Revenue recognition and non-financial assets

— REVENUE RECOGNITION (24 terms)

Revenue recognition

The report's principle:

The split of authority.

INTEREST income   →  NFRS 9 (effective interest method)
                     + NRB Interest Income Recognition Guidelines
FEE income        →  NFRS 15 (performance obligations)
DIVIDEND income   →  NFRS 9 (when the right to receive is established)
TRADING income    →  NFRS 9 (fair value)

Related terms. Part 2.1–2.9 · 8.E.2–8.E.24

Revenue from Contracts with Customers (NFRS 15)

Objective. To establish principles for reporting useful information about the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers.

The five-step model.

1. Identify the CONTRACT with a customer
2. Identify the PERFORMANCE OBLIGATIONS in the contract
3. Determine the TRANSACTION PRICE
4. ALLOCATE the transaction price to the performance obligations
5. RECOGNISE revenue WHEN (or AS) each performance obligation
   is satisfied

Applied to a Nepali bank's fee income.

POINT-IN-TIME obligations (recognise immediately)
  • LC issuance commission — the LC is issued, obligation done
  • Remittance fee — the transfer is executed
  • Card issuance fee — the card is issued
  • Brokerage — the trade is executed

OVER-TIME obligations (recognise across the period)
  • Commitment fee on an undrawn facility — the bank stands
    ready throughout the period
  • Locker rental — access provided over the rental term
  • Asset management fee — management provided continuously
  • Loan management fee — servicing provided over the loan life

Journal entry for an over-time obligation — worked in Part 2.4.

Scope exclusion. NFRS 15 explicitly excludes financial instruments and interest — those are NFRS 9.

Related terms. Part 2.4 · 8.E.6–8.E.19

Net interest income

Fully covered in Part 2.3. The report's policy note: "Interest income and expenses are recognised in profit or loss for all interest-bearing instruments on an accrual basis using the effective interest method."

Effective interest method / EIR

Simple definition. Spreading a loan's total return evenly over its life, including fees, so the reported yield reflects the true economics.

Technical definition. The report: "The effective interest rate is the rate that exactly discounts the expected estimated future cash payments and receipts through the expected life of the financial asset or liability."

Formula and full worked treatment in Part 2.1.

The Nepali transition — restated because it is critical

┌───────────────────────────────────────────────────────────────┐
│  TWO POPULATIONS RUNNING IN PARALLEL                          │
│                                                               │
│  Loans booked ≤ Asar end 2083  →  GROSS INTEREST RATE         │
│  ("old term loans")               fees recognised separately  │
│                                                               │
│  Loans booked ≥ FY 2083/84     →  EFFECTIVE INTEREST RATE     │
│                                   integral fees in the yield  │
├───────────────────────────────────────────────────────────────┤
│  ANALYTICAL CONSEQUENCE                                       │
│  As the old book runs off and the new book grows, reported    │
│  INTEREST INCOME and FEE INCOME will shift between each       │
│  other for methodological reasons. Do not read that shift     │
│  as a change in pricing or product mix.                       │
│                                                               │
│  Use *Net interest, fee and commission income* (Part 2.7)     │
│  for cross-period and cross-bank comparison — it is immune.   │
└───────────────────────────────────────────────────────────────┘

Related terms. Part 2.1, 2.4, 2.7 · Gross Interest Rate · 8.C.3

Gross Interest Rate

The contractual coupon rate applied to the principal outstanding, without spreading integral fees. The basis used for "old term loans" booked up to Asar end 2083, per the transition above.

Fees and commission income

Fully covered in Part 2.4, including the NFRS 9 / NFRS 15 split rule and the full list of fee types.

8.E.7–8.E.19 The thirteen named fee types

The report enumerates these under fees and commission income. Each is a performance obligation under NFRS 15; the recognition question is always point in time or over time.

Dividend Income

The report's policy:

Two rules in one sentence.

1. RECOGNITION POINT: when the RIGHT to receive is established —
   i.e. when the dividend is DECLARED and approved, not when
   it is received in cash.

2. BONUS SHARES ARE NOT INCOME.
   Receiving 100 bonus shares on a holding of 1,000 gives you
   1,100 shares at the SAME total cost. Cost per share falls;
   total cost is unchanged. Recognising income would
   double-count value already in the share price.

Where it lands. Other operating income (Part 2.9). Even for FVOCI-designated equity investments, dividends go to profit or loss — only fair value changes go to OCI (Part 3.4).

Related terms. Part 2.9 · Part 3.4 · Part 4.3 · Bonus shares

Bonus shares

Two distinct meanings — do not confuse them:

BONUS SHARES RECEIVED (as an investor)     → 8.E.20: NOT income
BONUS SHARES ISSUED (by the bank)          → Part 5.25, 7.20:
                                              retained earnings
                                              capitalised

Net Trading Gain

The report's policy:

Fully covered in Part 2.8, including the critical distinction from FX revaluation.

Unrealized fair value changes

Changes in fair value not yet realised through sale. Their destination depends entirely on classification:

FVTPL          →  PROFIT OR LOSS (Net trading income)
FVOCI-debt     →  OCI, recycled to P&L on sale
FVOCI-equity   →  OCI, NEVER recycled
Amortised cost →  not recognised at all

Discounting

The report's policy:

The principle. A rupee receivable in three years is worth less than a rupee today. Discounting converts future amounts to present value:

                Future amount
PV  =  ──────────────────────────
            (1 + r)ⁿ

Where it appears in a bank's accounts:

• EIR calculation (8.E.4)
• ECL — expected recoveries discounted to present value (8.D.10)
• Employee benefit obligations (NAS 19 — the discount rate that drives actuarial gains/losses)
• Lease liabilities (NFRS 16)
• Provisions (NAS 37, where the time value is material)
• The Day 1 difference on concessional staff loans (8.G.6)

Materiality qualifier. Discounting is applied only where the effect is material — a practical expedient that avoids discounting short-dated items.

Related terms. 8.D.10 · 8.E.4 · 8.G.15 · 8.H.3

— NON-FINANCIAL ASSETS (13 terms)

Property, plant and equipment (PPE) — NAS 16

Objective of the standard. To prescribe the accounting treatment for property, plant and equipment so users can discern information about an entity's investment in its PPE and the changes in such investment.

Recognition. When it is probable that future economic benefits will flow and cost can be measured reliably.

Initial measurement. Cost, comprising purchase price, directly attributable costs of bringing the asset to working condition, and any dismantling obligation.

Subsequent measurement. A policy choice — cost model or revaluation model. NMB uses the cost model.

Full treatment, including the depreciation table and journal entries, in Part 1.13.

Intangible Assets

Identifiable non-monetary assets without physical substance — for a bank, essentially software and licences, amortised straight-line over 5 years per the report's policy. Goodwill is excluded (not amortised). See Part 1.14.

Cost Model

Carrying an asset at cost less accumulated depreciation and accumulated impairment. NMB's stated choice: "Property, plant and equipment and Intangible assets (software) are stated at cost less accumulated depreciation (Cost Model)."

Consequence: no revaluation surplus, which is why the Revaluation Reserve column (Part 5.7) and the OCI revaluation line (Part 3.5) are both nil.

Accumulated depreciation

The cumulative depreciation charged since acquisition, deducted from cost to give the carrying amount.

Carrying amount = Cost − Accumulated depreciation − Accumulated impairment

Straight Line method

Allocating the depreciable amount evenly over the useful life. The report: "Depreciation of others is charged to Statement of Profit and Loss on Straight Line method over the useful life of those assets."

Annual depreciation = (Cost − Residual value) ÷ Useful life

Estimated useful life

The period over which an asset is expected to be available for use. NMB's table: buildings 40 years, office equipment 7, computers 5, furniture & fixtures 7, vehicles 7, software 5.

A change in useful life is a change in accounting ESTIMATE (NAS 8) — applied prospectively, with no restatement. See Part 5.13.

Rate of Depreciation

The percentage equivalent of the useful life under the straight-line method:

Rate = 1 ÷ Useful life
Buildings   1 ÷ 40 =  2.50%
Computers   1 ÷ 5  = 20.00%
7-year      1 ÷ 7  = 14.28%

Leasehold improvements

Fit-out costs on leased premises — branch interiors, counters, security installations. The report: "Leasehold improvements are capitalised at cost and amortised over period of lease."

Nepali relevance. Nepali banks lease most branch premises, so leasehold improvements are a significant and recurring capex item.

Capitalised and amortised

Recording an expenditure as an asset rather than an expense, then charging it to profit over the period it benefits. Applies to leasehold improvements, software, and the Day 1 difference on concessional staff loans (8.G.6).

Investment property

Fully covered in Part 1.12. For a Nepali bank this means non-banking assets — foreclosed land and buildings — held at fair value and not depreciated.

Non-banking assets

The Nepal-specific term. Land and buildings acquired by the bank in settlement of a defaulted loan.

The report's policy: "The Group has recognized as investment property all land or land and building acquired as non-banking assets. Non-banking assets (only land and building) are initially recognized at fair value. Since it is not intended for owner-occupied use, a depreciation charge is not raised."

The full regulatory overlay — NRB provisioning on NBAs [R], the distributable-profit appropriation (Part 7.12) and the NPL-flattering loophole it closes — is worked in Parts 1.12 and 7.12.

Non-Current Assets Held for Sale & Discontinued Operations (NFRS 5)

The standard governing assets whose carrying amount will be recovered principally through a sale transaction rather than continuing use. Referenced in the report's investment property policy as a scope exclusion — assets classified as held for sale under NFRS 5 are not investment property under NAS 40.

Measurement under NFRS 5: lower of carrying amount and fair value less costs to sell; depreciation ceases.

Investment Property (NAS 40)

Objective. To prescribe the accounting treatment for investment property and related disclosures.

Scope. Land or buildings held to earn rentals or for capital appreciation, rather than for use in the supply of services or for administrative purposes.

Measurement choice. Fair value model or cost model. NMB applies fair value with no depreciation for NBAs.

Boundary with NAS 16. Owner-occupied property is NAS 16 (Part 1.13); property held for rental or appreciation is NAS 40 (Part 1.12).

— EMPLOYEE BENEFITS (15 terms)

Employee Benefits (NAS 19)

Objective of the standard. To prescribe the accounting and disclosure for employee benefits, requiring recognition of a liability when an employee has provided service in exchange for benefits to be paid in the future, and an expense when the entity consumes the economic benefit of that service.

Scope. All employee benefits except share-based payment (NFRS 2).

The four categories, and where each lands.

┌──────────────────────────────────────────────────────────────────┐
│  1. SHORT-TERM BENEFITS                                          │
│     Salary, allowances, bonus, paid leave due within 12 months   │
│     → Undiscounted, expensed as incurred                         │
│     → PROFIT OR LOSS                                             │
├──────────────────────────────────────────────────────────────────┤
│  2. POST-EMPLOYMENT BENEFITS                                     │
│     ┌────────────────────────┬───────────────────────────────┐   │
│     │ DEFINED CONTRIBUTION   │ DEFINED BENEFIT               │   │
│     │ (Provident Fund)       │ (Gratuity)                    │   │
│     │                        │                               │   │
│     │ Fixed contribution;    │ Promised benefit; the bank    │   │
│     │ obligation ENDS on     │ bears the risk that the cost  │   │
│     │ payment                │ turns out higher              │   │
│     │                        │                               │   │
│     │ Expense = contribution │ ACTUARIAL VALUATION required  │   │
│     │ NO actuary             │ Service cost + net interest   │   │
│     │ NO OCI                 │   → PROFIT OR LOSS            │   │
│     │                        │ Remeasurement → OCI           │   │
│     └────────────────────────┴───────────────────────────────┘   │
├──────────────────────────────────────────────────────────────────┤
│  3. OTHER LONG-TERM BENEFITS                                     │
│     Accumulated sick leave, accumulated home leave,              │
│     long service leave                                           │
│     → Actuarially valued                                         │
│     → ! REMEASUREMENT GOES TO PROFIT OR LOSS, NOT OCI            │
│       (this differs from defined benefit plans)                  │
├──────────────────────────────────────────────────────────────────┤
│  4. TERMINATION BENEFITS                                         │
│     Payments for ending employment — e.g. under a VRS            │
│     → Recognised when the entity can no longer withdraw          │
│       the offer                                                  │
│     → PROFIT OR LOSS                                             │
└──────────────────────────────────────────────────────────────────┘

The report's application: provident fund (defined contribution), gratuity, accumulated sick leave and accumulated home leave (all actuarially valued), plus the VRS termination event.

Related terms. Part 1.26 · Part 2.14 · Part 3.6 · Part 10 (KMP compensation)