Ican Journal March 2016

CAHARTERED
CCOUNTANT
T H E
N E P A L
March 2016
Vol. 18 No. 3
Journal of the Institute of Chartered Accountants of Nepal
Hap
py N
ew Y
ear 2
0
73
March 2016
Vol. 18 No. 3
CA. Prakash Lamsal

CA. Mahesh Khanal
CA. Nil Bahadur Saru Magar
CA. Hemanta Pokharel
CA. Sanju Adhikari
CA. Shraddha Singh Shrestha
RA. Dev Bahadur Bohara
RA. Surendra Keshar Amatya
RA. Dharanidhar Adhikari
Mr. Binod Prasad Neupane
Chairman
Vice-Chairman
Member
Member
Member
Member
Member
Member
Member
Secretary
Editorial
President's Message
Accounting
Accounting for Employee Loans
- CA. Pooja Gupta
Economy
Bull is Bullish
- CA. Anal Raj Bhattarai
Working of the Fixed Exchange Rate Regime:

Some Country Evidences Relevant for Nepal
10
NRBs Decision to Hike Paid-up Capital by Multifold :

More of Tyranny Less of Foresight
15
Multinational Company: An Introduction
23
- Mr. Tula Raj Basyal
- CA. Biswash Gauchan
- Mr. Gyan Mani Adhikari
Information Technology
Ransomware A Dangerous Threat to your Digital Files
27
IT Governance and Auditing Entity-Level Controls
30
- CA. Mukunda Pokharel
- CA. Gaurav Khwaunju Shrestha
Taxation
Thin Capitalization- Highly Talked Issue in International Taxation
43
News
46
- CA. Kaushlendra Jha
Global Nepal Printing Press Service Pvt. Ltd.

Tel: 4102772
Notices
Contribution
NB Bank Ltd.
Nabil Capital
Sipradi Trading Pvt.Ltd.
Butwal Power Company Ltd.
Tourism Development Bank Ltd.
Nepal Telecom
7, 22, 42
The Institute of Chartered Accountants of Nepal (ICAN) has signed Membership Pathway
Agreement (MPA) on 10 March 2016 with CPA Australia to further develop the relationship
between the two bodies. This agreement has opened up avenues to ICAN domiciled
members to become the member of CPA Australia subject to some conditions. It is the
first ever membership agreement signed by ICAN with foreign professional accountancy
organization (PAO). It has created new thresholds in leadership and influence by reaching
out to global accounting regulators and foreign accounting institutions to the extent that
it is appreciated by all members of ICAN. In addition, the agreement paves the way for
creating new professional opportunities for members in the global arena.
CPA Australia is one of the largest accounting bodies with a membership of more than
150,000 finance, accounting and business professionals in 121 countries across the globe.
CPA Australias core services to Members include education, training, technical support
and advocacy. Employees and Members work together with local and international
bodies to represent the views and concerns of the profession to governments, regulators,
industries, academia and the general public.
Being a socially aware responsible institution, ICAN has not only wholeheartedly
supported the concerned government authorities with constructive suggestions and inputs
towards the formulation or the revision of legislation but rather always contributed actively
to develop, protect and promote the accounting profession by making the members and
the practicing accountants understand the responsibility towards the importance of the
accounting profession for the growth national economy.
The Professional Development Committee (PDC) of the institute will continue its efforts
towards increasing the professional opportunities available to the members by exploring
new areas where the expertise of the members could be utilized in a productive and fruitful
manner. As a part of this process, it will continue to discuss with foreign bodies, regulatory
authorities, and users of services of the profession.
Some initiatives are also under way for getting recognition of CA qualification with other
professional accounting bodies. The ICAN is always aware of playing a proactive role
on the international front to fructify its goals of globally building a brand image of the
profession across the world.
Dear Professional Colleagues,

It is my immense pleasure to use this medium to share with
you some of the activities performed by the Institute over the
period January 2016- March 2016. During this period, ICAN
carried out activities like educational programs, continuous
development of its members, strengthening of international
relation etc.
Students, Education and Educational Plan
We successfully conducted 15 days training on CA and AT
courses (9th batch) on General Management and Communication
Skill (GMCS) at ICAN premises, Satdobato from 12 March
to 3 April, 2016. In total 39 students participated the training
Program.
The result of Chartered Accountancy examination held in the
month of December 2015 has been published on February 14,
2016. The successful candidates shall be eligible for obtaining
ICAN membership on fulfilling necessary requirements
prescribed by the Institute.
In a bid to disseminate the importance and generate awareness
about chartered accountancy education to students, parents
and other stakeholders, the Institute as its regular activity
organized career counseling program in different parts of the
country. This activity is useful to attract the students in CA
education and deliver them the requirements for becoming
Chartered Accountant.
National Convention on Spectrum of Opportunities for CA
Students was held on18th &19th March, 2016, which was
jointly organized by the Institute of Chartered Accountants
of Nepal (ICAN) and its students wing Nepal Chartered
Accountant Students Association (NCASA) in Biratnagar,
Morang. Altogether 297 individuals participated in the
convention.
Member and Professional Activities
Its a matter of proud that The Institute of Chartered Accountant
of Nepal celebrated its 19th Anniversary with special function
at Hotel Yak & Yeti, Kathmandu on 2072/10/17 (31 January
2016) in the presence of The Honorable Minister of Finance
Mr. Bishnu Prasad Poudel. The Chief Guest, Special Guest
and Guest of Honors applauded the Institute for the progress
achieved and suggested to improve its regulatory regime.
Addressing the function, the chief guest suggested the

members of the Institute to respect ethical values and
professional standards while providing their services.
During the function the Institute honored the First and
Second Councils Presidents, Staff of the Institute and
given away the Gold and Silver Medals to merit holder
students of different levels of CA exams.
I would like to mention that the Institute has started
the practice of selecting the best article of the year
published in the ICAN Journal from 2072 B.S. In this
connection, the article titled Accounting Professionals
to Improve Governance and Financial Management
System in Corporate and Public Financial Management
(PFM) Sector was selected as the best article which was
published in Vol.17 No.3, March 2015 issue of The Nepal
The Institute organized 60 hours training course for
Registered Auditor members on NFRS/NAS from
22 January to 26 March, 2016 in order to enhance the
capacity of the accounting professionals of various
sectors and provide the knowledge on NFRS/NAS for
adoption in their organizations.
The conference themed Earthquake & Supply
Constraints- Opportunities & Challenges was organized
by coinciding with 19th anniversary day of the Institute.
The conference was attended by 100 individuals that
included the members and non-members of the Institute.
International Relation
I would like to share that the Institute has continued its
efforts to enhance the capability of its members with this
view, the Institute of Chartered Accountants of Nepal
arranged an exposure cum study visit of Malaysia and
Singapore from 27 February to 03 March 2016 for its
members with the objective of providing exposure of
Malaysian Institute of Accountants (MIA), National
Audit Department of Malaysia (NADM) and some
accounting firms in Malaysia. The delegation comprising
14 members attended the meeting with the representatives
from MIA and Auditor General of Malaysia and shared the
organizational system, processes and business practices
in Malaysia.
It is my pleasure to bring in the notice of the entire

membership that after long deliberations with CPA
Australia, ICAN has signed Membership Pathway
Agreement with CPA Australia on 10thMarch 2016. It
is the first ever membership agreement signed by ICAN
with foreign PAO. This pathway can help opening
the avenues to the ICAN domiciled CA to enter in an
International accounting arena.
In course of participating International events, on 26
January 2016 one of our Council Members as a resource
person attended the conference which was jointly
organized by ICASL, IFAC and SAFA in Colombo,
Sri-Lanka and presented a paper on behalf of the Institute.
I would like to inform that as a Board Member of SAFA,
I attended the SAFA Committee meetings held in Lahore,
Pakistan on 28-29 January, 2016 representing the Institute.
Institutional Development
It is reiterated that the Institute has already formed a
Quality Assurance Board to monitor the quality of the
audit firms. It has already started carrying out its functions
and is planning to conduct an interaction program with
key regulators and members of the Institute in near future.
The Institute has published its Citizen Charter for its
members, students and all stakeholders to obtain the
rquired information. I hope this Charter will help to all
stakeholders for getting services in time.
I assure the members that I will continue to update you
via this journal and other medium about the progress of
the Institute regularly.
Before I conclude I wish to extend my greetings of Happy
New Year 2073(B.S.) to all the members.
Best wishes !
CA. Prakash Lamsal

President
ACCOUNTING
Accounting for Employee Loans
Whenever the loan is granted to

an employee, the next question
which comes in the mind of
the employer is if he leaves the
company - Should he repay
the entire loan back? Can he
continue with the loan but at
market rates? or Can he continue
with the loan as per the present
agreement terms of subsidized
rates? The accounting treatment
will depend on the answers to the
above questions.
This article takes us through the

example of accounting for loans
given to the employees at subsidized
or below market interest rates.
Similar accounting treatment is
applied in many circumstances
where subsidized or interest free
loans are disbursed:
CA. Pooja Gupta

CA. Gupta is the writer works in Mumbai and is
author of the book Financial Instruments Standards
She can be reached at
capooja@yahoo.com
1. By a Government to support
some sort of activities of a
company;
2. By a holding/parent company to
its subsidiary or vice versa
IFRS Rules for Employee

Loans
There are two aspects which we can
look in an employee loan transaction.
One it meets the definition of
financial instrument under IFRS
9 / IAS 39. Second, some employee
gets some benefits from the
transaction which can be in the scope
of either IAS 19 Employee Benefits
or IFRS 2 Share based Payments.
For a simple understanding of
accounting of the transaction of
employee loans we ignore the share
based payments.
The Nepal Chartered Accountant
March 2016
ACCOUNTING
Case Study:
IStaR Ltd. provided a loan of Rs. 200,000/- to its employee
Ms. Galaxy on 1-April-20X1 @ 5% repayable in 3 equal
installments. At the end of each year installment due will
be Rs. 73,442/- (Note: if you discount Rs.73,442 with 5%
discount factor for 3 years you will get Rs.200,000/-). The
market interest rate was 9% when the loan was disbursed
to Ms. Galaxy.
We will now look at the accounting treatment of the
employee loan in the books of IStaR Ltd.
Recognition and Measurement of

Employee Loans
IFRS 9/ IAS 39 states that financial asset (employee loan in
our case) should be recognized on the balance sheet at fair
value when the entity enters into a contract with the party.
We have classified the loan in Amortized Cost category
under IFRS 9 or Loans and Receivables category under
IAS 39.
Fair Value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
We can infer from the above definition that Rs. 200,000/is not the fair value at initial recognition. So then what is
the fair value for IStaR Ltd. of Ms. Galaxys loan?
In order to determine the fair value IStaR will need to the
following:
a. Know the market interest rate for similar loans
(here, 9%)
b. Discount all future estimated cash flows of the
loan with 9% discount rate to arrive at the present
value of the loan. The present value is the Fair
Value of the employee loan.
The PV function in Excel will give us an amount of Rs.
185,903/- (=PV(9%,3,73442,0,0).
March 2016
The difference amount of Rs. 14,097/- between the

loan disbursed amount Rs. 200,000/- and fair value Rs.
185,903/- will normally be recognized upfront in the profit
and loss account. However, this difference is an employee
benefit and must be recognized as per the general
principles of IAS 19 since this standard does not provide
any guidance of accounting for this kind of transaction.
Employee Benefits
Whenever the loan is granted to an employee, the next
question which comes in the mind of the employer is
if he leaves the company - Should he repay the entire
loan back? Can he continue with the loan but at market
rates? or Can he continue with the loan as per the present
agreement terms of subsidized rates?
The accounting treatment will depend on the answers to
the above questions.
If the employee can continuewith the loan under the
same advantageous conditions even after he terminates
the employment, it means that the employee benefithas
already been earned.
In practical terms it is recognized straight in profit or
loss and the journal entry is:
Debit Profit or loss Employee benefits: 14,097
Debit Financial assets Loans: 185,903
Credit Bank: 200,000

If theloan will revert to a market interest rateafter

the employee leaves, then the benefit has not been fully
earned and is available only while the employee provides
services to the entity.
In line with IAS 19, an expense should be recognized
when the employee provides its services, therefore in this
case, we cannot recognize the full amount of Rs.14,097
in profit or loss at the time of making the loan.
Instead, we need todefer the expense and allocate it to
ACCOUNTING
the periods when the employee provides services.

The journal entry is:
Debit Deferred expenses for employee benefits:
14,097
Debit Financial assets Loans: 185,903
Credit Cash: 200,000

Amortize the Deferred expenses for employee benefits in

profit or loss but how? Amortization on straight line
basis is prohibited. There are several acceptable methods
but the most common one is based of effective interest
rate (EIR) method. The employee benefit will be treated
as short term benefit.
The cost of such an employee benefit in each period is
estimated as the difference between:
The interest income for the period based on the
fair value of the loan asset (using effective interest
method at the market rate of 9%); and
The interest payable by the employee (at 5%)

The following table will summarize the amortization

amount and the effective interest rate accounting:
Year
1
Amortized
Amortized Historical
Historical Difference
Cost at the
Cost at the Cost at the Interest
Cost at the (Amort
Start
EIR @ 9% Cashflow
End
Start
@ 5% Cashflow
End
amount)
185,903
16,731
67,378
6,064
129,192
11,627
73,442
129,192
200,000
10,000
73,442
136,558
6,731
73,442
69,945
3,497
73,442
2,567
73,442
67,378
136,558
6,828
73,442
69,944
Total
4,799
14,097
The journal entries at the end of the year 1:

#1 Interest income on the loan using the effective
interest method (at 9%):
Debit Financial Assets Loans: 16,731
Credit P/L Interest income: 16,731
#2 The 1st installment paid by the employee:
Debit Bank: 73,442
Credit Financial Assets Loans: 73,442

#3 The employee benefit resulting from the employee

loan:
Debit P/L Employee benefits: 6,731
Credit Deferred expenses for employee benefits: 6,731
For year 2 and year 3 entries similar to #2 and #3 above
will be passed. At the end of year 3 the loan will stand at
nil amount.
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March 2016
ECONOMY
Bull is Bullish
One thing that is certain, we will

have a bear market. In fact, in the
history of the stock market, we
always have bear markets after
bull markets and vice versa. The
question is when? We don't have
a clue when a bear market will
come. Do not let anyone fool
us into believing that they can
predict the market accurately.
CA. Anal Raj Bhattarai

CA. Bhattarai is a Fellow Member of ICAN.
He can be reached at
bhattaraiar@gmail.com
When the price of a particular share

rises, that stock is said to be "up,"
meaning up in price. When the price
falls, the stock is said to have gone
"down." An investor is said to be
"bearish" if they believe the stock
market will go down. A "bearish"
investor will buy stock cautiously.
A "bullish" investors believe the
market will go up. They will charge
ahead and put more money into the
market. Likewise, the term "bear
market" describes a time when
stock prices have been falling on the
whole.
March 2016
A "bull market" is a period when

stock prices are generally rising.
Bears are cautious animals who
don't like to move too fast. Bulls
are bold animals who might charge
right ahead. Unlike Spain, where
the running of the bulls is a tourist
attraction and participants really
enjoy, the raging bull in the stock
market is an entirely different
animal.
Due to non-economic reason, (which
most of us are aware of) for many
years we had shy bear in the stock
ECONOMY
market. But after the promogulation of new constitution

and logical ending of Tarai unrest, now we have muscular
bull in stock market.
The Nepalese bull has made impressive combat during
last twelve months. On the first week of April 2015 index
was hovering around 940 level but bullish bull had taken
market to all time high at 1377 on last week of March
2016. Many market players believe that market will
continue to behave like this during next fiscal year.
Conducive market conditions and adequate policy
response of the regulators, and availability of low-priced
credit, and impressive earning of listed companies, we
can easily predict that bull market may last for another
couple of years. The impressive bounces recorded on
during last quarter of current fiscal year 2015/16 with a
majestic jump of 190 points touching 1377 points making
record in the history of Nepalese Stock Market. This
trend is expected to continue for some time and coming
day market will move ahead creating new history.
After those majestic jumps, some of the stock analyst
had raised their concern saying market is overvalued.
Capital Market regulator had also issued various press
release cautioning investors to behave wisely. However,
many analyst had dare to take opposite views and
decided to follow the crowd. They are confident that
market will continues to have strong bull for coming
years.
At this juncture, let us examine doubts whether Nepalese
Stock market is overvalued or not? How soon we have
bear market? Are we heading for another bull market
during next fiscal year 2016/17?
I must confess here that, it is very difficult forecast
market behavior. Many times stock market had behaved
irrationally and at the sometime it had also worked as
catalyst to economic growth. Anyone attempting to jump
on the bull market better be very careful!
Looking at the market mix and nature of share traded in

Nepalese stock market, there is a general agreement that
the stock market is not marked to market value, meaning
that most stock prices are not trading at desirable
multiples of their earnings. As a result, climbing on the
stock market now could mean significant short-term gain.
Even if the correction occurs (some of analysts are
predicting), the new investors stands a good chance to
see their value of investments made today grow up by
10-15 percent within short period. Since investment in
the market involves risk, the investors need to be cautious
about their portfolio mix. Well mix portfolio structure is
highly recommended.
One thing that is certain, we will have a bear market.
In fact, in the history of the stock market, we always
have bear markets after bull markets and vice versa.
The question is when? We don't have a clue when a bear
market will come. Do not let anyone fool us into believing
that they can predict the market accurately. If we can't
forecast stock market movements, in that situation there
is not much point in wasting valuable time on it.
So why do investors worry about bear markets? They
worry because they don't want to lose money when their
stocks decline in value. In dire circumstances, you might
lose your money if your neighbor succeeds in forcing
you to sell your assets under his terms. However, the
"marketability" (Stock can be sold or bought easily in
the stock market) in the stock market gives peoples the
false impression that they can jump in and out quickly.
If you need to jump in and out frequently, then you will
naturally be troubled by market's volatility, as it becomes
a game of musical chairs. Over time, people usually earn
more from owning stock than from leaving money in the
bank, buying bonds, or making other investments.
March 2016
ECONOMY
Working of the Fixed Exchange Rate Regime:

Some Country Evidences Relevant for Nepal
With respect to Nepal, the IMF

Executive Board concluded the
Article IV Consultation in November
2015 concurring that the peg to the
Indian rupee continued to serve
as a transparent anchor and that
monetary policy should be geared
toward supporting the peg. While a
temporary increase in inflation as
a result of the recent supply shocks
should be accommodated, Directors
recommended that, as conditions
normalize, monetary policy be
reoriented to keeping Nepalese
inflation close to that in India.
1. An Introduction to
Fixed Exchange Rate
Regime
Mr. Tula Raj Basyal

Mr. Basyal is a Former Executive Director of
Nepal Rastra Bank.
tula.basyal@fulbrightmail.org
10
Exchange rates are fixed, flexible,

and variants of the two. In a fixed
exchange rate (FER), exchange rates
are set at officially determined levels
and are changed only by the direct
action of the authorities. In a flexible
or floating exchange rate system,
exchange rates are not officially fixed
but are determined by conditions of
supply and demand in the foreign
exchange market. In other words,
March 2016
in the FER regime, the central bank

signals its readiness to buy and sell
the domestic currency for foreign
currencies at a predetermined rate.
One of the greatest benefits of FER
is that it provides price stability,
the main objective of the monetary
authorities in most countries today.
By pegging the domestic currency
to the currency of a low-inflation
country, the ability to maintain price
stability is enhanced, provided there
is a strong commitment on the part of
the authorities to maintain the FER.
ECONOMY
Further, FER helps to avoid exchange rate fluctuations

and reduces the unfavorable effects of exchange rate
uncertainty on trade and investment. According to
the International Monetary Fund (IMF), the list of the
countries and the currencies to which they are pegged is
as described below (For example, the IMF categorizes
exchange rate arrangement of Nepal as well as that of
Bhutan, Lesotho, Namibia, and Swaziland along with
other countries as the conventional pegged arrangement,
with the number of such countries aggregating 42, as
listed in Text Table 1 below.)
Text Table 1. Countries Pegging their Currencies
Particulars
US dollar: (13 Countries)
1. The Bahamas, 2. Bahrain, 3. Barbados, 4. Belize,
5. Eritrea, 6. Jordan, 7. Oman, 8. Qatar, 9. Saudi
Arabia, 10. South Sudan, 11. Turkmenistan,
12. United Arab Emirates, and 13. Venezuela
Euro: (18 Countries)
1. Cabo Verde, 2. Comoros, 3. Denmark, 4. So Tom
and Prncipe, 5. Benin, 6. Burkina Faso, 7. Cte
dIvoire, 8. Guinea-Bissau, 9. Mali, 10. Niger,
11. Senegal, 12. Togo, 13. Cameroon, 14. Central
African Republic, 15. Chad, 16. Republic of Congo,
17. Equatorial Guinea, and 18. Gabon.
Composite Currencies (6 Countries)
1. Fiji, 2. Kuwait, 3. Libya, 4. Morocco, 5. Samoa,
and 6. Solomon Islands
South African Rand ( 3 Countries)
1. Lesotho, 2. Namibia, and 3. Swaziland
Indian Rupee: (2 Countries)
1. Bhutan and 2. Nepal
Source- International Monetary Fund, October 2014, Annual Report on Exchange
Arrangements and Exchange Restrictions, 65th Issue, Washington, DC
2. Fixed Exchange Regime in Lesotho,

Namibia, and Swaziland as well as
Bhutan and Nepal
On December 5, 1974, the Rand Monetary Area (RMA)
agreement was signed among Botswana, Lesotho, South
Africa, and Swaziland, formally establishing currency
union in this area. However, Botswana opted to withdraw

from the RMA in 1975 because of a desire to pursue
an independent monetary policy. On April 1, 1986, the
RMA agreement was revised to establish the Common
Monetary Area (CMA) comprising Lesotho, Swaziland,
and South Africa. Under the terms of agreement, Lesotho
and Swaziland continued issuing their own national
currencies. Namibia became independent in 1990, and
joined the CMA in 1992. Thus, the multilateral agreement
replaced the trilateral agreement when Namibia joined
the CMA. Namibia issued its own national currency, the
Namibian dollar, in 1993.
Lesotho, Namibia, and Swaziland have maintained
FER regime with South African rand. The CMA has
many of the characteristics of a monetary union, like
the exchange rates vis--vis other member countries are
fixed and, among them, there are no payment restrictions
and capital flows are free. CMA is a free trade area and
maintains common external tariff. In the external sector
transactions, CMA countries have adopted current
account convertibility. Among the CMA countries, there
is free capital mobility. Under the arrangement, while
national currencies circulate in small countries, there is a
de facto common currencythe South African rand. As
per the current parity arrangements, national currencies
of the small countries and the rand are perfect substitutes,
with no transaction cost in conversion. However, absence
of these arrangements like the single currency, common
central bank, external exchange rate anchor, common pool
of reserves, agreed convergence criteria, and regional
surveillance of domestic policies, particularly fiscal and
structural policies, etc. does not make the CMA a fullfledged monetary union like the European Union.
Bhutan and Nepal have maintained FER regime with
Indian Currency (IC) while the exchange rate arrangement
of India and South Africa is categorized as floating. Bhutan
has not adopted both current account and capital account
convertibility, both with India and other countries. Bhutan
March 2016
11
ECONOMY
first issued its own paper currency (ngultrum) in 1974

and pegged it at par with Indian rupee, which is adopted
as legal tender in Bhutan. So, both currencies exist
side by side and are used interchangeably for domestic
transactions, while only the Indian rupee is used for trade
with India. As an unknown quantity of Indian rupee also
circulates within Bhutan as legal tender, the extent of
monetization of Bhutan is difficult to estimate. Unlike the
CMA countries where there is capital account openness
within the CMA, Bhutan has not allowed current account
and capital account convertibility even with India. IC is
legal tender in Bhutan and ngultrum serves as the medium
of exchange for trade payments in the border areas.
On the other hand, the average inflation during the 24-year

period (1991-2014) was 7.6 percent in India, 5.9 percent in
Bhutan, and 7.6 percent in Nepal. The inflation in Bhutan
was lower than that in India while the inflation in Nepal
was equal to that in India. At the same time, the economic
growth during the same period averaged at 6.5 percent in
India compared to 6.7 percent in Bhutan and 4.5 percent
in Nepal (www.worldbank.org/indicator). Thus, the
economic growth in Bhutan was higher than that in India
whereas the economic growth in Nepal was lower than that
in India. The inflation effect of India was more dominant in
inflation in Nepal while the growth effect of India was less
effective in economic growth in Nepal.
In Nepal, the FER with the IC has been in operation since

April 16, 1960. Since September 17, 1966, the dual currency
was completely abolished by declaring that Nepalese
Currency (NC) was the only legal tender throughout the
country. The exchange rate of the NC with the US dollar
and other currencies was made flexible since February 12,
1993. There has been no capital account convertibility both
with India and the rest of the world. However, Nepal has
adopted current account convertibility for almost two and
a half decades under the Article VIII arrangement of the
IMF. Never the less, unlike in Bhutan, IC is not legal tender
in Nepal and NC is not accepted for payments in the border
trade.
As depicted in Table 1, among the seven economies under

review, Nepals per capita income in current US dollars
was lowest in 1994 and also in 2014. Increase in per capita
income in 2014 compared to 1994 in current US dollars
was also lowest in Nepal. Net change in external balance
of goods and services as percent of gross domestic product
(GDP) between 1994-2014 shows deteriorating balance
for six of the seven economies except for Lesotho which
witnessed 36.6 percent improvement over the period to a
deficit of 60.8 percent.
3. Macroeconomic Indicators
The average inflation during the 24-year period (1991-2014)
was 6.8 percent in South Africa, 4.5 percent in Lesotho, 5.9
percent in Namibia, and 7.9 percent in Swaziland (www.
imf.org/database). The inflation in Lesotho and Namibia
was lower while the inflation in Swaziland was higher
than that in South Africa. Similarly, the economic growth
during the same period averaged at 2.6 percent only in
South Africa compared to 4.0 percent in Lesotho, 4.1
percent in Namibia, and 3.1 percent in Swaziland. Thus,
the economic growth in Lesotho, Namibia, and Swaziland
was higher than that in South Africa.
12
March 2016
4. IMFs Assessment as per Article IV

Consultations of Some Countries
Adopting Fixed Exchange Rate Regime
The IMF generally reviews favorably the FER toward
serving the purpose of reducing economic fluctuations,
fostering better monetary conditions, and ensuring price
stability. In this respect, the recent reviews of the FER
have been made by citing some references of the Article
IV Consultations conducted by the IMF Executive
Board.
IMF Executive Board concluded 2015 Article IV
Consultation with the Kingdom of Lesotho in January
2016 noting that the currencys (lotis) parity with the
South African rand served Lesotho well by supporting
ECONOMY
macroeconomic stability and integrating the economy

with the region. The Board also advised that it was
critical that an adequate level of international reserves be
maintained to ensure this exchange rate regime.
While concluding the 2015 Article IV Consultation
with Namibia in October 2015, the IMF Executive
Board remarked that Namibias real effective exchange
rate (REER) misalignment was possibly smaller as the
recent deterioration of the current account did not seem
closely related to the exchange rate developments. The
overvaluation could be corrected if the government were
to successfully embark on its planned fiscal consolidation.
Given the fixed exchange rate with the rand, a nominal
depreciation would not necessarily result in improvements
in the current account.
On the conclusion of the Article IV Consultation with
Swaziland, the IMF Executive Board in November 2015
remarked that Swazilands REER depreciated since its
peak at end-2010 and moved close to its historical average
recently. Since the currency (lilangeni) is pegged to the
South African rand, the depreciation mostly followed
the rand, although the pace of the recent depreciation
was less pronounced for Swaziland. On average, the REER
depreciated by about 12 percent between end-2010 and end2014, reversing the bulk of the appreciation of 2009-10.
While concluding the Article IV Consultation with
Bhutan in June 2014, the IMF Executive Board observed
that given Bhutans close economic relationship with
India, the peg to the Indian rupee served Bhutan well and
remained an appropriate nominal anchor. Directors took
note of the staffs assessment that the real exchange rate
was overvalued. They encouraged the authorities to make
progress on structural reforms, to boost competitiveness,
create jobs, and help diversify the economy. Directors
encouraged elimination of exchange restrictions as soon
as macroeconomic conditions permitted.
With respect to Nepal, the IMF Executive Board
concluded the Article IV Consultation in November 2015

concurring that the peg to the Indian rupee continued to
serve as a transparent anchor and that monetary policy
should be geared toward supporting the peg. While a
temporary increase in inflation as a result of the recent
supply shocks should be accommodated, Directors
recommended that, as conditions normalize, monetary
policy be reoriented to keeping Nepalese inflation close
to that in India.
5. Lessons for Nepal

FER in Nepal was more instrumental for aligning
Nepalese inflation with Indian inflation whereas
productivity level and economic growth in Nepal could
not match with the productivity and growth in India.
The growth rate of Lesotho, Namibia, and Swaziland
exceeded the growth rate in South Africa which
implied that the policy regime adopted in the region
substantially favored these smaller economies vis--vis
South Africa. Even the inflation in Lesotho and Namibia
was less than that in South Africa, which implied that
South Africa provided these smaller economies possible
assistance for ensuring macroeconomic prudence.
FER could be sustainable and mutually beneficial
when trust, cooperation, and coordination underpin the
mutuality of economic interests among the neighboring
countries. Such coordinated policy framework, which
is essential for the success of the policy regime across
countries, has been lacking in South Asia. Instead of
helping smaller neighbors in their quest for prosperity,
big neighbors seem to demonstrate rivalries and bigbrotherly attitude. In an interdependent world, such
individualistic outlook could defeat the very purpose
which it wants to serve. Therefore, establishing
currency union ultimately leading to economic union
will turn out to be an improbable proposition for many
more years to come in South Asia. Domestically,
resource mobilization and utilization should receive
priority for expediting economic development process
March 2016
13
ECONOMY
besides fostering an enabling environment for trade

diversification and export promotion. Trade relations
based on trade agreement need to be updated with
enhanced negotiation skills and strengthened trade
capabilities. Nations trade transactions with the world
should be made sustainable by enhancing cooperation,
coordination, and negotiation skills that contribute to

address problems and mitigate challenges under the
agreed multilateral, regional, and bilateral framework
for trade. Besides adapting exchange rate regime for
growth and stability, the fundamentals for FER need to
be fostered and maintained for the time being.
Table 1. Macro Indicators (Lesotho, Namibia, Swaziland, and South Africa; Nepal and India)
Lesotho
Namibia
Swazi- land
South Africa
Bhutan
Nepal
India
Area (thousand sq. km.)
30
826
17
1221
38
147
3287
Population (million)
1.9
2.2
1.1
55.0
0.8
28.4
1286.8
Per Capita Income, 1994, current US dollars
437
2264
1503
3650
529
195
353
Per Capita Income, 2014, current US dollars
1034
5406
3477
6482
2560
701
1581
Increase in Per Capita Income in 2014 compared to 1994,

current US dollars
597
3142
1974
2832
2031
506
1228
PCI-Av. Annual Growth % for Two Decades
4.4
4.4
4.3
2.9
8.2
6.6
7.8
Share % of GDP: Agriculture, Industries, Services, 1994
18.3+39.8+
41.9
11.3+26.9+
61.8
13.4+42.2+
44.4
4.6+35.0+
60.4
34.9+30.0+
35.1
43.1+21.7+
35.2
28.3+26.4+
45.3
Share % of GDP: Agriculture, Industries, Services, 2014
8+31.9+
60.1
7+31.8+
61.2
6.3+44.1+
49.6
2.5+29.5+
68.0
17.7+42.9+
39.4
33.7+15.6+
50.7
17.8+30.1+
52.1
-10.3
-4.3
-7.1
-2.1
-17.2
-9.4
-10.5
Change in %age share of industry
-7.9
4.9
1.9
-5.5
12.9
-6.1
3.7
Change in %age share of services
18.2
-0.6
5.2
7.6
4.3
15.5
6.8
Av. Growth Rate, % (1995-2014)
3.8
4.1
3.2
3.0
7.4
4.3
6.9
Av. Inflation Rate, % (1995-2014)
7.0
7.5
7.3
6.2
6.5
7.2
7.2
External Bal. on G.& S., 1994, GDP %
-97.4
-1.3
-9.2
2.2
-9.9
-12.4
-0.3
External Bal. on G.& S., 2014, GDP %
-60.8
-26.2
-12.3
-1.9
-21.1
-29.6
-2.3
36.6
-24.9
-3.1
-4.1
-15.3
-17.2
-2.0
Change in %age share of agri.
Net change in G&S balance between 1994-2014, %age

points
Source- World Bank (website:data.worldbank.org/indicator)
14
March 2016
ECONOMY
NRBs Decision to Hike Paid-up Capital by Multifold :

More of Tyranny Less of Foresight
NRB in increasing paid up capital

is to force M&A activities so that
the number of existing banks and
FI are reduced considerably,
reopening license goes against its
own overriding goal. The NRBs
policy and implementation plan
are contradicting with each other
and it doesnt convey unified and
consistent message to the public
at large raising doubts over its
intention and integrity.
CA. Biswash Gauchan

CA. Gauchan is a member of ICAN
biswas.gauchan@gmail.com
Nepal Rastra Bank (NRB) in its

2072/73 monetary policy announced
on 23 July 2015 has decided to hike
the minimum paid up capital of
commercial bank, development bank
and finance company by multifold
to be met within next two fiscal
year i.e., by the end of Asad 2074.
The decision was so dramatic that
it sent shockwaves to the countrys
banking sector, causing banks
and Financial Institutions (FIs) to
scramble for possible partners for
merger and acquisition (M&A). It
is particularly interesting to note
that it is the first monetary policy
of the new Governor. In view of
that many believe that he wants to
take a very bold decision to leave
a legacy of being one of the most
resolute and effective Governors
in the history of countrys central
bank. On the contrary, there are
also other sections of people who
are of the opinion that it is indeed
the bureaucracy of NRB who took
the advantage of new Governors
inexperience to make him agree
on measures which they believe is
long overdue, in spite of being very
unpopular. Whatever may be the true
intention, the decision doesnt seem

to be based on the proper analysis
of ground realities and therefore
doesnt echo the concerns of
stakeholders. Ideally, such measures
are taken during the period of crisis
and the banking sector is nowhere
near that. The central bank being the
apex body of banking sector has to
broaden its view in foreseeing the
implication of such decision which is
likely to do more harm than good to
the countrys economy. The manner
in which decision was taken is
extremely ad hoc as no consultation
was carried out with stakeholders
on the one hand and on the other
hand no analysis of the likely
consequences of such decision
seems to be undertaken. Though the
sole objective of the policy appears to
be the consolidation of the banking
sector through aggressive M&A,
but even in the best case scenario,
the implication of the policy to the
overall economy looks blatantly
adverse. The economy of the country
cannot simply absorb the extent of
capital flight into banking sector
leading to a crowding out effect in
the real sector of the economy.
March 2016
15
ECONOMY
As the country is reeling under the consequences of

massive earthquake followed by supply constraints due
to political agitation and external factors, what is needed
is the huge investment in real sector of the economy to
uplift its overall productive capacity. On the contrary, the
policy will only aggravate the situation by channeling
more resources to already outsized banking sector leaving
other sectors of the economy to suffer from continued
underinvestment.
The central bank has cited few reasons in support of
its unilateral decision and I would like to argue how
each of them is based on misplaced beliefs and wrongful
judgment:
1. It has been made to believe that the paid up capital
of our banking sector is the lowest in South Asia.
On the contrary, the data in table 1 depicts a
completely different picture. The minimum paid up
capital of a commercial bank in Bhutan and Maldives
are much lower than ours while those of Afghanistan
and Bangladesh are marginally higher despite latters
economy being almost ten times bigger than the size
of Nepal. The highest minimum paid up capital in
South Asia is that of Pakistan followed by India and
Sri Lanka. As none of these countries are planning to
increase the minimum paid up capital anytime soon,
Nepal within two years will become the country
with the second highest minimum paid up capital in
the region along with India surpassing both Sri Lanka
and Bangladesh. Let us not forget that the economy
of India is 104 times bigger while Sri Lanka is
about 4 times bigger than the economy of Nepal.
In addition, our banks minimum paid up capital
will become more than 3 times larger than that of a
bank in Afghanistan though the economies of these
two countries are almost equal in size. Similarly,
the minimum paid up capital for commercial banks
in Uganda, Tanzania and Kenya which are equal,
two and half times and three times the size of our
16
March 2016
economy in that order and are sharing similar human

development indices and development challenges are
Rs. 70 crore, 23 crore and Rs. 1 billion respectively
much lower than our existing requirement. Measured
by percentage of nominal Gross Domestic Product
(GDP), even the current paid up capital of Rs. 2
billion for a commercial bank in Nepal is indeed one
of the highest in the world.
Minimum paid up capital of commercial banks in
SAARC countries
Table 1
AFG BAN BHU IND MLD NEP PAK SRI
Minimum Paid up capital in
local currencies in billion
2.0 0.30
5.0
0.03 2.0 10.0 5.0
In USD equivalent in million 23.5 26.67 4.5
80.0
2.0 20.0 100.0 40.0
Size of economy compared

to Nepal
1.35
1.03 9.44 0.11 104.37 0.15

16
60
90
12.65 3.8
30
36
25
Sources: Central Banks websites
2. The highly ambitious scenario of more than halving

current number of banks and FIs in next two years
considering the sole objective of reducing the
number of banks and FI will help us in understanding
overall implication of the decision in the economy
of resource strap country like ours. In the most
likely situation, the existence of non-national level
finance companies will come to an end in the light
of extremely harsh capital requirement imposed
upon them. Similarly, as there is no difference
in capital requirement between 1 district and 3
district development banks, development bank
with one district coverage will migrate to 3
district development banks. Moreover, these FIs
will probably merge either among themselves or
with a higher graded institution to meet the capital
requirement. Likewise, most of the national level
development banks by either merging with each
other or with one or more regional development
banks or finance companies can meet their capital
requirement. In the similar fashion, 20 out of 30
ECONOMY
commercial banks will find it difficult to meet the

capital on their own, so they will resort to merger
with suitable FIs including their counterparts as
well. It is however highly unlikely that commercial
banks will merge with each other for the sake
of meeting capital requirement. Nonetheless for
our analytical purpose we have assumed that 8
commercial banks will merge with another bank as a
highly optimistic scenario. These commercial banks
include those having problems amid persistent
financial and governance issues as well as those
which have received their operating license after
the imposition of moratorium in 2009 finding it
difficult to secure reasonable market share amid
excessive competition among large number of banks
and FIs. We are assuming that under the best case
scenario, we will end up having 22 commercial
banks, 15 national level development banks, 10
regional banks with ten district coverage, 15 regional
banks with 3 district coverage and 10 national level
finance companies in total 72 from existing 154
institutions as exhibited in the following table:
Best case merger scenario in two years
Commercial
Banks
National
Current paid up capital
No. of Institutions
New paid up capital
2 billion
30
8 billion
Best case merger scenario
22
Paid up Capital 71/72 (No.)
98.3
billion (30)
176
billion (22)
Paid up Capital 73/74 (No.)
Development
Banks
Table: 2
Finance
Companies
24
13
15
10
27
15
27.535 billion (76)

57 billion
(40)
12
500
million
42
154
800
400
million million
0
10
15.764 billion
(48)
8 billion
(10)
72
141 billion
(154)
241 billion
(72)
Sources: NRB Monetary Policy 2072/73, NRB Current Macroeconomic

situation of Nepal 2014/15, NRB circulars and NRB website
3. Analysis of the monetary aggregates: The

shortcoming of the decision can be better understood
from the analysis of monetary aggregates. The
following table highlights comparison of the
monetary aggregates among some of the countries
in the region as well as those economies which are
comparable to Nepal such as Uganda and Kenya:
Analysis of Monetary Aggregates
Total
National 4-10 dist. 3 dist. 1 dist. National 1-3 dist.

640
200
100
200
100
million million million million million
2.50
1.20
billion billion
in just about two years. Imperatives of injecting

additional Rs. 100 billion within two years in
comparison to Rs. 141 billion paid up capital built
over the entire history of Nepals banking sector can
have massive impact in our economy that the policy
maker and central bank has to contemplate since
more than 90% of the investment has to be raised
from within the country given very small foreign
holding in our banking sector (Standard Chartered,
Nepal SBI, Everest Bank and Nepal Bangladesh
Bank). The situation will be worse if the best case
scenario of reducing the total no. of banks and FIs
from 154 to 72 will not be achieved in two years
because the banking sector will be inundated with
even higher capital.
Going by NRBs new minimum paid up capital, the

banking sector will have a paid up capital close to
Rs. 241 billion within two years against Rs. 141
billion as of last financial year, an increase of 71%
Paid up Capital /GDP

Capital & Reserves/GDP
Capital Adequacy Ratio
Reserve Money
Narrow Money (M1/GDP)
Broad Money (M2/GDP)
Broad Money (M3/GDP)
Total Deposit/GDP
Loan & Advance/GDP
Claims on Private Sector/GDP
NPL
Profitability (ROE)
Profitability (ROA)
BAN IND NEP

6.66
4.83 7.10 10.47
11.35 13 12.70
9.58 15.38 23
10.46
65
51.83
88.4
85.13 93
49.04 72.92 82.61
46.72 52.10 75.98
37.57
64.65
9.69 3.80 3.80
8.09 10.70 14.40
0.60 0.80 1.50
Table 3
(In percentage)
PAK
2.12
5.53
15.10
35.62
43.97
55.88
12.80
23.50
2.10
SRI
1.46
5.02
16.70
5.91
6.26
35.37
39.61
40.64
50.88
36.44
4.20
16.50
2.00
Uganda Kenya
4.54
9.37
5.95
9.40
15.80
23.38
20.22
21.16
14.22
17.48
36.99
43.49
41.74
39.98
36.08
Sources: Based on central banks statistics, SAARCFIN e-bulletin, Financial

year considered is 2014 except for Nepal for which 2014/15 is used for
monetary aggregates.
In comparison to these countries, the monetary

aggregate of Nepal as a percentage of GDP is quite
March 2016
17
ECONOMY
high suggesting somewhat overstretched banking

sector. Higher level of credit compared to GDP
signals that beyond a certain point further credit
expansion could be counterproductive to the
financial stability of the country. Credit is indeed
the means of increasing money supply in the
economy through the creation of new deposits
which will again be used to provide additional
credit and the process keeps on repeating itself.
With sizable increase in paid up capital in a very
short span of time, there will be a pressure on scaling
up business to maintain similar level of return which can lead to the instances of moral hazards
on the part of both the Management and Board.
As these institutions will transform into behemoth
organizations, each of them can pose systemic
risk to the economy because of too big to fail
phenomenon. Considering an optimum commercial
bank with a paid up equity of 8 billion, deposit of
80 billion and credit of 70 billion; the total assets
of a single commercial bank alone will be over 4
to 5 % of GDP posing significant challenges in the
management and supervision of these companies in
the wake of systemic risk associated with its size
and nature. Moreover, the total paid up capital as
well as Capital & Reserves (C&R) of our banking
sector as a whole as a percentage of GDP is already
the highest in the region and any further attempt
to increase it substantially within a period of two
years as envisaged in our current monetary policy
would only invite more problems than would help in
fostering stability and economic development. The
banking sector currently has a combined Capital
& Reserves (which includes undistributed profit of
2071/72) of Rs. 220 billion and using a rule of
thumb, it will be sufficient to support a total credit
equivalent to ten times the C&R, i.e., Rs. 2,200
billion compared to total credit of Rs. 1,614 billion
based on the consolidated financials of last financial
18
March 2016
year published by NRB. Hence, with no additional

capital we still have a room for credit expansion of
additional Rs. 586 billion representing 36% growth
from current level which will be difficult to achieve
in next two years a sign of excess capacity in our
banking sector. Moreover, at this pace and scale, the
total credit is going to exceed the size of our GDP
signaling already outsized banking sector and some
underlying structural anomalies of our economy. In
addition, considering the best case scenario presented
in the above table, if the banking sector has to inject
Rs. 100 billion in a matter of two years to meet
NRBs minimum paid up capital requirement, it will
provide additional credit space of Rs. 1,000 billion
accounting for 50% of our GDP. When the country
has been facing excess liquidity for last several
months and NRB has been taking unprecedented
measures to address the matter, forcing banks and FIs
to inject substantial capital in the form of minimum
paid up equity is simply superfluous and arbitrary.
4
Opening branches in other countries in South Asia:

A Central Bank sets minimum paid up capital
requirement for banks and FIs by considering
host of factors related to countrys needs and its
economy. As far as opening an offshore branch
or subsidiary is concerned, the decision is personal
and the concerned bank shall accordingly satisfy
all the conditions required by the regulatory
authorities of the concerned country. Hence, in
the process of facilitating one or two domestic
banks to expand abroad, it is preposterous to impose
a capital requirement of a foreign country to the
whole domestic banking sector. Moreover, not all
the banks in a country will be opening branches in
the other countries. Insofar, when none of the banks
in Nepal including fully government owned bank
has made any intention of expanding abroad in
more than 75 years of its banking history, slapping
capital prescription based on this assumption is quite
untenable and counterproductive.
ECONOMY
Funding capital intensive projects: Time and again,

it is heard especially in relation to investment in
hydroelectric project that even if whole banking
sector of the country comes together it will not be
able to finance a project of 250 MW. For instance,
consortium has to be organized for funding small to
medium projects of 5 to 25 MW. I find this argument
a reason for increasing the paid up capital very
nave and irrational. We have to understand
that banking sector doesnt operate in vacuum
and it has to anchor around real sector of the
economy. When the size of our economy is just USD
20 billion, the banking sector can only generate
resources commensurate with its size and its income
(GNP). Potential (which is not yet harnessed) of
a countrys economy cannot alone determine the
amount of financial resources that a banking sector
of country can generate. The size of the economy
along with multitude of factors such as depth,
credibility, openness of our financial market will
determine it. Nepal has 100,000 MW of technically
feasible hydroelectric potential which requires total
investment of USD 200 billion, equal to ten times
the size of our own GDP. Even for a country
like India, it needs funding from foreign market to
exploit potential of this magnitude and scale, let
alone a small economy like Nepal. World Bank has
estimated an investment need of 13 to 18 billion
US dollar in Infrastructure over a period of 2011 to
2020 for Nepal to graduate from LDC to developing
one. It is quite irrational to expect mobilizing this
resource entirely from domestic market when the
size of our economy is too small compared to our
needs and our financial market is too shallow and
narrow. Increasing paid up capital with a view to
address these concerns seems totally misplaced and
undesirable.
Consolidation of banking sector by removing

categorization and keeping commercial bank only:
The Financial Sector Development Strategy

envisions the removal of different categories of FIs
to eventually have only commercial bank. The policy
to create different categories of FIs was initiated
with good intension when commercial banks were
hesitant to reach out to the mass and were conduits
of only few privileged and well off individuals and
corporates. So finance companies came into being
from early nineties to promote retail financing
followed by development banks from late nineties
and beginning of the millennium to extend banking
services to areas outside capital in small towns and
district headquarters with the concomitant aim of
channeling funds towards development sector. Their
establishments have helped promoting competition
and expanding banking services to areas and places
hitherto not reached out by commercial banks.
However, during the whole process, what seemed to
be totally overlooked was the importance of creating
differentiation and complementarity among different
categories leading to stiff competition among large
number of FIs crowding together in the same market.
As a result they ended up doing essentially the
same thing defeating the very purpose of creating
different categories of FIs. Regulatory authorities
and management alike could not act proactively
and innovatively to promote differentiation in
creating niche for each category of institution,
rather convergence in scope and areas of operations
got reinforced in the process. All the categories
of FIs have been financing vehicle loan as well as
providing consortium loan to hydroelectric projects
in the same market. The central bank that has created
these categories and issued licenses after following
due process cannot eliminate them simply because
the original goals were either not served or because
the numbers of these institutions are just too many.
Who is to blame for it and who created it in the first
place? The central bank has to take due share of its
March 2016
19
ECONOMY
responsibility and come up with exit strategy that is

gradual and calibrated. It is premature to envisage
that these challenges can be fully resolved in a matter
of two year or during one Governors term. Trying to
initiate sweeping reform without properly assessing
its broader macroeconomic implication can cost the
economy severely. There is still merit in creating
differentiation, for example, introduction of NonBanking Financial Companies (NBFC) specializing
in special products or line of credit. Once the
consolidation phase is over, the central bank can
promulgate new laws relating to the establishment
of NBFC and as a part of exit strategy, the existing
finance company can be incentivized to opt out to be
transformed into NBFC. Similarly the development
banks can be allowed to make equity investment
in infrastructure projects such as hydroelectric
ventures, toll roads, power transmission lines etc.
so that overtime it can build niche in this area and
play complementary role vis--vis commercial
banks thereby promoting both scale of investment
and transparency in the infrastructure funding.
Reserve Bank of India has introduced the concept
of differentiated banks by rolling out Payment Bank
and Small Finance Bank and recently issued 6 and
11 licenses respectively. These are some of the
things we can try to emulate from other countries
for the development and stability of our banking
sector. Furthermore, once the moratorium is lifted,
both the development banks and finance companies
can be allowed to compete for the license of a
commercial bank, similar to what has been practiced
in many countries as opposed to automatic upgrading
followed in the past.
7
20
Basel III implementation: Nepal has been ahead

of Basels requirement for the most of its banking
history. Even as of now, all the commercial banks are
BASEL III compliant as far as capital requirement
is concerned though it is yet to be enforced officially.
March 2016
BASEL III provides norms for capital adequacy,

leverage position and liquidity requirement mainly
from risk management perspectives. Our capital
adequacy guidelines have been stricter than those
contained in BASEL II and III frameworks to
which our banking sector in general have always
conformed. Increasing paid up capital by four
times in a matter of just two years doesnt augur
well in the pretext of BASEL III compliance.
8
Opening up license for new bank with a capital of

10 15 billion and removing moratorium: It is at the
sole discretion of the Central bank of the sovereign
country to decide on when to lift moratorium
based on its assessment of the situation. When the
paramount objective of
NRB in increasing paid up capital is to force M&A

activities so that the number of existing banks and
FI are reduced considerably, reopening license goes
against its own overriding goal. The NRBs policy
and implementation plan are contradicting with each
other and it doesnt convey unified and consistent
message to the public at large raising doubts over its
intention and integrity.
Opening foreign banks branches to do retail banking:

Currently foreign banks are permitted to do only
wholesale banking in the country. Accordingly,
thresholds have been imposed on the minimum
amount of deposit they can mobilize from a single
party and credit they can provide to a single party.
Due to this restrictiveness, foreign banks will not
find it feasible to operate their branch in the country.
Once such restrictions are lifted, foreign banks with
global ambition will not find capital requirement of a
small country like ours a major stumbling block for
their international expansion.
10 In the medium to longer term, the capital market

may face a brunt of the decision as it pushes back
ECONOMY
our secondary market to a similar state when the

banking sector alone constituted more than 80% of
total market capitalization (two third at the time of
decision) thereby amplifying the overall risk in the
capital market in the light of overconcentration in
one sector. In the short run, it looks as if the capital
market has responded positively to the decision
of the central bank, but it is very unlikely that the
momentum will be sustained over a longer period.
While it may be money making opportunity to the
shareholders of only handful of banks which are
able to meet the new capital threshold on their own,
for the majority of the other banks and FIs the bullish
sentiment can very quickly turn into bearish run.
Similarly, most of these banks including those who
have fared extremely well will in no circumstance be
able to sustain the same rate of return that they have
been reaping for the last several years. Moreover,
flooding of capital market with the shares of only
one sector within a very short span of time will
result into excessive portfolio concentration thereby
sharply heightening the vulnerabilities in the financial
market.
11 There are host of areas where central bank can initiate
reforms in the banking sector including its own
management. Professionalizing of its departments
and skilling of its staff are crucial in taking forward
the reform process. Plethora of ad hoc directives
that either do not conform to professional standards
and international practices such as accounting and
auditing standards or are impractical; unwarranted
focus on witch hunting in the past; embroiling
on petty issues; and excessive interference in the
internal management of banks undermines the larger
role of the central bank in streamlining and steering
the countrys banking sector into more advanced and
risk based management system. By any standard,
the operational efficiency of Nepals banking
system is probably one of the best in the world.
The banking sector has contributed immensely to

whatever has been achieved so far and is one
of the bright spots of our economy. However,
there are ample of negative vibes fueled by the very
ones who are at the helm of affairs which will not
be conducive in creating healthy and robust banking
system in the country. In every sector there are few
rogues who deserve to be identified and prosecuted
in a timely manner and Nepal banking sector is no
exception. But due care has to be exercised while
addressing these issues so that honest people dont
feel intimidated to take rightful decision in a free
and fair manner, else it will be difficult to uphold
and maintain the moral standard and professional
integrity necessary to revitalize the most promising
and transparent sector of our economy.

While sustained capital increment is good for every

prospering sector and institutions, any abrupt and
aggressive increase could be equally destabilizing
and counterproductive. Both the timeframe and
scale of increment are unreasonable and hence, the
central bank has to revisit its decision and come up
with more practical framework. The central banks
objective of reducing the number of banks and FIprobably the highest in the world in comparison to
the size of our GDP on the back of no differentiation
among different categories of FIs is well appreciated
and shall indeed be pursued with vigor and tenacity
for the overall development and consolidation of
banking sector. But putting whole onus of achieving
this objective in a single factor minimum paid up
capital is unwarranted and can actually be damaging.
It has to be supplemented by host of other policy
measures such as incentivizing differentiation among
different categories, introduction of NBFC to which
existing finance companies would have the option of
migration, tax rebate, concessional terms for branch
expansion, time extension for meeting minimum
paid up capital etc.
March 2016
21
ECONOMY
Based on the analysis of financials and the future

prospects of countrys banking sector, it is hard
to contemplate that any rational investors either
domestic or foreign would be in favor of NRBs
decision. This is because there is no economic sense
and business logic to increase paid up capital by at
least four times in a span of merely two years given
that there is no possibility of achieving similar rate
of return for many years to come under the weight of
massive paid up capital amid very little prospects
of commensurate business growth and economic
development. NRB shall pay heed to the genuine
concerns of stakeholders to avoid the ramifications
of likely failure of its policy on the overall
economy of the country. In the economy in which
the share of the banking sector is already outsized
and overstretched, NRBs unilateral decision could
be counterproductive from the point of view of
misallocation of the resources.
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22
March 2016
ECONOMY
Multinational Company: An Introduction
MNCs cover the entire spectrum

of business activity, from
manufacturing to extraction,
agricultural
production,
chemicals, processing, service
provision and finance. There is
no typical line of activity of a
multinational. Some MNCs are
truly 'global', with production
located in a wide variety of
countries and regions. In the
process of business expansion,
they may decide to go it alone
and create wholly owned
subsidiaries.
Introduction
A multinational company (MNC) is a
business that either owns or controls
foreign subsidiaries in more than
one country. It is this ownership or
control of productive assets in other
countries which makes the distinct
from an enterprise that does business
overseas by simply exporting goods
and services.
Mr. Gyan Mani Adhikari
Mr. Adhikari is a lecturer at different colleges.
adhikarigyanmani@yahoo.com
MNCs cover the entire spectrum

of
business
activity,
from
manufacturing
to
extraction,
agricultural production, chemicals,

processing, service provision and
finance. There is no typical line
of activity of a multinational.
Some MNCs are truly 'global',
with production located in a wide
variety of countries and regions. In
the process of business expansion,
they may decide to go it alone and
create wholly owned subsidiaries.
Alternatively, they might share
ownership and hence some of the
risk, by establishing joint ventures.
March 2016
23
ECONOMY
If MNC investment is made at regulated structure, many

governments insist on owing or controlling a share
in the new enterprise, but at different level or size of
investment. It also depends on the nature of the business
and its perceived national importance.
1. Horizontally
Integrated
Multinational:
A
multinational that produces the same product in
many countries. The main objective of this type of
multinational is to achieve growth of expanding into
new markets.
Trends in Multinational Investment
2. Vertically Integrated Multinational: A multinational

undertakes the various stages of production in different
countries for a core business. Thus, in some countries
it will go backwards into the business's supply chain
to the components or raw material stages, and in
others it will go towards into the product's assembly
or distribution. The principle motive behind such a
growth strategy is to be able to exert greater control
over costs and reduce the uncertainty of the business
environment. For example, oil companies such as Shell
and Esso are undertaking in a global operation the
extraction of crude oil, controlling its transportation,
refining it and producing byproducts and controlling
the retail sale of petrol and oil products.
Since the mid-1980s multinational business have

been downsizing, they have been shrinking the size of
their headquarters, removing layers or bureaucracy
and reorganizing their global operations into smaller
autonomous profit centers. Gone is the philosophy
that big companies will inevitably do better than small
ones. In fact, it now appears a hybrid form of business
organization, which combines the advantages of size with
the responsiveness and market knowledge of smaller
firms. The key for the modern multinational is flexibility,
and to be at one and the same time both global and
local.
The Transnationality Index

Transnationality refers to the significance to foreign
activities as part of either the performance of a country
or business as a whole. The index offers both opportunity
to evaluate the degree of globalization, as well as being
able to identify the most globally oriented countries and
business.
The transnationality index for multinational business is
composed of the average of three ratios:
3. Conglomerate Multinational: A multinational that

produces a range of different products in different
countries. By this process of diversification, they
look o spread risks and maximize returns through the
careful buying of overseas assets through such type
of diversification. Unilever is a good example of a
conglomerate multinational. It operates worldwide
from 103 sites in various food, homecare and personal
care markets.
Foreign assets to total assets

Foreign sales to total sales
Foreign employment to total employment
The Produce Lifecycle and the MNCs
Types of MNCs
1. The Launch Phase: This phase will tend to see the

new product produced in the economy where the
product is developed. It will be exported to the rest
of the world. At this stage, the monopoly position of
the producer and the novelty of the product enable the
business to charge high prices and make high profit.
Companies may choose to go multinational due to many

reasons such as nature of their business, their corporate
business strategies, etc. Generally, multinationals are
classified as followings:
24
March 2016
The product lifecycle of the MNCs can be split into

following four phases.
ECONOMY
2. The Growth Phase: Due to the expansion trend of

the market, rival firms will seek to introduce the new
product. Prices begin to fall. In order to maintain
competitiveness, the business will look to reduce
costs, and this stage might consider shifting production
overseas to lower-cost production centers.
3. Maturity: At the early stage of maturity, the business
is still looking to sell its product in the markets of the
developed economies. Thus, it may still be happy to
locate some of its plants in such economies. As the
original market becomes increasingly saturated,
however, the MNC will seek to expand into market
overseas which is at an earlier stage of development.
Part of this expansion will be by the MNC simply
exporting to these economies, but increasing it will
involve relocating its production there too.
4. Maturity and Decline: By the time the original
markets are fully matured and moving into decline, the
only way to extend the product's life is to cut costs and
sell the product in the market of developing countries.
The location of production may shift once again, this
time to even lower cost countries. By this stage, the
country in which the product was developed will almost
certainly be a net importer, but it may well be importing
the product from a subsidiary of the same company that
produced it within that country in the first place.
Problems Facing Multinationals

In the process of expanding business, multinationals
may face a number of problems resulting from their
geographical expansion.
1. Language Barriers: In general, MNCs employ
expatriate rather than local staffs. As a result, they
have to face language barriers in their functioning.
The problem of language is less of a difficulty in the
developed economies of the world than it is in the
developing markets or economies.
2. Selling and Marketing in Foreign Markets.

Strategies that work at home might fail overseas
given wide social and cultural differences. Many
multinationals are frequently accused of imposing
American values in the design and promotion of their
products, irrespective of the country and its culture.
This can lead to resentment and hostility in the host
country, which may ultimately backfire on the MNC.
3. Attitudes of Host Governments: Government will
often try to get the best possible deal for their country
from multinationals. This could result in governments
insisting on part of ownership in the subsidiary or
tight rules and regulations governing the MNC's
behavior, or harsh tax regimes. In response, the MNC
can always threaten to locate elsewhere.
4. Communication and Coordination between
Subsidiaries: Diseconomies of scale may result from
an expanding global business. Lines of communication
become longer and more complex. These problems
are likely to be greater, the greater is the attempted
level of control exerted by the parent company.
Advantages of MNCs
MNCs have positive contribution to national economy.
They are explained below:
Employment: Due to low level of capital formation,
most of the developing countries are suffering from
unemployment and underemployment. Most countries
attempt to entice MNCs to depressed regions where
investment is low and unemployment is high. The
employment that MNCs create is both direct in the form
of people employed in the new production facility, and
indirect, through the impact that the MNCs has on the
local economy. They also help in professionalization of
management and development of human resources.
Technology Transfer: Technology transfer refers to the
benefits gained by domestic producers from the technology
March 2016
25
ECONOMY
imported by the MNCs. For example: domestic producers

copy the production technology and working practices of
the MNCs. This process is referred to as the ''demonstration
effect''. In addition to copying practices, technology might
also be transferred through the training of the workers.
When workers move jobs from the MNCs to other firms
in the industry, or to other industrial sectors, they take their
newly acquired technical knowledge and skills with them.
Sources of Public Revenue: MNCs are required to pay tax
and therefore contribute public revenues. Hence, MNCs
are important resources of revenue in host countries.
Impacts on BOP: The MNCs investment will represent
a direct flow of capital into the country. Similarly, MNC
investment is likely to result in both import substitution
and export promotion. Hence, MNCs help to improve
BOP situation in host countries.
Industrial Development: MNCs bring huge investment
and advanced technology which ultimately help to
develop industries and entrepreneurship. It results in
efficient utilization of resources in domestic industries.
This process emerges competitive environment.
Problems Associated with MNCs

MNCs may also create negative effects to host countries.
The main problems associated with MNCs to host
countries are as follows:
They may use their power in the markets of host countries
to drive domestic producers out of business, thereby
lowering domestic profit and domestic investment.
The bulk of their profits may simply be repatriated to
shareholders in the rich countries, with little, if any,
invested in the developing country. This will tend to
make the foreign exchange gap worse.
The technology and skills brought in by the
multinationals may be fiercely guarded by the MNCs.
What is more; the dominance of the domestic market
by MNCs may lead to the demise of domestic firms
26
March 2016
and indigenous technology, thereby worsening the

skill and technology base of the country.
MNCs are often 'footloose', meaning that they can
simply close down their operations in foreign countries
and move. If a country has a large foreign multinational
sector within the economy, it will become very
vulnerable to such footloose activity, and face great
uncertainty in the long turn. It may thus be forced to
offer the multinational 'perks' in order to persuade it to
remain. These perks are clearly costly to the taxpayer.
MNCs enable them to exert various controls over
the host countries. They may not ready to follow
regulatory and control measures implemented by
government of host countries.
Does MNC Investment Contribute

Development?
Whether investment by multinationals in developing
countries is seen to be a net benefit or a net cost to these
countries depends on what are perceived to be their
development goals. If maximizing the growth in national
income is the goal, then MNC investment has probably
made a positive contribution. If, however, the objectives
of development are seen as more wide reaching, and
include goals such as greater quality, the relief of poverty,
a growth in the provision of basic needs (such as food,
health care, housing and sanitation) and a general growth
in the freedom and sense of well being of the mass of the
population, then the net effect of multinational investment
could be argued to be anti-development.
INFORMATION TECHNOLOGY
Ransomware A Dangerous Threat to

your Digital Files
Ransomware is a dangerous kind

of malicious tool which uses
encryption to lock the documents
and the decryption key is only
given when a sum of money is
paid to the party who created
the Ransomware. In many cases,
there is little option but to pay
the money to gain access to the
documents. It is almost impossible
to break the encryption because it
takes many years to even mighty
powerful computers to break the
encryption based on the type of
encryption method used.
CA. Mukunda Pokharel

CA. Pokharel is a Member of ICAN
mukund@rigonepal.com
Imagine a scenario: you worked

on a proposal for a week and one
morning, the day you were to present
the proposal to your client, the file
is locked and no more accessible.
A message appears in your screen
Unfortunately, the files on this
computer have been encrypted. To
obtain the encryption key for this
computer, which will automatically
decrypt the files on this computer,
you need to pay $750 or equivalent.
You have 96 hours to submit
payment to receive the decryption
key. Otherwise your files will be
permanently destroyed. Click Next
to select your preferred payment
method.
This type of attacks are actually
happening to many organizations
and individuals around the world and
in Nepal, too. This is like kidnapping
your documents, photos, videos or
any kind of digital documents and
asking for ransom to gain access to
your own documents stored in your
March 2016
27
own computer or mobile phone.
resources required are not practically feasible for us.
Ransomware is a type of malicious software designed

to block access to a computer system until a sum of
money is paid. According to Wikipedia - Ransomware
is a type of malware that restricts access to the infected
computer system in some way, and demands that the user
pay a ransom to the malware operators to remove the
restriction. Some forms of ransomware systematically
encrypt files on the system's hard drive, which become
difficult or impossible to decrypt without paying the
ransom for the encryption key, while some may simply
lock the system and display messages intended to coax
the user into paying. Ransomware typically propagates
as a Trojan, whose payload1 is disguised as a seemingly
legitimate file.
There are some ways or keys available to deactivate or

decrypt files encrypted by some ransomwares (search
on the internet or look at http://blog.rigotechnology.com
for any available solutions for ransomware targeted to
Nepal); but there is no guarantee that you will be able to
get access to the files without paying for it.
That is why it is very important to prevent ransomware
attacks from happening in the first place.
Some basic tips to prevent from ransomware
1. Backup your data

Start a practice to back up your data online or on some

external hard drive or USB drive. You can access the
backup data in case some kind of disaster happen.
2. Think before you click

Almost every Ransomware spread through the

Internet via file-sharing websites (like torrents),
attachments from an email, infected malicious files,
and links to file downloading websites shared in
social networking websites. So, whenever you see
an attachments or any link, always think before
you click, and make sure the link and file you are
downloading are from a trusted source.
Infographics source: sentinelone.com
3. Harden your anti-spam filters
Unlike viruses, which have the high probability that they

can be cleaned or removed, Ransomware is a dangerous
kind of malicious tool which uses encryption to lock the
documents and the decryption key is only given when a sum
of money is paid to the party who created the Ransomware.
In many cases, there is little option but to pay2 the money
to gain access to the documents. It is almost impossible
to break the encryption because it takes many years to
even mighty powerful computers to break the encryption
based on the type of encryption method used. The time and
4. Do not open suspicious attachments

1 The data that is being carried within a malicious file, packet

or other transmission unit.
2 The FBI says you may need to pay up if hackers
infect your computer with ransomware. http://www.
thebostoncalendar.com/events/cyber-security-summit
28
March 2016
Many spams emails contain eye-catching messages

and are attached with Ransomware which when
clicked by you gets your machines infected. Make
sure your Anti-Spam filters are enabled and your mail
server does not allow extensions like .exe, .vbs, or .scr
in attachments (if you are using Gmail or Windows
Live Mail, these extensions are already disabled.
You should do this if your organization has own mail
server.
Always suspect a file that is attached to your emails
or shared in social networking websites. Do not open
any files that you suspect. And in case you need to
open those files make sure you open it in an isolated
virtual environment.
5. Use show file extension settings
12. Enhance Security of Microsoft office component
This is a feature in Windows that permits you to view

what kind of document is being opened. An attacker
can hide malicious code in different file format like
in excel file e.g., account.xlsx.scr to execute their
hidden command. Enabling to show file extension in
setting would allow you to see what extension file
you are opening.
13. Block Popups (ad-blocker)

6. Always update

Make sure your system is always updated (not

only antivirus but windows operating system and
browsers, too). Updates usually contains critical
patches to several security vulnerabilities.
Every system has its own firewall. Make sure your
Firewall is enabled and properly configured.
8. Scan all compressed and archived files

Many malicious code and file may be inside a

compressed file. Use anti-virus and scanners to scan
that compressed file before opening.
9. Apply the principle of least privilege

As far as practicable, create a non-administrator user
with limited access and use that account for your
regular work. Restricting the privileges may prevent
malware from running or limit its capability to spread
through the network.
10. Define software restriction policy

Software restriction policy should be defined by the

user to stop automatically executing files in their
system or process from places likeProgramData,
AppData, Temp and Windows\SysWow. You may
need your IT Administrator Assistance to do this.
11. Disable Windows PowerShell

Windows PowerShell is a framework for task

automation, it must only be enabled when necessary.
To disable Windows PowerShell, go to Control Panel>
Program and Features> Turn Windows Features on
and off. Locate Windows PowerShell 2.0, uncheck it
and click OK.
Pop-ups are the entry point for Trojans and malware.

Adding add-on or extensions for blocking popups can
reduce entry point for Trojans and malware. One good adblocker is Ad Block Plus in Firefox or Chrome browser.
14. Disable Flash Add-on in your browser

Adobe Flash not only eats up your battery power, it
is one of the major weakness to attack your computer
if not regularly updated. It is always wise to disable
Flash in your browser.
7. Turn your firewall on

Block macros or Visual Basic code in office

documents downloaded from web unless you trust
the source of the document.
15. Deactivate Autoplay

Disabling autoplay will block harmful process to run

from external media devices like USB and external
hard drive.
16. Block known-malicious Tor IP addresses

Tor network (gateway) is used to communicate with

command and control server. Blocking tor network
connection is a good way to prevent malware from
communicating to control server. You may need your
IT Administrator Assistance to do this.
If you have already become a victim of Ransomware or

even after all the precautions, you become a victim:
i)
ii)
iii)
iv)
Don't panic;
Take the machine offline by unplugging
network cable or disabling Wi-Fi so that the
malware cannot propagate to your network;
Shut down your computer; and
Contact some security expert
Conclusion
Ransomware is a dangerous kind of Trojan with very
limited option to fight back. According to the security
researchers prediction and the current trend, Ransomware
is becoming the greatest cyber threat of year 2016. The
best way to be protected is to be aware now and take
precautions to prevent it from targeting you.
March 2016
29
IT Governance and Auditing Entity-Level Controls
Information
Technologies
Governance is more than
just security of information
system and its resources, since
it encompasses the entire
organization where technology in
information system and business
components
work
together,
and involves crucial concepts
that includes disaster recovery
planning, systems acquisition
and maintenance policies, and
organizational structure which
creates value that fits into the
overall Corporate Governance
Strategy of the organization.
CA. Gaurav Khwaunju Shrestha

CA. Shrestha is a Member of ICAN
gaurav.shrestha@ican.org.np
30
The continuous development of the

new technologies was followed up by
a rapid and continuous integration of
such technologies in the organization
level. Information Technologies
become an essential issue in strategic
development and performances
enhancement of any organizations.
The acclaimed advantages induced
by information technology component
are in balance with new risks arising
from such technology. The rapid pace
of the technological change asks for
timely update on information
technologies with a thorough
understanding of the risks and
opportunities associated with this
phenomena. The management of the
organizations faces a new challenge
in the structural re-definition of the
March 2016
information technologies component

in order to create value addition and
to minimize the risks through an
efficient management of all the
relevant resources of the organization.
Information Technologies Governance,
a subset of corporate governance,
focuses on the belief that the
managers, directors, and others in
charge of the organization must
understand the role of information
technology in the organization.
Information Technologies Governance
focuses specifically on information
technology systems, their performance
and risk management. The primary
goals of Information Technologies
Governance are to assure that
the investments in infrastructure
related to information technologies
generate business value, and to mitigate the risks that

are associated with information systems. This can be
done by implementing an organizational structure with
well-defined roles for the responsibility of information,
business processes, applications and infrastructure
Why Information Technology

Governance is Necessary?
Information Technologies Governance is more than just
security of information system and its resources, since it
encompasses the entire organization where technology
in information system and business components work
together, and involves crucial concepts that includes
disaster recovery planning, systems acquisition and
maintenance policies, and organizational structure
which creates value that fits into the overall Corporate
Governance Strategy of the organization.
A value realization and delivery framework helps the
Information Technology department to accomplish
both the demand and supply side of operations. As each
system is considered and evaluated, there should be
continuous assessment for alignment with the business
needs and strategies. However, environmental scanning
with respect to new technologies adopted or available
can help the organization identify obsolescence or
other factors that could require changes in information
system infrastructure. To enable value realization,
value management methodologies should be in place.
Operational objectives such as effectiveness, efficiency,
and economy are used to testify whether value realization
has been achieved or not Examination and assessment of
management information system throughout the systems
life cycle can be facilitated by internal audit or rotational
testing by the external auditors. The organization could
develop well efficient metrics to monitor and control the
value assessment process.
Despite efforts of the software industry to identify and
adopt best practices in the development of information
technology projects, there is still a high rate of failure and

missed objectives. Most of the information technology
projects do not meet the organizations objectives.
Effective governance framework, with well-defined
roles and responsibilities for stakeholders associated
with information system including Information System
Auditors should ensure that investments in information
technologies are aligned and delivered in accordance with
corporate objectives and strategies. Any projects without
this framework are more susceptible to failure increasing
the cost, lack of adaptation among the stakeholder, poor
performance. Many organizations fail to consider the
importance of information technology governance and
take the projects without fully understanding what the
organizations requirements are for the project and how
this project links to the organizations objectives.
Another important aspect in Information Technology
Governance is the Resource Management which
is concerned with the management of information
technology resources and the organization of information
technology infrastructures within a corporation. This
critical dimension of information technology governance
processes aims to provide high level direction for sourcing
and use of resources, to oversee the aggregate funding for
information system at the entity level and to ensure that
there is adequate capability and infrastructure to support
current and expected future business requirements.
Another aspect of this domain is the issue of project
management as the projects has considerable impact
on the financial position and strategic direction of the
organization, it must be properly governed.
Risk Management is another important issues in the
Information Technology Governance as the risk on
entity level cannot be eliminated. It will exist all the time
however the management of the entity is responsible with
minimizing it to an acceptable level. Risk management
should be a continuous process which begins by assessing
the level of exposure of the organization and identifying
March 2016
31
the main incident of risks. Once identified, risks have to

be minimized using control procedure and finally residual
risk should be adjusted at acceptable level.
Performance measurement, an another element of
Information Technology Governance, is concerned with
determining whether information systems implemented
in the organization have achieved the goals set for them
by the Board and senior management. For performance
measurement, Information Technology Governance
practices should define and monitor the various measures
together with management to verify that objectives are
achieved and measure performances related to information
system through metrics or similar other indicators
Implement a Sustainable Information

Technology Governance Framework
Today, Information Technology Governance is on the
agenda of many organizations, and high-level Information
Technology Governance models are being created by
every organization to align the objective of information
technology project with business objective. However,
having developed a high-level Information Technology
Governance model does not imply that governance is
actually working in the organization. Conceiving the
Information Technology Governance model is the first
step, implementing it into the organization as a sustainable
solution is the next challenging step.
The important question now is how organizations can
pragmatically implement a sustainable information
technology governance framework? Information Technology
Governance can be deployed using a mix of structures,
processes and relational mechanisms. Structures involve
the existence of responsible functions such as information
technology executives and a diversity of information
technology committees. Processes refer to strategic decision
making and monitoring via e.g. the Information Technology
Balanced Scorecard. The relational mechanisms to decision
making an monitoring include business and Information
32
March 2016
Technology participation, strategic dialogue, shared learning

and proper communication. Each of these practices serve
specific or multiple goals in the complex IT governance
challenge.
Evaluation of Information Technology

Governance
As information technology governance is a crucial
subset of corporate governance, similar to the assessment
of overall corporate governance, the cultural and
operating environment of the functional areas of
management information systems is the beginning point
of the evaluation of information technology governance.
Management Information System should be viewed as
a partner within the business rather than an adversary
or servant. Information Technology dependence should
be avoided. Such dependence occurs when there is a
disconnection between the business strategy and the
management information system operations, exhibited
when senior management, such as other executives and the
board, abandon supervision of information technology.
This tends to result in the reliance upon a small group
of individuals within the organization for information
needs, requirements, or operations of system. Instead, the
head of information technology department should be a
participant in executive meetings, with feedback, decision
making, and information flowing among members of the
executive team and other parts of the organization.
Strong entity-level controls in information technology
form a foundation for the control environment in
information technologies within a company. They
demonstrate that management is serious about internal
controls, risk management, and governance. A strong
overall control environment and attitude that originates
from the top to down throughout the organization leads
to strong controls over decentralized processes and
functions. Conversely, weak entity-level controls increase
the likelihood that controls will be weak throughout
the organization, because upper management has not
demonstrated and communicated to the organization that

internal controls are valued.
Auditing Entity-Level Controls

Entity level controls in information technology
environment show the effectiveness and efficiencies
of Information Technology Governance in achieving
the objective of the organization through investment in
information technology infrastructures. Assessment and
evaluation of these controls are important in efficient
functioning of the Information Technology Governance.
Information System Auditor should assess the entity
level controls to ensure that the entity level controls in
information technology environment are functioning as
desired. At least, the following areas should be considered
for an entity-level controls review.
1. Review the overall organization structure to ensure
that it provides adequate segregation of duties,
clear assignment of authority and responsibility
over information technology operations
How to Accomplish ?
Ensure that the company has Information Technology
Organization Reporting Structures that eventually
report to a person that is close enough to day-to-day
Information Technology operations
Chief Executive-Officers should have an annual
information security evaluation conducted, review
the evaluation results with staff, and report on
performance to the board of directors.
consider interviewing a sample of Information
Technology employees and customers to determine
whether there is a consistent understanding of the
division of responsibility.
Organizations should establish a security
management structure to assign explicit individual
roles, responsibilities, authority, and accountability.
Ensure that the responsibilities for initiating,
authorizing, inputting, processing, and checking data
should be segregated
2. Review the information technology strategic
planning process and ensure that it aligns with
business strategies. Evaluate the organization's
processes for monitoring progress against the
strategic plan.
How to Accomplish ?
Obtain the evidence of a strategic planning process
within information technology infrastructure, and
understand how the planning is performed. It should
highlight the need for continuous improvement, not a
one-time effort.
Determine how company strategies and priorities
were used in developing the information technology
strategies and priorities.
Review documented short- and long-term technology
priorities.
Evaluate processes in place for periodical monitoring
of the progress against those priorities, re-evaluating
and updating those priorities.
Review the Risk-Assessment Processes placed for the
security of data and information system resources and
evaluate whether it is in alignment with organizational
mission, vision and strategy.
How to Accomplish ?
Obtain the evidence that the organization is
periodically considering the risks to the Information

Technology environment and making conscious
decisions as to whether to accept, mitigate, or avoid
those risks. Inspect the board Minute and supporting
document justifying risk tolerance objective. Inquire
board member and management regarding the process
for setting risk tolerances.
Mandatory training for board members on the
concepts of enterprise risk management.
March 2016
Board
33
approval of Enterprise Risk Management framework

and code of ethics.
Inspect board Enterprise Risk Management
training program.
Inspect board minutes and documents justifying
selection of Enterprise Risk Management
framework.
Inspect code of ethics
.
Management clearly provides a strategy for
identifying risks. Board approves managements
strategy and provides feedback. Compare the
organizations identified risks to risks identified by
the auditor during the client business risk assessment
phase of the financial statement audit, looking
for gaps. Inspect board minutes and supporting
documents where approval of risk assessment
strategy is provided.
Board evaluates managements recommendations
for risk responses. Compare risk responses to

recommendations of external or internal auditors or
other specialized reports.
Inspect documents recommending risk
response activities.
Inspect board minutes of approval.
Inspect reports of specialists.
Recommending specific courses of action
with respect to risk responses.
Evaluate managements plan for Enterprise Risk
Management control activities. Document the
control activities, evaluate design effectiveness,
and conduct tests of Enterprise Risk Management
control activities where reliance will be placed on
the controls.
Inquire the management and request documentation
to support information and communication methods;

evaluate the adequacy. Obtain copies of the regular
communications and inspect it.
34
March 2016
Evaluate management recommendations for change
to Enterprise Risk Management process. Inspect

board minutes with respect to process and approval
of change to Enterprise Risk Management process.
3. Review performance indicators and measurements
for information technology to ensure that processes
and metrics are in place and approved by key
stakeholders for measuring performance of dayto-day activities and for tracking performance
against service-level agreements, budgets, and
other operational requirements.
How to Accomplish ?
Obtain a copy of any metrics being captured for
the information technology organization's routine
activities (such as system uptime and response time).
Determine the goals for those metrics, and ensure
that the appropriate stakeholders have approved
those goals.
If actual performance is significantly inferior to goals,
determine whether root-cause analyses have been
performed to understand the problem and whether
plans are in place to solve the problem.
Review any Service-Level Agreements that have
been established for supporting Information
technologies key stakeholders. Ensure that processes
are in place for measuring actual performance against
the requirements of the Service-Level Agreements
and for correcting any deviations.
Ensure that processes are in place for establishing
budgets and for holding the information technologies
organization accountable for meeting its budget by
obtaining copies of the information technologies
budget for the current and preceding years, as well as
copies of any "budget versus actual" analyses.
Determine how any significant variances were
reported and resolved.
4. Determine whether technology and application

strategies exist, and evaluate processes for longrange technical planning.
How to Accomplish?
Obtain the evidence that long-term technical planning
is being performed.
For purchased applications and technologies, determine
whether Information technologies understand the
vendor's supportroadmap for those products.
The Information technologies organization should
understand when their versions of the products will
cease to be supported and create plans for either
upgrading or replacing the products.
Determine whether processes are in place to monitor
for changes in relevant technologies, consider how
those changes will impact the company,
Identify the opportunities to use new technologies to
help the company.
5. Ensure that information technology security
policies exist and provide adequate requirements
for the security of the environment. Determine
how those policies are communicated and how
compliance is monitored.
How to Accomplish?
Obtain a copy of the company's Information
technologies security policies. Ensure that they
adequately cover the company's Information
technologies environment. At a minimum, the policies
should include coverage of the following areas:
Usage of the company's information resources
by employees for personal usage.

Data classification, retention, and destruction
Remote connectivity
Server security
Client security
Password and other logical Access
Review the company's password policy. It should

provide adequate guidelines dictating requirements
for the composition of company passwords (for
example, minimum of eight characters, combination
of letters and numbers, difficult to guess, and so on),
for aging company passwords (such as requiring
that they be changed every 90 days), for locking
accounts after a certain number of unsuccessful
logon attempts, for timing out login sessions after
a period of inactivity, and for retaining a password
history so that previous passwords cannot be reused
for a certain period of time.
Review the company's logical access policy. It should
provide adequate guidelines dictating requirements
for every user to have a unique ID, for accounts to be
suspended upon employee termination or job change,
and for users to be granted the minimum access
necessary to perform their jobs.
Obtain a list of employees involved in the creation
and approval of the Information technologies security
policies to ensure that key stakeholders were included
during the policy creation
Ensure that the Information technologies security
policies were approved by an executive, such as
the CIO or CEO. This will provide the Information
technologies organization with the authority and
backing necessary to enforce the policies.
Review processes for periodically reviewing and
updating the policies to ensure that they keep up
with the ever-changing Information technologies
environment. Obtain the evidence that these processes
have been executed.
Review processes for periodically evaluating
changes in the environment that might necessitate the
development of new policies. Obtain the evidence
that these processes have been executed.
Ensure that provisions have been made for
obtaining approved exemptions from the policy.
March 2016
35
The Information technologies security organization

should facilitate the exception process, including
providing a recommendation and an opinion on the
risk presented by the request, but they usually should
avoid making the final decision as to whether or not
to accept the risk.
Review processes implemented by Information
technologies security and other Information
technologies organizations for monitoring compliance
with the policies. Ensure that enforcement and
escalation processes are in place that results in the
correction of noncompliant situations. Review a
sample of recent applicable compliance-monitoring
reports, and ensure that significant issues were
tracked to resolution.
Ensure that a mechanism exists for employees to
report security incidents or concerns and that those
reports are followed up on and tracked to resolution.
Review a sample of recently reported incidents, and
determine whether they were resolved adequately.
Determine whether life-cycle information has been

created for company data. For a sample of major
data elements, review documentation of the data's
life-cycle requirements, including retention, archive,
and destruction requirements. Requirements will be
identified for how long the data should be active (online,
easily accessible, modifiable if appropriate, and backed
up periodically), when and for how long they should
be archived (possibly offline, not necessarily easy to
access, no longer modifiable, and no longer backed up
periodically), and when they should be destroyed.
Review and obtain the evidence that life-cycle
requirements have been implemented.
7. Review and evaluate processes for ensuring that end
users of the Information technologies environment
can report problems, are appropriately involved in
Information technologies decisions, and are satisfied
with the services provided by the technologies.
How to Accomplish ?
6. Review and evaluate policies and processes for

assigning ownership of company data, classifying
the data, protecting the data in accordance with
their classification, and defining the data's life cycle.
Ensure that a help desk function provides end users

with the ability to report problems.
How to Accomplish ?
Obtain a list of recent complaints, and select a sample,

ensuring that all complaints were resolved and that
no complaints were closed without the consent of the
user who entered the complaints.
Review the company's data classification policy. It

should have provisions for identifying owners for
all critical company data. It also should provide a
framework for classifying database on its criticality
(for example, confidential, internal data, public data).
Review and evaluate processes for capturing problems

and ensure that they are tracked to resolution.
Ensure that a process exists for obtaining end-user

feedback after complaints are closed.
Obtain the a list of data owners and documentation

indicating that those owners have classified their data.
Obtain the evidence that user-satisfaction metrics are

kept and that management follows up on end-user
feedback.
For a sample of this data, review evidence that

protection has been implemented in alignment with
the classification.
To ensure that the help desk does not seek customer

satisfaction at the expense of security, review policies
and processes for obtaining proper approvals prior to
36
March 2016
responding to user requests for having passwords

reset and for obtaining system access.
Review a sample of these sorts of complaints, and
ensure that proper processes were followed and
approvals obtained.
Obtain the existence of customer dealing teams
to provide input and prioritization of Information
technologies projects and enhancements.
For significant areas of the business, key stakeholders
should be identified to provide guidance to the
Information technologies organization regarding
projects and decisions that affect them..
Review any Service-Level Agreements that have been
established for supporting Information technologies
key stakeholders. Ensure that processes are in
place for measuring actual performance against the
requirements of the Service-Level Agreements and
for correcting any deviations.
8. Review the IT organization's process for approving
and prioritizing new projects. Determine whether
this process is adequate for ensuring that system
acquisition and development projects cannot
commence without approval. Ensure that
management review project status, schedule, and
budget periodically throughout the life of projects.
How to Accomplish ?
Review structured process used for investigation
for completeness and reasonableness. Examine
cost-benefit for thoroughness and reasonableness.
Ensure that formal proposals are prepared for all new
systems, with cost-benefits prepared, and a structured
process followed (e.g., consultation of affected users,
careful consideration of alternatives).
Consider appropriateness and competence of
individuals assigned to the task of functional
requirements review. Examine evidence of approval
of functional requirements
Examine testing plans for reasonableness and
completeness. Examine results of testing and
process used to clear problems and errors found.
Ensure that testing plans are prepared, in alignment
with functional requirements and known potential
problem areas.
Review testing plans for thoroughness considering
all data types, with sufficient detail to provide for
completeness, occurrence, and accuracy of data
conversion.. Examine and re-perform reconciliations
associated with data conversions of key data elements
(such as general ledger account balances).
Examine processes used for emergency changes
that brought systems down
Examine evidence of approval for program changes,
on a test basis. Ensure that all program maintenance
changes should be approved, documented, and tested
prior to implementation.
9. Ensure that effective processes exist for complying
with applicable laws and regulations that affect it
and for maintaining awareness of changes in the
regulatory environment.
How to Accomplish?
Identify the single point of contact that is responsible
for monitoring the regulatory environment and its
impact on information technology. This person should
be responsible for identifying laws and regulations
that apply to the company's information technology
environment, ensuring that the responsibility for
complying with those rules has been explicitly
assigned to the appropriate person and monitoring
the regulatory environment for additions and changes
that will affect the company.
Review the processes used to monitor the regulatory
environment, and evaluate their effectiveness.
March 2016
37
Obtain a list of information technology -applicable

regulations that have been identified, and obtain the
evidence that responsibility for compliance with those
regulations has been assigned and is being monitored.
10. Ensure that hiring and termination procedures
are clear and comprehensive.
How to Accomplish ?
processes for keeping the job descriptions up to date.

Review the information technology organization's
training policies and ensure that they provide the
opportunity for employees to attend training classes
and seminars for enhancing and updating their skills
and knowledge. Obtain the evidence that information
technology employees have taken training over the
past year.
Review Human Resource policies and procedures and

ensure management establishes/enforces standards
for hiring the most qualified individuals, with
emphasis on education, prior work experience and
evidence of integrity and ethical behavior. Recruiting
practices (particularly for employees with access to
assets susceptible to misappropriation) include indepth employment interviews, background checks
and presentations on entitys culture, expected
behaviors and operating style.
Review performance-review processes. Obtain the

evidence that information technology employees are
receiving regular feedback on their performance.
Ensure that termination procedures include physical

and logical access revocation, return of companyowned equipment, and supervision while the former
employee collects his or her belongings.
How to Accomplish ?
11. Review and evaluate processes for ensuring

that information technology employees at the
company have the skills and knowledge necessary
for performing their jobs.
If feasible, obtain a sample of nonemployee accounts,

and validate that they have appropriate approval.
How to Accomplish ?
Identify the mechanisms that ensure that qualified
people are hired and that provide for continuous
enhancements of employee skills and knowledge.
Ensure that job descriptions exist for all information
technology positions and that the job descriptions
specifically state the knowledge and skills required
for each job.
Review evidence that these job descriptions are
referenced during the hiring process. Review
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March 2016
Ensure that processes exist for identifying poor and

top performers, coaching them, rewarding them and
terminating from their responsibility if performance
does not improve.
12. Review and evaluate processes for controlling
nonemployee logical access.
Ensure that policies require approval from an

employee prior to a nonemployee obtaining logical
access to company systems.
Review and evaluate processes for communicating

company policies, information technology security
policies, rules and procedures to non-employees prior
to granting them system access. Obtain the sample of
evidence of occurrence of such communication.
Review and evaluate processes for removing logical
access from non-employees when they have ceased
to work with your company or otherwise no longer
need access.
Consider obtaining a sample of current nonemployee
accounts and validating that those nonemployees are
still working with your company and still have a need
for their current level of access.
Ensure that nondisclosure agreements are signed by

nonemployees to legally protect your company from
inappropriate use of company data.
Also ensure that contracts include right-to-audit

clauses that allow you to audit vendor activities that
are critical to your company.
Pull a sample of non-employee accounts, and obtain

a copy of the Non Disclosure Agreements (NDA)
for those accounts.
Review a sample of contracts for evidence that these

clauses are in place where applicable.
Ensure that consideration has been given to identify the

data that should not be accessed by non-employees and
activities that should not be performed by non-employees.
13. Review and evaluate processes for managing
third-party services, ensuring that their roles and
responsibilities are clearly defined and monitoring
their performance.
How to Accomplish ?
Review the process for selecting vendors.
Ensure that the process requires soliciting multiple
competitive bids, the comparison of each vendor
against predefined criteria, involvement of
knowledgeable procurement personnel to help
negotiate the contract, evaluation of the vendor's
technical support capabilities and experience
providing support for companies of similar size
and industries as yours, performance of a thorough
cost analysis, and investigation of each vendor's
qualifications and financial health.
For a sample of recent vendor selections, review
evidence that the process was followed.
Ensure that contracts with third-party service
providers specifically define the roles and
responsibilities of the vendor and include defined
Service-Level Agreements.
Review a sample of contracts for evidence that
expectations have been specifically defined.
Ensure that contracts include nondisclosure clauses,
preventing the vendor from disclosing company
information.
Review processes for monitoring the performance

and providing oversight of existing third-party
service providers.
For a sample of existing vendors, Obtain the evidence
that they are being monitored for compliance
with Service-Level Agreements and that they are
performing the responsibilities defined in the contract.
14. Review an.635d Evaluate Processes for Ensuring
that the Company is in Compliance with
Applicable Software Licenses.
How to Accomplish ?
Obtain the evidence that the company maintains a
list of enterprise software licenses such as Microsoft
Office, Enterprise Resources Planning(ERP)
application accounts, accounting software etc and
has developed a process for monitoring use of those
licenses and complying with the terms of agreement.
Determine how decentralized (non-enterprise)
licenses are monitored and tracked. This would
include software purchased by employees and placed
on their company computers, as well as software
downloaded from the Internet.
Comprehensive software asset management requires
a centralized database that contains information on
exactly what software the company has the right to
use (licenses purchased) and on exactly what software
is being used in the environment (licenses used) and
can compare the two.
Test the effectiveness of the method used at your
company either by performing your own scans on a
sample of computers or by reviewing evidence from
the company's processes.
March 2016
39
15. Review and evaluate controls over remote access

into the company's network
How to Accomplish ?
Ensure that a user ID and strong password are required
for remote access and that these information are
transmitted over secure and encrypted communication
channels.
Determine whether approval processes are in place
for granting remote access, especially for nonemployees. Take a sample of users with remote
access, and Obtain the evidence of approval.
Evaluate processes for removing dial-up and VPN
remote access accounts when employees leave the
company. Take a sample of users with remote access,
and ensure that they are still active employees.
Evaluate controls for ensuring that dedicated external
connections to business partners are removed when no
longer needed. Take a sample of current connections,
and by means of interviews and documentation
review, determine whether they are still legitimately
necessary.
Evaluate controls for ensuring that unauthorized
connections cannot be made to the network and/or
for detecting them if they are.
Evaluate controls for ensuring that unauthorized
modems or Virtual Private Network connection
points cannot be placed on the network and/or for
detecting them if they are.
Ensure one location has primary responsibility for
updating the information. Exception reports are
printed and differences between locations followed
up. Head office controls all program changes and
the branch offices are sent only the object code.
Use control totals, record counts, and sequential
numbering of transactions and follow up any missing
or out-of-sequence data.
40
March 2016
16. Review and evaluate policies and procedures for

controlling the procurement and movement of
hardware.
How to Accomplish ?
Review and evaluate the company's asset management
policies and procedures, and ensure that they encompass
the following:
Ensure that asset procurement process requires
appropriate approvals prior to the purchase of

hardware.
Ensure that the company is using asset tags and has
an asset management database.

Ensure that an inventory contains the asset number
and location of all hardware, along with information

about the equipment's warranty status, lease
expiration, and overall lifecycle (that is, when it is no
longer eligible for vendor support).
Ensure that an effective mechanism is in place for
keeping this inventory up to date. A sample of asset

tags also should be inspected visibly and tied back to
the inventory.
Ensure that unused equipment is stored in a secure
manner. Also ensure that data are erased properly

from equipment prior to its disposal.
17. Ensure that media transportation, storage, reuse,
and disposal are addressed adequately
How to Accomplish ?
Review of Information Technologies policies, procedures,
and security awareness training documents ,conduct the
user interviews and review the following while auditing
media control policies and procedures.
Sensitive information to be encrypted prior to
transporting it through a third-party carrier.

Magnetic media to be digitally degaussed prior to
reuse or disposal.
Optical and paper media to be physically torn prior
to disposal.
Users to be trained adequately on how to store and
dispose of computer media.
Computer media to be stored in a physically secure,
temperature-controlled, and dry location to prevent
damage to the media.
18. Ensure that system configurations are controlled
with change management to avoid unnecessary
system outages.
How to Accomplish ?
Ensure that the configuration-management procedures
include processes for the following:
Requesting changes (including processes for

end users to request changes).

Determining the specifics of what should
change
Prioritizing and approving proposed changes.
Scheduling approved changes.
Testing and approving changes prior to
implementation.
Communicating planned changes prior to
implementation.
Implementing changes.
Rolling back (removing) changes that don't
work as expected after implementation
.
Perform a network and application what-if analysis
to determine the outcome of a planned change.
Without a what-if analysis, organizations take
significant risks to change and overall network
availability. In many cases, network changes
have resulted in collapse causing many hours of
production down time. In addition evidence for a
number of application fail ,cause and impact to other
users, department and other associate applications
should be collected.
Approvals should incorporate a risk assessment and
typically are granted by a committee made up of
stakeholders.
Obtain a sample of Change-Control Requests, as well
as other configuration management documentation,
from information technology departments of the
organization.
19. Verify that capacity monitoring and planning are
addressed adequately
How to Accomplish ?
Ensure that systems and facilities are designed
to anticipated capacity requirements by selecting

architecture documents.
Review the Service Level Agreement between
the company and the network organization for a

service that includes capacity and performance
management. The service would include reports and
recommendations to maintain service quality.
Review the System monitoring logs to determine
the percentage of systems that are approaching or

exceeding capacity thresholds. The monitoring
activity of Capacity Management includes:
Central Processing Unit & Memory Utilization
Input / Output rates
Device utilization
Queue length
Storage utilization
Transaction rate
Packet rate
Response time
Bandwidth utilization
Review the System availability reports to
ensure that system capacity issues are not

causing undue downtime.
March 2016
41
Conclusion
Information technology governance is a broad and complex
topic with many parts. Creating and sustaining a more
effective Information technology governance environment
will take time and resources. It should focus on achieving
incremental information technology governance success in
priority areas, based on their value proposition or reduction
of major issue to the organization. It is not a one-time event
42
March 2016
and to achieve higher level of information technology

maturity, information technology governance should be
persistently and relentlessly perused both from a top down
and bottom up perspective. It is important to define clear
roles for the board, executive management, information
technology governance project team and information
system auditor including ownership and accountability for
each component and overall initiative.
TAXATION
Thin Capitalization- Highly Talked Issue in

International Taxation
The countries that adopted thin

capitalization rules in early are
Canada in 1972, France in 1979
followed by Australia, United
Kingdom and USA in 1980s and
the others countries after 1990.
The situation around the world
mostly in developed countries
and its subsidiary in developing
countries reflecting more alarming
in current days which is at high
pitch of discussion to discourage
the thin capitalization activities or
high debt coverage multinational
through fixing of debt equity ratios,
disallowing of interest to the extent
of arm's length.
CA. Kaushlendra Jha

CA Kaushlendra Jha is a Business Consultant
in India and Nepal,
kaushlendra@jkkfoundation.org
The birth of thin capitalization has

taken place with the motivation
of base erosion where the
multinational companies financed
through relatively high level of debt
compared to equity in their foreign
subsidiary and another companies
having significant interest. If the
capital of an entity is structured/
funded highly from loan fund and
low share capital, such entity is
called high leveraged capital gearing
and under capitalization company
in financial management and thin
capitalization under taxation regime
in many countries. Hence, thin
capitalization may also be termed
as anti-avoidance mechanism which
is prevalent in many countries.
Thin capitalization rules cap the
amount of debt for which interest

is tax deductible. The OECD
(Organisation for Economic Cooperation and Development) has
published a draft Background Paper
for Country Tax Administrations
in 2012 and IMF Working Paper
in January 2014 which has
been exhaustively covered the
Thin Capitalization Rules and
Multinational firms capital structure
practice in more than 54 countries
around the world. The paper
examines how thin capitalization
rules worldwide affect the capital
structures of foreign affiliates of US
multinational firms. Countries' thin
capitalization regimes differ among
several key dimensions. First, they
tend to vary in definition of the
March 2016
43
TAXATION
maximum debt ratio, beyond which interest on debt is no

longer deductible. The definition of maximum debt ratio
fall into two main categories, first either they restrict total
debt or they limit debt from related parties. Second, thin
capitalization rules differ in the treatment on interest on
debt determined to be excessive. For instance, interest
deductibility may be denied only for interest on debt in
excess of the limit or on all debt, and also possibly be requalified as a dividend. Third, countries vary in interest
in enforcement of the thin capitalization rules. In some
countries, the rules trigger automatic disallowances on
interest deductions and some other countries apply some
discretion in their application, and consider the corporate
indebtedness at similar, but unrelated. Firms that stand at
arms length to determine whether interest deductibility
is limited.
The countries that adopted thin capitalization rules in
early are Canada in 1972, France in 1979 followed by
Australia, United Kingdom and USA in 1980s and the
others countries after 1990. The situation around the
world mostly in developed countries and its subsidiary in
developing countries reflecting more alarming in current
days which is at high pitch of discussion to discourage
the thin capitalization activities or high debt coverage
multinational through fixing of debt equity ratios,
disallowing of interest to the extent of arm's length.
The influence of Debt financing can be understood with
simple example in company A table below:
Particulars
Profit Before Interest and Dividend
Less: Deduction of Interest
Profit After Interest
Tax @25%
Dividend
TDS @5% on Repatriation
Total Tax
Debt
Financing
Equity
Financing
100
100
0
0
0
15
15
100
0
100
25
75
3.75
28.75
We can see in above example that the company A is

paying total taxes of Rs.28.75 in case of Equity financing
44
March 2016
and of Rs.15 only in debt financing means saving of

Rs.13.75 (Rs.28.7-Rs.) in case of debt financing or say the
company is thinly capitalised or debt leveraged company.
In the context of foreign investor who has owned
subsidiary company in Nepal can finance different ways
where interest on loan is cheaper in foreign countries
comparatively than in Nepal and may charge high
interest rate through thin capitalization mechanism and
least bother on divided declaration and repatriation. If
the foreign company where divided are not taxable from
subsidiary company but shall be taxable at two times
in Nepal which are corporate tax and withholding tax
prefer to invest its subsidiary through debt financing in
place of equity. Hence, there are three benefits in case of
debt financing like deductibility of interest in subsidiary
resulting in less corporate profit and tax, easy repatriation
with final withholding, no repatriation of divided tax in
subsidiary company.
On the other hand, debt financing is also equally
experiencing the thin capitalization in domestic investors
too in some and other form. There are many private
business houses where the business incurred loss and
even heavy losses and funded by debt totally loan from
promoters and shareholders instead of equity funding or
injecting which shows unparallel turnover of the company
with meagre paid up share capital of the company.
These business houses have financed its business and
even purchase of capital assets like land and building
in the name of the company through bank financing
and getting interest deductibility though tax planning.
The directors and promoters have funded the company
through debts and never other to inject paid up capital
in the absence of thin capitalization rules in the country
and any other restriction in corporate laws and income
tax laws there on.
In our context, the causes of thin capitalization can be seen
in Annual Report of the Auditor General of Nepal and an
TAXATION
example extracted from Annual Report is given below.

(Rs in Thousand)
Tax payers
Nature of
transaction
Income
Year
Loan
Amount
Distillery
2067/68
63,12,09
50,00
6,66,32
1:126
Industry
2067/68
1,19,49,27
1,50,00
12,79,53
1:253
Medicine
2068/69
9,42,04
5,00
3,71,82
1:74
Industry
2068/69
44,19,39
81,83
2,02,75
1:54
Paid up
Capital
Interest
Expenses
Ratio of
Loan to
Capital
Source: Auditor Generals Annual Report 2070(2014)
In the absence of these rules, investor prefers to put

capital in the form of loan than equity which reduces the
tax base. The current income tax law has only put some
restriction in case of exempt controlled entity.
The provisions are in case, the amount of interest paid by
a resident Entity controlled by an Exempt organisation to
that organisation or association that controls the resident
entity may deduct in an income year under the said
sub-section shall not exceed the total of the following
amounts:
(i) All interest amounts received in that year that are to
be included in calculating Taxable Income of that
Entity, and
(ii) Fifty percent of the Adjusted Taxable Income of that
Entity in that year which has been calculated without
including the amounts of interest paid by the entity;
(iii) The remaining amount of Interest which is not
allowed to be deducted and not deducted as per
above may be carried forward and shown as exposes
during the next year through same process.
The Income tax Act has defined "A resident entity
controlled by an exempt organisation" means an entity
which becomes a resident entity in that year and in
which the following persons or organisations enjoyed
underlying ownership or control of 25 percent or more at
any time during that year.
(a) Exempt organisation and persons associated with them.

(b) Persons enjoying tax concession in that year under
section 11 or persons associated with such persons;
(c) Non-Resident persons or persons associated with
them or
(d) Any combination of persons mentioned in clause a to c.
These provisions has put restriction on debt financing in
place of equity by exempt controlled resident entity but
not in normal case of debt financing by resident entity.
The country may apply one of the two primary methods to
limit interest deductibility of the company is found debt
leveraged company. Firstly, there can be simply deny
some or all interest deductibility which Nepal in doing in
some respects, second they reclassify the excess interest
as dividend which is not in practice in Nepal.
The returning in the form of interest in disguised dividend
or profit from the investment made by promoters or
shareholders. There are number of private companies in
group companies and associates where loan have been
exchanged and attracted the case of thin capitalization but
Nepal has still not introduced thin capitalization rules so
far to protect its income tax base. Although there are four
special cases under current Income tax Act, 2058 where
Inland Revenue Department upon written notice, can recharacterize the transactions with amended quantification
and matter. The four cases are under Section 29-Indirect
payments, Section 33-Transfer Pricing and other
arrangements between associates, Section 34-Income
Splitting and Section 35-GEAR (General Anti Avoidance
Rule). Even if the income tax authority can linkage the
thin capitalization with above provision but there is no
such specific rules on Thin Capitalization other than above
mentioned occasion as such in Nepalese tax system.
Hence, the emergence or need of a specific thin
capitalization rules is felt not only in case of international
taxation but in domestic taxation as well.
March 2016
45
NEWS
Training Course on NFRS/ NAS

RA. Member Capacity Development Committee of The
Institute of Chartered Accountants of Nepal successfully
conducted 60 hours training course on NFRS/NAS from
22 January to 26 March, 2016.
President CA. Prakash Lamsal delivering speech in NFRS Training
This program was conducted in every Friday and

Saturday for three hours a day in Kathmandu for 20 days
by covering the contents of the following Standards that
were delivered to the participants.
S. No NAS/ NFRS
Name of the Standards
Conceptual Framework
NAS 1
Presentation of Financial Statements
NAS 2
Inventories
NAS 16
Property, Plant and Equipment
NAS 38
Intangible Assets
NAS 40
Investment Property
NAS 37
Provisions, Contingent Liabilities

and Contingent Assets
46
March 2016
NFRS 5
Non-Current Assets Held for Sale

and Discontinued
NAS 36
Impairment of Assets
10
NAS 18
Revenue
11
NAS 23
Borrowing Cost
12
NAS 8
Accounting Policies, Changes in

Accounting Estimates & Error
13
NAS 10
Events after the Reporting Period
14
NAS 24
Related Party Disclosure
15
NAS 41
Agriculture
16
NAS 12
Income Taxes
17
NAS 11
Construction Contracts
18
NAS 7
Statement of Cash Flow
19
NFRS 13
Fair Value Measurement
20
NFRS 1
First time Adoption
The objective of the training course was to provide the

knowledge on NFRS/NAS for their adoption in various
sectors. The course were delivered by the expert in the
related field. Altogether 45 members participated in the
training course.
Conference on Earthquake & Supply

Constraints- Opportunities & Challenges
The Institute of Chartered Accountants of Nepal organized
a conference themed on Earthquake & Supply ConstraintsOpportunities & Challenges in hotel Yak and Yeti in
Kathmandu on 31 January 2016. The conference was
organized by coinciding with 19th anniversary day of the
Institute. The conference was commenced with the opening
speech from the ICAN President CA. Prakash Lamsal.
NEWS
Minister Bishnu Prasad Poudel was the Chief Guest and

Honorable Auditor General Bhanu Prasad Acharya was
special guest of the program. The Chairs of SEBON and
Insurance Board were also present in the program as
guests of honor. The other dignitaries invited were Past
Presidents, Past and Current Council Members, ICAN
Committee Members, and stakeholders who were present
in the program. ICAN staffs were also present in the
program.
A Glimpse of the Conference
The conference was conducted in two sessions. The

conference segments, Chairperson, Paper presenters, and
commentators were as follows:
S.
No:
1
Session
Heading
Paper
Presenter
Chairperson
Commentator
Earthquake
& Supply
ConstraintsOpportunities
& Challenges
Honble
Dr. Yuba Raj
Khatiwada,
Vice- Cahairman,
National
Planning
Commission
Mr. Babu
Ram Gautam,
Council
Member and
Assistant
Auditor
General
Mr. Baikuntha
Aryal, Joint
Secretary,
Ministry of
Finance
Role of
Professional
Accountants
on the Road
to Economic
Recovery and
Resilience
Honble
Bhanu Prasad
Acharya,
Auditor
General
CA. Madan
Krishna
Sharma, Past
Chairman,
Accounting
Standard
Board.
CA. Narendra
Bhattarai, IPP
and Chairman
Accounting
Standard Board.
President CA. Prakash Lamsal welcoming Honorable Finance

Minister of Nepal
The President CA. Prakash Lamsal welcomed the Chief

Guest and Special Guests by offering batch and flower
bouquet.
The conference was conducted successfully and found

effective because it was based on contemporary issues
faced by the nation. The participants were members and
non-members of the Institute. Altogether 100 individuals
participated in the conference.
19th Anniversary Program of the Institute

The Institute celebrated its 19th Anniversary Program with
special function at Hotel Yak & Yeti in Kathmandu on
2072/10/17 (31 January 2016). The Honorable Finance
Honorable Finance Minister of Nepal Inaugurating the Program

by Lightning the Lamp
The program was formally commenced with the

inauguration by lightning the lamp by the Chief Guest
March 2016
47
NEWS
Honorable Finance Minister. National Anthem was also

played after formal inauguration of the program.
appreciation for their contribution to the development of

Institute and accounting profession in the country.
The President, CA. Prakash Lamsal welcomed the

participants and tabled the Annual Report and highlighted
the work done by the Institute over the previous twelve
months. He also gave an overview of the salient financial
indicators of the Financial Statements for the year ended
31 Ashad 2072 (16 July 2015). He also shared the work
plan for current fiscal year. The President thanked all the
stakeholders for their cooperation and contribution in the
functioning of the Institute.
Group Photograph of Award winning Students and ICAN Staffs

with Dignitaries
Honorable Finance Minister of Nepal Delivering Speech on the

Program
The Chief Guest of the function, Honorable Finance

Minister appreciated the Institute for the progress achieved
till date. He emphasized that as a regulatory body ICAN
has still to improve its regulatory functions. In this
occasion, he underscored the significance of accounting
professionals in the development of the economies and
markets in the country and suggested to further initiate
various activities for the development of the profession.
He also urged the ICAN members to respect the values
and ethics for upholding the integrity of the profession. He
committed to provide all possible support to the Institute
for its professional development initiatives.
In the anniversary ceremony, the Institute honored the
First and Second Council President by offering token of
48
March 2016
On behalf of the Institute, Honorable Auditor General

Bhanu Prasad Acharya given out the various Medal and
Certificate to the merit holder students of December 2014
and June 2015 chartered accountancy examination on the
presence of concerned founder of the Medal. The medals
given away in the program included were KB Chitracar
Gold Medal, BK Agrawal Gold Medal, Prakash Jung
Thapa Gold Medal, Dr. Govinda Ram Agrawal Gold
Medal, Narayan Bajaj Silver Medal, Shivaman Singh and
Chandra Bhandary Silver Medal and Narendra Vashishtha
Gold Medal.
The Institute has started the practice of selecting the best
article of the year published in the ICAN Journal from
2072 B.S to encourage the contributors and value the
quality articles. The article contributed by CA. Pradeep
Kumar Shrestha on the title Accounting Professionals
to Improve Governance and Financial Management
System in Corporate and Public Financial Management
(PFM) Sector was selected as the best article which was
published in Vol.17 No.3, March 2015 issue of The Nepal
NEWS
Before concluding the program, on behalf of the institute

the President, CA. Prakash Lamsal gave away the token
of love to Guests of honor.
Best Staff of the Year with ICAN President and Executive Director
Similarly, Honble Auditor General Bhanu Prasad

Acharya, on behalf of the Institute gave away the best
ICAN staff certificate to Mrs. Pragya Aryal, Miss.
Krishna Kumari B.C and Mr. Hardulal Chaudhary.
Acknowledging the outstanding performance of selected
staff these certificates are given every year in the occasion
annual anniversary of the Institute.
Addressing to the function, the ICAN First President
and SAFA Past President CA. Komal Bahadur Chitracar
praised the achievements gained by the Institute at
National and International level. He congratulated the
qualified students and the staff for their hard work and
effort to attain the achievement.
Similarly, speaking on the occasion, the Chairman of
Insurance Board Dr. Fatta Bahadur KC congratulated the
Institute for the development efforts and achievements of
the institute and also applauded the students and the staff
for their success and contribution.
Vice- President CA. Mahesh Khanal Formally Concluding the Program
Vice- President CA. Mahesh Khanal formally

concluded the program by offering vote of thanks to
Chief Guest, Guests of Honor, and all participants of the
program.
Student News
9th Batch General Management and
Communication Skill (GMCS) Program
The 9th batch of 15 days General Management and
Communication Skill (GMCS) training was successfully
completed at ICAN premises, Satdobato from 12 March
to 3 April, 2016. This training is mandatory for getting
Chartered Accountant membership of the ICAN for newly
qualified CA students and it is also mandatory for AT
students for obtaining Accounting Technician (AT) license.
Speaking on the occasion Chairman of SEBON Dr.

Rewat Bahadur Karki highlighted the importance of the
Institute and its practicing members in carrying out the
audit of companies under SEBON. He also congratulated
the Institute, Staff and qualified students for their
achievements.
Participants of GMCS Program.
March 2016
49
NEWS
This training was organized aiming with enhancing better

oral, written skill and non-verbal communication for
getting better opportunities in the market. This training is
not only confined to enhance the communication skill but
also helps to enhance the quality of general management
skill required for attaining higher level position. In total
39 students participated in the training of which 37
were newly qualified CA and 2 were newly qualified
Accounting Technicians.
National Convention on Spectrum of

Opportunities
National Convention on Spectrum of Opportunities
for CA Students was held on 18th & 19th March,
2016, which was jointly organized by the Institute of
Chartered Accountants of Nepal (ICAN) and Nepal
Chartered Accountant Students Association (NCASA) in
Biratnagar, Morang. It was hosted by Biratnagar Branch
of ICAN and Eastern Regional Chapter of NCASA.
Chartered Accountancy and Membership

Examination Result Published
The result of Chartered Accountancy Examination held
in the month of December 2015 has been published on
February 14, 2016. As per the result 536 students of CAP
I Level out of 673, 46 students of CAP II level out of
1322 were qualified to join CAP II and CAP III level
respectively and 31 students out of 459 were qualified
for the membership of ICAN on fulfilling the remaining
requirements prescribed by the Institute. Similarly, 19
CA degree holders from foreign countries were qualified
in membership examination out of 115 applicants. The
successful candidates will be eligible for obtaining
ICAN membership on fulfilling necessary requirements
prescribed by the Institute. Details of the results are as
follows.
S.
No
50
Level
CAP I
CAP II
CAP III
Membership
Description
Both
Group
First
Group
Second
Group
Total
Total appeared
673
673
Pass in exam
536
536
Total appeared
777
290
255
1322
Pass in exam
17
32
34
83
Total appeared
175
152
132
459
Pass in exam
30
48
87
Total appeared
115
115
Pass in exam
19
19
March 2016
President CA. Prakash Lamsal, delivering welcome speech in the

Convention.
CA. Prakash Lamsal, President of ICAN chaired the

opening session and delivered the welcome speech.
Honble Auditor General, Mr. Bhanu Prasad Acharya was
the Chief Guest. CA. L P Bhanu Sharma delivered the
Key Note Speech. The other dignitaries were Mr. Pawan
Kumar Sarda, President, Morang Merchant Association,
Mr. Shiv Shankar Agrawal, President, Chamber of
Industries Morang, CA. Hari Kumar Silwal, President,
ACAN, Mr. Toyam Raya, Chief District Officer, Morang,
Mr. Ghanshyam Lal Das, Vice Chancellor, Purwanchal
University, Mr. Tul Bahadur Shrestha, Registrar,
BPKIHS Dharan, CA. Narendra Bhattarai, Chairman,
ASB and Past President, CA. Binay Prakash Shrestha,
Executive Director, ICAN, RA. Mohan Kumar Subedi,
Member ASB and CA. Manish Goyal VC EIRC, ICAI,
Mr. Anil Acharya, President, NCASA. The Convener of
the program and ICAN Biratnagar Branch Co-ordinator
NEWS
CA. Aswani Bansal thanked all the guests, invitees and

students for their participation in the program.
The Program was conducted in four technical sessions
and a total of 12 papers were presented on the NFRS,
Forensic Audit, DTAA and Transfer Pricing and Auditing
in Computerized Environment.
The technical sessions and their Chairperson, Judge and
Paper Presenter were as given below.
Technical
Session
Session Heading
Session
Chairperson
First
Nepal Financial
Reporting
StandardsRoad Map and
Challenges
CA. Narendra
RA. Mohan Kumar
Bhattarai, IPP
Subedi
CA. Anil Joshi
and Chairman,
ASB/N
Second
Forensic Audit
CA. Jagdish
Bhattarai
Third
Transfer Pricing & CA.

Aswani
CA Umesh Raj
DTAA
Bansal
Pandey

CA Kinjal Pokharel

Amrit Poudel,

Sudip Poudel,

Sudesh Pandey
Fourth
Auditing in
Computerized
Environment

Jyoti Agrawal,

Hira Bahadur Khatri

Barsa Baral
CA. Sushil
Kumar Agrawal
Session Judge
Session Paper
Presenter

Dinesh Agrawal,

Anima Pokharel

Abhishekh Ghimire

CA. Sushil Kr. Agrawal
Prabesh Dhakal

CA. Pawan Kr. Rathi
Abhishek Agrawal

Sachin Agarwal

CA Arun Raut

Prof Dr. D N
Chaudhary
Top four papers presented were selected and awarded in

the program. Anima Pokharel, Sachin Agrawal, Sudip
Poudel and Barsa Baral were awarded as a best paper
presenter in First, Second, Third and Fourth Session
respectively.
CA. Hari Kumar Silwal and Professor Dr. P K Jha

delivered motivational speech on first and second day of
the program.
Altogether 297 students including paper presenters from
Nepal and India participated in the convention. The
Convention ended with Valedictory Session which was
addressed by CA. Aswani Bansal. Honble Judge Kumar
Pokharel as chief guest delivered the encouraging words
to the students and other dignitaries graced the closing
session. Token of Love were presented to the Chief Guest
and Guest of Honor.
Career Counseling
The Institute of Chartered Accountants of Nepal
organized career counseling program in different parts
of the country with the aim of providing the importance
and awareness of chartered accountancy education to
the interested visitors. During the program, various
aspects of CA education such as the eligibility criteria of
enrollment, future prospects, recognition, membership
criteria of the Institute and relevant information was
briefed and discussed. This program was conducted by
ICAN Officials. During the 3 months period around
1000 students in Kathmandu valley and 5000 in outside
the valley got the opportunity to get information on CA
Education. The participants of the program had shown
keen interest on the CA education. Program was organized
at Biratnagar, Butwal, Bhairahawa, Palpa,Syangja,
Pokhara, Tanahun, Parbat, Baglung, Myagdi, Dhangadi,
Nuwakot and Kathmandu Valley.
Student Registration
The status of the student registration in different course
and level during the Period of 1 January-March 31 is as
follows:
CAP I
CAP II
CAP III
AT
527
40
Participants and Officials Cheering the Convention
March 2016
51
NEWS
Member News
The List of 70 Chartered Accountant
Members Registered in ICAN in Fiscal
Year 2072/73
S.No.
Mem. No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
882
883
884
885
886
887
888
889
890
891
892
893
894
895
896
897
898
899
900
901
902
903
904
905
906
907
908
909
910
911
912
913
52
Name
BIBEK SHRESTHA
ANUJ ACHARYA
HARI PRASAD GYAWALI
PRAWIN KARKI
KALPANA GIRI
PRIME SHRESTHA
VIROCHAN KHANAL
PRIYATAM SHRESTHA
BIPIN RAJ AMATYA
VIKASH TODI
PRAVEEN KUMAR UPADHYAYA
RAJ KUMAR PHUYAL
SUNIL JOSHI
SUJEEP SHRESTHA
PRADEEP SIGDEL
HEMANTA RAJ RAMALI
MANISH KHAWAS
DINESH K.C.
SAGAR BHANDARI
PRAYAS SHRESTHA
SUMIT BAHADUR PRADHANANG
SUNIL KUMAR SHAH
ROSHANI KARKI
PUNYA PRASAD PRASAIN
MUKUL RAJ PANTHI
ANIL POKHREL
PRAJWAL POKHAREL
SURAJ NIROULA
BIKESH SHRESTHA
ARUN ARYAL
NAWA RAJ BASNET
NIRAJ KHADKA
March 2016
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
914
915
916
917
918
919
920
921
922
923
924
925
926
927
928
929
930
931
932
933
934
935
936
937
938
939
940
941
942
943
944
945
946
947
948
951
955
957
SHANKAR THAPA
RAMESH ARYAL
GOPAL PANGENI
AVIN PRASAD RAJBHANDARI
DIAMOND SINGH YONJAN
SHESH MANI DAHAL
SITARAM THAPA
ZOYA KHAN
DEEPAK THAPA
ASHIS AGARWAL
SHREE KRISHNA THAPA MAGAR
MANJU KATWAL
SABITA GHIMIRE
KUNDAN SHARMA
AMRIT SHRESTHA
PRAMILA SHRESTHA
SUSHRUT DHAKAL
SUNITA K.C.
MUKTI NATH SUBEDI
SHOVA SHRESTHA
SABEETA DHAKAL
SURAJ TIMSINA
SHISHIR BHATTARAI
AMITA DANGOL
AMRIT GIRI
SAMRAT BISTA
JOGAMEHAR SHRESTHA
SUNIL CHAPAIN
PRAKASH ADHIKARI
SNEHA GOENKA
SUNITA THAPA
RABINA THAPA
SHREESHA SHRESTHA
MANISHA ADHIKARI
SUVAS RIJAL
KINJAL POKHREL
MANOJ ADHIKARI
RAMESH BARAL
Status of Membership, Certificate of Practice

and Audit Firms
Malaysia in personal expenses. The delegation was led

by Mr. Binod Neupane, Joint Director of ICAN.
The status of membership, Certificate of Practice and

Audit Firms as of 31 March 2016 is given below:
Membership Pathway Agreement with

CPA Australia
Category/
Class
Membership
Total
No
FCA/CA 947
COP
Firm
Renewal
No
Total
No
Renewal
Renewal
Total No
No
No
651
703
347
617
349
RA- B
3377
1925
3140
1382
1624
1385
RA-C
1606
849
1473
680
816
680
RA -D
2284
1256
2092
1093
1181
1089
Total
8214
4681
7408
3502
4238
3503
ICAN has signed Membership Pathway Agreement with

CPA Australia on 10th March 2016. This agreement has
opened up ICAN domiciled members to become the
member of CPA Australia subject to some conditions.
International News
Malaysia and Singapore Visit
The Institute of Chartered Accountants of Nepal arranged
an exposure cum study visit of Malaysia and Singapore
from 27 February to 03 March 2016 for its members with
the objective of providing exposure of Malaysian Institute
of Accountants (MIA), National Audit Department of
Malaysia (NADM) and PWC Malaysia.
Group Photograph of Exposure Visit Participants
The delegation comprising 14 members attended the

meeting with the representatives from MIA, Auditor
General and PWC; and shared the organizational system,
processes and business practices in their respective
countries. The delegation members visited Singapore/
President, Vice president and Executive Director in Agreement

Signing Program
It is the first ever membership agreement signed by ICAN

with foreign PAO.
Conference on Empowering Asias Small and
Medium Business Hub
Council Member CA. Prakash Jung Thapa attended
the conference which was jointly organized by ICASL,
IFAC and SAFA as a resource person on Empowering
Asias Small and Medium Business Hub in Colombo,
Sri-Lanka on 26 January 2016. As a resource person
and the panelist he presented the paper on Growing
your Practice: Review, Compilation and Agreed-Upon
Procedures Engagements.
SAFA Committee and SAFA Board Meeting
President CA. Praksah Lamsal attended the SAFA Board
and Committee meeting held on 28-29 January, 2016 on
Lahore, Pakistan
March 2016
53
Report
Highlight of Exposure Visit
On the date 2016/02/26, 4 Chartered Accountant members and 9 Registered Auditor members from ICAN along with
Joint Director of ICAN Mr. Binod Neupane visited Malaysia on the invitation from Malaysian Institute of Accountants.
The 14 members team had a 5 days visit in Malaysia including a one day refreshment trip to Singapore.
On 2016/02/29 the team visited Malaysian Institute of Accountants (MIA). The team was warmly welcomed by the MIA
members along with the Chief Executive Officer of the MIA Ho Foong Moi organized a half day knowledge sharing
program. The session was basically about the organizational structure of MIA, functional activities of MIA, regulatory
role of MIA to its members, ways for enrollment in MIA as members and functional role of different committees and
sub committees in MIA. In the course of the session, the team also exchanged the information about the ICAN. Joint
Director Mr. Binod Neupane shared the information about the organizational structure of ICAN, various Committees
and Sub-committees with their functions. The team also briefly described about the examination procedure of ICAN and
the ways of getting the membership of the ICAN.
Similarly on 2016/03/01 the team visited the National Audit Department of Malaysia (NADM). The Director of the
NADM organized a half day meeting where he described about appointment, tenure and functions of the Auditor General
in Malaysia. During the meeting, both the team exchanged the information regarding the office of the Auditor General
in the respective countries, assignment of the wok to other audit firms and the ways audits are being conducted in the
government organizations and the Director also described how the office co-ordinate with the Ministry of Finance in
performing various task. After the completion of the meeting, the team had lunch with the Honorable Auditor General
of Malaysia Tan Sri Hj. Ambrin bin Buang.
The next day, PWC Malaysia invited the team for sharing the knowledge about their working environment, audit procedures,
manpower management, audit documentation and other audit related matters. PWC Malaysia shared the knowledge about
their Risk Assurance services, consulting and other financial services. They described the audit procedures followed by
them, audit documentation and working paper files. They also shared the information about the human resource planning,
the hierarchy of staff in PWC and their staff rules and regulations for proper Human resource management.
54
March 2016
Promise to change
lives for better
PIONEER IN HYDRO POWER DEVELOPMENT, SINCE 1965
Projects
1 Andhikhola Upgrading Project
2 Lower Manang Marsyangdi Project
3 Marsyangdi III Project
4 Nyadi Project
5 Kabeli - A
6 Kabeli - C
7 Tamor
8 Dudh Dona Project
Humla
Darchula
Bajhang
Mugu
Bajura
Jumla
Dadeldhura
Doti
Achham
Dolpa
Mustang
Jomsom
Jajarkot
Manang
Banke
Nepalgang
13
Puthan
Dang
1 10
14
Gulmi
Syangja
4
15
Lamjung
Gorkha
Rasuwa
Tanahu
Palpa
Kapilbastu
Sindhupalchowk
Nuwakot
Arghakhanchi
11
Dhading
KTM
Bh
Rupandehi
Butwal
Nawalparasi
Chitwan
Palanchok
12
Salukhambu
Lukla
Dolakha
pu
akta
Okheldhunda
Makawanpur
12 Liaison Office Butwal
Khudi Hydropower Limited

Nepal Hydro & Electric Limited
Nyadi Hydropower Limited
BPC Services Limited
Keton Hydropower Limited
Kabeli Energy Limited
Himal Power Limited
Bara
Sarlahi
BUTWAL POWER COMPANY LIMITED

P. O. Box: 11728, Ganga Devi Marga - 313
Buddha Nagar, Kathmandu, Nepal
Tel: +977-1- 4784026, 4785295, Fax: +977-1-4780994
Email: info@bpc.com.np
w w w . b p c . c o m . n p
Mahottari
11 Corporate Office, Kathmandu
Subsidiary Companies
Sindhuli
Udayapur
Dhanusha
Office
Rautahat
Khotang
Parsa
Shankhuwasabha
Taplejung
Ramechhap
Bhojpur
5
7
ar
Distributes Electricity
to 36000 Consumers
9 EDC Darimchaur
10 EDC Galyang
Bagung
Parbat
Rolpa
Kaski
Pokhara
ch
th
8
Myagdi
Salyan
Bardia
Pa
n
Rukum
Surkhet
Terhathum
Dailekh
Kailali
Patan
Kanchanpur
Dhankuta
Ilam
Siraha
Sunsari
Saptari
Generation Assets
13 Jhimruk Power Plant
14 Andhikhola Power Plant
15 Khudi Power Plant
Morang
Biratnagar
Jhapa

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CAHARTERED

Journal of the Institute of Chartered Accountants of Nepal

CA. Prakash Lamsal

- CA. Pooja Gupta

- CA. Anal Raj Bhattarai

Working of the Fixed Exchange Rate Regime:

NRBs Decision to Hike Paid-up Capital by Multifold :

Multinational Company: An Introduction

- Mr. Tula Raj Basyal

- CA. Biswash Gauchan

- Mr. Gyan Mani Adhikari

IT Governance and Auditing Entity-Level Controls

- CA. Mukunda Pokharel

- CA. Gaurav Khwaunju Shrestha

- CA. Kaushlendra Jha

Global Nepal Printing Press Service Pvt. Ltd.

Dear Professional Colleagues,

Addressing the function, the chief guest suggested the

It is my pleasure to bring in the notice of the entire

CA. Prakash Lamsal

Accounting for Employee Loans

Whenever the loan is granted to

This article takes us through the

CA. Pooja Gupta

IFRS Rules for Employee

The Nepal Chartered Accountant

Recognition and Measurement of

The Nepal Chartered Accountant

The difference amount of Rs. 14,097/- between the

If theloan will revert to a market interest rateafter

the periods when the employee provides services.

Amortize the Deferred expenses for employee benefits in

The following table will summarize the amortization

The journal entries at the end of the year 1:

#3 The employee benefit resulting from the employee

;b:oxsf nflu ;L=kL=O{= q]ml86 cfj/ ;DaGwL ;"rgf

One thing that is certain, we will

CA. Anal Raj Bhattarai

The Nepal Chartered Accountant

When the price of a particular share

A "bull market" is a period when

market. But after the promogulation of new constitution

Looking at the market mix and nature of share traded in

The Nepal Chartered Accountant

Working of the Fixed Exchange Rate Regime:

With respect to Nepal, the IMF

Mr. Tula Raj Basyal

The Nepal Chartered Accountant

Exchange rates are fixed, flexible,

in the FER regime, the central bank

Further, FER helps to avoid exchange rate fluctuations

2. Fixed Exchange Regime in Lesotho,

union in this area. However, Botswana opted to withdraw

The Nepal Chartered Accountant

first issued its own paper currency (ngultrum) in 1974

On the other hand, the average inflation during the 24-year

In Nepal, the FER with the IC has been in operation since

As depicted in Table 1, among the seven economies under

The Nepal Chartered Accountant

4. IMFs Assessment as per Article IV

macroeconomic stability and integrating the economy

concluded the Article IV Consultation in November 2015

5. Lessons for Nepal

The Nepal Chartered Accountant