Study on Impact of COVID-19 on application of NFRS 2013 · NAS 17 Leases 19 Modification in Lease...

Implementation Guidelines for NFRS 2013

on

Impacts of COVID-19

ACCOUNTING STANDARDS BOARD, NEPAL Satdobato, Lalitpur

June 25, 2020

Implementation Guidelines for NFRS 2013 on Impacts of COVID-19

ASB - NEPAL i

Contents from page

NAS 1 Presentation of Financial Statements 1

Going Concern 1

Comparative Information 3

Current and non-current distinction 4

NAS 2 Inventories 7

Measurement of inventories 7

NAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 9

Changes in Accounting Estimates 9

NAS 10 Event After Reporting Period 11

Recognition and disclosure of events after reporting period 11

NAS 11 Construction Contracts 13

Contract Revenue 13

Contract Costs 14

Recognition of contract revenue and expenses 14

Recognition of expected Loss 15

NAS 12 Income Taxes 17

Deferred Tax Assets 17

NAS 16 Property, Plant and Equipment 18

NAS 17 Leases 19

Modification in Lease 19

Operating Leases - Incentives 19

NAS 18 Revenue 21

Customer Loyalty programs 21

Sales Return from Sale of Goods 22

NAS 19 Employee Benefits 24

Termination benefits, reduction in salaries, suspension of employees and stay bonus 24

NAS 20 Accounting for Government Grants and Disclosure of Government Assistance 26

Recognition of Government Grants 26


ASB - NEPAL ii

NAS 23 Borrowing Cost 28

Suspension of capitalization 28

NAS 28 Investments in Associates and Joint Ventures 29

Impairment loss in investment in associates and Joint Ventures 29

NAS 34 Interim Financial Reporting 31

Recognition, Measurement and Disclosure requirement in Interim Financials 31

NAS 36 Impairment of Assets 33

Impairment of Non-Financial Assets 33

NAS 37 Provisions, Contingent Liabilities and Contingent Assets 36

Recognition of Provisions 36

Reimbursements 36

Future operating losses 37

Onerous contracts 38

Restructuring 38

NAS 38 Intangible Assets 40

Review of amortization period and amortization method 40

NAS 39 Financial Instruments: Recognition and Measurement 41

NFRS 7 Financial Instruments Disclosure 44

Disclosure Requirements for Financial Instruments 44

NFRS 8 Operating Segments 46

Reporting of Operating Segments 46

Quantitative thresholds 46

NFRS 9 Financial Instruments 48

Financial instruments 48

NFRS 12 Disclosure of interest in other entities 51

Interest in other entities 51

NFRS 13 Fair Value Measurement 53

Fair Value Measurement 53


ASB - NEPAL 1

NAS 1 Presentation of Financial Statements

Going Concern

Relevant Paragraph from NAS-1

NAS-1.25: When preparing financial statements, management shall make an assessment of an entity's ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to continue as a going concern, the entity shall disclose those uncertainties. When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern.

NAS-1.26: In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period. The degree of consideration depends on the facts in each case. When an entity has a history of profitable operations and ready access to financial resources, the entity may reach a conclusion that the going concern basis of accounting is appropriate without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.

Possible Impact due to COVID-19

As a response to fight against COVID-19, Government announced lockdown and the need to maintain social distancing and other measures for several months. This will result into severe business disturbances, affecting profitability, cash flows, ability to meet financial and other obligations of the entity, and in extreme situation inability of the entity to continue as a going concern.

Implementation Guidelines

In normal situation, the assessment of going concern assumption is pretty simple if an entity has the history of making profits and ready access to financial resources because in such case the conclusion without detailed analysis is that the going concern assumption is appropriate. But due to impact of COVID-19, various scenarios and probabilities taking into account all information available for at least, but not limited to, twelve months period from the end of reporting period, needs to be analyzed to forecast future profitability, ability to discharge obligations when due, reliefs and concessions provided by the Government and creditors, potential sources of financing, plan to mitigate the risk of inability to continue as a going concern etc.


ASB - NEPAL 2

The key consideration for assessment of going concern by management are summarized in the table below:

Key Consideration for assessment

Description

When (Frequency of Assessment)

For each financial reporting period (whether interim or annual)

Period of going concern

At least, but is not limited to, twelve months from the end of the reporting period

Subsequent event Events after the reporting date and before issue of financial statements may provide information about the entity’s ability to continue as a going concern. NAS 10.14 provides that an entity shall not prepare its financial statements on a going concern basis if management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.

Matters considered for assessment

The extent of operational and logistic disruption

Potential diminished demand for products and services

Operational and contingency plan of management for running the business in COVID 19 situation.

Availability and capacity of key suppliers

Availability of key workforce at affordable cost

Obligations due or anticipated within 12 months of reporting date

Position of working capital

Liquidity position and available and potential sources of finance

Reliefs and concessions provided by the Government, banks and creditors

Management’s Plan to mitigate uncertainties

Work from home, online trading and work at reduced capacity to survive for at least 12 months

Search of new/replacing suppliers and workforce

Negotiation with workforce, creditors and bankers

Rescheduling of debts

Preparation to abide by conditions to obtain reliefs and concessions offered by Government, local bank and creditors

The various outcome of assessment of going concern, the respective basis of preparation of financial statements and respective disclosure requirements are presented in the table below


ASB - NEPAL 3

Outcome of assessment of Going Concern

Basis of Preparation of Financial Statements

Disclosure requirement

Entity will continue as a Going Concern/ No material uncertainty exits about going concern

Going Concern basis (NAS 1.25)

No disclosure requirement is proposed by NAS 1. Going Concern is fundamental assumption

Material uncertainty (e.g. extent of impact on cost or revenue, duration of impact etc.) exists about Going Concern but management has plan to mitigate

Going Concern basis (NAS 1.25)

The management should disclose the principal events and conditions that may cast doubt on entity’s ability to continue as a going concern and management’s plan to deal with the events and conditions. Further, clearly disclose that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and, therefore, it may be unable to realize its assets and discharge its liabilities in the normal course of business.

Material uncertainty exists about Going Concern and management plans would not be able to mitigate the uncertainties/Going Concern basis is inappropriate

Other than going concern basis of accounting

Disclose the fact that financial statements have not been prepared on going concern basis. Disclose the basis of preparation used. Disclose the reasons why the entity is not considered as a going concern.

Note: NFRS does not provide for alternate basis to going concern basis of accounting (however, liquidation basis of accounting could be an alternative basis of accounting)

Comparative Information


NAS-1.38: Except when NFRSs permit or require otherwise, an entity shall disclose comparative information in respect of the previous period for all amounts reported in the current period's financial statements. An entity shall include comparative information for narrative and descriptive information when it is relevant to an understanding of the current period's financial statements.

NAS-1.43: Enhancing the inter-period comparability of information assists users in making economic decisions, especially by allowing the assessment of trends in financial information for predictive purposes. In some circumstances, it is impracticable to reclassify comparative information for a particular prior period to achieve comparability with the current period. For


ASB - NEPAL 4

example, an entity may not have collected data in the prior period(s) in a way that allows reclassification, and it may be impracticable to recreate the information.


The financial performance and financial position of the entities in the current fiscal year may be highly impacted due to business disruptions for extended period. So, the financial information of the current year, which is not normal year of operation, may not be fully comparable with the previous years, normal year of operation.


Preparers should consider making adequate disclosures and explanatory notes regarding the impact of COVID-19 on its financial position, performance and cash flows to explain to the users of the financial statements with reference to the corresponding information of the previous year. This disclosure and explanation will help users in making informed decisions when they use financial information of the entity for trend and other analysis.

Current and non-current distinction


NAS-1.69: An entity shall classify a liability as current when:

(a) it expects to settle the liability in its normal operating cycle;

(b) it holds the liability primarily for the purpose of trading;

(c) the liability is due to be settled within twelve months after the reporting period; or

(d) it does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period (see paragraph 73). Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

An entity shall classify all other liabilities as non-current.

NAS-1.73: If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the reporting period under an existing loan facility, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period. However, when refinancing or rolling over the obligation is not at the discretion of the entity (for example, there is no arrangement for refinancing), the entity does not consider the potential to refinance the obligation and classifies the obligation as current.

NAS-1.74: When an entity breaches a provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, it classifies the liability as current, even if the lender agreed, after the reporting period and before the authorization of the financial statements for issue, not to demand payment as a consequence of the breach. An entity classifies the liability as current because, at the end of the reporting period, it does not have an unconditional right to defer its settlement for at least twelve months after that date.


ASB - NEPAL 5

NAS-1.75:However, an entity classifies the liability as non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.

NAS-1.76: In respect of loans classified as current liabilities, if the following events occur between the end of the reporting period and the date the financial statements are authorized for issue, those events are disclosed as non-adjusting events in accordance with NAS 10 Events after the Reporting Period:

(a) refinancing on a long-term basis;

(b) rectification of a breach of a long-term loan arrangement; and

(c) the granting by the lender of a period of grace to rectify a breach of a long-term loan arrangement ending at least twelve months after the reporting period.


An entity may experience difficulties in meeting its debt obligation due to prolonged business disturbances and may default in principal and interest payments. Government and regulators and in some cases lenders may suo motu, provide relaxations to borrowers in payment/settlement of dues. Such situation may affect current/non-current status of liabilities.


The key consideration for current/non-current classification of liability whose nature is changed due to COVID-19 effect are summarized in the table below

S.N. Situation Classification of liability

Rationale for recommended classification

1. The entity expects and has discretion to roll over the obligation for at least 12 months from the end of the reporting period

Non-current The lender/creditor cannot enforce the entity to settle the liability within 12 months after reporting date

2. The entity breaches the terms of long term loan agreement before the end of the reporting period with the effect that liability becomes payable on demand

Entire loan becomes Current

Loan becomes payable on demand and the entity does not have right to defer settlement for at least 12 months from the end of the reporting period.


ASB - NEPAL 6

3. In situation 2 above, if the lender agrees before the end of the reporting period, at its own or as a result of Government order, not to demand payment as a consequence of the breach

Non-current The liability is not payable on demand as on end of the reporting period. However, the portion of liability payable within 12 months of reporting period end date shall be presented as current liability

4. In situation 2 above, if the lender agrees after the end of the reporting period and before financial statements are authorized for issue, at its own or as a result of Government order, not to demand payment as a consequence of the breach for at least 12 months from the end of the reporting period.

Current The liability is payable on demand as on end of the reporting period and the entity did not have unconditional right to defer settlement on demand.


ASB - NEPAL 7

NAS 2 Inventories

Measurement of inventories

Relevant Paragraph from NAS 2

NAS-2.9: Inventories shall be measured at the lower of cost and net realizable value.

NAS-2.10: The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

NAS-2.13: The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if it approximates normal capacity. The amount of fixed overhead allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognized as an expense in the period in which they are incurred. In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost. Variable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities.

NAS-2.16: Examples of costs excluded from the cost of inventories and recognized as expenses in the period in which they are incurred are:

(a) abnormal amounts of wasted materials, labor or other production costs;

(b) storage costs, unless those costs are necessary in the production process before a further production stage;

(c) administrative overheads that do not contribute to bringing inventories to their present location and condition; and

(d) selling costs.

NAS-2.18: An entity may purchase inventories on deferred settlement terms. When the arrangement effectively contains a financing element, that element, for example a difference between the purchase price for normal credit terms and the amount paid, is recognized as interest expense over the period of the financing.

NAS-2.28: The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated costs to be incurred to make the sale have increased. The practice of writing inventories down below cost to net realizable value is consistent with the view that assets should not be carried in excess of amounts expected to be realized from their sale or use.


ASB - NEPAL 8


Various entities may not operate at full capacity due to reduced demand, disruption in supply chain, shortage in workforce and lockdown effects. However, the fixed costs will continue to be incurred and in such situation, determination of cost of inventories needs to take into account the costs to be included in inventory costs to be charged as expenses. Further, due to liquidity crisis an entity may purchase goods under deferred settlement terms and cost of purchase may include financing cost which should be properly dealt with in determination of cost of inventories. Moreover, the net realizable value of inventories may be impacted due to seasonal nature of some inventories and perishable products might be exposed to the risk of loss due to damage, contamination, physical deterioration, obsolescence, changes in price levels or other causes. In addition to these impacts, estimating net realizable value in such volatile market conditions also poses challenges, on account of the uncertainties presented by the pandemic.


Fixed production overheads costs should be absorbed on the basis of normal production level. Due to low production level, compared to normal production level, some fixed production overhead costs may not be absorbed by produced units. Such unabsorbed production cost shall be charged as expenses and inventory cost shall be determined on the basis of normal production level. In case of purchase of goods under deferred settlement terms, the financing costs should be determined as excess of cost of purchases over cost of goods purchased under normal credit terms. Such excess costs (financing cost) should be recognized as financing expenses rather than cost of produced units.

Further, net realizable value of inventories should be estimated using the best judgement on the basis of available information and considering the events after reporting period which provides further evidence of the condition existed at the reporting date. Due to reduced demand, perishable nature of some goods, seasonal effect and other reasons, net realizable value of some goods may be less than their cost. In such situation, inventories should be written down to net realizable value.


ASB - NEPAL 9

NAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Changes in Accounting Estimates

Relevant paragraph from NAS 8

NAS- 8.32: As a result of the uncertainties inherent in business activities, many items in financial statement cannot be measured with precision but can only be estimated. The estimation involves judgments based on the latest available reliable information. For example, estimates may be required of

(a) bad debts;

(b) inventory obsolescence;

(c) the fair value of financial assets or financial liabilities;

(d) the useful lives of, or expected pattern of consumption of future economic benefits embodied in depreciable assets: and

(e) warranty obligations.

NAS-8.34: An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience.

NAS-8.36: The effect of a change in an accounting estimate, other than a change to which paragraph 37 applies, shall be recognized prospectively by including it in profit or loss in:

(a) the period of the change, if the change affects that period only; or

(b) the period of the change and future periods, if the change affects both.

NAS-8.37: To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or related to an item of equity, it shall be recognized by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.

NAS-8.39: An entity shall disclose the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods, except for the disclosure of the effect on future periods when it is impracticable to estimate that effect.

NAS-8.40: If the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact.


The current economic situation and its impacts on businesses has drastically increased the uncertainty about future market scenario. These uncertainties may impact the estimates and management judgments in a great deal. Estimates and judgments that are based on highly subjective assumptions (e.g., a valuation of financial instruments that is not based on observable market information, assumptions about future events and conditions) may be


ASB - NEPAL 10

challenging. Similarly, the COVID-19 Impact may have affected the expected useful life and residual life of PPEs, inventory obsolescence, Bad debt estimation, etc.


The management shall give due consideration to the COVID 19 impact while making estimates and judgment for valuation of financial instruments, expected useful life and residual life of PPEs, inventory obsolescence, bad debts, warranty obligations etc. While making estimates and judgments, if expectations differ from previous estimates, it is appropriate to account for the change(s) as an accounting estimate in accordance with paragraphs NAS-8.36 and 8.37.

Due to current market conditions, apart from the disclosures required by paragraphs NAS-8.39 and 8.40, it may be necessary for the entities to make additional disclosures about significant accounting estimates and management judgments to enable the users of the financial statements to understand those statements correctly. The entity shall also disclose information about the assumptions it makes about the future, and other major sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.


ASB - NEPAL 11

NAS 10 Event After Reporting Period

Recognition and disclosure of events after reporting period

Relevant paragraphs from NAS 10

NAS-10.3: Events after the reporting period are those events, favorable and un-favorable, that occur between the end of the reporting period and the date when the financial statements are authorized for issue. Two types of events can be identified:

(a) those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period); and

(b) those that are indicative of conditions that arose after the reporting period (non-adjusting events after the reporting period).

NAS-10.8: An entity shall adjust the amounts recognized in its financial statements to reflect adjusting events after the reporting period.

NAS-10.14: An entity shall not prepare its financial statements on a going concern basis if management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.

NAS-10.21: If non-adjusting events after the reporting period are material, non-disclosure could influence the economic decisions that users make on the basis of the financial statements. Accordingly, an entity shall disclose the following for each material category of non-adjusting event after the reporting period:

(a) the nature of the event; and

(b) an estimate of its financial effect, or a statement that such an estimate cannot be made.


The first infected case was identified on 23 January 2020 in Nepal and complete lockdown was announced by the Government from 24 March 2020 after identifying second case to contain the spread of COVID-19 in the country. The adverse economic impact of COVID-19 will go long beyond reporting period i.e. Ashadh end of FY 2076/77, which in turn will affect going concern aspects of many entities. Further, other significant events may occur even after Ashadh end, for example bankruptcy of major debtors due to COVID-19 which needs to be analyzed to decide whether the events are adjusting event or non-adjusting events.


There is no specific prescription at which entities should view all COVID‑19 related impacts to be adjusting events. Instead, each event should be assessed to determine whether it provides evidence of conditions that existed at the end of the reporting period or whether it reflects a change in conditions after the reporting date. If the event is determined as adjusting event,


ASB - NEPAL 12

the financial impact of such events shall be adjusted in the financial statements for the year ended Ashad 2076. For example, a major debtor could not pay his due liabilities by Ashad end 2076 due to his deteriorated financial condition caused from COVID-19 and after the end of the Ashad he was declared as insolvent.

In case of non-adjusting event, an entity shall disclose the nature of material non-adjusting event along with its estimated financial effect. The estimate does not need to be precise. It is preferable to provide a range of estimated effects as an indication of impact as compared to not providing any quantitative information at all. However, where quantitative effect cannot be reasonably estimated, qualitative description should be provided, along with a statement that it is not possible to estimate the effect.

Management shall assess and evaluate the impact of COVID-19 on its business environment. Even after the reporting period, management may intend to liquidate its business or to cease trading or it has no realistic alternative but to do so. In such circumstances, management should not prepare its financial statement on going concern basis.


ASB - NEPAL 13

NAS 11 Construction Contracts

Contract Revenue

Relevant Paragraphs from NAS 11

NAS-11.12: Contract revenue is measured at the fair value of the consideration received or receivable. The measurement of contract revenue is affected by a variety of uncertainties that depend on the outcome of future events. The estimates often need to be revised as events occur and uncertainties are resolved. Therefore, the amount of contract revenue may increase or decrease from one period to the next. For example:

(a) a contractor and a customer may agree variations or claims that increase or decrease contract revenue in a period subsequent to that in which the contract was initially agreed;

(b) the amount of revenue agreed in a fixed price contract may increase as a result of cost escalation clauses;

(c) the amount of contract revenue may decrease as a result of penalties arising from delays caused by the contractor in the completion of the contract; or

(d) when a fixed price contract involves a fixed price per unit of output, contract revenue increases as the number of units is increased.


The uncertainties associated with construction contract are likely to be amplified in the current situation and estimates of contract revenue needs to be revised.

Some of the situations which may result into the need of revision of contract revenue includes:

Increase in fixed price contract as a result of cost escalation clause (cost of material and labor may increase due to supply chain disruption and workforce shortage)

Decrease in contract revenue as a result of penalty due to delay in execution of contract resulting from lockdown, imposed restriction affecting business and similar other effects as a response to fight against COVID-19


The management should analyze all possible situations surrounding the uncertainties and calculate the revised estimate of contract revenue which is useful in estimating reliably the outcome of a construction contract.


ASB - NEPAL 14

Contract Costs


NAS-11.18: Costs that may be attributable to contract activity in general and can be allocated to specific contracts include:

(a) insurance;

(b) costs of design and technical assistance that are not directly related to a specific contract; and

(c) construction overheads.

Such costs are allocated using methods that are systematic and rational and are applied consistently to all costs having similar characteristics. The allocation is based on the normal level of construction activity. Construction overheads include costs such as the preparation and processing of construction personnel payroll. Costs that may be attributable to contract activity in general and can be allocated to specific contracts also include borrowing costs.

NAS-11.20: Costs that cannot be attributed to contract activity or cannot be allocated to a contract are excluded from the costs of a construction contract. Such costs include:

(a) general administration costs for which reimbursement is not specified in the contract;

(b) selling costs;

(c) research and development costs for which reimbursement is not specified in the contract; and

(d) depreciation of idle plant and equipment that is not used on a particular contract.


Construction activities may be halted during lockdown and extended period but still construction overhead (including payroll costs of construction personnel) and depreciation on plant and equipment that is not used on a particular contract will continue to be incurred.


Costs which are not related to normal level of construction activity should not be charged to the construction costs. Correct calculation of contract cost is useful in estimating reliably the outcome of a construction contract.

Recognition of contract revenue and expenses


NAS-11.22: When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract shall be recognized as


ASB - NEPAL 15

revenue and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting period. An expected loss on the construction contract shall be recognized as an expense immediately in accordance with NAS-11.36.

NAS-11.32: When the outcome of a construction contract cannot be estimated reliably:

(a) revenue shall be recognized only to the extent of contract costs incurred that it is probable will be recoverable; and

(b) contract costs shall be recognized as an expense in the period in which they are incurred.

An expected loss on the construction contract shall be recognized as an expense immediately in accordance with paragraph 36.


Due to uncertainties, the outcome of a contract may not be estimated reliably in various circumstances. Further, financial difficulty and liquidity issues of several entities may cause uncertainty about the collectability of contract revenue already recognized in profit or loss.


A contractor can reliably estimate the outcome of a contract if following conditions are met:

Total contract revenue can be measured reliably

Total contract costs can be identified and measured reliably

It is probable that economic benefit from the contract will flow to the entity and

Both estimated costs to complete the contract and stage of completion at end of reporting period can be measured reliably

When outcome of a contract cannot be estimated reliably, the contract revenue shall be recognized only to the extent of contract costs that are probable of being recovered.

Further, the uncollectible amount or the amount in respect of which recovery has ceased to be probable should be recognized as an expense rather than as an adjustment of the amount of contract revenue already recognized in accordance with NAS-11.28.

Recognition of expected Loss


NAS-11.36: When it is probable that total contract costs will exceed total contract revenue, the expected loss shall be recognized as an expense immediately.


ASB - NEPAL 16


The uncertainties may result into revision in estimate of total contract revenue and total contract cost. The revised estimate may indicate expected loss from a contract, which was estimated as expected profit before considering the impact of COVID-19.


If the revised estimate indicates expected loss from a contract, it should be recognized as expense immediately.


ASB - NEPAL 17

NAS 12 Income Taxes

Deferred Tax Assets

Relevant Paragraph from NAS 12

NAS-12.24:A deferred tax asset shall be recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized.

NAS-12.34:A deferred tax asset shall be recognized for the carry forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized.


Most of the entities are likely to face adverse impact on its profitability in the current year and in years to come. Therefore, there may be a need to revisit the assumptions about assessing the likelihood that the entity will have sufficient future taxable profit.


An entity should assess the probability that taxable profit will be available against which deductible temporary differences or unused tax losses and unused tax credits can be utilized. While assessing the possible future taxable profit of an entity, an entity should consider tax waivers or deferrals or relief packages offered to the industry to which entity belongs. The existence of unused tax loss even in pre COVID situation could be a strong indication that the entity may not have sufficient taxable profit in future against which unused tax loss can be utilized. Accordingly, in case an entity does not foresee the availability of future taxable profit, deferred tax assets should not be recognized or deferred tax assets recognized in previous year shall be derecognized to the extent that it cannot be recovered.

When assessing probable future taxable profits, an entity should also ensure the reasonableness of its business plan and its impact on future taxable profits and the consistency of assumptions compared to projections used in other financial statements estimates for elements that should be comparable. The assumptions used should reflect the conditions in existence at the reporting date after considering the most recent available information.


ASB - NEPAL 18

NAS 16 Property, Plant and Equipment

Depreciable amount and Depreciation period


NAS-16.51: The residual value and the useful life of an asset shall be reviewed at least at each financial year end, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with NAS 8.

NAS-16.55: Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with NFRS-5 and the date that the asset is derecognized. Therefore, depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production.

Possible Impact Due to COVID 19

Property Plant and Equipment (PPE) may remain idle or not utilized for certain period of time due to lockdown or other disruptions resulting from COVID. Further, the useful life and use pattern of assets may change in the changed circumstances; e.g. due to lack of scheduled maintenance during lockdown, change in expected use of the asset etc.

Implementation Guideline

Depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is derecognized or held for sale in accordance with NFRS-5. However, under usage methods of depreciation the depreciation charge can be zero while there is no production.

The management should reassess whether there is any change required in the useful life/residual life of property, plant and equipment. Mostly affected sectors like; tourism, tour & travels, transportation, aviation, hospitality, entertainment etc. should be careful while assessing the fair value, useful life and impairment losses of their PPE. The management may review the residual value and the useful life of an asset due to COVID-19 and, if expectations differ from previous estimates, it is appropriate to account for the change(s) as an accounting estimate.


ASB - NEPAL 19

NAS 17 Leases

Modification in Lease


Lack of guidance in NAS-17 for modification in Leases


Various lessors may provide concessions on lease rent (e.g. in the form of waiver of rent for few months, reduced lease rent for certain months or deferment of rent for few months) to lessee taking into account deteriorating financial condition of lessee or due to Government order or other consideration. So, the situation results into modification in the lease. There could be following issues arising from this situation:

Reduced amount of minimum lease payments

Interest rate implicit may change

Lease rentals income/expenses to be recognized on straight line basis will be reduced


The standard is silent on dealing with modification in lease.

The accounting to deal with issues arising out of modification in lease could be complex and non-comparable amongst the entities in the absence of clear guidelines and hence as a practical expedient, the Board requires the recognition of income/expenses as a result of above concessions on lease rent in the period in which it arises along with appropriate disclosure. This requirement is however applicable for concessions on lease rent as a response to COVID-19 up to 16 July 2021 only unless further extended.

For the new leases, the discount rate should consider the risks of COVID-19 and the incremental borrowing rate of the lessee at the inception of the lease which is likely to be less than the rate that was considered reasonable before COVID-19 impact due to economic stimulus offered by Government.

Operating Leases - Incentives

Relevant Paragraphs from SIC-15

SIC-15.3: All incentives for the agreement of a new or renewed operating lease shall be recognized as an integral part of the net consideration agreed for the use of the leased asset, irrespective of the incentive’s nature or form or the timing of payments.


ASB - NEPAL 20

SIC-15.4: The lessor shall recognize the aggregate cost of incentives as a reduction of rental income over the lease term, on a straight-line basis unless another systematic basis is representative of the time pattern over which the benefit of the leased asset is diminished.

SIC-15.5: The lessee shall recognize the aggregate benefit of incentives as a reduction of rental expense over the lease term, on a straight-line basis unless another systematic basis is representative of the time pattern of the lessee’s benefit from the use of the leased asset.


Economic activity is likely to slow down and lessees may terminate the lease resulting into pressure to lessors to find new lessees in current challenging economic environment. In order to attract lessees for leasing assets, lessors may provide incentives (e.g. up-front cash payment to the lessee or rent free or reduced rent for initial periods of lease term or the reimbursement or assumption by the lessor of costs of the lessee, such as relocation costs, leasehold improvements and costs associated with a pre-existing lease commitment of the lessee) while negotiating a new or renewed operating lease.


Lessee (or lessor) shall recognize lease rental expenses (or lease rental income) on straight line basis over the lease term, after deducting total incentives from total lease rental to arrive at net consideration for use of leased assets. So, in effect periodic lease rental amount shall be reduced in case incentives are provided by lessor.


ASB - NEPAL 21

NAS 18 Revenue

Customer Loyalty programs

Relevant Paragraphs from NAS 18 and IFRIC 13

NAS-18.13: The recognition criteria in this Standard are usually applied separately to each transaction. However, in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. For example, when the selling price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognized as revenue over the period during which the service is performed. Conversely, the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole. For example, an entity may sell goods and, at the same time, enter into a separate agreement to repurchase the goods at a later date, thus negating the substantive effect of the transaction; in such a case, the two transactions are dealt with together.

IFRIC-13.5: An entity shall apply NAS 18.13 and account for award credits as a separately identifiable component of the sales transaction(s) in which they are granted (the ‘initial sale’). The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between the award credits and the other components of the sale.

IFRIC -13.6: The consideration allocated to the award credits shall be measured by reference to their fair value, i.e. the amount for which the award credits could be sold separately.

IFRIC-13.7: If the entity supplies the awards itself, it shall recognize the consideration allocated to award credits as revenue when award credits are redeemed and it fulfils its obligations to supply awards. The amount of revenue recognized shall be based on the number of award credits that have been redeemed in exchange for awards, relative to the total number expected to be redeemed.

IFRIC-13.8: If a third party supplies the awards, the entity shall assess whether it is collecting the consideration allocated to the award credits on its own account (i.e. as the principal in the transaction) or on behalf of the third party (i.e. as an agent for the third party).

(a) If the entity is collecting the consideration on behalf of the third party, it shall:

(i) measure its revenue as the net amount retained on its own account, ie the difference between the consideration allocated to the award credits and the amount payable to the third party for supplying the awards; and

(ii) recognize this net amount as revenue when the third party becomes obliged to supply the awards and entitled to receive consideration for doing so. These events may occur as soon as the award credits are granted. Alternatively, if the customer can choose to


ASB - NEPAL 22

claim awards from either the entity or a third party, these events may occur only when the customer chooses to claim awards from the third party.

(b) If the entity is collecting the consideration on its own account, it shall measure its revenue as the gross consideration allocated to the award credits and recognize the revenue when it fulfils its obligations in respect of the awards.


Demand of goods or services of an entity may fall because of reducing purchasing power of customers. In order to increase the demand of the products of the entity, it may come up with customer loyalty programs to provide customers with incentives to buy its goods or services. If a customer buys goods or services, the entity grants the customer award credits (often described as ‘points’). The customer can redeem the award credits for awards such as free or discounted goods or services. The programs operate in a variety of ways. Customers may be required to accumulate a specified minimum number or value of award credits before they are able to redeem them. Award credits may be linked to individual purchases or groups of purchases, or to continued custom over a specified period. The entity may operate the customer loyalty program itself or participate in a program operated by a third party. The awards offered may include goods or services supplied by the entity itself and/or rights to claim goods or services from a third party.


In case of customer loyalty program, the fair value of consideration received or receivable shall be allocated between award credit and other components of sale. The revenue in relation to award credit shall be recognized, as per IFRIC 13, only when the award credit is redeemed and the entity fulfills its obligation in relation to award credits. The revenue in relation to other components of sale shall be recognized as usual in accordance with NAS-18.

Sales Return from Sale of Goods


NAS-18.17: If an entity retains only an insignificant risk of ownership, the transaction is a sale and revenue is recognized. For example, a seller may retain the legal title to the goods solely to protect the collectability of the amount due. In such a case, if the entity has transferred the significant risks and rewards of ownership, the transaction is a sale and revenue is recognized. Another example of an entity retaining only an insignificant risk of ownership may be a retail sale when a refund is offered if the customer is not satisfied. Revenue in such cases is recognized at the time of sale provided the seller can reliably estimate future returns and recognizes a liability for returns based on previous experience and other relevant factors.

NAS-18.18: Revenue is recognized only when it is probable that the economic benefits associated with the transaction will flow to the entity. In some cases, this may not be probable until the consideration is received or until an uncertainty is removed. For example, it may be uncertain that a foreign governmental authority will grant permission to remit the consideration from a sale in a foreign country. When the permission is granted, the


ASB - NEPAL 23

uncertainty is removed and revenue is recognized. However, when an uncertainty arises about the collectability of an amount already included in revenue, the uncollectible amount or the amount in respect of which recovery has ceased to be probable is recognized as an expense, rather than as an adjustment of the amount of revenue originally recognized.


Due to challenging situation, an entity may not be able to deliver goods and services to the satisfaction of customers and sales return is expected to increase. Further after recognition of revenue, due to worsening economic conditions of customers, collectability of already recognized revenue may be uncertain.


The seller can recognize full sales but reasonable estimate of sales return should be made considering factors like subsequent events and liability for returns should be recognized (if sales are in credit and sufficient amounts are still receivable as on year end date, adjustment of receivables).

If collectability of already recognized revenue is uncertain, the originally recognized revenue should not be adjusted rather the amount in respect of which recovery has ceased to be probable is recognized as an expense.

One of criteria to be fulfilled for recognition of sale of goods or service is that there should be probability that the economic benefits with the transaction will flow to the entity. Even though there is general presumption that at time of sales this condition is met, in current COVID 19 situation where there could be customer with difficult/deteriorating financial condition with high probability of default at the time of sale, careful consideration needs to be given in making assessment whether economic benefits attached to sale will flow to entity or not before recognizing transfer/sale of goods or service as revenue.


ASB - NEPAL 24

NAS 19 Employee Benefits

Termination benefits, reduction in salaries, suspension of employees and stay

bonus


NAS-19.165: An entity shall recognize a liability and expense for termination benefits at the earlier of the following dates:

(a) when the entity can no longer withdraw the offer of those benefits; and

(b) when the entity recognizes costs for a restructuring that is within the scope of NAS 37 and involves the payment of termination benefits.

NAS-19.169: An entity shall measure termination benefits on initial recognition, and shall measure and recognize subsequent changes, in accordance with the nature of the employee benefit, provided that if the termination benefits are an enhancement to post-employment benefits, the entity shall apply the requirements for post-employment benefits. Otherwise:

(a) if the termination benefits are expected to be settled wholly before twelve months after the end of the annual reporting period in which the termination benefit isrecognized, the entity shall apply the requirements for short-term employee benefits.

(b) if the termination benefits are not expected to be settled wholly before twelve months after the end of the annual reporting period, the entity shall apply the requirements for other long term employee benefits.

NAS-19.11: When an employee has rendered service to an entity during an accounting period, the entity shall recognize the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service:

a) as a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds the undiscounted amount of the benefits, an entity shall recognize that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund.

b) as an expense, unless another NFRS requires or permits the inclusion of the benefits in the cost of an asset (see, for example, NAS 2 and NAS 16).


Due to reduced demand, liquidity crunch and difficult work environment in current situations, various entities may:

reduce its workforce by terminating employees or

ask employees to work for less than full time at reduced salary or


ASB - NEPAL 25

suspend employees for certain period by paying at reduced rate or full rate to ensure that those experienced employees will be available for work at latter date when business peaks up.

provide special bonuses to employees as a reward for working in difficult conditions


Termination: NAS-19 deals with termination benefit separately from other employee benefits because it relates to the cost and obligation of entity in relation to termination of employee rather than from employee service. Termination benefits should be distinguished from employee benefits arising due to acceptance of employee’s decision to leave the organization without the offer of the organization or as a result of mandatory retirement requirement, which is post-employment benefit. Termination benefits result from either an entity’s decision to terminate the employment or an employee’s decision to accept an entity’s offer of benefits in exchange for termination of employment. The expenses and the liability of termination benefit shall be recognized when entity’s offer of termination is accepted by employees or when restructuring obligation relating to termination is recognized as per NAS -37. The measurement of termination benefits depends upon the nature of the benefit as summarized in the table below:

Nature of employee benefit Measurement guidance

Enhancement to defined benefit plan Requirements relating to post-employment benefits are applied for measuring termination benefits; i.e. discounting of liabilities and other complex measurement procedure with actuarial assumptions.

Benefits are expected to be settled fully within 12 months of annual reporting period end date

Requirements relating to short term employee benefits are applied for measuring termination benefits; i.e. no discounting of liabilities

Benefits are not expected to be settled fully within 12 months of annual reporting period end date

Requirements relating to long term employee benefits are applied for measuring termination benefits; i.e. discounting of liabilities but simplified method of accounting.

Reduced salary payment and temporary suspension: Salary is a short term employee benefit and hence reduced salary payment (or payment of salary during suspension) shall be recognized as expenses in the period with corresponding liability (if not already paid) or asset (if salary paid in advance) without discounting. There is no difference in accounting and presentation of reduced salary compared to the full salary of previous period.

Stay Bonus: Bonus is mostly short term employee benefit (if expected payment is after 12 months from the end of annual reporting period, it could be long term employee benefit). Payments of bonuses (other than statutory bonus which is regulated as per Bonus Act) may be contingent on the employees continuing to provide services until a certain date. In such circumstances, the plan creates a constructive obligation as employees render service that increases the amount to be paid if they remain in service until the end of that specified date. The fact that some employees may leave without receiving payments offered under the bonus plans is considered in the measurement of the obligation. It is not appropriate to defer recognition of the obligation until the employee completes the entitlement period.


ASB - NEPAL 26

NAS 20 Accounting for Government Grants and Disclosure of Government Assistance

Recognition of Government Grants


NAS-20.7: Government grants, including non-monetary grants at fair value, shall not be recognized until there is reasonable assurance that:

(a) the entity will comply with the conditions attaching to them; and

(b) the grants will be received.

NAS-20.10A:The benefit of a government loan at a below-market rate of interest is treated as a government grant. The loan shall be recognized and measured in accordance with NFRS 9 Financial Instrument. The benefit of the below-market rate of interest shall be measured as the difference between the initial carrying value of the loan determined in accordance with NFRS 9 and the proceeds received. The benefit is accounted for in accordance with this Standard. The entity shall consider the conditions and obligations that have been, or must be, met when identifying the costs for which the benefit of the loan is intended to compensate.

NAS-20.12: Government grants shall be recognized in profit or loss on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate.

NAS-20.20: A government grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs shall be recognized in profit or loss of the period in which it becomes receivable.

NAS-20.21: In some circumstances, a government grant may be awarded for the purpose of giving immediate financial support to an entity rather than as an incentive to undertake specific expenditure. Such grants may be confined to a particular entity and may not be available to a whole class of beneficiaries. These circumstances may warrant recognizing a grant in profit or loss of the period in which the entity qualifies to receive it, with disclosure to ensure that its effect is clearly understood.


To limit the adverse economic impact, the Government has responded/ may respond by providing various assistance (e.g. reduced interest rate for certain sector and certain size of entities, contribution to social security fund for certain period by SSF itself etc.) to entities.


ASB - NEPAL 27


The management should assess whether there are any conditions to be fulfilled to avail the benefit of Government grant. If the grant is for compensating the loss and past costs incurred or to provide immediate financial support without any future associated costs, the grant shall be recognized as income in the statement of profit or loss in the period in which it becomes receivable.

However, if future costs are expected to be incurred to meet the conditions associated with the grant, it shall be recognized as income over the period in which costs will be incurred in proportion of the cost. In such situation the entity has the option to choose the policy of presenting the grant income as other income or alternatively as deduction from associated cost.

If the Government assistance is for the benefit in determination of taxable profit (e.g. income tax holidays, reduced income tax rate), NAS-12 shall be applied for accounting of such Government assistance.


ASB - NEPAL 28

NAS 23 Borrowing Cost

Suspension of capitalization


NAS-23.20: An entity shall suspend capitalization of borrowing costs during extended periods in which it suspends active development of a qualifying asset.

NAS-23.21: An entity may incur borrowing costs during an extended period in which it suspends the activities necessary to prepare an asset for its intended use or sale. Such costs are costs of holding partially completed assets and do not qualify for capitalization. However, an entity does not normally suspend capitalizing borrowing cost during a period when it carries out substantial technical and administrative work. An entity also does not suspend capitalizing borrowing costs when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale.


Economic disturbance arising from the COVID-19 pandemic might have led to the suspension of the active development of the qualifying assets. Further modification of borrowing terms, arising out of negotiations or from government’s relief program may change the amount of borrowing cost too. Moreover, government and regulators and in some cases lenders may suo motu, provide relaxations in payment of interest or option of capitalization of interest. Such situation may affect the status of liabilities and treatment of interest portion.


The management shall reassess whether active development of the qualifying assets on which borrowing costs are capitalized are being suspended for a specific time period because of the COVID-19 outbreak. If so, the management shall consider suspending the capitalization of borrowing cost for such specific period of time.

However, entities can continue to capitalize borrowing costs if; (a) the interruption is for short duration, as a practical expedient; (b) it continues to perform substantial administrative or technical work and (c) temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. If the management’s assessment justifies continuance of capitalization of borrowing cost, modification, if any, of borrowing terms arising out of negotiations or from government’s relief program shall be considered while calculating the amount of the borrowing cost.

Proper disclosure shall be made regarding interest capitalization, period, rate, concession/relief received if any, in the financial statements of the entity.


ASB - NEPAL 29

NAS 28 Investments in Associates and Joint Ventures

Impairment loss in investment in associates and Joint Ventures


NAS-28.40: After application of the equity method, including recognizing the associate's or joint venture's losses in accordance with paragraph 38, the entity applies NAS 39 Financial Instruments: Recognition and Measurement to determine whether it is necessary to recognize any additional impairment loss with respect to its net investment in the associate or joint venture.

NAS-28.41: The entity also applies NAS 39 to determine whether any additional impairment loss is recognized with respect to its interest in the associate or joint venture that does not constitute part of the net investment and the amount of that impairment loss.

NAS-28.42: Because goodwill that forms part of the carrying amount of an investment in an associate or a joint venture is not separately recognized, it is not tested for impairment separately by applying the requirements for impairment testing goodwill in NAS 36 Impairment of Assets. Instead, the entire carrying amount of the investment is tested for impairment in accordance with NAS 36 as a single asset, by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, whenever application of NAS 39 indicates that the investment may be impaired. An impairment loss recognized in those circumstances is not allocated to any asset, including goodwill, that forms part of the carrying amount of the investment in the associate or joint venture. Accordingly, any reversal of that impairment loss is recognized in accordance with NAS 36 to the extent that the recoverable amount of the investment subsequently increases. In determining the value in use of the investment, an entity estimates:

(a) its share of the present value of the estimated future cash flows expected to be generated by the associate or joint venture, including the cash flows from the operations of the associate or joint venture and the proceeds from the ultimate disposal of the investment; or

(b) the present value of the estimated future cash flows expected to arise from dividends to be received from the investment and from its ultimate disposal.

Using appropriate assumptions, both methods give the same result.

NAS-28.43: The recoverable amount of an investment in an associate or a joint venture shall be assessed for each associate or joint venture, unless the associate or joint venture does not generate cash inflows from continuing use that are largely independent of those from other assets of the entity.


Current measures enacted by governments requiring businesses to temporarily shut-down and social distancing requirements will impact almost all businesses and there is likelihood to an indication of impairment. Therefore, entities that apply equity method accounting for joint ventures or significant influence investees (associates) may need to evaluate the impact that COVID-19 has on their investments and determine if there is an indication of impairment.


ASB - NEPAL 30


While recognizing the associate's or joint venture's losses, the entity applies NAS 39 Financial Instruments: Recognition and Measurement to determine whether it is necessary to recognize any additional impairment loss with respect to its net investment in the associate or joint venture.

The recoverable amount of an investment in an associate or a joint venture shall be assessed for each associate or joint venture, unless the associate or joint venture does not generate cash inflows from continuing use that are largely independent of those from other assets of the entity.


ASB - NEPAL 31

NAS 34 Interim Financial Reporting

Recognition, Measurement and Disclosure requirement in Interim Financials


NAS-34.12: NAS 1 (as revised in 2008) provides guidance on the structure of financial statements. The Implementation Guidance for NAS 1 illustrates ways in which the statement of financial position, statement of comprehensive income and statement of changes in equity may be presented.

NAS- 1.4: This Standard does not apply to the structure and content of condensed interim financial statements prepared in accordance with NAS 34 Interim Financial Reporting. However, paragraphs 15–35 apply to such financial statements.

NAS-34.15: An entity shall include in its interim financial report an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the end of the last annual reporting period. Information disclosed in relation to those events and transactions shall update the relevant information presented in the most recent annual financial report.

NAS-34.15B: The following is a list of events and transactions for which disclosures would be required if they are significant: the list is not exhaustive.

(h) changes in the business or economic circumstances that affect the fair value of the entity’s financial assets and financial liabilities, whether those assets or liabilities are recognized at fair value or amortized cost;

NAS-34.15C: Individual NFRSs provide guidance regarding disclosure requirements for many of the items listed in paragraph 15B. When an event or transaction is significant to an understanding of the changes in an entity’s financial position or performance since the last annual reporting period, its interim financial report should provide an explanation of and an update to the relevant information included in the financial statements of the last annual reporting period.

NAS-34.16A: In addition to disclosing significant events and transactions in accordance with paragraphs 15–15C, an entity shall include the following information, in the notes to its interim financial statements, if not disclosed elsewhere in the interim financial report. The information shall normally be reported on a financial year-to-date basis.

(c) the nature and amount of items affecting assets, liabilities, equity, net income or cash flows that are unusual because of their nature, size or incidence.

(d) the nature and amount of changes in estimates of amounts reported in prior interim periods of the current financial year or changes in estimates of amounts reported in prior financial years.


ASB - NEPAL 32


Para 15 to 35 of NAS 1: Presentation of Financial Statements are applicable to preparation of interim financial reports also. The recognition and measurement guidance described in other NFRSs applies equally to interim financial statements. There are typically no recognition or measurement exceptions for interim reporting. Hence the entities are required to give due care to all other NFRSs and the COVID-19 impact on those NFRSs.

Management’s going concern assessment may be significantly affected due to this COVID-19 environment. The considerations that apply for the going concern assessment when preparing annual financial statements also apply for interim financial statements.

Similarly, in the context of current economic conditions, use of estimates is expected to become more significant in the interim financial statements.


While preparing interim financial statements, entities should give due care to the recognition and measurement guidance for financial items and presentation of financial statements described in respective NFRSs including impact of COVID-19.

If there is a material uncertainty about the entity’s ability to continue as a going concern at the date on which the interim financial statements are authorized for issue, then that uncertainty is disclosed in those interim financial statements.

In preparing interim financial statement, the standard requires to disclose the circumstances, events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the end of the last annual reporting period. Further, the entity shall also disclose the nature and the amount of items affecting assets, liabilities, equity, net income or cash flows that are unusual because of their nature, size or incidence. Management shall take due care of these requirement while preparing interim financial reporting.

Entities should ensure that the estimates made are reliable and that all relevant information is disclosed.

Where significant, the disclosures required by paragraph 15B in NAS 34 should be included, together with additional disclosures such as:

the impact on the results, balance sheet and cash flows; significant judgements that were not required previously updates to the disclosures of significant estimates; and events since the end of the interim period.


ASB - NEPAL 33

NAS 36 Impairment of Assets

Impairment of Non-Financial Assets


NAS -36.9: An entity shall assess at the end of each reporting period whether there is any indication that an asset (non financial assets including Cash Generating Unit CGU) may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.

NAS-36.12: In assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the following indications:

External sources of information

(a) there are observable indications that the asset’s value has declined during the period significantly more than would be expected as a result of the passage of time or normal use.

(b) significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated.

(c) market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially.

(d) the carrying amount of the net assets of the entity is more than its market capitalization.

Internal sources of information

(e) evidence is available of obsolescence or physical damage of an asset. (f) significant changes with an adverse effect on the entity have taken place during the

period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite.

(g) evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.

Dividend from a subsidiary, joint venture or associate

(h) for an investment in a subsidiary, joint venture or associate, the investor recognizes a dividend from the investment and evidence is available that:


ASB - NEPAL 34

(i) the carrying amount of the investment in the separate financial statements exceeds the carrying amounts in the consolidated financial statements of the investee’s net assets, including associated goodwill; or

(j) the dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate in the period the dividend is declared.

NAS-36.30: The following elements shall be reflected in the calculation of an asset’s value in use:

(a) an estimate of the future cash flows the entity expects to derive from the asset;

(b) expectations about possible variations in the amount or timing of those future cash flows;

(c) the time value of money, represented by the current market risk-free rate of interest;

(d) the price for bearing the uncertainty inherent in the asset; and

(e) other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.


The current development in this pandemic has shown evidences of impairment indicators on both the internal and external sources. Decline of the stock market, decrease in interest rates, uncertainty in the market commodity prices, import and export barriers and lockdown situation of the economies are some of the external indications that provide evidence on the need to do an assessment for impairment. On the other hand, the idle assets, non-moving stocks, non-operating properties and other manufacturing plants, less production and drop in the selling prices will create a need to test the impairment from the internal side.

One of the challenges of COVID -19 for the entities will be the impairment testing of its non-financial assets. The impairment test for these assets often requires the development of cash flow projections that are subject to the significant uncertainties amid this COVID-19 environment. Normally an entity estimates the recoverable amount of the asset for impairment testing. Recoverable amount is the higher of the fair value less costs of disposal (FVLCD) and the value in use (VIU). Value in use is defined as the present value of the future cash flows expected to be derived from an asset or cash-generating unit. The calculation of an asset’s value in use incorporates an estimate of expected future cash flows and expectations about possible variations of such cash flows.

COVID 19 might have a significant impact on the risk-free rate and on entity-specific risk premiums (e.g. financing risk, country risk and forecasting risk) used in determining the appropriate discount rate to discount future cash flows.


The management shall assess and determine whether COVID-19 has drastically impacted its business and is there any indication (triggering event) that the assets are impaired.

If management is confirmed that the indication for assets impairment exists, then it shall calculate the impairment loss by deducting the carrying amount from recoverable amount of the asset. The recoverable amount of an asset or a cash-generating unit is the higher of its fair


ASB - NEPAL 35

value less costs of disposal and its value in use. While measuring value in use, management of the business shall consider the elements mentioned in paragraph 30 of this standard. The entity shall update the forecasts or budgets or future cash-flows prepared in the past to incorporate the impact of COVID-19. The entity shall also consider whether the assumptions used to determine discount rate to measure the recoverable amount require any adjustments. COVID-19 might have a significant impact on the risk-free rate and on entity-specific risk premiums (e.g. financing risk, country risk and forecasting risk) used in determining the appropriate discount rate to discount future cash flows.

The entity shall consider whether market assumptions used to determine fair value for recoverable amounts needs reconsideration as per NFRS 13: Fair Value.

The entity shall ensure that reasonable assumptions are taken in estimating the value-in-use and fair value less costs of disposal and ensure that the impairment loss, if any, is estimated reliably.

The entity shall consider enhancing sensitivity disclosures and disclosures about the key assumptions and major sources of estimation uncertainty in interim and annual reports.


ASB - NEPAL 36

NAS 37 Provisions, Contingent Liabilities and Contingent Assets

Recognition of Provisions


NAS-37.14: A provision shall be recognized when:

(a) an entity has a present obligation (legal or constructive) as a result of a past event;

(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

(c) a reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision shall be recognized.


An entity may not be able to meet the agreed terms of contract and legal or constructive obligation may arise. But Government, regulator or contractors at suo motu may relax the requirement of the contract in the current circumstance and despite the non-compliance with the terms of contract, obligation may not arise.


For each non-compliance a thorough analysis should be done to arrive at a conclusion whether there is an obligation or not, resulting from non-compliance with the contractual terms. When there is an obligation of an entity as a result of past event, the management shall assess whether it is more likely than not that outflow of economic resources will be required to settle the obligation. Further, the reliable estimate to settle the obligation shall be made. The entity should recognize the provision if the 3 recognition criteria of provision are met.

Reimbursements


NAS-37.53: Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognized when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset. The amount recognized for the reimbursement shall not exceed the amount of the provision.

NAS-37.55: Sometimes, an entity is able to look to another party to pay part or all of the expenditure required to settle a provision (for example, through insurance contracts,


ASB - NEPAL 37

indemnity clauses or suppliers’ warranties). The other party may either reimburse amounts paid by the entity or pay the amounts directly.

NAS-37.56: In most cases the entity will remain liable for the whole of the amount in question so that the entity would have to settle the full amount if the third party failed to pay for any reason. In this situation, a provision is recognized for the full amount of the liability, and a separate asset for the expected reimbursement is recognized when it is virtually certain that reimbursement will be received if the entity settles the liability.


Due to financial and other difficulties, an entity may be obliged to pay to third parties for non- compliance with agreed terms. However, the entity might have arrangement with another parties to get reimbursement in such a situation.


If an entity fails to meet its obligation to third party, the full amount of obligation shall be recognized in accordance with recognition criteria of the provision. If the entity has right to get reimbursement from another party (e.g. insurer or suppliers warranty) in relation to such obligation, the entity shall recognize the reimbursement as a separate asset (not to be deducted from provision) if the reimbursement is virtually certain.

Future operating losses


NAS-37.63: Provisions shall not be recognized for future operating losses.

NAS-37.64: Future operating losses do not meet the definition of a liability in paragraph 10 and the general recognition criteria set out for provisions in paragraph 14.

NAS-37.65: An expectation of future operating losses is an indication that certain assets of the operation may be impaired. An entity tests these assets for impairment under NAS 36 Impairment of Assets.


Most of the entities are likely to face operating losses in days to come because fixed costs will continue to be incurred whereas revenue will be lost for prolonged period due to reduced purchasing power of customer and business disruptions.


Provision for such future operating losses are not to be recognized because future operating losses are not present obligation of the entity and hence it does not meet the definition and recognition criteria for provision. However, future operating losses indicates that some assets might be impaired and hence impairment testing of assets shall be performed in accordance with applicable standard.


ASB - NEPAL 38

Onerous contracts


NAS-37.66: If an entity has a contract that is onerous, the present obligation under the contract shall be recognized and measured as a provision.

NAS-37.67: Many contracts (for example, some routine purchase orders) can be cancelled without paying compensation to the other party, and therefore there is no obligation. Other contracts establish both rights and obligations for each of the contracting parties. Where events make such a contract onerous, the contract falls within the scope of this Standard and a liability exists which is recognized. Executory contracts that are not onerous fall outside the scope of this Standard.

NAS-37.68: This Standard defines an onerous contract as a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it.


Due to difficulties faced by entity, it may breach certain contracts (e.g. unable to deliver agreed quality of goods or services within the agreed time frame) resulting into obligation of the entity and the unavoidable costs of those obligations under the contract may exceed the expected economic benefits under the contract.


The entity shall analyze the unavoidable costs from breach of a contract and expected economic benefit from the contract. If the contract is onerous; i.e. there is an obligation of the entity and the unavoidable costs of those obligations under the contract is expected to exceed the expected economic benefits under the contract, the entity should recognize the loss immediately from such onerous contract and accordingly recognize provision.

Restructuring


NAS-37.70: The following are examples of events that may fall under the definition of restructuring:

(a) sale or termination of a line of business;

(b) the closure of business locations in a country or region or the relocation of business activities from one country or region to another;

(c) changes in management structure, for example, eliminating a layer of management; and


ASB - NEPAL 39

(d) fundamental reorganizations that have a material effect on the nature and focus of the entity’s operations.

NAS-37.71: A provision for restructuring costs is recognized only when the general recognition criteria for provisions set out in paragraph 14 of NAS-37 are met. Paragraphs 72–83 of NAS-37 set out how the general recognition criteria apply to restructurings.


Various entities may undergo restructuring of various forms to survive in difficult time or to take benefit of the opportunity arising from changed scenario as a result of COVID-19.


Restructuring provision shall be recognized if an entity has a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. A restructuring provision shall include only the direct expenditures arising from the restructuring (i.e. necessarily entailed by the restructuring and not associated with ongoing activities of entity) and it does not include expenditures relating to future conduct of business (e.g. retraining or reallocating staff, marketing, investment in new system)


ASB - NEPAL 40

NAS 38 Intangible Assets

Review of amortization period and amortization method


NAS-38.97: The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. Amortization shall begin when the asset is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Amortization shall cease at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with NFRS 5 and the date that the asset is derecognized. The amortization method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line method shall be used. The amortization charge for each period shall be recognized in profit or loss unless this or another Standard permits or requires it to be included in the carrying amount of another asset.

NAS-38.104: The amortization period and the amortization method for an intangible asset with a finite useful life shall be reviewed at least at each financial year-end. If the expected useful life of the asset is different from previous estimates, the amortization period shall be changed accordingly. If there has been a change in the expected pattern of consumption of the future economic benefits embodied in the asset, the amortization method shall be changed to reflect the changed pattern. Such changes shall be accounted for as changes in accounting estimates in accordance with NAS 8.

NAS-38.105: During the life of an intangible asset, it may become apparent that the estimate of its useful life is inappropriate. For example, the recognition of an impairment loss may indicate that the amortization period needs to be changed.


Intangible assets may not be in use for a long time due to lockdown and other reasons. Due to non-use of the assets and the need to change the use pattern of assets in the changed circumstances, management may consider to revise the useful life of assets.


Even during the period in which the assets were not used, the amortization shall continue unless the intangible assets are classified as held for sale in accordance with NFRS 5 or derecognized on disposal or when no future economic benefits are expected from its use or disposal.

Further, the change in useful life of intangible assets or expected pattern of use of assets warrants change in amortization period and/or amortization method for intangible assets with finite useful life.


ASB - NEPAL 41

NAS 39 Financial Instruments: Recognition and Measurement

Relevant paragraphs from NAS 39 (HEDGING NOT COVERED)

NAS-39.58: An entity shall assess at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets measured at amortized cost is impaired. If any such evidence exists, the entity shall apply paragraph 63 to determine the amount of any impairment loss.

NAS-39.59: A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. It may not be possible to identify a single, discrete event that caused the impairment. Rather the combined effect of several events may have caused the impairment. Losses expected as a result of future events, no matter how likely, are not recognized. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the holder of the asset about the following loss events:

(a) significant financial difficulty of the issuer or obligor;

(b) a breach of contract, such as a default or delinquency in interest or principal payments;

(c) the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;

(d) it becoming probable that the borrower will enter bankruptcy or other financial reorganization;

(e) the disappearance of an active market for that financial asset because of financial difficulties; or

(f) observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including:

i. adverse changes in the payment status of borrowers in the group (e.g. an increased number of delayed payments or an increased number of credit card borrowers who have reached their credit limit and are paying the minimum monthly amount); or

ii. national or local economic conditions that correlate with defaults on the assets in the group (e.g. an increase in the unemployment rate in the geographical area of the borrowers, a decrease in property prices for mortgages in the relevant area, a decrease in oil prices for loan assets to oil producers, or adverse changes in industry conditions that affect the borrowers in the group).

NAS-39.60: The disappearance of an active market because an entity’s financial instruments are no longer publicly traded is not evidence of impairment. A downgrade of an entity’s credit rating is not, of itself, evidence of impairment, although it may be evidence of impairment


ASB - NEPAL 42

when considered with other available information. A decline in the fair value of a financial asset below its cost or amortized cost is not necessarily evidence of impairment (for example, a decline in the fair value of an investment in a debt instrument that results from an increase in the risk-free interest rate).

NAS-39.63: If there is objective evidence that an impairment loss on financial assets measured at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of the loss shall be recognized in profit or loss.

NAS-39.64: An entity first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant (see paragraph 59). If an entity determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

NAS-39.65: If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss shall be reversed either directly or by adjusting an allowance account. The reversal shall not result in a carrying amount of the financial asset that exceeds what the amortized cost would have been had the impairment not been recognized at the date the impairment is reversed. The amount of the reversal shall be recognized in profit or loss.

Possible impact due to COVID-19

Impairment charges on financial assets are likely to increase as a result of COVID-19. The borrowers may come under huge financial difficulties and may default in principal and interest payments. Some borrowers may even enter bankruptcy. Lenders may be required to grant concession to the borrowers. Further, the active market for any financial asset may disappear.

Under NAS 39, a financial asset is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the asset’s initial recognition (a ‘loss event’). For example:

(a) Borrowers defaulting in the payment of principal/interest and approaching for concession, may be one example of objective evidence of impairment.

(b) For investments in equity securities, a ‘significant’ or ‘prolonged’ decline in the fair value below cost may be another example of objective evidence of impairment.



ASB - NEPAL 43

If the entity concludes that there is objective evidence of impairment of its financial assets measured at amortized cost due to COVID-19, then it shall apply para 63 to determine the amount of impairment loss. The carrying amount of the asset shall be reduced either directly or through use of an impairment allowance account and the amount of loss shall be recognized in profit or loss. In case of determining recoverable amount of loan to default borrowers (financial asset), fair value of collateral shall also be considered as expected cash inflows, however careful consideration needs to be given while determining fair value of collaterals such as land and building for which price may have declined due to decrease in purchasing power of people/entity on account of economic loss from COVID 19 pandemic situation.


ASB - NEPAL 44

NFRS 7 Financial Instruments Disclosure

Disclosure Requirements for Financial Instruments

Relevant paragraphs from NFRS 7

NFRS-7.18: For loans payable recognized at the end of the reporting period, an entity shall disclose:

(a) details of any defaults during the period of principal, interest, sinking fund, or redemption terms of those loans payable;

(b) the carrying amount of the loans payable in default at the end of the reporting period; and

(c) whether the default was remedied, or the terms of the loans payable were renegotiated, before the financial statements were authorized for issue.

NFRS-7.19: If, during the period, there were breaches of loan agreement terms other than those described in paragraph 18, an entity shall disclose the same information as required by paragraph 18 if those breaches permitted the lender to demand accelerated repayment (unless the breaches were remedied, or the terms of the loan were renegotiated, on or before the end of the reporting period).

NFRS-7.20A: An entity shall disclose an analysis of the gain or loss recognized in the statement of comprehensive income arising from the derecognition of financial assets measured at amortized cost, showing separately gains and losses arising from derecognition of those financial assets. This disclosure shall include the reasons for derecognizing those financial assets.

NFRS-7.31: An entity shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period.

NFRS-7.32: The disclosures required by paragraphs 33–42 focus on the risks that arise from financial instruments and how they have been managed. These risks typically include, but are not limited to, credit risk, liquidity risk and market risk.

Possible impact due to COVID-19

In this COVID 19 environment, disruptions in production and reduced sales, decrease in customer demands, and impaired financial/nonfinancial assets etc. can have implications on an entity’s working capital. Entities may look for ways to manage the liquidity risk, including the use of alternative sources of funding, such as delayed payment to suppliers/lenders and arrangements with financial institutions. Disclosure of these facilities will be critical particularly when they are material to the entity’s funding or viability. There may be increased cases of defaults and breaches of debt covenants. Financial assets could be sold to fund the working capital needs.


ASB - NEPAL 45

Management of credit risk, liquidity risk and market risk may become a great challenge for the entities. Concentration risk may be particularly significant to some entities when customers are concentrated in an adversely affected industry such as the hospitality and tourism and airline industries.


NFRS 7 requires an entity to disclose the nature and extent of risks arising from financial instruments and how it manages those risks. Therefore, the entity would need to explain the significant impact (including the potential impact) of COVID 19 on the risks arising from financial instruments and how it intends to manage those risks. It will need to use judgement to determine the specific disclosures that are relevant to its business and necessary to meet these objectives. Accordingly, an entity needs to provide extensive disclosures in relation to the exposures to credit risks as a result of significant judgments and estimates on the possibilities of defaults and breaches of contracts; liquidity risks due to liquidity issues that affect continuity of operations; and market risks due to factors such as exchange rates, interest rates and other price risks supported by sensitivity analyses. The entity shall also disclose the risk management plans against those risks.

Entities should also consider the specific disclosure requirements for transfers of financial assets when financial assets are sold to fund the working capital needs. Further, entity should also consider the disclosure of defaults and breaches of loans payable, of gains and losses arising from derecognition or modification.

When an entity breaches a debt covenant relating to borrowings recognized during and at the end of the reporting period, NFRS 7 para18-19 requires specific disclosures in the financial statements.


ASB - NEPAL 46

NFRS 8 Operating Segments

Reporting of Operating Segments

Relevant Paragraphs from NFRS 8

Reportable segments

NFRS-8.9: An entity shall report separately information about each operating segment that:

(a) has been identified in accordance with paragraphs 5-10 or results from aggregating two or more of those segments in accordance with paragraph 12, and

(b) exceeds the quantitative thresholds in paragraph 13.

Paragraphs 14-19 specify other situations in which separate information about an operating segment shall be reported.

Quantitative thresholds

NFRS- 8.13: An entity shall report separately information about an operating segment that meets any of the following quantitative thresholds:

(a) Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating segments.

(b) The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of (i) the combined reported profit of all operating segments that did not report a loss and (ii) the combined reported loss of all operating segments that reported a loss.

(c) Its assets are 10 per cent or more of the combined assets of all operating segments.

Operating segments that do not meet any of the quantitative thresholds may be considered reportable, and separately disclosed, if management believes that information about the segment would be useful to users of the financial statements.

NFRS-8.16: Information about other business activities and operating segments that are not reportable shall be combined and disclosed in an 'all other segments' category separately from other reconciling items in the reconciliations required by paragraph 28. The sources of the revenue included in the 'all other segments' category shall be described.

NFRS-8.17: If management judges that an operating segment identified as a reportable segment in the immediately preceding period is of continuing significance, information about that segment shall continue to be reported separately in the current period even if it no longer meets the criteria for reportability in paragraph 13.



ASB - NEPAL 47

As the government has imposed lockdown across the country many entities may be experiencing serious business disruptions. However, some essential services like health, medicines, bio-medical supplies and other allied business have continued to serve the people in need. Further, with the partial release of the lockdown some more business might start operating though within a limited jurisdiction.

It is obvious that it may not be pertinent to all the entities but those entities doing business in variety of goods or classes of services may require reviewing the operating segments for the purpose of disclosure and comparability in segment profitability.


The operating segments that do not meet any of the quantitative thresholds may be considered reportable, and separately disclosed, if management believes that information about the segment would be useful to users of the financial statements.

Further, information about other business activities and operating segments that are not reportable shall be combined and disclosed in an 'all other segments' category separately from other reconciling items in the reconciliations required by paragraph 28.


ASB - NEPAL 48

NFRS 9 Financial Instruments

Financial instruments


NFRS-9.3.2.11: If, as a result of a transfer, a financial asset is derecognized in its entirety but the transfer results in the entity obtaining a new financial asset or assuming a new financial liability, or a servicing liability, the entity shall recognize the new financial asset, financial liability or servicing liability at fair value.

NFRS-9.3.2.12: On derecognition of a financial asset in its entirety, the difference between: (a) the carrying amount (measured at the date of derecognition) and (b) the consideration received (including any new asset obtained less any new liability assumed) shall be recognized in profit or loss.

NFRS-9.3.3.2: An exchange between an existing borrower and lender of debt instruments with substantially different terms shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing financial liability or a part of it (whether or not attributable to the financial difficulty of the debtor) shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability.

NFRS-9.3.3.3: The difference between the carrying amount of a financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, shall be recognized in profit or loss.

NFRS-9.4.1.1: Unless paragraph 4.1.5 applies, an entity shall classify financial assets as subsequently measured at either amortized cost or fair value on the basis of both:

(a) the entity’s business model for managing the financial assets and

(b) the contractual cash flow characteristics of the financial asset.

NFRS-9.4.1.1: A financial asset shall be measured at amortized cost if both of the following conditions are met:

(a) The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows.

(b) The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

NFRS-9.5.1.1: At initial recognition, an entity shall measure a financial asset or financial liability at its fair value (see paragraphs 5.4.1–5.4.3 and B5.4.1–B5.4.17) plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction


ASB - NEPAL 49

costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.

NFRS-9.5.1.1A: However, if the fair value of the financial assets or financial liability at initial recognition differs from the transaction price, an entity shall apply paragraph B5.1.2A.

NFRS-9.B3.3.6: For the purpose of paragraph 3.3.2, the terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognized as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortized over the remaining term of the modified liability.

NFRS-9.B5.1.2: If an entity originates a loan that bears an off-market interest rate (e.g. 5 per cent when the market rate for similar loans is 8 per cent), and receives an upfront fee as compensation, the entity recognizes the loan at its fair value, i.e. net of the fee it receives.

NFRS-9.B5.1.2A: The best evidence of the fair value of a financial statement at initial recognition is normally the transaction price (i.e. the fair value of the consideration given or received, see also NFRS 13). If an entity determines that the fair value at initial recognition differs from the transaction price as mentioned in paragraph 5.1.1A, the entity shall account for that instrument at that date as follows:

(a) at the measurement required by paragraph 5.1.1 if that fair value is evidenced by quoted price in an active market for an identical assets or liability (i.e. a Level 1 input) or based on a valuation technique that uses only data from observable markets. An entity shall recognize the difference between the fair value at initial recognition and the transaction price as a gain or loss.

(b) in all other cases, at the measurement required by paragraph 5.1.1, adjusted to defer the difference between the fair value at initial recognition and the transaction price. After initial recognition, the entity shall recognize the deferred difference as a gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability.

Impact due to COVID-19

Outbreak of COVID-19 pandemic has resulted in ongoing economic downturn which could significantly impact a borrower’s ability to repay principal and interest. Government of Nepal may introduce some financial relief packages like interest rebate, term deferral or loan rescheduling and restructuring for the borrowers that are affected from the lockdown. As a result, bank & financial institutions may enter into new negotiation with their borrowers to reschedule and restructure the existing loan. The modifications may result in simple modification or even results in de-recognition of financial liability. Lenders may offer loans with interest rate lower than the market rate.


ASB - NEPAL 50


In exercising the professional judgement in terms of NFRS 9.3.3.2 and NFFRS 9.B3.3.6, to determine whether there is a substantial change in the terms as a result of the modification which results in derecognition of the financial liability; the discounted present value of the cash flows under the new terms need to be at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability. Otherwise, it would be considered as a modification of that particular financial liability.

If there is a modification gain or loss arising from a modification of any loan or advance covered under the debt moratorium as discussed above that has to be accounted on the date of which the revised terms and conditions have been agreed by the lending institution with the borrower. An entity exercises judgement to determine an appropriate presentation for the gain or loss in the statement of profit or loss. As an example, this could be presented netting off against the interest revenue in the books of the lending institution.

When the business model is to measure financial instruments on initial recognition at fair value and if the loan is not on normal commercial terms (e.g.: carries below market rate of interest), the below market element of the transaction needs to be evaluated and separately accounted for. Accordingly, the difference between the gross carrying amount of loan proceeds and the fair value shall be reported as interest income in the statement of profit or loss. The subsequent unwinding of discount shall be reported as interest expense in the statement of profit or loss. However, in case of loans provided under the government refinance scheme could be considered as special type products. In that case, the interest rate offered by the lending institutions for that special product would be considered as applicable market rate resulting in no fair value adjustments being needed as mentioned above.

Reclassification of financial assets is required when, and only when, an entity changes its business model for managing the assets. In such cases, the entity is required to reclassify all affected financial assets.


ASB - NEPAL 51

NFRS 12 Disclosure of interest in other entities

Interest in other entities


NFRS-12.14: An entity shall disclose the terms of any contractual arrangements that could require the parent or its subsidiaries to provide financial support to a consolidated structured entity, including events or circumstances that could expose the reporting entity to a loss (e.g. liquidity arrangements or credit rating triggers associated with obligations to purchase assets of the structured entity or provide financial support).

NFRS–12.15: If during the reporting period a parent or any of its subsidiaries has, without having a contractual obligation to do so, provided financial or other support to a consolidated structured entity (e.g. purchasing assets of or instruments issued by the structured entity), the entity shall disclose:

(a) the type and amount of support provided, including situations in which the parent or its subsidiaries assisted the structured entity in obtaining financial support; and

(b) the reasons for providing the support.

NFRS-12.16: If during the reporting period a parent or any of its subsidiaries has, without having a contractual obligation to do so, provided financial or other support to a previously unconsolidated structured entity and that provision of support resulted in the entity controlling the structured entity, the entity shall disclose an explanation of the relevant factors in reaching that decision.

NFRS-12.17: An entity shall disclose any current intentions to provide financial or other support to a consolidated structured entity, including intentions to assist the structured entity in obtaining financial support.

NFRS-12.30: If during the reporting period an entity has, without having a contractual obligation to do so, provided financial or other support to an unconsolidated structured entity in which it previously had or currently has an interest (for example, purchasing assets of or instruments issued by the structured entity), the entity shall disclose:

(a) the type and amount of support provided, including situations in which the entity assisted the structured entity in obtaining financial support; and

(b) the reasons for providing the support.

NFRS-12.31: An entity shall disclose any current intentions to provide financial or other support to an unconsolidated structured entity, including intentions to assist the structured entity in obtaining financial support.


ASB - NEPAL 52


Financial and other difficulties experienced by several entities, especially small and medium sized entities, may push them in a situation that they are in the dire need of financial and other support from their related parties. An entity having interest in structured entities might have:

provided financial or other support during the reporting period to the structured entity either as a result of contractual obligation or otherwise or

current intention to provide financial or other support to structured entity or

current intention to assist the structured entity in obtaining financial support


In above situations, the entity shall disclose in its financial statements, the terms of the contractual arrangement, type and amount of support if made without contractual obligation, the reasons of making such support and intention to make support or assist in obtaining support.


ASB - NEPAL 53

NFRS 13 Fair Value Measurement

Fair Value Measurement


Definition of fair value NFRS-13.8: This NFRS defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The transaction NFRS-13.15: A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions.

NFRS-13.16: A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either:

(a) in the principal market for the asset or liability; or (b) in the absence of a principal market, in the most advantageous market for

the asset or liability.

The price NFRS-13.24: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique.

Valuation techniques NFRS-13.61: An entity shall use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

NFRS-13.63: In some cases a single valuation technique will be appropriate (e.g. when valuing an asset or a liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation techniques will be appropriate (e.g. that might be the case when valuing a cash-generating unit). If multiple valuation techniques are used to measure fair value, the results (i.e. respective indications of fair value) shall be evaluated considering the reasonableness of the range of values indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances.

NFRS-13.65: Valuation techniques used to measure fair value shall be applied consistently. However, a change in a valuation technique or its application (e.g. a change in its weighting when multiple valuation techniques are used or a change in an adjustment applied to a


ASB - NEPAL 54

valuation technique) is appropriate if the change results in a measurement that is equally or more representative of fair value in the circumstances. That might be the case if, for example, any of the following events take place:

(a) new markets develop;

(b) new information becomes available;

(c) information previously used is no longer available;

(d) valuation techniques improve; or

(e) market conditions change.

Fair value hierarchy NFRS-13.72: To increase consistency and comparability in fair value measurements and related disclosures, this NFRS establishes a fair value hierarchy that categorizes into three levels (see paragraphs 76–90) the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

NFRS-13.87: Unobservable inputs shall be used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs shall reflect the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk.

NFRS-13.88: Assumptions about risk include the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and the risk inherent in the inputs to the valuation technique. A measurement that does not include an adjustment for risk would not represent a fair value measurement if market participants would include one when pricing the asset or liability. For example, it might be necessary to include a risk adjustment when there is significant measurement uncertainty (e.g. when there has been a significant decrease in the volume or level of activity when compared with normal market activity for the asset or liability, or similar assets or liabilities, and the entity has determined that the transaction price or quoted price does not represent fair value, as described in paragraphs B37–B47).

NFRS-13.89: An entity shall develop unobservable inputs using the best information available in the circumstances, which might include the entity’s own data. In developing unobservable inputs, an entity may begin with its own data, but it shall adjust those data if reasonably available information indicates that other market participants would use different data or there is something particular to the entity that is not available to other market participants (e.g. an entity-specific synergy). An entity need not undertake exhaustive efforts to obtain information about market participant assumptions. However, an entity shall take into account all information about market participant assumptions that is reasonably available. Unobservable inputs developed in the manner described above are considered market participant assumptions and meet the objective of a fair value measurement.


ASB - NEPAL 55


When there is a significant decrease in the volume or level of activity for the asset or liability in relation to normal market activity, the fair value of those asset or liability may be affected. As the stock market is closed and there is a decline in the trading, this may increase its volatility as and when it resumes its functions. In absence of the active market or the increase in such volatility the valuation models may pose challenges to entities and may not reflect the fair value.

Thus, because of this COVID-19 where all the major business are either shut or under limited operation and people are under government orders to stay at home it is obvious the value of an item (such as certain financial instruments, investment properties, and items of property, plant and equipment) will not reflect the orderly transaction or at free market and a significant adjustment will be required to arrive at the fair value.

Some of the key factors and risks to consider when measuring fair value using a valuation technique may include:

Economic activity levels: Measures taken to contain the virus have led to a significant reduction in economic activity in terms of production of and demand for goods and services, and have a negative impact on forecast future cash flows used in a discounted cash flow valuation method.

Credit risk and liquidity risk: The uncertain economic environment has resulted in increases in credit risk and liquidity risk for many entities. Own credit risk and/or counterparty credit risk used as inputs into valuation techniques may therefore increase.

Forecasting risk: There will be greater uncertainty in making economic and financial forecasts in the near term, due to the difficulty in forecasting the magnitude and duration of the economic impact of COVID-19.

Foreign exchange risk: Entities with significant sales or purchases in foreign currencies may be adversely affected by exchange rate movements.

Commodity price risk: Entities in extractive industries may be significantly affected by decreases in commodity prices. Entities in countries that are economically dependent on these commodities may also have greater risk of adverse economic impacts.

Significant judgment may be needed to quantify risk premiums and other adjustments for these risks. Also, the number of fair value measurements classified as Level 3 in the fair value hierarchy may increase (e.g. due to unobservable inputs such as the credit risk becoming significant in the current environment).


Fair Value Measurement is a measurement date specific exit price estimate based on assumptions (including those about risks) that market participants would make under current market conditions. The objective of fair value measurement is to convey the fair value of the asset or liability that reflects conditions as of the measurement date and not a future date. Although events and/or transactions occurring after the measurement date may provide insight into the assumptions used in estimating fair value as of the measurement date (especially those that are unobservable), they are only adjusted for in fair value to the extent where they provide additional evidence of conditions that existed at the measurement date and these conditions were known or knowable by market participants.


ASB - NEPAL 56

The entity must ensure that the appropriate valuation techniques are applied to measure the fair value of assets or liabilities.

The entity shall consider whether the valuation:

• reflects market participants’ assumptions based on information available and market conditions at the measurement date; and

• incorporates the risk premiums that would arise from the increased uncertainty and other impacts of COVID-19.

The entity shall consider whether unobservable inputs have become significant, which would result in a Level 3 categorization and require additional disclosures.

The entity shall also consider expanding disclosures about the key assumptions, sensitivities and major sources of estimation uncertainty. Depending on the facts and circumstances of each case, disclosure may be needed to enable users to understand whether or not the impact of outbreak has been considered for the purpose of fair value measurement. Users should understand the basis for selecting the assumptions and inputs that were used in the fair value measurement and the related sensitivities.

Study on Impact of COVID-19 on application of NFRS 2013 · NAS 17 Leases 19 Modification in Lease...

Documents

Transcript of Study on Impact of COVID-19 on application of NFRS 2013 · NAS 17 Leases 19 Modification in Lease...