the country is inviting

foreign contractors and investors
to work and invest in Nepal, the
regulatory infrastructures
regarding taxation which takes
a toll on the performance has
not been given proper attention
to it. The weakness is from the
drafting stage of legislation to
implementation with proper
training and publication of up
to date circulars and ready
availability of the latest statutory
provisions. Even through when
the VAT Act was implemented,
with a view to promoting the
i m p l e m e n t a t i o n o f VAT
legislation against the opposition
of traders, very positive
development was shown by the
then Director and the
compliment should go to the
then Director, Mr. Narayan
Silwal for effecting quick
refunds wherever it is necessary
and allocate, without regard to
the quantum of refund involved..
Not only that he used to give a
patient hearing, discuss and try
to convince the tax payer or get
convinced by the tax payer.
1.2 But now even though the
June 2014
Department has brought a

Directive to explain the
provisions, they have given their
own outlook but without
considering what is actually
written in the Act. Whether this
should be treated as a lacuna in
enactment of the statute or
enthusiasm in interpretation (or
misinterpretation) of the Act for
their own purposes by the tax
department.
1.3 Circulating the taxation
proposals with explanatory
memorandum on each section
and inviting suggestions before
being enacted also resolves the
most of the difficulties in
implementation. This is the
practice in all commonwealth
countries who have adopted this
system as handed down by the
British to the benefit of all. The
necessary rules do not follow
immediately after the taxation
proposals are approved by the
parliament.
1.4 Further such explanatory
memorandum helps in the
proper interpretation of the
provision by the Courts. The
interpretation principle for the
TAXATION
relating to the taxation on its website with English

Translation, if the Government wants to welcome
foreign investment into Nepal, as is being done in
India in both Hindi and Englsh.
Court can be summarised as follows:

1.
if a statute's language is plain and clear, then to

enforce according to its tone.
2.
If one reading would make one or more parts

redundant and another reading would avoid the
redundant, the other reading is preferred.
3.
If a list of two or more specific description is

followed by more general description, the wide
meaning of the general description must be
restricted to the same class, if any of the specific
words that proceeded them. (ejusdem Generis)
4.
2. Let us Consider Some of the Major

Provisions of the VAT Act.
2.1
10 (1) The person desiring to involve in any

business should submit an application to the
tax officer in the prescribed format for
registration of the transaction before
commencing the transaction.
When primary legislation is ambiguous, in

certain circumstances, the Court may refer to
statements made in the legislature in an attempt
to interpret the meaning.
10 (2) Application should be submitted to the tax

officer by a person in the prescribed format
for registration within thirty days from the
date the tax becomes liable or from the date
of operating such business, if tax is leviable
on the goods in which person carries the
business by carries out the business of
hardware, sanitary, furniture, fixture,
furnishing, automobiles, motor parts,
electronics, marble, educational consultancy,
discotheque, health club, catering service,
Party palace carry out, Parking services, Dry
cleaners service having machines, restaurant
with bar and conducting colour lab within
the area of Metropolis, Sub-metropolis,
Municipal or the area as prescribed by the
Department within thirty days from the date
the tax becomes liable or from the date of
operating such business.
1.5. Thus when there are difficulties in the interpretation,

the intention of the legislature is the best resort for
the Court to decide the matter. This is major factor
for the legislation to be accompanied by explanatory
notes indicating the object to be achieved by the
provision or the speeches in the legislation but both
of them are not readily available to the public for tax
statutes in Nepal. In England, Hansard, a publication
of the Parliament provides the details of discussions
in the Parliament and the explanations provided by
the ministers. So in the absence of such publications,
it is difficult to decide the object or the intention of
a particular section.
1.6. Even though the Finance Minister is call out for
inviting foreign investment, the Internal Revenue
department, which is under the Finance Minister, has
not been able to put the latest amended Acts and
Rules, circulars and notifications relating to Income
tax, VAT, excise duty etc. on its website with English
translation. How the Finance Minister expects foreign
investment when the up-to-date official tax legislations
are not readily available in English on the IRD
website, for the foreign investors to consult before
considering investment in Nepal?
1.7. IRD as a first step should put on its website the latest
legislations including circulars and notifications
Sec.10 .Registration under VAT Act.:
10 (3) Notwithstanding Sub-section (1) and (2), a

person who carries out the transaction of
goods or services mentioned in Schedule 1,
shall not require to be registered.
2.2
Sec. 10(2) provides for two conditions for

registration.
(a)
He should register, if he deals in goods on

which VAT becomes payable or
(b)
If he carries on business
(i)
in any area of municipal corporation, sub

June 2014
35
TAXATION
(ii)
2.3
2.4
2.5
to a small entrepreneur, having a prescribed annual

taxable transaction threshold, from the requirements
of registration and filing tax returns and from such
requirements as prescribed.
corporation, municipality or the area notified

by the department and
in the following goods: Hardware, sanitary,
furniture and other business added from time
to time (consisting of 18 kinds of business)
since 2066.4.1 BS. by submitting an
application within 30 days from the date
when business is started.
Since no explanation is given at the time of

introducing the various types of the goods, it is
difficult to ascertain the intention of introducing
such nature of business in goods, whether it is only
for revenue purpose or for any other purposes.
The VAT directive issued by the IRD has mentioned
in Chapter 3.2. Provision for Compulsory
Registration. In the matter below that it is mentioned
" clgjfo{ ?kn] " in a compulsory manner i.e. whether
they make any sale or not, if a person intends to
carry on the business in the notified goods, he should
get registered. But there is no word " clgjfo{ "
indicating compulsory registration in Sec. 10(2) even
though the Directive states it is compulsory. Thus
the Directive is not reflecting what is in Section
10(2) of the Act, by introducing words which is not
specifically mentioned in the Act.
Even though Sec. 10(1) lays down in general that a
business carrying on transaction in taxable goods
should get registered under VAT, that Section is
subject to Sec. 9 which states with a non-obstante
clause "Notwithstanding anything contained
anywhere in this Act". This Sec. 9 not only subjects
Sec.10 in its field but also all the provisions anywhere
in the Act relating to registration in an unlimited
way.
Provided that a small entrepreneur may register the

transaction after completing the process of Section
10 on desiring to be registered.
3.2
This non obstante clause "Notwithstanding" at the

beginning of the section 9 intends to preclude
interpretation contrary to certain declared objects or
purposes. This is called a non-obstante clause.
3.3
A non-obstante clause is usually used in a provision

to indicate that the provision mentioned in such nonobstante clause should prevail in spite of anything
to the contrary contained in other provisions of the
Act. In case there is any inconsistency or a departure
between the non-obstante clause and other provisions,
one of the objects of such a clause is to indicate that
it is the non obstante which would prevail over the
other clause.
3.4
Since Sec. 9 has the non-obstante clause

"Notwithstanding any thing contained elsewhere in
the Act, Section 9(1) will prevail over sec.10. Sec.
9(1) also speaks of registration and Section 10 also
explains registration. Because of non-obstante clause
in Sec. 9, provision of Sec. 9 takes priority over Sec.
10, and sec. 10 is subject to Sec.9 and Sec.10 cannot
exceed the powers given in Sec.9.
3.5
Rule 6 (1) made under sec.9, Entrepreneur Carrying

out Small Transactions Need not to be Registered:
(1)
3. THE EFFECT OF SEC. 9

3.1
Thus Sec.10 is subject to the provision of Sec.9

which states as follows:
Provided that any person who imports into

Nepal goods valued at one hundred thousand
rupees or more per annum for commercial
purposes shall have to register his
transactions.
Section 9 states: Exemption for Enterpreneurs having

Small Transactions
Notwithstanding anything mentioned in other
provisions of this Act, exemption may be provided
36
June 2014
Notwithstanding anything mentioned in Rule

3, any person carrying out transactions not
exceeding two million rupees within the last
twelve months as set forth in Section 9 of
the Act need not have registered his
transactions.
(2)
Notwithstanding anything contained in sub-
TAXATION
rule (1), any person carrying out small

transactions may submit an application
pursuant to Rule 3 if he wishes to register
his transactions voluntarily. If an application
has been submitted to register the transactions
voluntarily, the tax officer shall register the
transactions by completing the procedures
of investigation referred to in Rule 4.
3.6
As a result the businesses that are listed in Sec. 10(2)

are required to be registered only where their income
in a year exceeds Rs.20 lakhs. Otherwise, they are
not obliged to register themselves compulsorily .
But they can voluntarily register, if they want, but
not compulsorily. Thus the explanation of the VAT
Directive that the business have to be compulsorily
registered under the Act is in violation of the provision
in Sec.9.
3.7
Such misleading directions should be avoided.

Actually the non-obstante clause should have been
put in Sec.10 instead of Sec.9, if the intention of the
Directive is to be achieved to make the registration
of listed businesses to be compulsorily registered
and by using the word "compulsorily" to make it
clear.
4. LEVYING OF PENALTY AND INTEREST.

4.1
In the case of VAT returns submitted late or VAT

amount remitted late, there is the provision to levy
interest and late fee in the Act. The tax payer makes
the payment in time but because of some confusion
in the tax office, the tax payer is levied late fee and
interest without his knowledge and it goes on
accumulating without the knowledge of the tax payer.
If the tax payer has been informed immediately the
interest or late fee levied , then he can immediately
pay the amount and free himself from the accumulated
interest.
4.2
But there is no clarification in the matter of levying

late fee and interest or no special mention has been
provided in the directive that the tax payer has to
verify on his won every month whether any penalty
or interest or fees have been levied. When manual
filing was there, at the time of filing the tax payer
can ascertain the position whether return has been
accepted in time and tax has been paid in time in the

tax office records. But with e-filing, that opportunity
is lost and levying interest in case of late payments
without informing the taxpayer. is in violation of
natural justice.
4.3
In one case, the cheque for the month of Srawan

was deposited to the tax office on the 19th of the
next month, viz. Bhadra, and if the tax officer had
deposited the cheque in the bank account on 20th
Bhadra, the cheque would have been credited to the
government account within 24/25 of the month even
if it is not certified good for payment, but the tax
officer kept the cheque in his drawer and deposited
in Kartik and due to the failure of the tax officer
carrying out his duty of collecting the revenue in
time, the tax payer has to pay a huge amount of late
fee and interest , because he was informed after two
years about the outstanding. This situation happened
because the tax office did not give a receipt for the
cheque received and did not look to the welfare of
the tax payer.
4.4
Now when the VAT return has been e-filed by the

tax payer, it is not treated as submitted unless it is
verified by going personally to the tax office and
getting it confirmed. But this is not publicized
anywhere for the public knowledge. If the tax payer,
who could not remember to go to the tax office in
time and confirm the filing due to his other
engagements in business, he is levied a penalty ,
even though he has submitted the return in time. The
tax office can easily find when the return was filed
and save the tax payer from penalty for late filing,
by sending an e-mail that he has not confirmed the
return or when it is uploaded to flash a message
"THAT YOUR RETURN WILL BE TREATED AS
SUBMITTED ONLY WHEN IT IS CONFIRMED
BY THE OFFICE WITHIN THE PRESCRIBED
T I M E B Y AT T E N D I N G T H E O F F I C E
PERSONALLY WITH THE REQUIRED
DOCUMENTS"
But there is no provision in the Act & Rules and the
public notification or circulars that e-filed return has
to be confirmed in person. This applies to income
tax returns also.
June 2014
37
TAXATION
4.5
4.6 When the taxpayer finds that he has to pay additional

amount towards interest and late fee and pays the
amount, it is observed in the cases examined by the
author, that the amount levied and amount collected
is mentioned in the VAT statement but they do not
set off the amount between each other and show the
correct dues but they show total dues and the total
amount collected separately at the top as if the
interest and late fees are still outstanding and liable
to be paid.
5 REFUND
5.1
The VAT directive says that the amount or claim for

refund if certified (k|dfl0ft ePdf_ will be refunded.
But it does not explain under what circumstances
that the amount will be considered as certified,
eligible for refund. Whether when the return is
confirmed , it will be treated as certified. The proper
steps to be taken for refund should be explained.
The foreign investors will be more interested to
know the procedures, since after understanding that
he will be entitled to refund, but getting the refund
is made a difficult affair, the foreign investor will
feel cheated.
5.2
If there is excess tax is paid, the tax office should

refund the amount by direct credit to the bank
account of the taxpayer without delay soon after
passing the assessement order . But as a rule the tax
officer makes the higher assessment to deny refund
or the claim for refund. Unless the government is
honest in its dealings with the taxpayers, they cannot
expect honesty from the tax payer.
5.3
38
has claimed the total tax with carried over excess

tax paid, it should be refunded to the taxpayer ,
since entering the tax paid as advance or by tax
deduction by others in Form 10 accompanying the
return, should be considered as the claim for refund
every year, but no action is taken by the Department
to refund the amount. Even in cases not taken for
scrutiny, they should send an assessment order by
email in all cases to the respective taxpayers, by
acceptance of the return and should refund the tax
excess paid immediately.
Such irritating situations could be avoided if every

month the VAT statement is programmed to be sent
to the taxpayer by e-mail within the end of the month,
or at least once in three months, then the damage to
the taxpayer could be reduced to a great extent. But
the problem is that the honest payer suffers in such
cases. This can be done easily by making suitable
provision in the VAT software itself without much
burden to the tax office. The taxpayer also can clear
his dues in time.
Once the taxpayer while filing the income tax return
June 2014
5.3
Given below are some recent cases in India in respect

of refunds by the department.
Court On Its Own Motion vs. CIT (Delhi High

Court)
March 16th, 2013
Strict guidelines issued to end Dept's TDS credit &
refund adjustment harassment
Anand Parkash, FCA, addressed a letter dated
30.4.2012 to the High Court in which he set out the
numerous problems being faced by the assesses
across the Country owing to the faulty processing
of the Income Tax Returns and non-grant of TDS
credit & refunds. He claimed that because of the
department's fault, the assessees were being harassed.
The High Court took judicial notice of the letter,
converted it into a public interest writ petition and
directed the CBDT to answer each of the allegations
made in the letter and certain other queries that the
Court raised. The Court also appointed eminent
senior counsel to assist it. The department accepted
that tax payers are facing difficulties in receiving
credit of TDS & refunds on account of adjustment
towards arrears. Thereafter, as an interim measure
to provide immediate relief to the assessees, the
Court passed an order dated 31.08.2012 by which it
gave detailed directions. After further hearing, HELD
by the Court
Rakesh Kumar Gupta vs. UOI (Allahabad High

Court)
25.4.2014
Assessee cannot be denied credit for TDS on the
TAXATION
ground of Form 26AS mismatch because he is not

at fault. Non-grant of TDS credit causes harassment,
inconvenience & makes the assessee feel cheated.
Department to pay interest + costs of Rs. 25,000
The assessee filed a return in which he claimed a
refund of Rs. 2.32 lakhs on account of excess TDS
by the Government department. The return was
processed by the Central Processing Centre (CPC)
of the Income-tax Department at Bangalore and a
refund of only Rs.43,740 was issued. No intimation
was given to the assessee as to why the balance
amount of Rs.188,630 was not refundable. The
assessee filed an application U/S 154 for rectification
of the mistake and asked for refund of the balance
amount. As there was no response from the
department despite several reminders, the assessee
filed a writ petition in the High Court. HELD by the
High Court allowing the Petition:
(i)
The difficulty faced by the tax payers relating to

credit of TDS was considered by the Delhi High
Court in Court On its Own Motion vs. CIT 352 ITR
273 and the CBDT was directed to issue directions
with regard to giving credit of unmatched and
mismatched TDS certificates. Pursuant thereto, the
CBDT issued Instruction No.5 of 2013 dated 8.7.2013
directing that where the assessee approaches the AO
with requisite details and particulars in the form of
TDS certificate as evidence against any mismatch
amount the AO would verify whether or not the
deductor had made payment of the TDS in the
government account and, in the event, the payment
had been made, credit of the same would be given
to the assessee.
(ii)
On facts, no effort has been made by the AO to verify

whether the deductor had made the payment of the
TDS in the government account. On the other hand,
the Income-tax department has shown helplessness
in not refunding the amount on the sole ground that
the details of the TDS did not match with the details
shown in Form 26AS. There is a presumption that
the deductor has deposited TDS amount in the
government account especially when the deductor
is a government department. By denying the benefit
of TDS to the Petitioner because of the fault of the
deductor causes not only harassment and

inconvenience, but also makes the assessee feel
cheated. There is no fault on the part of the Petitioner.
The fault, if any, lay with the deductor. The
mismatching is not attributable to the assessee. The
department must refund the amount within 3 weeks
with interest. The department must also pay costs of
Rs. 25,000 to the Petitioner.
6. PENALTY:
In other tax territories, penalty is treated as a special
demand and it is not clubbed with the regular tax
payment. As a rule of natural justice, before levying
penalty opportunity should be given to the tax payer
to explain if penalty is not leviable. This is the
universal practice. But there is no such provision in
the present taxation statutes. Thus investor cannot
understand on a reading of the Act or rules. Penalty
is usually levied in wanton negligence or misconduct
cases only. In other countries, no penalty or interest
is levied if a claim made by the tax payer in his return
is disallowed by the tax officer. If the tax payer does
not make the claim, he cannot get the benefit of the
claim. Even though as per the Act & Rules, the claim
is genuine, by disallowing the claim, the tax officer
can claim the tax on that but not interest, penalty or
additional charge. To minimize such disallowances,
the Act & Rules should be more clear to enable the
tax payer to make the proper allowable claim. The
directive says claim for head office expenses are
allowable but at the time of assessment the claim is
not only disallowed but in addition to tax on the
same, interest and penal charges are levied against
the norms in other countries .on such disallowed
items. Similar is the case with claim for bad debts.
[2013] 33 taxmann.com 227 (Bombay)
HIGH COURT OF BOMBAY

Commissioner of Income-tax - I, Mumbai vs
Bennett Coleman & Co. Ltd.
IT APPEAL (LOD) NO. 2117 OF 2012 (FEBRUARY 26, 2013)
Section 271(1)(c) of the Income-tax Act, 1961 Penalty - For concealment of income [Bona fide
claim, disallowance of] - Assessment year 1999-
June 2014
39
TAXATION
2000 - Assessee claimed deduction of interest on tax

free bonds - Assessing Officer asked assessee to give
details of interest on tax free bonds - While preparing
said details, assessee noticed that 6 per cent
Government of India Capital Index Bonds purchased
during year had been categorized as tax free bonds
and, therefore, interest earned on such bonds had
escaped tax - Thereupon Assessing Officer levied
penalty under section 271(1)(c) upon assessee Tribunal after recorded a finding of fact that there
was an inadvertent mistake on part of assessee in
claiming interest received on Government of India
Capital Index Bonds as interest received on tax free
bonds, deleted penalty levied upon assessee - Whether
since it was not contended by revenue that above
finding of fact by Tribunal was perverse, order of
Tribunal deserved to be upheld - Held, yes In favour
of assessee.
7.
40
Already the high handed assessment in the case of

VODAFONE and NOKIA in INDIA has given a jolt
to foreign investors. NOKIA has said that it will not
make any more investment in India until the tax
assessment is completed amicably. Thus the Revenue
has the habit of making high handed assessments on
silly grounds for the sake of addition and enhanced
tax collection only without proper understanding of
the accounting, system and policies of the entity. In
June 2014
other countries appeals are decided within one year

at the appellate tribunal level i.e. the second tier
appeal court. But nobody knows when will the
tribunal will sit and decide the case in Nepal. In
this way, no reputed investors will be forthcoming
to invest and start industries in Nepal, apart from
other non-tax uncertainties, due to absence of detailed
rules and procedures
8.
Detailed rules should be made as to the allowance

of head office expenses and bad debts so that there
should be no disallowance of these claims at the
time of assessment or make rules under what
circumstance these will not be allowed. In one case
a taxpayer obtained a decree against a debtor, but it
was open secret published in newspapers that the
said debtor has absconded without paying crores of
rupees due to the Revenue which has a first charge,
but still the tax office refused allow it as bad debt to
the taxpayer, knowing full well that the amount could
not be realized, with the result the taxpayer has to
pay tax on such disallowed amount and also interest
and penal charges.
There are other systemic improvements required
with regard to review and appellate tribunal
functioning, which will require legislative
intervention.
OTHER
Accepting Globalization
The Profession Needs to be Torch Bearer of Change
If Nepal is to go through another

phase of reforms, it is not about
new Acts or pieces of legislation
only. It is about reform in attitude.
The attitude that we want to be
a player in the global arena and
willing to compete with anyone
from anywhere. For that we need
to bring in an attitude that is
global
Twenty years ago it was possible in

Nepal for companies to maintain
corporate records in English and file
them in English. Agreements could
be in English and with the wave of
reforms, Nepal began its integration
with the outside world. However, as
time passed, people started realizing
that as the usage of English will
become extensive, local firms will
have to compete with international
ones. With more people in bureaucracy
being inducted on their knowledge of
Sanskrit, Nepali became more popular.
People started thinking that may be
making Nepali the official language
in spirit and practice will surely deter
the influx of foreign firms and Nepali
firms will not have to compete to
higher level of efficiency and
productivity. Politicians, bureaucrats,
lawyers and other professionals started
to insulate themselves from opening
up and rather push more difficult
forms and formats in Nepali thereby
providing space for them to work.
CA. Sujeev Shakya

CA. Shakya is Fellow Member of ICAN
Nepali attitude has always been about

rent seeking and the idea of keeping
Nepali afloat and English at bay has
been one that propagates rent seeking
out of a language. We keep forgetting
that businesses are getting global.
Our idea of rent seeking has been to
keep international firms and

businesses out rather than the thought
of Nepali firms going global. While
some of the older reputed auditing
firms took advantage of getting to
global mindset and take on businesses
outside Nepal, the newer entrants
probably were happier in insulating
themselves with the outside world.
From meetings of CA associations
and Institutes getting conducted in
English, we have converted each of
our associations and institutes into
nothing less than that of political
parties, making sloganeering rather
than professional progress the engine
for change.
For all of us, English is not our mother
tongue, but a language we have
acquired to further our professional
careers. The knowledge of English
pushes us to access the vast realm of
information, ideas and thoughts.
Developments around the world are
best chronicled in English language.
English language pushes our
ambitions as political boundaries blur
and the knowledge of the language
can make you a professional that can
work anywhere in the world. It seems,
we have not taken up to English not
because we do not like it and pushed
for its status also an official language
in Nepal in practice, but our insecurity
June 2014
41
OTHER
from international professionals competing with us have

made to push Nepali and insulate ourselves.
complicated? Is it to insulate against the entry of foreign

investors?
Similar, Goes to Many Other Practices.
If Nepal is to go through another phase of reforms, it is

not about new Acts or pieces of legislation only. It is about
reform in attitude. The attitude that we want to be a player
in the global arena and willing to compete with anyone
from anywhere. For that we need to bring in an attitude
that is global. It is about questioning the status quo. Why
documents required to be stamped? Why can't we start
using digital signature? Why is online transactions not yet
allowed? Why do we need to print deeds on rice paper?
Why do we need to everything in Nepali? There are many
questions that the profession needs to raise and change the
future for the professionals and the profession.
Why is it that the Chartered Accountant community does

not have anything to say against an official calendar that
begins and ends in mid-April and a fiscal year that begins
and end in mid-July? Why is it that we are not propagating
for Nepal to also follow Gregorian calendar and a financial
year that will be in line of financial year that is followed
globally? Is it out of the fear of international companies
that want to come to Nepal or is it yet another rent seeking
opportunity of little opportunities that it creates. We are
yet to adopt global practices when it comes to writing of
minutes of meetings, agreements or format for reports.
Why is it that the sale deed for sale of shares just made so
42
June 2014
OTHER
The Financial Reporting Supply Chain in Asia
Global accounting and auditing

standards provide a sound starting
point for high quality financial
reporting since they arise from
independent standard setting
boards. They also provide
consistency in a global
marketplace. Implementing these
standards can be a challenge, and
a number of countries in Asia are
late to the party.
Mr. Brian Blood

Mr. Blood, fulfills the role of Chief Executive of
the CAPA. He is based in Sydney, Australia.
The rapidly developing resort town

of Negombo, located within 20
minutes of the recently expanded
Bandaranayake International airport
near Colombo in Sri Lanka, was a
fitting location for the inaugural
Financial Reporting for Economic
Development Forum staged by the
Confederation of Asian and Pacific
Accountants (CAPA).
In his opening address, Sri Lanka's
Deputy Minister of Finance &
Planning, Dr. Sarath Amunugama,
reflected on the rapid economic
development in recent years and the
current healthy 7.5 % growth rate.
Whilst noting that financial
management reforms need to keep
pace, he was quick to point out that
the country has a strong accounting
profession, a comment supported by
the leadership of CAPA.
World Bank. "And without this

support the Forum could not have
proceeded," said Brian Blood, Chief
E x e c u t i v e o f C A PA . B o t h
o rg a n i z a t i o n s r e c o g n i s e t h e
importance of high quality financial
management and reporting across
private and public sectors as a key
driver of investment, employment,
and ultimately the reduction of
poverty. Fily Sissoko, Manager of the
South Asia Region Financial
Management unit of the Bank
explained, "The accountancy
profession has a vital role to play in
the goal of shared prosperity."
With globalisation, there is increasing
focus on doing business in and with
Asia. For Asia to be successful, it will
be important to have effective capital
markets and strong corporate
governance systems.
CAPA is a regional body recognised

by the global accountancy profession
represented by the International
Federation of Accountants (IFAC).
As a regional organisation, it
represents 31 professional accounting
organisations across 23 jurisdictions
of the Asia Pacificand aims to develop,
coordinate, and advance the
accountancy profession in the region.
Corporate scandals and collapses are

often associated with companies
outside of Asia; however the region
has not been immune. Chandu Bhave
would know - he was Chairman of
the Securities and Exchange Board
of India (SEBI) around the time of
the Satyam scandal. At the Forum he
joined in a panel discussing 'ethics
and the professional accountant.'
The Forum was supported by the
The Forum was based around the
June 2014
43
OTHER
financial reporting supply chain, a term used to depict the

myriad of players involved in the preparation, approval,
audit analysis and use of financial reports. "When failure
occurs, so often the first and possibly only question asked
is where were the auditors?" said Fayez Choudhury, Chief
Executive of IFAC. Choudhury sees this as an imbalance
in the public policy debate with a risk it leads to less than
the best outcome. "As with any chain, it is only as strong
as its weakest link, so all links in the chain need to be
strong."
Global accounting and auditing standards provide a sound
starting point for high quality financial reporting since
they arise from independent standard setting boards. They
also provide consistency in a global marketplace.
Implementing these standards can be a challenge, and a
number of countries in Asia are late to the party. Their
implementation and use requires a dearth of well-trained,
professional accountants and in some countries there is a
need to build capacity. Whilst mandating professional
qualifications for preparers of accounts is an idealistic
goal, it just may not be possible where shortages of
accountants exist.
This raised questions about the education systems
supporting the profession and Professor Narayanaswamy
from the Indian Institute of Management Bangalore, did
not pull any punches suggesting that the gap between what
academia is supplying and the needs of the profession has
widened in some locations. "There is much to be done,"
he conceded. "Academics in the Asia Pacific region and
in SAARC and ASEAN should collaborate more in teaching
and research, and there is a need to bring contemporary
issues into the classroom."
Financial reporting related reforms across Asia over the
last 15 years have been substantial. Analysis from the
Asian Corporate Governance Association (ACGA) revealed
that in 1998 most countries in Asia did not have codes of
corporate governance or require independent directors or
audit committees. "Today the position is very different;
with codes for Board governance having been introduced
and often updated over the period, and all but Japan of the
larger Asian countries requiring independent auditors and
audit committees. Taiwan is still phasing in the requirement
for independent directors, while audit committees will be
mandatory as of 2014," Sharmila Gopinath, a research
44
June 2014
director for ACGA based in India said.

However, whilst the reform has occurred and codes,
standards, and principles are widely referenced, many of
the speakers acknowledged the challenges, and indeed the
will, to implement. Oftentimes it comes down to human
behaviour and whether a strong corporate governance
culture will be encouraged and enforced. An analogy often
used in the Forum was 'why is it that a car driver from
Europe obeys the road rules in their own country, but if
driving in Asia appears to change habits; or a driver from
Asia not used to abiding rules in their own country quickly
falls in line with driving requirements if visiting Europe?'
"Enforcement is the number one issue," stated Sharmila
Gopinath. "Without this, there is little incentive to always
do the right thing."
One unique challenge for Asia reflects the preponderance
of closely controlled, often family related, companies.
Majority control places increased focus for investors on
related party transactions and transparency requirements.
Link to this the challenges of putting in systems that
encourage and support the raising of bad news - 'whistleblowing' - then you have some real challenges. Investors
demand confidence in financial reporting and Asia in
general has some work to do to reduce the level of perceived
unethical behavior or corruption.
Clement Chan, current President of the Hong Kong Institute
of Certified Public Accountants and also Chair of the AsianOceanian Standard-Setters Group, put it nicely when he
said: "The real question is what do we have to disclose to
give a true and fair view."
Financial reporting is moving ahead in other ways at the
moment under the increasingly recognised 'Integrated
Reporting' banner. Professor Mervyn King, Chair of the
International Integrated Reporting Council who is a
passionate advocate of integrated reporting noted: "Financial
reporting, while not broken, is not sufficient on its own.
Similarly, sustainability reporting is not sufficient on its
own. While both these reports are critical, it has to be
shown how the financial impacts on the non-financial and
vice versa. The reality is that the resources used by a
company and the relationships with its key stakeholders
are interdependent and interconnected. An analysis of the
market cap of companies listed on stock exchanges shows
OTHER
that only 20% of the market cap of companies is included

as additives in a balance sheet according to financial
reporting standards. Consequently the financial report does
not inform the user of the 'state of play' in a company.
debt crises. Andreas Bergmann, Chair of the independent

International Public Sector Accounting Standards Board
was clear in his view: "Accrual accounting is state of the
art."
Boards need to apply their collective minds to the financial

and non-financial reports and ensure that the material
matters are explained in clear, concise, and understandable
language in an integrated report so that the reader can
make an informed assessment that the business of the
company will sustain value creation in the short, medium,
and long term."
Suhas Joshi, Regional Advisor, Public Financial

Management with the International Monetary Fund pointed
out some of the challenges in achieving this goal and
questioned if expected levels of success were always being
achieved. Alan Edwards from the Chartered Institute of
Public Finance and Accountancy based in the UK focused
on some approaches to professionalise this sector, often
working closely with donor agencies such as the World
Bank. A large reform program underway in Bangladesh is
seeing over 300 staff undertake professional training, and
65 officials from the Office of the Comptroller and Auditor
General attained certificate level accreditation.
The integrated reporting journey is reasonably new and

has a way to go to reach mainstream acceptance, with
some stakeholders raising concerns over certain matters.
The challenges include providing the company's long term
strategy knowing others will rely on that information directors and auditors especially are closely considering
their risks. However, it is clear many companies are
embracing the spirit of integrated reporting, providing
understandable information on the business's total value
creation, short, medium, and long term. It has to be accepted
that business is at the junction of the economy, society,
and the environment.
A pilot program has been underway for some time with
companies from around the world participating. Diesel &
Motor Engineering Plc. based in Sri Lanka is one such
company, and Suresh Gooneratne, the executive director
noted the benefits were exceeding the efforts and costs
involved. Professor King did note that the number of
companies involved in the pilot program from Asia was
comparatively low, which supported a sense that Asia was
not keeping pace in this new area of development.
The Forum was largely devoted to the private sector,
however one session did focus on the financial reporting
supply chain as it relates to the public sector. The level of
interest and activity in this area has accelerated significantly
in recent years following a number of high profile sovereign
CAPA is also active in this area, and recently published

"Improving Public Financial Management in the Public
Sector - The Eight Key Elements of PFM Success" a toolkit
allowing national professional accounting organisations
to engage with key government stakeholders to discuss
challenges and opportunities. "Professional accounting
organisations have a vital role to play in ensuring the public
sector has access to properly equipped, qualified accountants
and auditors to manage and safeguard taxpayer funds,"
explained Gillian Fawcett, Head of Public Sector at ACCA
(Association of Chartered Certified Accountants) based in
London.
The level of interest in the public sector debate was such
that the next Financial Reporting for Economic
Development Forum will likely focus predominantly on
the public sector. "With support from the World Bank,
CAPA looks forward to staging the next Forum within
eighteen months, and we will move the location each time
around Asia," said Sujeewa Mudalige, CAPA President,
during his closing remarks.
June 2014
45
NEWS
News
Events
International Financial Reporting Standards (IFRS) Certification Course
Group Photograph of Participants with ICAN Officials
The Institute of Chartered Accountants of Nepal (ICAN) conducted IFRS training with the technical assistance from the
Institute of Chartered Accountants of India (ICAN). This course was conducted from 11 April to 27 April 2014 in different
phases.
This course was conducted with the aim of enhancing the knowledge and understanding the application of IAS/IFRS
to CA members of the Institute and preparers of financial statements. Course was focused to provide clear understanding
and interpretation of the standards, to discuss the challenges that the entity may face during the process of
convergence/adoption and prepare to plan the process of adoption and other practical implementation in preparing
financial statements.
Course was delivered by the eminent professionals from India having expert knowledge and practice in IFRS.
46
June 2014
NEWS
Pre- Budget Interaction Program
and sustainable economic growth". While delivering key

notes he suggested that the upcoming budget should
emphasize on the major areas such as development of solar
power in remote area, tourism policy of attracting Indians
and Chinese tourist, priority in agriculture development,
optimum utilization of capital expenditure, employment
generation within the country, widen tax area rather than
increasing tax rate, empowering the Ministry of Finance
to control foreign grants, control inflation, adjustment of
petroleum product, hydro power development, and increase
literacy rate etc. for new Nepal.
Speakers and Commentators in the Program
The Institute of Chartered Accountants of Nepal organized

half day Interaction Program on 11 May 2014 on PreBudget for Fiscal year 2071-72(2014-15) in Kathmandu.
Vice President CA. Narendra Bhattarai welcomed Key
speakers, commentators and participants and briefed the
objectives of the program. In his welcome speech he
emphasized on the importance of 3s (Scale, Spirit and
Skill) while preparing the budget. Further he stressed on
the role of the Government to concentrate on development,
stability and sustainability of different sectors. Dr. Yuba
Raj Khatiwada, Governor, Nepal Rastra Bank was Chief
Guest of the program. In the program Dr. Chiranjibi Nepal,
Dr. Posh Raj Pandey and CA. Sudarshan Raj Pandey were
Key Note Speakers while Dr. B. Pyakural, Mr. P. R Ligal,
Dr. G. B. Thapa, Dr. D. R. Khanal, and the representative
of CNI Mr. K. Agrawal attended as commentator. Key
note speakers focused on related topics on upcoming
budget.
Dr. Posh Raj Pandey Making Presentation
Dr. Posh Raj Pandey, the Second Speaker addressed on

"Creating Enabling Environment of doing business in
Nepal in the prospective of Globalization- Creating
Investment Friendly Environment". During his address he
focused on some burning issue of investment friendly
environment. He said that Investment friendly environment
can generate employment opportunities in different sectors,
so the government should create an investment environment
in the country. He also raised issues of inadequacies in
existing legal provision for investment and lack of stable
policy of the government as the major roots of barrier for
investment in Nepal.
Dr. Chiranjibi Nepal Making Presentation
Dr. Chiranjibi Nepal made presentation on "the structure

of budget required for 'new Nepal' to attain respectable
CA. Sudarshan Raj PandeyMaking Presentation
June 2014
47
NEWS
CA. Sudarshan Raj Pandey , ICAN Past President addressed

on " Identification of the areas of reform both in Policy
and Practices in Income Tax, VAT, and Customs for creating
conductive environment for collecting tax efficiently and
effectively". On his speech he focused on the reform in
income tax system, VAT and Custom so as to develop
Nepalese tax regime as tax payers friendly. He said multi
tax rate and widen tax base can increase government
revenue significantly. He suggested that the Government
should consider introducing the policy of generating more
revenue for economic development of the country in
upcoming budget.
thanks to the participants and expressed appreciation for

attending the program and decided the program closed.
Interaction Program on the Structure of Audit

Report
The Institute of Chartered Accountants of Nepal (ICAN)
and Auditing Standard Board of Nepal jointly organized
half day interaction program on 14 April 2014 in
Kathmandu.
Members Capacity Building
The commentators commented the issues raised by the

speakers during the speech.
Preview of Member Capacity Building Training
Dr. yuba Raj Khatiwada in Speech
Chief Guest, Dr. Yuba Raj Khatiwada, on his speech

mentioned that due to lack of coordination in various
entities of the government, the expenditure mechanism
country is bearing high cost of unproductiveness. He
suggested that the Government should utilize the recourses
properly rather than looking for different source of income
so as the Government could able to utilize the resources
allocated for the particular program and activities.
Speaking on the occasion the ICAN President CA. Mahesh
Kumar Guragain urged to discontinue the unproductive
sectors and promote the productive sector to enhance the
productive capacity of country. He further expressed his
satisfaction on active participation and inputs received
during the program and made his commitment on behalf
of ICAN to provide inputs and collaborate with the
Government in policy making.
Council Member CA. Suresh Devkota delivered vote of
48
June 2014
To enhance the capacity of its members The Institute of

Chartered Accountants of Nepal organized Members
Capacity Building Program in different date in different
places. The date, Place, Resource Persons and Topics are
given as under.
Program was conducted in four sessions each day. Member

Participants of the Institute were granted 15 CPE Credit
Hours.
NEWS
International Taxation
Education & Examination Department

General Management and Communication
Skills (GMCS)
Participants with ICAN Officials and Trainers
The Institute of Chartered Accountants of Nepal (ICAN)

organized 15 days Certificate Course on International
Taxation with collaboration of The Institute of Chartered
Accountants of India (ICAI) by focusing its members, tax
regulators, practitioners, academicians, researchers, and
Individuals in Kathmandu from 12th -26th June 2014.
This course was conducted with the aim of producing
capable manpower in the field of international taxation.
The course was delivered on the basis of treaty classes on
OECD Model Convention and OECD explanations to
interpreting articles to familiarize participants with
international tax issues, concepts, practices and
developments, in South Asia and abroad. Further it dealt
with the difference between OECD and UN Models and
approach of applying treaties, including the principles of
interpreting tax treaties, with reference to relevant case,
from India and abroad. Altogether 18 participants joined
the program.
The Institute of Chartered Accountants of Nepal has been

regularly organizing GMCS training since 2011 for the,
Final, CAP III Level and Accounting Technician Students
as a part of the study. The training aims to enhance the
capacity of the students in the real field of Management
and develop Communication Skills. Kathmandu University
School of Management (KUSOM) conducted the training
as per the agreement entered with KUSOM and The Institute
of Chartered Accountants of Nepal (ICAN) reviewed the
quality of training.
The training conducted from 24 March to 10 April, 2014,
13 students of Chartered Accountancy Course and 4 students
of AT participated in the training.
Training was mandatory to become a member of the
Institute for chartered accountant student and to get the
license for AT student
Scholarship
Every year ICAN grants full and partial scholarship to the
CA students studying at different levels of Chartered
Accountancy Course. ICAN awarded the scholarship
amount to the selected students are as under:
President handing over the CA Scholarship Ammount to the Student
June 2014
49
NEWS
S. No.
Full
Partial
Total
CAP I
16
20
CAP II
16
20
CAP III
Total
37
45
Chartered Accountancy Examination June

2014
The Chartered Accountancy Examination has been
conducted from 1st to 9th June, 2014. The details of
applicants and students appeared in examination are as
given.
been published. According to the published result only one

student has declared pass in the examination. The
Accounting Technician Examination was held from 18th
to 21th March 2014 in ICAN Building, Kathmandu. The
examination is being conducted twice in a year in March
and September.
Career Fair
The Institute of Chartered Accountants of Nepal participated
in Ambition Career educational fair to provide information
to the concerned visitors. On the month of May, 2014
(Jestha 2071) ICAN participated the fair in Kathmandu
organized by Asia Pacific Communication Associates
Nepal Private Limited (APCA) aiming to provide
information about chartered accountancy education of
Nepal to concerned visitors. In the fair ICAN participated
for 4 days from May 21 to 24, 2014. Around 800 visitors
visited ICAN stall to get information. The participation
was very fruitful
Career Counseling
CAP I Level Examination was conducted at Kathmandu

as well as Biratnagar, Pokhara, Butwal and Birgunj in the
same day and in scheduled date. Total applicants of all
level of CA Examination were 1756 and students appeared
at least one subject were 1632.
CA Membership Examination
Chartered Accountancy Membership Examination was
successfully conducted on 4th & 6th June 2014 for ICAI
qualified CA degree holders with same question papers
along with CAP III level students. Total applicants for the
examination in Corporate Law and Advanced Taxation
were 172 and 154 respectively while the examinees
appeared were 154 and 135 in the respective subject(s).
Altogether 201 Chartered Accountants qualified from ICAI
applied for the membership examination of ICAN. As per
the rule of ICAN, the foreign CA degree holders are
required to pass CA membership exam conducted by ICAN
so as to get membership of the Institute
Accounting Technician (AT) Result Published

The result of the Accounting Technician examination has

career counseling program in different parts of Nepal with
the aim of providing the importance and awareness of
chartered accountancy education to the interested visitors.
The program highlighted a detail deliberation on the
eligibility criteria of enrollment, future prospects,
recognition, and membership criteria of the Institute.
Program was conducted by ICAN Officials. The participants
of the program had shown keen interest on the CA
education. During the journal period around 1700 students
in Kathmandu and outside the valley got opportunity to
get information of CA Education.
RA Upgrading Examination
As per the regulation to upgrade RA members (RA C and
D class to the B and C class respectively), the Institute of
Chartered Accountants of Nepal (ICAN) conducted
upgrading written examination from 1st - 4th June, 2014.
In the examination 4 (C class) and 1 (D class) RA member
appeared written examination to upgrade to B and C from
C and D class respectively. For the examination purposes
6 and 2 RA C and D class members submitted their
applications form respectively. Upgrading examination is
conducted every year in June.
June 2014
50
NEWS
Student Enrollment
The number of students enrollment for CA course of
ICAN is growing trend. The growth in number of CA
students in ICAN indicates trust and confidence in
accounting profession. The status of enrollment in different
fiscal year is as given.
Fiscal Year
CAP I CAP II CAP III Total
2067/068(2010/011) 1223
590
103
1916
2068/069(2011/012) 564
567
108
1239
2069/070(2012/013) 1038
625
211
1874
2070/071(2013/014) 1004
954
170
2128
Information System Audit (ISA) - Eligibility Test Result Published

The Institute of Chartered Accountants of Nepal published ISA- eligibility test result in 20 May 2014 and only one
student declared pass on the test. This course was organized on 10 May, 2014 with the collaboration of ICAI. The Institute
is organizing ISA Course with the aim of providing professional knowledge of system development and use and
development of information technology in auditing sector.
Member and Professional Development Department

CPE Training and Other CPE Granting Program
and conducted different program to maintain the quality
standard of professional services with the collaborations
different partner organizations. Programs and trainings are
the part of regular activity of the Institute. As a part of
regular Activities of the Institute, ICAN conducted CPE
training, Workshop, Seminar, Member Capacity Building
and other CPE granting program in different parts of Nepal
in different time throughout the fiscal year 2070/71(201415). In this fiscal year ICAN and 4 partners outsourcing
units conducted CPE training. The details are given as
under;
S.
Total No of CPE
CPE
No Organizer Training Conducted
1
ICAN
9
Inside Outside
Valley Valley
6
3
AudAN
13
PS
CAI
PRISM
Total
31
13
18
Till date altogether 3605 Institute Members attended the

programs.
Renewal Status of Membership, Certificate of Practice and Auditing Firm

The total number of Registered Member, Certificate of Practice holder and Auditing Firms and the status of renewal till
30 June 2014 (Ashad 16, 2071) are as given.
51
June 2014
NEWS
International Participation
SAFA Committee, SAFA Board and SAFA Assembly Meeting, Pakistan
Group Photograph of 32nd SAFA Board Meeting Participants
The delegations headed by Vice President CA. Narendra

Bhattarai attended the SAFA Committee, 32nd SAFA
Board and 78th SAFA Assembly Meeting in Islamabad,
Pakistan from 2nd -3rd May, 2014. SAFA BPA awards,
SAARC Anniversary awards for Corporate Governance
disclosure ceremony was also attended by the delegates
of the Institute on 3rd May, 2014.

Delegates also attended the Regional Standards setter
conference on 4th May, 2014. Other delegates were
Immediate Past President CA. Madhu Bir, Pande and
Council Members CA. Prakash Lamsal and RA. Mohan
Parajuli.
SAFA Committee, SAFA Board and SAFA Seminar, Maldives
Group Photograph of 33rd SAFA Board Meeting Participants
A four member delegations led by President CA. Mahesh

Guragain attended the SAFA Committee, 33rd SAFA Board
and SAFA Seminar on "Efficiency Managing Small and
Medium Practices" from 8th - 10th May, 2014 held in
Maldives. The delegates were Past President CA. Suvod

Kumar Karn and Council Members CA. Suresh Devkota
and RA. Dol Prasad Dahal.
June 2014
52
June 2014
53
NEWS
CAPA Board, CAPA PSFM Committee Meeting

and CAPA Conference, Sri Lanka
Three member delegation team lead by ICAN President CA.
Mahesh Kumar Guragain attended the CAPA Board, CAPA
PSFM Committee Meeting and CAPA Conference in Sri Lanka
from 19th -21st May, 2014. The delegates were ICAN VicePresident CA. Narendra Bhattarai and Council Member Mr.
Guna Raj Shrestha.
International Tax Conference, Hungary
ICAN Delegates with President and Vice President of Association of

Hungarian Certified Tax Experts.
RA. Badri Prasad Bhattarai, Council Member & CA. Paramananda

Adhikari, Technical Director participated in the 8th International
Tax Conference, on the theme "taxation and accounting issues
for SMEs" jointly organized by the Association of Hungarian
Certified Tax Experts and the European Federation of Accountants
and Auditors for SMEs (EFAA) from 5th-6th June 2014, in
Budapest, Hungary.
The experts in accounting and taxation from the Europe and
SAFA member bodies shared their knowledge and experience
in the most exciting professional issues with each other during
the occasion. Experts from Europe argued that the European
Union regulations have favored the multinational companies
despite of existence of over 20 million SMEs in Europe,
approximately which is more than 90% of the total companies
registered in Europe. Therefore, the SMEs have an important
place in the micro-and macro-environment in European Union.
The professional experts on SMEs opined that more than 90%
of European businesses are small & medium sized enterprises,
they provided two-thirds of private sectors jobs in public and

contribute more than one half of the total value added created
by the businesses in European Union. Further, SMEs are the
true back-bone of the EU economy, being primarily responsible
for wealth and economic growth as well as having a key role in
innovation. More importantly, nine out of ten SMEs are actually
micro enterprises with less than 10 employees which is the
backbone of economy of European Union.
Further, the experts opined that there are over 20 million small
and medium size enterprises which employ over 87 million
people in European Union. This number represents two-third of
all the corporate employees employed in EU. The European
Commission came out with the European Union Small Business
Act (EU-SBA) 2008 with package of measures related to small
businesses. Based on the Act of SMEs, the small and medium
sized enterprises are classified as per the following criteria.
Further, Prof. Csath Magdolna expressed the views in her

presentation that following the various research reports in relation
to SMEs in Hungary in 2012, there were total 551,876 enterprises
out of which 551,076 were SMEs which was 99.9% share in
terms of number of enterprises existed. Likewise, there were
2,496,001 employees employed in those enterprises, out of which
1,777,698 employees were employed by SME sector which was
71.2 % of the total employment in Hungary. From this research
data, it was clear that SMEs play an important role in terms of
employment and value added production.
Among the experts in the conference were, Mr. Geoffrey Britton,
EFAA President, Dr. Janos Lukas, President, Hungarian Chamber
of Auditors, Dr. Herich Gyorgy, President, Association of
Hungarian Certified Tax Experts, Ms. Marie Lang, EFAA
Technical Director, Prof. Dr. Magdolna Csath, National University
of Public Service, Budapest, Prof. Dr. Anna Karmanska, Warsa
University, Poland, Mr. Peter Padar, Partner, Deloitte Ltd., Prof.
Dr. Hans Michael Korth, Auditor, Vice Chairman, Deutsche
Steuerberaterverband, CA. Sanjiv K. Chaudhary & CA. Nihar
Jambusaria Council Members of ICAI & representatives from
SAFA.
June 2014
54
A Prestigious & Reward

ing
Profe
ssi
on
'Punantu Manasa Dhiya' means

'Purity of Mind and Clarity of Wisdom'
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55
June 2014
June 2014
56
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June 2014

(Quarterly Journal of The Institute of Chartered Accountants of Nepal)

Mr. Binaya Paudel

The Institute of Chartered Accountants of Nepal

Need to Harmonize the Regulation of Audit

Risk Based Internal Auditing: Nepalese Banking Perspective

- CA. Chandra Kanta Bhandari

Branch Office Birgunj

Public Debt: An Emerging Global Concern

Branch Office Pokhara

- Mr. Iswar Raj Shrestha

Economic Vision for the Long Term Growth and

Designed & Printed By

- Dr. Basudev Sharma

(including courier charges for Organizations)

Rs. 400 (including courier charges for Member)

Improvements Required in the Functioning of Tax Hierarchy

- CA. Sujeev Shakya

The Financial Reporting Supply Chain in Asia

First Cover Back

Standard Chartered Bank (Nepal) Ltd.

Global IME Bank Ltd.

13, 23, 29 & 42

Since I took the charge of President last

around the world have implemented IFRSs. In this context,

To establish ICAN as a competent professional and

activities for the members participations at broader level.

corporate governance, capital market etc. within the country.

CA. Mahesh Kumar Guragain

Fully Depreciated Assets - IAS 16

IAS 16 permits 2 models for

Have you come across a situation

A survey proves that more than 95%

These assets are used beyond their

What is the solution then?

None, of course - because the carrying

CA. Pooja Gupta

Now this is extremely important: IAS

When faced with such a kind of

Review the useful life of its

The Nepal Chartered Accountant

and new remaining useful life.

standards how you will report certain transactions in the

1. The change is required by an IFRS. With our situation,

Entire class of assets and not an individual assets needs

2. The change results in the financial statements providing

To determine the fair value of the class of assets, IFRS

In our case, the second situation will match to an extent.

The Nepal Chartered Accountant

If after considering the above concerns if it is still beneficial

Reconciling Stakeholder Expectations of an Audit

It is for sure that if audit is carried

To start with, let me quote a proverb

CA. Nanda Kishore Sharma

CA. Sharma is Fellow Member of ICAN

We all appreciate that the auditing

reports are worthy of reliance,

The Auditor's Position

The Nepal Chartered Accountant

and the public outrage in response to such massive frauds

The Nepal Chartered Accountant

about job security and the future direction of the

in the traditional agency model of audit in that shareholders'

Responding to Expectation Gap