The NFRS framework, carve-outs and consolidation

137 terms — the largest Part. These are the notes to the accounts: the rules the bank applied to produce every number in Parts 1–7.

How to use this Part. Many terms here were already worked in full where they first appear as a balance or a line item. Those entries are compact and cross-referenced rather than repeated. The genuinely new material — the ECL machinery, the fair value hierarchy, NFRS 16 leases, NAS 12 deferred tax mechanics, NAS 19 employee benefits — gets full treatment here.

Part 8 map

— FRAMEWORK AND BASIS OF PREPARATION (13 terms)

Nepal Financial Reporting Standards (NFRS)

Simple definition. The accounting rulebook Nepali companies must follow.

Technical definition. The body of standards pronounced by the Nepal Accounting Standards Board (NASB) and issued by the Institute of Chartered Accountants of Nepal (ICAN), converged with IFRS but not identical to it, comprising NFRS (converged with IFRS) and NAS (converged with IAS).

The naming convention — memorise this.

INTERNATIONAL                    NEPAL
─────────────                    ─────
IFRS 3, 9, 10, 15, 16   →   NFRS 3, 9, 10, 15, 16
IAS  1, 7, 12, 16, 19   →   NAS  1, 7, 12, 16, 19

Same numbers. Different prefix.
"NFRS" is also used loosely to mean the WHOLE framework
(both NFRS and NAS), which is how the source report uses it:
"prepared in accordance with Nepal Accounting Standards
 comprising of Nepal Financial Reporting Standards and Nepal
 Accounting Standards (hereafter referred as NFRS)".

! The carve-out problem — the most important thing in this Part

The source report documents a carve-out lifecycle in its own words:

HOW A CARVE-OUT WORKS

ICAN identifies that full IFRS application would be
impractical or inappropriate in Nepal's context
                     │
                     ▼
Issues a CARVE-OUT: a permitted departure, usually with
an expiry date
                     │
     ┌───────────────┼───────────────┐
     ▼               ▼               ▼
EXTENDED        WITHDRAWN       ALLOWED TO LAPSE
(still live)    (as with        (full IFRS applies
                 NFRS 3 nos.     from that date)
                 3 and 4)

⇒ THE APPLICABLE RULE DEPENDS ON THE DATE.

Carve-outs have historically affected areas critical to banks, notably impairment of loans and the application of the effective interest rate. Always check ICAN's carve-out position for the reporting period you are analysing — do not assume.

Where to verify. ICAN (ican.org.np) publishes the carve-out notifications and explanatory notes; NASB (nasbnepal.org.np) pronounces the standards.

Related terms. NAS · Statement of Compliance · Part 1.14 Goodwill · Part 12 ICAN, NASB

Nepal Accounting Standards (NAS)

The Nepali equivalents of IAS. Used in this guide: NAS 1 (presentation), NAS 7 (cash flows), NAS 8 (policies and errors), NAS 10 (events after reporting period), NAS 12 (income taxes), NAS 16 (PPE), NAS 19 (employee benefits), NAS 21 (FX), NAS 27 (separate statements), NAS 28 (associates), NAS 32 (financial instruments presentation), NAS 33 (EPS), NAS 34 (interim reporting), NAS 37 (provisions), NAS 38 (intangibles), NAS 40 (investment property).

Interim Financial Reporting (NAS 34)

Simple definition. The standard governing quarterly and half-yearly accounts.

Technical definition. NAS 34 prescribes the minimum content of an interim financial report and the recognition and measurement principles for interim periods.

Objective. To provide timely information without requiring a full annual-report effort every quarter.

Scope. Applies where an entity is required or elects to publish an interim financial report. For Nepali listed banks, publication is mandatory — required by NRB and by SEBON's Securities Registration and Issuance Regulation 2073.

What NAS 34 permits — and the consequences.

┌───────────────────────────────────────────────────────────────┐
│  CONDENSED, not complete                                      │
│  • Headline statements, plus SELECTED explanatory notes only  │
│  • The report says exactly this: "The disclosures made in     │
│    the condensed consolidated interim financial information   │
│    have been limited based on the format prescribed by        │
│    Nepal Rastra Bank and should be read in conjunction with   │
│    the Bank's last annual financial statements. They do not   │
│    include all of the information required for a complete     │
│    set of NFRS financial statements."                         │
├───────────────────────────────────────────────────────────────┤
│  ⇒ CONSEQUENCE FOR THE ANALYST                                │
│  Many notes you want — full loan classification tables,       │
│  maturity gap analysis, detailed risk disclosures, fair       │
│  value hierarchy tables — are in the ANNUAL report, not       │
│  the quarterly. Read them together.                           │
└───────────────────────────────────────────────────────────────┘

Recognition and measurement — the "discrete period" principle. NAS 34 requires the same accounting policies as the annual accounts. Measurement is on a year-to-date basis, so a change in estimate is reflected in the YTD figures, which is why Q4 "this quarter" is a derived residual (Index §"Reading columns").

Unaudited status. The report is explicitly headed "(Unaudited)" and states: "The figures reported in interim financial report are subject to change upon otherwise instructions of statutory auditor and/or regulatory authorities."

The components NAS 34 + NRB require — the report lists them:

• Condensed Consolidated Statement of Financial Position
• Condensed Consolidated Statement of Profit or Loss
• Condensed Consolidated Statement of Other Comprehensive Income
• Condensed Consolidated Statement of Changes in Equity
• Condensed Consolidated Statement of Cash Flows
• Statement of Distributable Profit ← NRB addition, not in NAS 34
• Notes to Interim Financial Statements
• Ratios as per NRB Directive ← NRB addition

Related terms. Part 7 (entire) · Part 6 (entire) · Part 12 SEBON

Historical cost convention

Simple definition. Recording assets at what was paid for them, not what they are worth now.

Technical definition. The measurement basis under which assets are recorded at the amount of cash paid or the fair value of consideration given at acquisition, subject to specified exceptions.

The report's statement, with its exceptions:

The exceptions, listed in the report's Note 11:

┌──────────────────────────────────────────────────────────────┐
│  A bank's balance sheet is a HYBRID:                         │
│                                                              │
│  HISTORICAL COST          FAIR VALUE                         │
│  ───────────────          ──────────                         │
│  Loans and advances       Investment securities (equity)     │
│  Deposits                 Derivatives                        │
│  PPE (cost model)         Investment property (NBA)          │
│  Debentures               Employee benefit obligations       │
│                                                              │
│  ⇒ You cannot say "the balance sheet is at cost" or          │
│    "at fair value." It is both, item by item.                │
└──────────────────────────────────────────────────────────────┘

Related terms. Fair value · Part 1.8 · Part 1.12 · Part 1.13

Going concern

Simple definition. The assumption that the bank will keep operating for the foreseeable future.

Technical definition. The basis of preparation under NAS 1 assuming the entity will continue in operation and neither intends nor needs to liquidate or curtail materially the scale of its operations.

The report's assessment:

Why it matters so much for a bank.

IF GOING CONCERN FAILS:
• Loans would be measured at what they could be SOLD for today,
  not amortised cost — a fire-sale valuation
• Deferred tax assets become worthless (no future profits)
• Goodwill is written off
• Assets reclassify to current
⇒ A bank's reported equity would collapse

THIS IS WHY the going-concern statement is not boilerplate.
It underpins EVERY number in Parts 1-7.

The director-responsibility link. The report's CEO disclosure states: "I am personally responsible for the correctness of the facts and figures disclosed in this report." Going concern is a board judgement with personal accountability attached.

Related terms. Part 1.15 Deferred tax assets · Part 12 Corporate Governance

Materiality and Aggregation

Simple definition. Rules on what must be shown separately and what can be lumped together.

Technical definition. Under NAS 1, each material class of similar items is presented separately; items of dissimilar nature or function are presented separately unless immaterial.

The report's statement:

The offsetting rule stated in the same note:

Why this drives the gross derivative presentation. See Part 1.4 — derivative assets of NPR 19.02bn and liabilities of NPR 19.14bn are shown gross because the two offsetting conditions are not met.

Related terms. Offsetting · Part 1.4 · Part 1.9

Basis of Consolidation

Simple definition. How the parent bank and its subsidiaries are combined into one set of accounts.

Technical definition. The process under NFRS 10 of combining the financial statements of the parent and its subsidiaries line by line by adding together like items of assets, liabilities, equity, income and expenses, eliminating intra-group balances and transactions.

The report's statement:

The mechanics, with NMB's actual structure.

┌──────────────────────────────────────────────────────────────────┐
│                    NMB BANK LIMITED (parent)                     │
└───────────┬──────────────────┬──────────────────┬────────────────┘
            │ 100%             │ 100%             │ 51%
            ▼                  ▼                  ▼
  ┌──────────────────┐ ┌─────────────────┐ ┌───────────────────────┐
  │ NMB Capital Ltd. │ │ N.M.B.          │ │ NMB Laghubitta        │
  │ Merchant &       │ │ Securities Ltd. │ │ Bittiya Sanstha Ltd.  │
  │ investment       │ │ Share brokerage │ │ Microfinance, Class D │
  │ banking (SEBON)  │ │ (SEBON)         │ │ (NRB)                 │
  │ inc. 17 Sep 2010 │ │ inc. 21 Jun 2021│ │ 49% = NCI             │
  └──────────────────┘ └─────────────────┘ └───────────────────────┘

CONSOLIDATION STEPS:
1. Add 100% of every subsidiary's assets, liabilities, income
   and expenses — even the 51%-owned one
2. ELIMINATE the parent's "Investment in subsidiaries"
   (NPR 772,488 thousand) against the subsidiaries' equity
3. ELIMINATE all intra-group balances and transactions
4. Recognise NON-CONTROLLING INTEREST for the 49% of
   NMB Laghubitta the parent does not own

The eliminations, visible in the report. The related-party note (Part 10) lists exactly what gets removed:

Investment by NMB Bank Ltd.       400,000 + 172,488 + 200,000 = 772,488
                                  ↑ ties to "Investment in subsidiaries" OK
Deposits in NMB Bank Ltd.         346,887 + 119,676 + 4,420
Borrowing from NMB Bank Ltd.                2,591,889
Interest Payment by NMB Bank Ltd.  13,659 +       0 +     49
Interest Payment to NMB Bank Ltd.           107,790
Rent Payment to NMB Bank Ltd.                          1,100
Share Registrar Fee                 1,100
Debenture RTS Fee                     450
Dividend distributions             25,641 + 26,553 + 64,600

The report confirms: "The intra-group related figures have been excluded for presentation of the financial statements of the Group."

Coterminous periods. "The interim period of all of the subsidiaries is same as that of the Bank." NFRS 10 requires the same reporting date, or adjustments if impracticable.

Where consolidation shows up in Parts 1–7 — the Group/Bank differences you have already seen:

Related terms. NFRS 10 · Power over the investee · NCI · Part 1.10 · Part 1.35 · Part 10

Consolidated Financial Statements (NFRS 10)

Objective of the standard. To establish principles for presenting and preparing consolidated financial statements when an entity controls one or more other entities.

Scope. All parents, with limited exemptions.

The control model. NFRS 10 defines a single control model based on three elements, which the report reproduces from Para 8:

(a) Power over the investee;
(b) Exposure, or rights, to variable returns from its involvement
    with the investee; and
(c) The ability to use its power over the investee to affect the
    amount of the investor's returns.

ALL THREE must be present. Control is not a bright-line
percentage test — though >50% of voting rights normally
confers control.

Presentation. Single set of consolidated statements; NCI presented within equity, separately from parent shareholders' equity.

Disclosure. Composition of the group, NCI details, restrictions on accessing group assets.

Difference from NRB regulatory treatment. NRB regulates the licensed bank, and capital adequacy, CD ratio and most directive ratios are computed on the standalone entity even though the report presents both columns [R]. Consolidated supervision applies additionally.

Related terms. 8.A.7, 8.A.9, 8.A.10 · Part 1.10

Power over the investee

The first limb of the NFRS 10 control test — existing rights that give the current ability to direct the relevant activities (those that significantly affect the investee's returns). Usually voting rights, but can arise from contractual arrangements.

Non-Controlling Interest (NCI)

The report's own definition: "Non-Controlling Interest (NCI) refers to ownership of a company, which does not give the shareholder the control of the company."

Fully covered in Part 1.35 with the consolidation logic and the EPS/ROE consequences.

(NMB Group: NPR 530,872 thousand — the 49% of NMB Laghubitta.)