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March

2014

Vol. 16 No. 3

P A

Contents

ACCOUNTANT

(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

President's Message

BANKING
Creation of Synergy by Merger
- CA. Narendra Bhattarai

ACCOUNTING
Nepal Accounting Standard 40:Investment Property
- CA. Lalit Aryal

19

Determinants of Economic Growth and Performance for


Nepalese Economy
- Dr. Basudev Sharma

22

FINANCIAL MANAGEMENT

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

Financial Literacy
- Mr. Hermann Rune

27

MANAGEMENT
An Overview of Internal Oversight Mechanism in UN
Systems Organizations

Branch Office Birgunj


Tel: 051-522660, E-mail: icanbrj@ican.org.np

- Mr. Ram Babu Nepal

Branch Office Pokhara


Tel: 061-537679, E-mail: icanpkr@ican.org.np

30

Managing Talent - Delivering Results


- Mr. Bhuwan Raj Chataut

Designed & Printed By


Print and Art Service, Putalisadak,Ktm.
Tel: 4244419, 4239154

33

TAXATION
Alarming Compliance Cost of Taxation
- Mr. Kul Prasad Aryal

Subscription Rates
Annual Subscription Rs. 600

37

OTHER
ICAN and Other Regulatory Bodies in NepalA win win Relationship

(including courier charges for Organizations)

Rs. 400 (including courier charges for Member)


Rs. 300 (if received by self)

- Mr. Dev Bahadur Bohara

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.

49

Students News
Member News
Important Notice

ECONOMY

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

News

Editorial

5, 26, 39, 44 & 56

- CA. Shailendra Uprety

Recent Developments in Accounting Professions


in South Asia
- CA. Paramananda Adhikari

40

45

Editorial

Editorial

The journal of the institute is the mirror which has to reflect the contemporary
issues of the accounting, auditing, taxation, economics, and latest developments
in those areas. It should portray strength of the profession in diversified sectors
and support to enhance the social recognition and visibility.
The history of our journal began from the year 1998 when the concept of
publishing the journal visualized for the first time. However, the process of
improvement and advancement took many years.
As there is always room for further improvement, we realize that it is a high
time, and the responsibility goes not only to ICAN but to each and every
member, to magnify the professional values of the journal by enhancing its
existing scopes through latest news and developments in the field of accounting,
finance, taxation, economics, auditing and educational learnings. So as to speed
up the process of the enhancement and advancement of the quality of the journal,
we have proposed a draft editorial policy. The policy once adopted by the
council will be implemented and it will support the function of editorial committee
as well as encourage the existing and potential writers and contributors. The
Major Highlights of the Editorial Policy are:

Guidelines to the writers about the length and necessary content etc.
of the article.

Guidelines to the reviewer for analysis and screening the article.


Reward to the writer in the form of best article of the year.
Reconsideration of the remuneration of the article.
Drafting of the policy will not serve our purpose as they are only the means not
the end of our objective. So we call up all the members of the institute of institute
for their constructive ideas, views as well as creative articles in the field of
accounting, finance, taxation, economics etc. Further, members are encouraged
to invite the creative of the experts in the related field even if they are not
members of the institute.

Wishing you all a very happy new year 2071.

The Editorial Board

ACCOUNTING
Dear friends

President's
Message

I had the privilege to represent on the


SAFA Board, SAFA Task Force Meeting
and Assembly, SAFA Committee
meeting held during 20-22 January
2014 in Sri Lanka. Our delegation also
attended IFAC Professional
Accountancy Organization (PAOs
Development Workshop on realizing
the Power of PAOs) held in 22 January
2014 in Sri Lanka. Round table
conference were held in three groups
on Approaches to adoption and
implementation of International
Standards, Advocacy, stakeholders'
engagement and establishing a Public
Policy Role -A POA's perspective,
Good Practice Success Factor and
Challenges in POAs Capacity Building.
I also represented on SAFA Board, Committee Meeting and CFO
Conference held during 9-11 March, 2014 in Pakistan and
subsequently attended CAPA PSFM Committee Meeting which
was held in 23-25 March in Philippines.
In these events a range of diverse and topical issues relevant to
accounting and financial sector were discussed in formal and
informal meetings and interactions. Apart from these, in the
meetings it was acknowledged that the implementation of standards,
maintaining the quality of audit and upholding the integrity of the
profession as a major challenge faced PAOs.
Most importantly, we found that the issue of regulatory functions
of the PAO's is being raised strongly in order to uphold the sanctity
of the accounting profession. IFAC, CAPA, SAFA and other regional
bodies are working in this area. Similarly some of the national
accounting bodies are also doing homework to strengthen the
regulatory regime in order to uphold fundamental principles of
the profession for which the institution has been set up.
The Institute intends in providing a robust regulatory framework
to maintain the ethical values in making the members disciplined,
transparent and accountable in service delivery. Such mechanism
will also enhance the confidence among stakeholders and maintain
public trust towards our profession.
If we see the prevailing Nepal Chartered Accountants Act and
Rules these specify the regulatory mechanism for our profession.
However, the enforcement of the provisions has to be strengthened
by revisiting the legal provision, mechanism that is in place and
how it has been practiced.

The Nepal Chartered Accountant

June 2013

35

In this connection in February 2014 Institute has formed a


Law Enforcement Committee with specific terms of reference.
The committee comprises of Past Presidents of the Institute
and Senior Fellow Members and it is working to develop the
regulatory process and procedure to deal with the ethical,
professional and regulatory issues.
To achieve this initiative the attempt of the institute only may
not be sufficient, the commitment and support of membership
also equally important. If the Institute deems necessary shall
also take appropriate initiation to seek the technical support
from the strong accounting bodies of SAARC region.
Dear friends,
I would like to reiterate that Institute is always committed and
doing its best in making the profession more professional and
uphold its the integrity and members have positively supported
it. However, members are alleged for minor mistake or so
called misconduct in time to time for the audit performed
which we take it unfortunate and matter of concern for the
Institute and entire membership.
We also realize that one of the major reasons behind emergence
such unpleasant situation is of expectation gap expressed by
the stakeholders. The expectation gap that we observe is the
difference between stakeholders' understanding of the role
of the statutory auditor, and the role actually prescribed for
the statutory auditor by relevant auditing standards and
regulatory requirement. The stakeholders expect a sort of
guarantee and expect assurance of full transparency and
accountability in entity's fiscal operation although this may
not be the sole factor of the expectation gap.
In the meantime we have also to review the prevailing
regulatory enforcement mechanism and practice so as to
strengthen it. Therefore this matter has to be studied
extensivedely to find out the root cause with larger participation
consultative exercise with stakeholders. In the view of the
above, we plan to work collaboratively with the regulators to
understand their concern and what exactly they expect from
Institute and its membership. I hope such joint effort will be
useful to clear their misconception towards the accounting
profession.

desirable for better meet the requirement of client and


providing the quality service delivery. Presently convergence
of IFRS will be our one of the main agenda in 2014-15 and
for the purpose of implementation of IFRS/NFRS support
from all stakeholders including users and professional is vital
and highly desirable. The preparatory efforts from the part
of Institute and stakeholders are to be reviewed jointly in
time to time for smooth transition.
The regular participation of representatives of the World
Bank, Asian Development Bank and donor agencies etc. in
the events global, regional and national accounting bodies
indicate their acknowledgement of role of the accounting
professional and accounting bodies in accounting and
financial sector.
IFAC has advised to provide 120 credit hours of CPE for
accounting professional within the cycle of three years.
SAFA has recommended revising the syllabus to meet the
requirement of the pronouncements of international and
regional accounting bodies for the accounting professional.
The ultimate objective of above mentioned initiatives of the
global, regional and national accounting bodies are directed
to enhance the quality and integrity of the profession. inthe
view above, I humbly request to all the membership that
when it comes to enhancing audit quality it shouldn't be
painful.
Before I conclude I would like to extend my best wishes of
happy New Year 2071 (B.S) to all the members of ICAN and
stakeholders.

Best Wishes

Dear Friends.
I would also like to draw the attention of all members that
the compliance with the local laws of the countries and general
auditing practices by the accounting professional is highly

CA. Mahesh Kumar Guragain


President

BANKING

Creation of Synergy by Merger


1. Introduction

NRB should not focus only on


reducing the number of BFIs but
to focus whether the merger will
create synergy. If the merger fails
to create synergy, NRB should
not encourage creating another
mess. Theoretically, merger
creates synergy by lowering
operating costs, extends the
benefits of economies of scale,
expansion and diversification of
market share.

CA. Narendra Bhattarai

CA. Bhattarai is Vice-President of ICAN

One of my college friends who


recently retired from the government
job from the post of Joint Secretary
visited my house after a passage of
about 12 years. He shared his
experience of serving in the
government in different parts of the
country as the Accounts Officer, LDO,
CDO and Joint Secretary in different
ministries. There was Kantipur Daily
in my drawing room with the news
clipping '33 CEOs of Banks and
Financial Institutions (BFIs) are out
of the job because of the merger'. The
account was given that 58 BFIs who
opted for merger, the number of BFIs
after merger has reduced to 25 hence
33 BFIs are reduced and so is the
CEO's. As I was involved in the
banking sector for quite a long time
he put forward to me few very
pertinent but difficult questions on
merger of BFIs. He asked me that
from 1995 to 2010, Nepal Rastra Bank
distributed the banking license in
wholesale in the name of fair
competition which resulted huge
number of Commercial Banks,
Development Banks, Finance
Companies and Micro Finances in
existence. Now, from 2010 Nepal
Rastra Bank is propagating merger Is not it a policy contradiction? What
is the reason of such policy
contradiction? Who is responsible for
such contradiction? Is it necessary to

go for merger? What are the


advantages and disadvantages of
merger?
Referring with the analogy of the
merger of banks and financial
institutions he again asked me next
questions that the country is in the
mood of demerger - federal structure
and when he was working in Ministry
of Water Resources (Now Ministry of
Energy), the question of demerger of
Nepal Electricity Authority had also
emerged - Why such contradictions
are emerging? What is the legal
provision and policy of Nepal Rastra
Bank on merger issue? What are the
international practices? What are the
processes of merger execution? How
the swap ratio is determines to satisfy
the shareholders?
I was in the awkward position but I
had to respond my friend to his
satisfaction and at the same time I
could not put total blame on policy
paralysis of Nepal Rastra Bank.
This article is dedicated to my friend
who came to my residence after a
passage of 12 long years and also to
all my other friends whom I am unable
to communicate face to face.

2. Merger and Demerger


Merger is a combination of two
entities where one entity is completely
absorbed by another entity. One entity
loses its identity and becomes part of

The Nepal Chartered Accountant

March 2014

BANKING

the other entity, which retains its identity. A merger


extinguishes the merged entity, and the surviving entity
assumes all the rights, privileges, and liabilities of both
the entities.
Mergers appear in three forms- namely horizontal, vertical
and conglomerate. In a horizontal merger, one entity
acquires another entity that deals on identical or similar
product or services in the same geographic area and thereby
eliminates competition between the two entities. In a
vertical merger, one entity acquires either a customer
(forward integration) or a supplier (backward integration).
Conglomerate mergers encompass all other acquisitions,
including pure conglomerate transactions where the merging
entities have no evident relationship. The merger of the
banks which Nepal Rastra Bank is propagating is the
horizontal merger.

Demerger is the reverse of merger and it is a form of


restructuring in which the entity's business operations
segregated into one or more components. For example,
there are three important but distinct lines of business of
Nepal Electricity Authority namely generation, transmission
and distribution. If 3 distinct legal entities are constituted
to take over 3 lines of business separately and independently
then that is called the demerger of Nepal Electricity
Authority.

3. Positions of Banks and Financial


Institutions (BFIs) in Nepal
There has been a tremendous growth on the number
of BFIs during the last 4 decades or so. The following table
shows growth of BFIs during last 4 decades:

Growth Pattern of BFIs


Types of BFIs

1980 AD

1990 AD

2000 AD

2014 AD

Commercial Banks (A)

13

31

Development Banks (B)

86

Finance Companies (C)

45

59

NA

NA

NA

31

65

207

Micro Finance Institutions (D)


Total BFIs
Source: NRB Statistics July -2013

Total assets and liabilities of banks and financial institutions


represented 65.6 percent of total financial system of Nepal.
In terms of share in total assets, the commercial banks was
the key player in the financial system occupying 51.6
percent of the system's total assets followed development
banks (8.3 percent) and finance companies (4.2 percent).
NRB's share was NRB (22.2 percent). In case of other
institutions, on the same basis, employee provident fund
(EPF) was a dominant institution (6.0 percent), followed
by CIT (1.8 percent) and insurance companies (3.5 percent)
as of mid-July 2013.

The Nepal Chartered Accountant

March 2014

The total size of banking and non-banking financial


institutions in GDP expanded and reached to 141.6
percent of GDP in mid July 2013. Such a ratio was 125.0
percent in mid July 2012. Total assets and liabilities of
commercial banks remained at 73.1 percent of GDP
followed by Nepal Rastra Bank (31.4 percent), development
banks (11.8 percent) and finance companies (5.9 percent).
The following table shows the Structure of Nepalese
Financial System:

BANKING
Structure of Nepalese Financial System
Banks and Financial Institutions Mid -July
2012
Commercial Banks (A)
Development Banks (B)
Finance Companies
Micro Finance Institutions (D)
Sub-Total
Nepal Rastra Bank
NRB permitted Cooperatives
(with limited banking activities)
NRB permitted NGOs
(with limited banking activities)
Insurance Companies
Employees Provident Fund
Citizen Investment Trust
Postal Saving Bank
Total

Mid -Jan.
2013

Mid - July
2013
31
86
59
31
207
1

Assets/
Liabilities
(in billions)
1243
200
101
36
1580
538

Share
(percent
of total)
51.6
8.3
4.2
1.5
65.6
22.2

Share
(percent
of GDP)
73.1
11.8
5.9
2.1
92.9
31.4

32
88
70
24
214
1

32
90
67
25
214
1

16

16

18

15

0.6

0.9

36
25
1
1
1
295

34
25
1
1
1
293

31
25
1
1
1
285

5
85
145
42
1
NRs. 2411

0.2
3.5
6.0
1.8
0.1
100

0.3
5.0
8.5
2.5
0.1
141.6

Source: Financial Stability Report (NRB) Jul -2013

Comparing the structure of financial system of Nepal and


Sri Lanka, Assets/Liabilities of Financial System to GDP
of the country, such share is much higher in Nepal as
compared to that of Sri Lanka.
Comparison of Structure of Financial System of Nepal
and Sri Lanka
Banks & Financial
Institutions

Sri Lanka

Nepal
July 2013

Licensed Commercial Banks

24

31

Licensed Specialized Banks

86

Licensed Finance Companies

48

59

Total

81

176

72%

90.8%

Banking Sector Assets / GDP

Source: Central Bank of Sri Lanka and Financial Stability Report


(NRB) Jul -2013

4. Propagation for Merger - Factors Inducing


Merger
As discussed above Nepalese banking sector

has been growing faster in number but


inadequate capital base and lack of
professionalism in banking business have been
adversely affecting the health and sustainability
of the individual institutions and the financial
sector as a whole. There are instances that finance
companies were established with the capital base
as low as of Rs. 2.5 million, which has resulted
problems in attaining prescribed Capital Adequacy
Ratio (CAR). In order to improve the health and
sustainability of the financial sector and to propagate
merger NRB has unveiled the merger policy at the
recent past as an instrument for financial sector
consolidation. There is no mandatory requirement
for merger for any BFIs but it has been the policy
of NRB to induce merger as the first prescription
to manage the trouble facing by the BFIs.

The Nepal Chartered Accountant

March 2014

BANKING

restructuring and merger with the BFIs with


relatively sound financial position.

NRB has prescribed minimum capital requirement

for each type of BFIs (e.g. NRs. 2 billion for


Commercial Banks) many BFIs have opted to go
for merger to attain the prescribed minimum capital
requirement.

Some of the BFIs established outside Kathmandu

Valley within limited territory that have the intention


to expand business in Kathmandu Valley and
throughout the country are opting merger with the
BFIs which have the establishment in Kathmandu
Valley.

As per NRB Directives all the BFIs are required

to attain prescribed minimum capital adequacy


ratio. Total capital adequacy ratio (CAR) of the
banking system stood at 13.2 percent in mid July
2013, compared to 11.5 percent a year ago. The
improvement was primarily due to progress made
by two state owned banks with negative
capital adequacy-NBL and RBB, the
improvement in RBB which turned out into
positive, attributed in the perfection of capital
adequacy ratio of the commercial banks in
totality. NRB has also announced the policy of
prompt corrective action (PCA) for the BFIs not
attaining CAR; therefore some of the BFIs have
been opting to go for merger to improve CAR and
to avoid PCA.

It has been believed that merger process will bring

substantial benefits to the Nepalese banking system.


Merger will create synergy by lowering operating
costs, extend the benefits of economies of scope
and scale, expansion and diversification of
market share as big organization is considered
to be efficient in allocating resources and to
maximize the output gains. The Merger Bylaws,
2011 unveiled by NRB provides several benefits
for the merging financial institutions. As a result,
merging process has taken momentum in the
Nepalese banking sector. The following table shows
the status of number of Merged, Merging and Delicensed BFIs.

Some of the BFIs with bad financial position and

having question of survival are opting for

Number of Merged, Merging and De-licensed BFIs


Banks and Financial Institutions

Merged

Merging

New/ Upgraded

De-licensed

Commercial Banks

Development Banks

11

13

Finance Companies

16

16

Total

17

25

18

25

Source: Financial Stability Report of NRB, July 2013

Globalization is continually moving further, not

5. Pros and Cons of Merger


5.1 Pros

May take advantage of economies of scale and


scope

Financial Systems may be able to gear and align

more clearly in meeting the national economy's


need

10

The Nepal Chartered Accountant

March 2014

least in the financial services sector merger (because


of the size). As of today, Nepal's banks are not able
to compete internationally - in terms of funds'
mobilization, credit disbursal, investments and
rendering of financial services due to their relatively
small in size.

By merger the banks may be converted as a global


player.

BANKING

Able to take advantage of technological innovations


Take advantage of operating efficiency
Can meet the increasing expectations on Share
Holder Value Creation.

Strong financial position and balance sheets may


attract more efficient means of funding.

Both the 'operational efficiency' and 'risk-absorption


capacity' may improve.

As there is no environment for increasing capital

by issuing rights shares and bonus shares as that


will not be enough to raise capital to the required
level, finance companies have no other option than
to go for a merger.

Banks will be able to consolidate and improve their


risk management capabilities.

5.2 Cons

Merger eliminate small BFIs


A few BFIs make the banking business less
competitive

There will be winners and losers in management

which may create difficult working environment

Ambiguous technical issues - which technology to


retain which one to discard.

Ownership stakes may get diluted as banks became


larger

6. International Perspectives and Practices


6.1 Egyptian Experience
No significant positive impact of Merger: Recent
economic reforms in Egypt have significantly improved
its macroeconomic indicators and financial sector.
Banks have witnessed significant merger and acquisition
activity as a result of these reforms initiatives to
privatize and strengthen the banking sector. Not all
banks that have undergone deals of mergers or
acquisitions have shown significant improvements in
performance and return on equity when compared to
their performance before the deals.

Economy of Scale: Increasing economies of scale are


found to exist up to a bank size of about EGP 30bn ($
5bn), implying that all but the four largest banks in
Egypt could reduce their average costs by growth.
There has been witnessed positive impact of size,
growth, and merger activities on inefficiency.
The bigger the better: The statement "the bigger, the
better" describes pretty well the current status of the
Egyptian banking industry, encouraging further growth
and consolidation by mergers and acquisitions.
6.2 Malaysian Experience
Result of Asian Financial Crisis: Malaysian banking
sector faced a major consolidation in 2000, mainly due
to the aftermath of 1997 Asian Financial Crisis. In
addition, there were increased pressures to liberalise
the financial services in Malaysia from year 2003 under
an agreement with the World Trade Organization.
Reduced the Number of Anchor Banks to ten Banks:
On 29 July 1999, Bank Negara Malaysia (BNM)
announced the consolidation of 54 financial institutions
under six anchor banks. The planned consolidation
was met with objections from various quarters and
eventually BNM extended the number of anchor banks
to ten banks. The completion of the exercise was set
for December 2002. Merged banks were required to
have a minimum capital of RM 2 billion by 31
December 2001. But the deadline was later extended
to 30 June 2002. The banks were also required to have
an asset base of RM 25 billion. The banking
consolidation to ten anchor banks was completed by
mid 2002 with the final merger between RHB Bank
Bhd and Bank Utama (M) Bhd.
Able to Improve Shareholders Wealth: Banks' mergers
in Malaysia do not necessary improve their profitability
as measured by return on asset (ROA). Cost savings
as measured by expenses to revenue ratio indicated
mixed result whereas almost all the banks had shown
improvement in expenses to asset ratio. Most of the
banks had improved in shareholders wealth.

The Nepal Chartered Accountant

March 2014

11

BANKING

6.3 Sri Lankan Perspective

Merger Completed: lowering of number of 43

The Central Bank of Sri Lanka has announced 'New


Vision for Banking Sector by 2016' that includes:

At least 5 Banks with over 1 Trillion Assets and


with a strong regional presence

Substantially Low Interest Margins through

increased efficiency & Prudent Assets/ Liability


Management

Reduced number of banks as a result of mergers


& consolidation

There will be a large development bank that will

provide substantial impetus to the industry

Foreign banks will demonstrate a greater


participation in economic activities

Strengthen Financial sector to steer Sri Lanka


toward 2016 goals

Strengthen regulatory regime to encourage


diversification of funding & business operations

Risk Management framework of banks will also


be improved further.

The essential areas of the Financial Architecture of Sri


Lanka need to be transformed to more efficient and
productive units to:

Improve quality of the country's human resources


to service the new financial sector

Enhance the robustness and resilience of the


financial sector through consolidation

Enhance the global connectivity, both physically


and through updated IT capacities

Strengthen the financial sector regulatory process


to reach and compete at the international level

Enhance the ability of the banks to help their


customers, through effective business revival
support

6.4 Nepalese Experience


Move of NRB to induce merger so far resulted the
following:

12

The Nepal Chartered Accountant

March 2014

BFIs into 18;

Issued LOI: 19 BFIs (including five RDBs)

have obtained the letter of intent (LOI) for


merger to create 8 BFIs;

Application Submitted for Merger: 5 BFIs have

submitted application for merger into 3 BFIs;

Although the merger of BFIs has been moving


faster than expected , the expected outcome in
terms of financial soundness and strong
institutional capability for the stability of financial
system has yet to be realized.
NRB is planning to propagate acquisition policy
to achieve realized impact of consolidation of the
Nepal's financial system.
Merger itself could not enhance the success,
particularly in terms of access to finance in
the rural areas to the targeted groups and
communities. Both the merged entity and the
regulatory/supervisory authorities require having
a close surveillance to enhance and exploit
the synergy of the merger.
Preliminary information shows that after
consolidation through merger, BFIs in Nepal
have been able to improve their capital base.
As regard to the improvement in profitability, assets
quality and creating synergies to the stakeholders
it has been revealed from the financials published
by the BFIs after merger that Global IME Bank
(Global), NIC Asia Bank (NIC) and Machhapuchhre
Bank (MB) have been able to increase some
profitability, assets quality and creating synergies
to the stakeholders by increasing shareholders'
wealth after merger to some extent. The following
table shows the current financial position of 3
banks:

BANKING

Financial Position of 3 Commercial Banks after Merger


Paush-end 2070

Particulars of Domains

Ashwin-end 2070

Paush-end 2069

Global

NIC

MB Global

NIC

MB Global

NIC

MB

2.78

2.31

2.47

2.41

2.31

2.47

2.25

1.31

2.47

Deposit in Rs. billion

36.97

38.44

31.11

35.35

37.85

28.89

29.36

22.13

22.55

Lending in Rs. billion

30.11

31.83

25.27

28.59

31.80

23.48

23.91

17.84

18.61

Net Profit in Rs. million

532.8 385.35

204.0

271.4

144.9

67.4

244.9

233.4

32.9

Capital Adequacy Ratio in %

11.50

13.77

11.43

11.15

14.29

12.12

10.82

11.73

13.52

3.22

2.96

2.67

2.59

2.90

2.60

2.10

1.20

3.07

Return on Equity (Annualized) in % 22.07

13.78

16.46

25.15

10.83

10.88

17.61

20.70

1.33

Paid up Capital in Rs. billion

Ratio of NPL to Total Loan in %

Source: Published Quarterly Financial Report

were merged and size have been increased, the


control and management system could not work
effectively and hence could not produce expected
result. The following table shows the current
financial position of 4 development banks after
merger - namely Business Universal Development
Bank (BU), H&B Development Bank (H&B),
Infrastructure Development Bank (IDB) and Vibor
Development Bank (VB).

In contrary to the Commercial Banks, in case of


other BFIs (Development Banks and Finance
Companies), there has not been witnessed any
satisfactory improvement in the financial health
after merger. The BFIs which were distributing
dividend before merger are unable to earn
substantial profit after merger. The reason behind
this could be that such BFIs were running without
much transparency and institutionalized internal
control system before merger when such institutions
Post merger Financial Position of 4 Development Banks
Paush-end 2070
Particulars of Domains

Ashwin-end 2070

Paush-end 2069

BU

H&B

IDB

VB

BU H&B

IDB

VB

BU H&B IDB

VB

Paid up Capital in Rs. million

842

897

827

917

842

897

827

917

842

897

827

916

Deposit in Rs. billion

4.64

5.64

3.81

3.18

4.18

5.60

3.01

2.97

3.63

6.07

2.68

2.86

Lending in Rs. billion

4.10

4.59

2.43

1.93

3.86

4.77

2.20

1.70

3.48

6.01

2.15

1.68

Net Profit in Rs. million

20.1

(191)

25

(52)

16.7

4.8

10

(26)

(38)

3.5

Capital Adequacy Ratio in %

20.1

12.3

24.3

11.9

19.7

15.8

25.5

16.1

24.9 16.43

32.1

13.7

Ratio of NPL to Total Loan in %

8.15

4.85

8.29

13.3

4.36

4.96

7.44

15.5

3.75

7.99

33.3

3.98

(17) (115)

Source: Published Quarterly Financial Report

The Nepal Chartered Accountant

March 2014

13

BANKING
One of the principal objectives behind the mergers
and acquisitions in the banking sector is to reap
the benefits of economies of scale. Merger should
bring substantial benefits to the Nepalese banking
system. Merger should create synergy by lowering
operating costs, extend the benefits of economies
of scope and scale, expansion and diversification
of market share. It is perceived that a big
organization is considered to be efficient in
allocating resources to maximize the output
gains.
In case of the Nepalese context, both analogies
'small is beautiful' and 'bigger is better' hold true
in the context of merger of financial institutions.
Such experience was also witnessed in Egypt and
also in Malaysia. Hence the merger of finance
companies with other finance companies, finance
companies with development banks cannot create
any synergy. In order to create synergy, size matters
and hence merger of BFIs with commercial bank
is essential.

7. Merger Process
NRB has published 'Merger Guideline' for merger of
BFIs that has defined the merger processes. The main
elements of the merger process are depicted below:

Class 'A', 'B' and 'C' financial institutions can merge


into each other. 'D' class FI can merge with another 'D'
class FI only;

BFIs that interested to merge each other should form

a separate merger committee and sign Memorandum


of Understanding (MOU) to expedite the merger process
at the BFI level;

Once the MOU is signed the BFIs intending to merge

each other should form a Joint Merger Committee


(JMC) to expedite the merger process jointly;

The due process including MOU should be completed

before applying to the Nepal Rastra Bank (NRB) for


Letter of Intent (LOI). NRB should hold a meeting
within 15 days of receiving such LOI application.

NRB decides whether to issue LOI or not only after

conducting discussions and detailed study of concerned


institutions.

14

The Nepal Chartered Accountant

March 2014

Due Diligence Audit should complete within six months


of receiving LOI from the central bank.

The detailed factual report comprising assets and

liabilities of concerned institutions should be submitted


to the NRB.

Copy of the decision regarding name, address and

share ratio of concerned financial institutions should


be submitted to NRB.

Action plan of concerned financial institution including


date of operation after merger process is completed
should be submitted to NRB.

Other documents as prescribed by the NRB should be


submitted to NRB.

8. Determination of the Swap Ratio


8.1 Due Diligence Audit
Once the BFIs intending to merge each other sign
Memorandum of Understanding (MOU) a "Joint Merger
Committee (JMC)" is formed to oversee the merger
process. Nepal Rastra Bank provides the LOI as its
consent in-principle for merger. In order to execute the
merger process, JMC publish notice for consultancy
services to undertake Due Diligence Audit of BFIs
intending to merge.
The basic objective is to carry out DDA of both the
BFIs so as to reveal actual picture of both the BFIs so
that it may ensure successful implementation of the
merger process. The functional objectives of the DDA
are as follows:

To carry out Financial Due Diligence Audit to

assess the actual financial health of BFIs intending


to merge each other to determine the share exchange
ratio (swap ratio) for merger purpose.v

To carry out Human Resource Due Diligence

Audit to identify the key talents to be retained and


assess requirement of "golden hand-shakes" and
also to suggest appropriate "change management
plan" with detail calculation requiring provisioning/
adjustment in net-worth calculation to determine
the share exchange ratio (swap ratio) for merger
purpose.

BANKING
To carry out Legal Due Diligence Audit to examine

asset ownership and associated liabilities,


contractual obligations, potential litigation issues
or pending litigation and existing long-term contract
in terms of land/ building/services/ procurement
etc which have risk potential and requiring
provisioning/ adjustment in net-worth calculation
to determine the share exchange ratio (swap ratio)
for merger purpose.

To carry out Information Technology Due

Diligence Audit to conduct gap analysis and suggest


post-merger IT framework, integration plan
including alternatives, cost factor, timelines, training
requirements and to assess long term agreement/
commitments, if any, requiring adjustment/
provisioning in new-worth calculation to determine
the share exchange ratio (swap ratio) for merger
purpose.

To carry out Risk Management Due Diligence

Audit to assess the risk management practices and


framework and suggest whether any undue risks
are assumed and to determine any inherent, unaddressed risk requiring adjustment/provisioning
in new-worth calculation to determine the share
exchange ratio (swap ratio) for merger purpose.

To carry out Operational Due Diligence Audit to

suggest on operational integration plan including


shifting within district, to other district or merge
location wise of branch, ATM/POS units including

shifting, or merger location wise and to assess long


term agreement/commitments, if any, requiring
adjustment/provisioning in new-worth calculation
to determine the share exchange ratio (swap ratio)
for merger purpose.

To carry out Products and Services Due Diligence

Audit to suggest integrated services and products


for the merged entity.

To carry out Stress Testing to assess the risk in

stress situation relating to Deposit, lending, quality


of assets, interest rates etc. and suggest on
mitigations measures to be taken.

To carry out SWOT and PESTLE Analysis to

assess the opportunities and threats on doing


business under new environment based on the
assessment of various strength and weaknesses of
BFIs opting for merger.

To estimate various costs directly and indirectly

related to merger, suggest areas where "economies


and diseconomies of scale" may operate, suggest
on post merger management control and operation
and to estimate perceived benefits and risks of
mergers as regard to Operating Synergy and
Financial Synergy.

8.2 Business Valuation


Based on the DDA, business valuation is done. A
hypothetical example of business valuation and
determination of SWAP Ratio is discussed below:

Summary of Business Valuation based on the result of the DDA of Bank A and Bank B is given below:
Particulars

Valuation of Goodwill
1. Capitalization of Average Profit Method
2. Annuity Method
3. Average or 1 & 2
Valuation of Shares
1. Intrinsic Value Per Share
2. Book Value Per Share
3. Capitalization of Discounted Projected Earnings Per Share (EPS) of 5 Years
4. Capitalization of Projected Earnings Per Share (EPS) of 5 Years
5. Market Price (average of 180 days)

Bank A
Value per Share
(NRs.)

Bank B
Value per Share
(NRs.)

110
32
71

160
157
249
359
538

110
109
118
171
242

The Nepal Chartered Accountant

March 2014

15

BANKING

8.3 Calculation of Swap Ratio

to arrive at the swap ratio. Amongst them, value of


goodwill calculated as per annuity method provides a
most justified and equilibrium ratio to create synergy
for the shareholders of both the Banks. Accordingly,
swap ratio calculated as per annuity method may be
recommended. It means that shareholders of Bank A
shall get 1 share of merged entity for every 1 share of
Bank A they hold. Whereas the shareholders of Bank
B shall get 1 share of merged entity for every 2 shares
of Bank B they hold.

The swap ratio between Bank A and Bank B comes to


2:1 if the goodwill calculated as per annuity method
is taken into consideration. It will be 2.6:1 and 2.3:1
if the goodwill calculated as per Capitalization of
Average Profit Method and Average Method are taken
into consideration respectively. Annuity method is the
conservative and effective method of calculation of
Goodwill.
With a view to optimize the synergy effect for the
shareholders of both the Banks, values of goodwill
calculated as per all the three methods may be simulated

Swap Ratios have been calculated applying 3 methods of


Goodwill as below:

A. Swap Ratio if Goodwill as per Annuity Method is taken


S.No. Parameters

Assigned
Weight
(a)

Value per
Share-Bank A
(b)

Product
Value per Product
Bank B Share-Bank B Bank B
(a) x (b)
(c) (a) x (c)

Intrinsic Value

160

800

110

550

Book Value

157

628

109

436

Capitalization of Discounted Projected


Earnings Per Share (EPS) of 5 Years

249

747

118

354

Capitalization of Projected Earnings Per


Share (EPS) of 5 Years

359

718

171

342

Market Price (average of 180 days)

538

538

242

242

Total

Weighted Average Value per share

Value of Goodwill

Total Value per share for Share


Exchange Purpose

15

Share Exchange Ratio between Bank


A and Bank B

3431

1924

228

128

32

260

128

2:1

B. Swap Ratio if Goodwill as per Capitalization of Average Profit Method in taken


1

Weighted Average Value per share as calculated in (A) above

228

128

Value of Goodwill

110

Total Value per share for Share Exchange Purpose

338

128

Share Exchange Ratio between Bank A and Bank B

16

The Nepal Chartered Accountant

March 2014

2.6:1

BANKING

C. Swap Ratio if Goodwill as per Average Method is taken


1

Weighted Average Value per share as calculated in (A) above

Value of Goodwill

Total Value per share for Share Exchange Purpose

Share Exchange Ratio between Bank A and Bank B

9. Merger to Create Synergy


Operational and Financial Synergy: Synergy is achieved
when increased benefits arise when an activity or a business
is done by the two Banks together than the total benefit if
that same work was done by the two Banks separately.
The synergy can be segregated into two parts - qualitative
and quantitative. The qualitative synergy may emerge
because of the consolidation of the strengths of the two
Banks. The quantitative strengths may emerge into growth
in business, growth in bank network etc. However, the
bottom-line of both the qualitative and quantitative synergy
is on the EPS and increase in the shareholders wealth.
One of the most important parameter of opting merger is
the effect of merger in creating operating and financial
synergy. Because of the merger, there should be
enhancement in business with economy, efficiency and
effectiveness. It should reveal that the merger will be in
a position to create operating and financial synergy. The
bottom line of the synergy is the increment in the earnings
per share and shareholders wealth which should be increased
substantially in comparison to the pre-merger situation.
Need of Synergy Creation: Bank mergers require integrating
two financial institutions and their processes, technologies
and personnel into one unified, new institution. This requires
an understanding of the environment and culture of both
organizations, as well as training for the new infrastructure.
Mergers are most effective when the synergies between
two BFIs are realized.
Post Merger Vision and Strategy: The first step is to develop
a strategy for implementing the merger. Two separate
BFIs must merge their respective technology, people,
business lines and customer services. Therefore it is
important to explore and develop a post merger vision and
strategy up front.

228

128

71

299

128

2.3:1
Method of Post Merger Synergy Creation: The top areas
where banks can improve the integration process and
maximize synergy may include:

During DDA: Identify synergy areas and maping


responsibilities to achieve it.

Create post merger team approach by defining roles


of the each individual.

Define vision for the future


Create environment of effective communication to
manage resistance to change;

Focus on change management - prevent talent flight;


Organize training and discussion among the employees;
Develop a roadmap for success;
The top management team should be proactive to create
synergy and take the services of the professionals that
can be the differentiator that makes 1 + 1 = 3.

10. Conclusion
Nepal has unsustainable number of BFI at present in
term of her size of GDP and pace of economic development.
The NRB authority has no answer why such a huge number
of licenses were issued to establish BFIs within a span of
about 15 years. But being a regulator including the licensing
authority of BFIs, NRB has to focus on reducing the number
of BFIs at a sustainable level. It is only the merger and
acquisition which can bring the number of BFIs at a
sustainable level and therefore NRB induced merger by
bringing the Merger Bylaws in 2011. NRB should not
focus only on reducing the number of BFIs but to focus
whether the merger will create synergy. If the merger fails
to create synergy, NRB should not encourage creating
another mess. Theoretically, merger creates synergy by
lowering operating costs, extends the benefits of economies
of scale, expansion and diversification of market share.

The Nepal Chartered Accountant

March 2014

17

BANKING

The perceived gains arise out of the belief that a big


organization is considered to be efficient in allocating
resources to maximize the output gains. But, the empirical
studies have shown that merger itself could not enhance the
success and create synergy. Both the merged enteritis and
the regulatory/supervisory authorities require a close
surveillance to enhance and exploit the synergy of the
merger.
It has been revealed from the published information that
after consolidation through merger, BFIs in Nepal have
been able to improve their capital base and lowering the
number of BFIs but the expected outcome in terms of
financial soundness and strong institutional capability for

18

The Nepal Chartered Accountant

March 2014

the stability of financial system thereby creation of synergy


has yet to be realized. Therefore, NRB is reassessing the
current system of merger as envisaged in Merger Bylaws
and assessing the concept of acquisition policy to improve
the consolidation process of Nepal's financial system.
Published financials of BFIs shows that merger of BFIs
with commercial banks have been able to create relatively
high synergy and value to the shareholders whereas the
merger of finance companies with other finance companies
or merger of finance companies with development bank or
merger of development bank with development bank has
produced very disappointing and dismal result. Therefore,
the commercial banks should only be made as the 'Anchor
Bank' for merger of BFIs. n

ACCOUNTING

Nepal Accounting Standard 40:


Investment Property

This standard is applicable in


any kind of property that is held
for capital appreciation or for
letting it out on rental purposes

The current economic scenario and


market trends where we see a lot of
Mall culture is happening in Nepal.
We see in every month some new
shopping complex, malls and
supermarkets coming. All these
developments have created the need
for accounting treatment according to
Nepal Accounting Standard (NAS)
40 Investment Property.

Where is this Standard


Applicable?
This standard is applicable in any kind
of property that is held for capital
appreciation or for letting it out on
rental purposes. Some of the examples
of investment property as stated by
standards are:
(a) Land held for long-term capital
appreciation rather than for shortterm sale in the ordinary course
of business.
(b) Land held for a currently
undetermined future use. (If an
entity has not determined that it
will use the land as owneroccupied property or for shortterm sale in the ordinary course
of business, the land is regarded
as held for capital appreciation.)
CA. Lalit Aryal

CA. Aryal is Fellow Member of ICAN

(c) A building owned by the entity


(or held by the entity under a
finance lease) and leased out under
one or more operating leases.

(d) A building that is vacant but is


held to be leased out under one or
more operating leases.
(e) property that is being constructed
or developed for future use as
investment property
Citing the above examples and
definition given to investment
property, it is pretty clear that an
investment property is property (land
or a building-or part of a building-or
both) held (by the owner or by the
lessee under a finance lease) to earn
rentals or for capital appreciation or
both, rather than for:
(a) Use in the production or supply of
goods or services or for
administrative purposes; or
(b) Sale in the ordinary course of
business.
The malls and big business complexes
which are let out on to one or more
operating lease by the owner of the
property or any complexes taken on
financial lease and then again given
on operating lease are classified as
Investment property according to this
standard.
How to measure Investment property
according to this standard?
Investment property shall be
recognized as an asset when, and only
when:

The Nepal Chartered Accountant

March 2014

19

ACCOUNTING

(a) It is probable that the future economic benefits that are


associated with the investment property will flow to
the entity; and
(b) The cost of the investment property can be measured
reliably.

of the replaced part will be de recognized as the new cost


is capitalized. (Note this replacement of components
principle is the same as that applied to other non-current
assets (IAS 16)).

Initial Measurement:

Measurement Subsequent to Initial


Recognition

An investment property should be measured initially at its


cost, which is the fair value of the consideration given for
it. The transaction costs are included in initial measurements.
The cost can be anything like:

a) The fair value model

a) Investment property purchase price which comprises


of its purchase price, and any directly attributable
expenditures like professional fees for legal services
and property transfer taxes.
b) The cost of an investment property is not increased
by:
1) Start-up costs (unless they are necessary to bring
the property to the condition necessary for it to be
capable of operating in the manner intended by
management),
2) Operating losses incurred before the investment
property achieves the planned level of occupancy,
or
3) Abnormal amounts of wasted materials, labor or
other resources incurred in constructing or
developing the property.
c) If payment for an investment property is deferred, its
cost is the cash price equivalent. The difference between
this amount and the total payments is recognized as
interest expense over the period of credit.

Any day to day cost of running and maintaining investment


property should be recognized as expenses as and when
incurred and if any part of an investment property requires
replacement during the useful life of the property the
replacement part is capitalized when the cost incurred
meets the recognition criteria as defined by standard i.e.
probability of the future economic benefit will flow and
it can be measured reliably. Any value remaining in respect

The Nepal Chartered Accountant

The fair value for this model shall be fair value as


defined and calculated under NFRS 13 Fair Value
Measurement.
After Initial recognition an entity that choses fair value
model shall value all of its investment properties under
fair value model only, but in the following exceptional
circumstances where there is clear evidence, when an
entity first acquires an investment property (or when
existing property fist becomes investment property)
that the entity will not be able to measure its fair value
reliably on a continuing basis entity has to measure
that investment property using cost model in NAS 16
until the disposal of the investment property. The
residual value of the investment property should be
assumed to be zero (this is done because no market is
expected to exist in which it can be sold).
N.B.: The term revaluation should not be used when
discussing the fair value model under NAS 40.
Revaluation is and NAS 16 or NAS 38 accounting
policy and fair value is a method of valuing investment
property under NAS 40.
b) Cost Model

Subsequent Expenditure

20

An entity can choose either of :


a) The fair value model; or
b) The cost model

March 2014

After initial recognition, an entity that chooses the cost


model shall measure all of its investment properties in
accordance with NAS 16's requirements for that model,
other than those that meet the criteria to be classified
as held for sale (or are included in a disposal group
that is classified as held for sale) in accordance with
NFRS 5 Non-current Assets Held for Sale and
Discontinued Operations. Investment properties that

ACCOUNTING

meet the criteria to be classified as held for sale (or


are included in a disposal group that is classified as
held for sale) shall be measured in accordance with
NFRS 5.

What if there is Change in the Form of


Investment Property?
Transfer to and from investment property should be made
when and only when there is a change in use evidenced
by commencement of:
a. Owner occupation- for a transfer from investment
property to owner occupied property;
b. Development with a view to sale- for a transfer from
investment property to inventories; (the above transfer
will be at fair value under NAS 40 fair value model)
c. End of owner occupation- for a transfer from owner
occupied property to investment property;(any
revaluation surplus up to the date of transfer will be
recognized in other comprehensive income and
presented in equity)
d. Commencement of an operating lease to another partyfor a transfer from inventories to investment property.

What is the Treatment at Disposal of an


Investment Property?
An investment property shall be derecognized (eliminated
from the statement of financial position) on disposal or
when the investment property is permanently withdrawn
from use and no future economic benefits are expected
from its disposal.
The disposal of an investment property may be achieved
by sale or by entering into a finance lease. In determining
the date of disposal for investment property, an entity
applies the criteria in NAS 18 for recognizing revenue
from the sale of goods and considers the related guidance
in the illustrative examples accompanying NAS 18. NAS
17 applies to a disposal effected by entering into a finance
lease and to a sale and leaseback.

Disclosure Requirements
For All Circumstances:
1. Classification criteria.
2. Methods and assumptions used to measure fair value.
3. Extent of involvement of independent, professional
and recently experienced valuators in the measurement
of fair value.
4. Amount included in profit or loss for:
a. Rental Income
b. Direct operating expense from rented property
c. Direct operating expense from non- rented property
5. Restriction on reliability of property or remittance of
income/disposal proceeds.
6. Material contractual obligations:
a. To purchase, construct or develop investment
property; or
b. For repairs, maintenance or enhancements.
For Fair Value Model:
1. Reconciliation between opening and closing carrying
amount of investment property held at fair value.
2. Any investment property that is not carried at fair value
should be similarly subject to reconciliation separately
from other properties, and additional disclosure made
(e.g. including and explanation of why it is an
exception).
For Cost Model:
1. Deprecation method used
2. Useful lives or depreciation rates used
3. Gross carrying amount, accumulated depreciation and
impairment losses at beginning and end of the period.
4. Reconciliation of brought forward and carried forward
amounts.
5. The fair value of investment property (or an explanation
why it cannot be measured). n

The Nepal Chartered Accountant

March 2014

21

ECONOMY

Determinants of Economic Growth and


Performance for Nepalese Economy

Investment is the most


fundamental determinant of
economic growth identified by
both neoclassical and endogenous
growth models. However, in the
neoclassical model investment
has impact on the transitional
period, while the endogenous
growth models argue for more
permanent effects. The
importance attached to investment
by these theories has led to an
enormous amount of empirical
studies examining the relationship
between investment and
economic growth

Dr. Basudev Sharma

Dr. Sharma is Under Secretary ,


Ministry of Finance

This paper presents theoretic aspect


of economic growth and performance
factors to be needed for the developing
economy. A number of points emerged
during the history of economic
development, to analyzed economic
growth and development. Various
factors are studies and investigated to
ascertain the appropriate factor for the
economic growth of Nepalese
economy. Using different conceptual
and theoretical viewpoints, this study
have placed emphasis on a different
set of explanatory variables and
offered various insights to the sources
of economic growth.

Introduction
The pursuit for achieving economic
growth remains at the forefront of the
policy agenda of any economy.
Economic growth indeed constitutes
the necessary condition for attaining
higher standard of living or human
welfare, the ultimate objective of any
development policy. The modern-day
world has come off a long way from
the organic view of the state in which
the existence of the citizens and their
activities would exclusively mean for
the welfare of the 'state' rather than
the citizens themselves. The role of
the government has thus shifted from
maintenance of law and order, and
governance to enhancing the standards
of living of the citizens. This is

probably truer in democratic societies


where leadership is conferred by the
mandates of the citizens. The
perceived new role of the government
apparently made it performanceoriented, the achievement of which
is contingent upon the presence or
absence of certain parameters. These
set of parameters include, among other
things, governance, political violence,
political volatility, corruption, and
armed conflicts.
Although a singular formula has not
been credited as the reason behind
the country's rise in economic growth,
a laundry list of the features of the
so-called miracle stories are in the
literature. The Asian Development
Bank (2002) gave the following
reasons for the emergence of
economic growth: export promotion,
private sector-led development,
agricultural transformation, high
savings rates, skill accumulation and
economic flexibility.
Explaining economic growth is a very
difficult and complex task since it can
be seen as the result of interaction
between different socio-economic and
institutional factors. Also different
theoretical models identified different
variables behind growth, and in the
other hand, empirical evidence about
determinants of growth was found to
be inconsistent and non-comparable

The Nepal Chartered Accountant

March 2014

22

ECONOMY

across countries. It was Adam smith who first tried to


explain why some nations were rich and others were poor,
he noticed that some nations were rich although not all its
people were working, while others were poor although
almost all its peoples were working. He explained output
differences between counties by better organization and
labor division. In addition, although most core growth
theories agree on the importance of both quantity and
quality of factors of production and technology for growth,
there has been disagreement among economists on the
relative importance of each and the exact definition.
There exist ample literature on economic growth and its
determinants. The neoclassical theory of growth describes
economic growth as a function of capital, labor and
technology. The neoclassical growth theory is essentially
supply-oriented. The theoretical framework of the
neoclassical growth theory has now become an integral
element of macroeconomic textbook. And its empirical
applications are well documented in the growth literature.

Review of Factors which Determine Economic


Growth
Economic literature identified several key factors explaining
economic growth for most countries but often taken
individually. It includes human capital (Lucas, 1993, Barro
1998), natural resources (Shaban 1987), technology
(Kuznets 1966), trade (Pomeranz 2000), foreign direct
investment (Lyroudi, John and Athonasios 2004). Recently,
other factors are considered important for growth including
government policies and reform program, institutions
(North 19909), control of corruption (Aidt, Dutta and
Sena2008) and some indicators of human development
such as life expectancy, literacy, fertility etc. Among
problem facing researchers in this areas, is lack of data on
some of these variables especially in the case of time series
models as compared to panel models.
Theoretical developments have been accompanied by a
growing number of empirical studies. Initially, research
focused on the issue of economic convergence/divergence
since this could provide a test of validity between the main
growth theories (i.e. the neoclassical and the endogenous
growth theory). Eventually, focus shifted to factors
determining economic growth. Over the last two decades

23

The Nepal Chartered Accountant

March 2014

the determinants of economic growth have attracted


increasing attention in both theoretical and applied research.
Yet, the process underlying economic performance is
inadequately conceptualized and poorly understood,
something, which can be partly attributed to the lack of a
generalized or unifying theory, and the myopic way
conventional economics approach the issue
Despite the lack of a unifying theory, there are several
partial theories that discuss the role of various factors in
determining economic growth. Two main strands can be
distinguished: the neoclassical, based on Solow's growth
model, has emphasized the importance of investment and,
the more recent; theory of endogenous growth developed
by Romer and Lucas has drawn attention to human capital
and innovation capacity. Furthermore, important
contributions on economic growth have been provided by
Myrdal's cumulative causation theory, and by the New
Economic Geography School. In addition, other
explanations have highlighted the significant role noneconomic (in the conventional sense) factors play on
economic performance. These developments gave rise to
a discussion that distinguishes between 'proximate' and
'fundamental' (or 'ultimate') sources of growth. The former
refers to issues such as accumulation of capital; labour and
technology while the latter to institutions, legal and political
systems, socio-cultural factors, demography and geography.

Determinants of Economic Performance


A wide range of studies has investigated the factors
underlying economic growth. Using differing conceptual
and methodological viewpoints, these studies have placed
emphasis on a different set of explanatory parameters and
offered various insights to the sources of economic growth.
Investment is the most fundamental determinant of
economic growth identified by both neoclassical and
endogenous growth models. However, in the neoclassical
model investment has impact on the transitional period,
while the endogenous growth models argue for more
permanent effects. The importance attached to investment
by these theories has led to an enormous amount of empirical
studies examining the relationship between investment and
economic growth.
Human capital is the main source of growth in several

ECONOMY

endogenous growth models as well as one of the key


extensions of the neoclassical growth model. Since the
term 'human capital' refers principally to workers' acquisition
of skills and know-how through education and training,
the majority of studies have measured the quality of human
capital using proxies related to education (e.g. schoolenrolment rates, tests of mathematics and scientific skills,
etc.). A large number of studies have found evidence
suggesting that educated population is key determinant of
economic growth; however, there have been other scholars
who have questioned these findings and, consequently, the
importance of human capital as substantial determinant of
economic growth.

openness and growth. Openness affects economic growth


through several channels such as exploitation of comparative
advantage, technology transfer and diffusion of knowledge,
increasing scale economies and exposure to competition.
Openness is usually measured by the ratio of exports to
GDP. There is a substantial and growing empirical literature
investigating the relationship between openness and growth.
On the one hand, a large part of the literature has found
that economies that are more open to trade and capital
flows have higher GDP per capita and grew faster. On the
other hand, several scholars have criticized the robustness
of these findings especially on methodological and
measurement grounds.

Innovation and R&D activities can play a major role in


economic progress increasing productivity and growth.
This is due to increasing use of technology that enables
introduction of new and superior products and processes.
This role has been stressed by various endogenous growth
models, and the strong relation between innovation/R&D
and economic growth has been empirically affirmed by
many studies.

Foreign Direct Investment (FDI) has recently played a


crucial role of internationalizing economic activity and it
is a primary source of technology transfer and economic
growth. This major role is stressed in several models of
endogenous growth theory. The empirical literature
examining the impact of FDI on growth has provided
more-or-less consistent findings affirming a significant
positive link between the two.

Economic policies and macroeconomic conditions have,


also, attracted much attention as determinants of economic
performance. Since they can set the framework within
which economic growth takes place. Economic policies
can influence several aspects of an economy through
investment in human capital and infrastructure,
improvement of political and legal institutions and so on
(although there is disagreement in terms of which policies
are more conductive to growth). Macroeconomic conditions
are regarded as necessary but not sufficient conditions for
economic growth. In general, a stable macroeconomic
environment may favour growth, especially, through
reduction of uncertainty, whereas macroeconomic instability
may have a negative impact on growth through its effects
on productivity and investment (e.g higher risk). Several
macroeconomic factors with impact on growth have been
identified in the literature, but considerable attention has
been placed on inflation, fiscal policy, budget deficits and
tax burdens.

Institutional framework is the another important source of


growth highlighted in the literature. Although the important
role institutions play in shaping economic performance
has been acknowledged long time ago, it is not until recently
that such factors have been examined empirically in a
more consistent way. Rodrik (2000) highlights five key
institutions (property rights, regulatory institutions,
institutions for macroeconomic stabilization, institutions
for social insurance and institutions of conflict
management), which not only exert direct influence on
economic growth, but also affect other determinants of
growth such as the physical and human capital, investment,
technical changes and the economic growth processes. On
these grounds it is argued that none of the traditional factors
would have any impact on economic performance if there
had not been developed a stable and trustworthy institutional
environment. The most frequently used measures of the
quality of institutions in the empirical literature include
government repudiation of contracts, risk of expropriation,
corruption, property rights, the rule of law and bureaucratic
quality.

Openness to trade has been used extensively in the economic


growth literature as a major determinant of growth
performance. There are sound theoretical reasons for
believing that there is a strong and positive link between

Political factors, the relation between political factors and

The Nepal Chartered Accountant

March 2014

24

ECONOMY

economic growth has come to the fore by the work of


Lipset (1959) who examined how economic development
affects the political regime. Since then, research on the
issues has proliferated making clear that the political
environment plays an important role in economic growth.
At the most basic form, political instability would increase
uncertainty, discouraging investment and eventually
hindering economic growth. The degree of democracy is
also associated with economic growth, though the relation
is much more complex, since democracy may both retard
and enhance economic growth depending on the various
channels that it passes through. In the recent years a number
of researchers have made an effort to measure the quality
of the political environment using variables such as political
instability, political and civil freedom, and political regimes.
Brunetti (1997) distinguishes five categories of relevant
political variables: democracy, government stability, political
violence, political volatility and subjective perception of
politics.
Social-cultural factors recently there has been a growing
interest in how various social-cultural factors may affect
growth. Trust is an important variable that belongs to this
category. Trusting economies are expected to have stronger
incentives to innovate, to accumulate physical capital and
to exhibit richer human resources, all of which are
conductive to economic growth. Ethnic diversity, in turn,
may have a negative impact on growth by reducing trust,
increasing polarization and promoting the adoption of
policies that have neutral or even negative effects in terms
of growth. Several other social-cultural factors have been
examined in the literature, such as ethnic composition and
fragmentation, language, religion, beliefs, attitudes and
social/ethnic conflicts, but their relation to economic growth
seems to be indirect and unclear. For instance cultural
diversity may have a negative impact on growth due to
emergence of social uncertainty or even of social conflicts,
or a positive effect since it may give rise to a pluralistic
environment where cooperation can flourish.
Geography the important role of geography on economic
growth has been long recognized. Though, over the last
years there has been an increased interest on these factors
since they have been properly formalized and entered into
models. Researchers have used numerous variables as
proxies for geography including absolute values of latitude,

25

The Nepal Chartered Accountant

March 2014

distances from the equator, proportion of land within 100km


of the coast, average temperatures and average rainfall,
soil quality and disease ecology. There have been a number
of recent empirical studies affirming that natural resources,
climate, topography and 'landlockedness' have a direct
impact on economic growth affecting (agricultural)
productivity, economic structure, transport costs and
competitiveness. However, some of the researchers found
no effect of geography on growth after controlling for
institutions.
Demographic trends the relationship between demographic
trends and economic growth has attracted a lot of interest
particularly over the last years, yet many demographic
aspects remain today unexplored. Of those examined,
population growth, population density, migration and age
distribution, seem to play the major role in economic
growth. High population growth, for example, could have
a negative impact on economic growth influencing the
dependency ratio, investment and saving behavior and
quality of human capital. The composition of the population
has also important implications for growth. A large workingage population is deemed to be conductive to growth,
whereas population with many young and elderly
dependents is seen as impediment. Population density, in
turn, may be positively linked with economic growth as
a result of increased specialization, knowledge diffusion
and so on. Migration would affect growth potential of both
the sending and receiving countries. Findings again are
not conclusive since there have been studies reporting no
(strong) correlation between economic growth and
demographic trends.

Conclusion
From the stated theoretical background and economic
performance factor it could be concluded that following
factors will support economic growth and dynamism of
Nepalese economy. Whatever maybe the socio political
economy these factors are crucial for the long term growth
and development of Nepalese economy. The paper suggest
to Nepalese political, public, private, cooperative,
nongovernment institution along with international
development partners and donors to insist these factors.
such as: High quality of human capital, High technology,
innovation, R&D, Stable political environment, High degree

ECONOMY

of openness (networks, links), Secure formal institutions


(legal system, property rights, tax system, finance system),
Good infrastructure, Capacity for adjustment (flexibility),
Specialization in knowledge and capital intensive sectors,
Significant Foreign Direct Investment, Free market economy
(low state intervention), Rich natural recourses, robust
macroeconomic management, and Low levels of public
bureaucracy, Favorable demographic conditions (population

size, synthesis and growth) Favorable geography (location,


climate) Strong informal institutions (culture, social relations,
ethics, religion) Significant urban agglomerations (population
and economic activities) Capacity for collective action
(political pluralism and participation, decentralization) in
Nepalese development process for advancing economic
dynamism. n

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/sd ;d]tnfO{ hgfpg]5 .

The Nepal Chartered Accountant

March 2014

26

FINANCIAL MANAGEMENT

Financial Literacy

Financial literacy has been


defined as the ability to process
financial information and make
informed decisions about personal
finances. In the last few years,
with increasing focus on access
to finance as an important
determinant of household-level
economic development and its
accompanying positive
consequences for empowerment,
financial literacy has become an
important issue for actioners and
policymakers alike.

Financial literacy is mainly used in


connection with personal finance
matters. Financial literacy often entails
the knowledge of properly making
decisions pertaining to certain personal
finance areas like real estate,
insurance, investing, saving (especially
for college), tax planning and
retirement. It also involves intimate
knowledge of financial concepts like
compound interest, financial planning,
the mechanics of a credit card,
advantageous savings methods,
consumer rights, time value of money,
etc.
The absence of financial literacy can
lead to making poor financial
decisions that can have adverse effects
on the financial health of an individual.
The advantages or disadvantages of
variable or fixed rates are an example
of an issue that will be easier to
understand if an individual is
financially literate.
Financial Literacy is defined as "the
ability to use knowledge and skills to
manage financial resources effectively
for a lifetime of financial well-being."

Mr. Hermann Rune

Mr. Hermann Rune, Nepal


representative of "Savings Bank
Foundation for International
Cooperation" (SBFIC)

27

The Nepal Chartered Accountant

Personal financial literacy is more


than just being able to balance a
checkbook, compare prices or get a
job. It also includes skills like longterm vision and planning for the future,
and the discipline to use those skills
every day.

March 2014

We make great efforts to teach


children to read and write, but we
don't give their financial literacy the
same attention. As a result, few young
people know how to manage their
personal financial lives. By telling
dynamic, culturally aware (and true)
stories of young adults in financial
trouble it is tried to change that. As
their stories unfold, viewers learn how
and why they ended up in trouble and
how they got out.
These compelling and relevant stories
help viewers understand the issues.
They also show viewers how to
improve their own financial literacy.
Bolstered by the wisdom and
experience of experts, these young
people take control of their lives,
providing powerful examples of what
it means to "manage your money and
not be managed by your money."

About the Strategy


Improving financial literacy skills can
have significant benefits for everyone,
whatever their age or income. Good
financial literacy skills help
individuals and families to make the
most of opportunities, meet their goals
and secure their financial wellbeing,
and contribute to the economic health
of society.
Financial Literacy Strategy promotes
a national approach to improving the

FINANCIAL MANAGEMENT

financial wellbeing of all Nepalis. The Strategy recognizes


that improving financial literacy is a complex and long
term behavioral change initiative.

Introduction
In continuum of these stories it is attempted to understand
how financial literacy apart from business training enable
microfinance clients to run better businesses and make
appropriate financial decisions.
Financial literacy has been defined as the ability to process
financial information and make informed decisions about
personal finances. In the last few years, with increasing
focus on access to finance as an important determinant of
household-level economic development and its
accompanying positive consequences for empowerment,
financial literacy has become an important issue for
actioners and policymakers alike.
Why is financial literacy important? Firstly, financial
literacy can be an important determinant of access to
finance. Low levels of literacy may prevent the take-up of
more complicated financial products such as insurance,
since clients may be hesitant to buy a product whose utility
they do not fully comprehend.
Even for a less complicated financial product, such as a
bank account, a financially illiterate person may not
understand the importance of formal savings. Lack of
financial literacy may also be compounded by a lack of
access to a range of financial products.
Given its importance in today's context, financial literacy
programs have mushroomed, and much of the conversation
on policy focuses on how to improve it. For financial
literacy providers, some of the key questions include:

awareness can lead to over indebtedness and greater


economic vulnerability for the very clients that microfinance
seeks to help. Understanding loans analyses how MFI
clients understand their loan contracts and how this should
influence the definition of an informed MFI client.
Microfinance, in the last few decades, has had the effect
of exponentially increasing access to credit for poor and
marginalized households. Given the increasing
commercialization of microfinance and the entrance of
for-profit players in this sector, financial literacy has
acquired new importance as a means to enhance consumer
protection. While consumer protection is necessary to
ensure that consumers have the information they need to
make an informed decision, financial literacy gives them
the competence to evaluate that information.
Appropriate practices can also only be determined once
existing levels of financial awareness are known. Thus,
financial literacy is an important tool to enhance consumer
protection. Some of interesting observations threw light
on were:
o

Small borrowers were able to identify the size and


duration of the loan as well as their weekly, biweekly
or monthly installment.

Many of the borrowers also recognized that nonrepayment could have potentially harmful
consequences.

However, they knew very little about the interest rate


and total interest expense on the loan. It shows that
clients are able to understand the liability on their
loan in terms of the repayments, rather than in terms
of interest rates.

However, much greater effort is required to examine


in greater depth how small borrowers understand their
loans and how they use this understanding to make
financial decisions.

Who to target and how to assess their information


needs?

What does this target audience need to know in order


to understand their current financial situation, pinpoint
future goals, and adopt behavior that will allow them
to achieve these goals?

Financial Literacy is making the attempt to understand


whether financial education leads to improved financial
knowledge and better financial decision.

In recent years, microfinance policy and regulation


discussions in Nepal often center on whether small
borrowers understand their loans. Lack of financial

While a majority of financial institutions and regulators


unanimously agree on the importance of financial literacy
training, very little is spoken of about how to define and

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March 2014

28

FINANCIAL MANAGEMENT

measure financial literacy and therefore what financial


literacy training should entail. There should be a dialogue
with financial literacy training organizations to understand
how they view this topic and how they provide financial
literacy training.

Evaluating Savings Training on Microcredit


Groups
Another interesting question is how to evaluate a financial
literacy program wherein special emphasis is laid on savings
which is then followed by financial counseling. The
existence of poverty and debt traps suggests that the poor
may be stuck at low levels of income because they are too
poor to save. This perspective has been challenged by
showing that the poor do save. The financial decisions
made by low-income households' show that they may be
paying dearly because they have not thought through
simple issues related to borrowing and savings.
The first step to escape poverty and to start savings is to
set up a budget plan:

Budgeting
A budget is a plan for your future income and expenditures
that you can use as a guideline for spending and saving.
Although many people already use a budget to plan their
spending, the majority also routinely spend more than they
can afford. The key to spending within your means is to
know your expenses and to spend less than you make. A
good monthly budget can help ensure you pay your bills
on time, have funds to cover unexpected emergencies, and
reach your financial goals.
Most of the information you need is already at your
fingertips. To create or rework your budget, follow the
simple example outlined below to get a clear picture of
your monthly finances.

1. Add Up Your Income


To set a monthly budget, you first need to determine how
much income you have. Using a worksheet write a money
figure next to each relevant income source. Make sure you
include all sources of income such as salaries, interest,
pension and any other income - including your spouse's
income if you're married.

29

The Nepal Chartered Accountant

March 2014

If you get a salary, be sure to use your take-home pay


rather than your gross pay. Taxes are usually taken out
automatically, but if they're not, remember to include them
as another expense. If you receive money from somewhere
not listed, enter the source along with the amount under
"other income."

2. Estimate Expenses
The best way to do this is to keep track of how much you
spend for one month. In the worksheet you divide spending
into fixed and flexible expenses. Fixed expenses are those
that generally do not change from month to month, such
as rent and insurance payments. Flexible expenses are
those that do change from month to month, such as food
or entertainment. If some of your expenses for one or more
categories change significantly each month, take a threemonth average for your total.

3. Figure Out The Difference


Once you've totaled up your monthly income and your
monthly expenses, subtract the expense total from the
income total to get the difference. A positive number
indicates that you're spending less than you earn congratulations.
A negative number indicates that your expenses are greater
than your income. This means you will need to trim your
expenses in order to begin living within your means.
Well done - you've created a budget. The next step is to
track your budget over time to make sure you're sticking
to it. If you find you aren't able to follow your budget
successfully, it may mean that your plan isn't flexible
enough. It can take revisiting your budget a few times to
find the balance that works for you. n

MANAGEMENT

An Overview of Internal Oversight Mechanism


in UN Systems Organizations
Background

Oversight mechanisms are


increasingly seen as an
organizational instrument that
contributes in providing
reasonable assurance to managers
and governing bodies in relation
to the management of resources
and programs, promoting
integrity and ethics. These
mechanisms are also facing
challenges of ensuring quality,
adequate coverage and building
professional competence of its
human resources.

Mr. Ram Babu Nepal


Mr. Nepal is a Former Assistant Auditor General
- Office of the Auditor General. He had also
served in the UN and its related agencies from
1999 to 2012.

Oversight system has been recognized


as one of the effective means of
p r o m o t i n g a c c o u n t a b i l i t y,
transparency, internal control and
integrity in UN system organizations.
These organizations comprises United
Nations, its subsidiary organs,
separately administered funds and
programs and specialized agencies.
As a large number of countries with
wide variety of historical background,
administrative, economic, social and
political system has stake on the
performance and results achieved by
the UN system, it is very challenging
to the management of these
organization to ensure that the
concerns of member states (MSs) are
genuinely addressed. An oversight
mechanism with different
organizational set-up has been in
practice with the objective of ensuring
that the resources are used with
consideration to value for money and
achieving set objectives.
This article attempts to provide
information on the oversight system
in the UN systems organizations, main
elements of oversight, highlight
institutions arrangements, initiatives
for continuous improvements and
professional networking.

1Oversight

Structure and Objective of


Oversight Mechanism
The major elements of the oversight
mechanism are auditing, evaluation,
investigation and inspection. These
functions are independent to
management and required to carry out
their functions in an impartial and
objective manner. "Oversight is an
integral part of the system of
governance established by Member
States within the United Nations
system to provide them with assurance
that:

The activities of the organizations


are fully in accordance with
legislative mandates;

The funds provided to the

organizations are fully accounted


for;

The activities of the organizations


are conducted in the most efficient
and effective manner;

The staff and all other officials of

the organizations adhere to the


highest standards of
professionalism, integrity and
ethics".1

In most of the UN systems


organizations internal oversight
mechanism comprises internal

Lacunae in the United Nations System, Joint Inspection Unit, JIU/REP/2006/2, p. 1-2

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30

MANAGEMENT
auditing, evaluation and investigation. However in the
United Nations inspection function is attached to the
evaluation function (Inspection and Evaluation Division).
Currently, oversight mechanism is organized in three
different ways as follows:

Office of Internal Audit and Oversight - In this case

internal audit, investigation, management review and


inspection functions are carried by this office.

Office of Evaluation - Only evaluation is carried out


by this office. This is in case of UNDP and UNICEF,
FAO, IFAD and WFP.

Office of Internal Oversight - In this set up three major

oversight functions (internal audit, evaluation,


investigation) are carried out by the same office.

United Nations Office of Internal Oversight Services


(OIOS) was established in 1994 as an operationally
independent office to assist the Secretary-General in
fulfilling his oversight responsibilities in respect to the
resources of the organization. "The strategy of the Office
is focused on ensuring that the Organization has an effective
and transparent system of accountability in place and the
capacity to identify, assess and mitigate the risks that might
prevent it from achieving its objectives. To that end, the
Office will (a) propose measures to assist the Organization
in responding rapidly to emerging risks and opportunities;
(b) provide independent information and assessments to
assist effective decision-making; (c) provide independent
reviews of the effectiveness of the use of the Organization's
resources; and (d) promote a culture of change, including
accountability, planning, integrity, results orientation, and
risk awareness and management".2
Following the approach of the UN, specialized agencies
also started reorganizing oversight mechanism. As a result,
evaluation function which used to an integral part of
program management was made independent. Similarly,
internal audit was strengthened. The Heads of Internal
Oversight Mechanism has now fixed term of office to
maintain its independence. The decision of the UN General
Assembly states as follows:

"The Under-Secretary-General for Internal Oversight


Services shall serve for one fixed term of five years without
possibility of renewal".3
Funds and programs of the UN and specialized agencies
have provided safeguard to protect independence of
oversight mechanism. Its Head cannot be removed from
office without the consent of MSs. Similarly, their
appointment has also to be endorsed by general body of
respective organizations.

Professional Development and Use of


Standards
Maintaining professional standard a key to the efficiency,
effectiveness and trust on the oversight mechanism.
Therefore, internal oversight services are serious on
maintaining quality in their performance and reports. There
are a number of means to maintain professional standards
as follows:
1. Handbook and guidelines are developed to provide
guidelines, to ensure consistency and quality.
2. Professional standards are followed in planning, field
work and reporting. In case of internal audit, they
follow professional standards developed by Institute
of Internal Auditors (IIA). For, evaluation the norms
and standards issued by the United Nations Evaluation
Group (UNEG).
3. Different quality assurance mechanisms are adopted
to maintain quality and client oriented features of
reports. Such mechanisms include peer review and
review by Advisory Group comprised of the
representatives of professional bodies and independent
experts.
4. Periodic professional review by independent reviewer
with solid foundation on
The oversight offices are actively participating in the
following professional networks.

The Representatives of Internal Audit Services of the

United Nations Organizations and Multilateral Financial


Institutions (RIAS);

2www.un.org/Depts/oios
3Paragraph

31

5 (b) of the UN General Assembly Resolution A/Res/48/218 B, date: 12 August 1994

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March 2014

MANAGEMENT

The United Nations Evaluation Group (UNEG);


The Interpol Group of Experts on Corruption (IGEC);
The International Group for Anti-Corruption
Coordination (IGAC);

The International Investigators' Conference.


These networks provide a common forum to promote the
development and exchange of UN internal audit and
oversight related practices and experience. Participation
in these networks provide very good opportunity to the
following:

to keep abreast of the development taking place in the


management of oversight functions different
organizations;

to how oversight offices are addressing concerns of


management and MSs;

to develop guidelines, concept notes, standards etc. on


the topics of common interest;

to build professional relationships so that advice may


be sought in specific issues in time of need.

The writer has had the opportunity to participate the


Evaluation Practice Exchange Seminar and Annual General
Meeting of the UNEG (www.uneval.org) from 2006 to
2012 and contribute by making presentations of different
topics and also co-chaired the Task Force on Evaluation
of the Evaluation Function. In addition to the meeting of
UNEG, also participated in the UN-RIAS meeting in 2008
held in Washington D.C. hosted by the World Bank.

Reporting System

comments and their verification, final report is prepared


and submitted to the Chief Executive Officer (generally
Secretary-General or Director-General). H e h a s t h e
authority to further comment the report if deemed necessary.
If he finds the report acceptable, provide instruction to
implement the recommendations contained in the audit
and evaluation report. Oversight offices prepare annual
report highlighting their activities and summary of the
reports issued and recommendations.
Deliberations of annual reports are held in subsidiary bodies
formed by the organizations. Such bodies may comprise
representatives of MSs who are experts in financial
management. The bodies hold detailed deliberations and
prepare reports containing measures to be taken to address
issues highlighted in the reports of oversight offices and
implement recommendations. Upon receipt of such report
policy making organs generally Executive Board review
and endorse the report which is later submitted to the
highest policy making body such as Generally Assembly
for approval.

Concluding Remarks
Oversight mechanisms are increasingly seen as an
organizational instrument that contributes in providing
reasonable assurance to managers and governing bodies
in relation to the management of resources and programs,
promoting integrity and ethics. These mechanisms are also
facing challenges of ensuring quality, adequate coverage
and building professional competence of its human
resources. Clear and achievable objectives and continued
efforts can bring positive results. n

The reports of oversight mechanisms are initially submitted


to program managers for their comments. Upon receipt of

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32

MANAGEMENT

Managing Talent - Delivering Results

This is the war for talent era. It


has become a potential
battleground to fill any position
from executive level to front-line
employee. Simply put, firms with
better talent will be more
successful than firms with lesser
talent. Talent what comprises the
5 'C' comes within the people in
an organization, how they enter,
develop their skills, and move
through. Talent management
involves not only getting and
staffing the good but identifying
and removing the nonessential
and outright bad as the Welch
Way calls it weeding out.

"My main job was developing talent.


I was a gardener providing water and
other nourishment to our top 750
people. Of course, I had to pull out
some weeds, too." - Jack Welch
Former Chief Executive Officer
(CEO) of General Electric Welch's
words of mouth were not mere
philosophy, his outstanding endeavor
supported them. During his tenure at
GE, the company's value rose
unbelievably by 4000%. The magic
behind the Welch's leadership was the
putting people first strategy - he
fundamentally recognized the potential
of human resources and remained
engaged on unleashing potential and
developing them into 'talent'.
The great managers always wish to
play the chess. However, average
managers love to play checkers.
Average managers neither recognize
the potential nor do they feel to
develop and channelize the unleashed
power in getting excellence for
organization.

Understanding Human
Element and Business

Mr. Bhuwan R Chataut


Mr. Chataut is faculty at shanker Dev Campus
and St. Xavier College

33

The Nepal Chartered Accountant

Until and unless a manager looks


differently to the human resources, it
is likely to perish the organization. Of
course, all resources, namely - human,
financial, physical and information

March 2014

resources, are equally important.


Organizations deliver the results
through people by blending relevant
management functions.
Amongst all, people are the living
resources with body, mind, heart and
the spirit; these four dimensions create
the difference. Human element is full
of unlimited potentials and it can be
unleashed. They possess the
information stored in their mind, they
have ability to perform and finally,
they show behavior based upon their
perception, values, belief system,
learning and understanding.
Business starts with exploring unmet
needs. Once unmet needs get
identified, it involves value creation
process. It is followed by creating
demands for the value generated, i.e.,
the product. This step ensures the
prospective customers, often called
marketing. Then, another step in
business is turning prospective
customers into paying customers.
Another, vital activity is value
delivery; it focuses on quality delivery
of product and high responsiveness
towards customer satisfaction and
delight. Finally, finance as the
significant activity of business
emphasizes on continuous flow of
sufficient funds as it is the life blood
of it.

MANAGEMENT

Human element is very crucial in every steps of business


mentioned above. Obviously, right skills at right job in
right time makes the business organization successful.
Hence, a CEO and management team must have a crystal
clear understanding of business, if he/she really wants to
deliver the results. He/she must know what they are doing,
why they are moving ahead, the reason behind the existence,
the destinations and all. He/she always needs the eagle's
view of business.

Defining Talent in Organization-Setting


There are numbers of definitions for talent. Michigan
University Professor Dr Dave Ulrich expresses his way of
defining talent in a formula as Talent = Competency X Commitment X Contribution
Let me elaborate it in brief:
First, competency states that individuals have knowledge,
skills and abilities for todays and future jobs; the potential
is also the great component here what makes people differ
than other resources. Second, commitment is deep feelings
or willingness to do, share and work hard and responsibly
where and when it is asked for. It is all about readiness to
share time, effort and energy wherever and whenever
needed. Third, contribution signifies actual delivery of
performance at workplace and delivering the results. These
three are multiplicative, not additive. Hence, in the absence
of any one the value for talent equals to zero as organization
cannot produce the desired results and leads to mediocrity.
Besides these three multiplicative elements of 'Talent', I
found that there are two more element must be included
in same pattern namely - compatibility and congruence.
Compatibility focuses that individual has an art of getting
involved and work with the 'team' creating a positive
synergy whenever it is essential. And, congruence indicates
the people are in the harmony with organization's DNA,
mission, vision, goals and objectives, core values, strategy,
culture and the way to reach the destiny. Thus, for our
purpose, talent in organizational setting can be presented
as:
Talent = Competence X Commitment X Contribution X
Compatibility X Congruence

Managing it
You don't build a business- you build people- and then
people build the business. There's no such thing as a
successful business without a lot of successful people
helping to grow it. - Zig Ziglar
Organizations know that they must have the best talent in
order to succeed in the hypercompetitive and increasingly
complex global economy. Along with the understanding
of the need to hire, develop, and retain talented people,
organizations are aware that they must manage talent as
a critical resource to achieve the best possible results.
This is the war for talent era. It has become a potential
battleground to fill any position from executive level to
front-line employee. Simply put, firms with better talent
will be more successful than firms with lesser talent. Talent
what comprises the 5 'C' comes within the people in an
organization, how they enter, develop their skills, and move
through. Talent management involves not only getting and
staffing the good but identifying and removing the
nonessential and outright bad as the Welch Way calls it
weeding out.
White Paper: Nine Best Practices for Effective Talent
Management authored by Wellins, Smith & Erker on behalf
of DDI Inc., USA stated the following key components of
a highly effective talent management process that include:
A clear understanding of the organization's current
and future business strategies.
Identification of the key gaps between the talent in
place and the talent required to drive business success.
A sound talent management plan designed to close
the talent gaps. It should also be integrated with
strategic and business plans.
Accurate hiring and promotion decisions.
Connection of individual and team goals to corporate
goals, and providing clear expectations and feedback
to manage performance.
Development of talent to enhance performance in
current positions as well as readiness for transition
to the next level.

The Nepal Chartered Accountant

March 2014

34

MANAGEMENT

A focus not just on the talent strategy itself, but the


elements required for successful execution.
Business impact and workforce effectiveness
measurement during and after implementation.
Notably, leaders can assess the extent to which their
organization regularly attracts and keeps top talent and the
extent to which that talent is fully applied for optimal
performance. Following are the responsible functions in
managing talent (Ulrich & et al, 2009, p. 84):
Buying is probably the first fundamental HR practice,
because it ensures adequate personnel. The people must
have the abilities needed for today's job as well as
tomorrows. It comprises getting and staffing the talent
within organizations. It involves three major processes:
expanding the candidate pool, hiring the best candidates,
and orienting them to the work. Expanding the candidate
pool improves organization's chances of getting the
employees it needs. The pool can be created by building
relationships with key sources of talent (e.g., campuses,
search firms), using referral hiring, having an internet
hiring presence, and targeting special employees.
Building means on unleashing latent talent by focusing
on either training or development. To make informed
choices about training, HR leaders should address the
following questions:
Who should attend the program?
Who should present the program?
Who should design the program?
What should the program cover?
How will the program be delivered?
How will the program change the participants?
The other half of the build menu comes from developmentfrom opportunities to learn from experience. Development
may take a variety of forms including mobility (new
assignments), mentoring or coaching, experiences outside
the firm, personal development plans, and temporary
assignments.
A firm need not own all the human capital it uses. It can
take advantage of the talents of individuals who are not

35

The Nepal Chartered Accountant

March 2014

its full-time employees. This function of talent management


is called borrowing. Some options for accessing talent
without ownership include joint alliances with consulting
or other firms, site visits to learn from others, outsourcing
work to targeted vendors, and maintaining relationships
with former employees.
Bounding & Boosting - Bounding ensures placement of
right people at key position whereas boosting signifies
promotions not only put people in the right jobs, they show
what matters to the firm. Care in this area assures that the
right signals are sent to all stakeholders. Some of the
choices around promotion include establishing criteria for
the new job, having a broad net for potential candidates,
evaluating candidate potential, and supporting new job
holders.
Bouncing is removing low-performing and underperforming
individuals. It is obviously painful situation for concerned
employee and the leader as well. Meanwhile, the
organization needs to deliver quality product and services,
it has to sustain and strive for excellence. Eventually, there
would be no more choices with organization; to be
competitive it has to weed out. The major inputs are talent
that lend competitive advantages.
Binding is all about keeping good people (high performers)
within the firm. It is about retaining the talent. Senior
managers with vision and competence are critical to a
firm's success, which is why they are hot prospects for
rival recruiting. Many technical, operational, and hourly
workers are equally critical. Investments in individual
talent often take years to pay back. Often referred to as
"A" players, an organization's top talent produces many
times the value of average or poor talent. To bind talent,
leaders might think about finding out why talented people
leave, offering incentives to keep talented employees,
offering non-financial rewards to stay, and keep them at
work.

Talent Management in Nepali Context


Talent Management is a natural evolution of HR and it is
a series of business processes - not a "product" or "solution"
you can buy. - Josh Bersin
Before 1990, HRM in the majority of the enterprises of

MANAGEMENT

Nepal was not satisfactory because there was no training


and transfer policies and strategies in public enterprises,
poor state of employee participation, failed proper
communication system between employees and managers,
lacked systematic HR planning, low prioritized to planning,
recruitment, development, compensation and maintenance
of workforce, new employees selected through friends,
relatives and influential persons, centralized in decisions
and practiced of unchallenged responsibility and traditional
reward system (Agrawal, 1983; Adhikari, 1992; Adhikari,
2000; Adhikari, 2004; Adhikari & Gautam, 2008; cited in
Adhikari & Gautam, 2012, p. 270).
With liberalization and privatization process in mid 1980s,
gradual changes and development started in the field of
HRM. Nepalese organizations whether public or private
sector, they have been still shifting from traditional practice
to modern in order to achieve the goals with excellence.
Even only 69% of Nepali organizations from public and
private altogether have HR departments whereas 19% have
been reported to have no such departments.
Even human resource planning (HRP) has not been a
prioritized issue in public sector; it has not been linked with
corporate strategy. Still proper job analysis and effective
performance management are the missing links of HR in
Nepali organizations. Training and development activities
are considered either as costs or refreshments. At present,
managing talent is rare phenomenon in public sector.
However, few private organizations have shown their
positive inclination towards it. But, they have strong belief

that only people at higher level could impact on producing


results, not all levels; and, they need to be talent - not
necessarily all. Those few business houses and banking
institutions have missed some fundamentals and
relationships as concluded in Employees First Customers
Second by HCL Technologies' CEO Mr Vineet Nayer.

Conclusion
There are so many examples from the Mahabharata age to
present that clarify and describe explicitly that people build
organization and sustain it by serving others and realizing
the stated and desired goals and objectives. In the wake of
technology and presence of all new advancements due to
privatization, liberalization and globalization have
compelled business houses to become more strategic and
competitive - if they really choose to survive, sustain and
remain sound.
Hyper competition, heightened legislation, highly
unpredictable customer choices and responses, new way
of living, changing social fabric, and complex global
economy etc have put so many complexities and challenges
on business organizations. To accept and cope with such
turbulence and create winning, managing talent might be
choice-less alternative. Though it is indispensable, it should
not be taken as panacea. As there are so many forces,
factors and relationships that play vital role for
organizational effectiveness and success; absence of it,
delivering results will remain either daydream or
nightmare.n

The Nepal Chartered Accountant

March 2014

36

TAXATION

Alarming Compliance Cost of Taxation

Collection cost must be


interpreted with care, the even
more fundamental difficulty. In
terms of administration costs, the
organizational structure and
reporting practices of tax
authorities may make it difficult
to isolate and disaggregated costs.
The exercise may be especially
difficult in function based
organization, where value added
tax department is administered
along with other taxes
department, by the same
employee in the same offices

Mr. Kul Prasad Aryal


Mr. Aryal is Member of ICAN

37

The Nepal Chartered Accountant

Tax administration has 54 year of the


execution of income tax system in
Nepal. Nepalese tax administration
has gone several improvement in
different of time. The recent tax
reforms have been oriented towards
enhancing tax compliance of the
taxpayers and reducing compliance
and collection cost. Moreover, reform
initiatives focused towards developing
equitable, fair and neutral tax system
required for creating an investment
friendly environment to ensure
economic growth and development in
the country.
It is well known fact that in the process
of rapid economic development of
any country, it requires resources from
both internal and external sources.
The external source is not always
dependable. Taxation is the most
effective way of mobilizing internal
sources. Internal tax revenue involves
income tax, domestic value added tax,
excise duty and educational service
fee.
There are two broad types of resource
cost; they are compliance and
administrative cost. Compliance cost
is associated with the evaluating the
benefits of a tax system and
operational costs. A fair and simple
taxation system reduces complexity
require to fulfill obligations and legal

March 2014

requirements. The complexity in the


Nepalese tax system, on the contrary,
has further accelerated with the
perennial amendments in the tax
legislation and influenced tax
compliance. Together with the
constant changes in the tax laws,
limited administrative capacities and
adequate responsiveness towards
taxpayers contribute to creating higher
tax compliance cost. The compliance
cost refers the accounting cost of
taxpayers.
Administrative costs incurred by the
tax authorities and compliance costs
incurred by taxpayers, taken together,
are known as collection costs.
Administration costs are similar to a
reduction in tax revenues due to their
use in regular expenditure. The
administration costs also involves
operational costs, salary expenses,
capital expenditures, allowancing for
annual amortization of soft ware; how
the costs of tax office accommodations in government-owned
buildings should be calculated; how
pension funds of employees are
handled and taxpayer's compliance
costs for individual tax are not easy
to separate in the face of common
accounting and invoicing obligations.
High collection costs are not
necessarily a sign of a bad tax, but
may simply reflect inefficient. Nor

TAXATION

are low administration costs even relative to revenue raised


necessarily a sign of good one, since one could, for instance,
raise substantial revenue under value added tax with low
administration costs (IMF,2001). Collection cost must be
interpreted with care, the even more fundamental difficulty.
In terms of administration costs, the organizational structure
and reporting practices of tax authorities may make it
difficult to isolate and disaggregated costs. The exercise
may be especially difficult in function based organization,
where value added tax department is administered along
with other taxes department, by the same employee in the
same offices. Even when a separate value added tax
department is in place, there may be genuine common
costs arising, for instance, from joint auditing for income
tax and value added tax purposes.
Table 1: Collection Cost of Tax (Rs. in ten million)

Source: IRD, Annual Report 2012/13

In the tax structure of Nepal, though internal tax revenue


is providing large revenue and has emerged as the biggest
component of total revenue. Income tax, domestic value
added tax and excise duty are the internal tax revenue
only. The collection of internal tax revenue in fiscal year
1998/99 was an amount of Rs. 6.54 billion which
increased by around 18 folds and reached at Rs. 117.89
billion. The improvement in revenue collection is positive
sign but the huge amount amassed as import tax revenue
is a matter of stress. The status and trend of revenue
collection is increasing over the period of time. The
average annual growth rate of tax is 22.94 percent where
as in case of tax collection cost, the average annual
growth rate is 24.37 percent over the last fifteen years.
Average growth rate of tax collection cost is higher than
the revenue collection.

The total operation expenses and collection cost of the


Department of Inland Revenue and its associated offices
reached at Rs. 1.19 billion in the fiscal year 2012/13 which
came down to Rs. 0.056 billion in the fiscal year 1998/99.
Compared to the fiscal year 1998/99 and 2012/13,
percentage of tax collection cost increased from 0.86
percent tax revenue to 1.01 percent while the collection
cost suddenly increased from Rs. 4.35 in the fiscal year
2005/06 to Rs 16.38 per thousand rupee in the fiscal year
2006/07. The increment in the collection cost was because
of printing cost of lengthy collection processes, excise
stamp cost, soft ware development and infrastructure
measures in the initial year. However The system like Ereturn filling, e-PAN, e-VAT, e-TDS and SMS, such
Electronic Mailers are cost-effective online services. The
collection cost of Inland Revenue Department substantially
decreased from fiscal year 2007/08 to 2009/10 due to
online E-return filling, income from sales of stickers of
excise duty and improvement of collection processes. The
cost of collection for one thousand rupees tax has been
recorded to be Rs. 16.38 in the fiscal year 2006/07 and
gradually plummeted to Rs. 4.99 in the fiscal year 2009/10,
but shot up Rs. 12.72 in the fiscal year 2010/11. The
collection cost increased in the fiscal year 2010/11 because
of administration cost of expansion of Tax Service Offices
inside and outside Kathmandu Valley. Presently, it is 26
Tax Service Offices at different places of the country.
International Finance Corporation (IFC, 2012) had
conducted a compliance cost survey for a sample of 990
businesses in Nepal. The survey especially conducted on

The Nepal Chartered Accountant

March 2014

38

TAXATION

smaller and medium sized enterprises taking into account


the corporate income tax, value added tax, and others
withholding tax payers. According to the result of the survey,
the overall average compliance cost, accounting cost of tax
payers amounted to Rs. 9,382 whereas the compliance cost
for only value added tax reached to Rs.14,756 due to lengthy
collection processes, more time consuming and tax invoice

obligation. In addition, the survey indicates that an average


Nepalese enterprise spends over 300 hours on tax compliance
related matters per year. Higher compliance cost implies
disincentive to small and large entrepreneurs. The
simplification of processes and prompt response to reduce
compliance cost are essential for effective Nepalese tax
administrative. n

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39

The Nepal Chartered Accountant

March 2014

OTHER

ICAN and Other Regulatory Bodies in Nepal A win win Relationship


Initiatives of the institute alone may
not be sufficient, the role of the
government and regulatory
authorities is also equally vital for
the development of accounting
profession in the country. However,
as an apex accounting body of the
nation the duty and the onus is on
the institute itself, and it has to
establish itself as an advisor to the
government and other regulators
by bringing the proposals and
suggestions responsive to the policy
and programs of the government
and other regulators with respect
to the accounting and financial
sector.

Mr. Dev Bahadur Bohara

CA. Shailendra Uprety


Mr. Bohara is Former Deputy Auditor General
CA. Uprety is Member of ICAN

'I have found no greater satisfaction


than achieving success through honest
dealing and strict adherence to the
view that, for you to gain, those you
deal with should gain as well'
These wise words were remarks on
financial literacy by Alan Greenspan,
the ex-chairman of the Federal
Reserve of United States. In the speech
he further emphasizes that 'Human
relations [ ] are not, and should not
be treated as, zero-sum games.' The
relevance of the speech still lives on
and it is in the context of the relation
of The Institute of Chartered
Accountants of Nepal (ICAN),
'institute', and other regulatory bodies
in Nepal, it is being used here.
ICAN, established through an act of
parliament, 'Nepal Chartered
Accountants Act, 1997', is the only
regulatory authority in accounting
profession in Nepal. As enshrined in
the preamble of the Act, it was
established to, 'enhance social
recognition and faith in accounting
profession by raising public awareness
towards the importance of the
accounting profession, towards
economic and social responsibility of
the accountants and towards economic
development of the country through
the development of awareness among
the professionals about their

responsibility towards the importance


of accountancy in order to develop,
protect and promote the accounting
profession.' It is also responsible for
development of mechanism of
registration, evaluation and
examination of accounting
professionals in consonance with
international norms and practices so
as to make the accounting profession
respectable and reliable.
Within a short span of 17 years of
inception, it has emerged as the trend
setter in the field of accounting and
auditing profession in Nepal. It has
issued standards for auditing and
accounting which are the backbone
literature of the profession. Also, the
members of the institute, both in
practice and in service, have the
proven track record of excellence in
their respective domains.

Regulatory Authorities in
Nepal
ICAN and its members are the
forerunners for providing accounting,
assurance, taxation and financial
consultancy services. At the other end
of spectrum of the services offered
by ICAN and its members are the
recipients of these services which are
regulated by one or the other
regulatory bodies setup in Nepal. The
objectives and functions of these

The Nepal Chartered Accountant

March 2014

40

OTHER

regulators are as defined by the respective statutes under


which they operate.
The main regulatory bodies, their jurisdictions and related
legislation are given below.

Institute realizes that the government and regulatory authorities


are one of the main stakeholders and they need to work in
tandem with one another in achieving the common goal of
serving the public at large. The institute and regulators often
share common platform in various programs or represent
their organization on formal requests by the other body.
ICAN conducts various programs in the form of seminars,
workshop, interaction, etc. from time to time and the
representatives from the regulatory bodies are invited as
panelists or observers in many programs. Further, in few
occasions the institute and some of the regulators, particularly
Nepal Rastra Bank, IRD, and SEBON, have jointly organized
seminars or workshops. Such programs seem to be productive
and useful not only to the institute and regulators but to other
stakeholders as well.
The ties between the institute and regulators have also been
statutorily established, whereby, the Council of the institute
is represented by the government representatives. Similarly,
the Institute also represents the Board of some of the
regulatory agencies.

Some Soul Searching by ICAN


Despite the efforts to foster better ties - building on the
statutorily made relationship - a lacuna can be felt. Some
of this is attributable to the conducts of the ICAN itself.

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The Nepal Chartered Accountant

March 2014

Efforts of the institute in fostering relationship with the


regulators especially by holding seminars, workshops,
meeting, discussion etc. can be seen. Barring some
exceptions, the recommendations or suggestion received
from these forums are rarely aligned with the system. On
the other hand, suggestion or recommendation submitted
by the institute to the government and regulatory authorities
on particular issues such as legal, financial, economic,
corporate governance etc. matters are not made transparent
to the members and stakeholders. The discussion of the
meeting need to be recorded for the institutional memory
for future references and the outcomes, suggestions,
feedbacks or results of such programs also need to be
forwarded to the regulators for appropriate actions.
ICAN needs to be proactive and initiation from appropriate
level of the Institute needs to be taken to sign Memorandum
of Understanding (MOU) with government authorities for
supporting and providing professional services such as
accounting and quality assurance of external audit of local
governments under Ministry of Federal Affairs and Local
Development, capacity building activities of Revenue
Authorities, internal audit of public sector entities,
performance assessment of government projects etc.
Another instance where the ICAN needs to get its act
together is in the performance of the Council. The functions,
duties and rights of the Council as stipulated in the ICAN
Act states that the ICAN Council shall submit to the
government the issues to be dealt with in the prevailing
legislations related to industry and commerce, finance,
revenues and accounting profession for the improvement
of those issues. However, to what extent this provision has
been implemented by the Institute needs to be assessed
which can help identifying the areas of improvement and
expand the institute's presence.
Some concrete and proactive steps are desirable to further
enhance the relation with other regulators with active
initiation of the institute. First and foremost, the Institute
needs to make its backyard clean which may result in the
following:

Setting up a Department within the institute, headed


by a senior officer to work closely with regulators,

Forming non-standing Committees with specific


functions and make them responsible to deal with the

OTHER

concerned regulators,

Forming delegation teams in special matters for


dialogue,

Attending pre and post- budget sessions and submit


pre- budget suggestions and feedback on budget
announced,

Organizing/ attending seminars/conferences/workshops


unilaterally or jointly with regulators concerned,

Making a courtesy call with heads and dignitaries of


the government and regulators in time to time by the
president, vice president, standing and non standing
committees, Executive Director or any designated
persons or officers,

It is high time, the other regulatory bodies treat ICAN as


one of their counter parts and not as their competitors. They
have to acknowledge the statutorily ordained powers of
ICAN. Any sort of misunderstanding can be solved amicably
by following the proper established process of law.
ICAN is the apex body charged with the development of
the accounting profession in Nepal. Accounting profession
has gone through much advancement and has become a
technical field. Other regulators must recognize this fact
and seek technical inputs relevant to them from the institute.
The major areas where other regulators may seek cooperation
from the institute are summarized as follows:

Seek cooperation in enforcement of legislation,


Support for enhancing capacity building,

Organizing/ holding interaction or discussion program


or meetings,

Lobbying for arrangement of legislative, policy matters


or any other professional matters,

Seek support for adoption of IFRS/Nepal Financial

Exchange of information and sharing of the good


practices from participation in International seminars/
conferences/ workshop with the regulators,

Seek support for investigation and frauds related to white

Regular correspondence , etc.

The institute should try to engage full participation and


engage itself in the debate at more advanced stage with the
regulatory authorities. In case of reluctance from the part
of these authorities the Institute may approach to the Auditor
General (AG) to seek support for the initiatives undertaken
so that AG can issue instruction to the authorities concerned.

ICAN and Regulators - Peers on Equal Footing


ICAN stands on an equal footing as any other regulators
in Nepal with statutorily ordained powers. In recent past,
instances of other regulators by-passing the ICAN's
jurisdiction in many occasions or just offering lip service
to the honest demands of ICAN has been witnessed.
Occasionally, attempts have been made to encroach the
jurisdiction of ICAN by various regulators. In such a
situation, a written communication and debate at appropriate
level of government need to be strongly raised to find out
the solution so that misunderstanding or repetition of such
events can be avoided in future.

Request for getting technical inputs with respect to


accounting and auditing,

Reporting Standards in PSEs and Nepal Public Sector


Accounting Standards,
collar crimes,

Seek support for preparing guides and manuals for


financial management etc.

Other areas of cooperation can be identified through holding


interaction and meetings between the institute and
government officials/ regulators. It is appropriate to note
that institute needs to come forward for taking Initiation in
this regard.

Learning from Neighbors


We can take a cue from the developments in Bangladesh
where the Institute of Chartered Accountants of Bangladesh,
ICAB, has signed an MOU on December 2012 with the
Ministry of Local Government for incorporating the
oversight responsibilities for the Annual External Audit,
Performance Assessment and Fiduciary & Safeguard
Compliance Assessment. Similarly, in June 2009, Institute
of Chartered Accountants of Pakistan and Federal Board
of Revenue (FBR), the Revenue Division of the Ministry
of Finance of Pakistan, have entered into an MOU for the
development of a tax audit framework and to advise FBR

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March 2014

42

OTHER

regularly on technical matters relating to tax audit and


allied subjects, which clearly demonstrates the confidence
of the Government of Pakistan /FBR in ICAP and towards
CA profession.
Likewise, in India, the Institute of Chartered Accountants
of India, ICAI, on the request of government authorities/
regulators such as Central Board of Direct Taxes, Reserve
Bank of India, Stock Exchange Board of India, and Insurance
Regulatory Development Authority etc. has developed
technical guidance & manuals, conducted studies etc. and
supported them by offering suggestions for removing
practical difficulties in the implementations of tax laws,
corporate laws, system/ process improvements and so on.
It has also formed various standing and non- standing
committees such as Direct Tax Committee, Committee on
Economic, Commercial Laws and WTO, Committee on
Financial Market and Investors' Protection, Committee on
Banking, Insurance and Pension Initiatives, Committee on
Accounting Standards for Local Bodies etc. with the
objective, inter alia, to act as an interface between
Government/State Government, Regulators and various
constituents of Government of India/State Government' for
the specified services.

Areas of Cooperation
The institute too has to play a key role in enforcing
regulation and demonstrating their accountability towards
the profession and the country. Similarly, it is also important
to emphasize the government to establish the practice or
mechanism of seeking consultation from the Institute with
regard to formulation or amendment of legislation, policy
matters particularly with respect corporate laws, taxation
and policies thereon and capacity building measures.
The institute may establish a committee on taxation, provide
suggestions to the government in such areas as reforming
the revenue collection, broadening tax base, simplification
and removing of ambiguities in taxation, improving the
process of departmental scrutiny or review of Tax Returns,
enhancing tax payers services and so on. Such kind of
communications, dialogues or interaction can be productive
to the tax regime of the government in revenue collection
and the accounting profession within the country.
Another area where the help of ICAN can be useful is to

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The Nepal Chartered Accountant

March 2014

the Ministry of Federal Affairs and Local Development


(MOFA&LD), in adoption of accrual system of accounting
by the municipalities. Support from the institute in
preparation of resource materials and active help during the
implementation phase indispensible. Both the institute and
the MOFA & LD must take immediate steps in this direction.
Convergence with IFRS is another pertinent area where the
active cooperation of the institute and the regulators are
needed. As per the road map laid out by the ICAN for the
implementation IFRS, in initial stage the institute plans to
implement IFRS in the listed companies and Public Sector
Enterprises (PSEs) with effect from 2014-15. In the process
of IFRS convergence, appropriate amendment(s) in the
concerned laws may be necessary for which immediate
initiation is needed in the part of the institute to convince
the law makers because law making process usually takes
a considerable time. Similarly, capacity building of
accounting staffs of PSE's for convergence of NFRS is also
an area that needs to be delved into.
In near future, the country is going to adopt federal structure
of governance, which will necessitate the changes in
budgetary practices for which institute can provide technical
support in designing the appropriate modalities. ICAN can
also support the government by designing the accounting
guide for the autonomous bodies which will be functioning
under various ministries. Likewise, Institute can give
suggestion to NRB on matters such as liquidity management,
corporate governance, forex and other areas.
Some of the areas where ICAN can play a significant role
in collaboration with regulators and contribute to the national
economy are as follows:

Submit suggestions to Ministry of Finance on Direct


and Indirect Taxes,

Suggest the tax department in issues of International


taxation,

Fund Management of Mega Projects,

Suggestion on commercial laws and World Trade


Organization (WTO) requirements,

Guide on concurrent audit/Due Diligence Review of


banks and Insurance companies,

OTHER

Suggestion to Security Exchange Board (SEBO) on


financial market and investor's protection,

Provide inputs on policy formulation and recommend


remedies on BAFIA and contemporary issues in banking
and insurance business,

Contribute to the government in the efforts to tackle serious


financial crimes and countering anti money laundering
activities,

Guidance on Corporate Social Responsibility audit,

Submit suggestions or memorandum on pre- budget and


post budget discussion

Government of Nepal solicits suggestions in three columnar


templates for amendment of a particular legislation. The institute
can also use this template in specifying the details of the
suggested proposal with reasons for the same, with respect to
acts and regulations, especially, relating to taxation and fiscal
matters. The Institute also needs to develop a template to
recommend its suggestions in structured manner in the existing
legal, procedure, system, practice etc. for the improvements
or amendments prevailing within government regulators, even
when not solicited from the government.

It is worth to note that the potential area for support to the


government is exhaustive; however, such areas are to be
selected considering the priority needs of the issue. Such
priority areas need to be addressed in a strategic manner by
aligning activities with the annual plan and program of the
institute. This kind of arrangement will also open the
professional avenues to membership of the institute and the
government will also be benefitted.

Conclusion
Initiatives of the institute alone may not be sufficient, the
role of the government and regulatory authorities is also
equally vital for the development of accounting profession
in the country. However, as an apex accounting body of
the nation the duty and the onus is on the institute itself,
and it has to establish itself as an advisor to the government
and other regulators by bringing the proposals and
suggestions responsive to the policy and programs of the
government and other regulators with respect to the
accounting and financial sector.
Returning back to the wise words of Mr. Greenspan, an
honest cooperation between ICAN and other regulatory
bodies is the need of the hour; it is not a zero sum game
and is a win-win for accountancy profession and all the
stakeholders. n

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The Nepal Chartered Accountant

March 2014

44

OTHER

Recent Developments in Accounting Professions


in South Asia

Of late, the world is focusing


on South Asian region. The
region cannot lag behind to
follow international good
practices in the areas including
accounting profession. There
are challenges and
opportunities for accounting
profession in South Asia to go
ahead.

CA. Paramananda Adhikari

CA. Adhikari is Technical Director


of ICAN

45

The Nepal Chartered Accountant

The Institute of Chartered Accountants


of Sri Lanka (CA Sri Lanka) hosted
the series of SAFA events on 20th
and 21st of January 2014 and
workshop on "Realizing the Power
of PAOs" on 22nd January 2014 which
w a s c o n d u c t e d b y I FA C .
Comprehensive discussions were held
in the various SAFA Committee, Task
Force, Board and Assembly Meetings.

A. SAFA Committee Meetings


Committee for Improvement in
Transparency, Accountability and
Governance (ITAG)
The committee observed the
significant variances in marking by
the evaluators during SAFA BPA
Conference Marking Session held at
Kathmandu on 30th, 31st December
2013 and 1st January 2014.
Considering this fact only three
categories were finalized and specific
areas in Banking Sector was started
to re-moderate because of significant
variations in the marks awarded by
the member bodies. Further, it was
also decided to organize a SAFA BPA
Awards Conference Marking
Technical Session to moderate the
remaining areas and the technical
committee report will be followed by
a meeting of ITAG Committee to
finalize the winners. It was also
proposed to prepare detailed

March 2014

guidelines for member bodies,


evaluators for BPA Awards so as to
minimize the marking gap in future.
Committee on Accounting &
Auditing Standards
A comprehensive discussion was held
in the meeting on the issue of updating
on adoption/ convergence with IFRS
among SAFA member countries.
Apart from this, adoption of IFRSs
9, 10, 11, 12 & 13 and their adoption
in the SAFA region, exposure draft
on IFRS for SMEs, Integrated
Reporting Initiatives in SAFA Region
and hosting of Regional Standard
Setters (RSS) meeting was discussed.
Small & Medium Practices
Committee
In SMP committee it was discussed
to develop concept paper for Ethical
Framework for SMPs, concept paper
on the need of Quality Assurance and
the relaxations of certain conditions
for SMPs, response received from
member bodies on SAFA SMP Survey
2013 and consideration of organizing
joint SAFA-EFAA program. Further,
concerned was expressed about the
non receipt of adequate responses
from the member bodies and felt that
the report could not be prepared due
to a small sample size. The committee
has decided to consider the responses
received by 31st March 2014 inorder

OTHER

to finalize and circulate to member bodies.


Committee on Professional Ethics and Independence
The Committee has decided for undertaking two projects
namely(a) To conduct a comparative study on the status of
adoption of IFAC Code of Ethics for Professional
Accountants (2010 edition) by SAFA Member bodies.
All the member bodies briefed their status and it was
decided that a template shall be developed and
circulated by January 31, 2014 and all SAFA member
bodies will be requested to send their response and
views by March 31, 2014.
(b) To undertake a comparative study on the status of
Audit Firm Rotation in the countries of SAFA member
bodies. It was decided that questionnaire shall be
circulated to all member bodies by January 27, 2014
for their comments which shall be sent back to ICAB
by 15 February 2014. The chairman of the Committee
shall finalize the questionnaire by February 20, 2014.
Survey shall be completed by April 30, 2014 and
report shall be finalized by June 30, 2014.
International Relations Committee
The Committee decided to strengthen formal relationship
with SAARC secretariat and the committee presented
status reports with regard to Maldives, Bhutan and
Afghanistan. The committee apprised that the Auditor
General of Maldives expressed his views for incorporation
of CPA Maldives by an Act of Parliament. In Bhutan,
new accounting and auditing standards were in place and
ADB has supported to recruit experts to converge with
IFRS. It was also apprised that Bhutan is in the process of
drafting bill inorder to set up professional accounting
body and requested SAFA to provide inputs in this regard.
In case of Afghanistan, it was requested that ICAP and
ICMAP to follow up for their participation in the SAFA
meetings.
Committee on Education, Training and CPD
The Committee has decided to consider the Exposure Draft
issued by IAESB for proposed revision of IES 8,
Professional Competence for Engagement Partners for
Audit of Financial Statements. The Committee discussed

the CPD practices being followed in SAFA countries


specially structured and unstructured learning, provisions
related to mandatory CPE hours and the penal provisions
and member's feedback. It was decided to conduct a
comparative study on the same. Likewise, the Committee
has also decided to prepare a database of speakers from
SAFA Region on various CPD topics which can be used
by SAFA member bodies.

B. SAFA Task Force Meetings


Task Force to harmonize the evaluation criteria being
used by SAFA member bodies for BPA Awards
The major objective of the task assigned to the Task Force
is to harmonize the national criteria of member bodies and
consolidate the same to revisit the existing SAFA BPA
Criteria. The Task Force meeting reviewed the progress
made relating to revision/preparation of the existing national
criteria used by SAFA member bodies. It was also discussed
the national BPA criteria prepared by ICA Bangladesh in
the meeting.
CA Sri Lanka submitted their existing criteria with detailed
guideline. CA Sri Lanka is following the said criteria along
with detailed explanatory guidelines for consideration of
National BPA Awards in Sri Lanka. The meeting decided
that CA Sri Lanka shall prepare their draft national criteria
in concise format by keeping in view the main headlines
under the SAFA Evaluation Criteria.
In the meeting, representative from ICA India requested
for more time for revision of their existing national criteria.
Likewise, representative from Pakistan requested to take
up the issue in the next meeting of Task Force on submission
of the draft national criteria by 10 February 2014 by
Pakistan, India and Sri Lanka.
Representative from ICA Nepal reported that they have
not yet prepared the national BPA criteria as agreed in the
last meeting of the Task Force held in Kolkata, India.
Nepal has assured that they would be able to submit their
draft national criteria by February, 28th 2014.
Task Force to develop Strategy to Combat Corruption
in SAARC Region
The Task Force in its 1st meeting discussed some contents

The Nepal Chartered Accountant

March 2014

46

OTHER

to formulate the strategy to combat corruption in SAARC


Region. The areas inter alia were, the Terms of Reference
(TOR) for the Task Force, work methodology and time
frame for developing the strategy, deliverables of the
assignment. The Task Force also decided to include other
SAFA member bodies for wider participation, since the
current membership is limited to only Pakistan, Bangladesh
& India. Further, it was decided that the Task Force submit
a draft study on 'Corruption in Financial Institutions in
SAARC Region' as the first project and submit the report
by May 31, 2014 to the SAFA Board.

of Chartered Accountants of India was appointed as


President of SAFA and Mr. Arjuna Herath from the Institute
of Chartered Accountants of Sri Lanka appointed as VicePresident of SAFA for the year 2014.

Task Force to address Risk & Challenges to


Accountancy Profession

'Comparative Study of Transfer Pricing and


International Taxation in SAFA Countries' has to be
completed by February 28, 2014. This is also the
responsibility of ICA Nepal.

The task force meeting in its first step decided to address


the issue of risk and challenges to accountancy profession
for which a questionnaire has been distributed to all
accounting bodies within the region to collect the opinion
and inputs.
The major points discussed in detail inter alia were,
incorporation of professional body, recognition of
professional body by SAFA, provisions of foreign qualified
accountants to become members of a local body by granting
exemptions to such foreign qualified accountants through
a due process based on mutual agreement and foreign
accounting bodies should honor the jurisdiction of the
local Professional Accountancy Organizations (PAOs).

C. SAFA Board Meeting & Assembly Meeting

The main agenda and decisions of the Board Meeting were


to review the status of actions taken in respect of the
decisions of earlier Board Meeting. They wereComparative Study on Fiscal and Tariff Regimes in
SAFA Countries has to be completed by February
2014. This is the responsibility of ICA Nepal.

Comparative study of the provisions of transfer costing


in SAFA countries. The task of preparing comparative
study of the provisions of transfer costing in SAFA
countries in line with the transfer pricing was assig
ned to committee on professional accountants in
Business (PAIB)
Strategic action plan of SAFA for the year 2014 with
tangible outcomes to be achieved by the SAFA
Hosting of IFAC PAO Development Workshop on
the theme "Realizing the Power of PAOs" at Colombo,
Sri Lanka on 22nd January 2014

D. IFAC Events
(i) IFAC PAO Development Workshop on
"Realizing the Power of PAOs"

Participants at SAFA Board and Assembly Meeting

SAFA Board and Assembly Meeting were held on January


21, 2014. CA. Subodh Kumar Agrawal from the Institute

47

The Nepal Chartered Accountant

March 2014

The first part of the workshop was to present the technical


paper on realizing the power of PAOs. CA Sri Lanka hosted
the PAO Development workshop which was conducted
by IFAC. The event focused on knowledge sharing and
exchange with respect to adoption and implementation of
international standards including the SMOs, PAO
development and capacity building of the accountancy
profession. Keynote Address was delivered by Warren
Allen, President, IFAC. Marta Russell, Technical Manager,
Member Body Development of IFAC made a presentation
on "Building the Capacity of the Profession" and highlighted
the objective of SMOs for capacity building of the PAOs.

OTHER

Brian Blood, CEO, CAPA made a presentation on


"Supporting PAO Development in Asia-Pacific". In his
presentation it was highlighted the ' Maturity Model for
the Development of PAOs' and 'Improving Financial
Management in the Public Sector that includes 8 Key
Elements of Success'. The maturity model specifies 4 main
domains that include Sustainability, Professionalism,
Member Value and Relevance with 4 sub-domains in each
domain i.e. 16 key success areas, and five levels of progress
which includes,
1) Ad hoc Practices
2) Informal Practices
3) Good Practices
4) Strong Practices
5) Best Practices
The 8 Key Elements of PFM Success include: Climate
for Reform, Governance Climate, Governance Value
System, Fiscal and Policy Framework, Scrutiny and
Assurance, Reporting, Performance Management, Capacity
and Capability.
At the end of the technical session, Mr. Arjuna Herath,
President CA Sri Lanka, made a presentation on "Case
Study of Sri Lanka in PAO Development". He appraised
the support of the World Bank to CA Sri Lanka for its
development under ROSC Project. He mentioned that the
amount of support was US$ 1 million and US$ 500,000
for first and second phase respectively. The support was
used in CA Education, SMP capacity enhancement, IFRS
Implementation, PFM and Audit Quality Assurance (AQA).
With the financial assistance from the World Bank, CA
Sri Lanka has developed audit kits and training manuals
to assist for SMPs.
(ii) Round Table Discussion Program

Participants at Round Table Discussion

Group-1: Agenda- Approaches to adoption and


implementation of international standards.
Outcome: Different countries have adopted the approach
either convergence or adoption for IFRS implementation
but the key factor of success depends on the use of skilled
manpower in the entity along with the professional advice
from auditor, and cooperation from the regulators.
Group-2: Agenda- Advocacy, Stakeholder's engagements
and establishing a public policy role - A PAO's Perspective
Outcome: Still there is knowledge and expectation gap
of accounting profession within the community and
stakeholders, the PAOs should come forward to minimize
these gaps through dissemination of adequate information,
education and communication to the Public.
Group-3: Agenda- Good practice, success factors and
challenges in PAO capacity building in South Asia beyond.
Outcome: Of late, the world is focusing on South Asian
region. The region cannot lag behind to follow international
good practices in the areas including accounting profession.
There are challenges and opportunities for accounting
profession in South Asia to go ahead. n

The second phase of the workshop was concentrated on


group discussion comprising the representatives amongst
the SAFA member bodies. The participants were divided
into three different groups and each group discussed and
exchanged the ideas on various issues in their local
jurisdictions.

The Nepal Chartered Accountant

March 2014

48

NEWS

News
Events

17th Anniversary Function of the Institute

Hon' ble Finance Minister Shankar Pd. Koirala lighting the lamp at
ICAN Anniversary Program

The Institute of Chartered Accountants of Nepal celebrated


its 17th Anniversary on Magh 17 2070 corresponding (31st
January, 2014) in Kathmandu.
The function was marked in the presence of Chief Guest
Hon'ble Finance Minister Mr. Shankar Prasad Koirala. The
other Guests of Honor were Mr. Baburam Shrestha ,
Chairman Security Board of Nepal (SEBON) and the Prof.
Dr. Fatta Bahadur K.C. Chairman, Nepal Insurance Board,
Mr. Janak Raj Gautam, Deputy Auditor General OAG
office and CA. Maha Prasad Adhikari, Deputy Governor,
Nepal Rastra Bank.

ICAN President CA. Mahesh Kumar Guragain Presenting Annual


Report 2012/013

ICAN President presented the annual progress report (201213) of the Institute during the function and also highlighted
the annual plan and program for current fiscal year. President
urged the professional accountants to meet the expectation
of the society and the country and also requested to all
members to follow the Rules, Regulations, Code of Ethics
and Other Directions issued by the Institute. He thanked
all the stake holders, students, members for their financial
contribution for construction of Institute's building at
Satdobato, Lalitpur.

ICAN President CA. Mahesh Kumar Guragain welcomed


the Chief Guest and the Guests of Honor with Bouquet
and Batch.
The Chief Guest of the Program formally inaugurated the
anniversary function of the Institute with the lightning the
lamp.

Merit Holder Students with Hon'ble Finance Minister Shankar Pd.


Koirala and Other Officials

49

The Nepal Chartered Accountant

March 2014

NEWS

During the function Chief Guest awarded medals and


certificates to the merit holder students of different level of
June 2013 and December 2013 examination. Chief Guest
also distributed certificate, cash prize and enhancement
grade to the best staff of the year Mrs. Anita Bhandari and
Mr. Shiva Bhattarai for their outstanding performance during
the year. Similarly, Chief Guest distributed certificate and
prize to the winner of the staff sport tournament organized
on the auspicious occasion of 17th Anniversary of the
Institute.
Addressing to the function, the Guests of Honor applauded
the achievements of the Institute in the field of accounting
and auditing in a short period of time of its establishment.
Speaking on the occasion Chairman SEBON threw light
on the relation between Institute and the Board. He
highlighted the importance of the Institute and its members
in carrying out the audit of companies under SEBON.

He also highlighted the importance of the Institute for


economic development, financial management and revenue
collection for the government. Lastly he assured that Nepal
Rastra Bank is ready to facilitate the Institute when necessary.
The Chief Guest of the program congratulated the Institute
for the achievements. He praised the Institute for retaining
the students for CA. studies in Nepal. He welcomed the
initiation of ICAN for implementing NFRS. The role of
the members of the Institute is vital for the economic
development, and urged the members to comply Rules and
Regulations, Code of Ethics, and Directives to make their
work credible. During the speech the Chief Guest focused
on the co-ordination and also ready for financial support
to complete building construction of the Institute.
ICAN President presented Token of Gratitude to Chief
Guest and Guests of Honors.

Similarly, speaking on the occasion Guest of Honor


Chairman, Insurance Board of Nepal praised for the
achievements of the Institute.

The program was concluded with the Vote of Thanks


offered by Vice President CA. Narendra Bhattarai. He
appealed the government to expand role of the Institute in
national development.

The other Guest of Honor Mr. Janak Raj Gautam, DAG


from Office of the Auditor General stressed to comply with
professional standards in uphold the integrity of the
profession.

International Conference on Merger and


Acquisition of Banking & Insurance Sector

The other Guest of Honor Deputy Governor, Nepal Rastra


Bank CA. Maha Prasad Adhikari highlighted on the progress,
quality education, dedicated resource person of the Institute
and implementation of Standards in time.

Preview of International Conference on Merger and Acquistion of


Banking & Insurance Sector

Hon' ble Finance Minister Shankar Pd. Koirala Delivering Speech at


the Programme

The Institute of Chartered Accountants of Nepal (ICAN)


organized one day International Conference on the
theme"Merger and Acquisition of Banking & Insurance
Sector" on 31st January 2014 (corresponding Magh 17,

The Nepal Chartered Accountant

March 2014

50

NEWS

2070) coinciding with the auspicious occasion of the 17th


Anniversary of the Institute at Hotel Soaltee Crowne Plaza,
Kathmandu. The conference focused on the accounting of
merger and acquisition and prevailing practices. In the
present context, merger and acquisition in banking and
insurance sector is in high priority. The conference aimed
at addressing the issues related to merger and acquisition
in the Nepalese perspectives. Program was conducted by
the eminent professionals having expert knowledge and
practice on the"Merger and Acquisition of Banking &
Insurance Sector" from Nepal, Pakistan and SriLanka.

Program was concluded with the Vote of Thanks by the


Immediate Past President CA. Madhu Bir Pande.
8 CPE credit hours was granted to the participating member
of the Institute.

Interaction Program on the Role of the


Institute

ICAN President CA. Mahesh Kumar Guragain formally


opened the conference and addressed with the welcome
speech.
Conference was conducted in three sessions as follows:

Preview of Interaction Program

With the aim of providing the information regarding the


roles of the Institute interaction program was organized at
Biratnagar on Magh 23, 2070 by the Career Counseling
Committee. Higher Officials from Local administration
and heads of industrial and commerce sectors actively
participated in the program organized by the Institute.
Similarly, Assistant CDO, District Police Officer, Senior
Advocates, Custom Officers, Government Officials,
Journalists and Building Committee Member were also
present in the program.
CA. Madhu Bir Pande Chairman of the Program answered
all queries raised by the participants. Council Member RA.
Mohan Subedi coordinated the program and briefed about
the Institute.
This program was conducted in the presence of District
Judge Mr. Shekhar Prasad Poudel, DIG Mr.Nawaraj Silwal
and CDO Mr. Ganesh Karki who attended the program as
the Chief Guest and Guest of Honors respectively.

Second Session Chair and Paper Presentator of the Program

51

The Nepal Chartered Accountant

March 2014

In the same day career counseling and other interaction


program was also organized with students, parents and
teachers from higher secondary schools.

NEWS

Refresher Training on Peer Review System

Board and Past President CA. Sunir Kumar Dhungel gave


short introduction about the refresher training.
President CA. Mahesh Kumar Guragain delivered speech
briefing about the importance and overview of the refresher
training to the accounting profession.
Training was divided into four technical sessions:
Session Paper presentors

CA. Pradeep Kumar Shrestha is Speaking in Refresher Training

The Peer Review Board of the Institute organized a half


day "Refresher Training on Peer Review System" on Falgun
2, 2070 (14 February, 2014) in Kathmandu. The program
was targeted towards the practicing Chartered Accountant
and Registered Auditor members with the aim to update
the knowledge and issues related to Peer Review System.

Topic

1st

CA. Pradeep K. Shrestha Peer Review Process

2nd

CA. Shashi Satyal

Documentation of Audit Working Papers

3rd

CA. Sunir K.Dhungel

Review Process

4th

CA. Nanda K. Sharma

Reporting by Reviewer

Training was concluded with the closing remarks and vote


of thanks by Board Member and Program Coordinator CA.
Shashi Satyal. Altogether 22 members were participated at
the program. Peer review methods are employed to maintain
standards of quality, improve performance, and provide
credibility.

welcomeing the particiapants, the Chairman of Peer Review

Agreement Signed with Kathmandu University

provide training on "General Management and


Communication Skill" to newly qualified chartered
accountant and accounting technicians.
ICAN and KU both are educational institutions established
under the Act of Parliament. ICAN will review the quality
of the training. Both the Institutes have agreed to expand
the other areas of mutual Coporation in the days to come.

Rules Amended
The Nepal Chartered Accountants Rule, 2061 has been
amended as per the decision of dated 2070.10.24 of
Government of Nepal . The amended Rules can be seen in
notice given in the Journal on page:26 & 39.
Exchange of Signed Copies of Agreement between ICAN and KUSOM

The Institute of Chartered Accountants of Nepal (ICAN)


and Kathmandu University (KU), School of Management
(KUSOM) signed an agreement on 18th March 2014, to

The Nepal Chartered Accountant

March 2014

52

NEWS

Education and Examination


Chartered Accountancy December 2013 Examination Result Published
The result of Chartered Accountancy Board Examination of different level held in December 2013 has been published.
As per the result 447 students under New Syllabus and 12 students under old CAP I level were eligible to enroll CAP
II level. Similarly 72 students of CAP II level were eligible to enroll in CAP III Level and 12 students of CAP III Level
were eligible for the membership of the Institute after completing the requirement set by the Institute. The detailed result
is given as under:

Chartered Accountant Membership


Examination Result Published
The result of Chartered Accountancy Membership
Examination held in December 2013 has been published.
As per the result 50 examinees (qualified from Foreign
ICAN recognized Institution) were declared successful
and qualified for membership of the Institute. The total
number of 212 out of 223 students appeared in the
examination in different subject(s). The membership
examination shall be conducted along with CAP III level
examination from 2014 onward on the basis of question
paper used for CAP III level.

Registered Auditor (RA) Upgrading Result


Published
The registered auditor upgrading examination held on June
2013 and on the basis of experience of RA has been
published. According to the results 3 C class RA have been
upgraded to B is as given under:

53

The Nepal Chartered Accountant

March 2014

Similarly, Mr. Raman Rajbhandari was declared pass in


first part. Altogether 18 "C class" and 5 "D class" RA
members applied for the examination.

Accounting Technician (AT) Examination


The Institute of Chartered Accountants of Nepal conducted
Accounting Technician Examination from 18-21 March
2014. Out of 12 applicants 8 AT students appeared in the
examination. AT examination is generally conducted in
March and September twice in a year. The enrollment
status of students in AT course is increasing gradually. The
increasing demand of professional degree holder in the
market in the field of accounting and auditing sector has
shown the positive increment in the enrollment.

NEWS

Career Counseling

Student Enrollment Status

During the period of January - March 2014, the Institute


organized career counseling program in different colleges
in Kathmandu Valley and outside the valley with the aim
of generating awareness and to make more informed toward
chartered accountancy education to the interested parents,
students and other visitors.

The Number of students enrolled for CA and AT studies


is in growing trend as these are highly demanded
professional education in the market. The growing trends
indicates CA and AT as a choice of profession. The fiscal
year wise enrollment status is as given under.

Among other things the counseling offered information


on eligibility criteria and admission process, future career
prospects, membership and international recognition.
Council Members, ICAN Officials and CA Members
facilitated the program in different parts of the country.

Enrollment is open throughout the year.

During the program more than 1200 interested students


and individuals attended the program. The participants had
shown keen interest on CA education.

Member and Professional Development


Continuous Professional Education (CPE)
Training
As per the mandatory provision of CPE for Certificate of
Practice (COP) holder members to renew their COP, the
Institute is conducting CPE program at different location
for members. According to the provision, CPE training is
mandatory for the members up to 65 years of age. CPE

has covered different topics relating to Auditing,


Accounting, Communication Skill, Taxation and Other
Contemporary Topics. Till date altogether 1800 members
are benefitted from the training which were organized at
Mahendranagar, Baglung, Kathmandu, Dang, Birtamode,
Illam, Dharan, Bhairahawa, Birgunj, Biratnagar, Pokhara,
Narayanghat, Dhangadi, Janakpur, Nepalgunj.

Membership, Certificate of Practice and Auditing firm


Following is the total number of Registered Member, Certificate of Practice and Auditing Firms and the renewal
status till March end 2014 (Chaitra 18, 2070).
Category

Membership

COP

Firm

Total No.

Renewal No.

Total No.

Renewal No.

Total No.

Renewal No.

FCA/CA

714

501

588

258

493

242

RA- B

3374

2095

3130

1576

928

699

RA- C

1610

921

1475

761

331

210

RA -D

2292

1348

2098

1195

225

160

Total

7990

4865

7291

3790

1977

1311

The Nepal Chartered Accountant

March 2014

54

NEWS

International Paricipation
SAFA Committee, SAFA Board, Task Force
and Assembly Meeting, Sri Lanka
The four Member delegation of the Institute attended
various meetings held in Colombo, Sri Lanka from 20-22
January, 2014. The delegation was led by ICAN President,
CA. Mahesh Kumar Guragain and others were Vice
President CA. Narendra Bhattarai, Council Member RA.
Mohan Kumar Subedi and Technical Director CA.
Paramananda Adhikari. For detail information about the
events has been reported in this issue of Journal by CA.
Paramananda Adhikari.

SAFA iTAG Technical Committee Meeting,


Dhaka, Bangladesh

Comprehensive discussion was held for the preliminary


markings awarded to the annual reports by each member
bodies. Based on the present marking criteria the Technical
Committee carried out the marking session and finalized
all the categories nominated for SAFA BPA Awards from
member bodies. CA. Paramananda Adhikari, Technical
Director participated in the Technical Committee Meeting
as the representative from the Institute of Chartered
Accountants of Nepal.

Meeting of the SAFA iTAG Committee, Dhaka


Bangladesh

Participants of SAFA iTAG Committee Meeting


Participants of SAFA iTAG Technical Committee Meeting

The Technical Committee Meeting held on 17-18 February


2014, in Dhaka Bangladesh observed the significant
variances in marks given by the evaluators during SAFA
BPA Conference Marking Session held at Kathmandu on
30th, 31st December 2013 and 1st January 2014. Due to
such reason only three categories were finalized and specific
areas in banking sector was started to re-moderate because
of significant variations in the marks awarded by the
member bodies.

55

The Nepal Chartered Accountant

March 2014

Meeting of SAFA iTAG Committee, was held on 19


February 2014 in Dhaka, Bangladesh.
The meeting was commenced with the welcome speech
by the Chairman of the Committee CA. Lasantha
Wickremasinghe. The meeting recognized the contribution
of the Technical Committee for the work done during the
two day conference marking sessions and for the successful
completion of the finalization of SAFA BPA award winners.
The following modalities adopted by the Technical
Committee were discussed and approved in the iTAG
Committee meeting.

The Nepal Chartered Accountant

March 2014

56

A Prestigious & Reward


ing
Profe
ssi

on

'Punantu Manasa Dhiya' means


'Purity of Mind and Clarity of Wisdom'

g]kfn rf6{8{ PsfpG6]G6\; ;+:yf

57

The Nepal Chartered Accountant

March 2014

NEWS

In the case of abnormal variations of marks awarded


by a particular country being more than 30% of the
average excluding that country's marks, the particular
country with the abnormal variation to revisit their
own marking, during moderation.
The areas on which marks are given to be mentioned
with page reference, to ease the process during
moderation.
It was recommended to review the checklist to minimize
impracticable certain criteria for different sectors.
CA. Sunir Kumar Dhungel, Committee Member and CA.
Paramananda Adhikari, Technical Director were participated
in the iTAG Committee as the representatives from the
Institute of Chartered Accountants of Nepal.

SAFA Board, Committee Meeting and CFO


Conference, Karachi, Pakistan
The five member delegation headed by ICAN President,
CA. Mahesh Kumar Guragain attended SAFA Board,
committee meetings and CFO Conference held on 9-11
March, 2014 in Karachi, Pakistan organized by The Institute
of Chartered Accountants of Pakistan (ICAP). The other
delegates were Vice President CA. Narendra Bhattarai and
Council Members CA. Achyut Raj Joshi, RA. Dol Prasad
Dahal and Mr. Jaya Dev Shrestha. Various committee
meetings were held to discuss the broad objectives of the
federation and strategies for ensuring its eminence in the
world of accountancy.
SAFA Committee Meeting
SAFA Committee on Government and Public Sector
Enterprises Accounting , SAFA Task Force to Implement
BASEL II Report in SAARC Countries, SAFA International
Relations Committee, SAFA Task Force to Review the
Existing Committee System were held on March 9 and
10, 2014 in Karachi. Two of them were held on 9 March
and rest two were held on 10 March, 2014. The major
decisions and discussion of the meetings were presentation
of a Study Paper on the Status of Accrual-Basis Accounting
in Governmental and Public Sector Entities in SAARC
Countries, Member countries were asked to update the
current status in their respective country. A status report
of BASEL II was presented, decided to strengthen formal

relationship with SSARC secretariat, meetings to be held


frequently electronically and not only by physical mode,
nomination of the Committee Chairman. The Committee
decided to send all decision made by the Committee to the
Board.
SAFA Board Meeting
SAFA Board Meeting was held on 10 March 2014 in
Karachi, Pakistan. The Board reviewed and acknowledged
the report of the verious committies and task forces.
CFO Conference
The CFO Conference was held on 11 March, 2014 in
Karachi, Pakistan. The PAIB Committee of Institute of
Chartered Accountants of Pakistan has been organizing
the CFO Conference since 2010. The theme of the
conference was 'From Conformance to Leadership Evolving Role of CFOs'. The conference was attended by
more than 600 professionals from the area of finance and
business.
Two panel discussions were conducted during the
conference and concentrated on the 5 principle documents
formulated by IFAC that guides the roles and expectations
of CFOs in the globally connected world and remuneration
fixation of auditors.

CAPA PSFM Committee Meeting


President CA. Mahesh Kumar Guragain led three member
delegations and attended CAPA PSFM Committee meeting
held in Philippines during 23-25 March, 2014 which was
jointly organized by Phillipines Institute of Certified Public
Accountants (PICPA) and Asian Development Bank (ADB).
The delegation also attended ADB-CAPA-WB forum and
Philippines Public Sector Round Table program.
The other delegates were Council Members CA. Jitendra
Kumar Mishra and Mr. Krishna Prasad Devkota.

The Nepal Chartered Accountant

March 2014

58

NEWS

Meeting with Malaysian Institute of


Accountants (MIA)

ICAN President CA. Mahesh Kumar Guragain Delivering Speech at


Blood Donation Programm

ICAN Delegates with Officials of MIA

A three member delegates from the Institute of Chartered


Accountants of Nepal (ICAN) had a comprehensive meeting
with the officials of the Malaysian Institute of Accountants
(MIA) on 27 March 2014 in Kulala Lumpur, Malaysia.
The meeting focused on areas to strengthening and
promoting the accountancy profession through mutual
cooperation between the two organizations.
The discussion concentrated on the areas that ICAN seeks
to collaborate with MIA including technical and procedural
issues arising from implementation of Nepal Financial
Reporting Standards /IFRS as well as sharing of experiences
on convergence of IFRS in Malaysia.
Further, the discussion were on the implementation status
of International Public Sector Accounting Standards
(IPSASs) in Malaysia and CPE trainings conducted by
MIA especially in the area of information and
communications technology (ICT) such as budget and
variance analysis, modeling for accountants and building
financial models for decision making.
The delegates from ICAN were President, CA. Mahesh
Kumar Guragain, Council Member, CA. Jitendra Kumar
Mishra and Technical Director CA. Paramananda Adhikari.
Similarly officials from MIA were President Mr. Johan
Idris, Chief Executive Officer, Ms. Ho Foong Moi, Chief
Operating Officer Ms. Datin SK Yap, Registrar, Mr.
Sudirman Masduki, Director of Professional Standards
and Practices Mr. Eddie Wong and Head of Professional
Development Mr. G. Shanmugam.
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The Nepal Chartered Accountant

Blood Donation

March 2014

On the joint initiation of Nepal Rastriya Karmachari


Sangathan (National Employee Organization of Nepal)
(NEON) and Nepal Chartered Accountants Student
Organization (NCASA) along with Nepal Red Cross Blood
Transformation Service Center organized a blood donation
program on 3 Magh 2070 (17 January, 2014) at ICAN
Premises on the occasion of 17th inception day of the
Institute. Both organizations are associated within the
Institute. Altogether 87 pints of blood bags were collected
during the program. Staff members and Students were
donated the blood. The main motive of the program is to
collect the blood to save the human lives. Blood donation
program is being organized since last few years jointly by
both of the organizations as a part of social responsibility
Program was formally started with the Delivering speech
of ICAN President, CA. Mahesh Kumar Guragain followed
by NEON President and NCASA President.

Proposed Building

Current Status of Building

The Nepal Chartered Accountant

December 2013

58

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