Deferred tax, other assets, and the first liabilities

Deferred tax assets

Simple definition. A future tax saving the bank has earned but not yet used — because accounting rules and tax rules recognise income and expenses at different times.

Technical definition. The amounts of income taxes recoverable in future periods in respect of deductible temporary differences, the carry-forward of unused tax losses and the carry-forward of unused tax credits, recognised under NAS 12 only to the extent that it is probable that future taxable profit will be available against which they can be utilised.

The core idea in one diagram.

                 ACCOUNTING BOOKS          TAX RETURN
                 ────────────────          ──────────
Impairment
provision made   Expense NOW               Deduction only when
on a loan        (NFRS 9 ECL)              the loss is ACTUALLY
                                           crystallised
                       │                          │
                       ▼                          ▼
               Accounting profit          Taxable profit
                  is LOWER                   is HIGHER
                       │                          │
                       └──────────┬───────────────┘
                                  ▼
                 Bank pays MORE tax now than the
                 accounting profit implies
                                  ▼
                 ┌────────────────────────────────┐
                 │   DEFERRED TAX ASSET           │
                 │   = future tax relief          │
                 │   Dr DTA, Cr Tax expense       │
                 └────────────────────────────────┘

Formula.

Deferred tax asset  =  Deductible temporary difference  ×  Enacted tax rate

where
Temporary difference = Carrying amount in financial statements
                       − Tax base of the same asset/liability

Component explanation.

• Carrying amount — the NFRS book value on the balance sheet
• Tax base — the amount attributed to that item for tax purposes under the Income Tax Act 2058
• Enacted / substantively enacted rate — the rate expected to apply when the difference reverses. [R] The rate applicable to Nepali banks and financial institutions is set by the Income Tax Act as amended by the annual Finance Act — verify for your period.

Typical sources of DTA in a Nepali bank.

Worked example. Illustrative — HCBL.

ECL allowance per NFRS 9 / NRB               NPR 1,500,000,000
Provision allowable for tax this year        NPR   900,000,000
                                             ──────────────────
Deductible temporary difference              NPR   600,000,000
Tax rate (illustrative, [R] verify)                        30%
                                             ──────────────────
Deferred tax asset                           NPR   180,000,000

Journal entry:
Dr  Deferred tax asset                   180,000,000
    Cr  Income tax expense — deferred                180,000,000
        (a CREDIT to tax expense → increases profit after tax)

Observe in the source report's P&L: Deferred Tax expense/(Income) is NPR (61,174) thousand — a negative tax expense, i.e. a credit that increased profit. Beginners often read a bracketed tax figure as a cost. It is the opposite.

Recognition constraint — the probability test. A DTA may be recognised only to the extent future taxable profit is probable. A loss-making bank cannot simply book a large DTA to prop up its equity. This is a genuine judgement area and a standard audit focus.

The NRB overlay — why NRB distrusts DTAs. A deferred tax asset is not cash. It has value only if the bank earns future profits. If the bank fails, it is worthless — exactly when capital is needed most. NRB therefore:

1. 1Requires an appropriation of the recognised DTA out of distributable profit — see the

line "Deferred tax assets recognised (-)/reversal (+)", NPR (61,174) thousand in the source report's distributable profit statement; and

1. 1Typically applies **deduction or limitation of DTAs in the regulatory capital

computation** [R] under the Capital Adequacy Framework.

ACCOUNTING VIEW                    REGULATORY VIEW
──────────────                     ───────────────
DTA is an asset.                   DTA is not loss-absorbing.
It increases equity via a          Deduct it (or limit it) from
credit to tax expense.             capital, and block it from
                                   being paid out as dividend.

Presentation. Asset side. DTA and DTL are offset only where there is a legally enforceable right to offset current tax and they relate to the same taxation authority and same taxable entity — which is why the source report shows Group Deferred tax assets NPR 482,627 thousand and Group Deferred tax liabilities NPR 12,883 thousand at the same time (different entities in the Group).

Effect on P&L. Through Deferred Tax expense/(Income). Note this affects profit but involves no cash — a key reason accounting profit ≠ cash flow. Effect on OCI. Deferred tax on items recognised in OCI is itself recognised in OCI — the "Income tax relating to above items" lines in Part 3. Effect on equity. Via retained earnings, but blocked from distribution. Effect on cash flow. None directly. It is a non-cash item. Effect on regulatory ratios. Reduces regulatory capital where deducted [R], and reduces distributable profit.

Analyst interpretation.

• A large and growing DTA in a bank with weak profitability is a quality-of-earnings warning. Profit is being supported by a non-cash tax credit that depends on future profits materialising.
• Compare Current Tax to Deferred Tax in the P&L. If the effective tax rate is far below the statutory rate because of deferred credits, ask what is driving it.

Related terms. Deferred tax liabilities · Current tax assets · Part 2 Deferred Tax expense/(Income) · Part 3 Income tax relating to above items · Part 7 Deferred tax assets recognised · Part 8 Deferred Tax, Temporary differences, Tax base · Part 15

Other assets

Simple definition. Everything on the asset side that does not fit the named lines.

Technical definition. A residual caption comprising sundry receivables, prepayments, accrued income not presented elsewhere, stationery and stock, advances to staff and suppliers, and — significantly for the source report — deferred employee expenditure.

What is inside it in a Nepali bank.

The material item — Deferred Employee Expenditure. The source report discloses that this is NPR 3.07 billion, which is a very large portion of Other assets (Group NPR 5,822,911 thousand). Here is what it is:

Bank lends a staff member NPR 5,000,000 for a home
at a CONCESSIONAL rate of 5%,
when the market rate for a similar loan is 11%.
                 │
                 ▼
NFRS 9 says: measure the loan at FAIR VALUE.
Discount the future cash flows at 11%, not 5%.
                 │
                 ▼
Fair value < amount disbursed.
The difference is not a loss — it is EMPLOYEE COMPENSATION
paid in advance.
                 │
     ┌───────────┴────────────┐
     ▼                        ▼
Loan recorded at         "DAY 1 DIFFERENCE"
fair value               recognised as a PREPAID
(lower)                  EMPLOYEE BENEFIT in Other assets
                                 │
                                 ▼
                  Amortised to PERSONNEL EXPENSES over
                  the expected service period,
                  while the loan unwinds to par through
                  INTEREST INCOME.
                                 │
                                 ▼
                  Net effect on bottom line ≈ NIL
                  (cost to staff expense, income to NII)

The report states this precisely: "This is treated as cost to Staff Expenses and along with Income to Net Interest Income net effect being nil on bottom line."

The VRS event — a real earnings-quality lesson. The report further discloses:

Why an analyst must care. Look at the reported numbers (NMB, Asar 2083, Bank, YTD):

Personnel expenses this year        NPR 3,051,537 thousand
Personnel expenses last year        NPR 3,042,547 thousand
Apparent change                     ≈ flat

But that flatness is manufactured by a one-off NPR 204.5 million credit. Underlying staff cost actually rose by roughly that amount. A cost-control story here would be wrong.

Debit/credit nature. Debit (asset). Presentation. Single line; note must disaggregate. Given the size of the deferred employee expenditure, that note is worth reading in full. Effect on cash flow. Movements appear as (Increase)/Decrease in operating assets — Other assets — NPR (11,686,979) thousand at Group level in the source report, a large operating cash outflow.

Related terms. Part 2 Personnel expenses · Part 4 (Increase)/Decrease in operating assets · Part 8 Deferred Employee Expenditure, Day 1 difference, Voluntary Retirement Scheme (VRS), Concessional loans

Total Assets

Simple definition. Everything the bank owns and is owed, added up.

Technical definition. The sum of all recognised assets, equal by construction to Total liabilities plus Total equity.

Purpose. The scale measure of the bank, and the denominator of Return on Assets and of the leverage ratio.

Formula relationships.

Total Assets  =  Total Liabilities  +  Total Equity

Return on Assets (ROA)     =  Profit after tax ÷ Average total assets × 100
Assets per share           =  Total assets ÷ Number of ordinary shares outstanding
Leverage (equity/assets)   =  Total equity ÷ Total assets × 100

Worked reading. (NMB, Asar 2083, Group, NPR thousand.)

Total Assets            405,921,893
Total liabilities       366,496,887
Total equity             39,425,006
                        ───────────
Check: 366,496,887 + 39,425,006 = 405,921,893  OK

Equity / Assets = 39,425,006 ÷ 405,921,893 × 100 = 9.71%
→ Every NPR 1 of equity supports NPR 10.30 of assets.
→ A 9.71% loss across the asset book would eliminate shareholders.

Growth = (405,921,893 − 370,597,361) ÷ 370,597,361 × 100 = 9.53%

Analyst interpretation. Growth in total assets must be read against capital. A bank that grows assets 20% while equity grows 5% is levering up, and its capital adequacy ratio will fall unless the growth is in low-risk-weight assets. Growth is only as good as the capital and the credit quality behind it.

Related terms. Total liabilities · Total equity · Part 6 Return on Assets, Assets per share, Capital fund to RWA

LIABILITIES

Due to Bank and Financial Institutions

Simple definition. Money other banks and financial institutions have deposited with, or lent to, this bank on a short-term basis.

Technical definition. Financial liabilities to licensed BFIs — interbank borrowings, call deposits and settlement balances — measured at amortised cost, as the source report confirms: "Deposits from customers and BFIs and Debt Securities... are classified as financial liabilities measured at amortized cost."

Purpose and Nepalese context. The mirror image of Placement with BFIs. Nepali banks lend to and borrow from each other daily to smooth liquidity. When system liquidity is tight, interbank rates spike and this line becomes expensive; when liquidity is abundant, it is cheap and short.

What creates / changes it. Increases on interbank borrowing or when other BFIs place funds; decreases on repayment.

Debit/credit nature. Credit (liability).

Measurement. Initially fair value net of transaction costs; subsequently amortised cost using EIR.

Journal entry.

Dr  Cash and cash equivalent            300,000,000
    Cr  Due to Bank and Financial Institutions       300,000,000

Interest accrual:
Dr  Interest expense                      1,250,000
    Cr  Interest payable (Other liabilities)           1,250,000

Effect on P&L. Interest expense. Effect on ratios. Interbank funding is generally excluded from the deposit base for CD-ratio purposes and treated distinctly for liquidity ratios [R] — heavy reliance on it is a structural liquidity weakness because it is the first funding to disappear in a stress event.

(NMB, Asar 2083: Group fell to NPR 2,736,716 thousand from NPR 6,029,457 thousand — a sharp reduction in interbank dependence, generally a positive funding-quality signal.)

Analyst interpretation. Falling interbank borrowing alongside rising customer deposits = improving funding quality. The reverse = the bank is plugging a deposit gap with volatile wholesale money.

Related terms. Placement with BFIs · Deposits from customers · Part 6 CD Ratio, Liquidity Ratio

Due to Nepal Rastra Bank

Simple definition. Money the bank owes the central bank.

Technical definition. Liabilities to NRB, typically arising from refinancing facilities, standing liquidity facility (SLF) borrowings, repo transactions, or other central-bank lending windows, measured at amortised cost.

Nepalese context. NRB operates several facilities Nepali banks draw on:

• Standing Liquidity Facility (SLF) — very short-term borrowing against collateral
• Repo — liquidity injections against government securities
• Refinance facilities — concessional refinancing for priority sectors (agriculture, SMEs, energy, export, and crisis-response schemes)

Presentation. Separate line, because borrowing from the central bank carries a different signal from ordinary borrowing.

(NMB, Asar 2083: nil for both Group and Bank, and nil in the prior year — the bank has not needed central-bank funding, which is a positive liquidity signal.)

Analyst interpretation. A balance here is worth investigating. Refinance drawings are benign — cheap policy money the bank on-lends. SLF or repo balances at a period end can indicate the bank was short of liquidity on the reporting date. Persistent balances are a warning.

Related terms. Due from Nepal Rastra Bank · Borrowing · Part 12 Nepal Rastra Bank (NRB)

Derivative financial instruments (liability)

Simple definition. Derivative contracts that are currently against the bank — i.e. it would lose money settling them today.

Technical definition. Derivatives whose fair value is negative at the reporting date, measured at FVTPL, presented gross unless NAS 32 offsetting criteria are met.

Everything else — recognition on trade date, fair value measurement, P&L treatment, gross presentation, Level 2 valuation, RWA effect — is identical to the asset side.

See in full: 1.4 Derivative financial instruments (asset).

(NMB, Asar 2083: Group NPR 19,140,536 thousand against derivative assets of NPR 19,021,033 thousand — near-matched, indicating a hedging rather than speculative book.)

Deposits from customers

Simple definition. Money the public, businesses and institutions have placed with the bank. It is the bank's cheapest and most important funding, and it is a liability, not income.

Technical definition. Financial liabilities to non-bank customers arising from current, savings, call and fixed-deposit accounts and margin deposits, measured at amortised cost using the effective interest method.

Purpose. Deposits fund loans. The spread between what the bank pays depositors and what it charges borrowers is the Net interest income that drives the entire P&L.

The deposit mix — the single biggest driver of a Nepali bank's cost of funds.

DEPOSIT TYPE          COST TO BANK      STABILITY      CD/liquidity effect
────────────          ────────────      ─────────      ───────────────────
Current account       ~zero             volatile       cheapest funding
(business operating)                                   but can leave fast

Savings account       low               fairly stable  the retail backbone

Call deposit          moderate          volatile       institutional money,
                                                       rate-sensitive

Fixed deposit         HIGH              contractually  expensive but
(term)                                  stable         predictable

Margin deposit        ~zero             tied to LC /   restricted in use
                                        guarantee

Recognition. When the bank receives the funds. Initial measurement. Fair value (= amount received), net of directly attributable transaction costs. Subsequent measurement. Amortised cost; interest accrued via EIR into Interest expense.

Journal-entry logic.

1. Customer opens a fixed deposit of NPR 10,000,000 at 8% for 1 year:
Dr  Cash and cash equivalent            10,000,000
    Cr  Deposits from customers                       10,000,000

2. Monthly interest accrual:
10,000,000 × 8% × (1/12) = NPR 66,667
Dr  Interest expense                        66,667
    Cr  Deposits from customers (accrued interest)        66,667
    [or Cr Interest payable within Other liabilities]

3. On maturity, principal + interest repaid:
Dr  Deposits from customers             10,800,000
    Cr  Cash and cash equivalent                      10,800,000
    [less TDS on interest, remitted to IRD [R]]

Presentation. Single line on the face; note disaggregates by product type and by customer category (institutional vs individual), which is what lets an analyst compute CASA.

(NMB, Asar 2083: Group NPR 316,867,875 thousand, up from NPR 280,117,507 thousand — 13.1% growth. The Bank's management analysis states deposits stood at NPR 315.12 billion and loans at NPR 249.8 billion at quarter end. Note deposits grew ~13% while loans grew ~10% — funding outpaced lending, which is consistent with the CD ratio falling from 84.33% to 82.77%.)

Effect on P&L. Interest expense — the largest single expense of a bank. Effect on cash flow. Deposit growth is a cash inflow in operating activities (NPR 33,580,607 thousand at Group level in the source report — the largest single positive item in the cash flow statement). Effect on regulatory ratios.

• CD ratio — denominator
• CRR — drives the required balance at NRB
• Liquidity ratio / NLA — deposits are the liability base
• Deposit concentration — see Part 11

Analyst interpretation.

• Deposit growth faster than loan growth = falling CD ratio, more headroom to lend, but short-term margin drag from idle funds.
• Deposit growth slower than loan growth = CD ratio rising toward the cap, and the bank will soon have to bid up for deposits, raising cost of funds.
• Check the mix, not just the total. Growth funded entirely by fixed deposits is expensive growth.
• Check concentration (Part 11). NMB discloses that its twenty largest depositors held

21.80% of total deposits — meaningful concentration risk.

Related terms. Due to Bank and Financial Institutions · Part 2 Interest expense · Part 4 Deposit from customers · Part 6 CD Ratio, Cost of Funds, Average Interest Spread · Part 11 Concentration of Deposits