Chapter 7 · Part 7 — Distributable Profit
The nine regulatory adjustments
Accrued interest, foreclosed property, deferred tax, goodwill, actuarial losses and capitalised interest — every item NRB strips out.
REGULATORY ADJUSTMENTS
The regulatory adjustment block — how to read it
The governing principle.
╔═══════════════════════════════════════════════════════════════════╗ ║ EVERY ITEM IN THIS BLOCK ANSWERS ONE QUESTION: ║ ║ ║ ║ "Did the bank actually RECEIVE this profit in cash, ║ ║ and is it CERTAIN?" ║ ║ ║ ║ If NO → strip it out of distributable profit. ║ ║ Dr Retained earnings / Cr Regulatory reserve ║ ║ ║ ║ If the item later REVERSES (cash received, DTA utilised, ║ ║ NBA sold) → release it back. Hence "(-)/reversal (+)". ║ ╚═══════════════════════════════════════════════════════════════════╝
The sign convention.
(-) a NEGATIVE number → profit REMOVED from distributable profit (+) a POSITIVE number → a REVERSAL; profit RESTORED
Where the amounts go. Straight into the Regulatory reserve (Part 5.5). The total of this block should broadly reconcile to the regulatory reserve movement in the SoCE:
Total regulatory adjustments (Bank) NPR (709,748) thousand = 297,150 + 88,637 + 61,174 + 195,282 + 67,505 = 709,748 OK SoCE transfer to Regulatory reserve NPR 709,748 thousand OK EXACT This is a perfect tie between two statements. Verify it every time.
Interest receivable (-)/previous accrued interest received (+)
Simple definition. Interest the bank booked as income but has not actually collected.
Technical definition. An adjustment removing from distributable profit the net increase in accrued interest receivable recognised in profit under the effective interest method but not received in cash, restored when the interest is subsequently collected.
Why it is the flagship adjustment.
NFRS 9: recognise interest income on an ACCRUAL basis,
over the life of the loan.
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The bank books NPR 100 million of interest income.
Only NPR 80 million was actually received.
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The NPR 20 million receivable is REAL income under NFRS —
but it is not cash, and the borrower may never pay it.
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NRB: you may not pay a dividend out of interest you have
not collected.
│
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Dr Retained earnings 20,000,000
Cr Regulatory reserve 20,000,000Cross-reference to the cash flow statement — the numbers agree. From Part 4.1:
Interest income (P&L, accrual) NPR 21,041,592 thousand
Interest received (cash flow, cash) NPR 18,855,966 thousand
─────────────────────
Gap NPR 2,185,626 thousandThe adjustment here is NPR (297,150) thousand — much smaller than the NPR 2.19 billion gap.
The prior-year comparison — a striking reversal.
FY2082/83: NPR (297,150) thousand ← a DEDUCTION FY2081/82: NPR 593,012 thousand ← a REVERSAL (positive!)
Read that carefully. Last year the bank collected NPR 593 million of previously accrued interest, releasing it back into distributable profit. This year it accrued NPR 297 million more than it collected, removing it. That is a NPR 890 million year-on-year swing in distributable profit driven by collection performance alone.
FY2081/82: collections EXCEEDED new accruals → +593,012
FY2082/83: new accruals EXCEEDED collections → (297,150)
─────────
Swing (890,162)This single line explains much of why distributable profit per share fell from NPR 10.35 to NPR 9.08 while EPS rose. Collection performance deteriorated, and NRB's mechanism translated that directly into reduced dividend capacity.
Related terms. Part 2.1 Interest income · Part 4.1 Interest received · Part 5.5 Regulatory reserve · Part 8 EIR
Short loan loss provision in accounts (-)/reversal (+)
Simple definition. The amount by which NRB's required loan-loss provision exceeds what the bank has provided in its accounts.
Technical definition. An adjustment removing from distributable profit any shortfall between the loan-loss provision required under the NRB Unified Directives and the impairment allowance recognised in the financial statements under NFRS 9.
How a shortfall can arise — and why it is nil for NMB.
NRB's higher-of rule (Part 2.11) requires:
Recognised impairment = HIGHER OF
(a) NFRS 9 Expected Credit Loss
(b) NRB regulatory provision
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If the bank correctly applies the higher-of rule, the
accounts already carry the regulatory provision —
so there is NO SHORTFALL, and this line is NIL.
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NMB: NIL in both years OK
→ confirms the bank is applying the higher-of rule properlyThe relationship between the two regimes.
┌──────────────────────────────────────────────────────────────────┐ │ IF NFRS 9 ECL > NRB provision │ │ → book the ECL. No shortfall. This line = nil. │ │ → the excess ECL is simply a more conservative accounting │ │ outcome │ ├──────────────────────────────────────────────────────────────────┤ │ IF NRB provision > NFRS 9 ECL │ │ → the higher-of rule requires booking the NRB amount │ │ → still no shortfall, because it IS booked │ │ → this line = nil │ ├──────────────────────────────────────────────────────────────────┤ │ IF the bank books only the ECL and ignores the higher NRB │ │ requirement │ │ → SHORTFALL → appears here as a deduction │ │ → and the auditor and NRB will have questions │ └──────────────────────────────────────────────────────────────────┘
Related terms. Part 2.11 Impairment charge · Part 1.7 · Part 8 ECL · Part 15
Short provision for possible losses on investment (-)/reversal (+)
Simple definition. Any shortfall in provisioning against the bank's investment portfolio.
Technical definition. An adjustment removing from distributable profit any shortfall between the provision required against investments under NRB Directives and the impairment or fair value adjustment recognised in the accounts.
When it arises. NRB prescribes provisioning requirements for certain investments [R] — particularly unquoted equity, investments in institutions under stress, and investments held beyond prescribed periods. Where the accounts carry less than the required amount, the shortfall is blocked from distribution.
(NMB: nil in both years. Consistent with the bank carrying its investment securities at fair value under NFRS 9, which generally captures any decline in value already.)
Related terms. Part 1.8 Investment securities · Part 3.4 · Part 8 FVTPL, Fair value
Short loan loss provision on Non Banking Assets (-)/reversal (+)
Simple definition. The shortfall in provisioning against property the bank has taken over from defaulting borrowers.
Technical definition. An adjustment removing from distributable profit the shortfall between the provision required on Non-Banking Assets under the NRB Unified Directives and the amount recognised in the accounts.
Why NRB requires this at all — the loophole it closes.
A borrower defaults on a NPR 80 million loan.
The loan is classified LOSS and 100% provided.
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The bank enforces its security and takes over land worth
NPR 65 million.
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ACCOUNTING ENTRY (Part 1.12):
Dr Investment property (NBA) 65,000,000
Dr Allowance for impairment 80,000,000
Cr Loans and advances 80,000,000
Cr Impairment charge/(reversal) 65,000,000 ← INCOME!
│
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┌──────────────────────────────────────────────────────────────┐
│ THE LOOPHOLE: │
│ • The bad loan DISAPPEARS from the NPL ratio │
│ • A NPR 65 million impairment REVERSAL boosts profit │
│ • The bank now holds illiquid land it cannot easily sell │
│ │
│ Reported NPL improves. Reported profit improves. │
│ The bank is NOT better off. │
└──────────────────────────────────────────────────────────────┘
│
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NRB CLOSES IT with two measures:
1. Require escalating PROVISIONING on NBAs the longer they
are held [R]
2. Block any provisioning shortfall from distribution — this lineReading the numbers.
FY2082/83 FY2081/82 NBA short provision adjustment (88,637) (351,588) Balance sheet: Investment property 1,962,285 1,784,193 +NPR 178,092 (+9.98%) Cash flow: Purchase of investment properties (178,093) (932,756)
Analyst interpretation. Watch three numbers together every period:
1. Investment property balance → is it growing? 2. NBA short provision adjustment → is provisioning adequate? 3. Receipt from sale of NBA → is the bank disposing? Growing balance + nil disposals = escalating provisions ahead
Related terms. Part 1.12 Investment property · Part 2.11 Impairment charge · Part 4.21, 4.22 · Part 6.2 NPL ratio
Deferred tax assets recognised (-)/reversal (+)
Simple definition. The deferred tax credit that increased profit, removed from distributable profit because it is not cash.
Technical definition. An adjustment removing from distributable profit the deferred tax asset recognised in the period, restored on reversal or utilisation.
The cleanest illustration in the entire report of how NFRS and NRB interact.
┌─────────────────────────────────────────────────────────────────┐
│ STEP 1 — NFRS (Part 2.23) │
│ │
│ Dr Deferred tax asset 61,174,000 │
│ Cr Income tax expense — deferred 61,174,000 │
│ │
│ → Tax expense REDUCED by NPR 61,174 thousand │
│ → Profit INCREASED by NPR 61,174 thousand │
│ → EPS increased │
│ → ROE increased │
└────────────────────────────┬────────────────────────────────────┘
▼
┌─────────────────────────────────────────────────────────────────┐
│ STEP 2 — NRB (this line) │
│ │
│ Deferred tax assets recognised NPR (61,174) thousand │
│ │
│ Dr Retained earnings 61,174,000 │
│ Cr Regulatory reserve 61,174,000 │
│ │
│ → Distributable profit REDUCED by exactly the same amount │
└─────────────────────────────────────────────────────────────────┘
╔═════════════════════════════════════════════════════════════════╗
║ THE SAME NUMBER APPEARS TWICE — NPR 61,174 thousand — ║
║ once ADDING to profit, once REMOVING it from what can be paid. ║
║ ║
║ The bank gets the accounting profit. ║
║ The shareholders cannot have the cash. ║
╚═════════════════════════════════════════════════════════════════╝Why NRB does this. A deferred tax asset is a future tax saving that only materialises if the bank earns future taxable profit. If the bank fails, it is worthless — precisely when capital is most needed. It is:
- Not cash
- Not certain
- Not loss-absorbing
So it may not fund a dividend, and it is typically deducted from regulatory capital as well [R] (Part 6.10). NRB applies the same logic twice, in two different places.
Prior-year consistency.
FY2082/83: P&L deferred tax (61,174) → adjustment (61,174) OK FY2081/82: P&L deferred tax (41,172) → adjustment (41,172) OK
The tie holds in both years.
Reversal. When the DTA is utilised — the temporary difference reverses and the tax saving is actually realised — the adjustment turns positive and the amount is released back into distributable profit.
Related terms. Part 1.15 Deferred tax assets · Part 2.23 Deferred Tax expense/(Income) · Part 5.5 Regulatory reserve · Part 6.10 CET 1 · Part 15
Goodwill recognised (-)/impairment of Goodwill (+)
Simple definition. Goodwill from a merger, removed from distributable profit.
Technical definition. An adjustment removing from distributable profit any goodwill recognised in the period, restored when the goodwill is impaired or written off.
Why goodwill is blocked.
Goodwill is the premium paid over the fair value of net
assets acquired (Part 1.14).
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It is:
• Not cash
• Not separable or saleable
• Not loss-absorbing
• Typically DEDUCTED from CET1 capital [R]
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→ It cannot support a dividend.Note the sign logic, which is the reverse of intuition.
Goodwill RECOGNISED → (-) deduction from distributable profit Goodwill IMPAIRED → (+) RESTORATION to distributable profit
Why? Because the block existed only while the goodwill sat on the balance sheet. Once it is written off, there is nothing left to block — the restriction is released. An impairment, which reduces profit, simultaneously increases distributable profit. A genuinely counter-intuitive but logically correct outcome.
(NMB: nil in both years — the goodwill was recognised in FY 2021/22 following the ICAN carve-out withdrawal (Part 1.14), so the appropriation was made then, not now.)
Related terms. Part 1.14 Goodwill and Intangible assets · Part 5.27 Goodwill Recognition · Part 6.10 CET 1 · Part 8 Business Combination
Bargain purchase gain recognised (-)/reversal (+)
Simple definition. The accounting gain from buying a business for less than its net assets are worth, removed from distributable profit.
Technical definition. An adjustment removing from distributable profit any bargain purchase gain recognised in profit or loss under NFRS 3, being the excess of the fair value of identifiable net assets acquired over the consideration transferred.
What a bargain purchase gain is.
Consideration paid NPR 4,500,000,000
Fair value of net assets acquired NPR 4,800,000,000
─────────────────
BARGAIN PURCHASE GAIN NPR 300,000,000
→ recognised IMMEDIATELY
in profit or lossWhy NRB blocks it.
┌──────────────────────────────────────────────────────────────┐ │ The gain is an ACCOUNTING MEASUREMENT, not a cash receipt. │ │ │ │ It says: "the assets we acquired are worth more than we │ │ paid, according to our own fair value estimates." │ │ │ │ Those estimates are: │ │ • Made by the acquirer │ │ • Highly judgemental (especially for a loan book) │ │ • Not validated by any market transaction │ │ │ │ In Nepal's merger era, a bank could report a large profit │ │ simply by valuing an acquired loan book optimistically — │ │ and then pay a dividend out of it. │ │ │ │ NRB: no. │ └──────────────────────────────────────────────────────────────┘
(NMB: nil in both years — no acquisitions during the period.)
Related terms. Part 1.14 Goodwill · Part 8 Business Combination, Acquisition method, Identifiable net assets acquired
Actuarial loss recognised (-)/reversal (+)
Simple definition. The actuarial loss on employee benefit obligations, removed from distributable profit.
Technical definition. An adjustment in respect of actuarial gains and losses on defined benefit plans recognised in other comprehensive income under NAS 19, applied to distributable profit per NRB requirements.
The apparent puzzle — and its resolution.
PUZZLE: An actuarial LOSS already reduced equity through OCI
(Part 3.6). Why deduct it AGAIN from distributable
profit? Is that double-counting?
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RESOLUTION: Look at where each amount lands.
┌──────────────────────────────────────────────────────────────┐
│ ACTUARIAL LOSS goes to OCI │
│ ↓ │
│ OCI accumulates in RESERVES (or retained earnings, │
│ depending on presentation) │
│ ↓ │
│ It NEVER passes through PROFIT OR LOSS │
│ ↓ │
│ So the P&L "Net Profit" that starts this statement │
│ DOES NOT reflect the actuarial loss at all │
│ ↓ │
│ ⇒ Distributable profit computed from that P&L figure │
│ would OVERSTATE what is really available │
│ ↓ │
│ NRB: deduct it here, so distributable profit reflects │
│ the full economic position │
└──────────────────────────────────────────────────────────────┘
NOT double-counting. It is the ONLY place the actuarial loss
affects dividend capacity.Reading the numbers.
FY2082/83 FY2081/82 Actuarial loss adjustment (distributable profit) (195,282) (127,894) OCI actuarial loss (Bank, Part 3.6) (52,408) (182,706)
Related terms. Part 1.26 Other liabilities · Part 2.14 Personnel expenses · Part 3.6 Actuarial gains/(losses) · Part 8 NAS 19, Actuarial valuation
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