Chapter 7 · Part 7 — Distributable Profit
Why the statement exists, and the appropriations
How NRB stops a bank paying dividends out of profit it never received, and the five statutory appropriations that come first.
24 terms. This statement does not exist under IFRS. It exists because NRB refuses to let a Nepali bank pay a dividend out of profit it never actually received. It is the bridge between accounting profit and legally distributable profit, and it is the most Nepal-specific document in the entire report.
If you understand only one Part of this guide deeply, make it this one — it is where NFRS and NRB regulation collide most visibly.
Part 7 checklist
Appropriations (7): Net Profit or Loss as per Statement of profit or loss · General Reserve · Capital (Debenture) Redemption Reserve · Exchange Fluctuation Fund · Corporate Social Responsibility Fund · Employees Training Fund · Profit or Loss Before Regulatory adjustment
Regulatory adjustments (9): Interest receivable (-)/previous accrued interest received (+) · Short loan loss provision in accounts (-)/reversal (+) · Short provision for possible losses on investment (-)/reversal (+) · Short loan loss provision on Non Banking Assets (-)/reversal (+) · Deferred tax assets recognised (-)/reversal (+) · Goodwill recognised (-)/impairment of Goodwill (+) · Bargain purchase gain recognised (-)/reversal (+) · Actuarial loss recognised (-)/reversal (+) · Other (Interest Capitalised Term Loan)
Distribution (8): Net Profit available for distribution · Opening Retained Earning · Bonus shares issued · Cash Dividend Paid · Total Distributable profit (or loss) · Cash Dividend Distributable to PNCPS holders · Total Profit Distributable to Common Equity Share holders · Annualised Distributable Profit/Loss per share (Common Equity)
Why this statement exists
The problem
NFRS says: recognise revenue when EARNED, not when received.
Recognise a deferred tax asset when probable.
Recognise goodwill on acquisition.
Recognise a bargain purchase gain in profit.
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A bank can report a large PROFIT while holding very little
additional CASH.
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If it then pays a dividend based on that profit, it is
paying out money it never received — funded by depositors.
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┌──────────────────────────────────────────────────────────┐
│ DEPOSITORS' MONEY WOULD LEAVE THE BANK AS SHAREHOLDERS' │
│ DIVIDEND. That is exactly what a prudential regulator │
│ exists to prevent. │
└──────────────────────────────────────────────────────────┘NRB's solution
ACCOUNTING PROFIT (NFRS)
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┌─────────────────────────────┐
│ STEP 1 — APPROPRIATIONS │
│ Deduct statutory reserves │
│ (general, CSR, training, │
│ debenture redemption, │
│ exchange fluctuation) │
└─────────────┬───────────────┘
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PROFIT BEFORE REGULATORY ADJUSTMENT
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┌─────────────────────────────┐
│ STEP 2 — REGULATORY │
│ ADJUSTMENTS │
│ Strip out every rupee of │
│ profit that is NOT cash │
│ or NOT certain │
│ (9 specified items) │
└─────────────┬───────────────┘
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NET PROFIT AVAILABLE FOR DISTRIBUTION
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┌─────────────────────────────┐
│ STEP 3 — ADD OPENING │
│ RETAINED EARNINGS, │
│ DEDUCT DISTRIBUTIONS │
│ ALREADY MADE │
└─────────────┬───────────────┘
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TOTAL DISTRIBUTABLE PROFIT
│
┌───────────┴───────────┐
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PNCPS holders Common equity holdersThe full statement, as published
(NMB Bank Limited, quarter ended Asar 32, 2083. NPR thousand.)
Current Year Previous Year
This Qtr YTD Corresponding
─────────────────────────────────────────────────────────────────────────────────
Net Profit or Loss as per Statement of profit or loss 4,013,671 2,854,638
1. Appropriations
a. General Reserve (802,734) (570,928)
b. Capital (Debenture) Redemption Reserve (621,825) (237,301)
c. Exchange Fluctuation Fund (41,202) (33,351)
d. Corporate Social Responsibility Fund (22,145) (3,835)
e. Employees Training Fund (7,732) (18,480)
f. Other − (20,000)
────────── ──────────
Profit or Loss Before Regulatory adjustment 2,518,033 1,970,743
Regulatory Adjustment
a. Interest receivable (-)/previous accrued
interest received (+) (297,150) 593,012
b. Short loan loss provision in accounts
(-)/reversal (+) − −
c. Short provision for possible losses on
investment (-)/reversal (+) − −
d. Short loan loss provision on Non Banking
Assets (-)/reversal (+) (88,637) (351,588)
e. Deferred tax assets recognised (-)/reversal (+) (61,174) (41,172)
f. Goodwill recognised (-)/impairment of Goodwill (+) − −
g. Bargain purchase gain recognised (-)/reversal (+) − −
h. Actuarial loss recognised (-)/reversal (+) (195,282) (127,894)
i. Other (Interest Capitalised Term Loan) (67,505) (47,879)
────────── ──────────
Net Profit for the quarter ended Asar End, 2083
available for distribution 1,808,285 1,995,222
Opening Retained Earning as on Shrawan 1, 2082 1,901,381 (93,841)
Adjustment (+/-) − −
Distribution:
Bonus shares issued (918,335) −
Cash Dividend Paid (918,335) −
────────── ──────────
Total Distributable profit (or loss) as on quarter
ended Asar End, 2083 1,872,996 1,901,381
Cash Dividend Distributable to PNCPS holders (122,055) −
────────── ──────────
Total Profit Distributable to Common Equity
Share holders 1,750,941 1,901,381
Annualised Distributable Profit/Loss per share
(Common Equity) 9.08 10.35The headline finding
┌──────────────────────────────────────────────────────────────────┐ │ Reported profit NPR 4,013,671 │ │ Distributable to common shareholders NPR 1,750,941 │ │ ────────────── │ │ Only 43.6% of reported profit is actually ═══════════ │ │ available to ordinary shareholders. │ │ │ │ And note the DIRECTION OF TRAVEL: │ │ FY2081/82: EPS 14.80 · Distributable per share 10.35 │ │ FY2082/83: EPS 20.18 · Distributable per share 9.08 │ │ │ │ EPS rose 36%. DISTRIBUTABLE profit per share FELL 12%. │ │ │ │ An investor reading only EPS would reach exactly the wrong │ │ conclusion about this bank's dividend capacity. │ └──────────────────────────────────────────────────────────────────┘
APPROPRIATIONS
Net Profit or Loss as per Statement of profit or loss
The starting point, taken directly from the P&L. Fully covered in Part 2.24.
(NMB, Bank: NPR 4,013,671 thousand.)
General Reserve
Simple definition. The statutory slice of profit that must be permanently retained.
Technical definition. A mandatory appropriation from annual net profit to a general reserve, required of Nepali banks and financial institutions, not available for distribution.
Fully covered in Part 5.3. Restated here for its role in the distributable profit computation.
The appropriation.
General Reserve appropriation NPR 802,734 thousand
Net profit NPR 4,013,671 thousand
─────────────────────
Implied rate 20.00%Prior-year check.
FY2081/82: 570,928 ÷ 2,854,638 = 20.00% OK consistent
Journal entry.
Dr Retained earnings 802,734,000
Cr General reserve 802,734,000No cash. No P&L. Total equity unchanged. Distributable profit reduced.
Effect on regulatory capital. None — the general reserve is CET1 [R]. The capital stays; only its distributability changes.
Analyst interpretation. This is the single largest deduction in the appropriations block, consuming a fifth of profit before anything else happens. It is the primary reason a Nepali bank's dividend capacity is structurally below its EPS.
Related terms. Part 5.3 · Part 5.18 Transfer to reserves · Part 12 CET 1
Capital (Debenture) Redemption Reserve
Simple definition. Profit set aside each year so the bank will have the money to repay its debentures when they mature.
Technical definition. An appropriation from retained earnings to a non-distributable reserve established to provide for the redemption of debt securities issued, required under the Companies Act 2063 and/or the terms of the debenture issue.
The purpose, and why it is not a cash fund.
The bank issued NPR 12.38 billion of debentures.
They must be repaid in full at maturity.
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PROBLEM: if the bank distributes all its profit as dividend
every year, it will have nothing set aside when the
debenture falls due, and will have to refinance in whatever
market conditions prevail.
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SOLUTION: appropriate a portion of profit each year to a
redemption reserve. This BLOCKS that profit from being
distributed, so equity accumulates to match the obligation.
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! IMPORTANT: no cash is segregated. Nothing is placed in a
separate account. It is purely a DISTRIBUTION RESTRICTION.
The cash to repay must still be found at maturity — but
the bank's equity base will be larger because dividends
were constrained along the way.Reading the movement — and a significant observation.
FY2082/83 FY2081/82 Change Debenture Redemption Reserve appropriation 621,825 237,301 +162% Debt securities issued 12,382,000 12,384,569 ≈ flat
Release. When the debenture is actually repaid, the reserve may be released back to retained earnings, restoring distributability — see Part 5.19.
Journal entry.
Annual appropriation:
Dr Retained earnings 621,825,000
Cr Capital (Debenture) Redemption Reserve 621,825,000
On repayment of the debenture:
Dr Debt securities issued 3,000,000,000
Cr Cash 3,000,000,000
Dr Capital (Debenture) Redemption Reserve XXX
Cr Retained earnings XXXWhere it sits. Within Other reserve in the SoCE — and it reconciles exactly:
Debenture Redemption Reserve 621,825
CSR Fund 22,145
Employees Training Fund 7,732
───────
Transfer to Other reserve 651,702 OK matches Part 5.9 exactlyAnalyst interpretation. A rising redemption reserve appropriation is a forward signal of debenture maturity. Combine it with the maturity profile in the notes: as debentures approach maturity, (a) the appropriation rises, cutting dividend capacity, and (b) Tier 2 capital recognition amortises away [R], cutting the capital ratio. Both hit at once.
Related terms. Part 1.27 Debt securities issued · Part 5.9 Other reserve · Part 5.19 · Part 12 Tier 2
Exchange Fluctuation Fund
Simple definition. A reserve holding a portion of gains made purely from currency movements, so they are not paid out.
Technical definition. An appropriation from retained earnings of a prescribed proportion of revaluation gain arising on foreign currency assets and liabilities, required by NRB, blocking distribution of gains that are unrealised and reversible.
Fully covered in Part 5.4 as the Exchange equalisation reserve — the same reserve under a slightly different label in this statement. Note the terminology difference:
Statement of Changes in Equity → "Exchange equalisation reserve"
Distributable Profit statement → "Exchange Fluctuation Fund"
SAME reserve, same amount.Appropriation FY2082/83 NPR 41,202 thousand SoCE transfer to exchange equalisation NPR 41,202 thousand OK ties
The logic in brief.
NPR weakens → USD assets worth more in NPR → revaluation GAIN
→ flows to Other operating income → PROFIT
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But no cash was received and the rate can reverse tomorrow.
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NRB: appropriate a prescribed share to the Exchange
Fluctuation Fund. Not distributable. [R]Do not confuse with three other things:
| Item | What it is |
|---|---|
| **Exchange Fluctuation Fund** (here) | NRB appropriation of unrealised FX revaluation gain |
| Net trading income (Part 2.8) | Realised buy/sell FX margin — genuine income |
| Other operating income (Part 2.9) | Where the FX revaluation gain is recognised |
| OCI translation reserve (Part 3.10) | NAS 21 foreign-operation translation — **nil** for NMB |
Related terms. Part 2.9 · Part 3.10 · Part 5.4 · Part 8 Foreign Exchange Transactions
Corporate Social Responsibility Fund
Simple definition. Money the bank must set aside and spend on social causes.
Technical definition. A mandatory appropriation from annual net profit to a fund earmarked for corporate social responsibility expenditure, required by the NRB Unified Directives.
How it works — a two-stage obligation.
STAGE 1 — APPROPRIATE
Dr Retained earnings 22,145,000
Cr CSR Fund (Other reserve) 22,145,000
→ distributable profit reduced
STAGE 2 — SPEND
Dr CSR Fund XX,XXX,XXX
Cr Cash XX,XXX,XXX
→ the obligation is discharged; the reserve is drawn downReading the numbers — a striking movement.
FY2082/83 FY2081/82 Change CSR Fund appropriation 22,145 3,835 +477% As % of net profit: FY2082/83: 22,145 ÷ 4,013,671 = 0.55% FY2081/82: 3,835 ÷ 2,854,638 = 0.13%
Related terms. Part 5.9 Other reserve · Part 2.15 Other operating expenses · Part 12 Corporate Governance
Employees Training Fund
Simple definition. Money the bank must set aside and spend on training its staff.
Technical definition. A mandatory appropriation from annual net profit to a fund earmarked for employee training and development expenditure, required by the NRB Unified Directives.
The mechanism and the enforcement logic.
NRB requires banks to spend a prescribed minimum on staff
training each year [R].
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If a bank UNDER-SPENDS, the shortfall must be appropriated
to the Employees Training Fund — blocking that profit from
distribution until the training is actually delivered.
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┌──────────────────────────────────────────────────────────┐
│ THE INCENTIVE IS DELIBERATE: │
│ Spend it on training, or lose the ability to pay it │
│ out as dividend. Either way, the shareholders do not │
│ get it. │
└──────────────────────────────────────────────────────────┘Reading the numbers — and what a fall means.
FY2082/83 FY2081/82 Change Employees Training Fund appropriation 7,732 18,480 −58%
Counter-intuitively, a smaller appropriation is the better outcome. The appropriation represents the unspent shortfall. A fall from NPR 18.5 million to NPR 7.7 million means the bank actually spent more on training this year, leaving a smaller shortfall to appropriate.
Large appropriation → bank UNDER-SPENT on training → bad Small appropriation → bank SPENT its training budget → good
This is a rare case where a smaller number in the appropriations block is a positive signal. Note also that the cash spent on training appears in Other operating expenses (Part 2.15), not here.
Related terms. Part 2.14 Personnel expenses · Part 2.15 · Part 5.9 Other reserve
Profit or Loss Before Regulatory adjustment
Simple definition. Profit after taking out the statutory reserves, but before stripping out the non-cash items.
Formula.
Profit or Loss Before Net Profit as per Total Regulatory adjustment = Statement of P&L − Appropriations
Worked. (NMB, Bank, NPR thousand.)
Net Profit as per Statement of profit or loss 4,013,671
Less appropriations:
General Reserve 802,734
Capital (Debenture) Redemption Reserve 621,825
Exchange Fluctuation Fund 41,202
Corporate Social Responsibility Fund 22,145
Employees Training Fund 7,732
Other −
─────────
Total appropriations 1,495,638
─────────
Profit or Loss Before Regulatory adjustment 2,518,033 OK
Check: 4,013,671 − 1,495,638 = 2,518,033 OKThe appropriation rate.
Total appropriations
Appropriation rate = ────────────────────── × 100
Net profit
FY2082/83: 1,495,638 ÷ 4,013,671 = 37.26%
FY2081/82: 883,895 ÷ 2,854,638 = 30.96%
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Increase: +6.30ppRelated terms. 7.2–7.6 · Part 5.18 Transfer to reserves
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