december 2015 the nepal hartered accountant · why audit of information system is required in nepal...

December 2015Vol. 18 No. 2

Journal of the Institute of Chartered Accountants of Nepal

CHARTEREDCCOUNTANTA

T H E N E P A L

December 2015Vol. 18 No. 2

Global Nepal Printing Press Service Pvt. Ltd.Tel: 4102772

CA. Prakash Lamsal ChairmanCA. Mahesh Khanal Vice-ChairmanCA. Nil Bahadur Saru Magar MemberCA. Hemanta Pokharel MemberCA. Sanju Adhikari MemberCA. Shraddha Singh Shrestha MemberRA. Dev Bahadur Bohara MemberRA. Surendra Keshar Amatya MemberRA. Dharanidhar Adhikari MemberMr. Binod Prasad Neupane Secretary

Editorial 2

President's Message 3

Accounting

Challenges and Quality of Accounting Profession- CA. Paramananda Adhikari

7

The Legitimacy of International Public Sector Accounting Standards (IPSASs)- Dr. Pawan Adhikari

10

Economy

Nepal Unrest: The Fault Line- CA. Anal Raj Bhattarai

15

Managing Risks Facing the Economy- Mr. Tula Raj Basyal

18

Information Technology

Dimension of Digital Signature- CA. Mukunda Pokharel

22

Why Audit of Information System is Required in Nepal ?- CA. Gaurav Khwaunju Shrestha

27

Taxation

Taxation of Income from Long Term Contract: Need to have Clear Guidelines/Manual- CA. Kaushlendra Jha

33

Conference Material- CA. Narendra Bhattarai

38

News 45

Notices 14, 17, 52, 53, 56

Contribution

Standard Chartered Bank Nepal Ltd.

Kailash Bikash Bank Ltd.

Nabil Bank Ltd.

Rastriya Banijya Bank Ltd.

Deva Bikash Bank Ltd.

As stipulated by Nepal Chartered Accountants Act, 1997 the objective of the Institute of Chartered Accountants of Nepal (ICAN) is to play the role of a regulatory body to encourage the members to carry on accounting profession being within the extent of the code of conduct in order to consolidate and develop accounting profession as a cause for economic development of the nation. The function and duties of the Council is to monitor and regulate its members so as to ensure the compliance of Accounting Standards and Standards on Auditing developed or recommended by Accounting Standards Board and Auditing Standards Board".

Prior to the 5th amendment in Nepal Chartered Accountant Rules, 2061 ICAN has constituted a Peer Review Board in order to monitor its members with regards to practice monitoring. Institute has issued NSQC and a Statement on Peer Review with an intention to further enhance the quality of professional work of practicing CA/RA members. The Nepal Chartered Accountants Act, 1997 requires ICAN to enforce compliance with the prevailing Standards and laws by professional accountants and auditors through Disciplinary Committee. Many cases of violation of Code of Ethics (COE) and Standards are still under investigation in Disciplinary Committee. However, neither the Quality Assurance (QA) system for audit nor the practice monitoring of the members was effectively enforced. It is worth to note that ICAN has to fulfill IFAC membership obligations as a professional body and should ensure a mandatory quality assurance review program is in place for its members performing audits of financial.

In the above context, the Council feels necessary for mandatory QA system for audit firms that conduct audit of listed companies such as insurance, bank and financial institutions etc. under the direction of ICAN as well as oversight and supervision of a Board formed by ICAN.

In the view of above the 5th amendment in Nepal Chartered Accountant Rules, 2061 has been approved by the ministerial decision of 2072/08/18 of Government of Nepal empowering regulatory regime of the Institute more responsive by forming an independent Quality Assurance Review Board (QARB) comprising of 7 members. The Board will conduct inspection and monitoring independently to the accounting firms. The Board will oversee whether there exist assurance system in the accounting firms to conform the compliance with auditing standards, NSQC by accounting firms in course of performing audit.

The Board has started its functions and very soon will come up with its policy and programs on quality assurance. The function, duties and rights of the Board as specified in the Rules is to prepare policy and program for QA review, to enforce and conduct monitoring of Practice Unit pursuant to Rules as well as and as per the QA policy and program, to recommend Council to make aware about the areas of improvement revealed in course of QA review of PU (Practice Unit), to recommend council for prohibiting audit of related entity or audit of the particular sector for the errors if revealed through QA of PU. The QA Board will carry out quality assurance of accounting professional and accounting firms compulsorily for the effectiveness of accounting profession pursuant to the provision of the Rule and as its QA policy and programs.

Practice monitoring review activity is intended to ensure the quality of audit performed and audit procedures of the practicing members are in compliance with Nepal Standards on Auditing (ISAs). Therefore, we must be aware of the fact that NSQC requires that all firms including sole practitioners establish and maintain a system of quality control to be designed to provide with reasonable assurance that firm and its personnel comply with professional standards and applicable legal regulatory requirements. The Institute as a member of IFAC we are required to satisfy IFAC’s Statement of membership obligations (SMOs) with regards to quality of audit.

In recent years our members are facing many ethical dilemmas and some of them are very complex and difficult to resolve. In this context, we need to take QA Review System as an opportunity for our entire membership to demonstrate a strong sense of ethics in the conduct of our profession by bringing out our competence, knowledge and character. ICAN is determined to ensure that its members work beyond self-interest to uphold the integrity of the profession.

We have to be mindful of the fact that our failure to comply with these aspects may be challenging to retain the authority of self-regulation of the Institute. So all the members are expected to safeguard the public interest and avoid any action that would discredit the profession.

Dear Professionals,

This is my second message after assuming office as the President of ICAN. Without a doubt, the role of our profession is important as it contributes for the development of the society and the nation. Dedicational performance in the accounting profession is necessary to shape the professional activities in the changing financial scenario. Traditional practices in accounting profession have been eliminated and new practices have emerged. In this scenario, all the accounting professionals are required to be updated as prescribed by international accounting bodies to demonstrate professionalism in their performance. We feel this is our responsibility and opportunity to prepare our members more capable and result oriented. Considering the fact that the uses of relevant Accounting and Auditing Standards is very crucial while discharging the professionalism in accounting services. It is accounting professionals’ immense responsibility to provide professional services to stakeholders.

The extensive natural calamity is now becoming common in the world and Nepal is not free from such tragedy. We are still exhilarating with the catastrophic disaster of 25 April, 2015, earthquake which took more than 8000 lives, over 25000 injured leaving hundreds of thousands homeless and damaged around USD 6.6 billion worth of properties. Due to this devastation the national economy has been affected badly which adversely affected supply system leading to low economic growth. This low growth rate also affects the overall demand which highlights the current economic scenario of our country. Discouraging business environment has been rampant and investors are not ready to invest in such situation that further declines the national GDP and employment opportunities. But we are still hopeful to rebuild the nation by standing on the new Constitution, 2072 and all the people and professionals need to be united for nation building. On the above scenario, there have been direct disruptions on the supply that impacted communities and affected sector through formal business channel and there could be a number of financial reporting

issues that have emerged as a result of natural calamity. The Institute is organizing the Conference focusing on these issues on 31 January, 2016.

In the capacity of the President it’s my pleasure to share with the members and stakeholders about some achievement made as of the Journal period and upcoming program of the Institute.

Student, Education and Educational Plan

Indeed, the chartered accountancy education is the professional course carrying better future opportunities. It is said that the student in chartered accountancy course plays vital role in educational sector hence it has become the choice for deserving and meritorious student. This course is not bound only in one single sector but also covers various sectors of market.

The Institute has recently taken some reform initiatives in line with my previous message. Such initiatives include recruitment of the staff with appropriate professional qualification in order to update and revise the study materials and this activity will be continued in the coming days also. Similarly the Institute also organized interaction program between President as well as Vice President and CAP III level students so as to listen their grievances and matters related to educational activities to explore the room for further improvement in the existing professional education. We assure to organize such interaction program on regular basis with the students pursuing CA education. We hope that their comments and suggestions received will be useful for constructive improvement of the Institute.

Apart from the chartered accountancy curriculum, the institute in coordination with Kathmandu University, School of Management has conducted the GMCS training within the framework of market requirement. GMCS program has been able to raise the awareness about the

importance of dynamics of communication in a business environment and help participants to demonstrate individual communication abilities and recognize their strengths and weaknesses.

Career Counselling is the backbone to attract the deserving and meritorious student to chartered accountancy education. So considering this fact we need to step up our efforts in order to attract brightest students to the profession and increase the future prospects and opportunities in the CA education.

With the 5th amendment in Nepal Chartered Accountant Rules, 2061, the Education Committee has been replaced by the Board of Studies (BoS) to carry out all activities of Education Committee. With the formation of Board of Studies, we are hopeful to achieve further improvement in Chartered Accountancy education in future.

We have successfully conducted Chartered Accountancy, Membership and ISA examination during the Journal period. With the view of decentralisation policy and make our students facilitated we have conducted the CAP I and CAP II examination in different branches of the Institute. I would like to congratulate the students of all levels for their achievement and welcome the CAP III students those who completed all necessary requirements for obtaining membership of Institute of Chartered Accountant of Nepal. I wish all the best for their future professional career.

Formation of Quality Assurance Board

The Government of Nepal has approved the 5th amendment in Nepal Chartered Accountant Rules, 2061 by the ministerial level decision of 2072/08/18 empowering regulatory regime of the Institute further responsive by forming an independent Quality Assurance Review Board (QARB). The Board will comprise 7 members and conduct independent inspection and monitoring of

practicing accounting firms in order to oversee quality assurance system in the accounting firms.

In accordance with provision of the Rules ICAN has formed the QARB and has commenced its functions. Pursuant to Rules the function, duties and rights of the Board has been mentioned to prepare policy and program for QA review, to enforce and conduct monitoring of Practice Unit as per the QA policy and program, to recommend Council to make aware about the areas of improvement.

Members and Professional Capacity Development

We cannot deny the significant contribution of the members in the development initiatives of the Institute and acknowledge the accounting and auditing professionals as they are the pillars for the professional development. Therefore, Institute is conducting various professional development activities and keeping them well-informed of new development in the field of accounting, auditing and other related matters for the members in time to time.

We are making our membership aware about ethical practices by publishing different notices and using various other methods. Monitoring committee of the Institute is cautious to reduce any unethical activities of the members performed by them.

The Institute conducted Diploma in IFRS Certification Course in October, 2015, jointly with The Association of Chartered Certified Accountants of UK (ACCA) in Kathmandu. The Course provided in depth knowledge of International Financial Reporting Standards (IFRS). Refresh course for the previous batch was also conducted coinciding with the regular Diploma in IFRS course.

The Contemporary Issues Discussion Committee of the Institute organized workshop under the theme of Valuation Techniques to make our membership aware on

business valuation of different sectors.

The Institute organized a workshop on Nepal Financial Reporting Standards (NFRS) Implementation Status and Preparatory Work in Commercial Banks of Nepal in Kathmandu in collaboration with Nepal Rastra Bank, the Central Bank of Nepal in October 2015. The workshop was mainly targeted for the Chairperson of the Boards/Chair of the Audit Committee/ Board Members and Chief Executive Officers of the Commercial Banks.

Institutional and Human Resources

Considering the increasing volume of the work and activities of the Institute, it is felt that to some extent the existing organizational structure and manpower is overburdened to perform each and every task efficient and effectively. Therefore, to meet the organizational goal and face the new challenges, the organizational structure is being reconstructed so as to strengthen the working environment and operational efficiency of the Institute.

The 5th amendments of Nepal Chartered Accountant Rules, 2061 have been approved by the Ministerial Level decision of Nepal Government. As per the decision total 17 Rules have been either revised or added with new provision.

The Institute of Chartered Accountants of Nepal (ICAN) conducted TOT program on Nepal Public Sector Accounting Standards (NEPSAS) in October, 2015, with the joint initiatives of Financial Comptroller General Office (FCGO).

International Relation

ICAN’s relation with the International accounting bodies is now expanding gradually. In this regard, we have visited and attended the various meetings, seminars, workshops etc. organized by different national and international Accounting Bodies of different countries for

expanding the relation with those organizations. During the reporting period, we have attended the meetings in South Korea, Singapore, and Malaysia.

ICAN Officials and other member visited Bangladesh and Sri Lanka representing ICAN to attend various Committee and Board meetings.

It is my duty to inform the entire membership that the Institute has submitted the SMO Action Plan to IFAC in December 2015.

It’s my immense pleasure to bring the notice of the entire membership that I have been selected as the Board member of CAPA representing ICAN. This has been possible due to the significant contribution of past Presidents and unflinching support of my colleagues and all the members of ICAN.

I assure to keep our members and stakeholders informed about the activities of the Institute in the next issue of our Journal.

Before I conclude my message I would like to seek the support and valuable suggestions from ICAN family and past presidents for the development initiatives of the Institute.

Best wishes !

CA. Prakash LamsalPresident

The Nepal Chartered Accountant December 2015 7

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BackgroundAbout a month back, one of my fellow colleagues came to my office after a gap of couple of years. I ardently asked to him how you are doing. He softly replied that I had just started consulting work of record keeping, tax advising and other contemporary services. I was surprised and asked him that how can you provide these services without your relevant professional qualification. He simply replied that I had not audited the books of accounts of the clients. Still I had a question that though you had not audited the books of accounts but how can you provide the non-assurance services like those. Still he had throwing to me other non-tenable logic. Finally I did not want to lose my good friend through unnecessary debate and changed the topic to other non-accounting issues like the difficulties that we are passing now a days i.e. shortage of cooking gas, petroleum products, groceries items and quality of life of people of Nepal. This is not the single case practice over here. There are many more such services

carried out by the person who has no relevant qualification, experience and knowledge in the relevant field. This would be one of the biggest challenges to the regulating body to capture these types of services within the scope of accountancy.

IntroductionThe word accountancy that had a distinctive meaning in the past is now being changed as customary to suit their own purpose by the users or service providers. The meaning of accountancy embraces a number of assignments like record keeping, preparation of financial statement, audit and assurance, financial management, consultancy, taxation and so on. Now a days, person who are directly or indirectly associated with the accountancy claimed to the public that the different practice other than assurance services they are operating are not part of the accountancy profession and it’s a kind of service provided beyond the scope of accountancy. However, all over the world, accountancy is held as embracing all these disciplines and without getting valid authority

CA. Paramananda AdhikariCA. Adhikari is a Technical Director of ICAN.

He can be reached [email protected]

Challenges and Quality of Accounting Profession

The number of cases of audit failures all over the world since last one decade raise the question about the independency of auditor and their responsibilities. To win the public trust on the audit, there has obviously led the credibility question over the profession that provides justification for need of external/oversight regulation worldwide.

The Nepal Chartered Accountant December 20158

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cannot do any of the services. So, we have that great challenge to address the issue and bring those disciplines within the meaning of accountancy in our context.

Circumstances of Audit Failures The objective of audit is to get reasonable assurance rather than absolute assurance and the opinion of the auditor shall be considered persuasive rather than conclusive. Hence, auditor must obtain a high level of assurance that the conclusion expressed in management’s assessment is correct to provide an opinion. However, if we look back to the audit failures of the past across the globe, indicates that auditor fails to understand business environments, risk assessment including error in interpreting accounting principles, application of the standards and misstatements caused by client fraud are few of them. Aftermath investigation of the failures cases, it was found that in most of the cases auditors were also involved in the fraud with the management and found guilty of the professional misconduct due to concealment of facts and information. The number of cases of audit failures all over the world since last one decade raise the question about the independency of auditor and their responsibilities. To win the public trust on the audit, there has obviously led the credibility question over the profession that provides justification for need of external/oversight regulation worldwide. Probably, the oversight regulation is related to the result of the serious audit crisis and the way out of minimizing the consequences of the crisis and its reasons.

Criticism Against the AuditorsBased on the above facts, there are some specific charges against auditors which includes, failed to obtain adequate business knowledge, failed to obtain sufficient appropriate audit evidence to corroborate management representations and explanations, failed to assess the risk attached with the business, failed to respond on over-valuation of assets, limiting the analytical and substantive procedures, limiting the sample selection procedures,

failed to exercise professional skepticism on unusual or related party transactions and issued unqualified opinion despite being aware of many accounting material misstatements and failures of disclosure of such facts. The auditing profession in Nepal is experiencing a period of serious havoc. Few years back from now, backing to raise the fake VAT billing and manipulation of accounting data of the clients were some of the severe criticism against the auditors not only by the government but public too. Further, there are heavy debates on the minimum audit fee issues of the accounting professionals for the services they discharged to the clients. This may bring to light the charges faced by the accounting professionals but who knows the problem actually they are facing to uphold their profession.

Practicality of Audit ServicesThe audit function is governed through the theory of agency that the owner will monitor the management activities through audit function carried out by independent professional accountant. However, in Nepal audit is mandatory for all companies incorporated under the Companies Act, 2006, despite of their size and ownership structure i.e. private or public companies. According to the provisions of sections 108 and 109 of the Act, the management of the company is responsible to maintain the accounts of the company, annual financial statements and report of the Board. Similarly, sections 110, 111 and 115 of the Act, every company incorporated under the Act needs to have its financial statements duly audited by an independent auditor. This is a mandatory provision even for the small company. The low perceived value of the audit function is challenge facing audit practitioners in Nepal. Nevertheless, the mandatory audit requirement for the companies whether large or small, the actual contribution of auditing towards its intended purposes is somehow limited. This is because significant numbers of companies in Nepal are private companies incorporated under the Act as opposed to public companies. And


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majority of these private companies are owner-managed. Hence, an audit would be worthless to most of the private companies because the directors and the shareholders are ultimately the same persons. Due to this reason, most audit clients have found an audit function as a non-value adding activity and perceive it to be a costly process to them paying money to the auditor just for signing the financial statement. They totally ignore about the responsibility taken over by the auditors on issuing the audit report. The most noticeable value of auditing for the private companies is merely adding trustworthiness to the financial statements for the purpose of tax return to the Inland Revenue Department (IRD) and for the loan applications to the bank and financial institutions to catch the credit facilities.

Quality of Audit ServicesIn contrast with the usefulness of audit services in the private companies, audit function has a more significant role for public companies since it serves the purpose of reporting to their existing shareholders and attracting further investment. However, the practical usefulness of auditing may only be pertinent to a limited group of users such as bankers, regulatory bodies, institutional investors and large stakeholders such as IRD, NRB, Office of the Company Registrar and VIP shareholders. As opposed of these, by and large public do not actually rely on the audited financial statements for their decision making purposes. As a result, over the years, it is realized that the audit has gained very little recognition from a large section of the public. Another problem underlying the audit practice in Nepal is the inability of the public to make a fair evaluation of auditors’ performance. Public do not have adequate knowledge and ability to understand the quality of an audit. Public judgment of audit quality will only come out as a result of subsequent events (situation of failing) which more often negative reporting by the media that an audit has not been performed with due care. The issue of audit quality versus audit fees has

been a major concern of the auditing profession in Nepal since many years from now. Due to this, audit quality is likely to be sacrificed by the client as a result of low audit fees and the audit clients may not be interested for higher audit quality or the audit clients may not be able to judge the audit quality as it should be.

ConclusionPerhaps, higher moral value, competency and improved qualities of services are few of the fundamental principles of profession to enhance the scope, trust and credibility of auditing profession. Educating the public and various stakeholders on the nature, objective and expected outcome from an audit that may help the public to recognize the value of auditing and the value addition made by the auditors work. Stringent regulation alone may not be only solution in promoting qualitative and better practices of auditing.


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1. International Public Sector Accounting Standards in Nepal

The Financial Comptroller General Office (FCGO) is in the process of extending the pilot use of Nepal Public Sector Accounting Standard (NPSAS). The NPSAS corresponds to a large extent the requirements laid down in the cash basis International Public Sector Accounting Standard (IPSAS). Twelve more centre-level agencies would be preparing their consolidated statements using the NPSAS by the end of this financial year (2015-16). It is expected that the NPSAS would be used to prepare the consolidated statement of all 44 central-level agencies within the next three years. A number of trainings are being conducted to disseminate the underlying ideas of NPSAS to government accountants at different levels and to make them capable of preparing the consolidated statements, as required by the NPSAS. Once the adoption of the NPSAS across the central-level agencies is accomplished, the FCGO intends to initiate a step towards the

accrual basis of IPSASs.

What is worth mentioning is that six years have already been passed since the government first approved the use of NPSAS by budgetary entities. Some important changes have occurred in international public sector accounting standards during these years. For instance, the International Public Sector Accounting Standards Board (IPSASB) has recently announced that it will facilitate the revision of the cash basis IPSAS following the recommendations of the Task Force, which it had established in 2010 to review the use of the standard in developing nations. In another development, the Europe Commission (EC) has clarified that the accrual-based IPSASs cannot be implemented in Europe in their present form and has put forward a proposal for developing a separate European Public Sector Accounting Standards (EPSASs) for its member states. This paper aims at providing an update of contemporary developments taking place in international public sector

Dr. Pawan AdhikariDr Pawan Adhikari is a Lecturer in

Accounting at Essex Business School. He can be reached at [email protected]

The Legitimacy of International Public Sector Accounting Standards (IPSASs)

The government/FCGO should consider an incremental approach to public sector accounting reform extending the use of modified version of cash accounting and then gradually migrating towards a simpler form of accrual accounting.


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accounting standards. This understanding might be valuable both for the government/FCGO and accounting profession in the process of implementing the NPSAS and developing a reform strategy for future public sector accounting reforms.

2. Revisiting the Cash Basis IPSASThe global accounting profession and international organisations, mainly the World Bank, are of a view that the adoption of accrual accounting cannot be an immediate solution for developing countries to improve their poorly performing public sector accounting. The challenges in implementing accrual accounting and the costs incurred in the implementation process are unfolding, as more and more European governments have moved towards the accrual basis of accounting. For instance, the European Commission (2012, 2013) has in its reports assumed that the costs of moving away from a cash-based accounting system to an accruals-based accounting system for the central government alone in a medium-sized member could reach up to EUR 50 million given the expense of putting into place the new standards, the associated IT systems, and appropriate training and education. In the same report, it is mentioned that France had spent in excess of EUR 1,500 million on articulating accrual accounting and budgeting reforms over the last decade. Given the costs incurred in the transition process, some countries have been even forced to move back and adopt a step-by-step approach to accrual accounting starting the reforms from their ministries rather covering the entire public entities.

The global accounting profession and the World Bank have therefore urged developing countries to sequence their public sector accounting reforms, beginning with the adoption of the cash basis IPSAS, with a possible move towards accrual accounting in the longer-term. The adoption of the cash basis IPSAS has, however, appeared to be a problematic in many developing nations. Certain requirements of the standard, for instance,

full consolidation, reporting external assistance and third party payments, have proved impractical in many countries (see e.g. IFAC, 2010). Wynne (2013) claims that “at least 31 governments in Africa have tried to adopt this standard, but its key requirements have not proved practical”. The PriceWaterCoopers’s (PwC) report is another illustration in this regard. It is mentioned in the report that not a single government has been able to fully implement the core requirements of the cash basis IPSAS (PwC, 2013).

Such ambiguities in implementing the cash basis IPSAS have also been acknowledged by the IPSASB, the developer of the cash basis IPSAS. In 2008, the Board had established a Task Force with a view to identifying the areas/issues within the cash basis IPSAS that have apparently become an obstacle in extending its use in developing countries. The Task Force was also assigned to make recommendations as to whether the cash basis IPSAS should be modified, or if further guidance should be provided in light of the challenges that the countries had experienced in its implementation. In its report submitted to the IPSASB in 2010, the Task Force had raised concerns over several issues, consolidation being the primacy one. In addition to the Task Force, the International Consortium on Governmental Financial Management (ICGFM), which is reckoned to be a strong supporter of the cash basis IPSAS, had also submitted detailed proposals for amending the cash basis IPSAS. Due to the issues related resource constraints, the IPSASB was not in a position until recently to address the recommendations of both the Task Force and the ICGFM.

In 2015, the IPSASB, however, agreed on a project brief proposing that the cash basis IPSAS be reviewed to respond to certain recommendations of the Task Force. In its meeting which was held in Toronto in June 26, 2015, the IPSASB had on its agenda a review of the cash basis IPSAS. An entire session of the meeting


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was devoted to setting directions for the preparation of a first draft of an Exposure Draft (ED) identifying the potential amendments to the cash basis IPSAS. Some of the potential amendments to the standard discussed in the meeting included;

• shifting the consolidation requirements from part 1 (required) to part 2 (optional) and providing countries the option of either consolidating their financial statements or publishing them as stand-alone statements

• shifting the requirements for third-party payments from part 1 to part 2 and provide each country an option of reflecting third-party payments in their financial statements

• accommodating the requirement of external assistance in part 2 instead of part 1 so that each country will have the option of reflecting the extent of external assistance that they receive, and

• addressing the ambiguities in dealing with foreign currency and treasury single account transactions, amongst others.

An agreement was made in the meeting to action a limited scope review of the cash basis IPSAS so as to:

• propose amendments to requirements in part 1 of the cash basis IPSAS dealing with consolidation, external assistance and third party payments,

• propose limited “housekeeping” changes where necessary to ensure that the requirements remain appropriate, and

• clarify that the adoption of the cash basis IPSAS is intended as an intermediate step on the road towards accrual accounting, not an end in itself.

It is expected that this agenda of revising and simplifying the cash basis IPSAS will be endorsed in the next IPSASB meeting, which is scheduled in March, 2016.

3. The Applicability of the Accrual Basis IPSASs

As part of improving public sector governance, a large number of European countries have in the last decade adopted some degree of accrual accounting in their public sector (Ernst & Young, 2012; PwC, 2013). Organisations such as the IMF and the European Commission and the professional accounting associations and accounting firms have envisaged accrual accounting a means not only of tackling the evolving sovereign debt crisis in Europe, but also of avoiding the future financial crises. Despite the widespread use of accrual accounting, only few counties (except UK, Australia, New Zealand and Switzerland), however, have shown an interest in adopting the accrual basis of IPSASs. Mentions are made that the accrual basis of IPSASs have appeared inadequate to address the requirements of most of the central European governments in which public finance is centred around the annual budget (European Commission, 2012, 2013). For instance, countries such as Italy and Slovakia, have expressed concerns over the lack of public-sector-specific provisions in the IPSASs for recognising and measuring pension liabilities, social benefits, tax revenues and historical costs (Ernst & Young, 2012).

In a similar view, several EU member states have raised concerns over a lack of provisions in the IPSASs to address the main intangible asset inherent to the government, i.e. the power to levy taxes. The IPSASs have also come short in many counties in dealing with non-exchange transaction expenses, i.e. taxes and transfers, employee benefits, public debt and government revenues. For instance, non-exchange transaction expenses have been the main expense within many European central governments and some other public entities; there are however no IPSASs available for those expenses. In addition, IPSAS 23 has turned out be irrelevant in a number of European governments given that their revenue sources have been very broad rather than defined in the standard. Similarly,


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IPSAS 29 has appeared inapplicable in many European countries and do not have a developed system that could separate commissions and expenses for their public debt.

The significance of the IPSASB’s proposed conceptual framework has also been questioned by many EU member states. Having spent nine years and eight public consultations with the global constituency, the IPSASB has recently approved its “Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities” (Christiaens & Vandendriessche, 2015). The IPSASB claims that the framework has been developed by giving a special attention to specific public sector-related issues, and that it would provide a basis for preparing high-quality reports for both accountability and decision-making purposes. However, evidence shows that the notion of government control used in the conceptual framework has proved problematic in a range of countries. The accountability mechanisms in the European public sector are primarily focused on the use of budget appropriations and on the services provided and effects achieved from the point of ‘value for money’. This also means that the budgets statements and performance reporting, rather than the general purpose financial statements as prescribed by the IPSASs, would continue to form a basis for discharging accountability in the public sector. Furthermore, questions have been raised about the way the users of financial statements have been identified in the conceptual framework. The citizens, resource providers, legislators, and other service recipients and their representatives have been reckoned to be the key users of the financial statements in the public sector, without any actual interviews or field work having been undertaken to specify their requirements and their varied information needs (Christiaens & Vandendriessche, 2015). Countries are also of the view that the framework would have been introduced prior to the issuance of standards rather than when the standards are fully developed.

In its assessment report, the European Commission (2012) has underscored several critical issues relating to the accrual basis IPSASs, such as, the governance of the IPSASB, the relationship between the IPSASs and the European Systems of Accounts and the ‘left out of budgeting’, amongst others, and explicated that the accrual basis of IPSASs cannot be implemented in the EU member states as they currently stand. Using the IPSASs as a starting point, the European Commission (2013) has made a recommendation for the development of a set of harmonised public sector accounting and budgeting standards, i.e. the European Public Sector Accounting Standards (EPSASs) for the member states. This trend towards the EPSASs has certainly become a caveat, warning not only against the suitability of the IPSASs but also against their future adoption by EU member states.

4. Alternative Reforms to NepalThe fact that a large number of countries, both developed and developing, have referred to the IPSASs, while articulating their public sector accounting reforms, cannot be denied. However, there is no evidence that any country has fully complied with the requirements laid down in the IPSASs. The applicability and legitimacy of both the cash and accrual basis IPSASs have therefore raised concerns at a global level. Claims that a large number of countries are embarking on a move towards the IPSASs can therefore be contested. For instance, developing countries have failed to cope with several requirements of the cash basis IPSAS relating to the disclosures of third-party payment and external assistance and the preparation of consolidated statements. In a similar vein, Europe has rejected the accrual basis of IPSASs mentioning that the standards lack provisions for operating the budget, a key governance tool in the public sector and for tackling various other non-exchange transaction expenses, for instance, taxes. The Europe Commission (2012) has therefore proposed the development of a separate set of European Public Sector Accounting Standards (EPSASs)


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for its member states instead of adopting the accrual-based IPSASs.

Given this, concerns can therefore be raised whether it is time for Nepal to revisit its government accounting reform strategy and plans. Instead of devoting its energy and resources to implementing the NPSAS and developing consolidated accounts, it may be better to search for an alternative approach to improving the accounting practice. For example, the promotion of certain aspects of modified cash accounting could be one alternative. A large number of governments in Latin America have in recent years moved from pure cash accounting to a modified-version of cash accounting by disclosing certain aspects of receivables, payables, borrowings and other financial liabilities, non-cash assets, and accrued revenue and expenses. The paper therefore suggests that the government/FCGO should consider an incremental approach to public sector accounting reform extending the use of modified version of cash accounting and then gradually migrating towards a simpler form of accrual accounting. Only through the adoption of such approach the future federal and states governments would be able to demonstrate their financial viability and discharge their accountability to the citizens.

References:Christiaens. J., & Vandendriessche, F. (2015). IPSASs conceptual framework: a comment. CIGAR Network Newsletter, 6(2), 2.

Ernst & Young. (2012). Overview and comparison of public accounting and auditing practices in the 27 EU member states. UK.

European Commission. (2012). Public consultation – assessment of the suitability of the International Public Sector Accounting Standards for the member states. Summary of responses. Brussels: EUROSTAT.

European Commission. (2013). Towards implementing

European Public Sector Accounting Standards (EPSAS) for EU member states – public consultation on future EPSAS governance principles and structures. Public Consultation Paper. Brussels: EUROSTAT.

International Federation of Accountants (IFAC) (2010). Review of the cash basis IPSAS -Report of the task force (agenda paper 6.1). Vienna, Austria.

PWC. (2013). Towards a new era in government accounting and reporting. PWC:

PwC Global survey on accounting and reporting by central governments.

Wynne, A. (2013). International public sector accounting standards: compilation guide for developing countries, International Consortium on Governmental Financial Management. http://www.scribd.com/doc/134603499/ICGFM-Compilation-Guide-to-Financial-Reporting-by-Governments.


ECONOMY

The current economic difficulties and shortage of essential goods are the result from non-economic activities. Major factors of current crisis are political mistrust, border unrest and blockade. Political instability has significant impact on the economic growth as the market always negatively respond to Non-economic turmoil.

The political implications for the market are as important as the economic effects. The collapse of the supply system further amplified anger at ground level, sending a wide ramification throughout the Nepalese population. It was further accelerated by opportunists who want to fulfil their political dream and translate them into political benefits.

We stand at movement of great challenge and great opportunity. We are facing worst economic crises in generation, in part because of complex political situation. These difficult times are not a result of accident of history. There are a number of composite political

and legal issues which were not handled prudently. To be sure, some of these problems are results of unprecedented political development that could have been easily avoided. The recent turmoil does not condone our mistake!

Due to various reason price of daily necessitates from groceries to fuel had been skyrocketed. Many of us are worry about whether we will be able to raise our kids in safety and security and give them a better life. It is easy to feel as if that dream of boundless opportunity that should be right of all Nepalese is slipping away. Our country needs to provide economic opportunities to the people to fulfil their dream. We need to provide economic security to private sector with continual spread of benefit to the general public.

Economic policy need to protect the interest of the working families that are backbone and the engine of our economic growth. It is a complex phenomenon which not merely concerns the national policy or behaviour of political leaders

CA. Anal Raj BhattaraiCA. Bhattarai is a Fellow Member of ICAN.

He can be reached at [email protected]

Nepal Unrest: The Fault Line

Every institutions who are responsible for bringing current situation has been adversely affected by the crisis but, the general public has been affected the worst. The reasons for these failures can be clearly understood, it happened apparently because lead players had miscalculated the effects.


ECONOMY

but also touches upon the very structure of our country. We must create bottom-up growth that empowered hardworking families to climb the ladder of success and raise their children with security, opportunity, and hope for better future. These hopes are at the heart of Nepalese people. Yet despite of the resilience, optimism, and hard work of Nepalese people, their dreams too often have been frustrated.

In difficult times, there's less room for ambiguity in defining goals. To meet our challenge, we must summon our common faith in our values - "the sense of who we are, and what is our limits". We are at critical juncture of time, to lead Nepal at this critical moment in history, we require more rational judgements. We cannot simply look backward for finding solution to the complex economic problems.

Today’s political crisis needs to be analysed very carefully. Constitution promulgated by Nepalese Constitution Assembly may or may not be able to address concerns of all sections of the society but it has been able to emphasise on freedom of economic activities, unquestioned right to properties, smooth and free flow of goods and services etc. To encourage investment activities government must guarantee uninterrupted supply system. The demand, production, trade and transport are the major basis of market selection. We learnt our lesson.

When the economy takes a downturn, wise market player usually respond by changing their financial behaviour. Even though constitution has secured economic rights of all, Corporate Investors do not blend with political instability as a result of which they will book profits and go to another country. Further, crisis like today definitely encourage investors to make larger and riskier investments during the upswing of the business cycle and to cut back in their investments during the downturn, increasing rather than damping the instability of the financial markets and the volatility of the underlying

real economy.

The integrity of political system and the public’s trust in those system are essential to the economic well-being of a nation. The soundness and the sustained prosperity of the country depends on the notions of fair dealing, responsibility, and transparency. Unfortunately—there has been cases of mistrust and confusion—we witnessed an erosion of standards of responsibility and ethics that exacerbated the political crisis. The Political system has been thus suffering from mistrust (lax governance, falling confidence, ownership and slow acceptance) through the fault in its own inabilities. The problem that we are facing is unique to our country. Though, the constitution has been able to address legitimate demands of various sections of societies, the political system has not been able to take venerable section in confidence. Serious flaws exist in the short-term vision of our political players.

Considering the situation in various part of country our political system should have taken some rational steps to deal with them so that they could have easily avoided those elements which can disintegrate country. They should have played a role to consolidate all Nepalese in to one roof. The political turmoil, when it appeared in some section of societies, or more precisely, in the Tarai regions but now the ramifications of turmoil had wider effect which crossed the Nation and had crossed maximum economic losses The problems we faced are not only political but it has rather affected the survival of people. This has had negative impacts on investment activities therefore the government must guarantee an uninterrupted supply system and support free market.

Every institutions who are responsible for bringing current situation has been adversely affected by the crisis but, the general public has been affected the worst. The reasons for these failures can be clearly understood, it happened apparently because lead players had miscalculated the effects.


ECONOMY

Under present condition, reconciliation with each one is necessary to remove the mistrust. If this continues, we expect that, the entire system, may become incapable of carrying out even the simplest of steps involved in the conversion of savings into investment or the financing of home building, personal consumption, or development.

There is a deep fault in our approach both politically, economically and diplomatically, we are not been able to design proper solution for current crisis. Further the crisis had not been managed smoothly. It seems our Political System does not process information efficiently, or well. Any solution must take account of the socio-economic costs of the crisis as its starting point, because these are disproportionally affecting the country economy as well as the poor and labour more generally.

Assuming that our political system cannot be fully reformed, measures must be taken to place a ring around the system’s core called “politic”. A stable political system is a means to an end, not an end in itself, and the ends that matter are social justice and economic development. The merit of the political system should not be judged merely in terms of the stability that it promotes or in terms of the growth, innovation, and investment that it may encourage. The political arrangements should also be judged in terms of how effectively they promote social justice.

We must analyse the magnitude of the impact of current crisis and its impact on social harmony and loss of businesses confidence. We need an emergency economic plan to jump-start the economy and get our economy back in track. We must adept our policies that can triggered a fundamental changes in the economy and create wide spread opportunity and economic prosperity; we need to make commitment towards future generations, so that, they know, we care:-

1. To move beyond the bitterness,

2. To arrive at consensus,

3. Fulfil our responsibility for the Nation,

4. To start the path for economic development and reconstruct our Nation.

We know, once we overcome with our political difference, other complex economic and legal issues can be easily resolved to ensure sustainable economic development. We are confident on our abilities and we must look forward, do work efficiently and maintain good relation with our neighbouring countries.

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ECONOMY

1. Past GrowthOn an annual basis, Nepal’s growth for the last four decades (1975/76-2014/15) averaged at a lower single digit of 4.2 percent. Population growth during the period averaged at 1.8 percent. So, Nepal’s per capita gross domestic product (GDP) growth during the four decades averaged at 2.3 percent. However, talking about our neighbors, the average per capita GDP growth during the 34-year period (1980-2015) was 9.0 percent in China and 4.5 percent in India, according to World Economic Outlook Database (IMF, October 2015). According to GDP figures published by the Central Bureau of Statistics of Nepal, the pre-democracy period (1975/76-1989/90) recorded an average growth of 3.9 percent while the post-democracy period (1990/91-2014/15) experienced an average growth of 4.4 percent. The highest growth rates recorded were in 1983/84 (9.7 percent), 1993/94 (8.6 percent), 1980/81 (8.3 percent), 1987/88 (7.7 percent), and 1990/91 (6.4 percent). During the three years,

namely, 1984/85, 1999/00, and 2007/08, the growth rate recorded in each of these years was 6.1 percent. The growth rates were 5.3 percent each in 1995/96 and 1996/97, 5.6 percent in 2000/01, and 5.4 percent in 2013/14. Rest of the 28 years witnessed growth rates below five percent. During the last nine years (2006/07-2014/15), the growth rate averaged 4.4 percent. During the current fiscal year 2015/16, the economy is heading for negative growth on account of so called economic blockade. Two previous blockades imposed by India were in (a) 1969 and (b) 1988/89 and 1989/90. The growth rate then was not negative. Actually, the growth rates recorded in 1988/89 and 1989/90 were positive 4.3 percent and 4.6 percent respectively. During the last four decades, there were previously two episodes of negative growth occasioned by large negative agricultural growth—in 1979/80 and 1982/83. The negative growth recorded in these two years was 2.3 percent and 3.0 percent respectively. In 2001/02, almost nil growth was recorded yet the growth (0.1 percent)

Mr. Tula Raj BasyalMr. Basyal is a Former Executive Director of

Nepal Rastra Bank.He can be reached at

[email protected]

Managing Risks Facing the Economy

Increasing and managing wider and deeper interrelationships with the global economy would be essential for enhancing the efficiency and effectiveness of the economies in the modern world. Globalization means increasingly integrating with the world economy through introducing facilitative changes and arrangements so that the benefits of the associated openness, competition, reform, and restructuring are available to the stakeholders at a faster pace and rising scale.


ECONOMY

was positive. We can, therefore, observe that the negative growth during this year will be the first such evidence in 33 years.

2. Effects of BlockadeThe effects of so called blockade now continuing for over four months are evident throughout daily lives of people and in every sector of the economy. The immediate and short-term costs of the blockade are catastrophic. The long-term costs of the blockade are even hard to guess. The shortage of fuel, food, medicine, other essential commodities, and industrial raw materials has hardest hit the people’s lives. Transportation in the country has been paralyzed. The Terai Bandha has crippled normal life. Closure of educational institutions has created uncertainty about the future of the children. Closure of about 2,200 industrial establishments and disruption of business activities has resulted in colossal loss in terms of lost output and employment. Blockade near the border points has severely affected Nepal’s transit facilities and resulted in revenue loss worth billions of rupees. The supply chain associated with domestic and foreign trade has been disrupted. As a result, scarcities and price rise of essential commodities have been the normal occurrence. The size and reach of Informal economy has been on the rise. Development projects in the public sector and investment activities in the private sector have been disturbed. On the whole, the economy’s consumption, investment, and external trade have been affected. Business confidence and competitiveness of the economy have declined. Unemployment has been on the rise. Consequently, the ratio of population living below the poverty line must have increased by a couple of percentage points more. Therefore, the 13th Plan (2013/14-2015/16) target of reducing the population below the poverty line to 18 percent by 2015/16 from 23.8 percent at the end of 2012/13 is unlikely to be attained. Nor will there be favorable outcome in the goal of elevating Nepal to the status of developing country by 2022 from the present

status of LDC. Other targets of the 13th Plan are also likely to be unmet.

3. Globalization as the Present TrendGlobalization is defined as the process of enhanced economic interdependence and integration among nations. Increasing integration is seen today in the dramatic growth in the flows of goods, services, and finance across national borders. Goods, services, finance, and even manpower markets across the globe are being liberalized, becoming more competitive and getting increasingly integrated. The restrictions in their transactions are being reduced through implementation of rule-based institutional arrangements, both at the regional and international levels. Institutions and fora like the Bretton Woods institutions; WTO, BIMSTEC, Group of Twenty, regional trading arrangements like the South Asia Free Trade Area, etc. are supporting this process. Increasing and managing wider and deeper interrelationships with the global economy would be essential for enhancing the efficiency and effectiveness of the economies in the modern world. Globalization means increasingly integrating with the world economy through introducing facilitative changes and arrangements so that the benefits of the associated openness, competition, reform, and restructuring are available to the stakeholders at a faster pace and rising scale. In fact, globalization is the process of expanding and intensifying the transactions and interrelationships with the global economy so as to make the domestic economies efficient, productive, and competitive.

One major component of globalization is the steady increase in the international trade as a share of GDP. Globalization is supported by a continuous drop in the transportation and associated costs along with declining tariffs and barriers to trade. Essentially, globalization reflects an extension of specialization and division of labor to the entire world. Global integration of goods and financial markets has produced impressive gains from


ECONOMY

trade in the form of lower prices, increased innovation, and more rapid economic growth. However, these gains have sometimes been accompanied by adverse side-effects. One consequence of economic integration is the unemployment and lost profits that occur when low-cost foreign producers displace domestic production. To address such interests, some arrangement of protectionism in the form of tariffs and quotas on international trade is sometimes advocated. Globalization could raise many new issues for policymakers as it has both positive and negative connotations. A prudent step would be to strive to make globalization a better instrument for a country’s prosperity. Inability to do so would only reflect ones ignorance in skillfully managing the dynamics of the domestic economy in the face of rising currents of the process of globalization. Inability on the part of national authorities to manage successfully the process of globalization due to lack of vision and failure to introduce necessary enabling and mitigating measures should not be viewed as the demerits and defects of the globalization itself. Are the gains from trade worth the domestic costs in terms of social disruption and dislocation? Does integration lead to greater income inequality? The policymakers with the responsibility to deal with globalization have to think about such questions.

4. Neighbors’ Wrong Policies in the PastNepal realized the importance and appreciated the virtues of increasing economic interrelationships with the world economy six decades ago and, consequently, adopted liberal trading regime, private sector-friendly investment climate, and other conducive policy arrangements. However, the control-based policies of the neighbors exerted pressure on Nepal to abandon the liberal regime and start pursuing the control-fostering policies, thereby dismantling from the roots Nepal’s vision and quest for rapid economic transformation. Our neighboring countries then loved and glorified the system of licenses, permits, quota, and inspection raj as the means for

economic transformation under the popularized slogan of creating socialistic society. Under the hangover of centuries of colonialism, they intentionally forced people to wrongly believe that economic liberalization was another form of colonization. They showed that they hated everything foreign and also discouraged growth of domestic private sector entrepreneurship and investment for their real fear that the domestic capitalists could snatch the politicians’ new-found luxury of controlling and exploiting the economy and the masses. However, they forced the masses to believe that all these controls were meant for making them rich and increasing their welfare. The policies adopted by the politicians penalized people who wanted to pursue prosperity and happiness through their hard work, enterprise, innovation, and efficiency. In the process, the politicians succeeded in amassing personal wealth and transformed themselves into a highly prosperous lot. They turned their economies into the most underdeveloped ones and pushed their countrymen into the abject poverty, misery, squalor, decline, and decay. The economies became most unproductive and the people became the most under-privileged. They were successful in making South Asia the abode of highest number of poor and destitute. The wrong policies succeeded in not only producing massive scale of poverty, unemployment, and underdevelopment but also transmitting the negative spill-over effects on the countries neighboring them. The only beneficiaries of this drama of incompetent handling of the economic management were none other than the whole lot of new political masters who falsely championed the cause of socialism to serve their real object of themselves becoming the biggest capitalists. When people finally woke up to the fallacies of such wrong tactics perpetrated by the politicians, many precious decades were already lost for the people and the economy. When the control-loving politicians also sensed that the drama of deception and cheating so far orchestrated would not become sustainable, they were forced to review it and introduce hesitatingly the liberal regime which they


ECONOMY

thought would widen the economic inequality. Since the adoption of these policies 25 years ago, substantial changes have occurred in these neighboring economies. The positive effects of liberal economic regime based on increased foreign direct investment (FDI), fostered productive domestic investment, and adoption of prudent macroeconomic and sectoral policies have been evident in these countries. Due to good policies, the previously poverty-producing economies have thus started creating wealth and prosperity. People have started to believe that they can become rich through hard work and enterprise instead of dishonesty.

5. Globalization Benefits for NepalNepal immensely benefitted from globalization. Sectoral areas of investment and economic activities have widened and deepened. Financial sector, civil aviation, mass communication, transportation, hotels and restaurants, cooperatives, NGOs, social infrastructure like educational and health institutions, etc. are fast progressing. Rising public resources and their more productive and equitable distribution have fostered better allocation of resources. Literacy and health indicators have improved. The ratio of population falling below the poverty line also came down fast. However, the current blockade is a vain attempt to deny Nepal the benefits of liberalization and globalization policy hitherto adopted by Nepal.

6. Assumptions behind Adopted Policy Regime

In the era of globalization and deregulation where each country is interlinked to the global economy, it is assumed that countries will foster, and not inhibit, the transit and border trade. It is assumed that the landlocked countries are offered unrestricted transit facility and the provisions of WTO, other international conventions like the UN Convention on Transit Trade of Landlocked States (Vienna Convention, 1965) and UN Convention on the Law of the Seas (1973), and also the bilateral agreements are respected. The minimum assumption for choosing

and pursuing any policy regime are the continuation of the status-quo by the external environmental factors. For close neighborly country with open border, the validity of such assumption becomes far greater. However, such assumptions get violated by bigger neighbors and no corrective mechanism for enforcing them is presently in sight.

7. Conclusion and SuggestionsTo minimize the risks and overcome the negative consequences of the so called blockade, the following measure should be adopted:

* For more agricultural production and productivity, Government should introduce policy reforms and support increased investment in agriculture, forestry, and fishing

* More investment should be channeled towards mining and quarrying with focus on extracting gas

* Government should introduce policy reforms and support increased investment in hydro-power and other sources of power

* Policy of prioritizing the regulated development of financial intermediation area should be continued

* Focus on real estate, renting, and business activities

* Enhance the capacity utilization of hotels, restaurants, and other tourism-related activities

* Prioritize development of education and health sector

* Focus on promoting community and social activities

* Manufacturing industries with indigenous raw materials and components should deserve priority

* Government should introduce policy reforms and support increased investment in construction

* To the extent possible, consumption and investment should be based on domestic products.


INFORMATION TECHNOLOGY

Contextual Background During the past few years, we have seen an increasing move from paper documents to electronic documents. With ever growing adoption of electronic transactions, there needs to be a mechanism to trust those digital documents at a level of signed paper documents or better. The major factor that determines the trustworthiness and legal enforceability of digital documents or electronic transactions is the ability and easy mechanism to establish that the transaction has been initiated by the party in question, that the document is not-altered before it reaches the recipient and when needed it can be validated and proved in the court that the document was signed and sent by the party in question.

It has been long since we have benefited from digital signature, knowing or unknowingly. For instance, when you download some update from Microsoft, the update is digitally signed and you can verify that the update is indeed sent by Microsoft and not by any bad party who wants to send some

spyware to your computer disguised as a genuine Microsoft update. Major software vendors release their software and updates digitally signed so that you can verify and be assured that the files received are not viruses or spywares.

Similarly, when you fill a form to apply for passport or file an income tax return with the document or message digitally signed by you (this will happen in near future), the passport or income tax office should be able to verify that the document was really send by you; and on the other hand, when you receive a notice from income tax office, bank or court, you should be able to verify that the document was really sent by the respective office and it is not a con to deceive you and steal your information.

A digital signature scheme offers a cryptographic analogue of handwritten signatures that provides much stronger security guarantee. Digital signatures serve as a powerful tool and are now accepted as legally binding in many countries

CA. Mukunda PokharelCA. Pokharel is a Member of ICAN

He can be reached [email protected]

Dimensions of Digital Signature

Digital Signatures provide a viable solution for creating legally enforceable electronic records, closing the gap in going fully paperless by completely eliminating the need to print documents for signing. Digital signatures enable the replacement of slow and expensive paper-based approval processes with fast, low-cost, and fully digital ones.



including Nepal. They can be used for certifying contracts, notarizing docu ments, filing returns or for authentication of individuals or corporations.

Digital Signatures provide a viable solution for creating legally enforceable electronic records, closing the gap in going fully paperless by completely eliminating the need to print documents for signing. Digital signatures enable the replacement of slow and expensive paper-based approval processes with fast, low-cost, and fully digital ones. The purpose of a digital signature is the same as that of a handwritten signature. Instead of using pen and paper, a digital signature uses digital keys (public-key cryptography). Like the pen and paper method, a digital signature attaches the identity of the signer to the document and records a binding commitment to the document. However, unlike a handwritten signature, it is considered impossible to forge a digital signature the way a written signature might be. In addition, the digital signature assures that any changes made to the data that has been signed cannot go undetected. Digital signatures calculate the hash or digest of the complete document and a small change in the document will result in big change in the hash which will make the digital signature verification fail.

After about 9 years of passing the Electronic Transaction Act, 2063, the Digital signature service has been officially launched in Nepal on Mangsir 16, 2072. This has a lots of potential regarding electronic transactions and document exchange in government services and banking services among other sectors.

What is Digital Signature?A digital signature is a mathematical scheme for demonstrating the authenticity of a digital document. A valid digital signature gives the recipient reason to believe that the message was created by a known sender in a way that they cannot deny sending it and that the message was not altered in transit.

A digital signature scheme is typically used by a signer and a set of potential ver ifiers. The signer possesses a pair of keys - public key and private key (or secret key). The private and public keys are mathematically related and it is not possible to compute the private key from public key. The signer then publicizes its public key so that any potential verifier is in possession of (or can obtain) an authentic copy of the public key associated with the signer.1

There is a public directory linking signers to their public keys, and this directory is administered in such a way that it is not possible for someone to reg ister a public key in someone else’s name. There will be many signers, each with their own public key, and so any potential verifier must know not only the set of valid public keys, but also which of these public keys belongs to the signer whose signature he is interested in verifying.

Once a signer has established a public key, digital sig-nature schemes allow the signer to “certify” (or “sign”) a message in such a way that any other party who knows public key can verify that the message originated from the signer and has not been modified in any way.

How Digital Signature Works?Let’s see how this works with an example.

Ram is sending a document to Sita. Sam wants to send the document in such a way that:

• Ram wants Sita to know that the document really came from him

• Ram wants to assure Sita that the document has not been changed in the way

• And if needed, Sita can prove that the sender of the document was Ram and not anyone else

1 Jonathan Katz, Digital Signatures (Advances in Information Security),



Using digital signature scheme, Ram will send the document to Sita as follows:

• Ram creates the document to be sent in electronic form like word, pdf or excel (also possible with email message)

• He also creates a hash (also called fingerprint or digest)2 of the message using a special software tool

• He then encrypts the hash with his private key• The encrypted hash becomes the digital signature of

the document and the signature is appended to the document using the software tool

• This becomes the signed document which Ram sends to Sita

On Sita’s part, she verifies the message as follows:

• Sita receives the document• To be sure it came from Ram unchanged; first, she

creates a hash of the document she received using some software tool.

• The signing and verifying tools are part of digital signature certificate issuance. The software tool may be in the form of web application or software supplied to the user in USB tokens or some other similar way.

• Then, she decodes the encrypted document hash using Ram’s public key which was attached to the message as well.

• In this process the software tool provided for digital signature checks the validity of the certificate by asking the Certificate Status Provider where all the valid and revoked certificates are listed.

• At this point, Sita compares the two hashes • If they match, the document came from Ram and has

not been tampered with. If they do not match, digital signature verification fails and the document cannot be trusted.

2 Message digest, also known as the hash of a message, is a small piece of data that is generated by applying a mathematical calculation (hashing function) on the message.

Diagrammatic representation of sending and verification process. Image adopted from Wikipedia



Digital Signature CertificateA Digital Signature Certificate explicitly associates the identity of an individual or application server with a pair of electronic keys - public and private keys - and this association is endorsed by a Certifying Authority. The private key is stored on the user's computer hard disk or in an external device such as a USB token and the public key is published through some key repository service. The user retains control of the private key; it can only be used with the issued password. The certificate contains information about a user's identity. The certificate can be used to verify that a public key belongs to the individual.

Digital signature certificates are also used by browsers and servers to encrypt and decrypt information regarding the identity of the certificate user during information exchange processes.

How Digital Signature Certificate is Managed and Issued?Digital signature can be used according to the need and preference of the parties involved. In our example above, Ram and Sita could build their own scheme and signing and verification infrastructure themselves. But, to be widely acceptable, verifiable and legally enforceable, there needs to be a scheme and infrastructure approved by the government through some Act and Rules.

Digital signature in Nepal is governed by Electronic Transaction Act, 2063 (ETA). As per the ETA, there will be an Office of the Controller for Certification as the governing body. The Controller will generate a Root Certificate which will sign Certification Authority (CA) certificates. The Controller certifies the public keys of CAs using its own private key, which enables users to verify that a given certificate is issued by a licensed CA. For this purpose, it operates as the Root Certifying Authority of Nepal.

Figure: Digital signature trust chain overview

In the trust chain, there will be one or more trusted authorities approved by Controller and empowered by law to issue digital signature certificate, known as Certifying Authorities or CAs. The CA is responsible for vetting all applications for Digital Signature Certificates, and once satisfied, generates a Digital Certificate by digitally signing the public key of the individual along with other information using its own private key. So far there is only one authorized CA in Nepal (Radiant Infotech).

Figure: Digital signature certificate issuance process in general

To assist the Certifying Authority there may be one or more Registration Authority (RA) who act as the verifier for the Certifying Authority before a Digital Signature Certificate is issued to a requestor. RA is the entity that collects and verifies each Subscriber’s identity and information that are to be entered into his or her public key certificate. An RA interacts with the CA and recommends the subscriber request for certificate issuance to CA.



Uses of Digital Signature in Government and Commercial Services Digital Signature Certificate can be presented electronically to prove one’s identity, to access information or services on the Internet or to sign documents digitally. The following are some the examples where the digital signature can be used:

• Send and receive digitally signed and encrypted emails• Carrying out secure web-based transactions, or

to identify the other parties of in the web-based transactions.

• Filing Income Tax, VAT and TDS returns• Filing documents with the Company Registrar’s office

and similar government offices.• Application for PAN, Passport or Driving License• Signing documents like word, Excel and PDF• Banking Transactions like fund transfer• Signing Audit Report by a Chartered Accountant or

Registered Auditor

Legal Validity of Digital SignaturesAs mentioned above, Electronic Transaction Act, 2063 provides legal validity to electronic records and digital signatures. Electronic Transaction Rules came a year later in BS 2064 to make rules to operate and maintain digital signature scheme.

Section 4 of the Act provides legal validity to electronic records. The section titled Legal Recognition of Electronic Record says “Where the prevailing law requires any information, documents, records or any other matters to be kept in written or printed typewritten form, then, if such information, document, record or the matter is maintained in an electronic form by fulfilling the procedures as stipulated in this Act or the Rules made hereunder, such electronic record shall also have legal validity.”

In section 5, the Act gives legal validity to the digital

signature. The section titled Legal Recognition of Digital says “Where the prevailing law requires any information, document, record or any other matters to be certified by affixing signature or any document to be signed by any person; then, if such information, documents, records or matters are certified by the digital signature after fulfilling the procedures as stipulated in this Act or the Rules made hereunder, such digital signature shall also have legal validity.”

ConclusionWe have legal validity of both electronic records and digital signature for about 9 years now. The only issue remaining in the adoption of digital signature is the set-up of trusted and secure infrastructure and e-governance plan to incorporate digital signature in government service in the first place to take full benefit of the digital signature in real sense for good governance.

ReferencesDigital Signatures (Advances in Information Security), Jonathan Katz, Springer

http://www.cca.gov.np

http://www.cert.com.np

https://en.wikipedia.org/wiki/Digital_signature

http://cca.gov.in

Electronic Transaction Act, 2063

Electronic Transaction Rules, 2064



Information System: A Global ScenarioOrganizations today operate in a dynamic global multi-enterprise environment with team-oriented collaboration.The chief executive officer and senior management of the organizations want to exceed their business objectives and attain maximum profitability through an extremely high degree of availability, fast response time, extreme reliability, and a very high level of security in information in value chain process. In such a situation, organizations are critically dependent on the timely flow of accurate information. This means that information system provides necessary information which will be of high quality, rich in information content, and come packaged with a variety of useful services to meet the changing business conditions and competition.

In this modern age, information technology is playing an ever increasing role in supporting business strategies and transformation with E-business lending new visibility

to organizational strategic roles. To compete effectively in the business competitive environment, organization must adopt a business process strategy and global supply chain prospective that allow organization to shape their process into adaptable structure. The essential prerequisite for global business optimization is an integrated information system. In addition to this, the advancements in network environments technologies have resulted in bringing to the forefront issues of security and privacy that were once only of interest to the legal and technical expert but which today are topics that affect virtually every user of the information infrastructure. The Internet has grown exponentially from a simple linkage of a relative few government and educational computers to a complex worldwide network that is utilized by almost everyone from the terrorist who has computer skills to the novice user and everyone in between. Common uses for the Internet include everything from marketing, sales, and entertainment purposes to

CA. Gaurav Khwaunju ShresthaCA. Shrestha is a Member of ICAN

He can be reached at [email protected]

Why Audit of Information System is Required in Nepal ?

With the evolution of new devices of information system ,ever increasing use of electronic infrastructure, integration of technology in business process to improve the competitive advantage and weak implementation of cyber law, criticality of information technology control and audit has become a critical mechanism for ensuring the integrity of information systems and prevent future financial scandals



e-mail, research, commerce, and virtually any other type of information sharing.

Unfortunately, as with any breakthrough in technology, advancements have also given rise to various new problems that must be addressed, such as security and privacy. Along with the spread of the internet, evolution of new infrastructure for the information system, a new avenue for crime has also evolved.The financial scandals in global area and domestic companies generated a demand for the new measures to prevent, detect, and correct such aberrations.

In July, 2014 The US largest bank was compromised by the hacker, stealing the name, addresses, phone number and email address of seventy six million household and seven million small business account. The hacking was began in June but was not discovered until July, when the hacker has already obtained highest level of administrative privilege to dozen of bank computer server. Until the JP Morgan breach surfaced in July, banks were viewed as relatively safe from online assaults because of their investment in defenses and trained security staff. Most previous breaches at banks have involved stealing personal identification numbers for A.T.M. accounts, not burrowing deep into the internal workings of a bank’s computer systems.

Around the world, reports of white-collar crime, information theft, computer fraud, information abuse, and other information technology control concerns are being heard more frequently these problems demanded the assurance from control specialists due to their impact on public and private organizations.

Various control-oriented organizations such as the American Institute of Certified Public Accountants (AICPA), Institute of Internal Auditor, Association of Certified Fraud Examiners (ACFE), and others have issued guidance and instructions and supported studies/research in this area.

The most recent addition to these major studies is the Control Objectives for Information and Related Technology (CoBiT) research.CoBiT emphasizes that high speed information processing has become indispensable to organisation activities and substantiates the need to research, develop, publicize, and promote up-to-date internationally accepted IT control objectives. The primary emphasis of CoBiT is to ensure that information needed by businesses is provided by technology and the required assurance qualities of information are both met.

The International Federation of Accountants (IFAC) acknowledged the need for better university-level education to address growing IT control concerns and issues. From this, it has published more recent guidance and information.

The Institute of Internal Auditors (IIA) 1992 document "Model Curriculum for Information Systems Auditing" was developed to define the knowledge and skills required by internal auditors to be proficient in the information age of the 1990s and beyond. The IIA has developed and produced guidance for its membership while conducting the information system audit.

Protection against Cyber Crime: A Domestic ConcernThe increased connectivity , availability of systems and open environments have proven to be the lifelines of most business entities in Nepal now a days as they are getting more dependent on information technology. The banking industry is considered to be one of the forerunners in the use of computers in the Nepal. The industry started with mechanizing bookkeeping and accounting tasks, automating transaction flows, implementing magnetic ink character recognition (MICR) technology, and finally, utilizing online terminals to update depositor's account and record receipt or disbursement of cash. The advancement of both computer and communication technologies has spurred the phenomenal growth of



electronic Commerce and Electronic Fund transfer systems. As more consumers become familiar and trust electronic financial transactions, EFTs will continue to be more widely used. Today, information system have already gone beyond the banking industry and can be seen in almost all other establishments such as insurance, hospital, manufacturing companies, supermarkets ,movie theaters, online retail. Some example of Business using the Internet based E-Commerce are given below :

Industries Application of Internet based E-Commerce

Airlines Most of the airlines around the world have created web sites and are actually receiving order for tickets

Banks and Financial Institutions

Use of Electronic Fund transfer, Debit and Credit cards and various internet based services was conducted

Media and Publishing

Many publishing houses have developed the Web version of traditional print media “e-zines” , a entirely new electronic magazines

Retails industries and outlet

Many retailers are now marketing on internet and thousands of product and services are offered

Hotels and recreation center

Reservation of hotel room or booking of ticket are done in advance through Websites

Increased use of information technology in Nepal has brought with it issues related to policy, security, control and responsibility on the authorized person. Prior to 2004, the government of Nepal dealt with cyber crimes under the Public Offence Act. Later The Electronic Transaction and Digital Signature Act 2004, also known as the cyber law, was passed which was taken as a landmark legislation for the development of IT industry in Nepal.Under Act of 2004, hacking, deleting data, stealing e-documents, software piracy and posting defamatory information invite criminal and civil sanctioning to individuals and institutions. Under this law, the government can punish cyber offenders with up to five years of imprisonment and/or a fine of up to fifty thousand rupees which is dependent on the severity of the crime.

The Government of Nepal (House of Representatives) has approved the Electronic Transaction Act, 2063 on 4th December 2006. The law does not only legalize all sort of electronic transactions and digital signatures, it has undoubtedly implied the ways to run several computer-based mechanisms and penalize cyber crime. Apart from that the Act has formulated the terms of Comptroller of Certification Authority which is further divided into 12 Sections and 80 Clauses. For further effectiveness it has been assigned separate judicial body called IT Tribunal and Appellate Tribunal to keep an eye into all cases which are connected to computer and cyber crime. If anyone is found to be violating Cyber Law then he is equally punished like any other crimes. According to Cyber Law in Nepal if an individual is found involved in such cybercrime like hacking the intellectual property of others he or she will be punished for minimum of 6 months to 3 years in prison and has to pay minimum of Rs. fifty thousand to max three lakhs.

Security Threats and Assurance of ControlsWith the evolution of ecommerce and online shopping system, people buy what they want via online system. The online system of transactions will bring us benefits as well as problems. One major benefit of digital money is its increased efficiency. However, it will also create another problem. "Security" is perhaps the biggest factor for individuals interested in making online purchases by using digital money. As people are shopping in the comfort of their home through networks so its controls and reliability of information security are very important. A number of large-scale breaches that took place in 2014 show that criminals are looking for more efficient, lesstime-consuming and more profitable ways to steal a large number of credit cards or large sums of money. Instead of spending time phishing and using social engineering on individuals, cybercriminals are penetrating retailers’ systems and stealing data as the card is swiped. Cybercriminals have been known to launch



these attacks by penetrating insecure systems belonging to a third party in the retailer's supply chain. Another method used in stores whose points of sale are under video surveillance that the criminal scans hosts for open ports which indicate a remote access connection to the POS (left open to enable easy access to check balances and so on) and IP video (which lets the attacker know where the cameras, and therefore the points of sale, are). Attackers will brute-force the remote access connection until they get in to the system, at which point they can install the POS malware and start stealing card details. Attackers monetize the credit card details stolen during these large breaches in the usual way, either by selling the card details or using them to buy goods online which are then resold.

Similarly, given the increasing rate of smartphone adoption around the world, mobile threats and fraud could create a major threat for the business operating through mobile services. The vast majority of mobile malware is still focused on the Android platform. Not only is it an open platform, but Android phones tend to be manufactured and distributed using less tightly controlled supply chains than other company, say, Apple's. And because Android is the most widely used platform, there's a big attack surface to exploit. Banking Trojans, used with SMS sniffers on mobiles, have seen increased adoption over the past couple of years. In this scenario, a user is persuaded through social engineering to download mobile malware from the internet. For example, during an online banking session, a screen will pop up inviting the user to download a mobile app, often masquerading as a security feature, which is actually an SMS sniffer. When the user's bank detects an unusual activity, such as a high-value wire transfer, and sends an out-of-band one-time password to the user's mobile that must be entered to authorize the transaction, the criminal can intercept it and complete the transfer to their own account.

Fraudsters who attack financial institutions are targeting

the corporate network and going straight to where the money or the information is. The attack types include:

• Transferring cash from a bank's system to criminals' own accounts

• ATM attacks — directly cashing out an ATM

• Ransom requests — extorting money based on locking private information about a bank's customers

Most people are afraid of conducting the transactions using the ATM Cards provided by the respective banks. Credit card system is still in infancy in the Nepalese environment. Users of credit card are afraid that people will be able to use these to retrieve their private or other valuable information without their consent. With identity theft and fraud on the rise, much care is needed in the protection, security, and control of such information. Security, indeed, is the biggest risk in using digital money on the Internet. Besides the problem of security, privacy is a significant factor in some electronic payment systems. To encourage people to use digital money, these electronic payment systems should ensure that personal and unrelated information is not unnecessarily disclosed and their transaction are legally secured from cyber crimes.

In February, 2015, Moscow-based security firm Kaspersky Lab released a report showing that a gang of international hackers have stolen as much as $1 billion from 100 banks across 30 countries by installing malware that allowed them to take control of the banks' internal operations. Previously, the biggest cyber threat to banks was of hackers going after customers, including lifting their personal financial information and skimming their cards. Now the hackers steal directly from bank instead of their customer. The scheme used phishing and other techniques to infect bank employee computers, and then to spread the virus to entire networks. Once inside, the hackers would lie in wait, often for months, watching how employees operated until they could figure out how



to lift money, often in amounts under $10 million, to an outside account. They were so good at taking control of the banks' operations they could remotely dispense cash from ATMs. The Report said that the losses per bank ranged from $2.5 million to $10 million, where it seemed to be deliberately capped, perhaps to avoid detection and total financial losses could be as much higher as $1 billion.

The existing legislation in Nepal is inadequate in a number of ways to cover such offense. Some of the most common forms of cybercrime are not covered by the law. For example, no punishment exists for sending offensive messages. Cyber crime like, ‘cyber-squatting’, or purchasing domain names to benefit from another’s trademark or brand, does not come under Nepal’s cyber-laws. Similarly, the act of electronically obtaining private information for financial or personal benefit lacks legal coverage in Nepalese environment.and the biggest hindrance to cybercrime prosecution is weak law enforcement. Even if the reporting on number of cybercrimes have been increasing; the official response has been slow. The Information Technology industry is continually changing which demands the laws, policies, procedures, and guidelines must change constantly along with it; otherwise, they will have a tendency to become outdated, ineffective, and obsolete.Thus, if security products are not safe from every attack, and if current laws may not always be efficient in addressing the problem correctly, every user of the information infrastructure are at the vulnerable state while doing transactions on information system.

With the evolution of new devices of information system ,ever increasing use of electronic infrastructure, integration of technology in business process to improve the competitive advantage and weak implementation of cyber law, criticality of information technology control and audit has become a critical mechanism for ensuring the integrity of information systems

and prevent future financial scandals Although many products are quite efficient in securing the majority of attacks on a network, no single product seems to be able to protect a system from every possible intruder. The extant security legislation, although addressing the issues of unwanted entry into a network, may also allow for ways by which some criminals can escape the most severe penalties for violating authorized access to a computer system.

Although there is nothing at this time that will guarantee a system's security, a good starting point might be the establishment and implementation of a good computer security policy and diligent audit of the information system. A good policy can include:

• Specifying required security features and recovery procedures

• Defining reasonable expectation of privacy

• Requiring violations security to be recorded and establishing trust through an effective password policy, access privilege

• Defining access rights and privileges and protecting resources from losses, disclosures, or damages by specifying acceptable use guidelines for users and also, providing guidelines for external communications (networks)

• Defining responsibilities of all users and providing users with support information

A good computer security policy may differ from each organization, corporation, or individual depending on security needs, although such a policy does not guarantee a system's security or make the network completely safe from possible attacks from cyberspace. With the implementation of such a policy, helped by good security products and a plan for recovery, perhaps the losses can be targeted for a acceptable level and the leaking of private information can be minimized.



IT audit is next tools to assure that the information system are fully secured reliable. Initially, IT auditing evolved as an extension of traditional auditing with included auditing around the computer.Traditional IT auditing means that processing done by the computer system needs not to be audited as auditor expects that sufficient appropriate audit evidence can be obtained by reconciling inputs with outputs. In simple words evidence is drawn and conclusions are reached without considering how inputs are being processed to provide outputs.

IT auditing is an integral part of the audit function because it supports the auditor's judgment on the quality of the information processed by computer systems. Initially, auditors with IT audit skills are viewed as the technological resource for the audit staff because the audit staff often looked to them for technical assistance as can be seen in organizational IT audits (management control over IT), technical IT audits (infrastructure, data centers, data communication), application IT audit (business/financial/operational), development/implementation IT audits (specification/ requirements, design, development, and post-implementation phases), and compliance IT audits involving national or international compliances. The IT auditor's role has evolved to provide assurance that adequate and appropriate controls are in place. Even though the responsibility for ensuring that adequate internal controls are in place rests with the management, the audit's primary role, except in areas of management advisory services, is to provide a statement of assurance as to whether adequate and reliable internal controls are in place and operating in an efficient and effective manner.

The breadth and depth of knowledge required to audit IT systems are extensive which involves the

• Application of national or international standards to improve and implement quality systems in software development and meet security standards

• Examination and verification of the organization's compliance with any IT-related legal issues that may jeopardize or place the organization at risk

• Understanding of business roles and expectations in the auditing of systems under development as well as the purchase of software packaging and project management

• Assessment of information security and privacy issues which can put the organization at risk

• Evaluation of complex systems development life cycles (SDLC) or new development techniques; e.g., prototyping, end user computing, rapid systems, or application development

• Reporting to management and performing a follow-up review to ensure actions taken at work

ConclusionIn summary, owing to the rapid diffusion of computer technologies ,the criticality of security of information system, protection against computer fraud, complexity of system and privacy of the information of the user, organization needs IT auditors to ensure that effective IT controls are in place to maintain data integrity and manage access to information. As auditors recognized repeating patterns of fraud which ranged from data entry clerks changing check payees to programmers making deliberate rounding errors designed to accumulate cash balances in hidden bank accounts, they recommended a variety of security features designed to automatically prevent, detect, or recover from theft of assets. For the every organisation, the need for audit, security, and control will be critical in the areas of IT and will be the challenge of this millennium. There are many challenges ahead; everyone must work together to design, implement, and safeguard the integration of these technologies in the workplace.


TAXATION

BackgroundContribution of Construction Industry to the country's GDP is around 10 to 11 percent which accounts around 35 percent of government budget. Similarly about 60 percent of the nation's development budget is spent through the use of contractors*1. Most of the construction projects completed in more than a tax year or 12 months time period which attracts under long term contract. The taxation of Income from Long term contract becomes relevant for the government and concerned stakeholders. We believe that most of the contractors books of accounts which attract Sections 26 of Income Tax Act should be prepared and presented as the Nepal Accounting Standard. Standard on Construction Contracts (NAS 13) and the Standard on Revenue (NAS 7) are not being followed.

There are many reasons of not following the Standards of constructions contract such as due to lack of professional staffs with the construction company, the Internal Revenue Department is not

following up for the compliance of related sections of the act, the complexity to compliance of VAT in case of recognizing the revenue and expenses based on degree of completion method, unawareness among contractors about methods of accounting and lastly not having clear manual/guidelines on Income from long term contract.

Provision in the Income Tax Act and RulesThe related Sections of Acts and Rules attracted to the taxation of income from long term contract are the basic sections of taxability, assessable income, calculation and deductions are Sections 5, 6,7,13,20,12 and 63 whereas special Sections are 26,22 and Rules 10,11,12.

The article has covered the related Section of Nepalese Income Tax Act and Income Tax Rules laws and commentary in the Inland Revenue Department's Income Tax Manual (Updated 2068) and the how the same areas are being treated in USA , UK and India.

CA. Kaushlendra JhaCA Kaushlendra Jha is a Business Consultant

in India and Nepal, He can be reached at

[email protected]

Taxation of Income from Long Term Contract: Need to have Clear Guidelines/Manual

Nepal Accounting Standards prescribed by Nepalese law provide the basis for the time at which income and expenses are recognized for income tax purposes. The Accounting Standard which attracts in case of Long term contract is Standard on Construction Contracts (NAS 13) and the Standard on Revenue (NAS 7) – require revenue and costs to be recognized by reference to the stage of completion of the contract.


TAXATION

Section 26(1) says for calculating the income of any person in any income year from any heads of income, the estimated amounts includible and deductible according to the sum of sequential increase as per the percentage of completion of the contract under the long-term contract of that person shall be deemed to have been received or spent.

Long Term contract has been defined in explanation of the same Section is:

æbL3{sfnLg s/f/Æ eGgfn] b]xfo adf]lhdsf] cj:yfsf] s/f/ ;Demg' k5{ M–

-s_ ;f] s/f/sf] axfnL cjlw afx| dlxgf eGbf a9L ePsf], /-v_ ;f] s/f/ pTkfbg, h8fg jf lgdf{0fsf nflu jf To:tf]

k|To]s sfdsf ;DaGwdf ;Da4 ;]jfsf] ;Dkfbgsf nflu ul/Psf] jf ;dfj]z gePsf] s/f/ afx]ssf] k|ltkmn ljnlDat x'g] s/f/ .

"Long-Term Contract" means a contract in the following circumstance:

(a) A contract with a validity period of more than twelve months, and

(b) A contract which is concluded for production, installation or construction or for the discharge for relevant services for each of such works and A contract with a deferred consideration except excluded contract."

There happens to be many businesses which enters into contract completes in more than one year. The one year for long term contract in Nepal means more than 12 months but in many countries like USA, UK, India are tax year which may be 1 to 365 days of income year.

Calculation of taxable income from long term contract shall attract tax accounting Sections and Rules of Income Tax Act and Rules, Section 22 of the Acts provides the time when a person receives any income or makes any expenditure shall be determined according to the generally accepted accounting principles subject to the Act. The general accounting principles is if the Standard is prescribed under prevailing law that Standard, if not prescribed by

Department vide Rule 8 so Rule 8 hence Nepal Accounting Standard prevail except specific anti avoidance rule.

Nepal Accounting Standards prescribed by Nepalese law provide the basis for the time at which income and expenses are recognized for income tax purposes. The Accounting Standard which attracts in case of Long term contract is Standard on Construction Contracts (NAS 13) and the Standard on Revenue (NAS 7) – require revenue and costs to be recognized by reference to the stage of completion of the contract. Hence, this requires the application of a percentage-of-completion method.

The provisions of NAS 7 and NAS 13 are consistent with the equivalent with International Accounting Standard on Construction Contracts (IAS 11) and International Accounting Standard on Revenue (IAS 18).

The need of these Accounting Standards felt because actual income and expenditures to be charged cannot be measured as per the matching concept under long terms contract hence prescribed different method of calculation of profits to be allocated to the accounting year.

Further, Section 26 with Rule 12 has stipulated to apply percentage of completion method in calculating the taxable income for a particular income year from a long-term contract.

Section 26 states that the method of calculating average of amounts to be included or deducted under long term contract: (1) For the purposes of calculating a person's income for an income year from an employment, business, or investment, estimated cumulative inclusions and deductions under a long-term contract of the person shall be treated as derived or incurred according to the percentage of the contract completed during the year.

Type of Long Term Contract shall be Attracted by Section 26. The precondition of the application of Section 26 relates to the type of contract which are:


TAXATION

�� a contract for manufacture, installation, or construction;

�� a contract for the performance of services related to a contract for production, installation, or construction; or

�� a contract with a deferred return other than an excluded contract.

A long-term contract method of accounting (completed contract or percentage of completion) is only available to taxpayers that have long-term contracts. Therefore, whether or not a long-term contract exists and the classification of the contract must be determined prior to electing a proper method of accounting.

We shall take reference of the same from Internal Revenue Code (IRC) USA Section 460The term "long-term" tends to indicate a contract that lasts a long period of time, but the duration of the contract is irrelevant in order for it to be classified as a long term construction contract. IRC Section 460(f) (1) generally defines a long-term contract as one that is not complete at the end of the tax year.

The Long Term Contract must also be for the Manufacture, Building, Installation, or Construction of Property.IRC Section 460(f)(1): In general, the term "long-term contract" means any contract for the manufacture, building, installation, or construction of property if such contract is not completed within the taxable year in which such contract is entered into.

Example:A calendar year of taxpayer begins a construction job on December 31 and completes the job on January 1 of the subsequent year. The contract is considered a long term contract even though the job was only two days in duration.

Long Term Contract A long-term contract generally is any contract for the manufacture, building, installation, or construction of property if the contract is not completed within the contracting year, as defined in Regulation Section 1.460-1(b)(5). However, a contract for the manufacture of property is a long-term contract only if it also satisfies either the unique-item or 12 month requirements described in Section 1.460-2. A contract for the manufacture of personal property is a manufacturing contract. In contrast, a contract for the building, installation, or construction of real property is a construction contract.

Construction ContractAs per IRC 460 (e) (4) the term "construction contract" means any contract for the building, construction, reconstruction, or rehabilitation of, or the installation of any integral component to, or improvements of, real property.

Manufacturing ContractIRC Section 460(f) (2) provides a special rule for manufacturing contracts. A contract for the manufacture of property shall not be treated as a long-term contract unless such contract involves the manufacture of:

1. Any unique item of a type which is not normally included in the finished goods inventory of the taxpayer, or

2. Any item which normally requires more than 12 calendar months to complete (without regard to the period of the contract).

Integral Components of Real PropertyA contract not completed in the year, the contract is entered into is a long-term construction contract if it involves the building, construction, reconstruction, or rehabilitation of real property; the installation of an integral component to real property; or the improvement of real property. These are collectively referred to as construction. Treas. Reg. Section 1.460-3(a).


TAXATION

Real property means land, buildings, and inherently permanent structures, as defined in section 1.263A-8(c) (3), such as roadways, dams, and bridges. Real property does not include vessels, offshore drilling platforms, or natural products of land that have not been severed.

An integral component to real property includes property not produced at the site of the real property but is intended to be permanently affixed to the real property, such as elevators and central heating and cooling systems.

Example 1: A contract to install an elevator in a building is a construction contract because a building is real property, but a contract to install an elevator in a ship is not a construction contract because a ship is not real property.

Example 2: A taxpayer enters into a contract to manufacture an elevator. However, an unrelated party will install it. The contract for the manufacture of the elevator is not a construction contract even though the elevator is considered an integral component to real property. The regulations define a construction contract as one that involves the installation of the integral component.

Nepal Perspectives:The definition of Long term contract has restricted and mixed up 12 month period provision and expanded the areas through deferred returns concept. There is no such classification of long term contract has been given in Income Tax Act, Rules and Manual as well. We may elaborate the types through definition and explanation given in Section 26 and relevant rules.

For the application of Section 26 a long term contract is contract if it is:

�� a contract for manufacture, installation, or construction;�� a contract for the performance of services related

to a contract for manufacture, installation, or construction; or

�� a contract with a deferred return other than an excluded contract.

A Contract for Manufacture, Installation, or Construction:There is no fixed meaning of these three word/function manufacture, installation, or construction but we have explained the same as above with reference of IRC 460. A contract for construction also includes a contract for:

�� the demolition of assets; and�� the restoration of the environment following the

demolition of assets.

A Contract for the Performance of Related Services:A contract for the performance of related services is a contract requiring one party to the contract (the service provider) to provide services in support of manufacturing, installation, or construction activities being undertaken by the other party to the contract.

A Contract with a Deferred Return:The reference to 'contract with a deferred return' expands the scope of Section 26 beyond contracts for manufacture, installation, or construction or a contract for related services. But Rule 10 clarifies that a contract with a deferred return has the following meaning:

Any contract of a person shall be a contract with a deferred return if the person does not show the details prescribed by the Department regarding estimated gain and estimated loss during every six-month period from the commencement of the contract.

That is, Rule 10 confirms that a person who does not disclose the required details as to the estimated gain or estimated loss from any contract (other than an excluded contract) that has a term of more than 12 months must apply the percentage-of-completion method to determine the income from that contract that is to be disclosed in the person's tax return.


TAXATION

As noted, Rule 10 is not limited in its application. Thus, where a person has failed to disclosure the required information but same has not been given in the Act and Rules that what are the required information, Rule 10 would require that the percentage-of-completion method be applied to:

�� a contract for manufacture, installation, or construction or a contract for related services;

�� a contract for the sale of goods;�� a contract for the use of an asset owned by another

(a lease or hiring contract);�� a contract for other types of services.

It means the contract shall includes all kinds of contract whether manufacturing, construction or its related services, consultancy services, sale of goods etc. which obviously shall bring this section into complexities for calculation of income from long term contracts.

The Term 'Excluded Contract' is Defined in Rule 11 to Mean:(1) any contract created by reason of an interest in an entity

or by obtaining membership in a retirement fund; or

(2) any contract of investment insurance.

Example: Mr. A has entered into contract with Life Insurance Company for his retirement time. In return for regular monthly payments which increase over the term of the agreement in line with increment, The Company agree to pay Rs, 7000 per month on his retirement at 58 years of age.

Even though the period of the contract exceeds 12 months, Rule 10 would not apply as the insurance contract is an excluded contract as defined in Rule 11.

Rule 12 clarifies that Section 26 does not apply to a person unless that person is required to file an estimate of tax payable for the year under Section 95 of the Act.

We have seen the accounting standard prescribed by Nepal Accounting Standard Board, India Accounting

Standard Board and International Accounting Standard Board are Standard on Construction Contracts but not Standard on long term contract.

The reasons of application of accounting standard or degree of completion of contract method is that if the tax payer could not estimate their gain or expenses for the period of six months in case of deferred return in any contract but in case of manufacturing and construction contract normally it happens that the gain or loss can not be confirmed in just ending of accounting year for which one needs to have an estimated gain or loss for the period.

The purpose of accounting standard is on construction contract which definitely covered long term contract related to support services in manufacturing, construction and installation but if it extends to any contract with differed returns of which cannot be given estimated gain or estimated loss from any contract (other than an excluded contract) that has a term of more than 12 months must apply the percentage-of-completion method to determine the income from that contract that is to be disclosed in the person's tax return.

The coverage areas of the differed returns should only be taken where the contracts is relates to manufacturing, construction, installation and support services but not to any long term contract of which by its natures estimated gain or estimated loss from the contract can be known. Rather in case of related support services where only management consultancy like planning, design, supervision anything of consultancy services are involved and income generates based on man month basis which can be calculated or estimated exactly does not required to apply Section 26. Hence, there is a need or emergence of clear manual/guidelines on taxation of income from long term contract.

*1:As per Federation of Contractors' Associations of Nepal date; References: http://www.fcan.org.np, https://ird.gov.np, https://www.irs.gov, http://www.icai.org, http://www.ican.org.np and others related materials.


Conference Material

Earthquake and Economic Blockade

Role of Professional Accountants in

Road to Recovery

&

Economic Resilience

Narendra Bhattarai

Chairman, ASB Nepal

Survival Strategy of the Nation If you don’t have a strategy, you will be …. part of somebody- else's strategy.”- Alvin Toffler

Barriers to Implementation of National Strategy

Nepalese Context

9 of 10 entities fail to

execute strategy

The Management Barrier

85% High Ranking Executives spend less

than one hour per month discussing strategy

The Resource Barrier 60% of the entities don’t link budgets to national strategy

The Vision Barrier Only 5% of the Decision Makers understand the

national strategy

The People Barrier

Only 25% of the bureaucrats have

incentives linked to national strategy

National Strategic Choice

Growth and Development Strategy of the Nation

“… my little children one day live in a nation where they will not be judged by the color of their skin but by the content of their character, I have a dream today…” - Martin Luther King, Jr. August 28, 1963

Some Positives • The US Senate has recently passed a bill "Nepal Trade

Preferences Act" granting duty-free treatment to certain textile or apparel articles from Nepal, effective from 1 January 2016. This provision will remain in place by 2025

• Promulgation of the New Constitution • Nepal has been ranked as the best tourist destination

for 2016 • CEO of Authority appointed • Reconstruction work launched


Conference Material

Some Negatives • Birgunj-Raxaul customs point has remained closed for more

than 120 days • The y-o-y consumer price inflation hit 11.6 percent in mid-

December 2015, While the food and beverage group inflation saw a pick up of 14.8 percent

• Around 2200 industries are closed for the last 5 months • Revenue Loss to the Government - The government revenue

mobilization dropped by 20.6 percent to Rs. 112.81 billion (24.1 percent growth previous year).

• Government revenue collection during first 5 months is just 23.7 percent of the annual target of Rs. 475.01 billion

• Earthquake victims died because of cold • Huge smuggling of POL products • Low level of capital expenditure by the government

Impact of Economic Blockde

Humanitarian Crisis • As issue of post-quake vulnerability became lost • Humanitarian crisis has erupted • UNICEF - Looming humanitarian disaster as more than 3 million

children under the age of 5 in Nepal are at risk of death or disease during the harsh winter months due to a severe shortage of fuel, food, medicines and vaccines

• Unicef has cautioned that the blockade of Nepal’s border posts with India“threatens the future of the country itself”.

• “First, there was a devastating act of nature – the earthquakes that took and damaged so many lives,” said Anthony Lake, the executive director of Unicef, during a recent visit to the country. “Now, political differences among human beings are dealing new blows to the children of Nepal.”

Context of Graduation from LDC

Investors’ Darling Environment? • Are we ready to create investors’

darling environment to kick off economic growth to attain the target of attaining the status of developing nation by 2022 from LDC status?

• Will Nepal graduate from LDC category by 2022?

Impact of Earthquake

Additional people below poverty line • The estimated 700,000-982,000 additional people

pushed below the poverty line by the earthquake-induced income shock

• The post-reconstruction programs need to be well coordinated, ensure ‘building back better’, and be an integral part of the larger goal of meaningful structural transformation of the economy.

• PDNA - the cumulative damage and loss amount to 33.3% of GDP ($7.1 billion) and the cumulative need for recovery is estimated at $6.7 billion (31.5% of GDP).


Major Development Indicators • Population (Growth Rate 1.35%) • Poverty and inequality (Gini Coefficient, Population

below poverty line) • National Accounts – GDP, Saving and Investment • Public Finance – Revenue/GDP Ratio, Capital Exp • External Sector – Import/Export to GDP • Education – Enrolment • Health and Nutrition • Others – Drinking water, sanitation, employment,

road, electricity


Development Parlance • Development Happened • Development Achieved • Real Sustainable Development • Façade Development • Size, Speed and Skill (3S) • Big Push Theory


Conference Material

Are we heading to a failed state?

Politically Failed State? • Loss of control of its territory, or of the monopoly on

the legitimate use of physical force therein • Erosion of legitimate authority to make collective

decisions • Inability to provide public services • Inability to interact with other states as a full member

of the international community

A state must have a permanent population, a defined territory, a government and sovereignty. If just one of these is missing, an area will not be given statehood.

Public & Development Partners Perception? • Ego of Nepali people badly hurt because of the

Challenge to National Sovereignty • Government inability to control price rise and

maintain rule of law • Government inability to resolve political problem

for more than 5 months • Poor Project Management Skill • High Fiduciary Risk! • Why?

Score PEFA 2014 PEFA 2008 Net Change

A 7 1 +6

B+ 3 0 +3

B 3 3 0

C+ 9 9 0

C 3 8 -5

D+ 4 6 -2

D 2 4 -2

Total 31 31 0

Summary of Changes in Indicator Scores: PRFA 2008 & 2014

Are we heading to a failed state ?

Fragile States Index social, economic and political • Mounting Demographic Pressures • Massive Movement of Refugees or Internally Displaced Persons • Vengeance Seeking Group Grievance • Chronic and Sustained Human Flight • Uneven Economic Development • Poverty, Sharp or Severe Economic Decline • Legitimacy of the State • Progressive Deterioration of Public Services • Violation of Human Rights and Rule of Law • Security Apparatus • Rise of Factionalized Elites • Intervention of External Actors

PEFA 2014: Change in Rating

Change in Ratings over PEFA

2008 Rating

Number of

Indicators % Indicators

Upwards 19 61

Downwards 2 7

Remained the same 10 32

TOTAL 31 100

Corruption Perception Index (CPI) 2014 Rank Country 2014 2013 2012

1 Denmark 92 91 90 2 New Zealand 91 91 90 11 Australia 80 81 85 14 UK 78 76 74 15 Japan 76 74 74 30 Bhutan 65 63 63 43 S. Korea 55 55 56 50 Malaysia 52 50 49 85 India 38 37 40 85 Sri Lanka 38 37 40 126 Nepal 29 31 27 126 Pakistan 29 28 27 145 Bangladesh 25 27 26 172 Afghanistan 12 8 8


Conference Material

Ease of Doing Business Index 2015 Rank Country DTF Score

1 Singapore 88.27

2 New Zealand 86.91

3 Hong Kong 84.97

4 Denmark 84.20

5 S. Korea 83.40

10 Australia 80.66

18 Malaysia 78.83

29 Japan 74.80

99 Sri Lanka 61.36

108 Nepal 60.33

116 Maldives 58.73

125 Bhutan 57.47

128 Pakistan 56.64

142 India 53.97

173 Bangladesh 46.84

183 Afghanistan 41.14

Value for Money Continuum

VFM

Input

Process

Output Outcome

Impact

Fiduciary Risk Assessment

23

Financial Risks (Accountability)

Democratic Risks

(Accountability)

Operational Risks

Governance Risks

Reputational Risks

Contracting

Budgeting

Accounting Procurement

Cash Management

Audit

Internal Controls

Reporting

Human Resources

Program Management

Institutional Capacity

Oversight Quality

PFM Reform

Capacity Development Agenda

Shared Risk

Donor image

Civil Service Training

Civil Service Laws

Public and CSO participation

Media Freedom

CSO Vibrancy Political Will

Value for Money = 3Es

Input

ECONOMY

Spending less

Process

EFFICIENCY

Spending well

Output

EFFECTIVENESS

Spending Wisely

Types of Fiduciary Risk Operational Risk Financial Risk Governance Risk Reputation Risk Democratic Risk

Components of Fiduciary Risks

Fiduciary Risk

Capacity Risk

Corruption Risk

Result Risk

Compliance Risk


Conference Material

Role of Professional Accountants

Control Design

Control Design

Right Structure

Right People

Right Process

Right Technology

Reconstruction Authority - Structure

• The Reconstruction Authority has three-tier structure: Steering Committee, Advisory Council and Executive Committee

• Steering Committee and Advisory Council is led by the prime minister with the leader of the main opposition as vice-chair

• The Executive Committee will be led by CEO who has been appointed by the government

• Advisory Council has representation of 14 lawmakers, one each from 14 worst affected districts

• A monitoring team comprising lawmakers also will be formed to oversee the activities of the Authority

• The Reconstruction Authority will mobilize Rs 91 billion from the state coffers and Rs 450 billion pledged by donors

Concerns over budget execution

• Given the persistent budget execution shortfalls even

under normal circumstances, which has further weakened, one of the biggest challenge for NRA is its ability to fully execute the planned reconstruction budget.

• Actual capital spending averaged about 72% in the last decade and about 60% is bunched in the last quarter.

• The actual capital spending (about 3% to 4 % of GDP) is far less than the required spending (of 8-10% of GDP) to close the infrastructure gap.

Reconstruction Authority • Establishment of a National Reconstruction Authority

(NRA) • Reconstruction-focused budget and monetary policy

for FY2016 • Gradual improvement in political environment • Making NRA operational with immediate planning

and strategizing of reconstruction projects is critical for ensuring a fast and inclusive recovery

• NRA’s and sector ministries’ ability to swiftly prepare and implement the viable reconstruction projects are the key determinant for speedy restoration of livelihoods and economic recovery.

Effective reconstruction and recovery • Public as well as private buildings should be rebuilt to

earthquake-resilient standards, fully applying the principle of “Build-Back-Better”.

• Inclusiveness should be at the core of reconstruction effort. • A robust institutional setup for reconstruction at the central,

district and local level for successfully execute reconstruction projects

• A strong leadership and competent human resources are vital for the success of the NRA.

• Continuous enhancement of the institutional capacity with the adoption of sound governance and fiduciary risk management systems for the reconstruction process are also important.

• Effective donor coordination and strong government ownership

Challenges in Budget Execution • Bureaucratic hassles: project approval delays, and

weak intra and inter-ministry coordination, • Structural weaknesses: limited appraisal, planning,

and implementation capacity of line ministries, • Low project readiness: lack of feasibility studies and

detail designs in advance, lack of well-planned procurement plans, and delays in land acquisition,

• Weak project management: high staff turnover, lack of staff capacity, lengthy procurement process, weak contractor capacity, and weak contract management

• High fiduciary risks in project implementation • Political instability and interference at operational leve


Conference Material

NRA - Crucial Issues

• Hiring competent human resources • Preparing a credible time-bound action plan • Managing political interference in normal operations and

preparation of reconstruction projects • Ensuring line ministries’ full ownership of projects

designed, approved and procured by the NRA • Coordinating with development partners • Engaging civil society in reconstruction planning, design,

implementation, monitoring, and evaluation • Ensuring ‘crowding-in’ of private investment for

reconstruction on public-private partnership (PPP) basis • Outsourcing of managerial as well as non-managerial work


Role in Creating Internal Control System

• Control Environment • Risk Assessment • Control Activities • Communication • Monitoring


Risk Response - Internal Control • Transaction Level Control • Management Oversight Control • Governance Control • Additional Mitigating and Compensating

Control • Monitoring and Evaluation • Internal and External Audit • Social Audit, Public Audit and Hearing • Reporting


Role in PFM

• Professional Accountants with Professional Skepticism in the Cabinet Table to provide value added services in decision making process


Internal Control Mechanism Components • Governance - Risk management, System of control, Good supervision and monitoring, Accountability and

responsibility • Effective Operations • Compliance • Protection of Assets Testing • Existence • Put in Practice Continuously • Effectiveness


Issues on Internal Control • High fiduciary risk • Control Override • Control Collusion • Unmonitored control system tends to deteriorate over

time.


Conference Material

Assurance Mechanism: Role of Professional Accountants

Fiduciary Risk –

Assurance Mechanism

Programmatic Visits & Monitoring

External/Internal Audit

Social/Public Audit and Public Hearing

Payment Control through

Monitoring

Third Party Performance Evaluation

Follow up of Audit & Monitoring

Report

Action against fraud and other corrupt

practices

Assuring compliance with policies and

procedures

Earthquake disaster recovery

Assertions Assertions Assertion Tests and their Definitions

C - Completeness Test of potential understatement

O - Occurrence Test of potential overstatement

M - Measurement Test of accuracy and consistency onmeasurement

P – Presentation & Disclosure Test of classification, presentation anddisclosure.

A – Accuracy and Regularity Test of accuracy, compliance and regularity.

R – Rights and Obligations Test of right and obligation

E - Existence Test of existence.

Professional Attitude? One cannot do today's job with

yesterday's methods and be in business tomorrow

Earthquake disaster recovery

You Can’t Improve What you Don’t Measure

• If you cannot measure, you cannot count; if you can not count, you cannot plan; if you cannot plan, you cannot manage.

• Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.

• Measure twice and cut once

Business Recovery from the shock of

Earthquake and Economic Blockade is an Extremely Difficult Task

& Recovery Depend on the Positive

Response of : Government

Development Partners Business Community

General Public

Time for Discussion and feedback


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Diploma in IFRS

The Institute of Chartered Accountants of Nepal (ICAN) successfully conducted Diploma in IFRS Course from 6-12 October, 2015, jointly with The Association of Chartered Certified Accountants of UK (ACCA) in Kathmandu. The Course was designed to provide in depth knowledge of International Financial Reporting Standards (IFRS). The course was conducted eight hours a day for seven days. The course was attended by 29 member and non-member of the Institute.

Participants of Diploma in IFRS Course with ICAN Officials.

Refresh course for the previous batch were also conducted coinciding with the regular Diploma in IFRS course.

The examination result of Diploma in IFRS conducted on 11 December, 2015 has been published. According to the result 20 examinees were declared pass in the exam out of 37 examinees. For the examination purpose 63 examination form were submitted.

Workshop on NFRS Implementation in Commercial Banks

In collaboration with Nepal Rastra Bank, the Central Bank of Nepal, the Institute of Chartered Accountants of Nepal organized a workshop on Nepal Financial Reporting Standards (NFRS) Implementation Status and Preparatory Work in Commercial Banks of Nepal on 9 October 2015 in Kathmandu. The workshop was mainly focused to the Chairpersons of the Board/the Audit Committee, Board Members and Chief Executive Officers of the Commercial Banks.

Technical papers on gap analysis as well as roadmap to move forward for the effective implementation of the NFRS in the banks were presented at the workshop.

Preview of Workshop NFRS Implementation in Commercial Banks.

The gap analysis highlighted some of the key critical areas in NFRS and existing local GAAP practice by the commercial banks following the existing Nepal Accounting Standards, Directives issued by the Central Bank and other regulations applicable to the banks and financial institutions. CA. Prakash Lamsal, President of ICAN threw the light on the objectives of the workshop.


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The program was chaired by the Acting Governor of Nepal Rastra Bank CA. Maha Prasad Adhikari. Altogether over 80 participants attended the program. The program was found effective in disseminating the knowledge and enhancing confidence of high level officials about the importance of application of NFRS in the long-run.

Training for Trainers (TOT)

The Institute of Chartered Accountants of Nepal (ICAN) conducted TOT program on Nepal Public Sector Accounting Standards (NPSAS) from 11-16 October, 2015, with the joint initiatives of Financial Comptroller General Office (FCGO) in Kathmandu. The training was designed to provide the knowledge about Nepal Public Sector Accounting Standards.

Preview of TOT Program on Nepal Public Sector Accounting Standards.

Altogether 25 officials of FCGO and Office of the Auditor General (OAG) participated in the training program.

Workshop on Valuation Techniques

The Contemporary Issues Discussion Committee of the Institute of Chartered Accountants of Nepal conducted half day workshop under the theme of Valuation Techniques in Kathmandu on 18 December 2015(Poush 3, 2072).

ICAN President CA. Prakash Lamsal Delivering Speech on Workshop on "Valuation Techniques".

Contemporary Issues Discussion Committee, Chairman CA. Sunil Jakibanja welcomed the participants and highlighted the features of the program and ICAN President CA. Prakash Lamsal has delivered the opening remarks. Program was divided into two sessions followed by program highlight and opening remarks. The sessions were as follows:

S. No. Topic Paper Presenter

1 Issues of valuation of business and other assets and liabilities on DDA in Banking Sector in Nepal.

CA. Sudarshan Raj Pandey

2 Valuation Techniques CA. Suman Rayamajhi

Altogether 71 participants attended the workshop. Participant Members of the Institute have been granted 5 CPE credit hours.

ICAN Submitted SMO Action Plan

(2015-17) to IFAC

The Institute of Chartered Accountants of Nepal has submitted its Statements of Membership Obligations (SMOs) Action Plan (2015-17) on 15 December 2015 to the International Federation of Accountants (IFAC) that provide clear benchmark to ensuring high-quality performance by professional accountants. The SMOs cover IFAC member bodies’ obligations to support the (a) adoption and implementation of international standards and other pronouncements issued by the International Auditing and Assurance Standards Board


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(IAASB), International Accounting Education Standards Board (IAESB), International Ethics Standards Board for Accountants (IESBA), International Public Sector Accounting Standards Board (IPSASB), and International Accounting Standards Board (IASB), and (b) the establishment of quality assurance, investigation and disciplinary systems. The action plan prepared and reviewed by compliance staffs was comprehensively discussed in the Council Meeting before submission to the IFAC.

Rules Amendments

The 5th amendments of the Nepal Chartered Accountant Rules, 2061 have been approved by the Ministerial Level decision of Nepal Government. As per the decision total 17 Rules have been either revised or added with new provision. The major revisions and additions include Education, Internship, Certificate of Practice, Board of Studies, Accounting Technician Board, Quality Assurance Board etc. the new provision shall be made effective immediately.

Member RelatedStatus of Membership, Certificate of Practice and Audit Firms

The status of membership, Certificate of Practice and Audit Firms as of December end is given below:

Category/ Class

Membership COP Firm

Total No

Renewal No

Total No

Renewal No Total No Renewal

No

FCA/CA 896 574 688 323 600 323

RA- B 3375 1867 3140 1353 1610 1357

RA- C 1607 816 1475 665 811 666

RA -D 2285 1222 2093 1071 1167 1065

Total 8163 4479 7396 3412 4188 3411

Student Related

Student Registration

Chartered accountancy course is job oriented and highly demanding professional course for the student interested to make their career in accounting and auditing profession. Now a days the craze towards this course is growing and becoming the choice of the youngsters. Till date (Jan 14) in 2072/073 the enrollment status of the different levels is as follows.

CAP I CAP II CAP III

309 301 80

Additional Books in Library

The Institute of Chartered Accountants of Nepal has added some new books in Library for CAP II and CAP III level of different subjects.

Information System Audit (ISA) Examination

The Institute of Chartered Accountants of Nepal conducted Information System Audit (ISA) Examination on 26 December 2015. Total of 22 persons attended in the exam.

Publication

The Institute of Chartered Accountants of Nepal has Published Revision Test Paper for 2015 December examination of CAP II and CAP III. Similarly It has also published the suggested answers of 2015 June examination of CAP I, CAP II and CAP III level.

Chartered Accountancy Membership Examination

The Chartered Accountancy Membership Examination was successfully conducted on 4th and 7th December 2015 in PEA Building, Thapathali, Kathmandu.

Total applicants of the examination in Corporate Law and Advanced Taxation were 138 and 142 respectively while the appeared examinees were 108 and 101 in the respective subjects.


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Membership examination is mandatory for ICAI pass outs. Corporate Law and Advance Tax are compulsory paper to pass for eligibility to get membership of the Institute.

Chartered Accountancy Examination

The Institute of Chartered Accountants of Nepal conducted final examination of different Level of chartered accountancy course. Exam was conducted from 1 to 9 December, 2015.

CAP I and CAP II Level Examinations were conducted at Kathmandu as well as at branch offices Biratnagar and Pokhara. The Details of applicants and appeared students are given below.

S. No Level Student Description First

GroupSecond Group

Both Group Total

1 CAP I

No. of Applicants 704

Appeared Number in Examination 675

2 CAP II

No. of Applicants 348 300 812 1460

Appeared Number in Examination 290 255 777 1322

3 CAP IIINo. of Applicants 164 159 178 501

Appeared Number in Examination 152 132 175 459

Total applicants of all level of CA Examination were 2665 and appeared at least one subject were 2456.

AT Examination Result Published

The Accounting Technician Board of the Institute of Chartered Accountants of Nepal has published Accounting Technician Examination result in pursuance of Bye-Law 17 of the Accounting Technician Bye-Laws, 2067 on 8 November 2015. The Accounting Technician Examination was conducted from 17 - 21 September 2015 in ICAN Building, Satdobato, Lalitpur. According to the result only one examinee was declared pass. After fulfilling the necessary requirements set by the Institute,

successful candidates become eligible to get AT License from the Accounting Technician Board. The Details are as follows:

Subjects Advanced A/c & Management A/c

Audit & Assurance

Corporate & Other Laws

Tax Laws

Date 2015/09/17 2015/09/18 2015/09/20 2014/09/21

Total Applicants

8 8 8 8

Appeared 4 4 4 4

Completion of 8th Batch of GMCS Program

The 8th Batch of 15 days GMCS program has been organized from 23 November to 13 December 2015 by the Kathmandu University, School of Management (KUSOM). The program has been designed to improve skills in oral, written and non-verbal communication for executives in business situations. In addition to specific skills, GMCS program raised awareness the dynamics of communication in a business environment and help participants demonstrate about their individual communication abilities and identify their strengths and weaknesses.

Participants of GMCS Programs with ICAN Officials.

The programme helped in developing General Management, Personality Development and Communication Skills that would enable the Chartered Accountant to occupy higher general management positions and even aspire to become the head of large business corporate. This program was highly acclaimed by the participants. Altogether, 32 newly qualified chartered accountants attended the program.


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Education Committee Replaced by Board of Studies

The Education Committee which was formed by the Council as a non-standing committee in 2003 with the terms of reference of the committee inter alia designation of professional education course, review and finalization of curriculum at par with the international peer institute and IFAC requirements, development of study modules, conduction of eligibility test and intensive coaching classes, granting of accreditation to tuition providers, liaison with universities for course matching between ICAN and them at graduate / post graduate level and monitoring of CA firms imparting articled training to CA students.

With the 15th amendment of Nepal Chartered Accountant Rules, 2061, the Education Committee has been replaced by the Board of Studies (BOS) to carry out all the work of Education Committee. The 116th Education Committee meeting held on Tuesday, 8 December 2015 was the last meeting since its first meeting held on Monday, 15 September 2003.

Interaction with CA Students of CAP-III Level

In continuation of the past practice, the students of CAP-III level were invited for interaction with the president and Vice president on various matters of education system and identify the room for further improvement for the betterment of professional education.

A Glimpse of Interaction Program.

The interaction program was organized by the Education Department on 1st January 2016 at ICAN Office, Satdobato, Lalitpur.

International Relation

CAPA Annual General Meeting, CAPA Board and CAPA Conference, Seoul, South Korea

The Five members’ delegation team led by President CA. Prakash Lamsal visited South Korea to attend the CAPA Annual General meeting, CAPA Board meeting and 19th CAPA Conference from 26-30 October 2015. Korean Institute of Certified Public Accountants (KICPA) hosted the CAPA conference.

Delegates at CAPA Conference.

The delegation team comprises of Vice President, CA. Mahesh Khanal, Council Members CA. Bhashkar Singh Lala, RA. Ganesh Raj Rai and Executive Director CA. Binay Prakash Shrestha attended the events. ICAN President CA. Prakash Lamsal was elected as a Board Member of the CAPA representing ICAN for four years tenure.

IFAC Board and the Council Meeting, Singapore

President & Vice President of ICAN with IFAC President Olivia Kirtley.


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President CA. Prakash Lamsal and Vice President CA. Mahesh Khanal attended the IFAC Board and the Council Meeting in Singapore from 10-13 November, 2015. This meeting was held to discuss IFAC Strategy for 2016–2018 and Strategy Implementation Plan.

Malaysian Institute of Accountants (MIA) Visit

President and Vice President in Malaysian Institute of Accountants (MIA)

President and Vice President visited Malaysian Institute of Accountants (MIA) to discuss on the renewal of Memorandum of Understanding (MOU) signed between ICAN and MIA and other contemporary issues. ICAN signed MOU with MIA in 10 May 2013.

41st SAFA Board Meeting - Dhaka, Bangladesh

The Institute of Cost and Management Accountants of Bangladesh (ICMAB) hosted the 41st SAFA Board Meeting on 18 October, 2015 and SAFA International Conference on the theme “Financial Reforms to Boost Industry and Service Sectors” on October 18-19, 2015 at Dhaka, Bangladesh.

Group Photograph of Participants at 41th SAFA Board Meeting

The Board discussed inter alia legal status of SAFA Virtual Knowledge & Training Centre, signing of MoU amongst member bodies for sharing of their material/courses and other documents available for their members and students, study report on Impact of Basel-II implementation in SAARC Countries, Integrated Reporting, SAFA-IFAC Regional SMP Forum 2016, SAFA Best Presented Annual Report Awards, Integrated Reporting Awards & SAARC Anniversary Awards for Corporate Governance Disclosures Competition 2014 in the meeting.

RA. Dhruba Prasad Paudel, Council Member and CA. Paramananda Adhikari, Technical Director attended the SAFA Board Meeting representing ICAN.

SAFA iTAG Committee Meeting: Dhaka, Bangladesh

The SAFA iTAG Committee Meeting was held on 17 October 2015 at Dhaka, Bangladesh. In the meeting a comprehensive discussion was held on marking moderation process in order to finalize the SAFA BPA & CG winners. The iTAG Committee felt that there is a requirement to give the comments on the marks given by each country before the conference marking session. The iTAG Committee concluded by agreeing to circulate the respective marks given by each country before the 31st of October 2015 to the SAFA secretariat and the next Technical Committee meeting was fixed to be held from 5-7 November 2015 at Colombo, Sri Lanka to finalize the winners. Further ICAP has agreed to host the BPA Awards Ceremony 2014 on 30

January 2016 at Lahore, Pakistan.

RA. Dhruba Prasad Paudel, Council Member and CA. Paramananda Adhikari, Technical Director attended the meeting representing the Institute of Chartered Accountants of Nepal.

SAFA BPA Conference Marking Meeting: Colombo, Sri Lanka

The SAFA Best Presented Annual Report Awards-2014, Technical Committee meeting was held to finalize the


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winners of SAFA BPA & CG Awards, 2014 from 5 - 7 November 2015 at Colombo, Sri Lanka. The Technical Committee moderated the marks awarded by the member bodies and recommended its finding to the SAFA iTAG Committee.

Technical Staffs from the five SAFA Member Bodies represented in the marking session and comprehensive discussion was held for the preliminary markings moderation process to finalize the SAFA BPA & SAARC Corporate Governance Award winners. Based on the present marking criteria, the Technical Committee carried out the marking session and finalized all the business categories nominated for SAFA BPA Awards from member bodies.

CA. Paramananda Adhikari, Technical Director attended the Technical Committee meeting representing the Institute of Chartered Accountants of Nepal.

Meeting of the SAFA iTAG Committee: Colombo, Sri Lanka

The SAFA iTAG Committee meeting was held on 17th October 2015 in Sri Lanka with the welcome speech of Chairman of the Committee Mr. Lasantha Wickremasinghe.

Delegates at The SAFA iTAG Committee Meeting.

The meeting recognized the contribution of the Technical Committee for the work done during the three day conference marking sessions and for the successful completion of the finalization of SAFA BPA award winners. Altogether 74 entities were selected for the award and merit certificates from the five member countries. Out of 74 entities, 31 were from Sri Lanka, 15 from Bangladesh, 15 from Pakistan, 10 from India and 3 from Nepal.

CA. Paramananda Adhikari, Technical Director was represented in the iTAG Committee Meeting from the Institute of Chartered Accountants of Nepal.


Notice

As per the decision of 197th

Council meeting, the following Nepal Standards on

Auditing revised and drafted based on IAASB hand book 2012 edition, are

applicable voluntarily from 1st Sharwan 2072 & Mandatory from 1

st Sharwan 2073.

Nepal standards on Auditing (Based on IAASB Hand Book 2012 Edition)

LIST OF STANDARDS

S.No. NSA No. Standards

NEPAL STANDARDS ON QUALITY CONTROL(NSQCs)

1 NSQC1

Nepal Standard on Quality Control (NSQC) 1 : Quality Control For Firms that Perform

Audits and Reviews Of Financial Statements, and Other Assurance and Related Services

Engagements

AUDITS OF HISTORICAL FINANCIAL INFORMATION

200-299 GENERAL PRINCIPLES AND RESPONSIBILITIES

1 NSA 200 Overall Objective of the Independent Auditor and the conduct of an Audit in Accordance

with Nepal Standards on Auditing

2 NSA 210 Agreeing the Terms of Audit Engagements

3 NSA 220 Quality Control for an Audits of Financial Statements

4 NSA 230 Audit Documentation

5 NSA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements

6 NSA 250 Consideration of Laws and Regulations in an Audit of Financial Statements

7 NSA 260 Communication with Those Charged with Governance

8 NSA 265 Communicating Deficiencies in Internal Control to Those Charged with Governance and

Management

300-499 RISK ASSESSMENT AND RESPONSE TO ASSESSED RISKS

9 NSA 300 Planning an Audit of Financial Statements

10 NSA

315(Revised)

Identifying and Assessing the Risks of Material Misstatement through Understanding the

Entity and Its Environment

11 NSA 320 Materiality in Planning and Performing an Audit

12 NSA 330 The Auditor’s Responses to Assessed Risks

13 NSA 402 Audit Considerations Relating to an Entity Using a Service Organization


Notice

14 NSA 450 Evaluation of Misstatements Identified during the Audit

500-599 AUDIT EVIDENCE

15 NSA 500 Audit Evidence

16 NSA 501 Audit Evidence-Specific Considerations for Selected Items

17 NSA 505 External Confirmations

18 NSA 510 Initial Audit Engagements—Opening Balances

19 NSA 520 Analytical Procedures

20 NSA 530 Audit Sampling

21 NSA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related

Disclosures

22 NSA 550 Related Parties

23 NSA 560 Subsequent Events

24 NSA 570 Going Concern

25 NSA 580 Written Representations

600-699 USING THE WORK OF OTHERS

26 NSA 600 Special considerations-Audit of Group Financial statements (including the work of

component Auditors)

27 NSA

610(Revised) Using the work of Internal Auditors

28 NSA 620 Using the work of an Auditors Expert

700-799 AUDIT CONCLUSIONS & REPORTING

29 NSA 700 Forming an opinion and Reporting on financial statements

30 NSA 705 Modifications to the opinion in the Independent Auditors report

31 NSA 706 Emphasis of Matter Paragraphs and other Matter Paragraphs in the Independent Auditors

Report

32 NSA 710 Comparative information-corresponding Figures and comparative Financial Statements

33 NSA 720 The auditor's responsibilities relating to Other information in Documents Containing

Audited Financial statements.

800-899 SPECIALIZED AREAS


Notice

Note: Click on link below for details.

http://www.ican.org.np/newnsas.php

34 NSA 800 Special Considerations-Audit of financial statements Prepared in accordance with special

Purpose Frame works

35 NSA 805 Special Considerations-Audits of Single Financial statements and Specific Elements,

Accounts or Items of a Financial statements

36 NSA 810 Engagements to Report on Summary of Financial Statements

NEPAL AUDITING PRACTICE NOTES

37 NAPN 1000 Special considerations in Auditing Financial Instruments

AUDITS AND REVIEW OF HISTORICAL FINANCIAL INFORMATION

2000-2699 NEPAL STANDARDS ON REVIEW ENGAGEMENTS(NSREs)

38 NSRE 2400 Engagement to Review Financial Statement

39 NSRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the

Entity

ASSURANCE ENGAGEMENTS OTHER THAN AUDITS OR REVIEWS OF

HISTORICAL FINANCIAL INFORMATION

3000-3699 NEPAL STANDARDS ON ASSURANCE ENGAGEMENTS (NSAEs)

3000-3399 APPLICABLE TO ALL ASSURANCE ENGAGEMENTS

40 NSAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial

Information

3400-3699 SUBEJECT SPECIFIC STANDARDS

41 NSAE 3400 The Examination of Prospective Financial Information

42 NSAE 3402 Assurance Reports on Controls at a Service Organization

43 NSAE 3410 Assurance Engagements on Greenhouse Gas Statements

44 NSAE 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial

Information Included in a Prospectus

RELATED SERVICES

4000-4699 NEPAL STANDARDS ON RELATED SERVICES (NSRSs)

45 NSRS 4400 Engagements to Perform Agreed-Upon Procedures Regarding Financial Information

46 NSRSs

4410(Revised) Compilation Engagements


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