Chapter 8 · Part 8 — Accounting Policies, NFRS and NAS

Employee benefits, leases and deferred tax

Four NAS 19 categories with three different destinations, the Day 1 difference on staff loans, and NFRS 16.

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Defined benefit obligations

The present value of expected future payments required to settle the obligation arising from employee service in the current and prior periods, determined by actuarial valuation.

Measured under the projected unit credit method, discounted at a rate referenced to high-quality corporate or government bond yields.

Sits in Other liabilities (Part 1.26).

The discount-rate mechanics — the dominant driver of actuarial gains and losses — are worked at Part 3.6.

Long service leave

An other long-term employee benefit under NAS 19 — leave entitlement accumulating with service. The report notes it is measured at fair value. Remeasurement goes to profit or loss, not OCI (see 8.G.1).

Deferred Employee Expenditure

Simple definition. The value of below-market interest given to staff on their loans, recorded as a prepaid benefit and charged to staff costs over time.

Fully worked in Part 1.16. (NPR 3.07 billion — a very large component of Other assets.)

The report's policy:

Concessional loans

Loans to employees at below-market interest rates under the bank's Staff Bylaws. Measured at amortised cost by discounting future cash flows at the prevailing market rate for a similar asset — which is what creates the Day 1 difference.

Day 1 difference

Simple definition. The gap between the cash lent to an employee and the fair value of that loan, being employee compensation paid up front.

The mechanism, from the report:

Worked illustration.

Bank lends a staff member NPR 5,000,000 for 10 years at 5%.
Market rate for a comparable loan: 11%.

Fair value = PV of the 5% cash flows discounted at 11%
           ≈ NPR 3,850,000  (illustrative)

Day 1 difference = 5,000,000 − 3,850,000 = NPR 1,150,000

Dr  Loan to employee (at fair value)     3,850,000
Dr  Deferred employee expenditure        1,150,000
    Cr  Cash                                        5,000,000

THEN, over the expected service period:
Dr  Personnel expenses                     115,000/yr
    Cr  Deferred employee expenditure               115,000/yr

AND the loan unwinds from 3,850,000 back to par at 11%:
Dr  Loan to employee                       ~423,500/yr
    Cr  Interest income                              ~423,500/yr

⇒ Cost to Personnel expenses, income to Net interest income.
  Net effect on profit ≈ NIL, as the report states.

Prepaid employee benefit

The asset created by the Day 1 difference, sitting in Other assets and amortised to personnel expenses over the expected service period. Same item as Deferred Employee Expenditure.

Voluntary Retirement Scheme (VRS)

Simple definition. An offer to employees to leave early in exchange for a package.

Technical definition. A termination benefit under NAS 19, recognised when the entity can no longer withdraw the offer or when related restructuring costs are recognised, whichever is earlier.

What happened at NMB, and why it matters — full treatment at Part 2.14.

THE CHAIN OF CONSEQUENCE

VRS offered → employees leave → they settle their staff
housing loans early
                 │
                 ▼
The expected SERVICE PERIOD over which the Day 1 difference
was being amortised ENDS EARLY
                 │
                 ▼
The remaining unamortised prepaid benefit (NPR 204.5m) has
no future service to attach to
                 │
                 ▼
REVERSED — credited to Personnel expenses
                 │
                 ▼
Reported staff cost looks FLAT (+0.30%)
Adjusted staff cost actually ROSE ~7.02%

Related terms. Part 1.16 · Part 2.14 · 8.G.4, 8.G.6

Unamortised employee benefit cost

The portion of the Day 1 difference not yet charged to personnel expenses. NPR 204.5 million of it was reversed on the VRS settlements.

Retirement Benefits

The report's umbrella heading: "The Bank offers retirement benefits to its confirmed employee, mainly provident fund, gratuity and accumulated sick leave, all payable at the time of separation from service."

Note the qualifier "confirmed employee" — probationary staff are excluded, which affects the actuarial population.

Provident fund

A defined contribution plan. The report: "Provident fund is recognised at the time of contribution to the fund which is independent to the Bank."

The key phrase is "independent to the Bank." Once contributed, the fund is outside the bank's control and the obligation is discharged.

Dr  Personnel expenses           XXX
    Cr  Cash / PF payable                XXX

No actuary. No OCI. No further obligation.

Gratuity

A defined benefit plan. The report: "Provision for gratuity is made on the basis of actuarial valuation (done annually) carried out by an Actuary as per the provisions of Nepal Accounting Standards. At the time of separation from service, cash payments are made to the employees and the amount is computed as per the Bank's Policy."

The accounting split (NAS 19):

Current service cost        →  PROFIT OR LOSS (personnel expenses)
Net interest on the net
  defined benefit liability →  PROFIT OR LOSS
REMEASUREMENT (actuarial
  gains and losses)         →  OCI, permanently, never recycled

Fully worked, with the discount-rate mechanics, at Part 3.6.

(NMB Group actuarial loss: NPR 58,594 thousand, with tax of NPR 38,358 thousand.)

Accumulated sick leave

An other long-term benefit, actuarially valued. The report applies the same wording as for gratuity. Note the NAS 19 distinction at 8.G.1: remeasurement of other long-term benefits goes to profit or loss, not OCI.

Accumulated home leave

As for accumulated sick leave. The report: "At the time of separation from service or eligible accumulated leaves, cash payments are made to the employees and the amount is computed as per the Bank's Policy."

Actuarial valuation

Simple definition. A professional estimate of what the bank's employee promises will cost.

Technical definition. The determination by a qualified actuary of the present value of defined benefit obligations using the projected unit credit method and a set of financial and demographic assumptions.

The assumptions, and their direction of effect:

Assumption	If it rises	Effect on obligation
Discount rate	↑	↓ obligation → actuarial gain
Salary growth	↑	↑ obligation → actuarial loss
Employee turnover	↑	↓ obligation (fewer reach entitlement)
Life expectancy	↑	↑ obligation
Retirement age	↑	↓ obligation (paid later)

The frequency, and its consequence. The report: "The actuary valuation is done on annual basis only."

Q1  Q2  Q3   ────────── Q4 ──────────
 0   0   0    ENTIRE YEAR'S REMEASUREMENT

⇒ Never annualise a Q4 OCI or personnel-expense figure
⇒ A Q4 swing is a once-a-year true-up, not a trend

Related terms. Part 3.6 · Part 2.14 · 8.G.2, 8.G.12

— LEASES, TAX, CAPITAL AND PROVISIONS (25 terms)

Operating Lease

The report's policy:

Leases (NFRS 16)

Objective of the standard. To ensure lessees and lessors provide relevant information that faithfully represents lease transactions, principally by requiring lessees to recognise assets and liabilities for most leases.

The single-model change and why it matters to a bank.

┌──────────────────────────────────────────────────────────────────┐
│  BEFORE NFRS 16 (NAS 17)          AFTER NFRS 16                  │
│  ───────────────────────          ─────────────                  │
│  Operating lease:                 ALL leases (with limited        │
│  • Nothing on the balance sheet   exemptions for short-term and  │
│  • Straight-line rent expense     low-value):                    │
│    in operating expenses          • ROU ASSET recognised          │
│                                   • LEASE LIABILITY recognised    │
│                                   • Rent expense REPLACED by:     │
│                                       - depreciation of ROU       │
│                                       - interest on the liability │
└──────────────────────────────────────────────────────────────────┘

The P&L reclassification effect.

Annual rent NPR 10,000,000 on a 5-year branch lease

OLD:  Other operating expenses          10,000,000

NEW:  Depreciation of ROU asset          ~8,500,000
      Interest on lease liability        ~2,000,000  (year 1)
                                        ───────────
                                         10,500,000  (front-loaded)

⇒ Other operating expenses FALL
⇒ Depreciation & Amortisation RISES
⇒ Interest expense RISES
⇒ Total expense is FRONT-LOADED (higher early, lower later)

Nepali relevance. Nepali banks lease the large majority of their branch network. A bank with 100+ branches on 5–10 year leases carries a material ROU asset and lease liability.

Where they sit in NMB's accounts — per the report's own note: ROU assets inside Property and equipment (Part 1.13); lease liabilities inside Other liabilities (Part 1.26).

Related terms. Part 1.13, 1.26 · Part 2.15, 2.16 · 8.H.3, 8.H.4

ROU (right-of-use) assets

The lessee's right to use the leased asset over the lease term, recognised at the present value of lease payments plus initial direct costs, and depreciated over the lease term. Included within Property and equipment.

Lease liabilities

The obligation to make lease payments, measured at the present value of remaining payments discounted at the rate implicit in the lease or the lessee's incremental borrowing rate. Included within Other liabilities. The unwinding of the discount is interest expense.

Current Income Tax

Fully covered in Parts 1.9, 1.23 and 2.22. The report: "Provision for current income tax is made in accordance with the provisions of the prevailing Income Tax Act, 2058 and Rules framed there under."

Income Tax Act 2058

Nepal's principal income tax legislation, amended annually by the Finance Act. It determines taxable profit, allowable deductions, tax depreciation, TDS obligations and the rate applicable to banks and financial institutions.

Deferred Tax

The report's policy:

Note

"Deferred tax is recognised on the differences between the carrying amount of assets and liabilities in the financial statements and corresponding tax bases used in the computation provided on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined by using tax rates (and laws) that have been enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax related to temporary differences in opening balances is credited or charged directly to equity and subsequent year differences are recognised in the income statement together with the deferred gain or loss."

Fully worked in Parts 1.15, 1.25, 2.23 and 7.13.

The asymmetry to remember:

DEFERRED TAX LIABILITY  →  recognised in FULL, no test
DEFERRED TAX ASSET      →  recognised ONLY to the extent future
                           taxable profit is PROBABLE

Prudence: recognise obligations fully, benefits cautiously.

And the NRB overlay: the DTA is appropriated out of distributable profit (Part 7.13) and typically deducted from regulatory capital [R] (Part 6.10). Two independent blocks on the same item.

Temporary differences

Differences between the carrying amount of an asset or liability in the accounts and its tax base. Deductible temporary differences give rise to DTAs; taxable temporary differences give rise to DTLs. Full table of Nepali bank examples at Part 1.15.

Tax base / Carrying amount

CARRYING AMOUNT  =  the value in the NFRS financial statements
TAX BASE         =  the value attributed for tax purposes under
                    the Income Tax Act 2058

Temporary difference = Carrying amount − Tax base

Deferred income tax asset / liability

The balance sheet consequences of temporary differences. Fully covered in Parts 1.15 and 1.25, including offsetting rules and the regulatory treatment.

Share capital and reserves

The report's policy heading covering the NAS 32 debt-vs-equity classification and the PNCPS. Fully covered in Parts 1.30–1.33 and Part 5.

Financial Instruments: Presentation (NAS 32)

Objective. To establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities.

The classification principle, as the report states it:

THE SINGLE TEST:
Is there a CONTRACTUAL OBLIGATION to deliver cash
(or a variable number of own shares)?

YES → FINANCIAL LIABILITY
NO  → EQUITY

Note: economic compulsion is NOT the same as contractual
obligation. A bank may feel commercially obliged to pay a
PNCPS dividend to protect its market standing — but if the
contract gives it discretion, the instrument is equity.

Also governs offsetting — see 8.C.16.

Related terms. Part 1.30 · 8.C.16 · 8.H.13

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