Ican Journal September 2011

Vol. 14 No.
P A
Contents
September 2011
ACCOUNTANT
(Quarterly Journal of The Institute of Chartered Accountants of Nepal)
Editorial
President's Message
ACCOUNTING
Editorial Board
Urgency of Carbon Accounting Strandards in Nepal

- Mr. Tara Prasad Upadhyaya, Prof. Dr. Prashant Kumar
7
CA. Sudarshan Raj Pandey

CA. Madhu Bir Pande
CA. Jaganath Upadhyay
CA. Ashish Garg
CA. Bishnu Prasad Bhandari
CA. Mukunda Subedi
CA. Sewa Pathak
CA. Suresh Khakurel
RA. Dhruba Prasad Poudel
Mr. Binod Neupane
Chairman
Member
Member
Editor
Member
Member
Member
Member
Member
Secretary
Mr. Binaya Paudel
Editorial Support
Consolidated Financial Statements

- Mr. Yuba Raj Pandeya
11
IFRS- Time to get ready

- Mr. Lok Man Maskey
16
AUDITING
The Institute of Chartered Accountants of Nepal

Babar Mahal, P O Box 5289, Kathmandu, Nepal
Tel. No. 4269130, 4258569, Fax: 977-1-4258568
E-mail: ican@ntc.net.np
Website: www.ican.org.np
Understanding the "Expectation Gap" in Auditing

- CA. Paramananda Adhikari
20
BANKING
Financial Sector Reform in Nepal
- Mr. Tula Raj Basyal
Branch Offices:
Biratnagar: Tel: 021- 422077
Fax: 021- 422077, E-mail: icanbrt@wlink.com.np
Butwal: Tel: 071-622574, E-mail: icanbtl@ntc.net.np
Birgunj: Birgunj, Tel: 051-522660, E-mail: icanbrj@ntc.net.np
Designed & Printed By
Crdit Risk and Its Management in Bank & Financial

Institution
- CA. Prakash Baral
Corporate Governance in Banking Business
- CA. Mukunda Subedi
24
34
37
Print and Art Service
Putalisadak, Ktm. Tel: 4244419, 4239154
ECONOMY
Subscription Rates
A Knowledge-based Economy: Some Issues

-Mr. Gyan Mani Adhikari
Annual Subscription
Corporates- Rs. 600
(including courier charges )
Members Rs. 400

Members
(including courier charges)

Rs. 300 (if received by self)
INFORMATION TECHNOLOGY
Opinions expressed by the contributors in this journal are their own and do not
necessarily represent the views of the Institute. Member Bodies of SAFA may
quote or reprint any part of this journal with due acknowledgements. For
others, solicitation is expected.
Information System Risk-Relevant cases

- CA. Sanjay Chaudhary
47
XBRL
- CA. Ashish Garg
50
News
67
Students' Corner
69
Members' Corner
69
LEGAL
International Participation
70
The Convening of Meetings

- CA. N. Krishnaswamy
Members as Corporate Leaders
72
;DklQ z'l4s/0f sfg"g / n]vfk/LIf0f k]zfsf r'gf}ltx?

- cf/P=
Standing Committes & Non Standing

Committes (068/69)
40
75
t'naxfb'/ >]i7
52
55
Tax Issues
Workshop on Tax Issue
62
Editorial
Editorial
With the change of leadership at ICAN, the new Editorial Board has taken charge and it is our great
pleasure to present yet another informative journal. Over the years the Journal has evolved to a
sound communicative track among the members of ICAN. Nonetheless the improvement and
further loading of information is an ongoing process.
This issue tries to usher in a feel of change with introduction of new features relating to leadership
and corporate subscription. Humour has been added with corporate jokes "The funny Accountant"
to break the, at times, mundane accounting and auditing issues. With increased reach and influence
of members across all sectors of economy need has been felt to increase the Journals subscription
to non members. Now the corporate world can subscribe to the Journal at attractive rates. Further
features in next issue are being worked out.
In addition to our fiefdom of accounting and auditing, articles highlight issues on information
technology risks, corporate law, economy, banking etc. The Journal desperately needs feedback
from the readers to improve and meet readers expectation. A serious attempt shall be made to seek
readers views in coming days.
The accounting profession continues to pose new challenges and opportunities and ICAN is
gradually taking its strides from a just born to a growing institution. Under the leadership of new
President CA Sudarshan Raj Pandey and his team, the Institute is expected to make a paradigm
shift to meet the present challenges.
The festive season has bought new hope with greetings. We wish a very happy Dashain and Tihar
to all.
Happy Reading !
Editorial Board
President's Message
Dear Colleagues,
President's
Message
would like to extend my deepest gratitude to all the members for electing
me as 15th President of the Institute of Chartered Accountants of Nepal.
I feel deeply honored to assume this responsibility. I would like to thank
all the council members for electing me as their President without any
opposition. I am confident that all the past presidents, vice president, council
members and all the members of the Institute will assist me in fulfilling my
duties and responsibilities.
The Institute of Chartered Accountants of Nepal (ICAN) is an autonomous
body established under Nepal Chartered Accountant Act 2053 to enhance
social recognition and faith of people at large in the accounting profession
by raising public awareness towards the importance of accounting profession
as well as towards economic and social responsibility of the accountants,
and to contribute towards economic development of the country. The main
duty of the Institute is to achieve the objectives set forth in the Act. This is
the last year of the Fifth Council and I believe my duty also includes
providing continuity to the activities initiated by the council. With a viewpoint
to achieve the organizational objectives, as the 15th President, I have laid
down the following program for this year.
1. Members Capacity Building
CPE program shall include practical trainings and relevant topics; primarily
focussing to enhance the knowledge of registered auditors with appropriate
coordination from professional organisations.
Structured Training Program shall be conducted in the Institutes branches
by mobilising local manpower and resources at least once in a year.
Seminar, workshop shall be conducted by qualified resource person from
India and abroad to acquaint and educate the members on International
practices. ISA and IFRS certification course shall be organised for interested
members and individuals with technical assistance from ICAI and other
accounting bodies.
Dialogue with professional association like ACAN, AuDAN shall be initiated
to address professional issues and concerns.
Peer Review shall be gradually implemented. Awareness program shall be
initiated addressing One Man One Profession which has already been
implemented for Chartered Accountants and shall come into effect from
2070 for registered auditor members.
Feasibility of renewal of membership electronically is being considered. To
make membership renewal easy and hassle free, provision for area wise
counter shall be made and prior notice of the same shall be given.
Matters related to Income Tax Act, VAT Act, Nepal Chartered Accountant
Act and its Rules, Nepal Accounting Standards, Nepal Standards on Auditing,
Code of Ethics and other related materials shall be uploaded in the Institutes
website. Provisions for obtaining professional queries via Email shall be
developed.
A Monitoring Committee shall be formed to regularly monitor the members
activities, its compliance with the Code of Ethics and to make them more
aware and responsible towards their profession.
Efforts shall be made to conduct preliminary investigation

on complaints against the members received in a timely
manner.
Profession related suggestions/ recommendations received
from different organisation/ agencies shall be provided to
the members in a timely manner.
Code of Ethics handbook has already been developed and
with necessary amendments and translation in Nepali, it will
be made available to the members.
3.Institutional Development and Enhancement

of Employee Capability.
2.Professional Studies
Priorities shall be given to activities which meet the Institutes

objective to provide quality professional education to
accounting professionals in consonance with international
norms and practice so as to make the accounting profession
respectable and reliable.
The education committee and education department shall be
actively engaged to enhance the quality of professional studies,
Collaboration with ICAI and other Professional body will be
sought to make Education Department more able and effective.
Standards issued by IFAC International Studies Board and
other international accounting bodies shall be referred to while
developing different study material and curriculum of the
Institute.
Study materials for different level of CA course shall be fully
developed and made available to students this year and entry
level curriculum and entry level examination procedure shall
be made simplistic to attract students.
GMCS training and IT Practical Training shall be conducted
to enhance ability of the student.
Revision Test Paper and Suggested Answers shall be timely
published for the students and efforts shall be made to it make
it more effective and complete. Crash Course for different
level of students shall be organized periodically and it shall
be completed one month prior to the examinations. Provisions
shall be made to make adequate Resource Material available
in Institutes library.
Scholarship programs to underprivileged students shall be
continued. Efforts shall be made to include
organizations/members/ individuals to broaden the program
to include more deserving candidates.
Recognition shall be given to coaching centers meeting
standards laid down by the Institute and periodic review of
the same shall be done to ensure quality education is imparted.
With a viewpoint to enhance students performance, general
interaction programs shall be conducted at least twice a year
to discuss about the examination results, areas of weaknesses,
suggestions and measures for improvement.
Discuss with local universities on recognition of quality of
examination undertaken by the Institute.
Regular assessment of the Accounting Technical Course and
its effectiveness shall be conducted.
Advisory Committee of Past Presidents shall be formed and

interact at least twice a year to provide valuable suggestions
on policy and matter concerning institution development.
Construction of ICAN building has already started and efforts
shall be made to complete it on schedule.
In house training and other educational tour /trainings shall
be given to employee to enhance their morale and performance.
Regular interactions with the employees shall be conducted
on staff welfare, capability enhancement and other employee
related matters.
With the objective to enhance employee performance,
Performance Indicator shall be implemented.
4.Relationship with Regulatory and Other Related

Entities.
Efforts shall be made to make Institute's role and the role of

its members clear to other regulatory bodies and entities.
Regular discussion sessions, workshop/ seminar and print
media shall be employed to educate the entities/ organization
and public regarding roles and obligations of auditors and of
ICAN.
Priority shall be given to investigation and timely settlement
of complaints received from other regulatory bodies and
detailed information regarding complaint under settlement
shall be given.
Efforts shall be made to create suitable environment for
casual/official interaction and conduct joint programs with
Nepal Rastra Bank, Office of Auditor General of Nepal, Beema
Samiti, Securities Board of Nepal, Inland Revenue Department
, Nepal Accounting Standard Board and Auditing Standards
Board.
In order to implement Branch Audit in a fully fledged manner,
cooperation shall be sought from regulatory bodies such Nepal
Rastra Bank, Beema Samiti, Securities Board of Nepal.
Efforts shall be made to create an environment of cooperation
from Nepal Chamber of Commerce, Bankers Association,
FNCCI, Development Bank Association, Association of Finance
Companies etc.,
5.Compliance with Nepal Accounting and Auditing

Standards and Implementation of IFRS.
Provide Continuous information and education to members

regarding accounting and auditing standards.
Interact with NRB, SEBON, Insurance Board, FNCCI CNI,
and Nepal Chamber of Commerce for implementation of
accounting standards.
A Task Force committee under Nepal Accounting Standards
Board shall be formed to enforce the commitment made with
IFAC to adopt IFRS in Nepal by 2012.
Conduct separate IFRS training programs for accountants,

consultants, auditors and other finance related professional.
Conduct awareness and interaction programs with FNCCI,
Nepal Chamber of Commerce, CNI, Nepal Bankers
Associations, Nepal Development Bank Association,
Association of Finance Companies etc to ensure timely
implementation of IFRS.
6.International Matters
Participate in international platform for better liaison with

IFAC, CAPA, SAFA and other international bodies to enhance
ICAN global image.
Efforts shall be made to develop single Chartered Accountancy
Course in SAARC region.
Efforts shall be made to obtain Mutual Recognition for CA

course by ICAI and other accounting bodies of the SAARC
region.
In the end, I would like to ensure that the above mentioned

activities are carried out upon detailed discussion and decision
of the Council.
In order to make my tenure successful and to enhance the work
of ICAN, I would appreciate the continued help and assistance
from Government of Nepal, Office of Auditor General of Nepal,
different regulatory bodies, council members, past presidents,
different organizations, Nepal Accounting Standards, Chief
Executive officers and all the employees and members of the
Institute.
I would like to wish everybody Happy Dasain, Deepawali and
Chhaat 2068.
Thank You
CA. Sudarshan Raj Pandey

President
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tyf cfrf/ ;+lxtfsf] clwgdf /xL kl/ifbn] u/]sf b]xfo jdf]lhdsf lg0f{ox? ;+:yfsf
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eg] n]vfk/LIf0f ug'{x'+b}g .
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hlt;'s} /sd ;Ddsf] .
@_ v ju{sf] k]zfut k|df0fkq gljs/0f cBfjlws ePsf cf/=P ;b:ox?nfO{
$) -rfln;_ s/f]8 ?k}of ;Ddsf] .
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! -Ps_ s/f]8 ?k}of ;Ddsf] .
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k]zfut k|df0fkq k|fKt ;b:on] Ps cfly{s jif{df hDdf !)) -Ps ;o_ j6f dfq
n]vfk/LIf0f ug{ kfpg] 5g\ h;df klJns sDkgLsf] ;+Vof !% eGbf a9L x'g] 5}g
. ;fem]bf/L kmd{sf k|To]s ;fem]bf/n] of] l;df ;+Vof ;Dd n]vfk/LIf0f ug{ kfpg]
5 . t/ pk/f]Qm l;df ;+Vofsf] u0fgf ubf{ jflif{s %-kfFr_ nfv eGbf sd sf/f]jf/
x'g] ;/sf/L k|fylds laBfnox? ;dfj]z ul/g] 5}g .
Ps JolQm Ps k]zf ;DaGwdf
ut @)^& kf}if @) ut]sf] g]kfn ;/sf/, cy{dGqfnosf] -df=dGqL:t/Lo_ lg0f{o

adf]lhd g]kfn rf6{8{ PsfpG6]G6\; lgodfjnL @)^! df ;+zf]wg ePsf] 5 . pQm
;+zf]wg cg';f/ Ps JolQm Ps k]zfsf] lgod rf6{8{ PsfpG6]G6 ;b:ox?nfO{ ;f]xL

ldlt b]lv k"0f{ ?kdf nfu' eO{;lsPsf] 5 h;cg';f/ k"0f{sflng ;]jf/t rf6{8{ PsfpG6]G6
;b:ox?n] k]zfut k|df0fkq kfpg] 5}gg\ eg] kfO{ /x]sf rf6{8{ PsfpG6]G6 ;b:ox?sf]
k]zfut k|df0fkq :jtM :yug e};s]sf] 5 . btf{jfnf n]vfk/LIfs ;b:ox?sf] xsdf
eg] of] lgod ldlt @)&) >fj0f )! ut] b] l v dfq nfu" x' g ] 5 .
k"0f{sflng ;]jf/t ;b:osf] kl/efiff tyf o;sf] k|li6s/0f ;+:yfsf] j]a ;fO6df x]g{
;lsg]5 .
zfvfsf] n]vfk/LIf0f (Branch Audit) ;Dawdf
a}s+ tyf ljQLo ;+:yfsf] s'g} zfvfn] pQm a}s+ tyf laQLo ;+:yfdf hDdf ePsf] lgIf]k
jf C0f nufgLsf] b' O { k| l tzt jf ;f] eGbf a9L /sd ;+ s ng jf C0f
nufgL u/] s f] ePdf To:tf] zfvfsf] 5' } :jtGq n] v fk/LIf0f ug' { k g] { 5 .
;b:ox?n] a}+s tyf ljQLo ;+:yfsf n]vfk/LIf0f ug]{ qmddf s'g} zfvfn] pQm a}+s
tyf laQLo ;+:yfdf hDdf ePsf] lgIf]k jf C0f nufgLsf] b'O{ k|ltzt jf ;f] eGbf
a9L /sd ;+sng jf C0f nufgL eP gePsf] olsg ug'{kg]{5
/ o:tf zfvfx?sf] :jtGq n] v fkl/If0f k| l ta] b g k| f Kt ug' { k g] { 5 .
o;/L a}+s tyf lalQo ;+:yfsf] pk/f]Qm adf]lhdsf zfvfx?sf] :jtGq n]vfk/LIf0f
gePsf] ca:yfdf n]vfkl/Ifsn] cfkm\gf] n]vfk/LIf0f k|ltj]bgdf ==zfvfx?af6 k|fKt
ljj/0f eGg] jfSof+zsf] k5f8L :jtGq n]vfkl/If0f gul/Psf] ePtfklg=== ("The
returns received from branches of the Bank." to be followed by

"though the statements are independently not audited" ) eGg]
zAbfanL yk u/L Unqualified report hf/L ug{ ;Sg] 5g\ .
g] k fn n] v fdfg tyf n] v fk/LIf0fdfg nfu" ug] { ;Dawdf
o; ;+:yfn] hf/L u/]sf] g]kfn n]vfdfg tyf g]kfn n]vfk/LIf0fdfgsf] k"0f{ ?kdf
kfngf ug'{ ;Dk"0f{ ;b:ox?sf] st{Jo xf] . ;b:ox?n] n]vfk/LIf0f ug]{ l;nl;nfdf
;Dk"0f{ n]vfk/LIf0fdfgx?nfO{ k"0f{tof kfngf ug'k{ b{5 eg] u|fxsn] ljlQo ljj/0f tof/
kfbf{ g]kfn n]vdfgsf] kl/kfngf u/] gu/]sf] ;d]t x]g'{ kb{5 . olb u|fxsn] ljlQo
ljj/0f tof/ kfbf{ g]kfn n]vfdfgsf] kl/kfngf u/]sf] 5}g eg] cfk\mgf] n]vfk/LIf0f
k|lta]bgdf :ki6 pNn]v ug'{ kb{5 .
g]kfndf a}+s tyf ljlQo ;+:yfx? tyf aLdf sDkgLx?n] cfk\mgf] cfosf] n]vf+sg
ubf{ Nepal Accounting Standard cg';f/ Accrual Basis df ug'{kg]{df
;DalGwt ;+:yfsf] lgodgsf/L lgsfosf] P]g, lgod tyf lgb]z{ g cg';f/ Cash Basis
df n]vf+sg ug]{ u/]sf] x'Fbf tL lgsfox?sf] n]vfk/LIf0f ul/ n]vfk/LIf0f k|ltj]bg
hf/L ubf{ g]kfn n]vfdfgsf] cfwf/df oyfy{ lrq0f ub{5 elg /fo k]z ug{ gldNg]
b]lvG5 . t;y{ o:tf] cj:yfdf k|:t't cfly{s ljj/0f g]kfn n]vfdfg cg';f/ tof/
kfl/Psf] 5 eGg] zAbfanLsf] cuf8L k|rlnt sfg'gsf clwgdf /xL nfu' ug{ ;lsg]
xb;Dd ("in accordance with Nepal Accounting Standards.." to be
followed by "so far as applicable in compliance with the prevailing

Laws..") eGg] zAbfanL yk u/L Unqualified report hf/L ug{ ;Sg] 5g\ .
;+:yfsf ;b:ox?n] pk/f]Qm Joj:yfx?sf] jlv{nfk s'g} sfo{ u/]df tyf sfo{ u/]sf]
ph"/L ;+:yfdf k|fKt ePdf g]kfn rf6{8{ PsfpG6]G6\; P]g, @)%#, g]kfn rf6{8{
PsfpG6] G 6\ ; lgodfjnL, @)^! tyf cfrf/ ;+ l xtf adf] l hd sfjf{ x L
x' g ;Sg] Joxf] / f ;DjlGwt ;a} s f] hfgsf/Lsf] nfuL ;" l rt ul/G5 .
accounting
Urgency of Carbon Accounting

Standards in Nepal
"Carbon trading deal of Nepal Biogas Project (NBP) became the first project for carbon trading under the Clean
Development Mechanism of the Kyoto Protocol on climate change and raises a need of carbon accounting standards
in Nepal. As we know the estimation of CO2 i.e. total amount of carbon emitted during the production, processing
and distribution of a product as well as forest change is a matter of concern with carbon accounting. The final
outcome of this exercise is called the products carbon footprint and the exercise itself is known as carbon accounting.
Carbon footprints are expressed in units of CO2 equivalents (CO2e).Fuzzy accounting environment, question about
asset type and accounting value (cost or fair market value of CERs) are still in question for carbon accounting around
the world. So far Nepal is concerned it has to develop its own carbon accounting standards in parallel growth with
the worlds development on the same field."
Mr. Tara Prasad Upadhyaya
As a Party to the United Nations

Framework Convention on Climate
Change (UNFCCC) and the Kyoto
Protocol, Nepal is implementing number
of climate change related activities in the
recent year. The Government of Nepal has
issued the Climate Change Policy, 2011
that includes number of policies to address
the impacts of climate change, and make
the development climate-friendly and
resilient.
Carbon Accounting
Prof. Dr. Prashant Kumar
Today a movement is established which

addresses the management of carbon foot
print on a personal, product or
organizational level. ISO have issued, and
continue to issue, standards on carbon foot
printing for the voluntary sector. The
European Union has published Directives
and guidelines for the permitting and
enforcement of Carbon Dioxide (CO2) for

the mandatory sector in Europe.
In an important study (Brenton, Jones, &
Jensen, 2009) stated that concern about
climate change has stimulated interest in
estimating the total amount of carbon
emitted during the production, processing
and distribution of a product. The final
outcome of this exercise is called the
product's 'carbon footprint' and the exercise
itself is known as 'carbon accounting'. A
product's carbon footprint is different from
a company's as the former includes the
carbon emitted by consumption (and
disposal) of the product itself as well as of
all inputs necessary to produce it. It is
therefore called an embedded (or
embodied) footprint Carbon. Footprints
are expressed in units of CO2 equivalents
(CO2e). This is because different GHGs
have different impacts on the atmosphere
so-called radioactive forcing. The
Mr. Upadhyaya is permanently from Butwal, Nepal, and a Ph.D Scholar in Banaras Hindu University, Faculty of Commerce, Varanasi, India.
Dr. Prashant Kumar is a senior professor in Faculty of Commerce, Banaras Hindu University, Varanasi India.
The Nepal Chartered Accountant
September 2011
accounting
GHGs(green house gases) data reported by Parties contain
estimates for direct GHGs, such as CO2 - Carbon dioxide, CH4
- Methane, N2O - Nitrous oxide, PFCs - Perfluorocarbons, HFCs
- Hydrofluorocarbons, SF6 - Sulphur hexafluoride, as well as for
the indirect greenhouse gases such as SO2, NOx, CO and NMVOC
(UNFCC, 1992 a).
Kyoto protocol and Carbon Accounting

Kyoto Protocol is an agreement made under the United Nations
Framework Convention on Climate Change (UNFCCC). The
treaty was negotiated in Kyoto, Japan in December 1997, opened
for signature on March 16, 1998, and closed on March 15, 1999.
The agreement came into force on February 16, 2005, under which
the industrialized countries will reduce their collective emissions
of greenhouse gases by 5.2% compared to the year 1990 (but note
that, compared to the emissions levels that would be expected
by 2010 without the Protocol, this target represents a 29% cut).
The aim is to lower overall emissions of six GHGs, carbon dioxide,
methane, nitrous oxide, sulfur hexafluoride, HFCs(Hydrofluro
Carbon), and PFCs - calculated as an average over the five-year
period of 2008-12. National targets range from 8% reductions for
the European Union and some others to 7% for the US, 6% for
Japan, 0% for Russia, and permitted increase of 8% for Australia
and 10% for Iceland. The GHGs are changing the Earth's energy
balance and are already resulting in observed impacts on the
global climate system (Houghton, J.T.,Y.Ding, D.J.Griggs et al,
2001).
CDM
The Clean Development Mechanism (CDM) is an arrangement
under the Kyoto Protocol allowing industrialized countries with
a greenhouse gas reduction commitment to invest in emission
reducing projects in developing countries as an alternative to
what is generally considered more costly emission reductions in
their own countries. These companies in developing countries
must adopt newer technologies, emitting lesser gases, and save
energy. Only a portion of the total earnings of carbon credits of
the company can be transferred to the company of the developed
countries under CDM. There is a fixed quota on buying of credit
by companies in Europe. Under CDM, a developed country can
take up a greenhouse gas reduction project activity in a developing
country where the cost of GHG reduction project activities is
usually much lower. The developed country would be given
credits (Carbon Credits) for meeting its emission reduction targets,
while the developing country would receive the capital and clean
technology to implement the project (KYOTO MECHANISM
Article 12).
credits are measured in units of certified emission reductions

(CERs). Each CER is equivalent to one tone of carbon dioxide
reduction. A company has two ways to reduce emissions. One,
it can reduce the GHGs by adopting new technology or improving
upon the existing technology to attain the new norms for emission
of gases. Or it can tie up with developing nations and help them
set up new technology that is eco-friendly, thereby helping
developing country or its companies 'earn' credits. India, China
and some other Asian countries as well as Nepal have the
advantage because they are developing countries. Any company,
factories or farm owner in Nepal can get linked to United Nations
Framework Convention on Climate Change(UNFCCC) and know
the 'standard' level of carbon emission allowed for its outfit or
activity. The extent to which a country emits less carbon (as per
standard fixed by UNFCCC) it get credited in a developing
country. This is called carbon credit. These credits are bought
over by the companies of developed countries mostly Europeans
because the United States has not signed the Kyoto Protocol
(KYOTO MECHANISM Article 17).
IET
Under IET (International Emissions Trading) mechanism, countries
can trade in the international carbon credit market. Countries
with surplus credits can sell the same to countries with quantified
emission limitation and reduction commitments under the Kyoto
Protocol. Developed countries that have exceeded the levels can
either cut down emissions, or borrow or buy carbon credits from
developing countries (KYOTO MECHANISM Article 6).
Carbon trading of Nepal

Nepal has signed on to "a carbon emissions reduction" agreement
with the World Bank whereby it will trade surplus carbon for
biogas plant. According to the Agreement, Nepal is set to fetch
income worth Rs.43.4 million (US$967,000) from two biogas
projects which have been approved by the executive board of
Clean Development Mechanism (CDM) under the Kyoto
convention on Climate change. The Nepal Biogas Project (NBP)
thus became the first project for carbon trading under the Clean
Development Mechanism of the Kyoto Protocol on climate
change. (Positivenepal, 2008). The Alternative Energy Promotion
Center (AEPC), under which NBP is running, submitted two
proposals for saving carbon from 9,708 and 9,688 biogas plants,
respectively, last year. After signing the agreement, the director
of AEPC, Dr. Madan Bahadur Basnet, said the revenue received
from carbon selling would be invested to install 25,000 plants
annually. He also stated that such trading will further lift the
standards of living among rural people (Dhital, 2006).
Carbon Credits
ICAI and Carbon Accounting
Carbon credits are certificates issued to countries that reduce

their emission of GHGs which causes global warming. Carbon
Accounting Standards Board, The institute of Chartered

Accountants of India has issued an Exposure Draft: "Guidance
September 2011
accounting
Note on Accounting for Self Generated Certified Emissions
Reductions (CERs)." Besides this there is not any accounting
standards approved and in practice in India.
Whether CER is an 'asset : 'Framework for the Preparation and
Presentation of Financial Statements', issued by the Institute of
Chartered Accountants of India, defines an 'asset' as follows: "An
asset is a resource controlled by the enterprise as a result of past
events from which future economic benefits are expected to flow
to the enterprise." From the above-mentioned definition of 'asset'
it follows that for a CER to be considered as an asset of the
generating entity, it should be a resource controlled by the
generating entity arising as a result of past event/s, and from
which future economic benefits are expected to flow to the
generating entity (ICAI, 2010 a).
Recognition of CERs: According to the 'Framework for the
Preparation and Presentation of Financial Statements' "An asset
is recognized in the balance sheet when it is probable that the
future economic benefits associated with it will flow to the
enterprise and the asset has a cost or value that can be measured
reliably." accordingly CERs come into existence when these are
credited by UNFCCC in a manner to be unconditionally available
to the generating entity. Therefore, CERs should not be recognized
before that stage (ICAI, 2010 b).
Type of asset: CERs are non-monetary assets without a physical
form; they do not strictly fall within the meaning of 'intangible
asset' as per AS 26. The reason is that CERs are not held for use
in the production or supply of goods or services, and neither is
CERs used for administrative purposes nor are they used for the
purpose of renting to others. Instead, CERs generated by the
generating entity are held for the purpose of sale (ICAI, 2010 c).
Measurement of CERs: CERs are inventories for an entity which
generates the CERs. Therefore, the valuation principles as
prescribed in AS 2 should be followed for CERs. As per AS 2,
inventories should be valued at the lower of cost and net realizable
value. Accordingly, CERs should be measured at cost or net
realizable value, whichever is lower.
Cost of CERs Inventories: As per AS 2, The cost of inventories
should comprise all costs of purchase, costs of conversion and
other costs incurred in bringing the inventories to their present
location and condition. Various costs are incurred by the
generating entity to set up a CDM project activity, operate the
CDM project and generate CERs. These may include the following:
(i) research costs arising from exploring alternative ways to
reduce emissions;
(ii) costs incurred in developing the selected alternative as a
process/device to reduce emissions;
(iii) costs incurred to prepare the Project Design Documents;
(iv) fees paid to DOEs for validation and verification and to the
National Authority for approval;
(v) fees of registering with UNFCCC;

(vi) costs incurred for monitoring the reductions of emissions;
(vii)costs incurred for certification of CERs; and
(viii)operating costs incurred to run the CDM project.
Net Realizable Value of CERs: In the determination of the net
realizable value of CERs, paragraph 22 of AS 2 reproduced below
should be used as guidance: "22. Estimates of net realizable value
are based on the most reliable evidence available at the time the
estimates are made as to the amount the inventories are expected
to realize. These estimates take into consideration fluctuations
of price or cost directly relating to events occurring after the
balance sheet date to the extent that such events confirm the
conditions existing at the balance sheet date"(ICAI, 2010 e). From
the above, it is clear that any pollution control/emission reduction
devices installed by the generating entity for the purpose of
generating CERs are property, plant and equipment and therefore
they shall be accounted for as per AS 10 (Revised). Further, as
these devices are specifically installed to generate CERs, the
depreciation of such devices should not be included in the cost
of the inventory of the principal product/s of the generating
entity as they do not contribute to bringing the inventory of the
principal product/s to their present location and condition.
ICAN and Carbon Accounting Standards

The Institute of Chartered Accountants of Nepal (ICAN) was
established under a special act, The Nepal Chartered Accountants
Act, 1997 to enhance social recognition and faith of people at
large in the accounting profession by raising public awareness
towards the importance of accounting profession as well as
towards economic and social responsibility of the accountants,
and to contribute towards economic development of the country.
The Institute is an autonomous body and the Council is fully
authorized by the Act to undertake accountancy profession in
Nepal (ICAN a. , 2010).
Keeping all its objectives in mind the ICAN has issued and
implemented different Accounting Standards for the betterment
of investors, shareholders, corporate body, Government and
others so concerned. As per the decision of the Council, the Nepal
Accounting Standards that have been made Mandatory for
Compliances are NAS 1: Framework for the Preparation and
Presentation of Financial Statements Presentation of financial
statements; NAS 2: Accounting Policies, Changes accounting
Estimates and Errors; NAS 3: Cash Flow statements; NAS 4:
Inventories; NAS 5: Events after the Balance sheet date; NAS 6:
Property, Plant and Equipments; NAS 7: Revenue; NAS 8:
Borrowing Costs; NAS 9: Income Taxes; NAS 10: Accounting for
Government Grants and Disclosure of Govt. Accounting; NAS
11: The Effects in Changes in Foreign Exchange Rates; NAS 12:
Provisions, Contingent Liabilities and Contingent Assets; NAS
13: Construction Contract; NAS 15: Leases; NAS 16: Related Party
Disclosures; NAS 17: Interim Financial Reporting; NAS 18:
September 2011
accounting
Impairment of assets; NAS 19: Investment Property; NAS 20: NoCurrent assets Held for Sale and Discontinued Operation (ICAN).
Though ICAN is active and tried its best for the development of
Nepal Accounting Standards as well as Nepal Standards on
Audits but the question is still the same that there is not any
accounting standards' being issued against the carbon accounting
as well as carbon trading activities of Nepal. As we know The
Nepal Biogas Project (NBP) became the first project for carbon
trading in Nepal, therefore it seems a high time for the highest
professional body of Nepal to react constructively on the raised
issued as soon as possible.
Challenges of Carbon Accounting

Fuzzy accounting Environment: In spite of growing awareness
about the climate change and carbon emission none of the nations
of the world has developed a clear cut accounting principles and
methodology for carbon accounting. There is currently no
authoritative accounting literature from either the Financial
Accounting Standards Board (FASB) or the International
Accounting Standard Board (IASB) on accounting for emission
allowances. Both U.S. and international accounting standard
setters have attempted to address the issue as early as possible
(Rohrig & Davis, 2011 a).
Question about the asset type: Emission allowances, expressed
as carbon credits, entitle the holder of such credits to emit one

ton of carbon per credit. Emission allowances, as intangible assets,
have a number of unique characteristics that challenge the accurate
measuring and reporting of their value. Intangible assets are
identifiable nonfinancial assets that lack physical substance
(Rohrig & Davis, 2011 b). From a definitional perspective, emission
allowances appear to align more closely to intangibles than
inventory, although some traditional intangible accounting
practices may not be a precise fit for the allowances. For one,
intangibles with a finite life are typically amortized over the
period based on a unit-of-production approach (or straight line
if the previous method is difficult to identify).
Conclusion
Carbon trading is becoming a latest financial aspect to earn foreign
currencies especially for the developing nations who are the
signatories of Kyoto Protocol under UNFCCC. The trading is
normally done between developed and developing nations.
Because of carbon trading the need for accounting standards is
vital for recording purposes in concerned Economy. There is not
any finally and universally accepted carbon accounting standards
but the process for the development and enhancement is action.
Nepal as a developing nation and a party of UNFCCC is in need
of carbon accounting standards while involving in carbon deal.
Therefore we feel that the role must be played by ICAN to tackle
the latest situation as an apex body concerned with accounting
10
September 2011
practices and methods in Nepal.
Bibliography
Brenton, P., Jones, G. E., & Jensen, M. F. (2009). Carbon labelling
and Low Income-Country Exports: A Review of Development
Issues. Development Policy review , 27 (3), 243-267.
Dhital, M. (2006, May 5). Ohmy News International Global Watch.
Retrieved September 22, 2011, from Nepal Sign Carbon
Trading Deal: http://english.ohmynews.com/articleview/
article_view.asp?no=290004&rel_no=1
ICAI. (2010 a). The Institute of Chartered Accountants of India.
Retrieved August 15, 2011, from Whats New: http://icai.org/
backindex.html
ICAI. (2010 b). The Institute of Chartered Accountants of India.
backindex.html
ICAI. (2010 c). The Institute of Chartered Accountants of India.
backindex.html
ICAI. (2010 d). The Institute of Chartered Accountants of India.
backindex.html
ICAI. (2010 e). The Institute of Chartered Accountants of India.
backindex.html
ICAN. Retrieved from Nepal Accounting Standards:
www.ican.org.np/nepaccstd.php
Positivenepal. (2008, January 28). Positivenepal. Retrieved
September 22, 2011, from Carbon Trading:
http://positivenepal.wordpress.com/2008/01/28/carbontradinga-new-source-of-revenue-for-nepal/
Rohrig, M., & Davis, M. (2011 a, April a). Deloitte China Research
and Insight Centre. Retrieved August 14, 2011, from Deloitte
energy solution: www.deloitte.com/energysolutions
Rohrig, M., & Davis, M. (2011 b, April a). Deloitte China Research
and Insight Centre. Retrieved August 14, 2011, from Deloitte
energy solution: www.deloitte.com/energysolutions
UNFCC. (1992). United Nations Framework Convention on
Climate Change. Retrieved August 16, 2011, from GHG Data
from UNFCC: http://unfccc.int/ghg_data/ghg_data_unfccc/
items/4146.php
accounting
Consolidated Financial Statements

(IAS 27 Consolidate & Separate Financial Statements)
(SIC 12 Consolidation-Special Purpose Entities)
(The Companies Act, 2063)
Background
Nepal is in the process of adopt of Global
set of Financial Reporting Standards (IFRS)
starting 17 July 2012 (for listed entities).
IFRS adoption is a subject of hot debate in
recent time, especially for the accounting
professionals.
There is no Accounting Standard

covering consolidation in Nepal
however, some of provisions of The
Companies Act, 2063 indicate for
preparation of consolidated financial
statements by the reporting entities.
Currently Nepal is following its own

Accounting Standards (NAS, or popularly
known as Local GAAP). There is no
standards local GAAP covering
consolidation of financial statements in
Nepal. Thus it is worthwhile and relevant
to discuss the requirements of IFRS
regarding Consolidated Financial
Statements.
Legal Requirement
The financial statements are either
prepared on the basis of GAAP or statutory
requirements. There is no Accounting
Standard covering consolidation in Nepal
however, some of provisions of The
Companies Act, 2063 indicate for
preparation of consolidated financial
statements by the reporting entities. The
relevant provisions of The Companies Act,
2063 are reproduced here;
A. Section 141 Acquisition or Sale of
Property:
Mr. Yuba Raj Pandeya
1. A public company or its subsidiary

company shall, if the purchase or
sell of any property by it results in

the following situation, give
information thereof to the office:
a. If the purchase of any property
results in an increase in the
value of consolidated property
mentioned in the audited latest
financial statement, by more
than 15%;
b. If the income to be earned from
the property sold or intended
to be sold exceeds by more than
15% of the consolidated income
before making payment for tax
as mentioned in the audited
latest books of account of the
company.
(As per this section, the entities do not
require consolidation; however the
consolidation is indirectly supported
for knowing the consolidated
property/ profit).
B. Section 143 Documents to be enclosed:
1. Any holding company shall enclose
the following documents of its
subsidiary company in its balance
sheet:
a. One copy of annual accounts of
the subsidiary company for the
immediately expired financial
year and the report of its board
of directors during that period;
Mr. Pandey is a CAP III Student of ICAN
September 2011
11
accounting
b. Auditors Report;
v) Notes and other statements;
c. Details of investment of the holding company at the

end of financial year;
vi) Restated opening Statement of Financial Position in accordance

with IAS 8 (Accounting Policies Change in Accounting
Estimates & Errors).
d. In cases where the financial year of the holding

company and that of subsidiary are different , the
matter or change, if any, in any matter of the right of
holding company over the subsidiary company during
such different periods.
2. The details as referred to in clause (b) of sub-section (1)
shall also contain the net profits derived after deducting
the loss suffered in the concerned financial year of the
subsidiary and the profit and loss as well which has not
been mentioned in accounts of the company after it has
become the subsidiary company but which may be the
concern of the shareholders of the holding company.
3. In cases where the Board of Directors of the holding
company fail to obtain the information as mentioned in
clause (b) of sub-section (1), and sub-section (2) due to
any reason, the balance sheet of the holding company
shall contain a written report thereof.
4. The details as referred to clause (c ) of sub-section (1) shall
also show loans borrowed against the mortgage of any
immovable property of the subsidiary or the loans
borrowed for any purpose other than discharging existing
liabilities.
(As per this section also, the consolidation is not required,
however there is indication of consolidation to know the net
profit of the parent and subsidiary as a whole).
Control
Control is the power to govern the financial and operating policies
of an entity so as to obtain benefits from its activities. The first
criterion for determining control is majority of voting power. As
per para 13 of ISA 27 control is presumed to exist when the parent
owns, directly or indirectly through subsidiaries, more than half
of voting power if an entity, except in exceptional circumstances.
Other criterion deciding existence of control over another entity
are:
i)
Power over more than half of voting rights by virtue of an

agreement with other investors;
ii) Power to govern the financial and operating policies of the

entity under statue or an agreement;
iii) Power to appoint or remove the majority of the members of
the board of directors or equivalent governing body and
control of the entity is by that board or body; and
iv) Power to cast the majority of votes at the meetings of the
board of directors or equivalent directors governing body
and control of the entity is that board or body.
Establishment of Control
Based on the control criteria mentioned above the control is
presumed to be established
Introduction to Consolidated Financial

Statements
i) When the control is through holding majority of voting power,

the date of control is when the shares carrying the voting
rights are registered in the name of investor.
Consolidated financial statements are the financial statements of

a group presented as a single economic entity. A group is a parent
and all its subsidiaries. A parent company is the investor that
controls the subsidiary. The parent and subsidiary (subsidiaries)
constitute a group.
ii) When control is by agreement with other shareholder, the

date of agreement is the date when the control is established.
As per IFRS the parent company is required to prepare

consolidated financial statements of the group as a whole, which
includes:
i)
Consolidated Statement of Financial Position (Balance Sheet);
ii) Consolidated Statement of Comprehensive Income (it is

possible to have one statement have two parts-Consolidated
Statement of Income & Consolidated Statement of Other
Comprehensive Income or two separate statements);
iii) Consolidated Statement of Changes in Equity;
iv) Consolidated Statement of Cash Flows;
12
September 2011
iii) When the control is through power to appoint or remove the

majority of the members of the board of directors, the date
when the power is established which may be voting rights
as mentioned in (i) or by agreement with other shareholders
as stated in (ii). In case it is demonstrated that without having
majority voting rights or an agreement and entity has
appointed (removed) majority directors, then control is
established on and from that date.
iv) When the control is through power to cast majority of votes
at meetings of Board of Directors- The control is established
when it is demonstrated that an entity enjoys the power of
casting majority of voting rights not having appointed majority
directors by virtue of (i), (ii), or (iii) above. In this case the
control should be established on demonstration of the ability
to cast majority votes consistently over the meetings.
accounting
incident to the activities of the SPE; or
Special Situations
Potential Voting Rights
As per para 14 of IAS 27 while evaluating control, the potential
voting rights are also taken into account.
Dual Control
A situation may arise when there is dual control. When dual
control situation arises (for example one company has control
through majority of voting rights and another company appoints
the majority members of Board for another reason, but this
situation is unlikely to exist for longer period of time). When the
case of dual control exists, both the reporting entities, which have
control, should consolidate.
Indirect Control
Another special situation is indirect control (for example in case
of group having more than one subsidiaries and subsidiary of
subsidiaries), in this case also the entities having indirect control
should evaluate the control situation to the lowest possible level
and consolidate the financial statements.
Special Purpose Entities (SPEs)

Sometimes entities are created to accomplish narrow and welldefined objectives like affecting a lease, research and development
activities are securitization of financial assets. These entities are
termed as SPEs which may take form of corporation, trust,
partnership and unincorporated entity.
IAS 27 requires the consolidation of entities that are controlled
by the reporting entity. The SIC 12 has given special guidance
on consolidation of SPEs, however the SIC 10 interpretation does
not apply to post-employment benefit plans or other long-term
employee benefit plans to which IAS 19 (Employee Benefits)
applies.
As per SIC 12, an SPE shall be consolidated when substance of
relationship between an entity and the SPE indicates that the SPE
is controlled by that entity. The control may be demonstrated
even if there is no majority ownership by the parent company in
the SPE. The circumstances which demonstrate existence of
control as per SIC 12 are:
i)
In substance, the activities of the SPE are being conducted on

behalf of the entity according to its specific business needs
so that the entity obtains benefits from the SPE's operation;
ii) In substance, the entity has decision making-powers to obtain

the majority of benefits of the activities of the SPE or, by
setting up an 'autopilot' mechanism, the entity has delegated
these decision-making powers;
iii) In substance, the entity has rights to obtain majority of the
benefits of the SPE and therefore may be exposed to risks
iv) In substance, the entity retains the majority of the residual or

ownership risks related to the SPE or its assets in order to
obtain benefits from its activities.
Parents excluded from Consolidation

A parent entity may not consolidate its subsidiaries in the
following cases:
i) A parent which is a subsidiary of another company having
informed its minority shareholders and having objection from
shareholders;
ii) The parent's debt and equity are not listed;
iii) The parent is not potential listing candidate;
iv) The ultimate or intermediate parent of the parent produces
consolidated financial statements available for public use that
comply with IFRSs.
If a parent is excluded to issue consolidated financial statements
then it presents separate financial statements as per para 38-43
of IAS 27.
A subsidiary is not excluded from consolidation simply because
the investor is a venture capital organization, mutual fund, unit
trust or similar entity, nor a subsidiary is excluded from
consolidation because its business activities are dissimilar from
those of other entities within the group (US GAAP allows to
exclude if the operations of the parent and subsidiaries are nonhomogenous). However, the held for sale subsidiaries are excluded
from consolidation.
Consolidation Procedures
As per para 18-31 of ISA 27 the consolidation procedure are:
1) Basic Principles : Consolidated financial statements present
financial information about the group as that of a single
economic entity. To achieve that purposei) The carrying amount of the parent's investment in each
subsidiary and the parent's portion of equity of each
subsidiary are eliminated.
ii) Goodwill arising out of acquisition is determined in
accordance with IFRS 3 Business Combinations and that
goodwill will appear in the consolidated statement of
financial position as an intangible asset.
iii) Non-controlling interests in the profit or loss of
consolidated subsidiaries for the reporting period are
identified; and
iv) Non-controlling interests in the net assets of consolidated
subsidiaries are identified separately from the parent's
ownership interests in them. Non-controlling interests in
September 2011
13
accounting
the net assets consists of :
a) The amount at the date of original combination
calculated in accordance with IFRS 3 Business
Combinations; and
b) The non-controlling interests' share of changes in
equity since the date of the combination.
Effectively 'equity' of the subsidiary company is distributed
between the parent and non-controlling interest. Noncontrolling interest is presented as a separate component of
equity.
In case there exists potential voting right, parent's share and
non-controlling interest are computed based on existing
interest not on the basis of potential interest.
2) Line by line addition : An entity combines the financial
statements of the parent and its subsidiaries line by line by
adding together like items of assets, liabilities, equity, income
and expenses (expect investment in subsidiaries).
3) Intra-group balances, transactions, income and expenses :
They are eliminated in full.
Profit and losses resulting from intra-group transactions
that are recognized in assets, are eliminated in full. Intragroup losses may indicate an impairment that requires
recognition in the consolidated financial statements. IAS 12
Income Taxes applies to temporary differences that arise
from the elimination of profits and losses resulting from
intra-group transactions.
4) Consolidation is effected from the date of acquisition : The
income and expenses of a subsidiary are included in the
consolidated financial statements from the acquisition date
as defined in IFRS 3 Business Combinations.
Depreciation on the property, plant and equipment and
amortization of intangibles, impairment of assets are computed
based on that acquisition date fair value of assets of the
subsidiary. This will effectively require that property, plant
and equipments and intangibles of the subsidiary are carried
at the acquisition date fair value. Similarly, de-consolidation
is effected from the date of loss of control.
5) Computation of deficit balance of non-controlling interest
is permitted : Profit or loss and each component of other
comprehensive income are attributed to the owners of the
parent and to the non-controlling interests. Total
comprehensive income is attributed to the owners of the
parent and to the non-controlling interests even if this results
in the non-controlling interests having deficit balance.
6) Existence of preference shares which are treated as equity :
If a subsidiary has outstanding cumulative preference shares
14
September 2011
that are classified as equity and are held by non-controlling

interests, the parent has to compute its share of profit or loss
after adjusting for the dividends on such shares, whether or
not dividends have been declared.
7) Adjustment for changes in non-controlling interest : Changes
in a parent's ownership interest in a subsidiary that do not
result in a loss of control are accounted for as equity
transactions.
Therefore, the carrying amounts of the controlling and noncontrolling interests are adjusted to reflect the changes in
their relative interests in the subsidiary. Any difference
between the amount by which the non-controlling interests
are adjusted and the fair value of the consideration paid or
received shall be recognized directly in equity and attributed
to the owners of the parent.
8) Uniform accounting policies : Adopt uniform accounting
policies while finalizing accounts of the parent and
subsidiaries for similar transactions and other events. In case
uniform accounting policies could not be adopted, it is
necessary to disclose the fact together with the proportions
of transactions wherein uniform accounting policies could
be adopted.
9) Uniform accounting period : Financial statements of the parent
and subsidiary should ideally be drawn up to the same
reporting period. In case it is not possible to follow the same
reporting period, the difference should not be more than 3
months. Adjustments should be made for the effects of
significant transactions and other events of the subsidiary
that occurred between the reporting date of the subsidiary
up to the reporting date of the parent company.
Loss of Control
A parent may lose control of a subsidiary with or without a
change in absolute or relative ownership levels. It also could
occur as a result of contractual agreement. A parent might lose
control of subsidiary in two or more arrangements (transactions).
However, sometimes circumstances indicate that the multiple
arrangements should be accounted as a single transaction.
When a parent loses the control over the subsidiary, the following
accounting treatment are carried out by the entity:i) Derecognize the assets (including any goodwill) and liabilities
of the subsidiary at their carrying amounts at the date when
control is lost.
ii) Derecognize the carrying amount of any non-controlling
interests on the former subsidiary at the date when control
is lost (including any components of other comprehensive
income attributable to them).
accounting
iii) Recognize any investment retained in the former subsidiary
at its fair value at the date when control is lost.
iv) Reclassifies other comprehensive income for all amounts
recognized in other comprehensive income in relation to that
subsidiary.
v) Derecognizes investment disposed of and fair value of
consideration received.
vi) Recognizes any resulting difference as a gain or loss in profit
or loss attributable to the parent.
vii)Balance of the investment in subsidiary is accounted for
applying other IFRSs.
Way Forward
The IFRS implementation date is knocking at our door in Nepal.
With less than a year left for its adoption, the accounting regulatory
body, ICAN and Accounting Standards Board should gear up
and organize interaction and discussion programs and make
timely perparations for its implementation. Interaction with
various regulatory bodies e.g. Nepal Restra Bank, Beema Samiti,
Securities Exchange Board, Comapany Registrar shall pave the
way for easy and timely adoption.
(In recent pronouncement the IASB proposed to replace IAS 27
by new IFRS 10 Consolidated Financial Statements, which is in
discussion phase).
September 2011
15
accounting
IFRS Time to get ready
1. Introduction
As per the decision of the council dated

32 Ashad , 2067 of the The Institute of
Chartered Accountants of Nepal has
decided to implement IFRS for listed
companies'. But the listed companies
are not properly aware about IFRS. In
certain case, even the regulatory bodies
lack awareness about it. Government
of Nepal has not taken any initiation
till now. Among the regulator, ICAN
and ASB have taken some initiative on
the awareness of the IFRS by
conducting Training programs and
seminars.
Financial Reporting StandardsI(FRS) are

accounting standards issued by the
International Accounting Standards Board
(IASB), an independent organization based
in London, U.K. They publish a set of
rules knows as IFRS to be applied fo
financial reporting by public companies
world wide . International Accounting
standards were issued by the IASBs
predecessor organization, the International
Accounting Standards Committee,(IASC)
established in 1973 by the professional
accountancy bodies in Australia, Canada,
France, Germany, Japan, Mexico,
Netherlands, United Kingdom and Ire
land, and the United States of America.
During that period, between 1973 and 2000,
the IASCs rules were described as
International Accounting Standards (IAS)
This rule-making function has been taken
over by a newly re-constituted IASB.
fromApril 2001. The IASB described its
rules under the new label International
Financial Reporting Standards, it is betterfunded, better staffed and more
independent than its predecessor, the
Internaltional Financial Accounting
Committee(IASC).
1.1 What are IFRS?

International Financial Reporting
Standards are globally accepted high
quality standards which are issued by the
International Standards Board (). They are
the following:
Mr. Lok Man Maskey
1. International Accounting Standards

Committee (IASC1973 2000) issued
Mr. Maskey is a CEO of Accounting and Auditing Standard Board, Nepal
16
September 2011
International Accounting Standards

(IASs).
2. International Accounting Standards
Book (IASB 2001 to date) issued
International Financial Reporting
Standards (IFRSs).
3. International Financial Reporting
Interpretations Committee (IFRCs).
4. Standard Interpretation Committee
Interpretation (SIC).
1. IFRS (IASB)
2. IAS (IASC)
3. IFIC (IASB)
4. SIC (IASC)
Total
=
=
=
=
=
9
29
16
11
65
Although the guiding principales for

preparation of financial Statements are
same its pressentation differs from Country
to contry due to its variety of social
economic and legal . Keeping that in mind
IFRS are developed for International
uniformity. IASB is commited to narrowing
this difference by seeking harmony in
accounting standards and procedures
relating to the preparation and presentation
of financial statement.
1.2 Recent Standards and

Developments
IAS is no longer being developed , Each
year it is being replaced by There are four
IFRS in developing stage. They are as
follows:
accounting
(1)
(2)
(3)
(4)
IFRSs not permitted

IFRSs permitted
IFRS s required some domestic listed companies
IFRSs required for all domestic listed companies
IFRS 10 Consolidation
IFRS 11 Joint Arrangements
IFRS 12 Disclosures and Interest other Entities
IFRS 13 Fair value measurement
30
28
6
93
Source: Deloitte IAS Plus 2011
1.3 Proposed Improvement

The proposed improvements relating to IFRS:are as follows:
(1) IFRS 1 First time adoption of IFRS
(2) IAS 1 Presentation of Financial
(3) IAS 16 Property, Plant and Equipments
(4) IAS 32 Financial Instruments Presentation
(5) IAS 34 Interim Financial The date of comments to be provided
up to 21 October 2011.
1.4 Revisions and Effectives dates of IFRSs & IASs

Frequent changes of IFRSs and IASs is posing difficulties in
updating the Nepal Accounting Standards. However we are
bound to adopt IFRS. The following are amendments and effective
date for implementation of IFRS and its compliance.
2. Basis of International Financial Reporting

Standards (IFRS)
2.1 Framework based IFRS
IASB uses Framework to set standards. It
* Enhances consistency across standards
* Provides benchmarks for judgments
The framework is used to develop accounting policies in the
absence of specific standards. IFRS are based on IASB's conceptual
framework which sets out agreed concepts that under lies IFRS
financial reporting. The Conceptual Framework of IASB are as
following:
*
*
*
*
*
*
The objective of general purpose financial reporting

Quantitative characteristic
Elements of financial Statements.
Recognition
Measurement
Presentation and disclosures other concepts all follow the
objectives.
2.2 IFRS Principle based standards

IFRS principles are recognition measurement, presentation and
disclosures requirements for transactions are important to general
purpose financial statements. It is prepared and presented for
external users.
Structure of a principle based standards
Source ; Michael Wells, Director IFRS Education Initiative IFRS Foundation
Source: IASB Standards Revesion and Effecvtive date
There is no exception in the scope of the standards. The principles

based standards are derived from the framework. It relies on
professional judgment to apply these principles. The application
guidance explains application of principles.
1.5 Uses of IFRS around the world

Use of IFRSs for domestic reporting by listed companies in their
consolidated financial statements as of May 2011
September 2011
17
accounting
CANADA First IFRS Reporting Period
INDIA First IFRS Reporting Period

First year of reporting
Date of adoption
Comparative year
Date of transaction
:
:
:
:
31 March, 2012
1 April, 2011
1 April, 2010-31 March 2011
1 April, 2010
3. Does IFRS apply to you?

It applies to general purpose financial statements of profit oriented
enterprises . ICAN has announced its implementations for listed
companies.
4. When does IFRS apply?

4.1 Implementation Date
In Ashad 2067 Institute of Chartered Accountants of Nepal has
annouced that IFRS shall be effective from the following fiscal
year.
(1) 2068/69 Listed Companies
(2) 2069/70 Public Companies
(3) 2070/71 All Companies
5. Challenges
There are Currently 202 listed companies till 2067.12.22. It

comprises 24 Commercial Banks, 71 Finance companies, 4 Hotels,
18 Construction companies, 4 Hydro-Power 20 Insurance
Companies, 55 Development Banks and 2 others.
4.2 The IFRS definition of dates :

The Transaction Date
The beginning of the earliest period for which an entity presents
full comparative information under IFRS in the first financial
statement.
The Reporting Date
The end of the latest period covered by financial statements by
a interim report.
Nepal First IFRS Reporting Period
18
September 2011
The following are few challenges besides others, which require

immediate attention
1. Awareness
Though the commitment is not given for conversion or
transition to IFRS by the regulatory authority. Council of the
Institute of Chartered Accountants of Nepal has decided to
implement the IFRS from the Fiscal Year 2068/69. How many
people are aware of IFRS in Nepal is a big underlying question.
The promoters, investors, regulators, and other stakeholders
are still not aware about it. It will be a major challenge to
bring awareness about IFRS and impact of such changes. The
users of such financial statement would need to understand
the financial statements being presented as per new norms.
2. Training
There is shortage of skilled human resources. The professionals
should have expert knowledge of IFRS. But it is a big
challenges to train the 7,818 Professional Accountants
(including 7,283 Registered Auditor), in this short period and
non-availability of expert trainers is also a big challenge.
accounting
6. Status of IFRS Implementation in Nepal
3. Amendments in the Law

There are regulatory endorsement and acceptance which pose
a challenges. Once IFRS is implemented it would overrule
not only management requirements but also law. This requires
major changes in the system. In addition to Company Law
immediate amendment is also required in Income Tax Act
Bank and Financial Institution Act, Insurance Act, Nepal
Rastra Bank Act and Directives and other related Regulations.
5. Effective Mechanism
There is practically no effective mechanism enforcing the
implementation of IFRS. The major role of Ministry of Finance
as a regulator relies upon other regulators. The Office of the
Company Registrar simply collects the financial statements
without checking for compliance with the stated IFRS
requirements. Even the Securities Board of Nepal does not
review the financial statements or their adherence with the
reporting framework. Securities Board of Nepal does not have
the legal power to review and to take measures against the
companies.
An important and relatively efficient and effective regulatory
agent is the Nepal Rastra Bank.Still, they do not insist on
enforcing the IFRS framework. Their main focus is on
enforcement of the bank supervision criteria. Insurance Board
is still focused primarily on regulatoruy issueds than financial
issues. This means that the real enforcement agent for enforcing
the financial reporting standards is the Professional
Accountant. Having in mind the situation that we have
described above and on the absence of external quality
assurance process of the audit firm. It becomes evident that
this is the area that requires immediate address and action.
6. Action plan
A quick action plan and road map is needed to implemenmt
the IFRS. The reporting entities and regulators should develop
practical action plans.
The wave of IFRS for the first time came in Nepal on December
17, 2005 with the training programme organized by the Association
of Chartered Accountants of Nepal among the professionals. In
case of reporting entities, the concept of International Accounting
standards and International Auditing standards was first
introduced in Nepal Electricity Authority as a part of the loan
covenants of Arun -III hydro project in early 1994. But it was not
until 2006tha t some concrete actions were taken. NEA Institution
Strengthening Project implementation of International accounting
standards program funded by World Bank is still in process
making NEA the only organization in Nepal to take systematic
steps towards IFRS implementation.
As per the decision of the council dated 32 Ashad , 2067 of the
The Institute of Chartered Accountants of Nepal has decided to
implement IFRS for listed companies'. But the listed companies
are not properly aware about IFRS. In certain case, even the
regulatory bodies lack awareness about it. Government of Nepal
has not taken any initiation till now. Among the regulator, ICAN
and ASB have taken some initiative on the awareness of the IFRS
by conducting Training programs and seminars.
Training Programme
ICAN conducted the following training programme on IFRS
1. 2010
2. 2011
July 16
June 3 to 19
5 days
47 participants
40 participants
ASB has also conducted two days training programme on IFRS

twice. They areas follows :
1. 2067
2. 2068
Bhadra 5-6
2 Days
Sharwan 20-21 2 Days
75 participants
60 participants
Discussion Programme
ASB has conducted interaction programme on IFRS Conversion
Plan with the ICAN President. Vice President and Past Presidents
of ICAN and Board Chairman, The same interaction programme
has been conducted between other Regulators. ASB is going to
implement NAS/IFRS convergence project with the financial
assistance from World Bank through the Financial Comptroller
Office GON. It is expected that the programme will start by
Ashwin 2068.
September 2011
19
auditing
Understanding the "Expectation Gap"

in Auditing
" Over the years, increased litigation and criticism towards auditors has left little room for doubt that auditors are facing
a liability and credibility crisis in accountancy profession. The auditors are blamed for anything they are not responsible
for. The reputation of profession called into question of reliability of services performed by the auditors. This problematic
issue in auditing profession is termed as "audit expectation gap". The gap arise from the combination of misconceptions
on the part of users, the objective of the audit, unreasonable expectations by the public from the auditors and sometimes
under-performance by auditors as well. The audit expectation gap is the result of deficiencies in audit, auditors'
independence, audit process, regulatory mechanism and expectation of public. The users expect in-depth information
of company's affairs, watching the management surveillance and detecting illegal acts or frauds on the part of management
from the auditors."
Introduction
'
"Expectation gap" in auditing refers

the difference between what the public
and other financial statement users
perceive about auditors' responsibilities
to be and what auditors have their
responsibilities".
'
CA. Paramananda Adhikari
The accounting profession, like other

medical or legal profession exists only
through wide public acceptance. Public
acceptance means that the society perceives
a need, which can be met by qualified and
highly trained professionals. The
fundamental principle, in case of auditing,
is an independent attestation function. The
users, normally creditors, shareholders
and public need to have the financial
statements audited by an independent
auditor who examine the financial
statements, evaluates the methods of
valuation, collects sufficient appropriate
evidence and information to express his
opinion, whether the financial statements
reflects the true and fair view of the entity.
Once the auditor has examined the books
of accounts and financial statements, the
user/public understand that there remains
no problem . Maintenance of independency
by the auditors from the management adds
the dimension in the financial statements
in the form of relevance and reliability.
The main aim of this article is to highlight
about the expectation gap, independence
Mr. Adhikari is Technical Director of ICAN
20
September 2011
of professional accountant and bridging

the expectation gap.
Independence
What is independence? Why is it necessary
for Professional Accountants? How to
maintain the independency? These are
some of the questions raised by anyone.
However, the word independence has not
been defined explicitly anywhere. The
concept of auditors' independence was
right back from the beginning when the
accounting accepted as a profession.
During the late 19th and early 20th
centuries, the perception of independence
in accounting profession has been changed
due to huge capital injection in large
corporate organizations. These
organizations were functioning based on
the separation of ownership from
management. The day-to-day operational
activities were rest with the latter.
However, the former watched the
operational activities of the latter. They
can trust for the reliability of accounts, as
the preparation of financial statement is
the prerogative of the management.
auditing
Independence is fundamental to the reliability of auditors' reports.
Investors, creditors and public would have little confidence in
auditor's report, if they were not independent to the management
in both fact i.e. state of mind and appearance.
Independence is the cornerstone of the auditing profession.
Integrity, objectivity & trustworthiness are the key elements of
independence. An auditor is an independent professional that
he has no personal relationship with the company's executives
that is likely to impact professional integrity . Auditor's judgment
should not be dictated or controlled by management. Without
independence, the auditor's opinion is suspect. The third parties'
believe that there is no need for external auditors, if independent
is not maintained. Third parties' acceptance implies that the role
of external auditors includes the independent financial control
within the corporate entity. To maintain independence under the
pressure, auditor must be conscious about the undue influences
on his planning, execution and reporting. The auditor must strive
to ensure that standard of audit quality would not be compromised
under any circumstances. Independence auditing maintains
professional status consistently in quality by maintaining
independence from management. However, many causes help
to reducing the independence of the professional accountant.
Among others, these are:
financial dependence upon the client
market competition in audit and assurance services
non-audit services, like accounting manual preparation,
tax advisor, system evaluation etc.
affectionate relationship with the client's executive,
acceptance of goods/services from clients in heavy
discount or free of cost
concern about their re-appointment etc.
Due to these causes, sometimes auditors may be unable to produce
a fair and reliable report and the independency of course, be
dampened. Hence, "auditor's independence is a key element of
the audit expectation gap". If auditors are to be independent, it
definitely reduces the expectation gap to some extent. If the
quality of the reports were significantly deteriorate or if auditors
were perceived not being independent, the report of the
independent auditor could be greatly reduced below the standard
of a profession.
User's/Public's Perception
There has been disparity in the public's expectations on the duties
and responsibilities of auditors' and scope/objectives of audit.
In their views, the responsibility of any wrongdoing in the
company is also the auditor among others. There are
misconceptions that it is the auditor's role to prepare the company's
books of accounts and that the onus is upon directors and
management of a company to ensure that the financial statement
is prepared in compliance with accounting standards and statutory
requirements. However, the auditor's responsibility is to express
an opinion as to whether the financial statements generated from
the client's books of accounts give a true and fair view in

accordance with the financial reporting framework. The
users/public may have expectations from auditors that go beyond
the responsibility required by the professional standards and
provide absolute assurance about the accuracy of a company's
financial statements and its financial strength. The auditing
profession has been the subject of misconceptions. The alleged
"audit failures" involving a number of big business houses such
as Lincoln Savings and Loan Association (USA), Bank of Credit
& Commerce International (UK) United American Bank (USA),
State Bank of South Australia (Australia) for more than two
decades from now.
Following the same, over the past decade there were large numbers
of corporate failures/scandals all over the world that ultimately
creates an audit crisis in the marketplace. The large payouts
resulting from audit litigation in the developed countries have
adversely affected the quality of audit services. Corporate failure
is not just an audit crisis but also a business and national crisis.
Some of the big corporate failures over the past decade were,
Enron (USA), WorldCom (USA) Lehman Brothers (USA), Merrill
Lynch (USA), Freddie Mae (USA), Fannie Mae (USA), Parmalat
(Italy) Maxwell (UK), Flowtex (Germany) Vivendi (France) Baan
(Netherlands) Satyam (India). These corporate failures/scandals
were one after another. Public also raised the question "where
were the auditors"? Are they not the watchdog of the financial
system of the entity? These cases clearly mapping out public's
expectations of the duties and responsibilities of auditors and
taking steps to align the expectations with their performance,
thereby improving the image of the profession. As a result, the
various regulating and oversight agencies have been conducting
hearings into the status of the accounting profession particularly
in western world.
Of late, public have witnessed and victims of companies going
bust due to poor corporate governance of the management,
inappropriate accounting policies and system, not accounting of
transactions, over valuation of collateral property that may
running amuck in companies and pitch in some of the cases like,
Nepal Development Bank (Liquidation), Samjhana Finance Ltd,
Nepal Share Markets & Finance Ltd, United Development Bank
Ltd, Gurkha Development Bank Ltd, Peoples Finance Ltd, Vibor
Bikas Bank Ltd, World Merchant Banking and Finance Ltd, CMB
Finance Ltd are only to name but few.
The Expectations Gap

"Expectation gap" in auditing refers the difference between what
the public and other financial statement users perceive about
auditors' responsibilities to be and what auditors have their
responsibilities". Therefore, it is the gap between the public's
expectation from the auditors and reporting duties and
responsibilities of the auditors as prescribed by the professional
standards. However, the user of the financial statements prevail
that the professional accountant has maintained the quality of
September 2011
21
auditing
services with the established level of standards. A disparity
between user's and professional accountants' perceptions
regarding the attestation function is regarded as the expectations
gap. The following table shows the disparity of expectation gap.
The standards requires that the auditor should consider whether

the results of the audit indicate the substantial doubt exists as to
the entity's ability to continue as a going concern for a period not
to exceed one year. If such doubt does exist, the auditor must
add an explanatory paragraph following the opinion paragraph
of his report.
How to Narrowing the Expectation Gap ?
The independent auditor's responsibility for detecting fraud is

one of the major areas contributing to the expectation gap relating
to attestation function. Most of the financial statements users
believe that an unqualified audit opinion means that the auditor
has detected all material errors/irregularities that may have
occurred during the period under audit. However, this perception
is inverse with the professional standards, which holds that the
auditor is responsible only for exercising due care in the conduct
of examination.
Sometimes management overrides the control structure and other
forms of management misrepresentation and conceals the facts.
In such a case, auditors' exercise of due care fails to detect the
error free financial statements produced by the management.
This will results the involving significant financial statements
misrepresentations not detected by the independent auditor have
tended to widen the expectation gap.
Another area of difference is the perception of auditor's
responsibility towards the ability of a company to continue as a
going concern or sustainability of the entity's' existence. Most of
the users believe that an unqualified audit opinion provides the
company with a "healthy" when the company immediately or
sometimes later in a difficult financial situation to sustain/existence
and question arose about the role of external auditors and their
unqualified report. Market do not seem to have been assured by
unqualified audit opinion and that many corporate organizations
either collapsed or had to be bailed out within a short period of
receiving unqualified audit opinions. These events may attract
suspicion that the auditors lack the expertise to render an
independent and objective audit report of the entity.
The users of financial statements may question why the auditors
did not detect such conditions and cover them in the audit report.
22
September 2011
The preparation and presentation of entity's financial statements

are the prerogative of the management. The auditor examines
the books of accounts and provides reasonable assurance that
the financial statements are free from material misstatements.
Normally audit has been done on test basis from the sample
drawn on the population of a class of transactions. Further, due
to inherent limitation of internal control system adopted by the
management, the auditor could not detect all the irregularities
and absolute assurance could not be possible. Thus, an audit
provides only the reasonable assurance that an objective of an
audit will reduce the risk within the professional level. In the
following paragraphs, we have discussed some of the approaches
to narrowing the audit expectation gap.
l Compliance of Laws and Standards: How the efficacy of the
work done by the auditors be tested? There are various ways
to monitor the auditors' performance. If the auditors are found
misreporting, non-reporting or non-compliance of the
professional standards or pronouncements issued by the
regulator fails to disclose the material facts and do not perform
duties with professional due care and ethics, auditors will be
held guilty of professional misconduct or gross negligent to
discharge their duties. Accordingly, auditor may be penalized
as per Section 34 and 35 of the Nepal Chartered Accountants
Act 1997 and Code of ethics. Similar provisions are also
contained in Section 160 and 161 of the Companies Act 2006
and Section 60 and 61 of the Bank and Financial Institutions
Act 2006.
l Quality Control Programs: The Institute of Chartered
Accountants of Nepal (ICAN) set up by an Act of Parliament,
is the regulator of the accounting profession in the country
and has full authority to develop and regulate the accounting
profession. Accordingly, it has started to ensure the quality
assurance program of attestation function by its members. It
has established the Peer Review Board (PRB) in 2007 and
making quality control standard NSQC-1 mandatory to be
followed by auditing firms that perform audit and review of
historical financial information and other assurance and
related services engagements which was effective from July
2008 onwards. Further Nepal Standards on Auditing (NSA)220 Quality Control for Audits of Historical Financial
Information provides that the engagement partner should
take responsibility for the overall quality on each audit. Peer
review system; examines the quality of audit, adequacy of
disclosures, filing and documentation of audit evidences and
auditing
reporting practices. However, implementation of the quality
control standard and peer review system i.e. auditing the
auditors still in process of implementation although it was
decided that the records of attestation services performed by
members of the Institute after 15 July 2005 should be subject
to peer review.
l Educating the People: Educating the people (shareholders as
well as public at large) and making them aware about the
scope and objectives of the audit, auditors' responsibilities.
It is also indispensable to the people that the auditors have
performed as per the accounting and auditing standards. This
may help to narrow the audit expectation gap.
Auditors' Liability
Sometimes auditors may be found guilty of gross negligence in
order to examination of financial statements of the entity. Gross
negligence means failure to exercise minimum care by the auditor
when materials errors or irregularities that should have been
detected by the application of professional standards. For
example, material amount of fictitious sales recorded by the client
at the year-end to inflate income and fails to detect this intentional
misstatement referred to as management misrepresentation fraud
and interpreted as gross negligence. A similar misstatement by
understating several expenses account each by a small amount
or charging expenses in capital and fails to detect by the auditor
also considered as gross negligence. Further, because of significant
weaknesses in internal control system of the management or
material errors occurs within the control structure and fails to
detect the same is an indication of gross negligence to discharge
the responsibility by the auditor. The following table shows the
significant role in maintenance of quality control by the members.
Cases alleging auditor about the application of professional

standards and practices and inadequate disclosure have occurred
over time, causing questions of auditor's independence to surface.
Some of the cases that distortions of non-compliance of standards
are revenue recognition, fictitious receivables, failure to disclose

the existence of related party transactions, verification of balances
either cash or bank, fails to get third party confirmation, loans
not adequately secured by collateral, non-accounting of major
transactions etc. Therefore, the auditor must demonstrate to the
public that it is independent from the management and provides
the high quality of audit and assurance services. This is the prime
liability of members to perceive the level of quality of services
rendered by them.
The code of conduct issued to members provides for a more
positive approach to the professional accountants' ethical behavior.
Further, these codes encompass all services rendered by auditors
including attestation services, compilations, reviews, consulting
engagements including taxations services. Failing to compliance,
or departure from the code of ethics by the member is liable to
disciplinary action.
Therefore, the auditor has the duty to report every item of
importance or material, after careful scrutiny of all the
documentary evidences and compliance of rules, regulations,
and professional standards, which are adequately disclosed in
the entity's financial statements. Auditor, as a "public watchdog"
should report the effectiveness of internal control system, the
financial statements are free from misstatements resulting from
management fraud as well as employee fraud; and the entity has
not engaged in illegal activities/operations. Further, it has also
to report about the entity's ability to continue as a going concern
for a reasonable period not to exceed one year beyond the date
of the audited financial statements.
To Conclude
The users of financial statements are of the opinion that the Auditor
should not only provide an opinion, but also interpret the financial
statements in such a manner that they could evaluate the overall
performance of the entity. There are also users who expect Auditors
should report about the in-depth information of company's affairs,
watching the management surveillance and detecting illegal acts
or frauds on the part of management. These are the high
expectations on the part of users of financial statements that create
a gap between Auditors and users' expectations in auditing.
The disparity in audit gap arises due to over-expectations of users
regarding the functions of an Auditor and lack of knowledge
about Auditors' duties and responsibilities that have made the
users to make the expectation gap high. Educating the public
about the scope and objectives of an audit, Auditors' duties and
responsibilities will help to narrow the audit expectation gap.
At present, the regulatory framework for professional accountants
have already been undergone a change. We have peer review
concept, quality control standards and guidance notes to
implement quality control standard and on the top of that the
disciplinary mechanism. All this has been done with a view to
Provide credibility of the accounting profession.
September 2011
23
banking
Financial Sector Reform in Nepal
Financial sector reform is necessary to

improve the health and soundness of
the financial system, increase the
credibility and competence of the
system, attract more resources
including more efficient investments
toward this system, help reduce the cost
of financial intermediation, foster
productive domestic and foreign
investments in the economy, improve
the range and quality of products and
delivery of services, and raise the rate
of return on resources deployed, under
a sound and pragmatic macroeconomic
environment and a prudent financial
regulatory framework.
Mr. Tula Raj Basyal
Risk and Role of Financial

System
A financial system offers many
advantages, benefits, and opportunities.
It is also exposed to a number of
uncertainties, risks, and vulnerabilities.
So, soundly managing the financial
institution and prudently regulating the
financial system become the responsibility
of highest concern, both national and
institutional. Any lapse in such
responsibility could invite trouble that
could prove extremely costly not only for
the institution concerned but also for the
financial system and the national economy
as a whole. In the globalized economies
of today, such a crisis becomes contagious
and could hurt other inter-linked, though
well-managed, economies. A weak
financial system could be a potent source
for the emergence of a financial or
economic crisis, with its devastating
consequences. The Asian financial crisis
of 1997-98, the global financial crisis of
2008-09, the debt crisis in some euro zone

countries in 2010 and 2011, etc. offer some
instances of the severity of such crisis.
Notwithstanding the above-stated risks
and vulnerabilities, the role of financial
systems in building and expanding
modern economies has remained
immense. Through fostering financial
intermediation and performing other
auxiliary services, the financial systems
promote efficiency in resource allocation
and contribute to the objective of
accelerating economic growth and
development. As stated above, the
financial system also entails huge risks.
Being a highly volatile and sensitive sector
having large and far-reaching effects, the
authorities and other stakeholders need
to deeply understand the strengths,
weaknesses, opportunities, and threats
that characterize the operations of the
financial system in an economy. So, careful
management of the macroeconomy
including the financial system would be
Mr. Basyal is Former Executive Director, Nepal Rastra Bank, Research Department, and Former Senior Economic Advisor, Government of Nepal, Ministry of
Finance
24
September 2011
banking
a prerequisite to attain higher economic growth on a stable and
sustained basis. The global records of financial crises and the
associated economic uncertainties force us to believe that even
big, advanced economies could be punished hard if the
weaknesses and risks facing the financial system as well as the
overall economy are not well-recognized in time, measured
properly, and addressed appropriately.
Financial markets help pool scattered financial savings and utilize
them in productive purposes, reduce costs and risks, expand and
diversify financial market opportunities, and tap the feasible and
sound projects and activities in the economy. Fostering a healthy,
dynamic, stable, secure, and inclusive financial system is vital to
the sustained high level of broad-based economic growth. Efficient
financial systems contribute to greater accumulation of productive
capital through increased mobilization of financial resources and
the sustained high investment levels. Conditions like larger
accumulation of financial resources, efficiency in financial
intermediation, reduced level of the non-performing assets (NPA),
maintenance of the competitive interest rate structure, adoption
of the flexible and market-based exchange rates, increased
managerial autonomy and operational professionalization, and
the implementation of an effective monetary policy would help
catalyze the objective of enhancing the saving, investment,
productivity, economic growth and the overall socio-economic
development in an environment of predictability, stability,
prudence and transparency. A sound financial system contributes
to the large-scale growth of efficient investments besides catering
to the financial service needs of all the segments of the society,
thereby enabling them to undertake productive economic activities
and raise their income levels. Accordingly, in Nepal also, a number
of banks and financial institutions have been in operation and
delivering services in the growing competitive environment of
today. So, there is the need for fostering a properly-directed,
well-regulated, better-supervised, efficiently-working, and highlyeffective financial system that could address the financing needs
of the country on a sustainable basis and in a stable, strong,
healthy, and prudential manner. The financial system should
work as the sound pillar for economic transformation with the
least risk and vulnerability surrounding the financial system and
the macroeconomy as a whole.
Financial System in Nepal-Composition and

Growth
Financial system could be broadly categorized as formal and

informal, with the former registered with, and regulated by, the
public authorities, especially the central bank, and the latter
operating as unlicensed and unregulated mechanisms. Financial
market is also classified as money market and capital market,
with the former dealing in short-tem borrowing and lending (up
to on year) and the latter denoting longer-term funding through
bonds and equity. The formal financial system in Nepal comprises
the banks (commercial banks, development banks, finance
companies, and micro-finance development banks-MFDBs) and
non-banks (financial cooperatives and NGOs, insurance
companies, securities market, Employees' Provident Fund-EPF,
Citizen Investment Trust-CIT, Deposit and Credit Guarantee
Corporation-DCGC, etc.). The banks are the depository institutions
while the non-banks include member-based institutions like the
cooperatives and financial NGOs as well as the long-term
contractual saving institutions like the EPF, CIT, and insurance
companies, capital (securities) market, etc. The informal financial
system consists of the financial transactions with the relatives
and friends, money-lenders, revolving saving and credit
associations or Dhikutis, etc. The regulatory authorities for these
institutions are: Nepal Rastra Bank (NRB) for the banks,
Department of Cooperatives for the financial cooperatives,
Insurance Board for the insurance companies, Securities Board
of Nepal (SEBON) for the securities market, Ministry of Finance
(MOF) for the EPF and CIT, etc.
As in mid-July 2011, the NRB-regulated financial system
comprised 31 commercial banks (Agricultural Development Bank,
established in 1968, changed from development bank to
commercial bank in 2006), 87 development banks, 79 finance
companies, 21 micro-finance development banks (MFDBs)
including five regional rural development banks (RRDBs), 16
financial cooperatives (FCs) dealing in limited banking transactions
only, and 38 micro-credit NGOs (MCNGOs). The number of these
institutions in mid-July 2011 thus reached 272. Besides the Nepal
Stock Exchange Center (NEPSE) which is regulated by the SEBON
and the long-term contractual saving institutions as mentioned
before, there are presently 25 insurance companies (five in 1990)
and around 10,000 saving and credit cooperatives in the country.
The numbers in 1990 were five commercial banks, two
development banks, and five insurance companies. In 1993, the
then Securities Marketing Centre, established in 1976, was replaced
by the SEBON and the NEPSE. The EPF, DCGC, and CIT were
established in 1962, 1974, and 1991 respectively. Following the
introduction of the Cooperatives Act, 1992, the number of saving
and credit cooperatives mushroomed, as stated before. Among
the NRB-regulated institutions, 25 commercial banks, all the 79
finance companies, 86 development banks, all the 21 MFDBs
including the five RRDBs, all the 16 FCs, and all the 38 MCNGOs
were established since 1992/93. The number of the NRB-regulated
institutions in mid-July 1992 was seven--five commercial banks
and two development banks, among which two commercial
banks and two development banks were State-owned
enterprises/public enterprises (SOEs/PEs) and the three
September 2011
25
banking
commercial banks in the private sector were the joint-venture
undertakings with the foreign banks. Except for the five RRDBs,
of which four have already been privatized, and the Nepal
Housing Development Finance Company Ltd. established as a
government undertaking on August 3, 1992, the rest of the
institutions established since the 1990s have remained the private
sector undertakings.
Along with the growth in the number of the banks and financial
institutions, the size of their operations and the sphere, reach,
and variety of their services witnessed stupendous rise. During
the decade of 2001/02-2010/11, the financial intermediation sector
of the GDP saw the highest annual average growth of 8.7 percent,
equal to the growth in the education sector. The share of financial
intermediation sector to the GDP, rose from 2.7 percent in 2001
to 4.3 percent in 2011, 1.6 percentage points growth, the second
highest such growth following the education sector's 2.5
percentage points growth (from 4.1 percent in 2001 to 6.6 percent
in 2011. During 1990-2011, deposits of commercial banks witnessed
an average annual growth of 17.2 percent, far higher compared
to the nominal GDP growth of 13.0 percent. Deposits of
commercial banks as percent of GDP rose from 21.2 percent in
1990 to 45.9 percent in 2011. Notwithstanding such growth, the
formal financial system has failed to bring the majority of the
population under its purview. According to the World Bank
Study entitled Access to Financial Services in Nepal (2006), only
25.2 percent households had bank accounts, 15.0 percent
households obtained credit only from the formal system, and
15.5 percent households obtained credit from both the formal
and informal sources while a total of 32.1 percent households
remained without any sort of credit.
Supportive Environment for the Financial

System
A supportive macroeconomic and corporate environment is
essential for the growth and stability of the financial system while
a sound financial system contributes to the objective of
macroeconomic stability. In an environment of uncertainty,
imbalances, and instability, attaining the long-term growth of
the financial system would be almost impossible. Such an
uncertain environment would discourage saving, investment,
and economic growth besides generating the risk factors in the
economy. The risks and vulnerabilities which the financial system
would undergo on account of the macroeconomic imbalances
and corporate-level weaknesses could become severe and even
lead to the financial as well as the economic crises. Realizing the
importance of a supportive macroeconomic environment for
which the macroeconomic conditions and the structure required
to be improved, various reform and restructuring measures were
undertaken since mid-1980s. Associated with the macroeconomic
stabilization and structural adjustment initiatives, the 1980s
marked the beginning of implementation of some financial sector
and monetary reform measures though they were not initiated
26
September 2011
in a sound, systematic and comprehensive way. As a result, the

expected results of these reform initiatives could not be sustained.
The financial system, and particularly the depository financial
system, experienced a new turn with the introduction of the
private players in the field. The first joint-venture bank with 50
percent equity of foreign bank came into operation in 1984
followed by two similar banks coming into operation in the latter
period of the 1990s. The interest rate determination process was
completely deregulated since August 1989. While implementing
the recommendations of the Commercial Banks' Problem Analysis
and Strategy Study (CBPASS), which was carried out in FY
1988/89, the Government also allocated large amount of resources
(Rs. 3.27 billion) in FY 1990/91 to supplement the capital base of
the two largest commercial banks, namely, Rastriya Banijya Bank
(RBB) with 100 percent Government ownership and Nepal Bank
Limited (NBL) with 51 percent Government ownership (which
later came down to 40 percent through disinvestment as a part
of the process of reducing the majority holding of the
Government).
The task of reforming the macroeconomic environment and
expanding the frontier of the financial system received momentum
during the 1990s. The monetary and exchange rate system reforms,
fiscal reforms, sectoral reforms in the real sector, legal and
regulatory improvements, and the emphasis placed on
macroeconomic stability and structural adjustment measures
paved the way for fostering the economic growth through greater
mobilization, and optimal utilization, of resources, both domestic
and foreign, Government and private. To enhance competition,
transparency and efficiency in the foreign exchange and trade
systems, the Nepalese currency was made partially convertible
in the external current account transactions since March 4, 1992
and fully convertible since February 21, 1993, placing all the
imports under the Open General Licensing (OGL) system, without
the quota or other quantitative restrictions and with a minimum
of administrative hassles. Following the current account openness,
Nepal attained, in May 1994, the Article VIII status under the
Articles of Agreement of the IMF. With the current account
convertibility, the exchange rate of the currency vis--vis the
convertible currency was determined through the competitive
market process, except in the case of the Indian currency, which
has been determined by the central bank. Exporters and serviceearners were entitled to retain 100 percent of their export earnings
in the commercial banks in convertible currency accounts. The
banks were also allowed to extend credit in convertible currencies
and invest abroad their convertible currency earnings.
Following the complete autonomy given to the institutions in
determining the level and structure of the interest rates since
August 1989, there have been significant positive outcomes due
to the increased competitive environment and the consequent
benefits accruing to the stakeholders of the financial system. The
interest rates became more attractive for the borrowers though
there have been some concerns that the depositors have not
banking
adequately been benefited as in the previous regime of the
controlled interest rates. Besides, there have been voices that the
interest rate spread is still at a relatively higher side. In addition
to the complete deregulation of the interest rates, loosening of
other control-oriented measures and the focus on prudential
regulation and supervision aimed at promoting greater efficiency
and overall soundness of the financial system.
The macroeconomic, structural and sectoral reform initiatives,
implemented on a comprehensive and systematic basis especially
during the 1990s, improved the nature of the Government
involvement in the economy, enhanced the private sector
participation in the various sectors of the economy, expanded
opportunities for, and areas of, investments, increased the size
and pace of the resource mobilization and its utilization, expanded
the export and other modern sectors of the economy, strengthened
the balance of payments (BOP), maintained the macrocosmic
stability, and raised the economic growth rate. Along with these
macroeconomic and financial sector measures, the Nepalese
financial system witnessed significant growth, especially during
the last two decades. The process of the quantitative expansion
and the qualitative improvement moved at a rapid pace.
Corresponding to the institutional and the operational growth,
there were improvements in the variety, quality, and pricing of
the products and services attributed to the increased competitive
environment in the financial system.
Despite the progress, a number of structural problems weakened
the position especially of the Government-owned institutions.
The large intermediation cost together with the managerial and
operational inefficiencies remained the major drawbacks of the
financial system which, therefore, was in need of vigorous reforms
so as to address the institutional deficiencies and structural
inadequacies and promote an orderly, stable and sound financial
system that would be least affected by the vulnerabilities and
occasional uncertainties. As a strong financial system worked as
a pre-requisite to help accelerate the economic growth and
development, a soundly developed, properly regulated and
professionally directed financial system became the urgent need
for the economy. This necessitated the implementation of the
reforms in all the important dimensions of the financial system
on a priority basis.
Reform Measures
The financial system needed comprehensive measures that would
help reduce vulnerabilities and fragmentation in the financial
system and foster the efficient intermediation and resource
allocation role of the financial system. Encouraging and enhancing
competitive climate and reducing unbusinesslike influences on
the financial system remained a crucial step in improving the
system. The respective departments and agencies of the
Government would have a paramount responsibility in building
an atmosphere for paving the way for the emergence of
professional management and efficient financial operations not
only in the institutions owned by them but also in the privatelyowned institutions. There was also the sharp need for the public
sector to re-orient its activities from being an operator in the
financial system toward being its strong catalyst and effective
regulator. Devising and implementing sound framework for
ensuring macroeconomic stability, fostering competition, securing
the rights of creditors, depositors and shareholders, facilitating
the flow of information on credit as well as financial operations
of the institutions on a regular and systematic basis, and ensuring
that the financial institutions are not over-exposed to risks became
essential for the development of efficient financial markets.
Studies were conducted to assess the financial condition of the
Government-owned banks. With a view to ascertain the real
financial status and the quality of the financial statements, accounts
reconciliation project was carried out in the RBB by the Nepalese
consultants in 1999, under the initiation of the NRB. The study
revealed weak financial situation and a host of problems and
discrepancies. Following this, a diagnostic review of the RBB and
the NBL was carried out by the KPMG/Barrents, an international
accounting firm, in 2000. The study showed that the management
in these two banks was practically dysfunctional, no reliable data
on loan portfolio was available, financial accounting was primitive
and not according to the international standards, business
strategies were not in place, human resource policy was weak
and counter-productive, management information system and
record keeping was very primitive, and the governance and
management were highly driven by non-business considerations
and lacked a commercial focus. These problems would have
serious impacts in terms of systemic risk in the financial system,
increased financial burden on the budget, and adverse
macroeconomic implications. Accordingly, the financial sector
reform program was incorporated in the budget for FY 2000/01.
The strategy paper of the Government on the financial sector
reform was brought out on November 22, 2000. According to the
strategy, the expectations and outcomes from reforms in the
financial system were visualized as: (a) a well-developed,
competitive and strong financial system stable and resilient to
large-scale uncertainties, and one contributing to the promotion
of a self-sustained, high-growth development framework; (b) a
strong central bank with capability to steer the financial system
that profoundly contributes to the economic development of the
country; (c) lower spread between the borrowing and lending
rates as a manifestation of improved efficiency in financial
intermediation process; (d) drastically reduced level of the NPA;
(e) developed capital markets; (f) financial system devoid, to the
extent possible, of scams and crises; (g) improved foreign exchange
markets; (h) improved operating efficiency and effectiveness in
the delivery of financial services through increased competitive
environment; (i) promoting foreign institutional investments
through supporting improvements in the legal and investment
framework for short-term as well as long-term financial markets;
(j) creation of diverse market instruments and enlargement of
the access to key financial services by a large segment of the
September 2011
27
banking
potential borrowers; and (k) development of efficient domestic
debt markets.
In order to achieve these outcomes, the crucial components of
the reform strategy encompassed (a) initiating a strong corporate
governance by ensuring that financial institutions are owned and
managed by competent private investors and professionals,
implying the progressive withdrawal of the Government from
the ownership of all the financial institutions and also refraining
from promoting financial institutions with the equity participation
of the Government or Government-owned institutions; (b)
enhancing the authority and ability of the central bank for effective
supervision of all the depository institutions, enforcing regulations
and improving the central bank autonomy in a real sense; (c)
improving the legal and judicial processes for enforcing financial
contracts; (d) improving accounting and auditing standards in
the financial system; and (e) promoting financial discipline
through adequate disclosure, corporate governance and enlarged
competition.
The broad components of the financial sector technical assistance
project (FSTAP) were re-engineering of the NRB, restructuring
of the RBB and NBL, and capacity-building in the financial sector.
The re-engineering of the NRB focused on improving its
regulatory, supervisory, accounting, administrative and IT
functions. The restructuring of the RBB and NBL comprised the
placing of management teams with the responsibility of turning
around the banks by reforming all the critical areas of the bank
operations and their eventual privatization in the hands of the
strategic investors. The capacity-building aimed at strengthening
the legal framework, training capacity and financial journalism.
The first phase of the FSTAP credit agreement was signed on
April 30, 2003 with a closing date of June 30, 2007. The cost of
the first phase of the project was estimated at US$ 30.1 million,
with the IDA credit of US$ 16 million, DFID grant of US$ 10
million, and the Nepal Government grant equivalent to US$ 4.1
million. Similarly, the second phase of the FSTAP credit agreement
was signed on June 10, 2004, with a closing date of April 29, 2009
which was later extended to December 2011. The cost of the
second phase of the project was estimated at US$ 75.5 million,
with the IDA credit of US$ 68.5 million and grant of US$ 7 million.
Thus, the total project cost was estimated at US$ 105.6 million.
The reform actions implemented in order to bring about the
expected outcomes in the financial system could be broadly
categorized as the introduction of the new NRB Act in January
2002 in addition to the legislations on debt recovery, bankruptcy,
secured transactions, banks and financial institutions (umbrella
Act), companies, securities transactions, anti-money laundering,
and banking crimes and punishments. The other reform actions
are: (a) restructuring RBB and NBL, through management contract,
for their sound management and better technical capability; (b)
improved supervision mechanism attuned to the international
guidelines, norms and practices; (c) improvements in the
28
September 2011
prudential regulation, accounting, and auditing practices and

the operations of the financial institutions; (d) strengthening the
regulatory, monitoring and supervisory functions of the central
bank including its re-engineering and restructuring exercise; (e)
promoting insurance markets for their enhanced efficiency and
wider access; (f) strengthening micro-finance to improve
production and income, social mobilization, and employment
growth of the deprived women at the local level; (g) increasing
the formalization process of the informal and semi-formal credit
markets; (h) restructuring the Government-owned financial
institutions other than the commercial banks; and (i) creating
suitable and sound framework for the establishment of wholesale
branches of reputed international banks as per the commitments
under the membership requirements in the World Trade
Organization (WTO).
The management contract process in the NBL (since July 2002
though the foreign management team, ICC Consulting of the
Bank of Scotland (Ireland) Ltd. finished its mandated five years
on July 21, 2007 and the NRB management team, now confined
to the CEO, has since been working in the Bank) and the RBB
(management team working since January 16, 2003 through
January 15, 2010, and then only the CEO remaining till March
2011, with the NRB-appointed chairman of the Board of Directors
entrusted with the responsibility of the CEO as well since April
1, 2011 though the acting CEO at the present happens to be an
ex-NRB official) remained the most delicate, important and costly
endeavor among the measures aimed at strengthening the health
and quality of the financial system in general and the commercial
banking in particular. Failure in this endeavor would have made
the whole economic reform and restructuring exercise in Nepal
doubtful. So, achieving success in this endeavor remained the
most important task not only to consolidate the operations and
improve the health of these institutions but also to strengthen
the overall position and delivery efficiency of the entire financial
system. In addition to taking the day-to-day control over the
managerial processes and operational activities of the banks, the
management teams in these two banks were responsible to
stabilize the banks and restore their financial health to an
acceptable level, steer the financial control process so as to increase
profitability, make every effort to recover the existing loan
portfolio, and develop and strengthen the accounting capacities.
The management teams were responsible for implementing the
arrangements required for improving the assets and liabilities
structure and making the banks financially strong and
operationally viable, developing and implementing
comprehensive human resource policies, designing and
implementing information technology plan, progressively
computerizing and automating them, and preparing them for
the eventual disinvestment to the sound strategic investors. Such
changes in these two banks became essential for de-politicizing
them and developing them into fully autonomous economic
institutions by building strong corporate culture, fostering business
discipline, and strengthening corporate governance improvements.
banking
Through these changes, the banks would be enjoying a favorable
internal and external environment for making corporate and
administrative systems supportive to professionalism and sound
decision-making. These changes and reforms were expected to
help in raising the managerial and operating efficiency of the
banks significantly. Such actions remained inevitable for making
the Government-owned commercial banks strong and viable,
and strengthening the competitive pressures in the financial
markets and enhancing the efficiency of the financial system,
thereby contributing immensely to the objective of delivering
better financial services to support the dynamics of the accelerated
economic growth momentum.
Reform Outcomes
The NRB re-engineering work witnessed reasonable progress in
terms of the implementation of the new organizational structure
of the NRB, development of new regulatory framework for the
banks and financial institutions, and implementation of new onsight and off-sight supervisory manuals along with gradual
building of the supervisory capacity. The role of the NRB in
blacklisting and initiating actions against, the loan defaulters has
also remained commendable though much needs to be done to
enhance the capacity of the institutions in actually recovering the
huge amount of the past over-dues. The accounting and auditing
capacities in the NRB have seen gradual improvements.
Opportunities for foreign trainings and seminars were The human
resource management area needs further development through
introduction of appropriate reform actions and their faster
implementation. The management contract process in the RBB
and NBL has seen progress in bringing about profitability in the
banks, reducing the level of NPA, introducing the IT system,
rationalizing the branch operations, improving the accounting
and auditing areas, reducing the over-sized personnel strength
and increasing their motivation levels, introducing business-like
operations in the work, and gradually restoring the competitive
strengths of these banks in the financial system of Nepal.
However, the progress with respect to recovering the past dues
has been slow and inadequate. The networth of these two banks
is still negative (Rs. 4.86 billion in NBL and Rs. 12.31 billion in
RBB in mid-January 2010). The NPA as a percent of total credit
was 4.9 percent in NBL and 12.1 percent in RBB (the aggregate
NPA ratio of the commercial banks 3.1 percent) in mid-July 2010.
As a result, the financial health of these banks continues to remain
weak and shaky. Innovative business processes and
professionalized management operations as expected from the
management teams could not be forthcoming to the extent desired
and also in relation to the cost involved in the contract. The
important assignment of the management team, namely, turning
around the banks and handing them over to the strategic investors,
has thus remained unfulfilled. Some progress notwithstanding,
serious questions have, therefore, been raised about the
effectiveness of the management contract process as a whole,
especially in consideration of the large cost associated with the

project. Regarding the FSTAP's other component of capacity
enhancement, the progress in the formulation of the financial
legislation, as noted above, could be termed as satisfactory.
Attributed to the trainings for journalists, the financial journalism
has witnessed some progress as evident in the reporting standards
and dissemination level. Mechanization work of the Credit
Information Center has been in progress. Preparations in
connection with the mechanization work for the Secured
Transaction Registrar have begun. However, progress in this
field is still inadequate. The contemplated task of developing a
streamlined, unified and effective training institute for the capacitybuilding of the manpower involved in the financial sector could
not materialize as visualized under the reform initiative of the
FSTAP.
So, the successful outcomes in the envisaged reform areas remain
highly significant in the context of improving the efficiency,
strength, vibrancy, and stability of the financial system.
Accomplishing tangible results as expected from the reengineering work at the NRB, striving by the top managements
in the RBB and NBL to strictly comply with the fundamentals
underlying the performance criteria as specified in the terms of
reference determined for the erstwhile management teams,
ensuring strict compliance with the prudential regulatory and
supervisory framework as established by the NRB for the financial
institutions, and the continued proactive role of the stakeholders
in the financial system become crucial to make the health of the
financial system sound and the role of the financial system
dynamic and effective. The successful implementation of the
prevailing central banking Act along with other financial sector
legislations in their true spirit would become crucial. Most
importantly, the outcome of the reform process in the Governmentowned institutions needs to be improved for their early
disinvestment to the strategic investors.
Challenges
The financial system is characterized by a number of problems
and challenges that need to be appropriately addressed for
ensuring the strength and vitality of the financial system and
fostering its immense role in the economic development of the
country. If the financial system is not sound, it could lead to
many undesired consequences including the possibility of the
occurrence of full-blown crisis situation. So, besides expanding
the size and improving the quality of the financial system,
preventing the probable occurrence of the crisis remains a
fundamental responsibility. Among the financial crises in the
past, the 1997-98 Asian crisis seriously affected the financial
system and economic stability of the South-East Asian region.
Large currency depreciations, capital market collapses, largescale bankruptcies, swollen NPA level, negative economic growth
rates, massive unemployment, disrupted social services, dwindled
September 2011
29
banking
investor confidence, and sharp reduction in the general standards
of living in the affected economies were the immediate effects of
the crisis. It his been commonly believed that one of the critical
factors behind the crisis was the absence of adequate central
banking autonomy which substantially reduced the efficiency
and effectiveness of the central banking functions and
responsibilities. The sub-prime mortgage crisis that erupted in
the USA in the second half of 2007 snowballed and led to the
emergence of global financial crisis in 2008 which, besides seriously
disrupting the global financial markets and contracting the global
trade, resulted in a negative growth of global output, the first
such experience since the Second World War. Nepal being a least
developed country with an emerging financial system, it would
be a disaster if such crisis ever visited her. In order to avoid the
occurrence of such crisis and ensure a sustained growth, stability
and efficiency of the financial system, it is necessary that
appropriate arrangements and systems are put into sound
implementation and the envisaged reform initiatives are
successfully carried out.
It may be observed that, along with the fast growth of the financial
system, there have been reports of growing malpractices and
mismanagement. Absence of effective regulation and timely
supervision, presence of unstable and uncertain regulatory
environment, and laxity in enforcing compliance with the
established norms and guidelines have accentuated the risk and
vulnerability and reduced the trust and confidence in the financial
system. As the financial institutions deal in money, instances of
fraudulent behavior and less attention given toward
professionalization have especially haunted Nepal's financial
system. High ratio of NPA in the Government-owned as well as
some private-sector owned financial institutions has been a major
problem afflicting Nepal's financial system. Principles of corporate
governance have been reportedly flouted. There are reports of
connected lending, that is, lending to the operators' own or their
relatives' purposes with the intention of embezzling the people's
money. Misdeeds in the collateral valuation have reduced the
quality of the loan portfolio. Undermining the principles and
practices of professional lending decisions, especially though
lending to promote the vested interests of the decision-makers
under personal and outside undue influences, has remained the
chief cause for the high ratio of NPA. News about maintenance
of duplicate records and false documentation and misutilization
of the funds for the operators' own uses have been surfacing with
increasing frequency. The unholy nexus between operators and
the dishonest borrowers has weakened the strength and stability
of a number of financial institutions. In some cases, the operators
have fled the scene, defrauding the hard-earned money of the
unsuspecting public. There have arisen questions of transparency,
accountability, and authenticity in decision-making and financial
transactions. There have been instances of run on banks,
depositors' money has been lost, general shareholders have not
received a reasonable return on their investments, and the culprits
have walked scot-free. The micro-finance institutions (MFIs) have
30
September 2011
also not lived up to their expectations of improving the inclusive

finance as a measure for poverty reduction on an effective basis.
The insurance market is narrow and needs vigorous development.
The activities of the capital market are shrouded with suspicion
and lack transparency. Genuine investors in the capital market
have suffered and dishonest players have undermined the sanctity
of a sound capital market framework. As a result, confidence of
the public in the capital market has been waning. On many
occasions, efforts toward early resolution of the problems at hand
are not seen forthcoming. As a result, the economy and the people
of Nepal have been deprived of the potentialities and opportunities
offered by a vibrant, strong, and sound financial system.
Despite the adoption of various regulatory, reform and
restructuring exercises over the years, it is disheartening to note
that the financial system still faces a number of problems and
challenges that have constrained the growth of efficient financial
markets and speedier development of the economy. As observed
earlier, even the financial sector reform program has not been
successful to deliver its envisaged results. As a result, the positive
outcomes expected from well-developed, soundly-operated and
properly regulated financial markets have yet to transmit to the
real sector of the economy. The host of challenges and complexities
that confront the financial system of Nepal could be categorized
as the weak financial position of most of the Government-owned
financial institutions as reflected in their negative networth and
huge accumulated losses, higher proportions of the NPA,
predominance of the informal financial system, high interest rate
differential between the formal and informal financial sectors,
large interest spread between lending and borrowing rates in the
formal financial sector, etc. Accounting is also weak in the
corporate sector, making the business environment along with
the lending decisions for the financial institutions difficult. The
frontier of the formal financial structure could also not expand
as required, with the consequent negative implications on the
process of enhancing the financialization of resources, utilizing
the resources in an optimal manner, identifying and financing
the opportunities for improved production and productivity,
and building enabling conditions for the effective
operationalization of the monetary policy instruments.
One key challenge in reforming the financial system lies on the
managerial inefficiency and professional incompetence
surrounding the operations of the Government-owned institutions.
In an increasingly competitive financial system, the Government's
direct participation in the operation of the financial system has
been still significant, thereby generating risks and uncertainties
as to the future of these institutions. Ranging from ownership of
key financial institutions such as the RBB, ADB/N, NIDC, EPF,
CIT, Rastriya Beema Sansthan (National Insurance Corporation)
and two-fifths share ownership in the NBL along with some
involvement in the regulation of these and other financial
institutions, the Government's hand has been evident in many
of the dimensions of the financial system. This resulted in strong
non-professional influence on the operation of these institutions,
banking
which significantly reduced their growth and modernization. In
the Government-owned institutions where the reform measures
have not been systematically carried forward, decision-making
has not been sound, financial disciplinary norms and practices
became weak, accountability has been lax and professionalism
has been under-developed. So, the successful implementation of
the reform strategy in the institutions remained extremely
important.
Being the collateral-based lending institutions, the formal financial
structure could not increase the access to finance among the
poverty-ridden populace that lacked collaterals. The financial
service needs of the rural borrowers could not be properly
addressed due to the heavy presence of the formal financial
structure in the urban centers and the procedures and conditions
of the formal institutions being largely non-responsive to the
needs and demands of the rural borrowers. What prevented these
borrowers from gaining satisfactory access to the formal financial
resources were the excessively bureaucratic procedures (excessive
forms, formalities and delays), cumbersome collateral valuation
requirements, strict conditions as to the purposes for which only
the loan could be extended, inflexible repayment schedule, and
the fear of the loss of the collateral when failed to repay in time,
etc. Consequently, the formal structure could not extend into the
depths and breadths of the rural community, negatively affecting
the resource mobilization and credit delivery mechanism so
essential for enhancing the economic activities, employment
promotion and income generation.
As the micro-finance credit presently occupy only two percent
of the outstanding credit of the commercial banks and the MFIs
characterize limited credit size and constrained operations, the
potential role of the micro-finance has not yet been tapped. The
remote districts still lack access to the micro-finance. Though a
number of financial cooperatives outside the purview of the
NRB's regulation, monitoring and supervision are found doing
sound business in deposit mobilization and resource utilization
among their members, some of them have closed the business
and failed to meet the obligations to the depositors or have fled
the scene, defrauding the stakeholders in general and the
depositors in particular. Because of their narrow and limited
operations, the financial cooperatives and NGOs are still struggling
to make their presence felt in their efforts at contributing to the
task of poverty reduction through the provision of the financial
services near the doorsteps of the people. Besides focusing on
micro-finance, the challenge to meet increasing resource
requirements in the rural economy needs to be addressed through
undertaking a number of development programs by the
Government so as to ensure sound, sustainable, balanced, and
broader-based socio-economic development process.
As noted above, the overall condition of the financial system is
still weak, inefficient, and fragmented. With the Governmentowned financial institutions still occupying a sizeable share in
the financial system, continuing their restructuring work and
their eventual disinvestment becomes essential to ensure a strong

and competitive financial structure, improve the public sector
resource allocative efficiency, and enhance the confidence of the
public in the financial system. As the indicators of weak financial
system in the country, the depositors have not received adequate
levels of interest rates, the genuine borrowers have suffered from
larger cost of funds, the general equity holders have not been
able to receive satisfactory rate of return on their investments,
and the economy as a whole could not enjoy favorable outcomes,
to the extent desired, offered by a potentially healthy and efficient
financial system.
Reform Areas Ahead

To improve the capacity of the economy to address the reasonable
development needs of the people, there is an urgent need to
achieve a higher level of sustained high economic growth trajectory
through increased financialization of savings, improved financial
intermediation, reduced cost of capital for the borrowers, enhanced
rate of return on the capital, to the depositors and the investors,
and increased level of domestic and foreign investments. In this
respect, the financial system should be strengthened by ensuring
managerial improvements and operational soundness, improving
the regulatory and supervisory responsibilities, reducing the
level of NPA, and narrowing down the spread between the
deposit and the lending rates. The macroeconomic fundamentals
need to be made stronger through the adoption of the prudent
fiscal, financial, investment and monetary policies. The capital
in the financial system become crucial to make the health of the
financial system sound and the role of the financial system
dynamic and effective. The successful implementation of the
prevailing central banking Act along with other financial sector
legislations in their true spirit would become crucial. Most
importantly, the outcome of the reform process in the Governmentowned institutions needs to be improved for their early
disinvestment to the strategic investors.
Market should be promoted as a competitive sector with the large
potential for enhancing financial resource generation and
mobilization. Foreign institutional investors should be encouraged
to bring in their investments through the securities market. The
credibility of economic policies should be enhanced and the
confidence in the economy raised for which financial system
reform strategy is an essential condition. The reform strategy
should ensure that financial institutions are run in accordance
with sound business principles and practices. The central bank's
capability for effective supervision of the financial institutions
should be further raised. Similarly, financial discipline based on
adequate provisions of disclosure and implementation of
internationally-recognized accounting and auditing practices and
systems should be ensured. Competition-oriented policies should
be pursued accompanied by strengthened regulatory and
supervisory capacity so as to reduce the risk elements and enhance
the financial sector efficiency and effectiveness. Problems relating
September 2011
31
banking
to the liquidity like those currently being faced by the financial
system should be corrected in time through judicious use of the
monetary management instruments' and the better regulatory
and supervisory arrangements and practices.
The objective of making the financial system competitive would
also not be fulfilled unless the reform and restructuring exercise
is carried out with seriousness and vigor. The efficient role of
the central bank in implementing improvements in the prudential
regulations and carrying out the monitoring and supervision of
the financial system in a sound framework becomes a sine-quanon to this endeavour. Attracting more foreign investment,
reducing the incentive for capital flight and expanding the level
of domestic investment would call for the development of a
macroeconomic and financial sector framework that supports
the development and growth of effective financial markets and
the implementation of proper mechanisms for the improvement
of these markets. The government institutions that remained
under the management contract need to intensify their reform
efforts continuously and those that are under the process of
reform need to be restructured sooner so as to control the
weaknesses, ineffectiveness and distortions that could result in
the whole financial system. The top management needs to
discharge tits assigned tasks and responsibilities more seriously,
competently and effectively. The management reform process
initiated in the past needs to be made successful at any cost
because of the seriousness of the work and also because the nation
has already incurred a huge cost for this task. As the effectiveness
of the regulation and supervision carried out under a conducive
macroeconomic environment holds the key to developing a
strong, smooth, and efficient financial system, the regulatory and
the supervisory framework needs to be constantly improved.
The micro-finance has been regarded as an effective tool for
promoting economic activities, meeting basic needs, supporting
human development, and improving the status of the low-income
households through focused participation especially of the
deprived rural women, thereby contributing to poverty reduction
in a significant way. As a medium of financial inclusion, microfinance is recognized as an important financial service to uplift
the level of income of such households by ensuring the availability
of the finance services at their doorsteps. Hence, the potential
role of a proper micro-finance system to provide the financial
services to the poor and the low-income households on a
sustainable basis needs to be strengthened. For raising the
production and productive capacity, promoting income,
generating employment and enhancing the earnings levels of the
poor, marginalized, disadvantaged, and the weaker sections of
the society, the micro-finance framework needs to be made
effective, efficient and sustainable through the development of
a comprehensive policy as well as a sound legal and regulatory
framework. Implementing a viable rural credit delivery system
for the mobilization of financial resources and supplementation
of rural credit needs forms an important strategy toward bridging
32
September 2011
the resource gap in the rural areas. The existing informal system
of credit needs to be aggressively brought into the formal system
and institutionalized by encouraging the local-level financial
intermediaries established and operated by the local stakeholders
themselves. This would reduce the cost of funds, make funds
available in required needs, size and maturity, and provide
incentive to participants to enhance the competitiveness of the
markets for such funds. As a consequence, the existing constraints
of fund availability would be reduced and financial resources
would smoothly flow to farm activities and other rural
requirements at required volume, pace and modality.
Opening the capital account has remained an important policy
agenda following the current account convertibility that was
affected in February 1993. However, no efforts were undertaken
in this direction fearing the associated risks and costs if the policy
failed in its implementation. The benefits of the capital account
openness could be cited as the availability of larger capital stock
supplemental to domestic resources, reduction in the cost of
capital and unrestricted access to international financial markets,
resulting in higher yields for savers, lower interest cost for
investors, and greater allocative efficiency of the resources. The
necessary homework of preparing the economy for the capital
account convertibility (CAC) entails pursuing sound and
substantial measures aimed at ensuring and improving the
macroeconomic fundamentals and fostering the growth and
health of the financial system. In order to adopt full convertibility
of the currency, macroeconomic indicators such as the fiscal
deficit, inflation, BOP, interest rate, and foreign exchange reserve
need to be sustained at prudent levels. Likewise, competitive
financial markets, efficient implementation of prudential
regulations, low ratio of NPA, enhanced credibility and confidence
in the economy, increased transparency and disclosure, and an
enabling environment for the sustained, high economic growth
through the greater participation of the private sector in the
economic development would constitute the other important
prerequisite for the CAC. The pace and sequencing of the CAC
should be considered very cautiously. For example, it may be
necessary to open capital accounts with maturities of one year
and above before opening the short-term capital movements.
Similarly, regulatory arrangements should be made so that shortterm resources are least used for long-term investments. Such
arrangement would avoid the situation that some Asian tiger
economies experienced when there was sudden reversal of shortterm foreign capital that characterized the onset of the Asian
financial crisis in 1997-98. The exchange rate flexibility is another
important factor that needs to be reviewed to improve the
resilience of the economy to the sudden reversals in the capitol
flows as well as making the financial system more competitive
and strong. Pursuing the inflation targeting framework in a
regime of open capital account and floating exchange rates would
enhance the macroeconomic discipline, confidence in the economic
policy framework, and the competitiveness of the economy.
banking
Conclusion
Financial sector reform is necessary to improve the health and
soundness of the financial system, increase the credibility and
competence of the system, attract more resources including more
efficient investments toward this system, help reduce the cost of
financial intermediation, foster productive domestic and foreign
investments in the economy, improve the range and quality of
products and delivery of services, and raise the rate of return on
resources deployed, under a sound and pragmatic macroeconomic
environment and a prudent financial regulatory framework. The
implementation of the structural adjustment measures became
significant for the Nepalese macroeconomy in general and the
financial system in particular as the policies adopted were found
useful in improving the macroeconomic environment as also the
quantitative and the qualitative dimensions of the financial
system. It may be observed that the sphere, reach and delivery
of the financial products enlarged along with the large increment
in the number and activities of the banking and financial
institutions, especially during the last two decades. The financial
intermediation indicators and other related parameters signal
positive developments and progress. Consequently, the financial
sector has now occupied a significant role in the economy.
Despite the various efforts initiated for bringing about qualitative
change through improvements in the legislative, regulatory,
policy-related, supervisory, managerial and structural areas, the
large intermediation costs as well as the various institutional and
structural deficiencies and the managerial and operational
inefficiencies have remained the major drawbacks of the Nepalese
financial system, which need to be urgently addressed for attaining
its sustained growth and vibrancy so crucial for contributing
toward accelerating the pace of overall economic development.
Besides improving the functions relating to regulation, monitoring
and supervision of the financial system, putting in place

appropriate financial legislative regime and ensuring its sound
implementation is important for enhancing the competitiveness,
transparency, stability, confidence and credibility of the financial
system. Such a framework would ensure the qualitative growth
of the financial products and services, enhance delivery efficiency,
improve the resource allocative process, and foster a competitive
financial environment on a sustainable basis. Hence, the financial
system has been in need of constant reforms and restructuring
for addressing the various institutional deficiencies and structural
inadequacies that would generate unfavorable impacts and
implications for the high, sustained growth and vitality of the
economic system. Nepal's rising expectations and huge
development needs also require greater proportions of financial
resources being available at appropriate size, price and modality,
for which the reform measures would be essential. The
implementation of these measures would sustain necessary
environment and prerequisites for the growth of an orderly,
stable and efficient financial system that is least affected by the
occasional uncertainties and vulnerabilities for which the system
needs to be developed, managed, regulated, monitored,
supervised, and restructured in sound ways. Looking at the
managerial as well as the liquidity problems currently being
faced by some financial institutions, with a couple of them already
being declared insolvent, financial sector reform should continue
to remain a priority agenda in Nepal. In the absence of a
comprehensive financial sector reform process in operation, the
likelihood of few more financial institutions getting declared
insolvent and the overall financial system becoming weaker
would remain higher. To mitigate such risks and provide a
disciplined and enabling environment for the growth, strength
and stability of the financial system, a continuous process of
financial sector reform becomes the sine-qua-non.
September 2011
33
banking
Credit Risk and its Management in Banks

& Financial Institutions
The goal of credit risk management is to

develop a risk appetite capacity of the
bank and maximise a bank's risk-adjusted
rate of return by maintaining credit risk
exposure within the acceptable
parameters. Banks need to manage the
credit risk inherent in the entire portfolio
as well as the risk in individual credits
or transactions.
Credit Risk
The term risk, in banking, refers to the
possibility that the outcome of an action
or event could bring adverse impacts on
the bank's capital, earnings or its viability.
Such outcomes could either result in direct
loss of earnings and erosion of capital or
may result in imposition of constraints on
a bank's ability to meet its business
objectives.
The risk that the Bank may face during the
course of business include credit risk,
liquidity risk, market risk and operational
risk. Out of these risks, Credit risk is the
major risk that banks are exposed during
the normal course of lending and credit
underwriting.
CA. Prakash Baral
"Credit" means a provision of, or

commitment to provide, funds or
substitutes for funds, to a borrower,
including off-balance sheet transactions,
customers' lines of credit, overdrafts, bills
purchased and discounted, and finance
leases.
Mr. Baral is a Chartered Accountant Member of the Institute & currently working with Kist Bank Ltd
34
September 2011
"Credit Risk" means the risk of credit loss

that results from the failure of a borrower
to honour the borrower's credit obligation
to the financial institution according to the
terms specified in a credit agreement
resulting in economic loss to the bank.
Credit risk also refers the risk of negative
effects on the financial result and capital
of the bank caused by borrower's default
on its obligations to the bank. Credit risk
does not necessarily occur in isolation. The
same source that endangers credit risk for
the bank may also expose it to other risk.
Hence, it is very challenging for a bank
and financial institution to manage credit
risk
Credit Risk Management

Objective of Credit Risk Management
The goal of credit risk management is to
develop a risk appetite capacity of the bank
and maximise a bank's risk-adjusted rate
banking
of return by maintaining credit risk exposure within the acceptable
parameters. Banks need to manage the credit risk inherent in the
entire portfolio as well as the risk in individual credits or
transactions. Banks should also consider the relationships between
credit risk and other risks. The effective management of credit
risk is a critical component of a comprehensive approach to risk
management and essential to the long-term success of any banking
organisation.
Responsibility of Credit Risk Management
So far as the responsibility of credit risk management is concerned,
the bank is itself responsible for credit risk management. Banks
should identify and manage credit risk inherent in all products
and activities. The Board of Directors have a vital role in granting
credit as well as managing the credit risk of the Bank. The Board
of Directors are entrusted to assume the responsibility for
approving and periodically reviewing the credit risk strategy
and significant credit risk policies of the Bank.
Further, the chief executive along with all credit personnel in the
bank is equally responsible for the credit risk management. The
chief executive of the bank must ensure that the board approved
credit risk management policy is implemented in its true spirit,
using strictly and exclusively prudential credit appraisal criteria
and considerations and not influenced by any extraneous factors.
In this way, the credit risk management is everyone's responsibility
in the bank who directly or indirectly involved in the credit
function.
exposure to credit risk and on the concentration of credit

risk in different areas of the institution's credit portfolio;
and
l
2. Determine the Credit Strategy

The effectiveness of credit risk management can not be
achieved until and unless the bank determines its risk appetite
capacity. The primary purpose of bank's credit strategy is to
determine the risk appetite. Risk appetite, at the organizational
level, is the amount of risk exposure, or potential adverse
impact from an event, that the bank is willing to accept. Credit
risk strategy should be developed on the basis of bank's target
market and its internal strength.
3. Establishment of independent Credit Risk Management
Committee (CRMC)
Each bank, depending upon its size, should constitute a Credit
Risk Management Committee (CRMC). This Committee
should be empowered to oversee credit risk taking activities
and overall credit risk management function. The CRMC
should be mainly responsible for;
l
The implementation of the credit risk policy/strategy

approved by the Board.
Monitor credit risk and ensure compliance with limits

approved by the Board.
Recommend to the Board, for its approval, clear policies

on standards for presentation of credit proposals, financial
covenants, rating standards and benchmarks.
Recommend delegation of credit approving powers,
prudential limits on large credit exposures, standards for
loan collateral, portfolio management, loan review
mechanism, risk concentrations, risk monitoring and
evaluation, pricing of loans, provisioning, and
regulatory/legal compliance.
To o l s o f C r e d i t R i s k M a n a g e m e n t
One of the most important tool to manage the credit risk is the
credit personnel to be guided by the review result of existing
portfolio of risk assets so that further strategy can be set for
approval of fresh loan and management of existing risk assets.
However, there are various tools used by Bank and Financial
Institutions to manage the credit risk:
1. Formulation of Credit Policy Guidelines:
The most essential tool of credit risk management is the credit
practices and decision making process which is to be guided
by its internally developed Credit Policy Guidelines. Hence,
every bank and financial institution must internally establish
written credit policy guidelines that
l
includes a statement of principles and objectives governing

the extent to which the institution is willing to accept
credit risk;
establishes the areas of credit (types of credit, target

industry sectors, geographical areas, countries) in which
the financial institution is willing to engage and those in
which it is not willing to engage;
clearly defines the levels of authority to approve credits;
establishes prudent limits on the financial institution's
clearly defines the accountabilities of the management to

the board of directors in the light of this guideline.
4. Determine the Credit Limits

An important element of credit risk management is to establish
exposure limits covering on balance sheet and off-balance
sheet credit exposures for single counter party and group of
connected counter parties, which is also called Single Obligor
Limit (SOL). The objective of setting SOL is to prevent banks
from concentration risk on a large borrower or group of
borrowers. Though the regulatory body may also determine
the BFIs SOL, the size of SOL should be based on the credit
strength of the counterparty, purpose of credit, economic
conditions and the bank's risk appetite.
5. Know Your Customer (KYC)
An important tool of Credit Risk Management is to know
September 2011
35
banking
about the every aspect of customers before allowing them
credit facility. Hence, the credit procedures of every BFIs
should aim to obtain a deep understanding of the bank's
clients, their credentials and their businesses in order to fully
know their customers. These strategies should be reviewed
periodically and amended, as deemed necessary.
6. Credit Approval Process
A sound and well-defined criteria for new credits as well as
the expansion of existing credits is necessary for credit risk
management. Ideally, there shall be the Credit Risk Assessment
Department (CRAD) in the organization as a credit control
centre and the credit proposal originated from relationship
department shall be assessed by CRAD before the credit
proposal get approved.
7. Develop Internal Risk Rating System
To manage the credit risk efficiently, every BFIs need to
internally develop a system to assign the risk rating to every
credit proposal so that the proposal can be categorized based
on risk attached thereto. The internal risk rating system should
be developed by considering various parameters like: credit
limit of the proposal, past banking relationship, capability of
management, security coverage, financial performance of the
borrower etc
8. Lending to be adequately secured
Lending is a risky function since in case of loan default, the
bank may not have only loose the interest but also loose its
own money i.e. principle. Hence at the time of lending, BFIs
must ensure that their lending is adequately secured by
primary as well as secondary collateral so that the loan can
be recovered even in default situation and the credit risk can
be minimized. The security of the loan must be periodically
reviewed to ensure that loan downsize strategy can be adopted
in case the value of security is deteriorated.
9. Develop Stress Testing System
Under credit risk management, it is important for every BFI
to know their actual position of existing portfolio of risk assets
to find out whether it is in line with the industry and economic
environment and analyze the deviation. For this purpose, BFI
must develop an stress testing system for sensitivity analysis
and set further credit strategy.
36
September 2011
10. Credit Administration

Financial Institutions must ensure that their credit portfolio
is properly administered, i.e. loan agreements are duly
prepared, renewal notices are sent systematically and credit
files are regularly updated. An Institution may allocate its
credit administration function to a separate department or to
designated individuals in credit operations, depending on
the size and complexity of its credit portfolio.
11. Monitoring and Control of Individual Credits
To safeguard financial institutions against potential losses,
problem facilities need to be identified early. A proper credit
monitoring system will provide the basis for taking prompt
corrective actions when warning signs point to deterioration
in the financial health of the borrower. Examples of such
warning signs include unauthorised drawings, arrears in
capital and interest and deterioration in the borrower's
operating environment. Financial institutions must have a
system in place to formally review the status of the credit and
the financial health of the borrower at least once a year. More
frequent reviews (e.g at least quarterly) should be carried out
of large credits, problem credits or when the operating
environment of the customer is undergoing significant
changes.
Conclusion
Credit risk management process should cover the entire credit
cycle starting from the origination of the credit in a financial
institution's books to the point the credit is repaid. It should
provide for sound practices in:
credit processing/appraisal;
credit approval/sanction;
credit documentation;
credit administration;
disbursement;
monitoring and control of individual credits;
monitoring the overall credit portfolio (stress testing)
credit classification; and
managing problem credits/recovery.
banking
Corporate Governance in
Banking Sector
In the Bank the Board Members,

Investors and Management should
understand the operational
structure, jurisdiction, roles,
responsibilities etc. Same level of
honesty of human organs (like:
nose never sees, eyes never get taste
of fruits, ear never eat) should be
shown by the stake holders like
board, management, investors and
staffs. Management should not try
to enter into the jurisdiction of
board.
CA. Mukunda Subedi
Current financial market in the Country

is alleged to have been badly affected with
undue practices undermining corporate
governance. This concern is generally been
raised by stakeholders like Nepal Rastra
Bank, Promoters, Directors, Shareholders,
Chief Executives and Business Persons.
The wrong corporate governance practices
are perceived to have been a leading factor
for financial problems witnessed in the
industry in recent time.
Evidencing the claims deep rooted crisis

has appeared in the industry. The noteable
incidents occurred in Gorkha Development
Bank Limited (GDBL), Nepal Share Market
and Finance Limited (NSM) and Samjhana
Finance Limited (SFL) indicating wrong
corporate governance practiced. Rumours
and speculation are afloat in the industry
of few other Banks & Financial Institutions
which are suspected to have weak
corporate governance practices. Inspite of
such glaring malpractices large number of
financial market players have still not
realized the value of good governance.
Regulars too have not been able to make
sure the complete implementations of their
guidelines and instructions in this matter.
Causes of weak Corporate

Governance
There are large number of reasons of non
compliance with improvements and
awareness made by internal and external
organizations. Following may be some of
the causes leading to compromised
corporate governance
1. A key reason of weak corporate

governance is lack of realization of its
benefits. It is true that good
governance never gives the way of
due/imbalance power, and short term
benefit which has been the
unavoidable desire of the people at
helm of affairs of banks and financial
institutions. Expectation of Nepalese
businesspersons who have promoted
banks or those who run banks to scale
unnatural stature in short time has
largely driven practices laced with
vested self interes. It is obvious to
expect higher return but investors
should realize they have been
entrusted to protect interest of millions
of people's hard earned money. Their
mindset cannot be similar to a
privately run business enterprise.
Mr. Subedi is working in Private Commercial Bank
September 2011
37
banking
Business persons are yet to be educated on the value and
need of corporate governance. We all know that examination
cannot be held until students get ready to appear for each
subjects, not only one or two or math or science only. Bankers
and promoter of banks are found eligible and strong on the
subject of financial source collection, but most of them are
not prepared for other subjects like good governance, good
banking practices, public confidence and nation's goal on
financial markets.
2. Wrong perceptions of the Bankers and promoter of banks
may be a second cause of financial problems. Banking business
has been taken as a sector where profit is one and only factor.
Banking business is distinct which includes financial
intermediation as custodian of depositors hard earned money.
But the same money sometimes is taken as income, and used
as business assets rather than liability which needs to be
repaid with reasonable interest. Only cash in hand and bank
balances are taken care on large business deals. Banks and
financial institutions should deeply be involved on managing
the funds available from public as a trustee and should expect
only the management/service fees and not the capital gain
from those funds. Capital gain is only possible from own
assets and not the cash received from depositors.
3. Regulators have issued some guidelines and instructions to
maintain good corporate governance but banks & financial
institutions have taken the guidelines as hindrances in meeting
their own ends. It has been supposed that except the directives
of the regulator, everything else is acceptable corporate
governance practice and no one can question such other
activities. Self governance practice has not been practiced.
We are ready to do whatever the regulators instruct but do
not move ahead proactively. At times even the shortcuts to
circumvent Directives of Regulator is also resorted.
4. Lack of adequate knowledge of banking business by
directors/promoters of banks & financial institutions have
also been a cause of weak corporate governance. A serious
confilict of interest situation has arisen due to Business hosues
being involved as promoters of Banks. Most of the business
persons involved in key business sectors of the Country have
hold controlling position in the banks and financial institutions
too. Their priority is on profit maximization of their private
business which has also been linked with banking business
too. Much of time has not been given to develop system
procedures of the banks. Chief executives are psychologically
forced to maximize the profit giving examples that younger
bank has earned this much, smaller size bank has earned
higher of us and the like. This is one of the cause of
compromising the risk management practices. Staffs are
motivated to earn more by taking unnatural high risk. If,
directors and promoters are educated on risk management,
implications of taking high risk, relevant laws, nature of
banking business, problems presently seen in the industry
would be controlled to the large extent.
38
September 2011
5. Though Banking business is considered to have higher level

of transparency than other business sectors in Nepal, but it
has still not reached the required level. Public confidence
has still not been buildup on the data/indicators presented
by the banks and financial institution. The reason behind it
is the failures of some banks and financial institutions which
were thought to have been strong and giving high return to
the depositors and other stakeholders
Improvement Tools
There may be a long list of weak corporate governance practices
adopted by banks and financial institutions. But, this is the time
to strengthen the good governance practices as businesses have
not been expanded largely. More than that financial irregularities
have been witnessed during last one year due to weak corporate
governance. It has badly deteriorated the public confidence as
well.]
Corporate governance is mainly concerned on relationships with
management, board of directors, shareholders, depositors, lenders
and other stakeholders. Strong stance of management on corporate
governance solves significant problems of undue influences.
Nepalese banking business should have at least following practices
on corporate governance so that the success of the banks and
financial institutions would be trustworthy and sustainable.
1. Board members should hold adequate knowledge of
banking business. Whatever proposals are put on Board
should be endorsed only after being fully convinced on
the benefit to the bank and safeguarding depositors' interest.
They should know their roles in corporate governance
and should have regular oversight on the implementation
of policies and procedure put in implementation. Board
members should be updated on market condition and
bank's position all the time. Too much interference in
Management of Bank is not desirable.
2. Another problem in Nepalese banking is having large
numbers of board level committees. Even the non executive
directors have shown keen interest to be actively
participated in the bank business. Directors influence the
work of chief executives in name of committees. Like
political coalition, board level committees are formed in
banks and financial institutions to balance the power of
board members. Very limited committee should be formed
to oversee the implementation status of policies and
procedures. Running the Bank should be left for the expert
management which has the domain expertise. Board should
oversee the strategy and policy level issues only.
3. Another terrifying concern is on conflict of interest.
Whatever problems have appeared so far is the result of
conflict of interest. Lack of professional approach of board
members and chief executive is one of the causes of conflict
of interest. Lots of undue interest has been observed on
banking
lending, procurements, administrations and other financial
activities. Strong and committed chief executive can control
the conflict of interest of directors and promoters to the
large extent.
4. Another problem on banking industry is ambiguous roles
and responsibilities of board members and executives.
Investors are to take return on their money with their
specific policies, visions and missions. But directors want
their direct involvement on day to day business especially
on loan approval, procurement functions and daily
administrative function.
5. Timely update and monitoring of implementation of
policies by management is a key tool to keep intact the
corporate governance but it has not been initiated in most
of the organizations. For this, board may ensure the effective
utilization of the work of internal audit, external audit and
internal control functions. Audit committee reviews the
report of internal audit but its utilizations have not been
satisfactory in most of the cases.
6. Independence of internal audit function goes a long
way to ensure the good corporate governance. Though
internal audit is placed under direct supervision of Audit
Committee, functional flow has not been as desired. Key
remarks of audit have not crossed the boundary of
management making Audit Committee unknown. Auditors
too have become silent as their performance would be
counted by management and not by Audit Committee.
7. Banks should be governed in more transparent manner.
On the subject of proprietary matter, important information
are not disclosed to the public. Practice of making key
financial and risk indicators healthy on reporting date like
quarter end has still not been completely stopped. This
practice has encouraged to banks and financial institutions
that over the quarter indicators need not to be sound if
quarter end result is fine. If disclosure is made even the
weak indicators over the periods like lowest liquidity ratio
of the quarter, lower capital adequacy ratio of the period,
banks and financial institutions would be forced to maintain
the financial condition constant over the period.
8. Auditor should maintain well established professional
conduct, audit standards and communication to board of
directors and management. Depositors and other customers
should not be involved in any transaction with banks and
financial institution that are operated in an unsound
manner. Securities board and stock exchange should
disclose basic information obtained in regular basis.
Employees should communicate to concerns regarding
illegal or unethical practices or other corporate governance
weaknesses.
9. Like Know Your Customer (KYC) on customer dealing,
Know Your Structure (KYS) is also needed in the
organization. In the Bank the Board Members, Investors

and Management should understand the operational
structure, jurisdiction, roles, responsibilities etc. Same level
of honesty of human organs (like: nose never sees, eyes
never get taste of fruits, ear never eat) should be shown
by the stake holders like board, management, investors
and staffs. Management should not try to enter into the
jurisdiction of board. Board members should not have
intentions to go on management level on day to day work.
Board is to oversee the implementations of policies through
different organs of organization and management is to
implement the policies.
Supervisors' Role
Supervisors play key roles to promote strong corporate governance
practice in the organization. Nepal Rastra Bank, Company
Registrar Office, Securities Board may play vital role in this.
Supervisors should educate corporate governance as one element
of depositor protections along with the protection of investment.
Non compliance of governance principles should be brought
under strong supervisory actions. Supervisor's inspections should
be primarily focused on the corporate governance practices being
applied in the banks and not just on reviewing credit files.
Effectiveness of internal audit, external audit and internal control
functions should be ensured at least once a year in inspection.
Output of committees formed at board level should be evaluated.
Based on the gravity of work, first priority should be on forming
management level committees. It would be better if mandatory
provisions are made to have informal meeting of inspection team
with board of directors before beginning the work and after
completion. Supervisor may bring a provision of appraising
performance of internal auditor by Audit Committee and not by
management. Audit Committee may consult with management
but appraisal would be signed by Audit Committee only.
Accordingly, transfer, promotion of internal auditor should be
as recommended by Audit Committee.
Conclusion
Board of directors and chief executive are primary responsible
for maintaining good corporate governance. In addition to that
banking supervisor has an important role for improving
governance practices. Other stakeholder like auditors,
shareholders, government, depositors, securities board, stock
exchange and employees should play effective role to promote
good corporate governance. We should all be concerned about
the future because we will have to compete with other international
banks. Ultimately depositors would weigh options to choose
among the banks and financial institutions which have good
corporate governance and risk management practices. By the
time lots of things woul d be learned and improved it may be
too late to develop a strong financial system fostering economic
growth. Its time to rush for good governance practice.
September 2011
39
economy
A Knowledge-Based Economy:
Some Issues
The evolution of K-economy

essentially involves optimal and
ever increasing application and
use of knowledge in all sectors of
the economy and development of
viable, profitable and high valueadded knowledge-intensive
economic activities in a
developing economy.
Gyan Mani Adhikari
Introduction
Today, we are living in a chaotic transition
period wherein we are moving to age
defined by global competition, rampant
change, faster flow of information and
communication, increasing business
complexities and pervasive globalization.
The pace of change has become so rapid
that has created a new breed of firms /
institutions to be dominant and marked
entirely new era of development process.
The knowledge base of an economy is not
a given state, but remains operational as
a driver of change. The network of
university - industry - government
relations can be considered as an
institutional 'knowledge infrastructure'
that carries a system of operations
containing, science, technology and
knowledge based innovations. While the
political economy coordinated two
functions - notably the market and the
state - the knowledge infrastructure
coordinates the three subdynamics of (i)
organized production (ii) wealth
Mr Adhikari is Lecturer at Patan Multiple Campus, Tribhuvan University
40
September 2011
production (iii) private vs public control.

In other words, political economies are
increasingly transformed into knowledge
based economies by the additional
subdynamics of systematically organized
innovation process.
Meaning and Significance

A Knowledge Based Economy (KBE) is
defined as an economy that is capable of
knowledge production, dissemination and
use; where knowledge is a key factor in
growth, wealth creation and employment
and where human capital is the driver of
creativity with reliance on innovation and
generation of new ideas information and
communication technology (ICT) as an
enabler. In other words, K-economy is the
outcome of a fuller recognition of the role
of knowledge and information technology
in the process of economic growth.
Knowledge is a power, a highly productive
economy
knowledge workers' skills are used to do something in
the production activity. Marketing manager, for instance,
uses his skill (know-how) in judging the market
potentiality in a territory for selling a product. Finance
manager possesses the know-how of financial
management, and so on.
resource as embodied in human beings (as 'intellectual capital')

and in information technology has become a pivotal force to
economic development in the contemporary era.
Under K-based economy system, knowledge is created, acquired,
transmitted and applied effectively by the economic agents
including enterprises, organizations, individuals and society at
large for the greater economic and social development for the
betterment of life and performance. The evolution of K-economy
essentially involves optimal and ever increasing application and
use of knowledge in all sectors of the economy and development
of viable, profitable and high value-added knowledge-intensive
economic activities in a developing economy.
In a traditional market economy, the roots for the development
of productivity, value creation and wealth are set in the division
of labour bringing out specialized work. In the case of a K-based
economy, the development of the capacity to innovate, value
creation and wealth are based on the division of knowledge. The
KBE, therefore, needs a different and new institutional framework
in order to fully develop to its potential. The dynamics of
knowledge division and transformation enhances the capacity
of organizations / institutions to build sustainable comparative
advantages in international competition under the framework of
globalization. The more specialized competencies and knowledge
are developed, the more far reaching become the potentials for
problem solving and thinking to competent partners and leads
specialization (Apefroae and Curaj, 2006: 1-2).
The managers, economic advisers and applied economists must
understand the complexities and characteristics of the K-economy
at macro level and K-business/K-commerce at micro level as
well as in transitory state. Applied economics such as, Managerial
economics deals with managerial use of economic knowledge in
business decision making. Similarly, managerial economics deals
with the application of economic knowledge in formulating
business planning and strategies.
Types of Knowledge
Knowledge is a wider concept than information. Analytically,
there are four kinds of knowledge which can be regarded as
economic resources - (K element) into production functions. They
are: Know-what, Know-why, Know-how and Know-who. (OECD,
2006: 12)
1.
Know-what refers to 'facts.' These constitute numerical

data when statistical informations are collected.
2.
Know-why refers to 'scientific' knowledge. It implies

invention. The creation of know-why is usually made
possible through specialized organization, such as research
laboratories, educational institutions, etc. Business firms
have to interact with the scientists and such specialized
institutions for an access to this kind of knowledge.
3.
Know-how refers to 'skills/capabilities, Experts/
4.
Know-who refers to information pertaining to who knows

what and who know how. Since knowledge and expertise
are widely dispersed owing to complex division of labour
and specialization among people and organization, knowwho is a crucial part of knowledge management. It is
basically internal to the organization.
Production Function in a K-economy

Knowledge application and knowledge management are integral
parts of the production function in a K-economy. Learning,
acquisition, accumulation, management and use of knowledge
of these four kinds (mentioned above) take place by means of
different channels and routes. Know-what and know-why can
be obtained through books, lectures, access to databases. Knowhow and know-who largely depend on learning through practical
experience and involvement. Know-how, for instance, can be
learned in business situations by the juniors by
following/observing their seniors in decision-making. Knowwho has social embodiment which can be learned in day-to-day
practice and specialized educational environments. Therefore,
business firms need to have an access to networks of economic
experts and institutions to have knowledge about their innovative
capabilities. Know-who in the marketing channels can also be
developed while dealing with customers, agents, associates and
staff. The importance of such types of knowledge is largely due
to the fact that organizations operate in a 'knowledge society'
characterized by economical, social and cultural aspects being
driven by information.
Information Technology (IT) caters to the need for handling the
know-what and know-why part of knowledge management more
efficiently. All knowledge that can be modified is easily transmitted
over long distances at lower costs through IT networks. As such,
digital economy becomes crucial in K-economy for it signifies
the diffusion and use of knowledge/information in a wider
spectrum. What is more important is the creation of knowledge
and knowledge distribution power by developing digital economy
as pivotal to the K-economy.
Production function and process in the K-economy will have a
distinct shift in using productive resources-land, labour and
capital through growing use of information and knowledge
technology. In the IT era, therefore, human resources, the
originator of information, knowledge and intellectual supremacy
of mind over matter will tend to be the most critical and crucial
form of resource which is more flexible and mobile in the global
arena.
September 2011
41
economy
K-economy accumulates intangible assets. Returns on capital
tend to be higher in investing in intangible assets. Intangible
assets include:
(i) Customer relationship through web-based selling and
(ii) Customer information through personalization with ecommerce application.
K-economy is directly based on production, exchange and
distribution processes involving exploitation of knowledge and
information in all its sectors. This means K-economy is an
economic society organized around knowledge explosion for the
purpose of socio-economic advancement involving dynamic
innovative changes in the system as a whole.
The production function in the K-business consists K (Knowledge)
as significant input. Thus:
Q = f (X, K)
Where, Q = output per unit of time
X = set of physical inputs
K = knowledge input
Adopting Cobb-Douglas approach, we can restate production
function of the business firm in a K-economy as under:
in the gamut of microelectronics, computer and

telecommunication.
3. Economic sector: drastic structural shift towards service
economy.
4. Occupational structure: the pre-eminence of the knowledge
workers-the professional and technocrats.
5. Decision-making power: centred with the blending of
axial principle/theoretical knowledge and artificial
intelligence advanced through the creation of a new
intellectual technology.
6. Goal orientation: profit and welfare maximization through
the control of technology and knowledge assessment.
The K-economy: The Basic Framework

K-economy is the market system refers to the integrated
framework of economic operation and activities under the layers
of Internet and Knowledge application relation to E-commerce
and E-business. Following Figure 29.1 envisages the framework
of K-economy.
Q = aXbKc
Alternatively, transformed into a linear function:
Log Q = log a + b log X + c log K
In a K-economy, the competitive advantage is seen through the
innovation and creation of knowledge - the accumulation of
intellectual capital and not just in terms of financial and physical
capital stocks. This poses a great challenge to the business
managers and economic researchers in analyzing and quantifying
innovation and relating the knowledge management to the
business incomes, functional and behavioural relationship of the
basic variables to the examined in this regard, are the flow rates
of: Knowledge input, real output and generation of income by
the firm.
In the K-economy, at macro level, the flow rates of income, output
and knowledge are inter linked.
Knowledge
Output
Income
The flow rate of knowledge determines the rate of output, which

ultimately generates the rate of income. These flows are never
smooth in a modern K-based society. These are all subject to
fluctuation of pulses and acceleration that might occur.
Dimension of K-economy
We may identify the following dimensions of the K-economy:
1. Knowledge explosion: through effective use of information.
2. Advancing IT sector: through technological advancement
42
September 2011
Knowledge Management
Knowledge management is the bedrock of the K-economy. It
refers to the way in which knowledge is gathered, stored and
applied. Knowledge management is how one generates value
from knowledge based assets, which can be classified into either
explicit or tacit (Apefroae and Curaj, 2006: 3). In other words,
the KM practitioners recognized two types of knowledge
(ADB, 2007: 4):
economy
i.
Tangible Assets: equipment, technology, properties, cash

and deposits.
ii. Intangible Assets:

a. Human capital: skills and work attitude
b. Structural capital: information and other support
systems, work processes
c. Stakeholder capital: networks of relationships with
customers, suppliers, partners and allies and local
communities
Characteristically, information, advanced knowledge in science
and technology constitute the major paradigm of the K-economy
and its growth process. Physical infrastructure in the layers of
economic sectors should be complemented by the intellectual
technology, consistent with the need to operate and upgrade the
working of the entire system in a progressive mode and move.
The building block of E-economy is techno-infrastructure and
not just physical infrastructure. The IT sector provides a support
in this regard. The use of IT is pervasive in the K-economy in
sharpening human skills and ability in dealing with economic
problems with the application of intellectual technology more
strategically. An effective knowledge management practices help
organizations avoid repeating mistakes of past project, thereby
reducing the time span required for completing current projects.
The importance of knowledge is illustrated by the problem raised
from the existence of the so called 'strategic knowledge gap', i.e.
the gap between what the organization needs to know and what
it does now and knowledge management is the process by which
organizations could bridge this gap. Any organization that aims
to create a KM system should have to follow following knowledge
management initiatives (Ibid: 4).
Sharing of best practice

Development of knowledge pools
Creation of knowledge centres
Selection and use of collaborative technologies
Creation of intellectual capital teams
Internet Economy
It is composed of production, distribution and effective utilization
of knowledge. Information Technology (IT) is the pillar on which
the edifice of the K-economy is built up. Internet economy, ecommerce and e-business, besides extensive and intensive use
of knowledge are the building blocks of the K-economy. Internet
has diabolic power to transform the economy as K-economy by
creating rapid changes both in communications and commerce.
IT penetration vs. Gross National Product (GNP) may be regarded
as a parameter in measuring the economic growth of a country
towards K-economy.
Internet-economy refers to business and economic activities
perused along the Internet. It is comprised of four layers:
1. The Internet Infrastructure: Technological infrastructure

is the prerequisite of the K-economy. It largely consists of
the telecommunication, Internet-service provider, Internet
backbone carrier, and the suppliers of end-user networking
equipment. These are essential for the Web system and
the proliferation of Internet-based e-commerce.
2. The Internet/Knowledge Application Infrastructure: The
Internet-knowledge applications relates to software
products and services facilitating web transactions and
transmission intermediaries. It requires the army of
knowledge workers who create software. It also needs
the consultants and service firms that design, build and
maintain all kinds of web sites in catering to portals to ecommerce.
This layer of the K-economy requires huge investment in
production and accumulation of intellectual capital.
Without adequate brain power the society cannot succeed
well in building the Internet Applications Infrastructure.
3. The Internet-Intermediaries: This layer of the interneteconomy comprises purely web content providers and
market makers or market intermediaries. The firms
undertaking intermediary Internet business generate webbased business revenue indirectly through advertising,
membership subscription fees and commissions.
4. The Internet-Commerce: The web-based commerce
transactions constitute the Electronic commerce (Ecommerce). E-commerce implies purchases and payments
done electronically. It is further extended with effective
application of knowledge in various dimensions as Kcommerce.
K-business involves transactions of both tangible and intangible
goods. The mode of K-business transactions may be: Businessto-Business (B2B) and Business-to-Consumer (B2C).
K-Profit
K-Profit is the additional/excess profit earned by the firm owing
to K-business. Certain intangible business assets corresponding
to business goodwill attribute it to the increase in sales revenue
or cost reduction resulting on account for K-commerce
applications.
K-Profit is essentially estimated as an addition made to firm's
total profits through the K-business or K-commerce applications
by intangible assets class.
That is to say, K-Profit can be measured in terms of the excess
return on capital invested in intangible asset of business goodwill
(such as customer relationship, utility-orientation, etc.) enhanced
through knowledge application against the investments
corresponding to tangible assets (such as liabilities and equities)
of the firm (Cohan, 2000: 8). Thus:
September 2011
43
economy
unique advantages such as:
K - p = Rita - Rta
Where,
K - p = K-Profit,
Rita = Return on investment in intangible assets, and
Rta = Return on investment in tangible assets
K-Business Intangible Assets

An economic success is increasingly based upon the effective
utilization of intangible assets. Major types of intangible assets
as the building blocks of firm goodwill under the K-Business
application include:
1.
2.
3.
4.
Customer Relationship
Consumer Knowledge
Electronic Supply Procurement and Distribution
Web-based Technical Service
Customer Relationship: Customer Relationship of the firm is

well developed and maintained on a wider scale through www
contacts. After establishing initial consumer ties, additional
products can be easily sold to the existing and new customers
mere efficiently though Web. Web-based selling has certain
advantages, such as:
1. Increase in revenue
2. More efficient, quicker and streamlined order-fulfilment
catering to the consumer needs
3. Lower incremental selling/marketing coast.
Consumer Knowledge: Information Technology-especially, the
personalization technology of Web-used in E-commerce, helps
the firm to know more and better about consumers' preferences,
interest, needs and behaviour. Knowing their consumers'
behaviour and interest very well from the web-buying selling
process, the firm can recommend additional products. This may
enhance the firm's sales per capita and revenues.
1. It eliminates the need for maintaining a large army of

technical service staff as well as record keeping for their
interaction with the customers.
2. It is cost-effective. It saves the cost of updating the software
patches or printing updated technical information.
3. It is time saving
4. It enhances customer satisfaction by solving their technical
problem faster. (Cohan, 2000: 10)
Knowledge Based Development (KBD)

The World Bank proposed a wide used KBE model that identifies
the four pillars of the KBE (ADB, 2007: 7).
i. Education for a skilled workforce
ii. Science and technology, and innovation
iii. ICT infrastructure
iv. Policy and regulatory environment
Human rights, sustainable development, and poverty alleviation
are basic consensual values of the international community, as
embodied in the United Nations' decisions such as the Declaration
of Human Rights, Agenda 21, and the Millennium Development
Goals, respectively.
Sustainable development asserts the equal importance of three
value domains: economy, society, and natural environment.
Growths in economic capital, social capital, and natural capital
are equally important but should not be pursued at the expense
of one another. Knowledge-as a means for creating value-should
be designed to support all three value domains. The result is a
development model or option that is broader than KBE and,
which is but a formalization of the mix of economic and social
objectives.
Electronic Supply Procurement and Distribution: E-Commerce

facilitates electronic supply procurement to the firm. The firm
can streamline its administration of the purchase process and
resort to bulk purchases which can be channelised for distribution
in all its multi-divisions by implementation electronic procurement
and distribution systems. Major benefits of such Web-based
system are:
1.
2.
3.
4.
Bulk-Purchases discounts
More efficient administration
Just-in-Time (JIT) Supply Management
Inventor cost minimization.
Web-based Technical Service: The firm can adopt a system of

providing Web-based technical self-service to its customer.
Technical service information catered to through web system has
44
September 2011
Building on the World Bank's formulation of the four pillars of

a KBE, which is focused on the economic dimension (Column 2,
Table 1), the resulting alternative framework combines the two
globally emergent development paradigms: sustainable
economy
development and knowledge management (KM). If the KBE
framework is broadened to encompass also planning for a
knowledge-based society and a knowledge-assisted caring for
the environment, then the resulting broader framework can be
called Knowledge-Based Development (KBD).
The World Bank's four pillars of a KBE and the corresponding
scope of knowledge assessment methodology fit precisely the
three categories of intellectual capital applied to the economic
domain (Shown in Table 1, Column 1):
Similarly, the OECD policy framework for KBE embraces three
policy areas: ICT including communication infrastructure and ebusiness; science, technology, and innovation; and skills,
education, and knowledge-based employment.
Following the KBD perspective, the ICT infrastructure should be
expanded to "infrastructure for a networked society" where
"infrastructure" and "network" are understood both in their
physical-technical and social institutional dimensions. Similarly,
the concept of technological innovation should be broadened to
encompass social inventions -new institutions, programs,
legislation, and protocols-to pursue socially desirable goals such
as peace and human rights. Corresponding development of
simple but more comprehensive indicators could be part of ADB's
agenda toward planning for KBD.
development of a country or region towards the K-based economy.

The KEI is calculated based on the average of the normalized
performance scores of a community or region on all four pillars
related to the knowledge economy.
Paradigms of K-economy
For developing a K-based economy, the following steps are
needed (Shariffadeen, 1994: 8):
Creation of appropriate economic and institutional
framework that will provide incentives for the efficient

use and application of existing and new knowledge.
Provision of adequate educated and skilled manpower the knowledge workers. Enhance their ability and
willingness to learn and interest to explore for progress
and prosperity in the dynamic system.
Development of physical infrastructure and infrastructure
of international standard at a competitive cost reflecting

enhanced competitive advantage of the country.
Set up of a well developed science and research centres

involving University faculties, think tanks, expert
consultants, firms, institutions and organizations aspiring
for knowledge creation, assimilation and adoption.
Restructuring the financial system towards a stronger
base and advancement that will support and ensure the

smooth transition of the traditional economy to a Keconomy. Some specialized financial institution called
"Knowledge Development Bank (KDB)" may be created
for serving the purpose. Likewise, global funds could be
attracted through venture capital investment in new and
expanding K-business/enterprises.
The K-economy Indicators

Measuring the performance of the K-economy the following
major knowledge indicator have been identified by the OECD
(1996: 31).
Expenditure of Research and Development (R & D). It

In brief, all three value domains of sustainable development
should be pursued together, and through the development and
deployment of three categories of knowledge assets: human
capital through education, structural capital through innovation,
and stakeholder capital through building of networks.
Knowledge Economics Index (KEI)

The KEI takes into account whether the environment is conducive
for knowledge to be used effectively for economic development.
It is an aggregate index that represents the overall level of
relates to efforts towards enlarging the knowledge-base

and knowledge inputs.
Employment of technocrats.
Patents. They reflect knowledge outputs. They represent
practical applications of certain specific ideas or knowledge
development.
Technology Balance of Payments (TBOP). It measures

international movements of technical knowledge through
payments involved such as royalties, licensing fees etc. It
is a flow measure.
September 2011
45
economy
Concluding Remarks
venture capital investments in new and expanding enterprises.
Knowledge-based economic society is emerging rapidly. Extensive

and intensive application of knowledge as an important productive
resource in economic activities regarded as a propelling force
behind the emergence of knowledge based economy. KBE
provides knowledge to solve the global economic problems and
collect healthy returns. Its wealth increases if it generates more
ideas and applies them on a wider scale and scope.
In short, an economy heading on to K-based economic society

need to increase efficiency, productivity, flexibility and
innovativeness in its operations and overall economic
performance.
A shift towards knowledge-based economy will pose significant

new challenges besides opportunities to the government,
organizations, institutions, enterprises and people at large in a
developing country. Each and every developing country should
examine its own SWOT (strength, weakness, opportunities and
threats) in the evolution of K-economy. The county has to design
and develop its own framework of the K-economy arising from
its own socio-economic needs and aspirations as well as capacity
in creating and adopting the intellectual technology. It should
be realized that K-economy covers every aspect of business and
economy both at micro and macro level. The policy-makers need
to figure out the dimensions of the K-business/K-economy and
prepare the blueprint to take care of constraints and growth
propelling forces.
Some specialized financial institutions called 'Knowledge
Development Bank' (KDB) may be created for servicing the
purpose. Likewise, global funds could be attracted through
46
September 2011
References
ADB (2007) Moving Toward Knowledge-Based Economies: Asian
Experiences, Manila, ADB.
Apefroae, M. and Curaj, A. (2006) Dimensions of Knowledge
Capital, Paper presented on International Conference on Business
Excellence, Romania, 27-28 October.
Cohan, Perter S. (2000). E-profit, AMACOM, New York: American
Management Association
Mithani, D.M. (2001). "An Evolutionary Approach to Managerial
Economics in the Knowledge Age: Some Reflections", NMIMS
Management Review, Vol. XIII, No. 1, June-Dec.
OECD (1996) The Knowledge Based Economy. Paris, OECD.
Shariffadeen, Tengku Mohd. Azzman (1994): Information
Technology and the Knowledge Paradigm in Malaysian
Development Experience - Changes and Challenges, Kuala
Lumpur, National Institute of Public Administration.
information technology
Intormation System Risk

- Relevant Case
The complex and ever-changing

nature of IT gadgets and related
technology, poses very serious
challenge for the auditor to gain
confidence in the system being
audited. Even after devoting
reasonable time and effort a
sense of discomfort on what lies
inside the computer system is a
common issue faced by auditors.
The audit world has changed - gone are

the days the typical auditor is surrounded
by voucher files, thick registers,
reconciliation sheets etc. Even gone are
the days of just scanning the computer
and being satisfied on the reliability of the
accounting system. With technological
revolution and increased dependence and
benefit of automated work environment,
it's time to migrate to more of IT audit
than the traditional accounting audit. The
maxim goes - the integrity, authenticity
and confidentiality of information should
be ensured.
To reiterate the importance of system audit
and degree of specialization required in
ever changing IT world, some very
relevant and common risks are outlined
as under:
Pen Drive
CA. Sanjay Chaudhary
It seems that everybody is using Universal

Serial Bus (USB) data storage devices like
flash drives, jump drives, pen drives and
thumb drives. With more than 10 GB or
more data stored, less cost, easy to plug

in-out, the floppies and even CD's would
be history. With the amazing benefits come
certain unique risks which the auditors
should be aware of.
1. System Intrusion - Consider a
malicious user who wants to obtain
unauthorized access to an
application or network. He/she
could easily plug the USB device
into a computer on the network. That
USB drive might( within seconds)
install a:
Key catcher program that will
capture all characters typed on the
computer keyboard including IDs
and passwords
Password gathering program that
will retrieve Windows password
hashes, which could later be cracked
Vulnerability scanner program that
could launch a vulnerability scan of
devices on the network, and the
information obtained could later be
used to gain unauthorized access
Virus that could propagate across
Mr. Chaudhary is a Certified Information System Auditor (CISA) from ISACA, USA
September 2011
47
the network, impacting availability of systems
2. System Compromise - Computer security firms have
reportedly used USB drives in performing penetration
testing by simply distributing "compromised" drives in the
organization's parking lot. Unsuspecting employees arrive
at the parking lot, find the compromised drives, pick them
up and plug them in to their company computer to see if
they work. Just like that, their machine and possibly the
entire network are compromised.
3. Data leakage - USB devices save huge data which can be
copied in a flick of second. When you share your pen drive
with your colleague for copying a file, you may not know
the entire existing data stored in pen drive would have
been copied by your colleague.
Protection issues
Presence of a removable media policy - based on the

organization's risk assessment a policy should address the
type of information that can be stored, Encryption
requirements, Password requirements and User security
awareness training
Use of third-party security tools to protect misuse
Defined Active Directory environment
Prevent users from installing any device
Allow users to install only devices that are on an approved

list
Prevent users from installing devices that are on a prohibited

list
Deny read or write access to users for devices that are

themselves removable or that use removable media, such
as CD and DVD burners, external hard drives, and portable
devices, such as media players, smart phones, or Pocket
PC devices
Auditors should make sure that their organizations understand

the risk and put controls in place to mitigate it.
Wi fi network
Wi-Fi wireless network systems are growing rapidly because
they are easily deployed and provide convenient network access
to users. Wi-Fi networks have become pervasive in recent years
because the costs of Wi-Fi access points and network interface
cards (NICs) are more affordable for businesses and home users,
and the installation of Wi-Fi networks has become as simple as
so-called "plug-and-play." The current ADSL scheme offered by
Nepal Telecom has further revolutionalised Wi-Fi LANs in offices
in Nepal.
However, when business users transmit sensitive information
48
September 2011
(e.g., unencrypted e-mails or remote corporate Intranet access)

over an insufficiently secured Wi-Fi connection, the users are
exposed to multiple types of information attacks.
The unique security issue in Wi-Fi networks is that all data
transmission is not over physical wires but through radio waves
in open space. Therefore, IT auditors should pay special attention
to the areas described as under :
1. Interception of user ID and password-Unencrypted or
cracked Wi-Fi communication exposes logon operations
and breaches user ID and password, which are used to
access sensitive information of an organization.
2. Interception of data-When unencrypted or cracked Wi-Fi
communication is eavesdropped, sensitive data can be
breached by the attacker.
3. Corruption of data integrity-Advanced attacks based on
the previous two risks along with frame spoofing can further
corrupt the data integrity, damaging organizations' database
systems and information processes.
4. Disruption of network communication-DoS attacks directly
disrupt the Wi-Fi network communication. Now that
organizations heavily rely on network communications,
even the shortest disruption can mean significant financial
losses.
Just imagine all emails travelling on the Wi-Fi network are
intercepted. All business secrecy and even personal information
is tracked by stranger at the least cost.
Protection issues
Many security technologies can be applied to the Wi-Fi networks
for authentication and encryption purposes. These technologies
include, but are not limited to, a virtual private network (VPN)
based on Secure Sockets Layer (SSL) or IP Security (IPSec). The
key assurances required are :
1. Confidentiality-Assurance that the message sent over the
wireless network is readable by only the intended recipient
(i.e., protection against interception or eavesdropping)
2. Authenticity-Assurance that the message originates from
the claimed entity (i.e., protection against spoofing or
impersonation over the wireless networks)
3. Integrity-Assurance that the message has not changed in
transmission over the wireless network (i.e., protection
from transmission errors and/or willful modification of
the message)
4. Availability-Assurance that the data will be available to
users when and where they are required (i.e., protection
against DoS or poor reliability)
IT auditors should examine the critical role played by
management to establish policies and procedures that can
control most Wi-Fi risks.
Printer
Printer is just a printing dumb device, can it pose any risk? Why
should anybody care about securing their networked printers
when there are firewalls, routers and many other fancy network
protection devices in place?
The only requirement to access the web console for a networked
printer is to type the Internet Protocol (IP) address in a web
browser. The problem with this is that many models in use allow
for anybody with the IP address to view most if not the entire
configuration. The common printer risks are :
1. Denials of Service - There are several risks that arise from
the vulnerability of unmitigated remote administration,
including IP address modification. This is of particular
interest on the denial-of-service (DoS) attack front. If one
pulls the old switch on the printer's IP address, users will
be unable to successfully send print jobs, leading to mass
confusion, or at least mass complaining.
2. Man in middle attack - The most severe weakness identified
in a printer audit would be the concept of a successful manin-the-middle attack carried out through IP address
modification. After finding a printer configuration that is
not locked down via strong passwords, the first step to
complete an attack is to modify the IP address of the printer
to an unused address on the same subnet. Next, the IP
address of the PC is modified to the printer's previous
address. Then, all traffic sent over to the IP address that
end users are configured to print to can be captured. Further
all print jobs can be forwarded on to the 'new' IP address
of the printer. When the end user who submitted the job
heads over to the printer in question to retrieve the print
job, they will find out that it has processed as normal. In
fact, it has happened so fast that there is no cause for
suspicion for the end user. If the attack is successfully
carried out, this is particularly frightening, as there is not
necessarily going to be any detection to end the problem

quickly, resulting in prolonged exposure and the monitoring
of all or some select print jobs. If the attacker knew the IP
address of a particular executive or just someone with
whom a grudge was held, they could certainly target a
particular user.
3. Spooling - Even printers have spooling memory i.e. storing
printing jobs till they are printed. This queue of memory
can be retrieved from the printer memory for unauthorized
purpose.
Protection issues
In light of the ever-increasing abilities of networked printers,
every entity should perform an audit to determine whether their
networked printer environment is reasonably secure. Some control
objectives to consider reviewing are:
1. Policies and procedures governing the security of networked
printers are adequate
2. The remote administration web console for each networked
printer is configured strongly
3. Risks identified by network-based vulnerability scans of
the printers themselves are accounted for and mitigated
4. Other printer risks are considered and accounted for through
additional tests of general controls
The auditor should carefully examine the printer related risk and
its impact on the overall control system.
The complex and ever-changing nature of IT gadgets and related
technology, poses very serious challenge for the auditor to gain
confidence in the system being audited. Even after devoting
reasonable time and effort a sense of discomfort on what lies
inside the computer system is a common issue faced by auditors.
In this current context it is highly recommended that first an
assessment of internal control system of the information flow
network is done. Once confidence is achieved the transaction
audit can commence. IT audit is inevitable prerequisite in the
audit process.
September 2011
49
XBRL
XBRL is a language for electronic

communication of business and
financial data which is
revolutionizing business reporting
around the world. It is an open,
royalty-free software specification
being developed through a process
of collaboration between
accountants, major companies,
organizations, government
companies and technologists from
all over the world.
CA. Ashish Garg
Off late I have been reading the term XBRL

in various publications in accounting
world globally. Whether it be website of
organization related to finance and
accounting or journals of institutes in
developed and developing world, this
term is gaining prominence. But to confess,
atleast in our accounting world in Nepal
this term is an alien and thus the need for
all of us to atleast know what is XBRL.
accounting procedures etc. Financial

irregularities in wake of Enron, Worldcom,
Satyam, Xerox and the fall of Arthur
Andersen has eroded confidence of user
of financial information. Everyone craves
for true and reliable financial information
based on which business decision can be
made. Further no one has ample time to
spend hours and days to dig out the right
financial information. XBRL address this
burning issue.
Invention of XBRL
Definition of XBRL
eXtensible Business Reporting Language

(XBRL) is a financial reporting tool used
as a global standard for exchanging
business information. With the increasing
complexity in financial reporting, ever
increasing importance of reliable financial
information in wake of financial frauds
the need for improvement in financial
reporting is felt. XBRL is a invention to
this necessity and backed by Information
Technology revolution.
Business transactions are getting more
complicated with global business
transcending geographical boundaries,
invention of complex products, creative
Mr. Garg is a Certified Information System Auditor (CISA) from ISACA, USA
50
September 2011
The XBRL website describes XBRL as "a

language for electronic communication of
business and financial data which is
revolutionizing business reporting around
the world. It offers major benefits to all
those who have to create, transmit, use or
analyse such information." It is an open,
royalty-free software specification being
developed through a process of
collaboration between accountants, major
companies, organizations, government
companies and technologists from all over
the world. Together, they formed XBRL
International, a not-for-profit organization,
which is now made up of over 650
members, which includes global
companies, accounting, technology, government and financial
services bodies. XBRL is the tool that the companies can use to
make their financial filings more interactive and which can help
the regulators, etc. to do more meaningful analysis and data
mining. It starts after accounting standards ends i.e. once financial
statements are prepared; XBRL
is used as a tool to report them.
How does it work

XBRL allows labels in any language to be applied to items, as
well as accounting references or other related information, making
the data interactive. The powerful structure of XBRL allows very
efficient handling of business data by computer software. It
supports all the standard tasks involved in compiling, storing
and using business data. One more important feature of XBRL
is explained in its name! XBRL is easily expandable, so companies
and other organizations can adopt it to meet a variety of
requirements - hence the word 'eXtensible'. To put it simply,
XBRL can be treated as analogous to a bar code. Instead of treating
financial information as a block of text, as is the case with an
HTML or a PDF file, XBRL provides a code or a "tag" for each
item of data making it possible for the
data to be treated "interactively" or "intelligently".
It is Interactive Data
Interactive data can be defined as "the use of technology to
provide users with faster access to the information they
want, in an easily usable format". Interactive data allows the
creation of documents that are machine-readable,
so that computers can quickly extract the desired data.For e.g.,
every fact in an annual report, every number in a company's
financial statements, gets a unique code that tells the software
what the item represents and how it relates to other items in the
report. Interactive data 'tags' all of the key facts in these large
documents so that software can instantaneously recognise them
and serve them up to the user. This tagging allows users to
immediately pull out exactly the information they want, and
instantly compare it to the results of, say, other companies,
performance in past years, industry averages, etc. In short, the
user can 'slice and dice' the data as per his requirements.
What does XBRL constitute

An XBRL document comprises the taxonomy and the instance
document. Taxonomy contains description and classification of
business and financial terms, while the instance document is
made up of the actual facts and figures. Taxonomy and Instance

document together make up the XBRL documents.
Taxonomy can be referred as an electronic dictionary of the
reporting concepts. Taxonomy consists of all the
data definitions, the basic XBRL properties and the
interrelationships amongst the concepts. It includes terms
such as net income, EPS, cash, etc. Each term has specific attributes
that help define it, including label and definition
and potentially references. In simple terms, a taxonomy is simply
the collection of pre-defined tags that are available for companies
to "affix" to their financial data. The process of tagging will also
not be cumbersome for companies as there are software available
that will assist with the tagging process.
An XBRL instance document is a business report in an electronic
format created according to the rules of XBRL. It contains facts
that are defined by the elements in the taxonomy it refers to,
together with their values and an explanation of the context in
which they are placed.
A financial statement in XBRL would not be stored as a PDF file
or a scanned document, it would be stored as metadata which
can be exchanged, stored and retrieved easily. The major benefit
with XBRL for regulators and analysts is the saving of time on
routine tasks like entering and validation of data. Further the
potential of XBRL lies in the world of data analytics. Data analytics
would not be restricted to only regulators. XBRL would permit
data to be used widely for analysis.
Global adoption
XBRL has been introduced in the United States of America in a
phased manner commencing from early 2009. In the United
Kingdom many companies already report in XBRL, which will
be mandatory in 2011. There is also a high degree of
implementation in countries like Canada, Belgium, France,
Germany, Spain, Japan, China and Singapore to name a few.
Even our next door India seems to have taken long strides in
adopting XBRL framework way back in 2007. Three years down
the line the Ministry of Corporate Affairs, the regulators of
companies in India, came up with a circular dated 31st March,
2011, has mandated the filing of financial statements in XBRL
format for the year ended 31st March, 2011, covering more than
25,000 companies in their first phase of implementation.
Our tax department and other government offices are getting
techno savvy. So are the corporate and accountants in use of
accounting softwares including ERP. Its high time even Nepal
embraces XBRL in its own limited form to start with.
September 2011
51
Legal
The Convening Of Meetings
Every corporate act must be done at a

meeting properly convened, properly
constituted, and properly held at the
usual place of meeting at which every
member has the right to attend, or some
other place at which the members have
the like right.
The concept and principle of Law of

meeting has evolved over the years in
England and the same have been
incorporated in the various Companies
Act. We consider some of the broad
principles here.
In the case of a company most of the
provisions as to meetings are to be found
in the company's Articles of Association
or in the Companies Act.
There are, however, a number of general
principles applicable to most meetings of
bodies of this kind. It should be borne in
mind that the principles stated in this Part
will apply only where the relevant rules
governing the meeting in question do not
otherwise provide.
CA. N. Krishnaswamy
So that a meeting may be validly convened,

proper notice must be given to each
member entitled to notice in strict
accordance with the standing orders or
rules of the body, organization, or society
affected, and such notice must be issued
by the proper officer, person, or authority.
Where no definite notice is required by
Mr. Krishnaswamy is a practising Chartered Accountant
52
September 2011
the rules, a reasonable notice must be given

which will give those whose duty or right
it is to attend the opportunity to do so.
assembled] The question is whether the
allegation that the defendants were duly
assembled as a select vestry has been made
out. As they were assembled not on the
general day of meeting, but on a particular
day and for a special purpose, they should
have proved the notice, without which
they could not be assembled as a vestry.
The sort of notice is not material; but some
notice should have been shown, and it is
admitted that one of them received none"
(Dobson v. Fussy, 1831, 7 Bing, at p. 311).
A public body entrusted with the
performance of a public duty cannot hold
an extraordinary meeting unless all the
members be summoned who can be
summoned, or the un-summoned members
are actually present at such meeting. The
proceedings at a meeting at which any
individual is not present who might have
been summoned and was not summoned
are void, though the individual has given
a general notice that he wishes not to be
summoned (Rex v. Lang-horne, 1836, 6 N.
legal
& M. 203). It is competent, however, as, for example, in the case
of companies, for the relevant rules to provide that certain classes
of members need not be given notice of certain classes of meetings,
and also that accidental omission to give a member notice of a
meeting is not to invalidate the proceedings at that meeting. The
right of an enemy at common law or under the Trading with the
Enemy Act, 1939, to notice of meetings of a company of which
he is a member, is suspended, and a meeting is properly held
though no notice has been given to such a person (re AngloInternational Bank, Ltd., 1943, Ch. 233).
(1) Notice must (in the absence of provisions to the contrary)
be given
to every person entitled to attend
The omission to summon one member to a corporate meeting
avoids the acts of that meeting (R.v Shrewsbury, 1735, Cas.
Lee, temp. Hardw. 147). "I am of the same opinion [i.e. no
justification an assault had been made out on the ground that
the meeting was not a select vestry duly assembled] The
question is whether the allegation that the defendants were
duly assembled as a select vestry has been made out. As they
were assembled not on the general day of meeting, but on a
particular day and for a special purpose, they should have
proved the notice, without which they could not be assembled
as a vestry. The sort of notice is not material; but some notice
should have been shown, and it is admitted that one of them
received none" (Dobson v. Fussy, 1831, 7 Bing, at p. 311).
A public body entrusted with the performance of a public
duty cannot hold an extraordinary meeting unless all the
members be summoned who can be summoned, or the unsummoned members are actually present at such meeting.
The proceedings at a meeting at which any individual is not
present who might have been summoned and was not
summoned are void, though the individual has given a
general notice that he wishes not to be summoned (Rex v.
Lang-horne, 1836, 6 N. & M. 203). It is competent, however,
as, for example, in the case of companies, for the relevant
rules to provide that certain classes of members need not be
given notice of certain classes of meetings, and also that
accidental omission to give a member notice of a meeting is
not to invalidate the proceedings at that meeting. The right
of an enemy at common law or under the Trading with the
Enemy Act, 1939, to notice of meetings of a company of which
he is a member, is suspended, and a meeting is properly held
though no notice has been given to such a person (re AngloInternational Bank, Ltd., 1943, Ch. 233).
(2) Notice not essential if all entitled to attend are present:But if all the persons entitled to attend are present without
notice and agree to what is proposed, the proceedings cannot
afterwards be invalidated on that ground.
(3) Absence beyond reasonable summoning distance (or

possibly serious illness) of a person entitled to attend a
meeting may sometimes be a good reason for not summoning
him:"The election being by a definite body on a day of which, till
summons, the electors had no notice, they were all entitled
to be specially summoned, and if there was any omission to
summon any one of them, unless they all happened to be
present, or unless those not summoned were beyond
summoning distance (as, for instance, abroad), there could
not be a good electoral assembly, and even a unanimous
election by those who did attend would be void" (Smyth v.
Darley, 1849, 2 H. L. C. 789, at p. 803).
In re Portuguese Copper Mines (1889, 42 Ch. D. 160), a director
of a company, on being told a meeting would be held next
week, said, "I cannot be there." It was held that this could not
be relied on as a waiver of his right to notice and as no noticed
was sent to him the meeting was declared invalid. "Perhaps
if a member were at such a distance that it would be absolutely
impossible for him to attend, then the secretary might be
excused from sending a notice to him and the meeting would
be properly convened. Possibly the same exception might
hold good when a member was so dangerously ill that he
could not be moved" (Young v. Ladies' Imperial Club, 1920,
2 K.B. 523).
It is desirable to send notices of meetings to all members in
all circumstances, even to those who may be abroad, since it
enables them to be kept fully informed of what is being done
at meetings of bodies of which they are members.
(4) Insufficient notice of purpose of meeting may affect the
validity of resolutions passed thereat:The notice convening the meeting should contain sufficient
description of the nature of the business which the meeting
is to transact, and the meeting cannot in ordinary cases go
outside the business mentioned in that notice (Longfield
Parish Council v. Wright, 1918, 88 L.J. (Ch.) 119).
The object of requiring a proper notice of the purposes for
which the meeting is to be held, is to enable a member to
exercise his own judgment as to whether he will attend or
not. A notice may be good in part and bad in part, and it is
not wholly invalid because it extends to something which
cannot be done at the meeting (Cleve v. Financial Corporation,
1873, L.R., 16 Eq. 363). The heading in a notice of "Any other
business" will generally authorize the transaction of business
of a purely formal nature but not business of any substantial
importance.
(5) Notices must be explicit:They must be frank, open, clear, satisfactory, and free from
September 2011
53
legal
"trickiness"." If they do not fairly disclose the purpose for
which the meeting is convened, such meeting is invalid (Kaye
v. Croydon Tramways, 1898, 1 Ch 358). "The Court does not
scrutinize these notices with a view to exercise criticism, or
to find out defects, but it looks at them fairly. I think the
question may be put in this form: What is the meaning which
this notice would fairly carry to ordinary minds? That, I think,
is a reasonable test" (Henderson v. Bank of Australasia, 1890,
45 Ch. D., at p. 337).
(6) In giving notice of a meeting it is necessary to give in detail
the following particulars:Place, date, day, and time of meeting. If one meeting is to be
held immediately after another, it is desirable to fix the time
of the second meeting when it is thought the first meeting
will end, adding the alternative "or at the determination of
the previous meeting."
A meeting may not be convened for a Sunday under England
Law (Sunday Observation Act, 1833).
The place at which the meeting is to be held must be one
which is accessible to the persons entitled to be present. A
majority cannot bind a whole corporation if a minority is
deprived of its of attending the meeting, e.g. by holding a
meeting in a place to which some have no access or where
the place of meeting is so inconvenient or small that is
physically impossible for all to be present. Every corporate
act must be done at a meeting properly convened, properly
constituted, and properly held at the usual place of meeting
at which every member has the right to attend, or some other
place at which the members have the like right. The date of
the meeting must be sufficiently far ahead to comply with
any relevant requirements as to the length of notice for that
meeting, and in the absence of any such provisions the notice
should be of a reasonable length.
(7) Adjourned meetings:A meeting may be adjourned to complete unfinished business,
and in such cases unless the relevant rules otherwise provide,
54
September 2011
no notice of such adjourned meeting need be given, but no

business not specified in the notice of the meeting can be
transacted at the adjourned meeting.
Where the rules specify a particular length of notice but
contain no other provision this means that the notice must
be given that number of "clear days" before the meeting. See
re Railway Sleepers Supply Co. (1885) 29 Ch. D. 204 and the
authorities there cited.
"Clear days" means days exclusive of the day of service and
of meeting: e.g. when fourteen days' notice is required notice
for a meeting to be held on the 16th of a month must be given
on the 1st. It will be necessary in each case to see from the
rules when service is deemed to be effected. This in Table A
(Clause 131) of the Companies Act, 1948, service is deemed
to have been effected 24 hours after the letter containing the
same is posted and where these apply and notice is being
given by post the notice required to be given on the 1st of the
month in the above example would have to be posted on the
last day of the previous month.
Similarly the phrase "not less than twenty-one days' notice"
in the Companies Act, 1948, means twenty-one clear days'
notice , exclusive of the day of service and exclusive of the
day on which the meeting is to be held. An article which
provides that the day of service of a notice is to be counted
in the specified number of days is contrary to the provisions
of the Act and must be disregarded (re Hector Whaling, Ltd.,
1936, Ch. 208).
Where notice is to be given by advertisement the clear days
count between the day on which the advertisement calling
the meeting appears in a newspaper and the day of the
meeting, and such notice is effectual even though it may not
reach members until some days afterwards (Mercantile
Investment Co. v. International Co. of Mexico, 1893, 1 Ch.
484n.).
In the absence of any express provision to the contrary
Saturdays will be included in computing the length of the
notice.
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September 2011
55
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wdfwd lgdf{0f e}/x]sf 5g . o;/L ag]sf cGt/f{li6o PsLs/0fsf ;+hfn
leq k|To]s /fi6x? k|ToIf ?kdf ;+nUg /xg' kg]{ / cGt/f{li6o ?kdf
g} o:tf ck/fwsf la?4 ;+3{if ug'{kg]{ ePsf] 5 . ;DklQ z'l4s/0f
ck/fwnfO{ lgoGq0f lg/fs/0f ug{ /fi6x?sf] cfd ;xdltaf6 ag]sf
cGt/f{li6o ;+oQ
' m /fi6 ;+3Lo dxf;lGwx? / ;lGwx? cg'sn
' sf ;b:o
/fi6x?sf ;DklQ z'l4s/0f lgoGq0f lg/fs/0f ug{ sfg"g lgoGq0fsf/L
;+/rgf agfO{ nfu' ug'{kg]{ cj:yf 5 . lsgeg] ;b:o /fi6x? jf
x:tfIf/stf{ kIf /fi6sf] jrgj4tf klg cGt/f{li6o sfg"g cg'?k cfkm\gf]
sfg"gnfO{ cg's'n agfO{ cfkm\gf] b]zdf k|efjsf/L ?kdf nfu' ug'{ xf] .
;DklQ z'l4s/0f P]g @)^$ tyf ;f] cGtu{tsf sfd sf/jfxL z'? eP
kl5 o; ljifodf cTolws rf;f] a9]sf] kfO{G5 . /fHonfO{ 7Ug] /
ck/fwsf] rqm ;+rfng ug]{ JolQm la?4sf] ;+oGq dfq xf] . ;j}
Joj;fonfO{ ;jn, ;Ifd bLw{sflng / kf/b{zL agfpg' o;sf] d'Vo
p4]Zo /x]sf] 5 . ;DklQ z'l4s/0f ck/fwn] /fHo, ;dfh / ljZjdf
kg]{ k|efjsf] af/]df s'g} dfkg ug{ ;lsg] ca:yf 5}g . o;sf] If]q
Jofks ePsf]n] o;sf] k|ToIf k|efj n]vfk/LIf0fsf] If]qdf ;d]t kg{
;Sg] ePsfn] ;f] ljifonfO{ phfu/ ug'{ g} of] n]vssf] d'Vo p4]Zo
/x]sf] 5 .
g]kfndf ;DklQ z'l4s/0f lgjf/0f ;DalGw

sfg'gL Joj:yfx?M
;Dklt z'l4s/0f -dlg nfpG8l/_ lgjf/0f P]g
@)^$
g]kfndf ;DklQ z'l4s/0fsf ;+DaGwdf sfg"gsf] cfjZostf

dxz'; w]/} cufl8 b]lv ePsf] ePtf klg dlg nfpg8l/sf]
g]kfnL ?kfGt/0f ;DklQ z'l4s/0f jf d'b|f lgd{lns/0f s'g
/fVg] eGg] laifodf nfdf] ljjfb kl5 @)^$ ;fn df3 !$
ut] dfq ;DklQ z'l4s/0fsf] gfd af6 of] P]g cfof] . o;
P]gsf] k|:tfjgfdf ck/fwhGo sfo{af6 k|fKt ;DklQ z'l4s/0f
ug]{ sfo{nfO{ lgjf/0f ug]{ ;DaGwdf sfg"gL Joa:yf ug{ cfPsf]
eGg] pNn]v 5 . of] P]g cg';f/ s;}n] klg ;DklQ z'l4s/0f
u/fpg x'bg} u/fPdf ;hfo ;d]t x'g] pNn]v u/]sf] 5 . pQm
P]gdf pNn]v ul/Psf d'Vo Joj:yfx? o; k|sf/ 5g .
s_ ;Dklt z'l4s/0f u/]sf] dflgg] cj:yf

s;}n] b]xfosf s'g} jf ;j} sfo{ jf s;'/ u/L k|ToIf jf ck|ToIf
?kdf k|fKt, wf/0f, ef]urng u/] jf u/fPsf] ;DklQ jf To:tf]
;DklQ s'g} k|sf/n] nufgL u/L a9] a9fPsf] ;DklQ ;DalGwt
JolQm jf cGo s;}n] k|fKt jf wf/0f jf ef]urng , k|of]u,
56
September 2011
pkof]u jf cfh{g u/] jf u/fPdf jf To:tf] ;Dkltsf] >f]t,

k|sl[ t, :yfg, :jfldTj,clwsf/, sf/f]jf/ n'sfpg] , kl/jt{g ug]{
jf 5Ng] p2]Zon] jf x:tfGt/0f u/] jf u/fPdf jf To;/L k|fKt
;DklQ xf] eGg] hfgL hfgL jf ljZjf; ug'{ kg]{ dgfl;j sf/0f
eO{ To:tf] ;DklQ k|fKt ,vl/b, wf/0f, ef]urng, k|of]u, pkof]u
jf pkef]u u/] jf u/fPdf jf cGo s'g} klg tl/sfn] sf/f]jf/
jf Jojxf/ u/] jf u/fPdf jf ;DklQ ?kfGt/0f , kl/jt{g jf
x:tfGt/0f ug{ jf u/fpg k|ToIf jf ck|ToIf ?kdf s'g} klg
;xof] u u/] jf u/fPdf lghn] ;DklQ z' l 4s/0f u/] s f]
dflgg]5 .
v_ ;Dklt z'l4s/0f u/]sf] dflgg] s;'/

o; P]gn] ;Dklt z'l4s/0f u/]sf] dflgg] s;'/ cGt{ut b]xfosf
s;'/x?nfO{ ;dfj]z u/]sf] kfOG5
o; P]gn] ;DklQz'l4s/0f u/]sf] dflgg] s;'/ cGt{ut

b]xfosf s;'/x?nfO{ ;dfj]z u/]sf] kfOG5
/fh:j 5nL
;+ul7t ?kdf ck/fw u/L
cft+ssf/L lqmofsnfkdf nufgL u/L
xftxltof/ v/vhfgf ;DalGw k|rlnt sfg"g cGt{utsf]
s;'/ u/L
ljb]zL ljlgdo lgoldt ug]{ sfg"g cGt{utsf] s;'/ u/L
Hofg, rf]/L, 7uL, lst]{ sfuh,vf]6frng,ckx/0f jf z/L/
aGws ;DalGw s;'/ u/L,
nfu'cf}ifw lgoGq0f ;DalGw s;'/ u/L
/fli6o lgs'Gh tyf aGo hGt' ;+/If0f ;DalGw s;'/ u/L
Dffgj a]rlavg tyf cf];f/ k;f/ lgoGq0f ;DalGw s;'/
u/L
;xsf/L ;DalGw s;'/ u/L
ag ;DalGw sfg"g cGt{utsf] s;'/ u/L
e|i6frf/ lgoGq0f ;DalGw s;'/ u/L
a}s tyf ljQLo ;:yf ;DalGw sfg"g cGt{utsf] s;'/ u/L
a}ls s;'/ tyf ;hfo ;DalGw s;'/ u/L
k|frLg :df/s ;+/If0f ;DalGw s;'/ u/L
g]kfn ;/sf/n] /fhkqdf ;"rgf k|sfzg u/L tf]ss
] f cGo
s'g} sfg"g jf g]kfn kIf ePsf] s'g} ;lGw cGt{utsf]
s;'/ u/L .
u|fxssf] klxrfg, sf/f]jf/ / ljj/0f ;DalGw

Joj:yf
s'g} a}s tyf ljQLo ;:yf jf u}/ ljQLo ;:yfn] s'g} JolQm ;+u s'g}
k|sf/sf] Joj;flos ;DaGw :yfkgf ubf{ jf g]kfn /fi6 a}sn] ;do
;dodf ;"rgf k|sfzg u/L tf]ss
] f] /sd eGbf a9L /sdsf] Ps} k6s
jf k6s k6s u/L sf/f]jf/ ubf{ To:tf] JolQmsf] klxrfg :k:6 ?kdf
ug'{ kg]5
{ . o;/L u|fxssf] klxrfg ubf{ a}s, ljQLo ;+:yf jf u}/ ljQLo
legal
;+:yfn] To;/L Joj;flos ;DaGw :yfkgf ug]{ jf sf/f]jf/ ug]{ JolQmnfO{
cfjZos sfuhft k]z ug{ nufO{ sfuhft / sf/f]jf/sf] ldlt tyf
k|s[lt vftf eP To:tf] vftfsf] lsl;d , ;+s]t g+ ;d]t ;dfj]z u/L
5'} clen]v /fVg' kg]{ 5 .
ljQLo hfgsf/L OsfO{
;DklQ z'l4s/0f ;DalGw ;"rgf ;+sng tyf ljZn]if0f ug{sf] nflu

g]kfn /fi6 a}sdf Pp6f ljQLo hfgsf/L O{sfO{ /xg] 5 . h;sf] k|dv
' df
g]kfn /fi6 a}ssf] k|yd >]0fLsf clws[t / sfof{no g]kfn /fi6 a}sdf
/xg] 5 . o; O{sfO{sf] sfd sQ{Ao / clwsf/df ;/sf/L lgsfo ,a}s
tyf ljQLo ;+:yf / u}/ ljQLo ;+:yfaf6 sf/f]jf/sf] ljj/0f k|fKt ug],{
k|zf]wg u/L clen]v /fVg], cfjZos hf+ra' tyf cg';Gwfg ug]{,
cfjZos b]lvP sf/jfxLsf nflu ljefudf n]lv k7fpg], ljj/0fx?
kf/:kl/stfsf cfwf/df pknAw u/fpg] / ;f] k|fKt ug{ cGt/f{li6o
;+:yfx? ;+u ;dGjo ug]{, lg/LIf0f ug]{, tflndsf] Joj:yf ug]{ ;fy}
tf]lsP adf]lhdsf] cGo sfd ug]{ .
;DklQ z'l4s/0f ljefu u7g

;DklQ z'l4s/0f P]g @)^$ cGt{utsf s;'/sf] cg';Gwfg tyf txlssft
ug{ ;f]xL P]gsf] bkmf !!-!_ adf]lhd g]kfn ;/sf/n] Ps ;DklQ z'l4s/0f
cg';Gwfg ljefu g]kfn ;/sf/sf] dGqL kl/ifbsf] ldlt @)^*#!
sf] lg0f{ofg'zf/ :yfkgf u/]sf] 5 . cg';Gwfg txlssftsf] l;nl;nfdf
;/sf/L lgsfo, a}s, ljQLo ;+:yf jf u}/ ljQLo ;+:yfnfO{ cfjZos
sfuhft ljefudf k]z ug{ cfb]z lbg], sfuhft, lnvt, b;L k|df0f
j/fdb ug],{ sAhfdf lng], ;Da4 JolQmnfO{ pkl:yt u/fO{ ;f]wk'5 ug],{
aofg lng], sfuh u/fO{ 5f8g], tf/]vdf /fVg], w/f]6L hdfgt lng], jf
cbfntsf] cg'dlt lnO{ y'gfdf /fVg],;DklQ /f]Ssf /fVg cfb]z lbg],
ljefusf] cfb]z gdfGg] kbflwsf/LnfO{ ks|fp ug]{ / Ps xhf/ ?k}of
;Dd hl/jfgf ug]{ clwsf/ /x]sf] 5
;DklQ z'l4s/0f u/L ;DklQ cfh{g u/]sf] dflgg]

cfwf/
;DklQ z'l4s/0f P]g cGt{utsf] s;'/df d'4f rnfOPsf]df JolQmsf]
cfo>f]t jf cfly{s cj:yfsf] t'ngfdf lghsf] ;DklQ c:jefljs b]lvg
cfPdf jf lghn] c:jefljs pRr hLjg:t/ ofkg u/]df jf cfkm\gf]
x}l;ot eGbf a9L s;}nfO{ bfg ,bftJo, pkxf/ ;fk6L, rGbf jf as;
lbPsf] k|dfl0ft ePdf lghn] To:tf] ;DklQ s] s:tf] >f]taf6 cfh{g
u/]sf] xf] eGg] s'/f k|dfl0ft ug'{ kg]{5 / To;/L k|dfl0ft ug{ g;s]df
To:tf] ;DklQ o; P]g cGt{ut s;'/ u/L k|fKt u/]sf] dflgg]5 .
s;'/ ug]{nfO{ x'g] b08 ;hfo
cft+ssf/L lqmofsnfkdf nufgL ug]{nfO{ ! aif{ b]lv kfFr aif{

;Dd s}b / lauf] v'n]sf]df lauf] adf]lhd / gv'n]sf]df kfFr
nfv ?k}of ;Dd hl/jfgf x'g]5 .
cft+ssf/L lqmofsnfkdf nufgL ug]{nfO{ afx]s kl/R5]b @
cGt{utsf cGo s;'/ ug]n

{ fO{ lauf] adf]lhdsf] hl/jfgf / Ps
aif{ b] l v rf/ aif{ ;Dd s} b jf b' j } ;hfo x' g ] 5 .
s'g} a}s tyf ljQLo ;+:yf jf u}/ ljQLo ;+:yfn] u/]sf] s;'/sf]
;DaGwdf dfly pNn]v eP adf]lhdsf] ;hfo ubf{ a}s tyf
ljQLo ;+:yf jf u}/ ljQLo ;+:yfsf] s;'/ ug]{ kbflwsf/L jf
sd{rf/L klxrfg x'g ;s]df To:tf] kbflwsf/L jf sd{rf/LnfO{
/ klxrfg x'g g;s]sf]df s;'/ x'bF fsf avt ;f] a}s tyf ljQLo
;F:yf jf u}/ ljQLo ;F:yfsf] k|dv
' eO{ sfdsfh ug]{ JolQmnfO{
;hfo x'g]5 .
s'g} /fi6;j] s jf a}s tyf ljQLo ;F:yf jf u}/ ljQLo ;F:yfsf]
kbflwsf/L jf sd{rf/Ln] s;'/ u/]sf] /x]5 eg] pk/f]Qm ;hfodf
!) k|ltlzt yk x'g]5 .
o; P]g cg';f/ s;'/ ug{ pBf]u ug]{ jf ug{ d2t ug]{ jf
b' ? T;fxg lbg] n fO{ s;' / bf/nfO{ x' g ] ;hfosf] cfwf
;hfo x'g]5 .
s;}n] s'g} kmd{, sDkgL jf ;F:yfnfO{ k|of]u u/L o; P]g adf]lhd
s;'/ u/] jf u/fPdf To:tf] kmd{, sDkgL jf ;F:yfnfO{ ;d]t
o; bkmf adf]lhd hl/jfgf x'g]5 .
dflysf afx]s s;}n] of] P]g jf o; P]g cGt{ut ag]sf] lgod
jf hf/L ul/Psf] lgb]z
{ gsf] pn+3g u/]df lauf] v'ns
] f]df lauf]
hkmt u/L lauf] adf]lhd hl/jfgf / lauf] gv'ns
] f]df kfFrnfv
?k}of ;Dd hl/jfgf x'g]5 .
;DklQ z'l4s/0f / n]vfk/LIf0f k]zfsf jLrsf]

cGt{;DaGw
n]vfk/LIf0f k]zf k|ToIf jf ck|ToIf ?kdf ;DklQ z'l4s/0f ck/fw ;+u
cGt{;DjlGwt 5 . lsgeg] ;a} z'4 jf cz'4 ;DklQ cfh{g ug]{x?n]
;fj{hlgs ?kdf JoQm ubf{ z'4 ;Dkltsf] g} jsfnt ul//fv]sf x'G5g
. g]kfndf ;j} vfn] Joj;fflos JolQm jf ;+:yfx?sf] n]vfk/LIf0f g]kfn
rf6{8{ Psfpg6]06\; ;+:yfdf btf{ ePsf ;b:ox?n] dfq ug]{ Joj:yf
5 . To:tf Joj;flos ;+:yfx?sf] n]vfk/LIf0f :jefljs ?kdf btf{jfnf
n]vfk/LIfsx?af6 g} x'g] x'b+ f tL ;+:yfx?n] cfh{g u/]sf] ;Dkltx? z'4
jf cz'4 s] xf] egL 5'ofP/ x]/L jf:tljstf kQf nufO{ n]vfk/LIf0f
ug{ sl7g aGb} uPsf] tYo xfd|f] ;fd' 5 . tyfkL n]vfk/LIfsx?n] oL
r'gf}tLx?sf afjh'b klg olb k]zf u/L cfkm\gf] hLljsf]kfh{g ug]{ g}
xf] eg] ;DklQ z'l4s/0f P]g tyf lgodfjnL, lgb]{lzsf / jt{dfg
cGt/f{li6o ;lGw ;Df}tf ;d]tsf] kfngf u/L n]vfk/LIf0f ug'{ kg]{
ePsf] 5 . o;}n] ;DklQ z'l4s/0f / n]vfk/LIf0f k]zfsf jLrsf]
cGt{;DaGw lbg k/ lbg a9L /x]sf] b]lvG5 . g]kfn /fi6 a}s ljQLo
hfgsf/L O{sfO{n] ;DklQ z'l4s/0f -dlg nfpG8l/_ lgjf/0f P]g @)^$
adf]lhd ;DklQ z'l4s/0f tyf cft+ssf/L sfo{df nufgL ug]{ h:tf
ck/fwsf] lgoGq0fsf] l;nl;nfdf n]vfk/LIf0f Joj;fo ug]{ JolQm ,kmd{
jf sDkgLn] k7fpg' kg]{ ;"rgf tyf hf]lvd Joj:yfkgsf ;DaGwdf
hf/L u/]sf lgb]z
{ g cg'zf/ klg yk cGt{;DaGwsf] ljsf; ePsf] kfO{G5.
September 2011
57
legal
ljQLo hfgsf/L O{sfO{af6 hf/L lgb]{zg4f/f
n]vfk/LIf0f Joj;foLsf d'Vo lhDd]jf/Lx?
o u|fxs;]jfu|fxLsf] :k:6 klxrfg sfod u/L ;f] sf]

ljj/0f /fVg' kg]{
n]vfk/LIf0f Joj;foLn] s'g} JolQm ;+u cfkm\gf] k]zfut sfd
sf/jfxLsf] l;nl;nfdf ;DaGw :yflkt ubf{ u|fxs;]jfu|fxLsf]

cg';r
" L! Afdf]lhdsf] klxrfg v'Ng] sfuhfttyf ljj/0f lnO{
;f]sf] clen]v /fVg' kg]{ 5
n]vfk/LIf0f Joj;foLn] klxn] g} :yflkt u/]sf] klxrfg / ;f]
;+u ;DalGwt sfuhftdf s'g} klg kl/j{tg ePsf] ca:yfdf

v08 ! Afdf]lhd klxrfg k|lqmofnfO{ k'gM ;DkGg ug'{kg]{ 5 .
o ljj/0f lbg' kg]{

lgb]z
{ g g+ ! adf]lhd n]vfk/LIf0f Joj;foLn] cfjZos ljj/0f dfUbf
To:tf] ljj/0f pknAw u/fpg] bfloTj ;DalGwt u|fxs ;]jfu|fxLsf]
x'g]5 . sf/0faz To:tf] ljj/0f glbg] jf lbg g;Sg] u|fxs
;]jfu|fxL;+u n]vfk/LIf0f Joj;foLn] cfkm\gf] sf/f]jf/ jf Joa;flos
;DaGw /fVg tTsfn OGsf/ ug{ ;Sg]5 . sf/0fjz ;DaGw :yflkt
ug{ OGsf/ ug{ g;lsg] cj:yf ePdf To:tf u|fxs ;]jfu|fxLsf]
sf/f]jf/nfO{ z+sf:kb dfgL ;f] sf] ljj/0f cg';l' r @ adf]lhdsf]
9f+rfdf ljQLo hfgsf/L O{sfO{df k]z ug'{ kg]{5 .
o z+ s f:kb sf/f] j f/sf] ljj/0f k7fpg' kg] {

n]vfk/LIf0f Joj;foLn] o; lgb]{zgdf lbPsf] cfwf/ adf]lhdsf]
cj:yf /x] ePdf To:tf] s'g} klg u|fxs ;]jfu|fxLsf] sf/f]jf/sf]
;"rgf cg';"rL @ adf]lhdsf] 9f+rfdf ljQLo hfgsf/L O{sfO{nfO{
tTsfn lbg' kg]{5 .
n]vfk/LIf0f Joj;foLn] z+sf:kb sf/f]jf/ egL ljQLo hfgsf/L
O{sfO{nfO{ lbPsf] hfgsf/Lsf] clen]v v8f u/L /fVg' kg]{5 .
o ;"rgf lbg' kg]{ z+sf:kb sfd sf/f]jf/sf] k|s[lt

P]g lgod tyf lgb]{zg adf]lhd n]vfk/LIf0f Joj;foLn] cfkm\gf]
k]zfut sfd sf/jfxL sf] l;nl;nfdf s'g} klg :jb]zL tyf ljb]zL
gful/s ,kmd{, sDkgL,;+:yf jf lgsfon] ;DklQ z'l4s/0f ,cft+ssf/L
sfo{ jf ;Da4 cGo s;'/hGo s'g}klg sfo{ u/]sf] jf ug{ nfu]sf]
jf ug{ k|of; u/]sf]] yfxf x'g cfPdf jf b]lvPdf jf lgDgfg'zf/
z+sf:kb sfo{sf] ;"rgf cg';l" r @ sf] 9f+rfdf tTsfn lbg' kg]5
{ .
u|fxs ;]jfu|fxLn] :jb]zdf jf ljb]zdf s'g} s;'/ jf ck/fwaf6
k|fKt jf k|rlnt sfg"g adf]lhd nfg Nofpg gldNg] s'g} k|sf/sf]

;DklQ, ;f] df k|of]u ePsf jf ug{ vf]lhPsf a:t', pks/0f
jf s'g} >f]t ;fwg Nofpg n}hfg jf ;f] sf] k|of]u jf pkof]u
58
September 2011
u/]sf] jf ug{ vf]h]sf] kfOPdf .

cfkm"n] ;]jf k|bfg u/L /x]sf] u|fxs ;]jfu|fxLn] :jb]zdf jf
ljb]zdf s'g} s;'/ jf ck/fwaf6 k|fKt /sd jf cGo s'g}
;Dkltsf] joj:yfkg ug]{ lhDdf lnPsf] jf lng k|of; u/]sf]df.
ccfkm"n] ;]jf k|bfg u/L /x]sf] u|fxs ;]jfu|fxLn] :jb]zdf jf
ljb]zdf s'g} s;'/ jf ck/fw ug{ u/fpg k|ToIf jf ck|ToIf
pBf] u , d4t, ;xof] u jf b' ? T;fxg u/] , u/fPdf,
cfkm"n] ;]jf k|bfg u/L /x]sf] u|fxs ;]jfu|fxLn] :jb]zdf jf
ljb]zdf s'g} lsl;dn] o; P]g adf]lhdsf] s;'/ jf s/ /fh:j
tyf cGo ;/sf/L b:t'/ 5nL;+u ;DalGwt sfd sf/jfxLdf
;+nUg ePsf] jf s'g} klg lsl;dsf] ck/flws sfo{df k|ToIf
jf ck|ToIf ?kdf ;+nUg ePsf] kfO{Pdf jf ;f]sf] z+sf nfu]df.
cfkm"n] ;]jf k|bfg u/L /x]sf] u|fxs ;]jfu|fxL s'g} klg lsl;dsf]
cft+safbL lqmofsnfkdf jf /fli6o jf cGt/f{li6o cft+safbL
;+ u 7gdf ;+ n Ug ePsf] kfO{ P df jf z+ s f nfu] d f .
cfkm"n] ;]jf k|bfg u/L /x]sf] u|fxs ;]jfu|fxLn] k|rlnt sfg"g
tyf n]vf dfkb08 cg'?k n]vf g/fvL ;+:yfsf] >f]t ;f3g
b'/kof]u u/]sf] kfO{Pdf .
cfkm"n] ;]jf k|bfg u/L /x]sf] u|fxs ;]jfu|fxLn] jf:tljs
sf/f]jf/ n'sfpg, sd b]vfpg, jf cjf:tljs sf/f]jf/ ePsf]

egL b]vfpgsf nflu cfkm"nfO{ cg'/f]w ug]{ bjfj lbg], k|efj
kfg]{ sfo{ u/]df .
o cft+ssf/L klxrfg, sf/f]jf/df lgogq0f / ;"rgfM
n]vfk/LIf0f Joj;foLn] cfkm"n] ;]jf k|bfg u/L /x]sf] u|fxs
;]jfu|fxL ;+oQ
' m /fi6 ;+3, ;'/Iff kl/ifbsf] lg0f{o g+ ! @^& tyf
;f] ;+u ;DalGwt cft+ssf/Lsf ?kdf ;"lrs[t cnsfobf,
tflnjfg nufot ;do ;dodf tf]lsPsf cGo ;+:yf, ;d"x jf
JolQm / To:tf;+u ;Da4 s'g} klg ;+:yf, ;d"x jf JolQm;+u
ePsf] kfO{Pdf ;f] sf] hfgsf/L ljQLo hfgsf/L O{sfO{df tTsfn
k7fpg' kg]{5 .
pk/f]Qm adf]lhdsf] s'g} sfd sf/f]jf/df ;+nUg s'g} AolQm,
;+:yf, kmd{ jf sDkgLnfO{ cfkm"n] ;]jf k|bfg ul//x]sf] kfOPdf
jf yfxf kfPdf tTsfn z+sf:kb sf/f]jf/sf] ?kdf pQm O{sfO{nfO{
hfgsf/L k7fO{ ;f]sf] hfgsf/L ck/fw lgoGq0f ug]{ ;DalGwt
;/sf/L lgsfo jf clwsf/LnfO{ ;d] t lbg' kg] { 5 .
n]vfk/LIf0f Joj;foLn] pk/f]Qm adf]lhdsf] s'g} ;+:yf,kmd{,jf
sDkgL ;DalGw hfgsf/L ;+oQ

' m /fi6 ;+3sf] j]e ;fO6 http//
committees/1267/pdf/consolidated.pdf af6 k|fKt u/L
;f] sf] klxrfg / lgoGq0f ug]{ cfjZos ;+oGq lgdf{0f ug'{ kg]{
5.
g]kfnsf] k|rlnt sfg"g jf sfg"gL Joj:yfn] cGoyf u/]sf]df
afx]s n]vfk/LIf0f Joj;foLn] laleGg d'n'ssf] cft+ssf/L jf
legal
ck/flws lu/f]xsf ?kdf 3f]if0ff u/]sf] s'g} ;+:yf ,;d"x,jf JolQm
/ To:tf ;+u ;+Da4 s'g} klg ;+:yf, ;d'x jf JolQm cfkm\gf]
u|fxs ;]jfu|fxL ePsf] yfxf kfPdf tTsfn z+sf:kb sf/f]jf/sf]
?kdf pQm O{sfO{df k7fO{ ;f] sf] hfgsf/L ck/fw lgoGq0f ug]{
;DalGwt ;/sf/L clwsf/LnfO{ ;d] t lbg' kg] { 5 .
o hf]lvd Joj:yfkg
sfo{ ug]{ (Focal point) sf] ?kdf sfd ug{ Ps sfof{Gjog

clws[tsf] Joj:yf ug'{ kg]5
{ . sfd ug]{ JolQmsf] gfd, 7]ufgf,;Dks{
gDj/,Od]n nufotsf ljj/0f ljQLo hfgsf/L O{sfO{df k7fpg'
kg]{5 .
o ljj/0f k7fpg] k4lt

n]vfkl/If0f Joj;foLn] ljQLo hfgsf/L O{sfO{df k7fpg' kg]{
ljj/0fb]xfo adf]lhd x'g' kg]{5
z+sf:kb sf/f]jf/sf] ;"rgf tyf ljj/0f cg';r
" L @ sf] 9f+rfdf
k7fpg' kg]{5 .
z+sf:kb sf/f]jf/nfO{ kq, kmofS;,O{d]n,h:tf laB'tLo ;+rf/
dfWodaf6 ljQLo hfgsf/L O{sfO{nfO{ k7fpg ;lsg]5 . To:tf
dfWodaf6 hfgsf/L k7fPsf] eP tTsfn cGo dfWodaf6 ;f]
sf] k'li6 ug'{ kg]{5 .
ljQLo hfgsf/L O{sfO{nfO{ lbOPsf] ljj/0fdf s'g} s'/f 5'6 ePdf
jf To:tf] sf/f]jf/ ubf{sf ;dodf ;DalGwt JolQmn] k]z u/]sf]
ljj/0f jf hfgsf/L eGbf km/s ljj/0f jf hfgsf/L kl5 k|fKt
ePdf ;DalGwt n]vfk/LIf0f Joj;foLn] ;f] sf] hfgsf/L t'?Gt
ljQLo hfgsf/L O{sfO{nfO{ lbg' kg]5
{ . ljQLo hfgsf/L O{sfO{nfO{
lbg' kg]{5 .
n]vfk/LIf0f Joj;foLn] cfkm\gf] u|fxs ;]jfu|fxL b]xfo adf]lhdsf]

eP h:tf] nfu]df pgLx?sf] sf/f]jf/nfO{ hf]lvdo'Qm sf/f]jf/ dfgL
To:tf u|fxs ;]jfu|fxLnfO{ ;]jf k|bfg ubf{ laz]if zt{stf ckgfpg'
kg]{5 .
b]z jf ljb]zdf cft+ssf/L ultljlw ,cft+sjfbL ;+u7g,;+ul7t
ck/fw, nfu' cf}ifw nfufot cGo s'g} klg lsl;dsf ck/flws
sfo{nfO{ k|ToIf jf ck|ToIf ;xof]u k'ofpg] ;DalGwt JolQm,
;+:yf jf pgLx?;+u ;Da4 /x]sf] kmd{, sDkgL kf ;+3 ;+:yf,
/fhg}lts, Joj;flos,;fdflhs, ljQLo, k|zf;lgs cflb If]qdf
pRr txdf /x]sf :jb]zL jf ljb]zL gful/s tyf yfxf eP ;Dd
lghsf kl/jf/,glhssf gft]bf/ jf lghx?;+u ;Da4 kmd{,
sDkgL jf ;+3 ;+:yf ,
cfdg] ;fdg] geO{ ;]jf k|bfg ug'{ kg]{ JolQm, kmd{, sDkGfL jf
;+3 ;+:yf,
;DklQ z'l4s/0f jf cft+sjfbL lqmofsnfk /f]Sg] ;DaGwdf
cfjZos dfkb08 gckgfO{Psf b]zsf kmd{,sDkgL jf ;+3 ;+:yf,
UNO jf cGo cGt/;/sf/L cGt/f{li6o ;+:yfn] cfly{s gfsfaGbL
nufPsf] jf vj/bf/L u/]sf /fi6sf kmd{, sDkgL jf ;+3 ;+:yf,
;DklQ z'l4s/0f / cGo ljQLo ck/fwdf ;+nUg ePsf] egL
cfd;+rf/ dfWddf rrf{ kfPsf kmd{, sDkgL jf ;+3 ;+:yf,
N]fvfk/LIf0f Joj;foLsf] sfo{If]q leq x'g] u/]sf sfd sf/jfxL
cflbsf] cfwf/df a9L z+sf ug'{ kg]{ kmd{, sDkgL , ;+3 ;+:yf,
s/, eG;f/,b:t'/, jf cGo /fh:j cflb 5nL , lxgfldgfug{
u/fpg] egL al'Psf / ;f] ;+u s'g} klg k|sf/n] ;DalGwt
kmd{, sDkgL ,jf ;+3 ;+:yf,
jf:tljs sf/f]jf/ n'sfpg, sd b]vfpg,jf cjf:tljs sf/f]jf/
ePsf] egL b]vfpgsf nflu cfkm"nfO{ cg'/f]w ug]{ , bjfj lbg],
k|efj kfg]{ JolQmx? ;+nUg /x]sf] kmd{, sDkgL jf ;+3 ;+:yf,
n]vfk/LIf0f Joj;foLn] cfkm}n] pko'Qm 7fg]sf cGo JolQm jf
;+:yf,
o sfo{fGjog clws[tsf] Joj:yf

n]vfk/LIf0f Joj;foL cfkm} jf cfkm";+u sfo{ ug]{ s'g} JolQmnfO{
;DklQ z'l4s/0f -dgL nfpG8l/ _ lgjf/0f P]g , ljQLo hfgsf/L
O{sfO{sf] lgb]zg tyf o; ;DalGw cGo k|rlnt sfg"g adf]lhd
o cg'udg tyf lgodg

k|rlnt g]kfn sfg"g tyf ;DklQ z'l4s/0f -dgL nfpG8l/_
lgjf/0f P]g tyf ;f] cGtu{t hf/L ePsf lgod, ljlgod,lgb]z

{ g
jf cfb]z adf]lhd ug'{ kg]{ sfo{x? n]vfk/LIf0f Joj;foLn] u/]
gu/]sf] ;DaGwdf ;do ;dodf cg'udg ug{ u/fpg jf ;DalGwt
lgsfonfO{ cg'/f]w ug{ ;Sg]5 .
To;/L cg'udg ubf{ u/fp+bf cfjZos kg]{ ;Dk"0f{ ;xof]u ug'{
u/fpg' ;DalGwt n]vfk/LIf0f Joj;foLsf] sQ{Ao x'g]5 .
Uff]Kotf e ug{ gx'g]
n]vfk/LIf0f Joj;foL jf ;f]sf] s'g} klg sd{rf/L, kbflwsf/L jf k|ltlglwn]

ljQLo hfgsf/L O{sfO{nfO{ k|bfg u/]sf] ;"rgf, hfgsf/L,cg';Gwfg tyf
txlssftsf] l;nl;nfdf jf cfkmgf] sQ{Jo kfng ubf{ 1ft x'g cfPsf]
s'g} klg tYo jf bflvn ePsf] s'g} klg lnvtsf] uf]Kotf k|rlnt
sfg"gn] afWo u/]sf] cj:yfdf afx]s cGo cj:yfdf e ug{ jf u|fxs
nufot cGo sf]xL s;}nfO{ klg s'g} tl/sfaf6 hfgsf/L lbg x'b}g .
;DklQ z'l4s/0fsf l;nl;nfdf n]vfk/LIf0f Joj;foLsf

r'gf}tLx?
;DklQ z'l4s/0f -dgL nfpG8/L_ lgjf/0f P]g @)^$ cfpg' eGbf
cufl8 klg n]vfk/LIf0f Joj;fo sd r'gf}tLk"0f{ lyPg . t/ of] P]g cfP
kl5 o:n] n]vfk/LIf0f Joj;fonfO{ cGo k]zfsf] t'ngfdf yk r'gf}tLk"0f{
September 2011
59
legal
agfPsf] 5 . lsgeg] n]vfk/LIf0f Joj;fosf] k|ToIf ;/f]sf/ g} nufgL
u/]/ gfkmf sdfpg] p2]Zo /fVg]x? ;+u x'g] ub{5 . g]kfn rf6{8{
PsfpG6]G6\; P]g @)%# n] n]vfk/LIf0f Joj;foLx?nfO{ lhDd]jf/L ;'Dk]sf]
5 eg] ;f] P]g cGt{ut aGg] lgodfjnL , ljlgod , lgb]l{ zsf tyf cfrf/
;+lxtfx?n] klg yk lhDd]jf/ agfPsf] tYonfO{ klg la;{g ;lsb}g .
sDkgL P]g @)^#, cfos/ P]g @)%* tyf lgodfjnL @)%(, d'No
clea[l4 s/ P]g @)%@ tyf lgodfjnL @)%# nufotsf s/ tyf cGo
/fh:j ;DalGw P]gx?n] klg Tolts} lhDd]jf/ agfPsf] 5 . ut laut
b]lv g} of] k]zf cGo k]zfsf] t'ngfdf hf]lvdk"0f{ /x]sf] x'+bf x'+b} klg
;DklQ z'l4s/0fsf l;nl;nfdf of] Joj;fodf ;+nUg JolQm jf ;+:yfsf]
yk lhDd]jf/L cfpg' g} k|dv
' r'gf}tLsf] ?kdf b]vfk/]sf] 5 . of] k]zfdf
;+nUg JolQm jf ;+:yfx?sf nflu jQ{dfgdf b]vfk/]sf r'gf}tLx?nfO{
lgDgfg' z f/ ;' q j4 u/L k| : t' t ug] { sf] l ;; ul/Psf] 5 .
s]Gb|Lo sfof{nodf Joj:yfksLo txsf] Ps pRr kbflwsf/LnfO{
;fdflhs lhDd]jf/L yk ePsf] .

ljQLo hfgsf/L O{sfO{nfO{ lbg' kg]{ ;"rgfx?sf] juL{s/0fdf
;d:of x'g' .
Joj:yfkgn] /fv]sf] axLvftfsf] k/LIf0f u/L /fo lbg' kg]{
lhDd]jf/L /x]sf] n]vfk/LIf0f Joj;fo z'4 cz'4 ;Dklt 5'ofpgdf
;d]t lhDd]jf/ x'g' .
;Dklt z'l4s/0f lgjf/0f P]g tyf lgodfjnLn] n]vfJoj;foLnfO{
;"rssf] ?kdf tf]s]sf] x'+bf b]xfo adf]lhdsf] bfloTj tf]s]sf]

5
s= s;}n] /fi6 a+}sn] tf]ssf] /sd eGbf a9L /sdsf] Psd'i6
jf k6s k6s sf/f]jf/ u/]df ;f] sf] clen]v /fVg] .
v= s'g} sf/f]jf/ z+sf:kb b]lvPdf jf ;Dklt z'l4s/0f ug]{
p4]Zon] u/]sf] jf ePsf] b]lvPdf jf z+sf ug'{ kg]{ dgfl;a
sf/0f ePdf ;f] ;DaGwdf cg';Gwfg tyf hfFra' ug]{ .
u= v08 -s_ adf]lhdsf] sf/f]jf/sf] laj/0fsf] hfgsf/L t'/Gt
ljQLo hfgsf/L O{sfO{nfO{ lbg]
;"rs ;+:yfn] cfkm\gf sd{rf/Lx?nfO{ tflndsf] Joj:yf ug]{,
cfGtl/s lgb]{lzsf agfO{ nfu' ug]{, cfkm\gf] ;+:yf leq o;

;DalGw sfo{x?sf] ;+of]hg tyf Joj:yfkg ug{ sfof{Gjog
clws[tsf] lgo'lQm ug'{ kg]{ .
oL afx]s b]xfosf hLDd]jf/L klg ;'rs JolQm jf

;:yfnfO{ tf]lsPsf] 5
ljQLo hfgsf/L O{sfO{n] tf]s] adf]lhd sf/f]jf/sf] clen]v
/fVg] .
of] lgodfjnL nfu' ePsf ldltn] % aif{ leq ljQLo hfgsf/L
O{sfO{n] tf]s]adf]lhd k'/fgf u|fxssf] clen]v cBfalws u/L
;f] sf] tYof ;lxtsf] k|lta]bg ;f] O{sfO{ ;dIf k]z ug]{ .
z+sf:kb sf/f]jf/sf] clen]v 5'} k'l:tsfdf ;DalGwt sd{rf/L
/ sfof{ n o k| d ' v sf] x:tfIf/ u/fO{ uf] K o /fVg] .
60
September 2011
sfof{Gjog clws[t tf]sL lghsf] gfd , 7]ufgf,/ ;Dks{ 6]lnkmf]g

gDa/sf] hfgsf/L ljQLo hfgsf/L O{sfO{nfO{ lbg], t/ ;/sf/L
lgsfosf] xsdf ;f] lgsfosf] k|dv
' jf lghn] tf]ss
] f] sfof{Gjog
clws[tsf] ?kdf sfd ug{ ;Sg] .
z+sf:kb sf/f]jf/sf] ljj/0f olsg u/L ljQLo hfgsf/L O{sfO{df
clgjfo{ ?kdf k7fO{ ;f] sf] clen] v /fVg' kg] { .
cfkm\gf] u|fxs pk/ z+sf u/L p;n] u/]sf] x/]s sf/f]jf/sf]
lgu/fgL /fVg' kg] { ePsfn] ;f] sfo{ ug{ ;/n gx' g ] .
cfkmgf] u|fxssf] sf/f]jf/nfO{ hf]lvdo'Qm sf/f]jf/ cGt{ut /fvL
;"rgf ug'{ kg]{ .
sfof{Gjog clws[t ;+u ;dGjo u/L sfd ug'{ kg]{ ePsfn]
:jefljs ?kdf :jtGq lsl;dn] sfd ug] { n] v fk/LIf0f
Joj;foLx?sf nflu yk r'gf}tL >[hgf x'g' .
cfkm"nfO{ k|fKt ;"rgf tTsfn sfof{Gjog clws[t dfkm{t k]z
u/]sf]df ;f] sf] tTsfn cGo dfWodaf6 k'li6 ug'{ kg]{ yk
lhDd]jf/L >[hgf x'g' .
cg'udgst{fnfO{ cg'udg ubf{ u/fp+bf cfjZos ;Dk"0f{ ;xof]u
ug'{ u/fpg' n]vfk/LIf0f Joj;foLsf] sQ{Josf] ?kdf tf]lsg' .

g]kfn rf6{8{ PsfpG6]06\; ;+:yf4f/f lglZrt ul/Psf] cfrf/
;+lxtf tyf ljQLo hfgsf/L O{sfO{n] hf/L u/]sf] lgb]z
{ gsf jLr
tfnd]n ldnfO{ sfd ug{ sl7gfO{ >[hgf x'g' .
n]vfk/LIf0f Joj;foLn] cft+ssf/Lsf] klxrfg, sf/f]jf/df lgoGq0f
/ ;f] ;+u ;DalGwt k|fKt ;"rgf tTsfn ljQLo hfgsf/L O{sfO{df
k7fpg' kg]{ .
;dfwfgsf pkfox?
pk/f]Qm r'gf}tLx?sf] ;fdgf ug{sf nflu jt{dfg cj:yfdf n]vfk/LIf0f
Joj;foLx?n] ax't} ;t{stf ckgfpg cfjZos 5 . ut ljutdf of]
k]zfdf hlt ckm\7of/fx? lyP tL ;a} ca ;fdfGodf kl/0ft ePsf 5g
t/ ;dosf] cGt/fn ;+u} ljZjJofkL ?kdf cfPsf] kl/jt{gn] of] k]zfnfO{
klg c5'tf] /fVg ;s]g . ljZjAofkLs/0fsf] k|efj of] k]zfdf klg k/]sf]
5 f To;}n] oL ;j} cj:yfx? laBdfg /xbf /xb} klg olb of] k]zfdf
;+nUg e} cfkm\gf] hLljsf]kfh{g ug]{ g} xf] eg] ca x/]s n]vfk/LIf0f
Joj;foLx?n] pk/f]Qm r'gf}tLx?sf] ;fdfgf ug{ tof/ x'g' kg]{ ePsf]
5 . ;f] sfo{ ;lhn} ;+u ;DkGg ug{ ;lsg] cj:yf 5}g t/ klg To;sf
nflu lgDgfg' ; f/sf] k| o f;af6 ;/nLs/0f ug{ ;lsG5 .
bL3{sflng gLlt tyf sfo{of]hgf lgdf{0f u/L sfof{Gjog ug'{
kg]{ .
n]vfk/LIf0f Joj;foLx?nfO{ ;do ;fk]If tflnd tyf Ifdtf
clej[l4sf sfo{qmdx? ;+rfng ul/g' kg]{ .
;/sf/L tyf u}/ ;/sf/L lgsfox?sf] cfly{s gLlt :k:6 /
kf/blz{ x'g' kg]{ .
legal
;"rgf cfbg k|bfg / ;xof]u ug]{ ;+:s[ltsf] lasfz cGt/fli6o
?kdf x'g' kg]{ .

cj}w sf/f]jf/ ug]{ jf cz'4 ;Dklt cfh{g ug]{ JolQm jf ;+:yfnfO{
;fdflhs ?kdf alxisf/ ug'{ kg]{ .
a}s tyf ljQLo ;+:yfx?nfO{ Jojl:yt 9+un] cg'udg tyf
lg/LIf0f ug'{ kg]{ .
u7g ePsf] ;DklQ z'l4s/0f cg';Gwfg ljefunfO{ zlQmzfnL
/ k|efjsf/L agfpg' kg]{ .
u|fxs klxrfg tyf lgoGq0f k4ltnfO{ Jojl:yt ug'{ kg]{ .
n]vfk/LIf0f Joj;foLx?sf] lgodgsf/L ;+:yf ICAN df ;DklQ
z'l4s/0f ;DalGw ;xhLs/0f zfvf vf]nL ;b:ox?nfO{ cfjZos
;]jf pknAw u/fpg' kg]{ .
ICAN / ;Dklt z'l4s/0f cg';Gwfg ljefusf jLr ;dGjo
sfod u/L n]vfk/LIf0f Joj;foLx?sf jLr ;do ;dodf
cGt/lqmof, ;+jfb tyf 5nkmn sfo{qmd cfof]hgf ug{' kg]{ .
;DklQ z'l4s/0f cg';Gwfg ljefusf tkm{af6 cfd hgtfsf
jLr Jofks dfqfdf ;DklQ z'l4s/0fsf ;DaGwdf k|rf/ k|;f/

u/L hgr]tgf clea[l4 ug'{ kg]{ .
n]vfk/LIf0f Joj;foLnfO{ hf]lvd Joj:yfkgsf] ;DaGwdf ICAN
n] ;do ;dodf tflnd, uf]li7sf] cfof]hgf u/L Ifdtf clea[l4df
;xof]u ug'{ kg]{ .
n]vfk/LIf0f Joj;foLx?sf k]zfut ;+:yfx? jLr ;dGoo sfod
u/L tL ;+:yfx?sf] ;xof]uaf6 ;DklQ z'l4s/0f P]g cGt{ut
x'g] ck/fwx?sf] lgoGq0f ;DalGw Jofks k|rf/ k;f/ u/L
ck/fwLnfO{ lg?T;fxL agfpg] .
lgisif{
g]kfn h:t]f ;fgf /fi6sf nflu ;DklQ z'l4s/0f h:tf] ck/fw g
lrGtfsf] ljifo xf] . ;DklQ z'l4s/0f lj?4 s7f]/ lgoGq0fsf/L sbd
grfn]sf] sf/0f ck/fwLX?Aff6 ;+rflnt ck/flws wGbfx? e|i6frf/,
nfu'kbfy{sf] sf/f]jf/, dfgj a]rlavg tyf cf];f/ k;f/, ax'd'No

j:t'x?sf] t:s/L, ;Ldf t:s/L,cft+sjfb h:tf ck/fwx?n] d'ns
' x?nfO{
bnbndf km;fPsf] jt{dfg ;fIfL 5 . ljZj a}ssf] >f]t -@))^_ n]
eG5 ls olb ljsfzf]Gd'v b]zx?n] ;DklQ z'l4s/0f tyf cft+sjfbsf
nflu ljQLo ;xof]usf la?4 s7f]/ sbd grfn]df a9\bf] ck/fw /
e|i6frf/ ,cGt/f{li6o kl/0ffd ef]Ug' kg]{ , ljb]zL nufgLsf] cfudg gx'g]
/ ePsf] klg jlxu{dg x'g], cy{tGqdf lge{/ x'g], gLlhs/0fsf] k|of;
c;kmn x'g] vt/f 5g . olb s7f]/ snd rfng ;s]df ;Dklt, z'l4s/0f
ck/fw, e|i6frf/af6 /fxt ldNg], ljQLo ;+:yfx?sf] :yfloTj x'g,] cfly{s
ljsf;df pT;fx a9g], sfg"gsf] zf;g, bLuf] ljsf;, l:y/tf cflbdf
kj4{g x'g] s'/fdf ljZj:t x'g ;lsG5 .
u}/sfg"gL sfo{ u/L ;DklQcfh{g ug]{, ;f] ;DkltnfO{ z'l4s/0f ug]{ /
cft+ssf/L sfo{df ljQLo nufgL ug]{ h:tf sfo{x? /fli6o tyf cGt/f{li6o
;'/Iff, ljQLo k|0ffnL, sfg"gL k|0ffnL / ;fdfhls Gofosf nflu r'gf}tLsf]
?kdf ljsf; e}/] x]sf 5g\ . ;DklQ z'l4s/0f P]g tyf lgodfjnLsf ;fy}
cGo hf/L ePsf lgb]l{ zsfx? ;d]tsf cfwf/df n]vfk/LIf0f Joj;foLx?sf
nflu ut ljut eGbf jt{dfgdf Hofb} yk hLDd]jf/L cfPsf] ePtf klg
To;nfO{ cDDfn ug{ pgLx?nfO{ sl7gfO{ ePsf] dxz'; e} /x]sf] 5 .
t/ klg g]kfnsf] ljsf;sf nflu of] ljsNkxLg ljsNk xf] . g]kfnsf]
e"/fhg}lts cj:yf , o; ljifodf gLlxt ufDeLo{tf, /fli6o tyf
cGt/f{li6o rf;f], / y'k|} r'gf}tLsf sf/0f ;d]t ;DklQ z'l4s/0fsf
;d:of ;+u h'Wg'sf] ljsNk g]kfn ;+u 5}g . ljQLo cg'zf;g /
hjfkmb]lxtf cfhsf] cfjZostf xf] . ;DklQ cfh{g ubf{ , a]rljvg
ubf{ / ;Dkltsf] cGo sf/f]jf/ ubf{ sfg"g adf]lhd a}w tl/sf cg';f/
ug'{ kb{5 . sfnf] wgnfO{ ;]tf] wgdf kl/0ft ug]{ v]nnfO{ lgjf/0f ug{
/fHo zlQm a9L lgodgsf/L aGg' kb{5 . cfly{s :yfloTj sfod u/L
a9L eGbf a9L ;"rgfd'ns sf/f]jf/ ug]{ k4ltsf] ljsf; ug{ cfaZos
5 . ;DklQz'l4s/0f P]g tyf lgodfjnL / xfn ;Dd hf/L ePsf
lgb]l{ zsfx? ;d]tsf cfwf/df ;DklQ z'l4s/0fsf ck/fwx?nfO{ Go"lgs/0f
ug{ n]vfk/LIf0f Joj;foLx?sf] ;d]t ckl/xfo{ e"ldsf /xg] ePsfn]
;f] e"ldsf lgefpg cj ;j}n] cfcfkm\gf] tof/L ug{ kg]{ ePsf] 5 .
log} hfgsf/L d'ns tYox? Kfl:sb} tndfly ePsf v08df ;Rofpg]
k|lta4tfsf ;fy cGTo ub{5' .
September 2011
61
tax issues
Summary of workshop on Tax Issues
1. Background
Nepal Investment Climate Reform Program (NICRP) managed
by the International Finance Corporation (IFC), a member of
World Bank Group, among other components, is working on tax
simplification project in Nepal. IFC is working on various taxrelated areas such as conducting Tax Cost Compliance Survey,
Risk Based Audit in IRD, Appeal Reforms, Incentive Reforms
and SME tax reforms. The intention is to enhance tax revenue
by increasing the tax base at the same time increasing efficiency
in Tax administration and reducing compliance burden to the
taxpayers.
The Institute of Chartered Accountants of Nepal (ICAN) as the
governing body of accounting and auditing profession. ICAN
also acts as an advisor to the government of Nepal in the matter
related to the profession of accountancy. The members of ICAN
are either preparing tax returns in the capacity of accountants in
various organisations or certifying tax returns as tax auditors.
Therefore ICAN carries the responsibility to educate its member
regarding tax administration and tax issues and also to provide
professional opinion to other stakeholders.
With request from the members of both in professional practice
and those working in various organisations, ICAN felt the
necessity to have an intimate interaction between Tax Authorities,
Taxpayers and Intermediaries including tax auditors. Therefore
a decision was taken to organise a 'Workshop on Tax Issues'.
With the knowledge that IFC is also involved in tax simplification
ICAN requested the IFC to join hand to conduct the workshop,
which IFC readily accepted and came on board as a joint organiser.
2. Objectives
of tax administrations for procedural reforms if that mean

providing quality service to the tax payers
l
Identify policy issues that need legal considerations and

recommend to the concern authority for review and action.
3. Methodology
l
Presentation by ICAN on Tax Issues - followed by Q&A

and floor discussions
Presentation by IRD - followed by Q&A and floor

discussions
Concerns of various business organisation such as Nepal

Chamber of Commerce (NCC) and Federation of Nepales
Chember of Commerce and Industries (FNCCI)
Clarification and comments from Director General, Inland

Revenue Department.
More than 140 participants attended the workshop, including

l IRD - Director General
l ICAN President, Vice President and Council Members
l ICAN Past Presidents
l IFC Representatives
l IRD DDG, Chief LTO, IRD Directors
l Representatives from FNCCI (including FNCCI Vice
Chairman)
l Representative of NCC and Industry. ,
l Chartered Accountants and Registered Auditors
l Representatives from various businesses
4. Outcomes
To establish face to face dialogue between the Tax

Authorities, Taxpayers and Intermediaries.
4.1 Session 1:- Issues Presented by CA. Mahesh Khanal
Provide forum for Intermediaries to raise their issues and

concerns to the tax authorities.
General issues on application of various provisions of Income

Tax Act:
Provide Tax Authority direct interaction with taxpayers

and intermediaries to explain their
strategy in tax administration
1. Service Fee under Sec 2 is very vaguely defined and different

individual define the provision differently. Specific clarification
required as it affects withholding tax for most of the taxpayers.
Highlight procedural issues on tax matters where taxpayers

are having difficulties so that the issues comes to the notice
2. General Deduction under Sec 13 has been inclusively defined

in the law. However this inclusive section has been narrowed
62
September 2011
tax issues
like for withholdings. IRD is also seeking withholding taxes
in the case of payment made to non-resident where the service
is executed outside Nepal.
10. No specific policy or guideline for consumption and loss
(normal or otherwise) in production industries, resulting in
arbitrary assessment.
Advance Ruling and Administrative Review
11. IRD has to give advance ruling under Sec 76 within 45 days.
In Many of the advance rulings are either ignored or issued
with vague language.
CA. Mahesh Khanal is Presenting a Paper on Tax Issues
during implementation. (e.g. Debenture issue expenses, if the

company decides not to go with the issue in the end have
been added back)
3. Timing of Tax Accounting - though the Act allows accrual
method of accounting assessments are being done on cash
basis. (e.g. Prepaid cards sold by telecom companies taken to
income when they are sold not when the service is rendered
by the tax assessments, as against the Nepal Accounting
Standards on Revenue Recognition. Taxpayers are of the
opinion that timing for VAT and Income Tax accounting need
not be the same). Similarly Travel agencies are sometime
asked to account entire ticket sales as their revenue where as
it is only their commission that can be accounted as thair
revenue.
4. IRD is reluctant to accept market price as on the date of the
application of Income Tax Act 2058, as outgoings (cost) in the
case of companies holding asset prior to the application of
this Act, where as Sec 40(5) specifically provides the same to
person (not only natural person).
5. Conflicting views on the allowance for tax of contribution to
the Approved Retirement Funds.
6. No clarification exists on contractual payments to Non
residents. This has created problem in determining how
much to withhold for compliance.
7. To what extent auditor will be an accomplice for Tax Fraud
and evasion has to be clarified
8. Though withholding is not attracted in the payments made
to non-residents of the countries having DTAA with Nepal
withholding tax is demanded on such payments too.
9. Though tax under sec 70 applicable to non-residents providing
water and air transport and telecommunication services is
the income tax payable in three instalments as normal tax,
tax authorities have explicitly demanded monthly payments
12. Independence of DG, IRD who is entrusted for Administrative

Review may be in question.
13. The Taxpayer is not provided reasonable opportunity to be
heard in the process of settlement of Administrative Review.
Revised Return
14. The Act provides the authority to IRD for the ammendments
of assessment any times before the completion of four years
from the due date of submission tax return. The taxpayers
does not have right to ammend the tax return submitted by
them.
4.1.1 Floor Discussion

Telecom Companies - Nepal Telecom, NCell, Smart
l Payment to the bandwidth provider (satellite) cannot be
treated as having source in Nepal as the payment is made
outside and service is provided outside Nepal - IRD needs
to clarify.
l Wheter imports of goods/ service under contract or direct
purchase attract witholding tax?
l Trade Discount (volume Discount) to the recharge card
dealers should be allowed for deduction in line with sec
12 of VAT Act. (netting -off the discounts given).
l Revenue Recognition - only when the ultimate service is
rendered for prepaid services.
l Inter-Operator Charges - Settlement between two operators
should not attract VAT, adjustment through Debit/Credit
notes should be allowed.
l Ownership tax of 2% needs to be further elaborated
whether Pre-paid price should be determined before TSA.
l Whether import of goods/service under contract or not
to attract 5% withholding.
Non-Life Insurance
l IRD does not allow the gratuity unless amounts are
identifiable for individuals and deposited the same in the
name of individual however Insurance Regulators (Beema
Samiteee) requires such account to be kept as a whole.
September 2011
63
tax issues
l
Commission to Local Insurer (facultative) whether attract

withholding tax or not needs to be clarified, as not it is
established that no withholding is required for General
Insurance Premium.
Banking
Tax audit after four years of account closing is burdensome

to the taxpayers in reproducing the documents as it will
be difficult to maintain the documents for such a long
period.
Since the NRB directives required provisions for NonBanking Assets whether to allow such provisions as
expense or not.
Provision on loss of Investments whether allowable or

not.
withholding of tax by a client of taxpayer is treated as

advance tax but it is to be clarified allowable as advance
tax for the year other than to which it relates to: i.e. whether
the same is avable for set-off in subsequent year.
Discrepancy in cash-flow produced by the taxpayer does

not generate any taxable income.
Out of pocket expenses incurred by the auditors including

their travel expenses where the original supporting
documents are submitted to the client should not be
considered as income of the auditor as there is no profit
component and original documents are alraedy submitted
to the client.
There is no provision for Revises Return
Since source of income is not in Nepal payment for

Swift/card transactions would not attract withholding
requirements
withholding tax sought on travel service provider is

unrealistic as the agent only gets the commission and the
withholding tax in most of the cases will be more than
the commission.
Clarifications made by the department should be applied

prospectively (e.g. leasehold developments)
withholding tax on remittance should not be applicable

as this banking transaction - some tax authority and NRB
is looking for withholding tax on such bnking transaction.
SME / Intermediary
l
l
Supply agreement (foreign party payment) - whether fall

under sec 89 or as under DOI approval
Hotel
l
Consulting services by a NGO whether to attract Tax or

not
Sec 92(3) carry forward of non final deduction was not
allowed.
Definition of first year of operation is required for claiming

pre-operating (and preregistration) expenses.
NRs 20,000 deposit by Indian Businesses can this be

adjusted with the income tax.
withholding liability on using the service of truck for

transport.
Hydropower
l
Bank's withholding (TDS) on interest - evidence of tax

deposit not available from the bank as they issued only
certificate (and tax office requires such deposits). The
evidence of deposit is available only in bulk.
Files returned from the Administrative Review reassessment delays by IRD whether to be subject to a set
time frame or not.
Chartered Accountants (Tax Practitioners)-on Appeals
Nepal Chamber of Commerce

l
Account payee cheques for payment more than NRs 50,000
in rural part of Nepal is not practicable
Foreign nationals can get PAN number but not a bank

account
Administrative Review by the DG who has responsibility

for Revenue collection
Cheque clearance is time consuming and involves costs
How to ensure that the cheques will be honoured
Decisions are made ex-parte (no natural justice) - replies

are just one-liners with no justifications. Supreme court
decides with detailed justification
Electronic filings of all transaction (sales or purchase above

NRs 100,000) - is cumbersome
Justice delayed is justice denied
For inspection of damaged and expired items applications

made to IRD no action is initiated form the department.
Deposits kept under sec 115 for Administrative Review

are being forfeited and settled with tax demand.
There has to be provisions for revised return - as human

error sometime result in heavy penalties.
Manufacturing Industry
l
Sec 57 allows market value at the time of the deemed

disposal
Interest under sec 118 for less than 90% payment
Transport Contract to be defined to put under either Sec

88 or sec 89
64
September 2011
IRD Response
l
DDG IRD
tax issues
l
On Administrative Review - DG is not a Tax Officer
IRD is ready for changes in Administrative review process
Advance Ruling - only for practical issues where the Act

is not clear, should not be used for hypothetical cases
All advices should come at the time of policy formulation

(before the budget) - IRD website or email
LTO - Chief
For prepaid card value and talk time validation and &
evidence required
Trend of claiming more damages
Administrative review has been under IRD's performance

indicators.
4.2 Session 2
IRD Presentation - Mr. Laxman Aryal, DDG - IRD
High net worth individuals
Reforms initiated at IRD

l Policy reform
l Operational reforms
l e-systems
l organisational reforms
l Tax payers education
l Request to IFC for Tax Compliance Cost Survey
Increasing Voluntary Compliance to reduce cost and increase
revenue
4.3 Session 3: Closing Remarks

4.3.1 Parsuram Dahal-Nepal Chamber of Commerce
l
l
l
l
l
l
No concrete answer came for the issues and queries raised.

Any bank banking should be introduced by IRD for
taxpayers convenience.
Deposit requirement for Administrative Review is too
high for businesses.
Government salary increases, Expenditures increases but
there in no increase in tax exemptions.
IRD needs to clarify for withholding requirements (TDS)
in detail.
Tax dues should be collected in installments.
4.3.2 Pashupati Murarka-Vice Chairman, FNCCI

l
There is a tendency to add back, as if it is mandatory

during audit by IRD.
There is lack of uniformity in dealing with tax scrutiny

(differential treatments).
Normal loss allowance needs to be revisited.
IRD's focus
l Quality service to tax payers
l Reduce tax compliance cost
l Applying law with integrity and fairness
If Administrative Review does not respond, there is no

need for having that structure, otherwise tax payer can
go to the tribunal directly saving time.
In case of questioned costs the bank accounts are seized,

so how can the tax payer pay.
Modern tax system

l Self Assessment - Voluntary compliance
l Tax Neutrality - equity and fairness
l Functional Organisation - specialised for the work
l Risk Management
OAG's second level audit (and raising of questioned

costs);which should be the responsibility of IRD.
Non entry of tax deposit by tax offices and taxpayers are

held accountable, similarly vouchers are misplaced by
NRB and taxpayers are troubled.
Businesses try to avoid the tax net because of unnecessary

bureaucratic and psychological pressure.
CA. Laxman Aryal is Presenting a Paper on Tax Issues
Global Tax payments (reforms)

l Transfer pricing - cross boarder transactions
l Offshore Compliance
l Risk Based Audits
l Banks to improve tax compliance
l Code of Conduct
4.3.3 Rajan Khanal - DG, IRD

l
This forum to discuss policy issues, individual procedural

issues can be discusses separately at IRD
September 2011
65
tax issues
l
Advance Ruling under Sec 76 should not used for future

transactions
For Administrative Reviews - 7% of the cases has been

decided against the IROs. However there is no hearing
for the cases. Policy proposal is in discussion for cases to
go to tribunal directly like in UK to HM -Tribunal
Normal Loss allowance - to be allowed on actual basis.

For those IRO not allowing losses their incentives will be
stopped.
Basic exemption can increase in the next year.
Risk based audit will be introduced even for the LTO engine is in preparation
Law has to be followed and socio political reasons cannot

be blamed for non-compliance of the law. It's the
compliance of the law that saves during the hard times.
For role of intermediaries like CAs, though tax planning

is legal tax evasion is not
IRD is committed to decreasing contact between the

taxpayer and the tax office
IRD is working towards nurturing tax payers and

intermediaries needs to support IRD
5 Recommendations
5.1 Procedural Recommendations
66
Tax Audit should be conducted closer to the financial

period to which it pertains.
Further clarifications are required from the IRD on issues
September 2011
and topics like (i) service fees, (ii) general deductions, (iii)
revenue recognition, (iv) retirement fund contributions,
(v) payments to non-resident, (vi) withholdings, (vii)
production loss, and (viii) application of Sec 57.
l
For special industries such as banking and insurance,

where regulator's requirement has tax implication, IRD
needs to clarify on application of tax laws on periodic
basis.
5.2 Policy Recommendations

l
Concept of Revised returns needs to be contemplated for

inclusion in the Income Tax Act.
Appeal processes should be reformed in line with

international best practice for it to be taxpayer friendly.
Nepal Accounting Standards needs to be accepted for

accounting other than the areas specifically recommended
by the Tax laws.
6 Conclusion
The seminar of this sort gives opportunity for the tax-payers,
intermediaries and the tax authorities to directly interact on issues
of their concern in application of tax laws. The seminar of this
kind does not only identify the grievances of the various
stakeholders but also raises issues and concerns that contributes
for procedural and policy reforms in the tax administration,
including areas for possible amendments to the law itself, so that
Income Tax Laws are made taxpayer friendly and compliance of
the laws can be more efficient and effective.
News
Announcement of National Best Presented
Accounts Awards
Newly Elected President and Vice

President Takes Oath of Offices
Acting Officiating Auditor General handing over BPA award to the winner.
On the Oath taking ceremony of newly elected President and

Vice President, National Best Presented Accounts Award (BPA
Award) 2010 program was also organized. The Chief Guest,
Officiating Auditor General Mr. Khem Prasad Dahal presented
the National Best Presented Accounts (BPA) Awards 2010 to the
Winners and Runner Up. The evaluation for BPA Awards is as
per the norms set by South Asian Federation of Accountants
(SAFA), an apex body of SAARC. The award winning annual
report will be nominated for SAFA BPA Award representing
Nepal. The Managing Director Mr. B.K.Shrestha of Oriental Hotels
Ltd gave a speech from BPA Award winners' panel.
The winners of the National BPA Award 2010 are as follows:
CA. Sudarshan Raj Pandey taking oath with Officiating Auditor General .
On July 22 2011, newly elected President CA Sudarshan Raj Pandey

took oath of office from the Chief Guest, Officiating Auditor General
Mr Khem Prasad Dahal as the 15th President of ICAN. Speaking on
the occasion the outgoing President CA Sunir Kumar Dhungel gave
a brief outline of the achievements of his tenure. After wishing his
best to the newly elected President and Vice President, handed over
the President medallion to the newly elected President CA Sudarshan
Raj Pandey.
Delivering his acceptance speech, the newly elected President CA
Sudarshan Raj Pandey thanked all the members and colleague of
the sixth council who have faith in him, and elected him to the
President and along with the newly elected Vice President CA Madhu
Bir Pande, pledged commitment for the continuity for the Institutional
development. Similarly, the newly elected President administered
the oath of office to the newly elected Vice President CA Madhu Bir
Pande. During that ceremony a token of love was also given by the
ICAN Family to the outgoing President CA Sunir Kumar Dhungel.
Meeting of President of ICAN with the Staffs

The Outgoing President CA Sunir Kumar Dhungel had lunch with
staffs of the Institute to express his gratitude to them for their great
support during his tenure. He expressed his sincere thanks during
his brief speech, for being able to fulfill many of his projects which
he had promised to do during his one year tenure.
September 2011
67
Refresher Course on Peer Review

System
Interaction Program on Criteria for Best

Presented Accounts (BPA) Award

organized one day refresher course on Peer Review
System on 4th Shrawan 2068 for the Invitee from the
Institute in Kathmandu. The main aim of the refresher
program was to build capacity of the practicing
professional members. The program was focused mainly
on the procedure of Auditing, Planning, Documentations
and so on. Refresher program was divided in to four
sessions. in the first session CA. Tirtha Raj Upadhyay
focused on concept and the processes of the peer review
while in the second session CA. Nanda Kishore Sharma
focused on NSQC 1 and NSA 220. In the similar way, in
the third session CA. Shashi Shatyal focused on peer
Review Procedure and in the last session CA. Nanda
Kishore Sharma focused on the reporting system of peer
review.
On 5th of Bhadra, 2068, an interaction program was organized on

the theme "Criteria for Best Presented Accounts (BPA) Awards" in
hotel Del' Annapurna, Kathmandu.
All together 33 professionals from ICAN Council and

Committee Members, Accounting and Auditing Board
Members as well as other members participated in the
program. Eight CPE credit hours have been provided to
the participants.
ICAN President CA. Sudarshan Raj Pandey welcomed 40 participants

from the different sectors of various organizations with the welcome
speech. He stressed on the objectives of the program.
Former president CA. Sunir Kumar Dhungel presented his working
paper regarding the weakness and the evaluation criteria of BPA
Awards set by the South Asian Federation of Accountants (SAFA).
ICAN President, Vice President and former President queries all
questions raised by the participants during the program. The
participants thanked the Institute for organizing such program in a
time coinciding with report preparation.
The Institute has been evaluating financial reports according to the
standard and the norms set by SAFA. The Institute has been presenting
BPA Awards for winners of different organizations for different
sectors for their best presentation of Annual Report since 2003.
BPA Award Winning annual reports of various sectors will have a
chance to compete with other South Asian Regions award winners.
Workshop on Issues on Tax
CA. Sudarshan Raj Pandey delevering welcome speech in Workshop on Tax Issues.
On 9th Bhadra 2068, workshop on issues in tax audit program

was jointly organized by the Institute and South Asia Enterprise
Development Facility (SEDF) in hotel Everest Kathmandu. CA.
Sudarshan Raj Pandey, President of ICAN, inaugurated the
program with his welcome speech. The workshop was divided
into three technical sessions. On the first and second session CA.
Mahesh Khanal presented the issues on Tax Auditing and current
issues on tax. In the similar way Representative of Internal
Revenue Office presented current issues on Tax Auditing. All
68
September 2011
Glimpse of Workshop on Tax Issues.
together 152 participants from different sectors were present in

the workshop. At the end of the program panel, discussion was
conducted. Representative from Internal Revenue Department
(IRD) , representative from Federation of Nepal Chamber of
Commerce & Industry (FNCCI), representative from
Confederation of Nepalese Industry (CNI) and representative
from Nepal Chamber of Commerce (NCC) along with the
President of ICAN were present at the panel discussion.
CA. Madhu Bir Pande, Vice President of ICAN concluded the
program with Vote of Thanks.
Interaction Program on Accrual Accounting System

CA. Paramananda Adhikari, Technical Director of the Institute participated in an interaction program on Accrual Accounting System
Manual (Draft) on 11th July 2011 (27 Ashad 2068) organized by Ministry of Local Development, Government of Nepal in Association
with GIZ/UDLE in Kathmandu. On the program he emphasized on :
IPSAS can no longer be ignored since now and The Government of Nepal in principle has agreed on 2066/05/30 to adopt
NPSAS.
Over 40 countries in the world are in line to follow IPSAS to improve their Public Finance and Accrual Accounting which
is prerequisite very important system to draw the clear financial picture.
He suggested to follow NPSAS (Nepal Public Sector Accounting Standard) to establish Accrual Accounting Manual
for Public Sector Entities like Municipalities. Further he emphasized that start with one or two Municipalities as a Pilot Project.
MEMBERS' CORNER
Renewal Status
The following is the status of members till September, 2011
STUDENTS' CORNER
Scholarship Announcement
Student Exchange Program
Education Department announces the application for Scholarship

for fiscal Year 2068/069 to deserving students.
Institute has provided an opportunity to CAP III Level students

to visit, Nagpur, India on student exchange program from July
23 to 24, 2011. The Theme of the student exchange Program was
Improving Excellence. Shankar Thapa, Sujeep Shrestha, Sajani
Aryal, Shikha Bagla, and Lalita Pyatha presented their working
paper on the program.
Training on Information Technology

Registration of Information Technology Training for CAP II,
CAP III and Accounting Technician is now open at Education
Department for the all concerned students.
Publication
Books on Information Technology Practical Training Material
Model for CAP II, CAP III Level and Accounting Technician
Course are published by the institute.
Similarly, Suggested Answers of CAP I Level were published
and CAP II Level is being published in a book form.
CAREER COUNSELING
Career Counseling program was organized in Biratnagar on 25th
Ashad 2068 with the coordination of Biratnagar Branch by the
Education Department of the Institute. The program included
the details deliberation on the eligibility criteria for enrollment
in CA and AT Course, future prospects, international recognition
and membership criteria of the Institute.
September 2011
69
Examination Department
Results of CA Examination of June 2011
The result of the Chartered Accountancy Examination held in the month of June 2011 have been published.
As per the results, 249 students from CAP I and foundation level are eligible to register to Upcoming CAP II level after passing the
exam while 57 students from CAP II and Intermediate level are eligible to register to CAP III Level. In the similar way, 12 students
from CAP III and Final Level are eligible to obtain the membership of ICAN.
Level
No.of Student
CAP I
1209
Registration Status of Students
CAP II
592
Following are the students' registration in CA and Accounting Technician (AT)
CAP III
103
course on fiscal year 2067/68.
AT
28
International Participation
73rd SAFA Assembly Meeting
73rd SAFA Assembly Meeting was held on 25th July 2011 in
Karachi, Pakistan. The participants in delegation included
CA. Sudarshan Raj Pandey, President of ICAN, CA. Madhu Bir
Pande, Vice President of ICAN, CA. Suvod Kumar Karn, Past
President of ICAN, CA. Mahesh Khanal, Council Member, RA.
Krishna Prasad Poudel Council Member, RA. Suresh Pradhan
Council Member and Bhuwan Prasad Acharya, Council member.
The Participants of SAFA Assembly meeting from the Institute
had also participated ICAP Golden Jubilee program of 26-27 July,
2011.
18th CAPA Conference and CAPA General

Meeting, Australia
The 18th CAPA Conference was held on 6-9 September 2011 in
Brisbane, Australia which was hosted by CPA Australia and the
Institute of Chartered Accountants of Australia (ICAA). Over
1200 attendees from 30 countries were present in the conference.
80 speakers were involved across a wide range of plenary and
concurrent session. Extraordinary General Meeting (EGM) Selected
the Korean Institute of Certified Public Accountants (KICPA),
Seoul, Korea, to host 19th CAPA Conference in the year 2015 and
70
September 2011
that conference had elected Mr. Sejeewa Mudalige from The

Institute of Chartered Accountants of Sri Lanka as a new Deputy
President.
Delegates from ICAN at 18th CAPA Conference.
The delegates from Nepal attended 18th CAPA Conference

(6-8, September 2011) and CAPA General Meeting (9-10
September, 2011). CA Madhu Bir Pande, Vice President of ICAN,
CA. Sunir Kumar Dhungel, Past President of ICAN, CA. Suvod
Kumar Karn, Past President of ICAN, CA. Krishna Prasad
Acharya, Council Member, and CA Binay Prakash Shrestha,
Executive Director of the ICAN attend the conference.
17th SAFA Board Meeting held in Kathmandu on 25th September 2011
Consolidating the Accounting Profession in SAARC Region-17th SAFA Board Meeting, Kathmandu, Nepal
Front Row: Mr. M. Gopalakrishnan (ICWAI), Mr. Jaydeep N. Shah (ICAI), Mrs. Parveen Mahmud (ICAB), Mr. Komal Chitracar
(ICAN) Mr. A.N. Raman (ICWAI) , Mr. Muhammad Rafi (ICMAP), Mr. Lakshman R. Watawala (ICMASL)
Mr. Sudarshan Raj Pandey (ICAN), Mr. Sudir Sharma (ICWAI)
Back Row: Mr. Paramananda Adhikari (ICAN), Mr. Madhu Bir Pande (ICAN), Mr, Amit A. Apte (ICWAI) Mr. A. Om Prakash
(ICWAI) Mr. Suvod K. Karn (ICAN), Mr. M. Abdul Kalam Mazumdar (ICMAB), Mr. Sujeewa Rajapakse (ICASL)
Mr. Md. Abdul Aziz Miah (ICMAB), Mr. Mushtaq Ahmed Madraswala (ICMAP), Mr. Mudit Vashistha (ICAI)
The 17th SAFA Board Meeting was held on 25th September 2011 at 2.00 PM at Hotel Radission Kathmandu under the chair of Mr.
A.N. Raman, President SAFA. Member of the SAFA Board and their Technical Advisors were actively participated in discussion at
the Board Meeting.
The meeting inter alia has decided to endorse the Memorandum of Understanding (MoU) between South Asian Federation of
Accountants (SAFA) and European Federation of Accountants (EFAA), both the accountancy grouping of IFAC with their individual
focus in the respective regions they operate. The signing of MoU will take place coinciding with the joint SAFA-EFAA seminar planned
on 2nd-3rd November 2011 at New Delhi, India.
Likewise, as per the action plan of Kathmandu Declaration on the issue of sustainable development in the SAARC region, SAFA
proposed a MOU to be entered with Global Reporting Initiatives (GRI) to institutionalized sustainability movement including reporting.
The MOU is expected to be signed at the end of November 2011 at Dhaka, Bangladesh.
September 2011
71

Chartered Accountants have made a paradigm shift in their vision and work domain.
Traditionally the professional accountant was a perfect accountant known for his/her accounting skills. Hovering around
debit and credits and expressing audit opinions, the work area moved further backward to the back office. As businesses
got global transcending geographical boundaries due to technological revolution and globalization of economies, a new
breed of management experts gradually took over the center stage. The B schools now provide the right mix of real life and
academic knowledge of modern business. Communication skills, practical approach to work and modern business techniques
have equipped the new age MBA to multiply money.
Need has been felt among accounting bodies in the region to transform its system and mode of imparting education. Now
we talk of not only accounting but management accounting. We talk of Information systems, operational research and
economics. We have more real life practical experience during article ship which shapes up the finesse in the aspiring CA.
The rigorous training and not so easy academic curriculum moulds the basic ingredients for a successful career. The results
have been felt in Nepal with wide acceptability of professional accountant as a Corporate Leader. Large number of key
positions in leading organization in the country are manned by - we the members of ICAN.
Numbers indicate that CA's hold high proportion of key position in the corporate sector which is more than any other
profession. In-depth knowledge, problem solving skills and knowledge of multiple subjects has provided decisive edge to
the new age CA.
The Journal aims to glorify the new age corporate leader and in this first attempt a illustrative list of corporate
leaders follows :
72
September 2011
CA. Anal Raj Bhattarai

CEO
Commerz and Trust Bank Nepal Ltd.
CA. Dinesh Bahadur Bista

Executive Chairman
Soaltee Hotel Ltd.
CA. Anil Dhungel

CEO
International Leasing and
Finance Co. Ltd.
CA. Gyanendra Prasad Dhungana

GM
NCC Bank Ltd.
CA. Bir Bikram Rayamajhi

CEO
United Insurance Co. (Nepal) Ltd.
CA. Krishna Kumar Bhattarai

CEO
Gurkha Development Bank Ltd.
CA. Biswash Gauchan

Chairman
Sangrila Development Bank Ltd.
CA. Maha Prasad Adhikari

Deputy Governer
Nepal Rastra Bank
RA. Dr. Chandra Mani Adhikari

Chairman
Citizen Investment Trust
RA. Mohan Raj Regmi

Chairman
Corporate Development Bank Ltd.
RA. Dilip Dhungana

Chairman
Nepal Consumer Dev. Bank Ltd.
CA. Rajan Singh Bhandari

CEO
Citizen Bank International Ltd.
September 2011
73
CA. Ratna Raj Bajracharya

CEO
Global Bank Ltd.
CA. Sushiel Joshi

GM
Himalayan Bank Ltd.
CA. Shambhu Prasad Chaudhary

Chairman
Purbanchal Grameen Bikas Bank Ltd.
CA. Tanka Prasad Paneru

Chairman
Nepal Stock Exchange Ltd. (NEPSE)
and CDS and Clearing Ltd.
CA. Sunil Devkota

CEO
Guras Life Insurance Co. Ltd.
RA. Uday Kant Jha "Jeevan"

Chairman
Sahayogi Vikas Bank Ltd.
CA. Surendra Man Pradhan

CEO
Sunrise Bank Ltd.
CA. Vijaya Bahadur Shah

CEO
NLG Insurance Co. Ltd.
(This is a illustrative information avilable)
74
September 2011

Standing Committes & Non-Standing Committes(068/69)
Standing Committes (068/69)
4. Examination Committee
1. Executive Committee
2. Professional Development Committee
Non-Standing Committes (068/69)

Editorial Committee
3. Disciplinary Committee
Audit Committee
September 2011
75
IFRS Implementation Committee
Education Committee
Ethics Committee
Scholarship Selection Committee
Continuing Professional Education Committee
Law Reform Committee
76
September 2011
Expert Advisory Committee
Monitoring Committee
Building Committee
Information Technology Committee
Small and Medium Practice (SMP) Committee
Accounting Technician Board
Peer Review Board

Recruitment Committee
September 2011
77
The Funny Accountant

___________________________________________________________
Why do accountants make good lovers? They're great with figures

What do accountant's do for fun? Add up the telephone book.
The tax advisor had just read the story of Cinderella to his four-year-old
daughter for the first time. The little girl was fascinated by the story,
especially the part where the pumpkin turns into a golden coach. Suddenly
she piped up, "Daddy, when the pumpkin turned into a golden coach,
would that be classed as income or a long-term capital gain?"
________________________________________________________
Why won't sharks attack tax inspectors? Professional courtesy.
A fine is a tax for doing something wrong.
A tax is a fine for doing something right
A patient was at her doctor's office after undergoing a complete physical exam.
The doctor said, "I have some very grave news for you. You only have six months to live."
The patient asked, "Oh doctor, what should I do?"
The doctor replied, "Marry an accountant."
"Will that make me live longer?" asked the patient.
"No," said the doctor, "but it will SEEM longer."
An accountant visited the Natural History museum. While standing near the dinosaur he said to
his neighbor: "This dinosaur is two billion years and ten months old".
"Where did you get this exact information?"
"I was here ten months ago, and the guide told me that the dinosaur is two billion years old."
78
September 2011

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Vol. 14 No.

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

Urgency of Carbon Accounting Strandards in Nepal

CA. Sudarshan Raj Pandey

Mr. Binaya Paudel

Consolidated Financial Statements

IFRS- Time to get ready

The Institute of Chartered Accountants of Nepal

Understanding the "Expectation Gap" in Auditing

Crdit Risk and Its Management in Bank & Financial

Print and Art Service

Putalisadak, Ktm. Tel: 4244419, 4239154

A Knowledge-based Economy: Some Issues

Corporates- Rs. 600

(including courier charges )

Members Rs. 400

(including courier charges)

Information System Risk-Relevant cases

The Convening of Meetings

Members as Corporate Leaders

;DklQ z'l4s/0f sfg"g / n]vfk/LIf0f k]zfsf r'gf}ltx?

Standing Committes & Non Standing

1. Members Capacity Building

Efforts shall be made to conduct preliminary investigation

3.Institutional Development and Enhancement

Priorities shall be given to activities which meet the Institutes

Advisory Committee of Past Presidents shall be formed and

4.Relationship with Regulatory and Other Related

Efforts shall be made to make Institute's role and the role of

5.Compliance with Nepal Accounting and Auditing

Provide Continuous information and education to members

Conduct separate IFRS training programs for accountants,

Participate in international platform for better liaison with

Efforts shall be made to obtain Mutual Recognition for CA

In the end, I would like to ensure that the above mentioned

CA. Sudarshan Raj Pandey

g]kfn rf6{8{ PsfpG6]G6\; ;+:yfsf ;b:ox?nfO{ ;"rgf

Go" g td n] v fk/LIf0f z' N s / kfl/>lds ;DaGwdf

ljleGg ju{sf k]zfut k|df0fkq k|fKt ;b:ox?n] kl/ifbsf] lg0f{ofg';f/ k|To]s

n]vfk/LIf0f ug{ kfpg] xb /sd ;DaGwdf

k]zfut k|df0fkq k|fKt ;b:ox?nfO{ g]kfn rf6{8{ PsfpG6]G6\; lgodfjnL -;+;f]wg

clwstd n] v fk/LIf0f ug] { kfpg] ;Ldf ;+ V of ;DaGwdf

Ps JolQm Ps k]zf ;DaGwdf

ut @)^& kf}if @) ut]sf] g]kfn ;/sf/, cy{dGqfnosf] -df=dGqL:t/Lo_ lg0f{o

;+zf]wg cg';f/ Ps JolQm Ps k]zfsf] lgod rf6{8{ PsfpG6]G6 ;b:ox?nfO{ ;f]xL

zfvfsf] n]vfk/LIf0f (Branch Audit) ;Dawdf

returns received from branches of the Bank." to be followed by

g] k fn n] v fdfg tyf n] v fk/LIf0fdfg nfu" ug] { ;Dawdf

followed by "so far as applicable in compliance with the prevailing

Urgency of Carbon Accounting

Mr. Tara Prasad Upadhyaya

As a Party to the United Nations

Prof. Dr. Prashant Kumar

Today a movement is established which

enforcement of Carbon Dioxide (CO2) for

The Nepal Chartered Accountant

Kyoto protocol and Carbon Accounting

credits are measured in units of certified emission reductions

Carbon trading of Nepal

ICAI and Carbon Accounting

Carbon credits are certificates issued to countries that reduce

Accounting Standards Board, The institute of Chartered

The Nepal Chartered Accountant

(v) fees of registering with UNFCCC;