Ican Journal September 2010

Vol. 13 No.
1
September 2010
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Contents
ACCOUNTANT
(Quarterly Journal of The Institute of Chartered Accountants of Nepal)
Editorial
President's Message
Banking
Editorial Board
CA. Sunir Kumar Dhungel
CA. Sudarshan Raj Pandey
CA. Bishnu Prasad Bhandari
CA. Prakash Basyal
CA. Santosh Kumar Jha
CA. Prakriti Tuladhar
CA. Bikram Khadka
CA. Santosh Ghimire
RA. Kedar Nath Paudel
Binod Neupane
Chairman
Member
Editor
Member
Member
Member
Member
Member
Member
Secretary
Satyendra Sharma Satyam
Editorial Support
Supervisory Challenges in Liquidity Risk Management

- CA. Surendra Man Pradhan
Entry of Foreign Banks in Nepal: Opportunities and
Challenges
- Gyan Mani Adhikari
11
Default Mode Paradigm: An Approach For Credit Loss

Measurement For Economic Capital Allocation
- CA. Narayan S. Shilpakar
17
The Institute of Chartered Accountants of Nepal

Babar Mahal, P O Box 5289, Kathmandu, Nepal
Tel. No. 4269130, 4258569, Fax: 977-1-4258568
E-mail: ican@ntc.net.np
Website: www.ican.org.np
Insurance
Branch Offices:
Some Challenges in Implementing Nepal Public Sector

Accounting Standards
- Dr. Pawan Adhikari & Ramesh Kumar Sharma
26
Financial Statements of
a Life Insurance Company: Neither True nor Fair
- CA. Jagdish Agrawal
Public Sector
Biratnagar: Tel: 021- 422077

Fax: 021- 422077, E-mail: icanbrt@wlink.com.np
Butwal: Tel: 071-622574, E-mail: icanbtl@ntc.net.np
Birgunj: Birgunj, Tel: 051-522660, E-mail: icanbrj@ntc.net.np
Ethics
Ethical Values for Professional Accountants
- CA. Paramananda Adhikari
Designed & Printed By

Print and Art Service, Putalisadak,Ktm.
Tel: 4244419, 4239154
29
Reporting
Subscription Rates
Annual Subscription
20
XBRL and its Prospect of Adoption in Nepal

- CA. Bigyan Shrestha
Rs. 400
(including courier charges)
33
Rs. 300
(if received by self)
Economy
Economy in Distress
- Tula Raj Basyal
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.
38
Nepals WTO commitments in financial services and their

implications
- Paras Kharel
42
Nepal Standard on Quality Control (NSQC) 1
51
News
69
Students' Corner
72
Continuous Learning: A Choiceless Alternative

- Bhuwan Raj Chataut
Staff News
72
SMPs
Member Corner
73
SAFA Events
74
The Evolution of SMPs

-Robert L Bunting
International News
76
Management
46
49
Editorial
O
n behalf of editorial board, we would

like to congratulate our newly elected president
& vice president and further wish them for their
successful tenure for upcoming period.
We can witness a tremendous growth and
recognition of professional accountants
across the globe. The development of
various accounting forum like SAFA,
CAPA, IFAC etc. have been playing vital
role to strengthen the professional and
social image of the profession. Though
our Institute is relatively young member
of these forums, it has been
emerging with professionalism and
enthusiasm for the achievement
of the mission of the profession.
To achieve the broad objectives of the SAFA, the

upcoming summit will explore issues related to
corporate social responsibility, environmental and
profitability dimensions, regional cooperation on
utilization of resources, which are integral part of
the sustainability framework.
ICAN
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South Asian Federation of Accountants

(SAFA) has recently announced the first
summit of Professional Accountants in the SAARC
region to be held at Kathmandu, which is being hosted
by our Institute. The event can be taken as a milestone
for our Institute to strengthen the bond of the
profession with international forum like SAFA as
well as to enhance our social image across the nation,
SAARC region and the globe.
Eminent personalities from the region

will be presenting the technical papers
in sustainable development for the
South Asian Countries. We, hereby,
request all our members to actively
participate in the summit and take
benefit so as to understand the profession
in the regional context and
contribute to promote
harmonization of accountancy
profession in SAARC region.
Lets join our hands together and

contribute to make the summit a successful and
memorable one!
Editorial Board
PRESIDENT'S
MESSAGE
Dear Colleagues,
ith your trust and faith, I have been

elected as the fourteenth President of The
Institute of Chartered Accountants of Nepal. I would
like to take this opportunity to thank all the member
and council members for their support and trust for
electing me as the President of the Institute after
successfully completing the tenure of the Vice
President for the last year. Definitely, being President
of the only authorized body in Nepal to regulate and
systematize the worlds one of the leading profession
in Nepal Accounting and Auditing, is the matter of
pride for me and this brings together a huge
responsibility towards the community, nation and
especially towards the members and I will do my
best to fulfill them. I am also sure that during my
tenure as President of ICAN, the same level of support,
trust and cooperation from all the members,
stakeholders and employee will continue.
During my tenure the first priority will be towards
completing the Institute Builiding within the Council
Tenure. Organization is people bringing together

their skills to achieve the common as well as personal
goals. So, definitely to take Institute to the greater
heights, the only key is to develop people working
for it so that they are not only trained, skilled and
motivated but also they can integrate their knowledge
to create synergy of positive energy. So, this year
human assets will be prioritized by providing required
training and interaction programs for learning
experience.
Continued Professional Education (CPE) is the only
unique factor of the Chartered Accountancy. So, this
year ICAN will focus on making CPE more effective
by organizing seminars and trainings on the relevant
issues. Focus will be kept on more systematic
outsourcing of the CPE trainings. Provisions for
providing credit hours for the training organized by
the other entities with permission of ICAN, will be
developed. For the members out of the valley,
trainings and seminars will be organized at least in
three places outside the valley. ICAN will also lauch
the IFRS certification courses under technical
assistance of ICAI. Peer Review Board will be

developed as the Quality Assurance Board for effective
quality control within the profession.
Chartered Accountancy education is the source of
our members. So, the Education Committee will be
delegated with the strategic authority to assist the
Council for rapid and effective decision making.
ICAN will put its effort for obtaining the technical
assistance of other professional bodies and review
the syllabus at par with the International Education
Standards as issued by the IAESB of IFAC. The set
of study materials for all levels of Chartered
Accountancy Education will be completed this year
as continuity to the last years initiation. Crash courses
will be organized at least one month before the
respective exam. Also, ICAN will prepare modality
for GMCS training under technical assistance of ICAI.
IFRS is required to be implemented from 2012 in
Nepal. So, ICAN in collaboration with Nepal
Accounting Standard Board, will make roadmap for
effective implementation and various training and
seminar to this regard will be organized at national
at well as regional levels. The awareness program to
enlighten the importance of IFRS implementation will
be organized in partnership with various Chambers

of Commerce, associations and other regulatory
organizations. ICAN will participate and represent
in all the SAFA, CAPA and IFAC related international
activities for the updates and recognition at the
international level.
I am confident that with the support of my all council
members and committee teams and employees of
ICAN, the objectives set for my tenure will be
achieved. I am also confident that the enlightening
experience of the past presidents will also be equally
helpful in my tenure as President of ICAN. I also look
forward for the continuous support and help from
the accounting as well as auditing standard boards
and all other statutory and regulatory bodies.
With Best Regards,

President
Banking
Supervisory Challenges
in Liquidity Risk Management
Introduction
Liquidity is the capability to fund investments in assets
and congregate obligations as they come due. Within this
definition is an assumption that obligations will be able to
be met at reasonable cost. Liquidity risk management
seeks to ensure a banks ability to continue to do this. This
involves meeting uncertain cash flow obligations, which
depend on external events and on other agents behavior.
The fundamental role of banks and financial institutions
in facilitating the maturity transformation of short-term
deposits into long-term loans makes banks inherently
vulnerable to liquidity risk, the risk that demands for
repayment surpass the capacity to raise new liabilities or
liquefy assets. Effective risk management estimates future
cash flow requirements under both normal and stressed
conditions. This presents a challenge even under relatively
compassionate market conditions, as it requires the ability
to draw information from various operations of the bank
and assess the impact of external events on the availability
of funding liquidity. However, this challenge increases
during stressed conditions, as the assumptions underlying
liquidity risk may change notably through changes in
counterparty behavior and market conditions that affect
the liquidity of financial instruments and the availability
of funding. These factors give rise to a different and
significant set of challenges for firms in assessing their
liquidity risk and for supervisors in the evaluation of risk
management and controls.
The market pandemonium that began in mid-2007 has
highlighted the crucial importance of market liquidity to
CA. Surendra Man Pradhan*
the financial sector. The contraction of liquidity in certain

structured product and interbank markets, as well as an
increased probability of conversion of off-balance sheet
commitments into banks on site balance sheet items, led
to rigorous funding liquidity strains for some banks and
central bank intervention in some cases. These events
emphasized the links between funding and market liquidity
risk, the interrelationship of funding liquidity risk and
credit impact risk, and the fact that liquidity is a key
determinant of the soundness of the banking sector.
This turmoil had a severe impact in Nepal as well.
Commercial banks and other financial institutions faced
a liquidity pressure for a time being while they could not
adjust their portfolio along with a slowdown in their deposit
growth and sources of fund on account of BOP deficit.
Banks also used their foreign bank balances to some extent
to relieve the liquidity pressure. The NRB emphasized on
open market operation as a monetary measure to avert the
systemic risk likely to emanate from such liquidity pressure.
In response to a situation of liquidity contraction, the NRB
extended the maturity period of repo and reverse repo
auction from the existing period of 28 days to 45 days.
In the Nepalese context, as per data available from Nepal
Rastra Bank, the liquid assets of the commercial banks
stood at Rs. 211.7 billion as at mid-July 2010 on account of
a substantial BOP deficit and excess credit flow in relation
Mr. Pradhan is a Fellow member of the ICAN.
The Nepal Chartered Accountant
September 2010
Banking
to that of deposit mobilization rate. Of the components of

liquid assets, liquid fund increased by 4.9 percent. Although
the balance held abroad remained almost unchanged in
the review year, an increase in commercial banks' balance
with the NRB accounted for such an expansion in the liquid
funds. In the review year, balance held abroad slightly
increased by Rs. 59.0 million amounting to Rs. 60.0 billion
while the balance with NRB increased by Rs. 5.3 billion.
However, another component of liquid assets, commercial
banks' investments in government securities, increased by
Rs. 11.1 billion in the review year. The credit-deposit ratio
increased to 82.5 percent in mid-July 2010 from 81.6 percent
in mid-July 2009. Similarly, the liquidity-deposit ratio
declined to 34.2 percent in mid-July 2010 from 35.4 percent
in mid-July 2009.
In 2009/10, NRB injected net liquidity amounting to Rs.
126.6 billion from the open market operations of
government bonds. In the review year, Rs. 7.4 billion and
Rs. 1.0 billion were mopped up through outright sale
auction and reverse repo auction respectively, while Rs.
131.7 billion and Rs. 3.4 billion were injected through repo
and outright purchase auction respectively. In the previous
year, net liquidity amounting to Rs.9.7 billion was mopped
up from such operations. Of the total liquidity mopped
up, Rs. 7.5 billion and Rs. 13.3 billion were mopped up
through outright sale auction and reverse repo auction
respectively, while Rs. 11.0 billion was injected through
repo auction. In 2009/10, NRB injected net liquidity
amounting to Rs. 118.7 billion through net purchase of
USD 1.6 billion from commercial banks. A net liquidity of
Rs. 142.5 billion was injected through the net purchase of
USD 1.8 billion in the previous year. The NRB purchased
Indian currency equal to 102.1 billion by selling of USD
2.2 billion in the Indian money market in 2009/10. In the
previous year, Indian currency equal to 73.4 billion was
purchased by selling of USD 1.5 billion. An accelerated
trade deficits with India accounted for such a higher volume
of Indian currency purchase in the review year.
Banks and Financial Institutions used standing liquidity
facility (SLF) amounting to Rs.95.9 billion in the review
year. The use of the SLF by commercial banks had
September 2010
amounted to Rs. 107.8 billion in the previous year. Likewise,

Inter-bank transactions of commercial banks stood at Rs.
268.8 billion in 2009/10 compared to Rs. 293.4 billion in
2008/09.
In 2009/10, open market operation was carried in a balanced
way so as to guide the banks' credit to private sector at
desired level. In addition, the bank rate was also included
as a basis for determining SLF rate with a view that banks
will give high priority on liquidity management rather
than on credit expansion in their portfolio management.
With this arrangement the minimum SLF rate could not
fall below 9.5 percent. Likewise, to minimize the risk of
excessive credit expansion on financial stability, a provision
was introduced under which the banks and financial
institutions required to gradually lower down their creditdeposit ratio and maintain to 80 percent by mid-January,
2013. 59. To avoid systemic risk in financial system and
strengthen financial stability, different provisions such as
SLR, net liquidity ratio and credit-deposit ratios were
introduced in 2009/10. Similarly, to minimize the credit
concentration risk, a provision has been introduced in
2009/10 under which banks and financial institutions are
required to bring down their real state exposure to a
specified level within the stipulated time span.3
Supervisory Challenges
The nature of liquidity risk in recent years has significantly
transformed with the financial innovations and global
market developments. Traditional retail deposits have
started to be replaced by a greater reliance on the capital
markets as the main source of funding requirements by
some of the banks and financial institutions, which are
potentially a more volatile source of funding. In addition,
the growth and product range of the securitization market
has broadened and has started to gain momentum in the
recent years. These factors have increased the potential for
rapid shifts in demands on the funding capacity of the
institutions, as well as the buildup of loan inventory in
banks warehouses prior to securitization. Also, the
complexity of financial instruments has also led to a
heightened demand for collateral and to additional
Banking
uncertainty on prospective liquidity pressures from margin
calls, as well as to a lack of transparency that may (and
recently did) contribute to asset markets contracting in
times of stress. Corresponding to these market
developments, the increasingly real-time nature of payment
and settlement systems and the increasing interdependence
among different systems has increased the importance of
intraday liquidity management. Increased cross-border
business, in combination with these structural changes,
means that events in one market can quickly impact another.
These factors pose serious challenges to the supervisory
authorities in relation to the liquidity risk management.
They are explained briefly hereunder.
I)
Use of capital markets for funding requirements.

Some of the banks have shifted their attention towards
the capital markets for meeting their funding
requirements over the past few years and have thus
become more reliant on wholesale funding sources
such as commercial paper, repurchase agreements,
and other commercial money market instruments. In
general, money market instruments tend to be more
volatile than traditional retail deposits and may pose
additional challenges to liquidity risk management.
As recent events demonstrate, during times of market
stress, investors show evidence of discriminating risk
aversion by demanding higher compensation for risk,
requiring banks to roll over liabilities at considerably
shorter maturities, or refusing to extend financing at
all. In these cases, the short-term nature of many
money market instruments poses a problem as
refinancing sources must be found quickly to replace
the loss of funding.
II) Use of complex financial instruments.

The use of complex financial instruments has grown
substantially over the past decade. The increasing
complexity of financial instruments creates new
challenges for banks management of liquidity risk.
The assessment of a financial instruments liquidity
profile has been complicated by the inclusion of credit
rating downgrade clauses and call features. The use
of complex and highly modified instruments also can
make assessing the price and secondary market
liquidity of such instruments highly challenging.
III) Impact of payment systems and intraday

requirements.
Many banks are also facing increasing challenges with
respect to intraday liquidity management in relation
to both their own activities and to the activities of their
customer firms or banks. These challenges arise in
part from recent improvements to the design of
modified clearing and payment and settlement
systems, such as the adoption of large-value payment
systems with intraday finality. These improvements
have reduced certain interbank credit risks, as well as
operational risks. At the same time, however, these
changes have increased collateral needs within some
systems and increased the time-criticality of certain
payments resulting into new forms of intraday liquidity
risks to many banks. The failure of an institution to
meet time critical payments could transmit a major
liquidity shock to other firms domestically and
internationally. It could also impair the functioning
of short-term money markets in multiple jurisdictions.
To ensure the smooth functioning of systems, central
banks generally offer intraday credit to the participants.
For this purpose, institutions must have some form
of liquidity available to meet their obligations on a
timely basis throughout the business day which might
create a severe challenge to them.
IV) Increased international business and dependence on
international markets.
In the recent years, many banks and financial
institutions have expanded their international
businesses. Financial markets are increasingly
integrated and intermediated as a result of increased
volume and of speed of cross border flows. Strong
cross-border flows also raise the prospect that liquidity
disruptions could pass quickly across different markets
and settlement systems. A few large banks and
financial institutions are increasingly seeking to
manage their intraday and overnight liquidity
demands (including collateral) in a centralized manner
across currencies and across borders. Such banks
consequently need to factor into their plans the
condition of overseas markets, as well as the time it
takes to complete the transfer of funds or collateral
across jurisdictions. Liquidity may not be fully
September 2010
Banking
transferable across borders, particularly in times of
market stress, as each national regulator requires
sufficient liquidity to be held for local operations to
protect national interests.
V) Securitization.
Securitization has grown significantly in the
international financial markets to pool and sell illiquid
assets and it started gaining momentum in our context
as well. Banks use the mechanism of securitization to
increase the source of fund and to free up extra balance
sheet capacity. They also use it as a means of creating
revenue through buying and distributing third party
assets which has not been originated by them.
Securitization creates risks that need to be managed
carefully. For example, the process of pooling assets,
selling to a special purpose vehicle, obtaining credit
ratings and issuing securities is time consuming, and
market difficulties during this timeframe could result
in a bank having to warehouse assets for longer than
planned. Even as financial market innovation allows
firms to obtain liquidity from previously illiquid assets,
it also makes them more reliant on the functioning
and stability of financial markets. Securitization (i.e.,
asset backed commercial paper) may generate
contingent liquidity risk, i.e., the likelihood that a firm
will be called upon to provide liquidity unexpectedly,
potentially at a time when it is already under stress.
For example, some firms provide liquidity backstop
arrangements in which they commit to provide
funding if certain agreed-upon conditions occur,
ensuring timely payment of principal and interest to
holders of the commercial paper and thus contingent
funding of the assets.
Lessons learnt from the recent financial

turmoil
The financial turmoil that started in August 2007 and then
grew into a full-blown global credit crisis has elicited
unprecedented policy initiatives. Its long term implications
for the functioning of the financial system and economic
policies will be profound. As all its predecessors, the crisis
September 2010
has once more hammered home the message that the

evaporation of liquidity plays a key role in the dynamics
of financial distress.
The turmoil began against a background of a longstanding
search for yield where credit and liquidity premia had
been bid down to exceptionally low levels, and which had
spurred rapid financial innovation and growth of complex
financial instruments. Rising arrears on US sub-prime
mortgages, nearly all of which were packaged in residential
mortgage-backed securities (a large share of which were
then purchased by managers of collateralized debt
obligations of asset-backed securities), caused investors to
lose faith in the ratings of these structured securities. This,
in turn, led to heightened concerns about the valuation of
such securities and over which institutions were most
exposed to losses. The loss of investor confidence in a wide
range of structured securities markets led to risks flowing
on to banks balance sheets. The initial shock in credit
markets was transmitted through a fall in asset market
liquidity, which led to an increase in funding risk. Money
markets tightened internationally as banks built up liquidity
to meet contingent claims or in anticipation of having to
meet such claims. Asset managers also stockpiled liquidity
to guard against increased redemption risks. The
combination of liquidity and balance sheet pressures and
heightened credit concerns made banks reluctant to provide
others with term funding. The impact of the shock on banks
has differed across jurisdictions. Some medium-sized banks
that were very active in complex products or were
particularly reliant on wholesale funding were vulnerable
to liquidity pressures. To date, very large banks, while
often significantly affected by weakening credit markets
and exposure to complex instruments and to off-balance
sheet vehicles, have retained access to a more diverse range
of funding and have gained from some flight to quality.
However, this is a situation that could change. Banks (often
smaller ones) funded primarily by retail deposits have also
faced less liquidity pressure than those more dependent
on wholesale funds. Authorities have increased the intensity
of their supervision of liquidity in response to the rise in
stress. Considering the above mentioned supervisory
challenges, we need to pay due attention towards different
facets of the financial turmoil. It is necessary to grasp some
important lessons from this turmoil. Some of the emerging
Banking
lessons for liquidity risk management and supervision are
highlighted below.
a)
b)
c)
Recent events have highlighted the need to modify

and strengthen contingency funding plans by banks
and financial institutions. Stress tests and contingency
funding plans were often not sufficiently integrated.
Moreover, the source of the recent funding shock
involved instruments that some banks had assumed
they would be able to use more extensively in their
contingency plans. They had often assumed continuous
high liquidity of these markets, and indeed some had
treated mortgage securitization and assets backed
commercial papers (ABCP) as very resilient support
facilities and core backstops in the event of funding
difficulties. It had not been anticipated that the liquidity
of such markets would evaporate; nor had there been
anticipation that this would be associated with
widespread impairment of the term interbank market.
The episode has raised the question of which assets
could be relied upon for consistent liquidity. Some
supervisors also noted that banks were sometimes
unprepared to execute their contingency plans. The
need for a diversity of elements within a contingency
plan should also be paid due attention so as to make
it workable in times of necessity.
Capital allows banks to absorb unexpected losses and
provides financial flexibility to support unanticipated
asset growth or to sell assets at a discount if needed
to meet obligations. But while higher levels of capital
may provide some reassurance to market participants,
recent events demonstrate that even well capitalized
banks can face severe liquidity problems. That
demonstrates the need for strong liquidity risk
management by banks and the importance of welldesigned liquidity regimes.
The turmoil highlighted the importance of close
coordination between treasury functions and business
lines to ensure a full appreciation of potential
contingent liquidity risks. At some banks, treasury
functions had been unaware of the contingent liquidity
risk of new products or how evolving business
practices could change the contingent liquidity risk
of existing business lines. Moreover, the extent to

which firms internal transfer pricing systems assessed
business lines for building contingent liquidity
exposure varied from extensively to little or none.
Banks that, before the turmoil began, were less rigorous
in pricing contingent liquidity internally or externally
had greater challenges in meeting their funding
liquidity needs.
d)
Due attention should also be given to the risks of

extending liquidity support to conduits and off-balance
sheet vehicles. We should take into account of
contingencies that may materialize when banks felt
compelled to offer capital and liquidity support to
affiliated investment vehicles on reputational grounds.
This highlighted the need for banks to take sufficient
consideration of reputational risk and its implications
for liquidity buffers.
e)
The nature, magnitude and duration of the shock

across much of the global financial system were not
fully anticipated by the financial sector. Recent events
indicated that stress tests should also capture the
implications of wider disruptions (e.g. market-wide
events and events affecting multiple markets or
currencies simultaneously) and the combination of
distinctive and market-wide shocks which incorporate
the behavioral responses of other affected banks.
The challenge of defining an appropriate level of stress
remains a formidable one for both banks and
supervisors.
f)
It is very essential that the supervisory authority

should follow such an approach that allows rapid
collection and analysis of additional information once
stresses had been identified. The shortcomings in the
regular reporting frameworks for monitoring liquidity
risk need to be addressed instantly.(e.g. often missing
off- balance sheet items and funding pressure points),
the comparability and timeliness should also be
emphasized. Market disclosure did not always meet
the needs of market participants, and in some cases,
financial markets sought additional information on
the liquidity positions of banks. These factors need to
be addressed instantly.
September 2010
Banking
g)
In some cases, when use of central bank marginal

lending facilities became visible to the market, it was
interpreted by market participants as a signal of
funding difficulties. The perceived stigma of
borrowing from the central bank led to other banks
withdrawing lines and cutting exposures, thus risking
an escalation rather than an easing of funding pressure.
Conclusion
Considering the supervisory challenges, supervisory
authorities have been implementing different liquidity
regimes along national lines to support the preservation
of the safety and soundness of each countrys financial
system. Supervisors have national responsibilities to ensure
that banks and financial institutions hold appropriate levels
of liquidity assurance in the form of liquid assets or access
to contingent funding arrangements. Supervisory regimes
recognize that the interests of individual banks and financial
institutions are closely aligned with the interests of their
shareholders and thus may fail to take full account of the
impact of their failure on the financial system more broadly.
This could result in under-insuring against liquidity risk
from a public policy perspective in the absence of
supervision. There is a diversity of approach to liquidity
supervision within some countries. One important
differentiating factor is the extent to which supervisors
prescribe detailed limits on liquidity risk and insurance
that banks should hold. In recent years several regimes
have placed greater emphasis on banks internal risk
management practices to better capture the risks that arise
from financial market innovations. Moreover, countries
are currently assessing their liquidity regimes to determine
whether there are areas that could be strengthened. Broadly
speaking, high-level approaches to supervising liquidity
risk are common across regimes: firms are expected to
have specific policies to address liquidity risk; the use of
stress tests and scenario analyses are frequently undertaken;
10
September 2010
internal limits or targets are set out; all regimes recognize

the importance of contingency funding plans; and all
regimes require firms to report information regularly to
supervisory authority and transparently disclosed for the
information of general public. However, it is very necessary
that appropriate action be taken so as to strengthen the
liquidity risk management mechanisms to be employed
by banks and financial institutions considering the level
of risks they are in fact exposed. The potential areas where
due focus need to be exercised in the context of supervisory
challenges cropped up as a result of the financial turmoil
can be highlighted as follows:
a)
The stringent mechanism for identification and

measurement of the full range of liquidity risks,
including contingent liquidity risks associated with
off-balance sheet transactions need to be exercised.
b)
The regular system of stress testing and scenario

analyses including greater emphasis on market-wide
stresses and the linkage of stress tests to contingency
funding plans should be exercised.
c)
Proper system of management of intra-day liquidity

risks arising from payment and settlement obligations
both domestically and across borders should be
exercised.
d) Appropriate mechanism for the management of the

Cross-border flows and foreign currency liquidity risk
should also be exercised.
e)
The role of public disclosure and the market discipline

in promoting improved liquidity risk management
practices should be encouraged.
f)
The mechanism of cross boarder supervision, including

communication and cooperation between supervisory
authorities in strengthening liquidity risk management
should be brought into regular practice. n
Banking
Entry of Foreign Banks in Nepal:

Opportunities and challenges
Gyan Mani Adhikari*
1. Introduction
It is argued that economic globalization boosts the world
economy and that global integration of small and
landlocked countries like Nepal through WTO membership
can be instrumental for rapid economic growth, poverty
reduction and promotion of human development. Financial
services are crucial for savings, efficient resource allocation
and growth. A good financial system has been shown to
be an essential ingredient for sustainable economic growth
(Claessens, 2001: 5). Financial globalization can help
countries to build efficient financial system by introducing
international practices and standards. Financial
liberalization generally possesses multiple objectives:
boosting deposit mobilization, enhancing the allocative
efficiency of financial intermediation by abolishing the
distortion created by administrative controls, stimulating
greater competition in financial markets and improving
monetary control (Pant, 2009: 25). The entry of foreign
banks results financial FDIs in the host country. The entry
of foreign banks usually increases competition in the
banking sector of the host country. Stronger competition
leads to an overall enhancement in the efficiency of financial
services in the host country and to reduction of interest
spreads (lending-deposits). This not only has a positive
welfare offers a direct bearing on the stabilization of the
economy as improves the transmission mechanism of
monetary policy (Jazbec & Silipo, 2007).
Adopting a liberal approach to foreign bank entry has also

been laid down by international trade agreements such as
WTO or has been a condition of memberships of the
regional organizations. A foreign bank is a financial
intermediary that basically performs wholesale banking
in host countries. It connects customers with capital deficits
to customers with capital surpluses. Foreign bank is defined
as a bank in which foreign banks set up operations in a
host country by opening up a branch or a subsidiary
(Woelfel, 1994: 1). The process of entry of foreign banks is
based upon the business strategy, banking structures and
laws of host country.
2. Modalities of Foreign Bank Entry

Each host country determines the types of foreign banks
operations it will permit. It depends upon the business
strategy and host countrys laws and banking structures
and also from bank to bank and country to country. The
varieties of institutional structures adopted by the foreign
banks are through representative office, agency office, joint
venture, branch banking and subsidiaries.
Representative office is a facility operated in a different
region or nation from a banks home office that provides
link back to the home office. This office neither takes deposit
nor makes loans. It only acts as an agent of the foreign
bank. Generally it is established to test the possibility of
further involvement in host country.
* Lecturer, Department of Economics, TU
September 2010
11
Banking
Agency is a more expansive form of entry. Agency office
provides limited services to customers in distant markets.
It can make commercial and industrial loans and transfer
funds but cannot make consumer loans or accept deposit.
Agencys funding come from its parent bank.
Foreign bank entry may also occur through joint venture
with domestic banks. A joint venture is a shared ownership
by two or more organization in which the investors have
an equity investment in a separate enterprise. It requires
specific equity investments by all parties. In Nepal, joint
venture is very popular mode of foreign banks entry.
Branch banking is part of the parent corporation and simply
an extension of domestic operations to host country. A
branch is established by registering the parent company
in the host country and obtaining necessary permits to
conduct business. Branch may be of two types full service
branch and shell branch. Full service branch provides
complete line of financial services as done by home office.
On the other hand, in shell branch deposits are recorded
but the deposits are loaned and invested through the full
service branch. Branch assets, liabilities, profits or losses
are part of the parents financial statement. Taxes are paid
in the parents country on total company profits.
A foreign subsidiary is a separate company organized
under a foreign nations legal with accountability distinct
from the parent company. It has independent assets and
liabilities and it is taxed by host nation. Subsidiary can be
wholly or partly owned by a foreign bank.
3. Rationale of Entry of Foreign Banks

There are various reasons for the invitation of foreign banks
in the host country. They are as follows:
1.
The entry of foreign banks results in increasing bank

competition and by enabling the application of more
modern banking skills and technology. Hence, they
help to improve the quality and availability of financial
services in the domestic financial market.
2.
Foreign banks promote competition in the banking

sector and then improve the efficiency of domestic
banks to reduce cost and increase efficiency of existing
12
September 2010
financial services through competition. Competitive

pressure from foreign banks reduces margins for
domestic banks, thereby stimulating investment in
order to gain efficiency.
3.
Foreign banks help to reduce the financial repression

policies of the government on the domestic financial
sector.
4.
Foreign banks can operate two different roles:

microeconomic role of rehabilitation of troubled
individual banks and in a macroeconomic role as
instruments of reforms of the banking system.
5.
The entry of more sophisticated banks increases

financial awareness of host residents and contributes
opening international financial markets to domestic
investors.
4. Entry of Foreign Banks in Nepal

In Nepal the formal banking system commenced with the
establishment of Nepal Bank Ltd as a semi-government
ownership in 1937. The second commercial bank with the
government ownership was established in 1966, 29 years
after the establishment of the first commercial bank. In the
1980s GON adopted open liberalized and market oriented
policy and the financial reforms with a view to enhance
efficiency in the financial services. The liberalization policy
and the financial reform programme laid the rapid
development in the domestic financial system. Major
structural changes happened not only in the institutional
development of the financial sector but also at the policies,
regulations and supervision practices of the financial sector.
GON opened the door for domestic private sector to invest
in the financial sector and at the same period foreigners
were also allowed to invest in the financial sector (Pant,
2006: 23). In Nepal, the process of financial liberalization
was actually initiated in the mid-1980s when the
government gave a green signal for the entry of commercial
banks in joint venture with foreign banks with the need to
modernize banking services through the transfer of
technology and managerial skills, Nabil Bank Limited was
established in 1984 as the first joint-venture bank in Nepal,
which was subsequently followed by the establishments
of Nepal Investment Bank Ltd and Standard Chartered
Bank Nepal Limited (Pant, 2009: 25-26). Gradually other
Banking
joint-venture banks such as Himalayan Bank Ltd, Nepal,
SBI Bank Ltd, Nepal Bangladesh Bank Ltd, Everest Bank
Ltd, Bank of Kathmandu Ltd, Nepal Bank of Ceylon Ltd
(now Nepal Credit and Commerce Bank Ltd) were
established in the decade of 1990s. During these periods,
nine banks were established under joint venture in Nepal
but three of them have withdrawn their investment and
sold to Nepalese promoters. These joint venture banks
offer all the services that are offered by the domestic
bankers. They collect all types of deposits, offer commercial,
consumer, industrial and agriculture loans, credit card
services, remittance business and other trade finance
services. International banks branches operate in various
forms in the global market. At present 28 commercial banks
are operating in Nepal. Among them 6 are with foreign
joint venture, 19 are established by the domestic private
sectors and 2 (i.e. RBB and ADB) are fully government
owned and Nepal Bank, Ltd is semi-government owned
(Pant, 2006: 24).
5. Nepals membership in WTO and the

Entry of Foreign Bank Branches
Nepal has got membership of World Trade Organization
(WTO) on 23 April 2004. Being the member of WTO, Nepal
has committed to liberalize 11 of 12 possible services sectors
including financial sector. During the negotiation process
Nepal has allowed the entry of foreign banks as Wholesale
banking as of 1 January 2010. As per the terms and
conditions of Nepal Rastra Bank, all the commitments are
subject to entry requirements, domestic laws, rules and
regulations.
The total foreign shareholding in any institutions providing
financial services is limited to 67 percent of the issued share
capital. The shares held by foreign nationals and foreign
financial institutions in their locally incorporated companies
are not transferable without the prior written approval of
the Nepal Rastra Bank. The members of the Board of
Directors of a financial service supplier will be in proportion
to equity representation of that financial service supplier.
The commitments made in the financial services sector has
made Nepal Rastra Bank to be aware of the implications
of the WTO membership on the financial sector which will
help us prepare ourselves to face the challenges and

maximize the benefits arising from the membership (Pant,
2006: 24).
6. Legal Processes and Provisions

Regarding the Establishment of Foreign
Banks
Nepal Rastra Bank Act, 2002
The Nepal Rastra Bank Act 2002 has stated the objectives
of the bank as to formulate necessary monetary and foreign
exchange policies in order to maintain the stability of price
and balance of payments for sustainable development of
economy and manage it, promote stability and liquidity
required in banking and financial sector, develop a secure,
healthy and efficient system of payment, regulate, inspect,
supervise and monitor the banking and financial system.
This act has given full authority to Nepal Rastra Bank
regarding regulation, inspection and supervision of the
banks and financial institutions.
Banks and Financial Institutions Act, 2006

This Act governs all the functional aspects of banks and
financial institutions. The Section 34 of this Act has made
special arrangements regarding the establishment of foreign
banks and financial institutions.
The criteria and terms and conditions for establishing a
branch in Nepal are as follows:
According to a new policy of NRB, foreign banks

willing to open a branch in Nepal are required to:
o
Bring at least US$30 million to get a licence to
conduct banking services.
o
Invest at least another US$ 5 million for each
branch they want to set up.
o
The capital requirement was fixed as per the
WTOs principle of national treatment for foreign
companies.
o
Wholesale banking as deposits above Rs 100
million and lending above Rs 300 million.
September 2010
13
Banking
Foreign banks are allowed to open branches only after

obtaining licence from the central bank (NRB) or from
the monetary board with approval of the Ministry of
Finance.
Foreign bank willing to operate in Nepal should be

rated at least B by international Credit Rating Agency
such as Moodys or standard and poor etc.
Foreign banks have to comply with the instructions

issued by the host central bank (NRB) or monetary
authority. They are subject to domestic laws, rules
and regulations and terms and conditions of NRB.
Foreign bank branches can indulge in wholesale

banking only. They cannot engage in retail banking
such as accepting deposits or lending to individual
customers. Hence, they will not compete with domestic
bankers. They can accept institutional large deposits
and lend to local banks and financial institutions.
The same prudential norms that apply to domestic
banks are applied to foreign bank branches regarding
loan classification, provisioning, and income
recognition, etc.
7. Opportunities and Threats from

Foreign Bank Penetration
Foreign bank branches will create opportunities in the
country and pose some threats as well. Some of the
opportunities and threats that can be summarized are as
follows:
Opportunities
Foreign banks will bring a healthy competition

between banks and assist considerably in the
development and growth of banking industry and
other economic sectors of the country.
Foreign banks play a crucial role in the rapid economic

growth of the country. Such banks shore up the
industrialization process and encourage trade and
services.
When number of foreign banks is established in our

domestic market, it creates number of employment
opportunities for skilled and other manpower.
Foreign banks will act as a catalyst in the economic

activities and infrastructure development of the
country by bringing a deluge of capital flow to the
country. With the inflow of sufficient resources, foreign
banks can assist the local banks to undertake huge
projects in the domestic market.
Foreign banks will integrate Nepal with rich and

powerful countries of the world which will boost
export business and other trades.
Foreign banks will provide services to Nepali

individuals, agencies and industry. The indigenous
resources which are just being wasted due to lack of
fund will be utilized to generate income and create
employment. It will uplift the living standard of the
general public.
Foreign bank introduces new technologies techniques,

high skills, and international experiences in the
domestic market. Domestic banks can have ample
opportunities to learn and adopt such international
practices.
Some legal provision regarding documentation and

information to be submitted prior to the approval of licence:
Copy of memorandum of association and article of

the associations.
Copy of the operating licence of the bank issued by

the banking authority from its country of origin.
No objection letter from the parent bank.
Consolidation financial statements for the last three

years audited by internationally reputed auditor.
Certified documents concerning: Bank rating, structure

of business group, comparison of parent company
with subsidiaries and affiliated companies, details of
organizational structure with job description of staff
managing the branch and qualifications and
experiences of its key personnel.
Foreign banks have to comply with the instructions

issued by the central bank or monetary authority of
the host country (Nepal).
14
September 2010
Banking
For large projects like hydroelectricity generation,

technology and other industries cater such demands;
foreign banks will pay a crucial role.
Foreign banks will assist in the development of capital

market by flooding adequate funds to the domestic
bankers.
The business community can avail loans at a lower

interest rate prevailing in the international market due
to the inflow of international funds through the foreign
banks to the domestic bankers.
Foreign banks will assist in exploitation of natural

resources which are being wasted due to lack of fund.
The Indian attitude of Beggar thy neighbour and
exploit their natural resources still persists. This will
end up with international influence and affiliation of
such banks.
Threats
Foreign banks branches will pose some threats and

challenges to the regulations (NRB) because such
institutions are going to operate between two laws:
(i) governed by their country of origin and (ii) under
regulation of the central bank of Nepal.
Foreign bank branches are likely to pose some threat

to NRB on bank rates, open market operations, money
supply, inter bank transactions etc. Due to this, the
central bank cannot control the economy through its
monetary policy.
In the long run, when these foreign bank branches

enter into retail banking business, the domestic bankers
may have to compete with them which are equipped
with heavy resources, high skills, international
experiences and good and strong infrastructures.
If the country relies completely on foreign funds and

in case such banks form collusion for some demands
and withdraw their fund together, it can ruin the
countrys economy.
Foreign banks collect large amount of money as profit

and it exists from our country. It results in reduction
of domestic capital.
In times of liquidity crisis, foreign banks may curtail

their lending in the host country, which exacerbate
the problem further.
8. Conclusion
The past experience of many developed and developing
countries reflects that there are both the pros and cons
arguments regarding the foreign banks entry. The main
question now is what benefits will foreign banks likely to
bring and what risk does it poses. Various studies conducted
in developed countries on the performance of foreign banks
have concluded that domestic banks of developed countries
are more efficient than the foreigners but in developing
countries foreign banks typically outperform domestic
ones. In the developing countries foreign banks do more
than merely following their domestic clients. Their entry
will exert competitive pressure to domestic banks. They
tend to supply credit only to top-ranked customers such
as large domestic corporate houses, multinational
companies and cherry picking host country customers
etc. while handling retail and wholesale finance in the
domestic market. When this cherry picking practice
becomes the norm among foreign banks, the ratio of
domestic banks loan to customers with relatively low
credit ratings, such as small to medium-sized companies,
increases. In this case, total loans to the SME sector may
decrease as foreign banks have reduced loans to SMEs,
however, domestic banks cannot make new loans to all of
those SMEs whose loan applications were rejected by
foreign banks. Therefore, the possibility that the financial
soundness of domestic banks would deteriorate that cannot
be excluded.
The real effect of foreign banks depends upon the level of
financial development of the host country. There is wide
gap between the qualities of financial services provided
by domestic banks as compared to foreign banks at lower
levels of financial development. On the other hand, at
higher levels of financial development banking markets
are more competitive and the gaps between domestic and
foreign banks are smaller. So there are fewer spill-over
effects. Domestic banks are mainly confronted to keep their
market shares. So the domestic banks need to make
September 2010
15
Banking
investment to implement modern banking techniques and
practices for realizing positive spill-over effects.
In long run, the presence of foreign banks promotes high
competition with high efficiency. If advanced global banks
enter the domestic banking industry, introducing new
advanced financial techniques and financial techniques
and financial products (hedge mechanisms, off-floor
derivative products, etc.); domestic banks make efforts to
improve their financial service quality by developing new
financial products, thereby contributing to strengthening
the financial intermediary function and developing financial
market. If the domestic economic conditions deteriorate
significantly, due to the occurrence of a foreign exchange/
financial crisis, depositors tend to withdraw their deposits
in small banks or those showing signs of insolvency and
deposit their funds in large foreign banks that are judged
to be healthier (flight-to-quality). In this case, foreign
banks can act as a safe haven to prevent a bank run,
thereby contribution to the stability of the domestic financial
system.
16
September 2010
On the other hand, with the increase in mergers and

acquisitions between banks in the process of entry by
foreign banks into the domestic banking industry, the
market concentration of the domestic banking industry
can increase, but this does not necessarily reduce
competition between banks. Usually, even if market
concentration in the banking industry is high, the barriers
to entry are low so that the more market entry by new
competitors such as banks or non-banks is made possible
(competitive market structure), the more competition
between existing banks can be strengthened.
It should be clearly noted that the presence of foreign
banks is the main source of foreign direct investment in
the developing countries. The management skill and
other banking practices should be further strengthened
in order to reap the benefits of globalization by Nepal due
to the implementation of the policy of economic
liberalization. n
Banking
Default Mode Paradigm:

An Approach For Credit Loss
Measurement For Economic
Capital Allocation
Most of the Nepalese banks at present are using regulatory
capital for risk controlling purposes. However, in order to
establish the risk-bearing capacity it is necessary to determine
the economic capital available to the bank.
The Nepal Rastra Bank has issued a Risk Management

Guideline to provide the minimum standards for the risk
management practice to be exercised by banks. The
guideline presents the broader principles and concepts for
the risk management in banking business. Even though
most of the commercial banks of Nepal do not have a
separate risk management guideline and/or the risk
management unit/department or committee, this does not
imply that they do not have any mechanism for minimizing
credit risk. For instance, the commercial banks of Nepal
have been fulfilling most of the basic standards set by the
guidelines with regard to Credit Policies, even though a
robust internal credit risk grading system might be new
to some of them. However, the credit risk measurement
approaches, stress testing, credit risk control (such as risk
adjusted pricing, credit derivatives, securitization etc) are
the ones yet to be adopted by Nepalese banks, and seems
to be a tough task ahead for various reasons some of which
may be lack of staffs having the relevant expertise, lack of
adequate resources and/or clear guidelines on these part
from Nepal Rastra Bank. This paper attempts to discuss
a simple approach for credit loss measurement, which I
think is the most appropriate one for the Nepalese banks
to start up with.
CA. Narayan S. Shilpakar*
Approaches for measuring credit loss

There are different approaches for measurement of credit
loss. Most banks employ either of two conceptual definitions
of credit loss: the default-mode paradigm, in which a credit
loss arises only if a borrower defaults within the planning
horizon, and the mark-to-market (or more accurately, mark
to model) paradigm, in which credit deterioration short of
default is also incorporated. In my view, secondary loan
markets in Nepal are not sufficiently developed to support
a full mark-to-market or trading approach to risk
measurement. Therefore, this paper intends to discuss the
Default Mode Paradigm only.
Within the DM paradigm, a credit loss arises only if a
borrower defaults within the planning horizon. It is
sometimes called a two-state model because only two
outcomes are relevant: non-default and default. If the
loan does not default there is no credit loss. If the loan
defaults, however, there generally is a credit loss, equal to
the present value of the difference between the customers
contractual obligations and the loans actual net cash flows
over the workout period (e.g., recoveries less workout
costs). The loss rate per rupee of initial value is generally
represented in terms of the loans loss-rate-given-default
(LGD), which is usually treated as a random variable whose
value (in the event the loan defaults) is uncertain as of the
beginning of the planning horizon.
Valuation Models
Under both the DM and MTM loss paradigms, the modelbuilder is required to specify precisely how the current
* Currently working at Nepal Credit and Commerce Bank Limited
September 2010
17
Banking
and future values of each credit instrument are determined
at the beginning and end of the planning horizon,
respectively. Under the DM paradigm, a loans current
value equals its book amount. The future value of a nondefaulting loan also is taken to be its book amount, while
the decline in value of a defaulting loan is given by the
loans book value times its LGD, as is generally the case
in MTM models.
Expected (EL) and unexpected loss (UL)

on an individual loan
The expected credit loss on each borrower can be
determined as a product of three factors. The first element
is the probability that the borrower defaults. The basis for
this might be the ratings of well-reputed international
credit rating agencies such as Standard & Poor's, Moodys
and KMV. Alternatively, internal ratings, which are the
banks' own assessments, can be used. The risk management
guideline issued by NRB requires the commercial banks
to formulate the internal credit risk rating guidelines to be
incorporated in the credit policy itself. The second factor
is the size of the loan at the time of default. However, it is
not certain that the bank will lose the total outstanding.
Therefore, a third factor is included, which is the loss given
default ratio. This will depend primarily on the seniority
and security of the granted loan. All other things being
equal, the lower the mortgage seniority and security, the
higher the loss ratio. The fact that a bank cannot be certain
of the size of the three factors means that the credit loss,
which is the bank's risk the unexpected loss is subject
to uncertainty. An individual loan can thus be seen as a
stochastic variable. The loan will with great certainty be
repaid on the agreed terms, but there is a risk that the
borrower either cannot or will not repay the loan. Therefore,
the bank must take into account a small probability that
the loan will not be repaid on the agreed terms.
The probability of repayment of the loan will typically
depend on the economic development, since experience
shows that it is more difficult for a borrower to repay a
loan when the business conditions are less favourable. The
bank thus cannot in advance only rely on an average
probability that the borrower will repay the loan, since this
probability will be subject to great fluctuation. It is thus
necessary for a bank besides the average values of the
18
September 2010
aforementioned factors (EL) also to consider the scale of

variation (UL).
Expected (EL) and unexpected loss (UL)

on the credit portfolio
Quantification of a portfolio's credit risk in principle
constitutes the combined risks on the individual loans in
the portfolio. However, this cannot be added up in the
ordinary way since, as previously stated, account must be
taken of the interdependence/ correlation of the individual
credit exposures. Via concentration and diversification
effects these have a great influence on the overall risk of
the portfolio. The expected loss on the total credit portfolio
can, however, be determined without taking into account
the trade-off between the loans, since it is found by simply
adding up the expected losses on individual borrowers/
credit exposures.
The unexpected loss, UL, or the risk entailed by the
credit portfolio, on the other hand, is the probability
that the credit loss will be greater than expected. UL will
depend on the volatility of the portfolio's credit loss,
which again depends partly on the uncertainty
concerning the losses on individual credits, and partly on
the interdependence of the individual credits. UL is thus
to a high degree determined by the extent to which the
bank's lending is subject to geographical and sectoral
distribution, etc., or in other words, the scale of the
portfolio's diversification.
Measuring expected loss: Mean/ Variance

Approach
As already stated in the preceding paragraph, a portfolios
expected credit loss () over the assumed time horizon
equals the summation of the expected losses for the
individual credit facilities:
Banking
where for the i facility, LGDi is the expected loss rate
given default, EDFi is the facilitys expected probability
of default (often termed the expected default frequency
or EDF), and LEEi is the banks expected credit exposure
(often termed the loan equivalent exposure or LEE). As
per the study conducted by a task force constituted by the
Basle committee, most banks use a combination of historical
data and intuition to determine LGD rates. The expected
losses should be accounted for income planning and
included as standard risk costs in the credit conditions.
Measuring unexpected loss

At some risk of inconsistent terminology, practitioners
often refer to the standard deviation of credit losses as the
portfolios unexpected loss. The portfolios standard
deviation of credit losses (s) can be decomposed into the
contribution from each of the individual credit facilities:
where si denotes the stand-alone standard deviation of

credit losses for the ith facility, and ri denotes the
correlation between credit losses on the ith facility and
those on the overall portfolio.
The parameter ri captures the ith facilitys correlation /
diversification effects with the other instruments in a banks
credit portfolio. Other things being equal, higher
correlations among credit instruments represented by
higher ri lead to a higher standard deviation of credit
losses for the portfolio as a whole.
Unexpected losses are taken into account only indirectly
via equity cost in the course of income planning and setting
of credit conditions. They have to be secured by the risk
coverage capital. Under the default mode paradigm, the
economic capital allocation process generally simplifies to
setting capital at some multiple of the estimated standard
deviation of the portfolios credit losses.
Conclusion
to be independent from one another and thus does not

incorporate regulatory capital requirements in the
calculation of economic capital. However, a few institutions
appear to incorporate the costs of regulatory capital into
their pricing methodology.
Most of the Nepalese banks at present are using regulatory
capital for risk controlling purposes. However, In order to
establish the risk-bearing capacity it is necessary to
determine the economic capital available to the bank. A
banks economic capital is determined by the sum of all
coverage capital components to be held that are required
to just maintain the banks solvency in case of a maximum
loss estimated under certain assumptions. The regulatory
capital as per the Simplified Standardized Approach
adopted by NRB, whereas, is usually less precise in
reflecting risks than economic capital, as the calculation
currently used is based on very general assumptions.
Even though the adoption of advanced methodology for
computation of unexpected losses such as value-at-risk
process might not be an ideal method to be adopted at
present by the Nepalese banks considering the cost likely
to be involved and the benefit expected to be derived for
more effective management of credit risk, the mechanism
to be developed for computation of expected and
unexpected losses under default mode paradigm is far
more challenging to the Nepalese banks due to numerous
reasons such as lack of adequate resources and staffs
having relevant expertise. Therefore, in my view, the
Nepal Rastra Bank, in addition to general risk management
framework issued by it at present, needs to provide other
comprehensive guidelines on the methodologies/
approaches that are available for credit risk management
as has been done by some of the regulatory bodies of
developed countries. Such guidelines should, amongst
others, define the best approaches for credit approval
process, credit administration, credit risk measurement,
credit risk monitoring and control, credit risk mitigation,
internal rating systems, stress testing, risk tolerance limits,
and strengthening organization structures for credit risk
management including internal audit functions. n
The study conducted by the task force constituted by the

Basle Committee on Banking Supervision found that the
majority of banks considers economic and regulatory capital
September 2010
19
Insurance
Financial Statements of
a Life Insurance Company:
Neither True nor Fair
CA. Jagdish Agrawal*
Background
I have taken this challenge to put the confusion regarding
the financial statements of a Life Insurance Company into
light. I think one of us as to make initiation to start the
discussion regarding the presentation of the financial
statements prepared by a life insurance company and the
audit opinion thereon.
One bank recently asked me to evaluate the intrinsic value
of ordinary shares of a life insurance company, as one
shareholder of the company has approached the bank for
loan against the collateral of the shares. I studied the
financial statements but was unable to calculate the intrinsic
value, because the available figures are not sufficient to
calculate true Earning Per Share (EPS) and the book value
per share, which are the basic inputs to calculate the intrinsic
value of an equity instrument.
I am unable to calculate EPS as I have noted that only
interest and dividend received from investment and
administrative expenses are included in income statement.
In addition to that, the company has not included the gain
or loss during the year from the insurance business
(premium income claim expense) in the income statement
as the company has not performed actuarial valuation
during that year. Thus, the income statement does not
present actual performance of the company.
The company has presented the life fund in line just below
the share capital, without clearly stating whether it is a
component of equity or a component of a noncurrent/current liability or combination of both. Life fund
is a bundle of the following components:
*
Mr. Agrawal is a Fellow member of the ICAN.
20
September 2010
a.
Non-current liability - as deposit component of the

premium received;
b.
Non-current liability - as bonus payable to

policyholders;
c.
Equity- as undisclosed profit or loss from income from

investment and expenses appropriated to various
revenue accounts without routed through income
statement;
d.
Equity- as undisclosed profit or loss from life insurance

business.
In this situation, I am unable to treat the amount of life

fund as equity for calculation of book value per share.
A life insurance company adopts indirect method to
unbundle the various components included in the life fund
by performing actuarial valuation. But, as the direction
from Beema Samiti, an insurance company is required to
do the actuarial valuation once in three years only and the
excess of amount is transferred to income statement. as
per actuarial valuation only.
Instead of such presentations each life insurance company
claims that the financial statements are prepared strictly
as per IFRSs and these statements present true and fair
position of financial position and performance of the
company.
The Beema Samiti has prescribed a detailed format for
preparation and presentation of financial statements of a
life insurance company. The format includes the main parts
of the financial statements like revenue accounts, balance
Insurance
sheet, profit and loss account, cash flow statement and
statement of changes in equity along with several annexure
forming part the financial statements. Even the wordings
in each financial statements and annexure are available in
the prescribed format. This includes the points to be
disclosed for accounting policies for different subjects
adopted by the company.
It could be easily understood that after unbundling the

deposit components from life insurance, the remaining
features of a life insurance business do not materially differ
from the features of a general insurance business.
Through this article, I have made an attempt to compare

and list down where and how the format differs materially
from the provisions of various IFRSs. IFRS 4 Insurance
Contracts directly relates to insurance contracts. But, IAS
1 Presentation of Financial Statements, IAS 18 Revenues,
IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors, IAS 19 Employees Benefits, IAS 37 Provisions,
Contingent Liabilities and Contingent Assets, IAS 38
Intangible Assets and IAS 39 Financial Instruments
Recognition and Measurement are also relevant to insurance
contracts.
10. Some insurance contracts contain both an insurance

component and a deposit component. In some cases,
an insurer is required or permitted to unbundle those
components.
Characteristics of a life insurance

business
Life insurance business is also called investment insurance,
because it has two different features - one as banking to
accept deposits and another one is to cover risk on life of
the insured. Thus, we can say that: Life insurance business=
Banking business for receiving deposits + insurance
business. There are certain differences between features of
insurance component of a life insurance contract and of
general insurance contract. These are as under:
Unbundling of deposit components

Paragraph 10 of IFRS 4 provides that:
(a) unbundling is required if both the following

conditions are met:
(i)
the insurer can measure the deposit

component (including any embedded
surrender options) separately (i.e. without
considering the insurance component).
(ii) the insurers accounting policies do not
otherwise require it to recognize all obligations
and rights arising from the deposit
component.
(b) unbundling is permitted, but not required, if the
insurer can measure the deposit component
separately as in (a)(i) but its accounting policies
require it to recognize all obligations and rights
arising from the deposit component, regardless of
the basis used to measure those rights and
obligations.
(c) unbundling is prohibited if an insurer cannot
measure the deposit component separately as in
(a)(i).
Separate treatment for both the components
Paragraph 12 of IFRS 4 states that:
To unbundle a contract, an insurer shall:
a. apply this IFRS to the insurance component.
b. apply IAS 39 to the deposit component.
Fact finding
As per my study on life insurance products issued by
various life insurance companies in Nepal, I am sure to
September 2010
21
Insurance
say that almost all the products are such that unbundling
of deposit component from insurance component could
be done with or without using complicated mathematical
equations.
For this we are required to estimate a reasonable rate of

interest on such deposits prevailing in the market under
similar circumstances. We have estimated it at 12% per
annum.
Thus, as per IFRS 4 paragraph 12, a life insurance company

should apply this IFRS to the insurance component and
IAS 39 to the deposit components. Simply to say, the
installment part of the annual premium should be
accounted as deposit received and the remaining balance
shall be treated as premium for insurance contract.
For calculation of the amount of each annual installment,

we have to use Table 4: Sum of an Annuity of Rs. 1 per
period for n periods:
Example
I am not a mathematician and have no knowledge about
complicated mathematical formulae. Thus, I have taken a
simple example on a life insurance product, which is
commonly being issued by all most all the issuers.
A life insurance company has issued a life insurance policy
on life of Mr. X for 10 years for Rs. 500,000. It is a withprofit policy. Mr. X has to pay Rs. 52,475 as annual premium.
As per past record of the life insurance company, it is
regularly paying a bonus of Rs. 60 per thousand to
policyholders.
The various steps of calculation to unbundle the

deposit component are given hereunder in a
sequence.
a. Calculation of the guaranteed amount:
We have to calculate the amount to be received by Mr. X
in case he survives for the insurance period of 10 years:
Particulars
Sum insured
Bonus @ Rs. 60 per thousand for 10 years
Guaranteed amount
Amount Rs.
500,000
300,000
800,000
b. Calculation of annual installments (deposit component

only) to be received from Mr. X so that the sum of the
installments and interest on amount outstanding shall be
Rs. 800,000 at the end of 10th year.
22
September 2010
In case we deposit Rs. 1 annually and charge 12% p.a.

interest on the outstanding balances, at the end of 10th
year the sum of the installments along with interest thereon
will be Rs. 17.5487.
Thus, the annual installment shall be:
Rs. 800,000/17.5487 = Rs. 45,587
c. Unbundling of deposit installment from premium for
insurance risk undertaking:
Out of the total amount of annual premium Rs. 52,475, Rs.
45,587 shall be accounted for as deposit received on which
interest payable, and the balance amount Rs. 6,888 is the
amount of premium for risk undertaking.
d. Accounting treatment:
a. Rs. 45,587 shall be credited as deposits from Mr. X.
Each annual installments received from him shall
again be credited to the same deposit account.
b. Interest @12% per annum shall be calculated at the
end of each financial year on the outstanding amount
and charged to profit or loss. The corresponding
credit entry shall either be made to interest payable
account or the same deposit account.
c. Rs. 6,888 shall be treated as premium for insurance
component of the contract and shall be treated as
revenue of the accounting year after due adjustment
for expired and unexpired risks.
e. Unbundling of claim amount:
When a life insurance company unbundles the premium
amount, it has to unbundle the claim amount also, so as
the claim amount could be divided into two parts as return
Insurance
of deposits with interest and payment of compensation for
risk coverage. Out of the total claim amount, his deposits
with interest up to the claim period shall be treated as
refund of the deposit amount and the rest amount shall be
treated as expense and shall charge to profit or loss.
Suppose in the above example Mr. X expired at the end of
5th year of policy taken. His nominated person shall receive
a claim amount as calculated below:
Particulars
Sum insured
Bonus for 5 years Rs. 60 per ,000
Total claim amount
Amount Rs.
500,000
150,000
650,000
At the end of 5th year his deposit account shows the

following amount:
Rs. 45,587 (installment amount)* 6.3528 (multiplication
factor) = Rs. 289,605
So, out of the total payment of the claim Rs. 289,605 shall
be accounted as refund of deposit amount and the balance
Rs. 360,395 shall be treated as claim for risk assumed and
should charged to profit or loss.
In case a policy is complicated and not easy to unbundle
the deposit component, complicated mathematical formulas
or equations could be used. But, in case it is not measurable
anyhow, the total amount of premium shall be taken as
revenue to be charged to profit and loss and simultaneously
a liability adequacy test should be conducted to show
relevant expenses in the income statement.
Liability adequacy test

Where unbundling is not practical, the IFRS provides to
do liability adequacy test on each balance sheet date. The
provision is as under:
An insurer shall assess at each reporting date whether its
recognized insurance liability are adequate, using current
estimates of future cash flows under its insurance contracts.
If that assessment shows that the carrying amount of its
insurance liabilities (less related deferred acquisition costs
and related intangible assets, such as those discussed in
paragraphs 31 and 32) is inadequate in the light of the

estimated future cash flows, the entire deficiency shall be
recognized in profit or loss.
Considering the above discussions on unbundling of
deposit components, I am of the view that the insurance
companies are preparing its financial statements not as per
IFRS 4 and IAS 39 but only and only according to
framework provided by Beema Samiti.
Consequently, the financial statement does not show true
and fair position of the life insurance company. The reasons
are once again enumerated hereunder:
When unbundling is possible:
a.
Deposits received during the year are not shown

as liability as per IAS 39, rather these are shown
as one of the component of equity (Life Fund);
b.
The interest accrued on the deposit during the

year is not shown as expense of the year;
c.
Premium received minus installment for deposit

is not shown as revenue of the year after due
adjustment for unexpired period;
d.
Claims paid or payable during the year minus

deposit component are not shown as expenses of
the year.
When unbundling is not possible:

a.
Total amount of premium received during the

year after due adjustment for unexpired period
is not shown as revenue of the year;
b.
Liability adequacy test or actuarial valuation is

not conducted annually so as to determine actual
addition in liability of the company from insurance
contract to be charged to income statement of the
year.
But, as per Insurance Regulation, actuarial valuation could

be done once in three consecutive financial years. It does
mean that the financial statements of a life insurance
company of the financial year in which actuarial valuation
is not done does not present true and fair position of the
company.
September 2010
23
Insurance
Actual practice in Nepal
In Nepal, most of the life insurance products issued by life
insurance companies are of the nature where insurance
component could be easily separated from its deposit
components. The insurers are, as per practice and as
provided by Beema Samiti, crediting the total amount of
premium received to the revenue accounts, without
unbundling the deposit components and the insurance
component. The balances in the revenue account are being
transferred to insurance fund which is ultimately and
directly treated as a component of equity.
This is a major deviation from IFRS 4. As the deposit
components are not being unbundled and are not being
shown separately in the balance sheet, the provisions of
IAS 39 is also violated.
Investment income:
As per IAS 18, revenue or gain from investment shall be
treated as revenue of the company as accrued. The total
income from investment, as accrued, should be shown as
revenue in income statement prepared for the financial
year.
Income from investment such as interest, dividend,
including gain/loss from sale of investment, provision for
impairment in value of available-for-sale investment are
the major component of income from investment to be
shown in profit and loss account.
Interest income, dividend income, rent income etc, shall
be recognized as accrued.
Gain or loss from sale of investment is recognized on sales
of a particular investment.
Provision for impairment in value of investment shall be
made as per quoted prices of the investment at the year
end.
But, as per the format prescribed by Beema Samiti, the
total income from investment is to be appropriated to
revenue accounts and income statement in a ratio given
24
September 2010
by it. It does mean that only a small part of the total income
from investment is being included as revenue in income
statement.
As per paragraph 78 of IAS 1, All items of income and
expense recognized in a period shall be included in profit
or loss unless a Standard or an Interpretation requires
otherwise.
Paragraph 92 of the Framework for the Preparation and
Presentation of Financial Statements provides that Income
is recognized in the income statement when an increase in
future economic benefit related to an increase in an asset
or a decrease of a liability has arisen that can be measured
reliably.
The presentation of investment income in its income
statement by a life insurance company surely complies
with directive issued by Beema Samiti, but it does not
comply with the provisions of Framework, IAS 1, IAS 18
and IFRS 4. Thus, the income statement of a life insurance
company does not present true and fair position of its
financial performance.
Administrative Expenses
Paragraph 94 of the Framework for the Preparation and
Presentation of Financial Statements provides that
Expenses are recognized in the income statement when
a decrease in future economic benefits related to a decrease
in an asset or an increase of a liability has arisen that can
be measured reliably.
The directive issued by Beema Samiti compels a life
insurance company to divide the administrative expenses
in several parts to charge the bigger part to different revenue
accounts and a smaller part of it to profit or loss.
Conclusion
The various points of differences from IFRSs has already
been discussed in my previous article published in the
June 2010 issue of Chartered Accountant magazine under
the topic Financial Statements of a General Insurance
Company: Comparison of Directive with IFRSs. In this
Insurance
article, I have discussed only the points that have come on
the way of true and fair characteristics of financial
statements of a life insurance company, but the other points
of differences from IFRSs as discussed in my previous
article are the same and prevails for life insurance business
also.
I humbly request my colleagues to devote certain time to
comment on the issues raised in this article, so as the final
findings may be established.
The Institute of Chartered Accountants of Nepal, a

governing body responsible for implementation of IFRSs
in Nepal, should also make an investigation in this regard
so as a best practice could be adopted in future.
Similarly, Beema Samiti, a regulating body of insurance
companies in Nepal, should also have a thought on the
issue raised for more transparent accounting and
presentation of the insurance business. n
September 2010
25
Public Sector
Some Challenges in Implementing Nepal

Public Sector Accounting Standards
Ramesh Kumar Sharma*
Dr. Pawan Adhikari**
1. Growing Interest in the Cash Basis

IPSAS
The government accounting system in the majority of
developing countries is still based either on the cash basis
or the modified-cash basis. In recent years, improvements
in accounting have become an important part of governance
reforms in the developing world. The Cash Basis IPSAS,
which was first issued in January 2003 and updated with
the inclusion of additional requirements for the presentation
of budget information in 2006 and the disclosure of external
assistance information in 2007 has therefore been drawing
a great deal of attention in public sector accounting reforms
in developing nations. The Cash Basis IPSAS is envisaged,
particularly by international monetary institutions such as
the World Bank and the Asian Development Bank, as a
means of improving the quality and comparability of cash
information reported by public entities in developing
countries.
The support of professional accountants has also
contributed to increasing the popularity of the cash basis
IPSAS in developing countries. In fact, the IPSASs, both
the cash and the accrual basis, have been acknowledged
by the accounting profession worldwide as the best
government accounting alternatives for developing nations
lacking internationally approved regulations and standards.
Moreover, there is a view that the cash basis IPSAS is an
initial step on the path to full accrual. This has led many
countries attempting to migrate towards the accrual basis
of accounting to reconsider their plans and to comply with
the cash basis IPSAS. Nepal can for instance provide one
example in this regard. The adoption of Nepal Public Sector
Accounting Standard (NPSAS) can be seen as a result of

the interplay among various groups, including government
stakeholders, the World Bank, the Accounting Standards
Board, and the Institute of Chartered Accountants. Nepal
has now postponed its intention to initiate accrual
accounting reforms prior to implementing other reforms
such as the implementation to Nepal public sector
accounting standards, the single treasury system, and the
integrated government financial management information
system.
2. Challenging Aspects of the Cash Basis

IPSAS
Despite the widespread support and interests, it is worth
mentioning that not a single country has so far adopted
the cash basis standard in all material aspects (Parry and
Wynne, 2009). For example, the case of South Asia
demonstrates that despite all countries in the region have
shown interests towards the cash basis IPSAS and have
agreed to converge their standards with IPSASs, each
country has in fact been attempting to translate the IPSASs
ideas in its own way, so as to ensure compliance with
specific local requirements (Adhikari and Mellemvik, 2010).
Indeed, this effort seemingly thwarts the wish of the
IPSASB, urging governments around the world to avoid
reinventing the wheel. The IPSASB emphasizes that
countries should spend their time and energy in developing
the IPSASs implementation guidance and elevating the
accounting education and training opportunities, rather
than amending the standards to cope with their local
regulations.
* Mr. Ramesh Kumar Sharma belongs to Public Service Commission, Government of Nepal.
** Dr. Pawan Adhikari belongs to Bod Graduate School of Business
26
September 2010
Public Sector
In fact, there are several issues in the cash basis IPSAS
providing impediments to developing countries in its
implementation. Probably, the most complicated issue is
the preparation of the consolidated government financial
statements - a key requirement of the cash basis IPSAS.
There is still no consensus about which entities should be
included in consolidated statements at a global level and
a number of countries, including the USA and the UK have
been struggling to implement this requirement (Brusca
and Montesinos, 2009; Parry and Wynne, 2009). Another
challenging issue is perhaps the disclosure of third party
payments. The cash basis IPSAS requires that the payments
made directly by third parties, for instance, international
monetary organizations, donors, and other development
partners to settle the obligations and to purchase goods
and services on behalf of the entity are to be reported in
a separate column on the face of the statements of the cash
receipts and payments (Sutcliffe, 2009). However, the case
of developing nations shows that very often international
organizations and donors make a direct payment to
suppliers, service providers, and lenders without any notice
to the recipient governments. The other striking difficulty
is that many developing countries practice modified cash
recognizing items such as advances, deposits, lending, and
unpaid bills. The presentation of these financial assets and
liabilities is not mandatory in the cash basis IPSAS, although
the entity can display information on such items voluntarily.
Having acknowledged these weaknesses, the IPSASB has
now formed a task force to undertake a review of the cash
basis IPSAS. The task team comprising both the IPSASB
members and representatives of organizations such as the
World Bank, the ADB, the OECD, and the IASB is asked
to locate major technical issues in implementing the cash
basis IPSAS in developing nations and to determine
whether the IPSAS should be revised in light of those issues
or underpinned by additional guidance on its application.
The task force has now been undertaking more detailed
interviews and round table discussions with respondents
to the questionnaires, which it had distributed in 2009. The
IPSASB has considered the review of the cash basis IPSAS,
which is intended to accomplish in 2010, a respond to the
needs of developing economies (Sutcliffe, 2009).
3. Implementation of Nepal Public Sector

Accounting Standards (NPSAS)
In late 2005, the Accounting Standards Board made public
its intention to initial work on public sector accounting
standards in line with IPSASs. The main idea was to study
the applicability of IPSASs in Nepal and convince
government agencies of the need of accounting standards
in the public sector. In 2006, the Board was able to receive
some financial assistance from the National Planning
Commission under the Economic Reform Project sponsored
by the World Bank in order to initiate a public sector
accounting standards project. Although the Board had
initially announced that it would pronounce both the cash
and the accrual basis accounting standards and let the
government decide which standards to follow, the lack of
funding confined the Board to focusing only on the cash
basis standards. In fact, the World Banks gap analysis of
2007 comparing Nepal public sector accounting and
auditing standards against international standards
significantly helped the Board develop a positive attitude
towards the cash basis IPSAS in Nepal.
On 5th September 2009, the government approved Nepal
Public Sector Accounting Standard (NPSAS) pronounced
by the ASB for use in public entities. Apart from some
minor amendments in preface and introduction and minor
revisions in areas such as the basis of presentation, reporting
entities, reporting currency, cash, other cash receipts, and
financial statements, amongst others, NPSAS is a replica
of the cash basis IPSAS updated by the IPSASB in 2006
and 2007. The government has made several commitments
to help implement the NPSAS pronounced by the Board.
Some of the committed activities include;
prepare the consolidated financial statements of

2009/2010 adhering to the NPSAS as an experiment
and disseminate them to the major stakeholders, mainly
the FCGO, MoF, and OAG as supplementary
information,
submit the consolidated financial statements of

2010/2011 to the OAG and get them audited, and
prepare a road map for the adoption of the accrual

basis IPSASs.
September 2010
27
Public Sector
However, what is worth mentioning is that the cash basis
IPSAS or NPSAS is to large extent focused on financial
reporting by using data from the accounting system. As
the NPSAS is being implemented without any significant
improvements in the accounting system, there is a concern
as to whether and to what extent the NPSAS will enhance
the quality and consistency of financial information reported
by government entities. Some of the major weaknesses of
the existing accounting system that are to be improved
prior to implementing the NPSAS include;
Failure to track irregularities. The Auditor Generals

report of 2008 has recorded approximately 10.78% of
the total audited amounts of the fiscal year 2007/2008
as irregularities and stated that approximately 4.90%
of the total irregularities are yet to be settled.
Failure to tally all loans and loan repayments (OAG,

2008).
Failure to recognize revenues and expenditures

incurred through extra budgetary funds, including the
road maintenance fund, heavy equipment fund, health
tax fund, peace fund, and alcohol control fund, etc. In
fact, such off-budget expenditures out of revolving
funds account about 0.4% of GDP annually.
Failure to record and report of non-cash items included

in the budget such as commodity grants and loans,
technical assistance received from external donors, and
other direct payments offered by donors. More than
$100 million every year offered by donors in the form
of technical assistance is not included in the accounting
statements as this does not go through the budget
(ADB, 2005).
Failure to ensure that expenditures are not misclassified

and spent on ineligible/inappropriate items.
Approximately, 3-4% of developing spending is being
disallowed for reimbursement every year due to
inadequate accounting.
Indeed, the initiative of the government to implement the

NPSAS has envisaged the possibility of updating Nepalese
government accounting so as to reflect the internationally
agreed minimum benchmarks of best practice in cash
accounting and reporting. However, it is equally important
to improve the performance of the accounting system so
that the latter would be able to provide reliable and
adequate accounting information, as demanded by the
NPSAS. Efforts are needed in parallel with the
implementation of the NPSAS to recognize off-budget
expenditures, accounting arrears, third party payments,
advances, and deposits, just to a name a few. What is
important is to provide timely financial statements
demonstrating the way the budgets have been
implemented prior to preparing the consolidated
government financial statement, using the NPSAS.
Without first addressing the aforementioned weaknesses
inherit to the accounting system, the NPSAS is likely to
be remained merely a standard rather than an established
national practice. n
28
September 2010
4. Conclusion
ETHICS
Ethical Values for

Professional Accountants
CA. Paramananda Adhikari*, ACS
Abstract/Background
Profession is guided by code of ethics. This allows the
professionals to practice or perform their duties and
responsibilities with due care and knowledge and helps
to maintain the publics trust on overall profession. This
means, public will continue to receive or seek their
professional services relying upon their expert knowledge
on the relevant field. Practically, it is very difficult to
monitor ethics and assumed the code of practice may be
self-serving by the members related to their profession
and they have expert knowledge on a particular area. For
example a physician could not utilize his medical expertise
to provide financial consultancy services to the corporate
entities neither a professional accountant can perform the
surgery of a patient.
Over the time business practices have been changed so
have client expectations. As a result, ethical issues have
become more important for the professionals like auditors.
Most of the professional bodies all over the world have
developed their own or adopted the code of ethics issued
by other supreme institutions for the guidance to their
members. Over the last ten years, the world has experienced
one financial crisis after another. Tens of thousands of
people in all parts of the world have lost their employment
and investment due to the collapse of big business houses
and financial institutions. Public faith in government,
regulating bodies and professional accountants has
degraded all time low. However, there are many questions
surrounding the validity of professional code of ethics and
its compliance by the members. This begs many questions
like these; Are we, accountants, responsible for this? Are
we in a difficult situation? Are we not following our code

of conduct? Et cetera, Et cetera. This article aims to highlight
the issues regarding profession, moral values, ethics and
guidance with special focus on professional accountants.
Profession: What is it?

Profession can be defined as a group of specified people
within an occupation having adequate knowledge,
training/experience and their own ethics. Professionals of
any field are expected to meet and maintain the best
practices and standards within their occupation. Profession
is a disciplined group of individuals who adopt ethical
standards as well as possess special knowledge, skills on
their occupation and have a respect for their profession.
For example, if a corporate body outsourced a non-licensed
law graduate at a very low cost, wouldnt be able to hold
this person to the same standards as a licensed professional.
Profession has a key feature. Just completing the prescribed
level of education and credentials one may not be able to
uphold such dignity. One must require regular knowledge
on latest developments, pronouncements of the professional
bodies and more importantly compliance of the standards
and codes issued by such bodies to get refreshed and up
to date.
*Author is Technical Director, ICAN
September 2010
29
Ethics
What professional ethics are?
Professional ethics are standards or codes of conduct set
in a respective profession, whether it may be a medical,
legal or an accounting profession. A code of ethics is a part
of the expectations of those involved in different types of
profession. People in any profession do not welcome bad,
dishonest or irresponsible behavior. If someone in their
field practices it, they detest such behavior. By setting out
expected behavior in the form of ethics, professionals,
together, try to uphold a good reputation in their
occupation. The major components of the professional
ethics are respect, honesty, integrity, and independence.
For example, if a corporate body approaches a professional
who is engaged only in management consultancy services
for various taxation issues, then ethically it will be better
that he must tell to the corporate body to approach others
who are engaged in tax consultancy services and he is not
an expert in taxation field.
People within each profession are expected to be respectful
and honest in their personal dealings and also expected to
uphold professional ethics by not getting involved in any
type of conflict of interest. A conflict of interest is a situation
when an individual tries to get personal benefits or goal
by using professional cap. For example, a professional
accountant who uses clients resources to get work done
for his personal benefit could be seen as being involved in
a conflict of interest. Therefore, the codes or ethics rules
must be complied by each members of the respective
profession to make the profession meaningful and respected
by others and these rules should never go against prevailing
laws of land but rather coordinate with them for
compliance.
Is independence a key factor?

In general, professional ethics always include upholding
honesty and respect in the profession over personal benefits,
conflict of interest or bias towards a certain group of people
or any other authorities. One of the guiding factors in
auditing profession is independent to the client. When
professional ethics rules have been complied then the real
independence reflects into the picture. In case of accounting
profession codes of professional ethics are established by
30
September 2010
the organizations or regulating body of the profession in

their respective jurisdictions. A violation of professional
ethics will make the accountant subject to the disciplinary
action. The accountants professional ethics whether in
public practice or in employment affects the reputation of
the profession and the confidence of the public.
The auditor should be independent of client served so that
objectivity and integrity can be maintained. For example,
independence will be violated if the auditor has financial
interest or is connected directly or indirectly with the group
of people/entity in any other mode. The auditor must be
professionally competent, exercise due care and properly
supervise the engagement and obtain adequate data,
information and evidence to form a conclusion about an
engagement. An auditor in public practice shall not engage
in an incompatible occupation creating a conflict of interest
or damage the reputation of the overall profession. For
example, if an auditor were to be told by a client that he
was in fact guilty of a charge by evasion of tax, when he
wished to plead not guilty. Professional ethics dictates
that the auditor cannot then represent the client, since the
auditor would be aware of the fact that the client is guilty
and ethically it would be wrong to present a plea refuting
the case.
Is ethics similar with values and morals?

What are ethics, values and morals? What are the differences
between them? Do they provide behavioral rules? Let us
simply analyze these terms from birds eye view, tabulating
for an easy understanding.
ETHICS
Therefore, to determine the root cause, we look no further
than the ethical lapses that most societies as well as
professionals face today. Ethical values are the foundation
on which societies run and are the guiding path to them
to determine their knowledge, recognition as well as
integrity.
For example, a client may approach an auditor to certify
the financial statements, which were found, of course not
in compliance with the prevailing laws and standards. He
may refuse the assignment to do so on moral grounds
otherwise; he should state the non-compliance of the
respective laws. If the client refused to do so, then it may
go for other auditor, who may be less scrupulous and will
be certifying ignoring his moral grounds or may be taking
any other benefits too, thus saving client business taking
the risk on his own. This makes the damages to the
reputation of the profession from the view point of
application of the code of best practices.
EthicsWhat are major assumptions ?

Ethics is the foundation for the smooth regulation and
control of the profession. Normally professional
organizations have issued code of ethics based on certain
assumptions, which covers the process, behavior,
individuals perception, actions, consequences and
influence. Ethics is not the text to be learnt just once. It is
a way of reviewing behavior against constantly changing
standards of codes and what may be ethical today or in a
particular profession would be different at another time
and other profession.
Therefore, in profession, ethics motivates professionals to

act in accordance with the code of conduct to win the
public confidence. As a result, professional accounting
organizations have the responsibility of ensuring their
members to comply with ethical guidelines according to
which they are required to behave. Unfortunately, ethics
is not something that automatically poses but it must be
taught and as human being, we simply do not have an
inborn quality to act ethically for ourselves or for the wellbeing of others. Questions arise upon the ethical limits of
the professionals responsibility and how power and
authority should be used in the service of the clients and
the society.
Most professions have internally enforced codes of practice
that member of the profession must follow, to prevent the
exploitation of clients and preserve the integrity of the
profession. This is not only for the benefit of the client but
also for the benefit of those belonging to the profession
overall.
How to Maintain Ethical Dimension?

The most crucial part of discussion is the maintenance of
ethical codes. The code of conduct issued by the professional
bodies like ICAN is on the assumptions that it will be
accepted and complied by all the members of the accounting
profession, whether in public practice or in industries.
Unfortunately, there are occasions when members do not
live up to these standards; therefore, members have the
vital role to play in developing the reputation of the
profession.
ICAN recognized as a self-regulating body, should exercise
specific rule of conduct and disciplinary powers to maintain
the standards in the society, public, other regulators as
well as in governments. To maintain the ethical dimension
by the professional like auditors, they have a responsibility
to maintain the best ethical practices that are not exhaustive
but inclusive and need not necessarily be limited with the
followings.
Maintain a level of knowledge and training appropriate

to area of work.
Keep own actions under review
September 2010
31
Ethics
Follow directives/advices given by professionals

bodies on ethical behavior
Established own organizations to develop ethical
ways of working
Be responsible for ethical compliance
Participate in ethics training programs organized
by professional bodies
Adopt ethics management, audit and improve systems
within organization.
These responsibilities applies no matter which type of

organizations the person works for, whether in public
practice or employed in commercial or other organizations.
Maintenance of ethical standards is the tough job for
professional accountants and they help to improve a
business/professions competitive position, however the
major focus of professionals on short-term earnings poses
a major threat to professional ethics. One day the power
of the crowd may kick off the profession if professionals
are continuously acting in an unethical manner.
What are the responsibilities of

Professional Bodies?
The major responsibility of the professional institution is
to ensure that their members are well prepared at all times,
exercise due care and moral judgements in all their
endeavors. Although professional bodies will never be
able to provide all to the individual member concerned
however, it prescribe behavior in relation to develop their
professional dealings and decision-making process when
they are confronted with ethical issues. As leaders in society,
professional accountants need to appreciate that their
actions represent strong influence and society look up to
them from ethical environment.
Regulatory and statutory frameworks are the minimum
standard of action to follow, but it cant be ignored that a
persons standard of action should be based on what is
right and not merely on what is technically legal. However,
the developments of the past few years clearly emphasizes
the need for regulating bodies and clear regularity
guidelines, rather than merely relying on legal framework,
that would amount to little more than symptomatic
treatment. To maintain the ethical education, the
32
September 2010
professional institution has the responsibility to maintain

the best ethical practices and it will assist by the following
ways.
Continuously review the code of ethics and develop

programs to educate members in their responsibilities.
Maintain ethics in pre and post qualification training
and assessment
Issue advices by professionals bodies on ethical
behavior to members
Provide ways to support members in managing ethical
ways of working
Monitor the violation of ethical compliance
Organize ethics training programs and awareness
programs about ethical compliance
Conclusion
Codes of ethics are the backbone of any profession. If the
members do not follow these guiding principles, then their
actions are called into question under disciplinary case,
and will be asked to justify the steps taken by them.
When an allegation of professional negligence is made
against member, the disciplinary committee is likely to
take account of the contents of any relevant guidance notes
published by accounting body in deciding whether the
member acted with reasonable care and competence. If
he follows the recommended practices, then he should
have at least a partial defense to an allegation of negligence.
On the other hand, if he does not follow the code of practices
he will be judged negligent and recommended to follow
the codes and other pronouncements of professional body.
In the event of litigation, the Court may need an explanation
from him, why he has not adopted the recommended
practice.
At last, we, professional accountants are the key part of
professional bodies like ICAN and should abide the value
of code of conduct issued by it while certifying the financial
statements, providing assurance services and other
assignments of clients. This will help to foster public faith
towards our accounting profession and will increase our
reputation in the days to come. n
Reporting
XBRL and its Prospect of

Adoption in Nepal
CA. Bigyan Shrestha*
Introduction
XBRL stands for extensible Business Reporting Language.
XBRL is a data description language that enables the
exchange of understandable, uniform business information.
It is freely available, market driven, open and global
standard for business information exchange. It provides
major benefits in the preparation, analysis and
communication of business information. It offers cost
savings, greater efficiency and improved accuracy and
reliability to all those involved in supplying or using
financial data.
XBRL allows organization to structure information into
tags. For example when a piece of data is tagged as revenue
defined in XBRL standard, then XBRL enabled applications
know that it adheres to a strict definition of revenue and
can use it accordingly. XBRL is not an accounting standard
but a standard for computer for understanding the financial
information. XBRL is a tool for converting financial reports
to machine readable report. The machine readable report
is called instance. Hence XBRL consist of XBRL standard
called taxonomies and financial report called instance.
Instances are created based upon uniform accepted standard
of taxonomies. Generally, government or authorized
institution approves the developed XBRL standard and
companies who present the data creates their own instances
based upon the XBRL standard published. XBRL standard
may be prepared for Taxation, Accounting Standard and
other reporting requirement.
Basic concept of XML and XBRL

XBRL is a member of the family of languages based on
XML, or Extensible Markup Language, which is a standard
for the electronic exchange of data between businesses and
on the internet. Under XML, identifying tags are applied
to items of data so that they can be processed efficiently
by computer software.
XBRL is a powerful and flexible version of XML which has
been defined specifically to meet the requirements of
business and financial information. It enables unique
identifying tags to be applied to items of financial data,
such as net profit. However, these are more than simple
identifiers. They provide a range of information about the
item, such as whether it is a monetary item, percentage or
fraction. XBRL allows labels in any language to be applied
to items, as well as accounting references or other subsidiary
information.
XBRL can show how items are related to one another. It
can thus represent how they are calculated. It can also
identify whether they fall into particular groupings for
organizational or presentational purposes. Most
importantly, XBRL is easily extensible, so companies and
other organizations can adapt it to meet a variety of special
requirements.
The rich and powerful structure of XBRL allows very
* Deputy Director - Finance, Securities Board of Nepal
September 2010
33
Reporting
efficient handling of business data by computer software.

It supports all the standard tasks involved in compiling,
storing and using business data. Such information can be
converted into XBRL by suitable mapping processes or
generated in XBRL by software. It can then be searched,
selected, exchanged or analyzed by computer, or
published for ordinary viewing.
How XBRL Works?

The schematic diagram of XBRL and its uses are given
below:
Taxonomies and Instance

XBRL taxonomies and Instance are new words
introduced in the dictionary of accounting and finance.
XBRL consists of taxonomy and instance. Taxonomy
is somewhat a vocabulary or dictionary which describes
data contained in XBRL instance document. An XBRL
instance document is somewhat of a database of
financial statement information issued by an entity.
XBRL is based on XML. Taxonomy document is an XML
Schema file which describes a set of concepts which are
intended to be used in preparing an XBRL instance
document. Items which may come in presentation of
financial information are defined in taxonomy in the form
of tags. For example, Fixed Assets may be defined by tag
<fixed_assets></fixed_assets>. Such definition in taxonomy
states that any value coming between these two tags
represent the value of fixed assets. All possible items are
defined in taxonomy. Taxonomy can be extended with the
use of additional taxonomy based on original taxonomy,
i.e new fields can be defined and described through creating
new secondary taxonomy.
Instance documents contain data. An XBRL instance
document contains accounting, financial or other business
related data, for example a financial statement issued by
a company may be in instance form, expressed using XBRL
syntax and making use of an XBRL taxonomy. If instance
document contains <fixed_assets>5,000,000</fixed_assets>,
this means that the value of fixed assets is 5 million. Hence,
instance documents gives the value to the fields defined
in Taxonomy.
34
September 2010
Description
1.
XBRL developers (Expert organization) develop the

standard of reporting called taxonomies. Regulators
may coordinate and cooperate in the process of
development.
2.
Taxonomies developed are approved by regulators

for filing electronic financial statements by the
companies based upon the developed taxonomy.
3.
Software vendors develop the software for creating

taxonomy and analyzing the instance documents based
on approved taxonomy. Anyone can develop the
software for instance creation and analysis of data.
4.
Companies create the instance document with all the

data required for filing based upon the approved
taxonomy. Companies may themselves create the
instance document or use the software developed by
various vendors for creation of instance documents.
Reporting
5.
The generated instance is then filed to Regulator and

disclosed to public.
6.
The instance document can be analyzed by using the

various software which are specifically based upon
the approved taxonomies.
7.
The instance can be easily processed and analyzed by

the computer on the basis of approved taxonomy to
generate various analytical reports as per requirement.
It takes huge amount of time and inconsistency in

data presentation. With the use of XBRL after creation
of single instance file, all stakeholders can generate
report from same file. Hence, this facilitates the data
exchange among companies and stakeholders.
PDF and other format cannot be used by computer

for data analysis. Different computer files like excel,
database exported file, xml can be processed by
computer but they may lack consistency among
companies and software, so single standard for
financial reporting is needed and XBRL is emerged.
With the emergence of strong IT regulation and legal

validity of computerized information, the next
revolution in data exchange among companies and
regulators and other stakeholder is definitely XBRL.
In current days, manual data analysis is impossible

considering the time, validity, cost and effectiveness.
Then why not we present the financial information in
a form which is readable both by human and machine.
XBRL Benefits
Single computer file can be used for analysis and

generating all type of reports. So it creates more
confidence in data and reports because there will be
lesser chances of error and mistakes. The computer
file can be read and processed by all types of computer
application and are able to analyze and generate the
reports.
Minimize costs by allowing easier, more automatic

composition and processing of reports by computer.
XBRL reduces the reporting burden for preparers of

accounting and financial information.
Accelerated analysis. No need to feed data from hard

copy reports.
Lower hindrance in filing the data to authorities and

easy data analysis for regulation.
XBRL is ideal for web. i.e can be directly process in

by web applications.
International Adoption of XBRL

Some facts of worldwide adoption of XBRL
The first country to formally require XBRL for public

company financial reporting was China in 2004.
During the Paris conference, XBRL China announced
that it is also requiring all China-based mutual funds
to report their information in XBRL to the China
Securities Regulatory Commission (CSRC), the body
that regulates securities in China. Each of the more
than 60 Chinese mutual fund companies is already
reporting daily, monthly, quarterly, semi-annual and
annual reports to the CSRC.
The Securities and Exchange Commission has officially

adopted a rule requiring public companies to begin
filing their financial statements in an interactive data
format, XBRL standard. (December 18, 2008).
Need for XBRL
Financial statements filed by the companies to

regulating authority contain number of clerical errors.
Same financial information is to be printed, disclosed
and filed in number of places. Human error may make
these data inconsistent. XBRL rules out this type of
difficulty. All the analysis and reports can be made
from one single file with the use of computer. This is
the greatest advantage of XBRL in reduction of time
and cost both in the part of companies and regulators.
Investors, Regulators, Financial Institution and Public
need different type of reports and financial information.
There would be a three-year phase-in schedule. In the

first year, the rules apply only to domestic and foreign
large accelerated filers that use U.S. GAAP and have
a worldwide public float above $5 billion. In the second
year, all other domestic and foreign large accelerated
filers using U.S. generally accepted accounting
September 2010
35
Reporting
principles would be subject to interactive data
reporting. In year three, all remaining filers using U.S.
GAAP, including smaller reporting companies, and
all foreign private issuers that prepare their financial
statements in accordance with International Financial
Reporting Standards as issued by the International
Accounting Standards Board would be subject to the
same interactive data reporting requirements, starting
with fiscal years ending on or after June 15, 2011.
Primary financial statements, footnote disclosures and
financial schedules will be required to be tagged.
Tagging of other narrative disclosures will be optional
under the rules..
SEC chairman Christopher Cox pointed out that The

interactive data that XBRL data tagging makes possible
can help everyone in this room achieve many of your
different goals: keeping investors informed;
minimizing your costs and improving your
productivity as analysts; and managing your own
companies better with real-time management control
information. Interactive data can make the SEC a far
more effective regulator, by helping us focus on
preventing fraud, not just reacting to it."
Over 450 worldwide members from the financial and
business reporting supply chain have bet on a positive
outcome for open source developed taxonomies. When
successful, their efforts will mean that a broad spectrum
of the accounting profession will be reinvented
according to open-source principles and XBRL
interactive data. Consequently, there is a demand for
accountants with XBRL Taxonomy included in their
professional skill sets or at the very least, in their
professional vocabulary.
In 2009, XBRL filing is requirement in more than 22
countries in the world.
Development of Taxonomies
Taxonomy is standard for tagging the financial information.
The taxonomy is developed by expert in XBRL
Development. Taxonomies are based upon the specific
standard for Financial Reporting like set of Accounting
Standards or income tax requirement. Securities Exchange
Commission in US has adopted the US GAAP taxonomy
released by XBRL US, a not for profit consortium of
approximately 500 companies and agencies worldwide
working together to build the XBRL language and promote
and support its adoption. Additional taxonomies are being
developed by XBRL US for IFRS, Proxy disclosures, Mutual
Fund Risk and return disclosures and others. Hence, for
adoption of XBRL, there must be XBRL taxonomy based
on which instance documents with financial information
is prepared by business entities.
In Nepal also, the foremost challenge is to adopt for the
XBRL standard, taxonomy. Taxonomy developed for IFRS
reporting, IFRS taxonomy may be used, but due to Nepal's
own accounting standard and other legal requirement new
standard may be needed. The XBRL expert organization
may come up with development of such taxonomy.
Institute of Chartered Accountants of Nepal, SEBON,
Company Registrar, Nepal Rastra Bank and other
government and non government bodies may participate
in development of taxonomy.
Approval of Standard Taxonomy developed
The next step is acceptance of XBRL taxonomy by the
regulators as well as the entities who need to file the reports
to regulators.
The possible difficulty may be regarding correctness,
exhaustiveness, completeness and operability of the
taxonomy.
Adoption of XBRL in Nepal
Preparing the business entities for XBRL
Belief of stakeholders
Business entities shall be ready to accept the challenge

which may come by adoption of XBRL. The unavailability
of expertise may be greatest hurdle. Various training,
workshop and seminars shall be organized for proper
education and alignment.
The foremost requirement for adoption of XBRL in Nepal

is the belief of regulators, business entities, investors and
other stakeholders that XBRL can help them to achieve
long-term goals.
36
September 2010
Reporting
Conclusion
XBRL is the arising standard for financial reporting and
accounting information exchange all over the world. XBRL
is based upon XML, the widely used standard for data
exchange in computer and internet. XBRL helps in
correctness, consistency and generation of machine readable
financial data formats.
For, adoption of XBRL in Nepal, the foremost challenges
is the belief of the regulators, users and other stakeholders
about use and benefit of XBRL. The development of

taxonomy and approval by the regulator may be greatest
hindrances. XBRL taxonomies need to be exhaustive to
cover all the aspect of the reporting requirement. Nepal
has its own set of Accounting Standard, Tax Policy and
other legal requirement. Taxonomies developed on other
set of standard and for other purpose can't be implemented
in Nepal. Hence, separate taxonomy need to be developed
for the country and it requires both physical and human
resource. n
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AUDAN/ICAN
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k'gZr M k|fljlws sf/0fn] pk/f]Qm ;do tflnsfdf x]/km]/ x'g;Sg] 5 . x]/km]/ ePsf] cj:yfdf ;fj{hlgs ;"rgfdfkm{t hfgsf/L u/fO{g] 5 .
September 2010
37
Economy
Economy in Distress
Tula Raj Basyal*
Nepals Unsatisfactory Comparative

Position
Despite abundance of natural and human resources as well
as the strategic location of the country, economic prosperity
has so far eluded most of the Nepalese citizens due to the
political leaderships inability to lead the economy in a
pragmatic and fruitful manner. Nepals economic
development indicators are unsatisfactory and the
development challenges daunting. According to the Central
Bureau of Statistics (CBS) of Nepal, the annual average
economic growth during the last 35 years (1975-2010) was
4 percent. The population recorded an annual growth of
2.28 percent, resulting in a 1.7 percent per capita income
growth during the period. Even by official statistics, onefourth of the population (25.4 percent) currently lives below
the nationally-defined poverty line. This has happened
despite the implementation of the planned development
endeavors for more than five decades. Comparatively
speaking, Nepals per capita income and the rate of
economic growth in South Asia has been the lowest. The
per capita income (in current US dollars) in 1980 was 216
in Bangladesh, 256 in India, 131 in Nepal, 347 in Pakistan,
and 301 in Sri Lanka. During the period of 29 years (19802009), the annual average economic growth (in percent)
was 4.8 in Bangladesh, 6.2 in India, 4.5 in Nepal, 4.9 in
Pakistan, and 4.8 in Sri Lanka. During 2009, the per capita
income (in current US dollars) in these countries was 574
in Bangladesh, 1,031 in India, 452 in Nepal, 1,017 in Pakistan,
and 2,041 in Sri Lanka. Besides, among the 26 developing
economies of Asia, Nepals per capita income in 2009 has
remained the lowest. Only 10 countries in the world have
per capita income lower than that of Nepal. These countries

and their per capita incomes in 2009 (in current US dollars)
are Burundi (163), Democratic Republic of Congo (171),
Sierra Leone (311), Eritrea (363), Zimbabwe (375), Ethiopia
(390), Guinea (414), Togo (422), The Gambia (440), and
African Republic of Congo (447) (World Economic Outlook,
April 2010, International Monetary Fund). According to
the World Development Report 2010, population living
below $1.25 a day in Nepal was 55.1 percent compared to
49.6 percent in Bangladesh, 41.6 percent in India, 22.6
percent in Pakistan, and 14.0 percent in Sri Lanka. The
share of the weakest quintile in he national consumption
or income in Nepal was 6.1 percent compared to 9.4 percent
in Bangladesh, 8.1 percent in India, 9.1 percent in Pakistan,
and 6.8 percent in Sri Lanka. This shows that the income
distribution pattern of Nepal among the South Asian
countries is the most inequitable.
Development Challenges and

Unfavorable Macroeconomic Indicators
Low economic growth, high under-employment, rampant
poverty, widespread economic and social exclusion,
inadequate social and economic infrastructure, and
unsatisfactory public service delivery have remained the
structural features of the Nepalese economy. As
employment opportunities outside the agriculture have
not expanded in proportion to the growth of the population,
most of the population is forced to derive its livelihood
through the subsistent agriculture which happens to be
one of the most unproductive in the world. Efforts directed
at modernizing the agriculture have remained scant. There
* Former Executive Director, Nepal Rastra Bank, and former Senior Economic Advisor, Government of Nepal, Ministry of Finance
38
September 2010
Economy
are rural and urban dualities in the development process
and its outcomes. Infrastructure-related problems have
reduced the potential of increased productivity and
competitive strength of the economy. Reduced economic
growth despite the sharp rise in the total government
expenditure especially during the past couple of years
evidences inefficient allocation of the resources. Imprudent
policies and reduced focus on the sound implementation
have turned Nepal into a high-cost economy. The trust
and confidence in the economy has been waning. Budget
projections for the capital expenditure and foreign assistance
have remained unrealistic. Consumption has risen and
productive investments adversely affected. The competitive
position of the economy has further eroded. Less priority
accorded to the economic development agenda by the
successive governments that came into power mainly
resulted in such a pitiable economic condition of the
country. Ever-deepening political problems and the lack
of competence of the leadership to address the problems
by sincerely and effectively implementing the envisaged
plans, policies, and budgets adversely affected the
development process and outcomes of Nepal. In an
environment of reduced priority attached to the economic
development agenda, promises expressed over the years
for expediting the development initiatives thus proved
mere slogans. The governments positive role for improving
the economic status of the country has thus remained a
distant dream.
During the recent years, the economy has been mainly
afflicted by domestic and external imbalances, increasing
risks for the macroeconomy stability. Economic growth
decelerated from 6.1 percent in 2007/08 to 4.9 percent in
2008/09 and 4.6 percent in 2009/10. The agriculture growth
percent for these three years was 5.8, 3.0, and 1.1
respectively. The services sector growth percent for these
three years was 7.3, 6.3, and 5.5 respectively. The industry,
which had grown by 1.7 percent in 2007/08, contracted by
0.2 percent in 2008/09 and then recorded a positive growth
of 3.9 percent in 2009/10. However, he manufacturing
sector as percent of the GDP decreased to 6.8 in 2009/10
from 6.8 in 2008/09. During 2009/10 in comparison to
2008/09, the growth rate of deposits as well as loans and
advances of the commercial banks substantially declined.
Private sector credit growth reduced quite sharply.
Economys consumption as percent of the GDP increased

from 87.3 in 2007/08 to 88.3 in 2008/09 and 91.5 in 2009/10.
Accordingly, the gross domestic saving as a percent of the
GDP declined consecutively. The gross fixed capital
formation as a percent of the GDP declined, from 19.3 in
2007/08 to 18.6 in 2009/10. During the past nine years
(2001/022009/10), the budgets projection of the economic
growth averaged 5.0 percent while the actual growth
averaged 3.8 percent only. Even the government statistics
of 25.4 percent population living below the poverty line
means as high as 7.2 million population (25.4 percent of
28.3 million) living below the poverty line. The doubledigit inflation that had started since June 2008 continued
its pace throughout 2008/09 and 2009/10, with the average
inflation reaching 13.2 percent (food and beverages 16.7
percent) in 2008/09) and 10.5 percent (food and beverages
15.4 percent) in 2009/10. General consumers were extremely
inconvenienced due to the price spiral, notably in the food
items. Hence, the goal of price stability could not be attained.
The earlier double-digit inflation had occurred in 1998/99.
At the same time, the external sector has been further
weakening during the current years as noted below.
Unfavorable External Sector

The economy recorded a balance of payments (BOP) deficit
in 2009/10, the first such incidence since 2001/02. Every
month in 2009/10 recorded a BOP deficit, with the deficit
figure reaching Rs. 23.5 billion in the eighth month of the
fiscal year. In 2009/10, gold import amounted to Rs. 41.6
billion (3.5 percent of GDP) compared to such import of
Rs. 16.6 billion (1.7 percent of GDP) in 2008/09. Due to the
over-valued currency attributed to the higher inflation in
Nepal compared to its trading partner inflation as well as
the adverse supply-side shocks resulting from closures
and labor-related problems that hampered production and
productivity growth, Nepals competitive position vis-vis the rest of the world reduced in 2009/10. Consequently,
Nepals macroeconomic problems have been intensifying
while our immediate neighbors have been successfully
managing their economies and reaping the benefits of
sustained high economic growth. During 2009/10 in
comparison to 2008/09, Nepals merchandise exports
contracted by 9.7 percent while merchandise imports
increased by 33.2 percent, resulting in a trade deficit growth
September 2010
39
Economy
of 46.5 percent. Exports/imports ratio declined to 16.1
percent in 2009/10 from 23.8 percent in 2008/09. During
2009/10, exports (Rs. 61.13 billion), imports (Rs. 378.80
billion), and trade deficit (Rs. 317.67 billion) represented
5.2 percent, 32.0 percent, and 26.8 percent of the GDP (Rs.
1182.68 billion) respectively. During 2008/09, exports,
imports, and trade deficit as percent of the GDP were 6.8,
28.7, and 21.9 respectively. During 2009/10, workers
remittances recorded a modest rise of 10.5 percent (47.0
percent in 2008/09) to Rs. 231.7 billion, which worked out
to be 19.6 percent of the GDP in comparison to 21.2 percent
of the GDP in 2008/09. Tourism receipts as percent of the
GDP declined to 2.4 in 2009/10 from 2.8 in 2008/09. The
current account deficit reached Rs. 32.3 billion representing
2.7 percent of the GDP. During 2008/09 and 2009/10,
current account surpluses as percent of the GDP were 2.9
and 4.2 percent respectively. During 2009/0, the BOP deficit
amounted to Rs. 2.6 billion representing -0.2 percent of the
GDP. During 2007/08 and 2008/09, the BOP surpluses had
amounted to Rs. 29.7 billion and Rs. 44.8 billion respectively,
representing \3.6 percent and 4.5 percent of the GDP
respectively. Foreign exchange reserve daring 2009/10
contracted by 7.0 percent to Rs. 266.6 billion, sufficient for
goods and services imports for 7.3 months, a decline of 2.7
months imports equivalent from the 2008/09 level of 10
months. As percent of the GP, foreign exchange reserve
fell to 22.5 in 2009/10 from 28.9 in 2008/09. To meet the
Indian Currency (IC) demand, US$ 2.19 billion was sold
for IC in 2009/10 while such sale amount in 2008/09 was
US$ 1.52 billion.
(2004/052009/10) shows that the actual recurrent

expenditure averaged 94 percent of the budget estimate.
Such ratio in the case of the capital expenditure was 85.6
percent. This ratio was 72.5 percent for the foreign grants
and 55.8 percent for the foreign loans. These figures indicate
large deviation between the projections and the actuals in
the case of capital expenditure and foreign assistance. This
shows the problem of unrealistic planning and ineffective
implementation in Nepals government finance.
The past two years have witnessed huge unplanned
overdrafts as a structural problem of the government
finance. There was an overdraft of Rs. 6.2 billion at the end
of 2009/10. The 2008/09 overdraft of Rs. 12.8 billion had
violated the Nepal Rastra Bank Acts provision of limiting
the overdraft to 5 percent of the previous years revenue
which had amounted to Rs. 107.6 billion, thereby statutorily
limiting the overdraft to Rs. 5.4 billion even on the basis
of the gross revenue. So, the overdraft figure in 2008/09
was Rs. 7.4 billion more than the legal limit. This shows
lack of appropriate mechanism for expenditure monitoring
besides the problems of fiscal responsibility. At the same
time, the productivity of the government expenditure has
reduced. A comparison of two four-year periods, 2001/02
2005/06 and 2006/072009/10, shows real budget
expenditure growth of 1.9 percent and economic growth
of 3.3 percent during the first period and a real budget
expenditure growth of 12.5 percent and economic growth
of 4.2 percent during the second period, indicating a
significantly reduced productivity of the budget
expenditure in the second period.
Unpredictable Position and Weak Role

of the Government Finance
Conclusion
Revenue growth in 2009/10 slowed to 25.4 percent in

comparison to a growth of 33.3 percent in 2008/09. Cash
foreign grants increased by 1.9 percent only. Such grants
had risen by 39.2 percent in 2008/09. On cash basis, capital
expenditure growth in 2009/10 (20.2 percent) remained
short of the revenue growth, indicating that more resources
were allocated for the government consumption, thereby
constraining the foundation for increased production and
productivity in the future. A comparison of the budgets
targets and actuals during a period of past six years
40
September 2010
On June 3, 2009, the 22 political parties had agreed on a

common minimum program for the new government. The
program also envisaged for improving the supply situation,
controlling inflation, increasing the pace of industrialization,
and expediting the economic development process. The
budget for 2009/10 also highlighted the development
problems facing the economy and envisaged necessary
objectives, priorities, and programs to address the problem
and improve the situation. However, the promises and
commitments of the parties and the government have
remained unfulfilled. The situation has even deteriorated,
Economy
as mentioned before. The political leadership has failed
to prioritize the economic development agenda, hence
making the development outcomes inadequate besides
deepening the development problems. Lack of focus on
implementation has undermined the overall development
process besides hurting the credibility of the development
planning, policymaking, and the budgeting exercise. There
have been large time and cost overruns as well as lapses
in quality levels in the development projects under the
public sector. Focus on sound implementation of the plans,
policies, and programs has been lacking, thereby wasting
scarce national resources, sacrificing the productivity, and
undermining economic growth. So, what is crucial is
developing the capacity and arrangements that could
transform the development visions, goals, and policies into
outcomes in the framework as anticipated. The focus should
lie on addressing the macroeconomic imbalances and policy
uncertainties that have generated distortions, reduced
productive investments, weakened the economic growth,

and reduced trust and confidence in the economy.
Macroeconomic policies should be designed and
implemented in such a way that sound progress could be
made toward attaining the economic development
objectives on a sustainable basis. Besides marinating the
price stability, the large trade imbalance and the risks to
the external sector stability should be contained. Productive
investments in the economy need to be attracted and the
trust and confidence in the economy raised. In the absence
of such arrangements, economys distress would continue
to worsen and the economic development agenda of the
country relegated to the background. In a least developed
country like Nepal, such a phenomenon would be the least
desired one. n
Invitation to Join a Panel of Resource Person

The Institute of Chartered Accountants of Nepal (ICAN) hereby seeks application from the desirous candidates with qualification
mentioned hereunder to be enlisted in the pool of resource person for IT Training.
1. Training Details
ICAN has introduced a 100 hours of Information Technology
Training that is mandatory for the students pursuing Chartered
Accountancy Course with effect from June 2010. The training
is designed to address the theoretical and practical concept of
IT. It has basically the following modules:
S.N.
Module
Hours
Fundamentals of Information Technology
MS-Excel
16
MS-Word
10
MS-PowerPoint
Introduction to Data Base & Data Base Management System
16
Accounting Packages
30
Computer Aided Audit Techniques
15
Total
100
2. Qualification Expected
We are expecting professionals with a proven experience in the
above modules and with following qualification as per below:
1. Chartered Accountants. Special preference will be
given to those having completed CISA or DISA
course.
2. IT professionals with recognized qualification (such

as BE, BCA, BIT or like).
We understand that a candidate may not have a whole sole
experience in all the above modules. As such we encourage the
applicant to apply for only those modules which they have
experience and qualification.
3. Application
The potential candidates may apply for empanelment by filling
the Expression of Interest (EOI) Form which is available upon
request or can be downloaded from the Institutes website
www.ican.org.np .
4. Selection Process and Tenure
The selection of the candidates for empanelment in the pool of
resource person would be finalized by the IT Committee of
ICAN. The tenure of the resource person would be for a period
of six months extendable upon assessment of satisfactory
performance.
For further details, contact the Education Department, ICAN,
Babarmahal.
September 2010
41
Economy
Nepals WTO commitments in

financial services and their
implications
Paras Kharel*
In acceding to the World Trade Organization (WTO) in

2004, Nepal made commitments to liberalize its trade rules
in the areas of goods, services and intellectual property
under a binding international rules-based trading regime.
The relevant agreement under the WTO governing trade
in services is the General Agreement on Trade in Services
(GATS). Nepal is committed to liberalize 11 of the 12
services sectors, and 70 sub-sectors under them. One of
the sectors is financial services, consisting of insurance and
insurance-related services, and banking and other financial
services.
As per WTO rules, Nepal has made two types of
commitments in services: horizontal and sectoral.
Horizontal commitments are applicable to all the sectors
in which Nepal has made any liberalization commitments.
Sectoral commitments, on the other hand, relate to the
specific sub-sectors in which Nepal has made liberalization
commitments, with such commitments also specified for
each of the four modes of services supply: a) Mode 1: crossborder supply (from the territory of one member into the
territory of any other member); b) Mode 2: consumption
abroad (in the territory of one member to the service
consumer of any other member); c) Mode 3: commercial
presence (by a service supplier of one member, through
commercial presence, in the territory of any other member);
and d) Mode 4: presence of natural persons (by a service
supplier of one member, through the presence of natural
persons of a member, in the territory of any other member).
*
Horizontal commitments
Under horizontal commitments, Nepal has committed to
keep the first three modes of service supply generally
unrestricted except for some conditions. In terms of market
access, the only restriction in Mode 2 is that Nepali citizens
on personal travel abroad can obtain convertible currency
up to US$2,000 only. In Mode 3, Nepal has committed that
the conditions of supply of services by an existing foreign
supplier will not be made more restrictive than they existed
at the time of Nepals accession to the WTO. In contrast,
Nepal has left service supply under Mode 4 unbound,
that is it has not made any commitments, except for
temporary entry and stay of natural persons of WTO
members in the categories of services sales persons, persons
responsible for setting up a commercial presence and intracorporate transferees (executive and managers, and
specialists). Services suppliers in the last category should
not exceed 15 percent of local employees and not provide
services for more than 10 years.
On national treatment, there are no restrictions in Mode
1 except with respect to foreign exchange provided to
foreigners (excluding those categories of persons covered
by Nepals commitments) to pay for any cross-border
services. There are no restrictions in Mode 2. A relevant
restriction in Mode 3 relevant to financial services is that
incentives and subsidies provided by the Government of
Senior Programme Officer, South Asia Watch on Trade, Economics & Environment (SAWTEE), Kathmandu.
42
September 2010
Economy
Nepal are available only to enterprises wholly owned by
Nepali nationals.
General conditions governing commitments in

financial services
There are some general conditions governing Nepals
specific commitments in financial services. A notable one
is that commitments are made not only in accordance with
GATS but also the Annex on Financial Services, which
provides a prudential carve-out, whereby members can
take measures for prudential reasons, including for the
protection of investors, depositors, policyholders or persons
to whom a fiduciary duty is owed by a financial services
supplier, or to ensure the integrity and stability of the
financial system. All the commitments are subject to entry
requirements, domestic laws, rules and regulations and
the terms and conditions of the Nepal Rastra Bank,
Insurance Board and any other competent authority in
Nepal, as the case may be, which are consistent with Article
VI (on domestic regulation) of the GATS and paragraph
2 of the Annex on Financial Services.
Financial services in the form of operations where
commitments are made can be carried out in Nepal through
a locally incorporated company. Since 1 January 2010,
foreign service providers can provide insurance services
and wholesale banking through branches. This means
while insurance services and wholesale banking services
can be provided by foreigners through a locally
incorporated company as well as a branch, retail banking
services can be provided by foreigners only through a
locally incorporated company. Only a licensed commercial
bank, a licensed specialized bank or a registered finance
company may accept deposits. Only a licensed commercial
bank may accept deposits, which are repayable upon
demand. Only financial institutions with rating of at least
B by credit rating agencies such as Moody and Standard
& Poor can have commercial presence in Nepal. The total
foreign shareholding in any institution providing financial
services is limited to 67 percent of the issued share capital.
However, the scope of operation and equity structure of
existing foreign financial service providers have been
bound at the level existing on the date of accession. The
shares held by foreign nationals and foreign financial
institutions in their locally incorporated companies are not
transferable without the prior written approval of the

Nepal Rastra Bank or any other competent authority as
the case may be. Representative offices may not be engaged
in commercial business. The members of the board of
directors of a financial service supplier should be in
proportion to equity representation of that financial service
supplier.
Specific commitments in financial services

The sub-sectors within insurance and insurance-related
services in which Nepal has made commitments are a)
direct insurance: life and non-life; b) re-insurance and
retrocession; and c) services auxiliary to insurance, including
insurance broking and agency services. In terms of market
access and national treatment in direct insurance, Modes
1 and 2 are without restrictions, whereas in Mode 3, there
are no restrictions except as indicated in the general
conditions (mentioned above). Mode 4 is left unbound
except for what is conceded in the horizontal section
(mentioned above). The same commitments hold in the
two other sub-sectorsre-insurance and retrocession, and
services auxiliary to insuranceexcept that in the case of
the former, there were greater restrictions in market access
until 31 December 2007.
The area of operations under banking and other financial
services in which Nepal has made commitments are given
in Table 1.
Compared to insurance and insurance-related services,
specific commitments in banking and other financial
services are less liberal. In terms of market access, Modes
1 and 2 are unbound (no commitments) except for
provision and transfer of financial information, and financial
data processing and related software by suppliers of other
financial services, and advisory services on all the listed
activities. In Mode 3, there are no limitations other than
those indicated in general conditions. Also, derivative
products under sub-sector f and settlement of and clearing
services for financial assets, including securities, derivative
products and other negotiable instruments under j, have
been kept unbound until the Government of Nepal
determines what types of entities can conduct these services,
the related laws and regulations are established and such
September 2010
43
Economy
Table 1: Sub-sectors in banking and other financial

services where Nepal had made commitments
(a)
Acceptance of deposits and other repayable funds

from the public
(b)
Lending of all types, including, inter-alia, consumer

credit, mortgage credit, factoring and financing of
commercial transactions.
(c)
Financial leasing
(d)
All payment and money transmission services
(e)
Guarantees and commitments
(f)
Trading for own account or for account of

customers, whether on an exchange, an over-thecounter market or otherwise, the following:
Comparison with South Asian countries
(g)
money-market instruments (cheques, bills,

certificates of deposits, etc.)
foreign exchange
derivative products including, but not limited
to, futures and options
exchange rate and interest rate instruments,
other than swap.
transferable securities
other negotiable instruments and financial
assets, including bullion.
Participation in issues of all kinds of securities,
including under-writing and placement as agent
(whether publicly or privately) and provision of
service related to such issues.
(h)
Money broking
(i)
Asset management, such as cash or portfolio

management, all forms of collective investment
management, pension fund management, custodial
depository and trust services.
(j)
Settlement of and clearing services for financial

assets, including securities, derivative products,
and other negotiable instruments
(k)
Provision and transfer of financial information,

and financial data processing and related software
by providers of other financial services.
(l)
Advisory services on all the activities listed above
44
business is authorized by the government or other

designated authority. In terms of national treatment, Modes
1 and 2 are without restrictions, and Mode 3 is without
restrictions except as specified in the general conditions
and the horizontal section. There are no commitments in
Mode 4 for both market access and national treatment
except as specified in the horizontal section
September 2010
A comparison of Nepals commitments in financial services

with other South Asian WTO members that have made
commitments in that sector India, Pakistan and Sri
Lankashows that Nepals commitments are more liberal
than those of the others. Commitments of the three other
countrieswhich were members of the General Agreement
on Tariffs and Trade (GATT)-1947, the WTOs
predecessorare comparatively narrow and strongly
similar and consistent for all the sub-sectors in financial
services for both market access and national treatment.
The difference between Nepals and the trios commitments
is particularly pronounced in market access for insurance
and insurance-related services, where Nepal has made no
restrictions in Modes 1 and 2 in life and non-life insurance
services, whereas India does not have any commitment in
life insurance, and Pakistan and Sri Lanka have made
commitments only in Mode 3 in this sub-sector. In banking
services, India, Pakistan and Sri Lanka committed to allow
equity participation of around 50 percent, less than Nepals
commitment. India limited the number of services providers
to 12 and put a cap on total assets of foreigners in the
banking system. The fourth mode of supply is restrictive
in all South Asian countries, though with some variation,
which likely reflects the different labour and immigration
laws of the specific countries.
Implications and way forward
In the main, Nepals commitments at the WTO in financial
services were not higher than the actual level of liberalization,
which had already led to a sizeable presence of foreign service
providers in the domestic market. Therefore, for example,
Nepals Mode 3 liberalization commitments in the area of life
and non-life insurance (through locally incorporated joint
venture or branch), and banking (through locally incorporated
Economy
joint venture) only served to lock in the countrys liberalization
policy in the financial services sector. However, allowing
foreign service suppliers to open up branches in Nepal in
wholesale banking beginning 1 January 2010 represents a
commitment beyond the current level of liberalization, and
may have a visible impact on the financial sector even in the
short to medium run.
The goal behind agreeing to open up wholesale branch banking
was to attract foreign banks, which would be able to mobilize
funds, not just domestically but also from abroad, on a scale
necessary for financing huge infrastructure projects. It is
imperative that government agencies and Nepal Rastra Bank
formulate and implement policies to realize that goal. On
their part, banks should start exploring the possibilities of
going for mergers to be in a position to compete with foreign
bank branches in wholesale banking if and when they come
calling.
As per its commitment to allow foreign commercial presence
in trade in derivative products, and settlement of and clearing
services for financial assets, the government, in consultation
with stakeholders, should make preparations for determining
what types of entities can conduct these services and
authorizing conducting such business, and establish relevant

laws and regulations.
The operations of a growing number of insurance companies
in the market will have a meaningful impact on Nepals longterm development only if funds are collected domestically,
including small, scattered savings, are channelized into
productive investment activities that will positively impact
the real sector and economic growth. There is an observed
trend among foreign insurance companies operating in Nepal
repatriating the insurance premiums they collect to their
parent companies for investment abroad. It is imperative that
the relevant authorities take measures to prevent such capital
flight and ensure that funds mobilized within the country are
put to use for long-term domestic economic development.
Such measures can be taken within the scope of existing laws,
rules and regulations, and without running afoul of WTO
rules, political will permitting.
In addition, the regulatory and supervisory capacity of Nepal
Rastra Bank and the Insurance Board should be enhanced to
maintain financial sector stability even as the number of
players in the financial market increases and the types of
services traded expand.
September 2010
45
Management
Continuous Learning:
A Choiceless Alternative
Bhuwan Raj Chataut*
We cannot solve problems using the same kind of

thinking we used when we created them.
"It is impossible for a man to learn what he thinks

he already knows."
-Albert Einstein
- Greek philosopher Epictetus
The above great words of preeminent scientist, a great

innovator, a lifelong learner and globally revered
personality - are getting more relevant and valuable for
present and the days to come. Everything is changing
rapidly so there are no other choices for everyone rather
than to be in dynamism. Hence, those who cope with this
dynamism could survive and sustain; and those could not,
gets perished. It is the law of nature.
Continuous Learning is multidimensional and neverending

process that gathers more and more information from
every stakeholder present in environment, and it processes,
analyses, interprets and finds a set of relevant concepts,
designs and strategies. Then, it starts disseminating to
execute and gets up-to-date feedback. Again, it repeats the
phenomenon to form a cycle. Therefore, it needs to
conceptually integrate with every aspect of organization.
And, it is also the significant determinant for culture,
innovation and creativity in workplace.
Likely, this pervasive law of existence also works for all

types of organization. As an individual who stops moving
for a minute, get numbers step back; and an organization
that stops creating newness, gets uprooted sooner or later.
The level of thinking needs to be updated, upgraded,
figurative and visionary; no old beliefs, patterns, dogmas
could give way-out. Hence, the panacea for any
organization to come out of possible predicament of future
complexity and uncertainty is continuous learning. It has
become a proven choiceless alternative for all kinds of
organization and business houses to achieve their destiny
with efficiency and effectiveness.
Fundamental of Continuous Learning in

Organization
The ability of an organization is not measured by what it

knows rather how it learns the process of learning.
Management practices should encourage, recognize and
reward: openness, systematic thinking, creativity, a sense
of efficacy and empathy. Management can get all through
continuous learning. And the organization that opt
continuous learning (CL) are called learning organization.
Learning organization first learns and then practices and
again learns from the outcomes of that practice. It learns
not only for the learning sake; it learns to produce results,
to accomplish the objectives and learning process continues
till it remains in existence and vice versa. Hence, CL never
ceases as it has cyclical form not a linear.
*Mr. Chataut is a Freelance Consultant and Trainer for Finance and Management.
46
September 2010
Management
Needless to say, management has apex responsibility in
any organization that leads people, organizes the resources
in order to attain the predetermined goals. So,
authoritatively a manager and his whole team are delegated
to choose the way what organization needs to use to add
value for their stakeholders. Thus, a manager and his whole
team should have the following qualities to be proven a
learning organization with CL.
The very first quality is openness and communication. I
remember the words of Donald Trump, an American
business magnate and author, he has said Watch, listen
and learn. You cant know it yourself. Certainly, the team
that governs organization must be honest, unbiased,
unconditioned to the stakeholders of environment. This
quality only can lead an organization to cyclical learning.
Second attribute is learning by doing. The first is to gather
information, ideas and concepts and second quality is
applying new information and skills and doing something
that create value. Without doing, one cannot understand,
one cannot learn. One of the Chinese proverbs says- I see,
I forget. I hear, I remember. I do, I understand.
Third, getting up-to-date feedback- it is the backbone of
learning. Fourth, mutual respect and support- in the absence
of this ingredient, the organization loses its harmony, and
obviously gets interruption in CL. The most significant
and fifth, ethics and integrity- it is quality of being a whole.
Dividing an elephant in half does not produce two small
elephants. Until and unless, there is integrity and ethics,
addressing the perspective of CL is impossible.
Along with these qualities for CL, there are five disciplines
of the learning organization for developing three core
learning capabilities: fostering aspiration, developing
reflective conversation, and understanding (Senge, 1990).
Peter M. Senge is an American scientist; a leading writer
and author of the seminal works "The Fifth Discipline: The
Art and Practice of the Learning Organization". He has
explained the five disciplines as: first, personal mastery is
a discipline of continually clarifying and deepening our
personal vision, of focusing our energies, of developing
patience, and of seeing reality objectively. Second, mental
models are deeply ingrained assumptions, generalizations,
or even pictures of images that influence how we
understand the world and how we take action. Third,

building shared vision - a practice of unearthing shared
pictures of the future that foster genuine commitment and
enrollment rather than compliance. Fourth, team learning
starts with dialogue, the capacity of members of a team to
suspend assumptions and enter into genuine thinking
together. And, systems thinkings is the fifth discipline that
integrates the all above.
Continuous Learning and Worlds Top

CEOs/Companies
It is not enough to just do your best or work hard;
you must know what to work on.
- W. Edwards Deming
3M (Minnesota Mining & Manufacturing Co.), a St. Paul
company is a leader in research and development in global
arena. It looks imaginary when George W. Buckley, the
Chairman, President and Chief Executive Officer says,
even in the worst economic times in memory, we released
over 1000 new products as reported by a global business
magazine, Fortune (Vol. 162, No. 5, Sep 24). 3Ms core
strength is applying its more than 40district technology
platforms contribute to a wide array of customer needs. It
employs 75,000 people worldwide and has operation in
more than 65 countries with twenty billion dollars in annual
sales. Altogether, 3M employs 6,500 people (out of about
75,000) in R&D.
Buckley has introduced CL and made it an integral part
of 3M. He has accelerated the innovation machine by
developing his personal time, his energy, his focus, to
empowering the researches, opening up their minds and
urging them to restore the luster of 3M. Thats why, 3M is
everywhere and the same magazine writes- 3M is
everywhere. Apple and many others couldn't do what they
do without 3M. The St. Paul Company produces a mindbending 55,000 products.
Another, Apple Inc. is top ranked company among the 50
most admired companies around the globe for 2010
surveyed and published by Fortune. Apple had started its
September 2010
47
Management
journey with Apple I in 1976 and till this date it has released
varieties of updated and different products such as iPod,
iPad, Apple TV, iPhone, Mac mini, Mac Book and so on.
The credit goes to the CEO of the Apple- Steve Jobs who
has been declared the best performing CEO among 50 top
CEO in the world by the prestigious Harvard Business
Review at the end of 2009. He continually focuses on
innovation.
Steve Jobs says- You cant just ask customers what they
want and then try to give that to them. By the time you
get it built theyll want something new. This statement
gives a clear picture to his dedication for innovation and
creativity.
Let us have a glance at another company whose brand
name is Walmart. Wal-mart Stores Inc. is the largest retail
chain on the earth having an elephantine network of
discount stores that employ more than 2 million people in
fifteen countries. The present CEO of Walmart Mike Duke
says revealing the secret behind its success story- Walmart
started out with a single discount store in Northwest
Arkansas and less than 50 years grew to become the worlds
largest retailer, with thousands of stores and labs and
millions of associate. Our culture of ethics and integrity
has been a constant throughout that transformation.
Wherever we go and study the cases, the success story
behind them is the same. Their openness, application of
information and skills into practices, taking feedback,
mutual respect and support, and ethics and integrity- have
played significant role to striving excellence. I have to
mention here the three basic beliefs of Walmart that guides
their decisions and leadership are as follows- Respect for
the individual, Service to our customers and Striving for
excellence.
Be a Learning Organization
And miles to go before I sleep,
And miles to go before I sleep.
- Robert Frost
We have mainly three types of organizations, they are-
48
September 2010
government owned companies, public and private.

Government owned companies are influenced by
bureaucratic model of management at greater extent. They
are rigid in structure, slow in decision making, traditional,
change averter and conditioned where as public and private
are flexible, faster, open and modern in comparison.
Nepalese organizations are yet to incorporate CL. They
need to be learning organization by keeping customer at
centre and should be so open to keep their eyes on taste,
preferences, needs of valued customers even without a
single blink. Moreover, the management should integrally
link the knowledge acquisition by openness and
communication, rational interpretation and distribution
of information, cooperation, and the integrity to the
organization. It ensures the organizations survival and
sustainability in the market by providing the much value
for what the customer pays. It also aids in retaining the
customers loyalty to particular brand for long. It is the
key for continued existence of an organization in todays
world.
Concluding Remark
The dogmas of the quiet past are inadequate
to the stormy present.
- Abraham Lincoln
Todays organization exists in tough rivalry, advanced
technology and complexity. Certainly, they need to replace
the old pattern with new and should empower people and
align its resources to get excellence. Aligning all resources
efficiently and effectively only can create the operational
excellence that paves corporations path to success.
However, the art of aligning resources comes through
continuous learning. It keeps customers and their needs
in the centre. It repeatedly focuses on the first choice of
customers and it also gathers information, inquires,
and takes feedback for customer. As CL accepts its
customers as real assets, it leads an organization to a new
height and has become a choiceless alternative for every
organization. n
SMPs
The Evolution of SMPs

International Federation of Accountants
President Robert L Bunting Says SMPs Should
Evolve to Satisfy SMEs Growing Needs
Small- and medium-sized practices (SMPs) today can no
longer rely strictly on compliance work to pay the bills.
The reason why is simple: SMEs (small- and medium-sized
enterprises) the traditional client of the SMP increasingly
need a broad range of competencies beyond the core skill
set of the small practice. At the same time, the threshold
for mandatory statutory audits has risen in some countries
and increases are under consideration in many others. A
fast-changing and complex regulatory environment means
that SMEs want their SMP to provide proactive business
advisory services. SMEs need advice that will help them
generate business plans and financial forecasts, identify
and manage risk, define and implement IT systems, and
value the business. SMPs must evolve to meet these growing
needs or face dwindling clients and revenues. A new study
by the International Federation of Accountants (IFAC)
makes clear that smaller accountancy practices need to
address their skills base, their working methods and their
referral models if they are to meet the evolving needs of
the SMEs that are their lifeblood. The study The Role of
Small and Medium Practices in Providing Business Support
to Small- and Medium-sized Enterprises, written by
professors Robert Blackburn and Robin Jarvis points out
that accountants are still SMEs most frequently used
source of advice. According to a study last year by the
UKs Open University, trade connections, the media, family
and friends are all important, but none ranks as highly as
the accountant. SMPs are usually highly experienced in
dealing with SMEs and, as small enterprises themselves,
can empathise with their clients resource constraints. This
contrasts with very large practices where the focus is on
large companies and SME clients may have to deal with
several departments.
Building Trust
But the assumption that SMEs nearly always choose an
SMP is not correct. A significant proportion of the clients
of large accounting practices the Big Four and secondtier practices in most countries are SMEs. These are more
likely to have the resources and the benefits of economies
of scale to offer services and products to meet their clients
accounting and other specialised support needs; in fact,
they often position themselves as professional services
supermarkets. Many SMPs actually use larger firms to
provide limited speciality services to their SME clients or
as a technical backstop for their own client service work.
While compliance work will remain hugely important for
SMPs accounting services and tax are core services at all
levels in public practice technical competency and timely
delivery in compliance work build trust and usually lead
to requests for non-compliance advice and support. This
is a time-proven formula driven in part by the nature of
most small business owner-managers, many of whom are
determined to make all their own decisions and avoid
advertising any managerial weakness. In this kind of
fortress enterprise culture, many SMEs do not request
advisory services until the expert has already provided a
specific demonstration of their competency.
Becoming Knowledge Professionals

Business consulting services represent a crucial growth
area for SMPs. As mentioned at the start, the raising of the
statutory audit threshold has diminished a key revenue
stream for many SMPs and the market is increasingly
competitive. As a result, if they are to thrive rather than
merely survive, SMPs must diversify and focus on other
September 2010
49
SMPs
advice requirements for SMEs (or provide audit services

to larger companies). They must develop their skills base
beyond bookkeeping, tax preparation and audit. In short,
they must move from being accounting technicians to
knowledge professionals. So how can SMPs overcome the
unavoidable resource constraints in-house and provide a
range of services to their clients? The most common model
is to expand the technical and soft skills of existing
personnel. Some accountants can make the transition from
accounting expert to management adviser through
experience and self development. Others may need training
or coaching to grasp the necessary flexibility and an
understanding of the context and cultural environment of
the SME. For example, accountants might need to hone
their interpersonal skills or make time to discuss a clients
succession planning (or other business advisory needs).
Another common model is to focus on a specific industry
sector or speciality linked, for example, to the music
industry or environmental legislation. This model usually
works best in large cities or where a particular industry is
highly concentrated. But there have been successful cases
where SMPs are willing to travel further to serve their
clients. A third model, which can be a standalone strategy
or one that complements the first two, involves the SMP
participating in a high-quality referral network. Before
using one, SMP owners should analyse the different types
of networks and carefully consider how they will monitor
service quality and timelines for the clients they refer. But
referral networks offer SMPs many potential advantages:
they are an effective way to satisfy the increasing breadth
of demands from SME clients. They also offer the
opportunity to gain clients through referrals from other
network members or to win new ones due to their more
extensive service capabilities.
Why SMEs Use SMPs

Competency: SMEs often lack the full range of managerial
expertise. Most outsource their financial management to
SMPs with their required technical competencies and
expertise in statutory audit and taxation.
Trust: As members of a regulated profession with codes
of conduct, accountants enjoy institutional trust. Their
provision of compliance services wins them competence
trust.
Responsiveness/proximity: SMEs rate SMPs
responsiveness to their demands so highly that it can be
regarded as more important than a qualification or
competency. The geographical proximity of SMPs to their
SME clients is also important. Many owner-managers
prefer face-to-face meetings with their advisers, and value
ease of access.
Robert L. Bunting is a Past President of the International Federation of Accountants (IFAC)

This article originally appeared in the ACCA's Accountancy Futures
50
September 2010
NSQC
NEPAL STANDARD ON QUALITY CONTROL 1
QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS

OF HISTORICAL FINANCIAL INFORMATION, AND OTHER ASSURANCE
AND RELATED SERVICES ENGAGEMENTS
Introduction
1. The purpose of this Nepal Standard on Quality Control
(NSQC) is to establish standards and provide guidance
regarding a firms responsibilities for its system of
quality control for audits and reviews of historical
financial information, and for other assurance and
related services engagements. This NSQC is to be read
in conjunction with Parts A and B of the ICAN Code
of Ethics.
2. Additional standards and guidance on the
responsibilities of firm personnel regarding quality
control procedures for specific types of engagements
are set out in other pronouncements of the Auditing
Standards Board (AuSB). Nepal Standards on Auditing
(NSA) 220, Quality Control for Audits of Historical
Financial Information, for example, establishes
standards and provides guidance on quality control
procedures for audits of historical financial information.
3. The firm should establish a system of quality control
designed to provide it with reasonable assurance that
the firm and its personnel comply with professional
standards and regulatory and legal requirements,
and that reports issued by the firm or engagement
partners are appropriate in the circumstances.
4.
A system of quality control consists of policies designed

to achieve the objectives set out in paragraph 3 and the
procedures necessary to implement and monitor
compliance with those policies.
5. This NSQC applies to all firms. The nature of the

policies and procedures developed by individual firms
to comply with this NSQC will depend on various
factors such as the size and operating characteristics
of the firm, and whether it is part of a network.
Definitions
6. In this NSQC, the following terms have the meanings
attributed below:
(a)
Engagement partner the partner or other

person in the firm who is responsible for the
engagement and its performance, and for the
report that is issued on behalf of the firm, and
who, where required, has the appropriate
authority from a professional, legal or regulatory
body.
(b)
Engagement quality control review a process

designed to provide an objective evaluation,
before the report is issued, of the significant
judgements the engagement team made and the
conclusions they reached in formulating the
report.
(c)
Engagement quality control reviewer a

partner, other person in the firm, suitably
qualified external person, or a team made up of
such individuals, with sufficient and appropriate
experience and authority to objectively evaluate,
before the report is issued, the significant
judgements the engagement team made and the
conclusions they reached in formulating the
report.
September 2010
51
NSQC
(d) Engagement team all personnel performing
an engagement, including any experts contracted
by the firm in connection with that engagement.
(e) Firm a sole practitioner, partnership,
corporation or other entity of professional
accountants.
(f) Inspection in relation to completed
engagements, procedures designed to provide
evidence of compliance by engagement teams
with the firms quality control policies and
procedures.
(g) Listed entity an entity whose shares, stock or
debt are quoted or listed on a recognised stock
exchange, or are marketed under the regulations
of a recognised stock exchange or other
equivalent body.
(h) Monitoring a process comprising an ongoing
consideration and evaluation of the firms system
of quality control, including a periodic inspection
of a selection of completed engagements,
designed to enable the firm to obtain reasonable
assurance that its system of quality control is
operating effectively.
(i) Network firm an entity under common
control, ownership or management with the firm
or any entity that a reasonable and informed third
party having knowledge of all relevant
information would reasonably conclude as being
part of the firm nationally or internationally.
(j) Partner any individual with authority to bind
the firm with respect to the performance of a
professional services engagement.
(k) Personnel partners and staff.
(l) Professional standards AuSB Engagement
Standards, as defined in the AuSBs Preface to
the Nepal Standards on Quality Control,
Auditing, Assurance and Related Services, and
relevant ethical requirements, which ordinarily
52
September 2010
comprise Parts A and B of the ICAN Code of

Ethics and relevant national ethical requirements.
(m) Reasonable assurance in the context of this
NSQC, a high, but not absolute, level of
assurance.
(n) Staff professionals, other than partners,
including any experts the firm employs.
(o) Suitably qualified external person an
individual outside the firm with the capabilities
and competence to act as an engagement partner,
for example a partner of another firm, or an
employee (with appropriate experience) of either
a professional accountancy body whose members
may perform audits and reviews of historical
financial information, or other assurance or
related services engagements, or of an
organisation that provides relevant quality control
services.
Elements of a System of Quality Control
7. The firms system of quality control should include
policies and procedures addressing each of the
following elements:
(a) Leadership responsibilities for quality within
the firm.
(b) Ethical requirements.
(c) Acceptance and continuance of client relationships
and specific engagements.
(d) Human resources.
(e) Engagement performance.
(f) Monitoring.
8. The quality control policies and procedures should
be documented and communicated to the firms
personnel. Such communication describes the quality
control policies and procedures and the objectives they
are designed to achieve, and includes the message that
each individual has a personal responsibility for quality
and is expected to comply with these policies and
procedures. In addition, the firm recognises the
importance of obtaining feedback on its quality control
NSQC
system from its personnel. Therefore, the firm
encourages its personnel to communicate their views or
concerns on quality control matters.
Leadership Responsibilities for Quality within the Firm
9. The firm should establish policies and procedures
designed to promote an internal culture based on the
recognition that quality is essential in performing
engagements. Such policies and procedures should
require the firms chief executive officer (or
equivalent) or, if appropriate, the firms managing
board of partners (or equivalent), to assume ultimate
responsibility for the firms system of quality control.
10. The firms leadership and the examples it sets
significantly influence the internal culture of the firm.
The promotion of a quality-oriented internal culture
depends on clear, consistent and frequent actions and
messages from all levels of the firms management
emphasising the firms quality control policies and
procedures, and the requirement to:
(a) Perform work that complies with professional
standards and regulatory and legal requirements;
and
(b) Issue reports that are appropriate in the
circumstances.
Such actions and messages encourage a culture that
recognises and rewards high quality work. They may
be communicated by training seminars, eetings, formal
or informal dialogue, mission statements, newsletters,
or briefing memoranda. They are incorporated in the
firms internal documentation and training materials,
and in partner and staff appraisal procedures such
that they will support and reinforce the firms view
on the importance of quality and how, practically,
it is to be achieved.
11. Of particular importance is the need for the firms
leadership to recognise that the firms business strategy
is subject to the overriding requirement for the firm to
achieve quality in all the engagements that the
firm performs. Accordingly:
(a) The firm assigns its management responsibilities
so that commercial considerations do not

override the quality of work performed;
(b) The firms policies and procedures addressing
performance evaluation, compensation, and
promotion (including incentive systems) with
regard to its personnel, are designed to
demonstrate the firms overriding commitment
to quality; and
(c) The firm devotes sufficient resources for the
development, documentation and support of its
quality control policies and procedures.
12. Any person or persons assigned operational
responsibility for the firms quality control system
by the firms chief executive officer or managing
board of partners should have sufficient and appropriate
experience and ability, and the necessary authority,
to assume that responsibility.
13. Sufficient and appropriate experience and ability
enables the responsible person or persons to identify
and understand quality control issues and to develop
appropriate policies and procedures. Necessary
authority enables the person or persons to implement
those policies and procedures.
Ethical Requirements
designed to provide it with reasonable assurance
that the firm and its personnel comply with relevant
ethical requirements.
15. Ethical requirements relating to audits and reviews
of historical financial information, and other assurance
and related services engagements ordinarily comprise
Parts A and B of the ICAN Code of Ethics together
with national requirements that are more restrictive.
The ICAN Code of Ethics establishes the fundamental
principles of professional ethics, which include:
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
September 2010
53
NSQC
(d) Confidentiality; and
(e) Professional behavior.
(b)
16. Part B of the ICAN Code of Ethics includes a conceptual

approach to independence for assurance engagements
that takes into account threats to independence,
accepted safeguards and the public interest.
(c) The accumulation and communication of

relevant information to appropriate personnel
so that:
17. The firms policies and procedures emphasise the

fundamental principles, which are reinforced in
particular by (a) the leadership of the firm, (b) education
and training, (c) monitoring, and (d) a process for
dealing with non-compliance. Independence for
assurance engagements is so significant that it is
addressed separately in paragraphs 17-21 below.
These paragraphs need to be read in conjunction with
the ICAN Code of Ethics.
Independence
the firm, its personnel and, where applicable, others
subject to independence requirements (including
experts contracted by the firm and network firm
personnel), maintain independence where required
by the ICAN Code of Ethics and national ethical
requirements. Such policies and procedures should
enable the firm to:
(a) Communicate its independence requirements
to its personnel and, where applicable, others
subject to them; and
(b) Identify and evaluate circumstances and
relationships that create threats to independence,
and to take appropriate action to eliminate
those threats or reduce them to an acceptable
level by applying safeguards, or, if considered
appropriate, to withdraw from the engagement.
19. Such policies and procedures should require:
(a) Engagement partners to provide the firm with
relevant information about client engagements,
including the scope of services, to enable the
firm to evaluate the overall impact, if any, on
independence requirements;
54
September 2010
Personnel to promptly notify the firm of

circumstances and relationships that create a
threat to independence so that appropriate
action can be taken; and
(i)
The firm and its personnel can readily

determine whether they satisfy independence
requirements;
(ii) The firm can maintain and update its

records relating to independence; and
(iii) The firm can take appropriate action
regarding identified threats to
independence.
designed to provide it with reasonable assurance that it
is notified of breaches of independence requirements,
and to enable it to take appropriate actions to resolve
such situations. The policies and procedures should
include requirements for:
(a)
All who are subject to independence requirements

to promptly notify the firm of independence
breaches of which they become aware;
(b) The firm to promptly communicate identified

breaches of these policies and procedures to:
(i) The engagement partner who, with the firm,
needs to address the breach; and
(ii) Other relevant personnel in the firm and
those subject to the independence
requirements who need to take appropriate
action; and
(c)
Prompt communication to the firm, if necessary,

by the engagement partner and the other
individuals referred to in subparagraph (b)(ii) of
the actions taken to resolve the matter, so that
the firm can determine whether it should take
further action.
21. Comprehensive guidance on threats to independence
NSQC
and safeguards, including application to specific
situations, is set out in Section 8 of the ICAN Code
of Ethics.
22. A firm receiving notice of a breach of independence
policies and procedures promptly communicates
relevant information to engagement partners, others
in the firm as appropriate and, where applicable, experts
contracted by the firm and network firm personnel,
for appropriate action. Appropriate action by the firm
and the relevant engagement partner includes
applying appropriate safeguards to eliminate the
threats to independence or to reduce them to an
acceptable level, or withdrawing from the engagement.
In addition, the firm provides independence education
to personnel who are required to be independent.
23. At least annually, the firm should obtain written
confirmation of compliance with its policies and
procedures on independence from all firm personnel
required to be independent by the ICAN Code of Ethics
and Regulatory ethical requirements.
24. Written confirmation may be in paper or electronic
form. By obtaining confirmation and taking appropriate
action on information indicating noncompliance, the
firm demonstrates the importance that it attaches to
independence and makes the issue current for, and
visible to, its personnel.
25. The ICAN Code of Ethics discusses the familiarity
threat that may be created by using the same
senior personnel on an assurance engagement over a
long period of time and the safeguards that might be
appropriate to address such a threat. Accordingly, the
firm should establish policies and procedures:
(a) Setting out criteria for determining the need
for safeguards to reduce the familiarity threat
to an acceptable level when using the same
senior personnel on an assurance engagement
over a long period of time; and
(b) For all audits of financial statements of listed
entities, requiring the rotation of the
engagement partner after a specified period in
compliance with the ICAN Code of Ethics and
Regulatory ethical requirements that are more
restrictive.
26. Using the same senior personnel on assurance

engagements over a prolonged period may create a
familiarity threat or otherwise impair the quality of
performance of the engagement. Therefore, the firm
establishes criteria for determining the need for
safeguards to address this threat. In determining
appropriate criteria, the firm considers such matters as
(a) the nature of the engagement, including the extent to
which it involves a matter of public interest, and (b)
the length of service of the senior personnel on the
engagement. Examples of safeguards include rotating
the senior personnel or requiring an engagement quality
control review.
27. The ICAN Code of Ethics recognises that the familiarity
threat is particularly relevant in the context of financial
statement audits of listed entities. For these audits, the
ICAN Code of Ethics requires the rotation of the
engagement partner after a pre-defined period,normally
no more than seven years, and provides related
standards and guidance. National requirements may
establish shorter rotation periods.
Acceptance and Continuance of Client Relationships
and Specific Engagements
for the acceptance and continuance of client relationships
and specific engagements, designed to provide it
with reasonable assurance that it will only undertake
or continue relationships and engagements where it:
(a)
Has considered the integrity of the client and

does not have information that would lead it
to conclude that the client lacks integrity;
(b)
Is competent to perform the engagement and

has the capabilities, time and resources to do
so; and
(c)
Can comply with ethical requirements.

The firm should obtain such information as
it considers necessary in the circumstances
before accepting an engagement with a new
client, when deciding whether to continue an
existing engagement, and when considering
acceptance of a new engagement with an
September 2010
55
NSQC
existing client. Where issues have been identified,
and the firm decides to accept or continue the
client relationship or a specific engagement, it
should document how the issues were resolved.
29. With regard to the integrity of a client, matters that the

firm considers include, for example:
31. In considering whether the firm has the capabilities,

competence, time and resources to undertake a new
engagement from a new or an existing client, the firm
reviews the specific requirements of the engagement and
existing partner and staff profiles at all relevant levels.
Matters the firm considers include whether:
Firm personnel have knowledge of relevant

industries or subject matters;
The identity and business reputation of the

clients principal owners, key management,
related parties and those charged with its
governance.
Firm personnel have experience with relevant

regulatory or reporting requirements, or the
ability to gain the necessary skills and knowledge
effectively;
The nature of the clients operations, including

its business practices.
The firm has sufficient personnel with the
Information concerning the attitude of the clients

principal owners, key management and those
charged with its governance towards such
matters as aggressive interpretation of
accounting standards and the internal control
environment.
Whether the client is aggressively concerned with

maintaining the firms fees as low as possible.
Indications of an inappropriate limitation in the

scope of work.
Indications that the client might be involved in

money laundering or other criminal activities.
The reasons for the proposed appointment of the

firm and non reappointment of the previous firm.
The extent of knowledge a firm will have regarding the

integrity of a client will generally grow within the
context of an ongoing relationship with that client.
30. Information on such matters that the firm obtains may
come from, for example:
56
Communications with existing or previous

providers of professional accountancy services to
the client in accordance with the ICAN Code of
Ethics, and discussions with other third parties.
Enquiry of other firm personnel or third parties
such as bankers, legal counsel and industry peers.
Background searches of relevant databases.
September 2010
necessary capabilities and competence;
Experts are available, if needed;
Individuals meeting the criteria and eligibility

requirements to perform engagement quality
control review are available, where applicable;
and
The firm is able to complete the engagement

within the reporting deadline.
32. The firm also considers whether accepting an

engagement from a new or an existing client may give
rise to an actual or perceived conflict of interest. Where
a potential conflict is identified, the firm considers whether
it is appropriate to accept the engagement.
33. Deciding whether to continue a client relationship
includes consideration of significant matters that have
arisen during the current or previous engagements, and
their implications for continuing the relationship. For
example, a client may have started to expand its business
operations into an area where the firm does not possess
the necessary knowledge or expertise.
34. Where the firm obtains information that would have
caused it to decline an engagement if that information
had been available earlier, policies and procedures
on the continuance of the engagement and the client
relationship should include consideration of:
NSQC
(a) The professional and legal responsibilities that
apply to the circumstances, including whether
there is a requirement for the firm to report to
the person or persons who made the
appointment or, in some cases, to regulatory
authorities; and
(b) The possibility of withdrawing from the
engagement or from both the engagement and
the client relationship.
35. Policies and procedures on withdrawal from an
engagement or from both the engagement and the client
relationship address issues that include the following:
Discussing with the appropriate level of the

clients management and those charged with its
governance regarding the appropriate action that
the firm might take based on the relevant facts
and circumstances.
If the firm determines that it is appropriate to

withdraw, discussing with the appropriate level
of the clients management and those charged
with its governance withdrawal from the
engagement or from both the engagement and the
client relationship, and the reasons for the
withdrawal.
Considering whether there is a professional,

regulatory or legal requirement for the firm to
remain in place, or for the firm to report the
withdrawal from the engagement, or from both
the engagement and the client relationship,
together with the reasons for the withdrawal, to
regulatory authorities.
Documenting significant issues, consultations,
conclusions and the basis for the conclusions.
Human Resources
it has sufficient personnel with the capabilities,
competence, and commitment to ethical principles
necessary to perform its engagements in accordance
with professional standards and regulatory and legal
requirements, and to enable the firm or engagement
partners to issue reports that are appropriate in the
circumstances.
37. Such policies and procedures address the following
personnel issues:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Recruitment;
Performance evaluation;
Capabilities;
Competence;
Career development;
Promotion;
Compensation; and
The estimation of personnel needs.
Addressing these issues enables the firm to ascertain the

number and characteristics of the individuals required
for the firms engagements. The firms recruitment
processes include procedures that help the firm select
individuals of integrity with the capacity to develop the
capabilities and competence necessary to perform the
firms work.
38. Capabilities and competence are developed through a
variety of methods, including the following:
Continuing professional development, including

training.
Professional education.
Work experience.
Coaching by more experienced staff, for

example, other members of the engagement team.
39. The continuing competence of the firms personnel

depends to a significant extent on an appropriate level of
continuing professional development so that personnel
maintain their knowledge and capabilities. The firm
therefore emphasises in its policies and procedures the
need for continuing training for all levels of firm
personnel, and provides the necessary training resources
and assistance to enable personnel to develop and
maintain the required capabilities and competence.
Where internal technical and training resources are
unavailable, or for any other reason, the firm may use a
suitably qualified external person for that purpose.
40. The firms performance evaluation, compensation and
September 2010
57
NSQC
promotion procedures give due recognition and reward
to the development and maintenance of competence and
commitment to ethical principles. In particular, the firm:
workload and availability of engagement partners so as

to enable these individuals to have sufficient time to
adequately discharge their responsibilities.
(a) Makes personnel aware of the firms expectations

regarding performance and ethical principles;
44. The firm should also assign appropriate staff with

the necessary capabilities, competence and time to
perform engagements in accordance with
professional standards and regulatory and legal
requirements, and to enable the firm or engagement
partners to issue reports that are appropriate in the
circumstances.
(b) Provides personnel with evaluation of, and

counseling on, performance, progress and career
development; and
(c) Helps personnel understand that advancement to
positions of greater responsibility depends,
among other things, upon performance quality
and adherence to ethical principles, and that
failure to comply with the firms policies and
procedures may result in disciplinary action.
41. The size and circumstances of the firm will influence the
structure of the firms performance evaluation process.
Smaller firms, in particular, may employ less formal
methods of evaluating the performance of their
personnel.
Assignment of Engagement Teams
42. The firm should assign responsibility for each
engagement to an engagement partner. The firm
should establish policies and procedures requiring
that:
(a) The identity and role of the engagement
partner are communicated to key members of
client management and those charged with
governance;
(b) The engagement partner has the appropriate
capabilities, competence, authority and time to
perform the role; and
(c) The responsibilities of the engagement partner
are clearly defined and communicated to that
partner.
43. Policies and procedures include systems to monitor the
58
September 2010
45. The firm establishes procedures to assess its staffs

capabilities and competence. The capabilities and
competence considered when assigning engagement
teams, and in determining the level of supervision
required, include the following:
An understanding of, and practical experience

with, engagements of a similar nature and
complexity through appropriate training and
participation.
An understanding of professional standards and

regulatory and legal requirements.
Appropriate technical knowledge, including

knowledge of relevant information technology.
Knowledge of relevant industries in which the

clients operate.
Ability to apply professional judgement.
An understanding of the firms quality control

policies and procedures.
Engagement Performance
designed to provide it with reasonable assurance
that engagements are performed in accordance with
requirements, and that the firm or the engagement
partner issue reports that are appropriate in the
circumstances.
47. Through its policies and procedures, the firm seeks to
establish consistency in the quality of engagement
performance. This is often accomplished through written
NSQC
or electronic manuals, software tools or other forms of
standardised documentation, and industry or subject
matter-specific guidance materials. Matters addressed
include the following:
50.
work performed by less experienced team members.

Reviewers consider whether:
How engagement teams are briefed on the

engagement to obtain an understanding of the
objectives of their work.
(a) The work has been performed in accordance with

requirements;
Processes for complying with applicable

engagement standards.
(b) Significant matters have been raised for further

consideration;
Processes of engagement supervision, staff

training and coaching.
(c) Appropriate consultations have taken place and

the resulting conclusions have been documented
and implemented;
Methods of reviewing the work performed, the

significant judgements made and the form of
report being issued.
(d) There is a need to revise the nature, timing and

extent of work performed;
Appropriate documentation of the work

performed and of the timing and extent of the
review.
(e) The work performed supports the conclusions

reached and is appropriately documented
Processes to keep all policies and procedures

current.
48.
49.
It is important that all members of the engagement team

understand the objectives of the work they are to
perform. Appropriate team-working and training are
necessary to assist less experienced members of the
engagement team to clearly understand the objectives
of the assigned work.
(f) The evidence obtained is sufficient and

appropriate to support the report; and
(g) The objectives of the engagement procedures
have been achieved.
Consultation
51.
Supervision includes the following:

Considering the capabilities and competence of
individual members of the engagement team,
whether they have sufficient time to carry out
their work, whether they understand their
instructions and whether the work is being
carried out in accordance with the planned
approach to the engagement.
Identifying matters for consultation or

consideration by more experienced engagement
team members during the engagement.
The firm should establish policies and procedures

designed to provide it with reasonable assurance that:
(a) Appropriate consultation takes place on
difficult or contentious matters;
Tracking the progress of the engagement.
Addressing significant issues arising during the

engagement, considering their significance and
modifying the planned approach appropriately.
Review responsibilities are determined on the

basis that more experienced engagement team
members, including the engagement partner, review
(b) Sufficient resources are available to enable

appropriate consultation to take place;
(c) The nature and scope of such consultations are
documented; and
(d) Conclusions resulting from consultations are
documented and implemented.
52.
Consultation includes discussion, at the a ppropriate

professional level, with individuals within or
outside the firm who have specialised expertise, to resolve
a difficult or contentious matter.
September 2010
59
NSQC
53.
54.
55.
56.
Consultation uses appropriate research resources as

well as the collective experience and technical
expertise of the firm. Consultation helps to promote
quality and improves the application of professional
judgement. The firm seeks to establish a culture in which
consultation is recognised as a strength and encourages
personnel to consult on difficult or contentious matters.
Effective consultation with other professionals requires
that those consulted be given all the relevant facts that
will enable them to provide informed advice on
technical, ethical or other matters. Consultation
procedures require consultation with those having
appropriate knowledge, seniority and experience within
the firm (or, where applicable, outside the firm) on
significant technical, ethical and other matters, and
appropriate documentation and implementation of
conclusions resulting from consultations.
A firm needing to consult externally, for example, a
firm without appropriate internal resources, may take
advantage of advisory services provided by (a) other
firms, (b) professional and regulatory bodies, or (c)
commercial organisations that provide relevant quality
control services. Before contracting for such services,
the firm considers whether the external provider is
suitably qualified for that purpose.
The documentation of consultations with other
professionals that involve difficult or contentious matters
is agreed by both the individual seeking consultation and
the individual consulted. The documentation is
sufficiently complete and detailed to enable an
understanding of:
Conclusions reached should be documented and

implemented.
58. Such procedures encourage identification of ifferences
of opinion at an early stage, provide clear guidelines
as to the successive steps to be taken thereafter,
and require documentation regarding the resolution
of the differences and the implementation of the onclusions
reached. The report should not be issued until the matter
is resolved.
59. A firm using a suitably qualified external person to
conduct an engagement quality control review
recognises that differences of opinion can occur and
establishes procedures to resolve such differences, for
example, by consulting with another practitioner or firm,
or a professional or regulatory body.
Engagement Quality Control Review
requiring, for appropriate engagements, an engagement
quality control review that provides an objective
evaluation of the significant judgements made
by the engagement team and the conclusions
reached in formulating the report. Such policies
and rocedures should:
(a)
Require an engagement quality control review

for all audits of financial statements of listed
entities;
(b)
Set out criteria against which all other audits

and reviews of historical financial information,
and other assurance and related services
engagements should be evaluated to determine
whether an engagement quality control review
should be performed; and
(c)
Require an engagement quality control review

for all engagements meeting the criteria
established in compliance with subparagraph(b).
(a) The issue on which consultation was sought; and

(b) The results of the consultation, including any
decisions taken, the basis for those decisions and
how they were implemented.
Differences of Opinion
57.
The firm should establish policies and procedures for

dealing with and resolving differences of opinion
within the engagement team, with those consulted
and, where applicable, between the engagement
partner and the engagement quality control reviewer.
60
September 2010
61. The firms policies and procedures should require the

completion of the engagement quality control review
before the report is issued.
NSQC
62.
Criteria that a firm considers when determining which

engagements other than audits of financial statements of
listed entities are to be subject to an engagement
quality control review include the following:
Significant risks identified during the

engagement and the responses to those risks.
Judgements made, particularly with respect to

materiality and significant risks.
The nature of the engagement, including the

extent to which it involves a matter of public
interest.
The identification of unusual circumstances or

risks in an engagement or class of engagements.
Whether appropriate consultation has taken place

on matters involving differences of opinion or
other difficult or contentious matters, and the
conclusions arising from those consultations.
The significance and disposition of corrected and

setting out:
(a)
The nature, timing and extent of an engagement

quality control review;
(b)
Criteria for the eligibility of engagement

quality control reviewers; and
(c)
Documentation requirements for an

engagement quality control review.
Nature, Timing and Extent of the Engagement Quality Control

Review
64. An engagement quality control review ordinarily
involves discussion with the engagement partner, a
review of the financial statements or other subject matter
information and the report, and, in particular,
consideration of whether the report is appropriate. It also
involves a review of selected working papers relating to
the significant judgements the engagement team made
and the conclusions they reached. The extent of the
review depends on the complexity of the engagement
and the risk that the report might not be appropriate in
the circumstances. The review does not reduce the
responsibilities of the engagement partner.
65. An engagement quality control review for audits of
financial statements of listed entities includes
considering the following:
uncorrected misstatements identified during the

engagement.
Whether laws or regulations require an

engagement quality control review.
The engagement teams evaluation of the firms

independence in relation to the specific engagement.
The matters to be communicated to management

and those charged with governance and, where
applicable, other parties such as regulatory
bodies.
Whether working papers selected for review

reflect the work performed in relation to the
significant judgements and support the
conclusions reached.
The appropriateness of the report to be issued.

Engagement quality control reviews for engagements
other than audits of financial statements of listed
entities may, depending on the circumstances,
include some or all of these considerations.
66. The engagement quality control reviewer conducts the

review in a timely manner at appropriate stages during
the engagement so that significant matters may be
promptly resolved to the reviewers satisfaction before
the report is issued.
67. Where the engagement quality control reviewer makes
recommendations that the engagement partner does not
accept and the matter is not resolved to the reviewers
satisfaction, the report is not issued until the matter is
resolved by following the firms procedures for dealing
with differences of opinion.
Criteria for the Eligibility of Engagement Quality Control
Reviewers
68. The firms policies and procedures should address
the appointment of engagement quality control
reviewers and establish their eligibility through:
September 2010
61
NSQC
(a)
The technical qualifications required to

perform the role, including the necessary
experience and authority; and
(b)
The degree to which an engagement quality

control reviewer can be consulted on the
engagement without compromising the
reviewers objectivity.
69. The firms policies and procedures on the technical

qualifications of engagement quality control reviewers
address the technical expertise, experience and authority
necessary to perform the role. What constitutes sufficient
and appropriate technical expertise, experience and
authority depends on the circumstances of the
engagement. In addition, the engagement quality control
reviewer for an audit of the financial statements of a
listed entity is an individual with sufficient and
appropriate experience and authority to act as an audit
engagement partner on audits of financial statements of
listed entities.
70. The firms policies and procedures are designed to
maintain the objectivity of the engagement quality
control reviewer. For example, the engagement quality
control reviewer:
(a)
Is not selected by the engagement partner;
(b)
Does not otherwise participate in the engagement

during the period of review;
(c)
Does not make decisions for the engagement

team; and
(d)
Is not subject to other considerations that would

threaten the reviewers objectivity.
71. The engagement partner may consult the engagement

quality control reviewer during the engagement. Such
consultation need not compromise the engagement
quality control reviewers eligibility to perform the role.
Where the nature and extent of the consultations become
significant, however, care is taken by both the
engagement team and the reviewer to maintain the
reviewers objectivity. Where this is not possible,
another individual within the firm or a suitably qualified
external person is appointed to take on the role of either
the engagement quality control reviewer or the
62
September 2010
person to be consulted on the engagement. The firms

policiesprovide for the replacement of the engagement
quality control reviewer where the ability to perform an
objective review may be impaired.
72. Suitably qualified external persons may be contracted
where sole practitioners or small firms identify
engagements requiring engagement quality control
reviews. Alternatively, some sole practitioners or small
firms may wish to use other firms to facilitate
engagement quality control reviews. Where the firm
contracts suitably qualified external persons, the firm
follows the requirements and guidance in paragraphs
68-71.
Documentation of the Engagement Quality Control Review
73. The engagement quality control review should
require documentation of:
(a)
The procedures required by the firms policies

on engagement quality control review have
been performed;
(b)
The engagement quality control review has

been completed before the report is issued;
and
(c)
The reviewer is not aware of any unresolved

matters that would cause the reviewer to
believe that the significant judgements the
engagement team made and the conclusions
they reached were not appropriate.
Engagement Documentation
Completion of the Assembly of Final Engagement Files
73a. The firm should establish policies and procedures for
engagement teams to complete the assembly of
final engagement files on a timely basis after
the engagement reports have been finalized.
73b. Law or regulation may prescribe the time limits by
which the assembly of final engagement files for specific
types of engagement should be completed. Where no
such time limits are prescribed in law or regulation, the
firm establishes time limits appropriate to the nature of
the engagements that reflect the need to complete the
NSQC
assembly of final engagement files on a timely basis. In
the case of an audit, for example, such a time limit is
ordinarily not more than 60 days after the date of the
auditors report.
73c. Where two or more different reports are issued in
respect of the same subject matter information of an
entity, the firms policies and procedures relating to
time limits for the assembly of final engagement files
address each report as if it were for a separate
engagement. This may, for example, be the case when
the firm issues an auditors report on a components
financial information for group consolidation
purposes and, at a subsequent date, an auditors
report on the same financial information for statutory
purposes.
Confidentiality, Safe Custody, Integrity, Accessibility and
Irretrievability of Engagement Documentation
73d. The firm should establish policies and procedures
designed to maintain the confidentiality, safe custody,
integrity, accessibility and retrievability of
engagement documentation.
73e. Relevant ethical requirements establish an obligation
for the firms personnel to observe at all times the
confidentiality of information contained in engagement
documentation, unless specific client authority has
been given to disclose information, or there is a legal
or professional duty to do so. Specific laws or
regulations may impose additional obligations
on the firms personnel to maintain client confidentiality,
particularly where data of a personal nature
are concerned.
73f.
Whether engagement documentation is in paper,

electronic or other media, the integrity, accessibility or
retrievability of the underlying data may be
compromised if the documentation could be altered,
added to or deleted without the firms knowledge, or
if it could be permanently lost or damaged.
Accordingly, the firm designs and implements
appropriate controls for engagement documentation
to:
(a) Enable the determination of when and by whom
engagement documentation was created, changed

or reviewed;
(b) Protect the integrity of the information at all
stages of the engagement, especially when the
information is shared within the engagement
team or transmitted to other parties via the
Internet;
(c) Prevent unauthorized changes to the engagement
documentation; and
(d) Allow access to the engagement documentation
by the engagement team and other authorized
parties as necessary to properly discharge their
responsibilities.
73g. Controls that the firm may design and implement
to maintain the confidentiality, safe custody,
integrity, accessibility and retrievability of
engagement documentation include, for example:
The use of a password among engagement

team members to restrict access to electronic
engagement documentation toauthorized users
Appropriate back-up routines forelectronic

engagement documentation at appropriate stages
during the engagement.
Procedures for properly distributing

engagement documentation to the team
members at the start of engagement,
processing it during engagement, and
collating it at the end of engagement.
Procedures for restricting access to, and

enabling proper distribution and confidential
storage of, hardcopy engagement documentation.
73h. For practical reasons, original paper documentation

may be electronically scanned for inclusion in
engagement files. In that case, the firm implements
appropriate procedures requiring engagement
teams to:
(a) Generate scanned copies that reflect the entire
content of the original paper documentation,
including manual signatures, cross-references
and annotations;
September 2010
63
NSQC
(b) Integrate the scanned copies into the engagement

files, including indexing and signing off on the
scanned copies as necessary; and
(c) Enable the scanned copies to be retrieved and
printed as necessary. The firm considers whether
to retain original paper documentation that has
been scanned for legal, regulatory or other
reasons.
Ownership of Engagement Documentation

73l.
Retention of Engagement Documentation

73i.
73j.
The firm should establish policies and procedures for

the retention of engagement documentation for a
period sufficient to meet the needs of the firm or
as required by law or regulation.
The needs of the firm for retention of engagement
documentation, and the period of such retention, will
vary with the nature of the engagement and the firms
circumstances, for example, whether the engagement
documentation is needed to provide a record of matters
of continuing significance to future engagements.
The retention period may also depend on other
factors, such as whether local law or regulation
prescribes specific retention periods for certain types
of engagements, or whether there are generally
accepted retention periods in the jurisdiction in
the absence of specific legal or regulatory
requirements. In the specific case of audit engagements,
the retention period ordinarily is no shorter than five
years from the date of the auditors report, or, if later,
the date of the group auditors report.
74.
The firm should establish policies and procedures

the policies and procedures relating to the system of
quality control are relevant, adequate, operating
effectively and complied with in practice. Such policies
and procedures should include an ongoing onsideration
and evaluation of the firms system of quality control,
including a periodic inspection of a selection
of completedengagements.
75.
The purpose of monitoring compliance with quality

control policies and procedures is to provide an
evaluation of:
(a) Adherence to professional standards and
regulatory and legal requirements;
(b) Whether the quality control system has been
appropriately designed and effectively
implemented; and
Enable the retrieval of, and access to, the

engagement documentation during the retention
period, particularly in the case of electronic
(c) Whether the firms quality control policies and

procedures have been appropriately applied, so
that reports that are issued by the firm or
engagement partners are appropriate in the
circumstances.
documentation since the underlying technology

may be upgraded or changed over time.
64
Provide, where necessary, a record of changes

made to engagement documentation after the
engagement files have been completed.
September 2010
Unless otherwise specified by law or regulation,

engagement documentation is the property of the
firm. The firm may, at its discretion, make portions of,
or extracts from, engagement documentation
available to clients, provided such disclosure does
not undermine the validity of the work performed,
or, in the case of assurance engagements, the
independence of the firm or its personnel.
Monitoring
73k. Procedures that the firm adopts for retention of

engagement documentation include those that:
Enable authorized external parties to access and

review specific engagement documentation for
quality control or other purposes.
76.
The firm entrusts responsibility for the monitoring

process to a partner or partners or other persons with
sufficient and appropriate experience and authority in
the firm to assume that responsibility. Monitoring of the
NSQC
77.
firms system of quality control is performed by

competent individuals and covers both the
The size of the firm.
The number and geographical location of offices.
appropriateness of the design and the effectiveness of the

operation of the system of quality control.
The results of previous monitoring procedures.
The degree of authority both personnel and

offices have (for example, whether individual
offices are authorised to conduct their own
inspections or whether only the head office may
conduct them).
The nature and complexity of the firms practice

and organisation.
The risks associated with the firms clients and

specific engagements.
Ongoing consideration and evaluation of the system of

quality control includes matters such as the following:
Analysis of:
78.
New developments in professional

standards and regulatory and legal
requirements, and how they are reflected
in the firms policies and procedures
where appropriate;
Written confirmation of compliance with

policies and procedures on independence;
Continuing professional development,

including training; and
Decisions related to acceptance and

continuance of client relationships and
specific engagements.
Determination of corrective actions to be taken

and improvements to be made in the system,
including the provision of feedback into the
firms policies and procedures relating to
education and training.
Communication to appropriate firm personnel of

weaknesses identified in the system, in the level
of understanding of the system, or compliance
with it.
Follow-up by appropriate firm personnel so that

necessary modifications are promptly made to the
quality control policies and procedures.
The inspection of a selection of completed engagements

is ordinarily performed on a cyclical basis. Engagements
selected for inspection include at least one engagement
for each engagement partner over an inspection cycle,
which ordinarily spans no more than three years. The
manner in which the inspection cycle is organised,
including the timing of selection of individual
engagements, depends on many factors, including the
following:
79.
The inspection process includes the selection of

individual engagements, some of which may be selected
without prior notification to the engagement team.
Those inspecting the engagements are not involved in
performing the engagement or the engagement quality
control review. In determining the scope of the
inspections, the firm may take into account the scope
or conclusions of an independent external inspection
program. However, an independent external
inspection program does not act as a substitute for
the firms own internal monitoring program.
80.
Small firms and sole practitioners may wish to use a

suitably qualified external person or another firm
to carry out engagement inspections and other
monitoring procedures. Alternatively, they may
wish to establish arrangements to share resources
with other appropriate organisations to facilitate
monitoring activities.
81.
The firm should evaluate the effect of deficiencies

noted as a result of the monitoring process and
should determine whether they are either:
(a) Instances that do not necessarily indicate that
the firms system of quality control is
insufficient to provide it with reasonable
assurance that it complies with professional
standards and regulatory and legal
requirements, and that the reports issued by
the firm or engagement partners are
September 2010
65
NSQC
in accordance with their defined roles and
responsibilities. Information communicated
should include the following:
appropriate in the circumstances; or

(b) Systemic, repetitive or other significant
deficiencies that require prompt corrective
action.
82.
83.
(a) A description of the monitoring procedures

performed.
The firm should communicate to relevant

engagement partners and other appropriate
personnel deficiencies noted as a result of the
monitoring process and recommendations for
appropriate remedial action.
The firms evaluation of each type of deficiency
should result in recommendations for one or more
of the following:
(b) The conclusions drawn from the monitoring

procedures.
(c) Where relevant, a description of systemic,
repetitive or other significant deficiencies and
of the actions taken to resolve or amend those
deficiencies.
86.
The reporting of identified deficiencies to individuals

other than the relevant engagement partners ordinarily
does not include an identification of the specific
engagements concerned, unless such identification is
necessary for the proper discharge of the responsibilities
of the individuals other than the engagement partners.
87.
Some firms operate as part of a network and, for

consistency, may implement some or all of their
monitoring procedures on a network basis. Where firms
within a network operate under common monitoring
policies and procedures designed to comply with this
NSQC, and these firms place reliance on such a
monitoring system:
(a) Taking appropriate remedial action in relation

to an individual engagement or member of
personnel;s
(b) The communication of the findings to those
responsible for training and professional
development;
(c) Changes to the quality control policies and
procedures; and
(d) Disciplinary action against those who fail to
comply with the policies and procedures of
the firm, especially those who do so repeatedly.
84.
85.
Where the results of the monitoring procedures

indicate that a report may be inappropriate or that
procedures were omitted during the performance
of the engagement, the firm should determine what
further action is appropriate to comply with relevant
requirements. It should also consider obtaining
legal advice.
(a) At least annually, the network communicates the

overall scope, extent and results of the
monitoring process to appropriate individuals
within the network firms;
(b) The network communicates promptly any
identified deficiencies in the quality control
system to appropriate individuals within the
relevant network firm or firms so that the
necessary action can be taken; and
At least annually, the firm should communicate
(c) Engagement partners in the network firms are

entitled to rely on the results of the monitoring
process implemented within the network, unless
the firms or the network advises otherwise.
the results of the monitoring of its quality control

system to engagement partners and other appropriate
individuals within the firm, including the firms
chief executive officer or, if appropriate, its anaging
board of partners. Such communication should
enable the firm and these individuals to take
prompt and appropriate action where necessary
66
September 2010
88.
Appropriate documentation relating to monitoring:

(a) Sets out monitoring procedures, including the
NSQC
procedure for selecting completed engagements
to be inspected;
(b)
Records the evaluation of:

(i)
Adherence to professional standards and

regulatory and legal requirements;
(ii) Whether the quality control system has

been appropriately designed and
effectively implemented; and
(iii) Whether the firms quality control
policies and procedures have been
appropriately applied, so that reports that
are issued by the firm or engagement
partners are appropriate in the
circumstances; and
(c)
Identifies the deficiencies noted, evaluates their

effect, and sets out the basis for determining
whether and what further action is necessary.
Complaints and Allegations

it deals appropriately with:
(a)
Complaints and allegations that the work

performed by the firm fails to comply with
professional standards and regulatory and
legal requirements; and
(b)
Allegations of non-compliance with the firms

system of quality control.
90. Complaints and allegations (which do not include those

that are clearly frivolous) may originate from
within or outside the firm. They may be made by
firm personnel, clients or other third parties. They
may be received by engagement team members or
other firm personnel.
91. As part of this process, the firm establishes clearly
defined channels for firm personnel to raise any
concerns in a manner that enables them to come
forward without fear of reprisals.
92. The firm investigates such complaints and allegations in
accordance with established policies and procedures.

The investigation is supervised by a partner with
sufficient and appropriate experience and authority
within the firm but who is not otherwise involved in the
engagement, and includes involving legal counsel as
necessary. Small firms and sole practitioners may use
the services of a suitably qualified external person or
another firm to carry out the investigation. Complaints,
allegations and the responses to them are documented.
93. Where the results of the investigations indicate
deficiencies in the design or operation of the firms
quality control policies and procedures, or
noncompliance with the firms system of quality
control by an individual or individuals, the firm takes
appropriate action as discussed in paragraph 83.
Documentation
requiring appropriate documentation to provide
evidence of the operation of its system of quality
control.
95. How such matters are documented is the firms
decision. For example, large firms may use electronic
databases to document matters such as independence
confirmations, performance evaluations and the results
of monitoring inspections. Smaller firms may use
more informal methods such as manual notes,
checklists and forms.
96. Factors to consider when determining the form and
content of documentation evidencing the operation of
each of the elements of the system of quality control
include the following:
The size of the firm and the number of offices.
The degree of authority both personnel and

offices have.
The nature and complexity of the firms practice

and organisation.
97. The firm retains this documentation for a period of

time sufficient to permit those performing monitoring
September 2010
67
NSQC
be based. However, such an assessment should
encompass an evaluation of all factors relevant
to the audited entity. Such factors include size,
complexity, commercial risk, parliamentary or media
interest and the number and range of stakeholders
affected.
procedures to evaluate the firms compliance with its

system of quality control, or for a longer period if
required by law or regulation.
Compliance with International Standards on Quality Control
98. Compliance with this NSQC 1 ensures compliance with

ISQC 1 (Quality Control for Firms that Perform Audits
and Reviews of Historical Financial Information, and
Other Assurance and Related Service Engagements)
applicable for large firms and listed entities assignments.
2.
NSQC 1, paragraph 70, states that The firms policies

and procedures are designed to maintain the objectivity
of the engagement quality control reviewer.
Subparagraph (a) notes as an example that the
engagement quality control reviewer is not selected by
the engagement partner .However, in many jurisdictions,
there is a single statutorily appointed auditor -general
who acts in a role equivalent to that of engagement
partner and who has overall responsibility for public
sector audits. In such circumstances, where applicable,
the engagement reviewer should be selected having
regard to the need for independence and objectivity.
3.
In the public sector, auditors may be appointed in

accordance with statutory procedures. Accordingly,
considerations regarding the acceptance and continuance
Effective Date
99. Systems of quality controlin compliance with this
NSQC are required to be established by July 16, 2008.
Firms consider the appropriate transitional arrangements
for engagements in process at that date.
Public Sector Perspective
1.
Some of the terms in the NSQC, such as engagement

partner and firm, should be read as referring
to their public sector equivalents. However, with
limited exceptions, there is no public sector equivalent
of listed entities, although there may be audits of
particularly significant public sector entities which
should be subject to the listed entity requirements of
mandatory rotation of the engagement partner
(or equivalent) and engagement quality control
review. There are no fixed objective criteria on
which this determination of significance should
68
September 2010
of client relationships and specific engagements, as set

out in paragraphs 22-26 of NSQC, may not apply.
4.
Similarly, the independence of public sector auditors

may be protected by statutory measures, with the
consequence that certain of the threats to independence
of the nature envisaged by paragraphs 17-21 of NSQC
are unlikely to occur.
News
Oath taking ceremony of newly
elected President and Vice-President
National BPA Awards of 2009 announced

Amidst a ceremony held on 2067 Shrawan 7, Officiating
Auditor General of Nepal Mr. Khem Prasad Dahal handed
over the National Best Presented Accounts (BPA) Awards
for the year 2009 to representatives of various reporting
entities.
Officiating Auditor General Mr. Khem Prasad Dahal administering oath of

office to the newly elected president.
Newly elected President Mr. Sunir Kumar Dhungel and

Vice President Mr. Sudarshan Raj Pandey took oath of
office for the year 2067/68 amidst a ceremony held on
2067 Shrawan 7. Officiating Auditor General of Nepal
Mr. Khem Prasad Dahal administered oath of office and
secrecy to the newly elected president.
In his inaugural speech, Mr. Dhungel expressed his
willingness to receive help from all concerned for the
implementation of the programs he will be launching
during his tenure.
The Chief Guest Mr. Dahal extended his felicitations to
the newly elected padadhikaris. He also anticipated for
a closer relationship between the Institute and the Office
of the Auditor General (OAG). Likewise, President of
the South Asian Federation of Accountants (SAFA)
Mr. Komal Bahadur Chitracar expressed his felicitations
on the occasion. Immediate Past President Mr. Suvod
Kumar Karn informed about the initiatives taken in his
tenure.
Mr. Dhungel was vice-president for the year 2066/67.
Similarly, Mr. Pandey was Council Member in the Second
Council.
Representative of Butwal Power Company Limited Receiving the BPA Award in

the Manufacturing Sector.
The awardees are as follows:

Category:
Banking Sector Subject to
Prudential Supervision
Winner:
Nabil Bank Ltd.
First runner-up:
Global Bank Ltd.
Second runner-up:
Everest Bank Ltd.
Category:
Non-Banking Sector Subject
Not Subject To Prudential
Supervision
Subcategory:
Financial Institutions
Winner:
Annapurna Finance Co. Ltd.
First runner-up:
Ace Development Bank Ltd.
Second runner-up:
United Finance Ltd.
Subcategory:
Insurance Companies
Winner:
Everest Insurance Co. Ltd.
First runner-up:
Prudential Insurance Co. Ltd.
Second runner-up:
Nepal Insurance Co. Ltd.
September 2010
69
Category:
Manufacturing Sector
Winner:
Butwal Power Company Ltd.
First runner-up:
Unilever Nepal Ltd.
Category:
Hospitality, Health,
Transportation and Shipping
Sector
Winner:
Orientals Hotel Ltd.
Category:
Public Sector Entities
Winner:
Karja Suchana Kendra Ltd.
Interaction Program on "Criteria on Best

Presented Accounts (BPA) Award"
ICAN-ICAI Joint Conference on

"Way Forward to IFRS"
Mr. Komal Bahadur chitracar, President of SAFA Chairing the Technical Session.
On the occasion of the Oath Taking Ceremony, a conference

was jointly organized in collaboration with the Institute of
Chartered Accountants of India (ICAI) on the theme "Way
Forward to IFRS".
Vice President Mr. Sudarshan Raj Pandey Delivering a Presentation on BPA Criteria
On Bhadra 30, 2067 an interaction program was organized

on the theme "Criteria on Best Presented Accounts (BPA)
Awards" in Hotel De l'Annapurna.
Vice President Mr. Sudarshan Raj Pandey delivered a
presentation on the criteria set by the South Asian
Federation of Accountants (SAFA) regarding Best Presented
Accounts. He deliberated on various components of a good
accounts report including Managerial Analysis, Accounting
Policies & General Disclosures, Corporate Governance,
and Stakeholders Information among other things.
Begun with the welcome speech by President Mr. Sunir
Kumar Dhungel, the program was attended by altogether
45 participants representing various sectors of the economy.
The participants thanked the Institute for organizing such
program in a time coinciding with reports preparation.
In his inaugural speech, Immediate Past President Mr.

Suvod Kumar Karn hoped that the conference would be
useful for creating awareness among the preparers and
auditors of financial statements about the new reporting
framework represented the International Accounting
Standards/International Financial Reporting Standards
(IASs/IFRSs).
The conference was divided into four technical sessions.
In the first session chaired by Mr. Komal Bahadur chitracar,
President of SAFA, Dr. Sanjeev Singhal, Member, ASB,
ICAI presented a paper elaborating overview of IFRS,
Roadmap to transition to IFRS and challenges faced during
adoption/transition.
While CA. Yagnesh Desai from ICAI presented paper on
IAS 1 in the second session chaired by Mr. Prabhu Ram
Bhandary, Past President of ICAN, Mr. Pradeep Kumar
Shrestha, Chairman of Accounting Standards Board of
Nepal presented a paper on NAS's conversion to IFRS
Process, Steps, Plan and Implementation and Fundamental
Differences between NAS & IFRS in the third session chaired
by Mr. Tirtha Raj Upadhyay, Past President of ICAN. In
the last and the fourth session, Mr. Dr. Singhal presented
paper on IFRS 1. The last session was chaired by Mr.
Kaushalendra Kumar Singh, Past President of ICAN.
Altogether 140 delegates from various sectors including
the members of the Institute attended the conference.
70
55
September 2010
Listing of auditors by the DDCs for the audit of VDCs abolished

As a result of continuous consultation and dialogues in various stages between the officials of the Ministry of Local
Development (MoLD) and the Institute, the Government of Nepal (secretary-level) has decided on 2067 Ashwin 13 to
abolish the provision of maintaining a list of eligible auditors for the audit of local bodies. Instead, the MoLD has agreed
to accept the list of COP holder members of the Institute for the same purpose. As per the agreement between the
Institute and the MoLD, the former shall provide an updated list of valid COP holder members to all the 75 District
Development Committees (DDCs).
Various Committees Formed

The Council has formed various standing as well as non-standing committees for FY 2067/68. Besides four standing
committees, namely, Executive Committee, Professional Development Committee, Disciplinary Committee and Examination
Committee, the Council has formed the following non-standing committees:
Name of the Committee
Editorial Committee
Education Committee
Ethics Committee
Continuing Professional Education Committee
International Affairs Committee
Audit Committee
Scholarship Selection Committee
Law Reform Committee
Expert Advisory Committee
Information Technology Committee
Small & Medium Practice (SMP) Committee
Advisory Committee
Monitoring Committee
Building Committee
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Chairman
CA. Narendra Bhattarai
CA. Kaushalendra Kumar Singh
CA. Bijay Kumar Agrawal
CA. Narendra Bhattarai
CA. Suvod Kumar Karn
CA. Tirth Raj Upadhyay
CA. Ratna Raj Bajracharya
CA. Suvod Kumar Karn
Similarly, the Council has constituted Accounting Technician Board and Peer Review Board under the chairmanship
of CA. Suvod Kumar Karn and CA. Pushpa Lall Shrestha respectively.
Five voluntary NSAs now to be mandatory

The Council, in its 138th meeting on 2067 Shrawan 4, has issued the following five NSAs, previously issued for voluntary
compliance, for mandatory compliance with effect from 2067 Magh 1 (January 15, 2011):
S. No.
NSAs
Name of the Standard
NSA 220
Quality Control for Audits of Historical Financial Information
NSA 315
Understanding the Entity and Its environment and Assessing the Risks of Material Misstatement
NSA 330
The Auditors Procedures in Response to Assessed Risks
NSA 520
Analytical Procedures
NSA 701
Modifications to the Independent Auditors Report
September 2010
71
STUDENTS' CORNER
Results of CA Examinations of June 2010
The results of the Chartered Accountancy Examinations held in the month of June 2010 have been published. As per
the results, 373 students have passed the CAP-I/Foundation Level while 52 students have passed the CAP-II/Intermediate
Level. Similarly, 22 have been qualified in the CAP-III/Final Level being eligible for Chartered Accountant membership.
Registration Status
The status of students registration in the CA course in the FY 2067/68 (till September end) is as follows:
Level
CAP-I
CAP-II
CAP-III
Number of Students
90
266
27
S TA F F N E W S
New Employees Appointed
21 new employees have joined the Institute in various positions. They are:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Mr. Chudamani Acharya

Mr. Manoj Giri
Mr. Sanoj Bhattarai
Ms. Kumari Jyotsna
Mr. Ram Kumar Nepal
Mr. Amod Khanal
Mr. Umesh Regmi
Ms. Sweta Chitrakar
Mr. Kumar Thapa
Ms. Krishna Kumari B.C.
Senior Officer
Officer
Assistant
Assistant
Assistant
Assistant
Assistant
Assistant
Assistant
Assistant
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
Ms. Samita Dangol

Mr. Prayas Shakya
Ms. Sabina Maharjan
Mrs. Binu Thapa
Mr. Hardulal Chaudhary
Ms. Anima Maharjan
Ms. Anita Bhandari
Mr. Anup Maharjan
Mr. Shivahari Nepal
Mrs. Sarita Ghimire
Mr. Shiva Bhattarai
Junior Assistant
Junior Assistant
Junior Assistant
Junior Assistant
Junior Assistant
Junior Assistant
Junior Assistant
Junior Assistant
Office Helper
Office Helper
Office Helper
Resignation
Officer Mr. Manoj Giri has resigned from his post to pursue his future career. He had been working for the last 4 years.
72
September 2010
MEMBERS' CORNER
Renewal Status
The following is the renewal status of members till September 30, 2010 :
Certificate of Practice
Membership
Category
Total figure Renewed till September 30
Category
Total figure Renewed till September 30
FCA
212
153
FCA
186
123
CA
300
206
CA
292
165
RA B
3358
2073
RA B
3100
1620
RA C
1581
923
RA C
1440
796
RA D
2344
1397
RA D
2144
1279
Accounting Firms
Category
Total figure
Renewed till September 30
FCA/CA
392
226
RA B
864
631
RA C
297
195
RA D
193
140
Workshop for Strategic Partners on Institutional Annual Audit

The resource persons of the program were Mr.
Paramananda Adhikari, FCA Technical Director, ICAN,
Mr. Mahesh Khanal, FCA Council Member and Mr.
Gyanendra Bhari, FCA.
At end of the workshop, participants were of the view that
this program facilitates to enhance the quality of the audit
and audit reports for setting up strategies and taking
corrective actions.
Mr. Paramananda Adhikari, FCA, Technical Director, ICAN with Mr. Lars Peter Christensen, DanidaHUGOU)
DanidaHugou organized a one day workshop program

on Thursday, 5th August 2010 at Hotel Malla , Kathmandu
to its partner organizations on Institutional Annual Audit.
The Institute of Chartered Accountants of Nepal (ICAN)
facilitated the Program. The Participants of the workshop
were senior executives and finance chiefs from all the
Strategic Partner Organizations.
September 2010
73
S A FA E v e n t s
14th SAFA Board Meeting in Dhaka
14th SAFA Board meeting held in Dhaka, Bangladesh on
8th August 2010 decided that SAFA Summit is scheduled
to be held on 11-12th December 2010 at Kathmandu. ICAN
shall provide all the logistic support and undertake financial
responsibility as the host body. A five member working
group coordinated by SAFA Vice President Mr. A.N. Raman
was formed to review and finalize the sub-themes within
end of August 2010.
IASB, Andreas Bergman, Chairman of IPSAS committee

and Md. Faiz, chairman of AOSSG are expected to
participate at the SAFA Forum. The forum will be of a
short duration lasting about 2 hours.
Revision of SAFA Constitution:

SAFA President pointed out some anomalies in the revised
draft, which was agreed to be corrected.
It was also decided that, SAFA President should represent
in IFAC Regional Group meeting and CAPA meeting to
be held from 5-7 November 2010 at Kula Lumpur Malaysia.
Regional Standard Setters Conference:

ICAI is hosting it in New Delhi on 30th November and 1st
of December 2010 at Indian Habitat Center, New Delhi.
71st SAFA Assembly Meeting

The 71st meeting of SAFA Assembly decided to adopt the
following recommendations of the Board :
Dignitaries at 14th SAFA Board Meeting-Dhaka, Bangladesh
Revision of SAFA Constitution: ICASL raised a question

about the need of having an Assembly meeting since
all the representatives of Board are present in the
Assembly meeting too. The Assembly considered the
view and passed the revised constitution as proposed
by the Board.
Annual Activity report of SAFA for the year 2010 as

proposed by the Board was approved.
As per the decision of 69th Assembly meeting, SAFA

President was authorized to visit CPA Maldives in
connection with assisting them in establishing their
own education system, regulatory system etc. No
initiative has come so far from CPA Maldives to take
the matter in further. ICASLs offer to make enquiries
to CPA Maldives and to coordinate the proposed
visit was approved.
The next Assembly meeting is to be held on 5 January

2011 in Chennai and is to be hosted by ICWAI. SAFA
President for 2011 will be installed in a ceremony to
be organized then along with the National Conference
of ICWAI.
Sitting (Left to Right): Mr. Sheikh A. Hafiz, Advisor SAFA, Mr. A. N.

Raman, Vice President SAFA, Mr. Komal B. Chitracar, President SAFA,
Mr.T. Karthikeyan, Permanent Secretary SAFA, and Mr. Paramananda
Adhikari, Executive Secretary, SAFA.
Standing (Left to Right): Mr. Nishan Fernando (ICASL), Mr. Md. Nasrat
Hasan (ICAB), Mr. Sudarshan Raj Pandey (ICAN), Mr. Sunir Kumar
Dhungel (ICAN), Mr. Md. Syful Islam (ICAB), Mr. G.N. Venkataraman,
(ICWAI), Dr. Jamaluddin Ahmed (ICAB), Mr. M. Abdullah Yusuf
(ICAP), Mr. Md. Abdus Salam, ICAB, CA. Amarjit Chopra (ICAI), Mr.
Brij Mohan Sharma (ICWAI), Mr. Masud Mujallah (ICMAP), Mr.
Muhammad Rafi, (ICMAP), Mr. Md. Abdul Aziz (ICMAB) CA. Mudit
Vashishtha (ICAI), Prof. Lakshman R. Watawala (ICMASL), Mr. Sujeewa
Rajapakse (ICASL)
SAFA Forum:
SAFA President briefed on the development on organizing
a SAFA event in Kuala Lumpur on 8th November 2010
coinciding with the WCOA. The Forum would be a Panel
discussion on IFRS and IPSAS. International experts like
Kevin Stevenson, Chairman of Australian Accounting
Standards Board and the former Technical Director of
74
September 2010
President of SAFA visits SAARC Secretariat: Cooperation between SAARC and SAFA
Mr. Komal Bahadur Chitracar President SAFA and Mr. Paramananda

Adhikari, Executive Secretary SAFA met with Mr. Ghulam Dastgir, Director
of SAARC Secretariat
Mr. Komal Bahadur Chitracar President SAFA and Mr.

Paramananda Adhikari, Executive Secretary SAFA met
with Mr. Ghulam Dastgir, Director of SAARC Secretariat,

at the latters office at Tridevi Marg, Kathmandu Nepal
on 7th July 2010. Mr. Chitracar has informed the various
activities taken up by the SAFA, which is also an apex
body of SAARC and programs that are to be scheduled
during the 2010. He also informed that South Asian
Federation of Accountants (SAFA) is organizing the first
SAFA Summit as an international conference on the
theme of Sustainable Development in SAARC on 1112th of December 2010 at Kathmandu Nepal. The Institute
of Chartered Accountants of Nepal hosts the event. This
is a mega event, the first of its kind in the history of SAFA.
Further Mr. Chitracar requested to Mr. Dastgir to support
this event through the presence from the representative
of SAARC Secretariat and Mr. Dastgir assured that SAARC
Secretariat will support such prestigious event in the
history of SAFA.
SAFA Board, Committees & Task Force Meetings- Dhaka, Bangladesh

Five member delegation from ICAN attended the 14th SAFA Board Meeting, different Committees meeting, 71st SAFA
Assembly Meeting and ICAB International Conference of Chartered Accountants on the theme Role of Chartered
Accountants in the Mobilization of National Resources organized by the Institute of Chartered Accountants of Bangladesh
from 8-9th August 2010. The delegation comprises of the followings.
Mr. Komal Bahadur Chitracar, SAFA President
Mr. Sunir Kumar Dhungel, President
Mr. Sudarshan Raj Pandey, Vice President
Mr. Suvod Kumar Karn, President 2009/10
Mr. Paramananda Adhikari, Technical Director/ Executive Secretary, SAFA
September 2010
75
International news
IFAC Board Approves Recommendations to Better Support Professional
Accountancy Organizations
IFAC has approved a set of important recommendations
designed to expand support and assistance in the
development of Professional Accountancy Organizations
(PAOs) throughout the world. The recommendations are
the culmination of a regular triennial review of the
Developing Nations Committees (DNC) structure,
activities, and effectiveness.
Currently, IFAC helps establish, strengthen, and advocate
for PAOs that are, or are aspiring to become, IFAC members
or associates. IFAC also helps governments and other
stakeholders that seek to develop such organizations within
their jurisdictions. However, the DNC recognized that
approximately 60 percent of IFAC members and associates
operate in developing nations, where capacity and
resource constraints make it difficult to establish effective
financial legislative frameworks, design strong education
and certification programs, and develop competent and
capable accountancy professionals able to meet the needs
of government and the marketplace. This can contribute
to poor-quality financial reporting, lack of transparency
and confidence in the financial markets, and limited
foreign direct investment and economic growth. Better
addressing the needs of these organizations is critical for
improving the profession around the world as well as
strengthening the global financial system.
From autumn 2009 until spring 2010, the DNC Review
Task Force solicited input from member bodies, IFAC
Recognized Regional Organizations and Acknowledged
Accountancy Groupings, the donor community, PAO Chief
Executives, IFAC Board Members, IFAC staff, and other
relevant stakeholders through online surveys, structured
interviews, and formal group discussions. Analysis of this
extensive feedback and data yielded a formal report
supporting the implementation of 13 recommendations to
improve and strengthen the DNC and better respond to
the needs of developing countries.
These findings and recommendations-including the
renaming, and refocusing, of the DNC to the Professional
76
September 2010
Accountancy Organization Development Committee

(PAODC)were presented during the June 2010 IFAC
Board meeting. The recommendations reflect the Task
Forces findings, and are intended to concentrate the
DNCs activities on one of the most pressing needs among
existing and potential IFAC members and associates:
support and assistance for the development of professional
accountancy organizations.
The recommendations to refocus the PAODC (formerly
DNC) activities included:
Renaming the DNC to the PAODC in order to better

reflect its focus and communicate its purpose to
external stakeholders;
Placing more emphasis on activities that directly

support the development of PAOs, through the
provision of tools and guidance, advocacy, and
outreach;
Increasing the emphasis on communication of the

needs of PAOs and the tools and guidance developed
by the committee, including translation of these
resources to ensure they reach relevant stakeholders;
and
Continuing to strengthen advocacy and build

awareness within the donor community by developing
a strategy to improve coordination of activities and
messaging.
IFAC is currently preparing a work plan for the PAODC,

as well as for the Member Body Compliance Program, that
will assess the resource requirements for maintaining
existing service levels as well effectively implementing the
full recommendations of the Task Force. Implementing
these recommendations will result in a committee that will
liaise more with donor groups and be more engaged with
PAOs in a number of different ways, such as developing
mentoring relationships and regional events.
Source: www.ifac.org

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Vol. 13 No.

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

Satyendra Sharma Satyam

Supervisory Challenges in Liquidity Risk Management

Default Mode Paradigm: An Approach For Credit Loss

The Institute of Chartered Accountants of Nepal

Some Challenges in Implementing Nepal Public Sector

Biratnagar: Tel: 021- 422077

Designed & Printed By

XBRL and its Prospect of Adoption in Nepal

(including courier charges)

(if received by self)

Nepals WTO commitments in financial services and their

Nepal Standard on Quality Control (NSQC) 1

Continuous Learning: A Choiceless Alternative

The Evolution of SMPs

n behalf of editorial board, we would

To achieve the broad objectives of the SAFA, the

South Asian Federation of Accountants

Eminent personalities from the region

Lets join our hands together and

ith your trust and faith, I have been

Tenure. Organization is people bringing together

assistance of ICAI. Peer Review Board will be

be organized in partnership with various Chambers

With Best Regards,

CA. Sunir Kumar Dhungel

CA. Surendra Man Pradhan*

the financial sector. The contraction of liquidity in certain

Mr. Pradhan is a Fellow member of the ICAN.

The Nepal Chartered Accountant

to that of deposit mobilization rate. Of the components of

The Nepal Chartered Accountant

amounted to Rs. 107.8 billion in the previous year. Likewise,

Use of capital markets for funding requirements.

II) Use of complex financial instruments.

III) Impact of payment systems and intraday

The Nepal Chartered Accountant

Lessons learnt from the recent financial

The Nepal Chartered Accountant

has once more hammered home the message that the

Recent events have highlighted the need to modify

of existing business lines. Moreover, the extent to

Due attention should also be given to the risks of

The nature, magnitude and duration of the shock

It is very essential that the supervisory authority

The Nepal Chartered Accountant

In some cases, when use of central bank marginal

The Nepal Chartered Accountant

internal limits or targets are set out; all regimes recognize

The stringent mechanism for identification and

The regular system of stress testing and scenario

Proper system of management of intra-day liquidity

d) Appropriate mechanism for the management of the

The role of public disclosure and the market discipline

The mechanism of cross boarder supervision, including

Entry of Foreign Banks in Nepal:

Adopting a liberal approach to foreign bank entry has also

2. Modalities of Foreign Bank Entry

* Lecturer, Department of Economics, TU

The Nepal Chartered Accountant

3. Rationale of Entry of Foreign Banks

The entry of foreign banks results in increasing bank

Foreign banks promote competition in the banking