Chapter 5 · Part 5 — Statement of Changes in Equity
The equity grid and the reserve columns
The reading rule that makes this statement simple, and the six reserves a Nepali bank must maintain.
28 terms. The SoCE is a grid: reserve columns across, movement rows down. It answers the question the P&L cannot — what actually happened to the profit? In a Nepali bank the answer is usually "most of it was locked up," and this is the statement that shows you where.
Part 5 checklist
Equity columns (11): Share Capital · Share premium · General reserve · Exchange equalisation reserve · Regulatory reserve · Fair value reserve · Revaluation Reserve · Retained earning · Other reserve · Non-controlling interest · Total equity
Movement rows (17): Balance at Shrawan 1 / Balance at Asar end · Adjustment/Restatement · Adjusted/Restated balance · Profit for the year / for the period · Other comprehensive income · Total comprehensive income · Transfer to reserves · Transfer from reserves · Transfer from Merger · Contribution from and distributions to owner · Share issued to merged entity / Share issued / Merger Transfer · Share based payments · Dividends to equity holders · Bonus shares issued / Bonus shares capitalized · Cash dividend paid · Goodwill Recognition · Total contributions by and distributions
The structure
The universal equity equation
Opening equity ± Adjustments / restatements + Profit for the period + Other comprehensive income ───────────────────────────────── = Total comprehensive income ± Reserve transfers ← moves WITHIN equity, no net effect + Share issues ← new money in + Bonus shares ← moves WITHIN equity, no net effect − Cash dividends ← money out ± Other movements ───────────────────────────────── = Closing equity
The grid, and how to read it
┌──────────────────── COLUMNS = WHERE equity sits ─────────────────────┐
Share Share General Exch. Regul. Fair Reval. Retained Other Total
Capital Premium Reserve Equal. Reserve Value Reserve Earning Res.
┌──────────────┬───────┬───────┬────────┬───────┬───────┬───────┬───────┬────────┬─────┬──────┐
R │ Opening │ │ │ │ │ │ │ │ │ │ │
O │ Profit │ │ │ │ │ │ │ │ ████ │ │ ███ │
W │ OCI │ │ │ │ │ │ ████ │ │ ██ │ │ ███ │
S │ Transfer to │ │ │ ████ │ ████ │ ████ │ │ │ (████) │████ │ 0 │ ← nets to ZERO
│ Transfer from│ │ │ │ │ │ │ │ ████ │(██) │ 0 │ ← nets to ZERO
= │ Bonus shares │ ████ │ │ │ │ │ │ │ (████) │ │ 0 │ ← nets to ZERO
│ Cash dividend│ │ │ │ │ │ │ │ (████) │ │(███) │ ← REDUCES equity
W │ Share issue │ ████ │ ████ │ │ │ │ │ │ │ │ ███ │ ← INCREASES equity
H │ Closing │ │ │ │ │ │ │ │ │ │ │
A └──────────────┴───────┴───────┴────────┴───────┴───────┴───────┴───────┴────────┴─────┴──────┘
T
╔═══════════════════════════════════════════════════════════════════════════════════════╗
║ THE READING RULE: ║
║ If a row's TOTAL column is ZERO, nothing left the bank — equity was merely ║
║ RECLASSIFIED from "free" to "locked." ║
║ Only rows with a non-zero total actually changed the bank's net worth. ║
╚═══════════════════════════════════════════════════════════════════════════════════════╝The full year, worked
(NMB Bank standalone, Shrawan 1 2082 → Asar End 2083, NPR thousand. Reproduced from the report and re-derived.)
Share General Exch. Regul. Fair Retained Other Total
Capital Reserve Equal. Reserve Value Earning Reserve Equity
─────────────────────────────────────────────────────────────────────────────────────────────────────
Balance Asar end 2082 18,366,706 5,981,038 215,637 2,998,136 819,054 1,901,381 1,892,656 32,174,608
Adjustments − − − − − − − −
Adjusted balance 18,366,706 5,981,038 215,637 2,998,136 819,054 1,901,381 1,892,656 32,174,608
Profit for the period − − − − − 4,013,671 − 4,013,671
Other comprehensive income − − − −(173,367) − (36,686) (210,053)
──────────
Total comprehensive income − − − −(173,367) 4,013,671 (36,686) 3,803,618
Transfer to Reserves − 802,734 41,202 709,748 − (2,205,386) 651,702 0 ←
Transfer from Reserves − − − − − − (120) (120)
Bonus shares capitalized 918,335 − − − − (918,335) − 0 ←
Cash dividend paid − − − − − (918,335) − (918,335)
Others (NMB PNCPS 8.25%) 3,000,000 − − − − − − 3,000,000
────────── ───────── ─────── ───────── ─────── ────────── ────────── ──────────
Balance Asar End 2083 22,285,041 6,783,772 256,839 3,707,883 645,687 1,872,996 2,507,552 38,059,771Verify the two zero rows.
Transfer to Reserves: 802,734 + 41,202 + 709,748 + 651,702 − 2,205,386 = 0 OK Bonus shares capitalized: 918,335 − 918,335 = 0 OK
Verify the total.
32,174,608 + 3,803,618 + 0 − 120 + 0 − 918,335 + 3,000,000 = 38,059,771 OK
Now read the story.
The bank earned NPR 4,013,671
OCI took away NPR (210,053)
─────────────
Comprehensive income NPR 3,803,618
Of that, LOCKED into reserves NPR 2,205,386 (58% of profit)
Paid out in cash NPR 918,335 (23% of profit)
Converted to share capital (bonus) NPR 918,335 (23% of profit)
─────────────
Left in free retained earnings NPR (28,385) ← actually FELL
Equity still grew NPR 5.9 billion — but HALF of that
(NPR 3.0 billion) came from issuing PNCPS, not from earnings.THE EQUITY COLUMNS
Share Capital
Paid-up ordinary share capital plus equity-classified preference shares (the PNCPS). Fully covered in Part 1.30. In the SoCE it increases through bonus capitalisation and share issues.
Movement: 18,366,706 + 918,335 (bonus) + 3,000,000 (PNCPS) = 22,285,041.
Share premium
Amount subscribed above par value. Covered in Part 1.31. Bank column nil; Group NPR 37,216 thousand, unchanged all year.
General reserve
Simple definition. A statutory reserve built by setting aside a fixed share of profit every year, permanently.
Technical definition. A reserve created by mandatory appropriation from annual profit, required of banks and financial institutions in Nepal, intended to build permanent loss-absorbing capital and not available for distribution.
Framework. The requirement arises under the Bank and Financial Institutions Act (BAFIA) and the NRB Unified Directives.
Testing the rate against the report.
Transfer to general reserve NPR 802,734 thousand
Profit for the period NPR 4,013,671 thousand
─────────────────────
Implied appropriation rate 802,734 ÷ 4,013,671 = 20.00%Exactly 20%, consistent with the long-standing statutory requirement — but treat the rate itself as regulation-dependent and verify it rather than assuming it is fixed forever.
Journal entry.
Dr Retained earnings 802,734,000
Cr General reserve 802,734,000No cash. No P&L. Total equity unchanged.
Why it exists — the economic purpose.
Without a mandatory reserve, a bank could distribute
100% of profit every year as dividend.
│
▼
Equity would never grow from earnings.
Every rupee of loan growth would need new share issues,
or would push leverage up.
│
▼
MANDATORY APPROPRIATION forces the bank to retain a
fixed share, so capital grows with the balance sheet
automatically.Effect on regulatory capital. The general reserve is a core component of CET1 [R] — so the appropriation does not reduce capital. It only reduces distributable profit. The money stays in the bank; it simply cannot leave as dividend.
Analyst interpretation. The general reserve balance divided by paid-up capital is a rough measure of how long the bank has been profitable and how much it has retained. NMB: 6,783,772 ÷ 22,285,041 = 30.4%.
Related terms. Part 1.33 Reserves · Part 7 General Reserve · Part 12 CET 1
Exchange equalisation reserve
Simple definition. A reserve holding a portion of gains made purely from exchange-rate movements, so they are not paid out as dividend.
Technical definition. A reserve created by appropriation from retained earnings of a prescribed proportion of revaluation gain on foreign currency assets and liabilities, required by NRB, intended to prevent distribution of unrealised or reversible exchange gains.
The logic.
The NPR weakens against the USD.
│
▼
The bank's USD assets are worth more in NPR.
A revaluation GAIN goes to Other operating income → PROFIT.
│
▼
But the rate can move back tomorrow. The gain is not
locked in and no cash was received.
│
▼
NRB: appropriate a prescribed share of it to the
EXCHANGE EQUALISATION RESERVE, blocking it from dividend.Movement: 215,637 + 41,202 = 256,839 (Bank).
Do not confuse with the OCI translation reserve. See Part 3.10 for the distinction — that one is NAS 21 for foreign operations and is nil here; this one is an NRB appropriation and is populated.
Related terms. Part 2.9 Other operating income · Part 3.10 · Part 7 Exchange Fluctuation Fund · Part 8 Foreign Exchange Transactions
Regulatory reserve
Simple definition. A reserve holding profit that NRB says the bank recognised on paper but must not pay out, because it is not backed by cash or certainty.
Technical definition. A non-distributable reserve created by appropriation from retained earnings of specified amounts prescribed by the NRB Unified Directives, comprising items recognised in profit under NFRS that NRB considers unrealised, uncertain or not loss-absorbing.
The items appropriated — exactly the lines in the distributable profit statement (Part 7):
| Item | Why NRB blocks it |
|---|---|
| **Interest receivable / accrued interest** | Income recognised but cash not received |
| **Short loan loss provision in accounts** | Regulatory provision exceeds accounting ECL |
| **Short provision for possible losses on investment** | Investment provisioning shortfall |
| **Short loan loss provision on Non Banking Assets** | Foreclosed property under-provided |
| **Deferred tax assets recognised** | A future benefit contingent on future profits |
| **Goodwill recognised** | Not loss-absorbing; deducted from capital anyway |
| **Bargain purchase gain recognised** | An accounting gain, not cash |
| **Actuarial loss recognised** | Remeasurement, reversible |
| **Interest capitalised on term loans** | Interest added to principal, not collected |
The mechanism.
┌────────────────────────────────────────────────────────────┐ │ NFRS says: recognise this in profit. │ │ NRB says: fine — but you may not pay it out. │ │ │ │ Dr Retained earnings XXX │ │ Cr Regulatory reserve XXX │ │ │ │ → Profit unchanged │ │ → Total equity unchanged │ │ → CET1 capital unchanged (the reserve is still capital) [R]│ │ → DISTRIBUTABLE PROFIT REDUCED │ └────────────────────────────────────────────────────────────┘
Reading the movement.
Regulatory reserve, Asar end 2082 NPR 2,998,136 thousand
Transfer to Reserves NPR 709,748 thousand
────────────────────
Regulatory reserve, Asar End 2083 NPR 3,707,883 thousand
Increase = 23.7%
As % of profit for the period = 709,748 ÷ 4,013,671 = 17.68%Analyst interpretation.
- A jump in the regulatory reserve is a quality-of-earnings warning. It quantifies, in rupees, how much reported profit was not cash-backed.
- Track Regulatory reserve transfer ÷ Profit as a ratio across years. Rising = deteriorating earnings quality.
- A bank with a large regulatory reserve balance relative to retained earnings has a long history of recognising non-cash profit. ``` NMB: Regulatory reserve 3,707,883 vs Retained earnings 1,872,996 → the blocked balance is nearly TWICE the free balance ```
Related terms. Part 1.33 Reserves · Part 7 (entire) · Part 15 · Part 12 Regulatory reserve
Fair value reserve
Simple definition. The accumulated unrealised gains and losses on investments carried at fair value through OCI.
Technical definition. The cumulative balance of fair value movements on FVOCI financial assets, net of related deferred tax, recognised in OCI and accumulated in equity.
Movement.
Fair value reserve, Asar end 2082 NPR 819,054 thousand
Other comprehensive income NPR (173,367) thousand
────────────────────
Fair value reserve, Asar End 2083 NPR 645,687 thousandOn disposal. For FVOCI-equity, the accumulated balance transfers within equity to retained earnings — never through profit. For FVOCI-debt, it recycles through profit. See Part 3.4 and Part 3.8.
Related terms. Part 1.8 Investment securities · Part 3.4 · Part 3.3
Revaluation Reserve
Accumulated surplus from applying the revaluation model to PPE under NAS 16. Nil throughout because NMB applies the cost model. See Part 3.5 and Part 1.13.
Retained earning
Accumulated undistributed profit. Fully covered in Part 1.32, including the complete reconciliation. In the SoCE it is the column that absorbs profit and from which every appropriation and distribution is made.
Other reserve
Simple definition. A catch-all column for earmarked reserves that do not have their own column.
Technical definition. Reserves created by appropriation for specified statutory or contractual purposes, other than those separately presented.
What is inside it in a Nepali bank — visible from the distributable profit statement:
| Reserve | Purpose | Basis |
|---|---|---|
| **Capital (Debenture) Redemption Reserve** | Accumulate funds to repay debentures | Companies Act / debenture terms [R] |
| **Corporate Social Responsibility Fund** | Mandated CSR spending | NRB Directive [R] |
| **Employees Training Fund** | Mandated staff training expenditure | NRB Directive [R] |
| Investment adjustment reserve | Against certain investments | NRB Directive [R] |
Movement.
Other reserve, Asar end 2082 NPR 1,892,656 thousand
Other comprehensive income NPR (36,686) thousand
Transfer to Reserves NPR 651,702 thousand
Transfer from Reserves NPR (120) thousand
─────────────────────
Other reserve, Asar End 2083 NPR 2,507,552 thousandReconciling the NPR 651,702 transfer to the Part 7 appropriations.
Capital (Debenture) Redemption Reserve NPR 621,825
Corporate Social Responsibility Fund NPR 22,145
Employees Training Fund NPR 7,732
───────────
NPR 651,702 OK exact matchThe CSR and Training Fund logic. These are mandatory spending obligations, not discretionary provisions. NRB requires banks to appropriate a prescribed percentage of profit [R] and to actually spend it on CSR activities and staff training. Unspent balances accumulate here. A large, static balance means the bank is appropriating but not spending — a supervisory point.
Related terms. Part 1.27 Debt securities issued · Part 7 Capital (Debenture) Redemption Reserve, Corporate Social Responsibility Fund, Employees Training Fund
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